Year 5 IGCSE Notes Booklet 2023-24

ECONOMICS IGCSE
YEAR 5
NOTES BOOKLET
VOLUME I
YEAR: 2023-2024
NAME:
TEACHER:
1
YEAR 5
Contents page
Topic Area Rob Jones E/S Booklet
IGCSE Success and Assessment Criteria 1 – 10
Specification 11 - 31
Course content and exam techniques 32 - 38
Section C: Government and the Economy

1. Macroeconomic Objectives Ch. 25 – 30
39 - 131
192-249
2. Government Policies
Ch. 31 – 33
132 - 172
250-273
3. Relationship between Objectives and Policies

Ch. 34
173 - 178
274-283
Section D: The Global Economy

Ch. 35 - 36
179 - 201
1. Globalisation 284-303
2. International Trade
Ch. 37 - 40
202 - 235
304-332
3. Exchange Rates
Ch. 41 - 42
236 - 257
333-347
See Volume II for Exam Practice and Mnemonics

and Glossary of Economic Terms
2
Year-5 Formative Assessment Plan
Year 5 CA: 60% - 5 per year

FA: 40 %- 10 % class participation ,30 % - 3 graded HW per term
1Presentation Pupils are expected to take pride in their presentation. All work should have a
date, title and c/w or h/w in the margin as appropriate. These should be
underlined. Pupils should write in black or blue ink although other colours
and/or highlighters may be used for emphasis. All self and peer assessment and
responses to teacher marking should be visible. Teachers will challenge work of
poor quality and will ask students to resubmit.
Homework  At least 1 substantive piece of homework every half term linking in with the
main syllabus areas that will focus on Knowledge, Application, Analysis and
Evaluation for Year 4/5. This homework assignment could be an extended
writing task drawn from a past paper or a task that is exam style.
 For extended Writing, students should;

o Use appropriate key terms within context.
o Identify the business and economic problem of the scenario given.
o Use evidence from the extracts/global economy/ individual organisations
to develop their responses
o Use P. E. E. E. L. for each paragraph. (Point, Explain, Evidence, Evaluation,
Link back to the question)
o Use well-labelled diagram (where appropriate) to support analysis.
o Show working of their calculation and use their final answers to develop
response.
o Develop clear logical chains of reasoning when addressing business and
economic issues to support analysis and evaluation
o Appreciate the unintended consequences of issues raised
o Use quotes to support analysis and evaluation where possible/create
context.
o Be able to form a justified value judgment by comparing and contrasting
issues
o Distinguish between short term and long-term effects/consequences
3
Class Participation Grade Descriptors
Some criteria to consider for class participation
 Response to questioning
 Punctuality to lessons
 Participation in group activities
 Attitudes to peer assessment
 Completion and quality of assignments
 Initiative in verbal and written work
 Attentiveness
 Frequency of participation in discussions
 Home preparation to assist in class participation
 Following instructions for class activities
Class Participation Grade Descriptors

9-10 Points
Outstanding participation shows initiative and excellence in written and verbal work. The student
helps to create more effective discussions and activities through his/her verbal and written
contributions. Reading and writing assignments are completed on time and with attention to
detail. In discussions and activities, comments to peers are tactful, thorough, specific, and often
provide other students with a new perspective. The level of preparedness for the lesson is
outstanding with an excellent punctuality record.
7-8 Points
Strong participation demonstrates active engagement in written and verbal work. The student
plays an active role in the classroom but does not always add new insight to the discussions.
Reading and writing assignments are completed on time. In discussions and activities, comments
to peers are tactful, specific, and helpful. The student comes to his/her lessons well-prepared
with a good punctuality record.
5-6 Points
Satisfactory participation demonstrates consistent, satisfactory written and verbal work. Overall,
the student completes assigned reading and writing tasks on time, and contributes to small group
activities and large class discussions. In discussions and activities, comments to peers are tactful
and prompt, but could benefit from more attentive reading and/or specific detail when giving
comments. The student has done some preparation for the lesson. Student may occasionally be
disruptive and late more than once a week.
4
3-4 Points
Weak participation demonstrates inconsistent written and verbal work. The student may be late
to class, unprepared, and may contribute infrequently or unproductively to classroom discussions
or small group activities. Reading and writing assignments are not turned in or are insufficient. In
discussions and activities, comments to peers may be missing, disrespectful, or far too brief and
general to be of help or to be insightful. Student may also be disruptive and frequently late to
class.
1-2 points
Unacceptable participation shows ineffective written and verbal work. The student may be
excessively late to class, completely unprepared, and not able to contribute to classroom
discussions or small group activities. This student may also be disruptive in class. Reading and
writing assignments are not turned in or are insufficient. In discussions and activities, the student
is completely unprepared, disruptive, or sleeping and otherwise not participating. Almost no
preparation for lessons and student may be consistently disruptive and persistently late to
lessons.
0 points
The student is absent from class, or leaves early from class.
5
IGCSE Economics
Success and Assessment Criteria
The table below shows the command words that may be used in different types of questions as well
as the steps you need to take to answer the questions successfully.
6
ECONOMICS DEPARTMENT ASSESSMENT FEEDBACK SHEET
IGCSE Economics – 6 Mark question
Name Date of test:
Date of test returned:
Question Title:
Knowledge Analysis Application

Ensure that your point is Develop clear step by step Use relevant examples from the
relevant to the question chains of analysis data to support your point
asked
Use accurate and relevant Explain the cause and Be specific and accurate in
theory to answer the effects of your points. Use interpreting and quoting data (dates
question relevant link words like / calculating numbers
therefore, consequently, /trends/quotes)
and so.
Mark Awarded /6 Grade
Presentation
1 (excellent) 2 3 4 5 (poor)
WWW (What went well ) Self / Peer Review :
WWW (What went well ) Teacher Review :
EBI (Even Better if ) Self / Peer Review :
EBI (Even Better if ) Teacher Review :
7
8
Name Date of test :
Date of test returned :
Question Title
Knowledge Analysis Application Evaluation

Define the key term in Extend your chains Use relevant examples Evaluate as you end
the question of analysis and from the data to each paragraph
explain the cause support your point
and effects of your
points
Ensure that your point Use accurate Write your answer in Extend your
is relevant to the relevant diagrams to the context of the evaluative points
question asked support your answer question
and explain them
Use accurate and Provide balance by Be specific and Evaluate in the

relevant theory to assessing both sides accurate in context of the data
answer the question of the argument interpreting and given
quoting data (dates /
calculating numbers
/trends/quotes )
Presentation
9
10
Name Date of test :
Date of test returned :
Question Title

Define the key term in Develop clear step Use relevant examples Evaluate as you
the question by step chains of from your own end each
analysis knowledge to support paragraph
your point
Ensure that your point Explain the cause Use relevant examples Extend your
is relevant to the and effects of your from the extract to evaluative
question asked points support your analysis points
Use accurate and Provide balance by Write your answer in Evaluate in the
relevant theory to assessing both sides the context of the context of the
answer the question of the argument question data given
Use accurate Be specific and Prioritise at the

relevant diagrams to accurate in end of your
support your answer interpreting and essay with a
and explain them quoting data (dates / final judgement/
calculating numbers conclusion
/trends/quotes )
Presentation
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
COURSE OUTLINE
Topic Area Syllabus content
Section C: Government and the • Basic Circular Flow of Income

Economy • AD/AS analysis
• Economic growth
1. Macroeconomic Objectives
• Low and stable inflation
• Low unemployment
• Surplus or balance on the current account of the
balance of payments
• Protection of the environment
• Redistribution of income
2. Government Policies • Fiscal policy: - Government revenue and
Government expenditure
• Monetary policy
• Supply-side policy
• Government controls
3. Relationship between • Inflation and unemployment

Objectives and Policies • Growth and inflation
• Growth and the environment
• Growth, inflation and balance of payments
Section D: The Global Economy • Integration and independence of economies
• Multinational companies
1. Globalisation
• Reasons for globalised operations
• Foreign investment and development aid
• Advantages and disadvantages of MNCs/FDI
• Impact of globalisation and global companies
34
2. International Trade • Advantages and disadvantages of free trade
• Reasons for protection
• Methods of protection
• Modern trading blocs
• Role of the WTO (World Trade Organisation)
• Trade patterns of developed and developing
countries
3. Exchange Rates  Defining exchange rates

 Factors affecting the demand and supply of
currencies
 Definition of appreciation/ revaluation
 Impact of appreciation of exchange rate on:
 Definition of depreciation/ devaluation
 Impact of depreciation of exchange rate on:
 Price elasticity of demand for exports and imports
35
Evaluation skills
There are several ways to evaluate when completing economics questions, including:
 Consider alternatives
This means looking at alternative explanations for the data being considered, or
considering alternative remedies and policies. For example, 'road pricing may not be as
effective as increasing parking charges in reducing urban congestion'.
It does not really matter which policy is the most effective - it simply enables you to
present an alternative view or policy.
 Consider the assumptions

This means raising doubts about the assumptions made in the data or analysis, or
changing the ceteris paribus rule - the assumption that everything else remains constant.
For example, 'if all conditions of demand do not change, then a decrease in price will
increase demand'. May not be true, if incomes fall or population falls.
Or, 'TR will rise if price falls'. This is not true if demand is inelastic.
 Assess the degree of significance

This means commenting on the likely significance of the change or event being
considered. For example, 'the increase in the balance of trade deficit is relatively small,
and it may only be a temporary issue for government'.
Or, 'the extent of the change in NMW is small, thus, having limited effects' (magnitude of
change).
 Assess limitations of remedies or policies

This might mean, for example, questioning the reliability of data upon which policies
decisions have been made, or raising the issue of information failure.
 Discuss possible conflicts or constraints

When assessing remedies or policies, evaluative marks can be earned by considering the
unintended consequences of policy decisions (conflicts) or the limitations which prevent
the policy or remedy working (constraints).
36
For example, 'a consequence of expansionary fiscal policy might be the unintended effect
of raising the rate of inflation1 - or, 'the fall in house prices might put downward pressure
on interest rates, which reduces rates for savers and may have a negative effect on those
pensioners who rely on investment income from saving.'
 Time lags
It is always important to remember that the effects of any policy change or any market
change may be slow, and will create a time lag between implementation/change and
effect. In other words, there will be a difference in effects between the short-run and the
long-run.
 Weak effects
Similarly, changes on policies or the implementation of a new remedy may have a weak
effect on the behaviour which has been targeted. For example, the effect of a minimum
price on alcohol may have a very weak effect on the behaviour of drinkers.
37
Useful Websites
General websites
www.bbc.co.uk As well as topical issues there is also an education section. ww.bbc.co.uk/learning Online
learning support and advice.
www.bized.co.uk Originally designed for Business Studies and now incorporates a wealth of useful
information for both teachers and students.
www.s-cool.co.uk Although available for AS/A level only, many topics are also relevant for the IGCSE
specification and are dealt with simply with revision questions.
www.tutor2u.net Originally for AS/A2 but developing more resources for GCSE level.
Current economic issues and statistical data
www.economist.com Economist magazine.
www.ft.com Financial Times newspaper.
www.guardian.co.uk Guardian newspaper.
UK data
www.bankofengland.co.uk - for information on current interest rates and the UK’s financial system.
www.direct.gov.uk - the website of the UK government, providing information for citizens from various
government departments.
www.hm-treasury.gov.uk - the UK’s economic and finance ministry. Access to budget reports and policy
information.
www.statistics.gov.uk - Holds all national statistics, for example economy, census, population, labour market.
World data
www.europa.eu.int/en/comm/eurostat - Holds statistics on all nations in the European Economic Community.
www.oecd.org - The website holds comparable statistics, economic and social data from countries committed
to democracy and market economy.
www.worldbank.org - Source of loans, credits and grants to developing countries. Website has a section on
world data and research.
www.wto.org - The World Trade Organization deals with rules of trade between nations. Includes a section on
trade statistics.
38
Macroeconomic Objectives
2.1.1 Macroeconomic Objectives
 Basic Circular Flow of Income
 AD/AS analysis
 Economic growth
 Low and stable inflation
 Low unemployment
 Surplus or balance on the current account of the balance of payments
 Protection of the environment
 Redistribution of income
39
Introduction
Economics consists of two broad areas of study: microeconomics and macroeconomics.
1. Microeconomics is the study of individual units within an economy, for example,

individual consumers, firms or markets.
2. Macroeconomics is the study of the economy as a whole whether this is national or

international. So we look at total spending in an economy, known as Aggregate Demand
(AD), and total national output known as Aggregate Supply (AS).
Aggregate demand total

in an economy
Macroeconomic objectives refer to the targets set by the government in relation to the
whole economy that it wishes to achieve. There are five main macroeconomic objectives.
These are:
1. To achieve or encourage sustainable economic growth

2. To have low and stable inflation prevent
priles fromrisingfast
3. To have low unemployment tohave jobs
foreveryone that is looking forone
4. To have a favourable balance of payments on current account
5. To protect the environment
6. To have an equal distribution of income and wealth
Other macroeconomic objectives
ernment
go
1. To have healthy public finances
Different macroeconomic objectives are pursued by different governments. These will

change over time depending on the political party in power and the general state of the
economy. In recent years, the objective of protecting the environment has gained in
popularity whilst that of a more equal distribution of income and wealth has been put to the
bottom of the list.
40
How does the Macro economy Work?
In the model below, assume an economy where there only households (people) and firms.
There is no government, banking sector or international sector. In this economy,
households (H) provide factors land, labour and capital to firms (F) in return for factor
payments (rent, wages and interest). Firms use the factors of production to produce goods
and services in return for payment. If households were paid £100, the economy’s national
income (NY) will be £100. Households will spend this on the output produced, national
product (NP). Thus, national expenditure (NE) will be £100, which in turn will be used to
produce NP of £100, which becomes firms’ income and so on. Hence, this is referred to as
the circular flow of income.
Notice the flow of income in the diagram below as opposed to the non-monetary flow of
goods/services and factors.
supplygood revile
housen.to expenV
we
tonsumer
firms
Leakage
i I Savings
I
2 Imports
supply resources 31 Taxes
Injettion
land labour
1 Investments yapped entrepreneurship
21Exports
31 Government National Income
spending e g totalintome of a National product
lountryfoveragearl
roads NY = NE = NP output Total value
of goods and
f servile produced
in a year
National expenditure
totalspending of a country
on goods services over
consumers
all
41 by
a
year
Leakages/withdrawals (W) refer to income that flows out of the circular flow. These are
savings (S), imports (M) and taxation (T).
Injections (J) refer to income that flows into the circular flow of income which comes from
outside the model. These are investment (I), exports (X) and government spending (G).
If withdrawals are equal to injections, the circular flow of income is in equilibrium.
If withdrawals are greater than injections, the circular flow of income will fall.
W ˃ J = NY
If more money is teaing than enteringtheeconomy

If injections are greater than withdrawals, the circular flow of income will increase.
J ˃ W = NY
Core Activity:
Fill in the table below.
Variable Leakage/ injection Impact on national income
Increase in imports
14 151 Intl
Lt Nt t
Increase in savings
Li Ne t
Decrease in taxation
t t Nt t
Decrease in government
spending
t t Ne t
Increase in exports
II Ne P
Decrease in investment
Il Nt t
Extension:
What happens when interest rates change? Explain your answer – give specific application
to the UK economy.
42
AGGREGATE DEMAND AND AGGREGATE SUPPLY
Introduction
Demand is the quantity of a particular good or service that consumers are willing and able
to buy at a given price over a given period of time. This is individual demand.
Aggregate means total or sum.
AGGREGATE DEMAND
Definition: Aggregate demand is the total of all demands or expenditure in the

economy at any given price.
National expenditure (NE) is thus, the same as Aggregate Demand (AD).
NE = AD
AD and thus, NE, is made up of 4 components:
AD = C + I + G + X – M
Where,
C = Consumption is spending by households on goods & services.
I = Investment is spending by firms on investment goods (i.e. capital goods).
G = Government Spending includes current spending on wages and spending by govt on

investment goods such as roads, schools, etc.
X = Exports are the goods produced in the domestic economy that foreigners spend money
on.
othercountries
pin
M = Imports are goods produced abroad. They do not form part of national expenditure and
do not contribute to national income.
Note: AD refers to demand for domestically produced goods/ services hence M is

subtracted.
43
AGGREGATE DEMAND
Definition: The aggregate demand curve shows the inverse relationship between the
price level and output in the economy.
Price level is the average level of price in the economy.
Real output is the value of goods and services produced in an economy over a given period
of time. You may see real output expressed as GDP.
The aggregate demand curve is downward sloping.
General PriceLevel Note an increase in

Cl G Y will
one n
lousetheAD to
shift to theright
expansion
Phi pg
B
6Plz I J i
i
i
NY NY NY
Generaldemand
If a household is on a fixed income, a rise in average prices will mean that they can buy
fewer goods and services than before i.e. the higher the price level, the lower the demand
of the whole economy and vice versa.
44
Shifts in the AD curve
Assuming price level remains the same, changes in non-price factors will cause the AD
curve to shift.
These factors could include:
 A change in unemployment
 fall in income tax and/or corporation tax
A change CT IT All r fshifts right
 A change in the rate of interest
y A change in business confidence

 A change in government spending
x A change in the value of the pound
For example, if unemployment increases, incomes fall causing consumption to fall. This will
shift the AD curve to the left to AD1. If on the other hand for example, the rate of interest
falls, this will cause more people and businesses to borrow making consumption and
investment increase. This will cause AD to shift to the right to AD2. See graph above.
ont n increase in AD
GPL p
t
I i
n I
i 1
i s
2000 2200 NY
E million
45
AGGREGATE SUPPLY
Definition: Aggregate supply (AS) is the total amount a country’s supply at any given
price. In other words, it shows the level of output in the whole economy at any given
level of average prices.
Aggregate Supply Curve
The aggregate supply curve is upward sloping suggesting that total output increases as the
price level increases. This can be explained by the profit motive.
At low levels of output, the AS curve is horizontal showing that firms can increase output
without raising prices due to excess capacity.
At higher levels of output, the AS curve becomes vertical. This shows the total productive
capacity of the economy, i.e., the total amount of goods and services the economy can
produce using all its factors of production as efficiently as possible. In other words, firms are
producing at full capacity. This is known as the full employment level of output (Yf).
I AS
i
unemployed
i resources
X Ye NY
46
Shifts in the AS curve

L ngrun As
Pif
The factors that will cause a shift in the AS curve include:
1. Changes in costs of production. For example, changes in wage rates, prices of raw
materials, energy, rate of interest, etc.
An increase for example, in wages, will cause the AS curve to shift upwards. On the
other hand, a decrease for example, in the cost of raw materials, will cause the AS
curve to shift downwards.
Sos 2. Changes in the resources of the economy. For example, changes in the quantity and
quality of land, labour, capital and enterprise. e Moreimmigration means more
g
labour or more investment whichmeans morecapital
If the resources of the economy were either to increase or improve or technology
was to improve, then the AS curve will shift to the right to AS1, showing that the
economy can now produce more goods and services with its resources. The full
employment level of output is now greater. This is more a long-run phenomenon,
given that the long-run is defined as that period of time when all factors of production
are variable. See graph on the next page.
of As As
Long run
economic
growth
NY
He rife
47
Aggregate Demand and Aggregate Supply
The equilibrium level of output in the graph below is Ye and equilibrium prices are Pe where
AD equals AS. The aggregate demand in the economy was inadequate to keep all factors
of production fully employed. Potential output of distance AB is not produced. There is,
thus, unemployment in this economy. At the same time, the level of AD in the economy
results in higher prices, distance CD. There is, thus, inflation in this economy also.
Gry
o
te
Ife Ife NY
National
output
L potential or
equilibrium maximum
output
full employment leet
48
AGGREGATE DEMAND
Core Activity
1) Define Aggregate Demand.
Total demand of a country economy
2) What are the components of Aggregate Demand?
Consumption Investment Government spending
exports import
Ct i t G t
X M
AD
3) Draw an AD curve and label all the axes.
org
Is
4) Draw an AD curve shifting to the left and identify four factors that would cause it to shift
to the left.
1 A rise inincome tax
onya 2 A fall in wages
3 A rise in unemployment
4 A fall in
At government spending
5) Draw an AD curve shifting to the right and identify four factors that would cause it to shift
to the right.
49
AGGREGATE DEMAND AND AGGREGATE SUPPLY
Core Activity
What effects might each of the following have upon AD/AS analysis?
In each case draw an AD/AS diagram showing the effects on the equilibrium price and the
real level of national income.
Use the whiteboards to draw each diagram.
1. Rise in wages
2. Fall in consumption
Cd Apt Pd Ney
3. Rise in the price of oil
4. Fall in exports Xt ADI Pl Nit

5. Increased efficiency and productivity, combined with lower input costs
6. Increase in government spending
7. Fall in the unit costs of production
8. Increase in the size of the female population entering the workforce
9. Increase in imports
10. Rise in interest rates
Extension task:
Draft a test on AD/AS for your class with 10 questions. Produce a mark scheme.
50
Topic Review
51
ECONOMIC GROWTH
Introduction
Definition: Economic growth is defined as a long-term expansion of the productive

potential of the economy and an increase in the economy’s real national output (real
GDP).
An increase in Aggregate Demand will cause an increase in national output (GDP) hence
there is actual economic growth. This is short – run economic growth.
É i I AD
1
n I
l
I Ye
An in increase in Long-run Aggregate Supply will increase the productive potential of the
economy and allow for a higher level of national output, hence there is long term economic
growth when the productive potential of the economy increase. This is long-run economic
growth.
Gry LRAS LRASI
E
Pe P E
p i i
He Yfe
. potential output
rises
52
Measuring economic growth through theintoease in real GDP

NIN Gross Domestic Product (GDP) is the final value of goods and services produced in an
economy over a given period of time.
The production and sale of goods and services generates income for people, thus,
economists measure economic growth by how much national income or Gross Domestic
Product increases.
National income is often used as the main indicator of the standard of living in an economy.
Therefore, a rise in real GDP per head is not only an indication of economic growth but also
a rise in living standards.
Standard of living - How well off an individual or nation is at a point in time. One
important, but not perfect measure is the level of GDP, more specifically GDP per
head.
capita
GDP of Cyprus 2213
GDP per Head = GDP Population IM
Population g pp head 22
However, national income or GDP may appear to rise without more goods and services
being produced because of a rise in prices (inflation). Thus, to find out how real output has
changed we must account for inflation.
Output or income or GDP that includes inflation is known as nominal output or income or
GDP. If the inflation rate is discounted from this, then this gives rise to real output or
income or GDP. Nominal GDP, in this context, is the same as money GDP.
Real means adjusting for the effects of inflation
Real GDP is the value of goods and services produced in an economy over a given period
of time, after adjusting for inflation.
money GDP is the value of goods and services produced in an economy over a given
Nominal
period of time at current market prices, i.e. before adjusting for inflation
53
Core Activity:
GDP OF CYPRUS
Year GDP Billion Absolute Economic Inflation Rate Real economic

(Euro) Growth Growth growth %
Rate
Absolute (Change in
(% change
figures GDP)
in GDP)
2005 13462 -- -- -- 3.9
2006 14435 340 at 3.1

973 13402 7,231 4,131 economy
grewby
1,131
2007 15565 14431 3.4
4 431
1. Calculate the change in absolute growth for 2006 and 2007.
2. Calculate the economic growth rate for 2006 and 2007.
3. Calculate the Real economic growth rate in % terms for 2006 and 2007.
4. What is the difference between total (absolute) growth and real (%) growth rates?
Absolute growth is before inflation while real growth
is after inflation take plane
54
Limitations of using GDP as a measure of growth.

Nominal
 Inflation – GDP is calculated in money terms so if there has been an increase in prices
there appears to be an increase in output without having been an increase in the amount of
goods and services produced. This is not a limitation if we are usingreal GDP
 Increase in population size – if there is a rise in population goods and output have to be
shared amongst more people making individuals worse off. This is whywe use GDP per
person as a measureoflivingstandards
good
 Hidden economy – Certain paid activitiesfor
are unrecorded and form part of the black
market/ informal economy (e.g., drugs and prostitution), as a result GDP is underestimated.
illegal smuggling ofgoods tax evasion
 Home produced goods - GDP doesn’t take into account home produced goods (e.g., DIY,
vegetables grown at home i.e. subsistence farming. This is especially a problem in
developing countries where subsistence farming plays a major role. It not only
underestimated GDP but also makes comparison between countries more difficult because
inevitably countries with a bigger informal economy will appear worse off.
e gpaintingyourown house
alcohol
orcigarettes
for
 GDP doesn’t consider what goods are produced if more weapons are being produced it
doesn’t increase the standard of living even though national output has increased. It also
ignores changes in quality of goods and service.
 External costs are ignored - it ignores any environmental and any other external costs
that the higher levels of production might have on the wellbeing of society.
 Statistical error.
 Ignores income distribution – it does not say anything about the way the extra income is
shared between population. Often owns of businesses benefit much more compared to the
workers in the businesses.
Not everyone benefits thesame by economic growth
55
Section C: Government and the Economy CA 12110
The Economic Cycle
If real output increases over time there has been economic growth. Plotted against time it
should look like a steadily rising line as shown below.
GDP activity
felonomi high
conomilactivity is
Boom
GDP
I Consumption Trend rate of growth
AD
Employment y F
prices
recovery
feconomil
activityvises
o
recession
flow economic
activity TIME
Although there tends to be economic growth in the long-run, in the short-run national
income/output experiences many ups and downs. These ups and downs are shown in the:
Economic Cycle/ Business Cycle/ Trade Cycle.
When real output and national income grow faster than usual the economy is said to be
experiencing a boom. A boom is associated with a high level of aggregate demand, high
level of investment, low unemployment, rising prices (inflation) and profits as well as high
tax revenues.
In a slowdown, economic growth is still positive. However, real output increases at a

decreasing rate.
When real national output and national income fall the economy is in downturn. Downturn
is associated with falling aggregate demand, a fall in investment and consumption as well
as rising unemployment. Tax revenues fall and government spending on unemployment
benefits begin to rise.
In recessions (slumps) an economy is at the bottom of the cycle. High unemployment

exists so consumption, investment and imports will be low.
56
Note: A Recession is defined as two consecutive quarters of negative economic growth as

measured by GDP.
In a recovery, economic growth becomes positive again. National output and incomes
begin to rise, unemployment falls, and confidence starts to rise and so investment and
spending start increasing too.
BOOM DOWNTURN RECESSION RECOVERY

Economic
growth
High Falling Low Rises
Inflation
High Falling Low Rise

Unemployment
High Low Rises

Falling
Graphical representation of phases in the trade cycle
In the AD/AS graph below, a fall in spending shifts the AD curve to the left to AD1, causing
the price level to fall and more importantly for real GDP to fall from Ye to Y1. There is a fall
in short-run economic growth and the economy is in the recession phase of the trade cycle.
Recession
Of As
bi AD
Ay
Ni
E 57
As the economy moves from unemployment towards full employment it is said to

experience economic recovery.
In the AD/AS graph below, an increase in spending shifts the AD curve to the right to AD,
causing the price level to rise and more importantly for real GDP to increase from Y1 to Ye.
There is an increase in short-run economic growth and the economy is in the recovery
phase of the trade cycle.
Gry AS
TI it an
I ADA
N
Y
Causes of economic growth
In the long-run, economic growth can increase the potential of the economy to produce
more goods and services. This will not occur with increases in AD (which leads to short-run
economic growth) but when AS shifts to the right. See the following graph.
Longrungrowth of Cause
PPFshiftsoutwards As As
1 Inirease in
amount of resourier
2 Improvement in
Pi pl quality of resourie
Ppe i g
AD
I i
N
E
58
The AS curve can shift to the right for any of the following reasons:
 Labour increases - increases in the number of workers in an economy should lead to

economic growth. The size of the labour force can increase because of immigration,
increase in participation rates, and changes in demography. Increases in the quality of
the labour force because of an increase in education and training. Also morewomen
entering
theworkforce
 Investment increases – this not only increases the productive capacity of a country, but
also generates new income through the multiplier effect. However, some investment is
not growth related. E.g., investment in new hospitals or new housing is unlikely to create
much wealth in the future.
my
 Innovation – this can be defined as the application of new ideas and new methods of
production. Technological progress increases economic growth in two ways: it cuts the
cost of production of a product and it creates new products for the market.
To some extent innovation depends on the amount of research and development that is
undertaken in a country. Government expenditure in this area might therefore be
significant.
 Availability and discovery of new natural resources – For example, the difference in
the availability of natural resources between the USA and Mali is regarded as a major
reason why the US has a faster growth rate. New oil supplies in Cyprus might enable it to
achieve a faster rate of growth in the future.
 A more developed financial system – it is important for businesses to be able to

borrow money in order to finance investment.
59
The Impact of Economic Growth
Employment
During times of economic growth incomes tend to be rising, so with people earning more
money consumption will rise, thus as consumption rises AD rises causing an increase in
demand for workers as labour is derived demand. Furthermore, in times of economic
growth firms tend to invest more thus creating more jobs. Thus, the rise in AS and AD will
create employment opportunities.
more employment
Standard of living
During economic growth incomes tend to be rising thus giving people a better material
standard of living as they can afford to buy more goods and services and even follow a
healthier diet. Economic growth also allows people more leisure time due to improvements
in efficiency in the workplace. Also the government has more to spend on improving public
services like education and health care, parks, road networks etc. All of these factors have
also contributed to longer life expectancy.
On the other hand, some people argue that during times of economic growth stress level
increase. During periods of rapid growth, people may be forced out of towns and villages,
as they are being developed.
Poverty
In some countries economic growth has managed to reduce poverty as jobs have been
created. Furthermore, the fact that the government has more tax revenues in times of
growth has allowed the government to improve public services like health care, education,
welfare benefits which are mostly consumed by the poor; this has helped improve their
living standards and reduced the gap between the rich and the poor.
However, growth may be associated with exploitation. It is often argued that owners of
business and workers in higher paid jobs have benefited more than low-income earners
thus the extent to which income inequality has been reduced is debatable. Although the
national cake gets bigger and the piece of the cake grows for each group in society, large
corporations have gained by far more than workers.
60
Productive potential Benefitofeconomic

growth
During times of economic growth, the productive potential of a country increases as firms
spend more on capital goods, and also have the finances to train workers who then become
more productive thus increasing the productive capacity of a country. Economic growth
as
Moreca y
In ant
Inflation Negativeeffectofeconomic income t
growth since
If economic growth is driven by an increase in AD and this increase happens too fast the
economy is said to overheat, this means that the economy can’t keep up with rising
demand levels and so prices begin to rise, causing inflation. As inflation rises the real
standard of living falls as we can buy less goods and services with our existing wages.
EV However, if economic growth is fuelled by a rise in AS, inflation should not be a problem in
the long term. longrungrowth p58
The environment Negativeeffect

During growth production levels increase, this involves increased noise and air pollution,
at global warming, destruction of the rain forest and water pollution.
Rapid growth is also usually associated with the using up of resources, with the result that
natural and non-renewable resources such as coal, oil and gas will eventually run out. This
a does not only impact on the health and living standards of society but creates a problem for
the sustainability of future generations.
However, richer countries can devote resources to the environment and environmentally
friendly methods of production and the government can spend their extra revenues on
CV
cleaning up the environment
61
Other benefits of economic growth:
For consumers
 It allows consumers to buy more goods and services, increasing their material standard
of living. This is becauseeconomicgrowthisassociatedwithhigherincome and therefore consumption
 It allows for more choice Duringeconomicgrowth there

aremorestartup morevariety
 It allows for more competition and ultimately, lower prices ofgoods
For the government
 The government receives higher tax revenues because incomes are rising. Note they
will receive more in income tax as well as in indirect taxes e.g. VAT as consumers
spend more.
 The government also will spend less on unemployment benefits given that with
economic growth there will be less unemployment.
For firms
 Firms should benefit from higher sales revenue and higher profits. more funds
availablefor investments for training workers etc However
morecompetition loweringprices
For workers Labourcostsp wagest
 Job security
Sinceduringgrowth
thereis moredemand
forworkers
Lowerfearofunemployment
Higherwagesas DLT
Mightneedto workovertime
lessleisuretime
Lowskilledworkers in developed
mightnotsee a risein
countries
theirwages
62
Activity 1: Differing growth rates between countries (extension)

Using the following charts, discuss what each chart is showing for the individual countries
and the differences in growth rates between the UK and China.
UK’s Growth rate:
recession
covid
China’s Growth Rate:
63
Core Exam Practice
1. In Sri Lanka, economic growth has seen the increased use of pesticides and chemical
fertilisers to increase the amount of crops produced. The growth of the tourism industry
has brought about an increase in the construction of roads, hotels and guest houses.
This has created jobs but at a cost of natural wildlife habitats.
(a) Discuss the potential long-term impacts of growth in Sri Lanka and whether the benefits
outweigh the costs. (9 marks)
Identify and develop one advantage (APPLY)
The growth in Sri Lankafrom increased tourism hasresulted in more Ib in hotels and
construction companies thatbuild thehotels Therefore morejob lead to more
economi growth andpeople can afford to buymoregoods and services as incomes
will rise and this will lead to improved living standards
However, .....
É Inbuildingthesehotels the forestshavebeencut down

ofanimals Also the
destroying the natural
environment construction of the road leads to more
É noise polution
Identify and develop one advantage (APPLY).
The government in Sri Lanka will benefit fromhigher tax revenues and
unemployment benefits since more people will havejobs
lower spending on
that
Therefore this extra revenue can be used to improve public services
improve livingstandards
However, …….
Tourism is an exportfor Sri Lanka meaning that AD is rising easing

short run economilgrowth Eventuallysupplywill not be able to latch up with
demand lausingprices to rise
Conclusion Overall since Sri Lanka is a poor country a rise in overall

income will
outweigh pointing the environment until theybecomericher and
are able to protest 64
the environment better
Extension Exam practice
Core exam practice homework
Using the data above assess whether economic growth always lead to an increase in the
standard of living? (9 marks)
65
Core Exam practice
China has enjoyed a long period of economic growth in recent decades. However, this has put a strain
on its environment. Pollution-related problems, from acid rain to contaminated rivers, are now common in
China. In northern China, drought has left more than two million people without enough drinking water,
partly because the water is supply contaminated.
On the other hand, developed countries like the UK had been hit by the ‘credit crunch’. This meant that
banks and other financial institutions reduced their lending to consumers and firms. In a very short period
of time the UK moved into recession. There was a fall in demand, a rise in unemployment, an increase in
business closures, a fall in stock markets and a fall in house prices.
recession
To what extent are the problems associated with negative economic growth greater
than the problems associated with positive economic growth? (12 marks)
Explain a problem of negative growth.

Negative growth is associated with falling national incomes, this means that…..
Evaluate i.e. give a potential benefit of negative growth

However, negative growth might reduce inflationary pressure, which will….
Explain a problem of positive growth
Evaluate i.e., give a benefit of positive growth
Conclusion:
66
Exam practice
In Bali, economic growth has seen the increase use of pesticides and fertilisers in order to
improve the production of crops. The growth of the tourist industry has increased the
construction of roads, hotels, etc. This has created an increase in job opportunities at the
expense of extensive destruction of the environment.
(a) Discuss the potential long-term impacts of economic growth in Bali and whether the
advantages outweigh the disadvantages. (12 marks)
Identify and develop advantages of economic growth.
However, .....
Identify and develop advantages of economic growth.
However, .....
Conclusion:
67
Match the limitation with the explanation

measure
n ofusing one at a
Limitation ofgrowth Explanation
External costs Price increases can mean that growth rates are
A misleading. If an economy grows by 5% in a year

and prices rise by 5% in the same year, the
economy has not grown
7
Living standards An increase in population will offset any growth in
2 GDP. To overcome this, GDP per capita (GDP /

size of population) can be used instead 6
The value of home-produced goods Given the huge number of businesses and
individuals from whom the government collects
31 information, mistakes can and do happen 5

The hidden economy Some goods and services are not traded and
therefore economic activity is not recorded (e.g.
people who grow produce in their own gardens, or
work done by DIY enthusiasts) 3
Statistical errors Some paid work goes unrecorded (e.g., paying a
friend in cash to paint your house). This transaction
becomes part of the hidden, ‘black’ or informal
economy 4
Population changes GDP is used to measure living standards. However,
a rise in GDP does not automatically mean living
standards have risen because it does not take into
account people’s leisure time, the way extra income
is shared between the population, whether growth
G has resulted in pollution, or the quality of goods and
services Z
Inflation (a general rise in prices) GDP does not take into account external costs such
as environmental costs and impacts on the
7 wellbeing of society
I
68
Extension Task:
Improved edulation cutting down forests

training make more machines
h
reducing benefits 4
Y
more business investment
new technology
increased efficiency
CA ADP GPLP
more products I more pollution
More intome people can buy more goods andservice
homeworkfor 2 10
69
Monday
Topic Review
Definition How we measure it

real GDP
Economic
growth Causes of
economic
growth
Limitations
of GDP as
a measure of
she E
growth impact of growth
Benefit Drawbacks
70
INFLATION
Inflation: can be defined as the persistent rise in the general level of prices of
goods and services over a given period of time.
For example, if it is said that prices rose by 2.5% in 2009, this means that what would
have cost, say £100 to buy in December 2008, would cost £102.50 in December 2009.
i
Inflation rate: the change in average prices in an economy over a given period of
time.
Inflation target: is an economic policy in which a central bank estimates and makes
public a projected, or "target", inflation rate and then attempts to steer actual inflation
towards the target through the use of interest rate changes and other monetary tools.
In the EU andUK theinflationtarget is 21 but theyallow I 11
Why is controlling inflation important?
Ensuring inflation is low and stable and within target is one of the main
macroeconomic objectives. Governments aim to maintain the inflation targets,
because fluctuating prices create uncertainty which, discourages investment so
restricts future growth, reduce living standards because the purchasing power falls as
the prices rise. There is also an impact on unemployment – higher prices mean lower
AD so there is less demand for workers and the balance of payments worsens as our
goods becomes less price competitive.
exports fall as they
become moreexpensive
Core Activity
The inflation rates for Fiji are as follows:
Year Annual rate of inflation % Effect on the Price level
2000 1.1
2001 4.3
Rise Faster
2002 t 0.8 Rise Slower disinflation
2003 4.2
Rise Faster
2004 -0.2
O
Explain what happened to prices in Fiji between 2000 and 2003.
fall deflation
71
Deflation: is the persistent or sustained decrease in the general level of prices (the
inflation rate is negative), over a given period of time.
slower
Disinflation: describes a situation when prices are rising but at a lower rate, e.g.,
prices rise by 3% in 2017, and by 2.5% in 2018 (prices are rising but the actual price
increase is dropping.
It is a fall in the rate of inflation (the period in which inflation falls relative to the
previous period, in other words, prices rise but at a decreasing rate).
Hyperinflation: describes a situation where inflation levels are very high say, 100% or
200% per annum. Zimbabwe Venezuela Libanon
e.g
Stagflation: high levels of inflation accompanied with high levels of unemployment.
PP unemployment
inflation
disinflation
disinflation
inflation
deflation
Core Activity:
Discuss the following chart.
When did the UK experience inflation, disinflation and deflation?
Homework Task:
Rob jones Page 205 q 1-3 hw
72
Measuring Inflation
by one organisationof National Statistic
Changes in the cost of living are measured by changes in prices.
Inflation is measured by:
Consumer Price Index (CPI)

 A Living Costs and Food (LCF) survey is carried out that records the spending
patterns of around 7,000 households.
 From this survey a ‘basket of 600 goods and services’ is determined, which
represents the most commonly consumed goods and services by the average
household.
 Weights are attached to each item in this basket on the basis of the proportion of
income that the average UK household spends on this good.
 Price surveys are then carried out each month and prices are collected for the
items in the `basket' of goods and services, from across the country
 Average prices are then calculated for each item in the basket and multiplied by
the weights.
Pl

p
These average prices are then converted into an index number.
The reason why an index is used is that it allows for comparison over time.
Extension Activity
Year CPI % Change Rate Effect on the price
alwaystoointhe (inflation) level
base
BASE YEAR 1 year
100 -
2 103 3% Inflation
3 106
2,91 Disinflation
4 110
Inflation
5 109
3,81
0,91 l Deflation
Inflation'rate
New pl old Pl
t 100
Old p
106 107 100 1 oz

103
73 2,91
Switzerland Sk month then
pero muyexpensive
What causes inflation?

Types of Inflation
Demand – pull inflationToo muchADI

If demand in the economy increases faster than the rate at which firms can increase
their supply of goods and services prices will rise.
The main cause for this inflation is ‘too much money chasing too few goods’, and can
occur during a boom where AD is rising at a faster rate than AS.
Excess demand may also be due to:

- too much government spending
- too much consumer spending perhaps due to excessive incomes and “easy bank
credits” thus consumers have more money in their pockets and demand rises.
- a fall in interest rates will make borrowing cheaper and savings less attractive, so
people will borrow more and save less, thus consumption rises causing a rise in AD
adding to inflationary pressure.
In the following graph, AD shifts to the right causing prices to rise from Pe to P1
alongside an increase in output from Ye to Y1. Distance Pe to P1 shows the extent of
demand-pull inflation.
PL
i KRIAS
Py É
i
i Ifan AD
RealGDP
74
Cost – push inflation

This type of inflation is caused by increases in the costs of production. Costs of
production may rise because of an increase in: the price of raw materials, commodity
prices like oil, transport costs, power, indirect taxes, or an increase in wage rates not
matched by an increase in output. Costs per unit rise and these will be passed on to
consumers through higher prices. See recent higher food and commodity prices (2010
onwards). In otherwords firm
try to protect their profitability byincreasing
theirpriies to cover the extra costs
In the following graph, AS shifts to the left causing prices to rise from Pe to P1
alongside a decrease in output from Ye to Y1. Distance Pe to P1 shows the extent of
cost-push inflation.
G
Pg
ASI
SRI A
r
i n
I i
n
i
AD
i
i I
Y te Real GDP
Inflation can become permanent if a wage spiral comes about. This occurs when an
initial increase in prices makes workers ask for higher wages. These higher wages
add to firm’s costs of production and make prices rise even further. This sets off
further demand for wage increases and so it goes on. (This is known as the wage spiral.)
75
Impact of Inflation (i.e., CONSEQUENCES) consumers or workers

sufferfrom a lowerstandard
y
 Erosion of values/ income distribution effects of living
Purchasing power of money – inflation reduces the value of what money can buy. E.g.,
in 1975 £1 could have bought 16 pints of beer – fifty years later the same £1 would
only buy just 1 pint of beer.
Rising prices do not cause a problem for everyone in the economy because some
people’s incomes go up even more quickly than prices leaving them better off. This is
especially true for those workers that belong to powerful trade unions.
However, some people do suffer:

- Workers, who cannot negotiate higher wages because belong to weak trade
unions, or don’t belong to trade unions at all.
- Pensioners or people on fixed incomes. As price goes up, the pensioner for
example can buy less and less with his/ her money. The higher the rate of inflation
the more quickly will the real value of the pension go down.
- Savers. If the interest rate on the savings is lower than the inflation rates the value
of savings goes down.
losethevalue of their
savingwhen pricesgoup
 Debtors gain and creditors lose during period of inflation
If a borrower undertakes to repay £30 per week for the next 25 years to a building
society, then if prices and incomes rise, the real value of £30 will decline. As a debtor
the borrower gains, as a lender the building society i.e., the creditor loses.
 Exports
As inflation rises, the prices of domestic goods and services rise, making our exports
less competitive in overseas markets. Thus, exports fall, causing a fall in AD and as a
result a fall in demand for workers. The balance of payments will worsen as exports
fall. And as imports may now be relatively cheaper imports will rise worsening the BOP
further.
 Unemployment
Inflation reduces the competitiveness of British goods. Imports become cheaper;
exports more expensive. Fewer workers are now needed in the UK to produce goods
and services. Therefore, inflation causes unemployment.
76
 Uncertainty
Inflation is a cost to the economy because it creates uncertainty about the future. High
inflation means that people find it difficult to keep a record of what is the right price to
pay for a good. Firms do not know for how much they will be able to sell the products
for in three years time. They don’t know how much it will cost to produce the good.
 Business and consumer confidence

As inflation creates uncertainty, consumers worry about the changes in their costs of
living and lose confidence and job security. Business lose confidence about the future
prospects of their business, as they cannot be sure of their costs of production and
profitability. So as both consumers and business lose confidence, savings will rise,
consumption will fall and so will investment. All of these will lower AD and the
opportunities for future growth.
 Shoe-leather costs
When inflation rises, consumers and producers are unclear as to what constitutes a
fair price, thus, leading them to shop around to find the cheapest prices.
 Menu costs
Increasing costs for firms that have to keep changing their menus, price lists, vending
machines, etc whenever prices rise.
77
Core Exercises:
1. Define ‘demand pull inflation’.
2. Define ‘cost push inflation’.
3. Look at each scenario in the table below and identify whether it is demand pull or cost
push inflation. Write the correct answer in the right-hand column.
Scenario Demand pull or cost push?
Rising consumer spending encouraged by tax

cuts or low interest rates
Rising costs of imported goods such as oil
Sharp increase in government spending
Wage increase
Rising demand for resources by firms
Booming demand for exports
Increase in taxation
4. Explain one way in which inflation will impact prices.
5. Explain one way in which inflation will impact menu costs.
78
Exam practice
1. One of the governments’ macroeconomic objectives is to keep inflation within target. Inflation
can cause problems for consumers, firms and the economy. In recent years, Venezuela has
seen some unbelievable price increases. In Venezuela the government has declared a state
of emergency. Inflation at this level can have some serious consequences.
(a) Describe two negative impacts that households in Venezuela have experienced as a
result of inflation. (6 marks)
Identify and explain one negative effects of inflation

Point 1 - (K), (Ap), (An)
Identify and explain one negative effects of inflation

Point 2 - (K), (Ap), (An)
Remember a 6-mark question requires: Knowledge (K), Application (Ap), Analysis (An)
79
Exam practice
2. On the main contributors to the rising global demand for zinc has been the growth in
the motorcar industry in China. The rising demand has resulted in higher prices for
zinc.
(a) Calculate the percentage change in the price of zinc between 2016 and 2017. (3)
(K), (Ap), (An)
80
(b) Using the information above, what is meant by demand-pull inflation? (3)
(K), (Ap), (An)
3. The data below show the inflation rates for a country over three years.
Year 1 2 3
Inflation Rate (%) 2.5 1.7 2.3
(a) Define the meaning of inflation rate. (2)
(b) Using the table above, explain why prices were at their highest level in the third year.
(3)
81
Exam practice
The news that prices are rising far faster than expected will cause more misery for
many consumers who are seeing their family finances squeezed, with food and fuel
bills rising, but wages staying flat.
Pensioners – Those on a fixed income are hit hardest by rising prices, as this
effectively reduces the buying power of their pensions. To make matters worse, those
aged 65 or over spend a far greater proportion of their income on fuel and food – two
areas that have seen some of the biggest price increases.
Borrowers – inflation is good news for those who have large debts, as it effectively
reduces the size of the debt in real terms. With inflation at 3 % (December 2017) your
debt effectively halves in 12 years. So those with large mortgage debt, outstanding
loans and credit cards will benefit from higher inflation.
1) ‘There are winners and losers with inflation’. Explain. (6)
Core Peer Marking Activity:
2) Creditors and people on fixed incomes suffer more than others in an

economy during times of inflation. Do you agree with this statement? Give
reasons for your answer. (9)
82
83
84
85
Think-Pair-Share Activity:
86
Extension Activity
Based on the data on UK CPI inflation for goods and services answer the following
questions:
1. What is CPI and how is it measured?
2. Describe what has been happening to inflation in the UK in the last 10 years and why?
3. Comment on UK’s target inflation and relate this to the data given.
87
Topic Review
88
UNEMPLOYMENT
Introduction
The unemployed are measured as the people within the working population who
are able and willing to work at the going wage rate but cannot find a job.
Measuring unemployment
Two measures of unemployment are currently used in the UK:
1. International Labour Organization (ILO)
This measure of unemployment is drawn from the Labour Force Survey. This is a
quarterly survey based on a random sample of 60000 households from across the UK
of which private households account for 99%.
ILO counts the unemployed as those people who are without a job who:
- have looked for a job in the past four weeks
- are available to start a job in the next two weeks
- are waiting to start a job they have already obtained.
Advantage of ILO
- Uses an internationally standardised definition of unemployment
Disadvantages of ILO
- Costly and it takes time to compile and publish
- It is out of date by the time it is published and subject to sampling errors
- The survey may underestimate the number of unemployed as it does not include:
o Part – time workers who are looking for full time work. Those who are out of
work and who are not actively seeking work, but who are receiving benefit
and would take job if it were offered to them.
2. Claimant Count (Not examinable):

This method calculates unemployment by measuring the number of people
receiving benefits (Jobseekers allowance).
89
Types of unemployment
 Frictional unemployment – occurs when workers change jobs and spend some
time looking for a new one.
 Seasonal unemployment – occurs because consumer demand for some goods and
services is seasonal. E.g., tourist industry – hotels, water parks, ski resorts,
Christmas tree sellers.
 Cyclical unemployment – occurs when there is too little aggregate demand for
goods and services in the economy during an economic recession. Firms will reduce
production and lay off workers creating unemployment. In the following graph, AD
shifts to the left to AD1 causing output to fall from Ye to Y1. This shows the amount
of output lost due to unemployment.
 Structural unemployment – arises from long-term changes in the structure of the

economy as entire industries close down because of a lack of demand for the goods
and services they produce. Workers and are made unemployed and have skills that
are no longer needed; therefore, they cannot switch to another occupation and this
results in long term unemployment. E.g., ship building industries, coal mining.
We can break down structural unemployment into Regional and Technological
unemployment. If a country has a declining industry concentrated in a particular
90
region due to past location factors, then we can see ‘regional unemployment’.
Technological unemployment - occurs when machines replace workers.
 Voluntary unemployment – occurs because some people decide not to work

because they are better off receiving unemployment benefits.
 Real wage unemployment (labour market imperfections) – this occurs because TU

have priced labour out of the market. Govt introduction of NMW has the same effect.
Causes of unemployment
 Recession
 An increase in the value of the country’s currency
 An increase in imports from low wage countries
 Low productivity
 Lack of information
 Lack of mobility
 New technology
 High wages
Impact of unemployment
 Costs for the unemployed
- Loss of income
91
- Depression, divorce, alcoholism, etc

- Loss of skills – the longer the worker is unemployed he becomes deskilled and
finds it harder to find a job
 Costs to the government
- Money spent on unemployment benefits
- Money to retrain unemployed workers
- Money to operate Job Centres
- Loss of tax revenue from income tax, corporation tax, VAT etc
 Costs for people in work:

- Higher taxes to cover the costs of Jobseekers Allowance
- Fall in standard of living because of cuts in public spending
- Loss of job security = loss of confidence = less spending
 Costs for whole economy:

- Total output falls, thus fewer goods to share
- Economy is producing below its full potential thus there is a waste of resources.
- Poverty for those out of work or those who have never had a job opportunity;
poverty = hardship
- Opportunity cost – goods and services they could have produced
- Opportunity cost to taxpayers – tax revenue could have been used on say new
hospitals rather than on paying unemployment benefits
- Social problems – crime, higher divorce rates etc
92
Think-Pair-Share Activity
Work in your groups/pairs to come up with ways through which we can tackle the
following types of unemployment?
 Frictional unemployment
 Seasonal unemployment
 Cyclical unemployment
 Structural unemployment
 Voluntary unemployment
 Technological unemployment
Exam Practice
1) Structural unemployment accounted for most of the unemployed in Germany

in 2003. Explain what is meant by structural unemployment. (2)
2) Briefly explain one reason why the government of Germany might regard
structural unemployment as more serious than frictional unemployment. (2)
93
Exercises
1. Define ‘unemployment’.
2. Name one important measure of unemployment used in the EU.
3. Explain what the LFS does.
4. Extension task: The government should give benefits to people who are
unemployed’. To what extent do you agree with this statement?
94
5. Draw lines to match each type of unemployment with the correct explanation.
Type of unemployment Explanation
This is when people are unemployed in the short

term when they are between jobs (i.e. when they
Cyclical or demand deficient
have finished working for one company and are
unemployment
taking a couple of weeks’ holiday before starting to
work for another company)
This is linked to the economic cycle. When an

economy moves from a boom to a downturn,
Structural unemployment
people are likely to lose their jobs as businesses
look for ways to cut costs
This is when the structure of an economy changes

and includes three main areas:
Seasonal unemployment • sectorial unemployment

• technological unemployment
• regional unemployment
This is when people choose not to work. There are

many reasons for this, e.g. they are not prepared to
Voluntary unemployment
work for the wages offered, or they do not like the
idea of work in general
This is when some types of worker are only

Frictional unemployment required at certain times of the year (e.g. in holiday
resorts)
95
96
Extension Task:
97
SOW
98
99
Activity 2 + Peer Assessment Activity
In the space below, graphically represent the situation in statements P and J. Give a brief
explanation of your graph.
Graph 1
Graph 2
100
Topic Review
101
BALANCE OF PAYMENTS
The balance of payments is a record of all inward and outward transactions with
other countries. It is a record of all money flowing into and out of a country from
international trade.
Introduction
International trade is the exchange of goods and services across international
boundaries or territories. In most countries, it represents a significant part of GDP. As a
result of this exchange of international trade money flows into and out of a country; thus,
these inflows and outflows of money from international trade are recorded in the balance
of payments.
Why do countries trade?

1. To get goods and services that they cannot produce themselves.
2. They trade for goods that they can produce themselves but which are more cheaply
made elsewhere.
3. They trade for goods that they can produce themselves but which are made of better
quality elsewhere.
What do countries trade?

Exports – all goods and services sold to other countries. Exports represent a
flow of money coming into a country/ an injection in the circular flow
of income
Imports – all goods and services bought from other countries. Imports
represent a flow of money leaving a country/ a leakage in the
circular flow of income
102
Visible trade - now referred to as trade in goods. These can be seen, weighed or
touched as they pass through ports or across borders.
Balance of trade – measures the flow of money coming into and going out of
a country from visible exports and imports i.e. goods.
Balance of trade = value of visible exports – value of visible imports
If Exports > Imports = surplus (favourable balance of trade)

If Exports < Imports = deficit (unfavourable balance of trade)
Invisible trade now referred to as trade in services. These cannot be seen, weighed or
touched as they pass through ports or across borders.
Balance of invisible trade –measures the flow of money coming into and
going out of a country from invisible exports and imports i.e., services.
Balance of invisible trade = value of invisible exports – value of invisible imports
If Invisible Exports > Invisible Imports = surplus

If Invisible Exports < Invisible Imports = deficit
Current balance – the sum of the balance of trade plus the balance of invisible
trade.
Activity:
Calculate the balance of trade and the invisible balance from the following figures:
$ million
Invisible imports 10000
visible exports 15000
Invisible exports 20000
visible imports 17000
Balance of trade: Invisible balance:
103
BALANCE OF PAYMENTS
The Balance of payments is split up into three main accounts:
1. Current Account: This is a record of all money flowing into and out of the
country for trade in goods and services and primary and secondary income
from abroad.
In detail it includes:
- Trade in goods (previously known as visible trade), which includes imports and
exports of goods
- Trade in services (previously known as invisible trade), which includes imports

and exports of services
- Primary income which is composed of income paid to foreigners for the use of
factors of production i.e., wages, interest, profit, dividends minus income earned
by UK residents working overseas or from overseas investments.
- Secondary income, which includes government transfers that do not involve any
trade e.g., contributions to the EU, foreign aid, etc.
2. Capital and Financial Account: It measures all the short term and long-term
monetary transactions between the UK and the rest of the world. These flows of
money are associated with saving, borrowing, investment and speculation.
104
Why is a BOP on current account deficit considered to be undesirable?

Impacts of a current account deficit:
1. A deficit leads to less economic growth, as “X” are a component of AD so as X

falls, AD falls, which in turn leads to a fall in national output.
2. A deficit can lead to more unemployment, as labour is derived demand. As

demand for domestic goods falls, due to foreign goods being more competitive
than ours, demand for workers that produce these goods will fall causing
unemployment.
3. A deficit might mean that reserves of gold and foreign currency have to be run
down to pay for the deficit. This means the country will be decreasing its assets.
4. Loans to pay for the deficit may have to be made, and in future repaid with
interest.
5. Unpopular measures like deflation and protection might have to be introduced to

solve the problems causing the deficit.
6. May cause inflation if prices of foreign goods increase. Imports will be more
expensive leading to a rise in average prices in our domestic economy especially
if the imported goods are important raw materials like oil, as this will create cost-
push inflation.
7. Exchange rates are affected by the BOP – if our exports are less than imports
there will be less demand for our currency from foreigners as they don’t need it to
purchase our goods; thus, as demand for our currency falls the exchange rate will
depreciate. This will increase the risk of imported inflation as we will need to give
more of our currency to pay for imports.
105
Is a BOP on current account surplus always desirable?

A surplus is normally considered to be desirable because more money is flowing into the
economy rather than out of it. However, it could be considered undesirable if:
1. The surplus is large and made year after year. This must mean that some countries
are making deficits and these countries may have to limit their future trade. Japan
has usually had a BOP surplus since 1950, but it had re-valued its currency at times
to reduce its surplus.
2. The surplus could be inflationary because it will mean money flowing into the
economy is increasing the money supply and also demand, which may cause
prices to rise (as X is a component of AD).
3. It will increase demand for our currency, causing it to appreciate.
Think-Pair-Share Activity - Working in pairs:
Identify two gains from a surplus Identify two problems from a surplus
106
Core Exam Practice –
Using the data that follows answer the following:
1) Explain two ways in which rising inflation might influence the current account of
the balance of payments. (6)
2) Do you think that a balance of payments deficit is a serious problem? Give

reasons for your answer.
(9)
107
108
109
110
Balance of payments on the current account

1. Define an import.
2. Define an export.
3. Give one example of an import.
4. Give one example of an export.
111
Task 2 – Think-Pair-Share Activity:
Working in groups, complete the table below by writing an explanation for

each reason for deficit or surplus:
Reason for Explanation

deficits and
surpluses
Quality of domestic
goods
Quality of foreign
goods
Price of domestic
goods
Price of foreign
goods
Exchange rates
between countries
112
Extension:
Study the table and answer the questions below
Exports/imports £million
Visible exports 166,921
Visible imports 179,578
Invisible exports 50,807
Invisible imports 43,665
1. Calculate the balance of trade. (2)
2. Calculate the current account balance. (3)
3. Explain how the UK’s current account balance would be affected by:
a. UK consumers buying more foreign holidays. (2)
b. French consumers buying more cars from the UK. (2)
4. How might a slowdown in the UK economy’s rate of growth affect the balance of
payments? Explain your answer. (6)
5. In what ways could a strong £ and high interest rate policies affect a car
manufacturer in the UK? (6)
6. What do you think are the main factors that determine the main export markets for
UK goods and services? (6)
7. Explain 2 ways in which a country might protect its domestic market from imports.
(6)
8. Do you think that British membership of the single European currency will benefit UK
firms? Give economic reasons for your decision. (9)
113
Topic Review
114
PROTECTION OF THE ENVIRONMENT

Introduction
The benefits of economic growth are well documented. However, growth has also
brought with it many economic problems. The negative effects on the environment
are serious enough for governments around the world to want to take action to limit
the environmental damage caused by growth. Protection of the environment is now
an important government macroeconomic objective given the massive economic
growth that has occurred globally in the last 40 years.
The Environmental Problem

The increase in the levels of greenhouse gases has caused:
 Global warming
 Change in land fertility
 Rising sea levels
 Flooding and crop failure
 Acid rain
Sources of Greenhouse Gas Emissions

 80% of greenhouse gas emissions come from carbon dioxide, which come from
transport, industry and domestic sectors. The use of petrol, gas, coal, oil and
electricity account for CO² emissions in the atmosphere.
 The remainder of greenhouse gas emissions come from agriculture and the use
of nitrous oxide in fertilisers and methane from cattle.
APPLICATION:
Who are the biggest polluters?
Theoretically, the more one produces, the more pollution there will be. The richer the
country, the more consumption there will be. Hence, you would expect the rich
industrialised countries, for example, USA, Japan, Germany, etc to be the biggest
polluters, with the newly emerging economies like China and India following. Growth
in pollution though, has not been keeping up with growth in GDP because of more
efficient fuel technology and strict environmental control that rich countries have.
The newly industrialised countries are big polluters because of lack of environmental
control and the use of old fuel inefficient technology.
115
How business pollute the environment:

Various business activities such as mining, power generation, chemical processing,
agriculture, construction and transport all contribute to damaging the environment.
All these activities create external costs and they all contribute to creating air, noise
and visual pollution as well as contaminate water. Such pollution brings health
problems, the destruction of wildlife and causes issues to the sustainability of future
generations.
Government intervention to protect the environment:

(see last year’s notes pg 118-123)
1. Regulation. E.g. the 2008 Climate Change Act established the world’s first legally
binding climate change target. The UK aims to reduce greenhouse gas emissions
by at least 80% (from the 1990 baseline) by 2050.
2. The introduction of an emissions trading scheme i.e., pollution permits.
Businesses would buy permits which would allow them to pollute the atmosphere
up to a certain amount.
3. Shift in producing electricity with the more fuel-efficient gas rather than coal in the
1980’s and 1990’s.
4. Taxation. E.g., fuel taxes, plastic bag tax.
5. Encouraging householders to be greener by recycling, conserving electricity,
building more energy efficient houses, etc. (could be through regulation)
6. Congestion charge, road pricing.
7. Fines
8. Government provision of parks. E.g., national parks to protect wildlife, historic
sites, beautiful scenery etc. These also create positive externalities.
116
Why do Governments care about the environment?
1) Pollution affects sustainability of resources for future generations
2) The effects on health

- Increases the cost to the government in terms of providing health care
- Cost from the loss of productivity ca
PLEASE REVIEW YEAR 4 WORK ON EXTERNALITIES
POLICEIS: What can the government do to help?

 Indirect taxes
 Subsidising green technology
 Regulation – laws protecting the environment
 Tradeable pollution permits
 Fines
117
Find the following key terms in the word search, then define as many of the
terms as you can.
a) Deforestation b) environment c) pesticides d) tailings

e) Intervention f) contamination g) pollution h) construction
I N N O I T N E V R E T N I
N D E F O R E S T A T I O N
O C O N T A M I N A T I O N
I C I E E N N N N E S T R N
T N I T U L T A N U E N I E
C E N T S T F L E T D E P D
U I T E C O L U L C I M O C
R T M A S M D E E A C N L C
T E T R I N N S T N I O L V
S O O T N L R S N T T R U N
N N A C L N I N A E S I T T
O T R N C O T N E C E V I E
C I T T C A A N G T P N O V
L N I U P I M I O S I E N L
118
Activity
Answer the following question:
Governments want to reduce the environmental costs of economic growth. To

what extent might taxation be more successful than government regulation to
achieve this objective? Use examples to support your conclusion. (9)
Peer Assessment Activity:

Using the mark scheme below, mark your partners work, justifying your mark
with detailed comments, focussing on the content of the answer and the
required success criteria.
Tick (🗸)
 

 Advantage of taxation as a method reducing  1 mark 

environmental costs

 Development with application (in context could be by Up to 2 
using examples). marks

 Evaluation of point in context  Up to 2 
 marks
 Advantage of regulation as a method of reducing  1 mark 
environmental costs

 Development (in context could be by using  Up to 2 
examples) marks

 Evaluation of point in context  Up to 2 
 marks
Core homework: SAM 4(b) and 4(c) – Peer Marking Activity

*REMEMBER TO STAY IN CONTEXT – APPLICATION IS A MUST*
119
ENVIRONMENTAL PROTECTION
The Council of Ministers has the overall responsibility for the formulation of
environmental policy.
Environmental policy is co-ordinated through the Minister of Agriculture, Natural

Resources and Environment. In addition, the Minister of the Interior and the Minister of
Labour and Social Insurance also play important roles.
The Ministry of Agriculture, Natural Resources and Environment (MANRE) has the
primary responsibility for many different aspects of the environment.
Environment service duties and responsibilities are summarized in the table below:
Research task:
Choose one of the topics from the box above and investigate how Cyprus has
dealt with one area. For example, packaging waste has been dealt with by local
authorities through working with Green Dot.
120
Topic Review
121
Redistribution of income
Brainstorming Activity
What does
poverty mean?
122
Think-Pair-Share Activity:
1. Estimate how much the following people would earn in your country.
a) someone who works in a shop
b) Managing Director of a large company
c) Teacher
d) Pensioner.
2. Is the distribution of income equal in the examples in question 1?
3. Why do you think this is? Explain your reasoning.
123
Income inequality
This refers to the gap between rich and poor, seen via differences in percentages of
income going to the richest or poorest groups in the population.
Absolute poverty
This is where people have insufficient income to buy basic necessities such as
food and shelter, their basic human needs cannot be met.
Application
 Developed countries such as the UK and the US face the problem of homeless
people.
 In Africa, millions of people live in absolute poverty and thousands die every week
because of hunger and disease.
 Measures of absolute poverty are: measured by those living on less than $1.25 a
day at 2005 PPP GDP or those living on less than $2 a day. The World Bank now
uses $1.90 a day measure.
Relative poverty
This refers to people who are poorer compared to others in society the poverty line
is often measured at below 60% average income.
Application
 In terms of global income inequality, the poorest two-thirds of the world’s people
are estimated to receive less than 13 per cent of world income, while the richest 1
per cent take nearly 15 per cent (Source: UNDP HDI report for 2014)
Causes of poverty
 High and persistent unemployment
 Lack of human capital
 Pensioner poverty
 Inheritance- the ‘cycle of poverty’
124
Governments, poverty and inequality;

Reasons governments should want to Reasons governments should NOT
reduce poverty and inequality want to reduce poverty and inequality
1. Meet basic needs to sustain an active 1. Voluntary unemployment implying

and healthy life, reduce risk of starving that people are lazy thus the
to death and reduce the effect of many government should cut benefits so the
diseases. unemployed are forced to just accept
any job and go back to work.
2. Raise living standards can lead to 2. Opportunity cost: e.g., unemployment
higher income and education. this will benefits could have been used on
boost economic growth, more tax things like healthcare;
revenue for the government which can Unfair to the working population whose
be spent on public services. taxes contributions are being used to
pay for benefits.
3. Ethical reasons, this means it is 3. They should not want to reduce poverty
believed that it is the moral duty of the as the “working class system” enables
government to help reduce poverty. employers to fill labour shortages
(unskilled labour). This keeps wage
costs low and helps increase firms’
profits.
4. Social unrest and civil disobedience 4. Poverty trap: state benefits might be
(this can be related to an increase in higher than earnings from low paid work
negative externalities, fall in and as a result people feel discouraged
productivity and loss of output) to work as they will be worse off than
being unemployed; thus, they land up
5. Serious income inequalities can trapped in poverty
damage growth & development- the
argument is that if low-income families
have less to spend, then consumption
will fall in the economy. This will result
to less investment by firms, reducing
aggregate demand and thus, growth.
125
Government intervention to reduce inequality and poverty

Class Activity:
Discuss the advantages and disadvantages of each of these policies
Policy Advantages Disadvantages
1. Progressive Reduces the gap between Unfair: This is usually
Taxation rich and poor: considered unfair by the
This is one that places Takes money away from the high-income earners as they
the burden of taxation rich who can afford it and pay a higher % in tax
more heavily on the redistributes it to the poor
higher income groups. thus reducing the gap Tax evasion: high taxes
between rich and poor. encourage people to look for
ways to avoid/ evade paying
tax
2. Redistribution Helps reduce absolute Not possible in poor

through benefit poverty: incomes are countries where absolute
payments “topped up” by state benefits poverty is so high and
Governments have a so poor can afford governments don’t receive
welfare system which is necessities enough tax revenues.
used to redistribute
income in favour of the Benefits contribute to Reduces incentives to
poor. This may involve economic growth: as the Y work: as the Poor learn to
using tax revenue to of the poor increase, the rely on benefits
make direct payments ability to spend rises so C
to those on low increases = AD rises
incomes and those who AND benefits are part of G
cannot work at all. which also contributes to
economic growth
126
3. Investment in Free education gives The cost of education

education and access to lower income goes beyond fees there is
healthcare. groups to receive an still the cost of books,
This eradicates education which will open uniforms etc.
poverty through doors to better paid jobs
developing skills and which in turn will improve Children may need to
health. living standards and help leave school young to find
break the poverty cycle. work and help the family.
Free health means poor Quality of public school &

people live longer and health depends on
healthier lives which means governments finances to
better living standards and a offer a good education.
more productive work force.
Productivity increases =
economic growth: a more
educated and healthier
society = a more productive
society = more chance of
economic growth.
127
Policies to reduce poverty in both developed & developing countries
Developed country Developing country

1. Reduce indirect taxes e.g. fuel taxes 1. Provide free primary education to
all/improve enrolment rates. Tackle
child poverty
2. Increase progressive taxes e.g. the 2. Encourage investment particularly in

top rate of income tax manufacturing/tax
incentives/encourage FDI
3. Increase direct taxes such as the top 3. Improve transport infrastructure

rate of income tax
4. Increase spending on welfare benefits 4. Tackle AIDS & malaria
5. Increase the minimum wage or living 5. Empower women and tackle sex
wage and/or fixing a maximum wage discrimination
6. Legislation to protect part-time & 6. Population control

temporary workers
7. Job-creation: programs like 7. Price controls on essential goods and

subsidisation of employment services
128
Plenary
Complete the table below, giving an explanation and an example of each type of poverty.
Type of Explanation Example

poverty
absolute
poverty
relative
poverty
129
EXTENSION MATERIAL
SEE PAGE 242 OF ROB JONES (OPTIONAL)
Measures of income inequality
Two measures of income inequality are the Lorenz curve & the Gini co-efficient. These
are based on relative income levels earned by different groups of individuals in an
economy.
Diagram of Lorenz* curve Gini co-efficient
 A graphical device for  Gini coefficient = Section A

illustrating the extent of Section A+ B
inequality in society
 Value can range from 0 to 1
 Diagonal represents complete  The Gini coefficient is used to show the degree of
income inequality between different groups of
equality households in the population.
 It can also be used to show how inequality of incomes

 The further the curve bows has been changing over a period of time.
out from the diagonal, the
 The higher the value, the greater the degree of income
greater the degree of inequality
inequality
 If 0, then there is complete equality
 Lorenz curve has bowed out

 If 1, then there is complete inequality i.e. one person
since 1980s-income enjoying all the nation’s income!
inequalities have increased
Task 1:  Gini coefficient increased since the 1980s
 Usually
130 increases when there is a recession
Core Exam Practice
131
Assess one policy that the UK government could use to reduce the level of relative
poverty. (9 mark)
However
However
132
Using the model answer below, mark your partner’s answer by completing the Peer
Assessment Sheet provided on the next page. Try to provide a detailed justification of your
comments and ticks (🗸) wherever possible.
133
134
Name
Question Title
Assess one policy that the UK government could use to reduce the level of relative
poverty.
Define the key term in the Extend your chains of Use relevant examples Evaluate as you end
question analysis and explain the from the data to support each paragraph
cause and effects of your your point
points
Ensure that your point is Use accurate relevant Write your answer in the Extend your
relevant to the question diagrams to support context of the question evaluative points
asked your answer and explain
them
Use accurate and relevant Provide balance by Be specific and accurate in Evaluate in the
theory to answer the assessing both sides of interpreting and quoting context of the data
question the argument data (dates / calculating given
numbers /trends/quotes)
Mark Awarded: /9 Grade:
WWW (What went well) Self / Peer Review:
WWW (What went well) Teacher Review:
EBI (Even Better if) Self / Peer Review:
EBI (Even Better if) Teacher Review:
135
136
Government Policies
Topic Review
137
Government Policies
2.1.2 Government Policies
 Fiscal policy: - Government revenue and Government expenditure
 Monetary policy
 Supply-side policy
 Government controls
138
Government Policies
FISCAL POLICY
Fiscal policy uses government expenditure and taxation to control aggregate

demand and improve long-term productive capacity.
This section concentrates exclusively on the demand-side capacity of fiscal policy.
Fiscal policy can take two forms:
 Expansionary fiscal policy – increasing public spending or reducing taxes

to AD during a recession.
Expansionary fiscal policy is also known as reflationary fiscal policy.
When private sector spending is low the government can increase its spending
say on education, healthcare, roads, civil servants pay etc to increase AD. It can
also cut taxes to increase individual’s incomes and firm’s profits. This should
increase private sector spending, hence increasing AD.
Risk = leakages, individuals and firms may save this extra money or spend
it on imports.
 Contractionary fiscal policy – decreasing public spending or raising taxes

to AD during periods of high demand – pull
inflation.
When AD is too high the government may cut back on its spending e.g. by cutting
nurses salaries or defence expenditure to decrease AD. It can also raise taxes
which will reduce people disposable income and hence AD will fall.
Risk = may reduce employment and growth in real output.
139
Government Policies
Graphical Representation of Expansionary and Contractionary Fiscal Policy

In the graph below, equilibrium prices and income are at Pe and NYe
respectively. Clearly at this point the economy is suffering from unemployment.
Expansionary fiscal policy will shift AD to the right to AD1, which increases
employment and national income to NY1. However, at this point, the economy is
suffering from inflation. Contractionary fiscal policy will shift AD to the left to AD,
which decreases inflation.
140
Government Policies
Problems with Fiscal Policy (Evaluation Points)

 Difficult to use
If AD rises too quickly it will cause demand-pull inflation. If the government cuts
spending too much or raises taxes too much it may cause unemployment. It is
also politically unpopular.
 Public spending crowds out private spending

As governments borrow more and more from the private sector there is less credit
available for the private sector to spend on Investment. This is because private
individuals spend their money on buying government bonds, so there is less cash
(liquidity) left in the banks, so banks can’t lend out to the private sector so the private
sector can’t invest. This is a problem because the public sector is not driven by the
profit motive so they won’t be as efficient as the private sector in their Investments
and so the country won’t grow as much as it could have.
 Raising taxes reduces work incentives, employment and economic growth
 Expansionary fiscal policy increases expectations of inflation
 Conflict of objectives
Fiscal Policy and Macroeconomic Objectives

Expansionary fiscal policies are used to:
 Reduce unemployment
 Stimulate economic growth
Contractionary fiscal policies are used to:

 Reduce inflation
 Reduce a BOP current account deficit
 Reduce fiscal deficit
For the macroeconomic objective of protecting the environment, fiscal policy will be
specific for the purpose, e.g., raise fuel taxes, raise carbon taxes, etc. Government
spending for this objective will also be selective for the purpose, e.g., spend more to
141
Government Policies
police and administer regulations introduced to protect the environment. Some

governments give subsidies to encourage environmentally friendly activities.
NB: Fiscal policy also has a supply-side effect i.e. it affects AS as well as AD. This will be explored
later.
GOVERNMENT SPENDING AND TAXATION - GOVERNMENT BUDGET
Introduction
Governments are like any other economic agent. They have many expenses and must
raise enough money to finance these. Government budgets are concerned with
government spending and government income.
When government expenditure (G) is equal to government revenue (T), there is a

balanced budget.
G=T Balanced budget
G˃T Budget deficit
G˂T Budget surplus
The total stock of government borrowing is known as the national debt. Interest payable
on this is part of G and is payable from T.
142
Government Policies
Fiscal deficits
When government spending is greater than government revenue, there will be a budget
or fiscal deficit and the government will have to borrow to fund the deficit. The PSNCR,
public sector net cash requirement in this instant will be positive.
If fiscal deficits build up, they add to national debt. This means that it will be more difficult
to repay. The government will need to spend more and more of its revenue to repay the
debt and interest payments that accompany the debt. This not only creates an opportunity
cost as the money spent of interest repayments could have been used elsewhere, but it
also results in a loss of confidence in the economy making it very difficult for the
government to borrow money in the future as investors fear the government will not be
able to repay them. In some cases, economies have been forced into “austerity
programmes” to reduce their deficit; such programmes require a cut in government
spending, involving job losses and a rise in taxes which will limit private sector spending
and investment.
NOTE: the size of a fiscal deficit must be looked at as a percentage of the country’s GDP;
as the bigger percentage of GDP the deficit takes up the more difficult it will be to repay.
Fiscal Surplus
When government spending is less than government revenue, there will be a budget or
fiscal surplus and the government will be able to repay its debts or spend on making
provisions for future public services. The PSNCR, public sector net cash requirement in
this instant will be negative.
Why do Government Spend?
 To provide goods and services that are in the public interest

 To reduce inequalities in incomes
 To invest in the national infrastructure
 To support agriculture and industry
 To achieve macro-economic objectives.
143
Government Policies
Where do Governments spend their Money?

 Social Security Benefits (Unemployment benefits, pensions, sickness, etc)
 Health
 Education
 Defence
 Law and order
 Transport
 Agriculture and industry, etc
 Environment
How do governments raise finance?
 Taxation / National insurance contributions

 Fines
 Selling off of assets (privatisation)
 Profits made by public corporations
Taxation
This refers to a compulsory levy imposed by the government.
The Reasons for Taxation
 To raise revenue for the government
 To reduce inequalities in income and wealth
 To discourage the consumption of harmful goods
 To protect the environment
 To achieve macroeconomic objectives
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Types of Taxation
1. Direct taxes. These are taxes levied on incomes and wealth. These include:
 Income tax. This is a tax on income, which includes wages, rents, dividends
and interest on savings.
 Corporation tax. This is a tax on company profits.
 Capital gains tax. This is tax on any gain in value from the assets held, such
as shares and property.
 Transfer taxes. This is a tax levied on transfers of assets from one person to
another, whether a person makes the transfer while they are alive or after they
are dead (inheritance).
Advantages of direct tax Disadvantages of direct tax
 they are based on the ability to  disincentive to effort

pay
 reduces the profit motive

 they help reduce inequalities
 if high, encourage tax evasion and

 they are easy to estimate and tax avoidance
convenient to pay
 reduce the ability to save

 a major source of government
revenue
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2. Indirect taxes. These are taxes levied on spending. These include:
 VAT, e.g., a percentage tax levied on the selling price of a good or service (Ad
valorem tax).
 Tariffs. This is a tax levied on imported goods as they enter the country. They
are also known as custom duties.
 Excise duties. These are taxes on specific goods, such as alcohol, cigarettes
and petrol (specific tax).
Advantages of indirect tax Disadvantages of indirect tax
 are cheap for the government to  adds to costs so can lead to cost
collect push inflation
 have a wide tax base  penalise low-income groups

(regressive)
 can be used to discourage the
consumption and production of
harmful goods  costs of collecting falls on
producers

 very small disincentive effect
 tax revenues are less certain
because they depend on spending
 have an element of choice as if
patterns
you dint want to pay the tax you
can choose not to buy the good
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Progressive, Regressive and Proportionate Tax
Progressive tax is one which takes an increasing proportion of income as incomes rise,
such as income tax. Income of let’s say less than £10,000 may be taxed at 20% and
above £10,000 at 40%. Direct taxes tend to progressive.
Proportionate tax is one that takes a constant proportion of tax from people’s incomes.
Regressive tax is one which takes a decreasing proportion of income as incomes rise. In
other words, the percentage paid in tax falls as incomes increase. For example, a 10%
sales tax on a fridge that costs £1,000 is £100. £100 must be paid by the consumer
whether they are a high or a low-income earner. On an income of £1,000 per month, the
tax paid is 10% but on a lower income of let’s say, £400 per month, the tax paid is 25%.
Most indirect taxes are regressive e.g fuel and tobacco taxes.
Government Budget and Macroeconomic Objectives
Expansionary macroeconomic policy:
Budget deficit G˃T
This will be pursued when a government wants to:
 stimulate economic growth

 reduce unemployment
Contractionary macroeconomic policy:
Budget surplus G˂T
This will be pursued when a government wants to:
 control inflation
 reduce a BOP deficit on current account
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Numerical example of the three types of direct tax
Income Progressive Progressive Regressive Regressive Proportional Proportional
Amount paid % Paid in tax Amount paid % Paid in tax Amount paid % Paid in tax
in tax in tax in tax
£1000 £100 10% £100 10% £100 10%
£2000 £250 12.5% £180 9% £200 10%
£3000 £450 15% £180 6% £300 10%
Core Activity
Discuss the above table.
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Core Exam practice
Exam Practice
1) Explain one advantage and disadvantage to the economy of a reduction in direct

taxes (6).
2) Identify two ways , other than taxation , in which a government can raise revenue (2)
3) Examine whether the benefits of taxing petrol outweigh the disadvantages for the
economy (12).
4) Examine the extent to which an increase in income tax is likely to affect the current
account of the balance of payments (9).
5) Do the advantages of indirect taxes outweigh their disadvantages? Explain your

answer (12).
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Extension:
Suppose the government’s revenues total £865 billion and its expenditure is £879 billion.
(a) Define the term budget deficit. (2 marks)
(b) Calculate the value of the country’s budget deficit in this case. (2 marks)
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151
Government Policies
152
Government Policies
153
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Peer Assessment Activity
Do the advantages of indirect taxes outweigh their disadvantages? Explain your

answer. (12)
Using the following mark scheme mark your partners work. Try to justify your mark with
detailed comments.
Each advantage identified, 1 mark (up to 2), development, 1 mark, application
Each disadvantage identified, 1 mark (up to 2), development, 1 mark, application
One sided argument maximum 3 marks.
Must have evaluation for 5 to 6 marks.
E.g., Indirect taxes have an element of choice (1 mark) – buy the good pay the tax or don’t
buy it (1 mark). They are regressive (1 mark) as the poor pay the same tax on a good as
the rich (1 mark). If the good is a necessity, then the poor have no choice (1 mark), they
have to pay the tax and so their living standards fall (1 mark). This shows that the
disadvantages outweigh the advantages for the poor (1 mark).
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Topic Review
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MONETARY POLICY
Monetary policy is a government policy that tries to influence aggregate demand

by changing the interest rate or the money supply, through quantitative easing,
or the exchange rate.
Introduction
Monetary policy has traditionally been associated with controlling interest rates, which
in turn, controls spending and AD with its main objective being the control of inflation.
The Monetary Policy Committee (MPC) of the Bank of England is responsible for
achieving the target level of inflation, which is set by the government and is currently
at 2% with +/- 1% variation. This inflation target is achieved by changing the base
rate.
The base rate is the interest rate set by the central bank and it influences all interest
rates in the economy (the rates paid by borrowers and the rates paid to savers set by
commercial banks).
Interest rates are known as the cost of borrowing and the return on savings.
The role of the Central Bank E.g., Bank of England (BoE)

 With the help of the MPC (Monetary Policy Committee) it decides when or by
how much to raise or lower interest rates to keep inflation within the target
range. I.e., controls inflation and stabilises a country’s currency.
 Oversees the operation of the banking system.
 Makes loans to commercial banks acting as a lender of last resort.
 Looks after tax and other government revenues.
 Manages payments for public spending.
 Holds gold and foreign currency reserves.
 Power to print money
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Reasons for controlling the money supply or interest rates:

1. Growth in the money supply can cause inflation.
If there is too much money in the economy people will have more to spend. If
aggregate supply cannot meet the level of aggregate demand, demand- pull
inflation occurs.
2. Changes in interest rates affect AD, Economic Growth & Unemployment.

If interest rates fall, aggregate demand rises as it is cheaper for people to borrow
money so basically they borrow more, which allows them to spend more so C and I
will rise, which causes AD to rise. An increase in aggregate demand causes a fall
in unemployment (as labour is derived demand). As it is cheaper to borrow money
firms will increase investment which results in economic growth.
3. Interest rates can be used to affect the value of the pound and the BOP.
High interest rates say in the UK cause an increase in the demand for the £ as
foreigners will prefer to save their money in UK banks. An increase in demand for
the £ causes its value to go up (appreciate).
NOTE: It is not possible to control both the interest rate and the money supply
at the same time. They must be controlled ONE at a time
Controlling Interest Rates

Monetary policy is proactive and forward looking; thus, the MPC uses information and
forecasts about the movement of the general price level, wages, real output and
exchange rates, and if inflation is expected to rise the MPC will increase interest rates.
This will reduce consumers and firms demand for borrowing, as borrowing will be more
expensive and as a result, there will be less money to spend therefore AD falls.
Higher interest rates increase the value of the UK exchange rate (i.e., causing it to
appreciate) and this holds down the prices of imports.
If inflation is expected to fall, there might be a recession, so the MPC will reduce
interest rates to encourage borrowing and cause AD to rise.
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1. How does the Bank of England / the MPC change interest rates?
The BOE changes interest rates in the economy by changing the interest rate it
charges on loans to commercial banks; i.e., the base rate.
Base Rate = the rate of interest charged by the BOE to other banks.
So to raise interest rates it must increase the base rate. This causes the costs of
commercial banks to rise so to cover the higher costs the commercial banks
increase interest rates to the general public. If the BOE wishes to reduce interest
rates it will reduce the base rate to commercial banks.
2. How does the Bank of England increase the money supply?

a) Asset purchasing used by central banks
Quantitative easing
Quantitative easing involves the buying of financial assets, such as government
bonds from commercial banks, which results in a flow of money from the central
bank to commercial banks.
E.g. the Bank of England credits commercial banks with more money in return for
govt bonds i.e., the BOE buys back bonds from banks and in return gives them
cash. This increases their liquidity, which in turn allows them to lend out more
money to consumers causing AD to increase.
Extension: other ways to increase money supply

b) Printing more money
c) Reducing the rate of interest
d) Easing of credit
Evaluation points: Has QE worked? (Evaluation points)
 Risk of future inflation: this is because the money used by the government does not
exist; it is created electronically. The government buys financial assets from commercial
banks and increases the cash balances in their accounts without actually giving them
any cash. It is like printing money.
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 Opportunity cost: Is £435bn of QE the best use of the Bank of England’s money? How
much of it has filtered through to the small businesses likely to lead the way in creating
new jobs in the next few years? Much of the money created by QE was given as credit
to households which spent it on housing, pushing house prices up making
accommodation in London unaffordable.
Homework task: Rob Jones
Activity 2 page 264
Monetary Policy and Macroeconomic Objectives

Expansionary monetary policy necessitates a decrease in the rate of interest and
easing of credit. This will increase demand for loans, which increases consumption
and investment and thus, AD.
Expansionary monetary policies are used to:

 Reduce unemployment
 Stimulate economic growth
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Contractionary monetary policy necessitates an increase in the rate of interest and

restricting of credit, which will reduce loans and thus, consumption and investment falls and
eventually AD will fall too.
Contractionary monetary policies are used to:

 Reduce inflation
 Reduce a BOP current account deficit
Evaluation Points for Monetary Policy
 It may take 6 to 18 months for the full impact to be felt by the economy of a change
in interest rates
 A change in interest rates can have adverse side effects. For example, a rise in
interest rates designed to reduce inflation may also cause a fall in output and
employment (conflict of policies).
 The effects of interest rate changes do not fall equally on everyone. A rise in interest
rates will benefit savers but harm borrowers and have a more harmful effect on
manufacturers than on service firms (conflict of policies).
 The central bank is restricted by the interest rates of other countries as a big
difference could result in undesirable hot capital flows.
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Exam practice
1) Identify and briefly explain ONE monetary measure a government

can use to control the rate of inflation (3).
2) Analyse how effective changes in the rate of interest may be in

reducing unemployment (6).
3) Explain how changes in the rate of interest might be used to increase

the level of investment in Greece (6).
4) One policy to reduce the rate of inflation is raising the rate of interest.
Assess the effects of this policy on other economic objectives. (9)
Core: Monetary policy

1. Define ‘monetary policy’.
3. Define ‘interest rates’.
4. Use the words below to complete these sentences.

a) Inflation
When interest rates are ____________, borrowing is likely to ____________ as it will
be more expensive to pay money back. The money supply will grow ____________
quickly which will help to ____________ aggregate demand in the economy and limit
price increases.
fall higher Less reduce
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b) Unemployment
A decrease in interest rates is likely to ____________ consumer and business
borrowing. This, in turn, will increase ____________, leading to an increase in
____________ of goods and services. Businesses will need to recruit more
employees to meet the demand, so unemployment will ____________.
production fall increase aggregate demand
c) Economic growth
Governments can use monetary policy to encourage an economy out of a recession.
If base rates are set very ____________, this will encourage businesses and
consumers to borrow more because it will be ____________ for them to
____________ the loan than it might be if rates go ____________.
low cheaper repay up
d) The current balance

To reduce a deficit, a government might decide to tighten monetary policy. This
would ____________ aggregate demand and ____________ spending on imports.
However, raising interest rates may also increase the exchange rate. This would
make ____________ more expensive, make ____________ cheaper and worsen the
current balance.
lower reduce imports exports
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164
Government Policies
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Government Policies
Think – Pair – Share Activity
166
Government Policies
167
Government Policies
168
Government Policies
Topic Review
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Government Policies
SUPPLY-SIDE POLICIES
These refer to government policies that aim to increase the productive potential
in the economy by using measures to increase productivity, efficiency and
competition in markets and generate incentives to work and invest. This should
promote jobs, lower inflation, improve competitiveness and encourage economic
growth.
In the graph below, supply-side policies increase the potential of the economy to
produce more thus, shifting the AS curve to the right to AS1 causing prices to fall to P1
and output to increase to Y1. This is known as long-term economic growth.
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Supply – side policies include:

1. Reducing the tax burden
Cutting taxes on incomes will give workers an incentive to work harder, thus
increasing productivity.
Lower taxes on profits will give incentives to firms to invest this will expand
production increasing both output and competitiveness.
2. Privatisation
Promotes efficiency as there is more competition in private industries and private
sector companies are driven by profit. Competition encourages efficiency because
if a firm wishes to survive in the private sector, it must reduce costs, offer lower
prices and offer better quality of goods and services than its competitors.
3. Deregulation
The removal of regulations and restrictions (e.g., on opening hours of shops, on
what each shop is allowed to sell etc) increases output, reduces costs and helps
lower prices for consumers.
4. Improving education and training - investment in people and human capital

A well-trained workforce can increase labour productivity as they will acquire the
education and skills needed to master certain tasks. This will improve the quality of
the product but will also increase output per worker.
5. Policies to boost regions with high unemployment

Some areas suffer more unemployment than others thus creating regional
inequality in terms of income and economic development. Measures can be taken
to divert resources to these areas e.g., government can provide financial aid to
encourage business to relocate to these areas; this will create jobs and
encourage other businesses to move there too. The government may improve
infrastructure in these areas to encourage firms and people to move there. Or it
can spend on improving / developing tourist attractions which will bring business
to cater for visitors.
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6. Infrastructure spending
By investing in infrastructure to improve transport and communication private sector
firms will be able to distribute goods more easily thus increasing productivity, people will
be more geographically mobile thus making it easier for them to find jobs.
Investing in education and healthcare will improve the quality of human capital, creating
a more educated and healthier society which will increase productivity of labour, thus
increasing AS.
7. Encouraging new research and development

Govt can provide incentives e.g., subsidies or tax relief to encourage firms to
invest in R&D to come up with new innovative products and production methods.
8. Decreasing unemployment benefits

This will increase incentives for the unemployed to look for jobs thus, increasing
national output.
Note: Supply – side policies usually operate on a longer-term than demand-side

policies. For instance, it takes longer to train and educate workers than it does to cut
taxes, it takes time to invest in new capital and increase production, it may take years
to come up with new methods of production.
Supply-side Policies and Macroeconomic Objectives

Supply-side policies are always expansionary. They aim primarily to:
 Increase AS and thus, economic growth
 Decrease unemployment
Which, in the long-run lead to:

 Lower prices and
 A reduced deficit on BOP current account
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By pursuing sustainable growth, supply-side policies can also control environmental costs.
Sustainable growth is pursuing growth that "meets the needs of the present without
compromising the ability of future generations to meet their own needs."
Evaluation points for Supply-Side Policies
 Spending on education and training creates an opportunity cost involved. It is also

hard to know what sort of skills are needed in several years’ time - by the time
education programmes have been developed, they may be out of date
 Reducing unemployment benefits, it may cause poverty and increases income

inequality
 by reducing taxes, it may add to income inequality
 Time lag
Exam Practice
1) Identify two measures of supply side policy (2)
2) To what extent are supply side policies likely to be successful in reducing

unemployment. (9)
3) Evaluate the effectiveness of SSP in reducing structural unemployment. (12)
4) To what extent is increased expenditure on education and training likely to

reduce the level of structural unemployment? (9).
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Government Policies
175
Government Policies
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Think Pair Share Activity
177
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Government Policies
GOVERNMENT CONTROLS
The government can use controls other than fiscal, monetary and supply-side policies when
managing the economy and to achieve its macro-objectives. Such policies have been
looked at in the previous chapters e.g., legislation to protect the environment, fines,
pollution permits, regulation, policies that protect against consumer exploitation etc.
Core Activity: Summarise the advantages and disadvantages of these government controls
in the table below:
Advantages Disadvantages
Regulation
Legislation
Fines
Pollution
permits
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Topic Review
180
RELATIONSHIP BETWEEN OBJECTIVES AND POLICIES
2.1.3. Relationship between Objectives and Policies
 Inflation and unemployment
 Growth and inflation
 Growth and the environment
 Growth, inflation and balance of payments
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CONFLICTS BETWEEN MACROECONOMIC OBJECTIVES
Introduction
Unfortunately, it is virtually impossible for a government to achieve all the
macroeconomic objectives at the same time. This is because there are conflicts
between the objectives which result in trade-offs. A trade-off is when one variable
increases while another falls.
Examples of Macroeconomic Conflicts:
1. Economic growth and low inflation

If an economy grows too quickly, especially if it is due to high consumer
spending, then demand will outstrip supply and prices will rise. Equally, the steps
taken to keep inflation low, like relatively high interest rates, will restrict growth via
reduced consumer spending and investment. It is difficult to achieve both aims.
The 'trend' rate of growth is seen as the rate of growth an economy can grow
without igniting inflation. It is calculated as the average growth rate over a
number of years. In the UK, the trend rate of growth is estimated to be around
2.5%.
2. Economic growth and a balance of payments equilibrium

When an economy is growing quickly, consumer spending tends to be high
because incomes are rising. As consumption increases so does the consumption
of foreign-produced goods. Thus, imports increase relative to exports, which will
worsen the trade deficit.
The government can cure deficits by increasing import controls, which is hard
given that the UK is a member of the EU and with the World Trade Organisation
overlooking international trade. The government can deflate the economy by
increasing taxes or reducing government spending. The fall in consumption will
reduce the number of imports bought but it will also lead to a lower standard of
living and a lower rate of economic growth. It is, thus, difficult to achieve both
aims.
182
3. Low unemployment (or full employment) and low inflation
This is the classic conflict. These two variables have, in theory, an inverse
relationship. If a government tries to reduce unemployment through reflationary
measures, such as lower interest rates or increased public spending, then the
resulting reduction in unemployment will push wages higher (as employers try to
attract workers from a diminishing pool of the unemployed). This will lead to
higher prices.
On the other hand, when the government tries to control high inflation with higher
interest rates and reduced spending, the resulting reduced consumption and
investment will result in job losses. It is, thus, difficult to achieve both aims.
4. Economic growth and the environment

A high rate of growth will result to high levels of production and thus, high levels
of pollution from factories, cars, etc. Also, vital rain forests tend to disappear, not
just because we consume the wood; new factories, towns and housing are built
on the resulting land. Any attempt to reduce externalities from production, and
this is something that the world has only recently woken up to, will result to a
lowering of economic growth.
5. Healthy growth and equality

As an economy grows the poor may well get a smaller slice of the cake but the
cake gets so large that the poor man still gets more cake. Of course, this does
overlook the fact that the rich man is getting a larger slice of a bigger cake! So,
with economic growth comes a wider gap between low- and high-income earners.
This is more evident in the newly emerging economies that have an absence of
welfare policies designed to reduce the gap.
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Activity
Relationships between objectives and policies
Complete the tables below, identifying the most suitable policies to meet each
objective and explaining their impact on consumers and firms.
Objective: Reduce inflation
Monetary policy: Fiscal policy:
Impact on consumers: Impact on firms:
Trade off with?
184
Objective: Increase inflation
Trade off with?
185
Objective: Promote growth
Trade off with?
Objective: Promote growth
Other policies:
Trade off with?
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Globalisation
Topic Review
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Globalisation
SECTION D: Globalisation
2.2.1 Globalisation
 Integration and independence of economies
 Multinational companies
 Reasons for globalised operations
 Foreign investment and development aid
 Advantages and disadvantages of MNCs/FDI
 Impact of globalisation and global companies
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Globalisation
Key term Definition
Globalisation Globalisation can be defined as the increased integration and

interdependence of national economies into global instead of
national markets
Multinational MNCs are defined as companies that produce in more than

Companies
one country.
(MNCs)
Foreign Direct FDI is long term investment by multinational companies in

Investment countries overseas, where flows of private capital move from
one country to another, normally funding for business ventures.
International Debt An amount owed by one country to others. Developing countries

with limited resources can find international debt repayment
difficult.
International An international organisation intended to help countries with

Monetary Fund exchange rate problems and persistent trade deficits.
Development Gap The pace of development is faster in developed countries as

they have the resources to exploit the forces of globalisation. It
is a fall in the amount of people on less than $1 a day, this is
greater in Asia than in Sub – Saharan Africa.
Trading Bloc A Trading Bloc is a group of countries which have a free trade
agreement between members and sometimes common external
tariffs.
The World Trade The World Trade Organization (WTO) is an international body
Organization whose purpose is to promote free trade by persuading countries
to abolish import tariffs and other barriers.
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Globalisation
What is Globalisation?
Globalisation can be defined as the increased integration and interdependence of

national economies into global instead of national markets.
This integration has taken the form of:

 Liberalised trade flows: goods and services are more freely traded across
national borders
 Liberalised capital flows: a more relaxed flow of capital between countries
 Workers are free to work and live wherever they choose, at least within the EU
 Enterprise is more mobile between countries
 Liberalised exchange of technology and intellectual property e.g., copyrights,
patents and trademarks
 More interdependence between countries
 Increase in tourism
Reasons for / causes of globalisation

Globalisation has existed ever since the first ship sailed to another country to exchange
goods. The reasons why globalisation, since the early 1980s, has increased to such an
extent today are due to:
 Significant advances in information technology e.g., Internet, which reduce costs

of communication and increase efficiency enabling trade across countries
 Decreases in cost of international transport e.g., container ships
 Increased activity of Multinational Companies
 Deregulation of capital markets
 More free trade (fewer tariffs and quotas)
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Globalisation
The Role of Multinational Companies (MNCs)
Definition: MNCs are defined as companies that produce in more than one
country.
MNCs are creating global factories, where production takes place in a number of
countries, taking advantages of the different costs in those countries.
They might produce certain parts in a country that has a certain raw material, they
may produce another part that needs lots of workers in another country where labour
costs are low, they might put the final product together in yet another country. This is
known as integrated international production. MNCs have, therefore, contributed
greatly to the process of globalisation and global economic growth.
MNCs are associated with foreign direct investment (FDI).
Why do firms want to become MNC’s?

 To gain economies of scale. Some firms can benefit from cost savings only if they have
world wide access to both production facilities and markets, e.g., oil and motor industries
 To develop knowledge and gain finance. MNCs have the knowledge, technology and
financial muscle to bring new products to the market, e.g., oil, genetic engineering and
microchips
 To gain access to natural resources/ cheap materials. E.g., Nestle in Brazil who is rich in
cocoa and coffee beans
 To gain global branding and marketing. Some MNCs use little technology but rely instead
on branding and marketing to make their presence worldwide. Heavy use of patenting,
advertising and other forms of sales promotion enable the firm to become global, e.g.,
Coca-Cola and McDonald’s
 To obtain market and political power. MNCs often start out as national monopolies on
legitimate grounds but then build on their strength by using anti-competitive practices.
Some MNCs become so powerful that they can subvert governments to achieve their
aims.
 To gain access to lucrative markets eg. China and growing consumer demand.
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Globalisation
Foreign Direct Investment
Definition: FDI is long term investment by multinational companies in countries
overseas, where flows of private capital move from one country to another,
normally funding for business ventures.
It occurs through MNCs by:

 building new plants (a factory, distribution centres or store or even developing a
mine or tea/ coffee plantation)
 expanding existing facilities in foreign countries
 merging or acquiring (buying) existing firms in foreign countries
Ways governments encourage FDIs

 invest in the country’s infrastructure
 increase spending on education and training
 give lower taxes to MNCs, such as corporation tax
 investment and/or location grants
 lower interest rates on loans
 relax regulations e.g., less bureaucracy when it comes to opening a business in
the country
The USA is the largest recipient of FDI, followed by the China and then the UK. In
2013 China received 18% of all FDI inflows while Africa as a whole only received
2.8%.
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Globalisation
China and FDI
Discuss the above chart. Note your observations
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Globalisation
Impact of Globalisation and Global Companies
Advantages to the Multinationals of moving to Developing Countries

MNCs are attracted to developing countries for a number of reasons:
 Some developing countries may be rich in natural resources - MNCs have the technology
and expertise to extract these e.g., many Chinese firms locate in African countries such as
Angola to exploit natural resources.
 Some developing countries represent huge and growing markets e.g., China and India
 Labour costs are much lower in developing countries e.g., Vietnam. This decreases costs of
production and allows MNCs to sell products at lower prices and make larger profits.
 Government regulations are less severe in developing countries – this makes it easier for
companies to set up, reducing costs of production.
 Developing country governments offer tax concessions, etc to attract FDI. E.g., in 2004
more than 20 countries lowered their corporate tax rates in an attempt to attract more FDI.
Advantages to developing countries from receiving FDI from MNCs
 FDI fills the savings gap and can lead to economic growth. A necessary condition for
economic growth is increased savings and developing countries tend to suffer from a lack of
savings – FDI fills this gap. This is because MNCs can afford to save hence banks get
deposits so they have more liquidity available for lending therefore it is easier for local firms
to borrow and invest.
 MNCs provide employment, education and training. This results in a more skilful workforce
and improves managerial capabilities.
 Allows developing countries greater access to research and development, technology and
marketing expertise – these boost industrialization.
 Host government may gain tax revenue. This can be invested in infrastructure, used to
improve public services e.g. healthcare and education – such investments promote
economic development, lead to economic growth and improve living standards.
 Sometimes MNCs improve infrastructure either physically or through financing or they act
as incentive to governments to improve them in order to attract MNCs.
 MNCs provide more choice for consumers at lower prices, and provide goods that are not
available domestically.
 MNCs along with international free trade can result to a more efficient allocation of world
resources.
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Globalisation
Disadvantages to developing countries from receiving FDI from MNCs
 MNCs create large external costs to the environment – MNCs tend to locate where laws on
pollution are poor, thus they can reduce their private cost by creating external costs e.g.,
Coca-Cola in India & recent Chinese FDI in Sub-Saharan Africa
 MNCs exploit local workers, use child labour – MNCs tend to locate where labour laws are
weak or almost non-existent, this allows them to take advantage of workers through low
pay and poor working conditions e.g., Nike in Vietnam.
 MNCs may enter countries to extract particular resources. It can strip the country of these
resources and then leave.
 MNCs might employ capital intensive production methods. This will not improve levels of
employment in the country as machines will do the jobs of workers.
 MNCs may repatriate their profits – MNCs might transfer their profits back to their country of
origin e.g., J&P sending profits back to Cyprus.
 Given the rate at which news travels through the media and the Internet and strong public
interest groups globally e.g., Green Peace, it is becoming difficult for MNCs to cover up
activities that contribute to these problems as it will be negative publicity.
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Globalisation
Core Activity 1
Given the increase in FDI going to developing countries in the last 20 years, discuss
the costs and benefits of this to developing economies.
Costs Benefits
Evaluation:
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Globalisation
Think – Pair Share Activity 2
Discuss the costs and benefits of developed economies receiving FDI.

Costs Benefits
Evaluation:
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Globalisation
Exam practice
Sri Lanka signed agreements for FDI worth $1.6dollars in 2015, up from 2014’s total
$1.5 billion. New projects include a $26.5 million assembly plant from Volkswagen and
$100 million investment in the sugar industry by companies from Singapore. Other
multinational already operating in Sri Lanka include Unilever, Nestle, Holcim, Coca-
Cola and Reckitt Benckiser.
Evaluate the impact that FDI might have on a developing economy such as Sri
Lanka. (12)
Activity 3
Do the disadvantages outweigh the advantages that multinational companies

bring to the developing host country? (12)
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Globalisation
Extension:
Peer Marking Activity 4
Answer the following question:
Do firms like Nestlé always need government incentives when deciding to setup
in foreign countries? Give reasons for your answer. (12)
Argument supporting statement
Argument against statement
Argument supporting statement
Argument against statement
Conclusion/ Reasoned judgement
e.g. The decision to move/set up in a foreign country will depend on many factors.
Government incentives form part of this but may be outweighed by other factors like
proximity to large market, cheap labour and political stability of country.
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Globalisation
Winners and Losers from Globalisation
Arguments in favour of Globalisation

 Increased global wealth associated with free trade leading to a reduction in
world poverty.
 Faster economic development and growth. Associated with this increased

economic activity are rising standards of living.
 Economies of scale. Larger corporations can spread overheads, reducing

average costs and allowing prices to fall.
 Fall in prices of manufactured goods owing to the mobilisation of production

from the developed world to low labour cost countries. For example, switching
production of TV sets from Wales to China has led to lower prices for TV sets.
People in the developed world can consume TVs, other electronic goods,
clothes, trainers, etc at lower prices.
 Increases national and global output as it allows countries to specialise in

the production of those goods they are best at, thus increasing output and jobs.
Arguments against Globalisation
 Greater inequality.
- Many African countries have gained very little from globalisation and
continue to be very poor. They are hindered by additional problems of aids,
corruption and civil wars.
- On a more general note, there is a continuing development gap between the
Southern and the Northern hemispheres.
- Profits of MNCs are growing at the expense of wages, thus, favouring the
developed world.
- Wages in developing countries, like China and South Korea, have been
growing. Wages of unskilled workers in developed economies, like the USA,
have been falling.
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Globalisation
 Environmental impact. Globalisation has speeded up the rate of pollution,

climate change, extra demand for raw materials and associated negative
effects of these on people’s lives. Environmental degradation is not inevitable
though. The developed world has put controls in place and there is growing
pressure on the developing world to do so also.
 Reduced competition and choice. This is true when local producers cannot
compete with MNCs and have to exit the market.
 More homogenised goods and services. Goods and services are the same
around the world. High streets look the same. National variation is reduced.
 Greater vulnerability to exogenous shocks. Globalisation has made

countries more interdependent. What affects one corner of the world will have
an impact on the rest of the world, for example, a fault in a plant in Thailand can
impact on an assembly plant in the UK or the financial crisis in 2008, which
started in the USA, resulted in a global recession. Or, today’s crisis in Greece
threatening the whole of the European Union and the global economy.
 Prices of agricultural goods and other commodities fluctuate affecting

developing countries adversely and in different ways.
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Globalisation
Activity
Fill in the tables below
Benefits to developed economies of Benefits to developing economies of
Globalisation Globalisation
Disadvantages to developed Disadvantages to developing

economies of Globalisation economies of Globalisation
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Globalisation
Core: Exam Practice
Multinational companies are attracted to the United Arab Emirates (UAE) because of its low
taxes, political stability, and high GDP per capita. Examples of MNCs in the UAE are
Microsoft, Marriott Group, DHL and Ericsson, along with a number of engineering, law and
accountancy firms. An influx of MNCs to the area brings workers from many countries and this
creates a demand for international goods, services and schools. There are many shopping
malls and Dubai has gained a reputation as a destination for shopping.
(a) Analyse the costs and benefits of MNEs locating in the UAE. (12 marks)
Identify and develop one advantage (APPLY)
However, .....
Identify and develop one advantage (APPLY).
However, .....
Conclusion: is the location of an MNE good or bad for a country? Why? Or what does
it depend on?
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Globalisation
Top 10 MNCs
There are approximately 70,000 MNCs operating internationally.
The table below shows the largest 10 MNCs in 2014, ranked in terms of revenue.
Source: Wikipedia
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Globalisation
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Globalisation
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Globalisation
Flower farms may be killing Kenya's Lake Naivasha
Heavily polluted and shrinking, Lake Naivasha is in dire trouble. Environmentalists say the
cause is clear: flower farms. Some 60 flower farms line the entire lakeside, growing cut
flowers for export largely to the EU. While the flowers industry is Kenya's largest
horticultural export (405.5 million last year) it may have also produced an environmental
nightmare.
Environmentalists say that flower farms have taken water from the lake for irrigation and
then dumped pesticide-waste back into the lake. Long-ignored by policymakers, the
situation has recently reached a head due to thousands of fish and other freshwater
organisms perishing in the lake. Fishing, once common in the lake, has since been banned.
Samples of the water, fish, and sediments have been taken by government agencies for
testing. If it turns out that the flower farms are responsible for the lake's pollution problems,
the government could revoke farm licenses. A preliminary inquiry has already linked the
flower farms to the lake's troubles stating that the fish mortality was likely caused by low
levels of dissolved oxygen.
The lake is also shrinking due to a variety of factors: over-irrigation from the farms, water
requirements for nearby Naviasha town, and climate change.
Lake Naivasha is also a major tourism spot in Kenya.
Exports from Kenya
85% of all roses sold in the UK come from Kenya. Lake Naivasha’s cut flower industry
amounts to nearly 75% of the countries horticultural exports. In 2008, 93,000 tonnes of
flowers were exported. About 97% of exports are to the EU. The following year President
Mwai Kibaki’s government warned that nearly 10 million people – more than a quarter of the
population – were at risk from food shortages.
The rapid growth of this industry in a unique and biodiverse ecosystem has had disastrous
consequences. The lake’s water level has dropped by three metres from its maximum and
its surface area has shrunk to half its size. Precious wetlands have been degraded and
wildlife no longer comes to drink at the crowded and polluted shores.
The cost for the people is terrible too. The international companies that extract the water
(and money) and grow the roses have been repeatedly slammed for failing to protect
workers. Hundreds at a time are sacked for trying to protect their rights. Workers are
exposed to extremely harsh conditions but so many job seekers come in from the
surrounding parched landscape that workers who complain are simply sacked and replaced.
Finally the evil was exposed for what it was with the murder of a celebrated (68 year old,
female) environmentalist, Joan Root, who tried to make a stand.
In the meantime, the international companies operating there extract ever more water,
diverting it from agricultural production and its ecological purpose of sustaining the land.
University of Leicester biologist and Earthwatch scientist Dr David Harper who has
conducted research for over 25 years at Lake Naivasha: “Roses that come cheap are grown
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Globalisation
by companies that have no concern for the environment, who cut corners and avoid
legislation, who sell their flowers into the auction in Amsterdam so that all the buyer knows
is the flowers ‘come from Holland’. In reality, they have come from Kenya where the
industry is – literally – draining that country dry.”
Food & Water Watch, in their report, Lake Naivasha: Withering under the Assault of
International Flower Vendors, write: “I witnessed chemical spraying while people working
nearby wore no protective gear…The pesticides applied on the farms and in the
greenhouses eventually end up in Lake Naivasha and in the groundwater, threatening
people and wildlife.”
Activity:
Read the above passage and from your own knowledge answer the following
evaluation question.
Do the disadvantages outweigh the advantages that multinational companies
bring to the developing host country? Give reasons for your answer using the
case study above or an economy of your choice.
Think – Pair - Share Activity
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Globalisation
To what extent does globalisation benefit developing more than developed countries?
Definition:
Benefits developing more than Benefits developed more than

developed countries developing countries
Examples of MNCs (must be specific)
Opinion/Conclusion
209
Globalisation
Extension: GLOBALISATION
CONTRAST BETWEEN DEVELOPED AND DEVELOPING ECONOMIES
Activity
You are expected to research the following economic data:
GDP, GDP per head, population, life expectancy, literacy rate, HDI, national debt,
inflation, unemployment, current account and economic growth.
You will be allocated which countries to research. The aim is to collect information on
all the countries above to share with the whole class.
A good source of information is the CIA Factbook.
210
International Trade ________
Topic Review
211
2.2.2 International Trade
 Advantages and disadvantages of free trade
 Reasons for protection
 Methods of protection
 Modern trading blocs
 Role of the WTO (World Trade Organisation)
 Trade patterns of developed and developing countries
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Introduction
International trade is the exchange of goods and services across international

boundaries or territories. In most countries, it represents a significant part of GDP.
While international trade has been present throughout much of history, its economic,
social and political importance has risen over recent centuries.
Industrialisation, advanced transportation, globalisation, multinational companies and

outsourcing all have a major impact on international trade. International trade is the
primary meaning of globalisation.
Why do countries trade?
1. To get goods and services that they cannot produce themselves

2. They trade for goods that they can produce themselves but which are more
cheaply made elsewhere.
3. They trade so they can have access to a larger market and to benefit from
economies of scale from mass production.
How we decide what to trade?
International trade is an extension of the principle of division of labour on an

international sphere.
Countries specialise in the production of certain goods and services. They tend to
specialise in those goods for which they have the resources and the skills. E.g.,
Cyprus will specialise in oranges, halloumi and tourism while Japan will specialise in
technology.
So, countries will specialise in those goods at which they are better at producing
than other countries. They are said to have an absolute advantage in these goods.
Countries might also specialise in goods that they can produce at a relatively
cheaper cost than another country. E.g., the UK can grow tropical fruit but at a much
higher price than say South Africa that has the climate for them.
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Countries specialise and then exchange a part of their total production for goods
made in other countries.
Advantages of International Trade (Arguments for Free Trade)
 Variety
Without international trade countries would have to go without certain goods
e.g., petrol, gold, cars. International trade enables countries to enjoy a greater
variety of goods and services.
 Competition and Efficiency

Foreign trade leads to more competition and so greater efficiency. The
import of goods similar to those produce at home will lead to further competition
and may force down prices. This might result in a fall in the cost of living and
will increase the standard of living.
 Specialisation and wealth

As countries tend to specialise in the production of specific goods, producers can
produce in mass production leading to a fall in average costs per unit. International
trade also means a larger more diversified market for home produced goods. Again
this result in economies of scale e.g. lower costs per unit, lower prices, lower risks
etc. This leads to higher profits and incomes for producers.
 Exchange of knowledge and culture

Through trading with other countries friendship and understanding will
result.
 Balance of payments surplus

Countries may end up exporting more goods and services than importing, this
will lead to a surplus on the balance of payments e.g. Germany.
 Increasing world trade

To increase the volume of trade and output from both developed and less
developed economies.
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Disadvantages of international trade (arguments against international trade)
 Balance of payments deficit
Countries might land up spending more on imports than what they earn
from exports i.e. they spend more abroad than what they receive from abroad
e.g UK, Greece, Cyprus
 Unfair competition
Some countries find it hard to compete with other countries especially if
overseas producers are receiving subsidies from their governments.
Some small firms will be forced out of business if they cannot compete with
cheaper imports, this will create unemployment.
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FREE TRADE vs PROTECTIONISM
Free trade: Free trade refers to the international trade of goods and services
without tariffs or other trade barriers. Free trade is believed to make society
richer. This is because the free trade increases the global level of output due to the
specialisation involved in world trade.
Protectionism: This involves the use of tariffs and other trade barriers by
governments to restrict overseas trade.
How can we promote ‘free trade’

1) Remove trade barriers
2) Membership and enforcement of WTO rules
3) Trading blocs
Protectionism
Reasons for protectionism
Free trade is not always desirable. There are several reasons for protectionism:
 To protect an infant industry
Sometimes an economy may wish to set up an important industry. In its early
stages it will not be able to withstand competition from similar industries of other
countries. It will have high start up costs and will not be in a position to produce in
large enough numbers to experience economies of scale. A young industry
needs to overcome its teething problems to obtain customers. Government
therefore needs to help these infant industries through giving them subsidies and
protecting their home market from foreign competition at least until these
industries are strong enough to compete internationally.
 To prevent unemployment
When there is a general world depression in world trade, countries have been
known to impose trade barriers on imports to ensure that income is spent on
home produced goods, thus proving employment at home.
It is the same for declining industries. For example, as the UK ship-building
industry started to decline as Malaysia became better at building ships, many
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jobs were lost in the UK. If there were restrictions on trade some jobs may have
been saved.
 To prevent dumping
Dumping is when one country sells goods to another country below cost. This will
force some UK producers say out o business as they can’t compete with the
lower cost imports.
 Because other countries use barriers to trade (Retaliation)

Many countries impose barriers to trade simply because other countries have. It
is difficult to get all countries to agree to free trade and to keep to their word.
Because of this the GATT (General Agreements on Tariffs and Trade) was set up
by trading countries in order to try getting countries to agree on removing trade
barriers (this was replaced by the WTO in 1995).
 To prevent over-specialisation
Given that demand for goods and services keeps on changing, if a country relies
on the production of just one or two goods it is taking a huge risk. This is because
tastes keep on changing and people might not demand the goods the country
specializes in any more. Obviously, they will lose their income. So, protectionism
allows a country to be more diversified.
 To protect consumers from unsafe products

In order to prevent diseases to be pass from country to country through exports
and imports of livestock, fruit, vegetables, seeds etc. To ensure products traded
are safe in accordance to international quality standards e.g., that non-toxic
materials are used, to ensure batteries are safe etc.
 To protect the Balance of Payments

In order to reduce deficits on the Current Account or improve surpluses, the
government will use tariffs and other forms of protection in order to reduce
imports. A country needs to be able to pay for its imports, so deficits must be
manageable.
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Methods of Protectionism
Imports may be limited by:
 Quotas – limits on the quantity of the commodity allowed to come into the
country. In the graph below, the quota is represented by a perfectly inelastic
supply curve. If the government imposes a quota of let’s say 10,000 tons of
coal, then the supply curve will be vertical at 10,000 tons, which is less than
the free market determined quantity of imports of Qe. This has the effect of
reducing imports at this point and raising prices from Pe to P1.
Evaluation:
218
 Tariffs – taxes on imported goods. These raise the price of imports therefore
reducing demand. In the graph below, the tariff on imports shifts the supply
curve to the left causing price of imports to rise from Pe to P1 and the quantity
imported to fall from Qe to Q1.
Evaluation:
219
 Subsidies – a country might decide to subsidise certain domestic industries.
This will reduce their costs of production, lower prices and increase AD for
domestic goods. It will also reduce the competitiveness of similar imported
goods. In the graph below, the subsidies on the domestic good shifts the supply
curve to the right causing price to fall from Pe to P1 and the quantity demanded
of the domestic good to rise from Qe to Q1.
Evaluation:
220
 Exchange controls – restrictions on getting foreign exchange to pay for imports
or to undertake investment abroad. The Central Bank can restrict the amount of
foreign currency that can be bought by British citizens, thus limiting their power to
import large amounts.
 Embargo – a complete ban on trade with another country because of bad

international relations.
 Health and safety regulations – sometimes countries impose health and safety
regulations to keep out imports.
Arguments against protectionism

The following arguments may be given to oppose the use of protectionist measures
in trade:
Loss of free trade benefits such as:
 Consumers will be faced with higher prices for imported goods
 Fall in global trade
 There will be less choice for the global consumer
 There will also be a fall in people’s standard of living
 Retaliation- in its worst form, this could result to a trade war (all lose in a trade
war)
 A less efficient allocation of resources takes place as a result of moving

resources away from the production of lower cost goods to higher cost goods
 Results to unfair competition in the case of subsidies to domestic industries

and a deliberate depreciation of currencies
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Activity
Complete the following chart.
Arguments for protectionism Arguments against protectionism
Core Exam Practice

Sri Lanka’s average tariff is 6.3%. However, agriculture imports have higher tariffs.
Dairy products, meat products, fruit and vegetables have a 30% tariff.
Analyse why Sri Lanka might impose higher tariffs on agricultural imports. (6)
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Activity: Protectionism
Sorting the boxes to match their definitions
Reason for Description
protectionism
This is when foreign producers sell goods below cost
in a domestic market. They do this to deliberately
To gain tariff revenue destroy overseas competitors. Businesses that do
this are often heavily subsidised by their government
so they have an unfair advantage over foreign rivals.
Jobs can be lost if industries die because of cheap

To reduce current
imports. Domestic businesses can’t match/beat the
deficit
price of overseas competition so would have to close.
These are new industries that are yet to become

established. They often need protection from strong
To prevent dumping
overseas rivals until they can grow, become
established and exploit economies of scale.
To protect This can be spent on government services to

employment improve living standards.
Governments can use protectionism if they feel

Retaliation
goods are harmful or unwanted.
A government might try to reduce imports and

To protect infant
increase exports at the same time to reduce deficit.
industries
Protectionism can help it reduce its imports.
This is when you take action against someone who

To prevent the entry has done something bad to you. If a government
of harmful or feels that another country has done something bad to
unwanted goods them (e.g. dumping) they can impose heavy taxes on
their goods when they come into the country.
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224
225
226
227
Topic Review
228
Trading blocs
Definition: A trading bloc is a group of countries which have a free trade
agreement between members and sometimes common external tariffs.
Different types of trading blocs are:

Using Rob Jones page 320 complete:
 Preferential trading areas (PTA’s) e.g. agreement between India, Nepal,
Mauritius
Preferential trade agreements between member countries - this means trade barriers do
exist but they are not as strict between its members
 Free trade areas

Free movement of goods without tariffs or quotas e.g.
 Customs unions
Free movement of goods plus common external tariffs (towards non-member
countries) e.g.
 Single markets/common markets

Free movement of goods, services, capital and labour plus common external tariffs
e.g.
 Economic and monetary unions

Free movement of goods, services, capital and people plus common external tariffs
plus common economic policies plus a common currency e.g., Eurozone
229
Examples of trading blocs:
 European Union (EU) – a single market with a single currency * for the
members of the Eurozone (28 EU countries are inside the single market and
19 nations have joined the EU single currency bloc)
 North American Free Trade Agreement (NAFTA) involving the USA, Mexico
and Canada
 Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay

and Venezuela
 Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)
 Trans-Pacific Partnership (TPP) - a free trade agreement between Australia,

Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the
United States, and Vietnam
The impact of trading blocs on members and non-members

Advantages to members:
 Consumers benefit from lower prices and wider choice. As the volume of
imports increases it creates competition forcing prices down.
 Firms will be able to exploit economies of scale because have access to

larger markets = firms can increase their revenues from selling to a bigger
market and profit rise due to lower costs from eco of scale.
 Invites FDI – foreign companies want to access a larger and free trade area =
economic growth + job opportunities e.g. Wargaming setting up in Cyprus
gained access to EU market
230
 Increase in trade volumes, hence an increase in economic growth = national
income = better living standards
 Increase in jobs as a result of the above
Disadvantages to members:
 Less efficient firms may close down = loss of output and jobs, this is because
less efficient firms can’t cope with the increased competition from
imports from member countries
 High financial cost to the government and hence, the taxpayer member
countries pay administration fees to the EU e.g. UK contributed 9bln
annually, Cyprus contributes 180 million to the EU but of course they also
receive money back from EU funding e.g. money spent to build the
Newham building came from the EIB (European investment bank)
 Firms may merge to survive competition and as a result, gain monopoly

power. Consumers may suffer from higher prices and less choice e.g.
CytaVoda (Cyta joined with Vodafone to prevent it from coming into
Cyprus in 2003 and creating direct competition)
 Countries may rely too much on trade within the bloc i.e. most of their
exports might be sold within the trading bloc and so they don’t look for
new markets to sell to and if they decide to leave the bloc they will see a
huge fall in exports e.g. the UK sold 45% of its exports to the EU so
after BREXIT they will need to find new markets otherwise their X will
face tariffs.
231
Advantages to non-members:
 Greater flexibility in trade decisions as countries that are not part of trading
blocs are not binded by common agreements concerning trade with other
countries
 No administration fees
Disadvantages to non-members:
 Difficult to trade within the trading bloc especially if the bloc has common
external tariffs, [this is especially a problem if member countries are
emerging (developing/ growing) economies as these countries having rising
incomes and are thus big spenders so we lose the opportunity to sell our
exports extension]
 May be difficult to find new markets
 Their products may be taxed heavily (tariffs); as a result, their exports fall,
and economic growth suffers e.g. CAP and its impact on many African
countries. (CAP is the common agricultural policy which is an EU policy to
protect EU farmers thus it means African countries find it difficult to
sell their agricultural products to the EU)
SOW Exam Practice
1) Discuss how the formation of a trading bloc such as NAFTA affects

a) countries outside the bloc (4) b) countries inside the bloc. (4)
2) Explain why trade is likely to increase when a country joins a trading

bloc. (2)
3) Could the disadvantages of joining a trading bloc be greater than the

advantages? Give reasons for your answer. (6)
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CURRENT AFFAIRS
Discussion: Britain inside the European Union
 In recent times, the debate over continued UK membership of the European

Union and their single market has become more intense and heated.
 BREXIT has become the short-hand for the UK deciding to leave the EU
 The EU is the UK’s major trading partner, accounting for 45% of exports and
53% of imports in 2014
 The EU is a major source of inward investment into the UK. In 2013, EU

countries accounted for £453 billion of the stock of inward Foreign Direct
Investment, 46% of the total.
 Over £4 billion worth of exports are sold by the UK to EU countries each week
Discussion: Brexit
Arguments for staying inside the European Union
• Multinationals might reconsider their FDI into the UK

• UK will lose tariff-free access to largest export market
• Costs for businesses adjusting to many new laws (creates administrative
costs, bureaucracy)
• Moves to limit free movement of labour with Brexit might worsen skills
shortages for many UK businesses (many industries like construction rely
on workers from the EU e.g. building workers from eastern European
countries, nurses in the NHS, teachers)
233
Arguments for Brexit (i.e., leaving the EU)
• Britain could negotiate new trade agreements with EU trade partners and
many emerging countries
• Britain would free itself from many of the EU's complex and expensive laws &
regulations
• Leaving the EU would cut contributions to EU budget i.e. they would save
9billion pounds in administrative costs
World Trade Organization (WTO)

The World Trade Organization (WTO) is an international body whose purpose
is to promote free trade by persuading countries to abolish import tariffs and
other barriers. It regulates international trade and tries to settle trade disputes.
The WTO exists to promote free trade. It aims to reach agreements between its
members to reduce trade barriers such as tariffs, quotas, subsidies or overly
demanding safety or technical standards which are used to restrict imports. It was
established in 1995 as a successor to GATT.
The Role of the WTO

 Reducing or eliminating trade barriers through negotiation and agreeing on the
rules of international trade.
 Administering and monitoring the application of the WTO’s rules for trade.
 Monitoring , reviewing and documenting the trade policies of members
 Settling disputes between members.
 Helping new members to join.
Arguments in favour of the WTO

 The WTO together with the World Bank and the IMF are fundamentally in favour
of free trade as a means of development. By liberalising international trade both
the developing and the developed world will benefit with greater exports, more
economic growth and higher standard of living. Because X is a component of
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AD so as X rises, AD rises = eco growth, and also higher international trade
means more X & M = more choice for consumers
 Supporters of the WTO argue that it is democratic, in that its rules were written
by its member states. Because member countries are given the right to vote
in favour or against new rules (1 country = 1 vote)
 The agreement also imposes rules on agricultural export subsidies and domestic
subsidies. This is especially helpful for developing countries that rely on
agricultural or other primary industries (i.e. commodities) as it ensures the
prevention of dumping, which will thus allow the farmers to grow and
compete against imports and also sell their own goods overseas (so X+ = AD+
+ eco growth).
 The greatest achievement of the WTO is the fact that global world trade has
increased. There has been a 250% increase in global exports in the 20 years
from 1990 to 2010. (i.e. X+ = AD+ + eco growth and M+ = more choice).
A critique of the WTO

 It is undemocratic because the WTO rules are written by and for corporations
(MNC) with inside access to the negotiations (corruption). The views of
consumers, environmental, human rights and labour organisations are often
ignored.
 It favours the rights of corporations over those of workers e.g. child labour in
developing countries.
 It is destroying the environment because of the increased need of transport to
X and M goods and servies internationally.
 It favours wealthy nations; negitiators from poor countries are often not invited or
235
are not qualified to take part in the negotiations. some can’t afford to attend the
negotiations
 It is causing hardship for poorer countries. It is argued that the corporate control of
food distribution means 800 million people worldwide suffer from malnutrition.
(e.g. preventing dumping is good for companies/ producers but its bad for
consumers because dumping would have given them access to cheaper food
and other goods).
Overall, the WTO aims to promote free trade between countries. To what extent
is it successful?
Successful Unsuccessful
The WTO organises trade talks where Not all members agree to the reductions,
member countries agree to reduce trade so the success of the WTO is limited by
between themselves. This can be a % some countries who, although members
reduction in tariff barriers. This is seen by protect their own interests.
the increased volume of international trade
If a dispute arises the WTO can intervene Unfortunately the WTO has no sanctions it
and negotiate a satisfactory outcome can impose. It has to rely on countries
which will promote free trade. agreeing to work towards free trade so
barriers still exist. It has no power to
punish
236
Exam practice: Rob Jones 325.
In 2016, Brazil complained to the World Trade Organisation (WTO) about Thaliand’s
use of sugar subsidies.
Explain one role of the WTO . (3)
SOW Exam Practice
1) The WTO aims to promote free trade between countries. To what extent
do you consider the WTO to have been successful in recent years? Give
reasons for your answer (9).
2) State two aims of the WTO. (2)
3) What do other WTO members gain from Chinese membership? (3)
237
World Trade Patterns
The graphs below show the changes in world, developed and developing exports and
imports from 2010 to 2014.
(Developing: top line, world: middle line, developed: bottom line)
Activity
Identify the changes in exports and imports in the graphs above.
238
Trade Patterns of Developed and Developing Countries
Core Activity: 1. Using pages 328-330 of Rob Jones take brief notes - filling in the
chart below (add one example).
World trade patterns: Trade in Developed Trade in Developing

Reasons for increase in countries countries
world trade
2. Discuss similarities and differences between trade patterns of developed and

developing countries.
239
The Pattern of World Trade
Trade is the exchange of goods and services between countries. Goods bought into
a country are called imports, and those sold to another country are called exports.
Developed countries have a greater share of global trade than developing countries.
Usually developed countries export valuable manufactured goods such as
electronics and cars and import cheaper primary products such as tea and coffee.
Trading blocs, such as the European Union, dominate world exports.
The greatest volume of trade occurs between the developed, rich countries,
especially between industrial leaders such as Germany, Japan, the United Kingdom
and the United States.
Shifting patterns of trade
Developed countries no longer have as large a share of international trade as they

once did. Between 1995 and 2010 their share in world merchandise trade dropped
while developing countries increased their share. Over this 15-year period, China’s
share alone increased from 2.6 per cent to about 10 per cent. Over the same period,
the market share of Latin America and the Caribbean increased from 4.5 per cent to
5.9 per cent.
The value of Africa’s merchandise exports rose from $100 billion in 1995 to $560
billion in 2010. Its share in world trade improved modestly from 2.0 per cent to 3.2
per cent. East and South Asia include three of the most dynamic emerging
economies: China, India and the Republic of Korea. Between 1980 and 2011,
developing economies raised their share in world exports from 34 per cent to 47 per
cent and their share in world imports from 29 per cent to 42 per cent.
240
World exports
Although global trade collapsed during the recent financial crisis (2008), it has since
bounced back strongly, led by trade among emerging markets, like Brazil and the
Philippines. The bar chart below clearly shows the continued dominance of
developed countries in world trade. For developed countries, and China, profits from
world trade run into thousands of billions of dollars. This is compared to Brazil 242
580 (USD Million), Philippines 51 995, Malawi 11184, Uganda 2357 and Rwanda
591.
Experts believe that rapid growth markets will become an even more dominant force
in global trade over the coming decade, with the Asia-Pacific region set to
experience the fastest growth in global trade to 2020. **Trade will also be
increasingly focused around Asia, the Middle East and Africa, suggesting that the
key geographical location for companies will change. ** thus instigated a trade war
between USA and China
241
Europe’s exports to Africa and the Middle East by 2020 are forecast to be almost
twice as large as Europe’s exports to the US.
China’s dominance in low cost manufactured goods will come under pressure from
countries such as Bangladesh, Vietnam and parts of Africa. The fastest-growing
trade route will be between India and China. Some experts believe trade between
China and India alone will account for almost one-fifth of global trade flows by 2020.
There is a huge amount of trade across borders. This however, may reflect trade
within and between companies, rather than flows to final consumers. Many
companies export finished goods across borders within their own organisation.
Summary
Changing Volume and Patterns of World Trade:
Increase in the volume of global exports
Volume of global exports has increased more than the increase in GDP
Dominance of developed countries
Shift of manufacturing to the East (because of MNCs)
Increase in exports from developing countries, with exports from East Asian
countries forming the greatest proportion (due to MNCs setting up there)
Homework task
Page 332 Rob Jones questions 5 and 6
Exam Practice: Sample Assessment Paper question 2 f
242
EXTENSION
Commodity Prices and the Developing World
Many lower-income developing nations still rely on specialising in and exporting low
value added primary commodities. The prices of these goods can be volatile on
world markets. When prices fall, an economy will see a sharp reduction in export
incomes, risks of a higher trade deficit and a danger that a nation will not be able to
finance investment in education, healthcare and core infrastructure.
What are commodities? A commodity is a raw material or primary agricultural

product that can be bought and sold, such as copper or coffee.
Commodities are split into two types: hard and soft commodities. Hard commodities
are typically natural resources that must be mined or extracted (such as gold, and
oil), whereas soft commodities are agricultural products or livestock (such as corn,
beef).
Commodities
Primary goods
Oil Wheat Copper Coffee
Example:
Angola and Nigeria are producers of oil.
India and China are producers of wheat.
Zambia and Congo are producers of copper.
Ethiopia and Uganda are producers of coffee.
Volatile Commodity Prices
Why
Income inelastic demand Weather Speculation Price inelastic supply
243
Effects of Decreasing Commodity Prices
 Inelastic demand so TR for farmers (primary producers) ↓
 Less revenue from exporting the commodities
 Difficulty in paying for imports and repaying old international debts
 Current account deteriorates
 International borrowing ↑
 Farmers and commodity producers see a fall in profits/increase in losses
 Farmers and commodity producers exit the market
 Job losses in the industry ↑
Activity
What are the effects of an increase in the prices of agricultural goods and
commodities on farmers in the developing world?
1.
2.
3.
However,
 Can raise cost of living for consumers in both developing and developed
countries
 Can worsen Balance of Payments for importing countries, mainly developed
countries, such as the UK.
244
Dependence of Developing Countries (% share of total exports)
Here are some examples of export dependence for a selection of countries in Sub-
Saharan Africa: The data shows the % of total exports in 2014:
1. Angola: 97% oil

2. Ghana: 39% gold, 26% oil, 17% cocoa
3. Kenya: 19% tea, 12% horticulture
4. Nigeria: 90% oil
5. Senegal: 11% fish, 11% phosphate
6. Tanzania: 37% gold
7. Uganda: 18% coffee
8. Zambia: 84% copper
Sub-Saharan Africa (SSA) is often cited as a region where primary sector

dependence is very high. SSA’s share in global manufacturing trade remains
extremely low.
Source: World Trade Organisation
245
Extension Activity : Discuss the data
246
Exchange Rates
Topic Review
247
Exchange Rates
2.2.3 Exchange Rates
 Defining exchange rates
 Factors affecting the demand and supply of currencies
 Definition of appreciation/ revaluation
- Impact of appreciation of exchange rate on:
o Import and export prices
o Demand for imports and exports
o Current account on balance of payments
 Definition of depreciation/ devaluation
- Impact of depreciation of exchange rate on:
o Import and export prices
o Demand for imports and exports
o Current account on balance of payments
 Price elasticity of demand for exports and imports
248
Exchange Rates
Introduction- Key concepts
What is the exchange rate?

Definition: the exchange rate is the price of one currency in terms of another e.g.
€1=£1.17 or £1=0.85c
What is the foreign exchange market?

The foreign exchange market consists of all consumers, businesses and
governments who wish to buy foreign currency and all the suppliers of foreign
currency. – where currency is bought and sold (FOREX market)
How is the value of a currency determined?

Like all goods and services in a free market the price of a currency is determined
through the forces of demand and supply.
Why do we need foreign currencies?

We need foreign currencies to pay for goods and services that are imported.
Demand for currency: foreigners buy pounds (£s) to pay for UK goods i.e.,
exports.
Supply of currency: UK sells pounds (£s) in return for foreign currency, say $s or
€s to pay for goods and services from abroad i.e., imports.
When a currency rises in value it is said to APPRECIATE.

E.g. £1=$2 now £1=$2.50
When a currency falls in value it is said to DEPRECIATE.

E.g. $1=£0.50; now $1 =£0.40
Devaluation is when a government or central bank officially fixes a new lower
exchange rate. This is done in a fixed exchange rate system.
Revaluation is when a government or central bank officially fixes a new higher
exchange rate. This is done in a fixed exchange rate system.
249
Exchange Rates
Appreciation/ depreciation happened due to changes in demand and supply whilst
devaluation/revaluation are done intentionally by the government.
The Exchange Rate
The market for Sterling (i.e. how many $ per £1; so how much is each £1
in terms of $) e.g. $2 = £1
P of £ in $ - S£ - Demand for UK imports by
UK residents
($/£)
D£ - Demand for UK exports by

foreign citizens
Q. of £
The exchange rate is the price of one currency in terms of another. It is determined
by the interaction of supply and demand in the foreign exchange market.
The demand for £ sterling is by foreigners to pay for imports of UK goods and
services, and to pay for investment in real or financial assets in the UK.
The supply of £ sterling arises when the UK residents require foreign currencies
(over a period of time) for importing or investing overseas.
The demand for a currency is determined by:
1) The demand for UK exports – if the UK goods are competitive (in terms of
price and non-price factors) then the demand for UK exports should increase.
2) Capital flows:
a. Short-term capital flows (inward hot capital movements) – if interest

rates in the UK are higher than abroad, the demand for sterling will rise
as foreign citizens seek to deposit their money in British bank
accounts.
250
Exchange Rates
b. Long-term flows (FDI inward movements) – if MNCs desire to set up
plants in the UK for investment purposes, then the demand for sterling
should increase.
3) Speculation – if speculators believe that the price of sterling will rise, they will
rush to buy sterling. This itself might cause the price of £ to rise.
Activity
Complete the explanations of how the supply of sterling is affected.
1) The demand for UK imports – in order for UK citizens to buy goods/
services from overseas they must give their pounds (i.e. supply £s) to
receive the foreign currency. So as M (imports) increase the supply of
the £ increases; as more £s are given to pay and receive more foreign
goods.
2) Capital flows:
a. Short – term capital flows (outward hot capital movements) – if interest
rates in UK are low or interest rates abroad are higher then…more
people will wish to save abroad in foreign banks so in order to do
so they must exchange their £s to receive the foreign currency in
order to save in the foreign banks. E.g. if interest rates are higher in
Germany then UK citizens and other depositors will wish to save in
Germany instead of in the UK thus they will give £ to receive € so
they can save in Germany – this increases the supply of £ as more £
are given to receive euros.
b. Long – term flows (outward FDI movements) – if UK businessmen want
to invest in companies abroad they will need foreign currency in order
to carry out their FDI; to receive the foreign currency they must give
251
Exchange Rates
(supply) their £ in order to receive the foreign currency to pay for
their FDI (e.g. building a factory in Japan/ investing in a Japanese
business) i.e. as supply of the £ increases the £ depreciates (show on

diagrams page 240)
3) Speculation – if we expect the pound to depreciate people will sell the
pounds so supply of pounds increases = depreciates
Appreciation of the exchange rate
When the exchange rate rises, we say that the exchange rate has appreciated.
Complete the diagrams in the boxes below.
Increase in Demand Decrease in Supply
252
Exchange Rates
Depreciation of the exchange rate
When the exchange rate falls, we say that the exchange rate has depreciated.
Complete the diagrams in the boxes below.
Decrease in Demand Increase in Supply
Core Activity
If the value of the pound goes up then it will cause a rise in the currency
1.) Explain two reasons why the currency may go up?
If the value of the pound goes down then it will cause a fall in the currency
2.) Explain two reasons why the currency may go down? Depreciates
253
Exchange Rates
Impact of Exchange Rate Changes on Imports And Exports
EXPORTS
What happens to the price of UK exports when the value of £ appreciates?
i.e., £1=$1 £1 = $2, i.e., to get the same amount of goods the Americans need
to give more dollars i.e., UK exports are more expensive
 The price of exports rises
 Demand for exports falls
 Balance of payments on current account gets worse (i.e., injections fall)
 Demand for workers will fall and unemployment will rise (X falls = AD falls =
demand for workers falls i.e., because labour is in derived demand)
 Output in the UK will fall i.e., as AD falls (NE = NO) so GDP falls
What happens to the price of UK exports when the value of £ depreciates?

i.e., £1=$1 £1 = $0.50 i.e., exports are cheaper for Americans because they
only need to give $0.50 for each pound
 The price of exports falls (X cheaper)
 Demand for exports rises
 Balance of payments on current account improves (injections have increased)
 Demand for workers will rise and unemployment will fall (X RISES =AD
INCREASES = demand for workers increases)
 Output in the UK will rise i.e., economic growth (as AD rises = GDP rises)
254
Exchange Rates
IMPORTS
What happens to import prices when the value of £ appreciates?
i.e., £1=$1 £1 = $2 i.e., UK citizens now can get $2 worth of goods with their
same £1
 The price of imports falls (M cheaper)
 Demand for imports rises
 Balance of payments on current account gets worse (leakages increase = AD
falls)
 Demand for UK workers will fall and unemployment will rise (as M rises = AD
falls = demand for UK workers falls as less local goods are demanded)
 Output in the UK will fall (as M falls = AD falls = GDP falls)
What happens to import prices when the value of £ depreciates?

i.e., £1=$1 £1 = $0.50
 The price of imports rises (M more expensive)

 Demand for imports falls (d M falls)
 Balance of payments on current account improves (less leakages = BOP  )
 Demand for workers will rise and unemployment will fall (as M falls = AD rises
= demand for workers rises)
 Output in the UK will rise i.e., economic growth (as M falls = AD rises = GDP
rises)
SPICED = strong pound imports cheap exports dear (expensive) = BOP 

WPIDEC = weak pound imports dear exports cheap = BOP 
255
Exchange Rates
Price Elasticity of Demand for Imports and Exports and The Effect on B.O.P
IMPORTS
 IF DEMAND FOR IMPORTS IS PRICE ELASTIC it means that a change in import
prices leads to a larger change in quantity demanded.
Effects on B.O.P
A rise in import prices will cause the demand for imports to fall. This will mean
less money leaving our country thus improving the B.O.P
A fall in imports prices will cause a rise in the demand for imports. This means
more money leaving our country thus making the B.O.P worse.
 IF DEMAND FOR IMPORTS IS PRICE INELASTIC it means that a change in

import prices will have little or no effect on demand for imports.
Effects on B.O.P
A rise in import prices will leave the demand for imports unchanged (e.g., oil).
This will simply mean more money leaving our country to pay for the same level of
imports thus worsening the B.O.P
A fall in imports prices will leave demand for imports unchanged. This means
less money leaving our country for the same amount of goods thus improving
B.O.P.
EXPORTS
 IF DEMAND FOR EXPORTS IS ELASTIC it means that a change in the price of
domestic goods will lead to a large change in demand for exports.
Effects on B.O.P
A rise in export prices will cause the demand for exports to fall. This will mean
less money coming into our country thus worsening the B.O.P
A fall in exports prices will cause demand for exports to raise significantly thus
improving B.O.P.
256
Exchange Rates
 IF DEMAND FOR EXPORTS IS INELASTIC it means that a change in the price of
domestic goods will have little or no effect on the demand for exports.
Effects on B.O.P
A rise in export prices will cause the demand for exports to remain unchanged.
This will mean more money coming into our country thus improving the B.O.P.
A fall in exports prices will leave demand for exports unchanged. This means
less money coming into our country for the same amount of goods thus worsening
B.O.P.
Remember
SPICED
WPIDEC
257
Exchange Rates
SOW: PRICE ELASTICITY OF DEMAND AND THE BALANCE OF PAYMENTS

DEPRECIATION PRICE OF ELASTIC EFFECT PRICE OF ELASTIC EFFECT
(explain) EXPORTS EXPORTS ON BOP IMPORTS IMPORTS ON BOP
(increase/decrease) (explain) (increase/decrease) (explain)
It’s the fall in the WPIDEC dX will Improves Weak Pound dM will As M fall
value of one Weaker currency = increase by as X are Imports Dear decrease by there are
currency cheaper exports so a bigger % an Exports Cheap a bigger % less
compared to Demand for X will than the fall injection M are more than the leakages
another. i.e. with rise in price expensive because change in so the
my every £1 I to get the same price BOP
receive less $ value of imports I improves
need to give more £
DEPRECIATION PRICE OF INELASTIC EFFECT PRICE OF INELASTIC EFFECT
It’s the fall in the Weaker currency = dX will Little or no M are more Demand for Worsens
value of one cheaper exports so increase by effect expensive because M will because
currency Demand for X will a smaller % because to get the same decrease by to bur
compared to rise than the fall demand value of imports I a smaller % relatively
another. i.e., with in price for X need to give more £ than the rise the same
my every £1 I increased in price amount of
receive less $ by a small M they will
% need to
give more
of their
currency
APPRECIATION PRICE OF ELASTIC EFFECT PRICE OF ELASTIC EFFECT
It’s the rise in the SPICED (strong d X will fall Worsen as Imports are now dM will Will
value of one pound imports by a bigger X fall cheaper because increase by worsen as
currency cheap exports % than the with my same £ I a bigger % M
compared to dear) rise in price receive more foreign than the fall increase =
another. i.e., with Price of exports rises currency so dM will in price more
my every £1 I so demand for X will rise leakages
receive more $ fall
APPRECIATION PRICE OF INELASTIC EFFECT PRICE OF INELASTIC EFFECT
258
Exchange Rates
It’s the rise in the Price of X rises so DX will fall Little or no Imports are cheaper dM will Improve
value of one demand for X falls by a smaller effect on so dM will rise increase by because
currency % than the the BOP a smaller % they are
compared to price rise than the buying
another. i.e., with change in nearly the
my every £1 I price same
receive more $ amount
but at a
lower
price due
to the
strong
currency
259
Exchange Rates
EFFECTS OF APPRECIATION/REVALUATION OF £
PRICE ELASTIC B.O. P INELASTIC B.O. P
IMPORTS Cheaper Demand Worsens as Demand Improves as
rises by a people buy rises by a people buy
larger more smaller ‘similar’ amount
proportion imports proportion but just pay a
than the fall than the lower price
in price increase in
price
EXPORTS More Demand falls Worsens as Demand Improves as
expensive by a larger foreigners falls by a people buy
proportion demand smaller ‘similar’ amount
than the rise less proportion of goods but
in price than the just pay more
rise in price
EFFECTS OF DEPRECIATION/DEVALUATION OF £
PRICE ELASTIC B.O. P INELASTIC B.O. P
IMPORTS More Demand Improves as Demand Gets worse as
expensive falls by a people buy falls by a people buy
larger less smaller ‘similar’ amount
proportion proportion but just pay
than the than the higher price
increase in increase in
price price
EXPORTS Cheaper Demand ↑ Improves as Demand ↑ Gets worse as
by a larger foreigners by a people buy
proportion demand smaller ‘similar’ amount
than the fall more proportion of goods but just
in price than the ↓ pay less
in price
260
Exchange Rates
Extension material: The J Curve
The J curve shows what can happen to a country’s balance of payments when it
devalues its currency, when the depreciation of the currency takes place, the
current account deficit will worsen before improving, suggesting a time lag effect.
The J-Curve effect exists because households and firms may not respond
immediately to a change in price caused by a change in the exchange rate.
There are a number of reasons for this:
1. Consumers may wait and see if the price rise is sustained.

2. Businesses may find it difficult to switch to or from an overseas supplier. It
may take considerable search time to find alternatives.
3. Households and firms do not purchase consumer durables very often, so
changes in exchange rates only take effect when decisions to purchase are
made.
4. Consumers may be loyal to overseas brands.
5. Price is not the only factor that affects demand for imports - indeed, there
are many other non-price factors.
261
Exchange Rates
Core Exam Practice
1) When the exchange rate of a currency depreciates, the balance of trade

improves. Do you agree with this statement? Give reasons for your answer.
(6)
2) Examine the impact of an appreciation of a country’s currency on the

country’s balance of trade. (6)
3) Explain, with the aid of a numerical example, what is meant by the term
appreciation of a currency. (3)
4) Briefly explain the effects on the exchange rate of a currency of: a) an

increase in exports b) a decrease in the rate of interest. (4)
262
Exchange Rates
263
Exchange Rates
264
Exchange Rates
265
Exchange Rates
THE IMPACT OF EXCHANGE RATES ON IMPORTS AND EXPORTS
Activity
1. Assume the exchange rate is £1 = €1.15.
a. Cyprus exports potatoes to the UK worth €100,000. How many £s

does the UK have to pay?
b. Cyprus imports 10 UK manufactured Nissans at £10,000 each. How

many €s does Cyprus have to pay?
2. Now assume that the exchange rate increases to £1 = €1.22.
a. How many £s does the UK have to pay for the €100,000 potatoes?
b. How many €s does Cyprus have to pay for the 10 cars?
3. What conclusions can you derive about changes in exchange rates and their
effects on imports and exports?
266
Exchange Rates
Consider how the value of the £ will chanqe if:
1. Export of British petroleum increases. X increases = D£ = £appreciates
2. UK residents are importing less manufactured goods. M falls = S£ falls =

£appreciate
3. Imports from Japan have reached an all-time high. M rise = S£ increases =

depreciation
4. British financial services are in demand by foreign countries.
5. There is a slump in British exports.
6. UK residents deposit less money in overseas banks.
7. Demand for foreign holidays increases S pound increases and demand for
British primary products increases. D pound increases
Graphically represent the changes you have identified and explain the effect
on the exchange rate. You will need to draw a graph for each situation. Use
the space below.
267
Exchange Rates
Extension Activity – Fluctuating Exchange Rates
Consider how the exchange rate for the £ would be affected if:
a) The UK Balance of Payments is in deficit.
b) The inflation rate in the UK is lower than that of international trading

partners.
c) The interest rates in the UK are higher than those of international trading
partners.
d) There is speculative demand for the euro.
268
Exchange Rates
269
Topic Review
270

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ECONOMICS IGCSE

Topic Area Rob Jones E/S Booklet

IGCSE Success and Assessment Criteria 1 – 10

Course content and exam techniques 32 - 38

Section C: Government and the Economy

3. Relationship between Objectives and Policies

Section D: The Global Economy

See Volume II for Exam Practice and Mnemonics

Year 5 CA: 60% - 5 per year

 For extended Writing, students should;

Class Participation Grade Descriptors

IGCSE Economics – 6 Mark question

Name Date of test:

Date of test returned:

Knowledge Analysis Application

Mark Awarded /6 Grade

WWW (What went well ) Self / Peer Review :

WWW (What went well ) Teacher Review :

EBI (Even Better if ) Self / Peer Review :

EBI (Even Better if ) Teacher Review :

IGCSE Economics – 9 Mark question

Name Date of test :

Date of test returned :

Knowledge Analysis Application Evaluation

Use accurate and Provide balance by Be specific and Evaluate in the

Mark Awarded /9 Grade

WWW (What went well ) Self / Peer Review :

WWW (What went well ) Teacher Review :

EBI (Even Better if ) Self / Peer Review :

EBI (Even Better if ) Teacher Review :

IGCSE Economics – 12 Mark question

Name Date of test :

Date of test returned :

Knowledge Analysis Application Evaluation

Use accurate Be specific and Prioritise at the

Mark Awarded /12 Grade

WWW (What went well ) Self / Peer Review :

WWW (What went well ) Teacher Review :

EBI (Even Better if ) Self / Peer Review :

EBI (Even Better if ) Teacher Review :

Topic Area Syllabus content

Section C: Government and the • Basic Circular Flow of Income

3. Relationship between • Inflation and unemployment

3. Exchange Rates  Defining exchange rates

 Consider the assumptions

 Assess the degree of significance

 Assess limitations of remedies or policies

 Discuss possible conflicts or constraints

Current economic issues and statistical data

www.economist.com Economist magazine.

www.ft.com Financial Times newspaper.

www.guardian.co.uk Guardian newspaper.

Section C: Government and the Economy

2.1.1 Macroeconomic Objectives

 Basic Circular Flow of Income

 Low and stable inflation

 Surplus or balance on the current account of the balance of payments

 Protection of the environment

Economics consists of two broad areas of study: microeconomics and macroeconomics.

1. Microeconomics is the study of individual units within an economy, for example,

2. Macroeconomics is the study of the economy as a whole whether this is national or

Aggregate demand total

1. To achieve or encourage sustainable economic growth

Other macroeconomic objectives