I. International trade
The exchange of goods, services, and capital across international territories is referred to as international trade. Different countries specialize in producing different goods and trade the goods with each other (Grand mont & McFadden, 1972). This creates mutual benefit in the countries involved. The concept of international trade has been in existence since history, and its political, social, and economic importance has always been on the rise. This trade constitutes a significant share of the Gross Domestic Product of various economies (Kemp & Wan, 1993). Some of the factors that have had a huge impact on international trade include multinational corporations, globalization, outsourcing, advanced transportation, and industrialization. International trade has enabled nations to sell their goods freely across international borders and preventing countries from being limited to the goods and services only produced nationally.
Taking an example of rose flower business in Canada, it used to be an extremely expensive gesture to grow the roses (Maher, 2001). The country is located in the Northern hemisphere and the roses are booming business during Valentine’s Day, which happens to fall during fall (Maher, 2001). Growth of roses therefore required the use of green houses, which is very costly (Taylor, 2010). Growing the flowers needs resources including labor, energy, and capital. Since the flower business in some countries is not viable or yielding many returns, the opportunity cost of growing rose flowers means that the country has to forego other potential products (Taylor, 2010).
Illustration of Equilibrium before Trade.
Assume that a country does not trade with the rest of the world and it produces commodity X. Then the equilibrium position and the domestic price in the country is determined by the forces of demand and supply. The sum of the producer and the consumer surplus will be equal to the benefits received by the buyers and the sellers. The following graph gives a clear illustration of the condition.
Pe = Equilibrium price.
Qe = Equilibrium quantity.
dS and dD = Domestic demand and Supply respectively.
Production possibility frontier before trade
Production possibility frontier is a graph that shows the how goods and services can be produced when all the resources in the society are efficiently used (Hammond & Sempere, 2006). Production above the product possibility frontier is not attainable since the resources cannot allow. Also, the production below the Product possibility frontier means that the resources are underutilized.
Assuming that a country produces two commodities X and Y, the Production possibility frontier before trade will be as follows;
The country will produce at point E in the product possibility frontier before trade given that it utilizes the available resources efficiently. That is, 25 units of commodity X and 20 Commodity Y. These amounts of commodities will be consumed locally.
Equilibrium after trade
If the country decides to trade with another country, then it will be an importer of one commodity and be the exporter of the other commodity depending on its comparative advantage. If the country has a comparative advantage of commodity X, then that makes it export that commodity since the domestic price will be lower than the world price. If it does not have a comparative advantage then, that means that the world prices will be lower that the domestic prices.
Illustration
If the country has the comparative advantage of producing commodity X then this means that the world price Pw will be higher than the domestic price Pe. The country will the export the commodity. Consequently, the Producer surplus will increase from area TPeK to area TPwJ and the consumer surplus will reduce from area PeLK to area PwLM.
If the country does not have a comparative advantage of producing commodity X, then this means that the world price will be slightly lower than the domestic price. This will make the country export the commodity. As a result the producer surplus will decrease from area TPeK to area TPdZ and the Consumer surplus will increase from area PeLK to area PdLH. This will result into welfare gain in the importing country. The welfare gain is represented by the area ZKH (the shaded region).
The change in PPF after trade
The Production possibility frontier depicts a county’s production given its resource endowment. However, with the gains from the International trade, consumption can be outside the frontier as shown by the graph below.
The graph above shows the impact of international trade on the Production possibility frontier. Initially, the country produces at point E, after trade it gives up 5 units of product Y and produce 5 additional units of commodity X. Through trade, the country will sell 5 units of Y for 10 units of X in return; meaning that the economy will operate outside the PPF (point G).
Still looking at the example of rose flower production in Canada, it is cheaper if the flowers are produced in a country with the ideal weather for the business (Taylor, 2010). Roses can be grown in South America where the weather is favorable for growth of the product in January and February (Taylor, 2010). Canada can now simply import roses from South American countries without worrying about the high cost of production (Taylor, 2010). South American countries benefit from sales of the roses to different countries in the Northern hemisphere while people in these countries can get to share the roses with their loved one during Valentine’s Day (Taylor, 2010). There is mutual benefit in international trade as every country specializes in production particular goods and services while trading the goods with other countries (Hammond & Sempere, 2006).
Trade is important for the growth of many economies. With an increase in exports and imports, economies experience steady growth (Hammond & Sempere, 2006). The graph below demonstrates how international trade represents a significant part of the GDP of various countries (Taylor, 2010).
Gains from international trade
It is easier to produce certain goods in specific countries or regions. Conversely, producing other goods in these regions or countries is not entirely ideal or profitable (Hammond & Sempere, 2006). Some countries have rich resources and skilled labor force for the production of machinery equipments that other countries do not have (Grand mont & McFadden, 1972). There is increased return in international trade. This can be argued theoretically using the comparative advantage theory (Euwals & Roodenberg, 2004). The focus is on the differences between countries, which include technology, factor endowment, and climate. Because of these differences, each nation has a national comparative advantage, which it uses to increase returns by trading with other countries (Hammond & Sempere, 2006). The returns from the trade are divided among the trading partners. The gains are divided as follows;
Let Xi be the cost of producing X (a or b) in country i. Ci / Cj represents the exchange rate between the two countries’ currencies.
The trade between the two countries will be gainful when ai / bi ( the ratio of production costs of a and b in country i. is not the same as aj / bj ( the ratio of production costs of a and b in country j)
If aj /bj > ai / bi then country i will export commodity a and import commodity b given and country j will import commodity a and export commodity b.
The change in price after trade
Before trade, the world price is PW, which is higher than the autarky price Pe. When the international trade occurs, some of the supply from the domestic markets will be exported making the domestic price Pe to rise to the world price PW. Consequently, the domestic demand of the quantity falls from QA to CT and the production increase from QA to QT.
“The quantity of labor demanded relative to the quantity of capital demanded in each industry at Home depends on the relative wage at Home W/R. We can use these relative demands “for labor in each industry to derive an economy-wide relative demand for labor” (Taylor, 2010), which can then be compared with the economy-wide relative supply of labor L−−/K−−. By comparing the economy-wide relative demand and supply, just as we do in any supply and demand context, we can determine Home’s relative wage. Moreover, we can evaluate what happens to the relative wage when the Home relative price of computers rises after Home starts trading.” (Taylor, 2010)
II. Immigration
Many economists have agreed to the fact that migration has desirable results to the economy of country of host (Hammond & Sempere, 2006). Thus, economists (Hammond & Sempere, 2006) have applauded measures that encourage mobility of labor. However, migration also seems to have negative impact. For instance, over population in cities may create rigidity in housing markets thus hindering people from moving to better jobs (Hammond & Sempere, 2006). Despite all these concerns, migration is generally regarded to have benefits to the economies around the world (Hammond & Sempere, 2006). “The main obstacle to proving existence of equilibrium with gains from migration arises, In the absence of public goods because of the obvious difficulty a potential migrant faces in being in more than one place at a time” (Hammond & Sempere, 2006)
The gains from immigration
Migration has potential benefits to the international trade (Kemp & Wan, 1993). There no specific theoretical explanation that can be used to elaborate on the benefits and losses of migration. Delocalization and immigration are two of the main challenges facing firms and workers in the global economy (Sullivan & Sheffrin, 2005). The reason is that hiring migrating workers or relocation part of the production processing implies loss of jobs in the country of origin. This allows firms to become more competitive and therefore expand their employment opportunities for the native workers (Grand mont & McFadden, 1972). Whether this effect is going to be strong enough depends on the institutional characteristics of the different markets in which firms operate on. This implies that it is going to be an act of cross-country variation (Kemp & Wan, 1993).
Ideally, to investigate the gains of migration on the labor markets, one would like to have a large data set of spending in different countries while looking at the individual performance of workers depending on the country in which they are operating in (Hammond & Sempere, 2006). Unfortunately, this sort of data is not readily available, and when it is available, it is not easily comparable across countries (Euwals & Roodenberg, 2004). This implies that at the moment, the best strategy to get some insights on the gains of migration is to look at some key countries that have a long tradition in terms of both phenomena. Several economic researches that have focused on this issue consider two key countries, the US and Germany (Burgstahler & Dichev, 1997).
In the US, the labor market is flexible. This means that most of the effects can be captured in terms of changes in the wages of the native workers rather than changes in the employment of native workers (Euwals & Roodenberg, 2004). Looking at these effects, the thing that stands out is that migrating workers mainly compete with off shore workers and not the native workers. This implies that the competitive effect of this sort of re-organization is increasing the wages of native workers (Euwals & Roodenberg, 2004). Difference exists in terms of the consequences of immigration off shoring on native employment; the reason being that the effects of immigration and firm competitiveness seem to be much stronger (Hammond & Sempere, 2006). These effects have been observed in countries such as the US and countries that generally have highly flexible labor markets (Kemp & Wan, 1993). However, there are other countries with less flexible labor markets but encourage migrating workers. Such countries, migrating workers compete with previous immigrants for jobs. The competition never seems to involve the natives. This implies that the competition between the natives and migrating workers is weak (Sullivan & Sheffrin, 2005).
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