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INTRODUCTION

International economics is a macroeconomic discipline studying general principles,
conditions and participants of exchange in the world market. It can be divided into
two parts: International Trade and International Finance.
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International trade deals with:
o International trade theory – analysis of the basis for trade, trade
patterns, and gains from trade.
o International trade policy – examination of reason for and effects of
different trade instruments, economic integration, international trade
institutions and organizations, international trade strategy…
International finance deals with open-economy macroeconomics:
o Theory of international finance – balance-of-payments, exchange rates
regimes, adjustment…
o International monetary policy – monetary integration, international
capital
movement,
financial
markets,
international
financial
institutions…

INTERNATIONAL TRADE THEORY
Trade theory is the product of an evolution of ideas in economic thought.

MERCANTILISM
Mercantilism was the first complete view on international trade. It appeared during
the period of colonialism and the discovery of the new world.
The wealth of nations was measured by the stock of precious metals – the more
gold and silver a nation had, the richer and more powerful it was.
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The main goal of the economic policy was to increase wealth.
o By growth in production of precious metals
o By war and robbery
o By surplus in foreign trade (government regulation in foreign trade –
restricting import and stimulating export)

Mercantilists preached “economic nationalism” – national interests were basically in
conflict; one nation could gain only at the expense of other nations.
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Zero-sum game – if one wins, the other must lose.

We calculate the absolute advantage by comparing production costs for a unit of the certain product within two countries. aLp< aL pf aLp – labor costs for production of a unit of a certain product in the domestic country aLpf – labor costs for production of a unit of a certain product in the foreign country Each country does not attempt to produce all the commodities it needs. 2 goods. A country has an absolute advantage if it is the most efficient country in producing a certain good. it specializes in the production of the products it can produce most efficiently and then exchange it for all other products it needs. They gave a partial explanation of international trade flows. 1 factor of production) Labor theory of value Constant costs Perfect competition Full employment Free trade Zero transportation costs Perfect mobility of production factors (labor) within and between countries Production differences (costs differences) govern the movement of goods among nations. World resources will be utilized most efficiently and the world output and welfare will maximize if countries specialize according to their absolute advantages. and failure to explain incomplete specialization. Some limitations of classical theories include: simplified models with abstract assumptions. THEORY OF ABSOLUTE ADVANTAGES – ADAM SMITH Basic assumptions:         2 x 2 x 1 (2 countries.CLASSICAL TRADE THEORIES Classical trade theories presented the beginning of scientific research of the basis for trade and they provided cognition of importance of specialization and international division of labor for international trade. failure to identify causes of cost differences. analysis of the supply side only. - All countries benefit from mutual trade – international trade is a “positivesum game” . statical view of comparative advantages.

THEORY OF COMPARATIVE ADVANTAGE – DAVID RICARDO Basic assumptions:           2 x 2 x 1 (2 countries. 1 factor of production) Labor theory of value Constant costs Perfect competition Full employment Free trade Zero transport costs Perfect mobility of labor between industries within a country and no international mobility Fixed but different technology between countries Fixed resources. Second. First. Instead of producing a good for itself. The Ricardian model is the simplest model that shows how differences between countries give rise to trade and gains from trade. and countries differ only in the productivity of labor in different industries. tastes. it must be true that this indirect “production” requires less labor than direct production. In this model. we can show that trade enlarges a country’s consumption possibilities. labor is the only factor of production. aLx aL x f : aLy aL y f aLx – time/labor costs for production of a unit of product x in the domestic country aLy – time/labor costs for production of a unit of product y in the domestic country aLxf – time/labor costs for production of a unit of product x in the foreign country aLyf – time/labor costs for production of a unit of product y in the foreign country . which implies gains from trade. a country can produce another good and trade it for the desired good. 2 goods. we can think of trade as an indirect method of production. a country’s production pattern is determined by comparative advantage. countries will export goods that their labor produces relatively efficiently and will import goods that their labor produces relatively inefficiently. Comparative advantages are calculated by comparing relative unit costs of production (comparing ratios of unit costs). The simple model shows that whenever a good is imported. We can show that trade benefits a country in either of two ways. - There is an equal distribution of gains – international trade is a positive-sum game. In the Ricardian model. In other words. etc. technology.

neoclassical theories have changed some key elements of classical theories. free trade Thesis on reason for trade based on comparative advantages principle Neoclassical theories have made the next step offering an explanation (although only a partial one) of causes of comparative costs differences.S. i.THEORY OF RECIPROCAL DEMAND – JOHN STUART MILL Former theories exclusively analyzed the supply side of the market as the determinant of relative product prices.Mill left the labor theory of value and introduced the demand side of the market. - Export price is determined by reciprocal demand intensity. A country with lower productivity can reach better terms of trade depending on demand conditions in the market. At the same time. NEOCLASSICAL TRADE THEORIES Neoclassical trade theories share numerous characteristics with classical trade theories. two commodities. equal to the amount to be paid for all factors required for production of an additional product unit). perfect competition. Similarities: - Several assumptions: full employment. Differences: - Two or multi-factor models Abandonment of labor theory of value Costs expressed in money terms instead of physical product units Both constant and variable costs Both complete and incomplete specialization Transportation costs OPPORTUNITY COSTS THEORY – GOTTFRIED HABERLER Basic assumptions:      2 x 2 x 3 (two countries. . three factors of production) Perfect competition Free trade Full employment Increasing costs Haberler introduced a new element in his analysis – the principle of marginal costs (the price is equal to the marginal production costs. J. Reciprocal demand is the demand of each of two countries for the export product of the other one.e.

indicating that terms-of-trade are equal to the relation of the substitution costs: - - P s MC s ∆ t = = Pt MC t ∆ s Under constant cost conditions. terms-of-trade are determined by marginal not average costs (INCOMPLETE SPECIALIZATION – a country meets its needs in some product partly from domestic production and partly from imports) o PPF is a concave line to the diagram’s origin and it is not identical to the price line – the price line is tangent to the PPF. Under changeable cost conditions. The H-O theory has some similarities with Ricardo’s theory:  The common basis – the identical explanation of reason for trade by comparative costs differences . which indicates the amount of one product that must be “sacrificed” in order for an additional unit of another product to be produced. MRT = M Cs M Ct Terms-of-trade between two products are equal to the relation of their marginal costs. assuming that all resources are used in their most efficient manner (full employment) - Marginal rate of transformation: - The slope of the PPF provides a measure of the MRT. The production of one product can be increased only at the expense of another product. Opportunity costs can be illustrated by the production possibilities frontier. o Under decreasing-cost conditions – “sacrificed” amount of some product decreases for each new unit of another product. terms-of-trade between two products are equal to the relation of their marginal costs and to the relation of their average costs (COMPLETE SPECIALIZATION) o PPF is a straight line and identical to the price line o Amount of some product to be “sacrificed” in order to produce a new unit of another product is always the same. - PPF indicates the maximum amount of any two products an economy can produce. and the theory of factor proportions. the slope of the PPF is equal to opportunity costs. the factor endowment theory. HECKSCHER-OHLIN THEORY The H-O theory is also known as the general-equilibrium theory.A country has a comparative advantage in some product if it can produce an additional unit of that product at lower opportunity costs (expressed in terms of another product) than the other country can. o Under increasing-cost conditions – “sacrificed” amount of some product increases for each new unit of another product.

It is capital abundant if its ratio of the total amount of capital to the total amount of labor is higher than the ratio in another country TK 1 TK 2 > TL1 TL2 o By factor prices – the price definition – a country is relatively capital abundant if its ratio of interest rate (price of capital) to wage (price of PK 1 PK 2 < PL1 PL2 labor) is lower than that ratio in another country. Numerous identical assumptions of models There are also many differences:   Different explanation of sources of comparative advantages – in H-O theory. comparative advantages do not stem from differences in productivity than from differences in factor endowment. there is a one-to-one relationship between the relative prices of goods and the relative prices of factors used to produce the goods. but in a strongly biased way: at unchanged relative goods prices. r1 r2 < w1 w 2 A product is capital-intensive if the ratio of capital to labor in its production (K/L) is bigger than that ratio in production of another product. the output of the good intensive in that factor rises while the output of the other good actually falls. . The H-O theory relies on two main characteristics of countries and products: countries differ by factor endowment and products differ by factor intensity. ( KL ) >( KL ) x y As long as a country produces both goods. Some of the basic assumptions are different. A rise in the relative price of the labor-intensive good will shift the distribution of income in favor of labor. and will do so very strongly: the real wage of labor will rise in terms of both goods. An increase in the supply of one factor of production expands production possibilities. while the real income of capital owners will fall in terms of both goods. - Relative factor endowment can be defined in two ways: o By physical units of factors – the quantitative definition – a country is considered to be relatively capital abundant not if its total amount of capital is bigger than total amount of capital in the other country.

and profitability of international trade. H-O model – no technological change. The first empirical test was undertaken by Wassily Leontief. Stolper-Samuelson Theorem – in free trade conditions production factor gains and relatively scarce factor loses. A country will tend to produce relatively more of goods that use its abundant resources intensively. given but different technology between countries.A country that has a large supply of one resource relative to its supply of other resources is abundant in that resource. - Leontief found that the United States. thereby influencing intensity. given but the same technology available to all countries. tended to export labor-intensive goods and import capital-intensive goods.   Ricardo’s model – no technological change. relatively abundant The H-O theory was the dominant explanation of international trade in the period 1930-1960. New theories consider technology as very important for the explanation of basis for trade. there is a continuous moving of PPF due to:   Increase in factor supply More efficient use of factors (because of technological exchange) There is also different technology between countries and technological change as a new reason for trade. the production possibilities are given and fixed. NEW TRADE THEORIES In conventional theories. became known as the “Leontief Paradox”. despite having a relative abundance of capital. H-O-S Theorem: international trade will bring about equalization in the relative and absolute returns to homogeneous factors across nations. - A capital-abundant country exports capital-intensive products and a laborabundant country exports labor-intensive products. In new theories. There are different technological innovation types:    Improvement in production process of some product Improvement in product characteristics Introduction of a new product THEORY ON ECONOMIC GROWTH AND TRADE . unexpected findings which contradicted the predictions of H-O theory. structure. Technological innovations have strong effects on production.

V. PPF expands disproportionately. an increase in the endowment of one factor will increase the output of the product intensive in that factor and will reduce the output of the other product which is intensive in the other factor. The basic assumption is that international trade can be based on differences in technological changes over time among countries because of a time lag in transfer of technology. the PPF shifts outward. . The theory analyzes two types of effects:   Effect of growth in factor supply and effect of technological changes on economic growth o Factor endowments change over time o Growth in factor supply might lead to balanced or imbalanced economic growth  Balanced growth – growth in supply of all factors at the same rate – PPF moves symmetrically (evenly in all directions)  Imbalanced growth (biased growth) – growth in supply of only one factor or faster growth in supply of one factor compared to the growth of the other one – PPF shifts out asymmetrically Effect of economic growth on international trade Rybczynski theorem: at constant product prices. tends to worsen a growing country’s terms-oftrade to the benefit of the rest of the world.    Export-biased growth – growth biased toward the good a country exports. There are three types of technical progress – neutral.    Neutral growth – trade and output grow at the same rate Protrude growth – faster growth of trade Antitrade growth – faster growth of output TECHNOLOGICAL GAP THEORY – M. Innovation creates a technological gap which provides for a temporary monopoly in the world market. POSNER The technological gap theory proposes that changes in international trade are dictated by the relative technological sophistication of countries. tends to improve a growing country’s terms-of-trade at the rest of the world’s expense Immiserating growth Technological progress changes a way of use of factors in production enabling the same output to be produced with fewer inputs. and capital saving. labor-saving.Economic growth is the growth in potential output. It causes change in production and consumption that have important implications on international trade. Import-biased growth – growth biased toward the good of a country imports. The effect of economic growth on trade depends on the net results of growth on production and consumption (relation of production growth in export products and import-substitutive products and on consumption structure).

an innovator country initially is an exporter. Later phases are characterized by lack of innovation and by emphasis on factor endowments. the more his production moves to lower income countries with low labor costs that in this phase are more important than R&D expenses. LINDER’S THEORY Basic assumptions:    Imperfect competition Increasing return (economies of scale) Product differentiation Structure of international trade is different than it has been presented in conventional models: developed countries trade much more mutually than with . then loses its advantage vis-à-vis its trading partners.- Technological innovations create dynamic comparative advantages – comparative advantages can be changed or created due to technological change and diffusion of technology. and eventually may become an importer of the product at the end of the cycle. The more standardized a product becomes. PRODUCT LIFE CYCLE THEORY – RAYMOND VERNON This theory focuses on the role of technological innovation as a key determinant of trade patterns in manufactured products. Product-maturity phase – cheaper labor There are different factor requirements in each phase and therefore each phase has a different effect on trade patterns. explanation of comparative advantages becomes closer to the explanation given in the H-O theory. When a product life cycle foes toward its end. Product-growth phase – scale economy 3. During this cycle. New product phase – highly skilled labor 2. Differences compared to conventional theories:        Different technology between countries Technology changes over time Capital moves among countries Focus on a product and not on a country Limited usability – only for technology-intensive products Analysis of both supply-side factors (costs) and demand-side factors (income) Dynamic comparative advantages Phases of the product life cycle: 1.

and they trade in similar products. Increasing returns to scale refers to the production situation where output grows proportionately more than the increase in inputs or factors of production (if all inputs are doubled. providing they are similar. THEORY OF ECONOMY OF SCALE – PAUL KRUGMAN Basic assumptions:    Imperfect competition Increasing returns – economies of scale Product differentiation Economies of scale means decrease of average costs of a product in long-term.developing countries. - Demand structure is determined by consumers’ preferences and income by producers’ preferences. The more similar demand structure among countries is. not in products of different industries. The basis for trade in primary and secondary products is not identical – explanation of trade in primary products is supply-side based. based on the increase of output. Internal economies of scale: - Average costs depend on the size of an individual company but not necessarily on that of the industry A company specializes in only one or a few product varieties A company with an internal economy of scale is large and can monopolize an industry Internal economy of scale creates imperfect competition in the industry External economies of scale: - Average costs depend on the size of the industry but not necessarily on the size of any company Single companies might not be large. and explanation of trade in industrial products is demand-side based. - Basis for trade in primary products – difference in relative factor endowment Basis for trade in industrial products – similarity in demand structure o Thesis on similar consumers’ preferences – international trade in industrial products depends much more on similarities of consumers’ preferences. Linder’s theory concludes that the same products can be traded in both directions – a country can export and import the same products simultaneously. Domestic demand determines both exports and imports commodity structure. but they cooperate within an industry . Implicitly. output is more than doubled). than on cost differences. the bigger their mutual trade in industrial products will be.

The country’s capability to reach the main goal depends on productivity in using its resources.- The market consists of many small companies and is perfectly competitive A country can dominate the world market THEORY ON COMPETITIVE ADVANTAGES – MICHAEL PORTER Emphasis on productivity as the key determinant of international competitiveness. Intra-industry trade is international trade in product within the same industry.e. - - It combines macro and micro view – competitiveness and international trade are analyzed both from the point of view of a company as the main subject and from the point of view of a national economy as the creator of business environment. INTER AND INTRA-INDUSTRY TRADE Inter-industry trade is international trade in products of different industries. Substitution in production 2. and/or market factors. rivalry Outside factors are chance and government. Porter’s theory successfully combines some thesis and characteristics from conventional and new theories. According to Porter. of business and institutional environment enabling a productive use and improvement of country’s resources. i. the primary economic goal of a country is high and increasing level of living standards. Substitution in consumption 3. It is a two-way trade in products connected either in supply and/or demand. It combines elements of supply-side of the market (factor endowment) and demand-side (market conditions). Reasons for IIT: - In homogenous products o Aggregation bias . temporal. structure. production. Three criteria are frequently used to classify products in the same industry: 1. Identical technology intensity Explanation of circumstances in which IIT appears is in geographical. Porter has explained his theory by creating the “diamond of national advantages”:     Factor conditions Demand conditions Related and supporting industries Firm strategy.

Protection of domestic producers b. There are two types of IIT: 1. Passive – includes restrictions on import and export flows a.- o Cross-border trade o Differentiation in time (trade in seasonal goods) o Joint production and consumption o Re-export o Offshore processing o Oligopolistic behavior In horizontal/vertical differentiated products: o Consumer preferences o Scale economy o Foreign direct investment It is more possible for intensive IIT to appear between larger. practically all nations impose some restrictions on flows of goods and services. Vertical – exchange of similar products within the same industry. Protection of balance-of-payments . more developed countries and countries that are more similar or geographically closer. 2. but products of different quality levels. A foreign trade policy is a system of instruments or measures used by the government in order to regulate the exchange of goods (to limit or to stimulate). since they satisfy the same need and are of approximately same quality but have different individual features. Protection of domestic consumers c. Horizontal – exchange of products within the same industry that are imperfect substitutes. In today’s world. - It is based on the dominant view on foreign trade in a certain period There is an emphasis on import restrictions There are two types of foreign trade policy: 1. Determinants of IIT: - Country-specific characteristics (demand side) o Common characteristics (all countries in a model) o Specific characteristics (certain countries in a model) Industry-specific characteristics (supply side) – characteristics of products and characteristics of market of an industry INTERNATIONAL TRADE POLICY An open economy is one with a high level of trade liberalization while a closed economy is one with numerous and very high trade barriers.

 A prohibitive tariff is one that reduces imports to zero. particularly to standardized products. which industries. Increasing budget revenues 2. Active – includes instruments of export promotion a.  Advantages: distinguishing among small differentials in product quality. how much. expressed in a fixed amount of money per physical unit of a product  Advantages: easy to apply and administer. maintaining a constant degree of protection in the period of changing prices. Promotion of production and export Necessary conditions for creating and implementing an adequate protection policy:    Single national economic area Political willingness for protection of domestic production Instruments for protection and criteria for their use (what. By trade relations o Autonomous (maximal) tariffs – no trade agreements o Conventional (minimal) tariffs – trade agreements By way of determination o Ad valorem tariffs – based on value. industrial policies. There are many different ways to classify tariffs:     By type of trade flow o Import tariffs – most widespread o Export tariffs – rare or prohibited o Transit tariffs – do not exist anymore By main function o Protective tariffs – work to protect domestic producers and consumers as well as the balance of payment.d. easy to determine . by what. and how long to protect) Main groups of instruments:    Tariffs Non-tariff barriers o Traditional barriers – quantitative restrictions and others o Indirect protectionism – administrative and technical barriers Export promotion measures TARIFFS A tariff is a tax (duty) levied on a product when it crosses national boundaries. expressed as a fixed percentage of the product’s value.  Disadvantage: customs valuation o Specific tariffs – based on quantity or weight. o Revenue tariffs – work to increase budget revenues.

- Tariff  increase in import price  decrease in import demand  decrease in import Effect on prices: a tariff can raise the prices of imported goods for the amount of the tariff.  Preferential tariff – a lower (or zero) tariff on a product from one country than is applied to imports from most countries  Retorsive tariff – a tariff imposed for a purpose to force other country to release. . designed to countervail the effect of the subsidy. Effect on domestic production: tariff  increase in price of imported goods  increase in demand for domestic substitute  increase in domestic production Effect on domestic consumption: decreasing and diverting of domestic consumption Protective effect:    In the short-run.    EFFECTS OF TARIFFS Effect on import: tariffs reduce import directly through their impact on product price. degree of protection varies inversely with changes in import prices o Compound tariffs – a combination of ad valorem and specific tariffs By country of origin o Unitary tariffs o Differential tariffs – leads to a different treatment of goods originated from different countries (they have political character). the effect is positive because of the increase in domestic production. the effect is negative because of the isolation of domestic producers from foreign competition. protective effect becomes prohibitive and import stops. or more than the amount of the tariff. less than the amount of the tariff. o In case of perfectly elastic foreign supply. In the long-run. o Countervailing – for neutralizing export subsidies – tariff levied against imports that are subsidized by the exporting country’s government. It depends on the elasticity of foreign export supply: o In case of perfectly inelastic foreign supply. there is no protective effect at all.Disadvantages: cannot be applied on all kinds of goods. For equalizing o Anti-dumping – for neutralizing dumping – tariff levied on dumped imports  Dumping is when the export price is “unfairly low” – either below the home market price or below cost.

Revenue effect: increase in budget revenue. This leads to inefficiencies (protection costs of a tariff). but eliminates the protective effect. Costs and benefits for a small nation: an import tariff in a small nation redistributes income from domestic consumers (who pay higher price for the commodity) to domestic producers of the commodity (who receive the higher price). Producer surplus is a payment that need not to be made in the long run in order to induce producers to supply a specific amount of a commodity. a tariff improves terms of trade. a tariff does not improve terms of trade In case of inelastic foreign supply. revenues from tariffs can be used for increasing budget surplus. It decreases the deflationary effect and increases protective effect (because of increased consumption of domestic goods) Redistributive effect: redistribution of income from domestic consumers to domestic producers. - A small nation always loses form the imposition of the import tariff. similar to selective currency devaluation. and redistributive effect. Consumer surplus is the difference between what consumers are willing to pay for each unit of the commodity and what they actually pay. Effect on employment: leads to reallocation of resources to protected industries if there are not unemployed capacities. Effect on reallocation of resources: resources are reallocated to less efficient industries. - Tariff  decrease in import  increase of consumption of domestic goods  increase of domestic production  increase of income in protected industries. Effect on balance of payments: decrease in import and outflow of foreign currencies (biggest in case of prohibitive tariff) Effect on currency: reduces import by raising price of imported goods. making its consumer surplus decrease (making its consumers worse off – consumption effect) and making its producer surplus increase (making its producers better off – redistributive effect) - Government revenue will increase Tarif Export Import Quota Voluntary . effect on domestic consumption. increasing of government spending (reduction of income taxes). It is biggest for most efficient producers who get extra profit from tariffs. Effects on terms-of-trade: depends on the price elasticity of foreign supply:   In case of an elastic foreign supply. Costs and benefits for a large nation: a tariff raises the price of a good in the importing country.

There are different types of integration:     By subjects: o Functional integrations – trans-national corporations o Institutional integrations – countries By sectoral scope: o Sectoral integration o Total integration By level of development of members o Among developed countries o Among developing countries o Among developed and developing countries By symmetry of obligations o Symmetrical o Asymmetrical There are two aspects of economic integration: trading aspect (merchandise exchange) and non-trading aspect (monetary arrangement. LAIA) Customs union (CU) . mostly at the regional level. and factor mobility. Stages of Economic Integration:    Preferential trading agreement Free trade area (FTA) o Free movement of goods. factor movements). - It is a process of eliminating restrictions on international trade.Subsidy Producer Surplus Consumer Surplus Government Net Revenue National Welfare increases increases increases Export Restraint increases decreases decreases decreases decreases increases decreases ambiguous: falls for small countries decreases no change: rents to license holders ambiguous: falls for small countries no change: rents to foreigners decreases THEORY OF ECONOMIC INTEGRATION International economic integration is a process or a stage of institutional integrating of countries. by liberalization of trade and/or liberalization of factor movement. payments. individual customs tariffs. rules of origin (EFTA.

common customs tariff (CARICOM) Economic union (partial or total) o Partial economic union – free movement of goods. o Total economic union – free movement of goods. harmonized fiscal. - Prominent state intervention in foreign trade Protectionism Subsidies for protected industries Stages: 1. common trade policy. Weaknesses and costs: inefficient and expensive industries. services. overvalued currency in order to encourage import of capital goods but therefore decreasing in competitiveness of export on primary products. common customs tariff. than in intermediate goods 3. It encourages domestic industry. single economic policy. free factor movement. Balance-of-payment arguments Decrease in economic dependence on foreign market Increase in public revenues Increase in employment Attracting foreign direct investment Potential long-term effects: benefits from industrialization and increase in export Positive results at the very beginning: relatively easy and fast development in manufacturing production and increase in production and employment. first in production of consumer goods. dividing of tariff revenues (Benelux. further worsening of trade balance. supranational institutions (EU) o   FOREIGN TRADE STRATEGIES Import substitution is an attempt to replace import by domestic production. especially on import of consumer goods 2. . monetary. and factors of production. Development of domestic industry.Free movement of goods. Increase in export Motives and arguments:       Infant industry argument – protection for industries in the early stage of development in order to achieve scale economy and high level of competitiveness. services. and other economic policies. Raising trade barriers. industrial. single currency. and factors of production. MERCOSUR) Common market (CM) o Free movement of goods.

but in practice: prominent state intervention – industrial policies and export subsidies. old technology and limited resources o Low price elasticity of demand – decreasing trend in prices of primary products and export revenues o Low population growth in developed countries o Development of synthetic substitutes Export promotion of industrial products: 1. foreign investment . mostly with countries belonging to the same region. Motives for integration – political and economic – most common motives: broader market. - Trade liberalization – reduction in barriers to import Declaratively advocating free trade and market forces as drivers of efficiency. Improvement in production and export of cheap labor-intensive products 2. Economic Integration The strategy of economic integration means orientation to joining some economic integration that already exists or establishing a new economic integration.   Concentration on cheap labor-intensive products because of endowment of cheap labor Protection measures in developed countries. Export promotion of primary products:    Largely implemented in developing countries Best results in export of oil and some minerals Insufficient export expansion because of: o Bad climate conditions.Export promotion improves exports. Production of more sophisticated industrial products based on improvement in technology. based on free trade and higher competition. and skilled labor force.    Trade liberalization within the integration Increasing barriers in trade with outsider Characteristics of trade policy of member countries mostly depend on integration level. infrastructure development.