Regulation globalization and macroeconomics - Global trade a...

Learning Outcomes

After reading this article, you will be able to explain how global trade operates, describe how exchange rates affect trade and business activity, and recognise the role of regulation and government policy in shaping international trade outcomes. You should be able to analyse the impact of currency movements and trade restrictions on business, and relate these economic principles to ACCA exam scenarios.

ACCA Business and Technology (BT) Syllabus

For ACCA Business and Technology (BT), you are required to understand the main principles of global trade and exchange rates, and their effects on business and regulation in the macroeconomic environment. Focus your revision on:

• The purpose and effects of international trade for businesses and economies
• How globalisation influences economic activity and regulation
• Trade barriers: tariffs, quotas, embargoes, and their business impacts
• How exchange rates are determined and their effects on imports and exports
• The influence of government and supra-national policy on international trade and currency markets
• How businesses are affected by exchange rate fluctuations and economic policy decisions

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main benefit and one main risk of international trade for a business?
2. If the domestic currency strengthens against other currencies, what is the likely effect on exports?
3. Name two types of government policies that can restrict international trade.
4. True or false? A rise in the exchange rate makes imports cheaper for domestic consumers.

Introduction

International trade and exchange rates are central to modern business activity. With increasing globalisation, companies are more directly affected by events across borders and by changes in currency values. Governments and international bodies regulate trade and currency markets to encourage growth, reduce instability, and protect their economies. Understanding how global trade flows, how exchange rates work, and how regulation intervenes is essential for effective decision-making in business and is frequently tested in the ACCA exam.

Key Term: globalisation
The process by which economies, markets, and businesses become increasingly interconnected and interdependent across international borders.

Key Term: exchange rate
The price at which one currency can be exchanged for another.

Key Term: trade barrier
Any government-imposed restriction on the free exchange of goods or services between countries.

THE ROLE OF INTERNATIONAL TRADE

International trade allows countries and businesses to buy and sell goods and services across national borders. By specialising in products they produce efficiently, countries can export surplus goods and import those they cannot produce as efficiently, raising overall welfare.

Benefits of international trade

• Access to larger markets and more customers
• Greater choice of goods and services for consumers
• Opportunities to achieve economies of scale
• Spread of technology and innovation
• Increased competition, leading to efficiency gains

Potential disadvantages

• Exposure to global economic cycles and shocks
• Increased competition for domestic businesses
• Greater risk of dependence on foreign suppliers
• Potential for loss of domestic jobs in certain industries

Exam Warning
Be prepared to evaluate both positive and negative impacts of global trade in scenario questions, providing reasons for your assessment.

TRADE BARRIERS AND REGULATION

Despite the benefits of trade, governments sometimes intervene to restrict imports or favour their own industries. These measures are known as trade barriers.

Common types of trade barriers

• Tariffs: Taxes on imported goods, raising their price to domestic buyers.
• Quotas: Limits on the quantity or value of certain goods that can be imported.
• Embargoes: Complete bans on trade with specific countries or products.
• Subsidies: Financial support to domestic industries, making their goods more competitive against imports.
• Product standards/regulations: Technical rules that make it harder for foreign goods to enter the market.

Key Term: tariff
A tax imposed by a government on imported goods and services.

Worked Example 1.1

A country imposes a 20% tariff on imported shoes to protect its local footwear industry. If foreign-made shoes cost $50 per pair before the tariff, how much will the customer now pay?

Answer:
The tariff will add $10 (20% of $50) to the price, so the customer will pay $60 per pair.

Trade barriers can benefit some domestic industries but often increase costs for consumers and may risk retaliation from other countries.

EXCHANGE RATES AND BUSINESS

Exchange rates are the prices at which two currencies are exchanged and can change daily. They are set by supply and demand in the foreign exchange market.

Determinants of exchange rates

• Relative interest rates and inflation between countries
• Balance of payments (trade surplus or deficit)
• Market speculation
• Government intervention (e.g., central bank buying/selling currencies)

Effects of exchange rate changes

Worked Example 1.2

A UK manufacturer sells goods to the US priced at £10,000. The exchange rate moves from £1=$1.30 to £1=$1.25. How does this affect the dollar price received?

Answer:
At £1=$1.30: £10,000 × 1.30 = $13,000
At £1=$1.25: £10,000 × 1.25 = $12,500
The UK exporter receives fewer dollars for the same invoice in sterling after the pound strengthens.
Revision Tip
Always consider how both imports and exports are affected by currency shifts. Use simple examples to test your understanding.

GOVERNMENT AND SUPRA-NATIONAL POLICY

Governments aim to manage exchange rates and trade for economic stability and growth. They may influence currency values through central bank activity, interest rates, or capital controls. International bodies, such as the World Trade Organization (WTO), regulate global trade and help resolve disputes.

Trade policy options

• Free trade: Few (or no) trade barriers, encouraging open markets.
• Protectionism: Use of barriers to protect domestic jobs and production.
• Reciprocal agreements: Countries negotiate to mutually reduce barriers.

Exchange rate policy

• Fixed exchange rate: The central bank maintains the currency at a set value relative to another (e.g., US dollar, Euro).
• Floating exchange rate: The currency's value is determined by the market, changing in response to global supply and demand.
• Managed float: The currency floats, but the central bank may intervene to avoid excessive movement.

Key Term: balance of payments
A record of all financial transactions made between residents of one country and the rest of the world over a period of time.

IMPACT OF GLOBALISATION AND CURRENCY MOVEMENTS ON BUSINESS

Globalisation increases business opportunities but also exposes companies to risks from foreign currency fluctuations and changing trade policies. Currency risk management—such as using hedging—becomes important for firms trading internationally.

Worked Example 1.3

A UK business imports electronics from Japan and must pay ¥1,000,000 in three months. If the exchange rate worsens from £1=¥150 to £1=¥140 between order and payment, what is the increased cost in pounds?

Answer:
At £1=¥150: ¥1,000,000 / 150 = £6,666.67
At £1=¥140: ¥1,000,000 / 140 = £7,142.86
If the pound weakens against the yen, the payment in pounds rises by £476.19.

Businesses may use forward contracts or other financial instruments to reduce the uncertainty from such movements.

Exam Warning
In ACCA questions, ensure you clearly show the effect of currency movements on both trade profitability and cost when answering scenario-based items.

Summary

International trade and exchange rates directly influence business operations and profitability. Trade barriers affect access to markets and costs, while exchange rate changes can quickly alter the competitiveness of exports or the cost of imports. Governments and international institutions regulate these areas to encourage growth and reduce volatility, but interventions can create both opportunities and new risks for businesses.

Key Point Checklist

This article has covered the following key knowledge points:

• Define globalisation and explain its business effects
• Identify types and purposes of trade barriers
• Explain how exchange rates are determined and influence trade
• Summarise the main government and international trade policies
• Illustrate the impact of currency fluctuations on business transactions
• Recognise the role of regulation in shaping global trade
• Use examples to calculate the business effect of exchange rate changes

Key Terms and Concepts

• globalisation
• exchange rate
• trade barrier
• tariff
• balance of payments