Explain why countries trade, the benefits and drawbacks of international trade, the balance of payments, and the arguments for and against protectionism.

What this dot point is asking

The international economy section opens with trade between countries. CCEA expects you to explain what imports and exports are, why countries trade, the benefits and drawbacks of international trade, the balance of payments (how a country keeps score of its trade), and the arguments for and against protectionism (tariffs, quotas and other barriers). This is the foundation of Section 5, The international economy, and links to exchange rates and globalisation.

Imports, exports and why countries trade

International trade is the exchange of goods and services across national borders. Imports are goods and services a country buys from abroad; exports are goods and services it sells abroad. The UK, for example, imports cars and electronics and exports financial services and machinery.

Countries trade because no country can produce everything efficiently. By specialising in what they are relatively best at and trading for the rest, all countries can gain. Reasons for trade include access to goods and raw materials that cannot be produced at home (such as tropical fruit or certain minerals), the ability to buy more cheaply from countries that produce a good at lower cost, larger markets for a country's own firms, and the wider choice and competition that benefit consumers.

The benefits and drawbacks of trade

International trade brings clear benefits. Consumers get lower prices and greater choice; firms reach larger markets and can grow; specialisation raises efficiency and output; and competition from imports keeps domestic firms sharp and innovative.

There are also drawbacks. Domestic firms and jobs can be lost if cheaper imports undercut them; an economy can become over-dependent on imports of essential goods, leaving it vulnerable if supply is disrupted; and trade can expose workers to competition that causes structural unemployment. These drawbacks are the usual arguments for protectionism.

The balance of payments

The balance of payments is a record of all the financial transactions between a country and the rest of the world over a period. The part most often examined is the trade balance (or balance of trade): the value of exports minus the value of imports.

A trade surplus occurs when exports exceed imports, so more money flows in for goods sold than flows out for goods bought. A trade deficit occurs when imports exceed exports, so more money leaves the country than comes in. A persistent deficit can be a concern because it must be financed, though it also means consumers are enjoying plenty of imported goods.

Protectionism: the arguments for and against

Protectionism is the use of barriers to restrict imports and shield domestic industries. The main tools are tariffs (taxes on imports, which raise their price), quotas (limits on the quantity of a good that may be imported) and subsidies to domestic firms.

The arguments for protectionism are to protect domestic jobs and infant industries that are not yet strong enough to compete, to guard against dumping (foreign goods sold below cost), and to reduce a trade deficit.

The arguments against are that protectionism raises prices for consumers, reduces choice and competition, can make domestic firms inefficient by shielding them, and risks retaliation by other countries, which harms a country's own exporters. For these reasons, free trade is generally preferred, with protectionism used sparingly.

Why this matters

International trade is central to a modern economy and to the balance-of-payments objective from Section 4. It links directly to exchange rates (which change the price of imports and exports) and to globalisation, and the protectionism debate is a classic evaluation topic. Examiners reward candidates who can calculate a trade balance, explain why countries trade, and weigh the arguments for and against protectionism before reaching a judgement.