📝 Sets the rules
Member countries agree rules about how they will trade with each other. Everyone knows what to expect, so firms feel safe selling to other countries.
A Connected World » WTO, IMF and TNCs
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 8.1 A connected world (b)
- What the World Trade Organisation (WTO) does and how it makes trade easier
- What the International Monetary Fund (IMF) does and how it helps countries
- What a transnational corporation (TNC) is and how it spreads production around the world
- How all three create a more globalised economy
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Unlock This CourseWho helps the world economy work?
The last lesson showed that trade, investment and transport have built a global economy. But a global economy needs rules, money and businesses. Three big players help to create it: two global institutions and one type of company.
Key terms:
- Global institution: an organisation set up by many countries together to work on a world-wide issue.
- World Trade Organisation (WTO): the global institution that sets the rules for trade between countries and helps to settle arguments about trade.
- International Monetary Fund (IMF): the global institution that lends money to countries in financial trouble and gives advice on how to manage their economies.
- Transnational corporation (TNC): a very large company that has its head office in one country and factories, offices or shops in several other countries. It is also called a multinational company.
- Tariff: a tax a country puts on goods that are brought in from abroad. It makes those goods more expensive.
- Loan: money lent that must be paid back, usually with extra charged on top.
The World Trade Organisation (WTO)
The WTO began in 1995 and is based in Geneva, in Switzerland. Most of the world's countries are members. Its job is to make trade between countries smoother, fairer and easier to predict.
🤝 Lowers trade barriers
Countries meet at the WTO to agree to cut tariffs and other barriers. Cheaper imports mean more goods cross borders.
⚖ Settles disputes
If one country thinks another is trading unfairly, it can take the problem to the WTO instead of starting a trade war.
🌎 Result
Lower barriers and clear rules make it easier and cheaper to buy and sell across the world. That is how the WTO helps to create a more globalised economy.
The International Monetary Fund (IMF)
The IMF was agreed by countries in 1944, began work soon after, and is based in Washington DC, in the USA. It has about 190 member countries. Its main aims are to keep the world's money system steady and to help countries that run into money trouble.
- Lending: a country with big money problems, for example one that cannot pay for its imports, can borrow from the IMF. This is a loan that has to be paid back.
- Conditions: the IMF often asks the country to make changes in return, such as cutting government spending or opening up its markets to foreign trade and investment.
- Advice: the IMF watches the economies of its members and gives advice on keeping them stable.
How does this create a more globalised economy? A country that is financially stable is safer for foreign firms to invest in and trade with. IMF loans can also help a country keep trading when it would otherwise have to stop. Conditions that open up markets link the country more closely to the rest of the world.
Transnational corporations (TNCs)
TNCs are the businesses of the global economy. Well known examples are Apple, Toyota, Coca-Cola and Unilever. Each has its head office in one country but sells in, and often makes things in, many countries.
🏭 Spread production
A TNC may put factories in different countries and join them into one production chain.
💲 Big investors
TNCs are a main source of the foreign investment you met in the last lesson.
🛍 Global brands
The same products and brand names are sold in many countries, so shoppers around the world buy similar things.
A TNC chooses where to put each step of its chain to keep costs low or find skilled workers. It uses modern transport and ICT to link them all together. In this way, TNCs create a more globalised economy by turning separate national economies into connected ones. The effects of TNCs on the countries they move into are covered in a later lesson, TNCs: Costs and Benefits for Host Countries.
Putting the three together
- WTO (global institution): rules and lower tariffs make trade easier.
- IMF (global institution): loans and advice keep economies stable and open to trade.
- TNC (large company): factories and sales in many countries link places together.
Worked example
Question: Explain how the World Trade Organisation has helped to create a more globalised economy. [3 marks] Answer: The WTO gets countries to agree to cut tariffs on imports (1). This makes goods cheaper to sell in other countries (1), so more trade happens across borders and economies become more connected (1).
Common mistakes
Common mistakes
- Mixing up the WTO and the IMF. Remember: WTO is about trade rules; IMF is about money and loans.
- Thinking a TNC is a global institution. A TNC is a company that wants to make a profit. The WTO and IMF are set up by countries.
- Writing "the IMF gives money away". It lends money, and the country must pay it back.
- Naming the institution but not explaining. Say what it does and how that makes the economy more global.
- Writing about the costs and benefits of TNCs for host countries. That belongs to a later lesson.
Exam-style question
(a) State one job of the International Monetary Fund. [1 mark]
(b) Explain how transnational corporations have helped to create a more globalised economy. [3 marks]
Model answer
(a) It lends money to countries that are in financial trouble (1).
(b) TNCs build factories and offices in several countries (1), which spreads production around the world and links it into long production chains (1). They also sell the same goods in many countries, so more trade and investment cross borders (1).
Exam tip
For "explain how" questions on an institution or company, name what it does, then add "so" and say what changes for world trade or connections between countries.