Unit 3 Diagram Bank — Must-Know Diagrams for the Exam
Every diagram you need for the Unit 3 examination, in one place. For each one: what it shows, how to draw it, and the single point examiners most want to see. Use this as your final-revision checklist — cover the caption and try to reproduce each diagram from memory.
1. Gains from trade (PPF)
The production possibility frontier shows the maximum combinations of two goods an economy can produce. Comparing two countries' PPFs reveals comparative advantage and the gains from specialising and trading.
Plot two goods on the axes; the straight or bowed frontier shows the trade-off. The country with the flatter trade-off (lower opportunity cost) in a good has the comparative advantage in it.
2. Tariff on the demand & supply model
A tariff raises the price of imports from the world price to the world price plus the tariff, lifting domestic production, cutting domestic consumption and shrinking imports.
Draw domestic D and S, a horizontal world-price line, then a higher world-price-plus-tariff line. The import quantity is the gap between domestic demand and supply at each price.
3. Structure of the balance of payments
The balance of payments splits into the current account (trade balance plus primary and secondary income) and the capital and financial account, which mirror each other under the double-entry rule.
Draw the tree: BOP at the top branching into the current account and the capital & financial account, then break the current account into its components.
4. The terms of trade index
The terms of trade is an index of export prices relative to import prices, set to a base of 100. Commodity booms push it well above 100 and lift national income.
Plot the index over time against a base-100 line; mark the commodity-boom peak and recall the formula (export price index ÷ import price index × 100).
5. Exchange-rate determination
The exchange rate is the price of the dollar, set where demand for $A meets supply of $A. A rise in demand (or fall in supply) appreciates the dollar; the reverse depreciates it.
Put the price of $A on the vertical axis and the quantity of $A on the horizontal. Shift the demand or supply curve and read off the new equilibrium exchange rate.