Globalisation links economies. Comparative advantage explains why countries specialise and trade. Blocs and tariffs shape that trade. And the balance of…
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7.1
Globalisation, trade and international finance
Pearson Edexcel International A Level Economics (WEC14), specification Issue 2,
June 2018. This topic covers spec sections 4.3.1–4.3.3 in full: the
characteristics, causes and effects of globalisation (three rows); trade and
the global economy — specialisation 专业化, terms of trade, trading blocs 贸易集团 and
protectionism (five rows); and the balance of payments 国际收支, exchange rates and
international competitiveness (three rows). Worked examples are original or
adapted from the WEC14/01 Sample Assessment Materials (labelled SAM) with
arithmetic re-derived; the tariff model reuses the shared micro demand and
supply curves ($Q_d = 140 - 2P$, $Q_s = 20 + 4P$).
Globalisation 全球化 shows three characteristics (4.3.1.1): trade grows as a
proportion of GDP; transnational companies (TNCs 跨国公司) and foreign direct
investment (FDI 外国直接投资) gain importance; and migration 移民 increases. Its
causes over the last 50 years (4.3.1.2a): trade liberalisation 贸易自由化; more and
larger trading blocs; political change (the Soviet system's breakdown, China
opening up); reduced transport and communication costs; and the increased
significance of TNCs. FDI by TNCs happens to access markets, resources,
cheaper labour and tax advantages, and its impact on RECIPIENT countries runs
both ways — investment, jobs, technology and tax revenue against crowding
out, profit repatriation and influence over policy (4.3.1.2b). Possible
benefits of globalisation (4.3.1.3a): higher growth, higher tax revenue,
economies of scale 规模经济, lower prices with higher consumer surplus 消费者剩余, more choice,
higher living standards. Possible costs (4.3.1.3b): displaced workers,
exploitation of workers, the environment, lost revenue through TRANSFER
PRICING, within-country inequality, and TNC influence on domestic policy.
foreign direct investment/ˈfɒrən daɪˈrekt ɪnˈvestmənt/
migration/maɪˈɡreɪʃn/
trade liberalisation/treɪd ˌlɪbərəlaɪˈzeɪʃn/
economies of scale/ɪˈkɒnəmiz ɒv skeɪl/
consumer surplus/kənˈsuːmə ˈsɜːpləs/
7.1
Specialisation and comparative advantage
Specialisation and trade raise total output, but they concentrate economies
on narrow industries whose prices can collapse — the benefits and costs of
specialisation in the international context (4.3.2.1a). The theory of
COMPARATIVE ADVANTAGE (4.3.2.1b): a country has comparative advantage where
it produces at the LOWEST OPPORTUNITY COST — distinct from ABSOLUTE
advantage (most output per input). Original example: Country A makes 4 wheat
or 2 cloth per labour hour, Country B makes 1 wheat or 1 cloth. A has
absolute advantage 绝对优势 in BOTH; but one cloth costs A two wheat while one cloth
costs B only one wheat — A specialises in wheat, B in cloth, and a trade
ratio between the two opportunity costs (say 1.5 wheat per cloth) lets BOTH
consume beyond their own frontiers: A buys cloth at 1.5 wheat instead of
forgoing 2; B sells cloth at 1.5 wheat instead of 1. Assumptions: constant
costs, no transport costs, full employment, perfect factor mobility.
Limitations: costs are rarely constant, transport and trade barriers exist,
factors are not perfectly mobile, and exchange rates and TNCs blur the
story.
Original data: output per labour hour; the trade ratio 1.5 wheat per cloth sits between the two opportunity costs.
The terms of trade 贸易条件 (4.3.2.3) measure export prices against import
prices: $ToT = \tfrac{\text{export price index}}{\text{import price index}}
\times 100$. (SAM WEC14/01 Q3) Tanzania's export price index rose from 100
to 128.9 while its import price index rose to 117.1, so its terms of trade
$= \tfrac{128.9}{117.1} \times 100 = 110.1$ — a 10.1% improvement. The terms
move with relative inflation, relative productivity, relative labour costs,
the exchange rate and import/export prices (4.3.2.3b); a RISE improves export
revenue per unit and living standards (imports cost fewer exports) but a
rise driven by dearer exports can worsen the balance of trade if demand is
inelastic (4.3.2.3c). Trade PATTERNS (4.3.2.2) shift with emerging economies,
changing comparative advantage, trading blocs and bilateral agreements,
relative exchange rates and protectionism.
The WTO promotes trade liberalisation through negotiation rounds, rules and
dispute settlement (4.3.2.4a). Trading blocs deepen in stages (4.3.2.4b):
free-trade areas 自由贸易区 (no internal barriers), customs unions 关税同盟 (plus a common
external tariff), common markets 共同市场 (plus free factor movement), economic and
monetary unions (plus a shared currency). Membership brings trade creation 贸易创造
(cheap partner production replaces dear domestic) but risks trade diversion 贸易转移
(dear partner production replaces cheap world production once the external
tariff bites), plus lower costs and prices, economies of scale, lower
transaction costs and factor mobility (4.3.2.4c); blocs can conflict with
the WTO's most-favoured-nation principle (4.3.2.4d).
Restrictions on free trade (protectionism 保护贸易, 4.3.2.5) are justified to protect infant (and
geriatric) industries, domestic employment, national security, against dumping 倾销, to correct a current-account deficit, or to raise revenue
(4.3.2.5a); the types are tariffs 关税, quotas 配额, non-tariff barriers and subsidies 补贴
to domestic producers (4.3.2.5b). On the shared model at a world price of
12: $Q_d = 116$ against $Q_s = 68$, so imports are 48. A tariff of 4 raises
the domestic price to 16: imports fall to 24, government collects $4 \times
24 = 96$, producers gain, consumers lose 448 — of which 304 goes to
producers and 96 to the government, leaving a deadweight loss 无谓损失 of $32 + 16 =
48$ (4.3.2.5c: consumers lose, producers and the government gain, living
standards and equality typically fall with the price rise).
Original model: world price 12 with imports 48; the tariff of 4 cuts imports to 24, raises 96 in revenue and destroys 48 of welfare.SAM data: export prices outpaced import prices, lifting the terms of trade to 110.1.An illustrative J-curve: the trade balance can worsen initially, then improve as volumes respond. This path is conditional; other current-account components are held unchanged.
The balance of payments (4.3.3.1) has the current account 经常账户 (trade in goods
and services plus primary and secondary income — topic 3) and the CAPITAL
AND FINANCIAL ACCOUNTS (asset transactions, reserves). Current-account
deficits follow deficient competitiveness, strong domestic demand, or
commodity price collapses; surpluses mirror them (4.3.3.1b). Imbalances can
be reduced by expenditure-reducing policies (deflation), expenditure-
switching policies (depreciation, tariffs) and supply-side competitiveness
policies (4.3.3.1c); global imbalances matter because surplus savings
finance deficit borrowing, storing up corrections (4.3.3.1d).
Exchange-rate systems (4.3.3.2a): fixed exchange rate 固定汇率 (pegged, state-maintained), managed exchange rate 管理汇率
(market-set within a band the state defends) and floating exchange rate 浮动汇率 (market-set).
Government intervenes through foreign-currency transactions, interest rates
and quantitative easing 量化宽松 (4.3.3.2b). Floating rates move with relative
interest rates, relative inflation (the purchasing power parity 购买力平价 theory —
currencies adjust until baskets cost the same), the current account,
economic strength, capital flight, expectations and speculation 投机, and global
shocks such as commodity price falls (4.3.3.2c). A RISE under a fixed rate
is a revaluation 法定升值; under a float it is an appreciation 升值; a fall is
devaluation 法定贬值 versus depreciation (4.3.3.2d–e). A depreciation 贬值 can make exports
cheaper abroad and imports dearer, depending on price pass-through. In the
traditional benchmark with initially balanced trade, perfectly elastic export
and import supply, and full pass-through, the Marshall–Lerner condition 马歇尔-勒纳条件
requires the magnitudes of export and import demand elasticities to sum to
more than one for the trade balance to improve. A J-curve J曲线 is possible:
the trade balance can worsen initially before quantities respond; later
improvement is conditional. The current account also includes income and
transfers. Depreciation can attract FDI through cheaper domestic assets,
but uncertainty can deter investment; dearer imported inputs can add
inflationary pressure and affect output and jobs (4.3.3.2f); competitive depreciations invite retaliation 报复 and
trade wars (4.3.3.2g).
Competitiveness is measured by relative productivity rates, relative unit
labour costs and relative export prices (4.3.3.3a); it is influenced by
productivity, human-capital quality, the exchange rate, wage and non-wage
costs, regulations, infrastructure quality and non-price factors
(4.3.3.3b). Measures to raise it: education and training, investment
incentives, privatisation and deregulation, reducing the currency's value,
and trade liberalisation (4.3.3.3c). A competitive economy enjoys export
growth, jobs and FDI; an uncompetitive one suffers persistent current-
account deficits, deindustrialisation 去工业化 and forced deflation (4.3.3.3d).
Extract. In March 2024 Egypt's central bank let the Egyptian pound float. In one day the official rate moved from about 30.9 pounds per US dollar to about 49.5, close to the rate on the black market, where dollars had been scarce for months. Inflation had reached a record of about 38% in September 2023, and many importers had been unable to buy dollars to pay for goods. At the same time the central bank raised interest rates by 6 percentage points, the IMF increased its loan programme to about US$8 billion, and the United Arab Emirates agreed to invest US$35 billion in a coastal development project. Egypt imports much of its wheat and fuel, while its main sources of foreign currency include tourism, Suez Canal fees and money sent home by Egyptians working abroad.
Questions
(a) Calculate the percentage fall in the value of the Egyptian pound against the US dollar. [2]
(b) Explain two reasons why Egypt allowed its currency to fall. [4]
(c) With the help of a J-curve diagram, explain how Egypt's trade balance might change after the depreciation. [6]
(d) Examine the likely effect of the depreciation on inflation in Egypt. [8]
(e) Evaluate whether the depreciation is likely to improve Egypt's current account. [12]
Model answers
(a) One pound was worth $\tfrac{1}{30.9} \approx \$0.0324$ before and $\tfrac{1}{49.5} \approx \$0.0202$ after. Fall $= \tfrac{0.0202 - 0.0324}{0.0324} \times 100 \approx -38\%$. (Note: the number of pounds per dollar rose by about 60%, but the pound's value fell by about 38%.)
(b) To end the shortage of dollars and the black market: the official rate was far above the pound's market value, so few people would sell dollars at it; trade and investment were held back. Floating the pound brings the official rate to the market rate, so dollars flow through official channels again. To meet the conditions of IMF support and attract investment: a flexible exchange rate was part of the IMF programme, and foreign investors are more willing to bring money in when they can convert it at a fair rate.
(c) The J-curve shows the trade balance against time. Immediately after the depreciation, import contracts are priced in dollars and volumes are slow to change, so Egypt pays more pounds for the same imports and the trade balance gets worse. Over time, Egyptian exports and tourism become cheaper for foreigners and imports dearer for Egyptians, so export volumes rise and import volumes fall. If the Marshall–Lerner condition holds ($|PED_X| + |PED_M| > 1$), the balance then improves: the curve rises above its starting level.
(d) A depreciation raises the pound price of imports. Because wheat and fuel are necessities with price-inelastic demand, Egyptians keep buying them at higher prices, so food and energy prices rise: cost-push inflation, which spreads through transport and production costs. Cheaper exports and more tourism raise AD (demand-pull). But: the black-market rate was already near 49.5, so many prices had already adjusted to it, which limits the extra inflation. The 6-point interest-rate rise reduces demand and makes holding pounds more attractive, and new dollar inflows allow importers to buy goods again, easing shortages. Over time inflation may fall rather than rise.
(e) Reasons it may improve: tourism, a large export of services, becomes cheaper and is likely to be price elastic. Remittances from Egyptians abroad are more likely to come through official channels at a fair rate, raising measured current-account inflows. Expensive imports of non-essential goods fall.
Reasons it may not: demand for imported wheat and fuel is inelastic, so the import bill may rise in pounds without falling much in volume, and the Marshall–Lerner condition may not hold in the short run. Suez Canal fees are priced in dollars and depend on world shipping, not on the exchange rate; they fell when shipping avoided the Red Sea in 2024. If inflation rises fast, the competitive gain from the cheaper pound is lost.
Other influences: the large capital inflows (UAE investment, IMF loans) appear in the financial account, not the current account; they support the currency but must be repaid or earn profits later, which are current-account outflows.
Judgement: the depreciation is likely to improve the current account slowly, mainly through tourism and remittances, but less through goods trade, because Egypt's key imports are necessities. The improvement depends on keeping inflation under control (so the real exchange rate stays competitive) and on factors outside Egypt's control, such as Red Sea shipping.
What examiners reward: a percentage change in the currency's value (not in the number of units per dollar), reasons linked to the extract, a J-curve with the Marshall–Lerner condition, inflation effects that weigh cost-push against the offsetting policies, and a conditional judgement.
7.2
Checklist
Globalisation's three characteristics, five causes, FDI reasons and impacts; six benefits and six costs (4.3.1).
Specialisation's benefits and costs; absolute versus comparative advantage with the 4/2 and 1/1 table; the trade ratio between the opportunity costs; assumptions and limitations (4.3.2.1).
Trade patterns and their five shift factors (4.3.2.2).
Terms of trade formula with the SAM Tanzania calculation (110.1); its five influences; effects on export revenue, living standards and the trade balance (4.3.2.3).
WTO role; the four bloc types; trade creation versus diversion; bloc-WTO conflicts (4.3.2.4).
Six motives and four types of restriction; the tariff arithmetic — price 12 to 16, imports 48 to 24, revenue 96, DWL 48 — with the five impact groups (4.3.2.5).
BoP components; deficit causes; three imbalance remedies; global imbalances (4.3.3.1).
Fixed, managed and floating systems; three intervention routes; seven floating-rate factors; revaluation vs appreciation, devaluation vs depreciation; Marshall–Lerner and the J-curve; depreciation's six impact channels; competitive depreciations (4.3.3.2).
Competitiveness: three measures, seven influences, five measures to raise it, advantages and problems (4.3.3.3).
Boundary notes: WEC14 is 2 hours, 80 marks, drawing on Units 1–3 — expect
AD/AS, market failure and business-economics material inside global
questions. Data questions reward index-number work (the ToT calculation) and
diagram labels (D, S, world price, tariff line, revenue box, DWL triangles).
Worked examples are original or SAM-adapted as labelled.
This package now covers the full IA2 targets of specification sections 4.3.1–4.3.3 (36 objectives), grounded in specification pages 44–48 and WEC14 January 2025, June 2025 and October 2023 papers and mark schemes. Read the native introduction first.
Comparative advantage means lower opportunity cost, not being absolutely faster. Calculate each country's forgone alternative in the same units. A feasible exchange between the two opportunity costs can make specialization and exchange attractive in a simplified model. Transport, adjustment, distribution and productive assumptions matter; the model does not guarantee benefits for every worker.
Protection can support a named industry, but tariffs also raise some consumer or input costs and can provoke retaliation. An infant-industry argument requires a plausible learning mechanism, a credible temporary plan and review; permanent protection is not established by the label. In a currency quotation of domestic units per foreign unit, an increase means domestic depreciation. Import costs can rise before quantities adjust; the current account also includes income and transfers, so it is not simply the goods balance. Integration can lower barriers within a group while affecting outside suppliers differently. Evaluate the actual rule and source conditions rather than treating every agreement as identical.
Worked case
Country A uses three worker-hours per cloth unit and six per grain unit. Country B uses four per cloth and four per grain. Calculate opportunity costs, then consider exchange of one grain unit for 1.5 cloth units, assuming constant costs and no trade costs.
In A, one cloth costs 3/6 = 0.5 grain and one grain costs 6/3 = 2 cloth. In B, one cloth costs 4/4 = 1 grain and one grain costs 1 cloth. A has comparative advantage in cloth; B in grain. A obtains one grain for 1.5 cloth instead of producing it at a cost of two cloth. B receives 1.5 cloth for grain costing it one cloth. The stated trade ratio lies between one and two cloth per grain. Feasible production and transport costs must still be checked; no distribution claim follows automatically.
Independent transfer
After depreciation, import expenditure rises. A commentator calls the comparative-advantage model false and recommends a permanent tariff. Assess both leaps.
Checked original model
Depreciation can raise domestic-currency import prices while contracts and limited substitutes slow quantity adjustment. Import spending alone does not establish the whole current account or refute an opportunity-cost model. A tariff recommendation needs a specific objective, effect on consumers and input users, adjustment and retaliation evidence, and a comparison with feasible alternatives. Set a review condition rather than infer permanent protection from one observation. The detailed IA2 trade, integration and exchange-rate analysis is now taught in the sections below.
Globalisation: characteristics, causes and effects
Globalisation is the growing integration of national economies. Its three measured characteristics are: trade rising as a share of GDP; the growing importance of transnational companies 跨国公司 (TNCs) and foreign direct investment (FDI) — investment that sets up or buys lasting control of productive capacity abroad; and increased migration.
Causes over the last 50 years: trade liberalisation (falling tariffs and quotas through successive WTO rounds), more and larger trading blocs, political change (the breakdown of the Soviet system and the opening up of China), cheaper transport and communications (container shipping, the internet), and the growing significance of TNCs themselves.
TNC motives for FDI: access to cheaper labour or raw materials, access to markets behind trade barriers, lower taxes, and spreading risk across countries. Effects on recipient countries can run both ways: FDI can bring capital, jobs, technology transfer and tax revenue, but profits may be repatriated and large TNCs can influence domestic policy. Transfer pricing 转让定价 means setting prices for transactions between related companies. Misuse of those prices can shift profits to lower-tax locations and erode tax revenue.
Evaluating globalisation: possible benefits include faster growth, higher tax revenue, economies of scale, lower prices and higher consumer surplus, more choice and higher living standards. Possible costs include displaced workers in declining industries, exploitation where labour standards are weak, the environmental damage of longer supply chains, revenue loss from transfer-pricing misuse, widening income inequality within countries, and TNC influence over domestic policy. A good evaluation asks who gains, who loses, and under which conditions.
Specialisation, comparative advantage and the terms of trade
The worked case above shows the method: compute each country's opportunity cost per good in the same units; the lower opportunity cost identifies the comparative advantage; any exchange ratio between the two opportunity costs can benefit both. The theory assumes two countries, two goods, constant costs, full employment, no transport costs and free mobility of factors within countries; its limitations — transport costs, adjustment unemployment, demand patterns and increasing returns — are exactly where evaluation earns marks.
Patterns of world trade change with emerging economies, shifts in comparative advantage, new trading blocs and bilateral agreements, relative exchange-rate movements and changing protectionism.
The terms of trade measure export prices against import prices: ToT = (index of export prices / index of import prices) × 100. Worked example matching the June 2025 WEC14 question: export prices fell 4.8% and import prices fell 3.1% from a base of 100, so ToT = 95.2 / 96.9 × 100 = 98.25 — a deterioration, because export prices fell faster. Influences include relative inflation, relative productivity and labour costs, the exchange rate and world commodity prices. Effects depend on elasticities: a ToT improvement raises revenue per export unit, but export revenue rises only if demand is not too price-elastic; living standards move with the buying power of exports; the trade balance follows prices times volumes.
Trading blocs and the WTO
The World Trade Organization 世界贸易组织 negotiates trade-liberalisation rounds, sets rules (national treatment, most-favoured-nation) and runs dispute settlement. Bloc types form a ladder: a free-trade area 自由贸易区 removes tariffs between members only; a customs union 关税同盟 adds a common external tariff; a common market 共同市场 adds free movement of labour and capital; an economic and monetary union 经济与货币联盟 adds coordinated policy and often a single currency. Membership brings trade creation (buying from cheaper partners), scale economies and lower transaction costs, but also trade diversion (switching from cheaper outside suppliers to dearer members), and possible conflict with WTO non-discrimination rules.
Protectionism
Reasons for restricting free trade: protecting infant industries while they learn, geriatric industries while they decline, domestic jobs, and national security; preventing dumping; correcting a current-account deficit; and raising revenue. Types: tariffs (import taxes), quotas (quantity limits), non-tariff barriers (standards, red tape) and subsidies to domestic producers.
In the diagram's numbers (domestic supply P = 2 + 0.5Q, demand P = 14 − 0.5Q, world price 4, tariff 2): the price rises to 6, domestic output rises from 4 to 8, consumption falls from 20 to 16, imports fall from 16 to 8, and government revenue is 2 × 8 = 16. Consumers lose surplus and pay more; domestic producers gain; the government gains revenue but risks retaliation; living standards and equality can fall because tariffs hit low-income consumers hardest.
Balance of payments
The balance of payments records transactions with the rest of the world: the current account (trade in goods and services, primary income, secondary transfers), the capital account (capital transfers and non-produced assets), and the financial account 金融账户 (investment flows and reserves). A current-account deficit means the combined balance of goods, services, primary income and secondary income is negative. A trade deficit can contribute, but income and transfer flows can offset it. Weak competitiveness or strong import demand may contribute; distinguish these mechanisms from the accounting definition.
Measures to reduce a deficit (the June 2025 WEC14 essay demand): expenditure-reducing deflationary policy (higher income tax or lower government spending to cut the marginal propensity to import; higher interest rates to cut spending); supply-side policy (education, infrastructure, R&D tax relief to raise competitiveness); a lower exchange rate; and protectionism (tariffs and quotas). Evaluation: deflation costs growth and jobs, supply-side policies take years, depreciation works only when the Marshall-Lerner condition holds, and tariffs invite retaliation. Global imbalances matter because one country's deficit is another's surplus: persistent gaps build debts, fuel capital-flow instability and can trigger protectionist pressure.
Exchange rates
A floating exchange rate 浮动汇率 is set by currency markets; a fixed 固定汇率 rate is held by the central bank; a managed rate lies between. Governments influence currency markets through foreign-currency transactions (buying or selling reserves), interest rates, and quantitative easing (which increases money supply and tends to lower the currency).
Floating rates respond to relative interest rates (higher rates attract "hot money"), relative inflation (the purchasing-power-parity idea: high inflation erodes a currency's value), the current account, economic strength, capital flight, speculation and global factors such as commodity-price falls. Distinguish the words precisely: under a fixed regime the government devalues or revalues; under floating, the market drives depreciation or appreciation. A fixed-rate reduction is a devaluation 法定贬值 — as the January 2025 WEC14 MCQ tested with the UAE dirham.
A cheaper currency can lower foreign-currency export prices and raise local import prices, depending on pass-through. In the traditional benchmark of initially balanced trade, perfectly elastic supply and full pass-through, the Marshall-Lerner condition requires the magnitudes of export and import demand elasticities to sum to more than 1 for a trade-balance improvement. A J-curve can arise if prices change before quantities: the balance initially worsens, then improves if later quantity responses are sufficient. It is not an inevitable path. Exchange-rate changes also move the financial account (capital follows expected returns), growth, employment, inflation (dearer imported inputs) and FDI flows. Competitive depreciations — each country cheapening its currency to steal demand — invite retaliation and can shrink world trade, as in the 1930s.
International competitiveness
Competitiveness is measured by relative productivity, relative unit labour costs 单位劳动成本 (labour cost per unit of output) and relative export prices. It depends on productivity, human-capital quality, the exchange rate, wage and non-wage costs (such as employer contributions), regulation, infrastructure and non-price factors such as design and reliability. Policies to raise it: education and training, investment incentives, privatisation and deregulation, a lower exchange rate, and trade liberalisation. A competitive economy sells more abroad and attracts investment; an uncompetitive one faces rising imports, weak export industries and pressure on jobs.
WEC14 assessment demand for this topic
WEC14 is an IA2 unit: 120 minutes, six Section A MCQs (6 marks), a 34-mark Section B source question, and two 20-mark Section C essays chosen from three; it may draw on Units 1–3. Section A has tested the devaluation/depreciation distinction, comparative-advantage outcomes, index numbers, customs-union definition and the tariff diagram's areas. Section C essays on this topic's ground include terms-of-trade causes (October 2023), current-account-deficit measures with a named country (June 2025), and FDI benefits (October 2023); "refer to a country of your choice" is a standing requirement, so prepare two or three revised country examples. The essay rubric (12 + 8) is the same as certified for WEC13.
Source boundary
XEC11/YEC11, 2018 specification, Issue 2. Evidence: specification pages 44–48 (sections 4.3.1–4.3.3), WEC14 January 2025 QP/MS (Section A Q1–6), June 2025 QP/MS (Section A Q3, Q5; Section C Q8) and October 2023 QP/MS (Section C Q8, Q10). Local authored marking guidance is not an official qualification scheme.
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