Prueba de cálculo de orientación

Absolute advantage means that a country is more efficient in the production of both goods under consideration than the other country being considered. A country’s absolute advantage is measured in relation to other nations. If two countries are producing the same product, the country that produces the product cheaply has an absolute advantage over the other.

Even if a country has absolute advantage over the other in all products, there is still a possibility for the two nations to trade as illustrated in the example below.

For example, if two nations produce computers and cars as follows:

Computers Ratio (calculate opportunity cost) Country X 10, 000, 000 10:1 in favour of country X Country Y 1,000,000

Cars

Country X 1,000,000 2: 1 In favour of country X again Country Y 500,000

Given the scenario above, it is still possible for the two countries to engage in trade. Absolute advantage cannot hamper international trade.

Country X has absolute advantage in both cases but the size of its advantage is greater in computer production than in car production. Country Y’s disadvantage is smaller in car production than in the computer production. So it would be more beneficial to both countries if country X specializes in computer production and imports cars, while country Y specializes in cars production and imports computers.

3.0 FREE TRADE AND ITS EFFECTS

Free trade is a situation whereby the flow of goods, services and capital are not hindered by any artificial barriers. In theory, trade on an international level, should be free from any restrictions, and those who advocate for free trade maintain that this, would lead to numerous advantages, such as

- Enabling countries to specialise and increase production bearing in mind that the surplus can be exported.

- Countries export surpluses and import what they lack.

- Access to the world market, therefore enabling countries to benefit from economies of scale. - Allowing countries to develop their industries as a result of free movement of capital.

- Promoting beneficial political links and closer cooperation between countries.

- Increasing efficiency due to competition from imports and limiting the creation of monopolies.

- The efficient use of resources also leads to lower costs of production which in turn leads to the reduction in the prices of goods and services.

- Provision of goods that were previously unavailable, a wider choice of goods to consumers.

3.1 DISADVANTAGES OF FREE TRADE

- It leads to unemployment especially in cases where imported goods are subsidised by the countries of their origin.

- It has negative effects on new industries.

- Dumping of imports on the local market leads to unfair competition. - It may lead to the importation of undesirable products.

- The government will lose revenue because it can longer impose taxes on imports. 4.0 BARRIERS TO INTERNATIONAL TRADE

In spite of the numerous advantages of international trading, countries the world over engage in some form of protectionism. There are different forms of protectionism, and some of them are:

• Quotas. These are limits imposed on specified goods to be brought in the country. Import quotas restrict the quantity of certain products, which can be imported into the country. If the product is homogeneous then a simple quota is imposed. If they are heterogeneous, then the quota can take the form of a value of imports allowed in any given currency.

The effect of quotas is to reduce the volume of imports, raise the price of imports and encourage the demand for locally produced commodities.

Note that sometimes one country persuades another country to voluntarily reduce its exports of a product to a certain acceptable level, this is known as voluntary export restraints (VERs). VERs is also known as orderly market arrangements emphasizing their negotiated manner. VERs often apply to key industries, an example is VERs negotiated by the United States of America on Japanese exports of motor vehicles.

• Tariffs or custom (import) duties. These are taxes that are levied on imports. It can be a fixed amount per unit (specific) or a percentage of the price (ad valorem).

The effect of tariffs is to raise prices of imports, and therefore reduce their demand, encourage the demand for locally produced commodities, as well as raise revenue for the government.

• Trade embargoes. This is a complete ban of imports from a particular country. Sometimes it is a total ban imposed on particular products like drugs, from any country! During the Iraq war of the early 1990s, the United Nations imposed a ban on Iraq’s exports.

• Hidden export subsidies and import restrictions (Direct controls). This is a range of government subsidies and assistance for exports and deterrents against imports as follows: - Subsidies. The government gives subsidies to local firms to allow them to compete favourably

in terms of pricing of goods, with foreign firms.

- Export credit guarantees or insurance against bad debts for overseas sales. - Grants or any form of financial help is provided to firms in the export sector - Zero rating or reducing taxes on exported goods

- State assistance provided for firms in the export sector via the foreign office. In addition, imports are discouraged through

- Health and Safety regulations. Countries sometimes put in place health and safety regulations that limit the importation of certain goods. For example, the Zambian government has put in place a regulation that stipulates that sugar sold in Zambian market must be fortified with vitamin A regardless of whether this sugar is locally produced or imported.

- Administrative procedures (bureaucracy). These are long, complex and costly procedures that importers have to go through at border posts.

- Exchange controls. These are aimed at restricting the amount of foreign exchange that is available to importers.

4.1 ARGUMENTS IN FAVOUR OF PROTECTIONISM