Week Two Blog: How do nations decide what to trade? How does public policy affect comparative advantage?

According to the theory of David Ricardo that specialization and trade are mutually beneficial even if a county finds it is more efficient at producing everything than its trading partners. If one country produces a given good at a lower resource cost than another country, it has an absolute advantage in its production. ( the other country has an absolute disadvantage in its production.) If all productive resources were highly mobile between countries, absolute advantage would be the criterion governing what a country  produces  and the pattern of any trade between countries.  Demonstrated by Ricardo resources, particularly labor and the skills and knowledge it immobile, a comparison of a good’s absolute cost of production in each country is not relevant for determining whether specialization and trade should occur. Rather, the critical comparison within each country is the opportunity cost of producing any good. How much output of good Y must be forgone to produce one more unit of good X .  The opportunity costs of producing X and Y are different in each economy, then each country has a comparative advantage in the production of one of the goods. In this circumstance, each country can realize gains from trade by specializing in producing what it does relatively well and in which it has comparative advantage and trading. The Nations trade will be decided by its Absolute Advantage, Comparative Advantage, Economies of Scale, Natural Resource, Technology and Infrastructure.

Reference to article “ Detroit’s Big Three Face  Obstacles in Restructuring” it is clearly indicated that American car manufacturers are currently facing difficult times in competing with foreign automakers because of the newly introduced healthcare costs. It is true that if American had a national healthcare policy in place U.S.carmaker would benefit the best comparative advantage. Healthcare cost is among the small cost that the US companies are facing in comparison to their foreign competitors. In addition to healthcare costs, there are differences in wages, retirement benefits, vacation pay, and other employee perks. For a U.S.Company to recruit and retain good talent these programs must be in place. Another Object to America’s comparative advantage is the government policies and regulations. It is evident that many regulations have been put in place to assure worker and consumer safety and security, not forgetting that they come by at a cost. For this reason, the tax weight is extremely high for U.S.Companies to afford.

 

I believe policies that could be enacted to improve the comparative advantage of US car manufactures is to through stabilizing economy overall which would stimulate dollar and the exchange rate will increase for profits and then perhaps increasing the tax on foreign import automobiles in the United States or stricter regulation of foreign automobile imports on safety standards that must be met to allow consumers in the US to operate a car legal in the United States.

There are current issues such as global financial crisis, global warming, environmental issues, racism and China’s currency policy etc, was affecting on the global economy

There is policy’s to remedy  in the wake of the current financial crisis which has spilled across markets and borders, the report calls for urgent regulatory reform. The availability of better data on commodities futures trading would provide regulators with early warning signals and allow them to recognize emerging commodity price bubbles. Related stepped-up regulatory authority would allow them to prevent bubble-creating trading behavior from having adverse consequences for the functioning of commodity futures trading.

Using  fundamental tools of economic reasoning like comparative advantage, opportunity cost, and market analysis to clarify issues that arise from the increasingly global nature of trade.