IB Economics Week 6

The week 6 revision ticklist for IB U6th economists

Week 6: International Trade, Balance of Payments and Exchange Rates

Revision Ticklist. Do you know…

Reasons for trade
Absolute and Comparative Advantage- numerical and diagramatic analysis (HIGHER LEVEL ONLY)

Free Trade and Protectionism

Types of protectionism
Arguments for and against protectionism

Economic Integration

Globalisation
Trading Blocs
Trade creation and diversion (HL only)
Obstacles to integration- political and economic (HL only)

World Trade Organisation (WTO): aims, successes and failures

Balance of Payments

Current account (balance of trade and invisible balance)
Capital Account

Balance of Payments Problems

Consequences of deficit and surplus on both capital and current accounts
Methods of correction
Marshall-Lerner condition (HL only)
J-Curve (HL only)

Exchange Rates

Fixed exchange rates
Floating exchange rates
Managed exchange rates
Depreciation vs devaluation
Appreciation vs revaluation

Advantages and Disadvantages of fixed and flaoting (HL only)
Advantages and Disadvantages of single currency (HL only)
Purchasing Power Parity (HL only)

Terms of Trade (TOT)

Definition
Consequences of changes in terms of trade for BOP
Developing countries and TOT
Measurment of TOT (HL only)
Short and long run changes to TOT (HL only)
Elasticity of demand for exports and imports (HL only)

Question Bank

Short Answers [10 Marks]

1. What factors might determine the competitiveness of a country in international trade?

2. Explain why a deterioration in the terms of trade could bring about an improvement in the balance of payments on the current account

3. Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff.

4.Using the principle of comparative advantage, explainwhy economic theory suggest that countries should specialise and trade with each other.

5. Explain why a depreciation of a country’s exchange rate may not always lead to an improvment in its current account of the balance of payments

Essay Questions

1a) What problems might a country face if it experiences a persistent deficit in the current account of its balance of payments? [10]

b) Evaluate the alternative ways in which such a deficit might be reduced or eliminated [15]

2a) Explain the theory of comparative advantage [10]

b) Given the benefits of specialisation, evaluate the reasons why countries may choose not to specialise [15]

3a) Explain three factors that influence the value of a country’s exchange rate [10]

b) Evaluate government/central bank intervention in the foreign exchange market to reduce the value of the exchange rate [15]