FOREIGN TRADE POLICY

AND THE LAW OF

DEMAND
Group 5
FOREIGN TRADE
POLICY
Objectives

1. Define foreign trade policy.

2. Identify the different tools of foreign trade policy.
3. Explain how the foreign trade policy functions in
the economic system.
What is Foreign Trade Policy?

It is a set of activities that tends to

manipulate imports and exports of the
economy. It controls the level of money
supply in its desired level through export
and import.
Price Effects of Import and Export

Import and Export not only have income but

price effects as well. Imports tends to bring down
domestic prices by bringing into the system more
finished goods, or raw materials for processing into
final goods, at the same time they bring out funds. In
a sense, import function is a stabilizer of an
economy. The opposite holds true for exports.
Tools of Foreign Trade
Policy
1. ADMINISTRATIVE or EXCHANGE
CONTROL
■ A tool that tries to avoid the dollar deficiency
by controlling its sale.

■ This overall reduction in the quantity

demanded for dollars may be achieved by
general or selective control
2. EXCHANGE RATE REGIMES
• The price of the dollar in terms of pesos is
known as the exchange rate

3 Types of Exchange Rate

1. Flexible Exchange rates
2. Fixed Exchange rates
3. Multiple Exchange rates
A. Flexible Exchange Rates
• Exchange rate of dollars to peso is determined
by the demand and supply of dollars.
SALES DEMAND EXCHANG
E RATE
DOLLAR
B. Fixed Exchange Rates

• A tool where the rate of exchange is fixed

by monetary authorities for extended
period of time. This enables them to avoid
wild fluctuations.
C. Multiple Exchange Rates
• The foreseen balance of payments
problems maybe solved by having a
multiple exchange rate and have buyers
and sellers transact at different exchange
rates.
3. TARIFFS AND SUBSIDIES
•Tariffs are taxes imposed on imports which
are based on either the value of the product
(ad valorem) or on the physical unit of
measure.
THE LAW OF DEMAND
Overview
■ Many Individuals do not really understand how prices of goods
and services are determined.Many thinks that prices are
determined by the government. This is true in some basic goods
and services like gasoline,rice, sugar or rent of apartment. In a
market economy like ours, prices of goods and services are
determined by the interaction between demand and supply of
goods and services. The government does not interfere.
■ In this lesson, focus is geared on the law of demand with special
emphasis in its determinants and how these determinants affect
the demand in the market
What is Demand?
• Demand means the desire for a particular good backed up bu
sufficient purchasing power, and also it talks about the principle
referring to a consumer's desire and willingness to pay a price for a
specific good or service. Holding all other factors constant, an
increase in the price of a good or service will decrease demand,
and vice versa.

• Demand in economics is defined as consumers' willingness and

ability to consume a given good. ... The inverse relationship
between price and quantity demanded of a good is known as the
law of demand and is typically represented by a downward sloping
line known as the demand curve.
Demand Schedule and
Demand Curve
Demand Schedule
– A demand schedule reflects the quantities
of goods and services demanded at
different prices.
Hypothetical Demand Schedule of Beef Per Month in Manila

Price of Beef (Per Kilo) Quantity Demanded (In Kilo)

P 200.00 50
P 170.00 60
P 150.00 90
P 130.00 110
P 110.00 130
P 100.00 160
Demand Curve
Demand Curve
■ Demand curves generally have a negative gradient
indicating the inverse relationship between quantity
demanded and price.

3 accepted explanations of why demand curves slope

downwards:
1. The law of diminishing marginal utility
2. The income effect
3. The substitution effect
The Law of Demand
The Law of Demand
■ The law of demand states that quantity
purchased varies inversely with price. In other
words, the higher the price, the lower the
quantity demanded. The reason for this
phenomenon is that consumers' opportunity
cost increases, so they must give something
else up or switch to a substitute product.
The Law of Demand
■ Income Effect- At lower price , an individual has a greater purchasing
power. This means we can buy more goods and services. But the
higher prices, naturally we can buy less.
■ Substitution Effect- Consumers tend to buy goods with lower prices.
In case the price of a product that they are buying increases, they look
for substitutes whose prices are lower that the give price, thus, the
demand for higher priced goods will decreased.

Generally, low supply and high demand increase price. In contrast,

the greater the supply and the lower the demand the price tends to fall,
vice versa the higher demand the lower the supply.
 Income

Tastes and
Population
Preferences

Determinants
of
Demand

Price Prices of
Expectations Related Goods
The Ceteris Paribus Assumption
■ The law of demand states as price increases
quantity demanded decreases, and as the price
decreases quantity demanded increases.
■ “ All other things equal or constant.”
■ “ Assuming that the determinants of demand are
constant, price and quantity demanded are inversely
proportional to each other.”
Changes in Demand
■ Changes in demand refers to the shift of demand
curve which is brought about by the changes in the
determinants of demand, like income, population,
price expectation and so forth.
Changes in Quantity Demanded
■ Change in quantity demanded refers to change in the
quantity purchased due to increase or decrease in the price
of a product.

■ Changes in quantity demanded can be measured by the

movement of demand curve, while changes in demand are
measured by shifts in demand curve. The terms, change in
quantity demanded refers to expansion or contraction of
demand, while change in demand means increase or
decrease in demand.
■ Figure-11 demonstrates the expansion and contraction of demand:

■ When the price changes from OP to OP1 and demand moves from OQ to
OQ1, it shows the expansion of demand. However, the movement of price
from OP to OP2 and movement of demand from OQ to OQ2 show the
contraction of demand.
Standard Method
■ % triangle = New - Old /Old * 100

We can use this formula to calculate the percentage change between

any two numbers or quantities. As applied to economics, we typically
present percentage change as follows where...

P 1= New Price
P2 = Old Price
Q 1= New Quantity
Q 2= Old Quantity
Y 1= New Income
Y 2= Old Quantity
■ Now that we have calculated our percentage change in price
and quantity demanded, we can measure the price elasticity
of demand.

E = change in quantity demanded

Change in Price
E = 57%/88%

E = 65%