IGCSE Economics

IGCSE Economics Concise & Comprehensive Revision Notes

© www.i-study.co.uk

The Basic Economic Problem The basic economic problem is: limited resources exist but people have unlimited wants. This leads to conflicts over the use of scarce resources and decisions over how to use them most effectively need to be made.

Capital

Labour

Capital is anything that is used to produce other goods & services rather than being used for its own sake (machinery, tools, offices etc).

Labour is the human effort that is used to produce an item, both mentally & physically.

There are 2 main categories of capital: * Working Capital - which is used up in the process of production (seeds, raw materials). * Fixed Capital - long lasting & not used up in production (machinery, warehouse etc). The supply of capital generally increases as machinery is replaced/updated or factories expand their premises.

The supply of labour is determined by how many workers are available & how long they can work for. Factors affecting this include: • retirement age • school leaving age • length of working day (varies between countries) • holiday entitlement (varies between countries)

Enterprise

Land The land for farming and building on, but it also includes the resources under the land (coal, minerals, metals etc), the resources on the land (forests, lakes etc) and the fish stocks in the sea.

This is the decision making and risk bearing in business by an entrepreneur. An entrepreneur has to organise the factors of production and decide what & how much to produce.

The supply of land does not really change but the resources in/on the land can change significantly due to mining, forestry, fishing etc.

Some risks can be insured against (fire, theft etc), but others such as increases in costs of production & increased competition cannot

Opportunity Cost This is the cost of the best alternative that is given up when a decision is made. This can be applied to products that we buy, the jobs that we undertake and the products firms decide to make. Private firms generally base their decisions on which product will maximise their profit.

The Production Possibility Curve indicates the points at which resources are being used efficiently. Any point to the left of the curve means that resources are not being used to their potential.

Cars

20

It is also known as the Opportunity Cost Curve as it shows the opportunity cost of producing more of one product. In this example ( a simplified economy) the opportunity cost of producing 10 more TVs is the loss of 10 cars produced.

10

Increases in productivity, new technologies or discoveries of new resources could push the PPC to the right.


15

25

TVs

The Allocation of Resources The Types of Economic Systems Planned Economies * The government makes the decisions about what is produced, how its produced & who produces it. * The government is the main owner of land, labour and capital. * The government is the employer, sets wages and decides prices. * The government issues its instructions through directives. * There are few planned economies in the world. * Goods produced may not match the consumers wants.

Example: North Korea

Market Economies * Also known as free enterprise economies * Minimum government involvement/intervention. * Land & capital are privately owned. * Consumers decide what is produced by paying more for the things they want. * Firms and resources switch to things that are more popular. * Advantages: efficient use of resources, more choice & potential to make lots of money. * Disadvantages: profit maximisation aims mean that public goods are not likely to be supplied & external costs not accounted for. No pure market economies exist in the world

Mixed Economies * Combination of both the above systems. * Public & private firms, land & capital. * Market forces provide choice & efficiency in some industries. * Government can provide public goods such as defence & street lighting. * Government can encourage consumption of merit goods & discourage consumption of demerit goods. * Government can impose charges on private firms to reflect external costs such as pollution. * All economies are mixed but to different degrees. Example: United Kingdom


Demand Movements Individual demand is how much of a product a consumer will buy at a given price. Market demand is the sum of all the individual demand for a product at a given price. Demand is based on the actual ability of consumers to purchase the product, not just what they would like but cant afford (sports car, jewellery etc). This is called effective demand. Demand curves slope down from left to right - this is because the higher the price the more of a consumers income must be spent on it & the more satisfaction they must get from it to justify the opportunity cost.

Price

Movement along the Demand Curve (Price)

Contraction

P1

A change in price causes a movement along the curve

P

The higher the price of a product, the lower the quantity demanded will be, so... ..if the price rises then quantity demanded will fall, this is known as an contraction in demand.

D Q1

Quantity

Q

If the price falls then quantity demanded will rise, this is known as an expansion in demand.

Price

Shift of the Demand Curve A shift of the demand curve represents an increase or decrease of demand at a given price level. This may be because of: • • • •

Increase in demand

P

a change in consumers incomes a change in price of competing products changes in tastes/fashion seasonal factors such as weather

D1 D Q

Substitute Goods Goods that can be used as an alternative to the original Tea and coffee are examples of these

Complementary Goods Goods that are purchased to go with another good: bread & peanut butter


Q1

Quantity

Supply Movements Price

Contraction

Movement along the Supply Curve (Price)

S

A change in price causes a movement along the curve

P

The higher the price of a product, the more suppliers will produce..

P1

If the price rises then quantity supplied will rise, this is known as an expansion in supply.

Q1

Q

Quantity

Shift of the Supply Curve A shift of the supply curve represents an increase or decrease in the quantity supplied at each & every price. Several factors that can cause a shift in supply: • • • • •

Improvements in technology (can increase efficiency & reduce costs). Weather, climate and disease (especially agricultural products). Taxes and subsidies can make the costs of production more/less expensive and thereforé increase or decrease supply. Natural disasters & wars can severely disrupt supply. Resources: discoveries of new resources or depleting reserves of resources can affect the supply of products.

If the price falls then quantity supplied will fall, this is known as an contraction in supply.

Price

Increase in supply

S

S1

P

Q

Q1

Quantity

Equilibrium Price

S

The equilibrium price or market clearing price is the point at which demand and supply are equal (where they cross on the diagram). Consumers want low prices & suppliers want higher prices, this leads to adjustments in the price of products until the equilibrium point is reached.

P

D Q

Quantity

Market Failure This occurs when the equilibrium price fails to take into account all of the costs. Most commonly this occurs when the external costs of a product are not included in the price (see next page). The cost of pollution or environmental damage is often passed on to the people living in the area of production through decreased quality of life/contaminated environments. To correct this failure intervention needs to take place in the form of fines, taxes or strict regulation for firms to clean up and stop future external costs from occuring


Excess Demand & Supply Price

Excess Demand

S

At price P there is more quantity demanded than suppliers are willing to provide. To get back to equilibrium the price increases to P1: * quantity demanded reduces * quantity supplied increases

Area of excess demand

P1 P

D Quantity

Price Area of excess supply

Excess Supply

S

At price P there is more quantity supplied than quantity demanded

P P1

D Quantity

To get back to equilibrium (& clear stock) price must decrease to P1: * quantity supplied reduces * quantity demanded increases

Example: Minimum Wage Level One of the arguments used to oppose minimum wage levels is that it sets the price of labour too high. This results in more people offering themselves for work, but employers actually wanting less people at the higher price. So in this case the grey area would represent unemployed people

Private, External & Social Costs/Benefits Private Costs & Benefits

External Costs & Benefits

These are the costs and benefits to the individual of an activity. In the case of smoking - the cost of buying the cigarettes and the lighter/matches.

These are the costs and benefits to a third party of an activity. In the case of smoking - air pollution, smell on clothes, possible passive smoking illness. This may subsequently include the cost of healthcare (in a state healthcare system).

* Social Costs = Private Costs + External Costs * Social Benefits = Private Benefits + External Benefits * When making decisions about whether an activitiy or product should be carried out/produced the social cost should be calculated. If there is a cost to society then this cost should be taken into consideration and paid for through fines/taxation or the activity should not be allowed. * In the case of smoking there is a distinct social costs as the external costs outweigh any external or private benefits. In many countries cigarettes are heavily taxed to pay for the health costs created but also to reduce the quantity demanded.


Price Elasticities of Demand (PED) Price elasticity of demand measures how much the quantity demanded changes in relation to a change in price. This is important for entrepreneurs as they want to know: - the impact a change in price would have on their revenue & ultimately profit. - how sucessfull puttng products on sale is likely to be. - whether they should absorb cost increases themselves or pass them onto the consumer through higher prices To calculate it:

PED=

% change in quantity demanded % change in price

Price

Elastic demand

Elastic demand

P P1

This is when a change in price results in a larger % change in the quantity demanded.

D

Q

Q1

If substitutes exist then a product is likely to have elastic demand (coca cola & pepsi). Luxury goods also tend to have elastic demand (since they are not essential).

Quantity

Price

Inelastic Demand This is when a change in price results in smaller % change in the quantity demanded of a product.

P

Low value goods such as sugar & salt are likely to be inelastic.

P1

Goods that are necessary such as shampoo & soap tend to be inelastic since people have to purchase them.

Inelastic demand

Q

Q1

D

Quantity

Price inelastic

Price elastic * luxury good

* very cheap * neccesity for food * no substitutes

* lots of substitute goods * lots of competitors

Inferior Goods * These are products that people actually buy less of as they have more disposable income. * In this example, as comsumers have more money, they are likely to buy less cheap disposable razors and buy a more expensive, high quality version instead.


The Individual Money Money has allowed us to develop systems of trade that do not rely on barter. In an economy based on barter some products and commodities may perish & lose value, be difficult to transfer to another owner or to divide into small amounts.

Functions of Money

Types of Money

* Medium of exchange: exchangeable for other goods & services. * Measure of value: common measurement of the value of goods and services. * Store of value: money should not lose its value over time (inflation devalues money). * Deferred payment: money allows the true value of a transaction to be paid at a later date.

* notes & coins (cash) * bank accounts - money transferred through cheques & direct debits.

Characteristics of money * Acceptable * Portable * Scarce

* Durable * Divisible

Banking Commercial Banks

Central Banks * The government’s bank: - taxes paid in & gov spending paid out. - holds foreign currency & gold reserves - used for monetary policy (interest rates and control of the money supply). * Issues bank notes & coins. * Emergency lender to banks. * Regulates the banking system.

* Private sector & profit orientated. * Accept deposits & lend to the public. * Typical services offered: - current/checking account (instant access). - savings/deposit account (notice period for withdrawal or penalty). - overdraft (borrow money instantly). - loans (set amount & repayments). - cheques, debit & credit cards.

Stock Exchange * Organisation facilitating the buying & selling of shares. * Stock exchange traders are called stock brokers. * Only public limited companies can trade shares on the stock exchange. * Strict regulations for listed/quoted companies protect share buyers. * Share price indicies give an indication of the performance of the economy. * Most share deals are done electronically nowadays. * People buy shares for capital gains (rising values) or dividend payments.


Employment Wage Factors * The higher the wage the more attractive the job is. * Form of payment: - Salary: an agreed annual amount paid monthly regardless of hours worked. - Wage: an hourly rate so hours worked become important. - Piece Rate: worker paid according to their output (fruit picking). * Overtime pay Jobs offering lots or regular overtime opportunities may be attractive to workers looking to supplement their income. * Bonuses Jobs that have bonus payments related to performance are attractive to workers. It encourages workers to be increasingly productive. * Commission Associated with jobs in sales industries & based on employees getting a % of the value of a sale they make. Succesful sales people can earn large commissions.

Non-Wage Factors * Working conditions: jobs in a pleasant environment, with regular breaks are attractive. * Working hours: jobs that require evening/night time and weekend work may be unattractive, especially to people with families. * Job satisfaction: people often highly value being satisfied at work. * Location: jobs that are close to home reduce travelling time. It is difficult for many people to move for a job. * Holidays: jobs that offer more holiday are attractive (teaching). * Pensions: the type and generosity of pension provision by an employer can vary. * Fringe benefits: company car, health insurance, free meals etc.

Differences in Earnings There is a wide range in the amount that individuals get paid for the work they do. Various reasons exist: * Supply & demand of labour: if workers are highly demanded and in low supply then firms will offer high wages to attract workers. The opposite is also true. * Skill level: highly skilled workers are likely to earn high wages as few people can do what they do (doctors, vets etc). * Experience: workers that remain in a job generally recieve higher pay as they gain more experience. * Geographical location: some workers recieve higher wages to make up for a higher costs of living some parts of a country (London) * Danger factor: jobs that have risks associated often pay higher wages (firemen, soldiers etc). * Trade Union influence: workers that can bargain collectively (teachers unions etc) can demand higher wages. * Government policy: some governments impose minimum wage levels. * Gender: Men often get paid more than women & obtain the higher level jobs in companies. * Industrial sector: Agricultural jobs often pay lower wages than manufacturing and service jobs.

Variations in Earnings over a Lifetime * Younger people are likely to start their working lives on lower wage levels due to lack of qualifications & experience. The longer they work they are likely to recieve training and promotions (additional responsibility) and recieve higher levels of pay. * When people retire they are likely to see their earning significantly reduce as they live off investments and pensions.


Trade Unions * Trade Unions are organisations of workers that negotiate with their employers about wages, working conditions and working hours. * By bargaining collectively, workers have more influence/power. * If workers want to be represented by a trade union they must become a member. Members pay a fee to the union. * Trade Unions also mean that employers dont have to negotiate with each individual worker. A single union agreement may exist in workplaces where only one union represents all the workers, this gives the union more influence & employers only have to deal with one union (saves time & effort). * Trade Unions can try and restrict the supply of labour to an industry, or increase the productivity of the workers to raise wages. * If wages and working conditions are improved but the productivity of workers does not rise then the firm will become less competitive as it has higher costs. This could lead to conflict between firms and unions.

Specialisation Specialisation of labour focuses workers on a single task or small range of tasks. Firms hope that specialisation will lead to lower costs: * Workers should beome more efficient at the task if they continually practise it. * It should be quicker to train workers if they only need to learn a small range of skills. * Specialisation in production line saves time & money as workers do not have to move to the next machine. * Individuals may train to become specialised in certain professions (doctors, engineers) and recieve higher wages and better working conditions as a result.

Individuals Spending Individuals spend to buy the goods and services that they want or require. There are several factors that affect peoples spending choices: * Disposable income: as this rises people tend to spend more money. * Wealth: if peoples wealth is rising (increased share values/house prices) they often spend more. * Confidence: good job prospects/booming economy encourage spending. * Interest rates: low interest rates encourage spending as borrowing is cheap & savings earn little interest.

Individuals Savings People save money in various ways and for different reasons: Reasons for saving * target saving: saving for a particular thing (new television/car). * unexpected event: people want to have the money to cope with a sudden bill (car repair). * the future: saving for retirement. Parents may save for education fees for their children. Factors affecting saving * income: people with higher incomes find it easier to save. * interest rates: higher interest rates encourage people to save as the returns are higher. * tax factors: tax concesions on savings interest may encourage people to save more. * age: people of working age find it easier to save than retired people or young people.


The Private Firm Business Organisation Partnership

Sole Trader

Co-operatives

* Minimum of 2 partners * Increased financial capacity * Increased skill set * Partners share profits/losses * Accountants, architects, solicitors

* Owned by one person

* Low set up costs & small in size * Owner gets profits or liable for all losses * Limited financial capacity * Owner may lack some skills * Builders, carpenters, mechanics

Private Limited Companies (Ltd.)

* Jointly owned by members * Run for benefit of members * Bulk-buy to allow low prices * Workers co-ops: share profits & decision making. * Housing co-ops buy & manage housing

Public Limited Companies (Plc)

* financial capital divided as shares * Shares sold privately not on stock market * Share holders only have limited liability * Shares often sold to friends & family * limited ability to raise finance due to shares being limited to private sale

* Financial capital divided as shares * Shares sold to public on stock exchange * Can raise large amounts of finance through share sales * Often large in size. * Admin costs of initial prospectus & sending annual accounts reports to shareholders. * Owned by shareholders, * Controlled by Board of Directors

Business Costs & Revenue Fixed Costs These are the costs that don’t vary with output such as rent, interest on loans etc. This means that the Total Fixed Cost (TFC) line is straight. The Average Fixed Cost (AFC) line is sloped. TFC/output = AFC. If fixed costs are $10 and 1 item is produced then the AFC is $10, however if 2 items are produced then the AFC is $5.

Variable Costs These are the costs that change as output changes such as raw materials, wages, utility bills. As output increases Total Variable Costs (TVC) increase. Average Variable Costs (AVC) initially fall as productivity of workers increase and the firm benefits from economies of scale but these diminish & may reverse with increased output. TVC/output = AVC

Total Costs Fixed Costs + Variable Costs = Total Costs. The total cost line starts at the level of the fixed cost line since these costs must be paid despite no production.

Average Costs = total cost/output © www.i-study.co.uk

Revenue: Average Revenue:

This is the total amount of money a firms recieves from selling goods (before costs are deducted). Total revenue/output

Diminishing Marginal Utility

Firm Size & Integration Firm Size

Internal Growth

Indicators of a firms size: * Number of employees * Value of output produced * Financial capital it has

* Expansion in the current market * Increasing market share * Diversifying into other products

Horizontal Integration * Merging of firms at same stage of production * May benefit from increased economies of scale * Rationalisation of staff and capital to increase efficiency

Dunlop

Firestone

Goodyear

Vertical Integration * Merging of firms producing same product but at different stages * Backward verticle integration: merging with a firm that supplies your raw materials/components * Forward verticle integration: merging with a firm that sells your product/commodity

Size Advantages * Small firms can be more personal, flexible, specialised * Large firms have more financial capital, benefit from economies of scale, can attract highly skilled employees. * Firms often start on a small scale & may then expand if that is the owners ambition & the market is big enough


The Role of Government Price

Aggregate Demand * This is the total demand in the economy. * It is made up of: * Consumption * Investment * Government Expenditure * Exports - Imports

AD Quantity

Price

Aggregate Supply This is the total supply in the economy. * It is initially flat due to the ability to employ more resources (labour) and increase supply. * It becomes steeper & then vertical when the economy reaches full employment which means we cannot increase supply. * At this stage prices increase if AD increases (inflation)

AS

Quantity

Circular Flow of Income Labour and consumption spending flow from households to businesses

Businesses

Households

Wages and goods flow from businesses to households

The above model represents a simplistic model of a closed economy. In reality there are other economies to trade with, the infuence of the Government and also people & businesses own choices about saving and investing. All these additional aspects represent leakages from, or injections into this model.

Leakages

Injections

* Imports represent money leaking out to other economies. * Taxation removes money from households and takes it out of the economy unless the Government spends it. * Savings by households represent money taken out & stored by banks (although its often lent for investment).

* Exports by firms represent additional money coming into the economy * Government spending injects more money into the economy * Capital investment by firms (often borrowed).


Government Macroeconomic Policies Monetary Policy * Key Characteristics: controlling changes in the money supply, interest rates & exchange rate. * Money Supply: changed by printing money & encouraging/discouraging lending by commercial banks. Increased money supply = Increased Aggregate Demand (AD). * Interest Rates: Central Bank raises or lowers these. Raised interest rates make saving more attractive and borrowing more expensive. This should lower AD & therefor firms are also likely to invest less. * Exchange Rates: these can be fixed to another currency (dollar) to control inflation or they can be floating. Deflationary Monetary Policy: raising interest rates and reducing money supply to reduce AD Reflationary Monetary Policy: reducing interest rates and increasing the money supply to increase AD

Fiscal Policy * Key Characteristics: changes in government expenditure and taxation. * Government Expenditure: increases in spending will increase AD, decreases in spending decrease AD. * Taxation: increases in taxation will leave people with less money to spend & so reduce AD. * Budget: the government has a surplus when it takes more money than it spends & a deficit when it spends more than it takes. Reflationary Fiscal Policy: increasing gov spending and reducing taxation to increase AD. Deflationary Fiscal Policy: reducing gov spending and increasing taxation to reduce AD.

Reflationary Fiscal & Monetary Policy Price

Supply Side Policies Price

AS

AS AS1

AD1 AD Q

Q1

Quantity

AD Q Q1

Quantity

Supply-Side Policies * Key Characteristics: focuses on increasing AS (Aggregate Supply) and shifting the PPC to the right. * Tax reduction: reducing the tax on firms profits can encourage them to invest in becoming more productive to earn larger profits. * Regulation: removing or adding regulations on firms can reduce or increase business costs and affect AS. * Education & training: increased investment in these should increase the labour forces productivity & increase AS.


Economic Indicators Measuring Output Gross Domestic Product (GDP)

* The total value of the goods and services produced in an economy. * This is the standard measurement but there are several variations that are used to provide a clearer picture of what is happening in the economy. - Nominal GDP: GDP valued using the current prices (no inflation consideration). - Real GDP: GDP that has had the effect of inflation removed.

- Real GDP per capita: average Real GDP per person in the country. This allows any changes in the popula-

tion size to be reflected.

Measuring Inflation The Retail price Index (RPI) * This is a price index that shows the general change in prices over time as a %. * A hypothetical basket of goods and services which represents a normal households spending. * The items are ‘weighted’ to reflect the % of income spent on them. * Each month the prices of the goods & household spending patterns are monitored and the RPI is calculated. * The index has a ‘base year’ and the % change is measured from this.

Causes of Inflation Cost-Push Inflation

* Increases in wages & raw material costs push production costs up and result in higher prices. * If increases in wages are matched by an increase in worker productivity then unit costs should not rise. * A ‘wage spiral’ may occur when workers demand higher wages leading to higher prices & so workers then demand higher wages again & so on.

Demand-Pull Inflation

* Excess demand (an increase in demand without an equal increase in supply) pulls prices higher. * Usually output can be increased to match demand but if there is full employment then extra workers cannot be employed to increase output. It could also be a shortage of a raw material that limits supply.

Monetary

* Increases in the money supply that are greater than increases in output (more money chasing same output). * Can be classed as demand-pull inflation.

Effects of Inflation * The value of money falls (each $ buys less). Hyperinflation may lead to loss in confidence of the currency. * Redistribution of income: - savers lose out as their savings lose ‘real’ value & borrowers gain as they repay less in ‘real terms’ than they borrowed. - People on fixed incomes (pensioners, students) see their real income fall unless it is ‘index-linked’ (linked to the changes in the rate of inflation). * Increased costs for firms: changing prices, labels, working out future costs. * Balance of Payments: increased prices make a country’s exports less desirable & imports seem comparatively cheaper. This can lead to further issues such as unemployment.


Unemployment Measuring Unemployment * Measured as the % of the labour force who are willing & able to work and looking for a job. * Methods for measuring unemployment vary & generally the official rate is lower than the actual number of people looking for work.

Causes & Types of Unemployment * Frictional unemployment: people between jobs - tends to be short term. * Structural unemployment: industrial change over the long term can leave sectors of the labour force with skills that the economy no longer demands. * Seasonal unemployment: labour only demanded at certain times of the year (fruit pickers/ tour guides). * Cyclical unemployment: high unemployment in times of recession. * Immobility of labour: workers are generally fairly immobile (home, family) & only seek work in their region. * Technology: increases in technology have replaced some jobs and reduced number of workers in others. * Minimum wage: increased labour costs may force employers to hire less workers

Effects of Unemployment * Increases in unemployment lead to higher costs for the Government (support & benefits) & at the same time less income for the Government (income tax). This could mean higher taxes for the working population or reduced spending on schools/hospitals/emergency services etc. * Increased unemployment means less output & so less goods and services for people to share. * Increased costs to society through higher crime rates, higher health bills (alcoholism/depression), increased rates of divorce.

Measuring Development/ Quality of Life Human Development Index (HDI) * This is an index that takes into account 3 factors (each is an index itself): * Life expectancy index * Education index * Income index * It generates a score between 0 and 1. The closer to 1 the higher the quality of life. * It is considered a better measure of overall development then GNI or GDP because it takes into account social factors aswell as purely economic ones.


Developed & Developing Economies * LDC = Less Developed Country

* MDC = More Developed Country

There are various reasons why countries are at varying levels of development: Environmental Climate Fertile soils Natural resources Natural disasters

Political

Historical

Corruption High military spending Political corruption

Colonial debt legacy Slave trade Unfair trade deals

Measuring Devlopment

LDC Characteristics

* GDP = Gross Domestic Product: total value of goods & service produced in a year.

* Low life expectancy * Low income/capita * Low levels of education * Low levels of healthcare * Large primary sector * Raw material exports * High population growth * High dependency ratio

* GDP/capita = GDP per person. * Real GDP = GDP minus inflation. * HDI = Human Development Index: quality of life index - scale 0 (low) - 1 (high)

Benefits of Devlopment * Increased incomes * Higher levels of consumption * Shorter working hours * Increased tax for government: * Provision of public goods (libraries, swimming pools etc)

Problems of Development * Resource depletion - sustainable for future generations? * Increased pollution * Opportuity cost of other land use - food production/leisure activities? * Loss of animal habitats (land cleared for urbanisation, industrial location & resource extraction).


Population & Development Population Indicators

Causes of Population Growth

* Birth rate: No of births/1000 people/year * Death rate: No of deaths/1000 people/year * Infant mortality rate: No of babies that die before reaching 1 year/1000 live births/year. * Natural increase: birth rate - death rtae * Net migration: immigration - emigration

* Availabilty & cost of contraception * Family planning services & education * Gender equality * Age of marriage

Population Pyramids & Changing Structures

LDC countries have: * high birth rates due to the high infant mortality & death rates (many children don’t survive). * Poor healthcare systems, lack of variation in diet & limited access to fresh water lead to high death rates & low life expectancy. MDC countries have: * low birth rates due to affordable contraception, family planning education in schools, high cost of children, increasing numbers of women having careers & delaying starting families. * low death rates due to good healthcare systems & balanced diet.

Youthful Populations

Aging Populations

Many LDCs have large proportions of their population who are young. This creates problems: * Large investment in schools needed * Women needed for childcare so can’t work * Tax burden for working populations as they have to support the large young population.

Many MDCs have large proportions of their population who are elderly. This creates problems: * Large investment in nursing homes & hospitals required. * Lack of housing as people live longer (which also pushes house prices up). * Tax burden on working population to support elderly popluations pensions & healthcare.

Migration & Development * LDCs often have large numbers of emmigrants who leave to seek higher wages and a better quality of life in MDCs (who subsequently have high levels of immigration). * The emmigrants are often of working age and so are a loss to the productive capacity of LDCs. They often send remittence payments back to their home country though which boosts the economy there. * Immigration for MDCs can be considered both good and bad. The increased supply of cheap labour allows firms to keep costs lower. Howevere it places extra pressure on housing and services such as health and education.


International Aspects Why do Countries Trade? * To acquire goods/resources that are not available or produced in their own country (spices, oil etc). * To benefit from lower prices due to specialization. * To reach larger markets.

Balance of Payments Balance of Payments = current account + capital account + financial account + official reserves

Current Account This shows the income and spending from trade with other countries. The main parts are: * Trade: revenue from imports & exports of physical goods (manufactured items, food etc). * Services: revenue from buying & selling services with other countries (financial, airlines etc) * Income: adds wages from residents working abroad, subtracts foreign workers wages. adds profits & dividends sent back by firms abroad, subtracts these leaving the country. * Transfers: Aid sent & received between governments, taxes/payments to/from E.U. etc

Key terms * Visible Trade: trade in physical items - ones you can touch. * Invisible Trade: trade in services - things you can’t touch. * Balance of Trade Surplus: visible trade exports greater than imports * Balance of Trade Deficit: visible trade imports greater than exports * Balance of Payments Surplus: value of the combined accounts is positive * Balance of Payments Deficit: value of combined accounts is negative

We can import products more cheaply than we can make them.

USA

We need to sell loads of $s in exchange for yuan so we can buy the stuff.

Our BOT account is looking bad with all these imports

If we keep our currency value low - we can boost our exports with cheap products to the USA

China

We’ve now got loads of $s - lets invest it in USA debt (Government bonds)

...but our BOP account looks OK due to China buying our bonds with $s.


We have financed much of the USAs consumption through lending them money.

Specialization Why Specialize? * If countries focus on producing what they are best at & then trade with other countries for the products they need, it should result in all the countries having more goods & services to share in total.

Absolute Advantage * This is the ability of a country to produce more of a certain good than other countries can with the same amount of resources. * Therefore countries should specialise in what they have an absolute advantage in & then trade.

Comparative Advantage * This occurs when a country does not have an absolute advantage in the production of anything. * In this case it makes sense for it to specialise in producing the item in which it is most efficient. * Other countries should produce the items they have the most advantage in & through trade everybody should end up better off.

Protectionism Why use Protectionist Measures? * Protectionism is used to reduce the level of imports and help boost exports (BoT). * It may also be used in retaliation to measures adopted by other countries. * In some cases embargoes may be used to make a country change its ways.

Methods of Protectionism * Quotas: limits on the number of certain products that can be imported. * Tariffs: taxes placed on imports to make them more expensive. * Subsidies: money given by the government to attract firms or make them more competitive (through the equavaent of lowering their costs). * Embargoes: Bans on the import of products from a certain country.

Benefits and Problems of Protectionist Measures * Countries may use protectionism to help new domestic industries grow. They do this since new industries are unlikely to be able to compete with established foreign firms that are benefitting from economies of scale. When these industries are established the protectionist measures should be removed. * Protectionism can harm economies in the long run since it allows industries to operate inefficiently yet remain competitive, but when the protective measures are removed they are likely to fail. * Protectionism also distorts absolute and comparative advantage since some industries may remain competitive because they are being protected. It can be argued that a country may be better off allowing these industries to fail and concentrating on the ones that they have an advantage in.
