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International Business and Trade – Economics and Trade Introduction
(Adapted from Professor Peter Abulon Course Pack)
Prepared by: Ador Gil Reyes
February 21, 2022
Session Objectives –
1.
At the end of the session:
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Describe the concept of international trade
Distinguish the importance of international trade to the economy
Apply session objectives to the assigned case studies
International Trade
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International trade is the exchange of capital, goods, and services across international borders or territories.
Trading-partners reap mutual gains when each nation specializes in goods for which it holds a comparative advantage and then engages in
trade for other products.
In other words, each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs
of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations.
While several specialistic fields of economics have been developed as distinct branches of general economic theory only in relatively recent
times, the presence of a specific treatment of the theory of international economic transactions is an old and consolidated tradition in the
economic literature. Various reasons can be advanced to explain the need for this specific treatment, but the main ones are the following.
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Mobility of Factors of Production:
The first is that factors of production are generally less mobile between countries than within a single country. Traditionally, this
observation has been taken as a starting point for the development of a theory of international trade based on the extreme
assumption of perfect national mobility and perfect international immobility of the factors of production, accompanied by the
assumption of perfect mobility (both within and between countries) of the commodities produced, exception being made for
possible restrictive measures on the part of governments.
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Complexity of Transactions:
The second is the fact that the mere presence of different countries as distinct political entities each with its own frontiers gives
rise to a series of problems which do not occur in general economics, such as the levying of duties and other impediments to
trade, the existence of different national currencies whose relative prices (the exchange rates) possibly vary through time, etc.
What is Economics about?
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It is a social science which is concerned with the efficient utilization and management of limited productive resources for the purpose of
attaining the satisfaction of unlimited wants.
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It is a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and
services.
What are the two branches of Economics?
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Macroeconomics – studies the aggregate level of economic activity, such as the total level of national income, the total level of employment
and the general price level for the economy viewed as a whole.
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Microeconomics – studies the economic behavior of individual decision-making units such as consumers, resource owner, and business
firms.
International economics
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It uses the same fundamental methods of analysis as other branches of economics because the motives and behavior of individuals are the
same in international trade as they are in domestic transactions.
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It is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences
and the international institutions that affect them.
Theory of international trade – has an essentially microeconomic nature
deals with the causes, the structure and the volume of international trade (that is, which goods are exported, which are imported, and why, by each
country, and what is their amount); with the gains from international trade and how these gains are distributed; with the determination of the
relative prices of goods in the world economy; with international specialization; with the effects of tariffs, quotas and other impediments to trade;
with the effects of international trade on the domestic structure of production and consumption; with the effects of domestic economic growth on
international trade and vice versa; and so on.
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Causes, structure, volume: export, import, why, amount
Gains and distribution patterns
Prices and what drives them
Tariffs and quotas
The effects of internationalization on domestic structure of production and consumption
Domestic and international economic growth effects on each other
International monetary theory – has an essentially macroeconomic nature
deals with the problems deriving from balance-of-payments disequilibria in a monetary economy, and in particular with the automatic adjustment
mechanisms and the adjustment policies of the balance of payments; with the relationships between the balance of payments and other
macroeconomic variables; with the following:
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How much is coming in?
How much is going out?
The Gains from Trade
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Everybody knows that some international trade is beneficial
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Probably the most important single insight in all of international economics is that there are gains from trade—that is, when countries sell
goods and services to each other, this exchange is almost always to their mutual benefit.
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The range of circumstances under which international trade is beneficial is much wider than most people imagine.
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On one side, businesspeople in less technologically advanced countries, such as India, often worry that opening their economies to
international trade will lead to disaster because their industries won’t be able to compete.
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On the other side, people in technologically advanced nations where workers earn high wages often fear that trading with less advanced,
lower-wage countries will drag their standard of living down—one presidential candidate memorably warned of a “giant sucking sound” if
the United States were to conclude a free trade agreement with Mexico.
Advantages of International Trade
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Builds up domestic trade competition
Enhances the trading technology of the country
Increases the sales and profits of importers and exporters
Offers more potential for business sales
Opens up new markets for businessmen
Creates a place in the global market
Increases potential
Balances local market fluctuations
The importance of international trade
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International trade between different countries is an important factor in raising living standards, providing employment and enabling
consumers to enjoy a greater variety of goods. International trade has occurred since the earliest civilizations began trading, but in recent
years international trade has become increasingly important with a larger share of GDP devoted to exports and imports.
Raising living standards
Providing employments
Enabling greater choice for consumers
Make use of abundant raw materials
Comparative advantage
Specialization and economies of scale – greater efficiency
Service sector trade
Global growth and economic development
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World Bank statistics show how world exports as a % of GDP have increased from 12% in 1960 to around 30% in 2015.
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ONLINE REFERENCES/SOURCES
Read the article, “Why Trade?” from the Nobel Prize website linked below.
http://www.nobelprize.org/educational/economic-sciences/trade/ohlin.html
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