Absolute Advantage Absolute Advantage versus versus

Comparative AdvantageComparative Advantage

Absolute AdvantageAbsolute Advantage Absolute AdvantageAbsolute Advantage

When a country can produce a good When a country can produce a good and an absolute or unquestioned and an absolute or unquestioned advantage over others, then it benefits advantage over others, then it benefits by producing that good and trading it by producing that good and trading it with other countries. with other countries.

A (Arab Country)A (Arab Country) B (Europe)B (Europe)

Example:Example:

B (Europe)B (Europe)A (Arab Country)A (Arab Country)

-Is the ability of one country to Is the ability of one country to produce a commodity at a lesser produce a commodity at a lesser cost compared to that of another cost compared to that of another country.country.-This theory is being practiced in This theory is being practiced in international trade.international trade.

Comparative AdvantageComparative Advantage

““David Ricardo”David Ricardo” -one of the famous classical economists, developed the theory or law of comparative advantage .based on this law, .based on this law, nation should export the goods w/c they nation should export the goods w/c they enjoy the greatest advantage and should enjoy the greatest advantage and should import the goods w/c import the goods w/c they have the greatest have the greatest disadvantage. This simply means-do not disadvantage. This simply means-do not produce the product if it is cheaper to buy it.produce the product if it is cheaper to buy it. -David Ricardo also concluded that trade trade between countries was influenced by relative costs of production and by differences in internal price structures that could maximize the comparative advantages comparative advantages of the trading countries.

Example:

Example:COUNTRIES RICE CALCULATO

RJapan 120 Days 10 Days

Philippines 90 Days 15 Days

PHILIPPINESPHILIPPINES

ADVANTAGEADVANTAGE DISADVANTAGEDISADVANTAGE

ADVANTAGEADVANTAGE DISADVANTAGEDISADVANTAGE

JAPANJAPAN

-In order to know what is happening to the course of international trade, governments keep track of the actual transactions among countries.-The record of such transaction is made in the balance of payments balance of payments accounts.

-The balance of payments on visible accounts is usually referred to as the balance of tradebalance of trade.

The Balance of Payments The Balance of Payments (BOP)(BOP)The Balance of Payments The Balance of Payments (BOP)(BOP)

Current Account Current Account - - includes trade in goods and services and

unilateral transfers.

Capital AccountCapital Account - shows the change in the nation`s assets abroad and foreign assets in the nation, other than official reserve assets. Official Reserve AccountOfficial Reserve Account

- measures the change in a nation`s official reserve assets and the change in foreign official assets.

Balance of Payments SurplusBalance of Payments Surplus -means that the authorities are reducing

their liquid liabilities to foreign central authorities or else adding to their holdings of official reserves in such forms as gold and foreign exchange.

Balance of Payments Deficit Balance of Payments Deficit -means that the authorities are adding to

their liquid liabilities to foreign central authorities or else reducing their stocks of official reserves.

General Agreement on Tariffs and Trade

(GATT)

General Agreement on Tariffs and Trade

(GATT)The General Agreement on Tariffs and Trade (GATT) is an agreement between states and other entities on the rules for trade. It was signed in GenevaGeneva, SwitzwerlandSwitzwerland in 19741974 by 23 states. It was not an international international organizationorganization, although there had been from the beginnings plans to establish an International Trade Organization. The agreement was amended several times, including most recently by the Marrakesh Marrakesh AgreementAgreement in 1995, which ended the Uruguay Round of trade negotiations, which established the World Trade World Trade OrganizationOrganization.

In 1962 the Kennedy Round instituted the "Trade Expansion Act of 1962." This act gave greater power to the executive branches of the respective nations. The Executive was granted negotiation powers up to 50%. GATT functions as the foundation of the WTO trading system, and remains in force, although the 1995 Agreement contains an updated version of it to replace the original 1947 one. The GATT, as an international agreement, is very similar to a treaty. Under United States law it is classed as a congressional-executive agreementcongressional-executive agreement. It is based on the "unconditional most favored nation principle." This means that the conditions applied to the most favored trading nation (i.e. the one with the least restrictions) apply to all trading nations.

How is the WTO different from GATT

How is the WTO different from GATT

The World Trade Organization is not a simple extension of GATT; on the contrary, it completely replaces its predecessor and has a very different character. Among the principal differences are the following:

1. The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940’s. The WTO is a permanent institution w/ its own secretariat.

2. The GATT was applied on a “provisional basis” even if, after more than forty years, government chose to treat it as a permanent commitment. The WTO commitments are full and permanent.

3. The rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade in services and trade-related aspects of intellectual property.

4. While GATT was a multilateral instrument, by the 1980’s many new agreements had been added of a plurilateral, and therefore selective, nature. The agreements w/c constitute the WTO are almost all multilateral and, thus involve commitments for the entire membership.

5. The WTO dispute settlement system is faster, more automatic and thus much less susceptible to blockage, than the old GATT system. The implementation of WTO dispute findings will also be more easily assured.

congressional-executive agreement