INTERNATIONAL TRADE

INTRODUCTION
Have you ever thought of
living in a closed economy?

WHY WE MUST TRADE?

Scarcity problems fulfill the countrys
need / citizens wants and needs
Specialization in the production of goods
and services focus in the production of
goods that they are efficient in it and import
the goods that they are less efficient in it.

ADVANTAGES OF INT. TRADE

A country can enjoy certain goods that it
cannot produce domestically.
More choices of goods for the population.
Countries can enjoy the benefit of
specialization.
Competition leads to efficiency in the
production.
Prevent monopoly power

ABSOLUTE ADVANTAGE AND

COMPARATIVE ADVANTAGE
Assumptions:
There are only two countries in the world
that involve in the international trade.
There are only two goods produced by the
two countries using all of their resources to
produce these two products, for example car
and rice.

Cont..
All resources in both of the countries are
homogenous, for example labor. They are all
equally efficient in producing both of the
goods.
there is a perfect mobility of resources. All
resources are mobile and can be transferred.
Labors can be transferred from one
production line to another easily.

Absolute Advantage
A country is said to have an absolute
advantage in the production of a good when
it can produce more of that good than
another country, using the same amount of
resources.
Rice

Car

Thailand

20 units

6 units

Malaysia

10 units

10 units

Absolute Advantage, cont..

Specialization : a country will use all of its
resources to produce that particular good
only and it will not produce the other good
at all.
Based on the example given, under
Absolute Advantage, Malaysia will employ
all of the population to produce car only and
Thailand will employ all of the population to
produce rice only

BUT!!
What happen if a country has absolute
advantage in both of production?
How can they practice international
trade?

COMPARATIVE ADVANTAGE
A country is said to have a comparative
advantage in producing one good, which it
has greater relative efficiency compared
to another country. The relative efficiency
can be measured by the opportunity cost
to produce the good.

Cont..
When Malaysia has absolute advantage
in both lines of production, it does not mean
that it will specialize in both of the goods
and Thailand does not do any because
international trade can still be practiced
based
on
Comparative
Advantage
principle.

Cont..
The opportunity cost will represent the
amount of good that has to be sacrificed
by one country when it wants to produce
another good.
If Thailand and Malaysia wants to increase
the production of rice, they have to sacrifice
the production of car. Why?
More labor needs to be employed to
produce rice so less labor in the production of
car.

Cont..
Rice

Car

Thailand

7 units

1 unit

Malaysia

8 units

4 units

Cont..
A lower opportunity cost shows a greater
efficiency in producing a good. Why?
Because when a country chooses to
produce one good, a lower opportunity
cost means it has to forego (sacrifice)
smaller units of other goods.

PROTECTIONISM
The barriers to the free import flow of
goods and services set up by a country in
order to protect domestic industries from
foreign competition.
But How?

Tools of Protectionism
Tariffs tax imposed on imports (benefit to gov)
-Discourage local importers from importing goods
into the country, as they have to pay some taxes on
goods (Ex: imported cars)
Quota restrictions or limitations on the volume
of imports (benefit to local importers)
- The supply of goods become limited, push up the
prices of the goods and demand is expected to
decrease.

Cont..
Subsidies on export
-Encourage the producer to produce
exported goods cost of production become
less make exports become more
competitive because their prices will be
lower.

Cont..
Exchange controls gov restricts the
supply of foreign currency in the country.
-In order to import goods from foreign
countries, we need to pay them in their
currencies.
- Control the availability of foreign
currencies in our country will check the
amount of import into our country

Cont..
Embargo
-Ban some items into the country
-Due to economic, social or political reasons

Reasons for Protectionism

To raise revenues to the government
To prevent dumping - goods are sold
abroad at lower prices than in the home
market overseas producers are given
export subsidies
To protect infant industries
To diversify the economy prevent
depending on one sector only
To increase employment