AQA GCSE Economics: International trade, the UK and exchange rates (8136) – Revision Notes

These notes condense sections 3.2.4.1 Why countries trade and the importance of international trade to the UK and 3.2.4.2 Exchange rates of the AQA GCSE Economics (8136) specification for first teaching from September 2017. The specification has no tiers. The current account is in the balance of payments and distribution of income revision notes, and demand and supply diagrams in the demand and supply revision notes. Next: free trade and globalisation. Course links: AQA GCSE Economics hub, checklist and free diagnostics. Worked-example figures are invented unless a real UK fact is stated.

Part A: Why countries trade (3.2.4.1)

Key terms

Term	Meaning
Exports	Goods and services produced in the UK and sold to buyers abroad (money flows in)
Imports	Goods and services produced abroad and bought by UK buyers (money flows out)
Specialisation	A country concentrating on producing what it is relatively good at, and trading for the rest
Global interdependence	Countries relying on each other for goods, services, markets, investment and supply chains

Why trade matters to economies

• Different resources: countries have different climates, natural resources, skills and capital. The UK cannot grow bananas or mine much of the metal it uses, so it imports them.
• Specialisation: each country can focus on what it produces most efficiently, so total world output rises.
• Lower prices and more choice for consumers.
• Bigger markets for firms, which allow economies of scale and lower average costs.
• Competition from foreign firms pushes domestic firms to become more efficient and innovative.
• Jobs and income in exporting industries, and tax revenue for the government.

The UK’s exports and imports

UK exports	UK imports
Services, especially financial, insurance and other business services, which make up about half of UK exports	Machinery and electrical goods
Machinery, including aircraft engines	Cars and other vehicles
Cars	Fuels such as gas and oil
Medicines and other chemicals	Food
Precious metals and fuels	Clothing and consumer electronics

• The UK usually has a deficit on goods and a surplus on services.
• The European Union, as a group, is the UK’s largest trading partner. The USA is the largest single country for UK exports.

Consequences of global interdependence for the UK

Advantages	Risks
Access to cheaper goods and inputs	A recession abroad cuts demand for UK exports, so output and jobs fall
Large export markets for UK firms	Problems in supply chains abroad can cause shortages and price rises (as in 2021–22)
Foreign investment and jobs in the UK	Rises in world energy and food prices feed into UK inflation
Shared technology and ideas	UK firms can lose out to cheaper foreign producers

Calculations and data

1. Shares. Total UK exports are £800bn, of which services are £420bn. Services’ share = 420 ÷ 800 × 100 = 52.5%.

2. Openness to trade. Exports £800bn and imports £850bn in an economy with GDP of £2,500bn. Trade as a share of GDP = (800 + 850) ÷ 2,500 × 100 = 66%.

3. Change over time. Exports to a country rise from £40bn to £46bn: (46 − 40) ÷ 40 × 100 = 15% growth.

Part B: Exchange rates (3.2.4.2)

Key terms

Term	Meaning
Exchange rate	The price of one currency in terms of another, for example £1 = $1.25
Floating exchange rate	A rate set by the demand for and supply of the currency, as for the pound
Appreciation	A rise in the value of a currency: each pound buys more foreign currency
Depreciation	A fall in the value of a currency: each pound buys less foreign currency

How the rate is determined: demand and supply of pounds

Demand for pounds comes from	Supply of pounds comes from
Foreign buyers of UK exports	UK buyers of imports
Foreign tourists visiting the UK	UK tourists going abroad
Foreign firms investing in the UK	UK firms investing abroad
Foreign savers attracted by higher UK interest rates	UK savers moving money abroad
Speculators who expect the pound to rise	Speculators who expect the pound to fall

• On a diagram, the price is the exchange rate (for example $ per £) and the quantity is pounds traded.
• More demand for pounds (demand shifts right) → the pound appreciates.
• More supply of pounds (supply shifts right) → the pound depreciates.
• Example: a rise in UK interest rates attracts foreign savers, demand for pounds rises, and the pound appreciates.

UK examples. After the EU referendum in June 2016 the pound fell by more than 10% against the US dollar within weeks. In September 2022, after a mini-budget of unfunded tax cuts, it fell to a record low against the dollar.

Effects of a change in the exchange rate

Memory aid: SPICED, Strong Pound, Imports Cheap, Exports Dear. A weak pound does the opposite.

Group	Pound appreciates (strong)	Pound depreciates (weak)
UK consumers	Imported goods and holidays abroad are cheaper	Imports and holidays abroad dearer
UK exporters	Goods dearer abroad, so they may sell less	Goods cheaper abroad, so sales may rise
UK firms using imported materials	Costs fall	Costs rise, which may push up prices
UK firms competing with imports	Face cheaper foreign rivals	Imports dearer, so they gain sales
Inflation	Tends to fall (cheaper imports)	Tends to rise (dearer imports)
Current account	May worsen	May improve, if demand responds

Calculations you must be able to do

1. Converting prices. At £1 = $1.25:

• A UK good priced at £40 costs 40 × 1.25 = $50 in the USA.
• A US good priced at $500 costs 500 ÷ 1.25 = £400 in the UK.

2. After a depreciation to £1 = $1.10:

• The £40 UK good now costs 40 × 1.10 = $44: cheaper for US buyers.
• The $500 US good now costs 500 ÷ 1.10 = £454.55: dearer for UK buyers.

3. Size of the change. From $1.25 to $1.10 is a fall of 0.15 ÷ 1.25 × 100 = 12% in the value of the pound.

Rule: going from pounds to dollars, multiply by the rate; going from dollars to pounds, divide.

Exam traps

• A “strong” pound is not always good: it hurts exporters and firms competing with imports.
• A depreciation helps exporters only if foreign buyers respond to lower prices, and it can raise UK inflation.
• When the pound rises, foreign currencies fall in pound terms. Check which way round the rate is written.
• UK tourists going abroad supply pounds; foreign tourists coming to the UK demand pounds.

Quick self-test

1. Give three benefits of international trade.
2. Name two main types of UK export.
3. What is global interdependence? Give one risk it brings the UK.
4. Define an exchange rate.
5. Give two sources of demand for pounds.
6. What happens to the pound if UK interest rates rise? Why?
7. At £1 = €1.20, how much does a £30 UK good cost in euros?
8. At £1 = €1.20, how much does a €90 French good cost in pounds?
9. The pound depreciates. What happens to the price of UK exports abroad?
10. Who loses when the pound appreciates?

Answers

1. Any three: access to resources not found at home, specialisation, lower prices, more choice, bigger markets and economies of scale, more competition.
2. Any two: financial and business services, machinery (including aircraft engines), cars, medicines and chemicals.
3. Countries relying on each other for goods, markets and supply chains. Risk: for example, a recession abroad cuts UK exports and jobs.
4. The price of one currency in terms of another.
5. Any two: foreign buyers of UK exports, foreign tourists, foreign investors, foreign savers, speculators.
6. It tends to appreciate, because higher returns attract foreign savings, raising demand for pounds.
7. 30 × 1.20 = €36.
8. 90 ÷ 1.20 = £75.
9. They fall in foreign currency, so UK exports become more competitive.
10. Exporters, and UK firms competing with imports; foreign tourists visiting the UK also pay more.

Where marks are usually lost

• Multiplying when you should divide in a currency conversion.
• Saying a strong pound “is good for the economy” without saying for whom.
• Forgetting that the pound’s value is set by demand and supply, then giving no shift.
• Naming UK exports as only goods: services are about half.

Frequently asked questions

What does SPICED stand for? Strong Pound, Imports Cheap, Exports Dear. A weak pound does the opposite: imports become dearer and exports cheaper.

What determines the value of the pound? The demand for and supply of pounds. Demand comes from foreign buyers of UK exports, tourists, investors, savers and speculators; supply comes from UK buyers of imports, tourists and investors going abroad.

What happens to the pound if UK interest rates rise? It tends to appreciate, because higher returns attract foreign savers, which raises demand for pounds.

What is global interdependence? Global interdependence is countries relying on each other for goods, services, markets, investment and supply chains, so problems abroad, such as a recession, can affect the UK.

What does the UK mainly export? Services, especially financial, insurance and other business services, which make up about half of UK exports, plus machinery, cars and medicines. The UK usually has a deficit on goods and a surplus on services.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017 (Version 1.0), published by AQA: sections 3.2.4.1 Why countries trade and the importance of international trade to the UK and 3.2.4.2 Exchange rates.