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International Economics

Theoretical Bases
of International Trade

By:
Antonio, Zarahlyn C.
Languisan, Stefany Eden C.
Trinidad, Jennifer Lorelie Clare P.

1. Mercantilism (Thomas Munn)

- For a nation to become rich and

powerful, it needs to export more and
import less.
- The more gold a nation had, the
richer and more powerful it was.

2. Theory of Absolute Advantage (Adam

Smith)
Each nation could specialize in the
production of those commodities in
which it has an absolute advantage,
and import those commodities in which
it has an absolute disadvantage.
Produce increase in world output.

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2. Theory of Absolute Advantage (Adam

Smith)

PH has an absolute advantage over JPN in terms of producing sugar

JPN has an absolute advantage over PH in terms of producing rice
If PH concentrate in producing sugar while JPN concentrate in
producing rice, production of both commodities would be greater.
Both countries would share in this increase from exchange and both
will benefit from higher output of both commodities.

3. Theory of Comparative Advantage

(David Ricardo)

JPN has an absolute disadvantage in both sugar and rice; sJPN has a less
disadvantage in rice.
JPN has a comparative advantage in rice and comparative disadvantage
in sugar.
PH has a comparative advantage in sugar and comparative disadvantage
in rice.
When PH and JPN exchange 10rice 10sugar, PH gains 4sugar.
To produce 10rice, JPN needs 10 days of labor but can utilize these to
produce 40sugar.
JPN can exchange 10sugar for 10rice and keep the remaining 30sugar.
PH would gain 4sugar and JPN would gain 5rice.

3. Theory of Comparative Advantage

(David Ricardo)
Even if a nation has an absolute disadvantage
in the production of both commodities with
respect to other nations, mutually
advantageous trade could still take place.
Less efficient nation should concentrate in the
production and export of commodity with less
absolute disadvantage.
Commodity in which a nation has a
comparative disadvantage should import the
commodity in which it has a greater
disadvantage.

4. Heckscher-Ohlin (OH) Theory

Factor endowments and corresponding prices
differ among nations.
Highly developed countries are abundant with
capital; less developed countries are abundant
with excess labor. Wherein the prices of capital
and labor are low because of abundance.
Each nation will export commodity intensive in its
relative abundance and cheap factor; and import
commodity intensive in its relatively scarcity and
expensive factor.
Trade will eliminate or reduce any difference in
relative and absolute factor price between nation:

factor-price equalization theorem

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Trade

Trade Barriers

Free Trade: Nothing hinders or gets in

the way from two nations trading with
each other.
Trade Barrier: Measures that
governments or public authorities
introduce that prevent or restrict
overseas trade and investment.

Trade Barriers

Trade Barriers

1. Tariff is tax on imports

Effect: is to raise the price of the
imported product. It makes imported
goods more expensive so that people
are more likely to purchase domestic
products.

2. Quota is a legal limit on the amount of

a good that may be imported
Effect: Putting a quota on a good
creates a shortage, which causes the
price of the good to rise and makes the
imported goods less attractive for
buyers. This encourages people to
buy domestic products, rather than
foreign goods.

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Trade Barriers
3. Embargo stops exports of a product or
group of products. Sometimes all trade
with a country is stopped, usually for
political reasons.
Effect: The embargo is the harshest
type of trade barrier and is usually
enacted for political purposes to hurt a
country
economically
and
thus
undermine the political leaders in
charge.

Foreign Exchange Rate

Price of the Philippine Peso versus
other currencies.
Exchange rate is made the same in all
markets by arbitrage.
Foreign Exchange Arbitrage is the
buying of a currency when its price is
low and selling it when it is high.

Foreign Exchange Rate

Foreign Exchange Rate

Currency Depreciation: when the value
of a currency declines because of
market forces (demand and supply
factors)
Currency devaluation: occurs when a
country allows the value of its
currency to drop in relation to other
currencies

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Foreign Exchange Rate

Appreciation: occurs when a currency

becomes more valuable (i.e. more
expensive)
Revaluation: is an upward change in the
currency's value.

Floating Exchange Rate

Is a rate determined by the private
market through supply and demand.
Constantly changing.
If demand for a currency is low, its
value will decrease.
Thus making imported goods more
expensive and stimulating demand for
local goods and services. This in turn
will generate more jobs, causing an
auto-correction in the market.

Fixed Exchange Rate

Is a rate the government (central bank)
sets and maintains as the official
exchange rate.
In order to maintain the local exchange
rate, the central bank buys and sells
its own currency on the foreign
exchange market in return for the
currency to which it is pegged.

Importance of Exchange Rate

For an importer, exchange rate is

important because the supplies will
require payment in a particular
currency. To pay for these supplies
the business needs to convert or
exchange their currency to the
specified currency

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Importance of Exchange Rate

When currencies collapse and the

economies go down with them things
can get rather ugly both economically
and politically.

Importance of Exchange Rate

Exchange rate markets can sometime

make or break an economy. Exchange
rates can help an economy rebuild and
come back from recessions some
times.