1. KEB2223 Intermediate Macroeconomy
keb2223
Intermediate
MAcroeconomics
Name : Nuril Ekma Hj Abd Muda KJC0950313
Section :2
Lecturer : Madam Wan Nor Asyikin
Date submit : 15th April 2012
Marks :
__________________
( Mdm Wan Nor Asyikin )
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table of content
1. Introduction 3-4
2. Body
part 1: Why firm engage in International Trade
 different in resource endowment 5
 lack in technology 5
 availability of labor 6
 different in preference 6
 share idea & knowledge 6
 reduce the risk of one economy 6-7
 different in productivity 7
 different in Opportunity Cost & Corporative Advantage 7-8
 diversity of product 8
 different in season 8
part 2: how government policy affect international trade
 subsidiary protect the main industry 9
 ensure the survival of new small industry 9-10
 quota : limit certain imported goods 10
 tariff : protecting domestic employment 10-11
 embargo 11
 anti dumping 11-12
 buy national products 12
3. Summary 13-14
4. Reference 14
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INTRODUCTION
Every day the world is growing closer and closer together. Countries rely
on one another for resources that they don't have available to them otherwise.
Because of this, they must trade with one another to get what they need.
Traditional or “old” theories of international trade explain the flow of goods
between countries in terms of comparative advantage (differences in opportunity
costs of production). Comparative advantage can arise because of productivity
differences (“Ricardian”comparative advantage model) or because of a
combination of cross-industry differences in factor intensity and cross-country
differences in factor abundance (“Heckscher-Ohlin” comparative advantage
model). In either case, a key implication of old trade theory is “inter-industry
trade”: That is, countries will export one set of industries and import another.
Endowment-driven “old” trade theory models also provide a mechanism through
which international trade can influence relative factor rewards (and hence income
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distribution), as specialization across industries that differ in factor intensity
changes the relative demand for the various factors of production.
With good preparation and follow-up, missions can be great door openers,
and participants benefit in many ways, including:
 Obtain sales and contracts as a direct outcome of the mission
 Find personal contacts for future follow-up
 Sign partnerships and cooperative agreements for further business
development
 Get hands on and up-to-date market information and research
 Assess overseas opportunities, culture, infrastructure and potential
demand
 Initiate new vendor relationships
 Learn about the culture, customs, business and operating environments of
the target countries
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CONTENT
1. Why firm engage in international trade
The primary reason firm to go international is to expand their market
penetration. With that said, the initial driver would be if firm have saturated their
domestic market and needed to expand outside of home country in order to
further their growth opportunities. In other cases, it may be that firm product may
be more marketable in a foreign market than their own. Despite that, there are
many factors why firm engage in trading with firm outside their home country.
Above listed some of the reason why firm goes for international trading.
Different in resources endowment
Since some countries have more natural resources due to their locations
as compared to others it leads to international trade. For example gulf countries
have huge reserves of oil but they lack other resources so they export oil to other
countries and import the other resources which they need from other countries.
For example, the United States imports lots of oil from countries in other
continents.
Lack in technology
It may be also due to the technology. Some country are better equipped
to produce technologically goods which are cheap as well better which leads
to international trade. For example is Russia. Their country is better equipped in
technology for producing diving ship for military purpose. So, Malaysia imports
their ship which we already purchase 2 known as ‘Kapal Selam Tun Abdul
Rahman’ and the other one is ‘Kapal Selam Tun Abdul RAzak’. This situation
show that limited technology that we had make Malaysia trade with Russia for
their goods which Malaysia have not yet achieve that level of technology Russia
had.
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Availability of labor
Resources do not have to be material goods, but can also be labor related
as well. There are some countries which enjoy substantial cost advantage in
producing certain products due to availability of cheap labor and therefore they
can produce goods at a much lower cost, increasing their profitability. This helps
both the company producing the products as it lowers their cost, but also helps
the people doing the labor, as it provides a place of employment for them.
Differences in Preferences
Even if two countries have identical resources they might benefit from
trade if they have different preferences. Let's assume that the Malaysia and
Thailand have identical resources for the production of coffee tea. So both
countries can produce both products. But in Malaysia we prefer coffee and in
Thailand they prefer tea. So they can both achieve more satisfaction from the
same amount of resources if Malaysia sells Thailand our excess tea and they sell
us their excess coffee.
Share idea and knowledge
International trade allows countries to learn from each other and take in
new ideas. While one country might be focused on developing one type of
product, another maybe focusing on completely different subject. Together, they
can share their ideas, benefiting both of the economies for both countries. For
example, Japan tends to be ahead of the field in consumer electronics. A country
like the United States can directly purchase goods from them, as well as learn
about the new technology is being discovered on the other side of the world.
Reduce the risk for one economy
If one economy has to deal with everything, and if it ever collapses, the
country will fall apart. By trading internationally, countries rely on one another
and it creates a balance amongst them. If one country's economy is doing very
well, then the economies of other countries that trade with it tend to be doing well
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also. If a country falls on hard times, but other countries might also suffer. An
example of this is the current credit situation the United States. Countries around
the world were affected by the credit problem because a lot of them loaned
money to other countries.
Differences in Productivity
First, we have to know a few definitions.
 production : the "quantity produced
 productivity : output per unit of resource, usually output per person
 productive efficiency : producing at a minimum cost
A difference in productivity is a reason that countries benefit from trade. If
a country is more productive in producing a product we say that they have an
absolute advantage in producing that product. A country has an absolute
advantage in the production of a product if it can produce it with fewer resources
than another country. Absolute advantage is the ability to produce a good or
service with fewer resources because of greater productivity. Here are some
example how differences in productivity (absolute advantage) results in
specialization and exchange (trade).
example
Let's say there are two people. One is an attorney, the other a mechanic.
Assume that the lawyer is more productive at doing law than is the
mechanic since he or she can do it in less time and the mechanic is more
productive at fixing cars. So the lawyer has an absolute advantage in law
and the mechanic has an absolute advantage in fixing cars. It doesn't
surprise us that if the lawyer's car breaks down he or she will bring it to the
mechanic to get it fixed. The lawyer trades with the mechanic.
Differences in opportunity costs and comparative advantage
The main argument in favor of trade is the principle of comparative
advantage. the principle of comparative advantage was first observed and
explained in early 1800s by david ricardo. This principle says that it pays for a
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person or a country to specialize and exchange even if that person or nation is
more productive than potential trading partners in all economic activities.
Specialization should take place if there are relative cost differences in
production of different items.
Comparative advantage is the ability to produce a product at a lower
opportunity cost. Opportunity cost in an earlier lecture and the value of the next
best alternative that is not chosen as the result of a decision.
Diversity Of Product
Refer to the potential conditions of production factors of production owned
by the state. For example Indonesia, has great potential in producing agricultural
goods. In other words, through trade, a country can obtain the goods that cannot
be produced domestically. So, if a country specializes in producing and exporting
certain goods, the average production cost will come down
Different season
Every country has different season. This led to country specialization in
different things/product and service according to their season. For example, in a
4 season country like America or Britain, the trend of fashion have to suit to their
country climate change. Thus, fashion designer usually will come out of new
collection every different season. It’s different in Malaysia which we live in a
different season that those live in America. Despite that, we exchange our
product when there is demand by customers.
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2. How government policy affect
international trading
The phrase "Instruments of Trade Control" is popular with IB textbook writers,
it is a lot simpler to say ‘basic ways government controls trade’. Government
implies policy to international trading because of certain reason and is usually to
make sure that our country not totally relies on international trading. They are
some policy that government put to international trading. The policy is as below
 tariff
 embargo
 subsidies
 quota
 fiscal policy
 anti-dumping
 buy national policy
 foreign exchange control
Different country might have different policy in international trading. This
policies affect trading as government put rules & regulation to firm who want to
import or export their product. How government policies affect trading actually?
Here are some ideas how government policies affect international trading.
SUBSIDY : PROTECT THE MAIN INDUSTRY
Is a form of assistance paid to a finance commercial or economic
sector. Most of the subsidies made by the kingdom to the expenditure or dealers
in the industry to prevent a deterioration of the industry as a result of the
continuity of operation a result of the continuity advantages or an increase
in product prices or just to encourages to hire more workers prices subsidiary up
some food boarding perpetuate life especially in the urban area; and subsidies to
encourage the development of the industry.
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The subsidy may be considered as a form of protection or trade barriers
by making domestic and product & service artificial competitive against imports.
Subsidies may interfere with the market and should wear big economic boarders.
Help financial in the form of subsidies may be the coming of the kingdom, but the
term refers to aid subsidy might by others, such as individual or institution is
not the kingdom.
In developing nations, the government would use restrictions to close the
market for advance products (example: electronics). Domestic firms do not have
enough power or capitals to compete with strong foreign firms, so the
government gives them incentives to grow by letting them control the market until
it rises. In developed nations, governments use restrictions to support decreasing
industries. The best example is Agriculture sector. Even though subsidy is used
most of the time, you will see some restrictions. Farmers in the U.S. cannot
compete against developing nations due to high costs. Therefore, the U.S.
cannot let this sector die. There are many theoretical reasons, but mainly due to
main food supply. We cannot depend on foreign foods entirely.
QUOTA : LIMIT CERTAIN AMOUNT OF IMPORTED PRODUCT
Taxes are that the government applies to imported goods to limit quantity
imported. Quotas are quantity restriction applied to imported goods to limit
quantity imported. In general, if tariff is used, government receives revenue from
foreign firms. Quotas means, instead of the government, foreign firms will receive
the portion that government would have received if tariff was used.
TAARIF : PROTECTING DOMESTIC EMPLOYMENT
The levying of tariffs is often highly politicized. The possibility of increased
competition from imported goods can threaten domestic industries. These
domestic companies may fire workers or shift production abroad to cut costs,
which means higher unemployment and a less happy electorate. The
unemployment argument often shifts to domestic industries complaining about
cheap foreign labor, and how poor working conditions and lack of regulation
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allow foreign companies to produce goods more cheaply. In economics however,
countries will continue to produce goods until they no longer have a comparative
advantage.
EMBRGO
An embargo (from the Spanish embargo) is the partial or complete
prohibition of commerce and trade with a particular country, in order to isolate it.
Embargoes are considered strong diplomatic measures imposed in an effort, by
the imposing country, to elicit a given national-interest result from the country on
which it is imposed.
Embargoes are similar to economic sanctions and are generally
considered legal barriers to trade, not to be confused with blockades, which are
often considered to be acts of war. Embargo may also refer to the practice of
blocking fare classes at certain levels, and award availability on airlines.
Embargoes are complex in their international meaning. In response to
embargoes, an independent economy or autarky often develops in an area
subjected to heavy embargo. Effectiveness of embargoes is thus in proportion to
the extent and degree of international participation.
ANTI DUMPING
There are many different ways of calculating whether a particular product
is being dumped heavily or only lightly. The agreement narrows down the range
of possible options. It provides three methods to calculate a product’s “normal
value”. The main one is based on the price in the exporter’s domestic market.
When this cannot be used, two alternatives are available—the price charged by
the exporter in another country, or a calculation based on the combination of the
exporter’s production costs, other expenses and normal profit margins. And the
agreement also specifies how a fair comparison can be made between the export
price and what would be a normal price.
The anti-dumping duties imposed are as follows:
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 Bangkok Polyester Public Co Ltd -- 5.33 per cent,
 Indorama Chemical (Thailand) Co Ltd -- 49.25 per cent,
 Indorama Polymers Public Co Ltd -- NIL,
 Thai PET Resin Co Ltd -- 36.45 per cent,
 Thai Shinkong Industry Corp -- 49.25 per cent, and
 others -- 49.25 per cent.
BUY NATIONAL PRODUCT
Interest in buying artificial Barangan Malaysia's most dominant drainage
of the eye is able to circumvent our nation money out of the country. Malaysia
money will not spill out if the people of Malaysia's own emphasize on ‘Barangan
Tempatan” meetingtheir daily needs. The main fund will also increase once the
gus will be able to stem the problem of inflation. Malaysia has reached its time to
change people's negative responses are thought bahawaBarangan import better
than Barangan Tempatan. Obviously if all the people that domestic choose and
purchase products, we actually have triumphed eye guard our money instead
of flowing out of the country.
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Conclusion
First, we document that trade is more concentrated than employment and
sales. This is the result of few firms accounting for a large share of trade volumes
and appears to be mainly occurring within rather than between sectors. This fact
supports recent theories of international trade with heterogeneous firms against
traditional theories based on comparative advantages. Furthermore, we find
significant concentration along the sector and country extensive margins: few
firms serve trade in many sectors and with many countries, but these firms
account for a share of import and export. Finally, we show that import is more
concentrated than export, especially between sectors and along the sector and
country extensive margins.
Second, we confirm that firms with different exposure to international
markets have different performances, in terms of size, capital intensity and
productivity. In particular, we support the idea, as in a wealth of recent studies,
that firms more engaged in international activities (those involved in both
importing and exporting) are the best performers, but we also find that firms
involved only in importing activities perform better than those involved only in
exporting. Our results suggest that the importers’ premium is more the result of a
self-selection process than a productivity enhancement due to import of capital
and intermediate inputs. We provide some evidence that this may have to do with
the fact that only importers buy mainly capital goods from major European
countries. To the extent that these capital goods incorporate advanced
knowledge, they may entail sunk 25 costs which the importers have to incur to
accumulate the absorptive capacity needed to use those goods in production.
Third, the degree of geographical and sect oral diversification is positively
correlated with firm size and productivity. However, diversification premier with
respect to capital intensity are connected only to the import side. In particular, we
have evidence that on the one hand, larger, more capital intensive and more
productive firms are able to import a large number of products from a larger
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number of countries, and, on the other hand, firms exporting into a larger number
of countries are more likely to experience a performance boost.
REFERENCE
1. http://www.sos.wa.gov/itrade/trade_missions.aspx
2. http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-
basics.asp#ixzz1qHqGrWPT
3. http://answers.yahoo.com/question/index?qid=20100216183323AAxrVzR
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