International trade and globalisation

• Trade because resources differ → globalisation because barriers, transport and communication fell → restrictions because someone loses → exchange rates because payments cross currencies → the current account because all of it has to add up.
• Tariff taxes, quota counts. Weak currency: exports cheap abroad, imports dear at home. High interest rate pulls money in, so the currency goes up. Remittances are gifts, so they are secondary.
• Free trade is not free of cost. It is free of government restriction. Consumers and efficient producers gain; workers in uncompetitive industries and infant industries lose.
• Pick the group, pick the period, build three links, then name the condition. Five true points left undeveloped are still five undeveloped points; one point taken four steps is analysis.
• Tariff taxes — money to the government. Quota counts — money to the importer. Subsidy pays — money from the government, price down. Embargo bans — no trade at all.
• Four causes: restrictions, transport, communication, multinationals. Six effects: trade, competition, environment, migration, income distribution, development. Every cause runs both ways.
• Money coming in is demand for the currency. Money going out is supply of it. Exports, inward investment, inbound remittances and profits brought home pull the currency up; imports, outward investment, outbound remittances and profits sent away push it down.
• Inflow → demand for the currency → appreciation. Outflow → supply of the currency → depreciation. The price axis tells you which happened; the quantity axis never does.

• I can define specialisation by country and explain that it rests on the best allocation of resources and/or the lowest cost of production. 0455 6.1.1
• I can give at least three advantages and three disadvantages of specialisation by country, and develop one of each into a chain. 0455 6.1.1
• I can define free trade as trade without government restrictions, and state its advantages and disadvantages. 0455 6.1.2
• I can define globalisation. 0455 6.2.1
• I can name all four causes of changes in globalisation — trade restrictions, transport costs, communication costs, the movement of MNCs — and show each one working in both directions. 0455 6.2.2
• I can explain the effect of changes in globalisation on all six named areas: international trade, competition, the environment, migration, income distribution and economic development. 0455 6.2.2
• I can define a multinational company and separate its advantages and disadvantages for the host country from those for the home country. 0455 6.2.3
• I can define and distinguish a tariff, an import quota, a subsidy and an embargo, including which of them raises government revenue. 0455 6.2.4
• I can state all eight syllabus reasons for imposing trade restrictions, and give the counter-argument to each. 0455 6.2.5
• I can explain the consequences of trade restrictions for the home country and for trading partners, including retaliation, and argue both sides of restricting free trade. 0455 6.2.6
• I can define a foreign exchange rate as the price of one currency in terms of another. 0455 6.3.1
• I can give all six reasons for buying and selling foreign currencies. 0455 6.3.2
• I can define a floating exchange rate, appreciation and depreciation, and draw the foreign exchange market with both currencies named on the axes. 0455 6.3.3
• I can explain and draw how a change in export or import demand, in the interest rate, or in speculation moves the rate. 0455 6.3.3
• I can work out what an exchange-rate change does to export and import prices, and say what it does to demand — including when elasticity reverses the conclusion. 0455 6.3.4
• I can name the four components of the current account and classify a transaction into the right one — including putting remittances in secondary income. 0455 6.4.1
• I can calculate the balance on each component and on the whole current account, and state whether it is a deficit or a surplus. 0455 6.4.1
• I can give causes of a deficit and of a surplus. 0455 6.4.2
• I can explain the consequences of a persistent deficit and of a persistent surplus for GDP, employment, inflation and the exchange rate. 0455 6.4.3
• I can describe the five policies for balance of payments stability taught in Lesson P — the syllabus asks for the range available, not a fixed number — and judge the effectiveness of each. 0455 6.4.4
• I can apply DRAW to a foreign exchange diagram: axes named with both currencies, original position recorded, change added with an arrow, result written.
• I can apply FIND to an export-price or current-account calculation: formula, insert, number with units, decide.
• I can apply DEAL to a part (d) discussion: define, explain one side, argue the other, land a judgement naming the deciding condition.
• I can write a three-link analysis chain without being prompted, and finish it with the condition that could reverse it.

The one habit that carries the whole chapter. Treat a currency as a good with its own demand and its own supply. Everything that would make you want dollars — buying American exports, investing in America, expecting the dollar to rise — is demand for dollars. Everything that would make you give dollars up — buying imports, investing abroad — is supply of dollars. Once you can sort any event into demand for the currency or supply of the currency, every exchange-rate question in this topic becomes the demand-and-supply diagram you already met in Chapter 2.

• The same discipline applies to every definition in this chapter. Write the syllabus formulation, then an example. Never open a definition with “this is when…”.
• Interdependence is the word that distinguishes globalisation from trade. Two countries that each sell the other a shipload of goods once a year trade. Two countries whose factories cannot run for a week without components from the other are interdependent, and it is interdependence that makes globalisation both productive and fragile.
• Answer those two questions about any restriction in an examination question and you have identified it correctly, whatever it is called in the data.
• A useful sanity check: in this example a dollar buys only \(0.90\) of a euro, so a dollar is worth less than a euro — and a \(\$100\) item must therefore cost fewer than 100 euros. Run the check the other way as well: a euro is worth \(\$1.11\), so a 100-euro item must cost more than \(\$100\). If your answer moved the wrong way, you inverted the rate.
• The general rule, worth stating in an answer: a depreciation improves the current account only when demand for exports and imports is sufficiently elastic. Where a country imports essentials with few substitutes — fuel, food, medicines, components its factories cannot run without — import demand is inelastic and the depreciation mainly raises the import bill.
• The same logic applies to a surplus. A surplus caused by high competitiveness is a different thing from a surplus caused by a domestic recession that has collapsed import demand — the second is a symptom of a problem, not evidence of success.
• The two traps are placed deliberately. Wages earned by residents working abroad are payment for labour, so primary. Remittances received are gifts, so secondary. They look alike and belong on different lines.

• Knowing the shape of each paper changes how you revise. Paper 1 rewards precise definitions and quick arithmetic; Paper 2 rewards developed chains and a judgement that names its condition. The same content serves both, but the practice is different.
• Across the whole qualification the weights are AO1 43%, AO2 47%, AO3 10%. Analysis (AO2) is the largest single component, which is why every explanation in this chapter is written as a chain rather than a list.
• Definition discrimination. Four options that differ by one word: tariff versus quota, primary versus secondary income, appreciation versus depreciation. An item like this is answerable only if you have separated the pair precisely beforehand.
• Direction of effect. “A country's currency depreciates. What happens to the price of its exports abroad?” One wrong direction costs the whole mark, and the two directions are easy to confuse under time pressure.
• Arithmetic. Add four component balances to a current account total; convert a price at two different exchange rates; calculate a percentage change. These are quick to answer once the layout is practised, and they have exact answers.
• Reading a diagram. A foreign exchange market with a shifted curve, asking which event caused it. Read which curve moved first — demand or supply — before you read the direction.