The Global Economy

Your complete mastery of IB Economics international trade and development - from benefits of trade and protectionism through exchange rates and balance of payments to sustainable development, measuring development, barriers to growth, and economic development strategies

The global economy section forms the international and development-focused dimension of the IB Economics course, providing essential frameworks for understanding how countries interact through trade and finance, why some nations prosper while others struggle with poverty, and how sustainable development can lift billions out of deprivation. With global trade exceeding $32 trillion annually, 689 million people still living in extreme poverty on less than $2.15 per day, and climate change threatening development progress across the Global South, understanding international economics and development has never been more critical. This comprehensive section explores why countries trade, how protectionism affects welfare, what determines exchange rates, how countries integrate economically, how we measure development beyond GDP, what barriers prevent progress, and which strategies can achieve sustainable and inclusive growth. The 2022 syllabus emphasises real-world policy evaluation, contemporary development challenges, and the nine key concepts of scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, and intervention throughout all topics.

What You'll Master:

• Complete understanding of comparative advantage theory and gains from trade

• Deep analysis of tariffs, quotas, and subsidies with welfare effects using consumer and producer surplus

• Critical evaluation of arguments for and against trade protection including infant industry, employment, and strategic trade arguments

• Comprehensive knowledge of economic integration from free trade areas through customs unions and common markets to monetary unions

• Sophisticated understanding of exchange rate systems, determination, and effects on trade competitiveness

• Advanced analysis of balance of payments structure, deficits and surpluses, and adjustment mechanisms

• Strategic insight into sustainable development balancing economic, social, and environmental dimensions

• Deep knowledge of development measurement beyond GDP including HDI, GNI per capita, and multidimensional poverty

• Critical evaluation of barriers to development including poverty cycles, inadequate infrastructure, institutional weaknesses, and debt

• Comprehensive analysis of development strategies including market-oriented, interventionist, and balanced approaches

• Real-world applications using contemporary examples from US-China trade wars to Brexit to SDG progress

• Advanced policy evaluation skills considering effectiveness, equity, and sustainability

• SL and HL Comprehensive IB Economics Diagram Analysis

The global economy module comprises approximately 30-35 hours at Standard Level (SL) and 40-45 hours at Higher Level (HL), integrating microeconomic tools with macroeconomic concepts to analyse international and development issues. Understanding comparative advantage, exchange rates, and development strategies requires sophisticated analytical thinking connecting trade theory, policy evaluation, and real-world development challenges. The mean grade of 4.8 for Economics HL and 4.7 for SL reflects the rigorous international perspective this section develops.

Full breakdowns of international trade and development theory with contemporary case studies, policy analysis, diagram construction, and exam techniques are available in our added value IB Economics resources.

Current Global Economy Context (2024-2025)

Trade Wars and Protectionism Revival

The post-2016 period witnessed a dramatic revival of protectionism, with the US-China trade war imposing tariffs on over $500 billion of bilateral trade. US tariffs on Chinese imports rose from 3% to over 20% on average, with China retaliating with tariffs on US agricultural products, aircraft, and automobiles. By 2024, despite some tariff reductions, trade tensions persist with new restrictions on technology exports including semiconductors and AI systems. Global trade growth slowed from 5% annually pre-2016 to just 2-3% during 2017-2024, partly reflecting these protectionist measures.

Brexit and Economic Integration

The UK's 2020 exit from the European Union represents the first reversal of economic integration in modern history. UK-EU trade fell 15-20% post-Brexit due to new customs checks, regulatory divergence, and non-tariff barriers despite the zero-tariff trade agreement. Services trade particularly affected, with financial services losing passporting rights. Brexit illustrates costs of leaving integrated markets including reduced trade, investment flight, and regulatory complexity.

Exchange Rate Volatility

Currency markets experienced extreme volatility 2020-2024, with the US dollar strengthening 25% against most currencies during 2021-2022 as the Federal Reserve raised interest rates aggressively. The British pound fell to $1.03 (lowest since 1985) in September 2022 following unfunded tax cut announcements, illustrating how fiscal policy affects currency confidence. Emerging market currencies depreciated sharply, with Turkish lira falling 80%, Argentine peso collapsing, and many African currencies weakening substantially.

Sustainable Development Goals Progress

The UN's 17 Sustainable Development Goals (SDGs) target 2030 faces significant setbacks. Covid-19 pushed 120 million people back into extreme poverty, reversing decades of progress. Climate change increasingly threatens development through droughts, floods, and extreme weather affecting agriculture and infrastructure. However, progress continues in some areas: global poverty fell from 10% (2015) to 8.6% (2024), though 689 million people still live on less than $2.15 daily. Access to electricity reached 91% globally (up from 83% in 2010), and child mortality continues declining.

Debt Crisis in Developing Countries

Low-income country debt reached $860 billion in 2024, with 60% of these countries in or near debt distress. Rising interest rates increased debt servicing costs while currency depreciation made dollar-denominated debt more expensive. Zambia, Sri Lanka, Ghana, and Pakistan faced debt crises requiring IMF support and restructuring. The "debt trap" concerns over Chinese lending through Belt and Road Initiative intensified as many countries struggle to repay infrastructure loans.

Unit 1: Benefits of International Trade

International trade enables countries to specialise according to comparative advantage - producing goods where they have lowest opportunity cost - generating gains from trade exceeding autarky (self-sufficiency). Even when one country has absolute advantage in producing all goods, both countries benefit from specialising according to comparative advantage. David Ricardo's 1817 theory remains the foundation of trade economics.

Benefits of trade include access to goods unavailable domestically, lower prices through competition, greater consumer choice, economies of scale enabling lower costs, technology and knowledge transfer, increased efficiency through specialisation, and export market access supporting growth and employment. Global trade exceeds $32 trillion annually (40% of world GDP), with developing countries increasing their share from 25% in 1995 to 45% in 2024.

IB Economics real-life examples include Vietnam specialising in textiles and electronics assembly due to abundant low-cost labour, Chile exporting copper leveraging natural resource endowments, and Switzerland specialising in pharmaceuticals and precision instruments due to skilled labour and R&D capabilities. However, trade also creates adjustment costs including job losses in import-competing industries and regional inequality.

Unit 2: Types of Trade Protection

Trade protection restricts imports through various barriers, with three main types: tariffs (taxes on imports), quotas (quantity limits on imports), and subsidies to domestic producers. Tariffs generate government revenue while raising domestic prices, reducing consumer surplus and creating deadweight loss, though increasing producer surplus for domestic firms. The welfare loss occurs because reduced trade eliminates gains from comparative advantage.

Quotas limit import quantities, creating similar price increases and welfare losses as tariffs but transferring quota rents to import license holders rather than to the government. Quotas may create greater welfare loss than tariffs due to this rent-seeking and lack of government revenue. Export subsidies support domestic producers' sales abroad, potentially triggering WTO disputes and retaliation from trading partners.

Non-tariff barriers (NTBs) increasingly important as tariffs fell: technical standards, safety regulations, administrative procedures, and "buy national" policies create obstacles to trade without explicit tariffs. IB Economics real-life examples: The US-China trade war imposed tariffs averaging 20% on $500 billion of trade, demonstrating protectionism's revival. EU Common Agricultural Policy subsidies exceed €50 billion annually, protecting European farmers but increasing food prices for consumers and disadvantaging developing country exporters.

Unit 3: Arguments For and Against Trade Protection

Arguments for protection include infant industry protection (allowing new industries to develop economies of scale before facing international competition), national security (maintaining domestic production of strategic goods), protection of employment in declining industries, dumping prevention (blocking below-cost imports), and revenue generation for developing countries with limited tax capacity.

Strategic trade policy suggests government intervention can help domestic firms compete internationally in industries with economies of scale and learning effects. Environmental and labour standards arguments claim trade with countries having lower standards creates "race to the bottom" pressures. Anti-globalisation arguments emphasise trade's role in inequality, job displacement, and cultural homogenisation.

Arguments against protection emphasise welfare losses from higher prices and reduced choice, retaliation risks triggering trade wars, rent-seeking and corruption in quota allocation, protection of inefficient industries preventing restructuring, and greater harm to developing countries denied export markets. The infant industry argument faces challenges: identifying genuinely viable infants is difficult, protection often becomes permanent, and East Asian success stories (South Korea, Taiwan) succeeded through export promotion rather than import protection.

Contemporary debates focus on whether national security justifies technology export controls on China, whether carbon border adjustments protecting climate-ambitious countries are legitimate or protectionist, and whether "reshoring" supply chains for resilience justifies efficiency costs.

Unit 4: Economic Integration

Economic integration involves countries removing barriers to trade and factor mobility through various arrangements with increasing depth. Free Trade Areas (FTAs) eliminate tariffs between members while maintaining independent external tariffs - USMCA (US-Mexico-Canada) and ASEAN are examples. Customs Unions add common external tariff to FTA - EU began as customs union, MERCOSUR in South America.

Common Markets add factor mobility (labour and capital) to customs unions - EU single market allows free movement of goods, services, capital, and people. Monetary Unions adopt single currency with unified monetary policy - Eurozone with 20 countries using the euro represents deepest integration.

Benefits of integration include trade creation (replacing high-cost domestic production with lower-cost partner imports), economies of scale, increased competition, and bargaining power in international negotiations. Costs include trade diversion (replacing low-cost non-member imports with higher-cost member imports), loss of policy independence (especially monetary policy in monetary unions), and adjustment costs from increased competition.

IB Economics Real-life examples: The Eurozone sovereign debt crisis (2010-2015) illustrated monetary union challenges: countries cannot use independent monetary policy or currency devaluation, making adjustment to economic shocks more difficult. Brexit demonstrates that even deep integration can reverse when political preferences shift, with UK-EU trade falling 15-20% post-2020.

Unit 5: Exchange Rates

Exchange rates - the price of one currency in terms of another - determine international competitiveness and affect trade balances, inflation, and economic growth. Floating exchange rates are market-determined by supply and demand for currencies, with most major currencies (USD, EUR, GBP, JPY) floating since the 1970s. Fixed exchange rates are maintained at set levels by central bank intervention buying/selling foreign reserves.

Exchange rate determinants include relative interest rates (higher rates attract capital appreciating currency), relative inflation rates (higher inflation depreciates currency), trade balances (surplus appreciates currency through export demand), speculation and market sentiment, and government intervention. Currency appreciation makes exports more expensive and imports cheaper, worsening trade balance but reducing inflation. Depreciation makes exports cheaper and imports more expensive, improving trade balance but increasing inflation.

IB Economics Real-life examples: The British pound fell from $1.42 (2021) to $1.03 (September 2022) following unfunded tax cuts announcement, illustrating how fiscal credibility affects currency values. The US dollar strengthened 25% during 2021-2023 as Federal Reserve raised rates from 0.25% to 5.5%, demonstrating interest rate effects. Emerging market currencies depreciated sharply, complicating debt repayment for countries with dollar-denominated borrowing.

Managed exchange rates involve some government intervention maintaining exchange rates within target ranges. Advantages of floating rates include automatic adjustment to shocks and policy independence. Fixed rates provide stability for trade and investment but require large foreign reserves and sacrifice monetary policy independence. Currency crises occur when speculators attack overvalued fixed rates, forcing devaluation or float.

Unit 6: Balance of Payments

The balance of payments records all transactions between a country and the rest of the world, comprising three accounts: current account (trade in goods and services, primary income, secondary income), capital account (capital transfers and non-financial assets), and financial account (investment flows including FDI, portfolio investment, and reserve changes).

Current account deficits occur when imports exceed exports plus net income and transfers, requiring borrowing or asset sales to finance the gap. Surpluses occur when exports exceed imports. Deficits aren't necessarily problematic if financing productive investment, but persistent deficits financed by debt accumulation create sustainability concerns. The US runs persistent current account deficits averaging 3% of GDP, financed by capital inflows attracted by dollar reserve currency status.

Current account imbalances require adjustment through exchange rate changes (depreciation improving competitiveness), expenditure reduction (contractionary policies reducing import demand), or expenditure switching (depreciation switching spending toward domestic goods). The Marshall-Lerner condition states that depreciation improves trade balance only if sum of export and import demand elasticities exceeds one - in short-run, depreciation may worsen trade balance due to low elasticities (J-curve effect).

IB Economics Real-life examples: Germany runs persistent current account surpluses (6-8% of GDP), reflecting high savings, export competitiveness, and Eurozone membership preventing currency appreciation. China's surplus fell from 10% of GDP (2007) to 2% (2024) as rising wages reduced competitiveness and domestic demand increased.

Unit 7: Sustainable Development

Sustainable development - meeting present needs without compromising future generations' ability to meet their needs - integrates economic, social, and environmental dimensions. The UN's 17 Sustainable Development Goals (SDGs) provide framework targeting 2030: end poverty and hunger, ensure health and education, achieve gender equality, provide clean water and energy, promote decent work and growth, reduce inequality, combat climate change, and protect ecosystems.

Economic sustainability requires maintaining productive capacity and living standards over time. Social sustainability involves reducing poverty and inequality, improving health and education, and promoting social cohesion. Environmental sustainability requires protecting natural capital, reducing pollution, mitigating climate change, and preserving biodiversity.

Tensions exist between dimensions: rapid growth may increase pollution and inequality. However, green growth theory suggests technological innovation can divide growth from environmental damage. Circular economy approaches emphasise recycling, reuse, and waste reduction. Renewable energy costs fell 90% for solar and 70% for wind during 2010-2024, making clean energy increasingly competitive.

Progress is mixed: global poverty fell from 36% (1990) to 8.6% (2024), but climate change threatens gains through droughts, floods, and extreme weather. Deforestation continues at 10 million hectares annually. Income inequality increased in most countries. Covid-19 pushed 120 million into extreme poverty, demonstrating development progress fragility.

Unit 8: Measuring Development

GDP per capita measures average income but ignores inequality, non-market production, environmental costs, and quality of life. GNI (Gross National Income) per capita includes net income from abroad, better reflecting national income than GDP. The World Bank classifies countries: low-income (<$1,135 GNI per capita), lower-middle ($1,136-4,465), upper-middle ($4,466-13,845), and high-income (>$13,845).

The Human Development Index (HDI) combines income, education (expected and mean years of schooling), and health (life expectancy), providing broader development measure. Norway scores highest (0.961) while Niger scores lowest (0.400), with HDI ranging 0-1. However, HDI still ignores inequality, environmental sustainability, and freedom.

Alternative measures include Multidimensional Poverty Index (MPI) assessing education, health, and living standards deprivations; Inequality-adjusted HDI (IHDI) discounting for inequality; Gender Development Index (GDI) comparing male-female HDI; and Genuine Progress Indicator (GPI) adjusting GDP for environmental costs, income distribution, and non-market benefits.

Single indicators reveal aspects of development: life expectancy (85 years in Japan vs. 54 in Central African Republic), infant mortality (2 per 1,000 in Iceland vs. 80 in Somalia), literacy rates (99%+ in developed countries vs. 40% in some African countries), and access to clean water (99% in developed countries vs. 50% in some developing countries).

Unit 9: Barriers to Growth and/or Economic Development

Poverty cycles trap countries in underdevelopment: low income → low savings → low investment → low productivity → low income. Inadequate human capital from poor health and education reduces productivity. Lack of access to credit prevents entrepreneurship and investment. Insufficient infrastructure (transport, energy, communications) raises costs and prevents market access.

Institutional barriers include corruption diverting resources from productive uses (Nigeria lost an estimated $400 billion to corruption since independence), weak property rights discouraging investment, poor governance creating uncertainty, and excessive bureaucracy deterring business formation. Political instability and conflict destroy capital and disrupt economic activity - Syria's GDP fell 60% during civil war.

External barriers include dependence on primary commodity exports with volatile prices (oil price fall from $120 to $40 per barrel 2014-2016 devastated Venezuela and Nigeria), trade barriers in developed countries blocking market access, debt burdens consuming government revenue, and "brain drain" as skilled workers emigrate to developed countries.

Geographic disadvantages affect some countries: landlocked countries (Bolivia, Chad, Afghanistan) face higher transport costs, tropical diseases burden health systems, and vulnerability to natural disasters (hurricanes, earthquakes, droughts) destroys capital and diverts resources. Climate change disproportionately affects developing countries despite contributing least to emissions.

Unit 10: Economic Growth and/or Economic Development Strategies

Market-oriented strategies emphasise private sector, free markets, and limited government intervention. Trade liberalisation opens markets to competition, reducing protection and joining WTO. Privatisation transfers state enterprises to private ownership improving efficiency through profit motive. Deregulation reduces business regulations and bureaucracy. Foreign direct investment (FDI) attraction brings capital, technology, and management expertise. Microfinance provides small loans enabling entrepreneurship.

Interventionist strategies involve active government intervention roles. Infrastructure investment in roads, ports, electricity, and communications enables growth - China invested 8% of GDP annually in infrastructure during rapid development. Industrial policy supports strategic sectors through subsidies, protection, or state ownership - South Korea's government guided chaebols (Samsung, Hyundai) to international success. Education and healthcare investment builds human capital essential for productivity growth.

Balanced approaches combining market mechanisms with strategic intervention achieved greatest success. East Asian tigers (South Korea, Taiwan, Singapore) used export-oriented industrialisation combining trade openness with government coordination. China's "socialist market economy" mixed state planning with market competition. Botswana achieved Africa's fastest growth combining prudent macroeconomic management, diamond revenue investment in education and infrastructure, and democratic stability.

Development strategy debates focus on: appropriate openness degree (Washington Consensus free trade vs. strategic infant industry protection), state vs. market roles (neoliberal vs. developmental state approaches), speed of reform (shock therapy vs. gradualism), and whether successful East Asian model can be replicated elsewhere given the different initial conditions and changed global context.

Contemporary focus includes sustainable development requiring green growth strategies, inequality reduction through inclusive growth, technological leapfrogging using mobile technology and renewable energy, and resilience building for climate change adaptation.

IB Economics Topic Integration

International trade connects directly to microeconomic comparative advantage, consumer/producer surplus analysis, and government intervention through protection. Exchange rates and trade affect macroeconomic aggregate demand through net exports component. Development challenges involve both micro issues (market failures, poverty traps) and macro challenges (inflation, unemployment, debt).

Understanding the global economy requires synthesising microeconomic efficiency analysis, macroeconomic policy evaluation, and development economics perspectives on poverty, inequality, and sustainability. Trade policies, exchange rate systems, and development strategies all involve fundamental choices about market vs. government roles, efficiency vs. equity, and present vs. future.

Key Concept Integration

Scarcity and Choice: Trade reflects scarcity forcing specialisation choices. Development strategies involve choices about resource allocation between consumption and investment, present and future.

Efficiency and Equity: Free trade maximises efficiency but creates winners and losers requiring adjustment policies. Development strategies balance growth efficiency with equitable distribution.

Economic Well-being: Trade and development directly affect well-being through income, health, education, and environmental quality.

Sustainability: Development must balance economic growth with environmental protection and social inclusion for long-run sustainability.

Change: Globalisation, technological change, and climate change continuously reshape trade patterns and development possibilities.

Interdependence: Countries are interdependent through trade, finance, migration, and shared environmental challenges requiring international cooperation.

Intervention: Trade policies, exchange rate management, and development strategies demonstrate government intervention shaping economic outcomes.

IB Economics Real-life examples & Case Studies

US-China Trade War: Demonstrates protectionism effects including higher prices, retaliation, supply chain disruption, and welfare losses exceeding any strategic benefits.

Brexit: Illustrates costs of leaving economic integration including trade barriers, investment falls, and economic underperformance relative to EU members.

China's Development Success: Shows export-oriented industrialisation, infrastructure investment, and gradual market reforms lifting 800 million from poverty while creating inequality and environmental damage.

Venezuelan Collapse: Demonstrates commodity dependence risks, mismanagement, corruption, and policy failures reducing GDP 75% and creating hyperinflation.

Botswana vs. Nigeria: Contrasts prudent resource management and institutional development (Botswana achieving upper-middle income status) with corruption and conflict despite oil wealth (Nigeria remaining lower-middle income).

Study Progression Strategy

Foundation Building (Weeks 1-3)

Master comparative advantage and gains from trade, protection types and welfare effects, exchange rate determination, and balance of payments structure. Practice trade diagrams showing consumer/producer surplus effects.

Application Development (Weeks 4-6)

Apply theories to IB Economics Real-life examples: including trade wars, Brexit, exchange rate movements, development challenges, and strategy debates. Evaluate trade policies and development approaches.

Evaluation and Synthesis (Weeks 7+)

Develop sophisticated policy evaluation considering efficiency-equity trade-offs, short-run vs. long-run effects, stakeholder impacts, and sustainability. Practice extended response questions requiring international perspectives and development analysis.

For Optimal Global Economy Success:

• Master trade diagrams: practice showing tariff/quota effects on consumer/producer surplus, welfare losses, and protection consequences

• Connect theory to contemporary issues: understand US-China trade tensions, Brexit effects, currency movements, and development challenges

• Develop evaluation skills: every trade policy and development strategy has benefits, costs, winners, losers, and unintended consequences

• Practice comparative analysis: compare developed vs. developing country challenges, successful vs. failed development strategies

• Use key concepts throughout: efficiency-equity trade-offs, sustainability challenges, interdependence requiring cooperation

• Follow international news: understand trade agreements, currency crises, development progress, and SDG implementation

Quick Access to Global Economy Topics

Unit 1: Benefits of Trade - Comparative advantage, gains from specialisation, trade benefits and costs

Unit 2: Types of Protection - Tariffs, quotas, subsidies, welfare effects, non-tariff barriers

Unit 3: Arguments For/Against Protection - Infant industry, employment, strategic trade, dumping, versus welfare losses and retaliation

Unit 4: Economic Integration - FTAs, customs unions, common markets, monetary unions, trade creation and diversion

Unit 5: Exchange Rates - Floating vs. fixed systems, determinants, appreciation/depreciation effects

Unit 6: Balance of Payments - Current account, capital account, financial account, deficits and surpluses, adjustment

Unit 7: Sustainable Development - Economic, social, environmental dimensions, SDGs, tensions and trade-offs

Unit 8: Measuring Development - GDP per capita limitations, HDI, GNI, MPI, alternative measures

Unit 9: Barriers to Development - Poverty cycles, human capital, infrastructure, institutions, external barriers

Unit 10: Development Strategies - Market-oriented, interventionist, balanced approaches, East Asian model

Why Choose Our Global Economy Hub?

Exam-Focused Content: Every concept designed with IB Economics assessment requirements in mind, ensuring you know exactly what matters for Papers 1, 2, and 3 (HL).

Real-World Context: From US-China trade war tariffs on $500 billion of trade to Brexit reducing UK-EU trade 15-20% to 689 million people in extreme poverty to exchange rate volatility, we make global economy concepts concrete through IB Economics Real-life examples.

Complete Coverage: All international trade and development topics from comparative advantage through protection and integration to exchange rates, balance of payments, sustainable development, and development strategies, with guides covering every syllabus requirement for both SL and HL.

Contemporary Context: Updated with 2024-2025 data on trade wars, Brexit effects, currency movements, debt crises, and SDG progress.

Think Like a Development Economist: Develop the analytical reasoning and critical evaluation skills that make international economics and development economics powerful tools for understanding global challenges.

Trade and Development Diagram Mastery: Practice the graphical analysis essential for IB Economics success through step-by-step trade welfare diagrams, exchange rate effects, and policy evaluation frameworks.

Ready to Master The Global Economy?

Start with comparative advantage and trade benefits in Unit 1, analyse protection in Units 2-3, understand integration in Unit 4, master exchange rates and balance of payments in Units 5-6, explore sustainable development and measurement in Units 7-8, and evaluate development barriers and strategies in Units 9-10. Each unit builds your international perspective while providing frameworks for understanding global economic challenges and development possibilities.

This hub is regularly updated with the latest international trade data, exchange rate movements, and development progress to ensure you have the most current information for your IB Economics course.