CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 of 20
Fiscal austerity (cuts to spending) reduces the current account deficit by reducing aggregate demand and import spending.
Lower government spending reduces incomes and demand economy-wide — consumers buy less of everything, including imports, narrowing the deficit.
Question 2 of 20
A current account deficit has no effect on employment levels in the economy.
A deficit means domestic production loses out to foreign competition — firms produce less and employ fewer workers, increasing unemployment in import-competing industries.
Question 3 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 4 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 5 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 6 of 20
A high exchange rate makes imports cheaper and tends to increase import demand.
Appreciation means domestic currency buys more foreign currency — so the domestic price of imports falls, making them more attractive to domestic consumers.
Question 7 of 20
Secondary income consists of income transfers between residents and non-residents, including financial gifts.
Secondary income covers transfers with no exchange of goods or services — such as foreign aid, remittances, and gifts between residents of different countries.
Question 8 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 9 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 10 of 20
The trade in goods account and trade in services account together make up the entire current account.
The current account has four parts: trade in goods, trade in services, primary income, and secondary income — not just the two trade accounts.
Question 11 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 12 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 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
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 15 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 16 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 17 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 18 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 19 of 20
A current account surplus can be caused by a country specialising in high-demand goods that the rest of the world wants to buy.
Comparative advantage in producing globally demanded goods — e.g. Germany's engineering, or Saudi Arabia's oil — drives export demand and supports a current account surplus.
Question 20 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.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 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 2 of 20
A country running a balance of payments surplus will tend to see its currency appreciate.
A surplus means the country receives more foreign currency than it spends — net demand for the domestic currency is positive, pushing its value up.
Question 3 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 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
Certainty for businesses is an advantage of a fixed exchange rate.
A stable, predictable exchange rate allows firms to plan long-term, set prices in foreign markets confidently, and reduces the risk of unexpected exchange rate losses.
Question 6 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 7 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 8 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 9 of 20
Depreciation and devaluation mean exactly the same thing.
Depreciation is the automatic fall in a floating exchange rate due to market forces. Devaluation is a deliberate government decision to lower a fixed exchange rate — they are different concepts.
Question 10 of 20
Devaluation of a currency will always successfully improve the current account balance.
Devaluation helps only if export and import demand is sufficiently price-elastic. If demand is inelastic (as described by the Marshall-Lerner condition), devaluation may not improve — or could worsen — the current account.
Question 11 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 12 of 20
A floating exchange rate frees up monetary policy for the government to pursue domestic objectives.
Without the need to defend a fixed rate, the central bank can set interest rates to target inflation, employment, or growth — rather than to manage the exchange rate.
Question 13 of 20
Outward FDI increases the supply of domestic currency and decreases its value.
When domestic firms invest abroad, they must sell domestic currency to buy foreign currency — increasing supply of the domestic currency and causing it to depreciate.
Question 14 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 15 of 20
Revaluation is a deliberate rise in the value of a fixed exchange rate.
Revaluation is the opposite of devaluation — the government raises the fixed rate, making the currency stronger (exports more expensive, imports cheaper).
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
A fixed exchange rate gives the government more freedom to use monetary policy for domestic objectives.
The opposite is true — a fixed rate constrains monetary policy. Interest rates may need to be adjusted to maintain the fixed rate, limiting their use for domestic goals like controlling inflation.
Question 18 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 19 of 20
A floating exchange rate system means a country does not need to worry about balance of payments imbalances.
In theory, floating rates self-correct — a deficit causes depreciation which boosts exports and reduces imports, automatically restoring equilibrium.
Question 20 of 20
Speculation is listed as a disadvantage of floating exchange rates because it can cause excessive volatility.
Hot money flows driven by speculation can cause exchange rates to overshoot their equilibrium values, creating harmful volatility unrelated to economic fundamentals.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 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 2 of 20
Protectionism always leads to lower production costs for domestic firms.
Protectionism can raise production costs — domestic firms may pay more for imported raw materials and components when trade barriers restrict supply.
Question 3 of 20
In Diagram C, profit repatriation is listed as a disadvantage of MNCs for host countries.
Diagram C shows profit repatriation as a disadvantage — profits earned in the host country leave the economy when sent to the MNC's home country, reducing local income.
Question 4 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 5 of 20
Globalisation has no effect on the environment.
Globalisation increases the movement of goods, which raises carbon emissions. It can also lead to over-exploitation of natural resources in countries with weak environmental laws.
Question 6 of 20
In Diagram B, six different stakeholders are shown as being affected by MNC activity.
Diagram B shows the MNC at the centre surrounded by six stakeholders: host country, home country, local workers, local firms, consumers, and governments.
Question 7 of 20
A tariff makes domestic goods relatively cheaper compared to imports.
By raising the price of imports, a tariff shifts demand towards domestically produced substitutes, protecting domestic industries.
Question 8 of 20
US tariffs on Chinese solar cells leading to China imposing tariffs on US chemicals is an example of retaliation.
This real-world example illustrates how protectionist measures can trigger retaliatory actions, escalating into a damaging trade war for both sides.
Question 9 of 20
Free trade encourages countries to specialise and trade based on comparative advantage.
Under free trade, countries produce what they are relatively more efficient at and import the rest — improving global resource allocation.
Question 10 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 11 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 12 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 13 of 20
Embargoes are usually imposed for economic reasons to gain a trade advantage.
Embargoes are typically imposed due to political conflicts, trade disputes, or to apply economic pressure — not primarily to gain a trade advantage.
Question 14 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 15 of 20
Overreliance on MNCs in low-income countries can have severe consequences if the MNC decides to relocate.
Carrefour's exit from Thailand and Malaysia in 2010 is a real example — when MNCs leave, jobs are lost and dependent supply chains collapse.
Question 16 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 17 of 20
Honda manufacturing in Belgium, Italy, and France is an example of avoiding EU trade restrictions.
By producing cars within the EU, Honda avoids paying tariffs on cars imported from Japan — a real-world example of MNCs using FDI to bypass trade barriers.
Question 18 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 19 of 20
Tariffs reduce the price of imported goods for consumers.
Tariffs increase the price of imports by adding a tax to their cost — making them more expensive, not cheaper, for consumers.
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
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 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
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 4 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 5 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 6 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 7 of 20
In Diagram B, both host and home countries are shown as stakeholders affected by MNC activity.
Diagram B — stakeholders affected by MNC activity
Diagram B shows both the host country and home country as spokes around the MNC centre — both are stakeholders with potentially different experiences of MNC activity.
Question 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 of 20
Carrefour's exit from Thailand and Malaysia in 2010 illustrates the risk of host country over-reliance on MNCs.
When Carrefour left, job losses followed — a real-world demonstration of what happens when a host economy or community becomes too dependent on a single MNC.
Question 16 of 20
Differences in legal systems, tax regulations, and environmental laws across countries can complicate MNC operations.
Each country has different rules — navigating multiple legal systems, tax codes, and regulatory environments adds complexity and cost to MNC management.
Question 17 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 18 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.
Question 19 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 20 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.