INTERNATIONAL

TRADE
Presented by:
Sehar Nisar
Asad Raza
Zahid Saeed
Syed Shabbir Rizvi
Presented to:
Dr. Ayesha Shouket
1/3/17

Date: 4th Dec, 2016

DETERMINANTS
OF TRADE

EQUILIBRIUM WITHOUT
TRADE

When an economy cannot trade in world

markets, the price adjusts to balance
domestic supply and demand.
The following figure shows consumer and
producer surplus in an equilibrium without
international trade.

Equilibrium without Trade

Copyright 2004 South-Western

Price
of Steel

Domestic
supply

Equilibrium
price

Consumer
surplus
Producer
surplus
Domestic
demand

Equilibrium
quantity

Quantity
of Steel

EQUILIBRIUM WITHOUT
TRADE
Domestic price adjusts to balance
demand and supply.
The sum of consumer and producer
surplus measures the total benefits that
buyers and sellers receive.

WORLD PRICE
The price of a good that
prevails in the world
market for that good

ABSOLUTE ADVANTAGE
If a country has an absolute advantage in the
production of a good or service, it means it is the
most

efficient producer

of that product.

South Africa
Japan
Wheat
55(bags)
18(bags)
DVDs
11
72
Japan has an absolute advantage in DVDs
South Africa has an absolute advantage in Wheat

COMPARATIVE ADVANTAGE
Wheat
DVDs

South Africa
40
8

Japan
8
4

40/8 = 5
For each DVDs S.A produces it loses 5 bags of
wheat as OC
8/4 = 2
For each DVDs JAPAN produces it loses 2 bags of
wheat as OC

THE WORLD PRICE &

COMPARATIVE ADVANTAGE
A country has a comparative advantage, then
the domestic price will be below the world price,
and that country will be an exporter of the good.
Whereas if a country does not have a
comparative advantage, then the domestic
price will be higher than the world price, and the
country will be an importer of the good

Balance Of Payment
Current Account
BOT-Trade Deficit and Trade Surplus
Capital Account
Financial Account

The Gain And

Loses of
Importing/
Exporting
Country

- Understanding & Effects of

Tariff
- Trade Policy
- Benefits of International
Trade

UNDERSTANDING & THE EFFECTS OF TARIFF

Prices of Oil

$ 30

Domestic
Supply

Domestic
Demand

Consumer
Surplus
After Tariff

Equilibriu
m without
trade

Tariff: A tax on
good produced
abroad and sold
domestically

Prices with $ 25
Tariff
(World Price +
Tax)

Prices
without
Tariff
(World Price)

Consumer Government
(After
Surplus Revenue
Tariff)
Import
Before Tariff
with
$ 20
Supply
Demand
Producer
tariff
Surplus
Import without tariff
with out Tariff
Producer Surplus
with Tariff

QSD

QSD

QDD

QDD

Quantity
of Oil

Trade Policy

LESSONS FOR TRADE POLICY

1.

If government allows import and export ,

what effect it will create on price and quantity
of the good sold in the domestic market?

2.

What effect (gain or lose) free trade will

create on market?

3.

Should a tariff be a part of the trade policy?

OTHER BENEFITS OF INTERNATIONAL TRADE

MODELS OF EXCHANGE
RATE
Purchasing Power Parity (PPP):
It suggests that purchasing power of
different currencies should be the same
when converted to a common currency
value through the exchange rate.

LAW OF ONE PRICE:

When converted to a common currency
value through the exchange rate, the
price of identical goods should be the
same across national boundaries.

EXCHANGE RATE:
The price of one currency expressed
in units of another currency.

2 FORMS OF PPP:
The ABSOLUTE PPP model suggests
that the law of one price holds
because of the presence of arbitrage
processes, & that the exchange rate is
nothing more than the ratio of the
price levels of a common bucket of
goods expressed in each currency.

2 FORMS OF PPP:
The RELATIVE PPP model focuses on
the importance of relative inflation
rates as a determinant of the
exchange rate. It suggests that if the
rate of inflation in the domestic
economy exceeds that of the foreign
country, the currency will depreciate
in line with the inflation differential.

THE JOB ARGUMENT

Trade with other countries destroys
domestic jobs.
Yet free trade creates jobs at the same
time that it destroys them.
Workers
in
each
country
will
eventually find jobs in the industry in
which that country has a comparative
advantage.

NATIONAL SECURITY
ARGUMENT:
Free trade often argue that the
industry is vital for national security.

THE UNFAIR COMPETITION

ARGUMENT

An assumption that free trade is only

favorable when all the countries plays
with the same rules.
In-fact neither the rules are same nor
they can be same. (every country has
its own governing rules and business
rules.
Free trade may not be favorable for
the producers.

THREAT AS A BARGAINING
TOOL.
Policy makers beliefs that trade
restriction can be useful when we
bargain with our trading partners.
A threat of restriction can be used as a
tool to bargain. i.e. Ill impose tariff on
my exports on steel if you fail to
remove tariff on your wheat supplies
to me.
Response to threat can result in freer
trade.

 If the threat doesn't works country has

to make a difficult choices.
Backing from the threat may harm the
prestige of the country in the
international market. Backing from the
threat is a IMAGE SPOILER of the
country.

WORLD AGREEMENTS AND THE

WORLD TRADE
ORGANIZATIONS

Approaches
Unilateral

Multilateral

UNILATERAL AND BILATERAL

APPROACH
Removing trade and restrictions on its own is
called unilateral approach.
When two countries with mutual consent
remove sanctions and restrictions and agree
to open trade, its called bilateral approach.
USA recently removed sanctions on its own
to trade with Iran.
Iran also removed sanctions and restrictions
on trade and has decided to export goods to
America and also import the goods from
USA.

MULTILATERAL APPROACH
A country can reduce its own
restrictions and sanctions while the
other countries do the same.
Multilateral trade is a trade bargain
with its trading partners to reduce
restrictions around the world.
International organizations play their
roles
in
promoting
trade
and
negotiations between the countries to
curb sanctions.

INTERNATIONAL
ORGANTIZATIONS
North America Free Trade Agreement
(NAFTA)
General Agreement on Tariff and
Trade(GATT)
World Trade Organizations. (WTO)

ADAM SMITH & FREE TRADE

Mutual gains from voluntary exchange
of existing goods
Increased competition
The division of labor
Better us of skills and resources in
different countries.

1/3/17

THANK YOU!
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