EFB336 International Economics

How EFB336 is assessed

What EFB336 covers

Move from the gravity model and comparative advantage to modern firms, policy institutions and contemporary trade disputes.

These models answer different questions.

Gravity explains the strength of bilateral flows; comparative advantage explains the direction of specialisation; scale economies explain concentration; and firm-level models explain why only some producers export or invest abroad.

The policy half of the course connects those mechanisms to tariffs, quotas, the World Trade Organization, regional agreements, inequality, multinational taxation, environmental policy and trade wars.

Strong analysis follows a consistent chain: identify the market failure or political objective, trace the instrument through prices and quantities, separate transfers from efficiency losses, and state which groups gain or lose.

Diagrams are useful only when their labels and welfare areas support that verbal chain.

Assessment consists of a group project worth 30%, an individual online group viva voce worth 10%, and an individual face-to-face final examination worth 60%. The assessment overview states that the final uses four equally weighted essay questions and that all course materials are examinable.

The supplied final-exam page does not state a duration or permitted-materials rule, so this book does not infer either. Revision therefore emphasises comparison, causal explanation and defensible policy evaluation rather than a guessed examination routine.

Worked example · free

Calculate and explain the welfare effect of a tariff

Key terms

Absolute advantage

The ability to produce a good with fewer resources than another producer.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Gravity model

A model linking bilateral trade positively to economic size and negatively to trade resistance such as distance.

Multilateral resistance

The influence of each country’s trade barriers with all partners on any one bilateral flow.

External economies of scale

Cost reductions that arise when an industry expands rather than when one firm alone expands.

Trade creation

Replacement of costly domestic production by lower-cost imports after economic integration.

Trade diversion

Replacement of lower-cost external imports by higher-cost partner imports because preferences alter relative prices.

Tariff

A tax on imports that creates a wedge between the world price and the domestic price.

Import quota

A quantitative restriction on imports whose rents depend on how import licences are allocated.

Terms of trade

The price of a country’s exports relative to the price of its imports.

Carbon leakage

A shift of emissions or production abroad following uneven climate policy across countries.

Retaliation

A trade restriction imposed in response to another country’s policy action.

EFB336 FAQ

Questions students ask in each EFB336 chapter

Why is distance negative in a gravity equation?

Distance proxies transport, information, coordination and other separation costs. When the structural equation places distance in the denominator, its logarithm enters with a minus sign. The coefficient should be interpreted conditionally because other barriers and each country’s alternative partners also affect trade. Chapter 01 · World Trade and the Gravity Model

Can a less productive country still export?

Yes. A country may have an absolute disadvantage in both goods and still possess comparative advantage in the good for which its relative productivity disadvantage is smaller. Export direction follows opportunity cost, while wages and exchange conditions help reconcile productivity differences. Chapter 02 · Comparative Advantage and Factor Endowments

How do external economies differ from internal economies?

Internal economies lower a firm’s cost as that firm expands its own output. External economies lower the cost of firms because the whole industry or local cluster grows. The distinction matters for market structure: internal scale favours large firms, while external scale can coexist with many firms. Chapter 03 · Agglomeration and External Scale Economies

Why do only some firms export?

Exporting often requires market research, distribution, compliance and other fixed costs in addition to shipping costs. Productive firms generate enough operating profit to cover those costs. Less productive firms may remain domestic even when every firm faces the same foreign market price. Chapter 04 · Firm Trade, Outsourcing and Multinationals

Why does a tariff create two triangles?

The higher domestic price induces production by suppliers whose marginal cost exceeds the world price and prevents consumption valued above the world price. Those are separate production and consumption distortions. Transfers to producers and government must be removed before identifying the net efficiency loss. Chapter 05 · Tariffs, Quotas and Trade Intervention

Why bargain multilaterally over tariffs?

Each government may face pressure to protect its own market while wanting access abroad. Reciprocal bargaining helps exchange politically valuable concessions and restrains mutually damaging escalation. It can turn diffuse export interests into support for domestic liberalisation. Chapter 06 · WTO Rules and Multilateral Bargaining

Why can a trade agreement reduce welfare?

Preferences may cause buyers to replace a lower-cost outside supplier with a higher-cost partner whose tariff advantage makes its delivered price cheaper. The government also loses tariff revenue on the displaced outside imports. These trade-diversion costs can outweigh production savings. Chapter 07 · Regional Agreements and Brexit

Can trade raise income and inequality together?

Yes. Specialisation can increase aggregate real income while changing product prices and sector demand in ways that reward some factors, firms or regions more than others. Evaluating trade therefore requires separate statements about total surplus, its distribution and the costs of adjustment. Chapter 08 · Globalisation and Inequality

Why does a monopolist not price from marginal revenue?

Marginal revenue determines the profit-maximising quantity when equated with marginal cost. Price is then read from the demand curve for that quantity. Confusing the two curves understates the price because marginal revenue lies below demand for a downward-sloping demand schedule. Chapter 09 · Multinational Market Power and Taxation

Why can domestic emissions fall while the footprint stays high?

A country may import carbon-intensive products instead of producing them locally. Production-based accounts record the emissions where production occurs, while consumption-based accounts attribute embodied emissions to final demand. The two measures answer different policy questions and can move in opposite directions. Chapter 10 · Trade, Pollution and Carbon Tariffs

Why might a government begin a trade conflict?

Motives can include protecting politically important industries, seeking bargaining leverage, responding to a partner’s policy or attempting to improve terms of trade. These motives do not establish welfare gains. Incidence, retaliation, uncertainty and downstream input costs must be evaluated separately. Chapter 11 · Trade Wars and Retaliation

Is reshoring always the safest strategy?

No. Domestic production can remain exposed to local disasters, imported inputs or a single plant. Diversified international supply may withstand country-specific shocks better. The relevant comparison is the portfolio of risks, adjustment speed and cost rather than distance alone. Chapter 12 · Strategy for an Uncertain Trade System

How to study for the exam

Build revision around mechanisms rather than isolated definitions. First, make a one-page comparison of the gravity, comparative-advantage, scale-economy and heterogeneous-firm models, recording the question each model answers and its crucial assumption. Second, redraw the tariff, quota and environmental-policy diagrams from blank axes and narrate each movement in words.

Third, use a policy ledger with four headings: efficiency, distribution, strategic response and institutional constraint. This prevents an essay from stopping at a one-sided claim. Fourth, prepare paired comparisons such as multilateral versus regional bargaining, trade creation versus diversion, and cooperation versus retaliation.

For every contemporary case, lead with the economic mechanism and use the case as evidence rather than as a substitute for analysis. Finally, practise four compact essay plans in one sitting because the official material identifies four equally weighted questions. Allocate planning time consistently, state assumptions, show intermediate calculations, and end with a conditional judgement.

Do not build a strategy around an assumed duration or materials policy because neither is stated in the captured final-exam information.

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