International Economics Exam Revision

40 cards

A concise overview of key concepts for International Economics, covering comparative advantage, factor‑proportion models, increasing returns, tariffs, non‑tariff barriers, protection arguments, WTO trade liberalisation, balance of payments, foreign exchange markets, open‑economy macroeconomics, exchange‑rate policies, and advanced practice problems.

20 cards

Review

Question

What is **comparative advantage**?

Answer

A country has a comparative advantage in a good if its **opportunity cost** of producing that good is lower than in other countries.

Question

Define **autarky**.

Answer

A situation of **no trade** where the economy is self-sufficient; price is set by domestic supply and demand alone.

Question

What is the key assumption of the **Ricardian model** regarding factors of production?

Answer

**Labour** is the only factor of production. Productivity differences (technology) across countries drive trade.

Question

Explain the concept of **opportunity cost** in the Ricardian model.

Answer

To produce one more unit of a good, how many units of another good must be sacrificed. It is constant (linear **PPF**), given by the slope of the production possibility frontier.

Question

What does the **Heckscher-Ohlin Theorem** state about a country's exports?

Answer

A country exports the good whose production uses its **abundant factor intensively** (e.g., a capital‑abundant country exports capital‑intensive goods).

Question

How does **trade** affect domestic prices and quantities for an **exporting country**?

Answer

Domestic price rises to the world price (

P_w > P_{autarky}

). Domestic **production rises** and **consumption falls**, generating exports. Producers gain more than consumers lose, yielding a net welfare gain.

Question

What does a **current account deficit** imply about a country's borrowing from abroad?

Answer

A current‑account deficit means the country’s domestic spending (

C+I+G

) exceeds its output (

Y

), so it borrows from abroad, running a **surplus in the financial account** to finance the gap. The deficit represents net foreign borrowing.

Question

What does the **Stolper-Samuelson Theorem** predict about factor returns due to trade?

Answer

Trade that raises the relative price of a good **increases the real return** to the factor used intensively in that good and **reduces the real return** to the other factor.

Question

Why do **standard trade models** (Ricardian, H-O) fail to explain **intra-industry trade**?

Answer

Standard models assume **constant returns** and **homogeneous goods**, so they cannot explain two‑way trade in **similar or differentiated products** within the same industry.

Question

What are **internal economies of scale**?

Answer

**Average cost falls** as a single firm increases its output, creating **imperfect competition** (e.g., monopolistic competition or oligopoly).

Question

Define an **ad valorem tariff**.

Answer

A **percentage** of the import's value, e.g., 10%.

Question

What is the **net welfare effect** of a tariff for a **small country**?

Answer

A **net welfare loss** equal to the deadweight loss (production distortion + consumption distortion). The tariff is always welfare-reducing for a small country.

Question

What is the purpose of the **Effective Rate of Protection (ERP)**?

Answer

To measure the protection on **value added**, not the nominal tariff. It reveals how tariffs on inputs affect the true protection of a domestic industry.

Question

What is an **import quota**?

Answer

A **quantitative limit** on the volume of a good that can be imported, typically enforced through licenses.

Question

Explain **dumping**.

Answer

Selling exports **below the home price** or below the cost of production. It can be predatory, persistent (price discrimination), or sporadic.

Question

What is the primary argument for **free trade** regarding global output?

Answer

Free trade maximises global efficiency and **total world output** by allowing each country to specialise according to its comparative advantage and then trade, so that resources are allocated to their most productive uses worldwide.

Question

How does **trade** affect product variety and prices under **monopolistic competition**?

Answer

Trade **expands the market**, leading to **lower prices** (via greater competition and scale economies) and **greater product variety** (more imported varieties available to consumers).

Question

What is the **infant industry argument** for protection?

Answer

New, high‑cost domestic industries may need **temporary protection** from import competition to develop **economies of scale and learning‑by‑doing**, after which the protection is removed. The argument is valid only if capital‑market failures prevent private investment and the protection is truly temporary.

Question

What does the **Most-Favoured-Nation (MFN)** principle of the WTO entail?

Answer

The MFN principle requires that any trade concession (e.g. a tariff cut) granted to one WTO member must be extended **immediately and unconditionally** to all other WTO members. It is a rule of **non‑discrimination** among trading partners.

Question

Distinguish between **trade creation** and **trade diversion** in regional trade agreements.

Answer

**Trade creation** replaces high‑cost domestic production with lower‑cost imports from an RTA partner, yielding a welfare gain. **Trade diversion** shifts imports from a low‑cost non‑member to a higher‑cost RTA partner due to preferential tariffs, causing a welfare loss.

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