Gains from Trade

Trading started with barter wherein goods are exchanged for other merchandise depending on
their trade value. In the Philippines, the Chinese traded their silk and porcelain for local betel
nuts, pearl, and edible bird’s nest. in other parts of the world, the basis of trade value is the
estimation of the product’s importance to both the buyer and the seller. This kind of trading still
exists in some places in the country, notably in Zamboanga City where products from Malaysia
are exchange for local Mindanao products.

As countries advance in their process, they find that each of them is able to manufacture
some products more efficiently than others. The same is observed in firms that have explained
through absolute and comparative advantages. They are the basis of trade among firms and
countries.

Absolute Advantage

Country A and Country B both produce tables and chairs. With 100 units of inputs each,
Country A can make 150 units of chairs and 150 units of tables and Country B can create 50
units of tables and 50 units of chair (Table 3.3). Clearly, Country A has an absolute advantage
because its output for both tables and chairs is greater than the output of Country B. Therefore,
using the number of inputs, Country A is more efficient in producing the two goods.

TABLE 3.1 Productions of Country A and Country B (Absolute Advantage)

Country Tables Chairs Total

A 150 150 300
B 50 50 100

Comparative Advantage and Opportunity Cost

Chapter 1 discussed that opportunity cost is related to prioritize. The same idea can also
be used and analyzed on a wider scale such as in trade. The theory of comparative advantage
explains that the country which can supply a product for a cheaper cost should specialize in
manufacturing that product. As a result, that country can increase its output and sell the excess to
other countries at a relatively lower price.

An example is the case of two countries, Country A and Country B, manufacturing both
agricultural and technological products using 100 units of resources for each. Table 3.2 shows
that both countries yield 150 units of both products. However, Country A’s strength is in
manufacturing agricultural goods while Country B has more advantage on creating technical
products.
 Table 3.2 Production of Country A and Country B (no trade)

Country Agricultural Technical Total

Goods Products
A 100 50 150
B 50 100 150

If there is not trade between Countries A and B, both of them need to produce both
goods. However, if Country A decides to specialize in agricultural production, that is, to allocate
all its resources in producing agricultural goods, its output will increase. Table 3.3 shows that
when Country A uses all its resources on the product it specializes in, its output increases by 50
units. The same happens to Country B which concentrates in manufacturing technical products.
If the two countries start to trade, opportunity cost is eliminated because the forgone units of a
certain product in one country as a result of specialization will be compensated by more of it
from the other country. In the final analysis , after trade, both countries will have 100 units of
each product amounting to 200 units in all.

Table 3.3 Production of Country A and Country B (with trade)

Country Agricultural Technical Total

Goods Products
A 100 + 100 200
B 100 + 100 200

International Trade of the Philippines

To fully appreciate trade, the participation of the Philippines in the global buying and
selling is considered. Exports are goods and services sold by the country and imports refer to
those bought from other countries if a country exports a product, it is assumed that it has a
comparative advantage on the production of that good. The imported products are those that are
needed for the local industries as well as for public consumption.

Table 3.4 Philippine’s Share of Exports and Imports

Exports Share Imports Share

Electronics 58% Electronics 35%
Clothing 4% Fuel 22%
Furniture 3% Transport 5%
Wiring 2% Food 5%
Copper 2% Machinery 4%
Bananas 1% Chemicals 2%
Tuna 1% Iron 3%
 Table 3.4 reveals that the country is selling and buying a lot of electronic products. This
is because the Philippines has a comparative advantage in terms of skilled manpower that
produces the electronic components in the different export processing zones in the country. The
22% share of fuel importation shows the dependency of the the Philippines on imported of foreign
oil. This also explains why the country is severely affected by the oil price movement in the
world market.

The Philippines had more exports than imports in only three out of 39 years, as shown in
Table 3.5. The export
rt income and the import expense must at least break even. Therefore, the
formula for the balance of trade (BOT) is exports = imports. The Philippines, therefore, has an
unfavorable trade balance. It is unfavorable because it needs to pay for the differenc
difference in foreign
exchange or the currency in which it bought the imports. More often than not, the U.S. dollar is
used for international transactions. Thus, if there are more imports, the country needs to have
more dollars to pay for the difference.
POINT TO BE DISCUSSED

 Is it better if the Philippines trade products with other nations?

KEYS POINTS TO REMEMBER

 Barter refers to the exchange of goods depending on their trade value between traders or
merchant.
 Most of the time, the basis for trade value is the number of hours used in creating a
particular product.
 Absolute advantage occurs when a country is more efficient in producing goods and
services compared with another country.
 Comparative advantage is a principle which states that if a nation decides to specialize in
the production of a certain good in which it has the largest advantage over the nations, the
amount of output will increase.
 Buying and selling rates are exchange value of the Philippine peso against the American
dollar during importation and exportation.
 There are more years of deficit trading in the Philippine experience.