International Trade

International Trade
DLSL- A2D Macecon. SY:2012-2013
madebymathelrain

An Overview to the International Trade

International Trade
• the branch of economics concerned with the
exchange of goods and services with foreign
countries
• purchase, sale, or exchange of goods and
services across national borders

International Trade
• Almost every kind of product can be found
on the international market such as:
 Food
 Clothes
 Spare Parts
 Oil Jewelry
 Wine
 Stock
 Currencies

Reference: http://www.wto.org/english/res_e/statis_e/its2012_e/its12_trade_category_e.htm

The Growth in World Trade
• about 15 percent of the world's output is
traded in international markets in a typical
year.
• while the importance of the international
sector varies enormously from country to
country, the volume of international trade has
increased substantially.
Reference:
Sexton, R.L. (2011). The Exploration of Macroeconomics. (5th ed.) China:
China Translation & Printing

The Growth in World Trade
• Year 1947: saw the creation of the GATT
(General Agreement on Tariffs and Trade)
as an attempt to reduce such barriers to trade
as quotas, subsidies, tariffs and taxes.
Reference:
Sexton, R.L. (2011). The Exploration of Macroeconomics. (5th ed.) China:
China Translation & Printing
• In 1997 GATT was
replaced by the WTO
(World Trade
Organization), its mandate
expanded to include
intellectual property rights
and foreign investment.

World Trade Organizations
• only global international
organization dealing with
the rules of trade between
nations.
Main Goal:
• to help producers of
goods and services,
exporters, and importers
conduct their business.
Reference: http://wto.org/english/thewto_e/whatis_e/what_we_do_e.htm

WTO: What They do?
• Implementation and monitoring trade
• Dispute settlement
• Building trade capacity
• Investment and Trade
• Trade Policy Reviews
Reference: http://wto.org/english/thewto_e/whatis_e/what_we_do_e.htm

TRADE POLICY DEVELOPMENTS
Philippines:
• continues to hold with importance its membership
in the WTO and recognizes the value of the
WTO's achievements in fostering a competitive
environment.
• with its membership in 1995, the Philippines made
substantial commitments on market access and
plans to seek technical assistance programs from
its donor agencies and bilateral partners to assist
in the compliance of Trade Facilitation
commitments.
Reference: http://http://docsonline.wto.org

Did you know that?
It was last Nov. 10, 2012
when Management Board
of the Advisory Center
on WTO Law (ACWL)
under Pres. Aquino
appointed Ambassador
Esteban B. Conejos Jr.
as Philippine permanent
representative to the
World Trade Organization
(WTO)

Absolute
Advantage
Comparative
Advantage
and

0
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0 1 2 3 4 5 6 7 8
Units of clothing (millions)
Unitsoffood(millions)
Units of food Units of clothing
(millions) (millions)
8m 0.0
7m 2.2m
6m 4.0m
5m 5.0m
4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m

0
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0 1 2 3 4 5 6 7 8
a 8m 0.0
7m 2.2m
6m 4.0m
5m 5.0m
4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
a

0
1
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0 1 2 3 4 5 6 7 8
8m 0.0
b 7m 2.2m
6m 4.0m
5m 5.0m
4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
b

0
1
2
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0 1 2 3 4 5 6 7 8
8m 0.0
7m 2.2m
c 6m 4.0m
5m 5.0m
4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
c

occurs when a person or country can
produce a good or service at a lower
opportunity cost than others.
occurs when one producer can do a
task using fewer inputs than the
other producer
Absolute Advantage
Comparative Advantage

Because of specialization, both
nations can be better off, even if
one nation has an absolute
advantage in both goods over the
other.
Why Specialize?

Why Trade?
Reasons countries benefit from foreign
trade: • They can import resources
they lack at home.
• They can import goods for
which they are a relatively
inefficient producer.
• Specialization sometimes
permits economies of large-
scale production.

Application:
Student A is an academic scholar who almost constantly gets
a GPA of 1.25 every semester. This he is able to get by
allotting 54 hours of study time every week. Supposedly,
student A is also good at dancing and was planning to join
their school’s dance troop. On the other hand, B is an average
student who was also planning to join the troop.
Unfortunately, only one of them can be qualified. Moreover,
the troop allots 20 hours for practice weekly. Student A is
undeniably better than Student B in both dancing and
academics. Should Student A join the troop? Explain and
apply the concepts of specialization, opportunity cost,
absolute and comparative advantage and trade.

Answer:
•Student A has an absolute advantage over Student B in both
academics and paperwork.
•Still, by joining the Dance troop, Student A’s allotted time for
studying will be reduced to 34 hours every week. If he lets
Student B join the Dance troop instead, he will not be robbed of
time for study and his grades will not be affected in the process.
•Even though Student A is both better at academics and
dancing, it is better for him to specialize in academics (if he
wants to maintain his academic standing) in which he has a
comparative advantage, and allow Student B to join the Dance
troop. If he allows the other, there will be trade.
•The opportunity cost to Student A of being in the Dance troop
is high. For Student B, who is an average student, the
opportunity costs of being in the Dance troop are lesser.

"Humans do not have to
experience everything
themselves but can benefit
from what others have
learned."

Trade Barriers
(tariffs, quotas, and subsidies)
• Tariff
• Non-tariff

Tariff Trade Barrier
• a tax on goods
shipped
internationally
• A price-based barrier

Tariffs: Types of tariffs
• Import and export tariffs: a tax
levied on imports or exports of a
country.
• Transit tariff: a tax levied on
goods passing through the country.

• Specific duty: a tariff based on the
number of items being imported.
• Ad valorem duty: a tariff based on a
percentage of the value of imported
goods.
• Compound duty: a tariff consisting
of both a specific and ad valorem
duty.
Tariffs: Types of tariffs

Non- Tariff Trade Barrier
• Quota
• Subsidies

Import Quotas
A legal limit on the imported quantity of
a good that is produced abroad and
can be sold in domestic markets

Export Subsidies
• Government payments made to
domestic firms to encourage exports.
• Closely related to subsidies is
dumping.
– A firm or industry sells products on the
world market at prices below the cost of
production.

Reasons for Trade
Barriers
• Domestic Employment
• Low foreign wages
• Infant Industry
• Unfair Trade
• National Security

• Excess of what a consumer is willing to pay to
what he actually has to pay.
• Excess of what a supplier is willing to receive at
a minimum amount and what he actually
receives.

• Represents a collection of maximum prices a
consumer is willing and able to pay for
different quantities of commodities.
• Represents a collection of maximum prices that
suppliers require to be willing to supply
different quantities of commodities.

• Once the equilibrium output is reached at the
equilibrium price, all of the mutually beneficial
opportunities from trade between suppliers and
demanders will have taken place.
• Total gains to the economy from trade is the sum of
consumer and producer surplus

Quantity
Price
$8
7
6
5
4
3
2
1
1 2 3 4
CS
PS
PS
PS
CS
CS
S
D

• Domestic producers gain more than domestic
consumers lose.

• Domestic consumers gain more than
domestic producers lose.

• If the price of a good or service of Country X
increases, the quantity of goods or services offered by
suppliers, foreign and domestic, increases and vice
versa.
• If the prices of the goods of Country X increases, the
demand for those goods will decrease and the
demand of the goods of Country Y which costs less will
increase.

ADVANTAGES AND
DISADVANTAGES OF
INTERNATIONAL TRADE

Advantages of International Trade
• Leads to more efficient resource allocation
and lower cost per unit of output as the
market becomes bigger and broader to
exercise economies of scale, etc.
• Non-economic advantages like political,
social and cultural advantages to be
gained by fostering trade in international
organizations like WTO, etc.

• It helps to widen the range of choice of goods
or products
• It allows the transfer of knowledge,
technologies and information between trading
partners
• It enables the countries to specialization
which increases the world output and
standard of living

• It increases the need to become efficient
and effective in the production process
because of competition
• It stimulates research and development
policies and more rapid adoption of new
technology to reduce cost of production

Disadvantages of
International Trade

• One may need to wait for long term gains
• Hiring professional staffs to launch international
trade is timely and costly to do
• Modifying product or packaging
• Develop new promotional material
Disadvantages of International Trade

• Incur added administrative costs
• Dealing with special licenses and regulations
• Apply for additional financing
Disadvantages of International Trade

International Trade

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