Republic of the Philippines

Bicol University
College of Business, Economics and Management
Daraga, Albay
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

A. OVERVIEW
This topic is centered in the foundation concepts comprising the introduction to
international economics and its features. The topics are as follows:

• Gains from Trade • Exchange Rate Determination

• Patterns of Trade • International Policy Coordination
• How Much to Trade • International Capital Market
• Balance of Payments • Trade and Money

B. OBJECTIVES
1. Be acquainted with the history of international trade and agreement.
2. Develop thorough understanding of the concepts and overview of international trade
and agreement.
3. Be guided with the content of the succeeding topics.

C. LEARNING OBJECTIVES
Through the course of this topic, the learners shall be able to demonstrate knowledge on
the basic concepts and principles of international trade and agreement, as well as to inculcate
real world examples relative to the subject matter.

D. INSTRUCTIONS
1. Kindly read and comprehend this topic on Introduction to International Trade. Bear
with the length of the modules. You need to read in order to learn. However, if some
of the concepts confuse you, I will explain them to you on our next virtual meeting. Do
your best to comprehend. As I’ve said, dreams are unreachable for a motivation
too low. Kaya mo yan, tiwala lang! I’m here to guide you.
2. Watch the video suggestions or read the suggested materials, if there’s any.
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

3. Prepare the Assignment. The deadline is a week after you receive this module. Send
the output with the filename: ITA_Topic I Output_Course-Year & Block_Surname,
First Name, Middle Initial (ex. ITA_Topic I Output_BS Economics 3B_Garcia, Riza L.)
4. Should you have any questions or concerns, do not to hesitate to send me a message
in these mediums:
a. Private Comment in the Classwork Tab on Google Classroom
b. Messenger Group Chat
c. Email at [email protected]
5. Enjoy your own pace, ‘cause learning is never a race. In these hard and trying times,
I understand that you are walking on a rough patch. Do not forget to pause, breathe,
and carry on! You got this!

E. DISCUSSION
GAINS FROM TRADE

Shouldn’t the Philippines grow its own rice, consumers just buy locally produced rice, so that there
will be no need to import from Vietnam and/or Thailand? Shouldn’t the United States of America produce
its own automotive and food products without depending on China’s labor force? Why do countries trade?
How much do they trade? What are the gains from trade?

One important acumen in international economics is that there are gains from trade. Putting it to
context, when two countries sell goods and services to each other, there is predominantly a mutual benefit.
One of the main misconceptions on trade is that it is disadvantageous to less developed countries and
only plays a great advantage on the advanced countries’ part. The disproportions on productivity and wages
among countries lead businessmen in less technologically advanced nations to fear, because of its “inability
to compete” in the international market once it opens its nation to international trade. On the other hand,
capitalists
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

in technologically advanced nations, high-wage countries, distress on their standard of living being dragged
down by low-wage countries once they engage in trade.

As you go through other topics, you will see:

• How the first trade model demonstrates how two countries mutually benefit from trading, regardless
of difference in efficiency and wage rate.
• International trade is beneficial by exporting goods whose inputs of production are locally abundant,
and importing goods whose inputs of production are locally scarce.
• International trade makes it possible for countries to specialize in producing fewer number of goods
resulting to large-scale production’s greater efficiencies.
• That the benefits of international trade do not only include trade of tangible goods.
• International migration, international borrowing and international lending also are forms of
mutually beneficial trade.

Despite the fact that nations generally gain from trade, it does not remove from the equation the
possibility of afflicting particular clusters within nations- that is in terms of the distribution of income. In fact,
international trade theorists pointed out that:

• International trade has an adverse effect on the owners of resources that are “specific” to
industries competing with imported goods/services. This includes the industries without alternative
employment in other industries.
• There is an alteration on the distribution of income among groups including, but not limited to the
workers and the owners of capital.

PATTERN OF TRADE

Unless an economist has a good theory to explain the international trade observed in a particular
nation will the economist be confident to discuss the effects of international trade and recommend
changes on policies relative to its trade pattern. These clearly explain why Saudi Arabia and Brazil
export oil and coffee, respectively. Conversely, why does Japan export automobiles? Why does USA
export aircraft? Alternative explanations have been proposed in the 20th century, but in early 19th century,
David Ricardo, an English Economist offered an explanation on international differences in labor
productivity. In Chapter 4, interaction between the relative supplies of national resources (Land, Labor and
Capital) and the relative use of these factors to production of various goods are discussed.
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

HOW MUCH TO TRADE

If there are gains from trade, to know how much to trade is the next concern. It is said that knowing
how much trade a nation should allow is the most important policy theme in international economics. Since
the 16th century, when modern nation-states start to emerge, governments’ apprehension lie mostly on
the effect of international competition on the domestic industries. Governments have tried to place
limits on imports and subsidized exports in order to shield local industries from foreign
competition. Some of the consistent missions of international economics are to 1. Analyze the effects of
protectionist policies, and sometimes 2. Criticize protectionism and show the advantage of freer
international trade. In 1990s, a new perspective on how much to trade was introduced. The advanced
democracies, led by the United States of America, took a policy of removing barriers to international
trade. Such policy reflects the view that a free trade stimulates prosperity and promotes world peace.

In early 1990s, free trade agreements were negotiated. The two most notable were the North
American Free Trade Agreement (NAFTA) between United States, Canada and Mexico which was
approved in 1993, and the Uruguay Round Agreement founding the World Trade Organization in 1994.
However, also at that time, an international political movement opposing globalization transpired.
Nonetheless, such movement received a bad reputation in 1999 when representatives of various
traditional protectionists and ideologists interrupted a major international trade meeting in Seattle.

Chapters 8-9 showcase an analytical framework international economist developed for

determining the effects of government policies that affect international trade. The framework also
provides cost-benefit analysis and defines criteria of a good government intervention in relation to its
economy. In reality, governments do not necessarily depend their policies on what the cost- benefit analysis
reflects. Yet, economic analyses are used as tools in scrutinizing politics of international trade policy by
identifying who benefits and loses from quotas on imports, subsidies to exports and other government
actions. Usually, conflict of interest within nations are more important that conflicts of interest between
nations in crafting a trade policy. Chapters 3-4 show that trade has very strong effects on income
distribution within countries, while Chapters 9-10 prove that the main determining factor in government
policies toward international trade is the relative power of different groups within countries, and not the
overall national interest.

BALANCE OF PAYMENTS

Every year since 1982, other than the concern on protectionism, balance of payments has become
an issue for United States due to its huge trade deficits. Balance of payment, basically, is the outflow and
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

inflow of money from the country to the rest of the world, vice versa. Moreover, the trade surpluses in China
and Korea amounting to about $80 billion in 1998 demonstrate why there is a need to analyze balance of
payments in the perspective of economic analysis to understand its context. In the case of China, the trade
surplus was intentional as the country had been making trade surpluses for several years, causing other
countries to complain that China does not go by the rules of trade. On the other hand, Korea’s trade surplus
was forced by the economic and financial crisis. Is it actually good to run a trade surplus, and bad to
run a trade deficit? These can be answered in various specific contexts of International Capital
Movements discussed on Chapter 7.

EXCHANGE RATE DETERMINATION

Exchange rate is defined as the ratio at which the principal unit of two currencies may be
traded (Merriam-Webster Dictionary). One interesting fact is, for most of the 20th century, exchange rates
are not determined in the marketplace, but are fixed by government action. Before World War I, world’s
major currencies were fixed in terms of gold, while after World War II, the values of most currencies were
fixed in terms of U.S. dollar. Still an important substance is the analysis of international monetary systems
that fix exchange rates. Did you know that the euro, common monetary unit of most countries of the
European Union, was introduced on 1st of January 1999 at a worth of $1.17? Immediately after its
introduction, its value began to drop. In fact, in early 2002, it was worth $0.85, currently valued at $0.84.
Such slide caused major humiliation to European politicians, yet many economists argued that the drop in
value of euro was actually beneficial to the European economy, and the strong value of U.S. dollar had
become a problem for the United States. Having the euro-dollar exchange rate as an example, relative
values of monetary units change over time, sometimes significantly.

INTERNATIONAL POLICY COORDINATION

In international economy, sovereign nations are free to choose their own economic policies.
Meanwhile, in an integrated world economy, a country’s economic policies understandably affect other
countries as well. Take for example the action of Germany’s Bundesbank in 1990 where it tried to control
the possible inflationary impact of the reunification of West and East Germany. It raised interest rates on
the said year, which helped precipitate a recession in the rest of Western Europe.

Logically, variances in goals between countries often lead to conflict of interest. This does
not mean that countries having similar goals will not suffer from losses. If countries of the same goals fail
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

to coordinate their policies, then their tendency to lose is high. As to how to create an adequate degree of
harmony among international trade and monetary policies of different countries without a world government
mandating what to/not to do is a fundamental problem in international economics. As early as now, it is
important to know that General Agreement on Tariffs and Trade (GATT) is the international treaty
governing international trade policies and massive international negotiations. On chapter 9, the rationale
of this system is discussed, together with the rules of the game for international trade’s survival in the world
economy.

Although it has been a well-established custom to coordinate international trade policies between
countries, coordination of international macroeconomic policies is not yet fully standard to many. Only
recently have economists formulated the case for policy coordination in the macroeconomic setting.
Nonetheless, there are many attempts to practice international macroeconomic coordination among
countries.

THE INTERNATIONAL CAPITAL MARKET

In 1970s, firms and government of poorer nations, including Latin America, were lent large sums
of money by banks in advanced countries. This era of easy credit system came to a sudden end in 1982
when a number of counties including Mexico were unable to pay the money they were lent with. This
resulted to “debt crisis” which lasted until 1990. Afterwards, investors once again had the enthusiasm to
invest hundreds of billions of dollars into “emerging markets” in Latin America and in the rapidly growing
economies of Asia. History repeated itself as the said investment boom dropped drastically. Another
financial crisis was experienced by Mexico in 1994, and much of Asia was engrossed in a massive crisis
beginning in the summer of 1997. The said tide of history describes the importance of the international
capital market.

An extensive capital market exists in any sophisticated economy, where a set of engagements
by which firms and individuals exchange money and promises to pay such in the future. Since the 1960s,
international capital market is linked with the growing importance of trade, just like what happened between
Middle Eastern nations, London and New York in 1970s. Oil-rich Middle Eastern nations deposited their
revenues from oil in banks in London or New York. In turn, these banks lent money to the governments and
corporations situated in Asia and Latin America. Furthermore, in 1980s, Japan invested the money it earned
from its booming exports in the United States, together with the establishments of a growing number of
U.S. subsidiaries of Japanese corporations.

There is a vast difference between international capital markets and domestic capital
markets. Special regulations imposed on foreign investment by many countries must be abided, same with
 Republic of the Philippines
Bicol University
College of Business, Economics and Management
Daraga, Albay

opportunities that must be offered to evade regulations placed on domestic markets. Perhaps 1960s was
the birth of huge capital markets, including the remarkable London Eurodollar market wherein billions of
dollars are exchanged daily without physical arrival in the United States.

With gains come risks of international capital markets including, but not limited to currency
fluctuations and national default. Currency fluctuations can be exemplified by the drop in value of the
euro against US dollar or vice versa. If the euro falls against the US dollar, U.S. investors who bought euro
bonds suffer capital loss. Conceivably, such investors assumed that euro would be stronger than the dollar.
National default, on the other hand, happens when a nation simply refuses to pay its debts, possibly
because of its inability to do so, and there may be no effective way for its creditors to bring it to court.

INTERNATIONAL ECONOMICS: TRADE AND MONEY

International trade and international money comprise the economics of the international economy.
In the real world, issues pertaining the trade and money do not have a clear demarcation line. Discussions
on the succeeding topic suggest that monetary events have important consequences for trade, since
most international trade involves monetary transactions.

• International trade analysis revolves mainly on real transactions in the international economy, which
includes the physical movement of goods and/or tangible commitment of economic resources. The
conflict between the United States and Europe over Europe’s subsidized exports of agricultural products
is an example of international trade issue.

• International monetary analysis focuses on the monetary side of the international economy, which
includes financial transactions, including but not limited to the foreign purchases of US dollars. One
example of international monetary issue is the difference of opinion regarding the foreign exchange rate
value of the dollar to float freely in the market or to be controlled by government intervention.

Chapters 2-7 discourse analytical theory of international trade, while chapters 8-10 relate trade
theory to the analysis of government policies toward trade. These chapters are all related to international
trade issues.

F. SUGGESTED READINGS/VIDEO MATERIALS

No further readings and video materials this week. I will explain them to you next meeting

G. REFERENCES
Merriam-Webster Dictionary. (n.d.)
Paul R. Krugman, M. O. (2003). International Economics Theory and Policy, 11thEdition. 75 Arlington St., Suite 300, Boston, MA 02116: Pearson
Education, Inc.