International trade and globalisation
Countries specialise and trade, but may protect their industries. Exchange rates and the current account of the balance of payments link a country to the rest of the world.
📌 Key points
- Countries specialise in the products they can make relatively efficiently and trade; this raises output and choice but can make a country over-dependent on a few products.
- Globalisation is the growing integration of the world’s economies through trade, investment and the movement of people, ideas and technology.
- Multinational companies (MNCs) produce in more than one country; they can bring jobs, investment, tax and technology, but may send profits home, harm local firms or damage the environment.
- Free trade is trade without restrictions; it increases competition and choice and can lower prices.
- Methods of protection: tariffs (taxes on imports), import quotas (limits on quantity), subsidies to domestic firms and embargoes (bans).
- Reasons for protection include protecting infant industries, declining industries and jobs, strategic industries, and stopping dumping (selling exports below cost).
- An exchange rate is the price of one currency in terms of another; a floating rate is set by demand and supply, a fixed rate by the government or central bank.
- Demand for a currency comes from foreigners buying the country’s exports and investing in it; supply comes from residents buying imports and investing abroad.
- An appreciation makes exports dearer and imports cheaper; a depreciation makes exports cheaper and imports dearer.
- The current account of the balance of payments has four parts: trade in goods, trade in services, primary income and secondary income. A deficit means outflows are greater than inflows.
📖 Key terms
- Globalisation
- The growing integration of the world’s economies.
- Multinational company
- A firm that produces in more than one country.
- Tariff
- A tax on imports.
- Import quota
- A limit on the quantity of a product that can be imported.
- Embargo
- A ban on trade in a product or with a country.
- Dumping
- Selling exports at a price below their cost of production.
- Appreciation
- A rise in the value of a currency in a floating exchange rate system.
- Current account deficit
- When a country’s current account outflows are greater than its inflows.
✏️ Worked example
A US firm sells a product for $30. The exchange rate changes from £1 = $1.50 to £1 = $1.20. What happens to the price of the product in the UK?
- Before: $30 ÷ 1.50 = £20.
- After: $30 ÷ 1.20 = £25.
- Each pound now buys fewer dollars, so the dollar has appreciated against the pound.
- Answer: the UK price rises from £20 to £25, so US exports become less competitive.
Many students mix up appreciation and depreciation effects. Remember SPICED: Strong Pound (currency), Imports Cheap, Exports Dear.
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