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Introduction
Evaluation of a countrys natural resources is paramount in determining the countrys rate of economic growth. Considering the fact that countries have got different quantities and quality of resources, various countries consider trading with other countries in an effort to optimize their rate of economic growth (Suranovic, 2009, p.1). To attain this, each country should optimize its wealth through efficient utilization of the resources. In order to determine the effectiveness with which Rodamia can conduct international trade, it is important for the relevant authorities to integrate the concept of simulation by applying various international trade concepts. Through simulation, it becomes possible to gain a better understanding of the impact that international trade decisions will have on the economy. In the process of determining the benefits of associated with international trade, both absolute and comparative advantage should be considered. A country is considered to have a high absolute advantage if it can undertake production of a good with a high productivity or at a relatively low cost compared to another country. On the other hand, comparative advantage occurs when a low opportunity cost is involved in producing a good or service. The report entails evaluation of the possibility of Rodamia conducting international trade.
Aim
The objective of the report is to evaluate the procedure that Rodamia government should consider in making decisions related to international trade.
Scope
The first part of the report entails an illustration of simulation in international trade. This is achieved by considering comparative and absolute advantage. Two scenarios are considered in evaluating decision to make on what to import and export. The advantages and limitations experienced in conducting international trade simulation are illustrated. In addition, the report also outlines the influences to foreign exchange rate. Finally, a set of recommendations in relation to international trade are outlined.
Simulation in international trade concepts
Agriculture contributes 4% to Rodamias Gross Domestic Product (GDP) which is relatively low. Some of the main agricultural products include corn, cotton, wheat, dairy and poultry products. The industry and services sector account for 30% and 66% of the countrys GDP.
In making decision to venture into international trade through simulation, a number of issues should be addressed. These include the following;
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Conducting an evaluation of the countrys neighbors to explore the possibility of conducting trade with them. The countrys neighbors include Uthania, Suntize and Alfazia.
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Determining the opportunity cost involved related to international trade.
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Evaluating the comparative advantage associated with the country and its trading partner.
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Determining the advantages and risks associated with international trade through international trade simulation.
Rodamias comparative advantage
Decision to trade with the neighbors should be based on the respective absolute and comparative advantage. This will enable the country to make effective decision with regard to the products to export and which to import. To arrive at this decision using simulation method, two scenarios are considered by considering the three countries. These included production and exportation of corn and cheese. In relation to importing, comparative advantage of DVD players and watches was evaluated. The table below gives an illustration of comparative advantage of producing corn and cheese in the three countries.
From the table above, Rodamia has a high comparative advantage in producing cheese compared to corn. Cost of producing 1unit of corn in Rodamia is equivalent to producing 2 units of cheese. This shows that it is advantageous for the country to concentrate on production and exportation of cheese. On the other hand, producing 3 units of cheese in Alfazia is equivalent to producing 2 units of corn. This makes Alfazia to have a low comparative advantage in producing cheese. The table below gives an illustration of comparative advantage in relation to DVD players and watches.
The table above depicts Alfazia to have a high comparative advantage in production of watches compared to Rodamia and Uthania.
From the above illustration, Rodamia gains comparative advantage through production and exportation of DVD players and cheese. This arises from the fact that Rodamia has a low opportunity cost in cost in production of these products. In addition, comparative advantage will also be attained by importing watches and corn from Uthania and Alfazia.
Advantages and Limitations experienced
Through international trade simulation, Rodamia government will gain understanding on the benefits resulting from trading with the neighboring countries. As a result, it will be possible for the government to concentrate on maximizing production of the products it has a high absolute and comparative advantages.
One of the limitations experienced in conducting the simulation in relation to international trade relate to the risk of the product considered being dumped in the country. This culminates into a reduction in the countrys comparative advantage.
Factors affecting foreign exchange rates
In conducting international trade, different currencies are involved. This has an effect on the resultant receipts and expenditures due to the fluctuations of the foreign exchange rate. There are number of factors which affect the exchange rate. These factors vary in relation to the different currencies.
Some of these factors relate to economic factors such as differentials in interest and inflation rate, relative growth and current and trade account balances. According to Habermier & Kriljenko (2004, p.3), interest rate is one of the major factors that influences foreign exchange rate. The interest rate is determined by movements in the forces of demand and supply. In addition, foreign rate is also influenced through policy actions such as exchange rate intervention by the government and other agencies. Exchange rates move in the same direction as the rate of inflation. A high rate of inflation results into a reduction of the countrys competitiveness within the international market. This means that its ability to sell its products in the international market is reduced.
Conclusion
Through international trade simulation, Rodamia government will be able to make decisions related to international trade. This will be attained by evaluating its international trade partner. Both comparative and absolute advantages in relation to the various countries should be analyzed. By considering the two scenarios, the government will be able to make decision on what to produce locally and what to import.
Recommendations
The following recommendations should be considered:
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The government should consider incorporating trade liberalization agreement. This can be attained by opening its boundaries to encourage international trade with its neighbors. Trade liberalization will culminate into reduction of barriers related to international trade.
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Rodamia government should conduct trade negotiations with its neighbors in an effort to promote its economic growth through international trade.
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Rodamia government should consider evaluating imposing tariffs on importation of products in which it has a high comparative advantage.
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The government should consider making decisions on how to improve its efficiency in producing the products in which it has a low comparative advantage.
Reference
Habermier, K. & Kriljenko, J. (2004). Structural factors affecting exchange rate volatility: a cross sectional study. New York: International Monetary Fund.
Suranovic, S. (2009).International trade theory and policy: definitions- absolute and comparative advantage. Washington: Cengage Learning. Web.
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