Business Economics · Impact of the macroeconomic environment on business

International Trade, Balance of Payments and Globalisation Effects

Updated 11 October 2026 · Fact-checked

International trade is the exchange of goods, services and capital across borders. The balance of payments records these flows in the current account, capital account and financial account. To answer exam questions, identify the flow, place it in the right account, then assess how trade barriers and globalisation affect firms' costs, revenues and risks.

Understand International Trade and Globalisation Effects

Countries trade because they differ in resources, skills and costs. A firm sells abroad to reach more customers. It buys abroad to get cheaper or better inputs. Trade lets each country focus on what it does relatively well.

The balance of payments (BoP) is a record of all transactions between residents of a country and the rest of the world over a period. It uses double-entry logic. Every transaction has two sides, so the full account always balances. When people say a country has a BoP deficit, they mean a deficit on one part, usually the current account.

The current account covers trade in goods (visible), trade in services (invisible), primary income (such as profits, interest and wages earned abroad) and secondary income (transfers such as remittances and aid). The capital account records small capital transfers and non-produced assets. The financial account records investment flows: foreign direct investment, portfolio investment, other investment and changes in reserves. A current account deficit must be matched by net inflows on the financial side, or by a fall in reserves.

Trade barriers protect domestic firms. A tariff is a tax on imports. It raises the price paid by buyers and gives the government revenue. A quota is a limit on the quantity imported. It raises price by cutting supply, and the extra price goes to importers or foreign sellers unless licences are auctioned. Other barriers are subsidies to local producers, embargoes and technical standards.

Globalisation is the growing link between economies through trade, investment, finance, people and information. For firms it brings larger markets, economies of scale, cheaper inputs and access to capital. It also brings more competition, exchange rate risk, supply chain disruption, and exposure to shocks from other countries. Benefits and risks are not the same for every firm or every country, so exam answers should use the context given.

Key rules to remember

Current account balance: CA = (X − M) + net primary income + net secondary income; X = exports of goods and services, M = imports. A positive value is a surplus, a negative value is a deficit.
Trade balance: Trade balance = exports − imports; Can be stated for goods only (visible balance) or goods and services together. Check which one the question wants.
Overall BoP identity: Current account + capital account + financial account + errors and omissions = 0; Sign conventions differ by source. Use the one in the question and state it. Reserve changes sit in the financial account in modern presentation.
Tariff effect on price (small country): Domestic price = world price + tariff; For a specific tariff, add the amount per unit. For an ad valorem tariff, price = world price × (1 + rate).
Tariff revenue: Revenue = tariff per unit × quantity imported after the tariff; Use the post-tariff import quantity, not the original one.
Terms of trade: Terms of trade = (index of export prices ÷ index of import prices) × 100; A rise means each unit of exports buys more imports.

How to solve International Trade and Globalisation Effects questions

Use this order for any question on trade, the balance of payments or globalisation.

1Read the command word. 'Explain' needs a definition and reasons. 'Evaluate' needs both sides and a judgement. 'Calculate' needs working.
2Identify the flow or policy. Is it a trade in goods, services, income, a transfer or an investment? Is the policy a tariff, a quota or a subsidy?
3Place each flow in the correct BoP account. Goods and services, income and transfers go in the current account. Investment flows go in the financial account.
4For a calculation, write the formula, substitute the numbers, and state the sign (surplus or deficit) with units.
5For barriers, show the effect on price, quantity, domestic producers, consumers and the government.
6For globalisation, list the effects on the firm: markets, costs, competition, currency and supply chain. Give both a benefit and a risk.
7Link to the firm in the question. Say who gains, who loses and why.
8Finish with a short conclusion that answers the question asked.

Quickest way: Account-first sorting

When to use it: Use this for MCQs that ask where a transaction is recorded or what a policy does.

Ask: is it a payment for goods or services, income, a gift or an investment?
Goods, services, income and transfers: current account. Investment, loans and reserves: financial account.
Money coming into the country from abroad is a credit. Money going out is a debit.
For tariffs: price up, imports down, domestic output up, government revenue up. For quotas: price up, imports capped, no tariff revenue.
Remove options that reverse a direction, then pick the one that matches the account and sign.

Common mistakes in International Trade and Globalisation Effects

Saying the balance of payments can be in deficit overall in the same way as a household budget.
The word 'balance' is read as a budget balance.
Fix: Remember the full BoP balances by construction. A deficit refers to one account, usually the current account, which is financed by the financial account or by reserves.
Putting foreign direct investment in the current account.
It is a flow of money, so it looks like trade.
Fix: Investment in assets goes in the financial account. Only the income earned on it, such as profits, goes in the current account.
Treating tariffs and quotas as the same thing.
Both raise domestic prices and cut imports.
Fix: A tariff is a tax and earns government revenue. A quota is a quantity limit and earns no revenue unless licences are sold. State this difference.
Using trade balance and current account as if they were equal.
Trade is the largest part of the current account.
Fix: Add services, primary income and secondary income to the trade balance to get the current account.
Writing only the benefits of globalisation.
Students learn the positive points first and stop.
Fix: Give at least one risk for each benefit, such as exchange rate risk, stronger competition or supply chain shocks, and link to the firm.
Using the pre-tariff import quantity to find tariff revenue.
The original quantity is the first number given.
Fix: Tariffs cut imports. Multiply the tariff by the new, lower import quantity.

Worked examples

Example 1

A country records the following for a year (₹ crore): exports of goods 5,000; imports of goods 6,200; exports of services 2,400; imports of services 1,300; net primary income −400; net secondary income +900. Calculate the trade balance in goods, the balance on goods and services, and the current account balance.

Show the solution

Goods balance = 5,000 − 6,200 = −1,200.
Services balance = 2,400 − 1,300 = +1,100.
Goods and services balance = −1,200 + 1,100 = −100.
Current account = −100 + (−400) + 900 = +400.

Answer: Goods balance: −₹1,200 crore (deficit). Goods and services balance: −₹100 crore. Current account: +₹400 crore (surplus).

Example 2

The world price of a good is ₹80 per unit. A country imports 10,000 units a year at that price. It imposes a specific tariff of ₹20 per unit, and imports fall to 6,000 units. Find the new domestic price and the tariff revenue, and explain one effect on domestic producers and one on consumers. Assume the country is small, so the world price is unchanged.

Show the solution

Domestic price = world price + tariff = 80 + 20 = ₹100 per unit.
Tariff revenue = tariff × post-tariff imports = 20 × 6,000 = ₹1,20,000.
Producers: the higher price of ₹100 lets domestic firms sell more and earn more per unit, so they gain.
Consumers: they pay ₹20 more per unit and buy less in total imports, so they lose.

Answer: New domestic price ₹100 per unit. Tariff revenue ₹1,20,000. Domestic producers gain from higher price and output. Consumers lose through higher prices and less choice.

Exam tips

Learn which account each flow belongs to. This is a frequent MCQ and also supports written answers.
Always state surplus or deficit with the sign and units when you calculate a balance.
For tariffs versus quotas, name the revenue difference. It is the point examiners reward most.
In evaluation answers, give benefits and risks, then a judgement that depends on the firm's size, sector and exposure to currency moves.
Check whether the question says goods only or goods and services before computing a trade balance.

Practice questions from Impact of the macroeconomic environment on business

International Trade and Globalisation Effects: frequently asked questions

What does the current account of the balance of payments include?

It includes trade in goods, trade in services, primary income such as profits and interest, and secondary income such as remittances and aid. The sum of these is the current account balance.

What is the difference between tariffs and quotas?

A tariff is a tax on imports and raises revenue for the government. A quota is a limit on the quantity imported and raises no revenue unless the licences are sold. Both usually raise domestic prices and protect local producers.

Is a current account deficit always bad for a business?

No. It can reflect strong investment and demand for imported inputs. It becomes a concern if it is large and persistent and can only be financed by volatile inflows, which may put pressure on the exchange rate.

What are the main benefits and risks of globalisation for firms?

Benefits include bigger markets, scale economies, cheaper inputs and wider access to finance. Risks include more competition, exchange rate exposure, supply chain disruption and sensitivity to foreign shocks.