Economics is the study of reconciliations between unlimited wants and limited resources. Those reconciliatory attempts extend across geographic boundaries. A central issue in international trade is whether gains accrue to citizens in the global market place due to their exchanges. Theoretically, larger quantities and wider choices of goods are available with international trade than without it. Exchanges include both goods and currencies because of the interactions among firms, households, and governments located around the globe. In this essay, students will learn economic concepts and philosophical differences that allow them to examine policies affecting the prices and the quantities of items traveling between nations. We will focus some initial attention on the production possibilities model, the opportunity cost concept, and the foreign exchange market. Afterwards, readers will gain a better understanding about the processes and content of payments between trading partners. Those exchanges take into account how much of one currency is worth in terms of another currency, which is something that continues to captivate the attention of many peoples. Readers will find that international trade is a rather odd concoction of free trade practices and trade restrictions. Across time and space, international leaders and their countries come together in an attempt to lessen trade restrictions in some instances and increase them in other instances. The essay closes by providing readers some insight into various arguments and rationales for trade restrictions.
Keywords Absolute Advantage; Ceteris Paribus; Comparative Advantage; Exchange Rate; Export; Free Trade; Import; Law of Demand; Law of Supply; Macroeconomics; Market; Microeconomics; Net Exports; Normative Economics; Opportunity Cost; Positive Economics; Production Possibilities Model; Quantity Demanded; Quantity Supplied; Quota; Tariff; Trade Restriction Rationale
Economics: International Trade Economics
Readers may come to understand economics as a study of reconciliations between unlimited wants and limited resources. Reconciliation is an attempt to find some optimal middle ground in problem solving. The economic problem arises due to resource scarcity and it prompts decision makers to make rational choices from amongst all the alternative solutions. Each and every choice involves a sacrifice because it is very difficult, if not impossible, to avoid tradeoffs.
International trade is an interesting topic and lends itself to being one of the most controversial topics in economics. Getting to the conceptual foundations for international trade, the main purpose of this essay is to inform undergraduate students about the economic context in which exchanges of physical quantities of products and currencies occur between countries. To some extent, the author assumes readers are familiar with principles of economics. Nonetheless, the information found in this essay appeals to those unfamiliar with economics, but engages all readers in pondering and attempting to answer some important initial questions.
Where do you stand regarding the issue of international trade? Do you favor protecting domestic jobs? If so, what cost attachments are there to job preservation measures? To what extent are you willing to make sacrifices in terms of accepting fewer choices in the market place and paying higher prices for them? Where does product quality and safety fit into all this? Perhaps recent news reports about recalls of foreign-made products diminishes the concern about higher prices. One could reasonably argue that consumers realize that high quality is available at a high price though some major retailers of imported goods claim quality is available at a low price.
Basic Economic Concepts
At issue is whether benefits or gains accrue through international trade. Economists tend to believe that international trade does indeed provide benefits to consumers, producers, and workers. However, their views fall short of being universally acceptable due, in part, to the various dimensions of any international trade issue. Free trade may be an ideology given the existence of constraints such as trade barriers, international politics, and isolationist strategies. All those issues and concerns provide a rich backdrop against which to learn the major tenets of international trade theory as the reader may find in an introductory economics course.
International trade theory fits well with a basic understanding of how a country progresses through various stages of an economic maturation process. As countries move from an economy primarily based on hunting and gathering through manufacturing, services, and information heading toward and beyond a knowledge-based economy, a larger portion of domestic production becomes available for exchange with a trading partner. Opportunities arise to trade that excess production for other goods, which are the excess production of another country. In accordance with theory, specialization in production creates those opportunities (Razmi & Refaei, 2013).
For varied reasons some countries are better at producing specific items than are other countries. As a case in point, the US is better at growing wheat and Columbia is better at growing coffee beans. In essence, each country will specialize in producing those goods best suited to their resource bases. Specialization arises from the discovery and acknowledgement that one country in the absolute sense is better suited at producing more of one specific item than is another country. Absolute advantage by definition is the ability of one country to produce more of something than another country. However, maximizing the gains from trade is reliant upon a country's ability to produce more than another, doing so in a most efficient manner.
The gains from trade are observable when a country's citizenry attains a combination of goods that consists of larger amounts of each good than would be possible in the absence of trade. Comparative advantage by definition is specializing in that product for which the country's sacrifice in terms of other goods is minimal. The value of the foregone alternative is, by definition, an opportunity cost. In essence, finding solutions to the economic problem of scarcity involves minimizing opportunity costs. In brief, the gains from trade accrue through specialization, which in turn, reflects a country's recognition of what it can and should produce at a lower opportunity cost than another country.
Opportunity costs sometimes take the form of sacrifices that are linear in their relationship, which translate into the correspondence of a benefit with some given or constant amount of cost. However, economists tend to view the equation as one involving increasing amounts of cost in the form of a curvilinear relationship. The illustration of the opportunity cost concept is most effective when one attempts to consider all the possible choice combinations whether the opportunity costs are increasing as in the case of a curved-line concave-shaped arrangement or they are constant as in the case of a straight-line downward-sloping arrangement. A study of international trade introduces students to both forms within a larger model of production, specialization, and exchange often in the context that the world contains only two countries. Furthermore, students and other readers should think of a model as a tool that simplifies reality and remain cognizant of the fact that a key component in any economics model is the ceteris paribus assumption, which in translation from Latin into English means all else held constant.
Under this and some other assumptions, Country A will eventually purchase products from Country B and vice versa by virtue of their being trading partners within the population of countries around the globe. At any given moment, for the sake of simplicity if for no other reason, there is an immediate need to hold constant the state of technology, the availability of resources, and the level of productivity. This constraint limits production possibilities to an initial set of specific combinations. With a view toward a nation's current ability to produce two items, say goods X and Y, there is some precise point at which a specific combination of X and Y is possible in equal amounts, but any attempt to produce more of one essentially translates into the production of less of the other. In brief, the opportunity cost associated with producing one unit of X is the sacrifice of one unit of Y. This situation illustrates the opportunity cost concept while holding all else constant.
Economics, in general, involves applying the opportunity cost concept to decisions made at the margin. In other words, how a change in one variable results in a change in another variable. As an introduction to the orientation of economics toward marginal analysis, the production possibilities frontier is a model that portrays all those combinations that a country's entire economy can produce. It is a macroeconomic concept, which effectively conveys the interdependencies among scarcity, choices, and tradeoffs. The difference between those economic divisions resides in their scope. Macroeconomics is a study of economics using models of the whole economy whereas microeconomics is a study of the behaviors of consumers and producers as they interact through price mechanisms in models we can refer to as a market....
Effects of Free Trade Agreement on Indo-China Trade
9 PagesPosted: 27 Jun 2008
Date Written: April 27, 2008
Given the nature of huge trade inflows into the Indian market from the China this paper tries to shape up the possible effects that a free trade agreement between these trading giants will have. In addition to a general overview of how trading relation has gone about in the last decade we will try to magnify into the fact that whether the proposed FTA agreement between India and China will lead to any welfare gains for India or not.
Keywords: Indo-China FTA, tariff rates, gravity model
JEL Classification: F13, F17
Suggested Citation:Suggested Citation
Subhajit, Subhajit, Effects of Free Trade Agreement on Indo-China Trade (April 27, 2008). Available at SSRN: https://ssrn.com/abstract=1152134 or http://dx.doi.org/10.2139/ssrn.1152134
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