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Edexcel IGCSE Economics Your notes
The Macroeconomic Objectives

Contents
Economic Growth
Economic Growth: The Economic Cycle
Low & Stable Rate of Inflation
Types of Inflation
Low Unemployment
The Impact of Unemployment
The Current Account
The Impact of Exchange Rates on the Current Account
Environmental Protection
Government Intervention to Protect the Environment
The Redistribution of Income
Government Intervention to Redistribute Income
Page 1 of 45
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Economic Growth
Your notes
An Introduction to the Macroeconomic Objectives
Macroeconomic Objectives are goals set by the government aimed at improving the overall economic
performance of a country as well as the quality of life of its citizens
The government aims to achieve these objectives through the use of macroeconomic policies
It can be difficult to achieve some outcomes simultaneously
E.g High economic growth and stable price levels can be in conflict with one another, as growth
can drive upthe general price level
Governments set specific macroeconomic objectives as they want their economies to grow and
prosper
The macroeconomic objectives
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Economic growth: this is the annual increase in the level of national output as measured by the gross
domestic product (GDP)
Your notes
Low and stable rate of inflation: generally, an inflation target of 2% is set
Low unemployment: the lower the unemployment level, the more productive are the human factors of
production - and the higher the nation's output
Stable current account balance of payments: the current account primarily considers the value of
trade in a nation's exports and imports. Wild fluctuations are a sign of an unstable economy
Environmental protection: rapid economic growth often occurs at the expense of the environment,
which has a knock-on effect on citizens. Protecting the environment is a key 21st century goal
Equity in the distribution of income: the wider the disparity between rich and poor, the more socially
unstable an economy becomes
Investigating Economic Growth

Economic growth is the annual increase in the level of national output as measured by the gross
domestic product (GDP)
GDP is the total value for all goods and services produced in an economy in a year
Many developed nations (UK included) have an annual target rate of 2–3%
This is considered to be sustainable growth
Growth at this rate is less likely to cause excessive demand pull inflation
Politicians often use it as a metric of the effectiveness of their policies and leadership
Economic growth has positive impacts on confidence, consumption, investment, employment,
incomes, living standards and government budgets
Strong economic growth means higher incomes, lower unemployment rates and better government
budgets
Sustainable economic growth will have less demand-pull inflationary pressures or excessive
environmental pressure
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Your notes
Following the dismal covid figures of 2020, the UK economy rebounded strongly in 2021
(Source: Macrotrends)
Graph analysis
Summary of Economic Growth Trends in the UK Since 1998
1998-2007 2008-2015 2016-2019 2020 -
Steady Global financial Gradual disinflation Supply chain issues

growth crisis followed by is possibly due to due to Brexit.
fluctuating rapid bounce back future expectations Decreased
between 2- due to government regarding the consumption due to
4% intervention - and impact of the Brexit the impact of Covid 19
then steady growth vote
These created a deep
recession (short-lived
due to government
intervention)
WORKED EXAMPLE
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Calculate, to two decimal places, the percentage change in GDP per capita in South Africa between
2021 and 2022. You are advised to show your working. (2)
Your notes
GDP per Capita US$
2021 2022
7,073 7,629
Step 1: Substitute values into a percentage formula
new − old
Percentage change = x 100
old
7,629 − 7,073 1 mark

= x 100
7,073
= 7 . 86 %
1 mark for correct working and 1 mark for the final answer
Limitations of Using GDP to Measure Growth

Using GDP as a measure of economic health of a country has numerous limitations
A better measure of economic growth is GDP per capita (GDP / the population)
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries. For example, Switzerland
has a much higher GDP/capita than Burundi
Limitations of Using GDP to Measure Growth
Limitation Explanation
Lack of information The distribution of income in an economy is provided as an

provided average (GDP/capita)
on inequality
The differences in the standard of living within the same country
can be significant
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Quality of goods and GDP provides no information on the increase/decrease in the

services quality of goods/services over time
Your notes
If quality worsens but prices are lower, then the standard of living
is judged to have increased
The poor quality may actually have decreased the standard of
living
Does not include If it included voluntary/unpaid work, then GDP/capita would be

unpaid/voluntary work higher
E.g some economies have a high amount of family child care
provision. This increases standards of living but is not recorded
in any way
Differences in hours GDP data does not capture the amount of time taken to produce
worked the GDP/capita
In one country, where it takes less time to generate income than in
a similar country, the standard of living would actually be higher
Environmental factors GDP does not capture the environmental and health impacts of
generating income within a country (externalities)
In one country, where there are fewer externalities in generating
income, the standard of living would be higher
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Economic Growth: The Economic Cycle

Your notes
The Economic (Business) Cycle
The economic cycle describes the upturns and downturns in the level of a country’s economic activity
(Gross Domestic Product or GDP) over time
Economies do not experience consistent levels of growth over time
The economic cycle diagram shows periods of growth, boom, recession and slump in an economy
A recession occurs when an economy experiences two consecutive quarters (6 months) or more of
negative GDP growth
Incomes and consumer demand fall, leading to reduced output
Consumer and business confidence tend to be low
Business profits fall and unemployment rises
Deflation may set in
A slump is an extended period of negative GDP growth
Unemployment is likely to be high as a result of high levels of business failure
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Significant declines in household incomes and business profits

Increased government spending on welfare benefits and infrastructure projects to inject demand Your notes
into the economy may benefit some businesses
The growth stage is a period of increasing rates of GDP growth
Disposable income levels rise and lead to increased demand for products
Inflation usually rises
This drives an increase in production levels, which leads to a rise in employment levels
Businesses look to expand and increase profit
A boom is a period of time when an economy experiences an extended period of increasing rates of
GDP growth
Consumer incomes and business profits are high
Inflation is also high due to higher demand for goods and services
Unemployment levels are low and wages are high due to a shortage of skilled workers
The Impact of Economic Growth on Other Indicators
Economic growth is considered to be the main contributor to an improvement in the standards of
living
Due to the negative aspects of economic growth, there is much controversy about maintaining it as a
central macroeconomic aim
Instead, arguments for a focus on societal well-being are gaining traction
Impact of Economic Growth on Macroeconomic Objectives
Macroeconomic Impact
Objectives
Employment Increasing economic growth rates leads to higher rates of employment

E.g Between 2013-2020, Poland's unemployment rate fell from 13% to
below 4%. A positive correlation with its strong economic performance
Standard of living As employment rises, income increases, and households are better able to
afford goods & services
The government receives more tax & may spend it on improving health and
education
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Tax revenue may be used to redistribute income, reducing inequality
Poverty E.g Poverty rates in South Korea declined from over 60% in the 1950s to Your notes
less than 5% by the 2000s as a result of economic growth
Productive potential Economic growth occurs when there is an increase in the productive
potential of an economy
This is demonstrated by an outward shift of the entire PPC
More consumer goods and more capital goods can now be produced
using all of the available resources
This shift is caused by an increase in the quality or quantity of the available
factors of production
Inflation Rising economic growth causes demand pull inflation and the purchasing
power of people on fixed incomes may fall
The environment Environmental damage is caused by negative externalities of production

and consumption increases
Resources are depleted more rapidly
There can be Improvements in the quality and quantity of environmentally
friendly technologies
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Low & Stable Rate of Inflation

Your notes
An Introduction to Inflation
Inflation is the sustained increase in the average price level of goods and services in an economy
A low & stable rate of inflation is important as it
Allows firms to confidently plan for future investment
Offers price stability to consumers
Deflation occurs when there is a fall in the average price level of goods and services in an economy
Deflation only occurs when the percentage change in prices falls below zero %
Disinflation occurs when the average price level is still rising, but at a lower rate than before
These figures demonstrate disinflation: Y1 = 5% Y2 = 4% Y3 = 2%
Inflation is increasing but at a decreasing rate
Between 2011 and 2015, the UK economy mainly experiences disinflation
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Graph analysis
In the UK, a continual deviation from the target of 2% would not be considered stable Your notes
An inflation rate in April 2022 of 4-5% was considered to be unstable, eroding household
purchasing power
According to the CPI data, the following changes happened to the price level
In 2018, prices were rising at around 3% (inflation)
In 2019, prices were still rising but only by 1.8% (disinflation)
In 2021, they were still rising but by a much lower 0.5% (disinflation)
In 2022, prices rose at their fastest level, reaching 4.2% (inflation)
EXAM TIP
Remember that a reduction in the inflation rate from e.g. 5% to 3% means that prices are still rising
but rising more slowly (inflation at a decreasing rate is called disinflation)
MCQ will check your understanding of decreasing inflation by asking you questions such as:
In which year are prices their highest?
A. Y1 Inflation = 5%
B. Y2 inflation = 3%
C. Y3 inflation = 1%
C is the answer, as prices are 9% higher in Y3 than at the start of Y1 (5% + 3% + 1%)
Measuring Inflation Using the Consumer Price Index

(CPI)
The consumer price index (CPI) is used to measure inflation
The inflation rate is the change in general price levels in a given time period
The inflation rate is calculated using an index with 100 as the base year
If the index is 100 in year 1 and 107 in year 2, then the inflation rate is 7%
The Consumer Price Index (CPI)

A 'household basket' of 700+ goods/services that an average family would purchase is compiled on
an annual basis
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A household expenditure survey is conducted to determine what goes into the basket
Each year, some goods and services exit the basket, and new ones are added Your notes
Goods/services in the basket are weighted based on the proportion of household spending
E.g. More money is spent on food than shoes, so shoes have a lower weight in the basket
Each month, prices for these goods and services are gathered from hundreds of locations across the
country
These prices are averaged out
The price x the weighting determines the final value of the good/service in the basket
These final values are added together to determine the price of the 'basket'
The prices of the baskets are then used to calculate the CPU using the following formula:
Cost of basket in year X
CPI = x 100
Cost of basket in base year
The percentage difference in CPI between the two years is the inflation rate for the period
WORKED EXAMPLE
What was the rate of inflation if the consumer price index (CPI) of a country rose from 110 to 130?
Round to the nearest percentage.
A. 18%
B. 15%
C. 30%
D. 25%
Step 1: CPI data is already provided so calculate the inflation rate
new − old
Percentage change = x 100
old
130 − 110
= x 100
110
= 18. 18 %
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A is the correct answer
Your notes
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Types of Inflation
Your notes
Demand Pull Inflation
An increase in the average prices in an economy can be caused by demand-pull inflation or cost-
push inflation
Demand-pull inflation is caused by excess demand in the economy
This excess demand leads to higher prices as suppliers increase prices to balance the demand-
supply gap
Excess demand is often caused by higher incomes, resulting in more money flowing around the
economy
Factors that lead to higher incomes include:
Salary increases
Lower taxes raise disposable income
More government spending
Lower interest rates reduce interest payments, leading to an increase in disposable income
Higher employment levels
Increased exports generate more income in the country
Examples of demand pull inflation

If the Central Bank lowers the base rate, there is likely to be increased borrowing by firms and
consumers
This will result in an increase in consumption and investment
It is likely to lead to a form of demand-pull inflation
If the government increases public spending or lowers taxes, people may have more money to spend,
which could result in demand-pull inflation
Cost Push Inflation

Cost push inflation is caused by increases in the costs of production in an economy
This can be a result of an increase in cost of raw materials, labour, or interest rates
It passes on the increased costs to consumers in the form of higher prices
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E.g If there's a rise in oil prices, it will increase the cost of production for goods that rely on oil,
leading to cost-push inflation
Your notes
Impacts of Inflation
The aim is to have a low and stable rate of inflation of approximately 2%, which means there is a steady
rate of economic growth
Higher levels of inflation have many negative impacts on firms, workers, consumers and the
government
Impact of Inflation
Factor Impacted by Explanation

Inflation
Purchasing power If inflation increases by more than 2% and income does not increase by
the same rate, there is a loss of purchasing power
Wages Workers demand higher wages to compensate for reduced purchasing

power
If wage increase ≠ inflation, motivation and productivity may fall
Exports Inflation erodes international competitiveness of export industries as

the country's exports are now relatively more expensive
Economic growth may slow due to a fall in exports and a possible fall in
consumption
Unemployment Generally, there is an inverse relationship between inflation and

unemployment
When inflation increases unemployment decreases and vice versa
Menu costs Price changes force firms to change their menu prices too
Businesses have the additional cost of updating menus or price cards
Shoe leather costs Shoe leather costs refers to hidden costs or waste of resources during
periods of high inflation
E.g People spend more time browsing Google for a better deal
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Business and consumer With falling output and rising unemployment, households and business
confidence lose confidence choosing to save or delay investment
Your notes
Consumption and investment fall, and real GDP reduces even more
Consumers delay purchasing goods and services as they believe
prices will be cheaper in a few weeks or months
Investment Rapid price changes create uncertainty and firms delay investment
Low and stable inflation improves confidence in future purchasing
power, encouraging long-term investment
EXAM TIP
When analysing inflation, make certain that you consider the size of any inflation. Low Inflation is
generally positive and a sign of a healthy economy, as it is indicative of economic growth
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Low Unemployment
Your notes
An Introduction to Unemployment
Employment refers to the economic use of labour as a factor of production
Unemployment occurs when a person is not working but actively seeking work
A country's population is divided into the labour force and non-labour force
The labour force consists of all workers actively working plus the unemployed (who are seeking
work)
The non-labour force includes all those not seeking work, e.g. stay-at-home parents,
pensioners, and school children (these people are economically inactive)
Measuring Unemployment
Unemployment is measured in many countries using the International Labour Organisation (ILO)
Survey
An extensive survey is sent to a random sample of households every quarter (60,000 households
in the UK)
Respondents self-determine if they are unemployed based on the following ILO criteria:
Ready to work within the next two weeks
Have actively looked for work in the past month
The same survey is used globally so the results are useful for making international comparisons
Calculating the Unemployment Rate

Three metrics are commonly used when analysing the labour market in an economy
The unemployment rate
The employment rate
The labour force participation rate
Unemployment rate Employment rate Labour force participation

rate
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no . actively seeking no . in employment labour force

= x 100 = x 100 = x 100
total labour force population of working age total population Your notes
The employment rate could be increasing even as the unemployment rate is increasing:
It may be caused by increased immigration, which causes working age population to increase
This may be caused as people move from being economically inactive to employed
Unemployment rates do not capture the hidden unemployment that occurs in the long term
Workers look for a job but may eventually give up and become economically inactive
This actually improves the unemployment rate, as fewer people are actively seeking work
WORKED EXAMPLE
The table provides information about a country's labour market
Population size 4000000
Labour force size 2400000
Number employed 1800000
Number of full-time students 200000
What is the unemployment rate of this country?

a) 15%
b) 25%
c) 50%
d) 75%
Step 1: Decide which information in the table is useful
The number of full time students would not be included in the labour force size, so it is not useful
(it is a distraction)
The key information is the size of the labour force and the number employed
Step 2: Calculate the number of unemployed in the labour force
Labour force - employed = unemployed
2,400,000 - 1,800,000 = 600,000 unemployed
Step 3: Calculate the unemployment rate
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no . actively seeking
= x 100
total labour force
Your notes
600 ,000
= x 100
2,400 ,000
= 25 %
Types of Unemployment
It is possible to classify unemployment into different categories
Types of Unemployment
Type of Explanation
Unemployment
Cyclical This is caused by a fall of total (aggregate) demand in the economy

It often happens during a downturn or recession in the economic (business)
cycle when real gross domestic product (rGDP) is falling
The demand for labour is derived from the demand for goods and services.
As output falls in the economy, firms lay off workers
Structural It occurs when there is a mismatch between jobs and skills in the economy
It usually happens as the structure of an economy changes, e.g. the
secondary sector is declining and the tertiary sector is growing
There is no longer a need for a specific type of worker, e.g. ship builders in
Glasgow
Many Western industries have relocated production to China, causing
structural unemployment in their economies
Unless workers receive help to retrain, they are often left unemployed or
underemployed
Seasonal Seasonal unemployment occurs as certain seasons come to an end and

labour is not required until the next season
E.g Fruit pickers; summer seaside resort workers; ski instructors
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Voluntary Occurs when workers choose to be unemployed

E.g They may be waiting to find a job with higher wages or are qualified for Your notes
Frictional Occurs when workers are between jobs

This is usually short-term unemployment
Workers have voluntarily left their previous job to search for another
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The Impact of Unemployment

Your notes
Consequences of Unemployment
Unemployment can have implications for different stakeholders (workers, firms, government, society
and consumers)
E.g During 2009-2013 recession, Greece's unemployment reached 27%, with youth
unemployment peaking at 60%
This led to increased spending on social welfare, high poverty rates, homelessness, social
problems and some households not being able to afford basic necessities
The Impacts of Unemployment
Impact Explanation
National output High levels of unemployment reduces consumer incomes. As a result,

demand for goods and services falls
In response, firms reduce the level of output produced
Scarce resources As the economy contracts, there is a more inefficient use of available
resources
Poverty Levels of poverty rise as unemployment rises and incomes fall

Some workers may struggle to afford afford the basic necessities,
such as food, shelter and clothing
Government Government's receive less tax revenue and have higher expenditures
in the form of welfare payments
Consumer and business The level of optimism that consumers and businesses have regarding
confidence their expected financial situation falls
Consumers have less job security, so save more
Businesses expect to receive less sales revenue so they delay any
investment plans
Society Inequalities rise as some individuals in society struggle to access

healthcare and education
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There may be increased societal problems, such as an increase in

crime rates
Your notes
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The Current Account

Your notes
The Current Account on the Balance of Payments
The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur
between it and the rest of the world
The current account focuses mainly on the financial transactions related to exports and imports of
goods and services
The Current Account is often considered to be the most important account in the BoP
This account records the net income that an economy gains from international transactions
The UK Current Account Balance for 2017
Component 2017
Balance of trade in goods £-32.9bn

(exports - imports)
Balance of trade in services £27.9bn

(exports - imports)
Sub-total trade in goods/services £-5bn
Net income £-2.1bn

(interest, profits and dividends)
Current transfers £-3.6bn
Total Current Account Balance £-10.7bn
Current Account as a % of GDP 3.7%
Goods are also referred to as visible exports/imports

Services are also referred to as invisible exports/imports
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Net income consists of income transfers by citizens and corporations

Credits are received from UK citizens who are abroad and send remittances home Your notes
Debits are sent by foreigners working in the UK back to their countries
Current transfers are typically payments at government level between countries, e.g. contributions to
the World Bank
Current Account Deficits and Surpluses
A Current Account deficit occurs when the value of the outflows is greater than the value of the inflows
It usually occurs when imports > exports
Imports represent a leakage of money from the economy
A Current Account surplus occurs when the value of the inflows is greater than the value of the
outflows
Usually occurs when imports < exports
Exports represent an injection of money into the economy
Most governments have a macroeconomic aim to get their Current Account balance as close to
equilibrium as possible
If a country is running a deficit, export-led economic growth would help it become positive
However, with increasing income and wealth in an economy, the value of imports rises
Consumers enjoy the variety of goods/services abroad
Rising imports push the balance towards a deficit
Reasons for Current Account Deficits

Reasons for current account deficits and surpluses can be due to the quality and price
competitiveness of domestic and foreign goods, as well as exchange rates between countries
The USA and UK have historically experienced significant trade deficits
In 2023, the United States had a trade deficit of over $773 billion, while the UK had a trade deficit
of around £53 billion
Reasons for Deficits on the Current Account
Reason Explanation
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Quality of When a country develops a reputation for poor quality and design, its exports fall
domestic goods as foreign buyers look for better substitutes elsewhere
Your notes
Domestic buyers who are able to shop abroad also choose to buy better quality
products elsewhere, and the level of imports rises, leading to a current account
deficit
Quality of If foreign goods are of higher quality as compared to domestic goods,

foreign goods consumers may favour foreign-produced goods, leading to a current account
deficit
Price of Exporting firms may find themselves at a price and cost disadvantage in
domestic goods overseas markets, which will decrease competitiveness and the level of exports
Price of foreign If foreign goods are competitively priced relative to domestic goods, it can lead
goods to increased imports and a current account deficit
E.g The United States' trade deficit has been influenced by competitively
priced consumer goods from countries like China
Exchange rates Any appreciation of a country's currency makes a country's exports more
expensive relative to other nations and imports cheaper
Domestic consumers may switch demand to foreign goods and as imports rise,
the balance on the current account worsens
Reasons for Current Account Surpluses

In 2023, Germany had a trade surplus of €209.4 billion
This reflects their strong exports, particularly in sectors such as cars, machinery, and engineering
In 2023, China had a trade surplus of $823.2 billion U.S. dollars
This was due to its competitive pricing of electronics and weaker currency, which increased
demand for their exports
Reasons for Surpluses on the Current Account
Reason Explanation
Quality of When a country develops a reputation for excellent quality and design, its
domestic exports rise as foreign buyers increase demand
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goods Domestic buyers choose to buy domestic products and the level of imports
falls, leading to a current account surplus
Your notes
E.g Japan's electronics industry historically produced high-quality goods,
contributing to its trade surplus
Quality of If foreign goods are of lower quality compared to domestic goods, consumers
foreign goods may favour domestically produced goods, resulting in fewer imports and leading
to a current account surplus
Price of If domestic goods are competitively priced relative to foreign goods, it can
domestic stimulate exports and lead to a current account surplus
goods
E.g South Korea's automotive industry's success is partially attributed to
competitive pricing, contributing to its trade surplus
Price of foreign If foreign goods are priced higher relative to domestic goods, it can lead to
goods decreased imports and a current account surplus
Exchange rates Any fall in the value of currency (depreciation) makes exports more attractive to
foreign buyers
E.g The depreciation of the British pound following Brexit helped increase
exports and reduce its trade deficit in the short term
EXAM TIP
The elasticity of imports and exports determines how impactful an appreciation or depreciation of
the currency are. In the short term, elasticity tends to be more inelastic. There is little response to the
price change, which was caused by the currency fluctuation. In the long term, exports and imports
are more elastic in demand. Consumption patterns change as stakeholders realise the currency
fluctuation has caused longer term changes to relative prices.
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The Impact of Exchange Rates on the Current Account

Your notes
Current Account and Exchange Rates
The exchange rate is the relative price of one currency expressed in terms of another currency
Impact of an appreciation
Appreciation often leads to a worsening of the current account balance
A currency appreciation occurs when the value of a currency rises, making a nation's exports relatively
more expensive and its imports less expensive
E.g The appreciation of the Japanese Yen in the early 2010's made exports (cars and electronics)
more expensive for foreign buyers compared to similar products from South Korea and China. This
increased its trade deficit
Exports fall
Foreign buyers look for substitute products which are priced lower
Exports fall, and the balance on the current account worsens
Imports rise
Similarly, currency appreciation makes imports cheaper
Domestic consumers may switch demand to foreign goods, and as imports rise, the balance on
the current account worsens
Impact of a depreciation
Depreciation often leads to an improvement in the current account balance
A currency depreciation occurs when the value of a currency falls, making a nation's exports relatively
more attractive and its imports less attractive
E.g the depreciation of the British pound following Brexit helped increase exports and reduce its
trade deficit
Exports rise
The number of foreign buyers increases as they are attracted by the relatively cheaper prices
Exports rise and the balance on the current account improves
Imports fall
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Similarly, currency depreciation makes imports more expensive

Domestic consumers may switch from purchasing foreign goods to purchasing domestic goods, Your notes
and as imports fall, the balance on the current account improves
Impact of a Current Account Deficit

The consequences of current account deficits include:
Increasing unemployment
With falling demand for locally produced goods and services, fewer workers will be required and
unemployment will rise
Slow down in economic growth or a recession
Exports are a key component of the real GDP of many countries, and a fall in exports may
significantly reduce the level of economic growth
Lower standards of living
A fall in economic growth usually leads to a reduction in wages, which leads to a decrease in the
standards of living
Increased levels of borrowing
If the deficit is caused by increasing levels of imports, then it is likely that these imports are being
paid for through higher levels of borrowing
Depreciating exchange rate
While this may ultimately help to increase exports again, it makes the cost of imported goods and
raw materials more expensive and may cause cost push inflation
The J-Curve Effect

It is also important to recognise that there is a time lag between the depreciation of the currency and
any subsequent improvement in the current account balance
This time lag is explained by the J-Curve effect
It takes time for firms and consumers to respond to changes in price
Once it becomes evident that price changes will last for a longer period of time, firms and
consumers change their patterns
E.g A firm in the USA has been importing electric scooters from the UK. If the Euro depreciates, the
price of scooters in France becomes relatively cheaper. In the short-term, the USA firm will not
switch immediately to purchasing scooters from France as the exchange rate may soon bounce
back. They also have a good relationship with their UK suppliers. In the long term, they are likely to
switch
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Your notes
Diagram analysis
In the short run, the sum of PEDs for exports and imports was less than one, which is inelastic, so the
deficit widens
However, in the long run, combined PED of imports and exports is greater than one, and the trade
balance begins to improve
With any currency depreciation/devaluation, the trade balance will initially worsen before it improves
EXAM TIP
You do not need to know the J-curve for the exam. It is helpful here to understand exchange rate and
the relationship with the current account. It will enable a deeper analysis.
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Environmental Protection
Your notes
Business Activity and the Environment
Governments are doing more and more to set macroeconomic targets based around environmental
protection
Business activity can create external costs of production when providing a good or service
Types of pollution that create external costs to the environment include visual, air, noise and water
pollution
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Your notes
Negative business impacts on the environment include visual, noise, air, and water pollution
Ways in Which Business Activity Damages the Environment
Type of Explanation Example

Pollution
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Visual Business activity can cause a landscape Prior to plastic bag ban in Kenya,
Pollution to look like an eyesore plastic bags could be seen littering
Your notes
streets, rivers and natural
It can take the form of litter, mine dumps environments
or the release of chimney smoke
Noise Noise pollution refers to excessive noise Noise from air traffic at Heathrow
pollution that causes stress or hearing loss airport from flights arriving and
departing. Impacts local residents
Noise can come from loud machinery, near airport
factories, traffic or even bars and
restaurants
Air Greenhouse gases are released into the Up to two million air pollution deaths
pollution atmosphere from the burning of fossil are recorded per year in China
fuels, leading to increased air pollution
Beijing and Shanghai rank among the
Electricity stations (using fossil fuels), most polluted cities in Asia
factories, transportation and agricultural
activities all cause air pollution This has led to health diseases, such as
respiratory and cardiovascular
illnesses
Water Water pollution refers to the In Ecuador, pesticide use in banana

pollution contamination of rivers, lakes, and farming has also been linked to water
oceans with harmful substances pollution, posing risks to rivers quality
This can occur because of agriculture,
mining, and industrial activities.
Pesticides, fertilisers or chemicals end
up in water
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Government Intervention to Protect the Environment

Your notes
Types of Government Intervention
Governments uses a combination of policies to protect the environment
A combination of solutions are generally used to reduce impacts
Governments intervention through taxation, subsidies, regulation, fines, permits & provision of parks
Some of the following government interventions to protect the environment have been explained
earlier:
Taxation (Government Intervention: Taxation & Subsidies)
Subsidies (Government Intervention: Taxation & Subsidies)
Regulations and fines (Government Intervention: Fines, Regulation & Permits)
Pollution permits (Government Intervention: Fines, Regulation & Permits)
Provision of parks
Page 33 of 45
Tackling Plastic Waste

Over 5 trillion plastic bags are produced around the world each year, and much of it ends up on streets Your notes
or in landfill
Plastic can take 500-1000 years to break down
Many countries use bans or taxes to reduce their use
Some governments force retailers to sell the plastic bags and then donate the money raised to
environmental causes (this is a form of regulation)
Other governments charge firms a 'plastic tax' which they have to pay whenever they import
plastic packaging into the country
An evaluation of 'plastic taxes' to reduce plastic bag usage
Advantages Disadvantages
Source of revenue for government Firms may pay the tax and pass on the
increased costs to their customers
The tax provides financial incentives for firms
to source alternative forms of packaging Higher prices will disproportionately impact
low income consumers
The use of plastic may be inelastic in the short
term, but very elastic in the long term as firms To avoid the plastic tax on import, firms may
make alternative plans seek to manufacture their own plastic bags in
country
Tackling Aircraft Noise

Over 700,000 people are impacted by the noise from flights at Heathrow airport
Heathrow has some of the strictest regulations in order to reduce noise pollution.
These include:
A limit on the number of flights that can take off and land between 11:30pm and 6:00am
Variable landing charges linked to the level of noise that the aircraft makes
Noise insulation around the airport perimeter
An evaluation of regulation to reduce aircraft noise
Page 34 of 45
The combination of regulations mitigates the Loss of revenue for airlines as they have to
noise impact for the community provide fewer flights during the night hours
Your notes
A higher variable landing charge for noisy If the size of the variable landing charge is too
planes incentivises airlines to invest in noise small, there will be no incentive to invest in
reducing planes modern technology
Fewer flights does not mean no flights.
Residents will still be disrupted
Tackling Fossil Fuels

Coal powered plants emitted 15.22 billion metric tonnes of carbon dioxide in 2022
Many governments respond by taxing emissions, selling pollution permits, or limiting the amount of
emissions that can be produced (regulation)
An evaluation of using taxation and pollution permits to reduce emissions
Solution Advantages Disadvantages
Taxation The tax acts acts as a cost incentive Increased cost for firms, may cause
to reduce use of fossil fuels them to go out of business
Government revenue can be used to Cost passed on to consumers
invest in renewable energy
Pollution There is an incentive for coal powered Coal powered firms may choose to buy
permits plants to invest in cleaner permits rather than reduce emissions
technologies
Governments may issue to many
Incentive to reduce emissions at the permits, resulting in little change to the
lowest cost, as it is cheaper than level of emissions
buying permits
Tackling Agricultural Water Pollution

Agricultural fertilisers and pesticides are a major source of water pollution
Many governments regulate surface and ground water quality
An evaluation of using regulation and fines to reduce water contamination
Page 35 of 45
Your notes
Regulation on pesticides and fertilisers The cost of monitoring and enforcing compliance
use send a clear signal to stop using of water quality is high
them
Compliance with regulations can be costly for
Can prevent harmful substances from businesses, particularly small and medium-sized
entering water supplies, protecting enterprises, potentially leading to increased
public health from diseases and toxic operational costs
exposures
Strict regulations might stifle innovation by creating
Effective regulations help preserve a rigid framework that discourages the
aquatic ecosystems by controlling development of new contamination prevention
pollutants that can harm wildlife and technologies
natural habitats
Providing Parks and Green Spaces

Parks are free open spaces and are considered a public good
For example, the Canadian government provides 48 national parks in order to conserve land,
protect ecosystems and provide recreational activities
An evaluation of the provision of parks
This reduces government expenditure on There is an opportunity cost of using land for other
healthcare, as it creates an incentive to be purposes
outdoors and lead a healthier lifestyle
Land and money could be used for alternative
It protects large areas of land, wildlife and uses such as housing, schools or hospitals,
ecosystems particularly in urban areas
E.g. Fiordland in New Zealand Land used for parks could lead to loss of job
contains a significant portion of creation from other uses
protected woodland, contributing to
its ecological and biodiversity E.g If the government decides to provide a
conservation park rather than allowing it to be developed
into a shopping centre or office complex,
Land can be used for recreational and potential job losses in retail and construction
tourism purposes will occur
E.g Visitors to Yosemite national park Parks are a public good so are free and will not be
in the USA can hike, camp, rock climb a source of income for the government
Page 36 of 45
and watch wildlife Governments need to fund provision,

maintenance and upkeep of park
Your notes
EXAM TIP
When assessing policies to protect the environment, the most effective way to protect the
environment is by combining different types of government intervention (regulation, fines, taxation,
subsidies)
Page 37 of 45
The Redistribution of Income

Your notes
What Are Inequality and Poverty?
Equality describes situations where economic outcomes are similar for different people or different
social groups
Income equality would mean everyone, irrespective of their job, is paid the same
Inequality in the distribution of income is one cause of absolute and relative poverty
Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a
healthy and safe existence
These necessities include shelter, water, nutrition, clothing and healthcare
In 2022, the World Bank defined absolute poverty as anyone who was living on less than $2.15 a
day (the so called international poverty line)
Absolute poverty is more prevalent in developing countries than in developed ones
Relative poverty is a situation where household income is a certain percentage less than the median
household income in the economy
Poverty in a household is considered relative to income levels in other households
Households that are living with less than 50% of the median household income are considered to
be in relative poverty
Relative poverty is the main form of poverty that occurs in developed countries
Reasons to Reduce Poverty and Inequality

Capitalism is at the heart of free market economics
Under Capitalism, inequality is inevitable
Workers with higher skills receive higher wages
Workers with little to no skills receive little to no wage
Individuals with higher income will acquire more assets, leading to higher levels of income
In turn, they can keep on acquiring assets
Individuals with lower income will find it hard to acquire assets
The principles of capitalism are considered important as the incentive to acquire income raises
productivity and output
Page 38 of 45
However, the long-term outcome of capitalism is that the factors of production become
concentrated in ownership, with relatively few individuals developing extreme wealth, at the expense
of many who lose out Your notes
The existence of inequalities and poverty raises ethical concerns, particularly when certain
households do have access to basic necessities and experience a lower standard of living
Reasons to reduce poverty and inequality
Reason Explanation
Meet basic needs All individuals should have access to basic needs such as food and shelter
Inequalities in food access exist globally. According to United Nations, an
estimated 600 million people will experience hunger and malnutrition by
2030
To address this, Sustainable Development Goal 2 strives for zero hunger by
2030
Improve standards If the inequality gap gets narrower, it will increase the overall standard of
of living living
The poorer households will be able to access better education and
healthcare and have higher income
This creates even more opportunity for poorer households in the future
E.g Finland's investment in education has led to higher educational
attainment.
This allows for better job opportunities, higher incomes, reduced
inequality and an overall increase in standard of living
Ethical Individuals may be more concerned with more equitable outcomes for
considerations society than their own self-interest
Governments may use a progressive tax system so that lower income
earners pay a lower tax rate than higher income earners
E.g Australia's income tax rates range from 19% to 45% depending on
income
Page 39 of 45
Government Intervention to Redistribute Income

Your notes
Methods to Redistribute Income
Government intervention aims to reduce inequality and poverty through:
Progressive taxation
Using benefit payments to increase income of the poorest households
Investing in education and healthcare
Some countries have a stronger focus on the redistribution of income than others
E.g Nordic countries like Norway and Sweden focus on taxing higher income earners, providing
benefits payments and investing into education and healthcare, leading to lower inequality and
poverty
The aim of governments is not to have an equal distribution of income but rather a more fair or
equitable distribution of income
A blend of policies is the most effective way to tackle poverty and inequality
Progressive Taxation
Tax systems can be classified as progressive or regressive
A progressive tax system redistributes income from those with higher income to those with lower
income
As income rises, a larger percentage of income is paid in tax (called the marginal tax rate)
Most countries have a mix of progressive (direct taxation) and regressive (indirect taxation) taxes in
place
The benefits of a good progressive tax system are sometimes lost to society because the high number
of regressive (indirect) taxes worsens income inequality
E.g High VAT rate
An explanation of tax systems
System Explanation
Progressive As income rises, a larger percentage of income

is paid in tax
Page 40 of 45
In the diagram, when personal income rises

from Y1 to Y2, the tax rate rises from TR1 to TR2
Your notes
Regressive As income rises, a smaller percentage of

income is paid in tax
In the diagram, when personal income rises
from Y1 to Y2, the tax rate falls from TR1 to TR2
All indirect taxes are regressive
In the USA, Federal income tax is progressive
but almost all State taxes are regressive (the
bottom 20% of income earners pay as much as
6x the percentage of their income as the top
20%)
Progressive tax systems are built around the idea of marginal tax rates
The calculation of an individual's personal income tax requires several calculations
Using this system, a salary of £60,000 would attract a tax bill of £11,500, calculated as follows:
Calculating a tax bill using the UK progressive tax rates from 2022
Tax Band Taxable Income Tax Rate Tax Paid on £60,000
Personal Allowance Up to £12,500 0% 0
Basic Rate £12,500 to £50,000 20% £37, 500 at 20% = £7,500
Higher Rate £50,00 to £150,000 40% £10,000 at 40% = £4,000
Page 41 of 45
Additional Rate Over £150,000 45% 0

Your notes
Total Tax Paid on £60,000 £7,500 + £4,000 = £11,500
Once the tax revenue is received by the government, redistribution often starts with the provision of
free education and healthcare
Many governments use tax revenues to provide multiple levels of financial support to poor
households, including disability payments, heating subsidies, travel subsidies, etc
An evaluation of progressive taxes
Advantage Disadvantage
Reduces income inequality Potential disincentive to work

Higher earners pay a larger High taxes on higher incomes may discourage
percentage of their income, which people from working harder or longer
can help reduce the gap between
rich and poor Complexity and compliance costs
Increases revenue for public services Progressive tax systems can be complicated
and expensive to administer
Can generate more revenue for
essential public services like Tax avoidance and evasion
education, healthcare, and High-income individuals may seek to exploit
infrastructure loopholes or move their money to lower-tax
Fairness perception jurisdictions, reducing the effectiveness of the
tax system
People with higher incomes have a
greater ability to pay, so progressive Impact on investment
taxes are often seen as fairer Progressive taxes on capital gains and
dividends can deter investment, which might
slow economic growth and innovation
WORKED EXAMPLE
The table below shows rates of taxation for country X
Income ($ per year) Rate of Income Tax
1–10,000 5%
Page 42 of 45
10,001–18,000 10%
18,001–35,000 20% Your notes
35,001 and over 30%
This is an example of what type of taxation system?

A. Sales tax
B. Corporation tax
C. Progressive tax
D. Indirect tax
Answer: C. Progressive tax

The table shows that as income rises, a larger percentage of income is paid in tax
A is incorrect as sales tax is one specific figure e.g. 20%
B is incorrect, as corporation tax is one specific figure, e.g. 17%
D is incorrect as an indirect tax is one specific figure, e.g.VAT of 20%
Benefit Payments
Benefit payments are usually given to the poorest and most vulnerable in society
They include unemployment and disability payments, pension payments, heating discounts,
public transport subsidies, child benefits, etc
E.g In Denmark, social welfare is high compared to other countries. Income is transferred to low
income households through unemployment benefits and housing assistance
An evaluation of benefit payments
Benefit payments reduce inequality and High levels of benefit payments can act as a
poverty by directly transferring income to disincentive to work
households with low incomes
E.g Some European countries with high
Benefit payments enable households with low social welfare payments may be less
incomes to afford basic necessities such as motivated to actively seek employment
food and shelter. This reduces poverty
Many families may become dependent on
Child benefit payments can empower benefit payments
mothers to re-enter the workforce
Page 43 of 45
There is a high opportunity cost of spending on

benefit payments
Your notes
Benefit payments may be perceived as unfair
by households that do not qualify for such
assistance
The need to pay benefits may create a high
burden of taxation on the working population
Investment in Education and Healthcare

Investing in education and healthcare is a supply-side policy
It increases the potential output of the country (shifts the production possibility frontier
outwards)
Education helps to reduce inequality and poverty by providing individuals with the necessary skills
and knowledge to access better employment opportunities
Healthcare leads to a healthier workforce that is more productive
An evaluation of investment in education and healthcare
Higher levels of education and healthcare There is a high cost and an opportunity cost of
contribute to increased human capital and spending on education and health care
greater productivity
There is a time lag involved between investing in
This leads to higher output and, as a result, education and healthcare and seeing the future
higher levels of income benefits
Higher levels of education facilitate greater A blend of policies (investment in education and
occupational mobility benefit payments) may be the most effective
way to tackle poverty and inequality
By acquiring skills needed for jobs,
individuals can break the poverty cycle and
contribute to economic growth
EXAM TIP
In paper 2, you will often be asked to evaluate how progressive taxes, benefit payments or
investment in education and healthcare will impact inequality or poverty in a given scenario.
Page 44 of 45
Make sure you have a balanced argument and consider the impact on multiple stakeholders (high-
and low-income households, producers and government). Also, consider that a blend of policies
may be the most effective way to tackle poverty and inequality Your notes
Page 45 of 45

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Edexcel IGCSE Economics Your notes

The Macroeconomic Objectives

The macroeconomic objectives

Investigating Economic Growth

1998-2007 2008-2015 2016-2019 2020 -

Steady Global financial Gradual disinflation Supply chain issues

Step 1: Substitute values into a percentage formula

7,629 − 7,073 1 mark

Limitations of Using GDP to Measure Growth

Lack of information The distribution of income in an economy is provided as an

Quality of goods and GDP provides no information on the increase/decrease in the

Does not include If it included voluntary/unpaid work, then GDP/capita would be

Economic Growth: The Economic Cycle

Significant declines in household incomes and business profits

Employment Increasing economic growth rates leads to higher rates of employment

Tax revenue may be used to redistribute income, reducing inequality

The environment Environmental damage is caused by negative externalities of production

Low & Stable Rate of Inflation

Between 2011 and 2015, the UK economy mainly experiences disinflation

Measuring Inflation Using the Consumer Price Index

The Consumer Price Index (CPI)

A is the correct answer

Examples of demand pull inflation

Cost Push Inflation

Factor Impacted by Explanation

Wages Workers demand higher wages to compensate for reduced purchasing

Exports Inflation erodes international competitiveness of export industries as

Unemployment Generally, there is an inverse relationship between inflation and

Calculating the Unemployment Rate

Unemployment rate Employment rate Labour force participation

no . actively seeking no . in employment labour force

Population size 4000000

Labour force size 2400000

Number employed 1800000

Number of full-time students 200000

What is the unemployment rate of this country?

Cyclical This is caused by a fall of total (aggregate) demand in the economy

Seasonal Seasonal unemployment occurs as certain seasons come to an end and

Voluntary Occurs when workers choose to be unemployed

Frictional Occurs when workers are between jobs

The Impact of Unemployment

National output High levels of unemployment reduces consumer incomes. As a result,

Poverty Levels of poverty rise as unemployment rises and incomes fall

Society Inequalities rise as some individuals in society struggle to access

There may be increased societal problems, such as an increase in

The Current Account

Balance of trade in goods £-32.9bn

Balance of trade in services £27.9bn

Sub-total trade in goods/services £-5bn

Net income £-2.1bn

Current transfers £-3.6bn

Total Current Account Balance £-10.7bn

Current Account as a % of GDP 3.7%

Goods are also referred to as visible exports/imports

Net income consists of income transfers by citizens and corporations

Reasons for Current Account Deficits

Quality of If foreign goods are of higher quality as compared to domestic goods,