LESSON 1.
1
EVOLUTION OF INTERNATIONAL TRADE
1. The classical theories of international trade are the
historical country-based theories. This includes
mercantilism, absolute advantage, comparative advantage,
and Heckscher-Ohlin theories.
2. The modern mid-twentieth century theories are referred
to as firm-based or company-based. This includes country
similarity, product life cycle, global strategic rivalry, and
Porter’s national competitive advantage.
3. The Standard Theory of International Trade is a classical,
country-based international trade theory that states that a
country’s wealth is determined by its holdings of gold and
silver.
4. In a free-trade system, individuals benefit from a greater
choice of affordable goods.
5. Mercantilism restricts imports and reduces the choices
available to consumers.
6. Division of labor is the separation of a work process into a
number of tasks, with each task performed by a separate
person or group of persons (based from Smith, witnessed in
his homeland, England).
7. Trade surplus is the amount by which the value of a
country’s exports exceeds the cost of its imports.
8. Industrial capitalism was the second phase of capitalism in
which industries/factories became the dominant factor in the
production of goods.
9. Absolute advantage is the country’s inherent ability to
produce specific goods efficiently and effectively at a relatively
lower marginal cost.
10. Comparative advantage refers to the country’s capability
to produce specific goods at lower marginal cost and
opportunity cost.
11. Marginal cost is the cost incurred in producing an
additional unit of a product.
12. Opportunity cost means the value you will get from an
alternative that you did not choose.
13. The Theory of International Trade and Commercial
Policy, still considered to be one of the oldest branches of
economic thought, has evolved from the Standard Theory of
International Trade.
LESSON 1.2: BARTER
1. Bartering involves a direct trade/exchange of goods and
services.
Advantages:
·It does not involve money
·Very simple
Disadvantages:
·It is difficult to find people who need what the other people
have
·There is no standard measure of value
·Time-consuming
2. The early humans had very little needs and there was no
need for exchange of goods.
3. As the number of people increased, they started forming
groups and travelled long distances to find food. Intergroup
interaction started and this paved the way for a system of
trading.
4. As cultivation and farming flourished, there was no
shortage of food. They started trading surplus goods and the
system of trade flourished.
5. The history of bartering can be traced back to 6000 BC,
when the barter system was introduced by the tribes of
Mesopotamia, then adopted by the Phoenicians, and
improved by the Babylonians.
6. Salt was so valuable that time that even the salary of
Roman soldiers were paid with salt.
LESSON SUMMARY LESSON 1.3
1. It is believed that the first recognizable metal coins
appeared in China, during 1000 BC. The earliest currency of
China of the eighth century BC consisted of miniature hoes
and billhooks (pruning implements), with inscriptions
indicating the authority.
2. Sometime around 770 BC, miniature replicas of tools and
weapons cast in bronze were used by the Chinese as a
medium of exchange. The small bronze celts (prehistoric tools
resembling chisels) and bronze rings played a monetary role.
Due to impracticality, these tiny daggers, spades, and hoes
were eventually abandoned for objects in the shape of a
circle. These objects became some of the first coins.
3. Around 700 BC, the Chinese moved from coins to paper
money. By the time Marco Polo (the Venetian merchant,
explorer, and writer) visited China in approximately AD 1271,
the emperor of China had a good handle on both the money
supply and various denominations.
4. The first region of the world to use an industrial facility to
manufacture coins (a mint) was in Europe, in the region
called Lydia (now western Turkey). Minting is the process of
making a coin by stamping metal. In 600 BC, around the time
China started using paper money, Lydia's King Alyattes
minted the first official currency, non-standardized coins
from electrum (a naturally occurring alloy of gold and silver)
that did not have a standardized value
5. King Croesus (son of King Alyattes) of Lydia (reigned 560-
546 BC) produced a bimetallic system of pure gold and
pure silver coins. The Croeseid, anciently Kroiseioi stateres,
was a type of coin, either in gold or silver, which was minted in
Sardis by King Croesus, from around 550 BC. Croesus is
credited with issuing the first true gold coins with a
standardized purity for general circulation, and the world's first
bimetallic monetary system.
6. The foundation deposit of the Artemisium (temple to
Artemis) at Ephesus shows that electrum (which the Greeks
called "white gold") coins were in production even before
Croesus, possibly under King Gyges.
7. The European colonial governments in North America
issued the first paper currency in Canada (then a French
colony). Instead of going back to a barter system, the colonial
governments issued IOUs (promissory notes) that traded as a
currency.
8. According to Adam Shortt, the great Canadian economic
historian, the first regular system of exchange in Canada
involving Europeans occurred in Tadaoussac in the early
seventeenth century, where French traders bartered each year
with the Mantagnais people (also known as the Innu) trading
weapons, cloth, food, silver items, and tobacco for animal
pelts, especially those of the beaver.
9. The first colonial settlement at Quebec on the St. Lawrence
River was established by Samuel de Champlain in 1608. The
beaver pelt was the one universally accepted medium of
exchange in the infant colony, although wheat and moose
skins were also employed as legal tender. As the colony
expanded and its economic and financial needs became more
complex, coins from France came to be widely used.
10. Silver and copper coins designed especially for the
colonies was minted in 1670. These coins could not be
circulated in France. While apparently intended only for the
West Indies, a small number of these coins are believed to
have circulated in Canada.
11. The West Indies are a chain of islands in the Caribbean
Sea and Atlantic Ocean divided into three groups: The
Bahamas, the Greater Antilles, and the Lesser Antilles.
12. During the mid-1600s, Spanish dollars (piastres) began
to circulate in the French colonies These over-stamped
Spanish dollars represent the first distinctive Canadian coins.
13. The livre (French for “pound” and the name of both units of
account and coins) was the currency of the Kingdom of
France and its predecessor state of West Francia from 1781 to
1794.
14. In 1685, Jacques de Meulles, Intendant of Justice, Police,
and Finance came up with the temporary issuance of paper
money printed on playing cards. Card Money served as
money in Canada, just as coin did in France. 15. In 1717, all
debts and contract in Canada became payable in monnoye de
France.
16. Copper coins were introduced in 1722, but they were not
well received by merchants. Notes issued by private
individuals based on their own credit standing also circulated
as money. The government issued promissory notes called
ordonnances and treasury notes called acquits, which began to
circulate as money.
17. In March 1729, card money was legal tender for all
payments and replaced the ordonnances in circulation. Legal
tender means currency, such as coin and paper money, is
valid and sufficient for the payment of debts. A rapid increase
in the amount of paper in circulation during the late 1750s led
to rapid inflation. Inflation means increase in prices, reducing
the purchasing power of money.
18. On October 15, 1759, the French government
suspended payment of bills of exchange drawn on the
Treasury for payments of expenses in Canada until three
months after peace was restored. Paper money traded at a
sharp discount and ultimately became worthless following the
British conquest in 1760. Gold and silver, which had been
hoarded, came back into circulation.
19. Settlement of the paper obligations issued by the
colonial authorities in Canada was included in the Treaty of
Paris, signed in February 1763, which ended the war
between Great Britain and France.
20. The advent of paper money led to an increase in
international trade. Today, physical currency is not
required, as electronic money is widely used for monetary
transactions. In fact, we now have digital/virtual currencies or
cryptocurrencies.
KEY TAKEAWAYS
1. The first recognizable metal coins appeared in China,
during 1000 BC.
2.Sometime around 770 BC, the small bronze celts
(prehistoric tools resembling chisels) and bronze rings played a
monetary role.
3. Objects in the shape of a circle became some of the first
coins.
4. Around 700 BC, the Chinese moved from coins to paper
money.
5. The first mint, an industrial facility to manufacture coins,
was established in Lydia (now western Turkey).
6. Minting is the process of making a coin by stamping
metal.
7. In 600 BC, around the time China started using paper
money. Lydia’s King Alyattes minted the first official
currency, non-standardized coins from electrum (a naturally
occurring alloy of gold and silver).
8. King Croesus (son of King Alyattes) of Lydia is credited
with installing the world’s first bimetallic monetary system of
pure gold and pure silver coins, the Croeseid (anciently
Kroiseioi stateres), around 550 BC.
LESSON SUMMARY LESSON 1.4
1. Barter was the means of trade long before the Spaniards
came to the Philippines However, the inconvenience of the
barter system led to the adoption of a specific medium of
exchange the cowries, glossy, often colorfully patterned shells.
Cowries produced in gold, jade, quartz, and wood became
the most common and acceptable form of money through
many centuries.
2. Barter rings made in gold were the first local form of
coinage called piloncitos. These had a fiat base that bore an
embossed inscription of the letters "MA" or "M," believed to be
the name by which the Philippines was known to Chinese
traders during the pre-Spanish time.
3. The Spaniards ruled the Philippines from 1521-1897 (over
300 years). The cobs or macuquinas (silver coins) of
colonial mints were the earliest coins brought in by the
galleons from Mexico and other Spanish colonies. These silver
coins usually bore a cross on one side and the Spanish royal
coat-of-arms on the other.
4. The barrilla, a crude bronze or copper coin worth about
one centavo, was the first coin struck in the country as
ordered by the Royalty of Spain. The Filipino term "barya,"
referring to small change, had its origin in barrilla.
5. Gold coins with the portrait of Queen Isabela were
minted in Manila. Silver pesos with the profile of young
Alfonso XIII were the last coins minted in Spain. The pesos
fuertes, issued by the country's first bank, the El Banco
Español Filipino de Isabel II, were the first paper money
circulated in the country.
6. The Philippine Republic of 1898 under General Emilio
Aguinaldo issued its own coins and paper currency backed
by the country's natural resources. At the Malolos arsenal, two
types of two-centavo copper coins were struck. One-peso
and five-peso revolutionary notes printed as Republika Filipina
Papel Moneda de Un Peso and Cinco Pesos were freely
circulated.
7. With the coming of the Americans in 1898, modern
banking, currency and credit systems were instituted making
the Philippines one of the most prosperous countries in East
Asia. The Americans instituted a monetary system for the
Philippine based on gold (gold standard) and pegged the
Philippine peso to the American dollar at the ratio of 2:1, two
pesos one US dollar. The gold standard is a monetary
system where a country's currency or paper money has a
value directly linked to gold; countries agreed to convert
paper money into a fixed amount of gold per unit of currency.
8. The US Congress approved the Coinage Act for the
Philippines in 1903. The coins issued under the system bore
the designs of Filipino engraver and artist, Melecio Figueroa.
Coins in denomination of one-half centavo to one peso were
minted. The renaming of El Banco Español Filipino to Bank
of the Philippine Islands in 1912 paved the way for the use
of English from Spanish in all notes and coins issued up to
1933. Beginning May 1918, treasury certificates replaced the
silver certificates series, and a one-peso note was added.
9. Two kinds of notes circulated in the country during the
outbreak of World War II. The Japanese Occupation Forces
issued war notes in high denominations, which had no back up
reserves; thus, Filipinos dubbed it “Mickey Mouse” money.
Guerrilla notes or resistance currencies, in low
denominations that were issued by different provinces and
municipalities, show resistance against the Japanese
occupation
10. Having gained independence from the United States
following the end of World War II, the country used as
currency old treasury certificates overprinted with the word
“Victory.”
11. With the establishment of the Central Bank of the
Philippines in 1949, the first currencies issued were the
English series notes printed by the Thomas de la Rue &
Co., Ltd. In England and the coins minted at the US Bureau of
Mint.
12. The “Filipinization” of the republic coins and notes began
in the late 60s and is carried through to the present. In the
70s, the Ang Bagong Lipunan (ABL) series notes printed at
the Security Printing Plant were circulated starting 1978. In
1983, the Flora and Fauna coin series was initially issued.
The New Design Series of banknotes issued in 1985
replaced the ABL series. Ten years later, a new set of coins
and notes were issued carrying the logo of the new Bangko
Sentral ng Pilipinas.
LESSON 1.5.: MOBILE AND INTERNET PAYMENTS
1. Mobile payments are money rendered for a product or
service through a portable electronic device, such as a cell
phone, smartphone, or a tablet device. It can also be used to
send money to friends or family members.
2. Near field communication (NFC) payments is the
technology that allows two devices-your phone and a
payment's terminal-to process contactless payments using
close-proximity radio frequency identification.
3. Sound wave-based (SWB) or sound signal-based (SSB)
mobile payments or pay-by-sound uses an advanced, ultra-
low power, wireless transmission technology to transmit data
via sound waves that originate from POS terminals Any phone
with a microphone can pick up those waves to complete a
transaction without the need for internet.
4. Magnetic secure transmission (MST) is when a phone
emits a magnetic signal imitating the magnetic strip on the
payer's credit card, which the card terminal picks up and
processes as if a physical card was swiped through the
machine. MST is secure as it uses a secure tokenization
system.
5. A mobile/digital wallet stores payment information on a
mobile device, usually in an app that utilizes different
technologies in the payment process. They commonly work
through complex encryption and tokenization, a method using
time-limited token numbers generated to process the specific
transaction using your already-encrypted card "stored" in your
mobile wallet.
6. Quick response (QR) codes are the trademark of a type of
matrix barcode (type 2D barcode) readable by smartphones.
This is more secure because your phone, that your card details
are securely connected to, confirms you are the owner of the
card.
7. A QR code has four important advantages:
a. It stores a large volume of data.
b. It can be scanned from a screen, not just paper.
C. It can be read even if part of the code is damaged.
d. It is safer because information can be encrypted.
8. Short message (or messaging) service (SMS), also
called premium SMS payments, simply means paying for
products or services via a text message with the relevant
information to the right payee phone number and the payment
amount is added to your mobile phone bill.
9. Direct carrier billing (DCB) is similar to SMS payments
because you pay through your mobile carrier instead of using
bank or card details, the payment will then be added to your
phone bill or prepaid SIM card as with SMS payments.
10. Internet payments can be done on desktops, laptops, or
even phones (asin mobile payment) and can also be used to
send money to friends or family members.
11. Wireless application protocol (WAP) payments used to
be the most common facility on smartphones through a more
limited-capacity WAP browser or app.
12. Most credit cards and bank accounts have what we call
"auto pay," where payments to credit cards or other bills, like
for water, electricity, or whatever bills need to be paid, are
scheduled to be automatically paid on a certain date from
funds of the payee with a certain bank. It can be the bank
doing the auto pay or the credit card company.
13. Payment links or pay by link is most commonly referring
to a button/link sent in an email, text message, messaging app,
or over social media where a checkout page opens up in an
internet browser where the recipient can enter their card details
to process a transaction for a specified merchant.
14. Neobank literally means "new bank," and is from the
Greek word neos meaning "new." It is an umbrella term for the
new generation of cutting-edge, fully digital banking services.
They all operate online or through apps; hence, they are
classified as a type of financial technology (fintech) solution.
LESSON 1.6: VIRTUAL CURRENCY
1. Cryptocurrency or virtual/digital currency is any type of
digital unit that is used as a medium of exchange or a form of
digitally stored value generated by agreement within the
community of virtual currency users. It is referred to as "digital
gold." It is also called "altcoins." Cryptocurrency is digital
money-it is virtual and has no physical form.
2. Fiat currency or cash, on the other hand, is the real
currency. Coins and paper money (bills) issued and printed by
the central bank of a country are fiat currency, fully-backed by
the government of a country and is acceptable as payment for
public and private debts.
3. E-money is a digital representation of fiat currency stored in
digital wallets or e-wallets. Any amount of currency stored in an
electronic wallet (such as GCash, PayMaya, Coins PH,
GrabPay, and the like) is e-money, which can also be accepted
as a "card payment" or can be withdrawn right away as cash.
4. Virtual currency, which is stored digitally, would still need to
be converted first to Philippine peso, then transferred to a
destination wallet or be withdrawn as cash through different
mediums that are accepted in the country. In general,
conversion is done through a virtual currency exchange. In the
Philippines, cryptocurrencies are regulated by the Bangko
Sentral ng Pilipinas (BSP).
5. Cryptocurrencies work through blockchain technology.
Blockchain is a special kind of database, a "distributed
ledger" or a "global ledger" built on a data structure known
as "blocks" Blockchain allows all participants to view the
records and all the changes that happen in the database. Your
transaction data will be stored in a block, which is technically a
list of other transactions made by other people. The block
where your transaction is listed will then be chained to previous
blocks. Cryptocurrencies use electronic coins as their form of
exchange, which are nothing more than slots in the blockchain.
6. Cryptocurrencies use cryptography, the process of
protecting information by using codes, for security. It is also
used to control transactions and increase the supply. With this
feature, cryptocurrencies have become self-governing and self-
regulating. It provides routine escrow mechanisms that could
easily be implemented to protect buyers.
7. However, having no intrinsic value, there are also significant
risks associated with cryptocurrencies. Their worth comes
from their users. The more users a coin has, the more
useful it becomes, and the higher its price goes.
Cryptocurrencies only serve to transfer wealth from one party
to another. But when a coin falls out of favor, there is nothing to
stop it from going to zero and That is the risk.
8. China has already developed a Central Bank-backed
crypto, and in the US, it was discussed as part of the C-19
stimulus. In other words, unregulated cryptocurrencies will one
day compete against state-sponsored ones, too.
9. Decentralized crypto coin markets run through a
blockchain relying on a peer- to-peer protocol. So, trading
altcoins is done through dozens or even hundreds of
independent nodes and master nodes. Transactions occur only
when the nodes come to a consensus based on the
exchange's verification rules.
10. When it comes to cryptocurrency exchange websites,
however, centralization remains a core concept. Centralized
exchanges are run by companies that manage and earn
revenue from transactions on the platform.
CHAPTER 2: CLASSICAL COUNTRY-BASED THEORIES
OF INTERNATIONAL TRADE
INTERNATIONAL TRADE THEORIES - are various theories
that analyze and explain the patterns and mechanisms of
international trade, how countries exchange goods and
services, and help countries in deciding what should be
exported done globally and what should be imported, in what
quantity, and with whom trade should be.
International trade theories were initially country-based and
were called classical theories. Classical economists were
oriented primarily toward growth economics, and their main
concern was to explain how the "wealth of nations" could be
increased.
TRADE - is the concept of exchanging goods and services
between two people or entities.
INTERNATIONAL TRADE- is the exchange of goods and
services between people of entities in two different countries.
The main points of the classical theories of international trade
are the following:
a) Trade is an important stimulator of economic growth.
b) Trade tends to promote greater international and domestic
equality.
c) Trade helps countries to achieve development.
d) In a world of free. trade,international prices and costs of
productions determine how much a country should trade in
order to maximize its national welfare,
e) In order to promote growth and development, self-reliance
based on partial or complete isolation is asserted to be
economically inferior to participation in a world of free
unlimited trade.
In the mid-twentieth century, economists shifted from
country-based to firm-based or company-based theories,
which were called modern theories. These theories are useful
and can help with international trade by helping a business
determine the right country to expand into and make
goods more efficiently than other firms.
CHAPTER 2.2: MERCANTILISM
The "Commercial Revolution" brought a revolutionary
change in the economy of Europe: the transition from
• local economies to NATIONAL ECONOMIES
• feudalism to CAPITALISM
• rudimentary trade to a GLOBALLY LARGER
INTERNATIONAL TRADE.
This commercial revolution gave birth to mercantilism.
According to the mercantilists, it is the goal of the economy
politics to ensure that the state is enriched by increasing the
entry of gold and silver and stocking the country with the same
through creating the highest possible export/trade surplus.
Exports bring an inflow of gold, whereas imports lead to the
outflow of gold.
This is the reason mercantilism was also known as
"bullionism."
Mercantilism believes that the state should actively intervene
in the economy.
Countries employed a policy of protectionism.
-protecting the export industries that bring in the gold and
silver through customs tariffs, quotas, and the like to
curtail imports.
The period also marked the rise of new nation-states, whose
rulers were able to amass more gold and wealth for their
countries by increasing exports and trade. These nation-
states expanded their wealth by using their colonies around the
world in an effort to control more trade and amass more riches.
Mercantilism aimed to encourage production within the
national territories through the concession of monopolistic
privileges granted to the export producing enterprises, granting
government subsidies, and giving tax exemptions.
The importation of advanced technology (mostly to benefit
the export industries), acquisition of manufacturing secrets,
and encouraging immigration of skilled workers that will
bring in remittances to the country were done.
Nation-states also placed lots of importance on the
development of merchants and naval fleets, which would
facilitate exports.
In mercantilism, the government strengthens the private
owners of the factors of production, which are the following:
a) Labor - refers to the work performed by a person for a
monetary consideration. It is the monetary consideration that
forms part of the cost of production.
b) Natural resources - are those found in nature, including
land, trees, and mines.
c) Capital goods (capital) - consist of those goods which are
produced by the economic system and are used as inputs in
the production of further goods and services. Capital refers to
the money or funds used to purchase the goods used in the
production process.
d) Entrepreneurship - the entrepreneur is the one that
combines the factors in the correct proportion and mobilizes
them.
Although mercantilism is one of the oldest trade theories, it
remains part of our modern life. Countries such as Japan,
China, Singapore, Taiwan, and even Germany still favor
exports and discourage imports through a form of neo-
mercantilism, ---- protectionism through tariffs and import
barriers and domestic industry protection through
subsidies and tax exemptions:
FREE TRADE- advocates highlight how free trade benefits all
members of the global community, while mercantilism's
protectionist policies only benefit select industries at the
expense of both consumers and other companies both within
and outside the industry.
Free trade is when international trade is free from barriers
such as tariffs, quotas, or other restrictions, and can flourish on
its natural growth. It requires less government regulatory
power.
The proponents of the theory were:
• Sir William Petty and Sir Thomas Mun in England
• Jean-Baptiste Colber
• Jean Bodin
• Irish-born Richard Cantillon, and Lord Antoine de
Montchrétien in France
• Antonio Serra and Giovanni Botero in Italy although
they never used the term themselves.
• It was the Scottish economist Adam Smith, in his
Wealth of Nations (1776), who gave currency to
the term.
Adam Smith viewed mercantilism as not freely initiated
and did not bring benefits to all parties. He
refuted(disagree) the general notion that the wealth of a
nation should be measured by the country's treasury. Through
his book, Adam Smith illustrated that a freely conducted
trade (free trade) was much better than the mercantile
doctrine as it would benefit most parties.
Free trade is a system that allowed for liberalization which
would pave the way for a freely initiated trade and engage the
maximum possible number of people bringing benefits to most
parties and lead to further development of all participants in the
long run.
LAISSEZ-FAIRE ECONOMICS is a theory that restricts
government intervention in the economy. Smith
demonstrated that the free market would translate into an all-
encompassing economic development in a significantly wider
sense than mercantilism.
Smith also developed the concept of specialization leading to
the development of economies of scale, - creating efficiency
with the ultimate effect of achieving sustainable growth.
For him, the collusive relationship between the government
and the business class observed in the mercantile system was
detrimental to the citizenry.
Adam Smith described mercantilism as having the following
characteristics:
a) It was used to enhance the economic power of states
through building wealth, an important measure of which was
precious metals, especially silver and gold.
b) It led to massive and rapid unification of control of
countries under strict economic and political policies, in
sharp contrast with what was observed under feudalism
resulting in economic nationalism.
c) The countries aggressively sought to have a favorable
balance of trade by selling more than they imported so as
to have a surplus of precious metals and accumulate it over
time.
Jean-Baptiste Colbert was considered as a more profound
influence on the development of mercantilism in France, where
it was known as "Colbertism."
Jean-Baptiste's system was very similar in concept and
application to mercantilism described by Adam Smith. He
carried out the program of economic reconstruction that helped
make France the dominant power in Europe.
Sir William Petty posits that surplus gain or surplus value
leads to expanded reproduction and that expanded
reproduction is conditional on capital accumulation
(productive capital expansion).
EXPANDED REPRODUCTION - is a model in which a
capitalist economy smoothly reproduces itself. The surplus
value created by the workers is not merely realized but
reinvested.
Philipp Wilhelm von Hornick, in his Austria Over All, If She
Only Will of 1684, detailed a nine-point program of what he
deemed effective national economy, which sums up the tenets
of mercantilism comprehensively.
Sir Thomas Mun was most closely associated with the idea of
mercantilism in England, where Mercantilism was called
commercial system or mercantile system, because it
emphasized the importance of commerce and free trade.
This school of thought mainly focused on international trade
and the balance of trade through acquisition of silver and
gold.
Antoine de Montchrétien published a book titled A Tract on
Political Economy in which he laid great emphasis on
development of agriculture and described it as the basis
of all wealth.
He stood for the principle of self-sufficiency and diamonds,
which make a state rich and opulent, but the convenience of
the things necessary to life.
Richard Cantillon is considered by many to be the FIRST
ECONOMIC THEORIST.
His only known book, Essai sur la Nature du Commerce en
General (the Essai), may represent one of the single largest
steps forward in the social sciences.
He emphasized the need of importing raw materials and
exporting finished products to maintain a favorable
balance of trade.
Physiocrats is an eighteenth-century group of French
economists who believed that agriculture was the source of
all wealth and that agricultural products should be highly
priced. Advocating adherence to a supposed natural order of
social institutions, they also stressed the necessity of free
trade.
The PRICE-SPECIE-FLOW MECHANISM - was originally
attributed to Scottish economist David Hume to illustrate
how trade imbalances can self-correct and adjust under
the gold standard. Fluctuations in prices in a country adjusted
completely or partially by an inflow or outflow of gold or specie
which adjusts the price levels across borders and equalized
them bringing balance in international transactions and
payments.
Giovanni Botero and Antonio Serra of Italy did not directly
touch on' mercantilism, but developed theories using the city
as a unit of analysis and finding development to be the result
of industrialization.
LESSON 2.3: THEORY OF ABSOLUTE ADVANTAGE
1. Absolute advantage means that a producer can produce a
good or service in greater quantity for the same cost or the
same quantity at a lower marginal cost.
2. Marginal cost is the cost incurred in producing an additional
unit of product.
3. Adam Smith is recognized as the father of economics
- founder of modern economics
- credited using the word mercantilism first and his book The
Wealth of Nations marked the birth of modern capitalism
4. Capitalism also called free market economy or free
enterprise economy is an economic system, where most
means of production are privately owned and production is
distributed through the operation of markets, which determine
prices, products, and services.
5. The physiocrats were a group of economists who believed
that the wealth of nations was derived solely from
agriculture; that only agriculture yielded a surplus.
6. Physiocracy - the first well-developed theory of economics.It
immediately preceded the first modern school, classical
economics. They believed that the wealth of a nation lies not
in its stocks of gold and silver, but rather in the size of its net
product.
7. Net Product- Value of Output - Value of Input
8. Smith did not believe that industry was unproductive and that
only the agricultural sector was capable of producing a surplus
above the subsistence level. Smith saw that division of labor and
extension of markets created almost limitless possibilities for
society to expand its wealth through production and trade.
9. The theory of absolute advantage believes that countries
should produce and export such products which they have an
absolute advantage on and import those goods that they
produce relatively less efficiently and at a higher cost.
10. The theory of absolute advantage, theory of
international trade, and theory of economic development
are closely interwoven and interlinked.
11. Free trade promotes international division of labor through
specialization giving certain countries absolute advantage
paving the way for international trade that will bring about
economic development.
12. Vent for surplus doctrine states that a nation can exchange
its overproduction for other goods which are in demand in other
countries, which will result in the fullest utilization of the idle
productive capacity.
13 . An additional beneficial aspect of international trade is it
transfers knowledge and technology between different
nations.
LESSON 2.4: THEORY OF COMPARATIVE ADVANTAGE
1. Comparative advantage means a producer can produce a
good or service at a lower opportunity cost than others.
2. Opportunity cost is what is lost or missed out on when
choosing one possibility over another.
3. Adam Smith was among the first to put in writing the theory
of comparative advantage, but the theory of comparative
advantage was formulated by David Ricardo.
4. The extent of specialization and division of labor was
dependent upon the size of the market. A larger market would
encourage a greater degree of specialization and division of
labor; hence, the development of international trade.
5. For Smith, the specialization and division of labor provided
the base for lowering labor costs, which ensured comparative
advantage for a country.
6. Industrial capitalism is an economic system in which trade,
industry, and capital are privately controlled and operated for
profit.
7.Comparative advantage warranted complete specialization
in the specific commodity with a comparative advantage in terms
of labor hours used per unit of output.
8. David Ricardo started out as a successful stockbroker,
making $100 million in today's dollars. After reading Adam
Smith's The Wealth of Nations, he became an economist.
9. Ricardo developed monetarism, the theory or practice of
controlling the supply of money as the chief method of stabilizing
the economy.
10. He also developed the law of diminishing marginal
returns, which states that there is a point in production where
the increased output is no longer worth the additional input.
LESSON 2.5: HECKSCHER- OHLIN THEORY (H-O THEORY)
1. David Ricardo's theory of comparative advantage posits
that countries export the goods they have abundant production
factors for, while they import the goods for which they have
scarce production factors, which determine the comparative
advantage of a country.
2. Swedish economists, Eli Heckscher and his student Bertil
Ohlin, studied how a country could gain comparative advantage
by producing products that utilized factors that were in
abundance in the country and propounded the Heckscher-
Ohlin theory or H-O theory, also called the factor proportions
theory.
3. Heckscher and Ohlin determined that the cost of any factor
or resource was a function of supply and demand.
4. Many elaborations of the model were provided by Paul
Samuelson after the1930s and thus, sometimes the model is
referred to as the Heckscher-Ohlin-Samuelson (HOS) mode.
5. Countries with cheap labor would specialize in labor-intensive
industries, while countries that have large pools of capital would
specialize in capital-intensive industries.
6. InteHrnational trade can improve economic efficiency, but that
trade will also cause a redistribution of income between different
factors of production; some will gain from trade, some will lose,
but the net effects are still likely to be positive.
LESSON 3.1. PORTER'S NATIONAL COMPETITIVE
ADVANTAGE THEORY
Competitive Advantage
Refers to the ability of the country or company to offer
greater value to customer, either by means of lower prices, or
offering more benefits and services at the same price and
putting a country or company in a favorable or superior
business position than its competitors.
Cost Advantage + Quality Advantage = COMPETITIVE
ADVANTAGE
Michael Porter introduced a new model in his book,
The Competitive Advantage of Nations, known as Porter’s
Diamond.
Porter’s Theory- A nation’s competitiveness in an industry
depends on the capacity of the industry to innovate and
upgrade.
FOUR STAGES OF DEVELOPMENT in the evolution of a
country, identified by Michael Porter:
1. Development based on (production) factors
2. Development based on Investment(capital)
3. Development based on Innovation(creativity)
4. Development based on Prosperity (economic growth and
development)
FOUR DETERMINANTS that Porter linked together to form
Porter’s diamond:
1. Local market resources and capabilities;
2. Local market and demand conditions;
3. Local suppliers and complementary industries;and
4. Local firm characteristics
These four determinants are the dimensions of the diamond
model that Porter envisioned to help in contributing to national
competitive advantage. According to Porter, these dimensions
cooperate with each other and help in increasing the
competitiveness not only of organizations, but nations.
Local Market Resources and Capabilities factors conditions.
Porter recognized the value of the Factor Proportion Theory
or the H-O theory of Hecksher and Ohlin in determining what
products a country will export and import.
A new list of advanced factors added to basic factors by Porter.
A. Human Resource, including skilled labor
B. Material Resources, including natural resources, vegetation,
space and the like
C. Investment in Education, including knowledge and
research universities
D. Technology
E. Infrastructure
Local Market Demand and Conditions
Porter believed that a creative domestic market is critical to
ensuring ongoing innovation, thereby creating a sustainable
competitive advantage.
Strong demand conditions in the domestic country persuade
domestic businesses to constantly improve their products. If the
demand for a product is more in the domestic market, it can
influence the demand of customers in the foreign market
Local Firm Characteristics
A. Firm Strategy
B. Industry Structure
C. Industry Rivalry
Local Suppliers and Complementary Industries
To be competitive, firms must have an efficient and strong
support network.
Besides consumers and suppliers, related industries are of
importance. These are industries that can use and coordinate
particular activities in the value chain together, or that are
concerned with complementary products (e.g., hardware and
software).
LESSON 3.2. COUNTRY SIMILARITY THEORY
Traditional trade theories
• speak of differences in resources and demand or supply
conditions as a necessary condition for trade between countries.
Country similarity theory
• built upon similarities or identical features of nations for them
to trade with each other.
• the idea that countries with comparable qualities are mainly
likely to trade with each other. These qualities include: stage of
development, per capita income, savings rate, natural
resources, cultural millieu, geographical features, political
and economic interests, and the like.
• developed by Swedish economist Steffan Linder in 1951, as
he tried to explain the concept of intra-industry trade.
Two types of trade
• Inter-industry Trade - trade between and among
different industries.
• Intra-industry Trade - trade between and among the
same industries.
Geert-Hofstede model
• a tool developed to compare countries
• includes six dimensions:
1. Power distance - distribution in country's power
2. Individualism - interdependence of the members of a
society
3. Masculinity - want to be the best vs liking what you do
(feminine)
4. Uncertainty avoidance - feeling threatened by
unknown situations?
5. Long-term orientation - links with the past and deals
with the challenges of the present and the future
6. Indulgence - control in impulses and desires
LESSON 3.3: PRODUCT LIFE CYCLE
1. Life cycle is the series of stages through which a living thing
passes from the beginning of its life until its death.
2. The term product life cycle refers to the length of time a
product is introduce in the market until it is removed from the
shelves.
3. The product life cycle theory is a marketing strategy
developed by Raymone Vernon in 1966 to help companies
plan out the progress of their new product and explain the
pattern of international trade and foreign direct investment which
follows the product life cycle.
4. Vernon explained that from the invention of a product to its
demise due to lack of demand, a product goes through four
stages: introduction, growth, maturity and decline. The length of
each stage can vary from product to product. Many factors go
into determining how quickly a product goes through the four
stages including how the product is marketed, the demand for
the product, and the product itself.
5. Product life cycle management (PLM) is the process of
managing a product's life cycle from inception, through design
and manufacturing, to sales, service and eventually,
retirement.
6. Prior to a product being introduced to the market, companies
conduct research on which product is in demand, how to
produce the product, and conduct market tests to see if the
product will sell. If the results of these researches and tests are
positive, that is the time the company will begin production and
the product will be introduced to the market.
7. At the introduction stage, the need is to create
awareness, not profits, and the underlying goal is to gain
widespread product and brand recognition as consumers try
the product, Big money is spent on distribution and promotion.
At the introduction stage, companies can expect sales to be
low, but will gradually increase, and profitability to be negative.
Businesses can also expect to have no direct competition
during this phase since competitors also do not have
knowledge about the product.
8. There are two price-setting strategies at this stage:
a. Price skimming - charging an initially high price and
gradually reducing ("skimming") the price as the market grows.
b. Price penetration - charging a low price to "penetrate" the
market and capture market share, before increasing prices in
relation to market growth.
9. At the growth stage, demand for the product begins to
increase and sales usually grows exponentially from the takeoff
point. At this stage, profitability reaches the highest level.
Economies of scale are now in order as sales revenue
increases faster than costs and production reaches capacity.
10. At the maturity stage, sales increase continues in a
decreasing pattern, but the sales Curve tends to decrease after
the top selling point is reached. There is intense competition and
product differentiation and generating brand awareness
becomes a must. Retaining customer brand loyalty is the key
The biggest challenge is maintaining profitability and
preventing sales from further decline.
11. A product enters the decline stage when no amount of
marketing or promotion can keep the sales figures from
declining. Other innovative or substitute products that satisfy
customer needs better have entered the market. Sales likely
continue until the cost to produce the product rises higher than
the profits generated from it.
12. Some of the strategies that can be employed in the decline
stage are:
a) milking or harvesting, which means reducing
marketing efforts and attempt to maximize the life of the
product for as long as possible:
b) slowly reducing distribution channels and pulling the
product from underperforming geographic areas allowing
the company to pull the product out and attempt to introduce
a replacement product; and
c) selling the product to a niche operator or subcontractor
to allow the company to dispose of a low-profit product,
while retaining loyal customers.
KEY TAKEAWAYS
1. Life cycle is the series of stages through which a living thing
passes from the beginning of its life until its death.
2. Product life cycle refers to the length of time a product is
introduced in the market until it is removed from the shelves
3. The product life cycle theory is a marketing strategy
developed by Raymond Vernon in 1966 to explain the pattern
of international trade and foreign direct investment that follows
the product life cycle.
4. Product life cycle management (PLM) is the process of
managing a product's life cycle from inception, through design
and manufacturing, to sales, service, and eventually, retirement.
5. The introduction stage, the underlying goal is to gain
widespread product awareness and brand recognition and
big money is spent on distribution a promotion, but sales is low
and profitability is negative.
6. Price skimming is charging an initially high price and
gradually reducing ("skimming") the price as the market grows.
7. Price penetration is charging a low price to "penetrate"
the market and capture market share, before increasing prices
in relation to market growth.
8. At the growth stage, sales usually grows exponentially, and
profitability reaches the highest level.
9. At the maturity stage, sales increase continues in a
decreasing pattern, product differentiation and generating
brand awareness become a must and retaining customer
brand loyalty is the key.
10. A product enters the decline stage when no amount of
marketing or promotion can prevent the sales figures from
declining
LESSON 3.4. GLOBAL RIVALRY THEORY
Global strategic rivalry theory was forwarded in 1980 by
economists Paul Krugman and Kelvin Lancaster.
The theory focused on multinational corporations (MNCs)
and how they get a competitive advantage over other firms in
their industry. Firms encounter global competition in their
industries and in order to prosper, they must develop
competitive advantages. The theory focuses, however, on
planned decisions that firms implement as they participate
globally. These decisions influence both international trade and
international investment.
Barriers to entry refer to the obstacles a new firm may face
when trying to enter into an industry or a new market and these
barriers to entry are the exact means by which companies can
gain competitive advantage.
These barriers to entry are the following:
a) research and development;
b) ownership of intellectual property rights;
c) economies of scale;
 d) unique business processes or methods;

e) extensive experience in the industry or exploiting the

experience curve; and

f) control of resources or favorable access to raw materials.

Research and development (R&D) are activities engaged in

by companies for the invention of new products or services to
remain competitive.

Owning intellectual property

An intellectual property refers to creations of the mind, a

work or invention that is the result of creativity, such as a
manuscript (book) or a design, to which one has rights and for
which one may apply for a patent, copyright, trademark,
brand name, and the like.

A patent is an exclusive right granted for a new, inventive, and

useful product. It can take the form of a new product process, or
technical improvement to an existing invention. A patent may be
used for licensing.

Copyright is the exclusive legal right to reproduce, publish, sell,

or distribute the matter and form of something (such as a literary,
musical, or artistic work).

A trademark/brand name is a word, a group of words, sign,

symbol, or a logo that distinguishes your business' goods or
services from those of other traders. Brand names and
trademarks are used for franchising.

Economies of scale means a proportionate saving in costs

(cost advantage) gained by an increased volume of production.
The cost advantage is a result of spreading the total fixed
overhead cost among a greater number of units produced,
which, therefore, reduces the unit fixed cost for the product.

There are two economies of scale:

a. Internal economies of scale - refers to economies

that are unique to a firm. For instance, a firm may hold a patent
over a mass production machine, which allows it to lower its
average cost of production more than other firms in the industry.

b. External economies of scale refers to economies of

scale enjoyed by an entire industry. If studies indicate that cotton
production will need 1,000 workers to be able to enter a trade
with a foreign country, all those engaged in cotton production
will try their best to employ 1,000 workers to become
competitively advantaged.

Exploiting the experience curve

Experience produces competitive advantage over those without

experience in any endeavor. Therefore, experience will also
count in engaging in international trade, as those with
experience become more conversant with what is going on in
the global trade arena. Employing experienced employees is
equally advantageous for firms