A Simple Model of International Trade
Yes, it is super-simplified, with a purpose. With the tariff wars headlining the news, Leaders across USA, Canada, Mexico, China are wondering what the implications of tariffs will be, both in short run and in the long run.
What about prices?
What about production?
What about trade balances?
Let's take a short step back from the fears and visit the base model of international trade. What exactly does trade do for the global economy?
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Assumptions:
Only 2 countries in the world: A and B.
Only 2 products produced: Wine and Cheese.
A is better at making wine, B at making cheese.
In a no trade scenario (Autarky):
A produces 25 units of wine, 50 lbs of cheese.
B produces 15 units of wine, 75 lbs of cheese.
Total World production: 40 wine and 125 cheese.
If trade is possible:
Everyone can be better off in both A and B.
Option 1 (extreme):
A could make ONLY wine = 50 units.
B could make ONLY cheese = 150 lbs.
Global production: 50 wine and 150 cheese.
Option 2 (common)
A makes 25 to 50 units wine & some cheese.
B makes 75 to 150 units cheese & some wine.
Global production: over 40 wine and over 125 cheese.
When tariffs are considered:
Option 1 becomes even less likely.
Option 2 still yields better outcome than autarky.
Rates at which trade occurs changes more rapidly.
NOTE: The simple model can be extended to multiple countries and multiple products based on comparative and absolute advantages of production.
Actionable Insights:
Give suppliers and producers time to adjust.
Recognize that countries have capacity for basics.
Understand geo-political concerns behind trade wars.
Focus on identifying where your SMB can contribute most.
Get experts on board to help you navigate these changes well. Follow Dr. Kruti Lehenbauer & Analytics TX, LLC for
P.S.: Can I help clarify anything on the International Trade model?
P.P.S.: Please note that I will not engage in any political debate.
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