Economic Lens

Absolute advantage

is the ability to carry out an activity with fewer resources than someone else. Relative wage

Comparative advantage

is having a lower opportunity cost of carrying out an activity than someone else. Trade pattern

Internal Economies of Scale:

The average cost of production depends on the size of the firm. As the firm grows, it can reduce costs per unit through factors like specialisation, bulk buying, and spreading fixed costs.

External Economies of Scale:

The average cost of production depends on the size of the industry. Cost reductions occur because the industry’s growth improves infrastructure,develops specialised suppliers, and knowledge sharing.

Industry clusters

when external economies of scale exist, many small

firms often cluster in one location, benefiting from shared resources,

specialised labour, and knowledge spillovers.

Gross Domestic Product (GDP)

The size of an economy is typically measured by the total production of goods and services in the economy in a given period

GDP = C + I + G + (X – M)

Expenditure approach

Production approach

Value added = Value of output – Value of intermediate inputs.

Income approach

how income generated from production is distributed across

factors of production by taking the sum.

Nominal GDP

-Measured using current prices

• Reflects changes in both output and prices

• Not adjusted for inflation or deflation

Real GDP

-Measured using constant prices

• Adjusted for inflation or deflation

• Reflects changes in the quantity of goods and services produced

Provides a more accurate measure of economic growth over time.

GDP per capita

GDP divided by population

Real GDP per capita

Real GDP divided by population

Long-run Economic Growth

growth underpins rising living standards and geopolitical power. fiscal and monetary policies: Creates a steady environment for long-term growth.

Unemployment

share of the labour force that is unemployed.

Unemployed/ labour force

Unemployment Rate

Economic Inequality

how income and wealth are distributed across individuals and countries.

Growth Rates

few percentage points in growth can mean massively different living

standards, tax revenue, and job opportunities over time.

The Solow-Swan Model

economic growth model that uses a

production function to determine the long-term growth path of an

economy – explains long-term economic growth and changes in

aggregate production.

Aggregate Production Function

𝒀= 𝑨 × 𝑲^𝜶 × (𝒉 × 𝑳) ^𝟏−𝜶

development accounting

uses a production function to account for (explain) difference income across countries

Business Cycle

depicts the rise and fall in output overtime

boom

strong economic expansion

recession

output has fallen for a period of time

depression

a very severe recession

The Income-Expenditure Model

Modelling changes in income (𝒀𝒀) helps businesses anticipate

economic trends/changes in the economy.

Multiplier Effect

the initial spending stimulates demand, which in turn generates income for others who then spend a portion of it, creating a ripple of additional spending throughout the economy.

Aggregate Demand

the total demand for goods and services in the economy.

Hand-to-Mouth Households

consuming most or all of any additional current income.

Marginal Propensity to Consume

fraction of each additional dollar of income that households spend rather than save

Fiscal Policy

use of government expenditure and tax policy to influence aggregate demand and reduce economic fluctuations.

Inflation

A sustained increase in the level of prices of the goods and services households typically buy.

Inflation Target

If demand grows faster than the economy’s productive capacity,

firms may not be able to increase output enough to meet

demand.