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For your next white paper for company deployments, you have

For your next white paper for company deployments, you have been asked to write about trade, cost, and price using your work in Acme Mexico as one example.

Multinational corporations are continually seeking sources of comparative advantage by investing in developing countries. Sometimes, they are initially willing to pay a high price for that advantage. For example, U.S. tobacco companies create strong incentives for local farmers in developing countries to grow tobacco instead of crops used for domestic food production by offering underwritten loans, subsidies for startup costs, and a guaranteed demand for their tobacco crops. The following questions pertain to the foundations of modern trade theory and comparative cost of production and pricing decisions:

Explain why the U.S. would subsidize the short run costs of production for tobacco farmers in foreign countries. Do these practices guarantee the tobacco farmers a profit in the short run? Long run? Explain.
How does this practice shift the equilibriums (price and output) for tobacco and domestic food items (analyze both the local and international effects)?
In the case with Acme Motors, what are the production gains to the entire company from the facility in Nuevo Laredo, Tamaulipas specializing in Autoturbo Quattro engines (i.e., why do they just make engines in Nuevo Laredo rather than the entire auto)?
Why would Acme Motors shift its production of engines from Detroit to Mexico and then shift the engines back to the U.S. to be assembled into the finished auto?
What are the gains and losses for consumers in these types of international production and trading patterns?

Solution Preview

For your next white paper for company deployments, you have been asked to write about trade, cost, and price using your work in Acme Mexico as one example.

Multinational corporations are continually seeking sources of comparative advantage by investing in developing countries. Sometimes, they are initially willing to pay a high price for that advantage. For example, U.S. tobacco companies create strong incentives for local farmers in developing countries to grow tobacco instead of crops used for domestic food production by offering underwritten loans, subsidies for startup costs, and a guaranteed demand for their tobacco crops. The following questions pertain to the foundations of modern trade theory and comparative cost of production and pricing decisions:

Explain why the U.S. would subsidize the short run costs of production for tobacco farmers in foreign countries. Do these practices guarantee the tobacco farmers a profit in the short run? Long run? Explain.
In economics, the theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other.
While international trade has been present throughout much of history, its economic, social, and political importance have been on the rise in recent centuries, mainly because of industrialization, advanced transportation, globalization, multinational corporations, and outsourcing.

WHY DO COUNTRIES TRADE WITH EACH OTHER?
- To obtain goods that they cannot produce themselves
- To increase choice for their consumers
- To obtains goods at a cheaper price than what they can produce themselves
- To make more revenues and profits. It an extra place in which to sell their goods
- Countries specialise in the production of goods and services at which they are better.
- To exploit a comparative or absolute advantage.
Thus US in order to take advantage of low cost of Mexico, wants to subsidize in short run to provide incentive to the farmers to grow tobacco in Mexico. In short run ...

Solution Summary

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