Business and the international economy

Q: Define the term 'import quota'. [2]

A limit (1) on the quantity/amount (1) of a good that can be imported (1) into a country. (Max 2 marks)

Q: Explain two reasons why a government might introduce an import tariff. [4]

To protect domestic industries from foreign competition by making imports more expensive, encouraging consumers to buy local goods. (2 marks) To generate government revenue from the tax collected on imported goods. (2 marks)

Q: Explain two benefits to a business of becoming a multinational company. [4]

Access to new markets: The business can sell its products to more customers, increasing total sales and revenue. (2 marks) Lower production costs: The business can access cheaper labour or raw materials in the host country, reducing average costs and increasing profit margins. (2 marks)

Q: Evaluate whether the benefits of globalisation for a business outweigh the threats. [6]

Benefits: Access to larger markets increases sales potential; risk is spread across different economies. Threats: Increased competition may reduce market share; cultural differences may lead to marketing failures. Judgement: For a large business with strong brand recognition, benefits likely outweigh threats because it can leverage economies of scale. However, for a small business, the threat of being outcompeted by global giants is significant. The outcome depends on the business's size and resources.

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Globalisation: Concept and Causes

Globalisation is the process by which businesses or other organisations develop international influence or grow. It involves the increasing integration of economies, cultures, and populations due to cross-border trade in goods and services, technology, and flows of investment, people, and information.

Why is globalisation happening?

Technological advances: Improvements in transport (container shipping, air freight) and communication (internet, digital platforms) have reduced the cost and time of doing business across borders.
Trade liberalisation: Governments have reduced barriers to trade through agreements (e.g., WTO, regional free trade areas), lowering tariffs and quotas.
Market saturation: Businesses in developed countries seek new markets as domestic markets become saturated.
Cost efficiencies: Access to cheaper labour and raw materials in developing countries allows businesses to reduce production costs.

Import Tariff

An import tariff is a tax imposed by a government on goods imported into the country. It is designed to make imported goods more expensive compared to domestic products, thereby protecting local industries.

Import Quota

An import quota is a physical limit on the quantity of a specific good that can be imported into a country during a given period. Unlike tariffs, quotas do not generate government revenue directly but restrict supply.

Government Intervention: Tariffs and Quotas

Why governments introduce tariffs:

Protect infant industries: New domestic industries need protection from established international competitors until they become efficient.
National security: Protecting industries vital for national defence (e.g., steel, food production).
Revenue generation: Tariffs provide income for the government.
Retaliation: Responding to unfair trade practices by other countries.

Why governments introduce quotas:

Control supply: To prevent a flood of cheap imports that could destroy domestic industries.
Balance of payments: To reduce the volume of imports and improve the country’s balance of payments position.
Protect jobs: By limiting foreign competition, domestic firms can maintain employment levels.

⚠︎ Confusing Tariffs and Quotas

Mistake: Students often define a tariff as a limit on quantity or a quota as a tax.
Correction: Remember: Tariff = Tax (cost-based); Quota = Quantity (limit-based). A tariff raises the price; a quota restricts the amount available.

Multinational Corporations (MNCs): Benefits to Business

A multinational corporation (MNC) is a business that operates in its home country and at least one other country. Businesses become multinational to gain specific advantages:

Access to new markets: Expanding sales base increases total revenue and market share.
Economies of scale: Larger production volumes lower average costs per unit.
Risk spreading: If demand falls in the home market, profits from foreign markets can offset losses.
Lower costs: Access to cheaper labour, raw materials, or land in host countries reduces production costs.
Avoiding trade barriers: Producing locally within a country avoids tariffs and quotas that would apply to exports.

MNCs: Impact on Stakeholders

When a business becomes an MNC, it affects various stakeholder groups differently. It is crucial to distinguish between benefits to the business and impacts on stakeholders.

1. Shareholders:

Impact: Generally positive if the expansion increases overall profitability. They may receive higher dividends or see an increase in share value due to diversified revenue streams.
Risk: If the MNC fails in a new market, losses can reduce shareholder returns.

2. Consumers (in Host Country):

Positive Impact: Increased choice of products and potentially lower prices due to competition with local firms or economies of scale.
Negative Impact: If the MNC becomes a monopoly, it may raise prices. Local consumers may lose access to traditional local goods.

3. Employees (in Host Country):

Positive Impact: Creation of new jobs and potentially higher wages/standards if the MNC offers better conditions than local firms.
Negative Impact: Jobs may be low-skilled or poorly paid if the MNC exploits cheaper labour regulations. Job security may be threatened if operations are moved elsewhere later.

4. Local Government (in Host Country):

Positive Impact: Increased tax revenue from corporate profits and employee income taxes. Infrastructure development may occur.
Negative Impact: If the MNC repatriates (sends back) most of its profits to its home country, the host government receives less long-term economic benefit.

Exchange Rates: Depreciation and Appreciation

The exchange rate is the price of one currency in terms of another.

Depreciation: The value of a country’s currency falls relative to another currency. It buys less foreign currency than before.
Appreciation: The value of a country’s currency rises relative to another currency. It buys more foreign currency than before.

Note: These changes are determined by market forces in a floating exchange rate system.

Exchange Rate Effects on Businesses

For Exporters:

Depreciation: Exports become cheaper for foreign buyers. This increases competitiveness, leading to higher demand, sales, and revenue.
Appreciation: Exports become more expensive for foreign buyers. This reduces competitiveness, leading to lower demand, sales, and revenue.

For Importers:

Depreciation: Imports become more expensive. Costs of raw materials or components rise, reducing profit margins unless prices are passed on to consumers.
Appreciation: Imports become cheaper. Costs fall, increasing profit margins (if prices stay constant) or allowing the business to lower selling prices to gain market share.

⚠︎ Confusing Exchange Rate Effects

Mistake: Stating that depreciation makes imports cheaper or appreciation makes exports cheaper.
Correction: Remember the logic: If your currency is weaker (depreciated), foreign money buys more of your goods (exports cheaper), but your money buys less foreign goods (imports dearer). The opposite applies to appreciation.

Justifying Decisions in Essay Questions

Context: When asked to justify which benefit of globalisation or MNC expansion is 'most important' (e.g., 6-mark or 12-mark questions).
Why examiners accept this: Examiners look for a clear link between the business context and the outcome. A justification must explain why one factor outweighs another based on the specific case study data.
Example: 'The most important benefit is risk spreading. Although accessing new markets increases revenue, the home market is in recession (as shown in Appendix 1). Therefore, relying solely on the home market would be catastrophic. Spreading risk ensures survival, which is more critical than short-term profit growth.'
Strategy: Always use a 'Because... therefore...' structure linked to the case study facts.

Defining Economic Terms Precisely

Context: Short answer questions asking for definitions (e.g., 'Define import tariff').
Why examiners accept this: Partial marks are awarded for key components. A full definition requires the object (tax/limit) and the target (imports).
Example: For 'import tariff', acceptable phrases include: 'A tax placed on imported goods' or 'A charge imposed by the government on goods entering the country'. Avoid vague terms like 'a cost of trading' without specifying it is a tax on imports.

Practice Questions

Define the term 'import quota'. [2]

A limit (1) on the quantity/amount (1) of a good that can be imported (1) into a country. (Max 2 marks)

Explain two reasons why a government might introduce an import tariff. [4]

To protect domestic industries from foreign competition by making imports more expensive, encouraging consumers to buy local goods. (2 marks)
To generate government revenue from the tax collected on imported goods. (2 marks)

Explain two benefits to a business of becoming a multinational company. [4]

Access to new markets: The business can sell its products to more customers, increasing total sales and revenue. (2 marks)
Lower production costs: The business can access cheaper labour or raw materials in the host country, reducing average costs and increasing profit margins. (2 marks)

Explain how a depreciation of the home currency might affect a business that imports raw materials. [4]

Depreciation means the home currency is worth less against foreign currencies. This makes imports more expensive (1). The cost of buying raw materials will increase (1). This will likely reduce profit margins (1) unless the business can pass the higher costs on to customers by raising prices (1).

Evaluate whether the benefits of globalisation for a business outweigh the threats. [6]

Benefits: Access to larger markets increases sales potential; risk is spread across different economies.
Threats: Increased competition may reduce market share; cultural differences may lead to marketing failures.
Judgement: For a large business with strong brand recognition, benefits likely outweigh threats because it can leverage economies of scale. However, for a small business, the threat of being outcompeted by global giants is significant. The outcome depends on the business's size and resources.