THE IMPORTANCE OF INTERNALTIONAL TRADE IN AN ECONOMY

THE IMPORTANCE OF INTERNALTIONAL TRADE IN AN ECONOMY

International trade is important, and, over time, has become more important. There have been three primary reasons for this increase in importance.

First, there have been large reductions in the cost of transportation and communication. It is now much cheaper to not only operate internationally and trade with foreign partners, but also to exchange information between potential buys and sellers.

Second, technological advances have made international production and trade easier to coordinate. More efficient telecommunications, from the first transatlantic telephone cable in 1956 to the popularization of the internet in the 1980s and 1990s, have allowed companies to exchange goods more efficiently and lowered the costs of international integration. Technological advances, from the invention of the jet engine to the development of just-in-time manufacturing, have also contributed to the rise in international trade.

Third, trade barriers between countries have fallen and are likely to continue to fall. In particular, the Bretton Woods system of international monetary management has shaped the relationship between the world's major industrial states and has resulted in a much more integrated system of international exchange. Established in 1946 to rebuild the international economic system after World War II, the Bretton Woods Conference set up regulations for production of their individual currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade.This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and, among other things, maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system. Although the world eventually abolished the system of fixed exchange rates, the goal of more open economies and free international trade remained.

They are analogously valid for its aggregated trading partners. First, the input-output table shows the output of economic sectors, which is the delivery of intermediate products to domestic sectors as well as to foreign sectors and the supply of goods and services to domestic and foreign final demand. On the other hand, economic sectors need input to produce their output. Thus, the input-output table presents these sectors’ obtainment of intermediate products from sectors at home and abroad. Beside these domestic and imported intermediate products sectors require also domestic production factors. Founded on this input-output table is the input-output analysis, which is subject of the subsequent subsection. Several assumptions are made for modeling the described connections between the output and its input. It is supposed that every sector produces a homogeneous product by using a homogenous technology. Hence, the necessity to distinguish between products and economic sectors is omitted. Furthermore, a proportional relation between total production of a sector and its necessary intermediate products is assumed. Returns to scale are presumed as constant in the production and production coefficients are supposed to be independent from the factor input. An exogenously given final demand is assumed besides, being necessary for the determination of the economic sector’s total production. Finally, it is presupposed that a given production of a sector is only achievable by a combination of production factors. Thus, no possibilities of factor substitution exist. As a result of that, an efficient input of factors is only achievable if all sectors produce the amount of intermediate products, which are required for the total production of the sector. In the following, sets of equations describe the input-output table of the model. They include the regions:

1.     Home country

2.     Foreign country

Which show the sectors:

1.     agriculture and other primary production

2.     Manufacturing and Services

These sectors use the factors

i.                   unskilled labor

ii.                 skilled labor 

iii.              capital

iv.              land

v.                 natural resources

Finally, these economic sectors produce for the demand in the home country and in the foreign country.

EXPLAIN THE DIFFERENCE BETWEEN INTERNATIONAL TRADE AND DOMESTIC TRADE

Many significant and substantial differences were seen between the two groups. Principal differences between the two groups can be seen in their view of the effectiveness of trade shows and their satisfaction with its results. International exhibitors indicate a higher perceived effectiveness and say their upper management believes in its high effectiveness and tend to be more satisfied with its results. International exhibitors tend to exhibit at more national shows and at more vertical (industry specific) shows than do domestic exhibitors. International exhibitors also tend to use more follow up (post-show) tactics than did domestic exhibitors. As to have been expected, international exhibitors indicate theirs is more of a worldwide orientation than did domestic exhibitors, many more of which are content to be considered disproportionally only North-American in geographical coverage. Although international in scope, two-thirds of the international exhibitors indicate their predominate activities to lie only in North America and Western Europe.

International exhibitors indicated that over half attended 5-9 international trade shows in 91-92 with more planned for 93-94. The predominate criteria international exhibitors used to evaluate/select international trade fairs include size, number of visitors, with quality of audience most important. Principal reasons given by international exhibitors for participating in intl trade fairs were establishing contacts (most important) and worldwide image. Of the exhibitors who self-classified themselves as international, almost half are new international exhibitors (1-4 yrs) who tend to rate domestic and international audiences about same, not having reached the experience necessary to differentiate the audiences. Most of those who indicated they were international exhibitors said what prompted their start in export activities were unsolicited orders. The major difficulties the international exhibitors indicate they face in the international arena are business customs and logistics. Their mix of trade show booth personnel is (mean values): Technical 12%, Mktg & Sales 60%, Executive 16%, which differ from domestic exhibitors by having more marketing and sales personnel present and fewer technical-advisors.

A Discriminant analysis between domestic and international exhibitors was also run. Results can be seen in Table 3. As Table 4 shows in the predict versus actual table, a very high significance level was obtained. These two techniques confirm and verify each other. The Multivariate result was marginally significant, thus indicating not spectacular differences between the two groups (this despite the highly significant group versus predict matrix shown in Table 4). In essence, while some differences were seen between the two groups, their behavior as a whole (especially as concerns versus non-exhibitors) were very similar. One interesting observation was that while North American oriented firms were, not unexpectedly, domestic exhibitors, the internationally exhibiting firms, although quite new, gave worldwide orientation and indicated that one of the first facets of their marketing mix changed in the upgrading from North American emphasis to Worldwide-orientation, was to become an international exhibitor at trade shows. This quite clearly indicates the value and importance of exhibiting overseas

DISCUSS THE COST ADVANTAGE AND COMPARATIVE ADVANTAGE

ABSOLUTE COST ADVANTAGE

Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than another party producing the same product or service.

Absolute cost advantage is therefore the competitive advantage that a firm or a country obtains through cheaper inputs, innovation, proprietary know how, waste minimization, or other such means resulting in lower average costs.

COMPARATIVE COST ADVANTAGE

Comparative advantage was first described by David Ricardo who explained it in his 1817 book on the Principles of Political Economy and Taxation in an example involving England and Portugal.

          Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries.

The principle of comparative costs is based on the differences in production costs of similar commodities in different countries. Production costs differ in countries because of geographical division of labour and specialisation in production. Due to differences in climate, natural resources, geographical situation and efficiency of labour, a country can produce one commodity at a lower cost than the other.