Cambridge IGCSE · 0455

Economics

International trade and development — Syllabus topics 5-6

Name: ____________________Date: October 4, 2026

1.
Country X can produce 100 units of wheat or 50 units of cloth with its resources. Country Y can produce 60 units of wheat or 80 units of cloth with the same resources. Which country has an absolute advantage in wheat production? A Country X B Country Y C Both equally D Neither
[1 mark] · no calculator
Marking points
- Selects A: Country X, since it can produce more wheat (100 units) than Country Y (60 units) with the same resources.
Examiner tip: Absolute advantage compares output of one good directly, using the same quantity of resources.
2.
Using the figures above (Country X: 100 wheat or 50 cloth; Country Y: 60 wheat or 80 cloth), calculate the opportunity cost of producing one unit of wheat in each country, and state which country has a comparative advantage in wheat.
[4 marks]
Marking points
- Calculates Country X's opportunity cost of one unit of wheat as 50 ÷ 100 = 0.5 units of cloth.
- Calculates Country Y's opportunity cost of one unit of wheat as 80 ÷ 60 ≈ 1.33 units of cloth.
- States that Country X has the lower opportunity cost for wheat.
- Concludes that Country X has a comparative advantage in wheat production.
Examiner tip: Comparative advantage depends on the lower opportunity cost, not on which country can produce more in total.
3.
A government imposes a tariff on imported steel. What is the most likely effect on the domestic market for steel? A The domestic price falls and imports rise B The domestic price rises and imports fall C Domestic producers' output falls D Foreign producers' costs fall
[1 mark] · no calculator
Marking points
- Selects B: a tariff raises the price of imported steel, making domestic steel more competitive and reducing import volumes.
Examiner tip: A tariff is a tax on imports, so it raises their price to consumers and protects domestic producers from foreign competition.
4.
Explain one benefit to consumers of international trade.
[2 marks] · no calculator
Marking points
- States a benefit such as a wider choice of goods and services than domestic production alone provides.
- Explains that specialisation and competition between countries can also lead to lower prices for consumers.
Examiner tip: Trade lets a country consume goods it either cannot produce or can only produce at a higher opportunity cost.
5.
A government wants to protect its domestic car industry from foreign competition. Analyse two methods, other than a tariff, that it could use.
[4 marks] · no calculator
Marking points
- Identifies a quota as a valid method, limiting the physical quantity of cars that can be imported.
- Explains that a quota directly restricts supply from abroad, protecting domestic sales volume.
- Identifies a subsidy to domestic producers as a second valid method.
- Explains that a subsidy lowers domestic producers' costs, letting them price more competitively against imports.
Examiner tip: Protectionism can work through price (tariffs, subsidies) or directly through quantity (quotas) and regulation.
6.
Explain how an increase in demand for a country's exports is likely to affect the external value of its currency under a floating exchange rate system.
[3 marks] · no calculator
Marking points
- Explains that more exports being bought means foreign buyers must exchange their currency for the exporting country's currency.
- States that this increases demand for the domestic currency on the foreign exchange market.
- Concludes that, under a floating system, the domestic currency is likely to appreciate.
Examiner tip: Under a floating exchange rate, the currency's value is set by the demand and supply of that currency in the foreign exchange market, just like any other price.
7.
Analyse how an appreciation of a country's currency is likely to affect its consumers who buy imported goods.
[4 marks] · no calculator
Marking points
- Explains that appreciation means foreign currency becomes cheaper to buy in terms of the domestic currency.
- Explains that this lowers the domestic-currency price of imported goods for consumers.
- Concludes that consumers are likely to buy a greater quantity of imported goods.
- States that consumers of imported goods benefit, even though domestic exporters may be harmed.
Examiner tip: Appreciation benefits importers and consumers of foreign goods, while it tends to harm exporters — the opposite of depreciation.
8.
Explain the difference between economic growth and economic development.
[3 marks] · no calculator
Marking points
- Defines economic growth as an increase in a country's real output or real GDP over time.
- Defines economic development as a broader improvement in living standards and well-being, such as health, education and reduced poverty.
- States that a country can experience growth without equivalent development, for example if higher output does not reach most citizens.
Examiner tip: Growth is a narrower, purely quantitative measure of output; development is a wider, more qualitative measure of living standards.
9.
Explain one benefit a developing country could gain from a large foreign company building a factory there through foreign direct investment (FDI).
[2 marks] · no calculator
Marking points
- Identifies a benefit such as new jobs, new technology, or new skills being transferred to local workers.
- Explains how this benefit could help the wider economy develop, beyond the single factory itself.
Examiner tip: FDI can bring more than just jobs — it often transfers technology, management skills and connections to international markets.
10.
Explain what is meant by remittances, and how they can benefit a developing country.
[2 marks] · no calculator
Marking points
- Explains that remittances are money sent back home by citizens who are working abroad.
- Explains that this money can raise household incomes and spending in the home country, supporting economic activity and development.
Examiner tip: For some developing countries, remittances from workers abroad are a larger source of foreign income than exports or aid.
11.
Explain one benefit to member countries of forming a trade bloc, such as a group of countries agreeing to trade freely with each other.
[2 marks] · no calculator
Marking points
- Explains that member countries can trade with each other without tariffs or quotas, lowering costs for both producers and consumers.
- Explains that this gives firms access to a larger combined market, allowing them to benefit from economies of scale.
Examiner tip: A trade bloc removes trade barriers between its own members while often still applying them to countries outside the group.
12.
Explain the infant industry argument for temporarily protecting a new domestic industry with tariffs on imports.
[2 marks] · no calculator
Marking points
- Explains that a new domestic industry may not yet be able to compete with established, more efficient foreign producers.
- Explains that temporary protection gives the new industry time to grow, gain experience and become efficient enough to compete without protection later.
Examiner tip: The infant industry argument treats protection as temporary support for growth, not a permanent shield from all competition.
13.
Explain what is meant by dumping in international trade, and why other countries often object to it.
[2 marks] · no calculator
Marking points
- Explains that dumping occurs when a firm exports a good at a price below its normal cost of production, often to undercut foreign competitors.
- Explains that other countries object because this can unfairly damage their own domestic producers, who cannot profitably match such a low price.
Examiner tip: Dumping is controversial because it is selling below cost, not simply selling at a genuinely low, efficient price.
14.
Distinguish between a fixed exchange rate system and a floating exchange rate system.
[2 marks] · no calculator
Marking points
- Explains that in a fixed exchange rate system, the government or central bank sets and maintains the currency's value against another currency.
- Explains that in a floating exchange rate system, the currency's value is determined by the free interaction of demand and supply on the foreign exchange market.
Examiner tip: A fixed rate requires active government or central bank intervention to maintain; a floating rate adjusts automatically with market forces.
15.
Explain the difference between a currency depreciation and a currency devaluation.
[2 marks] · no calculator
Marking points
- Explains that depreciation is a fall in a currency's value caused by market forces (demand and supply) under a floating exchange rate.
- Explains that devaluation is a deliberate decision by a government or central bank to lower the official value of a currency under a fixed exchange rate.
Examiner tip: Depreciation happens through the market; devaluation is a deliberate policy decision — both result in the currency being worth less.
16.
Explain one risk to a developing country of relying heavily on exporting a single primary commodity, such as one type of agricultural crop.
[2 marks] · no calculator
Marking points
- Explains that the country's export earnings depend heavily on the world price of that one commodity, which can be very volatile.
- Explains that a sharp fall in that price, or a bad harvest, could severely damage the country's income with little to fall back on.
Examiner tip: Relying on one export good concentrates risk; diversifying into multiple industries spreads it out.
17.
Explain what is meant by debt relief, and why some developing countries receive it.
[2 marks] · no calculator
Marking points
- Explains that debt relief means some or all of a country's debt to other countries or international institutions is cancelled or reduced.
- Explains that this is given to countries whose debt repayments are so large that they prevent spending on development priorities such as health and education.
Examiner tip: Debt relief aims to free up a country's budget so it can be spent on development rather than entirely on repaying past loans.
18.
Explain what is meant by ‘brain drain’, and why it can be a problem for a developing country.
[2 marks] · no calculator
Marking points
- Explains that brain drain is the emigration of highly skilled or educated workers, such as doctors or engineers, to other countries.
- Explains that this is a problem because the home country loses valuable skills and the return on its investment in educating these workers, often to wealthier countries offering higher pay.
Examiner tip: Brain drain means a developing country effectively subsidises the education of skilled workers who then benefit a wealthier country instead.
19.
Explain one challenge that rapid population growth can create for economic development in a low-income country.
[2 marks] · no calculator
Marking points
- Identifies a valid challenge, such as greater pressure on limited healthcare, education, housing or job opportunities.
- Explains that if the economy cannot create resources or jobs fast enough to match population growth, average living standards can fail to improve or even fall.
Examiner tip: The challenge is not population size itself, but whether the economy's resources and job creation can keep pace with how fast the population is growing.
20.
Explain why investing in primary education is often considered one of the most effective ways for a developing country to promote long-term economic development.
[2 marks] · no calculator
Marking points
- Explains that education raises workers' future productivity and skills, supporting higher output and wages over time.
- Explains a further benefit, such as educated populations typically having better health outcomes and lower birth rates, both associated with faster development.
Examiner tip: Education is often called an investment in ‘human capital’ — it raises an economy's long-run productive potential, much like investment in machinery does for capital.
21.
Explain what is meant by sustainable development.
[2 marks] · no calculator
Marking points
- Explains that sustainable development means meeting the needs of the present generation without compromising the ability of future generations to meet their own needs.
- Gives an example, such as balancing economic growth today with protecting natural resources and the environment for the future.
Examiner tip: Sustainable development asks whether today's growth is achieved in a way that can continue, rather than growth that depletes resources future generations will need.
22.
Discuss whether international aid or increased trade opportunities is likely to do more to help a low-income country develop in the long run.
[4 marks] · no calculator
Marking points
- Explains a benefit of aid, such as providing immediate resources for essential needs like healthcare, food or disaster relief that the country cannot yet afford itself.
- Explains a benefit of trade, such as building a country's own productive capacity and export earnings in a way that does not depend on continued generosity from others.
- States a limitation of aid, such as creating dependency or sometimes being misused, versus a limitation of relying on trade, such as needing competitive industries to exist first.
- Reaches a judgement depending on the country's current stage of development and the urgency of its immediate needs.
Examiner tip: Aid can address urgent short-term needs; trade builds longer-term, self-sustaining capacity — the right balance depends on how urgent the country's needs currently are.
23.
Explain the purpose of a fair trade scheme for a product such as coffee grown by small farmers in a developing country.
[2 marks] · no calculator
Marking points
- Explains that fair trade guarantees farmers a minimum price for their crop, protecting them from very low world prices.
- Explains that this gives farmers a more stable and reliable income, helping to improve their living standards.
Examiner tip: Fair trade aims to protect small producers from the full volatility of world commodity prices, which can otherwise leave them with very little income in a bad year.
24.
Explain what is meant by a country's terms of trade.
[2 marks] · no calculator
Marking points
- Explains that the terms of trade compare the prices a country receives for its exports with the prices it pays for its imports.
- Explains that an improvement in the terms of trade means a country can buy more imports for the same quantity of exports sold.
Examiner tip: A rise in export prices relative to import prices improves a country's terms of trade, effectively making its exports buy more imports than before.