Module VII

International Economics
Reasons for Trade
Trade Theories
Trade Barriers

Leandro S. Estadilla

International Economics

Objective
Answer the question on why do countries
trade and what are the trade theories.
Enumerate why nations trade
Discuss the trade patterns explained by Adam
Smith
To know David Ricardos principle of
comparative advantage.
Discuss why other nations need protection for
trade.

International Economics

Why do nations trade? Hinges on three facts:

1. The distribution of natural, human, and capital
resources among nations is uneven.
2. Efficient production of various goods requires
different technologies or combination of
resources.
3. Products are differentiated as to quality and
other non-price attributes. A few or many
people may prefer certain imported goods to
similar goods made domestically.

International Economics

Theory of Absolute Advantage (Adam

Smith)
A country is said to have an absolute
advantage if it is more efficient in the
production of a product than other
countries with which it is contemplating
to trade.

International Economics

Table 1 No Trade

Products
Sacks of
potatoes

Pieces of
clothes

Angeles

Philippines

12

Production schedule without trade

Country

Labor for
potatoes

Output of
potatoes

Labor for
clothes

Output of
clothes

Angeles

30

20

Baclaran

15

60

Total

10

45

10

80

Production schedule with trade

Country

Labor for
potatoes

Output of
potatoes

Labor for
clothes

Output of
clothes

Angeles

10

60

Baclaran

10

120

Total

10

60

10

120

International Economics

Theory of Comparative Advantage (David

Ricardo)
A country will export the goods and
services that it can produce at a low
opportunity cost and import the goods
and services that it would otherwise
produce at a high opportunity cost.

Production schedule per person

Country

Sacks of rice

Pairs of shoes

Carriedo

12

Divisoria

Production schedule without trade

Country

Labor for
rice

Output for
rice

Labor for
shoes

Output for
shoes

Carriedo

96

12

Divisoria

24

Production schedule with trade

Country

Sacks of rice

Pairs of shoes

Carriedo

120

Divisoria

40

International Economics

What Determines the Trade Pattern?

They differ because

Production conditions differ

Consumption conditions differ

International Economics

The Need for Trade

Developing Nations
Types of Trade Protections
1. Tariff
2. Quota
3. Government Regulations
4. Exchange controls

Protection

of

Top ten trading partners of the

Phillippines
Total Exports

Share Total trade

Share

Rank

Country

49,025,391,912

100

56,645,579,919

100

US

8,204,638,738

16.74

15,419,092,299

14.59

Japan

7,682,638,738

15.67

14,279,134,975

13.51

China

5,466,880,683

11.15

9,716,568,228

9.20

Hongkong

4,984,958,957

10.17

6,944,398,507

6.57

Netherlands 3,708,548,273

7.56

4,126,449,964

3.90

Singapore

2,598,385,098

5.30

8,555,978,896

8.10

S.Korea

2,520,797,239

5.14

5,482,889,759

5.19

Germany

2,440,024,706

4.98

3,503,583,512

3.32

Malaysia

1,957,750,300

3.99

4,400,096,607

4.16

10

Taiwan

1,858,799,104

3.79

5,694,832,783

5.39

International Economics

Conclusion
After discussing why nations need trade, the trade theories, and the
barriers to trade, the researcher comes up with a conclusion that trade
affects production and consumption of a nation. It increases production,
and to have a more efficient production due to the specialization being
dictated by trade with other countries.
In each country, opening to trade also alters the quantities consumed
of each product. Consumer theory indicates that the quantity consumed
of the importable goods in each country increases which will result to a
decrease in the price of imported goods (positive substitution effect).
Meanwhile, due to the opening of trade income rises so consumers buy
even more (a positive income effect) the quantity consumed of the
exportable product in each country could increase, stay the same, or
decrease because of the opposing pressures from a negative substitution
effect (because of the cheap imported goods) and a positive income
effect (because of the earnings in the exportation of goods).
Developing countries need to be protected for trade, it doesnt mean
that they refuses trade nor close their economy with other nations. The
conclusion is for them to limit their trade with other countries in order for
their economy to sustain growththat is, to protect their local production
of goods in the trade, at least maintain their employment, and in the longrun, for them to improve the quality of their product.