Econ-Development-Lesson-13 Foreign Trade.pptx

Econ Devt Foreign Trade

1. Foreign Trade Economic Development: Lecture 13

2. Foreign Trade Foreign trade is the exchange of goods and services between countries. However, the dynamics of trade are highly complicated as there are a lot of risks involved, but the reward to reap when it is a success.

3. Foreign Trade This economic activity started for centuries, even before history was written. Early people exchange goods for a different variety of products, we know it as barter , which some of us are still doing nowadays, especially during the time of pandemic, 2020 and 2021.

4. Foreign Trade The Greek civilization and Roman Empires used to trade with their nearby empires and so as the Chinese (Middle Kingdom ) to the world.

5. History of Foreign Trade Mercantilism , which started toward the end of seventeenth century, valued balance of trade, exports given to a foreign country must, at any time, exceed the imports, if not equal.

6. History of Foreign Trade In the eighteenth century, Adam Smith wrote a book, The Wealth of Nations , the time of liberalism emphasized the role of specialized production to supply the highly increasing demand of consumption.

7. History of Foreign Trade This led to David Ricardo’s theory of comparative advantage , wherein each country specializes in a particular product or set of products and import everything else for consumption.

8. History of Foreign Trade The main factor that pushes international trade is a comparative advantage , a concept by David Ricardo. A country has a comparative advantage in the production of goods and services if that particular country can produce the same at a lower opportunity cost than other countries .

9. History of Foreign Trade In the year 1913, gold and other precious metals were considered a medium of exchange ; a lot of countries considered it valuable and made it possible to trade much easier despite the borders.

10. History of Foreign Trade The League of Nations organized the World Economic Conference in 1927, masterminded the multilateral trade agreement between nations, and set the regulations to keep up with the ever-evolving international trade.

11. History of Foreign Trade Today, profitability is maximized through efficient production and distribution , as well as exchange, using comparative advantage and regulations that are in placer to ensure seamless business transactions beyond borders.

12. History of Foreign Trade Governments always sought to manipulate foreign exchange activities to favor their own economy, which is just reasonable.

13. Concept of Foreign Trade Household and firms around the world constantly change their demand for goods and services that may be available in their country; there is a need to acquire these products in exchange for its own capital, goods, and services .

14. Concept of Foreign Trade In fact, in the computation of the GDP, we include a component of international trade that is net exports , the difference between exportation and importation, and the balance of payments.

15. Concept of Foreign Trade When a country exports more than its imports, there is a trade surplus , while when there are more imports than exports, there is a trade deficit .

16. Concept of Foreign Trade The balance between all payments out of a country within a given period and all payments into the country is an outgrowth of the mercantilist theory of balance of trade .

17. Concept of Foreign Trade Balance of payments includes all payments between a country and its trading partners and is made up of the balance of trade, private foreign loans and their interests, loans and grants by government or international organizations, and movements of gold.

18. Concept of Foreign Trade For example, the Philippines is one of the leading suppliers of business process outsourcing services in the world. We may have more skillful individuals who can do the job in terms of language or technical knowledge, specifically in voice-based services, for example, call centers.

19. Concept of Foreign Trade Another concept in international trade is where the foreign currency is being traded and that is what we call the foreign exchange market .

20. Concept of Foreign Trade There is a currency appreciation when a currency increases in value compared to another currency, while there is a currency devaluation when a currency decreases compared to another currency.

21. Concept of Foreign Trade The term “ dual exchange rate ” refers to a situation in which more than one exchange rate applies between one currency and another.

22. Concept of Foreign Trade The term arises most often when a country’s authorities establish one currency rate for certain transactions involving foreign exchange/currency and a second rate governing other transactions .

23. Concept of Foreign Trade Many countries in Europe and the developing world use a fixed exchange rate for commercial (current account) transactions and another rate, either fixed or floating for other (e.g., financial account) transactions .

24. Concept of Foreign Trade A prevailing price of a good in the international market is called the world price . This can be the basis of the decision to import and export when the domestic price of a good is higher or lower than the world price, hence, maximizing the cost to acquire the specific good.

25. Gains from Trade

26. Production Costs Raw materials in certain countries are cheaper than the others making the production costs lower.

27. Production Costs For example, China can maximize the economies of scale of the mining and light industries thereby lowering the production costs making the price that is passed on to the consumers comparatively low.

28. Production Costs It is true however, that not all industries in China are able to optimize economies of scale, and it is currently going down according to the same study.

29. Competition The liberalization of trade and investment stimulates healthy competition .

30. Competition There are two main reasons for an examination of the relationship between trade and competition.

31. Competition In a highly competitive open market , prices are low because these business entities tend to compete with each other’s prices and quality of products.

32. Competition In a monopolistic market , prices are at the discretion of the producer as the sole seller of the product, which makes it more expensive for the buyers.

33. Competition Moreover, the production processes become more efficient, always innovating on new ways to produce the same products at a much cheaper cost, thereby improving the existing processes and achieving the optimized result .

34. Competition It may also be true that in pursuit of looking for more efficient ways to produce the product, they may produce with eco-friendly technique , such as lowering consumption of non-renewable energy.

35. Product Variation Some people in less developed countries enjoy the benefits of electronic devices and machines like computers, mobile phones, home appliances, etc., even if they are not producing them because of foreign trading . This somehow makes life for them easier and increases their standard of living.

36. Product Variation In addition, products that are available depending on the season may be accessed any time of the year as they can be supplied by a country that is not affected by seasonal changes.

37. Surplus Market This benefit is particularly for those producer countries of agricultural products or other perishable goods that may have surpluses and would be willing to exchange these for other products that are useful to them.

38. Surplus Market For example, a surplus of tomatoes in Indonesia may supply the deficiency of the same good in Mongolia, where tomatoes are not grown year-round because of the weather. There is almost always a country that needs the surplus products of another country.

39. Market Efficiency Seasonal fluctuations of products affect some companies that may lose the opportunity to do business when their product is in low demand.

40. Market Efficiency For example, the demand for winter clothes . There must be at least one country that needs this good, even if it is not winter in the home country, like the weather seasons of the United Kingdom and Australia or South Africa .

41. Market Efficiency It may be summer in the UK but winter for those countries and be demanding for warm clothing. This manages the risks of losses of seasonal fluctuations and enjoys profits because of international trade.

42. Risks of Foreign Trade

43. Buyer Risks It may be challenging to start international trade with the first client, trust will always be an issue as the possibility to be scammed is great.

44. Supplier Risks Reputation may be compromised as two factors must always be met, the volume and the distance of delivery . Hence, the quality as well as the quantity of the products must always be met, agreement to always be adhered upon.

45. Third-Party Risks Failure to honor buyer-seller agreements is one of the risks of foreign trade. In cases of losses of products in transit, the believed insurance may not cover the expenses .

46. Effects of Foreign Trade World price is the price of the product set to other countries except for the price in own country.

47. Effects of Foreign Trade We tend to export goods and services with domestic prices lower than the world price and import goods and services where the local price is higher than the world price.

48. Effects of Foreign Trade In the imposition of tax on import, known as tariff , the world price increases by the amount of tariff. It changes the equilibrium demand and supply.

49. Effects of Foreign Trade For the consumer side, as the price increases, the quantity demanded after the tariff decreases, whereas for the domestic supplier side, as the price increases because of the tariff, the quantity supply also increases.

50. Effects of Foreign Trade The importation is the difference between the quantity demanded and quantity supplied after the imposition of tax . This imposed tax may be used by the government to finance public goods and services.

51. Effects of Foreign Trade A tariff has implications that surely affect the welfare, although it may not be true always that it benefits both domestic consumers and suppliers .

52. Effects of Foreign Trade Tax basically increase the prices to the consumers, hence demand decreases, and this makes a deadweight loss , an economic inefficiency as tariff creates a new equilibrium point.

53. Effects of Foreign Trade It also diverts production from foreign producers who may be using low-cost production to domestic producers that may be using high-cost production and this wastes resources .

54. Any Questions?