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Comparative Advantages of Serbia


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Comparative Advantages of Serbia

  1. 1. International Economics AY 2012/2013POLITECNICO DI MILANO
  2. 2. AGENDAFastFactsaboutSerbiaEconomyofSerbiaFacts&HypothesesTheory&PracticeConclusion
  3. 3. SERBIA AT A GLANCEOfficial Name Republic of SerbiaForm of State Democratic RepublicPolitical StructurePresident and unicameralassembly with 250 seatsCapital BelgradeArea 88,361 km2 (including Kosovo)Population7,243,007 (July 2013 est.,excluding Kosovo)Median Age 40 years (men), 43 (women)Life Expectancy 72 years (men), 77 years (women)Monetary UnitRepublic Serbian Dinar (RSD),1€ = 111,1RSD*Major Language SerbianMajor Religion Christian OrthodoxSerbiabridgesEastandWest.ItstreasuredpositionintheheartofSouthEasternEurope,inthecentralpartoftheBalkanPeninsula,makesitanoutstandinginvestmentlocation* Official Exchange Rate, NationalBank of Serbia, as on May 26th 2013,
  4. 4. IMPORTANT EVENTSINHISTORY OFSERBIAThe Kingdom ofSerbs, Croats, andSlovenes isformedThe countrychanges name intoFederal PeoplesRepublic ofYugoslaviaAfter the Yugoslavwars, FederalRepublic ofYugoslavia (FRY) isformedAfterMontenegrinindependence,Republic of Serbiais formed1918 1929 1992 2003 2006 20081946 1963Kosovo declaresindependence, butthere is still ongoingdispute on whether itis a legally recognizedstate or notThe federation isreconstituted into astate union knownas Serbia andMontenegroThe country isrenamed toSocialist FederalRepublic ofYugoslavia (SFRY)The name of thecountry ischanged intoYugoslavia
  5. 5. SERBIA’S MEMBERSHIPSMassive 78-day bombing campaign by NATO allianceUN membershipIMF, World Bank, European Investment Bank membershipsPartnership for Peace (PfP) membershipWTO membership negotiationsFull candidate status for EU and rejection of NATO membership199920002001200620112012
  6. 6. FastFactsaboutSerbiaEconomyofSerbiaFacts&HypothesesTheory&PracticeConclusionAGENDA
  7. 7. Source: Doing Business, Measuring Business Regulations, a BusinessDealing withConstruction PermitsGetting EectricityRegistering PropertyGetting CreditProtecting InvestorsPaying TaxesTrading Across BordersEnforcing ContractsResolving InsolvencySerbia’s Ranking on Doing Business TopicsDOING BUSINESS IN SERBIA
  8. 8. SERBIA’S TRADE AGREEMENTSMarket Trade RegimeYear ofAgreementNo. ofInhabitantsEUPreferentialTrade Regime2010 494,070,000USAGeneralizedSystem ofPreferences2005 302,558,000Russia, Belarus andKazakhstanFree TradeAgreement2010 168,640,600Macedonia, B&H,Montenegro, Kosovo,Albania, MoldovaFree TradeAgreement2007 29,990,542EFTAFree TradeAgreement2009 13,000,000TurkeyFree TradeAgreement2010 75,000,000Total Market SizeSource: Serbia Investment and Export Promotion Agency,,083,259,142
  9. 9. FINANCIAL INDICATORSSource: World Economic Outlook 2013, IMP, 1.6-1.8223-4-3-2-101234562007 2008 2009 2010 2011 2012 2013(est)2014(est)2015(est)Real GDP Growth6.912. 2008 2009 2010 2011 2012 2013(est)2014(est)2015(est)Consumer Prices (annual % change)Inflation is measured by the consumerprice index; it reflects the annualpercentage change (CPI) in the cost tothe average consumer of acquiring abasket of goods and services. The CPI iscalculated by taking price changes foreach item in the basket and averagingthem.After the economic crisis in 2008, acomprehensive set of state measureswas undertaken. The country’s externalliquidity is secured through a €3 billionworth, Stand-By Arrangement with theIMF.Public expenditures are substantiallyreduced, but with the increased stateinvestment in infrastructuredevelopment.
  10. 10. LABOR FORCE[PERCENTUALE][PERCENTUALE][PERCENTUALE]Serbian Labor Force EducationPrimary EducationSecondary EducationUniversitySerbia’s labor force combines exceptionalworking efficiency with sizable labor supply.With a unique combination of high qualityand low costs, it is one of the key factors inreaching a strong business performance.Source: Statistical Office of the Republic of Serbia, Labor Force Split by OccupationServicesAgricultureIndustryAgricultural sector in Serbia has extremelystrong economic power, it is the basis foreconomy and engine for development ofrural areas. The share of industrialemployment in Serbia is low compared toother European countries. However, theshare of employment in the services sector isjust slightly below the level recorded in the27 countries of the EU.
  11. 11. WORKFORCE TRENDS14.416.920.0 20.0 19.4 18.805101520252008 2009 2010 2011 2012 2013Unemployment Rate (%)The unemployment rate measures thenumber of people actively looking for ajob as a percentage of the labor force.Historically, from 2008 until2012, Serbia’s unemployment rateaveraged 20% reaching an all time highof 25.5% in March of 2012 and a recordlow of 13.3% in March of 2008.Source: CIA World Factbook, 179204275350370331 324363 3760501001502002503003504002003 2004 2005 2006 2007 2008 2009 2010 2011 2012Average Net Salary in Serbia (€) With 7.2 million people, theSerbian market is the 2nd largestin South Eastern Europe. Theaverage net monthly salary rosefrom €91 in 2001 to €376 in 2012.Rapid consumer loan expansionwas reflected in double – digitgrowth of retail trade turnover onan annual basis.
  12. 12. FDI OVERVIEW2.2551.8100.9492.9451.6371.8990.0000.5001.0001.5002.0002.5003.0003.5002008 2009 2010 2011 2012 2013FDI (in million €) 0.400.511.522.532007 2008 2009 2010 2011FDI as a Percentage of GDPAccording to PWC, Serbia is the 3rd mostattractive manufacturing and 7th mostattractive services destination amongemerging economies. In the past fouryears alone, Serbia attracted nearly €11billion of inward foreign directinvestment.Serbia attracted 77.7 million euros innet FDI and 106.3 million euros in netportfolio investment, mainlyin government bonds. Full – year netFDI amounted to 232 million euros in2012.Source: Serbia Investment and Export Promotion Agency,
  13. 13. FDI BY SECTORSource: Serbia Investment and Export Promotion Agency, and FurnitureTourismInsurance and PensionMetallurgyConstructionPharmaceuticalAutomotive IndustryTobaccoReal EstateOil and GasRetailTelecommunicationsFinancialFood and Beverage, Agriculture879.1256.2300.4313.0399.1711.1752.5760.0847.01,016.01,427.01,853.22,172.02,400.02,642.6FDI in Serbia by Sector in 2011 (in million €)
  14. 14. FDI LOCATORSource: Serbia Investment and Export Promotion Agency,
  15. 15. SERBIA’S FOREIGN TRADESource: Serbia Investment and Export Promotion Agency,
  16. 16. MAIN TRADE PARTNERSHungaryCroatiaSloveniaMacedoniaMontenegroRussian FederationRomaniaBosnia and HerzegovinaItalyGermany256.5309.5333.6375.0623.0675.8727.6842.6933.21,023.8Major Export Countries in 2012 (in million €)PolandCroatiaSloveniaAustriaRomaniaHungaryChinaItalyGermanyRussian Federation409.5418.8460.3512.6641.4728.21,078.91,431.91,608.01,608.0Major Import Countries in 2012 (in million €)Source: Statistical Office of the Republic of Serbia,
  17. 17. MAIN TRADE GOODSRubber manufacturesIron and steelMiscellaneous articlesApparel and clothingMetal manufacturesFruits and vegetablesRoad vehiclesNon-ferrous metalsElectrical machineryCereals282.9287.9340.3392.4402.0421.4469.9523.8647.1651.8Major Export Products in 2012 (in million €)PaperPlasticsNon-ferrous metalsIron and steelGeneral industrial machineryMedicals and pharmaceuticalsElectrical machineryGasRoad vehiclesPetroleum428.0456.8484.9493.6509.3550.6636.5843.3909.31,457.6Major Import Products in 2012 (in million €)Source: Statistical Office of the Republic of Serbia,
  18. 18. AGRICULTURE IN SERBIAAgriculture is the only sector in Serbia with apositive foreign trade balance, which meansthat it is the backbone of foreign tradedevelopment of the countryAgricultural and food products accounted for23% of the Serbia’s total exports and 7.9% ofthe country’s overall imports in 2011Sources: World Bank, of Agriculture of the Republic of Serbia, most important agricultural productsexported by Serbia are:• Maize, yellow• Frozen raspberries with no sugar added• Sugar, white• Soybean oil, crude• Sunflower oil, edible• Sunflower oil, crude• Wheat flour36%30%8%21%5%Agriculture Export Commodities in 2012FruitCerealVegetableLivestockOil seed
  19. 19. FRUIT PRODUCTION IN SERBIASource: SIEPA’s Fact Sheet about Serbia’s Agriculture in 2012Production by Fruit Species in 2010The share of exports of fruitand processed fruit products inthe total value of exportedagricultural and food productsis significant, usually averaging27%.In terms of value ofexports, raspberries top the list.The share of raspberries in thetotal value of fruit exports in2010 was 47%.In 2011, Serbias total agricultural exports increased for 20% comparing toprevious year, reaching record of 2.8 billion USD. The biggest surplus in foreigntrade of agriculture product came from grain and grain products (USD 666million), processed fruit and vegetables (USD 450 million) and refined sugar (USD200 million).
  20. 20. FastFactsaboutSerbiaEconomyofSerbiaFacts&HypothesesTheory&PracticeConclusionAGENDA
  21. 21. ABOUT RASPBERRIES IN SERBIAMost of Serbia’s raspberries are exported in FROZEN FORM (around 95% of allproduction goes for exports). Exporting them FRESH would strongly improverevenues, but many structural problems go against Serbianproducers, examples being the countrys SHIPPING AND LOGISTICAL CAPACITY.The fresh raspberry must reach the final consumer within a couple of daysfrom the moment it is hand picked in the plantations. This is not an easy taskgiven the conditions in the region. It does not only depend on the DEXTERITYOF THE PRIVATE SECTOR, but also on PUBLIC ADMINISTRATION.Serbia has 4.2 mil ha of arableland (0.56 ha per citizen); 90%is privately owned and 10%belongs to the government67% of the total area underberries is used for raspberryplantations
  23. 23. ABOUT MILK IN GERMANYSource: DiaryCo, of milk primarily takes placewith other EU MEMBER STATES.Alongside these particularly closetrade relationships, there isalso great potential for exporting toDEVELOPING COUNTRIES OUTSIDEEUROPE (e.g. China).The dairy industry has developed into the sector with thehighest turnover in agriculture and in the food and drinkindustry in Germany. Germany is THE BIGGEST PRODUCEROF MILK IN THE EU, producing about a fifth of all Europeanmilk.German milk production costs well over 40 cents a liter.The dairy industry’s focus over the next few years will be onhow to reorient itself after THE MILK QUOTA EXPIRES IN2015, and accommodating the European Union’s newcommon agricultural policy.
  24. 24. GERMAN DIARY SECTORSource: European Diary Association,
  25. 25. TARIFF SYSTEMS0%20%COUNTRYIMPORT TARIFFIMPORT PRODUCTSource: Administrative Customs and Tariffs,
  26. 26. WHYSHOULDSERBIAANDGERMANYTRADE?Serbia can produce raspberries at a lower cost(Pr)Serbia < (Pr)Germany*Germany, as opposite, can produce milk at a lower cost(Pm)Germany < (Pm)Serbia*Serbia’s productivity in producing raspberries ishigher than Germany’s, while Germany’s productivity inproducing milk is higher than Serbia’sSerbia is better at producing raspberries, whileGermany is better at producing milk* absolute price comparisonr - raspberrym - milk
  27. 27. FastFactsaboutSerbiaEconomyofSerbiaFacts&HypothesesTheory&PracticeConclusionAGENDA
  28. 28. GAINS FROM TRADEA country specializes in its sector of comparative advantageWhen the country specializes in its sector of comparative advantage,its GDP at international prices increasesThe relative price of the good thathas comparative advantageincreases with tradeThe relative price of the othergood (without comparativeadvantage) decreases with tradeDomestic workers earn a higher income from production of the good thathas comparative advantage
  29. 29. CONCLUSION ABOUT TRADEConsumption isrestricted to whatis producedinternallyConsumption ineach country isexpanded becauseoverall worldproduction isincreased as aresult ofspecialization ofthe countriesWITHOUT TRADE WITH TRADE
  30. 30. RICARDIAN MODELThe Ricardian model, using concepts of OPPORTUNITYCOST and COMPARATIVE ADVANTAGE, provides thesimplest setting to illustrate comparative advantage andthe gains from trade in a general equilibrium settingThe model explains DIFFERENCES IN PRODUCTIVITY OFLABOR between countries, which is a consequence ofDIFFERENCES IN TECHNOLOGY.Implication of Ricardian model: a home country’seconomy gains from the trade (import) of products thatit does not have comparative advantage for.
  31. 31. ASSUMPTIONS OFTHERICARDIAN MODEL1.•Two countries are included in the model – Serbia (home) and Germany (foreign)2.•Only two goods are produced in both countries – raspberries and milk3.•Labor is the only factor of production4.•Supply of labor is constant in time5.•A situation of perfect competition is present in both countries – everyone is a price taker6.•There is an infinite number of suppliers and customers who have the same preferences in bothcountries7.•Workers can move freely among different sectors of a country, but not between the two countries8.•There is a constant return on scale9.•There are no transportation costs between countries
  32. 32. UNIT LABOR REQUIREMENTGeneral formula:* the number of hours of labor required to produce one unit ofoutputP price of a product in a specific countryW wages of the workers in a specific sector1+ μ desired gain marginRelative prices according to the Ricardian model:PRICEMILK[€/L]WMILK[€/h]aLMPRICERASPBERRIES[€/L]WRASPBERRIES[€/h]aLRGERMANY 0.69 5.33 0.129 8.2 5.33 1.538SERBIA 0.76 1.98 0.384 2.7 1.98 1.364
  33. 33. AVERAGE PRODUCTIVITY* the amount of goods and services produced by one hour of laborGeneral formula:AVERAGE PRODUCTIVITYMilk RaspberriesGERMANY 7.72 0.65SERBIA 2.61 0.73Raspberries in Germany: 1/1.538= 0.65Milk in Germany: 1/0.129 = 7.72Raspberries in Serbia: 1/1.364 = 0.73Milk in Serbia: 1/0.384 = 2.61Calculations:Summary:
  34. 34. COMPARATIVE ADVANTAGECOMPARATIVE ADVANTAGEGERMANY SERBIA11.88 > 3.550.08 < 0.28A country has a comparative advantage in producing a good if the opportunity costof producing that good is lower in the country than in other countries.A country with a comparative advantage in producing a good uses its resources mostefficiently when it produces that good instead of producing other goods.Germany has comparativeadvantage in producingmilkSerbia has comparativeadvantage in producingraspberriesCalculations:Summary:
  35. 35. PRODUCTION FRONTIERPRODUCTION FRONTIERMax Milk Max RaspberriesGERMANY 772.46 65.00SERBIA 260.52 73.33The production possibility frontier (PPF) of an economy shows the maximum output thatcan be produced for a fixed input.The economy’s total resources are defined as L, the total labor supply(e.g. if L = 100, then this economy is endowed with 100 hours of labor or 100 workers).Assuming the two countries have the same labor force(ASSUMPTION: 100 WORKERS),the production frontier will have the maximum values of production as follows:Summary:
  36. 36. GERMAN PRE-TRADE PPF* The assumption is that the intersection point identifies a quantity in eachsector equal to half of the maximum production capacity65[VALORE X].46386.2332.501020304050607080900 200 400 600 800 1000 1200 1400 1600RaspberriesMilkMaximum amount of raspberries thatcan be produced In GermanyMaximum amount of milk thatcan be produced in GermanyRaspberry consumption& productionMilk consumption& production
  37. 37. SERBIAN PRE-TRADE PPF180[VALORE X].26900501001502002503000 50 100 150 200 250 300 350 400 450 500RaspberriesMilkMaximum amount of raspberriesthat can be produced in SerbiaMaximum amount of milk thatcan be produced in SerbiaRaspberry consumption& productionMilk consumption& production*The assumption is that the intersection point identifies a quantity ineach sector equal to half of the maximum production capacity260.52
  38. 38. OPPORTUNITY COSTA country faces opportunity costs when it employs resources to produce certain goodsand services. For example, the opportunity cost of producing raspberries is theamount of milk not produced, while the opportunity cost of producing milk is theamount of raspberries not produced* The cost of an alternative that must be forgone in order to pursue a certainaction, i.e. the benefits that could have been received by taking an alternative action.SERBIA:GERMANY:0.08 0.25<3.55 4.01<
  39. 39. GERMAN POST – TRADE SITUATIONIndicatorsPre-TradeConditionPost-TradeConditionMilk Consumption 386.23 386.23Raspberries Consumption 32.50 32.50Milk Production 386.23 772.46Raspberries Production 32.50 0Milk Overproduction 0 386.23Raspberries Gained fromTrade0 96.3670[VALOREX].46[VALOREX].2332.50501001502002503000 200 400 600 800 1000 1200 1400 1600RaspberriesMilkNational PriceInternational PriceEE’
  40. 40. SERBIAN POST – TRADE SITUATIONIndicatorsPre-TradeConditionPost-TradeConditionRaspberriesConsumption36.67 36.67Milk Consumption 130.26 130.26Raspberries Production 36.67 73.33Milk Production 130.26 0RaspberriesOverproduction0 36.67Milk Gained from Trade 0 146.9673.33[VALOREX].52010203040506070800 100 200 300 400 500 600RaspberriesMilkE’ENational PriceInternational Price36.67130.26
  41. 41. GAINSFROMINTERNATIONALTRADE* refers to the advantages which different countries, participating in internationaltrade, enjoy as a result of specialization and division of labor.The gains from trade are the benefits from trading rather than producing i.e. thebenefits that accrue to each country to a transaction over and above the benefitseach would have derived from producing the goods or services themselvesGermany: 386,23 * 0,25 = 96.36 kilograms of raspberriesSerbia: 36.67 * 4.01 = 146.96 liters of milkGains from trade = Production of specialized product * Opportunity costGeneral formula:Calculations:
  42. 42. FastFactsaboutSerbiaEconomyofSerbiaFacts&HypothesesTheory&PracticeConclusionAGENDA
  43. 43. RICARDIAN MODEL IMPLICATIONSSERBIA has comparativeadvantage in producingRASPBERRIES, and GERMANYhas comparative advantage inproducing MILK.Serbia specializes in raspberriesproduction and Germanyspecializes in milk production.BOTH COUNTRIES ARE BETTER OFFBY ENGAGING IN INTERNATIONALTRADE.
  46. 46. International Economics AY 2012/2013POLITECNICO DI MILANO
  47. 47. REFERENCES• Administrative Customs and Tariffs,• CIA World Factbook,• DiaryCo,• Doing Business, Measuring BusinessRegulations,• European Diary Association,• National Bank of Serbia,• Ministry of Agriculture of the Republic ofSerbia,• Serbia Investment and Export Promotion Agency (SIEPA),• Serbia Investment and Export Promotion Agency (SIEPA),• SIEPA’s Fact Sheet about Serbia’s Agriculture in 2012• Statistical Office of the Republic of Serbia,• World Bank,• World Economic Outlook2013, IMP,
  48. 48. APPENDIX