INTERNATIONAL TRADE. Introduction Should the President mow his own lawn? Should Tiger Woods be his...
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Transcript of INTERNATIONAL TRADE. Introduction Should the President mow his own lawn? Should Tiger Woods be his...
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.