Microeconomics Study Set 47
Quiz 16 :
Gaining From International Trade
Most of the countries in the world are interdependent, which means they depend on each other to maintain their economies. Each country needs other countries to purchase their goods and services to generate money to buy goods and services that are not produced in their own country. The main reason behind this idea, that countries can specialize in producing a good or service at very low cost and the products which they cannot produce efficiently can import from other countries specialized producing that good. American household and businesses buy certain things from other countries in which they are not specialized in producing those goods and services; the opportunity cost of producing these goods is higher as compared to the other countries. This creates difficulties for domestic producer to compete with foreign producers. We buy goods from foreign countries in which we are not specialized , and the opportunity cost of producing these goods in domestic market is higher than other countries, and sell those goods in which we are specialized and can produce at very low cost in domestic market. Normally, any country produces goods for which they have abundant resources and buy those goods for which the resources are scarce. On the other hand, strategic advantage plays an important role to decide whether to buy or sell the particular product or goods from other countries. If a country has strategic advantage in particular industry like, IT then it will export IT products to other countries and will buy those goods in which the country does not have strategic advantage.
The source of economic prosperity is the availability of goods and services at cheaper price in domestic market. When a good is relatively cheaper in a foreign country than it can be produced at home, then the country can increase the quantity of goods and services offered for consumption in which the country is specialized in the production of goods in which it is a low-cost producer and exchange them for the cheaper foreign goods. Trade restrictions will limit the capacity of consumers of America to buy low-cost goods from foreign countries smother this procedure and thus reduce the living standard of Americans.
Trade barriers between two countries will reduce the supply of goods and services, which leads to increase in the price of imported goods in the domestic market. The imposition of any kind of trade barriers will increase the price of the traded goods. If two or more countries constantly use trade barriers with each other, this will create the trade war between the two nations. Most of the economists generally agree that any kind of trade restrictions are harmful and reduce the whole economic efficiency. Trade restrictions lead to increase in the scarcity of the product in the market, which further increase the price of goods and services produced in the domestic market. The consumer surplus will decline and the producer surplus will increase. This has distributional significances, but it is clear that the whole nation will be hurt by the increased scarcity of products in the domestic market, that goes along with the trade restraints.