International trade and

globalization
 International trade involve import and export of goods and
services in international market

 To determine the trading pattern between countries;

 The country should export goods that they have comparative
advantage and import goods that they don't have comparative
advantage
 KFC Kuwait
7-11 Beijing
 Global industrialism or globalization is a process of forging international political,
economic, religious, and socio-cultural interconnections.

 In other word, it’s a world without border.

 In generally, globalisation is characterised by an increase in flow of trade, capital, and

information as well as mobility of individuals to cross borders.

 Definitions express different assessments of global changes, ranging from historical,

geography, social, political, cultural to economic integration.

 Refers to the growing interdependence of countries resulting from the increasing

integration of trade, finance, people and ideas in one global marketplace.
 Absolute advantage
 Absolute advantage is the ability to produce a good using fewer
inputs than another producer
 It refers to higher efficiency and lower costs

 Comparative advantage
 Comparative advantage is the ability to produce a good at a
lower opportunity cost than another producer
 Comparative advantage is the principle upon which trade
patterns are based as opportunity cost is the information
necessary for an individual or nation to determine whether to
produce a good
 Goods Cars Palm oil
Malaysia 15 30
Indonesia 20 50

 On the above table, Indonesia have absolute advantage in

producing both goods because they can produce more
compare to Malaysia

 Specifically, Malaysia is able to produce 15 units of cars or 30

units of palm oil if utilizing all its resources

 Indonesia is able to produce 20 units of cars or 50 units of

palm oil if utilizing all its resources
 However, trading between countries is still possible by
determining their comparative advantage

 Malaysia has the comparative advantage in the production of

car because it has to forgo 2 unit of palm oil to get an extra
unit of car, while Indonesia opportunity cost of producing car
is higher, i.e., 2.5units of palm oil

 Indonesia has the comparative advantage in the production

of palm oil because it has to forgo 0.4 unit of car to get an
extra unit of palm oil, while Malaysia opportunity cost of
producing palm oil is higher, i.e., 0.5units of car
 Hence, Malaysia should specialize in producing cars and
export to Indonesia while importing palm oil from Indonesia

 Indonesia should specialize in producing palm oil and

export to Malaysia while importing cars from Malaysia
 Specialization through the theory of comparative or
absolute advantages
 There is an increase in world output and gains from individual
country as a result of specialization and trade.
 Even though a country could produce all commodities more
cheaply than others, it would still gain as long as comparative
advantage differs.

 Differences in Taste ( wider consumer choice)

 Greater variety of goods and services to choose from.
 Will result in higher standard of living. Consumers can choose
commodities that cannot be produced locally and those goods
that are too expensive to be produced locally.
 Diversity of Natural Resources
 International trade leads to proper resource allocation; resources
will be fully utilized according to the comparative advantage of
the country.
 E.g. Malaysia for rubber, Thailand for rice and Singapore for
services.

 Generates income
 International trade generates income and brings about higher
economic growth and hence, a higher standard of living.
 When countries specialize in certain goods and service, there is
greater efficiency and productivity.
 The expansion of output also creates employment.
 Sharing of new knowledge
 International trade brings about of new knowledge and
information.
 New knowledge is acquired.
 Research and development (R&D) program from developed
countries like the United States and Japan benefit developing
countries through trade.
 Economic over dependence and interdependence
 International trade leads not only to economic, but also political
interdependence.
 E.g China imposed quota on Malaysia Palm Oil.

 Balance of Payment
 Import greater than export will lead to BOP deficit
 This will lead to a depreciation of exchange rate

 Influence of Multi-national Cooperation

 MNC will influence government policy
 Example: British Tobacco and Vapor.
 Rate at which country exchange its export for imports.
 It can be interpreted as the amount of import goods an
economy can purchase per unit of export goods.
 Changes in terms of trade can be measured by the average
prices of exports and average prices of imports.

TOT = Price Index of Export / Price Index of Import X 100

 If the country export price is cheaper relative to its import,

then more goods would have to be exported by the country
in order to purchase a given quantity of import.
 If the country export price is greater relative to its import,
then less goods would have to be exported by the country in
order to purchase a given quantity of import.
 Example
 If price index of export for year’s 2000 is 100 and price index for
import is 120 then:
100/120 x 100 = 83.33

 TOT is 83.33 which is not favorable as export price is

comparative lower than import price by 16.67%.
 When
 TOT > 100 = favorable
 TOT < 100 = unfavorable
 TOT = 100 = Balance
 Trade barrier are government induced restriction on
international trade
 Five forms
 Tariff
 Tax on import or export
 Non-tariff barrier
 Import quota which is a limit on the quantity of a good that can be
produced abroad and sold domestically
 Preferential agreement
 Granting preferential/privilege to partners country
 By reducing tariff and etc
 Embargo
 Setting a total ban on the goods, which are not allowed to be imported
into the country
 Example: US embargo on Iraq, Iran, North Korea…
 Export Subsidies
 The government provide subsidies to local producer to make them
more competitive compared to imported goods.
 Tariff
 Tariffs raise the price of imported goods.
 Hence, local consumer will need to pay a higher price for
imported goods.
 As result, demand for imported goods decrease.

 Import quota
 Specifies the maximum amount of a commodity which may be
imported in any period.
 More effective than tariffs to protect domestic producers.
 Residents would have to buy the locally produced goods.
 Voluntary export restraint
 Limit on the quantity of some category of goods that can be
exported to a specific country for a certain period.
 Example: 1981 automobile VER, Japan restrict the export of
automobile to US as request by US because Japan automobile
threatened US automobile industry.
 Trade restriction is argue to be necessary for trade policy
because:
 Jobs Argument
 National-Security Argument
 Infant-Industry Argument
 Unfair-Competition Argument
 Job argument
 Trade destroys jobs opportunities in domestic industries
because it need to compete with imported goods (foreign
company)

 National-security argument
 An industry vital to national security should be protected from
foreign competition, to prevent dependence on imports that
could be disrupted during wartime
 Example: Steel, weapons, food
 Infant-industry argument
 A new industry argues for temporary protection until it is mature
and able to compete with foreign firms
 Example: Proton

 Unfair-Competition Argument
 Producers argue their competitors in another country have an
unfair advantage due to different law and regulation, subsidy
policy in foreign country
 Example: Trade restriction might imposed by foreign country;
Foreign government might subsidies raw material such as Petrol,
this make foreign firms have cost advantage over domestic firm
 A statement that summarizes an economy’s transactions with
the rest of the world for a specified time period

 The balance of payments, also known as balance of

international payments, encompasses all transactions
between a country’s residents and its non-residents involving
goods, services and income; financial claims on and
liabilities to the rest of the world; and transfers such as gifts

 The balance of payment record both debit and credit

 Debit – any transactions that supplies the country’s currency

in foreign exchange market is recorded as debit (-)
 Credit – any transactions that created a demand for the
country’s currency in foreign exchange market is recorded
as credit (+)

 The balance of payments classifies these transactions in two

accounts:
 The current account
 The capital account
 The current account
 Includes all payments related to the purchase and sale of goods
and services
 Components of account include exports, import, and net
unilateral transfers abroad

 Export of goods and services

 Export will increase the demand for domestic currency
 Hence, they are recorded as credits (+) in the current account

 Import of goods and services

 Import increase the supplies of domestic currency
 Hence, they are recorded as debits (-) in the current account
 Merchandise trade balance
 The situation where the value of merchandise exports and the value of
merchandise imports are exactly the same

 Merchandise trade deficit

 The situation where the value of merchandise exports is less than the
value of merchandise imports

 Merchandise trade surplus

 The situation where the value of merchandise exports is more than the
value of merchandise imports
 Net unilateral transfers abroad
 Are one way money payment
 Grants or gifts from one country to another

 Current account balance

 The sum of all three component in current account
 Current account surplus
 Occur when foreign currency flow in are more than domestic currency
flow out to foreign country
 Current account deficit
 Occur when foreign currency flow in are less than domestic currency flow
out to foreign country
 Included all payments related to the purchase and sale of assets
and to borrowing and lending activities

 Component include outflow of domestic capital and inflow of

foreign capital

 Outflow of domestic capital

 Domestic purchase of foreign assets
 Increase supplies of domestic currency in foreign exchange market

 Inflow of foreign capital

 Foreign purchase of domestic assets
 Increase demand for domestic currency in foreign exchange market
 When domestic consumers purchase foreign goods, domestic
currency and other financial assets flow out of the country to
foreigners

 Domestic money is only useful for domestic consumers. Hence,

we say that holders of domestic currency have a claim on
domestic assets
 Foreigners may hold these claims in a variety of forms, including:
 Currency
 Treasury bills and notes
 Stock in domestic companies
 Government or Corporate bonds
 Capital account balance
 The summary for the outflow of domestic capital
 It is equal to the difference between the outflow of domestic capital
and inflow of foreign capital
 The balance of payment has to be balance overall because
goods, services, and resources traded internationally are paid
for;

 Thus every movement of products is offset by a balancing

movement of money or some other financial asset

 Example:
 If a U.S. retailer imports $1 million of Japanese televisions, there is a
corresponding or balancing movement of money to the Japanese
producer
 A surplus in the Current account is by definition offset by
a deficit in the Capital account
 A surplus in current account will be balanced by capital account
deficit because positive net sales abroad is associated with foreign
capital inflow (foreign currency flow in)

 Another way to think of this is that if we export goods and services,

then we import financial assets of the foreigners who purchased
those goods and services
 Similarly, a deficit in the Current account must be offset by
a surplus in the Capital account
 A deficit in current account be balanced by capital account surplus
because negative net sales abroad need to be financed by a net
inflow in the capital and financial account (domestic currency flow
out)

 In practical terms, if we import foreign products, then we export our

financial assets to pay for them
 Two types of exchange rate system
 Fixed exchange rate
 Flexible exchange rate

 Fixed exchange rate

 Fixed exchange rate system is a type of exchange rate regime where
a currency value is fixed against the value of another single currency
 The central bank need to bought and sold their own currencies to
keep their exchange rate fixed at a certain level
 Example: Malaysia FOREX policy after Asian financial crisis in 1997:
Fixed exchange rate of RM 3.80 for USD 1 dollar
 Currency devaluation - When central bank deliberately reduce the
value of domestic currency
 Currency revaluation - When central bank deliberately increase the
value of domestic currency
 MYR/USD

SSrm
Surplus

0.333 Revaluation

0.286

0.263 Devaluation

Deficit DDrm

0 Qrm
 The central bank need to bought all the surplus ringgit in the
foreign exchange market if its aim to revaluated ringgit value
higher than equilibrium

 The central bank need to supplies all the shortage of ringgit in

the market to keep their exchange rate fixed at a level lower
than equilibrium (devaluation)
 Flexible exchange rate
 Flexible exchange rate is a type of exchange rate regime in
which currency value is allowed to fluctuate in response to
market mechanisms of the foreign exchange market
 The value of the currency is determined by the demand and
supply force of that currency in the foreign exchange market
 Example: Malaysia FOREX policy after 2005, currently
depreciated from RM 3/ USD 1 to RM 3.49/ USD 1
 Currency appreciates
 When a country’s currency appreciates (rises in value relative to other
currencies), the country’s goods abroad become more expensive and
foreign goods in that country become cheaper (holding domestic
prices constant in the two countries)
 Makes domestic businesses less competitive – country’s goods abroad
become more expensive
 Benefits domestic consumers – foreign goods in that country less
expensive
 Currency depreciates
 When a country’s currency depreciates, its goods abroad become
cheaper and foreign goods in that country become more expensive
 Makes domestic businesses more competitive – country’s goods
abroad become less expensive
 Benefits foreign consumers – foreign goods in that country less
expensive