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E1. THE BASIC ECONOMIC PROBLEM QUIZ CARDS

Question Answer
What is the nature of the economic problem? People’s wants are unlimited and the resources to provide for them
are limited therefore scarcity exists. We must choose what is
produced and give up other things (opportunity cost). An economic
system must decide what is produced, how it is produced and for
whom it is produced.
What do we need? Goods and services necessary for survival
What do we want? Goods and services not necessary for survival
Define economic good There is an opportunity cost in producing the good as it takes
resources to produce (goods which are limited in supply)
Give some examples of economic goods food, clothing, housing
Define free good A good that is free because there is more than enough available to
satisfy the demand for them unlimited supply- NO opportunity costs
Give some examples of free goods Seawater, air, webpages...
Define factors of production The scarce resources used in the production of goods and services
Give the four factors of production Land, Labour, Capital, Enterprise
Define land Natural resources that is used in production
Give some examples of land Land, forest, sea and what is found within them
Define labour Labour is the mental and physical contribution of the workers to the
human resources required in production process: skilled and unskilled labour production process. For example, minor provide a physical
contribution and lawyers provide a mental contribution
Define capital Any human made good that is used to produce other goods and
manufacturing resources
services - they are aids to production
Give some examples of capital machinery, factories, offices
Define enterprise Enterprise is undertaken by entrepeneurs who take a risk (with their
money, time...) and bring together the other 3 factors of production
to start a business in order to make a profit.
What is the reward for land Rent
What is the reward for labour? Wage
What is the reward for capital? Interest
What is the reward for enterprise? profit
What are the mobility of the factors of production? The mobility of the factors of production refers to the extent that
resources can be changed from one production process to another
What are the factors that affect the mobility of The revenue gained from alternative use:
land? If the price of houses go up, then the price of land to build houses on
will also go up, therefore more land will be transferred from
agricultural uses to provide housing
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What are the factors that affect the mobility of
labour?
What are the factors that affect the mobility of
capital?
What are the factors that affect the mobility of
enterprise?
Labour is
What does it mean by labour is derived demand?
What increases the quantity of land?
What increases the quality of land?
What increases the quantity of labour and
enterprise?
What increases the quality of labour and
enterprise?
What increases the quantity of capital?
What increases the quality of capital?
Define opportunity cost
Why is opportunity cost important?
What is the Production Possibility Frontier (PPF) ?
productive capacity of the economy
An increase in any or all of the factors of production An increase in any or all of the factors of production will cause an
will cause an in the PPF
The demand for a good or service:
Labour is derived demand so if the demand for a good or service
increases, then the demand for the labour that produces that good
or service will increase too.
occupational mobility influenced by education:
The more education a person receives, the more qualifications they
have so they will have more job choices
occupational mobility influenced by training:
The more training a person receives, the more skills they have so
they will find it easier to switch jobs
geographical mobility influenced by price/availability of housing:
Where there is cheaper housing, workers will find it more attractive
to work in that area.
geographical mobility influenced by family ties:
people may be reluctant to move to another place to work because
their children are at school in a particular area.
The different uses the capital can be put to:
The more specialised a machine is in one area, the less mobile it is to
be moved into another area
Enterprise is the most mobile factor of production. The skills
involved can be applied in every industry.
Labour is derived demand
If the demand for a good or service increases then the demand for
the labour that produces that good or service will increase
Land reclaimation
Irrigation and fertilisers
Increase in birthrate, immigration, decrease in the natural rate of
unemployment
Education, Training, Apprenticeship programmes
Investment
Technological advancements, Research and development (better
machines) to increase innovation
Opportunity cost is the benefit lost from the next (second) best
alternative given up when making a decision
Opportunity cost shows that a choice must be made when making a
decision because resources are too scarce to meet all our wants
(because wants are unlimited, but all resoruces are limited)
It shows the maximum potential of two goods or services that can be
produced using all the resources that an economy has available
increase in the PPF
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An decrease in any or all of the factors of
production will cause a in the PPF
In a PPF showing consumer goods and capital
goods, an increase in the production in capital
goods will come with what it in the short run?
In a PPF showing consumer goods and capital
goods, an increase in the production in capital
goods will come with what it in the longrun?
An decrease in any or all of the factors of production will cause a
decrease in the PPF
There will be an opportunity cost of consumer goods in the short
run as more capital goods are being produced.
In the long run, increased production of capital goods will shift the
PPF outwards and therefore increase the potential amount of capital
and consumer goods that can be produced.
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E2. THE ALLOCATION OF RESOURCES QUIZ CARDS
Question
What is microeconomics?
What is macroeconomics?
The types of economic system chosen
decides which three factors?
List the types of economic systems
Market System:
What should be produced?
Market System:
How should it be produced?
Market System:
For whom should it be produced?
What is a Free/market system?
What is a mixed economy?
What is a planned economy?
What are the advantages of the free market 1. Consumer sovereignty - consumer have the power to decide what is
system (capitalism)?
Answer
Microeconomics is the study of the decision making of individuals,
households and firms. It is concerned with the economic factors that
affect their choices
Macroeconomics is the study of economic behaviour and decision
making (usually by the government) in the whole economy. It looks at
aggregated demand and supply (all the demand and supply in the
economy) and their effects on the price level and national output
What should be produced?
How should it be produced?
For whom should it be produced?
Free/Market
Mixed
Planned
Firms will produce what makes the highest profit. If consumers increase
their demand for a good, prices will increase (and therefore profits) and
firms will produce more of that good
In order to make a profit, firms need to keep their costs as low as
possible. Therefore, they must combine the 4 FOPS in the most efficient
way to keep costs down.
Those who have the willingness and ability to pay.
In a free market system, goods and services are freely exchanged
through a market without the need for government intervention. An
equilibrium price and quantity is established in the market through the
interaction of buyers and sellers and this will determine the allocation of
scarce resources. The price mechanism signals preferences and profits
encourage switching/reallocation of resources.
A mixed economy is one in which there is both a private sector (in which
resources are allocated by the price mechanism) and a public sector (in
which resources are allocated by the state/government). The price and
quantity of goods supplied by the private sector are determined by
supply and demand and the allocation of resources is determined by the
profit motive. The government will intervene to by supplying services
themselves or through influencing the private sector through laws and
regulations.
In a planned economic system, decisions are made centrally, by
government. Planners employed by the government decide how to use
scarce resources, (which goods and services to produce and how to
produce them) often with the intention of producing those goods and
services they think their people need and want. They may also try to
share them out more equally amongst the population
produced
2. More incentives (profits) for innovation as producers try to meet
consumer demands
3. Greater variety of goods and services
4. Lower prices due to competition
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What are the disadvantages of the free
market system (capitalism) ?
What are the advantages of the planned
economy (socialism)?
What are the disadvantages of the planned
economy (socialism)?
What is the private sector
What is the public sector?
Define demand
State the law of demand
Movement up the demand curve is called a
(n)
Movement down the demand curve is
called a(n)
A is the only thing that will cause a A change in price is the only thing that will cause a contraction or
contraction or extension on the demand
curve
1. Wide spread of income (capitalism can create very wealthy people
and very poor people)
2. Goods which are socially desirable but not profitable may not be
produced (wild life reserves)
3. Self interest is predominant
4. Poor consumers have little influence on what is produced as they
have little purchasing power
5. Monopolies may develop (they charge higher prices and low quality
products)
6. Products that cause external costs will be overproduced
7. Products that cause external beneits will be underproduced
1. More equal distribution of goods and services (people can get goods
and services even if very poor)
2. Greater awareness of social needs
1. Little or no consumer sovereignty (gov decides what’s produced)
2. Few incentives to innovate
3. Availability and quality of goods are poor
The part of the economy where market forces/price mechanism
allocates resources. Firms are owned by individuals.
The part of the economy where government allocate resources.
Governments run organisations.
The willingness and ability to buy a product.
If prices rise, quantity demand will fall and vice versa
Movement up the demand curve is called a(n) contraction
Movement down the demand curve is called a(n) extension
extension on the demand curve
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List the factors that shift demand
Factors that shift demand:
Changes in income
Factors that shift demand:
Changes in tastes and fashion
Factors that shift demand:
Changes in population
Factors that shift demand
Price of other goods – substitutes
Factors that shift demand:
Price of other goods – complimentary
Factors that shift demand:
Advertising
Factors that shift demand:
Seasonal fluctuations
Factors that shift demand:
Interest rates
How can you calculate sales revenue?
Define supply
What is fixed supply
What is the law of supply?
What is extension of supply?
What is contraction of supply?
1. Changes in income
2. Changes in tastes and fashion
3. Changes in population
4. Price of other goods – substitutes
4. Price of other goods – complimentary
5. Advertising
6. Seasonal fluctuations
7. Interest rates
An increase in income will increase the demand for normal goods
(positively income inelastic, less and +1) and luxury goods (positively
income elastic, more than +1) and decrease the demand for inferior
goods (negative elasticity) and vice versa
If something is in fashion then demand for it will increase and when it is
out of fashion demand will decrease.
The part of the population that is increasing will determine the type of
goods that will experience an increase in demand e.g increase in the
proportion of 0 – 15 years will mean more demand for toys/education
etc.
If the price of a substitute good increases then the demand for a good
will increase. If the demand for a substitute good decreases then the
demand for a good decreases.
If the price of a complimentary good increases then the demand for a
good decreases. If the price of a complimentary good decreases then the
demand for a good increases.
If a product is advertised, the demand for it will increase
Most of the world experiences seasons where it is cold in the winter and
warm in the summer. A firm selling ice cream is likely to see an increase
in demand in the summer and a decrease in demand in the winter.
If interest rates rise it will be more expensive for people to borrow or
purchase goods and services therefore the demand for goods and
services will fall (and vice versa).
Quantity Sold x Selling Price = Sales Revenue
The amount of a product which suppliers will offer to the market at any
given price at a particular time.
In some cases, the supply of a product may be fixed. This is shown by a
vertical supply curve. For example, the seats at a cinema for any given
show is fixed, therefore supply is fixed.
If prices rise, the quantity supplied also rises, ceteris paribus. Likewise, if
the price of a good falls the quantity supplied will decrease.
An extension in supply occurs when more is supplied because prices have
increased
A contraction in supply occurs when less is supplied because prices have
decreased
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List the factors that shift supply 1. Costs of production
2. Technology
3. Indirect taxes
4. Subsidies
5. Weather
6. Price of other goods
Shifts in supply: If a firm’s costs increase, they will supply less and the supply curve will
Cost of production shift to the left. If a firm’s costs decrease, they will supply more and the
supply curve will shift to the right.
Shifts in supply: New technology should lead to a decrease in firms’ costs. Therefore new
Technology technology causes the supply curve to shift to the right. More is supplied.
Shifts in supply: An increase in indirect tax will increase firms’ costs therefore shifting the
Indirect taxes supply curve to the left (decrease). A decrease in indirect tax will do the
opposite.
Shifts in supply: An increase in subsidies reduces firms’ costs and therefore shifts the
Subsidies supply curve to the right (increase in supply) and decrease in subsidies
will do the opposite.
Shifts in supply: The weather has an effect on the supply of many goods, particularly
Weather agricultural goods. Good weather during the growing season should
increase supply, whereas bad weather will decrease supply.
Shifts in supply: The price of good X may affect the supply of good Y. For example, if a
The price of other goods farmer grows carrots and wheat and the price of carrots rise then it is
logical that the farmer will swap some or all of his/her wheat production
into carrot production. This decreases the supply of wheat.
Define equilibrium Where the demand and supply curve intersect. The market point is set
where the quantity demanded is equal to the quantity supplied. There is
no pressure for price to change (there is balance).
If demand increases and supply falls then If demand increases and supply falls then price will rise
price will
If demand falls and supply increases then If demand falls and supply increases then price will fall
price will
If demand increases and supply increases If demand increases and supply increases then whether price increases
then whether price increases or falls or falls depends upon the the extent of the shift in demand or supply
depends upon the
What is excess supply? Excess supply occurs when price is set above the equilibrium price. There
is a contraction of demand and an extension of supply. Therefore, supply
is greater than demand = excess supply.

What is excess demand? Excess demand occurs when price is set below the equilibrium price.
There is a contraction of supply and an extension of demand. Therefore,
demand is greater than supply = excess demand.
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What is the price elasticity of demand?
What is the formula?
What are the types of PED?
Define perfectly inelastic demand
Define inelastic demand
Define unitary elastic demand
Measures the responsiveness of demand to a change in price.
Formula:
% change in Quantity Demanded / % change in Price
1. Perfectly inelastic demand
2. Inelastic demand
3. Unitary elastic demand
4. Elastic demand
5. Perfectly elastic demand
A percentage change in price leads to no change in quantity demanded
PED: 0
A percentage change in price leads to a smaller percentage change in
quantity demanded
PED: <1
A percentage change in price leads to the same percentage change in
quantity demanded
PED: 1
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Define elastic demand A percentage in price leads to a greater percentage in quantity demand

PED: >1

Define perfectly elastic demand A percentage change in price leads to an infinite change in quantity
demanded

PED: infinite

For a good with price inelastic demand, an For a good with price inelastic demand, an increase in price will increase
increase in price will sales sales revenue
revenue
For a good with price inelastic demand, a For a good with price inelastic demand, an decrease in price will
decrease in price will sales decrease sales revenue
revenue
For a good with price elastic demand, an For a good with price elastic demand, an increase in price will decrease
increase in price will sales sales revenue
revenue
For a good with price elastic demand, a For a good with price elastic demand, a decrease in price will increase
decrease in price will sales sales revenue
revenue
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What affects the price elasticity of demand? 1. Number of substitutes: if many substitutes, good likely to be elastic in
demand, if few substitutes or none good likely to be inelastic
Why is knowing the PED of a product useful
to a business?
Why is knowing the PED of a product not
useful to a business?
Why do the government usually increase
tax on PED inelastic goods like cigarettes,
petrol and alcohol?
What is the price elasticity of supply? What
is the formula?
What are the types of PES?
Define perfectly inelastic supply
2. Necessity or luxury: if good is necessity then likely to be inelastic in
demand, if luxury then likely to be elastic
3. Proportion of income: if good takes low proportion of income then
more likely to be inelastic (change in price hardly noticed), if good takes
high proportion of income then more likely to be elastic in demand
4. Time: In the short run, goods are more inelastic in demand. If a good’s
price rises demand may not fall too much in the short run as it takes time
for consumers to find substitutes, therefore the good will be inelastic in
demand. In the longer run, consumers will find substitutes and demand
for the good will be more elastic.
Because PED determine the affect of a price change on demand and
therefore sales revenue.
For example,
If a firm has an elastic product, a percentage decrease in price will lead to
a greater percentage increase in quantity demanded and therefore sales
revenue increases
If a firm has an inelastic product, a percentage increase in price will lead
to a smaller percentage decrease in quantity demanded and therefore
sales revenue increases
Price of a product is only one of the things that affect demand. Changes
in the prices of other products and changes in the incomes of consumers
will also affect demand and revenue.
PES is also important. For example, if demand is elastic, lowering price
will lead to a higher percentage increase in quantity demanded, but if
supply is perfectly inelastic then no more can be supplied.
They are highly inelastic in demand so an increase in price due to the
imposition of indirect taxation will lead to a smaller percentage decrease
in quantity demanded and therefore the government will gain a lot of tax
revenue.
Measure the sensitivity of supply to a change in price.
Formula:
% change in Quantity Supplied / % change in Price
1. Perfectly inelastic supply
2. Inelastic supply
3. Unitary elastic supply
4. Elastic supply
5. Perfectly elastic supply
Definition: A percentage in price leads to no change in quantity supplied.
PES: 0
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Define inelastic supply Definition: A percentage change in price leads to a smaller change in
quantity supplied

PES: <1

Define Unitary elastic supply Definition: A percentage change in price leads to the same percentage
change in quantity supplied.

PES: 1

Define elastic supply Definition: A percentage in price leads to a greater percentage change in
quantity supplied

PES: >1

Define Perfectly elastic supply Definition: A percentage change in price leads to an infinite change in
quantity supplied.

PES: infinite
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What determines the elasticity of supply?
Why do consumers prefer goods have an
elastic PES?
The effect of PES on the government
Why do firms prefer goods that are elastic
in supply?
Advantages of an increasing PES
What is a merit good?
What are Demerit goods?
1. Time.
Primary sector goods take time to extract/grow, therefore in the short
run they are likely to be inelastic in supply. In the long run they are likely
to be elastic in supply. Secondary sector goods are likely to be elastic in
supply in the short and long run.
2. Availability of resources.
In a boom resources are scarce therefore supply is more likely to be
inelastic. In a recession supply is more likely to be elastic.
3.Ability of good to be stocked/availability of stock
If a good can be stocked (it’s not perishable) and stocks are available
then when price rises the stocked goods can be released on to the
market – this makes the good more elastic in supply.
4.The mobility of fops
If the fops that produce a good are highly mobile, then if prices rise these
fops can move into the industry and increase supply – this makes the
good more elastic in supply
When demand and the price of a good increases, the PES will determine
how long the price will remain high. With elastic PES, supply would
increase quickly, therefore lowering the price of a good. Therefore
consumers would prefer if good have an elastic PES.
A government is a provider of key services in the economy such as
education and healthcare. How quickly their services can be increased in
quantity when the population increases will be determined by their PES.
Government also provide subsides for goods they want to see produced
in greater quantities. How quickly the quantity supplied increases
depends upon the PES.
A firm would rather have goods that are elastic in supply. Therefore if
price rises they can increase their supply quickly and gain the extra profit.
Firms can increase the elasticity of their products by::
* ensuring greater mobility of the fops
* creating spare capacity (more machinery)
* training staff to improve productivity
A more elastic supply would allow a firm to adjust their output more
quickly and fully to a change in price. This allows a firm to increase supply
quickly if price rises and therefore gain more sales revenue and profit.
Goods about which there is a lack of information about how beneficial
they are for the consumer. This leads to them being underconsumed
(consumed below the social optimum).
Example - education and healthcare
Goods about which there is a lack of information as to how harmful they
are for the consumer leads to them being overconsumed.
Example – cigarettes.
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What are Externalities?
What are Private costs?
What are Private benefits?
What are External Costs?
What are External benefits?
What is the formula for social costs?
What is the formula for social benefits?
If the social benefit of producing a product
is greater than the social cost then the
production of that product should
What is Market failure?
What are Public Goods?
Market failure may exist due to:
Market failure may exist due to:
De-merit goods.
Merit goods
Why education is under consumed:
Market failure may exist due to:
External costs
Something that results from a business’ activity that is felt by the
community or environment. They can be either costs or benefits.
The costs a firm pays i.e. the cost of the land labour and capital involved
in the production of a product.
The sales revenue received by a firm from selling its products.
A firm will continue to produce if its private benefits are greater than its
private costs because this allows a firm to make a profit.
Costs generated by a firm’s activities which the firm do not pay. Society
usually ends up paying firms’ external costs, for example pollution and
congestion.
Standard markscheme answer:
harmful effects (1) on third parties (1)
social costs - private costs (1)
Benefits enjoyed by the third party who are neither involved in the
production or consumption of goods and services.
Example - training employees.
Private costs + external costs = social costs
Private benefits + external benefits = social benefits
If the social benefit of producing a product is greater than the social cost
then the production of that product should continue.
Occurs when the market (Supply and Demand) does not work efficiently
and therefore it results in an under or over production/consumption of a
good.
- non-excludable i.e. it is impossible to stop someone who has not paid
for them from consuming them.
- non-rivalrous i.e. the consumption of it by one person does not prohibit
the consumption of it by another person
De-merit goods.
Merit goods.
External cost
External benefits
Public goods
Abuse of monopoly power
Factor immobility
Goods about which there is a lack of information as to how harmful they
are for the consumer leads to them being overconsumed = market failure
Goods about which there is a lack of information about how beneficial
they are for the consumer. This leads to them being underconsumed
(consumed below the social optimum) = market failure
1. Because it’s a merit good and therefore consumers are not fully aware
of all its benefits
2. It has external benefits and therefore consumers do not receive all the
benefits of it and therefore its onder consumed.
Firms that do not pay for their external costs (pollution) have cheaper
costs and can therefore charge a lower price. This results in greater
demand and over production and over consumption = market failure.
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Market failure may exist due to:
External benefits
Market failure may exist due to:
Public goods
Market failure may exist due to;
Abuse of monopoly power
Market failure may exist due to:
Factor immobility
Microeconomic policies for dealing with
market failure:
Microeconomic policies for dealing with
market failure:
Maximum price below equilibrium
Benefit of a maximum price below
equilibrium
Drawbacks of a maximum price below
equilibrium
Benefits to a third party from the consumption (or production) of a good
or service. The producer or consumer does not receive all the benefits
and therefore it is under produced/consumed = market failure.
Due to non-excludability, it is impossible for firm to receive any revenue
from providing a public good, therefore none is provided =
underproduced = market failure.
If a market is supplied by a single firm it is a pure monopoly. The supplier
might abuse their monopoly power by increasing price to increase
profits.This would lead to lower demand and therefore there would be
under-consumption = market failure.
Geographical immobility
Occurs when it is difficult to move a fop from one geographical area to
another.
For example, unemployed people may not live in an area where there
are job vacancies due to expensive houses prices in an area may stop
labour moving into that area. This can lead to firms in that area being
unable to expand therefore there is an underproduction of goods or
services = market failure.
Occupational immobility
A mismatch between the skills that labour has and the skills that are
required to fill available job vacancies. This can lead to firms being
unable to expand therefore there is an underproduction of goods or
services = market failure.
1. Maximum price below equilibrium
2. Minimum price above equilibrium
3. Indirect taxation
4. Subsidies
5. Regulations
6. Privatisation
7. Nationalisation
8. Direct provision of goods
9. Provision of information
Maximum price is a price set by the government below equilibrium
above which a good or service may not be sold.
- some consumers will benefit as they will be able to purchase the
good/service at the lower (maximum price) price
- a maximum price on a country’s exchange rates can improve
international price competitiveness (a depreciated exchange rate)
- some consumers will be worse off as they will not be able to obtain the
good as there is less supplied at the lower price
- market failure as less than the optimal amount is now produced by the
market
- there may be queues outside shops as shortages are present
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Microeconomic policies for dealing with
market failure:
Minimum price above equilibrium
Maximum price below equlibrium is used in - Increase the output of (merit) goods that are under produced,
agricultural markets to:
In labour markets, a minimum price is a
Advantages of minimum wage
Drawbacks of minimum wage
Maximum and minimum prices' influence
on exchange rates
Microeconomic policies for dealing with
market failure:
Indirect Taxation
Advantages of indirect taxation
Disadvantage of indirect taxation
Microeconomic policies for dealing with
market failure:
Privatisation
Minimum price is a price set by the government above equilibrium below
which a good or service may not be sold.
therefore remedying market failure
- Reduce price fluctuations for farmers (price can’t fall below the
minimum price)
In labour markets, a minimum price is a minimum wage
- increases the amount of people that want to work and therefore
decrease market failure
- reduces poverty by raising the living standard of the lowest paid
workers
- prevents exploitation of workers who have poor bargaining strength in
the labour market i.e. no access to trade unions
- may cause unemployment
The increase in wage may lead to a contraction in demand for labour and
therefore unemployment (therefore increasing market failure):
Maximum and minimum prices combined together have been used to
influence exchange rates. A government can set a band for a currency – a
minimum price which is does not want the currency to fall below and a
maximum price which it does not want the currency to go above. This is a
fixed exchange rate system and reduces the fluctuations of the exchange
rate, making import and export prices more stable for businesses.
An indirect tax is a tax on expenditure. It increases the cost of production
and therefore causes a leftwards shift in the supply curve, increasing
price and decreasing demand.
Example – tax on cigarettes
- Provides an incentive for consumers to decrease their consumption,
reducing the consumption of demerit goods.
- A taxation on pollution provides an incentive for firms to decrease their
external costs
- Provides revenue for the government which can then be used to treat
the negative externalities of the consumption of the good (cancer wards
in hospitals from cigarette tax!)
- May lead to a black market and smuggling from which the government
will receive no revenue (if something is banned)
- Banning a good needs the support of the public or else it won’t work i.e.
prohibition in America
The transfer of state owned assets (electric company etc) to the private
sector.
If a state owned monopoly is split up and privatised then it can solve the
problem of abuse of monopoly power.
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Advantages of privatisation
Disadvantages of privatisation:
Microeconomic policies for dealing with
market failure:
Nationalisation
Microeconomic policies for dealing with
market failure:
Direct provision
Advantages of direct provision:
Disadvantages of direct provision:
Microeconomic policies for dealing with
market failure:
Information provision
Drawbacks of information provision
- Can create competition (if public sector monopoly is broken up), there
decreasing monopoly power
- Provides a one off cash win fall for the government
- Private sector organisations are thought to be more efficient in the
delivery of some services
- If a public sector monopoly is transferred to the private sector without
breaking it up, then a private sector monopoly is created. This will lead to
a greater abuse of monopoly power.
- Public sector firms are more socially minded and do not just consider
their private benefits. Therefore, they are less likely to pollute etc.
Government transfer of private sector organisations into the public
sector.
A government can overcome the abuse of monopoly power in say the
electricity industry by nationalising it.
Governments may decide to simply provide a service itself. This is
particularly the case with public goods and merit goods.
Guarantees provision
Economies of scale are attainable
Expensive
The over consumption of de-merit goods such as cigarettes and alcohol
occurs partly due to the lack of information by consumers of the harmful
effects. This can be overcome by government information campaign to
make consumers aware and therefore decrease the amount of
overconsumption – reducing market failure.
De-merit goods such as cigarettes and alcohol are highly addictive, so
information alone may not have much effect on reducing demand.
Made by Cattaystudies
E3. MICROECONOMIC DECISION MAKERS QUIZ CARDS
Question
Define Money
There are 3 main forms of money:
List the functions of money
1. A medium of exchange (generally
acceptable).
2. A measure of value (a unit of account)
3. A store of value
4. A standard of deferred payment
Give the characteristics of money
Define Central Banks
Answer
Anything that is generally accepted as a means of payment for goods and
services.
1. Commodity money
Any commodity can be used as money - gold, silver etc because these
metals have value in their own right (intrinsic).
2. Fiat money
Notes and coins. The basis of all modern money systems. The value of fiat
money is determined by its exchange rate to other currencies.
3. Fiduciary money
Today's monetary system is highly fiduciary. This means that bank notes
and coins have no intrinsic value (they are not made from valuable metals
etc), their value is dependent on being backed by a country's central bank.
1. A medium of exchange (generally acceptable)
3. A measure of value (a unit of account)
3. A store of value
4. A standard of deferred payment
Means that money can be used to buy and sell things. People must be
willing to accept money as payment of goods and services they provide.
Before money there was barter (exchange). However, this relied upon a
double coincidence of want and that the items being exchanged were of
equal value.
Money acts of a measure of value. The value of an item can be measured
in how many units of a currency it is worth
Money has value. $1,000 deposited in your wallet will hold its value (more
or less depending on the rate of inflation) for a week. Because it stores
value it can be used to accumulate wealth i.e. money in bank accounts
etc.
Money enables people to borrow money and pay it back at a future date.
In this way, money allows people to borrow and lend and an agreement
can be reached about the amount to be repaid in the future
1. Durability
Money should be long lasting and easily replaced when it becomes worn.
2. Acceptability
Widely recognised and accepted as a medium of exchange.
3. Divisible
It must be possible for money to be divided into different values in order
to pay for goods and services that cost different amounts. Also, divisibility
allows for change to be given.
4. Portable
Easy to carry and move around.
In most countries Central Banks are owned by the government but run
independently of the government i.e. the government has little control
over what a Central Bank does on a day to day basis.
Made by Cattaystudies
The importance of central banks for
government:
The importance of central banks for
producers:
The importance of central banks for
consumers:
Define Commercial Banks
Type of bank accounts commercial banks
have:
The importance of commercial banks for
government:
The importance of commercial banks for
producers:
* It operates the government's monetary policy.
Some Central Banks set the interest rate for a country independent of
influence from the government
* Issues/prints notes and coins for the nation's currency, therefore
influences the money supply
* It supervises the banking system, regulating the conduct of banks,
holding their deposits and transferring funds between them.
* It manages payments to and from the government
Tax revenue which a government receive will be held in an account in the
Central Bank. Government payments will be made from the government's
Central Bank account.
* It manages a country's national debt
A central bank can issue or repay public sector debt on behalf of the
government.
* It is 'lender of last resort' to the commercial banking system
A commercial bank (HSBC) can access funds from the Central Bank if it
absolutely needs to
Its importance is related to its role in issuing currency, controlling
monetary policy and acting as banker to the government and commercial
banks (as detailed above)
The central banks sets interest rates which will determine the costs of
borrowing from commercial banks. Interest rates up = businesses borrow
less.
Also the central bank regulates commercial banks and therefore
determines how much funds are available for lending - this will affect a
businesses' ability to borrow.
Consumers must be confident in the banking system as they deposit their
money in banks.
Also, the central bank sets the interest rates which will determine the cost
of borrowing and therefore how much consumers borrow
A financial institution that offers services to people/household firms. It is
profit orientated and is usually in the private sector. An example is HSBC.
The services Commercial Banks provide for individuals and businesses is
to:
Accept deposits of money from individuals and businesses, providing a
secure place to save
Provide loans to individuals and businesses at an interest rate
Current account
An account an individual/business can put money into. The funds can be
accessed through cash machines or through writing cheques.
Savings accounts
Account where individuals/businesses can put their money and earn
interest from it. Usually the money must be stored in the savings account
for a certain length of time (i.e. 1 year) before interest is paid.
Increase/decrease interest rates in line with central bank changes.
Lends money to producers and consumers.
Provides loans to businesses to allow them to Invest in capital equipment
and therefore grow.
Provides advice to business who need loans for expansion.
Provides foreign exchange that producers use to purchase imported raw
materials.
Made by Cattaystudies
The importance of commercial banks for
consumers:
How does income affect how much an
individual spends?
How does income affect how much an
individual saves?
How does income affect how much an
individual borrows?
How does interest rates affect how much an
individual spend?
How does interest rates affect how much an
individual save?
How does interest rates affect how much an
individual borrow?
How does consumer confidence affect how
much an individual spend?
How does consumer confidence affect how
much an individual save?
How does consumer confidence affect how
much an individual borrow?
How does age affect how much an individual
spend?
How does age affect how much an individual
save?
How does age affect how much an individual
borrow?
How does household type affect how much an The more children in the house the more spending that will occur. Also
individual spend?
How does household type affect how much an The more children in the house the less saving that will occur. Also
individual save?
How does household type affect how much an Low income groups borrow to purchase necessities (food and rent). High
individual borrow?
How does wealth affect how much an
individual spend?
How does wealth affect how much an
individual save?
How does wealth affect how much an
individual borrow?
Influences on an individual's decision to
borrow money from a bank:
Allows consumers to deposit their money in a safe place in which they can
earn interest.
As incomes rise so does total spending, but spending as a % of income
falls.
As incomes rise so does total saving, but it also increases as a % of income
Low income groups borrow to purchase necessities (food and rent). High
income groups borrow to purchase expensive items such as houses.
I/r down, borrowing cheaper, therefore borrowing and spending up.
I/r up - other way round
I/r down, less returns on savings, savings down.
I/r up - other way round
I/r down, borrowing cheaper, therefore borrowing and spending up.
I/r up - other way round
If confidence is high (job security/income rising), spending increases. Vice
versa.
If confidence is low (job insecurity), saving increases. Vice versa.
If confidence is high consumers and firm will borrow to spend, confident
that they can repay their loans. Vice versa.
People in their twenties and people with children tend to spend more
than their income.
Elderly people tend to use their saving to finance their spending.
People in their late 30s, 40s and 50s tend to save more - to finance their
pension.
Borrowing peaks between 25 to 40 when people tend to buy expensive
items such as houses.
depends on the number and age of adults in the household
depends on the number and age of adults in the household
income groups borrow to purchase expensive items such as houses.
Wealth can generate income - renting out houses etc, so therefore the
more wealth, the more income, the more spending. Vice versa.
Wealth can generate income - renting out houses etc, so therefore the
more wealth, the more saving. Vice versa.
Wealth is assets (collateral) that individuals can use to borrow more.
Poor individuals have no/little assets.
Rate of interest = the cost of borrowing.
The higher the rate of interest the more money that'll have to be repaid. A
fall in the rate of interest will mean that it is less expensive to borrow
funds and therefore this will encourage borrowing.
The ability to repay the loan
Those with higher incomes will be better able to repay loans from banks.
The need for a loan
Someone with financial difficulty may need to seek a loan
The availability of loans from banks
Made by Cattaystudies
Should a government be worried if more
people in a country decide to save a large
proportion of their income
Worried:
- Money that is being saved is not being spent therefore withdrawal from
circular flow increases and AD decreases
- If the level of demand falls there will be an increase in unemployment
(labour is derived demand)

Not worried:
- Money that is being saved will eventually be spent
- Money that is saved in banks is available to lend to others - this could
provide the funds for businesses to expand
- Increased savings will decrease inflationary pressure.
Different groups of people are likely to spend High income groups are more likely to spend more in total as they have
differently and different proportions of their more money.
income However, high paid workers are more likely to spend a lower proportion
of their income because their income is more than enough to buy
High income groups are more likely to spend everything they need.
more in total as... High paid workers are more likely to spend a higher proportion of their
income on luxuries/spend more on luxuries.
High paid workers more likely to spend a lower proportion of their income
on necessities/less on necessities.
Different groups of people are likely to spend Low income groups are more likely to spend less in total as they have less
differently and different proportions of their money
income However, low paid workers are more likely to spend a higher proportion
of their income in order to buy what they need.
Low income groups are more likely to spend Low paid workers are more likely to spend a lower proportion of their
less in total as... income on luxuries/spend more on luxuries.
Low paid workers more likely to spend a higher proportion of their income
on necessities/less on necessities.
Different groups of people are likely to save High income groups are likely to save a higher proportion of their income
differently and different proportions of their because:
income
They will have higher disposable income (money left over after all bills
High income groups are likely to save a higher have been paid) therefore they will be able to save more
proportion of their income because: They will already have purchased many items so they have less of a need
to spend
Different groups of people are likely to save Low income groups are likely to save a lower proportion of their income
differently and different proportions of their because:
income
They will have lower disposable income therefore they will be able to save
Low income groups are likely to save a lower less
proportion of their income because: They will have a need to purchase basic necessities which will take up
most of their income
Made by Cattaystudies
Describe the 3 stages of working life
1. Entry into employment = income low
For example, in a professional occupation in education or medicine the
income received when starting in the profession is quite low. This reflects
the inexperience of the worker.

2. Mid point of working life

As the person enters their late thirties/early forties they will have gained
more qualification and enough experience to be able to take on more
challenging roles (promotion) in their profession and therefore their
income will rise. Moreover, most professions have a pay scale that
rewards people for how many years of experience they have.

3a. Older/end of career scenario A

The pattern of increasing age and therefore increasing income may hold
true until the individual retires in most cases. This is due to the vast
amounts of experience and qualifications gained over the years and the
many promotions that may have occurred.

3b. Older/end of career scenario B

On the other hand, there are exceptions such as cases where individuals
may feel that they no longer want the increased responsibility as they get
older and near retirement and 'step down' to an easier position therefore
their income will drop.
List an Individual's choice of occupation (wage 1. Wage
factors) Payment for carrying out a particular job. Time rate paid per hour (over
time possible)
2. Salary
A fixed annual amount paid monthly (no overtime)
3. Overtime
Payment for work in excess of the standard contracted hour. Paid at a
higher hourly rate.
4. Bonus
Extra payment acting as an incentive/payment for performance above
that usually expected.
5. Commission
Payment based on the percentage of sales a worker makes
6. Profit sharing (employee get a share of the company's profit)
List an individual's choice of occupation (non- Working hours
wage factors) Promotion prospects
Job security
Fringe benefits
Pension entitlement
Holiday entitlement
Quality of working environment
Job satisfaction
Training opportunities
Why are some people prepared to work in low 1. High non wage factors
paid occupations: 2. They're unskilled and therefore can't get well paid jobs
3. No other work available
4. Job near home
5. The work is interesting
The wage rate is determined by: A. The demand for labour
B. The supply of labour
C. The bargaining power of labour
D. Government policy (including minimum wage)
E. Government policy (anti-discrimination legislation, income tax)
Made by Cattaystudies
What determines the Demand for Labour
What determines the supply of labour?
What determines the bargaining power of
labour?
Define a Government policy - Minimum wage An amount of pay set by the government below which an employer
cannot pay an employee.
Advantages of a minimum wage
Disadvantages of a minimum wage
Describe the effects of minimum wage on
employment.
1. The demand for labour is derived demand
2. The productivity of labour (greater productivity = higher demand)
3. The profits of a firm (greater profits = higher demand for labour to gain
more profits)
4. The cost of capital equipment
* Size of working population, determined by:
- Changes in retirement age
People living longer = retirement age has increased.
- Immigration and emigration
In developed countries immigration has increased the amount of labour.
In less developed countries emigration has decreased the amount of
labour available.
- Changes in school leaving age.
School leaving age tends to increase over time. This means that the supply
of this labour is delayed (as it stays in education for longer) and therefore
this decreases the supply of labour.
- Increased role of women in the workforce
In the last 50 years there has been a change in the attitudes towards
women working - more acceptable nowadays. This has increased the
amount of labour supplied.
*Non wage factors
The bargaining power of labour is determined by:
How skills a person is (more skilled = more productive = more valuable)
Whether a person is part of a trade union or not and how strong the trade
union is
- reduces poverty by raising the living standard of the lowest paid workers
- prevents exploitation of workers who have poor bargaining strength in
the labour market i.e. no access to trade unions
- a minimum wage can cause unemployment because it increases the cost
of employing workers and therefore the demand for these type of
workers decreases
- a minimum wage will raise business costs and therefore cause them to
increase their price. This reduces their international competitiveness.
The minimum wage diagram shows that if a minimum wages causes
wages to rise above the equilibrium wage level it will cause
unemployment.
1. The minimum wages increases the wages of those who are on the
lowest wage level and therefore it is likely that these workers will spend
all their extra income on goods and services. This will increase demand for
goods and services and therefore increases demand for labour (it has
been shown that an increase in the minimum wage does not cause
unemployment because of this reason).
2. It depends upon whether the wages level was below the equilibrium
level or not. If the wage level was below the equilibrium level then an
increase may only bring it to the equilibrium level and therefore there is
no negative impact on employment.
Made by Cattaystudies
How does other government policies (anti- Anti-discrimination legislation
discrimination legislation and changes in Anti-discrimination legislation will allow greater labour force participation
income tax) determine the wage rate? by ethnic minorities etc and therefore increases the supply of labour.

Changes in income tax

An increase in income tax may decrease the supply of labour as some
people may not feel that it is worth their while working (disincentive of
taxation).
How does the relative bargaining strength of Skilled workers are scarcer and more productive therefore they have
skilled workers differ from unskilled workers? more bargaining strength
Will government policies like minimum wage The introduction of policies like the minimum wage will benefit unskilled
more likely benefit skilled or unskilled workers as their wage is low
workers?
Compare the PED of skilled and unskilled PED of skilled workers is inelastic (necessary - non replaceable skills).
workers PED for unskilled workers in elastic.
Compare the PES of skilled and unskilled PES for skilled workers is inelastic (takes time to train etc).
workers PES for unskilled workers is elastic
Compare the relative bargaining strength of Tertiary sector workers are usually most skilled (but not always) and
workers in the primary, secondary, and therefore have more bargaining power. The secondary sector is usually
tertiary sectors the most unionised and therefore have more bargaining power.
Compare the effect of removal of Whilst laws removing discrimination will benefit workers in all sectors, it
discrimination laws to workers in the primary, will be most beneficial to tertiary sector workers as this is where large
secondary, and tertiary sectors. number of women are employed.
Compare the effect of government policies Low paid workers are usually in the primary and secondary sectors
like minimum wage to workers in the primary, (cleaners, shop workers) and therefore they will benefit most from a
secondary, and tertiary sectors. minimum wage.
Compare the PED of primary, secondary, and PED of primary, secondary and some (unskilled) tertiary sector workers is
tertiary sector workers elastic.
Skilled workers most often found in the tertiary sector whose PED is
inelastic.
Compare the PES of primary, secondary, and PES of primary, secondary and some (unskilled) tertiary sector workers is
tertiary sector workers elastic due to little skill being required (less training time needed).
Skilled workers most often found in the tertiary sector whose PES is
inelastic.
Compare the relative bargaining strength of Trade unions are often more powerful in the public sector.
workers in the public and private sector In the private sector, the secondary sector is usually the most unionised.
Compare the effect of removal of Enforcement of anti-discrimination laws is easier in the public sector as it
discrimination laws to workers in the public is controlled by the government.
and private sector
Compare the effect of government policies to The government decides on the level of public sector pay and this may
workers in the public and private sector result in it being less than private sector pay.
Compare the PED of public and private sector Skilled workers will be in high demand in both the private and public
workers sector.
Compare the PES of public and private sector In many countries there is a greater supply of labour into the public sector
workers (making it more elastic in supply) as they are seen as secure jobs with
good pensions.
Specialisation definition: This is a process by which individuals, firms, regions and economies
concentrate on producing those goods and services in which they have an
advantage. The specialisation of labour is called 'division of labour
Define Specialisation of labour (division of Occurs when a task is broken up into many smaller tasks in which one
labour) person specialises on each smaller task. Rather than one person doing all
the tasks, many people do one small repetitive task each. This increases
productivity.
Made by Cattaystudies
Advantages of specialisation for a country
Disadvantages of Specialisation for a country
Advantages of specialisation of labour
(division of labour) for businesses
Disadvantages of specialisation of labour
(division of labour) for businesses
Advantages of specialisation of labour
(division of labour) for workers
Disadvantages of specialisation of labour
(division of labour) for workers
Disadvantages of Specialisation for a country
Advantages for a country of becoming less
specialised.
Trade Union definition:
Define Collective bargaining
If the good produced has a high or rising price then it will mean increased
export revenue for the country (oil exported from Brunei)
A country specialising in one industry will increase their expertise in this
area and may benefit from external economies of scale, reducing costs for
all firms in the industry and increasing international competitiveness.
* Greater dependence on other countries.
Countries can rely too heavily on other countries for goods in which they
do not specialise in
* Risks for a country.
If the demand for a product that a country is highly specialised in fall then
the export revenue of that country declines. Moreover for country that
are specialised in finite goods (oil etc) they will eventually run out.
* Mechanisation and automation can create unemployment in the short
term (less workers needed with increased use of machinery).
1. More goods can be produced. As people specialise in one task they can
complete the task very quickly leading to greater productivity. This may
decrease labour cost per unit.
2. It makes full use of everybody's ability because people specialise at
what they are good at.
3. It allows the use of machinery. Repetitive tasks can be mechanised. As
more capital is used productivity will increase.
1. Training costs may increase
2. Quality may suffer as workers become bored with the lack of variety in
their work
1. Workers may receive higher pay for specialised work/higher
productivity
2. It makes full use of an individual's ability because people specialise at
what they are good at.
1. Workers may become bored. Doing repetitive tasks increases the
chances of boredom which will lead to demotivation.
2. Workers may eventually be replaced by machinery as repetitive tasks
are mechanised.
1. Greater dependence on other countries. Countries can rely too heavily
on other countries for goods in which they do not specialise in
2. Risks for a country. If the demand for a product that a country is highly
specialised in fall then the export revenue of that country declines.
Moreover for country that are specialised in finite goods (oil etc) they will
eventually run out.
3. Mechanisation and automation can create unemployment in the short
term (less workers needed with increased use of machinery).
1. A broader spread of industries are developed, leading to less reliance
on only one/a few industries.
2. It lowers risk for a country. If the demand for a product that a country
is highly specialised in fall then the export revenue of that country
declines. Moreover for countries that are specialised in finite goods (oil
etc) they will eventually run out.
A Trade Union is an organisation that workers join, which represents them
in negotiations with company managers. The idea is that the Trade Union
speaks for everybody (collective bargaining) and therefore the workers
have strength in numbers and are more likely to have their demands met
by managers.
A process of negotiation over pay and conditions between a trade union,
who represent the workers, and employers.
Made by Cattaystudies
Define Industrial action
List the functions of Trade Unions:
A trade union has a range of industrial actions striking
available to it, such as:
How will trade unions affect company costs?
Describe the factors that affect the strength of -The percentage of the workforce in the trade union (higher % = more
a Trade Unions (and therefore its ability to
raise wages etc)
Advantages of trade unions to workers
Disadvantages of trade unions to workers
Advantages of trade unions to firms
An action taken by trade unions to try to force an employer to give in to
their demands. E.g. strikes, go slow, work to rule
* negotiates with management to improve workers' wages, working
conditions, holiday entitlement etc
* pressure government to pass legislation which is favourable to
employees (shorter working week)
* protecting employment which includes:
- trying to guard against redundancies
- representing workers in disputes with their employer where they might
be sacked
working to rule
go slows
Besides increasing workers' wages a Trade Union will also want to:
* increase workers holiday entitlements
* improve employees working conditions
* improve the health and safety of the workplace.
all of these will increase a company's costs
strength)
-Level of economic activity.
Boom = labour scarce, therefore firms more likely to give in to TU
demands as they will not want to lose them.
-How much profit the firm makes.
The more profitable a firm is the more likely it is that unions will be able
to increase wages.
-How substitutable capital is for labour
* Trade Unions (through collective bargaining) increases the chances of
workers having their interests met i.e. increased wages, improved working
conditions
* Trade Unions offer their members a range of benefits such as legal
representation in disputes with their employer
* Trade Unions can influence the government to pass more worker
friendly legislation
* Increased wages may mean that firms cannot afford to employ all the
workers they used to and therefore some workers may be made
unemployed
* Workers have to pay to be a member of a Trade Union and this will
reduce their take home pay
* Industrial action by a Trade Union can be disruptive. Workers lose their
wages during a strike.
* easier to negotiate with Trade Unions than every single worker, saves
time.
* if workers have their needs met it is likely they will be more motivated
and therefore more productive. This increase in productivity may offset
the increased cost incurred by having a union
Made by Cattaystudies
Disadvantages of trade unions to firms * Trade Unions increase costs for firms. This means that the price of firms'
goods rise and demand falls.

* A union make undertake industrial action which could be costly for a

firm.
Advantages of trade unions to the economy * Trade Unions raise the income of the poorest who spend all their
income on goods and services. This increases demand in the economy and
therefore decreases unemployment

* Governments can receive advice on work related legislation from unions

Disadvantages of trade unions to the economy * Trade Unions increase the costs for businesses therefore making them
less price competitive internationally. Therefore exports and the balance
of payment will suffer.

* Strikes by Trade Unions can affect firms and may cause them to lose
business. This can be damaging for their survival prospects.
Evaluate whether trade unions are bad for an It is true that Trade Unions raise the costs of domestic firms and therefore
economy they will have to increase their price. However, the impact depends upon
whether:
the domestic firms have their costs raised by their trade unions to a
greater extent than foreign firms have their costs raised by their trade
unions. A firm can negotiate an increase in labour productivity in return
for higher wages etc. If a firm can, then the increase in productivity can
offset much of the increase in costs
How significant would it be for a person when - Trade Unions can negotiate better wages and conditions for workers
deciding to join a firm if the firm didn't have a - However, highly skilled workers will receive good pay and working
Trade Union? conditions and therefore may have little use for a Trade Union.
- It depends upon how interest the person was in the types of work they
would do in the firm
Reasons why Trade Union membership might • trade union subscriptions may increase making it more expensive for
decrease: people to join a trade union
• government legislation may reduce the power of trade unions this
would make membership less valuable
• employers may not recognise trade unions/be reluctant to employ
members of trade unions this may make people reluctant to join as it
would reduce their employment opportunities
• in a boom period/high level of economic activity workers may gain wage
rises/better
working conditions without belonging to a trade union
Explain why governments may discourage • strikes disrupt output/service provision this may result in lower
strikes. GDP/incomes/living standards
• increase firms' costs of production and lose international
competitiveness
• may reduce exports and so harm the balance of payments position
Define Primary sector Firms involved in the growing and extraction of raw materials are in the
primary sector.

For example: Farming, fishing, mining.

Define Secondary sector Firms in manufacturing and construction are in the secondary sector.

For example: manufacturing and construction

Define Tertiary sector Firms involved in the provision of services are in the tertiary sector.

For example: banking, retailing, communication and education.

Made by Cattaystudies
Why is the tertiary sector the most important 1. In developed countries incomes are higher. This extra income is usually
sector in developed countries?
Why is the secondary sector less important in As a country develops wages rise. Therefore, developed countries are
developed economies?
Why is the primary sector less important as an As an economy develops wages rise. Rising wages causes developed
economy develops?
Describe the movement through the sectors
Define Private sector firms:
Define Public sector organisations
Private sector - ownership
Private sector - funding
Private sector - objective
Public sector - ownership
Public sector - funding
Public sector - objective
Define Small firms
Define Medium firms
Define Large firms
What are reasons for small firms' existence?
Why do some firms stay small?
Advantages of small firms
spent on services rather than goods, therefore the tertiary sector grows
2. As income rises in developed countries they become price
uncompetitive in manufactured goods. Therefore, they specialise in
services.
uncompetitive in the production of manufacturing goods compared to
countries such as India and China. Therefore, developed countries'
manufacturing sectors declines.
countries to become uncompetitive in the extraction of primary recourses
and therefore they have to import them. This decreases the size of the
primary sector in the developed country.
Initially a country's primary sector is the most important. As the country
develops it will industrialise and it manufacturing sector will become the
most important. When a country fully develops, the tertiary sector will be
the most important sector.
The private sector is made up of firms that are run and owned by
individuals. Their main objective is to make a profit e.g. Apply and Metro
Public sector organisations are in the public sector unsurprisingly. They
are owned by the people of a country (the public) and run by the
government. Their main objective is to provide a good service.
Private individuals own private sector organisations: they can be sole
traders or shareholders in a plc (Public Limited Company)
Owners money (maybe borrowed from banks etc)
profit
Owned by the public, run by the government
Public sector organisations are funded using taxpayers' money
Provide a good service to the general public and to provide value for
taxpayers' money
Less than 50 employees and sales revenue less than 10 million
Between 51-250 employees and sales revenue between 10m - 50m
More than 250 employees and sales revenue over 50m
Small markets (niche)
Some markets are small and therefore only a small firm can supply it. It is
not worthwhile for a large firm to concentrate on it.
Technology
Highly technical hardware is now available to even the smallest business
e.g. smart phones, ipads etc and this helps small companies to be
competitive with large companies
Objectives of owner
Size of the market
Lack of availability of finance
Convenient locations (small shop compared to supermarket)
Personalized service
React quicker to changes in demand
Good communication and relationships with workers and customers
Made by Cattaystudies
Disadvantages of small firms
Advantages of large firms
Disadvantages of large firms
Benefits of mergers and takeovers to
companies:
Define Chain of production:
Define Horizontal integration
Define Backward vertical integration
Define Forward vertical integration
Define Conglomerate Integration
Horizontal Integration - Advantages
Horizontal Integration - Disadvantages
Backwards Vertical Integration - Advantages
Backwards Vertical Integration -
Disadvantages
Forwards Vertical Integration - Advantages
No economies of scale and therefore small businesses' prices are usually
higher as higher unit cost
Difficulties raising finance = banks reluctant to lend to small firms
Difficulties attracting and retaining workers
Vulnerable to recession due to lack of resources
Less customer recognition due to decreased ability to spend on
advertising. = difficult to attract consumers
risk of failure due to inexperienced of owners
Large firms provide more employment
Large firms get economies of scale and therefore if the market is
competitive these cost savings will be passed onto the customer in the
form of lower prices
Large firms get economies of scale and these costs savings allow it to
compete internationally which improve a country's Current Account
Ability to manage large contracts
Large firms can acquire monopoly power (restrict supply and raise price),
this is bad for consumers and international competitiveness
Large firms may suffer from diseconomies of scale and become too
bureaucratic
Workers may become alienated and suffer from poor motivation
Financial economies of scale
Bulk buying economies of scale
Managerial economies of scale
Diversification
When one firm joins another firm they will have a greater amount of
products in a greater amount of markets. Therefore the risk of failure is
spread 'not all eggs in one basket'. If the new merged firm has 7 products
and one fails it has six other products to fall back on.
Rationalisation
When firms merge there will be duplicated roles (roles that were done in
each firm before merging) that now only needs to be done by one
person/team.
The stages a product goes through from raw material
A merger or takeover between 2 firms from the same stage of the same
chain of production.
A merger or takeover between one firm and another firm from further
back in the same chain of production
A merger or takeover between one firm and another firm from further
forward in the same chain of production
Merger or takeover between 2 firms in completely different chains of
production.
Economies of Scale (bulk buying)
Reduced competition as a competitor is merged with or taken over
Firm knows the industry
No diversification
Diseconomies of scale (possibly)
Secures supplies (at a reasonable cost)
Can restrict competitors access to raw materials
No real diversification (still only in one chain of production)
Firm may not know the industry very well, leading to inefficiencies
Greater access to customers
Ensures products are well displayed and promoted by retail outlet
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Forwards Vertical Integration - Disadvantages No real diversification (still only in one chain of production)
Conglomerate Integration - Advantages
Conglomerate Integration - Disadvantages
Do horizontal mergers always benefit the
customer?
Define Internal economies of scale
Describe Managerial Internal Economies of
scale
Describe Marketing Internal Economies of
Scale
Describe Bulk Buying Internal Economies of
Scale
Describe Financial Internal Economies of Scale Bigger firms have more collateral, therefore banks see them as less of a
Describe Technical Internal Economies of Scale Bigger firms can use their capital equipment all the time because they
Describe Diversification Internal Economies of Bigger firms will have a wider range of products in more markets than
Scale
Define Diseconomies of scale
Describe Control & Coordination
Diseconomies of scale
Describe Communication problems
diseconomies of scale
Describe Labour relations diseconomies of
scale
Define External economies of scale
Describe Skilled labour external economies of firms located in the same area can take advantage of each other's trained
scale
Describe Ancillary and commercial services
external economies of scale
Firm may not know the industry very well, leading to inefficiencies
Diversification
Limited knowledge of new industry
Yes, because:
Economies of scale - lower costs may be passed on to the customer in the
form of lower prices
R&D (bigger firm therefore more money for R&D)
No, because:
Less competition
The factors that lead to a decrease in unit cost for one firm as more is
produced. Managerial, Marketing, Purchasing, Financial, Technical and
Risk spreading are the factors that lead to a reduction in unit costs.
When firms grow they can hire specialised workers who will do their job
more efficiently therefore reducing unit costs
the cost of advertising is divided by the amount of units produced,
therefore the more units produced the lower the marketing cost per unit
bigger firms can buy in bulk and therefore reduce the costs of their inputs
which will reduce their unit cost
risk to lend money to. Therefore they charge them a lower interest rate
which reduces their cost of borrowing.
produce more. Therefore the cost of the capital equipment is divided by a
larger amount of output therefore reducing the cost of machinery per unit
of output.
smaller firms. Therefore if one product/market fails bigger firms always
have other successful products/markets to help them survive.
The factors that lead to an increase in the unit cost of production as
output increases past a certain point. Examples: bureaucracy, labour
relations and control & coordination.
The larger the business the more difficult it is to coordinate the activities
of all employees efficiently (i.e. ensuring that they're all doing what
they're supposed to do)
As firms become bigger communication tends to slow down and the
amount of paperwork increases. This decreases productivity which leads
to a higher unit cost.
Larger firms have greater division of labour which usually leads to a lower
unit cost. However, if taken too far it can alienate and demotivate
workers, therefore their productivity decreases and unit cost increases.
Factors that lead to a lower unit cost for firms in the same industry or
region.
Examples: Skilled labour, ancillary firms and co-operation
employees when they leave their present employer. This decreases their
training costs when hiring employees and therefore their unit cost
decreases.
when similar firms locate in one area, support firms will locate near them.
For example, where big car manufacturing firm locate, component
manufacturers locate nearby. This leads to cost savings for the car
manufacturer.
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Describe Co-operation external economies of when firms set up close to one another they can do certain things to help
scale
Describe Infrastructure external economies of if a particular industry dominates a region the roads, railways, ports,
scale
Define External diseconomies of scale
Describe Congestion external diseconomies of As industry gets bigger within a country it will cause more congestion on
scale
Describe Increased competition for resources As an industry grows there will be more competition for the resources
external diseconomies of scale
Labour intensive production definition
Why production is sometimes labour
intensive?
Capital intensive production definition
Why production is sometimes capital
intensive?
Why production by a firm might be changed
from capital intensive to labour intensive?
Define Productivity
Define Production
How can we increase productivity?
each other and therefore decrease their unit cost of production. For
example, if five car showrooms set up on the same street they may put an
ad in the paper that advertises the street as the place to buy cars. This is
cheaper than each car showroom putting in an advertisement.
buildings and other such facilities will be shaped to suit that industry's
needs. For example, a science park and specialised industrial estate may
be developed to help a local IT industry.
Factors that lead to a higher unit cost for all firms in the same industry or
region.
Examples: Congestion, Increased competition for resources
roads etc. This will increase journey time for firm's deliveries and other
inefficiencies, increasing their unit cost.
that that industry needs e.g. specialist raw materials and labour. Due to
the increased demand for these scarce resources their price will rise and
this will add to a businesses' cost increasing their unit cost.
Labour intensive production is a production process that employs mostly
labour as a means of completing tasks rather than capital. For example
making clothes
Some jobs are labour intensive in their nature - car repair/hairdressing
and cannot be made capital intensive like car manufacturing.
Labour intensive output allows a firm to give a personalized service i.e. a
tailor made suit
In many (developing) countries labour is plentiful and therefore the cost
of labour is cheap, therefore production tends to be labour intensive.
In many (developing) countries capital (machinery etc) is expensive or is
simply not available. Therefore, production tends to be labour intensive.
Capital intensive production is a production process that employs mostly
capital (machinery) as a means of completing tasks rather than labour. For
example car production
Allows firm to mass produce standard products such as coke cans.
The unit cost of production of capital intensive produced items is relative
low as expensive labour is used less.
Human error can be reduced.
Wages may fall due to an over supply of labour and therefore labour
intensive production become more attractive
Company may wish to move away from mass produced products to a
more specialized product
The amount of outputs (goods or services) that can be produced from a
given amount of inputs (factors of production) over a given period of time.
Production is the total output over a period of time e.g. week.
Either:
1. producing more outputs with the same amount of inputs
or
2. producing the same amount of outputs with less inputs
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How can we measure productivity?
Production VS Productivity
Advantages of increasing productivity
How the government can increase firms
productivity?
How can the government use education and
training to increase firms' productivity?
How can the government decrease interest
rates to increase firms' productivity?
How can the government decrease income tax Income tax is a disincentive for employees to work hard (increase their
to increase firms' productivity?
What affects production?:
What affects productivity?:
Define Profit
Define Total sales revenue
Productivity can be measured per unit of input, per worker, per machine
or per shift.
Formula:
Total output/
whatever you are measuring the productivity of
Increasing production does not necessarily increase productivity if the
ratio of outputs to inputs remain the same. For example, if a firm initially
uses 20 inputs to produce 10 outputs and then increases production to 40
inputs to produce 20 outputs, productivity has not increased because the
ratio of inputs to outputs is still 2:1
Increasing productivity will lower a firm's unit cost of production. This
allows them to lower their price which is useful if they are in a
competitive market. Moreover, if their product is price elastic in demand,
lowering price will increase their sales revenue
1. Increase spending on education and training
2. Decrease interest rates
3. Decrease income tax
The better trained and educated workers are the more productive they
will be. Therefore, to increase productivity, a government could increase
spending on education and training or provide incentives (grants etc) to
firms who provide training courses for their workers.
The lower interest rates are the more likely firms will be to borrow to
invest in capital equipment. The more capital equipment a firm has the
greater their productivity.
productivity) and earn more money (as more will be taken in income tax).
Decreasing income tax decreases this disincentive.
- increasing the factors of production employed
- increasing the productivity of the factors of production
Influences on production include:
- natural factors (land)
Finding new sources of metals, oil, gas etc are important for increasing
production
- technology
Leads to better and faster production
- Infrastructure e.g. roads etc
Leads to greater output
The amount of capital equipment labour has access to.
A person with an earth mover can get more done than a person with a
shovel
The amount of education/training (human capital) a person has.
The more education and training a person has, the more they can get
done
Healthcare
A person in poor health is not very productive.
Effective management
Helps combine the factors of production in the most efficient way to
maximize output.
Sales revenue - total costs
It is the profit made on all units of output sold
Selling price x quantity sold
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Define Fixed costs
Define Variable costs
Define Break even
Define Total costs
Define Average revenue
Define Average costs
Define Average fixed costs
Define Average variable cost
Why the ATC is U shaped?
Why are wages a variable cost?
Why are salaries a fixed cost?
How a firm could reduce its output and
increase its total profit.
Objectives of a firm include:
Describe profit maximisation
Describe Competitive markets
List the features of a competitive market:
How do firms compete against each other?
Costs that do not change as the quantity of output changes. For example,
rent and insurance and salaries
Costs that change as output changes. For example, labour and raw
materials
The amount of units that need to be sold in order for a firm not to make a
loss. At breakeven a firm neither makes a profit or a loss.
Fixed cost + variable costs = Total costs
Sales revenue divided by quantity sold
Total costs divided by quantity
Fixed costs divided by the amount produced.
The more that is produced the lower the fixed costs per unit will be.
Variable costs divided by quantity
ATC is AVC and AFC combined.
Initially when AFC and AVC are falling so is ATC.
Then when AVC begins to rise, ATC is still falling because AFC is falling
faster then AVC is rising.
Finally, AVC rises faster than AFC is falling and therefore ATC rises.
Wages are paid by the hour. Therefore the more hours a person works the
more wages they receive = variable cost.
Salaries are fixed amount of pay a person receives each month regardless
of how many hours they work = fixed cost.
Cut its costs by more than revenue by, for example, reducing the number
of workers it employs.
Raise price if demand is price inelastic, profit may increase even on a
smaller output.
1. Profit maximisation
2. To increase sales/growth. Increase the amount of sales by selling into
new markets etc
3. Survival
4. Social welfare
Profit maximisers seek to make as much profit as possible (where the
difference between total revenue and total costs is at its greatest). These
profits are used for reinvesting in the business or given back to
shareholders as dividends. Profits can be increased by lowering costs or
increasing revenue.
In a competitive market a large number of firms are in competition with
each other to satisfy customers.
1. There are many sellers (firms) and buyers in the market
2. Firms are price takers; they accept that they have little ability to raise
the price of their product
3. There are low barriers to entry
4. Similar or identical products sold in the market
Reducing their price below that of their competitors
Improving the quality of the good or service produced
Improving the quality of the service they offer to customers.
Producing new types of goods or services (innovation)
Advertising & promotions
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Advantages to consumers of a competitive
markets
Disadvantages to consumers of competitive
markets
Defined Monopoly
A monopoly market has the following
features:
Advantages of a monopoly
Disadvantages of a monopoly
Can monopolies be beneficial to the
economy?
Advantages of working for a large firm:
1. Decreased price (due to many firms)
2. Improved quality
3. Improved level of innovation as firms try to differentiate themselves
from the competition
4. More choice because more firms
1. Firm too small to gain economies of scale and therefore they may have
a high unit cost
2. Too much price competition can lead to firms cutting costs and
producing low quality products. Important when safety is an issue e.g.
airline industry
3. (Possibly) Lower levels of innovation because firms have less profit to
invest in R&D
4. Firms may produce too many adverts with exaggerated claims trying to
persuade consumers to purchase products they don't need
A firm with 100% of the market (only one seller)
1. One firm
2. Firms are price makers
3. Unique product/service
4. High barriers to entry and exit
Research and development: Monopolies can make large profits and
therefore invest more in research and development, resulting in
new/improved products
Economies of scale: Monopolies are large firms and therefore enjoy
economies of scale. - They may pass savings on to consumers in the form
of lower prices, at the very least they are using fewer resources to
produce their output.
International competitiveness: A firm with a domestic monopoly (a
national champion) may be well placed to compete internationally.
1. Monopolist can restrict output to raise prices
2. Poor customer services due to lack of competition
3. Lack of choice (only one producer)
4. Lack of innovation (monopolist under no pressure to improve product)
4. Inefficiency- lack of competitive pressure means it is not necessary to
cut costs
Competition is generally seen as good for consumers and the economy.
On a case by case basis you will need to consider the advantages and
disadvantages of monopolies and consider whether the possible cost
savings outweigh the benefits of choice and lower prices. One solution
would be to allow a monopoly but to establish a regulator to set prices
and customer service requirements (for example in the UK water
industry).
- More promotion opportunities
- Large firms are less likely to go bankrupt so there is a greater amount of
job security
- Large firm usually have better training opportunities (training per
employee is cheaper to provide for large firm rather than small firms)
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Are large firms (monopolies) good for Advantages:
for consumers? - Yes if they gain economies of scale and pass these
unit cost savings on to the consumer in the form of
lower prices.
- Larger firms will make more profits and therefore
carry out more R&D and therefore provide more innovative products for
consumers (iphone 6)

Disadvantages:
- Legal monopolies can restrict supply to increase
price
- No if they experience diseconomies of scale and
therefore the price for the consumer will be higher

Is price likely to be higher in a monopoly than Price likely to be higher in monopoly because:
in a competitive market.
Conclusion:
It depends upon if there is enough competition left
in the market to force the legal monopoly to pass
the lower unit cost on to the consumer in the form
of lower prices
• lack of competition gives a firm monopoly power and profit maximisers
may push up price by restricting supply. Consumer will have little option
but to buy the product.
• in PC (Perfect Competition) consumers can switch to rival producers if a
firm raises price. This helps keep prices down.

Price might be higher in competitive markets because:

• a monopoly may be able to take advantage of economies of scale (bulk
buying) which will lower average costs, which they may pass on to the
consumer in the form of lower prices.
• with high profits, a monopoly may be able to spend more on research
and development/new technology this can reduce costs of production
enabling a monopoly to charge a lower price
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E4. GOVERNMENT AND THE MACROECONOMY QUIZ CARDS
Question
Define Living standards:
Define Balance of payments
Define Current Account
Define Trade deficit
Define Trade surplus
Define Infrastructure
Define Welfare services
Define Merit goods
Define Public goods
Define Public services
List the Macroeconomic Objectives
List the Government roles (local)
List the Government roles (national)
List the Government roles (international)
Define Economic Growth
Define Real GDP
Define Money (nominal GDP)
Define Final goods and services
Give two reasons why money GDP may
increase:
Answer
The economic well being and quality of life of members of a country's
population.
A record of the flow of money into and out of a country.
A component of the balance of payments in which the inflows and outflows
of money from trade in goods and services and income flows are recorded.
When imports of goods and services and greater than exports.
When exports of goods and services and greater than imports.
Facilities that are essential for an economy to function such as roads, rail,
ports, communications network, electricity etc
Financial support provided by the government to those in need such as
pensions for the elderly, unemployment benefits for the unemployed.
Goods about which there is a lack of information about how beneficial they
are for the consumer. This leads to them being underconsumed (consumed
below the social optimum).
- non-excludable i.e. it is impossible to stop someone who has not paid for
them from consuming them.
- non-rivalrous i.e. the consumption of it by one person does not prohibit
the consumption of it by another person
Services provided by the government for the general public that are
considered essential for modern society to function effectively e.g. police
force, rubbish collection, fire service
1. Economic Growth (2-3%)
2. Low Inflation (2% or less)
3. Low Unemployment (less than 5%)
4. Balance of Payment equilibrium
5. Redistribution of income to improve income equality
* Managing public transport
* Providing local services (e.g. rubbish collection)
* Enforcing laws, e.g. building restrictions
* producing public goods
* providing street lights
* waste collection and management
* infrastructure investment
* Providing public services, e.g. police
* National defence
* Building infrastructure
* Printing notes and coins
* Collecting taxes
* Negotiating trade agreements
* Imposing trade restrictions
* Providing aid to other countries
increase in the country's real (1) GDP (1) over time (1)
The total value of all goods and services produced by an economy in a year -
adjusted for inflation.
The total value of all goods and services produced by an economy in a year -
not adjusted for inflation.
Goods and services that are ready to be used by the end consumer (both
households and firms) when they are purchased e.g. TVs, machinery
1) an increase in goods and services produced
2) an increase in the price of the goods and services being produced
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Declining Growth Rate
Increasing growth rate
Real GDP per Capita Formula:
An economic cycle (AKA business cycle AKA
trade cycle) shows the regular pattern of GDP
that an economy follows over time. List what it
consists of:
Describe a period of boom (peak) in the
economic cycle
Describe a period of recession in the economic
cycle
Describe a period of slump (trough) in the
economic cycle
Describe a period of recovery (expansion) in
the economic cycle
Aggregate Demand/GDP is made up of:
Define Aggregate supply
2000 Economic Growth = 5%
2001 Economic Growth = 4%
2002 Economic Growth = 3%
The economy is still growing, but is growing more slowly i.e. more goods
and services are being produced each year but the rate of increase is
declining.
2000 Economic growth = 2%
2001 Economic growth = 3%
2002 Economic growth = 4%
The growth rate is increasing, the economy is growing. GDP is increasing.
Real GDP/Population
Measures the average amount of goods and services an individual within a
country has access to.
1. Boom (peak)
2. Recession
3. Slump (trough)
4. Recovery (expansion)
rGDP and employment are high. The economy may well be working beyond
its capacity. This leads to inflationary pressure. Consumption and
Investment will be high.
Definition: A fall in GDP in 2 consecutive quarters (6 months).
There is Negative economic growth.
Less is being produced than before.
rGDP and employment falls
Tax revenue falls and wage demands are moderate.
Inflation falls.
Economic activity at its lowest point. Unemployment will be high,
Consumption and Investment low. There could also be deflation.
rGDP and employment begin to increase. Unemployment begins to fall.
Consumption and Investment begin to rise. Wage levels also start to move
upwards.
Consumption by individuals/households
Investment by firms in capital equipment
Government spending
Exports - Imports (X-M)
AD = C+I+G+(X-M)
All the individual supply curves of all the producers in an economy added
together. The aggregate supply curve shows what happens to the total
output of all the goods and services in the economy as the general level of
prices changes.
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Demand side causes of economic growth
A rise in Consumption can be caused by:
Demand side causes of economic growth
A rise in Government spending can be caused
by:
Demand side causes of economic growth
A rise in net exports (X-M) can be caused by:
Demand side causes of economic growth
A rise in Investment can be caused by:
Demand side causes of a recession
A fall in Consumption can be caused by:
Demand side causes of a recession
A fall in Investment can be caused by:
Demand side causes of a recession
A fall in Government spending can be caused
by:
Demand side causes of a recession
A fall in net exports (X-M) can be caused by:
Consumer confidence definition:
Business confidence definition:
List the supply side causes of economic growth
List the supply side causes of a recession
-Expansionary monetary/fiscal policy
-Lower unemployment therefore increased consumer incomes
-Increased consumer confidence therefore more consumer spending
-Increased government spending on areas like education and healthcare
-The creation of jobs as a result of government spending
-Increased incomes of trading partners means they will buy more of your
exports.
-A currency depreciation = X cheaper, M more expensive, therefore more
exported and less imported.
-Lower inflation compared with trading partners making exports relative
less expensive
-Trading partners removal of trade barriers means you can export more
-Imposition of domestic trade barriers mean less will be imported
-Expansionary monetary policy
-Higher consumer spending requires more machinery to produce the extra
goods
-Increased business confidence therefore increased investment
-Contractionary monetary/fiscal policy
-Higher unemployment therefore decreased consumer incomes
-Decreased consumer confidence therefore less consumer spending
-Contractionary monetary policy
-Lower consumer spending requires less machinery to produce the extra
goods
-Decreased business confidence therefore decreased investment
-Decreased government spending on areas like education and healthcare
-The creation of fewer jobs as a result of less government spending
-Decreased incomes of trading partners means they will buy less of your
exports.
-A currency appreciation = X more expensive, M cheaper, therefore less
exported and more imported.
-Higher inflation compared with trading partners making exports relative
more expensive
-Trading partners imposition of trade barriers means you can export less
-Decrease of domestic trade barriers mean more will be imported
The extent to which consumers feel optimistic about the future - greater
confidence means more spending (consumption) and less saving.
The extent to which businesses feel optimistic about the future - greater
confidence means more investing in capital equipment (Investment)
An increase in AS caused by an increase in the quantity and quality of
factors of production such as:
-more labour/enterprise = immigration
-more productive labour/enterprise = education/training
-more land = reclamation
-more productive land = irrigation/fertilisation
-more capital = lower i/r
-more productive capital = innovation
A recession can be caused by a fall in AS which reduces the quantity and
quality of factors of production caused by:
-the depletion of natural resources such as oil
-natural disasters such as floodings and earthquakes
-emigration
-Cost push inflation - moves AS to the left and less is produced.
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What are the benefits of economic growth for Employment opportunities:
individuals? * Economic growth means more goods and services are being produced,
therefore more workers are needed as labour is derived demand
What are the benefits of economic growth for Rising sales and profits:
firms? * Economic growth means consumers' incomes are rising, leading to more
Consumption. This leads to greater demand/sales for firms and therefore
increased profits.
What are the benefits of economic growth for Higher tax revenue:
the government? * Economic growth can result in workers earning higher incomes and pay
more income tax and firms making bigger profits and earning more
corporation tax.
What are the benefits of economic growth for Lower unemployment:
the economy? * Economic growth = more goods and services. Labour is derived demand
therefore more people are employed
What are the drawbacks of economic growth Exploitation of labour and reduced quality of life:
for individuals? * In some developing countries workers are exploited (forced to work long
hours for little pay. Moreover, increased production of goods increases
pollution which decreases the quality of life for particularly the poor.
What are the drawbacks of economic growth Rising production costs:
for firms? * Economic growth leads to greater demand for labour and raw materials
and this increases their price. This increases firms' costs - cost push
inflation.
What are the drawbacks of economic growth Pollution:
for the economy? * Increased production of goods and services tends to result in more air,
water and soil pollution.

Increased use of non-renewable resources:

Inflation:
* Increased demand for goods and services can lead to demand pull
inflation.

Inequality:
* Often the owners of fops, such as land and capital, are the main recipients
of the benefits of economic growth. This can lead to a widening gap
between the rich and poor.
List the policies to increase economic growth: 1. Expansionary fiscal policy
2. Expansionary monetary policy
Define Employment The state of having paid work
Define Unemployment The state of being willing and able to work but being unable to find work
Define Full employment Occurs when there is no cyclical unemployment, although other forms of
unemployment may exist.
Define Labour force All individuals of working age that are either employed or unemployed
Define Formal economy The official economy that is controlled by the government and subject to
taxation.
Define Informal economy The unofficial economy, which is not taxed or controlled by the
government.
Define Natural rate of unemployment A certain amount of unemployment that will always exist in an economy.
Why do developed economies have few In developed economies the cost of labour/wages is high. This means that:
workers in the primary and secondary sector - machinery is used in the primary and secondary sector instead of labour
and many in the tertiary? - manufacturing firms relocate to developing countries in search of cheaper
labour
- well paid workers demand a greater amount of services -
restaurants/holidays/entertainment and therefore the tertiary sector grows
in developed countries
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Why do developing economies have many
workers in the primary and secondary sector
and few in the tertiary?
Why are there more workers in the formal
economy when economies develop?
Why are there more women in the labour force Changes in social attitudes mean an increased proportion of women are in
when economies develop?
Why are there more employment in the private In recent decades, many governments have moved away from planned
sector when economies develop?
List the two ways of measuring unemployment
Describe how labour force survey is used to
measure unemployment
Describe how claimant count is used to
measure unemployment
Advantages and disadvantages of Labour Force
Survey
Advantages and disadvantages of Claimant
count
Give the formula to calculate the
unemployment rate
Define Unemployment level
List the types of unemployment
Also, in developing countries the cost of labour/wages is lower. This
means that:
- labour is used in the primary and secondary sector instead of machinery
- manufacturing firms relocate to developing countries in search of cheaper
labour
- there is less demand for services as workers are paid less - less use of
restaurants etc and therefore the tertiary sector does not grow so much in
developing countries
As economies develop more companies set up offering formal employment
which is more likely to be protected by labour market regulations (e.g.
minimum wage)
the labour force
economies to market economies. Privatisation has moved many public
sector organisations into the private sector, therefore less public sector
employment and more private sector employment.
Labour force survey
Claimant count
A survey of households conducted by the government under the guidance
of the International Labour Organisation (ILO). The UK government surveys
40,000 households every 3 months.
Those:
-without a job
-willing and able to work
-actively seeking work
-available to start within two weeks
are considered unemployed.
Counting the number of people who register as unemployed by counting
the amount of people claiming unemployment benefits.
Advantages:
1. Based on ILO (International Labour Organisation) standards therefore
valid comparisons can be made with other countries whose unemployment
measures are based on the same standards.
2. Extensive, therefore greater chance of accuracy
Disadvantage:
1. Expensive due to extent (40, 000 households).
Advantage:
Easy to compile as numbers are already available
Disadvantages:
1. Can't be used for international comparison
2.Not all unemployed workers will claim unemployment benefit for
example
Unemployment rate = (unemployed/labour force) x 100
The number of people unemployed
Frictional
Seasonal
Technological
Structural
Cyclical (AKA demand deficient)
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Describe Frictional unemployment
Describe Seasonal unemployment
Describe Technological unemployment
Describe Structural unemployment
Describe Cyclical (AKA demand deficient)
unemployment
Describe the costs of unemployment to the
individual
Describe the costs of unemployment to firms
Describe the costs of unemployment for the
government
The time spent between leaving one job and finding another.
Remedy:
More job centers to ensure that those who are unemployed are aware of
vacancies.
Demand for certain types of workers is higher in one part of the year and
lower in others e.g. hotel workers. When they are made unemployed in the
lean part of the year it is called seasonal unemployment.
Remedy:
More job centers to ensure that those who are unemployed are aware of
vacancies.
When new technology (capital equipment) replaces workers. Serious
problem because those made unemployed may not have the skills to find
another job easily. Mismatch of skills.
Remedy:
Retrain the unemployed so they can gain employment in growing industries
Problem with remedy:
Retraining takes a long time and is expensive to provide. Some people may
not want to be retrained.
Occurs when there is a change in the structure of an economy. This means
that the skills of the economy's labour force no longer match the jobs that
are available. Example - the decline of the secondary sector in developed
countries. Serious problem because long term.
Remedy:
retrain the unemployed so that they can work in growing industry
Problem with remedy:
Retraining takes a long time and is expensive to provide. Some people may
not want to be retrained.
Occurs in a recession when demand for goods and services falls in the
economy. Labour is derived demand and therefore less workers are
needed.
Remedy:
Increase AD through expansionary monetary or structural policy.
Problem with remedy:
May cause inflation and current account deficit.
Lower income and living standards resulting in poverty. Often causes
mental health problems.
Moreover, individuals in employment may have to pay more taxation in
order to fund payments to the unemployed.
Disadvantage:
Lower demand for goods and services, therefore lower revenue and
possible risk of failure.
Advantage:
Increased supply of available labour and therefore lower wage demands.
-Reduced tax revenue as fewer people paying income tax
-Increased spending on unemployment benefits
-Therefore less money available to spend on public services.
Made by Cattaystudies
Describe the costs of unemployment for the
economy
List the policies to reduce unemployment:
Inflation definition
Deflation definition:
List the policies to control inflation:
How is inflation measured?
Weighted price index definition:
Consumer price index definition:
Weighted average definition:
Basket of goods definition:
Weighing definition:
Base year definition:
Disinflation
Describe the steps to measure Inflation
Describe Demand Pull Inflation
Describe Cost Push Inflation
Disadvantage:
-Falling economic growth (less being produced)
-Increased poverty due to more people not have paid employment
Advantage:
Lower inflation. Higher Ue is caused by lower AD and therefore the Price
Level (inflation) decreases
1. Expansionary fiscal policy
2. Expansionary monetary policy
A persistent rise in the general prices of goods and services over a period of
time, usually measured yearly
Deflation is the sustained fall in the general level of prices of goods and
services in an economy over time.
1. Contractionary fiscal policy
2. Contractionary monetary policy
Involves the central bank increasing the money supply by printing more
money and injecting it into the economy, therefore increasing C and I,
increasing employment and economic growth
Inflation is measured using a weighted price index, such as the consumer
price index (CPI).
An index (with a base year of 100) in which prices of goods are weighted
according to their importance
A measure of the changes in the prices of a selection of goods and services
normally purchased by a typical household
Attained by calculating the percentage change in an item by its weight
A selection of goods and services normally purchased by a typical
household which is used in the calculation of the CPI.
Indicates the importance or a good when compiling a CPI. The higher the
weighting, the greater percentage of household income is spent on the
good.
A random year allocated a value of 100 index points against which other
years are compared.
Decreasing rate of inflation. Prices are rising but at a slower rate. For
example:
2000 inflation = 4%
2001 inflation = 3%
2002 inflation = 2%
The price level is continuing to increase, but as at a slower rate. Prices are
increasing. The rate of inflation is decreasing.
Inflation is measured using a weighted price index, such as the consumer
price index (CPI):
Inflation is constructed using the following steps
1. Conduct a household expenditure survey
2. Select a basket of goods
3. Collect price data
4. Assign a weight to each item in the basket of goods
5. Calculate a weighted average of the price change of each good
6. Convert to index form
Occurs when Aggregate Demand increases more rapidly the Aggregate
Supply and therefore prices rise. An increase in C or I or G or (X-M) will
cause demand pull inflation, particularly when an economy is close to full
employment or during a boom when AS is unable to keep up with increases
in AD.
Inflation caused by an increase in production costs (labour, raw materials)
which causes firms to increase their prices to consumers.
Made by Cattaystudies
Which is considered more of a problem:
Demand pull inflation OR cost push inflation?
Purchasing power definition:
Cost of living definition:
Fixed income earners definition
Menu costs definition
Shoe leather costs definition
Wage-price-spiral definition
What are the consequences of inflation for the
consumer?
What are the consequences of inflation for
fixed income earners such as pensioners?
What are the consequences of inflation for
savers?
What are the consequences of inflation for
lenders?
What are the consequences of inflation for
workers?
What are the consequences of inflation for
borrowers?
What are the consequences of inflation for
firms?
What are the consequences of inflation for the
economy?
Demand pull inflation is considered less of a problem than cost push
inflation because of their impact on the other macro-economic objective.
When AD increases and demand pull inflation occurs unemployment will
decrease and economic growth will increase. The opposite will have when
cost push inflation occurs.
The value of money in terms of the quantity of goods and services it can buy
Day to day living expenses incurred by an individual
People who receive a set amount of income and have no power to increase
it e.g. pensioners.
The costs incurred by firms when changing their prices
The costs incurred by businesses when searching for the best prices from
their suppliers.
The inflationary cycle of higher wages, leading to higher production costs,
leading to higher prices and living costs (cost push inflation), leading to
higher wage demands and so on
Reduces the purchasing power of their money. A real problem if they can't
increase their wages.
Reduces the purchasing power of their money. A real problem as they can't
increase their income.
Inflation can erode the value of savings as the value of their savings
decrease over time (not the amount)
Receive the same amount of money from debtors (people they have lent
money to), but the value of the money will have fallen.
Highly skilled and therefore scarce worker can increase their wage by at
least the rate of inflation so are not affected.
Unionised workers with strong bargaining power will be able to increase
their wage by the rate of inflation so are not affected.
Low skilled workers that are not unionised will not be able to increase their
wage by the rate of inflation as they are easily replaceable by another
worker or machinery and therefore their purchasing power will fall over
time.
People who have borrowed money from banks with a fixed interest rate
gain from inflation as inflation will erode the value of the money they pay
back.
1. Menu costs:
During periods of high inflation firms, will have to make frequent
adjustments to the price at which they sell and therefore incur menu costs.
2. Shoe leather costs:
During periods of high inflation, firms will have to recheck prices before
purchasing stock etc. They will want to get the lowest price but ass the costs
of supplies are changing constantly, they will use time to recheck prices.
This involves costs: time.
3. Wage price spiral
In times of high inflation workers wages demands will increase, leading to
higher production costs for firms, leading to higher prices and living costs
(cost push inflation) for consumer/workers, leading to higher wage
demands by workers and so on in a cycle
1. High inflation leads to higher prices therefore exports down and imports
up. This decreases AD, economic growth and increases unemployment.
2. High inflation makes future costs are revenues uncertain for firms and
therefore the economy is less likely to attract MNCs
Made by Cattaystudies
List the causes of deflation * Decreasing aggregate demand
* Increasing aggregate supply as costs (raw materials, wages) fall.
Which is considered a more serious problem: Deflation caused by decreasing AD
Deflation caused by decreasing AD OR deflation
caused by increasing AS
Deflation occurring due to a decrease in AD it is Consumers expect the price of goods to be cheaper in the future therefore
generally seen as damaging to consumers they will delay their purchases. This decreases AD, employment, and
because... economic growth.
Deflation occurring due to a decrease in AD it is The workers will either lose their jobs and therefore have less spending
generally seen as damaging to workers power or have job insecurity and therefore save more. This decreases
because... Consumption and worsens AD, employment, and economic growth.
Deflation occurring due to a decrease in AD it is Savers save more because deflation increases the purchasing power of their
generally seen as damaging to savers because... money as prices fall over time. This decreases Consumption and worsens
AD, employment, and economic growth.
Deflation occurring due to a decrease in AD it is Lender gain as the value of the money repaid to them from people who
generally seen as beneficial to lenders borrow their money will increase. (as the real value of money increases due
because... to deflation)
Deflation occurring due to a decrease in AD it is Borrowers will borrow less as the value of the money they repay will
generally seen as damaging to borrowers increase as prices are falling. This decreases Consumption and worsens AD,
because... employment, and economic growth.
Deflation occurring due to a decrease in AD it is Firms demand will decrease and they will lay workers off. This decreases
generally seen as damaging to firms because... Consumption and worsens AD, employment, and economic growth. Also, as
demand is falling, firms will Invest less therefore this decreases Investment
and worsens AD, employment, and economic growth.
Deflation occurring due to a decrease in AD is Deflation will decrease the costs of exports and increase the relative cost of
seen as beneficial to the economy because... imports. Therefore, X up (exports increase) and M down (imports decrease),
(deflation is normally harmful but this can be a helping to increase AD and increase employment and economic growth.
counter argument for 8 mark questions)
Deflation occurring due to an increase in AS is -it lowers cost for domestic firms who will then be more internationally
generally seen as beneficial to the economy competitive and therefore exports increase and imports decrease - good for
because... (deflation is normally harmful but the current account
this can be a counter argument for 8 mark
questions) -consumers will have greater purchasing power as the price of goods
decrease and this improves their living standard

List the winners and losers during a period of
inflation
-falling prices lead to greater demand for domestically produced goods and
therefore economic growth increases and unemployment decreases
Winners:
* People who borrowed from banks on a fixed interest
* Firms who export to countries with a higher rate of inflation

List the macroeconomic policies to achieve
macroeconomic objectives
Fiscal policy definition:
List some reasons for government spending
Losers:
* Pensioners on fixed incomes
* Creditors/Lenders
* Savers (if the interest rates are less than inflation, money being saved will
lose value. Therefore inflation may lead to lower savings!)
* Domestic firms who export to countries with lower rate of inflation.
1. Fiscal policy (changes in government spending and taxation)
2. Monetary policy (changes in interest rates)
3. Supply side policies (policies to improve the quantity and quality of
factors of production
The use of taxation and government spending to achieve macroeconomic
objectives e.g. low inflation
* Providing merit goods (e.g. education)
* Providing public goods (e.g. street lights)
* Providing welfare services (e.g. unemployment benefits)
* Providing infrastructure (e.g. roads)
* Providing other public services (e.g. rubbish collection)
Made by Cattaystudies
List some reasons for taxes
Define Direct tax (+ examples)
Define Indirect tax (sales tax) (+ examples)
Define Progressive taxation
Define Regressive taxation
Define Proportional taxation
Principles of taxation. What makes a good tax?
Multinational company (MNC) definition :
Tax evasion definition:
Tax avoidance definition:
Impact of higher direct taxes on consumers
Impact of higher indirect taxes on consumers
Impact of higher direct taxes on firms’ profits
Impact of higher indirect taxes on firms
Impact of higher direct taxes on the
government
Impact of higher indirect taxes on the
government
Impact of higher direct taxes on the economy
* To raise revenue for government spending
* To discourage the consumption of demerit goods
* To redistribute income
* To protect domestic industries
A tax paid directly to the government by the persons on whom it is
imposed.
Examples:
Income tax. This is a tax on individuals’ incomes (or wealth). It is usually a
progressive tax.
Corporation tax. A tax on companies’ profits.
Indirect tax is a tax on expenditure. It is regressive. Indirect tax increases
the cost of goods and services.
Example: GST
a tax system that takes a higher proportion of the income of high earners
than low earners
a tax system that takes a higher proportion of the income of low earners
than high earners
a tax system that takes an equal proportion of income from all earners
* Fairness - should be based on ability to pay
* Certainty - it should be clear how much should be paid and when
* Convenience - it should be collected in a manner and at a time suitable for
the payer
* Efficiency - it should be cheap to collect
A business that produces in more than one country
Illegal non-payment of taxes to the government
The process of finding legal ways to minimise the amount of tax paid to the
government
* Reduced consumer spending (higher income tax, lower disposable
income)
* Reduced incentive to work as worker will have less money left over after
higher income tax
* Increased tax evasion and avoidance as tax rises
* Higher prices
* Reduced consumption of goods that are taxed (e.g. demerit goods)
* Lower profits (higher corporation tax) and therefore lower Investment
* Reduced incentive for entrepreneurs to start a business as profits will be
lower
* MNCs might relocate to other countries
* Increased tax evasion and avoidance
* Higher costs
* Fall in sales as higher costs are passed onto the consumer in the form of
higher prices
* Higher tax revenue which can be used for government spending or paying
down the national debt
* Achievement of macroeconomic objectives through contractionary fiscal
policy
* Higher tax revenue which can be used for government spending or paying
down the national debt
* Achievement of macroeconomic objectives through contractionary fiscal
policy
* Lower inflation
* Lower growth
* Higher unemployment
* A more equal distribution of income
* Reduced incentives to work or start a business
Made by Cattaystudies
Impact of higher indirect taxes on the economy * Higher inflation as indirect taxes increases prices
* Fall in living standards of poor households as indirect tax is regressive
Advantages of Indirect Taxation
Disadvantages of Indirect Taxation
Advantages of Direct Taxation
Disadvantages of Direct Taxation
Expansionary fiscal policy definition
Contractionary fiscal policy definition
Demand Side Policies definition:
Examples of expansionary fiscal policy include:
Expansionary fiscal policy can be used to
achieve
Examples of contractionary fiscal policy
include:
Contractionary fiscal policy can be used to
achieve
Income tax up = ...
Indirect tax up (tax on expenditure) = ...
Corporation tax up = ...
Government spending down = ...
1. Relatively cheap to collect
2. Can be used to reduce externalities (increase price of goods with large
externalities)
3. Does not increase disincentive to work
1. Tend to be regressive
2. Increase prices (inflationary)
1. It’s progressive therefore helps redistribution
1. Increases disincentive to work (income tax)
2. Decreases investment by firms (corporation tax) as there is less profit left
over after tax to invest. Also, incentive to invest has been reduced as firm
keeps a smaller percentage of their profits.
Increases in government spending and/or decreases in taxation in order to
increase aggregate demand (AD)
Decreases in government spending and/or increases in taxation in order to
decrease aggregate demand (AD)
Demand side policies are Fiscal Policy and Monetary policy. They are used
to influence the total level of demand in the economy
* Higher government spending on infrastructure or public services (higher G
in AD)
* Income tax cuts (higher C in AD)
* Corporation tax cuts (higher I in AD)
* Higher economic growth (higher AD means more demand for goods and
services so higher real GDP)
* Lower unemployment (higher real GDP means more demand for workers
as labour is derived demand)
* Lower government spending on infrastructure or public services (lower G
in AD)
* Income tax increases (lower C in AD)
* Corporation tax increases (lower I in AD)
* Lower inflation (lower AD means less demand for goods and services so
businesses are reluctant to increase prices)
* Improves the current account (lower AD means less demand for imports)
Income tax up – consumers have less disposable income – C down –
therefore AD down – by how much depends on the size of the increase in
income tax and vice versa
= Contractionary fiscal policy
Indirect tax up (tax on expenditure) - consumers spend less on goods and
services – C down – therefore AD down – by how much depends on the size
of the increase in indirect tax and vice versa
= Contractionary fiscal policy
Corporation tax up – businesses invest less – I down – therefore AD down –
by how much depends on the size of the increase in corporation tax and
vice versa
= Contractionary fiscal policy
Government spending down – workers have less money/Ue higher – C
down – therefore AD down – by how much depends on the size of the
decrease in government spending and vice versa
= Contractionary fiscal policy
Made by Cattaystudies
Give an example of how fiscal policy can
achieve lower unemployment:
Give an example of how fiscal policy can
achieve higher economic growth:
Give an example of how fiscal policy can
achieve lower inflation:
Give an example of how fiscal policy can
achieve balance of payments stability:
How can fiscal policy be used to help
redistribute income?
Define Budget
Define Budget deficit
Define Budget surplus
Define Balanced budget
Define Public Sector Net Cash Requirement
(PSNCR).
Define National debt
Expansionary fiscal policy (spending rises or
taxation falls) is likely to:
Contractionary fiscal policy (spending
decreases or taxation increases) is likely to:
Budget deficits are not considered a problem if: • They are small
Budget deficits are considered a problem if:
Monetary policy definition:
Money supply definition:
Define Expansionary monetary policy
Define Contractionary monetary policy:
Income tax down (Expansionary fiscal policy), therefore consumers have
more disposable income, therefore Consumption and AD up. More workers
are employed to produce the extra goods and services demanded as labour
is derived demand, therefore unemployment decreases
Government spending on healthcare increases (Expansionary fiscal policy),
therefore more hospitals are built and more doctors and nurses are
employed, therefore increasing their incomes and spending power. This
increases Government Spening and Consumption and therefore AD which
increases economic growth
Income tax up (Contractionary fiscal policy), therefore consumers have less
disposable income, therefore Consumption and AD down. This decreases
demand pull inflation
Income tax up (Contractionary fiscal policy), therefore consumers have less
disposable income, therefore demand for imports decreases. This may lead
to a Current Account surplus
Progressive taxation takes a higher proportion of income from higher
earners thus decreasing their take home net income. This taxation can
therefore be used to increase social security benefits for the least well off,
provide free education and healthcare for the poor and provide job
opportunities through government spending. This will narrow the
distribution of income
A plan of a government’s future income from taxation and expected
spending over a period of time (usually a year)
Government Spending > Taxation.
Requires a Public Sector Net Cash Requirement (PSNCR), which increases
the national debt.
Taxation > Government Spending.
Surplus can be used to repay part of the national debt.
Government spending = Taxation
The money a government needs to borrow if it runs a budget deficit for the
year. Adds to national debt.
The total amount of money borrowed by the government - cumulative
PSNCRs
increase a budget deficit or
decrease a budget surplus
decrease a budget deficit or
increase a budget surplus
• Are often balanced by budget surpluses
• The National Debt is small
• They are big
• They are not balanced by budget surpluses
• The National Debt is large
A demand-side policy to control the supply of money by changing interest
rates/exchange rates/quantitative easing in order to achieve certain
macroeconomic objectives.
Three ways:
1.Changing interest rates (MOST IMPORTANT)
2.Quantitative easing
3.Changing exchange rates
The amount of money in circulation in an economy
An increase in the money supply through lowering i/r, QE or devaluing the
currency leading to a rise in aggregate demand.
A decrease in the money supply through raising i/r or revaluing the currency
leading to a fall in aggregate demand
Made by Cattaystudies
Define interest rates Interest rates are the cost of borrowing money, or the reward for
lending/saving money.
Describe the effects of decreasing i/r on AD -I/r down – consumers borrow more to spend – C up – AD up – by how
(four ways) much depends on the size of the decrease in i/r and vice versa.

-I/r down – consumer repay less on their mortgages (loans) therefore they
have more disposable income – C up – AD up - by how much depends on
the size of the decrease in i/r and vice versa.

-I/r down – firms borrow more to invest – I up – AD up - by how much

depends on the size of the decrease in i/r and vice versa.

-I/r down – demand for country’s currency down – exchange rate

How an decrease in interest rates affects
unemployment:
How an decrease in interest rates affects
economic growth:
How an decrease in interest rates affect
inflation:
How an decrease in interest rates affects the
Current Account:
Describe Quantitative Easing
3.Changing foreign exchange rates
Devaluation definition:
depreciates – X up/M down – AD up - by how much depends on the size of
the decrease in i/r and vice versa.
Interest rates down = cost of borrowing down = consumers will borrow to
spend and firms will borrow more to invest. This increases C & I, which
increases AD and therefore more workers are employed to produce the
extra goods and services demanded as labour is derived demand =
unemployment decreases (and vice versa)
Interest rates down = cost of borrowing down = consumers will borrow to
spend and firms will borrow more to invest. This increases C & I, which
increases AD and therefore more goods and services are produced = more
economic growth (and vice versa)
Interest rates down = cost of borrowing down = consumers will borrow to
spend and firms will borrow more to invest. This increases C & I, which
increases AD and therefore more goods and services demanded = demand
pull inflation (and vice versa)
Interest rates down = cost of borrowing down = consumers will borrow to
spend. This will increase the demand for imports and may therefore cause a
Current Account deficit (and vice versa)
-This is an expansionary monetary policy measure which increases the
money supply and therefore AD.
-The central bank creates some new money. This money is then lent to
commercial banks who lend it to consumers and businesses therefore
boosting C and I and therefore AD.
Devaluation definition:
A fall in the value of a fixed exchange rate due to a government intervening
in the foreign exchange market.

Revaluation definition: Revaluation definition:

A rise in the value of a fixed exchange rate due to a government intervening
in the foreign exchange market.
If a central bank devalues their currency this If a central bank devalues their currency this means that it is worth less in
means that... foreign currency.

Therefore:
-exports are cheaper = increase demand for them and causing more money
to flow into the economy
-Imports are more expensive = less are purchased, therefore less money
flows out of the country.
Expansionary monetary policy
Made by Cattaystudies
If a central bank revalues their currency this
means that...
How can monetary policy be used to
redistribute income?
Supply side policies definition:
Productive capacity definition:
Deregulation definition:
Grant definition:
Subsidy definition:
Privatisation definition:
List the types of supply side policy
Types of supply side policy:
Education and training
Types of supply side policy
Lower income tax
Types of supply side policy
Lower corporation tax
Types of supply side policy
Deregulation
Types of supply side policy
Privatisation
If a central bank revalues their currency this means that it is worth more in
foreign currency.
Therefore:
-exports are more expensive - decrease demand for them and causing less
money to flow into the economy
-Imports are cheaper = more are purchased, therefore more money flows
out of the country.
Contractionary monetary policy
Expansionary monetary policy will increase economic growth and therefore
reduce unemployment, this could help improve the incomes of poorer
citizens and therefore reduce income inequality.
Any government action which leads to an increase in aggregate supply in an
economy by improving either the quality or quantity of the factors of
production.
When aggregate supply in an economy increases, this indicates an increase
in the economy’s productive capacity. This means that the economy is
capable of producing more goods and services.
The removal of laws, rules and regulations making it easier for a business to
enter and operate in a market.
A sum of money given by the government to a business which does not
have to be repaid.
Money given by the government to firms in order to lower their cost of
production so that they can charge a lower price and increase output.
The transition of public sector organisations into the private sector.
Education and training
Lower income tax
Lower corporation tax
Deregulation
Privatisation
Subsidies
Labour market reforms
Improving infrastructure
If the government improves the quality and quantity of education students
receive then this will increase the quality of the economy's labour force.
This will shift AS to the right and the economy’s PPC outwards, indicating a
rise in the economy’s productive capacity.
Lower income tax will encourage more people to join the labour force
because workers will get to keep more of their income. This will increase
the quantity of labour and therefore shifts AS to the right and the economy’
s PPC outwards, indicating a rise in the economy’s productive capacity.
Lower corporation tax will mean that firms get to keep more of their profits
which they can use Invest. Increases in investment will increase the quantity
of capital in the economy and therefore shifts AS to the right and the
economy’s PPC outwards, indicating a rise in the economy’s productive
capacity.
Deregulation makes it easier for firms to enter a market, this increases
competition and therefore the amount of goods and services which can be
produced. This increases the quantity of capital and therefore shifts AS to
the right and the economy’s PPC outwards, indicating a rise in the economy’
s productive capacity.
Privatisation is when the ownership of a public sector business is
transferred to the private sector. Private owners are motivated by profit .
And therefore are more likely to ensure that workers are productive. This
improves the quality of labour and therefore shifts AS to the right and the
economy’s PPC outwards, indicating a rise in the economy’s productive
capacity.
Made by Cattaystudies
Types of supply side policy
Subsidies and grants to entrepreneurs
Types of supply side policy
Labour market reforms (reducing trade union
power)
Types of supply side policy
Infrastructure improvements (building roads,
airports etc)
Give specific examples of how SSPs achieves
economic growth:
Give specific examples of how SSPs achieves
low unemployment:
Give specific examples of how SSPs achieves
low inflation:
Give specific examples of how SSPs achieves
Balance of Payments stability:
How can SSPs be used to redistribute income?
Subsidies and grants reduce production costs and make it more attractive
to start a business. This increases the quantity of capital and therefore shifts
AS to the right and the economy’s PPC outwards, indicating a rise in the
economy’s productive capacity.
Reducing the power of trade unions can reduce wages. This reduces firms’
costs. This provides more funds for expansion and investment. This
increases the quantity of capital in the economy and therefore shifts AS to
the right and the economy’s PPC outwards, indicating a rise in the economy’
s productive capacity.
Infrastructure improvements make it easier for firms to transport raw
materials and finished goods. This reduces firms’ costs. This provides more
funds for expansion and investment. Therefore This increases the quantity
of capital in the economy and therefore shifts AS to the right and the
economy’s PPC outwards, indicating a rise in the economy’s productive
capacity.
An increase in the quantity and quality of education and training will make
an economy’s workforce more productive, therefore increasing the supply
of goods and decreasing their price. This will lead to greater demand and
therefore economic growth.
Reducing Trade Unions power will mean that wage demands will be less
and therefore businesses’ costs will be lower which will help make firms
more price competitive and therefore demand for their goods and services
will increase, increasing economic growth.
An increase in the quantity and quality of education and training will make
an economy’s workforce more productive, therefore increasing the supply
of goods and decreasing their price. This will lead to greater demand and
therefore more workers are required as labour is derived demand. This
lowers unemployment
Reducing Trade Unions power will mean that wage demands will be less
and therefore businesses’ costs will be lower which will help make firms
more price competitive and therefore demand for their goods and services
will increase and therefore more workers are required as labour is derived
demand. This lowers unemployment
Deregulation makes it easier for firms to enter a market, this increases
competition and therefore lowers prices which help reduce inflation.
Infrastructure improvements make it easier and cheaper for firms to
transport raw materials and finished goods. This reduces firms’ costs and
therefore their price, which helps reduce inflation.
Reducing the power of trade unions can reduce wages. This reduces firms’
costs and makes them more price competitive domestically and overseas.
This helps to increase exports and increase imports and therefore bring
about a Current Account surplus.
Subsidies and grants reduce production costs and make it more attractive
to start a business. This reduction in costs will make the firms more price
competitive domestically and overseas. This helps to increase exports and
increase imports and therefore bring about a Current Account surplus.
Improved education and training for the entire population will give poorer
people greater skills with which to gain a well paid job, thus lowering
inequality.
Lower income tax for the least well off workers will increase their standard
of living and lower inequality.
Subsidies for essential goods such as rice will ensure that everybody has
access to a certain standard of living and this will help reduce inequality.
Made by Cattaystudies
Conflicts between macroeconomic objectives
Conflict between Macroeconomic Objectives
1. Low unemployment vs low inflation:
Conflict between Macroeconomic Objectives
2. Economic growth vs balance of payments
stability
Conflict between Macroeconomic Objectives
3. Low unemployment vs balance of payments
stability
Conflict between Macroeconomic Objectives
4. Economic growth vs low inflation
5. Balance of payments stability vs economic
growth/low unemployment.
A policy conflict occurs when a government implements a policy designed
to achieve one objective and consequently harm another.
Examples include:
1) Full employment and price stability
2) Economic growth and balance of payments stability
3) Full employment and balance of payments stability
If a government wants low unemployment, it may decrease the rate of
interest (expansionary monetary policy). This will decrease the rewards for
savers so less will be saved and more spent. Moreover, the cost of
borrowing will decrease for consumers and firms, leading to increased
consumption by consumers (Consumption increases) and increased
investment by firms (Investment increases). As C and I increases and
AD=C+I+G+(X-M), this will increase Aggregate Demand. This will increase
the demand for goods and services and therefore increase the demand for
labour (labour is derived demand), decreasing unemployment. However,
this will cause an increase in inflationary pressure, particularly Demand Pull
Inflation.
If a government wants high growth, it may decrease the rate of interest
(expansionary monetary policy). This will decrease the rewards for savers so
less will be saved and more spent. Moreover, the cost of borrowing will
decrease for consumers and firms, leading to increased consumption by
consumers (Consumption increases) and increased investment by firms
(Investment increases). As C and I increases and AD=C+I+G+(X-M), this will
increase Aggregate Demand. This will increase the demand for goods and
services and therefore increase growth. If an economy is growing quickly,
then incomes will be increasing, which means that there will be more
spending on imports. This increase in imports may cause a Current Account
deficit.
If a government wants low unemployment it may decrease the rate of
interest (expansionary monetary policy). This will decrease the rewards for
savers so less will be saved and more spent. Moreover, the cost of
borrowing will decrease for consumers and firms, leading to increased
consumption by consumers (Consumption increases) and increased
investment by firms (Investment increases). As C and I increases and
AD=C+I+G+(X-M), this will increase Aggregate Demand. This will increase
the demand for goods and services and therefore increase the demand for
labour (labour is derived demand), decreasing unemployment. This will
increase incomes, which means that there will be more spending on
imports. This increase in imports may cause a Current Account deficit.
If a government wants high growth it may decrease the rate of interest
(expansionary monetary policy). This will decrease the rewards for savers so
less will be saved and more spent. Moreover, the cost of borrowing will
decrease for consumers and firms, leading to increased consumption by
consumers (Consumption increases) and increased investment by firms
(Investment increases). As C and I increases and AD=C+I+G+(X-M), this will
increase Aggregate Demand. This will increase the demand for goods and
services and therefore increase growth. However, this will cause an increase
in inflationary pressure, particularly Demand Pull Inflation.
A Current Account surplus occurs when exports are greater than imports.
To achieve a CA surplus a government can use contractionary monetary
and/or fiscal policy to decrease incomes and therefore decrease imports
leading to a CA surplus.
However, using contractionary monetary and/or fiscal policy to decrease
incomes can cause a recession and therefore:
* Economic growth will be lower
* Ue will be higher because there is less AD and labour has derived demand.
Made by Cattaystudies
E5. ECONOMIC DEVELOPMENT QUIZ CARDS
Question
Give the formula for real GDP per head
Define Living standards
Give the relationship between rGDP per head and
living standards.
Why is Real GDP per head useful to governments?
Advantages of Real GDP per head as a measure of
living standards:
Disadvantages of Real GDP per head as a measure
of living standards:
Define Human development index (HDI)
HDI measures which 3 areas equally?
Define Life expectancy
Define Gross national income (GNI)
Give the formula to calulate the Gross national
income per head
Advantages of using HDI as a measure of living
standards
Disadvantages of using HDI as a measure of living
standards
Why do living standards and income distribution
differ within countries?
Answer
Real GDP/population
Living standards refer to the general economic wealth, wellbeing
and quality of life of a country's population.
The higher the rGDP per head the more goods and services the
average person has access to therefore the greater the economic
wealth and standard of living.
Because it provides an indication of the economic wealth and
living standard of a country
1. It is calculated using income, which is a good indicator of living
standards.
2. It can be used to compare living standards between countries
as all countries record GDP and population figures.
3. The data needed to compile rGDP is readily available and easy
to access
1. Ignores factors other than income that contribute to quality of
life such as levels of healthcare, education, pollution etc
2. rGDP is given as an average therefore it doesn't consider how
much inequality may be present - may be that a small % of pop
have most of wealth
3. Doesn't consider what's being produced. If consumer goods
such as computers then good for development, if military
hardware then less good
4. Doesn't take into account the informal economy which can be
large
a measure of human development and wellbeing that takes into
account the three dimensions of GNI per capita, health and
education
1. GNI per head
2. Life expectancy
3. Years of schooling
Added together makes a country's HDI score from 0 to 1
the number of years a person in a country is expected to live
total income earned by the residents of a country (individuals and
businesses) at home and abroad
GNI/population
1. Takes into account 3 measures (GDP per capita, Education and
Healthcare) therefore a wider measure than rGDP per capita
alone.
2. Measurable (numbers) - no value judgments
1. It does not take into account all factors that influence living
standards such as environmental factors, political freedom etc.
2. Each of the three areas is an average so equality is not fully
explored
1. Economic growth unevenly spread
2. Employment by sector
3. Education and training
4. Government policy
Made by Cattaystudies
Why do living standards and income distribution
differ within countries?
Economic growth unevenly spread
Why do living standards and income distribution
differ within countries?
Employment by sector
Why do living standards and income distribution
differ within countries?
Education and training
Why do living standards and income distribution
differ within countries?
Government policy
Why do living standards and income distribution
differ between countries?
Why do living standards and income distribution
differ between countries?
Level of economic development
Why do living standards and income distribution
differ between countries?
Factor endowments
Why do living standards and income distribution
differ between countries?
The state of the economy
Why do living standards and income distribution
differ between countries?
The effectiveness of government
Why do living standards and income distribution
differ between countries?
War and conflict
Define Poverty:
Define Absolute poverty:
Owner of factor of production (owner of factories etc) and the
highly skilled tend to gain a large share of economic growth.
Those without fops or skills gain little
Usually people employed in the primary sector have few skills and
therefore supply of workers is high (anyone can do it) and
therefore wages are low.
Usually people employed in the secondary sector(construction
workers) have moderate skills and the supply of workers is
moderate therefore wages are reasonable.
Usually people employed in the tertiary sector have high skills
(solicitors, doctors etc) and the supply of workers is low therefore
wages are high.
The greater amount of quality education and training an
individual has, the greater their income is likely to be.
Children in rural areas may not have access to good local
education. In other countries, school fees are charged and
therefore the poorest may only be able to afford very limited
education
Government policy regarding the distribution of wealth greatly
affect its outcome. A government that enacts a progressive tax
system and uses the funds to provide free education and
unemployment benefits will narrow the distribution of income.
1. Level of economic development
2. Factor endowments
3. The state of the economy
4. The effectiveness of government
5. War and conflict
Developed countries with high incomes and a very progressive tax
system which funds free education and healthcare for all will have
a high standard of living that is relatively equally spread (narrow
distribution of income).
Countries that have little progressive tax may still be seen as
wealthy, but the wealth will not be equally spread (wide
distribution of income).
Some countries have large factor endowments (Brunei has
enormous stores of oil) and therefore this can generate GDP and a
high standard of living.
Countries that are suffering from poor economic conditions such
as high inflation and high unemployment will see their GDP
decrease and therefore their standard of living falls
Responsible government that encourage trade, and invest in
healthcare and education will see their economy grow providing a
greater standard of living
Countries engaged in conflict will lose some of its fops (labour,
capital etc) and therefore its standard of living will decrease.
An obstacle which prevents individuals from enjoying
opportunities that should be available to everyone and therefore
their quality of life is decreased. Opportunities include necessities
such as clothes and food.
A situation in which an individual does not have enough income to
satisfy their most basic needs of food, clothes, clean water,
shelter, education and healthcare. Living on less than $1.9 a day.
Made by Cattaystudies
Define Relative poverty: A situation in which an individual does not have enough money to
buy goods and services normally consumed by members of that
society e.g. a street coffee
List the 7 causes of poverty 1. Unemployment
2. Low wage
3. Old age
4. Sickness and disability
5. Increasing household debt
6. Lack of opportunities in rural regions
7. War and conflict
7 causes of poverty Unemployed individuals receive no income from work.
1. Unemployment In developed countries with unemployment benefits these
individuals will receive a subsistence allowance and will be
relatively poor.
In developing countries without unemployment benefits these
individuals will be absolutely poor.
7 causes of poverty Unskilled workers are forced to accept low wages which usually
2. Low wage means that they are relatively poor. The less developed a country
is the less education and training opportunities there are and
therefore the greater amount of relative poverty.
7 causes of poverty Elderly people are unable to work.
3. Old age In developed countries they may have access to a state pension
provided by the government and also a personal pension and
therefore may not be in poverty.
In developing countries elderly people often rely on their children
for support who themselves have little, therefore they may well
experience relative or absolute poverty.
7 causes of poverty Sickness and disability can mean that an individual is unable to
4. Sickness and disability work.
In developed countries with sickness benefits these individuals
will receive a subsistence allowance and will be relatively poor.
In developing countries without sickness benefits these
individuals will be absolutely poor.
7 causes of poverty Increasing household debt due to excessive spending on
5. Increasing household debt consumer goods has led to an increase in relative poverty in many
countries. Debt has to be repaid with interest therefore it makes
people poorer.
7 causes of poverty Absolute poverty happens mostly in rural regions as most
6. Lack of opportunities in rural regions employment is in the agricultural sector which is poorly paid.
Moreover, due to droughts etc farmers yields and therefore their
incomes are erratic, leading to poverty.
7 causes of poverty Individuals, fearing for their safety, are often displaced due to war
7. War and conflict and conflict and become refugees and therefore suffer absolute
poverty.
List the policies to alleviate poverty and 1. Progressive taxation
redistribute income 2. Welfare benefits
3. Education and training
4. Minimum wage legislation
5. Job creation
6. Subsidies
7. Direct provision of essential goods and services
8. Encouraging MNCs into a country
9. Educate people about how to manage their finances
10. Create new income-generating opportunities for the elderly
Made by Cattaystudies
Policies to alleviate poverty and redistribute Progressive taxation is when a greater proportion of income is
income taken in tax as incomes rise.
Progressive taxation
Advantage:
Allows government to generate revenue which they can use to
fund education etc

Disadvantage:
May lead to greater tax avoidance/evasion by those on high
incomes
Welfare benefits Use of government funds to provide a safety net for the
unemployed, elderly and sick.

Advantage:
Eliminates absolute poverty (but not relative poverty)

Disadvantage:
May lead to an increase in taxation (contractionary fiscal policy)
Policies to alleviate poverty and redistribute Free education and training for all will increase employment
income opportunities for the poor and allow them to earn a good salary in
Education and training the long term.

Advantage:
Increases the quantity and quality of labour and therefore the
productive potential of the economy

Disadvantage:
Policy will take a long time to have an affect
Policies to alleviate poverty and redistribute An amount of money below which an employer cannot pay an
income employee
Minimum wage legislation
Advantage:
- reduces poverty by raising the living standard of the lowest paid
workers
- prevents exploitation of workers who have poor bargaining
strength in the labour market i.e. no access to trade unions

Disadvantage:
- a minimum wage can cause unemployment because it increases
the cost of employing workers and therefore the demand for
these type of workers decreases
- a minimum wage will raise business costs and therefore cause
them to increase their price. This reduces their international
competitiveness.
Policies to alleviate poverty and redistribute The government can create employment through spending on
income infrastructure etc. Also, it can use expansion monetary policy
Job creation (lower i/r) to encourage business Investment

Advantage:
An increase in government expenditure and a reduction in i/r
boost aggregated demand, which will create employment
opportunities for the poor and therefore increase their standard
of living.

Disadvantage:
An increase in government expenditure can cause a budget
deficit.
Made by Cattaystudies
Policies to alleviate poverty and redistribute Subsidies for basic necessities such as rice and flour reduce their
income price and ensures even the poorest can afford them, thus helping
Subsidies to prevent absolute poverty.

Advantage:
Ensures a minimum level of nutrition for the population.

Disadvantage:
Costly for government.
Policies to alleviate poverty and redistribute Providing essential goods and services such as education,
income healthcare, sanitation, clean water and housing directly to the
Direct provision of essential goods and services poor.

Advantage:
Education and healthcare increases the quantity and quality of
labour and therefore the productive potential of the economy.
Sanitation etc reduces diseases.

Policies to alleviate poverty and redistribute
income
Encouraging MNCs into a country
Disadvantage:
Many governments do not have the funds to implement these
programmes
Encouraging FDI (foreign firms setting up factories in a country)
will mean job opportunities which can raise the standard of living
of the poor.

Advantage:
-Provides employment
-Generate tax revenue for the government

Disadvantage:
-Employment created tends to be low paid and low skill. Senior
positions filled with expats
-MNCs may lead to the closure of domestic firms who cannot
compete.
Policies to alleviate poverty and redistribute Some government seek to educate the population to budget their
income finances so that they only purchase what they can afford and
Educate people about how to manage their therefore don't fall into debt which is a major cause of poverty.
finances Moreover, some governments have compulsory saving schemes
that ensures that even the poor can build wealth.

Advantage:
Makes household self reliant.

Policies to alleviate poverty and redistribute
income
Create new income-generating opportunities for
the elderly
Disadvantage:
Some households may not have the extra income to save as all
their income goes to buying necessities.
Elderly people who are unable to rely on their children are given
job opportunities to ensure they have a level of income that
ensures they will not fall into absolute poverty.
Advantage:
Allows an income and dignity for elderly people.

Disadvantage:
Many elderly people may not be able to work due to illness etc.
Define Population growth: The change (increase or decrease) in the number of people living
in a particular geographical area.
Made by Cattaystudies
Define Birth rate: The number of live births for every 1,000 people in a country in a
year. An increase may increase the size of the population.
Define Death rate: The number of deaths for every 1,000 people in a country in a
year. An increase may decrease the size of the population.
Define Fertility rate: The average number of children per women of childbearing age
(15 to 44 years) in a country. A fertility rate above 2 is like to
increase a population, whilst a fertility rate below 2 is likely to
decrease a population.
Define Infant mortality rate: The number of babies who die before their first birthday for every
1,000 live births in a country in a year.
Define Immigration: The movement of people into a country who will reside there
permanently.
Define Emigration: The movement of people out of a country to reside permanently
elsewhere.
Define Net migration: The difference between immigration into a country and
emigration out of a country.
Define Net inward migration: Total immigration greater than total emigration
Define Net outward migration: Total emigration greater than total immigration
Define Population growth rate: The rate of change as a percentage in the number of people
residing in a country.
Define Subsistence economy: An economy in which people are self sufficient, producing only
enough to satisfy their basic needs of food, clothing etc.
Define Ageing population: The increase in the median age of the population of a country
over time.
Define Remittance: A sum of money sent by a worker in a foreign country to relatives
in their home country.
Define Dependent population: Consists of people who do not earn an income themselves and
rely on others to provide the goods and services they need.
Includes children, the elderly, the disabled etc
Why do population growth rate differ between 1. Variations in birth rates between countries
countries: 2. Variations in death rate between countries
3. Variations in net migration between countries
Variations in birth rate between countries for the a) The cost of raising children
following reasons: b) Subsistence farming
c) Support for the old
d) Infant mortality rate
e) Social attitudes towards women at work
f) Age of marriage
g) A young population:
h) Awareness and availability of contraception
Variations in birth rate between countries for the The higher the cost of raising children the lower the birth rate i.e.
following reasons: Singapore is very expensive to raise children in therefore the birth
The cost of raising children: rate is low.
Variations in birth rate between countries for the Countries that heavily relies on subsistence farming may have a
following reasons: high birth rate as many children are needed as labor to work the
Subsistence farming land.
Variations in birth rate between countries for the It is important that a male heir is secured to take care of the
following reasons: parents in old age in countries where there is no welfare pension
Support for the old payments. If the infant mortality rate is high, this means that a
woman must have many children to ensure a male heir.
Variations in birth rate between countries for the The higher the infant mortality rate the higher the birth rate will
following reasons: be in order to ensure that some children survive to adulthood.
Infant mortality rate
Made by Cattaystudies
Variations in birth rate between countries for the Women who work in well paid jobs will not have many children as
following reasons: it would mean they have to give up work and the opportunity cost
Social attitudes towards women at work is too high. Therefore the more progressive the social attitude is
toward women working the lower the birth rate.
Variations in birth rate between countries for the In developed countries where women have well paid jobs, they
following reasons: tend to marry later in life and therefore have less children.
Age of marriage Opposite in developing countries.
Variations in birth rate between countries for the The younger the median age of the population, the more women
following reasons: will be of childbearing age and the higher the birth rate.
A young population: Developing countries tend to have younger populations.
Variations in birth rate between countries for the The greater the awareness and availability of contraception the
following reasons: lower the birth rate.
Awareness and availability of contraception
Variations in death rates between countries for the a) Age structure of the population
following reasons: b) Access to healthcare:
c) Lack of education and awareness.
d) Higher incomes
e) Safe drinking water and sanitation
f) Health and safety laws.
g) War and conflict.
Variations in death rates between countries for the The higher the median age of the population, the higher the
following reasons: death rate. Developed countries tend to have ageing populations.
Age structure of the population:
Variations in death rates between countries for the Access to healthcare will obviously affect the death rate. In
following reasons: developing countries many people die from treatable disease
Access to healthcare increasing their death rate due to lack of access to healthcare.
Variations in death rates between countries for the In developing countries there is often a lack of education and
following reasons: awareness regarding nutrition, hygiene and smoking etc therefore
Lack of education and awareness. increasing the death rate.
Variations in death rates between countries for the In developed countries incomes are higher. This buys good
following reasons: nutrition and healthcare etc which lowers the death rate.
Higher incomes
Variations in death rates between countries for the In developing countries many diseases are spread through unclear
following reasons: drinking and open sewers increasing their death rate.
Safe drinking water and sanitation:
Variations in death rates between countries for the In developed countries laws regarding health and safety are
following reasons: strictly implemented i.e. laws regarding hygiene, workers safety.
Health and safety laws. Moreover as most people work in the tertiary sector they are
engaged in less dangerous employment. This lowers the death
rate. Opposite for developing countries.
Variations in death rates between countries for the Developing countries tend to have more war and conflict (Yemen,
following reasons: Central African Republic) and therefore a higher death rate.
War and conflict.
Variations in net migration between countries for a) Movement in migrants
the following reasons: b) Movement of refugees
Variations in net migration between countries for People tend to migrate from developing countries to developed
the following reasons: countries. This slows population growth in developing countries
Movement in migrants
Variations in net migration between countries for Refugees tend to leave developing countries and settle in
the following reasons: developed countries.
Movement of refugees
Made by Cattaystudies
Advantages to developing countries as a result of
net outward migration
Disadvantages to developing countries as a result
of net outward migration
Define Overpopulation:
Overpopulation can lead to...
This can be remedied by: ...
Define Underpopulation:
Underpopulation can lead to ...
This can be remedied by: ...
Define Optimal population:
The effects of an increase in population size.
- Emigrants send money back to relatives (remittances) which
increases their standard of living.
- Emigrants may return to their country in the future bring their
knowledge and skills they learnt in the developed country, thus
increasing the productive potential of the country.
- Emigration will slow population growth rate and help to ensure
that over population does not occur.
- Highly skilled people emigrating from developing countries is a
brain drain and reduces the productive potential of the economy
in the long run.
- Emigration may decrease the working population, therefore
decreasing the workforce and increasing the dependency ratio.
A situation where there are not enough resources to sustain the
population of a country.
Overpopulation can lead to excess demand for resources such as
food and housing as there are too many people for the available
resources.
This can be remedied by:
- Decreasing the size of the population e.g. China's one child
policy
Increasing the quantity or quality of resources (SSPs) e.g. better
use of land to provide food etc
A situation where some of the resources of a country are left
unused or wasted because there are not enough people to fully
exploit them.
Underpopulation can lead to excess supply of resources as there
are not enough people to make optimal use of the available
resources, leading to wasted resources.
This can be remedied by:
- Increasing the size of the population through immigration etc
- Making more efficient use of the resources
A situation where a population is sufficient to ensure that all
resources in a country are fully utilised and output is maximised.
There is no shortage or surplus of resources.
1. Increased competition for a country's resources
2. Overcrowding
3. Increased demand for goods and services
4. Competition for jobs
5. Increase in the dependent population
6. Depletion of natural resources and higher pollution levels.
Made by Cattaystudies
EXPLAIN the effects of an increase in population 1. Increased competition for a country's resources.
size water, food, housing is likely to experience increased competition
when a population increases. If the country is already
overpopulated this can lead to a serious lack of resources for food
etc. This can be remedied by importing extra resources, however
this can lead to a Current Account deficit.

2. Overcrowding
In developing countries overcrowding leads to slums with the
associated problems of inadequate sanitation.

3. Increased demand for goods and services

This increases AD and therefore employment as labour is derived
demand

4. Competition for jobs

Increased population = increased working population increasing
competition for low skilled jobs in particular (increased supply of
labour). This decreases wage rates and can cause poverty to
occur. Less of a problem for skilled workers as the supply is less.

5. Increase in the dependent population

An increase in population means more children who are
dependents, therefore the size of the dependent population
increases.

6. Depletion of natural resources and higher pollution levels.

The effects of a decrease in population size.
EXPLAIN the effects of a decrease in population
size
Increased population -= increased demand for goods and services
therefore they are depleted quicker and pollution is greater.
1. Lower demand in the economy
2. Lower productive capacity of the economy
3. Inefficient use of resources
4. Reduction in overcrowding
5. Change in government spending
1. Lower demand in the economy:
Lower population = lower demand = lower economic growth and
higher unemployment.

2. Lower productive capacity of the economy:

Labour is a factor of production therefore a decrease in
population decreases the labour force and decreases the
productive capacity of the economy.

3. Inefficient use of resources:

If a country is underpopulated then a decrease in population will
lead to even greater inefficiency in the use of its resources.

4. Reduction in overcrowding

5. Change in government spending:

If population is decreasing due to a serious epidemic such as
HIV/AIDs which increases the death rate then this will lead to
increased spending on healthcare etc.
If population is decreasing due to a decrease in the birth rate then
this will lead to a decrease in spending.
Define Age distribution: The proportion of the population who fall into certain age groups,
e.g. young (0-14) etc
Made by Cattaystudies
Define Occupational mobility:
Define Geographical mobility:
Changes in the age distribution of the population:
Advantages of an ageing population:
Disadvantages of an ageing population:
Government response to an ageing population:
Reason for a higher proportion of males to females 1. A preference for sons
in Asia:
The ease with which an individual can change from one job in a
particular industry to a job in another industry.
The ease with which an individual can change from one location
to another for work purposes.
This is mainly due to higher incomes and therefore better
healthcare and diet in developed countries resulting in longer
lives. Therefore developed countries are said to have ageing
populations. Opposite for developing countries.
1. Increase in productivity
Older workers tend to have more knowledge, skills and
experience and therefore older workers are often more
productive than younger workers leading to higher output and
economic growth.
2. Indicator of high living standards
1. Increase in dependent population:
Ageing population means more retired people and therefore an
increase in the dependency ratio.
2. Higher income taxes and increased government spending:
In order for the government to cover the4 increased spending on
pensions and healthcare of the increased elderly, income tax will
have to be increased on the working population.
3. Shortage of workers:
The working population as a percentage of the whole population
will decrease as the population ages and the dependency ratio
rises. This can reduce the productive potential of the economy.
4. Reduced labour mobility:
Younger workers tend to be more occupationally and
geographically mobile (as they are not yet fully tied to a particular
industry or region). As the population ages this will decreases.
1. Encourage people to have more children
Some government give young adults financial incentives to have
more children. Also, quality subsidised childcare so that both
parents can return to work after childbirth is also used.
2. Raise the retirement age
This keeps people in the working population for longer and out of
the dependent population for longer, thus decreasing the
dependency ratio.
3. Encourage migration
4. Push towards capital intensive production of goods and
services
Less reliance on labour.
Sons have the responsibility of looking after their parents when
they are elderly whilst daughters become part of their husbands
family. Therefore, for parents, some are preferable.
2. Immigration of male workers
Some countries have significantly more males than females due to
immigration of male workers e.g. Qatar where millions of male
immigrants undertake jobs in construction etc
Made by Cattaystudies
Economic and social consequences of gender
imbalances:
Define Occupational distribution
Define Geographical distribution
Define Population density
Define Population pyramid
Define Economics development
Define Developing country
Define Developed country
Define Corruption
Developed countries tend to have:
Developing countries tend to have:
1. Lower economic growth
Females are better at jobs that require high levels of consistent
concentration. For countries with fewer females this can mean
decrease in the productive capacity of the economy.
2. Fewer marriages.
Where there are serious gender imbalances there will be less
marriage as not everyone can find a partner.
3. Rising crime rates
Higher proportion of males = higher crime rates.
4. Increase in human trafficking
A greater proportion of females in some countries leaves them
vulnerable to human trafficking
The proportion of people working in each of the primary,
secondary and tertiary sector in an economy.
The way people are spread across a country or region e.g. the
proportion of the population living in urban or rural areas.
The number of people living in a certain area, usually one square
kilometer.
Shows the age and gender distribution of the population of a
country.
An improvement in the living standards and quality of life of the
population of a country as it transitions from being reliant on the
primary sector for employment and output towards the
secondary and tertiary sector.
A country that has a low income and is generally reliant on the
agricultural industry for its employment and output.
A country that has high income and living standards with most of
its economic activity based in the tertiary sector.
The dishonest behaviour of people in power for their own
personal gain.
- High GDP and high HDI ranking
- No absolute poverty
- A progressive taxation system that finances welfare benefits
such as pensions and unemployment benefits
- Advanced healthcare and education
- High life expectancy
- Good infrastructure that encourages private sector investment
- Very high percentage of workers in the tertiary sector
- Low GDP and Low HDI ranking
- Absolute poverty
- Difficulty in generating tax revenue and therefore less/no
welfare benefits such as pensions and unemployment benefits
- Lower levels of healthcare and education
- Low life expectancy
- Poor infrastructure that makes private sector investment more
difficult
Very high percentage of workers in the primary/secondary sector
Made by Cattaystudies
Differences between developed and developing 1. GDP per head
countries 2. Distribution of income and wealth
3. Population growth
4. Size of primary, secondary and tertiary sectors
5. Saving and investment
6. Education
7. Healthcare
8. Infastructure
Differences between developed and developing Developed countries have well educated highly skilled workforces
countries: that concentrate on producing high value adding tertiary sector
GDP per head services, therefore GDP per head is high.

Developing countries have less well educated and skilled

workforces that concentrate on producing low value adding
primary sector products, therefore GDP per head is low.

Impact on economic performance:

Differences between developed and developing
countries:
Distribution of income and wealth
The poorest countries struggle to produce an income to improve
their economic development. They therefore borrow from abroad
and this results in increasing national debt.
Developed countries usually have progressive taxation which the
use to provide merit goods and welfare benefits narrowing the
distribution of income and wealth.

Developing countries have difficulty in generating tax revenue and

therefore less/no welfare benefits such as pensions and
unemployment benefits and less is spent on merit goods widening
the distribution of income and wealth.

Impact on economic performance:

Wider income and wealth distribution in developing countries
leads to greater relative and absolute poverty.
Differences between developed and developing Developed countries have slow (if any) population growth rates.
countries: This is due to the high cost of raising children, combined with high
Population growth paying female employment providing an opportunity cost to
multiple pregnancies and people marrying earlier.

Developing countries have high population growth rates for the

opposite reasons.

Impact on economic performance:

Differences between developed and developing
countries:
Size of primary, secondary and tertiary sectors
Differences between developed and developing
countries:
Saving and investment
In developing countries population growth rate leads to higher
dependency rates and greater absolute poverty. Also, if the
population is growing faster than GDP, then GDP per head
decreases.
Developed countries have the vast majority of their labour force
in the high wealth generating tertiary sector.
Developing countries have the vast majority of their labour force
in the low wealth generating primary sector.
In developed countries: high incomes = high savings = high
investment in capital equipment = high productivity = high
incomes etc - virtuous circle

In developing countries: low incomes = low savings = low

investment in capital equipment = low productivity = low incomes
etc - vicious circle
Made by Cattaystudies
Differences between developed and developing In developed countries: high quality education = high productivity
countries: = high incomes = high savings = high investment in capital
Education equipment = high productivity = high incomes etc - virtuous circle

In developing countries: low quality education = low productivity

=low incomes = low savings = low investment in capital
equipment = low incomes etc - vicious circle (poverty cycle)
Differences between developed and developing In developed countries: high quality healthcare = high productivity
countries: (fit and able workforce) = high incomes = high savings = high
Healthcare investment in capital equipment = high productivity = high
incomes etc - virtuous circle

In developing countries: low quality healthcare = low productivity

(workforce with illness and disease) =low incomes = low savings =
low investment in capital equipment = low incomes etc - vicious
circle
Differences between developed and developing Developed countries have good infrastructure that encourages
countries: private sector investment
Infrastructure
Developing countries have poor infrastructure that makes private
sector investment more difficult
Made by Cattaystudies
E6. INTERNATIONAL TRADE AND GLOBALISATION QUIZ CARDS
Question
Specialisation definition: (unit 6)
International trade definition
Factor endowments definition
Advantage for consumers of specialisation at a
national level
Disadvantages for consumers of specialisation
at a national level
Advantages for producers of specialisation at
the national level
Disadvantages for producers of specialisation
at the national level
Advantages for the economy of specialisation
at the national level
Disadvantages for the economy of
specialisation at the national level
Advantages for a country of becoming less
specialised.
Disadvantages for a country of becoming less
specialised.
Globalisation Definition
Multinational companies (MNCs) Definition
Home country Definition
Host country Definition
Answer
This is a process by which individuals, firms, regions or countries
concentrate on producing those goods and services in which they have
an advantage.
Countries tend to specialise in the goods that they are most efficient
at producing. This is determined by the factors of production in the
economy.
The importing and exporting of goods and services between countries
The factors of production that a country has available to produce
goods and services
Increased choice. Consumers have access to efficiently produced
products from abroad.
Lower prices as goods will be produced by the most efficient country
External influences (prices and availability of products will be affected
by external factors, e.g. exchange rate changes)
Lower costs (as firms can grow by exporting to foreign markets they
can benefit from economies of scale, therefore lowering unit cost)
Increased productivity (as factors of production as used to produce
the goods that they are most suited to)
Reliance on imported raw materials that foreign countries have
specialised in. Issues with getting supplies on time etc.
Exchange rate uncertainty (exchange rate changes will influence
import and export prices)
Increased output and therefore economic growth (as the economy
can focus on producing the goods and services that its factor
endowments are most suited to)
Increased efficiency. Producing what you are best at makes the best
use of the world's resources.
Overdependence (if there is a fall in demand for the products a
country is specialised in this could lead to wide spread unemployment
and a fall in economic growth)
1. A broader spread of industries are developed, leading to less
reliance on only one/a few industries.
2. It lowers risk for a country. If the demand for a product that a
country is highly specialised in falls then the export revenue of that
country declines. Moreover, for countries that are specialised in finite
goods (oil etc) they will eventually run out.
1. If may be difficult for a country to identify new industries to
develop and the country may not be as efficient as other countries in
the industries it chooses to develop and this will lead to international
uncompetitiveness.
The integration of local markets into a single global market
An MNC is a business that produces in more than one country.
A country where the MNC was originally established and where the
headquarters is based
Any country in which an MNC produces that is not its home country
Made by Cattaystudies
Benefits of MNCs to their home country
Costs of MNCs to their home country
Benefits of MNCs to the host country
Costs of MNCs to the host country
Define Free trade:
Define Free trade agreement (FTA):
1. Inflow of profit into home country from the overseas operation of
the MNC
2. Improved reputation overseas of MNCs' country as they produce
high quality products, leading to greater sales of products for other
firms from the country
1. Loss of jobs when MNC moves abroad for cheaper labour, which
particularly affect workers in the home country.
2. Outflows of capital when building factories overseas
1. Lower unemployment as MNCs will need workers in the host
country
2. Lower prices for consumers as MNC will gain Economies of Scale
3. Inflow of capital investment (FDI)
4. Increased economic growth as the goods and services produced by
MNCs contribute to GDP
5. Transfer of knowledge and skills from MNC to host country
workers, which should lead to productivity of domestic in longer term
6. Increase in tax revenue - Corporation tax on MNCs' profits, Income
tax on MNCs' workers
7. Improved Current Account as MNC will usually increase exports
8. Local suppliers to MNCs will increase their profits
9. May pay higher wages = motivate workers = increase productivity
1. Low skilled jobs may be the only ones created for local workers as
expats will fill the high skilled jobs.
2. Local firms may close as they cannot compete with MNCs leading
to unemployment
3. Depletion of natural resources as MNC usually need non-renewable
resources
4. Exploitation of labour if MNC provide low wage employment with
poor working conditions and long unsociable working hours
5. Outflow of profits to the home country
6. Increased pollution (external costs) as production by NMC's will
lead to higher levels of air, water and soil pollution = reduce health of
workers = decrease productivity
7. Limited tax revenue if host government offers generous tax breaks
for MNC set up in host country
The exchange of goods and services between countries without any
government imposed restrictions on volume or price (no tariffs,
quotas etc)
An agreement between two or more countries to reduce restrictions
on some or all products traded between them
Made by Cattaystudies
Define Barriers to trade:
Advantages of free trade to consumers
Disadvantages of free trade to consumers
Advantages of free trade for producers
Disadvantages of free trade for producers
Decreased sales for domestic firms due to
competition from abroad
Disadvantages of free trade for the economy
Define Protection (or protectionism):
Define Tariffs
Advantages of tariffs
Disadvantages of tariffs
Evaluation of tariffs
Restrictions imposed by a government that prevents the free trade of
exports and imports between countries
Increased choice.
Free trade results in a greater variety of goods and services being
available to Consumers
Lower prices .
Greater competition due to free trade results in lower prices
Unequal distribution of the benefits of trade (e.g. those on lower
incomes will not be able to enjoy expensive luxury imports)
Access to overseas markets:
Increases sales revenue and profits
Economies of scale:
Increased output for export leads to lower costs per unit
Improved innovation:
Additional competition provides an incentive for firms to innovate to
maintain competitiveness
Imports of capital easier due to free trade
Decreased sales for domestic firms due to competition from abroad
Lower unemployment:
Sales of exports may create additional demand for labour
Lower inflation:
Increased competition from foreign imports may put downward
pressure on prices
Higher unemployment:
Increased competition from foreign producers may lead to
unemployment
Environmental damage:
As fossil fuels are used to transport goods and services
Unequal distribution of the gains from trade:
Poorer countries may be exploited for cheap labour the natural
resources
May lead to a current account deficit:
If free trade leads to greater imports than exports
Protectionism is the deliberate attempt to limit imports or promote
exports. The government imposes trade barriers (tariffs, quotas,
subsidies, embargoes) that restrict free trade between countries.
Tax on imports. Increases price and therefore decreases the demand
for imports.
decreases the demand for imports
the tariff provides tax revenue for the government
consumers have to pay more for imported goods
foreign governments may retaliate with tariffs of their own leading to
a fall in exports
The impact of a tariff on the amount imported will depend upon the
elasticity of demand for the import and the size of the tariff.
Made by Cattaystudies
Define Quotas Physical limit on the number of imports of a particular good
Advantages of quotas protects domestic producers from foreign competitors

limits imports (helps improve balance of payments)

Disadvantages of quotas there is restricted access for domestic consumer to cheaper or better
quality foreign products

foreign governments may retaliate with quotas of their own leading to

a fall in exports
Define Subsidies Money given to producer in order to lower their cost of production
and encourage an increase in output.
Advantages of subsidies Decrease the demand for imports as it makes domestically produced
products cheaper

Subsidies given to exporting firms makes them more price competitive

internationally
Problems with subsidies Subsidies decrease the need for producers to increase efficiency to
produce at a lower price to stay competitive as the subsidy will lower
the price of their products anyway. Decreasing a subsidy will increase
the pressure on producers to become more efficient.

The domestic consumer must pay for the subsidy given to producers
in the form of higher taxes.
Define Export subsidy: A subsidy is designed to increase exports i.e. given to exporters
Define Embargoes A complete ban on the import of a product or all products from a
certain country.
Define Infant industry An emerging or newly-established industry that is still too small to
benefit from internal economies of scale and is therefore unable to
compete with large foreign rivals.
Define Declining industry An industry that is experiencing falling sales due to a change in the
structure of the economy.
Define Strategic industry An industry that is important to the long term well being of a country.
Define Dumping The sale of imported goods at a price below what cost to produce
them
Made by Cattaystudies
List the reasons for protectionism:
What are the disadvantages of protectionism
for the consumer? (there are no advantages)
What are the advantages of protectionism for
firms?
What are the advantages of protectionism for
the economy?
What are the disadvantages of protectionism
for the economy?
Exchange rates definition
Define Appreciation
Define Depreciation
Define Foreign Exchange Market (Forex):
Define Floating exchange rate system:
Define Fixed exchange rate system:
1. Protecting domestic jobs. A government may feel that domestic
industries need protection from overseas competition to safeguard
domestic jobs
2. Protection of strategic industries. To ensure a country's national
security, many governments protect defence related industries that
do not enjoy comparative advantage. Most governments want to
avoid being dependent on military imports in case conflict develops
with the supplier country.
3. Protecting infant industries (small strategic industries that need to
be given a chance to grow without the pressure of competition).
4. Protect declining(sunset) industry
A declining industry is one which is no longer internationally
competitive for a country e.g. shipbuilding in the UK declined because
it lost competitiveness to South Korean firms.
5. Preventing dumping (overseas firms exporting goods at below cost
price).
6. Raising tax revenue. A tariff is a tax; more tariffs equal more tax
revenue for the government.
7. Improve Current Account. Tariffs and quotas will decrease imports,
therefore improving the Current Account position.
Disadvantages:
- Likely to increase the price of imported consumer goods
- Reduced choice for consumers and therefore a decrease in living
standards
Advantage:
- Increased protection for domestic industries and therefore greater
sales revenue and employment
Advantages:
- Increased tax revenue from tariffs
- Decreased imports and therefore a possible current account
improvement
- Decreased unemployment due to job protection
Disadvantages:
- Retaliation by foreign governments and therefore a decrease in
exports
- Cost-push inflation due to increased cost of imported raw materials
- Inflation due to increased cost of finished goods
An exchange rate is the price of one country's currency expressed in
terms of another country's currency. For example: £1 = 1.5 euros.
A rise in the value of a currency/exchange rate caused by market
forces
A fall in the value of a currency/exchange rate caused by market
forces
The place where buyers and sellers meet to trade foreign currencies.
The value of a currency is determined by the market forces of demand
and supply in the Foreign Exchange Market.
When the price of a currency is fixed to another currency. Requires
government to buy the currency when the value falls and sell the
currency when the value rises.
Made by Cattaystudies
Define Revaluation
Define Devaluation
Describe the two types of exchange rate
systems
List the factors affecting exchange rates
(Demand) in a floating exchange rate system
List the factors affecting exchange rates
(Supply) in a floating exchange rate system
Describe how the demand for imports and
exports affect exchange rates in a floating
exchange rate system?
Describe how the inward and outward
investment of MNCs affect exchange rates in a
floating exchange rate system?
Describe how the interest rates affect
exchange rates in a floating exchange rate
system?
Describe how currency speculation affect
exchange rates in a floating exchange rate
system?
Impact of exchange rate changes on export and S tronger
import prices (acronym)
An appreciation in the exchange rate will cause An appreciation in the exchange rate will cause the price of imports to
the price of imports to , therefore import fall, therefore import quantity increases
quantity
An appreciation in the exchange rate will cause An appreciation in the exchange rate will cause the price of exports to
the price of exports to , therefore export rise, therefore import quantity decreases
quantity
An increase in the value of a currency due to government intervention
in a fixed exchange rate system
A decrease in the value of a currency due to government intervention
in a fixed exchange rate system
Floating exchange rates - the exchange rate is determined by demand
and supply
Fixed exchange rates - where the value of a currency is controlled by
government intervention in the foreign exchange market
· Demand for a country's exports
· Inward Foreign Direct Investment
· Interest rates. Number of foreigners wishing to deposit funds in a
country
· Currency speculation
· Demand for imports
· Outward Foreign Direct Investment
· Interest rates. Number of a country's citizens wishing to deposit
funds abroad
· Currency speculation
* If the demand for exports increase then the demand for that
currency increases (appreciation)
* If the demand for imports increases then the supply of that currency
increases (depreciation)
* Inward investment (MNCs) into a country from foreigners will
increase the demand for a currency (appreciation)
* Outward investment (MNCs) from a country will increase the supply
of a currency (depreciation)
↑ interest rates in a country increases demand for its currency (more
foreigners wish to deposit funds in the country) (appreciation)
↓ interest rates in a country increases the supply for its currency
(foreigners will move their deposited funds out of that currency)
(depreciation)
If speculators think the price of a currency will rise in the future they
will buy it. This increases the demand for it (appreciation)
If speculators think the price of a currency will fall in the future they
will sell it. This increases the supply of it (depreciation)
P ound (or another currency)
I imports
C heap
E xports
D ear (old fashioned work for expensive)
The opposite is also true, a weak currency makes imports more
expensive and exports appear more expensive
Made by Cattaystudies
A depreciation in the exchange rate will cause A depreciation in the exchange rate will cause the price of imports to
the price of imports to , therefore import rise, therefore import quantity decreases
quantity
A depreciation in the exchange rate will cause A depreciation in the exchange rate will cause the price of exports to
the price of exports to , therefore export fall, therefore export quantity increases
quantity
If the PED of imports is price elastic an If the PED of imports is price elastic an appreciation will increase
appreciation will import expenditure - import expenditure - decreases a current surplus or increases a
a current surplus or a current current account deficit
account deficit
If the PED of imports is price inelastic an If the PED of imports is price inelastic an appreciation will decrease
appreciation will import expenditure - import expenditure - decreases a current deficit or increases a current
a current deficit or a current account surplus
account surplus
If the PED of imports is price elastic a If the PED of imports is price elastic a depreciation will reduce import
depreciation will import expenditure - expenditure - decreases a current deficit or increases a current
a current deficit or a current account surplus
account surplus
If the PED of imports is price inelastic a If the PED of imports is price inelastic a depreciation will increase
depreciation will import expenditure - import expenditure - decreases a current surplus or increases a
a current surplus or a current current account deficit
account deficit
Advantages of having a strong currency Cheaper imports can improve living standards

Advantages of having a weak currency
Cheaper imports can reduce costs for businesses that import raw
materials. This can lead to lower prices and lower inflation
Exports appear cheaper in foreign countries. This increases demand
for exports which leads to higher AD, higher economic growth and
lower unemployment

Can help improve the current account

How can a government maintain a fixed
exchange rate?
1. Using their reserves of foreign currencies to buy or sell their
currency.
If a government wants to increase the strength of its currency they
can use their foreign currency to buy their own currency, therefore
increasing the demand for their currency and strengthens it.

If a government wants to decrease the strength of its currency they

can use their currency to buy foreign currency, therefore increasing
the supply of their currency and weakens it.

2. By setting interest rates to influence the strength of a currency.

Interest rates up = currency strengthens
Made by Cattaystudies
Advantages of a floating exchange rate
Disadvantages of floating exchange rates:
Advantages of fixed exchange rates include:
Disadvantages of fixed exchange rates:
Describe the effect of depreciation on
economic growth
Describe the effect of depreciation on
unemployment
Describe the effect of depreciation on inflation Price of imported raw materials up, therefore cost push inflation up.
1) Automatically stabilises the current account
A Current Account deficit should lead to a depreciation in the value of
a currency because:
Less is exported, therefore the demand for the currency falls
More in imported, therefore there is greater supply of a currency
This depreciation of the currency will:
Decrease the price or exports and therefore demand for exports
should grow
Increase the price of imports and therefore demand for imports
should fall
This will help decrease a Current Account deficit.
2) Because a floating exchange rate can move freely it does not need
to be manipulated by interest rates. This leaves monetary policy free
to pursue objectives such as low inflation.
3) Because a floating exchange rate can move freely it does not need
to be manipulated by the buying and selling of foreign reserves.
1) Increased uncertainty, making trade more difficult.
Floating exchange rates means firms have more uncertainty when
calculating the costs of their imported raw materials and the revenue
from goods sold abroad.
2) Increased speculation which may destabilise the value of the
currency
1) Reduced uncertainty for firms regarding prices of raw materials
bought from abroad and revenue from goods sold abroad;
encouraging trade.
2) Fixed exchange rates should ensure that there is no speculative
demand for the currency
3) Governments can manipulate the currency to benefit the economy.
For example, they can devalue the currency to boost exports and
employment.
1) Monetary policy can't be used to achieve the government's
objectives
For example, if a currency is in danger of falling, then a government
may have to increase interest rates.
This has 2 problems:
It ties up the governments most powerful tool for running the
economy
It is contractionary and may well decrease AD and employment
2) The central bank will need to hold large amounts of foreign
currency reserves
3) Selecting the correct exchange rate is difficult
Likely export revenue up, import expenditure down. Therefore (X-M)
up and AD up - increase in growth.
More goods being made for export and less being imported (therefore
more being made domestically). Labour is derived demand therefore
Ue down.
AD up (as above) therefore demand pull inflation up.
Made by Cattaystudies
Describe the effect of appreciation on
economic growth
Describe the effect of appreciation on
unemployment
Describe the effect of appreciation on inflation
Current Account Definition: (unit 6)
Likely export revenue down, import expenditure up. Therefore (X-M)
down and AD down - decrease in growth.
Less goods being made for export and more being imported (therefore
less being made domestically). Labour is derived demand therefore Ue
up.
Price of imported raw materials down, therefore cost push inflation
down.
AD down (as above) therefore demand pull inflation down.
The Current Account records all the international trade of goods &
services and primary and secondary incomes

The current account is part of the balance of payments. The balance of

payments records all transactions between one country and the rest
of the world
Current Account consists of: 1. Balance of Trade, ie export and import of physical goods, eg
machinery, food (visibles)

2. Balance of Invisibles, ie export and import of services, eg banking,

tourism, interest, communications

3. Primary income (AKA income balance) measures the flow of Profit,

Interest and Dividends into and out of a country

4. Secondary income (AKA transfers), ie foreign aid paid overseas,

money given to and received from the EU (UK)
Define Credit and debit items Any money flowing into a country's current account is known as a
credit item. Any money flowing out is known as a debit item.
Define Balance of Trade Export and import of physical goods, e.g. machinery, food (visibles).
When more goods are exported than imported there is a balance of
trade surplus. When more goods are imported than exported there is
a balance of trade deficit.
Define Visibles: Goods that are tangible
Define Balance of Invisibles (balance of trade in Export and import of services, e.g. banking, tourism, interest,
services) communications. When more services are exported than imported
there is a balance of invisibles surplus. When more services are
imported than exported there is a balance of invisibles deficit.
Define Invisibles Services. Intangible.
Define Primary income: Earnings that come from a factor of production (land, labor, capital or
enterprise)
Define Dividends: The portion of a firm's profit that is paid to shareholders who are the
owners of the business.
Define Secondary income: Income received through current transfers
Define Current transfers: A transfer is a sum of money that is given to an individual, firm or
government but not in payment for a good or service. For example
government aid to foreign countries or money sent home by migrant
workers.
Define Current Account Deficit When the money flowing out of a country from trade in goods,
services and primary and secondary income is greater than the money
flowing in.
Define Current Account Surplus When the money flowing into a country from trade in goods, services
and primary and secondary income is greater than the money flowing
out.
Made by Cattaystudies
Define Net errors and omissions
Define Foreign currency reserves
Define Capital Account/Financial Account
Define Balance on Transfers (secondary
income)
Describe the causes of a current account deficit 1. Strong exchange rate (cheaper imports increases import spending,
Describe the causes of a current account
surplus
Describe the impact of a current account
deficit
Describe the impact of a current account
surplus
A balancing item included in the balance of payments which accounts
for mistakes made in calculating inflows and outflows of money to and
from a country
A store of foreign currency held in a country's Central Bank.
A record of the money flowing into and out of the country from
investments, savings and foreign currency transactions to stabilise the
exchange rate.
Foreign aid paid overseas, money given to and received from the EU
(UK), inward and outward remittances by expatriate workers.
and expensive exports reduces export revenue)
2. Higher inflation than trading partners (increased export prices
reduces export revenue)
3. High levels of consumer income (consumers more likely to
purchase luxury imports)
4. Lack of protectionist policies (tariffs, quotas etc)
5. Low productivity (this increases unit costs, therefore could lead to
higher prices and reduced exports)
1. Weak exchange rate (expensive imports reduces import spending,
and cheaper exports increases export revenue)
2. Lower inflation than trading partners (cheap export prices
increases export revenue)
3. Low levels of consumer income (consumers less likely to purchase
luxury imports)
4. Use of protectionist policies (tariffs, quotas etc)
5. High productivity (this reduces unit costs, therefore could lead to
lower prices and increased exports)
6. MNCs (if MNCs are producing goods for exports then this will
increase export revenue)
1. Reduced GDP - (X-M) down therefore AD down
2. Higher unemployment (falling GDP and so falling demand for
labour as labour is derived demand)
3. Lower inflation (lower AD leads to less demand pull inflation)
4. Weaker currency (falling demand for exports mean less demand for
the currency and increased demand for imports increases the supply
of the currency)
1. Increased GDP - (X-M) up therefore AD up
2. Lower unemployment (rising GDP and so rising demand for labour
as labour is derived demand)
3. Higher inflation (higher AD leads to demand pull inflation)
4. Stronger currency (rising demand for exports mean more demand
for the currency and reduced demand for imports reduces the supply
of the currency)
Made by Cattaystudies
List the ways we remedy a current deficit
How to remedy a current deficit
1. Monetary/fiscal policy
How to remedy a current deficit
2. Protectionism - tariffs and quotas
How to remedy a current deficit
3. Protectionism - subsidies
How to remedy a current deficit
4. Devaluation
How to remedy a current deficit
5. Supply side policies to increase productivity
If a country has a floating exchange rate they
may decide they don't need to use any policy
to reduce a current account deficit. Why is
this?
1. Contractionary monetary/fiscal policy
2. Protectionism - tariffs and quotas
3. Protectionism - subsidies
4. Devaluation
5. Supply side policies to improve productivity
A current account deficit is more likely to occur in a boom. Therefore a
government can use contractionary fiscal policy, or the central bank
can use contractionary monetary policy, to bring the economy out of a
boom (imports are income elastic). However, this does have the
negative effect of decreasing economic growth and increasing
unemployment.
A government can reduce the amount of imports entering the country
through tariffs and quotas. However, tariffs increase the price the
consumer has to pay. Moreover, imposing tariffs and quotas can lead
to retaliatory action by foreign governments.
A government can give subsidies to exporting firms to make their
goods more price competitive internationally, therefore increasing
exports. However, the domestic consumer must pay for the subsidy
given to producers in the form of higher taxes. It also decreases the
need for firms to strive for efficiency. Such actions may be contrary to
a country's agreed obligations at the World Trade Organisation. It may
also invite retaliatory action by foreign governments.
A government can pursue a policy of targeting a lower exchange rate.
This has the effect of making exports cheaper and imports more
expensive. However, it does not remedy the underlying problem of
why the current account deficit occurred (country uncompetitive in
goods and/or services).
Supply side policies, e.g. increased government spending on
education, would increase productivity. This would lower firms' unit
cost and allow them to charge lower prices for exports.
This is because the current account deficit will lead to an exchange
rate depreciation (few exports means reduced demand for the
currency and more imports means increased supply). This
depreciation will make imports expensive and exports appear
cheaper. Consequently, import spending may fall and export revenue
will rise and as a result the current account position will move back
towards a surplus.