A product will be traded only if the pretrade price difference between the two countries

 Options:

a. is less than the cost of transporting it between them b. is greater than the cost of transporting it between them c. equals the cost of transporting it between them d. more information is needed to answer this question

The Correct Answer Is:

b. is greater than the cost of transporting it between them

Trading between two countries involves considering various factors, one of which is the pretrade price difference. The correct answer to the given question is option b: the pretrade price difference must be greater than the cost of transporting the product between the two countries for the trade to occur. Here’s why:

Explanation of why Option B is Correct (b. is greater than the cost of transporting it between them):

For trade to be worthwhile, the price difference between countries needs to cover the expenses incurred in transporting the product. If the price difference is not substantial enough to exceed the transportation cost, trading becomes unprofitable.

Essentially, traders aim to capitalize on the price differential between markets. If the price variation is higher than the cost of transporting goods, it allows for profitable trading opportunities.

This profit margin accounts for not only the transportation cost but also additional expenses and potential risks involved in international trade, such as tariffs, taxes, and fluctuating exchange rates.

Explanation of Why the Other Options Are Incorrect:

a. Is less than the cost of transporting it between them:

If the pretrade price difference between two countries is less than the cost of transporting the product, engaging in trade becomes financially unfeasible. Here’s a more detailed breakdown:

Transportation costs involve various expenses, including shipping, handling, insurance, customs duties, and other logistics expenses. If the price difference doesn’t exceed these expenses, traders would incur losses.

For instance, imagine Country A sells a product at $100, and Country B sells the same product at $105. However, the transportation costs amount to $8. In this scenario, the price difference of $5 isn’t enough to cover the transportation expenses, resulting in a $3 loss per item traded.

Therefore, traders wouldn’t engage in such trade as it leads to financial losses rather than gains.

c. Equals the cost of transporting it between them:

When the pretrade price difference merely equals the cost of transporting the product between countries, there’s no surplus to cover any additional expenses or generate profits. Here’s a more detailed explanation:

If the price difference precisely matches the transportation cost, it implies a break-even situation. Traders would neither gain nor lose money from the trade, but they would also not generate any profit to justify the effort, risk, and resources involved in international trade.

Moreover, in real-world scenarios, unexpected costs or fluctuations in expenses might arise during the trading process, leading to losses if the price difference doesn’t provide a cushion to absorb these unforeseen costs.

d. More information is needed to answer this question:

The given question directly relates to the fundamental concepts of international trade—comparing the pretrade price difference with the cost of transportation. It doesn’t require additional specifics beyond this context to arrive at the correct answer.

However, some situations might involve additional considerations, such as regulatory restrictions, product perishability, or market demand variations, but these aspects wouldn’t alter the fundamental principle that the price difference should exceed the transportation cost for profitable trading.

In essence, the incorrect options fail to capture the essence of international trade dynamics, which heavily rely on profit margins dictated by the difference between prices in different markets and the associated costs of moving goods between those markets.

Without a substantial price differential exceeding transportation costs, engaging in trade becomes unprofitable, making options a, c, and d incorrect in the given context.

Related Posts

• Concerning import tariffs of the United States empirical studies tend to conclude that these tariffs are
• Which of these is the Purpose of Recruitment ?