KEB2223

Intermediate Macroeconomy

keb2223 Intermediate MAcroeconomics

Name Section Date submit Marks : Nuril Ekma Hj Abd Muda :2 : 15th April 2012 : KJC0950313

Lecturer : Madam Wan Nor Asyikin

__________________ ( Mdm Wan Nor Asyikin )

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Intermediate Macroeconomy

table of content
1. Introduction 2. Body part 1: Why firm engage in International Trade 3. Summary 4. Reference different in resource endowment lack in technology availability of labor different in preference share idea & knowledge reduce the risk of one economy different in productivity 5 5 6 6 6 6-7 7 3-4

different in Opportunity Cost & Corporative Advantage 7-8 diversity of product different in season subsidiary protect the main industry ensure the survival of new small industry quota : limit certain imported goods tariff : protecting domestic employment embargo anti dumping buy national products 8 8 9 9-10 10 10-11 11 11-12 12 13-14 14

part 2: how government policy affect international trade

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Intermediate Macroeconomy

INTRODUCTION
Every day the world is growing closer and closer together. Countries rely on one another for resources that they don't have available to them otherwise. Because of this, they must trade with one another to get what they need.

Traditional or old theories of international trade explain the flow of goods between countries in terms of comparative advantage (differences in opportunity costs of production). Comparative advantage can arise because of productivity differences (Ricardiancomparative advantage model) or because of a combination of cross-industry differences in factor intensity and cross-country differences in factor abundance (Heckscher-Ohlin comparative advantage model). In either case, a key implication of old trade theory is inter-industry trade: That is, countries will export one set of industries and import another. Endowment-driven old trade theory models also provide a mechanism through 3

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Intermediate Macroeconomy

which international trade can influence relative factor rewards (and hence income distribution), as specialization across industries that differ in factor intensity changes the relative demand for the various factors of production. With good preparation and follow-up, missions can be great door openers, and participants benefit in many ways, including:

Obtain sales and contracts as a direct outcome of the mission Find personal contacts for future follow-up Sign partnerships and cooperative agreements for further business development Get hands on and up-to-date market information and research Assess overseas opportunities, culture, infrastructure and potential

demand

Initiate new vendor relationships Learn about the culture, customs, business and operating environments of the target countries

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Intermediate Macroeconomy

CONTENT
1. Why firm engage in international trade
The primary reason firm to go international is to expand their market penetration. With that said, the initial driver would be if firm have saturated their domestic market and needed to expand outside of home country in order to further their growth opportunities. In other cases, it may be that firm product may be more marketable in a foreign market than their own. Despite that, there are many factors why firm engage in trading with firm outside their home country. Above listed some of the reason why firm goes for international trading. Different in resources endowment Since some countries have more natural resources due to their locations as compared to others it leads to international trade. For example gulf countries have huge reserves of oil but they lack other resources so they export oil to other countries and import the other resources which they need from other countries. 5

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Intermediate Macroeconomy

For example, the United States imports lots of oil from countries in other continents. Lack in technology It may be also due to the technology. Some country are better equipped to produce technologically goods which are cheap as well better which leads to international trade. For example is Russia. Their country is better equipped in technology for producing diving ship for military purpose. So, Malaysia imports their ship which we already purchase 2 known as Kapal Selam Tun Abdul Rahman and the other one is Kapal Selam Tun Abdul RAzak. This situation show that limited technology that we had make Malaysia trade with Russia for their goods which Malaysia have not yet achieve that level of technology Russia had. Availability of labor Resources do not have to be material goods, but can also be labor related as well. There are some countries which enjoy substantial cost advantage in producing certain products due to availability of cheap labor and therefore they can produce goods at a much lower cost, increasing their profitability. This helps both the company producing the products as it lowers their cost, but also helps the people doing the labor, as it provides a place of employment for them. Differences in Preferences Even if two countries have identical resources they might benefit from trade if they have different preferences. Let's assume that the Malaysia and Thailand have identical resources for the production of coffee tea. So both countries can produce both products. But in Malaysia we prefer coffee and in Thailand they prefer tea. So they can both achieve more satisfaction from the same amount of resources if Malaysia sells Thailand our excess tea and they sell us their excess coffee.

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Intermediate Macroeconomy

International trade allows countries to learn from each other and take in new ideas. While one country might be focused on developing one type of product, another maybe focusing on completely different subject. Together, they can share their ideas, benefiting both of the economies for both countries. For example, Japan tends to be ahead of the field in consumer electronics. A country like the United States can directly purchase goods from them, as well as learn about the new technology is being discovered on the other side of the world. Reduce the risk for one economy If one economy has to deal with everything, and if it ever collapses, the country will fall apart. By trading internationally, countries rely on one another and it creates a balance amongst them. If one country's economy is doing very well, then the economies of other countries that trade with it tend to be doing well also. If a country falls on hard times, but other countries might also suffer. An example of this is the current credit situation the United States. Countries around the world were affected by the credit problem because a lot of them loaned money to other countries. Differences in Productivity First, we have to know a few definitions.

production : the "quantity produced productivity : output per unit of resource, usually output per person productive efficiency : producing at a minimum cost A difference in productivity is a reason that countries benefit from trade. If

a country is more productive in producing a product we say that they have an absolute advantage in producing that product. A country has an absolute advantage in the production of a product if it can produce it with fewer resources than another country. Absolute advantage is the ability to produce a good or service with fewer resources because of greater productivity. Here are some

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Intermediate Macroeconomy

example how differences in productivity (absolute advantage) results in specialization and exchange (trade). example Let's say there are two people. One is an attorney, the other a mechanic. Assume that the lawyer is more productive at doing law than is the mechanic since he or she can do it in less time and the mechanic is more productive at fixing cars. So the lawyer has an absolute advantage in law and the mechanic has an absolute advantage in fixing cars. It doesn't surprise us that if the lawyer's car breaks down he or she will bring it to the mechanic to get it fixed. The lawyer trades with the mechanic. Differences in opportunity costs and comparative advantage The main argument in favor of trade is the principle of comparative advantage. the principle of comparative advantage was first observed and explained in early 1800s by david ricardo. This principle says that it pays for a person or a country to specialize and exchange even if that person or nation is more productive than potential trading partners in all economic activities. Specialization should take place if there are relative cost differences in production of different items. Comparative advantage is the ability to produce a product at a lower opportunity cost. Opportunity cost in an earlier lecture and the value of the next best alternative that is not chosen as the result of a decision. Diversity Of Product Refer to the potential conditions of production factors of production owned by the state. For example Indonesia, has great potential in producing agricultural goods. In other words, through trade, a country can obtain the goods that cannot be produced domestically. So, if a country specializes in producing and exporting certain goods, the average production cost will come down Different season 8

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Intermediate Macroeconomy

Every country has different season. This led to country specialization in different things/product and service according to their season. For example, in a 4 season country like America or Britain, the trend of fashion have to suit to their country climate change. Thus, fashion designer usually will come out of new collection every different season. Its different in Malaysia which we live in a different season that those live in America. Despite that, we exchange our product when there is demand by customers.

2. How government policy affect international trading

The phrase "Instruments of Trade Control" is popular with IB textbook writers, it is a lot simpler to say basic ways government controls trade. Government implies policy to international trading because of certain reason and is usually to make sure that our country not totally relies on international trading. They are some policy that government put to international trading. The policy is as below tariff embargo subsidies quota fiscal policy anti-dumping buy national policy foreign exchange control

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Intermediate Macroeconomy

Different country might have different policy in international trading. This policies affect trading as government put rules & regulation to firm who want to import or export their product. How government policies affect trading actually? Here are some ideas how government policies affect international trading. SUBSIDY : PROTECT THE MAIN INDUSTRY Is a form of assistance paid to a finance commercial or economic sector. Most of the subsidies made by the kingdom to the expenditure or dealers in the industry to prevent a deterioration of the industry as a result of the continuity of operation a result of the continuity advantages or an increase in product prices or just to encourages to hire more workers prices subsidiary up some food boarding perpetuate life especially in the urban area; and subsidies to encourage the development of the industry. The subsidy may be considered as a form of protection or trade barriers by making domestic and product & service artificial competitive against imports. Subsidies may interfere with the market and should wear big economic boarders. Help financial in the form of subsidies may be the coming of the kingdom, but the term refers to aid subsidy might by others, such as individual or institution is not the kingdom. In developing nations, the government would use restrictions to close the market for advance products (example: electronics). Domestic firms do not have enough power or capitals to compete with strong foreign firms, so the government gives them incentives to grow by letting them control the market until it rises. In developed nations, governments use restrictions to support decreasing industries. The best example is Agriculture sector. Even though subsidy is used most of the time, you will see some restrictions. Farmers in the U.S. cannot compete against developing nations due to high costs. Therefore, the U.S. cannot let this sector die. There are many theoretical reasons, but mainly due to main food supply. We cannot depend on foreign foods entirely.

QUOTA : LIMIT CERTAIN AMOUNT OF IMPORTED PRODUCT 10

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Intermediate Macroeconomy

Taxes are that the government applies to imported goods to limit quantity imported. Quotas are quantity restriction applied to imported goods to limit quantity imported. In general, if tariff is used, government receives revenue from foreign firms. Quotas means, instead of the government, foreign firms will receive the portion that government would have received if tariff was used. TAARIF : PROTECTING DOMESTIC EMPLOYMENT The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics however, countries will continue to produce goods until they no longer have a comparative advantage. EMBRGO An embargo (from the Spanish embargo) is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is imposed. Embargoes are similar to economic sanctions and are generally considered legal barriers to trade, not to be confused with blockades, which are often considered to be acts of war. Embargo may also refer to the practice of blocking fare classes at certain levels, and award availability on airlines. Embargoes are complex in their international meaning. In response to embargoes, an independent economy or autarky often develops in an area subjected to heavy embargo. Effectiveness of embargoes is thus in proportion to the extent and degree of international participation. 11

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ANTI DUMPING There are many different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It provides three methods to calculate a products normal value. The main one is based on the price in the exporters domestic market. When this cannot be used, two alternatives are availablethe price charged by the exporter in another country, or a calculation based on the combination of the exporters production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price. The anti-dumping duties imposed are as follows:

Bangkok Polyester Public Co Ltd -- 5.33 per cent, Indorama Chemical (Thailand) Co Ltd -- 49.25 per cent, Indorama Polymers Public Co Ltd -- NIL, Thai PET Resin Co Ltd -- 36.45 per cent, Thai Shinkong Industry Corp -- 49.25 per cent, and others -- 49.25 per cent.

BUY NATIONAL PRODUCT Interest in buying artificial Barangan Malaysia's most dominant drainage of the eye is able to circumvent our nation money out of the country. Malaysia money will not spill out if the people of Malaysia's own emphasize on Barangan Tempatan meetingtheir daily needs. The main fund will also increase once the gus will be able to stem the problem of inflation. Malaysia has reached its time to change people's negative responses are thought bahawaBarangan import better than Barangan Tempatan. Obviously if all the people that domestic choose and purchase products, we actually have triumphed eye guard our money instead of flowing out of the country.

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Conclusion
First, we document that trade is more concentrated than employment and sales. This is the result of few firms accounting for a large share of trade volumes and appears to be mainly occurring within rather than between sectors. This fact supports recent theories of international trade with heterogeneous firms against traditional theories based on comparative advantages. Furthermore, we find significant concentration along the sector and country extensive margins: few firms serve trade in many sectors and with many countries, but these firms account for a share of import and export. Finally, we show that import is more concentrated than export, especially between sectors and along the sector and country extensive margins. Second, we confirm that firms with different exposure to international markets have different performances, in terms of size, capital intensity and productivity. In particular, we support the idea, as in a wealth of recent studies, that firms more engaged in international activities (those involved in both importing and exporting) are the best performers, but we also find that firms involved only in importing activities perform better than those involved only in exporting. Our results suggest that the importers premium is more the result of a self-selection process than a productivity enhancement due to import of capital

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and intermediate inputs. We provide some evidence that this may have to do with the fact that only importers buy mainly capital goods from major European countries. To the extent that these capital goods incorporate advanced knowledge, they may entail sunk 25 costs which the importers have to incur to accumulate the absorptive capacity needed to use those goods in production. Third, the degree of geographical and sect oral diversification is positively correlated with firm size and productivity. However, diversification premier with respect to capital intensity are connected only to the import side. In particular, we have evidence that on the one hand, larger, more capital intensive and more productive firms are able to import a large number of products from a larger number of countries, and, on the other hand, firms exporting into a larger number of countries are more likely to experience a performance boost.

REFERENCE
1. http://www.sos.wa.gov/itrade/trade_missions.aspx 2. http://www.investopedia.com/articles/economics/08/tariff-trade-barrierbasics.asp#ixzz1qHqGrWPT 3. http://answers.yahoo.com/question/index?qid=20100216183323AAxrVzR

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