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 rule is symmetrical: depreciation does X; 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 exported good. The export becomes cheaper in foreign-currency terms, so foreign demand rises. Export revenue (in domestic currency) typically rises, and export-industry employment grows.
Effect on imports. An importer pays in foreign currency. To buy the same foreign good, the domestic firm or consumer now needs more of the domestic currency. Import prices rise in the domestic market, so the quantity of imports tends to fall.
Effect on inflation. Higher import prices feed into the prices consumers pay for imported goods and for domestic goods that use imported inputs. This is imported cost-push inflation (topic 13).
Effect on the current account. With exports rising and imports falling, the current account tends to improve. (This holds only if the combined price elasticity of exports and imports is greater than one, known as the Marshall-Lerner condition, which is usually true in the medium term but not always in the short run.)
Effect on growth and employment. Export industries grow; import-competing domestic industries gain market share. GDP growth typically rises, and unemployment falls.
Effect on living standards. Mixed. Consumers face higher prices for imports (a fall in real living standards). Workers in export industries see employment and wage gains.
A stronger currency makes exports more expensive abroad and imports cheaper at home.
The effects are the mirror image of depreciation.
Effect on exports. Foreign buyers now need more of their own currency to buy the same exported good. Exports become more expensive in foreign-currency terms; foreign demand falls. Export revenue tends to fall.
Effect on imports. Importers need less domestic currency to buy the same foreign good. Import prices fall; quantity of imports rises.
Effect on inflation. Cheaper imports lower the domestic price level. Appreciation helps to fight imported inflation.
Effect on the current account. Exports fall and imports rise; the current account tends to worsen.
Effect on growth and employment. Export industries shrink; import-competing industries lose market share. Growth slows; unemployment in export sectors rises.
Effect on living standards. Consumers benefit from cheaper imports. Workers in export sectors may suffer job losses.
| 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 |
| Current account | Improves (if M-L holds) | Worsens |
| Export-sector growth | Up | Down |
| Consumer purchasing power on imports | Down | Up |