Malaysian Economy Chapter 7: International Trade PDF

Chapter 7: INTERNATIONAL TRADE Learning Outcomes 1. To explain the benefit of International Trading 2. To understand economic principle that determines specialization and trade 3. To discuss reasons for protectionism 4. To explain Balance of Payments and its components ...

Chapter 7: INTERNATIONAL TRADE Learning Outcomes 1. To explain the benefit of International Trading 2. To understand economic principle that determines specialization and trade 3. To discuss reasons for protectionism 4. To explain Balance of Payments and its components  Types of Economic System: Open economy: Dealings or transact with other countries Closed economy: Does not transact with other countries  Why? ✗ Why do we export our goods and services to other countries? ✗ Why do we import goods and services from other countries?  What is International Trade? ✗ International Trade is usually referred to the exchange of goods, and services across international borders or territories. BENEFITS FROM INTERNATIONAL TRADE 1. To get goods not produce within country 2. To get benefit/profit from specialization 3. Means of production can be used efficiently 7 4. Every country able to used more goods compare if it is produce outside the country 5. Expand the local industries’ market 6. Technology imposed and increase the local productivity level 8 INTERNATIONAL TRADE – MALAYSIAN EXPERIENCED (1947-1965) Before and early independence ✗ Agricultural commodities (rubber, tin, iron, metal, are the main contributor to the export activity ✗ Foods, manufactured goods, raw material – the main products being imported – economic development. 9 ✗ Important to the national economic development ✗ Manufacturing goods (foods, cloth, mining industries, metal, electric and electronic appliances) 1993-2000 contribute highest in the export activity (US, Japan) ✗ Agricultural goods to be exported declined (rubber, palm oil, tin, cocoa) but liquid petrol and other petroleum output still remain at the higher level of demand from the foreign countries. ✗ The import activity has declined ✗ Imported electronic and electric appliances declined, only focus on the machines and the transportation equipment ✗ Consumer products exported increase especially rice, flour, sugar, milk industries/product – due to the abolishment of import duties 10  IMPLICATIONS OF INTERNATIONAL TRADE ✗ Depend on foreign trade, financial and technology ✗ Affected the export earning ✗ Deficit in the current account and balance of payment ✗ Implication on output: due to the decrease in demand for our exports, the growth rate of the primary products slowed down. ✗ Implication on the economic growth: Affected the GDP ✗ Implication on income ✗ Price of commodities is unstable ✗ The demand and supply of primary commodities are inelastic Economic Principle that determines specialization and trade ✗ Comparative advantage – the ability of a country to produce a goods at a lower opportunity cost than another country ✗ Absolute advantage – the ability of a country to produce a goods using fewer resources than another country 14  Free Trade vs. Protectionism ✗ Free trade is the flow of goods between countries without restrictions or special taxes Trade barriers/Protectionism ✗ Government policy that has been formulated to control or to tax the goods and services. ✗ Restrictions to protect domestic producers from foreign competition Forms/Types of Protectionism 1. Tariff Barrier  Tariff Tax against import products ✗ Ad-valorem tariff, import tax based on the price of the imported goods (eg. 50% on the price of goods). ✗ Specific tariff, fixed imported goods tax although the price of the goods changed (RM20 for every unit of imported goods). 2. Non- tariff barrier (steps taken by government to protect and giving priority to the local products. ) ✗ Embargo the strongest limit on trade. A law that bars trade with another country. Eg. Malaysia imposes trade embargo against Israel ✗ Quota: Maximum quantity of output that can be imported within certain duration of time, eg. A year. ✗ Foreign exchange control: monetary policy to control import activities. No loan facilities provided for the import activity or by controlling the foreign money (e.g. selling the foreign money with higher price from the formal exchange rate). 18 Reason for Protectionism Policies ✗ The infant industry argument ✗ The senile industry argument ✗ To prevent dumping and other unfair trade practices ✗ To prevent establishment of a foreign based monopoly ✗ To reduce reliance on goods with little dynamic potential ✗ To spread the risks of fluctuating markets ✗ To reduce the influence of trade on consumer tastes ✗ To prevent the importation of harmful goods ✗ To take account of externalities  Balance of Payments ✗ When trade occurs between Malaysia and other countries, many types of financial transactions are recorded in a summary. What is BOP? ✗ A bookkeeping record of all the international transactions between a country and other countries during a given period of time ✗ It records the value of a nations’ spending inflows and outflows made by individuals, firms and government ✗ BOP can be categorized into two accounts: ✗ Current account ✗ Capital account In Ta E ta C xp C n ur C n a or gi a pit re gi at pit bl pit nt bl al B Structure of BOP & BOT al & e O al A eI O A cc In P A cc ut m flo cc o flo o p w o u or w u nt ut nt nt BOT 23 Balance of Payments (BOP) ✗ Account statement that contains the transaction and the flow of money between one country to another country. ✗ BOP = Net Current Account + Net Capital Account ✗ IF: a. BOP > 0 = BOP Surplus b. BOP < 0 = BOP Deficit c. BOP = 0 – BOP Break-Even Current Account ✗ Comprises of merchandise exports and imports (goods account) and receipts and payments in respect of services rendered to and received from abroad (services account) ✗ Largest part of the current account is balance of trade (BOT) The statement structure Current Account ✗ Export and import of tangible goods - output from the agricultural, manufacturing, mining and others sectors. ✗ Export and import of intangible goods - E.g. insurance from the export or import of tangible goods, incomes from investment. ✗ Transfer of payment Capital Account ✗ It records payment flows for financial capital such as real estate, corporate stocks, bonds, government securities and other debt instruments ✗ Eg: when Japanese investors buy farm land in Kedah, there is an inflow of ringgit into Malaysia Capital Account ✗ Long Term Capital - Official loans: borrowing and payment between countries - Private investment ✗ Short term capital: -Commercial bank ✗ Other financial institution: EPF, Tabung Haji, PNB ✗ Change in central bank reserves  Balance of Trade ✗ The value of a nation’s goods imports subtracted from its goods exports Balance of Trade (BOT) ✗ BOT = net value of current tangible and intangible account ✗ BOT = tangible/intangible export – tangible/intangible import IF : a. BOT > 0 – BOT Surplus b. BOT < 0 – BOT Deficit c. BOT = 0 – BOT Break-Even Factors that influence BOP: 1) Current a/c – the value of both tangible and intangible exports and imports 2) Capital a/c – both capital inflow and outflow 3) Overall economic growth and GDP 4) Balance of Trade (BOT) 5) Others (political stability, socio-economic factors) Steps to overcome deficit in current account Why deficit? When tangible/intangible imports more than tangible/intangible exports. 1. Reduce intangible imports/increase intangible exports 2. Training – more knowledge and skilled workers 3. ICT based education produce more k-graduates 4. Promote those scarce areas 5. Government to reduce expenses – less foreign loans 6. Transfer of technology within the country Why huge surplus in trade balance? 1. Produce more goods internally and having less imported products. 2. High demand for export market – slow import growth. 3. Economies of scale – produce huge quantity and reduction in average cost. Price will be cheaper and will increase the dd. 4. Highly competence workers – can produce goods with high quality. 34