INTERNATIONAL

TRADE
Presented by:
Sehar Nisar
Asad Raza
Zahid Saeed
Syed Shabbir Rizvi
Presented to:
Dr. Ayesha Shouket
1/3/17

Date: 4th Dec, 2016

DETERMINANTS
OF TRADE

EQUILIBRIUM WITHOUT
TRADE

• When an economy cannot trade in world
markets, the price adjusts to balance
domestic supply and demand.
• The following figure shows consumer and
producer surplus in an equilibrium without
international trade.

Equilibrium without Trade Copyright © 2004 South-Western Price of Steel Domestic supply Equilibrium price Consumer surplus Producer surplus Domestic demand 0 Equilibrium quantity Quantity of Steel .

. •The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive.EQUILIBRIUM WITHOUT TRADE •Domestic price adjusts to balance demand and supply.

WORLD PRICE “The price of a good that prevails in the world market for that good” .

ABSOLUTE ADVANTAGE If a country has an absolute advantage in the production of a good or service. it means it is the most efficient producer of that product. South Africa Japan Wheat 55(bags) 18(bags) DVD’s 11 72 • Japan has an absolute advantage in DVD’s • South Africa has an absolute advantage in Wheat .

A produces it loses 5 bags of wheat as OC 8/4 = 2 • For each DVD’s JAPAN produces it loses 2 bags of wheat as OC .COMPARATIVE ADVANTAGE Wheat DVD’s South Africa 40 8 Japan 8 4 40/8 = 5 • For each DVD’s S.

• Whereas if a country does not have a comparative advantage. and the country will be an importer of the good . and that country will be an exporter of the good. then the domestic price will be higher than the world price.THE WORLD PRICE & COMPARATIVE ADVANTAGE • A country has a comparative advantage. then the domestic price will be below the world price.

Balance Of Payment • Current Account BOT-Trade Deficit and Trade Surplus • Capital Account • Financial Account .

The Gain And Loses of Importing/ Exporting Country .

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.Benefits of International Trade .Understanding & Effects of Tariff .Trade Policy .

UNDERSTANDING & THE EFFECTS OF TARIFF Prices of Oil $ 30 Domestic Supply Domestic Demand Consumer Surplus After Tariff Equilibriu m without trade Tariff: A tax on good produced abroad and sold domestically Prices with $ 25 Tariff (World Price + Tax) Prices without Tariff (World Price) Consumer Government (After Surplus Revenue Tariff) Import Before Tariff with $ 20 Supply Demand Producer tariff Surplus Import without tariff with out Tariff Producer Surplus with Tariff QSD QSD’ QDD’ QDD Quantity of Oil .

Trade Policy .

If government allows import and export .LESSONS FOR TRADE POLICY 1. Should a tariff be a part of the trade policy? . What effect (gain or lose) free trade will create on market? 3. what effect it will create on price and quantity of the good sold in the domestic market? 2.

OTHER BENEFITS OF INTERNATIONAL TRADE .

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.MODELS OF EXCHANGE RATE • Purchasing Power Parity (PPP): It suggests that purchasing power of different currencies should be the same when converted to a common currency value through the exchange rate.

LAW OF ONE PRICE: When converted to a common currency value through the exchange rate. . the price of identical goods should be the same across national boundaries.

EXCHANGE RATE: • The price of one currency expressed in units of another currency. .

& that the exchange rate is nothing more than the ratio of the price levels of a common bucket of goods expressed in each currency.2 FORMS OF PPP: • The ABSOLUTE PPP model suggests that the law of one price holds because of the presence of arbitrage processes. .

.2 FORMS OF PPP: • The RELATIVE PPP model focuses on the importance of relative inflation rates as a determinant of the exchange rate. It suggests that if the rate of inflation in the domestic economy exceeds that of the foreign country. the currency will depreciate in line with the inflation differential.

THE JOB ARGUMENT • Trade with other countries destroys domestic jobs. • Workers in each country will eventually find jobs in the industry in which that country has a comparative advantage. • Yet free trade creates jobs at the same time that it destroys them. .

.NATIONAL – SECURITY ARGUMENT: • Free trade often argue that the industry is vital for national security.

(every country has its own governing rules and business rules.THE UNFAIR COMPETITION ARGUMENT • An assumption that free trade is only favorable when all the countries plays with the same rules. • Free trade may not be favorable for the producers. • In-fact neither the rules are same nor they can be same. .

• Response to threat can result in freer trade.THREAT AS A BARGAINING TOOL. • A threat of restriction can be used as a tool to bargain. i. • Policy makers beliefs that trade restriction can be useful when we bargain with our trading partners. .e. I’ll impose tariff on my exports on steel if you fail to remove tariff on your wheat supplies to me.

. Backing from the threat is a “IMAGE SPOILER” of the country. • Backing from the threat may harm the prestige of the country in the international market.• If the threat doesn't works country has to make a difficult choices.

WORLD AGREEMENTS AND THE WORLD TRADE ORGANIZATIONS Approaches Unilateral Multilateral .

. its called bilateral approach.UNILATERAL AND BILATERAL APPROACH • Removing trade and restrictions on its own is called unilateral approach. • When two countries with mutual consent remove sanctions and restrictions and agree to open trade. • Iran also removed sanctions and restrictions on trade and has decided to export goods to America and also import the goods from USA. • USA recently removed sanctions on its own to trade with Iran.

MULTILATERAL APPROACH • A country can reduce its own restrictions and sanctions while the other countries do the same. • International organizations play their roles in promoting trade and negotiations between the countries to curb sanctions. • Multilateral trade is a trade bargain with its trading partners to reduce restrictions around the world. .

(WTO) .INTERNATIONAL ORGANTIZATIONS • North America Free Trade Agreement (NAFTA) • General Agreement on Tariff and Trade(GATT) • World Trade Organizations.

ADAM SMITH & FREE TRADE • Mutual gains from voluntary exchange of existing goods • Increased competition • The division of labor • Better us of skills and resources in different countries. 1/3/17 .

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