CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 of 20
A current account surplus can create inflationary pressure in the domestic economy.
A surplus injects money into the economy (export revenues) while domestic supply may not keep pace — increased demand relative to supply pushes prices up.
Question 2 of 20
Relatively higher production costs at home make domestic goods less competitive, contributing to a current account deficit.
If it costs more to produce goods domestically than abroad, domestic exports are more expensive and less price-competitive — reducing export demand and widening the deficit.
Question 3 of 20
Higher interest rates reduce import demand by making loans more expensive for households and firms.
When credit is more expensive, households borrow less and spend less overall — reducing import spending and helping narrow the current account deficit.
Question 4 of 20
Higher demand for imports always improves the current account balance.
Higher import demand increases the money flowing out of the country — worsening the current account balance by increasing the gap between import spending and export earnings.
Question 5 of 20
A current account surplus always means an economy is performing well in all areas.
A surplus can result from suppressed domestic demand (e.g. recession causing low imports) rather than export strength — a surplus alone does not guarantee overall economic health.
Question 6 of 20
A persistent current account deficit can lower living standards over time.
Deficits reduce national income, employment, and government tax revenues — all of which can reduce public services and household purchasing power, lowering living standards.
Question 7 of 20
A lower exchange rate resulting from a deficit automatically worsens the current account further.
A lower exchange rate actually helps correct the deficit by making exports cheaper and imports more expensive — it is a self-correcting mechanism under floating exchange rates.
Question 8 of 20
All policies to reduce a current account deficit have trade-offs with other macroeconomic objectives.
Every policy involves a trade-off — fiscal contraction raises unemployment, monetary tightening slows growth, protectionism risks trade wars. No policy corrects the deficit without costs.
Question 9 of 20
The current account includes both tangible and intangible international transactions.
Trade in goods covers tangibles (visible balance) and trade in services covers intangibles (invisible balance) — both are parts of the current account.
Question 10 of 20
A deficit on the current account means a country earns more from its international transactions than it spends.
A current account deficit means outflows (imports, income sent abroad) exceed inflows (exports, income received) — spending more than earning internationally.
Question 11 of 20
Supply-side policies that raise productivity can improve the current account without causing the unemployment that contractionary demand policies might create.
Unlike austerity, supply-side improvements raise competitiveness and output — improving the current account while potentially also creating jobs, avoiding the unemployment trade-off.
Question 12 of 20
The balance of payments only records the buying and selling of physical goods.
The BoP records all international transactions — including trade in services, income flows, and capital movements — not just physical goods.
Question 13 of 20
Lower living standards are a potential consequence of a persistent current account deficit.
Reduced employment, lower incomes, and reduced government revenues from a prolonged deficit all contribute to declining living standards over time.
Question 14 of 20
Trade in goods records the exports and imports of physical goods.
Physical goods — cars, food, machinery, clothing — are tangible products that can be seen crossing borders. Their export and import is recorded in the trade in goods account.
Question 15 of 20
Inflationary pressure is a potential negative consequence of a current account surplus.
The extra income flowing in from exports boosts aggregate demand — if supply cannot keep up, this demand-pull effect raises the price level.
Question 16 of 20
Supply-side policies can help reduce a current account deficit by improving productivity and export competitiveness.
Investment in education, healthcare, and infrastructure raises the quality and efficiency of the workforce — producing better, cheaper goods that are more competitive in export markets.
Question 17 of 20
A recession in trading partner countries can cause a current account deficit in the exporting country.
If trading partners are in recession, they buy fewer imports — reducing the exporting country's export revenue and potentially pushing its current account into deficit.
Question 18 of 20
Raising interest rates to reduce a deficit may conflict with the goal of promoting economic growth.
Higher interest rates reduce borrowing and investment — slowing economic growth. This creates a conflict between the BoP stability objective and the growth objective.
Question 19 of 20
A higher exchange rate resulting from a surplus always makes the surplus larger.
A higher exchange rate makes exports more expensive and imports cheaper — reducing export demand and increasing import demand, which tends to reduce the surplus over time.
Question 20 of 20
A country's balance of payments can tell us about its trading relationships and financial position with the world.
The BoP reveals whether a country is earning more from exports than it spends on imports, and whether it is a net lender or borrower internationally.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 of 20
A country with consistently higher inflation than its trading partners will tend to see its currency appreciate over time.
Persistently higher inflation erodes export competitiveness and reduces demand for the currency — leading to depreciation, not appreciation, over time.
Question 2 of 20
A disadvantage of a fixed exchange rate is that it can conflict with other macroeconomic objectives.
For example, if the government raises interest rates to defend the currency, this may slow economic growth — creating a conflict between exchange rate stability and the growth objective.
Question 3 of 20
A country experiencing high inflation should devalue its currency to restore export competitiveness.
Devaluation temporarily boosts competitiveness but can worsen inflation (by raising import prices). The better solution is to address the underlying inflation through monetary or fiscal tightening.
Question 4 of 20
Speculation can cause a currency to fall if investors lose confidence in the economy.
If speculators believe a currency will fall in value, they sell it — increasing supply and pushing the value down, creating a self-fulfilling fall.
Question 5 of 20
An increase in a country's imports increases demand for its own currency.
Higher imports means the country's residents must buy more foreign currency to pay for them — this increases the supply of the domestic currency (not demand), causing it to depreciate.
Question 6 of 20
Floating exchange rates are more stable than fixed exchange rates.
Floating rates can be highly volatile as they respond to every change in market sentiment, speculation, and economic data — fixed rates are more stable by definition.
Question 7 of 20
Under a floating exchange rate, the government must use its foreign reserves to maintain the exchange rate.
This is a feature of a fixed exchange rate. Under a floating system, the exchange rate adjusts automatically — no reserves need to be spent to defend it.
Question 8 of 20
Inflation higher than in other countries may cause a currency to depreciate.
High domestic inflation makes exports more expensive and less competitive, reducing export demand — and therefore demand for the currency — causing it to fall in value.
Question 9 of 20
A current account deficit tends to put upward pressure on a country's exchange rate.
A current account deficit means the country imports more than it exports — residents supply more domestic currency (to buy foreign goods) than foreigners demand, putting downward pressure on the exchange rate.
Question 10 of 20
A depreciation of the currency tends to improve the current account balance.
Cheaper exports boost export demand while dearer imports reduce import demand — both effects reduce the trade deficit and improve the current account.
Question 11 of 20
When a currency appreciates, the price of exports rises for foreign buyers.
A stronger currency means foreigners must pay more of their own currency to buy the same amount of exports — making them more expensive and less competitive abroad.
Question 12 of 20
A floating exchange rate provides insulation from external economic shocks.
If global conditions change (e.g. fall in foreign investment), the currency can depreciate to adjust — cushioning the domestic economy from the full impact of external shocks.
Question 13 of 20
A fall in interest rates in a country tends to reduce demand for its currency.
Lower interest rates make saving in that currency less attractive to foreign investors — demand for the currency falls and it may depreciate.
Question 14 of 20
Government intervention in the forex market can influence the exchange rate.
By buying or selling its own currency (or foreign reserves), the central bank can push the exchange rate up or down — this is a key tool in a managed or fixed exchange rate system.
Question 15 of 20
A revaluation of the currency makes imports cheaper for domestic consumers.
A higher exchange rate means each unit of domestic currency buys more foreign currency — reducing the domestic price of imported goods.
Question 16 of 20
Under a fixed exchange rate, a country with a current account deficit cannot use currency depreciation to restore balance.
Since the rate is fixed, the automatic adjustment mechanism (depreciation) is not available — the government must use other policies (fiscal, trade) to address the deficit.
Question 17 of 20
A fixed exchange rate requires a country to hold large foreign exchange reserves.
The central bank must be ready to buy or sell the domestic currency to defend the fixed rate — this requires holding substantial reserves of foreign currencies.
Question 18 of 20
When the government buys foreign currency, the supply of domestic currency in the market increases, causing it to depreciate.
To buy foreign currency, the government must sell (supply) domestic currency — increasing its supply in the forex market and pushing its value down.
Question 19 of 20
A fixed exchange rate eliminates exchange rate risk for businesses and investors.
Since the rate does not fluctuate, businesses trading internationally do not face the risk that currency movements will erode their profits — making planning much easier.
Question 20 of 20
A depreciation of the currency is always beneficial for all sectors of the economy.
While depreciation helps exporters, it harms importers and raises inflation. Firms relying on imported inputs face higher costs — so the effects are uneven across sectors.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 of 20
Japan enforcing strict quality checks on imported electronics is an example of using rules and regulations as a trade barrier.
Stringent quality and safety standards make it harder and more costly for foreign electronics firms to sell in Japan — an example of a non-tariff barrier.
Question 2 of 20
Coca-Cola is an MNC because it sells its products globally from a single production facility.
Coca-Cola is an MNC because it has production, bottling, and distribution operations in countries around the world — not just sales from one location.
Question 3 of 20
Subsidies increase the supply of domestic goods and incentivise firms to produce more.
Lower production costs mean firms can profitably produce more — increasing supply and output levels in the subsidised industry.
Question 4 of 20
MNCs face political risk when operating in countries with unstable governments or policy environments.
Policy changes — nationalisation, sudden tax increases, or trade restrictions — can occur in politically unstable countries, threatening MNC investments and operations.
Question 5 of 20
Differences in legal systems, tax regulations, and environmental laws across countries make MNC operations simpler.
Navigating different legal and regulatory systems across countries creates operational complexity and costs for MNCs — this is a disadvantage.
Question 6 of 20
MNCs can benefit from locating R&D in countries with strong universities and research institutions.
Access to world-class research talent and institutions helps MNCs innovate — many MNCs locate R&D centres near top universities regardless of where their home country is.
Question 7 of 20
A tariff generates revenue for the government that imposes it.
Every unit of an imported good that still enters the country generates tax revenue for the government — an advantage for government finances.
Question 8 of 20
The overall impact of an MNC on a host country depends on the specific context, including the country's level of development and regulatory framework.
Benefits and harms vary — a strong regulatory environment can capture MNC benefits (jobs, tax) while minimising harms (exploitation, environmental damage). Context determines net impact.
Question 9 of 20
Government exploitation by MNCs occurs when powerful MNCs secure special deals that are not in the public interest.
MNCs with economic power can negotiate subsidies, tax breaks, and regulatory exemptions from governments — securing advantages that cost the public but benefit the corporation.
Question 10 of 20
Free trade is always preferable to protectionism in every circumstance.
While free trade generally improves efficiency and welfare, there are valid cases for protectionism — infant industries, national security, dumping — meaning the best policy depends on context.
Question 11 of 20
Economies of scale are a positive impact of globalisation because large-scale production reduces costs and lowers prices.
Globalisation allows firms to produce for a much larger global market, achieving economies of scale that lower average costs and consumer prices.
Question 12 of 20
Lower taxes in Hong Kong, Singapore, and Bahrain attract MNCs to locate there.
These are real examples from the notes — favourable tax environments make these locations attractive for MNC headquarters and operations.
Question 13 of 20
In Diagram C, access to global markets is listed as an advantage for the host country.
Diagram C includes this — when MNCs use host country production for global export, the host country gains access to international markets it might not otherwise reach.
Question 14 of 20
Quotas and tariffs have exactly the same effects on price and quantity in the domestic market.
Both raise prices and reduce import quantities, but a tariff raises revenue for the government while a quota does not (unless import licences are auctioned). The mechanisms differ.
Question 15 of 20
Overreliance on MNCs in low-income countries can lead to severe consequences if the MNC decides to relocate.
If a host economy becomes dependent on one or a few MNCs, their departure can cause mass unemployment and economic crisis — Carrefour's exit from Thailand and Malaysia in 2010 is the example.
Question 16 of 20
Preventing dumping is an argument against protectionism.
Preventing dumping is an argument FOR protectionism. Dumping (foreign firms selling below cost to dominate markets) is unfair — trade barriers protect domestic firms from this practice.
Question 17 of 20
The inflow of MNC investment always improves the host country's balance of payments permanently.
MNC investment improves the capital account — but once the MNC repatriates profits, this creates current account outflows that can worsen the balance of payments over time.
Question 18 of 20
Retaliation by other countries is an argument against protectionism.
When one country imposes trade barriers, its trading partners often retaliate with their own barriers — leading to trade wars that harm all economies involved.
Question 19 of 20
By operating globally, MNCs can offset losses in one region with gains in another.
Geographic diversification provides a natural hedge — a downturn in Europe may be offset by growth in Asia, reducing the MNC's overall risk exposure.
Question 20 of 20
MNCs have been criticised for poor working conditions and low wages in low-income host countries.
In countries with weak labour regulations, MNCs sometimes pay below living wages and maintain poor conditions — exploiting lower standards to cut costs.
Practice
True / False - MNCs
20 questionsQuestion 1 of 20
MNCs always choose the lowest-wage country available for their manufacturing operations.
While labour costs matter, MNCs also consider skill levels, infrastructure quality, political stability, market access, and tax rates — location decisions are multifactorial.
Question 2 of 20
Powerful MNCs can pressure host country governments for subsidies, grants, and tax concessions.
Large MNCs have significant leverage — they can threaten to relocate, pressuring governments to offer financial incentives that may benefit the MNC at public expense.
Question 3 of 20
The inflow of MNC investment always improves the host country's balance of payments permanently.
MNC investment improves the capital account — but once the MNC repatriates profits, this creates current account outflows that can worsen the balance of payments over time.
Question 4 of 20
MNC investment in a host country counts as foreign direct investment (FDI).
When an MNC builds a factory or buys a company in a foreign country, it is making a direct investment — this FDI increases the host country's capital stock and productive capacity.
Question 5 of 20
Risk diversification means MNCs put all their resources into one market to maximise returns.
Risk diversification means the opposite — spreading operations across many markets so that poor performance in one does not devastate the whole company.
Question 6 of 20
Tesco's US venture 'Fresh & Easy' closing between 2013 and 2015 is an example of MNC failure to adapt.
Tesco misjudged American shopping habits and preferences — 'Fresh & Easy' failed to attract sufficient customers, illustrating the costly consequences of poor cultural adaptation.
Question 7 of 20
Host countries that rely heavily on a single MNC for employment are economically vulnerable.
Single-employer dependence creates extreme vulnerability — if the MNC leaves or downsizes, the community loses its main source of income with few alternatives available.
Question 8 of 20
MNCs always prefer to source all inputs from their home country to maintain quality control.
MNCs source globally — they choose suppliers based on cost, quality, and availability worldwide. Global sourcing is one of the key strategic advantages of being multinational.
Question 9 of 20
In Diagram D, the host country benefits from profit repatriation.
Diagram D — profit repatriation: who benefits, who loses?
Diagram D shows profit repatriation flowing AWAY from the host country to the home country — this is a loss of income for the host, not a benefit.
Question 10 of 20
Profit repatriation reduces the developmental impact of MNC investment on host countries.
When profits leave the host country, less of the income generated locally is retained for reinvestment — limiting the multiplier effect of MNC investment on the host economy.
Question 11 of 20
MNCs never face difficulties adapting their products to different cultural markets.
Cultural adaptation is one of the major challenges MNCs face — failure to adapt (as Tesco showed in the US) can result in costly market exits and damage to brand reputation.
Question 12 of 20
Operational challenges such as differences in environmental laws across countries can increase MNC compliance costs.
Meeting different environmental standards in each country requires legal expertise and operational adjustments — adding to costs that domestic firms do not face.
Question 13 of 20
MNCs face political risk when operating in countries with unstable governments or policy environments.
Policy changes — nationalisation, sudden tax increases, or trade restrictions — can occur in politically unstable countries, threatening MNC investments and operations.
Question 14 of 20
A company with customers in multiple countries but production only in one country qualifies as an MNC.
Simply exporting to multiple countries does not make a firm an MNC — it must have operational presence (production, offices, or subsidiaries) in two or more countries.
Question 15 of 20
The host country is the foreign country where an MNC sets up operations.
Host countries receive FDI from MNCs — gaining jobs, technology, and infrastructure investment, while also facing risks from over-reliance and profit repatriation.
Question 16 of 20
In Diagram B, local firms are shown as one of the stakeholders affected by MNC activity.
Diagram B — stakeholders affected by MNC activity
Diagram B includes 'local firms' as a spoke — MNCs affect domestic businesses through competition, supply chain relationships, and potential crowding-out.
Question 17 of 20
Local firms being crowded out by MNCs is a disadvantage for host countries.
When MNCs dominate markets, local businesses cannot compete — reducing domestic entrepreneurship, diversity of ownership, and long-term economic resilience.
Question 18 of 20
Repatriated profits from MNCs can be reinvested in the home country's economy.
Profits returned to the home country can be invested in new domestic projects, R&D, or expansion — contributing to home country economic growth.
Question 19 of 20
Lower taxes in Hong Kong, Singapore, and Bahrain are factors that attract MNCs.
These jurisdictions compete for MNC investment by offering favourable corporate tax rates — making them attractive locations for MNC headquarters and operations.
Question 20 of 20
MNCs can access skilled labour, raw materials, and technology in different countries by operating globally.
Global operations allow MNCs to source the best inputs from wherever they are available — skilled engineers in Germany, oil in Saudi Arabia, cheap manufacturing in Vietnam.