Why Nations Trade

• How does resource distribution affect trade?• What are the differences between absolute

and comparative advantage?• What are the major imports and exports of

the countries of the world?• How does trade affect employment?

Settling in to Penang

• Kia Rio

• pizza

• Beer• Petrol

• Green tea

• udon

Advantages to Trade

• Lower Prices• Different Factor Endowments• Economies of Scale• Increased variety/choice• Ability to acquire needed resources• Competition aiding efficiency• Political Benefits• Growth and development

• Each country of the world possesses different types and quantities of land, labor, and capital resources.

Resource Distribution/Factor Endowments

• By specializing in the production of certain goods and services, nations can use their resources more efficiently.

• Specialization and trade can benefit all nations.

Economies of Scale (and lower prices/increased efficiency)

• As firms get larger the specialization of their workforce and the introduction of technology improves productivity.

Acquisition of needed resources

Competition improves efficiency

• In 1984, the year before Proton started, Japanese brands dominated the market. Swedish brands, represented by Volvo (though some Saabs were also sold) were the only other brands which had a significant share. There were no Korean brands sold in Malaysia at that time.

Political Benefits• The iphone supply chain Theory

• http://sourcemap.com/

Increased variety/choices

Growth and Development• http://www.gapminder.org/world/

#$majorMode=chart$is;shi=t;ly=2003;lb=f;il=t;fs=11;al=30;stl=t;st=t;nsl=t;se=t$wst;tts=C$ts;sp=5.59290322580644;ti=2010$zpv;v=1$inc_x;mmid=XCOORDS;iid=tyadrylIpQ1K%5FiHP407374Q;by=ind$inc_y;mmid=YCOORDS;iid=0AkBd6lyS3EmpdHZSTVMxaVdxQlFLR3NMbnBEWnVuTXc;by=ind$inc_s;uniValue=8.21;iid=phAwcNAVuyj0XOoBL%5Fn5tAQ;by=ind$inc_c;uniValue=255;gid=CATID0;by=grp$map_x;scale=lin;dataMin=0.1401;dataMax=0.9376$map_y;scale=lin;dataMin=0.1102;dataMax=234$map_s;sma=49;smi=2.65$cd;bd=0$inds=

Flaws in Theory ofComparative Advantage

Doesn’t address winners and losers in the country

Assumes factors within the country are perfectly mobile

Static model - doesn’t address potential for changes

Ignores externalities – positive and negative

Ignores economies of scale

Ignores national security and issues of inter-dependence

Many others….

Protectionism and Trade Liberalisation

Why Do Countries Limit Trade?Protect domestic business interests or employmentHealth, safety or environmental concernsSupport infant “sunrise” industriesAvoid overspecializationPrevent dumpingRaise revenueProtect strategic industryTo improve terms of trade

Protect domestic business interests or employment

Health, safety or environmental concerns

Support infant “sunrise” industries

Protect strategic industry

Avoid overspecialization

Prevent dumping

Raise revenue

Why Do Countries Trade Freely?Allocate resources more efficientlyAvoid trade warProtectionism is a corruption magnetDomestic complacency causes higher costsHigher import costs

Allocate resources more efficiently

Domestic complacency causes higher costs

Avoid trade war

Protectionism is a corruption magnet

International Cooperation

• Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements.

• In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade.

• In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes.

Major Trade Organization Members

EUCARICOMMERCOSURAPECNAFTA & APEC

PACIFIC OCEAN

ATLANTIC OCEAN

INDIAN OCEAN

PACIFIC OCEAN

Global Trade AgreementsMany nations have formed regional trade organizations. These trade organizations establish free-trade zones, or regions where a group of countries has agreed to reduce trade barriers among themselves.