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Nothing Goes International

Is it time to produce Something?

Nothing, Ltd. has grown into a huge corporation, successful beyond our wildest dreams. Going global appears to be the next logical step in our continued success, and we feel that Nothing, Ltd is ready to make the move from the domestic market to the international market. However, first we must answer some important questions; who will we trade with, how will we define our terms of trade, and how can we benefit from this trading? As you can see, international trade is a complex situation, and it will require serious analysis in order to guarantee our success in this new venture.

As we begin to examine our trade possibilities, it is important that we understand the mechanics behind international trade. From reading Economics by Stephen Slavin, we know that specialization is the basis for international trade. So, first we will take a minute to define specialization, and try to understand why it is so important. According to the Brainy Dictionary, specialization is The act of specializing, or the state of being specialized, and the setting apart of a particular organ for the performance of a particular function.” (Brainy) When we look at specialization from a personal standpoint, it is easy to see how important specialization is. Just imagine what would happen if we did not specialize. Each person would have to create everything they needed to exist. Because not every person is suited to every task, a great deal of time and effort can be saved if we specialize in something we are good at, and trade for those things we are not as capable of producing. Nations operate in the same way, each one specializing in those areas in which they operate most efficiently, and trading for the products that other nations produce. (Brainy; Slavin p.716)

Now that we understand specialization, we can begin to explore our potential trade partners. Here in the United States, Nothing, Ltd. specializes in producing Nothing. In fact, we are more efficient at producing Nothing than any other nation in the world. After searching the world for a compatible trade partner, we finally discovered Lilliput, an exotic, island country that specializes in the production of Something. We need Something more than anything, and Lilliput is as efficient at producing Something as we are at producing Nothing, so we begin trade negotiations right away.

Our first step in successful trade negotiations is to define the terms of trade. To make this process easier, we will examine the production possibilities charts of the products we would like to trade. The production possibilities curve in the first chart tells us that using all our resources efficiently, we can produce 80 units of Nothing. We can also see that using the same resources, we could produce 40 units of Something. From this we can determine that our opportunity cost is 2 Nothings = 1 Something. It is important for us to realize that it is possible for us to produce Something ourselves. However, we are more efficient at producing Nothing, and we enjoy an absolute advantage in this field. A look at the production possibilities curve for Lilliput producing Something shows us that Lilliput, using all their resources, can produce 80 units of Something, or 40 units of Nothing. From this we can determine that Lilliput’s opportunity cost is 2 Somethings = 1 Nothing. Again, they could produce both products, but because they are more efficient at producing Something, Lilliput enjoys an absolute advantage in this area of production. Now that we know the production possibilities for each country, we can define the terms of trade. (Slavin, p.718)

The terms of trade are essential to our success in international trade, and it is important to remember that the terms of trade must be beneficial for each of the trading partners. If there were not benefits for all the parties involved, there would be no reason to trade. We know from our charts that in the US, 2 Nothings = 1 Something, and in Lilliput, 2 Somethings = 1 Nothing. From this we can determine our terms of trade. Would we be willing to trade 2 Nothings for 1 Something? Of course, we would, because then we would not have to make Something ourselves. Would we be willing to trade 2 Nothings for more than 1 Something? Since we could only make one Something for 2 Nothings, then we would benefit from trading our 2 Nothings for more than one something. Would Lilliput be willing to trade us 2 Somethings for 1 Nothing? Of course, they would. If this were the case, Lilliput could continue to specialize in making Something, and they would not need to produce Nothing. Would Lilliput be willing to trade 2 Somethings for more than 1 Nothing? Again, of course they would. Because Lilliput can only make 1 Nothing for 2 Somethings, they would benefit from trading 2 Somethings for more than 1 Nothing. As you can see, there are many variations of acceptable terms of trade. The most important thing to remember is that a country should not trade if the opportunity cost of trading is higher than the opportunity cost of producing a product. For example, we would be foolish to trade more than 2 Nothings for 1 Something. (Slavin, p.718-19)

Now that we have decided our terms of trade, and with whom we will trade, it is time to examine the benefits of trade. As I mentioned earlier, without specialization and trade, we would all need to produce everything we needed to survive. Not only would this waste a great deal of time, but it would also waste abundant resources that could be used more efficiently through specialization. When we trade, we can enjoy the benefits of the specialization of others, while continuing to have the resources required for our own specialization. International trade puts a wide array of products at consumer fingertips, and these imported products are usually a better quality, and less expensive, than similar products that we could make ourselves. International trade allows the people who produce products to enjoy a worldwide marketplace. Because producers can sell a great deal of their merchandise in foreign markets, they are able to help increase employment while enjoying an increase in profit. International trade has allowed the United States to reach a very high standard of living, and our continued participation in the international marketplace is crucial to our continued economic success. (Slavin, p.713)

When we are examining the potential for Nothing, Ltd’s success in the international marketplace, it is important that we remember that great benefits often bring great risks. In an ideal trade situation, a nations exports will essentially pay for their imports. That way, there is the same amount of money going out of the country as there is coming into the country. However, this is not the case here in the United States. In the United States, we import more products than we export. A lot more! According to the BBC, “The US trade deficit has unexpectedly swollen by 19% to a record $55.8bn (£30.4bn) in June.” What this means is that we have imported $55.8 billion more than we have exported. That is a lot of money going out of the country, and if this trade deficit continues to grow, we could face some serious economic situations. (BBC)

If we want to enjoy continued success as a country, we need to reduce this over-whelming trade deficit. Although it may seem impossible, there are steps we can take. First, we need to increase our productivity at home. Much of our manufacturing has been sent to foreign countries, and we need a viable replacement for the loss of these industries. Next, we need to reduce our dependence on foreign energy supplies. We are spending copious amounts of money on fuel, and this consumption will continue to rise. We need to continue exploring alternative methods of energy consumption, and we need to step up our production of these resources at home. Finally, we need to reduce our huge trade deficits with China and Japan. I think that this will be the hardest task to accomplish, because Americans have become dependant of these foreign made products, and we do not wish to give them up. (Slavin, p.738-40)

As we have seen, international trade allows us to maintain our successful way of life, and our high standard of living, but it also contains risks for the future economic well being of our country. I feel it is imperative that we find a balance in our international trade practices. To finance our huge trade deficit, we are essentially selling off pieces of our country to foreign investors. We cannot continue to export Nothing if we want to continue importing Something from other countries. If this continues, there could come a day when these foreign investors decide to cash in on our debt. What would we do then?

Sources

BBC, US trade deficit swells in June BBC News BBC News Link Aug. 13th, 2004

Brainy Dictionary Specialization

Cartoon from the Center for American Progress Cartoon Feb. 27th, 2004

Slavin, Stephen L, Economics 7th Edition Pub. McGraw-Hill/Irwin 2005 p. 713; 716; 718-19; 738-40