2008 h2 international trade lecture 1

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International Trade

Balance of Payments

Exchange Rate

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International Trade: Gains

Disadvantages

Pattern of Trade: Principle of Comparative Adv

Terms of Trade - meaning; Changes & Effects

Barriers to Trade: Types

Arguments for & against

Preferential Trading Agreement

Globalisation

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International tradeInternational trade

exchange of goods and services that takes place across international boundaries.international boundaries.

When a country is involved in International Trade.

Open economyOpen economy

Exports or Imports

GNP

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1. Principle of Comparative Advantage1. Principle of Comparative Advantage

GAINS FROM TRADEGAINS FROM TRADE

Economic resources are scarce & exhaustible, need to optimise use of them.

Countries differ in factor endowments.

The opportunity cost of producing the same good may differ between countries

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1. Principle of Comparative Advantage1. Principle of Comparative Advantage

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Countries should specialise in producing those goods in which they have the lowest lowest opportunity costsopportunity costs or greatest comparative greatest comparative advantageadvantage.

Countries with higher opportunity costs of production should import from a lower opportunity cost country.

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Benefits

International specialisation

more efficient use of the world’s economic resources

increase world output

Through international trade

increase consumption and living standard

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2. Exploitation of economies of scale2. Exploitation of economies of scale

There are many goods which are produced under decreasing cost conditions as their output expands economies of scale.

The home market may be too small need to get a world market for the good

Especially for countries with small domestic markets Switzerland, Singapore, Singapore, Belgium, Denmark, Israel

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3. Vent for surplus - the various types of 3. Vent for surplus - the various types of economic resources are unevenly distributed economic resources are unevenly distributed throughout the worldthroughout the world

due to geographical facts, physical features, & climatic difference

E.g. Africa in gold & diamonds;Arab countries in oil;West Malaysia in rubber;Brazil in coffee

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Thus, international trade originated on the basis of nations exchanging their products for others which they do not or could not produce for themselves.

Trade provides the vent for surplus production allowing the country to earn foreign exchange from exports which its has surplus of to purchase what it does not have or has insufficient supplies.

GAINS FROM TRADEGAINS FROM TRADE

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Trade widens consumers’ choice

Consumers have a higher level of satisfaction

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4. Supplement domestic supply - the 4. Supplement domestic supply - the international mobility of resources is international mobility of resources is extremely limitedextremely limited

Moving goods made by these factors

Nations with abundant land relative to labourwill supply land-intensive goods

Nations with abundant labour relative to landwill supply labour-intensive goods

exchange

E.g. land is geographically immobile, & labour mobility is restricted by language & customs

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5. There are differences in taste – a dd factor5. There are differences in taste – a dd factorAssume ~ 2 countries A and B which can produce meat and fish equally successfully.

Country A• dislike meat; like fish• meat - cheap• fish - expensive

Country B• like meat; dislike fish• meat - expensive• fish - cheap

With trade:• A buys cheap fish from B; B buys cheap meat from A • Prices of fish & meat in both countries tend to equalise• Incomes of farmers in A will rise• Incomes of fishermen in B will rise

Without trade:

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6. Widen range of goods - there exists 6. Widen range of goods - there exists product differentiationproduct differentiation

Consumers desire greater choice of goods.

Many advanced countries have developed trade with one another in what are essentially the same goods such as cars, washing machines, etc.

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In Japan, the motor car industry is capable of producing all cars demanded in the Country (Toyota, Nissan, Honda etc) but some Japanese residents may prefer to buy Continental or UK, American cars (Jaguar, Rolls Royce)

GAINS FROM TRADEGAINS FROM TRADE

GainGain::

Consumers enjoy the luxury of this variety - increase total utility, increase total utility, a real advantage of international trade

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7. Avoidance of development of domestic 7. Avoidance of development of domestic monopoliesmonopolies.

Economic efficiency increasesEconomic efficiency increases• domestic monopolies are broken down by

foreign competition• producers forced to keep prices and costs

low & quality of products high

consumers gainconsumers gain

competition increasescompetition increasesWith tradeWith trade

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8. An engine of growth.8. An engine of growth.

demand for a country’s exports will grow especially when these exports have a high income Ed

an increase in national income

In a growing world economy

GAINS FROM TRADEGAINS FROM TRADE

AD = C + I + G + X - Man increase in injection and AD

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Trade can act as a stimulus to economic development to developing countries through the transfer of new technology & methods of transfer of new technology & methods of productionproduction.

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9. Non-economic advantages9. Non-economic advantages

leads to a degree of economic interdependency

Trade can foster better international relations & political links among nations.

GAINS FROM TRADEGAINS FROM TRADE

reduces the likelihood of war

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Limitations to International Limitations to International Specialisation & TradeSpecialisation & Trade

(Arguments for Protectionism)(Arguments for Protectionism)

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With free trade With free trade changes in pattern of changes in pattern of demand demand supply side need to respond supply side need to respond butbut resources immobile resources immobile structural structural unemploymentunemployment

To protect infant industriesTo protect infant industriesTo protect against unfair competitionTo protect against unfair competitionTo protect against demerit goodsTo protect against demerit goodsTo protect the balance of paymentsTo protect the balance of paymentsTo avoid dangers of over-specialisationTo avoid dangers of over-specialisationTo improve terms of tradeTo improve terms of tradeStrategic reasonsStrategic reasons

Non-economic arguments – political decsisionsNon-economic arguments – political decsisions

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Pattern of Trade Using Supply and Demand Analysis

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ImportsImports

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