International Trade for CA Foundation
International trade: theories (absolute advantage, comparative advantage, Heckscher–Ohlin), trade policy instruments, the WTO, the balance of payments and exchange rates.
Business EconomicsPaper 411 MCQs2 lessons2 flashcards3 memory tricks
Practise International Trade free
What you'll learn
- Why countries trade
Explain the main theories of international trade. - Trade policy, WTO and balance of payments
Identify trade barriers and the parts of the balance of payments.
Concepts explained
Theories of international trade
Smith: absolute advantage. Ricardo: comparative advantage (lower opportunity cost). Heckscher–Ohlin: export goods using your abundant factor.
What it means
- Absolute advantage: produce more with the same resources.
- Comparative advantage: lower opportunity cost; trade benefits both even if one is better at everything.
- Heckscher–Ohlin: factor endowments decide trade patterns.
- New trade theory: economies of scale and variety.
- India: 1 phone = 2 shirts; Japan: 1 phone = 1 shirt
Answer: India makes shirts, Japan phones
- Labour-abundant India
Answer: Exports labour-intensive textiles
Related terms
- Mercantilism: favoured exports and gold accumulation
- Leontief paradox: US exports were labour-intensive, against H–O
Exam tip: For comparative advantage, compute each country's opportunity cost and compare.
Trade policy and the WTO
Governments protect or promote trade with tariffs, quotas, subsidies and anti-dumping duties; the WTO sets rules for fair, non-discriminatory trade.
What it means
- Tariff: tax on imports; quota: quantity limit.
- Anti-dumping duty: against imports below normal value.
- WTO (1995) succeeded GATT (1947).
- MFN: same treatment for all members; national treatment: imports treated like domestic goods after entry.
- Steel sold in India below its home price
Answer: Anti-dumping duty
- India cuts a tariff for one WTO member
Answer: Must extend it to all members
Related terms
- Free trade area: exception to MFN
- Non-tariff barriers: standards, licences, procedures
Exam tip: Tariff = price tool; quota = quantity tool.
Balance of payments and exchange rates
The balance of payments records all transactions with the rest of the world; the exchange rate links the rupee to other currencies.
What it means
- Balance of trade: exports − imports of goods.
- Current account: goods, services, primary income, secondary income (transfers).
- Capital/financial account: FDI, FPI, loans, reserves.
- Depreciation: exports cheaper, imports dearer; terms of trade = export price index ÷ import price index × 100.
- BoT −15; services +12; income and transfers +8
Answer: +5
- ₹83 → ₹86 per $
Answer: Exports cheaper in dollars
Related terms
- Floating exchange rate: set by demand and supply
- Forex reserves: RBI's holdings used to steady the rupee
Exam tip: Goods only = balance of trade; goods + services + income + transfers = current account.
Memory tricks
Smith: absolute advantage; Ricardo: comparative; H–O: factor endowments.
Tariff: import tax; quota: import quantity limit.
Depreciation makes exports cheaper and imports dearer.
Try 3 CA Foundation-style questions
Q1. Balance of trade refers to
- the difference between all receipts and payments with the rest of the world
- foreign exchange reserves
- the difference between the value of exports and imports of goods
- capital inflows
Show answer
Answer: (3) the difference between the value of exports and imports of goods
Balance of trade covers visible trade (goods) only; balance of payments covers goods, services, income, transfers and capital flows.
Q2. The World Trade Organization (WTO) was established in
- 1995, replacing GATT
- 1947
- 1944, at Bretton Woods
- 2001
Show answer
Answer: (1) 1995, replacing GATT
The WTO came into being on 1 January 1995 after the Uruguay Round, succeeding the GATT (1947).
Q3. The current account of the balance of payments includes
- foreign direct investment only
- loans from the IMF only
- changes in foreign exchange reserves only
- trade in goods and services, primary income and transfers
Show answer
Answer: (4) trade in goods and services, primary income and transfers
Current account: merchandise trade, services (invisibles), primary income (interest, dividends, wages) and secondary income (transfers like remittances).
Practise all 11 questions Free · explanations for every option · see where you go wrong