Unit 4: The Global Economy............................................................................................................... 2
Chapter 14: International trade: Part 1 ........................................................................................................ 2
14.1 benefits of international trade ......................................................................................................... 2
14.2 Free trade: absolute and comparative advantage ........................................................................... 3
14.3 Types of trade protection ................................................................................................................. 4
Chapter 15: International trade: Part 2 ........................................................................................................ 8
15.1 Argument for and against trade protection ..................................................................................... 8
15.2 Economic integration: trading blocs................................................................................................. 9
15.3 Economic integration: monetary union ......................................................................................... 10
15.4 World trade Organization ............................................................................................................... 10
Chapter 16: Exchange rates and the balance of payments ........................................................................ 11
16.1 Floating exchange rates .................................................................................................................. 11
16.2 Consequences of changes in exchange rates: an evaluation......................................................... 13
16.3 Government intervention ............................................................................................................... 14
16.4 The balance of payments................................................................................................................ 15
Chapter 17: Further topics on exchange rates and the balance of payments ........................................... 18
17.1 How the current account and the financial account are related to exchange rates .................... 18
17.2 Comparing and contrasting exchange rate systems ...................................................................... 18
17.3 Evaluating monetary union ............................................................................................................ 19
17.4 Understanding current account deficits and surpluses ................................................................. 19
Chapter 18: understanding economic development.................................................................................. 21
18.1 Sustainable development ............................................................................................................... 21
18.2 Measuring development ................................................................................................................ 22
Chapter 19: Barriers to economic growth and economic development ................................................... 24
19.1 Poverty cycles (or traps) ................................................................................................................. 24
19.2 Economic barriers ........................................................................................................................... 25
19.3 Political and social barriers ............................................................................................................. 28
Chapter 20: Strategies to promote economic growth and economic development ................................. 29
20.1 Internation trade strategies ........................................................................................................... 29
20.2 Diversification and social enterprise .............................................................................................. 30
20.3 Market-based policies .................................................................................................................... 31
20.4 Interventionist policies: redistribution and provision of merit goods .......................................... 31
20.5 Foreign direct investment and multinational corporations (MNCs) ............................................. 32
20.6 Foreign aid....................................................................................................................................... 33
20.7 Multilateral development assistance ............................................................................................. 34
20.8 Institutional change ........................................................................................................................ 35
20.9 Strengths and weaknesses of market-orientated policies ............................................................ 36
20.10 Progress toward meeting selected sustainable development goals ........................................... 36
,Unit 4: The Global Economy
Chapter 14: International trade: Part 1
14.1 benefits of international trade
Why do countries benefit from international trade?
o Key terms:
Gain from trade
Free trade – the absence of government intervention of any kind in
international trade, so that trade takes place without any restrictions
o Increased competition
o Greater efficiency in production
o Lower prices for consumers
o Greater choice for consumers
o Access larger markets
o Economies of scale in production
o Increase in domestic production and consumption as a result of specialisation
Specialisation occurs when a firm or country concentrates on one of a few
goods of services
Allows to produce a larger quanitity of output more efficiently
o Trade as an ‘engine for growth’
Increased copmetition, efficiency in production, expanding markets,
acquisition of resources and improved resource allocation all is an ‘engine
for growth’
Using diagrams to illustrate free trade
o Under free trade the prices of goods that are traded internationally are determined
entirely by the forces of demand and supply
Should a country export or import a good?
o If the price of producing and selling the domestic good is cheaper than the price of
the good in the world market it should export
o Under free trade, when the world price is higher than the domestic price, the good
in question is exports
o Under free trade, when the world price is lower than the domestic price in question
is imported
o Once a good enters the world market, it will accept the world price of the good so
that its previous domestic price no longer exists
o The perfectly elastic supply means that all good are bought and sold at he world
price and no other
o A country will export a good if its domestic price without trade is lower than the
world price and it will import a good if its domestic price without trade is higher than
the world price
Calculating the quantities of exports or imports
, o https://www.youtube.com/watch?time_continue=387&v=zhD--
UeRiOI&feature=emb_logo
14.2 Free trade: absolute and comparative advantage
The theory of absolute advantage
o The ability of one country to produce a good using fewer resources
than another country
o A country has an absolute advantage in a good if with the same
quantity of resources, it can produce more of the good
o It is a tool to show how specialisation in certain industries allows
countries to produce beyond the PPC curve
o If countries specialise in and export the good in which they have an
absolute advantage the result is increased production and
consumption in each country
o Diagram:
Robotia’s absolute advantage is in making robots
Coffeinia’a absolute advantage is in making coffee
If both countries agree to specialise (and produce 0 of the other good) both
countries will be producing somewhere on their PPC
The theory of comparative advantage
o Shows that countries can gain from specialisation and trade
even if one country has an absolute advantage on both goods
o For this result to hold, the countries have to have different
opportunity costs for their goods
o Refers to the situation where one country has a lower
opportunity cost in the production of a good than another
o As long as opportunity costs in two countries differ, it is possible
for all countries to gain from specialisation and trade
o The global allocation of resources improves, resulting in greater
global output and global consumption (countries consume
outside of their PPC)
o Diagram:
The country that has a flatter PPC curve has a comparative advantage in the
good measured on the horizontal axis
Cottonia has a comparative advantage in producing cotton
Micrchippia has a comparative advantage in producing microchips
The have lower opportunity costs (relative costs) for the good
What happens if the PPC curves are parallel?
o If opportunity costs are identical, there is no country which good is
relatively cheaper (no comparative advantage)
o Under this there is no possibility to gain from specialisation and trade (no
point in trading)
Revisiting should a country export or import a good
o If a country has a comparative disadvantage, it is less efficient than other
countries and should import because of lower world prices
o If a country has a comparative advantage, it can produce more efficiently and sell
them at a lower price (export)
The sources of comparative advantage
, o Depending on their factor endowments, different countries are more efficient in the
production of certain goods and services than others
Evaluating the theory of comparative advantage
o Weaknesses
It depends on many unrealistic assumptions
Technology is assumed to be fixed
Unrealistic because technologies are continuously introduced
There is full mobility of factors of a country within the country
Transportation costs are ignored
There are homogeneous products
Trade on the basis of comparative advantage might lead to excessive
specialisation
Making countries vulnerable of they become too dependent on
exports of these products
14.3 Types of trade protection
Tariffs
o Taxes on imported goods
o Serve two purposes:
Protect a domestic industry from foreign competition (protective tariff)
Raise revenue for the government (revenue tariff)
o Diagram COR:
Under free trade, the country accepts the world
price, which is lower than the domestic price
(comparative advantage)
It produces the quantity Q1 and demands Q4
(imports are Q4-Q1)
When the tariff is imposed, the price of the
imported goods rises, causing the domestic price
of the good to rise above the world price by the
ammount of the tariff
Winners of Tariffs
o Domestic producers are better off
Domestic producers receive a higher price, and they sell a larger quantity,
Q2 (rather than Q1)
o Domestic employment in the protected industry increases.
Since domestic producers sell a larger quantity, this has the effect of
increasing employment in the protected industry.
o The government gains tariff revenues.
the government's tariff revenue represents income that is transferred from
consumers to the government.
Losers of Tariffs
o Domestic consumers are worse off.
Consumers must pay a higher price and they can only buy a smaller quantity,
Q3 (rather than Q4).
o Domestic income distribution worsens.
tariff is a type of regressive tax which burdens people on lower incomes
proportionately more than people on higher incomes
o Increased inefficiency in production.
Chapter 14: International trade: Part 1 ........................................................................................................ 2
14.1 benefits of international trade ......................................................................................................... 2
14.2 Free trade: absolute and comparative advantage ........................................................................... 3
14.3 Types of trade protection ................................................................................................................. 4
Chapter 15: International trade: Part 2 ........................................................................................................ 8
15.1 Argument for and against trade protection ..................................................................................... 8
15.2 Economic integration: trading blocs................................................................................................. 9
15.3 Economic integration: monetary union ......................................................................................... 10
15.4 World trade Organization ............................................................................................................... 10
Chapter 16: Exchange rates and the balance of payments ........................................................................ 11
16.1 Floating exchange rates .................................................................................................................. 11
16.2 Consequences of changes in exchange rates: an evaluation......................................................... 13
16.3 Government intervention ............................................................................................................... 14
16.4 The balance of payments................................................................................................................ 15
Chapter 17: Further topics on exchange rates and the balance of payments ........................................... 18
17.1 How the current account and the financial account are related to exchange rates .................... 18
17.2 Comparing and contrasting exchange rate systems ...................................................................... 18
17.3 Evaluating monetary union ............................................................................................................ 19
17.4 Understanding current account deficits and surpluses ................................................................. 19
Chapter 18: understanding economic development.................................................................................. 21
18.1 Sustainable development ............................................................................................................... 21
18.2 Measuring development ................................................................................................................ 22
Chapter 19: Barriers to economic growth and economic development ................................................... 24
19.1 Poverty cycles (or traps) ................................................................................................................. 24
19.2 Economic barriers ........................................................................................................................... 25
19.3 Political and social barriers ............................................................................................................. 28
Chapter 20: Strategies to promote economic growth and economic development ................................. 29
20.1 Internation trade strategies ........................................................................................................... 29
20.2 Diversification and social enterprise .............................................................................................. 30
20.3 Market-based policies .................................................................................................................... 31
20.4 Interventionist policies: redistribution and provision of merit goods .......................................... 31
20.5 Foreign direct investment and multinational corporations (MNCs) ............................................. 32
20.6 Foreign aid....................................................................................................................................... 33
20.7 Multilateral development assistance ............................................................................................. 34
20.8 Institutional change ........................................................................................................................ 35
20.9 Strengths and weaknesses of market-orientated policies ............................................................ 36
20.10 Progress toward meeting selected sustainable development goals ........................................... 36
,Unit 4: The Global Economy
Chapter 14: International trade: Part 1
14.1 benefits of international trade
Why do countries benefit from international trade?
o Key terms:
Gain from trade
Free trade – the absence of government intervention of any kind in
international trade, so that trade takes place without any restrictions
o Increased competition
o Greater efficiency in production
o Lower prices for consumers
o Greater choice for consumers
o Access larger markets
o Economies of scale in production
o Increase in domestic production and consumption as a result of specialisation
Specialisation occurs when a firm or country concentrates on one of a few
goods of services
Allows to produce a larger quanitity of output more efficiently
o Trade as an ‘engine for growth’
Increased copmetition, efficiency in production, expanding markets,
acquisition of resources and improved resource allocation all is an ‘engine
for growth’
Using diagrams to illustrate free trade
o Under free trade the prices of goods that are traded internationally are determined
entirely by the forces of demand and supply
Should a country export or import a good?
o If the price of producing and selling the domestic good is cheaper than the price of
the good in the world market it should export
o Under free trade, when the world price is higher than the domestic price, the good
in question is exports
o Under free trade, when the world price is lower than the domestic price in question
is imported
o Once a good enters the world market, it will accept the world price of the good so
that its previous domestic price no longer exists
o The perfectly elastic supply means that all good are bought and sold at he world
price and no other
o A country will export a good if its domestic price without trade is lower than the
world price and it will import a good if its domestic price without trade is higher than
the world price
Calculating the quantities of exports or imports
, o https://www.youtube.com/watch?time_continue=387&v=zhD--
UeRiOI&feature=emb_logo
14.2 Free trade: absolute and comparative advantage
The theory of absolute advantage
o The ability of one country to produce a good using fewer resources
than another country
o A country has an absolute advantage in a good if with the same
quantity of resources, it can produce more of the good
o It is a tool to show how specialisation in certain industries allows
countries to produce beyond the PPC curve
o If countries specialise in and export the good in which they have an
absolute advantage the result is increased production and
consumption in each country
o Diagram:
Robotia’s absolute advantage is in making robots
Coffeinia’a absolute advantage is in making coffee
If both countries agree to specialise (and produce 0 of the other good) both
countries will be producing somewhere on their PPC
The theory of comparative advantage
o Shows that countries can gain from specialisation and trade
even if one country has an absolute advantage on both goods
o For this result to hold, the countries have to have different
opportunity costs for their goods
o Refers to the situation where one country has a lower
opportunity cost in the production of a good than another
o As long as opportunity costs in two countries differ, it is possible
for all countries to gain from specialisation and trade
o The global allocation of resources improves, resulting in greater
global output and global consumption (countries consume
outside of their PPC)
o Diagram:
The country that has a flatter PPC curve has a comparative advantage in the
good measured on the horizontal axis
Cottonia has a comparative advantage in producing cotton
Micrchippia has a comparative advantage in producing microchips
The have lower opportunity costs (relative costs) for the good
What happens if the PPC curves are parallel?
o If opportunity costs are identical, there is no country which good is
relatively cheaper (no comparative advantage)
o Under this there is no possibility to gain from specialisation and trade (no
point in trading)
Revisiting should a country export or import a good
o If a country has a comparative disadvantage, it is less efficient than other
countries and should import because of lower world prices
o If a country has a comparative advantage, it can produce more efficiently and sell
them at a lower price (export)
The sources of comparative advantage
, o Depending on their factor endowments, different countries are more efficient in the
production of certain goods and services than others
Evaluating the theory of comparative advantage
o Weaknesses
It depends on many unrealistic assumptions
Technology is assumed to be fixed
Unrealistic because technologies are continuously introduced
There is full mobility of factors of a country within the country
Transportation costs are ignored
There are homogeneous products
Trade on the basis of comparative advantage might lead to excessive
specialisation
Making countries vulnerable of they become too dependent on
exports of these products
14.3 Types of trade protection
Tariffs
o Taxes on imported goods
o Serve two purposes:
Protect a domestic industry from foreign competition (protective tariff)
Raise revenue for the government (revenue tariff)
o Diagram COR:
Under free trade, the country accepts the world
price, which is lower than the domestic price
(comparative advantage)
It produces the quantity Q1 and demands Q4
(imports are Q4-Q1)
When the tariff is imposed, the price of the
imported goods rises, causing the domestic price
of the good to rise above the world price by the
ammount of the tariff
Winners of Tariffs
o Domestic producers are better off
Domestic producers receive a higher price, and they sell a larger quantity,
Q2 (rather than Q1)
o Domestic employment in the protected industry increases.
Since domestic producers sell a larger quantity, this has the effect of
increasing employment in the protected industry.
o The government gains tariff revenues.
the government's tariff revenue represents income that is transferred from
consumers to the government.
Losers of Tariffs
o Domestic consumers are worse off.
Consumers must pay a higher price and they can only buy a smaller quantity,
Q3 (rather than Q4).
o Domestic income distribution worsens.
tariff is a type of regressive tax which burdens people on lower incomes
proportionately more than people on higher incomes
o Increased inefficiency in production.
