2. Trade Theory and Development Experience Pertemuan 7 Matakuliah: > Tahun: >

3. Bina Nusantara University 3 The opening of a foreign trade ….. Sometimes works a sort of industrial revolution in a country whose resources were previously under developed - John Stuart Mill, 1846

4. Bina Nusantara University 4 Material Outline : The importance of International Trade and Finance The importance of trade for development

5. Bina Nusantara University 5 The importance of trade for development : 1.LDC Exports : Trends and Patterns For the vast mayority of low – and middle – income developing countries, the export of primary commodities (food, food products, raw materials, minerals, and fossil flues) still accounts for more than three – quarters of their total export earnings.

6. Bina Nusantara University 6 The importance of trade for development : 2Importance of exports to different developing nations A critical dimension of the Third World’s merchandise trade balance – the excess or deficit in the value of its exports relative to its imports – relates to the commodity composition of that trade

7. Bina Nusantara University 7 The importance of trade for development : 3.Demand elasticities and export earnings instability Demand patterns for different commodity groups reveal that in the case of primary products, the income elasticity of demand is relatively low – the percentage increase in quantity of primary products demanded by importers (mostly rich nations) will rise by less than the percentage increase in their GNP’s. By contrast, for fuels, certain row materials, and manufactured goods, income elasticity is relatively high.

8. Bina Nusantara University 8 Trade theory and development : The Traditional Arguments 1.Trade is an important stimulator of economic growth 2.Trade tends to promote greater international and domestic equality by equalizing factor prices, raising real incomes of trading countries, and making efficient use each nation’s and the world’s resource endowments 3.Trade helps countries achieve development by promoting and rewarding the sectors of the economy where individual countries possess a comparative advantage, whether in terms of labor efficiency or factor endowments

9. Bina Nusantara University 9 Trade theory and development : The Traditional Arguments 4.In a world of free trade, international prices and costs of production determine how much a country should trade in order to maximize its national welfare. Countries should follow the dictates of the principle of comparative advantage and not try to interfere with the free workings of the market 5.To promote growth and development, an outward-looking international policy is required.