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I.B Economics Commentary

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Introduction

When a certain country opens its borders for free international trade and removes most of its trade barriers, we can say that this country is establishing trade liberalization. This openness to trade increases the country's welfare and encourages economic growth. On the other hand when a country regulates trade and enters into limited trade agreements, it faces significant difficulties in getting their goods into the international market and doesn't enjoy a variety of imported goods. In this case, the following assumptions will be used for the sake of explaining this case: * There are two trading entities: Country A (Asia) and Country B (international market). * There are only two commodities: clothes and computers. * Limited resources and one factor of production (labor) * Constant returns to scale. Diagram-1, 2 are the production possibilities frontier for both countries before trade. ...read more.

Middle

Opportunity cost is the cost of using a resource measured in terms of the sacrifice foregone in the next best alternative. The following table shows the calculation of the opportunity cost of producing both goods in each country using the same amount of labor. Country A Country B Clothes (yards) c 600 200 Computers (units) pc 200 600 For Country A: The cost of producing 1 yard of cloth = 200/600= 1/3 pc The cost of producing 1 unit of PC = 600/200= 3 c For Country B: The cost of producing 1 yard of cloth = 600/200= 3 pc The cost of producing 1 unit of PC = 200/600= 1/3 c Therefore, Country A has a comparative advantage in the production of clothes since it has lower opportunity cost, and in the same way Country B has a comparative advantage in the production of computers. ...read more.

Conclusion

So everyone is now better off. This conclusion comes in line with the ADB report that 'trade has long been a key driver in the Asian growth'. Country A (Asian countries) also gained further advantage from removing the trade barriers, which enabled them to reach levels of product that were not achievable in autarky. First, by specializing they gain economies of scale which means that the cost of producing additional unit will be lower, and their output will also increase. Moreover, Greater competition drives local producers to cut costs and be more efficient. Consumers also benefits from trade by Diversification of the products that a consumer can enjoy. However, these benefits can limit through transport costs that can make it more expensive to trade. Add to that, because of lack of protectionism infant industry might suffer as they need time to expand and gain economies of scale and be able to compete on an international basis. ?? ?? ?? ?? 1 ...read more.

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