The global economy (2.2.1-2.2.3)

Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3, February 2026. This topic covers spec sections 2.2.1–2.2.3 in full: globalisation (4 rows), international trade (6 rows) and exchange rates (4 rows). The tariff model reuses the shared curves ($Q_d = 140 - 2P$, $Q_s = 20 + 4P$); the exchange model sits at 5 domestic per foreign currency.

Must-know for this topic:

Globalisation 全球化 is the increased integration and interdependence of economies (2.2.1a). Reasons (2.2.1b): fewer tariffs and quotas, reduced transport costs, reduced communication costs, and the increased significance of MULTINATIONAL CORPORATIONS (MNCs). Impacts (2.2.1c): rising living standards, greater choice, lower prices and cheaper communication — against the closing of traditional industries, harm to workers in exposed industries, and environmental damage, affecting countries, governments, producers, consumers, workers and the environment. A multinational corporation 跨国公司 operates in more than one country; foreign direct investment 外国直接投资 (FDI) is building or buying productive assets abroad (2.2.1d). MNCs emerge to exploit economies of scale, access natural resources and cheap materials, cut transport and communication costs, and reach customers in different regions. Advantages of MNCs/FDI: creating jobs, investing in infrastructure, developing skills, developing capital, contributing taxes. Disadvantages: avoiding taxes, environmental damage, and moving profits abroad.

Free trade's advantages (2.2.2a): lower prices and increased choice for consumers, lower input costs, and wider markets for businesses; its disadvantages: foreign competition harming domestic businesses and increasing unemployment in exposed industries. Reasons for protection (2.2.2b): prevent dumping 倾销 (exporting below normal value, usually the comparable home-market price), protect employment, protect infant industries, gain tariff revenue, protect consumers from unsafe products, reduce current-account deficits, and retaliation. Methods (2.2.2c): tariffs 关税 (import taxes), quotas 配额 (quantity limits), subsidies 补贴 to domestic producers — each with advantages (revenue, jobs saved, precise quantity control) and disadvantages (higher prices, retaliation, inefficiency). The tariff diagram on the shared model: at the world price 12 imports are $116 - 68 = 48$; a tariff of 4 raises the domestic price to 16 and imports fall to $108 - 84 = 24$, the government collects $4 \times 24 = 96$, and the deadweight loss is $32 + 16 = 48$. Trading blocs 贸易集团 (2.2.2d) such as the EU favour members (free internal trade, economies of scale) at non-members' expense (trade diversion). The WTO (2.2.2e) negotiates liberalisation, sets trade rules and settles disputes. Trade PATTERNS (2.2.2f): developing countries export primary products and low-cost manufactures; developed countries export services and high-technology goods.

The exchange rate 汇率 is the price of one currency in another (2.2.3a). It is set by demand and supply of the currency (2.2.3b): interest rates (higher rates attract funds and raise the currency), currency speculators, and the imports and exports of goods and services — importers sell the domestic currency to buy foreign currency; foreign buyers of exports do the reverse. The diagram is the market for the foreign currency: demand meets supply at 5 domestic per foreign currency. Appreciation 升值 is a market-driven RISE in a floating exchange rate; a REVALUATION is a deliberate rise under a FIXED rate (2.2.3c). A depreciation 贬值 is a market-driven FALL; a devaluation 法定贬值 is a deliberate cut under a fixed rate (2.2.3d). Model: a rise in import demand shifts the demand for foreign currency right — one foreign unit now costs 6.5 domestic instead of 5, a DEPRECIATION of the domestic currency: import prices rise (dearer foreign goods), export prices abroad fall, so import demand falls and export demand rises — improving the current account if the elasticities allow, at the cost of imported inflation. An appreciation does the reverse: cheaper imports, dearer exports, current-account pressure.

Extract. In early 2022 one US dollar bought about 115 Japanese yen. By mid-2024 it bought about 160 yen, the weakest the yen had been since 1986. A key reason was the gap in interest rates: the US central bank raised its rate above 5%, while the Bank of Japan kept its rate below zero until March 2024. Savers moved money out of yen to earn more in dollars. Japanese car makers reported record profits, and a record 36.9 million foreign tourists visited Japan in 2024. But Japan imports most of its energy and much of its food, and in 2022 it had a record trade deficit as import bills rose.

Questions

• (a) Define depreciation of a currency. [2]
• (b) Using the extract, explain one reason why the yen depreciated. [3]
• (c) A Japanese car costs ¥3,000,000. Calculate its price in US dollars at 120 yen per dollar and at 150 yen per dollar. [2]
• (d) A barrel of oil costs $80. Calculate its cost in yen at 120 and at 150 yen per dollar, and the percentage change. [2]
• (e) Analyse how the depreciation affected Japan's tourism industry. [4]
• (f) Evaluate whether the weak yen was good for the Japanese economy. [9]

Model answers

(a) A depreciation is a fall in the value of a currency against other currencies in a floating exchange-rate system, caused by market forces (demand and supply of the currency).

(b) US interest rates rose above 5% while Japan's stayed below zero. Savers and investors could earn much more on dollar deposits and bonds, so they sold yen to buy dollars. The supply of yen on the currency market rose and demand for yen fell, so the yen's value fell.

(c) At 120: $3{,}000{,}000 \div 120 = 25{,}000$, so $25,000. At 150: $3{,}000{,}000 \div 150 = 20{,}000$, so $20,000. The same car is $5,000 (20%) cheaper for American buyers.

(d) At 120: $80 \times 120 = 9{,}600$, so ¥9,600. At 150: $80 \times 150 = 12{,}000$, so ¥12,000. The rise is $\tfrac{12{,}000 - 9{,}600}{9{,}600} \times 100 = 25\%$, with no change in the dollar price of oil.

(e) A weaker yen means each dollar, euro or yuan buys more yen, so hotels, meals and shopping in Japan become cheaper for foreign visitors. Demand for trips to Japan rises: the extract reports a record 36.9 million visitors in 2024. Tourism is an export of services, so spending by visitors adds to Japan's current account and to aggregate demand, creating jobs in hotels, transport and shops. Crowding at popular places is a cost of this success.

(f) Benefits: exports become cheaper abroad (the car falls from $25,000 to $20,000), so exporters sell more and earn more profit when they change dollars back into yen. Tourism booms. Higher exports raise aggregate demand, output and employment. Japan had very low inflation for many years, so some rise in prices was welcome.

Costs: imports become dearer. Energy and food are necessities with inelastic demand, so Japan keeps buying them and the import bill rises (oil up 25% in yen). This caused a record trade deficit in 2022 and cost-push inflation. Households' real incomes fall if wages rise more slowly than prices. Firms that import their materials face higher costs.

It depends on: how elastic the demand for Japan's exports is (if buyers do not respond much to lower prices, export revenue gains are small); how long the weak yen lasts (contracts take time to change, so the trade balance may get worse before it gets better); and who is affected. Exporters and tourism firms gain, while households and import-using firms lose.

Judgement: the weak yen helped large exporters and tourism, but it raised living costs for most households because Japan relies on imported energy and food. On balance it gave a short-term boost to demand, but it is not a lasting source of growth: that needs higher productivity, not a cheaper currency.

What examiners reward: correct currency calculations with units, a clear chain from the exchange rate to prices, to demand, to the current account, both winners and losers named, and a judgement.

• Globalisation definition, four reasons, impacts on all groups; MNC/FDI definitions, four emergence reasons, five advantages and three disadvantages (2.2.1).
• Free trade both ways; seven protection motives; tariffs, quotas and subsidies with pros and cons and the diagram arithmetic (48 → 24, 96, 48); blocs and the WTO; trade patterns (2.2.2).
• Exchange-rate definition; the three demand/supply factors with the diagram at 5; appreciation vs revaluation, depreciation vs devaluation; both directions' impacts on import/export prices, demand and the current account (2.2.3).

Boundary notes: Paper 2's data questions use exchange-rate conversions and the tariff arithmetic above. Definitions of the four direction words (appreciation, revaluation, depreciation, devaluation) are one-mark material. All worked numbers are original on the shared models.