This article presents the international trade microeconomics. The session will focus on explaining the importance of learning the international economics subject and international trade. By the end of the session you would be able to;
- Recognize the meaning of the subject and its main ingredients.
- Understand the complexity of International trade (IT) and its influence on the global economy
- Explain the salient features of International Trade (IT)
- Study the globalization process and its effects on national economies
- Study the institutional setup of international trade i. e. World Trade Organization and regional trade blocks such as the European Union.
- Understand the gravity model of international trade
Theoretical and conceptual base of international trade microeconomics
The international economics subject was designed by combining principles of micro and macroeconomics. Thus international trade theories and policies were based mainly on microeconomics theories while analysis of trade policies, worldwide transactions, and business activities were based on macroeconomic principles.
Thus the theoretical and conceptual base of international trade is based on microeconomic tools. They are production possibility frontier, price lines, indifference curve, and iso product and cost curves, etc.
However, we should know that economists can develop their sound theoretical framework for international economics based on the general equilibrium analysis.
Let us see what is international economics?
International Economics is a broader subject. It explains the factors and issues with worldwide trade, investment, transferring technology, and labor mobility across the world, irrespective of territorial boundaries.
According to Wikipedia, the virtual Encyclopedia, the subject describes the patterns and consequences of transactions and interactions between different countries’ people. It explains the effects upon economic activity of international differences in productive resources and consumer preference and the international institutions that affect them.
What topics in this subject mainly concerned?
- International trade
- transferring technology and foreign capital
- human migration
Thus, the subject is concerned mainly about international trade, transferring technology and foreign capital, and human migration. The political-economic issues such as regional integration, protection, and sanctions also became essential aspects of the subject.
International Trade microeconomics
International Trade (IT) is the main component of international economics subject. It defines as the exchange of goods, capital, and services across the international borders or territories.
Global interdependence has increased since the 1970s. At the same time, the exchange of goods, factors of production (capital, labor) were also increased rapidly. Thus globalization spreads over the world, minimizing time and space with economic development.
Once globalization was spread, the study of international economic activities becomes an important and popular subject. The reason was economists and policymakers wanted to find solutions for various questions.
- Why the production process and capacities are different from country to country?
- How to decide international trade?
- Why do people move from country to country?
- Why the price and quality of product differentiation in the world market?
- What’s the reason for exchange rates varied among countries?
- What are the gains from global investment and trade?
After that, the subject of international economics introduces a sound methodological base to analyze the complicated and comprehensive world economy.
Trade and Global Economy
International trade is a very complicated activity. It is related to investment, business, finance, and trade in goods and services among economic agents over the world.
The economic agents consist of individuals, companies, and countries engaged in trade. The country’s economic activity measure by the Gross Domestic Product (GDP and Gross National Product (GNP).
The composition of the economy i.e., agriculture, industry, and service sectors are essential to know production, export, and imports of the respective economy. Thus the exports and imports are measured by indices such as terms trade and trade openness. The GNP that includes economy-wide transactions indicates a deficit or surplus of foreign trade and Balance Payments.
At present, nearly 200 countries are involved in world trade and business activities. As indicated in table 1. Mineral fuels, oils, distillation products become the first among the top traded commodities of the international market. It was followed by Electrical, electronic equipment and machinery and vehicles become the third and fourth of the ranking table shown below.
Top traded commodities in World Trade (exports)
|Rank||Commodity||Value in US$(‘000)||Date of information|
|1||Mineral fuels, oils, distillation products, etc.||$2,183,079,941||2010|
|2||Electrical, electronic equipment||$1,833,534,414||2010|
|3||Machinery, nuclear reactors, boilers, etc.||$1,763,371,813||2010|
|4||Vehicles other than railway, tramway||$1,076,830,856||2010|
|5||Plastics and articles thereof||$470,226,676||2010|
|6||Optical, photo, technical, medical, etc. apparatus||$465,101,524||2010|
|8||Iron and steel||$379,113,147||2010|
|10||Pearls, precious stones, metals, coins, etc.||$348,155,369||2010|
The salient features of world trade assess under how to trade spread in the world as its composition, trade openness, major producers, and trade direction. Thus following features could be identified to global trade.
Features of global trade
1. The share of agricultural products in IT has decreased from 47 percent in 1950 to 8 percent in 2006 while the share of manufactured goods increased by 7.5 percent annual rate. The share of services has increased than agricultural and manufacturing goods.
2. Though the world trade has increased more in favor of industrialized and developed nations, trade-in developing countries have increased tremendously, indicating more openness to free global trade. The share of international Trade from emerging economies has improved greatly (World Bank, 2008).
3. Though 63 percent of world exports in 1965 were produced by the USA, Canada, and 15 member countries of the EU, now the EU is responsible for nearly 16 % of world exports. Nonetheless, the share of the EU and industrialized countries still represent more than 70 percent of world exports (table 2).
4. Faster growth in export of technology-intensive products i.e., computers, electronic items, and IT products
5. More rapid expansion in e-commerce, e-banking, and e-services
6. Faster growth in regional trade and bilateral trade arrangements
1950-73 period. By 1989, world exports were higher 1000 percent than in 1950, but output has increased only by 200 percent during this period. The share of world exports of developed nations has decreased from 82 percent in 1995 to 70 percent in 2006. At the same time, 70 percent of world exports are supplied by industrialized countries while the share of developing countries has increased. Thus the percentage of Asian countries has increased from 12 percent to 28 percent during the period.
Largest countries by total international trade
|Rank||Country||International trade of|
goods (billions of USD)
|International trade of|
services (billions of USD)
|Total international trade|
of goods and services
(billions of USD)
|21||United Arab Emirates||491||92||583|
Concerning the present status and future challenges of international trade, Dominick Salvatore (2008) has identified some key issues that need to be addressed by policy makers at global and national levels of each nation.
- Trade protectionism in industrial countries
- Fluctuation and large disequilibrium in exchange rates
- The financial crisis in emerging economies
- High structural unemployment and slow economic growth in EU countries
- Job insecurity in the USA
In addition to these key issues; existing global economic crisis, political unrest in Middle East and global climatic changes have created high uncertainty for the international trade, encouraging trade protection policies than free trade incentives.
Like other international institutions i.e. the World Bank and International Monetary Fund, the role of World Trade Organization (WTO) become very crucial to settle world trade conflicts particularly domination by larger countries in world trade. The WTO was established in 1993 by replacing the General Agreement on Tariff and Trade (GATT), which was established in 1947. The GATT embodies a set of rules of conduct for international trade policies that were monitored by the head office in Geneva. The WTO also acts as the apex body of settling world trade conflicts through the formulation of policies and implement them.
Though International trade was analyzed through rigid theoretical framework due to its complexity, the actual practice of world trade seems to be more competitive nature that based on monopolistic and oligopolistic features rather than the perfect market condition assumed in the theories and models.
Economic integration and forming Regional economic unions were become one of the strategic patterns of concentrating trade among neighbors than global trade. So many trade issues are solved through custom unions or regional trade blocks
So the theoretical framework of international trade provide sufficient base to explain how determine IT and distribute its benefits among nations. It also provide base to justify the need of coherent global trade policy to settle global issues.
Gravity Model and International Trade
Considering the nature and gravity of international trade, Paul Krugman and Maurice Obstfeld (2009) presented gravity model in accordance with the Newton’s law of gravity. Thus, mutually beneficial trade between two countries are determined on two factors i. e. GDP of respective countries and the distance between them.
T ij = A x Yi x y j / Dij
Tij = value of trade between country i and country j
Yi= country I’s GDP
Yj=country j’s GDP
Dij= distance between two countries
The model explains the importance of distance and the GDP of trading partners for determining trade. The mode was proved by empirical studies and found that trade in European countries was determined on the model.
1. Write note on these topics.
- International trade
- Gravity model and international trade
- Features of global trade
- World Trade Organization