TRADE POLICIES

The Need f o r Trade

• I f we look around us, we will

see many items we use which
are imported f r o m abroad or
which have components
imported abroad.
Reasons for Trade
●Differences in Factor
endowments
●Variety and quality of goods
●Gains from specialization
●Political reasons
 ⦿
Specialization:

In international trade, specialization

refers to a country’s decision to major in
the production of a certain good or list of
goods because of the advantages it
possesses in
their production.

⦿ Opportunity cost:
refers to what you sacrifice in making an
economic choice.
⦿ Adam Smith and David Ricardo (Great
philosophers).
⦿ Adam Smith (5 June 1723 – 19th July, 1790)
was a Scottish moral philosopher and a
pioneer of political economy. The ideas that
became associated with Smith not only
became the foundation of the
classical school of economics but also gained
him a place in history as the father of
economics. His work served as the basis for
other lines of inquiry into the economics
field, including the theory of absolute
advantage and even after his death, his great
ideas he promoted lives on.
⦿ David Ricardo
David Ricardo, a British, lived between
18-4- 1772 and 11-09-1823. Ricardo’s
interest in economic questions arose
in 1799 when he read Adam Smith’s
Wealth of Nations. David Ricardo’s
aspects that made him to be known
across the world is his contribution
to the law of comparative advantage.
He wrote his first economics article at age
thirty-seven and then spent the
following fourteen years—his last
ones—as a professional economist.
⦿ Trade:
According to a definition given by
wealth of Nations (WN ), a book
written by Adam Smith; trade is
the consequence of the human
“propensity to truck, barter, and
exchange one thing for another.
 International Trade

The process of buying goods and

services from the
rest of the world (importing) and that
of selling goods and services to the
rest of the world (exporting) is
referred to as international trade
Theory
It can be defined as a belief that can
guide behaviour or a well-
substantiated explanation of some
aspect of the natural world; an
organized system of accepted
knowledge that applies in a variety of
circumstances to explain a specific
set of phenomena.
International Trade Models
• Mercantilism;
• The Classical Theories:
– The Principle of Absolute
Advantage
– The Principle of Comparative
Advantage
• The Heckscher-Ohlin-
Samuelson Model;
• Alternative Trade Theories
Mercantilism
• Mercantilism is a political- economic
movement originating in t he period
1500-1750 whose paramount goal o f
national policy is t o make t he nation
rich and powerful t he means o f
which consisted mainly in t he
protection o f domestic industry and
t h e regulation o f trade.
 The Principle of Absolute
Advantage
“If a foreign country can supply us with a
commodity cheaper than we ourselves
can make it, better buy it of them with
some part of the product of our own
industry, employed in a way in which we
have some advantage” -Wealth of
Nations, Adam Smith
Even if one party is more
efficient in the production
of all goods (absolute
advantage in all goods)
than the other, both
countries will still gain by
trading with each other, as
long as they have different
relative efficiencies.
Country A can produce 1000 parts per hour
w i t h 200 workers.
Country B can produce 2500 parts per hour
w i t h 200 workers.
Country C can produce 10000 parts per hour
w i t h 200 workers.
COMPARATIVE ADVANTAGE
Comparative advantage refers to the
ability of a party to produce a
particular good or service at a lower
marginal and opportunity cost over
another.

The conclusion drawn is that each

party can gain by specializing in the
good where it has comparative
advantage, and trading that good for
the other.
 The Principle of
Comparative Advantage

“A nation, like a person, gains from

trade by exporting the goods or
services in which it has its greatest
comparative advantage in
productivity and importing those in
which it has the least comparative
advantage.”
David Ricardo
 C l o th Wine
Britain 100 110
Po rt ugal 90 80

I t is e f f i c i e n t f o r Britain t o produce clot h, and

Portugal t o produce wine, as, assuming t h a t these
trade a t equal price (1 u n i t o f c l o t h f o r 1 u n i t o f
wine) Britain can then obtain wine a t a cost o f 100
labor units by producing c l o t h and trading, rather
than 110 units by producing t h e wine itself, and
Portugal can obtain c l o t h a t a cost o f 80 units by
trade rather than 90 by production.
 The Gains From Trade
A nation’s gains from trade
consists of two
components:
the gain from the
reallocation of
consumption; and
the gain from
specialization in
production.
The fact that a
nation unequivocally
gains from international
trade does not mean
that all groups within
the nation necessarily
gain: in fact some
groups will lose.
Who Gains?
Producers and workers in the export
industry gain as a result of higher
world prices and a larger volume of
trade;
Consumers of the import competing
good gain as a result of lower world
prices and a larger supply; and
Firms which use imported components
and materials in their production
process gain as a result of lower
import prices.
Who Loses?
Producers and workers in the import-
competing industry lose due to
increased competition from imports;
Consumers of the export good lose due
to the smaller supply available to the
local market and higher world prices;
and
Firms which use exportable
components and materials in their
production process lose due to
increased prices.
What is Trade?
•A basic economic concept t h a t
involves multiple parties participating
in t h e voluntary negotiation and t hen
t h e exchange o f one's goods and
services f o r desired goods and
services t h a t someone else possesses.
Theory o f Comparative
Cost advantage
• Nations should specialize in t h e
production o f goods in which
they have comparative
advantage and import those
products o f which i t has t h e
least advantage .
Trade practices and policies

• Philippine exports have been

t h e main dollar earner o f t h e
country. In recent years, i t has
co nt rib ut e d about f i f t y
percent o f t o t a l dollar
receipts o f t h e country.
Balance o f payments
• O u r balance o f payments is
considered favorable i f dollar
inflows or receipts exceed
outflows or payments.
Balance of trade
• The balance of trade is called
favorable if exports exceed
imports.
• The balance of trade is called
unfavorable if imports exceed
exports.