A country can produce more of a good with the same resources.
Comparative advantage (HL)
A country can produce a good at a lower opportunity cost.
Gains from trade (HL)
Extra consumption made possible by specialising and trading.
WTO
World Trade Organization: negotiates lower barriers and settles disputes.
Benefits: more competition, lower prices, greater choice, access to resources, foreign exchange earnings, larger markets, economies of scale, more efficient allocation and production.
The full notes, worked example, interactive diagram and check questions for this subtopic are in the app.
4.2Types of trade protection
Key terms
Tariff
A tax on imports.
Quota
A physical limit on the quantity of imports.
Production subsidy
A payment to domestic producers, lowering their costs.
Export subsidy
A payment for each unit exported.
Administrative barriers
Standards, regulations and red tape that make importing harder.
Tariff: domestic price rises to world price + tariff; domestic production rises, consumption and imports fall; government earns revenue; welfare losses from inefficient production and lost consumption.
The full notes, worked example, interactive diagram and check questions for this subtopic are in the app.
4.3Arguments for and against trade control/protection
Key terms
Infant (sunrise) industry
A new industry that may need temporary protection until it can compete.
Dumping
Selling exports below cost of production.
Retaliation
Other countries respond with their own barriers.
For: protect infant industries, national security, health and safety, environmental standards, anti-dumping, unfair competition, correct a balance of payments deficit, raise government revenue, protect jobs, help economically less developed countries diversify.
The full notes, worked example and check questions for this subtopic are in the app.
Exam tip: Balance is rewarded: infant-industry protection can work if it's temporary and paired with investment, but it often becomes permanent.
4.4Economic integration
Key terms
Preferential trade agreement
Lower barriers on some goods between certain countries; can be bilateral, regional or multilateral.
Free trade area
No barriers between members; each keeps its own barriers against others.
Customs union
Free trade area + common external tariff.
Common market
Customs union + free movement of labour and capital.
Monetary union
Common market with a single currency and one central bank, e.g. the eurozone.
Trade creation / diversion (HL)
Switching to cheaper member producers / from cheaper non-members to dearer members.
Advantages of trading blocs: market access and economies of scale, free movement of labour and more employment, more bargaining power in multilateral talks, political stability and cooperation.
The full notes, worked example and check questions for this subtopic are in the app.
4.5Exchange rates
Key terms
Exchange rate
The price of one currency in terms of another.
Floating
Set by demand and supply in the foreign exchange market.
Fixed
Set by the central bank at a target level, defended by buying or selling currency.
Managed
Floats within limits, with occasional central bank intervention.
Appreciation / depreciation
Rise / fall in value of a floating currency.
Revaluation / devaluation
Rise / fall in value of a fixed currency.
Demand for a currency: foreigners buying exports, inward FDI and portfolio investment, remittances received, speculation. Supply: residents buying imports, investing abroad, remittances sent.
The full notes, worked example, interactive diagram and check questions for this subtopic are in the app.
4.6Balance of payments
Key terms
Balance of payments
Record of all transactions between residents and the rest of the world over a period.
Credit / debit
Money flowing in (exports, income received) / out (imports, income paid).
Current account
Trade in goods, trade in services, primary income and secondary income (current transfers).
Capital account
Capital transfers and non-produced, non-financial assets (e.g. patents).
Financial account
Direct investment, portfolio investment, reserve assets and official borrowing.
J-curve (HL)
After a depreciation, the current account first worsens, then improves.
The accounts are interdependent: a current account deficit must be matched by a surplus on the capital and financial accounts.
The full notes, worked example, interactive diagram and check questions for this subtopic are in the app.
4.7Sustainable development
Key terms
Sustainable development
Development that meets present needs without compromising the ability of future generations to meet theirs.
SDGs
The UN's 17 Sustainable Development Goals, agreed in 2015 for 2030.
Money leaving a country, often due to instability.
Economic barriers: rising inequality, lack of infrastructure and appropriate technology, low human capital (poor healthcare and education), dependence on the primary sector, lack of access to international markets, the informal economy, capital flight, debt, geography (being landlocked), tropical climates and endemic diseases.
The full notes, worked example, interactive diagram and check questions for this subtopic are in the app.
4.10Economic growth and/or development strategies
Key terms
Import substitution
Replacing imports with domestic production, usually behind barriers.
Export promotion
Growth driven by producing for world markets.
FDI
Foreign direct investment: a lasting stake in a business abroad.
ODA
Official development assistance: aid from governments.
Microfinance
Small loans for people without access to normal banks.
Social enterprise
A business with social or environmental goals that reinvests its profits.
Trade strategies: import substitution, export promotion, economic integration; diversification away from a few commodities.
The full notes, worked example and check questions for this subtopic are in the app.
Exam tip: In Paper 3 style answers, recommend one specific policy for the country in the data and justify it with evidence from the text, not a generic list.