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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
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.
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

Units of food (millions)

7
6

Units of food Units of clothing


(millions)
(millions)

5
4

8m
7m
6m
5m
4m
3m
2m
1m
0

3
2
1

0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m

0
0

Units of clothing (millions)

Units of food (millions)

7
6
5

Units of food Units of clothing


(millions)
(millions)

8m
7m
6m
5m
4m
3m
2m
1m
0

3
2
1

0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m

0
0

Units of clothing (millions)

Units of food (millions)

7
6

Units of food Units of clothing


(millions)
(millions)

5
4

8m
7m
6m
5m
4m
3m
2m
1m
0

b
3
2
1

0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m

0
0

Units of clothing (millions)

Units of food (millions)

Units of food Units of clothing


(millions)
(millions)

5
4

8m
7m
6m
5m
4m
3m
2m
1m
0

3
2
1

0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m

0
0

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 largescale 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 schools 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 As 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

7
6
CS
CS

Price

CS

4
PS

3
2

PS

PS

1
1

3
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
standard of living

the

world

output

and

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 -