This week we depart from the Course Project to examine trade policy between countries. Given the following scenario you are asked to play the role of an advisor to the highest levels of government in the country of Whizzenbart. Write a 3 to 5 page paper outlining the steps you recommend the government take toward trade with the neighboring countries. Here is the current situation in each country:
Whizzenbart is a country with mountains to the west and rolling hill country sloping down to the ocean in the east. It has some fishing and agriculture, but the largest sector of the economy is a declining heavy industrial manufacturing base of steel and automobiles, which government would like to replace with light industrial manufacturing such as medical devices. Its neighbor to the west is the country of Gizmo which has a workforce of highly educated people employed in the tech industry, along with some fertile dry land farming in the foothills and access to fishing grounds in the northern part of the country. To the Southeast is the country of Evenland, which is flat delta country that has deep topsoil capable of growing most crops, a thriving historical fishing industry, and a new but growing manufacturing sector based on technology.
There are two different markets these countries trade in: agricultural products and manufactured products. The production possibilities for each country and market as follows:
Wheat Sardines Whizzenbart 10 million bushels 20 million tons Gizmo 20 million bushels 30 million tons Evenland 10 million bushels 10 million tons
Smart Phones Heart Rate Monitors Whizzenbart 20 million phones 30 million monitors Gizmo 10 million phones 20 million monitors Evenland 20 million phones 50 million monitors
Looking at the data above, answer the following questions in a 3 - 5 page paper:
- As advisor to Whizznebart, discuss whether you should engage in trade with other countries. If so, should the basis of trade be comparative or absolute advantage? Define each of these terms and explain why you should use one approach over the other.
- What should Whizzenbart export and, if you recommend imports, what should they import from Gizmo and Evenland?
- If Gizmo begins to dump Smart Phones below cost into Whizzenbart, what would you suggest the government do and why?
- Is there a situation where a Free Trade Agreement makes sense between Whizzenbart and another country?
- What role would currency exchange rates play in your analysis of possible trade partnerships?
Explanation & Answer
Comparative advantage refers to the ability of a country to produce certain services and
good at a lower opportunity cost over others. Notwithstanding whether one nation has an
absolute advantage in production or manufacturing of all products, diverse nations could at
present have distinctive comparative advantages. In a scenario when one nation has a
comparative advantage over another, the two can make profit by exchanging their goods and
service so that each country will get a decent value that is lower than its own particular open
door cost of creating that goods and service. Specialization as per comparative advantage brings
about a more proficient portion of world assets. Bigger yields of the two items end up plainly
accessible to the two countries. The result of universal specializatio...