Cambridge O Level Economics: Globalisation, multinational companies and free trade (2281) – Revision Notes

These notes condense sections 6.2.1 to 6.2.3 of the Cambridge O Level Economics 2281 syllabus for examination in 2026: globalisation, multinational companies (MNCs) and the benefits of free trade. The study guide has the full explanations. Test yourself afterwards with the practice questions. Protection (6.2.4 to 6.2.6) is covered separately. Course links: hub, checklist and free 10-minute diagnostics. All figures are invented and illustrative.

Definitions to learn

Term	Definition
Globalisation	Economies becoming steadily more tied together and dependent on each other, through trade, investment and the movement of information and technology
Multinational company (MNC)	A business with production or other operations in two or more countries, run from one of them
Home country	The country in which the MNC’s head office is based
Host country	Any other country in which the MNC has a factory, shop or office
Free trade	Trade between countries with no tariffs, quotas, subsidies or other barriers favouring domestic producers
Trade openness	(exports + imports) / GDP × 100: a simple measure of how linked an economy is to others (an added teaching device, not required by the syllabus)

6.2.1 Globalisation: what to say

• Say “integration” and “interdependence”, not just “more trade”.
• Name the flows: goods and services, capital, technology, information.
• Possible drivers: cheaper transport and communication, lower trade barriers, spread of MNCs.
• A rise in trade openness suggests more integration, but check that GDP has not simply fallen.

Method: trade openness. Add exports and imports, divide by GDP, multiply by 100. Example: exports 18, imports 22, GDP 160 gives 40 / 160 × 100 = 25%.

6.2.2 MNCs: costs and benefits

	Benefits	Costs
Host country	Jobs and incomes; tax revenue; technology and skills; investment; more exports; lower prices and choice	Profits sent abroad; local firms may close; poor wages or conditions; pollution; MNC can leave and cause unemployment
Home country	Profits returned; tax revenue; cheaper imports; the firm stays competitive; head-office jobs	Jobs lost when production moves; less home investment; profits shifted to low-tax countries; wage pressure

Where the MNC fits in globalisation. MNCs build factories and buy from suppliers in several countries, so they link economies together. This is why 6.2.2 sits beside the definition: an exam answer on globalisation often needs an MNC example.

Corporation tax link. A lower corporation tax rate in one country makes it a more attractive place for an MNC to locate its head office or report profit, because the firm keeps more of each unit of profit.

Method: how much stays in the host economy.

1. Wages paid to local workers.
2. Tax paid = profit × tax rate.
3. Profit after tax = profit − tax.
4. Sent home = profit after tax × share sent abroad.
5. Kept locally = profit after tax − sent home.
6. Add local purchases from suppliers.
7. Total staying = wages + tax + kept profit + local purchases.

Reminder example. Profit 12 million, tax rate 20%, 50% of after-tax profit sent home. Tax = 2,400,000. After tax = 9,600,000. Sent home = 4,800,000. Kept = 4,800,000.

Evaluation checklist for “do MNCs help the host country?”

• How many jobs, and how skilled?
• Does the MNC buy from local suppliers and train workers?
• How much profit leaves the country?
• Is there pollution or use of scarce resources?
• Would the MNC leave easily?
• Conclusion: it depends on these factors, so decide which matters most and say why.

6.2.3 Benefits of free trade

Group	Benefits	Chain of reasoning (example)
Consumers	Lower prices; more choice; better quality; higher real purchasing power	Foreign supply is added to the market, so price falls, so quantity demanded rises
Producers	Bigger market; economies of scale; cheaper inputs; competition that drives efficiency	Higher output spreads fixed cost over more units, so average cost falls, which lets the firm lower its price or earn more per unit
Economy	Specialisation; higher output and growth; jobs in export industries; better resource allocation; access to goods the country cannot produce	Resources move to efficient industries, so output rises from the same resources

Method: gain from free trade with linear demand and supply.

1. Find the no-trade price by setting Qd = Qs.
2. Put the world price into Qd and Qs.
3. Imports = Qd − Qs at the world price.
4. Compare price and quantity before and after.

Reminder example (free trade, Country F, invented). Qd = 800 − 4P and Qs = −100 + 5P. With no trade: 800 − 4P = −100 + 5P, so 900 = 9P, P = 100 and Q = 400. At a world price of 80: Qd = 800 − 320 = 480 and Qs = −100 + 400 = 300, so imports = 180. Price falls 20%, and quantity bought rises from 400 to 480, which is 20%. Home output falls from 400 to 300.

Always finish with a sentence on who gains (consumers) and who loses (home producers). A table of before and after figures makes this easy to see:

	No trade	Free trade
Price	100	80
Quantity bought	400	480
Home output	400	300
Imports	0	180

Method: average cost with scale. Average cost = fixed cost / output + variable cost per unit. Compare two output levels, then find the percentage fall.

A variety of countries.

Country type	Typical gain from free trade
Large, rich	Cheaper inputs and consumer goods; competition spurs efficiency
Small	A far bigger market than its own, so economies of scale
Developing	Export earnings from primary or simple goods; imports of machinery

Limits to mention in evaluation. Free trade has losers, such as home producers who cannot compete, and workers may need retraining. Falling demand abroad hurts export industries. A country that depends on a few exports is exposed. The benefits are spread unevenly.

Must-know distinctions

• Home versus host. Profits sent home are a benefit to the home country and a cost to the host.
• Globalisation versus free trade. Globalisation is the wider process; free trade is the absence of trade barriers and one cause of globalisation.
• Free trade versus protection. Free trade removes barriers; protection adds them.
• Benefit versus gain for everyone. A benefit to the economy as a whole can still leave some workers or firms worse off.

Quick self-test

1. Define globalisation.
2. Explain the difference between a home country and a host country.
3. Exports are 18, imports are 22 and GDP is 160. Calculate trade openness.
4. An MNC makes 8 million profit in a host country with a 25% tax rate. 60% of profit after tax is sent home. Calculate the tax paid and the amount sent home.
5. State two benefits an MNC may bring to a host country.
6. State two costs an MNC may bring to its home country.
7. Before free trade, a good costs 80. Under free trade it costs 60. Calculate the percentage fall in price.
8. A bakery chain has overheads of 60,000 and ingredient costs of 3 per loaf. Calculate average cost per loaf at 20,000 loaves and at 60,000 loaves, and the percentage fall.
9. Explain why a cut in corporation tax might affect where an MNC puts its head office.
10. Explain one way free trade can harm a domestic producer.

Answers

1. Economies becoming more tied together and dependent on each other, through trade, investment and the movement of technology and information.
2. The home country holds the MNC’s head office. A host country is another place where the MNC runs a factory, shop or office.
3. (18 + 22) / 160 × 100 = 25%.
4. Tax = 25% × 8,000,000 = 2,000,000. Profit after tax = 6,000,000. Sent home = 60% × 6,000,000 = 3,600,000.
5. Any two of: jobs, tax revenue, technology and skills, investment, exports, lower prices and choice.
6. Any two of: job losses, less home investment, profit shifted to low-tax countries, downward pressure on wages.
7. (80 − 60) / 80 × 100 = 25%.
8. 60,000 / 20,000 + 3 = 6; 60,000 / 60,000 + 3 = 4; fall = (6 − 4) / 6 × 100 = 33.3%.
9. The firm keeps more of its profit in the lower-tax country, so it may move its head office or report profit there.
10. Foreign firms with lower costs sell at lower prices, so the domestic producer loses sales and may cut output or close.

Where marks are usually lost

• Defining globalisation as only “more trade”.
• Saying a benefit or cost without naming the host or home country.
• Listing “jobs” with no reasoning about their number, skills or whether they replace other jobs.
• Treating profit sent abroad as the MNC’s loss.
• Writing about tariffs or quotas when the question is about the benefits of free trade.
• Forgetting the chain: lower price, then more quantity demanded, then higher consumer surplus or real income.
• Giving only benefits in an evaluation question.
• Leaving out the percentage sign, or dividing by the wrong base in a percentage change.

Official syllabus

Cambridge O Level Economics 2281, syllabus for examination in 2026 (version 2), published by Cambridge University Press & Assessment (Cambridge International Education): section 6.2, topics 6.2.1 to 6.2.3.