role of multinational companies (MNCs): definition of MNC

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Cambridge International AS & A Level Economics (9708) – Complete Syllabus Notes

How to Use These Notes

  • Each major section follows the order of the official syllabus.
  • Key concepts are highlighted in bold; formulas are shown in italics.
  • Learning objectives (AO) are listed for every topic so you can check exam requirements (AO1‑AO3).
  • Where a diagram is essential, a Figure placeholder is provided – draw it in your notebook.
  • Real‑world examples are included to aid memorisation and to give material for evaluation.

1. AS‑Level Core (Sections 1.1‑6.5)

1.1 Scarcity, Choice & Opportunity Cost (AO1)

  • Scarcity: Limited resources vs. unlimited wants.
  • Choice: Selecting one alternative over another.
  • Opportunity Cost: The next‑best foregone alternative.

1.2 Economic Methodology (AO1)

  • Positive vs. normative statements.
  • Use of models – ceteris paribus, assumptions, limitations.
  • Data sources: primary, secondary, quantitative, qualitative.

1.3 Demand & Supply (AO1‑AO3)

  • Law of demand, determinants of demand.
  • Law of supply, determinants of supply.
  • Market equilibrium, surplus, shortage.
  • Elasticities – price, income, cross‑price (formulae & interpretation).

Figure 1: Standard demand‑supply diagram with shifts in demand and supply.

1.4 Government Intervention in Markets (AO2‑AO3)

  • Price controls – floors & ceilings.
  • Taxes (specific & ad valorem) – incidence and dead‑weight loss.
  • Subsidies – benefits and fiscal cost.
  • Regulation – quality standards, licensing.

1.5 Market Failure & Government Failure (AO2‑AO3)

  • Public goods, merit & demerit goods.
  • Externalities – positive & negative; Pigouvian taxes & subsidies.
  • Information asymmetry – market for “lemons”.
  • Government failure – unintended consequences, rent‑seeking.

1.6 Macroeconomic Objectives & Circular Flow (AO1‑AO3)

  • Key objectives: growth, low unemployment, price stability, external balance, equitable distribution.
  • Closed‑economy circular flow – households, firms, factor & product markets.
  • Open‑economy circular flow – adds foreign sector and government.

1.7 Aggregate Demand (AD) & Aggregate Supply (AS) (AO2‑AO3)

  • Components of AD: C + I + G + (X‑M).
  • Short‑run AS (SRAS) – upward sloping; Long‑run AS (LRAS) – vertical at full‑employment output.
  • Shifts in AD and AS – causes and macro‑policy implications.

Figure 2: AD‑AS model showing demand‑pull and cost‑push inflation.

1.8 The Multiplier (AO2)

  • Formula: k = 1 / (1‑MPC) where MPC = marginal propensity to consume.
  • Interpretation: total change in output resulting from an initial change in autonomous expenditure.
  • Limitations – leakages, capacity constraints, time lags.

1.9 Fiscal Policy (AO2‑AO3)

  • Expansionary vs. contractionary fiscal policy.
  • Tools: government spending, taxation, borrowing.
  • Multiplier effect, crowding‑out, fiscal sustainability.

1.10 Monetary Policy (AO2‑AO3)

  • Objectives: price stability, supporting growth.
  • Instruments: policy interest rate, open‑market operations, reserve requirements.
  • Transmission mechanisms – interest rate, exchange rate, asset‑price channels.

1.11 Supply‑Side Policy (AO2‑AO3)

  • Improving productivity – investment in R&D, education, infrastructure.
  • Labour‑market reforms – minimum wage, trade unions, training.
  • Regulatory reforms – competition policy, deregulation.

2. A‑Level Microeconomics (Sections 7‑8)

2.1 Consumer Behaviour – Utility & Indifference Curves (AO1‑AO3)

  • Ordinal utility – preference ordering.
  • Indifference curves – properties (convexity, non‑intersection, monotonicity).
  • Budget line – slope = –(price of good X / price of good Y).
  • Consumer equilibrium – highest attainable indifference curve tangent to budget line (MRS = price ratio).

Figure 3: Indifference‑curve diagram with budget constraint and optimal bundle.

2.2 Theory of the Firm – Costs & Revenue (AO1‑AO3)

  • Short‑run cost curves: TC, AVC, AFC, ATC, MC.
  • Long‑run cost curves – economies & diseconomies of scale, LRAC.
  • Revenue concepts – TR, MR, AR; profit maximisation condition MR = MC.
  • Shutdown point – P < AVC (short‑run) and P < LRAC (long‑run).

Figure 4: Short‑run cost and revenue curves showing profit, loss and shutdown.

2.3 Market Structures (AO1‑AO3)

Structure Key Characteristics Price‑Setting Behaviour Efficiency (X‑efficiency & allocative)
Perfect Competition Many sellers, homogeneous product, free entry/exit, perfect information. Price taker – P = MR = MC. Both allocative (P = MC) and productive (minimum ATC) efficiency.
Monopoly Single seller, unique product, high barriers to entry. Price maker – MR = MC, P > MC. Allocative inefficiency (dead‑weight loss); possible X‑inefficiency.
Monopolistic Competition Many firms, differentiated products, low barriers. Price > MC in short‑run; long‑run P = ATC (zero economic profit). Some excess capacity – not fully productive efficient.
Oligopoly Few large firms, inter‑dependent, possible product differentiation. Strategic behaviour – kinked‑demand, collusion, price‑leadership. Often X‑inefficient; outcomes depend on conduct (Cournot, Bertrand, Stackelberg).

2.4 Pricing Strategies (AO2‑AO3)

  • Price discrimination – first, second, third degree; conditions for feasibility.
  • Two‑part tariffs, bundling, peak‑load pricing.
  • Evaluation of welfare effects – consumer surplus vs. producer surplus.

2.5 Labour Market (AO1‑AO3)

  • Demand for labour – derived from marginal product of labour (MPL) and value of MPL.
  • Supply of labour – wage‑differential theory, reservation wage, non‑monetary motives.
  • Equilibrium wage and employment; effects of minimum wage, trade unions, immigration.
  • Evaluation of policy – efficiency vs. equity trade‑offs.

3. A‑Level Macroeconomics (Sections 9‑10)

3.1 Full Balance of Payments (AO1‑AO2)

  • Current Account: Trade in goods & services, primary income, secondary income.
  • Capital Account: Transfer of non‑produced, non‑financial assets.
  • Financial Account: Direct investment, portfolio investment, other investment, reserve assets.
  • Equation: Current Account + Capital Account + Financial Account + Errors & Omissions = 0.

3.2 Exchange‑Rate Regimes (AO2‑AO3)

  • Fixed (pegged) – central bank intervenes to maintain a target rate.
  • Managed float – occasional intervention to smooth volatility.
  • Floating – market determines the rate; affected by interest differentials, expectations, terms of trade.
  • Implications for monetary policy autonomy, balance‑of‑payments stability, and export competitiveness.

3.3 Inflation – Causes & Measurement (AO2‑AO3)

  • Demand‑pull: AD > LRAS.
  • Cost‑push: SRAS shifts left (wage‑price spiral, supply shocks).
  • Built‑in inflation – adaptive expectations, wage indexation.
  • Measurement: CPI, RPI, PPI, core inflation.

3.4 Unemployment – Types & Measurement (AO2‑AO3)

  • Frictional, structural, cyclical, classical.
  • Natural rate of unemployment (NRU) – sum of frictional + structural.
  • Measurement: ILO definition, unemployment rate, labour‑force participation.

3.5 Economic Growth (AO2‑AO3)

  • Short‑run vs. long‑run growth.
  • Determinants: physical capital, human capital, technology, institutions.
  • Measurement: real GDP, GDP per‑capita, PPP, growth rates.
  • Limits to growth – environmental constraints, resource depletion.

3.6 Policy Mix & Conflicts (AO3)

  • Policy trilemma – impossible to have free capital flows, fixed exchange rate, and independent monetary policy simultaneously.
  • Policy conflicts – e.g., expansionary fiscal policy may increase inflation while monetary policy aims to curb it.
  • Evaluation using the Phillips curve (short‑run trade‑off) and expectations‑augmented versions.

4. A‑Level International Economics (Section 11)

4.1 Development Indicators (AO1‑AO2)

  • GDP per‑capita (PPP), Human Development Index (HDI), Gini coefficient, Poverty headcount ratio.
  • Sustainable Development Goals (SDGs) – relevance to economic policy.

4.2 Globalisation & Trade (AO2‑AO3)

  • Benefits of trade – comparative advantage, gains from specialisation, terms of trade.
  • Costs – adjustment costs, terms‑of‑trade volatility, dependence on external markets.
  • Trade‑policy instruments – tariffs, quotas, subsidies, voluntary export restraints, non‑tariff barriers.
  • Evaluation of protectionism vs. liberalisation – short‑run distributional effects vs. long‑run efficiency.

4.3 Multinational Companies (MNCs) – Definition, Motives & Impacts

4.3.1 Definition (AO1)

An multinational company (MNC) is a firm that owns or controls production facilities, service operations, or other business activities in at least one country other than its home (or parent) country. Key characteristics:

  • Headquarters (HQ): Usually located in a high‑income (developed) country.
  • Foreign Direct Investment (FDI): Direct investment in foreign host economies – not portfolio investment.
  • Integrated Global Strategy: Coordinated production, marketing, finance, R&D across borders.
  • Technology & Knowledge Transfer: Ability to move capital, technology, managerial expertise and labour between countries.

4.3.2 Motivations for Operating Abroad (AO2)

  1. Market‑seeking: Access to larger or new consumer markets (e.g., Apple opening retail stores in India).
  2. Resource‑seeking: Secure natural resources, cheap labour or specialised inputs (e.g., oil‑field services firms in West Africa).
  3. Efficiency‑seeking: Exploit economies of scale and scope; locate production where costs are lowest (e.g., garment factories in Bangladesh).
  4. Strategic‑asset‑seeking: Acquire technology, brands or distribution networks (e.g., a European car maker buying a Chinese EV start‑up).

4.3.3 Economic Impact of MNCs

Impact on Host (Developing) Countries

Positive effects

  • Inflow of foreign capital – raises the financial account of the BOP.
  • Technology transfer and diffusion of managerial know‑how.
  • Creation of direct and indirect employment; up‑skilling of the workforce.
  • Export‑oriented production can improve the current account (X‑M ↑).

Potential drawbacks

  • Profit repatriation reduces domestic income (negative NFI).
  • Crowding‑out of domestic firms, especially in strategic sectors.
  • Exploitation of low‑wage labour and deterioration of working conditions.
  • Environmental degradation where regulation is weak.
Impact on Home (Developed) Countries
  • Higher returns on investment and diversification of risk across markets.
  • Access to cheaper inputs (labour, raw materials) → lower production costs and greater competitiveness.
  • Potential loss of domestic jobs in sectors relocated abroad.
  • Increased corporate influence on national policy through lobbying and economic power.

4.3.4 Key Formulas & Worked Example (AO2)

Formula Explanation Illustrative Calculation
Net FDI = FDI Inflows – FDI Outflows Measures the net change in foreign‑investment stock. FDI Inflows = US$ 12 bn; FDI Outflows = US$ 3 bn → Net FDI = US$ 9 bn.
Current‑Account Balance (CAB) = (X – M) + NFI Net flow of goods, services and factor income. X = US$ 5 bn; M = US$ 4 bn; NFI = –US$ 0.5 bn → CAB = (5‑4) – 0.5 = US$ 0.5 bn surplus.
Profit‑Repatriation Ratio = (Profits sent home ÷ Total profits earned abroad) × 100 % Proportion of foreign earnings returned to the home country. Profits abroad = US$ 2 bn; Repatriated = US$ 1.6 bn → Ratio = 80 %.

4.3.5 Comparative Overview (Host vs. Home)

Aspect Home (Developed) Country Host (Developing) Country
Primary Motivation for MNCs Market expansion, technology acquisition, risk diversification Access to natural resources, low‑cost labour, market entry
Typical Benefits Higher profits, economies of scale, global brand presence FDI inflows, job creation, skill transfer, export earnings
Typical Concerns Domestic job losses, profit repatriation, concentration of economic power Profit repatriation, environmental impact, crowding‑out of local firms
Policy Responses Tax incentives for R&D, export‑promotion, competition law Investment promotion agencies, minimum‑wage legislation, environmental standards, localisation requirements

4.3.6 Evaluation Checklist (AO3)

  • Assess the *net* contribution of MNCs to a host country’s balance of payments (both current‑account and financial‑account effects).
  • Weigh short‑run employment gains against long‑run risks of dependency on foreign capital and technology.
  • Analyse the effectiveness of host‑country policy tools (e.g., profit‑repatriation caps, mandatory technology‑transfer clauses).
  • Consider the home‑country perspective: gains from cheaper inputs versus social costs of off‑shoring.
  • Use real‑world case studies (Toyota in the UK, Samsung in Vietnam, Coca‑Cola in Africa) to illustrate both positive and negative outcomes.

4.3.7 Suggested Diagram (Figure 4)

Flow diagram showing the movement of capital, technology, labour and goods between a developed home country (HQ) and a developing host country (subsidiary). Arrows should indicate:

  • FDI inflow to host (financial account)
  • Export of intermediate goods from host to home (current account)
  • Technology and managerial expertise from home to host
  • Profit repatriation from host to home

5. Summary of Key Points (All Levels)

  • Economic analysis rests on scarcity, choice and opportunity cost (AO1).
  • Micro‑foundations (utility, cost curves, market structures) explain individual‑firm and consumer behaviour.
  • Macroeconomic tools – AD/AS, multiplier, fiscal & monetary policy – address aggregate objectives.
  • International economics links the domestic economy to the world through the balance of payments, exchange‑rate regimes and globalisation.
  • Multinational companies are a central feature of globalisation; they bring capital, technology and jobs to host economies but also repatriate profits and can create dependency.
  • Effective policy – at both home and host – is essential to maximise benefits and mitigate adverse effects.

6. Syllabus Reference (Cambridge International AS & A Level Economics 9708)

  • Section 1‑6: Core AS‑Level concepts (scarcity, methodology, micro‑foundations, macro‑framework).
  • Section 7‑8: A‑Level Microeconomics – utility, market structures, labour market.
  • Section 9‑10: A‑Level Macroeconomics – AD/AS, multiplier, policy mix, inflation, unemployment, growth.
  • Section 11: International economics – BOP, exchange‑rates, development indicators, globalisation, MNCs.

7. Suggested Practice Questions (Mixed AO)

  1. AO1: Define “foreign direct investment” and explain how it differs from portfolio investment.
  2. AO2: Using the AD‑AS model, show how an expansionary fiscal policy financed by borrowing affects output and price level in the short run.
  3. AO3: Evaluate the impact of a minimum‑wage increase on a developing country that hosts many MNCs in the garment sector.
  4. AO2: Calculate the multiplier if the marginal propensity to consume (MPC) is 0.75.
  5. AO3: Discuss the arguments for and against the use of profit‑repatriation caps as a policy tool in host economies.

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