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International Economics Unit Overview (IB Unit 4)
Reasons for Trade and The Terms of Trade
- Differences in factor endowments. Variety and quality of goods. Gains from specialization. Political reasons.
- Absolute and comparative advantage. Opportunity cost. The limitations of the theory.
- Definition of the Terms of Trade. Consequences of a change in the terms of trade – especially deterioration for developing countries.
- Measurement of the Terms of Trade. Short and long run causes of changes in a country’s Terms of Trade. Elasticity of demand for exports and imports.
Free Trade and Protectionism
- Definition of free trade. Arguments for protectionism. Arguments against protectionism.
- Types of protectionism.
Economic integration and the World Trade Organization
- Globalization. Trading blocs – free trade areas; customs unions; common markets.
- Trade creation and trade diversion. Obstacles to achieving integration.
Balance of Payments and Balance of Payment Problems
- Measurement of the Balance of Payments.
- Consequences of a deficit or surplus in current or capital accounts. Methods of correction.
- The Marshall-Lerner condition and the J-curve.
Exchange Rates
- Fixed, floating and managed exchange rates. Depreciation v devaluation and appreciation v revaluation. Factors affecting exchange rates.
- Advantages and disadvantages of different exchange rate systems. Advantages and disadvantages of single currencies/monetary integration. Purchasing Power Parity (PPP).
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