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Small economy and trade

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Trade between a large economy and a small inevitably implies that the largest economy capture most of any gain arising from the exchange due to the disparity of economic power between the two nations. Do you agree or disagree? Why or why not?

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This problem should be tackled from the perspective of open economy with the premise of free trade is good for all. It allows for welfare creation for all trading nations. This is the basis for the creation of the World Trade Organization (WTO).

The notion that a large economy will gain from trade on the expense of a small economy is a fallacy. In fact we can argue on the other way around. A small economy has more to gain from trade. We can take Singapore as a good example on how a small country with seemingly lacking in any production factor endowment is able to take advantage of free trade. The main contributing factor is market expansion by penetrating into the world market. With a bigger market, producers are able to benefit from economies of scale in production and distribution, which they cannot get from their local market.

The argument for a small economy cannot gain from trade ...

Solution Summary

A small open economy is still able to gain from trade despite of not able to influence world prices. This is due to efficient allocation of resources by allocating more resources towards producing products with comparative advantage in factor prices. Eventually, all trading parties are able to gain from trade by having more products to consume at cheaper prices and factors of production are better paid.

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List and essay

Food is traded between states as well as globally. Global food trade is extremely important to all countries. But how many of you know where the food on your tables comes from? Many scientists wonder if we will be able to continue to grow enough food for a growing population. One of the most widely debated issues right now is genetically modified organisms (GMO's). Genetic engineering allows for desired traits to be put into plants. Genetically modified foods have been available in this country for more than a decade. Most of you are probably eating GMOs without even knowing it. More than 75% of the products on the super market shelves contain a component that is a GMO.

Go to your local grocery store and comprise a list of 10-15 produce items (fresh fruits and vegetables). Write down the produce item and its country of origin (where it was shipped from). You MUST include this list with your homework assignment. After composing your list and doing some research, answer the following questions:

What types of produce are grown in your state and what produce does your state trade to other countries or other states?
How important is trade between states?
How important is global food trade?
Would the U.S. survive without global food trade?
How does food trade impact the economy?
What types of goods OTHER THAN AGRICULTURAL products does the United States import and export the most?
What are the pros and cons to GMOs?

Helpful Hints: You will see you are asked to go to the store and see where the produce (fruits and vegetables) is coming from. Look for the origin of the item rather than just where it was shipped from (if you can find it). You can usually see the origin on the little sticker on the fruit, or on the box if it is a larger package. Do not be afraid to talk to the produce manager at your local grocery store. Just explain what you are doing and they can offer a world of information.

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