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

This guide covers 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. Both sections sit in the second topic, How economies work (Paper 2). The course is not tiered. Every country, currency, firm and figure below is invented. Condensed recall is in the revision notes and exam-style questions are in the practice set. See also the course hub, the checklist and the free diagnostics.

What you must be able to do

Section	Content	You should be able to
3.2.4.1	Benefits of trade; exports and imports	Explain the importance of trade, exports and imports, the advantages of trade and the consequences of global interdependence
3.2.4.1	Free trade; free-trade agreements	Give arguments for and against free trade, and explain the significance and benefits of free-trade agreements
3.2.4.2	How exchange rates are determined	Explain how demand and supply set the exchange rate
3.2.4.2	Effects of exchange rate changes	Explain the effects on consumers and producers

Exports, imports and the importance of trade

Exports are goods and services produced in a country and sold to buyers in other countries. Imports are goods and services that a country’s residents and firms buy from producers abroad. Both include services: a foreign tourist paying for a hotel is an export for the host country.

Trade matters because no country can produce everything efficiently. It lets a country sell what it makes well, buy what it cannot make cheaply, and reach more customers than its own population.

Worked example 1: how important is trade? Country A (illustrative) has a GDP of 120 billion arlo, exports of 45 billion and imports of 52 billion. Country C has a GDP of 900 billion, exports of 90 billion and imports of 80 billion.

• Country A: exports / GDP = 45 / 120 x 100 = 37.5%
• (exports + imports) / GDP = 97 / 120 x 100 = 80.8%
• Country C: (90 + 80) / 900 x 100 = 18.9%

Trade is worth more than four times as much relative to output in Country A, so a change in world demand or import prices hits it harder.

The advantages of trade

1. Specialisation. Countries concentrate on what they produce at the lowest opportunity cost, so total output rises.
2. Lower prices and wider choice. Imports add variety and competition.
3. Economies of scale. Selling to the world lets a firm produce more, spreading fixed costs.
4. Access to resources. Countries without oil, minerals or skills can buy them.
5. Efficiency. Firms facing foreign rivals must cut costs and improve quality.

Worked example 2: gains from specialisation. In one month, Country P can make either 60 bolts of cloth or 30 sacks of grain. Country Q can make either 40 bolts or 40 sacks. Each splits its resources evenly.

• Opportunity cost of 1 sack of grain: P = 60/30 = 2 bolts Q = 40/40 = 1 bolt
• Opportunity cost of 1 bolt of cloth: P = 30/60 = 0.5 sack Q = 40/40 = 1 sack
• Before: P 30 bolts + 15 sacks; Q 20 bolts + 20 sacks. World total 50 bolts, 35 sacks.

P gives up less grain per bolt, so P specialises in cloth (60 bolts). Q gives up less cloth per sack, so Q specialises in grain (40 sacks). World output is now 60 bolts and 40 sacks, 10 bolts and 5 sacks more than before. Now trade at a rate between the two opportunity costs: P sells 24 bolts for 16 sacks (1.5 bolts per sack).

• P ends with 60 - 24 = 36 bolts and 16 sacks (before: 30 and 15)
• Q ends with 24 bolts and 40 - 16 = 24 sacks (before: 20 and 20)

Both countries consume more of both goods. Trade allows consumption beyond what each country could produce alone.

Worked example 3: economies of scale. A bakery has fixed costs of 100,000 a year and variable costs of 4 per loaf. It sells 20,000 loaves at home. Exporting lifts sales to 50,000.

• Average cost at home: 4 + 100,000/20,000 = 9 per loaf
• Average cost with exports: 4 + 100,000/50,000 = 6 per loaf

Average cost falls by 3 per loaf, so the firm can cut prices or raise profit.

Global interdependence

Countries are interdependent when each relies on others for markets, goods or materials. The consequences cut both ways.

Benefit	Risk
Supplies and markets from many countries	A recession in a main trading partner cuts export sales
Shared technology and ideas	A supply failure abroad can halt local factories
Lower costs through specialisation	Overspecialisation leaves a country exposed if one product’s price collapses

Worked example 4. Country M sends 40% of its exports to Country N. A recession in N cuts M’s exports to N by 15%, and sales to all other buyers are unchanged. M’s total exports fall by 0.40 x 15% = 6%. A country selling mostly to one partner is more exposed than one with many markets.

Free trade: arguments for and against

Free trade means trade between countries with no tariffs, quotas, subsidies to exporters or other barriers. It is the benchmark for judging restrictions.

For free trade:

• Specialisation and competition lower prices and raise quality. Consumers gain real income.
• Larger markets allow economies of scale and growth.
• Barriers invite retaliation, so everyone may lose.

Against free trade (arguments for some protection):

• Infant industries. New firms cannot compete with established foreign giants and may need temporary protection to grow.
• Job losses. Uncompetitive industries shrink, and workers may take years to retrain.
• Dumping. Foreign firms may sell below cost to drive out local firms, then raise prices.
• Strategic industries. A country may want its own food, energy or defence supply.
• Overdependence. Reliance on imports or on a few exports is risky.
• Standards. Imports made under weaker environmental or labour rules can undercut local firms.

Chain of reasoning (job losses): imports of cheap shirts rise, so local shirt factories lose sales and cut output, so shirt workers become unemployed. Evaluate: consumers pay less and other industries expand, but the loss is concentrated in one region and group. The strength of the argument depends on how quickly workers find new jobs, on the time period (short-run pain, long-run gain) and on who gains and loses.

Free-trade agreements

A free-trade agreement (FTA) is a deal between two or more countries to remove tariffs and other barriers on trade between them. Members keep their own rules for trade with non-members.

Benefits and significance: cheaper imports for households and firms; bigger markets for exporters; greater competition; more foreign investment into member countries; lower administration costs where rules are simplified; and closer links between members. One agreement can change the pattern of trade for many industries at once.

Costs: protected industries face new competition; governments lose tariff revenue; trade may shift from a cheaper non-member to a dearer member (trade diversion); and members have less freedom to set their own rules.

Worked example 5. Country A imports machines from Country B at 5,000 arlo each, with an 8% tariff.

• Price with tariff: 5,000 x 1.08 = 5,400 (tariff 400 per machine)
• A firm buying 25 machines saves 25 x 400 = 10,000 under the FTA.

The firm’s costs fall, so it may lower prices or invest. The government loses 400 per machine.

How exchange rates are determined

The exchange rate is how much of one currency buys a unit of another. Where market forces set it, the rate settles at the point where the demand for the currency matches its supply.

• Demand for the arlo comes from foreigners who need arlo to buy Country A’s exports, pay for tourism, invest in Country A, or save there.
• Supply of the arlo comes from Country A residents selling arlo to buy imports, travel abroad, or invest overseas.

The axes are the exchange rate (bexo per arlo) on the vertical axis and the quantity of arlo on the horizontal. Demand slopes downward: a higher price in bexo makes A’s goods dearer for foreigners, so fewer arlo are wanted. Supply slopes upward: a higher price makes imports cheaper for A’s residents, so more arlo are offered.

Bexo per arlo	Quantity demanded (million arlo)	Quantity supplied (million arlo)
2.4	50	90
2.2	60	80
2.0	70	70
1.8	80	60
1.6	90	50

Equilibrium is 2.0 bexo per arlo with 70 million traded. At 2.2 there is a surplus of 20 million arlo, so the price falls. At 1.8 there is a shortage of 20 million, so it rises.

What shifts the curves:

Change	Curve	Effect on the arlo
Overseas buyers want more of A’s exports	Demand shifts right	Appreciates
Higher interest rates in A attract savers	Demand shifts right	Appreciates
Speculators expect the arlo to rise	Demand shifts right	Appreciates
A’s residents buy more imports	Supply shifts right	Depreciates
Prices rise faster in A than abroad	Demand left, supply right	Depreciates
Lower interest rates in A	Demand left, supply right	Depreciates

Worked example 6. Exports of Country A rise, adding 20 million to demand at every rate.

• New demand at 2.4, 2.2, 2.0, 1.8, 1.6: 70, 80, 90, 100, 110
• Supply at those rates: 90, 80, 70, 60, 50
• Demand = supply at 2.2 (80 = 80)
• Change = (2.2 - 2.0)/2.0 x 100 = 10% appreciation

If instead residents buy more imports, adding 20 million to supply at every rate, equilibrium moves to 1.8, a 10% depreciation. An appreciation is a rise in the currency’s value, a depreciation a fall.

Effects of exchange rate changes

Suppose the arlo depreciates from 2.0 to 1.6 bexo.

• The arlo falls (1.6 - 2.0)/2.0 = -20% against the bexo.
• The bexo rises: arlo per bexo goes from 0.50 to 0.625, up 25%.

Consumers. A Country B jacket priced at 150 bexo costs 150/2.0 = 75 arlo before and 150/1.6 = 93.75 arlo after. Imports and holidays abroad become dearer, which can raise the cost of living. Foreign consumers find A’s goods cheaper: a 400-arlo export falls from 800 to 640 bexo.

Producers. Exporters become more price competitive, so sales may rise. Firms using imported components face higher costs. Firms competing with imports gain, because imports are dearer.

Worked example 7. An exporter sells at a fixed 400 arlo per unit. Each unit uses local inputs costing 220 arlo and an imported part costing 60 bexo. It sells 10,000 units at a rate of 2.0.

• Unit cost at 2.0 = 220 + 60/2.0 = 250 Profit = 150 x 10,000 = 1,500,000
• Unit cost at 1.6 = 220 + 60/1.6 = 257.5 Profit per unit = 142.5

The bexo price falls 20% (800 to 640). If price elasticity of demand is -1.5, volume rises 30% to 13,000 and profit becomes 13,000 x 142.5 = 1,852,500. If it is -0.5, volume rises 10% to 11,000 and profit is 1,567,500, a smaller gain. So the size of the benefit depends on elasticity.

An appreciation does the opposite: imports get cheaper (150 bexo costs 60 arlo at 2.5), but exports become dearer and exporters lose competitiveness.

Evaluating. The effect depends on the size of the change, elasticity, how much the exporter relies on imported inputs, and the time period, because contracts and prices are often set in advance. One group’s gain is another’s loss: depreciation helps exporters and hurts importers and holidaymakers.

Common errors

• Writing that a depreciation makes imports cheaper. It makes them dearer.
• Mixing up the direction: more bexo per arlo is an appreciation of the arlo.
• Drawing demand for a currency upward-sloping.
• Listing arguments against free trade with no chain of reasoning or judgement.
• Ignoring elasticity when saying a depreciation will help exporters.

Official syllabus

This guide follows the OxfordAQA International GCSE Economics (9214) specification, version 1.0, for exams from May/June 2025 onwards, published by OxfordAQA. For demand, supply and elasticity see how markets work.