The International Economy (AQA A Level Economics): Exam Questions

Extract B: The UK’s trade deficit

In September 2016, the UK’s trade deficit with the rest of the world widened unexpectedly. Exports fell, despite a sharp fall in the value of the pound. The trade deficit in goods alone rose to £12.7bn. The value of imports increased by £1.3bn to £38.8bn, while exports fell by £0.2bn to £26.1bn. The rebalancing of the UK economy to achieve export-led growth has not happened yet.

The disappointing trade figures suggest that the 16% fall in the value of the pound since the EU referendum in June 2016 has failed to lift exports significantly. An economist at Scotiabank, said “If we are lucky, the weak pound may boost exports, but export growth tends to be driven more by the strength of overseas demand, rather than the exchange rate.” Others point to a lack of competitiveness and low productivity as being central to the UK’s poor export performance.

In Quarter 3 of 2016, the UK economy grew much faster than many economists had initially expected, with signs that the growth had been supported by rising consumer spending. This may be one of the reasons why imports of goods have increased. A statistician at the ONS, said that “In this first full quarter since the EU referendum, there is little evidence of the lower pound feeding through into trade volumes or prices.”

In recent years, the UK’s earnings on assets overseas have fallen relative to the earnings of foreign investors in the UK. This contributed to the deterioration in the current account balance, leading to a record deficit of 5.4% of GDP in 2015. Although some argue that a current account deficit is not a problem, others point to the worryingly large and persistent nature of the deficit. The effects on employment, the need to attract inward investment and the possible negative effects on growth and living standards are among the causes for concern.

Source: News reports, 2016

Extract B describes the trade figures as ‘disappointing’.

Extract D

Extract E: US and China trade wars

The International Monetary Fund (IMF) has warned that a trade war between the US and China risks making the world a ‘poorer and more dangerous place’ and it has lowered its forecast for global growth this year and next. The IMF’s chief economist said that further trade barriers would hit households, businesses and the wider economy. Downgrades to global growth also reflected predictions of a slower expansion in the eurozone as well as problems in a number of emerging economies.

China recently announced new trade tariffs on $60bn of US goods, including products such as liquefied natural gas, produced in states loyal to the US President, Donald Trump. In a tweet, Mr Trump warned that ‘there will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted’. US tariffs on $200bn of Chinese imports came into effect in September.

The US and China’s escalation of trade tariffs is expected to hit growth in both countries in 2019, when the boost from President Trump’s sweeping tax cuts announced in 2017 will also start to fade. The IMF warned that the world faced further damage to growth if the US followed through on a threat to impose a 25% tariff on all imported cars. Additional tariffs would raise prices, hit business confidence and discourage investment. Unless world leaders respond by working together to raise living standards, improve education and reduce inequality, world development will be seriously hampered.

Extract C: Germany’s trade surplus

Germany’s surplus on the current account of its balance of payments surged to a record level in 2015, at 8.5% of GDP. It has now overtaken the Chinese surplus as the largest imbalance in the world. This imbalance is clearly causing problems inside the eurozone and globally. If the German current account is in surplus, it implies that other nations are in deficit.

Although the German government views the surplus as evidence of economic success, there is growing pressure from other countries and the European Commission for Germany to take steps to reduce the surplus. Trade deficits and surpluses may be self-correcting in a floating exchange rate system, but as Germany is part of the eurozone, its currency does not fluctuate against those of other member countries, since they all use the euro.

Germany’s surplus has been increased by low oil prices and the relatively low value of the euro. Healthy growth in other European nations has also contributed to strong demand for German exports. Whatever the reason for Germany’s surplus, the UK may only look on in envy.

Extract F: Protectionism in Brazil

Protectionism is on the rise this year, but those who support free trade say increased tariffs will lead to higher prices, less choice and lower living standards. Others maintain that protectionism can help economic development. Roberto Azevedo, Director General of the World Trade Organization (WTO), concedes that trade barriers which keep foreign rivals out will encourage domestic industries to grow.

Many countries in Latin America are in favour of tariffs to protect their infant industries. Tariffs can support the growth of domestic firms that may otherwise be crushed by foreign competition. Much of modern Brazil was built with the help of protectionist policies. Since the 1950s, foreign companies have been motivated to set up production in Brazil to avoid high tariff barriers. Government subsidies have also been used, for example, to encourage major car manufacturers, including Volkswagen, Ford, Fiat and Mercedes, to set up factories in the country. This inward investment has created jobs, growth and improved living standards for the Brazilian population.

In Brazil, many uncompetitive industries, from textiles to computers, were able to grow due to protectionist trade policies that made foreign goods too expensive to import. Current tariffs on imported trucks or buses more than double the original price. The price of an Apple iPhone in Brazil is on average 50% more than in the US, again due to tariffs. Some argue that many developed countries that now champion free trade, only achieved economic prosperity through protectionist policies. They believe free trade is a way in which developed economies keep developing nations poor.

However, the Director of the Brazilian branch of the International Chamber of Commerce (ICC), an organisation that supports free trade, argued that ‘because Brazil is such a closed economy, it ends up having very low productivity compared to more developed countries. If you are more competitive you become more productive – and for that you need to be more open and more integrated into global supply chains’.

An African Development Bank report showed that Angola received more direct foreign investment than any other African country in 2015. Angola is a less economically developed country (LEDC) that has had fluctuating economic growth in the past. Despite having suffered from a long civil war which ended in 2002, many multinational corporations (MNCs) are now investing heavily in Angola’s growing economy.

Extract B: The UK’s trade deficit

In September 2016, the UK’s trade deficit with the rest of the world widened unexpectedly. Exports fell, despite a sharp fall in the value of the pound. The trade deficit in goods alone rose to £12.7bn. The value of imports increased by £1.3bn to £38.8bn, while exports fell by £0.2bn to £26.1bn. The rebalancing of the UK economy to achieve export-led growth has not happened yet.

The disappointing trade figures suggest that the 16% fall in the value of the pound since the EU referendum in June 2016 has failed to lift exports significantly. An economist at Scotiabank, said “If we are lucky, the weak pound may boost exports, but export growth tends to be driven more by the strength of overseas demand, rather than the exchange rate.” Others point to a lack of competitiveness and low productivity as being central to the UK’s poor export performance.

In Quarter 3 of 2016, the UK economy grew much faster than many economists had initially expected, with signs that the growth had been supported by rising consumer spending. This may be one of the reasons why imports of goods have increased. A statistician at the ONS, said that “In this first full quarter since the EU referendum, there is little evidence of the lower pound feeding through into trade volumes or prices.”

In recent years, the UK’s earnings on assets overseas have fallen relative to the earnings of foreign investors in the UK. This contributed to the deterioration in the current account balance, leading to a record deficit of 5.4% of GDP in 2015. Although some argue that a current account deficit is not a problem, others point to the worryingly large and persistent nature of the deficit. The effects on employment, the need to attract inward investment and the possible negative effects on growth and living standards are among the causes for concern.

Source: News reports, 2016

An African Development Bank report showed that Angola received more direct foreign investment than any other African country in 2015. Angola is a less economically developed country (LEDC) that has had fluctuating economic growth in the past. Despite having suffered from a long civil war which ended in 2002, many multinational corporations (MNCs) are now investing heavily in Angola’s growing economy.

Extract C: ‘Make in India’ – the road to development?

India has steadily opened up its economy and reduced regulations that have sometimes held it back. More recently, India has begun to use more market-based strategies to help its development, including liberalising trade and privatisation. These may be risky strategies as India lacks the infrastructure that most of its global competitors have.

Trade reforms do appear to have produced remarkable results. India’s trade, as a percentage of GDP, has increased from 15% to 40% between 1990 and 2014, and the economy is now among the fastest growing in the world. In more recent years, the Indian government’s stand on trade and investment policy has displayed a shift from protecting producers to benefiting consumers. ‘Make in India’ is an initiative to encourage multinational companies to manufacture their products in India and shift Indian employment from the unstable primary sector to the secondary sector.

Recently, there has been a promise by foreign companies to invest $222 billion in India. When foreign companies come to a ‘Make in India’ event, they see an economy that is growing at 7% annually with a large well-educated and skilled workforce. However, problems persist with regulation and tax. In the World Bank’s Doing Business Index, which indicates how easy it is to set up and run a business, India is ranked 130th out of 189 countries. The question still remains, is the road to a more developed India one which involves the free market and liberalisation of trade, or one which involves government intervention and protectionism?

The UK has seen significant changes in its pattern of trade with the rest of the world in terms of what we trade and with whom. The UK’s current account deficit widened from £29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest annual deficit as a percentage of GDP since records began in 1948.

The UK has seen significant changes in its pattern of trade with the rest of the world in terms of what we trade and with whom. The UK’s current account deficit widened from £29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest annual deficit as a percentage of GDP since records began in 1948.

Extract A: Indicators of economic performance and living standards, selected nations, 2021

Extract C: Falling living standards in the UK?

According to the Office for Budget Responsibility (OBR), in 2022, the UK faced its biggest fall in living standards on record as the surging cost of living reduced real wages. The OBR also forecast a significant increase in unemployment.

Energy and food bills had risen dramatically due to shocks to the economy, such as labour shortages, a depreciation of the pound and the war in Ukraine. Inflation was at a 41-year high and average real household income was expected to fall by 7%, back to the level it was in 2013. The rising cost of living led to industrial action by workers trying to achieve pay increases that compensated for the rise in prices.

In response to the rise in inflation, the Bank of England increased Bank Rate. The rise in Bank Rate meant that financial institutions raised the rate of interest on mortgages. As a result, it has been forecast that house prices are likely to fall by around 9% over the next two years.

In his Autumn Statement of 2022, the UK Chancellor of the Exchequer, Jeremy Hunt, announced tax rises and cuts in public spending even though the UK economy was expected to contract in 2023. The cuts in public spending are likely to damage public services and came at a time when poverty and inequality appeared to be rising with life expectancy falling. Some have argued that tackling these issues, to prevent a further fall in living standards, is more important than introducing measures to increase productivity.

Source: News reports, 2022

Extract B: The UK’s productivity puzzle

The economist Paul Krugman once wrote that “Productivity isn’t everything, but, in the long-run, it is almost everything”. Productivity is a key determinant of living standards because it affects the amount of goods and services that can be produced, and therefore consumed, from the resources that are available. Historically, productivity has increased over time, which has contributed to real wage rises and improved living standards. Although productivity can be measured in several different ways, one common way is GDP per hour worked.

When economies move through their economic cycles, it is not unusual for productivity to fall during downturns, as happened in 2008–2009. However, the persistently low rate of growth of productivity that the UK has experienced since 2010 is unusual. Productivity growth in other nations, including Estonia and Hungary, has been much higher. The UK’s low rate of productivity growth is often referred to as ‘The UK’s productivity puzzle’. If the pre-2007 trend in productivity growth had continued, UK productivity would now be over 30% higher than it is today.

Many economists have tried to provide reasons for the productivity puzzle. Among the suggestions are low levels of investment and the impact of the financial crisis on banks’ willingness to lend to new businesses. More people working beyond normal retirement age has led to an older workforce and may have affected productivity. These factors may be relevant but they do not provide a complete explanation for the weakness in UK productivity growth.

So, what can be done to raise productivity? Investing in human capital to improve people’s skills and supporting improvements in technology should help. Creating a stable economy and effective use of the tax and benefits system are also key factors in driving productivity growth. 5 10 15 20 Source: News reports, 2022

Extract F: A period of deglobalisation?

After decades of growing integration and interdependence between nations, trade and investment flows between countries have been growing more slowly and, in some cases, falling. This process has been labelled ‘deglobalisation’ and is characterised by rising protectionism, reduced dependence on foreign imports and increased self-reliance by nations. However, could the rise in protectionism have boosted the Vietnamese economy in the short term?

The trade war between the USA and China, which started in 2018, has probably helped Vietnam. It is estimated that, in 2019, US tariffs on imports from China resulted in the US buying $31bn more imports from other low-cost Asian countries rather than China. Vietnam supplied almost half of these imports.

China’s rising labour costs, and the growing tensions between the world’s superpowers, make it easy to see why many big firms are relocating to Vietnam. Apple’s biggest suppliers, Foxconn and Pegatron, are building big factories in Vietnam, creating many jobs. Other big firms moving production from China to Vietnam include Dell, Hewlett Packard, Google and Microsoft.

Some see deglobalisation as a threat. Many nations such as Vietnam rely on international trade and investment for employment and economic growth. If other countries start to protect their economies from Vietnamese imports, this could damage the economic development of Vietnam. The slowing, or reversal, of globalisation could mean that the benefits of specialisation and foreign direct investment are lost.

Source: News reports, 2022

Over the last two centuries, international trade has grown faster than global GDP, completely transforming the world economy. Today, about one quarter of total global output is exported. Globalisation has generated gains for the UK economy but has also made it vulnerable to external shocks.

Over the last two centuries, international trade has grown faster than global GDP, completely transforming the world economy. Today, about one quarter of total global output is exported. Globalisation has generated gains for the UK economy but has also made it vulnerable to external shocks.

Extract B: Foreign direct investment in Africa

In 2018, foreign direct investment (FDI) in Africa rose to $46 billion, an 11% increase on the previous year. Morocco and Kenya saw some of the biggest rises in FDI, although many nations in Sub-Saharan and Central Africa experienced falls. Nations with high and stable growth seem better able to attract FDI inflows.

It was expected that increased rates of economic growth in Africa, along with progress towards the African Continental Free Trade Area (AfCFTA) agreement and key improvements in infrastructure, would boost FDI. Multinational corporations (MNCs) from developing countries have been expanding their activities in Africa but investors from developed countries remain key. French companies are currently the largest investors in Africa, followed by the Netherlands, the United States and the UK. Africa is a key producer of commodities and with higher demand and rising commodity prices, FDI inflows are expected to increase even further.

The growing number of special economic zones (SEZs) are also likely to help Africa attract more FDI. SEZs are areas with relaxed trade rules, little regulation and little or no tax on firms that invest in the zone. This makes locating in a SEZ very appealing to foreign firms. The creation of these zones has helped to promote development in several Asian economies and many African nations hope to make their economies more business-friendly. There are an estimated 237 SEZs in the African continent already.

FDI can have many benefits. It should create employment, boost long-run economic growth and increase exports. SEZs and improving competitiveness should contribute to the achievement of key macroeconomic objectives and the development of a country’s economy.

Source: News reports, 2020

Extract C: Problems for Africa

It has been said that ‘investing in Africa is only for the brave’. Some of the issues faced by firms include lack of infrastructure such as poor electricity and transport networks, bureaucracy, political instability and corruption. African nations’ current share of global trade is only around 3%.

Since African governments began to use SEZs in the early 1970s, they have failed to attract significant investment, to promote exports, or to create sustainable industrial development. SEZs create distortions in markets, with too much focus on short-term gains. Often, conflicts of interest occur between host governments and investors. Many MNCs, that have been attracted to Africa by the SEZs, have been accused of doing little to improve the living standards of the African people. It has been said that they do not create many jobs, they exploit workers and damage the environment. Too often, profits are not reinvested in Africa but distributed to shareholders or invested elsewhere.

Some argue that African governments should be doing more to improve the living standards of their citizens, rather than relying on foreign firms. However, high debts, high unemployment rates and low tax revenues often make it difficult for the governments of African nations to develop their economies without investment from abroad.

Source: News reports, 2020

The UK has been running a deficit on its balance of trade in goods and services since 1998. Expenditure-reducing and expenditure-switching policies can both be used to correct a trade deficit. However, the UK government has focused on other objectives rather than achieving a trade balance.

The UK has been running a deficit on its balance of trade in goods and services since 1998. Expenditure-reducing and expenditure-switching policies can both be used to correct a trade deficit. However, the UK government has focused on other objectives rather than achieving a trade balance

Over the past 20 years, the growth of world trade has averaged 6% per year, twice as fast as the growth in world output. As countries become ever more interconnected, they experience both economic opportunities and threats.

Over the past 20 years, the growth of world trade has averaged 6% per year, twice as fast as the growth in world output. As countries become ever more interconnected, they experience both economic opportunities and threats.

Extract F: Is South Korea’s miracle economic performance over?

Although growth in South Korea is forecast to be around 3% in 2019, this is far below its average rate of 7.3%, and the country finds itself with a negative output gap. Recently, exports declined for a tenth consecutive month and in September the consumer price index fell 0.4% from a year earlier. Some are wondering if South Korea’s miracle economic performance is over.

Trade ministry data showed exports in September plunged 11.7% from a year earlier. Economists said the data reinforced the view that the slump in South Korea’s trade-reliant economy would continue beyond this year, requiring the Bank of Korea to cut interest rates further. The central bank cut its base rate of interest from 1.75% to 1.50% in July 2019, the first cut in three years, as falling global demand and increasing trade tensions damaged macroeconomic performance. However, the South Korean government and central bank issued statements, saying that Asia’s fourth-largest economy would not fall into a long period of deflation.

South Korea is one of the world’s top ten exporters and its trade problems have been made worse by a number of recent events. Overseas shipments by South Korea are heavily dependent on sales of computer chips and electronic goods, which have been suffering from a fall in chip prices. South Korea also became involved in a trade war with Japan which was referred to the World Trade Organisation (WTO). Slowing growth in China, the world’s second-largest economy and South Korea’s top market for exports, also damaged trade. 1 5 10 15 Source: News reports, 2019

Since 1992, the UK has had a floating exchange rate, and between August and December 2019, the pound sterling rose by around 10%. In the recent past, several nations, such as Japan, Switzerland and China, have actively intervened to influence the value of their currencies.

Since 1992, the UK has had a floating exchange rate, and between August and December 2019, the pound sterling rose by around 10%. In the recent past, several nations, such as Japan, Switzerland and China, have actively intervened to influence the value of their currencies.