The document discusses international trade and balance of payments. It defines key terms related to international trade such as absolute advantage, comparative advantage, and opportunity cost. It also outlines various tools of protectionism such as tariffs, quotas, and embargoes. Additionally, it explains the components of a country's balance of payments including the current account, capital account, and errors and omissions. Finally, the document lists some policy options for correcting an imbalance of payments such as export promotions, import restrictions, currency devaluation, and using government foreign exchange reserves.

1. PREPARED BY :
N U R A MI R A B I N T I MD L A Z I
30D L S 12F 1030

2. International trade
• Exchange of goods and
service between the people
of two countries
Internal trade
• Exchange of goods and
services within the
political boundaries of a
country

3. International trade Domestic trade
Immobility of factor of production Mobility of factor of production
Comparative advantage in natural Using only national resources
resources – increase world output within the country
Differences in monetary units of Transactions within the country
currencies using domestic currency
Accordance to laws of different Accordance only to domestic trade
countries laws
Protectionism is practiced Protectionism is not practiced
Larger market size Small market size

4. • The ability of a country to produce
more efficiently than another country
• Assumptions :
• -Only two countries in the world
Absolute • - Only two goods are produced
• - Free trade exists between these
advantage two countries
• -No transportation costs
• Productions under the law
• - Identical production function
between trading countries

5. • Ability of one country to produce goods at a lower
Comparative opportunity cost than other country
advantage
• Desire goods that one has to forgo to obtain other goods.
Opportunity
cost
• The rate at which goods are exchanges
• Formula :
Terms of • TOT = Average price of export / Average price of imports
trade X 100

6. Merits Demerits
Increase world output Depletion of country’s reserves
• Through specialization and comparative • In long term continuous export can
advantage deplete the country’s reserve
• Ex : Oil export,palm oil
Varieties of goods and service
• Malaysia can import apples from other
countries Economic and political dependence
• Political relationship must be taken wisely
Relationship between trading partners
• Relay between ASEAN <> EU
Transportation costs
• If transportation costs is too high,not
profitable
Sharing of knowledge and technology
• Malaysia can import new technology based
machinery from japan

7. • National security argument
• Production of goods produce by country
itself
• Country should not depend on other
countries to produce secirity goods
• Infant industry argument
• New industries protect from established
competitors until have experience
Purpose of • Anti-dumping argument
• Sale of goods abroad at a price lower than
protectionism their cost and at a price below the price
charged in the local market
• Domestic employment argument
• Country needs to practice protectionism
and protect domestic employment by
reducing import but increaseing export
• Low foreign wage argument
• Countries needs to impose trade
restrictions cz wages in one country can be
higher than those in other country

8. Quota Embargoes
•A legal limit on the •A low that bars trade
number of units of a with another country
particular commodity
Ad valorem tariff that can be imported
•A tariff imposed on
Import licence
imported goods based on •Government control number of
the value of the goods importing firms and import
licence
Specific tariff Exchange
•A fixed tariff imposed on
a unit of imported goods
control
•Control under the amount
of money that is allowed
to be brought into and out
of a country
Tariffs Industry subsidies
•A tax imposed by the Tools of •Provides subsidies to import
competing domestic firms or
government on imported
product.
protectionism domestic firm producing export
based outputs

9. Balance of payment :
Statement of systematic Credit – Any transaction
Debit – Any transaction that creates demand for
that supplies the record of all economic
transaction between one the country’s currency in
country’s currency in the the foreign exchange
foreign exchange coutry and the rest of the
world during a given market.
market.
period of time

10. Current account
Merchandise trade balance – The difference
between export and import of physical
goods
Service balance – The difference between
receipts and payments from services
Net income – The difference between
investment income flows into and out of a
country
Current transfers – Gifts,military aid and
financial aid by the government,private
individuals and organizations to foreign
countries.

11. Capital account
Errors and omissions – A balancing
item that enables credits and
debits to be equal

12. BoP Formula
Merchandise trade balance Merchandise export – merchandise import
Service balance Services export – services import
Balance in current account Merchandise trade balance + service
balance + Net income + Current transfer
Balance on capital account Capital account + Financial account
Overall balance Balance in current account + Balance in
capital account + errors and omissions
Reserve assets - ( Overall balance)
Basic balance Balance in current account + Long-term
capital account

13. Occurs when is a deficit or surplus in the
balance of payment
A surplus shows a country’s strength or
weakness
Causes of imbalance is differ from country to country and from
time to time
• Development programs
• Increase in imports
• Price effect
• Slow progress in export

14. Export • Export promotions policy is to increase the
value of export
promotions
• Government can encourage export
• Developing quality products with lower price
• Improving market strategies
Discourage • Giving subsidies
• Abolishing export duties
imports • Promote local product in international markets
• Provide information and helps them to market products
globally
• Trade aggreements

15. • May increase the prices of locally goods
• Will make the imported products more attractive
Inflation • Foreign investor will reduce their investment
• Government will control the inflation by impose tight
monetary policies of tight fiscal policies
Using • In the form of gold and foreign currencies are used
to balance deficits
government • Only can be used for a short period
reverse • Government reserve will deplete
• Government’s policy of lowering the par value of country’s
currency compared to foreign currency
• Makes country’s exports cheap than imported goods
Devaluation • This will stimulate export cz foreigners purchase more
goods and service
• Imported goods will become more expensive
• Used for last resort

16. • Defined as the price of one cuurency in
Exchange terms of another currency
rate
• The value of all currencies fixed directly to
gold and have a fixed relationship to each
Gold
standard other
• Countries have to peg their currencies
Fixed exchange
against the U.S dollar instead of to gold
rate / Bretton
woods system
• Ex : RM 3.80 => $ USD 1.00

17. The rate of currency is
determined by equilibrium
Also known as floating
demand and supply in the
exchange rate
foreign exchange rate
market (market driven)
Systems is more volatile
than Bretton Woods
systems