CAIE IGCSE Economics Summarized Notes PDF

ZNOTES.ORG UPDATED TO 2023-2025 SYLLABUS CAIE IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS CAIE IGCSE ECONOMICS Geographical Mobility Occupational Mobility 1. The Basic Economic...

ZNOTES.ORG UPDATED TO 2023-2025 SYLLABUS CAIE IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS CAIE IGCSE ECONOMICS Geographical Mobility Occupational Mobility 1. The Basic Economic Refers to the willingness and the ability of a person to Refers to the ease with which Problem relocate from one area to a person can change between another due to employment jobs. purposes. 1.1. The Nature of the Economic Reasons why many workers This would vary depending on Problem are not willing to relocate - the cost, training period and Family Ties and Related the educational professions. There are too few resources to make all the goods and Commitments, Cost of Living services that consumers need and want. Unlimited wants and limited resources Changes in the Quantity or the Quality of Factors of The scarcity of resources is the basic economic problem Production Economic and Free Goods Cost (Labour Costs, Raw materials costs) Government Policies (Taxes, Subsidies) Economic goods: A good or service that requires New Technology resources to produce and has a degree of scarcity and, Migration of Labour therefore, an opportunity cost. Improved Education and Healthcare Free goods: A good or service that is not scarce and is Weather Conditions (Agricultural Products) available in abundance. For example, the air we breathe. 1.3. Opportunity Cost 1.2. The Factors of Production Opportunity cost is the cost of the next best alternative Consumers are people or rms who need and want goods while choosing the uses of a resource. and services Choosing one use will always mean giving up the Resources or factors of production are used to make opportunity to use resources in another way, & the loss of goods and services the next best goods & services they might have produced instead. LLCE The problem of resource allocation is choosing how best to use limited resources to satisfy as many needs and Land: natural resources used in production (e.g. land) wants as possible and maximize economic welfare. Labour: human resources used in the production of Economics aims to nd the most e cient resource goods/services (e.g. workers) allocation Capital: the manufactured resources that are used to Example 1: A person invests $10,000 in a stock produce goods/services (e.g. tractor) He could have earned interest by leaving 10,000 Enterprise: the skills and willingness of a business person dollars in a bank account instead to take the risks required to organize productive activities The opportunity cost of the decision to invest in stock Entrepreneurs organize and combine resources in rms is the value of the potential interest to produce goods and services Example 2: A city decides to build a hospital on vacant Durable consumer goods last a long while (e.g., furniture) land; it owns non-durable consumer goods (e.g., food) do not Could have built a school or sports centre Capital goods and semi- nished goods or components Opportunity cost is the value of the bene ts forgone of are used in production the next best thing which could have been done Rewards for Factors of Production 1.4. Production Possibility Curves (PPC) Land - Rent Diagrams Labour - Wages Capital - Interest Opportunity cost can be shown using a production Enterprise - Pro ts possibility curve (PPC) It shows the maximum combinations of two goods and Mobility of Factors services that an economy can produce in each time period with its limited resources Refers to the degree of mobility while changing from one Each combination is a choice production area to another. WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS An economy shouldn’t have any unemployment of factors 2.1. Microeconomics and of resources to be on the PPC A point within the curve signi es like X, represents Macroeconomics ine ciency A point outside the curve, like Y, represents combinations Microeconomics that cannot be produced due to the lack of resources 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 rms. It involves supply and demand in individual markets, Individual consumer behaviour, and individual labour markets Example - A consumer considering his options while buying a product Macroeconomics Study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and in ation. Involves decisions made by the government regarding, for example, policies Example - Governments deciding on the tax rates Movement in PPC and Shift of PPC 2.2. The Role of Markets in Allocating Movement in PPC Shift in PPC The shift of PPC occurs when Resources the PPC line is moved. This The Market System may be due to better Movement along the PPC is availability of resources (due A market economy is an economic system in which when the resources utilized to the Discovery of new economic decisions and the pricing of goods and services are moved from one product materials, Better Technology are guided by the interactions of supply and demand- the to another. For example, the and more), which causes an market mechanism. movement from Point A to outward shift of the PPC or a Point B is shown in the above decrement in resources (due Key Resources Allocation Decisions diagram. to natural disasters, war and more) which causes an The basic economic problem of scarcity creates three key inward shift of the PPC. An questions example is given below. What to produce? How to produce? For whom to produce? 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. Features of Price Mechanism Private Economic Agents can allocate resources without any intervention from the government. 2. The Allocation of Goods and Services are allocated based on price (Higher Price means more supply, and lower price means more Resources demand) Allocation of Factors of Production is based on nancial returns WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Competition creates choices and opportunities for rms, Movement along the Curve Shift of the Curve private individuals and consumers. 2.3. Demand Demand refers to the willingness and ability of customers to buy a good or service at a given price level. Contraction is caused when the demand falls due to a An increase in demand price increase; This causes causes the demand curve to the point to go upwards. shift rightwards, and a Extention is caused when the decrease in demand shifts the demand increases because of curve towards the left. a price decrease; This causes the point to go downwards. The 2.4. Supply higher price of a good = fewer people demand that good; hence, demand is inversely related to the price Supply refers to the ability and willingness of suppliers to 1 provide goods and services at a given price. Price ∝ Demand Factors that a ect demand Price Advertising Government Policies Consumer tastes/preferences Consumer Income Prices of substitute/ complementary goods Interest rates (price of borrowing money) Consumer population (population increase = demand increase) Weather The individual demand is the demand of one individual or rm The market demand represents the aggregate of all The higher price of good = higher quantity supplied; individual demands hence, quantity is directly proportional to the price Movement along the Curve Shift of the Curve Price ∝ Quantity supplied Changes in Non-Price factors Factors that a ect supply A Change in the price of the cause the demand curve to Cost of factors of production good or service will cause shift. These factors include Prices of other goods/services movement along the curve. tastes, prices of substitute Global factors The movement can be either goods, consumer incomes Technology advances contraction or extension. and many more. Business optimism/expectations The individual supply is the supply of an individual producer The market supply is the aggregate of the supply of all rms in the market. 2.5. Price Determination WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Market Equilibrium Inelastic Demand Elastic Demand PED lower than 1 PED greater than 1 When supply & demand are equal, the economy is said to be at an equilibrium. The necessity of the product The necessity of the product is high – it is either essential is relatively low or habitual A change in price has little Demand would respond e ect on the change in quickly and more drastically demand % change in quantity demanded At this point, the allocation of goods is at its most e cient PED = % change in price because the amount of goods being supplied is the same as the amount of goods being demanded & everyone is When demand is price inelastic: satis ed An increase in price would raise revenue When demand is price elastic: Market Disequilibrium A decrease in price would raise revenue Excess Supply Excess Demand Factors that a ect PED: The number of substitutes The period of time The proportion of income spent on the commodity The necessity of the product Special Situation with PED Perfectly Price Perfectly Price Unitary Price Elastic When the price is set below Inelastic Elastic If the price is set too high, the equilibrium price. Creates The percentage excess supply will be created demand that exceeds Any changes in the change in price is within the economy, and there Changes in price do production due to the low price will lead to the proportional to the will be allocative ine ciency not a ect the price. quantity demanded percentage change quantity demanded being zero in quantity Price Changes demanded Causes of Price Changes A change in supply 2.7. Price Elasticity of Supply (PES) A change in demand De nition: The responsiveness of quantity supplied to a Consequences of Price Changes change in price An inward shift of the supply curve will increase prices Inelastic Supply Elastic Supply and vice versa It has a PES of less than 1 It has a PES of more than 1 An inward shift of the demand curve will decrease prices A large price change will have A large price change will have and vice versa little e ect on the amount a large e ect on the amount supplied supplied 2.6. Price Elasticity of Demand (PED) De nition: The responsiveness of demand to a change in price Inelastic Demand Elastic Demand WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Inelastic Supply Elastic Supply Social Bene ts = Private Bene ts + External Bene ts Private Costs are the production and consumption costs of a rm, individual or the government Private Bene ts are the bene ts of the production and consumption to the rm, individual or government. External Costs are the negative side-e ects on third parties for which the consumer doesn’t pay. External bene ts are the positive side-e ects enjoyed by third parties. % change in quantity supplied Consequences of Market Economic System PES = % change in price Only goods and services that are pro table to make will Factors that a ect PES: be produced Time Public goods and services such as street lighting won’t be Availability of resources provided as the private sector can't earn pro ts from Supply available to meet demand them Spare production capacity available Resources are only employed if pro table – people may Factor substitution available be left unemployed without an income Harmful goods may be produced and sold freely Producers may ignore environmental impacts 2.8. Market Economic System Monopolies dominate the supply of products and charge Market Economic System is the economic system that high prices relies on the market forces of demand and supply to allocate market resources with minimal involvement of 2.10. Mixed Economic System the government. This system is run by private rms and individuals It has a private sector & a public sector They produce a wide variety of goods and services if it is A government can try to correct market failures in a pro table to do so, but only for those consumers who are mixed-economic system willing and able to pay for them It can allocate scarce resources to provide goods and Market failures can cause scarce resources to be services that people need allocated to uses that are wasteful, ine cient or even Can introduce laws and regulations to control harmful harmful to people and the environment activities Advantages Disadvantages Maximum Prices Wide variety of Serious market failure This is a price control method that involves the goods/services government setting the price below the equilibrium point The pro t motive encourages to make things more a ordable. the development of new and Only pro table goods are more e cient products & provided Minimum Prices processes. Quick response to changes in Firms will only supply The government sets the price above the equilibrium to consumers’ tastes and products to consumers with encourage the supply of certain goods. demand the ability to pay This involves the National Minimum Wage (NMW) as well. Resources will only be No taxes on incomes and Government Intervention provided if it is pro table to wealth or goods and services do so Produce merit goods such as education for the needy Harmful goods may be readily It can provide public goods such as street lighting available to buy. The public sector can employ people, and welfare bene ts can be given to the needy Laws to make goods illegal or high taxes to reduce 2.9. Market Failure consumption Market failure occurs when the market mechanism fails Laws and regulations would protect the natural to allocate scarce resources e ciently, so social costs are environment greater than social bene ts. Monopolies can be broken up or regulated to keep prices Social Costs = Private Costs + External Costs low WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Educating consumers about the private costs of The total amount the government owes is the national consuming demerit goods debt Manage international nancial system: governments of Privatisation and Nationalisation di erent nations lending each other money Privatisation transfers all assets from the public to the 3.2. Households private sector. Nationalisation is the purchase of all assets by the In uences on Spending, Saving and Borrowing government Disposable income: amount of income left to spend or save after direct taxes have been deducted 3. Microeconomic Decision Spending: enables a person to buy goods/services to satisfy their needs/wants Makers Saving: involves delaying consumption As interest rates rise, people may save more 3.1. Money and Banking Borrowing: allows a person to increase their spending, enabling them to buy goods they cannot a ord now Functions of money People with low disposable incomes may spend less in total than people with high incomes Medium of Exchange: accepted as means of payment But will tend to spend all or most of their income meeting Unit of account: for placing a value on goods/services their basic needs Store of value: can save money since it keeps its value The Standard for Deferred Payment: borrowers can Increase in… Spending Saving Borrowing borrow money and pay it back later Real income ↑ ↑ ↑ Characteristics of money Direct tax ↓ ↓ ↕ Acceptability: Anything can be used as money as long as Wealth ↑ ↓ ↑ it’s generally accepted Durability: Good money must be hard-wearing Interest rates ↓ ↑ ↓ Portability: It should be easy to carry around Availability of saving scheme ↓ ↑ ↓ Divisibility: Must be able to divide it into smaller values Availability of credit ↑ ↓ ↑ Scarcity: Should be limited in supply to create value Consumer con dence ↑ ↓ ↑ Commercial Banks 3.3. Workers Accepting deposits of money and savings Helping customers make and receive payments Entry: Young employees will receive low earnings due to a Making personal and commercial loans lack of work skills and experience; they can become an Buying and selling shares for customers apprentices or join a management training scheme to Providing insurance become more skilled Operating pension funds Skilled workers: the more skilled a worker is, the more Providing nancial and tax planning advice opportunities he has for increasing his earnings; bonuses Exchanging foreign currencies will be given a higher rate of overtime paid End-of-career employees: if workers keep updating their Central Banks skills, they will continue to have opportunities to increase Printing notes & minting coins that are legal tender wages; however, when they stop this, their demand will Destroying torn notes & worn-out coins fall & income will diminish, nally reaching a stop when Setting interest rates retired Lender of last resort: if a bank needs cash in a hurry, they can borrow from the central bank Factors that in uence the choice of occupational Supervising monetary policy: heads of the central bank hold meetings with o cials from other banks to Level of Challenge determine interest rates and the quantity of money in the Career Prospects economy Level of Danger involved Banker for commercial banks & the government: Length of training required Government accounts & spending are carried out with Level of education required the central bank Recognition in the job Helps government to borrow money Personal satisfaction gained from the job Level of experience required WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Why rms change demand for labour Defending employee rights and jobs Improving working conditions Changes in consumer demand for products Improving pay and other bene ts, including holiday Changes in the productivity of labour entitlement, sick pay and pensions Changes in price and productivity of capital Encouraging rms 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 Demographic changes Types of Trade Unions Factors that Cause Occupational Wage Di erentials General Unions: represent workers across many di erent occupations Di erent abilities and quali cations Industrial Unions: represent workers of the same industry ‘Dirty jobs’ and unsociable hours Craft Unions: represent workers with the same skill Job satisfaction across di erent industries Lack of information about jobs and wages Non-manual unions/Professional unions: represent Labour immobility workers in non-industrial and professional occupations Fringe bene ts Collective Bargaining Factors that cause wage di erentials in the same job Process of negotiating wages and other working Regional di erences in supply and demand of labour conditions between trade unions and employers Length of service A trade union will be in a strong bargaining position to Local pay agreements negotiate higher wages and better conditions if: Non-monetary agreements It represents most or all of the workers in a rm Discrimination Union members provide goods/services that Specialisation consumers need, which have few alternatives Division of labour: The production process is broken up Industrial Action into a series of di erent tasks Industrial action is taken when collective bargaining fails Specialization: workers concentrate on a few tasks and to result in an agreement then exchange their product for other goods/services Taking industrial action can help a union force employers Advantages for Individual Disadvantages for Individual to agree to their demands Industrial actions: Employees can make the best Doing the same job or Overtime ban: workers refuse to work more than their use of their talents/skills and repetitive tasks is tedious and normal hours increase them by repeating stressful Work to rule: workers deliberately slow down tasks. production by complying with every rule & regulation Individuals must rely on Go slow: workers deliberately work slowly Employees can produce more others to produce goods and Strike: workers protest outside their workplace to stop output and reduce business services they want but cannot deliveries/non-unionized workers from entering costs produce themselves Many repetitive tasks can now Impact of Trade Unions More productive employees be done by machines, leading Possible Advantages Possible Disadvantages can earn higher wages to the unemployment of low- Could help to bring about It might cause lack of skilled workers. minimum working standards exibility in working practices This could be major problem 3.4. Trade Unions Could help keep pay higher as fashions change very quickly An organization of workers formed to promote & protect Could help maintain This could lead to some rms the interest of its members concerning wages, bene ts & Employment/enhanced job going out of business working conditions security Could lead to improvement in Functions Workers made redundant health and safety Negotiating wages & bene ts with employers WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Possible Advantages Possible Disadvantages Economy of Scale Diseconomy of Scale Workers will need to pay Marketing/Selling: xed costs union membership fees. such as advertising and Labour: demotivated workers transportation are spread lead to a decrease in across a larger number of productivity due to boring, 3.5. Firms products, lowering per-unit repetitive tasks cost Classi cation of Firms Excess Agglomeration: A Primary Sector - Extracting raw materials from the earth company takes over or Technical: larger rms invest ( shing, mining, farming and more) merges with too many other in specialized production Secondary Sector - Manufacturing Goods (Construction, rms producing di erent equipment and highly skilled Re ning and more) products, making it hard for workers; they develop new Tertiary Sector - Service Sector (Retail Shops, Lawyers business owners and products and more) managers to co-ordinate all activities Public and Private Sector Risk-bearing: the ability to spread risk over many Private Sector rms are owned and run by private investors & reduce market individuals and owners. The main objective of this sector risks by selling a range of is to earn pro t. products in di erent locations The government owns Public Sector rms, and their main Purchasing: when raw aim is to provide services. materials are bought in bulk, Size of Firms suppliers may provide bulk discounts, lowering per unit Number of employees: less than 50 are classi ed as small cost of production Amount of capital employed: large rms invest a lot in xed assets such as machinery & equipment Integration Market share: relative size of rms compared by percentage share of total market supply/revenue Growth often involves integration with other rms Organization: large rms may be divided into many Takeover: a company acquires ownership & control of departments & be spread over many locations another a company by purchasing its shares Merger: two or more rms agree to form an entirely new Small Firms company & issue new shares Advantages Disadvantages Types of Integration Markets cannot raise enough The size of the market is capital to expand their Horizontal integration: occurs between rms at the same small business stage of production producing similar products Consumers like tailored Vertical integration: occurs between rms at di erent goods/services stages of production Governments provide help Forward: taking over the rm at a later stage of production Types of Economies and Diseconomies of Scale Backwards: integration is the opposite Lateral integration or conglomerate merger: occurs Economy of Scale Diseconomy of Scale between rms that are involved in totally unrelated Cost savings due to increased Rising costs because a rm business activities. scale of production has become too large Management: larger rms 3.6. Firms and Production must manage so many Financial: larger rms often di erent departments in have access to cheaper Demand for “Factors of Production” di erent locations, making sources of nance communication/ decision- Demand for goods & services by consumers: higher making di cult demand = more labour/capital rms 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 WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Productivity of labour & capital: more output/revenue labour & capital helps to produce, more pro t will generate over & above the cost of employing them Capital-intensive Production: where the use and cost of capital are higher than other factors of production Labour-intensive Production: where the cost of labour is higher than other factors of production 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 Output per Labour = Number of Labour Capital Productivity: Total Output Value Value per C apital = Value of Capital Objectives of rms Productivity refers to the e ciency of a business, whereas production refers to output only. Survival Social welfare Pro t maximisation 3.7. Firms’ Costs, Revenue and growth Objectives 3.8. Market Structure Fixed Costs: Costs that have to be paid regardless of the output, e.g. interest on loans Competitive Markets Variable Costs: Costs that change with the output. The higher the output, The higher the variable costs Businesses will charge the same price, a minimum price Breakeven: where total revenue = total cost they can charge without going out of business Total Revenue: the total receipts a seller can obtain from Price will be equivalent to the lowest average cost of selling goods or services to buyers producing goods Average Revenue: the revenue generated per unit of The average cost of production would be the same as the output sold average revenue for selling No rm would risk charging more than the market price Average Fixed Cost = F ixedC osts/Output A business would be a price taker; the market price Average Variable Cost = Variable C osts/Output Monopoly Markets Total Variable Cost = Variable C osts × Output Firms with monopolistic powers control all of the market shares Total Cost = T otal Variable C ost + T otal F ixed C ost Able to in uence the price; price makers Can restrict competition with arti cial barriers to entry & Average cost = (T otal C ost)/Output other pricing strategies Total Revenue = P rice P er U nit × Quantity Sold One rm controls the entire market supply May use predatory pricing to force competing rms out Profit or Loss = T otal Revenue − T otal C ost Other rms deterred from competing due to a lack of capital Advantages of Monopolies It avoids duplication & wastage of resources Economics of scale: bene ts can be passed to consumers High pro ts can be used for research & development WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Monopolies may use price discrimination, which bene ts 4.3. Fiscal Policy the economically weaker sections of the society Monopolies can a ord to invest in the latest technology & Budget: Financial planning of revenues and expenditures machinery to be e cient & avoid competition of the government Disadvantages of Monopolies Reasons for Government Spending May supply less & charge higher prices To supply goods and services that are not supplied by the May o er less consumer choice and lower quality private sector, such as defence; merit goods, such as products than if they had to compete with other rms education They may have higher production costs because they are To achieve improvements in the supply side of the macro- poorly managed economy, like providing subsidies Restrict competition using barriers to entry Reasons to Tax Barriers to entry Natural Arti cial To nance public expenditure, building schools and Cost savings from large-scale Predatory pricing strategies infrastructure production to force smaller rms out To discourage certain activities, e.g. taxes on cigarette To discourage the import of goods, tari s are import Preventing suppliers from taxes and can be levied as a % of the value of imports or a selling materials & Lots of capital equipment that set tax on each item components to other rms by other rms can’t a ord To redistribute income from the rich to the poor threatening to switch to rival To achieve other macro-economic objectives suppliers Large customer base built up Forcing retailers to stock & Types of over years sell only their product Description Examples Taxation Developed advanced Tax rate rises with products or processes that Progressive income; higher income = Income tax are protected by patents Tax higher tax Tax rate falls with income; Regressive Tax VAT 4. Government and The higher income = lower tax Proportional Everyone pays same Corporate income Macroeconomy Tax e ective tax rate tax Direct Tax Levied on individuals Capital gains tax Added to the price of 4.1. The Role of Government Indirect Tax Tari s commodities Local Role: Fund local services (Garbage Collection, Street Principles of Tax Lighting, Schools, Hospitals and more) National Role: Achieve macroeconomic goals (Economic Equitable Growth, Low In ation, Stable Prices and more) Economic International Role: Trading of goods and services Transparent Convenient 4.2. The Macroeconomic Aims of the Fiscal Policy Government It is the use of taxation and government spending to Economic Growth in uence aggregate demand Low Unemployment Low In ation/Stable Prices Policy About Balance of Payment Stability Reducing taxes and increasing Redistribution of Income government. Spending boosts Expansionary Fiscal Policy demand, so employment and Con icts between the Macroeconomic Aims output rise. It may be used to reduce recession. Full Employment vs Stable Prices Economic Growth vs Balance of Payment Stability Full Employment vs Balance of Payment Stability Economic Growth vs Stable Prices WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Policy About Instrument E ect on Macroeconomic Aims Increasing taxes and reducing Teaching new/existing workers government. Spending to Education and Training new skills to make them more Contractionary Fiscal Policy reduce demand. It may be used productive. to reduce price in ation. Include minimum wage laws to encourage more people to work Labour Market Regulations E ects of scal policy on govt. macroeconomic aims and legislation to restrict the power of trade unions. Expansionary scal policy can reduce unemployment Expansionary scal policy can increase economic growth Regulations that outlaw unfair Contractionary scal policy can reduce high in ation Competition Policy trading practices by monopolies and other large, powerful rms. Removing barriers to 4.4. Monetary Policy international trade allows Free Trade Agreements countries to trade their goods It is the use of interest rates, direct control of the money and services more freely and supply and the exchange rate to in uence aggregate cheaply. demand Removing old, unnecessary and Policy About Deregulation costly rules and regulations on It may be used to reduce price business activities in ation by increasing interest Contractionary Monetary rates charged by the central 4.6. Economic Growth Policy bank. This means commercial banks will also raise interest Economic growth is the annual increase in the level of the to encourage more savings. national output i.e the country’s GDP May be used during a Important as it increases the standard of living recession & to increase Expansionary Monetary Policy Measurement of Economic Growth employment by cutting interest rates Gross Domestic Product (GDP) is the main measure of total value of all the goods and services produced in a E ects of monetary policy on government macroeconomic aims given period of time Expansionary monetary policy can reduce unemployment An increase in prices will increase nominal GDP but this is Expansionary monetary policy can increase economic measured in current dollars thus includes in ations growth Contractionary monetary policy can reduce high in ation Nominal Real GDP = × 100 CPI 4.5. Supply-Side Policies Real GDP P er C apita = Real GDP Number of Population Supply-side policies aim to increase economic growth by Recession raising productive potential of the economy An increase in the total supply of goods & services will It is a signi cant decline in economic activity spread require more labour &other resources to be employed across the economy, lasting more than a few months, It will reduce market prices & provide more goods & normally visible in real GDP growth, real personal income, services to export employment, industrial production, & wholesale-retail sales Instrument E ect on Macroeconomic Aims A recession would cause the economy to produce at a Reducing taxes on pro ts and point that is within the PPC small rms can encourage Tax Incentives enterprise. It can also Causes of Economic Growth encourage investments in new equipment. Discovery of more natural resources Investment in new capital and infrastructure To reduce production costs and Technical progress help rms fund research and Subsidies/Grants Increasing the amount and quality of human resources development of new Reallocating resources technologies. WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Consequences of Economic Growth Frictional Unemployment: refers to transitional unemployment, which occurs when people are moving An increase in output can improve the living standards of between jobs. people Seasonal Unemployment: occurs because consumer Higher output and incomes increase government tax demand for goods/services change with seasons; e.g. no revenue. This can increase govt. spending without job for a ski instructor when/where there is no ice increasing tax rates However, it can increase pollution lead to the depletion of Measurement of Unemployment non-renewable resources and damage the natural environment Taking claimant count Labour force survey Policies to Promote Economic Growth Unemployment Rate = N umber of U nemploye Expansionary scal policy Expansionary monetary policy Consequences of Unemployment Supply-side policies Personal Economical Loss of income and reduced Unemployment is a waste of 4.7. Employment and Unemployment ability to buy goods & services human resources Unemployed people de-skill if Fewer goods & services Indicators Recent Trends long out of work produced Risen as the world population Unemployed people may Total output & income in the Labour force has grown become depressed & ill economy is lower Participation Rate: labour Risen in many countries The strain on family force as a proportion of total especially among females as Government tax revenues relationships & health population of working age it is now socially acceptable also lower services Poverty and rising living costs People in work may have to in developing countries has pay more taxes forced many women to work Government spending on Employment in services has welfare may rise Employment by Industry: been growing while Number of people employed employment in agriculture Policies to Reduce Unemployment in di erent industrial sectors and other primary sector industries has fallen Expansionary monetary policy Employment Status: Number Expansionary scal policy Most employees work full- Increase in quality and quantity of education and training of full-timers, part-timers or time with temporary contracts Part-time employees have 4.8. In ation and De ation grown rapidly, especially among female employees In ation: general & sustained increase in the level of prices of goods/services in an economy over a period of Unemployment: Number of Tends to rise during economic time people registered as being recessions De ation: decrease in the general price level of goods without work and services and occurs when the in ation rate falls Almost half the unemployed below 0% are young unskilled workers Unemployment Rate: Relatively stable in the recent Measurement Unemployment as a years but did increase in 2008 Base year: the rst year with which the prices of proportion of labour force during a global nancial crisis subsequent years are compared In ation rate: percentage change in annual CPI Types of Unemployment Weighted Average Price in Year Cyclical Unemployment: occurs during recession due to CP I in Y ear x = falling consumer demand & incomes Weighted Avereage Price in Base Y Firms reduce output & lay o workers Causes of In ation Structural Unemployment: caused by changes in industrial structure of an economy Demand-pull In ation: caused by total demand rising Entire industries close due to a permanent fall in faster than total output, causing market prices to rise demand for their goods/services WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Cost-push In ation: The cost of production increases, so Insu cient investment in education, skills & Healthcare rms try to pass costs to consumers through higher Low levels of investment in infrastructure prices Lack of e cient production and distribution systems High population growth Causes of De ation Other factors like a corrupt govt. or war Fall in the money supply Decline in con dence 5.2. Poverty Lower production costs Technological advances Absolute poverty Relative poverty Increase in unemployment Number of people living Increase in the real value of debt below a certain income Measures the extent to which threshold or number of a household’s nancial Policies to Control In ation & De ation households unable to a ord resources fall below an Contractionary scal and monetary policy for in ation certain basic goods & average income level. Expansionary scal and monetary policy for de ation services Supply-side policy can increase aggregate supply and Occurs when people are poor thus control both in ation and de ation Occurs when people do not relative to other people in the have access to basic food, country, unable to participate clothing and shelter fully in normal activities of the 5. Economic Development society they live in 5.1. Living Standards Causes of Poverty Unemployment Standard of Living refers to the social and economic well- Low wages being of the individuals in a country. Illness Real Gross Domestic Product (GDP) Per Capita Age Poor Healthcare GDP is the main measure of the total value of all goods Low literacy rates and services produced in a given period of time High population growth An increase in prices will increase nominal GDP, but this is Poor infrastructure measured in current dollars, thus includes in ations Low FDI (Foreign Direct Investment) High public debt Nominal Real GDP = × 100 Reliance on primary sector output CPI Corruption and Instability Real GDP Real GDP P er C apita = Alleviating Poverty Number of Population Governments will use policies to help alleviate poverty in If the economy has an extremely rich person & everyone their country, or in another country: else is poor, it brings up the Real GDP per capita Human Development Index (HDI) What are the Policy Why is it needed? problems? Used by the United Nations to make comparisons of Poor farming Free food supplies human & economic development in di erent countries Food aid methods produce can force farmers Combines three di erent measures for each country insu cient food out of business Standard of living, measured by average incomes LEDCs lack the Being educated, measured by adult literacy rate capital to invest in Living a long, healthy life, measured by life expectancy Loans have to be an industrial base Single index with a value between 0 and 1 Financial aid repaid sometimes and modern Greater than 0.8 = high human development. Less than with interest machinery and 0.5 = low human development infrastructure. Reasons For Low/Varying Economic Development Over-dependence on agriculture Domination on international trade by developed nations Lack of capital WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS What are the Population Structure Policy Why is it needed? problems? The Demographic Transition Model: LEDCs lack access Most people lack to modern the skill to use machinery and modern technology; Tech aid equipment and instead of using knowledge of machinery, more modern production jobs are needed to methods. employ people. Relieving LEDCs of This may debt will allow them encourage LEDCs to use money for to borrow more Debt relief economic money, or corrupt development governments may instead. misuse money. LEDCs may have Removing overseas natural supplies MEDCs will force This shows that population growth occurs in stages trade barriers can be exported for down their price Population Pyramid: a type of graph that shows the age money and sex structure of the country Governments in Advice is not LEDCs lack enough; LEDCs Economic Advice economic need more capital knowledge & stability 5.3. Population Stage 1: high birth rate; high death rates; short life Factors that a ect population growth expectancy; less dependency (since there are few old Birth rate people and children must work anyway) Death rate Stage 2: high birth rate; fall in death rate; slightly longer Net migration life expectancy; more dependency due to more elderly Immigration & emigration Stage 3: declining birth rate, declining g death rate, longer life expectancy, more dependency Dependency Ratio Stage 4: low birth rate, low death rate, highest dependency ratio, longest life expectancy Comparison of people in employment with the number of people who are not in the labour force. 6. International Trade & Reasons for di erent 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 Specialisation at a National Level In MEDCs, people marry later in life, so birth rates fall Countries specialize in the production of those goods and Varying Death Rates services in which they have an absolute advantage or comparative advantage over other regions or countries MEDCs have: A country has an absolute advantage if it can produce a Better food, housing, hygiene &high life expectancy given amount of a good or service with far fewer Fatty foods, smoking, and lack of exercise have resources and, therefore at an absolute cost advantage increased rates of diabetes, cancer & heart disease over any country Improved medicine & healthcare; prevents many A country has a comparative advantage in the production diseases & increased life expectancy of a good or service if it can be produced it at a lower LEDCS have: opportunity cost relative to other countries Widespread diseases which lower life expectancy Natural disasters, famines, wars Advantages of Specialisation WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS E ciency Gains For Consumers To Producers To Governments Labour Productivity International trade Increased Productive Capacity increases the Economics of Scale International Trade number of products Improved Competitiveness you make Disadvantages of Specialisation Increased competition from Overspecialisation international Lack of variety for consumers companies High labour turnover Lower Prices – Low labour mobility Better Qualities Higher labour costs Trade Protection 6.2. Globalisation, Free Trade and Tari s: Tax on imports, which increases costs for foreign Protection rms Subsidies: Form of government assistance which helps cut Globalisation: The process by which businesses or other down production costs of rms organizations develop international in uence or start Quota: Quantitative limit on the sale of imports operating on an international scale. Embargo: Ban of trade with a certain country Multinationals Excessive quality standards and bureaucracy Protection Operates in more than one country Some of the largest companies in the world Arguments For Possible Consequences Governments often compete to attract multinationals Other countries will retaliate Protection of a young industry Can provide jobs, incomes, business knowledge, skills with trade barriers and technologies which can help other rms It protects ine cient domestic Pay taxes on their pro ts to boost government To prevent unemployment rms revenue The loss of domestic jobs Headquarters are based in one country To prevent dumping from overseas competition will only be temporary. Advantages Disadvantages Trade barriers have Can reach many more Because other countries use Can switch pro ts to other increased the gap between consumers globally & sell far barriers to trade countries to avoid paying rich and poor countries more than other types of taxes on pro ts To prevent over-specialisation businesses Can minimise transport costs by locating plants in di erent Can force smaller local rms 6.3. Foreign Exchange Rates countries to be near raw out of business materials or big markets The exchange rate is the price of a country’s currency in Minimise wage costs by terms of another country’s currency May exploit workers in low- Most countries have a oating exchange rate, which locating in countries with low wage economies means no set value for their currency compared with any wages other currency May use their power to get Currency is a commodity. Thus, the value of a currency is Can enjoy low average generous subsidies & tax dependent on the demand and supply of that currency in production costs advantages from the the foreign exchange market. government An appreciation in the value of currency means its exchange rate against other countries has risen Bene ts of Free Trade A depreciation in the value of currency means its For Consumers To Producers To Governments exchange rate against other countries has fallen Exports increase Cheaper products Larger markets jobs, GDP, incomes Exchange Rate Fluctuations But imports take Better products Economies of scale Demand for a currency comes from foreign money them away owing into the country. If demand rises, the currency’s Workers more More produced, value will rise in relation to the other currency productive more pro t WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Supply of the currency comes from domestic money Advantages Disadvantages owing out of the country. If supply rises, the currency’s Elimination of uncertainty and Foreign exchange reserves value will fall risks needed A currency might depreciate A currency might appreciate Speculation deterred Internal objectives sacri ced because: because: Prevents currency Restricts international Demand for other currencies depreciation competition There is a balance of rises as domestic consumers Attracts foreign direct payments surplus buy more imports investment Demand for the currency There is a balance of rises as overseas consumers 6.4. Current Account of Balance of payments de cit buy more exports Interest rates fall relative to Interest rates rise relative to Payments other countries other countries Structure People move their savings to This attracts savings from bank accounts overseas overseas residents Visible trade account: the di erence between the export In ation is lower than in other revenue and import spending on physical goods, e.g. cars, In ation rises relative to other washing machines countries, so exports will be countries. This makes exports Invisible trade account: measures the di erence between cheaper, and overseas more expensive, and demand export revenue from and import spending on services, demand for them, and the for them and the currency e.g. banking, insurance and tourism currency required to pay for needed to buy them falls Income ows: e.g. interest, pro t and dividends owing in them, will rise and out of the country People speculate that the People speculate that the Current transfers: e.g. grants for overseas aid. currency will fall in value, and currency will rise in value, and Secondary Income - Income transfers between residents they sell their holdings of the they buy more of the currency and non-residents of a country. currency Balance of Payments De cit Balance of Payments Surplus Consequences of Exchange Rate Fluctuations Money owing out greater Money owing in greater than An appreciation of the currency will make exports more than in. out. expensive and imports will be cheaper, and vice versa Current + Capital + Financial Current + Capital + Financial If PED