International Trade and Business Environment
Domain 10 covers comparative advantage, gains from trade, terms of trade, trade policy, exchange rates, and the business environment. The exam tests absolute versus comparative advantage and balances of payments.
Core rules and concepts
- Absolute advantage compares productivity; comparative advantage compares opportunity cost. A country gains by specialising where its opportunity cost is lower.
- Terms of trade = export price index ÷ import price index × 100.
- Balance of trade covers goods only; the current account adds services, income, and transfers; the capital account records investment flows.
- A tariff is a tax on imports; a quota is a quantity limit. Both raise domestic prices and reduce consumer surplus.
- Currency depreciation makes exports cheaper and imports dearer; devaluation is a deliberate official reduction under a fixed rate. The business environment includes economic, political, legal, social, technological, and global factors.
Worked example
With the same resources, Country A can produce 10 cloth or 5 wine; Country B can produce 6 cloth or 6 wine. A's opportunity cost of 1 wine is 2 cloth; B's is 1 cloth. B has the lower opportunity cost in wine, so B should specialise in wine; A has the lower opportunity cost in cloth (0.5 wine versus 1 wine), so A should specialise in cloth. Trade at 1 wine for 1.5 cloth benefits both: A pays less than its own 2-cloth cost, and B receives more than its own 1-cloth cost.
Traps that cost marks
Do not use absolute advantage to predict trade. Do not confuse the balance of trade with the balance of payments. Do not call a tariff a quota. Do not confuse depreciation with devaluation. Remember that the current account includes transfers.