Gravity Models of Trade

IV. THEORITICAL FRAMEWORK

3.1 Theory of International Trade on Indonesian Cocoa.

No country in the world that can live without interaction with other countries. As rich as any natural resources, a country would require other states in ensuring the survival of its people. International trade is a form of interaction between countries is one important issue in world economic activity. It is then not only related to economic issues, but then also extends to political and social issues. International trade in principle arises as a result of the interaction between demand and supply is competitive. This is not apart from the concept of absolute advantage and comparative advantage. Adam Smith stated that the concept of inter-state trade is affected by absolute advantage. If a country produces a commodity with a more cost efficient than other commodities and also compared with other countries so the concept of specialization of production would be more beneficial for the country. This means that a country does not need to produce all the required items. Tabel 3. Absolute Advantages Commodity Indonesia Malaysia Rubber 1 unit 2 4 Tobacco 1 unit 4 2 Total 6 6 With the advantage absolute different in each country, each country does not need to produce all the goods. Malaysia and Indonesia can share the role. For one unit of rubber Indonesia requires less labor than Malaysia. Meanwhile, for a unit of Malaysian tobacco requires less labor than Indonesia. Therefore, Indonesia and Malaysia can share the role. To focus on Indonesian rubber production activities while Malaysia produces tobacco. In contrast to absolute advantage, comparative advantage put forward by David Ricardo explained that there is a condition in which a country has a better production efficiency compared with other countries. This can be exemplified as follows: Table 4. Comparative Advantages Commodity Indonesia Malaysia Rubber 1 unit 2 4 Tobacco 1 unit 4 6 Total 6 10 Table 4 shows that Indonesia has an absolute advantage for the two commodities are rubber and tobacco. This does not mean that Indonesia should produce both commodity and export it to Malaysia. Trade will not happen if Malaysia does not produce anything and sell anything to Indonesia. Indeed international trade has the principle of mutual benefit between the countries involved. However, it is not always possible. Often there is a case in which one party better off than others. This can be caused by the unfair agreement on when starting an agreement or violation of agreements that have been made. Trade relations between countries occurs because of differences in the potential and resources, production costs, tastes, differences in demand and supply, as well as the desire to expand the market to raise foreign exchange. In international trade are many factors that affect the exports that could be analyzed from the demand and supply that occurred in those commodities both domestically and internationally. 21 Theoretically, the volume of exports of a particular commodity from one country to another is the difference between domestic supply is referred to as excess supply. At the time of the excess supply of domestic used by other countries that are experiencing excess demand. In addition, exports are also affected by commodity price and other factors that may also affect either directly or indirectly Salvatore, 1997. Offering country exports of cocoa beans is the difference between productions or consumptions is reduced by domestic demand coupled with the stock of the previous year. According to research Nurasa and Muslim 2008 Indonesian cocoa exports have a tendency to increase from year to year. But still be exported cocoa beans that have not undergone processing. Although exports have increased from year to year, Indonesia experienced obstacles in marketing their cocoa to the EU. Indonesia must compete with the cocoa from Africa who enters the EU without tariffs. This rate gives a negative effect for cocoa exports. Burger 2007 conducted research on cocoa export tax by a case study on Cocoa commodity contained in the Ivory Coast. His research concluded that the Ivory Coast who has contributed 40 of world cocoa demand almost did not get the benefit of the export tax changes. In the long run this will have negative consequences for farmers. Welfare of farmers will be affected by high taxes. Research on cocoa has also been performed by Armanda 2009 and Lolowang 1999. The results Armanda 2009 showed that the response of cocoa area significantly affected by the variable price of coffee a year earlier, the price of CPO a year earlier, the area under the previous cocoa, cocoa prices the previous year and the rainfall the previous year. Generally, the analysis of international trade is done by using simultaneous equations model. According to Nachrowi 2006, simultaneous equations consist of endogenous and exogenous variables. Endogenous variables are variables whose values are determined in the model. Although not identical, the endogenous variables is similar to the dependent variable in the regression equation, where its value can be determined if the value of independent variables has been determined in advance. While the exogenous variables are variables which are determined from outside of the model. Endogenous variables in an equation affect the endogenous variables in other equations. In a simultaneous equations model there are two types of structural models and model reduction. Structural model is also called behavioral models, has a form based on the underlying theory to fit the behavior or structure of existing markets. While model reduction is a simple structural model. Studies using simultaneous equation analysis have been done by Lolowang 1999 Sanjaya 2009, Setiawan 2005 and Sihotang 1996. In his research, Lolowang 1999 and Sihotang 1996 using the estimation methods Three Stage Least Squares 3SLS while Sanjaya 2009 analyzed the response deals with the estimation method of Ordinary Least Square OLS. Cocoa bean is one of the export commodities that are able to contribute in the efforts to increase foreign exchange Indonesia. As specified in the objectives of this study emphasize the study of the factors that influence development of Indonesian cocoa beans with the response approaches the area and productivity of 23 cocoa, domestic consumption of cocoa beans, cocoa beans Indonesia export supply to the EU and the impact of economic policies and external to the grain market balance Indonesian cocoa. As a commodity traded on world markets, cocoa Indonesia is more oriented to export. With these considerations the model formulated must be related to the order of the market in cocoa beans producer and consumer countries. Indonesia exports of cocoa beans were analyzed based on the countrys main export destination of Indonesia to find out whether there are differences in the behavior of Indonesian cocoa exports offerings based on the segmentation or differentiation of export destinations. Analysis of the domestic price of cocoa beans is expected to inform the extent to which the prospect of the domestic price of cocoa beans is affected by the change from the side of consumers and producers, as well as domestic policy.

3.2 International Demand and Supply of Cocoa

Trade relations among countries occur because of differences in potential resources, cost of production and tastes, differences in demand and supply, as well as desire to expand market and to raise foreign exchange. In international trade there are many factors that affect exports that can be analyzed from demand and supply that occurred in those commodities both domestically and internationally. Cocoa export is difference between production and consumption which is reduced by domestic demand and coupled with stock of the previous year. Therefore cocoa exports are as follows: QX t = QP t – QC t + S t-1