IB · ECON SL

Economics SL

International trade — Unit 4

Name: ____________________Date: October 2, 2026

1.
Using 10 units of labor, Country A can produce either 100 units of cloth or 50 units of wine. Using the same 10 units of labor, Country B can produce either 60 units of cloth or 60 units of wine. (a) Calculate the opportunity cost of producing 1 unit of cloth in each country. (b) State which country has a comparative advantage in cloth, and which has a comparative advantage in wine. (c) Explain why both countries can gain from specializing and trading.
[5 marks]
Marking points
- Calculates the opportunity cost of 1 cloth in Country A as 50/100 = 0.5 units of wine.
- Calculates the opportunity cost of 1 cloth in Country B as 60/60 = 1 unit of wine.
- States that Country A has the comparative advantage in cloth (lower opportunity cost), and Country B has the comparative advantage in wine.
- Explains that if each country specializes in the good in which it has a comparative advantage, total world output of both goods increases compared to no specialization.
- Explains that as long as the agreed terms of trade lie between the two countries' opportunity costs (between 0.5 and 1 unit of wine per unit of cloth), both countries can consume beyond their own production possibilities frontier.
Examiner tip: Comparative advantage is always about relative (opportunity cost), not absolute, efficiency — a country can be comparatively disadvantaged in both goods in absolute terms and still gain from specializing in the one where its opportunity cost is lower.
2.
Marking analysis: A learner attempts the following task: “Using 10 units of labor, Country A can produce either 100 units of cloth or 50 units of wine. Using the same 10 units of labor, Country B can produce either 60 units of cloth or 60 units of wine. (a) Calculate the opportunity cost of producing 1 unit of cloth in each country. (b) State which country has a comparative advantage in cloth, and which has a comparative advantage in wine. (c) Explain why both countries can gain from specializing and trading.” Their response addresses only this point: “Calculates the opportunity cost of 1 cloth in Country A as 50/100 = 0.5 units of wine.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks]
Marking points
- Recognises credit for the stated point: Calculates the opportunity cost of 1 cloth in Country A as 50/100 = 0.5 units of wine.
- Identifies the missing requirement: Calculates the opportunity cost of 1 cloth in Country B as 60/60 = 1 unit of wine.
- Identifies the missing requirement: States that Country A has the comparative advantage in cloth (lower opportunity cost), and Country B has the comparative advantage in wine.
- Identifies the missing requirement: Explains that if each country specializes in the good in which it has a comparative advantage, total world output of both goods increases compared to no specialization.
- Identifies the missing requirement: Explains that as long as the agreed terms of trade lie between the two countries' opportunity costs (between 0.5 and 1 unit of wine per unit of cloth), both countries can consume beyond their own production possibilities frontier.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
3.
Explain two arguments a government might use to justify imposing trade protection (tariffs or quotas) on imported goods.
[2 marks] · no calculator
Marking points
- Explains the 'infant industry' argument: a new domestic industry may need temporary protection from established foreign competitors until it achieves economies of scale and becomes internationally competitive.
- Explains a second valid argument, such as protecting domestic employment in an affected industry, raising government revenue from tariffs, correcting a trade deficit, or national security concerns over reliance on foreign suppliers for strategic goods.
Examiner tip: Even when an argument for protection has some validity, most economists still note that the overall efficiency cost to the economy (through higher prices and reduced trade) often outweighs the benefit to the protected group.
4.
Marking analysis: A learner attempts the following task: “Explain two arguments a government might use to justify imposing trade protection (tariffs or quotas) on imported goods.” Their response addresses only this point: “Explains the 'infant industry' argument: a new domestic industry may need temporary protection from established foreign competitors until it achieves economies of scale and becomes internationally competitive.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains the 'infant industry' argument: a new domestic industry may need temporary protection from established foreign competitors until it achieves economies of scale and becomes internationally competitive.
- Identifies the missing requirement: Explains a second valid argument, such as protecting domestic employment in an affected industry, raising government revenue from tariffs, correcting a trade deficit, or national security concerns over reliance on foreign suppliers for strategic goods.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
5.
In a domestic market, demand is given by Qd = 100 − 2P and domestic supply is given by Qs = 2P − 20, where P is price in dollars. The world price is $10, and the country is a price taker in the world market. (a) Calculate the domestic quantity demanded, domestic quantity supplied, and the quantity of imports at the free-trade world price. (b) The government imposes a specific tariff of $5 per unit, raising the domestic price to $15. Calculate the new quantity demanded, quantity supplied, and quantity of imports. (c) Calculate the government's tariff revenue.
[5 marks]
Marking points
- Substitutes P = 10 into both equations: Qd = 100 − 2(10) = 80, Qs = 2(10) − 20 = 0.
- Calculates imports at the free-trade price as Qd − Qs = 80 − 0 = 80 units.
- Substitutes P = 15 into both equations: Qd = 100 − 2(15) = 70, Qs = 2(15) − 20 = 10.
- Calculates imports after the tariff as 70 − 10 = 60 units.
- Calculates tariff revenue as the tariff per unit multiplied by the new quantity of imports: $5 × 60 = $300.
Examiner tip: A tariff always does three things simultaneously: raises the domestic price, increases domestic quantity supplied, and decreases domestic quantity demanded — calculate all three changes before finding the new (smaller) import quantity.
6.
Marking analysis: A learner attempts the following task: “In a domestic market, demand is given by Qd = 100 − 2P and domestic supply is given by Qs = 2P − 20, where P is price in dollars. The world price is $10, and the country is a price taker in the world market. (a) Calculate the domestic quantity demanded, domestic quantity supplied, and the quantity of imports at the free-trade world price. (b) The government imposes a specific tariff of $5 per unit, raising the domestic price to $15. Calculate the new quantity demanded, quantity supplied, and quantity of imports. (c) Calculate the government's tariff revenue.” Their response addresses only this point: “Substitutes P = 10 into both equations: Qd = 100 − 2(10) = 80, Qs = 2(10) − 20 = 0.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks]
Marking points
- Recognises credit for the stated point: Substitutes P = 10 into both equations: Qd = 100 − 2(10) = 80, Qs = 2(10) − 20 = 0.
- Identifies the missing requirement: Calculates imports at the free-trade price as Qd − Qs = 80 − 0 = 80 units.
- Identifies the missing requirement: Substitutes P = 15 into both equations: Qd = 100 − 2(15) = 70, Qs = 2(15) − 20 = 10.
- Identifies the missing requirement: Calculates imports after the tariff as 70 − 10 = 60 units.
- Identifies the missing requirement: Calculates tariff revenue as the tariff per unit multiplied by the new quantity of imports: $5 × 60 = $300.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
7.
Using the market from the previous question (free trade: Qd = 80, Qs = 0; with a $5 tariff: Qd = 70, Qs = 10), explain, without needing to calculate exact areas, why imposing the tariff creates a deadweight welfare loss to society, even though it raises government revenue and benefits domestic producers.
[4 marks] · no calculator
Marking points
- States that consumers lose surplus from both the higher price paid and the lower quantity consumed.
- States that some of this lost consumer surplus is transferred to producers (as higher producer surplus) and some is transferred to the government (as tariff revenue), but these are transfers within society, not losses to society overall.
- Explains that the remaining loss comes from two sources: domestic producers now supply units at a higher cost than the units Country could have imported more cheaply (production inefficiency), and consumers who valued the good above the world price but below the tariff-inclusive price no longer purchase it (consumption inefficiency).
- Concludes that this unrecoverable loss (not transferred to anyone) is the deadweight welfare loss of the tariff.
Examiner tip: Deadweight loss from a tariff always has two triangular components on a standard diagram: a production inefficiency triangle and a consumption inefficiency triangle — the transfers to producers and government are rectangles, not losses.
8.
Marking analysis: A learner attempts the following task: “Using the market from the previous question (free trade: Qd = 80, Qs = 0; with a $5 tariff: Qd = 70, Qs = 10), explain, without needing to calculate exact areas, why imposing the tariff creates a deadweight welfare loss to society, even though it raises government revenue and benefits domestic producers.” Their response addresses only this point: “States that consumers lose surplus from both the higher price paid and the lower quantity consumed.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that consumers lose surplus from both the higher price paid and the lower quantity consumed.
- Identifies the missing requirement: States that some of this lost consumer surplus is transferred to producers (as higher producer surplus) and some is transferred to the government (as tariff revenue), but these are transfers within society, not losses to society overall.
- Identifies the missing requirement: Explains that the remaining loss comes from two sources: domestic producers now supply units at a higher cost than the units Country could have imported more cheaply (production inefficiency), and consumers who valued the good above the world price but below the tariff-inclusive price no longer purchase it (consumption inefficiency).
- Identifies the missing requirement: Concludes that this unrecoverable loss (not transferred to anyone) is the deadweight welfare loss of the tariff.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
9.
Distinguish between a tariff and an import quota as methods of trade protection, and explain one key difference in who receives the benefit that would otherwise be government tariff revenue.
[3 marks] · no calculator
Marking points
- States that a tariff is a tax placed on imported goods, while a quota is a physical limit placed on the quantity of a good that may be imported.
- Explains that with a tariff, the government collects revenue equal to the tariff multiplied by the quantity imported.
- Explains that with a quota, no government revenue is automatically collected; instead, the gap between the domestic price and the world price typically becomes extra profit ('quota rent') captured by whoever holds the import licenses, often foreign exporters or domestic importers.
Examiner tip: The key practical difference examiners look for is who captures the price gap created by protection: the government (tariff revenue) versus license holders (quota rent) — both raise domestic price similarly, but the beneficiary of that gap differs.
10.
Marking analysis: A learner attempts the following task: “Distinguish between a tariff and an import quota as methods of trade protection, and explain one key difference in who receives the benefit that would otherwise be government tariff revenue.” Their response addresses only this point: “States that a tariff is a tax placed on imported goods, while a quota is a physical limit placed on the quantity of a good that may be imported.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that a tariff is a tax placed on imported goods, while a quota is a physical limit placed on the quantity of a good that may be imported.
- Identifies the missing requirement: Explains that with a tariff, the government collects revenue equal to the tariff multiplied by the quantity imported.
- Identifies the missing requirement: Explains that with a quota, no government revenue is automatically collected; instead, the gap between the domestic price and the world price typically becomes extra profit ('quota rent') captured by whoever holds the import licenses, often foreign exporters or domestic importers.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
11.
Explain two reasons why many economists generally favor free trade over trade protection.
[2 marks] · no calculator
Marking points
- Explains that free trade allows countries to specialize according to comparative advantage, increasing total world output and making both consumers and producers better off on average.
- Explains a second valid reason, such as free trade giving consumers access to a wider variety of goods at lower prices, exposing domestic firms to competition that encourages efficiency and innovation, or avoiding the risk of retaliatory tariffs from trading partners.
Examiner tip: Contrast this with the earlier question on arguments FOR protection — a strong exam answer on trade policy usually shows you can argue both sides and then reach a balanced evaluation.
12.
Marking analysis: A learner attempts the following task: “Explain two reasons why many economists generally favor free trade over trade protection.” Their response addresses only this point: “Explains that free trade allows countries to specialize according to comparative advantage, increasing total world output and making both consumers and producers better off on average.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that free trade allows countries to specialize according to comparative advantage, increasing total world output and making both consumers and producers better off on average.
- Identifies the missing requirement: Explains a second valid reason, such as free trade giving consumers access to a wider variety of goods at lower prices, exposing domestic firms to competition that encourages efficiency and innovation, or avoiding the risk of retaliatory tariffs from trading partners.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
13.
Define 'trading bloc', and explain one potential benefit and one potential drawback for a country of joining a regional trading bloc such as a free trade area or customs union.
[3 marks] · no calculator
Marking points
- Defines a trading bloc as a group of countries that agree to reduce or eliminate trade barriers between themselves.
- Explains a valid benefit, such as increased trade and market access among member countries, leading to greater specialization and economies of scale.
- Explains a valid drawback, such as trade diversion, where a member country shifts its imports from a more efficient non-member producer to a less efficient member producer simply because of the removed internal tariff, reducing overall efficiency.
Examiner tip: Trade creation (shifting from an inefficient domestic producer to an efficient member producer) is a benefit of a trading bloc, while trade diversion (shifting from an efficient non-member producer to a less efficient member producer) is a cost — keep these two distinct.
14.
Marking analysis: A learner attempts the following task: “Define 'trading bloc', and explain one potential benefit and one potential drawback for a country of joining a regional trading bloc such as a free trade area or customs union.” Their response addresses only this point: “Defines a trading bloc as a group of countries that agree to reduce or eliminate trade barriers between themselves.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Defines a trading bloc as a group of countries that agree to reduce or eliminate trade barriers between themselves.
- Identifies the missing requirement: Explains a valid benefit, such as increased trade and market access among member countries, leading to greater specialization and economies of scale.
- Identifies the missing requirement: Explains a valid drawback, such as trade diversion, where a member country shifts its imports from a more efficient non-member producer to a less efficient member producer simply because of the removed internal tariff, reducing overall efficiency.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
15.
Explain how trade liberalization (the removal of trade barriers) might contribute to economic growth in a developing country, and state one risk this strategy carries.
[2 marks] · no calculator
Marking points
- Explains that trade liberalization allows a developing country to access larger export markets, exploit its comparative advantage, and attract foreign investment seeking to use its resources or labor for export production.
- States a valid risk, such as domestic infant industries being unable to survive sudden foreign competition, over-reliance on a narrow range of export goods (making the economy vulnerable to world price swings), or limited benefit if the country lacks infrastructure to compete effectively.
Examiner tip: Trade liberalization is a double-edged growth strategy in development economics — always be ready to pair its benefits with a specific, context-relevant risk rather than presenting it as unambiguously positive.
16.
Marking analysis: A learner attempts the following task: “Explain how trade liberalization (the removal of trade barriers) might contribute to economic growth in a developing country, and state one risk this strategy carries.” Their response addresses only this point: “Explains that trade liberalization allows a developing country to access larger export markets, exploit its comparative advantage, and attract foreign investment seeking to use its resources or labor for export production.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that trade liberalization allows a developing country to access larger export markets, exploit its comparative advantage, and attract foreign investment seeking to use its resources or labor for export production.
- Identifies the missing requirement: States a valid risk, such as domestic infant industries being unable to survive sudden foreign competition, over-reliance on a narrow range of export goods (making the economy vulnerable to world price swings), or limited benefit if the country lacks infrastructure to compete effectively.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
17.
A country imposes a minimum domestic content requirement on cars sold in its market, requiring at least 40% of parts to be sourced domestically. Explain how this type of non-tariff barrier protects domestic producers, and identify one group that is likely to be worse off as a result.
[2 marks] · no calculator
Marking points
- Explains that the requirement forces foreign car manufacturers to purchase a minimum share of parts from domestic suppliers, guaranteeing demand for the domestic parts industry even if its prices are not internationally competitive.
- Identifies consumers as likely worse off, since the requirement raises the cost of producing the car (if domestic parts are more expensive), and this cost is typically passed on as a higher final price.
Examiner tip: Domestic content requirements are a 'hidden' form of protection that acts much like a tariff in its economic effect, even though no explicit tax is charged at the border.
18.
Marking analysis: A learner attempts the following task: “A country imposes a minimum domestic content requirement on cars sold in its market, requiring at least 40% of parts to be sourced domestically. Explain how this type of non-tariff barrier protects domestic producers, and identify one group that is likely to be worse off as a result.” Their response addresses only this point: “Explains that the requirement forces foreign car manufacturers to purchase a minimum share of parts from domestic suppliers, guaranteeing demand for the domestic parts industry even if its prices are not internationally competitive.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that the requirement forces foreign car manufacturers to purchase a minimum share of parts from domestic suppliers, guaranteeing demand for the domestic parts industry even if its prices are not internationally competitive.
- Identifies the missing requirement: Identifies consumers as likely worse off, since the requirement raises the cost of producing the car (if domestic parts are more expensive), and this cost is typically passed on as a higher final price.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
19.
A country currently exports agricultural goods and imports manufactured goods. Explain one reason this pattern of trade might make the country's export revenue more volatile than a country exporting a diversified range of manufactured goods.
[2 marks] · no calculator
Marking points
- Explains that agricultural commodity prices tend to fluctuate significantly due to factors such as weather, pests, and global supply gluts or shortages, which are largely outside the country's control.
- Explains that relying heavily on one or a few export commodities means the whole economy's export revenue swings with that commodity's price, whereas a diversified range of manufactured exports averages out price swings across many different goods.
Examiner tip: Export concentration (relying on few goods) and commodity dependence are closely linked development issues — diversification of the export base is a commonly cited strategy to reduce this specific vulnerability.
20.
Marking analysis: A learner attempts the following task: “A country currently exports agricultural goods and imports manufactured goods. Explain one reason this pattern of trade might make the country's export revenue more volatile than a country exporting a diversified range of manufactured goods.” Their response addresses only this point: “Explains that agricultural commodity prices tend to fluctuate significantly due to factors such as weather, pests, and global supply gluts or shortages, which are largely outside the country's control.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that agricultural commodity prices tend to fluctuate significantly due to factors such as weather, pests, and global supply gluts or shortages, which are largely outside the country's control.
- Identifies the missing requirement: Explains that relying heavily on one or a few export commodities means the whole economy's export revenue swings with that commodity's price, whereas a diversified range of manufactured exports averages out price swings across many different goods.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
21.
Explain how the World Trade Organization (WTO) aims to promote international trade, and state one criticism commonly made of its role.
[2 marks] · no calculator
Marking points
- Explains that the WTO negotiates and enforces agreements between member countries to progressively reduce trade barriers and resolve trade disputes through an agreed set of rules.
- States a valid criticism, such as the concern that WTO rules can favor large, developed economies with greater negotiating power, or that enforcement and dispute settlement can be slow and difficult for smaller countries to access effectively.
Examiner tip: Whenever a question asks about an international institution, pair its stated purpose with at least one genuine, commonly cited limitation — this shows balanced evaluation rather than simply reciting its mission statement.
22.
Marking analysis: A learner attempts the following task: “Explain how the World Trade Organization (WTO) aims to promote international trade, and state one criticism commonly made of its role.” Their response addresses only this point: “Explains that the WTO negotiates and enforces agreements between member countries to progressively reduce trade barriers and resolve trade disputes through an agreed set of rules.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that the WTO negotiates and enforces agreements between member countries to progressively reduce trade barriers and resolve trade disputes through an agreed set of rules.
- Identifies the missing requirement: States a valid criticism, such as the concern that WTO rules can favor large, developed economies with greater negotiating power, or that enforcement and dispute settlement can be slow and difficult for smaller countries to access effectively.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
23.
Explain the concept of 'dumping' in international trade, and state one policy response a country might use against goods it believes are being dumped in its market.
[2 marks] · no calculator
Marking points
- Explains dumping as selling a good in a foreign market at a price below its cost of production (or below the price charged in the exporter's home market), often used to drive competitors out of the market.
- States a valid policy response, such as imposing an anti-dumping tariff on the specific goods to raise their price back to a fair market level.
Examiner tip: Anti-dumping tariffs are one of the few forms of protection widely accepted under WTO rules, precisely because dumping itself is considered an unfair trade practice rather than genuine comparative advantage.
24.
Marking analysis: A learner attempts the following task: “Explain the concept of 'dumping' in international trade, and state one policy response a country might use against goods it believes are being dumped in its market.” Their response addresses only this point: “Explains dumping as selling a good in a foreign market at a price below its cost of production (or below the price charged in the exporter's home market), often used to drive competitors out of the market.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains dumping as selling a good in a foreign market at a price below its cost of production (or below the price charged in the exporter's home market), often used to drive competitors out of the market.
- Identifies the missing requirement: States a valid policy response, such as imposing an anti-dumping tariff on the specific goods to raise their price back to a fair market level.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
25.
Explain how an export subsidy affects the domestic price, domestic quantity produced, and quantity exported of a good, compared to the free-trade equilibrium.
[4 marks] · no calculator
Marking points
- States that an export subsidy is a payment made by the government to domestic producers for each unit exported.
- Explains that the subsidy increases the effective price received by domestic producers, so domestic quantity supplied increases.
- Explains that with the world price effectively unchanged for buyers abroad, and domestic producers now preferring to sell to the (subsidized) export market, the quantity exported increases.
- Notes that this comes at a cost to the government budget, and that trading partners may view export subsidies as an unfair trade practice.
Examiner tip: An export subsidy works like a 'reverse tariff' from the producer's perspective — it raises the effective price received for exported units, increasing both production and the incentive to sell abroad rather than domestically.
26.
Marking analysis: A learner attempts the following task: “Explain how an export subsidy affects the domestic price, domestic quantity produced, and quantity exported of a good, compared to the free-trade equilibrium.” Their response addresses only this point: “States that an export subsidy is a payment made by the government to domestic producers for each unit exported.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that an export subsidy is a payment made by the government to domestic producers for each unit exported.
- Identifies the missing requirement: Explains that the subsidy increases the effective price received by domestic producers, so domestic quantity supplied increases.
- Identifies the missing requirement: Explains that with the world price effectively unchanged for buyers abroad, and domestic producers now preferring to sell to the (subsidized) export market, the quantity exported increases.
- Identifies the missing requirement: Notes that this comes at a cost to the government budget, and that trading partners may view export subsidies as an unfair trade practice.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
27.
Explain how a large reduction in global trade barriers over several decades might have contributed to both rising average living standards and rising income inequality within some developed countries.
[3 marks] · no calculator
Marking points
- Explains that trade liberalization generally lowers prices and increases variety for consumers overall, raising average real incomes and living standards.
- Explains that increased trade exposes low-skilled, labor-intensive domestic industries to competition from countries with lower labor costs, reducing employment and wages for low-skilled workers in the developed country.
- Explains that highly skilled workers and owners of capital, by contrast, often benefit from access to larger global markets, widening the income gap between these groups and displaced low-skilled workers.
Examiner tip: This is a genuinely debated real-world pattern in trade economics — average gains from trade can coexist with a more unequal distribution of those gains, which is why trade policy is often paired with domestic support (e.g. retraining programs) for displaced workers.
28.
Marking analysis: A learner attempts the following task: “Explain how a large reduction in global trade barriers over several decades might have contributed to both rising average living standards and rising income inequality within some developed countries.” Their response addresses only this point: “Explains that trade liberalization generally lowers prices and increases variety for consumers overall, raising average real incomes and living standards.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that trade liberalization generally lowers prices and increases variety for consumers overall, raising average real incomes and living standards.
- Identifies the missing requirement: Explains that increased trade exposes low-skilled, labor-intensive domestic industries to competition from countries with lower labor costs, reducing employment and wages for low-skilled workers in the developed country.
- Identifies the missing requirement: Explains that highly skilled workers and owners of capital, by contrast, often benefit from access to larger global markets, widening the income gap between these groups and displaced low-skilled workers.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
29.
A country currently has no trade restrictions on steel imports. Using a standard demand and supply diagram in words, explain what happens to domestic producer surplus and consumer surplus if the country opens up to free trade in a good it previously did not trade, where the world price is below the pre-trade domestic equilibrium price.
[5 marks] · no calculator
Marking points
- States that since the world price is below the pre-trade domestic price, the domestic price falls to the world price once trade opens.
- Explains that domestic producer surplus falls, since producers now receive a lower price and domestic quantity supplied decreases.
- Explains that domestic consumer surplus rises, since consumers now pay a lower price and domestic quantity demanded increases.
- States that the gap between the new (higher) quantity demanded and the new (lower) quantity supplied is filled by imports.
- Concludes that the gain in consumer surplus exceeds the loss in producer surplus, so total welfare (consumer plus producer surplus) increases overall from opening to trade.
Examiner tip: Whether a country becomes a net importer or net exporter when it opens to trade depends entirely on whether the world price is below or above its pre-trade domestic equilibrium price — always compare these two prices first.
30.
Marking analysis: A learner attempts the following task: “A country currently has no trade restrictions on steel imports. Using a standard demand and supply diagram in words, explain what happens to domestic producer surplus and consumer surplus if the country opens up to free trade in a good it previously did not trade, where the world price is below the pre-trade domestic equilibrium price.” Their response addresses only this point: “States that since the world price is below the pre-trade domestic price, the domestic price falls to the world price once trade opens.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that since the world price is below the pre-trade domestic price, the domestic price falls to the world price once trade opens.
- Identifies the missing requirement: Explains that domestic producer surplus falls, since producers now receive a lower price and domestic quantity supplied decreases.
- Identifies the missing requirement: Explains that domestic consumer surplus rises, since consumers now pay a lower price and domestic quantity demanded increases.
- Identifies the missing requirement: States that the gap between the new (higher) quantity demanded and the new (lower) quantity supplied is filled by imports.
- Identifies the missing requirement: Concludes that the gain in consumer surplus exceeds the loss in producer surplus, so total welfare (consumer plus producer surplus) increases overall from opening to trade.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
31.
Explain why countries with abundant unskilled labor tend to export labor-intensive goods, while countries with abundant capital tend to export capital-intensive goods, according to the factor endowment theory of trade.
[3 marks] · no calculator
Marking points
- States that a country's relative abundance of a factor of production (labor or capital) tends to make that factor relatively cheap within the country.
- Explains that a country can therefore produce goods intensive in its abundant (cheap) factor at a relatively lower cost, giving it a comparative advantage in those goods.
- Concludes that the country specializes in and exports goods that make intensive use of its abundant factor, consistent with this theory of trade.
Examiner tip: This factor endowment explanation complements, rather than replaces, the comparative advantage model — it explains one common underlying reason why opportunity costs differ between countries in the first place.
32.
Marking analysis: A learner attempts the following task: “Explain why countries with abundant unskilled labor tend to export labor-intensive goods, while countries with abundant capital tend to export capital-intensive goods, according to the factor endowment theory of trade.” Their response addresses only this point: “States that a country's relative abundance of a factor of production (labor or capital) tends to make that factor relatively cheap within the country.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that a country's relative abundance of a factor of production (labor or capital) tends to make that factor relatively cheap within the country.
- Identifies the missing requirement: Explains that a country can therefore produce goods intensive in its abundant (cheap) factor at a relatively lower cost, giving it a comparative advantage in those goods.
- Identifies the missing requirement: Concludes that the country specializes in and exports goods that make intensive use of its abundant factor, consistent with this theory of trade.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.