The Importance of Trade, Cost, and Price

Multinational companies are persistently searching for more techniques to save money and create an advantage. The advantages that are created are absolute advantage and competitive advantage. An absolute advantage is "the ability of a country to produce a good using fewer resources than another country" (Sawyer & Sprinkle, 2006, p. 24). When a product is specialized in by a country, that country experiences gains from trade between it and another country (Sawyer & Sprinkle, 2006, p. 27). The gains the both countries experience are an increase in both their GDPs (Sawyer & Sprinkle, 2006, p. 27). Comparative advantage is "the ability of a country to produce a good at a lower (opportunistic) cost than another country" (Sawyer & Sprinkle, 2006, p. 28). As with absolute advantage both the countries increase their GDPs (Sawyer & Sprinkle, 2006, p. 31).

The United States is willing to pay for the short run costs of the production for tobacco farmers in foreign countries because of the comparative advantage that it gives them (Sawyer & Sprinkle, 2006, p. 28). A multinational corporation (MNC) is more willing to invest in a country that is developing because there is a bigger chance for a much larger profit and also cheaper production of their products (Sawyer & Sprinkle, 2006, p. 124). In the short run, tobacco farmers are guaranteed somewhat of a profit because they are guaranteed a demand for the crops that they produce, but they still have to pay back the loans for the startup costs (Colorado Technical University Online, 2006). In the long run, the tobacco farmers are still guaranteed a demand for their crop, only now the loans will have been paid off, so they will increase their profit (Colorado Technical University Online, 2006).

When farmers are "paid" to become tobacco farmers instead of produce farmers there is a shift in price and output of both produce and tobacco. First of all the tobacco, which is now being highly produced will be exported more than before; and the produce that was being produced will lead to much lower exports of that particular product. The price of the tobacco will decrease within the country because it is much more abundant; whereas the price of the domestic food items will increase due to the lack of production. Their will be an increase of imports on the items that are now not being produced as much.

In the case of Acme Motors, it is more cost effective to produce the engines in Nuevo Laredo, Tamaulipas, Mexico than the United States. The labor costs are lower in a developing country as opposed to a developed country. It is in Acme Motor's best interest to produce the motors in Mexico, and then ship them to the United States to be put into the vehicles. The advantages that Acme received for moving the engine production to Mexico were plenty. Acme would be able to:

-"Offer more and better vehicles"

-"Increase its global market share"

-"Become the world's largest vehicle maker"

-"Increase profits substantially"

-"Develop a reputation as a note-worthy corporate citizen through the TCM strategy" (Colorado Technical University Online, 2006).

There are many gains and losses that consumers have due to these types of international production and trading patterns. Consumers buy products that are better manufactured than they would if the products were manufactured in their own countries. The consumers will also buy the products at a much cheaper rate due to the "cheap labor" of the developing countries that is being passed on by the companies. One loss that comes from these companies moving business out of the country is the detrimental permanent loss of jobs and mass layoffs that they cause. There is also a dependence on the producing companies to supply the products that are not being produced within the country.

References

Colorado Technical University Online. (2006). Task list: Acc350-0701a: Managerial accounting practices. Retrieved January 23, 2007, from CTU Online Web site: https://campus.ctuonline.edu/MainFrame.aspx?ContentFrame=/Default.aspx

Sawyer, W.C. & Sprinkle, R.L. (2006). International economics (2^nd ed.). Upper Saddle River, New Jersey: Pearson Prentice Hall.