Economics Week 8 International Trade Simulation
Assignment: International Trade Simulation XECO/212 University of Phoenix David Cullipher The economy of Rodamia relies on three main areas: agriculture, industry and services. The country is surrounded by neighbors who produce similar and different products. Uthania is specialized in making chocolate and confectionary, but also produces goods such as minerals, coals and corn. On the other hand, Suntize is a tourist attraction which is good at producing electronic goods. Lastly, Alfazia is an agrarian economy and produces goods like corn, rice and cotton.
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In this age of globalization, the economies of the world are becoming more integrated and countries are increasingly engaging in international trade. Rodamia is no exception. Its most obvious trading partners will be Suntize, Alfazia and Uthania. International trade occurs because different countries have different comparative advantage. Comparative advantage arises when countries experience different opportunity costs when producing the same goods. For example, China has comparative advantage in producing agricultural goods when compared to a country like Singapore.
This is because China is a large country with a large population and a lot of land available for plantation. On the other hand, Singapore is a small country with scarce land and a small population. As such, China is able to produce more agricultural products at a cheaper price with its cheap labor, and can devote the rest of its money to production of other goods. On the other hand, Singapore has to give up the production of a lot of goods should it decide to devote its land to agriculture. Therefore, this shows that China has a comparative advantage when it comes to the production of agricultural goods.
On the other hand, absolute advantage occurs when a country is able to produce more products using a lower amount of resources when compared to another country. For example, America is able to produce more cars using fewer resources than Africa due to its high levels of technology. As such, America has absolute advantage in producing cars and this is a big advantage. The same theories apply to Rodamia. In the first year, Rodamia should give export incentives to cheese and DVD players since it has comparative advantage in these areas.
In addition, the country should import corn from Uthania, watches from Suntize and no product from Alfazia. This is in line with the comparative advantages which these countries have and helps to maximize the benefits for Rodamia. Even though Rodamia does not have absolute advantage in this scenario, trading with other countries which are more efficient in producing other goods will still bring about benefits to the country. In international trade, countries are able to focus on the production of goods which they are most efficient at.
As such, they are able to increase output of goods and services. Through trading, countries are able to enjoy more goods and services than it could without trading. For example, when Rodamia trades cheese with corn with Uthania. It is able to enjoy more corn and cheese than it could if it divides its resources equally for the production of two goods without international trade. The increase in level of outputs by Rodamia and countries in the region will help to promote economic development. This can help to increase standard of living.
In addition, it will also add value and confidence in the region and help to attract foreign investors into the region. This will further help to develop the economy and create more jobs. Other than economic benefits discussed above, international trade can also help to enhance political ties between countries. For example, trade between Rodamia and Uthania will help to enhance the ties between the two countries and this can help to prevent conflicts between the neighboring countries. However, international trade is also associated with disadvantages and limitations as well.
In the case of Rodamia, it was believed that Suntize engaged in illegal dumping behavior in Rodamia. It was found that Suntize has priced its watches much lower than the price it has set in its domestic economy. As such, this has harmed the watch industry in Rodamia. This demonstrates the increase in competition which international trades which can harm domestic companies and force them to close down. One of the methods which Rodamia has taken to solve the problem was to impose quotas and taxes. Even though such measures can prevent problems like dumping, it can result in retaliation by other countries.
This means that other countries will likewise impose protectionist measures and this will hinder the export of Rodamia’s goods to other countries. Exchange rate is affected by demand and supply. When demand for a particular country’s goods is high, it will increase demand for its currency and thus causes the currency to appreciate. On the other hand, when demand for the country’s goods fall, the demand for its currency will fall and this will cause it to depreciate. Similarly, when supply of money increases, it will cause the currency to depreciate.
However, when supply of money decreases, it will cause the currency to appreciate. Exchange rate is an important factor in international trade. It can affect balance of trade which is a component of gross domestic product. For example, when the currency of Rodamia depreciates, its products will be relatively cheaper in foreign currency while foreign products will be relatively dearer in domestic currency. This will result in an increase in demand for Rodamia’s exports and a decrease in demand for foreign goods.
As such, this will increase balance of trade and thus increase gross domestic product for the country. On the other hand, when the currency of Rodamia appreciates, its products will be relatively dearer in foreign currency while foreign products will be relatively cheaper in domestic currency. This will result in a decrease in demand for Rodamia’s exports and an increase in demand for foreign goods. This will decrease balance of trade and thus decrease gross domestic product. In conclusion, international trade is very important to Rodamia.
It needs to be noted that comparative advantage is dynamic; as such the country needs to keep check of comparative advantages as well as that of other countries so that it can make trading decisions to maximize its welfare. Similarly, given that exchange rate plays a large part in influencing international trade, the government should manage the exchange rate on a frequent basis. References “Absolute Advantage”. Retrieved July 27,2011 http://www. investopedia. com/terms/a/absoluteadvantage. asp