INTERNATIONAL TRADE SIMULATION Advantages & Disad

The basic model of international trade is structured around the concept of comparative advantage. The theory of comparative advantage holds that mutually advantageous trade between countries will always be available, because trade patterns will be based on relative prices, as opposed to absolute prices, which is based on the theory of absolute advantage, wherein mutually advantageous trade between countries might not always be possible. The reasoning behind the theory of comparative advantage is that no single country can have comparative advantage in all commodities. Initially, the theory was based on labor-cost differentials. Today, it is recognized that both supply and demand factors are at work in the determination of relative prices that establish a basis for a mutually advantageous exchange between countries. In spite of significant changes in economic thought since the eighteenth century, the theory of comparative advantage still stands as an example of sound economic reasoning (Colander, 2003b).

Barriers to trade are obstacles that prevent goods and services from moving freely between countries. Most trade barriers are imposed by national governments, although they are most often imposed at the insistence of or with the support of domestic industry and labor organizations. The major formal barriers to international trade are tariffs and quotas. A tariff is an import tax. It is designed to restrict the fl

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China. Each country has the capacity to produce wool, and each country has the capacity to convert wool into clothing. New Zealand (because of its climate, land, and animal husbandry expertise) has a comparative advantage that enables it to produce wool more efficiently than is possible for China. In contrast to New Zealand, China possesses the availability of low-cost labor (with the requisite skills) to convert wool into clothing more efficiently than the conversion process can be performed in New Zealand. Thus, the comparative advantages of the two countries establish a basis for mutually beneficial trade. Absolute advantage implies that Country A can produce a good that Country B cannot produce at all. Thus, Kenya has an absolute advantage over Germany in Kenya's ability to produce coffee that Germany cannot produce at all (because of climatic conditions). Absolute advantage exists in relation to specific country pairs. Thus, Kenya does not have an absolute advantage associated with coffee in relation to Costa Rica, a country that also is capable of producing coffee. Economic efficiency may be defined within the context of productivity. Another definition of the term economic efficiency, however, is couched within t
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