econ01. economic of trade and economic of integration

ECONOMICSofa

nd

TRADE

INTEGRATION

CAMARAO | CHAN | DE OCAMPO | MEDIODIA | REYES | ZINAMPAN

Objectives• Determine the theories that serve as basis

for the economic principle “Trade can make everyone better-off.”

• Determine the different methods of restricting trade.

• Determine the different levels of Economic integration and their examples.

• Provide an overview of the ASEAN Economic Integration of 2015.

TABLE OF CONTENTSAbsolute AdvantageComparative AdvantageCompetitive AdvantageGains from trade based on Comparative AdvantageLimits to Specialization and TradeMethods of Restricting Trade

Economic of Trade

TABLE OF CONTENTSLEVELS OF ECONOMIC INTEGRATION

Free TradeCustoms UnionCommon MarketsEconomic UnionPolitical Union

ASEAN Economic Integration 2015

Economic of Integration

Economic of

Trade

Adam Smith’sAbsolute

Advantage

• The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. – Ability to produce– Lower cost per unit– Than other entity

Party Widgets per hour

Number of Employees

Southern Isles 5 3

Arendelle 10 3

Absolute Advantage

Who has the Absolute Advantage in producing boats?

Who has the Absolute Advantage in producing telescopes?

Absolute Advantage

GinaScenario 1:• One of your friends, Gina,

can print 5 t-shirts or build 3 birdhouses an hour.

Scenario 2• Suppose Gina wasn't as

agile with the hammer and could only make 1 birdhouse an hour, but she took a sewing class and could print 10 t-shirts an hour.

Mike

• Your other friend, Mike, can print 3 t-shirts an hour or build 2 birdhouses an hour.

• Mike on the other hand takes woodworking and so he can build 5 birdhouses an hour, but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts an hour.

You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making birdhouses.

David Ricardo’sComparative

Advantage

David Ricardo (1772 –1823)

• British political economist

• broker and financial market speculator

• held his parliamentary seat for the last four years of his life

Comparative Advantage

Is the ability of a country to produce a good at a lower opportunity cost than another country.

Comparative Advantage

• The law of comparative advantage – trade can benefit all countries if they specialise in the goods in which they have a comparative advantage.

Comparative Advantage

Example

Comparative Advantage

Tons of Steel Tons of Grains

Japan Either 40 40

America Either 50 100

If countries are to gain from trade, they should exports those goods in which they have comparative advantage and import those goods in which they have a comparative disadvantage.

Gains from trade based on:Comparative

Advantage

Gains from trade based onComparative Advantage

PRICES of the TWO GOODS are likely to REFLECT their OPPORTUNITY COSTS

Example:A: 12 sacks of grain for 3 gallons of milkB: 24 gallons of milk for 6 sacks of

grains

AB

Limits and Specialization and

Trade

Limits to Specialization and TradeUse Resources that are less and less suited

to its production and which were more suited to other goods.

AVERAGE PRICE OF EXPORTSAVERAGE PRICE OF IMPORTS

* CHANGES TERMS: CAUSE BY CHANGES IN THE DEMAND AND SUPPLY OF IMPORTS AND EXPORTS

TERMS of Trade

Gains from trade based onComparative Advantage

Other reasons for gains from trade

• Decreasing Costs• Differences in Demand• Increased competition• Trade as an ‘engine of growth’• Non-economic advantages

Michael Porter’sCompetitive

Advantage

Competitive Advantage

Michael E. Porter

the two types of competitive advantage:

1. cost leadership advantage and

2. differentiation advantage

• *FOCUS*

Competitive Advantagecost leadership advantage

Lower

cost

Competitive Advantagedifferentiation advantage

Strong Brand that Delivers benefits that

exceeds

Competitive Advantagefocus

Competitive Advantageexist when

countries is able to

deliver the same

benefits as other

countries but at a

lower cost, or deliver benefits

that exceeds those

of competing other countries’ products.

superior value for its

customers and superior profit

for itself

Competitive Advantage

RESOURCES

DISTINCTIVE COMPETENCI

ES

CAPABILITIES

COST-LEADERSHIP ADVANTAGE

orDIFFERENTIATI

ON ADVANTAGE

VALUE CREATION

? ???????

WHY DO COUNTRIES

“TRADE can make EVERYONE

BETTER-OFF”

Methods of RestrictingTrade

• is a tax put on goods imported from abroad.

• There are two types of tariffs:

a)Protective tariffs are put in place specifically to make foreign good more expensive.  

b)Revenue tariffs are put in place to raise money for the government

Tariff (custom duties)

Increase the domestic Decreased imports

Tariff (custom duties)

• is a limit on the amount of goods that can be imported.• quantity quotas limit the amount of a good that may be imported, and value quotas limit the monetary value of a good that may be imported.

GOODS/

VALUE

Quota

• Imposition of exchange controls or quotas will often involve obtaining licenses so that the government can better enforce its restrictions.

Import Licensing

• Limits on the amount or foreign exchange made available to importers (financial quotas)

or to citizens travelling abroad or for investing.

Exchange Controls

• stops exports or imports of a product or group of products to or from another country.

Embargoes

• is a tax imposed on commodities leaving a customs area. 

• It is used to increase the price of exports when the country has monopoly power in supply.

Export Taxes

• payments made by the government to domestic firms, both encourage exports and make domestic products cheaper to foreign buyers.

Subsidies

• Regulations may be designed to exclude imports.

• Countries are sometimes accused of using their various administrative rules as a way to introduce barriers to imports.

Administration Barriers

• This where government favor domestic producers when purchasing equipment.

Procurement Policies

Economic of

Integration

Five Levels of Economic

Integration

ECONOMIC INTEGRATION

ECONOMIC INTEGRATION process in which two or more states in a

broadly defined geographic area reduce a range of trade barriers to advance or protect a set of economic goals.

Free Trade

FREE TRADE Tariffs (a tax imposed on imported goods)

between member countries are abolished or significantly reduced. Each member country keeps its own tariffs in regard to third countries.

Customs Union

CUSTOMS UNION Sets common external tariffs among

member countries, implying that the same tariffs are applied to third countries.

Common Markets

COMMON MARKETS Factors of production, such a labor and

capital, are free to move within member countries, expanding scale economies and comparative advantages.

Economic Union

ECONOMIC UNION Monetary and fiscal policies between

member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used.

Political Union

POLITICAL UNION Represents the potentially most

advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

POLITICAL UNION

Economic Integration

2015

ASEAN

ASEAN Integration 2015

What is the ASEAN? The Association of Southeast Asian Nations is a political and economic organization of ten countries located in Southeast Asia,which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand.

Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress, and cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully.

Three pillars of ASEAN

ASEAN has emphasized regional cooperation in the “three pillars”

The ASEAN Economic Community (AEC) shall be the goal of regional economic integration by 2015

The AEC will be fully established by 2015, and is expected to improve competitiveness by transforming the economic group into a single market and production base, based on

the following five objectives:

1. Free Flow of Goods2. Free Flow of Trade3. Free Flow of Investments4. Free Flow of Capital5. Free Flow of Skilled Labor

ASEAN Integration 2015

The AEC is the realization of the region’s end goal of economic

integration. It envisions ASEAN as a single market

and production base, a highly competitive region, with equitable economic development, and fully

integrated into the global economy.

ASEAN Integration 2015

ECONOMICSofa

nd

TRADE

INTEGRATION

CAMARAO | CHAN | DE OCAMPO | MEDIODIA | REYES | ZINAMPAN