INTERNATIONAL TRADE II

International Trade Advantages

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 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 are able to 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 business men.
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.

Table of Contents

EVALUATION

State five advantages of International Trade.
Give four arguments against International Trade

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 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-specialisation production position is shown in schedule A below.

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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

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Rice Wheat

Nigeria 50 = ½ i.e. 100 = 2 i.e.

1 bag of rice = ½ 1 bag of wheat

bag of wheat bags of rice

Rice Wheat

USA 100 = ½ 50 = ½ i.e.

1 bag of rice 2 bags 1 bag of wheat ½ bag of rice.

of wheat

By the Law of Comparative Cost Advantage. Nigeria should specialize in the production of rice while 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 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.

EVALUATION

Using the United States of America and Nigeria as an example, show how the two countries will gain by specializing and trading on the basis of the theory of comparative cost advantage (NECO June, 2003).
Outline five assumptions of the theory of comparative advantage.

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 on the basis of individual licences 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 of 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.

iii. 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.

vii. Prevention of harmful and non-essential goods.

viii. Government may protect trade for strategic reasons – e.g. in retaliation against a foreign state.

EVALUATION

What are the arguments for protection in international trade?
Mention any five instruments of Trade protection.

GENERAL EVALUATION

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?

WEEKEND ASSIGNMENT

Which of these does not relate to the law of comparative advantage?
the law of comparative advantage was propounded by David Ricardo B. the law stresses the importance of relative efficiency. C. in order to specialize a country must have absolute advantage D. the principle if followed, should increase total world output.
Devaluation means A. reduction in the value of the national currency B. a reduction in the purchasing power of foreign currencies C. a reduction in the value of domestic currency relative to foreign currencies D. a decrease in the purchasing power of foreign currencies.
Dumping in economics means the selling of goods in a foreign market ………….
at a price below that received in the home market B. at a price that receive in the home market C. at a price equal to the cost price in the home market D. in order to encourage indigenous producers E. at a price equal to selling price in the home market.
Foreign Exchange control in Nigeria is enforced by the ………….
Commercial banks B. Merchant banks C. Mortgage bank D. Central bank
Agricultural Development Bank
Exchange Control is a weapon used in regulating …………. A. Internal trade B. stock exchange C. Foreign trade D.barter trade E. exchange of per sound property