International Economics

Name Bunny Lakhmani Application Number 50074 A1. There is a difference between international trade and inter-regional trade as the exchange of goods and services between countries is called International Trade and the exchange of goods and services with in a country is called Inter-regional Trade. A number of things which make difference between international and inter-regional are given as under. We can understand from these reasons that it gives rise to a separate theory of international trade: 1. Different Currencies: Each country has a different currency. Buying and selling between nations give rise to complications absent in internal trade. This hampers smooth flow of trade as between one country and another country. A large number of foreign exchange problems arise in number of foreign trade which are non-existent in interregional trade. Different needs lead countries to pursue divergent national policies and not only with respect to foreign exchange rates. National Policies differ in a wide matter of domestic matters affecting international economic relations, wages, prices, competition, investment, business regulation etc and often involve interference directly in international economic intercourse in tariffs, exchange controls, non-tariff barriers and the like. Labour and capital as factor of production do not move freely from one country to another country as they do with in the same country. Thus labour and capital are regarded as immobile between countries while they are perfectly mobile within a country. On the contrary between regions with in the same political boundaries, people distribute themselves more or less according to the opportunities. Real wages and standard of living tend to seek a common level though they are not wholly uniform as between national these differences continue to persist and check population movements. Capital also does not move freely from one country to another country.

2. Different National Policies:

3. Factors of production :

4. Different Political reasons:

Mostly countries differ in political circumstances. In inter-regional trade, trade takes place among same people. But international trade takes place among people of different cultures, habits and languages. These cultural distinctions between markets, important in the absence of different national measures have led political scientists to take look at the nature of countries. International markets are different in various aspects. Even the system of weights and measures and pattern and styles in machinery and equipment differ from country to country. Goods which are traded within regions may not sell in other countries. This is why in great many cases products to be sold in foreign countries are especially designed to confirm to the national characteristics of that country. Trade between different countries is not free. There are restrictions imposed by custom duties, exchange restrictions, fixed quotas or other tariff barriers.

5. Different Markets:

6. Restrictions on Trade:

A2. The following points below are the concepts that can be learnt during the international trade game: 1. Specialisation in work Each player had his or her own work to do, some people were cutting shapes. Some were trying to negotiate with the other team to sell and buy the resources. Other members were busy scouting around and seeing what other teams were doing. Each person had his or her own work. 2. Cost minimisation we learnt concept of cost minimisation by allowing each other to use the maximum resources we had, not waste paper, use each and every other resource properly so maximum profit could be earned. 3. Supply and demand affect the market prices- we learnt that the supply and demand for different products plays an important role in setting its prices as soon as one team would give a particular shape, the prices would fluctuate. 4. Incentive of lower prices each team somehow then forecasted demand and waited for prices to increase or decrease to make their various transactions allowing us to wait for the signals and learn how one trade in the market . 5. The concepts of game theory of trust, bargaining and strategy- each team was strategising on the availability of their resources and trusting the other team to help when needed. Each team wanted resources from one another, hence bargaining and reaching to a final decision was also a learning concept.

6. Inequality through this game we also learnt about the inequality prevalent in the world as powerful countries had most of the resources needed for trade, where as smaller countries do not have much say as they are less developed and dependent on developed countries. 7. Importance of technology and barriers many teams wanted scissors or a compass, or paper, hence the technology and barriers that each team had allowed them to learn the importance of each and every resource a country has is important. 8. Risks and Uncertainty we also learnt the concept of uncertainty as each team did not know how prices would fluctuate in the market, hence we did not know which shape to cut when, also the price of paper was increasing and the other teams had to negotiate with each other for the resources, making it hard for each team to move ahead, as the risk of prices lowering or increasing was always there.

A.3 1. Theory of absolute cost advantage for example a country (USA) produces clothes for $5 and wine for $10 , where as another country (Africa) produces clothes for $15 and wine for $20 , here we see that USA has absolute cost advantage when producing both the products. But in comparative cost advantage a country chooses to produce one product in which it specialises and the other country produces the other product. Though producing both the products is expensive for Africa, it still only produces clothes and purchases wine from USA in return. 2. Theory of comparative cost advantage when different regions or countries trade, there is a certain comparison in the costs involved with the production of the goods in each country or region. For example when a region produces say shoes and another region produces belts, and the cost is minimised for in each case, then those regions will benefit from one another as one region which specialises in shoes will trade with the region which specialises in belts, hence, both regions enjoying the benefits of free trade between them. 3. Hecksher Ohlin theory According to this theory, many countries have various factors of production when producing various goods and services. A country may have more labour compared to another country which has excess capital. These countries would specialise in labour-intensive and capital-intensive products. For example, India has excess labour hence produces labour intensive products, where as china produces capital intensive. Now these two countries trade goods as both can benefit from it and can increase the availability of products in their country.