A global perspective.

HookThe $6.50 iPhone

DataGlobalisation — the box, the map and who trades with whom

Globalisation is the deepening integration of economies through trade in goods and services, flows of capital and labour, and the spread of technology — with multinational corporations as the main carriers. Edexcel wants causes, and the best one is embarrassingly physical: the shipping container. In 1956, loading loose cargo onto a ship cost about $5.86 a tonne; Malcom McLean's steel box cut that to roughly 16 cents. Add falling tariffs (average duties on manufactures in rich countries dropped from around 40% after 1947 to under 5% through GATT and then the WTO), collapsing communication costs, the fall of communism, and China's WTO accession in December 2001, and world trade rose from about a quarter of world GDP in 1970 to roughly 60% by 2008 — where it has plateaued since, a stall some economists call 'slowbalisation'.

Impacts split by actor, and the exam rewards you for picking sides precisely. Consumers gained variety and lower prices; firms gained fifty-country supply chains and vast new markets; low-cost economies gained manufacturing employment on an unprecedented scale. The losers were concentrated: manufacturing fell from roughly a third of UK jobs in the early 1970s to about 8% today, and the towns that lost it did not smoothly reallocate. Governments face tax competition from footloose MNCs; the environment absorbs the transport emissions.

The pattern of trade shifted with it. China's share of world goods exports went from about 4% in 2001 to roughly 15% two decades later; trade between developing countries grew faster than trade with the old industrial core; and the UK's own exports are now more than half services — finance, law, education — which is why British trade policy obsesses over services access, not just tariffs on goods.

ModelComparative advantage — why 'worse at everything' still trades

Absolute advantage means producing more output from the same resources. Comparative advantage — Ricardo's deeper idea — means producing at a lower opportunity cost. The punchline: even a country with an absolute advantage in nothing gains from trade, provided opportunity costs differ, because world output rises when each country specialises where it sacrifices least.

State the assumptions, because the evaluation marks live there: two countries and two goods, constant returns to scale, no transport costs, factors mobile within countries and immobile between them. Relax them and the doctrine bends. Transport costs and tariffs can swamp small opportunity-cost differences; increasing returns mean advantage can be created rather than inherited (South Korea had no natural comparative advantage in semiconductors — it built one); and specialising hard on one export leaves an economy naked against price shocks, which is the whole story of commodity dependence in 4.3. Finally, who captures the gains from trade depends on where the terms of trade settle between the two countries' opportunity-cost ratios — the hinge into the next block.

ModelTerms of trade — the price of what you sell in terms of what you buy

The terms of trade index = (index of export prices ÷ index of import prices) × 100. A rise is an 'improvement': each unit of exports now buys more imports. Whether an improvement is good news depends entirely on its cause. If export prices rose because world demand for your products boomed, national income rises with them. If they rose because your inflation is out of control, your exporters are being priced out of world markets and the 'improvement' is a symptom of failure.

For developing economies the terms of trade are destiny. The Prebisch–Singer hypothesis argues that primary-product exporters face long-run deterioration, because demand for manufactures and services grows faster than demand for raw materials as world incomes rise — income elasticity from Theme 1 paying rent in Theme 4. And commodity prices are savagely volatile in the short run: Brent crude fell from $115 a barrel in June 2014 to $28 by January 2016. Nigeria, then earning around nine-tenths of its export revenue from oil, watched its terms of trade collapse, devalued the naira, and in 2016 fell into its first recession in a quarter of a century. The same mechanism runs in reverse: Australia's terms of trade surged through China's iron-ore boom, and its national income grew faster than its output for a decade.

MechanismTrading blocs, the WTO and what protection really costs

Integration comes on a ladder. A free trade area removes tariffs between members but leaves each with its own external policy (USMCA). A customs union adds a common external tariff — the EU's core. A common (single) market adds free movement of labour and capital plus shared regulation; the EU single market is the deepest attempt ever made. A monetary union adds a shared currency (20 EU members use the euro). Judge any bloc with two concepts: trade creation (tariff removal shifts purchases from a dearer domestic producer to a cheaper member — a welfare gain) and trade diversion (the common external tariff shifts purchases from the cheapest world producer to a dearer member — a welfare loss). The WTO, with over 160 members, polices the multilateral alternative through non-discrimination rules and dispute settlement, but its Doha round stalled years ago, and regional blocs cutting their own deals sit in permanent tension with it.

Protectionism's toolkit: tariffs, quotas, export subsidies and non-tariff barriers (standards, licensing, local-content rules). The stated reasons — infant industries, anti-dumping, saving jobs, strategic security — earn knowledge marks; the analysis marks come from the tariff diagram. A tariff raises the domestic price, so consumer surplus shrinks by four areas: one transfers to domestic producers, one becomes government revenue, and two triangles simply vanish — deadweight loss.

The empirics are brutal and quotable. When the US imposed a 25% tariff on steel in 2018, the mills it protected employed about 140,000 Americans, while the industries that buy steel employed millions now facing higher input costs. The same year's washing-machine tariff raised US washer prices by around 12% and created roughly 1,800 factory jobs — at a consumer cost economists estimated at about $815,000 per job per year, many times what any of those workers earned.

MechanismCurrencies, the balance of payments and competitiveness

The balance of payments always balances: a current account deficit (trade in goods and services, primary income from overseas assets, secondary income transfers) is mirrored by net inflows on the capital and financial accounts — foreigners buying your assets or lending to you. The global problem is persistent imbalances: Germany's current account surplus reached almost 9% of GDP in 2015, China's touched 10% before 2008, and the US has run deficits for decades. Corrections come in three flavours — expenditure-switching (depreciation, tariffs), expenditure-reducing (tighter fiscal or monetary policy squeezing import demand), and supply-side reform to rebuild competitiveness — each hurting a different group, which is your evaluation.

Exchange rate systems range from free floats (sterling, the dollar) through managed floats to hard pegs: Hong Kong has held its dollar between 7.75 and 7.85 to the US dollar since 1983. Vocabulary is marked: market-driven falls and rises are depreciation and appreciation; changes to a peg are devaluation and revaluation. A depreciation makes exports cheaper abroad and imports dearer at home, but it improves the current account only if the Marshall–Lerner condition holds — the price elasticities of demand for exports and imports must sum to more than 1 — and even then only after the J-curve: in the first months, contracts and habits keep volumes fixed, so the deficit widens before it narrows.

Underneath sits international competitiveness, measured by relative unit labour costs and relative export prices, driven by productivity, wage growth, investment and non-price quality. Germany held unit labour costs almost flat through the 2000s while southern Europe's rose 20–30% — and inside a currency union nobody could devalue, which is the eurozone crisis in one sentence. The UK's version is the productivity puzzle: output per hour grew about 2% a year before 2008 and roughly 0.5% a year since — a competitiveness problem no exchange rate can fix.

DataPoverty and inequality — the Lorenz curve and who gets what

Absolute poverty means income below a fixed subsistence line — the World Bank's is $2.15 a day at 2017 purchasing power parity. Relative poverty is defined against your own society: in the UK, households below 60% of median income. The distinction drives everything. Absolute poverty has collapsed — from about 38% of humanity in 1990 to under 9% by 2019, with China alone lifting roughly 800 million people over the line — while relative poverty in rich countries barely moves, because the line rises with the median. Around one in five UK households falls below it after housing costs.

Inequality needs two more distinctions. Income is a flow; wealth is a stock — and wealth is always distributed more unequally, because it compounds and is inherited. The UK's income Gini is about 0.35, but its wealth Gini is around 0.6, with the top tenth holding over 40% of total wealth. The Lorenz curve plots cumulative population share against cumulative income share; the Gini coefficient is the area between the curve and the 45° equality line as a fraction of the whole triangle below it — 0 is perfect equality, 1 is one person holding everything. Scandinavian economies and Slovakia sit near 0.25; South Africa, the world's most unequal major economy, near 0.63.

The spec asks something sharper than measurement: is inequality inevitable in a market economy? Some of it is functional — wage differentials are the price signals that pull labour into scarce skills, and profit is the return that makes risk-taking worth it. The live debate is about degree and direction: Kuznets predicted inequality would fall as economies mature, but in most advanced economies it has risen since 1980, driven by technology's skill premium, a globalised labour supply and lightly taxed returns on capital.

ModelDevelopment — measuring it, what blocks it, what works

Growth is more output; development is more capability — health, education, real choices. The Human Development Index scores each country as the geometric mean of three indices: life expectancy at birth, schooling (mean years adults actually received plus expected years for today's children), and GNI per head at purchasing power parity. Switzerland tops the table at 0.967; Somalia and South Sudan sit near 0.38; the UK scores about 0.94. The HDI's blind spots are the standard evaluation: it ignores distribution, gender gaps and the environment — hence the inequality-adjusted HDI and the Multidimensional Poverty Index, which counts concrete deprivations such as electricity, sanitation and school attendance. Growth without development is a real syndrome: Equatorial Guinea's oil pushed income per head towards European levels in the 2000s while life expectancy stayed near 60.

Barriers to development cluster into traps. Primary product dependency: copper is around 70% of Zambia's export earnings, so the terms-of-trade block above is Zambia's weather report — and Prebisch–Singer says the climate is worsening. The savings gap: households too poor to save starve firms of investable funds. Add the foreign exchange gap, capital flight, weak property rights and corruption (assets that cannot be collateralised are dead capital), missing infrastructure, thin human capital, heavy debt service, and geography — much of sub-Saharan Africa is landlocked, and crossing a border can cost more than crossing an ocean.

Strategies divide into market-led and state-led, and the exam wants you to weigh specific ones, not recite the list. Market-led: trade liberalisation and FDI promotion (Samsung alone generates about a fifth of Vietnam's exports), microfinance (Grameen Bank lends overwhelmingly to women), privatisation, floating exchange rates. State-led: infant-industry protection, public infrastructure, human capital investment, buffer stocks. Others: industrialisation out of the Lewis two-sector model, tourism, fair trade schemes, overseas aid and debt relief — the HIPC initiative wrote off over $100 billion for 37 countries — with the World Bank lending for development projects and the IMF rescuing balance-of-payments crises, usually with conditions attached. The killer comparison: South Korea and Ghana had similar incomes per head in 1960; Korea's export discipline, land reform and ferocious education spending have made it roughly fifteen times richer today.

MechanismFinancial markets — the plumbing and the leaks

Financial markets do five jobs the spec names: they channel household saving into lending to businesses and consumers; they run the payments system that lets goods and services be exchanged at all; they let firms raise capital in equity and bond markets; they provide forward markets so a Kenyan flower exporter can lock in today's euro price for next month's delivery; and they price risk. When they work, saving becomes investment and growth. When they fail, the failure is systemic — which is why this is a market-failure topic, not just a finance topic.

Each failure mode has a 2008 exhibit. Asymmetric information: lenders knew less than borrowers about repayment prospects, and by the mid-2000s American 'self-certified' mortgages required no proof of income at all. Speculation and market bubbles: US house prices roughly doubled between 2000 and 2006 on the belief they could not fall; when they fell about 30%, the securities built on them collapsed too, and in September 2007 Northern Rock suffered the first run on a British bank since 1866. Moral hazard: institutions judged too big to fail took risks whose downside belonged to taxpayers — the UK put £45.5 billion into RBS for what became an 84% stake. Market rigging: traders at major banks colluded to fix LIBOR, the benchmark behind trillions of pounds of contracts; Barclays alone paid £290 million in fines in 2012. And negative externalities: the crash cost the UK over 6% of GDP peak-to-trough, paid mostly by people who had never traded a derivative.

Central banks exist to manage exactly this. The Bank of England sets monetary policy — Bank Rate 0.5% in 2009, 0.1% in 2020, then 5.25% by August 2023 against CPI inflation that had peaked at 11.1%, with quantitative easing peaking at £895 billion of asset purchases. It acts as lender of last resort on Bagehot's 1873 rule: lend freely, at a penalty rate, against good collateral. It is banker to the government. And since 2013 it regulates the banks through the Prudential Regulation Authority and Financial Policy Committee: retail banking ring-fenced from investment banking, annual stress tests, and capital requirements roughly triple their pre-crisis levels.

DataPublic spending and taxation — the size and shape of the state

Distinguish three kinds of public expenditure: current spending (nurses' wages, medicines), capital spending (the hospital itself), and transfer payments (pensions, benefits — redistribution rather than output, so they do not enter G in aggregate demand). The state's size varies enormously and the reasons are analysable: France spends about 58% of GDP, the UK around 45%, Singapore under 20% — differences driven by demographics, income levels (demand for state services rises with income) and political choices about collective insurance versus self-provision. High spending can crowd out private activity — government borrowing competing funds away and bidding up interest rates — or crowd it in, when public infrastructure raises private returns; which dominates depends on how much spare capacity the economy has, your standard evaluation hinge.

Taxes are progressive (the average rate rises with income — UK income tax runs to 45%), proportional, or regressive (the average rate falls as income rises — VAT and duties take a larger share of a poor household's income). Edexcel examines the effects of changing them across seven registers: work incentives, tax revenues, income distribution, real output and employment, the price level, the trade balance and FDI flows. The Laffer curve formalises the revenue question — beyond some rate, higher rates shrink the base — and the UK ran the experiment: the 50p top rate of 2010 was cut to 45p in 2013 after HMRC concluded it raised far less than forecast as taxable incomes shifted, though how much less is still argued about. On the price level: the January 2011 VAT rise from 17.5% to 20% fed straight into CPI. On FDI: Ireland's 12.5% corporation tax pulled in the European headquarters of much of Silicon Valley — so much booked profit that Irish GDP jumped 26% in 2015 on paper — a race to the bottom the new 15% global minimum tax is designed to floor.

MechanismDeficits, debt and policy when shocks cross borders

A fiscal deficit is a flow — this year's borrowing. The national debt is a stock — all past borrowing not yet repaid. Halving the deficit still grows the debt. Split deficits into cyclical (recession shrinks receipts and swells benefit spending, then recovery reverses it) and structural (persists at full employment — the part growth alone cannot close). UK public sector net debt was about 35% of GDP in 2007 and roughly 100% by 2023 — the footprint of two once-a-century shocks. Whether that matters depends on arithmetic examiners love: the interest burden (UK debt interest hit about £111 billion in 2022–23, swollen because a quarter of gilts are index-linked to inflation), who holds the debt and in which currency, and growth versus interest rates. Japan carries debt around 260% of GDP cheaply, borrowed in yen largely from its own savers; Greece, unable to print its own currency, saw revealed deficits near 15% of GDP in 2009 send bond yields above 30% and force three bailouts and, in 2012, the largest sovereign debt restructuring in history.

The final leaf is the synoptic one: using Theme 2's toolkit — fiscal, monetary, exchange rate and supply-side policies, plus direct controls — on problems that arrive from abroad. In 2009 the G20 answered a global crash with coordinated stimulus and $1.1 trillion of support routed largely through the IMF. In 2020 the UK's furlough scheme spent about £70 billion protecting 11.7 million jobs from a shock no domestic policy caused. In 2022 the Federal Reserve's rate rises strengthened the dollar and helped push dollar-indebted Sri Lanka into its first ever default. And the spec names the policymaker's three permanent problems: imperfect information (output gaps are estimates; data get revised), risk and uncertainty (no model priced a pandemic), and external shocks that domestic policy cannot prevent — only absorb.

VocabularyKey terms the mark scheme pays for

TrapsMisconceptions that cost marks

ExamWhat examiners want