International Economics and the Maltese Economy
What this domain tests
International economics examines trade, protection, exchange rates and the balance of payments; the Maltese part asks you to apply these ideas to a small, open, euro-area island economy. Expect questions on comparative advantage, the current account, tourism and import dependence.
Core rules
- Absolute advantage compares output per unit input; comparative advantage compares opportunity cost. Mutually beneficial trade requires different opportunity costs, not absolute superiority in everything.
- Tariffs and quotas raise domestic prices, reduce imports and create deadweight loss; consumers lose and protected producers gain.
- The balance of payments records current, capital and financial accounts; it must balance overall through reserve or financing flows. A current-account deficit is not automatically a crisis.
- Exchange-rate depreciation makes exports cheaper and imports dearer in foreign currency; the Marshall–Lerner condition says the trade balance improves only if |PEDx| + |PEDm| > 1.
- Malta is highly open: it imports most energy, raw materials and many consumer goods, and exports services such as tourism, financial services and remote gaming. It adopted the euro in 2008, so it has no independent monetary policy and faces ECB rates.
- EU membership gives single-market access but also competition and common rules.
Worked example
Suppose Malta can produce 1 unit of specialised electronics with 4 labour hours or 1 unit of tourism services with 2 hours; a larger partner needs 3 hours for electronics and 6 for tourism. Malta’s opportunity cost of 1 electronics unit is 2 tourism units; the partner’s is 0.5 tourism units. Malta has comparative advantage in tourism (lower opportunity cost: 0.5 electronics versus 2 electronics), so specialising in tourism and trading for electronics raises total output.
Traps
Do not confuse absolute and comparative advantage. Do not say a current-account deficit always requires depreciation. Do not assume Malta controls interest rates. In balance-of-payments answers, specify the account and the offsetting entry.