Lesson 29 ª


 

 

 

 

 

   

 

International Trade

Nowadays, it is impossible for a country to live without buying or selling to other countries. If a country was closed for business with other countries they would have to produce everything they need: food, energy, any product (from washing machines to cars, etc).

However, nowadays there are still a few examples of closed economies (North Korea, Cuba, Irak, etc) these countries generally have a lower level of life.

It is normal for countries to establish trade relationships with the rest of the world, creating a flow of exports (the sale of a country's goods and services to the rest of the wordl) and imports (purchasing goods and services that different countries in the world have for sale).

International trade allows countries to improve their level of wellbeing.

Different theories have tried to explain the reason why certain countries specialise in making a determined range of products, exporting the excess that they do not need and with the generated income they import goods or services that they do not produce.

Theory of absolute advantage: every country tries to obtain and produce things more efficiently than the rest of the world:

Let's see an example: we are going to look at the production of two products: shoes and furniture.

Let's suppose that Spain takes 1 hour to make a pair or shoes and 4 hours to make a piece of furniture, whilst in France they take 2 hours to make a pair of shoes and 3 hours to make a piece of furniture.

What happens? Spain specialises in making shoes (as they make them better than France), whilst France specialises in making furniture (as they make them better than Spain).

Spain will sell shoes to France and France will sell furniture to Spain.

Theory of relative advantage: every country will specialise in what they produce more efficiently amongst the different production alternatives they have.

Let's imagine now that Spain takes 1 hour to make a pair of shoes and 2 hours to make a piece of furniture, whilst France takes 2 hours to make a pair of shoes and 4 hours to make a piece of furniture.

In this case, Spain will have absolute advantage with regards to France in both products. Let's analyse the cost of opportunity:

Let's see Spain's situation:

If they produce 1 pair of shoes (1 hour) they will be prevented from producing 0,33 of a piece of furniture (every piece of furniture needs 3 hours), then the relative cost is: 1 pair of shoes = 0,33 a piece of furniture.

In echange if they make 1 piece of furniture they will stop producing 2 pairs of shoes, then the relative cost is: 1 piece of furniture = 3 pairs of shoes.

Let's see France's situation:

If they make 1 pair of shoes (2 hours) they will stop producing 0,5 of a piece of furniture (each piece of furniture needs 4 hours). The relative cost is: 1 pair of shoes = 0,5 a piece of furniture.

If they make 1 piece of furniture they will stop producing 2 pairs of shoes. Then the relative cost is: 1 piece of furtniture = 2 pairs of shoes.

If we compare the situation in both countries, Spain has the comparative advantage over France with making shoes (0.33 a piece of furnture against 0,5 in France), whilst France has a comparative advantage in the making of furtniture (2 pairs of shoes v 3 in Spain).

This situation will make Spain specialise in making shoes and France specialise in making furniture.

Spain will buy furniture from France as long as they pay the price of less than 3 pairs of shoes (if they do not reach this deal then they should start producing their own furniture), whilst France will sell them furniture as long as they receive more than 2 pairs of shoes (if this doesn't happen they should manufacture less furniture and spend more time in producing their own shoes).

Therefore, the foreign trade between these two countries will develop when Spain buys a piece of furniture from France they have to give them more than two pairs of shoes, but less than three.

Obstacles in free trade

In practice, it is very common for countries to establish different measures to defend their national industry (recently established industries or strategically considered industries), which make international trade more difficult.

Amongst these measures you can find:

Customs duty: taxes on imported products which make products more expensive and which make them less competitive in comparison with national products.

(see the graphs on page 161 and 162 of the X book)

Import possibilities: there is a limit to the amount of a certain product that can be imported during a certain time frame.

For example: Portugal establishes an import limite of 5000 Korean cars per year.

Non customs barriers: these include complex and expensive customs procedures (in short, dissuasive); very strict quality and health regulations to be able to import a product; subsidies to national manufacturers so that they can produce goods at lower prices, making them more competitive compared with imported goods.

Teacher, teacher, a question....therefore, is a pair of shoes a legal currency in circulation? What are you talking about son, this is only an example!!!