Code:MSCM 709

MIDLANDS STATE UNIVERSITY

FACULTY OF BUSINESS SCIENCES
MASTER OF COMMERCE IN SUPPLY CHAIN MANAGEMENT

Surname: Name: Reg no.

GWATSAIRA ZVISINEI R2115891Z

Mode of Entry: HARARE WEEKEND SCHOOL

Module: MSCM711- VALUE CHAIN

Level: 1 Semesters: 2 Lecturer: MISS MUPFIGA

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Due Date: 23/06/2022

QUESTION 1
Free trade is where they are no restrictions on the entry and exit of goods and services within the
borders of the country. This means that the government imposes no tariff, taxes, or duties on
imports and place no quotas on export. Within the free trade areas, they are many benefits that
are being enjoyed and these include, specialization, efficiency, increased consumption, market
power, and so on.

First and foremost, free trade is beneficial as it enables specialization to take place.
Specialization is whereby a country is concerned with the production of goods in which it has a
comparative advantage rather than the absolute advantage. As far as the terms of international
trade are concerned, a country will mostly focus on the production of goods in which it has a low
opportunity cost. Opportunity cost is the next best alternative forgone when making a choice,
thus what a country forgoes to produce when it produces a certain type of a good or service. For
instance, let's assume that the movement of goods and services between Zimbabwe and Malawi
is not restricted and that given fixed resources the two nations are only able to produce wheat
and maize in the quantities shown in the table below.

Countries/ crops Maize Wheat

Zimbabwe 100tonnes 200tonnes

Malawi 300tonnes 100tonnes

Looking at the above table in absolute terms, the terms of trade will allow Zimbabwe to produce
wheat where given fixed resources it is able to produce more tonnes of wheat as compared to
maize and Malawi will focus on the production of maize where it is producing 300tones of maize
as compared to 100 tones of wheat. However, in comparative terms, we have to calculate the
opportunity cost of each country as shown in the table below.

Countries/ crops Maize Wheat

Zimbabwe 1/2tonnes:1 2tonnes:1

Malawi 3tonnes:1 1/3tonnes:1

The comparative terms of trade will allow Zimbabwe to specialize in maize production where for
each tone of maize produced it only forgo a half tone of wheat which is better as compared to
wheat where a tone of wheat produced cost two tones of maize. Malawi will specialize in wheat
production where production where for each tones of wheat produced it forgo a 1/3 tone of maize
which is better than for it to produce maize because for each tonne of maize produced it loses 3

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tones of wheat. AS specialization occurs, it comes out with a varsity of advantages that include
higher productivity and efficiency, lower unit cost products resulting in low prices being charged
on goods and services, thus maxim using the social welfare of consumers.

Equally the same free trade allows efficiency to take place. Efficiency is about making the best
possible use of resources, thus maximization of output from given resources, and by so doing,
they will be minimizing their cost of production and will likely produce where the average cost
per unit of production is low. When domestic firms face competition from foreign rivals, they
will be more incentive to cut costs and increase efficiency. Thus free trade allows efficient
utilization of scarce resources which is a benefit as the cost of production incurred by a firm is
the major determinant of prices that will be charged to consumers by profit-maximizing
firms .with free trade goods and services are likely to be produced at low cost and offered to the
market at affordable prices and hence the living standards with the free trade area will be high as
consumers will have more purchasing power as compared to a closed economy.

Another relevant outcome of free trade is that it allows a country to consume combinations of
goods and services that are outside its production possibility curve. A production possibility
frontier is a curve that shows a different combination of goods and services that a country is able
to produce given a fixed amount of resources. Due to unequal distribution of resources by nature,
scarcity of resources is likely to occur in each nation, thus for each country there exit a
combination of goods and services that is unattainable. This combination is out of its production
possibility curve as shown by the diagram below.

Good A *Z

Good B

Given fixed amount of resources a country is able to produce any combination of goods and
services within the boundary of the line ab. Point z on the diagram represents a combination of
good and services that a country can afford to produce given certain resources. With free trade
the degree of scarcity that is the distance between line ab and point z is reduced as country
supplement shortages in another country. For instance, because Zimbabwe is not self-sustainable,
they are commodities that we import from south Africa the likes of cooking oil, clothes, car
wheels to supplement local shortages in here. when scarcity level is reduced, consumers are
being exposed to a wide range of goods and services and thus maximizing consumer welfare.

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Furthermore, free trade allows firms to enjoy economies of scale .Economies of scale is when the
average cost per unit of output is falling with the increase in the scale of output produced by a
firm .when international trade occurs firms are exposed to a market with a varsity of consumers
and hence the need to produce many goods to meet consumer demand. When firms produce
more, they are likely to enjoy discounts when purchasing bulk raw materials, thus purchasing
economies of scale. In free trade area as a result of intense competition among firms, they are
likely to hire expert managers to run the daily operations of their businesses. As a result,
managerial economies of scale are likely to be high. Also, financial economies of scale are likely
to occur. As firms in the free trade arena are growing big, they will enjoy low interests when
borrowing from banks. All these leads to more output being produced at lower average costs.

To add more, free trade results in low prices being charged on goods and services as compared to
closed economy. This can be explained by the diagram below.

(Price ($)) S

D*

P E1

Wp E2 W

D*

D A B (Output)

On the diagram before international trade ,the equilibrium position in country C was E1 with price P
and quantity demand (A).When country C begins to engage in international trade the price will fall to
pw as supply will be increased by supplies from firms abroad with local demand being
heldconstant .The world supply curve is WS and now the new equilibrium position will be E2.As you
can see on the diagram the new equilibrium is now E2 with the price being reduced from p to pw and
quantity demanded increased from A to B Consumers in country C are now enjoying consuming
more goods at low prices this an increase in their purchasing power and even those who were not
able to consume at price P are now able to purchase at the reduced price Pw.

Moreover, the market power of monopolies is decreased as a result of free trade as a result of
competition at global level. This prevents domestic monopolies from charging too high prices.
As the number of suppliers increases with demand held constant, the market forces will force the
price to fall automatically. With trade, technology can cross boarders more easily and accelerates
improvements in technology.

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However, the free flow of goods and services may not be suitable for some countries. This
because of reasons such that includes protecting local infant industries, generating government
revenue through taxation, job protection and for national security purposes. For these reasons a
country may see it possible to impose trade restrictions such as import quota and embargoes.

The major reason why most countries restricts free trade is the infant industry argument. Yes, I agree
that with free trade consumer are enjoying but let's look on the growth of the local industry. Some
small firms in the local industry may not survive in the environment of free trade and may be forced
to shut down with tense completion from big foreign firms abroad. Trade restrictions like quota or
embargo are sometime put in place to act as a buffer to protect fledging domestic industries. Firms In
the new industry may be too small to achieve significant economies of scale and could be clobbered
by established firms in other developed countries, For instance ,consider a situation where a new firm
in Zimbabwe is trying to enter into the car manufacturing industry which already exists in the
international are like in Japan. The companies in Japan have taken advantage of economies of scale
and have therefore achieved relatively low levels of production costs. That new firm in Zimbabwe
will face low levels of output and higher average costs, may find it difficult to compete. Therefore to
promote the growth of that new emerging firm in Zimbabwe, the government of Zimbabwe may
impose a tariff or an embargo to restrict the importation of cars from Japan such that the new firm's
new cars will be demanded locally and will be able to cover fixed costs in the short run and will
continue with operations in the long run.

Equally the same, job protection on the local residents is one of the key factors in which a
country may see it possible to restrict free trade. Some local industries that at one time had a
comparative advantage locally are longer among the world's lowest cost producers. This can be
explained by the diagram below,

(Price ($)) S

D*

P E1

Wp E2 W

D*

D A B (Output)

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On the diagram before international trade took place, the equilibrium point was E1, the price was
P and the quantity demanded was A. To meet local demand ,local firms were producing and
supplying quantity A to the market .Then let's assume that the country engaged in international
trade, the equilibrium point will be E2 with word supply W and the quantity demanded Buy local
consumers at the world's price(WP),but now local firms has experienced a decline in the amount
of output Which they can offer to the market. They are now supplying quantity D hence there is
decline in output from A to D. That fall in supply forces local firms to reduce output being
produced and that fall in output may call for firms to retrench workers. This means some
members in the local country lose jobs, thus increasing poverty in the local economy. To protect
job loss the government can put import quotas and embargoes in place as protection measures.

Another reason why a country can restrict trade of some goods and services is for national
security's sake. They are some strategic materials that are most important in the daily activities of
a nation for example electricity. The country should not fully depend on the importation of these
materials from foreign powers. This is because in times of conflicts, it may be cut off from
sources of foreign supply and lose some of the material for example the cut of supply of oil in
the current Ukraine - Russia crisis.

On top of that, a reason to impose trade restrictions is to raise government revenue through
import tariffs. An import tariff is a duty or a levy charged on imported goods and services. This
has the effect of reducing imports as they became expensive but at the same time generating
revenue for the government. This can be explained by the diagram below.

(Price ($)) S

D*

P E1 Wt

Wp W

E2
D*

D A B (Output)

On the diagram as the country engaged in free trade, the world supply curve is Ws, the world price is
WP and the equilibrium output is A. The government imposes a tariff, this has the effect of shifting
the price from WP to pt and the equilibrium output will shift to Q on the diagram. Imports

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are reduced from the difference between B and D to the difference between Q and D. The shaded
area on the diagram shows the amount of tariff revenue that will be collected by the government.

In a nutshell, free trade is essential to a certain extent as it exists with efficiency, low prices a
wide variety of goods and services, it should not be fully restricted. However, as far as
development is concerned in the local industries, the need to secure local employment levels
should be restricted to some extent such that local production is maintained. A wise country does
not full restrict trade or full allow free trade but has to keep a balance between the two such that
it jointly enjoys the advantages of free trade and the advantages of protectionism like importing
to supplement shortages but Charging tariffs on that imported commodities and use that revenue
to subsidize local firms to grow.

References

Guajardo, R. G., and Homero A. Elizondo, “North American Tomato Market: A Spatial
Equilibrium Perspective,” Applied Economics, 35(3) (February 2003): 315–22.

The Wall Street Journal, “Who Wants to Be a Millionaire?”, May 14, 2008, p. A20.