Globalisation, trade and exchange rates practice questions (A-Level Economics)

Sample questions

All 2 free A-Level Economics questions on this topic, from the free A-Level Economics Practice Paper and the free A-Level Economics Multiple Choice Questions with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 11 mark · Exchange rates
   The pound sterling depreciates significantly against the currencies of the UK's main trading partners. Assuming the Marshall–Lerner condition holds, the most likely effect is that:
   • A.
     export volumes rise and import volumes fall, improving the current account position
   • B.
     cost-push inflation falls because imported raw materials become cheaper
   • C.
     export revenue falls because UK goods now sell at lower foreign-currency prices
   • D.
     aggregate demand contracts because net exports decrease
   Show answerFrom the free A-Level Economics Practice Paper →
2. Question 21 mark · Exchange rates
   The pound rises from 1.20 US dollars to 1.32 US dollars. A UK firm exports a product priced at 50 pounds. As a result of the change in the exchange rate:
   • A.
     the product's dollar price falls from 66 to 60 dollars, making UK exports more competitive
   • B.
     the product's dollar price rises from 60 to 66 dollars, making UK exports more competitive
   • C.
     the product's dollar price rises from 60 to 66 dollars, a 10 percent appreciation that makes UK exports less competitive
   • D.
     the product's dollar price is unchanged at 60 dollars because its pound price has not changed
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →

Key terms

The definitions and formulas A-Level Economics expects for globalisation, trade and exchange rates, typeset as they appear on the paper.

Globalisation

The growing integration of economies through trade, capital flows, migration and technology. Causes: falling transport and communication costs, trade liberalisation, multinational companies and the collapse of communism. It raises growth and lowers prices while creating structural unemployment and inequality.

Comparative advantage

A country should specialise in goods it produces at a lower opportunity cost than its partners, even without an absolute advantage. The theory assumes constant returns, no transport costs and mobile factors, each a point of evaluation.

Terms of trade

The ratio of export prices to import prices as an index. An improvement means more imports per unit of exports; for developing countries dependent on primary products, the terms of trade tend to deteriorate over time.

$$\text{terms of trade} = \frac{\text{index of export prices}}{\text{index of import prices}} \times 100$$

Protectionism

Tariffs, quotas, subsidies to domestic producers and non-tariff barriers. A tariff raises the domestic price, increases producer surplus and government revenue, and reduces consumer surplus by more; the two triangles of welfare loss show the net cost.

Exchange rate systems

Floating (set by demand and supply for the currency), fixed (pegged by the central bank) and managed. Under a floating rate a depreciation makes exports cheaper and imports dearer; under a fixed rate the central bank must hold reserves to defend the peg.

Factors affecting a floating exchange rate

Relative interest rates (hot money flows), relative inflation, the current account balance, foreign direct investment, speculation and government intervention. Higher interest rates attract inflows and appreciate the currency.

Marshall-Lerner condition and the J-curve

A depreciation improves the current account only if the sum of the price elasticities of demand for exports and imports exceeds one. Elasticities are low in the short run, so the balance worsens before it improves.

$$|PED_X| + |PED_M| > 1$$

International competitiveness

The ability to sell goods and services abroad, measured by relative unit labour costs and relative export prices. It depends on productivity, wages, the exchange rate, non-price factors (quality, design) and infrastructure.

Frequently asked questions

Other A-Level Economics topics

• Nature of economics and economic methodology
• How markets work: demand, supply, elasticity
• Market failure and government intervention
• Measures of economic performance
• Aggregate demand and aggregate supply
• National income, growth and the multiplier
• Macroeconomic objectives and policies
• Business growth, market structures and the labour market
• Poverty, inequality and development
• The financial sector

All A-Level Economics topics · A-Level Economics exam guide · All free practice exams