introduction.pptx

UNIVERSITY OF TUNIS
CARTHAGE
INTERNATIONAL TRADE
NABIL ALIMI

INTRODUCTION
• What Is International Trade?
• International trade is the exchange of goods and services
between countries
• Trading globally gives consumers and countries the
opportunity to be exposed to goods and services not available
in their own countries.
• Almost every kind of product can be found on the
international market: food, clothes, spare parts, oil, jewelry,
wine, stocks, currencies, water.. etc.
• Services are also traded: tourism, banking, consulting and
transportation
• If there is a trade of goods and services, then there will be a
money flow; inflow and outflow

Reason for Trade #1: Differences in
Technology
Advantageous trade can occur between countries if the
countries differ in their technological abilities to produce
goods and services. Technology refers to the techniques
used to turn resources (labor, capital, land) into outputs
(goods and services).

Reason for Trade #2: Differences in Resource
Endowments
Advantageous trade can occur between countries if
the countries differ in their endowments of
resources. Resource endowments refer to the skills
and abilities of a country’s workforce, the natural
resources available within its borders (minerals,
farmland, etc.), and the sophistication of its capital
stock (machinery, infrastructure, communications
systems).

Reason for Trade #3: Differences in Demand
Advantageous trade can occur between countries if
demands or preferences differ between countries.
Individuals in different countries may have different
preferences or demands for various products. For
example, the Chinese are likely to demand more
rice than Americans, even if consumers face the
same price. The Dutch more wooden shoes, and
The Japanese more fish than Americans would,
even if they all faced the same prices.

Reason for Trade #4: Existence of Economies
of Scale in Production
The existence of economies of scale in
production is sufficient to generate
advantageous trade between two countries.
Economies of scale refer to a production
process in which production costs fall as the
scale of production rises. This feature of
production is also known as “increasing
returns to scale.”

Reason for Trade #5: Existence of
Government Policies
Government tax and subsidy programs
alter the prices charged for goods and
services. These changes can be sufficient
to generate advantages in production of
certain products. In these
circumstances, advantageous trade may
arise solely due to differences in
government policies across countries.

Efficiency of Trading Globally
• Global trade allows wealthy countries to use their
resources - whether labor, technology or capital - more
efficiently. Because countries are endowed with different
assets and natural resources (land, labor, capital and
technology).
• Some countries may produce the same good more
efficiently and therefore sell it more cheaply than other
countries.
• If a country cannot efficiently produce an item, it can
obtain the item by trading with another country that can.
This is known as specialization in international trade.

Balance of payments (BOP):
The balance of payments of a country is the record of all
economic transactions between the residents of a country
and the rest of the world in a particular period (over a
quarter of a year or more commonly over a year). These
transactions are made by individuals, firms and
government bodies.

Relation of Foreign Trade to
National Income:
•The impact of international trade can be judged from the
balance of payments of a country.
•When the exports of a country exceed its imports, there is a
flow of money income into the country and the level of national
income and employment goes up. On the other hand, when
imports exceed exports, there is a withdrawal of national
income.
•How much the volume and value of exports of a country will
be depends upon the extent of the market for the goods of the
country
The national income equation thus is: Y = C + I + G + (X – M)
X and M stand for export and import respectively

Advantages of international trade
Nations with strong international trade have
become rich and have the power to control
the world economy.
• The global trade can become one of the
major contributors to the reduction of
poverty.
• The rise in the international trade is
essential for the growth of globalization

Some more advantages
(i) Economy in the Use of Productive Resources: Each
country tries to produce those goods in which it is best
suited. As the resources of each country are fully exploited,
there is thus a great economy in the use of productive
resources.
(ii) Wider Range of Commodities: International trade makes it
possible for each country to enjoy wider range of
commodities than what is otherwise open to it. The
commodities which can be produced at home at relatively
higher cost can be brought from the cheaper market from
abroad and the resources of the country thus saved can be
better employed for the production of other commodities in
which it is comparatively better fitted.
(iii)Scarcity of Commodities: If at any time there is shortage
of food or scarcity of other essential commodities in the
country, they can be easily imported from other countries
and thus the country can be saved from shortage of
commodities and low standard of living

(iv) Promotes Competition: International trade promotes
competition among different countries. The producers in
home country, being afraid of the foreign competition, keep
the prices of their products at reasonable level.
(v) Speedy Industrialization: International trade enables
a backward country to acquire skill, machinery; and other
capita! equipment from industrially advanced countries for
speeding up industrialization.
(vi) Fall of Prices prevented: A country can export her
surplus products to a country which is in need of them.
The home prices are, thus, prevented from falling.

(vii) Extension of Means of Transport: When goods are
exchanged from one county to another, it leads to an
extension of the means of communication and transport.
(viii) Socio-Economic intergration: International trade
offers facilities to the citizens of every country to come in
contact with one another. it makes them realize that no
country in the world is self-sufficient. It thus promotes
peace and goodwill among nations.

Disadvantage of international trade
• International trade has its own demerits/disadvantages.
These, in brief are as follows:
• (i) Exhaustion of Resources: In order to earn present export
advantages a country may exploit her limited natural
resources beyond proper limits. This may lead to exhaustion
of essential material resources like iron, coal, oil, etc. The
future generation thus stands at a disadvantage.
• (ii) Effect on Domestic Industries: If no restrictions are
placed on the foreign trade, it may ruin the domestic
industries and cause widespread distress among the people.
• (iii) Effect on Consumption Habits: Sometimes it so
happens that the traders in order to make profits import
commodities which are very harmful and injurious to the
people For instance, if opium, wine, etc., are imported, it will
adversely affect the health and morale of the people.

MODELS
Several different models have been proposed to predict
patterns of trade and to analyze the effects of trade policies
such as tariffs.

ABSOLUTE ADVANTAGE (Adam
smith)

RICARDIAN MODEL
THE RICARDIAN MODEL FOCUSES ON COMPARATIVE
ADVANTAGE AND IS PERHAPS THE MOST IMPORTANT
CONCEPT IN INTERNATIONAL TRADE THEORY. IN A
RICARDIAN MODEL, COUNTRIES SPECIALIZE IN
PRODUCING WHAT THEY PRODUCE BEST. UNLIKE
OTHER MODELS, THE RICARDIAN FRAMEWORK
PREDICTS THAT COUNTRIES WILL FULLY SPECIALIZE
INSTEAD OF PRODUCING A BROAD ARRAY OF GOODS.
ALSO, THE RICARDIAN MODEL DOES NOT DIRECTLY
CONSIDER FACTOR ENDOWMENTS, SUCH AS THE
RELATIVE AMOUNTS OF LABOR AND CAPITAL WITHIN
A COUNTRY.

HECKSCHER-OHLIN MODEL
The Heckscher-Ohlin model was produced as an
alternative to the Ricardian model of basic comparative
advantage. Despite its greater complexity it did not prove
much more accurate in its predictions. However from a
theoretical point of view it did provide an elegant solution
by incorporating the neoclassical price mechanism into
international trade theory.

The theory argues that the pattern of international trade is
determined by differences in factor endowments. It predicts
that countries will export those goods that make intensive
use of locally abundant factors and will import goods that
make intensive use of factors that are locally scarce.
Empirical problems with the H-O model, known as the
Leontief paradox, were exposed in empirical tests by
Wassily Leontief who found that the United States tended
to export labor intensive goods despite having a capital
abundance.

NEW TRADE THEORY
New Trade theory tries to explain several facts about trade,
which the two main models above have difficulty with.
These include the fact that most trade is between countries
with similar factor endowment and productivity levels, and
the large amount of multinational production (i.e. foreign
direct investment) which exists. In one example of this
framework, the economy exhibits monopolistic competition
and increasing returns to scale.

GRAVITY MODEL
The Gravity model of trade presents a more empirical
analysis of trading patterns rather than the more
theoretical models discussed above. The gravity model, in
its basic form, predicts trade based on the distance
between countries and the interaction of the countries'
economic sizes. The model mimics the Newtonian law of
gravity which also considers distance and physical size
between two objects. The model has been proven to be
empirically strong through econometric analysis. Other
factors such as income level, diplomatic relationships
between countries, and trade policies are also included in
expanded versions of the model.

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