Chapter 8: International Economics
1. Why International Trade Matters
● Nations trade to specialize in what they do best and benefit from comparative
advantage.
● Trade allows access to:
○ A greater variety of goods and services
○ More efficient resource allocation
○ Technology and innovation
2. Absolute vs. Comparative Advantage
Absolute Advantage
● A country can produce more of a good than another country using the same resources.
Comparative Advantage
● A country can produce a good at a lower opportunity cost than another.
● Key concept behind trade—countries should specialize in what they do relatively best.
, 3. Gains from Trade
● When countries specialize and trade based on comparative advantage, total world
output increases.
● Everyone can be better off, even if one country is more efficient in producing
everything.
4. Balance of Payments (BOP)
● A record of all economic transactions between a country and the rest of the world over
a period of time.
Two Main Accounts:
1. Current Account
○ Includes trade in goods/services, income from abroad, and transfer payments.
○ Trade balance: Exports – Imports (Net Exports)
2. Capital (Financial) Account
○ Records flow of financial assets: investments, real estate, stocks, bonds,
currency.
Current Account + Capital Account = 0, in theory (any deficit is offset by a surplus in the
other)
5. Trade Deficit vs. Trade Surplus
● Trade Deficit: Imports > Exports (negative net exports)
● Trade Surplus: Exports > Imports (positive net exports)
A trade deficit is not always bad—may reflect strong consumer demand or
investment opportunities.
1. Why International Trade Matters
● Nations trade to specialize in what they do best and benefit from comparative
advantage.
● Trade allows access to:
○ A greater variety of goods and services
○ More efficient resource allocation
○ Technology and innovation
2. Absolute vs. Comparative Advantage
Absolute Advantage
● A country can produce more of a good than another country using the same resources.
Comparative Advantage
● A country can produce a good at a lower opportunity cost than another.
● Key concept behind trade—countries should specialize in what they do relatively best.
, 3. Gains from Trade
● When countries specialize and trade based on comparative advantage, total world
output increases.
● Everyone can be better off, even if one country is more efficient in producing
everything.
4. Balance of Payments (BOP)
● A record of all economic transactions between a country and the rest of the world over
a period of time.
Two Main Accounts:
1. Current Account
○ Includes trade in goods/services, income from abroad, and transfer payments.
○ Trade balance: Exports – Imports (Net Exports)
2. Capital (Financial) Account
○ Records flow of financial assets: investments, real estate, stocks, bonds,
currency.
Current Account + Capital Account = 0, in theory (any deficit is offset by a surplus in the
other)
5. Trade Deficit vs. Trade Surplus
● Trade Deficit: Imports > Exports (negative net exports)
● Trade Surplus: Exports > Imports (positive net exports)
A trade deficit is not always bad—may reflect strong consumer demand or
investment opportunities.
