International Trade Concepts Simulation Paper

Introduction

Why is trade so important to every country? Countries are endowed with different quantities, qualities, and cost of resources such as land, labor, capital and entrepreneurship. Countries can then specialize in the production and exportation of products it can produce cheaply and trade these products for items that are more costly for the country to produce (UOP, 2008). When deciding which products to import and which to export a country needs to look at the production possibilities frontier (PPF) in essences how many units of one item does it need to give up in order to produce more of another item? Tariffs and quotas are also things that need to be carefully considered when setting up trade with another country. Each of these affects the cost of goods. Countries need to decide is it more cost effective to impose a quota on how much one can import or a tariff being careful to consider the deadweight loss of the tariff or should the country stick with free trade which benefits both countries.

The advantages and limitations of International Trade identified in the simulation

International Trade between countries lower trade barriers, increase the volume of trade, allow producers to explore different markets, allow consumers a better range of products, and open up new avenues for investment. Each country opens up its market to the other countries. The increased demand that producers in the concerned countries face, leads to an increase in production, achievement of economies of scale, and hence more competitive production. In addition, the increased competition that domestic producers face from foreign producers also increases the competitiveness of domestic industry. This leads to benefits for consumers as well that can enable the flow of investment between countries. Furthermore, employment opportunities are relatively high in the country where investment is taking place, and better returns on capital for the investing country....