Chapter XII

Introduction to
International Economics
International Trade
Benefits of Trade
Gains of Trade
David Ricardo's
Comparative Advantage
›Ricardo’s “On the Principles of Political Economy
and Taxation” in 1817.
›Economic theory about the work gains from trade for
individuals, firms or nations that arise from differences
in their factor endowments or technological progress.
›Agents have comparative advantage in a economic
model.
›Mercantilism
Determinants of
Comparative Advantage
› Availability or lack thereof of natural resources
› Factor Endowments
› Heckler-Ohlin Theory – a nation will export the
commodity whose production requires the intensive
use of the nation’s relatively abundant and cheap
factor and import the commodity.
Trade Balance
›Trade Surplus / Favorable Balance of Trade - (E > I)
›Trade Deficit / Unfavorable Balance of Trade - (I > E)
Tariff and Nontariff
Barriers to Trade
› TARIFF is a tax levied on import of goods. Its main purpose
is to reduce imports to protect domestic producers from
foreign competition.
›Import Quota is a nontariff barrier which limits the quantity
of good that is produced by foreign entity that can be
imported.
›Voluntary Export Restraints (VER) refer the case where an
importing country induces another country to voluntarily
reduced its exports of a particular commodity under threat of
higher all-around trade restrictions when these compromise
an entire domestic industry.
›Dumping is the export of a commodity at below cost or at
least the sale of commodity at a lower price abroad than
domestically
Exchange Rate
• Exchange Rate expresses the currency of the nations in
respect to foreign ones.
•It is important price in the economy because it determines the
international balance of payment.

Exchange Rate as of Oct. 17, 2017

Types of Exchange Rates
›Nominal Exchange ›Real Exchange Rate
Rate (e) is a rate at (RER) determines how
which currency can much goods and services in
one home country can be
be exchange. exchange for the goods and
services in a foreign country.
›Exchange Rate Regime is the system that a country's monetary
authority adopts to establish the exchange rate of its own currency
against other currency.

›TYPES OF EXCHANGE RATE REGIMES

›Floating Exchange Rate Regime is the most adopted regime in

many different countries. Market participants determine current
rates through the increase or decrease of the currencies' supply and
demand.
›Pegged Exchange Rate or Fixed Exchange Rate Regime is a
system of pegging a country's currency to a band or value, which
may be fixed or periodically adjusted.
Purchasing Power Parity
›Purchasing Power Parity is a theory of exchange
rate dermination and a way to compare the
average costs of goods and services between
countries.
› The theory assumes that the action of importers
and exporters, motivated by cross country price
differences, induce changes in the exchange rate.

Price of good Export of Goods Import of Goods

due to inflation
The Law of One Price
Economic Integration
Levels of Economic
Integration
The ASEAN Integration
ASEAN Free Trade Area
ASEAN Financial
Integration
Impact of AEC on the
Financial System
Where ASEAN
Stands