International Trade 2

INTERNATIONAL TRADE 2
WEEK 3:
BASIC COMPONENTS OF INTERNATIONAL TRADE
Lecturer:
Ono Supriadi, Ph.D.
FACULTY OF BUSINESS, PRESIDENT UNIVERSITY

Introduction
 International trade is the backbone of our modern commercial

world.
 Many reasons for trade across the national borders to occur.
 International trade is a complex business system.
 Goods and services are much more mobile internationally than the
resources used in their production.
 Each country will tend to export those goods and services for which
its resources base is most suited.
 Other reasons for international trade is that it allows a country to
specialise in the goods and services that it can produce at a
relatively low cost and export those goods in return for import
which domestic production is relatively costly.
Learning Objectives
At the end of this unit, it is expected that you do the

following:
 Dilate copiously the explanation of the term international trade.
 Examine the various key components of international trade.
 Discuss terms of trade and its features.
 Explain some of the measures of terms of trade.
 Define balance of trade.
 Examine the techniques and economic effects of international trade
restrictions.
 Discuss the ill effects of trade to involve.
 Immiserizing growth and The Dutch Disease technique.
Components of International Trade (1)
 Lower Costs of Production of Developing Countries.

 A great concern over jobs being taken away from developed countries.
 Severe restrictions on imports from developing nations.
 Specialised Industries.
 A specialised industry has developed due to national talent and/or
tradition.
 Swiss watches, for example, will never be price- competitive with mass
produced watches from Asia.
 German Cutlery, English bone, China’s ceramics, Scottish wool, fine
French silks such as Hermes and other such products always find their
way onto the international trade scene.
Components of International Trade (2)
 Volume and Value of Goods.

 Total net oil imports in 2010 are over 96 million barrels per day (U.S.
Energy Information Administration figures Imports crude oil, natural
gas liquids and refined products). At a recent average of $114 per
barrel per day.
 Despite complaints about trade imbalances, effects on domestic
economics, currency up heavals, and loss of jobs, the reality of goods
and services continually crossing borders will not go away.
 The global economic system is thus characterised by a growing level of
integrated services, finance, retail, manufacturing and nonetheless
distribution, which in turn is mainly the outcome of improved transport
and logistics, a more efficient exploitation of regional comparative
advantage and a transactional environment supportive of legal and
financial complexities of global trade.
Terms of Trade (1)
 Terms of trade is a quantitative measure of the rate at which a

country’s export exchange for its imports. It is a measure of
the purchasing power of its exports expressed in its imports
or, alternatively, the price of its imports expressed in terms of
its exports.
 The terms of trade are said to be favourable if for some given
imports a country pays with smaller exports, or if for some
given exports, it gets more imports.
 How much cloth must England give in exchange for
Portuguese wine is a question that is very much decided by
countries terms of trade?
Terms of Trade (2)
The Essential Features:

 An Average
When a country is trading in more than one item a measure of

its terms of trade represents an average with prices of
individual items of trade scattered around.
 A Derivative
Being a derivative of price index numbers, a measure of terms

of trade is bound to suffer from all the limitations which are
inherent in the compilation of price index numbers. E.g.
choice of base period, the choice of weights, the method of
averaging, and so on.
Terms of Trade (3)
The Measures:
 Commodity Terms of Trade (CTT)
It is the ratio of the price index number of exports to the price

index of imports from the country concerned.
 Gross Barter Terms of Trade
It uses relative change in a country’s volume of exports and

imports as against the Comparative changes in their prices.
Balance of Trade
 This is the difference between visible imports and visible

exports.
 Balance of Trade
 Unfavourable Balance of Trade
 Favourable Balance of Trade
Technique and Economic Effects of
Iinternational Trade
 TRADITIONAL TECHNIQUES
 Tariff
 Import Quota
 NON-TARIFF BARRIERS
 Government Legislation
 Government Commercial Policy
Ill Effect of International Trade
 The inability of a developing country to pursue sustainable

development.
 Exhaustion of non-renewable productive resources.
 Environmental degradation and pollution.
 Immiserising growth, that is the situation where an increase in
a country’s export commodity leads to such deterioration in it
terms of trade that there is a net decline in its export earnings
and social welfare.
 The Dutch disease is an economic loss which a country
suffers on account of an increase in its factor endowment or a
natural windfall (like the discovery of huge oil resources or
deposit of a mineral).
Conclusion and Summary
 This unit is indeed self-explanatory. You could see how broad

and complex international trade is. You have learnt about the
in-depth explanation of the term international trade, the major
components of international trade, the terms of trade and
balance of trade concept. You have also learnt about the
techniques and economic effects of international trade
restrictions and the common ill effects of trade.
 International trade is quite wide. It involves not only
merchandising, importing or export but trade in services,
licensing and franchising as well as foreign investments. The
major components of international trade – lower cost of
production of developing nations.
Evaluation
 Distinguish between government legislation and government

commercial policy as non-tariff barriers to nations engaged in
international trade!
 Discuss succinctly the three key components of international
trade!
Again, take a look at this video!
Learn about WTO

Thank you and Take care!
References:
Bakare I. O. (2003: Fundamentals and Practice of Macro-
Economics. Gil back Publishers, Fadeyi, Lagos.
Andy, C. E (2001): Essential Economics, Toad Publishers.
Jhingan M. L. (1997): Money, Banking and International
Trade, Vrinda Publication 5th Edition.
www.studyat.anu.edu.au
www.management.about.com/cs/international

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FACULTY OF BUSINESS, PRESIDENT UNIVERSITY

 International trade is the backbone of our modern commercial

At the end of this unit, it is expected that you do the

 Lower Costs of Production of Developing Countries.

 Volume and Value of Goods.

 Terms of trade is a quantitative measure of the rate at which a

The Essential Features:

When a country is trading in more than one item a measure of

Being a derivative of price index numbers, a measure of terms

It is the ratio of the price index number of exports to the price

It uses relative change in a country’s volume of exports and

 This is the difference between visible imports and visible

 The inability of a developing country to pursue sustainable

 This unit is indeed self-explanatory. You could see how broad

 Distinguish between government legislation and government

Learn about WTO

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