Why Do Countries Trade?

“countries engage in trade because it is

potentially beneficial to them. International
trade can expand both consumption and
production possibilities for a country.”

The Basis for Trade:

 Natural Resources- temperate zones,
Mediterranean type, tropical lowlands
 Product differentiation –
cheap vs. expensive,
 Differences in Technology
 Differences in Demand (taste)
 Entrepreneurship
 Labor
Factors Endowment Theory
• Countries differ w/ respect to their
endowments of factors
• Abundant factors will be relatively
cheap; scarce ones, relatively dear
• Countries export those commodities
that are relatively cheap under
autarky, & import those commodities
that are relatively dear in autarky

Comparative Advantage –
country can produce that commodity
more efficiently (or at a lower opportunity
cost) than another commodity relative to
another country.
Law of Comparative Advantage -
countries specialize and export those
goods & services where they have
www.worlbank.org
comparative advantage and import those
Economic Development
commodities where they don’t have
vs.
comparative advantage or less advantage.
Economic Growth
Growth:
• Increase in real GDP &
per capita real GDP
(Melvin & Boyles, 2013)
Determinants of Growth:
1. Labor
2. Capital
3. Land
4. Technology
Development:
• more output & changes in the
technical & institutional arrangements
by which the output is produced and
distributed
(Kindleberger & Herrick as cited by Belo et.al, 2012)
• GROWTH w/ CHANGE
 POVERTY
Human Development Index the inability to attain a minimal standard
(HDI) of living.(Melvin & Boyles, 2013)
Poverty line/threshold
composite index showing the “average
Poverty Incidence – proportion of families
deprivation” using longevity, knowledge &
(population) w/ per capita income below the
income as the criteria of development
poverty line.
(World Bank, 2009).
Monthly poverty thresholds as a Filipino family w/
 life expectancy
5 members were:
 literacy rate
2000 – Php 4,774
 school rate enrollment ratio 2003 – Php 5,129
 income distribution 2006 – Php 6,274
Source:nscb.gov.ph
HDI – 0 to 1
 process of extending people’s choices Poverty Situation
 uplifting level of their well being Top 5 poorest provinces, 2006

Poverty
Province Region Incidence
(%)

Tawi-Tawi ARMM 78.9

Zamboanga del Norte IX 63.0

Maguindanao ARMM 62.0

Apayao CAR 57.5

Surigao del Norte CARAGA 53.2

Regional Poverty Incidence, 2006

Region Incidence
(%)
Gender-related Development Index
ARMM 55.3
GDI, a gender adjusted HDI.
UNDP to account for the differences in the CARAGA 45.5
level of attainment of men & women, as IV-B 43.7
separate groups, on the 3 component values
of HDI. V 41.8

VII 40.7
FYI: Source: www.nscb.gov.ph
• Botswana, the average life expectancy at
birth is 61 yrs. old, 17 yrs. less than U.S.A Classical Theories of Development
• Cambodia, only an estimated 65% of the Adam Smith –
population has an access to safe water Division of Labor
• Ghana, 30% of the population exists less Law of Accumulation
on than $1.25 day David Ricardo –
• Chad, only 35% of women and 53% men Law of Diminishing Return
between 15 & 24 yrs. old can read Thomas Malthus –
• ¾ of world’s poorest live in Sub-Sharah Malthusian Theory
Africa Roy Harrod & Evsey Domar –
Source: http://go.worlbank.org rate of growth in output is dependent on
the current savings rate & the capital-output
Sustainable Development
ratio.
“theory of sustainable development”
Robert Solow’s -
preserving the quality & the general capacity (neoclassical growth model)
of the natural environment.(Bello et.al, 2012) difference in the average income across
countries is explained by the different rates of
savings & population growth.