INTERNATIONAL TRADEINTERNATIONAL TRADE

Introduction

Should the President mow his own lawn? Should Tiger Woods be his own caddy? Should Bill Gates type his business proposal

and prepare presentation slides instead of his secretary?

Would you teach 1 or 2 subjects if given a choice?

Introduction

You wake up to an alarm clock made in Korea.

You drink coffee from beans grown in Brazil. You put on some clothes made of cotton

grown in America and sewn in Thailand. You watch the morning news broadcast

from New York on your TV made in Japan. You drive to class in a car made of parts

manufactured in a half-dozen different countries.

Introduction

How do individuals and nations satisfy their wants? We can be economically self-sufficient. We can specialise and trade with others,

leading to economic interdependence.

International Trade & International Trade & InterdependenceInterdependence

Economists and most politicians support free trade.

Politicians praise greater trade because it means more exports, thus creating jobs and boosting GDP

“The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity, not the commodity given” (James Mill, 1821)

To economists, the real benefits of trade lie in importing rather than exporting.

AbsoluteAbsolute AdvantageAdvantage

A country has an absolute advantage over another country in a good when it can produce more of that good than the other country using the same amount of resources.

Example 1 (Absolute Advantage)

Question:

What happens if a country has an absolute advantage in both goods?

Bananas Palm Oil

Malaysia 50 20

Cuba 200 15

Total production 250 35

Example 2 (Comparative Advantage)

According to David Ricardo, country with the lower opportunity cost of producing a good has the comparative advantage in producing the good.

Country should specialize in the good that they have a CA in.

Bananas Palm Oil

Malaysia 50 (1B = 0.4P) 20 (1P = 2.5B)

Cuba 200 (1B = 0.075P) 15 (1P = 13.3)

Example 2 (Output after Specialization)

Therefore, nations should specialize in producing goods that they have CA in.

Total world production will increase with specialization.

Nations then engage in trade to obtain the goods that it does not produce.

Bananas Palm Oil

Malaysia 0 40

Cuba 400 0

Total production 400 (+150) 40 (+5)

Example 3

Hard Disk (millions) Radio (millions)

Sg 20 30

HK 2 15

Total output 22 45

Example 3

Hard Disk (millions) Radio (millions)

Sg 20 (1H = 1.5R) 30 (1R= 0.7H)

HK 2 (1H = 7.5R) 15 (1R = 2/15 H)

Total output 22 45

Example 3 (Total specialization)

Hard Disk (millions) Radio (millions)

Sg 40 0

HK 0 30

Total output 40 30

Net change in output

+18 -15

Example 3 (Partial specialization)

Hard Disk (millions) Radio (millions)

Sg 30 15

HK 0 30

Total output 30 45

Net change in output

+8 ---

Benefits from TradeBenefits from Trade

Allows for efficient use of the world’s limited resources

Access to wider range of goods

Benefits from TradeBenefits from Trade

Lower cost of production through economies of scale from bulk production

Creates jobs and income

Benefits from TradeBenefits from Trade

Foster ties with nations and regions Promotes growth and create jobs in

developing countries

ProtectionismProtectionism Measures taken to create barriers that restrict trade. Examples:

tariffs import quotas, subsidies for domestic goods preferential treatment import licenses MFN status trade sanctions Linking trade to political issues

Protectionism Protectionism – Cost of free trade

CA

specialization

putting all the eggs in 1 basket

at odds with portfolio diversification

Protectionism Protectionism – Cost of free trade

Protect infant or politically strategic industries at home

Prevent job loss in uncompetitive industries

Protectionism Protectionism – Cost of free trade

Minimise economic shocks from abroad

(the more you depend on other nations, the more their problems will affect you)

e.g. Great Depression, Uncle Sam’s cold

Free Trade VS ProtectionFree Trade VS Protection

Many protectionist polices are implemented for short-term benefits:

Raise money for the govt Protect jobs for locals Protect industries Ensure political support base

Free Trade VS ProtectionFree Trade VS Protection While trade lead to some job losses because of

cheaper foreign goods, The retrenched workers can move to productive

domestic sectors where country has CA greater productivity/demand in sector will lead to

higher wage Result of trade can be higher, not lower wage for

locals Money we pay for foreign goods will also flow back to

us because the recipients will also buy goods from us Although there are short term run costs of free trade,

the longer term benefits more than compensates the short term discomfort.

Quotes……Quotes……

“Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs.” Alan Greenspan

“The philosophy of protectionism is a philosophy of war.” Ludwig von Mises

“But I think that the spirit of protectionism would be the grave of European cinema. You cannot protect something by building a fence around it and thinking that this will help it survive.” Wim Wenders

Trade

Globalisation fostering trade links between countries far apart geographically.

Outsourcing: the practice of getting foreign countries to produce goods or services.

SATS, Siemens and Sins. Implications on jobs and growth?

Singapore: Virtuous or Singapore: Virtuous or Promiscuous?Promiscuous? Singapore forms free trade agreements (FTAs)

with many countries. ASEAN’s preference for lowest common

denominator formula too slow for Singapore. Countries that trade are better off than closed

countries like N.Korea, Myanmar and Cuba.