International Trade

International Trade

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

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)

Reference: http://http://docsonline.wto.org

Reference: http://http://docsonline.wto.org

Absolute Advantage

Comparative Advantage

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Opportunity Cost

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

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

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• 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

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

Advantages 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

Disadvantages of International Trade

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