Unit Overview
International Finance and Globalisation
CIE A-Level EconomicsΒ· 5 min read π 10-12% of total exam marks
1. Unit at a Glance
This unit builds sequentially from core accounting foundations to broader global economic themes. We start with how countries record international trade and financial flows in the balance of payments, then move to understanding how currencies are valued under different exchange rate regimes.
Next, we explore causes of persistent current account imbalances and policy options to correct them, before turning to the big picture of globalisation: its drivers, benefits, costs, and the role of foreign direct investment (FDI) and multinational corporations in the global economy. High-mark essay questions frequently draw connections across multiple sub-topics in this unit, so it is important to understand how concepts link together.
We cover the following core sub-topics in order:
Balance of payments
Learn the structure of current, capital and financial accounts and the balance of payments identity.
β β β± 8 min
Exchange rates
Understand how exchange rates are determined and factors that shift currency demand and supply.
β β β β± 10 min
Fixed vs floating exchange rates
Compare the relative advantages and disadvantages of fixed and floating exchange rate regimes.
β β β β± 9 min
Exchange rate systems
Explore managed floats, currency boards, dollarization and other intermediate exchange rate systems.
β β β β± 8 min
Current account imbalances and correction
Learn causes of current account deficits/surpluses and evaluate policies to correct persistent imbalances.
β β β β β± 12 min
Globalisation and its impacts
Examine the drivers of globalisation and its economic, social and environmental impacts on countries.
β β β β β± 11 min
FDI and multinational corporations
Analyze the role of FDI and MNCs and their impacts on home and host economies.
β β β β± 9 min
2. Common Pitfalls
Wrong move:
Confusing the capital account with the financial account of the balance of payments
Why:
This is a common error in multiple choice and definition questions that leads to easy lost marks
Correct move:
Remember the small capital account covers capital transfers, while the financial account records changes in cross-border asset ownership
Wrong move:
Assuming a current account deficit is always harmful to an economy
Why:
Examiners test evaluation skill, so a one-sided conclusion shows incomplete understanding
Correct move:
Evaluate the size, duration and cause of the deficit before concluding whether it is problematic
Wrong move:
Claiming depreciation will always correct a current account deficit
Why:
Candidates often forget the Marshall-Lerner condition and J-curve effect, key evaluation points
Correct move:
Always reference the Marshall-Lerner condition when evaluating the impact of depreciation on the current account
3. Quick Reference Cheatsheet
Concept | Key Summary |
|---|---|
Balance of Payments Identity | , the overall balance must always sum to zero |
Real Exchange Rate | , adjusted for differences in domestic and foreign price levels |
Marshall-Lerner Condition | Depreciation improves the current account if |
Fixed Exchange Rate Key Benefit | Reduces exchange rate uncertainty for trade and investment |
Floating Exchange Rate Key Benefit | Enables independent monetary policy and acts as an automatic economic shock absorber |
J-Curve Effect | Current account may worsen immediately after depreciation before improving over time |
Main Drivers of Globalisation | Lower trade barriers, improved transport/communications tech, reduced capital controls |
What's Next
Begin your study of this unit with the first sub-topic on the balance of payments, the core accounting framework for all international finance concepts. After completing all sub-topics in this unit, you can progress to the next unit on development economics, which builds heavily on the globalisation and FDI concepts introduced here.