CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 of 20
A fall in domestic income tends to improve the current account balance.
Lower income reduces consumer spending including on imports — falling import demand reduces the deficit or contributes to a surplus.
Question 2 of 20
The balance of payments is made up of only one account — the current account.
The BoP consists of the current account AND the capital and financial account — both record different types of international transactions.
Question 3 of 20
A tourist visiting from abroad spending money in a country counts as a service export for that country.
Tourism is a service export — the foreign tourist 'imports' the tourism service from the host country, bringing foreign currency in and improving the host's trade in services.
Question 4 of 20
A country exporting more services than it imports has a surplus on the trade in services account.
When service exports (tourism, finance, insurance sold abroad) exceed service imports (foreign services used domestically), the trade in services account is in surplus.
Question 5 of 20
A current account deficit can lead to reduced aggregate demand in the domestic economy.
A deficit means more money is flowing out (on imports) than coming in (from exports) — this net outflow reduces overall spending and demand in the economy.
Question 6 of 20
Investment in infrastructure by the government is a supply-side policy that supports export businesses.
Better roads, ports, broadband, and energy networks reduce firms' costs and improve their ability to produce and export goods efficiently.
Question 7 of 20
Protectionist measures always solve a current account deficit permanently.
While tariffs and quotas reduce imports, they can trigger retaliation from trading partners — reducing exports and potentially worsening the deficit. They also do not address underlying competitiveness issues.
Question 8 of 20
A current account surplus benefits domestic workers in export industries through higher employment and wages.
Strong export demand means export firms hire more workers and can afford to pay higher wages — directly improving the welfare of workers in those sectors.
Question 9 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 10 of 20
A current account deficit is associated with higher unemployment.
If domestic firms lose sales to foreign competitors (rising imports, falling exports), they produce less and need fewer workers — increasing unemployment.
Question 11 of 20
Primary income includes net income earned from investments abroad, such as dividends and profits.
When residents invest overseas, they receive returns (dividends, interest, profits) — these inflows are recorded as primary income in the current account.
Question 12 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 13 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 14 of 20
Low productivity reduces a country's international competitiveness, making it harder to export.
If firms produce less efficiently, their goods cost more to make — raising export prices and reducing their competitiveness in global markets.
Question 15 of 20
A current account surplus tends to increase employment in the export sector.
Rising export demand means domestic firms produce more and need more workers — boosting employment, particularly in export industries.
Question 16 of 20
Government subsidies to exporters can improve the current account by boosting export capacity.
Subsidies lower production costs for exporting firms — enabling them to offer more competitive prices internationally and expand export volumes.
Question 17 of 20
A high exchange rate can cause a current account deficit by making exports more expensive for foreign buyers.
A strong currency raises the foreign-currency price of exports (reducing demand) and lowers the domestic price of imports (increasing demand) — both effects worsen the current account.
Question 18 of 20
A country that receives more investment income from abroad than it pays out has a primary income surplus.
If returns on overseas investments (dividends, interest) received by residents exceed what is paid to foreign investors in the country, there is a primary income surplus.
Question 19 of 20
Supply-side policies are the most effective short-term solution to a current account deficit.
Supply-side policies are slow-acting — improving productivity and competitiveness takes years. Fiscal and monetary policies work faster to reduce import demand in the short run.
Question 20 of 20
Trade protectionism as a BoP policy can lead to retaliation from trading partners, reducing exports.
When a country imposes tariffs or quotas, affected partners often respond in kind — reducing the original country's exports and potentially worsening its current account balance.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 of 20
Speculation always stabilises exchange rates by correcting market imbalances.
Speculation can destabilise exchange rates — speculative 'hot money' flows can cause excessive volatility, as speculators react to sentiment rather than economic fundamentals.
Question 2 of 20
Under a floating system, there is less incentive for governments to engage in currency manipulation.
Since the rate is market-determined, governments are not defending an artificial rate — reducing the temptation or ability to manipulate the currency for competitive advantage.
Question 3 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 4 of 20
Changes in domestic interest rates affect exchange rates by changing the relative attractiveness of saving in that currency.
Higher rates attract foreign savers; lower rates repel them. This changes the demand for the currency — a key transmission mechanism of monetary policy to exchange rates.
Question 5 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 6 of 20
If a fixed exchange rate is set too high, exports become uncompetitive.
An overvalued currency makes exports more expensive for foreign buyers — reducing demand for them and harming export industries.
Question 7 of 20
An increase in a country's exports increases demand for that country's currency.
Foreign buyers must convert their currency into the exporter's currency to pay for goods — rising exports increase demand for the currency, causing it to appreciate.
Question 8 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 9 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 10 of 20
Under a fixed exchange rate, the central bank intervenes by buying and selling its currency in the forex market.
To maintain the fixed rate, the central bank buys the currency when it is falling (to prop up demand) and sells it when it is rising (to increase supply).
Question 11 of 20
The equilibrium exchange rate is determined where the demand and supply of a currency are equal.
Just like any market, the price of a currency (the exchange rate) is set where demand equals supply in the foreign exchange market.
Question 12 of 20
Inward Foreign Direct Investment (FDI) boosts demand for a country's currency and increases its value.
Foreign companies must convert their currency into the domestic currency to invest — this increases demand for the domestic currency, causing it to appreciate.
Question 13 of 20
When a currency appreciates, the price of imports falls for domestic consumers.
A stronger currency means each unit of domestic currency buys more foreign currency — so imported goods become cheaper for domestic buyers.
Question 14 of 20
Under a floating exchange rate, the balance of payments adjusts automatically without government intervention.
A deficit causes depreciation (making exports cheaper, imports dearer), which restores equilibrium — the automatic stabilisation mechanism of floating rates.
Question 15 of 20
A currency appreciates when its value rises relative to other currencies.
Appreciation means one unit of the currency now buys more of another currency — for example, if 1 GBP rises from 1.20 USD to 1.30 USD, the pound has appreciated.
Question 16 of 20
When US residents demand more Malaysian goods, the demand for the Malaysian Ringgit increases.
To buy Malaysian goods, Americans must first exchange USD for Ringgit — increasing demand for the Ringgit and putting upward pressure on its value.
Question 17 of 20
If a fixed exchange rate is set too low, it can cause inflation.
An undervalued currency makes imports more expensive — raising domestic prices and contributing to inflation through higher import costs.
Question 18 of 20
'Hot money' flows refer to speculative short-term capital movements attracted by higher interest rates or expected currency movements.
Hot money moves quickly between countries chasing the best returns — it can cause significant exchange rate volatility as it flows in and out rapidly.
Question 19 of 20
High domestic inflation tends to increase a country's exports and strengthen its currency.
High inflation makes domestic goods more expensive relative to foreign goods, reducing export competitiveness and demand for the currency — causing depreciation, not appreciation.
Question 20 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.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 of 20
A quota generates the same tax revenue for the government as a tariff of equivalent effect.
Unlike a tariff, a quota does not automatically generate revenue for the government. The price increase benefits importers who hold quota licences, not the government (unless licences are sold).
Question 2 of 20
Host countries always experience economic growth as a result of MNC investment.
While MNC investment typically stimulates growth, the net effect depends on whether profits are repatriated, whether local firms are crowded out, and whether workers' wages are fair.
Question 3 of 20
Apple, Exxon Mobil, Coca-Cola, Volkswagen, and Johnson & Johnson are all examples of MNCs.
All five operate across many countries — producing, selling, and employing people globally. They are classic examples of multinational corporations.
Question 4 of 20
Honda manufactures cars in Belgium, Italy, and France to avoid EU trade restrictions.
By producing within the EU, Honda avoids paying tariffs on cars imported from Japan — a strategic use of foreign production to bypass trade barriers.
Question 5 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 6 of 20
Domestic industries benefit from rules and regulations by being encouraged to adhere to higher standards.
When foreign imports must meet high standards, domestic firms that already meet them face less unfair competition — and industry standards overall improve.
Question 7 of 20
Communication barriers due to language, cultural, and time zone differences are a management challenge for MNCs.
Coordinating teams across different languages, cultures, and time zones creates misunderstandings and inefficiencies — a real operational cost for MNCs.
Question 8 of 20
MNC presence in a host country can stimulate the development of local supplier industries.
MNCs often source materials and services locally — creating demand for local suppliers, supporting the growth of domestic businesses linked to the MNC supply chain.
Question 9 of 20
A decrease in transportation costs is a cause of increased globalisation.
Cheaper shipping (e.g. containerisation) makes it more economical to trade goods internationally, accelerating globalisation.
Question 10 of 20
The United States providing subsidies to its corn and soybean farmers is an example of an export subsidy.
US agricultural subsidies help American farmers compete internationally by lowering their costs — making US farm products cheaper than they would otherwise be.
Question 11 of 20
Selling to a larger customer base in overseas markets increases MNC profits.
Access to billions of consumers worldwide dramatically expands revenue potential — global sales allow MNCs to earn far more than domestic-only firms.
Question 12 of 20
MNCs achieve economies of scale by operating on a large scale, allowing them to lower costs.
Large-scale global production allows MNCs to spread fixed costs, negotiate bulk discounts, and use specialist technology — reducing average costs.
Question 13 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 14 of 20
Tariffs can be used to protect strategic industries such as defence-related manufacturing.
Governments may use tariffs to protect industries vital for national security, ensuring domestic production capacity in sectors like steel or electronics.
Question 15 of 20
The European Union imposing import quotas on sugar is an example of this trade protection method.
The EU uses import quotas on agricultural products like sugar to protect its domestic farming industry from cheaper foreign competition.
Question 16 of 20
Free trade can lead to over-specialisation, making a country vulnerable if demand for its exports falls.
If a country specialises heavily in one product, a collapse in demand or prices for that good can devastate its economy.
Question 17 of 20
Economic dependence is a negative impact of globalisation because nations may become over-reliant on the global economy.
When countries are deeply integrated into the global economy, an economic crisis in one country (e.g. a financial crash) can quickly spread to others.
Question 18 of 20
Host country governments receive no tax revenue from MNC operations.
MNCs pay corporate taxes, employment taxes, and other levies to host governments — providing revenue that can fund public services and infrastructure.
Question 19 of 20
A subsidy is funded by consumers of the subsidised product.
Subsidies are funded by the government — and ultimately by taxpayers. The cost is a burden on the public purse, not directly on consumers of the good.
Question 20 of 20
Carrefour's exit from Thailand and Malaysia in 2010 caused job losses.
This real example illustrates the danger of over-reliance — when Carrefour left, workers lost jobs and supplier businesses lost their key customer, illustrating the vulnerability of MNC-dependent economies.
Practice
True / False - MNCs
20 questionsQuestion 1 of 20
Host country governments receive no tax revenue from MNC operations.
MNCs pay corporate taxes, employment taxes, and other levies to host governments — providing revenue that can fund public services and infrastructure.
Question 2 of 20
Over-reliance on MNCs is listed as a disadvantage in Diagram C.
Diagram C — host country advantages vs disadvantages of MNCs
Diagram C explicitly lists over-reliance on MNCs as a disadvantage — economic dependency on foreign corporations creates vulnerability when they choose to relocate.
Question 3 of 20
Whether MNCs are net beneficial or harmful to a host country is a question of balance that requires weighing advantages and disadvantages in context.
This is the key evaluation point — there is no universal answer. Context, regulation, and the specific MNC and host country all determine whether the net impact is positive or negative.
Question 4 of 20
MNCs only operate in manufacturing industries.
MNCs span all sectors — services (banking, retail, technology), manufacturing (cars, electronics), resources (oil, mining), and healthcare. Coca-Cola (beverages) and Johnson & Johnson (healthcare) illustrate this diversity.
Question 5 of 20
The home country of an MNC is the country where it is headquartered or originally founded.
The home country is where the MNC has its headquarters — it benefits from repatriated profits and the MNC's global brand and tax contributions.
Question 6 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 7 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 8 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 9 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 10 of 20
MNCs can set up manufacturing plants in foreign countries to avoid import taxes.
By producing inside the target market (or a trade bloc like the EU), MNCs avoid tariffs on imports — Honda manufacturing in Belgium, Italy, and France to avoid EU trade restrictions is a key example.
Question 11 of 20
MNCs are always either entirely beneficial or entirely harmful to host countries.
MNCs produce mixed effects — creating jobs and technology transfer while also potentially exploiting workers, repatriating profits, and crowding out local firms. The net impact depends on many factors.
Question 12 of 20
MNCs transfer technology and skills to the host country's workforce, contributing to long-term development.
When MNCs train local workers and introduce advanced technology and management practices, they raise the skill level of the local labour force — a lasting development benefit.
Question 13 of 20
Home countries may experience deindustrialisation if MNCs shift production to cheaper host countries.
If MNCs move factories overseas to cut labour costs, home country manufacturing can decline — causing job losses and structural unemployment in affected industries.
Question 14 of 20
MNCs can cause environmental damage in host countries, particularly where regulations are weak.
In countries with lax environmental laws, MNCs may pollute, deplete natural resources, or avoid environmental costs — shifting the burden onto the host country's environment.
Question 15 of 20
Home countries benefit when MNCs create jobs abroad because this reduces unemployment at home.
MNCs creating jobs abroad may actually reduce home country employment if production moves overseas — this is a potential disadvantage for home countries, not an advantage.
Question 16 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.
Question 17 of 20
In Diagram C, job creation is listed as an advantage of MNCs for the host country.
Diagram C — host country advantages vs disadvantages of MNCs
Diagram C clearly lists job creation in the advantages column — MNC investment generates local employment, which is typically the most visible benefit for host nations.
Question 18 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 19 of 20
The home country's international reputation and influence can grow as its MNCs expand globally.
Successful global MNCs enhance their home country's economic prestige — a strong MNC sector raises a country's international profile and trade relationships.
Question 20 of 20
Operating on a large scale allows MNCs to lower costs through economies of scale and pass savings to customers.
MNCs serve global markets — their massive scale allows them to spread fixed costs, negotiate bulk discounts, and specialise production, lowering average costs.