The Basic Theory Using Demand and Supply With Annotated Bibliography - Paper Example

Shahal, Andrea (2017, October 10). Trump's Iran plans driving EU toward Russia and China: Germany. Reuters. Retrieved from https://www.reuters.com/article/us-iran-nuclear-trump-germany/trumps-iran-plans-driving-eu-toward-russia-and-china-germany-idUSKBN1CH2OKThis article by Andrea Shalal explores the possible repercussions of US President Donald Trumps call for the decertification of the Iranian Nuclear Deal on severing relations between the United States and Europe (para. 1). According to the article, the move is likely to create a wedge between the United States and Europe and result in tightening of European relations with both China and Russia (para. 2). The article also cites warnings by Senior US lawmakers, government officials and European allies that such a move would inevitably lead to the inevitable unraveling of the nuclear agreement and significantly hamper efforts to stabilize the Middle East and curb nuclear weapon proliferation in other nations (para. 7).

Associated Press (2017 October 12). 'We're going to fight like hell to protect the agreement.' business leaders try to save NAFTA. Fortune. Retrieved from http://fortune.com/2017/10/12/nafta-mexico-canada-donald-trump/.

This report by Associated Press tracks the progress of ongoing negotiations to salvage the North American Free Trade Agreement (NAFTA) and the possible consequences of blowing up the deal. While, according to the article, President Trump seems keen to end the agreement as illustrated by his utterances both during the campaign trail and in interviews (para. 4), the effects of such an action are far reaching with American farmers bearing the brunt (para. 6). The article also highlights ways lawmakers could attempt to stop a withdrawal from the deal including requiring the president to seek congressional authority before invoking the withdrawal clause.

Elliot, L (2017 October 10). Global economic recovery may not last, warns IMF. Globe and Mail. Retrieved from https://www.theguardian.com/business/2017/oct/10/global-economic-recovery-may-not-last-warns-imf-international-monetary-fund

This news article by Larry Elliot comments on the sustainability of the current global economic recovery. The article quotes International Monetary Fund Managing Director, Christian Lagarde, warning that policymakers needed to guard against governments complacency during this period of recovery (para. 2). The article cites the political turmoil in Catalonia, Brexit, high asset prices and rapidly growing credit in China as possible risks to the global economic outlook (para. 3). It, however, adds that there is a good cause for greater confidence owing to positive developments in the global economy for the last 18 months (para. 13).

Reflection

The terms under which Mexico, Canada, and the United States entered NAFTA allow for the unilateral withdrawal of either of the three parties from the agreement (Associated Press, 2017). Currently, The United States, through its President Donald Trump, looks most likely to trigger that clause. I find the circumstances surrounding such a withdrawal and the possible repercussions following such action particularly interesting as they effectively present a conundrum. On the one hand, a hasty unilateral withdrawal by the United States would cause a significant decline in trade particularly in states like Texas and Arizona which do considerable business with Mexico. I posit that a withdrawal would cause a backlash and immense political repercussions on Trump these states. On the other hand, Trump has to consider his support base having heavily relied on manufacturing states that had lost the manufacturing jobs that once underpinned their prosperity in the NAFTA deal.

Part 2 - Analysis

Chapter 2: The Basic Theory Using Demand and Supply

Question 4. A countrys supply curve is the graphical representation of the relationship between the price of a given item and the quantity of the item supplied domestically over a given period. Such a curve takes into consideration the price of the item as the most important determinant of how much of the item is supplied. A countrys demand curve, on the other hand, is the graphical representation of the relationship between the domestic demand for a certain commodity or service and its price. The demand curve also uses price as the most important determinant of the quantity of the product of commodity demand in the country (Pughel, 2016. p.15). A countrys demand for imports refers to the amount by which the domestic quantity of a commodity demanded in the country exceeds the quantity of the same commodity supplied. The demand for imports curve is obtained by calculating the difference between the domestic quantity of a commodity demanded, and the domestic quantity of the same quantity supplied for every possible market price where the quantity demanded is greater than the quantity supplied (Pughel, 2016. p.24). The demand for imports curve shows the quantities a country would be willing to import for each possible international market price of the commodity in question.

Question 6. Turkey, Canada, China and the other countries the US exports substantial amounts of scrap iron and steel to constitute an additional market for US scrap iron and steel other than its domestic market and therefore extra demand. An increase in demand significantly increases the market prices of scrap iron and steel meaning that domestic users of scrap steel and iron buy it at a comparably higher price. Imposing restrictions on the exportation of scrap iron and steel has two beneficial effects on the domestic consumer. First, if there were no exports of scrap iron and steel, the domestic market would clear at the price at which the quantity of steel demanded domestically equaled the quantity supplied (Pughel, 2016. p.22). The export restriction would create a wedge between the domestic prices and the world prices of scrap iron and steel by reorienting all domestic supply to the domestic market. A second way this benefits the domestic steel user is that restriction on the exportation of unprocessed substances like scrap iron and steel act like an indirect subsidy for the processing and higher-value-added industries in the country by considerably reducing the domestic price of inputs compared to the world or market -non- distorted -price. Limiting the exportation of scrap iron and steel therefore also results in a considerable increase in the producer surplus for commodities where scrap iron and steel are the main raw materials. Thus, some support the prohibition on exports of scrap steel and iron to reduce the market price of the scrap they buy and increase the production surplus in the value addition process.

Chapter 3: Why Everybody Trades: Comparative Advantage

Question 4. Incomplete specialization has some gains. However, if the nations trade with each other at the price of 1 W/C, shifting to incomplete specialization in production only halfway would be worse for each of the countries than shifting to compete specialization. If the United States only shifted halfway, its new tradeline would be parallel to the one shown in figure 3.1 (Pughel, 2016. p.39) and it would start from the point on the PPC that is halfway between s0 and s1. While the new tradeline would allow the United States to consume at a point with more consumption than the initial S0, it could do a lot better by shifting production to points S1 and consuming along the trade line shown in the figure. Consuming at another point, e.g., point C would have even greater consumption than at a point on the new halfway line. The same reasoning applies to the rest of the world.

Question 8. Moonited Republic has an absolute advantage in both goods as it can produce both cheese and wine at comparatively lower labor inputs. Moonited has the comparative advantage in cheese with an opportunity cost of 0.4 bottles of wine as compared to Vintlands 0.67 bottles. Vinland has a comparative advantage in wine with an opportunity cost of 1.5 kilograms of cheese as compared to Mooniteds 2.5 kilos. When trade is opened, Vintland Republic exports wine and Moonited exports cheese. At an equilibrium free trade price of half a bottle per kilogram, Vintland will specialize completely in making wine and Moonited will specialize completely in producing cheese. Both countries benefit from the trade with each being able to consume quantities of both wine and cheese that it would be unable to produce domestically. The free trade consumption point is outside of the production possibility curve.

Absolute advantage is the ability of one country or territory over another to produce a good or service using fewer resources. National wage levels, on the other hand, refer to the amount of money a particular worker or group of workers earn. Absolute advantage influences the national wage levels in that highly productive workers are paid more and lowly productive workers paid less (Pughel, 2016 p.40).

The opportunity cost of producing a product refers to the amount of production of the other product that is given up. Comparative advantage, on the other hand, comparative advantage is the ability of a country or territory to make a good at lower opportunity and marginal costs than another country or territory (Pughel, 2016 p.35). A country will import the goods and services it would produce at high opportunity cost and export the goods and services it produces at low opportunity cost.

References

BIBLIOGRAPHY Associated Press. (2017, October 12). Fortune. We're Going to Fight Like Hell to Protect the Agreement.' Business Leaders Try to Save NAFTA. Retrieved from: http://fortune.com/2017/10/12/nafta-mexico-canada-donald-trump/

Elliot, L. (2017, October 10). Globe and Mail. Global economic recovery may not last, warns IMF. Retrieved from Globe and Mail: https://www.theguardian.com/business/2017/oct/10/global-economic-recovery-may-not-last-warns-imf-international-monetary-fund

Pugel, T. (2016). International Economics. New York: McGraw Hill Education.

Shahal, A. (2017, October 12). Reuters. Trump's Iran plans driving EU toward Russia and China: Germany. Retrieved from https://www.reuters.com/article/us-iran-nuclear-trump-germany/trumps-iran-plans-driving-eu-toward-russia-and-china-germany-idUSKBN1CH2OK