STUDY GUIDE - IGCSE ECONOMICS

SYLLABUS AREAS D2 & D3: THE GLOBAL

ECONOMY - INTERNATIONAL TRADE,
FOREIGN EXCHANGE AND THE BALANCE OF
PAYMENTS
OBJECTIVES: After studying this section you should be able to do the
following:
1. Describe and explain the reasons why countries trade internationally.
-Allows you to obtain goods that you cant produce domestically
Obtain goods that can be produced more cheaply abroad
Improves consumers choice
Sell off unwanted commodities
2. Evaluate the arguments for and against free trade and protectionism,
outlining the main barriers to free trade that countries operate.
Advantages- choices, competition
Disadvantages- overspecialization, unemployment, environmental damage
Protectionism
When government try to restrict trade to protect their domestic industries from
cheaper imports
They use trade barriers to do this
Tariff
Making important more expensive by placing a tax
Reduces demand as people will hopefully switch to domestically produced
products. Also known as customs duties
Raise revenue for the govt

Quota
Limiting the amount that you can import into a country
Gives domestic producers more of the market

Administrative barriers
Making really tough barriers such as health and safety standards so that it is
difficult to sell abroad
Depreciate Exchange rate
Depreciating exchange rate making it cheaper to buy exports are cheaper and
imports are more expensive
3. Describe the pattern of international trade with reference to developed and
developing countries.
4. Identify the worlds major trading blocs eg NAFTA, EU and explain their
effects on world trade patterns.
5. Explain the role of the World Trade Organisation, using real world
examples.
6. Explain the structure of the balance of payments account and identify trends
in the B.O.P account for major world economies.
7. Evaluate policies designed to correct B.O.P deficits.
8. Use supply and demand theory to help explain how exchange rates are
determined in a free market.
Shows the price of one currency in terms of another
Currencies are brought and sold on the foreign exchange market
Demand of exports Increase in D for Export = Increase in demand for
currency
Inward foreign Direct Investment
Interest Rates- higher the interest rate
Speculation-most important things
Evaluate what will be happen for the currency
Supply
Demand for imports
Outwards FD1
Interest rates in others countries
Increase supply
Speculation
9. Examine the importance of price elasticity of demand for imports and
exports.
10. Analyse the effects of a change in a country`s exchange rate on its economic
performance.
11. Discuss the arguments for and against fixed and floating exchange rate
systems.

Falling exchange rate

Domestic currency becomes cheaper to buy for other country
Becomes more expensive for us to buy other countries currency
Increases demand for exports
Decrease demand for import
Rise exchange rate
Domestic currency becomes stronger . more expensive to buy fir foreign
Fixed and floating exchange rates
Float- the value of currency is allowed to float it will only change whenever cua
forces of demand and supply
Fixed- the government control the currency so that here is a maximum and
minimum value that it can rise and fall
Keep inflation low
Stablilty encourages investment
. Conflict with other objectives.
Less Flexibility

CRITICAL THINKING SKILLS

- Who gains and who loses from free trade?
- What are the best policies for reducing BOP deficits?
- Is a currency depreciation a good or bad thing?
KEY TERMS
Visible/invisible trade . Current account .
Trade surplus/deficit .Appreciation/depreciation of exchange rate .
Capital flows .Tariffs/quotas . Infant industries . Speculation .Devaluation .
References
Anderton :Units 73 to 80
Moynihan and Titley : Chapter 18

Fixed

Advantages

Disadvantages

-Reduced risk in
international trade

Less Flexibility.
Conflict with other
objective

-Keep inflation Low.

-Stability encourages
investment.

Float

Automatic balance of
payments adjustment
Flexibility

Uncertainty
Lack of investment
Speculation
Inflation