Pearson Edexcel IAL Economics: Causes and effects of globalisation (YEC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 4.3.1, Causes and effects of globalisation, items 1 to 3, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018. It is Unit 4 content, an International Advanced Level compulsory unit. Every figure is invented and every country or firm is fictional. Learn the content first in the study guide and the revision notes. The course hub, checklist and free diagnostics are also linked.

Questions

1. Country X: in Year 1, GDP is 800, exports 150, imports 170 and FDI inflow 20. In Year 2, GDP is 1,000, exports 220, imports 240 and FDI inflow 35.

(a) Work out the openness ratio for Year 1 and Year 2. [2] (b) Calculate FDI inflow as a percentage of GDP in each year. [2] (c) State whether the data are consistent with increasing globalisation. [1]

2. In Country Z the population is 12 million, with 90,000 arrivals and 210,000 departures in a year. Migrants abroad send home 3.0 and GDP is 40.

(a) Calculate the net migration rate per 1,000 people and remittances as a percentage of GDP. [2] (b) Explain one benefit and one cost of emigration for Country Z. [4]

3. Explain two causes of globalisation from: increased number and size of trading blocs, political change, reduced transport and communications costs. [4]

4. A good has an ex-factory price of 80 and freight of 20. A 15% tariff applies to price plus freight. Later the tariff falls to 5% and freight to 12.

(a) Calculate the landed price before and after. [2] (b) Calculate the percentage fall in the landed price. [1] (c) Calculate the landed price if only the tariff had fallen, and if only freight had fallen. [2]

5. Explain two reasons why a TNC might choose to build a factory abroad rather than export. [4]

6. A TNC opens a clothing factory in Country Y. Assess the impact of this FDI on Country Y. [8]

7. Demand for a product in Country W is P = 140 - 4Q. Trade liberalisation lowers the price from 100 to 60, with imports supplying the extra quantity.

(a) Calculate the quantity and consumer surplus before and after, and the gain. [4] (b) Explain why the gain to Country W as a whole is smaller than your answer. [2]

8. A TNC raises output from 50,000 to 200,000 units. Total cost rises from 600,000 to 1,500,000.

(a) Calculate average cost before and after, and the percentage change. [3] (b) Explain how this may lower prices and one reason it may not. [3]

9. A TNC’s subsidiary in Country M (profit tax 35%) buys 50,000 units from its affiliate in Country N (profit tax 15%). The charge is 52 per unit and the arm’s-length price is 40.

(a) Calculate the profit shifted, the tax lost by M, the tax gained by N and the group’s saving. [3] (b) Explain two effects on Country M. [3]

10. In Country Q, 15,000 jobs are lost in import-competing industries and 11,000 created in export industries. The labour force is 2,000,000. The richest 10% share of income rises from 30% to 36% and the poorest 40% share falls from 18% to 15%.

(a) Calculate the net job change and its percentage of the labour force. [2] (b) Calculate the ratio of the richest 10% share to the poorest 40% share in each year. [2] (c) Explain why globalisation may raise income inequality within a country. [4]

11. Trade in a good involves an external cost of 5 per unit on 80,000 units.

(a) Calculate the total external cost. [1] (b) Explain why free trade may lead to too much of the good being produced and traded. [3] (c) Explain how TNC influence on policy could weaken environmental rules. [2]

12. Evaluate the view that the benefits of globalisation outweigh the costs for a developing country. [12]

Answers

1. (a) Year 1: (150 + 170) / 800 = 40% [1]. Year 2: (220 + 240) / 1,000 = 46% [1] [2] (b) Year 1: 20 / 800 = 2.5% [1]. Year 2: 35 / 1,000 = 3.5% [1] [2] (c) Yes, trade and FDI both rose as a share of GDP [1] [1] Examiner insight: Add imports to exports before dividing; using exports alone gives a different ratio.

2. (a) (90,000 - 210,000) / 12 million x 1,000 = -10.0 per 1,000 [1]. 3.0 / 40 x 100 = 7.5% [1] [2] (b) Benefit: remittances raise household income and support spending, which adds to AD [1] with a development of the chain, such as foreign exchange for imports [1]. Cost: loss of workers, especially skilled ones (brain drain), reduces productive capacity [1], so output and tax revenue may be lower than otherwise [1] [4] Examiner insight: One developed point per side earns more than a list of four labels, so state the mechanism.

3. Any two causes. Trading blocs: lower tariffs between members raise intra-bloc trade [1]; a bigger market lets firms gain scale and attracts outside investors [1]. Political change: the breakdown of the Soviet system or opening of China brought new countries into trade and investment [1]; new labour and consumer markets raised world trade [1]. Transport and communications are an equally valid cause [4] Examiner insight: Each cause needs the change it brings, not just a name. “Cheaper transport” is stronger once it is linked to trade or location choices.

4. (a) Before: (80 + 20) x 1.15 = 115 [1]. After: (80 + 12) x 1.05 = 96.60 [1] [2] (b) (96.6 - 115) / 115 x 100 = -16.0% [1] [1] (c) Tariff only: 100 x 1.05 = 105 [1]. Freight only: 92 x 1.15 = 105.80 [1] [2] Examiner insight: Show which base the tariff applies to, since it is charged on the sum of price and freight in this question.

5. Any two developed reasons. Lower unit costs: cheaper labour or land lowers cost per unit [1], raising profit or price competitiveness [1]. Avoiding tariffs: producing inside the barrier means the product avoids the tariff [1], so it can be sold more cheaply in that market [1]. Also acceptable: closeness to a growing market, resources, skills, incentives [4] Examiner insight: “To make more profit” alone is too thin; say what changes in cost or revenue.

6. Benefits: jobs and wages raise household income and consumption [1], with some skills and technology passing to local workers [1]. Corporate and income tax rise [1], and exports may earn foreign exchange [1]. Costs: profits may be sent abroad, so national income rises by less than GDP [1]; local firms may be crowded out, or wages and conditions may be poor [1]. Judgement: net impact depends on local sourcing, tax rules and how long the TNC stays [1], with a reasoned conclusion [1] [8] Examiner insight: A clear final judgement that picks the factor that matters most is more persuasive than a list of two-sided points.

7. (a) Before: Q = (140 - 100) / 4 = 10 [1]; surplus 0.5 x 10 x 40 = 200 [1]. After: Q = (140 - 60) / 4 = 20; surplus 0.5 x 20 x 80 = 800 [1]. Gain = 600 [1] [4] (b) Domestic producers lose revenue and surplus as cheaper imports replace output [1]; some workers lose jobs, so the net gain is below 600 [1] [2] Examiner insight: Label the height of each triangle as the intercept minus the price; the height is not the price itself.

8. (a) Before 600,000 / 50,000 = 12 [1]. After 1,500,000 / 200,000 = 7.50 [1]. Change = (7.5 - 12) / 12 = -37.5% [1] [3] (b) Spreading fixed costs over more units lowers average cost [1]; competition can pass the saving on as a lower price [1]. A firm that faces little rivalry may simply absorb the saving in higher profit [1] [3] Examiner insight: A full answer says why a lower cost becomes a lower price (competition), not just that it can.

9. (a) Profit shifted = (52 - 40) x 50,000 = 600,000 [1]. M loses 0.35 x 600,000 = 210,000; N gains 0.15 x 600,000 = 90,000 [1]. Group saves 120,000 [1] [3] (b) M loses tax revenue [1] which reduces funds for public spending [1]. M may also see its firms undercut, or it may need to enforce arm’s-length rules at a cost [1] [3] Examiner insight: Keep the sign right when comparing: the group saves 210,000 minus 90,000.

10. (a) 11,000 - 15,000 = -4,000 [1]; -4,000 / 2,000,000 x 100 = -0.2% [1] [2] (b) Year 1: 30 / 18 = 1.67 [1]. Year 2: 36 / 15 = 2.40 [1] [2] (c) Skilled workers and capital owners gain from larger markets [1], so their incomes rise faster [1]. Unskilled workers face competition from imports or cheaper labour abroad [1], and job losses may lower or flatten their pay [1] [4] Examiner insight: Name who gains and who loses; “inequality rises” alone is the claim, not the reason.

11. (a) 5 x 80,000 = 400,000 [1] [1] (b) The market price reflects private cost only, not the external cost [1]. Output and trade go beyond the level where marginal social benefit equals marginal social cost [1], so there is overproduction and a welfare loss [1] [3] (c) Large TNCs can threaten to relocate [1], and governments may relax rules to keep jobs and investment [1] [2] Examiner insight: Refer to marginal social cost, not only to damage, so the economic link is explicit.

12. Benefits, credit three developed points such as: FDI and trade lift growth and jobs [1]; technology and scale lower costs [1]; more choice and lower prices raise living standards [1]. Costs, credit four developed points such as: displaced workers in uncompetitive industries [1]; exploitation or weak labour standards [1]; environmental damage [1]; profit shifting and tax loss through transfer pricing [1]. Evaluation, credit four such as: depends on institutions and tax rules [1]; time period, as costs come first [1]; whether winners can compensate losers [1]; the economy’s diversification [1]. Reasoned conclusion that weighs the two sides [1] [12] Examiner insight: Reward the judgement over the list: choose one or two factors and say why they decide the conclusion.

Where marks are usually lost

• Using exports instead of exports plus imports for trade as a share of GDP.
• Dividing by the wrong base for a percentage change.
• Stating a benefit with no mechanism.
• Writing about FDI without separating the TNC’s gain from the host’s gain.
• Forgetting that cheaper imports cut domestic producers’ surplus.
• Treating lower average cost as automatically lower prices.
• Leaving out winners and losers in an evaluation.
• Ending a long answer without a judgement.

Next steps

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Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, first assessment June 2020, published by Pearson Education Limited: section 4.3.1, Causes and effects of globalisation.