CIE A Level Economics 6 International Economic Issues Exam Questions

About CIE A Level Economics 6 International Economic Issues

Topic 6 is the final AS Level section of the Cambridge 9708 syllabus and looks at the economy in a global setting. You study why countries trade, using absolute and comparative advantage and the terms of trade, and why they sometimes restrict trade through tariffs, quotas, subsidies and other protection. You then cover the structure of the current account, causes and consequences of deficits and surpluses, floating, fixed and managed exchange rates, and policies such as expenditure switching and expenditure reducing. It links back to AD in topic 4 and forward to topic 11 at A Level. Examiners often test comparative advantage calculations, terms of trade index numbers and tariff diagrams.

What you need to know

• 6.1 Reasons for trade Absolute advantage is producing more of a good with the same resources; comparative advantage is producing at a lower opportunity cost. Specialising by comparative advantage and trading raises total output. Terms of trade = (index of export prices / index of import prices) x 100.
• 6.2 Protectionism Tools include tariffs, import quotas, export subsidies, embargoes and excessive administrative burdens (red tape). Arguments for include infant industries, strategic industries and anti-dumping; arguments against include higher prices, inefficiency and retaliation.
• Tariff diagram A tariff raises the domestic price above the world price, domestic output rises, consumption falls, imports fall and the government gains revenue. Consumer surplus falls and there are deadweight losses.
• 6.3 Current account Components: trade in goods, trade in services, primary income and secondary income. A deficit means outflows exceed inflows on these items; causes include high domestic demand, low competitiveness and a strong currency.
• 6.4 Exchange rates A floating rate is set by demand and supply of the currency; a fixed rate is held by the central bank; a managed float combines both. Depreciation and appreciation (floating) differ from devaluation and revaluation (fixed).
• 6.5 Correcting imbalances Expenditure switching policies (tariffs, devaluation) change the relative price of imports and exports; expenditure reducing policies (contractionary fiscal or monetary policy) cut total spending and so imports. Supply-side policies improve competitiveness over time.

Common mistakes in 6 International Economic Issues

• Saying a country should specialise where it has an absolute advantage. Gains from trade come from comparative advantage, which depends on opportunity cost.
• Treating an improvement in the terms of trade as always good for the current account. If export prices rise relative to import prices, export volumes may fall, depending on PED.
• Using devaluation for a floating exchange rate. A fall in a floating rate is a depreciation; devaluation applies to a fixed rate.
• Putting financial flows such as foreign direct investment in the current account. These are on the financial account; the current account has goods, services, primary and secondary income.
• Assuming a tariff simply stops imports. It reduces them, raises domestic price, adds government revenue and creates deadweight losses.

Try three 6 International Economic Issues exam-style questions