Lessons 31 · 1 lessons · E. Sariqov, B. Xaydarov. Fundamentals of Economic Knowledge (Economics), Grade 9, 4th edition. “Huquq va Jamiyat” publishing house, Tashkent, 2019
31
International trade
Textbook: pp. 134–137
GoalKnow why international trade is needed, the principles of absolute and comparative advantage, opportunity cost, export, import, foreign trade volume and balance; do simple calculations.
Countries differ in natural resources, climate, capital and technology, so they trade with each other; the world market includes markets for goods, labour, capital and currency. Exports are goods and services produced at home and sold abroad, imports are those bought from abroad; their sum is the foreign trade volume, and their difference (exports − imports) is the foreign trade balance (saldo). By Adam Smith’s principle of absolute advantage, a country specialises in the good it makes using fewer resources than others. David Ricardo’s principle of comparative advantage shows that even if a country is better at everything, it benefits both sides when it specialises in and trades the good with the lower opportunity cost (the amount of another good given up for one unit of a good). If the balance is positive, exports exceed imports in value; if it is negative, a shortage of foreign currency may arise, though it is not always bad if imports bring equipment for investment.
Worked examples
In country A 1 unit of cloth takes 4 hours and 1 machine part takes 12 hours; in country B 8 and 16 hours respectively (conditional). A has an absolute advantage in both goods. Opportunity cost of a part: in A 12 : 4 = 3 units of cloth, in B 16 : 8 = 2 units of cloth. A part is cheaper in B, so it pays B to specialise in parts and A in cloth.
A country exported 12 bn dollars of goods and imported 9 bn dollars in a year. Foreign trade volume = 12 + 9 = 21 bn dollars. Balance = 12 − 9 = +3 bn dollars (positive). With imports of 15 bn the balance would be 12 − 15 = −3 bn, that is, negative.
Class activity
“Specialisation game”. Pairs get a table of two conditional countries (production hours). For each good they calculate the opportunity cost, decide who specialises in what and explain why both countries gain.
Practice
1
Distinguish export and import in one sentence each.
Export — goods and services sold abroad, import — those bought from abroad.
2
In country X 1 unit of tea takes 6 hours and 1 unit of cotton 18 hours. What is the opportunity cost of cotton in units of tea?
3
3
Exports are 20 bn and imports 14 bn dollars. What is the foreign trade balance in bn dollars?
6
4
Why does even a country that makes everything well gain from trade?
It can specialise in the good with the lower opportunity cost and import the other more cheaply; resources are saved and both sides have more goods.