The affects of Rate of Exchange and Comparative Advantages of Countries Essay

                                               Abstract      This paper answers the queries that have been posted relating to the subject of International Trade. The main points raised in the paper pertain to the increase and decrease of Dollar foreign reserve in China and the affect of it when the Yuan is pegged to the former. Again, the changes that is visible when the tariff is raised in the US and when exports of furniture exports are increased into the US from China. The other part of the paper discusses the comparative advantage of one country with that of another when doing trade with one another. Here in this instance it is about the trading advantage of Canada with that of Germany.1) (a)        If as the question says that the Central Bank in China pegs the Yuan with that of the US dollar then the following would happen in course of its trade with that of US.

In this case the US parents had begun buying fewer Chinese made toys which implies that they have either begun to place less order to the Chinese manufacturers than previously done or that they have begun to buy after a relative some period of no trade. In the first instance, there is a decrease in the net flow of US Dollars into the Chinese reserve as had been the case when the toys imports into the US was in boom. In the second case there will be an increase of US Dollars after stagnation in the Chinese Dollar reserve position as the US parents have again started to buy from China.     (b)  The second question is when the US interest rate rises relative to the interest rates in China there will be a tendency to invest in US by Chinese residents for the rate of return is more attractive than that of the home country.

In this instance there will be a decrease in the Dollar reserve of China.      (c)  Again, when the Chinese manufacturers export large quantities of early American furniture then there will be inflow of US Dollars from US to China and thereby increase the Dollar reserve of China. This would additionally bring in more capital inflows into China for investment in this sector resulting in further increase of Dollar reserve in China.       The above factors also add to the significance of international trade between countries since the World War II and have made every country increasingly interdependent. The proportion of output as seen and studied has greatly increased in most regions of the world and it means a shock in one part of the world is immediately felt in the other part also (Grimwade, 2000, p.1).(2)       In the next query as to who would benefit if a 30% tariff is imposed by the US Congress on imported automobile then the answer would be that it would in the short run benefit the American consumers as they would prefer to buy only their home made cheaper vehicles. This would never impact the rich as the wealthy can buy any automobile without caring much for the tariff.

The other country including that exports these vehicles would be immediately affected yet in the long run would out beat the US by opening newer markets elsewhere and by bringing down the cost of the automobiles significantly due to technological breakthroughs. The US automobile manufacturers on the other hand would tend towards a state of complacency and even lose those markets which it had held on previously to competitors from abroad. Eventually the US would no doubt lose out in the long run. (3)  (a)      In the next query it is seen that with production opportunity remaining the same as seen in the chart, Canada still can produce more of either the autos as well as the computer when comparing with Germany. Well should there be any reason for trade then between the two countries? The answer to this is that there must be trade between the two countries firstly because there remains a degree of specialization for each country in one of the product, Secondly, when there is trade between the two countries it is usually seen that consumption levels are much more between the two than when each produces and consumes both the product without trade.     (b)    In the next instance it is seen that the comparative advantage that Canada holds relative to that of Germany in autos is much more than the computers.

In other words, Germany is relatively more advantageously placed in producing computers for the sacrifice it makes by discarding the production of autos is relatively small if Canada has to make a sacrifice in autos. On the other hand the sacrifice that Canada makes in stopping of computer production is relatively small when compared to Germany if the latter has to sacrifice the same. Thus there is comparative advantage.   (c)     Again, if Germany is producing 40 autos and 40 computers while Canada has been producing 60 autos and 80 computers before trade for their own consumption only then during the course of full fledged trade with each other there would be a marked increase in the consumption levels.

Yet it is seen that this does not necessarily mean to be advantageous to either of the countries as their comparative cost in producing one of the product comes down drastically. What profits they would have got with a degree of specialization would have been cancelled out by unnecessary competition with one another.                                              Reference ListGrimwade, Nigel (2000). New Patterns of Trade Production and Investment. New York,        Routelege, 1, p.1. 

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