International Trade and Globalisation Notes

8/9/2019 International Trade and Globalisation Notes

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International Economics

International Trade refers to the exchange of goods and services between countries

involving the use of di!erent currencies and crossing international borders"

#aw of CA states that countries would have to gain from trade if there are

dierences in the relative opportunity costs of producing specic goods amongthem. They benet from specializing and exporting products in which they have

the greatest relative advantage in, and importing products in which they have

least relative advantage in.

$ow to ex%lain the theory of CA&

Table 1& 'roduction %attern before s%eciali(ation

)heat Cloth*+A 100 ,0C$I-A . 10)orld Total 10. /0*+A has absolute advantage over China in the %roduction of both wheat and cloth since it

is able to %roduce ore of both goods with the sae aount of resources"

Table & 2%%ortunity Cost of %roducing

*+A 1 unit of wheat to 0", unit

of cloth

1 unit of cloth to 1",/ unit

of wheatC$I-A 1 unit of wheat to unit of 1 unit of cloth to 0". unit


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)orld Total 110 /6

Assuing the ters of trade is 1 wheat& 1 cloth in the international ar7et the *+ can

ex%ort 10 units of wheat to China in exchange for 10 units of i%orted cloth"

Table 6& Consu%tion after trade

)heat Cloth*+A 100 ,6C$I-A 10 10)orld Total 110 /6

Assuing the consu%tion level after trade is as Table 6 above it can be seen that *+A

gains 6 units of cloth while China gains . units of wheat after s%eciali(ation and trade"

8oth countries bene9t fro a higher level of total out%ut consued thus allowing the to

consue beyond their %roduction %ossibility curve 4''C5"

:end of ex%lanation:

ne para explanation& The theory of CA states that it is utually bene9cial for two

countries to s%eciali(e and trade as long as the o%%ortunity costs of %roduction di!er

between the two countries" A country is said to have a co%arative advantage in a good if

she can %roduce that good at a lower o%%ortunity cost than in other countries" Countries

gain fro trade if they s%eciali(e and ex%ort those goods in which they have a

co%arative advantage and i%ort those goods in which they have a co%arative


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!dvantages and "isadvantages of Trade

Advantages Disadvantages

Microeconoic e!ects Theory of CA& +%eciali(ation leads to greater world out%ut

#onsumption beyond country$s %%# Countries can achieve

higher levels of consumer welfare

"umping refers to the selling of goods in overseas

ar7ets below the marginal costs of production.

2bBective& to drive out rival %roducers in the i%orting

country ono%oli(e the ar7et 4gain ar7et share5

%rice


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8M) in Eerany 5

An exa%le of I>2+& #earning by Doing

Costs ay vary with the tie that a %roduct has been in existence" As

countries gain ex%erience in %articular tas7 wor7ers becoe oreecient in the %roduction of a good causing unit cost of %roduction to

fall"I%ortation of large varieties of E + a7es catering to the di!erent

tastes of consuers becoes %ossible greater consuer choice

e"g" Malaysians who believe that Thai rice is su%erior can have the

choice of consuing Thai rice

b5 I%ortation of demerit goods such as alcohol drugs

tobacco consu%tion of such goods results in

negative externalities in the econoy 4go on to

elaborate on the externality5d5 trade ex%oses doestic %roducers to foreign co%etition

deand for the 9rFs %roduct reduces and becoes ore %rice

elastic due to the increase in substitutes 4draw diagra5 lower

%rices

encourages doestic 9rs to %ut their %ro9ts into @ D better

=uality of %roducts and dynaic eciency 'revents co%lacency aong local %roducers" Dicult for

co%anies to erge or to gain ono%oly control in an o%en econoy

4)$Y5 local %roducers will strive for lowered %rices lowering

inGationary %ressures locally"

e5 )idening income disparities

< ore o%%ortunities for those who are s7illed rather than

those with low s7ills and education

< between tradable sectors and non)tradable sectors'

incoes of those tradable sectors will rise due to the

increase in deand and out%ut while incoes of those in

non


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growth

< International trade facilitates transfer of technology and

ideas increase the eciency of %roduction and raise the

%roductive ca%acity stiulating %otential growth

< )ith rise in AD and A+ allowed for sustainableeconoic growth without inGationary %ressure 4diagra5

4to avoid such over


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Terms of trade T2T& the rate at which a country exchanges its ex%orts for i%orts" It is the =uantity of i%orts

that can be obtained %er unit of ex%orts"

Ters of trade J ( Export Price Index Import Price Index ) x100

*ingapore$s pattern of trade ' "irection and #omposition of Trade

Total trade volue is a%%roxiately 3 ties ED'" MaBor ex%ort destinations are China $ong<

Kong Malaysia Indonesia a%an >* and *+"

+ources of Co%arative Advantage&

a5 +trategic location -atural CA in trans%ortation and aritie trade services

b5 $igh ED' %er ca%ita can engage in ca%ital intensive %roduction and has the s7illed labourresources to underta7e value


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'erfect obility ofresources within country

@esources ay not be as ecient when used elsewhere"

+ae aount of

resource endowent

2bviously countries are not endowed with the sae

aountty%es of resources"

%rotectionism

%rotectionism is a policy of sheltering domestic industries from foreign competitionthrough the imposition of trade barrier on imports.

Methods of %rotectionis

a5 Tari!s

;igure& The e!ects of a s%eci9c tari! on the ar7et for cars


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decreasing %rices"

b5 -onbargo

f5 Trade agreeentsg5 International cartels collusive agreeents aong %roducing countries to 9x %rices and

out%ut %olicies with the obBective of diinishing co%etition and increasing %ro9ts"

h5 -ew %rotectionist easures" >"g" +afety and hygiene regulations on food %roducts so as to

bene9t the hoe %roducers

Economic case for and against protectionism

@easons >valuation To %rotect an infant industry

Infant industries have %otential

co%arative advantage

< Dicult to deterine which countries have

that %otential CA 4high o%%" cost

une%loyent over tie5


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ono%oly in that ar7et subse=uentlyraise %rices to ex%loit consuers"

good"< Doestic %roducers ay accuse foreign

9rs of du%ing when they fail to atch

their lowered %rices"

To %rotect sunsetature industries

Traditional industries ay lose their

co%arative advantage should they close

down itFll result in assive structuralune%loyent" 8y te%orarily %rotecting

these ature industries the decline can

be slowed down tie can be gained to

switch resources into other areas of

econoic activity"

< *sually brought about under the %ressures

of trade unions where wage growth has

outstri%%ed growth in %roductivity"

< 8ene9ts of increased e%loyent enBoyedby the %rotected country achieved at the

ex%ense of its trading %artners" The %artners

who ex%erience a decline in ex%ort sales and

conse=uently a lower une%loyent will

trigger siilar retaliatory easures"

In *+A the ?@A %laced on steel in 1NO6 saved

1,NNN Bobs but destroyed .600 Bobs in

industries that use steel"

To increase doestic %roduction and

national incoe in ties of recession

>ergency short run easure to avoid

heavy une%loyent" I%osition of tari!s

and =uotas on i%orted goods create Bobs

by raising the %rices of i%orts and

diverting deand towards doestic%roduction"

'olitical reasons

May be essential to %roduce its own

araents and aircrafts for use in war as

well as industries involved in %roducing the

;2's of wea%onry"

Trade can be used as a wea%on of foreign

%olicy where a country does not trade with acountry it disagrees with %olitically"

+ynthesis of Arguents for 'rotectionis

Eoes against the #aw of Co%arative Advantage


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-lobalisationdened as the growing economic interdependence of countries worldwide through

increasing volume and variety of cross)border transactions, largely in goods and

services, free ows of international capital, spread of technology as well as labour

migration /

-lobalisation is the process through which an increasingly free ow of goods and

services, capital ows, labour and technological transfers result in closer integration

of economies in the world.

Accounting for the trend of globali(ation

4need to ention the econoic theory that globali(ation is based on a7a CAP5

1" /eduction in barriers to trade and coerce and established international agreeents to

%roote trade in goods services and investent" Eovernents recogni(e the bene9ts to

globali(ation and free tradeQ hence they agree to wor7 together to reduce trade barriers

together with the wor7 of international organi(ations such as the )T2" >"g" Eeneral Agreeenton Tari!s and Trade 4EATT5 %redecessor to )T2 served to %roote trade in anufactured goods

aong develo%ed countries"" !dvancement of technology& Through i%roveent in technollogy costs of counicating

inforation have fallen draatically since the %ost


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be ore otivated to underta7e research and develo%ent to i%rove their =ualityof %roducts so as to better co%ete with foreign %roducers" 8oth of this will lead to

an i%roveent in consuer welfare"

Macroeconoic e!ects1" Countries can gain access to larger ex%ort ar7ets enhancing growth in ex%ort

sales generating an increase in aggregate deand 4AD5 which translates into

increase in e%loyent levels rising national incoes as well as actual growth"

" Increase in trade balance i%rove CA

increase in ca%ital inGows i%rove KA when inGows exceeds outGows 82'

i%roves

" ;ree Trade Agreeents and its e!ects 4see section on free trade agreeents5

3" 2n ;oreign Direct Investent 4;DI5

;DI refers to the oveent of ca%ital that involves foreign ownershi% and control of %roduction

facilities"

0enet

s of +"I

+ource country 4usually develo%ed country5 @eci%ient country 4usually

develo%ing country5

+hort

Ter

< 'roduction is shifted overseas @educed AD

une%loyent reduced actual growth

< increase I increase AD

actual growth


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3" >!ects of international oveent of factors of %roduction

3"1 >=uali(ation of wages between countries

)hen two countries enter a ;TA wages for identical 2obs in both countries tend to a%%roach

each other"

2riginally the average wage rates in country A and country 8 were N and 3 res%ectively"

@es%onding to the wage di!erential wor7ers in country 8 igrate to country A this leads to a

reduction in labour su%%ly in country 8 and an increase in country A" )age rates will continue to

fall in country A and rise in country 8 until they are eventually e=uali(ed assuing that labour is

hoogeneous and obile and ar7ets are wor7ing freely and %erfectly"

3" )orld 2ut%ut increases

Country 8 has a lower level of deand for labour due to lower labour %roductivity" )age

di!erentials attract wor7ers to those areas where they will be ore eciently used" Also wor7ers

also tend to igrate fro countries where Bob o%%ortunities are low 4they could be une%loyed5to countries where Bob o%%ortunities are ore abundant" $ence the outGow of labour fro

country 8 will resulted in a saller reduction in out%ut value than the ex%ansion in out%ut arising


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6" >!ects of Elobalisation 4develo%ing countries vs develo%ed countries5


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"eveloping countries "eveloped countriesWWW

i%a

ct

8ene9ts of trade&

Theory of CA& +%eciali(ation leads to greater world out%ut #onsumption beyond country$s %%# Countries

can achieve higher levels of consumer welfare

icro bene9ts Doestic 9rs in both develo%ed and develo%ing countries face higher levels of competition

with the entrance of foreign %roducers into the doestic ar7et" This %rovides incentive for %roducers to %rice

their goods ore co%etitively and %ass on their cost savings to consuers in the for of lower prices"'roducers ay also be ore otivated to underta(e research and development to i%rove their 3uality of

%roducts so as to better co%ete with foreign %roducers" 8oth of this will lead to an i%roveent in consumer

welfare.

VVVacro bene9ts Countries can gain access to larger export mar(ets enhancing growth in ex%ort sales

generating an increase in aggregate demand 4!"5 which translates into more than proportionate

increase in national income due to the ulti%lier e!ect generating actual growth and resulting in a higher

aterial standard of living"Increase in +"I increase in 0% and

investment in the *T increase in

productive capacity and the !*Increase in remittances from wor(er who

have emigrated improvement in

current account 4e"g" Indonesia aids

wor7ing in +inga%ore send a %ortion of their

incoe hoe5

< @eittances of prots from +"I which will i%rove the

current account and the 82' in the long ter"

< inGux of foreign labour fro develo%ing countries will lead to

an increase in the size of wor(force increase in productive

capacity and outward shift of the A+"


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." >valuation of the >!ects of globali(ation

s% i%ortant for +inga%oreFs trade architecture" 8y 011 +inga%ore has signed a total of 1O regional and bilateral ;TAs with

Australia a%an -ew Xealand and the *+"

Trade Creation vs Trade Diversion

Consider how Country A and Country 8 are in an ;TA" Country C is the lowestciency >=uity

>E #ow *- #ow and stable inGation $ealthy 82'"

International Trade and Globalisation Notes

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