Business and the international economy

Globalisation is the increasing connection of countries with one another. They are linked through trade in goods and services, so businesses buy from and sell to other countries more easily.

Globalisation happens to the world. A business does not become globalised by opening in another country. A business that operates in several countries is a multinational company, which is a different idea.

A business can take advantage of globalisation without ever becoming a multinational.

Globalisation gives a business access to more markets. More potential customers can mean higher sales, more revenue and a bigger market share. It also spreads risk, because the business no longer relies on one market for its sales.

It can give access to cheaper or better quality raw materials and to cheaper or more skilled labour. Lower costs raise the profit margin, or allow lower prices. Lower tariffs and fewer quotas mean exports do not become dearer or limited in quantity.

Each opportunity needs a second sentence: what it leads to for the business.

The main threat is increased competition. Overseas businesses, including multinationals, can enter the home market, which could lower sales and market share.

Employees may leave if the business cannot pay as much as international competitors, which increases recruitment costs. To keep them, it may have to increase wage rates to match the pay offered by multinationals.

The question is about the business. Effects on the country or on consumers earn nothing here.

To judge whether opportunities are greater than threats, explain one opportunity and one threat. Then decide which is more important and say why. An answer must refer to both to reach the evaluation marks.

A decision with a reason beats a summary. Repeating earlier points, or adding a new one, is not evaluation. A question about 'a business' in general has no marks for application.

An import tariff is a tax on goods brought into a country. Say what it is, not why a government uses it.

A tariff raises the cost of the imported good. The business may raise its price to cover the cost, and demand may fall.

A government may introduce a tariff because it makes imports dearer than home-made goods. Home producers then become more competitive and may sell more.

An import quota is a physical limit on the number of goods that can be brought into a country. It limits quantity. It is not a tax.

A quota reduces the number of imports. A business that relies on imported materials may have to find alternative suppliers, may have less choice of materials, or may make less output.

A quota also limits a business that exports. It can sell only a limited number of goods in a country that sets one, however many customers want them. A government may introduce a quota to limit how many foreign goods come into the country.

A multinational company (MNC) operates in a number of countries. Do not confuse it with an exporter.

The main benefit is access to more markets, which may increase revenue. Selling in more than one country also spreads risk, because the business is not relying on one market for its sales.

Producing abroad can lower costs. Wages and raw materials may be cheaper, and the business can avoid tariffs and quotas. Some governments also offer grants. Economies of scale is a benefit of growth in general, not of being an MNC.

Becoming an MNC affects the stakeholders of the business. Owners and shareholders may gain if higher sales lead to higher profit. Higher profit is not certain.

For employees, new jobs are created in the countries the business moves into. The effects are not all good. Some MNCs offer low wages or poor working conditions, so employees there can lose out.

In an answer, name the stakeholder and then the effect on that stakeholder.

A country that hosts an MNC may gain jobs. More jobs could lower unemployment.

The government gains tax revenue, which gives it funds to improve health, education and infrastructure. The MNC may also bring investment, create exports and offer consumers increased choice.

Always say which benefit you mean and how it helps the country. "Economic growth" alone is too vague.

An MNC brings increased competition. Local businesses may have reduced sales and can be forced to close.

The repatriation of profits means profit is sent back to the home country, so there is less tax revenue for the host country. An MNC may also try to avoid or reduce tax paid in the host country.

Often only unskilled jobs are created, with low wages. The MNC may also use up scarce resources.

An exchange rate is the value of one country's currency in terms of another. It compares the value of each currency. It is not the goods and services that pass between two countries.

An appreciation is a rise in the value of a currency. A depreciation is a fall in the value of the currency. Do not define it as 'a fall in the exchange rate': that only repeats the term.

The syllabus does not assess exchange rate calculations. Questions ask for the direction of the effect and the reason for it.

An importer buys products from other countries. When the home currency appreciates, imports become cheaper. Costs of production fall, so profit can rise. The business may cut its prices and sell more.

When the home currency depreciates, imports become more expensive. Costs rise. The business may raise its prices, which may lower demand, or accept a lower profit margin.

An exporter sells products to customers in other countries. When the home currency appreciates, its exports become more expensive for overseas buyers, so the business is less competitive abroad. Overseas sales and revenue may fall.

When the home currency depreciates, exports are cheaper abroad and the business is more competitive. Overseas demand may rise.

Say whether you mean imports or exports. 'Prices would fall' does not say which.

In an 'explain two ways' question each way earns one mark for the point, one for a reference to the business and one for the explanation. The explanation is a chain: the exchange rate changes a price or a cost, which changes demand, which changes revenue and profit. Name every link.

For an importer the chain runs through costs. Dearer imports raise costs, which lowers the profit margin or leads to a price rise. A price rise may lower demand.

For an exporter the chain runs through competitiveness and sales. A change in sales changes revenue.

Read the case first. Does the business import, export or both? A business that sells only at home is not affected as an exporter. An export answer for it does not use the case.

The size of the effect depends on how much of the business is exposed. A business that imports most of its inputs feels a depreciation strongly. One that exports a small share of its sales gains little from it. The business may be able to buy from local suppliers, but quality may be lower.

A 'justify' question needs a decision and a reason for it.