The document discusses international trade and how it works. It states that international trade is based on specialization at a national level, with countries exporting goods they have an advantage in producing and importing goods from other countries. For the system to work effectively, there need to be few barriers to free trade. It then provides background on the basic principles of free trade dating back to mercantilism and early economists like Adam Smith who developed the idea of absolute advantage.

1. TRADING WITH
OTHER NATIONS

2. watch this video
 International trade is based on specialization at a national
level. Countries exchange goods with others and pay for
imports from the revenues received from exporting. To work
effectively, this system relies on few, if any, barriers existing
to interfere with ‘free trade’.
INTERNATIONAL TRADE

3.  The basic principle of free trade
dates back to mercantilism and
fed through to the early
exponents of laissez-faire
economics in the seventeenth
century.
 Amongst the most famous early
writers on economics was Adam
Smith, who produced his ideas
on absolute advantage. This was
where one country concentrated
on developing those goods in
which its natural resource base
allowed it to produce more than
any other country with given
resources.
FREE TRADE: THE BEGINNING

4. INTRODUCTION
What reasons are
there for governments
not to interfere with
trade?
 There are many
arguments in favor of free
trade:
 Efficiency
 Economies of scale in
production
 Political argument
 Absolute advantages and
comparative advantages
Watch this video!

5. Slide 9-5
Free Trade and Efficiency
The efficiency argument for
free trade is based on the
result that in the case of a
small country, free trade is the
best policy.
 A tariff causes a net loss to the
economy.
 A move from a tariff equilibrium to
free trade eliminates the efficiency
loss and increases national
welfare.
THE CASE FOR FREE TRADE

6. Slide 9-6
Copy
right
©
200
3
Pear
World price
plus tariff
World price
Price, P
Quantity, Q
S
D
Consumption
distortion
Production
distortion
Figure 9-1: The Efficiency Case for Free Trade
The Case for Free Trade

7. Slide 9-7
Economies of scale in production
 Protected markets in small countries do
not allow firms to exploit scale economies.
 Example: In the auto industry, an efficient
scale assembly should make a minimum of
80,000 cars per year.
 In Argentina, 13 firms produced a total of 166,000
cars per year.
 The presence of scale economies favors
free trade that generates more varieties
and results in lower prices.
 Free trade, as opposed to “managed”
trade, provides a wider range of
opportunities and thus a wider scope for
innovation.
The Case for Free Trade

8. Political Argument for Free
Trade
A political commitment to free
trade may be a good idea in
practice.
Trade policies in practice are
dominated by special-interest
politics rather than consideration
of national costs and benefits.
The Case for Free Trade

9.  Absolute advantage
exists when one
country is able to
produce a good
more cheaply in
absolute terms than
another country.
ABSOLUTE ADVANTAGE

10.  Comparative advantage exists
when one country is able to
produce something at a lower
opportunity cost than another
country
 Comparative advantage is a
principle of economics which
states that trade between two
countries will be mutually
beneficial as long as their
domestic opportunity costs of
production differ.
COMPARATIVE ADVANTAGE

11.  Stage 1 – opportunity cost ratios
 Let’s say that there are two countries – Utopia and Happyland.
These countries produce two products – hardware and
software. With one unit of their resources they can each
produce as shown in Table 1 below.
 Table 1 Potential production – Utopia and Happyland
COMPARATIVE ADVANTAGE – EXAMPLE

12. This means that the opportunity cost ratios for each country are
as follows:
 Utopia – for every 1 unit of hardware they produce the
opportunity cost is 5 units of software.
 Happyland – for every 1 unit of hardware they produce the
opportunity cost is 15 units of software.
COMPARATIVE ADVANTAGE – EXAMPLE

13.  This means that Utopia has a comparative advantage in the
production of hardware as for every unit of hardware they
produce they give up less software. This makes them relatively
more efficient at the production of hardware.
 However, this also means that Happyland has a comparative
advantage in the production of software as for every unit of
software they produce they only give up one fifteenth of a unit of
hardware, whereas Utopia have to give up one fifth of a unit.
COMPARATIVE ADVANTAGE – EXAMPLE

14.  Let’s say that they choose to use half their resources on the
production of each good. In this case, their consumption (pre-
trade) will be as shown in table 2 below.
 Table 2 Pre-trade consumption

15.  Stage 2 – specialisation
 If each country now specialises where they have a
comparative advantage, then we will get production as shown
in Table 3.
 Table 3 Specialisation

16. Terms to know:
Imports
Exports
Absolute advantage
Specialization
Comparative advantage
BEFORE STARTING TO TEST…….

17. Why is important trading with other nations?
What would happen if the Italy or EU could no
longer sell goods to other countries or buy
goods in return?
What percent of goods in Italy stores are
foreign made?
What happens to the euro spent outside the
Euro zone?
SOME QUESTIONS

18. Imports a. Ability of one country to produce a
product more efficiently than can
another country
Exports b. Concept that a nation should produce
and export a limited assortment of
goods for which it is particulary suited in
order to remain profitable
Absolute advantage c. Goods bought from other countries for
domestic use
Specialization d. Ability of a country to produce a
product at a lower opportunity cost than
another country
Comparative advantage e. Goods sold to other countries
TERMS TO KNOW: WRITE THE LETTER OF
DEFINITION IN COLUMN B THAT CORRECTLY
DEFINES EACH IN COLUMN A

19. Write three reasons
 …………………………………………………………….
 …………………………………………………………….
 ……………………………………………………………..
WHAT ARE THE MOST COMMON BENEFITS
OF INTERNATIONAL TRADE?

20.  Look at the two videos in KHAN ACADEMY
Comparative advantage specialization and gains
Comparative advantage and absolute advantage
LISTENING

21. LEZIONE 2
To trade or not to trade?

22. Tariffs are enacted with the aim
of protecting a
domestic industry. Tariffs are also
imposed in order to
raise government revenue, or to
reduce an undesirable activity.
Although a tariff can
simultaneously protect domestic
industry and earn government
revenue, the goals of protection
and revenue maximization suggest
different tariff rates, entailing a
tradeoff between the two aims
TARIFFS

23.  a. Tax on imports
used primarily to
raise government
revenue without
restricting imports
REVENUE TARIFF

24.  A tariff is a tax added onto goods
imported into a country; protective
tariffs are taxes that render the cost
of a foreign import higher than the
cost of the initially costlier domestic
good. For example, if a piece of cloth
cost $4 in Britain and $4 in the
United States, the American
government would have to impose a
tariff to make the price of British
cloth higher for Americans. The
underlying goal for a protective tariff
is to protect domestic industry from
foreign competition.
PROTECTIVE TARIFF

25. Restriction imposed on
the number of units of a
particular good that can
be brought into the
country
IMPORT QUOTA

26.  An embargo is the partial or
complete prohibition of commerce
and trade with a particular country
or a group of countries. Embargoes
are considered strong diplomatic
measures imposed in an effort, by
the imposing country, to elicit a
given national-interest result from
the country on which it is imposed.
Embargoes are similar to economic
sanctions and are generally
considered legal barriers to trade.
EMBARGO

27. TERMS TO KNOW: WRITE THE LETTER OF
DEFINITION IN COLUMN B THAT CORRECTLY
DEFINES EACH IN COLUMN A
Tariff a. Tax on imports used primarily to raise
government revenue without restricting
imports
Revenue tariff b. Restriction imposed on the number
of units of a particular good that can be
brought into the country
Protective tariff c. People who argue for trade
restrictions to protect domestic
industries
Import quota d. Tax placed on an imported product
Embargo e. Complete restriction on the import or
export of a particular good
Protectionists f. Tax on imports used to raise the cost
of imported goods and thereby protect
domestic producers

28. ARGUMENTS AGAINST FREE TRADE
 Domestic jobs
 National economic security
 Infant industries
 Government revenue
 Balance of payments deficit
 Strategic arguments

29. CASE STUDY
 The Banana War between the EU and the Latin American
countries
Search through the Net this case and try to explain it with your own
words.
Look at this video about Banana war

30. ARGUMENTS FOR FREE TRADE
 Improved products and international relations
 Export industries
 Specialization and comparative advantage
 Efficiency gains
 Access to resources
 Lower prices
 Economies of scale
 Greater choise

31. EXAM PRACTICE
Bangladesh is one of the world’s largest producers of rice and
tropical fruits.
In Brunei Darussalam, crude oil and natural gas account for
around 90 percent of the country’s gross domestic product.
This makes Brunei Darussalam one of the leading producers
of oil in Southeast Asia.
 Explain two reasons why countries such as Bangladesh and
Brunei Darussalam trade with each other.
 Explain how Bangladesh’s export of rice and tropical fruits
helps its farmers to achieve economies of scale

32. APPLYING ECONOMIC CONCEPTS
Assume you are (a) a startup computer software
producer, (b) steelworker whose company just
closed, (c) a student working in fast food service.
 Write a short argument for or against free trade from the
stand point of each individual.

33. Use Figure 18.2 to
answer the following
question:
In what two
products do trading
partners seem to have
the greatest absolute
advantage or
comparative advantage
over the United States?
Explain
SYNTHESIZING INFORMATION

34. LESSON 3
INTERNATIONAL TRADE AND THE BALANCE
OF PAYMENTS

35. DEFINITION
The balance of payments (BOP) records all
financial transactions made between consumers,
businesses and the government in one country
with other nations

36. THE STRUCTURE OF THE BALANCE OF
PAYMENTS
The current account,
the capital account and
the financial account make up
a country's balance of
payments (BOP). Together,
these three accounts tell a
story about the state of an
economy, its economic
outlook and its strategies for
achieving its desired goals.

37. THE STRUCTURE OF THE BALANCE OF
PAYMENTS
A large volume of imports and
exports, for example, can
indicate an open economy that
supports free trade. On the
other hand, a country that
shows little international activity
in its capital or financial
account may have an
underdeveloped capital market
and little foreign currency
entering the country in the form
of foreign direct investment.

38. THE CURRENT ACCOUNT
The current account of the
balance of payments is the
main measure of external
trade performance:
• Inflows of foreign currency
are counted as a positive entry
(e.g. exports sold overseas)
• Outflows of national currency
are counted as a negative
entry (e.g. imported goods and
services)

40. THE FINANCIAL ACCOUNT
A financial account covers claims on or
liabilities to non residents, specifically
with regard to financial assets. Financial
account components include direct
investment, portfolio
investment and reserve assets and
are broken down by sector. When
recorded in a country’s balance of
payments, claims made by nonresidents
on the financial assets of residents are
considered liabilities (passività), while
claims made against nonresidents by
residents are considered assets.

41. THE FINANCIAL ACCOUNT OF THE
BALANCE OF PAYMENTS
a.It records an economy’s transaction in external
financial assets and liabilities

42. THE CAPITAL ACCOUNT
A nation’s capital account
summarizes the country’s
overall economic status. The
markets closely monitor the
capital account because it
shows the overall direction of
the country’s economy and
provides buy and sell
signals for various industries
or portfolio strategies.

43. THE CAPITAL ACCOUNT
In the capital account appear
unilateral capital transfers, which
may be private or public.
The private ones are transfers
related to expatriation or
definitive return of emigrants, so-
called net emigrant wealth,
remission of debts and other
transfers not intended for
consumption.

44. THE CAPITAL ACCOUNT
The public ones are distinguished by
counterparty:
• European Union: Contributions to the Fund for
Support to Agriculture and the Regional
Development Fund;
• Other international bodies: transfers to / from
international organizations other than the EU;
• National agencies and bodies: it includes, inter
alia, debt remittances from developing
countries;
• Acquisitions and disposals of non-financial
non-produced assets: income / expense for
transactions related to land, subsoil resources,
etc. Whether issued by embassies, consulates
or military bases abroad, and intangible assets
(licenses, patents, etc.).

46. TERMS TO KNOW: WRITE THE LETTER OF
DEFINITION IN COLUMN B THAT CORRECTLY
DEFINES EACH IN COLUMN A
1. Current
account
2. Capital
account
3. Financial
account
4. Balance
5. Deficit
6. Surplus
a. It records an economy’s transaction in external
financial assets and liabilities
b. A “balance” showing that more money has been
paid out or is owed by a company than has been
received or is owed to the company
c. The net flow of current transactions, including
goods, services, and interest payments, between
countries
d. An account that tracks the movement of funds
for investments and loans into and out of a
country
e. A “balance” showing that more money has been
received or is owed to a company than has been
paid out or is owed by the company
f. In banking and accountancy, the outstanding
“balance” is the amount of money owed that
remains in a deposit account at a given date,
after all past remittances, payments and
withdrawal have been accounted for

47. TERMS TO KNOW:
1. Current account
2. Capital account
3. Financial account
4. Balance
5. Deficit
6. Surplus

48. LESSON 4
FINANCING WORLD TRADE

49. Wto
World Trade Organization
GATT
General Agreement on
Tariffs and Trade
IMF
International Monetary
Fund
WB
World bank
FINANCING WORLD TRADE

50. GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT)
It was a multilateral agreement
regulating international trade.
According to its preamble, its purpose
was the "substantial reduction of
tariffs and other trade barriers and
the elimination of preferences, on a
reciprocal and mutually advantageous
basis." It was discussed during
the United Nations Conference on
Trade and Employment and was the
outcome of the failure of negotiating
governments to create
the International Trade
Organization (ITO).

51. GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT)
GATT was signed by 23 nations
in Geneva on October 30, 1947
and took effect on January 1,
1948. It lasted until the
signature by 123 nations in
Marrakesh on April 14, 1994 of
the Uruguay Round
Agreements, which established
the World Trade
Organization (WTO) on January
1, 1995.

52. WORLD TRADE ORGANIZATION
The World Trade Organization
(WTO) is the only global
international organization
dealing with the rules of trade
between nations. At its heart are
the WTO agreements, negotiated
and signed by the bulk of the
world’s trading nations and
ratified in their parliaments. The
goal is to ensure that trade flows
as smoothly, predictably and
freely as possible.

53. WORLD TRADE ORGANIZATION
The WTO is run by its member
governments. All major decisions
are made by the membership as
a whole, either by ministers (who
usually meet at least once every
two years) or by their
ambassadors or delegates (who
meet regularly in Geneva).

54. WORLD TRADE ORGANIZATION
While the WTO is driven by its
member states, it could not function
without its Secretariat to coordinate
the activities. The Secretariat
employs over 600 staff, and its
experts — lawyers, economists,
statisticians and communications
experts — assist WTO members on a
daily basis to ensure, among other
things, that negotiations progress
smoothly, and that the rules of
international trade are correctly
applied and enforced.

55. INTERNATIONAL MONETARY FUND
The International Monetary Fund,
or IMF, promotes international
financial stability and monetary
cooperation. It also facilitates
international trade, promotes
employment and sustainable
economic growth, and helps to
reduce global poverty. The IMF is
governed by and accountable to
its 189 member countries.

56. INTERNATIONAL MONETARY FUND
The IMF was conceived in July 1944
at the United Nations Bretton Woods
Conference in New Hampshire, United
States. The 44 countries in attendance
sought to build a framework for
international economic cooperation in
order to avoid repeating the
competitive currency devaluations that
contributed to the Great Depression of
the 1930s.

57. INTERNATIONAL MONETARY FUND
The IMF's primary mission is to
ensure the stability of the
international monetary system—the
system of exchange rates and
international payments that
enables countries and their citizens
to transact with each other..

58. INTERNATIONAL MONETARY FUND
Providing loans to member countries
that are experiencing actual or
potential balance-of-payments
problems is a core responsibility of the
IMF. Individual country adjustment
programs are designed in close
cooperation with the IMF and are
supported by IMF financing, and
ongoing financial support is
dependent on effective
implementation of these adjustments.
In response to the global
economic crisis, in April 2009
the IMF enhanced the IMF’s
crisis-prevention toolkit,
bolstering its ability to mitigate
contagion during systemic
crises and allowing it to better
tailor instruments to meet the
needs of individual member
countries.

59. THE WORLD BANK
The World Bank is a vital source of
financial and technical assistance to
developing countries around the world.
They are not a bank in the ordinary
sense but a unique partnership to
reduce poverty and support
development. The World Bank Group
comprises five institutions managed by
their member countries.
Established in 1944, the World Bank
Group is headquartered in Washington.

60. It provides low-interest loans, zero
to low-interest credits, and grants to
developing countries. These support
a wide array of investments in such
areas as education, health, public
administration, infrastructure,
financial and private sector
development, agriculture, and
environmental and natural resource
management.
THE WORLD BANK

61. Some of its projects are cofinanced
with governments, other multilateral
institutions, commercial banks, export
credit agencies, and private sector
investors.
WB also provide or facilitate financing
through trust fund partnerships with
bilateral and multilateral donors.
Many partners have asked the Bank to
help manage initiatives that address
needs across a wide range of sectors
and developing regions.
THE WORLD BANK
The World Bank Group has set
two goals for the world to achieve by
2030:
End extreme poverty by decreasing
the percentage of people living on
less than $1.90 a day to no more
than 3%
Promote shared prosperity by
fostering the income growth of the
bottom 40% for every country