Introduction to International Economics

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Introduction to International Economics

a- Explain how the role of the Mercantilism practice between 1500- to the late 1700s century has influence the International Trade Theories in the 19th -21st century.

In general, international trade is economic trade, such as trade in products, the movement of capital and labour and service trade, that made beyond the border. International trade theory is a brunch of economics that the study about every motive for economic activity and the effects made across the border. To put in concretely, international trade theory treats why trade occurs between nations, what products a nation exports and imports when they participate in trade, what profits countries that taking part in trade will gain and how the profits are distributed among nations. It is also important subject of study that what economic effect is, when a nation interrupt free trade flows directly and indirectly by trade policy. International trade theory was started with the publication of "The Wealth of Nations" in 1776, Adam Smith, however before then, there was some writings already about international trade and these writings was contained economic philosophy as known as mercantilism.

Mercantilism was the economic theory supporting economic policies that European countries had adopted in 15th- and 18th century during the collapse of the feudal system. Mercantilist argued that restricting the import and encouraging the export in order to increase the wealth of the country. Mercantilism thought profits occur in the process of distribution, not the process of production, and that how much precious metals they have such as gold and silver being used all over the world means the wealth of the nation. But it led to depreciation of gold and silver because the amount of precious metals became excessively large. Then over the end of the 18th century and 19th century, mercantilism have been changed in the form of economic nationalism. Economic nationalism found the motive power of national economic development from within. They argued that to maintain independent status politically, economic also need to secure an independent phase.

In the late 20th century, Neo-mercantilism emerged because it was difficult to predict what will happen in the future so they argued that the need to protect domestic manufacturers, economically ahead in another country and strengthen national security.

b- Examine why countries engage in trade and the benefits of specialization and trade between countries.

c- When you sit down for your evening meal try to estimate the number of people and transactions that are required to bring your meal to you - be as lateral, imaginative and as specific as possible.

Question 2 - Trade structure of your chosen countries

a- Analysis

b- Data table

Table 1 :

Basic economic indicators and trade structure of Spain and Saudi Arabia in 2013/2014


Saudi Arabia

Land area(sq. km.)



GDP(current USD, millions)



CNI per capita(current USD)



Total Trade (X+M) (current USD, millions)



Total export(current USD, millions)



Total import(current USD, millions)



Trade to GDP ratio(%, 2011-2013)



Share of exports (%)

Agricultural products



Fuels and mining products






Share of imports (%)

Agricultural products



Fuels and mining products






Source : eurostat 2013


worldbank 2013


WTO 2014


Question 3 - Absolute advantage

  • Explain the theory

When an economic entity produces a good or service at a lower cost compared to other economic entities, the economic entity is said to have an absolute advantage. For example, suppose Australia produces 100 cars per year, while New Zealand produces 50 cars per year. Australia has an absolute advantage because it produces more cars(the output) in the same amount of time(the input) as New Zealand.

Adam Smith redefined the concept of the national wealth unlike mercantilists and in accordance with the absolute advantage, he argued international division of labour and free trade. He thought the national wealth should be evaluated by amount of good and service which people of the nation can consume, not by amount of precious metals a nation has. Adam Smith also argued that if the two countries in a free trade, it is possible to maximize the output of the world by specialization completely product that each country produced more efficiently than the other country. Ultimately Adam Smith viewed a free trade by absolute advantage as a win-win game, and argued that the more countries participate in trade, the more the people of the two countries can consume.

  • Analysis of absolute advantage of Spain and Saudi Arabia
  • Data table

Table 2 :

Production - four selected agricultural products of Spain and Saudi Arabia in 2011/2014


Saudi Arabia


Total production (thousands of tonnes)

Yield (kg/hectare)

Total production (tonne)

Yield (kg/hectare)



21,318 ha



1,782 ha



378,909 ha



21,402 ha

Source : Spain : total production 2011 - Instituto Nacional de Estad√≠stica ( / Yield 2014 - Encuesta Sobre Superficies Y Rendimientos De Cultivos 2014 (√ĎA_tcm7-352546.pdf)

Question 4 - Comparative advantage

  • Explain the theory

According to Adam Smith's the theory of absolute advantage, the trade does not occur if a nation has an absolute advantage in all of productions. Nonetheless, the classical economist David Ricardo explained by his theory of comparative advantage that trade can be happened even if a nation has an absolute advantage in all of commodities.

In 1817, while Ricardo explained the law of comparative advantage in "Principles of Political Economy and taxation", Ricardo argued that though a nation has an absolute disadvantage in the production of two products, if it will be trade, all countries can get benefits according to comparative advantage. That is to say that even though a country has an absolute advantage in the production of both commodities, the product production that has relatively large absolute advantage makes specialize and the other country has an absolute disadvantage in the production of both commodities, the product production that has relatively low absolute disadvantage makes specialize so then mutual benefit is possible by exchanging their comparative advantage products through free trade between two countries.

  • Application and Analysis of comparative advantage of Spain and Saudi Arabia
  • Data table

Table 3 :

Producer price : four selected products of Spain and Saudi Arabia in 2012


Saudi Arabia


Producer price (USD / tonne)









Source : Food and Agriculture Organization of the United Nations 2012 (

Question 5 - Factor endowment, trade and income distribution

(a) Heckscher-Ohlin (H-O) model

  • Explain the theory

The Heckscher-Ohlin (H-O) model is the theory that explaining trade pattern and Bertil Ohlin argued and Eli Heckscher develpoed this model. It says a country export that is easy to produce and abundant goods, and import that is not. It also elucidated an effect of trade on the price of factors of production. The Heckscher-Ohlin (H-O) model explained the reason of comparative advantage at factor endowment and the relative price of factor tends to equalize. In other words it argued there are difference in factors of production and factor endowment, each production has different factor intensity between trade partners therefore trade occurs because of difference of comparative cost.

  • Application and Analysis of H-O model for Spain and Saudi Arabia
  • Data table

Table 4 :

Factor endowment and pattern of trade of Spain and Saudi Arabia in 2012/2014



Saudi Arabia

Agricultural Land (sq. km)



Agricultural Land (% of land area)



Labour (millions)



Capital (USD)



Four major exported products

Cars (8.8%)

Crude Petroleum (76%)

Refined Petroleum (6.3%)

Refined Petroleum (5.7%)

Packaged Medicaments (3.7%)

Ethylene Polymers (3.7%)

Vehicle Parts (3.5%)

Acyclic Alcohols (2.9%)

Four major imported products

Crude Petroleum (13%)

Cars (11%)

Refined Petroleum (4.6%)

Refined Petroleum (5.4%)

Vehicle Parts (4.2%)

Packaged Medicaments (2.3%)

Petroleum Gas (4.0%)

Barley (1.8%)

Source: Encuesta Sobre Superficies Y Rendimientos De Cultivos (

Central Intelligence Agency - The World Factbook 2014 (

Observatory of economic complexity 2014 (,

(b) Stolper-Samuelson (S-S) model

  • Explain the theory

Wolfgang Stolper and Paul Samuelson determined that "an exogenous increase in the relative price of a good leads to an increase in the real and relative return to the factor used more intensively in that good and a decrease in the real and relative return to the other factor." (PanagariyaArvind, 2009)

  • Application and Analysis of S-S model for Spain and Saudi Arabia

Question 6 - Context of new trade theories

(a) Economies of scale

  • Explain the theory
  • Application and Analysis of economics of scale for Spain and Saudi Arabia
  • Data table

Table 5 :

domestic consumption and export : four selected agricultural products of Spain and Saudi Arabia in 2014


Saudi Arabia


Domestic consumption (Thousands of tons)

Exports (ton)

Domestic consumption (ton)

Exports (ton)







Source : Presentation of the 2013 Food Consumption Data ( December 2013,

(b) Imperfect competition and market power

  • Explain the theory
  • Application and Analysis of economics of scale for Spain and Saudi Arabia
  • Data table

Table 6 :

One selected agricultural product in 2011

Agricultural product name : Apricots

Top 4 exporting countries

Volume of production (tons)

Share of world production (%)









Source : Food and Agriculture Organization of the United Nations 2011 (

Question 7 - Conclusion

Question 8 - References


Bowles, P. (2009). Mercantilism. Princeton: Princeton University Press.

Falkner, R. (2011). International political economy. Retrieved 4 24, 2015, from londoninternational:

Kim, C. (2011). Mercantilism. Retrieved 4 23, 2015, from Naver:

Maneschi, A. (2009). Comparative advantage. Princeton: Princeton University Press.

Panagariya, A. (2009). Heckscher-Ohlin model. Princeton: Princeton University Press.

Van Marrewijk, C. (2009). Absolute advantage. Princeton: Princeton University Press.

Lecturer : Dr. Jacob KettoolaPage 1 of 10