INTERNATIONAL BUSINESS & ECONOMICS

01.13.23 - Negative Aspects: local sourced

01.17.23 produce chocolate makes the
market more competitive
- Invest innovating Research and
development to be competitive

Effects of Innovations
- Cost of production lower resources
- Law of demand
- Increase in revenue
- Improve quality
- Lower down process
- Suppliers
- Cost efficient

There are challenges to attaining this goal.

Local producers are still threatened by the
international competition

Circular Flow Diagram

The Globalization of the World Economy
- 5 Sector Model
- A globalizing world provides
- to understand how money moves
opportunities and challenges to
within an economy.
nations and people in the world.
- Flow of goods and services
Differentiation
- Flow of labor and jobs
- Upper part of the diagram: emphasis
- Flow of financial instruments,
on the interaction of households and
currency
firms can
Three Periods of Rapid Globalization
- Lower part of the diagram: macro
- 1870-1914
economic approach since it talks
- Industrial Revolution
about the economy as a whole
- Millions of immigrants,
foreign investments,
Extended Circular Flow Diagram
increased production.
Interaction between house hold and firm is
- 1945-1980
called simple circular flow
- Dismantling heavy trade
protection led to rapid
It is characterized Open Economy -
increase in international
Interaction between Overseas Sector
trade.
- 1980-present
International trade: import and exports
- Most pervasive and dramatic
period of globalization
Globalization:
- Fueled by improvements in
- Access Sourcing materials from
telecommunications and
other countries
transportation
- Abundance of employment but also
- Elimination of restrictions on
loses it
capital flows led to massive
- Makes life easier and convenient
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international capital
movements, more
X = Exports: Exporting refers to the selling
accommodating
of goods and services from the home
- Most countries in the world
country to a foreign nation.
participated

Unit: %
What can restrict trade?
● Tax = tariffs, because you have to
shell out more money NOTE: That the HIGHER the percentage =
● TRADE BARRIERS OR NON TARRIF more trade.
BARRIERS OR NON TARRIF + Greater the dependence of that
MEASURES: country on trade.
○ Policies, licenses, quota
01.20.23 GDP by Expenditure Approach

Anti Globalization Movement GDP is a measure of income

● Claims globalization sacrifices Y = C + I + G + (X - M)
human and environmental well-being
to corporate profits of C= consumption
multinationals. I = investments
G = Government expenditure
Globalization is blamed for: M = Imports
- World poverty and child labor in X = Exports
poor countries Y = GDP
- Joblessness and lower wages
- Environmental pollution and climate
change.
International Trade and the Nation’s
Principle 5: Trade can make everyone
Standard of Living
better off

Interdependence
● Relation of EXPORT to GDP:
- Economic relationship among
Positively (+) related
nations
● Relation of IMPORT to GDP:
- Roughly measured as ratio of a
Inversely (-) negatively related
nation’s imports and exports of
goods and services to GDP
Why does the Philippines Import?
- Much larger for smaller industrial
● Greater quality
developing countries than for United
● Lesser cost
States
● Skillsets

Trade to GDP Ratio = M + X / GDP Where can we find the source of

Trade-to-GDP Ratio?
M = Imports: purchase of foreign ● World Bank
products and bringing them into one's
home country. Sources of Potential Gain
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- Access to items with limited

availability domestically (such as The International Flow of Labor and
coffee, tin, tungsten, petroleum. And Capital
copper) - 190 million people live in a country
- Access to lower cost products other than where they were born.
- Access to greater product Variety - Migration is primarily for economic
reasons although nations place
Economic Interdependence has increased many restrictions on migration.
throughout the years. - In general, capital flows more freely
than labor, particularly financial
Gravity Model capital.
- Other things equal, the bilateral
trade between 2 countries is International Economic Theories and
proportional, or at least positively Policies
related, to the product of the two
countries’ GDPs; ● International Trade Theory
- and the GREATER DISTANCE ○ Analyzes the basis of and
between the 2 countries the the gains from international
SMALLER is their the bilateral trade.
trade. ● International Trade Policy
- That is, the LARGER (and more ○ Examines the reasons for
equal in size) and the CLOSER two and the effects of
countries are the LARGER the restrictions on international
volume of trade between them is trade.
expected to be. ● Balance of Payments
○ Measures a nations total
receiprs from and total
payments to rest of the
world.
● Foreign Exchange Markets
Variables of the Gravity Model
○ The institutional framework
for the exchange of one
- Distance (*affects the volume of
national currency into
trade)
another.
- Volume of Trade (*the main
● Adjustments in the Balance of
focus)
Payments
- GDP (*affects the volume of
○ Focuses on the relationship
trade)
between internal and
external aspects of the
How DISTANCE affects VOLUME OF TRADE economy of a nation, and
● proportional/positively (+) related their interdependence with
● inverse/negatively (-) related rest of the world economy
under different international
How GDP affect VOLUME OF TRADE monetary systems.
- The higher the income the higher the
trade. Demo on how to access data on trade
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Trademap.org - trade analysis

Trading partners of the ph
Where do we export the products
1st - products
2nd - country
Bilateral trade 3rd dropdown but you can -
see rack if blanck

01.24.23 01.31.23

Gauge familiarity Chapter 2: The Law of Comparative

Advantage

What is the basis for trade?

● Trade can make everyone better of,
you can gain an advantage if you
engage in trade.

How can a country benefit from trade?

● You can source unique products.
● You don’t have the product.
● You have the capacity to produce
the product but lack supplies.
Reporting the countries trade status key ● You can’t meet the demand of the
observations trends increasing neighboring population.
countries products are agricultural? Observe ● We can be at an advantageous spot
bc of specialization, instead of
allotting our materials or producing
everything so that we can meet local
consumption, instead of producing
everything let’s focus on the things
we do best and rely on the other
countries that can produce goods
better than we do.

How do we gain from trade?

Make demand of local popu
Maximize local resources’ potential
- 1 slide per item (creative freedom in
presenting) check the unit Assume two-nation, two-good world
parameters criterion generate - It refers to focusing on 2 countries in
- Does the country import or export the analysis and 2 goods.
more? characteristics
The Mercantilists’ Views on Trade

Mercantilism
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● Economic philosophy in 17th and other nation in a second commodity,

18th centuries, in England, Spain, both nations can gain by specializing
France, Portugal and the in their absolute advantage good
Netherlands. and exchanging part of the output
● Belief that nation could become rich for the commodity of its absolute
and powerful only by exporting disadvantage.
more than it imported.
● GDP Expenditure: GDP = C + I + G + Examples:
(X - M)
● Trade policy was to encourage
exports and restrict imports.
● One nation gained only at the
expense of another.
● Mercantilists measured wealth of a
nation by stock of precious metals it
possessed.
● Today, we measure wealth of a ● Specialization and trade benefit both
nation by its stock of human, countries.
man-made and natural resources ● Adam Smith and other classical
available for producing goods and economists advocated a policy of
services. minimal government interference
○ The greater the stock of with economic activity.
resources, the greater the ● Free trade would cause world
flow of goods and services resources to be utilized most
to satisfy human wants, and efficiently, maximizing world welfare.
the higher the standard of
living.

How are EXPORTS related to GDP?

● Export is positively related (+) GDP
● Selling to them (inflow of cash)

How are IMPORTS related to GDP?

● Import is negatively related (-) GDP
● Buying from them (outflow of cash)

Trade Based on Absolute Advantage: Adam What if US has an absolute advantage for
Smith both products?
● A nation has absolute advantage
over another nation if it can produce ● This can be addressed with the Law
a commodity more efficiently. of Comparative Advantage to gain
○ Efficient = More Output mutual beneficial trade, since it does
● When one nation has absolute not only look at the output, but also
advantage in production of a how efficient they utilize their inputs.
commodity, but an absolute
disadvantage with respect to the
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Trade Based on Comparative Advantage: ● A curve that shows alternative

David Ricardo combinations of the two
commodities a nation can produce
Law of Comparative Advantage by fully using all resources with best
available technology.
● Even if one nation is less efficient
● Constant opportunity costs arise
than (has absolute disadvantage
when:
with respect to) the other nation in
○ Resources are either perfect
production of both commodities,
substitutes for each other or
there is still a basis for mutually
used in fixed proportion in
beneficial trade.
production of both
● The original idea of comparative
commodities, and
advantage was based on the labor
○ All units of the same factor
theory of value:
are homogeneous.
○ The value or price of a
commodity depends The Basis for and the Gains from Trade
exclusively on the amount of under Constant Costs
labor used to produce it.
● Can use the opportunity cost ● In the absence of trade, a nation’s
theory to explain comparative production possibilities frontier also
advantage: represents its consumption frontier.
● The opportunity cost of a good is ● Under constant cost conditions,
the amount of a second good that nations will completely specialize in
must be given up to release just their comparative advantage .
enough resources to produce one
additional unit of the first good.
(allocate)
○ Opportunity Cost: Anything
you give up in order to get
another thing. (alternatives
forgone)

02.07.23

Trade Policy

Simple Circularflow Diagram

Comparative Advantage and Opportunity

Costs

Production Possibilities Frontier

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● Government intervention/regulation
● Instrument to alter:
○ Volume
○ Composition
○ Destination
○ Price
● Importance of having defined
objectives: Knowing what we want
(in “exchange” of what we give
up/trade)

External Sector and Trade Policy

- See how products flow in the system
and how they are exchanged. ● To regulate the amount of inflows
- Right Side: Factors of Production and outflows in the economy within
- Left Side: Factors of Goods and a trade perspective, tools in trade
Services policy are used.
● Terms to look out for:
○ Tarrifs
○ Subsidy
○ Quota
○ Exchange Rate

Policy Significance

Theory of Absolute Advantage

● Developed by Adam Smith
● It is the ability of a country to
produce a good or service at a lower
cost per unit than the cost which
any other country produces that
good or service.

Theory of Comparative Advantage

● Polarized by David Ricardo

● It is the ability of a country to
produce a good or service at a lower
cost per unit and opportunity cost
than the cost which any other
country produces that good or
service.
Trade Policy: A government policy that ○ “How many of the other units
directly influences the quantity of goods are they willing to give up?”
and services that a country imports or
exports. Example:
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Resource: 120 Laborers

Country: US
Outputs: 120 Cars and 90 sacks of Rice

Defense for 1st Statement (Comparative

Advantage): Because for the U.S for every 1
unit of car, it gives up ¾ sacks of rice.
Meanwhile for the Philippines for every 1 unit
of care they give up 1 and ⅓ sacks of rice.
Thus, the U.S has a lower opportunity cost.

Defense for 2nd Statement: For the

Philippines it only takes ¾ units of cars to
give up to 1 sack of rice. Meanwhile, U.S takes
Trading Partner: Philippines
1 and ⅓ units of cars to give up 1 sack of rice.
Resources: 120 Laborers
Thus, the Philippines has a lower opportunity
Outputs: 60 Cars and 80 sacks of rice
cost.

How can trade benefit both countries?

To solve for OPPORTUNITY COST

TIP: Put the UNIT in the DENOMINATOR and

whatever is left is in the NUMERATOR.

*You can use decimal or fraction (fraction is

more accurate)
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FORMULA:
● Output/Resources = Number of
Units per Laborer
● Devoted Labor x Number of
Units = Laborers
● Laborers x Production =
Cumulative Units of Product

Breaking Trade Barriers

MERGED VERSION:
INTERNATIONAL BUSINESS & ECONOMICS