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Chapter 1
Chapter 1
ECONOMICS I (Econ3081)
RVU
BY: MILKESSA D.ROBI
April, 2022
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► COURSE OUTLINES
1. Introduction
Introduction
to
International Economics
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Introduction
Economics divided in to
Microeconomics
Macroeconomics
International Economics
International trade
deals
under microeconomics concept
International finance
deals under macroeconomics concept
Here our concern is international trade
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1.1 What is international Trade?
International trade
Is the study of the production, distribution and
consumption of goods and services on a worldwide basis.
Is exchange of goods, and services across international
borders or territories.
It concerned on decision making with respect to the use
of scarce resources to meet desired economic objectives.
its economic, social, and political importance has been
on rise in recent centuries.
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International Trade count…
It examines how international transactions influence
social welfare,
income distribution,
employment,
growth,
price stability etc
international trade highly influenced by
Industrialization
advanced transportation
globalization
multinational corporations and
outsourcing .
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1.2 The Basis and Gain of International Trade
A. The Base of International Trade
The basic question in international trade is to explain
why nations trade with each other.
Countries trade with each other basically for the same reasons that
individual people trade with each other.
No nation by itself can produce all the goods and services which its
citizens require for their consumption.
International trade exist due to
Differences in factor endowments
Division of labor (specialization)
Gains form exchange of goods and services
Price differentials
Existence of Economics of Scale
Existence of government policy
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Basis of IT Count…
1. Differences in factor endowments
Countries in nature differ in terms of
natural resource endowments,
climatic conditions,
mineral resources and mines,
labor, capital, technological capabilities,
entrepreneurial and management skills
These difference determine the capacities and efficiency of
countries to produce goods and services.
Japan can produce automobiles or electronic goods
Malaysia can produce rubber and palm oil
Brazil and Ethiopia can produce coffee
Thailand can produce rice at a lower cost than other countries
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Basis of IT Count…
2. Division of labor (specialization)
Just as there is division of labor among individuals,
there could be division of labor among countries of
the world.
No countries is able to produce all the goods and
services that requires to consume.
Countries specialize in the production of certain
goods and services in which they have production
superiorities over the other countries.
It export of those goods and services (absolute or a
comparative advantage than others) and it imports
other goods and services.
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Basis of IT Count…
3. Gains from exchange of goods and services
The basis of international trade is the gains or profits to be
made from the exchange of goods and services.
If there are no gains to be made, there would be no such
trade between countries.
4. Existence of Economics of Scale
It is the production process in which production cost falls as
the scale of production rises
5. Existence of government policy
Government tax and subsidy programs can be sufficient to
generate advantage in production of certain product
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Basis of IT Count…
6. Price differentials
It is the immediate cause of international trade
It can arise due to either differences in supply or differences in
demand conditions or due to differences in both.
A. Supply conditions (or production possibilities)
It can arise due to difference in the previously stated factors.
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The Gain From International Trade
In the absence of trade, a nation can only consume the
commodity that it produces.
As a result, nation’s production equivalent its
consumption
Which combination of commodities the nation actually
chooses to produce and consume depends on the
people's tastes, or demand considerations and
TOT between the two commodities in the two nations.
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Gain From International Trade
International trade
brings about improvement in production and promotes
economic development in the participating countries.
prevents monopolies.
benefit consumers by providing them new and cheap
commodities.
it facilitates international payments.
The gains from international trade can be broadly
classified into
static and
dynamic gains.
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Gain From International Trade
i. Static gains
It arise from optimum use of the country’s factor
endowments (human and physical resources),
This maximized the national output
resulting in increase in social welfare.
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Gain From International Trade
IT promotes economic development in following ways.
1) Developing countries can import capital goods in exchange
for their exports that are mostly agricultural exports.
This will increase the productive capacity of these countries
and promote the process of industrial development.
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1.3 International Trade vs. Domestic Trade
Domestic (interregional) trade
is trade between different sections of the same country.
All factors which affect prices and other aspect of IT also affect
interregional(domestic) trade.
There is no fundamental difference between interregional
and international flows of goods and services and the
factors affecting them.
The difference stems from the social, political, cultural and
economic boundaries have drawn around various
geographical areas called nations.
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IT vs. DT count…
Existence of difference in tastes and demand may
possibly play a large role internationally than
interregional in determining the pattern of trade.
The difference between domestic and foreign trade
can be explained by:
Factor mobility
Product mobility
Economic environment
Monetary units
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IT vs. DT count…
1. Factor mobility
In international trade the factor mobility is neither free nor
perfect than domestic trade.
there are restrictive immigration laws which prevent free mobility
of labor from one country to another.
there are restrictions on the inflow and outflow of capital and
investment across national frontiers.
there are other social, language, climate, educational systems,
cultural, customs, practices and political barriers that restrict the
mobility of factors from one country to another.
Within the nation, such differences may not exist, or may not
appear too formidable to be overcome by economic incentives.
At any rate factor mobility is relatively greater within country
than between countries.
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IT vs. DT count…
2. Product mobility
In DT the only internal barriers to trade products are distance
& cost of transportation (which we call natural barriers)
In case of IT, such a movement is not free, because of
natural barriers,
import and export duties and quotas,
exchange controls,
non-tariff (hidden) barriers
Examples of barriers in IT are
Agricultural protectionism in the DCs and
Industrialization through import-substitution in the LDCS
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IT vs. DT count…
3. Economic environment
Within the nation, the economic environment is more or less the same in all
the regions of the country.
the laws governing consumption, production and exchange of goods and
services
government polices on interest rates, taxes, wages or prices
Production techniques, factor proportions, factor prices, infrastructure
facilities and production functions
market structures-the degree of competition or monopoly in production-
and
consumer taste patterns and preferences are similar
But b/n nations, they could all differ very significantly.
This would make the character of IT significantly different from that of
DT.
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IT vs. DT count…
4. Monetary units
Within the nation, monetary laws, currency and the financial
system are the same for all regions in the country.
There are no currency complications or convertibility
problems involved in carrying out domestic trade.
This is not so between countries.
We have dollars, euros, yens, pounds, marks franks, birr
all of them are not freely accepted in discharge of
international monetary obligations.
International monetary differences, therefore, introduce
complications and complexities in international transactions;
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ANY QUESTION
THANK YOU FOR
YOUR
ATTENTION!!!
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