Trade Efficiency Rule

What Is The Trade Efficiency Rule?

The trade efficiency rule refers to a situation where all producers and manufacturers operating in international markets concentrate solely on producing one specific good/item. The trade efficiency rule in economics results from this peculiar modus operandi. The purpose of this operating style is to improve trade efficiency through production.

The trade efficiency rule allows manufacturers to develop comprehensive expertise in manufacturing one particular good/item. Producing goods in this manner helps them manufacture items at relatively lower costs than producers who produce diverse items. Due to this, the selling price reduces, and specialist manufacturers can typically make their goods highly competitive in international markets.

• The trade efficiency rule is prevalent in situations where all producers and manufacturers in an international marketplace concentrate entirely on producing one specific good.
• The logic is that capital investment in plant and machinery to start production is usually a one-time investment (upgrading machinery or modifying existing ones may need funds, though). However, once the production process is set, subsequent production costs will likely be lower than the first time.
• The price of the goods will decrease because producers may now charge less for the product while still earning a profit.
• The situation may lead to a monopoly market where one manufacturer controls the market for particular goods or services.

Trade Efficiency Rule Explained

The trade efficiency rule is an economic phenomenon where producers in the global market decide to specialize in one particular product's production. This enables producers to develop expertise and become specialists in producing that particular item. Due to continuous and focused production, they get acquainted with the ins and outs of producing the item efficiently. In this context, efficiency refers to both time and cost.

Efficiency increases because capital investment in plant and machinery to start production is usually a one-time expenditure (apart from upgrading or replacing existing machines). Once production begins, each subsequent production run will likely cost lower compared to the first production cycle. As time passes, workers also develop the skills and efficiency to deliver quality finished goods. Hence, these factors greatly influence the production cost and eventually lower the price of a product. The price of such goods will decrease because producers may now charge less for the product while still earning a profit.

Although a global economy built on the trade efficiency rule can be positive for consumers, it has some disadvantages. The situation may lead to a monopoly market where one manufacturer controls the market for a particular good/item or service. Such situations may push nations to cease attempting to compete with other countries once it becomes impossible to undercut manufacturers from a certain country on price. They may instead concentrate on developing something new. As a result, fewer businesses will compete, giving one nation excessive influence and control over the market. However, modern economies produce many commodities and can coexist in multiple sectors. As a result, there is little probability of such a situation occurring.

Examples

Let us study a few examples to understand and note some details of this concept.

Example #1

Let us take the example of the country "A," which exports a cloth made from a special plant fiber to other countries. The country has a history of trading in different commodities and makes profits by trading inside and outside its borders. However, it decided to focus on this particular cloth material because it is rare. Country A believes it has a comparative advantage as the plant is endemic to its land.

Hence, if Country A focuses on making clothing materials from this fiber and selling them, it would have a chance to dominate the global market. Soon after, Country A’s neighboring countries with similar climates also adopted the technology and started manufacturing the same goods. At this stage, multiple countries have become producers in the global market and compete to develop the same product. This is now a case of the trade efficiency rule.

Example #2

Let us take another hypothetical example of two countries, A and B, which produce only two products, coffee, and tea. However, Country B produces slightly better quality tea leaves because of its climate. Production possibilities given by the Production Possibilities Frontier (discussed in a section below) for these nations also show that Country B is better at producing quality tea.

Similarly, Country A is better at producing coffee if it applies effort equal to the effort to produce tea. Therefore, if the trade efficiency rule is applied in this case, Country B should solely produce tea. It increases the supply but reduces the price of the tea by lowering the cost of production.

Competitive Markets

A market is competitive when neither the consumer nor the producer can influence it. Producers in a competitive market are price-takers and accept market rates because independent pricing adjustments may result in sales loss. In a competitive market, the sale of goods and services benefits both the customer and the supplier.

In competitive markets, only a few buyers and sellers exert control relative to the market size. Hence, these do not directly impact the market. Highly competitive markets work to provide uniform goods and lower entry barriers.

How To Measure?

The Production Possibilities Frontier (PPF) can measure how well a country adheres to the trade efficiency rule for a specific good/item. The production possibilities frontier of a country demonstrates how many units of a given good/item it can create, given production factors like labor and capital. The specific goods a country is better at producing than others will depend on the slope of its production-possibilities frontier.

Frequently Asked Questions (FAQs)

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This article has been a guide to What Is Trade Efficiency Rule. We explain it with its examples, competitive markets, and how to measure it. You may also find some useful articles here -

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