TOPIC 16: INTERNATIONAL TRADE ~ ECONOMICS FORM 6
– Is the trade taking place between two or more countries.
Qn:- What is the difference between International and domestic trade?
The following are the differences:-
Reasons for International trade “It must for International’ trade” Discuss:-
Importance of International trade:-
DISADVANTAGES OF INTERNATIONAL TRADE
Qn.:- 1. International trade is must, Discuss
Barriers for International trade:-
Barriers are limitation or difficulties which limit smooth flow of commodities in International trade. They can either be natural or artificial (man mode).
(i) GEOGRAPHICAL BARRIERS
Long distance implies high cost of transport affecting the smooth flow of commodities.
1/ Social and cultural difference
2/ Changes in the weather condition (world climatic pattern)
3/ War uprising
4/ Ignorance of goods and services available elsewhere
2. ARTIFICIAL (MAN MADE) BARRIERS
Tariffs (custom duty); It’s a tax which government imposes on goods entering the country. It is aimed at controlling imports by making them expensive. It can either be specific or adventurer.
Reasons for restricting import:-
Qn: Discuss the argument against protectionism:-
The following are the argument against protectionism:-
THEORIES OF TRADE
There are two theories of trade namely:-
1. Theory of absolute advantage
2. Theory of comparative advantage.
This theory was advocated by Adam Smith. It states “A country is said to have absolute advantage in the production of a commodity if it can produce that commodity more efficiently than the other country”.
The theory is based on following assumptions:-
From the above Uganda has absolute advantage in the productive of coffee while Tanzania has absolute advantage in Tea. One unit of labor can produce 15 kg of coffee and only 4 kg of tea.
If one labor in Uganda can produce 15 kg of coffee by specializing. Uganda can produce 30 kg of coffee and if Tanzania would specialize in production it can produce 20 kg.
It can be illustrated as follows:-
Output before trade & specialization:-
Output after trade and specialization
Specialization would lead to:-
Qn. Given the following information:-
II. THEORY OF COMPARATIVE ADVANTAGES
Is a condition in which a country produces some goods or services at a lower cost in terms of opportunity cost of other good and have services which could have been produced.
It is based on comparison of production cost and it is expressed in the form of comparative ratio which gives the opportunity cost.
It state that “ If one country is less efficient in the production of both commodities and another country is more efficient in both commodities the two countries can benefit from trade by specializing in the production and export of commodity in which it has a low opportunity cost.”
According to the above data country B has comparative advantage in the production of both products coal and wheat this is because one unit of labor in country B produces one units of coal compared to 3 units of coal produced by one unit of labor in country A.
According to comparative advantage the two countries can trade and gain from trade as follows:-
Country A has comparative advantage in the production of wheat while country B has comparative advantage in the production of coal.
Given the following production per unit labor:-
Country B has a comparative advantage in production of fuel while Country A has a comparative advantage in production of food.
Qn: Your given
The figure represents Input quantities per unit of output of the corresponding commodities.
Assumption of theory of comparative advantage:-
Criticisms against the theory of cooperative advantage:-
Application of comparative advantage theory:-
Terms of Trade (T.O.T):-
Terms of Trade is given by:
T.O.T = (PRICE INDEX OF EXPORT)/(PRICE INDEX OF IMPORT)×100
PX is price index of export
PM is price index of import
Qn:- Suppose from 1980 – 1990 the export price index of Tanzania rose from 100 to 150 while the import price index rose from 100 to 170 .
Calculate the terms of trade.
T.O.T (1980) = PX/ x 100 = 100 x 100/
T.O.T (1990) = 150 X 100 = 88.2%
In 1990 terms of trade in Tanzania worsen, in had to export of large physical quantity of goods to buy the same amount of import goods.
Qn. 2: Given the following prices of import and export, Calculate the terms of trade:-
Calculate price index:-
Price index = Pn/ x 100
Price index 1990 = 100 % Price index (M) 1990 = 100%
Price index (1991) = 594/ x 100 = 120% Price index (1991) = 6480/ x 100% = 144%
Price index (1992) = 621/x 100 = 115% Price index (1992) = 4860/ x 100% = 108%
Price index (1993) = 648/x 100 = 120% Price index (1993) = 5400/ x 100% = 120%
Total price index:-
Different ways of measuring term of trade (T.O.T)
Is the ratio of price index of exports and price index of imports
T.O.T Net barter =100
It is the ration between the product price index for export and quantity of export to the price index of imports.
Income T.O.T = PX Qx/Pm x 100
Where, Ox is quantity of export = Vx/PX
Vx = volume of export
PX = price index of export
Gross barter T.O.T = Qx/ QM x 200
Where; Qx is quantity of export
QM is quantity of import
Favorable terms of trade:-
It occurs when a country export prices rises while the import prices decline or remain constant. This implies that a country can get more import by exporting the same quantity of export.
Unfavorable terms of trade:-
Countries terms of trade are said to be unfavorable when the price of export declines or remain constant while the price of import rises. This implies that there is less foreign exchange comings from export.
Balance terms of trade:-
Balance terms of trade occurs when terms of trade between two countries is equal to one.
Determinants of term of trade:-
These are the factors which determine whether terms of trade are favorable, unfavorable or balance.
When the demand of export raises the price of export increases leading to favorable T.O.T and Vice versa
When there is a monopoly, high degree of monopoly power terms of trade are favorable.
This means quantitative restriction. It leads to unfavorable terms of trade to the exporting countries.
This is lowering of country currency which lead export to be cheaper and import expensive hence unfavorable.
Increase in import duty leads to increases in import prices, leading to unfavorable terms of trade
Causes of unfavorable terms of trade:-
Factors leading to favorable terms of trade:-
Reasons for deteriorating terms of trade in leads:-
Qns: Discuss why terms of trade in lack are mostly unfavorable:-
In LDC’s most countries are ago based countries and due to limitation of land and increase in population affect etc.
In LDC’s have low technical progress.
Qn. Discuss the possible solution for deteriorating terms of trade in LDC’s:-
The following are some of the solution:-
Export promotion increases the demand of export leading to increase in price.
Using of modernized machines.
Increase in population leads to increase in demand and vice versa.
BALANCE OF TRADE (B.O.T)
Is the difference between the value of the countries visible export and visible imports:-
Balance of trade can either be favorable or unfavorable:-
B.O.T = Total value of (x) – Total value of (M).
BALANCE OF PAYMENT (BOP):-
Is an accounting statement that shows the difference between in flow (receipts) and outflow (payment) of foreign currency within a specific time.
Balance of payment is divided into the following account:-
This is an account that has the following accounts:-
The following is shown in the current account:-
(Visible export – Visible import) + (Invisible export – invisible import) = Net current balance.
The net balance can either show surplus or deficit. Deficit means there is more out payment than in payment.
Net long term capital in flow
Net short term capital inflow
Net short term government capital inflow
Net long term government capital inflow
If the sum above is positive there is a surplus and if negative there is deficit.
This accounts record international monetary flows such as investment in business, real estates and in stock exchange.
Disequilibrium in balance of payment:-
Occurs when total payments to abroad exceed total receipts from abroad.
The following are its major causes:-
The more you import the more money you pay:-
Methods of controlling disequilibrium B.O.T:-
Qn: Suggest reasons for persistent balance of payment deficit:-
Is the price of a countries currency expressed in terms of another country currency.
TYPES OF EXCHANGE RATE
This is an exchange rate that is determined by market forces. i.e. demand and supply.
– It is a system where by countries fix their values of currency in terms of other countries currency or
– Its an exchange rate which government set and maintain rate of exchange through central bank.
Is an exchange rate system where a given foreign currency is purchased at different rate (price) for a local currency
The exchange rate depends on government interior in controlling importation for example basic needs are given at lower exchange rate while luxury goods are given a higher exchange rate.
PEGGED EXCHANGE RATE:
Is a system where the price of particular / domestic currency is stick/ fixed in relation to a given foreign currency, for example TSH and dollar where all the prices of goods and services in Tanzania are determined by dollar.
INTERNATIONAL INSTITUTIONS USED IN INTERNATIONAL TRADE
I.F.C:– International Finance for Cooperation