Global Economic Environment
Discuss The Principle of Comparative Advantage and Explain Why it Should Be Considered When Developing Public Policy? Be Sure to Give Examples to Support Your Conclusions.
The principle of comparative advantage refers to the ability of a party to create a good or service at opportunity cost that is less than another party (Carbaugh, 2010). To explain the principle of comparative advantage, consider two countries: Portugal and England. Portugal can effortlessly produce both cloth and wine using fewer resources, while in England it is relatively difficult to produce both cloth and wine. Since both countries can cheaply produce cloth, but only Portugal can produce wine, it will be much easier for Portugal to manufacture surplus wine and exchange it for cloths from England. England will still gain from this trade in that it will be able to get wine at a lower price from Portugal. This example shows that every country can benefit by focusing on the production of goods where it has a comparative advantage, and trading that good for others that require more resources to produce.
Why The Principle of Comparative Advantage Should Be Considered When Developing Public Policy?
A good public policy should be wholly acceptable by the citizens i.e. the citizens should feel that it is just and fair, and it is in the best interest of the whole society. The principle of comparative advantage is based on fairness of trade, and therefore, its consideration in the development of public policy ensures that the policy is fair and it is in the interest of everyone.
We Assume That Those People Actively Engaged in Trade (Importers And Exporters) Are Aware of The Effect of Tariffs Upon The Cost of Their Product. Who Else May Be Affected by Tariffs? Discuss The Unintended Effects of Tariffs.
Other than importers and exporters, tariffs also affect consumers of goods and services. This is because tariffs increase the cost of imported raw materials, which consequently translates into an increase in the production cost, as well as the selling price of goods and services. When the prices of goods and services are high, their demand reduces since fewer consumers can afford them (Carbaugh, 2010).
The Unintended Effects of Tariffs
Though tariffs are meant to benefit local producers, sometimes they may have an unintended (opposite) effect. Tariffs eliminate foreign competition from local industries resulting in an extensive increase in the prices of goods and services. The high prices mean less demand by the consumers because their purchasing power is reduced. In addition, retaliatory protections adopted by certain countries prevent local companies from engaging in trade in the international market, thus generally limiting global trade (Carbaugh, 2010).
Discuss the Reasons Nations Adopt Protectionist Policies and Enact Trade Restrictions. Be Sure to Consider both the Advantages and Disadvantages.
According to Carbaugh (2010), nations adopt protectionist policies and enact trade restrictions to protect local employment opportunities. Imported goods which are usually cheaper than the locally produced goods, lead to destabilization of local production, resulting in loss of local jobs to overseas labor. On the other hand, protectionism and trade restraints tend to shield the local jobs in some industries and not others i.e. while some jobs are saved; numerous other people loose their jobs locally. Another reason is that protectionist policies and trade restrictions guarantee equality in trade by offering a level ground for all parties involved. Nonetheless, if all nations would adopt trade restrictions and protectionism, global trade would stall.
Discuss The Transformation of GATT into The WTO. What Are The Differences Between The Two? Are There Similarities? What is The Role of the WTO in Globalization? Does Membership in the WTO Compromise a Nation’s Sovereignty?
The Transformation of GATT into the WTO
General Agreement on Tariffs and Trade (GATT) was established in 1947 by twenty three nations (Carbaugh, 2010). When GATT was started, its functions were limited to a trade agreement, but with time, it developed to encompass both non-tariff trade and domestic policies. It is important to note that as the organization grew, more nations also joined it. However, a growing fragmentation among member countries led to significant amendments to the treaty in the mid 1960s and the expansion of the scope of GAAT, leading to the creation of the World Trade Organization (WTO) (Greenaway, 2011).
Similarities and Differences between GATT and WTO
According to Greenaway (2011), both GATT and WTO share similar principles like non-discrimination, and transparency, as well as being driven by the member countries and having their proceedings through members’ consent. However, it is important to note that the two organizations have their differences for instance, while all the provisions of WTO equally affect all its members, GATT’s provisions are flexible enough to permit nations to take a back seat in matters that they do not agree with. In addition, WTO has a more extensive coverage than GATT.
The Role of the WTO in Globalization
The roles of World Trade Organization in globalization include providing mechanisms for resolving disputes, strengthening the integrity of trade reforms, as well as assisting in the facilitation of trade forums.
Whether the Membership in the WTO Compromise a Nation’s Sovereignty
Sovereignty refers to the right of a country to rule itself. In my opinion, I think that membership in the WTO compromises a nation’s sovereignty because WTO does not only put limitations on the execution of the domestic sovereignties of nations, but also constrains their independence. With the emergence of global organizations like WTO, nations have increasingly depended on other nations economically leading to a weakening of state control over economic matters (Greenaway, 2011).