Cambridge A Level Economics: International aid, trade and investment (9708) – Revision Notes

Quick recall for sections 11.5.1 and 11.5.2 of the Cambridge International AS & A Level Economics 9708 syllabus (examination in 2026, 2027 and 2028). This is A Level content, topic 11. For full explanations and the main worked examples, read the study guide. Then try the practice set, the free diagnostics and the course checklist. Course home: Cambridge A Level Economics. Multinationals, foreign direct investment, external debt, the IMF and the World Bank are separate statements and are not covered here. All figures are invented.

Key definitions

Term	Meaning
Aid	Transfer of money, goods or expertise on easy terms or free, for development or emergencies
Bilateral aid	From one government directly to another
Multilateral aid	Pooled by many donors and passed on through an international body
Non-governmental aid	From charities and other voluntary organisations
Grant	Aid that need not be repaid
Concessional loan	Loan with below-market interest or long repayment; part of it is a gift
Tied aid	Aid that must be spent on the donor’s goods or services
Technical assistance	Training, advice and expertise rather than money
Terms of trade	Export price index divided by import price index, times 100
Income terms of trade	Terms of trade multiplied by the export volume index, divided by 100
Tariff escalation	Higher import tariffs on processed goods than on raw materials
Portfolio investment	Purchase of shares or bonds abroad without taking control of a firm

Forms of aid (11.5.1)

• By source: bilateral, multilateral, non-governmental.
• By terms: grants or concessional loans.
• By conditions: tied or untied.
• By purpose: project, programme or budget support, technical assistance, emergency relief, food aid.

Match the form to the purpose. Emergency relief meets short-run needs. Project aid and technical assistance build long-run capacity. Budget support relies on the recipient’s institutions.

Reasons for giving aid

Motive	Idea	Weakness
Humanitarian	Relieve suffering after disaster or famine	Hard to help long-run growth
Developmental	Fill the savings gap and foreign exchange gap	Assumes the funds are invested
Political and strategic	Influence, alliances	Aid may follow donor interests, not need
Commercial	Tied aid supports donor exporters	Raises the cost of what is bought
Shared problems	Disease, instability, migration	Benefits are slow and uncertain

Effects of aid: two-sided chains

Positive chain: aid for infrastructure and schools, then higher capital and human capital, then greater productive capacity (long-run aggregate supply shifts right), then higher potential output and living standards.

Negative chains

• Large inflow, then higher demand for the local currency, then stronger exchange rate, then dearer exports and cheaper imports, then loss of competitiveness.
• Free food aid, then supply shifts right, then lower local food prices, then lower farm incomes and less incentive to grow food.
• Aid replaces tax revenue, then a weak tax system and less government accountability.
• Fungibility: aid for one use releases domestic funds for another, perhaps unproductive.

Importance of aid

Measure by size, not total.

Aid as % of GNI = (aid / GNI) x 100. Aid per head = aid / population.

Aid matters most for small, low-income economies with a weak tax base and limited private finance. Then evaluate: type, predictability, governance, and what else is available (trade, private investment, remittances).

Calculation reminders

Grant element and loans. Grant element = (face value - present value of repayments) / face value. Discount repayments at a market rate. A loan of 50 at 0% interest repaid in one lump after 10 years, discounted at 8%: present value = 50/1.08^10 = 23.16. Grant element = (50 - 23.16)/50 = 53.7%.

Aid ratio. Country C has GNI of 5,000 and aid of 150, population 6 million. Aid/GNI = 150/5,000 = 3.0%. Per head = 150/6 = 25 units.

Tied aid. A tied grant of 90 where donor prices are 20% above world prices. Effective value = 90/1.20 = 75. Loss = 15.

Savings gap. Target growth 4%, capital-output ratio 3, so investment needed = 4 x 3 = 12% of GDP. Saving is 9%, so the gap is 3% of GDP. With GDP of 2,000 the gap is 60.

Real value. Nominal aid of 200 where the price index has risen from 100 to 125: real aid = 200/1.25 = 160, a fall of 20%.

Trade and investment (11.5.2)

Terms of trade method.

1. Divide the export price index by the import price index.
2. Multiply by 100.
3. Compare with the base year. A fall means more exports are needed per unit of imports.
4. For income terms, multiply by export volume / 100.

Example: export prices 110, import prices 125. ToT = 110/125 x 100 = 88.0. With export volume at 120, income terms = 88.0 x 120/100 = 105.6, so the country can afford more imports in total even though each export buys fewer.

Primary product volatility. Price elasticity of demand is low, so a supply change moves price a lot. Example: PED = -0.25 and sales rise 5%. Price change = -5/0.25 = -20%. Revenue = 1.05 x 0.80 = 0.84, a fall of 16%.

Barriers faced. Tariff escalation, quotas, rich-country farm subsidies and standards that raise costs.

Evaluating liberalisation

For	Against
Comparative advantage, larger markets	Dependence on a few exports
Imported technology and capital goods	Infant industries face strong competition
Competition lowers prices and raises efficiency	Adjustment costs, job losses in some sectors

Investment flows. Richer countries’ savers invest in poorer countries for higher returns. Portfolio flows can be sudden. Stable flows that fund productive capacity are more useful than short-term flows.

Method in steps: an evaluation question on aid

1. Define the form of aid in the question (grant, loan, tied, emergency).
2. Give one developed benefit chain, ending with a macroeconomic effect such as higher potential output.
3. Give one developed cost chain, such as the exchange rate effect or dependency.
4. Use a figure if one is supplied, such as aid as a share of GNI.
5. Judge. Say what the outcome depends on (size relative to the economy, governance, type of aid, predictability, alternatives) and then reach a conclusion that follows from it.

The same method works for trade and investment questions. Replace the aid chains with access to markets, terms of trade and capital flows, and judge which matter most for the country described.

Must-know distinctions

• Bilateral and multilateral: who delivers it, not who pays.
• Terms of trade and income terms of trade: price only against price and volume.
• Nominal and real aid.
• Aid amounts and aid as a share of GNI.
• Tied aid (the cost is a price premium) and conditional aid (the cost is loss of policy choice).
• Portfolio investment and bank loans: portfolio is a purchase of financial assets.

Quick self-test

1. Country D has GNI of 4,000 and receives aid of 200. State aid as a percentage of GNI.
2. Tied aid of 120 is spent where prices are 25% above world prices. Calculate the effective value.
3. Export price index 90 and import price index 120: calculate the terms of trade.
4. Using question 3, explain what the figure says about the country’s trade.
5. State two reasons why aid might not raise growth.
6. Sales of a primary product rise 8% when PED is -0.5. Calculate the price change and the revenue change.
7. Define tariff escalation and state its effect on a poor exporter.
8. Nominal aid is 300 and the price index for aid purchases rises from 100 to 120. Calculate real aid.
9. A target growth rate is 6% and the capital-output ratio is 3. Calculate the investment needed as a percentage of GDP.
10. Give one benefit and one risk of portfolio investment inflows.

Answers

1. 200/4,000 x 100 = 5.0%.
2. 120/1.25 = 96.
3. 90/120 x 100 = 75.0.
4. Each unit of exports buys 25% fewer imports than in the base year. Volume could offset this.
5. Aid may be spent on consumption, may be lost to corruption, may strengthen the exchange rate and hurt exporters, or may create dependency.
6. Price: -8/0.5 = -16%. Revenue: 1.08 x 0.84 = 0.9072, a fall of 9.3%.
7. Higher tariffs on processed goods than on raw materials; it discourages processing in the poor country and keeps it as a raw-material supplier.
8. 300/1.20 = 250.
9. 6 x 3 = 18% of GDP.
10. Benefit: finance for investment above domestic saving. Risk: sudden outflows weaken the currency.

Where marks are usually lost

• Quoting aid in total with no comparison to GNI or population.
• Listing positive and negative effects of aid with no judgement.
• Describing tied aid but not the price premium.
• Reversing the terms of trade fraction.
• Calling a terms of trade fall a fall in export revenue.
• Presenting the aid-growth link as automatic.
• Not using a figure from the data when asked to use the source.
• Giving only one side of liberalisation.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, sections 11.5.1 and 11.5.2.