CHAPTER 1: EVOLUTION OF INTERNATIONAL TRADE

Lesson 1.1.: Evolution of International Trae Theory: A Glimpse

KEY TAKEAWAYS

1. The classical theories of international trade are the historical country-based theories.
2. The modern mid-twentieth century theories are referred to as firm-based or company-based.
3. Adam Smith published Wealth of Nations (1776) and David Ricardo published Principles of Economics (1951).
4. The Standard Theory of International Trade is a classical, country-based international trade theory that states that
a country's wealth is determined by its holdings of gold and silver.
5. In a free trade system, individuals benefit from a greater choice of affordable goods, while mercantilism restricts
imports and reduces the choices available to consumers.
6. Division of labor is the separation of a work process into a number of tasks, with each task performed by a
separate person or group of persons.
7. Trade surplus is the amount by which the value of a country's exports exceeds the cost of its imports.
8. Industrial capitalism was the second phase of capitalism in which industries/factories became the dominant factor
in the production of goods.
9. Absolute advantage is the country's inherent ability to produce specific goods efficiently and effectively at a
relatively lower marginal cost.
10. Comparative advantage refers to the country's capability to produce specific goods at lower marginal cost and
opportunity cost.
11. Marginal cost is the cost incurred in producing an additional unit of a product.
12. Opportunity cost means the value you will get from an alternative that you did not choose.
13. The Theory of International Trade and Commercial Policy, still considered to be one of the oldest branches of
economic thought, has evolved from the Standard Theory of International Trade.

Lesson 1.2.: Barter

1. Bartering involves a direct trade/exchange of goods and services.

2. The advantage of bartering is that it does not involve money and it is very simple.
3. However, it is difficult to find people who need what the other people have and there is no standard measure of
value.
4. Even today, there are swap markets, online auctions, and numerous websites that offer online bartering
arrangements.
5. The early humans had very little needs and there was no need for exchange of goods.
6. As the number of people increased, they started forming groups and travelled long distances to find food.
7. Gradually, however, intergroup interaction started and this paved the way for a system of trading.
8. As cultivation and farming flourished, there was no shortage of food. They started trading surplus goods and the
system of trade flourished.
9. The history of bartering can be traced back to 6000 BC, when the barter system was introduced by the tribes of
Mesopotamia, then adopted by the Phoenicians, and improved by the Babylonians.
10. Salt was so valuable at that time that the salary of Roman soldiers was paid in salt.

Lesson 1.3.: Origin of Money

1. The first recognizable metal coins appeared in China, during 1000 BC.
2. Sometime around 770 BC, the small bronze celts (prehistoric tools resembling chisels) and bronze rings played a
monetary role.
3. Objects in the shape of a circle became some of the first coins.
 4. Around 700 BC, the Chinese moved from coins to paper money.
5. The first mint, an industrial facility to manufacture coins, was established in Lydia (now western Turkey).
6. Minting is the process of making a coin by stamping metal.
7. In 600 BC, around the time China started using paper money, Lydia's King Alyattes minted the first official
currency, non-standardized coins from electrum (a naturally occurring alloy of gold and silver).
8. King Croesus (son of King Alyattes) of Lydia is credited with installing the world's first bimetallic monetary system
of pure gold and pure silver coins, the Croeseid (anciently Kroiseioi stateres), around 550 BC.
9. The foundation deposit of the Artemisium (temple to Artemis) at Ephesus shows that electrum (which the
Greeks called "white gold") coins were in production even before Croesus, possibly under King Gyges.
10. The European colonial governments in North America issued the first paper currency in Canada (then a French
colony). Instead of going back to a barter system, the colonial governments issued IOUs (promissory notes) that
traded as a currency.
11. The first regular system of exchange in Canada involving Europeans occurred in Tadaoussac in the early
seventeenth century, where French traders bartered each year with the Mantagnais people (also known as the
Innu) trading weapons, cloth, food, silver items, and tobacco for animal pelts, especially those of the beaver.
12. The first colonial settlement at Quebec was established by Samuel de Champlain in 1608.
13. The beaver pelt was the one universally accepted medium of exchange in Quebec, although wheat and moose
skins were also employed as legal tender. As the colony expanded and its economic and financial needs became
more complex, coins from France came to be widely used.
14. Silver and copper coins, apparently intended only for the West Indies, was minted in 1670, believed to have
circulated in Canada, but could not be circulated in France.
15. The West Indies are a chain of islands in the Caribbean Sea and Atlantic Ocean divided into three groups: The
Bahamas, the Greater Antilles, and the Lesser Antilles.
16. During the mid-1600s, Spanish dollars (piastres) represent the first distinctive Canadian coins.
17. The livre (French for "pound") was the currency of the Kingdom of France and its predecessor state of West
Francia from 1781 to 1794.
18. In 1685, Jacques de Meulles, Intendant of Justice, Police, and Finance came up with the card money, which
served as money in Canada, just as coin did in France, but it was only in March 1729 that card money became
legal tender and replaced the ordonnances in circulation.
19. Legal tender means currency, such as coin and paper money, is valid and sufficient for the payment of debts.
20. Inflation means increase in prices, reducing the purchasing power of money.
21. In 1717, all debts and contract in Canada became payable in monnoye de France.
22. Copper coins were introduced in 1722, but they were not well received by merchants. Notes issued by private
individuals also circulated as money.
23. The government issued promissory notes called ordonnances (replaced later by card money) and treasury notes
called acquits, which began to circulate as money.
24. Bills of exchange drawn on the Treasury were used for payments of expenses in Canada.
25. Settlement of the paper obligations issued by the colonial authorities in Canada was included in the Treaty of
Paris, signed in February 1763, which ended the war between Great Britain and France.
26. The advent of paper money led to an increase in international trade.

Lesson 1.4.: History of the Philippine Currency

1. Barter was the means of trade long before the Spaniards came to the Philippines.
2. Barter was inconvenient so cowries, glossy, often colorfully patterned shells. was adopted as a medium of
exchange.
3. Barter rings, made in gold called piloncitos, were the first local form of coinage. These had a flat base that bore
an embossed inscription of the letters "MA" or "M" believed to be the name by which the Philippines was known
to Chinese traders.
 4. The cobs or macuquinas (silver coins) were the earliest coins brought in by the galleons from Mexico and other
Spanish colonies. These silver coins usually bore a cross on one side and the Spanish royal coat-of-arms on the
other.
5. The barrilla, a crude bronze or copper coin worth about one centavo, was the first coin struck in the country as
ordered by the Royalty of Spain. The Filipino term "barya," referring to small change, had its origin in barrilla.
6. Gold coins with the portrait of Queen Isabela were minted in Manila.
7. Silver pesos with the profile of young Alfonso XIII were the last coins minted in Spain.
8. The pesos fuertes, issued by the country's first bank, the El Banco Español Filipino de Isabel II, were the first
paper money circulated in the country.
9. The Philippine Republic of 1898 under General Emilio Aguinaldo issued its own coins and paper currency backed
by the country's natural resources. Two types of two-centavo copper coins were struck at the Malolos arsenal.
10. One-peso and five-peso revolutionary notes were printed as Republika Filipina Papel Moneda de Un Peso and
Cinco Pesos.
11. With the coming of the Americans in 1898, the Philippines became one of the most prosperous countries in East
Asia. The Americans instituted the gold standard and pegged the Philippine peso to the American dollar at the
ratio of 2:1.
12. The gold standard is a monetary system where a country's paper money has a value directly linked to gold;
countries agreed to convert paper money into a fixed amount of gold per unit of currency.
13. The US Congress approved the Coinage Act for the Philippines in 1903. The coins issued under the system bore
the designs of Filipino engraver and artist, Melecio Figueroa. Coins in denomination of one-half centavo to one
peso were minted.
14. El Banco Español Filipino was renamed Bank of the Philippine Islands in 1912. All notes and coins issued up to
1933 used English. Beginning May 1918, treasury certificates replaced the silver certificates series, and a one-
peso note was added.
15. Two kinds of notes circulated in the country during the outbreak of World War II-war notes in high
denominations issued by the Japanese Occupation Forces dubbed as "Mickey Mouse" money and guerrilla notes
or resistance currencies in low denominations issued by different provinces and municipalities.
16. Old treasury certificates overprinted with the word "Victory" was used as currency when the Philippines gained
independence from the United States following the end of World War II.
17. With the establishment of the Central Bank of the Philippines in 1949, the first currencies issued were the
English series notes printed by the Thomas de la Rue & Co., Ltd. in England and the coins minted at the US
Bureau of Mint.
18. The "Filipinization" of the republic coins and notes began in the late 60s and is carried through to the present.
19. In the 70s, the Ang Bagong Lipunan (ABL) series notes printed at the Security Printing Plant were circulated
starting 1978.
20. In 1983, the Flora and Fauna coin series was initially issued.
21. The New Design Series of banknotes issued in 1985 replaced the ABL series.
22. Ten years later, a new set of coins and notes were issued carrying the logo of the new Bangko Sentral ng Pilipinas.

Lesson 1.5.: Mobile Payments and Internet Payments

1. Mobile payments are money rendered for a product or service through a portable electronic device, such as a
cell phone, smartphone, or a tablet device.
2. Near field communication (NFC) payments is the technology that allows contactless payments using close-
proximity radio frequency identification.
3. Sound wave-based (SWB) or sound signal-based (SSB) mobile payments or pay-by-sound uses an advanced,
ultra-low power, wireless transmission technology.
4. Magnetic secure transmission (MST) makes use of a magnetic signal to process payment using a secure
tokenization system.
 5. Mobile/digital wallets work through complex encryption and tokenization to process specific transactions.
6. Quick response (QR) codes are the trademark of a type of matrix barcode (type 2D barcode) readable by
smartphones used in e-commerce to process payments.
7. Short message (or messaging) service (SMS), also called premium SMS payments, simply means paying for
products or services via a text message.
8. Direct carrier billing (DCB) is similar to SMS payments where you enter your phone number on a payment page
or in an app and the payment will then be added to your phone bill or prepaid SIM card.
9. Internet payments can be done on desktops, laptops, or even phones (as in mobile payment).
10. Wireless application protocol (WAP) payments used to be the most common facility on smartphones through a
more limited-capacity WAP browser or app.
11. "Auto pay" is done when payments to credit cards or other bills, like for water, electricity, or whatever bills need
to be paid, are scheduled to be automatically paid on a certain date from funds of the payee with a certain bank,
just like a debit card.
12. Payment links or pay by link is most commonly referring to a button/link sent in an email, text message,
messaging app, or over social media to process a transaction for a specified merchant.
13. Neobank is an umbrella term for the new generation of cutting-edge, fully digital banking services classified as a
type of financial technology (fintech) solution.

Lesson 1.6.: Virtual Currency

1. Cryptocurrency, virtual/digital currency, "digital gold", or "altcoins" are any type of digital unit that is used as a
medium of exchange or a form of digitally stored value generated by agreement within the community of virtual
currency users.
2. Fiat currency/fiat money or cash is the real currency, coins and paper money (bills) issued and printed by the
central bank of a country.
3. E-money is a digital representation of fiat currency stored in digital wallets or e-wallets.
4. Virtual currency, which is stored digitally, would still need to be converted first to Philippine peso, then
transferred to a destination wallet or be withdrawn as cash through different mediums that are accepted in the
country done through a virtual currency exchange.
5. Cryptocurrencies work through blockchain technology. Blockchain is a special kind of database, a "distributed
ledger" or a "global ledger" built on a data structure known as "blocks."
6. Cryptocurrencies use electronic coins as their form of exchange, which are nothing more than slots in the
blockchain.
7. Cryptocurrencies use cryptography, the process of protecting information by using codes, for security.
8. The more users a coin has, the more useful it becomes, and the higher its price goes. But when a coin falls out of
favor, there is nothing to stop it from going to zero.
9. China has already developed a Central Bank-backed crypto.
10. The crypto coin market is decentralized, but cryptocurrency exchange websites, are centralized.
 CHAPTER 2: CLASSICAL COUNTRY-BASED THEORIES OF INTERNATIONAL TRADE

KEY TAKEAWAYS

Lesson 2.1.: International Trade Theories

1. International trade theories are various theories that analyze and explain the patterns and mechanisms of
international trade, how countries exchange goods and services, and help countries in deciding what should be
exported and what should be imported, in what quantity, and with whom trade should be done globally.
2. Trade is the concept of exchanging goods and services between two people or entities.
3. International trade is the exchange goods and services between people or entities in two different countries.
4. International trade theories were initially company-based and were called classical theories. Classical economists
were oriented primarily toward growth economics, and their main concern was to explain how the "wealth of
nations" could be increased.
5. The main points of the classical theories of international trade are the following:
a. Trade is an important stimulator of economic growth.
b. Trade tends to promote greater international and domestic equality.
c. Trade helps countries to achieve development.
d. d. In a world of free trade, international prices and costs of productions determine how much a country
should trade in order to maximize its national welfare.
e. In order to promote growth and development, self-reliance based on partial or complete isolation is
asserted to be economically inferior to participation in a world of free unlimited trade.

6. In the mid-twentieth century, economists shifted from country-based to firm-based or company-based theories,
which were called modern theories. These theories are useful and can help with international trade by helping a
business determine the right country to expand into and make goods more efficiently than other firms.

Lesson 2.2.: Mercantilism

1. The "Commercial Revolution" saw the transition from local economies to national economies, from feudalism to
capitalism, and from a rudimentary trade to a globally larger international trade.
2. According to mercantilism, also known as "bullionism," it is the goal of the economy politics to ensure that the
state is enriched by increasing the entry of gold and silver. Exports bring an inflow of gold, whereas imports lead
to the outflow of gold.
3. Countries employed a policy of protectionism; the country tried to protect the export industries that brings in
the gold and silver.
4. New nation-states practiced colonization where one country takes control of another country or region. These
nation-states expanded their wealth by using their colonies around the world in an effort to control more trade
and amass more wealth.
a. 5.
b. Entrepreneurship - The entrepreneur is the one that combines the factors in the correct proportion and
mobilizes them.
5. Capital goods - These consist of those goods which are produced by the economic system and are used as inputs
in the production of further goods and services.
6. Capital - This refers to the money or funds used to purchase the goods used in the production process.
7. Natural resources These are found in nature, including land, trees, and mines.
8. Labor This refers to the work performed by a person for a monetary consideration. It is the monetary
consideration that forms part of the cost of production.
9. In our modern times, the four factors of production are land, labor, capital, and entrepreneurship.
 10. Neo-mercantilism, therefore, combines protectionism through tariffs and import barriers and domestic industry
protection through subsidies and tax exemptions.
11. Free trade is when international trade is free from barriers, such tariffs, quotas, or other restrictions, and can
flourish on its natural growth free from government regulatory Intervention.
12. Free trade is a system that allowed for liberalization which would pave the way for a freely initiated trade and
engage the maximum possible number of people bringing benefits to most parties and lead to further
development of all participants in the long run.
13. Laissez-faire economics is a theory that restricts government intervention in the economy.
14. Specialization is a method of production whereby an entity focuses on the production of a limited number of
goods to gain a greater degree of efficiency that would lead to the development of economies of scale.
15. Economies of scale occur when increasing output leads to lower long-run average costs. It means that as firms
increase in size, they become more efficient.
16. Jean-Baptiste Colbert was considered as a more profound influence on the development of mercantilism in
France, where it was known as "Colbertism."
17. Sir William Petty posited that surplus gain is the fundamental originator of expanded reproduction, which is
conditional on capital accumulation.
18. Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of
what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively.
19. Sir Thomas Mun wrote a pamphlet, A Discourse of Trade in England, where mercantilism was called commercial
system or mercantile system.
20. Antoine de Montchrétien published a book titled A Tract on Political Economy in which he laid great emphasis on
development of agriculture and described it as the basis of all wealth.
21. Richard Cantillon is considered by many to be the first economic theorist. He emphasized the need of importing
raw materials and exporting finished products to maintain a favorable balance of trade.
22. Physiocrats is an eighteenth-century group of French economists who believed that agriculture was the source of
all wealth and that agricultural products should be highly priced.
23. Giovanni Botero and Antonio Serra of Italy did not directly touch on mercantilism, but developed theories using
the city as a unit of analysis and finding development to be the result of industrialization.

Lesson 2.3.: Theory of Absolute Advantage

1. Absolute advantage means that a producer can produce a good or service in greater quantity for the same cost
or the same quantity at a lower marginal cost.
2. Marginal cost is the cost incurred in producing an additional unit of product.
3. Adam Smith is recognized as the father of economics.
4. Capitalism, also called free market economy or free enterprise economy is an economic system, where most
means of production are privately owned and production is distributed through the operation of markets, which
determine prices, products, and services.
5. The physiocrats were a group of economists who believed that the wealth of nations was derived solely from
agriculture; that only agriculture yielded a surplus.
6. The theory of absolute advantage believes that countries should produce and export such products which they
have an absolute advantage on and import those goods where they do not have absolute advantage.
7. The theory of absolute advantage, theory of international trade, and theory of economic development are
closely interwoven and interlinked.
8. Free trade promotes international division of labor through specialization giving certain countries absolute
advantage paving the way for international trade that wil bring about economic development.
9. Vent for surplus doctrine states that a nation can exchange its overproduction for other goods which are in
demand in other countries, which will result in the fullest utilization of the idle productive capacity.
10. An additional beneficial aspect of international trade is it transfers knowledge and technology between different
nations.
Lesson 2.4.: Theory of Comparative Advantage

1. Comparative advantage means a producer can produce a good or service at a lower opportunity cost than
others.
2. Opportunity cost is what is lost or missed out on when choosing one possibility over another.
3. Adam Smith was among the first to put in writing the theory of comparative advantage, but the theory of
comparative advantage was formulated by David Ricardo.
4. For Smith, the specialization and division of labor provided the base for lowering labor costs, which ensured
comparative advantage for a country.
5. Industrial capitalism is an economic system in which trade, industry, and capital are privately controlled and
operated for profit.
6. Comparative advantage warranted complete specialization in the specific commodity with a comparative
advantage in terms of labor hours used per unit of output.
7. David Ricardo started out as a successful stockbroker, making $100 million in today's dollars. After reading Adam
Smith's The Wealth of Nations, he became an economist.
8. Ricardo developed monetarism, the theory or practice of controlling the supply of money as the chief method of
stabilizing the economy.
9. He also developed the law of diminishing marginal returns, which states that there is a point in production where
the increased output is no longer worth the additional input.

Lesson 2.5.: Heckscher-Ohlin Theory (H-O Theory)

1. David Ricardo's theory of comparative advantage posits that countries export the goods they have abundant
production factors for, while they import the goods for which they have scarce production factors, which
determine the comparative advantage of a country.
2. Swedish economists, Eli Heckscher and his student Bertil Ohlin. products that utilized factors that were in
abundance in the country and propounded the Heckscher-Ohlin theory or H-O theory, also called the factor
proportions theory.
3. Hecksher and Ohlin determined that the cost of any factor or resource was a function of supply and demand.
4. Countries with cheap labor would specialize in labor-intensive industries, while countries that have large pools of
capital would specialize in capital-intensive industries.
5. International trade can improve economic efficiency, but that trade will also cause a redistribution of income
between different factors of production; some will gain from trade, some will lose, but the net effects are still
likely to be positive.