The purpose of this section is to encourage candidates to understand why countries trade, the problems involved and how these problems are addressed. Students need to understand how exchange rates affect international trade. The international trade theory introduced in this section should be related to real-world examples.
4.1 Reasons for trade
- Differences in factor endowments
- Variety and quality of goods
- Gains from specialization
- Political
- Absolute and comparative advantage (numerical and diagrammatic representations)
- opportunity cost
- limitations of the theory of comparative advantage
4.2 Free trade and protectionism
- Definition of free trade
- Types of protectionism
- Tariffs
- Quotas
- Subsidies
- Voluntary Export Restraints (VERs)
- Administrative obstacles
- Health and safety standards
- Environmental standards
Arguments for protectionism
- Infant industry argument
- Efforts of a developing country to diversify
- Protection of employment
- Source of government revenue
- Strategic arguments
- Means to overcome a balance of payments disequilibrium
- Anti-dumping
Arguments against protectionism
- Inefficiency of resource allocation
- Costs of long-run reliance on protectionist methods
- Increased prices of goods and services to consumers
- The cost effect of protected imports on export competitiveness
4.3 Economic integration
Globalization
Trading Blocs
- Free trade areas (FTAs)
- Custom unions
- Common markets
- Trade creation and trade diversion
- Obstacles to achieving integration
- reluctance to surrender political sovereignty
- reluctance to surrender economic sovereignty
4.4 World Trade Organization (WTO)
- Aims
- Success and failure viewed from different perspectives
4.5 Balance of payments
- Current account
- balance of trade
- invisible balance
- Capital account
4.6 Exchange rates
- Fixed exchange rates
- Floating exchange rates
- Managed exchange rates
- Distinction between
- depreciation and devaluation
- appreciation and revaluation
- Effects on exchange rates of
- trade flow
- capital flows/interest rate changes
- inflation
- speculation
- use of foreign currency reserves
- Relative advantages and disadvantages of using fixed and floating rates
- Advantages and disadvantages of single currencies/monetary integration
- Purchasing Power Parity Theory (PPP)
4.7 Balance of payment problems
- Consequences of a current account deficit or surplus
- Methods of correction
- managed changes in exchange rates
- reduction in aggregate demand/expenditure-reducing policies
- change in supply-side policies to increase competitiveness
- protectionism/expenditure-switching policies
- Consequences of a capital account deficit or surplus
- Marshall-Lerner condition
- J-curve
4.8 Terms of trade
- Definition of terms of trade
- Consequences of a change in the terms of trade for a country’s balance of payments and domestic economy
- The significance of deteriorating terms of trade for developing countries
- Measurement of terms of trade
- Causes of changes in a country’s terms of trade in the short run and the long run
- Elasticity of demand for imports and exports