CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 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 2 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 3 of 20
High domestic productivity contributes to a current account surplus by making exports more competitive.
Productive economies produce goods at lower cost — making exports price-competitive internationally, increasing export demand, and contributing to a surplus.
Question 4 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 5 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 6 of 20
A current account deficit may force a country to borrow more from abroad to finance the gap.
A deficit means the country spends more internationally than it earns — it must finance this gap through the capital account by borrowing, selling assets, or attracting foreign investment.
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
A sustained current account deficit can lead to increased national debt as the country borrows to finance it.
Persistent deficits require ongoing financing — through borrowing abroad or selling assets — which over time builds up external debt and interest obligations.
Question 9 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 10 of 20
Higher taxes reduce household income, which in turn decreases spending on imports.
This is the transmission mechanism of contractionary fiscal policy on the current account — lower disposable income reduces demand for all goods including imports.
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 country with higher cost of production than its competitors will tend to run a current account deficit.
Higher production costs make exports less price-competitive — foreign buyers choose cheaper alternatives, reducing export revenues and worsening the current account.
Question 13 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 14 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 15 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.
Question 16 of 20
A current account deficit can occur when there is lower demand for a country's exports.
Fewer exports means less foreign currency coming in — if this is not offset by falling imports, the current account moves into deficit.
Question 17 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 18 of 20
A depreciation of the exchange rate typically helps reduce a current account deficit.
A weaker currency makes exports cheaper for foreign buyers (boosting export demand) and imports more expensive for domestic consumers (reducing import demand) — both effects improve the current account.
Question 19 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.
Question 20 of 20
Reduced demand for imports contributes to a current account surplus.
When domestic residents buy fewer foreign goods and services, import spending falls — if export earnings remain stable, this reduces or eliminates the deficit, creating a surplus.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 of 20
Constant fluctuation in a floating exchange rate can cause businesses and consumers to lose confidence in the economy.
If the currency fluctuates too rapidly, it signals economic instability — which can deter investment and reduce business and consumer confidence.
Question 2 of 20
A rise in interest rates in a country tends to increase demand for its currency.
Higher interest rates attract foreign investors seeking better returns on savings — they buy the domestic currency to invest, increasing demand and causing appreciation.
Question 3 of 20
Exchange rate changes have no effect on domestic price levels.
Exchange rate changes directly affect import prices — a depreciation raises import costs (inflationary), while an appreciation lowers them (disinflationary).
Question 4 of 20
A floating exchange rate requires the central bank to hold large foreign exchange reserves.
Foreign reserves are needed to defend a fixed exchange rate. Under floating rates, no reserves are needed because the rate adjusts automatically.
Question 5 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 6 of 20
A currency appreciation always improves a country's current account balance.
Appreciation makes exports dearer and imports cheaper, which tends to worsen (not improve) the current account by reducing exports and increasing imports.
Question 7 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 8 of 20
The foreign exchange rate is the value or price of a currency expressed in terms of another currency.
This is the definition of a foreign exchange rate — for example, 1 USD = MYR 4.5 means one US dollar is worth 4.5 Malaysian Ringgit.
Question 9 of 20
A strong exchange rate is always good for an economy.
A strong rate makes imports cheaper (good for consumers and firms using imports) but makes exports expensive (bad for export industries). The net effect depends on the economy's structure — there is no universally 'good' exchange rate level.
Question 10 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 11 of 20
A fall in imports reduces the supply of domestic currency in the forex market and strengthens it.
Fewer imports means less domestic currency is being sold to buy foreign goods — reducing supply of the currency and causing it to appreciate.
Question 12 of 20
It is easy to know the correct rate at which to fix a currency.
Setting the right rate is very difficult — if set too high, exports become uncompetitive; if too low, it can cause inflation. Getting it wrong creates serious economic problems.
Question 13 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 14 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 15 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 16 of 20
A sudden fall in foreign investor confidence can lead to rapid depreciation of a currency.
If foreign investors sell their holdings in a country, they flood the forex market with the domestic currency — rapidly increasing supply and causing sharp depreciation.
Question 17 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 18 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 19 of 20
A current account surplus tends to strengthen a country's currency.
Exports exceeding imports means foreigners demand more of the country's currency to buy its goods — increasing demand and causing appreciation.
Question 20 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.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 of 20
MNCs expanding into foreign countries reduces their transportation costs and gives access to new markets.
Producing closer to customers reduces shipping costs and delivery times, and gives MNCs direct access to new consumer markets — a form of market expansion.
Question 2 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 3 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 4 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 5 of 20
Host countries always benefit from MNC investment with no disadvantages.
While MNCs bring jobs and investment, they also bring risks — profit repatriation, exploitation of workers, tax avoidance, crowding out of local firms, and vulnerability to sudden relocation.
Question 6 of 20
Honda, Nissan, and Toyota have factories in China to access the world's largest car market.
China is the world's largest car market — Japanese manufacturers set up local production to serve Chinese consumers and reduce logistics costs.
Question 7 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 8 of 20
Exchange rate fluctuations present a financial risk to MNCs earning revenues in multiple currencies.
When an MNC earns in foreign currencies, changes in exchange rates affect the home-currency value of profits — currency risk is a unique challenge of multinational operations.
Question 9 of 20
Reducing the number of foreign goods in the market through a quota leads to higher prices for consumers.
Less supply of imported goods means domestic prices rise — this is a direct negative consequence of import quotas for consumers.
Question 10 of 20
One benefit of free trade is that firms gain access to a larger global market, increasing revenues and profits.
Without trade barriers, firms can sell to customers worldwide — greatly expanding their potential market and revenue base.
Question 11 of 20
Globalisation can lead to greater migration of workers between countries.
As economies integrate, workers can move more freely to find jobs — contributing to both economic growth and cultural exchange, but also potential social pressures.
Question 12 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 13 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 14 of 20
Import quotas raise the price of imported goods by restricting their supply.
When supply of imports is capped below the free market quantity, the restricted supply pushes prices up — benefiting domestic producers.
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
Tariffs encourage free trade by removing barriers between countries.
Tariffs are a trade barrier — they restrict free trade by making imports more expensive. They are the opposite of a free trade measure.
Question 17 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 18 of 20
Operating in multiple currencies exposes MNCs to exchange rate risk.
When revenues are earned in foreign currencies, changes in exchange rates can reduce the home-currency value of profits — this is a financial risk of multinational operations.
Question 19 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 20 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.
Practice
True / False - MNCs
20 questionsQuestion 1 of 20
In Diagram A, MNCs are defined as companies that only operate within one country.
Diagram A — MNC definition, examples, advantages and disadvantages at a glance
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 2 of 20
Competition from MNCs can encourage domestic firms in host countries to improve efficiency.
When MNCs bring superior products and management practices, local firms face pressure to improve their own efficiency and quality to survive — potentially raising overall productivity.
Question 3 of 20
MNCs can both create and destroy jobs in host countries depending on their impact on local competitors.
MNCs create new jobs directly, but their competition can force local firms to downsize or close — the net employment effect depends on whether new MNC jobs exceed local job losses.
Question 4 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 5 of 20
Expanding to countries with lower corporate tax rates benefits MNCs by reducing their tax burden.
Tax differentials between countries are a major incentive — MNCs route profits through low-tax jurisdictions to minimise their global tax liability.
Question 6 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 7 of 20
Cultural disruption can occur when MNC products and practices challenge local traditions and businesses.
The spread of global brands (fast food, fashion, media) can displace local cultural industries and businesses — a social cost not captured in economic statistics.
Question 8 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 9 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 10 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 11 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.
Question 12 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 13 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 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
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 16 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 17 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 18 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 19 of 20
MNCs generate tax revenue for their home country governments through profits earned abroad.
When profits are repatriated, home country governments can tax them — generating revenue from overseas business activity.
Question 20 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.