CIE IGCSE NOTES
6.0 International Trade and Globalisation
Practice
True / False - Current Account of Balance of Payments
20 questionsQuestion 1 of 20
A surplus on the current account means a country spends more on imports than it earns from exports.
A current account surplus means a country earns more from exports (and other inflows) than it spends on imports — the opposite of a deficit.
Question 2 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 3 of 20
Rising consumer incomes in a country tend to increase spending on both domestic and imported goods.
As incomes rise, the marginal propensity to import increases — more goods from abroad are purchased, increasing import spending and contributing to a current account deficit.
Question 4 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 5 of 20
Remittances sent home by workers abroad are recorded in the secondary income section of the current account.
Workers sending money back to family in their home country are making income transfers — these cross-border financial gifts are secondary income flows.
Question 6 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 7 of 20
Raising interest rates to reduce a deficit may conflict with the goal of promoting economic growth.
Higher interest rates reduce borrowing and investment — slowing economic growth. This creates a conflict between the BoP stability objective and the growth objective.
Question 8 of 20
Quotas improve the current account by limiting the amount of imports available in the domestic market.
By capping import quantities, quotas directly reduce import spending — helping to reduce or eliminate a current account deficit.
Question 9 of 20
A current account deficit can lead to reduced aggregate demand in the domestic economy.
A deficit means more money is flowing out (on imports) than coming in (from exports) — this net outflow reduces overall spending and demand in the economy.
Question 10 of 20
A current account deficit tends to put downward pressure on the exchange rate.
A deficit means more domestic currency is being supplied (to buy imports) than demanded (for exports) — this excess supply puts downward pressure on the currency's value.
Question 11 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 12 of 20
Importing more goods than a country exports creates a deficit on the trade in goods account.
If import spending on goods exceeds export earnings from goods, the difference is a trade in goods deficit — contributing to a current account deficit.
Question 13 of 20
Supply-side policies are the most effective short-term solution to a current account deficit.
Supply-side policies are slow-acting — improving productivity and competitiveness takes years. Fiscal and monetary policies work faster to reduce import demand in the short run.
Question 14 of 20
Relatively higher production costs at home make domestic goods less competitive, contributing to a current account deficit.
If it costs more to produce goods domestically than abroad, domestic exports are more expensive and less price-competitive — reducing export demand and widening the deficit.
Question 15 of 20
Higher demand for imports always improves the current account balance.
Higher import demand increases the money flowing out of the country — worsening the current account balance by increasing the gap between import spending and export earnings.
Question 16 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 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
A current account deficit always causes immediate economic collapse.
Many countries run deficits for extended periods without crisis — deficits can be financed by capital inflows (borrowing, FDI). Problems arise if deficits become large and persistent.
Question 19 of 20
Protectionist measures such as tariffs and quotas can help reduce a current account deficit.
Tariffs raise the price of imports (reducing demand) and quotas limit import quantities — both reduce import spending and can help improve the current account balance.
Question 20 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.
Practice
True / False - Foreign Exchange Rates
20 questionsQuestion 1 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 2 of 20
A fall in a country's exports leads to a decrease in demand for its currency.
Fewer exports means fewer foreign buyers converting to the domestic currency — demand falls and the currency depreciates.
Question 3 of 20
One advantage of floating exchange rates is that countries are better insulated from external economic shocks.
External shocks (e.g. sudden fall in export demand) cause the currency to depreciate, which partially offsets the shock by boosting competitiveness — providing a buffer.
Question 4 of 20
A fixed exchange rate eliminates exchange rate risk for businesses and investors.
Since the rate does not fluctuate, businesses trading internationally do not face the risk that currency movements will erode their profits — making planning much easier.
Question 5 of 20
If a fixed exchange rate is set too high, exports become uncompetitive.
An overvalued currency makes exports more expensive for foreign buyers — reducing demand for them and harming export industries.
Question 6 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 7 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 8 of 20
A fixed exchange rate is less flexible in responding to external economic shocks.
Since the rate cannot adjust, the economy must absorb shocks through internal adjustments (e.g. wage cuts, deflation) rather than through currency depreciation — a significant disadvantage.
Question 9 of 20
A floating exchange rate provides insulation from external economic shocks.
If global conditions change (e.g. fall in foreign investment), the currency can depreciate to adjust — cushioning the domestic economy from the full impact of external shocks.
Question 10 of 20
When a currency depreciates, imports become more expensive for domestic consumers.
A weaker currency means more domestic currency is needed to buy the same amount of foreign goods — raising import prices.
Question 11 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 12 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 13 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 14 of 20
A rise in the exchange rate makes it harder for domestic firms to compete in international markets.
Appreciation raises the foreign-currency price of exports, making them less competitive — domestic firms may lose market share to cheaper foreign rivals.
Question 15 of 20
An increase in imports has the same effect on the exchange rate as an increase in exports.
Imports increase the supply of domestic currency (residents buy foreign currency), weakening it. Exports increase demand for domestic currency (foreigners buy it), strengthening it. The effects are opposite.
Question 16 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 17 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 18 of 20
Inflation higher than in other countries may cause a currency to depreciate.
High domestic inflation makes exports more expensive and less competitive, reducing export demand — and therefore demand for the currency — causing it to fall in value.
Question 19 of 20
An appreciation of a currency tends to worsen the current account balance.
Appreciation makes exports more expensive (reducing export demand) and imports cheaper (increasing import demand) — both effects widen the trade deficit and worsen the current account.
Question 20 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.
Practice
True / False - Globalisation, Free Trade and Protection
20 questionsQuestion 1 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 2 of 20
Exxon Mobil is an example of an MNC in the oil and energy sector.
Exxon Mobil explores, extracts, refines, and sells oil and gas across dozens of countries — one of the world's largest and most geographically spread MNCs.
Question 3 of 20
A multinational company (MNC) is a company that operates in two or more countries.
This is the definition of an MNC — firms like Apple, Coca-Cola, and Toyota have operations (production, sales, or services) across multiple countries.
Question 4 of 20
A subsidy is financial assistance provided by the government to domestic producers in the form of lump-sum payments or cheap loans.
This is the definition of a subsidy — government financial support that lowers producers' costs without raising prices for consumers in the same way a tariff does.
Question 5 of 20
In Diagram C, access to global markets is listed as an advantage for the host country.
Diagram C includes this — when MNCs use host country production for global export, the host country gains access to international markets it might not otherwise reach.
Question 6 of 20
Managing a geographically spread organisation is easier than managing a single-country firm.
Large geographic spread creates significant management challenges — coordinating teams across time zones, cultures, and languages increases complexity and the risk of miscommunication.
Question 7 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 8 of 20
A government that offers excessive tax concessions to attract MNCs may lose more in tax revenue than it gains in economic benefits.
If tax breaks are too generous, the government foregoes revenue without sufficient compensation in jobs or growth — the balance between incentives and fiscal cost is a real policy challenge.
Question 9 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 10 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 11 of 20
MNCs achieve economies of scale by operating on a large scale, allowing them to lower costs.
Large-scale global production allows MNCs to spread fixed costs, negotiate bulk discounts, and use specialist technology — reducing average costs.
Question 12 of 20
Local firms being crowded out by MNCs is a disadvantage for host countries.
When MNCs dominate markets, local businesses cannot compete — reducing domestic entrepreneurship, diversity of ownership, and long-term economic resilience.
Question 13 of 20
Free trade has no connection to globalisation.
Free trade is a central driver of globalisation — the removal of trade barriers increases cross-border flows of goods, services, capital, and people.
Question 14 of 20
MNCs face political risk when operating in countries with unstable governments or policy environments.
Policy changes — nationalisation, sudden tax increases, or trade restrictions — can occur in politically unstable countries, threatening MNC investments and operations.
Question 15 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 16 of 20
After a quota is imposed, the domestic supply curve becomes perfectly inelastic at the quota limit.
Once the quota ceiling is reached, no more imports can enter — making supply completely fixed (inelastic) at that level.
Question 17 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 18 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 19 of 20
A quota can protect domestic industries from foreign competition more directly than a tariff.
A quota sets an absolute limit on imports regardless of price changes, giving domestic producers a guaranteed level of market protection.
Question 20 of 20
An effect of a tariff is to shift the supply curve of domestic producers to the right.
A tariff does not directly shift domestic supply. It raises the price of imports, which shifts demand towards domestic goods — it is the demand side that is affected, not the domestic supply curve.
Practice
True / False - MNCs
20 questionsQuestion 1 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 2 of 20
Tesco's US venture 'Fresh & Easy' closing between 2013 and 2015 is an example of MNC failure to adapt.
Tesco misjudged American shopping habits and preferences — 'Fresh & Easy' failed to attract sufficient customers, illustrating the costly consequences of poor cultural adaptation.
Question 3 of 20
In Diagram C, profit repatriation is listed as a disadvantage of MNCs for host countries.
Diagram C — host country advantages vs disadvantages of MNCs
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 government that offers excessive tax concessions to attract MNCs may lose more in tax revenue than it gains in economic benefits.
If tax breaks are too generous, the government foregoes revenue without sufficient compensation in jobs or growth — the balance between incentives and fiscal cost is a real policy challenge.
Question 5 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 6 of 20
MNCs always pay their fair share of taxes in every host country.
Tax avoidance is a significant criticism — MNCs use transfer pricing and profit-shifting to low-tax jurisdictions to minimise their host country tax bills, reducing government revenues.
Question 7 of 20
MNCs can cause environmental damage in host countries, particularly where regulations are weak.
In countries with lax environmental laws, MNCs may pollute, deplete natural resources, or avoid environmental costs — shifting the burden onto the host country's environment.
Question 8 of 20
The inflow of MNC investment always improves the host country's balance of payments permanently.
MNC investment improves the capital account — but once the MNC repatriates profits, this creates current account outflows that can worsen the balance of payments over time.
Question 9 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 10 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 11 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 12 of 20
MNCs can set up manufacturing plants in foreign countries to avoid import taxes.
By producing inside the target market (or a trade bloc like the EU), MNCs avoid tariffs on imports — Honda manufacturing in Belgium, Italy, and France to avoid EU trade restrictions is a key example.
Question 13 of 20
The benefits of MNC investment may be greater in developing countries with large skill and capital gaps.
In countries lacking capital and technology, MNC investment fills critical gaps — providing jobs, skills, and technology that may not otherwise be available.
Question 14 of 20
In Diagram C, tax avoidance is listed as a disadvantage of MNCs for host countries.
Diagram C — host country advantages vs disadvantages of MNCs
Diagram C shows 'tax avoidance' as a disadvantage — when MNCs shift profits to low-tax jurisdictions, host governments lose tax revenue that could fund public services.
Question 15 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 16 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 17 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 18 of 20
Workers in host countries gain skills and training from working with MNCs.
MNCs often provide training in technical skills, management, and workplace practices — improving the human capital of the local workforce even if workers later move to other employers.
Question 19 of 20
In Diagram C, technology transfer is listed as an advantage MNCs bring to host countries.
Diagram C — host country advantages vs disadvantages of MNCs
Diagram C includes technology transfer in the advantages column — when MNCs introduce advanced production methods, local firms and workers can learn and adopt these technologies.
Question 20 of 20
Home countries benefit when MNCs create jobs abroad because this reduces unemployment at home.
MNCs creating jobs abroad may actually reduce home country employment if production moves overseas — this is a potential disadvantage for home countries, not an advantage.