Unit 4 International Economics
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.

Texts: McConnell/Brue chapters 37, 38 and Sloman chapters 23 – 25

4.1 and 4.8 Reasons for Trade and The Terms of Trade

• Differences in factor endowments
• Variety and quality of goods
• Gains from specialization

Higher level only:

• Absolute and comparative advantage.
• Opportunity cost.
• The limitations of the theory.

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
• customs unions
• common markets.

Higher level only

• Trade creation and trade diversion
• Obstacles to achieving integration
• reluctance to surrender political sovereignty
• reluctance to surrender economic sovereignty
  

4.4 the World Trade Organization

• Aims
• Success and failure viewed from different perspectives

4.5 Balance of Payment

• 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

Higher level only

• Relative advantages and disadvantages of 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

Higher level only

• 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

Higher level only

• Measurement of terms of trade
• Causes of changes in a country's terms of trade in the short-run and long-run
• Elasticity of demand for imports and exports

Unit 4.1 Reasons for trade: Performance Objectives

1. State two economic points that explain why nations trade.
2. Compute, when given appropriate data, the relative costs of producing two commodities in two countries and determine which nation has the comparative advantage in each good.
3. Compute, when given appropriate data, the range for the terms of trade.
4. Calculate the potential gains from trade and specialization for each nation and the world when given appropriate data.
5. State the economist’s case for free trade.

Unit 4.2 Free trade and protectionism: Performance Objectives

1. Identify four types of trade barriers.
2. Describe the economic impact of tariffs, including both direct and indirect effects.
3. Contrast the economic impact of a quota with that of a tariff.
4. List seven arguments in favor of protectionist barriers, and critically evaluate each.
5. Identify the costs of protectionist policies and their effects on income distribution.
6. Describe the major provisions of the WTO.

Unit 4.5 and 4.6 Balance of payments and Exchange rates: Performance Objectives

1. Explain how imports and exports create a demand for and a supply of foreign exchange; and how a country's imports create a demand for foreign exchange and a supply of domestic currency.
2. Explain and identify the various components of the balance of payments.
3. Identify trade and balance of payments deficits or surpluses when given appropriate data.
4. Explain how a nation finances a “deficit” and what it does with a “surplus.”
5. Explain how exchange rates are determined in a flexible system.
6. Explain how flexible exchange rates eliminate balance of payments disequilibria.
7. List five determinants of exchange rates.
8. List three disadvantages of flexible exchange rates.
9. List three ways a nation could control exchange rates under a fixed‑rate system.
10. Describe a system based on the gold standard, the Bretton Woods system, and a managed float exchange rate system.
11. Describe two effects of a trade deficit.