International Trade & Globalisation · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 11% of your exam marks.
Exchange rate definitions, depreciation/appreciation effects on exports, imports, and inflation are increasingly examined since 2021.
This is the most-tested part of the topic. The effects are symmetrical: a depreciation does one thing, an appreciation does the opposite.
A weaker currency makes exports cheaper abroad and imports more expensive at home.
Effect on exports. A foreign buyer paying in their own currency now needs less of it to buy the same export, so the export is cheaper in foreign-currency terms and foreign demand for it rises.
Effect on imports. A domestic importer now needs more of the domestic currency to buy the same foreign good, so import prices rise at home and the quantity of imports tends to fall.
Effect on prices and inflation. Dearer imports raise the prices of imported goods and of domestic goods made with imported inputs, adding to imported cost-push inflation.
Effect on growth and employment. With exports rising and import-competing industries gaining market share, GDP growth tends to rise and unemployment in those industries tends to fall.
A stronger currency makes exports more expensive abroad and imports cheaper at home.
The effects are the mirror image of depreciation: export prices abroad rise and the quantity of exports tends to fall; import prices at home fall and the quantity of imports tends to rise; cheaper imports help to bring inflation down; growth in export industries slows and unemployment in those industries may rise.
Depreciation vs appreciation: which way round?
What comes up: short-answer and MCQ questions test whether a fall in the currency makes exports cheaper or dearer, and imports cheaper or dearer. Getting the direction backwards is the most common error.
Write: A depreciation (fall in the currency's value) makes exports cheaper for foreign buyers and imports more expensive for domestic buyers. An appreciation does the opposite. A memory aid candidates use is SPICED (Strong Pound, Imports Cheaper, Exports Dearer); reverse it for a weaker pound.
Watch out: getting the direction wrong turns every later step (current account, employment, inflation) the wrong way too, so state the direction first, then chain the reasoning.
Discuss whether a rise in the exchange rate benefits the economy (8 marks)
What comes up: an 8-mark "Discuss whether or not a rise in a country's exchange rate would benefit its economy." Both sides need developed chains, then a judgement.
Write: It might benefit: a higher exchange rate reduces import prices (1), so firms' imported raw-material costs fall (1), which can lower inflation (1); consumers can buy more imports for any given quantity of exports, raising real living standards (1). It might not benefit: a higher exchange rate raises export prices (1), so foreign demand for exports falls (1), export revenue declines (1), and growth slows while unemployment in export industries rises (1). Judgement: state which effect dominates and why, for example that it depends on the price elasticity of demand for the country's exports.
Watch out: a one-sided answer is capped below the top band. Develop each point into a chain rather than listing it.
| Depreciation (currency ↓) | Appreciation (currency ↑) | |
|---|---|---|
| Export prices abroad | Cheaper | More expensive |
| Quantity of exports | Rises | Falls |
| Import prices at home | More expensive | Cheaper |
| Quantity of imports | Falls |
| Rises |
| Inflation | Rises (imported cost-push) | Falls |
| Export-sector growth | Up | Down |
| Consumer purchasing power on imports | Down | Up |