Trade, whether global, international, or local to the domestic market is all about demand and supply. The key understanding concerns the factors of production; land, labor, and capital. Which of these factors does a country have in abundance, which in scarcity, and is the country self-sufficient in factors? Demand is how much of a product or service a consumer, or group of consumers will seek to obtain. Certainly, the consumers have demands that are dependent on taste, cost, and whether having the product or service will increase the sense of well-being. Supply is not the obverse of demand, which is enlightening in itself. It is the amount of product or service a company, or group of companies will bring to the market. It is wholly dependent on the production requirements, how much does it cost to produce, and what can the company expect to receive in price for goods tendered to the market. We will select three theories of international trade that address what we think are the major theories, which are; comparative advantage, monopolistic competition, and oligopolies.
Comparative advantage is simple enough, it exists when a producer can manufacturer a product in a less costly manner than its competition. Therefore, if a company has the ability to produce a good better and more efficiently than its neighbor, it then has a comparative advantage, and can use that advantage to the benefit of its customers. On the surface, that seems a simple equation, and it ought to be if the world were in fact open to fair and free trade. However, is it actually open to fair and free trade? Some experts don't think so. Perhaps that indicates an unwillingness to allow the marketplace to function in the fair and free mode. In fact, there is a whole regimen of protection activities that countries use to gain advantage, and drive the market off the fair and free trade notion. Politicians often hide gaining a competitive advantage under talk about trade imbalances, lost jobs, and other matters. Most economists accept as a trade truth a country can expect to gain in some areas, and lose in others.
Has any country, including the United States, anything to fear in the trade arena for allowing the comparative advantage to work unfettered by protectionist behaviors? Not a thing, according to experts who so correctly pointed out free trade depends on the comparative advantage, rather that absolute advantage.
When we talk about monopolistic competition we are really addressing perfect competition, which is that market process where each firm takes the price it receives and accepts it has no direct influence or control on the market price. Zero net profit is a condition where the demand for a good has reached a point of equaling the cost of producing the good thereby rendering zero net profit. These terms are important to the theory of monopolistic competition as the actual range of this theory may extend from monopoly to perfect competition, meaning it is a continuum rather than a fixed point. A business may find itself in the position of a near monopoly when it first comes on the market with a new and well-differentiated good. At that point, the business may have the ability to set the price of the good at any level it chooses. Later as competitive forces begin to gather and produce goods that cut into the advantage the first producer has the demand and cost may reach a point where the original firm is nearing the perfect competition range. At that point, the ability to set the market price is not controllable by the first producer.
This trade theory may seem to reflect a positive process that slows a company to get a good price for a good it has produced and differentiated well enough to command a fair market share. Unfortunately, the global economy is neither well disciplined enough, nor is the playing field leveled adequately to allow all the businesses to operate in this manner.
Trading internationally is a positive for the countries that have the status to participate and, where it flourishes in a fair and free environment, it provides excellent outcomes for the consumers.
Here is a definition of oligopolies; a few large firms (global size) have reached a point where they can control the price of their goods, and if they are cooperating with each other (nice way of talking about colluding to fix prices), they can set high prices that consumer would have little choice but to pay. If they should choose to compete a bit more aggressively, then the consumer might see more reasonable or sensible prices. The point is made that firms on a global scale are trying to gain market advantage and will naturally compete (besides, colluding to set prices is mostly illegal), thereby driving prices lower until the firms are earning low profits in a situation called a prisoners' dilemma. Depending on the economies of scale the oligopolistic firms are able to attain the better their price advantage will be.
Strong oligopoly does not change the law of comparative advantage; rather it is probable that each country with the good in production will tend to continue to produce the good. Further if there is equal, but strong, oligopolistic power in each country with these entities the gains for the economies will be less, but greater for the workers than would be the case under perfect competition. Essentially this analysis is showing that the price will be greater, but the economy will not realize any benefit from the greater price, since that increased profit will go to the producers in the oligopolies. Under perfect competition, this would not be true, as the economy should have a fair share of the profit, and the companies would need to lower prices to be competitive, therefore there would actually be smaller profit.
Closing a discussion is hard, and it always seems that the writer reaches the end wanting to have something of value with which to conclude the discussion. So, here is my value statement; let us hope that the free and fair trade model of perfect competition grows stronger and protectionist efforts reduce effecting the change to a better model.
Article Source: http://EzineArticles.com/?expert=Kenneth_Wallin
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