Chapter 18 once again helped me understand the importance of opportunity cost and why some country import things they may be able to produce cheaper by themselves. The answer lies in opportunity costs since countries have limited resources thus, they benefit by allocating the resources to most productive uses even though there may be many things they can do better than most other countries in the world. Thus, when each country focuses on things it does best, all of the countries benefit by engaging in international trade. I suspect if there were was not a problem of limited resources, countries will only buy products from other countries that they could not produce cheaper by themselves.
The chapter has also helped me understand why artificial barriers to trade and other protectionist policies are harmful for country even though they may seem beneficial in the short run. The overall theme seems to be the gain of suppliers at the expense of consumers due to lack of competition. Lack of competition hurts consumers by making products and services more expensive, and thus, decreases consumer surplus while increasing producers’ surplus. The chapter has also introduced me to different types of trade barriers such as quotas which put limits on imports and tariffs. All kinds of trade restrictions harm the consumers by lowering competition and making goods and services more expensive. But trade barriers are not the only ways government may hurt competition. Other ways include giving subsidies to local producers and imposing strict requirements through regulations.
I also learnt in this chapter that benefits of trade have also inspired several movements such as regional economic zones as well as WTO which works towards promoting free trade among countries. But these efforts have also drawn protest from those who believe that international trade harms developing countries who have infant industries and cannot compete effectively with more efficient foreign competitors. Similarly, nationalistic arguments such as protecting local jobs are also often given in opposition of international trade.
Chapter 19 also addressed the topics related to international trade. The first topic is balance of trade and I was not surprised to learn the deficits being enjoyed by the U.S. in its trade with China. But it also made me realize that the deficit is not all bad because it has helped keep cost of living low in the U.S. As the chapter shows, U.S. probably has more people than any other country who live and work here but send most of the income to their home countries and negatively affect U.S. balance of trade. One thing that really surprised me was the rise in international investment in the U.S. in 2007 because I thought the foreign investment has been moving to emerging economies mostly. It probably means that stable economies such as U.S. continue to maintain edge over developing economies which have higher political and cyclical risks.
The chapter has also helped me understand why countries prefer lower currency values and allegations against China such as keeping Yuan’s value lower have become a trend around the world. This shows that currency values can have material impact on balance of trade and some of China’s trade surplus has been due to lower currency value rather than lower labor costs. One of the most interesting concepts in the chapter is Purchasing Power Parity (PPP) which measures the real cost of living among countries. It explains why McDonald’s burgers seem expensive in some emerging economies even though they are priced quite same after converting dollar prices in the U.S. to local prices in international countries and I know this from personal experience. I have also learnt through the chapter why flexible exchange rate system is better and sustainable in the long run because it is being determined by the market forces as opposed to fixed exchange rate system. To some extent, Euro seems to me like fixed exchange rate system and has prevented many Euro Zone countries from quickly recovering during recent financial crisis because the currency value doesn’t reflect the reality on the ground.