Globalisation, exchange rates and the balance of payments

Globalisation

• Globalisation is the growing links between economies around the world through trade, investment, migration and technology.
• Causes: cheaper transport (containers), the internet, trade agreements and the growth of multinational companies (MNCs).
• Benefits: cheaper goods, more choice, jobs from foreign investment, and growth in developing countries. Costs: jobs moving abroad, exploitation of low-paid workers, environmental damage, and loss of local culture.

Exchange rates

• An exchange rate is the price of one currency in terms of another, such as £1 = $1.25.
• It is set by the demand for and supply of the currency on foreign exchange markets. Demand for pounds rises when foreigners buy UK exports, visit the UK or invest here.

Effects of exchange rate changes

• A stronger pound (appreciation): exports become more expensive abroad and imports cheaper. Good for UK tourists abroad and import costs; bad for exporters.
• A weaker pound (depreciation): exports become cheaper and imports dearer. Good for exporters; may cause cost-push inflation.
• Remember SPICED: Strong Pound, Imports Cheaper, Exports Dearer.

Converting currency

• If £1 = $1.25, then £200 = $250, and $50 = £40.

Key terms

Globalisation

The growing links between economies around the world.

Multinational company

A firm that operates in more than one country.

Exchange rate

The price of one currency in terms of another.

Appreciation

A rise in the value of a currency.

Depreciation

A fall in the value of a currency.

SPICED

Strong Pound, Imports Cheaper, Exports Dearer.