3.5.2

Gains from Trade

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Benefits of International Trade

Free trade is defined as “the free movement of goods and services cross-border between countries with no attempt from government to unfairly restrict imports from, or exports to, other countries.”

Improved allocative efficiency

Improved allocative efficiency

Free trade improves allocative efficiency.
Free trade improves the efficiency of resource allocation because countries produce in sectors they are better suited to, rather than all goods and services.
The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services.

Higher global output

Higher global output

Comparative advantage theory states that, if countries specialize in goods and services, have a lower opportunity cost of producing than other countries, and engage in free trade, they have the possibility of achieving an allocation of resources outside their initial PPC.

Greater competition and choice

Greater competition and choice

Free trade causes increased competition, which will lead to cheaper prices and higher consumer surplus.
The reduction in prices increases real incomes, increases purchasing power and allows more goods and services to be bought. So this increases standard of living.
Free trade brings down cost-push inflationary pressure.
Free trade increases choice. Free trade allows countries to consume bananas even if they don’t have the climate for it.

Economies of scale

Economies of scale

Firms and countries can specialize in the production of a small range of good and services, and trade them with other countries.
Because firms can focus on producing a few goods and services, there is scope for more economies of scale, lower long-run average cost, lower prices, higher consumer surplus and increased demand for goods.

Expanding beyond the PPC

Expanding beyond the PPC

The image above shows two PPCs, for the U.S. and Mexico.

Expanding beyond the PPC

Expanding beyond the PPC

With 40 workers, the United States can produce either 10,000 shoes and zero refrigerators or 40,000 refrigerators and zero shoes.
With 40 workers, Mexico can produce a maximum of 8,000 shoes and zero refrigerators, or 10,000 refrigerators and zero shoes.
Point A on both graphs is where the countries start producing and consuming before trade. Point B is where they end up after trade, due to the benefits of each country specializing in the good where they have the lowest opportunity cost (and hence a comparative advantage).

1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand 1.1.2Diminishing Marginal Returns 1.1.3Supply 1.1.4Market Equilibrium 1.1.5Price Mechanism 1.1.6Consumer & Producer Surplus 1.1.7IB Multiple Choice - Demand 1.1.8IB Multiple Choice - Supply

1.2

Elasticity

1.2.1Elasticities of Demand 1.2.2Factors Affecting Price Elasticity of Demand 1.2.3Elasticity of Supply 1.2.4Price Elasticity of Supply 1.2.5IB Multiple Choice - Price Elasticity of Demand 1.2.6IB Multiple Choice - Price Elasticity of Supply 1.2.7IB Multiple Choice - Other Elasticities

1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies 1.3.2Application Question - Taxing Prices or Quantities 1.3.3Subsidies & Price Controls 1.3.4Deadweight Loss & Government Intervention 1.3.5Elasticity & Tax Incidence 1.3.6IB Multiple Choice - Government Intervention

1.4

Market Failure

1.4.1Types of Market Failure 1.4.2Introduction to Externalities 1.4.3Negative Externalities 1.4.4Policy for Negative Externalities 1.4.5Positive Externalities 1.4.6The Deadweight Welfare Loss of Externalities 1.4.7Case Study - The Externalities of Education 1.4.8Public Goods & the Free-Rider Problem 1.4.9Asymmetric Information 1.4.10End of Topic Test - Market Failure 1.4.11Application Questions - Market Failure

1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income 2.1.2Defining GDP 2.1.3Limitations of GDP 2.1.4IB Multiple Choice - Economic Indicators 2.1.5Business Cycles 2.1.6Output Gaps

2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve 2.2.2Components of Aggregate Demand 2.2.3Shape of the Aggregate Demand Curve 2.2.4Shifts in Aggregate Demand 2.2.5IB Multiple Choice - Aggregate Demand 2.2.6Short & Long-Run Aggregate Supply 2.2.7Alternative Models of LRAS 2.2.8Equilibrium in the AD-AS Model 2.2.9Output Gaps & the AD-AS Model

2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment 2.3.2Limitations of Unemployment 2.3.3Types of Unemployment 2.3.4Causes & Impact of Unemployment 2.3.5Defining Inflation 2.3.6Measuring Inflation 2.3.7Use of Index Numbers 2.3.8The Consumer Price Index 2.3.9Consequences of Inflation 2.3.10Causes of Inflation 2.3.11Inflation & Unemployment Tradeoff 2.3.12The Short-Run Phillips Curve 2.3.13The Long-Run Phillips Curve

2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth 2.4.2Determinants of Productivity 2.4.3Economic Growth & Productivity 2.4.4Absolute & Relative Poverty 2.4.5Inequality 2.4.6Inequality 2 2.4.7Lorenz Curve 2.4.8Government Policy on Poverty 2.4.9End of Topic Test - Poverty & Inequality 2.4.10Application - Inequality & Poverty

2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy 2.5.2Fiscal Policy and AD-AS Model 2.5.3Fiscal Policy Lags 2.5.4Automatic Stabilizers 2.5.5IB Multiple Choice - Fiscal Policy

2.6

Monetary Policy

2.6.1Objectives of Monetary Policy 2.6.2Monetary Policy Implementation 2.6.3Monetary Policy & AD-AS Model 2.6.4Monetary Policy Lags & Pitfalls

2.7

Supply-Side Policies

2.7.1Supply-Side Policies 2.7.2Supply-Side Policies 2

3

The Global Economy

3.1

International Trade

3.1.1Globalisation 3.1.2Globalisation for LEDCs 3.1.3Globalisation for MEDCs 3.1.4Comparative Advantage & Trade 3.1.5Protectionism 3.1.6Arguments for Protectionism 3.1.7Arguments Against Protectionism 3.1.8End of Topic Test - Globalisation & Trade 3.1.9Case Study - Globalisation & Trade

3.2

Exchange Rates

3.2.1Floating Exchange Rates 3.2.2Fixed Exchange Rate 3.2.3Effect of a Stronger & Weaker Dollar

3.3

The Balance of Payments

3.3.1Balance of Payments 3.3.2Balance of Payments 2 3.3.3FDI & Reducing a BoP Deficit

3.4

Economic Integration

3.4.1Customs Unions & WTO 3.4.2Merged Currency

3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage 3.5.2Gains from Trade 3.5.3Terms of Trade 3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6

Economic Development

3.6.1Factors Influencing Growth & Development 3.6.2International Institutions 3.6.3Measures of Development 3.6.4Barriers to Development 3.6.5Case Study - The Bottom Billion 3.6.6End of Topic Test - Emerging & Developing

3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies 3.7.2Development Strategies 3.7.3Development Promotion Policies 3.7.4End of Topic Test - Growth & Global Development 3.7.5Application Questions -Growth & Global Development

3.8

The Role of International Trade

3.8.1International Institutions 3.8.2End of Topic Test - Globalisation & Trade

3.9

The Role of Foreign Aid

3.9.1Aid 3.9.2Limitations of Aid 3.9.3Support for Aid 3.9.4Application Questions - Developing Countries

Jump to other topics

1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand 1.1.2Diminishing Marginal Returns 1.1.3Supply 1.1.4Market Equilibrium 1.1.5Price Mechanism 1.1.6Consumer & Producer Surplus 1.1.7IB Multiple Choice - Demand 1.1.8IB Multiple Choice - Supply

1.2

Elasticity

1.2.1Elasticities of Demand 1.2.2Factors Affecting Price Elasticity of Demand 1.2.3Elasticity of Supply 1.2.4Price Elasticity of Supply 1.2.5IB Multiple Choice - Price Elasticity of Demand 1.2.6IB Multiple Choice - Price Elasticity of Supply 1.2.7IB Multiple Choice - Other Elasticities

1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies 1.3.2Application Question - Taxing Prices or Quantities 1.3.3Subsidies & Price Controls 1.3.4Deadweight Loss & Government Intervention 1.3.5Elasticity & Tax Incidence 1.3.6IB Multiple Choice - Government Intervention

1.4

Market Failure

1.4.1Types of Market Failure 1.4.2Introduction to Externalities 1.4.3Negative Externalities 1.4.4Policy for Negative Externalities 1.4.5Positive Externalities 1.4.6The Deadweight Welfare Loss of Externalities 1.4.7Case Study - The Externalities of Education 1.4.8Public Goods & the Free-Rider Problem 1.4.9Asymmetric Information 1.4.10End of Topic Test - Market Failure 1.4.11Application Questions - Market Failure

1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income 2.1.2Defining GDP 2.1.3Limitations of GDP 2.1.4IB Multiple Choice - Economic Indicators 2.1.5Business Cycles 2.1.6Output Gaps

2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve 2.2.2Components of Aggregate Demand 2.2.3Shape of the Aggregate Demand Curve 2.2.4Shifts in Aggregate Demand 2.2.5IB Multiple Choice - Aggregate Demand 2.2.6Short & Long-Run Aggregate Supply 2.2.7Alternative Models of LRAS 2.2.8Equilibrium in the AD-AS Model 2.2.9Output Gaps & the AD-AS Model

2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment 2.3.2Limitations of Unemployment 2.3.3Types of Unemployment 2.3.4Causes & Impact of Unemployment 2.3.5Defining Inflation 2.3.6Measuring Inflation 2.3.7Use of Index Numbers 2.3.8The Consumer Price Index 2.3.9Consequences of Inflation 2.3.10Causes of Inflation 2.3.11Inflation & Unemployment Tradeoff 2.3.12The Short-Run Phillips Curve 2.3.13The Long-Run Phillips Curve

2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth 2.4.2Determinants of Productivity 2.4.3Economic Growth & Productivity 2.4.4Absolute & Relative Poverty 2.4.5Inequality 2.4.6Inequality 2 2.4.7Lorenz Curve 2.4.8Government Policy on Poverty 2.4.9End of Topic Test - Poverty & Inequality 2.4.10Application - Inequality & Poverty

2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy 2.5.2Fiscal Policy and AD-AS Model 2.5.3Fiscal Policy Lags 2.5.4Automatic Stabilizers 2.5.5IB Multiple Choice - Fiscal Policy

2.6

Monetary Policy

2.6.1Objectives of Monetary Policy 2.6.2Monetary Policy Implementation 2.6.3Monetary Policy & AD-AS Model 2.6.4Monetary Policy Lags & Pitfalls

2.7

Supply-Side Policies

2.7.1Supply-Side Policies 2.7.2Supply-Side Policies 2

3

The Global Economy

3.1

International Trade

3.1.1Globalisation 3.1.2Globalisation for LEDCs 3.1.3Globalisation for MEDCs 3.1.4Comparative Advantage & Trade 3.1.5Protectionism 3.1.6Arguments for Protectionism 3.1.7Arguments Against Protectionism 3.1.8End of Topic Test - Globalisation & Trade 3.1.9Case Study - Globalisation & Trade

3.2

Exchange Rates

3.2.1Floating Exchange Rates 3.2.2Fixed Exchange Rate 3.2.3Effect of a Stronger & Weaker Dollar

3.3

The Balance of Payments

3.3.1Balance of Payments 3.3.2Balance of Payments 2 3.3.3FDI & Reducing a BoP Deficit

3.4

Economic Integration

3.4.1Customs Unions & WTO 3.4.2Merged Currency

3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage 3.5.2Gains from Trade 3.5.3Terms of Trade 3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6

Economic Development

3.6.1Factors Influencing Growth & Development 3.6.2International Institutions 3.6.3Measures of Development 3.6.4Barriers to Development 3.6.5Case Study - The Bottom Billion 3.6.6End of Topic Test - Emerging & Developing

3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies 3.7.2Development Strategies 3.7.3Development Promotion Policies 3.7.4End of Topic Test - Growth & Global Development 3.7.5Application Questions -Growth & Global Development

3.8

The Role of International Trade

3.8.1International Institutions 3.8.2End of Topic Test - Globalisation & Trade

3.9

The Role of Foreign Aid

3.9.1Aid 3.9.2Limitations of Aid 3.9.3Support for Aid 3.9.4Application Questions - Developing Countries

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1
Which of the following are advantages of international trade?True / false

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Absolute & Comparative Advantage

Terms of Trade