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

This guide follows the Cambridge O Level Economics 2281 syllabus for examination in 2026. It covers sections 6.2.1 to 6.2.3: what globalisation means, what multinational companies (MNCs) do and who gains or loses in host and home countries, and why free trade helps. The course is not tiered. Protection (6.2.4 to 6.2.6) has its own pages, so this guide only touches it where it helps you evaluate. All figures are invented and illustrative.

Course links: Cambridge O Level Economics hub, printable checklist and the free 10-minute diagnostics. Companion pages: revision notes and practice questions.

What you must be able to do

Syllabus	Outcome	Where in this guide
6.2.1	Define globalisation	Section 1
6.2.2	Explain the role of MNCs and the costs and benefits to their host and home countries	Section 2
6.2.3	Explain how free trade benefits consumers, producers and the economy, in different kinds of country	Section 3

The wording for 6.2.3 ends “in a variety of countries”. Check your answers work for a large rich country, a small country and a developing country, not only one of them.

1. Globalisation (6.2.1)

Globalisation means national economies becoming steadily more tied together, so that each depends more on the others. Goods, services, money, firms, technology and ideas cross borders more easily, so events in one economy increasingly affect others.

Globalisation is a process, not a single event. Three features are worth being able to name:

• More trade: exports and imports grow faster than output.
• More cross-border investment: firms build factories and offices abroad.
• Faster movement of information and technology: a design made in one country can be copied or used in another quickly.

Several things drive it. Transport and communication have become cheaper and quicker. Many governments have lowered barriers to trade. MNCs have spread production across borders. You do not need to learn a list of causes for 6.2.1, but one or two help a definition answer gain credit.

A simple measure: trade openness

A common way to show a country becoming more integrated is trade as a share of national output:

trade openness (%) = (exports + imports) / GDP × 100

Worked example 1 (Country C, invented). In Year 1, exports are 30, imports 36 and GDP 220 (all in billions of local currency units).

• Year 1: (30 + 36) / 220 × 100 = 66 / 220 × 100 = 30.0%
• In Year 8, exports are 48, imports 54 and GDP 240.
• Year 8: (48 + 54) / 240 × 100 = 102 / 240 × 100 = 42.5%

Openness rose by 12.5 percentage points. This suggests Country C’s economy is more closely linked to the rest of the world. The measure is a teaching device, not a required formula, so only use it if a question gives you the data. One weakness: a rise in openness can also come from falling GDP, so look at both figures.

2. Multinational companies (6.2.2)

A multinational company (MNC) is a firm that owns or controls production or other operations in more than one country. Its headquarters sit in the home country. Each country where it sets up a factory, shop or office is a host country.

The role of MNCs is to carry out production and investment across borders. They move capital, technology and management skills between countries, employ workers in several economies and sell in many markets. They are a main channel through which globalisation happens.

Why does a firm go multinational? It may want lower labour or material costs, to sell inside a large market without paying import barriers, to be close to customers, or to gain from a lower tax rate. The syllabus gives, as an example of a real event to study, how changes in corporation tax between countries may affect where MNCs locate their head office. A cut in a country’s corporation tax makes it a more attractive base, because the firm keeps more of its profit.

Benefits and costs to the host country

Benefits to the host	Costs to the host
Jobs for local workers, and higher incomes	Profits sent abroad to the home country
Tax revenue from the MNC’s profits and its workers	Local firms may close if they cannot match the MNC’s costs and prices
New technology and skills passed to local workers and suppliers	Wages or working conditions may be poor, and jobs are low-skilled
Investment, so capital goods and infrastructure improve	Pollution and use up of natural resources (external costs)
More output and exports; lower prices and more choice for consumers	The MNC may leave if costs rise, causing sudden unemployment

Benefits and costs to the home country

Benefits to the home	Costs to the home
Profits returned to the home country raise incomes and tax revenue	Jobs may be lost if production moves abroad
Cheaper imports of goods made abroad	Less investment may stay in the home economy
Access to new markets and cheaper resources keeps the firm competitive	The firm may shift profits to a low-tax country, so home tax revenue falls
The firm grows, which supports head-office jobs	Home workers may see wages held down because the firm can threaten to move work abroad

Worked example 2 (Country H, invented). An MNC from Country M opens a factory in Country H. It employs 2,000 workers on 6,000 a year each. Annual profit is 30 million. Country H taxes profit at 20%. After tax, 70% of profit is sent home. The factory buys 5 million of goods and services from local firms.

Money that stays in Country H each year:

1. Wages: 2,000 × 6,000 = 12,000,000
2. Tax: 20% × 30,000,000 = 6,000,000
3. Profit after tax: 30,000,000 − 6,000,000 = 24,000,000
4. Profit sent home: 70% × 24,000,000 = 16,800,000
5. Profit kept in Country H: 24,000,000 − 16,800,000 = 7,200,000
6. Local purchases: 5,000,000

Total staying in the host economy = 12,000,000 + 6,000,000 + 7,200,000 + 5,000,000 = 30,200,000. The 16,800,000 sent home is a benefit to Country M and a cost, in lost income, to Country H.

Evaluating. Whether the host gains depends on: how much local content the MNC buys; the skills passed on; whether the jobs would otherwise exist; the tax deal; environmental rules; and how easily the MNC can move. A strong answer weighs these rather than just listing them. For the home country, the net effect depends on whether lost jobs are replaced by higher-skilled head-office and design work.

3. Benefits of free trade (6.2.3)

Free trade is trade between countries with no tariffs, quotas, subsidies or other barriers that favour domestic producers. Imports and exports are decided by prices and demand alone.

For consumers

• Lower prices. Foreign producers with lower costs add supply to the market.
• Greater choice and quality. Goods and services that the country cannot produce, or produces poorly, become available.
• More goods for the same money. Cheaper imports raise real purchasing power.

Worked example 3 (Country A, bicycles, invented). Home demand is Qd = 1,000 − 2P and home supply is Qs = −200 + 2P, where P is the price.

Without trade. Set Qd = Qs: 1,000 − 2P = −200 + 2P, so 1,200 = 4P and P = 300. Quantity = 1,000 − 600 = 400. Consumers spend 300 × 400 = 120,000.

With free trade at a world price of 200.

• Qd = 1,000 − 2(200) = 600
• Qs = −200 + 2(200) = 200
• Imports = 600 − 200 = 400
• Consumer spending = 200 × 600 = 120,000

Price falls by 100 (33.3%). Consumers buy 200 more bicycles (a 50% rise), for the same total spending. Home output falls from 400 to 200, a 50% fall. Consumers gain a lot, and home producers lose sales. That adjustment cost is the main argument for the protection you study in 6.2.4 to 6.2.6, so mention it when evaluating.

For producers

• Larger markets. Selling abroad adds customers, so output can rise.
• Economies of scale. Higher output spreads fixed costs over more units.
• Cheaper inputs. Firms can buy raw materials, machinery and components at lower prices from abroad.
• More competition. Facing foreign rivals gives firms a reason to cut costs and improve quality.

Worked example 4 (a small clothing firm in Country B, invented). Fixed costs are 400,000 and variable cost is 4 per unit.

• Home market only, 50,000 units: average cost = 400,000 / 50,000 + 4 = 8 + 4 = 12
• With exports, 200,000 units: average cost = 400,000 / 200,000 + 4 = 2 + 4 = 6

Average cost falls by 6, which is 50%. The firm can cut its price, sell more, or earn more profit per unit. This only works if the fixed cost does not rise as output grows, which you should say.

For the economy

• Specialisation. Countries concentrate on what they produce at lower cost or with better use of resources, so more is produced from the same resources (see 6.1).
• Higher output and growth. Exports add to total demand and imports of capital goods raise capacity.
• Jobs in export industries. Employment grows where the country is competitive.
• Better resource allocation. Resources move out of inefficient firms into efficient ones.
• Access to goods a country cannot produce. A small country with few resources can gain a great deal.

A variety of countries. A large country gains from cheaper inputs and competition. A small country gains a market far bigger than its own, which makes economies of scale possible. A developing country that sells primary products or simple goods gains export earnings, which can pay for imported machinery. Each also faces risks, such as falling demand abroad, so do not claim that every group gains equally.

Common errors

• Defining globalisation as “trade” only. Add integration, interdependence and the movement of capital or information.
• Writing “MNC” benefits without saying who benefits. Name the host or home country every time.
• Treating profits sent abroad as a cost to the MNC. It is a cost to the host country, in lost income.
• Listing “jobs” with no explanation. Say how many, what skills, and whether they replace existing jobs.
• Forgetting that free trade has losers. Name the domestic producers who face competition.
• Mixing up free trade with protection. Free trade means barriers are removed.

Next steps

Revise from the revision notes, then attempt the practice questions. Tick off progress on the checklist and find gaps with the diagnostics.

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.