Trade in economics

1. Macroeconomics

2. International Trade
• It is branch of economics concerned with exchange of
good and services with foreign countries
• About 15 % of world’s output is traded in international
market in a year
• A trade deficit occurs when imports ≥ exports
• A trade surplus occurs when exports ≥ imports

3. International Trade
• Almost every kind of product can be found on the
international market:
• Consumer goods such as television sets, clothing, drinks and
food etc.
• Capital goods, such as machinery; and raw materials and
spare parts etc.
• Other goods oil, jewelry, stocks, currencies, and water.

4. “Why do nations trade?”
• The distribution of natural, human, and capital resources
among nations is uneven.
• Efficient production of various goods requires different
technologies or combinations of resources
• Products are differentiated as to quality and other nonprice
attributes. A few or many people may prefer certain imported
goods to similar goods made domestically.

5. Absolute Advantage (Adam Smith)
• A country has an absolute advantage in the production of a good
when it can produce it more efficiently than other countries.
• U.S has advantage in production
of wheat
• China has advantage in production
of rice
• After having specialized in their respective goods, trade will take place
b/w China and U.S
Countries Products Products
Wheat Rice
U.S. 6 (Labors) 10 (Labors)
China 10 (Labors) 6 (labors)

6. Comparative Advantage (David Ricardo)
• Suppose there are only two countries producing two goods
• One country has an absolute advantage in production of both
commodities
• Then that country should produce that good where the
advantage is comparatively more
• The other country should produce that good where
disadvantage is comparatively less

7. Comparative Advantage
• U.S has an absolute advantage in production of both products
• U.S needs
80
120
× 100 = 67% of Brazil effort to
produce one kg of wheat
• U.S needs
90
100
× 100 = 90 % of Brazil effort
to produce one kg of Rice so U.S is more
efficient in producing Wheat
Countries Product
Product
Wheat Rice
U.S 80 Labors 90 Labors
Brazil 120 Labors 100 Labors
R
W
90
100
80 120

8. Gain from trade
• For Brazil, one kg of wheat will cost
120
100
= 1.2 kg of Rice or with a labor
1 unit of wheat or 1.2 unit of Rice can be produced
• Wheat producing is cheaper in U.S as
compare with rice
80
90
=0.80 means one unit
of W cost 0.89 unit of rice
• International price will be settled b/w 1.2 and 0.89 if price is settled
at 1 both countries will gain from trade
Countries W R
U.S 80 90
Brazil 120 100

9. Diagram
• Brazil U.S.A
• After trade, if Brazil is in position to get 1 unit of wheat by offering
less than the domestic price 1:1.2 unit of rice, then she will gain from
trade
R
w
1:1.2
1:1
R
W
1:0.89
1:1

10. Trade Barriers
• Revenue Tariffs
• It is Excise taxes on import and imposed to obtain revenue . It applied to a
product that f is not being produced domestically. Rates on tariffs are modest.
• Protective tariff
• designed to shield domestic producers from foreign competition. Usually it is
not high enough to stop the importation of foreign goods, they put foreign
producers at a competitive disadvantage in selling in domestic markets.
• Import quota
• Specifies the maximum amount of a commodity that may be imported in any
period

11. Trade Barriers
• A nontariff barrier (NTB)
• It includes licensing requirement to improve product quality and safety, or to
unnecessary bureaucratic red tape that is used to restrict imports. It is used to
restrict import. U.K uses this barrier to bar the importation of coal.
• A voluntary export restriction (VER)
• The foreign firms “voluntarily” limit the amount of their exports to a
particular country. The exporters in the hope of avoiding more strict trade
barriers cut their export.

12. World Trade Organization
• In 2001 the WTO initiated a new round of trade negotiations in Doha,
Qatar. By 2008 the Doha Round (or Doha Development Agenda) was
still in progress.
• An organization which dealing with the rules of trade between nations
• Main objective
• The goal is to help producers of goods and services, exporters, and
importers conduct their business.
• Resolves disputes over the rules
• Negotiate for trade liberalization