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INTERNATIONAL TRADE. Introduction Should the President mow his own lawn? Should Tiger Woods be his own caddy? Should Bill Gates type his business proposal.

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Presentation on theme: "INTERNATIONAL TRADE. Introduction Should the President mow his own lawn? Should Tiger Woods be his own caddy? Should Bill Gates type his business proposal."— Presentation transcript:

1 INTERNATIONAL TRADE

2 Introduction Should the President mow his own lawn? Should Tiger Woods be his own caddy? Should Bill Gates type his business proposal and prepare presentation slides instead of his secretary? Would you teach 1 or 2 subjects if given a choice?

3 Introduction You wake up to an alarm clock made in Korea. You drink coffee from beans grown in Brazil. You put on some clothes made of cotton grown in America and sewn in Thailand. You watch the morning news broadcast from New York on your TV made in Japan. You drive to class in a car made of parts manufactured in a half-dozen different countries.

4 Introduction How do individuals and nations satisfy their wants? We can be economically self-sufficient. We can specialise and trade with others, leading to economic interdependence.

5 International Trade & Interdependence Economists and most politicians support free trade. Politicians praise greater trade because it means more exports, thus creating jobs and boosting GDP The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity, not the commodity given (James Mill, 1821) To economists, the real benefits of trade lie in importing rather than exporting.

6 Absolute Advantage A country has an absolute advantage over another country in a good when it can produce more of that good than the other country using the same amount of resources.

7 Example 1 (Absolute Advantage) Question: What happens if a country has an absolute advantage in both goods? BananasPalm Oil Malaysia5020 Cuba20015 Total production25035

8 Example 2 (Comparative Advantage) According to David Ricardo, country with the lower opportunity cost of producing a good has the comparative advantage in producing the good. Country should specialize in the good that they have a CA in. BananasPalm Oil Malaysia50 (1B = 0.4P)20 (1P = 2.5B) Cuba200 (1B = 0.075P)15 (1P = 13.3)

9 Example 2 (Output after Specialization) Therefore, nations should specialize in producing goods that they have CA in. Total world production will increase with specialization. Nations then engage in trade to obtain the goods that it does not produce. BananasPalm Oil Malaysia040 Cuba4000 Total production400 (+150)40 (+5)

10 Example 3 Hard Disk (millions)Radio (millions) Sg2030 HK215 Total output2245

11 Example 3 Hard Disk (millions)Radio (millions) Sg20 (1H = 1.5R)30 (1R= 0.7H) HK2 (1H = 7.5R)15 (1R = 2/15 H) Total output2245

12 Example 3 (Total specialization) Hard Disk (millions)Radio (millions) Sg400 HK030 Total output4030 Net change in output +18-15

13 Example 3 (Partial specialization) Hard Disk (millions)Radio (millions) Sg3015 HK030 Total output3045 Net change in output +8---

14 Benefits from Trade Allows for efficient use of the worlds limited resources Access to wider range of goods

15 Benefits from Trade Lower cost of production through economies of scale from bulk production Creates jobs and income

16 Benefits from Trade Foster ties with nations and regions Promotes growth and create jobs in developing countries

17 Protectionism Measures taken to create barriers that restrict trade. Examples: tariffs import quotas, subsidies for domestic goods preferential treatment import licenses MFN status trade sanctions Linking trade to political issues

18 Protectionism Protectionism – Cost of free trade CA specialization putting all the eggs in 1 basket at odds with portfolio diversification

19 Protectionism Protectionism – Cost of free trade Protect infant or politically strategic industries at home Prevent job loss in uncompetitive industries

20 Protectionism Protectionism – Cost of free trade Minimise economic shocks from abroad (the more you depend on other nations, the more their problems will affect you) e.g. Great Depression, Uncle Sams cold

21 Free Trade VS Protection Many protectionist polices are implemented for short-term benefits: Raise money for the govt Protect jobs for locals Protect industries Ensure political support base

22 Free Trade VS Protection While trade lead to some job losses because of cheaper foreign goods, The retrenched workers can move to productive domestic sectors where country has CA greater productivity/demand in sector will lead to higher wage Result of trade can be higher, not lower wage for locals Money we pay for foreign goods will also flow back to us because the recipients will also buy goods from us Although there are short term run costs of free trade, the longer term benefits more than compensates the short term discomfort.

23 Quotes…… Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs. Alan Greenspan The philosophy of protectionism is a philosophy of war. Ludwig von Mises But I think that the spirit of protectionism would be the grave of European cinema. You cannot protect something by building a fence around it and thinking that this will help it survive. Wim Wenders

24 Trade Globalisation fostering trade links between countries far apart geographically. Outsourcing: the practice of getting foreign countries to produce goods or services. SATS, Siemens and Sins. Implications on jobs and growth?

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26 Singapore: Virtuous or Promiscuous? Singapore forms free trade agreements (FTAs) with many countries. ASEANs preference for lowest common denominator formula too slow for Singapore. Countries that trade are better off than closed countries like N.Korea, Myanmar and Cuba.


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