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IGCSE Economics Section 5
IGCSE Economics Section 5
Economic Development
Bellwork
• In your opinion (and not from the textbook, there are no right or wrong
answers), why are some countries rich and other countries poor?
Some countries are rich because of natural resource endowments, land,
proximity to the sea, etc.
Human resources (East Asians generally are higher IQ and more productive
workers)
Education system and innovation (development of new technology. The
more technology you have, the easier it is to grow one’s economy)
• How much arable land area is there overall.
• Winning a major war
• Agricultural vs Industrialized
• Distribution of resources
Standards of Living
• We have two primary measurements for living standards. GDP per capita
and Human Development Index
• Real GDP per capita is even better than GDP per capita because it
accounts for inflation
• The Human Development Index adds a few indicators on top of Real GDP
Per capita
HDI (Human Development Index)
• The HDI will also include education, as measured by the average expected years of
schooling in the country, and health, as measured by life expectancy, in order to measure
living standards.
• So in total, it is a composition of real gdp per capita, number of years of education, and
life expectancy.
• You need to be able to explain why real GDP per capita by itself isn’t adequate to
describe living standards, what HDI is, and why adding life expectancy (health) and
average # of years of education is a valid way to improve GDP to reveal more about
living standards. We might also need to be critical of HDI and explain how it could be
improved.
HDI imperfections
• HDI is still not a perfect measurement of living standards because it does
not include things like human rights, gender equality, income distribution,
environmental issues, or cultural differences.
• Some questions ask you to critically assess HDI. This means we need to
talk about how living standards can be measured with real GDP per capita,
how HDI expands upon these measurements of living standards, what is
good about HDI, but also what is bad about HDI and what sorts of
measurements of living standards are missing from HDI.
Bellwork
• Why are there differences in living standards both between and within
countries?
Why are there differences in living standards
and income distribution?
• When we ask this question, we mean both between and within countries.
• Productivity levels: if either workers individually or as a group within a
country are more productive, we naturally expect them to receive a larger
share of total income
• Role of governments: tax systems can be set up differently to discourage
or encourage more fairness in the distribution of income
• Population size directly impacts living standards
PPP
• It is for this reason that economists make use of purchasing power parity
(PPP) exchange rates when comparing countries’ GDP. These use an
exchange rate based on the buying power of currencies in their own
countries. They compare the amount of a country’s currency needed to
buy the same basket of goods and services with that of another country or
countries’ currencies
Why are there differences in living standards
and income distribution?
• Distribution of income can vary a lot between countries and can greatly
influence living standards. For instance, Thailand and China have fairly
similar GDPs per capita, but China has a much more equal distribution of
income and so living standards are higher for almost everyone.
• Regional income differences: Big cities vs country-side.
• Inflation
• Level of education
• Level of Freedom
Pg 297
Poverty
Poverty on the individual level has obvious consequences, what about on the societal
level?
Hunger and malnutrition
Ill health and mortality from illness
Limited or lack of access to education and other basic services
Homelessness and inadequate housing
Unsafe environments
Social discrimination and exclusion
Absolute poverty vs Relative poverty
• Absolute poverty is the kind of poverty where all of their income or working
hours are spent on food, clothing, and shelter. They are not able to afford
anything other than basic human needs (or they can’t put their labour toward
anything other than acquiring these)
• Relative poverty just means that somebody has a much lower standard of
living than an average member of their society. Somebody in Germany with
an apartment, a car, and a television may still be “poor”, but their basic
physical needs in addition to more are still met, even if they are much poorer
than average.
Causes of poverty
• Unemployment
• Low wages or low gdp per capita country
• Illness and poor healthcare
• Low rates of literacy
• High population growth
• Poor infrastructure
• Low FDI
• High Government Debt
More causes of poverty
• Overreliance on primary sector output
• Political corruption and instability
The poverty trap
• A lack of infrastructure, technology, and capital is a cause of poverty. This can
be alleviated by higher investment spending (I in the GDP equation). This
requires savings, however, since most investment spending is done with
borrowed money.
• The supply of money to borrow comes from how much people saved money.
• In very poor countries, low income means that almost all of it is exhausted just
paying for physical necessities. This leaves nothing left over for savings, and
thus there is very little available lending. This leads to low investment
spending, and so incomes tend to stay low.
How can governments alleviate poverty and
redistribute income
• Promoting Economic growth: By raising the overall standard of living we can likely
increase the standard of living for the poorest citizens
• Improving Education: A person’s education level is very positively associated with their
level of income and earnings, so providing more fair access to education tends to improve
the standards of living for the poorest.
• Providing more generous state benefits: This works by directly taking tax dollars and
spending them on programs benefitting the poor.
• Use of progressive income taxation systems can reduce tax burdens on the poor while
allowing more money to be collected from richer people to be spent on benefits for the
poor.
Population
Factors that affect population growth
• A country might have an increase in its population either from
immigration or naturally through high birth rates (>2.1 births per woman
on average)
• This can then be influenced by the average age of the population (older
people in general are less fertile) as well as the level of economic
opportunities for young people.
• Net Immigration is when we have more people coming into our country
than we have leaving our country to go live somewhere else
• The birth rate is likely to be high when there is a young average aged
population in which women marry young, infant mortality rate is high,
women are not well-educated, most women do not work and it is cheap to
bring up children.
• In some countries, its very expensive to raise children. We can measure
this as what is the ratio of how much is spent on average to raise a child
from 1-18 to the average or median income in that country. We expect
birth rates to be lower in these countries
Death Rate
• This obviously matters in determining the country’s overall population
growth rate.
• Countries that have low rates of alcohol consumption, smoking, and drug
use, healthier diets, higher levels of exercise and activity, and good health
care systems tend to have lower death rates.
Net Migration
• Net migration is defined as the amount of people entering minus the
amount of people leaving a country.
• The factors that might influence this are somewhat obvious; what are the
living standards in the home country and abroad? What sort of incentives
does the country offer foreigners to come live there? Are the skills that
foreign workers have highly rewarded in this country?
International
Specialization
Lesson Objectives
• Today we’re going to talk about specialization and trade. We will focus on
understanding the following questions in the context of both reality and
current events as well as the IGCSE exam:
• 1. What determines patterns in international trade and what goods
countries specialize in?
• 2. What are the positive and negative impacts of globalization ( 经济全球
化) and international trade?
Bellwork (10-12 minutes, pages 333-336)
• Explain 1 advantage and 1 disadvantage of specialization and international trade for
consumers.
• 1. Specialization may also result in lower costs of production and the benefits of this
can be passed onto consumers.
• 2. For the consumers, the product will have good quality because it will enable
countries to be concentrating on one product and they’ll develop more skill in
producing the product.
• Do the same for firms.
• Explain what is meant by “absolute advantage” in the context of international trade
• Advantages: 1. Specialization may also result in lower costs of production and the benefits
of this can be passed onto consumers.
• 2. For the consumers, the product will have good quality because it will enable countries
to be concentrating on one product and they’ll develop more skill in producing the
product.
• Disadvantages: 1. If one country or a small number of countries maintain control over
most of the global market for the product and they use it to restrict supply and increase
price.
• 2. If consumers are buying products from foreign specialist those firms may not follow the
same health and safety standards as in the home country.
• Advantages for firms: The firm can specialize and they will experience
economies of scale; lower long run average cost can make them have a
higher market share.
• Disadvantage for firms: The firms could experience a fall in demand. If
more firms in other countries are more efficient at producing the product
or a substitute, people will buy the import instead of the domestically
produced good.
• Absolute advantage: Is when one country can produce a good or service
more efficiently than another. You might also see this defined as “one
country can make more of a good with less inputs”.
• “You could say…that globalization, driven not by human goodness but by
the profit motive, has done far more good for far more people than all the
foreign aid and soft loans ever provided by well-intentioned governments
and international agencies.”
Paul Krugman, “The Magic Mountain,” New York Times,
January 23, 2001
• “The growth of the Internet will slow
drastically, as the flaw in ‘Metcalfe’s
law’—which states that the number of
potential connections in a network is
proportional to the square of the number
of participants—becomes apparent:
most people have nothing to say to each
other! By 2005 or so, it will become
clear that the Internet’s impact on the
economy has been no greater than the
fax machine’s.” – Paul Krugman
Not exactly the master of prediction
• “Calling Trump the “mother of all adverse effects,” the Nobel Prize-
winning economist predicted that the GOP nominee’s
administration could quickly undo the progress that the markets
around the world have made in the eight years since the financial
crisis.”
Bellwork
• Explain what is meant by specialization in the context of international trade
Specialization occurs when countries concentrate on the production on certain goods and
services because of resource endowments related to a specific good or service.
• Explain what is meant by absolute advantage and how it is different from comparative
advantage.
Absolute advantage is when a country can produce a product using fewer resources or can
produce something with higher quality or efficiency.
Comparative Advantage is what most of international trade is based on. This is when a
country can produce something at a lower opportunity cost.
• International specialization occurs when countries concentrate on the
production of certain goods or services because they have resource
endowments that are relatively more suited toward those specific goods
and services
• Resource endowments: The resources a country naturally has. Saudi
Arabia naturally has a lot of oil in its borders, China has lots of metals and
coal, South and Central American countries have a lot of high quality
coffee.
Specialization Advantages
• Essentially, we have our country specialize in one good or type of goods, we lower
the amount of waste we engage in. By devoting resources to goods that we
specialize in exclusively and simply trading for the goods that we aren’t specialized
in, we can improve the overall amount of goods and services we can consume.
• We will also have higher worker productivity if our workers are only working on
the tasks to which the country is most suited overall. This may lead to higher wages
and salaries.
• We have higher productive capacity overall and our consumers can consume more
goods and services, as mentioned above.
Specialization Advantages
• Economies of Scale: If we specialize very heavily in fewer goods and
services, the industries that produce those are going to become larger and
may benefit from the cost reductions granted by economies of scale.
• Improves competitiveness: Specialization helps enhance our global
competitiveness so we can often earn more money from international
trade. (it is likely to raise our export revenue and may only raise import
spending a little bit, so AD can increase through an increase in NX)
Specialization Advantages
• Through specialization and trade, we often end up with a larger variety of
goods and services available to our consumers. We can access goods and
services that we otherwise don’t produce domestically.
Bellwork
• Explain 2 advantages and 2 disadvantages of international specialization.
• For consumer’s international specialization can enable them to enjoy (a wider variety) of goods and services
at higher quality and lower prices. The living standards can be higher because of the aforementioned higher
product quality and lower prices and because of higher incomes due to higher productivity.
• For firms, firms become more dependent on other countries for the market of their products.
• Workers may suffer from structural unemployment; it’s harder for them to change skills if they’re specialized
in one field.
• Lack of variety (in domestically produced goods) for consumers
• What is an “MNC” and why might a country want many of them ?
• Multinational corporation or company most MNCs are public limited companies and they can increasing
employment, output, and tax revenue.
Disadvantages of specialization
• Overspecialization can cause structural unemployment. Countries may
also suffer during times of crisis if they can’t rely on imports and haven’t
developed a domestic industry to produce something yet because they
were relying on specialization and importing what they don’t specialize in.
• Semiconductors and computer chips during Covid.
• Lack of variety for consumers: specialization tends to lead to standardized
and mass-produced goods.
Disadvantages of specialization
• High labour turnover: Lots of workers may choose to leave jobs in search of
less boring work. Higher labour turnover means higher frictional
unemployment. Specialization will lead to more boring jobs that workers are
more likely to quit
• Low labour mobility: Workers will develop a more narrow skillset that applies
to only one specific industry and it’ll be hard to get workers for new industries.
• Higher labour costs: firms that employ workers with highly specialized skills
may need to pay them more.
Globalization, free trade, and protectionism
• Globalization is the process by which the worlds economies become more
interconnected and interdependent (what happens in other countries
affects us, what happens in our countries affects other countries)
• An increasing amount of the companies we buy our goods and services
are operating in many different countries. We refer to these as MNCs
(multi-national companies).
The costs and benefits of MNCs: Advantages