Globalisation, multinational companies and exchange rates

Last time

Before we start: last time, in The environment, external costs, ethics and pressure groups, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Business across borders

Your phone may be designed in one country, assembled in another, and sold in a third. That is globalisation. This lesson covers its opportunities and threats, multinational companies, and how exchange rates change prices and profits.

Globalisation

Globalisation is the growing trade and links between countries' economies. It is driven by cheaper transport, the internet, fewer trade barriers, and the growth of multinational companies. It brings both opportunities and threats for businesses.

Opportunities of globalisation

New markets abroad, so more customers and higher sales. Cheaper materials and components from other countries, so lower costs. The chance to produce abroad where costs are lower, and economies of scale from a bigger market.

Threats of globalisation

More competition from foreign firms, often with lower costs, in the home market. Pressure to cut prices and costs, and the risk of losing customers. Workers may lose jobs if production moves abroad.

Tariffs and quotas

A tariff is a tax on imports, which makes them dearer. A quota is a limit on the quantity of a product that can be imported. They help home businesses compete, by making imports dearer or scarcer. But they raise prices for customers and for firms using imported materials, and other countries may retaliate.

Multinational companies

A multinational company is a business with factories or operations in more than one country. MNCs locate abroad to be near markets, cut costs, reach raw materials, and avoid trade barriers. Many large brands in Pakistan, in food, drinks and phones, are made or sold by MNCs.

MNCs and a host country

Here are the main benefits and drawbacks of an MNC to the country where it locates.

Exchange rates

The exchange rate is the price of one currency in terms of another, such as how many rupees buy one dollar. Appreciation is a rise in the value of a currency; depreciation is a fall. Changes affect importers and exporters differently.

Appreciation

When the home currency appreciates, imports become cheaper, so firms buying raw materials from abroad gain. But exports become dearer for foreign buyers, so exporters may lose sales. Remember: Strong Pound, Imports Cheap, Exports Dear, or SPICED, works for any currency.

Depreciation

When the home currency depreciates, exports become cheaper abroad, so exporters may sell more. But imported raw materials cost more, raising the costs of firms that import. So whether a change helps or hurts depends on whether the business mainly imports or exports.

Mistakes that lose marks

Mistake one: saying a stronger currency makes exports cheaper. Mistake two: confusing a tariff with a quota. Mistake three: giving MNC benefits to the MNC when the question asks about the host country. The fix: SPICED, the right term, and the right group.

The full-marks tip

The full-marks tip: for exchange rates, say whether the business imports or exports, then use SPICED. For MNCs, say who gains: the MNC, the host country, or the home country.

On one card

So, on one card: globalisation and exchange rates. Keep it for revision.