Comparative Advantage in Trade

Comparative Advantage in Trade

Benefits of Trade Specialization     

The simulation game delves into the benefits that come with trade specialization. The results show that specializing in the distribution of one of the two products brings optimal results. In other words, specializing in either burgers or fries will lead to optima sales.

Specialization borders around a country or a firm choosing to do what they are best at, to save on costs and earn more profit. A key driver of specialization is ‘absolute advantage’ (Mankiw, 2020).  That is, a country or a firm incurs relatively less operational cost compared to another. Also, a producer who requires fewer inputs to produce has an absolute advantage.

One of the benefits of specialization is that it increases the amount of knowledge produced per research and development unit invested. Essentially, countries specializing in specific areas have a comparative advantage in reaping the best outcomes. For instance, the US is known for its electronic engineering prowess. Therefore, specializing in electronics devices, an area where the country has a comparative advantage, gives better outcomes (Mankiw, 2020). The case would have been different if the country had focused on electronics and food products. Do you need help with your assignment ? Contact us.

Specialization also strengthens the foreign intellectual property rights of US firms. Consequently, US firms allow foreign companies to use their technology for cash. In essence, specialization can be a source of new income streams, apart from the sale of goods and services. Specifically, royalty payments for foreign intellectual property rights increased by 16% after reforms for strengthening intellectual property rights in affiliate countries (Mankiw, 2020).

Benefits of Free Trade Agreements

Free trade agreements (FTAs) improve the supply chains of trading nations. According to Donno & Rudra (2020), developing countries have been the greatest beneficiaries of free trade agreements. Ramping of trade between developing countries improves their production scale and quality. FTAs also act as stepping stones for smaller countries to access even bigger markets in the long run.

References

Donno, D., & Rudra, N. (2020). Analysis | Developing countries have been busy forging trade agreements — with one another. Washington Post. https://www.washingtonpost.com/politics/2020/05/26/developing-countries-have-been-busy-forging-trade-agreements-with-one-another/

Mankiw, N. G. (2020). Principles of Macroeconomics. Cengage learning.

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The United States has a comparative advantage over China in 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 in Trade

For this discussion, first play these simulation games in the MindTap environment:

• Comparative Advantage (Without Trade)
• Comparative Advantage (With Trade)

In your initial post, share your experience playing the games, and include an image of one of your simulation reports. (See Module Two Simulation Discussion Screenshot Instructions PDF.) Then address the following:

• 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?

In your responses, comment on at least two of your peers’ posts. Critique the arguments made in each peer’s article by weighing the costs of FTAs against the benefits. Support your position with sources from the news or the textbook.