Economics Of International Trade Assignment Sample

Q.1. Explanation of Economics Of International Trade

Q.1.a. Explanation of the commodity that will be imported and exported in China and India for different exchange rate

The given table shows the different prices of the six commodities in two different currencies of Rupee and Yuan in India and China (Bagchi et al. 2023). Now, to differentiate the import commodity and the export commodity for these two countries of India and China, the “exchange rates” need to be converted into one specific currency.

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Here 3 exchange rates of 1) ¥1 = ₹2, 2) ¥1 = ₹3 and 3) ¥1 = ₹5 are given based on which the commodities need to be identified whether they will be imported commodities or will be exported commodity, which is described as follows.

Exchange Rate at CN¥1 = ₹2
Commodity	Prices of commodities in India (Rupees ₹)	Prices of the Commodities in China (Yuan ¥)	After the conversion of the Exchange rate in China
A	₹18	2	(2*₹2) = ₹4
B	₹15	4	(4*₹2)= ₹8
C	₹14	6	(6* ₹2) = ₹12
D	₹12	8	(8* ₹2) = ₹16
E	₹10	10	(10 * ₹2) = ₹20
F	₹6	12	(12 * ₹2) = ₹24

Table 1: Conversion of the “exchange rate” at CN¥1 = ₹2

From the table analysis below, it shows that China has a lower price in producing commodities A, B and C hence enjoys “absolute advantage” in the production of these commodities while India enjoys “absolute advantage” in the production of commodities D, E and F. Therefore buying and selling will be China will sell A, B and C to India, while India will sell D, E and F to China.

At CN¥1 = ₹2	Export	Import
China	A, B, C	D, E, F
India	D, E, F	A, B, C

Table 2: Export and import at CN¥1 = ₹2

Here China will be an importer of commodity D, commodity E and F and for India, it will be commodity A, B and commodity C.

Exchange Rate at CN¥1 = ₹3
Commodity	Prices of commodities in India (Rupees ₹)	Prices of the Commodities in China (Yuan ¥)	After the conversion of the Exchange rate in China
A	₹18	2	(2*₹3) = ₹6
B	₹15	4	(4*₹3)= ₹12
C	₹14	6	(6* ₹3) = ₹18
D	₹12	8	(8* ₹3) = ₹24
E	₹10	10	(10 * ₹3) = ₹30
F	₹6	12	(12 * ₹3) = ₹36

Table 3: Conversion of the “exchange rate” at CN¥1 = ₹3

The above table shows that the Chinese country has the “absolute advantage” in the production of commodities A and B due to lower production costs (Murdock, 2020). Therefore, China will Export A and B. And India will export commodities C, D E and F to China.

At CN¥1 = ₹3	Export	Import
China	A, B,	C, D, E, F
India	C, D, E, F	A, B,

Table 4: Export and import at CN¥1 = ₹3

Hence the import commodity for China is C, D, E and commodity F and for India, it is only A and B.

Exchange Rate at CN¥1 = ₹5
Commodity	Prices of commodities in India (Rupees ₹)	Prices of the Commodities in China (Yuan ¥)	After the conversion of the Exchange rate in China
A	₹18	2	(2*₹5) = ₹10
B	₹15	4	(4*₹5)= ₹20
C	₹14	6	(6* ₹5) = ₹30
D	₹12	8	(8* ₹5) = ₹40
E	₹10	10	(10 * ₹5) = ₹50
F	₹6	12	(12 * ₹5) = ₹60

Table 5: Conversion of the “exchange rate” at CN¥1 = ₹5

The above table shows that China has the “absolute advantage” in the production of the only commodity A for which China will export only commodity A to India (Rahman, 2023). India has the “absolute advantage” in the production of commodities B, C, D, E and F for which India will be the exporter of commodities B, C, D, E and F.

At CN¥1 = ₹5	Export	Import
China	A	B, C, D, E, F
India	B, C, D, E, F	A

Table 6: Export and import at CN¥1 = ₹5

Here the import commodity for China is commodity B, commodity C, D, commodity E and commodity F and for India, it is only commodity A.

Q.1.b. Examination of the limitations of the “Ricardian theory of comparative advantage” using examples and explanation of “gains from trade”

“The comparative advantage theory of Ricardian Theory” is a popular economic theory that describes that countries get the opportunities to get benefits from trade and each country will trade the commodities that have the specialization opportunities. The limitation of the Ricardo’s trade associated with different types of factors like labor cost, 2 commodities, transportation cost etc. (Edisciplinas.usp.br, 2024). David Ricardo first developed this comparative advantage theory in the nineteenth century which is also known as the “Ricardian comparative advantage theory” (Toraubally, 2022).

Restriction on the 2 commodities and 2 countries

It is identified that “Ricardian theory” considered only “two countries” and “two commodities”. But the actual setting, of course, is a bit far more complicated and deals with other countries as well. Hence the “Ricardian theory” cannot hold in the real- life situation, this is the major shortcoming of the “Ricardian theory”( Sundberg and Tucker, 2024). For example, the US traded high-tech types of goods with other countries like China, agricultural products with China and other services with India. Therefore, this type of complex trading situation cannot solve the real-world situation. [Referred to Appendix: 1].

Dependency upon the labor theories

Another important limitation is this type of Ricardian Theory is based upon the values of the labor theory. This type of unrealistic assumption is a major limitation of this theory (Hisamatsu, 2022). This “Ricardian Theory of comparative theory” only considers the labor cost and neglects all types of non-labor costs during the production process of the commodities.

Dependency upon the one-side factor (Supply-side factor)

This theory only focused on side of supply or the “Supply-side theory” without also stressing on problems on the demand side which is a weakness we can see with the “Riparian theory”. Unlike income levels, consumer preference patterns or “demand elasticity”, “Ricardian theory” does not come under the scope of application of this theory. 

Dependency on usage of a fixed proportion of labor

This theoretical approach also describes that the labor proportions are always used in fixed proportionate for the production of the commodities. However, this type of assumption is also an unrealistic assumption (Ara, 2020). For example, the required amount of labor for the steel production is not equal to the required amount of labor for the textile production.

Ignorance of the transportation cost

Ignorance of the transportation cost is another unrealistic assumption under this “Ricardian Comparative Advantage Theory”. The transportation cost is another variable that put limitations on Ricardo’s trade theory (Eclass.duth.gr,(2024).

The presence of mobile factors in the production

In this type of doctrine theory, Ricardo assumed that production factors have the nature of perfect mobile for internal markets and immobile for the international market. This type of assumption is not a realistic assumption because the factors cannot have access to free movement from one industrial structure to another industry or region (Huang and Ottaviano, 2023).

Dependency of the unrealistic nature of “constant cost”

Ricardo’s theory assumes the “constant type of opportunity cost” during the production of any commodities. However, this type of assumption is not realistic. Ricardo’s model wanted to tell that the country has the specialization ability in the production of one commodity. However, often the countries produce more than 1 commodity which limits “Ricardo’s theory”. The PPF curve is always bowed out in shape. Thus, such kinds of assumptions can be relevant to the hypothetical type of a situation. 

Miss use of the concept of the full-employment situation

The concept of the full-employment situation is not applicable in reality. In reality situation, the production cost might change in terms of labor cost due to the movement of the employment situation to the full employment situation.

Assumption of the free-trade situation and ignorance of trade barriers

Ricardo assumes that the country has the movement power between two different countries. This types of assumption is again not realistic. Because the countries have to face the different types of barriers like quotas, tariffs, some non-tariff barriers etc. for example, it is identified that the African countries faced higher subsidies and tariff barriers that reduce the comparative advantages.

Unrealistic assumption of the complete specialization

Ricardo also assumes that one country, suppose country A fully focuses on specialization one one good. Similarly, the country, Country B emphasized on production of commodities like agricultural production (Reinert et al. 2023). Therefore, this limited on the “comparative advantages” of Ricard’s assumption of full specialization on the production of some commodities. Therefore, the assumption related to the full specialization in any commodities limited the assumptions of “Ricardo’s theory”. This type of theoretic approach highlighted the unrealistic assumptions of the complete specialization situation. For example, Ricardo’s theory provides a statement that Country A will specialize fully in clothing goods and Country B will specialize fully in the production of agricultural goods (Keller and Utar, 2023).

Q.1.c. Analysis of the Contribution of International Trade to increasing wage inequalities for developed nations

International trade might lead to an increase in wage inequalities for the developed nations. Therefore, international trade can increase the wage inequalities in the developed nations in different type of ways.

Changes in the skill-biased technologies

Most of the time countries need to adopt innovative technologies from which the unskilled and the skilled workers benefit. For this reason, the industries emphasize on investment of hiring skilled workers and increasing the wage rates for those skilled workers. On the other hand, the demand for unskilled workers is reduced which leads to the creation of wage inequalities between the unskilled and the skilled workers.

Application of the “Heckscher-Ohlin Model (H-O) model” helps to identify increasing of wage inequalities for the “developed nations”. The theory indicates that trade can benefit the “capita-intensive based industries” for which the wages for the skilled labour increased and reduce the demand for the “unskilled workers” by which wage inequality” in “developed nations” can arise. 

Figure 1: “H-O Model” for skill-based technologies

The above figure shows the skilled-based change in wage inequalities for the “developed nations”.

Impact on the outsourcing and the offshoring process

International trade also allows for outsourcing the overall production process at a lower level of labor costs. This indicates a reduction in the low-skilled workers' demand for the developed nations which also leads to the downward pressure for the wage rates (Spirin, 2023). On the other hand, skilled workers can get the benefits of increasing demand, especially for skilled workers in the international markets.

Rising global competition

The increase in “global competition” is also another responsible factor for the fluctuation of the “wage inequalities”. Intensified competition forced the workers to bear “lower wage rates” in the “international markets”. This is another reason for which the “developed nation” faced the “wage inequalities”. 

Trade Agreement

“Trade agreement” is another big factor that is also responsible for increasing of the “wage inequalities” which increase the market competition and responsible for disparities among the “unskilled and the skilled workers”.

Presence of mobility in capital sectors

Capital mobility is the process whereby capital migrates between countries or between different sections of the same country in affecting wages or income disparity and economic progress. While capital is channeled towards countries with cheaper employees, it boosts industry development although, it enhances the pay for professional employees with more skills compared to the unskilled employees (Ikechukwu et al. 2022). FDI led to the importance of the capital-intensive industries and an increase in the demand for skilled employees and an increase in income inequality (Parrinello, 2022). Essentially, capital mobility makes the world richer but at the same time it widens the dispersal of growth benefits within and across countries.

Reference list

Book

• Parrinello, S., 2022. On Some" new" Interpretations of Ricardo's Principle of Comparative Advantages. Centro di ricerche e documentazione" Piero Sraffa". Available at: http://www.centrosraffa.org/public/bba9693f-9bfa-47cb-b09e-6da1021f173f.pdf [Accessed on: 26.10.2024]
• Sundberg, M. and Tucker, K., 2024. International Trade in Services. Taylor & Francis. Available at: https://books.google.com/books?hl=en&lr=&id=u3UhEQAAQBAJ&oi=fnd&pg=PP1&dq=Limitation+of+Ricardo+theory&ots=J7rerFnTeE&sig=zlXcoz7bYEy5hP2ZdHkUEu7VeB8 [Accessed on: 09.01.2024]

Journals

• Ara, T., 2020. Country size, technology, and Ricardian comparative advantage. Review of International Economics, 28(2), pp.497-536.
• Bagchi, T.P., Mohanty, R.P. and Sinha, S., 2023. A tutorial on optimisation involving the David Ricardo theory on comparative advantage. International Journal of Industrial and Systems Engineering, 44(1), pp.34-51.
• Bhatia, G., 2021. Labor Productivity and Comparative Advantage: The Ricardian Model.
• Hisamatsu, T., 2022. Ricardo and the Construction of the'Ricardian'Trade Model of Comparative Advantage. History of economic ideas: XXX, 3, 2022, pp.11-30.
• Huang, H. and Ottaviano, G.I., 2023. Revealing Ricardian Comparative Advantage with Micro and Macro Data. Available at SSRN 4646675.
• Ikechukwu, I.F., Fyneface, P. and Anochie, C., 2022. Assessing The Concept of Heckscher Ohlin Model. BW Academic Journal, pp.7-7.
• Keller, W. and Utar, H., 2023. International trade and job polarization: Evidence at the worker level. Journal of International Economics, 145, p.103810.
• Marjit, S., 2020. A new Ricardian model of trade, growth and inequality.
• Murdock, C.W., 2020. Why Ricardo's Theory of Comparative Advantage Regarding Foreign Trade Doesn't Work in Today's Global Economy. U. Bologna L. Rev., 5, p.59.
• Rahman, M.A., 2023. David Ricardo’s Principle of Comparative Cost Advantage inspires International Trade. Available at SSRN 4519038.
• Reinert, E.S., Di Fiore, M., Saltelli, A. and Ravetz, J.R., 2023. Altered states: Cartesian and Ricardian dreams. In A Modern Guide to Uneven Economic Development (pp. 108-134). Edward Elgar Publishing.
• Spirin, V., 2021. Ricardo Through the Looking Glass:(Mis) adventures of Comparative Advantage in Developing Economies.
• Toraubally, W.A., 2022. Strategic trading and Ricardian comparative advantage. Journal of Economic Behavior & Organization, 195, pp.428-447

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