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                           How international Trade affects a product's price By Zihao Luo

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                           How international Trade affects a product's price By Zihao Luo

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                                                                         Introduction

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                                                                         Introduction

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In the presentation we will be looking at how product's price are affected by international trade and what are the factors that was taken into consideration.

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                                        What is International Trade and supply chain?

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                                        What is International Trade and supply chain?

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The following video explains about global trade system in the 21st century, how companies split the production of goods and services among many countries that reduce overall costs, for example a car company may have a tire production line in china and a steering wheel production line in Africa due to price difference in all countries.

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                                                                     World Trade Prices

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                                                                     World Trade Prices

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In the following video, it demonstrates the relationship of  how international trade affects product's price in a mathematical way, that product's price is directly proportional to manufacture capital cost, as manufacture capital cost increases the product's price will increase as well.

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Ricardian model possible world trade prices

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Analysis of range of world trade prices in a simple Ricardian model example

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                                                                Factor Price Equalization

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                                                                Factor Price Equalization

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The following video will demonstrate the relationship between factor price and internal trade. for example in order to produce a pair of shoes, it require a lot of labour and a little capital, and let's take labour wages into consideration, lets say Canada have a minimum wages of $12.50 per hour and china have a minimum waves $5 per hour, large shoes company such as Nike would choose to build a production line in china over Canada. and the product take less capital to produce, most likely it will be cheaper.

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Factor Price Equalization--How International Trade Changes Factor Prices

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Gives an intuitive explanation of the factor Price Equalization Theorem.

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                                                             What is international Trade ?

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                                                             What is international Trade ?

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The following website explains what is international trade, and the efficiency of trading globally. international trade is the change of goods and services between countries, which rise a world economy in prices, supply and demand.

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If you walk into a supermarket and can buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade.

International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. It is the reason why you can pick between a Japanese, German or American car. As a result of international trade, the market contains greater competition and therefore more competitive prices, which brings a cheaper product home to the consumer.

What Is International Trade?

International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.

Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.

Increased Efficiency of Trading Globally

Global trade allows wealthy countries to use their resources-whether labor, technology or capital- more efficiently. Because countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade.

Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces ten sweaters and six bottles of wine a year while Country B produces six sweaters and ten bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the ten sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce ten sweaters and three hours to produce six bottles of wine (total of four hours).

But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine, and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products.

We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well.

Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization.

Other Possible Benefits of Trading Globally

International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can, therefore, grow more efficiently and can more easily become competitive economic participants.

For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.

Free Trade Vs. Protectionism

As with other theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth, because market forces will do so automatically.

In contrast, protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade, and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies, and quotas. These strategies attempt to correct any inefficiency in the international market.

The Bottom Line

As it opens up the opportunity for specialization, and therefore more efficient use of resources, international trade has the potential to maximize a country's capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change, and, as it develops, so too must all of its participants.

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If you walk into a supermarket and can buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade. International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us.

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                                                       How money affects the Trade

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                                                       How money affects the Trade

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This article demonstrates how currencies from different countries affects the Trade. as supply and demand are high companies are seeking for a better and cheaper way to produce their goods and produces. outsourcing is the cheapest way because other country such as china, India and Vietnam have a very low currency exchange rate, which means it would cost a lot less to produce the same amount of products/goods.

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                                          How international trade affect the economy

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                                          How international trade affect the economy

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This following article talks about how international trade affect the economy and product prices, international trade is producing goods/services through other countries for a cheaper price which is known as outsourcing, outsourcing would decrease job opportunity in one country and increase in another country which will lower the economy and result in a cheaper product price.

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Foreign trade has become more important to our economy in recent years. Exports and imports of goods and services have grown rapidly. A growing trade volume benefits our standard of living in several ways, but, as the recession deepens, my focus here will be limited to the impact of the trade balance on America's gross domestic product and, by implication, its job market. G.D.P and employment generally move in the same directions; so what I say about the impact on G.D.P generally applies to employment as well.

G.D.P., as I've discussed here before, is the way economists calculate how much an economy is producing in total goods and services. It is usually calculated by adding together several categories of spending, including consumer spending, investment and government spending. Exports of goods and services generate income at home, and so they are also a component of G.D.P. Imports, on the other hand, generate income abroad, so they are subtracted from the other categories of spending to get a more complete picture of how much an economy is actually producing. Higher exports and lower imports add to G.D.P., while reduced exports and higher imports contract G.D.P.

For many years we've had a deficit, in which imports exceed exports, but in recent quarters a decline in that deficit has contributed to G.D.P. growth. In 2007, exports were 12 percent and imports were 17 percent of G.D.P., compared to the third quarter's 13 and 16 percent.

In other words, because the gap between imports and exports has been shrinking, it has had a much smaller negative effect on G.D.P. - thereby allowing the economy to grow. The drag on G.D.P. becomes less as you move from a larger negative to a smaller negative. Think about facing a 50 mile-per-hour headwind that is reduced to 25 miles per hour; you're still facing a headwind, but you can move a little faster.

The shrinking trade deficit contributed 2.93 percentage points to G.D.P. growth in the second quarter, and 1.07 percentage points in the third quarter. (You might know that G.D.P. overall didn't grow nearly this much - in fact, in the second quarter G.D.P. grew at an annual rate of 2.88 percent, and in the third quarter it shrank 0.5 percent. This is because other forces - in particular the decline in consumer spending - offset gains in trade.)

Why has the trade deficit been shrinking? Because changes in the value of the dollar relative to other currencies have made our products look relatively cheap.

American exports respond positively to higher foreign demand and a cheaper dollar. Our imports grow with higher domestic demand and a more expensive dollar. The decline in our trade deficit in recent years resulted primarily from the depreciation of the dollar, since most countries were growing simultaneously with the U.S. and thus partially neutralized the influence of differential growth rates. Dollar depreciation made our exports cheaper to foreigners and our imports more expensive to us.

However, in recent months, as the financial crisis has worsened and spread abroad, the dollar has rebounded, presumably the result of a "flight to quality." Apparently, when the chips are down, the dollar is still considered the safest currency in the world despite the crisis having originated here. "Flight to quality" is usually applied to a move from riskier investments into riskless (from a credit standpoint) Treasury bills.

If the dollar continues to appreciate rapidly, our trade balance will change from a positive to a negative impact on G.D.P. Growth in exports and the decline in imports showed smaller changes from the second to the third quarter, as you'll see in the table below. This may mark the beginning of that transition.

If our trade deficit increases at a time when consumer spending is falling and investment is flat, fiscal policy will be the only game in town. Hopefully, dollar appreciation will slow enough for net exports to continue growing and supporting our economy - and our jobs.

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The Impact of Foreign Trade on the Economy

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Foreign trade has become more important to our economy in recent years. Exports and imports of goods and services have grown rapidly. A growing trade volume benefits our standard of living in several ways, but, as the recession deepens, my focus here will be limited to the impact of the trade balance on America's gross domestic product and, by implication, its job market.

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                                                           International Trade.

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                                                           International Trade.

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This picture below shows the international trade cycle, how goods/products are produced in one country ( for a lower price) and sold in another country for a higher price due to high demand.

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                                                                    Why International Trade?

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                                                                    Why International Trade?

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International trade only exist because of money, companies and government are trying their best to spent less and earn more.

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                                        How international trade affect product's price

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                                        How international trade affect product's price

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The following image demonstrates the relationship between production capital and product's price, production capital and product's price is directly proportional, and product's price to quality is inversely proportional.

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1: the most surprising thing i learn about this topic is that, international trade can increase and lower a country's economy.

2:the topic of how international trade affects a product's price is particularly interesting to me because i've all way wonder why are some product's price are so ridiculously expensive such as black truffle which is a type of fungus that cost around $2000/3pound. which is due to supply and demand. where there is a short of supply and a very high of demand.

3: a interesting fact that i found during my research is that companies took advantage of currency exchange rate and can produce 10times the produce with the same amount of money in other countries.