INTERNATIONAL

e c o n o m i c s
dpb20033 | macroeconomics
 international trade | definition | domestic trade and international trade | merits and
c o n t e n t s demerits of international trade | absolute advantage theory
and comparative advantage theory
protectionism policies | definition | purposes and tools of protectionism policies
balance of payments | definition | balance of payments structure of Malaysia | ways to
overcome the disequilibrium
exchange rate | definition | fixed exchange rate and floating exchange rate
international trade

“ exchange of goods
and services
between countries.
- definition
“
 differences of domestic trade vs international trade

Immobility of factors of production

Documentation
Labour are free to move within
the country Greater documentation in
international trade
Natural resources
Protectionism
Different country, different
commodities Practiced in international trade

Monetary units
Size of market and total transaction
Different country, different
currencies Bigger size and greater total
transaction in international trade
National policies
Differences in the laws of different
country

Domestic Trade (Internal Trade/Home Trade) is the exchange of domestic goods within the boundaries of a country;
sub-divided into wholesale and retail.
 merits and demerits of international trade

Merits
Demerits
▪ Increase world output
▪ Varieties of goods and services ▪ Depletion of country’s reserve
▪ Relationship between trading ▪ Economics and political
partners dependence
▪ Higher income and economic ▪ Transportation cost
growth
▪ Sharing of knowledge and
technology
 absolute advantage theory

“ theproduce
ability of a country to
more efficiently
than another country
- definition
“
“ trade between two countries occurs if one of
them has an absolute advantage in producing
one product while the other has an absolute
cost advantage in producing another product “
- Adam Smith
absolute advantage theory | assumptions

“ ▪
▪
only two countries in the world
only two goods are produced
▪ free trade exists between these two country
▪ no transportation costs are involved
▪ production is under the law of constant
costs
▪ identical productions between trading
countries
“
absolute advantage theory | before and after

Before Specialization After Specialization

Cotton Rice Cotton Rice

Malaysia 20 60 0 120

China 40 20 80 0

Total 60 80 80 120

▪ Equally divided resources for production cotton ▪ 120 tons rice and 80 tons cotton will produced
and rice after specialization
▪ Malaysia has absolute advantage in producing rice ▪ With specialization total world output will
▪ China has absolute advantage in producing cotton increase
▪ When specialization take place, Malaysia will
channel all its resources to produce rice and China
will produce cotton
 comparative advantage theory

“ the ability of a country to

produce goods at a lower
opportunity cost than
another country
- definition
“

Opportunity Cost is the cost of desired goods that has to be forgone to obtain another goods.
comparative advantage theory | before

Before Specialization
Cotton Rice

Malaysia 80 100

Thailand 70 50

Total 150 150

“ Ahascountry should specialize in goods in which it

a greater comparative advantage or lower
opportunity cost than other countries. “
- David Ricardo
comparative advantage theory | opportunity cost

Before Specialization Opportunity Cost

Cotton Rice Cotton Rice

Malaysia 80 100 8 0.8

Thailand 70 50 0.71 1.4

Total 150 150

Calculation of Opportunity Cost for Cotton

▪ Malaysia : 1 ton of cotton = rice/cotton = 100/80 = 8 rice
▪ Thailand : 1 ton of cotton = rice/cotton = 50/70 = 0.71 rice
Calculation of Opportunity Cost for Rice
▪ Malaysia : 1 ton of rice = cotton/rice = 80/100 = 0.8 cotton
▪ Thailand : 1 ton of rice = cotton/rice = 70/50 = 1.4 cotton
▪ Malaysia has to sacrifice only 0.8 tons of cotton to
produce 1 ton of rice, compare to Thailand (1.4)
▪ Better for Malaysia to produce rice due to lower
opportunity cost
▪ Cotton; Thailand has to sacrifice 0.71 tons of rice
compare to Malaysia (8).
▪ Thailand can produce cotton at lower cost
comparative advantage theory | before and after

Before Specialization After Specialization

Cotton Rice Cotton Rice

Malaysia 80 100 0 (80/0.8) + 100 = 200

Thailand 70 50 70 + (50/0.71) = 150.4 0

Total 150 150 150.4 200

▪ After specialization, total world output of cotton and rice

increase.
▪ How much rice to exchange for cotton is determine by
term of trade.

Term of trade refers to the rate at which goods are exchange.

sample question
Table below shows the trade of two goods between two countries. Based on the
table, answer the following questions.

Country Wood Product (unit) Palm Oil Product (unit)

Malaysia 800 1500
Indonesia 500 750

i. Which country has absolute advantage in the production of Palm Oil

Product?
ii. Define comparative advantage and determine which country should
specialize in the production of Wood Product and Palm Oil Product based
on comparative advantage theory. Show your calculation.
iii. Construct a table to show the total production after specialization.
Suggested Answer

Country Wood Product (unit) Palm Oil Product (unit)

Malaysia 800 1500
Indonesia 500 750

i. Which country has absolute advantage in the production of Palm Oil Product?
Malaysia
ii. Define comparative advantage and determine which country should specialize in the production of Wood Product
and Palm Oil Product based on comparative advantage theory. Show your calculation.
Comparative advantage is the ability of a country to produce more efficiently than another country, based on
the lower of the opportunity cost.
Calculation of Opportunity Cost for Wood Product
▪ Malaysia : 1 unit of wood product = palm oil product/wood product = 1500/800 = 1.875 unit palm oil product
▪ Indonesia : 1 unit of wood product = palm oil product/wood product = 750/500 = 1.5 unit palm oil product
Calculation of Opportunity Cost for Palm Oil Product
▪ Malaysia : 1 unit of palm oil product = wood product/palm oil product = 800/1500 = 0.53 unit wood product
▪ Indonesia : 1 unit of wood product = palm oil product/wood product = 500/750 = 0.67 unit palm oil product
Wood Product = Indonesia Palm Oil Product = Malaysia
Suggested Answer
iii. Construct a table to show the total production after specialization.
▪ Wood Product, Indonesia : 1 unit of wood product = 1.5 unit palm oil product
▪ Palm Oil, Malaysia : 1 unit of palm oil product = 0.53 unit wood product

Country Wood Product (unit) Palm Oil Product (unit)

Malaysia 0 1500 + (800/0.53) = 3009.4

Indonesia 500 + (750/1.5) = 1 000 0

Total 1 000 3009.4

“restrict
government policies that
international trade to
protect domestic industries. “ protectionism policies
- definition
national security argument
▪ a country must self sufficient
in certain industry
▪ eg. National defense and
security
anti-dumping argument
▪ sales of import goods at a
lower price than local
▪ disadvantages for local
product
▪ eg. rice from Thailand
low foreign wage argument
▪ uneven wages between
countries lead to migration
▪ threats to local employment
protectionism policies | reasons

▪ new industries should be ▪ to control unemployment

protected until established due to competition between
▪ eg. Proton vs import cars domestic and local
producers

infant industry argument domestic employment argument

“
“
A tax imposed by the government
on imported products “ A law that bars trade with
- Tariffs

“
another country “
- Embargo
A fixed tariff imposed on a unit
of imported goods “
- Specific Tariffs

“
protectionism policies | tools
A tariff imposed on imported goods
based on the value of the goods “
- Ad Valorem Tariffs

“ Control on the amount of money that is

allowed to brought into and out of a country “
“
- Exchange Control
A legal limit on the number of units of a
particular commodity that can be imported
“
- Quota
“a statement of all transactions made between entities
in one country and the rest of the world over a
defined period of time, every quarter and every year.
- definition
“
balance of payment
the structure of Malaysian Balance of Payments
the structure of Malaysian Balance of Payments

earnings arising from the provision of a factor of production:

Current Account labor, financial assets, land, and natural resources
Contains receipts and redistribution of income through current transfers (e.g., by
payments on goods governments or charitable organizations)
and services

an investment in a foreign business enterprise designed to

acquire a controlling interest in the enterprise.
Capital and Financial
ownership of a stock, bond, or other financial asset with
Account the expectation that it will earn a return or grow in value
Records the payment over time, or both.
flows on purchase of
foreign asset and a contract between two or more parties whose value is
Malaysian asset based on an agreed-upon underlying financial asset, index,
or security.
balance of payments | overcome disequilibrium

Export promotion
▪ Strengthening competitiveness (developing
quality, improve marketing strategies)
▪ Granting subsidies
▪ Tax exemption Using government reserve
▪ Abolishing export duties ▪ Gold and foreign currencies
▪ Short term
Discourage import
▪ Impose tariff rates
▪ Quota Devaluation
▪ Lowering the par value of the country currencies
Inflation ▪ Export will decrease because price relatively
▪ Control inflation by impose monetary and fiscal decrease
policy in order to reduce n=money supply ▪ Import decrease due to lower purchasing power
 exchange rate

“ currency
the value of one nation's currency versus the
of another nation or economic zone. “
- definition
exchange rate| fixed exchange rate vs floating exchange rate

“ A fixed, or pegged, rate is a rate the government (central bank)

sets and maintains as the official exchange rate. “
- Fixed Exchange Rate

“ A floating exchange rate is determined by the private market

through supply and demand. “
- Floating Exchange Rate
thank | you