Chapter 7: International Trade and agricultural products.

The important
Investment feature of a commodity is that there is
I. INTRODUCTION very little, if any, differentiation in
that good whether it is coming from
 People access to trade through the one producer and the same
internet, telephone, by mail order or commodity from another.
through department stores, and markets,
Absolute Advantage- The ability of an actor to produce
people had already engages in trade
more of a good or service than a competitor.
 Import-substitution and export-
promotion. Comparative Advantage- The ability of an actor to
7.2 THEORIES OF INTERNATIONAL produce a good or service for a lower opportunity cost
than a competitor.
TRADE
7.2.1 Gains from trade  Arises because of expanded production,
- International trade begins with an autarkic through utilizing economies of scale
economy. resulting from larger markets, or
 Autarkic economy- an economic system of self- technology transfers which helps the
sufficiency and limited trade. A state of affairs
production possibility frontier to expand.
in which countries do not trade, and only
 Economies of scale- are important
acquire goods or services from within.
because they can help provide
 Economy gain through 2 main avenues: businesses with a competitive advantage
consumption and production. in their industry. Companies will
Consumption Gains therefore try to realize economies of
scale wherever possible, just as
investors will try to identify economies
of scale when selecting investments.
 Trade enables a country to purchase raw
materials and intermediate products not
available locally
Difference between Absolute and Comparative
- The country can produce the commodity
more efficiently (absolute terms)
 - Commodity can be produced relatively
 International trade tends to reduce the more efficiently (comparative terms)
prices of consumption goods, creating
welfare gains for consumers in importing
countries.
Production Gains
 Trade enables the production and
reallocation of gains by allowing
countries to specialize in the production
of commodities at a relatively lower cost
either because of absolute advantage or
comparative advantage.
 Production of commodities-
Commodities are the raw inputs used
in the production of goods. They may
also be basic staples such as certain

NOTE:
- According to Smith, the gains from trade
arise from the advantages of division of
labour and specialisation—both at the
national and international level.
- Such advantages arise, according to
Smith, due to the absolute differences in
costs. Ricardo goes a step further.
- Ricardo says that trade contributes “to
increase the mass of commodities, and
therefore, the sum of enjoyments…”
Ricardo adds that the gain from trade
consists in the saving of cost resulting
from obtaining the imported goods
through trade instead of domestic
production.
 Comparative cost doctrine suggests that
trade can provide benefit to all countries
if they specialize in the production of
those goods and, hence, export them in
which they have comparative advantage.
7.2.2 RICARDIAN THEORY OF TRADE
 Says that in differences in technology
determine comparative advantage.
 The trade patterns can be explained by
technological differences or labor
productivity differences between
countries.
 Walang competitive relative to the other
country kasi same lang sila na
nagbebenefit
 The deficiency is addressed by the
Hecksher-Ohlin theory.
NOTE: In the Ricardian trade model, even a
country with no absolute advantage in the
production of any commodity can gain from
international trade, specializing in the production
of the good in which it is has a comparative
advantage.
7.2.3 HECKSHER-OLIN THEOREM
 Countries will specialize and trade in
goods which are relatively abundant.
- Labor-rich countries = Labor intensive
- Capital countries = Capital intensive
- Included skill- or education –intensive
goods
- Poorer will export labor intensive, while
rich will export capital intensive
- Nakadepende kung saan sila mas
nagproroduce ayun yung ipagttrade nila.
- Trade should be greater between
countries that have the greatest
differences in economic structures. If
walang differences sa HOS model, then
walang trade.
Factor price equalization
- Sa country na may comparative
advantage sa labor-intensive products, its
wage rate will be low relative to a
country that has a comparative advantage
in capital-intensive product.
- As trade take place, the country
producing labor-intensive products will
experience an increase in labor relative to
capital.
- Pag nagincrease si labor increase din si
capital
Rybczynski Theorem & Stolper-Samuelson
Theorem
7.2.4 IMPERFECT COMPETITION
(oligopoly and monopoly)
- Two aspects of international trade that
model deficient when confronted with the
actual flow:
1. Model suggests that there should only be
a small amount of trade between
countries with the same factor
endowments.
2. Neither theory considers intra-industry
trade, which has shown a significant
increase.
- Intra-industry trade may be broadly defined
as the situation where countries simultaneously
import and export what are essentially the same
products.
- Monopolistic competition exists when many
companies offer competing products or
services that are similar, but not perfect,
substitutes. The barriers to entry in a
monopolistic competitive industry are low, and
the decisions of any one firm do not directly
affect its competitors.
Address the two aspects: applied to international
trade
With regard to intra-industry trade, theory states
that the more alike countries are in terms of
relative factor endowments (H-O theory), the
larger the share of intra-industry to total trade.
7.3 TRADE EXPERIENCE OF EAST ASIA
7.3.1 Pattern of Growth in International
Trade: Some facts
- may decline sa trade owing to the relative
decline of the agriculture sector.
- nagkaroon ng Engel curve effects- how the
spending on a certain good varies with
household income by either proportion or
absolute dollar amount
- Income elasticity of demand for primary
products has been low and falling over time.
7.3.2 Actual Evolution of Trade
- It is often thought that trade should be greatest
between countries that have the greatest
differences in economic structures.
- major part of trade takes place between
rich countries that have similar factor
endowments and relative prices.
- The factor price equalization theorem states
that factor prices will tend to be more equal as
trade takes place.
- factor prize equalization theorem does not
seem to hold.
7.3.3 IMPORT SUBSTITUTION TRADE
REGIMES
- A country tries to stimulate the
production of a different array of
domestic goods by imposing taxes,
licensing, putting qoutas on or banning
imports
- The consumer pays higher prices for the
imported good (may tax si import) and so
he loses consumer surplus, and domestic
(insufficient) production is subsidized.
- Infant industry should be protected, thus,
domestic industries will eventually
become efficient producers on the world
market
- A working industrial policy that subsidizes
and organizes the production of strategic
substitutes, barriers to trade such as tariffs, an
overvalued currency that aids manufacturers
in importing goods, and a lack of support for
foreign direct investment.
7.3.4 Outward-Oriented Trade Regimes
- Export Promotion in Asia and in
Newly Industrialized Economies
(NIEs)