DLSL- A2D Macecon.

SY:2012-2013

International Trade

made by mathelrain
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
 Wine
 Clothes
 Stock
 Spare Parts
 Currencies
 Oil Jewelry
Reference: http://www.wto.org/english/res_e/statis_e/its2012_e/its12_trade_category_e.htm
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.
• In 1997 GATT was
replaced by the WTO
(World Trade
Organization), its mandate
expanded to include
intellectual property rights
and foreign investment.
Reference:
Sexton, R.L. (2011). The Exploration of Macroeconomics. (5th ed.) China:
China Translation & Printing
 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)

Reference: http://http://docsonline.wto.org
Reference: http://http://docsonline.wto.org
 Absolute
Advantage
and

Comparative
Advantage
 8

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 8
a
7

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 8

b
7

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 8

c
6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

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

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
Opportunity Cost
 Absolute Advantage

occurs when one producer can do a

task using fewer inputs than the
other producer

Comparative Advantage

occurs when a person or country can

produce a good or service at a lower
opportunity cost than others.
 Why Specialize?

Because of specialization, both

nations can be better off, even if
one nation has an absolute
advantage in both goods over the
other.
 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.
Tariffs: Types of tariffs
• 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.
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
In International Trade
• 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
 $8
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7

6
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5 CS
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Price

4
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3 PS
PS D
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Quantity
• 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.
Advantages of International Trade

• 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
Advantages of International Trade

• 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
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

- The end -