Topic 11

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Topic 11

  1. 1. International Trade Chapter #15, 16 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  2. 2. Open Economies <ul><li>Economies which engage in international trade, that is, economies which export and import goods and services are said to be open. </li></ul><ul><li>The nature of such economies is that some output is produced for the purpose of exporting foreign markets. </li></ul><ul><li>At the same time a proportion of the goods and services consumed are imported from foreign producers. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  3. 3. International Trade <ul><li>One of the primary factors which explain why countries trade with each other is differences in cost structures across countries. </li></ul><ul><li>This arises out of the diversity of conditions that exist in different countries in terms of factor endowments, technology and economic status. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  4. 4. Absolute Advantage <ul><li>Absolute advantage is enjoyed by a country if it can produce more goods and services compared to other countries with the same amount of resources. </li></ul><ul><li>In such a case, the country would be able to produce the good cheaper than other countries. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  5. 5. Reciprocal Absolute Advantage EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Computers Nutmeg Japan 20 computers from one unit of labour 2kg from one unit of labour Grenada 4 computers from one unit of labour 6kg from one unit of labour Total Output 24 from 2 units of labour 8kg from 2 units of labour
  6. 6. Specialization on the Basis of Absolute Advantage EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Country Computers Nutmeg Japan 40 from 2 units of labour 0 Grenanda 0 12kg from 2 units of labour Total Output 40 from 2 units of labour 12kg from 2 units of labour
  7. 7. Comparative Advantage <ul><li>Sometime countries would trade with each other even if reciprocal absolute advantage does not exist. </li></ul><ul><li>This would occur when there is comparative advantage. </li></ul><ul><li>A country has a comparative advantage in the production of a good if the opportunity cost from producing the good is lower than that in the other countries. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  8. 8. Non-Reciprocal Absolute Advantage EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Nutmeg (kg) Bananas (kg) Grenada 6 from one unit of labour 3 from one unit of labour St Kitts 6 from one unit of labour 10 from one unit of labour Total Output 12 from 2 units of labour 13 from 2 units of labour
  9. 9. Opportunity Cost Ratios EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Nutmeg : Bananas Bananas : Nutmeg Grenada = 6 ÷ 3 = 2 : 1 ⇒ 1 kg of banana costs 2 kg of nutmeg = 3 ÷ 6 = 0.5 : 1 ⇒ 1 kg of nutmeg costs 0.5 kg of banana St Kitts = 6 ÷ 10 = 0.6 : 1 ⇒ 1 kg of banana costs 0.6 kg of nutmeg = 10 ÷ 6 = 1.3 : 1 ⇒ 1 kg of nutmeg costs 1.3 kg of banana
  10. 10. Complete Specialization on the basis of Comparative Advantage EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Nutmeg (kg) Bananas (kg) Grenada 12 units from 2 units of labour 0 St Kitts 0 20 units from 2 units of labour Total Output 12 units from 2 units of labour 20 units from 2 units of labour
  11. 11. June 2008 <ul><li>Q8 (a) Explain what is meant by the term “absolute advantage”. (3 marks) </li></ul><ul><li>(b) Explain what is meant by the term “comparative advantage”. (4 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  12. 12. June 2009 <ul><li>Q8 (a) The table below shows two countries: A and B, which, before trade, each produce two products: cars and bread. Assume that before trade they each devote half of all their productive resources to the production of cars and half to the production of bread. </li></ul>Outline the gains from trade if both countries specialise fully according to their comparative advantage. Produce a new table which shows what these gains are. (10 marks) EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  13. 13. Comparative Advantage and the production possibility frontier Computers Cars Country P Country Q 100000 2000 8000 6000 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  14. 14. Comparative Advantage and the production possibility frontier <ul><li>The slope of the production possibility frontier gives the opportunity cost of computers in terms of cars. </li></ul><ul><li>In the figure, the slope of country P’s PPF is smaller. </li></ul><ul><li>This means the opportunity cost of producing computers is smaller in this country compared to country Q. </li></ul><ul><li>Therefore country P has a comparative advantage in the production of computers. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  15. 15. June 2008 (c) The diagram below shows the production possibility frontier (PPF) for two countries, A ( PPFA) and B (PPFB), producing two goods, X and Y. Consider whether either of the c ountries has a comparative advantage or absolute advantage in the production of either of the two goods. Explain your answer. EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  16. 16. June 2008 <ul><li>(d) The diagram below shows the production possibility frontier (PPF) for two countries, A ( PPFA) and B (PPFB), producing two goods, X and Y. Consider whether either of the countries has a comparative advantage or absolute advantage in the production of either of the two goods. Explain your answer. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  17. 17. The balance of trade <ul><li>The balance of trade refers to the difference between exports of goods and imports of goods. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Trinidad and Tobago Jamaica Balance of trade US$32 -$US15
  18. 18. Short Term Measures to Address Trade Deficit <ul><li>Devaluation or depreciation of the exchange rate. </li></ul><ul><li>Embargoes </li></ul><ul><li>Quotas </li></ul><ul><li>Tariffs </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  19. 19. Long Term Measures to Address Trade Deficit <ul><li>Tools to increase competitiveness to increase exports and lower imports. </li></ul><ul><li>Government subsidies to export sector to lower cost of production </li></ul><ul><li>Investment in new capital and technology to increase efficiency in production </li></ul><ul><li>Research and development to improve products </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  20. 20. June 2007 <ul><li>Q6 (a) Discuss the measures that a government can take to improve the balance of trade in the short-term. (6 marks) </li></ul><ul><li>(b) Explain the advantages and disadvantages of the measures used in part (a) above. (6 marks) </li></ul><ul><li>(c) Discuss the range of measures that are available to a government to improve the balance of trade in the long-term. (8 marks) </li></ul><ul><li>(Total 20 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  21. 21. Arguments for Free Trade <ul><li>An increase in efficiency . Specialization in production which enables improved efficiency in the use of resources means lower costs and prices which ultimately benefits consumers. </li></ul><ul><li>More Income . Also as more is produced more income is generated and there is greater employment opportunities. </li></ul><ul><li>Greater Choice . Trade among countries enables greater choice for consumers as a wider variety of goods and services can be consumed which cannot be produced in the domestic economy. Conclusively, specialization and trade enables many benefits which cannot be attained by closed economies. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  22. 22. Arguments for Protectionism <ul><li>Protectionism are barriers imposed by Governments which restrict the importation of goods into a country. </li></ul><ul><li>Creation of domestic jobs. </li></ul><ul><li>Avoiding trade deficits. </li></ul><ul><li>Protect Infant industries. </li></ul><ul><li>Government Revenue creation. </li></ul><ul><li>Prevent dumping. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  23. 23. June 2009 <ul><li>(8b) Discuss the advantages and disadvantages of free trade for developing economies. </li></ul><ul><li>(15 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)

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