Unit I – Student Learnings Objectives:

After the three-hour home-based study period for this lesson I, Student are expected to:
(1) Read thoroughly the general field of International Business and Trade;
(2) Identify and explain the importance of Methods of protection;
(3) Demonstrate the ability to understand the different World Organization;
(4) Identify the different Economic Unions.
Lesson I: The Global Economy

Student Motivation:
In the space provided given below, write your Insight about global economy in 5
sentences and in the second paragraph introduce yourself and what do you expect from your teacher in this
lesson?

Analysis:
 a. Analyze the Global Economy today which is experiencing a global economic depression because of
covid-19 pandemic.
b. How do you feel about the situations nowadays, “a new norms” specially to
“no face-to-face class”?

Discussion:

A. The rationale for foreign trade and its organization

There are two basic types of trade between countries:

• At first in which the receiving country itself cannot produce the goods or
provide the services in question, or where they do not have enough.
• The second, in which they have the capability of producing the goods or
supplying the services, but still import them.

This explain clearly that if we have experiencing a shortage of goods and services we can be able ask for the
importation of a particular product as long as we can afford to buy it in other country. So that, the importing
country can afford to buy the products or services they are able to acquire things which, otherwise they would
have to do without. (Examples of different significance are the import of bananas into the UK, in response to
consumer demand, or copper to China, an essential for Chinese manufacturing industry.)

The second kind of trade is of greater interest because it accounts for a majority of world trade today and the
rationale is more complex. A lot of imports in United Kingdom like coals, motor cars, TV set, domestic
appliances, IT equipment, clothing and many more products which it was well able to produce domestically
until it either transferred production abroad or ceased production as local industries became uncompetitive. At
first sight, it would seem a waste of resources to import goods from all over the world in which a country could
perfectly well be self-sufficient.

There’s a reasons for importing this kind of product generally and fall into three classifications:

• the imported goods may be cheaper than those produced domestically;

• a greater variety of goods may be made available through imports;
• the imported goods may offer advantages other than lower prices over
Domestic production – better quality or design, higher status (eg prestige
labelling), technical features, etc.

B. Comparative Advantage

What is comparative advantage?

This was first articulated in by the 19th century economist David Ricardo who concluded that there is an
economic benefit for a nation to specialize in producing those goods for which it had a relative advantage, and
exchanging them for the products of the nations which had advantages in other kinds of product. Example is
coal which can be mined in open-cast Australian mines or in China with low cost of labor and shipped more
than a miles to the United Kingdom where a dwindling supply of coal can be extracted only from high cost
deep mines. In coal, Australia and China have comparative advantages. In our country, coal don’t have
comparative advantage in china and in Australia because we have rules and regulations to follow. Another
example will be in services, if you are a great plumber and a great baby sitter and you make more money will
be on plumbing therefore your comparative advantage will be plumbing.

Stated at its most basic, of course the theory ignores many factors, of
which the most important is that there may be limited international demand
for some nations’ specialized output. The question arises why
specialization has not occurred on a greater scale in the real world. The
main reasons, all of them complex, may be summarized in order of
significance, as follows:

• strategic defense and economic reasons this a need to produce goods for
which there would be heavy demand in times of war;
• transport costs which preclude the application of comparative advantage;
• Artificial barriers to trade imposed to protect local industry, such as tariffs
and quotas.

C. The Evolution of World Trade

The pattern of world trade over more than a century from 1870 to 2001 is discussed in detail. Overall,
merchandise trade grew by an average of 3.4% per annum from 1870 to 1913 in the period up to World War I.
Two World Wars interspersed by the Depression and a world slump effectively reduced the annual rate of
growth in international trade to less than 1% in the period 1914 to 1950.

Then, as the international institutions which were established in the immediate post-1945 period began to
introduce some financial stability and impact, world trade there followed a 23 year period of more buoyant
growth averaging 7.9% up to 1973. In the next 25 years to 1998, the average growth rate in merchandise trade
fell back to 5.1%. More recently, a less stable period of global economic slowdown saw merchandise exports
fall by 4% in 2001, after rising by an exceptional 13% in 2000. Current trends which have surfaced in the early
years of the 21st century are identified in Chapter 9.3. Apart from the period between the two World Wars and
up to 2001, trade has continuously outstripped growth in the world economy as a whole.
This teaches you how's the world trade help the economy of each country who is engage in international trade,
This is also give us information on how’s the development of world trade up to this millennial time.

D. Methods of protectionism

Tools of protection may be categorized as either tariff or non-tariff

barriers:
 Tariffs - A tariff is a ‘tax’ or import duty levied on goods or services entering a
country.
It can be fixed or percentage rates and serve the twin purposes
of generating revenue for governments and making it more difficult for
companies from other countries to do business in the protected mark.
 Non-tariff barriers – There’s a list of non-tariff measures which have been deployed by both
developed and developing countries:
 a. Quotas – This define as a numerical limit in terms of value or volume
imposed on the amount of a product which can be imported.
There’s only specific quotas imported in every nation importing goods this is to protect
the infant industry of every country.

b. Voluntary export restraints – This refers to agreed arrangements whereby an

exporter agrees not to export more than a specific amount of a good to the importing
country.

c. Domestic subsidies - This provision of financial aid or preferential tax status

to domestic manufacturers which gives them an advantage over external suppliers.

d. Import deposits - The device of requiring the importer to make a deposit

this usually a proportion of the value of the goods, with the Government for a fixed
period.

e. Safety and health standards / technical specifications - This more delicate

form of restraining requires importers to meet inflexible standards or to complete
complicated and lengthy formalities, there’s a regulation implementing every country
regarding the safety and health standards in each importing goods, like here in our
country we have the consumer act of the Philippines to protect the consumer on
imported goods from dangerous products.

E. Regions in World Trade

Although the multilateral trading system promoted by the GATT and now the WTO has been broadly
successful in overcoming protectionist regimes –at least up to the current Doha round – it has failed to prevent
the concomitant proliferation of regional pacts and regional trade agreements (RTAs).

There are four basic models of trading block:

 Free trade area - Members agree to reduce or abolish trade barriers such as tariffs and
quotas between themselves but retain their own individual tariffs and
quotas against non-members.
 Customs union - Countries which belong to customs unions agree to
reduce or abolish trade barriers between themselves
and agree to establish common tariffs and quotas
against outsiders.
 Common market - Essentially, a common market is a customs union in
which the members also agree to reduce restrictions
on the movement of factors of production – such as
people and finance – as well as reducing barriers on
the sale of goods.
 Economic union - A common market which is taken further by agreeing
to establish common economic policies in areas such
as taxation and interest rates. Even a common
 currency is described as an economic union.

F. The UK’s changed status in world trade

The EU is now the most important market for most UK exporters, accounting for around two-thirds of the
UK’s trade. The ratio represents the most dramatic difference between Britain in 1970 and Britain today. In
1970, most of the UK’s trade was with markets beyond Europe, mainly Commonwealth countries including
Australia, New Zealand, Canada, the Caribbean, West and East Africa. In the 20 years following, as a result of
the UK joining the EEC, the situation was reversed with UK trade focused on Europe, and the Commonwealth
countries becoming relatively minor trading partners.

The consequences for both UK manufacturing industry and the Commonwealth have been far-reaching:

 the countries of the Commonwealth had to make trading arrangements

of their own, having lost previously captive UK markets.
 much of the agricultural product previously imported by the UK from the
Commonwealth is now sourced from within Europe.
 the UK has lost many of its markets for low-tech, low cost goods.
 UK exporters have tended to become higher-tech and more expensive.
 UK exporters have had to learn to do business in foreign languages and,
with the advent of the EU monetary union, in euros rather than sterling.

In fact, the United Kingdom has always experienced difficulties with trade in manufactured goods. Actually,
UK was heavily dependent on the import of cheap raw materials from the colonies and Commonwealth in
larger volume than the goods exported but take note, they can provide a quality of goods.

Of course the commercial services include much more than banking, insurance and other financial services.
They also include:
 the tourist trade. UK expenditure by foreign visitors less spending abroad;
shipping and aviation freight services;
 communication services (telecommunications, postal and courier);
 computer and information services;
 royalties and license fees;
 personal, cultural and recreational services;
 other business services.

This are the net effect of ‘invisible’ transactions on the balance of payments, government disbursements,
interest and profits earned abroad and emigrants’ remittances are also taken into account.

G. Organizations in world trade

Earlier in our discussion, regarding the world organization, there is some significance of three international
organizations of key importance formed in the immediate post-World War II period was talked about in the
context of the campaign against protectionism. The purpose of all three organizations was to attempt to
establish international approaches to trade and to economic development which would enhance world wealth
while helping countries to adjust to economic fluctuations.
H. The IMF (International Monetary Fund)

This describe to regulate the way in which countries adjust to fluctuations in exchange rates. Which means,
That IMF was set up to provide a way in which countries experiencing trade deficits and it could borrow funds
to pay their debts from a central source. The Member of countries subscribe amounts of their own currencies
and gold which are used, in theory, and to assist the deficit the nations. And in addition the purpose of the IMF
is to establish also a system of currency rates and a form of ‘world money’ called ‘Special Drawing Rights’.
Now, what is Special Drawing Rights?
This refer to an international type of monetary reserve currency which means an artificial currency instrument
used by the IMF, and is built from a basket of important national currencies, this also created in response to
concerns about the limitations of gold and dollar as the sole means of settling international accounts.
I. The World Bank

The World Bank has taken on the role of providing loans at preferential rates mostly to developing countries
for projects which will assist and accelerate their economic development. Example: typical projects are
irrigation and hydro-electricity schemes, roads and power supply, and some of our

J. The General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade or GATT is a legal agreement or a law between many countries,
which the purpose is to promote international trade by reducing or eliminating trade barriers such as the tariffs
and quotas.

GATT rules for preventing infringements on tariff concessions and keeping the channels of trade open are
based on two principles:

 most-favored nation treatment for members; and

 non-discrimination.

This controls in conflict with the rules are permitted if they were in operation when the General Agreement
was concluded, or, in the case of new members, when they first enter into negotiations. New restrictive
measures of a discriminatory nature are allowed under certain conditions, and this is the most important being
protection the balance of payments. And we’re going to discuss the balance of payment in the next lesson.

Progress Check:

What is comparative advantage

and give example of goods and
services of our country which
is have an advantage in other
nation and explain.
Assignment:

Make a research about a legal agreement

and implementing rules given in many
nations by the GATT.

Send output on or before (date to be announced) _________________________ to grace_dlacruz@yahoo.com

or through your Google classroom account for Product Management (code to be announced via
SMS/Messenger. Likewise, maintain a Portfolio of Accomplishments which is to be submitted one week
before every major examination which the period or date shall be duly announced.