IB Economics SL & HLTopic 4 — The Global EconomyPaper 1 & 2Core idea~9 min read
Why Free Trade Benefits Countries
No country makes everything it uses, and no country is good at making everything. Trade lets each one do what it does best and swap for the rest. The theory is simple; the marks come from being able to show the gain on a diagram and then argue about who actually gets it.
📚 What you need to know
International trade is the exchange of goods and services between countries, through exports and imports.
Trade is free when governments do not step in with tariffs, quotas, subsidies or other barriers.
The main gains are more choice, lower prices, access to resources, new ideas, greater efficiency, growth and development.
If the world price is below the domestic equilibrium price, the country imports the shortfall.
If the world price is above the domestic equilibrium price, the country exports the surplus.
World supply is drawn as a horizontal line, because one country’s demand is tiny next to the world market.
Trade raises total output, but it does not share the gains evenly — that is where the evaluation lives.
Where the gains come from
Every benefit of trade traces back to the same root: countries specialise in what they are relatively good at, so the same resources produce more.
Benefit
Why it happens
Greater choice
Households can buy goods that are not made at home at all, so living standards rise
Lower prices
Domestic firms face competition from abroad and cannot hold prices above the world price
Access to resources
Firms can buy raw materials and components their own country does not have, cutting costs
Flow of ideas
Technology and better methods spread with the goods and the firms that trade them
Greater efficiency
Only firms that can compete internationally survive, so world resources are used better
Economic growth
Exports are a component of aggregate demand, so rising exports raise real output
Economic development
Higher output means more jobs and higher incomes, which lifts living standards
Better relations
Countries that depend on each other economically have more reason to stay on good terms
Do not list all eight in an essay. Pick the two or three that fit the country in the question and develop them properly. Depth beats breadth every time in Paper 1.
When the world price is below the domestic price
Here the country can buy the good more cheaply abroad than it can make it. Domestic firms have to accept the world price, so some of them cut back, consumers buy more, and the gap between the two is filled by imports.
The world supply curve is flat because a single country can buy as much as it likes without moving the world price.
When the world price is above the domestic price
Now the country is the cheap producer. Domestic firms can sell abroad for more than they would get at home, so they expand output, domestic consumers pay the higher world price and buy less, and the surplus is exported.
Same two domestic curves, same flat world price line — only the position of Pw changes. Learn one diagram and you can draw both.
The quick check: world price under the equilibrium means imports; world price over it means exports. Everything else on the diagram follows from that one comparison.
Worked examples
WORKED EXAMPLE
Calculating imports and import expenditure
In the market for bananas in a small country, the world price is $3 per kg. At that price, domestic firms supply 20 million kg and domestic consumers demand 80 million kg. Calculate the quantity of imports and the import expenditure. [4]
Step 1: find the excess demand at the world priceimports = Qd − Qs = 80m − 20mimports = 60 million kgStep 2: expenditure = price × quantity= $3 × 60mimport expenditure = $180 millionOnly the imported quantity goes into import expenditure — not the whole 80m consumed.
WORKED EXAMPLE
Calculating exports and export revenue
In the market for rice in a different country, the domestic equilibrium price is $6 per kg but the world price is $8. At $8, domestic supply is 90 million kg and domestic demand is 30 million kg. Calculate the quantity of exports and the export revenue. [4]
Step 1: find the excess supply at the world priceexports = Qs − Qd = 90m − 30mexports = 60 million kgStep 2: revenue = price × quantity= $8 × 60mexport revenue = $480 millionDomestic consumers are worse off here: they now pay $8 instead of $6. That is your evaluation point.
💡 Exam tip
Draw the world price as a straight horizontal line across the whole diagram, and label it Sw.
Mark three quantities, not one: domestic supply, domestic demand, and the original equilibrium.
Say who gains and who loses in the same breath. That habit turns explanation into evaluation later.
Use the exact words contracts and extends for movements along a curve. Trade does not shift Sd or Dd.
Read the units on the axes before calculating. Millions and thousands are the usual trap.
Have one real example ready, such as a country that exports a commodity it has a natural advantage in.
⚠ Common mix-up
Shifting the domestic curves when the world price appears. Nothing shifts — you move along them to the new price.
Reading imports as the whole quantity demanded rather than the gap between demand and domestic supply.
Drawing the world supply curve upward sloping. For a small country it is horizontal.
Assuming everyone gains. Imports hurt domestic producers; exports raise the price for domestic consumers.
Calling any cheap import “dumping”. Dumping means selling below cost, not simply selling cheaply.
Confusing trade with the balance of trade. The diagram shows one market, not the whole current account.
Up next: Absolute and Comparative Advantage — the HL theory that explains why countries specialise in the first place, and why even a country that is worse at everything still has something to sell.
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