6. International Economic Issues

explain why countries engage in international trade

countries engage in international trade to specialise according to comparative advantage, increase consumer choice, access resources unavailable domestically, achieve economies of scale and promote economic growth

explain the principle of absolute advantage

absolute advantage occurs when a country can produce a good or service using fewer resources or at a lower cost than another country

explain the principle of comparative advantage

comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country, allowing both countries to gain from specialisation and trade

explain the limitations of the theory of comparative advantage

comparative advantage assumes no transport costs, perfect mobility of resources within countries, constant costs of production and free trade, making it less applicable in the real world

explain the meaning of protectionism

protectionism is the use of government policies to restrict imports and protect domestic industries from foreign competition

explain the methods of protectionism

methods of protectionism include tariffs, quotas, subsidies to domestic producers, import licensing, embargoes and administrative regulations that restrict imports

explain the arguments for protectionism

protectionism can protect infant industries, safeguard employment, prevent dumping, improve the current account balance, protect strategic industries and raise government revenue through tariffs

explain the arguments against protectionism

protectionism reduces competition and consumer choice, raises prices, encourages inefficiency, may provoke retaliation from trading partners and reduces the gains from international trade

explain the structure of the current account of the balance of payments

the current account consists of trade in goods, trade in services, primary income and secondary income, recording the flow of income and current transactions between a country and the rest of the world

distinguish between a current account deficit and a current account surplus

a current account deficit occurs when payments to the rest of the world exceed receipts, while a current account surplus occurs when receipts from the rest of the world exceed payments

explain the causes of a current account deficit

a current account deficit may result from strong domestic demand for imports, low international competitiveness, an overvalued exchange rate, higher domestic inflation or low productivity

explain the causes of a current account surplus

a current account surplus may result from strong export demand, high international competitiveness, a competitive exchange rate, high productivity or weak domestic demand for imports

explain the consequences of a current account deficit

a current account deficit may reduce foreign exchange reserves, increase foreign debt, weaken the exchange rate, lower confidence in the economy and slow long-term economic growth if it persists

explain the consequences of a current account surplus

a current account surplus may increase foreign exchange reserves, strengthen the exchange rate, improve national wealth and provide funds for overseas investment, but may reduce domestic consumption and increase international trade tensions

explain the meaning of an exchange rate

an exchange rate is the price of one currency expressed in terms of another currency

distinguish between fixed and floating exchange rate systems

a fixed exchange rate is maintained by government or central bank intervention, while a floating exchange rate is determined by the forces of demand and supply in the foreign exchange market

explain the factors affecting exchange rates in a floating exchange rate system

exchange rates are affected by changes in demand and supply for a currency, influenced by international trade, interest rates, inflation, investment flows, speculation and government policies

explain the effects of an appreciation of a currency

an appreciation makes exports more expensive and imports cheaper, reducing export demand, increasing import demand and potentially worsening the current account balance

explain the effects of a depreciation of a currency

a depreciation makes exports cheaper and imports more expensive, increasing export demand, reducing import demand and potentially improving the current account balance

explain how expenditure-reducing policies correct a current account deficit

expenditure-reducing policies lower aggregate demand and household spending, reducing demand for imports and improving the current account balance

explain how expenditure-switching policies correct a current account deficit

expenditure-switching policies encourage consumers and firms to buy domestically produced goods instead of imports, increasing domestic demand and improving the current account balance

explain the expenditure-switching effect of devaluation

devaluation reduces the value of a currency under a fixed exchange rate system, making exports cheaper and imports more expensive, encouraging expenditure to switch from foreign to domestic goods

explain the expenditure-switching effect of protectionist policies

protectionist policies such as tariffs and quotas increase the cost or restrict the quantity of imports, encouraging consumers to switch their spending towards domestically produced goods

explain the advantages and disadvantages of expenditure-reducing policies

expenditure-reducing policies can improve the current account balance and reduce inflationary pressure, but they may lower economic growth, increase unemployment and reduce living standards

explain the advantages and disadvantages of expenditure-switching policies

expenditure-switching policies can improve the current account balance and support domestic industries, but they may increase prices, reduce consumer choice, encourage inefficiency and provoke retaliation from trading partners