Running head: COMPARATIVE AND ABSOLUTE 1

ADVANTAGE IN INTERNATIONAL TRADE

Comparative and Absolute Advantage in International Trade

Bobbe Jurado

Kaplan University

BU224-01

Unit 2 Assignment

July 23, 2017

COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
TRADE 2

Comparative and Absolute Advantage in International Trade

When searching through my closet I picked out ten items that I wear the most. Looking at

those ten items I was able to find one item that was manufactured in America. The other nine

items were manufactured in China. Before today I did not realize how many things I own were

manufactured outside of America. When purchasing items I do not take into consideration where

they are manufactured. I focus on the need of the item, durability and price. International trade

allows me and others the ability to have a wider selection of the items we want. International

trade allows more resources at competitive prices for consumers that otherwise would not be

available.

When a country doesn’t have the resources or ability to produce what they need, they

trade with other countries. Trading allows countries to fulfill their needs and wants. When a

country can supply goods cheaper than other countries that country has an absolute advantage

over other countries. Trading with a country that has the absolute advantage will allow the

purchasing country to save money and resources. Providing a wider selection of goods and

services can result in consumers purchasing more and contributing to economic growth.

According to the US Trade Representative the United States is the world's largest

economy and the largest exporter and importer of goods and services. There are advantages and

disadvantages of trade to both trading countries. Trade in America allows a larger variety of

goods for people to choose from. Without trade Americans could only purchase items made in

America. Importing creates jobs for many people and increases disposable income. The increase
COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
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in disposable income contributes to economic growth because people are spending more money.

Trading also provides affordable prices for consumers. If goods were not affordable through

trade it would not be beneficial to trade. Importing is used as a competition tactic to drive prices

down.

Americans are also negatively impacted by importing goods and services into the U.S.

markets. Importing goods affect local business that supply the same good. Importing competes

with the local business and if the local businesses cannot match the prices of the imports it forces

local business to close. The closing of local businesses puts workers out of jobs and increases the

unemployment rate. When this happens there is less disposable income and spending goes down.

Decline in spending is a negative impact on the global economy. There has to be a balance of

imports and exports to prevent contributing to the deficit. The advantages have to outweigh the

disadvantages for trade to benefit Americans.

With trade comes the opportunity for an imposed tariff. A tariff is a tax on imported

goods. The goal of a tariff is to control trade, decrease imports and increase local purchasing.

There are advantages and disadvantages of imposing an import tariff. Decreasing imports

increases opportunities for local companies by reducing competition. When consumers purchase

products locally, they pay less for the product in most cases. Manufacturers and workers of the

local companies benefit from the local purchases through increased income. The government

collects the tax and can use the additional money towards the deficit.

The disadvantages effect the workers and the consumers. A tariff increases the price of

the product being imported resulting in the consumer paying more. Decreasing imports lowers

the competition of a product. When competition is low the quality of the product can suffer

because there is no incentive to increase the quality. Reducing trade results in decreased
COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
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production of products that lead to increased unemployment. Job loss results in less spending and

that negatively impacts the economic growth. Retaliation can also occur as a result of a tariff. In

retaliation the other country will increase the cost of exports. This increase will result in loss of

income for the importing country, contributing to unemployment. The disadvantages outweigh

the advantages of imposing a tariff on imports.

In January 1994, the United States, Mexico, and Canada implemented the North

American Free Trade Agreement (NAFTA). The goal of NAFTA was to improve the current

trading procedures. Reducing tariffs, removing boundaries on investments and improving the

protection of copyright and patents were part of this agreement (Amadeo, 2017). Trade

agreements have advantages and disadvantages as well as tariffs. The advantages of NAFTA was

the increase in trade. The increase in trade created jobs and improved the economic growth in the

United States. When trade increases it raises the competition of goods. When there is more

competition the price of products is driven down. This saves consumers money and reduces the

amount of money the government spends on the products.

There were as many disadvantages as there were advantages. Companies began

relocating to Mexico because of the cheaper wages. The companies could save money by hiring

cheaper labor in Mexico. Relocating companies to Mexico resulted in workers losing their jobs

and suppressing wages in the U.S. (Amadeo, 2017). This agreement allowed for subsidized farm

products to be brought into Mexico. The farm products that were imported was cheaper than

what Mexico could produce. Eventually farmers were forced out of business and many lost their

farms.

Another trade agreement that The United States was involved in was the Free Trade of the

Americans Agreement (FTAA). This agreement included the Caribbean, North, Central, and
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South America. After 10 years of work on this agreement it was abandoned. If the FTAA had

been implemented it would have “enabled prosperity through increased economic integration and

free trade (where barriers to trade in goods and services and investment are progressively

eliminated) among the countries of the Western Hemisphere with a view to raising standards of

living” (Bardouille, N.C., 2002). The U.S. could have benefited from this agreement in several

ways.

The U.S. would have had a competitive advantage in this agreement. The poorer

countries would have access to richer countries. This access would help in fighting poverty of

those countries. The agreement would open up more trading and increase imports. Increasing

imports is good for economic growth. This agreement would increase competition and lower

prices of goods and services for consumers.

The problems with the FTAA is that America would have had an unfair competitive

advantage against the other countries. America is able to produce food at a much cheaper price

than the other countries. The other countries would not be able to compete with America and

would suffer job loss. The government would have negatively been impacted by organizations if

the agreement had been implemented. Organizations would have had the opportunity to be

treated at legal entities. “The organizations would have been able to sue the government for loss

of profits resulting from sovereign laws” (Amadeo, 2016).

The TAFTA between the U.S. and the EU is the world’s largest free trade area. The

purpose of this agreement was to increase trade and eliminate tariffs. The agreement also set

standards that companies have to adhere to. Eliminating tariffs allows consumers to purchase

goods and services at a lower price. Increasing trade creates new businesses and jobs for both

countries. The agreement increases trade opportunities that both countries can benefit from.
COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
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All agreements have negative effects and the TAFTA has a few of its own. With

companies having the ability to sue the government legal issues can increase. Europe can suffer

because of the new standards of companies. If the new standards are not as severe as before it

can cause more severe issues. With the increase in trade some areas are not able to compete with

the lower prices and those areas will result in job loss.

The Trans-Pacific Partnership (TPP) i.e. the U.S. trade across the Pacific Ocean “is

dedicated to expanding economic opportunity for American workers, farmers, ranchers, and

businesses” (US Trade Representative 2015). The TPP is one of the most ambitious free trade

agreements ever attempted. The goals of the TPP is to promote trade, create jobs, and increase

economic growth and investments. This agreement could create more jobs resulting in more

income for the workers.

Increased wages as a result of this agreement is not an advantage to most workers. “The

increase of wages would primarily go to workers making more $88, 000 a year” (Amadeo,

2017). Another down side to TPP is the protection of patents and copyrights. The protection

reduces the availability of medications. When there is a reduction in supply the cost goes up.

Consumers will be forced to pay higher prices for medication.

As companies expand internationally the need for adapting to other cultures is imperative

to success. Companies sell their products and services into foreign markets to increase their

profitability. Marketing the business is dependent on understanding the culture it is in. In order

for companies to sell their products they must hire workers to produce the products.

Understanding cultural differences of employees helps the organization hire, train and manage

the employees. Laws and customs must be obeyed in every country. Violating the laws could
COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
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have substantial monetary consequences for the business. Accepting cultural difference allows

for a larger way of looking at things and bringing solutions to problems.

Americans can increase their understanding and acceptance of foreign cultures by

educating themselves. There are many resources available to research other cultures.

Researching other cultures will increase the understanding of opinions and habits of other

cultures. Accepting the difference increases the network of groups and communities and

promotes relationships. Understanding and accepting cultural differences allows America to have

endless opportunities for growth by learning from other countries strengths.

References
 COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
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Amadeo, K. (2016). FTAA: Agreement, members, pros and cons. The Balance. Retrieved from

https://www.thebalance.com/ftaa-agreement-member-countries-pros-and-cons-3305577

Amadeo, K. (2017). Do NAFTA’s 6 pros outweigh its 6 cons. The Balance. Retrieved from

https://www.thebalance.com/nafta-pros-and-cons-3970481

Amadeo, K. (2017). Trans-Pacific Partnership summary, pros and cons. The Balance. Retrieved from

https://www.thebalance.com/what-is-the-trans-pacific-partnership-330558.

Bardouille, N. C. (2002). Western Hemispheric Trade Integration: An Update of FTAA Negotiations.

Latin American Business Review, 3(3), 49. Retrieved from

http://search.ebscohost.com.lib.kaplan.edu/login.aspx?direct=true&db=bth&AN=27647546&site

=eds-live

Froman, M. (2015). US Trade Representative 2015. 2015 Special 301 Report. Retrieved from

https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2015/2015-special-

301-report

United States Trade Representative. Benefits of Trade. Retrieved from https://ustr.gov/about-us/benefits-

trade
COMPARATIVE AND ABSOLUTE ADVANTAGE IN INTERNATIONAL
TRADE 9

AB/BU224 Unit 2 Assignment:

Perecent
Possible awarded Points
Points out of Awarded
100%
International Trade Content (30%)
Discuss how the concepts of Absolute Advantage and
Comparative Advantage relate to international trade and
12 100% 12
discuss the attitudes both in favor of and against the
U.S.A.’s continued encouragement of free trade.
Multiculturalism Content (20%)
Develop and discuss your recommendations for how to
encourage Americans to have a more accepting attitude
8 100% 8
toward other cultures and how that acceptance will further
economic conditions world-wide.
Analysis (30%)
Analysis and critical thinking regarding the international
12 100% 12
trade
Writing (20%)
Grammar, spelling, and paragraph composition. 4 100% 4
References
List all of your references according to APA format and in-
4 4
text citations. Includes a minimum of three cited and 100%
referenced academically credible sources.
LATE Paper Deduction 0 minus 0

Total Points Earned 40 40