unit 8 international specialization and trade

Unit 8 INTERNATIONAL SPECIALIZATION AND TRADE

International Trade:

International trade refers to the exchange of goods and services between countries. It results in specialisation and this will lead to an increase in the quantity as well quality of goods and services produced and consumed. Trade thus increases the welfare of a society.


What caused globalization?- Increasing reliance of economies with each other.- Opportunities for firms to buys and sell products with any

countries in the world (improvement in transportation and communication)

- Increasing opportunities for labour and capital movement anywhere in the world

- Growth of global financial markets

All the above factors promote globalization and international trade and affect the allocation of resources, balance of payment, economic growth, employment and inflation in different countries.


Specialization and Comparative AdvantageSpecialization comes about because of factor endowment, land, labour and capital and entrepreneurship.

Examples:- Thai labour is endowed with ability to grow rice. Therefore

Thailand is a major rice exporter to the world.- Chinese have abundantly skilled and productive labour. This

makes the Chinese the greatest manufacturer the world has ever seen, arguably.

- French vineyards have some of the best grapes in the world. France has a monopoly on the wine industry.

- America has advance nuclear technology. America is much sought after in the manufacture of nuclear plants and weapons.


Specialization and Comparative Advantage

Teaser 1: What does Singapore specialize in?

- very open economy (we import and export freely with little restrictions)- highly skilled and intelligent labour force- first class port and airport facilities- a great geo-graphical position- a very developed financial center

Endowments are:

Specialization in:- Import export business- Financial services- Production of high technology computer components- Consultancy in management of public infrastructure.


What is Absolute Advantage: (page 428 Monyihan)

AA: Based on Units Produced Per labour.


What is Comparative Advantage (page 429 Moynihan)

CA: Based on how much one has to sacrifice of the other good (X) to create one more (Y) (opportunity cost)


Teaser 1: Comparative AdvantageCars Ships

China 1000 100

USA 500 10

1500 110

1. Calculate the amount of cars the US has to sacrifice to build 1 ship.2. Calculate the amount of cars China has to sacrifice to build 1 ship.

3. Calculate the amount of ships the US has to sacrifice to build 1 car.

4. Calculate the amount of ships China has to sacrifice to build 1 car.

5. Which country should specialize in building ships and which in cars.

Presenter: Bank of China To hand up: Quraishah, Winnie, Amelia, Tsu Yang, Ryan, Faith, Valarie


Structural Changes in the Global EconomyA. Increasing Integration of Economies of the World Through Trade.1. Economies of the world are becoming more integrated with each other. The world has become more open and globalized. What does this mean? With globalization, countries are able to increase their consumption beyond their economic potential as illustrated by a PPC. 2. The last decade has also seen rapid economic growth and development in many countries causing worldwide income to rise especially in Asia and Africa . This growth and income has generate a demand for a range of variety of goods and services and as such caused many countries to look towards imports to meet their needs of an improving standard of living.3. Improvements in technology of transport and communication and the resulting fall in transport cost have contributed significantly to the process of globalization.

Unit 8 INTERNATIONAL SPECIALIZATION AND TRADESpecialization and Comparative Advantage

1. There has been increasing deregulation of financial system in many countries. This means that many governments have removed significant barrier to entry of their financial system allowing foreign banks to operate and compete with local banks.2 . This deregulation has also allowed banks to create and develop many new financial products which has significantly increase in the volume of flow funds in and out of a country in search of financial assets that would yield higher returns. International flows of capital and funds have thus increased.3 . Improvement in ICT like algorithmic trading has leads to a significant fall in communication costs as well and financial capital can be transacted across countries at negligible costs and time and have caused the increase in the volume of financial capital flowing in and out of countries.

B. Increase Movement of Capital Between Countries


Specialization and Comparative Advantage

C. Relaxation of legal barriers to labour mobility has increased labour flows between countries

1. Singapore has relaxed its immigration policies to allow greater inflow of foreign labour to fill up shortages in various industries and keep wage cost competitive.

2. At the same time, labour from developed countries and who have specialized skill will be highly needed in helping developing countries to improve and to be more efficient and productive as they strive to be a developed nation.

3. Multinational Corporation will relocate from developed to developing nations to take advantage of the cheaper cost of labour.


Advantage of International TradeAdvantages:1. Allows countries to benefit from specialization.

2. International trade increases consumer choice.

3. International trade increases competition and efficiency

4. International trade creates additional business opportunities and help local firms to increase their scale of operation.

5. Free trade enables firms to benefit form the best workforces, resources and technologies from anywhere in the world.

6. International trade creates interdependency amongst countries and reduces the potential for conflicts.


Advantage of International TradeDisadvantages:1. Economies with cheap labour are creating cheaper exports that

will threaten jobs in the developed countries where wages are higher.

2. International trade is contributing to rapid resources depletion and climate change.

3. International trade may increase the exploitation of workers and the environment.

4. International trade may be increasing the gap between rich and poor countries as the big companies which dominate the world markets for a commodity like oil or other resources can dictate market price and keep it low and depressed.


Owing to the disadvantages of international trade and globalization barriers to trade exist to reduce imports and to protect locally produced goods. So methods of protectionism are:

1. Tariffs(a tax on Imports) – A tax on imports.

2. Subsidies – Subsidizing the production of a domestic good so as to reduce its cost of production.

3. Embargo – Banning an imports from coming into the country.

4. Excessive quality standards and bureaucracy – Rules, regulation, import license etc.

A tariff is used to reduce imports so as to reduce imports and to maintain a positive and stable balance of payment

P

Q

S

D(Import price , China) P1

(Domestic US Price) P0

Q1Q0

US, Cellphone Market - Domestic cellphone too expansive compared to Chinese imported cellphone, P0<P1

- Government levies, a tariff (T), to reduce imports

Amount of imported cellphones Q1-Q0

Tariff, T

- Q1 (quantity demanded) > Q0 (quantity supplied)

P2 Import amount ($) before Tariff

Import amount ($) after Tariff

A tariff can therefore reduce imports and reduce the amount of funds flowing out of a country leading to positive BOP.

How A Tariff Works (An Example of Protectionism)


Teaser 2:

1. What is protectionism.

2. Use and example to explain how protectionism can help a country to restrict imports and improve on the country’s balance of payment.

Presenter: Sumitomo

To hand up: Melvin, Dilan, Kenneth, Dylan, Desmond, Denise, Sue Ning, Mandy, Xinyu


Arguments for Trade Barriers:

1.To protect infant industries.2.To protect sunset industries.3.To protect strategic industries.4.To protect domestic firms from dumping.5.To limit over specialization 6.To correct trade imbalance.


Arguments against Trade Ba rriers:

1.They restrict consumer choice.2.They restrict new revenue and

employment opportunities.3.They protect inefficient domestic firms.4.Other countries may retaliate.

unit 8 international specialization and trade

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