This mini-lesson works through Unit 4 — The global economy: international trade and comparative advantage, protectionism, exchange rates, the balance of payments, the terms of trade, economic integration, and measuring economic development.
Work through each screen, answer the questions (several are calculations) and collect ⭐ stars. Press Start when ready.
International trade
Why countries trade
Countries gain by specialising in what they produce relatively best and trading for the rest. Comparative advantage means producing a good at a lower opportunity cost than another country.
Gains from trade include: greater world output, lower prices, more variety, economies of scale and access to resources a country lacks.
Key concept — interdependence: specialisation makes economies reliant on each other, which raises living standards but also spreads shocks.
Quick check
The gain from trade
?Two countries specialise according to comparative advantage and then trade. The main gain is that:
Protectionism
Free trade vs protectionism
Governments sometimes restrict trade to protect domestic industries or jobs. The main tools are:
Tariff — a tax on imports, raising their price.
Quota — a physical limit on the quantity of a good that can be imported.
Subsidy — a payment to domestic producers, lowering their costs so they can undercut imports.
Costs of protection: higher prices for consumers, inefficiency, welfare loss and risk of retaliation, even if some domestic jobs are protected.
Sort it
Which protectionist tool?
Tap a description, then tap the tool it describes.
🧾 Tariff
🚧 Quota
💶 Subsidy
Exchange rates
Exchange rates
An exchange rate is the price of one currency in terms of another. In a floating system it is set by demand for and supply of the currency.
Appreciation — the currency rises in value: exports become dearer abroad, imports cheaper at home.
Depreciation — the currency falls in value: exports cheaper, imports dearer.
Converting currencies
If £1 = $1.25, then a UK good priced at £240 costs 240 × 1.25 = $300 to a US buyer.
Calculate
Your turn — currency conversion
1The exchange rate is £1 = $1.25. A UK machine is priced at £240. Calculate its price to a US buyer in dollars.
?A country’s currency appreciates. Ceteris paribus, the likely effect on its trade is that:
Balance of payments
The balance of payments
The balance of payments records all transactions between a country and the rest of the world. Its main parts are:
Current account — trade in goods and services, primary income (investment income) and secondary income (transfers).
Capital and financial account — flows of investment and financial assets.
A current account deficit is largely offset by surpluses on the financial account (e.g. inward investment).
Trade balance: value of exports − value of imports. A negative figure is a deficit.
Calculate
Your turn — trade in goods
2A country exports $500bn of goods and imports $620bn of goods. Calculate its balance of trade in goods (a deficit should be negative).
$bn
Hint: balance = exports − imports = 500 − 620.
Terms of trade
The terms of trade
The terms of trade measure the ratio of a country’s export prices to its import prices, expressed as an index:
Terms of trade = (index of export prices ÷ index of import prices) × 100
An improvement (a rise in the index) means each unit of exports buys more imports. It can come from higher export prices or lower import prices.
Worked example
Export price index = 120, import price index = 100. Terms of trade = (120 ÷ 100) × 100 = 120 — an improvement from a base of 100.
Calculate
Your turn — terms of trade
3A country’s index of export prices is 110 and its index of import prices is 100. Calculate its terms of trade index.
index
Hint: (110 ÷ 100) × 100.
Quick check
Reading the index
?A country’s terms of trade index rises from 100 to 110. This means that:
Economic integration
Economic integration
Countries cooperate through deeper stages of integration:
Free trade area — no tariffs between members.
Customs union — free trade plus a common external tariff.
Common market — adds free movement of factors (labour and capital).
Monetary union — members share a single currency and monetary policy.
Trade-off: integration brings larger markets and efficiency but reduces national policy independence.
Match it
Match each term to its definition
Tap a definition on the left, then the term on the right.
Definition
Term
Economic development
Measuring economic development
Growth is a rise in output; development is a broader improvement in living standards and freedoms. Because no single figure captures it, we use composite measures.
The Human Development Index (HDI) combines three dimensions:
Health — life expectancy at birth.
Education — mean and expected years of schooling.
Income — GNI per capita.
Single vs composite: single indicators (e.g. GDP per capita) are easy but narrow; composite indicators like HDI give a fuller picture.
Quick check
Inside the HDI
?Besides income (GNI per capita), the Human Development Index combines which two dimensions?
Barriers & sustainability
Barriers to development & sustainability
Common barriers to development include poverty traps, low savings and investment, poor infrastructure, weak institutions and governance, heavy dependence on primary exports, and high debt.
Sustainable development meets present needs without compromising the ability of future generations to meet theirs — balancing growth with environmental protection and equity.
Strategies: investment in human capital and infrastructure, trade, foreign direct investment, aid, and micro-finance can all support development.
Calculate
Your turn — imports after appreciation
4The pound appreciates from £1 = $1.25 to £1 = $1.40. A US product costs $700. Calculate its price to a UK buyer, in pounds, AFTER the appreciation.
£
Hint: pounds = dollars ÷ exchange rate = 700 ÷ 1.40. A stronger pound makes imports cheaper.
Recap
The big ideas to know
Trade: specialise by comparative advantage (lower opportunity cost) → gains from trade