Would people ever stop thinking about why some countries simply do much better than others? Stop thinking why people move in one country to another just to live a much better life? Most likely not! It is believed that the principles of specialty area and international trade have helped ensure that one countries enjoy a relatively high quality lifestyle while other countries look rather exploited therefore of the, and rightly so. But why does this occur? Could it be because first-world countries focus and participate in the profitable aspect of international trade? If so then let's the next and third-world countries just follow in this path? Apparently it generally does not seem to be as easy as it noises for different reasons from different perspectives. Before one can figure out why this is so, the belief of specialization must first be known. So what is field of expertise?
In general, "specialization is a way of production where a business or country targets the development of a limited scope of products or services in order to gain greater examples of productive efficiency within the whole system of businesses or sector. Many countries focus on producing the goods and services that are local to their area of the world. This specialty area is the basis of global trade as few countries produce enough goods to be completely self-sufficient. Specialization can also refer to development, for example when in a stock an assembly line is organized in a special manner rather than producing the whole product at one development train station. " [Investopedia. com (N. D) (Online)]
A whole lot of first-world countries have a tendency to utilize the idea of specialization when participating in international trade. That is so since when a country specializes on a business area in international trade, it promises the required development efficiency had a need to create a feeling of monopoly regarding a commodity's international trade affairs. So what is international trade?
"International trade is the interchange of goods and services between countries. This can be bilateral or multilateral trade. It is bilateral if it consists of two nations trading with the other person and multilateral if the trading includes more than two countries. This type of trade gives climb to a world economy, where prices, or supply and demand, affect and are affected by global happenings. Political amendments in Asia, for example, can cause a rise in the price tag on labour, thus escalating the price of production for a British isles gym shoe company founded in Malaysia, which would then result in an increase in the purchase price that you have to pay to choose the tennis shoes at an area mall. A decrease in the expense of labour, on the other hand, would lead to having to pay less for new athletic shoes. " [Studymode. com (N. D) (Online)]
"Trading internationally offers consumers and countries the possibility to come in contact with goods and services unavailable in their own countries. Nearly every kind of product can be found on the international market: food, clothes, extra parts, engine oil, jewellery, wine, stocks and shares, currencies and normal water. Services are also exchanged: tourism, bank, consulting and travelling. A product that comes to the global market is an export, and something that is bought from the global market is an transfer. Imports and exports are accounted for in a country's current consideration in the balance of repayments. " [Ezinearticles. com (N. D) (Online)]
"Global trade allows wealthy countries to make use of their resources - whether labour, technology or capital - more efficiently. Because countries are endowed with different possessions and natural resources (land, labour, capital and technology), some countries may produce the same good more efficiently and for that reason sell it more cheaply than other countries. When a country cannot proficiently produce an item, it can obtain that by trading with another country that can. That is known as field of expertise in international trade. " [Ezinearticles. com (N. D) (Online)]
Assume both Country A and Country B produce natural cotton sweaters and wine beverage. "Country A produces 10 sweaters and six wine bottles per year while Country B produces six sweaters and 10 wine bottles a year. Both can produce a total of 16 items. Country A, however, calls for three hours to create the 10 sweatshirts and two hours to create the six wine bottles (total of five time). " [Scribd. com (N. D) (Online)]
"Country B, on the other side, takes 1 hour to create 10 sweatshirts and three time to produce six bottles of wine (total of four time). But these two countries realize that they could produce more by focusing on those products with which they have a comparative gain. Country A then begins to produce only wine beverage and Country B produces only organic cotton sweaters. Each country is now able to create a specialised outcome of 20 units per 12 months and trade equal proportions of both products. So, each country now has usage of 20 models of both products. " [Scribd. com (N. D) (Online)]
"It can then be seen that for both countries, the ability cost of producing both products is higher than the expense of specializing. More specifically, for every country, the ability cost of producing 16 models of both sweatshirts and wines is 20 devices of both products (after trading). Expertise reduces their opportunity cost and for that reason maximizes their efficiency in acquiring the products they want. With the greater supply, the price tag on each product would decrease, thus giving an edge to the end consumer as well. " [Scribd. com (N. D) (Online)]
"Remember that, in the example above, Country B could produce both wine beverages and egyptian cotton more effectively than Country A (less time). That is called an definite advantage, and Country B may have it because of a higher-level of technology. However, based on the international trade theory, even if the country comes with an absolute advantage over another, it can still reap the benefits of expertise. " [Scribd. com (N. D) (Online)]
"International trade not only brings about increased efficiency but also allows countries to take part in a global current economic climate, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals make investments into overseas companies and other property. In theory, economies can therefore grow more successfully and can easier become competitive financial individuals. " [Ezinearticles. com (N. D) (Online)]
For the acquiring government, FDI is a way by which foreign currency and competence can enter the country. These raise job levels, and, theoretically, lead to a growth in the gross domestic product. For the trader, FDI offers company development and growth, which means higher earnings.
"Economist believes that if countries take part in international trade, they can generally benefit under a free of charge international trade environment. To obtain a clear perspective to the claim, I am going to glimpse though five major main theories on international trade-the Ricardian Comparative benefits Model on benefits from field of expertise and opportunity cost theory, Heckscher-Ohlin model who believes that factor effectiveness differences will be the reasons why countries take part in international trade as a result of gains from field of expertise and income distribution results, the new international trade theory which examines the economies of scale and the Heterogeneous companies theory which explains why countries engage in international trade basing on a firm level point of view. " [Cartercentre. blogspot. com (N. D) (Online)]
"Relating to David Ricardo (1817), countries engage in international trade because they stand to gain if they specialize in the development of products with low opportunity cost. To Ricardo countries should understand their factor endowments then direct creation to the best choice in using the available resources. A country starting such specialization would then take part in international trade with others countries to get those products which can be of second best option in utilization of resources. " [Cartercentre. blogspot. com (N. D) (Online)]
"Ricardo stresses his point using the ability cost theory. Noting that resources are scarce, a country must give up development of 1 product to be able to produce the other. To know which one to give up, a country has to determine where it would have higher end result if the same reference available was employed in the production of either product. A country would specialize in production of this product whose usage of the available reference produces the most end result. " [Cartercentre. blogspot. com (N. D) (Online)]
"In opportunity cost conditions, a country should specialize in production of that product whose cost for inability to create it is greater than that of the next alternate. " [Cartercentre. blogspot. com (N. D) (Online)]
"To Ricardo, countries are endowed diversely and they also have different opportunity costs. The difference in opportunity cost is what would permit countries to engage in international trade with one another so as to obtain the disadvantaged products. " [Cartercentre. blogspot. com (N. D) (Online)]
"Ricardo sums up the above with the use of what he called the utter and comparative advantages. To him even if a country would produce more of both products than the other country (the complete advantage), it should specialize in producing that product in which it comes with an advantage in utilization of the available resources (comparative edge). " [Cartercentre. blogspot. com (N. D) (Online)]
Next, this theory will be examined using the following example.
The theory assumes that;
There are two countries to engage in international trade -Assume Nigeria and the U. K are being used.
There are two products produced- i. e. Coffee and Computers
One factor of development is present- i. e. Labour
Factor production is constant
Perfect competition is available in the market
Homogeneous of factors-They have set and same capabilities and production levels
Factors are perfectly mobile within country and between industries -Can be shifted from production of one product to some other and from one region to another
Factors are immobile between countries -Endowments in one country cannot proceed to another country.
Fixed degree of technology
"The stand below shows the levels of coffee and personal computers that would be produced by Nigeria and the U. K whenever a unit of labour is allocated in the production process. This stand also indicates the situation pertaining in each country before the countries take part in international trade. " [Cartercentre. blogspot. com (N. D) (Online)]
"From the stand, the U. K comes with an absolute benefits in the production of both coffee and computers per device of labour utilized. Next is to analyse the opportunity costs in order to determine their particular comparative advantages. This is achieved by taking a look at the foregone good thing about not producing one product in order to produce the other. In the lack of international trade the chance cost is calculated as the percentage of the produced product to the foregone choice. " [Cartercentre. blogspot. com (N. D) (Online)]
"In a situation of autarky (i. e. no trade), the (comparative) price of the good equals the opportunity cost of producing that good in a country. Under free trade however, world (relative) prices are determined by world resource and demand across countries (i. e. they show up between the ability costs of the two countries)" [Cartercentre. blogspot. com (N. D) (Online)]
"If Nigeria focuses primarily on coffee, it will have to forego 50/50, 000 devices of computers for every unit of espresso produced. If however Nigeria decides to focus on computers, it would forego 50, 000/50 = 1, 000 items of coffee for every unit of pcs produced. Moreover, if the U. K specializes in coffee, it will have to forego 400/100, 000 = 0. 004 systems of computers for each and every unit of caffeine produced. If however, the U. K chooses to focus on computers, it would forego 100, 000/400 = 250 items of coffee for every unit of computer systems produced. " [Cartercentre. blogspot. com (N. D) (Online)]
The table underneath recapitulates the chance costs for Nigeria and the U. K if they both specialised in the creation of 1 of the merchandise.
"From the table, it could be figured Nigeria has a comparative benefits in the production of coffee and the U. K has a comparative benefits in development of computers. Because of this, the U. K should focus on production of personal computers and Nigeria in espresso and the two countries should engage in international trade and exchange the commodities where they have a comparative gain with those in which these are disadvantaged. " [Cartercentre. blogspot. com (N. D) (Online)]
"In the event the relative price of caffeine is higher in the U. K than in Nigeria, it is profitable for both countries if Nigeria exports espresso to the U. K and imports computers from there. " [Cartercentre. blogspot. com (N. D) (Online)]
"Now why don't we examine the result of moving one device of labour to focus on production of something where each country has a comparative benefits. As one product of labour is customized in creation of coffee, Nigeria foregoes (loses) 50 products of models of computers to gain 50, 000 items of coffee. Moreover, as one unit of labour is moved from the production of coffee to the production of computers, the U. K loses 100, 000 models for an increase of 400 devices. As the countries specialize in their respective comparative advantages, the changes in their outputs will look as follows;" [Cartercentre. blogspot. com (N. D) (Online)]
"But both countries will still require the products it hasn't produced. The U. K will obtain the 100, 000 models of caffeine from Nigeria. For Nigeria to be able to produce that amount it will have to allocate 2 models of labour. The effect of this labour transfer is the fact Nigeria will forego production of 100 items of computers so as to meet up with the demand for coffee by the U. K. The U. K, still which consists of one product of labour, must exchange its 50 items of computer systems with the 100, 000 products of coffee from Nigeria. The desk shows the international trade related changes in result as countries utilize their respective labour reference in the best alternate;" [Cartercentre. blogspot. com (N. D) (Online)]
Total change in output
"Due to specialization and trading predicated on comparative gain, additional 250 units of personal computers are produced and consumed without lowering the quantities of espresso produced and traded in the international market. In general, countries gain from free trade because the output and consumption possibilities of both countries broaden as opposed to no trade. Why don't we try to analyse the device allowing countries to get from trade. " [Cartercentre. blogspot. com (N. D) (Online)]
"In case the world price of espresso is equal to $1and the price of some type of computer equals $500, Nigeria can purchase 200 units of personal computers from the U. K by exporting 100, 000 espresso devices. As both countries engage in international trade, they finish up consuming more computer systems and the same amount of espresso than in the situation without trade. " [Cartercentre. blogspot. com (N. D) (Online)]
"Therefore allowing countries to focus their resources in the monetary activities in which they have a comparative edge and then take part in international trade to get products where they have a comparative downside will not only expand the size of global production, it permits expanded 'global consumption opportunities'. " [Cartercentre. blogspot. com (N. D) (Online)]
"The theory has been criticized due to the fact of its assumptions which for some economists are not realistic. Below are some of the areas that the theory ignores. " [Cartercentre. blogspot. com (N. D) (Online)]
"Free international trade is effective not only to that country with a far more beneficial sector than foreign countries but also to the people countries that are able to prevent the high costs for goods that they might otherwise have to produce domestically. " [Cartercentre. blogspot. com (N. D) (Online)]
"The theory is not sophisticated enough to examine income distributional issues in just a country. For example free trade with countries that pay legislation wages can harmed high wage countries. Despite the fact that consumers gain because they can buy goods more cheaply, international trade may reduce income for some personnel, thereby impacting on the circulation of income within the country. In effect international trade with such low wage countries erodes the incomes of the manufacturers/workers that are acquired using resources more effectively and through higher prices/wage. " [Cartercentre. blogspot. com (N. D) (Online)]
"The assumption that all countries are indistinguishable aside from their differences in systems is farfetched. Countries vary in their endowments of critical indicators of production (inputs). Will that matter for trade?" [Cartercentre. blogspot. com (N. D) (Online)]
"The idea ignores the nature and form of transport in the several countries and the effect it has on the comparative price for one good to any other. Transfer costs differ in conditions of cost and appropriateness in delivery mechanisms. " [Cartercentre. blogspot. com (N. D) (Online)]
"These dissimilarities have a bearing on the price of the merchandise and do affect the conditions of trade. In other words, a country with a comparative advantage say in using labour to produce coffee could find itself disadvantaged in the international market, if its move sector is not well toned. " [Cartercentre. blogspot. com (N. D) (Online)]
"Factors of development are not necessarily homogeneous. Because they won't be the same, they cannot always move from the development of 1 good to another. " [Cartercentre. blogspot. com (N. D) (Online)]
Protectionism is an integral theory in international trade. It can be defined as "an economic insurance policy which is intended to benefit domestic companies of goods and services. " [wiseGEEK. com (N. D) (Online)] or it can even be defined "federal actions and guidelines that restrain international trade, often finished with the purpose of guarding local businesses and careers from international competition. " [Investopedia. com (N. D) (Online)]. Trade cover simply means stopping importation as explained through strategy like tariffs, quotas and taxes cuts.
Protectionism comes in several forms depending on the situation and its importance to the general welfare of a country. The following procedures are different ways that protectionism can be employed.
One of such ways is placing of tariffs. Tariffs are "A duty imposed on imported goods and services. " [Investopedia (N. D) (Online)]. Tariffs are put to discourage the consumers within an current economic climate from buying imports. The effect of tariffs on imports is the fact it increases the price tag on imports causing the house made products to seem to be cheaper than the brought in goods. The situation with using tariffs is the fact that it could cause other countries to retaliate by imposing even higher tariffs on the goods. The graph below shows that once tariffs are imposed, prices of imports increase and demand for transfer decrease.
Source: [mrski-apecon-2008 (N. D) (Online)].
Another method of protectionism is granting of subsidies to baby businesses. A Subsidy is "A benefit given by the federal government to communities or individuals usually by means of a cash payment or tax lowering. "[Investopedia. com (N. D) (Online)]
When subsidy is awarded to smaller businesses, cost of production and prices of goods are reduced which would cause consumers to increase demand for these goods somewhat than imports. Subsidy also helps newborn firms to contend favourably with bigger firms in other countries. The downside of using subsidy is that consumers indirectly purchase the subsidy by spending higher fees which would be utilized to give the subsidies.
Another form of protectionism is imposition of quotas. Quotas are "A government-imposed trade limitation that limits the number, or in certain cases the worthiness, of goods and services that can be imported or exported during a particular time period" [Investopedia. com (N. D) (Online)]. The result of quotas is the fact the number of imports is reduced. Quotas really do not have any influence on the costs of the imports. The problem of quotas is the goods and services that quotas are placed on, may be essential goods and services that the house country is unable to produce.
http://2. bp. blogspot. com/-wMix83-JaTA/T7WC3nL7YTI/AAAAAAAAAFM/kVMR9c5jeeg/s1600/Quota_effects. png
Source: [Nirmitkadakia (2012) (Online)].
Judging from the above graph, when quotas are placed, the world resource doesn't change but the domestic supply of goods and services boosts from Q to Q2 and local prices reduce from P to P2.
Embargo is another form of protectionism. Embargo is "A federal government order that restricts commerce or exchange with a specified country" Investopedia (N. D) (Online). Embargoes are usually placed on imports. When embargoes are positioned on goods, those goods are not imported by any means into a country. Embargoes are incredibly effective for goods that are hazardous in nature. An example of such goods is heroine- a difficult drug that is dangerous to the health of the consumers.
As an organization, the world's economists are not known for consensus of all subjects. However they are almost unanimous using one thing: Trade protectionism harms financial progress. Although global movements have shifted toward freer trade, most countries continue to use a number of protectionist steps, such as tariffs and import quotas, to safeguard domestic sectors from foreign competition. Although most economists like free trade, they recognize that protectionism benefits some players on earth economy.
This is one of the leading arguments for protectionism; namely, that doing so protects domestic market sectors and their staff' careers. Labour unions and home industries often appeal to patriotism to marshal support for protectionist procedures. "Buy American" is a popular rallying cry, such as one of the American auto industry when the best Three automakers faced stiff competition from Japanese imports. Economists concede that free trade imposes costs and burdens on some market sectors and staff in the brief run, but that in the long term, it is a lot more beneficial than protectionism, that they believe that helps only a go for few at the expense of the larger economy and modern culture.
Governments often justify protectionist guidelines by proclaiming that such guidelines are essential to help business that are in their infancy to develop. The validity of this argument, however, is undermined by the trend for such insurance policies to become permanent as the aided industry expands dependent on the support and even lobbies federal government officials to keep protectionist methods set up.
Protectionism restricts competition by limiting the availability of foreign goods, forcing consumers to buy more expensive domestic products. The expenses of tariffs and other protectionist obstacles are offered to consumers in the form of higher prices for foreign goods. Free trade, on the other hand, makes more competition among makers surrounding the world, which decreases prices and escalates the variety of goods.
Economists contend that protectionism boundaries economic progress by restricting the markets in which goods are available. They caution that a country that restricts goods from other countries may find its products likewise limited, which slows progress by making it harder for market sectors to export their products.
When the federal government of one nation restricts another country's imports through tariffs, import quotas, or other protectionist insurance policies, the second country may retaliate with similar activities against goods from the first country. Actions to limit trade with other nations can form into a "trade conflict, " as nations continually take action against each other's goods. In extreme cases, these tensions can escalate into armed conflict.
"As with other ideas, there are opposing views. International trade has two contrasting views regarding the level of control located on trade: free trade and protectionism. Free trade is the simpler of the two ideas: a laissez-faire procedure, with no constraints on trade. The primary idea is that supply and demand factors, working on a global scale, will ensure that production happens successfully. Therefore, nothing must be done to protect or promote trade and expansion, because market forces can do so automatically. " [Ezinearticles. com (N. D) (Online)]
"In contrast, protectionism contains that legislation of international trade is important to ensure that markets function properly. Advocates of this theory believe market inefficiencies may hamper the advantages of international trade and they aim to guide the market consequently. " [Ezinearticles. com (N. D) (Online)] Protectionism exists in many different forms, but the most common are tariffs, subsidies and quotas. "These strategies try to correct any inefficiency in the international market. " [Ezinearticles. com (N. D) (Online)]
"Since it opens up the opportunity for specialization and therefore better use of resources, international trade gets the potential to increase a country's capacity to create and find goods. Competitors of global free trade have argued, however, that international trade still permits inefficiencies that leave producing nations compromised. What's certain is that the global economy is in a state of continual change, and, as it evolves, so too must most of its members. " [Scribd. com (N. D) (Online)]
In conclusion, when the advantages of free trade are compared to the benefits associated with protectionism, it could be seen that the benefits of free trade outweighs that of protectionism. Hence, it might be recommended for countries to activate in free trade in order to increase specialisation. Also countries should use these two concepts as a watch dog for each other in order to enable a manipulated economy. Let us be aware that we cannot rule out protectionism absolutely from a country's market or else it will make the current economic climate turn into a wishy-washy one that will allow anything in and out of the economy. This is detrimental to the newborn industries in the united states and can turn the united states to a dumping surface which is significantly not healthy for a proactive economy. Hence specialization should work or go hand in hand with the protectionism to be able to provide an equilibrium overall economy.