Joined: 04 Feb 2011
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Argument: "Sacchar sugar export - trade deficit" please eval [#permalink]
21 Mar 2011, 07:24
“The country of Sacchar can best solve its current trade deficit problem by lowering the price of sugar, its primary export. Such an action would make Sacchar better able to compete for markets with other sugar-exporting countries. The sale of Sacchar’s sugar abroad would increase, and this increase would substantially reduce Sacchar’s trade deficit.”
In analyzing the trade deficit problem of Sacchar, the author argues that the country should lower the price of sugar, its primary export, thereby increasing sugar sale abroad and reducing the trade deficit. This argument is too simplistic, contains many logical flaws and does not consider other market forces that are at work behind the scene.
First of all, the author argues that by lowering the price of sugar, Sacchar would be able to better compete for markets with other sugar-exporting countries. The author does not provide logical explanations for this causal relationship. Certainly cheaper sugar products are more attractive in simple models of the market where there are only a few producers and that price is the only factor affecting consumer behavior. In reality, consumers of sugar may consider many factors beside price, such as taste, brand, and hygiene. If sugar products of Sacchar are well below par in these attributes in comparison to other exporters, a mere decrease in price will probably not help the country's competitiveness. In some cases it may even work against the exporter if consumers are led to believe that lower prices indicate lower quality.
Second of all, the author argues that with increased competitiveness the sale of Sacchar's sugar would rise. This belief is unsubstantiated. We know that sale equals volume times price, which means that in order for sale to increase, volume must increase enough to offset the decrease in price. The author does not provide us any data proving that volume will increase by the right amount. Conversely, if the demand for Sacchar's sugar is primarily controlled by taste, brand and hygienic level as described above, the volume increase may be so weak that total sale may actually drop as a result. The author's argument would be greatly strengthened if he/she considers this scenario and scientifically assesses its likelihood.
Finally, the author goes on to conclude that if the sale of Sacchar's sugar increase, the country's trade deficit would reduce as a result. In making this conclusion the author demonstrates his lack of understanding of the definition of trade balance, which is the different between net import and net export. Even if we were to accept the fact that sugar export will increase, there is no telling what will happen to Sacchar's export of other products and Sacchar's imports. In one scenario, cheaper sugar imports from Sacchar may help cake producers of another country. If this country happens to export its cakes primarily to Sacchar, it is likely that Sacchar's citizens will end up purchasing more and more cakes from abroad. It is then possible that the trade deficit of Sacchar may worsen as a result of the policy the author is advocating. Hence, I believe the argument would benefit greatly from actual data discrediting these alternative scenarios, which the author fails to mention.
In conclusion, I'd like to restate that the author's reasoning is weak, overly simplistic and demonstrates a lack of understanding of market forces and economic principles besides the ones the author mentions. Furthermore, the argument could use some actual data to prove that among many possible changes that will take place as a result of the policy, the change mentioned in the argument is the most likely. In failing to do so, the author's argument loses its credibility and should not be taken seriously.