Economics: Trade Policy, Exchange Rates, and Open-Economy Policy
What this domain tests
경제학 is principles-level micro and macro with a heavy international emphasis: trade policy, exchange rates, and the policy trilemma.
Core rules
- Elasticity and tax incidence: the burden falls more heavily on the less elastic side of the market.
- Trade: comparative advantage rests on opportunity cost, not absolute productivity. A tariff in a small open economy lowers consumer surplus, raises producer surplus and government revenue, and leaves two deadweight triangles - consumption distortion and production distortion. A quota generates quota rent for whoever holds the licences.
- Exchange rates: real rate = nominal rate × (P*/P). Nominal depreciation with higher domestic inflation may leave the real rate unchanged.
- Mundell-Fleming: with perfect capital mobility, monetary policy is powerless under a fixed rate and powerful under a float; fiscal policy is the reverse. This is the open-economy trilemma - a fixed rate, free capital movement, and independent monetary policy cannot coexist.
- Covered interest parity: i − i* ≈ forward premium.
- Public goods and externalities: non-rival, non-excludable goods are undersupplied; a Pigouvian tax equals marginal external cost.
Worked example
A small country pegs to the dollar and opens its capital account. A recession hits and the central bank cuts rates. Capital flees, the currency comes under pressure, and defending the peg forces the bank to sell reserves and absorb domestic money - reversing the cut. Conclusion: fiscal expansion, not monetary easing, is the available instrument.
Traps that cost marks
- Confusing nominal with real depreciation.
- Swapping the two deadweight triangles.
- Treating a quota and a tariff as equivalent when quota rent accrues to licence holders.
- Assuming a tariff improves the terms of trade for a small country; it cannot.