Chapter 3: Problem 14

In general, what can be concluded about the impact of transportation costs on the price of the traded product in each trading nation? The extent of specialization? The volume of trade?

Short Answer

Expert verified

Transportation costs significantly impact the price of traded products, the degree of specialization, and the volume of trade. If these costs increase, they can lead to higher prices for traded goods, a reduction in the efficiency of specialized production, and a decrease in the total volume of trade.

Step by step solution

Impact on Price of Traded Products

Transportation costs can significantly affect the price of traded products. If the transportation cost for a certain product is high, the price of this product for the importing country will increase correspondingly. This is because sellers will include the transportation cost in the selling price to recover the cost they have paid. Thus, an increase in transportation cost results in a higher price of products in the trading nation.

Impact on the Extent of Specialization

The impact of transportation costs on the extent of specialization depends on the comparative advantage of nations. If a nation has a lower transportation cost for a certain product, it will specialize in the production of that product. However, if these costs rise, the ability of countries to specialize in certain commodities will reduce, leading to reduced efficiency and output in the production of these commodities.

Impact on the Volume of Trade

Higher transportation costs can decrease the volume of trade. This is because as transportation costs increase, import prices rise, which reduces the demand for imported goods. This will lead to a decrease in the volume of total trade. Additionally, an increase in transportation costs will discourage nations from importing, as the increased price due to transportation could exceed the benefit of importing, reducing the volume of trade.

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In general, what can be concluded about the impact of transportation costs on the price of the traded product in each trading nation? The extent of specialization? The volume of trade?

Short Answer

Step by step solution

Impact on Price of Traded Products

Impact on the Extent of Specialization

Impact on the Volume of Trade

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