Global Economy

Economic integration is a ladder: PTA (reduced tariffs on select goods) → FTA (zero tariffs between members, own external tariff) → customs union (zero tariffs plus a common external tariff) → common market (+ free movement of labour and capital) → economic union (+ harmonised policy) → monetary union (+ single currency, e.g. the Eurozone). Each rung removes more friction but demands more shared policy. Multilaterally, the WTO chases similar liberalisation through Most-Favoured-Nation (treat every partner as well as your best-treated one) and National Treatment (treat imports like domestic goods once they clear customs) — but regional blocs are a deliberate, legal exception to MFN, which is exactly the tension exam extracts about stalled WTO talks keep testing.

Trade creation happens when a union member switches from a less efficient domestic producer to a more efficient union-partner producer — world efficiency and consumer welfare rise. Trade diversion happens when a member switches away from a more efficient non-member producer to a less efficient member producer purely because the tariff preference makes the member look cheaper — world efficiency falls and the government loses tariff revenue. The trap: an efficient outsider existing is not enough to prove diversion; you must trace what the country was actually doing before the union and show a genuine switch away from that outsider.

An exchange rate is the price of one currency in another. Under a floating regime, demand and supply in the forex market set the rate freely and it appreciates or depreciates. Under a fixed regime, the central bank commits to a rate and defends it with reserves, deliberately revaluing or devaluing it; a managed float sits in between. Same direction of movement, completely different mechanism and command word — mixing up the vocabulary is one of the most common ways to lose marks.

Percentage appreciation or depreciation is calculated as $\%\Delta e=\frac{e_1-e_0}{e_0}\times 100$. Always check direction: more local currency per unit of foreign currency means depreciation, not appreciation, even if the number looks like it 'went up'. To convert a foreign-currency import bill into local currency, multiply the foreign price by the units of local currency per unit of foreign currency. HL students should also recognise the Marshall-Lerner condition ($PE{D}_x+PE{D}_m>1$) and the J-curve, though SL is only examined on the basic demand/supply model.

The balance of payments records a country's transactions with the rest of the world across several accounts. The current account covers trade in goods (visible), trade in services (invisible), primary income (interest, profit, dividends, wages earned abroad) and secondary income (transfers such as remittances and aid). The capital account is usually a small line item covering capital transfers and sales of non-produced, non-financial assets like patents. A third account, the financial account, completes the picture — the full revision notes break down exactly how it fits with the other two.