KEB2223 Intermediate Macroeconomy

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keb2223

Intermediate

MAcroeconomics

Name : Nuril Ekma Hj Abd Muda KJC0950313

Section : 2

Lecturer : Madam Wan Nor Asyikin

Date submit : 15th

April 2012

Marks :

__________________

( Mdm Wan Nor Asyikin )

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table of content

1. Introduction 3-4

2. Body

part 1: Why firm engage in International Trade

different in resource endowment 5

lack in technology 5

availability of labor 6

different in preference 6

share idea & knowledge 6

reduce the risk of one economy 6-7

different in productivity 7

different in Opportunity Cost & Corporative Advantage 7-8

diversity of product 8

different in season 8

part 2: how government policy affect international trade

subsidiary protect the main industry 9

ensure the survival of new small industry 9-10

quota : limit certain imported goods 10

tariff : protecting domestic employment 10-11

embargo 11

anti dumping 11-12

buy national products 12

3. Summary 13-14

4. Reference 14

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INTRODUCTION

Every day the world is growing closer and closer together. Countries rely

on one another for resources that they don't have available to them otherwise.

Because of this, they must trade with one another to get what they need.

Traditional or “old” theories of international trade explain the flow of goods

between countries in terms of comparative advantage (differences in opportunity

costs of production). Comparative advantage can arise because of productivity

differences (“Ricardian”comparative advantage model) or because of a

combination of cross-industry differences in factor intensity and cross-country

differences in factor abundance (“Heckscher-Ohlin” comparative advantage

model). In either case, a key implication of old trade theory is “inter-industry

trade”: That is, countries will export one set of industries and import another.

Endowment-driven “old” trade theory models also provide a mechanism through

which international trade can influence relative factor rewards (and hence income

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distribution), as specialization across industries that differ in factor intensity

changes the relative demand for the various factors of production.

With good preparation and follow-up, missions can be great door openers,

and participants benefit in many ways, including:

Obtain sales and contracts as a direct outcome of the mission

Find personal contacts for future follow-up

Sign partnerships and cooperative agreements for further business

development

Get hands on and up-to-date market information and research

Assess overseas opportunities, culture, infrastructure and potential

demand

Initiate new vendor relationships

Learn about the culture, customs, business and operating environments of

the target countries

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CONTENT

1. Why firm engage in international trade

The primary reason firm to go international is to expand their market

penetration. With that said, the initial driver would be if firm have saturated their

domestic market and needed to expand outside of home country in order to

further their growth opportunities. In other cases, it may be that firm product may

be more marketable in a foreign market than their own. Despite that, there are

many factors why firm engage in trading with firm outside their home country.

Above listed some of the reason why firm goes for international trading.

Different in resources endowment

Since some countries have more natural resources due to their locations

as compared to others it leads to international trade. For example gulf countries

have huge reserves of oil but they lack other resources so they export oil to other

countries and import the other resources which they need from other countries.

For example, the United States imports lots of oil from countries in other

continents.

Lack in technology

It may be also due to the technology. Some country are better equipped

to produce technologically goods which are cheap as well better which leads

to international trade. For example is Russia. Their country is better equipped in

technology for producing diving ship for military purpose. So, Malaysia imports

their ship which we already purchase 2 known as ‘Kapal Selam Tun Abdul

Rahman’ and the other one is ‘Kapal Selam Tun Abdul RAzak’. This situation

show that limited technology that we had make Malaysia trade with Russia for

their goods which Malaysia have not yet achieve that level of technology Russia

had.

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Availability of labor

Resources do not have to be material goods, but can also be labor related

as well. There are some countries which enjoy substantial cost advantage in

producing certain products due to availability of cheap labor and therefore they

can produce goods at a much lower cost, increasing their profitability. This helps

both the company producing the products as it lowers their cost, but also helps

the people doing the labor, as it provides a place of employment for them.

Differences in Preferences

Even if two countries have identical resources they might benefit from

trade if they have different preferences. Let's assume that the Malaysia and

Thailand have identical resources for the production of coffee tea. So both

countries can produce both products. But in Malaysia we prefer coffee and in

Thailand they prefer tea. So they can both achieve more satisfaction from the

same amount of resources if Malaysia sells Thailand our excess tea and they sell

us their excess coffee.

Share idea and knowledge

International trade allows countries to learn from each other and take in

new ideas. While one country might be focused on developing one type of

product, another maybe focusing on completely different subject. Together, they

can share their ideas, benefiting both of the economies for both countries. For

example, Japan tends to be ahead of the field in consumer electronics. A country

like the United States can directly purchase goods from them, as well as learn

about the new technology is being discovered on the other side of the world.

Reduce the risk for one economy

If one economy has to deal with everything, and if it ever collapses, the

country will fall apart. By trading internationally, countries rely on one another

and it creates a balance amongst them. If one country's economy is doing very

well, then the economies of other countries that trade with it tend to be doing well

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also. If a country falls on hard times, but other countries might also suffer. An

example of this is the current credit situation the United States. Countries around

the world were affected by the credit problem because a lot of them loaned

money to other countries.

Differences in Productivity

First, we have to know a few definitions.

production : the "quantity produced

productivity : output per unit of resource, usually output per person

productive efficiency : producing at a minimum cost

A difference in productivity is a reason that countries benefit from trade. If

a country is more productive in producing a product we say that they have an

absolute advantage in producing that product. A country has an absolute

advantage in the production of a product if it can produce it with fewer resources

than another country. Absolute advantage is the ability to produce a good or

service with fewer resources because of greater productivity. Here are some

example how differences in productivity (absolute advantage) results in

specialization and exchange (trade).

example

Let's say there are two people. One is an attorney, the other a mechanic.

Assume that the lawyer is more productive at doing law than is the

mechanic since he or she can do it in less time and the mechanic is more

productive at fixing cars. So the lawyer has an absolute advantage in law

and the mechanic has an absolute advantage in fixing cars. It doesn't

surprise us that if the lawyer's car breaks down he or she will bring it to the

mechanic to get it fixed. The lawyer trades with the mechanic.

Differences in opportunity costs and comparative advantage

The main argument in favor of trade is the principle of comparative

advantage. the principle of comparative advantage was first observed and

explained in early 1800s by david ricardo. This principle says that it pays for a

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person or a country to specialize and exchange even if that person or nation is

more productive than potential trading partners in all economic activities.

Specialization should take place if there are relative cost differences in

production of different items.

Comparative advantage is the ability to produce a product at a lower

opportunity cost. Opportunity cost in an earlier lecture and the value of the next

best alternative that is not chosen as the result of a decision.

Diversity Of Product

Refer to the potential conditions of production factors of production owned

by the state. For example Indonesia, has great potential in producing agricultural

goods. In other words, through trade, a country can obtain the goods that cannot

be produced domestically. So, if a country specializes in producing and exporting

certain goods, the average production cost will come down

Different season

Every country has different season. This led to country specialization in

different things/product and service according to their season. For example, in a

4 season country like America or Britain, the trend of fashion have to suit to their

country climate change. Thus, fashion designer usually will come out of new

collection every different season. It’s different in Malaysia which we live in a

different season that those live in America. Despite that, we exchange our

product when there is demand by customers.

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2. How government policy affect

international trading

The phrase "Instruments of Trade Control" is popular with IB textbook writers,

it is a lot simpler to say ‘basic ways government controls trade’. Government

implies policy to international trading because of certain reason and is usually to

make sure that our country not totally relies on international trading. They are

some policy that government put to international trading. The policy is as below

tariff

embargo

subsidies

quota

fiscal policy

anti-dumping

buy national policy

foreign exchange control

Different country might have different policy in international trading. This

policies affect trading as government put rules & regulation to firm who want to

import or export their product. How government policies affect trading actually?

Here are some ideas how government policies affect international trading.

SUBSIDY : PROTECT THE MAIN INDUSTRY

Is a form of assistance paid to a finance commercial or economic

sector. Most of the subsidies made by the kingdom to the expenditure or dealers

in the industry to prevent a deterioration of the industry as a result of the

continuity of operation a result of the continuity advantages or an increase

in product prices or just to encourages to hire more workers prices subsidiary up

some food boarding perpetuate life especially in the urban area; and subsidies to

encourage the development of the industry.

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The subsidy may be considered as a form of protection or trade barriers

by making domestic and product & service artificial competitive against imports.

Subsidies may interfere with the market and should wear big economic boarders.

Help financial in the form of subsidies may be the coming of the kingdom, but the

term refers to aid subsidy might by others, such as individual or institution is

not the kingdom.

In developing nations, the government would use restrictions to close the

market for advance products (example: electronics). Domestic firms do not have

enough power or capitals to compete with strong foreign firms, so the

government gives them incentives to grow by letting them control the market until

it rises. In developed nations, governments use restrictions to support decreasing

industries. The best example is Agriculture sector. Even though subsidy is used

most of the time, you will see some restrictions. Farmers in the U.S. cannot

compete against developing nations due to high costs. Therefore, the U.S.

cannot let this sector die. There are many theoretical reasons, but mainly due to

main food supply. We cannot depend on foreign foods entirely.

QUOTA : LIMIT CERTAIN AMOUNT OF IMPORTED PRODUCT

Taxes are that the government applies to imported goods to limit quantity

imported. Quotas are quantity restriction applied to imported goods to limit

quantity imported. In general, if tariff is used, government receives revenue from

foreign firms. Quotas means, instead of the government, foreign firms will receive

the portion that government would have received if tariff was used.

TAARIF : PROTECTING DOMESTIC EMPLOYMENT

The levying of tariffs is often highly politicized. The possibility of increased

competition from imported goods can threaten domestic industries. These

domestic companies may fire workers or shift production abroad to cut costs,

which means higher unemployment and a less happy electorate. The

unemployment argument often shifts to domestic industries complaining about

cheap foreign labor, and how poor working conditions and lack of regulation

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allow foreign companies to produce goods more cheaply. In economics however,

countries will continue to produce goods until they no longer have a comparative

advantage.

EMBRGO

An embargo (from the Spanish embargo) is the partial or complete

prohibition of commerce and trade with a particular country, in order to isolate it.

Embargoes are considered strong diplomatic measures imposed in an effort, by

the imposing country, to elicit a given national-interest result from the country on

which it is imposed.

Embargoes are similar to economic sanctions and are generally

considered legal barriers to trade, not to be confused with blockades, which are

often considered to be acts of war. Embargo may also refer to the practice of

blocking fare classes at certain levels, and award availability on airlines.

Embargoes are complex in their international meaning. In response to

embargoes, an independent economy or autarky often develops in an area

subjected to heavy embargo. Effectiveness of embargoes is thus in proportion to

the extent and degree of international participation.

ANTI DUMPING

There are many different ways of calculating whether a particular product

is being dumped heavily or only lightly. The agreement narrows down the range

of possible options. It provides three methods to calculate a product’s “normal

value”. The main one is based on the price in the exporter’s domestic market.

When this cannot be used, two alternatives are available—the price charged by

the exporter in another country, or a calculation based on the combination of the

exporter’s production costs, other expenses and normal profit margins. And the

agreement also specifies how a fair comparison can be made between the export

price and what would be a normal price.

The anti-dumping duties imposed are as follows:

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Bangkok Polyester Public Co Ltd -- 5.33 per cent,

Indorama Chemical (Thailand) Co Ltd -- 49.25 per cent,

Indorama Polymers Public Co Ltd -- NIL,

Thai PET Resin Co Ltd -- 36.45 per cent,

Thai Shinkong Industry Corp -- 49.25 per cent, and

others -- 49.25 per cent.

BUY NATIONAL PRODUCT

Interest in buying artificial Barangan Malaysia's most dominant drainage

of the eye is able to circumvent our nation money out of the country. Malaysia

money will not spill out if the people of Malaysia's own emphasize on ‘Barangan

Tempatan” meetingtheir daily needs. The main fund will also increase once the

gus will be able to stem the problem of inflation. Malaysia has reached its time to

change people's negative responses are thought bahawaBarangan import better

than Barangan Tempatan. Obviously if all the people that domestic choose and

purchase products, we actually have triumphed eye guard our money instead

of flowing out of the country.

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Conclusion

First, we document that trade is more concentrated than employment and

sales. This is the result of few firms accounting for a large share of trade volumes

and appears to be mainly occurring within rather than between sectors. This fact

supports recent theories of international trade with heterogeneous firms against

traditional theories based on comparative advantages. Furthermore, we find

significant concentration along the sector and country extensive margins: few

firms serve trade in many sectors and with many countries, but these firms

account for a share of import and export. Finally, we show that import is more

concentrated than export, especially between sectors and along the sector and

country extensive margins.

Second, we confirm that firms with different exposure to international

markets have different performances, in terms of size, capital intensity and

productivity. In particular, we support the idea, as in a wealth of recent studies,

that firms more engaged in international activities (those involved in both

importing and exporting) are the best performers, but we also find that firms

involved only in importing activities perform better than those involved only in

exporting. Our results suggest that the importers’ premium is more the result of a

self-selection process than a productivity enhancement due to import of capital

and intermediate inputs. We provide some evidence that this may have to do with

the fact that only importers buy mainly capital goods from major European

countries. To the extent that these capital goods incorporate advanced

knowledge, they may entail sunk 25 costs which the importers have to incur to

accumulate the absorptive capacity needed to use those goods in production.

Third, the degree of geographical and sect oral diversification is positively

correlated with firm size and productivity. However, diversification premier with

respect to capital intensity are connected only to the import side. In particular, we

have evidence that on the one hand, larger, more capital intensive and more

productive firms are able to import a large number of products from a larger

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number of countries, and, on the other hand, firms exporting into a larger number

of countries are more likely to experience a performance boost.

REFERENCE

1. http://www.sos.wa.gov/itrade/trade_missions.aspx

2. http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-

basics.asp#ixzz1qHqGrWPT

3. http://answers.yahoo.com/question/index?qid=20100216183323AAxrVzR