ENTERNATIONAL

ECONOMICS I (Econ3081)
RVU
BY: MILKESSA D.ROBI
April, 2022

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► COURSE OUTLINES
1. Introduction

2. International trade theories

3. International Trade and Commercial Policy

4. International Trade, and Economic

Development
5. International Trade Institutions and Regional
Economic Arrangements
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 Chapter One

Introduction
to
International Economics
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 Introduction
Economics divided in to
Microeconomics
Macroeconomics
International Economics
International trade
 deals
under microeconomics concept
International finance
 deals under macroeconomics concept
Here our concern is international trade

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1.1 What is international Trade?
International trade
 Is the study of the production, distribution and
consumption of goods and services on a worldwide basis.
 Is exchange of goods, and services across international
borders or territories.
 It concerned on decision making with respect to the use
of scarce resources to meet desired economic objectives.
 its economic, social, and political importance has been
on rise in recent centuries.

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International Trade count…
It examines how international transactions influence
 social welfare,
 income distribution,
 employment,
 growth,
 price stability etc
international trade highly influenced by
 Industrialization
 advanced transportation
 globalization
 multinational corporations and
 outsourcing .

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1.2 The Basis and Gain of International Trade
A. The Base of International Trade
The basic question in international trade is to explain
 why nations trade with each other.
Countries trade with each other basically for the same reasons that
individual people trade with each other.
No nation by itself can produce all the goods and services which its
citizens require for their consumption.
International trade exist due to
 Differences in factor endowments
 Division of labor (specialization)
 Gains form exchange of goods and services
Price differentials
Existence of Economics of Scale
Existence of government policy
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 Basis of IT Count…
1. Differences in factor endowments
Countries in nature differ in terms of
 natural resource endowments,
 climatic conditions,
 mineral resources and mines,
 labor, capital, technological capabilities,
 entrepreneurial and management skills
These difference determine the capacities and efficiency of
countries to produce goods and services.
 Japan can produce automobiles or electronic goods
 Malaysia can produce rubber and palm oil
 Brazil and Ethiopia can produce coffee
 Thailand can produce rice at a lower cost than other countries
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Basis of IT Count…
2. Division of labor (specialization)
Just as there is division of labor among individuals,
there could be division of labor among countries of
the world.
No countries is able to produce all the goods and
services that requires to consume.
Countries specialize in the production of certain
goods and services in which they have production
superiorities over the other countries.
It export of those goods and services (absolute or a
comparative advantage than others) and it imports
other goods and services.
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 Basis of IT Count…
3. Gains from exchange of goods and services
The basis of international trade is the gains or profits to be
made from the exchange of goods and services.
If there are no gains to be made, there would be no such
trade between countries.
4. Existence of Economics of Scale
It is the production process in which production cost falls as
the scale of production rises
5. Existence of government policy
 Government tax and subsidy programs can be sufficient to
generate advantage in production of certain product

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 Basis of IT Count…
6. Price differentials
It is the immediate cause of international trade
It can arise due to either differences in supply or differences in
demand conditions or due to differences in both.
A. Supply conditions (or production possibilities)
It can arise due to difference in the previously stated factors.

B. differences in demand conditions

 It is a function of income levels and taste patterns
 Mostly higher level of income matched by a stronger taste
 Hence, both income and tastes, in their capacity to affect
demand, would affect international trade, by causing
international price differentials.

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The Gain From International Trade
In the absence of trade, a nation can only consume the
commodity that it produces.
 As a result, nation’s production equivalent its
consumption
Which combination of commodities the nation actually
chooses to produce and consume depends on the
 people's tastes, or demand considerations and
 TOT between the two commodities in the two nations.

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 Gain From International Trade
International trade
 brings about improvement in production and promotes
economic development in the participating countries.
 prevents monopolies.
 benefit consumers by providing them new and cheap
commodities.
 it facilitates international payments.
The gains from international trade can be broadly
classified into
 static and
 dynamic gains.

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Gain From International Trade
i. Static gains
It arise from optimum use of the country’s factor
endowments (human and physical resources),
 This maximized the national output
resulting in increase in social welfare.

ii. Dynamic gains

 Refer to those benefits, which promote economic
growth and economic development of the participating
countries.
 IT increases national income and facilitates saving
and opens out new channels of investment.

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Gain From International Trade
IT promotes economic development in following ways.
1) Developing countries can import capital goods in exchange
for their exports that are mostly agricultural exports.
 This will increase the productive capacity of these countries
and promote the process of industrial development.

2) A country can also import technical know-how, technical

skills, managerial talent and entrepreneurship through foreign
trade and collaboration.

3) International trade has brought about a great movement of

capital from developed countries to developing countries.
 Foreign trade facilitates the payment of interest or
repatriation of capital.

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1.3 International Trade vs. Domestic Trade
Domestic (interregional) trade
 is trade between different sections of the same country.
 All factors which affect prices and other aspect of IT also affect
interregional(domestic) trade.
There is no fundamental difference between interregional
and international flows of goods and services and the
factors affecting them.
The difference stems from the social, political, cultural and
economic boundaries have drawn around various
geographical areas called nations.

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IT vs. DT count…
Existence of difference in tastes and demand may
possibly play a large role internationally than
interregional in determining the pattern of trade.
The difference between domestic and foreign trade
can be explained by:
 Factor mobility
 Product mobility
 Economic environment
 Monetary units

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 IT vs. DT count…
1. Factor mobility 
In international trade the factor mobility is neither free nor
perfect than domestic trade.
 there are restrictive immigration laws which prevent free mobility
of labor from one country to another.
 there are restrictions on the inflow and outflow of capital and
investment across national frontiers.
 there are other social, language, climate, educational systems,
cultural, customs, practices and political barriers that restrict the
mobility of factors from one country to another.
Within the nation, such differences may not exist, or may not
appear too formidable to be overcome by economic incentives.
At any rate factor mobility is relatively greater within country
than between countries.
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 IT vs. DT count…
2. Product mobility
In DT the only internal barriers to trade products are distance
& cost of transportation (which we call natural barriers)
In case of IT, such a movement is not free, because of
natural barriers,
import and export duties and quotas,
exchange controls,
non-tariff (hidden) barriers
Examples of barriers in IT are
Agricultural protectionism in the DCs and
Industrialization through import-substitution in the LDCS

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 IT vs. DT count…
3. Economic environment
 Within the nation, the economic environment is more or less the same in all
the regions of the country.
 the laws governing consumption, production and exchange of goods and
services
 government polices on interest rates, taxes, wages or prices
 Production techniques, factor proportions, factor prices, infrastructure
facilities and production functions
 market structures-the degree of competition or monopoly in production-
and
 consumer taste patterns and preferences are similar
 But b/n nations, they could all differ very significantly.
 This would make the character of IT significantly different from that of
DT.

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IT vs. DT count…
4. Monetary units
Within the nation, monetary laws, currency and the financial
system are the same for all regions in the country.
 There are no currency complications or convertibility
problems involved in carrying out domestic trade.
This is not so between countries.
 We have dollars, euros, yens, pounds, marks franks, birr
 all of them are not freely accepted in discharge of
international monetary obligations.
International monetary differences, therefore, introduce
complications and complexities in international transactions;

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ANY QUESTION
THANK YOU FOR
YOUR
ATTENTION!!!
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