Exporting And Importing Decision Making Rationale
Introduction
Most of the world’s countries frequently access the amount of revenue that they can generate based on the products they are capable of exporting. Exporting refers to the transfer of goods and services from one country to another for money (Girma et.al, 2008). States do not possess the competitive advantage of producing all goods locally. Importing is the act of purchasing goods from a foreign country (Portugal and Wilson, 2012). The cost of labor, and returns the product give back to the country are the main factors to consider when deciding whether to import or export. Cost versus benefit analyses will be discussed in this essay.
Home Country Investment Analysis
A country should export those goods whose returns are relatively higher as compared to the other products which it produces. In this context, cost versus benefit analysis is imperative for the nation based on amounts of spending on the labor required and what amount of output it gives back to the country or the company (Portugal and Wilson, 2012). Ranking the goods in order of the returns they give to the country is essential in choosing what good to export as shown below:
Good Relative Home Productivity Advantage Ranking
Apples 10 (i)
Bananas 8 (ii)
Coconuts 4 (iii)
Dates 2 (iv)
Enchiladas 0.75 (v)
Advice; the home country should specialize in the production and exporting of Apples given that apples give the highest returns to the home country. Bananas, Coconuts, and Dates are also viable goods which the country should consider producing.
Foreign Country Investment Analysis
Exportation is a very crucial activity for any nation to consider undertaking. To advise the foreign country on what good(s) to produce and specialize in their exportation, this case analyses the relative international productivity advantage as well as the number of employees responsible for carrying out the exercise (Girma et.al, 2008). The table below ranks the goods in order of the returns they give back to the foreign country.
Good Foreign Labor Home Labor Relative Foreign Rank Required Productivity Returns
Apples 10 1 0.1 (v)
Bananas 40 5 0.125 (iv)
Coconuts 12 3 0.25 (iii)
Dates 12 6 0.5 (ii)
Enchiladas 9 12 1.333 (i)
Advice; Enchiladas is the best option for the foreign country to export since it gives the highest and the most viable returns to the nation.
Home Versus Foreign Exportation Choices
The countries of origin should import those goods which it does not have an absolute, relative, and comparative advantage in production (Portugal and Wilson, 2012). Based on the analyses of home exportation, the country’s management should import Enchiladas since its output in the countries of origin has no benefits, it only results in a loss.
The foreign country should make an appropriate choice on what good or goods it should import based the competitive advantage analysis in that it imports those goods which it has no competitive or natural advantage in its production (Girma et.al, 2008). Therefore, the country should import apples, bananas, coconuts, and dates since they produce no return to the foreigners.
Three To One Wage Ratio
The home pay is three times foreign payment. The countries of origin imports that goods which it has no natural and competitive advantage in its production, therefore, this analysis should be based on the importation of Enchiladas. If the home nation decides to produce enchiladas, cost of labor will be relatively higher compared to the other goods. Importation minimizes such energy costs for the countries of origin at the expense of the foreign producer. This analysis is shown below:
Assuming that the home wage is (w), then the foreign wage rate is (1/3*w);
Good Home Wage Foreign Wage
Labor Rate(w) Labor Rate(w/3)
Apples 1 w 10 3.333w
Bananas 5 5w 40 13.333w
Coconuts 3 3w 12 4w
Dates 6 6w 12 4w
Enchiladas 12 12w 9 3w
Advice; Importing Enchiladas is the best option since the country reduces the costs incurred in labor and enjoys the product at the expense of the foreign country.
Limitation of Ricardian Model
Ricardian Model assumes that there are two countries producing two different goods using one factor of production, particularly labor (Samuelson, 2004). Based on offshoring and outsourcing of human resources in the manufacture of products and services, Ricardian model has several limitation for both the home and foreign country (Chadwick and Dabu, 2009). One of the most significant limitation is that the theory assumes that trading nations control certain productive resources, yet this is not realistic as the availability of resources especially labor keep on advancing from time to time in this modern economy.
Conclusion
Cost versus benefit analysis is very critical when it is coming to decision making amongst various alternatives for a country to specialize in the production of the best option (Atkinson and Mourato, 2006). Exporting should be done by a country only when it gives a viable advantage or returns to the country’s economy. Importing on the other side should be chosen by a country when the nation has no competitive advantage in its production.
References
- Atkinson, G., & Mourato, S. (2006). Cost-benefit analysis and the environment: recent developments.Retrieved from: https://trid.trb.org/view.aspx?id=795431
- Chadwick, C., & Dabu, A. (2009). Human resources, human resource management, and the competitive advantage of firms: Toward a more comprehensive model of causal linkages. Organization Science, 20(1), 253-272.
- Girma, S., Görg, H., & Pisu, M. (2008). Exporting, linkages and productivity spillovers from foreign direct investment. Canadian Journal of Economics/Revue Canadienne d’économique, 41(1), 320-340.
- Portugal-Perez, A., & Wilson, J. S. (2012). Export performance and trade facilitation reform: hard and soft infrastructure. World Development, 40(7), 1295-1307.
- Samuelson, P. A. (2004). Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization. The journal of economic perspectives, 18(3), 135-146H.