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International Trade Basic Economic Questions

O What goods and services should an economy

produce? – should the emphasis be on agriculture,
manufacturing or services, should it be on sport and
leisure or housing?
O How should goods and services be produced? –
labour intensive, land intensive, capital intensive?
Efficiency?
O Who should get the goods and services
produced? – even distribution? more for the rich?
Adriane John P. Luncido, EnP
for those who work hard?
Professor-in-Charge

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Factors of Production

Payments
to factors
Land Labor Capital Enterprise
of
Production

Rent Wages Interest Profit

INCOME

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Definition of International Trade
• Exchange of goods and services between
and among countries that is through
imports and exports of products
(Investopedia.com)
• The exchange of capital, goods, and
services across international boarders or
territories for the purpose of growth and
development (dictionary.com).
Importance of International
Trade
• Trade has significant share in increasing
the gross national product of the country
• Creates employment opportunities to cater
the international demand
• The importance of international trade was
recognized early on by political
economists like Adam Smith and David
Ricardo

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Bottomline for International Trade Bottomline for International Trade

• Limited resource
• Unavailability of resource
• Expand the market range and threshold
• Increase supply of products
• Increase profit
• Lower prices of commodities
• Increases the general welfare of people,
liberality and justice
• Opens up the opportunity for specialization
• More efficient use of resources
• International trade has the potential to
maximize a country's capacity to produce
and acquire goods
• Allows for inefficiencies that leave
developing nations compromised; need to
be competitive.

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WHAT IS EXPORT? Exports

Are goods and/or services
Any known Philippine produced by the domestic
export products ? economy and purchased
by the foreign countries.

e.g. Philippine Banana

chips products exported to
the United States.

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WHAT IS IMPORT? Imports

are goods or services
Any known import produced by the foreign
products to the sector and purchased by
the domestic economy.
Philippines? These are goods and/or
services that flow into or
purchased by the
domestic economy.

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Winners and Loser of

Protectionism Policies
International Trade
• Tariff
Winners?
• Import Quotas
• Export Subsidies
Losers? • Embargo

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Tariff Import Quotas

• A foreign trade policy of the domestic
government
• Usually, in the form of taxes imposed /
levied to imported products, either per unit
of product or by bulk
• Legal restrictions on the quantities or
volume of imported products (goods or
services) that are imposed by the
government
• Once the total quota is reached, there will
be no more import products (goods or
services) allowed

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Export Subsidies Embargo

• Transfer payments made by the
government directly to domestic producers
to encourage them to export their products
to foreign countries.
• One way of helping domestic producers to
compete with the international
community/competitor at lower import
costs
• A severe form of trade restriction in which
a country completely bans/stops the
importing of products from one country to
another or forbids exporting its own
products to that country
• Usually, embargo is imposed when there
is serious violation of agreements for trade
or of the international law

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What is Demand?
- refers to the various quantity
EXPORTS and of goods/ services that a
consumer is willing to
IMPORTS: DEMAND purchase at different price
levels, per unit of time, holding
AND SUPPLY other factors affecting demand
to be constant
Source: Leftwich (1973). Price Theory and
Application: An Alternative Approach

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Factors Affecting/Shifters/ What is Supply?

Determinants of Demand
1. Consumer’s income
- refers to the various
quantity of goods/ services
2. Taste and preference
that producer/seller is
3. Price of related goods
willing to sell at different
4. Consumer’s expectation
price levels, per unit of
5. Unexpected events time, holding other factors
6. Number of buyers affecting supply to be
Source: Manapat, et al., (2010). Economics
Taxation and Agrarian Reform constant
Source: Leftwich (1973). Price
Theory and Application: An
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Shifters/Determinants of
Supply
1. Technology
2. Input price
3.
4.
Number of Sellers
Seller’s expectation
Production
5. Climatic and agronomic
factors Possibility Frontier
6. Price of competing product
7. Price of joint products (PPF)
8. Government’s interventions
(e.g tax, subsidies)

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Production Possibility Curves (Frontier) also known as

Production Possibility Frontiers
PPF
O Show the different combinations of goods
• Production – output of goods and services and services that can be produced with a
• Possibility – maximum attainable amount given amount of resources
• Frontier – border or boundary O No ‘ideal’ point on the curve
• PPF shows the boundary of what is possible and is O Any point inside the curve – suggests
used as an illustration in economics to show the resources are not being utilised efficiently
choices facing all countries in producing goods O Any point outside the curve – not attainable
which use limited factors of production. with the current level of resources
O Useful to demonstrate economic growth and
opportunity cost

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Production Possibility Frontiers Production Possibility

Capital Goods IfIf it devotes
the
Assume country all
a country is Frontiers
Capital Goods
Production It can only produce at
points outside the PPF
Ifresources
it reallocatesto its
capital inside the PPF
atcan
goods
resources
produce
point A ontwo
it (moving
could the
round if it finds a way of
types of – e.g. point B
agoods
expanding its
Ym PPF
the Itfrom
PPF
produce can A to B) it can
maximum
with means or
resources theimproves
produce
of
produceYm.its
moreresources
consumer
the C the productivity of
goods but only
– capital goods at the Y1 country is not
combination
If it devotes
expense of fewer of
its Yo
allcapital those resources it
and consumer usinghas.all This
its will
A A already

.
Yo goods.
capital
resourcesThe opportunity
goods and
to Yo
goods
cost of producing anitextra
resources
push the PPF further
consumer goods
Xo–consumer
Xo X1 consumer goods outwards.
could produce a
goods
is Yo – Y1 capital goods.
maximum of Xm B
Y1 B

Xo X1 Xm Consumer Goods Xo X1 Consumer Goods

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Making a fuller use of resources

• Production Possibility Frontiers (PPF)

Schools Y1
x
Production inside

Food
Y Z1
the production y
Z possibility curve
W
V
v

0
X X1
Motorcars
O
Clothing

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Growth in potential output Growth in potential output

5 years’ time
Food

Food

Now Now

O O
Clothing Clothing

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Growth in potential and actual output Growth in potential and actual output

y
x
Food

Food

O O
Clothing Clothing

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Three Famous International Trade
Theories
❖The Ricardian model
❖The Heckscher model
❖Gravity model of trade
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The Heckscher-Ohlin Model
- Put stress on endownments of factors
of production as basis for international
trade.
- As per this theory countries will
specialize in and export those product,
which make use the domestically abundant
factors of production more intensively
than those factors, which are scarcely
available in the home country.
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The Ricardian Model
-Is developed on the theory of comparative
advantage.
-According to this model countries
involved in trade, specialize in producing
the product in which they have comparative
advantage.
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The Gravity Model of Trade
- Provides an empirical explantion of
international trade.
- According to this model, the economics
sizes and distance between nations are
the primary factors that determine the
pattern of international trade.
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DEFINITION

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BENEFITS COST

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ECONOMIC NATURE SUMMARY: KEY DIFFERENCES

• A country has an absolute advantage if it produces a
large number of goods with the same resources as
provided to another country whereas the Country has a
comparative advantage if the Country can produce a
particular product with better quality at a cheaper price
than another country.
• There is no mutual benefit in trade in absolute advantage
whereas the trade is mutually benefitted with
comparative advantage. This is because the Country
which has a higher opportunity cost of producing a good
can now receive it at a lower cost from the production of
another country.

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SUMMARY: KEY DIFFERENCES

• Cost is a factor to determine if the country • Consider two countries X and Y which
has an absolute advantage whereas have following dynamics for the production
opportunity cost is a factor which of rice and corn. The output for an equal
determines if the country has a number of resources per day is as below
comparative advantage
COUNTRY RICE CORN
• Comparative advantage is mutual and
reciprocal whereas absolute advantage is COUNTRY X 30 15
not. COUNTRY Y 5 10

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