Paper Topic:

The Changing Global Economy

Name XXXX

Professor XXXX

Course XXXX

2 May 2008

The Changing Global Economy

1 . Construct a quantitative example to illustrate the principle of comparative advantage . What are dynamic effects of free trade and why might they be important

The following table shows that Country Y can produce both food and clothing more cheaply than Country X (that is , Country Y has an absolute advantage in both commodities . In Country X , a unit of clothing costs the same amount to produce 2 units of food - the opportunity cost of

producing a unit of clothing is 2 units of food . In Country Y , a unit of clothing costs 1 .5 units of food to produce Production Cost Per Unit

Available Man Hours

Production Level (Units (in Man Hours Before Trade After Trade

Country

Food Clothing Food Clothing Food Clothing

X

3 6

210

30 20 70 0

Y

2 3

160

35 30 0 53 65 50 70 53 Rounded off number

Country X is relatively better in producing food than clothing , so Country X has the comparative advantage in producing food . On the other hand , Country Y has a comparative advantage in producing clothing . Since both have comparative advantages in producing a certain good , it is beneficial to trade

The table shows the production level before and after trade . If both countries will specialize , Country X producing only food and Country Y producing only clothing , the increase to 70 units and 53 units , respectively , from 65 units and 50 units , respectively , before trade

There are a number of important assumptions for this free trade to take effect : only two economies producing two goods , no transaction costs , no tariffs or other trade barriers , perfect information , mobile production factors , identical goods , and no economies of scale

2 . List and explain three major instruments that governments use to restrict trade

Notwithstanding the benefits of free trade , governments impose trade limits for several reasons . The National Council on Economic Education (NCEE ) lists tariffs , quotas , and subsidies as among the major instruments that governments use to restrict trade (1 ) A tariff is a tax on imported goods . A fixed tariff increases the price of imported goods , and eventually reduces the demand for that imported good . It drives domestic producers of similar goods to produce more of the same goods , and earn more profits . The domestic government collects the tariff revenues (NCEE (2 ) Quotas are strict quantity restrictions on imported goods . This creates shortages of the supply of imported goods in the domestic market , which will push up the prices of the said imported goods . A quota and a fixed tariff provide similar benefits to domestic producers i .e , increased profits . However , the domestic government earns no revenue , and the foreign producers benefit from any incremental sale on the imported goods (NCEE (3 ) Subsidies are payments provided by government to its domestic producers to enable them to produce goods at lower costs . These are temporary assistance , which will allow domestic producers to acquire new technology for efficient...

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