1. Why countries trade
There are several reasons anticipated to which countries do trade with other countries. These are as follows:-
- Generates earnings: - The main reason that the countries do trade is that it generates earnings through obligations being enforced on goods which can be imported in the united states.
- Gives Comparative advantages: - Trade amidst the countries gives comparative benefits to them i. e. it induces the nations to create goods and services that they can produce better and proficiently.
- Lowest opportunity cost: - It also encourages countries to create those goods which have lowest opportunity cost and at exactly the same time encourages these to import goods which have more opportunity cost from other countries.
- Economies of Range: - When countries range narrows in terms of producing goods and services then efficiency and success rises even more and country can produce those goods in high volumes with less cost which eventually helps the countries in obtaining economies of scale.
- Breaks down monopolies: - When country makes trade with other countries then new entrants enter into the countries local market, gives escalates the competition for the local market. The humans have a tendency that they do not make an effort to innovate new methods until the time they don't face any competition. Such competition has two benefits firstly the product quality and progressive goods are made by the business firms. Secondly it surface finishes i. e. reduces the local monopolies and eventually it helps the country's consumers.
- Increase in Occupation: - Trading among the countries lead to more development of goods and services. More the development more employment must be done to cope up or meet out the deadlines of the export order.
All these factors encourage a country to do trade and achieve better economy.
2. Comparative advantage
Theory of Comparative Advantages: - Theory of comparative benefits lays down that it can help the country in producing only those goods that they can produce with minimum opportunity cost as compare to the other countries and at the same time encourages those to transfer those goods whose opportunity cost would have cost them high if they would have produced them in their own country.
It was David Ricardo in nineteenth century that by using a numerical example proved the benefits of the comparative benefits. Before this countries early logic related to free trade could be helpful was based on absolute advantages. Ricardo in his example revealed that suppose there are two countries Great britain and Portugal. If England is good in producing towel with low priced whereas the same good development cost high to Portugal and on the other hand Portugal is good in producing wines whereas your wine development cost high to Great britain. So it will be relatively beneficial for both countries to produce only those goods which cost them less in high quantities and to choose the other good from other country rather than which makes it on a higher cost this way it increases the development of a particular good at global level and promotes the united states to buy those goods or goods from other countries at cheaper price somewhat than producing them at high cost. In this manner Ricardo revealed the advantageous area of the comparative benefits to the countries.
Assumptions behind Comparative advantage: -
- There are two countries. Let the two countries be X and Y.
- They produce the same two goods or commodities. Allow two goods be A and B. The nature of quality of the goods in both countries is comparable.
- The main factor of development is labour, that ought to be homogeneous and unchanged.
- The resources should not be mobile between countries.
- The production of the good should be at the mercy of equal come back.
- There should be no transport cost between two countries.
- Productivity for same good will vary between two countries.
3. Factor endowment and labor productivity
Factor endowment: - It is a significant factor which effects the country's overall economy by payingmore attention specialized goods that have low opportunity cost as compare to other goods. Whenever we chat of lower opportunity cost of particular good in a country then this means low opportunity cost in terms of the other nations of same good. This is exactly what we call comparative benefit of a country over other countries in terms of production of some particular product. Comparative gain can arise scheduled to large quantity of raw material, due to high output, cheap or very skilled labor, or may be land or capital and previous but not minimal in some instances countries achieve economies of size. By far the most affecting and simple form of example with regards to the land could be fertile garden soil gives high source of agriculture products which country like India can export and make high revenue on it.
Labor production: - This is term directed at one of the solution which is often used in economics to know the economic growth of the united states. As the name suggest it is a measure of amount of goods made by a labor in one hour. Growth in labor production depends upon investment and saving in physical capital, new technology, and individual capital.
How it is assessed: - The true GDP (gross local product) of an market divided by the aggregate hours of labor in the country offers per labor of hour.
Importance of measuring labor production: - It's very much important to measure and understand how much the development in the country's labor output is, as it shows the living standard according of the use. As the one reason in the progress of labor output may be the increase in amount of hours they did the trick in a season and that is only due to the high development of goods. So more the labor output more would be the production of the products and so it'll boost the country's caliber to export the extra produced goods to other countries and gain profit.
4. Protectionism and methods of protection
It is a way or a strategy a country uses to protect its home market from unfair competition which from international industries. No doubt country uses it for the welfare of its and it computes to be always a good for short run. But eventually with the span of time it creates the domestic market more lethargic and less innovative. Humans are likely they don't work hard until they get some good competition. So such varieties of competitions are good up to an magnitude as it favors the residents of country in terms of development of qualitative and impressive goods.
Methods generally used as protectionism:-
Firstly, by increasing the tariffs and tax on the imported products into the country which eventually makes the brought in product less competitive as compare to the home one because they cannot match the price tag on the neighborhood products due to high paid tariff and taxes on the goods. Secondly, by subsidizing the local producers. That reduces the price tag on their product. This technique works two ways i. e. for home industry and even for the export sector as they need to pay less shipment cost. Thirdly, the countries also impose quotas on the imported goods which bound the foreign countries to export certain product only up to some extent. This works even well than the other two, so no subject how low they sell they could harm the local industries only up to a certain extent of your time. And fourthly, also sometimes country intentionally lower their currency's so that they can make their export cheaper plus more competitive in global market.
So, protectionism takes on a vital role as a security tool in country's international trade to save its local industry from foreign industries.
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Economics Online. (n. d. ). Why do countries operate. Retrieved Feb 8th, 2017, from Economics Online: www. economicsonline. co. uk/global-economices/why_do_countries_trade. html
Investopedia. (2015, april 16). How exactly to factors endowment impact a country's comperative benefit. Retrieved feb 14, 2017, from www. investopedia. com: www. investopedia. com/ask/answers/041615/how-do-factor-endowments-impact-countrys-comparative-advantage. asp
Investopedia. (n. d. ). Labor Efficiency. Retrieved feb 14, 2017, from www. investopedia. com: www. investopedia. com/terms/l/labor-productivity. asp
Suranovic, S. M. (2015, dec 1th ). International trade theory and insurance plan. Retrieved february 8th, 2017, from intrernationalecon: Internationalecon. com/Trade/Tch40/T40-0. php
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