Back to: ECONOMICS SS3
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In today’s class, we will be talking more about international trade. Enjoy the class!
International Trade II
ADVANTAGES OF INTERNATIONAL TRADE
- International trade generates the exchange of goods and services among the nations of the world to mutual advantages of all participating countries.
- Promotion of economic development.
- International trade provides employment opportunities.
- It enhances international specialization.
- It leads to an increase in world output.
- International trade promotes friendship among nations of the world.
- International trade increases the standard of living.
- It fosters – equitable distribution of national resources.
- Countries can acquire skills and ideas.
DISADVANTAGES OF INTERNATIONAL TRADE
- International trade can lead to dumping of goods into less developed countries by multinational companies from the developed nations.
- This development above affects infant industries adversely.
- International trade if not checked can destroy the cultural values of a country. E.g. use of mini skirt from America is anti-cultural and against our social norms.
- Through international trade, harmful or dangerous goods can be imported into a country by unscrupulous businessmen.
- A deficit may arise, which affects the country adversely.
- Where dumping is highly prevalent, it may lead to unemployment.
- Reduction of effort to attain self-reliance.
- The developed countries may use their position to exploit the less developed ones.
LAW OF COMPARATIVE COST ADVANTAGE
The theory or principle of comparative cost advantage states that countries derive mutual benefit from trade when they specialize in the production of those commodities in which they have a greatest comparative cost advantage over others and exchange them for other commodities which have comparative cost disadvantage.
A country has a comparative advantage over others in the production of a commodity in which it has the lowest opportunity cost than others. Therefore, it is the real cost of producing a commodity (in terms of other commodities forgone) that is taken into consideration. This theory was propounded by David Ricardo in the 19th century.
ASSUMPTIONS OF THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE
This principle or theory is based on the following assumptions:
- There are only two countries.
- Only two items are produced with the available resources.
- There is free flow and mobility of factors of production.
- There is no transport cost
- Constant costs prevail.
- Technology is constant.
- Labour is the only factor of production.
In line with the above assumptions, Nigeria and the United States of America (USA) for example, are producing and consuming rice and wheat. The pre-specialization production position is shown in schedule A below.
Schedule A Rice Wheat
Nigeria 100 bags 50 bags
USA 50 bags 100 bags
TOTAL 150 bags 150 bags
Schedule B is an estimated opportunity cost of producing the two commodities by the two nations.
Schedule B Rice Wheat
By the Law of Comparative Cost Advantage. Nigeria should specialize in the production of rice while the USA should specialize in the production of wheat.
THE PRINCIPLE OF ABSOLUTE ADVANTAGE
The principle of absolute advantage was propounded by Adam Smith and it states that a country should specialize in the production of a commodity or commodities and services in which it has an absolute advantage over other countries. According to Adam Smith, a country has an absolute advantage over other countries if she can produce a commodity or service which other countries cannot produce. Again, given the same unit of resources, a country has absolute advantages where she can produce the two commodities concerned at the least cost.
INSTRUMENTS OF TRADE PROTECTION
The government of any country control or restrict trade through the following instrument.
- Import duties or tariffs: This is a tax imposed on imported goods to reduce the amount of trade.
- Foreign Exchange Control: This is the control that is exercised by the state, and usually through the Central Bank on all dealings, in gold and foreign exchange i.e. foreign currencies.
- Import licensing: Under import licensing, no commodity may be imported except based on individual licenses issued by the government of a country.
- Devaluation: This is a deliberate reduction in the value of a country’s currency in terms of the values of the currencies of other countries of the trading world. Devaluation is used as a tool for correcting an imbalance in a country’s balance of payments.
- Quota: An import quota is a quantitative restriction imposed on commodities entering a country for a specified period of time.
- Embargo: This is the prohibition or outright ban placed on some imported goods.
REASONS FOR TRADE PROTECTION
The following points are advanced in support of trade protection.
- Maintenance of full employment at home.
- Protection of infant industries.
- Development of import substitutes at home
- To correct or remove any imbalance in Balance of payment Account.
- To raise revenue e.g. tax
- Prevention of dumping.
- Prevention of harmful and non-essential goods.
- The government may protect trade for strategic reasons – e.g. in retaliation against a foreign state.
- What is Crop farming?
- Outline any four measures that can be adopted to increase crop production.
- Highlight five differences between public limited liability company and private limited liability company.
- Define specific duty.
- What is a normal channel of distribution?
In our next class, we will be talking about Deficit Balance of Payment. We hope you enjoyed the class.
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