ECO 303: International Trade Theory and Policy Exam Notes

International trade shapes national income, employment, technology transfer, and development prospects—especially in open and rapidly integrating economies. ECO 303 focuses on the core theories that explain why countries trade, how trade patterns emerge, and what policy tools governments use to influence trade outcomes. This study guide is structured around exam-relevant concepts, graphical and mathematical intuition, and policy debates, with special emphasis on how these ideas show up in the South African tertiary learning context (universities, colleges, and TVETs).

To support your revision effectively, the guide proceeds from foundational theory (comparative advantage, demand and supply, trade costs) to policy (tariffs, quotas, export subsidies, trade agreements), then to welfare, distributional impacts, and contemporary debates (global value chains, industrial policy, and “new” trade perspectives). Throughout, you’ll find exam-style problem templates, typical derivations, and consistent examples that you can adapt in your own answers.

Section 1: Core Foundations of International Trade (Theory You Must Get Right)

1.1 Why Countries Trade: Gains from Trade, Specialisation, and Opportunity Costs

A frequent exam starting point is the basic logic of trade: if production possibilities differ across countries (due to technology, resources, or productivity), then specialisation can raise total output and welfare. Even if one country has absolute advantages in everything, trade can still generate gains through comparative advantage, which relies on opportunity cost rather than efficiency alone.

Key terms to remember:

Absolute advantage: a country can produce a good with fewer inputs than another.
Comparative advantage: a country can produce a good at a lower opportunity cost relative to another good.
Opportunity cost: the value of the forgone alternative when choosing one production option over another.

Exam tip: Many students confuse absolute and comparative advantage. In diagrams or written answers, explicitly link comparative advantage to relative costs.

1.2 Comparative Advantage via Numbers and Opportunity Costs (Worked Example Template)

Consider two countries, Country A and Country B, producing two goods: W and C.

Suppose their labour requirements per unit are:

Good	Country A labour per unit	Country B labour per unit
W	2 hours	6 hours
C	3 hours	4 hours

Compute opportunity cost:

For Country A:
- Opportunity cost of 1 unit of W in terms of C:
- If A uses 2 hours to make W, those 2 hours could make (2/3) units of C (because C takes 3 hours per unit).
- So OC(_A)(W) = (2/3) units of C.
For Country B:
- OC(_B)(W) = 2 hours of labour? Use B’s labour: W takes 6 hours, C takes 4 hours.
- If B uses 6 hours to make W, those 6 hours could make (6/4 = 1.5) units of C.
- So OC(_B)(W) = 1.5 units of C.

Since (2/3 < 1.5), Country A has comparative advantage in W. Similarly you can compute OC of C:

OC(_A)(C): 1 unit of C requires 3 hours, those 3 hours can make (3/2 = 1.5) units of W ⇒ OC(_A)(C) = 1.5 W.
OC(_B)(C): 1 unit of C requires 4 hours, those 4 hours can make (4/6 = 2/3) units of W ⇒ OC(_B)(C) = 2/3 W.

So Country B has comparative advantage in C.

How to write the exam answer:

Calculate opportunity costs; 2) Identify comparative advantage; 3) State that trade allows each country to specialise where opportunity cost is lower; 4) Conclude that total world output increases and both can potentially gain if the terms of trade lie between autarky opportunity costs.

1.3 Production Possibilities Frontiers (PPF) and Autarky Equilibrium

A classic diagram question: compare autarky (no trade) with free trade.

The PPF shows the maximum combinations of two goods a country can produce given resources and technology.
Slope of PPF at a point reflects the opportunity cost.
Indifference curves represent consumer preferences; the tangency between PPF and an indifference curve gives the autarky consumption bundle.

With trade, the consumption bundle changes: once trade is possible, consumption is determined by:

the world relative price (terms of trade),
the budget constraint given that the country can exchange goods at that relative price.

Exam-style steps:

Draw PPF and indifference curves for each country (if asked).
Find autarky equilibrium (tangency).
Show the budget line under trade with slope = relative world price.
Consumption point shifts to a higher indifference curve (showing welfare gain).

1.4 Terms of Trade: When Trade Is Beneficial

Trade benefits depend on the world price relative to domestic autarky prices.

Let:

autarky relative price in A be (P_C/P_W|_A),
autarky relative price in B be (P_C/P_W|_B),
world relative price (P_C/P_W|_W).

For trade to be mutually beneficial:

the world relative price must be such that each country prefers exporting the good it has comparative advantage in.

Common confusion: Students treat world price as arbitrary. In exam answers, show that “beneficial trade occurs when the world price lies between the opportunity costs of the two countries.”

1.5 The Ricardian Model (Comparative Advantage from Productivity Differences)

The Ricardian model is the simplest benchmark: comparative advantage arises from differences in productivity (often labour productivity) across goods.

Core Ricardian insights:

Each country specialises in the good where it has lower unit labour cost (relative productivity).
Wages adjust so that comparative advantage remains consistent with relative costs.

What to write:

Present the intuition: productivity differences → relative unit costs → specialisation.
Then explain welfare: trade expands feasible consumption sets.

If a question asks for “derivation”:

Express labour requirements and compute relative prices.
State equilibrium trade pattern and consumption using budget constraints.

1.6 Heckscher–Ohlin (H–O): Factor Abundance and Trade Patterns

The H–O model explains trade using factor endowments:

Countries differ in capital and labour relative abundance.
Goods differ in factor intensity:
- a good is labour-intensive if it uses labour relatively more than capital.
- a good is capital-intensive if it uses capital relatively more than labour.

Heckscher–Ohlin predictions:

labour-abundant countries export labour-intensive goods.
capital-abundant countries export capital-intensive goods.

Key elements to remember:

Factor endowments affect relative supply and equilibrium relative prices.
Trade changes relative wages/rents: labour-scarce countries tend to experience wage increases relative to capital (and vice versa), depending on the elasticity of substitution and diversification.

Exam extension: link H–O to policy debates in South Africa where labour markets, unemployment, and inequality are central. Many policy proposals claim that industrial policy must consider factor-biased development (skills, labour absorption, capital deepening).

1.7 The Stolper–Samuelson Theorem: Trade and Income Distribution

Stolper–Samuelson states:

When the relative price of a good increases (due to trade opening), the return to the factor used intensively in producing that good increases.
The return to the other factor decreases.

In a labour vs capital setting:

If labour-intensive good’s price rises:
- wages rise,
- returns to capital fall.

How to answer distribution questions:

Identify which good price rises (from trade or a tariff).
Identify factor intensity.
Apply Stolper–Samuelson: intensive factor gains; other loses.
Mention that the magnitude depends on model assumptions, but the direction is robust under standard H–O conditions.

1.8 The Rybczynski Theorem: Output Changes with Factor Supply

Rybczynski focuses on what happens when:

one country’s factor endowment changes (e.g., labour expands) while relative goods prices remain fixed.

Typical result:

Increase in labour supply (holding prices constant) increases labour-intensive good output and decreases capital-intensive good output.

This is essential for exam essays linking to development:

If a country expands labour force (or receives capital flows), its production mix shifts.
But in reality, adjustment costs, infrastructure limits, and institutional capacity matter.

1.9 Trade Costs and Why Reality Deviates from Pure Theory

Classic models assume frictionless trade. Real-world trade involves:

transport costs (shipping, logistics),
tariffs and non-tariff barriers,
compliance costs (customs, standards),
trade finance constraints,
communication and contracting costs.

Exam questions sometimes ask: “How do trade costs affect trade volumes and patterns?”
Core answer:

higher trade costs reduce trade flows,
they can shift the effective comparative advantage,
they can lead to market segmentation and persistent domestic market power.

South Africa relevance: trade costs are influenced by port efficiency, rail and road logistics, customs procedures, and compliance with standards. When these are high, benefits from comparative advantage may not fully materialise, and protective strategies appear more politically attractive.

Section 2: Trade Policy Instruments—Tariffs, Quotas, Subsidies, and Trade Agreements

2.1 Tariffs: Mechanism, Price Effects, and Welfare Components

A tariff is a tax on imports. Effects depend on whether the country is large (can influence world prices) or small (takes world price as given).

For a small country (world price fixed):

Importers pay tariff → domestic import price rises.
Consumers switch from imports to domestically produced goods.
Producers expand output (domestic supply).
Government collects tariff revenue.
Welfare effects are typically:
- Consumer surplus falls,
- Producer surplus rises,
- Government revenue increases,
- but there is also deadweight loss from efficiency and consumption distortions.

Key welfare terms:

Consumer surplus (CS): value consumers derive above what they pay.
Producer surplus (PS): value producers receive above costs.
Government revenue (GR): tariff revenue collected.
Deadweight loss (DWL):
- production distortion,
- consumption distortion.

Exam diagram instruction:

Show domestic demand and supply with world price line.
Introduce tariff, raising price.
Identify triangle areas for DWL and rectangle for tariff revenue.

2.2 Quotas: Import Quantity Limits and Rent-Seeking

A quota limits how much can be imported. Under a quota, if domestic demand exceeds domestic supply:

imports are rationed.
the scarcity raises the domestic price.
depending on quota allocation:
- if import licences are granted to foreigners, foreigners capture rents,
- if granted to domestic firms, domestic firms capture rents,
- if auctioned, government captures rents.

Welfare comparison with tariffs:

Both distort trade and usually create deadweight loss.
Key difference: tariffs generate government revenue; quotas often generate rents that may not be captured by the government.

Exam-style answer structure:

Explain quota raises domestic price.
Explain consumption contraction and production expansion.
Explain distribution of quota rents (who gains).
Identify welfare losses and potential political economy issues (rent-seeking, corruption).

2.3 Export Subsidies: Why They Are Usually Inefficient

An export subsidy pays exporters per unit exported. For a small country:

domestic price rises by the subsidy amount.
exporters gain incentive to export.
consumption falls; domestic production expands.

However:

the government bears fiscal costs (negative GR).
welfare effects include:
- transfer to producers,
- loss to consumers,
- and deadweight loss due to distorted production/consumption.
in general, export subsidies are inefficient from a national welfare perspective in standard models.

Strategic view: In game-theoretic settings, export subsidies may be used strategically against rivals, potentially starting trade wars.

2.4 Infant Industry Argument and Industrial Policy: Theory vs Reality

A common policy justification is the infant industry argument:

young industries need temporary protection until they mature and achieve economies of scale and learning-by-doing.

To evaluate the argument in an exam, cover both sides:

Supporting points:

dynamic learning can reduce costs,
temporary protection can allow firms to invest,
coordination failures can prevent entry.

Counter-arguments:

firms may never “grow up” if protection continues,
rent-seeking and political capture can lock in inefficiency,
protection may reduce export discipline and productivity growth.

What examiners look for:

the difference between temporary, credible protection and permanent, open-ended protection.
the requirement of sunset clauses, performance metrics, and complementary policies (skills, infrastructure, competition).

2.5 Trade Agreements: Preferential vs Multilateral Liberalisation

Trade agreements alter tariffs and rules between members.

Two broad categories:

Preferential trade agreements (PTAs), e.g., free trade agreements (FTAs) where member countries reduce tariffs among themselves but not with outsiders.
Multilateral liberalisation (broad reductions across many countries), historically through institutions such as the WTO framework.

Exam concepts:

trade creation: consumers shift to lower-cost producers within the agreement.
trade diversion: consumers shift to higher-cost producers within the agreement compared to cheaper non-members.

South Africa context:

regional trade dynamics within Southern Africa and beyond influence industrial strategy.
preferential access can improve market reach, but trade diversion can harm competitive incentives.

2.6 Non-Tariff Barriers (NTBs): Standards, Customs, and Technical Regulations

Real-world “protection” often occurs through NTBs:

product standards and certification,
sanitary and phytosanitary (SPS) measures,
technical regulations (TBT),
licensing requirements,
customs delays and documentation burdens.

Exam guidance:

distinguish legitimate safety/quality regulations from disguised protection,
argue how NTBs can raise effective protection even without formal tariffs,
mention compliance costs that disproportionately hurt smaller firms.

Important for South African policy debates:

balancing consumer protection and safety with the risk that regulations become barriers for local exporters.
capacity of regulators and clarity of standards matter for competitiveness.

2.7 Rules of Origin and the Economics of “Preference Erosion”

With FTAs, benefits depend on whether products meet rules of origin (ROO):

only goods meeting ROO qualify for preferential tariff treatment.

ROO complexity can:

increase compliance costs,
reduce utilisation of preferences by smaller or complex supply chains,
cause “preference erosion” when external tariffs fall.

Exam question framing:

explain ROO as a mechanism to prevent transshipment,
then assess the cost burden and how it may deter export expansion.

2.8 Summary of Policy Effects on Welfare and Distribution

To consolidate policy instruments, recall the general pattern:

Trade restrictions (tariffs, quotas) usually:
- reduce imports,
- shift production toward higher-cost domestic producers,
- harm consumers (higher prices),
- can transfer income to protected producers,
- create deadweight losses.
Trade restrictions do not eliminate distributional winners; they reassign gains:
- government may gain from tariffs,
- politically connected groups may gain from quotas (rent capture),
- producers may gain from subsidies.

This becomes crucial in policy essay questions: “Who wins and who loses?” and “Is the aggregate welfare cost justified?”

Section 3: Welfare Analysis, Equilibrium with Trade, and Distributional Impacts

3.1 Measuring Welfare Changes: Concepts and Diagram Interpretation

Welfare analysis in trade often uses the logic of surplus changes:

Consumer surplus: price changes affect consumer welfare directly.
Producer surplus: output and prices affect producer welfare.
Government revenue: tariffs generate revenue; subsidies cost revenue.
Deadweight loss: efficiency losses due to distortions.

In exam settings, you may be asked to:

compute welfare changes (qualitative or quantitative),
interpret areas in diagrams,
distinguish transfers from true efficiency losses.

Rule of thumb for exam writing:

Transfers change who benefits but not total efficiency.
Deadweight loss reflects the cost of distortions.

3.2 Small Country vs Large Country: World Price Effects

The “small country” assumption is common in basic welfare diagrams:

world price fixed.

But if a country is “large”:

tariffs and quotas can change world prices.
welfare analysis becomes more complex:
- the tariff may reduce import demand,
- lowering the world price,
- which benefits domestic consumers at the margin but costs exporters and affects trading partners.

Exam question prompts often include:

“Show welfare for a large country tariff.”
“Does the country benefit from imposing a tariff if it is large?”

A complete answer discusses:

domestic distortion,
terms-of-trade effect,
possible reduction in foreign welfare.

This can also tie to modern debates about negotiating power and bargaining chips in trade negotiations.

3.3 Demand and Supply in Trade: Import Demand and Export Supply

Another exam topic is the use of trade equilibrium with world prices.

Typically:

Domestic demand determines import quantity at given domestic price.
Domestic supply determines domestic production.
Import quantity = demand − supply.
Export quantity depends on international price relative to domestic supply.

In tariff/quota diagrams:

import demand shrinks when the domestic price rises,
domestic supply expands.

Quantitative approach template:

Choose world price (P^*).
Apply tariff (t) to get domestic price (P = P^* + t) (small country).
Use demand and supply functions to compute:
- domestic quantity demanded (Q_D(P)),
- domestic quantity supplied (Q_S(P)),
- imports (M = Q_D – Q_S).
Compute welfare rectangles/triangles using elasticities or assumed functional forms if provided.

3.4 Terms of Trade and Welfare: The Logic of “Optimal Tariffs”

An “optimal tariff” is the tariff level that maximises a large country’s welfare by exploiting terms-of-trade improvement. Key idea:

a large country can influence the world price,
the terms-of-trade effect can outweigh domestic distortion up to some point.

In writing:

identify that “optimal tariff” requires the large-country condition,
discuss that retaliation by other countries may eliminate gains.

Exam addition:

mention that in trade policy games, optimal tariffs may lead to escalation and lower welfare for all.

3.5 Trade Liberalisation: From Protection to Welfare Gains

If the country moves from tariffs to free trade:

price falls (for a small importing country),
consumers benefit from lower prices,
producers may lose in protected sectors,
overall welfare increases if efficiency gains exceed losses.

But distributional impacts can be politically decisive.

Core exam message:

Aggregate welfare may rise,
yet groups losing from liberalisation can demand compensation or protection.

3.6 Factor Adjustment and Labour Market Outcomes

Even if the H–O model predicts factor return changes, actual labour market outcomes depend on:

unemployment and job search frictions,
migration constraints,
skills mismatch,
the speed of sectoral adjustment.

In South Africa, these frictions are often emphasised due to:

persistent unemployment,
uneven skills distribution,
structural inequality.

So an exam essay should acknowledge:

trade policy interacts with labour market institutions and social policy,
adjustment assistance matters to translate aggregate gains into inclusive outcomes.

3.7 The “Resource Curse” Style Misinterpretations: Avoiding Common Errors

Students often misinterpret factor models:

Saying trade always increases wages for all workers is incorrect.
In standard theory, wage outcomes depend on factor abundance and intensity of exported goods.

Similarly, “trade causes inequality” is too simplistic:

trade may increase within-sector or between-sector inequality depending on factor returns, technology adoption, and labour market structure.

Better exam framing:

Trade affects the relative demand for factors and thus relative wages.
With frictions, adjustment is slow and temporary losers persist.

3.8 Trade and Growth: Beyond Static Welfare

Trade theory often begins with static efficiency. But exams frequently ask about growth channels.

Potential channels:

technology transfer and knowledge spillovers from imported capital goods,
competition effects: reduced market power and efficiency improvement,
scale economies when access to larger markets increases output,
investment: stable policy frameworks encourage capital accumulation.

But note:

growth benefits are conditional on institutions, human capital, and the ability of domestic firms to scale.
trade liberalisation can also expose infant firms without adequate adjustment capacity.

3.9 A Consistent, Simple Numerical Welfare Illustration (Practice Set)

Suppose the world price is (P^* = 10). The domestic demand and supply are given in a simplified linear form (numbers are chosen for practice):

Let:

Domestic demand: (Q_D = 100 – 4P).
Domestic supply: (Q_S = 20 + 3P).

Imports when trade is allowed:

at (P = P^* = 10),
(Q_D = 100 – 4(10) = 60),
(Q_S = 20 + 3(10) = 50),
(M = 60 – 50 = 10).

Now impose a tariff (t = 2), so domestic price rises to (P = 12):

(Q_D = 100 – 4(12) = 52),
(Q_S = 20 + 3(12) = 56),
(M = 52 – 56 = -4) which means exports rather than imports; in practice, domestic supply exceeds demand so the country becomes a net exporter.

In exam answers, this becomes a good lesson:

when tariffs are too high, market equilibrium can reverse direction.
welfare analysis requires recalculating producer and consumer changes carefully and recognising the sign change in trade balance.

If your exam gives diagrams instead of formulas, translate the logic: tariff shifts price → changes quantities → changes CS/PS/GR and DWL.

Section 4: Global Supply Chains, “New Trade Theory,” and Contemporary Policy Debates

4.1 The Limitations of Classical Models

Classical trade models (Ricardo, H–O) are strong for explaining:

comparative advantage,
patterns based on productivity or factor endowments.

But many modern trade features are not fully captured:

large volumes of intra-industry trade (similar goods traded both ways),
the importance of economies of scale,
the role of firm-level strategy and market structure (imperfect competition),
trade in intermediate inputs forming global value chains (GVCs).

This motivates “new trade” and firm-based models.

4.2 Intra-Industry Trade and Economies of Scale

Intra-industry trade occurs when:

countries both import and export varieties within the same broad product category.

A simplified explanation:

consumers value variety,
firms benefit from scale economies,
competition leads to specialisation in specific varieties.

Exam answer:

explain how economies of scale and product differentiation can produce two-way trade even among similar countries with similar endowments.

4.3 Monopolistic Competition and Variety Models (High-Yield Sketch)

In monopolistic competition:

firms differentiate products,
each firm has some market power,
entry and scale influence the number of varieties.

Trade can:

expand the set of varieties available to consumers,
reduce average costs through larger markets,
shift firm entry/exit.

Welfare interpretation:

trade may increase welfare via love-of-variety effects even when comparative advantage is not central.

4.4 Strategic Trade Policy: When Government Might Influence Firm Profits

Strategic trade policy suggests:

in markets with imperfect competition, government may influence outcomes by subsidising “winning” firms or correcting coordination failures.

Core logic:

if exporting firms compete strategically (as in oligopoly), policy may affect market shares and profits.
however, strategic policy is difficult because:
- it requires credible models of rivals’ reactions,
- can attract retaliation,
- can be captured by lobbying.

For an exam essay, write a balanced answer:

conditions where strategic policy could work (imperfect competition, credible targeting),
reasons it often fails in practice (misallocation, rent-seeking, limited fiscal capacity).

4.5 Global Value Chains (GVCs) and the Role of Intermediate Inputs

Modern trade is often about:

exporting parts, components, and services embedded in goods.

Key ideas:

a product assembled in one country may rely heavily on imported inputs,
trade policy affecting intermediate inputs can change competitiveness.

For example:

tariffs on imported components raise production costs for exporters,
even if finished goods are protected, exporters may suffer due to input cost inflation.

Exam relevance for South Africa:

industrial policy and localisation strategies must consider input–output linkages.
if local supply chains are weak, protection can raise costs rather than build competitiveness.

4.6 Trade Facilitation and Logistics Policy

Trade facilitation includes measures to reduce friction:

faster customs clearance,
better ports and freight systems,
standardised documentation,
predictable regulations.

In a trade-cost framework:

lowering trade costs can increase trade volumes and market access,
can raise effective competitiveness more than tariff reductions alone.

An exam question may ask:

“How do trade facilitation policies compare with tariff policies?”
A strong answer:
tariffs are price-instruments,
trade facilitation reduces time and compliance costs,
trade facilitation often has broad benefits across imports and exports.

4.7 Technology, Data, and Services Trade

Trade isn’t only goods:

services trade (finance, ICT, transport, professional services) is important.

Policy issues include:

regulatory barriers,
cross-border data rules,
licensing and professional recognition.

For a trade theory exam, you can link services trade to:

productivity and innovation,
enabling functions for goods trade (e.g., logistics services).

4.8 Environmental and Social Standards (Sustainability-Driven Trade Policy)

Contemporary policy debates incorporate:

carbon border measures,
environmental standards,
labour standards embedded in trade agreements.

Exam framing:

explain potential welfare and distribution effects,
distinguish “genuine” standards from protectionist disguised measures,
mention compliance costs and the risk of excluding low-income exporters.

4.9 The Political Economy of Trade Policy

Trade policy is shaped by:

lobbying by protected industries,
election incentives,
distributional conflict between sectors and factors.

A robust exam answer should include:

which groups gain (producers in protected sectors),
which groups lose (consumers, non-protected producers),
how institutions decide compensation mechanisms.

In South Africa, political economy is particularly relevant due to:

high unemployment,
legacy inequality,
regional disparities in industrial capacity.

Section 5: Exam Practice—How to Answer Problems, Essays, and Graph Questions (Institution-Relevant Study Focus)

5.1 Exam-Ready Graph Literacy: What Markers Typically Reward

In ECO 303-type exams, a large portion of marks often depends on correct diagrams and coherent explanation. The marker’s checklist typically includes:

correct axes and labels (price, quantity; CS/PS; tariff/quota lines),
correct shifting of curves (tariff raises price; supply expands; demand contracts),
correct identification of areas (consumer loss, producer gain, government revenue, deadweight loss),
clear written linkage between diagram elements and welfare concepts.

Your best strategy:

draw diagrams cleanly,
label everything,
then explain in words in the same order as the diagram.

Common diagram mistakes:

forgetting to label tariff revenue vs deadweight loss,
misinterpreting quota rents as government revenue when licences are not auctioned,
drawing consumption increase under tariff (it should fall for importing country under standard assumptions).

5.2 Policy Question Writing Framework (Tariff/Quota/Subsidy)

For a typical question like “Analyse the effects of a tariff,” use this structure:

Mechanism (1–2 sentences)
Explain what the tariff does to domestic price and import incentives.
Quantities and Market Adjustment (3–5 sentences)
- imports fall,
- domestic production rises,
- consumers shift toward domestic goods.
Welfare Effects (4–7 sentences)
- CS decreases,
- PS increases,
- GR increases (for tariffs),
- DWL occurs (with triangles),
- overall welfare depends but is typically reduced for a small country.
Distributional Impacts (3–5 sentences)
Identify who benefits and who loses, linking to factor mobility if relevant:
- protected sectors gain,
- consumers lose through higher prices,
- workers may gain or lose depending on sectoral changes and adjustment.
Political Economy / Policy Evaluation (2–4 sentences)
Mention lobbying, rent-seeking, and whether revenue can fund adjustment assistance.

This framework is adaptable to quotas, export subsidies, and infant industry protection—only swap the mechanism and welfare transfer channels.

5.3 Quantitative Problem Approach: Trade Equilibrium with a World Price

When the exam provides formulas, proceed systematically:

Identify whether country is small (world price fixed) or large (world price changes).
Compute post-policy price (e.g., tariff adds (t)).
Use demand and supply functions to compute:
- domestic consumption,
- domestic production,
- imports/exports.
Calculate welfare changes using given parameters (elasticities, surplus measures) or specified method.

If the exam doesn’t provide welfare formulas, you can still:

express qualitative welfare effects,
indicate how CS/PS/GR/DWL would change using diagram logic.

5.4 Typical Essay Prompts and Strong Answers (South African Learner Friendly)

Below are plausible prompts for ECO 303 with suggested strong-answer components. Use these as rehearsal templates.

Prompt A: “Explain comparative advantage and the gains from trade.”

A top answer should:

define opportunity cost,
compute relative costs with a clear numerical example,
interpret results via PPF and indifference curve logic (if asked),
explain why trade leads to higher consumption possibilities.

Include:

the condition on terms of trade (world price between autarky opportunity costs),
a short note on how real-world trade costs may limit gains.

Prompt B: “Analyse the welfare effects of an import tariff.”

A top answer should:

show welfare components: CS down, PS up, GR up, DWL up (efficiency losses),
mention that the aggregate effect for small countries is typically negative,
identify winners/losers and distributional impacts.

Bonus:

discuss political economy and potential use of tariff revenue for adjustment.

Prompt C: “Discuss infant industry protection. Is it justified?”

Strong elements:

explain infant industry logic (learning by doing, scale economies),
specify conditions for success: temporary, credible, performance-based protection,
provide counter-arguments: permanent protection, rent-seeking, misallocation,
conclude with policy design recommendations.

5.5 South Africa and the Institutional Lens: How to Focus Your Revision by Institution

Different South African institutions may emphasise different styles (more graph-heavy, more policy essays, or more quantitative derivations). The guidance below groups revision clusters by one institution at a time, so you can align your preparation style without mixing course expectations.

Cluster 1: University of Johannesburg (UJ) — ECO 303: International Trade Theory and Policy Exam Notes

UJ-style revision focus tends to reward clear economic reasoning, consistent diagram interpretation, and well-structured policy critique.

Core UJ revision checklist (graph + policy):

Comparative advantage: show opportunity cost computations and interpret the production and consumption shifts.
Welfare from tariffs: explicitly name CS/PS/GR/DWL areas and connect them to policy outcomes.
Policy evaluation: emphasise both efficiency and distribution; do not stop at “deadweight loss exists.”
Trade agreements: include trade creation vs trade diversion and mention preferential erosion.