Type of paper: Report

Topic: Business, Trade, Commerce, Countries, Economics, Information, Ratio, Education

Pages: 2

Words: 550

Published: 2020/11/25

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Introduction

Just as one would explore the fundamentals and attractiveness of any business in which to invest, it is equally important to know about countries in which to invest. One of such essential facts is the significance of international trade to the economy. An indicator of importance is the “trade-to-GDP ratio” that refers to the sum of imports and exports divided by the gross domestic product. Even though there is no precise cause-effect relationship between this ratio and the economic health of a country, it is an attribute that one should understand if one intend to invest in country-specific funds (Shaw par. 2). A related concept to the above sentiments is that of the degree of openness of an economy. In this item, the pertinent question is not what a country exports or imports but how much it exports and imports in relation to its GDP? (Rodriguez par. 2). This paper uses the ratio TGDP = (Exports + Imports)/GDP as the measure of openness of the economy. However, the most serious problem today is the lack of a clear definition of what is meant by “openness”. The definition of openness has evolved considerably over time from one extreme interpretation to another. Recently, however, the gist of “openness” has become analogous to the notion of “free trade”. Free trade is a trading system where all trade distortions are eliminated (Yanikkaya 60).

Question 1 (a)

A graph showing the ratio of imports/GDP and exports/GDP for the USA since 1980 to 2013
Source of data: http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries

A graph showing the ratio of imports/GDP and exports/GDP for the UK since 1980 to 2013

Source of data: http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries

A graph showing the ratio of imports/GDP and exports/GDP for the France since 1980 to 2013

Source of data: http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries
The most observable pattern is that the ratio of imports/GDP and exports/GDP for each country increases as the years increase. The pattern creates an indication of a rise in the level of exports and imports for each country.

Question 1 (b)

A graph showing the degree of openness for the France since 1980 to 2013
A graph showing the degree of openness for the UK since 1980 to 2013
A graph showing the degree of openness for the USA since 1980 to 2013
The degree of openness, also called the Openness Index, is a metric used in economics that is calculated as a ratio of country's total trade to the country's GDP (Gross Domestic Product). Total trade implies the summation of imports exports. The patterns show an increase in the degree of openness as the years pass.

Question 1 (c)

In economics, the degree of openness is interpreted in such a way that the higher the index, the greater the influence of trade on a country’s domestic activities. Hence, for the USA to keep a balance of influence with the United Kingdom and France in trading activities, it has to have a lower degree of openness.

Question 2 (a)

When a country levies tariffs on imports, its demand for imported goods decreases because of high import prices. Reduced demand for imports causes competition among domestic producers to increase in the because of elimination of cheap foreign goods. Also, the discouragement of importation through tariffs creates shortages in the goods market. As a result, aggregate demand for goods exceeds aggregate supply, causing domestic prices to rise. Increase in prices serves to induce local industries to increase production by hiring more workers, hence reducing unemployment. However, tariffs may have adverse effects on consumer spending and ultimately on the economy. High prices in the market will erode consumers' purchasing power, making them reduce expenditure on the commodity with the tariff or some other good if the former is essential. Consequently, reduction in consumer spending will cause a decrease in sales and supply, leading to a decline in the economy. Furthermore, other countries may retaliate by imposing tariffs on goods from the import-imposing country, making the export expensive. Therefore, tariffs are not the excellent way to reduce unemployment because their costs far outweigh their advantages.

Question 2 (b)

Tariffs and import quotas are usually beneficial only for large nations that can drive down world prices. Large countries are those that affect international prices. As such, a rise in domestic prices in a large country following the imposition of tariffs is usually less than the amount of the tariff because part of the tariff is offset by a decrease in international prices (METI n.p.). In addition, large countries benefit from tariffs through an improvement in their balance of trade. This is because tariffs reduce the aggregate that the country wants to import, so foreign exporters lower their price. Conversely, small countries do not affect international prices thus show no improvement in their balance of trade position. Therefore, a rise in domestic prices in a small country following the imposition of tariffs is equal to the amount of the tax. The increase in domestic price of both the imported product and local substitutes reduces consumer spending. Hence, consumers will be worse off, causing a loss in national welfare. This welfare loss is larger in small countries that large ones.

Question 2 (c)

Economic reality shows that any tariff reduction is linked with a higher inter-occupational and inter-industry disparity in poorer countries (i.e. countries below the world median income). However, the reverse is true in richer countries. Tariffs, therefore, should be implemented to support wages in developed countries such as the U.S in the facade of falling global prices of manufactures. Imposing tariffs on automobiles made by foreign workers (Mexicans) who receive lower wages will level the competitive playing field compared to local automobiles produced by higher paid domestic workers. Therefore, imposing a tariff that equals the difference between Mexican and U.S. wage rates will erode the cost advantage enjoyed by companies that outsource production to countries with cheap labor.

Works Cited

Ministry of Economy, Trade and Industry (METI). "CHAPTER 4 TARIFFS." Ministry of Economy, Trade and Industry. N.p., n.d. Web. 24 Feb. 2015. <http://www.meti.go.jp/english/report/data/gCT9904e.html>.
Rodriguez, Carlos A. UCEMA | Universidad Del CEMA. N.p., 14 Feb. 2000. Web. 24 Feb. 2015. <http://www.ucema.edu.ar/u/car/Advantage.PDF>.
Shaw, Richard. "Using Trade-To-GDP Ratio To Evaluate Country ETFs | Seeking Alpha." Stock Market Insights | Seeking Alpha. N.p., 24 Sept. 2007. Web. 24 Feb. 2015. <http://seekingalpha.com/article/47992-using-trade-to-gdp-ratio-to-evaluate-country-etfs>.
The World Bank. "Exports of Goods and Services (% of GDP) | Data | Table." Data | The World Bank. N.p., n.d. Web. 24 Feb. 2015. <http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries>.
Yanikkaya, Halit. "Trade Openness and Economic Growth: a Cross-country Empirical Investigation." Journal of Development Economics 72 (2003): 57 - 89. Web. 24 Feb. 2015. <http://www.cer.ethz.ch/resec/teaching/seminar_aussenwirtschaft_wt_04_05/yanikkaya_JDE.pdf>.

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