MA5020 Lesson 1 - International Trade

Maritime Economics and Shipbroking

MA5020

Lim Yuon Fatt Chit Htwe

SMA SMA

Rm No.T1A 734 Rm. No. T1A 736

Tel.no. 68790421 Tel. no. 68706178

yflim@sp.edu.sg ChitHtwe@sp.edu.sg

LYF/April 2013 SP-SMA Slide 1

Maritime Economics and Shipbroking

MA 5020

Components Weightings

CA1 40%

CA2 20%

CA3 40%

TOTAL 100%

LYF/April 2013 SP-SMA Slide 2

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MA5020 Lesson 1 - International Trade

Reading Material on Shipping

LYF/April 2013 SP-SMA 3

Reading Material on Shipping

LYF/April 2013 SP-SMA 4

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MA5020 Lesson 1 - International Trade

Reading Material on Shipping

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Recommended Textbooks

! Alderton, P.M. 1985, Sea Transport Operation and

Economics, Thomas Reed Publications Limited,
Britain.
! Branch, A.E. 1988, Economics of Shipping Practice
and Management, Chapman and Hall, London.
! Stopford, M. 2009, Maritime Economics, Routledge,
London.
! Chrzanowski, I. 1985, An Introduction to Shipping
Economics, Fairplay, London.
! Case, K.E. and Fair 1994, Principles of Economics,
Prentice-Hall International.

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MA5020 Lesson 1 - International Trade

Learning Objectives

1. Know the meaning of the term Economics

1.1 Understand and discuss the following terms:
i) Scarcity
ii) Unlimited wants
iii)Choices
1.2 Discuss the Factors of Production namely:
i) Land
ii) Labour
iii)Capital
iv)Entrepreneurship
1.3 Understand the meaning of the term opportunity cost
1.4 Understand the meaning of the term GDP and GNP

LYF/April 2013 SP-SMA Slide 7

Economics
! Is a study of how people choose to use their scarce
resources in an attempt to satisfy unlimited
wants.

! The study of economics is broadly divided into 2

broad groups:
" Microeconomics
# Focuses on individual decision making unit such
as how a firm or individual decides on the product to
produce or things to buy with his/her income.

" Macroeconomics
# Focuses on the economy as a whole such as
nation’s output of products, inflation rate and level of
unemployment
LYF/April 2013 SP-SMA Slide 8

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MA5020 Lesson 1 - International Trade

Economics

! Is about making choices due Scarcity of economic

resources and unlimited human wants.

! Economic resources are also known as Factors of

Production (FOP).
! 1. Economic principles, theories or models seek to
understand
! 2. Predict economic events and
! 3. Develop policies or corrective actions to correct
economic problems.

LYF/April 2013 SP-SMA Slide 9

Economics

Limited Resources Unlimited Wants

Scarcity

Results

Choice
Incur

Opportunity Cost

LYF/April 2013 SP-SMA Slide 10

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MA5020 Lesson 1 - International Trade

Opportunity Cost
! When making choices, something must be foregone or
sacrificed.

! The cost of any activity measured in terms of the best

alternative forgone-Definition

! Includes explicit and implicit costs

" Explicit costs - The payments to outside suppliers of inputs

" Implicit costs - Costs does not involve a direct payment to a

third party but involve a sacrifice of some alternative
If the workers on a farm can produce 1000 tonnes of wheat
or 2000 tonnes of barley, then the opportunity cost of
producing 1 tonne of wheat is 2 tonnes of barley.
LYF/April 2013 SP-SMA Slide 11

Opportunity Cost

! During the next hour, John can play video games,

watch TV or sleep. The opportunity cost of sleeping
during the next hour is:

a. The cost of the bed

b. Is the value of playing video games if he
prefers that to watching TV.
c. Is the value of playing video games and
watching TV.
d. Equals to how much John enjoys his
sleep

LYF/April 2013 SP-SMA Slide 12

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Opportunity Cost

! Mary quits her $70,000 a year job to start her own

business. She hires a helper for $15,000 and
spends another $12,000 for supplies. Mary’s
opportunity cost in starting her business is

a. $27,000
b. $70,000
c. $15,000
d. $97,000

LYF/April 2013 SP-SMA Slide 13

Opportunity Cost

! FC2 serves 40 ice cream flavours. When you

choose a chocolate ice cream, your opportunity
cost

a. Depends on the flavour not available at FC2.

b. Is positive if you don’t like any of the other
flavours.
c. Is how much you would have enjoyed your
next favourite vanilla ice cream
d. Is how much you would have enjoyed all
the other 39 flavours.

LYF/April 2013 SP-SMA Slide 14

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MA5020 Lesson 1 - International Trade

Factors of Production (FOP)

! Factors of production are required to produce a

range of goods and services to satisfy human
wants.
! The 4 FOP are:
" Land (Sin = 581, China = 9.6 mil)
#Refers to all plots of ground
" Labour
#Refers to manpower, both physical and
mental
#Tie to time

LYF/April 2013 SP-SMA Slide 15

Factors of Production (FOP)

" Capital
# Refers to human capital and physical capital
– Human capital consists of knowledge and skills
– Physical capital is also known as capital goods.
– Physical capital consists of building, machinery,
tools and other equipment.
– Does not include money!

" Entrepreneurship
# This includes managerial and organisation skills
together with the willingness to take risk
# Human resource that assumes risk of success or failure.

LYF/April 2013 SP-SMA Slide 16

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Factors of Production (FOP)

! Which of the following is not a factor of production?

A. The individual who is innovative, take risks, raises

capital and organises production.
B. A petroleum deposits estimate @ 50 million barrels.
C. $200 millions of financial capital owned by ABC
Company.
D. 20,000 new entrants into the labour market.

LYF/April 2013 SP-SMA Slide 17

Factors of Production (FOP)

! Which of the following is an example of a capital

resource?

a. A printing press
b. A baker’s oven
c. A shovel
d. All of the above

LYF/April 2013 SP-SMA Slide 18

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MA5020 Lesson 1 - International Trade

Factors of Production (FOP)

! Factors of production are

a. Economic resources used as inputs to produce

goods and services
b. Land, labour, capital and enterprise
c. Limited at any point in time
d. All of the above

LYF/April 2013 SP-SMA Slide 19

Making Choices

! FOP are limited and human wants are

unlimited.
! Society is confronted with the problem of not
having enough resources to provide for all
wants.
! When making choices, society must answer
3 basic economic questions:
" What to produce (W),
# Looks at the type of goods to produce
" How to produce and (H) and
# Focus on the method to produce the goods
" For whom to produce (F)

LYF/April 2013 SP-SMA Slide 20

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Measuring National Income and Output

! How does Singapore national income compare with

that of other countries?

! How much has the economy grown over the last

five years?

! Are we better off than we were ten years ago?

! To assess how fast the economy has grown we

must have a means of measuring the value of the
nation’s output.

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Measuring National Income and Output

! The measure we use is called Gross Domestic

Product (GDP).

! The value of output produced within the country

over a 12 month period irrespective of citizenship
(ownership).

! Gross National Product (GNP) =

Value of output produced by residents of Singapore
in and outside Singapore over a 12 month period.

LYF/April 2013 SP-SMA Slide 22

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MA5020 Lesson 1 - International Trade

Why do countries trade with each other?

! Cost in the production of good in different countries

is different
" Different kinds and amount of factors of
production available in different countries

! Countries trade to take advantage of cheaper

prices for goods produced in other countries.

LYF/April 2013 SP-SMA Slide 23

Advantages of Free Trade/

International Trade

1. Countries can specialise in producing commodities in which

they have a comparative advantage.

2. Countries can maximise their resources.

3. Consumers can enjoy more varieties of goods.

4. Free trade encourages competition. Competition encourages

efficiency. Good for consumers.

5. Consumers can enjoy cheaper and better goods.

6. Free trade discourages protectionism. Protectionism can lead

to retaliation from other countries.

LYF/April 2013 SP-SMA Slide 24

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MA5020 Lesson 1 - International Trade

International Trade

! Absolute Advantage
" The ability of a country to produce more output
than another country with the same factors of
production (or uses less resources to produce
a good).

! Comparative Advantage
" The ability of one country to produce a good
with a lower production opportunity cost than in
another country ( it has to forgo less of other
goods to produce it).

LYF/April 2013 SP-SMA Slide 25

Law of comparative advantage

! The law of comparative advantage

" Trade can benefit all countries if they specialise
in the goods in which they have a comparative
advantage.

LYF/April 2013 SP-SMA Slide 26

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MA5020 Lesson 1 - International Trade

Production Possibilities Curve (PPC)

• A curve that depicts the trade- As we specialize into one

off between two items product, we will be using
produced. more & more resources that
are poorly suited to produce
it.
• All points on the curve are
points of maximum productive

Conventional Cargo
efficiency.

• Higher sacrifices near axes &

thus curve is concave. There
is diminishing marginal return Ts
in production of each goods Containers
as the other approaches zero.

LYF/April 2013 SP-SMA Slide 27

International Trade

! Countries should specialised in goods which have

absolute advantage and trade with each other. Both
will gain.
France has absolute advantage in wine.
UK has absolute advantage in gin.
Both France and Gin will gain from trading.
! Trade can still take place between countries if one
country could produce all goods with less resources
than the other.
! Trade can still take place as long as each country
has goods of comparative advantage to trade.

LYF/April 2013 SP-SMA Slide 28

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MA5020 Lesson 1 - International Trade

International Trade and its effect on factor

prices
! Countries will tend to have comparative advantage in goods
where their FOP are in abundant.
! Australia specialises in grain production
" Abundant land
! SEA countries specialise in labour intensive goods
" Abundant labour with low wages
! Japan, Switzerland and USA specialise in high end capital
intensive goods
" Abundant skills and cheap capital
! Trade between countries will lead to greater equality in factor
prices.
! Demand for labour in SEA will push up wages in these
countries.
! Without trade, the wages would be even lower as the abundant
supply of labour exceeded the limited demand.
LYF/April 2013 SP-SMA Slide 29

Effects of International Trade on price and

sales

! Specialisation will lead to lower prices.

! Economy of scale will lead to lower prices.
! Lower prices will lead to increase in quantity
demanded.
! Increase competition will stimulate greater
efficiency at home.
" May lead to greater R & D and more rapid
adoption of technology.
" May lead to innovations (new products)

LYF/April 2013 SP-SMA Slide 30

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MA5020 Lesson 1 - International Trade

Business Cycle (Trade Cycle)

- In some years, countries will experience high rates of economic growth
(boom). In other years, economic growth will be low or even negative
(recession). This cycle of booms and recessions is known as the trade cycle or
business cycle.

- Is the time interval of periodic upward and down movement of national output
over time, measured from a point to its starting point. 4 phases, duration of
each phase is not the same

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Trade Cycle

! In some years, countries will experience high rates of economic

growth (boom). In other years, economic growth will be low or even
negative (recession). This cycle of booms and recessions is known
as the trade cycle or business cycle.
! The periodic fluctuations of national output round its long-term trend.

! Phase 1: The upturn

" Excess stock is cleared and production will increase.
" Replacement investment re-emerges.
" Home produced substitutes become relatively cheaper.
" Makes export cheaper.
" Imports fall
" Bank have surplus funds and interest will be low.
" To further simulate the economy, government intervenes with
fiscal and/or monetary measure.
" Employment reduces and demand for goods is stimulated.
LYF/April 2013 SP-SMA Slide 32

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MA5020 Lesson 1 - International Trade

Trade Cycle

! Phase 2: Expansion

" Many factors that caused recovery go on to stimulate

economy.
" Aggregate demand causes a rise in income and hence
demand
" Rise in income will lead to increase in investment
" Firms which are low on stock will increase production to
meet extra sales and build up stocks.
" People to anticipate rising prices
" Both firms and consumers stock up while prices are still
relatively low.
" Firms anticipate further rises in demand
" Invest in both capital and stock.
LYF/April 2013 SP-SMA Slide 33

Trade Cycle

! Phase 3: The peaking out

" many firms reach max. capacity

" Inflation sets in.
" Consumers spending level out.
" Makes export less competitive
" Makes import relatively cheaper than home-produced
goods.
" Interest rate stays high
" Various random shock may bring the boom to an abrupt
end: e.g. a war, sudden rise in oil price, volatile exchange
rate movement and stock market crash.

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MA5020 Lesson 1 - International Trade

Trade Cycle

! Phase 4: The recession

" Business prospect is low. Stock increases due to poor demand.

" Confidence is low.
" Consumption and investments remain low.
" Cut down on production.
" Borrowing from bank is likely to be low.
" Bank have surplus fund and interest rate will be low.
" Fewer machines were needed. Many worn-out machines not
replaced.
" Effects on capital goods industry become severe.
" Unemployment sets in.
" Firm cuts back production due to unsold stock.
" GDP remain in negative territory for a few quarters and may last
even longer if government does not take decisive action.

LYF/April 2013 SP-SMA Slide 35

Economic terms

Monetary Policy
! Refers to the determination of the nation’s money
supply.
! Most economists agree that changes in the money
supply affect important macroeconomic variables,
including national output, employment, interest
rates, inflation and stock prices.

Fiscal Policy
! Refers to decisions that determine the
government’s budget, including the amount and
composition of government expenditures and
government revenues.
LYF/April 2013 SP-SMA Slide 36

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MA5020 Lesson 1 - International Trade

Economic terms

! Inflation
Refers to general rise in the level of prices
throughout the economy.

! Recession
A period where the output of a country falls for a
few months.

! Technical Recession
A period where the output of a country falls for 2 or
more quarters.

LYF/April 2013 SP-SMA Slide 37

Indicate how each of the following factors is affected in

a trade cycle.
Trade Unemployment Income Excess Production Investment Fiscal Interest rates
Cycle Inventories Measures on
expenditure

1st phase
Upturn

2nd Phase
Expansion

3rd Phase
Peaking
Out

4th Phase
Recession

LYF/April 2013 SP-SMA Slide 38

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MA5020 Lesson 1 - International Trade

Tutorial
Q1. Economics is the study
a. of how individuals allocate resources among
competing uses so as to produce the maximum
amount of goods and services in an infinite
amount of time.
b. of how individuals allocate resources among
competing uses so as to maximise the plentiful
resources that are available.
c. of how individuals allocate scarce resources
among competing uses to achieve maximum
benefit.
d. of how individuals allocate scarce resources
among competing users to achieve maximum
profit. .

LYF/April 2013 SP-SMA Slide 39

Tutorial
Q4. A worker in the USA can produce either 8 computers or 6
motorcycles in a day. A worker in Japan can produce either 12
computers or 9 motorcycles. Which of the following statement
is true?

a. Japan has an absolute advantage in both goods and a

comparative advantage in computers.
b. Japan has an absolute advantage in both goods and a
comparative advantage in neither good.
c. Japan has an absolute advantage in both goods and a
comparative advantage in motorcycles.
d. Japan has an absolute advantage and comparative
advantage in both goods.

LYF/April 2013 SP-SMA Slide 40

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