Table 0.1
Where, RU = Resources Used; Q = Quantity of good produced
Absolute advantage refers to the condition where one country is more efficient in producing a good when compared to another. In the table above (table 0.1), the country A is shown to hold the absolute advantage in production of Machinery with the 200 units of machinery for every 100 units of resources whereas country B produces only 100 units of machinery for every 100 resources. But then when looking at clothing, country B would hold the absolute advantage as it has the capacity to produce 200 units of clothing for 100 units of resources whereas country A can only produce 100 clothing units for 100 resource units.
Table 0.2
Where, RU = Resources Used; Q = Quantity of good produced
In this situation of absolute advantage, it would be more equitable to have production as the above situation (table 0.2). This would allow for the maximum production with the given amount of resources. These two countries specialising in the good they have an absolute advantage in and then trading would satisfy a greater demand. So when comparing the original situation (table 0.1) with the new situation (0.2), the total amount of produce had doubled in this example after specialisation. This is a reason why countries trade.
Table 0.3
Where, RU = Resources Used; Q = Quantity of good produced; PPU = Production per Unit resource; Total = total amount of good produced
The next situation (refer to table 0.3) described is that where one country has an absolute advantage over the other in production of goods. This then poses the question, why should country C want to trade with country D. This is where the concept of comparative advantage comes into play. The idea is that these two countries have the most productive outcomes (i.e. produce the greatest amount of goods with the least waste in resources. This is where we utilise the concept of opportunity cost. In country C, the opportunity cost of producing 1 unit of kitchenware is 4 units of textiles, while in country D, 1 unit of kitchenware has an opportunity cost of 2 units of textiles. As we can see, it would be more equitable for these two countries to specialise where they are relatively efficient. This would mean that country C should tend to the production of textiles.
Table 0.4
Where, RU = Resources Used; Q = Quantity of good produced; PPU = Production per Unit resource; Total = total amount of good produced
Table 0.4 shows the reallocation of resources with country C tending to specialisation with some diversified production. This has allowed for an increase in the overall total of the goods produced. Here, countries can satisfy their own demands then trade the excess goods among themselves. This is how comparative advantage can motive international trade.
Although international trade can be economically effective for all involved, countries may consider some of the effects of trade to be detrimental to the nation and creating an artificial barrier to trade, resulting in an inequitable allocation of resources. These barriers, termed “Protection” means they are in place to protect domestic industry. Tariffs, quotas, subsidies, local content rules, and voluntary export restraints are the main forms of protection employed by governments.
Tariffs are taxes that artificially inflate import prices, making it cost more and less competitive on the domestic market. Quotas limit the amount of product that a country can import. Subsidies involve payments to industry by the government in order for then to be able to be more competitive in the market when compared with imports. Local Content Rules would require a certain percentage of a good have locally made parts to avoid tariffs or quotas (the Australian motor industry). Voluntary export restraints are mutual agreements between two nations to restrict the movement of certain goods between their countries.
The major reasons for such an action would include: the infant industry argument, protection of domestic employment, anti-dumping argument, defence and self-sufficiency argument and cheap labour and environmental exploitation argument.
The infant industry argument, although no longer generally accepted, simply is protection for allowing local industry to expand and reduce cost of production so they can compete with the rest of the world. This type of protection is usually temporary and given to industries that can achieve some form of advantage in the future.
Unfortunately, an outcome of international trade is usually a rise in unemployment caused by international competition being more efficient, forcing the closure of some industries. This is generally unsupported by economists as it distorts the allocation of resources within the economy and it may spark retaliatory actions by trading partners which could only worsen the situation as in the long-term there may be more unemployed.
Dumping is the practise where a firm sells a high quantity of goods as unsustainably low prices in order to force much competition out o business. Although beneficial to the consumer in the short-term, once local producers go out of business, the firm may raise prices, making it worse for the consumer in the longer term.
The defence and self-sufficiency argument is that of countries wanting to retain their own defence industries so that they can be confident that in wartime situation they can produce their own defence equipment. The self-sufficiency argument is very much similar to this defence argument - - for example, Japan is inefficient at food production, yet maintains a high tariff on rice imports; this is because in the 20th century in a time where food imports were restricted by wartime blockades, and the country had experienced famine twice.
The growth in international trade has seen a more efficient allocation of resources through the specialisation and the aims of free trade. This efficient reallocation of resources is a result of the concepts absolute and comparative advantage. Even with these advantages, some countries feel it necessary that they use protectionist measures (such as tariffs and quotas) in order to protect their local industries against actions dumping and or for defence and self-sufficiency.
