HL Economics

Introduction to Economics – August 2022

Focus Questions

● Why is scarcity the fundamental problem of economics?

● How does the concept of “opportunity cost” influence an economist's view of decision making?
● How do market economic systems answer the allocation questions?
● Explain why / how governments intervene to alter the ways that markets allocate resources.
● What are the strengths and limitations of using economic models to understand and predict?
● How does a circular flow diagram illustrate the interdependence between firms and households?
● How does a circular flow diagram illustrate the sources of economic growth?
● Explain why economists use GDP/GNI to measure changes in the standard of living of a nation?
● Explain three factors that illustrate the limitations of using GDP/GNI as a measure of a nation’s standard
of living.
● What do economists mean by sustainable development?
● Explain how three barriers can slow sustainable development.
● Use a poverty cycle diagram to explain why absolute / extreme poverty is self-reinforcing.
● Explain the difficulties in measuring improvements in the development of a nation.
● Under what circumstances can economic growth yield sustainable development?
● Use a production possibilities curve to explain the difference between action and potential growth.
● What can governments do to promote actual and potential economic growth?
● What can governments do to promote development other than promoting growth?

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 Tragakes: Chapter 1 - pp. 3-9

Economics as a Social Science

● Economic attempts to study, predict and influence human behavior.

● Economists attempt to use the scientific method (see below)
● Since humans are difficult to study, predict and influence accurately there are many fundamental disagreements
within the discipline of Economics.

Two areas of study in Economics

● Microeconomics – the branch of economics that studies individual units: households, firms and industries;
studies the interrelationships between these units in determining the pattern of production and distribution
of goods and services

● Macroeconomics – the branch of economics that studies economic aggregates (grand totals) the overall
level of prices, output and employment in the economy; concerned with the economy as a whole; the
overall level of economic activity rather than with detailed individual choices.

IB Key Concepts:

Scarcity, Choice, Efficiency, Equity, Economic well-being, Sustainability, Change, Interdependence & Intervention

IB Real World Issues:

● How do consumers and producers make their choices in trying to meet their economic objectives?
● When are markets unable to satisfy important economic objectives – and does government
intervention help?
● Why does economic activity vary over time and why does it matter?
● How do governments manage their economies and how effective are their policies?
● Who are the winners and losers from the integration of the world’s economies?
● Why is economic development uneven?

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Scarcity refers to the limited nature of economic resources used to produce goods and services - in comparison to the
unlimited or infinite nature of human wants and needs.

● The basic economic problem revolves around scarcity since there are only a limited amount of resources available to
produce the unlimited amount of goods and services we desire.

● Since factors of production are affected by scarcity (the inputs into the production of goods and services) then
scarcity must affect the final goods and services available to us.

● Since the goods and services produced are limited - societies must decide:
○ What to produce?
○ How to produce?
○ For whom to produce?

Factors of production - also referred to as “means of production”, “economic inputs”, “economic resources”.

● Land (and raw materials) – Natural resources of all kinds (“free gifts of nature”) used to produce goods and services

● Labor – all forms of human input, both physical and mental, into production

● Capital (physical capital) human produced inputs into the production process e.g. equipment, tools, buildings, and other
manufactured goods that can be used in production

● Entrepreneurship – human skill that includes the risk taking and innovation needed to seek opportunities for opening and
running a business.

Differing meanings of “capital”

● Physical capital: (see above)

● Human capital: skills, abilities and knowledge and good health acquired by people that make them more “productive”.

● Natural capital (environmental capital): An expanded meaning of the economic resource “Land” plus additional natural
resources that occur naturally including: air, biodiversity, soil quality, ozone layer and climate.

● Financial capital - investments in financial assets (stocks, bonds, etc.) - can also refer to money used to buy these assets.

Opportunity cost - p.8

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 Tragakes: pp. 10-14

Introduction to comparative economic systems

Allocation Questions

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

Economic Systems - Alternative methods of answering the 3 questions:

● Traditional: Economic questions are answered in the same way they always have been answered -
custom determines what, how and for whom to produce

● Market: Economic questions are answered by interaction of buyers and sellers. Utilizes profit
motive and private property.

● Central Planning/Command/Government Intervention: Economic questions are

answered by some central authority/government. Govenment “answers” the 3 allocation by:

○ Producing goods or encouraging firms to produce particular goods and services

■ What to produce?
○ Requiring firms to change their production methods
■ How to produce?
○ Changing income levels through taxes, direct payments, etc
■ For whom to produce?

Market Systems characterized by:

● Private ownership/control over economic resources (land, labor & capital)

● Legal protection for private property (accumulated profit).
● Use of price rationing / price mechanism to signal buyers and sellers, thus encouraging them to change their
behavior.
● Business firms have the choice to produce goods/services using any combination of land, labor & capital they feel
will be profitable. By producing what consumers want, firms can generate revenue and thus profit for the firm.
● Consumers generally earn income by selling their labor to the market, generating income which they use to
purchase goods and services.
● Consumers are free to buy only those goods/services they wish - sending signals to firms about which goods and
services are profitable.

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Potential Benefits of Market Systems - The competition for profit:

● Encourages firms to produce ANYTHING consumers might want to buy AND is profitable for firms to
produce/sell. As there are a wide variety of individual consumers each with a unique set of wants/needs -
markets tend to produce a large number and wide variety of goods.

● Encourages firms to continue looking for ways to improve quality of goods and services to attract consumers.

● Encourages firms to continue to find more "efficient", "profitable" methods of production - improving the
efficient use of economic resources.

● Encourages firms to keep prices as low as they can while still earning profit.

● Encourages people to continually develop their skills/knowledge to earn a higher salary. This can increase
productive efficiency for the economy as a whole..

Potentially Negative Aspects of Markets (Market Failures)

● Inequitable division of income / wealth: Since markets do not distribute income thus goods and services
equally / equitably - many people do have access to minimum standards of goods & services.

● Insufficient production of public / merit goods. Some goods and services are not profitable to produce and
sell (public / merit goods) and so they will not be produced (in sufficient quantities) even though society as a
whole wants them. Examples: health care, education, etc.

● Overproduction of demerit goods: Some goods / Services are produced by firms that may actually have a
negative impact on quality of life Examples: cigarettes, firearms, etc...

● Negative externalities: firms and consumers have an incentive to NOT address the negative effects of
their actions.
○ Various types of pollution arising from the production of goods and services.
○ Negative impact of consuming goods and services: (second hand smoke, car exhaust, etc…)
○ Competition for profit can lead firms to exploit workers - low wages, poor working conditions.

● Creation of monopolies: Competition can lead to some firms outperforming other firms, leaving the market
with only a single firm producing a good or service – thus canceling out benefits of competition.

Real World - mixed economic systems

● Most economies utilized aspects of all three economic systems. Markets may answer the economic questions in
a variety of ways, but government intervention also occurs. Mixed systems require people and governments to
decide on the appropriate level of market forces versus central planning - creating significant disagreements
with the world of economics:

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 Tragakes pp. 23- 27

Economic Methodology - theories and models

Positive versus normative statements

● Positive- statements that are factual or can be directly proven with evidence.

● Normative -statements that are subjective in nature. Opinions about what type of action should be taken. Value
judgements

Positive Economics: Economists use data and logic to create theories and models which in turn can improve the human
condition.

Rational choice theory - Human beings are rational animals:

● People consistently make economic decisions in their own self-interest.

● an individual acts as if balancing costs against benefits to arrive at an action that maximizes personal advantage.

Human science methodology

● Step 1: Observation - collection of data

● Step 2: Identify variables

● Step 3: Make a hypothesis - a prediction of how changes in one variable will affect other variables.

● Step 4: Make assumptions - deciding to examine some variables but not others:
Ceteris paribus - all other variables to remain constant

● Step 5 Test hypotheses using empirical evidence

● Step 6: Compare hypothesis with experimental outcome

Economic laws: statements that describe events or relationships that should be valid in different places and situations.
● Ceteris paribus

Economic models: diagrams and/or mathematical equations that illustrate economic laws. Models can also be used to illustrate
specific economic relationships - primarily descriptive.

Challenges of creating economic laws and models:

● it is impossible to construct controlled experiments
● it is impossible to predict human behavior with accuracy

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 Tragakes pp. 20-22

Introduction to Macroeconomics

Macroeconomics – the branch of economics concerned with the economy as a whole; the overall level of economic activity rather
than with detailed individual choices, firms or industries..

Potential macroeconomics objectives for governments:

● Increase economic growth / promote full employment - Growth is assumed to increase opportunities for
employment and income.

● Promote sustainable production and growth - use economic resources in a way to preserve them for future
generations.

● Promote Price stability - Create low and stable rates of inflation

● Promote equitable distribution of wealth

Economic Growth is defined as an overall increase in the quantity of goods and services produced (output) as measured
by GDP or GNI.

● GDP - Gross Domestic Product - the final market value of all the final goods and services produced within a country in a
specified time period.

● GNI – Gross National Income – the total income received by residents of a country from the production of the goods and
services produced.

First economic model / diagram: Circular flow model

Circular flow demonstrates how simplified collection of economic stakeholders interact. The model can be used to illustrate/predict
economic growth, recessions and impact of government intervention.

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Primary economic actors – those decision-makers who are making the economizing choices; we begin with the two basic
economic actors:

● Households – any group of people living together as a decision-making unit

● Firms – An organization that combines the factors of production to produce goods and services
● Government – an organization that provides goods and services and redistributes income and wealth. Governments use tax
revenue to provide goods and services and to make transfer payments.
● Banks/Financial Markets – attract savings from households which are then made available to firms that wish to increase
Capital.
● Foreign nations – firms, households and governments of other nations that buy and sell goods and services.

Circular flow of consumption / income - represented by the initial “oval” linking households and firms.

Leakages from the Circular flow - represented by the 3 arrows leaving households: Savings, Taxes and imports. These represent
income that is not used to buy goods and services from domestic firms.

● Since this income is not used for purchases, increasing leakages (all else being equal) would reduce incentive for firms to
create goods and services, thus reducing production and the resulting flow of income back to households.

○ Savings - household income that is not immediately spent on goods and services.
○ Taxes - required contribution from households to government.
○ Imports - goods and services purchased from foreign firms rather than domestic firms.

Injections into the Circular Flow - represented by the 3 arrows flowing towards firms: investment, government spending and
exports. These arrows illustrate purchases of goods and services that do not directly result from household income.

● Investment refers to purchases of physical capital goods by one firm from another firm. The arrow flows from financial
markets due to the assumption that firms borrow money from financial institutions to fund capital investment.
● Government Spending refers to goods and services purchased by the government from firms.
● Exports - refers to goods and services purchased by foreign households and firms.

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Circular Flow diagram can be used to illustrate:

● Circular Flow can illustrate the interdependence of different actors within the macro economy.
○ Households rely on firms for income
○ Firms rely on households for purchases of goods and services
○ Changes in leakages and / or injections can

● Circular flow can illustrate one method by which economists measure economic output
○ Total of consumption, investment, government spending and exports - imports will result in the total
demand for goods and services and thus the total production of goods and services.

Different economic systems and economic growth

Markets tend to promote growth:

■ Firms motivated by profit will want to increase production to increase profit. The profit motive encourages firms will look
for opportunities to increase investment to increase production.
■ Competition encourages firms to continue to look for more efficient methods of production - increasing productivity thus
increasing the number of goods/services produced per unit of economic resource.
■ The competition for profit encourages firms to produce ANYTHING consumers will buy and is profitable to produce/sell.
As there are a wide variety of individual consumers each with a unique set of wants/needs - firms are always searching for
ways to meet these needs resulting in increased production.

Planned economic systems /government intervention may reduce growth:

■ Government regulations/tax may increase costs of production thus reducing profitability and production.
■ Government regulations/tax may discourage investment and production.
■ Government production is not subject to profitability thus may not be as efficient as private firms thus reducing total
production.
■ Government production is not subject to consumer wants/needs, thus governments may produce goods/services people do
not want, reducing total production.

While market systems have proven effective at promoting economic growth - often government intervention is used to
promote the goals of sustainability, greater equity and improved quality of life.

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 Tragakes pp. 28-30

Role of value judgements - Normative Economics

● Normative statements that are subjective in nature. Opinions about what type of action should be taken. Value
judgements

Value judgments are used to prioritize among various economic priorities

● Maximize economic growth versus promoting sustainable economic growth

● Maximizing economic growth versus promoting economic equity (equality)
● Maximizing economic growth versus promoting an overall improved quality of life.

Normative Economics: evaluating markets / growth

Benefits of maximizing GDP as a way of improving the economic well being of a nation

● GDP growth from one year to the next can indicate rising employment and income levels and thus increasing quality of life
for people of a nation.

● GDP growth per capita can indicate increasing wealth of a society and thus increased access to goods and services by
citizens.

● Important Note: The Circular flow diagram is a useful way of illustrating the benefit of production for
households. You can use the arrow labeled factor incomes to illustrate the flow of income generated by
production. The assumption of this model is that income flows from firms to households. Thus production should
result in increases in standard of living.

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Limitations of using GDP growth as a way to promote the economic well being of a nation:

● The benefits of growth are dependent on the equity of income distribution within a nation. If income is distributed
inequitably, the per capita GDP may provide a misleading picture of the actual goods and services being accessed by most
people. Therefore rising growth may thus provide a misleading indicator of a population's “standard of living”.

● Increasing GDP does not reveal whether or not the production of goods / services created negative externalities.
Increasing GDP growth may create high levels of pollution, loss of biodiversity, or climate change and thus may actually
decrease people’s quality of life.

● GDP doesn't reveal anything about resource depletion or the sustainable use of resources. Thus economic growth may
reduce the ability of future generations to produce goods and services.

● GDP doesn't measure the intrinsic value to society of the goods and services produced. IF GDP includes demerit goods such
as cigarettes or alcohol may have negative impacts on people’s standard of living. Likewise, firms may be underproducing
Merit goods such as health care and education may have positive impacts on people’s standard of living.

● GDP only includes legal production that involves a monetary payment reported to the government, thus doesn't actually
provide a value of ALL goods and services produced. For example, the informal economy is not included in GDP. In
some nations, informal production (street food, motorcycle taxis, etc…) may be significant, thus GDP will understate
actual goods and services being produced.

● GDP doesn't convey any information about the conditions under which goods are produced or the amount or quality leisure
time experienced by people. If increasing GDP is the result of people working longer hours or in dangerous work
environments, increasing growth may not be increasing the quality of life of these people.

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 Tragekes pp. 540-556
Introduction to sustainable development

Development - increasing quality of life for people of a nation.

Sustainable development - meeting the needs of the present without compromising the ability of future generations to meet their
own needs.

UN Sustainable Development Goals

Tragakes, pp. 542-3

Roots of unsustainable development

Pollution of affluence - environmental degradation, overuse of common pool resources resulting from industrial production and use of
fossil fuels.

Pollution of poverty - environmental degradation, overuse of common pool resources as a result of poor societies in their efforts to
survive.

● Deforestation and soil erosion as people expand areas needed to grow crops or graze animals.
● Depletion of soil due to unsustainable agricultural practices.
● Inefficient use of resources for energy.

Multidimensional nature of human development

● Improvement in basic life sustenance - access to basic services and satisfaction of basic needs.
○ Education, health, food, housing, clothing, etc.

● Self-esteem -increasing self-respect, dignity and respect gained when people are in control over their own economic lives.
○ The absence of exploitation and the realistic hope that their children will lead a better life.

● Freedom - the ability to make choices that are often not available to people who are experiencing poverty.
○ Includes civil and political rights.

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Definitions:

Income poverty - when a society falls below a nationally or internationally agreed upon poverty line.

Human poverty - deprivations and the lack of opportunities that allow individuals to lead a long, healthy and creative life and to enjoy
a decent standard of living, freedom, dignity, self-esteem and the respect of others.

Common barriers to sustainable development

See Tragakes pp. 567-573

● High levels of Income Inequality - high concentration of income/wealth in a small percentage of the population.

● High levels of gender inequality - lack of access to labor market, reproductive health, etc.

● Low levels of production and income -as measured by GDP and GNI

● Existence of absolute poverty - the inability of an individual or family to access a minimum level of goods and
services needed for survival as measured by a nationally or internally determined poverty line.

● Reliance on agricultural production. High numbers of people working in agriculture. Agricultural production
makes up a relatively large % of GDP.

● Poor quantity / quality of infrastructure - a type of physical capital and organization structures needed to improve
overall productivity for a society. Most often provided by governments. Examples: roads, power supply, sanitation,
telecommunications, water supply, etc.

● Large "informal economy” primarily in urban areas. Informal Economy made up of economic activities that are
unregistered, unregulated and not taxed by the government. The Informal economy is usually not included in formal
GDP.

● Low levels of health and education. Many people lack access to minimum levels of health and education services.

● Low levels of productivity - usually resulting from low levels of education and health services as well was low
quality/quantity of physical capital.

● Weak institutional framework: legal system, ineffective taxation structures, inefficient banking system.

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 Cycle of Poverty - Poverty Trap
See Tragakes pp. 564-66

Extreme / Absolute poverty is both a characteristic of LDN’s and a important barrier to economic development

Societies experiencing extreme poverty:

● Have low levels of income, making saving difficult

● Are too poor to access minimum levels of health and education to improve human capital.
● Cannot afford investments in physical capital
● Often deplete their natural resources, reducing natural capital.

Poverty Cycle Diagram

● Illustrates the belief that Extreme / Absolute Poverty is a self-perpetuating condition.

● Since large numbers of people have low incomes they will in turn have low savings meaning there is likelihood
that firms will invest in physical capital that might improve productivity.

● Low income and saving also prevent households from accessing sufficient levels of health and education to
improve human capital.

● Because of this low “investment”, poverty results in very low levels of Human and Physical Capital which
prevent improvement in productivity - efficiency of production.

● Without improvements in productivity it is unlikely income levels will increase, thus keeping income levels
low.

● Thus poverty becomes self perpetuating.

Reminder: Human Capital refers to skills, abilities, knowledge and good health acquired by people that make them more
productive. Physical Capital refers to human created machines, tools, equipment, factories that increase economic
efficiency / productivity

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 Measuring sustainable development
See Tragakes pp. 546-557

Single Indicators used to measure progress in very specific areas.

● Growth: GDP/GNI per capita, GDP/GNI growth rates, GNI as a percentage of GDP, GNI/GDP in terms of PPP

● Health: Life expectancy at birth, infant mortality, maternal mortality, doctors per 1,000, hospital beds, etc.

● Education: adult literacy, primary school enrollment, secondary school enrollment, mean years of schooling, etc.

● Economic inequality: gini coefficient, % of people below poverty line, etc.

● Social inequality indicators: child labor, gender inequality, adolescent fertility rates, etc.

● Energy indicatory: renewable energy consumption, access to electricity, share of income spent on energy, etc.

● Environmental indicators: CO2 emissions, measures of waste generation, water use, etc..

Composite indicators: summary measures of more than one dimension of development

● Human development index (HDI): GNI, Life expectancy, expected years of schooling and mean years of schooling.
● Gender inequality index
● Happy Planet index
● Inequality Adjusted HDI
● Inclusive Wealth Index
● Other

Some limitations of development measures

● Indicators measure a specific bit of data rather than the goal itself. Increasing mean years of schooling may or may not mean
that education has actually improved.

● Indicators and/or composite indicators may sometimes convey contradicting information.

● Indicators are often averages thus hiding a wider range of actual progress.

● Data may not be accurate or available in many LDN’s.

● LDN’s with large informal economies may yield inaccurate data.

● No single or composite indicator can accurately measure the complexity of economic development.

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 Tragakes pp. 561

Relationship between growth and development

Economic growth may lead to sustainable development:

● increasing production may increase jobs (see Circular Flow diagram) thus increase incomes.
● With higher incomes people can access more goods and services - particularly merit goods such as education and healthcare
thus improving their quality of life (development).
● If society incomes increase, then government access to taxes will also increase (see Circular Flow diagram) and the
government may thus increase spending on merit goods to improve people’s quality of life.

Economic growth may not lead to sustainable development:

● If income inequality is high then the increases in production may not result in increasing incomes for the majority of a
society, thus not improving most people’s quality of life.

● If growth results in significant resource depletion, pollution or other externalities, the quality of life for many people
may decrease and may compromise future growth and development.

● Increased access to tax revenue may not lead governments to increase production of merit goods.

Sustainable development may lead to economic growth:

● Improvement in health, education and decision making should increase productivity (efficiency) thus improving human capital
and potential growth (see PPC).

● Productivity increases should also increase overall economic efficiency of firms thus increasing actual growth.

Production Possibility Curve (PPC)

A PPC is a curve showing all the possible combinations of two goods (or groups of goods) that a country can produce within a
specified time period with all its resources efficiently employed at 100% capacity. PPC indicates possible output when all resources are
employed at 100% efficiency

Three basic assumptions of all PPCs

1 Fixed point in time

2. With existing technology
3. Fixed amount of factors of production (land, labor
and capital)

PPC can be used to illustrate:

● Scarcity - curve illustrate the limits of production of

goods and services due to scarcity

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PPC can be used to illustrate:

● Efficiency - All combinations of goods corresponding

to points on the curve increase maximum production -
the country is producing at maximum efficiency.
a. Points outside the curve are unattainable
b. Points inside are attainable for indicate
inefficient use of resources - some land, labor
and capital are idol or underused

PPC diagram can also be used to illustrate

● Increases in actual production

○ Movement from producing a combination of
goods and services indicated by “point a” to
that indicated by “b” or “c”

● Increases in potential output:

○ Increases in potential output indicated by
outward shifts of the curve. The economy is
now capable of producing more goods and
service due to Increases in quality or quantity
of:
■ Land
■ Labor
■ Capital
○ Country could increase total number of
physical capital goods
○ Country could improve the quality of physical
capital
○ Country could improve the size or quality of
labor force - Human Capital

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 Policies to increase development by increasing growth
Prioritizing the increase in production of goods and services.

● Promote increases quantity and quality of Physical Capital - Capital goods usually improve the productive efficiency of
a nation. Most LDN's have low productivity rates that would benefit from increased use of capital goods. Governments can
adopt policies (reduced taxes) to encourage domestic and foreign firms (FDI) to invest in new capital thus improving
productivity thus increasing the output of goods and services.

● Promote use of markets via improvements in social, legal, political and economic institutions to increase efficiency,
better protect property rights, contract enforcement, effective taxation system, banking institutions, etc.

○ Privatization – governments sell any “state-run” industries to private owners. This increases the competition in the
market and thus improves productivity as firms must continually improve efficiency to earn profits. More firms
should result in increased employment.

○ Deregulation – governments can reduce the regulations firms must follow to encourage firms to open and to
increase production. Some regulations reduce productivity, profits and output.

Problem with using growth policies to promote development

● Benefits of increased growth may flow to a minority - increasing income and wealth inequality.

● Growth built on depletion of natural resources may be unsustainable. . While many LDN’s have exploited natural resources
(minerals, forests, etc.) to increase production, this is often “unsustainable”.

● Deregulation can result in environmental problems and exploitation of workers. While deregulating can promote growth, it is
sometimes at the cost of reduced quality of life for people of the LDN.

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 Policies to first promote development in hopes growth with follow
Prioritizing improvements in quality of life” rather than economic growth

Government interventions to promote quality of life

● Reduce absolute poverty and improve access to education and health service.
○ Improve tax policies by lowering rates on low income households.
○ Increase transfer payments to promote a more equitable distribution of income.
○ Increase production of merit goods / public goods making them available to poor households at low/no cost.
Examples of merit goods: education, transportation, and health services. Government may nationalize industries
such as health care.

● Improve infrastructure that directly increases quality of life and productivity – roads, rail, internet, etc
● Increase regulation of business firms to increase wages, improve working conditions, improve sustainability, increase
gender equality, and improve product safety/quality.
● Use regulations/taxes to improve sustainable growth
● Reform political and legal systems to increase transparency and access by marginalized groups.

Drawbacks to development first policies

● High taxes and increased regulations may reduce free market incentives thus reducing investment and thus preventing
improvement in physical capital and reducing job creation.
● Increased government regulation and bureaucracy may reduce productivity
● Nationalized industries may lead to inefficient production of public and merit goods

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 Some key economic definitions

Capital goods – human made resources (buildings, machines, equipment) used to produce goods and services; goods that do not
directly satisfy human wants.

Ceteris paribus - all other variables to remain constant.

Consumer goods – products that satisfy human wants directly and are purchased by households.

Consumption – the process of using up goods and services.

Development - improvements in the quality of life of a society.

Economic theory – a general rule or principle that enables us to understand and predict economic choices. Economic theory is the
bridge between economic models and the real world; a catalog of models that seems to work, that seems to enable us to understand
and interpret the past and to predict some aspects of the future.

Economic growth - an increase in the production of goods and services (output) over time.

Economic model – a formal presentation of an economic theory; represents a condition that is real, yet simplified, including only
those features that are needed for the purpose at hand.

Economic Diagram - a visual representation of an economic model.

Free good – a good in unlimited supply at zero cost and thus not affected (theoretically) by the problem of scarcity.
“Sunlight” or “air” are examples of free goods.

Goods and Services – results of combining resources - Goods are tangible products - Services are intangible and any actions or
activities that are performed for a fee and are purchased by households.

Normative Economics - statements that are subjective in nature. Opinions about what type of action should be taken. Value
judgements.

Opportunity cost: The cost of any activity measured in terms of the next best alternative forgone. Remember there is only ONE
next best alternative – therefore you will only identify one opportunity cost for each economic decision.

Positive Economics - statements that are factual or can be directly proven with evidence.

Production – the conversion of natural, human, and capital resources into goods and services .

Productivity – Amount of output produced per unit of input used to produce it; average output per unit of input; usually talked about
in relation to the input Labor

Scarcity - refers to the limited nature of economic resources used to produce goods and services - in comparison to the unlimited or
infinite nature of human wants and needs.

Sustainability - the use of natural resources at a pace and in ways that do not decrease the quantity or destroy the quality of resources
available for future generations.

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 Growth versus Sustainability

Economic Growth:

1) In the past three decades, land use in the Brazilian Amazon has been characterized by the intense exploitation of natural
resources which has resulted in a mosaic of human-altered habitats... About 17 percent of the Amazon forest, or 60 million hectares
– an area equivalent to France – has been converted to other land uses in the past 30 years (INPE, 2008)….

2) …Brazil is one of the world’s top producers and exporters of sugar cane, soybean, oranges and other products (FAO, 2008). In the
nine states of the Brazilian Amazon, the area under intensive mechanized agriculture grew by more than 3.6 million hectares from
2001 to 2004 (Morton et al., 2006)…By displacing cattle ranchers, soybean production has pushed the Amazon deforestation frontier
further north. Forces driving the expansion of mechanized agriculture include lower transportation costs as a result of improved local
infrastructure (roads, railroads, ports and waterways); higher international soybean prices; increased soybean demand from European
markets because of the mad-cow disease and rapid economic growth in China (9 percent per year) (Nepstad, Stickler and Almeida,
2006), which consumes great quantities of poultry and pork fed with soybean.

3) Soybean can also be used for biofuel… With the announced interest of other countries in alternative fuels, has encouraged local
producers to increase their soybean plantation area. About 2 million hectares will be needed just to meet the new Brazilian demand. In
addition, Brazil has built up technological expertise in ethanol production from sugar cane.

Sustainability:

4) The Ministry of Agriculture states that the total area of already deforested and arable land in Brazil is more than enough to increase
soybean plantations without need for further deforestation. For instance, the national production of ethanol could be doubled by using
only 3.3 percent of Brazil’s 90 million hectares of arable land. However, care must be taken to prevent new deforestation caused by
displacement of other economic activities such as cattle ranching, which has already occurred. When biofuels increase demands for
crops, prices will rise, farms will expand and displaced ranchers will clear new lands, usually in forested areas where land prices are
still low.

5) Agribusiness has been one of the strongest forces for the implementation of new infrastructure in the region, especially roads. The
current governmental infrastructure plan for the Amazon includes road paving, new hydropower projects and construction of
waterways and ports. It has the potential to drastically change the social, economic and environmental situation of the Amazon. Paved
roads can generate economic and social benefits, but also deforestation and forest degradation if not accompanied by regional
planning. Studies have shown that more than 70 percent of deforestation occurs within 50 km of paved roads, while at most 7 percent
occurs along unpaved roads (IPAM, 2000). The promise of a new highway (Br163) in the central Amazon has already taken many new
sawmills to the region and redirected migration.

6) The trees in the Amazon forests contain 60 to 80 billion tonnes of carbon, more than the global emissions generated by humans in a
decade. Deforestation in the Brazilian Amazon alone releases about 200 million tonnes of carbon annually, accounting for 3 percent of
global net carbon emissions and 70 percent of national emissions (Houghton, 2005).

7) Around 1.5 million hectares per year are harvested for timber (Asner et al., 2005), often using practices that increase forest
degradation and related biodiversity loss. Almost one-third of the Amazon forest has been degraded by the use of unsustainable
practices. In addition, the summed effect of deforestation, degradation, and poor harvesting and slash-and-burn agricultural practices
puts millions of hectares of forests at high fire risk. In El Niño years, forests are even more susceptible to fire because long periods of
drought make forests drier and result in accumulation of fuel (dead leaves) on the ground (Nepstad et al., 2004)..

Adapted from: Sustainable development and challenging deforestation in the Brazilian Amazon: the good, the bad and the ugly,
Claudia Azevedo-Ramos, Director of the Brazilian Forest Service, Ministry of Environment, Brasilia, Brazil. 2007
http://www.fao.org/docrep/011/i0440e/i0440e03.htm

21
 The trouble with chocolate

1. ELIZABETHTOWN, Pa. — Mars Inc., maker of M&M’s, Milky Way vowed in 2009 to switch entirely to sustainable cocoa to
combat deforestation, a major contributor to climate change. But as the United States stocks up for trick-or-treating, Mars and other
global chocolate makers are far from meeting that ambitious goal. Over the past decade, deforestation has accelerated in West Africa,
the source of two-thirds of the world’s cocoa. By one estimate, the loss of tropical rainforests last year sped up more in Ghana and
Ivory Coast than anywhere else in the world. “Anytime someone bites on a chocolate bar in the United States, a tree is being cut
down,” said Eric Agnero, an environmental activist in Abidjan, the economic capital of Ivory Coast. “If we continue like that, in two,
three, four years there will be no more forests.” Washington Post, Oct. 29, 2019

Kerala: Govt decides to ban e-cigarettes - The Indian Express, July 1, 2016

1. Kerala government has decided to ban ‘electronic cigarettes’ in view of studies claiming that its use can cause various health
issues, including cancer and heart ailments.

2. State Health Minister K K Shylaja on Thursday directed the additional chief secretary (health) to issue an order banning the
production, sale and advertisement of ‘electronic cigarette’ alias ‘e-cigarette’. E-cigarettes are handy devices that emit doses of
vaporised nicotine. An official release here today said that there were media reports that the e-cigarette market was flourishing in
Kerala targeting youth and children.
http://indianexpress.com/article/india/india-news-india/kerala-govt-decides-to-ban-e-cigarettes-2887377/

Money for nothing: The good and the bad of a guaranteed government paycheck - CNBC Sun, 30 July 2017

1. What if the federal government gave everyone a check, every month? Tesla CEO Elon Musk and Facebook CEO Mark Zuckerberg
are among those who say universal basic income, or UBI, is a good idea. With inequality widening, the idea of an unconditional,
periodic cash payment that the government makes to everyone has suddenly become a hot topic.

2. The idea is whether a person is unemployed or wealthy, a $1,000 monthly government check could replace all current welfare
programs, including Social Security. The conversation about UBI has reached a crescendo as the workforce leans more heavily on
technology. Nearly half of all U.S. jobs could be replaced by robots in the next decade or two, according to an Oxford University
Study.
3. Last November, Tesla's Musk said there was "a pretty good chance we end up with a universal basic income, or something like
that," as a rising number of workers lose jobs due to automation. UBI supporters say the cash from the government could fund basic
needs, like food and housing, freeing people up to find new jobs in the digital economy.

Germany plans to ban combustion engine cars by 2030

1. A senior government official in Germany has declared all new car registrations must be for emissions-free models from 2030.
Rainer Baake, German Deputy Economy Minister, has said that new cars will have to be emissions-free to enable his country to meet
its CO2 reduction target of at least 80% by 2050. “The fact is, there’s been no reduction at all in CO2 emissions by transport since
1990,” explained Baake at a forum hosted by German newspaper Tagesspiegel.

2. Germany’s uptake of electric vehicles has been slow, with about 25,000 registered on German roads at the moment, alongside 14.5
million diesel vehicles. The ongoing dieselgate scandal has revealed large-scale inconsistencies in emissions test results and real-world
emissions, meaning it’s possible that pollution released by diesel models is higher than the latest estimated figures.
http://www.autocar.co.uk/car-news/industry/germany-plans-ban-combustion-engine-cars-2030

22
 Guardian Industries Corp. to Cut Harmful Air Pollution at Flat Glass Manufacturing Plants in Seven States -
09/29/2015

WASHINGTON -- The U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ) today announced a
settlement with Guardian Industries Corp. that will resolve alleged violations of the Clean Air Act at Guardian’s flat glass
manufacturing facilities throughout the United States. Under the proposed settlement, Guardian will invest more than $70 million to
control emissions of nitrogen oxide (NOX), sulfur dioxide (SO2), particulate matter (PM) and sulfuric acid mist (H2SO4) from all of
its flat glass manufacturing facilities. Guardian will also fund an environmental mitigation project valued at $150,000 to reduce
particulate matter pollution in the San Joaquin Valley in California and pay a civil penalty of $312,000.

Chinese see dramatic rise in quality of life: economist

The impact of China's [market] economic reforms in the last three decades has been awe-inspiring...according to a leading
international economist. China's fast economic growth has vastly improved the quality of life for its population...The life
expectancy data from the World Health Organization show China's average life expectancy was 72.4 years in 2005,
compared with the world average of 67. China's overall performance in virtually all health indicators, assessed by the
United Nations, surpasses developing country averages by wide margins.

Poverty in Thailand on the rise, says new World Bank report- Prachatai, Fri, 6 Mar 2020

1. A new report from the World Bank, launched yesterday morning (5 March) at the Foreign Correspondents’ Club of Thailand
(FCCT), said that the number of people living in poverty in Thailand has risen in recent years,

2. The report found that...the number of people living in poverty rose from 4.85 million to more than 6.7 million. It also found that the
increase in poverty is widespread, occurring in 61 out of 77 provinces, with the southern region having the highest poverty rate for the
first time in 2017. The report calls for active [government] interventions and investments to help households break out of...poverty... It
also suggests that, in order to break the poverty cycle, the country needs to “invest equitably” in the next generation and give every
child the opportunities needed in order to reach their full potential.

New inventions that transferred housework

In the early 20th century, food poisoning was on the rise in the U.S. Food was traveling further from farms to stores and homes, and
more of it was being contaminated, causing everything from botulism to typhoid. Throughout the 19th century, reducing food spoilage
involved harvesting and storing blocks of ice that were used in everything from shipping containers to household “ice boxes.” But ice
consumption had reached unsustainable levels, and the sources of that ice were increasingly polluted by industry.
Engineers found ways to use compressed gasses as artificial refrigerants on a commercial scale, but it was Alfred Mellowes in Fort
Wayne, Indiana, who devised the first compact refrigerator in 1915 for home use. William Durant, then-president of General Motors,
bought the fledgling company, which had been struggling to keep up with orders. His team refined the design and began assembling the
new Frigidaire on an assembly line in Detroit.

Mexico Sues Gun Companies in U.S., Accusing Them of Fueling Violence

For years, Mexican officials have complained that lax U.S. gun control was responsible for devastating bloodshed in
Mexico. On Wednesday, they moved their campaign into American courts, filing a lawsuit against 10 gun companies.
The lawsuit, filed in federal court in Massachusetts, was the first time that a national government has sued gun makers in
the United States, officials said. The suit accuses the companies of actively facilitating the flow of weapons to powerful
drug cartels, and fueling a traffic in which 70 percent of guns traced in Mexico are found to have come from the United
States.

23
 The rise of weed killing robots
In the corner of an Ohio field, a laser-armed robot inches through a sea of onions, zapping weeds as it goes. This field...([belongs to]
Shay Myers, a third-generation farmer whose TikTok posts about farming life often go viral. He began using two robots last year to
weed his 12-hectare crop. The robots – which are nearly three meters long, weigh 4,300kg (9,500lb), and resemble a small car –
clamber slowly across a field, scanning beneath them for weeds which they then target with laser bursts.
“For microseconds you watch these reddish color bursts. You see the weed, it lights up as the laser hits, and it’s just gone,” said Myers.
“Ten years ago this was science fiction.” Other than engine sounds, the robots are almost silent and each one can destroy 100,000
weeds an hour, according to Carbon Robotics, the company that makes them.

What…to do for Poverty? Look to Bangladesh - Opinion NYTimes March 10, 2021

1. ...Bangladesh was born 50 years ago this month amid genocide, squalor and starvation. Back in 1991, after covering
a cyclone in Bangladesh that killed more than 100,000 people, I wrote a bleak article for The Times suggesting that
the country was “bountiful primarily in misfortune.” I was right that Bangladesh faces huge challenges.. But over all
my pessimism was dead wrong, for Bangladesh has since enjoyed three decades of extraordinary progress.

2. Economic growth rates rose steadily, and for the four years before the current pandemic, Bangladesh’s economy soared by 7
to 8 percent per year, according to the World Bank. That was faster than China’s. Life expectancy in Bangladesh is 72 years.
That’s longer than in quite a few places in the United States, including in 10 counties in Mississippi. Bangladesh may have
once epitomized hopelessness, but it now has much to teach the world about how to engineer progress. What was
Bangladesh’s secret? It was education and girls.

3. In the early 1980s, fewer than one-third of Bangladeshis completed elementary school. Girls in particular were rarely
educated and contributed negligibly to the economy. But then the government and civic organizations promoted education,
including for girls. Today, 98 percent of children in Bangladesh complete elementary school. Still more astonishing for a
country with a history of gender gaps, there are now more girls in high school in Bangladesh than boys.

4. The most dramatic thing that happened to Bangladesh has to do with transforming the status of women, starting with the
poorest women,” Muhammad Yunus, the Nobel Peace Prize winner who pioneered microcredit in Bangladesh and elsewhere,
told me. Yunus founded Grameen Bank, which turned women into entrepreneurs — nearly 100,000 became “telephone
ladies” over four years, selling mobile phone services — in ways that helped transform them and their country.

5. As Bangladesh educated and empowered its girls, those educated women became pillars of Bangladesh’s economy. The
nation’s garment factories have given women better opportunities, for Bangladesh is now the world’s largest garment
exporter, after China. Granted, factories in Bangladesh pay poorly by Western standards, have problems with abuse and
sexual harassment, and pose fire risks and other safety problems; a factory collapse in 2013 killed more than 1,100
workers. But the workers themselves say that such jobs are still better than marrying at 14 and working in a rice paddy,
and unions and civil society pushed for and won huge though incomplete improvements in worker safety.

6. Educated women also filled the ranks of nonprofits like Grameen and BRAC, another highly regarded development
organization. They got children vaccinated. They promoted toilets. They taught villagers how to read. They explained
contraception. They discouraged child marriage. [Bangladesh's] investments in human capital created a dynamism that
we can all learn from.

7. The World Bank calls Bangladesh “an inspiring story of reducing poverty” — with 25 million Bangladeshis lifted from
poverty over 15 years. The share of children stunted by malnutrition has fallen by about half in Bangladesh since 1991 and
is now lower than in India. You skeptical readers are shaking your heads and muttering: Overpopulation will undo the
progress. In fact, Bangladeshi women now average only two children each (down from seven).

8. In short, Bangladesh invested in its most underutilized assets — its poor, with a focus on the most marginalized and least
productive, because that’s where the highest returns would be. And the same could be true in America. We’re not going to
squeeze much more productivity out of our billionaires, but we as a country will benefit hugely if we can help the one in
seven American children who don’t even graduate from high school.

24
 World Leaders Commit $40 Billion to Advancing Gender Equality- NYTimes, Updated July 29, 2021

1. World leaders don’t often gather with the sole purpose of investing money in women’s advancement. They don’t even
typically gather for major discussions on the issue; it seems to happen only about once every quarter-century. The last time
was in 1995 for the Beijing World Conference on Women. That was when Hillary Clinton, the first lady at the time, delivered
her now-iconic “women’s rights are human rights” speech, considered so audacious back then that officials at home had
advised her to soften it. China even cut off airing her speech in the convention center as she was speaking.

2. More than two decades later — and after a pandemic that reversed many advances in gender equality — world leaders
gathered in Paris on Wednesday with a heightened sense of urgency, committing to a host of new ambitious goals on
gender equality. And this time, with significant financial commitments on the table. At the Generation Equality Forum
convened by U.N. Women, political leaders, corporate executives and activists unveiled a total of $40 billion to advance
gender equality — most likely the largest dollar amount ever dedicated to the issue. The funding will go toward
instituting hundreds of new gender-focused policy proposals on issues including gender-based violence, which spiked
globally during the coronavirus pandemic, economic empowerment and access to reproductive health services.

3. “Women are just one-quarter of those who are managers, they are one-quarter of parliamentarians around the world, they are
one-quarter of those who negotiate climate change, less than one-quarter of those who negotiate peace agreements,”
Phumzile Mlambo-Ngcuka, executive director of U.N. Women, said at the opening ceremony. “One-quarter isn’t equality.
Equality is one-half.”

4. Significant nongovernmental pledges were also announced on Wednesday. The Bill and Melinda Gates Foundation said it
would put $2.1 billion toward gender equality work over five years, one of the organization’s largest-ever single
commitments. The announcement cemented Ms. French Gates’s longtime focus on gender equality, which she has noted
remains an underfunded area in philanthropy. The Ford Foundation committed $420 million over the next five years, with
$159 million devoted to addressing gender-based violence.

5. All participants — whether U.N. member states or grass-roots activist organizations — would be required to submit clear,
measurable proposals that fell under any of the six main policy areas: eliminating gender-based violence, advancing
women’s economic empowerment, enhancing access to sexual and reproductive health care, increasing gender parity in
private and political spheres, investing in gender-focused climate change solutions and narrowing the gender digital divide.
... some of the commitments were ambitious, sometimes to the surprise of the forum’s organizers. Kenya, for instance, came
forward with a plan to counter gender-based violence that includes new funding for survivor recovery centers, legal services
and psychological support systems. Other African countries then used Kenya’s proposal as a template for their own plans to
curb gender-based violence.

6. Of the many charismatic speakers on Wednesday, one — Shantel Marekera, an advocate from Zimbabwe and a member of
the U.N.’s youth task force — seemed to capture the mood. “It sounds silly that we’re still talking about this in 2021,” she
said onstage in Paris. “We are done talking.”

25
 Students Dropping Out of School as Pandemic Impacts Parents Income - CRtimes- June 2021

1. As the new school semester begins in Thailand, schools are reporting a higher than normal student dropout rate found in
correlation with households economically affected by Covid-19. Parents just can’t afford to pay for their children’s
education.

2. The Equitable Education Fund (EEF) has revealed the cost of education has become unaffordable for many low income
families especially given the impact of the coronavirus. The Equitable Education Fund reports over 10% of students are
not returning to school and dropout rates are continuing to rise. Poorer communities in Bangkok are accumulating informal
debts to pay for their children’s education, and parents are struggling to pay for school transport.

3. Initially, the EEF found 6,568 students had dropped out, but the number is estimated to have increased to at least 10,000
which equates to about 65,000 students by the end of 2021, according to Sompong Jitradub, Director of Civil Society at
EEF. Dropout rates in primary school are 4%, 19-20% for young high school students, and 48% for older high school
students. Only 8-10% of these students have the opportunity to enter university.

4. Schools have advised the government to find a policy solution. Many suggested increasing subsidies that have been at the
same rate for 10 years for poor communities. The EEF provides 3,000 baht every year to poor students. However, there are
other costs in education such as travel and food expenses which are about 2,000-6,000 a month, making it impossible for
some students to continue their studies. “Currently, there is an increase of 700,000-800,000 students that are under the
poverty line,” Prof Sompong said. “If we use 1,021 baht a month as the poverty line, then around 900,000 students are
living in poverty. If we use the 1,388 baht as the poverty line, then around 1.9 million students are living in poverty.” Prof
Sompong said: “Right now, the EEF can only help 10-15% of these students.

5. Anchalee Vanich Thepbutr, president of the Women’s Association for Creative Thailand Social Development, who is
working for an equitable education in Phuket, said the impact of the pandemic for Phuket has been much more severe than
the 2004 tsunami. She said Phuket used to be one of the top tourist destinations in 2019, earning more than 440,000
million baht and the average income per capita each month was 33,000 baht. Now, it is only 1,961 per person which is
below the poverty rate in Thailand which is 3,000 baht. “Since April last year, 13-15% of parents have lost their jobs,” she
said. “It is estimated that 400,000 people that lose their jobs have to travel back home, affecting the dropout rates. People
who send themselves to school are no longer able to after losing their jobs. In 2019, 1,800 people applied to study; today it
is only 170.”

6. Stanford University scholars predict that preventing students from dropping out of the education system will increase
Thailand’s GDP by 3%, while Unesco economists estimate that finding a solution will generate an economic return of
more than 228 billion baht per year, said Poomsarun Thongliamnak, an expert on economics at the Equitable Education
Fund Research Institute.

26
 H&M Embarrassed After 14-Year-Olds Found Working in Burma Garment Factories -
by Leon Kaye on Wednesday, Aug 24th, 2016

1. As Burma (also known as Myanmar) opened itself to the world in recent years, companies from Coca-Cola to Chevron to garment
manufacturers invested in this Southeast Asian nation home to 53 million people. As Reuters reports, foreign direct investment (FDI)
in Burma last year reached over $8.1 billion as companies see cheap labor in the short term and a robust market in the long run.

2. The garment industry, always looking for countries where operating costs are low, has been a huge investor in Burma over the past
few years. But there’s an ugly side to this trend. And this case became evident as H&M was embarrassed by revelations that teens as
young as 14 years old were found working within factories contracted with the fast-fashion giant.

3. Two Swedish authors, whose book on the garment industry will be released next week, interviewed girls who worked for factories
as young as 14 years old, and whose workdays in factories went as late as 10 p.m. and as long as 12 hours a day. The book,
“Modeslavar” (“Working Slave”), alleges that the garment industry has made little progress despite the 2013 Rana Plaza tragedy in
Bangladesh. That factory’s collapse, which killed over 1,100 people and injured another 2,000 workers, exposed many wrongs within
the garment industry as many labor activists accused some of the world’s leading fashion brands of not doing enough to address the
human-rights violations endemic within the sector. Tobias Andersson Akerbom and Moa Core Strand, however, say in their book that
despite promises of reform, the industry is still driven by a search for the lowest wages at the expense of poor workers’ health and
safety.

4. According to a report issued last fall by Oxfam, conditions throughout Burma’s garment factories are abysmal. Workers within
the sector usually work six days a week and put in 10.5 hours of overtime weekly on average. Although the Burmese government
instituted a minimum wage a year ago, that $83 monthly wage is often not enough to support workers’ families. Furthermore, 1 in 3
workers claimed to have been injured on the job. Verbal abuse is also the norm during working hours, and 1 in 4 workers said they
were forced to work overtime. Working during lunch breaks and late at night are the norm as building doors are often blocked or
even locked so workers cannot leave.

http://www.triplepundit.com/2016/08/hm-embarrassed-14-year-olds-found-working-burma-garment-factories/

Land loss threatens indigenous communities worldwide-Deutsche Welle, August 9, 2018

1. Global hunger for resources is driving the destruction of indigenous land. On World Indigenous Peoples' Day, campaigners warn
that, without action, we risk losing a key part of what makes our planet and humanity diverse. Deforestation and land grabbing are
major challenges confronting many of the 370 million indigenous people worldwide. They are protectors of 80 percent of the most
biodiverse areas on Earth, but activists warn many groups' livelihoods are in grave danger from multinational corporations, conflict,
and even nature conservation organizations. The increasing effects of global warming are only making the situation worse.

2. Indigenous peoples are immensely diverse — according to the United Nations, they are spread across 90 countries, with 5,000
distinct cultures and 4,000 unique languages. Fiona Watson, director of Research and Advocacy at Survival International, told DW
that one of the biggest challenges many of the different groups face is the loss of their native lands. "Indigenous and tribal peoples
around the world have extremely close relationships to the environment," she said. "The land is fundamental to their livelihood, their
economies, but also they have very deep and profound spiritual relationships to the natural world."

3. The land grabbing that marked colonial times still happens today, leaving whole groups with nowhere to go, activists say. Conflict
and violence in any form often also encroaches on indigenous land, turning the people into refugees. Many times, governments play a
role by planning new dams or highways through an indigenous area without considering the people living there. "Indigenous peoples
are regarded as 'backwards' or 'primitive' — this is often used by the state, or by multinational corporations, or by whoever…to justify
taking over or stealing their land in the name of so-called development," Watson told DW.

4. Take, for example, the Guarani people in southern Brazil, who have been forced off their land to make room for cattle ranches and
sugarcane for ethanol. They now have one of the highest suicide rates in the world, and "all the biodiversity from their land has
disappeared," Watson said. "Whether the consumer is buying ethanol in the states or in Brazil, many are doing so probably not even
knowing that this is at the cost of a whole tribe's future."…

https://www.dw.com/en/land-loss-threatens-indigenous-communities-worldwide/a-44997211

27
 India's Economic Growth Produces Real Wage Rises Of 5% A Year
Tim Worstall, Opinion. Feb 23, 2016

1. As we all know there are those out there who tell us that economic growth isn’t the be all and end all of life. But there’s some who
then go on to insist that this means that we don’t need economic growth at all. And that’s where the error creeps in. We do indeed want
continued economic growth as it is that very economic growth which is going to make our children
richer than ourselves, which is going to make our future selves richer than we are now. An interesting little example of which is the
effects of the GDP growth India is currently enjoying. As we know, India is currently the world’s fastest growing large economy,
just beating China for that title. But it’s worth thinking about what that 7 and 8% growth rate actually means for the average person
in that country. And fortunately we can construct that from the numbers we have available. Nominal wages are rising strongly:

2. Employees in India can expect an average pay increase of 10.3 percent across various job roles in 2016 with chemicals and high
technology industries likely to lead the market in terms of salary hikes. That’s pretty good, we wouldn’t be complaining if our own
pay was going up at 10% a year, that’s for sure. We’re also seeing a welcome change in the structure of pay: The major way that a
place or country gets richer is when labor productivity rises. Thus, differentiating between high and low productivity labor is a useful
thing to do. It’s an incentive for that labor to become more productive.

4. …the important point here is that yes, economic growth really does matter… There’s no particular reason why India cannot
replicate the Chinese boom of the past few decades. Not just doubling real wages in a decade and a half, but quadrupling,
quintupling, the average living standard in just one working lifetime. All it really requires, is the continued move toward a more
free market economy. If India’s growth is maintained for the next 30 years the average person will have a living standard four
times higher than the average person does today in that country.

India's remarkable growth story clouded by a degrading environment

1. JAIPUR: The past decade of rapid economic growth has brought many benefits to India, but on the flip side the environment has
suffered the most, exposing the population to serious air and water pollution. India's remarkable growth record, however, has been
clouded by a degrading environment and growing scarcity of natural resources. Mirroring the size and diversity of the Indian economy,
environmental risks are wide ranging and are driven by both prosperity and poverty.

2. A new report by the World Bank finds that environmental degradation costs India $80 billion per year or 5.7% of its economy. For an
environmentally sustainable future, India needs to value its natural resources, and ecosystem services to better inform policy and
decision-making especially since India is a hotspot of unique biodiversity and ecosystems. In a recent survey of 132 countries whose
environments were surveyed, India ranked 126th overall and last in the 'Air Pollution (effects on human health)' ranking. The survey
concluded that India has the worst air pollution in the entire world, beating China, Pakistan, Nepal and Bangladesh. Also, according to
another recent WHO survey, across the G-20 economies, 13 of the 20 most polluted cities are in India. Simultaneously, poverty remains
both a cause and consequence of resource degradation: agricultural yields are lower on degraded lands, and forests and grasslands are
depleted as livelihood resources decline. To subsist, the poor are compelled to mine and overuse the limited resources available to
them, creating a downward spiral of impoverishment and environmental degradation.

3. Over the last decade, India's strong growth has increased employment opportunities and allowed millions to emerge from poverty.
Among the three striking findings of the report, environmental sustainability could become the next major challenge as India surges
along its projected growth trajectory. Besides, for an environmentally sustainable future, India needs to value its natural resources, and
ecosystem services to better inform policy and decision-making. "But does growth so essential for development - have to come at the
price of worsened air quality and other environmental impacts? Green growth is necessary. With the cost of environmental degradation
at 5.7% of GDP, the environment could become a major constraint in sustaining future economic growth. Further, it may be impossible
or prohibitively expensive to clean up later," reads the report. "While the overall policies focus should be on meeting basic needs and
expanding opportunities for growth, they should not be at the expense of unsustainable environmental degradation," said Muthukumara
Mani, senior environmental economist at the World Bank. Source: Rachna Singh, TNN Aug 12, 2013, 06.19PM IST

Analysis Question: Using information from the article, explain why India’s recent economic growth may NOT necessarily lead to
economic development.

Analysis Question: Using information from the article, explain why India’s recent economic growth may NOT be sustainable.

28
 Make In India’ promises manufacturing jobs for millions. Here’s why it won’t work

Vikram Mansharamani, PBS, Making Sense, February 18, 2016

1. Indian Prime Minister Narendra Modi is spending this week promoting his “Make In India” campaign, an ambitious
program designed to turn the subcontinent into a “global manufacturing hub.” Modi’s vision is grand: He hopes to create
100 million manufacturing jobs in the next six years and spur the development of a middle class that will power the Indian
economy for years to come. Many are bullish on this vision. I’m not.

2. At first glance, you might not notice the problems with the Make In India strategy. Modi’s plan has, after all, attracted
significant foreign investment. Last summer, electronics manufacturer Foxconn announced plans to invest $5 billion in a
factory in western India, while GM unveiled $1 billion in planned investments on the subcontinent. Other companies,
including Airbus and Hyundai, also announced major investments in India to expand their global manufacturing footprint.
Overall, foreign direct investment increased 39 percent over the last 18 months, making India the number one destination
in the world for foreign investment.

3. This is all great news for India. But it may not create the jobs Modi needs to achieve his goal. The outlook for the Make
In India campaign is not as rosy as recent investments suggest. The country only created 4 million manufacturing jobs
between 2010 and 2014. At that rate of growth, the sector would only produce 8 million more jobs by 2022 — far below
Modi’s target of 100 million.

4. A likely culprit for this probable shortfall was embodied by one of Prime Minister Modi’s distinguished guests at this
week’s promotional events. It was not the CEO of a powerful multinational, the prime minister of a major European
country or even an accomplished development economist. It was a robot. Thanks to rapid technological progress and the
consistently falling prices of robots, production processes are becoming increasingly automated.

5. Even Foxconn, a company that uses more than 1 million employees to assemble Apple products, plans to automate 70
percent of its assembly line work over the next three years. The future of global manufacturing is clear: more robots,
fewer workers. And this means a huge pool of low-cost labor is no longer a competitive advantage in development.
Manufacturing may never again be the job-creation engine it once was.

6. If manufacturing cannot create the much-needed jobs, it’s hard to imagine how the Make In India campaign will
generate the broad-based, sustainable growth the country seeks. Even if India becomes a global production hub, the
declining labor intensity of manufacturing suggests the rewards from this accomplishment will be highly concentrated
among very few. The economic tide may rise, but not everyone will have a boat.

7. … Further, remember that per capita calculations are affected by demographics. Given that India is slated to become the
world’s most populous country by 2022, the pressures to create jobs and incomes are rising. An additional 150 million
Indians will enter the workforce over the next 15 years — roughly the population of Russia, the world’s ninth largest
country. Will these new workers find jobs? And how much will these jobs pay? The reality is that productivity-enhancing
technologies allow economies to produce more with less. India needs to produce more with more.

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 IB Paper 1 sample questions:
Part A:
1. Explain how the three basic economic questions would be answered in a free market economy and in a
centrally-planned economy. [10 marks].

2. Using a production possibility curve, explain the problem of scarcity faced by all societies. [10 marks] 3.
Explain what is meant by a production possibility curve and use a production possibility curve diagram to
explain the concepts of scarcity, choice and opportunity cost. [10 marks].

3. Explain two factors that might result in economic growth. [10]

4. Explain how an increase in leakages can affect the size of the circular flow of income. [10 marks]

Part B:

1. Discuss the view that economic growth always raises living standards in a country. [15]

2. To what extent is the use of GDP an effective way of comparing the standard of living between two
countries? [15]

3. Discuss the view that the consequences of economic growth are always beneficial. [15]

Part a – marking criteria

● Specific demands of question are understood and addressed

● Relevant economic theory is fully explained
● Relevant economic terms are used appropriately throughout the response
● Where appropriate, relevant diagrams(s) are included and fully explained
● A relevant real-world example(s) is identified and fully developed to support the argument. (usually not
included in a part a response)

Part b- marking Criteria

● The specific demands of the question are understood and addressed.

● Relevant economic theory is fully explained.
● Relevant economic terms are used appropriately throughout the response.
● Where appropriate, relevant diagram(s) are included and fully explained.
● The response contains is evidence of effective and balanced synthesis or evaluation
● A relevant real-world example(s) is identified and fully developed to support the argument.

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 Practice Paper 2
Economic growth and poverty in India

1. Although India has one of the fastest growing economies in the world, it is unlikely that the Sustainable Development goal of
ending poverty will be achieved anytime soon. An important factor is growing income inequality. Calculations of Gini
coefficients show that inequality increased by about 14% between 2001 and 2011.

2. India still has about one third of the world’s population living in extreme poverty. It is estimated that nearly half the Indian
population suffers from malnutrition. Part of India’s poverty problem is a result of poor governance and failure to address the
underlying causes of poverty.

3. Growth averaged 8.6% per year in the years 2005-2011 compared with the 10% needed over 20 years to lift the poor out of
their poverty. The central bank governor says that the lack of steps to improve the supply-side of the economy will make it
difficult for India to maintain its high growth rates.

4. The Indian Nobel Prize winner Amartya Sen argues that economic growth should not be “our ultimate objective, but a useful
means to achieve...a better quality of life”.

a) i) define [2 marks]

ii) define [2 marks]

b) Use X diagram to explain [4 marks]

c) Use X diagram to explain [4 marks]

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 d) Using information from the text/data and your knowledge of economics, explain, discuss, evaluate…. [10 marks]

Practice Paper 2
Brazil's Rousseff says extreme poverty almost eradicated

1) (Reuters) - President Dilma Rousseff on Tuesday raised the monthly stipend of 2.5 million people living below the poverty line to
make good on her promise to eradicate extreme poverty in Brazil, a nation with enormous income gaps between rich and poor. She
said she has almost met her anti-poverty target halfway through her four-year term, though Brazil's last census points to 700,000
Brazilian families who still live in extreme poverty. Rouseseff said her government will now focus on improving access to public
services for poorer Brazilians, extending school hours for their children, and ensuring they have electricity, water, sewers and basic
housing.

2) Brazil's internationally praised monthly stipend program has pulled 36 million people from extreme poverty since it was first
expanded in 2003 by then president Luiz Inacio Lula da Silva. The means-based program is based on conditional cash transfers -
usually paid to mothers who must prove their children attend school and are properly vaccinated. These requirements are designed to
improve human capital in Brazil. According to the United Nations Development Program, Brazil has successfully raised living
standards through its anti-poverty programs, which are being emulated worldwide. In addition, during his eight years in office, Lula
also oversaw dramatic economic growth that helped create a vast middle class in a country long known as a society of haves and
have-nots.

3) Despite an economic slowdown during her administration, Rousseff extended Lula's poverty reduction program when she took
office in 2011 to add stipends for children and adolescents living in extreme poverty and poor farmers who engage in conservation.
Brazilians who have benefited from these programs are still poor but this regular income, however small, allows them to afford
important necessities.

Adapted from Boadle, Anthony, Brazil's Rousseff says extreme poverty almost eradicated, "Reuters", 19, Feb. 2013.

Table 1

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