1.5 Business and the international economy
- Syllabus
- 2026
- Topic
- 1.5
- Level
- —
Learning objectives
1.5.1GlobalisationGlobalisation:• concept of globalisation• opportunities and threats of globalisation for businesses.1.5.2Importance and growth of multinationalsThe importance and growth of multinationals:• benefits of a business becoming a multinational• benefits to a country and/or economy where a multinational company is located• possible drawbacks to a country and/or economy where a multinational is located.1.5.3Exchange rate calculationCalculate exchange rates in business contexts, including relevant percentages and percentage changes.1.5.4Impact of exchange rate changesThe impact of exchange rate changes:• on international competitiveness• on importers and exporters.
Evaluate globalisation as opportunity and threat
Globalisation is the increasing integration and interdependence of businesses and economies across countries through trade, investment, production, technology and communication.
| Opportunity for a business | Business mechanism | Matching threat |
|---|---|---|
| wider markets | more potential customers can raise sales and support growth | foreign rivals also enter domestic markets and increase competition |
| larger scale | higher output can spread fixed costs and reduce average cost | expansion may create coordination cost or excess capacity if demand disappoints |
| wider input and skills access | international suppliers and labour may lower cost or improve capability | long supply chains expose the firm to disruption and quality/control problems |
| investment and partnerships | access to capital, knowledge and technology may accelerate development | dependence on overseas partners or rules can reduce control |
| diversified countries/markets | weak demand in one market may be offset elsewhere | exchange rates, political/legal differences and global shocks add risk |
The net effect depends on competitiveness, product differentiation, scale, supply-chain resilience, management capability and exposure to particular countries. A small business can reach international customers online, but it may also face global price competition.
Globalisation is more than exporting one order. It is a wider process of cross-border integration; it creates possible opportunities and threats, not guaranteed gains or losses.
Judge multinational growth for the business and host country
A multinational operates business activities in more than one country. Growth abroad can benefit the company while producing both gains and costs for the country where it locates.
| Perspective | Possible benefit | Possible drawback/condition |
|---|---|---|
| multinational business | wider markets and sales; economies of scale; access to skills, resources or lower-cost locations; risk spread across markets | high setup/coordination cost; unfamiliar laws/cultures; exchange-rate, political and reputation risk |
| host-country workers | jobs, wages, training and skill transfer | working conditions or progression may be weak; jobs can leave if the MNC relocates |
| host-country firms | supplier demand, technology and competitive pressure can raise capability | powerful MNC competition may take sales or skilled workers from local firms |
| host government/economy | investment, output, exports, infrastructure and potential tax revenue | profits may be sent abroad; tax contribution may be limited; incentives/infrastructure have opportunity costs |
| host environment/community | investment can support local services or cleaner methods | production or extraction can create pollution, resource pressure or community disruption |
Assess scale, duration, local sourcing, wages/training, tax contribution, environmental controls and how much profit stays in the host economy. More jobs alone do not prove that total host-country benefit is positive.
Selling abroad does not by itself make a business multinational. It must own or operate business activities in more than one country.
Calculate exchange rates and percentage changes
| Quotation | Direction | Operation |
|---|---|---|
| currency A 1 = currency B r | A → B | multiply the amount in A by r |
| currency A 1 = currency B r | B → A | divide the amount in B by r |
Write units beside the rate so the starting currency cancels. Multiply any quantity by unit price before or after conversion consistently, then round only the final answer and include the destination currency.
If EUR 0.93 = USD 1, then a EUR 1,590 handbag costs USD 1,590 ÷ 0.93 = USD 1,709.68. The reverse check is USD 1,709.68 × 0.93 ≈ EUR 1,590.
\text{percentage}=\frac{\text{part}}{\text{whole}}\times100\qquad \text{percentage change}=\frac{\text{new}-\text{original}}{\text{original}}\times100
If a quoted rate falls from 1.15 to 1.05, the percentage change is (1.05 − 1.15) ÷ 1.15 × 100 = −8.70%. The negative sign records a fall in that specific quoted rate.
Never decide multiply/divide from whether the number should ‘look bigger’. Use units and the exact quotation; reversing the currency pair reverses the numerical interpretation.
Trace exchange-rate changes through importers and exporters
Start by naming the home currency. Appreciation means it buys more foreign currency; depreciation means it buys less.
| Home-currency change | Importer effect | Exporter/international competitiveness effect |
|---|---|---|
| appreciation | foreign inputs/products cost fewer home-currency units → import costs tend to fall | home products become dearer to foreign buyers → export demand and competitiveness may fall |
| depreciation | foreign inputs/products cost more home-currency units → import costs tend to rise | home products become cheaper to foreign buyers → export demand and competitiveness may rise |
A business can be both importer and exporter. After depreciation it may gain overseas demand but pay more for imported materials; its profit effect depends on the relative size of export revenue and imported-input cost.
Size, duration, contracts, pricing decisions, demand responsiveness, product quality, capacity and imported-input dependence determine the result. A business may keep the foreign price unchanged and take a larger margin rather than cut price.
An exchange-rate change does not alter every firm's competitiveness in the same direction. Always identify which currency moved, whether the firm imports or exports, and which prices/costs are denominated in each currency.