International economics flashcards

International economics examines how countries trade goods and services, manage their currencies, and interact financially across borders. Students must understand the theory of comparative advantage and why free trade is generally considered beneficial, while also recognising why governments impose protectionist measures such as tariffs, quotas, and subsidies. The balance of payments records all financial transactions between a country and the rest of the world, split into the current account and the capital and financial account. Exchange rates determine the relative value of currencies and can be fixed, floating, or managed. Students must analyse how exchange rate changes affect trade balances, inflation, and economic growth. The topic also covers economic integration, from free trade areas to monetary unions, and examines the arguments for and against globalisation, including its effects on development and income distribution.

1. Card 1

   What is comparative advantage and why does it justify trade?

   Comparative advantage means producing a good at a lower opportunity cost than another country. Trade allows both nations to specialise and consume beyond their own production possibilities.

2. Card 2

   How does a tariff affect domestic consumers and producers?

   A tariff raises the import price, reducing consumer surplus and increasing producer surplus. It creates deadweight welfare loss and generates government revenue.

3. Card 3

   What is the difference between a quota and a voluntary export restraint?

   A quota is a government-imposed limit on import quantity. A voluntary export restraint is an agreement where the exporting country limits its own exports, often under political pressure.

4. Card 4

   What does the current account of the balance of payments record?

   The current account records trade in goods and services, primary income (investment income and wages), and secondary income (transfers such as foreign aid and remittances).

5. Card 5

   What is a current account deficit and what can cause it?

   A current account deficit occurs when a country imports more than it exports in goods, services, and income. Causes include low competitiveness, strong consumer demand, and an overvalued currency.

6. Card 6

   How does a depreciation of the exchange rate affect exports and imports?

   Depreciation makes exports cheaper for foreign buyers and imports more expensive domestically, potentially improving the trade balance if the Marshall-Lerner condition is satisfied.

7. Card 7

   What is the Marshall-Lerner condition?

   The Marshall-Lerner condition states that a currency depreciation will improve the current account only if the sum of the price elasticities of demand for exports and imports exceeds one.

8. Card 8

   What is the J-curve effect?

   The J-curve effect describes how a depreciation initially worsens the current account before improving it, because trade contracts are fixed in the short run and quantities adjust slowly.

9. Card 9

   What distinguishes a free trade area from a customs union?

   A free trade area removes tariffs between members but each keeps its own external tariffs. A customs union also adopts a common external tariff against non-members.

10. Card 10

    What are trade creation and trade diversion in economic integration?

    Trade creation occurs when joining a bloc shifts purchases from costly domestic production to cheaper imports. Trade diversion occurs when lower-cost global suppliers are replaced by less efficient bloc members.

11. Card 11

    What is a fixed exchange rate system and how is it maintained?

    In a fixed exchange rate system, the government or central bank pegs the currency to another currency or gold, using foreign reserves and interest rate adjustments to defend the peg.

12. Card 12

    What are the main arguments for protectionism?

    Arguments include protecting infant industries, safeguarding national security, preventing dumping, correcting balance of payments deficits, and protecting employment in strategic sectors.

• Students often confuse absolute advantage with comparative advantage, arguing that a country with no absolute advantage cannot benefit from trade, when in fact comparative advantage always allows gains from specialisation.
• A common error is treating a current account deficit as automatically harmful, ignoring that it can reflect strong investment inflows or high consumer confidence rather than economic weakness.
• Many students incorrectly assume that a currency depreciation will always improve the current account immediately, forgetting that the Marshall-Lerner condition must hold and that the J-curve effect causes a short-run deterioration first.

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