Sie sind auf Seite 1von 37

The International

Trade
A2 Business Studies
Chandima Harishchandra B.A,PGD (econ),Mecon(Col-Reading)
M-0777 356 086
E-info.readers@gmail.com
Paul Krugman on Trade

• “If there were an


Economist’s Creed, it
would surely contain the
affirmations “I believe in
the Principle of
Comparative Advantage”
and “I believe in Free
Trade”.”
• Paul Krugman, Professor
of Economics at MIT,
Cambridge
Hidalgo and Economic Complexity

Ask yourself the question: If a good


cannot be produced in Japan
or Germany, where else can it be made?
Global Regions
What is Free Trade?

• Trade free from artificial barriers


• Trade reflects the impact of
specialisation and exchange
– Specialization: specialisation of scarce
resources
– Exchange: in part based on
comparative advantage in supplying
different goods and services
The concept of an open economy

• In an open economy, one nation


trades openly with other
– Trade in goods
– Trade in services
– Free flow of financial capital
– Free flow of labour resources
• An economy integrated with and
connected to the world economy
World Trade
Volume of world merchandise exports and gross
domestic product, 1950-2011, annual % change
Time period Volume of world trade Real GDP (world)
1950-60 7.7 4.5
1960-70 8.6 5.5
1970-80 5.3 4.1
1980-90 3.9 3.2
1990-00 6.5 2.3
2000-11 4.7 2.7
2001 -0.2 2.0
2002 3.4 2.3
2003 5.7 2.9
2004 9.7 4.0
2005 6.5 3.5
2006 8.6 4.0
2007 6.5 3.9
2008 2.3 1.3
2009 -12.1 -2.4
2010 14.0 3.8
2011 4.9 2.4
Exports of Goods and Services
Exports of Goods and Services
Potential Advantages from Trade

• (1) Increased competition for producers


– Increased market contestability
– Pressure on suppliers to keep prices down
– Improved allocative & productive efficiency
• Prices closer to their factor cost
• Pressure on unit costs to fall / scale economies

• (2) Better use of scarce resources


– Exploitation of comparative advantage
– Benefits from specialisation
– Trade can be an important source of economic
growth and development
Potential Advantages from Trade

• (3) Dynamic Efficiency Gains


– Trade speeds up the pace of technological
progress and innovation
– Transfer of ideas / technology spill-overs
– World Bank – “dynamic globalisers have
achieved the fastest growth over the last twenty
years”
– Greater choice for consumers
Potential Advantages of Trade

• (4) Economies of scale


– Increasing returns to scale from selling to larger
markets e.g. BRICs or the EU single market
– Falling LRAC / lower real prices
– Gains in producer & consumer surplus

• (5) A stimulant to growth / recovery


– Exports – an injection of AD into circular flow
– Boost to exports will have multiplier and
accelerator effects on national income
– Supply-side improvements from investment and
greater factor mobility between countries
Export Potential to BRICs & Beyond

Jim O’Neill

“By the end of the


decade, Britain’s trade
with the BRIC
countries of Brazil,
Russia, India and
China, will account for
17pc of total exports.”
Gains from External Trade

Reduction in Increased market Access to new


extreme poverty competition technologies

Inflows of Economies of Better use of


knowledge scale scarce resources
Comparative Advantage

• David Ricardo, one of the founding fathers


of classical economics
• Comparative advantage exists when
– Relative opportunity cost of production is lower
than in another country
– A country is relatively more productively efficient
than another

• Basic rule – specialise in the things that you


are relatively best at
• This opens up important gains from trade
Factor endowment model

• Developed by Heckscher and Ohlin


• Countries with a relative factor abundance
can specialise and trade
– Abundance of skilled labour → specialisation
→ export → exchange for goods and
services produced by countries with
abundance of unskilled labour
– Exports embody the abundant factor
– Imports embody the scarce factor
– Assumes a high degree of factor mobility
The Theory of
Comparative
Advantage

Analysis of the potential gains from specialisation,


trade and exchange between regions and nations
Theory of Comparative Advantage

Half of each Freezers Dishwashers


country’s available
(000s per year) (000s per year)
resources are
allocated to each
industry
Germany 1000 500

Italy 800 200

Total Output
Theory of Comparative Advantage

Half of each Freezers Dishwashers


country’s available
(000s per year) (000s per year)
resources are
allocated to each
industry
Germany 1000 500

Italy 800 200

Total Output 1800 700


Assuming Constant Returns – The
Effects of Partial Specialisation

Gain in total output Freezers Dishwashers


after specialisation
(000s per year) (000s per year)

Germany 400 (-600) 800 (+300)

Italy 800 200

Total Output
Assuming Constant Returns – The
Effects of Partial Specialisation

Gain in total output Freezers Dishwashers


after specialisation
(000s per year) (000s per year)

Germany 400 (-600) 800 (+300)

Italy 1600 (+800) 0 (-200)

Total Output
Assuming Constant Returns – The
Effects of Partial Specialisation

Gain in total output Freezers Dishwashers


after specialisation
(000s per year) (000s per year)

Germany 400 (-600) 800 (+300)

Italy 1600 (+800) 0 (-200)

Total Output 2000 (+200) 800 (+100)


Assuming Constant Returns – The
Effects of Partial Specialisation

Gain in total output Freezers Dishwashers


after specialisation
(000s per year) (000s per year)

Germany 400 (-600) 800 (+300)

Italy 1600 (+800) 0 (-200)

Total Output 2000 (+200) 800 (+100)


Beneficial Terms of Trade

• A beneficial terms of trade is an agreed rate


of exchange of one product for another than
leaves both countries better off from trade
• Consider the domestic terms of trade for each
country
– Without trade, Germany gets 2 extra freezers for
every dishwasher that is gives up
– Without trade, Italy has to give up 4 freezers for
every extra dishwasher it produces

• Is there a mutually beneficial terms of trade?


Trade increases amount available
in each country

Final output in Freezers Dishwashers


after trade
(000s per year) (000s per year)

Germany 1150 550


(+750 .. import) (-250 ..export)
Italy 850 250
(-750 .. export) (+250 .. import)
Total Output 2000 800
At start: (1800) At start: (700)
Assumptions underlying theory

Constant
returns to scale

Mobility of
factor inputs

No externalities

Trade finance
available

Barriers to
trade are small
Assumptions underlying theory

Krugman – Constant
New Trade returns to scale
Theory
Mobility of
factor inputs
“In reality,
world trade is
dominated by No externalities
rich countries
trading Trade finance
similar goods available
with each
other” Barriers to
trade are small
Assumptions underlying theory

Krugman – Constant Standard theory


New Trade returns to scale ignores extra
Theory benefits from
Mobility of
factor inputs (i) Consumer
“In reality, choice
world trade is (ii) Economies
dominated by No externalities of scale
rich countries (iii) Positive
trade
trading Trade finance externalities
similar goods available (iv) Other
with each dynamic
other” Barriers to effects of
trade are small trade
Supply and Demand Analysis
Price Domestic Supply

World Price

Domestic Demand

Output (Q)
Supply and Demand Analysis
Price Domestic Supply

P1

World Price
Pw

Domestic Demand

Qs Q1 Qd Output (Q)
Comparative Advantage

Unit labour costs Exchange rate Innovation

Economies of scale Sustainability Human capital


The Importance of Human Capital =
More Value Added from Exports
Technology spill-overs Universities Science Parks

Precision Engineering Capital Projects Creative Industries


Economic complexity and trade

Two countries that have


high levels of economic complexity, but
still low levels of per capita income are
China and Thailand

Ask yourself the question, if you cannot


produce it in China or Thailand, where
else can you produce it?
Export Patterns: Rwanda
Export Patterns: Malawi
Export Patterns: United Kingdom
Shifts in Advantage for the UK

• Long term decline in comparative advantage


in many areas of manufacturing industry
– Lower cost producers in SE Asia and E.Europe
– Productivity gap with other leading economies
– Strong ex. rate has damaged competitiveness

• The UK still has trade surpluses in chemicals


and high knowledge manufacturing
• Main comparative advantage lies with
business and financial services