OxfordAQA International GCSE Economics: Why countries trade, free trade and exchange rates (9214) – Revision Notes

These notes condense sections 3.2.4.1 and 3.2.4.2 of the OxfordAQA International GCSE Economics (9214) specification, version 1.0, for exams from May/June 2025 onwards (Paper 2, How economies work). The course is not tiered. For fuller explanations use the study guide, then test yourself with the practice set. See also the course hub, the checklist and the 10-minute diagnostics. All countries, currencies and figures are invented.

Key terms

Term	Meaning
Exports	Goods and services produced in a country and sold abroad
Imports	Goods and services that residents and firms buy from producers abroad
Global interdependence	Countries relying on one another for markets, goods and materials
Free trade	Trade with no tariffs, quotas or other barriers
Free-trade agreement (FTA)	A deal between countries to remove barriers on trade among themselves
Exchange rate	The amount of one currency needed to buy a unit of another
Appreciation	A rise in a currency’s value against another
Depreciation	A fall in a currency’s value against another
Tariff	A tax on imports

Benefits of trade (3.2.4.1)

Benefit	The reasoning
Specialisation	Each country makes what it gives up least to produce, so total output rises
Lower prices, more choice	Imports add variety and competition
Economies of scale	A bigger market spreads fixed costs, so average cost falls
Access to resources	Buy what cannot be produced at home
Efficiency	Foreign rivals push local firms to cut costs

Method for average cost with exports: average cost = variable cost per unit + fixed cost / output.

Reminder. A workshop has fixed costs of 30,000 and variable costs of 2 a unit. At 5,000 units: 2 + 30,000/5,000 = 8. At 15,000 units (after exporting): 2 + 30,000/15,000 = 4.

Reminder: trade as a share of GDP. Trade share = (exports + imports) / GDP x 100. Exports share = exports / GDP x 100. A higher share means the economy is more open and more exposed to events abroad.

Global interdependence

Gain	Risk
Supplies and markets from many countries	Recession in a main partner cuts exports
Lower costs	A shortage abroad can stop local production
Technology shared	Overreliance on one export or one supplier

Method for an export shock: fall in total exports (%) = share of exports going to the partner x percentage fall in sales to that partner. Example: 50% of exports go to Country B and sales there fall 12%. Fall = 0.50 x 12% = 6% of total exports.

Free trade

For:

• Lower prices and wider choice
• Competition raises efficiency
• Specialisation and scale
• Less risk of retaliation

Against (arguments for protection):

• Infant industries need time to grow
• Job losses in uncompetitive industries
• Dumping below cost
• Strategic industries such as food and energy
• Overdependence on imports or a few exports
• Weaker standards abroad can undercut local firms

Evaluation checklist. For each argument ask about the size of the effect, its duration, the winners and losers, and whether there is a better remedy than restricting trade (retraining, for instance).

Free-trade agreements (FTAs)

Benefits	Costs
Cheaper imports	Protected industries lose protection
Larger market for exporters	Lost tariff revenue
More competition	Trade diversion from cheaper outsiders
More foreign investment	Less freedom over rules
Lower admin costs	Gains and losses unevenly spread

Tariff reminder. A 12% tariff on a good worth 250 adds 250 x 0.12 = 30, so the price is 280. Removing the tariff under an FTA saves 30 per unit for the buyer and costs the government 30 per unit imported.

Exchange rate determination (3.2.4.2)

The rate is set where the demand for a currency equals its supply.

Demand for the arlo comes from	Supply of the arlo comes from
Foreign buyers of A’s exports	A’s residents buying imports
Tourists visiting A	A’s residents travelling abroad
Investment into A	Investment out of A
Savers attracted by high interest rates	Savers leaving when rates are low
Speculators expecting a rise	Speculators expecting a fall

Diagram in words. Vertical axis: exchange rate (bexo per arlo). Horizontal axis: quantity of arlo. Demand slopes down and supply slopes up; the equilibrium rate is where they cross. A rightward shift in demand moves the rate up (appreciation). A rightward shift in supply moves it down (depreciation).

Method for finding a new equilibrium from a table: (1) add or subtract the shift at every rate on the shifted curve; (2) find the rate where demand and supply are equal; (3) work out the percentage change = (new rate - old rate) / old rate x 100.

Effects of exchange rate changes

If the arlo depreciates	Consumers	Producers
Imports	Dearer	Importers pay more; firms using imported parts face higher costs
Exports	Cheaper for foreigners	Exporters more price competitive
Holidays abroad	Dearer	Home tourism more attractive
Competition	Local goods relatively cheaper	Local firms face less import competition

An appreciation reverses every row.

Converting prices. If 1 arlo = 2.5 bexo, a 500-bexo import costs 500/2.5 = 200 arlo. If the rate falls to 2.0, it costs 500/2.0 = 250 arlo, which is 50 more.

Percentage changes differ. Moving from 2.0 to 2.5 bexo per arlo is a 25% rise for the arlo, but arlo per bexo goes from 0.50 to 0.40, a 20% fall for the bexo.

Holiday reminder. A hotel bill of 3,000 bexo costs 1,500 arlo at 2.0 and 1,200 arlo at 2.5, so a stronger arlo saves 300.

Evaluation points. Depreciation helps exporters more if demand for exports is elastic. It raises costs for firms with imported inputs. Effects may take time because of contracts and fixed prices.

Must-know distinctions

• Exports earn foreign money and give a currency demand; imports use up local money and add currency supply.
• Depreciation lowers the value of a currency and changes prices of both imports and exports; a tariff is a tax that raises only the price of imports.
• Free trade means no barriers; an FTA removes barriers only between members.
• Higher exchange rate helps buyers of imports; lower exchange rate helps exporters, subject to elasticity.

Quick self-test

1. Define imports.
2. Country X has GDP 80, exports 24 and imports 20 (billion arlo). Calculate exports as a percentage of GDP and trade as a percentage of GDP.
3. At 2.0 bexo per arlo a good costs 300 arlo. State its price in bexo, and its price after an appreciation to 2.5.
4. Country P sends 50% of its exports to Country Q. Sales to Q fall by 12%. Calculate the fall in P’s total exports.
5. A 15% tariff is added to an import priced at 40. Calculate the new price and the tariff revenue on 200 units.
6. State two arguments against free trade.
7. Give two reasons why the demand for a currency may rise.
8. The rate falls from 2.0 to 1.5 bexo per arlo. Calculate the percentage change, and the arlo cost of a 90-bexo part before and after.
9. Using the study guide table (equilibrium 2.0, 70 million), supply falls by 20 million at every rate. Find the new equilibrium rate and percentage change.
10. Explain one benefit and one cost of a depreciation for a producer.

Answers

1. Goods and services bought from other countries.
2. Exports 24/80 x 100 = 30%. Trade (24 + 20)/80 x 100 = 55%.
3. 300 x 2.0 = 600 bexo; 300 x 2.5 = 750 bexo (up 25%).
4. 0.50 x 12% = 6%.
5. Tariff 40 x 0.15 = 6, new price 46. Revenue 200 x 6 = 1,200.
6. Any two of: infant industries, job losses, dumping, strategic industries, overdependence, weaker standards.
7. Foreigners buy more exports; higher interest rates attract savers; more foreign investment; speculation of a rise.
8. (1.5 - 2.0)/2.0 x 100 = -25%. Part cost 90/2.0 = 45 arlo, then 90/1.5 = 60 arlo, 15 more.
9. New supply is 70, 60, 50, 40, 30 against demand 50, 60, 70, 80, 90. They match at 2.2 (60 = 60), a 10% appreciation.
10. Benefit: exports become cheaper abroad, so sales may rise. Cost: imported components cost more in local currency, so unit costs rise.

Where marks are usually lost

• Writing “the exchange rate falls” with no currency named, so the direction cannot be judged.
• Saying depreciation makes imports cheaper.
• Converting in the wrong direction: multiplying or dividing by the rate without checking which currency it is quoted in.
• Dividing a change by the new figure rather than the starting one.
• Describing a benefit of trade with no chain (for example, “more competition” with no link to lower prices).
• Listing arguments against free trade with no explanation of why they matter, or no judgement.
• Treating an FTA as the same thing as free trade with the whole world.
• Forgetting that an exchange rate change helps one group and harms another.

Official syllabus

These notes follow the OxfordAQA International GCSE Economics (9214) specification, version 1.0, for exams from May/June 2025 onwards, published by OxfordAQA.