International trade, globalisation and multinationals: the reasons for and effects of international trade and globalisation, the role and impact of multinational corporations, and trade barriers and exchange rates.

What this dot point is asking

WJEC Unit 4 examines international trade, globalisation and multinationals: why firms trade internationally, the effects of globalisation, the role and impact of multinational corporations (MNCs), and the influence of trade barriers and exchange rates. Strong answers weigh the opportunities of going global against the risks, and judge the impact of MNCs on host countries in a balanced way.

The answer

International trade and why firms do it

The reasons for trading internationally include:

• A larger market - far more potential customers than at home, raising sales and enabling growth.
• Spreading risk - selling in several economies reduces dependence on any one.
• Cheaper inputs or production - sourcing materials or manufacturing where it is cheaper.
• Economies of scale - larger output lowers unit costs.

Globalisation

Multinational corporations

A multinational corporation (MNC) produces and sells in more than one country. MNCs have a major impact on host countries:

• Positive: they bring investment, create jobs, transfer technology and skills, raise tax revenue and widen consumer choice.
• Negative: they may exploit cheap labour and weak regulation, harm the environment, out-compete local firms, repatriate profits to their home country, and exert significant power over governments.

The net impact depends on the host country's regulation and the firm's conduct.

Trade barriers and exchange rates

Trade barriers restrict international trade: tariffs (taxes on imports that raise their price), quotas (limits on the quantity imported) and other restrictions, often used to protect domestic industries. They can shield home firms but raise costs and prices and invite retaliation.

Exchange rates - the value of one currency in another - affect trade directly. A weaker pound makes UK exports cheaper abroad (boosting export demand) and imports dearer (raising the cost of imported inputs); a stronger pound does the reverse. Exchange-rate changes therefore swing the competitiveness and costs of firms that trade internationally.

Examples in context

Example 1. Going global for growth. A successful Welsh food brand expands by exporting to Europe and beyond, gaining access to a far larger market and exploiting economies of scale, while spreading its risk across several economies. It must manage exchange-rate risk and any trade barriers. The example shows the core benefits of international trade - a larger market, scale and risk-spreading - that drive firms to globalise.

Example 2. An MNC's mixed impact. A multinational opening a plant in a region brings investment, jobs, skills and tax revenue, a clear benefit to the local economy. But it may pay low wages, out-compete local firms and send profits back to its home country, and it holds bargaining power over the host government. The example illustrates the balanced judgement the exam wants on multinationals: real benefits alongside real risks, with the outcome shaped by regulation and conduct.

Try this

Q1. Define the term globalisation. [2 marks]

• Cue. The increasing integration and interdependence of the world's economies, driven by freer trade, better communications and transport, and the spread of multinational firms.

Q2. Explain how a fall in the value of the pound affects a UK firm that exports. [3 marks]

• Cue. A weaker pound makes the firm's exports cheaper for overseas buyers, so export demand and competitiveness rise (though any imported inputs become dearer).