Teaching guide: podcast - the international economy
These podcast teaching guides cover topics from our AS and A-level Economics specifications. You can download them below.
Podcast 4: The international economy
This podcast teaching guide looks at how the macroeconomy works. It aims to highlight how students can apply economic concepts and tools to critically analyse real life examples and comment on the potential impact to macroeconomic variables.
Transcript
In this podcast, we will be talking about: The International Economy. Paying particular attention to globalisation, trade, the balance of payments, exchange rate theory, and economic growth and development.
With the recent referendum vote to leave the European Union, this area of the specification could not be more topical and, as a consequence, a topic that students will enjoy engaging with. It could be argued that the Brexit vote was, in part, an anti-globalisation vote. The real challenge approaching this topic is to ensure that, when discussing issues such as membership of the EU, students confine their comments to the economic issues only and avoid straying into politics and the emotive issues that surround migration.
The key to good understanding is the successful synthesis of economic theory and the application of that theory to the analysis of real world events.
When teaching the topic of globalisation, it’s unlikely you or your students will be short of real world examples. When beginning this topic it should be made clear to students, that globalisation is a generic term that has a number of facets of which economics is only one. Globalisation has political, cultural, environmental as well as economic consequences. Teachers must ensure that students focus on the economic causes and consequences of globalisation.
As you know, Globalisation is the process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange. The biggest companies are no longer national firms but multinational corporations with subsidiaries in many countries. High profile examples of this include high street names such as McDonalds and Starbucks.
Globalisation has been taking place for hundreds of years, but has speed up enormously over the last half-century and it has resulted in increased international trade, greater dependence on the global economy, freer movement of capital, goods, and services and is seen by many as being a major source of benefit to the world economy.
Although globalisation is probably helping to create more wealth - it is not helping to close the gap between the world's richest and poorest countries and, as a result, many commentators emphasise the negative consequences of globalisation. It is important for students to be able to discuss the economic advantages and disadvantages of globalisation and be able to show an understanding of both sides of the debate.
Moreover, students need to understand that the benefits of globalisation may not be distributed evenly and that less developed economies may not benefit as much as more developed economies, from the process. The ability to evaluate both sides of an argument is actually a generic skill that the specification promotes and the most successful students can routinely display this skill.
In order to help students understand the extent to which globalisation has created interlinked economies, it is worthwhile undertaking a product case-study. A good example of this would be the iPhone which has a complicated global supply chain. The product was conceived and designed in Silicon Valley, California; the software was enhanced by software engineers working in India, and the phones are assembled / manufactured in China and Taiwan. The ability to apply economic theory to real world examples is crucial and many longer answer questions invite the student to “use their own knowledge”.
Following on from Globalisiation the next topic in the specification, relates to trade. A good starting point for this topic is to ask students the question “Why do nations trade?” The central economic argument that answers this question is the theory of comparative advantage which is an extension of Adam Smith’s work on specialisation and division of labour. This theory has to be well understood as it forms the cornerstone of why economists believe that trade is beneficial to nations and should therefore be encouraged.
To develop understanding and demonstrate quantitative skills, students must be able to develop a simple numerical example to illustrate this theory. Not only must a student be able to develop this theory in longer examination questions, they may also be tested via multiple choice questions.
Having understood the theory of comparative advantage students also need to understand that there are other economic reasons that pressure nations to trade such as: the emergence of global brands which have popular consumer following; the exploitation of differing international tax regimes; technological change reducing the costs of sharing and transmitting information and the opening up of global financial markets facilitating foreign direct investment in economies.
Another trade promoting factor in recent decades has been the reduction in protectionism. However, there is evidence emerging that this trend is slowing as countries have struggled to achieve growth after the global financial crisis.
The logical next step, having helped students understand the economic arguments supporting free trade, is to examine how and why nations may pursue protectionist policies such as tariffs or quotas. It is important, particularly with those longer questions where students’ evaluative skills are assessed, that a student can give arguments both for and against the promotion of free trade.
When looking at protectionism, students should gain much practice at drawing and describing the relevant diagrams to show the effects of a tariff and the effects of joining a customs union. These diagrams are integral to answering context questions on this area of the specification and often feature in multiple choice questions. The ability to draw and explain relevant diagrams as part of an extended answer, if done correctly, will always be recognised and rewarded in mark schemes.
Finally, a student must understand the role of key institutions that impact upon trade, economic growth and exchange rates. The EU, WTO, IMF and World Bank should all be defined and their significance and influence explained. In the case of the EU students must have a clear understanding of the economic arguments for and against UK membership and, post Brexit, the likely positive and negative economic consequences of withdrawing from the union.
The next topic on the specification relates to the balance of payments.
To engage students in what, to them, can feel like a distant and abstract concept, a brief discussion of the pretty poor state of the UKs current account may interest them. Informing students that, for example, the record balance of payments current account deficit of £96.2bn (5.2% of GDP) for 2015 was higher in percentage terms than in any year since the second world war, may well promote discussion. From a consideration of this initial statistic, students should be confronted with questions such as: “Why has this deficit reached such levels?”, “Why is it that there seems little likelihood of change in the short run?”, “How is the deficit funded?”, “What are the implications for the value of the £?”, “What are the implications of this deficit upon future generations prosperity?” Questions such as these will inevitably generate a lively debate, and it is likely that teaching the drier topics that follow, such as the accounting elements of the balance of payments account, will prove to be a little less challenging once students are enthused.
As the topic is developed, as with all key macroeconomic policy targets, students will need to be able to understand the causes and effects of trade deficits and the policy options open to governments to correct them.
The next logical area of economics that follows from the balance of payments is exchange rate theory. The market for a currency should be developed in just the same way as any other individual market that is analysed but there is a key chain of reasoning which students must understand, namely; the causal links between currency price movements, import and export price changes, and finally the consequent impact upon export and import volumes.
Integral to an understanding of this chain of causation is an understanding of the role of the price elasticities of import and export demand. It is not uncommon for students to have a poor understanding of these links, resulting in weaker exam performances in longer, essay type, questions on this area of the specification.
Once students have mastered how the market for a currency functions, they need to consider the arguments for and against government intervention in this key marketplace and look at the recent history of fixed and managed exchange rates.
The final topic that is included in this area of the specification is economic growth and development. A good starting point for this topic would be to give students clear definitions of the two terms and explain how economists measure both growth and development. In the case of development there are a plethora of measures and students need not go beyond the human development index and perhaps the 2015 revision called the inequality adjusted human development index which takes into account the distribution of income, education and life expectancy in nations.
Having studied data on growth and development, students need to appreciate why economies have grown and developed at differing rates. Arguably one of the best ways to appreciate this is through the specific study of one or two actual nations’ progress and the identification of those factors that contributed towards their successes or slow progress. In doing this it is important to understand the characteristics of less developed economies and how other, more prosperous, nations can assist and promote their economic development. This particular area of the specification invites a synoptic approach to study as inevitably there are many links to other areas of the specification such as the impact of globalisation on differential rates of progress or the role of free markets in promoting growth and development.
As with all areas of economics the key to successful teaching is the synthesis of economic theory and real world events. The ability to write confidently in an examination about specific nations and why they have or haven’t developed and grown strongly, is invaluable.
Thank you for listening we hope you have found this podcast useful. For more helpful AQA resources, visit the AS and A-level Economics pages of our website, aqa.org.uk/economics