This essay explores the issues surrounding international trade. The Theory of Comparative Advantage. If two countries X and Y trade in two goods G and H, both can benefit by specializing in the good in which they have a comparative advantage and then trading them. This has been proved valid even when country X has an absolute advantage in both goods due to the complexities of intra-country distribution of resources. Distribution of Gains and Losses from Trade. If goods G and H use two inputs, K and L (capital/ labor), at given prices, production of goods will probably utilize inputs in different ratios. If G uses a higher ratio of K to L than H, production of that good becomes K-intensive, relative to H. Here, if G is K-intensive, it will mean that H is L-intensive. If country X’s inputs of production have a higher ratio of K to L than country Y, then X is K-abundant and Y is L-abundant, relatively. A country will tend to export products which are intensive in factors that country has in abundance. A labor-abundant country (say country Y), will tend to export labor-intensive products. Also, country X’s capital-intensive exports will rise. As it does so, the relative price of the abundant factor in that country will rise. The L-abundant country will see labor prices rising, i.e. wages will rise. The purchasing power of owners of labor will rise; purchasing power of owners of capital will fall. International trade will tend to equalize the relative prices of the two factors in the two countries
This paper will list advantages and limitation of international trade and identify key points from the reading assignment emphasized in the simulation. It will also define absolute and comparative advantage and describe the influences affecting foreign exchange rates. …
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16 pages (4000 words)Essay
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