Commentator: Vishal Bhagia INTRAFN: V24

Weekly Essay #1 January 21, 2020

This week’s readings assigned to create a reflection essay on were the following: Integrasyong sa Silangang Asya and A
Survey of the Theory of International Trade. This paper, as this will take on the role of commentator, will be presenting 4
passages in regard to the English reading and providing its corresponding meaning and significance to our discussion in the
course.

The 1st significant passage would be “when it is said that international trade depends on a difference in the comparative,
not in the absolute, cost of producing commodities, the costs compared, it must be carefully noted, are the costs in each
country of the commodities which are the subject of exchange, not the different costs of the same commodity in the
exchanging countries.” This is significant because the author, Cairnes, states the distinction between utilizing absolute
advantages and comparative advantages. An absolute advantage over an international trader would be obtained when the
costs of producing a certain commodity, for example an apple, is cheaper in one country over the other – however, this is
the error that Cairnes points out as an absolute advantage could provide so little of the picture with regard to the country at
a disadvantage and the commodities it trades in. In the same scenario, the country having a higher cost to produce an apple
may have the comparative advantage given it produces machines, as well. This comparative advantage can be obtained if it
has less of an opportunity cost in producing machines instead of apples. This passage highlights the significance of bringing
in opportunity costs in analyzing the status of international trade as this provides the motive for a country’s production and
point of specialization – a country that has less of an opportunity cost in producing 1 good relative to the other will choose
that product as the driver of the country’s trade and exports.

The 2nd passage deemed significant would be "The produce of a country exchanges for the produce of other countries, at
such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. This law of
International Values is but an extension of the more general law of Value, which we called the Equation of Supply and
Demand." Here, John Stuart Mill describes the law of International Values as a mere debate on the equivalent value in
money obtained for exports and the equivalent value in money given up for imports. Upon settling a State’s primary
commodity, it must further analyze whether this is exactly what will maximize the State’s output – this problem arises by
the fact that, in the case of more than 2 countries, there may be States that specialize in the same thing. In this scenario, the
problem a State faces is whether it is producing said specialized output at the most minimal cost or the highest absolute and
comparative advantage because this will allow a greater inflow of resources equivalent in money than the outflow of
resources equivalent in money. This idea can be further simplified by asking the question “Do the commodities I am
producing allow me to produce and distribute the most, in order to obtain the most, or at least equal amount to the outflow,
inflow of economic resources?”

The 3rd passage chosen for its significance “As has already been indicated, if the inhabitants of each country have utility
∝ ∝ ∝
functions of the Millian form 𝑈 = 𝑋1 1 𝑋2 2 … 𝑋𝑛 𝑛 (with the same parameters in all countries), the problem of equilibrium
international values reduces to the problem of maximizing 𝑈 subject to the appropriate linear inequalities in the nonnegative
𝑥𝑖′ 𝑠, a problem in homogenous programming.” This passage highlights the common theme in both microeconomics and
macroeconomics – much of how an entity, or in the macro case, a State, acts is dependent on maximizing its utility function.
Although a State’s primary objective is actually the maximization of output, this passage emphasizes the role of maximizing
consumption to achieve this result. In fact, in analyzing the most basic equation for output in an open economy, consumption
plus government spending plus net exports plus investments, it is obvious to mention that consumption plays a significant
role in determining the level of output a State will perform at. However, this passage, as authored by Graham, lacks a certain
realistic approach as these relied heavily on the assumption that the terms of trade were stable and that demand for
commodities was highly sensitive, not to price, but rather desire.

The 4th and final passage deemed significant is “as soon as trade in intermediate products is allowed, there will be more
than one possible price constellation, and it can no longer be known in advance, with respect to a given country, which of
its possible production processes each of its industries will use.” Here, we are able to understand the gravity of which
intermediate goods in the international trade scene allow domestic processes to vary. Although the introduction of these
goods cause a certain level of uncertainty, it is the introduction of these goods that a country’s production-possibility set
expands. However, introducing trade in intermediate products poses problems in theory as well. For example, a country
would not be able to completely determine the commodity it should specialize in – in order to optimize a production of the
given commodity and importing of the other, it would entail a negative net world output of a certain commodity.
Nonetheless, an appreciation of intermediate products diversifies our understanding of international trade.