INTRODUCTION TO INTERNATIONAL

TRADE MID TERM ASSIGNMENT

Professor: Simon Robinson

Student ID number: 1109100051

Student Name: Yu-Wen WANG

ENHGLISH DEPARTMENT
Topic chosen 1: Japanese labor productivity is roughly the same

as that of the United States in the manufacturing sector (higher

in some industries, lower in others), while the United States is

still considerably more productive in the service sector. But

most services are nontraded. Some analysts have argued that

this poses a problem for the United States, because its

comparative advantage lies in things it cannot sell on world

markets. What is wrong with this argument?

Although nontraded good such as service cannot be sold in the

international markets, it does not mean it cannot make profits

itself inside of the country. According to the chapter 3, countries

actually spend lots of money on these nontraded goods and it

will be a crucial element to the international economics.

To have a strong non-traded sector is indeed a good thing to a

nation for its comparative advantage. If all the inputs of the

traded industries are outsourced, their cost will be influenced

easily by the world market or other countries. However, if they

have some strong suppliers which rely on non-traded industries

inside of the country, their domestic market can attract more

foreign firms to invest or to come. After attracting more foreign

firms to invest into the country, those non-traded industry such

as services and restaurants can once again save the money in the

domestic market. As a result, this will create more chances for

the country and hence boost the national economic and the

global one.

In addition, since the components or the materials are less

dependent on import that much, marginal costs can be lower due

to these non-traded industries. The competitiveness of this

country can hence be improved. This has resulted in the US

having more comparative advantage, and therefore it is not

accurate to say that the high proportion of non-tradable sectors

in the US is detrimental to its competitive position in the global

market.

In conclusion, non-tradable sectors, such as services and

catering industry, can be beneficial for a country to enhance its

comparative advantage.

Topic chosen 2: Mexico and Brazil have very different

trading patterns. While Mexico trades mainly with the United

States, Brazil trades about equally with the United States and

with the European Union. In addition, Mexico does much more

trade then Brazil relative to its GDP. Explain these differences

using the gravity model.

Gravity model is also called empirical relationship. In

accordance with the Chapter 2, this relationship will be affected

mainly by international borders and distance between countries.

GDP(Gross domestic product) will not only be influenced by the

size of economic but also by the volume of trade (both imports

and exports).

Due to the fact that the cost of shipping is relatively cheap, and

the location of Brazil enable it to trade with European countries

much easily than Mexico, Brazil has the friendly borders to

European countries. However, even though Brazil has more

trading partnerships to increase its trade volume and the

subsequent revenue, the distance would still reduce the net

profit, which is why Brazil's GDP is no bigger than Mexico's.

Mexico also has a larger economy because it has a trade

agreement with the United States, as they are neighbors. This

agreement removed tariffs and other barriers, allowing net

profits to grow, and established a stronger gravity model. Size of

economic is one of the key factors in a country's GDP. Since the

distance between Mexico and the United States is even closer

than Brazil, their costs of transporting good and service are

much lower than Brazil, Mexico will eventually gain a higher

amount of GDP.

In conclusion, Brazil has less advantage in the gravity model to

compare with Mexico. United States owns the biggest scale of

economic in America, and Mexico is not just closer to the

United States but also has less barriers to trade with the US.

Despite that Brazil can increase the trade volume with European

countries, but the negative impacts caused by the distance will

be the obstacle to its’ gravity model.

Topic chosen 3: If there are internal economies of scale, why

would it ever make sense for a firm to produce the same good

in more than one production facility?

The market becomes bigger and bigger as the time pass, all

firms need to face the new challenge posed by market

integration or international competition. Even though there are

already internal economies of scale, the competition with the

rivals will never cease in order to become the monopolistic firm.

The productivity of a firm needs to be as high as possible since

the least productive firm will be kicked out of the market, and
the average cost and marginal cost will be decreased as the

productivity grows. This is the reason why companies tend to

expand their facilities and factories in foreign countries.

Due to the fact that different locations of production in different

countries bring about comparative advantage. For example, if

the foreign facility is installed at the place where lots of

customer locate, it can reduce costs and create more value.

Multinational and foreign outsourcing allow firms to gain more

profits in the long term. In view of the increasing market, even if

the product is the same, with a lower cost, a greater advantage

can be obtained through international trades.

Moreover, exporting firms are generally much larger than non-

exporting firms. Foreign direct investment can help these firms

to minimize costs and add value.

All in all, the current market is increasingly integrated,

international and competitive. The profit from the domestic

economic scale is limited, while the international economic

scale can generate relatively higher revenues. In my opinion, to

achieve this, the establishment of facilities at home and abroad

is one of the indispensable factors.