Globalisation and multinational business: formula sheet

Key formulas

Trade openness ratio

Openness = (Exports + Imports) ÷ GDP

Often shown as a percentage. A higher ratio means the economy is more exposed to trade. Small economies tend to have higher ratios than large ones.

FDI intensity

FDI intensity = FDI flows (or stock) ÷ GDP

Measures how much foreign investment an economy attracts or makes relative to its size.

Driver grouping

Drivers = Technological + Political + Economic

A checklist for structuring any answer. Not a numerical formula.

Comparative advantage rule

Trade gains arise when each country specialises in the good with the lower opportunity cost

Opportunity cost of good X = units of Y given up per unit of X. Gains hold even if one country is better at everything (absolute advantage).

Net welfare effect

Net gain = gains of winners − losses of losers

Globalisation can raise total welfare while some groups lose. Gains only become widespread if winners compensate losers, for example through retraining or taxes.

Gini coefficient (inequality)

Gini lies between 0 and 1; 0 = perfect equality, 1 = one person has all income

A higher Gini means more inequality. Use it to describe change in inequality within a country.

Opportunity cost

Opportunity cost of good X = units of Y given up ÷ units of X gained

Calculate it for each good in each country. The lower figure shows comparative advantage.

Comparative advantage rule

Country A has comparative advantage in X if OC(X in A) < OC(X in B)

Opportunity costs of the two goods are reciprocals of each other in a two-good model, so a country cannot have the advantage in both.

Terms of trade range

OC(X in exporter) < price of X in units of Y < OC(X in importer)

Both countries gain only if the agreed exchange rate lies strictly between the two opportunity costs.

Tariff-inclusive price

Domestic price = world price + tariff

For a specific tariff, add a fixed amount per unit. For an ad valorem tariff, world price × (1 + rate).

Tariff revenue

Revenue = tariff per unit × quantity imported after the tariff

Use the post-tariff import quantity, not the free-trade quantity.

Percentage change in value of home currency

With the rate in ₹ per $: change in the rupee's value (%) = (old rate ÷ new rate − 1) × 100

A negative result means the home currency has depreciated. For ₹80 to ₹84 per dollar: (80 ÷ 84 − 1) × 100 = −4.76%. If the rate is quoted as foreign currency per unit of home currency, use (new rate ÷ old rate − 1) × 100 instead.

Balance of payments identity

Current account + Capital account + Financial account (including reserve assets) + Net errors and omissions = 0

In principle the total balances. Some presentations show changes in reserves as a separate balancing line instead of inside the financial account, so state your convention.

Trade balance

Trade balance = Exports of goods − Imports of goods

This is only one part of the current account. Add services, primary income and secondary income for the full current account.

Current account

Current account = Trade in goods + Trade in services + Primary income + Secondary income

A negative total is a current account deficit.

Marshall-Lerner condition

Depreciation improves the trade balance if |PEDx| + |PEDm| > 1

PEDx is the price elasticity of demand for exports. PEDm is that for imports. It assumes the trade balance starts at zero.

Relative purchasing power parity (approximate)

For a rate quoted as home currency per unit of foreign currency (such as ₹ per $): % rise in the rate (home currency depreciation) ≈ domestic inflation − foreign inflation

This is a long-run tendency, not an exact rule. A positive value means the home currency depreciates. If the quote is the other way round, the sign flips.

Quick revision

• Globalisation is increasing integration of economies through trade, investment, finance, people and technology.
• Key drivers include lower transport and communication costs, trade liberalisation, capital mobility and technology.
• Benefits include greater choice, lower prices, economies of scale, technology transfer and wider markets.
• Costs include job losses in exposed industries, inequality, dependence on other economies and faster spread of shocks.
• A multinational company controls operations in more than one country, usually through FDI.
• FDI is long-term investment that gives control or significant influence over a foreign business.
• A tariff is a tax on imports; it raises domestic price, cuts imports and raises government revenue.
• A quota limits import quantity; the gain from the higher price goes to quota holders rather than the government unless licences are sold.
• Trade blocs range from free trade areas to customs unions and common markets, with deeper integration at each step.
• The balance of payments records a country's transactions with the rest of the world; the main parts are the current account and the capital and financial accounts.
• Currency depreciation makes exports cheaper abroad and imports dearer, but the net effect depends on how responsive demand is.
• Always state assumptions and give both sides in a discussion answer.

Common mistakes

• Confusing causes of globalisation with its effects. Fix: Ask whether the item makes cross-border activity easier (a driver) or is a result of it (an effect). Keep effects for the costs and benefits topic.
• Listing drivers with no explanation. Fix: For each driver, add one sentence on how it cuts cost or raises reward for cross-border business.
• Treating globalisation as wholly good or wholly bad. Fix: Always present both sides and finish with a conditional judgement based on policy and time frame.
• Saying globalisation reduces inequality everywhere, or increases it everywhere. Fix: State the level. Gaps between countries can narrow while inequality inside a country widens.
• Treating any foreign share purchase as FDI. Fix: Apply the control test. FDI gives lasting control or influence. Portfolio investment is passive and easier to reverse.
• Mixing up host and home country. Fix: Label the countries at the start. The host receives the investment. The home is where the MNC is based.
• Confusing absolute advantage with comparative advantage. Fix: Always compute opportunity costs. Absolute advantage compares output; comparative advantage compares what is given up.
• Dividing the wrong way when finding opportunity cost. Fix: Write the sentence first: 'To get 1 unit of X, I give up ... units of Y.' Then divide Y lost by X gained.
• Reading the quoted rate backwards, saying the rupee strengthened when ₹ per $ rose. Fix: Always ask what one unit of which currency costs. If more rupees buy one dollar, the rupee is weaker.
• Saying the balance of payments can be in deficit overall. Fix: State that the full BoP balances by construction. Say which account or sub-balance is in deficit, and how it is financed.

Exam tips

• Structure every causes question as technological, political, economic. Examiners look for this grouping.
• Explain the mechanism in each driver; a bare list earns few marks.
• In MCQs, check whether the question asks for a cause, a measure or an effect before picking an option.
• Show the openness ratio formula and your working if a numerical part appears.
• Mention that globalisation trends can slow or reverse to show balanced judgement in discuss questions.
• Command words matter. 'Discuss' or 'evaluate' needs both sides and a conclusion; 'explain' needs mechanisms.
• Tie each point to a named group in the question, such as consumers or workers.
• Use the within-country versus between-country split whenever inequality appears.