International Trade

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1. Is it possible for comparative advantage to change, and thus change the direction of trade?

Comparative advantage is based on the efficiency and cost of inputs. These things can change dramatically over time, and therefore it is quite possible for comparative advantages to be reversed. This would theoretically also reverse the direction of trade.

2. What are the challenges of the international trading system? Explain, give examples and/or back up your answer with evidence.

A primary difficulty arising from international trade is currency valuation. Because of variations in the exchange rate, the values of imported goods and increase and decrease dramatically. This causes a burden of uncertainty to fall on importers and exporters.

For example, let's assume that the U.S. dollar appreciates in value relative to the Japanese yen. When the dollar appreciates, it takes more yen to buy one dollar. The price of US goods therefore increases in Japan. The price of Japanese goods declines in the US.

3. Does factor price equalization occur in the real world? Explain, give examples and/or back up your answer with evidence.

Economic theory predicts that resources as well as goods will flow from where they are in relative abundance to where they are in relative scarcity. Given that there are no costs associated with migration, this means that all laborers will quickly relocate to the country where they can obtain the higher wage. This can be seen in the labor markets of the US and Mexico. Because Mexico has an abundance of unskilled labor relative to the US, Mexico's unskilled labor moves to the US.

4. What is the focus of the product life cycle theory, and where is it applicable?

The theory best explains the pattern of international trade with respect to capital intensive products suited to high income groups. It describes how the product, when first developed, is manufactured in the area of its invention. Over time, more of the components or assembly of the good occurs in foreign markets. An example is the personal computer.

5. Can import duties have unintended side effects? Explain, give examples and/or back up your answer with evidence.

Tariffs do often have unexpected results. In the case of US steel import duties, there was a significant number of layoffs among steel workers because of the resulting higher prices. See http://www.tradepartnership.com/pdf_files/2002jobstudy.pdf

6. What are some major trade problems faced by developing nations?

The benefits of international trade are ...