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
The trend toward a more globalized market has become increasingly developed in the latter half of the 20th century. Emphasis on world trade has become a dominant figure in almost every Nation’s economy. Between 1970 and 2000 world trade has experienced an increase of almost 370 percent. Concurrently, world GDP increased by 150 percent. Trade is beneficial to Nations because it allows the creation of avenues that aid in efficient allocation of resources (Canas & Coronado). Countries can gain from trade when they specialize according to their comparative advantage. This is, when they create conditions where goods and services can be produced at a lower opportunity cost than in any other country. Along the same logic, countries can also make large profits by taking advantage of another countries comparative advantage.
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:
...olombia but the US as well since most of the coca produced in Colombia is exported to Mexico or the United States.
Fair Trade is an organization that helps certify farmers get the right amount of money for their products. It was founded in 1992, the headquarters is in London, England, UK. Fair trade is a non profitable organisation. Without Fair Trade; the shops and the investors will get profit but the farmer won't. Fair Trade helps the farmers have a safe vision of the amount of profits they will get.
Per the WTO website (https://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm), the process for resolving disputes within the WTO are quoted below:
The development of the international trade patterns and the theories that try to describe these patterns are analysed in this essay. With special focus on major international trade streams in each period of time, the Classical Theory, the New Trade, and Contemporary International Trade Theories are described.
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). International trading has its comparative advantages. Gains arise when a nation specializes in production and exchanges output with a trading partner, Meaning each nation should produce goods they are the best at making. When that happens the transaction leads to lower cost of production and maximizes the combined output of all nation involved. For example California shouldn’t try to produce and sell coconuts, it would be too expensive because they don’t have the right climate, where else in Indonesia it would be cheaper because it has the right climate for
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.
As we can see, international trade may contain dangers of trade dependency and other negative sides, but it is necessary element for every healthy economy in the world.
Though foreign manufactures typically are not able to produce the good at a lower cost because of the economies of scale, foreign producers due have many advantages that they can utilize to compete in the foreign country’s home market. Already, the original manufacturers have researched, developed, tweaked, and mostly perfected the product; thus the foreign manufacturer is saved time and money, allowing them to proceed almost straight to production. The foreign manufacturers also has home-field advantage given that their prices do not need to accommodate for import tariffs and freight costs. While the foreign manufacturer is not necessarily able to export the good at a price that can compete with the original country’s price, foreign manufacturers are able to chip away at the original country’s exports. As more foreign firms appear and grow in different markets, the original country will start to see their export growth slipping until the point their market share begins to
To start with, a profit-maximizing firm under perfect competition has, first of all, too small the proportion of total industry supply to make any influence on the market price of the identical product. It is therefore a price-taker. As nobody has the power to control the industry, there is complete freedom or no barrier for new firms to enter the industry competing with the existing firms. In this case, the individual firm faces a horizontal demand curve and its AR and MR coincide with the demand curve (shown in figure 1).
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
There are also many consequences of adverse terms of trade internationally. High costs of debt servicing, even with a greater quantity of export are required to pay back the same amount of foreign debt. Also, falling export receipts can cause current account deficits, which could lead to increased borrowing. Adverse terms of trade reduce the country’s ability to afford much needed imports, which become more expensive. In dealing with illegal crops it may seem attractive to growers, such as cocaine in South America. The worst thing that can lead to long term depletion of resources is the incentive to export more primary products to compensate for lower export prices.
In long-run competitive equilibrium, all firms are in profit-maximizing equilibrium (P =LMC), and there is no incentive for any firm to either enter or exit from the market since the economic profit is equal to zero (P = LAC). Hence, the competitive equilibrium, in the long run, is at the lowest level where P = LMC = LAC. The long-run average cost curve shows the lowest cost at which a firm is able to produce a given quantity of output in the long run. So, we would expect that in the long run, competition drives the market price to the minimum point of the typical firm’s long-run average cost
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.