Memory tricks for international trade

Comparative advantage (Ricardo, 1817): specialize where opportunity cost is lowest. Even if one country is better at everything, both gain from specialization and trade. World output rises with specialization.

Tariffs (taxes on imports): raise domestic price, reduce imports, protect industry, generate revenue, create DWL. Quotas: limit quantity. Export subsidies: pay exporters to sell abroad. Free trade maximizes efficiency but creates winners and losers.

Terms of trade = price index of exports / imports. Improvement (ratio rises): more imports per export, gains more from trade. Prebisch-Singer hypothesis: commodity exporters face secular TOT decline.

BOP = Current Account + Capital/Financial Account = 0 (always). Current Account: goods trade + services + income + transfers. Capital Account: FDI, portfolio investment, loans. Trade deficit = capital surplus.

GATT (1947): multilateral framework for reducing trade barriers. WTO (1995): replaced GATT, has dispute settlement, 164 members. Most Favored Nation (MFN): give all members best tariff rates. FTAs and customs unions create preferential arrangements.

Since 1990: global trade as share of GDP doubled, living standards rose dramatically in developing countries. But: manufacturing job losses in developed countries, increased within-country inequality, supply chain vulnerabilities, national security concerns.

Appreciation: exports more expensive (fall), imports cheaper (rise), trade balance worsens. Depreciation: opposite. Countries sometimes weaken currency to boost exports (currency manipulation — forbidden by IMF but hard to enforce).

Export-led growth (East Asian model): specialize in labor-intensive manufacturing, move up value chain. South Korea, Taiwan, China — dramatic success. Import substitution industrialization (ISI): protect domestic industries. Latin America 1950s-1980s — largely failed.

Arguments for protection: infant industry, national security, retaliation, jobs. Economic consensus: free trade increases total welfare but creates losers who need assistance. Politically: concentrated industry interests vs diffuse consumer costs.

Absolute advantage: produce more output per unit of input. Comparative advantage: lower opportunity cost of production. Ricardo's insight: even if country A is better at everything, both countries gain from specializing in comparative advantage and trading. Total world output rises when each country specializes. Terms of trade must fall between both countries' opportunity costs for both to gain.

Tariff = tax on imported goods. Domestic price rises to world price plus tariff. Domestic supply rises. Domestic demand falls. Imports narrow. Government collects revenue = tariff times import quantity. Net effect: consumer surplus loss is greater than producer surplus gain plus revenue — creating two triangles of deadweight loss. Winners: domestic producers and government. Losers: domestic consumers.

Fixed exchange rate: central bank commits to specific rate and buys or sells currency to defend it. Advantage: reduces uncertainty for trade. Disadvantage: loses monetary policy independence (Mundell trilemma). Floating: determined by supply and demand. Central bank free to conduct monetary policy. Appreciation: currency value rises, exports hurt, imports cheaper. Purchasing Power Parity: exchange rates adjust so same basket costs same in all countries.

Current Account: trade in goods, services, income, and transfer payments. Financial Account: investment flows — FDI, portfolio investment, reserve changes. BOP identity: CA + KA + FA = 0 always. USA current account deficit since the 1980s is financed by financial account surplus (foreigners buying US assets). Trade deficit does not necessarily indicate weakness — can reflect strong investment demand.

National security: accepted by economists for genuine cases but often abused. Infant industry: valid in theory but protection is rarely temporary. Jobs: saves jobs in protected sector but destroys more in export industries and raises consumer costs. Dumping: WTO allows countervailing duties. Level playing field: foreign subsidies are a gift to importing consumers. Political economy: concentrated producer benefits are organized and vocal, dispersed consumer gains are silent.

Export-led growth: focus manufacturing on exports, build competitive industries, earn foreign exchange. Succeeded in South Korea, Taiwan, China, Singapore. Import substitution industrialization (ISI): protect domestic industry behind tariff walls — mostly failed in Latin America. Washington Consensus: free trade, privatization, fiscal discipline — IMF prescription. Criticized for ignoring institutions and inequality. FDI brings capital and technology but may exploit low wages.