2.2 The global economy

Integration means national economies become more connected through cross-border production, trade and investment. Interdependence means decisions or shocks in one economy increasingly affect firms, workers, consumers and governments elsewhere.

The forces reinforce one another: cheaper transport and communication make multinational production practical, while fewer trade barriers give those firms wider access to inputs and customers.

Judge the outcome by identifying the stakeholder, time period and distribution of gains. Lower consumer prices can coexist with job losses in a traditional industry, so an economy-wide benefit does not mean every group benefits.

Net benefit depends on the MNC's conduct, local linkages, wages and training, tax enforcement, environmental regulation, how long it remains and how much profit is retained in the host economy.

Fewer barriers → imports become cheaper or more available → competition rises → consumers gain and firms face pressure to cut costs, improve quality or leave the market. At the same time, exporters may gain reciprocal access to larger markets.

Judge free trade by comparing widespread consumer and exporter gains with concentrated adjustment costs. The result depends on competitiveness, labour mobility, the importance of affected industries and whether trading partners also reduce barriers.

Each reason has a condition: infant protection needs a credible route to competitiveness; import demand must respond for the current account to improve; safety rules must target genuine risk; retaliation may instead escalate a trade war.

For every diagram: label price and quantity axes, D and the original S, add the changed supply or quota line, then mark both equilibria. State the causal direction: tariff/tighter quota → supply left → price up, quantity down; subsidy → supply right → price down, quantity up.

Choose by objective and side effect. A tariff supplies revenue but does not guarantee an import quantity; a quota fixes the limit but can create licence rents; a subsidy supports producers while using tax revenue rather than restricting imports directly.

Distinguish trade creation from trade diversion. Creation occurs when a lower-cost member replaces higher-cost domestic production; diversion occurs when a member replaces an even lower-cost non-member because the outsider still faces a barrier.

Negotiation or enforcement of agreed rules → fewer arbitrary barriers and greater predictability → lower risk and transaction costs → firms are more willing to trade and invest internationally.

Different sector structures, skills, capital, technology, infrastructure, natural resources and stages of industrialisation help explain the contrast. As an economy develops, its pattern can diversify and shift toward manufacturing and services.

The exact Question Bank has only one row for this objective, comparing a developing economy with the UK. Treat the pattern as a tendency to apply with country evidence, not a rule about every economy.

Identify the currency you have and the currency required, write the units beside the rate, choose multiplication or division so the starting unit cancels, then include the destination currency and sensible rounding.

Example: £15,000 × €1.10 per £ = €16,500. Reverse check: €16,500 ÷ 1.10 = £15,000.

For a diagram answer: name the currency priced on the vertical axis, shift only the causal curve, label D1 or S1, and mark the new exchange rate and quantity. D right or S left raises the currency's price; D left or S right lowers it.

Interest rates and speculation affect capital flows, while exports and imports affect trade-related currency flows. The final movement depends on the net size of all simultaneous demand and supply changes.

Both channels tend to worsen the current account balance: lower export receipts and higher import spending can reduce a surplus or enlarge a deficit.

The size and timing depend on price elasticity of demand, the scale and duration of appreciation, contracts, quality and non-price competitiveness. Inelastic export demand or cheaper imported inputs can weaken or partly offset the predicted effect.

Both quantity responses tend to improve the current account balance: stronger exports and weaker imports can enlarge a surplus or reduce a deficit.

Improvement is not automatic. It depends on demand elasticities, size and duration, contracts, spare capacity, quality and how much production relies on imported inputs. A higher import price can initially raise spending before quantities adjust.