Global Managerial Economics - Essay Example

Global Managerial Economics Explain why the U.S. would subsidize the short run costs of production for tobacco farmers in foreign countries. Do these practices guarantee the tobacco farmers a profit in the short run? Long run? Explain. Subsidizing the short run costs of production for tobacco farmers in foreign countries is essential for US since it allows these farmers to grow tobacco (and not other domestic crops) profitably, without incurring losses. Direct subsidies pay suppliers for any cost that has not been recovered so they could keep on producing cheap tobacco for the US producers. Instability or changes in production in these foreign countries is crucial for these suppliers may opt to increase or decrease output or simply shut down due to price volatility. The short run subsidy addresses this particular issue. Any form of incentive is helpful to the tobacco farmer as well as the local economy which rely on the income of these industries to generate employment. However, we cannot really say whether this short run subsidy has a favorable impact in the long-run profit of the tobacco farmers. We must remember that it is fixed and is applicable only to a given period of time. It might even be disadvantageous if the subsidy created a market trend or disrupted the market’s equilibrium, which the farmers cannot sustain without any help or incentives in the future. According to B. J. Spencer (p. 76), a factor price effect to be considered whenever there is a subsidy particularly in the short run cost is the possibility that there is a fixed amount of some critical input used in a group of exporting industries. So while one exporting industry increases its production, which in this case is the tobacco, it might be at the expense of other exporting industries as well. Of course, it would be all right if the subsidy displaces the export of other countries not the domestic ones. How does this practice shift the equilibriums (price and output) for tobacco and domestic food items (analyze both the local and international effects)? Giorgio Navaretti & Anthony Venables (2004, p. 257) explained that subsidies and incentives affect the equilibrium in this way: There is an increase in marginal and average value of employment because the incentives/subsidies could afford wage increase and this translates into an increase of production for existing firms and the incentive for new players to start-up with positive externalities. The lowering of prices may follow due to a stronger competition. In the local front, this is favorable to consumers while in international arena; it provides a competitive edge to the country when pitted against other exporting economies. In the case with Acme Motors, what are the production gains to the entire company from the facility in Nuevo Laredo specializing in Autoturbo Quattro engines (i.e., why do they just make engines in Nuevo Laredo rather than the entire auto)? Globalization enables companies to easily choose and maintain the most advantageous locale for its offices and facilities in around the world. This is due to deregulation, liberalization and the integration of one global economy. Multinational companies rake in profits with the intense competition among countries for foreign direct investments (FDI). The upshot of this is that companies such as Acme Motors enjoy cheap labor, low taxes, economic incentives and policies of a host country. In the case of its facilities, for example, in Nuevo Laredo, the gain involves lower production costs than any of its counterparts within the United States. But why manufacture just the engine and not the whole automobile? The answer is maybe quite simple and does not require a complicated economic theorem for analysis. Acme Motors have existing plants doing that job in the United States. It has been in operation and is doing just fine so setting up another in Mexico would be quite impractical. Why waste money on something that you already have? It is actually going against the principle why Acme Motors is in Mexico in the first place. This move would underutilize the facility or even worse, have it phased out and, hence, would be too costly even if there are perks waiting in Nuevo Laredo. Tariffs also would be higher if automobiles are to be shipped to the US instead of the engines. Why would Acme Motors shift its production of engines from Detroit to Mexico and then shift the engines back to the U.S. to be assembled into the finished auto? As mentioned earlier, the low production cost of setting up the manufacturing facility in Nuevo Laredo instead of in the United States must be very cost effective. It must have offset the cost even of the shipping of the engines to the United States and the parts to be assembled back, which is why the plant is there. What are the gains and losses for consumers in these types of international production and trading patterns? Ideally, consumers gain in the whole scheme of this international production and trading patterns in two ways: First, consumers get a low cost product due to competition and lower production costs. Or, if the producer decided not to lower the cost and rake in more profits, the consumers still benefit since these funds are most probably going to be funneled on the improvement of the product, better consumer support and so on. Consumer losses could be on the area of the product’s quality. But this is, of course, debatable, considering that multinational companies have their own standards on checking quality. Works Cited Spencer. B.J. in Krugman, Paul’s Strategic Trade and the New International Economics. The MIT Press. 1986 Navaretti, Giorgio & Venables, Anthony. Multinational Firms in the World Economy. Princeton University Press. 2004 Read More