International trade flashcards

International trade occurs when countries exchange goods and services across borders. Students must understand the principle of comparative advantage, which explains why trade is mutually beneficial even when one country can produce everything more efficiently than another. Key concepts include absolute advantage, the terms of trade, and the distinction between free trade and protectionism. Students should be able to evaluate the arguments for and against protectionist measures such as tariffs, quotas, and subsidies, and understand their effects on consumers, producers, and government revenue. The balance of payments, particularly the current account, links closely to trade. Students should also appreciate the role of trading blocs, the World Trade Organisation, and exchange rates in shaping patterns of international trade, and be able to assess the costs and benefits of globalisation for developed and developing economies.

1. Card 1

   What is comparative advantage?

   Comparative advantage exists when a country can produce a good at a lower opportunity cost than another, making specialisation and trade mutually beneficial.

2. Card 2

   How does comparative advantage differ from absolute advantage?

   Absolute advantage means producing more output with the same resources. Comparative advantage is about lower opportunity cost, which is the actual basis for beneficial trade.

3. Card 3

   What are the terms of trade and how are they calculated?

   The terms of trade measure the ratio of export prices to import prices: (index of export prices / index of import prices) x 100. A rise means exports buy more imports.

4. Card 4

   What is a tariff and what are its effects?

   A tariff is a tax on imports. It raises the domestic price, reducing consumer surplus, protecting domestic producers, and generating government revenue, but causes allocative inefficiency.

5. Card 5

   What is an import quota?

   An import quota is a physical limit on the quantity of a good that can be imported, raising domestic prices and protecting home producers but reducing consumer choice and welfare.

6. Card 6

   What is a subsidy in the context of trade protection?

   A subsidy is a government payment to domestic producers, lowering their costs so they can compete with cheaper foreign goods without directly restricting imports.

7. Card 7

   What is a trading bloc and give an example?

   A trading bloc is a group of countries with preferential trade arrangements between members. The European Union is an example of a customs union with a common external tariff.

8. Card 8

   What is the difference between trade creation and trade diversion?

   Trade creation occurs when joining a bloc shifts purchases to a lower-cost member. Trade diversion occurs when trade shifts from a more efficient non-member to a less efficient member.

9. Card 9

   What is the role of the World Trade Organisation (WTO)?

   The WTO oversees international trade rules, provides a forum for negotiating trade liberalisation, and resolves disputes between member countries to promote free and fair trade.

10. Card 10

    What is the current account of the balance of payments?

    The current account records trade in goods and services, primary income (investment flows), and secondary income (transfers). A deficit means imports of these exceed exports.

11. Card 11

    State two arguments in favour of protectionism.

    The infant industry argument protects new industries until competitive. The strategic industry argument protects sectors vital to national security or long-run economic development.

12. Card 12

    How does a depreciation of the exchange rate affect trade, according to the Marshall-Lerner condition?

    Under the Marshall-Lerner condition, a depreciation improves the current account only if the combined price elasticities of demand for exports and imports sum to more than one.

• Students often confuse comparative advantage with absolute advantage, incorrectly arguing that a country with no absolute advantage in any good has no reason to trade.
• A common error is assuming that a depreciation always immediately improves the current account balance, ignoring the J-curve effect and the conditions set out by the Marshall-Lerner condition.
• Many students incorrectly treat all protectionist measures as equivalent, failing to distinguish between the different welfare effects of tariffs, quotas, and subsidies on consumers, producers, and government revenue.

Planning your revision? Read how to revise A-Level Economics, or make cards from your own notes with the notes to flashcards tool.