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  1. 1. KEB2223 Intermediate Macroeconomy keb2223 Intermediate MAcroeconomicsName : Nuril Ekma Hj Abd Muda KJC0950313Section :2Lecturer : Madam Wan Nor AsyikinDate submit : 15th April 2012Marks :__________________ ( Mdm Wan Nor Asyikin ) 1
  2. 2. KEB2223 Intermediate Macroeconomy table of content1. Introduction 3-42. Body part 1: Why firm engage in International Trade  different in resource endowment 5  lack in technology 5  availability of labor 6  different in preference 6  share idea & knowledge 6  reduce the risk of one economy 6-7  different in productivity 7  different in Opportunity Cost & Corporative Advantage 7-8  diversity of product 8  different in season 8 part 2: how government policy affect international trade  subsidiary protect the main industry 9  ensure the survival of new small industry 9-10  quota : limit certain imported goods 10  tariff : protecting domestic employment 10-11  embargo 11  anti dumping 11-12  buy national products 123. Summary 13-144. Reference 14 2
  3. 3. KEB2223 Intermediate Macroeconomy INTRODUCTION Every day the world is growing closer and closer together. Countries relyon one another for resources that they dont have available to them otherwise.Because of this, they must trade with one another to get what they need. Traditional or “old” theories of international trade explain the flow of goodsbetween countries in terms of comparative advantage (differences in opportunitycosts of production). Comparative advantage can arise because of productivitydifferences (“Ricardian”comparative advantage model) or because of acombination of cross-industry differences in factor intensity and cross-countrydifferences in factor abundance (“Heckscher-Ohlin” comparative advantagemodel). In either case, a key implication of old trade theory is “inter-industrytrade”: That is, countries will export one set of industries and import another.Endowment-driven “old” trade theory models also provide a mechanism throughwhich international trade can influence relative factor rewards (and hence income 3
  4. 4. KEB2223 Intermediate Macroeconomydistribution), as specialization across industries that differ in factor intensitychanges the relative demand for the various factors of production. With good preparation and follow-up, missions can be great door openers,and participants benefit in many ways, including:  Obtain sales and contracts as a direct outcome of the mission  Find personal contacts for future follow-up  Sign partnerships and cooperative agreements for further business development  Get hands on and up-to-date market information and research  Assess overseas opportunities, culture, infrastructure and potential demand  Initiate new vendor relationships  Learn about the culture, customs, business and operating environments of the target countries 4
  5. 5. KEB2223 Intermediate Macroeconomy CONTENT 1. Why firm engage in international tradeThe primary reason firm to go international is to expand their marketpenetration. With that said, the initial driver would be if firm have saturated theirdomestic market and needed to expand outside of home country in order tofurther their growth opportunities. In other cases, it may be that firm product maybe more marketable in a foreign market than their own. Despite that, there aremany factors why firm engage in trading with firm outside their home country.Above listed some of the reason why firm goes for international trading.Different in resources endowment Since some countries have more natural resources due to their locationsas compared to others it leads to international trade. For example gulf countrieshave huge reserves of oil but they lack other resources so they export oil to othercountries and import the other resources which they need from other countries.For example, the United States imports lots of oil from countries in othercontinents.Lack in technology It may be also due to the technology. Some country are better equippedto produce technologically goods which are cheap as well better which leadsto international trade. For example is Russia. Their country is better equipped intechnology for producing diving ship for military purpose. So, Malaysia importstheir ship which we already purchase 2 known as ‘Kapal Selam Tun AbdulRahman’ and the other one is ‘Kapal Selam Tun Abdul RAzak’. This situationshow that limited technology that we had make Malaysia trade with Russia fortheir goods which Malaysia have not yet achieve that level of technology Russiahad. 5
  6. 6. KEB2223 Intermediate MacroeconomyAvailability of labor Resources do not have to be material goods, but can also be labor relatedas well. There are some countries which enjoy substantial cost advantage inproducing certain products due to availability of cheap labor and therefore theycan produce goods at a much lower cost, increasing their profitability. This helpsboth the company producing the products as it lowers their cost, but also helpsthe people doing the labor, as it provides a place of employment for them.Differences in Preferences Even if two countries have identical resources they might benefit fromtrade if they have different preferences. Lets assume that the Malaysia andThailand have identical resources for the production of coffee tea. So bothcountries can produce both products. But in Malaysia we prefer coffee and inThailand they prefer tea. So they can both achieve more satisfaction from thesame amount of resources if Malaysia sells Thailand our excess tea and they sellus their excess coffee.Share idea and knowledge International trade allows countries to learn from each other and take innew ideas. While one country might be focused on developing one type ofproduct, another maybe focusing on completely different subject. Together, theycan share their ideas, benefiting both of the economies for both countries. Forexample, Japan tends to be ahead of the field in consumer electronics. A countrylike the United States can directly purchase goods from them, as well as learnabout the new technology is being discovered on the other side of the world.Reduce the risk for one economy If one economy has to deal with everything, and if it ever collapses, thecountry will fall apart. By trading internationally, countries rely on one anotherand it creates a balance amongst them. If one countrys economy is doing verywell, then the economies of other countries that trade with it tend to be doing well 6
  7. 7. KEB2223 Intermediate Macroeconomyalso. If a country falls on hard times, but other countries might also suffer. Anexample of this is the current credit situation the United States. Countries aroundthe world were affected by the credit problem because a lot of them loanedmoney to other countries.Differences in ProductivityFirst, we have to know a few definitions.  production : the "quantity produced  productivity : output per unit of resource, usually output per person  productive efficiency : producing at a minimum cost A difference in productivity is a reason that countries benefit from trade. Ifa country is more productive in producing a product we say that they have anabsolute advantage in producing that product. A country has an absoluteadvantage in the production of a product if it can produce it with fewer resourcesthan another country. Absolute advantage is the ability to produce a good orservice with fewer resources because of greater productivity. Here are someexample how differences in productivity (absolute advantage) results inspecialization and exchange (trade).example Lets say there are two people. One is an attorney, the other a mechanic. Assume that the lawyer is more productive at doing law than is the mechanic since he or she can do it in less time and the mechanic is more productive at fixing cars. So the lawyer has an absolute advantage in law and the mechanic has an absolute advantage in fixing cars. It doesnt surprise us that if the lawyers car breaks down he or she will bring it to the mechanic to get it fixed. The lawyer trades with the mechanic.Differences in opportunity costs and comparative advantage The main argument in favor of trade is the principle of comparativeadvantage. the principle of comparative advantage was first observed andexplained in early 1800s by david ricardo. This principle says that it pays for a 7
  8. 8. KEB2223 Intermediate Macroeconomyperson or a country to specialize and exchange even if that person or nation ismore productive than potential trading partners in all economic activities.Specialization should take place if there are relative cost differences inproduction of different items. Comparative advantage is the ability to produce a product at a loweropportunity cost. Opportunity cost in an earlier lecture and the value of the nextbest alternative that is not chosen as the result of a decision.Diversity Of Product Refer to the potential conditions of production factors of production ownedby the state. For example Indonesia, has great potential in producing agriculturalgoods. In other words, through trade, a country can obtain the goods that cannotbe produced domestically. So, if a country specializes in producing and exportingcertain goods, the average production cost will come downDifferent season Every country has different season. This led to country specialization indifferent things/product and service according to their season. For example, in a4 season country like America or Britain, the trend of fashion have to suit to theircountry climate change. Thus, fashion designer usually will come out of newcollection every different season. It’s different in Malaysia which we live in adifferent season that those live in America. Despite that, we exchange ourproduct when there is demand by customers. 8
  9. 9. KEB2223 Intermediate Macroeconomy 2. How government policy affect international tradingThe phrase "Instruments of Trade Control" is popular with IB textbook writers,it is a lot simpler to say ‘basic ways government controls trade’. Governmentimplies policy to international trading because of certain reason and is usually tomake sure that our country not totally relies on international trading. They aresome policy that government put to international trading. The policy is as below  tariff  embargo  subsidies  quota  fiscal policy  anti-dumping  buy national policy  foreign exchange control Different country might have different policy in international trading. Thispolicies affect trading as government put rules & regulation to firm who want toimport or export their product. How government policies affect trading actually?Here are some ideas how government policies affect international trading.SUBSIDY : PROTECT THE MAIN INDUSTRY Is a form of assistance paid to a finance commercial or economicsector. Most of the subsidies made by the kingdom to the expenditure or dealersin the industry to prevent a deterioration of the industry as a result of thecontinuity of operation a result of the continuity advantages or an increasein product prices or just to encourages to hire more workers prices subsidiary upsome food boarding perpetuate life especially in the urban area; and subsidies toencourage the development of the industry. 9
  10. 10. KEB2223 Intermediate Macroeconomy The subsidy may be considered as a form of protection or trade barriersby making domestic and product & service artificial competitive against imports.Subsidies may interfere with the market and should wear big economic boarders.Help financial in the form of subsidies may be the coming of the kingdom, but theterm refers to aid subsidy might by others, such as individual or institution isnot the kingdom. In developing nations, the government would use restrictions to close themarket for advance products (example: electronics). Domestic firms do not haveenough power or capitals to compete with strong foreign firms, so thegovernment gives them incentives to grow by letting them control the market untilit rises. In developed nations, governments use restrictions to support decreasingindustries. The best example is Agriculture sector. Even though subsidy is usedmost of the time, you will see some restrictions. Farmers in the U.S. cannotcompete against developing nations due to high costs. Therefore, the U.S.cannot let this sector die. There are many theoretical reasons, but mainly due tomain food supply. We cannot depend on foreign foods entirely.QUOTA : LIMIT CERTAIN AMOUNT OF IMPORTED PRODUCT Taxes are that the government applies to imported goods to limit quantityimported. Quotas are quantity restriction applied to imported goods to limitquantity imported. In general, if tariff is used, government receives revenue fromforeign firms. Quotas means, instead of the government, foreign firms will receivethe portion that government would have received if tariff was used.TAARIF : PROTECTING DOMESTIC EMPLOYMENT The levying of tariffs is often highly politicized. The possibility of increasedcompetition from imported goods can threaten domestic industries. Thesedomestic companies may fire workers or shift production abroad to cut costs,which means higher unemployment and a less happy electorate. Theunemployment argument often shifts to domestic industries complaining aboutcheap foreign labor, and how poor working conditions and lack of regulation 10
  11. 11. KEB2223 Intermediate Macroeconomyallow foreign companies to produce goods more cheaply. In economics however,countries will continue to produce goods until they no longer have a comparativeadvantage.EMBRGO An embargo (from the Spanish embargo) is the partial or completeprohibition of commerce and trade with a particular country, in order to isolate it.Embargoes are considered strong diplomatic measures imposed in an effort, bythe imposing country, to elicit a given national-interest result from the country onwhich it is imposed. Embargoes are similar to economic sanctions and are generallyconsidered legal barriers to trade, not to be confused with blockades, which areoften considered to be acts of war. Embargo may also refer to the practice ofblocking fare classes at certain levels, and award availability on airlines.Embargoes are complex in their international meaning. In response toembargoes, an independent economy or autarky often develops in an areasubjected to heavy embargo. Effectiveness of embargoes is thus in proportion tothe extent and degree of international participation.ANTI DUMPING There are many different ways of calculating whether a particular productis being dumped heavily or only lightly. The agreement narrows down the rangeof possible options. It provides three methods to calculate a product’s “normalvalue”. The main one is based on the price in the exporter’s domestic market.When this cannot be used, two alternatives are available—the price charged bythe exporter in another country, or a calculation based on the combination of theexporter’s production costs, other expenses and normal profit margins. And theagreement also specifies how a fair comparison can be made between the exportprice and what would be a normal price.The anti-dumping duties imposed are as follows: 11
  12. 12. KEB2223 Intermediate Macroeconomy  Bangkok Polyester Public Co Ltd -- 5.33 per cent,  Indorama Chemical (Thailand) Co Ltd -- 49.25 per cent,  Indorama Polymers Public Co Ltd -- NIL,  Thai PET Resin Co Ltd -- 36.45 per cent,  Thai Shinkong Industry Corp -- 49.25 per cent, and  others -- 49.25 per cent.BUY NATIONAL PRODUCT Interest in buying artificial Barangan Malaysias most dominant drainageof the eye is able to circumvent our nation money out of the country. Malaysiamoney will not spill out if the people of Malaysias own emphasize on ‘BaranganTempatan” meetingtheir daily needs. The main fund will also increase once thegus will be able to stem the problem of inflation. Malaysia has reached its time tochange peoples negative responses are thought bahawaBarangan import betterthan Barangan Tempatan. Obviously if all the people that domestic choose andpurchase products, we actually have triumphed eye guard our money insteadof flowing out of the country. 12
  13. 13. KEB2223 Intermediate Macroeconomy Conclusion First, we document that trade is more concentrated than employment andsales. This is the result of few firms accounting for a large share of trade volumesand appears to be mainly occurring within rather than between sectors. This factsupports recent theories of international trade with heterogeneous firms againsttraditional theories based on comparative advantages. Furthermore, we findsignificant concentration along the sector and country extensive margins: fewfirms serve trade in many sectors and with many countries, but these firmsaccount for a share of import and export. Finally, we show that import is moreconcentrated than export, especially between sectors and along the sector andcountry extensive margins. Second, we confirm that firms with different exposure to internationalmarkets have different performances, in terms of size, capital intensity andproductivity. In particular, we support the idea, as in a wealth of recent studies,that firms more engaged in international activities (those involved in bothimporting and exporting) are the best performers, but we also find that firmsinvolved only in importing activities perform better than those involved only inexporting. Our results suggest that the importers’ premium is more the result of aself-selection process than a productivity enhancement due to import of capitaland intermediate inputs. We provide some evidence that this may have to do withthe fact that only importers buy mainly capital goods from major Europeancountries. To the extent that these capital goods incorporate advancedknowledge, they may entail sunk 25 costs which the importers have to incur toaccumulate the absorptive capacity needed to use those goods in production. Third, the degree of geographical and sect oral diversification is positivelycorrelated with firm size and productivity. However, diversification premier withrespect to capital intensity are connected only to the import side. In particular, wehave evidence that on the one hand, larger, more capital intensive and moreproductive firms are able to import a large number of products from a larger 13
  14. 14. KEB2223 Intermediate Macroeconomynumber of countries, and, on the other hand, firms exporting into a larger numberof countries are more likely to experience a performance boost. REFERENCE1. 14