Question

Economics history question

a). What does the arbitrage inequality tell us about trade costs if we know prices in both markets and markets are fully competitive?

b). How can trade can rise even if trade costs do not change?

c). Explain why the division of labor is determined by the “extent of the market”.

Answer 1

a) Arbitrage is the process of buying and selling assets simultaneously on different platforms, exchanges or locations to take advantage of the price difference (usually lower in percentage). When entering into an arbitration transaction, the amount of underlying asset purchased and sold must be the same. Only the net difference is recorded as net commercial payment. The reward must be large enough to cover the costs associated with completing the transaction (for example, transaction costs). Otherwise, it would make no sense for the trader to start trading first.

Currency arbitrage is a strategy to exploit price inequality in money markets. This can be done in various ways, but although it is done, arbitration tries to buy prices in foreign currencies and sell prices in currently devalued currencies, which are likely to converge quickly. With prices falling on average, arbitrage is expected to be more profitable and may sometimes close within milliseconds.

In real life, arbitration opportunities (if any) exist only for short periods, as most arbitration negotiations have been done by algorithm exchanges in mature markets. These algorithms quickly identify and capture arbitrage opportunities, thus facilitating the maintenance of exchanges by human operators.

B) Trade costs are expressed as a relative measure, that is, as a relation between international trade and internal trade. The increase shows that international flows have increased relative to national flows, which facilitate trade between the two partners rather than trade within their own country.

C) Lower trade costs actually increase comparative advantage by increasing competitive exports. Lower commercial costs allow companies to use technology and intermediate inputs, preventing them from entering or growing global value chains. Improve well with a wide range of consumer goods and services and at low prices.

Although the cost of trade does not merely guide the development of economies, they are an important factor that explains why some countries cannot grow and diversify. The range of policies affecting business costs is wide.

When Adam Smith advanced his famous theorem that division of labor was limited by market size, he created at least one superficial dilemma. If this proposal is of general application, shouldn't most areas have a monopoly? As long as the additional division of labor (with which we can understand the greater specialization of labor and machinery) provides lower costs for larger products, employers will win by combining or expanding and expanding their competitors. And here is the dilemma: either the division of labor is limited to the size of the market, and industries usually have a monopoly; Industries are generally competitive and the theorem is false or insignificant. No option is attractive.

The division of labor adds specialization and the division of a complex production activity into more or more secondary activities. Its importance in the economy lies in the fact that a certain number of workers can produce much more from the division of labor than the number of workers alone. Interestingly, this is true even if those who work alone are skilled artisans. There are many reasons for the increase in production. According to Adam Smith, this includes greater learning ability, innovations in design and use of tools, as steps are more clearly defined and savings on movement losses that change from task to task. other.

In the early 1800s, David Ricardo developed a comparative theory as an explanation of the origins of trade. And this explanation holds considerable power, especially in a pre-industrial world. For example, suppose England is suitable for the production of wool, while Portugal is suitable for the production of wine. If each nation is specific, the total consumption in the world and each nation increases. It is interesting to note that this holds true if a country produces the better two raw materials - even the least productive country benefits from expertise and trade.