ZNOTES.

ORG

UPDATED TO 2020-22 SYLLABUS

CAIE IGCSE
ECONOMICS
(0455)
SUMMARIZED NOTES ON THE SYLLABUS
CAIE IGCSE ECONOMICS (0455)

Opportunity cost of decision to invest in stock is the

value of
the potential interest
1. The Basic Economic Example 2: A city decides to build a hospital on vacant
land it
owns
Problem Could have built school or sports centre
Opportunity cost is the value of the benefits forgone
of the
next best thing which could have been done
1.1. Economic Problem
There are too few productive resources to make all the 1.4. Production Possibility Curves&
goods and
services that consumers need and want. Choice
Unlimited wants and limited resources
Scarcity of resources is the basic economic problem Opportunity cost can be shown using a production
  possibility curve
(PPFC)
It shows the maximum combinations of goods and
services that can be
produced by an economy in each
Types of goods
period of time with its limited
resources
Economic goods: A good or service that has a degree of A PPC shows all the combinations of possibilities,
scarcity
and therefore an opportunity cost. involving two
goods or options
Free goods: A good or service that is not scarce and is Each combination is a choice
available in abundance. For example, the air we breathe. An economy can use all its scarce resources to produce
this
combination
A point within the curve signifies like X, represents
1.2. Factors of Production inefficiency
A point outside the curve like Y, represents combinations
Consumers are people or firms who need and want that
cannot be produced due to the lack of resources
goods and services
Resources or factors of production are used to make
goods and
services

LLCE

Land: natural resources used in production (e.g. land)

Labour: human effort used in production of
goods/services (e.g.
workers)
Capital: the man-made resources that are used to 2. Allocation of Resources
produce
goods/services (e.g. tractor)
Enterprise: the skills and willingness to take the risks
required to organize productive activities 2.1. Microeconomics and
Entrepreneurs organize and combine resources in firms
to produce
goods and services
Macroeconomics
Durable consumer goods last long while (e.g. furniture)
non-durable
consumer goods (e.g. food) do not Microeconomics
Capital goods and semi-finished goods or components
are used up in
production It is the study of particular markets, and segments of the
economy.
It looks at issues such as consumer behaviour,
individual labour
markets, and the theory of firms.
1.3. Opportunity Cost It involves supply and demand in individual markets,
Individual
consumer behaviour, and individual labour
Opportunity cost is the cost of choosing between markets
alternative uses of
resources
Choosing one use will always mean giving up the  
opportunity to use
resources in another way, & the loss
of goods & services they might
have produced instead Macroeconomics
Problem of resource allocation is choosing how best to
use limited
resources to satisfy as many needs and wants Study of the whole economy. It looks at ‘aggregate’
as possible and
maximize economic welfare variables, such
as aggregate demand, national output
Economics aims to find most efficient resource allocation and inflation.
Example 1: A person invests $10,000 in a stock Involves decisions made by the government regarding,
Could have earned interest by leaving $10,000 dollars for example,
policies
in bank
account instead

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Consumer population (population increase = demand

2.2. The role of markets in allocating increase)
resources The individual demand is the demand of one individual or
firm
The Market System The market demand represents the aggregate of all
individual
demands
A market economy is an economic system in which
economic decisions
and the pricing of goods and services 2.4. Supply
are guided by the interactions
of supply and demand- the
market mechanism Supply represents how much the market can offer
 

Key Resources Allocation Decisions

The basic economic problem of scarcity creates three key

questions

What to produce?
How to produce?
For whom to produce?

Introduction to the Price mechanism

It aids the resource allocation decision making process.

Higher price of good = higher quantity supplied, hence
The
decision is made at the equilibrium point where
quantity is directly proportional to price
supply and demand
meet
Price ∝ Quantity supplied
2.3. Demand
Factors that affect supply
Demand refers to how much of a product or service is Cost of factors of production
desired by
buyers Prices of other goods/services
Global factors
Technology advances
Business optimism/expectations
The individual supply is the supply of an individual
producer
The market supply is the aggregate of the supply of all
firms in
the market

Price Determination
Market Equilibrium

When supply & demand are equal the economy is said to

be at
equilibrium

Higher price of good = less people demand that good, hence,

demand is inversely related to price

1
Price ∝
Demand
​

Factors that affect demand

Price
Consumer tastes/preferences
Consumer Income
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)

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At this point, the allocation of goods is at its most efficient A decrease in price would raise revenue
because amount of goods being supplied is the same as Factors that affect PED:
amount of
goods being demanded & everyone is satisfied The number of substitutes
The period of time
Market Disequilibrium The proportion of income spent on the commodity
Excess Supply Excess Demand The necessity of the product

2.6. Price Elasticity of Supply

Definition: The responsiveness of quantity supplied to a
change
in price

Inelastic Supply Elastic Supply

It has a PES less than 1 It has a PES more than 1
If the price is set too high, When price is set below the A large price change will have A large price change will have
excess supply will be created equilibrium price. Creates little effect on the amount a large effect on the amount
within the economy and demand that exceeds supplied supplied
there will be allocative production due to the low
inefficiency price.

Price Changes
Causes of Price Changes

A change is supply
A change in demand
Consequences of Price Changes
An inward shift of the supply curve will increase prices
and vice
versa % change in quantity supplied
PES =
An inward shift of the demand curve will decrease prices % change in price
​

and vice
versa
Factors that affect PES:
Time
2.5. Price Elasticity of Demand Availability of resources
Supply available to meet demand
Definition: The responsiveness of demand to a change in Spare production capacity available
price Factor substitution available

Inelastic Demand Elastic Demand

PED lower than 1 PED greater than 1
2.7. Market Economic System
The necessity of the product Has a private sector only
The necessity of the product
is high – it is either essential They produce a wide variety of goods and services if it is
is relatively low
or habitual profitable to do so but only for those consumers that are
A change in price has little willing
and able to pay for them
Demand would respond
effect on the change in Market failures can cause scarce resources to be
quickly and more drastically
demand allocated to uses
that are wasteful, inefficient or even
harmful to people and the
environment

ADVANTAGES DISADVANTAGES
Wide variety of
Serious market failure
goods/services
Profit motive encourages
development of new and Only profitable goods
more efficient products & provided
processes
% change in quantity demanded Quick response to change in Firms will only supply
PED =
% change in price consumers tastes and products to consumers with
​

demand the ability to pay

When demand is price inelastic:
Resources will only be
An increase in price would raise revenue No taxes on incomes and
provided if it is profitable to
When demand is price elastic: wealth or goods and services
do so

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CAIE IGCSE ECONOMICS (0455)

ADVANTAGES DISADVANTAGES Characteristics of money

Harmful goods may be Acceptability: Anything can be used as money as long as
available to buy readily it’s
generally accepted
Durability: Good money must be hard-wearing
Portability: Should be easy to carry around
2.8. Market Failure Divisibility: Must be able to divide it into smaller values
Scarcity: Should be limited in supply to create value
Market failure occurs when the market mechanism fails
to allocate
scarce resources efficiently, so social costs are Commercial Banks
greater than
social benefits
Accepting deposits of money and savings
Helping customers make and receive payments
Causes and Consequences of Markets Failure
Making personal and commercial loans
Only goods and services that are profitable to make will Buying and selling shares for customers
be produced Providing insurance
Services such as street lighting won’t be provided as you Operating pension funds
are unable
to separate it Providing financial and tax planning advice
Resources only employed if profitable – people may be Exchanging foreign currencies
left
unemployed without an income
Central Banks
Harmful goods may be produced and sold freely
Producers may ignore environmental impacts Printing notes & minting coins that are legal tender
Monopolies dominate supply of products and charge high Destroying torn notes & worn-out coins
prices Setting interest rates
Lender of last resort: if a bank needs cash in a hurry, they
2.9. Mixed Economic System can
borrow from central bank
Supervising monetary policy: heads of the central bank
Has a private sector & a public sector hold
meetings with officials from other banks to
A government can try to correct market failures in a determine interest rate
and quantity of money in
mixed economic
system economy
It can allocate scarce resources to provide goods and Banker for commercial banks & the government:
services that
people need Government accounts & spending are carried out with
Can introduce laws and regulations to control harmful central bank
activities Helps government to borrow money
Total amount government owes is national debt
Government Intervention Manage international financial system: governments of
different
nations lending each other money
Produce merit goods such as education for the needy
It can provide public goods such as street lighting
Public sector can employ people and welfare benefits can
3.2. Households
be given to the needy
Laws to make goods illegal or high taxes to reduce Influences on Spending, Saving and
Borrowing
consumption Disposable income: amount of income left to spend or
Laws and regulations would protect natural environment save after
direct taxes have been deducted
Monopolies can be broken up or regulated to keep prices Spending: enables a person to buy goods/services to
low satisfy
their needs/wants
Saving: involves delaying consumption
3. Microeconomic Decision As interest rates rise, people may save more
Borrowing: allows a person to increase their spending;

Makers enabling
them to buy goods they cannot afford now
People with low disposable incomes may spend less in
total than
people with high incomes
3.1. Money and Banking But will tend to spend all or most of their income meeting
their
basic needs
Functions of money
Increase in… Spending Saving Borrowing
Medium of exchange: accepted as means of payment Real income ↑ ↑ ↑
Unit of account: for placing a value on goods/services Direct tax ↓ ↓ ↕
Store of value: can save money since it keeps its value
Wealth ↑ ↓ ↑
Standard for deferred payment: borrowers are able to
borrow
money and pay back later Interest rates ↓ ↑ ↓
Availability of saving scheme ↓ ↑ ↓

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Increase in… Spending Saving Borrowing Advantages for Individual Disadvantages for Individual
Availability of credit ↑ ↓ ↑ Individuals must rely on
Employees can produce more
Consumer confidence ↑ ↓ ↑ others to produce goods and
output and reduce business
services they want but cannot
costs
produce themselves
3.3. Workers Many repetitive tasks can
More productive employees now be done by machines,
Entry: young employee will receive low earnings due to
can earn higher wages leading to unemployment of
lack of
work skills and experience; can become an low-skilled workers
apprentice or join a
management training scheme to
become more skilled
Skilled workers: the more skilled a worker is, the more 3.4. Trade Unions
opportunities he has for increasing his earnings; bonuses
will be
given and higher rate of overtime paid An organization of workers formed to promote & protect
End-of-career employees: if workers keep updating skills, the interest
of its members concerning wages, benefits &
they
will continue to have opportunities to increase working conditions
wages however when
they stop this, their demand would
fall & income would diminish,
finally reaching a stop Functions
when retired
Negotiating wages & benefits with employers
Why firms change demand for labour Defending employee rights and jobs
Improving working conditions
Changes in consumer demand for products Improving pay and other benefits, including holiday
Changes in the productivity of labour entitlement,
sick pay and pensions
Changes in price and productivity of capital Encouraging firms to increase worker participation in
Changes in non-wage employment costs business
decision-making
Developing skills of union members, by providing training
Why labour supply might change and
education courses

Changes in net advantages of an occupation Supporting members taking industrial action

Changes in provision and quality of education and
training Types of Trade Unions
Demographic changes
General Unions: represent workers across many different
Factors that Cause Occupational Wage
Differentials occupations
Industrial Unions: represent workers of the same industry
Different abilities and qualifications Craft Unions: represent workers with the same skill
‘Dirty jobs’ and unsociable hours across
different industries
Job satisfaction Non-manual unions/Professional unions: represent
Lack of information about jobs and wages workers in
non-industrial and professional occupations
Labour immobility
Fringe benefits Collective Bargaining

Factors that cause wage differentials in the

same job Process of negotiating wages and other working
conditions between
trade unions and employers
Regional differences in supply and demand of labour A trade union will be in a strong bargaining position to
Length of service negotiate
higher wages and better conditions if:
Local pay agreements It represents most or all of the workers in a firm
Non-monetary agreements Union members provide goods/services that
Discrimination consumers need which
have few alternatives

Specialization Industrial Action

Division of labour: workers concentrate on a few tasks Industrial action is taken when collective bargaining fails
then
exchange their product for other goods/services to
result in an agreement
Specialization: production process broken up into a series Taking industrial action can help a union force employers
of
different tasks to agree
to their demands
Industrial actions:
Advantages for Individual Disadvantages for Individual Overtime ban: workers refuse to work more than their
Employees can make best normal
hours
use of their particular Doing same job or repetitive Work to rule: workers deliberately slow down
talents/skills and can increase tasks is boring and stressful production by
complying with every rule & regulation
them by repeating tasks Go slow: workers deliberately work slowly

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Strike: workers protest outside their workplace to Economy of Scale Diseconomy of Scale
stop
deliveries/non-unionized workers from entering Agglomeration: company
Impact of Trade Unions Technical: larger firms invest takes over or merges with too
in specialized production many other firms producing
Possible Advantages Possible Disadvantages
equipment, highly skilled different products, making it
Could help to bring about Might cause lack of flexibility workers; develop new hard for business owners and
minimum working standards in working practices products managers to co-ordinate all
Could be major problem as activities
Could help keep pay higher
fashions change very quickly Risk-bearing: ability to spread
Could help maintain risk over many investors &
Could lead to some firms
Employment/enhanced job reduce market risks by selling
going out of business
security range of products in different
Could lead to improvement in locations
Workers made redundant
health and safety
Workers will need to pay Integration
union membership fees
Growth often involves integration with other firms
Takeover: a company acquires ownership & control of
3.5. Firms another
company by purchasing its shares
Merger: two or more firms agree to form an entirely new
Size of Firms company
& issue new shares

Number of employees: less than 50 are classed as small Types of Integration

Amount of capital employed: large firms invest a lot in
fixed
assets such as machinery & equipment Horizontal integration: occurs between firms at the same
Market share: relative size of firms compared by stage
of production producing similar products
percentage
share of total market supply/revenue Vertical integration: occurs between firms at different
Organization: large firms may be divided into many stages
of production
departments
&be spread over many locations Forward: taking over firm at later stage of production
Backward: integration is the opposite
Small Firms Lateral integration or conglomerate merger: occurs with
Advantages Disadvantages firms at
same stage of production but different products
Markets cannot raise enough
Size of market is small capital to expand their 3.6. Firms and production
business
Consumers like tailored Demand for “Factors of Production”‎
goods/services
Demand for goods & services by consumers: higher
Governments provide help
demand = more
labour/capital firms will need
Price of labour & capital: higher cost = less labour &
Economies and Diseconomies of Scale capital
demanded
Economy of Scale Diseconomy of Scale Firms may also decide to substitute labour for more
Cost savings due to increased Rising costs because a firm capital and
vice versa
scale of production has become too large Productivity of labour & capital: more output/revenue
Management: larger firms labour &
capital help to produce, more profit they will
must manage so many generate over & above
cost of employing them
Financial: larger firms often Capital-intensive Production: requires heavy capital
different departments in
have access to cheaper investment
to buy assets relative to sales or profits that
different locations, making
sources of finance assets can generate
communication/ decision-
making difficult Labour-intensive Production: main cost is labour; cost is
Marketing: larger firms high
compared to sales or value added by additional
Labour: demotivated workers manpower
employ specialists to buy
lead to decrease in Labour-intensive production method primarily involves
best quality materials in bulk
productivity due to boring, labour,
whereas, capital-intensive methods primarily
at discounted prices& spread
repetitive tasks involve machinery
advertising costs
Productivity & Production

Productivity: the ratio of output to input

Labour Productivity:

lO

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Total Output Survival
Output per Labour =
Number of Labour Social welfare
​

Profit maximisation
Capital Productivity: growth
Total Output Value
Value per Capital =
Value of Capital
​

3.8. Market Structure

Productivity refers to the efficiency of a business whereas Competitive Markets
production refers to output only
Businesses will charge same price, a minimum price they
3.7. Firms’ Costs, Revenue and can charge
without going out of business
Price will be equivalent to the lowest average cost of
Objectives producing
goods
Average cost of production would be same as average
Fixed costs: don’t vary with level of output e.g. interest on revenue for
selling
loans No firm would risk charging more than market price
Variable cost: vary directly with level of output e.g. A business would be a price taker; the market price
electricity
Breakeven: where total revenue = total cost Monopoly Markets
Total revenue: the total receipts a seller can obtain from
Firms with monopolistic powers control at least 25% of
selling goods or services to buyers
the market
share
Average revenue: the revenue generated per unit of
Able to influence price; price makers
output sold
Can restrict competition with artificial barriers to entry &
Average Fixed Cost = F ixedCosts/Output other
pricing strategies
One firm controls entire market supply
Average Variable Cost = Variable Costs/Output May use predatory pricing to force competing firms out
Other firms deterred from competing due to lack of
Total Variable Cost = Variable Costs × Output capital

Total Cost = T otal Variable Cost + T otal F ixed Cost Advantages of Monopolies

Average cost = (T otal Cost)/Output Avoids duplication &wastage of resources

Economics of scale; benefits can be passed to consumers
Total Revenue = P rice P er U nit × Quantity Sold High profits can be used for research &development
Monopolies may use price discrimination which benefits
Profit or Loss = T otal Revenue − T otal Cost the
economically weaker sections of the society
Monopolies can afford to invest in latest technology &
machinery to
be efficient & avoid competition

Disadvantages of Monopolies

May supply less & charge higher prices

May offer less consumer choice and lower quality
products than if
they had to compete with other firms
May have higher production costs because they are
poorly managed
Restrict competition using barriers to entry

Barriers to entry
Natural Artificial
Cost savings from large scale Predatory pricing strategies
production to force smaller firms out
Preventing suppliers from
selling materials &
Lots of capital equipment
components to other firms by
that other firms can’t afford
threatening to switch to rival
suppliers
Large customer base built up Forcing retailers to stock &
over years sell only their product
Objectives of firms

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Natural Artificial working hard & may decide

to migrate
Developed advanced This may slow down economic growth
products or processes that
are protected by patents 4.3. Fiscal Policy
Budget: It is an estimate made by the govt., of income
4. Government & The and
expenditure for a future period

Macroeconomy Reasons for Government Spending

To supply goods and services that are not supplied by the

4.1. Role of Government private
sector, such as defence; merit goods such as
education
As a Producer As an Employer To achieve improvements in the supply-side of the
macro-economy,
like providing subsidies
Produce essential goods & People work directly for the
services e.g. health care & government as civil servants, Reasons to Tax
education e.g. tax collectors
Employees in public sector: To finance public expenditure; building schools and
Supply merit goods Secure employment, and infrastructure
State pension To discourage certain activities; e.g. taxes on cigarette
Money earned by To discourage import of goods; tariffs are import taxes
Supply public goods e.g. road government employees is and can be
levied as a % of value of imports or a set tax
repairs/lights mainly spent in national on each item
economy To redistribute income from the rich to the poor
To achieve other macro-economic objectives
Control natural monopolies;
they may take over Types of
companies providing Description Examples
Taxation
necessities e.g. electricity or
Tax rate rises with
water Progressive
income; higher income = Income tax
Tax
higher tax
4.2. The Macroeconomic Aims of The Tax rate falls with
Regressive Tax income; higher income = VAT
Govt. lower tax
Objectives Proportional Everyone pays same Corporate income
Tax effective tax rate tax
Achieve low and stable rate of inflation in general levels Direct Tax Levied on individuals Capital gains tax
of price Added to price of
Achieve high and stable level of employment; low Indirect Tax Tariffs
commodities
unemployment
Encourage economic growth in national output and
Principles of Tax
income
Encourage trade & secure favourable balance of Equitable
international
transactions Economic
Transparent
Additional objectives:
Convenient
Reduce poverty & inequalities in income & wealth
Reduce pollution &waste; sustainable growth Fiscal Policy

Conflicting Aims It is the use of taxation and government spending to

influence
aggregate demand
Spending more money to stimulate growth can lead to
rising prices
because of increased demand Policy About
If spending is reduced to stop inflation, this will lead to a
Reducing taxes and increasing
fall
in growth
govt. spending to boost
If government tries to create full employment, labour
Expansionary Fiscal Policy demand, so employment and
becomes
increasingly scarce
output rises. May be used to
Employers must compete more strongly to attract labour
reduce recession.
They raise wages, which leads to wage inflation
If the government tries to redistribute income, richer
workers may
feel that they are unfairly penalized for

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Policy About Instrument Effect on macroeconomic aims

Increasing taxes and reducing Include minimum wage laws to
govt. spending to reduce encourage more people into
Contractionary Fiscal Policy Labour Market Regulations
demand. May be used to work, and legislation to restrict
reduce price inflation. the power of trade unions.
Regulations that outlaw unfair
Effects of fiscal policy on govt.
macroeconomic aims trading practices by
Competition Policy
monopolies and other large,
Expansionary fiscal policy can reduce unemployment powerful firms.
Expansionary fiscal policy can increase economic growth
Removing barriers to
Contractionary fiscal policy can reduce high inflation
international trade allow
Monetary Policy Free Trade Agreements countries to trade their goods
and services more freely and
It is the use of interest rates, direct control of the money cheaply
supply
and the exchange rate to influence aggregate Removing old, unnecessary and
demand Deregulation costly rules and regulations on
business activities
Policy About
May be used to reduce price
inflation by increasing 4.5. Economic Growth
interest rates charged by the
Contractionary Monetary Economic growth is when there is an increase in real
central bank. This means
Policy output over
time, i.e. increased GDP & national income
commercial banks will also
raise interest to encourage Important as it increases the standard of living
more savings.
Measurement of Economic Growth
May be used during a
Expansionary Monetary recession & to increase Gross Domestic Product (GDP) is the main measure of
Policy employment by cutting total value
of all the goods and services produced in a
interest rates
given period of time
Effects of monetary policy on govt.
macroeconomic aims
An increase in prices will increase nominal GDP but this is
Expansionary monetary policy can reduce unemployment measured in current dollars thus includes inflations
Expansionary monetary policy can increase economic Nominal
growth Real GDP = × 100
CPI
​

Contractionary monetary policy can reduce high inflation

Real GDP
Real GDP  P er Capita =
4.4. Supply-Side Policies Number of Population
​

Recession
Supply-side policies aim to increase economic growth by
raising
productive potential of economy It is a significant decline in economic activity spread
An increase in the total supply of goods & services will across the
economy, lasting more than a few months,
require
more labour &other resources to be employed normally visible in real
GDP growth, real personal income,
It will reduce market prices & provide more goods & employment, industrial production,
& wholesale-retail
services to
export sales
A recession would cause the economy to produce at a
Instrument Effect on macroeconomic aims point that is
within the PPC
Reducing taxes on profits and
small firms can encourage Causes of Economic Growth
Tax Incentives enterprise. It can also
encourage investments in new Discovery of more natural resources
equipment. Investment in new capital and infrastructure
Technical progress
To reduce production costs and
Increasing the amount and quality of human resources
help firms fund research and
Subsidies/Grants Reallocating resources
development of new
technologies. Consequences of Economic Growth
Teaching new/existing workers
Education and Training new skills to make them more An increase in output can improve living standards of
productive. people

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Higher output and incomes increase government tax Taking claimant count
revenue. This can
increase govt. spending without Labour force survey
increasing tax rates
However, it can increase pollution, lead to depletion of Unemployment Rate  = N umber of  U nemployed 
non-renewable resources and damage the natural
environment Consequences of Unemployment
Personal Economical
Policies to Promote Economic Growth
Loss of income and reduced
Unemployment is a waste of
Expansionary fiscal policy ability to buy goods &
human resources
Expansionary monetary policy services
Supply-side policies Unemployed people de-skill if Fewer goods & services
long out of work produced
Employment and Unemployment Unemployed people may Total output & income in
INDICATOR RECENT TRENDS become depressed & ill economy is lower
Risen as world population Strain on family relationships Government tax revenues
Labour force
has grown & health services also lower
Participation Rate: labour Risen in many countries People in work may have to
force as a proportion of total especially among females as pay more taxes
population of working age it is now socially acceptable Government spending on
Poverty and rising living costs welfare may rise
in developing countries has
forced many women to work Policies to Reduce Unemployment
Employment in services has
Employment by Industry: been growing while Expansionary monetary policy
Number of people employed employment in agriculture Expansionary fiscal policy
in different industrial sectors and other primary sector Increase in quality and quantity of education and training
industries has fallen
Inflation and deflation
Employment Status: Number
Most employees work full-
of full-timers, part-timers or Inflation: general & sustained increase in the level of
time
with temporary contracts prices
of goods/services in an economy over a period of
Part-time employees have time
grown rapidly, especially Deflation: decrease in general price level of goods and
among female employees services
and occurs when the inflation rate falls below 0%
Unemployment: Number of
Tends to rise during Measurement
people registered as being
economic recessions
without work Base year: first year with which the prices of subsequent
Almost half the unemployed years
are compared
are young unskilled workers Inflation rate: percentage change in annual CPI
Relatively stable in the recent
Unemployment Rate: Weighted Average Price in Year x
years but did increase in CP I in Y ear x =
Unemployment as a Weighted Avereage Price in Base Yea
2008 during a global financial
proportion of labour force
crisis
Causes of Inflation

Types of Unemployment Demand-pull Inflation: caused by total demand rising

faster than
total output, causing market prices to rise
Cyclical Unemployment: occurs during recession due to Cost-push Inflation: cost of production increases, so firms
falling
consumer demand & incomes try
to pass cost to consumers through higher prices
Firms reduce output & lay off workers Causes of Deflation
Structural Unemployment: caused by changes in Fall in the money supply
industrial
structure of an economy Decline in confidence
Entire industries close due to a permanent fall in Lower production costs
demand for
their goods/services Technological advances
Frictional Unemployment: refers to short-lived Increase in unemployment
unemployment;
e.g. moving to different job Increase in the real value of debt
Seasonal Unemployment: occurs because consumer Policies to Control Inflation &
Deflation
demand for
goods/services changes with seasons; e.g. no Contractionary fiscal and monetary policy for inflation
job for ski instructor
when/where there is no ice Expansionary fiscal and monetary policy for deflation
Measurement of Unemployment

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Supply-side policy can increase aggregate supply and Causes of Poverty

thus control
both inflation and deflation
Unemployment
Low wages
5. Economic Development Illness
Age

5.1. Living Standards Alleviating Poverty

Real Gross Domestic Product (GDP) Per

Capita Governments will use policies to help alleviate poverty in
their
country, or in another country:
GDP is the main measure of total value of all the goods
and
services produced in a given period of time What are the
Policy Why is it needed?
An increase in prices will increase nominal GDP but this is problems?
measured in current dollars thus includes inflations Poor farming Free food supplies
Food aid methods produce can force farmers
Nominal insufficient food out of business
Real GDP = × 100
CPI
​

LEDCs lack capital

Real GDP to invest in an Loans have to be
Real GDP  P er Capita = Financial aid industrial base, repaid sometimes
Number of Population
​

modern machinery with interest

If economy has an extremely rich person & everyone else and infrastructure
is poor, it
brings up the Real GDP per capita LEDCs lack access Most people lack
Human Development Index (HDI) to modern skill to use modern
machinery, technology; instead
Used by the United Nations to make comparisons of
Tech aid equipment and of using machinery,
human & economic
development in different countries
knowledge of more jobs are
Combines three different measures for each country
modern production needed to employ
Standard of living, measured by average incomes
methods people
Being educated, measured by adult literacy rate
Living a long healthy life, measured by life expectancy Relieving LEDCs of May encourage
Single index with a value between 0 and 1
debt will allow LEDCs to borrow
Greater than 0.8 = high human development. Less than them to use money more money or
Debt relief
0.5 = low human
development for economic money may be
development misused by corrupt
Reasons For Low/Varying Economic
Development instead governments
LEDCs may have
Over-dependence on agriculture Removing overseas natural supplies, MEDCs will force
Domination on international trade by developed nations trade barriers can be exported down their price
Lack of capital for money
Insufficient investment in education, skills & healthcare
Governments in
Low levels of investment in infrastructure Advice not enough;
LEDCs lack
Lack of efficient production and distribution systems Economic Advice LEDCs need more
economic
High population growth capital & stability
knowledge
Other factors like a corrupt govt. or war

5.2. Poverty 5.3. Population

Factors that affect population growth
Absolute poverty Relative poverty
Number of people living Birth rate
below a certain income Measures extent to which a Death rate
threshold or number of household’s financial Net migration
households unable to afford resources falls below an Immigration & emigration
certain basic goods & average income level.
services Reasons for different population growth
rates
Occurs when people are poor Varying Birth Rates
Occurs when people do not relative to other people in the
LEDCs have:
have access to basic food, country; unable to participate
Large families to help produce food & work for money
clothing and shelter fully in normal activities of
High infant mortality rate
society they live in
Low supply of contraceptives/forbidden to use them
In MEDCs, people marry later in life so birth rates fall

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Varying Death Rates comparative advantage over

other regions or countries
A country has an absolute advantage if it can produce a
MEDCs have: given
amount of a good or service with far less resources
Better food, housing, hygiene &high life expectancy and therefore at
an absolute cost advantage over any
Fatty foods, smoking and lack of exercise has country
increased rates of
diabetes, cancer & heart disease A country has a comparative advantage in the production
Improved medicine & healthcare; prevents many of a
good or service if it can produce it at a lower
diseases &
increased life expectancy opportunity cost
relative to other countries
LEDCS have:
Widespread diseases which lower life expectancy Advantages of Specialisation
Natural disasters, famines, wars
Population Structure Greater efficiency
The Demographic Transition Model: Consumer benefits from lower prices, greater variety and
quality of
goods & services
Opportunities for competitive sectors
Gains from trade

Disadvantages of Specialisation

Threats to uncompetitive sectors

Risk of over-specialization
Dependency on other countries

Globalisation, Free Trade and

Protection

Globalisation: The process by which businesses or other

organizations develop international influence or start
operating on
an international scale.

Multinationals
This shows that population growth occurs in stages
Operates in more than one country
Population Pyramid: a type of graph that shows the age
Some of the largest companies in the world
and sex
structure of the country
Governments often compete to attract multinationals
Can provide jobs, incomes, business knowledge, skills
and
technologies which can help other firms
Pay taxes on their profits to boost government
revenue
Headquarters are based in one country

Advantages Disadvantages
Stage 1: high birth rate; high death rates; short life Can reach many more
expectancy;
less dependency (since there are few old Can switch profits to other
consumers globally & sell far
people and children must
work anyway) countries to avoid paying
more than other types of
Stage 2: high birth rate; fall in death rate; slightly longer taxes on profits
businesses
life
expectancy; more dependency due to more elderly Can minimize transport costs
Stage 3: declining birth rate; declining g death rate; longer
by locating plants in different Can force smaller local firms
life
expectancy; more dependency countries to be near raw out of business
Stage 4: low birth rate; low death rate; highest
materials or big markets
dependency ratio;
longest life expectancy
Minimize wage costs by
May exploit workers in low
locating in countries with low
wage economies
6. International Trade & wages
May use their power to get
Globalisation Can enjoy low average generous subsidies & tax
production costs advantages from the
government
6.1. International Specialisation
Benefits of Free Trade
Specialization at a National Level For Consumers To Producers To Governments
Countries specialize in production of those goods and Exports increase
Cheaper products Larger markets
services in
which they have an absolute advantage or jobs, GDP, incomes

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For Consumers To Producers To Governments An appreciation in the value of currency means its
But imports take exchange rate
against other countries has risen
Better products Economies of scale A depreciation in the value of currency means its
them away
exchange rate
against other countries has fallen
More produced,
Workers more
lower average per Exchange Rate Fluctuations
productive
unit cost
International trade Demand for a currency comes from foreign money
increases number flowing into the
country. If demand rises, the currency’s
International Trade value will rise in relation
to the other currency
of products you
make Supply of the currency comes from domestic money
flowing out of the
country. If supply rises, the currency’s
Increased
value will fall
competition from
international
A currency might depreciate A currency might appreciate
companies
because: because:
Lower Prices –
Demand for other currencies
Better Qualities There is a balance of
rises as domestic consumers
payments surplus
buy more imports
Trade Protection
Demand for the currency
There is a balance of
Tariffs: tax on imports to raise its price and make them rises as overseas consumers
payments deficit
more
expensive than local goods to stop people buying buy more exports
them Interest rates fall relative to Interest rates rise relative to
Subsidies: grant given to an industry by government so other countries other countries
industry
will lower its prices encouraging consumers to People move their savings to This attracts savings from
stop buying foreign
imports by making home-produced bank accounts overseas overseas residents
goods cheaper Inflation rises relative to Inflation is lower than in
Quota: limit on number of imports allowed into country other countries. This makes other countries so exports
per year,
reducing quantity of imports without changing exports more expensive and will be cheaper and overseas
their prices demand for them, and the demand for them, and the
Embargo: complete ban on imports of certain goods. An currency needed to buy currency required to pay for
embargo
may be used to stop imports of drugs them, falls them, will rise
Excessive quality standards and bureaucracy
People speculate that the People speculate that the
Protection currency will fall in value and currency will rise in value and
Arguments For possible Consequences they sell their holdings of the they buy more of the
currency currency
Protection of a young Other countries will retaliate
industry with trade barriers
Consequences of Exchange Rate
Fluctuations
It protects inefficient
To prevent unemployment
domestic firms An appreciation of the currency will make exports more
The loss of domestic jobs expensive and
imports will be cheaper, vice versa
To prevent dumping from overseas competitions If PED<1 for exports, an exchange rate appreciation will
will only be temporary improve a
current account deficit
Trade barriers have If PED<1 for imports, an exchange rate depreciation will
Because other countries use worsen a
current account deficit
increased the gap between
barriers to trade
rich and poor countries
Types of Exchange Rate
To prevent over-
specialization Floating exchange rate: it is determined by the forces of
market
supply and demand
Managed floating exchange rate: it is influenced by state
6.2. Foreign Exchange Rates intervention
Fixed exchange rate: it is set by the government and
Exchange rate is the price of a country’s currency in terms
maintained
by the central bank buying and selling the
of
another country’s currency
currency and changing
interest rates
Most countries have a floating exchange rate, which
means no set
value for their currency compared with any Floating Exchange Rate
other currency ADVANTAGES DISADVANTAGES
Currency is a commodity thus the value of a currency is
Automatic stabiliser Uncertainty
totally
dependent on demand and supply of that currency
in the foreign
exchange market. Frees internal policy Lack of investment

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ADVANTAGES DISADVANTAGES Balance of Payments Deficit Balance of Payments Surplus

Management Speculation Money flowing out greater Money flowing in greater
Flexibility Lack of investment than in. than out.
Can avoid inflation Current + Capital + Financial Current + Capital + Financial
is negative. is positive.
Lower reserves

Trade Deficit
Fixed Exchange Rate
ADVANTAGES DISADVANTAGES Means people are buying more imports and may be
Elimination of uncertainty Foreign exchange reserves spending less on
products made by domestic firms
and risks needed Deficit may be a symptom of a declining industrial base
Speculation deterred Internal objectives sacrificed Foreign exchange for the national currency is likely to fall
Increases prices of imports and cause imported inflation
Prevents currency Restricts international
depreciation competition Trade Surplus
Attracts foreign direct
investment Means people are buying less imports and may be
spending more on
products made by domestic firms
Surplus may the result of economic growth
6.3. Current Account Balance of Foreign exchange for the national currency is likely to rise
Payments Increases prices of exports

Policies to achieve balance of payments

stability
Structure
Supply-side policy will increase domestic production and
Visible trade account: the difference between the export
exports
which can correct a current account deficit
revenue
and import spending on physical goods, e.g.
Expansionary fiscal policy, by reducing taxes and
cars, washing machines
increasing
government expenditure can increase total
Invisible trade account: measures the difference between
demand for imports to fix
current account surplus, vice
export
revenue from and import spending on services,
versa
e.g. banking,
insurance and tourism
Contractionary monetary policy can correct a current
Income flows: e.g. interest, profit and dividends flowing in
account
deficit, vice versa
and
out of the country
Current transfers: e.g. grants for overseas aid.

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