International Trade and Development Economics
The final domain covers why countries trade, how trade is recorded, and how development is measured. Questions tend to be short-answer: state the gain from trade, distinguish balance of trade from balance of payments, and define development indicators.
Core rules
- Absolute advantage: a country produces a good using fewer resources. Comparative advantage: it produces at lower opportunity cost - the basis of mutually beneficial trade.
- Terms of trade = (export price index / import price index) × 100.
- Balance of trade = value of exports − value of imports (goods only). Balance of payments records all transactions - current account (goods, services, transfers) and capital account - and balances in accounting terms.
- Development indicators: per capita income, HDI (life expectancy, education, per capita income), PQLI; sustainable development.
- Unemployment types: seasonal, disguised, structural, frictional, cyclical.
Worked example
Country A can produce 1 unit of cloth with the resources that yield 2 units of wheat; Country B can produce 1 cloth or 4 wheat with the same resources. The opportunity cost of 1 cloth is 2 wheat for A and 4 wheat for B, so A has a comparative advantage in cloth. A specialises in cloth, B in wheat, and both gain from exchange at a rate between 2 and 4 wheat per cloth.
Traps that cost marks
- Treating the balance of payments as a single figure; it comprises the current and capital accounts together.
- Confusing balance of trade (goods only) with the current account (which includes services and transfers).
- Confusing absolute with comparative advantage.
- Claiming HDI is based on income alone; education and health are equally weighted components.