International Trade
The answer to this question depends on the understanding of the different economic concepts related to international trade. For instance many economists from IMF, World Bank and the USA believe that free trade across countries boosts maximum welfare for all states and people involved. Where as another school of thought in the developing world says that countries which are not developed need to protect their infant industries so that they can strengthen their expertise and gain economies of scale overtime.
Advantages and Limitations of International Trade
The debate that I have highlighted in the opening two paragraphs forms the basis of what advantages and disadvantages world trade offers to different countries. For example countries which have a comparative advantage in one product over another country can export that product in exchange of goods or services in which the other country holds a comparative advantage. This will increase total benefit to both the countries by maximizing consumer and producer surplus. Similarly another advantage is of improved relationships between trading countries and the individual producers and associations. This will generate greater investment opportunities in both the countries.
Another advantage is to the domestic producers of goods who need goods from other countries to use as raw material. This will help reduce the prices of goods in the domestic country. We also see that because of free trade there is increased competition between domestic and foreign producers hence increasing quality and lowering pries for customers. International trade also provides greater choice and better prices for customers in all trading countries.
There are a few imitations to world trade as well. Firstly, domestic industries which are newly set up can face extinction if not protected appropriately. If countries decide to protect their infant industries this leads to reaction and trading partners also put tariffs and quotas on the imports from the country which initiated protectionism for its infant industry. Another issue related to international trade is of the potential of other countries which can start dumping products in the domestic market of another country. This would result in the importation of low cost goods priced down below the market price level in its own country deliberately by the exporting country. This practice can harm the industries in the importing country.
Implication of International Trade on the U.S
The United States of America can benefit immensely from trade as we already have seen through the years. The major impact is in terms of the availability of cheaper goods and services from sources outside USA that are used by consumers and the manufacturing and service industries alike. The fact is that countries like the USA, who have high level of technically skilled laborer and capability of producing manufacturing goods and agricultural products, can export these high quality products at competitive prices in return of imports of low priced raw material and other services.
Another recent phenomenon of international trade that has impacted US is of outsourcing. By outsourcing work to cheap skilled labor abroad US companies are reducing cost of manufacturing. This new trading activity has a negative impact as well such that many job opportunities are transferred out of the US in search of low costs. We also see an impact on the standard of living within the USA. By importing cheaper goods and exporting goods people in the US have been able to afford better life styles and increase their income by exporting. International trade has also brought in a lot of foreign investment especially in the auto-motive industry. The software industry has also benefited immensely from the export-oriented policies of the US government.
Effect of Fiscal and Monetary Policy on Exchange Rate
If in an economy interest rates rise we will see that the currency of that economy to appreciate as hot money will follow in the banks of the economy. What we mean is that higher bench mark interest rate which is a part of a monetary policy lead to more money flowing in from foreign countries as they see higher rates of return in this particular economy. If the Federal Reserve try to increase money supply than that could devalue the US dollar if we were talking about the US economy. This could be done if the US Federal Reserve decides to buy back treasury bills or government sold paper. Similarly if the Reserve decides to reduce the credit reserve ratio i.e. the amount of money that banks need to deposit with the Reserve as cash and as paper than the money supply will raise that can decrease interest rates and cause the currency to depreciate.
In terms of the fiscal policy, when tax rates increase in an economy it indicates that the government wants to raise money for future government expenditure and this could increase the cost of production for domestic producers hence decline exports causing a depreciation of the currency. Contrary to this if the government is limiting its public expenditure than it will be less dependent on foreign loans to cover for deficits hence the currency would appreciate as the supply of domestic currency is lower in the foreign markets.
Key Points from the Simulation
There were a number of key points that were highlighted in the simulation. Firstly, the simulation talked about the comparative advantage which is defined as the ability of a country to produce a particular good with fewer amount of opportunity cost in terms of another commodity compared to the opportunity cost ratio of the same two goods in another country. Another key point was about the anti-dumping duty which is placed to stop a country from dumping goods at lower than market price in a foreign country which can lead to market distortions. We also learned that countries can benefit if they can lower their dead-weight loss which is the total loss to the society. This can be achieved by maximizing the consumer and producer surplus combination and also looking at the collections of governments through taxes. Finally we also learned about the production possibility frontier in the simulation which provides the different combination of two goods that can be produced within an economy.
The concepts that we have learned from the simulation can be applied on the workplace in a number of ways. For instance if we go on and work for a government agency or for WTO that looks at potential trade relations and opportunity cost ratios than the comparative advantage analysis can benefit the decision making process. Similarly if we go on to work for a company that sells goods and services an analysis of comparative advantages can benefit in terms of finding out that the export of which goods and services will increase the benefit to our country and also we would align our export policies with the incentives from the government.
The import and export of goods and services in a free world economy will benefit all consumers and provide maximum benefit though a realization of that is a bit far in the future as nations come together to negotiate on forums such as Doha talks, WTO talks and FTA talks.