Edexcel A-Level Economics A (9EC0) · Theme 4
Specification points
- Globalisation and its causes and impacts.
- Absolute and comparative advantage; the benefits and costs of trade.
- Protectionism; the balance of payments; exchange rates.
- International competitiveness.
Globalisation
Globalisation is the increasing integration of economies through trade, capital flows, migration and technology, driven by lower transport and communication costs, trade liberalisation and multinational companies (MNCs). It raises output and choice but can widen inequality, harm the environment and increase interdependence.
Comparative advantage
A country has a comparative advantage in a good if it can produce it at a lower opportunity cost than another. Specialising according to comparative advantage and trading raises total world output — even if one country has an absolute advantage in everything.
Gains from trade come from comparative (opportunity-cost) advantage, not absolute advantage.
Assumptions and limits: no transport costs, factor mobility, and ignoring the risk of over-specialisation.
Key definitions
| Term | Definition |
|---|---|
| Comparative advantage | Producing a good at a lower opportunity cost than others. |
| Protectionism | Restricting trade to shield domestic industry (tariffs, quotas, subsidies). |
| Exchange rate | The price of one currency in terms of another. |
| Terms of trade | The ratio of export prices to import prices. |
Protectionism and the balance of payments
- Protectionism — tariffs, quotas, subsidies and regulations. It can protect infant industries and jobs but raises prices, protects inefficiency and risks retaliation.
- The balance of payments records trade and financial flows; the current account balance depends on competitiveness, incomes and the exchange rate.
Exchange rates and competitiveness
- A depreciation makes exports cheaper and imports dearer (SPICED: Strong Pound, Imports Cheaper, Exports Dearer works in reverse), potentially improving the current account (subject to the Marshall-Lerner condition and the J-curve).
- International competitiveness depends on relative unit labour costs, productivity, exchange rates and non-price factors.
Worked example
Two countries each produce wheat and cloth. Country A gives up less wheat to make cloth than Country B, so A has a comparative advantage in cloth and B in wheat. If each specialises and trades, combined output of both goods rises and both can consume beyond their own production possibilities.
Common exam mistakes
- Confusing comparative (opportunity cost) with absolute advantage.
- Getting exchange-rate effects backwards.
- Presenting protection as costless.
Exam technique
Use opportunity-cost reasoning for comparative advantage, evaluate protection by stakeholder and retaliation, and link exchange-rate changes to the current account with the Marshall-Lerner/J-curve caveats.
Quick revision
- Gains from trade: comparative advantage (lower opportunity cost).
- Protection: tariffs, quotas, subsidies — costs and retaliation.
- Depreciation → cheaper exports, dearer imports (M-L condition).