International trade

Traps in International trade

• Confuses absolute and comparative advantage
  Compute the opportunity cost of each good in each country. Each specialises where its opportunity cost is LOWER, even if one country is better at both.
• Reverses the direction of the effect
  Trace the chain step by step (e.g. buying securities → banks gain cash → money supply rises) and check the sign at every link.
• Over-generalises a rule
  Economic laws hold 'other things being equal' and within limits. Be suspicious of options with always/never/all.
• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Applies the rule for the opposite case
  Before answering, name the case in the stem (inelastic? price floor ABOVE equilibrium? point INSIDE the PPC?) and recall the rule for that case only.
• Uses the wrong arithmetic operation
  Write the definition in words first (TR = price × quantity; ATC = TC ÷ Q) and only then put in numbers. Check units: totals and averages cannot be added.
• Exchange rate misconceptions
  Devaluation lowers the value of the home currency: exports become CHEAPER abroad and imports DEARER at home. Success needs elastic demand (Marshall–Lerner).
• Stops at a different economic quantity
  Underline what the question asks for and check the final number is THAT quantity, not a step on the way.
• Turns the formula upside down
  Learn the formula with its meaning: elasticity = responsiveness of QUANTITY, so %ΔQ is on top; k = 1/MPS = 1/(1 − MPC).
• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.
• Chooses a true but irrelevant statement
  Re-read the question's key term and test each option against it, not against whether it is true in general.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• Picks another type in the same classification
  Learn each classification as a table of types with one defining feature each (monopoly: one seller; monopsony: one buyer; command economy: central planning).
• Balance of payments errors
  Visible trade = goods (balance of trade). Invisible = services (shipping, tourism, insurance). Current account = visibles + invisibles + income + transfers. Capital account = investment and loans.
• Confuses international economic organisations
  IMF: short-term balance-of-payments support. World Bank (IBRD): long-term development loans. WTO: rules of world trade. OPEC: oil-exporters' production policy. ECOWAS: West African economic integration.
• Confuses monetary and fiscal policy tools
  Monetary (central bank): interest/policy rate, open market operations, reserve requirements. Fiscal (government): taxation and public spending, budget deficit/surplus.
• Inflation misconceptions
  Demand-pull: too much money chasing few goods. Cost-push: rising costs. Debtors and holders of real assets gain; creditors and fixed-income earners lose.
• Confuses GDP, GNP and NNP
  GNP = GDP + net factor income from abroad. NNP = GNP − depreciation. Per capita = total ÷ population.