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UPDATED TO 2020-22 SYLLABUS

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

Could have earned interest by leaving $10,000 dollars

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

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
produce
goods/services (e.g. tractor)
Enterprise: the skills and willingness to take the risks
required to organize productive activities
Entrepreneurs organize and combine resources in firms
to produce
goods and services
Durable consumer goods last long while (e.g. furniture)
non-durable
consumer goods (e.g. food) do not
Capital goods and semi-finished goods or components
are used up in
production

1.3. Opportunity Cost 2. Allocation of Resources

Opportunity cost is the cost of choosing between
alternative uses of
resources 2.1. Microeconomics and
Choosing one use will always mean giving up the Macroeconomics
opportunity to use
resources in another way, & the loss of
goods & services they might
have produced instead
Microeconomics
Problem of resource allocation is choosing how best to
use limited
resources to satisfy as many needs and wants It is the study of particular markets, and segments of the
as possible and
maximize economic welfare economy.
It looks at issues such as consumer behaviour,
Economics aims to find most efficient resource allocation individual labour
markets, and the theory of firms.
Example 1: A person invests $10,000 in a stock

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It involves supply and demand in individual markets,

Individual
consumer behaviour, and individual labour
markets

Macroeconomics

Study of the whole economy. It looks at ‘aggregate’

variables, such
as aggregate demand, national output and
inflation.
Involves decisions made by the government regarding, for
example,
policies

2.2. The role of markets in allocating

resources Higher price of good = less people demand that good, hence,
demand is inversely related to price
The Market System
1
Price ∝
Demand
​

A market economy is an economic system in which

economic decisions
and the pricing of goods and services Factors that affect demand
are guided by the interactions
of supply and demand- the Price
market mechanism Consumer tastes/preferences
Consumer Income
 
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)
Key Resources Allocation Decisions
Consumer population (population increase = demand
The basic economic problem of scarcity creates three key increase)
The individual demand is the demand of one individual or
questions
firm
What to produce? The market demand represents the aggregate of all
How to produce? individual
demands
For whom to produce?

 
2.4. Supply
Supply represents how much the market can offer
Introduction to the Price mechanism

It aids the resource allocation decision making process.

The
decision is made at the equilibrium point where
supply and demand
meet

2.3. Demand
Demand refers to how much of a product or service is
desired by
buyers

Higher price of good = higher quantity supplied, hence

quantity is directly proportional to price

Price ∝ Quantity supplied
Factors that affect supply
Cost of factors of production

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Prices of other goods/services

2.5. Price Elasticity of Demand
Global factors
Technology advances Definition: The responsiveness of demand to a change in
Business optimism/expectations
price
The individual supply is the supply of an individual
producer Inelastic Demand Elastic Demand
The market supply is the aggregate of the supply of all
PED lower than 1 PED greater than 1
firms in
the market
The necessity of the product
The necessity of the product
Price Determination is high – it is either essential
is relatively low
Market Equilibrium or habitual
A change in price has little
When supply & demand are equal the economy is said to Demand would respond
effect on the change in
be at
equilibrium quickly and more drastically
demand

% change in quantity demanded
PED =
% change in price
​

When demand is price inelastic:

An increase in price would raise revenue
When demand is price elastic:
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
Market Disequilibrium The period of time
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

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

Price Changes
Causes of Price Changes

A change in 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
An inward shift of the demand curve will decrease prices
PES =
% change in price
​

and vice
versa

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Factors that affect PES: A government can try to correct market failures in a
Time mixed economic
system
Availability of resources It can allocate scarce resources to provide goods and
Supply available to meet demand services that
people need
Spare production capacity available Can introduce laws and regulations to control harmful
Factor substitution available activities

Government Intervention
2.7. Market Economic System
Produce merit goods such as education for the needy
Has a private sector only It can provide public goods such as street lighting
They produce a wide variety of goods and services if it is Public sector can employ people and welfare benefits can
profitable to do so but only for those consumers that are be given to the needy
willing
and able to pay for them Laws to make goods illegal or high taxes to reduce
Market failures can cause scarce resources to be consumption
allocated to uses
that are wasteful, inefficient or even Laws and regulations would protect natural environment
harmful to people and the
environment Monopolies can be broken up or regulated to keep prices
low
ADVANTAGES DISADVANTAGES
Wide variety of
goods/services
Serious market failure
3. Microeconomic Decision
Profit motive encourages
development of new and Only profitable goods Makers
more efficient products & provided
processes 3.1. Money and Banking
Quick response to change in Firms will only supply
consumers tastes and products to consumers with Functions of money
demand the ability to pay
Medium of exchange: accepted as means of payment
Resources will only be
No taxes on incomes and Unit of account: for placing a value on goods/services
provided if it is profitable to
wealth or goods and services Store of value: can save money since it keeps its value
do so
Standard for deferred payment: borrowers are able to
Harmful goods may be borrow
money and pay back later
available to buy readily Characteristics of money
Acceptability: Anything can be used as money as long as
2.8. Market Failure it’s
generally accepted
Durability: Good money must be hard-wearing
Market failure occurs when the market mechanism fails Portability: Should be easy to carry around
to allocate
scarce resources efficiently, so social costs are Divisibility: Must be able to divide it into smaller values
greater than
social benefits Scarcity: Should be limited in supply to create value

Commercial Banks
Causes and Consequences of Markets Failure
Accepting deposits of money and savings
Only goods and services that are profitable to make will Helping customers make and receive payments
be produced
Making personal and commercial loans
Public goods and services such as street lighting won’t be
Buying and selling shares for customers
provided as it is not possible for the private sector to earn
Providing insurance
profits from them Operating pension funds
Resources only employed if profitable – people may be
Providing financial and tax planning advice
left
unemployed without an income
Exchanging foreign currencies
Harmful goods may be produced and sold freely
Producers may ignore environmental impacts Central Banks
Monopolies dominate supply of products and charge high
prices Printing notes & minting coins that are legal tender
Destroying torn notes & worn-out coins
Setting interest rates
2.9. Mixed Economic System Lender of last resort: if a bank needs cash in a hurry, they
can
borrow from central bank
Has a private sector & a public sector

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Supervising monetary policy: heads of the central bank Changes in price and productivity of capital
hold
meetings with officials from other banks to Changes in non-wage employment costs
determine interest rate
and quantity of money in
economy Why labour supply might change
Banker for commercial banks & the government:
Changes in net advantages of an occupation
Government accounts & spending are carried out with
Changes in provision and quality of education and training
central bank
Demographic changes
Helps government to borrow money
Total amount government owes is national debt Factors that Cause Occupational Wage
Differentials
Manage international financial system: governments of
different
nations lending each other money Different abilities and qualifications
‘Dirty jobs’ and unsociable hours
Job satisfaction
3.2. Households Lack of information about jobs and wages
Labour immobility
Influences on Spending, Saving and
Borrowing
Fringe benefits
Disposable income: amount of income left to spend or
Factors that cause wage differentials in the
same job
save after
direct taxes have been deducted
Spending: enables a person to buy goods/services to Regional differences in supply and demand of labour
satisfy
their needs/wants Length of service
Saving: involves delaying consumption Local pay agreements
As interest rates rise, people may save more Non-monetary agreements
Borrowing: allows a person to increase their spending; Discrimination
enabling
them to buy goods they cannot afford now
People with low disposable incomes may spend less in Specialization
total than
people with high incomes
But will tend to spend all or most of their income meeting Division of labour: workers concentrate on a few tasks
their
basic needs then
exchange their product for other goods/services
Specialization: production process broken up into a series
Increase in… Spending Saving Borrowing of
different tasks
Real income ↑ ↑ ↑
Advantages for Individual Disadvantages for Individual
Direct tax ↓ ↓ ↕
Employees can make best use
Wealth ↑ ↓ ↑ of their particular Doing same job or repetitive
Interest rates ↓ ↑ ↓ talents/skills and can increase tasks is boring and stressful
Availability of saving scheme ↓ ↑ ↓ them by repeating tasks
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 now
More productive employees be done by machines, leading
Entry: young employee will receive low earnings due to
can earn higher wages to unemployment of low-
lack of
work skills and experience; can become an
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 wages working conditions
however when
they stop this, their demand would fall &
income would diminish,
finally reaching a stop when Functions
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

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Encouraging firms to increase worker participation in Size of Firms

business
decision-making
Developing skills of union members, by providing training Number of employees: less than 50 are classified as small
and
education courses Amount of capital employed: large firms invest a lot in
fixed
assets such as machinery & equipment
Supporting members taking industrial action Market share: relative size of firms compared by
percentage
share of total market supply/revenue
Types of Trade Unions Organization: large firms may be divided into many
departments & be spread over many locations
General Unions: represent workers across many different
occupations Small Firms
Industrial Unions: represent workers of the same industry
Advantages Disadvantages
Craft Unions: represent workers with the same skill
Markets cannot raise enough
across
different industries
Size of market is small capital to expand their
Non-manual unions/Professional unions: represent
business
workers in
non-industrial and professional occupations
Consumers like tailored
Collective Bargaining goods/services
Governments provide help
Process of negotiating wages and other working
conditions between
trade unions and employers
A trade union will be in a strong bargaining position to Types of Economies and Diseconomies of Scale
negotiate
higher wages and better conditions if: Economy of Scale Diseconomy of Scale
It represents most or all of the workers in a firm Cost savings due to increased Rising costs because a firm
Union members provide goods/services that scale of production has become too large
consumers need which
have few alternatives Management: larger firms
must manage so many
Industrial Action Financial: larger firms often
different departments in
have access to cheaper
Industrial action is taken when collective bargaining fails different locations, making
sources of finance
to
result in an agreement communication/ decision-
Taking industrial action can help a union force employers making difficult
to agree
to their demands Marketing/Selling: fixed costs
Industrial actions: such as advertising and Labour: demotivated workers
Overtime ban: workers refuse to work more than their transportation are spread lead to decrease in
normal
hours across a larger number of productivity due to boring,
Work to rule: workers deliberately slow down products, lowering per unit repetitive tasks
production by
complying with every rule & regulation cost
Go slow: workers deliberately work slowly Excess Agglomeration:
Strike: workers protest outside their workplace to stop company takes over or
deliveries/non-unionized workers from entering Technical: larger firms invest
merges with too many other
in specialized production
firms producing different
Impact of Trade Unions equipment, highly skilled
products, making it hard for
Possible Advantages Possible Disadvantages workers; develop new
business owners and
Could help to bring about Might cause lack of flexibility products
managers to co-ordinate all
minimum working standards in working practices activities
Could be major problem as Risk-bearing: ability to spread
Could help keep pay higher
fashions change very quickly risk over many investors &
Could help maintain reduce market risks by selling
Could lead to some firms
Employment/enhanced job range of products in different
going out of business
security locations
Could lead to improvement in Purchasing: when raw
Workers made redundant
health and safety materials are bought in bulk,
Workers will need to pay suppliers may provide bulk
union membership fees discounts, lowering per unit
cost of production

3.5. Firms Integration

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Growth often involves integration with other firms Fixed costs: don’t vary with level of output e.g. interest on
Takeover: a company acquires ownership & control of loans
another
company by purchasing its shares Variable cost: vary directly with level of output e.g.
Merger: two or more firms agree to form an entirely new electricity
company
& issue new shares Breakeven: where total revenue = total cost
Total revenue: the total receipts a seller can obtain from
Types of Integration selling goods or services to buyers
Average revenue: the revenue generated per unit of
Horizontal integration: occurs between firms at the same
output sold
stage
of production producing similar products
Vertical integration: occurs between firms at different Average Fixed Cost = F ixedC osts/Output
stages
of production
Forward: taking over firm at later stage of production Average Variable Cost = Variable C osts/Output
Backward: integration is the opposite
Lateral integration or conglomerate merger: occurs with Total Variable Cost = Variable C osts × Output
firms at
same stage of production but different products
Total Cost = T otal Variable C ost + T otal F ixed C ost
3.6. Firms and production Average cost = (T otal C ost)/Output
Demand for “Factors of Production”‎ Total Revenue = P rice P er U nit × Quantity Sold
Demand for goods & services by consumers: higher Profit or Loss = T otal Revenue − T otal C ost
demand = more
labour/capital firms will need
Price of labour & capital: higher cost = less labour &
capital
demanded
Firms may also decide to substitute labour for more
capital and
vice versa
Productivity of labour & capital: more output/revenue
labour &
capital help to produce, more profit they will
generate over & above
cost of employing them
Capital-intensive Production: requires heavy capital
investment
to buy assets relative to sales or profits that
assets can generate

Labour-intensive Production: main cost is labour; cost is

high
compared to sales or value added by additional
manpower
Labour-intensive production method primarily involves
labour,
whereas, capital-intensive methods primarily
involve machinery

Productivity & Production

Productivity: the ratio of output to input

Labour Productivity:

Total Output Objectives of firms

Output per Labour =
Number of Labour
​

Survival
Capital Productivity: Social welfare
Profit maximisation
Total Output Value
Value per C apital = growth
Value of Capital
​

Productivity refers to the efficiency of a business whereas 3.8. Market Structure

production refers to output only
Competitive Markets
3.7. Firms’ Costs, Revenue and
Businesses will charge same price, a minimum price they
Objectives can charge
without going out of business
Price will be equivalent to the lowest average cost of
producing
goods

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Average cost of production would be same as average As a Producer As an Employer

revenue for
selling Produce essential goods & People work directly for the
No firm would risk charging more than market price services e.g. health care & government as civil servants,
A business would be a price taker; the market price education e.g. tax collectors
Monopoly Markets Employees in public sector:
Supply merit goods Secure employment, and
Firms with monopolistic powers control at least 25% of the State pension
market
share Money earned by government
Able to influence price; price makers Supply public goods e.g. road
employees is mainly spent in
Can restrict competition with artificial barriers to entry & repairs/lights
national economy
other
pricing strategies
Control natural monopolies;
One firm controls entire market supply
they may take over
May use predatory pricing to force competing firms out
companies providing
Other firms deterred from competing due to lack of
necessities e.g. electricity or
capital
water
Advantages of Monopolies

Avoids duplication &wastage of resources 4.2. The Macroeconomic Aims of The

Economics of scale; benefits can be passed to consumers Govt.
High profits can be used for research &development
Monopolies may use price discrimination which benefits Objectives
the
economically weaker sections of the society
Monopolies can afford to invest in latest technology & Achieve low and stable rate of inflation in general levels of
machinery to
be efficient & avoid competition price
Achieve high and stable level of employment; low
Disadvantages of Monopolies unemployment
Encourage economic growth in national output and
May supply less & charge higher prices
income
May offer less consumer choice and lower quality
Encourage trade & secure favourable balance of
products than if
they had to compete with other firms
international
transactions
May have higher production costs because they are
poorly managed Additional objectives:
Restrict competition using barriers to entry Reduce poverty & inequalities in income & wealth
Reduce pollution &waste; sustainable growth
Barriers to entry
Natural Artificial Conflicting Aims
Cost savings from large scale Predatory pricing strategies
Spending more money to stimulate growth can lead to
production to force smaller firms out
rising prices
because of increased demand
Preventing suppliers from If spending is reduced to stop inflation, this will lead to a
selling materials & fall
in growth
Lots of capital equipment that
components to other firms by If government tries to create full employment, labour
other firms can’t afford
threatening to switch to rival becomes
increasingly scarce
suppliers Employers must compete more strongly to attract labour
Large customer base built up Forcing retailers to stock & They raise wages, which leads to wage inflation
over years sell only their product If the government tries to redistribute income, richer
Developed advanced workers may
feel that they are unfairly penalized for
products or processes that working hard & may decide
to migrate
are protected by patents This may slow down economic growth

4.3. Fiscal Policy

4. Government & The
Budget: It is an estimate made by the govt., of income and
Macroeconomy expenditure for a future period

Reasons for Government Spending

4.1. Role of Government

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To supply goods and services that are not supplied by the Monetary Policy
private
sector, such as defence; merit goods such as
education It is the use of interest rates, direct control of the money
To achieve improvements in the supply-side of the macro- supply
and the exchange rate to influence aggregate
economy,
like providing subsidies demand

Reasons to Tax Policy About

May be used to reduce price
To finance public expenditure; building schools and inflation by increasing interest
infrastructure Contractionary Monetary rates charged by the central
To discourage certain activities; e.g. taxes on cigarette Policy bank. This means commercial
To discourage import of goods; tariffs are import taxes banks will also raise interest
and can be
levied as a % of value of imports or a set tax to encourage more savings.
on each item
May be used during a
To redistribute income from the rich to the poor
recession & to increase
To achieve other macro-economic objectives Expansionary Monetary Policy
employment by cutting
Types of interest rates
Description Examples
Taxation
Tax rate rises with Effects of monetary policy on govt.
macroeconomic aims
Progressive
income; higher income = Income tax Expansionary monetary policy can reduce unemployment
Tax
higher tax Expansionary monetary policy can increase economic
Tax rate falls with income; growth
Regressive Tax VAT
higher income = lower tax Contractionary monetary policy can reduce high inflation
Proportional Everyone pays same Corporate income
Tax effective tax rate tax 4.4. Supply-Side Policies
Direct Tax Levied on individuals Capital gains tax
Added to price of Supply-side policies aim to increase economic growth by
Indirect Tax Tariffs raising
productive potential of economy
commodities
An increase in the total supply of goods & services will
Principles of Tax require
more labour &other resources to be employed
It will reduce market prices & provide more goods &
Equitable services to
export
Economic
Transparent Instrument Effect on macroeconomic aims
Convenient Reducing taxes on profits and
small firms can encourage
Fiscal Policy Tax Incentives enterprise. It can also
It is the use of taxation and government spending to encourage investments in new
influence
aggregate demand equipment.
To reduce production costs and
Policy About help firms fund research and
Subsidies/Grants
Reducing taxes and increasing development of new
govt. spending to boost technologies.
Expansionary Fiscal Policy demand, so employment and Teaching new/existing workers
output rises. May be used to Education and Training new skills to make them more
reduce recession. productive.
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 Competition Policy trading practices by monopolies
and other large, powerful firms.
Expansionary fiscal policy can reduce unemployment
Expansionary fiscal policy can increase economic growth
Contractionary fiscal policy can reduce high inflation

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Instrument Effect on macroeconomic aims Policies to Promote Economic Growth

Removing barriers to Expansionary fiscal policy
international trade allow Expansionary monetary policy
Free Trade Agreements countries to trade their goods Supply-side policies
and services more freely and
cheaply Employment and Unemployment
Removing old, unnecessary and INDICATOR RECENT TRENDS
Deregulation costly rules and regulations on Risen as world population has
Labour force
business activities grown
Participation Rate: labour Risen in many countries
4.5. Economic Growth force as a proportion of total especially among females as
population of working age it is now socially acceptable
Economic growth is when there is an increase in real Poverty and rising living costs
output over
time, i.e. increased GDP & national income in developing countries has
Important as it increases the standard of living forced many women to work
Employment in services has
Measurement of Economic Growth
Employment by Industry: been growing while
Gross Domestic Product (GDP) is the main measure of Number of people employed employment in agriculture
total value
of all the goods and services produced in a in different industrial sectors and other primary sector
industries has fallen
given period of time
Employment Status: Number
Most employees work full-
An increase in prices will increase nominal GDP but this is of full-timers, part-timers or
time
measured in current dollars thus includes inflations with temporary contracts
Part-time employees have
Nominal grown rapidly, especially
Real GDP = × 100
CPI among female employees
​

Real GDP Unemployment: Number of

Real GDP  P er C apita = Tends to rise during economic
Number of Population people registered as being
​

recessions
without work
Recession
Almost half the unemployed
It is a significant decline in economic activity spread are young unskilled workers
across the
economy, lasting more than a few months, Unemployment Rate: Relatively stable in the recent
normally visible in real
GDP growth, real personal income, Unemployment as a years but did increase in 2008
employment, industrial production,
& wholesale-retail proportion of labour force during a global financial crisis
sales
A recession would cause the economy to produce at a Types of Unemployment
point that is
within the PPC
Cyclical Unemployment: occurs during recession due to
Causes of Economic Growth falling
consumer demand & incomes
Firms reduce output & lay off workers
Discovery of more natural resources Structural Unemployment: caused by changes in
Investment in new capital and infrastructure industrial
structure of an economy
Technical progress Entire industries close due to a permanent fall in
Increasing the amount and quality of human resources demand for
their goods/services
Reallocating resources Frictional Unemployment: refers to short-lived
unemployment;
e.g. moving to different job
Consequences of Economic Growth
Seasonal Unemployment: occurs because consumer
An increase in output can improve living standards of demand for
goods/services changes with seasons; e.g. no
people job for ski instructor
when/where there is no ice
Higher output and incomes increase government tax
Measurement of Unemployment
revenue. This can
increase govt. spending without
increasing tax rates Taking claimant count
However, it can increase pollution, lead to depletion of Labour force survey
non-renewable resources and damage the natural
environment Unemployment Rate  = N umber of U nemploye

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Consequences of Unemployment
5.1. Living Standards
Personal Economical
Loss of income and reduced Unemployment is a waste of Real Gross Domestic Product (GDP) Per
Capita
ability to buy goods & services human resources
GDP is the main measure of total value of all the goods
Unemployed people de-skill if Fewer goods & services
and
services produced in a given period of time
long out of work produced
An increase in prices will increase nominal GDP but this is
Unemployed people may Total output & income in measured in current dollars thus includes inflations
become depressed & ill economy is lower
Strain on family relationships Government tax revenues Nominal
Real GDP = × 100
& health services also lower CPI
​

People in work may have to Real GDP

pay more taxes Real GDP  P er C apita =
Number of Population
​

Government spending on
welfare may rise If economy has an extremely rich person & everyone else
is poor, it
brings up the Real GDP per capita
Human Development Index (HDI)
Policies to Reduce Unemployment

Expansionary monetary policy Used by the United Nations to make comparisons of

human & economic
development in different countries
Expansionary fiscal policy
Combines three different measures for each country
Increase in quality and quantity of education and training
Standard of living, measured by average incomes
Inflation and deflation Being educated, measured by adult literacy rate
Living a long healthy life, measured by life expectancy
Inflation: general & sustained increase in the level of Single index with a value between 0 and 1
prices
of goods/services in an economy over a period of Greater than 0.8 = high human development. Less than
time 0.5 = low human
development
Deflation: decrease in general price level of goods and
services
and occurs when the inflation rate falls below 0% Reasons For Low/Varying Economic
Development

Measurement Over-dependence on agriculture

Domination on international trade by developed nations
Base year: first year with which the prices of subsequent Lack of capital
years
are compared Insufficient investment in education, skills & healthcare
Inflation rate: percentage change in annual CPI Low levels of investment in infrastructure
Lack of efficient production and distribution systems
Weighted Average Price in Year x
CP I  in Y ear x = ×High
100 population growth
Weighted Avereage Price in Base Year
​

Other factors like a corrupt govt. or war

Causes of Inflation
5.2. Poverty
Demand-pull Inflation: caused by total demand rising
faster than
total output, causing market prices to rise
Absolute poverty Relative poverty
Cost-push Inflation: cost of production increases, so firms
try
to pass cost to consumers through higher prices Number of people living
Causes of Deflation below a certain income Measures extent to which a
Fall in the money supply threshold or number of household’s financial
Decline in confidence households unable to afford resources falls below an
Lower production costs certain basic goods & average income level.
Technological advances services
Increase in unemployment Occurs when people are poor
Increase in the real value of debt Occurs when people do not relative to other people in the
Policies to Control Inflation &
Deflation have access to basic food, country; unable to participate
Contractionary fiscal and monetary policy for inflation clothing and shelter fully in normal activities of
Expansionary fiscal and monetary policy for deflation society they live in
Supply-side policy can increase aggregate supply and
thus control
both inflation and deflation Causes of Poverty

Unemployment
5. Economic Development Low wages

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Illness Varying Death Rates

Age
MEDCs have:
Alleviating Poverty Better food, housing, hygiene &high life expectancy
Fatty foods, smoking and lack of exercise has
Governments will use policies to help alleviate poverty in increased rates of
diabetes, cancer & heart disease
their
country, or in another country: Improved medicine & healthcare; prevents many
diseases &
increased life expectancy
What are the
Policy Why is it needed? LEDCS have:
problems?
Widespread diseases which lower life expectancy
Poor farming Free food supplies Natural disasters, famines, wars
Food aid methods produce can force farmers Population Structure
insufficient food out of business The Demographic Transition Model:
LEDCs lack capital
to invest in an Loans have to be
Financial aid industrial base, repaid sometimes
modern machinery with interest
and infrastructure
LEDCs lack access Most people lack
to modern skill to use modern
machinery, technology; instead
Tech aid equipment and of using machinery,
knowledge of more jobs are
modern production needed to employ
methods people
Relieving LEDCs of May encourage
debt will allow them LEDCs to borrow
to use money for more money or
Debt relief This shows that population growth occurs in stages
economic money may be
Population Pyramid: a type of graph that shows the age
development misused by corrupt
and sex
structure of the country
instead governments
LEDCs may have
Removing overseas natural supplies, MEDCs will force
trade barriers can be exported for down their price
money
Governments in
Advice not enough;
LEDCs lack
Economic Advice LEDCs need more
economic Stage 1: high birth rate; high death rates; short life
capital & stability
knowledge expectancy;
less dependency (since there are few old
people and children must
work anyway)
5.3. Population Stage 2: high birth rate; fall in death rate; slightly longer
life
expectancy; more dependency due to more elderly
Factors that affect population growth Stage 3: declining birth rate; declining g death rate; longer
life
expectancy; more dependency
Birth rate Stage 4: low birth rate; low death rate; highest
Death rate dependency ratio;
longest life expectancy
Net migration
Immigration & emigration
6. International Trade &
Reasons for different population growth
rates
Varying Birth Rates Globalisation
LEDCs have:
Large families to help produce food & work for money 6.1. International Specialisation
High infant mortality rate
Low supply of contraceptives/forbidden to use them Specialization at a National Level
In MEDCs, people marry later in life so birth rates fall

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Countries specialize in production of those goods and Benefits of Free Trade

services in
which they have an absolute advantage or For Consumers To Producers To Governments
comparative advantage over
other regions or countries Exports increase
A country has an absolute advantage if it can produce a Cheaper products Larger markets
jobs, GDP, incomes
given
amount of a good or service with far less resources
But imports take
and therefore at
an absolute cost advantage over any Better products Economies of scale
them away
country
A country has a comparative advantage in the production More produced,
Workers more
of a
good or service if it can produce it at a lower lower average per
productive
opportunity cost
relative to other countries unit cost
International trade
Advantages of Specialisation increases number
International Trade
of products you
Greater efficiency
make
Consumer benefits from lower prices, greater variety and
quality of
goods & services Increased
Opportunities for competitive sectors competition from
Gains from trade international
companies
Disadvantages of Specialisation Lower Prices –
Better Qualities
Threats to uncompetitive sectors
Risk of over-specialization
Dependency on other countries Trade Protection

Tariffs: tax on imports to raise its price and make them

Globalisation, Free Trade and
Protection
more
expensive than local goods to stop people buying
Globalisation: The process by which businesses or other them
organizations develop international influence or start Subsidies: grant given to an industry by government so
operating on
an international scale. industry
will lower its prices encouraging consumers to
stop buying foreign
imports by making home-produced
Multinationals goods cheaper
Quota: limit on number of imports allowed into country
Operates in more than one country
per year,
reducing quantity of imports without changing
Some of the largest companies in the world
their prices
Governments often compete to attract multinationals
Embargo: complete ban on imports of certain goods. An
Can provide jobs, incomes, business knowledge, skills
embargo
may be used to stop imports of drugs
and
technologies which can help other firms
Excessive quality standards and bureaucracy
Pay taxes on their profits to boost government
revenue Protection
Headquarters are based in one country Arguments For possible Consequences

Advantages Disadvantages Other countries will retaliate

Protection of a young industry
with trade barriers
Can reach many more
Can switch profits to other It protects inefficient domestic
consumers globally & sell far To prevent unemployment
countries to avoid paying firms
more than other types of
taxes on profits
businesses The loss of domestic jobs
Can minimize transport costs To prevent dumping from overseas competitions
by locating plants in different Can force smaller local firms will only be temporary
countries to be near raw out of business Trade barriers have
Because other countries use
materials or big markets increased the gap between
barriers to trade
Minimize wage costs by rich and poor countries
May exploit workers in low
locating in countries with low To prevent over-specialization
wage economies
wages
May use their power to get 6.2. Foreign Exchange Rates
Can enjoy low average generous subsidies & tax
production costs advantages from the Exchange rate is the price of a country’s currency in terms
government of
another country’s currency

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Most countries have a floating exchange rate, which Fixed exchange rate: it is set by the government and
means no set
value for their currency compared with any maintained
by the central bank buying and selling the
other currency currency and changing
interest rates
Currency is a commodity thus the value of a currency is
totally
dependent on demand and supply of that currency Floating Exchange Rate
in the foreign
exchange market. ADVANTAGES DISADVANTAGES
An appreciation in the value of currency means its Automatic stabiliser Uncertainty
exchange rate
against other countries has risen Frees internal policy Lack of investment
A depreciation in the value of currency means its
Management Speculation
exchange rate
against other countries has fallen
Flexibility Lack of investment
Exchange Rate Fluctuations Can avoid inflation
Lower reserves
Demand for a currency comes from foreign money
flowing into the
country. If demand rises, the currency’s
Fixed Exchange Rate
value will rise in relation
to the other currency
Supply of the currency comes from domestic money ADVANTAGES DISADVANTAGES
flowing out of the
country. If supply rises, the currency’s Elimination of uncertainty and Foreign exchange reserves
value will fall risks needed
Speculation deterred Internal objectives sacrificed
A currency might depreciate A currency might appreciate
Prevents currency Restricts international
because: because:
depreciation competition
Demand for other currencies
There is a balance of Attracts foreign direct
rises as domestic consumers
payments surplus investment
buy more imports
Demand for the currency
There is a balance of 6.3. Current Account Balance of
rises as overseas consumers
payments deficit
buy more exports Payments
Interest rates fall relative to Interest rates rise relative to
other countries other countries Structure
People move their savings to This attracts savings from
Visible trade account: the difference between the export
bank accounts overseas overseas residents
revenue
and import spending on physical goods, e.g. cars,
Inflation is lower than in other washing machines
Inflation rises relative to other
countries so exports will be Invisible trade account: measures the difference between
countries. This makes exports
cheaper and overseas export
revenue from and import spending on services,
more expensive and demand
demand for them, and the e.g. banking,
insurance and tourism
for them, and the currency
currency required to pay for Income flows: e.g. interest, profit and dividends flowing in
needed to buy them, falls
them, will rise and
out of the country
People speculate that the Current transfers: e.g. grants for overseas aid.
People speculate that the
currency will fall in value and
currency will rise in value and
they sell their holdings of the Balance of Payments Deficit Balance of Payments Surplus
they buy more of the currency
currency Money flowing out greater Money flowing in greater than
than in. out.
Consequences of Exchange Rate
Fluctuations Current + Capital + Financial Current + Capital + Financial
is negative. is positive.
An appreciation of the currency will make exports more
expensive and
imports will be cheaper, vice versa
Trade Deficit
If PED<1 for exports, an exchange rate appreciation will
improve a
current account deficit Means people are buying more imports and may be
If PED<1 for imports, an exchange rate depreciation will spending less on
products made by domestic firms
worsen a
current account deficit Deficit may be a symptom of a declining industrial base
Foreign exchange for the national currency is likely to fall
Types of Exchange Rate
Increases prices of imports and cause imported inflation
Floating exchange rate: it is determined by the forces of
Trade Surplus
market
supply and demand
Managed floating exchange rate: it is influenced by state Means people are buying less imports and may be
intervention spending more on
products made by domestic firms

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Surplus may the result of economic growth Expansionary fiscal policy, by reducing taxes and
Foreign exchange for the national currency is likely to rise increasing
government expenditure can increase total
Increases prices of exports demand for imports to fix
current account surplus, vice
versa
Policies to achieve balance of payments
stability Contractionary monetary policy can correct a current
account
deficit, vice versa
Supply-side policy will increase domestic production and
exports
which can correct a current account deficit

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ECONOMICS (0455)

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