CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 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 2 of 20
Contractionary fiscal policy (higher taxes, lower spending) can worsen unemployment while improving the current account.
Lower government spending and higher taxes reduce aggregate demand — cutting imports but also reducing output and employment, creating a policy trade-off.
Question 3 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 4 of 20
Raising interest rates is a monetary policy tool that can help reduce a current account deficit.
Higher interest rates make borrowing more expensive — reducing consumer spending (including on imports) and making the country more attractive to foreign investors, supporting the currency.
Question 5 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 6 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 7 of 20
A current account deficit only occurs when a country imports more goods than it exports.
A deficit can arise from any part of the current account — including trade in services, primary income, or secondary income outflows — not just from goods trade.
Question 8 of 20
Trade in services is known as the invisible balance.
Since services are intangible and cannot be seen crossing borders, trade in services is called the invisible balance.
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 always causes immediate economic collapse.
Many countries run deficits for extended periods without crisis — deficits can be financed by capital inflows (borrowing, FDI). Problems arise if deficits become large and persistent.
Question 11 of 20
Higher demand for exports is a cause of a current account surplus.
When foreigners buy more of a country's goods and services, export revenues rise — if this exceeds import spending, the current account moves into surplus.
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
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 14 of 20
Low domestic productivity leads to lower demand for a country's exports.
Less productive economies produce at higher cost — making their exports less price-competitive internationally and reducing foreign demand for them.
Question 15 of 20
A country cannot use both fiscal policy and monetary policy at the same time to address a current account deficit.
Governments regularly use multiple policy tools simultaneously — higher taxes (fiscal) and higher interest rates (monetary) can both be deployed together to reduce import demand.
Question 16 of 20
Government subsidies and tax incentives for exporters can encourage export-driven business start-ups.
Financial support lowers the barriers to entry for new export businesses — helping them grow, creating jobs, and increasing export revenues over time.
Question 17 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 18 of 20
Fiscal policy can be used to reduce a current account deficit by raising taxes and cutting government spending.
Higher taxes and reduced government spending lower household incomes — reducing consumer spending including on imports, which helps reduce the deficit.
Question 19 of 20
Rising consumer incomes in a country tend to increase spending on both domestic and imported goods.
As incomes rise, the marginal propensity to import increases — more goods from abroad are purchased, increasing import spending and contributing to a current account deficit.
Question 20 of 20
The balance of payments is a financial record of a country's transactions with the rest of the world over a period of time.
This is the definition — the BoP records all economic transactions between a country's residents and the rest of the world, including trade, investment, and transfers.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 of 20
Inward FDI and outward FDI both increase demand for a country's currency.
Inward FDI increases demand for the domestic currency (foreigners buy it to invest). Outward FDI increases supply of the domestic currency (residents sell it to invest abroad). Their effects are opposite.
Question 2 of 20
Both fiscal policy and exchange rate policy can be used to reduce a current account deficit.
Fiscal contraction reduces income (cutting imports), while devaluation/depreciation boosts exports and reduces imports — both can improve the current account.
Question 3 of 20
When US residents demand more Malaysian goods, the supply of USD in the foreign exchange market increases.
Americans selling USD to get Ringgit increases the supply of USD in the forex market — this is the mirror side of the transaction.
Question 4 of 20
Exchange rate policy, monetary policy, and fiscal policy can all interact and sometimes conflict with each other.
For example, raising interest rates to defend a currency (exchange rate objective) can slow growth (conflicting with the employment objective) — policy interactions create trade-offs.
Question 5 of 20
A fall in the exchange rate (depreciation) increases the price of exports in the domestic currency.
Depreciation makes exports cheaper in foreign currency terms — but in domestic currency terms, the export price is set by the producer and does not automatically change. It is the foreign buyer who benefits from lower prices.
Question 6 of 20
Exchange rate stability is important for businesses because it makes planning and investment easier.
When exchange rates are predictable, firms can set prices, plan contracts, and budget for imports and exports with confidence — reducing uncertainty and risk.
Question 7 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 8 of 20
Rising imports cause the domestic currency to weaken because residents must buy more foreign currency.
To pay for imports, residents sell domestic currency to buy foreign currency — increasing supply of the domestic currency and pushing its value down.
Question 9 of 20
A depreciation of the currency can contribute to inflation in the domestic economy.
Dearer imports raise the cost of raw materials and consumer goods — contributing to cost-push inflation domestically.
Question 10 of 20
The exchange rate is only important for countries that export goods.
The exchange rate affects both exporters and importers — it determines the cost of imports as well as the competitiveness of exports.
Question 11 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 12 of 20
Automatic stabilisation is an advantage of a floating exchange rate.
If a country has a current account deficit, the currency depreciates automatically — making exports cheaper and imports dearer, restoring balance of payments equilibrium without government action.
Question 13 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 14 of 20
If speculators lack confidence in an economy, they withdraw investments, causing the currency to fall.
Capital flight driven by loss of confidence reduces demand for the currency (as assets are sold) and increases its supply — causing depreciation.
Question 15 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 16 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 17 of 20
The foreign exchange market sets the price of goods and services directly.
The foreign exchange market sets the price of currencies, not goods. However, exchange rate changes affect the prices of traded goods indirectly.
Question 18 of 20
A fixed exchange rate makes it easier for a country to attract foreign investment.
Investors prefer a stable currency because it reduces the risk that returns will be eroded by exchange rate movements — a key advantage of fixed rates for attracting FDI.
Question 19 of 20
When a currency depreciates, exports become cheaper for foreign buyers.
A weaker currency means foreigners pay less of their own currency for the same exports — making them more price-competitive internationally.
Question 20 of 20
When a currency depreciates, imports become more expensive for domestic consumers.
A weaker currency means more domestic currency is needed to buy the same amount of foreign goods — raising import prices.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 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 2 of 20
After a quota is imposed, the domestic supply curve becomes perfectly inelastic at the quota limit.
Once the quota ceiling is reached, no more imports can enter — making supply completely fixed (inelastic) at that level.
Question 3 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 4 of 20
Dumping occurs when foreign firms sell goods at extremely low prices, often below production costs, to dominate a market.
This is the definition of dumping — a predatory pricing strategy used to undercut domestic firms and gain market dominance, after which prices may be raised.
Question 5 of 20
Avoidance of trade restrictions is an advantage for MNCs because it allows them to access markets without paying tariffs.
By producing locally in target markets or within trade blocs, MNCs sidestep tariffs and quotas — improving their cost competitiveness and market access.
Question 6 of 20
MNCs always support and strengthen local businesses in host countries.
MNCs' competitive advantage and scale can force local businesses to close down — reducing local entrepreneurship and damaging domestic industry.
Question 7 of 20
Free trade lowers prices for consumers by increasing competition and reducing costs.
When imports face no barriers, domestic firms face greater competition — driving down prices and improving value for consumers.
Question 8 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 9 of 20
Tesco entered the US market successfully with its 'Fresh & Easy' brand.
'Fresh & Easy' failed — Tesco misjudged US consumer behaviour and preferences, leading to closure between 2013 and 2015. It is a textbook example of failure to adapt to local markets.
Question 10 of 20
Managing a geographically spread organisation is easier than managing a single-country firm.
Large geographic spread creates significant management challenges — coordinating teams across time zones, cultures, and languages increases complexity and the risk of miscommunication.
Question 11 of 20
Low corporate tax rates in countries like Hong Kong, Singapore, and Bahrain attract MNCs.
Tax advantages are a major incentive for MNCs to locate in certain countries — reducing their global tax burden and increasing profitability.
Question 12 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 13 of 20
A major argument against protectionism is that protected industries may become inefficient due to reduced competition.
Without the pressure of foreign competition, domestic firms have less incentive to innovate or cut costs — leading to inefficiency over time.
Question 14 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 15 of 20
Communication barriers due to language, cultural, and time zone differences are management challenges for MNCs.
Operating across many countries means teams speak different languages, follow different business norms, and work at different times — creating real coordination and communication difficulties.
Question 16 of 20
One positive impact of globalisation is that it fosters job creation and economic growth through increased trade.
As countries trade more, industries expand and new jobs are created, contributing to higher GDP and living standards.
Question 17 of 20
Exxon Mobil is an example of an MNC in the oil and energy sector.
Exxon Mobil explores, extracts, refines, and sells oil and gas across dozens of countries — one of the world's largest and most geographically spread MNCs.
Question 18 of 20
A tariff is a tax imposed on imported goods.
This is the definition of a tariff — a levy placed on imports to make them more expensive relative to domestic goods.
Question 19 of 20
In Diagram A, MNCs are defined as companies that only operate within one country.
Diagram A clearly shows the definition: MNC = operates in 2+ countries. A company operating in only one country is a domestic firm, not an MNC.
Question 20 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.
Practice
True / False - MNCs
20 questionsQuestion 1 of 20
Tesco entered the US market successfully with its 'Fresh & Easy' brand.
'Fresh & Easy' failed — Tesco misjudged US consumer behaviour and preferences, leading to closure between 2013 and 2015. It is a textbook example of failure to adapt to local markets.
Question 2 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 3 of 20
Honda, Nissan, and Toyota having factories in China is an example of market expansion.
China is the world's largest car market — these Japanese MNCs set up local factories to access Chinese consumers directly, reducing costs and boosting sales.
Question 4 of 20
In Diagram D, the host country benefits most from profit repatriation.
Diagram D — profit repatriation: who benefits, who loses?
Diagram D shows the opposite — profit repatriation benefits the HOME country. It is actually a disadvantage for the host country, which loses income it helped generate.
Question 5 of 20
MNCs' competitive advantage may force local businesses to close down, reducing local entrepreneurship.
MNCs' superior scale, technology, and brand recognition can make it impossible for local firms to compete — driving them out of business and reducing domestic entrepreneurship.
Question 6 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 7 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 8 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 9 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 10 of 20
A lack of local knowledge may result in business failures for MNCs entering new markets.
Without understanding local consumer preferences, business practices, and cultural norms, MNCs risk misjudging the market and investing in unsuccessful products or strategies.
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 expand into foreign countries to access new markets and reduce transportation costs.
Locating production closer to customers reduces shipping costs and delivery times — Honda, Nissan, and Toyota in China access the world's largest car market while cutting logistics costs.
Question 13 of 20
In Diagram C, environmental damage is listed as a disadvantage of MNCs for host countries.
Diagram C — host country advantages vs disadvantages of MNCs
Diagram C includes 'environmental damage' in the disadvantages column — MNCs may prioritise profit over environmental protection in host countries with weak regulation.
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
An MNC must be headquartered in a developed country.
MNCs can be headquartered in any country — there are major MNCs from developing and emerging economies too, such as Samsung (South Korea), Huawei (China), and Tata Group (India).
Question 16 of 20
Profits earned by MNCs in foreign countries are often repatriated to the home country.
Repatriation means sending profits back to the MNC's headquarters country — these inflows improve the home country's current account and benefit shareholders.
Question 17 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 18 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 19 of 20
MNC expansion abroad can open new export markets for home country goods and services.
When MNCs establish a presence abroad, they often continue to source goods from their home country — creating export opportunities for home-based suppliers.
Question 20 of 20
Workers in host countries gain skills and training from working with MNCs.
MNCs often provide training in technical skills, management, and workplace practices — improving the human capital of the local workforce even if workers later move to other employers.