Topic 4: International Trade

 4.1 Benefits of Trade

• Countries trade to access goods/services they can’t efficiently produce themselves.
• Gains from comparative advantage: specialise in goods with lower opportunity cost.
• Trade increases variety, efficiency, and global living standards.

Memory cue: Trade = more choice + lower cost.

 

4.2 Absolute vs Comparative Advantage

• Absolute advantage: a country produces more of a good with the same resources.
• Comparative advantage: a country produces at a lower opportunity cost → basis for trade.
• Even if one country is better at everything, both benefit by specialising.

 

4.3 Balance of Payments

• Records all transactions between residents and the rest of the world.
• Current account: exports/imports of goods/services, income, transfers.
• Capital account: investment flows, loans, reserves.
• Surplus = exports > imports; Deficit = imports > exports.

 

4.4 Exchange Rates

• Value of one currency in terms of another.
• Floating exchange rate: determined by demand/supply of currency.
• Fixed exchange rate: pegged by the government/central bank.
• Depreciation → exports cheaper, imports costlier.
• Appreciation → exports costlier, imports cheaper.

 

4.5 Protectionism

• Governments may restrict trade to protect domestic industries.
• Methods: tariffs, quotas, subsidies, regulations.
• Pros: saves jobs, protects infant industries.
• Cons: inefficiency, higher prices, retaliation.

 

4.6 Free Trade & Trade Blocs

• Free trade: no barriers, promotes efficiency + growth.
• Trade blocs: groups of countries with agreements (EU, ASEAN).
• Can be free trade areas, customs unions, or common markets.