CHAPTER 5 TRADE AND FACTOR MOBILITY

Laissez-faire vs. interventionism

Laissez-faire: allow market forces to determine trading relation

Free Trade Theories

- absolute advantage

- comparative advantage

1. Theory of absolute advantage

- produce (quality) more despite having high cost

- country's wealth is based on its available goods/services rather than gold

Increase efficiency:

1. Labor could become more skilled by repeating the same task

2. Lavir would not lose time in switching production from one kind of product to another

3. Long production runs would provide incentives for developing more effective working method

Advantages

1. Natural Advantage

- creating products from climatic conditions

- access to certain natural resources

- availability to certain labor forces

2. Acquired Advaty

- either product/process technology

- product technology: produce unique products/easily distinguished from competitors

- process technology: efficiently produce homogeneous product / not easily distinguished from that of
competitors

Free Trade will bring:

1. Specialization

2. Greater Efficiency

3. Higher Global Output

2. Theory of comparative advantage

- produce at lower cost

- gains from trade will occur when it has absolute advantage

- it must give up less efficient output

1. Comparative advantage by analogy

- needs to give up another

2. Production Possibility

- determine which product is countries efficient for production

Theories kf Specialization: Assumptions and Limitations

1. Full employment
2. Economic effy

3. Division of gains - unfair fir some countries that gain more than others

4. Transportation cost - if more costly, stop trading

5. Statics and Dynamics (assumption) - not sure if the advantage we have still be out advantage in the
future

6. Services

7. Production networks - resources various in countries

8. Mobility

Interventionism

1. mercantilism

- gold

- counties should export more than import

- economic objectives

Favorable Balance of Trade (Trade Surplus)

- indicates that a country is exporting more than imports

Unfavorable Balance of Trade (Trade Deficit)

- import more than export

2. neomercantilism

- trade

- run export surplus to achieve social/political objectives

- not just economic objective

Theories of Trade Pattern (sub)

1. Trade theories and business - how government trade policies might affect business competitiveness

2. Factor - Mobility Theory

- depend largely on the quantity/quality of their production

- land, labor, capital, technology (resources)

Trade Pattern Theories (Main)

- this theories may have the sub umbrella (one, both)

1. Theory if Country Size

- big: less to trade

-small: more trading

2. Size of the economy

- big: trade more

- small: trade less - trade raw materials

Nontradable Goods

- seldom practical to export because of high transportation costs produce in every country

- haircuts, retail grocery

3. Factor- Proportion Theory

- types if products does a country have

1. People and land

- more people= less land = land is more expensive

- less in wheat, more on wool

2. Manufacturing locations

3. Capital, labor rate, specialization - less capital = less labor pay

4. Process Technology: machine or guman labor cost - choosing which is less costly

5. Product technology

4. Country- Similarity Theory (whom do countries trade)

- the more similar the more likely will trade

1. Specialization and acquired advantage

2. Product differentiatipn

3. Effects ln cultural similarity

4. Effects on political relationships and economic agreements

5. Effects of distance

6. Overcoming distance

Statics and Dynamics of Trade

1. Product Lifecycle Theory

2. Diamond of National competitive advantage

1. Product Lifecycle Theory

- not all products undergo PLC

STAGE 1. INTRODUCTION

- Innovation in response to observed need

- exporting by the innovative country - introuce certain products

- evolving product characteristics

STAGE 2. GROWTH

- increases in exports by innovating countries

- more competition

- increased capital intensity - investment in technology

- some foreign production - save transportation cost

STAGE 3. MATURITY

- decline in exports from innovatinf country

- more product standardization

- more capital intensity - mass production

- production start-ups in emerging economies

STAGE 4. DECLINE

- concentration of production in developing country

- innovating country becoming a net importer

Limitation

- fresh goods

- trendy clothes

- luxury watches

2. Diamond of National competitive advantage (DCNA)

- what country us good at

Facets of DNCA

1. Demand condition - what consumer need/want

2. Factor conditions - what the producing country have

3. Related and supporting industries

4. Firm strategy, structure, rivalry - comepete with each other so they tend to be better than others

Limitation

*Domestic existence of all conditions

1. Does not guarantee an industry will develop

2. Not necessary eith globalization

- can be successful if they adapt the change of globalization

- company sell more to other countries

- get a manager abroad - export human capital

- get parts easily

FACTOR-MOBILITY THEORY

- focuses: why production factors move, the effects on that movement on transforming factor
endowment and impact the international factory mobility on the worlttrade

- hor factors move freely around

Why do production factors move?

1. Capital

- transfer capital because of differences in expeyreturn (accounting for risks)

- people invest where they can have best return with least risks

2. People

- less mobile than capital

- usually must incur high transportation costs to work abroad

Production factors Move

1. Economic Motives

2. Political Motives

Capital and Labor Move international

1. Gain more income

2. Free adverse political situations

Effecirts of factor movements

- alter factor endowments

What happens when people move?

1. Help the country

Brain - drain - if skilled people migrate abroad to work

2. Gaining skilled:

- spend on education and health

- conflict with locals

Relationship between trade and factor mobility

1. substitution - people and money moving around the world

- lack of resources alliance to make the world balance (rich=poor)

2. complementary

Factor-Mobility through foreign investment often stimulates trade because of:

1. Need for componet

2. Parent company ability to sell complementary products

3. Need for equitfor subsidiaries

Example:

St. Peter - coffin (main product)

Flowers and insurance (complements)

CHAPTER 6 TRADE PROTECTIONISM

Trade - exchange of goods/services

Protectionism - protegere: to protect

Trade Protectionism - gov restriction and enhance/support tp influence international trade

competitiveness

Conflicting results (trade policies) - implemeneted by gov.

ECONOMIC RATIONALE FOR GOVERNMENT INTERVENTION

1. Economic

2. Non-economic

ECONOMIC

1. Fighting Unemployment

- import restrictions to create domestic employment

- lead retaliation by other countries

- less likely: small companies

- decrease import jobs: price increases for components; lower income abroad

2. Protecting infant industries

- justify gov intervention in trade

- shield emerging industries/market until they become strong enough to compete

1. Increase economies of scale

2. Greater worker efficiency

Gov give:

- tax break

- seminars

Risk: can't guarantee if it will be competitive in the future

3. Developing an industrial base

Industrialization:

1. Bring faster growth than agriculture

2. FDI bring in investment funds

3. Diversifies the economy

4. More income than primary products do

5. Reduces imports and promotes exports

6. Nation building

Problems:

1. Too mych population in the city

2. Investing is better in farming rhan rushing into factory

3. Thought of diversifying but if it gets old it could cause a problem

4. Economic relationship with other countries

- enhance a nation's economic welfare and competitive position in the global market

1. Making balance of trade adjustments

Options:

- low currency: cheaper in foreign products

- relying fiscal monetary policy

2. Gaining comparable access to foreign markets/fairness

- use comparable access argument

Reasons: tit-for-tat market access that can lead to restrictions that may deny one's own

3. Using restrictions as bargaining tool

4. Controlling prices

Export restrictions:

1. Keep up world prices

2. Reduce more contrils to prevent smuggling

3. Lead go substitution

4. Keep domestic prices down by increasing domestic supply

5. Give producers less incentive to increase output

6. Shift foreign production and sales

NON-ECONOMIC

1. Developing an industrial base/essential

- industrial argument: prevent reliance on foreign sources

1. Identify which industries are essential

2. Evaluating the costs and exploring alternative measures

3. Considering economic and political consequences

2. Promoting acceptable practices abroad

- national defense argument: prevent export

3. Maintaining/extending spheres of influence

- giving aid and credits: encouraging import, joint political alliance

4. Preserving national culture

INSTRUMENTS OF TRADE CONTROL

- each type may insight different reaction

1. Indirectly affect the amount of trade

2. Directly limit

DIRECT

Tariffs (duty) - most common type of trade control: tax levied on goods ship internationally
1. Tariffs barrier: price

2. Non-tariffs: price, quantity

TARIFFS BARRIER

Types:

1. Export tariffs

2. Transit tariffs

3. Import tariffs

Criteria:

1. Specific duty: assess per unit basis

2. Ad valorem duty: percentage of the item's value

3. Compound duty: both per unit basis and percentage of item's value

NON TARIFFS BARRIER: PRICE INFLUENCES

1. Subsidies - direct assistance to boost competitiveness

2. Aids and loans - aids: small amount ; loans: large amount

3. Custom valuation

4. Others

(1) special fees

(2) requirements (custom deposits be placed in advance shipment)

(3) minimum price levels at which goods can be sold after customs clearance

NON TARIFFS: QUANTITY CONTROL

1. Quotas

- most common
Import quotas:

1. Limit supply

2. Provide incentive use price com. to increase sales

Voluntary export restraints - ask other to lower their export

Embargoes

- specific type of quotas

- prohibits all trade

2. Buy local legislation - favor domestic producer

3. Standards and labels

4. Specific permission requirements

- require gov permission

- foreign exchange control: requires to apply to a government agency

5. Administrative delays- cause inefficiency

6. Reciprocal requirements- Counter trade: provide additional economic benefits (jobs)

7. Restrictions on services

Factors:

1. Essentiality

2. Not for profit preference

3. Standards

4. Immigration
Dealing with government trade influence

1. Losses because of import competition

a. Move to other countries

b. Concentrate on market with less international competitions

c. Adopt internal innovation (superior products, greater Efficiency)

d. Get government protection

E-COMMERCE

Commerce - activity of buying and selling

Barter Precious MetalsMetal Coins Paper MoneyPlastic Cards

TRADITIONAL:

1. face to face

2. Limit to geography

3. Limit to certain hours (daytime(

4. Delivery of goods instantaneous

ELECTRONIC

- process of buying and selling using electronic medium

1. Mobile Commerce - using mobile devices; mobile apps/websites- shopping/banking

2. Social Media Commerce - social media platforms; apps and websites

Mode of Payment:
1. Credit/debit cards

2. E-waller

3. Mobile banking

4. Digital banking

5. Prepaid cards

6. Net banking

RA 8792: E-COMMERCE ACT OF THE PHILIPPINES - Estrada

- state recognize e-commerce in nation building

Major Market Segments

1. Business to Business - longer cycle; higher order value: manufacturing to retail

2. Business to Consumer: most common

3. Consumer to Business: freelancer

4. Consumer to consumers : online marketplace

Other market segments - Government Administration E-commerce Models

1. Government to Government

2. Business to Government - selling goods to gov agencies

3. Government to consumers - paying taxes

4. Government to Business - starting new business

5. Consumer to Government - pay electricity through gov website

ADVANTAGES

1. Faster buying process

2. Eliminates operating cost

3. Personal shopping experience

4. Available 24/7

5. Connects far and wide

6. Detailed product information

7. Retargets the customers

DISADVANTAGES

1. Lack of personal touch

2. No guarantee about product quality

3. Security issues

4. Long delivery period

5. Cannot try before buying

EFFECT OF E-COMMERCE IN AUDIT OF FS

1. skills and knowledge (external auditor)

2. Knowledge of the business

3. Risk Identification

4. Internal Control Consideration