Edexcel IGCSE Economics - Paper 2:

Macroeconomics and The Global

Economy
Amount by which government spending
Budget Deficit
is greater than government revenue

Study of large economic systems such as

Macroeconomics
those of a whole country or area of the
world
Reducing unemployment, Protect the
environment, Balance of payments
What are the macroeconomic objectives?
(current account), Economic growth,
Controlling
inflation, Redistribution of income
Economic growth Increase in the level of output by a nation

Value of income, output or expenditure

National income
over a period of time

What does GDP stand for? Gross Domestic Product

Market value of all final goods and

services produced in a period (usually
Gross Domestic Product (GDP)
yearly), an
internationally recognised measure of
national income
Using the standard definition means that
Why is GDP used to measure economic
meaningful comparisons can be made
growth all over the world?
between the growth rates of different
countries
The value of all goods and services
What does GDP measure?
produced in a country for sale

Inflation, Population Changes, Statistical

What are limitations to GDP as a measure
Errors, Value of Home Produced Goods,
of growth?
Hidden
Economy, Living Standards, External Costs
Why can inflation limit the effectiveness of Price increases make growth rates
GDP? misleading
How can the problem of inflation and GDP
Using real GDP
be solved?

Why can population changes limit the Increases in population may offset growth
effectiveness of GDP? in GDP

How can the problem of population

GDP per capita
changes and GDP be solved?

Why can statistical errors limit the The information has been entered
effectiveness of GDP? inaccurately or left out by the
government
Why can the value of home produced Some goods and services are not traded
goods limit the effectiveness of GDP? and therefore economic activity is not
recorded
Why can the hidden economy limit the
Paid work and services can go unrecorded
effectiveness of GDP?

Why can living standards limit the GDP rising does not directly constitute an
usefulness of GDP? increase in living standards

Why can external costs limit the GDP does not take external costs like
effectiveness of GDP? environmental costs into account

What are the four stages of the economic Boom, Downturn, Recession, Recovery
cycle?
Peak of the economic cycle where GDP is
Boom
growing at its fastest

GDP is growing fast, existing firms will be

expanding, new firms will be entering the
What are some characteristics of boom?
market, demand will be rising, jobs
created, rise in wages, profits rise, prices
rise
How does economic growth affect Economic growth can increase the
productive potential? productive potential of a country

If an economy overheats, demand rises

too fast, causing prices and imports to
Overheat
rise, a situation
that governments may try to correct by
raising taxes and interest rates
Economic growth that it is not possible to
Unsustainable growth
sustain without causing environmental
problems
 If economic growth is too fast, the economy
Why can economic growth lead to inflation?
can overheat, which leads to inflation

Increased greenhouse gas emissions,

What are the effects of economic growth on
global warming, pollution, using up
the environment?
finite resources quickly, unsustainable
for future generations
Total demand in the economy including
Aggregate Demand consumption, investment, government
expenditure and exports minus imports

Period where the level of aggregate

Deflation
demand is falling

Rate at which prices rise, a general and

Inflation
continuing rise in prices

What does CPI stand for? Consumer Price Index

Measure of the general price level

Consumer Price Index (CPI)
(excluding housing costs)

Measure of the general price level which

Retail Price Index (RPI)
includes house prices and council tax

What does RPI stand for? Retail Price Index

Demand pull inflation

How can demand pull inflation occur?

Cost push inflation

How can cost push inflation occur?

Price paid to lenders for borrowed money,

Interest rates
the price of money

Economists who believe there is a strong

Monetarists link between growth in the money supply
and
inflation
What is the relationship between inflation Inflation is more likely to happen if interest
and interest rates rates are low because of the increases in
borrowing
What is the impact of inflation on prices? Prices rise, inflation reduces the
purchasing power of money, fall in living
standards for
 households

Amount of goods and services that can

Purchasing power of money
be bought with a fixed sum of money

Workers need to increase their wages to

What is the impact of inflation on wages?
compensate for the loss in purchasing
power
Firms need to raise prices in order to justify
Why can a wages/prices spiral develop
higher wage costs, which would demand
during a period of inflation?
higher wages and so on

If inflation is higher at home, demand for

What is the impact of inflation on exports?
exports is likely to fall

High levels of inflation usually mean

What is the impact of inflation on that AD is rising, so firms will be keen to
unemployment increase output since prices are
increasing, which reduces
unemployment
Costs to firms of having to make
Menu costs
repeated price changes

Costs to firms and consumers of

Shoe leather costs
searching for new suppliers when
inflation is high
Very high levels of inflation, rising prices
Hyperinflation
get out of control

What is the impact of inflation on menu Menu costs increase

costs?
What is the impact of inflation on shoe
Shoe leather costs increase
leather costs?

Higher uncertainty if inflation is high and

What is the impact of inflation on
uncertainty? varying

What is the impact of inflation on business

Decrease due to higher uncertainty
and consumer confidence?

Inflation results in a decline in business

What is the impact of inflation on
investment investment

When those actively seeking work are

Unemployment
unable to find a job
How is unemployment measured? The Labour Force Survey (in the EU)

People without a job, want a job, have

actively sought work in the last 4 weeks
What are the definitions of unemployment
and are
from the ILO?
available to start work in the next 2 weeks,
or
out of work, have found a job and are
waiting to start it in the next 2 weeks
Cyclical unemployment, Structural
unemployment, Seasonal unemployment,
What are the types of unemployment?
Frictional unemployment, Voluntary
unemployment

To stop employing someone because there

Laying off
is no work for them to do

Unemployment caused by falling demand

Cyclical or demand deficient
unemployment as a result of a downturn in the economic
cycle
Unemployment caused by changes in the
Structural unemployment structure of the economy such as the
decline in an industry

Sectorial unemployment, Technological

What are the types of structural
unemployment? unemployment, Regional unemployment

Occurs when people are laid off because

Sectorial unemployment
the industry they work in is in decline

Occurs when jobs that were previously

Technological unemployment
done by people are now done by
machines
Unemployment in a particular country is
Regional unemployment
not likely to be the same in all regions

Unemployment caused when seasonal

Seasonal unemployment workers, such as those in the holiday
industry, are laid off because the season
has ended
When workers are unemployed for a short
Frictional unemployment period of time as they move from one job
to another

Unemployment resulting from people

Voluntary unemployment
choosing not to work
 Output is lower than it could be because
Impact of unemployment on output the productive potential of a country is
not being fully exploited

It is a waste of resources and results in

Impact of unemployment on use of scarce lower levels of national income as people
resources who are out of work do not make any
contribution to
production
Increased employment leads to increased
Impact of unemployment on poverty
poverty

Increases because unemployed people are

Impact of unemployment on government
entitled to receive financial benefits from
spending
the state

Decreases as taxes are linked to income

Impact of unemployment on tax revenue
and spending

Likely to fall because state benefits are

Impact of unemployment on consumer
lower
confidence
than wages so people play a less
significant role in the economy
Impact of unemployment on business Businesses are less likely to take risks
confidence and may postpone or cancel investment
products
Record of all transactions relating to
Balance of payments
international trade

The part of the balance of payments where

Capital and financial account flows of savings, investment and currencies
are
recorded
Part of the balance of payments where all
Current account
exports and imporst are recorded

Exports Goods and services sold overseas

Imports Goods and services bought from overseas

When value of imports exceeds the value

Current account deficit
of exports

Difference between total exports and

Current balance
total imports (visible and invisible)
 When value of exports exceeds the value
Current account surplus
of imports

Difference between visible exports and

Balance of trade or visible balance
visible imports

Invisible trade Trade in services

Money received from the loan of

Primary income
production factors abroad

Government transfers to and from

Secondary income
overseas agencies such as the EU

Visible trade Trade in physical goods

Someone who gets advantages from an

Beneficiary
action or charge

Exchange Rate Price of one currency in terms of another

What is the relationship between the If a country's exchange rate gets

current account and exchange rates? stronger, it will have a negative impact
on the current account
How does increased quality of domestic It will cause a current account
goods affect the current account? surplus/improvement in the current
account
How does increased quality of foreign It will cause a current account deficit/the
goods affect the current account? current account will worsen

How does an increase in the price of It will cause a current account deficit/the
domestic goods affect the current account? current account will worsen

How does an increase in the price of It will cause a current account

foreign goods affect the current account? surplus/improvement in the current
account
Continuing to exist or happen, especially
Persistent
for longer than is usual or desirable

It suggests the country is dependent on

How does a current account deficit affect
imports, so money flows outwards to
leakages from the economy?
overseas businesses

How does a current account deficit impact A country running a high current account
inflation? deficit may be exposed to inflationary
pressures
 A country with a high current account
How would a current account deficit lead to
deficit may have domestic goods of
low demand for exports?
either a price too high or a quality too low

The nation will need foreign currency to

How may funding of a current account pay for the rising quantity of imports, and
deficit be an issue? if the reserves run low they may need to
borrow, leading to debts

What types of business activity can be Mining, Power Generation, Chemical

harmful to the environment? Processing, Agriculture, Construction

What are some types of Visual Pollution, Noise Pollution, Air

pollution/environmental damage? Pollution, Water Pollution

What are the types of government Taxation, Subsidies, Regulation, Fines,

intervention to protect the environment? Pollution Permits, Park Provision

How does taxation help to protect the Ensures that those who cause social
environment? costs through business activity meet
them
How do subsidies help to protect the Acts as an incentive to reduce activities
environment? that damage the environment

How does regulation help to protect the Uses legislation designed to help protect
environment? the environment and monitor pollution
levels
Many firms are responsive to financial
How do fines help to protect the penalties when imposed because fines
environment? will reduce their profits

They work well because the permits are

How do pollution permits help to protect
'tradable' so businesses can sell their
the environment?
permits which is a financial incentive to
pollute less
Opening large green areas where
How does park provision help to protect the
commercial ventures are illegal to
environment?
preserve wildlife and
historic sites
Amounts of money that firms are allowed
Tax Allowances
by the government to offset against tax

Differences in income that exist between

Income inequality the
different groups of earners in society, that
is, the gap between the rich and the poor
 Workers with natural talent will tend to
earn more, people who do not work
receive lower incomes, the extent to
Why may large differences in income arise?
which a government
redistributes income through taxes and
welfare payments, people who own
assets such as
property will enjoy additional income
Graphical representation of the degree of
Lorenz Curve
income or wealth inequality in a country

The 45 degree line shows the perfectly

equal
How does a Lorenz Curve work?
distribution of income, and the curve
shows the amount of the population that
shares a certain percentage of the
income
Where people do not have enough
Absolute Poverty
resources to meet all of their basic
human needs
In developed nations, are levels of absolute
Low
poverty high or low?

Poverty that is defined relative to existing

Relative Poverty
living standards for the average
individual
Households living below 60% of the
How is relative poverty defined in the EU?
median national income

What are the reasons to reduce poverty To meet basic needs, To raise living
and inequality? standards, Ethical Reasons

Progressive Taxation, Redistribution

What are the types of government
through
regulation to reduce poverty and
benefit payments, Investment in
inequality?
education and healthcare,
Particular costs, such as taxes or interest
Burden payments, seen as a problem, especially
when they are high

Where the proportion of income paid in tax

Progressive Taxation
rises as the income of the taxpayer rises

Tax system that places the burden of the

Regressive Taxation
tax more heavily on the poor
 The gap between the rich and the poor
How does progressive taxation help to
might be closed because people on
reduce poverty and inequality?
higher incomes will be paying more tax

Tax revenues are used to make direct

How does redistribution through benefit
payments to those on low incomes and
payments help to reduce poverty and
those who cannot work at all, so the
inequality?
incomes of the people most at

If people are educated and able to

develop a range of skills they are more
employable, and they can also fight
How does investment in education and
poverty and disease and
healthcare help to reduce poverty and
receive vaccines
inequality?

An increase in healthcare can reduce

child mortality rates, increase life
expectancy and reduce suffering

If average incomes are rising rapidly, the

How may progressive taxation fail to
people at the top of the income scales will
reduce inequality?
benefit more so the gap might widen

in countries where large amounts of

How may redistribution through benefit people live in absolute poverty, the
payments fail to reduce inequality? government may not be making enough
revenue from taxation to
redistribute to the poor
It is very expensive and the return on
How may government investment fail to
investment takes years to realise, so
reduce inequality?
funds are inadequate in a lot of
developing countries
Tools governments use to implement their
Policy instruments policies, such as interest rates, rates of
taxation, levels of government spending

Government's spending and revenue

Budget
plans for the next year

Decisions about government spending,

Fiscal policy taxation and levels of borrowing that
affect aggregate
demand in the economy
To pay for public sector services, to
Why do governments all over the world
discourage activities, to control
impose taxation?
aggregate demand, to
distribute wealth
 Taxes levied on the income earned by
Direct taxes
firms and individuals

Income tax, social insurance tax,

What are the types of direct taxes?
corporation taxes, capital gains tax

A direct tax on the amount earned by an

Income tax
individual

Social insurance taxes Imposed on people's income

Levied on the profits made by limited

Corporation taxes
companies

Levied on any financial gains made when

Capital gains tax
selling assets at a profit

Social protection, Health care, Education,

What are the main areas of focus for
Defence, Interest, Public order/safety,
government spending in most countries?
Social Services

State benefits, pensions, child benefits,

Social Protection
jobseekers allowances, disability
allowances
Salaries of nurses, doctors and admin
Health care
staff, drugs and medicines, equipment,
care programs
Teachers' salaries, equipment for
Education
schools, student grants

Defence Maintenance of the armed forces

The interest paid on government

Interest
borrowings such as the national debt

Spending on the police force, fire service,

Public order/safety
prison service, the justice system, health
and safety
Spending on the care of children, the
Social services
elderly, people with learning disabilities

What other focuses could government Transport, housing and the environment,
spending be on? industry, agriculture, training, recreation

Amount by which government spending

Fiscal deficit
exceeds government revenue
 Amount by which government revenue
Fiscal surplus
exceeds government spending

National debt Total amount of money owed by a country

The country will have to borrow money

to fund the deficit, national debt gets
Impact of a fiscal deficit larger,
government revenue has to be spent to
pay it off, high opportunity cost, future
generations burdened with debt

Could be used to spend on the future

provision of public services, or to lower
Impact of a fiscal surplus
taxes in the
economy, reduced future interest
payments on national debt and stonger
national finances
To encourage an activity to begin or
Stimulate
develop further

Fiscal measures designed to stimulate

Expansionary fiscal policy
demand in the economy

Fiscal measures designed to reduce

Contractionary fiscal policy
demand in the economy

Contractionary fiscal policy can be used

Impact of fiscal policy on inflation
to reduce inflation as demand will be
reduced
Expansionary fiscal policy can be used to
stimulate economic growth because
Impact of fiscal policy on economic growth
increases in government expenditure will
increase aggregate demand

Expansionary fiscal policy can help to

Impact of fiscal policy on unemployment reduce
unemployment as it helps to stimulate
demand, which firms will have to produce
more to satisfy
If there is a large deficit on the current
Impact of fiscal policy on current account account, contractionary fiscal policy will
deficit help to reduce
aggregate demand
Taxes such as landfill tax have been used
Impact of fiscal policy on the environment
to reduce environmental problems
 Use of interest rates and the money
Monetary policy
supply to control aggregate demand in
the economy
Money supply Amount of money circulating in the
economy
Rate of interest set by government or
Base rate regional central banks for lending to
other banks, which in turn influences all
other rates in the economy
Legal arrangement where you borrow
money from a financial institution in
Mortgage
order to buy land or a house, and you pay
back the money over a period of years

Rate of interest Price of borrowing money

Different banks charge different rates as

they compete with each other, rates are
Why are there many different rates of higher if
interest in most countries? money is borrowed without security, the
amount payed to borrowers is higher than
the amount
given to savers, some of the highest
rates are given to credit card users
Implementing the government's monetary
policy and regulating the banking system,
What role does the central bank play in the
acting as a lender of last resort to
economy?
commercial banks,
controlling inflation and stabilising a
nation's currency, setting interest rates
Monetarists say the way to reduce
inflation is to slow down the speed at
Impact of interest rate changes on inflation
which the money supply is growing, which
is likely to involve raising the
rate of interest
Impact of interest rate changes on A government may use lower interest
unemployment rates to reduce unemployment

Monetary policy may be used to smooth

Impact of interest rate changes on
out the small variations in the economic
economic growth
cycle, like to
get an economy out of recession
To reduce a deficit, a government may
Impact of interest rate changes on the
decide to tighten monetary policy, which
current balance
would lower AD and reduce spending on
imports
Impact of interest rate changes on the
Higher interest rates would reduce
current balance if the income elasticity of
demand for them, improving the current
imports were elastic
balance

Impact of interest rate changes on the

Exports will become expensive and imports
current balance if the link between interest
will become cheaper, worsening the
rates and exchange rates is strong
current balance

Impact of interest rate changes on the

Imports will be cheaper and exports will be
current balance if imports and exports are
more expensive, worsening the current
both price elastic
balance

When interest falls, demand for loans will

rise,
Impact of interest rates on consumers consumption of big ticket items rises,
consumers with a mortgage find that their
payments fall,
spending increases and is encouraged,
and consumption increases
When interest falls, the interest
payments on borrowings will fall, profits
Impact of interest rate on firms
are boosted,
confidence increases and investment
increases, returns on investment are
higher
Buying of financial assets such as
government bonds from commercial banks
Quantitative easing
which results in a flow of money from the
central bank to commercial banks

Part of the economy that is concerned

with actually producing goods and
Real economy services, as opposed to the part of the
economy that is concerned with buying
and selling on the financial markets

Total amount of goods and services

Aggregate Supply produced in a country at a given price
level in a given time
period
Government measures designed to
Supply side policies
increase aggregate supply in the
economy
What are the aims of supply side policies? Improve flexibility in labour markets by
removing restrictions, restore the
incentive to work by lowering taxes on
work and enterprise, promote
competition through privatisation,
 deregulation and helping small firms,
increase investment by improving the
flow of capital in capital markets

Making labour more flexible results in less

Impact of improving flexibility on disruption when new working practices and
productivity new technology were introduced and less
wage
If people receive more education and
Impact of training and education on training, the quality of the workforce will
productivity improve, which
will improve labour productivity and
increase AS
Supply side policies aim to increase the
productive potential of the economy, and
Impact of supply side policies on total
output therefore there should be increased
volumes of output

Impact of education and training on If the quality of human capital can be

macroeconomic objectives improved, workers will be more
productive
Impact of policies to boost regions with Wages were controlled, jobs were created
high unemployment on macroeconomic so low unemployment
objectives
Impact of infrastructure spending on Productive potential of the economy will
macroeconomic objectives increase

Impact of lower business taxes to stimulate The pace of economic growth can be
investment on macroeconomic objectives accelerated if business investment
increases
If something, such as a cost of sum of
money, offsets another cost it has the
Offset
effect or reducing or balancing it, so that
the situation remains the same

High taxes on income and profit will reduce

Impact of lower business taxes to output as they reduce the incentive to work
encourage working on macroeconomic and discourage people from setting up and
objectives developing businesses

Impact of privatisation on macroeconomic Breaks up state monopolies so competitive

objectives pressure can improve quality and reduce
prices
Impact of deregulation on macroeconomic Insufficient regulation may bring
objectives problems like financial crises and global
recessions
 To arrange to have a job done by a
Contracted out
person of company outside your own
organisation
What are some dangers surrounding State monopolies can become private
privatisation? monopolies which can exploit consumers

Excessive paperwork, obtaining

What problems does deregulation deal with unnecessary
in business? licenses, having lots of people or
committees to approve a decision,
various trivial rules that slow down
business development
Official action taken by a government in
Austerity order to reduce the amount of money
that it spends or the amount that
people spend
Governments often favour the use of
monetary policy to reduce inflation
What policy is used to reduce inflation?
because they can
quickly raise the interest rates to reduce
demand
Discourages consumers and businesses
from borrowing, high unemployment,
Negative effects of raising interest rates reduced
to reduce demand spending power of consumers, firms
profit less, firms borrow less to invest in
new technology
and may lose competitive edge in foreign
markets, harder for firms to sell stuff
abroad
Higher taxes and lower government
Negative effects of governments using spending could result in unemployment,
fiscal policy to reduce inflation people may
suffer as a result of poorer government
services after the cuts in expenditure
How can we prove a trade off exists between inflation and
unemployment?
They may avoid rising unemployment
Why may supply side measures be best
because they are designed to increase
to reduce inflation?
the supply of
output
Expansionary fiscal policy or
Policies to promote economic growth
expansionary monetary policy
Link between inflation and the current High inflation rates have a damaging effect
account on the balance of payments on a country's current account balance
 The higher interest rates drives up the
Impact of monetary policy on the balance
exchange rate making exports more
of payments
expensive, worsening the current balance

Growing interconnection of the world's

Globalisation
economies

Where the actions of one country or large

Interdependence
firm will have a direct effect on others

Goods and services are traded freely

across international borders, people are
free to live and work in any country they
Key features of globalisation
choose, high level of
interdependence, capital can flow between
different countries, free exchange of
technology and intellectual property

Fewer tariffs and quotas, Reduced cost of

Reasons for globalisation transport, Reduced cost of
communication, Increased significance of
multinationals
An increasing number of economies are
Why is fewer tariffs and quotas a reason for
more open and many countries have
globalisation?
stopped
protecting domestic industries
People can travel to business meetings
Why is reduced cost of transport a reason more easily and goods can be
for globalisation? transported more
cheaply, carriers can move goods more
quickly and easily for their consumers
It makes it easier for firms to have
Why is reduced cost of communication a operations all around the world and can
reason for globalisation? gather information
and buy goods online from different areas
in the world
Many firms want to sell abroad because
domestic markets have been saturated,
Why increased significance of
MNCs benefit considerably from having
multinationals a reason for globalisation?
international markets and producing
goods anywhere in the world where
costs can be minimised

Corporations that operate in many

Multinational Corporations (MNCs)
different countries

What does MNC stand for? multinational corporation

 Market in which there is more of a
Saturated market
product for sale than people want to buy

The countries where multinationals are

based will benefit from globalisation,
Impact of globalisation on individual Most are based
countries in developed countries and the gains
generated from business development
overseas will
contribute to increased wealth in that
country
The profits made by global companies are
Impact of globalisation on the government taxed by the host nation, which increased
tax revenue for the government

Countries can't trade if the government

keeps borders closed, International trade
Examples of how globalisation can only will be
advance if the government is committed limited if governments use protectionism,
to it People won't be free to live and work
anywhere if borders are closed, Firms
can't develop overseas if planning
permission is denied
By relaxing laws and regulations that
How can governments aid globalisation?
prevent, restrict or complicate trade and
business
What are the advantages of globalisation Access to huge markets, Lower costs,
for producers? Access to labour, Reduced Taxation

Lower prices, Wider range of goods and

Benefits of globalisation for consumers
services, New destinations for tourists

Workers from less developed nations can

Benefits of globalisation for workers look for jobs in developed countries,
learning new skills as a result of training
from multinationals
Practice of getting work done in another
Offshoring
country in order to save money

Offshoring occurs, so workers are

exploited, paid low wages, little to no
Disadvantages of globalisation for workers
concert for health and
safety and workers are made redundant
if the company finds a cheaper place to
produce
Increased greenhouse gas emissions,
Effects of globalisation on the environment
pollution, fewer resources for future
generations
 Huge assets, highly qualified and
Key features of MNCs experienced managers, powerful
advertising, highly
advanced and up
What does FDI stand for? Foreign Direct Investment

Occurs when a company makes an

Foreign Direct Investment
investment in a foreign coutnry

Economies of scale, Access to natural

Reasons for the emergence of MNCs and resources, Lower transport and
FDI communication costs, Access to
customers in different regions
Amount of something valuable such as
Reserves
oil, gas, or metal ore

They are very large firms, and influential

Why would economies of sale contribute to
enough to place large pressure on
the emergence of MNCs?
suppliers to reduce costs

Many large companies are happy to

Why would access to natural resources
invest FDI because they need resources
contribute to the emergence of FDI?
in such large quantities

Lower transport costs makes distribution

in overseas markets more attractive
Why would lower transport and
communication costs contribute to the
Lower communication costs make global
emergence of MNCs?
business more efficient

They develop more successfully

Why would access to customers in different
because they can sell far more goods
regions contribute to the emergence of
and services in global markets than in
MNCs?
domestic markets
By offering tax breaks, subsidies, grants,
low interest loans, lifting restrictions,
How do many governments actively seek
FDI? relaxing
regulations, investing in infrastructure,
investing in education
Job creation, Investment in
What are benefits of MNCs and FDI?
Infrastructure, Developing Capital,
Contributing to Taxes
How is contributing to taxes an advantage The profits made by MNCs are taxed by the
of MNCs? host nation which increases revenue for the
 government, which can be used to
improve government services

How is developing capital an advantage When a business sets up a new facility, it

of MNCs? is likely to install up

MNCs provide training and work

How is developing skills an advantage of experience for workers when they locate
MNCs? operations in foreign countries

Countries with poor infrastructure

How is investment in infrastructure an struggle to attract FDI, so due to the
advantage of FDI? attractiveness, governments are more
likely to make improvements to their
infrastructure
When MNCs set up overseas, incomes in
those countries rises, and local suppliers
How is job creation an advantage of MNCs?
are also more likely to get work because of
the extra output
and resources needed
Tax avoidance Practice of trying to pay less tax in legal
ways
Where a multinational returns the profits
from an overseas venture to the country
Repatriation of profit
where it is based, typically from a
developing country to a developed
country
Tax Avoidance, Environmental Damage,
What are the disadvantages of MNCs and
FDI? Moving Profits Abroad

MNCs can avoid paying taxes in countries

How is tax avoidance a disadvantage of
MNCs? with well

How is environmental damage a MNCs are heavily involved in the

disadvantage of MNCs? extraction industries which are
destructive
The host country loses out as profits are
How is moving profits abroad a returned to the country where the MNC is
disadvantage of MNCs? based rather than the country where the
goods were
produced
Obtaining goods that cannot be produced
domestically, Obtaining goods that can
Reasons why countries trade with
eachother be
bought more cheaply from overseas,
Selling off unwanted commodities
 Situation in which the goods coming
Free trade into or going out of a country are not
controlled or taxed

Lower prices and increased choice for

Advantages of free trade consumers, Lower input prices, Wider
markets for businesses

Competition for domestic businesses,

Disadvantages of free trade
Unemployment

There is a threat to employment levels

How is unemployment a disadvantage of
when domestic industries are
free trade?
threatened by cheap imports and
changes in demand patterns
Approach used by governments to
Protectionism
protect domestic producers

Trade Barriers Measures designed to restrict imports

Where an overseas firm sells large

Dumping
quantities of a product below cost in the
domestic market
Infant industries New industries yet to establish themselves

Preventing dumping, Protecting

employment,
What are the reasons for protectionism? Protecting infant industries, To gain tariff
revenue, Preventing the entry of harmful
or unwanted goods, Reduce current
deficits, Retaliation

A government may use trade barriers if it

fells that an overseas firm is dumping
Preventing dumping
goods, as it is considered to be unfair
competition for
domestic producers
Trade barriers may be used if domestic
Protecting employment industries need protection from overseas
competitors to save jobs

Infant industries should be protected

from strong overseas rivals until they can
Protecting infant industries
grow,
become established and exploit
economies of scale
 A government can raise revenue if it
To gain tariff revenue imposes tariffs on imports, which can be
spent on
government services to improve living
standards
A government may be justified in using
Preventing the entry of harmful or protectionism if it is felt that overseas
unwanted goods producers are trying to sell goods that are
harmful or
unwanted
A country may need to use trade barriers
because it has a very large current
Reduce current deficits
account
deficit, and may need to reduce imports
and increase exports
One motive for imposing trade barriers is
Retaliation
to retaliate against dumping

What are the methods of protection? Tariffs, Quotas, Subsidies

Tariffs of customs duties Tax on imports to make them more

expensive
They raise revenue for the government
Advantages of tariffs while
also reducing imports and improving the
current account
Why won't consumers benefit from tariffs in
They raise prices
the short term?

Imports may cease and government

What happens if tariffs are set too high?
revenue will be zero

Embargo Official order to stop trade with another

country
Physical limit on the quantity of imports
Quota
allowed into a country

They physically limit the supply of

Advantages of quotas imports and foreign companies cannot
get around it by
adjusting prices
Disadvantage of quotas Consumer choice is likely to be restricted

Bi lateral trade agreement

Advantages of export subsidies More domestic firms may be

encouraged to enter the market,
which boost exports,
 employment and current account

It costs the government money and there

Disadvantages of subsidies
is a high opportunity cost

Higher prices, limited choice, lower quality

General disadvantages of protectionism products, slower global growth, living
standards suffer

Inward shift of supply curve, forcing a

Effects of tariffs and quotas in markets
price increase

Effects of subsidies in markets Outward shift of supply curve, price

decrease
Groups of countries situated in the same
Trading blocs region that join together and enjoy free
trade of tariffs, quotas and other forms of
trade barrier
Preferential trading areas, Free trade
What are the types of trading blocs? areas, Customs unions, Common
markets, Economic unions

What does PTA stand for? Preferential Trading Area

What does FTA stand for? Free Trade Area

Members agree to remove trade barriers

Preferential trading areas (PTAs)
on a range of goods and services

Trade between members is completely

Free trade areas (FTAs)
free of trade barriers

Members impose a common set of trade

Customs unions
barriers on non

Freer movement of labour and capital

Common markets
between member countries

Aim for more integration and members

Economic unions are likely to adopt closer economic,
political and cultural ties

Goods will be cheaper, More consumer

choice, Economic growth, Firms can
Advantages of trading blocs for member
states exploit Economies of Scale, Better quality
of Goods, Invites FDI, Countries can share
resources, Reduced cross
 They encourage regional rather than
Disadvantages of trading blocs for global free trade, financial cost to
member states government and
taxpayer, can merge and become too
powerful, relying too heavily on trade
within the bloc
Impact of trading blocs on non member states

International organisation that promotes

World Trade Organization (WTO) free
trade by persuading countries to abolish
tariffs and other barriers
What does WTO stand for? World Trade Organization

It is undemocratic, It favours the rights of

corporations over workers, It is
What are the criticisms of the WTO? destroying the environment, It favours
wealthy nations over poorer ones, It is
causing hardship for poorer nations

Move towards greater free trade through

Trade liberalisation
the removal of trade barriers

Trade negotiations, Implementation and

What does the WTO do? Monitoring, Settling trade disputes,
Building membership

Better transport and communications,

Relaxing of trade barriers, Development of
Reasoning for an increase in world trade
multinationals, Travel and consumer
awareness, Trade agreements

Loss of trade in manufacturing, More air

Patterns in trade in developed countries
travel, Widening of the development gap

Increase in net migration, Increased FDI in

Patterns in trade in developing countries Africa,
Rise in commodity dependence, Debt
cancellation, Reduction in barriers
Product that can be sold to make a profit,
Commodities especially one in its basic form before it
has
been used or changed in an industrial
process
Exchange rate Price of one currency in terms of another
 Interest rates, Currency Speculators,
Factors affecting the demand for a currency
Demand for exports, Movements of
investment capital
If interest rates are higher in one country,
How do interest rates affect the demand for foreign savers may choose to put their
a currency? savings in a bank in that country, so they
will have to buy that currency, increasing
the demand
Foreign exchange markets attract
speculators because prices sometimes
How do currency speculators affect the
vary dramatically, If
demand for a currency?
speculators think the value of a currency
will rise in the future, they will buy it,
increasing the
demand
Firms that sell goods and services to
How does the demand for exports affect foreigners expect to be paid in their own
the demand for a currency? currency, so if
demand for export rises demand for that
currency rises
If a foreign MNC wants to build a factory
How do movements of investment capital
in one country, it will need their currency
affect the demand for a currency?
to pay for materials

Interest rates in other countries, Currency

Factors affecting the supply of a currency
Speculators, Demand for imports

If interest rates are higher in other

countries, savers domestically may
How do interest rates in other countries decide to place their money in foreign
affect the supply of a currency? countries, buying foreign
currency, and increasing supply of the
domestic currency as it increases the
flow in the foreign
exchange markets
If speculators believe the price of a
How do currency speculators affect the currency will fall, they will sell in
supply of a currency? exchange for another
currency, increasing the supply of the
currency in foreign exchange markets
Imported goods and services needs to be
How does the demand for imports affect bought with foreign currency, so if there
the supply of a currency? are more imports the supply of domestic
currency increases
 Market where foreign currencies can be
Foreign exchange market
bought and sold
 Where the value of a currency rises
Appreciate
owing to market forces

When the government fixes a new higher

Revalued
exchange rate

Where the value of a currency falls owing

Depreciate
to market forces

When the government fixes a new lower

Devalued
exchange rate

Demand for exports will fall as they are

Impact of exchange rate appreciation on
exports now more expensive

Impact of exchange rate appreciation on Demand for imports is likely to rise

imports because they are cheaper

Impact of exchange rate appreciation on Negative impact on the current account

the current account as exports fall and imports rise

Demand for exports to rise because they

Impact of exchange rate depreciation on
are cheaper
exports

Impact of exchange rate depreciation on Demand for imports to fall as they are
imports more expensive

Impact of exchange rate depreciation on Improvement in the current account

the current account because exports rise and imports fall

The government may not have complete

control over the interest rate, Reducing
Problems with policies to help a currency to interest rates to devalue a currency may
depreciate conflict with other policies like
contractionary monetary policy,
Devaluation will only work if demand for
exports and imports is responsive to price
changes
If interest rates in a country are reduced
Relationship between exchange rate and the value of the currency falls, a
changes and price elasticity current account
deficit will only be reduced if demand for
imports and exports are elastic