International Trade Notes
● 4.1 Benefits of free trade
● 4.2 Types of trade protectionism
● 4.3 Arguments for and against trade protectionism
● 4.4 Economic integration
● 4.5 Exchange rates
● 4.6 Balance of payments
Paper 1 and 2 (paper 2 = sl)
- Different command terms
,4.1 Benefits of International Trade:
Free Trade: Trade without barriers (doesn’t occur in reality)
World Price below domestic price:
World Price
above domestic price:
,Benefits of international Trade:
1. Increases competition
When engaging in trade and allowing import to flow freely into the domestic economy, it creates
competition. In return, drives firms to pursue the least costly method of production and become
more efficient
2. Lower prices
Allows consumers to choose goods sold at the lowest price
3. Greater choice
Consumers have access to a greater variety of goods and services - specifically access to
materials not found in their country and that are essential for production
4. Acquisition of resources
Trade allows countries to have access to resources from different countries and that are
essential for production
5. More foreign exchange earnings
Foreign exchange earning refers to the financial gain made by selling goods and services or by
exchanging currencies in global markets. Allows emerging economies the impurities to access
“hard currencies” - currency seen as economically stable
6. Access to larger markets
Opportunity to trade their goods and services with more consumers and potentially sell more
7. Economies of scale (def: A firm's ability to produce with a lower cost of production as
they grow in size)
When firms have access to large markers abroad they are able to increase output, reading to
decreasing average costs
8. More efficient resource allocation
To maximize benefits from trade, every country can specialize in the production of the good that
best suits their resources
9. More efficient production
Trade opens access to more raw materials. This allows countries to produce much more at a
lower cost (cheaper) and more efficiently
, HL: Comparative and Absolute Advantage
Absolute Advantage for a good exists where a country is able to produce more output than
other countries using the same inputs of factors of production.
· If countries specialize in and export the goods in which they have absolute
advantage, the result is increased production and consumption in each country.
· Output will be maximized, and after trading both countries will gain.
· Reciprocal Advantage Each country has an absolute advantage in the production of
one product.
Determining Absolute Advantage from a PPC Diagram:
- Country furthest along the axis of PPC has the absolute advantage of that good.
- Country A has absolute advantage in Rice, and Country B has absolute advantage in
Iron Ore.
- Incentive to specialize and trade to maximize output (efficiency), and decrease the
price of the products
● 4.1 Benefits of free trade
● 4.2 Types of trade protectionism
● 4.3 Arguments for and against trade protectionism
● 4.4 Economic integration
● 4.5 Exchange rates
● 4.6 Balance of payments
Paper 1 and 2 (paper 2 = sl)
- Different command terms
,4.1 Benefits of International Trade:
Free Trade: Trade without barriers (doesn’t occur in reality)
World Price below domestic price:
World Price
above domestic price:
,Benefits of international Trade:
1. Increases competition
When engaging in trade and allowing import to flow freely into the domestic economy, it creates
competition. In return, drives firms to pursue the least costly method of production and become
more efficient
2. Lower prices
Allows consumers to choose goods sold at the lowest price
3. Greater choice
Consumers have access to a greater variety of goods and services - specifically access to
materials not found in their country and that are essential for production
4. Acquisition of resources
Trade allows countries to have access to resources from different countries and that are
essential for production
5. More foreign exchange earnings
Foreign exchange earning refers to the financial gain made by selling goods and services or by
exchanging currencies in global markets. Allows emerging economies the impurities to access
“hard currencies” - currency seen as economically stable
6. Access to larger markets
Opportunity to trade their goods and services with more consumers and potentially sell more
7. Economies of scale (def: A firm's ability to produce with a lower cost of production as
they grow in size)
When firms have access to large markers abroad they are able to increase output, reading to
decreasing average costs
8. More efficient resource allocation
To maximize benefits from trade, every country can specialize in the production of the good that
best suits their resources
9. More efficient production
Trade opens access to more raw materials. This allows countries to produce much more at a
lower cost (cheaper) and more efficiently
, HL: Comparative and Absolute Advantage
Absolute Advantage for a good exists where a country is able to produce more output than
other countries using the same inputs of factors of production.
· If countries specialize in and export the goods in which they have absolute
advantage, the result is increased production and consumption in each country.
· Output will be maximized, and after trading both countries will gain.
· Reciprocal Advantage Each country has an absolute advantage in the production of
one product.
Determining Absolute Advantage from a PPC Diagram:
- Country furthest along the axis of PPC has the absolute advantage of that good.
- Country A has absolute advantage in Rice, and Country B has absolute advantage in
Iron Ore.
- Incentive to specialize and trade to maximize output (efficiency), and decrease the
price of the products
