REMINDERS

 New room for lecture: CEM 202

 Due date of Exercise 1 (written report and
oral presentation)
 Feb 1 (Wed) for AB-1R
 Feb 2 (Thu) for AB-2R

 Photocopy of Form 5. At the back write:

 Student number
 Campus address
 Landline/mobile number
 Name of parents/guardian and contact
numbers
Chapter 1
International Trade and
Agriculture – An
Introduction
Learning Objectives
At the end of the lecture, the students should
be able to:
a. define economic concepts related to trade,
b. discuss why nations trade, and
c. discuss the importance of trade and
agricultural trade.
 What is Trade?
“The most important single central
fact about a free market is that, no
exchange takes place unless both
parties benefit” Milton Friedman

Trade is the voluntary exchange of goods &

services between two or more participants, that
makes all participants better off.
 What is Trade?
• Trade is the voluntary exchange of goods &
services between two or more participants,
that makes all participants better off.
 Farm management – e.g. buying and selling of
factors of production
 Marketing – e.g. availment of marketing
services
 Finance – e.g. availment of credit and
insurance
 Policy and development – ?
 What is International Trade?

International trade is the voluntary exchange

of goods and services between TWO
COUNTRIES
– Goods and services
– Agricultural and non-agricultural (e.g.
machineries and equipment, textile, minerals
and oil)

Why International Trade? What about domestic

provincial trade?
 Additional Terms to Remember
Free trade
 exists when an country exchange goods and
services with other countries without tariffs,
quotas, or other trade restrictions (e.g. SPS)

Autarky
 exists whenever a country can survive of
continue its economic activities without
external assistance or international trade
 exists when a country does not engage in
international trade
 Additional Terms to Remember
Export
 quantity or value goods and services that are
produced domestically and sold abroad
Import
 quantity or value goods and services that are
produced abroad and sold domestically
Net Export or Net Trade
 value of export less value of import
 positive?
 negative?
Why Do Nations Go Into Trade?
Assume the following scenario:
• Two good – two country model
• Two individuals James and Nadine,
representing two nations
• James is a skilled farmer, and Nadine
is a good weaver
• A condition of autarky / self-sufficiency /
absence of trade
Autarky / Self-sufficiency / absence
of trade
James (farmer) Nadine (weaver)

Food Clothing Food Clothing

waste of skill waste of skill

 But with specialization

James (farmer) Nadine (weaver)

Food Clothing

full use of skill full use of skill

no ↑ food no ↑ clothing
wastage production wastage production
of skill of skill
 With trade

James (farmer) Nadine (weaver)

Food Clothing

own for trading own for trading

consumption consumption
Why Do Nations Go Into Trade?
• In AUTARKY, there is wastage of skill.
• SPECIALIZATION leads to full usage of
skill.
• It is then possible to make each individual
better off. This improvement is through
TRADE.
• Nations go into trade to specialize and be
better off.
 GAINS FROM TRADE
A. Goods that cannot be produced at home, can
be obtained from abroad
– Top Philippine imports: soyabean oil (US), wheat
(US), milk (New Zealand)
– Top Philippine exports: coconut oil (US), banana
(Japan), tuna (Japan), pineapple (US)
– Factors: differences in natural resources (land,
water), climate, consumer preference
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham...
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham and cheese.
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham and cheese.
→ But ham processing needs a meat slicer …
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham and cheese.
→ But ham processing needs a meat slicer,
and cheese processing needs a cheese grater.
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham and cheese.
→ But ham processing needs a meat slicer, and cheese
processing needs a cheese grater.
→ Both equipment requires fixed capital.
→ They are expensive, both in terms of money
and time (i.e. learning how to use it).
 GAINS FROM TRADE
B. Goods that can be produced at home at a
high cost, can be obtained at a lower cost
from abroad.
→ Guy and Pip both want ham and cheese.
→ But ham processing needs a meat slicer, and cheese
processing needs a cheese grater.
→ Both equipment requires fixed capital.
→ They are expensive, both in terms of money and time
(i.e. learning how to use it).
→To produce more ham and cheese for less
cost (i.e. fixed capital), Guy and Pip should
specialize and trade.
IMPORTANCE OF AGRI TRADE
 Focus of this course is on international trade
in agricultural markets
 Why do we care about markets in the
agricultural sector?
IMPORTANCE OF AGRI TRADE
1. Source of market expansion
 Domestic + world market
 Explore new markets
 Traditional – US, China, Japan
 Potential – Latin America, Africa

2. Provides incentive for increasing productivity

and output
 Need to be competitive in foreign markets
 e.g. palay COP, Philippines vs Thailand
IMPORTANCE OF AGRI TRADE
3. Influences the size, variety and price of food
for consumers
 Availability of wide variety of products
 Domestic producers will have to compete with
imports, in terms of prices

4. Source of employment and contributes to the

balance of trade
 Traditional export winners contribute to the
balance of trade
 e.g. banana, mango, pineapple, coconut oil
SUMMARY
 International trade involves:
• exchange of good and services,
• trading participants, represented by countries, &
• gains for all participants.
 Specialization leads to full usage of skill. To take
advantage of specialization, countries go into trade.
 The agriculture sector is an important contributor to
trade in terms of:
• market expansion,
• increasing productivity,
• lower prices, and
• source of employment and income.