bases for international trade

1. INTERNATIONAL
ECONOMICS
Theoretical bases of International Trade
o MERCANTILISM
oLAW OF ABSOLUTE ADVANTAGE
oLAW OF COMPARATIVE ADVANTAGE
oHECKSCHER-OLIN (HO) THEORY
oHECKSCHER-OHLIN-SAMUELSON
(HOS) THEOREM

2. MERCANTILISM (17th-18th Century)
 THOMAS MUNN
 For a nation to be wealthy, its
should encourage exports and
restrict imports
 “ the more gold a nation had, the
richer and more powerful it was”

3. Law of Absolute Advantage
 ADAM SMITH
 Free trade is the best policy for
nations
 One nation is more efficient than
another in production of one
commodity, but less efficient than
the other nations in producing a
second commodity

4. Law of Comparative Advantage
 DAVID RICARDO
 “even if a nation had an absolute
disadvantage in the production of
commodities, with respect to other
nations, mutually advantageous
trade could still take place”

5. Hecksher-Ohlin (HO) Theory
 Since capital is abundant in highly
developed nations, the price of
capital is low, the same is true with
the price of labor in less developed
countries
 FACTOR Proportions or FACTOR
ENDOWMENT Theory

6. HECKSHER-OHLIN-SAMUELSON
(HOS)
 PAUL SAMUELSON
 International trade will eliminate or
reduce any difference in relative and
absolute homogenous factors across
nations
 FACTOR PRIZE EQUALIZATION Theorem
 International trade will cause wages and
interest rate to be the same in all
trading nations

7. TRADE PROTECTIONS
 TARIFFS – tax on imported products
 QUOTA – fixed limit on the quantity of
imports allowed in a country
 GOVERNMENT REGULATIONS – forms
of protections arising from health and
safety standards.
 EXCHANGE CONTROLS – BSP restricts
sale of dollars and other forms of
currency to importers

8. FOREIGN EXCHANGE
MARKET
 Organizational framework
wherein individuals, businesses
and banks buy and sell foreign
exchange.
 The main function of foreign
exchange is to transfer funds of
purchasing power from the other
countries or vice versa

9. THE FOREIGN
EXCHANGE RATE
 Price of a unit of currency in terms of
the domestic currency
 CURRENCY DEPRECIATION/
CURRENCY APPRECIATION – value
of currency declines/ increases
because of market forces
 CURRENCY DEVALUATION/
CURRENCY APPRAISAL- value of
currency declines/increases due to
legislation

10. Importance of Exchange Rates
 Serves as basic link between local and
overseas for various goods, services and
financial assets
 Can affect actual inflation as well as
expectations about future price
movements
 Affects the country’s external sector thru
their impact on foreign trade.
 Affects cost of servicing (P & i) on the
country’s foreign debt.

11. BALANCE OF PAYMENTS
 Summary of Economic
Transactions of the Country with
the rest of the world for a specific
time period.
 Serves as an accounting statement
of the dealings of resident and
nonresidents of the country.
 An important tool for national,
international policy formulation of
countries

12. AGRARIAN REFORM
 Land reforms and ownership would
increase production, get the individual
free from poverty and debt, and make
him a dignified participant in nation
building.. It will also correct the present
imbalance in our society where there are
enormous concentration of land, wealth
and political power in the hands of the
few – Diosdado Macapagal

13.  Land is one of the major factors
of production
 The Agrarian Reform Law was
implemented to uplift the
economic stability especially the
farmers.
 Land Reform Law was first
implemented by the late
President Diosdado Macapagal in
1963
 Due to many constraints, the land
reform code had been a failure

14. Principles behind Agrarian
Reform
 Social justice
 Just compensation to landowners
CARP – major program of the
government involving
implementation of agrarian reform

15. GOOD LUCk!