Assignment: Comparative Advantage

Comparative Advantage

The simulation’s food trucks profited from specialization and trade activities. They were able to provide a greater range of products and better fulfill the expectations of their consumers by specializing in certain food and beverage categories as well as trading with other trucks that focused on the sale of other goods. As a result, each vehicle was able to increase its earnings and perform better as a whole. On the same note, nations may profit from trade and specialization by concentrating on creating commodities or services that they are comparatively better at producing than other countries and then trading with other nations to get the goods or services that they need but cannot create as effectively. As a result, each nation is able to focus on what it does best, realize economies of scale, and gain from the comparative advantages brought about by variations in resources, technology, and skill.

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From the textbook, the United States can significantly benefit from trade and specialization based on the goods and services that they produce. In other words, the country has a comparative edge in developing software and maintenance of intellectual property. In comparison, China, considered to be one of the United States’ competitors and a global leader in the production of electronic goods, can profit from the trade advantages and improve general standards of living through specialization in different areas of production. While China has a comparative advantage in the electronic industry, the United States of America has a comparative advantage in the software industry and intellectual property. The two countries can therefore benefit from their respective areas of specialization.

Analysis of a News Article on Free Trade Agreements
The article under consideration is “Indonesia to propose limited free trade deal with the US on critical minerals,” published by Reuters on April 10, 2023. This news report emphasizes Indonesia’s intention to negotiate a crucial minerals free trade agreement (FTA) with the USA; the deal is similar to the one reached between Japan and the United States (Reuters, 2023). With conditions on processing, the agreement would permit the unfettered movement of minerals, including nickel, lithium, graphite, cobalt, and manganese. This decision is crucial because, after Indonesia prohibited nickel ore exports in 2020, Chinese corporations began investing in refineries within the country (Reuters, 2023). The economies of both nations would profit from the FTA’s opening of new trade and investment possibilities (Reuters, 2023). This is consistent with the justification offered by economists who support FTAs; these economists contend that by lowering trade barriers and fostering competition, they may boost economic development, generate employment, and reduce consumer costs. Overall, this news story is in favor of the use of FTAs to encourage global economic progress.
Free trade agreement (FTAs) is significant because it lowers or do away with trade restrictions like tariffs and quotas, therefore facilitating the cross-border trade of goods and services between nations (Yanase & Tsubuku, 2022). FTAs may result in more competition, more efficiency, and cheaper costs for consumers by opening up markets and lowering trade barriers. They may also open up new prospects for corporate growth and market expansion (Yanase & Tsubuku, 2022). Additionally, by stimulating foreign investment and technical innovation, FTAs may aid in the promotion of economic growth and development. Finally, by promoting collaboration and trust via increasing trade and economic integration, FTAs may deepen diplomatic and political ties between nations.
References
Reuters. (2023, April 10). Indonesia proposes a limited free trade deal with the US on critical minerals. Retrieved from https://www.reuters.com/world/asia-pacific/indonesia-propose-limited-free-trade-deal-with-us-critical-minerals-2023-04-10/
Yanase, A., & Tsubuku, M. (2022). Trade costs and free trade agreements: Implications for tariff complementarity and welfare. International Review of Economics & Finance, 78, 23-37. https://www.sciencedirect.com/science/article/abs/pii/S1059056021002173

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The United States has a comparative advantage over China on the production of specialized and capital-intensive labor. It also has a comparative advantage in the production of services, such as travel and tourism.
⦁ Comparative Advantage (Without Trade)
⦁ Comparative Advantage (With Trade)

⦁ Countries trade goods just like the food trucks do in the simulation. Did the food trucks benefit from specialization and trade? How can the United States benefit from specialization and trade? Provide examples from the textbook.
⦁ Research and share a current news article on international trade that supports the argument economists make in favor of free trade agreements (FTAs). In what ways is the article supportive of FTAs?

Chapter 3 in a Nutshell
⦁ Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
⦁ There are two ways to compare the abilities of two people to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the lower opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.
⦁ Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.
⦁ The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.
Chapter 9 in a Nutshell
⦁ The effects of free trade can be determined by comparing the domestic price before trade with the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.
⦁ When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses.
⦁ A tariff—a tax on imports—moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Domestic producers are better off and the government raises revenue, but the losses to consumers exceed these gains.
⦁ There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have merit in some cases, most economists believe that free trade is usually the better policy.
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Principles of Economics

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ISBN: 978-0-357-03831-4
Loose-leaf Edition ISBN: 9780357133705
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