Absolute Advantages

Absolute advantages

The ability of a country to produce more efficiently than another country.

COUNTRY	Notebook	Cloth
MALAYSIA	1000	200
CHINA	800	400
TOTAL	1800	600

Before trade

·         Before occurrence of trade, Malaysia has issued as much as 1000 units of Notebooks and 200 units of Cloth. While, China have issued as much as 800 units of car and 600units of motorcycle. 

·         Before occurrence of trade, the amount of total world output is 1800 units of Notebooks and 600 units of car.

International trade

·         Notebook       :           Malaysia can produce more compared to China

·         Cloth               :           China can produce more compared to Malaysia

·         Malaysia has absolute advantage in Notebook production because Malaysia can produce more Notebook compared to China.

·         China has absolute advantage in Cloth production because China can produce more Cloth compared to Malaysia.

Specialization of trade

·         Malaysia produce Notebook

·         China produce Cloth

COUNTRY	Notebook	Cloth
MALAYSIA	2000	0
CHINA	0	800
TOTAL	2000	800

·         When the specialization, each of the country will focus to their production.

·          Malaysia will produce 2000 units of Notebooks and China will produce 800 units of Cloths.

·         So, the total world output will increase to 400 units;

-          Notebook production increases to 200 units.

-          Cloth production increases to 200 units.

·         Malaysia will export Notebook and import Cloth and China will export Cloth and import Notebook.

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Advantages of International Trade

Advantages of international trade.

International trade could be dispensed to three groups that are consumer, entrepreneurs and country.

A.           To consumer

                                 i.            Obtain goods that does not produced inside of their country

The country could not produce all goods because of availability various obstacles such as climatic differences, soil etc. As such, international trade enable one country obtain goods that does not are issued by the country. For example, Japan had no liquid natural gas could use resource that when running international trade with Malaysia. 

                               ii.            Offer various choice (substitutes goods)

Through international trade, there are variety of goods and services able to import. This can give various choices to users according to their taste and ability. For example, Malaysian can choose various types of cars, whether local model or import model. This wide choice will increase users’ standard of living. 

                             iii.            Obtain goods with the lower price

International trade encourages specialization. These specializations increasing skills and production efficiency and enable materials production mass-produced. Large-scale production enable producer to decrease price of goods and with better quality. 

 

B.           To entrepreneurship

                                 i.            Global Markets

International trade enable the exporter country to expand their supply.  It is because the international market is wider compared to the local market. More extensive market enable firm to acquire higher profit and further improving national income. 

                               ii.            Encourage technology usage

Through international trade, local manufacturer able to import machine and other modern tools to be applied in production process. Modern technologies enable to increase productivity and speed up development of local industry. 

                             iii.            Improving production efficiency

When one country do international trade, then the goods that produced by the country are available at its importer country. This competition would encourage manufacturer to produce goods with more quality and efficiently. As a result, competition can prevent monopoly firm from impose higher price. At the same time, competition can also encouraging research and development and accelerate the use of new technologies. 

                             iv.            Increasing employment opportunities

In the world with the growing economics, demand on exports increase from time to time. This would encourage manufacturer and foreign investor to expand their production scale. So, job opportunities can be created and unemployment problem in state can be reduced. 

 C.            To country

                                 i.            Encourage investment

When one country carries out open-economy policy, then that country can encourage entrance of foreign investment. Malaysia allows flow for foreign direct investment (FDI), especially in export sector because FDI can speed up economic growth. Besides that, Malaysia allows equity partnership with foreign investor like those occurring in car industry national and civil aviation. 

                               ii.            Trading partner

International trade can encourage understanding and cooperation between countries. This can create good relationship in terms of politics, social and cultural between trading country.

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Importance of International Trade

Importance of international trade

                           i.                  Foreign Exchange

Currency value for one country can be effected changes in currency value for another country. If the inflow of foreign exchange increase, then national income also increase.

Example: Malaysia gain more foreign exchange like USD$ from US, so Malaysia will get increasing in income.

                         ii.                  Global Market

International trade can offer new markets to local business. Local businessman can expand market for product until international market for product reach surplus in country.

Example: an entrepreneur would extend his market to US through international trade based on term of export and import.

 

                       iii.                  Technology Transfer

The international trade able to create relationship between countries and encourage technology transfer.

Example: International trade between Malaysia and Japan can encourage technology transfer from Japan to Malaysia.

                       iv.                  Contribution to economy

The international trade can encourage the entrance of outside firm into the country. So, this can provide many job opportunities to locals and can help to  reduce unemployment problem in the country.

Example: US companies come to Malaysia and start their business in Malaysia. Then, many job opportunities provided to Malaysian people.

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definition of international trade

Definition of international trade:

Exchange of goods and services between the people of two countries included the changes in currency.

The business of buying and selling commodities beyond national borders 

Home Trade or domestic trade

"Trade by a company within the country in which it is based, is known as home trade or domestic trade".

In the home trade, people try to specialize in the production of those commodities in which they have a comparative advantage.

a.                  Import

The activity of purchasing goods and services from foreign countries and brought into domestic to be used by domestic individual and organizational.

Categories

·         Directly through foreign agent or dealer

·         Indirect through local agent which acted as firm intermediary with foreign customer.

Example:

Malaysians import Kurma from Saudi Arabia country during Ramadhan.

 

b.                 Export

Export is the activity of sell goods and services to overseas to individual or organization in foreign countries whether by individual or organization.

Categories:

·         Directly through dealer or foreign agent

·         Indirect through local agent which acted as firm intermediary with foreign customer

Example:

Malaysia export palm oil to US

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