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UPDATED TO 2023-25 SYLLABUS

CAIE IGCSE
ECONOMICS
SUMMARIZED NOTES ON THE THEORY SYLLABUS
CAIE IGCSE ECONOMICS

Geographical Mobility Occupational Mobility

1. The Basic Economic Refers to the willingness and

Refers to the ease with which
a person can change between
the ability of a person to
Problem relocate from one area to
jobs. This would vary
depending on the cost,
another due to employment
training period and the
purposes.
1.1. Economic Problem educational professions
Reasons why many workers
There are too few productive resources to make all the
are not willing to relocate -
goods and
services that consumers need and want.
Family Ties and Related
Unlimited wants and limited resources
Commitments, Cost of Living
Scarcity of resources is the basic economic problem

  Changes in the Quantity or the Quality of Factors of

Production
Types of goods
Cost (Labour Costs, Raw materials costs)
Economic goods: A good or service that has a degree of Government Policies (Taxes, Subsidies)
scarcity
and therefore an opportunity cost. New Technology
Free goods: A good or service that is not scarce and is Migration of Labour
available in abundance. For example, the air we breathe. Improved Education and Healthcare
Weather Conditions (Agricultural Products)
1.2. Factors of Production
1.3. Opportunity Cost
Consumers are people or firms who need and want goods
and services Opportunity cost is the cost of choosing between
Resources or factors of production are used to make alternative uses of
resources
goods and
services Choosing one use will always mean giving up the
opportunity to use
resources in another way, & the loss of
LLCE goods & services they might
have produced instead
Problem of resource allocation is choosing how best to
Land: natural resources used in production (e.g. land) use limited
resources to satisfy as many needs and wants
Labour: human effort used in the production of as possible and
maximize economic welfare
goods/services (e.g. workers) Economics aims to find most efficient resource allocation
Capital: the man-made resources that are used to Example 1: A person invests $10,000 in a stock
produce goods/services (e.g. tractor) Could have earned interest by leaving $10,000 dollars
Enterprise: the skills and willingness to take the risks in bank
account instead
required to organize productive activities Opportunity cost of decision to invest in stock is the
Entrepreneurs organize and combine resources in firms value of
the potential interest
to produce goods and services Example 2: A city decides to build a hospital on vacant
Durable consumer goods last a long while (e.g. furniture) land it
owns
non-durable consumer goods (e.g. food) do not Could have built school or sports centre
Capital goods and semi-finished goods or components Opportunity cost is the value of the benefits forgone of
are used up in production the
next best thing which could have been done

Rewards for Factors of Production

Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profits
Mobility of Factors
produced by an economy in each
resources
Refers to the degree of mobility while changing from one
production line to another.
goods or options
Geographical Mobility
1.4. Production Possibility Curves &
Choice
Opportunity cost can be shown using a production
possibility curve (PPC)
It shows the maximum combinations of goods and
services that can be
period of time with its limited
A PPC shows all the combinations of possibilities, involving
two
Each combination is a choice
Occupational Mobility

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An economy can use all its scarce resources to produce It is the study of particular markets, and segments of the
this
combination economy.
It looks at issues such as consumer behaviour,
A point within the curve signifies like X, represents individual labour
markets, and the theory of firms.
inefficiency It involves supply and demand in individual markets,
A point outside the curve like Y, represents combinations Individual
consumer behaviour, and individual labour
that
cannot be produced due to the lack of resources markets
Example - A consumer considering his options while
buying a production

Macroeconomics

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

variables, such
as aggregate demand, national output and
inflation.
Involves decisions made by the government regarding, for
example,
policies
Example - Governments deciding on the tax rates

2.2. The role of markets in allocating

resources
The Market System
Movement in PPC and Shift of PPC
A market economy is an economic system in which
Movement in PPC Shift in PPC economic decisions
and the pricing of goods and services
are guided by the interactions
of supply and demand- the
The shift of PPC occurs when
market mechanism
the PPC line is moved. This
Shift in PPC is when the may be due to better
Key Resources Allocation Decisions
resources utilized are moved availability of resources (due
from one product to another. to the Discovery of new The basic economic problem of scarcity creates three key
For example, the Movement materials, Better Technology questions
from Point A to Point B in the and more) or decrement in
above diagram. resources (due to natural What to produce?
disasters, war and more). How to produce?
Example is given below For whom to produce?

Introduction to the Price mechanism

It aids the resource allocation decision making process.

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

Features of Price Mechanism

Private Economic Agents can allocate resources without

any intervention from the government
Goods and Services are allocated based on price (Higher
Price means more supply and lower price means more
demand)
2. Allocation of Resources Allocation of Factors of Production is based on financial
returns
2.1. Microeconomics and Competition creates choices and opportunities for firms,
private individuals and consumers.
Macroeconomics
Microeconomics
2.3. Demand

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Demand refers to how much of a product or service is Movement along the Curve Shift of the Curve
desired by
buyers Contraction is caused when
the demand falls due to an
increase in price, This causes An increase in demand
the point to go upwards. causes the demand curve to
Extention is caused when the shift rightwards and a
demand increases because of decrease in demand shifts the
a decrease in price, This curve towards the left.
causes the point to go
downwards

2.4. Supply
Supply represents how much the market can offer

Higher price of good = less people demand that good,

hence, demand is inversely related to price

1
Price ∝
Demand
​

Factors that affect demand

Price
Advertising
Government Policies
Consumer tastes/preferences
Consumer Income
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)
Consumer population (population increase = demand Higher price of good = higher quantity supplied, hence
increase) quantity is directly proportional to price
Weather
Price ∝ Quantity supplied
The individual demand is the demand of one individual or
firm Factors that affect supply
The market demand represents the aggregate of all Cost of factors of production
individual
demands Prices of other goods/services
Global factors
Movement along the Curve Shift of the Curve Technology advances
Changes in Non-Price factors Business optimism/expectations
A Change in the price of the
cause the demand curve to The individual supply is the supply of an individual
good or service will cause
shift. These factors include producer
movement along the curve.
tastes, prices of substitute The market supply is the aggregate of the supply of all
The movement can be either
goods, consumer incomes firms in
the market
contraction or extension.
and many more.
Price Determination
Market Equilibrium

When supply & demand are equal the economy is said to

be at
equilibrium

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Inelastic Demand Elastic Demand

A change in price has little
Demand would respond
effect on the change in
quickly and more drastically
demand

% change in quantity demanded
At this point, the allocation of goods is at its most efficient PED =
% change in price
​

because amount of goods being supplied is the same as

amount of
goods being demanded & everyone is satisfied When demand is price inelastic:
An increase in price would raise revenue
Market Disequilibrium
When demand is price elastic:
Excess Supply Excess Demand A decrease in price would raise revenue
Factors that affect PED:
The number of substitutes
The period of time
The proportion of income spent on the commodity
The necessity of the product

Special Situation with PED

When price is set below the Perfectly Price Perfectly Price

If the price is set too high, Unitary Price Elastic
equilibrium price. Creates Inelastic Elastic
excess supply will be created
demand that exceeds The percentage
within the economy and there
production due to the low Any changes in the change in price is
will be allocative inefficiency Changes in price do
price. price will lead to proportional to the
not affect the
quantity demanded percentage change
quantity demanded
Price Changes being zero in quantity
Causes of Price Changes demanded

A change in supply
A change in demand 2.6. Price Elasticity of Supply
Consequences of Price Changes
An inward shift of the supply curve will increase prices Definition: The responsiveness of quantity supplied to a
and vice
versa change
in price
An inward shift of the demand curve will decrease prices
and vice
versa Inelastic Supply Elastic Supply
It has a PES less than 1 It has a PES more than 1
2.5. Price Elasticity of Demand A large price change will have A large price change will have
little effect on the amount a large effect on the amount
Definition: The responsiveness of demand to a change in supplied supplied
price

Inelastic Demand Elastic Demand

PED lower than 1 PED greater than 1
The necessity of the product
The necessity of the product
is high – it is either essential
is relatively low
or habitual

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% change in quantity supplied Public goods and services such as street lighting won’t be

PES =
% change in price provided as it is not possible for the private sector to earn
​

profits from them

Factors that affect PES: Resources only employed if profitable – people may be
Time left
unemployed without an income
Availability of resources Harmful goods may be produced and sold freely
Supply available to meet demand Producers may ignore environmental impacts
Spare production capacity available Monopolies dominate supply of products and charge high
Factor substitution available prices

2.7. Market Economic System 2.9. Mixed Economic System

This system is run by private firms and individuals Has a private sector & a public sector
They produce a wide variety of goods and services if it is A government can try to correct market failures in a
profitable to do so but only for those consumers that are mixed economic
system
willing
and able to pay for them It can allocate scarce resources to provide goods and
Market failures can cause scarce resources to be services that
people need
allocated to uses
that are wasteful, inefficient or even Can introduce laws and regulations to control harmful
harmful to people and the
environment activities

ADVANTAGES DISADVANTAGES
Maximum Prices
Wide variety of
Serious market failure
goods/services This is a price control method which involves the
Profit motive encourages government setting the price below the equilibrium point
development of new and Only profitable goods to make things more afforable
more efficient products & provided
processes Minimum Prices
Quick response to change in Firms will only supply
Government sets the price above the equilibrium to
consumers tastes and products to consumers with
encourage the supply of certain goods.
demand the ability to pay
This involves National Minimum Wage (NMW) as well.
Resources will only be
No taxes on incomes and
provided if it is profitable to Government Intervention
wealth or goods and services
do so
Produce merit goods such as education for the needy
Harmful goods may be
It can provide public goods such as street lighting
available to buy readily
Public sector can employ people and welfare benefits can
be given to the needy
2.8. Market Failure Laws to make goods illegal or high taxes to reduce
consumption
Market failure occurs when the market mechanism fails Laws and regulations would protect natural environment
to allocate scarce resources efficiently, so social costs are Monopolies can be broken up or regulated to keep prices
greater than social benefits low
Social Costs = Private Costs + External Costs Educating consumers about the private costs of
Social Benefits = Private Benefits + External Benefits consuming demerit goods
Private Costs are the production and consumption costs
of a firm, individual or the government Privatisation and Nationalisation
Private Benefits are the benefits of the production and
consumption to the firm, individual or government. Privatisation is the transfer of all assets from the public to
External Costs are the negative side-effect on third- the private sector
parties for which the consumer doesn’t pay for. Nationalisation is the purchase of all assets by the
External Benefits are the positive side-effects enjoyed by government
the third-parties.

Causes and Consequences of Markets Failure 3. Microeconomic Decision

Only goods and services that are profitable to make will Makers
be produced

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People with low disposable incomes may spend less in

3.1. Money and Banking
total than
people with high incomes
Functions of money But will tend to spend all or most of their income meeting
their
basic needs
Medium of exchange: accepted as means of payment
Unit of account: for placing a value on goods/services Increase in… Spending Saving Borrowing
Store of value: can save money since it keeps its value Real income ↑ ↑ ↑
Standard for deferred payment: borrowers are able to Direct tax ↓ ↓ ↕
borrow
money and pay back later Wealth ↑ ↓ ↑
Characteristics of money
Interest rates ↓ ↑ ↓
Acceptability: Anything can be used as money as long as
it’s
generally accepted Availability of saving scheme ↓ ↑ ↓
Durability: Good money must be hard-wearing Availability of credit ↑ ↓ ↑
Portability: Should be easy to carry around Consumer confidence ↑ ↓ ↑
Divisibility: Must be able to divide it into smaller values
Scarcity: Should be limited in supply to create value
3.3. Workers
Commercial Banks
Entry: young employee will receive low earnings due to
Accepting deposits of money and savings lack of
work skills and experience; can become an
Helping customers make and receive payments apprentice or join a
management training scheme to
Making personal and commercial loans become more skilled
Buying and selling shares for customers Skilled workers: the more skilled a worker is, the more
Providing insurance opportunities he has for increasing his earnings; bonuses
Operating pension funds will be
given and higher rate of overtime paid
Providing financial and tax planning advice End-of-career employees: if workers keep updating skills,
Exchanging foreign currencies they
will continue to have opportunities to increase wages
however when
they stop this, their demand would fall &
Central Banks income would diminish,
finally reaching a stop when
Printing notes & minting coins that are legal tender retired
Destroying torn notes & worn-out coins
Setting interest rates Factors which influence the choice of occupational
Lender of last resort: if a bank needs cash in a hurry, they
Level of Challenge
can
borrow from central bank
Career Prospects
Supervising monetary policy: heads of the central bank
Level of Danger involved
hold
meetings with officials from other banks to
Length of training required
determine interest rate
and quantity of money in
Level of education required
economy
Recognition in the job
Banker for commercial banks & the government:
Personal satisfaction gained from the job
Government accounts & spending are carried out with
Level of experience required
central bank
Helps government to borrow money Why firms change demand for labour
Total amount government owes is national debt
Manage international financial system: governments of Changes in consumer demand for products
different
nations lending each other money Changes in the productivity of labour
Changes in price and productivity of capital
3.2. Households Changes in non-wage employment costs

Why labour supply might change

Influences on Spending, Saving and
Borrowing
Changes in net advantages of an occupation
Disposable income: amount of income left to spend or Changes in provision and quality of education and training
save after
direct taxes have been deducted Demographic changes
Spending: enables a person to buy goods/services to
satisfy
their needs/wants Factors that Cause Occupational Wage
Differentials
Saving: involves delaying consumption
As interest rates rise, people may save more Different abilities and qualifications
Borrowing: allows a person to increase their spending; ‘Dirty jobs’ and unsociable hours
enabling
them to buy goods they cannot afford now Job satisfaction

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Lack of information about jobs and wages Craft Unions: represent workers with the same skill
Labour immobility across
different industries
Fringe benefits Non-manual unions/Professional unions: represent
workers in
non-industrial and professional occupations
Factors that cause wage differentials in the
same job
Collective Bargaining
Regional differences in supply and demand of labour
Length of service Process of negotiating wages and other working
Local pay agreements conditions between
trade unions and employers
Non-monetary agreements A trade union will be in a strong bargaining position to
Discrimination negotiate
higher wages and better conditions if:
It represents most or all of the workers in a firm
Specialization Union members provide goods/services that
consumers need which
have few alternatives
Division of labour: workers concentrate on a few tasks
then
exchange their product for other goods/services Industrial Action
Specialization: production process broken up into a series
of
different tasks Industrial action is taken when collective bargaining fails
to
result in an agreement
Advantages for Individual Disadvantages for Individual Taking industrial action can help a union force employers
Employees can make best use to agree
to their demands
of their particular Doing same job or repetitive Industrial actions:
talents/skills and can increase tasks is boring and stressful Overtime ban: workers refuse to work more than their
them by repeating tasks normal
hours
Individuals must rely on Work to rule: workers deliberately slow down
Employees can produce more production by
complying with every rule & regulation
others to produce goods and
output and reduce business Go slow: workers deliberately work slowly
services they want but cannot
costs Strike: workers protest outside their workplace to stop
produce themselves
deliveries/non-unionized workers from entering
Many repetitive tasks can now
More productive employees be done by machines, leading Impact of Trade Unions
can earn higher wages to unemployment of low- Possible Advantages Possible Disadvantages
skilled workers
Could help to bring about Might cause lack of flexibility
minimum working standards in working practices
3.4. Trade Unions Could be major problem as
Could help keep pay higher
fashions change very quickly
An organization of workers formed to promote & protect
Could help maintain
the interest
of its members concerning wages, benefits & Could lead to some firms
Employment/enhanced job
working conditions going out of business
security
Functions Could lead to improvement in
Workers made redundant
health and safety
Negotiating wages & benefits with employers
Workers will need to pay
Defending employee rights and jobs
union membership fees
Improving working conditions
Improving pay and other benefits, including holiday
entitlement,
sick pay and pensions 3.5. Firms
Encouraging firms to increase worker participation in
business
decision-making Classification of Firms
Developing skills of union members, by providing training
and
education courses Primary Sector - Extracting raw materials from the earth
(fishing, mining, farming and more)
Supporting members taking industrial action Secondary Sector - Manufacturing Goods (Construction,
Refining and more)
Types of Trade Unions
Tertiary Sector - Service Sector (Retail Shops, Lawyers
General Unions: represent workers across many different and more)
occupations
Industrial Unions: represent workers of the same industry Public and Private Sector

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Private Sector firms are owned and run by private Economy of Scale Diseconomy of Scale
individuals and owners. The main objective of this sector Purchasing: when raw
is to earn profit. materials are bought in bulk,
Public Sector firms are owned by the government and
suppliers may provide bulk
their main aim is to provide services.
discounts, lowering per unit
Size of Firms cost of production

Number of employees: less than 50 are classified as small Integration

Amount of capital employed: large firms invest a lot in
fixed
assets such as machinery & equipment Growth often involves integration with other firms
Market share: relative size of firms compared by Takeover: a company acquires ownership & control of
percentage
share of total market supply/revenue another
company by purchasing its shares
Organization: large firms may be divided into many Merger: two or more firms agree to form an entirely new
departments & be spread over many locations company
& issue new shares

Small Firms Types of Integration

Advantages Disadvantages Horizontal integration: occurs between firms at the same
Markets cannot raise enough stage
of production producing similar products
Size of market is small capital to expand their Vertical integration: occurs between firms at different
business stages
of production
Consumers like tailored Forward: taking over firm at later stage of production
goods/services Backward: integration is the opposite
Governments provide help Lateral integration or conglomerate merger: occurs with
firms at
same stage of production but different products
Types of Economies and Diseconomies of Scale
Economy of Scale Diseconomy of Scale 3.6. Firms and production
Cost savings due to increased Rising costs because a firm
scale of production has become too large Demand for “Factors of Production”‎

Management: larger firms Demand for goods & services by consumers: higher
must manage so many demand = more
labour/capital firms will need
Financial: larger firms often
different departments in Price of labour & capital: higher cost = less labour &
have access to cheaper
different locations, making capital
demanded
sources of finance
communication/ decision- Firms may also decide to substitute labour for more
making difficult capital and
vice versa
Marketing/Selling: fixed costs Productivity of labour & capital: more output/revenue
such as advertising and Labour: demotivated workers labour &
capital help to produce, more profit they will
transportation are spread lead to decrease in generate over & above
cost of employing them
across a larger number of productivity due to boring, Capital-intensive Production: requires heavy capital
products, lowering per unit repetitive tasks investment
to buy assets relative to sales or profits that
cost assets can generate
Excess Agglomeration: Labour-intensive Production: main cost is labour; cost is
company takes over or high
compared to sales or value added by additional
Technical: larger firms invest manpower
merges with too many other
in specialized production Labour-intensive production method primarily involves
firms producing different
equipment, highly skilled labour,
whereas, capital-intensive methods primarily
products, making it hard for
workers; develop new involve machinery
business owners and
products
managers to co-ordinate all Productivity & Production
activities
Risk-bearing: ability to spread Productivity: the ratio of output to input
risk over many investors & Labour Productivity:
reduce market risks by selling
Total Output
range of products in different Output per Labour =
Number of Labour
​

locations
Capital Productivity:

lO l

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Total Output Value growth
Value per C apital =
Value of Capital
​

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

production refers to output only
Competitive Markets

3.7. Firms’ Costs, Revenue and
without going out of business
Objectives
goods
Fixed costs: don’t vary with level of output e.g. interest on
loans
selling
Variable cost: vary directly with level of output e.g.
electricity
Breakeven: where total revenue = total cost
Total revenue: the total receipts a seller can obtain from
selling goods or services to buyers
Average revenue: the revenue generated per unit of
output sold
share
Average Fixed Cost = F ixedC osts/Output
pricing strategies
Average Variable Cost = Variable C osts/Output
Total Variable Cost = Variable C osts × Output
Total Cost = T otal Variable C ost + T otal F ixed C ost
Businesses will charge same price, a minimum price they
can charge
Price will be equivalent to the lowest average cost of
producing
Average cost of production would be same as average
revenue for
No firm would risk charging more than market price
A business would be a price taker; the market price
Monopoly Markets
Firms with monopolistic powers control at least 25% of the
market
Able to influence price; price makers
Can restrict competition with artificial barriers to entry &
other
One firm controls entire market supply
May use predatory pricing to force competing firms out
Other firms deterred from competing due to lack of
capital

Average cost = (T otal C ost)/Output Advantages of Monopolies

Avoids duplication &wastage of resources

Total Revenue = P rice P er U nit × Quantity Sold
Profit or Loss = T otal Revenue − T otal C ost
economically weaker sections of the society
be efficient & avoid competition
Economics of scale; benefits can be passed to consumers
High profits can be used for research &development
Monopolies may use price discrimination which benefits
the
Monopolies can afford to invest in latest technology &
machinery to

Disadvantages of Monopolies

May supply less & charge higher prices

May offer less consumer choice and lower quality
products than if
they had to compete with other firms
May have higher production costs because they are

poorly managed
Restrict competition using barriers to entry

Barriers to entry
Natural Artificial
Cost savings from large scale Predatory pricing strategies
production to force smaller firms out
Preventing suppliers from
selling materials &
Lots of capital equipment that
components to other firms by
other firms can’t afford
threatening to switch to rival
suppliers
Objectives of firms
Large customer base built up Forcing retailers to stock &
Survival over years sell only their product
Social welfare
Profit maximisation

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Natural Artificial Types of

Description Examples
Developed advanced Taxation
products or processes that Tax rate rises with
Progressive
are protected by patents income; higher income = Income tax
Tax
higher tax
Tax rate falls with income;
4. Government & The Regressive Tax
higher income = lower tax
VAT

Macroeconomy Proportional
Tax
Everyone pays same
effective tax rate
Corporate income
tax
Direct Tax Levied on individuals Capital gains tax
4.1. Role of Government Added to price of
Indirect Tax Tariffs
commodities
Local Role - Fund local services (Garbage Collection,
Street Lighting, Schools, Hospitals and more)
Principles of Tax
National Role - Achieve macroeconomic goals (Economic
Growth, Low Inflation, Stable Prices and more) Equitable
International Role - Trading of goods and services Economic
Transparent
4.2. The Macroeconomic Aims of The Convenient

Govt. Fiscal Policy

Economic Growth It is the use of taxation and government spending to

Low Unemployment influence
aggregate demand
Low Inflation/Stable Prices
Balance of Payment Stability Policy About
Redistribution of Income Reducing taxes and increasing
govt. spending to boost
Conflicts between the Macroeconomic Aims Expansionary Fiscal Policy demand, so employment and
output rises. May be used to
Full Employment vs Stable Prices reduce recession.
Economic Growth vs Balance of Payment Stability Increasing taxes and reducing
Full Employment vs Balance of Payment Stability govt. spending to reduce
Economic Growth vs Stable Prices Contractionary Fiscal Policy
demand. May be used to
reduce price inflation.
4.3. Fiscal Policy
Effects of fiscal policy on govt.
macroeconomic aims
Budget: It is an estimate made by the govt., of income and
expenditure for a future period Expansionary fiscal policy can reduce unemployment
Expansionary fiscal policy can increase economic growth
Reasons for Government Spending Contractionary fiscal policy can reduce high inflation

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

Reasons to Tax Policy About

May be used to reduce price
To finance public expenditure; building schools and inflation by increasing interest
infrastructure
Contractionary Monetary rates charged by the central
To discourage certain activities; e.g. taxes on cigarette
Policy bank. This means commercial
To discourage import of goods; tariffs are import taxes
banks will also raise interest
and can be
levied as a % of value of imports or a set tax
to encourage more savings.
on each item
To redistribute income from the rich to the poor
To achieve other macro-economic objectives

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Policy About Important as it increases the standard of living

May be used during a
Measurement of Economic Growth
recession & to increase
Expansionary Monetary Policy
employment by cutting Gross Domestic Product (GDP) is the main measure of
interest rates total value
of all the goods and services produced in a

Effects of monetary policy on govt.

macroeconomic aims given period of time

Expansionary monetary policy can reduce unemployment An increase in prices will increase nominal GDP but this is
Expansionary monetary policy can increase economic measured in current dollars thus includes inflations
growth Nominal
Contractionary monetary policy can reduce high inflation Real GDP = × 100
CPI
​

Real GDP
4.4. Supply-Side Policies Real GDP  P er C apita =
Number of Population
​

Supply-side policies aim to increase economic growth by Recession

raising
productive potential of economy
An increase in the total supply of goods & services will It is a significant decline in economic activity spread
require
more labour &other resources to be employed across the
economy, lasting more than a few months,
It will reduce market prices & provide more goods & normally visible in real
GDP growth, real personal income,
services to
export employment, industrial production,
& wholesale-retail
sales
Instrument Effect on macroeconomic aims A recession would cause the economy to produce at a
Reducing taxes on profits and point that is
within the PPC
small firms can encourage
Tax Incentives enterprise. It can also Causes of Economic Growth
encourage investments in new
Discovery of more natural resources
equipment.
Investment in new capital and infrastructure
To reduce production costs and Technical progress
help firms fund research and Increasing the amount and quality of human resources
Subsidies/Grants
development of new Reallocating resources
technologies.
Teaching new/existing workers Consequences of Economic Growth
Education and Training new skills to make them more
An increase in output can improve living standards of
productive. people
Include minimum wage laws to Higher output and incomes increase government tax
encourage more people into revenue. This can
increase govt. spending without
Labour Market Regulations
work, and legislation to restrict increasing tax rates
the power of trade unions. However, it can increase pollution, lead to depletion of
Regulations that outlaw unfair non-renewable resources and damage the natural
Competition Policy trading practices by monopolies environment
and other large, powerful firms.
Policies to Promote Economic Growth
Removing barriers to
international trade allow Expansionary fiscal policy
Free Trade Agreements countries to trade their goods Expansionary monetary policy
and services more freely and Supply-side policies
cheaply
Removing old, unnecessary and Employment and Unemployment
Deregulation costly rules and regulations on INDICATOR RECENT TRENDS
business activities Risen as world population has
Labour force
grown

4.5. Economic Growth Participation Rate: labour Risen in many countries

force as a proportion of total especially among females as
Economic growth is when there is an increase in real population of working age it is now socially acceptable
output over
time, i.e. increased GDP & national income

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INDICATOR RECENT TRENDS Personal Economical

Poverty and rising living costs People in work may have to
in developing countries has pay more taxes
forced many women to work Government spending on
Employment in services has welfare may rise
Employment by Industry: been growing while
Number of people employed employment in agriculture Policies to Reduce Unemployment
in different industrial sectors and other primary sector
industries has fallen Expansionary monetary policy
Expansionary fiscal policy
Employment Status: Number
Most employees work full- Increase in quality and quantity of education and training
of full-timers, part-timers or
time
with temporary contracts Inflation and deflation
Part-time employees have
grown rapidly, especially Inflation: general & sustained increase in the level of
among female employees prices
of goods/services in an economy over a period of
time
Unemployment: Number of
Tends to rise during economic Deflation: decrease in general price level of goods and
people registered as being
recessions services
and occurs when the inflation rate falls below 0%
without work
Almost half the unemployed Measurement
are young unskilled workers
Base year: first year with which the prices of subsequent
Unemployment Rate: Relatively stable in the recent
years
are compared
Unemployment as a years but did increase in 2008
Inflation rate: percentage change in annual CPI
proportion of labour force during a global financial crisis
Weighted Average Price in Year 
Types of Unemployment CP I  in Y ear x =
Weighted Avereage Price in Base Y
Cyclical Unemployment: occurs during recession due to Causes of Inflation
falling
consumer demand & incomes
Firms reduce output & lay off workers Demand-pull Inflation: caused by total demand rising
Structural Unemployment: caused by changes in faster than
total output, causing market prices to rise
industrial
structure of an economy Cost-push Inflation: cost of production increases, so firms
Entire industries close due to a permanent fall in try
to pass cost to consumers through higher prices
demand for
their goods/services Causes of Deflation
Frictional Unemployment: refers to short-lived Fall in the money supply
unemployment;
e.g. moving to different job Decline in confidence
Seasonal Unemployment: occurs because consumer Lower production costs
demand for
goods/services changes with seasons; e.g. no Technological advances
job for ski instructor
when/where there is no ice Increase in unemployment
Increase in the real value of debt
Measurement of Unemployment Policies to Control Inflation &
Deflation
Contractionary fiscal and monetary policy for inflation
Taking claimant count
Expansionary fiscal and monetary policy for deflation
Labour force survey
Supply-side policy can increase aggregate supply and
thus control
both inflation and deflation
Unemployment Rate  = N umber of U nemployed P ersons / Labor F orce

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

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Nominal Corruption and Instability

Real GDP = × 100
CPI \
​

Real GDP Alleviating Poverty

Real GDP  P er C apita =
Number of Population
​

Governments will use policies to help alleviate poverty in

If economy has an extremely rich person & everyone else their
country, or in another country:
is poor, it
brings up the Real GDP per capita
Human Development Index (HDI) What are the
Policy Why is it needed?
problems?
Used by the United Nations to make comparisons of
Poor farming Free food supplies
human & economic
development in different countries
Food aid methods produce can force farmers
Combines three different measures for each country
insufficient food out of business
Standard of living, measured by average incomes
Being educated, measured by adult literacy rate LEDCs lack capital
Living a long healthy life, measured by life expectancy to invest in an Loans have to be
Single index with a value between 0 and 1 Financial aid industrial base, repaid sometimes
Greater than 0.8 = high human development. Less than modern machinery with interest
0.5 = low human
development and infrastructure
LEDCs lack access Most people lack
Reasons For Low/Varying Economic
Development to modern skill to use modern
machinery, technology; instead
Over-dependence on agriculture
Tech aid equipment and of using machinery,
Domination on international trade by developed nations
Lack of capital knowledge of more jobs are
Insufficient investment in education, skills & healthcare
modern production needed to employ
Low levels of investment in infrastructure methods people
Lack of efficient production and distribution systems Relieving LEDCs of May encourage
High population growth debt will allow them LEDCs to borrow
Other factors like a corrupt govt. or war to use money for more money or
Debt relief
economic money may be
development misused by corrupt
5.2. Poverty
instead governments

Absolute poverty Relative poverty LEDCs may have

Removing overseas natural supplies, MEDCs will force
Number of people living
trade barriers can be exported for down their price
below a certain income Measures extent to which a
money
threshold or number of household’s financial
households unable to afford resources falls below an Governments in
Advice not enough;
certain basic goods & average income level. LEDCs lack
Economic Advice LEDCs need more
services economic
capital & stability
knowledge
Occurs when people are poor
Occurs when people do not relative to other people in the
have access to basic food, country; unable to participate 5.3. Population
clothing and shelter fully in normal activities of
society they live in Factors that affect population growth

Birth rate
Causes of Poverty
Death rate
Unemployment Net migration
Low wages Immigration & emigration
Illness
Age Dependency Ratio
Poor Healthcare
Comparison of people in employment with the number of
Low literacy rates
High population growth people who are not in the labour force.
Poor infrastructure Reasons for different population growth
rates
Low FDI (Foreign Direct Investment)
Varying Birth Rates
High public debt
Reliance on primary sector output LEDCs have:

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Large families to help produce food & work for money

6.1. International Specialisation
High infant mortality rate
Low supply of contraceptives/forbidden to use them Specialization at a National Level
In MEDCs, people marry later in life so birth rates fall
Countries specialize in production of those goods and
Varying Death Rates
services in
which they have an absolute advantage or
MEDCs have: comparative advantage over
other regions or countries
A country has an absolute advantage if it can produce a
Better food, housing, hygiene &high life expectancy
Fatty foods, smoking and lack of exercise has given
amount of a good or service with far less resources
increased rates of
diabetes, cancer & heart disease and therefore at
an absolute cost advantage over any
Improved medicine & healthcare; prevents many country
diseases &
increased life expectancy A country has a comparative advantage in the production
LEDCS have: of a
good or service if it can produce it at a lower
opportunity cost
relative to other countries
Widespread diseases which lower life expectancy
Natural disasters, famines, wars
Advantages of Specialisation
Population Structure
The Demographic Transition Model: Efficiency Gains
Labour Productivity
Increased Productive Capacity
Economics of Scale
Improved Competitiveness

Disadvantages of Specialisation

Overspecialisation
Lack of variety for consumers
High labour turnover
Low labour mobility
Higher labour costs

Globalisation, Free Trade and

Protection

Globalisation: The process by which businesses or other

This shows that population growth occurs in stages organizations develop international influence or start
Population Pyramid: a type of graph that shows the age operating on
an international scale.
and sex
structure of the country
Multinationals

Operates in more than one country

Some of the largest companies in the world
Governments often compete to attract multinationals
Can provide jobs, incomes, business knowledge, skills
and
technologies which can help other firms
Pay taxes on their profits to boost government
Stage 1: high birth rate; high death rates; short life
revenue
expectancy; less dependency (since there are few old Headquarters are based in one country
people and children must work anyway)
Stage 2: high birth rate; fall in death rate; slightly longer Advantages Disadvantages
life expectancy; more dependency due to more elderly
Can reach many more
Stage 3: declining birth rate; declining g death rate; longer Can switch profits to other
consumers globally & sell far
life expectancy; more dependency countries to avoid paying
more than other types of
Stage 4: low birth rate; low death rate; highest taxes on profits
businesses
dependency ratio; longest life expectancy
Can minimize transport costs
by locating plants in different Can force smaller local firms
6. International Trade & countries to be near raw out of business
materials or big markets
Globalisation

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Advantages Disadvantages Arguments For Possible Consequences

Minimize wage costs by Trade barriers have
May exploit workers in low Because other countries use
locating in countries with low increased the gap between
wage economies barriers to trade
wages rich and poor countries
May use their power to get To prevent over-specialization
Can enjoy low average generous subsidies & tax
production costs advantages from the
6.2. Foreign Exchange Rates
government
Exchange rate is the price of a country’s currency in terms
Benefits of Free Trade of
another country’s currency
For Consumers To Producers To Governments Most countries have a floating exchange rate, which
Exports increase means no set
value for their currency compared with any
Cheaper products Larger markets
jobs, GDP, incomes other currency
But imports take Currency is a commodity thus the value of a currency is
Better products Economies of scale totally
dependent on demand and supply of that currency
them away
More produced, in the foreign
exchange market.
Workers more An appreciation in the value of currency means its
lower average per
productive exchange rate
against other countries has risen
unit cost
A depreciation in the value of currency means its
International trade
exchange rate
against other countries has fallen
increases number
International Trade
of products you Exchange Rate Fluctuations
make
Increased Demand for a currency comes from foreign money
flowing into the
country. If demand rises, the currency’s
competition from
value will rise in relation
to the other currency
international
Supply of the currency comes from domestic money
companies
flowing out of the
country. If supply rises, the currency’s
Lower Prices –
value will fall
Better Qualities
A currency might depreciate A currency might appreciate
Trade Protection because: because:
Demand for other currencies
Tariffs: tax on imports to raise its price and make them There is a balance of
rises as domestic consumers
more
expensive than local goods to stop people buying payments surplus
buy more imports
them
Subsidies: grant given to an industry by government so Demand for the currency
There is a balance of
industry
will lower its prices encouraging consumers to rises as overseas consumers
payments deficit
stop buying foreign
imports by making home-produced buy more exports
goods cheaper Interest rates fall relative to Interest rates rise relative to
Quota: limit on number of imports allowed into country other countries other countries
per year,
reducing quantity of imports without changing People move their savings to This attracts savings from
their prices bank accounts overseas overseas residents
Embargo: complete ban on imports of certain goods. An
Inflation is lower than in other
embargo
may be used to stop imports of drugs Inflation rises relative to other
countries so exports will be
Excessive quality standards and bureaucracy countries. This makes exports
cheaper and overseas
more expensive and demand
Protection demand for them, and the
for them, and the currency
Arguments For Possible Consequences currency required to pay for
needed to buy them, falls
them, will rise
Other countries will retaliate
Protection of a young industry People speculate that the
with trade barriers People speculate that the
currency will fall in value and
It protects inefficient domestic currency will rise in value and
To prevent unemployment they sell their holdings of the
firms they buy more of the currency
currency
The loss of domestic jobs
To prevent dumping from overseas competitions Consequences of Exchange Rate
Fluctuations
will only be temporary

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An appreciation of the currency will make exports more Visible trade account: the difference between the export
expensive and
imports will be cheaper, vice versa revenue
and import spending on physical goods, e.g. cars,
If PED<1 for exports, an exchange rate appreciation will washing machines
improve a
current account deficit Invisible trade account: measures the difference between
If PED<1 for imports, an exchange rate depreciation will export
revenue from and import spending on services,
worsen a
current account deficit e.g. banking,
insurance and tourism
Income flows: e.g. interest, profit and dividends flowing in
Types of Exchange Rate and
out of the country
Current transfers: e.g. grants for overseas aid.
Floating exchange rate: it is determined by the forces of
Secondary Income - Income transfers between residents
market
supply and demand
and non-residents of a country.
Managed floating exchange rate: it is influenced by state
intervention
Balance of Payments Deficit Balance of Payments Surplus
Fixed exchange rate: it is set by the government and
Money flowing out greater Money flowing in greater than
maintained
by the central bank buying and selling the
currency and changing
interest rates
than in. out.
Current + Capital + Financial Current + Capital + Financial
Floating Exchange Rate is negative. is positive.
ADVANTAGES DISADVANTAGES
Automatic stabiliser Uncertainty Trade Deficit
Frees internal policy Lack of investment Means people are buying more imports and may be
Management Speculation spending less on
products made by domestic firms
Flexibility Lack of investment Deficit may be a symptom of a declining industrial base
Can avoid inflation Foreign exchange for the national currency is likely to fall
Increases prices of imports and cause imported inflation
Lower reserves
Trade Surplus
Fixed Exchange Rate
ADVANTAGES DISADVANTAGES Means people are buying less imports and may be
spending more on
products made by domestic firms
Elimination of uncertainty and Foreign exchange reserves
risks needed Surplus may the result of economic growth
Foreign exchange for the national currency is likely to rise
Speculation deterred Internal objectives sacrificed
Increases prices of exports
Prevents currency Restricts international
depreciation competition Policies to achieve balance of payments
stability
Attracts foreign direct
Supply-side policy will increase domestic production and
investment
exports
which can correct a current account deficit
Expansionary fiscal policy, by reducing taxes and
6.3. Current Account Balance of increasing
government expenditure can increase total
demand for imports to fix
current account surplus, vice
Payments versa
Contractionary monetary policy can correct a current
Structure
account
deficit, vice versa

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Economics

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