Introduction to the Theory of International Trade

Each tour covers a variety of economic theory related to the issues raised in the tour. In the Trade Tour the following theories are considered:

• The Benefits of Trade
• The Principle of Absolute and Comparative Advantage
• Trade Creation and Trade Diversion
• The Formation of Trading Blocs
• Terms of Trade
• Balance of Payments:
  
  • Balance of Payments Policies
  • Interpreting the Balance of Payments
• Exchange rates:
  
  • Introduction to Exchange Rates
  • Fixed Exchange Rates
  • Floating Exchange Rates
  • Effects of a Floating Exchange Rate System
  • The Marshall-Lerner Condition
  • The Economic Effects of a Devaluation
• Protection:
  
  • The Imposition of Quotas
  • The Imposition of Tariffs and Welfare Loss
• Consumer and Producer Surplus
• Price Elasticity of Demand

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Economists use economic theories and model for essentially two reasons:

1. To enable a better understanding of a particular economic problem.
2. To allow predictions to be made about the effect of changes in variables, policies and strategies.

Many students new to economics find the constant desire to express what on the face of it seems to be a common sense assertion frustrating. Particularly when many of the models used are based on simplifying assumption. Nevertheless reality is often very complex and influenced by numerous interconnected variables. Often assumptions such as ceteris paribus must be made if we are going to be able to isolate certain variables and consider the impact of a change in these.

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