Economics is a social science that deals with the allocation of scarce resources

The economy is a mechanism where scare resources are organized for production, distribution and
consumption.

The four factors of production and the revenue they produce are

1. Land- rent
2. Labour- wages
3. Capital- interest
4. Enterprise – profit

The household makes the decisions and they are the consumers

The firm creates goods and get resources from the household

The government provides a framework of rules for the firm and government

Needs are goods and services that are necessary for life

Wants are goods or services that are not necessary for life but is a luxury good.

The market is the interaction between buyers and sellers

DEMAND

1. Quantities of a product that consumers are willing to pay for at certain prices
2. The amount of goods sellers will sell at a given price
3. Ceteris paribus (when everything is constant or equal)

Demand refers to the demand and supply of a good or service

If willing to but yet unable to buy, demand is ineffective

Law of demand

Prices increase, Qd decreases (contraction)

Price decrease, Qd increases (expansion

The demand curve is downward shaping

Change in Qd:

1. Change in price of the good itself

2. Causes a movement along the curve
3. Factors that affect Qd:
a. Income
b. Taste and desires
c. Time of the year

Changes in demand:

1. Non price factors

 2. Determinants of demand
3. Seasonal factors
4. Causes a shift

SUBSITUTE GOODS

Goods that are in competing demand

If price of good 1 raises, the demand of the other good raises

They have an inverse relationship

COMPLEMENTARY GOODS

price of good 1 raises, demand for good 2 falls

SUPPLY CURVE

Change in Qs

1. Change in supply price

2. Change in price of the good itself
3. Causes a movement along the curve

Change in supply:

1. Caused by things the firm cant control eg covid

2. Causes a shift
3. Technology
4. Cost of raw materials
5. Cost of production
TYPES OF ECONOMIES
 PRODUCTION POSSIBILITY FRONTIER

This graph shows the amount of two goods an economy is able to produce with fixed resources.

Assumptions:

1. The economy only produces two goods

2. Resources are fixed
3. Variable factor proportions

A-C= efficient points

X= inefficient

Y= unattainable

opportunity cost is defined as the next best alternative forgone

Money cost is defined as the amount actually paid for the input of a good or service

Factors that may cause an outward shift in the ppf

1. Discovery of new resources

2. New technology
3. Population growth
4. Economic growth
5. Improvements in labour
 FACTORS OF PRODUCTION

Land-

Natural resources that are geographically immobile, fixed in supply and has no production cost

1. Above ground
2. Underground
3. Sea
4. Air
5. Fixed in supply
6. Cannot be moved
7. No cost of production

Labor-

The amount of people willing to work in an economy

1. Little or no unemployment
2. Refers to the workforce
3. Produces wages and has a cost of production

Capital-

1. Refers to goods that are used to produce other goods

2. Movable
3. Units of the same type of capital are homogeneous
4. There are different types of capitals-
a. Working capital- now and intermediate goods
b. Fixed capital- factories and machinery
c. Social capital- services that are provided to the government eg roads, schools, hospitals
d. Human capital- consists of peoples abilities, knowledge and skill
5. Capital foundation- the increase of capital stock of a country

Enterprise-

1. This is when the previous three factors of production are combined to make a profit
 EQUILIBRIUM

This is where the market clears

At a lower price, supply will be lower and demand will be higher

INCREASE IN INCOME

1. Demand will raise

2. Curve shifts to the right

DECREASE IN INCOME

1. Demand will fall

2. Curve shifts to the left

SUPPLY INCREASES

1. Price will increase

2. Quantity increases
3. Shifts to the right

SUPPLY DECREASES

1. Causes shift to the left

2. Price increases
3. Quantity decreases

DEMAND INCREASES

1. Shifts to the right

2. Quantity inceases
3. Price increases

DEMAND DECREASES

1. Causes shift to the left

2. Price decreases
3. Quantity decreases

Non price factors of determinant of supply

1. Cost of production
2. Availability of raw materials

Non price factors of determinant of demand

1. Income
2. Taste/preference
 ELASTICITY

Elasticity refers to the responsiveness to change in price of Qd or Qs

Determinants of elasticity of demand:

1. Change in price
2. Income

Formula for percent:

(End value – start value) / start value x 100

Formula for elasticity:

% change in Qd / % change in price

Elasticities:

Elasticities of demand- how consumers react to change in price of a good

Elasticities of supply- how sellers react to change in price of a good

Elasticities of income- how consumers react to change in price of their own salary

Normal good: as your income increases, demand for the good goes up (eg steak)

Inferior good: as your increase goes up, demand for the good goes down (eg classic cola)
 ECONOMIES AND DISECONOMIES OF SCALE

Variable cost- raw materials

Fixed cost- rent/wages

Economies of scale- the cost advantage acquired by a firm when the output increases. This reduces the
average cost of producing a product.

There are two types of EoS:

1. Internal EoS- cost advantages that arise due to the expansion within the firm
a. Technical EoS- larger business benefits from automated machines
b. Managerial EoS- larger firms employ professionals while smaller businesses will have the
owner take charge of all the aspects of the house
c. Marketing EoS- placing ads can increase sales. If a large business sells more, cost will be
cheaper
d. Purchasing EoS- buying product in greater quantity
e. Financial EoS- large businesses can obtain loans easier than smaller businesses due to
having more assets and banks would loan to larger businesses at a cheaper interest rate.

2. External EoS- cost advantages that arise due to the expansion within the whole industry and ir
benefits all firms in the industry

Diseconomies of Scale- cost disadvantages that arise when the output increases too much.

There are two types of DoS:

1. Internal DoS
a. The disadvantages that arise from the expansion within the firm itself that lead to the
increase of the average cost of production. There are three major disadvantages
i. Poor communication
ii. Poor motivation of workers
iii. Poor coordination
2. External DoS
a. The disadvantages that arise from the expansion within the industry that lead to the
increase of ATC. There are three major disadvantages
i. Higher wages due to the demand for skilled jobs
ii. Increased competition for labor
iii. Reduced productivity
 PRODUCTION FUNCTION

we assume that any firms goal is to maximize economic profit

Profit= total revenue – total cost

Total revenue- the amount a firm receives from the sale of its output TR= price x quantity

TC= total fixed cost + total variable cost

TC- the market value of all the inputs a firm uses in produ ction

Production function is the relationship between :

1. Quantity of inputs used to make a food

2. The quantity of output of that good
3. Gets flatter as production rises

Marginal cost

Increase I total cost arising from an extra unit in production such as an additional unit of output

Marginal cost = Change in total cost ÷ change in quantity

 MARKET STRUCTURE

A market structure is defined as the factors that determine the behavior and performance of firms in the
industry

A market structure consists of

1. Monopolistic competition
2. Oligopoly
3. Monopoly
4. Duopoly
5. Perfect competition
6. Perfect knowledge

PERFECT COMPETITION

This is a market structure where there are many sellers and many buyers producing a homogenous
product. A new firm can enter the industry and start selling at any time. Note that ‘perfect competition’
is a theoretical concept.

Homogenous product- a product that cannot be distinguished from other products by different suppliers.
In perfect competition it can be easily substituted.

Free entry and exit- this is a situation where no industry dominates the market. It is where the industrial
firm has no market power.

Price taken- no firm can influence price

Perfect knowledge- every consumer is aware of all features of the product.

Monopoly- a market where only one firm dominates the market and many buyers are present.

Market failure- this is when the QD ≠ QS

 MONOPOLY

Features of a monopoly:

1. One supplier
2. Hard to enter the market
3. No competition
4. Controls price

Monopolistic competition:

1. Large number of firms

2. Product differentiation
3. Product variation
4. Heavy expenditure on ads and other cost
5. Some control over price
6. Free entry and exit

OLIGOPOLY

This is where few firms compete in a market

Features:

1. Interdependencies
2. Adventuring
3. Competition
4. Entry or exit barriers
5. Lack of uniformity
6. Few sellers
7. Oligopolies will collude with other firms to maximize profits

Price Rigidity- where the price of an item does not change over a long time

xx
 MARKET FAILURE

This is where the market mechanism fails to allocate resources efficiently.

Social-external costs and benefits are accounted for

Allocative- society produces goods at a minimum cost that are wanted by consumers

Productive- productions at the lowest factor cost.

Technical- production of goods and services uses the minimum amount of resources

CAUSES OF MARKET FAILURE:

1. Imperfect knowledge (ignorance):

a. Consumers do not have adequate technical knowledge
b. Advertising can be misleading
c. Producers are unaware of opportunities
d. Producers cannot measure productivity
e. Decisions are often based on past experiences rather than future knowledge

2. Differentiated goods and services:

a. Branding
b. Designer labels. Is the quality good for the given price?
c. Technology. Lack of understanding of the impact
d. Labelling and product information

3. Resource immobility:
a. Factors are not fully mobile
b. Labor immobility – geographical and occupation
c. Capital immobility
d. Land- cannot be moved to where it might be needed eg- London to South East

4. Market Power:
a. Existence of monopolies and oligopolies
i. Collusion
b. Price fixing
c. Abnormal profits
d. Rigging of markets
e. Barriers to entry
5. Inadequate provision:
a. Merit goods- a beneficial good that is provided by the market but consumers do not feel
the need to purchase it and the market would not provide them in the quantity society
needs

6. Existence of external costs and benefits

7. Inequality exists
 TERM 4

Public good-

1. a good or service that is provided to everyone by the government

2. non excludability- goods or products that everyone can use eg roads
3. free riders- consumers that use goods or services without paying for it
4. price of the good must be equal to the marginal cost

Merit good-

1. goods for which the social benefits of the community of the consumption of the good far
outweighs the private benefits of the consumer
2. society under consumers merit goods while over consuming demerit goods

Demerit good- a harmful good that is provided to everyone by the government but most people buy it eg
alcohol.

Externalities- problems caused by the consumers to other people. When there are positive and negative
externalities the market fails.

Markets also fail because of monopolies

 allocative efficiency is when price is equal to marginal cost

 monopolies sell where price is greater than marginal cost.

CAUSES RESULT
Public goods ‘missing market’ at zero price
Merit goods Underproduction
Negative externalities Overproduction
Positive externalities Underproduction
Monopoly overproduction
Consequences of Market failure:

1. retrenchment
2. unemployment
3. economic depression
4. a rise in the poverty levels
5. a decline in provision for social welfare

retrenchment is when workers lose jobs due to the declining activity of a firm

unemployment is when workers are laid off and are unable to find jobs but have been actively searching
for a job for over 4 weeks.

Economic depression is when there is falling output in the economy and rising unemployment

Increase in poverty is when people are out of jobs but public goods are produced in insufficient
quantities but very high prices.
 THE FINANCIAL SECTOR

Mechanism that brings together lenders and borrowers

This is a network of formal and informal, savers, investors and financial institutions that work to transfer
the money saved by people to investors (the bank).

This sector comprises of banks, investment companies, insurance companies, real estate firms and credit
unions.

 The financial sector organizes the financial markets that operate within it. Savers lend this
money and borrows from investors that use this money. The rework that savers get is called their
interest and this is also the money that people pay to borrow money.
 The financial sector ensures that people who are borrowing pay a rate that is profitable to
leaders. The financial sector works to increase consumption and investment in the economy.

FEATURES OF MONEY

Money has to be:

1. Identical
2. Divisible into smaller units
3. Portable
4. Legal tender (must be obliged to accept in debt)
5. Acceptable
6. Durable
7. Relatively scarce

Money is a type of flat currency that can be obtained through labor and defines a persons worth in the
economy and can be used to trade and buy goods

Money- any commodity which is widely acceptable as a means of settling bills or that facilitates in the
exchange of goods and services.

Functions of money: (SUMS)

1. Store of value
2. Unit of account
3. Medium of exchange
4. Standard of deferred payment
Store of value- money can be saved for later use or money can be stored as real estate, jewelry or
paintings.

Unit of account- money is a measure of value. All goods and services can be given prices in terms of
money. It is not necessary

Medium of exchange- it is acceptable as a means of payment for goods and services

Standard of deferred payment: in the modern economy, a consumer might buy a goods today and derive
satisfaction consuming it now but can pay for it in the future. This can be called down payment.

M1: narrow money

1. Notes and coins
2. Cheque deposits
3. Travelers cheques

M2- broad money

1. M1
2. Saving deposits
3. Money market account

Functions of the financial sector:

 It attracts funds from businesses and private individuals.

 It affords these businesses and private individuals an opportunity to earn interest on their idle
money balancezx
 It provides the government/ private sector with a source of funds for investment purposes.
 EXPENDITURE

 Capital expenditure- spending money on capital goods such as roads, schools and government
 Current expenditure- spending money on goods for present consumption and salary for
government workers
 Transfer payments- payments that people get that they don’t have to work for example pension
 Leakages-incomes of households and firms that is not passed on in the flow of income
 Savings- income that is not consumed.
 Disposable income- total personal income minus tax
 Injections- additions to the flow of income

GDP (gross domestic product)

The total market value of the final good and services produced within a country over a given
period of time.

Y = C + I + G (X-M)

Y= national income

C= consumption

I=investment

G=government expenditure

X=exports

M= imports

National income is the measure of economic activity in the economy

Formula for leakages=

W=S+T+M

W=withdrawals

S= savings

T= taxes

M=imports
Formula for injections

J=I+G+X

J=injections

I=investments

G=government spendings

X=exports
 MACROECONOMICS

Macroeconomics is the study of the economy as a whole rather than an induvial market or firm.

There are four goals:

1. Prices are stable

2. Unemployment is minimal
3. There is economic growth in the economy
4. There is balance of payment equilibrium

Inflation is the permanent increase in price of goods and services.

Imports are usually cheaper than local goods

Fiscal policy- the use of government spending and taxation to control aggregation in the economy

Monetary policy- the use of interest rates and other direct measures to control the money supply and
aggregate demand in the economy

Reflationary monetary policy- monetary policies that increases the monetary supply and controls
aggregate demand is called reflationary

These policies include:

1. Reducing interest rates- when interest rates fall, individuals save less and spend more. They
borrow money to make purchases. This increases money supply in the economy

2. Improving the availability of credit by decreasing the down payment needed and increasing
repayment periods on loans.

3. Open market operations- the buying and selling of government securities like bonds and
treasury bills on the open market. When someone buys these, the government lends them
money which increases the money supply.

4. Reducing the required reserve ratio- the lower the reserve requirement of deposits to reserves
of a bank, the more banks can lend to consumers, increasing the money supply

Deflationary monetary supply- measures to decrease the money supply

1. Increasing interest rates- when interest rates rise, individuals save more and spend less,
decreasing the money supply
2. Making credit less accessible- increasing down payment and decreasing the repayment period
on loans thus decreasing the money supply
 3. Open market operations- when the government sells securities to consumers, the consumers
give the government money, thus decreasing the money supply
4. Increasing the required reserve ratio- the higher the reserve requirement, the less money the
bank can lend, thus decreasing the money supply

Reflationary fiscal policy- the government increases their spending and reduces taxes, this increasing
aggregate demand.

Deflationary fiscal policy- when the government decreases their spending and increases taxes, this
decreases aggregate demand.
 UNEMPLOYMENT AND LABOR FORCE

Employed: those who are self employed, paid employees and unpaid workers in a family business

Unemployed: those who have been actively searching for a job for the past 4 week and cannot find
one due to lack of available jobs or not meeting the requirements to get a job.

Not in the labor force: everyone else

Labor force: employed + unemployed

The u rate is not an accurate measurer because

1. It excludes discouraged workers

2. Does not distinguish between part time or full time work
3. Some people misreport their work status

Natural rate of unemployment- the normal rate of unemployment around which the actual
unemployment rate fluctuates

Cyclical unemployment- deviation of unemployment from its natural rate and associated with business
cycles

There are two types of unemployment

1. Frictional unemployment-
a. occurs when workers spend time searching for the jobs that best suit their skill and
tastes
b. Short term for most workers
2. Structural unemployment-
a. Occurs when there are fewer jobs than workers
b. Usually long term
 CONSUMER PRICE INDEX

The CPI measures the typical consumers cost of living. It measures the overall cost of goods and services
bought by the average consumer. It is computed every month by the bureau of labor statistics.

CALCULATING CPI

1. Fix the basket- the BLS surveys consumers to determine whats in the typical consumers shopping
basket
2. Find the prices
3. Compute the inflation rate by
 INFLATION

Demand pull inflation- caused by an increase in the demand in the economy

Cost pull inflation- caused by the increase in price of factors of production

Import inflation- caused by when firms have to import scarce products from other countries at a high
price

In order to get rid of fiscal policy inflation, you must raise taxes and decrease government spending

In order to get rid of monetary policy, you must decrease the money supply and increase the interest
rate.

UNEMPLOYMENT

There are multiple types of unemployment:

1. Frictional unemployment - this is when the person looking for a job is occupationally or
geographically immobile.
2. Search unemployment - this is when the person looking for a job declines one offer for an offer
that offers a higher pay
3. Seasonal unemployment- some people have jobs at only certain times of the year
4. Structural unemployment- this occurs when there is a change in the structure of an industry. Can
also arise for falling demand for an export
5. Technological unemployment- when there are technological advancements in an industry and
the capital to fire people
6. Cyclical unemployment- the fall in aggregate demand in the economy. Called the Keynesian
unemployment
7. Real wage unemployment- when the trade unions succeed in raising the wage rate above
equilibrium level

Possible benefits of unemployment:

1. People have time to do extra training or pursue their hobbies

2. People can do retraining in a specific job area
3. Reduces cost push inflation
4. Means the labour market is a buyers market

Possible cons of unemployment

1. They do not have the economic means to enjoy a good quality of life
2. Might be depressed
3. When people are unemployed for a long time, it erodes the quality of human capital
4. Unemployment means that society isn’t using all its resources to produce goods and services
Measures to reduce each type of unemployment:

1. Retraining programmes will aid those who are occupationally immobile and frictionally,
structurally and seasonally employed.
2. Government projects such as housing developments, schools etc will reduce frictional
unemployment
3. job centers and more advertising of available jobs will reduce frictional and search
unemployment.
4. Reflationary fiscal policy will reduce seasonal, structural and cyclical unemployment. The
workers will receive a wage that part of it is spent and so aggregate demand in the economy
increases.
 TRADE UNIONS

A trade union is an association of workers of the same job and employer who have come together to
protect and seek the interests of all the members.

Types of trade unions:

1. General unions- membership is open to all types of workers

2. Craft unions- workers who have the same skills
3. Industrial unions-most of the workers are from a particular industry
4. Tertiary sector- a growing part of the population works in this sector
5. White collar unions- caters to the needs of this group of workers. Eg teachers and nurses

Goods market- firms sell goods and services

Factor market- household sells factor services (factors of production)

Closed shop- all employees in a given workplace must belong to a specific union

Demarcation- where tasks can be done only be members of a particular unions

Collective bargaining-the process by which trade union official met with employers to negotiate for
higher wages and better terms and conditions of work.

Industrial unrest-activities taken by workers to protest against pay or terms and conditions of work. This
can take many forms such as:

1. Strikes- a work stoppage caused by the mass refusal to work

2. Sit in- one or more person non violently occupying a area for protest
3. Sit down strike-A sit-down strike involves workers on strike occupying the area in which they
would be working, and refusing to leave so they cannot be replaced with other labour.
4. Slow down- workers work as normal but do work more slowly, reducing productivity
5. Work-to-rule- where workers follow the rules set out to the letter, therefore reducing
productivity
6. Sabotage- when a worker destroys company property. This is illegal
7. Lockout- when an employer locks entrances to prevent employees from entering

THE ROLE OF TRADE UNIONS IN A FREE MARKET ECONOMY

1. Trade unions secure higher wages for their members

2. Trade unions secure improved terms and conditions of employment
3. Trade unions can hold training sessions for workers
4. Trade unions ensure that there is equity of treatment of all workers
5. Trade unions contribute to the development of the country
6. Trade unions can also meet with government
SOME COSTS OF TRADE UNIONS ACTIVITY:

1. By demanding higher wages that do not match productivity, cost push inflation and wages can
increase. So employers increase prices so products remain the same
2. When a trade union succeeds in increasing wages, this might lead to unemployment
3. Trade unions contribute to a fall in economic activity and efficiency and to social disorder when
they engage in protest.
 INTERNATIONAL TRADE

International trade is the exchange of goods and services across international boundaries

Closed economy- one that does not engage in international trade

Open economy- one that does engage in international trade. All economies are open but some are more
open than others

Protectionism- a policy of protecting home industries from foreign competition by the Implosion of trade
barriers on imported goods and services.

Free trade- a policy imposing no restrictions on trade across international borders

ADVANTAGES OF INTERNATIONAL TRADE:

1. It opens up the world as a market for you product

2. Countries now have a larger variety of goods and services and a higher standard of living.
3. With a larger market, firms produce more and grow in size and can benefit from economies of
scale
4. As firms produce more, they become better at producing the goods and can buy machinery to
increase efficiency.
5. As industries grow, output increases and FOP increases. This increases employment
6. As firms have a wider market, they can earn foreign exchange
7. As an industry grows and develops this leads to economic development in the producing
country.
8. International trade allows countries to produce and specialize and produce the goods they are
best suited to produce
9. International trade promotes better international relations among countries

DISADVANTAGES OF TRADE:

1. International trade can make a country dependent upon other countries.

2. International trade exposes domestic firms to foreign competition
3. Many developing countries may trade primary products which may lead to a depletion of
mineral resources.

FACTORS THAT INFLUENCE INTERNATIONAL TRADE:

1. Domestic income levels- higher incomes allow consumers to purchase more products.
2. The exchange rate- the higher the value of the currency, the greater the levels of imports
3. Domestic product prices vs foreign product prices.
4. Quality of domestic goods
5. Social media influencing
6. Tastes of the consumer
 7. Foreign income levels
8. Quality of imported goods

THE THEORY OF ABSOLUTE ADVANTAGE

A country has an absolute advantage if it produces more goods and services compared with other
countries with the same quantity of resources.
THE THEORY OF COMPARATIVE ADVANTAGE

This theory states that a country should specialise in the production of the good in which it has the least
opportunity cost or the greatest advantage. Comparative advantage occurs when a country can produce
a good at the lowest opportunity cost when compared with other countries which have the same
resources.

TERMS OF TRADE

The ratio of export prices to import prices

GAINS FROM TRADE

The advantages a country makes from a result of trade.

1. Countries differ in climate and factor endowment

2. As countries specialize and increase production, their industries earn economies of scale.
 EXCHANGE RATES

The exchange rate is the rate and which once currency can be exchanged for another countrys currency
in the foreign exchange market. The foreign exchange market is a market that specialises in the sale of
different currencies.

Fixed exchange rate- this is when the government sets the exchange rate

Devaluation-a downward adjustment of the exchange rate.

Revaluation- an upward adjustment of the exchange rate

THE EXCHANGE RATE SYSTEM

The forces of demand and supply operate to determine the value of the currency.

There are three types of foreigners that demand domestic currency:

1. Visitors
2. Those who wish to buy products
3. Those who wish to invest

Depreciation- a fall in the external value of that currency due to changes in the force of demand and/or
supply

Appreciation- a rise in the external value of that currency due to changes in the forces of supply and /or
demand
THE MANAGED EXCHANGE RATE SYSTEM

When the government intervenes in the foreign exchange market to maintain the rate at a certain value
or a range of values through the central bank.

Clean floating- when a currency floats with no interference from the government

Dirty floating- when a currency floats but there is interference from the government.
 BALANCE OF PAYMENTS

the balance of payments is a summary of the payments and receipts of transactions between a country
and the rest of the world for a given period, usually one year.

Deficit- when the outflows are greater than inflows

A deficit might be due to:

1. Increasing demand for imported goods and services

2. Falling demand for local goods and services
3. An increase in holidays taken abroad
4. A decrease in visitors to the country
5. individual and governmental transfers out of the country being greater than those coming in
6. investment incomes being paid out to foreigners being greater than investment incomes coming
into the country
7. a greater value of investments being made abroad by domestic residents than foreign investors
are making in the domestic country\

The impact of a deficit

1. unemployment might increase

2. falling foreign exchange reserves
3. exchange rate depreciation.

Measure to reduce a deficit:

1. reduction of aggregate demand through deflationary monetary and fiscal policy

2. import controls
3. devaluation

Surplus-when inflows are greater than outflows

A surplus might be due to:

1. falling demand for imported goods and services

2. increasing demand by foreigners for locally produced foods and services
3. a decrease in holidays taken abroad
4. an increase in foreign visitors to the country
5. individual and governmental transfers into the country being greater than transfers out
6. investment incomes paid into the country to domestic investors who invested abroad being
greater than those being paid out to foreigners who invested locally.
The impact of a surplus:

1. falling unemployment
2. exchange rate appreciation
3. inflationary pressures

Measures to reduce a balance of payments surplus

1. increasing aggregate demand through reflationary monetary and fiscal policy

2. reduction of import controls
3. revaluation of the currency
 GLOBALIZATION AND TRADE LIBERIZATION

Tariff- a tax on imported goods (import tax)

Non-tariff barriers-

1. quotas- restrictions on the amount for a particular good that can be imported
2. embargoes- an embargo is a total ban on a particular good or a ban on goods from a certain
country
3. exchange control- a limit on the amount of foreign exchange an importer can obtain due to
import goods. Less foreign exchange means the importer imports less foreign goods
4. voluntary export restrictions (VERs)- this is where the exporting country agrees to export fewer
goods to the exporting country in return for the same benefit
5. quality standards- very high quality standards in the importing country can serve to reduce
imports, as fewer developing importing countries will meet the quality standards
6. Bureaucratic red tape- a great deal of paperwork from the importing country and licensing fees
payable by the exporter of the goods serve as deterrents to trade
7. Export subsidies- an export subsidy consists of some kind of assistance given to the firms of an
industry that is importing goods. When the good is exported, the exporter can sell at a lower
price

Preferential tariff- a reduced tariff granted by one country on certain goods from another country.

Reasons why a preferential tariff would be put in place:

1. A developed country might grant a P.T. (preferential tariff) to developing countries to help speed
up development
2. Countries in a integrated economy might grand P.T. to each other. Eg CARICOM, CARIFTA, NAFTA
3. Preferential tariffs might also be put in place for foreign policy reasons. A country might wish to
reward another country with a lower tariff on a given good.

Benefits of the preferential tariff:

1. The exporting country benefits from the lower tariff

2. Preferential tariffs foster stronger trading ties between countries
3. P.T. give developed countries to assist less developed countries

Costs of pt:

1. The more efficient suppliers might have higher taxes placed on their goods
2. Consumers in the importing country do not benefit from the availability of the goods
3. Pt cause other countries not in receipt of the lower tariff rate to become discontented
Trade liberalization- the reduction or even total removal of tariffs

Globalization- the emergence of a single world market facilitated by improved technology and
communications and deregulations.

Drivers of globalization:

1. Leaps in communication technology

2. Improved transportation
3. Trade liberalization
4. Liberalization of the capital markets

Economic and social benefits of large scale production:

1. Producing a larger output will enable small island economies to reap economies of scale
2. There will be a reduction in unemployment
3. There is open competition throughout the world resulting in lower prices and better quality
goods
4. Caribbean people will feel a sense of worth as world citizens

Effects of trade liberalization and globalization on firms in the Caribbean

1. Domestic firms now have to compete with the products of foreign firms
2. There is the rise of multinational corporations
3. Caribbean firms will now have to advertise internationally

Effects of trade liberalization and globalization on consumers in the caribbean:

1. There will be an increased standard of living as consumers now have access to a greater variety
of goods from all over the world
2. The developed countries are exporting artificial wants
3. There is the spread of food culture
4. There is westernization of the world
5. Workers lose jobs as caribbean products are competing with world class products
6. There is an increase in international travel and tourism

Effects of trade liberalization and globalization on the sovereignty of territories in the caribbean:

1. Natural resources may be explored by the multinational cooperations

2. Small industries may close in the caribbean
3. Increasing imports may result in a trade deficit
4. There is an increase in immigration from poor countries to countries with more opportunities
5. Some territories will lose some of the sovereignty as countries integrate
6. National borders are disappearing
 CARIBBEAN ECONOMIES

Caribbean economies are monocrop economies dependent on one export

There is a small market for some goods and services due to the small population

With the exception of Jamaica, Guyana, and Trinidad and Tobago there is no natural resource
endowment

There is a large primary sector in caribbean economies and a large informal sector where economic and
financial economies take place

In some economies, there is insufficient arable land

Economic problems facing caribbean economies:

1. Low per capita gdp

2. Large pool of unskilled labor
3. Little access to technology and use of capital in the production process
4. Large food import bill
5. Large amount of people live under the poverty line. The poverty line is the minimum amount of
income necessary to enjoy an adequate standard of living. Extreme poverty is where people lack
the very basic needs of food clothing and shelter
6. Migration out of skilled professionals
7. Underdeveloped infrastructure hindering economic activity and trade
8. Large debt burden

Development strategies for caribbean economies in a globalized environment:

1. Investment in a human capital

2. Foreign direct investment- the long term investment in a country by an investor from abroad
3. Export led growth
4. Foreign borrowing to promote development
5. Provision of social services such as free education and healthcare to the poor
6. Development of the entrepreneurial class will encourage people to start new businesses.
 ECONOMIC INTEGRATION (CARICOM)

Economic integration- the coming together of national economies to operate as one economy

Trading bloc- a group of nations coming together to trade under a trading agreement

There are four stages of economic integration:

1. Free trade area

a. Countries belong to a FTA have no trade barriers against other member countries
b. each member state determines its own trade policy (and tariffs) towards other countries
of the world
2. customs union
a. no barriers between member states
b. all member states will have a common external tariff with countries outside the customs
union
3. common or single market
a. there are no barriers to trade between a single state
b. external tariff with outside countries
c. free movement of labor and capital between states
d. there are common taxation policies, employment laws, product laws and competition
policies.
4. Economic union
a. No barriers to trade
b. External tariff with outside countries
c. Free movement of capital and labour between states
d. there are common taxation policies, employment laws, product laws and competition
policies.
e. There is common fiscal and monetary policies made bt a centralized body representing
the government of each single state

The CARICOM and single market economy (CSME)

When fully implemented, csme will enable the caribbeans financial, natural and human resources to
come together and develop economic power
CSME features:

1. Free movement of wage earners

2. Free movement of capital, enterprise and ideas
3. Free movement of goods (no tariff from other caribbean economies)
4. Free movement of services
5. The freedom for firms to set up businesses in any member country
6. Free movements of goods imported
7. Common external tariff
8. A common external policy
9. Harmonization of tax laws

Benefits of CSME:

1. Give each country a larger market for its goods and services
2. Enable the people of the region to improve their standard of living
3. Enable the region to improve its standard of work
4. Achieve full employment of labour
5. Expand trade and economic relations
6. Improve levels of international competitiveness
7. Increase production and productivity
8. Increase inflows of new capital
9. Introduce entrepreneurship and technology
10. Create more opportunities for travel, work and study
11. Provide opportunities for companies and individuals to invest in

EXAMPLES OF ECONOMIC INTEGRATION:

1. European union- EU
2. North American free trade agreement- NAFTA
3. Southern common market- MERCOSUR (mercado comun del sur)
4. The association of southeast Asian nations – ASEAN
5. The caribbean community and common market- CARICOM
6. Free trade area of the Americas- FTAA
 E-COMMERCE

Ecommerce is the buying of selling of goods and services online. This can also be called electronic
commerce.

Companies that conduct trade online are called e-businesses. There are two types of e-businesses:

1. Web based companies- these companies are fully based online. There is no physical store and all
interactions between the firm and consumer is done online. These companies are called
dot.coms. these are internet trading companies, with an example being Trinibiz.com
2. The other kind- this kind of companies have a physical location, as well as an online website.
Consumers can go inside the physical location and shop there, however, consumers can go
online and view the goods and buy the electronically. This increases the firms market to online
shoppers and those in foreign countries. N.B. a physical company without a
website is called a “bricks and mortar company” but a physical company with a website is called
a “bricks and clicks company”

Whatever the type of business, e-commerce is a form of direct selling. The supplier can sell directly to
the final consumer, thus eliminating some need for wholesalers and retailers. There is also less need for
shops and shop attendants.

Here is how you purchase items from an e-business:

1. Obtain the website address of the business.

2. Log on to the Internet and visit the site.
3. Browse through the site. You should see an e-catalogue. This is simply a list of items for sale with
the prices. There might be photographs or descriptions of the items to give the buyer a clearer
idea of the purchase.
4. Select the items you wish to purchase. There might be an e-shopping cart in which you place
your items.
5. ‘Proceed to checkout.’
6. Pay for the items using your credit card. There is an electronic transfer of funds from your bank
to the seller’s bank account.
7. Allow days to weeks for delivery, depending on where you live and where the business is
located.

The lock symbol on a site indicates that the site is secure and protected from hackers. Users can conduct
transactions and give personal information without such information falling into the wrong hands.

B2B is when a business sells goods and services to another business online (business to business)

B2C (business to consumer) when a business sells goods and services to a private consumer. Retailers
who sell on the internet primarily are called etailers
As countries undergo economic development, they have more access to computers and the internet.
This leads to:

1. Volume and value of goods traded on the internet has increased in recent years
2. The variety of goods traded has also increased

Advantages of e-commerce:

1. Advantages to the consumer:

a. Consumers now have access to a range of firms to purchase from. Caribbean shoppers
can access cheaper products, better-quality products and different brands in another
country within or outside the Caribbean region.
b. Goods are cheaper as e-shops do not have to pay to build a building
c. Shopping can be done in the comfort of your own home
d. Its faster than shopping physically
e. E-shopping is easier for people with disabilities
2. Advantages to the business:
a. The world is the market to the business
b. Businesses can grow overnight
c. The owner of the business doesn’t have to be present at the business all the time
d. The cost of setting up the business is online
3. Advantages to the economy:
a. There will be jobs for delivery services
b. Foreign earnings can increase if domestic businesses can sell goods in foreign markets

Challenges of ecommerce:

1. As e-commerce grows, some traditional shops lose business

2. People might choose to interact with computers instead of people
3. Credit card fraud is a risk
4. Some unknown sites might not be reputable and the buyers might lose money or the product
can not be what the buyer expected
5. A photograph and description of the product might not be enough for a person to want to buy it
online as they might want to see the product in person. One such example is clothing
6. The buyer cannot attain the product immediately
7. Unemployment might increase as ecommerce lessens job opportunities
8. Poorly designed sites might act as a turn off to customers
9. Goods will be difficult to return
10. Many households in developing countries may not have a computer or access to the internet
and cannot partake in online shopping

In this day of technology, you can also do e-banking, where you can check all your financial information
and pay bills online.
THE END. FIN. WHATEVER.