CAIE IGCSE Economics Past Paper PDF

ZNOTES.ORG UPDATED TO 2023-25 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 2023-25 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 Refers to the ease with which a person can change between the ability of a person to Problem relocate from one area to jobs. This would vary depending on the cost, another due to employment training period and the purposes. 1.1. Economic Problem educational professions Reasons why many workers There are too few productive resources to make all the are not willing to relocate - goods and services that consumers need and want. Family Ties and Related Unlimited wants and limited resources Commitments, Cost of Living Scarcity of resources is the basic economic problem Changes in the Quantity or the Quality of Factors of Production Types of goods Cost (Labour Costs, Raw materials costs) Economic goods: A good or service that has a degree of Government Policies (Taxes, Subsidies) scarcity and therefore an opportunity cost. New Technology Free goods: A good or service that is not scarce and is Migration of Labour available in abundance. For example, the air we breathe. Improved Education and Healthcare Weather Conditions (Agricultural Products) 1.2. Factors of Production 1.3. Opportunity Cost Consumers are people or firms who need and want goods and services Opportunity cost is the cost of choosing between Resources or factors of production are used to make alternative uses of resources goods and services Choosing one use will always mean giving up the opportunity to use resources in another way, & the loss of LLCE goods & services they might have produced instead Problem of resource allocation is choosing how best to Land: natural resources used in production (e.g. land) use limited resources to satisfy as many needs and wants Labour: human effort used in the production of as possible and maximize economic welfare goods/services (e.g. workers) Economics aims to find most efficient resource allocation Capital: the man-made resources that are used to Example 1: A person invests $10,000 in a stock produce goods/services (e.g. tractor) Could have earned interest by leaving $10,000 dollars Enterprise: the skills and willingness to take the risks in bank account instead required to organize productive activities Opportunity cost of decision to invest in stock is the Entrepreneurs organize and combine resources in firms 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 school or sports centre Capital goods and semi-finished goods or components Opportunity cost is the value of the benefits forgone of are used up in production the next best thing which could have been done Rewards for Factors of Production 1.4. Production Possibility Curves & Land - Rent Choice Labour - Wages Capital - Interest Opportunity cost can be shown using a production Enterprise - Profits possibility curve (PPC) It shows the maximum combinations of goods and Mobility of Factors services that can be produced by an economy in each period of time with its limited resources Refers to the degree of mobility while changing from one A PPC shows all the combinations of possibilities, involving production line to another. two goods or options Each combination is a choice Geographical Mobility Occupational Mobility WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS An economy can use all its scarce resources to produce It is the study of particular markets, and segments of the this combination economy. It looks at issues such as consumer behaviour, A point within the curve signifies like X, represents individual labour markets, and the theory of firms. inefficiency It involves supply and demand in individual markets, A point outside the curve like Y, represents combinations Individual consumer behaviour, and individual labour that cannot be produced due to the lack of resources markets Example - A consumer considering his options while buying a production 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 Example - Governments deciding on the tax rates 2.2. The role of markets in allocating resources The Market System Movement in PPC and Shift of PPC A market economy is an economic system in which Movement in PPC Shift in PPC economic decisions and the pricing of goods and services are guided by the interactions of supply and demand- the The shift of PPC occurs when market mechanism the PPC line is moved. This Shift in PPC is when the may be due to better Key Resources Allocation Decisions resources utilized are moved availability of resources (due from one product to another. to the Discovery of new The basic economic problem of scarcity creates three key For example, the Movement materials, Better Technology questions from Point A to Point B in the and more) or decrement in above diagram. resources (due to natural What to produce? disasters, war and more). How to produce? Example is given below 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 Goods and Services are allocated based on price (Higher Price means more supply and lower price means more demand) 2. Allocation of Resources Allocation of Factors of Production is based on financial returns 2.1. Microeconomics and Competition creates choices and opportunities for firms, private individuals and consumers. Macroeconomics Microeconomics 2.3. Demand WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Demand refers to how much of a product or service is Movement along the Curve Shift of the Curve desired by buyers Contraction is caused when the demand falls due to an increase in price, This causes An increase in demand the point to go upwards. causes the demand curve to Extention is caused when the shift rightwards and a demand increases because of decrease in demand shifts the a decrease in price, This curve towards the left. causes the point to go downwards 2.4. Supply Supply represents how much the market can offer Higher price of good = less people demand that good, hence, demand is inversely related to price 1 Price ∝ Demand ​ Factors that affect 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 Higher price of good = higher quantity supplied, hence increase) quantity is directly proportional to price Weather Price ∝ Quantity supplied The individual demand is the demand of one individual or firm Factors that affect supply The market demand represents the aggregate of all Cost of factors of production individual demands Prices of other goods/services Global factors Movement along the Curve Shift of the Curve Technology advances Changes in Non-Price factors Business optimism/expectations A Change in the price of the cause the demand curve to The individual supply is the supply of an individual good or service will cause shift. These factors include producer movement along the curve. tastes, prices of substitute The market supply is the aggregate of the supply of all The movement can be either goods, consumer incomes firms in the market contraction or extension. and many more. Price Determination Market Equilibrium When supply & demand are equal the economy is said to be at equilibrium WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Inelastic Demand Elastic Demand A change in price has little Demand would respond effect on the change in quickly and more drastically demand % change in quantity demanded At this point, the allocation of goods is at its most efficient PED = % change in price ​ because amount of goods being supplied is the same as amount of goods being demanded & everyone is satisfied When demand is price inelastic: An increase in price would raise revenue Market Disequilibrium When demand is price elastic: Excess Supply Excess Demand A decrease in price would raise revenue Factors that affect 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 When price is set below the Perfectly Price Perfectly Price If the price is set too high, Unitary Price Elastic equilibrium price. Creates Inelastic Elastic excess supply will be created demand that exceeds The percentage within the economy and there production due to the low Any changes in the change in price is will be allocative inefficiency Changes in price do price. price will lead to proportional to the not affect the quantity demanded percentage change quantity demanded Price Changes being zero in quantity Causes of Price Changes demanded A change in supply A change in demand 2.6. Price Elasticity of Supply Consequences of Price Changes An inward shift of the supply curve will increase prices Definition: The responsiveness of quantity supplied to a and vice versa change in price An inward shift of the demand curve will decrease prices and vice versa Inelastic Supply Elastic Supply It has a PES less than 1 It has a PES more than 1 2.5. Price Elasticity of Demand A large price change will have A large price change will have little effect on the amount a large effect on the amount Definition: The responsiveness of demand to a change in supplied supplied price Inelastic Demand Elastic Demand PED lower than 1 PED greater than 1 The necessity of the product The necessity of the product is high – it is either essential is relatively low or habitual WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS % change in quantity supplied Public goods and services such as street lighting won’t be PES = % change in price provided as it is not possible for the private sector to earn ​ profits from them Factors that affect PES: Resources only employed if profitable – people may be Time left unemployed without an income Availability of resources Harmful goods may be produced and sold freely Supply available to meet demand Producers may ignore environmental impacts Spare production capacity available Monopolies dominate supply of products and charge high Factor substitution available prices 2.7. Market Economic System 2.9. Mixed Economic System This system is run by private firms and individuals 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 profitable to do so but only for those consumers that 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, inefficient 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 goods/services This is a price control method which involves the Profit motive encourages government setting the price below the equilibrium point development of new and Only profitable goods to make things more afforable more efficient products & provided processes Minimum Prices Quick response to change in Firms will only supply 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 National Minimum Wage (NMW) as well. Resources will only be No taxes on incomes and provided if it is profitable to Government Intervention wealth or goods and services do so Produce merit goods such as education for the needy Harmful goods may be It can provide public goods such as street lighting available to buy readily Public sector can employ people and welfare benefits can be given to the needy 2.8. Market Failure Laws to make goods illegal or high taxes to reduce consumption Market failure occurs when the market mechanism fails Laws and regulations would protect natural environment to allocate scarce resources efficiently, so social costs are Monopolies can be broken up or regulated to keep prices greater than social benefits low Social Costs = Private Costs + External Costs Educating consumers about the private costs of Social Benefits = Private Benefits + External Benefits consuming demerit goods Private Costs are the production and consumption costs of a firm, individual or the government Privatisation and Nationalisation Private Benefits are the benefits of the production and consumption to the firm, individual or government. Privatisation is the transfer of all assets from the public to External Costs are the negative side-effect on third- the private sector parties for which the consumer doesn’t pay for. Nationalisation is the purchase of all assets by the External Benefits are the positive side-effects enjoyed by government the third-parties. Causes and Consequences of Markets Failure 3. Microeconomic Decision Only goods and services that are profitable to make will Makers be produced WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS People with low disposable incomes may spend less in 3.1. Money and Banking total than people with high incomes Functions of money But will tend to spend all or most of their income meeting their basic needs Medium of exchange: accepted as means of payment Unit of account: for placing a value on goods/services Increase in… Spending Saving Borrowing Store of value: can save money since it keeps its value Real income ↑ ↑ ↑ Standard for deferred payment: borrowers are able to Direct tax ↓ ↓ ↕ borrow money and pay back later Wealth ↑ ↓ ↑ Characteristics of money Interest rates ↓ ↑ ↓ Acceptability: Anything can be used as money as long as it’s generally accepted Availability of saving scheme ↓ ↑ ↓ Durability: Good money must be hard-wearing Availability of credit ↑ ↓ ↑ Portability: Should be easy to carry around Consumer confidence ↑ ↓ ↑ Divisibility: Must be able to divide it into smaller values Scarcity: Should be limited in supply to create value 3.3. Workers Commercial Banks Entry: young employee will receive low earnings due to Accepting deposits of money and savings lack of work skills and experience; can become an Helping customers make and receive payments apprentice or join a management training scheme to Making personal and commercial loans become more skilled Buying and selling shares for customers Skilled workers: the more skilled a worker is, the more Providing insurance opportunities he has for increasing his earnings; bonuses Operating pension funds will be given and higher rate of overtime paid Providing financial and tax planning advice End-of-career employees: if workers keep updating skills, Exchanging foreign currencies they will continue to have opportunities to increase wages however when they stop this, their demand would fall & Central Banks income would diminish, finally reaching a stop when Printing notes & minting coins that are legal tender retired Destroying torn notes & worn-out coins Setting interest rates Factors which influence the choice of occupational Lender of last resort: if a bank needs cash in a hurry, they Level of Challenge can borrow from central bank Career Prospects Supervising monetary policy: heads of the central bank Level of Danger involved hold meetings with officials from other banks to Length of training required determine interest rate and quantity of money in Level of education required economy Recognition in the job Banker for commercial banks & the government: Personal satisfaction gained from the job Government accounts & spending are carried out with Level of experience required central bank Helps government to borrow money Why firms change demand for labour Total amount government owes is national debt Manage international financial system: governments of Changes in consumer demand for products different nations lending each other money Changes in the productivity of labour Changes in price and productivity of capital 3.2. Households Changes in non-wage employment costs Why labour supply might change Influences on Spending, Saving and Borrowing Changes in net advantages of an occupation Disposable income: amount of income left to spend or Changes in provision and quality of education and training save after direct taxes have been deducted Demographic changes Spending: enables a person to buy goods/services to satisfy their needs/wants Factors that Cause Occupational Wage Differentials Saving: involves delaying consumption As interest rates rise, people may save more Different abilities and qualifications Borrowing: allows a person to increase their spending; ‘Dirty jobs’ and unsociable hours enabling them to buy goods they cannot afford now Job satisfaction WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Lack of information about jobs and wages Craft Unions: represent workers with the same skill Labour immobility across different industries Fringe benefits Non-manual unions/Professional unions: represent workers in non-industrial and professional occupations Factors that cause wage differentials in the same job Collective Bargaining Regional differences in supply and demand of labour Length of service Process of negotiating wages and other working Local pay agreements conditions between trade unions and employers Non-monetary agreements A trade union will be in a strong bargaining position to Discrimination negotiate higher wages and better conditions if: It represents most or all of the workers in a firm Specialization Union members provide goods/services that consumers need which have few alternatives Division of labour: workers concentrate on a few tasks then exchange their product for other goods/services Industrial Action Specialization: production process broken up into a series of different tasks Industrial action is taken when collective bargaining fails to result in an agreement Advantages for Individual Disadvantages for Individual Taking industrial action can help a union force employers Employees can make best use to agree to their demands of their particular Doing same job or repetitive Industrial actions: talents/skills and can increase tasks is boring and stressful Overtime ban: workers refuse to work more than their them by repeating tasks normal hours Individuals must rely on Work to rule: workers deliberately slow down Employees can produce more production by complying with every rule & regulation others to produce goods and output and reduce business Go slow: workers deliberately work slowly services they want but cannot costs Strike: workers protest outside their workplace to stop produce themselves deliveries/non-unionized workers from entering Many repetitive tasks can now More productive employees be done by machines, leading Impact of Trade Unions can earn higher wages to unemployment of low- Possible Advantages Possible Disadvantages skilled workers Could help to bring about Might cause lack of flexibility minimum working standards in working practices 3.4. Trade Unions Could be major problem as Could help keep pay higher fashions change very quickly An organization of workers formed to promote & protect Could help maintain the interest of its members concerning wages, benefits & Could lead to some firms Employment/enhanced job working conditions going out of business security Functions Could lead to improvement in Workers made redundant health and safety Negotiating wages & benefits with employers Workers will need to pay Defending employee rights and jobs union membership fees Improving working conditions Improving pay and other benefits, including holiday entitlement, sick pay and pensions 3.5. Firms Encouraging firms to increase worker participation in business decision-making Classification of Firms Developing skills of union members, by providing training and education courses Primary Sector - Extracting raw materials from the earth (fishing, mining, farming and more) Supporting members taking industrial action Secondary Sector - Manufacturing Goods (Construction, Refining and more) Types of Trade Unions Tertiary Sector - Service Sector (Retail Shops, Lawyers General Unions: represent workers across many different and more) occupations Industrial Unions: represent workers of the same industry Public and Private Sector WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Private Sector firms are owned and run by private Economy of Scale Diseconomy of Scale individuals and owners. The main objective of this sector Purchasing: when raw is to earn profit. materials are bought in bulk, Public Sector firms are owned by the government and suppliers may provide bulk their main aim is to provide services. discounts, lowering per unit Size of Firms cost of production Number of employees: less than 50 are classified as small Integration Amount of capital employed: large firms invest a lot in fixed assets such as machinery & equipment Growth often involves integration with other firms Market share: relative size of firms compared by Takeover: a company acquires ownership & control of percentage share of total market supply/revenue another company by purchasing its shares Organization: large firms may be divided into many Merger: two or more firms agree to form an entirely new departments & be spread over many locations company & issue new shares Small Firms Types of Integration Advantages Disadvantages Horizontal integration: occurs between firms at the same Markets cannot raise enough stage of production producing similar products Size of market is small capital to expand their Vertical integration: occurs between firms at different business stages of production Consumers like tailored Forward: taking over firm at later stage of production goods/services Backward: integration is the opposite Governments provide help Lateral integration or conglomerate merger: occurs with firms at same stage of production but different products Types of Economies and Diseconomies of Scale Economy of Scale Diseconomy of Scale 3.6. Firms and production Cost savings due to increased Rising costs because a firm scale of production has become too large Demand for “Factors of Production”‎ Management: larger firms Demand for goods & services by consumers: higher must manage so many demand = more labour/capital firms will need Financial: larger firms often different departments in Price of labour & capital: higher cost = less labour & have access to cheaper different locations, making capital demanded sources of finance communication/ decision- Firms may also decide to substitute labour for more making difficult capital and vice versa Marketing/Selling: fixed costs Productivity of labour & capital: more output/revenue such as advertising and Labour: demotivated workers labour & capital help to produce, more profit they will transportation are spread lead to decrease in generate over & above cost of employing them across a larger number of productivity due to boring, Capital-intensive Production: requires heavy capital products, lowering per unit repetitive tasks investment to buy assets relative to sales or profits that cost assets can generate Excess Agglomeration: Labour-intensive Production: main cost is labour; cost is company takes over or high compared to sales or value added by additional Technical: larger firms invest manpower merges with too many other in specialized production Labour-intensive production method primarily involves firms producing different equipment, highly skilled labour, whereas, capital-intensive methods primarily products, making it hard for workers; develop new involve machinery business owners and products managers to co-ordinate all Productivity & Production activities Risk-bearing: ability to spread Productivity: the ratio of output to input risk over many investors & Labour Productivity: reduce market risks by selling Total Output range of products in different Output per Labour = Number of Labour ​ locations Capital Productivity: lO l WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Total Output Value growth Value per C apital = 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 can charge without going out of business Objectives Price will be equivalent to the lowest average cost of producing goods Fixed costs: don’t vary with level of output e.g. interest on Average cost of production would be same as average loans revenue for selling Variable cost: vary directly with level of output e.g. No firm would risk charging more than market price electricity A business would be a price taker; the market price Breakeven: where total revenue = total cost Total revenue: the total receipts a seller can obtain from Monopoly Markets selling goods or services to buyers Average revenue: the revenue generated per unit of Firms with monopolistic powers control at least 25% of the output sold market share Able to influence price; price makers Average Fixed Cost = F ixedC osts/Output Can restrict competition with artificial barriers to entry & other pricing strategies Average Variable Cost = Variable C osts/Output One firm controls entire market supply May use predatory pricing to force competing firms out Total Variable Cost = Variable C osts × Output Other firms deterred from competing due to lack of Total Cost = T otal Variable C ost + T otal F ixed C ost capital Average cost = (T otal C ost)/Output Advantages of Monopolies Avoids duplication &wastage of resources Total Revenue = P rice P er U nit × Quantity Sold Economics of scale; benefits can be passed to consumers Profit or Loss = T otal Revenue − T otal C ost High profits can be used for research &development Monopolies may use price discrimination which benefits the economically weaker sections of the society Monopolies can afford to invest in latest technology & machinery to be efficient & avoid competition Disadvantages of Monopolies May supply less & charge higher prices May offer less consumer choice and lower quality products than if they had to compete with other firms May have higher production costs because they are poorly managed Restrict competition using barriers to entry Barriers to entry Natural Artificial Cost savings from large scale Predatory pricing strategies production to force smaller firms out Preventing suppliers from selling materials & Lots of capital equipment that components to other firms by other firms can’t afford threatening to switch to rival suppliers Objectives of firms Large customer base built up Forcing retailers to stock & Survival over years sell only their product Social welfare Profit maximisation WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Natural Artificial Types of Description Examples Developed advanced Taxation products or processes that Tax rate rises with Progressive are protected by patents income; higher income = Income tax Tax higher tax Tax rate falls with income; 4. Government & The Regressive Tax higher income = lower tax VAT Macroeconomy Proportional Tax Everyone pays same effective tax rate Corporate income tax Direct Tax Levied on individuals Capital gains tax 4.1. Role of Government Added to price of Indirect Tax Tariffs commodities Local Role - Fund local services (Garbage Collection, Street Lighting, Schools, Hospitals and more) Principles of Tax National Role - Achieve macroeconomic goals (Economic Growth, Low Inflation, Stable Prices and more) Equitable International Role - Trading of goods and services Economic Transparent 4.2. The Macroeconomic Aims of The Convenient Govt. Fiscal Policy Economic Growth It is the use of taxation and government spending to Low Unemployment influence aggregate demand Low Inflation/Stable Prices Balance of Payment Stability Policy About Redistribution of Income Reducing taxes and increasing govt. spending to boost Conflicts between the Macroeconomic Aims Expansionary Fiscal Policy demand, so employment and output rises. May be used to Full Employment vs Stable Prices reduce recession. Economic Growth vs Balance of Payment Stability Increasing taxes and reducing Full Employment vs Balance of Payment Stability govt. spending to reduce Economic Growth vs Stable Prices Contractionary Fiscal Policy demand. May be used to reduce price inflation. 4.3. Fiscal Policy Effects of fiscal policy on govt. macroeconomic aims Budget: It is an estimate made by the govt., of income and expenditure for a future period Expansionary fiscal policy can reduce unemployment Expansionary fiscal policy can increase economic growth Reasons for Government Spending Contractionary fiscal policy can reduce high inflation 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 To redistribute income from the rich to the poor To achieve other macro-economic objectives WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Policy About Important as it increases the standard of living May be used during a Measurement of Economic Growth recession & to increase Expansionary Monetary Policy employment by cutting Gross Domestic Product (GDP) is the main measure of interest rates total value of all the goods and services produced in a Effects of monetary policy on govt. 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 inflations growth Nominal Contractionary monetary policy can reduce high inflation Real GDP = × 100 CPI ​ Real GDP 4.4. Supply-Side Policies Real GDP P er C apita = Number of Population ​ Supply-side policies aim to increase economic growth by Recession raising productive potential of economy An increase in the total supply of goods & services will It is a significant 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 Effect on macroeconomic aims A recession would cause the economy to produce at a Reducing taxes on profits and point that is within the PPC small firms can encourage Tax Incentives enterprise. It can also Causes of Economic Growth encourage investments in new Discovery of more natural resources equipment. Investment in new capital and infrastructure To reduce production costs and Technical progress help firms fund research and Increasing the amount and quality of human resources Subsidies/Grants development of new Reallocating resources technologies. Teaching new/existing workers Consequences of Economic Growth Education and Training new skills to make them more An increase in output can improve living standards of productive. people Include minimum wage laws to Higher output and incomes increase government tax encourage more people into revenue. This can increase govt. spending without Labour Market Regulations work, and legislation to restrict increasing tax rates the power of trade unions. However, it can increase pollution, lead to depletion of Regulations that outlaw unfair non-renewable resources and damage the natural Competition Policy trading practices by monopolies environment and other large, powerful firms. Policies to Promote Economic Growth Removing barriers to international trade allow Expansionary fiscal policy Free Trade Agreements countries to trade their goods Expansionary monetary policy and services more freely and Supply-side policies cheaply Removing old, unnecessary and Employment and Unemployment Deregulation costly rules and regulations on INDICATOR RECENT TRENDS business activities Risen as world population has Labour force grown 4.5. Economic Growth Participation Rate: labour Risen in many countries force as a proportion of total especially among females as Economic growth is when there is an increase in real population of working age it is now socially acceptable output over time, i.e. increased GDP & national income WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS INDICATOR RECENT TRENDS Personal Economical 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 different industrial sectors and other primary sector industries has fallen Expansionary monetary policy Expansionary fiscal policy Employment Status: Number Most employees work full- Increase in quality and quantity of education and training of full-timers, part-timers or time with temporary contracts Inflation and deflation Part-time employees have grown rapidly, especially Inflation: general & sustained increase in the level of among female employees prices of goods/services in an economy over a period of time Unemployment: Number of Tends to rise during economic Deflation: decrease in general price level of goods and people registered as being recessions services and occurs when the inflation rate falls below 0% without work Almost half the unemployed Measurement are young unskilled workers Base year: first year with which the prices of subsequent Unemployment Rate: Relatively stable in the recent years are compared Unemployment as a years but did increase in 2008 Inflation rate: percentage change in annual CPI proportion of labour force during a global financial crisis Weighted Average Price in Year Types of Unemployment CP I in Y ear x = Weighted Avereage Price in Base Y Cyclical Unemployment: occurs during recession due to Causes of Inflation falling consumer demand & incomes Firms reduce output & lay off workers Demand-pull Inflation: caused by total demand rising Structural Unemployment: caused by changes in faster than total output, causing market prices to rise industrial structure of an economy Cost-push Inflation: cost of production increases, so firms Entire industries close due to a permanent fall in try to pass cost to consumers through higher prices demand for their goods/services Causes of Deflation Frictional Unemployment: refers to short-lived Fall in the money supply unemployment; e.g. moving to different job Decline in confidence Seasonal Unemployment: occurs because consumer Lower production costs demand for goods/services changes with seasons; e.g. no Technological advances job for ski instructor when/where there is no ice Increase in unemployment Increase in the real value of debt Measurement of Unemployment Policies to Control Inflation & Deflation Contractionary fiscal and monetary policy for inflation Taking claimant count Expansionary fiscal and monetary policy for deflation Labour force survey Supply-side policy can increase aggregate supply and thus control both inflation and deflation Unemployment Rate = N umber of U nemployed P ersons / Labor F orce Consequences of Unemployment 5. Economic Development Personal Economical Loss of income and reduced Unemployment is a waste of ability to buy goods & services human resources 5.1. Living Standards Unemployed people de-skill if Fewer goods & services Real Gross Domestic Product (GDP) Per Capita long out of work produced Unemployed people may Total output & income in GDP is the main measure of total value of all the goods become depressed & ill economy is lower and services produced in a given period of time Strain on family relationships Government tax revenues An increase in prices will increase nominal GDP but this is & health services also lower measured in current dollars thus includes inflations l WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Nominal Corruption and Instability Real GDP = × 100 CPI \ ​ Real GDP Alleviating Poverty Real GDP P er C apita = Number of Population ​ Governments will use policies to help alleviate poverty in If economy has an extremely rich person & everyone else their country, or in another country: 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 different countries Food aid methods produce can force farmers Combines three different measures for each country insufficient food out of business Standard of living, measured by average incomes Being educated, measured by adult literacy rate LEDCs lack capital Living a long healthy life, measured by life expectancy to invest in an Loans have to be Single index with a value between 0 and 1 Financial aid industrial base, repaid sometimes Greater than 0.8 = high human development. Less than modern machinery with interest 0.5 = low human development and infrastructure LEDCs lack access Most people lack Reasons For Low/Varying Economic Development to modern skill to use modern machinery, technology; instead Over-dependence on agriculture Tech aid equipment and of using machinery, Domination on international trade by developed nations Lack of capital knowledge of more jobs are Insufficient investment in education, skills & healthcare modern production needed to employ Low levels of investment in infrastructure methods people Lack of efficient production and distribution systems Relieving LEDCs of May encourage High population growth debt will allow them LEDCs to borrow Other factors like a corrupt govt. or war to use money for more money or Debt relief economic money may be development misused by corrupt 5.2. Poverty instead governments Absolute poverty Relative poverty LEDCs may have Removing overseas natural supplies, MEDCs will force Number of people living trade barriers can be exported for down their price below a certain income Measures extent to which a money threshold or number of household’s financial households unable to afford resources falls below an Governments in Advice not enough; certain basic goods & average income level. LEDCs lack Economic Advice LEDCs need more services economic capital & stability knowledge Occurs when people are poor Occurs when people do not relative to other people in the have access to basic food, country; unable to participate 5.3. Population clothing and shelter fully in normal activities of society they live in Factors that affect population growth Birth rate Causes of Poverty Death rate Unemployment Net migration Low wages Immigration & emigration Illness Age Dependency Ratio Poor Healthcare Comparison of people in employment with the number of Low literacy rates High population growth people who are not in the labour force. Poor infrastructure Reasons for different population growth rates Low FDI (Foreign Direct Investment) Varying Birth Rates High public debt Reliance on primary sector output LEDCs have: WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS 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 Countries specialize in production of those goods and Varying Death Rates services in which they have an absolute advantage or MEDCs have: comparative advantage over other regions or countries A country has an absolute advantage if it can produce a Better food, housing, hygiene &high life expectancy Fatty foods, smoking and lack of exercise has given amount of a good or service with far less resources increased rates of diabetes, cancer & heart disease and therefore at an absolute cost advantage over any Improved medicine & healthcare; prevents many country diseases & increased life expectancy A country has a comparative advantage in the production LEDCS have: of a good or service if it can produce it at a lower opportunity cost relative to other countries Widespread diseases which lower life expectancy Natural disasters, famines, wars Advantages of Specialisation Population Structure The Demographic Transition Model: Efficiency Gains Labour Productivity Increased Productive Capacity Economics of Scale Improved Competitiveness Disadvantages of Specialisation Overspecialisation Lack of variety for consumers High labour turnover Low labour mobility Higher labour costs Globalisation, Free Trade and Protection Globalisation: The process by which businesses or other This shows that population growth occurs in stages organizations develop international influence or start Population Pyramid: a type of graph that shows the age operating on an international scale. and sex structure of the country Multinationals Operates in more than one country Some of the largest companies in the world Governments often compete to attract multinationals Can provide jobs, incomes, business knowledge, skills and technologies which can help other firms Pay taxes on their profits to boost government Stage 1: high birth rate; high death rates; short life revenue expectancy; less dependency (since there are few old Headquarters are based in one country people and children must work anyway) Stage 2: high birth rate; fall in death rate; slightly longer Advantages Disadvantages life expectancy; more dependency due to more elderly Can reach many more Stage 3: declining birth rate; declining g death rate; longer Can switch profits to other consumers globally & sell far life expectancy; more dependency countries to avoid paying more than other types of Stage 4: low birth rate; low death rate; highest taxes on profits businesses dependency ratio; longest life expectancy Can minimize transport costs by locating plants in different Can force smaller local firms 6. International Trade & countries to be near raw out of business materials or big markets Globalisation WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS Advantages Disadvantages Arguments For Possible Consequences Minimize wage costs by Trade barriers have May exploit workers in low Because other countries use locating in countries with low increased the gap between wage economies barriers to trade wages rich and poor countries May use their power to get To prevent over-specialization Can enjoy low average generous subsidies & tax production costs advantages from the 6.2. Foreign Exchange Rates government Exchange rate is the price of a country’s currency in terms Benefits of Free Trade of another country’s currency For Consumers To Producers To Governments Most countries have a floating exchange rate, which Exports increase means no set value for their currency compared with any Cheaper products Larger markets jobs, GDP, incomes other currency But imports take Currency is a commodity thus the value of a currency is Better products Economies of scale totally dependent on demand and supply of that currency them away More produced, in the foreign exchange market. Workers more An appreciation in the value of currency means its lower average per productive exchange rate against other countries has risen unit cost A depreciation in the value of currency means its International trade exchange rate against other countries has fallen increases number International Trade of products you Exchange Rate Fluctuations make Increased Demand for a currency comes from foreign money flowing into the country. If demand rises, the currency’s competition from value will rise in relation to the other currency international Supply of the currency comes from domestic money companies flowing out of the country. If supply rises, the currency’s Lower Prices – value will fall Better Qualities A currency might depreciate A currency might appreciate Trade Protection because: because: Demand for other currencies Tariffs: tax on imports to raise its price and make them There is a balance of rises as domestic consumers more expensive than local goods to stop people buying payments surplus buy more imports them Subsidies: grant given to an industry by government so Demand for the currency There is a balance of industry will lower its prices encouraging consumers to rises as overseas consumers payments deficit stop buying foreign imports by making home-produced buy more exports goods cheaper Interest rates fall relative to Interest rates rise relative to Quota: limit on number of imports allowed into country other countries other countries per year, reducing quantity of imports without changing People move their savings to This attracts savings from their prices bank accounts overseas overseas residents Embargo: complete ban on imports of certain goods. An Inflation is lower than in other embargo may be used to stop imports of drugs Inflation rises relative to other countries so exports will be Excessive quality standards and bureaucracy countries. This makes exports cheaper and overseas more expensive and demand Protection demand for them, and the for them, and the currency Arguments For Possible Consequences currency required to pay for needed to buy them, falls them, will rise Other countries will retaliate Protection of a young industry People speculate that the with trade barriers People speculate that the currency will fall in value and It protects inefficient domestic currency will rise in value and To prevent unemployment they sell their holdings of the firms they buy more of the currency currency The loss of domestic jobs To prevent dumping from overseas competitions Consequences of Exchange Rate Fluctuations will only be temporary WWW.ZNOTES.ORG CAIE IGCSE ECONOMICS An appreciation of the currency will make exports more Visible trade account: the difference between the export expensive and imports will be cheaper, vice versa revenue and import spending on physical goods, e.g. cars, If PED