Economics International Economics Syllabus

International Economics syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for International Economics in Economics, not a summary of it.

1. 1

   International Trade

   4 topics

   • Theory of Comparative Advantage
   • Gains from Trade
   • Terms of Trade
   • Patterns of Global Trade
2. 2

   Trade Policy

   3 topics

   • Protectionism
   • Free Trade and Trading Blocs
   • The World Trade Organization
3. 3

   Balance of Payments

   3 topics

   • Current Account
   • Capital and Financial Accounts
   • Current Account Deficits and Surpluses
4. 4

   Exchange Rates

   4 topics

   • Determination of Exchange Rates
   • Floating vs Fixed Systems
   • Appreciation and Depreciation
   • Currency Unions
5. 5

   Globalisation

   4 topics

   • Causes and Characteristics
   • Multinational Corporations
   • Impact on Developed and Developing Economies
   • Foreign Direct Investment

International Economics flashcards for Economics

22 of 51 cards from the International Economics deck — real questions with worked answers.

1. State the Theory of Comparative Advantage (Ricardo).

   A country should specialize in and export the goods it can produce at the lowest opportunity cost, even if it holds no absolute advantage in any good. Mutual gains from trade arise from differences in relative (opportunity) costs, not absolute productivity.

2. Distinguish absolute advantage from comparative advantage.

   Absolute advantage: producing a good using fewer resources (higher productivity) than another country. Comparative advantage: producing a good at a lower opportunity cost than another country. Trade patterns are governed by comparative, not absolute, advantage.

3. How is opportunity cost calculated to identify comparative advantage between two goods?

   For a country producing goods X and Y, the opportunity cost of one unit of X is $\frac{\text{units of } Y \text{ forgone}}{\text{units of } X \text{ gained}}$. The country has comparative advantage in the good with the lower opportunity cost.

4. List the key assumptions of the classical comparative advantage model.

   Two countries and two goods; labour as the only factor; constant opportunity costs (no diminishing returns); perfect factor mobility within but not between countries; no transport costs; free trade; full employment; and identical technology-free competition.

5. What are the main sources of comparative advantage?

   Differences in factor endowments (Heckscher-Ohlin: capital- vs labour-abundant countries), climate and natural resources, levels of technology and capital, labour productivity and skills, and economies of scale.

6. How does trade generate 'gains from trade'?

   Specialization according to comparative advantage raises total world output; trade then lets each country consume beyond its own production possibility frontier (PPF). Gains include lower prices, greater variety, higher consumer/producer surplus, and access to larger markets.

7. Define the terms of trade and give its formula.

   The terms of trade measure the ratio of export prices to import prices: $$\text{ToT} = \frac{\text{Index of export prices}}{\text{Index of import prices}} \times 100$$ A rise (improvement) means each unit of exports buys more imports.

8. What does an improvement versus a deterioration in the terms of trade mean?

   Improvement: export prices rise relative to import prices (ToT index increases), so fewer exports are needed per unit of imports. Deterioration: import prices rise relative to export prices (index falls), requiring more exports to buy the same imports.

9. How do terms of trade affect a primary-commodity-exporting developing country?

   Because primary commodities tend to have low and volatile prices with low income elasticity of demand (Prebisch-Singer hypothesis), such countries often face long-run deteriorating terms of trade, reducing real income and worsening trade balances.

10. What is the range within which the terms of trade must lie for both countries to gain from trade?

    The exchange ratio must fall strictly between the two countries' domestic opportunity-cost ratios. Only within that range does each country get imports more cheaply than producing them at home, so both benefit.

11. Describe the main patterns of global trade.

    Growing share of manufactured goods and services; rise of intra-industry and intra-firm trade; increasing importance of emerging economies (especially China and Asia); regional trade blocs; and global supply chains fragmenting production across countries.

12. Distinguish inter-industry from intra-industry trade.

    Inter-industry trade: exchanging goods of different industries (e.g., wheat for cars), driven by comparative advantage. Intra-industry trade: two-way trade in similar goods within the same industry (e.g., cars for cars), driven by product differentiation and economies of scale.

13. Define protectionism and state its main aim.

    Protectionism is the use of government policies (tariffs, quotas, subsidies, regulations) to restrict imports and shield domestic industries from foreign competition, aiming to protect jobs, infant industries, and strategic sectors, and to correct trade imbalances.

14. Define a tariff and explain its effects on the domestic market.

    A tariff is a tax on imports. It raises the price of imports, reduces the quantity imported, increases domestic production and price, lowers consumer surplus, raises producer surplus and government revenue, and creates deadweight welfare loss.

15. Define an import quota and how it differs from a tariff.

    A quota is a physical limit on the quantity of a good that may be imported. Like a tariff it raises domestic price and cuts imports, but the extra revenue accrues to importers/licence holders (quota rents) rather than the government.

16. List the main arguments in favour of protectionism.

    Protecting infant industries; safeguarding domestic employment; preventing dumping; correcting a persistent current-account deficit; protecting strategic/national-security industries; raising government revenue; and improving the terms of trade for a large country (optimal tariff).

17. List the main arguments against protectionism.

    Higher prices and less choice for consumers; misallocation of resources and loss of efficiency; risk of retaliation and trade wars; protection of inefficient firms; reduced competition and innovation; and net welfare (deadweight) loss.

18. What is 'dumping' and why is it considered unfair trade?

    Dumping is selling exports below cost or below the domestic price, often to gain market share or dispose of surplus. It is deemed unfair because it can drive out efficient domestic producers, potentially creating a foreign monopoly once competitors exit.

19. Define free trade and state its principal benefits.

    Free trade is international exchange without tariffs, quotas, or other barriers. Benefits: lower prices, greater variety, efficient global resource allocation, exploitation of comparative advantage and economies of scale, more competition, and faster growth and innovation.

20. Define a trading bloc and name the four main types in order of integration.

    A trading bloc is a group of countries granting each other preferential trade terms. In increasing integration: (1) Free Trade Area, (2) Customs Union, (3) Common Market, (4) Economic (and Monetary) Union.

21. Differentiate a free trade area from a customs union.

    Free Trade Area: members remove internal tariffs but each keeps its own external tariffs (e.g., NAFTA/USMCA). Customs Union: members remove internal tariffs and adopt a common external tariff against non-members (e.g., the EU customs union).

22. What additional freedoms define a common market and an economic union?

    Common market: a customs union plus free movement of factors of production (labour and capital) across members. Economic union: a common market plus harmonized economic policies and often a single currency (monetary union).

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