International Trade - Essay Example

?International Trade Reasons for trade between countries can be simple as well as complicated depending on countries objectives. Availability of different resources in different countries is the simplest reason why countries trade with each other. Maximization is the main idea behind a country’s economy. Countries will therefore strive to maximize their output through efficiency and optimum resource allocation. Specialization is an aspect of production whereby a country concentrate in the production of products that it can produce efficiently using the available resources. Specialization create a difference in the availability of commodities in different countries and hence the need for trade. The case of surplus of a commodity resulting from specialization applies perfectly to Rodamia due to its mode of production. Rodamia is a vast country that specializes in production of agricultural products. Its neighbors Suntize, Uthania, and Alfanzia are slightly smaller in size and production capacity. This paper will therefore present a report on the state of Radamia’s international. The report will be aimed at making recommendations to the country’s president. International trade has advantages as well as limitations to the concerned countries. In most cases the benefits of international trade overweighs the limitations and hence its continuity. This implies that Rodamia will benefit from the advantages of international trade and at the same time suffers from the effects of the trade due to its limitations. Rodamia is a large country with many resources that include land, labor and capital these resources enable the country to produce goods and services for its growing population. In the process of meeting, the requirements of its people the country experience some aspects of overproduction resulting from specialization and availability of resources. International trade will therefore create a market for excess produce of the country. The country’s economy depends mainly on agriculture and therefore the sector is of great interest to the country. Through international trade, the country will be able to realize specialization. International trade will enable the country to concentrate in the production of agricultural products. This will enable the country to realize the benefits of specialization, large-scale production, and economies of scale. Large-scale production to meet the domestic and international market demand will increase the country’s per capita income resulting into improved standards of living (Tucker 78). The country has a chance to realize more benefits once fully engaged in the trade and I therefore recommend international trade to the country. The availability of benefits or advantages from international trade implies that the trade has some limitations. Limitations of international trade are difficulties or barriers that prevent free trade. Most countries have tried as much as possible to create free international trade. However, it is impossible to eliminate the difficulties. This implies that Rodamia should be prepared with appropriate strategies to tackle these limitations. To devise effective strategies required to tackle the limitation Rodamia’s president needs to be aware of some of the difficulties that his country might face from foreign trade. International trade is a long-distance form of trade and hence it is difficult to establish and maintain a close relationship between traders and their customers. This issue will create a difficult environment for international trade through the extra cost required to maintain the long distance relationship. Secondly, cultural differences between the countries involved in international trade will contribute to the difficulties experienced in the trade. Cultural differences will make people of a certain country to be selective in terms of their consumption and this might interfere with free trade. The country also needs to be aware of restriction imposed by different countries to control their imports. Knowledge of these limitations will enable the country to device effective strategies to handle them. International trade does not depend entirely on exchange of goods and services between countries, factors related to production determine international trade. International trade also depends on the production capacity of a country in comparison with that of other competing countries. This comparison is best analyzed through measuring the absolute and comparative advantage of the country. Absolute advantage of a country is the measure of a country’s ability to produce exceedingly above other producing countries with its current resources (Tucker 408). On the other hand, comparative advantage of a country refers to the ability of the country to produce a certain commodity better than other producing countries. This implies that the country can produce the commodity at low cost. Romania has comparative and absolute advantage in agriculture and hence agricultural products should form the country’s main export. The knowledge of Rodamia’s comparative and absolute advantage was very useful in identifying the country’s position in international trade. The countries position in international trade depends on the country’s production capacity as well as the demand for its products. Comparative and absolute advantage was applied to identify products that the country should emphasize on in its production. Information on absolute and comparative advantage was also used to make recommendation to the country concerning their exports and trading partners. These recommendations were aimed at maintaining the economic health of the country in order to enhance competence in the international market. Apart from inflation and interest rates, the exchange rate of a country is an important measure of its economic health. Exchange rates of a country are major determinant of the level of international trade in a country. Exchange rate is the value of a country’s currency relative the currency of other countries (Tucker 40). Rodamia needs to analyze its exchange rates in order to realize the advantage of free international trade. Exchange rates of a country are not constant and therefore they are a subject to various forces. Inflation rate in a country is the main factor that affects or determines a country's exchange rates. High inflation rate will imply low value of the country’s currency while a low inflation rate implies high currency value. A country’s interest rate is the second determinant of a country’s exchange rate. Interest rate is the value or the cost of money as a resource and a factor of production. Variation of interest rates causes variations in inflation that lowers or raises a country’s currency value. Inflation and exchange rates affects or determine a country’s position in international trade through an internal mechanism. This indicates that there are external factors that affect international trade. A country has little or no control of such factors and therefore its success in international trade will be determined by the role it plays in the trade. A current-account deficit is the main external factor that affects international trade. Current-account deficit of a country is the difference in value of trade between a country and its trading partners. Rodamia should therefore strive to create a favorable current-account deficit by maintaining a healthy deficit among its trading partners. The country will also need to consider its public debts as a factor that determines its interest rates. Public debts are debts that the country incurs from international borrowings to finance its domestic projects. These debts determine a country’s exchange rates by creating variations in its inflation rates. Terms of trade will also play an important role in the determination of the country’s exchange rate. Terms of trade is the difference between export and import prices in a country. Finally, Rodamia needs to consider maintaining its political stability as a measure to maintain a healthy economy through appropriate exchange rates. Conclusion Rodamia is a vast country with great agricultural potentials and hence the country should specialize in agriculture. International trade will enhance specialization, large-scale production and create a market for excess products. The country has a high comparative and absolute advantage in agriculture and hence agricultural products should form its main exports. In order to compete favorably in the international market the country needs to consider its barriers to free international trade as well as its exchange rates. Works Cited Tucker, Irvin. Microeconomics for Today. Boulevard: Cengage Learning. 2009. Print. Read More