International Trade & Exchange Rates

Comparative advantage allows countries to benefit from trade by specialising in goods with lower opportunity costs.. Comparative advantage shows that what matters is the relative opportunity cost of producing each good, not who is absolutely more efficient.

A weaker pound makes UK exports cheaper and imports costlier, and if the Marshall‑Lerner condition holds the trade balance improves over time.. A weaker pound lowers the foreign-currency price of UK exports and raises the domestic price of imports.

Depreciation lowers the foreign‑currency price of UK goods, boosting export demand, while raising the domestic price of imports, reducing import demand. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.

• !Students often think a currency depreciation automatically worsens the trade balance or that price effects dominate, ignoring the crucial role of elasticities.
• !Some people think trade only benefits the more efficient country, but this is incorrect. Both countries can gain from trade based on comparative advantage.
• !Some people may mistakenly believe that only foreign exporters are harmed by tariffs, but in reality, domestic consumers and firms that use the imported good as an input often bear a significant portion of the cost. Others may think that domestic producers always benefit from tariffs, but while they may gain in the short term, the overall impact on the economy can be negative.

Answer each from memory — you'll see instantly whether you're right and why.

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