Running head: INTERNATIONAL TRADE CONCEPT

International Trade Concept

INTERNATIONAL TRADE CONCEPT

International Trade Concept International trade plays a crucial role in a strong economy. Many countries who depend on international trade must carefully decide which countries to trade with. The International Trade Concept simulation provides an understanding of international trade, which will be the basis upon which this paper is written. This paper will discuss an advantage and a limitation of international trade, absolute and comparative advantage, and influences affecting foreign exchange rates, just to name a few. In addition, a summary of each team members assessment will also be given. Advantages and Limitations As with most business dealings there are advantages and limitations. The International Trade Concept simulation illustrates the advantages and limitations associated in trading with other countries. One advantage of international trade as identified in the simulation is the opportunity to provide more goods and services to a country, thus increasing the strength of the economy. One limitation is quotas, which limits the number of goods that can be imported in a country at certain time. Key Points Four key points from Economics emphasized in the simulation are open economics, closed economics, balance of trade, and tariffs. In the simulation individuals have to choose whether the simulated countries should have free trade with other countries or not. Trade with the surrounding countries would make an open economy whereas no trade would make a closed economy. One would also have to decide which items to import and export to make it most beneficial; balance of trade. To balance the monies in all trade transactions, a tariff is sometimes put into place additionally to tax certain imports.

INTERNATIONAL TRADE CONCEPT

Absolute and Comparative Advantage An advantage (2011), according to Merriam-Webster, is to have a superior position or possessing something that benefits the possessor. In economics there is absolute advantage and comparative advantage. The distinction between the two plays a part in trade between economies. Absolute advantage is the ability of an entity to produce more than others with the same number of resources (Hubbard & OBrien, 2010). When an entity can produce a commodity with lower opportunity costs, that entity has a comparative advantage over other entities (Hubbard & OBrien, 2010). Foreign Exchange Rate Before one can describe the influences that affect foreign exchange rates one must understand what a foreign exchange rate is and the mechanisms nations use to establish their exchanges rates for their currencies. According to the encyclopedia of business, a foreign exchange rate or international exchange rate is the price of one countrys currency in terms of anothers. Exchange rates are determined by the supply and demand for currencies, many of which are traded on foreign exchange markets (Reference for Business, 2011). It is imperative to manage the risk of adverse currency fluctuations in the world market to remain competitive in the business world because the exchange rate is the worlds largest market. The three main mechanisms nations use to establish exchange rates for the nations currencies are the gold standard, which is measured in units of gold; pegged rates, which is the government denominating their currencies into units into whatever the strongest currencies are at the time, usually the US dollar; and free floating rates, which are set by free market forces. The gold standard has not been used since the 1970s, so the exchange rate market mechanism today is driven by the pegged rates and free market forces. The rate is the most commonly used by the worlds largest economies, such as Europe, US, and Asia.

INTERNATIONAL TRADE CONCEPT

Several negative and positive factors influence the exchange rates, most of which are market influences. Such market influences are relative rates of inflation, comparative interest rates, growth of domestic money supply, economic growth (GDP), government policy and political stability, and central bank intervention (Reference for Business, 2011) . One of the main influences that affect foreign exchange rates is current events or the news. Governments, investors, and business monitor other countries current events and news to evaluate events pertaining to political issues, financial news, and countrys social disorder. If a certain country has political issues that countrys currency may weaken, for example, Egypt went through a change in government recently and their countrys upheaval may weaken or strengthen the exchange rate. It may weaken because of the chaos in the countrys society because most of the citizens are rallying and products and services are at a standstill, which could affect the Gross Domestic Product (GDP) for that country. Several other factors influence the affect on foreign exchange rates, such as unpredictable and predictable events, financial reports, rumors, and currency pairs (ForexCustomerReports, 2011). Predictable events are such things like elections, government policy changes, the world Olympics. Unpredictable events are such events as natural disasters, for example, the recent disaster in Japan. Financial reports are carefully monitored for information on changes in GDP, employment, interest rates, inflation, and major financial institutions. A good example of this is the combination of the U.S. news and financial reports about the bailouts to major financial institutions about 2005. Many factors influence the affect on foreign exchange rates, and it is very important to pay attention to all these tools to stay competitive in todays world market and for the wellbeing of personal investments for our future. If each citizen were educated in simple economics, and

INTERNATIONAL TRADE CONCEPT

made some personal changes to our individual lifestyles, and government changed its greedy lifestyle, it is quite possible our country could repair itself to its once powerful glory. Debate Several issues surround international trade, such as comparative advantage versus free trade, government policies, child labor laws, labor unions, etc. All the above issues that surround international trade are debatable. One can debate that comparative advantage is the way to go because it offers the best solution to the trading countries. One can also debate how one country can make sure that one will be protected if something goes wrong. The author believes that too many individuals and countries have become greedy and have lost morals and values concerning deals in business. Whether we are conducting business at the corner store or halfway around the world, society has become too demanding and greedy. Everyone and every company is trying to acquire the most, and the best for the least amount of money. If everyone conducted business with equal values and morals and did not try to deceive the other, international trade, and economic growth would benefit all. Unfortunately, this is not reality, each country, culture has different morals and values, and one must ensure self preservation. In reality one must have laws and regulations to maintain fair trade among individuals and countries. How does one decide what is fair and not pertaining to the laws and guidelines on international trade between different countries and their cultures? For example, child labor laws, one country believes it is wrong to put children to work to produce and manufacture products and services, where another country believes that it is fair to put children to work in order for their country to survive. Since countries cannot trade without quarrel, organizations have been created to ensure that trading can be done globally and acting as mediator to ensure that everyone is playing fair.

INTERNATIONAL TRADE CONCEPT

Concept Summary The International Trade Concept simulation has provided an understanding of the elements needed to conduct trade with other countries. Cheri found the simulation provided feedback on how well the trade representative applied the concepts to international trade through the theory of comparative advantage. Based on the Production Possibility Frontier (PPF) the trade representative had to decide which countries to apply quotas or tariffs to negotiate Fair Trade with new countries interested in trading. Jackie realized the importance of balanced trade with other countries. If one item is abundant in one country, but difficult to obtain in the other, it will benefit to export that item to the country that needs it. April shared that the simulation showed the process in which a trade expert would go through to present trade options. Joan found the simulation helpful in understanding the importance of the Free Trade Agreement and how to decide which countries to trade with for greater economic good. Government Policy Government policy can have both a negative or positive effect on the economy and how the people act. In an attempt to stimulate the economy, the government has made tax cuts and sent stimulus checks to taxpayers. The government has also lowered interest rates on home and automobile loans in an attempt to boost spending. Some people believe because this worked in small amounts; it would also work in larger amounts, giving the government the go-ahead to spend more money (The impact of government spending on economic growth, 2005). Government spending has increased significantly in recent years, and our debt as Americans has continued to rise. If the government does not step in and do something to correct its current situation, the United States will be a country forever in financial trouble. World Trade Organization

INTERNATIONAL TRADE CONCEPT

The World Trade Organization (WTO) is a place where member governments try to sort out the trade problems they face (World Trade Organization, 2011). The WTO is based on negotiations, which have helped to lower trade barriers and open markets to the world. One trade topic on the WTO website is tariffs. In the Uruguay Round, an agreement that took several years to complete, countries agreed to lower tariffs and make duty rates difficult to raise (World Trade Organization, 2011). As of July 2008 there were 153 member of the WTO along with 31 observer nations. Several councils and various committees carry out the business of the WTO. Membership in the WTO is done through negotiations as will aspects of the WTO. Conclusion In conclusion, the international trade simulation and other resources have provided an indepth understanding of the many considerations needed to conduct free trade. We know about absolute and comparative advantage, influences affecting foreign exchange, the effects of government policy and the role of the World Trade Organization. It is apparent that international trade is crucial in the success of a countries economy.

INTERNATIONAL TRADE CONCEPT

References Advantage. ( 2011). In Merriam-Webster. Retrieved from http://www.merriam-webster.com ForexCustomerReports. (2011). Foreign Exchange Basics The 6 Main Influences. Retrieved from http://www.forexcustomerreports.com/foreign-exchange-basics-the-6-maininfluences/ Hubbard, R. & OBrien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall.

The Impact of Government Spending on Economic Growth. (2005). The Heritage Foundation, (1831), . Retrieved from http://www.heritage.org/research/reports/2005/03/the-impact-ofgovernment-spending-on-economic-growth

Reference for Business. (2011). INTERNATIONAL EXCHANGE RATE. Retrieved from http://www.referenceforbusiness.com/encyclopedia/Int-Jun/International-ExchangeRate.html World Trade Organization. (2011). Understanding the WTO. Retrieved from http://www.wto.org