INTERNATIONAL
ECONOMICS
Mahyudin Ahmad
Economics Department
UiTM Kedah
INTERNATIONAL TRADE
Economic transactions between two different
countries
 Differences between domestic and international
trade:




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
Usage of different currencies
Greater specialization of workers
Advantages such as bigger market size, variety of
goods and services, large volume and greater
transaction
Cost might be higher
Trade barriers issue

Advantages of International trade:



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Specialization : different countries specialize in
production of different types of output, greater
quantity.
Large demand
Increase competition
Trade can be the engine of growth
Non-economic advantages such as political, sosial
and cultural from the bilateral trade relationship
TRADE BARRIERS / PROTECTIONISM

Reasons for trade barriers:

To protect infant industries: those industries that
cannot compete with foreign producers. eg. Proton

To prevent dumping: some countries involve in
international trade to dump their excessive output

To protect domestic employment: unemployment may
rise if a country depends too much on imported good

Reasons for trade barriers (cont):

Industrial diversification: to increase number of
important sectors in the economy and reduce
dependent on imported product

To protect strategic products: eg. military equipment

Non-economic reason: political reason (eg: Israel),
social or moral reasons (eg: pornographic materials)

Tools of trade barriers/protectionism

Tariff (custom duties): charged on imported goods
Ad-valorem tariff: tariff based on price
 Specific tariff: tariff based on volume


Export subsidies and grants: subsidies to domestic
producers to enter export market

Quota: Limitation on the quantity of the imported
goods

Tools of trade barriers/protectionism (cont)

Embargo: total ban on imported goods

Import licensing: importers are required to obtain
license before importing any foreign goods

Foreign currency control: reduce the supply of foreign
currency to reduce import from the currency’s
country
BALANCE OF PAYMENT (BOP)

An account that shows
summary economic transactions between a country
and the rest of the world over a period of time,
usually a year
 net exchange of domestic currency for foreign
currencies from all transactions between the country
and the rest of the world


Structure of BOP:
Current account
 Capital and financial account
 Official financing account (financed by BNM
reserves)

Definitions:
Goods: Physical goods/merchandise, the
value is called “Trade balance”
a
b
c
d=(a+b+c)
Services:
Transportation: freight & insurance for
transporting goods from other countries
Travel: tourism, education, healthcare
services paid abroad
Other services: healthcare, consultancy
etc.
Govt transactions: expenditures by foreign
embassies in Msia and Msian embassies
abroad
Income:
Compensation of employees: payment
work retrenchment, etc.
Investment income: net profit, interest
payment, dividend from abroad
e
f
g=(d+e+f)
Financed by:
Net change in
BNM
international
reserves:
331,277—
317,445
13,832
Current transfers: private transfer (eg. net
flow of money by foreign workers)
+ govt transfers (eg. military, financial aids,
grants to other country)
Direct Investment: physical investments
Portfolio Investment: purchase of stocks,
bonds, and govt securities.
Other Investment: private=short term
investments, official sector=govt repayment
of loans

BOP disequilibrium:
Deficit BOP = outflow of money > inflow of money
(payments > receipts)
 Surplus BOP = inflow of money > outflow of money
(receipts > payments)


Why deficit unfavorable?
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It means declining Aggregate Demand
It gives downward pressure for domestic prices, less
profitability
It increase indebtedness, as government has to
borrow to finance deficit
It reduces the BNM reserves
It gives devaluation pressure for domestic currency

Policies to reduce BOP deficit:

Encourage exports by:
giving subsidies,
 abolish export duties/licensing


Discourage import s by:
imposing import tariff/licensing
 campaign to buy locally produced goods


Trade agreement

to ensure enough exports volume to overcome deficit
Capital and currency control
 Contractionary MP andFP
