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DEFINITION OF INTERNATIONAL TRADE

International Trade refers to the

exchange of good and services between the people of two countries

ADVANTAGES OF INTERNATIONAL TRADE


1.

Increase world output World output increases through specialization and trade. This will explained in the earlier section on comparative advantage and how an individual countrys output increases.

2.

Varieties of goods and services There are varieties of goods and services available for consumption of a country. Consumers can enjoy some of the goods which cannot be produced in their country. Examples: Malaysia cannot produce apples and grapes.

3. Higher income and economic growth International Trade can generate more income and this can also increase the standard on living of a country. if more goods are exported, the income generate can lead to the economic growth of that particular country.

4. Relationship between trading partners the relationship between trading partners can be improved. Example: through trade fairs, economic co-operation (ASEAN,EU) and cultural exchanges.

5. Sharing knowledge and technology. through International Trade, there will also sharing of knowledge and technology by countries. example: if Malaysia imports new technology-basedmachinery from Japan, then both countries can share the technology.

PROTECTIONISM
Definition: Protectionism is practiced only in international

trade where many countries want to protect their local industries from foreign competition

TOOLS OF PROTECTIONISM
1. Tariff Is a tax imposed by the government on imported product. The effect is to raise the price of imports for domestic

consumption, to raise government revenue and also to mainly protect domestic producers. There are two types of tariffs: specific tariff and ad volarem tariff

(a) Specific tariff (based on unit)


A specific tariff is a fixed tariff imposed on a unit of imported goods. For example, a tariff is set that for an imported perfume bottle at

RM20. If the price of one perfume bottle is RM150 and the company imports 100 bottles, the tariff charge will be RM2000.
A specific tariff is based on quantity of goods and not on the value.

(b) Ad valorem tariff (based on value)


Ad valorem tariff is a tariff imposed on imports based on the value of

the import.
For example, a tariff for imported jeans is 20% and the price of jeans

is RM200. Thus the tariff charged is RM40. If the price of jeans is RM250, then the tariff rate is RM50.
Ad valorem tariff is based on the value of goods.

2. Quotas
a legal limit on the number of units of a particular commodity that can

be imported into the country.


also refer to limitations imposed on the quantity imported. Example : Malaysian government decides to limit the import of

television sets from Japan to 10, 000 units. Soon after the quota is reach and no more television sets can be imported.
3. Embargoes
A law that bars trade with another country. Also known as direct

control.
An embargo may include a ban on goods from countries with different

ideologies.
Example: Malaysia bans goods from Israel.

4. Exchange Control

A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market.

REASONS FOR PROTECTIONISM

Economic Reasons
To protect infant industries Infant industries are those which may need temporary protection from the established industries of other nations to develop an acquired comparative advantage. If such industries are not protected, they might never develop the comparative advantage and will be undercut and driven out of world markets. An example is our automobile industry. To protect against unfair trade practices An example dumping. Which is the export of goods in large quantity with the goods deliberately priced at lower than local goods for the purpose of maximizing profit. Dumping may affect sales of domestic goods if these goods cannot compete with the price of imported goods. Other kinds of unfair competition include foreign monopoly practice and unfair campaign on goods.

To protect domestic employment Employment in exporting industries may also be protected by protecting our industries from foreign competition.

Industrial diversification This policy promotes industrial diversification. By diversifying, it means a nation produces goods & services in all fundamental sectors of the economy, such as raw material, food & energy, even if producing at less than efficient output. This is to avoid economic & political dependency on other nations, which may bring problems to the nation if the relationship worsens.

Source of government revenue

tariff that is collected from international trade also acts as an important source of revenue to the government.

To correct an adverse balance of payments

protectionism is a measure to correct a temporary adverse balance of payments position (a deficit in the balance of payments). A deficit may result from an excess of imports of goods and services over exports. Thus a restriction in imports may help improve on the term of trade.

Balance of Payments

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