Cambridge IGCSE Economics: International specialisation, globalisation, MNCs and free trade (0455)

This guide follows the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 and covers sections 6.1.1 and 6.1.2 (specialisation at a national level) and 6.2.1 to 6.2.3 (globalisation, multinational companies and the benefits of free trade). The course is not tiered. Methods of protection, reasons for protection and consequences of protection (6.2.4 to 6.2.6) are taught in a separate unit, so this page does not cover them. All countries, firms and figures below are invented for illustration.

Related pages: revision notes, practice questions, the Cambridge IGCSE Economics hub, the printable checklist, the exam preparation guide and the free diagnostics.

What this unit covers

Section	What you must be able to do
6.1.1	Explain the basis of specialisation at national level: superior resource allocation and/or cheaper production methods
6.1.2	Explain advantages and disadvantages of specialisation for consumers, firms and the economy
6.2.1	Define globalisation
6.2.2	Explain the role of MNCs and their costs and benefits to host and home countries
6.2.3	Explain the benefits of free trade for consumers, producers and the economy, in a variety of countries

6.1.1 Why countries specialise

Specialisation at national level means a country concentrates its resources on producing a narrow range of goods and services, then trades them for everything else. The syllabus gives two broad reasons.

Superior resource allocation. Land, labour, capital and enterprise are not spread evenly. A country with fertile land and a suitable climate does better to put its land into farming. A country with a skilled, well-educated workforce does better to use labour in services or high-technology manufacturing. Moving resources to the uses where they produce the most output means more total output from the same resources.

Cheaper production methods. A country may produce a good at lower cost because of better technology, cheaper labour, or large-scale production. Making more of one product spreads fixed costs over more units, and workers become more skilled at a narrow task.

Worked example: output gain from specialising

Country A and Country B each have 100 worker-days. Both make grain and textiles. Figures are illustrative.

Output from 100 worker-days	Grain (tonnes)	Textiles (units)
Country A, all days on one good	40	20
Country B, all days on one good	30	30

Opportunity cost shows which country is cheaper at each good.

• Country A: 1 textile costs 40 ÷ 20 = 2 tonnes of grain. 1 tonne of grain costs 20 ÷ 40 = 0.5 textiles.
• Country B: 1 textile costs 30 ÷ 30 = 1 tonne of grain. 1 tonne of grain costs 1 textile.

Country A gives up less to make grain (0.5 textiles against 1). Country B gives up less to make textiles (1 tonne against 2).

Before specialisation each country splits its days 50:50.

• A: 20 grain and 10 textiles. B: 15 grain and 15 textiles.
• World total: 35 grain and 25 textiles.

After specialisation A makes only grain (40) and B makes only textiles (30). World total: 40 grain and 30 textiles, which is 5 more of each.

For both to gain, the trading ratio must lie between the two opportunity costs, so between 1 and 2 tonnes of grain per textile. Suppose they trade at 1.5 tonnes per textile and A buys 12 textiles.

• A pays 12 × 1.5 = 18 tonnes. A ends with 40 − 18 = 22 grain and 12 textiles, against 20 and 10 before.
• B receives 18 tonnes and keeps 30 − 12 = 18 textiles. B ends with 18 grain and 18 textiles, against 15 and 15 before.

Both countries consume more of both goods. That is the gain from specialisation plus trade.

6.1.2 Advantages and disadvantages of specialisation

Advantages

• Consumers: lower prices because output is cheaper, a wider choice because the country can import what it does not make, and often better quality.
• Firms: larger markets, since exporters sell abroad as well as at home. Higher output brings economies of scale.
• The economy: more output and income from the same resources, so higher living standards. Export industries create jobs and earn foreign currency, and a more efficient economy can grow faster.

Worked example: unit cost with a bigger market

A firm in Country A has fixed costs of 400,000 and variable cost of 7 per unit. Average cost = total cost ÷ output.

• Home market only, 40,000 units: total cost = 400,000 + (7 × 40,000) = 680,000. Average cost = 680,000 ÷ 40,000 = 17.
• With exports, 160,000 units: total cost = 400,000 + (7 × 160,000) = 1,520,000. Average cost = 1,520,000 ÷ 160,000 = 9.50.

Average cost falls by (17 − 9.50) ÷ 17 × 100 = 44.1%. The firm can cut its price, or keep it and earn more profit per unit.

Disadvantages

• Consumers: if the country depends on a few products, a poor harvest or a fall in demand can cut export earnings and the money available to pay for imports, so imported goods may become scarcer or dearer, and the choice of home-made goods may shrink.
• Firms: firms in industries that do not specialise cannot compete with cheaper imports and may close. Firms that depend on a few customers abroad are exposed if those customers cut orders.
• The economy: overspecialisation. If a country relies on one or two exports, a fall in their price or demand hits incomes, jobs and tax revenue together. Workers in declining industries may be structurally unemployed because their skills do not match new jobs. Resources such as land or minerals can also be used up faster.

Worked example: the risk of depending on one export

Country C earns 40 million units from 500,000 tonnes of a crop sold at 80 per tonne. Its GDP is 160 million.

• Export share of GDP = 40 ÷ 160 × 100 = 25%.
• World price falls 20%, to 80 × 0.8 = 64. Selling the same volume now earns 500,000 × 64 = 32 million.
• Loss = 8 million, which is 8 ÷ 160 × 100 = 5% of GDP.

A country with several different exports would lose less, which is why many governments try to diversify.

Evaluation chain: specialisation raises total output (benefit) → but it makes the economy sensitive to shocks in one market (cost) → the size of the risk depends on how much of income comes from one product, how flexible workers are in moving to new jobs, and whether the government invests in other industries.

6.2.1 Globalisation

Globalisation is the growing integration and interdependence of the world’s economies, as trade in goods and services, flows of capital, movement of labour, technology and information link countries more closely. Production, consumption and finance increasingly cross national borders.

Worked example: a rising trade ratio

Trade as a percentage of GDP = (exports + imports) ÷ GDP × 100. In Country D (illustrative):

	Exports	Imports	GDP	Trade as % of GDP
Year 1	36	44	200	(36 + 44) ÷ 200 × 100 = 40%
Year 2	90	105	300	(90 + 105) ÷ 300 × 100 = 65%

A higher ratio shows greater dependence on trade. It is a measure, not the definition.

6.2.2 Multinational companies (MNCs)

A multinational company (MNC) is a firm that has production units in more than one country, owned or controlled by it. The home country is where it has its headquarters. A host country is any other country where it operates.

Benefits and costs to the host country

Benefits	Costs
Creates jobs and income, which add to spending	Profits may be sent abroad, so less income stays
Brings capital, technology and skills that local firms can copy	May drive out smaller local firms
Pays corporation tax and may buy from local suppliers	May use cheap labour or damage the environment where rules are weak
Adds to exports, and competition may lower prices	May leave if costs rise elsewhere, taking jobs with it

Benefits and costs to the home country

Benefits	Costs
Profits return and may be taxed	Jobs may move abroad, raising unemployment in some industries
Cheaper production abroad can lower prices for home consumers	Less investment at home if spending goes overseas
The firm may expand and win bigger markets	Tax revenue may fall if the firm shifts profits to low-tax places

Worked example: where does an MNC’s money go?

An MNC’s factory in Host Country H earns revenue of 150 million units. It employs 2,000 workers at 9,000 each. Other costs are 30 million on local suppliers, 40 million on imported parts and 22 million on other local costs. Tax is 25% of profit and 80% of after-tax profit is sent to the home country.

Item	Working	Amount (million)
Wages	2,000 × 9,000	18
Total costs	18 + 30 + 40 + 22	110
Profit	150 − 110	40
Tax in H	25% × 40	10
After-tax profit	40 − 10	30
Sent home	80% × 30	24
Kept in H	30 − 24	6

Money that stays in H = wages 18 + local suppliers 30 + other local 22 + tax 10 + retained profit 6 = 86 million. Money that leaves = imported parts 40 + profit sent home 24 = 64 million. The two add to the 150 million of revenue.

Evaluation: the host gains from jobs and tax, but how much depends on how much it buys locally, how well workers are paid and trained, whether the firm stays for years, and whether local firms can compete.

6.2.3 Benefits of free trade

Free trade is trade between countries with no barriers placed on it by governments. The benefits are:

• Consumers: lower prices, more choice and better quality, because producers compete with firms from all over the world.
• Producers: access to larger markets, economies of scale, cheaper imported materials and machinery, and pressure to improve efficiency and innovate.
• The economy: resources move to their best uses, output and incomes rise, export industries create jobs and foreign currency.

Worked example: a price fall from free trade

In Country G the price of a bicycle is 120 units and consumers buy 50,000 a year. Opening the market to imports lowers the price to 90 and sales rise to 65,000. All figures are illustrative.

• Price change = (90 − 120) ÷ 120 × 100 = −25%.
• Saving on the original 50,000 bikes = 30 × 50,000 = 1.5 million units.
• Quantity change = (65,000 − 50,000) ÷ 50,000 × 100 = +30%.
• Spending before = 120 × 50,000 = 6,000,000. Spending after = 90 × 65,000 = 5,850,000. Consumers buy 30% more for slightly less money.

Local bicycle makers that cannot match the new price lose sales. The gain to consumers has to be weighed against the loss to those producers.

In a variety of countries

The syllabus asks you to apply free trade to different kinds of country.

Type of country	Likely benefit
Small economy with a small home market	Exporters reach a big market and gain economies of scale
Country short of a key resource	Can import it cheaply instead of making it at high cost
Developing country	Sells farm or raw material exports, earns foreign currency and can import machinery
Advanced economy	Consumers get cheaper goods and firms sell high-value products abroad

Free trade does not help everyone equally. Workers in industries that lose out may need retraining, and countries that export only a narrow range of goods may gain less than others.

Common errors

• Writing that specialisation always makes every worker better off. It raises total output, but some workers lose jobs.
• Defining an MNC as any large firm. It must operate in more than one country.
• Mixing up the two countries. Profits sent home are a cost to the host country and a benefit to the home country.
• Describing globalisation only as trade. Capital, labour, technology and information flows count too.
• Giving benefits of free trade for consumers only. Name producers and the economy as well.

Official syllabus

Source: Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International), section 6.1 and sections 6.2.1 to 6.2.3.