Econ 101 - International Trade Discussion

[Gelare]

Hey there, students. This is the discussion thread associated with the lecture on international trade. This is a hot topic these days, what with globalization happening and the countries of the world becoming more interconnected. Feel free to discuss and ask questions.

[Nesslandria Haneh]

Not to mention the political implications of specializing in only one area. What happens when we are only producing food, and then an event (natural disaster, fire, etc) occurs in Canada that halves their ability to produce clothing? The example is rather extreme, but we end up paying more for our clothes because supply has gone down while demand remains the same (theoretically), and we're left without a means to compensate for the lost supply. I suppose we could go to Mexico, who will then produce more clothes to compensate for the increase in demand. Mexico will produce less food because they can make more money selling us clothes. Then fires ravage our fair plains due to recent drought, and the whole continent is left hungry. I suppose we can eat our shirts.

I'm not pessimistic at all, no... *shifty eyes* The above example is a bit out there, but that's why we don't usually have one nation specialize in only one product. EXCEPT of course for the fact that the middle east provides a whole heck of a lot of the world's oil supply. Someone sneezes on the oil production equipment over there and the price goes up over here. International trade makes products cheaper, but it can involve a lot of risk. Wars over water for agriculture and other natural resources leave the nations involved and their trading partners in a bind. Generally nations try to balance out their trade between several other nations so no one country is providing all their food, clothes, iPods, etc. =p In this way we are still able to benefit from international trade even if China is suddenly attacked by India.

Sorry if this is rambling. I'm tired and working on stats, hence I'm not really coherent at the moment.

[Nesslandria Haneh]

This brings up the subject of America producing more oil for itself, as well. The cost and time it will take to extract the oil and build refineries to convert it to gasoline is a hot topic right now. Because America was not prepared for China and India's surge in demand for gasoline, we're getting hit at the pump. It's been decades since a refinery has been built in America, and they can't be built over night. The technology hasn't moved at all. Instead we've invested in alternative fuels, which have their own merit, but do not give as much bang for the buck as traditional gasoline.

This is just an example of how not being prepared when entering the global market can really come back and bite you in the bum. =/ I'm sure there are other examples, but I'm just too tired to think at the moment.

[Rook]

Nessa has just hit on the point that concerns me most. Being dependent on another country for all of a specific item puts you at a disadvantage. I'm not thinking about natural disaster or war though, I'm worried about greed and such. Sure you can say if Canada decides to charge more for shirts we can charge more for food, but that's not an equal balance of item value. If we stop giving food to Canada (as per your example) everyone in that country will starve to death. If they stop selling us shirts we fall a few weeks behind the latest fashion. So we with the food have a greater power over Canada with shirts. Even if Canada tried to compensate by trading with Mexico they wouldn't be able to receive nearly as much food as they were from Uantir and thus would either starve equally or food in Canada would be so expensive only the rich could afford to eat.

That's where the monkey wrench comes into the mix, when one country has a trade item of disproportional value. Needs vs. wants. You need food, you want a shirt. Sure there are environments where a shirt is needed or you die, a jacket and some trousers too, thus making a shirt in Canada a need in comparison to a Ferrari. But in comparison to a unit of food, it's not as important.

It is exactly, as Nessa pointed out, what's happening between the Middle East and the rest of the world. They have been the specialized supplier of oil and now the rest of the world is getting fleeced.

And as much as I hate oil dependency, oil has become a need, not a want. Without the technology derived from oil based power the earth could not support the amount of people living on it. If the oil ran out before alternative fuels reached a point where they meet the same energy demands, famine will completely change the face of our population. Shovel and hoe farming will never be able to yield the same crop size as a giant tractor. Unless that tractor can be made to run on something other than oil based fuel, when the oil runs out we have to revert to shovel and hoe, and that's bad news.

[Nesslandria Haneh]

The question is, what exactly do micronations trade in? With the recent discussion of Uantir creating a currency to partake in trade with other micronations, I don't know what we would be 'buying.'

Ah, but is the crop used to make clothing edible? Because then we look at conversion scenarios. "CountryA won't sell us more corn, but we can technically eat crop1 if we process the heck out of it." So long as the processing doesn't cost more than the cost of importing corn from CountryA, it's an option. Starving people need to eat. They lose money from the reduction of clothing manufacture, but you can't collect taxes from a dead populace.

[Gelare]

I'm afraid that David Ricardo did not take into account such possibilities as edible clothing in his discourse on international trade. Anyway, given the examples, if the countries were having problems with their trade partners withholding critical things like food, they could always just shift their production so that they produce food domestically. In the real world that takes some time and resources, but it's totally doable.

Bear in mind that this model of international trade makes a bunch of simplifying assumptions, among them:

- Labor is perfectly mobile across industries (people can switch from being farmers to factory workers instantly and without cost)
- Labor is perfectly immobile across countries (people can't move to another country where the situation is better)
- There is only one factor of production (that is, labor, meaning that people basically stand their and make motions with their hands and, magically, food or cloth comes out, no capital or land or materials required)
- Different technologies, and technologies cannot be shared across countries (no industrial espionage or reverse engineering to improve production techniques)
- Free trade, of course (no transport costs, no tariffs or quotas, etc.)

And no doubt several more. The point of the Ricardian model is to show that countries are always at least as well off, and never worse off, under free trade, and that these gains do not come from one country being absolutely better at producing something, but instead come from each country having something they're relatively better at. That's really an important result, and far from intuitive. It means that a country like the U.S., which is truly just ridiculous in its production capabilities, can still gain from trade with other countries.


There's one other hook to this Ricardian model, which is this:
Even though the country as a whole will benefit from trade, individuals may lose during the switch from producing one good to another (farmers will lose if their country switches to textiles and apparel, and vice verse). So what's to be done?

It is possible, in theory, to take the gains from trade that some people in the economy get and redistribute those gains to everyone, such that some people are better off and no one is worse off under free trade than they were without it. That's where the government comes in. Whether you embrace that possibility or not depends on how you feel about the government redistributing income among its citizens, but in theory, to do so would be a pareto improvement - it would make some people (or everyone, depending on how the distribution goes) better off and no one worse off.

[Rook]

That's an interesting question, as to what we trade. Micras has a 'resource' map, which lists what resources are within the boundaries of your country. Currently Uantir has a Chromium mine, farm worthy fields and silk as resources. If the Uantir expansion as custodian of Licentian lands ever is approved and added to the map we will double our farming as well as acquiring a hydro power facility and potentially, though it's on the border and thus not at full production, sheep.

I didn't try to deny that international trade was not beneficial. I realise that if need be production can be shifted from wants to needs if needs are being withheld by other countries. But that does take time and resources, during which the people are going without a need causing death and misery. Why allow that to happen? Out of cautious, perhaps paranoia, thinking, I would hesitate to rely on another country for anything that's a need. As much as I see the good in people, I realise the potential for greed and destruction and I won't let my people be subjected to that.