Question 1 Terms of Trade is defined as “the price of a country’s exports divided by the price of its imports” (Krugman, Obstfeld, & Melitz, 2015). Essentially, if export prices increase faster than import prices, then the terms of trade improve; reversely, if import prices increase faster than export prices, then the terms of trade deteriorate. This is because when export prices are higher than import prices, the terms of trade is higher than when the export prices are less than import prices (shown in equation 1 below). Equation 1: Terms of Trade = (Price of Exports/Price of Imports)*100 Terms of Trade change mainly due to economic growth and trade barriers. Economic growth is biased; export-biased growth is when growth “disproportionately …show more content…
Also, entry and exit is free, and in the long run, there are no economic profits (Krugman et al., 2015). In monopolistic competition, firms will sell more when total industry sales rise and when their rivals charge higher prices; they will sell less when firms exit the industry and prices rise. In Figure 4, the CC curve shows the relationship between average cost and number of firms; when there are more firms in the industry, the average cost increases because each firm produces less individually. Figure 4 also shows the relationship of number of firms and price through the PP curve; when there are more firms in the industry, there is more competition, so in order for firms to maximize profits, they will reduce prices charged. At n3, there are a lot of firms in the industry, and the corresponding price will be low, at P3. When firms exit the industry, to move to n2, the price rises to P2. This shows how fewer firms make prices rise, as there is less competition. This results in a downward sloping PP curve under monopolistic …show more content…
Where as, Intra-industry trades are “two-way exchanges of similar goods” (Krugman et al., 2015). Hence, intra-industry trades are “not based on comparative advantage” (Krugman et al., 2015). The main difference between inter- and intra- industry trade is that inter-industry trade occurs because of comparative advantage, while intra-industry trade happens because of lower costs from economies of scale and the wider variety of products for consumers. For example, there is intra-industry trade in the US auto industry (Turkcan, & Ates, 2010). Turkcan and Ates (2010) point out that the increase in outsourcing in the automobile industry has increased intra-industry trade; outsourcing has allowed manufacturers to get parts from the “best suppliers” which results in “lower unit costs”. They also indicate that companies “benefit from economies of scale” when outsourcing (Turkcan, & Ates, 2010). Another difference is that since monopolistic competition cannot predict which country will import and export in intra-industry competition, differentiation of goods may create comparative advantage which may determine which country will import and export a certain variety of a good. For example, Japan mainly makes family cars, like Toyota, while Germany mainly makes sports cars, like Audi; therefore, Germany will have a lower unit cost for sports cars and Japan will have a lower unit cost for family cars (Dudovskiy, 2012). In
Trade is the most common form of transferring ownership of a product. The concepts are very simple, I give you something (a good or service) and you give me something (a good or service) in return, everyone is happy. However, trade is not limited to two individuals. There are trades that happen outside national borders and we refer to that as international trading. Before a country does international trading, they do research to understand the opportunity costs and marginal costs of their production versus another countries production. Doing this we can increase profit, decrease costs and improve overall trade efficiency. Currently, there are negotiations going on between 11 countries about making a trade agreement called the Trans-Pacific
During the postclassical period, the expansion of trade had different interpretations around the world. Varying societies all reacted to trade in different ways due to how they viewed the situation. It had caused conflict in few areas around the world and also created peace as well as harm. Some communities had pros and cons to trade, like everything else. Some reasons for the positive or negative feedback on trade was due to religion, and or the philosophical system. Religion and the philosophical system was both pros or cons for trade in different civilizations. Religion helped with the spread of different ideas and religions across a mass area. Yet it had a negative input because then people fought, thinking their religion was more
Trade, of course, is only part of a larger network of relationships between our two countries. This network evolves in response to many complex influences, and exporters need to consider how our two countries' ever-expanding, ever-changing relationships will affect their activities. To take just a few examples:
Others added that monopolies produce less output and charge a higher price than a purely competitive environment. The monopolist sets the marginal revenue equal to marginal cost and output is therefore smaller. In monopolies, profits can persist indefinitely, because high barriers to entry prevent new firms from taking part in the
Slaves and slave trade has been an important part of history for a very long time. In the years of the British thirteen colonies in North America, slaves and slave trade was a very important part of its development. It even carried on to almost 200 years of the United States history. The slave trade of the thirteen colonies was an important part of the colonies as well as Europe and Africa. In order to supply the thirteen colonies efficiently through trade, Europe developed the method of triangular trade. It is referred to as triangular trade because it consists of trade with Africa, the thirteen colonies, and England. These three areas are commonly called the trades “three legs.”
The Triangular Trade was the fundamental foundation of many economic and social developments of this nation. However, this historical turning point in America’s history did not develop overnight. In Africa, the practice of enslavement had been occurring internally for centuries, but as the Triangular Trade developed between the Old World and New World, the slave labor system transformed and began to become an integral part of many nation’s economic systems. As the demand for agricultural products, such as tobacco and sugar, increased, the Atlantic Slave Trade also expanded as the need for laborers proliferated. Thus, the Triangular Trade was the building blocks of the United States, economically affected the world, and ultimately impacted racial
Besides that free trade encourages strengthen the development of a country’s institutions, in order to protect the country’s eco...
As the economic integration of Europe continues, it is likely that increasing international competition will affect firms in European industries. As other countries expand and have more trade worldwide, the more the European economy will be affected. The economy will tend to buy from outside of Europe due to taste and lower prices. There would be more firms to choose from decreasing Economies of scale are significant because motor vehicle manufacturing is an industry based on growth. Since the automotive industry being discussed is in Italy, it is based primarily around one company, Fiat. The majority of sales of automobiles in Italy are acquired by Fiat. The automotive industry constitutes a substantial part in the European economy because this industry makes up 10 percent of total manufacturing output.
While free trade has certainly changed with advances in technology and the ability to create external economies, the concept seems to be the most benign way for countries to trade with one another. Factoring in that imperfect competition and increasing returns challenge the concept of comparative advantage in modern international trade markets, the resulting introduction of government policies to regulate trade seems to result in increased tensions between countries as individual nations seek to gain advantages at the cost of others. While classical trade optimism may be somewhat naïve, the alternatives are risky and potentially harmful.
No single firm can influence market price in a competitive industry; therefore a firm’s demand curve is perfectly elastic and price equals marginal revenue. Short-run profit maximization by a competitive firm can be analyzed by comparing total revenue and total cost or applying marginal analysis. A firm maximizes its short-run profit by producing that output at which total revenue exceeds total cost by the greatest amount.
International Trade Law Case Study Introduction International trade transaction is essential for the sale of goods with the addition of an international element. In practice, the seller and buyer are in different countries where the goods must travel from the seller’s country to the buyer’s country by various means of transports. In international sale of goods, they usually transit the goods by sea because of the international transactions. Therefore, contracts for the carriage of those goods must be procured between the seller or buyer and common carrier depending on different types of sale of contracts. Moreover, in most of incidences, the agreed goods are usually insured at a reasonable amount in case of being loss or damaged during the transit.
Trade creation occurs whenever there is switching of imports from a high cost source to a low cost one or any consumption shifts from a high priced producer to a low cost one.
The Perceived Demand Curve for a Perfect Competitor and Monopolist (Principle of Microeconomics, 2016). A perfectly competitive firm (a) has multiple firms competing against it, making the same product. Therefore the market sets the equilibrium price and the firm must accept it. The firm can produce as many products as it can afford to at the equilibrium price. However, a monopolist firm (b) can either cut or raise production to influence the price of their products or service. Therefore, giving it the ability to make substantial products at the cost of the consumers. However, not all monopolies are bad and some are even supported by the
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
Trade creation occurs when low cost producers within free trade area replace high cost domestic producers. These agreements create more opportunities for countries to trade with one another by removing the trade barriers and investment. Trade creation allows member countries for a wider selection of goods and services not previously available. They can acquire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs which will encourage more trade between member countries the balance of money spend from cheaper goods and services, can be used to buy more products and services. Regional economic integration significantly contributes to the relatively high growth rates in the nation. By removing trade barriers between members countries the factor of production can be move