ECON3010 International Economics Exam Notes (University of the Witwatersrand – Wits)

ECON3010 International Economics examines how international trade, exchange rates, global capital flows, and policy interventions interact to shape outcomes for production, employment, prices, and welfare. This exam notes guide is written for Wits Economics students and emphasises the types of questions commonly assessed: theory with clear diagram logic, rigorous interpretation of policy, and applied reasoning using real-world examples (with a special focus on South African policy and trade context). Use these notes as a structured revision pack: definitions first, then mechanisms, then policy, then exam-style problem workflows.

The guide is organised into five substantial sections, moving from foundational trade theory to exchange rates and open-economy macro, then to international factor mobility and policy, and finally to how to handle South African and emerging-market case study questions.

1) Core Frameworks in International Economics: Trade, Gains, and Adjustment

1.1 What “international economics” asks you to explain

In exam questions, “International Economics” typically requires you to answer three connected questions:

Where do trade patterns come from? (What determines comparative advantage, specialization, and exports/imports?)
What are the consequences of trade? (Welfare gains, distributional effects, and factor movements.)
How do policies and institutions change outcomes? (Tariffs, quotas, trade agreements, exchange-rate policy, capital controls, and macro conditions.)

A high-scoring answer usually follows a consistent template:

Identify the model and assumptions (e.g., perfect competition, no transport costs, constant costs).
State what is being optimised (consumer surplus, producer surplus, government revenue, welfare).
Describe the equilibrium adjustment mechanism (price changes, resource reallocation, exchange-rate movement).
Conclude with welfare/distribution implications and likely policy trade-offs.

1.2 Comparative advantage: the engine of trade (Ricardian intuition)

A classic starting point is Ricardian comparative advantage, where countries differ in productivity (or technology) and trade emerges even if one country is absolutely better in both goods.

Key idea: A country exports the good for which it has the lowest opportunity cost.

Opportunity cost and specialization logic

If Country A can produce Good X at lower opportunity cost than Good Y, then specialization in X is mutually beneficial. In Ricardian models:

World relative prices settle between each country’s autarky relative prices.
Trade expands consumption possibilities for both countries.

What to write in an exam

When asked “Explain comparative advantage,” you should include:

Define opportunity cost.
Explain autarky prices/production.
Explain how trade changes relative prices and specialisation.
Explain why both countries can gain even if one has an absolute advantage.

Distributional consequences

Even in classical gains-from-trade logic, winners and losers exist:

Within a country, industries expanding gain; industries contracting lose.
Workers tied to contracting sectors face unemployment risk or wage adjustment.
This sets up later sections on adjustment costs and policy responses.

1.3 The Heckscher–Ohlin (H-O) framework and factor abundance

A second major framework in many international economics courses is Heckscher–Ohlin, which attributes trade patterns to differences in factor endowments (e.g., capital vs labour).

Core proposition:

A country will export goods that use its abundant factor intensively.
It will import goods that use its scarce factor intensively.

Stolper–Samuelson and income distribution

One of the most exam-relevant extensions is Stolper–Samuelson:

If the relative price of an exported good rises, the real return to the abundant factor increases, while the real return to the scarce factor decreases.

This is crucial for answering questions like:

“Who benefits from trade in a factor-rich economy?”
“How might trade affect wage inequality?”

Exam-writing tip: Tie the direction of price change (export good price) to factor returns, explicitly stating “abundant factor gains, scarce factor loses.”

Rybczynski theorem

Rybczynski focuses on factor endowments:

An increase in one factor endowment (say capital) causes output of the good intensive in that factor to rise more than proportionally, while output of the other good may fall.

This matters when the question mentions:

investment booms,
labour supply changes,
demographic shifts,
or capital formation programs.

1.4 The terms of trade and welfare: why gains are not uniform

Even when trade increases total welfare, individual country outcomes depend on:

changes in relative prices,
market power,
and the structure of world demand.

In many exam problems, you must interpret terms of trade (ToT):

If a country’s export prices rise relative to import prices, ToT improves.
Welfare effect depends on whether consumption expands more than income loses (or vice versa).

A caution students often miss

Students sometimes claim “trade always increases welfare” without conditions. It can fail with:

adverse selection and increasing vulnerability,
inability to adjust production,
market power and “immiserising growth” scenarios,
or distortions (e.g., tariffs in a second-best world).

So, a strong answer qualifies: trade can increase welfare, but distribution and policy context matter.

1.5 Trade policy basics: tariffs, quotas, and the deadweight loss story

South African exam questions often connect theory to applied policy (e.g., tariffs on manufactured goods, duties on agricultural products, regional trade commitments). The core mechanics are:

Tariff effects (small country vs large country)

Small country assumption: world prices fixed; tariff raises domestic price; consumption falls; production rises; government collects tariff revenue; part of welfare is lost via deadweight loss.
Large country: tariff can change world prices; welfare effects become ambiguous depending on whether terms-of-trade gains offset consumption distortions.

Quotas

Quotas restrict imports by quantity rather than price:

A quota creates scarcity rents.
Under an import license system, rents accrue to whoever receives the licenses (government or private actors), not automatically to consumers.
Like tariffs, quotas typically reduce consumer surplus and create welfare losses.

Exam-ready welfare decomposition

If you’re given a diagram or asked to interpret welfare, state the standard areas:

Consumer loss
Producer gain
Government revenue (tariff)
Deadweight loss (efficiency loss)
Quota rents (if quota, not tariff)

1.6 Exchange rates connect trade theory to open-economy macro

Trade and policy feed into the exchange-rate system:

Tariffs and trade barriers can affect import demand, export competitiveness, and therefore foreign exchange demand.
Exchange-rate changes affect relative prices for traded goods.
In the exam, you may be asked to connect “trade policy changes the current account” and “exchange-rate response depends on the exchange-rate regime.”

A coherent answer therefore links:

micro trade mechanisms (prices and quantities),
macro outcomes (income and balance of payments),
and policy instruments (tariffs, fiscal policy, monetary policy, and exchange rate management).

2) Exchange Rates and Open-Economy Macroeconomics: IS–LM–BP, Adjustment, and Policy Trade-offs

2.1 The balance of payments (BoP) and why the exchange rate moves

International economics is incomplete without the BoP identity:

Current account (CA): net exports and net income flows.
Capital and financial account (KA/FA): net capital inflows/outflows.
Official reserves or financing: the rest that closes the identity.

A simplified relationship (in many treatments):

CA + KA = 0 (under fixed exchange rate financing changes reserves).

In exam contexts, you might be asked:

“What happens to CA when domestic output rises?”
“How does a change in interest rates affect capital flows and the exchange rate?”

The exchange rate regime determines adjustment:

Fixed exchange rate: central bank intervenes to maintain parity; reserves change.
Flexible exchange rate: exchange rate adjusts to equilibrate foreign exchange markets.

2.2 Mundell–Fleming model: fiscal vs monetary in a small open economy

A key extension for many courses is the Mundell–Fleming framework (small open economy, high capital mobility). It predicts effects of policy on output, interest rates, and exchange rates.

Under high capital mobility

Interest parity condition implies domestic interest rate closely aligns with world interest rate (with risk adjustments).
Capital flows react strongly to interest differences.

Fiscal policy (increase in government spending)

In flexible exchange rates: fiscal expansion raises output → interest rates tend to rise → capital inflows → currency appreciates → exports fall → output effect is partially offset.
In fixed exchange rates: fiscal expansion raises output and interest rates → capital inflows → central bank must buy foreign currency to maintain the peg → money supply rises → monetary expansion strengthens output further.

Monetary policy (increase in money supply)

In flexible exchange rates: money supply rises → interest rates fall → capital outflows → currency depreciation → exports rise → output increases.
In fixed exchange rates: money supply expansion is neutralised by central bank intervention (selling foreign reserves or buying them) to maintain the peg; output may not rise as much.

These are classic exam predictions. Even if the course uses slightly different notation, the logic remains stable.

2.3 IS–LM–BP logic for interpreting graphs in exams

In IS–LM–BP:

IS: combinations of output and interest rate consistent with equilibrium in the goods market.
LM: combinations consistent with money market equilibrium.
BP: combinations consistent with balance of payments equilibrium.

You may need to interpret slope and intercept implications:

Under perfect capital mobility, BP becomes horizontal at world interest rate.
Under imperfect mobility, BP slopes upward.

2.4 Exchange rate determination: demand and supply for foreign currency

In many applied questions, the exchange rate is best described as the result of:

demand for foreign currency (imports, foreign investment purchases),
supply of foreign currency (exports, outward investment, foreign investors buying domestic assets).

If domestic income rises:

imports rise → demand for foreign currency rises → currency depreciates under flexible rates.

If domestic interest rates rise:

capital inflows increase supply of foreign currency (from foreigners converting to local currency) or, depending on definitions, increase demand for domestic currency → appreciation.

2.5 Real exchange rates and competitiveness

Nominal exchange rates alone are less meaningful than real exchange rate:

real exchange rate adjusts for relative prices.
competitiveness depends on relative unit labour costs, productivity, and price levels.

For South African students, this becomes particularly relevant when questions discuss:

inflation differentials,
exchange-rate pass-through to consumer prices,
and competitiveness of manufacturing exports.

2.6 J-curve and trade adjustment dynamics

A common applied concept is the J-curve:

after a depreciation, the trade balance may initially worsen (contracts are priced in foreign currency; import volumes do not change immediately),
then improve as quantities adjust and relative prices bite.

A strong answer distinguishes:

short-run effects (prices) vs
medium-run effects (quantities and elasticities).

Exam questions may ask: “Explain whether a depreciation improves the current account immediately.” Your response should:

explain contracts and pass-through,
reference elasticities,
and emphasise timing.

2.7 Macro policy for small developing economies: constraints and credibility

In emerging markets, policy effectiveness depends on:

inflation expectations,
exchange-rate credibility,
fiscal capacity,
and capital flow sensitivity.

A typical exam argument:

expansionary fiscal policy under weak monetary credibility can lead to currency depreciation and inflation,
which may worsen welfare even if output rises temporarily.

You should connect policy credibility to exchange-rate and inflation outcomes.

2.8 Case illustration using South Africa’s trade/exchange environment (applied reasoning)

South Africa frequently experiences:

fluctuating commodity prices (affecting export revenues),
exchange-rate volatility (affecting import prices),
and domestic inflation persistence.

In exam-style scenario questions:

If global risk rises (e.g., uncertainty shocks), capital outflows can weaken the rand.
A weaker currency raises the domestic price of imports and intermediate goods, which may raise production costs.
In the short run, this can worsen trade balances depending on import demand responsiveness and contract pricing.
In the medium run, competitiveness may improve exports, but only if supply chains and capacity allow.

To score well, do not treat “depreciation → exports increase → current account improves” as automatic. Instead:

discuss the role of elasticities,
timing (J-curve),
pass-through,
and constraints on export supply.

3) Trade in Goods and Welfare with Imperfect Competition: Market Size, Love of Variety, and Strategic Interaction

3.1 Why introduce imperfect competition in international trade?

Many syllabi for international economics move beyond pure competitive models into imperfect competition to explain:

intra-industry trade (countries trade similar goods),
the role of firm heterogeneity,
and the importance of market size and trade costs.

This section prepares you for exam questions that ask:

“Why do countries trade similar products?”
“How do tariffs affect firm entry and consumer varieties?”
“What is the welfare impact when markets are imperfectly competitive?”

3.2 Increasing returns and the gravity model intuition

A common tool in applied trade analysis is the gravity intuition:

trade flows increase with economic size (GDP, income),
decrease with distance (transport costs, information frictions),
and are affected by trade barriers (tariffs, NTBs, borders).

While the gravity model is econometric, exam questions often ask you to interpret it:

A larger market attracts firms and consumers.
Trade cost reductions raise both margins: intensive margin (more trade in existing goods) and extensive margin (new products and firms).

3.3 Love of variety and welfare in monopolistic competition

Under models with monopolistic competition, consumers value more varieties (and sometimes quality differences). A tariff affecting trade costs can:

reduce imported varieties (consumer harm),
increase domestic production of some goods (producer gain),
but generally create welfare losses if consumers lose access to cheaper varieties.

This provides a richer explanation for why protectionism can reduce welfare beyond the standard deadweight loss.

3.4 Firms, entry, and the effect of tariffs on number of varieties

In strategic or monopolistic competition settings:

tariffs raise the effective price of imports → foreign firms export less (or exit),
varieties fall → consumer welfare declines,
domestic firms may expand but often not enough to replace lost variety.

An exam answer might require distinguishing:

trade diversion vs trade creation (in trade agreements),
and effects on variety count.

3.5 Trade agreements: preference, rules of origin, and bargaining

Trade agreements appear frequently in applied exam questions. You may be asked about:

tariff reductions among member countries,
rules of origin (restricting whether goods qualify for preferential rates),
and administrative burdens that increase trade costs.

Under imperfect competition and heterogeneous firms, rules of origin can have non-trivial effects:

firms may restructure supply chains to qualify,
potentially affecting domestic production and welfare.

3.6 Strategic trade policy: when “picking winners” is rational

One controversial concept is strategic trade policy:

In markets with imperfect competition and increasing returns, a government may influence firm profits and entry.
With large market effects and barriers, targeted subsidies or tariffs could, in principle, shift profits.

But exam questions often require a balanced view:

the policy can be hard to implement (information requirements),
risks retaliation and fiscal cost,
may invite rent-seeking.

So the best answer:

states the conditions under which strategic trade policy can work,
then explains why in practice it often fails or is second-best.

3.7 Counter-arguments: why free trade is still a strong baseline

A thorough study guide must include counterpoints:

Tariffs and subsidies can distort incentives and encourage inefficiency.
Administrative complexity and corruption can arise.
Without adjustment mechanisms, workers may not transition quickly.

Therefore, a high-quality exam response often uses:

theoretical justification for trade gains,
plus realistic institutional caveats: adjustment costs, productivity gaps, and supply-side constraints.

3.8 South Africa and intra-industry trade: how to frame your reasoning

South Africa’s trade includes both:

inter-industry trade (e.g., commodities vs manufactured goods), and
intra-industry trade (e.g., processed goods and differentiated manufacturing products).

When answering “why countries trade similar goods,” your exam logic should mention:

product differentiation,
consumer taste for variety,
and firm-level specialisation.

When answering “tariffs and NTBs in South Africa,” you can link:

tariff revenue vs welfare loss,
supply-chain dependence (imported inputs),
and potential productivity effects.

4) International Factor Mobility, Capital Flows, and Exchange-Rate Risk: Implications for Growth and Stability

4.1 Labour mobility and migration: trade in factors

International economics often treats migration as “trade in labour.” Key mechanisms:

Migration affects labour supply in host countries, wages, and employment composition.
Remittances affect home-country income and consumption patterns.
Skill levels matter: skilled migration may reduce shortages in host markets and increase productivity, while unskilled migration may increase competition in low-skill segments.

A sophisticated exam answer distinguishes between:

short-run impacts (wage adjustments, labour market friction),
and long-run impacts (human capital accumulation, demographic effects).

4.2 Capital mobility: why investors chase returns and safety

Capital flows link domestic macro stability to international funding conditions.

Key determinants of capital inflows:

interest rate differentials,
risk perceptions (political risk, default risk),
exchange-rate risk,
liquidity and global financial cycles.

A typical exam problem might ask:

“How does an interest rate increase affect the exchange rate under high capital mobility?”
“How does perceived country risk influence capital flows?”

4.3 Balance of payments and the sustainability of external debt

Open-economy stability questions often require you to interpret sustainability:

A persistent current account deficit may be financed by capital inflows.
But if inflows reverse or borrowing becomes expensive, adjustment follows via:
- exchange-rate depreciation,
- reduced imports (lower consumption and investment),
- tighter fiscal/monetary policy.

You can strengthen your answer by describing the adjustment channel:

depreciation reduces import demand and may boost exports,
but it can raise debt service costs if debt is foreign-currency denominated.

4.4 Currency crises logic: expectation channels and speculative attacks

Even if you don’t study formal models, exam questions sometimes require conceptual crisis explanation:

Under fixed exchange rate regimes, the central bank may run out of reserves if policy is inconsistent.
When markets believe the peg is unsustainable, expectations shift.
Speculative pressure accelerates reserve loss, forcing devaluation or abandonment of the peg.

An excellent answer must mention:

fiscal and monetary inconsistency,
reserve adequacy,
and the role of expectations and credibility.

4.5 Risk, interest parity, and exchange-rate pass-through

Exchange-rate risk affects the interest rate investors demand. A conceptual equation (no need for exact notation unless provided) links:

expected return in domestic currency,
to foreign return plus expected exchange-rate changes and risk premium.

Exchange-rate pass-through affects domestic prices:

A depreciation can raise import prices.
This can increase inflation.
Inflation can feed into wages and policy responses (tightening monetary policy), affecting output.

In South Africa, where inflation targeting and pass-through are central, exam answers benefit from connecting:

currency moves → import prices → consumer inflation → interest-rate response → growth.

4.6 The macro link: capital flows, investment, and growth outcomes

Capital flows can support growth through:

financing investment,
technology transfer and productivity improvements,
smoothing consumption over time.

But they can also create vulnerability:

reliance on short-term foreign capital,
asset-price bubbles,
mismatched currency denomination (borrowing in foreign currency, earning in domestic currency),
and sudden stop risks.

A balanced exam response:

recognises potential growth benefits,
then explains instability risks and conditions that mitigate them.

4.7 Policy instruments in the face of volatile capital flows

Potential policy responses include:

monetary policy to anchor inflation expectations,
fiscal policy to manage domestic demand,
macroprudential regulations (capital buffers, limits on risky lending),
foreign exchange intervention under certain regimes,
capital flow management measures (short-term and targeted, depending on framework).

In exam questions, you often need to argue:

what each policy stabilises (inflation, output, reserves, financial stability),
and potential trade-offs (costs, distortions, credibility impacts).

4.8 Worked reasoning template for scenario questions

When given a case study with indicators (e.g., “current account deficit widened, rand depreciated, foreign portfolio outflows increased”), use a structured chain:

Identify the shock: commodity price drop? global risk-off? domestic inflation surge?
Predict BoP effects: CA worsens → FX demand rises; capital outflows → FX supply decreases (or funding dries up).
Predict exchange-rate direction: depreciation likely under flexible rates; reserve loss under fixed rates.
Predict inflation and policy reaction: pass-through → inflation ↑ → monetary tightening likely.
Predict real outcomes: higher real interest rates → investment slows; depreciation may support exports with timing lag.
Conclude: discuss welfare and stability implications, and what policies could best address the underlying cause (not just symptoms).

This template maps to most international economics exam problems.

5) South African International Economics Applications: Policy Analysis, Trade-offs, and Exam-Style Master Answers

5.1 Why South Africa is a special context for International Economics

South Africa’s international economic environment features:

exposure to global commodity cycles (especially energy and minerals),
a diversified but structurally constrained trade profile (import dependence for intermediate inputs in some manufacturing sectors),
a developing financial system exposed to global capital flow volatility,
policy objectives shaped by unemployment, inequality, and industrial development.

Therefore, exam questions often want you to connect theory to realities:

“How does tariff policy affect unemployment?”
“What happens to trade and growth when exchange-rate volatility rises?”
“How do external financing conditions influence macro outcomes?”

A strong answer consistently returns to mechanisms:

prices → quantities → incomes → welfare,
with timing and institutions.

5.2 Trade policy in South Africa: tariffs, industrial policy, and input costs

Trade protection arguments in South Africa often appeal to:

infant industry development,
strategic industrialisation,
protection against dumping,
employment preservation.

A high-scoring exam response does not dismiss these motivations; instead it evaluates them with trade theory:

Step-by-step evaluation of a tariff/industrial protection policy

Direct price effect: tariff raises domestic prices of protected goods.
Consumption and production changes: consumers reduce consumption; domestic producers increase production.
Input cost channel: if protected industries use imported intermediate inputs, tariffs can raise their costs unless input rebates or exemptions exist.
Productivity and dynamic effects: protection may either improve learning-by-doing or entrench inefficiency.
Distributional impacts: workers in expanding sectors gain; workers in contracting import-competing sectors lose.
Government revenue and welfare: the welfare outcome depends on the balance between producer support and efficiency losses.

Common exam counterpoint: the “tariff escalation” and value-added dilemma

If a country protects final goods more than intermediate inputs, the effective rate of protection can be high, potentially encouraging local assembly but not necessarily building robust upstream capabilities. For South Africa, questions may mention supply-chain dependence, so you should argue:

protection at the final stage may still leave producers reliant on imported inputs,
which can limit employment creation and reduce sustainable industrial upgrading.

5.3 Regional trade agreements and South Africa’s strategic positioning

South Africa’s trade environment includes regional relationships and broader commitments. In exam terms, the main analytic issues for trade agreements are:

Trade creation: cheaper member imports replace more expensive domestic production.
Trade diversion: imports shift from non-members to members due to preferential rates rather than lower costs.
Rules of origin: increase transaction costs and may reduce benefits if firms must restructure supply chains.

A master answer should:

define trade creation/diversion,
explain why preference margins may cause diversion even if overall cost advantages are small,
connect to how firms respond (sourcing decisions, logistics, certification compliance).

5.4 Exchange-rate management and inflation targeting: South Africa-specific reasoning

South Africa’s macro policy environment often features inflation-sensitive dynamics. Exchange-rate effects can influence:

imported consumer goods prices,
imported intermediate inputs and production costs,
inflation expectations and interest rate decisions.

Exam questions may ask about policy trade-offs:

If depreciation raises inflation, monetary tightening may be required, reducing output.
If the central bank intervenes to smooth volatility, credibility and reserve costs matter.

A high-quality policy argument

When evaluating “intervene to stabilise the rand,” your answer should address:

Why volatility is costly (investment uncertainty, balance sheet risk).
Whether intervention is sustainable (reserves and sterilisation capacity).
The interaction with interest rate differentials (capital flows).
The risk of losing credibility (markets may anticipate future devaluation).

5.5 Current account dynamics: interpreting deficit changes in a South African lens

In South Africa, changes in the current account may reflect:

commodity export revenues moving with global prices,
import demand linked to domestic growth and exchange rates,
net income effects (interest payments abroad),
remittance flows.

An exam question might present stylised data: “current account deficit widened; exports fell; imports rose; currency depreciated.” Your response should:

explain plausible mechanisms rather than simply stating “deficit worsened because imports grew.”
discuss whether depreciation helped exports sufficiently to offset import pressure (timing and elasticities).
mention trade composition: whether exports are concentrated in commodities with price-driven variability.

5.6 Capital flow volatility: portfolio investors, external financing, and policy constraints

When portfolio outflows rise:

the currency may depreciate,
domestic yields may rise,
financial conditions tighten,
and the government/private sector may face funding costs.

In exam answers, the key is to distinguish:

long-run structural causes (competitiveness, productivity, fiscal stance),
from short-run financial cycle causes (global risk, sudden stops, liquidity shocks).

South African exam problems sometimes require you to propose policy responses that address both:

stabilise expectations and inflation,
maintain financial stability,
and improve external competitiveness gradually.

5.7 Unemployment, wage inequality, and trade: distributional analysis that earns marks

International economics exams often reward the ability to connect trade outcomes to labour market outcomes.

You can use the following logic chains:

Trade and wages under factor models

In an H-O setting, opening to trade changes relative product prices.
Stolen from the Stolper–Samuelson direction: returns to factors in abundant use increase; returns to scarce factors fall.
In labour terms, if labour is abundant and goods are labour-intensive, skilled/unskilled outcomes depend on which labour types are treated as factors (and on education/skill differences).

Trade adjustment and unemployment duration

Even when aggregate welfare rises, unemployment can persist due to:

sector-specific skills,
mobility costs,
and insufficient safety nets.

A high-scoring South Africa-focused answer explicitly mentions:

how social protection and training reduce adjustment costs,
why active labour market policy can complement trade liberalisation.

5.8 Exam-style “master answer” formats (what to do during the test)

Format A: “Explain and evaluate” questions

Use this structure:

Define the concept (e.g., terms of trade, J-curve, Stolper–Samuelson).
Explain mechanism (how prices affect quantities, and how that affects welfare).
Draw or describe diagram logic (even if the exam doesn’t require a drawing).
Evaluate: mention assumptions and when conclusions change.
Apply to South Africa: link to an exchange-rate, policy, or trade barrier example.

Format B: “Policy recommendation” questions

Use:

Identify objective (growth, employment, inflation control, external stability).
Identify constraint (reserve limits, fiscal space, external debt, credibility).
Choose tool(s) (tariff reform, macroprudential regulation, monetary-fiscal coordination, exchange-rate regime credibility).
Predict effects using theory:
- output,
- exchange rate,
- current account,
- welfare distribution.
Discuss risks and mitigation.

Format C: “Compare two scenarios”

Example prompt types:

fixed vs flexible exchange rates,
tariff vs quota,
high vs low capital mobility.

Your method:

State the regime assumptions.
Predict the direction of each key variable (output, interest rate, exchange rate, imports).
Explain why the difference arises (capital mobility, central bank intervention, world price assumptions).
Conclude with welfare implications.

5.9 Common pitfalls (and how to avoid them)

Saying “trade always improves welfare” without qualifiers
Correct: mention deadweight loss, market power, distribution and adjustment costs, and second-best distortions.
Ignoring timing (especially with exchange-rate depreciation)
Correct: use J-curve reasoning and elasticity/time adjustment.
Confusing nominal vs real exchange rate
Correct: include relative price adjustment.
Treating tariffs as pure producer support
Correct: discuss input cost channel and supply-chain dependence.
Forgetting credibility constraints
Correct: mention inflation expectations and consistency across fiscal/monetary policy.

5.10 A final synthesis: tying the course into one coherent narrative

The “international economics” story is unified:

Trade theory explains pattern and welfare through comparative advantage and factor abundance.
Exchange-rate and open-economy macro explains how policies and shocks transmit through output, interest rates, and the current account.
Imperfect competition explains why trade looks like it does in real markets (variety, gravity, firm entry).
Factor and capital mobility explain how labour and finance move, and why external stability is fragile.
South Africa illustrates the applied relevance: tariffs, exchange-rate volatility, capital flow cycles, and labour market adjustment are not abstract—they shape welfare and political economy.

In exams, the best performance comes from linking these blocks rather than memorising isolated results. When you connect a diagram result (e.g., tariff welfare decomposition) to a macro implication (e.g., current account effects through exchange rate), and then to a South African institutional constraint (e.g., inflation pass-through, financing costs), your answers read like rigorous economics rather than disconnected notes.