OCR GCSE Economics: Exchange rates, globalisation and measuring development (J205)

This guide follows the OCR GCSE (9-1) Economics specification (J205, version 2.0, first assessment 2019), sections 4.3 (exchange rates) and 4.4 (globalisation). J205 has no Higher or Foundation tier, so the content is common to all candidates. The countries, firms and numbers in the examples are invented. Use the revision notes to recall it quickly and the practice set to test it. Demand, supply and elasticity are in The Role of Markets and Money. Other useful pages: the OCR GCSE Economics hub, a printable topic checklist and the diagnostics.

What the specification asks for

Section	You should be able to
4.3	draw and analyse how exchange rates are determined by supply and demand
4.3	calculate currency conversion
4.3	analyse recent and historical exchange rate data
4.3	evaluate the effect of exchange rate changes on consumers and producers
4.4	explain globalisation, including its driving factors
4.4	explain how development is measured: GDP per capita, life expectancy, access to health care, technology and education
4.4	evaluate costs and benefits of globalisation to producers, workers and consumers in developed countries, including economic, social and environmental sustainability
4.4	evaluate the same for less developed countries

4.3 Exchange rates

Currency conversion

An exchange rate tells you how much of one currency you must pay to obtain a unit of another. Suppose £1 = USD 1.25 (illustrative). Multiply to go from pounds to dollars. Divide to go from dollars to pounds.

• £240 × 1.25 = USD 300.
• USD 500 ÷ 1.25 = £400.
• A USD 175 hotel room costs 175 ÷ 1.25 = £140.
• The reverse rate is USD 1 = 1 ÷ 1.25 = £0.80.

Fees matter. A traveller changes £600 into euros at £1 = €1.35 and pays a £12 fee first: (600 − 12) × 1.35 = €793.80. Without the fee she would get €810.

How the rate is set

On a floating exchange rate the price of a currency comes from demand and supply, like any other price.

Draw the diagram with the exchange rate (dollars per pound) on the vertical axis and the quantity of pounds traded per day on the horizontal axis.

• Demand for pounds slopes downward. Overseas buyers need pounds to pay for Country A’s exports, to visit as tourists, and to invest. A lower rate makes Country A’s goods cheaper abroad, so more pounds are wanted.
• Supply of pounds slopes upward. Country A’s residents sell pounds to buy imports, holidays and assets abroad. A higher rate makes foreign goods cheaper for them, so more pounds are offered.
• Equilibrium is where the two curves cross.

Rate (USD per £)	1.00	1.10	1.20	1.30	1.40
Pounds demanded (millions a day)	100	85	70	55	40
Pounds supplied (millions a day)	40	55	70	85	100

Equilibrium is 1.20 dollars per pound and 70 million pounds. Now overseas demand for Country A’s goods rises by 30 million at every rate. Demand for pounds shifts right: 130, 115, 100, 85, 70. At 1.30 demand and supply are both 85 million, so the new equilibrium is 1.30. The pound has appreciated by (1.30 − 1.20) ÷ 1.20 = 8.3%. If instead residents import more and supply of pounds shifts right by 30 million, equilibrium falls to 1.10 and the pound has depreciated by 8.3%.

Change	Curve that shifts	Likely effect on the pound
Overseas demand for exports rises	demand right	appreciates
Higher interest rates attract savers from abroad	demand right	appreciates
More tourists arrive	demand right	appreciates
Residents buy more imports	supply right	depreciates
Firms invest abroad	supply right	depreciates
Speculators expect a fall and sell	supply right	depreciates

Higher inflation than competitors makes exports less attractive, which lowers demand for the currency over time.

Analysing exchange rate data

Illustrative annual averages of dollars per pound:

Year	1	2	3	4	5	6
Rate	1.50	1.45	1.30	1.28	1.35	1.42
Index (year 1 = 100)	100.0	96.7	86.7	85.3	90.0	94.7
Change on previous year		−3.3%	−10.3%	−1.5%	+5.5%	+5.2%

Describe the pattern first: the pound fell from 1.50 in year 1 to 1.28 in year 4, a fall of 14.7%, then recovered to 1.42 in year 6, still 5.3% below year 1. The sharpest drop was year 2 to year 3. Next, give a reason, such as lower overseas demand or interest rate cuts, and say that the data alone cannot prove the cause. Annual averages also hide changes within a year.

Effects on consumers and producers

A small bakery in Country A sells cakes at £8 and buys flour at USD 500 a tonne. Its sales are 10,000 cakes a year and it buys 20 tonnes.

Rate (USD per £)	Cake price abroad	Flour cost per tonne	Flour bill for 20 tonnes
1.25	10.00 dollars	£400.00	£8,000
1.60 (appreciation)	12.80 dollars	£312.50	£6,250
1.00 (depreciation)	8.00 dollars	£500.00	£10,000

After the appreciation the cake costs 28% more in dollars. How much sales fall depends on price elasticity of demand. If it is −1.5, quantity falls by 1.5 × 28 = 42% to 5,800 cakes and revenue in pounds falls from £80,000 to £46,400. If it is −0.5, quantity falls 14% to 8,600 and revenue is £68,800. Depreciation to 1.00 works the other way: cheaper cakes abroad, dearer flour at home. The pound’s value falls 20%, but flour costs 25% more in pounds.

Chain of reasoning for an appreciation: the pound buys more foreign currency, so exports are dearer abroad, so quantity sold falls (by more if demand is elastic), so exporters’ revenue and jobs are at risk. Imports are cheaper, so importers, firms using imported inputs and consumers gain, and holidays abroad are cheaper. A depreciation reverses each step.

Evaluation: judge the effect by (1) elasticity of demand for exports, (2) how much of a firm’s costs are imported, (3) the size and speed of the change, (4) how long it lasts, and (5) whether rivals’ currencies moved too. Exporters facing elastic demand and using few imported inputs gain most from depreciation, because the lower foreign price brings a larger rise in sales. Consumers who buy many imports lose from it.

4.4 Globalisation and development

Globalisation and its driving factors

Globalisation is the growing integration of economies through trade, movement of capital, people, information and ideas.

• Falling transport costs, such as larger ships and containers, make distant trade cheap.
• Communications technology lets firms manage supply chains and sell online across borders.
• Trade agreements that cut taxes and quotas on trade.
• Multinational companies that locate production wherever costs are lowest.
• Rising incomes that increase demand for foreign goods.
• Freer movement of capital between countries.

How development is measured

GDP per capita is GDP divided by population. Country X has GDP of 540 billion dollars and 60 million people: 9,000 dollars each. Country Y has 90 billion dollars and 30 million people: 3,000 dollars each. If X’s GDP grows 4% while its population grows 2.5%, GDP per capita rises by 1.04 ÷ 1.025 − 1 = 1.5%.

Indicator	Country X	Country Y
GDP per capita (dollars)	9,000	3,000
Life expectancy (years)	74	63
Doctors per 1,000 people (health care)	2.4	0.5
Internet users per 100 people (technology)	70	22
Average years of schooling (education)	10.2	5.1

Life expectancy shows health. Doctors per 1,000 people shows access to health care. Internet users show technology. Years of schooling or literacy show education. Composite measures, such as the Human Development Index, combine income, health and education in one figure.

Limits: GDP per capita is a mean. Five households earn 1,000, 1,200, 1,500, 1,800 and 9,500 dollars a month: the mean is 3,000 dollars but the median is 1,500. It also leaves out unpaid work, informal activity, pollution and how fairly income is shared, and countries with equal GDP per capita can differ greatly in health and schooling.

Costs and benefits of globalisation

	Benefits	Costs
Developed: producers	larger markets, cheaper inputs, lower costs from offshoring	more competition, loss of home production
Developed: workers	jobs in export industries, higher-skilled work	job losses in declining industries, pressure on low-skilled wages
Developed: consumers	lower prices, more choice	fewer local firms, products may travel far
Less developed: producers	access to world markets, technology, investment	competition from multinationals, reliance on a few exports
Less developed: workers	new jobs, often paying more than farming	low pay, long hours, weak protection
Less developed: consumers	cheaper goods, wider choice	local firms undercut, prices shaped by world markets

Worked example. A clothing firm in Country A makes a shirt for £14.00: labour £6.00, materials £5.00 and overheads £3.00. Offshore it costs labour £1.80, materials £5.00, overheads £2.20 and transport and import tax £1.50, a total of £10.50. The saving is £3.50, or 25%, and £700,000 on 200,000 shirts. Consumers may gain lower prices. Home workers lose jobs, and the cost of a retraining programme must be set against the saving. In the less developed country, a factory wage of 9 dollars a day against 5 on a farm is 80% higher, which raises incomes but may come with long hours and poor safety.

Sustainability means meeting today’s needs without harming future generations. Judge each side on three tests.

• Economic: does it build lasting income and skills, or create dependence on one export or one foreign employer?
• Social: does it reduce poverty and inequality, or widen them and break up communities?
• Environmental: longer transport adds emissions, and rapid factory growth can bring pollution and resource use. Cleaner technology can help.

Evaluation: conclude on who gains most and who loses, and say what it depends on: the pace of change, whether governments retrain workers and enforce standards, the type of goods traded, and the time period. A good judgement is that gains are often spread widely while costs fall on specific groups and places, so policy matters.

Common errors

• Dividing when you should multiply in conversion. Check that the answer looks sensible: pounds should buy fewer dollars at a lower rate.
• Saying a depreciation always helps exporters without mentioning elasticity.
• Reading GDP per capita as evidence of fairness between rich and poor.
• Listing benefits and costs without a judgement.

Official syllabus

OCR GCSE (9-1) Economics (J205), version 2.0 (June 2026), first assessment 2019, published by OCR.