TABLE OF CONTENTS

2
CHAPTER 1

The Basic Economic Problem

2
CHAPTER 2

Allocation of Resources

5
CHAPTER 3

Microeconomic Decision Makers

9
CHAPTER 4

Government and the Macroeconomy

12
CHAPTER 5

Economic Development

13
CHAPTER 6

International Trade and Globalisation

 CIE IGCSEECONOMICS//0455
 Example 2: A city decides to build a hospital
h on vacant
1. THE BASIC ECONOMIC PROBLEM land it owns
o Could have built school or sports centre
1.1 Economic Problem o Opportunity
pportunity cost is the value of the benefits
 There are too few productive resources to make all the forgone of the next best thing which could have
goods and services that consumers need and want. been done
 Unlimited wants and limited resources
 Scarcity of resources is thee basic economic problem 1.4 Production Possibility Curves& Choice
 Opportunity cost can be shown using a production
produc
Types of goods possibility curve (PPFC)
 Economic goods:A good or service that has a degree of  It shows the maximum combinations of goods and
scarcity and therefore an opportunity cost. services that can be produced by an economy in
eachperiod of time with its limited resources
 Free goods: A good or service that is not scarce and is
 A PPC shows all the combinations of possibilities,
available in abundance. For example, the air we
involving two goods or options
breathe.
 Each combination is a choice
1.2 Factors of Production  An economy can use all its scarce resources
resourc to produce
 Consumers are people or firms who need and want this combination
goods and services  A point within the curve signifies like X, represents
 Resources or factors of production are used to make inefficiency
goods and services  A point outside the curve like Y, represents
combinations that cannot be produced due to the lack
LLCE
of resources
 Land: naturalal resources used in production (e.g. land)
 Labour: human effort used in production ion of
goods/services (e.g. workers)
 Capital: the man-made
made resources that are u used to
produce goods/services (e.g. tractor)
 Enterprise:
nterprise: the skills and willingness to take the risks
required to organize productive activities
 Entrepreneurs organize and combine ine resources in
firms to produce goods and services
 Durable consumer goods last long while (e.g. furniture)
non-durable
durable consumer goods (e.g. food) do not
 Capital goods and semi-finished
finished goods or components
are used up in production 2. ALLOCATION OF RESOURCES
1.3 Opportunity Cost 2.1 Microeconomicss and Macroeconomics
 Opportunity
pportunity cost is the cost of choosing between Microeconomics
alternative uses of resources  It iss the study of particular markets, and segments of
 Choosing one use will always mean giving up the the economy. It looks at issues such as consumer
opportunity to usese resources in another way, & the behaviour, individual labour markets, and the theory
loss of goods & services they might have produced of firms.
instead  It involves supply
upply and demand in individual
 Problem of resource allocation
llocation is choosing how best to markets,Individual
ndividual consumer behaviour,
behaviour and individual
use limited resources to satisfy as many needs and labour markets
wants as possible and maximize economic welfare Macroeconomics
 Economics aims to find most efficient resource  Study
tudy of the whole economy. It looks at ‘aggregate’
allocation variables, such as aggregate demand, national output
 Example 1:A person invests $10,000 in a stock and inflation.
o Could have earned interest
nterest by leaving $10,000  Involves
nvolves decisions made by the government regarding,
dollars in bank account instead for example, policies
o Opportunity cost of decision to invest in stock is the
value of the potential interest
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2.2 The role of markets in allocating 2.4 Supply
resources  Supply representss how much the market can offer
The Market System FACTORS THAT AFFECT
 A market economy is an economic system in which SUPPLY CURVE
SUPPLY
economic decisions and the pricing of goods and  Cost of factors of
services are guided by the interactions of supply and production
demand- the market mechanism  Prices of other
goods/services
Key Resources Allocation Decisions  Global Factors
The basic economic problem of scarcity creates three
 Technology Advance
key questions
 Business Optimism/
 What to produce?
Expectations
 How to produce? Higher price of good =
 For whom to produce? higher quantity supplied
𝑃𝑟𝑖𝑐𝑒 ∝ 𝑆𝑢𝑝𝑝𝑙𝑦
Introduction to the Price mechanism  The individual supply is the supply of an individual
 It aids the resource allocation decision making process. producer
The
he decision is made at the equilibrium point where
 The market supply is the aggregate of the supply
suppl of all
supply and demand meet
firms in the market
2.3 Demand
 Demand refers to how much of a product or service is
2.5 Price Determination
Market Equilibrium
desired by buyers
 When supply &
DEMAND CURVE FACTORS THAT AFFECT
demand are equal the
DEMAND
economy is said to be
 Price at equilibrium
 Consumer  At this point, the
tastes/preferences allocation of goods is
 Consumer Income at its most efficient
 Prices of substitute/ because amount of
complementary goods goods being supplied is the same
s as amount of goods
 Interest rates (price of being demanded & everyone is satisfied
Higher price of good = less borrowing money) Market Disequilibrium
 Consumer population Excess Supply Excess Demand
people demand that good
1 (population increase =
𝑃𝑟𝑖𝑐𝑒 ∝ demand increase)
𝐷𝑒𝑚𝑎𝑛𝑑
 The individual demand is the demand of one
individual or firm
 The market demandrepresents
represents the aggregate of all
individual demands

If the price is set too high, When price is set below

excess supply will be the equilibrium price.
created within the Creates demand that
economy and there will be exceeds production due
allocative inefficiency to the low price.

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2.8 Price Elasticity of Supply
2.6 Price Changes  Definition: The responsiveness of quantity
quantit supplied to
Causes of Price Changes a change in price
 A change is supply INELASTIC SUPPLY ELASTIC SUPPLY
 A change in demand  It has a PES less than 1  It has a PES more than 1
Consequences of Price Changes  A large price change will  A large price change will
 An inward shift of the supply curve will increase p
prices have little effect on the have a large effect on
and vice versa amount supplied the amount supplied
 An inward shift of the demand curve will decrease
prices and vice versa

2.7 Price Elasticity of Demand

 Definition: The responsiveness of demand to a change
in price
INELASTIC DEMAND ELASTIC DEMAND
 PEDlower than 1  PEDgreater
greater than 1
 The necessity of the  The necessity oof the
product is high – it is product is relatively low % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑
either essential or 𝑃𝐸𝑆 =
 Demand would respo
respond % 𝑐ℎ𝑎𝑛𝑔𝑒
𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
habitual quickly and more
 A change in price has drastically  Factors that affect PES:
little effect on the o Time
change in demand o Availability of resources
o Supply available to meet demand
o Spare production capacity available
o Factor substitution available

2.9 Market Economic System

 Has a private sector only
 They produce a wide variety of goods and services if it
is profitable to do so but only for those consumers that
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 are willing and able to pay for them
𝑃𝐸𝐷 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒  Market failures can cause scarce resources to be
allocated to uses
ses that are wasteful, inefficient or even
 When demand is price inelastic: harmful to people and the environment
o An increase
se in price would raise revenue
ADVANTAGES DISADVANTAGES
 When demand is price elastic:
 Wide variety of  Serious market failure
o A decrease in price would raise revenue
goods/services  Only profitable goods
 Factors that affect PED:
 Profit motive encourages provided
o The number of substitutes
development of new and  Firms will only supply
o The period of time
more efficient products products to consumers
o The proportion of income spent on the commodity
& processes with the ability to pay
o The necessity of the product
 Quick response to  Resources will only be
change in consumers provided if it is profitable
tastes and demand to do so
No taxes on incomes and Harmful goods may be
wealth or goods and available to buy readily
services

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2.10 Market Failure  Divisibility: Must be able to divide it into smaller
 Market failure occurs when the market mechanism values
fails to allocate scarce resources efficiently, so social  Scarcity: Should be limited in supply to create value
costs are greater than social benefits Commercial Banks
Causes and Consequences of Markets Failure
 Accepting deposits of money and savings
 Only goods and services that are profitable to make  Helping customers make and receive payments
will be produced  Making personal and commercial loans
 Services such as street lighting won’t be provided as  Buying and selling shares for customers
you are unable to separate it  Providing insurance
 Resources only employed if profitable – people may be  Operating pension funds
left unemployed without an income  Providing financial and tax planning advice
 Harmful goods may be produced and sold freely  Exchanging foreign currencies
 Producers may ignore environmental impacts
Central Banks
 Monopolies dominate supply of products and charge
 Printing notes & minting coins that are legal tender
high prices
 Destroying torn notes & worn-out coins
2.11Mixed Economic System  Setting interest rates
 Has a private sector & a public sector  Lender of last resort: if a bank needs cash in a hurry,
they can borrow from central bank
 A government can try to correct market failures in a
mixed economic system  Supervising monetary policy: heads of the central
bank hold meetings with officials from other banks to
 It can allocate scarce resources to provide goods and
determine interest rate and quantity of money in
services that people need
economy
 Can introduce laws and regulations to control harmful
 Banker for commercial banks & the government:
activities
o Government accounts & spending are carried out
with central bank
Government Intervention
o Helps government to borrow money
 Produce merit goods such as education for the needy
o Total amount government owes is national debt
 It can provide public goods such as street lighting
 Manage international financial system: governments
 Public sector can employ people and welfare benefits
of different nations lending each other money
can be given to the needy
 Laws to make goods illegal or high taxes to reduce 3.2 Households
consumption Influences on Spending, Saving and Borrowing
 Laws and regulations would protect natural
 Disposable income: amount of income left to spend or
environment
save after direct taxes have been deducted
 Monopolies can be broken up or regulated to keep
 Spending: enables a person to buy goods/services to
prices low
satisfy their needs/wants
 Saving: involves delaying consumption
3. MICROECONOMIC DECISION MAKERS o As interest rates rise, people may save more
 Borrowing: allows a person to increase their spending;
3.1 Money and Banking enabling them to buy goods they cannot afford now
Functions of money
 People with low disposable incomes may spend less in
 Medium of exchange: accepted as means of payment total than people with high incomes
 Unit of account:for placing a value on goods/services  But will tend to spend all or most of their income
 Store of value:can save money since it keeps its value meeting their basic needs
 Standard for deferred payment: borrowers are able to
borrow money and pay back later INCREASE
SPENDING SAVING BORROWING
IN…
Characteristics of money Real ↑ ↑ ↑
 Acceptability: Anything can be used as money as long income
as it’s generally accepted Direct tax ↓ ↓ ↕
 Durability: Good money must be hard-wearing Wealth ↑ ↓ ↑
 Portability: Should be easy to carry around
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Interest ↓ ↑ ↓ Specialization
rates  Division of labour: workers concentrate on a few tasks
Availability ↓ ↑ ↓ then exchange their product for other goods/services
of saving  Specialization:production process broken up into a
scheme series of different tasks
Availability ↑ ↓ ↑ ADVANTAGES FOR DISADVANTAGES FOR
of credit INDIVIDUAL INDIVIDUAL
Consumer ↑ ↓ ↑
 Employees can make  Doing same job or
confidence best use of their repetitive tasks is boring
particular talents/skills and stressful
3.3 Workers and can increase them  Individuals must rely on
 Entry: young employee will receive low earnings due by repeating tasks others to produce goods
to lack of work skills and experience; can become an  Employees can produce and services they want
apprentice or join a management training scheme to more output and reduce but cannot produce
become more skilled business costs themselves
 Skilled workers: the more skilled a worker is, the more  More productive  Many repetitive tasks
opportunities he has for increasing his earnings; employees can earn can now be done by
bonuses will be given and higher rate of overtime paid higher wages machines, leading to
 End-of-career employees: if workers keep updating unemployment of low-
skills, they will continue to have opportunities to skilled workers
increase wages however when they stop this, their
demand would fall & income would diminish, finally 3.4 Trade Unions
reaching a stop when retired  An organization of workers formed to promote &
Why firms change demand for labour protect the interest of its members concerning wages,
benefits & working conditions
 Changes in consumer demand for products
 Changes in the productivity of labour
Functions
 Changes in price and productivity of capital  Negotiating wages & benefits with employers
 Changes in non-wage employment costs  Defending employee rights and jobs
 Improving working conditions
Why labour supply might change  Improving pay and other benefits, including holiday
 Changes in net advantages of an occupation entitlement, sick pay and pensions
 Changes in provision and quality of education and  Encouraging firms to increase worker participation in
training business decision-making
 Demographic changes  Developing skills of union members, by providing
training and education courses
Factors that Cause Occupational Wage Differentials  Supporting members taking industrial action
 Different abilities and qualifications
Types of Trade Unions
 ‘Dirty jobs’ and unsociable hours
 General Unions: represent workers across many
 Job satisfaction different occupations
 Lack of information about jobs and wages  Industrial Unions: represent workers of the same
 Labour immobility industry
 Fringe benefits  Craft Unions: represent workers with the same skill
across different industries
Factors that cause wage differentials in the same job  Non-manual unions/Professional unions: represent
 Regional differences in supply and demand of labour workers in non-industrial and professional occupations
 Length of service Collective Bargaining
 Local pay agreements  Process of negotiating wages and other working
 Non-monetary agreements conditions between trade unions and employers
 Discrimination  A trade union will be in a strong bargaining position to
negotiate higher wages and better conditions if:
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o It represents most or all of the workers in a firm Economies and Diseconomies of Scale
o Union members provide goods/services that Economy of Scale Diseconomy of Scale
consumers need which have few alternatives Cost savings due to Rising costs because a firm
Industrial Action increased scale of has become too large
 Industrial action is taken when collective bargaining production  Management: larger
fails to result in an agreement  Financial: larger firms firms must manage so
 Taking industrial action can help a union force often have access to many different
employers to agree to their demands cheaper sources of departments in different
 Industrial actions: finance locations, making
o Overtime ban:workers refuse to work more than  Marketing: larger firms communication/ decision-
their normal hours employ specialists to making difficult
o Work to rule:workers deliberately slow down buy best quality  Labour: demotivated
production by complying with every rule & materials in bulk at workers lead to decrease
regulation discounted prices& in productivity due to
o Go slow:workers deliberately work slowly spread advertising costs boring, repetitive tasks
o Strike:workersprotest outside their workplace to  Technical: larger firms  Agglomeration:company
stop deliveries/non-unionized workers from invest in specialized takes over or merges with
entering production equipment, too many other firms
highly skilled workers; producing different
Impact of Trade Unions develop new products products, making it hard
POSSIBLE POSSIBLE  Risk-bearing: ability to for business owners and
ADVANTAGES DISADVANTAGES spread risk over many managers to co-ordinate
 Could help to bring  Might cause lack of investors & reduce all activities
about minimum working flexibility in working market risks by selling
standards practices range of products in
 Could help keep pay  Could be major problem different locations
higher as fashions change very
 Could help maintain quickly Integration
Employment/enhanced  Could lead to some firms  Growth often involves integration with other firms
job security going out of business  Takeover: a company acquires ownership & control of
 Could lead to  Workers made another company by purchasing its shares
improvement in health redundant  Merger: two or more firms agree to form an entirely
and safety  Workers will need to pay new company & issue new shares
union membership fees Types of Integration
 Horizontal integration: occurs between firms at the
3.5 Firms same stage of production producing similar products
Size of Firms  Vertical integration: occurs between firms at different
 Number of employees: less than 50 are classed as stages of production
small o Forward:taking over firm at later stage of
 Amount of capital employed: large firms invest a lot in production
fixed assets such as machinery & equipment o Backward: integration is the opposite
 Market share: relative size of firms compared by  Lateral integration or conglomerate merger: occurs
percentage share of total market supply/revenue with firms at same stage of production but different
 Organization: large firms may be divided into many products
departments &be spread over many locations
3.6 Firms and production
Small Firms Demand for “Factors of Production”
ADVANTAGES DISADVANTAGES  Demand for goods & services by consumers: higher
 Size of market is small  Markets cannot raise demand = more labour/capital firms will need
 Consumers like tailored enough capital to expand  Price of labour & capital: higher cost = less labour &
goods/services their business capital demanded
 Governments provide help o Firms may also decide to substitute labour for more
capital and vice versa

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 Productivity of labour & capital: more output/revenue  Survival
labour & capital help to produce, more profit they will  Social welfare
generate over & above cost of employing them  Profit maximisation
 Capital-intensive Production: requires heavy capital  growth
investment too buy assets relative to sales or profits
that assets can generate 3.8 Market Structure
 Labour-intensive Production: main cost is labour; cost Competitive Markets
is high compared to sales or value added by additional  Businesses will charge same price, a minimum price
manpower they can chargee without going out of business
 Labour-intensive production method primarily  Price will be equivalentt to the lowest average cost of
involves labour, whereas, capital-intensive
intensive methods producing goods
primarily involve machinery  Average cost of production would be same as average
revenue for selling
 No firm would
ould risk charging more than market price
Productivity & Production  A business would be a price taker;
taker the market price
 Productivity: the ratio of output to input
 Labour Productivity: Monopoly Markets
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡  Firms with monopolistic
olistic powers control at least 25% of
𝑂𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝐿𝑎𝑏𝑜𝑢𝑟 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐿𝑎𝑏𝑜𝑢𝑟 the market share
 Capital Productivity:  Able to influence price; price makers
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝑉𝑎𝑙𝑢𝑒  Can restrict competition with artificial barriers to entry
𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 & other pricing strategies
 Productivity refers to the efficiency of a business  One firm controls entire market supply
whereas production refers to output only  May use predatory pricing to force competing
co firms
out
3.7 Firms’ Costs, Revenue and Objectives  Other firms deterred from competing due to lack of
 Fixed costs: don’t vary with level of output e.g. interest capital
on loans
 Variable cost: vary directly with level of output e.g. Advantages of Monopolies
electricity  Avoids duplication &wastage of resources
 Breakeven: where total revenue = total cost  Economics of scale; benefits can
ca be passed to
 Total revenue: the total receipts a seller can obtain consumers
from selling goods or services to buyers  High profits can be used for research &development
 Average revenue: the revenue generated per unit of  Monopolies
lies may use price discrimination which
output sold benefits the economically weaker sections of the
society
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝐶𝑜𝑠𝑡𝑠/𝑂𝑢𝑡𝑝𝑢𝑡
 Monopolies can afford to invest in latest technology
t &
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠/𝑂𝑢𝑡𝑝𝑢𝑡
machinery to be efficient & avoid competition
𝑻𝒐𝒕𝒂𝒍 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 × 𝑂𝑢𝑡𝑝𝑢𝑡
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 Disadvantages of Monopolies
+ 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
 May
ay supply less & charge higher
highe prices
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒐𝒔𝒕 = (𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡))/𝑂𝑢𝑡𝑝𝑢𝑡
 May offer
ffer less consumer choice and lower quality
𝑻𝒐𝒕𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑜𝑙𝑑 products than if they had to compete with other firms
𝑷𝒓𝒐𝒇𝒊𝒕 𝒐𝒓 𝑳𝒐𝒔𝒔 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡  May
ay have higher production costs because they are
poorly managed
 Restrict competition
etition using barriers to entry

Barriers to entry
Objectives of firms
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NATURAL ARTIFICIAL  They raise wages, which leads to wage inflation
 Cost savings from large  Predatory pricing  If the government tries to redistribute income, richer
scale production strategies to force workers may feel that they are unfairly penalized for
 Lots of capital smaller firms out working hard & may decide to migrate
equipment that other  Preventing suppliers  This may slow down economic growth
firms can’t afford from selling materials &
 Large customer base components to other 4.3 Fiscal Policy
built up over years firms by threatening to  Budget: It is an estimate made by the govt., of income
 Developed advanced switch to rival suppliers and expenditure for a future period
products or processes  Forcing retailers to stock Reasons for Government Spending
that are protected by & sell only their product  To supply goods and services that are not supplied by
patents the private sector, such as defence; merit goods such
as education
4. GOVERNMENT & THE MACROECONOMY  To achieve improvements in the supply-side of the
macro-economy, like providing subsidies
4.1 Role of Government Reasons to Tax
AS A PRODUCER AS AN EMPLOYER  To finance public expenditure; building schools and
 Produce essential goods  People work directly for infrastructure
& services e.g. health the government as civil  To discourage certain activities; e.g. taxes on cigarette
care & education servants, e.g. tax  To discourage import of goods; tariffs are import taxes
 Supply merit goods collectors and can be levied as a % of value of imports or a set tax
 Supply public goods e.g.  Employees in public on each item
road repairs/lights sector:  To redistribute income from the rich to the poor
 Control natural o Secure employment  To achieve other macro-economic objectives
monopolies; they may o State pension
take over companies  Money earned by
providing necessities government employees TYPES OF DESCRIPTION EXAMPLES
e.g. electricity or water is mainly spent in TAXATION
national economy
Tax rate rises with Income tax
Progressive
income; higher
4.2 The Macroeconomic Aims of The Govt. Tax
income = higher tax
Objectives
o Achieve low and stable rate of inflation in general Tax rate falls with VAT
Regressive
levels of price income; higher
Tax
o Achieve high and stable level of employment; low income = lower tax
unemployment Proportional Everyone pays same Corporate
o Encourage economic growth in national output and Tax effective tax rate income tax
income Levied on individuals Capital gains
Direct Tax
o Encourage trade & secure favourable balance of tax
international transactions Added to price of Tariffs
 Additional objectives: Indirect Tax
commodities
o Reduce poverty & inequalities in income & wealth
o Reduce pollution &waste; sustainable growth Principles of Tax
 Equitable
Conflicting Aims
 Economic
 Spending more money to stimulate growth can lead to  Transparent
rising prices because of increased demand
 Convenient
 If spending is reduced to stop inflation, this will lead to
a fall in growth Fiscal Policy
 If government tries to create full employment, labour  It is the use of taxation and government spending to
becomes increasingly scarce influence aggregate demand
 Employers must compete more strongly to attract POLICY ABOUT
labour Expansionary Reducing taxes and increasing govt.
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Fiscal Policy spending to boost demand, so of new technologies.
employment and output rises. May Education Teaching new/existing workers new
be used to reduce recession. and Training skills to make them more productive.
Contractionary Increasing taxes and increasing govt. Labour Include minimum wage laws to
Fiscal Policy spending to reduce demand, so Market encourage more people into work, and
employment and output rises. May Regulations legislation to restrict the power of
be used to reduce price inflation. trade unions.
Competition Regulations that outlaw unfair trading
Effects of fiscal policy on govt. macroeconomic aims Policy practices by monopolies and other
 Expansionary fiscal policy can reduce unemployment large, powerful firms.
 Expansionary fiscal policy can increase economic Free Trade Removing barriers to international
growth Agreements trade allow countries to trade their
 Contractionary fiscal policy can reduce high inflation
goods and services more freely and
4.4 Monetary Policy cheaply
 It is the use of interest rates, direct control of the Deregulation Removing old, unnecessary and costly
money supply and the exchange rate to influence rules and regulations on business
aggregate demand activities
POLICY ABOUT
Contractionary May be used to reduce price 4.6 Economic Growth
Monetary inflation by increasing interest rates  Economic growth is when there is an increase in real
Policy charged by the central bank. This output over time, i.e. increased GDP & national income
means commercial banks will also  Important as it increases the standard of living
raise interest to encourage more Measurement of Economic Growth
savings.  Gross Domestic Product (GDP) is the main measure of
Expansionary May be used during a recession&to total value of all the goods and services produced in a
Monetary increase employment by cutting given period of time
Policy interest rates  An increase in prices will increase nominal GDP but
this is measured in current dollars thus includes
Effects of monetarypolicy on govt. macroeconomic inflations
aims 𝑁𝑜𝑚𝑖𝑛𝑎𝑙
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = × 100
 Expansionary monetary policy can reduce 𝐶𝑃𝐼
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
unemployment 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
 Expansionary monetary policy can increase economic Recession
growth  It is a significant decline in economic activity spread
 Contractionary monetary policy can reduce high across the economy, lasting more than a few months,
inflation normally visible in real GDP growth, real personal
4.5 Supply-Side Policies income, employment, industrial production, &
wholesale-retail sales
 Supply-side policies aim to increase economic growth
by raising productive potential of economy  A recession would cause the economy to produce at a
 An increase in the total supply of goods & services will point that is within the PPC
require more labour &other resources to be employed Causes of Economic Growth
 It will reduce market prices & provide more goods &  Discovery of more natural resources
services to export  Investment in new capital and infrastructure
INSTRUMENT EFFECT ON MACROECONOMIC AIMS  Technical progress
Tax Reducing taxes on profits and small  Increasing the amount and quality of human resources
Incentives firms can encourage enterprise. It can  Reallocating resources
also encourage investments in new Consequences of Economic Growth
equipment.  An increase in output can improve living standards of
Subsidies/Gr To reduce production costs and help people
ants firms fund research and development
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 Higher output and incomes increase government tax o Entire industries close due to a permanent fall in
revenue. This can increase govt. spending without demand for their goods/services
increasing tax rates  Frictional Unemployment: refers to short-lived
 However, it can increase pollution, lead to depletion of unemployment; e.g. moving to different job
non-renewable resources and damage the natural  Seasonal Unemployment: occurs because consumer
environment demand for goods/services changes with seasons; e.g.
Policies to Promote Economic Growth no job for ski instructor when/where there is no ice
 Expansionary fiscal policy
Measurement of Unemployment
 Expansionary monetary policy
 Taking claimant count
 Supply-side policies
 Labour force survey
4.7 Employment and Unemployment  𝑼𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕 𝑹𝒂𝒕𝒆 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑃𝑒𝑟𝑠𝑜𝑛𝑠 / 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
INDICATOR RECENT TRENDS
Labour force  Risen as world population has Consequences of Unemployment
grown PERSONAL ECONOMICAL
Participation  Risen in many countries  Loss of income and  Unemployment is a
Rate: labour especially among females as it is reduced ability to buy waste of human
force as a now socially acceptable goods & services resources
proportion of  Poverty and rising living costs in  Unemployed people de-  Fewer goods & services
total population developing countries has forced skill if long out of work produced
of working age many women to work  Unemployed people  Total output & income
may become depressed in economy is lower
Employment by  Employment in services has been
& ill  Government tax
Industry: growing while employment in
 Strain on family revenues also lower
Number of agriculture and other primary
relationships & health  People in work may
people employed sector industries has fallen
services have to pay more taxes
in different  Government spending
industrial sectors on welfare may rise
Employment  Most employees work full-time
Status: Number  Part-time employees have grown Policies to Reduce Unemployment
of full-timers, rapidly, especially among female  Expansionary monetary policy
part-timers or employees  Expansionary fiscal policy
with temporary  Increase in quality and quantity of education and
contracts training
Unemployment:  Tends to rise during economic 4.8 Inflation and deflation
Number of recessions  Inflation: general & sustained increase in the level of
people  Almost half the unemployed are prices of goods/services in an economy over a period
registered as young unskilled workers of time
being without  Deflation:decrease in general price level of goods and
work services and occurs when the inflation rate falls below
Unemployment  Relatively stable in the recent 0%
Rate: years but did increase in 2008 Measurement
Unemployment during a global financial crisis  Base year: first year with which the prices of
as a proportion subsequent years are compared
of labour force  Inflation rate: percentage change in annual CPI
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑖𝑐𝑒 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑥
𝐶𝑃𝐼 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑥 = × 100
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑒𝑎𝑔𝑒 𝑃𝑟𝑖𝑐𝑒 𝑖𝑛 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟
Types of Unemployment
Causes of Inflation
 Cyclical Unemployment: occurs during recession due
 Demand-pull Inflation: caused by total demand rising
to falling consumer demand & incomes
faster than total output, causing market prices to rise
o Firms reduce output & lay off workers
 Cost-push Inflation: cost of production increases, so
 Structural Unemployment: caused by changes in
firms try to pass cost to consumers through higher
industrial structure of an economy
prices
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Causes of Deflation 5.2 Poverty
 Fall in the money supply ABSOLUTE POVERTY RELATIVE POVERTY
 Decline in confidence  Number of people living  Measures extent to
 Lower production costs below a certain income which a household’s
 Technological advances threshold or number of financial resources falls
 Increase in unemployment households unable to below an average
 Increase in the real value of debt afford certain basic income level.
Policies to Control Inflation & Deflation goods & services  Occurs when people are
 Contractionary fiscal and monetary policy for inflation  Occurs when people do poor relative to other
 Expansionary fiscal and monetary policy for deflation not have access to basic people in the country;
food, clothing and unable to participate
 Supply-side policy can increase aggregate supply and
thus control both inflation and deflation shelter fully in normal activities
of society they live in
5. ECONOMIC DEVELOPMENT Causes of Poverty
 Unemployment
5.1 Living Standards  Low wages
Real Gross Domestic Product (GDP) Per Capita  Illness
 GDP is the main measure of total value of all the goods  Age
and services produced in a given period of time
 An increase in prices will increase nominal GDP but Alleviating Poverty
this is measured in current dollars thus includes  Governments will use policies to help alleviate poverty
inflations in their country, or in another country:
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 WHY IS IT WHAT ARE THE
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = × 100 POLICY
𝐶𝑃𝐼 NEEDED? PROBLEMS?
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 = Poor farming Free food supplies
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
Food aid methods produce can force farmers
 If economy has an extremely rich person & everyone
insufficient food out of business
else is poor, it brings up the Real GDP per capita
LEDCs lack capital Loans have to be
Human Development Index (HDI)
to invest in an repaid sometimes
 Used by the United Nations to make comparisons of Financial
human & economic development in different countries industrial base, with interest
aid
 Combines three different measures for each country modern machinery
o Standard of living, measured by average incomes and infrastructure
o Being educated, measured by adult literacy rate LEDCs lack access Most people lack
o Living a long healthy life, measured by life to modern skill to use modern
expectancy machinery, technology; instead
 Single index with a value between 0 and 1 Tech aid equipment and of using machinery,
 Greater than 0.8 = high human development. Less than knowledge of more jobs are
0.5 = low human development modern production needed to employ
methods people
Reasons For Low/Varying Economic Development
Relieving LEDCs of May encourage
 Over-dependence on agriculture
debt will allow LEDCs to borrow
 Domination on international trade by developed
Debt them to use money more money or
nations
relief for economic money may be
 Lack of capital
development misused by corrupt
 Insufficient investment in education, skills &
healthcare instead governments
 Low levels of investment in infrastructure Removing LEDCs may have MEDCs will force
 Lack of efficient production and distribution systems overseas natural supplies, down their price
 High population growth trade can be exported for
 Other factors like a corrupt govt. or war barriers money
Economic Governments in Advice not enough;

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Advice LEDCs lack LEDCs need more
economic capit
capital & stability
knowledge

5.3 Population
Factors that affect population growth
 Stage 1: high birth rate; high death rates; short life
 Birth rate
expectancy; less dependency (since there are few old
 Death rate
people and children must work anyway)
 Net migration
 Stage 2: high birth rate; fall in death rate; slightly
 Immigration & emigration
longer life expectancy;
pectancy; more dependency due to more
Reasons for different population growth
rowth rates elderly
Varying Birth Rates  Stage 3: declining birth rate; declining g death rate;
 LEDCs have: longer life expectancy; more dependency
o Large families to help produce
roduce food & work for  Stage 4: low birth rate; low death rate; highest
money dependency ratio; longest life expectancy
o High infant mortality rate
o Low supply of contraceptives/forbidden
forbidden to ususe
them
6. INTERNATIONAL TRADE & GLOBALISATION
 In MEDCs, people marry later in life so birth rates fall
6.1 International Specialisation
Specialization at a National Level
Varying Death Rates
 Countries specialize in production of those goods and
 MEDCs have:
services in which they have an absolute advantage or
o Better food, housing, hygiene &high life expectancy
comparative advantage over other regions or countries
o Fatty
atty foods, smoking and lack of exercise has
increased rates of diabetes,
betes, cancer & heart disease  A country has an absolute advantage if it can produce
o Improved medicine & healthcare; preventsmany a given amount of a good or service with far less
diseases & increased life expectancy
tancy resources and therefore at an absolute cost advantage
over any country
 LEDCS have:
o Widespread diseases which lower life expectancy  A country has a comparative advantage in the
o Natural disasters, famines, wars production of a good or service if it can produce
produc it at a
Population Structure lower opportunity cost relative to other countries
 The Demographic Transition Model: Advantages of Specialisation
 Greater efficiency
 Consumer benefits from lower prices, greater variety
and quality of goods & services
 Opportunities for competitive sectors
 Gains from trade
Disadvantages
antages of Specialisation
 Threats to uncompetitive sectors
 Risk of over-specialization
 Dependency on other countries

6.2 Globalisation, Free Trade and

Protection
 Globalisation: The
he process by which businesses or
 This shows that population growth occurs in stages other organizations develop international influence
in or
 Population Pyramid: a type of graph that shows th
the start operating on an international scale.
age and sex structure of the country
Multinationals
 Operatess in more than one country
 Some of the largest companies in the world
 Governments often compete to attract multinationals
multi

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o Can provide jobs, incomes, business knowledge,  Excessive quality standards and bureaucracy
skills and technologies which can help other firms
o Pay taxes on their profits to boost government Protection
revenue ARGUMENTS FOR POSSIBLE
 Headquarters are based in one country CONSEQUENCES
Advantages Disadvantages  Protection of a young  Other countries will
 Can reach many more  Can switch profits to industry retaliate with trade
consumers globally & other countries to avoid  To prevent barriers
sell far more than other paying taxes on profits unemployment  It protects inefficient
types of businesses  Can force smaller local  To prevent dumping domestic firms
 Can minimize transport firms out of business  Because other countries  The loss of domestic
costs by locating plants  May exploit workers in use barriers to trade jobs from overseas
in different countries to low wage economies  To prevent over- competitions will only
be near raw materials or  May use their power to specialization be temporary
big markets get generous subsidies &  Trade barriers have
 Minimize wage costs by tax advantages from the increased the gap
locating in countries government between rich and poor
with low wages countries
 Can enjoy low average
production costs 6.3 Foreign Exchange Rates
 Exchange rate is the price of a country’s currency in
Benefits of Free Trade terms of another country’s currency
FOR TO  Most countries have a floating exchange rate, which
TO PRODUCERS
CONSUMERS GOVERNMENTS means no set value for their currency compared with
 Cheaper  Larger markets  Exports any other currency
products  Economies of increase jobs,  Currency is a commodity thus the value of a currency is
 Better scale GDP, incomes totally dependent on demand and supply of that
products  More  But imports currency in the foreign exchange market.
 Workers more produced, take them  An appreciation in the value of currency means its
productive lower average away exchange rate against other countries has risen
 International per unit cost  A depreciation in the value of currency means its
Trade  International exchange rate against other countries has fallen
 Increased trade
competition increases Exchange Rate Fluctuations
from number of  Demand for a currency comes from foreign money
international products you flowing into the country. If demand rises, the
companies make currency’s value will rise in relation to the other
 Lower Prices – currency
Better  Supply of the currency comes from domestic money
Qualities flowing out of the country. If supply rises, the
currency’s value will fall
Trade Protection
A currency might A currency might
 Tariffs: tax on imports to raise its price and make them
more expensive than local goods to stop people buying depreciate because: appreciate because:
them  There is a balance of  There is a balance of
 Subsidies: grant given to an industry by government so payments deficit payments surplus
industry will lower its prices encouraging consumers to  Demand for other  Demand for the
stop buying foreign imports by making home-produced currencies rises as currency rises as
goods cheaper domestic consumers overseas consumers buy
 Quota: limit on number of imports allowed into buy more imports more exports
country per year, reducing quantity of imports without  Interest rates fall  Interest rates rise
changing their prices relative to other relative to other
 Embargo: complete ban on imports of certain goods. countries countries
An embargo may be used to stop imports of drugs  People move their  This attracts savings
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savings to bank from overseas residents 6. 4 Current Account Balance of Payments
accounts overseas  Inflation is lower than in Structure
 Inflation rises relative to other countries so  Visible trade account: the difference between the
other countries. This exports will be cheaper export revenue and import spending on physical
makes exports more and overseas demand goods, e.g. cars, washing machines
expensive and demand for them, and the  Invisible trade account: measures the difference
for them, and the currency required to between export revenue from and import spending on
currency needed to buy pay for them, will rise services, e.g. banking, insurance and tourism
them, falls  People speculate that  Income flows: e.g. interest, profit and dividends
 People speculate that the currency will rise in flowing in and out of the country
the currency will fall in value and they buy  Current transfers: e.g. grants for overseas aid.
value and they sell their more of the currency
holdings of the currency Balance of Payments Balance of Payments
Deficit Surplus
Consequences of Exchange Rate Fluctuations  Money flowing out  Money flowing in
 An appreciation of the currency will make exports greater than in. greater than out.
more expensive and imports will be cheaper, vice versa  Current + Capital +  Current + Capital +
 If PED<1 for exports, an exchange rate appreciation Financial is negative. Financial is positive.
will improve a current account deficit
 If PED<1 for imports, an exchange rate depreciation Trade Deficit
will worsen a current account deficit  Means people are buying more imports and may be
Types of Exchange Rate spending less on products made by domestic firms
 Floating exchange rate: it is determined by the forces  Deficit may be a symptom of a declining industrial base
of market supply and demand  Foreign exchange for the national currency is likely to
 Managed floating exchange rate: it is influenced by fall
state intervention  Increases prices of imports and cause imported
 Fixed exchange rate: it is set by the government and inflation
maintained by the central bank buying and selling the
currency and changing interest rates Trade Surplus
 Means people are buying less imports and may be
Floating Exchange Rate spending more on products made by domestic firms
ADVANTAGES DISADVANTAGES  Surplus may the result of economic growth
Automatic stabiliser Uncertainty  Foreign exchange for the national currency is likely to
Frees internal policy Lack of investment rise
Management Speculation  Increases prices of exports
Flexibility Lack of investment Policies to achieve balance of payments stability
Can avoid inflation  Supply-side policy will increase domestic production
Lower reserves and exports which can correct a current account deficit
Fixed Exchange Rate  Expansionary fiscal policy, by reducing taxes and
ADVANTAGES DISADVANTAGES increasing government expenditure can increase total
Elimination of uncertainty Foreign exchange reserves demand for imports to fix current account surplus, vice
and risks needed versa
Speculation deterred Internal objectives  Contractionary monetary policy can correct a current
sacrificed account deficit, vice versa
Prevents currency Restricts international
depreciation competition
Attracts foreign direct
investment

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