INTERNATIONAL TRADE

INTRODUCTION

Have you ever thought of living in a closed economy?

WHY WE MUST TRADE?

Scarcity problems – fulfill the country’s need / citizens’ wants and needs Specialization in the production of goods and services – focus in the production of goods that they are efficient in it and import the goods that they are less efficient in it.

ADVANTAGES OF INT. TRADE

A country can enjoy certain goods that it cannot produce domestically. More choices of goods for the population. Countries can enjoy the benefit of specialization. Competition leads to efficiency in the production. Prevent monopoly power

ABSOLUTE ADVANTAGE AND COMPARATIVE ADVANTAGE

Assumptions: There are only two countries in the world that involve in the international trade. There are only two goods produced by the two countries using all of their resources to produce these two products, for example car and rice.

Cont..

All resources in both of the countries are homogenous, for example labor. They are all equally efficient in producing both of the goods. there is a perfect mobility of resources. All resources are mobile and can be transferred. Labors can be transferred from one production line to another easily.

Absolute Advantage

A country is said to have an absolute advantage in the production of a good when it can produce more of that good than another country, using the same amount of resources.

Rice Car

Thailand 20 units 6 units

Malaysia 10 units 10 units

Absolute Advantage, cont.. Specialization : a country will use all of its resources to produce that particular good only and it will not produce the other good at all. Based on the example given, under Absolute Advantage, Malaysia will employ all of the population to produce car only and Thailand will employ all of the population to produce rice only

BUT!!

What happen if a country has absolute advantage in both of production? How can they practice international trade?

COMPARATIVE ADVANTAGE

A country is said to have a comparative advantage in producing one good, which it has greater relative efficiency compared to another country. The relative efficiency can be measured by the opportunity cost to produce the good.

Cont..

When Malaysia has absolute advantage in both lines of production, it does not mean that it will specialize in both of the goods and Thailand does not do any because international trade can still be practiced based on Comparative Advantage principle.

Cont.. The opportunity cost will represent the amount of good that has to be sacrificed by one country when it wants to produce another good. If Thailand and Malaysia wants to increase the production of rice, they have to sacrifice the production of car. Why? More labor needs to be employed to produce rice so less labor in the production of car.

Cont..

Rice Car

Thailand 7 units 1 unit

Malaysia 8 units 4 units

Cont.. A lower opportunity cost shows a greater efficiency in producing a good. Why? Because when a country chooses to produce one good, a lower opportunity cost means it has to forego (sacrifice) smaller units of other goods.

PROTECTIONISM The barriers to the free import flow of goods and services set up by a country in order to protect domestic industries from foreign competition. But How?

Tools of Protectionism Tariffs – tax imposed on imports (benefit to gov)

-Discourage local importers from importing goods into the country, as they have to pay some taxes on goods (Ex: imported cars)

Quota – restrictions or limitations on the volume of imports (benefit to local importers)

- The supply of goods become limited, push up the prices of the goods and demand is expected to decrease.

Cont..

Subsidies on export

-Encourage the producer to produce exported goods – cost of production become less – make exports become more competitive because their prices will be lower.

Cont..Exchange controls – gov restricts the supply of foreign currency in the country.

-In order to import goods from foreign countries, we need to pay them in their currencies.

- Control the availability of foreign currencies in our country will check the amount of import into our country

Cont..

Embargo

-Ban some items into the country

-Due to economic, social or political reasons

Reasons for Protectionism To raise revenues to the government To prevent ‘dumping’ - goods are sold abroad at lower prices than in the home market – overseas producers are given export subsidies To protect infant industries To diversify the economy – prevent depending on one sector only To increase employment