Economics IGCSE Macroeconomics (paper 2)

Definition of economic growth

increase in level of output and national income

4 stages of the economic cycle + definitions

1. Boom: fast GDP growth, firms expanding, demand rises, unemployment decreases, wages rise, but PRICES RISE (inflation as a result of economic growth)

2. Downturn: economic growth begins to slow, demand falls, unemployment begins to rise+ profits may fall

3. Recession: period of economic decline, identified by fall in GDP for 6 months (2 consecutive quarters): poverty, demand falls, wages, unemployment, business confidence falls

4. Recovery: GDP rise again — business and consumer confidence, economic activity

GDP definition

Gross domestic product: a measure of a country’s output yearly; value of all g/s produced

Limitations of GDP as a measure of economic growth

(7)

1. Living standards

2. Inflation can be misleading

3. Statistical errors

4. Value of home produced goods

5. Hidden economy

6. External costs

7. Population changes

Economic growth impacts (6)

1. Employed: derived demand — increase and expand = need more jobs

2. Standard of living: more income, afford luxury goods leisure time, healthier diets

3. Poverty: more jobs and stable income—more tax revenue for healthcare and education, welfare benefits

4. Productive potential: economic growth will increase

5. Inflation: grow too fast lead to inflation

6. Environment: more production, afford cars, flights,==pollution

Inflation definition

A general rise in prices, measured using the consumer price index

Demand pull inflation

Caused by increase in consumer spending (demand); a result of tax cuts, low interest rates, gov spending

Cost push inflation

Caused by rising business costs, leading to higher prices to protect profit margins

Impacts of inflation

(8)

1. Prices increase: reduces purchasing power of money—SOL

2. Wages increase: as prices rise, need to negotiate, strikes, but may pass off as higher prices: furthering inflation

3. Exports: costs of exports increase, reduced demand, less jobs if less demand: derived, fall in BOP

4. Unemployment: decrease, as caused by demand pull, need more workers to meet demand: but longer term might decrease due to higher wages and less consumer/business confidence—replace with machinery

5. “Menu costs”: costs of updating prices, websites, ads, menus etc

6. “Shoe leather” costs: cost to consumers for searching for better alternatives/prices

7. Uncertainty: investing, prices rise, long-term contracts risk

8. Business/consumer confidence: may wait for decrease in prices, stop expansion prices, economic growth slows

Interest rates definition

price payed to lenders (usually banks) for borrowing money)

How do interest rates control inflation

When interest rates are low: borrowing money is cheaper so more consumers borrow money—increases money supply in the economy, causing demand pull inflation

So

During inflation, gov increases interest rates and decrease lending

Unemployment definition

When people actively seeking work are unable to find a job, measured by the ILO (international labour organisation)

Types of unemployment

(5)

1. Cyclical—follows economic cycle

2. Structural—changes in structure of economy

   • A, sectorial: industry in decline.

   • B, technological: replaced by machines

   • C, Regional: certain regions have less employment than others, industry in that region declined

3. Seasonal: industry only popular in certain seasons, made redundant outside of these periods

4. Voluntary: choosing not to work; may be not prepared, wages too low, don’t want to work in general

5. Frictional: short term unemployment, when moving in between jobs (considered normal unless over 2 months)

Impacts of unemployment

(7)

1. Output: when resources not fully employed, output decreases and GDP lower, but NOT if caused by replacement machinery

2. Use of resources: people out of work don’t contribute to production= waste of resources and lower GDP

3. Poverty: no income, other than benefits, will face financial difficulties and poverty

4. Tax revenue: decreases, less income tax and spending (sales tax, public services)

5. Consumer/business confidence: loss of jobs, spend less, less demand, derived demand, redundant — workers worried about job loss and demotivated as well

6. Society: run down regions, can’t maintain costs, stress, health, divorce, crime illegal methods to gain money

7. Gov opportunity cost: benefit spending

Visible trade

Buying/selling physical goods

Invisible trade

Buying/selling services

Impact of exchange rates on BOP

S—strong

P—pound/currency, means

I—imports

C—cheap, and

E—exports are

E—expensive

Which results in deficit, more imports than exports

Impact of CA on exchange rates

Country has surplus bc of high demand for exports, need more of that country’s currency= currency appreciates (more expensive), show on diagram

Reasons for CA deficits/surplus

(5)

1. Quality of domestic good: high demand and reputation

2. Quality of foreign good: comparison to domestic

3. Price of domestic

4. Price of foreign

5. Exchange rates

Impact of CA deficit

(4)

1. Leakages from the economy: dep. on imports, money flow to foreign businesses= leakage

2. Inflation: prices of imports increase (high demand), counted by CPI

3. Low demand for exports (cause of deficit—derived demand)

4. Fund the deficit: more reliant=more imports, buy w foreign currency—low foreign currency reserves, need to borrow= DEBT

income inequality definition

Differences that exist between diff groups of earners in society/gap between rich and poor

Absolute poverty definition

Do not have enough resources to meet all basic human needs, like healthcare

Relative poverty definition

Poverty defined in standards of living lower than typical

Reasons to reduce poverty/inequality

(3)

1. Meet basic human needs

2. Raise living standards: more educated, boost economic growth, employment, tax revenue

3. Ethical reasons: moral duty for gov and public to help reduce poverty and income gap

The diff Gov intervention on income inequality

1. Progressive taxation: proportion of income tax rises and income rises

2. Redistribution through benefits

3. Investment in education and healthcare

Benefits and drawbacks of progressive taxation

(As gov intervention on income inequality)

1. More gov revenue for spending on healthcare, education, benefits

2. Low income work lower tax, encourages people to join workforce

1. Unpopular decision amongst the rich, may cause to move to another country with less income tax

2. Depends on the use of revenue, eg; military spending won’t impact poverty

Benefits and drawbacks of redistribution through benefits

(As gov intervention on income inequality)

1. Ensures people have an income

2. Single parents can afford childcare and go back to work, support children, etc

1. Decreases incentive to work

2. Opportunity cost

Benefits and drawbacks of investment in education and healthcare as means to reduce income inequality

1. More skills/qualifications, more employment

2. Learn life skills, diseases, financial literacy

3. Provides jobs for teachers, doctors, cleaners

1. OPP cost

2. Funds for healthcare/edu might not be enough in developing currency

Monetary policy definition

Use of interest rates to control inflation by central banks

Interest rate (decreasing) effects on consumers

(3)

1. Demands for loans rise, More likely to borrow money as cheaper

2. Mortgage payments fall — more disposable income— inc aggregate demand

3. Incentive to save decreases, AD rises

Interest rate (decreasing) effects on businesses

(3)

1. Loan payments will fall—lower costs and higher profits

2. Higher confidence—due to higher demand

3. Exchange rates fall— imports more expensive, more demand for domestic firms

Interest rate (decreasing) effects on macro-economic objectives

1. Inflation—demand pull inflation

2. Unemployment—increase demand and spending, firms produce more, need more employees

3. Economic growth—dep. on economic cycle; consumer spending

4. Current account balance: appreciation/depreciation, but depends on PED, YED, exchange rates

Quantitative easing

To control money supply, involves Central bank, buying financial assets, gov bonds, so they have more money to offer loans to consumers/businesses which will increase consumer/business spending and AD

Aggregate demand formula

AD= consumption, investment, government spending, and net exports.

Fiscal policy

Adjusting levels of gov expenditure and taxation to influence AD in the economy

Different tax types and examples

(3)

1. Direct

   • income

   • Social insurance

   • Cooperation

   • Capital gains

   • Inheritance

2. Indirect

   • sales

   • Duties

   • Customs

   • Stamp duties

3. Environmental

   • landfill tax

   • Climate change levies

   • Aggregates levy

Different fiscal policies

(2)

1. Expansionary: low taxes, high gov spending to increase AD

2. Contractionary: tax more and lower gov spending, reduces inflation

Fiscal policies impacts on macro-economic objectives

1. Inflation: AD grows too quickly from EFP, can use CFP to slow

2. Economic growth: EFP more

3. Unemployment: EFP reduces, from derived demand

4. CA BOP: CFP reduce deficit, less income—less imports

5. Environment: higher environmental taxes De incentivise

Globalisation definition

Increased integration and interdependence of economies

reasons for globalisation

(4)

1. Reduced communication costs: online meetings, internet

2. Reduced cost of transport: meetings, shipping, flights, e-commerce

3. Fewer tariffs and quotas

4. Increased significance of MNCs

Impacts of globalisation on individual countries

(3 good 1 bad)

1. Provide employment: running factories to supply the MNCs—SOL

2. Increase output: MNC output measured as export in host

3. Bring new technology and training

1. Become too dependent on another country + can be impacted by events there

Impact of globalisation on governments

(2 good)

1. MNCs pay cooperation tax—tax revenue

2. Other businesses open up to supply MNC businesses, housing, mats, employment

Impact of globalisation on producers/firms

(4)

1. Access to larger markets overseas

2. Lower costs: larger firm benefit from EoS

3. Employ from other countries, better trained or cheaper

4. Reduced taxes: can operate in country with low cooperation taxes

impact of globalisation on consumers

(3)

1. Lower prices —all firms

2. More choice/variety

3. Foreign holidays

Impact of globalisation on workers

(2 good 1 bad)

1. More job OPP in other countries

2. Gain new skills: more employable

1. Workers lose jobs = offshoring, company relocation

Impact of globalisation on environment

1. Flights, shipping, oil spills, fuel emissions

2. Global economic growth also leads to environment damage

MNC and FDI definition

1. Companies that sell goods and services into global markets and production plants all over the world

2. An investment that is made by a business in a country into another (not literal money, more like building factories or setting up an office)

Reasons for emergence of MNCs

(4)

1. Benefit from EoS: sells to more geographical markets—larger

2. Lower transport/communication costs

3. Access to customers in diff regions —more sales

4. Access to natural resources/cheaper labour

How host countries attract MNCss

(4)

1. Offer tax breaks/subsidise firms to operate in host

2. Lift restrictions and regulations to MNCs

3. Invest in infrastructure to attract foreign firms

4. Invest in education — more employable and trained workers

Free trade definition

When goods moving in and out of a country aren’t restricted by taxes or quotas

Benefits of free trade

(4)

1. Increased choice

2. Lower prices

3. Lower input costs (business cost production)

4. Selling to other countries — more potential sales

Drawbacks of free trade

(2)

1. Competition for domestic firms

2. Unemployment

Protectionism definition

An approach used by a gov to protect domestic firms

Protectionism reasons

(7)

1. Prevent dumping

2. Protect employment

3. Protect infant industries

4. Tariff revenue

5. Retaliation

6. Prevent entry of unwanted or harmful goods

7. Reduce current account deficit

methods of protectionism

1. Quotas

2. Taxes

3. Subsidies

Quotas as a method of protectionism

(2 good 2 bad)

1. Protect employment

2. Reduce current account deficit

1. Limit choice

2. Price of good

3. Overprotect; not efficient

Taxes as a method of protectionism

(3 good 2 bad)

1. Protect employment

2. Reduce CA deficit

3. Tax revenue

1. If too high stops completely so no revenue

2. Imports more expensive

Subsidies as a method of protectionism

(3 good 2 bad)

1. Lower costs of business, protect employment and increase sales

2. CA deficit

3. More new domestic producers to enter the market

1. OPP cost

2. Cause retaliation

Trade blocs definition

Groups of countries in same region join together and enjoy free trade

Benefits of trade blocs to members

(4)

1. Businesses access to wider markets

2. More choice

3. Lower prices

4. Extra competition: choice, innovation, prices, quality

Drawbacks of trade blocs to members

(4)

1. Pay members fee= OPP cost

2. Merging of firms within trade blocs cause monopoly power and higher prices

3. Too reliant on bloc= miss opps in other global markets

4. Inefficient: too protected by bloc and result= extra/unnecessary costs

impact (drawback) of trade bloc on non members

—high trade barriers to bloc member countries when selling

Supply side policy definition

Policies designed to increase the productive capacity of the economy by influencing aggregate supply

Supply side policy impact on productivity

(4)

1. Improve flexibility —introducing legislation to weaken powerful trade unions, so less strikes/complaints so less disruption when new working practices/tech is introduced

2. Training and education

3. Investment from firms on machinery/tech

4. Privatisation and deregulation— more competitive markets // more efficient

Supply side on total output/ productive potential

PPC shift outwards bc productive capacity increase ,

Deregulation definition

Removal of government controls

Policies to reduce regional unemployment

• encouraging firms to open up—tax breaks, subsidies, covering relocation costs

• Transport to improve geographical mobility of labour

• Education and training

• Lower business/income tax

Infrastructure spending for supply side

• Transport to improve geographical mobility of labour

• Education and training

• Healthcare

• Broadband speed—online working efficiency