Question

Comparative Advantage, Exchange Rates and International Trade

Globalization is becoming a very important topic in economic discussions. While some politicians favor protectionist policies because they feel these policies protect domestic producers, others claim free trade increases economic activity and has advantages for the country as a whole. Comparative advantage dictates which good or service a particular region specializes in and exports to other regions.

1. Do you think it is better to source from overseas or should tariffs be in place to protect American industries? Why?
2. List one good or service that your home region specializes in and where it exports this good. Why is your region particularly good at the production of that good or service?
3. What are the impacts of an exchange rate system on exports and imports?

Answer 1

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Question:

Answer:

These days we are living in a globalized world and world is flat now. Most of the countries of the world are following capitalistic democracy and adopting neo-liberalism. World is open now and there is free flow of goods, services, technology, knowledge, culture and workforce. This time the world is very interdependent and world trade play an important role to driving this new eco-social philosophy. A country produce and export those products in which, it has specialization of opportunity cost is comparatively low and import those products which it has no expertise. Free trade increases economic activity and has advantages for the country as a whole. There are number of benefits are globalization. These benefits are following as-

a). Lower cost of production to service in high competitive world.

b). access to new culture, technology and talents.

c). Access into the new markets.

d). Increasing income level and standard of living etc.

Other people are in favor of protectionist policies because they feel these policies protect domestic producers but data and research do not support it. Comparative advantage play an important role in international trade. Increasing or imposing tariff or other trade restrictions are not favorable this time. This practice increase price of products in the domestic market and decrease consumer surplus. It also negatively affect the productivity and efficiency of domestic firms. It can increase a trade war that is favorable for both of the countries (exporter or importer). You can see the effect of tariff in recent years as a US-China trade war. So, i am not in favor of protectionist policies.

My region is specialized in business process outsourcing because of lower cost of labor. Due to lower cost of labor, the big firms outsource their required services that are costlier in their home region.

Exchange rate play an important role in export-import. When congruency depreciate, its increase export that increase net export. Other side appreciating currency is favorable for the countries that import more. When a countries export more then its increase demand for domestic currency and currency get appreciated and vice-versa. You can see how a countries like, China, Japan devaluate their currency to protect their export business. A depreciated currency is always favorable for export and vice-versa.

Thanks