International Economics Cheat Sheet

The core ideas of International Economics distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/international-economics/cheatsheet

Quick Reference

Comparative Advantage

The principle that a country should specialize in producing and exporting goods for which it has the lowest opportunity cost relative to other countries, even if it lacks an absolute advantage in any good. This is the foundational concept explaining why trade is mutually beneficial.

Balance of Payments

A comprehensive accounting record of all economic transactions between residents of one country and the rest of the world during a given period. It consists of the current account (trade in goods and services, income, transfers), the capital account, and the financial account.

Exchange Rate

The price of one country's currency expressed in terms of another country's currency. Exchange rates can be determined by market forces (floating rates) or fixed by government policy (pegged rates), and they play a crucial role in international trade competitiveness and capital flows.

Tariffs and Trade Barriers

Tariffs are taxes imposed on imported goods, raising their price in the domestic market. Non-tariff barriers include quotas, subsidies, regulatory standards, and administrative hurdles. Both forms of protection distort trade patterns and create economic inefficiencies, though they may serve strategic policy objectives.

Heckscher-Ohlin Model

A trade theory stating that countries export goods that intensively use their abundant factors of production and import goods that intensively use their scarce factors. It explains trade patterns based on differences in factor endowments (labor, capital, land) across countries.

Purchasing Power Parity (PPP)

The theory that in the long run, exchange rates should adjust so that identical goods cost the same in different countries when prices are expressed in a common currency. It serves as a benchmark for assessing whether currencies are overvalued or undervalued.

Terms of Trade

The ratio of a country's export prices to its import prices, indicating how much a country can import for each unit of goods it exports. An improvement in the terms of trade means a country can buy more imports for the same volume of exports.

Foreign Direct Investment (FDI)

Investment made by a firm or individual in one country in business interests in another country, typically by establishing operations or acquiring assets. FDI is distinguished from portfolio investment by the investor's intent to exercise significant management control.

Mundell-Fleming Model

An extension of the IS-LM framework to an open economy that analyzes the effectiveness of monetary and fiscal policy under different exchange rate regimes and degrees of capital mobility. It demonstrates the policy trilemma: a country cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.

Trade Creation and Trade Diversion

Trade creation occurs when a customs union or free trade agreement causes production to shift from a high-cost domestic producer to a lower-cost partner country. Trade diversion occurs when trade shifts from a lower-cost non-member to a higher-cost member country due to preferential tariff treatment.

Key Terms at a Glance

Absolute Advantage:The ability to produce a good using fewer inputs or resources than another producer or country.

Balance of Payments:A systematic record of all economic transactions between residents of a country and the rest of the world over a given period.

Beggar-Thy-Neighbor Policy:Economic policies that benefit the implementing country at the expense of its trading partners, such as competitive devaluations or protectionist tariffs.

Capital Account:The component of the balance of payments that records capital transfers and the acquisition or disposal of non-produced, non-financial assets.

Comparative Advantage:The ability to produce a good at a lower opportunity cost than another country, forming the basis for mutually beneficial trade.

Currency Appreciation:An increase in the value of a currency relative to another currency in foreign exchange markets.

Currency Depreciation:A decrease in the value of a currency relative to another currency, making exports cheaper and imports more expensive.

Current Account:The balance of payments component recording trade in goods and services, net primary income, and net secondary income.

Customs Union:A trade agreement where member countries eliminate tariffs among themselves and adopt a common external tariff against non-members.

Dumping:Selling goods in a foreign market at a price below the normal value (often below production cost), typically to gain market share or dispose of surplus inventory.

Exchange Rate:The price at which one country's currency can be exchanged for another country's currency.

Export Subsidy:A government payment or tax benefit to domestic firms to encourage exports, which can distort trade and invite retaliation.

Foreign Direct Investment:Cross-border investment in which a resident of one country obtains lasting interest and management influence in an enterprise in another country.

Free Trade Area:A region where member countries have eliminated tariffs among themselves but maintain independent external trade policies.

GATT:The General Agreement on Tariffs and Trade (1947-1994), a multilateral agreement governing international trade that was succeeded by the WTO.

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