4.7.

1 Understanding Employment
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Employment Terminology

 Key terms to understand are employment, labour force, unemployment, & full

employment
 

1. Employment: refers to the economic use of labour as a factor of production

2. Unemployment: Someone is considered to be unemployed if they are not working but

actively seeking work
 
3. Labour force: A country's population is divided into the labour force - & non labour
force
o The labour force consists of all workers actively
working PLUS the unemployed (who are seeking work)
o The non labour force includes all those not seeking work e.g. stay at home
parents, pensioners, school children (these people are economically inactive)

4. Full employment: describes the ideal situation when everyone in the economy who is
willing & able to work has a job

Changing Employment Patterns

 Many economies are experiencing changing patterns of employment within their

workforce & there are numerous reasons for this
 

Causes of Changing Employment Patterns

Structure of the Economy Proportion of Women Employed
 As Economies develop over
time, they tend to progress
through the different
sectors (primary, secondary
& tertiary) resulting in
changes to the employment
pattern
 E.g. More manufacturing jobs
in the secondary
 Changing social
attitudes have increased the
number of women entering
the workforce
 The proportion of women in
the workforce still varies
significantly between
different economies e.g.
Sweden has a much higher
Formal & Informal Work
 Workers doing informal
work are not included in
employment statistics
 Informal employment is
much higher in less
developed economies & tend
to decrease as an economy
develops
 sector attract workers who proportion of women in the
had previously worked in the workforce than India or Saudi
primary sector Arabia 

Proportion of Workers in the

Public & Private Sector
 Between the Second World
War & the late 1980's, the
number of public
sector employees was large
in many economies
 With an increase
in privatisation  & a move
towards more market based
economies, the percentage of
employees in public sector
work has decreased in many
countries
Part-time & full-time
 Working part-time provides
more flexibility to workers &
in recent years, there has
been an increase in the
number of part-time
workers
 In some economies workers
may not be able to find full-
time work & may be working
2 or 3 part-time jobs to pay
the bills
Work from home
 Covid 19 caused many
people to think about their
pattern of work. Many
workers are reluctant to
return to a commuting
lifestyle & wherever possible
are continuing to work from
home

4.7.2 Measurement of Unemployment

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The Claimant Count & Labour Force Survey

 Unemployment is often measured using two different approaches

o The International Labour Organisation (ILO) Survey
o The Claimant Count

The Differences Between the ILO Labour Force Survey & The Claimant Count

The ILO Labour Force Survey The Claimant Count

  An extensive survey is sent to a random sample of ≈
60,000 households every quarter
 Respondents self-determine if they
are unemployed based on the ILO criteria
o Ready to work within the next two weeks
o Have actively looked for work in the past
one month
 The same survey is used globally so it's useful for
making international comparisons
 Counts the number of people claiming
unemployment benefits
 More stringent requirement to be considered
unemployed than with the ILO survey
 Requires claimants to meet certain criteria &
excludes many e.g.
o Those with savings
o People who claim pensions
o Married women who are looking for a job

Calculating the Unemployment Rate

Three Metrics Are Commonly Used When Analysing the Labour Market in an Economy

Unemployment rate Employment rate Labor force participation rate

  

 The employment rate could be increasing even as the unemployment rate is increasing:

o May be caused by increased immigration which causes working age population to
increase
o May be caused as people move from being economically inactive to employed

 Unemployment rates do not capture the hidden unemployment that occurs in the long term

o Workers look for a job but may eventually give up and become economically inactive
o This actually improves the unemployment rate as fewer people are actively seeking
work

Worked Example
The table provides information about a country's labour market

Population size 4000000

Labour force size 2400000

Number employed 1800000

Number of full-time
200000
students
What is the unemployment rate of this country?

a) 15%

b) 25%

c) 50%

d) 75%

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Step 1: Decide which information in the table is useful


o The number of full time students would not be included in the labour force size, so it is
not useful (it is a distraction)
o The key infromation is the labour force size & the number employed
 

Step 2: Calculate the number of unemployed in the labour force


o Labour force - employed = unemployed
o 2,400,000 - 1,800,000 = 600,000 unemployed
 

4.7.3 Types of Unemployment

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Types of Unemployment
  It is possible to classify the causes of unemployment into three categories
 

1. Structural unemployment occurs when there is a mismatch between jobs and skills in

the economy
o It usually happens as the structure of an economy changes e.g. the secondary
sector is declining and the tertiary sector is growing
o There is no longer a need for a specific type of worker e.g. ship builders in
Glasgow
o Many Western industries have relocated production to China causing structural
unemployment in their economies
o Unless workers receive help to retrain, they are often
left unemployed or underemployed

2. Cyclical unemployment is caused by a fall of total (aggregate) demand in an economy

o This typically happens during a slow down or recession
o At least one of the components of real gross domestic product (rGDP) is falling
(consumption, investment, government spending or net exports)
o The demand for labour is a demand derived from the demand for
goods/services
o As output falls in the economy, firms lay off workers
 
3. Frictional unemployment occurs when workers are between jobs
o This is usually short-term unemployment
o Workers have voluntarily left their previous job to search for another
 

4.7.4 Consequences of Unemployment

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Consequences of Unemployment

 The effects of unemployment, especially long-term unemployment, are extremely

damaging
o There are impacts on the individual, the economy, the government, and firms
 Long term unemployment affects individuals, the economy, government, and firms
 

 Government's receive less tax revenue & have higher expenditure in the form of

welfare payments
 Individuals suffer significant emotional, relational & financial consequences
 Firms may find it harder to find workers to employ (as they have moved on) once the
economy starts to recover
 The economy contracts as there is a higher level of inefficient use of available resources

4.7.5 Policies to Reduce Unemployment

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Demand-side Policies

 Expansionary fiscal policy & expansionary monetary policy aim to increase total

(aggregate) demand in an economy
o The demand for labour is derived from the demand for goods/services
o If total demand for goods/service increases there will be a higher demand for
labour leading to lower unemployment
 
 Total demand can be increased through any policy which increases one of the
components of real gross domestic product (rGDP)
 

Examples of Demand-side Policies Which Are Likely To Reduce Unemployment

Broad Policy Type Specific Policy Explanation

Expansionary Fiscal Government decreases corporatio Firms pay less tax → firms have more profit →
Policy n tax firms hire more workers → firms increase output
→ unemployment falls
 Expansionary Fiscal Government increases expenditur Defence firms receive more orders from the
Policy e on national defence government → they hire more workers to produce
the output → unemployment falls

Expansionary Fiscal Government decreases personal Households have more discretionary income

Policy income tax → consumption increases → in order to produce
the extra goods/services, firms hire more workers
→ unemployment falls
Expansionary The Central Bank lowers interest Household repayments on existing loans fall →
Monetary Policy rates Households have more discretionary income
→ consumption increases → in order to produce
the extra goods/services, firms hire more workers
→ unemployment falls
Expansionary The Central Bank increases the Many firms receive money as the Central Bank
Monetary Policy money buys back their bonds → they decide to use the
supply through quantitative extra money to invest in new equipment &
easing technology → investment increases allowing the
production of the more goods/services → firms hir
more workers → unemployment falls
 

 Demand-side policies are very effective at dealing with unemployment caused by a fall

in total (aggregate) demand
 They are not effective at dealing with frictional & structural unemployment
 One conflict caused by expansionary policy is that demand pull inflation is likely to
occur
 Expansionary monetary policy tends to increase inequality in the distribution of income
as the poor are usually unable to benefit from it (banks do not necessarily lend to the
poorest households)

Supply-side Policies

 Supply-side policies aim to improve the quantity/quality of the factors of

production thereby raising potential output
o If output increases then firms will require more workers to produce that output
& unemployment may fall
 

Examples of Supply-side Policies Which Are Likely To Reduce Unemployment

Specific Supply-side Policy Explanation

 The Government reduces trade Trade union power weakens → firms lower wages → costs of production
union power decrease → firms can produce more output with the same input → firms
hire more workers as they are cheaper → unemployment falls
The Government reduces Regulations removed → costs of production decrease as firms no longer
regulation on the oil & banking need to spend money meeting requirements → firms can produce more
industries output with the same input → firms hire more workers as they are cheaper
→ unemployment falls
The Government introduces new Cheaper to study green technology → more students develop their skills
long term training subsidies for → supply of skilled workers in the industry grows → new firms launch
students of green technology → output increases & more workers are required → unemployment falls
 

 Supply-side policy tends to be long term e.g. breaking trade union power is a long term
process, as is training
 It is most effective in dealing with unemployment caused by frictional & structural
unemployment
 It does not help deal with unemployment caused by demand side issues e.g. a recession

Protectionist Policies

 Protectionism involves the use of government policies that restrict international

trade in order to protect domestic industries, including employment in domestic
industries
o Some firms are unable to compete with international firms & without protection,
go out of business
o Their workers become unemployed
o To avoid this, governments help domestic firms to survive by subsidising them,
or placing import tariffs on a range of products which raises the price of the
goods/services provided by foreign competitors
 
 Protectionist policies may well protect employment of some workers in the industry
targeted, but create even higher unemployment in related industries
o E.g. in 2016, The Trump Administration placed tariffs on all steel imports which
protected around 1,600 jobs in the steel industry. However, the raised price of
imported steel, which is used as a factor of production in many
industries, reduced output & increased unemployment in many related
industries
  
 A deeper evaluation of protectionism is available in Sub-topic 6.3.2

4.8.1 Definitions & Measurement

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Inflation & Deflation

 Inflation is the sustained increase in the general price level of goods/services in an economy

o The general price level is measured by checking the prices of a 'basket' of
goods/services that an average household will purchase each month
o This basket of goods is turned into an index and it is called the consumer price index
(CPI)
o The UK has an inflation target of 2% per annum
 Low inflation is better than no inflation as it is a sign of economic growth

 Deflation occurs when there is a fall in the general price level of goods/services in an economy

o Deflation only occurs when the percentage change in prices falls below zero %

Exam Tip
Remember that a reduction in the inflation rate from e.g. 5% to 3% means that prices are still
rising but rising more slowly (inflation at a decreasing rate is called disinflation)

MCQ will check your understanding of decreasing inflation by asking you questions such as:

In which year are prices their highest?

Y1 Inflation = 5%

Y2 inflation = 3%

Y3 inflation = 1%

Y3 is the answer. Prices are 9% higher in Y3 than at the start of Y1 (5% + 3% + 1%)

Using the Consumer Price Index (CPI) to Measure Inflation & Deflation

 Inflation is the sustained increase in the general price level of goods/services in an economy

 The inflation rate is the change in general price levels in a given time period
o The inflation rate is calculated using an index with 100 as the base year
o If the index is 100 in year 1 and 107 in year 2 then the inflation rate is 7%

 The consumer price index (CPI) is used to measure inflation

 The Consumer Price Index (CPI)

 A 'household basket' of 700+ goods/services that an average family would purchase is compiled

on an annual basis
o  A household expenditure survey is conducted to determine what goes into the basket
o Each year, some goods/services exit the basket & new ones are added

 Goods/services in the basket are weighted based on the proportion of household spending

o E.g. More money is spent on food than shoes, so shoes have a lower weighting in the
basket

 Each month, prices for these goods/services are gathered from hundreds of locations across

the country
o These prices are averaged out

 The price x the weighting determines the final value of the good/service in the basket
o These final values are added together to determine the price of the 'basket'

 The percentage difference in CPI between the two years is the inflation rate for the period

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Worked Example
Using the information in the table, calculate the inflation rate for 2021 if the price of the basket
in the base year (2019) was $400

Basket 2020 Basket 2021

Good Price 2020 Price 2021 Weighting
(Price x (Price x
weighting) weighting)
Housing, water,
950 1200 34% 323.00 408.00
electricity, gas

Transport 250 325 11% 27.50 35.75

Food 500 620 9% 45.00 55.80

Recreation &
300 340 10% 30.00 34.00
culture
 Clothing &
190 210 5% 9.50 10.50
footwear

        $435.00 $544.05

Step 1: Calculate the CPI for 2020

Step 2: Calculate the CPI for 2021

Step 3: Calculate the percentage difference between the CPI for 2021 and 2020

4.8.2 Causes & Consequences of Inflation

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The Causes of Inflation

 An increase in the general price level in an economy can be caused by demand pull

inflation or cost push inflation

1. Demand Pull Inflation

 Demand pull inflation is caused by excess demand in the economy

 Total (aggregate) demand is the sum of all expenditure in the economy
o rGDP = Consumption (C) + Investment (I) + Government spending (G) + Net Exports (X-
M)

 If any of the four components of rGDP increase, there will be an increase in the total demand in
the economy leading to an increase in the general price level
 Demand pull inflation has occurred
 

An Example of Demand Pull Inflation

  If the Central Bank lowers the base rate, there is likely to be increased borrowing by firms &
consumers
o This will result in an increase in consumption & investment which will increase the rGDP
o It is likely to lead to a form of demand-pull inflation

 
2. Cost Push Inflation

 Cost push inflation is caused by increases in the costs of production in an economy

 If any of the costs of production increase (labour, raw materials etc.), or if there is a fall
in productivity, the total supply will decrease
 With less supply, prices rise leading to an increase in the general price level
 Cost push inflation has occurred
 

An Example of Cost Push Inflation

 Trade Unions negotiate higher wages for workers

 The wage increases represent an increased cost of production for firms
 With the inputs, firms now produce less & supply reduces leading to higher general price levels
 Cost push inflation has occurred

4.8.3 Causes & Consequences of Deflation

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Demand-side Deflation

 Deflation occurs when there is a fall in the average price level of goods/services in an economy
as measured by the consumer price index (CPI)

o Deflation only occurs when the percentage change in prices falls below zero %

 
 Deflation can be caused by either demand-side or supply-side factors
o The two different causes of deflation have very different consequences for the economy
 

Demand-side Deflation (Bad Deflation)

 

 Demand-side deflation is caused by a fall in total (aggregate) demand in the economy

 Total (aggregate) demand is the sum of all expenditure in the economy as measured by the real
gross domestic product (rGDP)
 o rGDP = Consumption (C) + Investment (I) + Government spending (G) + Net Exports (X-
M)
 If any of the four components of rGDP decrease, there will possibly be a decrease in the total
demand in the economy leading to a decrease in the general price level
o Demand-side deflation has occurred

The Consequences of Demand-side Deflation

Unemployment Consumers Lose Confidence Debt

With a decrease in output, fewer
workers are required & so
unemployment increases
With falling output & rising Debt feels more burdensome as the
unemployment, households lose value of any debt is worth
confidence choosing to save instead more.  Real cost of borrowing
of spend. Consumption falls increase as real interest rates rise
& rGDP reduces even more when the price level falls e.g. if
interest rates are 1.5% & the inflatio
rate is –1.5%, then the real interest
rate is 3%

Firms Lose Confidence Bankruptcies  Exports

Falling output & falling prices cause
firms to lose confidence & so
they delay investment, further
reducing rGDP
Supply-side Deflation
Falling output & falling Persistently falling prices can
prices reduce the profits of firms. prove attractive to foreigners & th
Some firms will be unable to level of exports may increase (this
continue & will go out of business helps offset some of the reduction in
rGDP)

 Supply-side deflation is caused by increases in the productive capacity of the economy

o This is brought about by any increase in the quantity/quality of the factors of
production
o It effectively creates a condition of excess supply in the economy
o General price levels fall
o National output (rGDP) increases 
 

The Consequences of Supply-side Deflation

 Unemployment Consumers Gain Confidence Debt

With a decrease in costs, the output With rising output & falling price Debt still feels more burdensome a
of firms increases. More workers levels, households become more the value of any debt is worth more 
are required & so unemployment confident & consumption increasing
falls - increasing rGDP even more

Firms Gain Confidence Exports 

Rising output & falling costs of Persistently falling prices  

production cause firms to gain boosts international
confidence & increase investment, competitiveness & exports increase
thereby increasing rGDP
 

Exam Tip
Falling prices caused by a recession are not good for an economy. In this scenario, national
output is falling which means that fewer workers will be required to produce goods/services so
unemployment will increase.

Falling prices caused by an increase in supply are good for an economy. In this scenario, national
output is rising which means that more workers will be required to produce goods/services so
unemployment will decrease.

4.8.4 Policies to Control Inflation & Deflation

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Policies To Tackle Inflation

 Demand pull inflation is best addressed using contractionary demand side policies

o Contractionary fiscal policy & contractionary monetary policy aim to reduce
total (aggregate) demand in an economy
o If total demand for goods/services decrease there will be a fall in the general
price level thereby reducing the level of inflation
 
 Total demand can be decreased through any policy which decreases one of the
components of real gross domestic product (rGDP)
 
 Examples of Demand-side Policies Which Are Likely To Reduce Demand Pull Inflation

Broad Policy Type Specific Policy Explanation

Contractionary Fiscal Government increases corporation Firms pay more tax → firms have less profit →
Policy tax firms invest less → rGDP falls → inflation
decreases

Contractionary Fiscal Government decreases expenditur Government spending decreases → defence firms

Policy e on national defence receive fewer orders from the government →
national output falls → inflation decreases

Contractionary Fiscal Government increases personal Households have less discretionary income

Policy income tax → consumption decreases → national output fall
→ inflation decreases
Contractionary The Central Bank increases Household repayments on existing loans rise →
Monetary Policy interest rates households have less discretionary income
→ consumption decreases → national output fall
→ inflation decreases
Contractionary The Central Bank decreases the Firms receive less money from the sale of bonds
Monetary Policy money supply by → investment decreases → national output falls
stopping quantitative easing → inflation decreases
 

 Demand-side policies are more effective in the short term at dealing with inflation
caused by a rise in total (aggregate) demand
 They are less effective at dealing with cost push inflation
 One conflict caused by contractionary policy is that reducing demand pull inflation also
reduces output & employment
 

Examples of Supply-side Policies Which Are Likely To Reduce Cost Push Inflation

Specific Supply-side Policy Explanation

The Government reduces Regulations removed → costs of production decrease as firms no longer
regulation on the oil & banking need to spend money meeting requirements → national output (total supply
industries rises → inflation reduces
The Government changes More workers move into the country → the price of labour (wages) falls
 migration policies to allow more
workers into the country
The Government builds a new
rail network serving ports &
airports
→ costs of production reduce for firms → national output (total supply)
rises → inflation reduces
Speed & capacity of transport infrastructure is improved → costs of
production decrease as firms benefit from the improvements → national
output (total supply) rises → inflation reduces

 Supply-side policy tends to be long term, but highly effective in reducing price levels

 They do not help deal with inflation caused by demand side issues

Policies To Tackle Deflation

 Deflation caused by a fall in total demand (e.g. during a recession) is best addressed

using expansionary demand-side policies
 
 Expansionary fiscal policy & expansionary monetary policy aim to increase total
(aggregate) demand in an economy
o When total demand increases, general price levels also increase
o This reduces or eliminates the deflation
 
 Total demand can be increased through any policy which increases one of the
components of real gross domestic product (rGDP)
 

Examples of Demand-side Policies Which Are Likely To Reduce Deflation

Broad Policy Type Specific Policy Explanation

Expansionary Fiscal Government increases expenditur Defence firms receive more orders from the
Policy e on national defence government → total demand increases → deflation
is improved/eliminated

Expansionary Fiscal Government decreases personal Households have more discretionary income

Policy income tax → consumption increases →total demand
increases → deflation is improved/eliminated
Expansionary The Central Bank lowers interest Household repayments on existing loans fall →
Monetary Policy rates Households have more discretionary income
→ consumption increases → total demand
increases → deflation is improved/eliminated
 
  Demand-side policies can very effective at dealing with deflation
 Expansionary monetary policy tends to increase inequality in the distribution of
income as the poor are usually unable to benefit from it (banks do not necessarily lend to
the poorest households)

5.1.1 Indicators of Living Standards

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Real GDP Per Capita

 Economic development is the sustainable increase in living standards for a country, typically

characterised by increases in life span, education levels, & income
 
 There are many measures of living standards
o Single indicators e.g. real gross domestic product/capita, number of doctors/1000
people; infant mortality rate; % of the population with access to clean drinking water
o Composite indicators such as the Human Development Index (HDI)

 
The Distinction Between Real, Nominal & Per Capita GDP

 In economics, the use of the word nominal refers to the fact that the metric has not been
adjusted for inflation
 Nominal GDP is the actual value of all goods/services produced in an economy in a one-
year period
o There has been no adjustment to the amount based on the increase in general price
levels (inflation)

 Real GDP is the value of all goods/services produced in an economy in a one-year period -

& adjusted for inflation
o For example, if nominal GDP is $100bn and inflation is 10% then real GDP is $90bn

 Real GDP per capita = rGDP / the population

o It shows the mean wealth of each citizen in a country
o This makes it easier to compare standards of living between countries: 
 For example, Switzerland has a much higher GDP/capita than Burundi

  It is useful to know the rGDP/capita, however it has the following disadvantages

o It is a single indicator so provides very limited information
o It is an average so there may be significant poverty in many parts of a country that has
a high rGDP/capita
Exam Tip
When an exam question uses the phrase 'at constant prices' it is referring to real GDP. For
example, a question may read, 'Explain what is meant by a rise in GDP at constant prices'. This
requires you to define real GDP and then explain the rise.

The Human Development Index (HDI)

 Developed by the United Nations, it is a combination of 3 indicators

1. Health, as measured by the life expectancy at birth e.g.in 2019 it was 81.2 years in the UK
2. Education, as measured by a combination of the mean years of schooling that 25 year olds have
received, together with the expected years of schooling for a pre-school child
3. Income, as measured by the real GDP

 Each indicator is given equal weighting in the index

 The index ranks countries on a score between 0 & 1
o The closer to 1, the higher the level of economic development & the better the standard
of living
o A value of < 0.550 is considered low development e.g. Chad 0.394
o A value of 0.550-0.699 is considered medium development e.g. El Salvador 0.673
o A value of 0.700-0.799 is considered high development e.g Thailand 0.777
o A value ≥ 0.800 is considered very high development e.g. Norway 0.957

An Evaluation of HDI

1. It is a composite indicator & includes several important indicators of living standards

2. It includes rGDP/capita which is an average - so the HDI still does not take into
account inequality in the distribution of income
3. It does not measure environmental damage or resource depletion
4. It does not take into account cultural differences or measure qualitative factors such as
happiness or equal rights

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Exam Tip
Both MCQ & structured questions often ask you to compare or analyse the HDI & GDP/capita of
a country. On the whole, there is usually a positive relationship. Countries with a higher HDI
value usually have a higher GDP/Capita. However, look for exceptions in the data presented - is
the GDP/capita rising while the HDI is falling? If so, one reason may be that the inequality in the
country is worsening (rich getting richer & the poor, relatively poorer).

5.1.2 Living Standards & Income Distribution

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Reasons for Differences in Living Standards & Income Distribution

 There are many reasons that cause differences in living standards & the income
distribution within & between countries

1. Economic system: a mixed economy provides the highest quality of living standards.
There is much debate on how much government planning there should be. However,
countries in Scandinavia with a more mixed economic system score very highly on HDI
& living standards. With completely free markets (unchecked capitalism), wealth
inequalities increase exponentially. With planned economies, shortages abound
 
2. The Government: the values of a government influence their economic agenda, tax
system & government spending. Governments are more easily held accountable by the
citizens in countries with a low level of corruption
 
3. Corruption: significantly undermines quality of life & the standards of living
 
4. Tax system: most countries have a progressive tax system for corporate & personal
income tax. However, there can be many indirect taxes which completely change
the quality of life for the poorest households
 
5. Productivity levels: differences in skills result in difference in productivity & higher
levels of productivity are rewarded with higher wages, which leads to a better standard
of living
 
6. Size of the population: more densely populated countries or cities face more challenges.
A larger population can mean higher tax revenues but at the same time, government
expenditure on services is spread across more people often resulting in less government
spending/capita
 
7. Education levels: These directly influence productivity & wages
 
8. Inflation: Tends to impact poorer households more as any increase in general price
levels represents a larger absolute value of their wages when compared to wealthier
households
 
9. Regional differences: Many countries have historically poor areas, as well as wealthier
ones. Poverty in certain regions can be much higher
 
10. Personal freedoms: religious, economic, personal, political & civil freedoms improve
the quality of life within a nation
5.2.1 Causes of Poverty
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Absolute & Relative Poverty

 Poverty is a situation where a person lacks the financial resources to sustain a basic

standard of living
 
 Economists distinguish between absolute & relative poverty
  
 Absolute poverty is a situation where individuals cannot afford to acquire the basic
necessities for a healthy & safe existence
o
 These necessities include shelter, water, nutrition, clothing & healthcare
 In 2022, the World Bank defined absolute poverty as anyone who was
living on less than $1.90 a day

 Absolute poverty is more prevalent in developing countries than

developed ones

 Relative poverty is a situation where household income is a certain percentage less than
the median household income in the economy
o Poverty in a household is considered relative to income levels in other households
o E.g. The UK defines relative poverty as households that are living with less than
60% of the median household income
 In May 2022, the median UK monthly household income was
£2072/month
 This meant that the relative poverty line was any household earning less
than £1243,20/month
 
 Relative poverty is the main form of poverty that occurs in developed countries

Causes of Poverty

 There are many causes of poverty. However, poor countries have several common

characteristics which can be summarised in a poverty cycle diagram
 Poverty is caused by a lack of both economic growth & human development
 

 Low wages represent the intersection of economic growth & human development & are
the major cause of poverty
o Low wages are usually the result of unemployment, informal employment, a
lack of skills, or a primary sector based economy
 
 Education & healthcare cost money & with lower wage levels these are not accessible,
resulting in poor human capital
o People find it harder to stay well or to recover from illness resulting in lower
productivity & shorter life expectancy
  
 Low productivity results in low wages & the cycle continues

 Populations with a large number of dependents (old people & children) for each

working household tend to experience higher levels of poverty

5.2.2 Policies to Alleviate Poverty

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Policies Aimed At Alleviating Poverty

 The poverty cycle diagram (below) was introduced in the previous subtopic & helps to
explain the causes of poverty
 Any policy that helps to break the poverty cycle at any point will help to improve
the standards of living within a country
 
 Policies used to alleviate poverty include promoting economic growth, improving
education, providing more generous state benefits, progressive taxation, & the
establishment/increase of a national minimum wage
 
 

Policies which help to improve any factor in the diagram will help to alleviate poverty
 
 How Different Policies Alleviate Poverty

Policy
Explanation Impact on Poverty Cycle

Promoting economic  Removing protectionism or engaging in Higher growth → higher

growth expansionary demand & supply-side wages → better
policies will promote growth education/healthcare → bette
 Data shows that economic growth has a human capital → better
very positive impact on economic productivity → higher incom
development
 In most cases growth precedes
development

 Often in less developed countries, economic

growth is linked to one industry &
generates many negative externalities of
production possibly resulting in decreased
living standards

Improving education  Investing in this supply-side Higher education/skill levels

policy increases the potential output of the → higher human capital →
country (shifts the production possibility increased productivity →
frontier outwards) higher output → higher
income
More generous state  State benefits are usually given to More benefits → higher
benefits the poorest & most vulnerable people in wages → better
society education/healthcare → bette
 State benefits include unemployment & human capital → better
disability payments, pension payments, productivity → higher wages
heating discounts, public transport subsidies
etc.

Progressive taxation  A progressive tax system redistributes from Higher redistribution

those with higher income to those with lower → better
income & reduces income inequality education/healthcare →
 Redistribution often starts with the provision better human capital → bette
of free education & healthcare productivity → higher incom
 Sometimes the benefits of a
good progressive tax system are eradicated
by the penalties imposed
through multiple regressive (indirect)
taxes

Establishment/increase of  Minimum wages are set above the free Higher wages → better
 national minimum wage market rate education/healthcare → bette
 Firms are not allowed to pay anyone less human capital → better
than the legal rate productivity → higher wages

5.3.1 Population Growth

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Factors that Affect Population Growth

 Population refers to all of the inhabitants of a particular country

 The population growth rate is the size of the change in the population of a country, expressed
as a percentage
 
 The following factors affect population growth
o The annual birth rate
o The annual  death rate
o The net migration
 A higher birth rate & lower death rate would both increase the population
 More immigration than emigration would increase the growth rate
 
 All countries have different rates of population growth
o Population growth rates are currently highest in less economically developed
countries such as Niger, Mali and Zambia
o Population growth rates are lowest in more economically developed countries
o In some MEDCs such as Italy and Japan, the population is decreasing as the number of
deaths is higher than the number of births

Exam Tip
MCQ will often check your understanding of the differences between these terms. Remember
immigration & emigration are not the same. Immigration is the inward movement of people into
a country. Emigration is the outward movement of people from a country.

Reasons For Different Rates of Population Growth

 There are two broad causes of population change

o Migration (explained above)
o Natural population change (birth rates & death rates)
  
 Natural Causes of Population Change
 

 Natural change in population is calculated by deducting the death rate from the birth rate
 
 The following factors led to a decrease in the death rate 

o The agricultural revolution led to higher yields & healthier, more varied diets

o Improvements to medicine & medical care 
o Improvements to technology & transport, leading to a wealthier population which
increases life expectancy
o Improved housing & sanitation
 
 The birth rate has remained high in LEDCs due to
o Lack of access to family planning & contraception 
o An increase in women surviving childbirth
o Families continuing to have large numbers of children to look after their parents in old
age & to help support the family
o Culture of having larger families which takes many years to change
o Religious reasons 

 The birth rate has fallen significantly in many MEDCs due to

o Increased access to family planning & contraception
o Changing social norms which include starting families later, having fewer children, or
remaining single
o Increased costs of child rearing & university education

5.3.2 Effects of Changing Population Sizes

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The Optimum Population

 Overpopulation occurs when there are more people in a country/region than can be supported
by its resources & technology & leads to
o Higher levels of pollution
o Higher crime rates
o Higher unemployment or underemployment
o Higher levels of food & water shortages 
o Higher pressure on services such as hospitals & schools
 
  Underpopulation occurs when there are more resources available than the population can use
effectively & may lead to

o Fewer people paying tax which can lead to higher taxes

o Underused resources, which can lead to wastage
o A shortage of workers
o Lower levels of exports & production which affects the wealth of an area
o Fewer customers for goods & services
 
 Optimum population occurs when there is a balance between the number of people & the
resources/technology available
  
 

Optimum Theory of Population

  

 The optimum population results in the highest standard of living

o There are not so many people or so few resources that the standard of living falls
o There are enough people to develop the resources of the country 

Exam Tip
It is important to remember that over-population does not just mean there are a lot of people &
under-population that there are few people. The terms refer to the balance between population
& resources. There may be many people in a country, but it is only over-populated when there
are too few resources to support that population.

Population Distribution

 The characteristics of a population (the distribution of age, sex, ethnicity, religion etc), is known
as the population structure
  
 The population structure is the result of changes in:
o the birth rate
o the death rate
o net migration
 
 The two main characteristics of age & sex can be shown on a population pyramid

Population Pyramids

 Population pyramids are used to display the gender & age structure of a given population
o They illustrate the distribution of population across age groups and between
male/female
 
 Population pyramids can be used to identify the following groups:
o Young dependents 
o Old dependents e.g number of retired people
o Economically active (working population or labour force)
o Dependency ratio
 

Example 1 - Niger As A Less Economically Developed Country (LEDC)

 Population Pyramid - Niger

 LEDCs like Niger have a concave pyramid shape which indicates

o High birth rate
o Low life expectancy
o High death rate but starting to decrease (people dying through every age group)
o High infant mortality rate (significant decrease between 0-5)
o Young dependent population dominates the distribution
 

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Example 2 - USA As A More Economically Developed Country (MEDC)
 
 Population Pyramid - USA 

 This population pyramid indicates:

o Decreasing birth rate  - there is a smaller population reading down from age 29
o Increasing life expectancy - indicated by the relatively straight sides reaching the age of
70, followed by a good proportion of people living much longer
o Decreasing death rate - indicated by the relatively straight sides reaching the age of 70
o Low infant mortality - hardly any change between 0-9 years
o Larger working age population - 15 to 69 represents a large proportion of the
population
 
Example 3 - Japan As A More Economically Developed Country (MEDC)
 
 Population Pyramid - Japan 

 This population pyramid indicates
o Decreasing birth rate - indicated by decreasing population levels from age 29
o Increasing life expectancy - indicated by the relatively straight sides reaching the age of
74, followed by a good proportion of people living much longer
o Death rate is higher than the birth rate due to the ageing population
o Low infant mortality
o Ageing population - older dependent population with large proportion of the
population older than 40
 

Effects of Population Changes

 Population changes can have major impacts within the economy resulting in changes to
consumption, production, lifestyle, standards of living & government policies (fiscal, monetary &
supply-side)
 
 Typical changes that occur are

o Progressively ageing populations as economies develop

o Falling birth rates as economies develop
o Swings in net migration as influenced by war, famine, natural disasters & government
policy
 

Ageing Populations

 Many developed economies are experiencing ageing populations & an increase in the older

dependent population
 The implications of this include
o Increased pension payments by governments
o Increased need for care homes (public & private)
o Increased pressure on the healthcare service & social care results in higher government
spending
o It also results in a smaller labour force & often Governments collect less tax
o Firms suffer worker shortages
o Labour shortages result in increased wage costs for firms
  

Falling Birth Rates

 Falling birth rates have the following impact on an economy

o School closures due to fewer children
o Future labour shortages 
 o Governments typically put in place incentives that encourage families to have more
children
o Governments may change the migration laws to encourage immigration so that labour
shortages are prevented
 Excessive immigration can change the nature & culture of different regions
within a country
 

Migration

 In some countries migration can lead to an imbalance in the population structure e.g. the UAE
has significantly more males than females 
 Rapid population growth caused by migration can lead to
o Increased pressure on services such as healthcare & schools resulting in increased costs
for government
o A shortage of housing which generates social issues in society
o Increased traffic congestion which is a negative externality
o Increased water & air pollution which are negative externalities
o Food shortages

5.4.1 Reasons for Differences in Development

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Causes of Differences in Development

 Economic development is the sustainable increase in living standards for a country,

typically characterised by increases in life span, education levels, & income
o Two indicators used to compare development are the real GDP & the Human
Development Index (see sub-topic 5.1.1)
 
 Countries are all at different points of development & economists distinguish between
them using different criteria
o E.g. HDI has five categories of development based on the HDI score
 Low human development (<0.550)
 Medium human development (0.550–0.699)
 High human development (0.700–0.799)
 Very high human development (>0.800)
 
 There are numerous reasons for these differences including differences in income,
productivity, population growth, size of primary, secondary & tertiary sectors, saving &
investment, education & healthcare
 
 Causes of Differences in Development
Factor
Differences in income
Differences in productivity
Differences in population
growth
Differences in economic
sector sizes
Differences in saving &
investment
Differences in education
Differences in healthcare
Explanation
 Countries with a higher GDP/capita tend to be more developed
 Even with high GDP/capita, there may be significant inequality in the
distribution of income resulting in poor living standards for many  
 Differences in skills result in difference in productivity
 Higher levels of productivity are rewarded with higher wages, which lead
to a better standard of living
 More densely populated countries or cities face more challenges
 A larger population can mean higher tax revenues for the government bu
at the same time, government expenditure on services is spread across
more people
 Poorer economies are characterised by less government spending/capita
 Economies with a larger proportion of secondary & tertiary activity tend
to be more developed due to the wages associated with each sector
 Primary sector workers are usually paid low wages due to the unskilled
nature of the job & the fact that raw materials often generate the lowest
profits in the production chain
 Secondary sector workers add value to the raw materials & these
products sell for higher profits. Therefore wages tend to be higher than
primary sector wages
 Tertiary sector workers are paid the highest. Their jobs often require
highly valued skills that take years to acquire & the products they sell or
services they provide can be complex & expensive e.g. artificial
intelligence coders
 Higher savings result in higher investment & economic growth. It is
believed that as economies develop, savings increase
 Increased savings → increased investment → higher capital stock →
higher economic growth → increased savings
 If the dependency ratio is high it means there is less money available for
savings & investment
 These directly influence the level of skill in an economy
 Improved skills results in higher productivity & wages
 The level of health directly impacts productivity of labour
 Productivity influences output & income
  Developed economies tend to have healthy workforces
 The less developed the economy, the more sickness & disease there is

6.1.1 Reasons for National Specialisation

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Reasons for National Specialisation

 Specialisation occurs on several different levels

o On an individual level where a worker specialises in a particular task
o On a business level, e.g. one firm may only specialise in manufacturing drill bits
for concrete work
o On a regional level e.g. Silicon Valley has specialised in the tech industry
o On a national level as countries seek to trade e.g. Bangladesh specialises in
textiles and exports them to the world
 
 The two main factors which allow a country to specialise are:

1. Superior resource availability: If the quality of the resource is relatively better than

other nations, the country will be able to charge higher prices for it. Alternatively, if a
country has a higher quantity of the resource then it may be able to lower prices &
drive competitors out of business by specialising in its extraction & sale

2. Cheaper production methods: If the country has lower costs of production, then it is
very likely that they will be able to lower selling prices & gain a lead in
the international market share. Some countries are able to produce cheaply
using machinery or technological innovation, whilst others do so by providing large
labour force which can perform manual tasks very cheaply

Advantages & Disadvantages of National Specialisation

Pros & Cons of National Specialisation

Pros Cons

Greater competition may increase productivity. Higher  International trade is beneficial for the firms that can
productivity lowers cost / unit for firms, which makes compete globally. However, some industries will
their goods more competitive internationally (exports) be unable to compete & will go out of business
Increased exports can result in economic growth for the Many firms in an entire industry may close leading
nation to structural unemployment 

Economic growth usually leads to higher income and a Specialisation may create over-dependency on other
better standard of living countries' resources. This may cause problems if
conflict arises (For example, Europe's reliance on
Russian natural gas during the Ukraine crisis)

Income gained from exports can be used Specialisation using a country's own resources will
to purchase other goods from around the lead to resource depletion over time. Specialisation wil
world (imports). This increases the variety of increase the rate of resource depletion
goods available in a country

Global efficiency in the use of scarce resources As multinational firms grow in size & increase market
improves as resources are extracted by nations who power, they can dictate prices & output in many
have the competitive advantage regions. They are also able to wield their power to
influence governments & gain access to raw materials
through bribery & corruption 
With an increase in specialisation & output, it is Start-up firms in developing countries (infant
possible to generate significant economies of industries) find it harder to compete due to
scale which further lower production costs global competition - the ones that survive often have
government support. Global monopolies also exert larg
amounts of pressure on developing countries 
  Over-specialisation in developing economies often
occurs as they lack the finance to develop a diversified
product base & end up over-specialising in commodit
products. This makes the country's GDP very dependen
on the commodity prices

6.2.1 Globalisation
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Globalisation

 Globalisation is the economic integration of different countries through increasing freedoms in

the cross-border movement of people, goods/services, technology & finance
 This integration of global economies has impacted national cultures, spread ideas, speeded
up industrialisation in developing nations & led to de-industrialisation in developed nations
 Globalisation has been increasing for thousands of years - it is not a new phenomenon
  Improvements in technology & the speed of global connections have exponentially increased
the level of interdependence between nations in the past 50 years
 Consumers now source products globally recognising global brands wherever they travel  

The Four Main Characteristics of Globalisation

1. Increasing foreign ownership of companies 2. Increasing movement of labour & technology across
borders

3. Free trade in goods/services 4. Easy flows of capital (finance) across borders

Multi National Corporations (MNCs)

 A multinational corporation is business that has production facilities in two or more countries
e.g. Apple
 Globalisation has made it easier for firms to do business on a global scale & the number & size
of MNCs continues to increase
 There are advantages & disadvantages linked to the economic activity of MNCs, both in their
home country as well as in their host country

The Advantages & Disadvantages of MNCs

 
The Advantages of MNCs

1. Economies of scale: as they operate globally they are able to increase their output & benefit
from lowered costs created by economies of scale
2. Increased profit: much of their profit is sent back to their home country. This point is debatable
as many MNCs have offshore bank accounts & do not bring the profit back home
3. Create employment: new jobs are created in host countries each time a new facility is setup &
this raises income which helps to improve the standard of living in that country
4. New markets: MNCs can identify potential markets & begin to sell there
5. Transportation costs: MNCs are able to setup facilities closer to their customers which reduces
transportation costs
6. Risk management: By selling in many national markets, the risk of failure is reduced e.g. if Egypt
goes through a recession (with sales falling there), then this could be less impactful due to rising
sales in a strong German market
7. Tax incentives: MNCs are able to increase their profits by setting up in countries with low
corporation tax - or countries that offer MNCs a tax break (no tax) for their first 5-10 years of
operation
8. Avoidance of protectionism: MNCs can establish bases in countries that are
operating protectionistmeasures & by doing so, they avoid the measures e.g. A Chinese MNC
 may setup in the USA & produce there, thus avoiding import tariffs on  their products exported
from China to the USA

 
The Disadvantages of MNCs

Worker exploitation Resource plundering Political power

Many MNCs provide poor working Many MNCs extract large quantities Many MNCs enjoy revenue that
conditions & pay very low of host nation natural is higher than the GDP of the host
(sweatshop) wages resources providing very little nation & this gives them immense
compensation/payment political power which can be used to
their advantage
Reduce competition Lack of local knowledge/culture Over reliance on MNCs for jobs

MNCs are so large that they can out- This may result in problematic local Many developing nations have
compete domestic firms in the host relationships or flawed advertising an over-reliance on MNCs to
country. This puts many firms out of campaigns or product offerings provide jobs for their citizens. If the
business & reduces competition in MNC leaves it creates significant
that country & may increase unemployment
unemployment
Diseconomies of scale  Exchange rate fluctuations Negative Externalities

The challenges of operating a Unexpected exchange rate MNCs are associated with
business over different time zones & fluctuations can have severe impacts many negative externalities of
cultures can create on the costs & profits of MNCs production in developing countries
significant diseconomies of scale

6.2.2 Free Trade

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The Benefits of Free Trade

 International trade refers to the exchange of goods & services between countries

 International trade involves the exchange of goods/service through exports & imports
 International trade is 'free' when there is no government intervention (quotas, taxes etc.)
to reduce or limit trade
 The benefits of free trade

 Greater choice: with access to a wider variety of goods/services, the standard of living

improves
 Lower prices: with international competition prices fall giving households the ability to
buy more
 International cooperation: required for trade helps countries to build better
relationships which leads to lower levels of hostilities
 Flow of new ideas: innovative ideas & technology can be shared between countries
 Access to resources: output can increase & costs of production can fall with increased
access to raw materials
 Increased efficiency: international competition allows the most efficient firms to emerge
& this improves the use of global resources
 Economic growth: exports are a key component of the gross domestic product of many
countries & an increase in exports can lead to economic growth
 Economic development: Increased output leads to lower levels of unemployment which
leads to higher incomes & a higher standard of living