Question

Explain the following:

A) Carefully explain why do nations trade? What determines what should each

nation produce in trading with others?

B) Solve problem #3 on page 464 text book with China and Canada producing

apparel and chemicals.

C) What are trade restrictions? Explain. How might protective tariff reduce both

the imports and exports of the nation that levies the tariff? Carefully explain.

Answer 1

A.

National trade with each other due to different reasons. The first reason is the expansion of economy in terms of GDP and propensity to cater the demand of another market, with the excess supply present in their own economy. It creates more employment and economic strength increases. The second reason is to export what they can produce and import what they are not able to produce in lesser cost. The third reason is the protect economy from the business cycle fluctuations of domestic market, as different markets show different level of economic activities and business cycle stage. So, slow down in domestic economy and its negative impact can be offset when export takes place in the another economy.

While trading with another country, the nation should produce the goods, in that, they have comparative advantage. It will make them, specialize in that goods, produce it, and then trade it with another trading nation. It is based upon Ricardian theory of comparative advantage. Another approach is based upon factor abundance. Any country with bigger amount of a type of factor of production, should produce goods, that require that factor of production, already present in abundance. It will make the country to produce goods in huge volume and then trade. It is as per the Heckscher-Ohlin model of factor abundance for international trade. Besides, Porter's nation's competitive advantage is also used by the nations to identify their competitive edge in producing goods and export.

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Data of question B is not provided in the question.

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Trade restrictions are the government policy that involves restricting imports from another nation using tariff and non-tariff based trade barriers.  Here the government puts tariff on imports, or quota upon imports in an effort to protect the domestic industries who are in nascent stage. Protective trade policies reduces import and export of the nation, because putting tariff first reduces the import quantity and at the same time, other nations retaliate and put tariff upon the exports done by the country ( who first put the tariff on imports). So, export of the country also decreases, while import is already less due to the tariff. Further, nations, making imports with tariff, will try to produce goods, in that they are not specialized. It will consume their resources and they will also not be able to produce goods that are exported to another nation. It will also reduce the exports, done by the country.