Chapter 7-8 Reviewer

Chapter 7: International Trade and agricultural products.
The important
Investment feature of a commodity is that there is
I. INTRODUCTION very little, if any, differentiation in
that good whether it is coming from
 People access to trade through the one producer and the same
internet, telephone, by mail order or commodity from another.
through department stores, and markets,
Absolute Advantage- The ability of an actor to produce
people had already engages in trade
more of a good or service than a competitor.
 Import-substitution and export-
promotion. Comparative Advantage- The ability of an actor to
7.2 THEORIES OF INTERNATIONAL produce a good or service for a lower opportunity cost
than a competitor.
TRADE
7.2.1 Gains from trade  Arises because of expanded production,
- International trade begins with an autarkic through utilizing economies of scale
economy. resulting from larger markets, or
 Autarkic economy- an economic system of self- technology transfers which helps the
sufficiency and limited trade. A state of affairs
production possibility frontier to expand.
in which countries do not trade, and only
 Economies of scale- are important
acquire goods or services from within.
because they can help provide
 Economy gain through 2 main avenues: businesses with a competitive advantage
consumption and production. in their industry. Companies will
Consumption Gains therefore try to realize economies of
scale wherever possible, just as
investors will try to identify economies
of scale when selecting investments.
 Trade enables a country to purchase raw
materials and intermediate products not
available locally
Difference between Absolute and Comparative
- The country can produce the commodity
more efficiently (absolute terms)
 - Commodity can be produced relatively
 International trade tends to reduce the more efficiently (comparative terms)
prices of consumption goods, creating
welfare gains for consumers in importing
countries.
Production Gains
 Trade enables the production and
reallocation of gains by allowing
countries to specialize in the production
of commodities at a relatively lower cost
either because of absolute advantage or
comparative advantage.
 Production of commodities-
Commodities are the raw inputs used
in the production of goods. They may
also be basic staples such as certain
production of any commodity can gain from
international trade, specializing in the production
of the good in which it is has a comparative
advantage.
7.2.3 HECKSHER-OLIN THEOREM

 Countries will specialize and trade in
goods which are relatively abundant.
- Labor-rich countries = Labor intensive
NOTE: - Capital countries = Capital intensive
- According to Smith, the gains from trade - Included skill- or education –intensive
arise from the advantages of division of goods
labour and specialisation—both at the - Poorer will export labor intensive, while
national and international level. rich will export capital intensive
- Such advantages arise, according to - Nakadepende kung saan sila mas
Smith, due to the absolute differences in nagproroduce ayun yung ipagttrade nila.
costs. Ricardo goes a step further. - Trade should be greater between
- Ricardo says that trade contributes “to countries that have the greatest
increase the mass of commodities, and differences in economic structures. If
therefore, the sum of enjoyments…” walang differences sa HOS model, then
Ricardo adds that the gain from trade walang trade.
consists in the saving of cost resulting
from obtaining the imported goods Factor price equalization
through trade instead of domestic - Sa country na may comparative
production. advantage sa labor-intensive products, its
wage rate will be low relative to a
 Comparative cost doctrine suggests that country that has a comparative advantage
trade can provide benefit to all countries in capital-intensive product.
if they specialize in the production of - As trade take place, the country
those goods and, hence, export them in producing labor-intensive products will
which they have comparative advantage. experience an increase in labor relative to
capital.
7.2.2 RICARDIAN THEORY OF TRADE - Pag nagincrease si labor increase din si
 Says that in differences in technology capital
determine comparative advantage.
 The trade patterns can be explained by Rybczynski Theorem & Stolper-Samuelson
technological differences or labor Theorem
productivity differences between
countries.
 Walang competitive relative to the other
country kasi same lang sila na
nagbebenefit
 The deficiency is addressed by the
Hecksher-Ohlin theory.
NOTE: In the Ricardian trade model, even a
country with no absolute advantage in the
7.2.4 IMPERFECT COMPETITION - may decline sa trade owing to the relative
(oligopoly and monopoly) decline of the agriculture sector.
- Two aspects of international trade that - nagkaroon ng Engel curve effects- how the
model deficient when confronted with the spending on a certain good varies with
actual flow: household income by either proportion or
1. Model suggests that there should only be absolute dollar amount
a small amount of trade between - Income elasticity of demand for primary
countries with the same factor products has been low and falling over time.
endowments.
2. Neither theory considers intra-industry 7.3.2 Actual Evolution of Trade
trade, which has shown a significant - It is often thought that trade should be greatest
increase. between countries that have the greatest
- Intra-industry trade may be broadly defined differences in economic structures.
as the situation where countries simultaneously - major part of trade takes place between
import and export what are essentially the same rich countries that have similar factor
products.
endowments and relative prices.
- Monopolistic competition exists when many
companies offer competing products or
services that are similar, but not perfect, - The factor price equalization theorem states
substitutes. The barriers to entry in a that factor prices will tend to be more equal as
monopolistic competitive industry are low, and trade takes place.
the decisions of any one firm do not directly - factor prize equalization theorem does not
affect its competitors. seem to hold.
Address the two aspects: applied to international 7.3.3 IMPORT SUBSTITUTION TRADE
trade REGIMES
- A country tries to stimulate the
production of a different array of
domestic goods by imposing taxes,
licensing, putting qoutas on or banning
imports
With regard to intra-industry trade, theory states
- The consumer pays higher prices for the
that the more alike countries are in terms of
imported good (may tax si import) and so
relative factor endowments (H-O theory), the
he loses consumer surplus, and domestic
larger the share of intra-industry to total trade.
(insufficient) production is subsidized.
- Infant industry should be protected, thus,
domestic industries will eventually
become efficient producers on the world
market
- A working industrial policy that subsidizes
and organizes the production of strategic
substitutes, barriers to trade such as tariffs, an
overvalued currency that aids manufacturers
in importing goods, and a lack of support for
7.3 TRADE EXPERIENCE OF EAST ASIA foreign direct investment.
7.3.1 Pattern of Growth in International
Trade: Some facts
7.3.4 Outward-Oriented Trade Regimes
- Export Promotion in Asia and in
Newly Industrialized Economies
(NIEs)

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Chapter 7: International Trade and agricultural products.

7.2.3 HECKSHER-OLIN THEOREM

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