The part of the services sector in GDP of most of the developed states is vibrating about 75 per centum ; nevertheless, the portion of services in the international trade, as per the available informations from European Union is around 27-28 per centum for the twelvemonth between 2004 and 2007. This implies that service sector is non lending proportionate to its portion in the international trade in GDP of each state. Large sum of services are consumed domestically and non traded internationally.

Same is true for U.S. Services sector as it contributes about 78 per centum in U.S economic system. If U.S. or for that affair any of the developed states such as UK, France, Germany, Japan has to increase the international trade, their part has to come through the services sector because they are dominant subscribers in the GDP.

The grounds that services can non be traded every bit freely as goods can be are attributed to the followers.

1. Many services are non-transportable ; it requires geographic propinquity between manufacturer and consumer states.

2. Many services can non be mass produced ; largely they are tailored as per the geographical demands presenting a trouble in the international trade.

3. Many services go along with the supply of the goods and they can non be separated to leave the benefits to the consumers. Example is autos imported from Japan or China into US with 3-4 old ages guarantee. Servicing cost is included in the original monetary value.

It is hard to export the services from developed states ( U.S ) to developing states such as India. The ground is that the cost of bring forthing the services in a underdeveloped state is much lower than the cost incurred in developed economic systems. The glowering illustration is IT ( Information Technology ) services outsourced to states like India, China where the cost of production is much less.

Answer 2.

Troubles in the Balance of Payment ( B.O.P ) of the U.S in the present clip

United states is confronting Balance of Payment job since last many old ages and it is steadily increasing from 1 per centum in 1995 to about 8 per centum of the GDP now. The grounds for such high shortages are many and varied and can be enumerated as per the followers. ( Riley, Geoff 2006 )

It is an indicant of high ingestion with a weaker industrial sector. Consumers are passing beyond their agencies taking to higher family debt.

A trade shortage is besides an indicant of loss of employment and end product. It is a net escape between income and disbursement.

Currency value ( read $ ) comes under force per unit area against other taking currencies and go on to depreciates as shortage continues or rises. This besides necessitates an addition in involvement rates by the cardinal bank.

Answer 3.

Compare and contrast the construction of the E.U and the USA ( NAFTA ) .

NAFTA ( North American Free Trade Agreement ) is a pact between Canada, Mexico, and the United States. NAFTA has been operational since 1994. It governs the full North American trade. NAFTA understanding has removed the duties between the member states Mexico, Canada, and U.S for goods shipped between them. This has resulted into the purchase of goods by Mexico in big measures from U.S. This consequences into nest eggs for Mexican companies on imports and it saves American company well on transportation costs.

In contrast, EU has big figure of member states in it furthering similar cooperation among them. The major difference between these two is that EU members trade in a common currency but NAFTA members do non hold any common currency. Furthermore, EU has its ain political charter in contrast to NAFTA who does non hold any.

Answer 4.

Explain Ricardoaa‚¬a„?s theory of trade and compare it to the H-O theory of trade?

The theory of comparative advantage is behind the international trade in which both the states benefit from the trade. Ricardo explained this in his book on the Principles of Political Economy and Taxation giving illustration of England and Portugal.

Portugal produces vino and fabric with less labour compared to England for the same measure of vino and fabric. Still comparative costs of bring forthing these goods are different in two states. England has more trouble bring forthing vino and merely somewhat hard to bring forth fabrics compared to Portugal. In comparative cost difference, wine production in Portugal is far good compared to cloth. If Portugal deploys maximal labour for bring forthing vino and exchange or merchandise it with England in stead of fabric ; both states will be benefitted most because England will acquire vino at the cost really nigh to the cost of fabric. Therefore, theory concludes that each state can be benefitted by concentrating on the goods where it has comparative advantage.

Ricardian theoretical account assumes merely one factor of production and that is labour.

In contrast, Heckscher-Olin theoretical account takes into consideration two factors of productionaa‚¬ ” capital and labour, which seems to be more appropriate.

But H-O theoretical account has one booby trap, which assumes that capital can non travel from one state to the other. In todayaa‚¬a„?s planetary economic system this is non the instance and capital moves fleetly from state to state. ( Mankiw, Greg 2007 )