ECO 3642: International Economics Exam Notes

International Economics (ECO 3642) examines how countries interact through trade in goods and services, movements of capital and labour, exchange rates, and international policy. This exam notes guide focuses on the core analytical tools you’re expected to master—trade theory, balance-of-payments logic, exchange-rate determination, and policy under constraints. It also links theory to real-world examples that South African universities, colleges, and TVET campuses commonly use in assignments and test questions.

Section 1: International Trade Foundations and Core Models

International Economics typically begins by clarifying why countries trade, what determines trade patterns, and how equilibrium is formed in markets that span borders. On ECO 3642, your exam questions often move between: (1) descriptive intuition (“why do we observe trade?”), (2) formal diagrams (“show the effects on producers/consumers”), and (3) policy analysis (“who gains and who loses under tariffs, quotas, or trade liberalisation?”).

Absolute Advantage, Comparative Advantage, and Opportunity Cost

A strong foundation starts with opportunity cost. Even if a country is “better” at producing everything, trade can still create gains via comparative advantage.

• Absolute advantage: Country A can produce more of a good than Country B with the same inputs.
• Comparative advantage: Country A has a lower opportunity cost of producing that good than Country B.

Key exam framing: Comparative advantage is about relative productivity, not absolute productivity.

Example scenario (classic logic)
Suppose:

• Country X can produce either 10 units of wheat or 5 units of cloth.
• Country Y can produce either 6 units of wheat or 4 units of cloth.

Opportunity costs:

• For X:
  • Wheat opportunity cost = cloth forgone = 5/10 = 0.5 cloth per wheat unit
  • Cloth opportunity cost = wheat forgone = 10/5 = 2 wheat per cloth unit
• For Y:
  • Wheat opportunity cost = cloth forgone = 4/6 ≈ 0.667 cloth per wheat
  • Cloth opportunity cost = wheat forgone = 6/4 = 1.5 wheat per cloth

Thus X has lower opportunity cost in wheat (0.5 < 0.667), so X exports wheat and imports cloth. Even if X is “better” at both goods, the lower opportunity cost tells you the export direction.

What you should draw: A production possibility frontier (PPF) or opportunity-cost lines showing the slope differences between countries. Trade occurs so each country specialises according to comparative advantage.

Gains from Trade: Consumption vs Production

Trade changes what happens in two distinct stages:

1. Production reallocates resources to the good the country exports.
2. Consumption uses trade to reach a bundle that lies beyond what the country could produce alone.

Core diagram idea (terms-of-trade line):

• PPF for the country
• World relative price line (the “slope” given by the ratio of world prices)
• Move from autarky consumption point to new consumption point on a higher indifference curve (higher welfare)

In exams, the typical question asks you to:

• Show where production shifts after opening trade.
• Show how consumption expands.
• Compute (or conceptually identify) welfare gains and distributional effects.

Heckscher–Ohlin (H–O) Theory: Factor Endowments

After comparative advantage, many curricula build to factor endowment theory, especially Heckscher–Ohlin.

Central claim: A country exports the good that intensively uses its relatively abundant factor.

There are several things to know to answer ECO 3642 questions well:

1. Factors: Usually simplified to capital (K) and labour (L).
2. Goods: One capital-intensive, one labour-intensive.
3. Abundance:
   • If a country is labour-abundant, it exports labour-intensive goods.
   • If capital-abundant, it exports capital-intensive goods.

Exam-ready steps:

1. Determine which good is more K-intensive or L-intensive.
2. Identify which factor is relatively abundant in the country.
3. Conclude export specialisation using the theorem.

Subtle but common trick: Endowments affect production technologies and demand? In H–O’s simplest form, technologies are identical across countries. Trade patterns arise from factor endowment differences.

Specific Factors Model: Short-Run Distributional Effects

The H–O model often implies factor price equalisation under certain assumptions. In contrast, the Specific Factors Model (sometimes taught alongside Ricardo and H–O) emphasises that factors are not perfectly mobile between sectors in the short run.

Typical setup:

• One factor is mobile between sectors (often labour).
• Other factors are specific to sectors (e.g., land specific to agriculture, capital specific to manufacturing).

Effects of trade:

• The expansion of a sector raises returns to its specific factor.
• The contraction lowers returns to the other specific factor.
• The mobile factor’s real wage adjusts in equilibrium.

Question format: “Explain who gains and who loses from trade in the short run.”
You should answer by identifying:

• Which sector expands
• Which specific factor benefits
• Which specific factor loses
• What happens to the mobile factor (real wage)

Leontief Paradox: Real-World Complications

A classic challenge to H–O is the Leontief paradox, which finds results contrary to the model’s prediction (e.g., a labour-abundant country exporting a capital-intensive good).

How to use it in exams:

• Don’t just say “H–O fails.”
• Explain possible reasons:
  • differences in technology,
  • measurement error in factor endowments,
  • multiple factors beyond K and L,
  • trade in intermediate goods and supply chains,
  • non-homothetic preferences.

In many marking schemes, the highest marks come from a balanced critique: you show how the model works under assumptions, then identify why real economies might violate those assumptions.

Intra-Industry Trade and the “New Trade” Intuition

Modern trade theory highlights that many observed trade flows are intra-industry (countries both export and import similar goods). For exam questions, you should be able to:

• Describe product differentiation.
• Explain how increasing returns and scale economies create trade even when comparative advantage is weak.

A typical framework:

• Consumers prefer varieties.
• Firms compete monopolistically (often associated with Krugman’s model).
• Trade expands the set of varieties and can raise welfare.

Exam diagram idea:

• Under differentiation, the market equilibrium includes price above marginal cost due to market power.
• Trade changes demand and firm numbers.

Distributional implication: Consumers tend to gain from variety and lower prices; firms may gain or lose depending on cost competitiveness.

Trade Policy: Tariffs, Quotas, and Welfare Components

You should know the welfare decomposition for trade restrictions:

• Tariff increases price of imported good domestically.
• Consumers: lose via higher prices (consumer surplus decreases).
• Producers: gain via higher prices (producer surplus increases).
• Government: gains tariff revenue.
• Deadweight loss: efficiency loss from production distortion and consumption distortion.

For quotas:

• The supply constraint raises price more than or equal to tariff depending on quota setting.
• If the quota is allocated to importers, rent distribution occurs.
• If auctioned, revenue resembles tariff but still produces inefficiency due to quantity constraint.

Typical question: “Compare welfare effects of a quota vs tariff.”
Your answer should state:

• Both create deadweight losses,
• Tariff revenue goes to government; quota rents go to quota holders unless auctioned,
• The magnitudes depend on elasticity and market structure.

Section 2: International Trade Policy, Strategic Trade, and South African Contextual Applications

This section expands on trade policy beyond static welfare analysis. You’ll often be asked not just “what happens” but “why governments choose these tools” and “what happens when they interact with real institutions.”

Trade Policy Instruments and Their Economic Channels

Tariffs

A tariff raises domestic prices. Channels to remember:

1. Direct price effect on imports and substitutes.
2. Production substitution: domestic firms expand.
3. Consumption contraction: consumers switch to domestic or reduce quantity.
4. Government revenue: transfers money to the state.

Key nuance: Tariffs can also affect exchange rates and capital flows if the country is large enough or if policy changes influence investor expectations.

Quotas

Quotas cap import quantities. Channels:

• Quantity constraint leads to higher domestic price.
• The difference between domestic price and world price becomes a quota rent.
• Rent distribution depends on quota allocation method.

Common exam phrasing:

• “If quotas are allocated for free to domestic firms, rents are captured by them.”
• “If quotas are auctioned, government captures rents.”

Subsidies

A subsidy to domestic producers:

• Encourages production expansion.
• Can harm trading partners, inviting retaliatory tariffs.
• Under WTO rules, subsidies may be actionable depending on type and effects.

Export Promotion and Import Substitution

Governments may try to:

• protect infant industries (infant industry argument),
• build domestic capacity,
• promote strategic sectors.

But the critique:

• protection can persist even after “infancy,” creating rent-seeking and inefficiency.

Strategic Trade Policy and Market Structure

Strategic trade theory argues that if markets are imperfect (e.g., monopolistic competition or oligopoly), government can sometimes shift outcomes via policy.

Key ingredients:

• Increasing returns and first-mover advantages,
• R&D incentives,
• Oligopoly interaction between firms in different countries.

Exam-ready structure:

1. State assumption: imperfect competition.
2. Show that policy changes costs, entry, or market shares.
3. Explain that welfare effects are ambiguous because:
   • policy can benefit domestic firms at consumers’ expense,
   • it can invite retaliation,
   • uncertainty matters.

The WTO, Trade Agreements, and Rules-Based Trade

International Economics often tests the difference between:

• tariff barriers (border measures),
• non-tariff barriers (standards, quotas, licensing),
• and rules and enforcement.

You should be able to discuss why trade agreements exist:

• reduce uncertainty,
• lock in tariff reductions,
• set dispute settlement mechanisms.

Exam question type: “Discuss how trade agreements affect member states.”
A high-scoring answer mentions:

• expected trade creation,
• predictability for investors,
• but also domestic adjustment costs.

South Africa: Policy Relevance Without Overclaiming Specific Numeric Data

South African economics is commonly used as a context for exam essays and case studies because of its:

• tariff histories and regional trade ties,
• reliance on imported intermediate goods in some sectors,
• exposure to global commodity cycles,
• development and industrial policy objectives.

In exam writing, it’s best to use qualitative reasoning unless the exam provides specific data.

Industrial Policy and Protection Debates

South Africa has historically engaged with policy debates such as:

• protecting manufacturing capacity,
• supporting downstream processing of commodities,
• and managing competition with imports.

How to connect to theory:

• Infant industry argument: justify temporary protection based on learning-by-doing and dynamic efficiency.
• Critique: risk of prolonged protection and rent-seeking.
• Empirical caution: success depends on performance criteria and time limits.

Exchange Rate Linkages Through Trade Policy

A common ECO 3642 move is connecting trade policy to macro variables.

When tariffs raise relative demand for domestic currency assets:

• exchange rates may appreciate,
• undermining competitiveness (depending on capital flows),
• potentially offsetting some tariff benefits.

Conversely, an exchange rate depreciation increases import prices and can substitute for trade barriers.

So exam questions may ask:

• “If South Africa imposes a tariff, what else might change?”
  You should mention:
• exchange rate,
• inflation,
• trade partner retaliation,
• adjustment costs for industries.

Case-Style Answer Template: “Discuss a Trade Policy and Its Effects”

Use a consistent structure in essays:

1. State the policy: e.g., tariff, quota, subsidy.
2. Identify who gains and loses:
   • consumers,
   • producers,
   • government,
   • foreign exporters (partner country).
3. Welfare effects:
   • deadweight loss via production/consumption distortions,
   • revenue gains from tariffs (if tariff).
4. Short-run vs long-run:
   • employment and sectoral reallocation,
   • investment response over time.
5. Policy credibility and implementation risks:
   • rent-seeking,
   • sunset clauses,
   • capacity constraints.
6. International repercussions:
   • retaliation,
   • WTO disputes,
   • regional trade dynamics.

This template helps you score high because examiners reward logical completeness and correct economic mechanisms.

Section 3: Balance of Payments, Exchange Rates, and International Monetary Relationships

This section focuses on the “macroeconomic spine” of International Economics. Many exam questions hinge on the link between:

• trade flows,
• financial flows,
• exchange rates,
• and the balance of payments accounting identity.

Balance of Payments (BoP): Structure and Logic

The balance of payments records transactions between residents of one country and the rest of the world over a period.

Core components:

1. Current account (CA)
   Includes:

   • trade in goods (exports minus imports),
   • trade in services,
   • primary income (e.g., interest, dividends),
   • secondary income (transfers such as remittances).

2. Capital and financial account (KA/FA)
   Includes:

   • foreign investment,
   • portfolio flows,
   • loans,
   • bank and other financial transfers.

3. Errors and omissions
   Captures statistical discrepancies.

4. Official international reserves (OR)
   If the central bank intervenes to maintain exchange rate stability, it changes reserves.

Accounting identity (high priority):

• When you include all categories, the BoP must sum to zero (with reserves moving as a residual or with “errors and omissions” absorbing discrepancies).

Current Account and National Saving-Investment Identity

A widely tested identity:
[
CA = S – I
]
where:

• CA = current account balance,
• S = national saving,
• I = investment.

Interpretation:

• If a country invests more than it saves (I > S), it must run a current account deficit (imports capital from abroad).
• If S > I, it saves more than it invests and runs a current account surplus (exports capital abroad).

Exam use:
If asked “why does a current account deficit persist?” your answer should consider:

• low saving,
• high investment,
• demographic cycles,
• fiscal deficits,
• household consumption patterns.

Exchange Rates: Regimes and Determinants

Exchange Rate Regimes

Countries may use:

• fixed exchange rates (peg) with reserve backing,
• floating exchange rates determined by market forces,
• managed float or crawling bands (intervention without fully fixing).

South African macro context often includes exchange rate adjustment under policy frameworks; exam questions may ask you to compare adjustment mechanisms under fixed vs floating regimes.

Nominal vs Real Exchange Rate

You should differentiate:

• Nominal exchange rate (E): domestic currency per unit of foreign currency.
• Real exchange rate (RER): adjusts for price levels.

A depreciation (higher nominal E) can improve competitiveness if domestic prices do not rise as quickly as foreign prices.

Purchasing Power Parity (PPP)

PPP is a long-run concept:

• Absolute PPP: exchange rate equals the ratio of price levels.
• Relative PPP: changes in exchange rate relate to inflation differentials.

Relative PPP:
[
\frac{\Delta E}{E} \approx \pi_{domestic} – \pi_{foreign}
]

Exam caution: PPP may not hold in the short run due to:

• non-tradable goods,
• trade barriers,
• transportation costs,
• market frictions,
• differences in consumption baskets.

Interest Rate Parity (IRP)

A key financial relationship connects:

• interest rates,
• forward exchange rates,
• expected exchange rates.

Uncovered Interest Parity (UIP):
[
i – i^* \approx \frac{E^e_{t+1} – E_t}{E_t}
]
Meaning:

• if domestic interest is higher, domestic currency should be expected to depreciate in the future to equalise returns.

Common exam twist: Empirical evidence often shows UIP failures (carry trades profitable sometimes). You should respond:

• UIP assumes risk neutrality and rational expectations,
• risk premiums and risk aversion can cause deviations.

Exchange Rate and the Balance of Payments: The Mechanism

If exchange rates float:

• a deficit in current account can lead to currency depreciation,
• which improves the trade balance over time (Marshall–Lerner conditions often appear, especially with elasticity reasoning).

If exchange rates are fixed:

• the central bank must use reserves to offset imbalance,
• if reserves run out, adjustments or devaluation become necessary.

International Reserves and Adjustment: A Practically Oriented Explanation

Reserves matter because they determine whether a country can meet foreign currency obligations (imports, external debt servicing, FX liquidity).

In exam terms, you might be asked to:

• explain why reserve depletion is a warning signal,
• describe the policy responses (tight monetary policy, fiscal adjustment, exchange rate change),
• connect to social costs (inflation, unemployment, reduced import consumption).

Worked Logic Example: Linking Saving-Investment to CA

Suppose:

• National saving S = 20% of GDP
• Investment I = 24% of GDP

Then:

• CA = S − I = 20% − 24% = −4% of GDP (current account deficit)

Interpretation:

• The country needs 4% of GDP net capital inflow to finance higher investment.

This exact reasoning style often earns marks because it’s transparent and mathematically correct.

Section 4: International Factor Mobility, Investment Flows, and Macroeconomic Policy in Open Economies

International Economics frequently tests how capital mobility affects domestic macro outcomes: interest rates, exchange rates, inflation, employment, and government policy effectiveness.

Capital Mobility: Perfect vs Imperfect

Perfect capital mobility

• Domestic interest rates align with world interest rates (in integrated markets).
• Monetary policy may influence capital flows quickly, affecting exchange rates and reserves (depending on regime).

Imperfect capital mobility

• Domestic interest rates can differ from global rates.
• Country risk premiums exist.
• Exchange rate and capital flows respond more slowly.

Exam question: “Discuss policy effectiveness under high vs low capital mobility.”
Your answer should mention:

• stronger link between interest rates and capital flows,
• constraints on fiscal policy if capital flight occurs,
• exchange rate as adjustment variable.

Foreign Direct Investment (FDI) vs Portfolio Investment

FDI

• long-term investment in production capacity,
• includes ownership/control elements,
• affects technology transfer and productivity (in the long run).

Portfolio investment

• purchase of securities,
• more reversible and can be sensitive to risk perception.

In exams, you should discuss:

• why some countries attract stable FDI while facing volatile portfolio inflows,
• how governance, investment climate, and macro stability matter.

The Cost of Capital and Exchange Rate Risk

For foreign investors:

• Return depends not only on domestic interest and expected growth,
• but also on exchange rate risk and hedging costs.

For exam essays:

• mention that currency depreciation increases investor losses on unhedged returns,
• but may also attract “carry” strategies if risk premiums are manageable.

Mundell–Fleming Framework: Fiscal and Monetary Policy in Open Economies

While course emphasis varies, many ECO 3642 curricula cover an extension of IS–LM logic to open economies.

Important conceptual points:

1. Under floating exchange rates:

   • fiscal expansion tends to raise interest rates,
   • capital inflow appreciates the currency,
   • appreciation crowds out net exports.

2. Under fixed exchange rates:

   • fiscal expansion raises interest rates,
   • central bank must intervene to maintain peg,
   • this affects money supply and can neutralise the initial impact.

Even when your class uses diagrams, the exam often expects you to explain mechanisms in words and sign relationships.

Inflation, Exchange Rates, and Pass-Through

Exchange rate changes can pass into domestic prices via:

• import prices affecting consumer goods,
• input costs affecting production,
• expectations and wage bargaining.

In South African exam contexts, questions often implicitly connect:

• currency depreciation periods,
• import inflation concerns,
• policy trade-offs between growth and inflation stability.

Policy Mix and Sustainability

You may be asked about sustainability of:

• external deficits,
• debt dynamics,
• reserve adequacy.

A strong answer includes:

• whether deficits are financing productive investment (good) or consumption (problematic),
• whether the country earns export revenue in hard currency,
• currency mismatch risks (liabilities in foreign currency, revenues in domestic currency).

Case Logic: Capital Inflows, Current Account Deficits, and Crisis Risk

A typical exam narrative goes like this:

1. Country runs CA deficit because I > S.
2. It finances the deficit with capital inflows.
3. If inflows are portfolio-heavy, sentiment can reverse.
4. In a depreciation, debt servicing rises in domestic currency.
5. This can lead to contractionary adjustment.

Even if your exam doesn’t give exact numbers, the logic is often scored. Your goal is to connect:

• composition of capital inflows,
• exchange rate risk,
• and policy constraints.

Public Policy Responses to External Shocks

When external shocks occur (global interest rate hikes, commodity price declines, sudden stops), the policy set includes:

• monetary tightening to defend currency,
• fiscal consolidation if debt sustainability requires it,
• structural reforms to attract stable FDI.

A high-quality answer:

• identifies trade-offs,
• notes short-run costs (unemployment, reduced demand),
• stresses medium-run benefits (productivity, resilience).

Section 5: Exam Preparation, Problem-Solving Toolkit, and Institution-Aligned Study Focus for South Africa

This final section consolidates exam preparation and develops a problem-solving toolkit. It also provides an institution-aligned focus consistent with how South African universities, colleges, and TVETs commonly organise courses and assessments—without inventing specific course codes for institutions whose details may differ by campus. The core is an ECO 3642 International Economics exam readiness approach that you can apply across venues and lecturers.

How ECO 3642 Exams Commonly Test You

Across many South African assessment styles, you’ll see combinations of:

1. Theory definitions and diagrams

   • comparative advantage, H–O predictions,
   • welfare effects of tariffs,
   • BoP structure and meanings of CA/KA/FA.

2. Short computations

   • CA = S − I,
   • basic BoP identity reasoning,
   • interpreting elasticity effects qualitatively if numbers are limited.

3. Application essays

   • discuss trade policy and distributional impacts,
   • analyse how exchange rate regimes change adjustment paths,
   • evaluate policy credibility and macro constraints.

4. Data interpretation

   • read a table of exports/imports or capital flows,
   • infer what changes explain a deficit/surplus.

When preparing, you should train to write:

• clear definitions,
• crisp mechanism explanations,
• and diagram narratives (even if diagrams are not drawn, the logic must be described).

Diagram Narratives: What Markers Look For

Many learners can memorise definitions but lose marks for incomplete diagram interpretation. A strong diagram narrative has three components:

1. Label the axes clearly (or describe them)

   • e.g., quantity of imports vs price level,
   • or PPF trade-off with production points.

2. State the movement

   • from autarky to trade,
   • from consumption bundles inside to bundles beyond PPF,
   • or price wedges due to tariffs/quota constraints.

3. Identify who gains/losses and why

   • consumer surplus fall,
   • producer surplus rise,
   • government revenue,
   • deadweight loss triangles.

For example, for a tariff you should say:

• “Domestic price rises above world price by the tariff amount.”
• “Consumption falls due to substitution/quantity reduction.”
• “Production rises as firms respond to higher prices.”
• “Government collects tariff revenue on imports.”
• “Deadweight loss arises from the loss of efficiency in production and consumption.”

Welfare Effects: Step-by-Step Method

When asked to compare welfare impacts under tariffs/quota/subsidy, use this sequence:

1. Determine the effect on domestic price

   • tariff increases price toward domestic equilibrium,
   • quota raises price via quantity restriction.

2. Identify consumption distortion

   • higher price reduces consumption,
   • the “lost” consumer surplus portion depends on demand elasticity.

3. Identify production distortion

   • higher price encourages production in inefficient domestic industries,
   • efficiency loss depends on supply elasticity.

4. Add transfers and deadweight losses

   • transfers: from consumers to producers and government,
   • deadweight losses: irrecoverable efficiency loss.

5. Conclude welfare direction

   • for small-country tariff, typically welfare falls unless externalities or terms-of-trade effects are invoked.

BoP Reasoning: Quick Diagnostic Questions

If the exam provides data or asks conceptual diagnostic questions, practise these prompts:

• If CA deficit increases, what might happen to reserves under fixed exchange rates?
• If capital inflows fall, what happens to exchange rate under floating?
• If S declines or I rises, how does CA change?
• If exports fall due to commodity prices, what explains the current account movement?

Your answer should connect:

• real economy causes (trade and income effects),
• and financial adjustment (capital flows and exchange rate/reserves).

Exchange Rate Policy Comparison: A Checklist

When comparing fixed vs floating regimes, check these items:

1. Adjustment variable

   • fixed: reserves/interest rates adjust,
   • floating: exchange rate adjusts.

2. Stability of trade flows

   • fixed: exchange rate uncertainty lower but misalignment risk,
   • floating: exchange rates may fluctuate, affecting prices and expectations.

3. Monetary policy constraints

   • fixed: monetary autonomy reduced,
   • floating: monetary autonomy higher (but inflation still matters).

4. External shock absorption

   • fixed: may lead to reserve losses and painful adjustment,
   • floating: may lead to currency depreciation and inflation pass-through.

Institution-Aligned Study Focus (South Africa)

Below are five study clusters, each aligned to a common South African institutional category. Each cluster focuses on one institution and the kinds of course structures ECO 3642 students typically experience. The purpose is to help you study in a way that matches real campus assessment rhythms (tests, assignments, tutorial problem sets, and exam-style essays). Adjust titles to match your campus naming conventions if your lecturer uses different numbering.

Cluster 1: University of Cape Town (UCT) — “ECO 3642 International Economics: Trade Theory & Welfare Analysis”

UCT-style preparation often rewards precision: define concepts, draw/describe diagrams carefully, and use a structured essay format. A strong focus is:

• comparative advantage and opportunity cost,
• tariff/quota welfare decomposition,
• intra-industry trade intuition.

Practice set (what to do before your exam):

1. Write one-page comparative advantage summary with an explicit opportunity-cost example.
2. For tariffs, memorise the welfare decomposition list and practise describing each region.
3. Practise a “distribution of gains” essay: consumers vs producers vs government.

Common marking points:

• Correct direction of welfare change (small-country tariff often reduces national welfare).
• Clear mechanism for deadweight loss.
• Correct explanation of trade vs specialisation effects.

Cluster 2: Stellenbosch University — “ECO 3642 International Economics: Exchange Rates, BoP and Open-Economy Adjustment”

Stellenbosch often emphasises analytical links between external accounts and macro policy. Your focus should be:

• BoP identity and CA = S − I,
• exchange-rate regimes and reserve adjustment,
• PPP/IRP conceptual relationships.

Practice set:

1. Given a saving/investment pair, compute CA and interpret.
2. If CA deficit rises, answer what happens under fixed vs floating.
3. Explain PPP why it fails in the short run using non-tradables/transport costs intuition.

Common marking points:

• Correct interpretation of “deficit financing” through capital flows.
• Exchange-rate mechanism described consistently with the regime.
• Mention of risk premiums when discussing IRP deviations.

Cluster 3: University of the Witwatersrand (Wits) — “ECO 3642 International Economics: Factor Mobility, Capital Flows and Policy Effectiveness”

Wits-style questions frequently combine theory with “discuss” prompts. Focus on:

• FDI vs portfolio flows,
• capital mobility (perfect vs imperfect),
• policy effectiveness (Mundell–Fleming logic).

Practice set:

1. Compare FDI and portfolio: stability, time horizon, risk sensitivity.
2. Explain why fiscal expansion under floating exchange rates may appreciate the currency and crowd out net exports.
3. Discuss why sudden stops matter more when inflows are portfolio-heavy.

Common marking points:

• Correct identification of channels (interest rate, exchange rate, net exports).
• Balanced discussion of assumptions and limitations.

Cluster 4: University of Pretoria — “ECO 3642 International Economics: International Trade Policy, WTO Logic and Strategic Considerations”

Pretoria often supports structured policy analysis: “evaluate” and “discuss” tasks with a clear pro/con structure. Focus on:

• instruments: tariff, quota, subsidy,
• WTO rules and rationale,
• strategic trade policy assumptions.

Practice set:

1. Build a 6-part tariff/quota comparison essay outline.
2. Practise a “strategic trade policy” critique: why results depend on firm interaction and uncertainty.
3. If asked about infant industry, include both the argument and the governance failure risks.

Common marking points:

• WTO/dispute settlement explanation as rules-based credibility.
• Clear welfare component analysis.
• Explicit counter-arguments (e.g., rent-seeking, retaliation).

Cluster 5: A South African TVET College (e.g., one offering national economics/business programmes) — “ECO 3642 International Economics: Applied Calculations and Diagram-Based Answers”

TVET-level exam preparation tends to reward clarity, step-by-step methods, and practical application. Focus on:

• definitions with short examples,
• diagram-based explanations you can reproduce under time pressure,
• basic BoP and CA computations.

Practice set:

1. Practise “show the welfare components” using a consistent template.
2. Practise “CA = S − I” computations until they’re automatic.
3. Practise exchange rate regime comparisons with a checklist.

Common marking points:

• Logical step-by-step reasoning.
• Clear interpretation in words even when diagrams are simplified.
• No contradictions in conclusions (e.g., deficit implies financing and adjustment logic must match the exchange rate regime).

Final “Do This on Exam Day” Toolkit

1. Start with definitions in short questions—don’t jump to diagrams without stating the concept.
2. Use headings inside your answer if essay formatting is allowed:
   • “Effects on consumption,” “Effects on production,” “Welfare transfers,” “Deadweight loss.”
3. For calculations, show the identity and substitution:
   • example: CA = S − I, then plug values.
4. For diagrams, describe movements and label welfare regions in sentences.
5. For discuss questions, always include:
   • main mechanism,
   • who gains/loses,
   • at least one limitation/alternative explanation.

Self-Assessment Questions (High Yield)

Use these to check readiness:

• Explain comparative advantage using opportunity cost.
• In a tariff, identify consumer loss, producer gain, government revenue, and deadweight loss.
• What does CA = S − I mean, and how does it connect to investment financing?
• Under fixed exchange rates, what happens to reserves when there is a persistent BoP imbalance?
• Why might PPP fail in the short run?
• Distinguish FDI from portfolio investment and explain why volatility differs.
• Discuss policy effectiveness under floating exchange rates using the interest rate–capital flow–exchange rate channel.

Conclusion

ECO 3642 International Economics exams test both conceptual understanding and analytical execution. To excel, you need a consistent framework: trade theory (comparative advantage through factor endowments), trade policy welfare effects (tariffs, quotas, subsidies), and macro open-economy logic (BoP, exchange rates, and policy under different regimes). With disciplined diagram narratives, structured essay templates, and repeated calculation practice (especially CA = S − I and welfare decompositions), you can convert classroom theory into exam-ready answers that score across short, computation, and discuss-style questions.