Question-   International Trade Theory

Solution-

Answer:

International trade is an essential activity in business between two countries. Will a user in Vietnam use products from Europe, the United States or ASEAN, if the international trade activity never begins between countries? Definitely not. Not only user having one option of choosing the domestic products, but also consumers have opportunities to buy and use new products from others countries in the world by international trading. This paper will clarify more clearly about this greatly essential economic activity and its implications for the world economy.

"International trade is the exchange of goods and services between nations. This form of trade drives the entire world economy including prices, supply, and demand. They will be affected by global events"(Ahn, 2011). For illustration, political adjust in Asia could lead to an increment in labor costs, subsequently raising production costs for a Malaysian footwear company based on Malaysia, come up with the cost tennis shoes at the shopping center will be higher. On the other hand, reducing the costs of labor will make the shoes get the lower price. International trade creates changes for customers and countries to be used goods and services which they do not have. Almost all the popular types of products which you need are founded on the global market like food, clothing, oils, wine, cars, and water. The market will develop then the merchandise will be more abundant. That helps people in the developing countries can buy products which their country does not own. That is the reason why people be able to choose their car from Japan, German or America. As a result of international commerce, the prices are more competitive because of other global competitors. Services are also buy and sell like traveling, banking, and transport. When a product which is sold into the world market, is called an exported product, and in contrast, it is called an import.

“International trade allows rich countries to use their resources more effectively - whether in labor, technology or capital. Countries have different strengths in assets and natural resources (land, labor, capital, and technology), so some countries have the capacity to produce certain goods with the same substance with the products of other countries” (Tucker, 2008). However, the product cost is made them cheaper so the price is lower. If a country cannot have enough capacity to produce a commodity, they can buy it from other countries.  Specialization which is called in the international trade. Here is a simple example. Both countries A and B produce sweaters and wines. In country A, in a year, they can produce 10 sweaters and 6 bottles of wine while Country B produces 6 sweaters and 10 bottles of wine in the same year. Both can produce a total of 16 units of goods. However, in country A, 10 sweaters takes 3 hours and 2 hours to produce 6 bottles of wine (a total of five hours). In Country B, 10 sweaters in 1 hours while 6 bottles of wine in 3 hours (a total of four hours). Both countries recognize that they can manufacture more by focusing on which the products they have a comparative advantage. So Country A starts making only wine while Country B only focus on sweaters.

There are also has other benefits of worldwide exchange. Worldwide exchange not only increases worldwide production but moreover allows nations to take part in the international economy, encouraging foreign direct investment (FDI). For receiving countries, they accept foreign currency through FDI, thereby raising the technical of labor and leading to growth in the GDP. The investors of FDI helps them develop that means more revenue. “Free trade is the removal of barriers established by countries to make the flow of goods from one country to another more favorable on the basis of equal competition” (Tucker, 2008). The barrier is tariffs, import-export permits, regulations on goods quality standards, quarantine requirements, taxation methods, etc. These barriers are all items of the agreements which is monitoring by WTO. Based on the hypothesis of comparative advantage, the best advantage of exchange advancement is to advance an ever-increasing number of nations associated with exchange and trade of merchandise, in this way advancing financial development. On the basis of the theory of comparative advantage, the greatest benefit of trade liberalization is to promote more and more countries involved in trade and exchange of goods, thereby promoting economic growth. With the user, goods can sell easier, giving them the chance to choose better products with cheaper prices (consumers here can be understood as both the manufacturers import raw materials to produce other goods). The reason for protecting the domestic production against the external competitors is to reduce the domestic products. That will affect unemployment rate and furthermore increase revenues for the state budget (through tax collection), reduces foreign currency (expenditures for foreign goods), protect human health, animals and plants from merchandise has bad quality or risk of disease.

In conclusion, international trade is able of maximizing a national production capacity, subsequently maximizing the volume of products and services that nation collected. It is sure that the global economy is inconstant, so with its development, each nation has to become a member.

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