Economics IB Book Summary

Unit 1: What is economics?

- Known as a social science; Study of people in society and how they interact with each
other
- Goods: Physical objects capable of being touched (tangible)
- Services: Intangible things that can not be touched
- Needs: Things we must have to survive
- Wants: Things we would like to have but are not a necessity for our immediate physical
survival
- Scarcity: Finite amount of resources to create and provide goods and services
- Economics: Social science that examines the way that people behave and interact with
each other to overcome the problems that arise as a result of the basic economic problem
of scarcity (wants are infinite and resources are limited)
- Costs of choices made by economic agents
- Economic agents: Consumers, producers, government
- All make choices on how to allocate the scarce resources available to them
- Opportunity cost: Next best alternative foregone when an economic decision is
made (when you give up something for something else)
- Only thing without an opportunity cost is something that is not scarce
- Basic economic problem
- What should be produces and in what quantities?
- How should things be produced?
- For whom should things be produced?
- Microeconomics
- Deals with smaller, discrete economic agents, such as consumers and producers,
and the choice they make in response to change in a dynamic world
- Looks at individual markets
- Macroeconomics
- Looks at factors affecting economy as a whole
- Looks at the role of official policies in influencing economic activity and the way
income is distributed
- Central concepts
- Scarcity: Limited availability of economic resources relative to society’s
unlimited demand for goods and services
- Choice: Economic decision making to decide between competing alternatives
(relates to idea of opportunity cost)
- Efficiency: Making the best possible use of scarce resources to produce
coombinations of goods and services that are optimum for society, thus
minimizing resource waste
- Equity: Concept or idea of fairness. May apply to income distribution, wealth or
economic opportunity
- Economic wellbeing: Multi-dimensional concept relating to the levels of
prosperity and the quality of living standards enjoyed by members of an economy.
Includes:
- Present and future financial security
- Ability to meet basic needs
- Ability to make economic choices permitting achievement of personal
satisfaction
- Ability to maintain adequate levels of income over long term
- Sustainability: Ability of the present generation to meet its needs without
compromising the ability of future generations to meet its own needs. Limiting
the degree to which economic activities of current generations create harmful
environmental outcomes
- Change: Economic world is in continual state of flux and economists must be
aware of this and adapt their thinking accordingly
- Interdependence: Consumers, firms, households, workers and governments
interact with each other within and across nations to achieve economic goals. +
interaction, + interdependence
- Intervention: Government involving in the working of markets
- Factors of production
- Land/Natural capital: All resources provided by nature used to produce goods.
Includes soil, anything on the growth of land and under land; All natural resources
 - Labor/human capital: All human resources used to produce goods and services.
Physical and mental contribution of the existing workforce to production
- Capital/Physical capital: Includes all buildings, offices, factories, machines, tools,
infrastructure, technologies, used to produce goods and services. Anything made
by humans
- Investments: When firms spend money on capital
- Entrepreneurship: Organizing and risk-taking (profits are not guaranteed) of other
FoP to produce goods and services
- Ceteris paribus
- Latin term that means “all other things being equal” →Isolate effect of a variable
- In order to make economic models, economists must make certain assumptions,
they often use ceteris paribus
- Helps predict how people will behave
- Positive economics: Concerned with describing and analyzing economic relationships
and making factual and objective claims
- Uses scientific method to make predictions and uses empirical data to prove them
in order to create models and theories
- Normative economics: Concerned with how things should be, involves subjective value
judgement,
- Cannot be true or false
- Production Possibility Curve (PPC)
- Model used to illustrate the concepts of scarcity, choice, opportunity cost and
efficiency
- PPC shows maximum combinations of 2 types of output that can be produced in
an economy over a given time period, if all resources are being used efficiently
and the state of technology is fixed
- With the current amount of scarce resources available in an economy, it can
produce a limited amount of manufactured goods from raw materials
- PPC itself shows max quantity of both products that can be produced (potential
output)
- Assumptions of the PPC
- Economy only produces two goods (the one on x-axis and the one on
y-axis)
- Resources and state of technology are fixed
- All resources are fully employed
- Scarcity: Curve shows limit of goods that can be produced, scarce resources.
- Choice: Shows that choices skewed to one good or the other must be made
- Opportunity cost: Choice reflects shifting away resources to one side, opportunity
cost involved
- Efficiency: If economy operates efficiently, it operates at the PPC (productive
efficiency: the economy is using all of their factors of production to its fullest
extent) (changing from inside the ppc to the actual curve of the ppc is called
economic growth)
- Moving the PPC
- If there is an improvement in the quality of FoP or their quantity, PPC can
shift
- Growth comes from:
- Changes in education system (could improve quality of labor)
- Policies to increase immigration (could impove quantity and
maybe quality of production)
- Better-educated population could improve technology
 - New forms of energy could increase quantity of natural resources

- Circular flow of income model

- Illustrates interdependence between firms and households

- Households supply their FoP to the firms and in turn, they receive income for
their factors

FoP provided by households Income provided by firms

Labor Wages

Land Rent

Capital Interest

Entrepeneurship Profits
- Firms hire FoP from households and use them to produce the nation’s output of
goods and services, which are sold to the households, and recieve expenditure by
the households on these goods and services
 - In the real world, not all money is perfectly exchanged

- Leakages: not all money from households goes to firms; Saving go to

banks, money is spent on imports, and taken away in taxes
- Injections: extra money going into firms that does not come from
households; Banks invest on firms, exports give firms more money,
government intervenes with spending (subsidies, etc)
- What can the model tell us?
- Shows GNI; When national income is rising, the economy is
growing, and vice versa
- Equilibrium is when leakedges are qual to injections
- Rationing systems (way scarce resources are distributed)
- Planned economy
- Desicions as to what, how and for whom to produce are made by a central
body, the government
- All resources are collectively owned
- Gov arrange production, set wages, set prices
- Ex. USSR
- Free market economy
- Sometimes called private enterprise economy or capitalism
- Prices are used to ration goods and services
 - Production is fully in private hands and demand and supply are left free to
set wages and prices in the economy
- There should be free cases of surplus and shortages
- Consumers and producers make independent decisions of how to produce
(based on profit possibilities) and what to consume (based on purchasing
power)
- Since consumers and producers will work for their own best benefit, they
will obtain the best outcome for both
- In reality, economies are mixed
- Government intervention happens to some extent whilst markets are let
conduce themselves to some extent (USA)

Disadvantages of pure free markets Disadvantages of planned economies

Demerit goods will be over-provided Total production, investment, trade and consumption are too complicated to plan
efficiently, there will be misallocation of resources, shortages and surpluses

Merit goods will be underprovided Since there is no price system, there is inefficiency

Resources may be used up too quickly and environment may be Incentives are distorted. Workers with guaranteed employment and managers who
damaged gain no profit will be unmotivated. Output and quality may suffer

Some members of society will not be able to look for themselves Dominance of government may lead to a loss of personal liberty and freedom of
(orphans, long-term unemployed) and will not survive chocie

Large firms may grow and dominate industries, leading to high Govs may not share the same aims as the population. Plans may not be popular or
prices and inefficiency may even be corrupt
Unit 2: The evolution of economic thinking

Economic era Idea Explanation

18th century: Laissez-faire ('to A philosophy which believes there should be no (or minimal) government intervention with regard to decisions about
Adam Smith published his famous book on leave alone') resource allocation and production
Economics in 1776: The Wealth of Nations economics
He is widely regarded as the father of Classical
Invisible hand The unseen free market forces of demand and supply that coordinate the best allocation of resources within society
Economics
Markets are driven by consumers and producers seeking to maximise their self-interest
Written at the start of The Industrial Revolution,
it captured his thoughts on how markets could be Personal incentives, not government decisions determine the allocation of resources
coordinated by demand and supply
Free traden (sin Removing the protectionist measures found in mercantilism would increase production, trade and wealth
This book was a natural response to the previous
protectionism
century of government intervention in markets
measures)
in Europe during a period known as mercantilism
Wealth Production creates wealth for individuals and when individuals get wealthy, the nation gets wealthy

19th century: Classical Challenged what classical economists believed about how a product should be priced
Several key ideas emerged including classical microeconomics Previously, prices were a function of the costs of production involved. Now, prices were seen as a function of the
microeconomics (utility); the concept of the (utility) satisfaction gained in consumption
margin; classical macroeconomics (Say’s law) Producers should increase production for goods with high consumer utility
During this period Karl Marx also developed his Utility theory assumes that consumers always act rationally (yet many purchasing decisions are based on emotion)
critique of classical economic thought
Margin Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product
The utility gained from consuming the first unit is usually higher than the utility gained from consuming the next unit
To calculate total utility, marginal utility of each unit consumed is added together
Total utility keeps increasing even while marginal utility is decreasing

Classical Developed in 1802 by the classical, laissez-faire economist Jean-Baptise Slay

macroeconomics It can be summed up with the phrase 'supply creates its own demand'
(Say’s law) By supplying goods to the market a producer generates income from sales which they can then use to purchase
(demand) more products
This law implies that increasing national output in an economy is vital to income generation and thus governments
should focus on generating production and be less concerned with consumption

Karl Marx Karl Marx, a German philosopher, identified that wealth seemed to come from worker exploitation (a natural function
of profit maximisation) and that inequality was deepening in societies
The exploitation was seen in low wages and poor working conditions
The owners of the factors of production (capitalists) generated the highest income (wages, interest, rent and profit)
If all someone had to offer was labour, and wages were suppressed, then inequality was bound to increase
Marx argued that capitalism would eventually lead workers to revolt and that periods of exploitation would be
followed by revolutions
 These revolutions would require government intervention to restore stability and equality: Governments would need
to be involved in the allocation of resources (command economy) to prevent the pattern from repeating
Marx's ideas were incredibly influential and within a relatively short time frame resulted in more than a third of the
world's population living in economies influenced by his ideas

20th century: Market limitations Contrary to classical theory, Keynes saw that the Great Depression had created a situation where markets did not
The first half of the 20th Century was dominated automatically readjust to a new equilibrium
by the two World Wars and the Great Depression Some markets remained in a long term period of disequilibrium where supply was greater than demand
The economic ideas oft he previous century no Market forces were not resolving the situation
longer worked
Macroeconomic Keynes believed that Governments needed to stimulate demand by increasing government spending, this would begin
In this severe recession, Say's Law became
role of to increase the flow of income in the economy which would further stimulate demand which would help markets to
obsolete as households were unable to buy
government function again
goods/services due to a complete lack of income.
He developed the term and field of 'Macroeconomics' by explaining how aggregate demand is calculated
John Maynard Keynes, a British economist from
He argued that the use of Fiscal Policy was essential to stabilise an economy during periods of recession or
Cambridge felt new ideas were needed.
depression, much more so than the use of Monetary Policy
His ideas were quickly embraced and the next 50
years saw a widespread Keynesian revolution as Monetarist Monetarists believe that poor monetary policy lead to the Great Depression and that the use of fiscal policy leads to
governments adopted Keynesian economics revolution inflation as government spending increases aggregate demand
Milton Friedman was one of the leading Monetarists of the late 20th Century; His ideas influenced Ronald Reagan in
the USA and Margaret Thatcher in the United Kingdom.
Both Governments moved away from Keynesian economics
From the early 1980s there was a resurgence in belief in classical economics and laissez-faire market
Government spending reduced and the focus shifted to Supply-Side Policies.

21st century: Growing role of A fundamental flaw in economic theory is that individuals behave rationally in markets
The early part of the 21st Century has seen behavioral Behavioural economics recognises this and combines elements of economics and psychology to understand how and
several significant global challenges emerge: economics why individuals make the economic decisions they do
Climate change Understanding human behaviour creates better opportunities for firms and governments to nudge people towards
On-going wars and displacement of populations better choices
An increase of global population
Awareness of the The circular flow of income model has provided a basis for understanding macroeconomies since it was visualised by
The Global Financial Crisis of 2008
interdependencies Frank Knightin 1933: The model has been criticised as not fit for the 21st century as it does not take into account the
The Covid Recession of 2020 that exist inputs and outputs of societies
Keynesian economic thought came to prominence between the It focuses on money as opposed to well-being and planetary health
again with the 2008 Financial Crisis as economy, Inputs are the raw materials which are increasingly used in unsustainable ways
governments chose to spend their way out of society and Outputs are the carbon and waste that are generated
trouble environment
Government spending increased to levels never
The compelling A circular economy has three main principles:
seen before, continuing for more than a decade
reasons for 1. Eliminate waste and pollution. 2. Recirculate products. 3. Regenerate nature
This increased spending was financed by
moving toward a The increasing climate crisis provides a strong reason why economies should rush to move away from the circular
increased government borrowing which creates
circular flow of income model to the circular economy model
increased tax burdens for future generations
economy
Even with Government spending extraordinarily
high in many economies, expansionary Monetary
Policy had to be widely used to bring stability
This pattern of events prompted calls for societies
to rethink Economics

Microeconomics
Unit 3: Demand
- Market: Where buyers and sellers come together to carry out an economic transaction
- May be physical places where goods are exchanged for money or may be sold
online where goods are exchanged for money transfers or using credit cards
- Market forms
- Product market: Goods and services are bought and sold
- Factor market: FoP are bought and sold
- Stock market: Shares in companies are bought and sold
- International financial market: International currencies are traded
- Demand: Quantity of a good or service that consumers are willing and able to purchase at
different prices in a given time period
- Law of demand: As price falls, quantity demanded increases (demand curve slopes
downwards)
- Quantity demanded determines the number of products demanded at a certain price level
- Non-price determinants of demand
- Income
- Normal goods: + income, + demand; Causes a shift of the curve
- Inferior goods: + income, - demand (because people substitute that good
by a better one)
- Price of related goods
- Substitutes (Products that contribute the same. Ex. Chicken and meat =
proteins): When a product with substitutes’ price decreases, demand for
that product will increase, decreasing the demand for the other products
with higher prices. Conversely, +p (substitute product), -d (substitute
product), + d (product with unchanged price)
- Complements (Products often pushased together. Ex. Printers and ink
cartridges): A change in price for one product, leads to a change in
demand of its complement. +p (product), - d (product), -d (product
complement). -p (product), + d (product), + d (product complement)
- Tastes and preferences: - popularity for a product, - d. + popularity for a product,
+d
- Future price expectations: + expected future p, + d now. - expected future p, +d
now.
- Number of consumers: +consumers, +d. -consumers, -d
- Movement along the curve vs shift of curve
- Change in price causes movement along curve
 - Change in non-price determinants causes shift of curve

Unit 4: A closer look at demand: Elasticity of demand

- Elasticity of demand
- Elasticity: How much something changes when there is a change in one of the
determinants, measure of responsiveness
- Elasticity of demand: How much demand for a product changes when there is a
change in one of the factors that determine in
- PED (Price elasticity of demand)
- Measure of how much the quantity demanded of a product changes when there is
a change in price
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- PED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

- Range of theoretical values of PED

- From 0 to ∞
- Perfectly inelastic demand: If PED = 0→Change in price does not affect q
demanded
 - Perfectly elastic demand: If PED = ∞ → Demand curve goes on forever, q
demanded is infinite at that price

- Range of real values of PED

- Between 0 and 1
- Inelastic demand: 0 > PED > 1 | Change in price causes a proportionally
smaller change in q demanded→Total revenue for the firm will increase

- Elastic demand: 1 > PED > ∞ | Change in price causes a proportionally

larger change in in q demanded→Total revenue for the firm will fall
 - Unit elastic demand: PED = 1 | Change in price leads to proportionate,
opposite, change in q demanded→Total revenue for the firm will not
change

- Determinants of PED
- Number of closeness of substitutes available: More (or closer) substitutes,
+ elasticity
- Products with many substitutes: Household products, fruit
- Products without many substitutes: Oil
- Necessity of a product and how widely defined it is
- Need for food = low elasticity
- But if defining narrowly and considering meat = more elasticity
- Proportion of income spent on the good
- If a good costs very little and constitutes a very small part of a
person’s budget→Δ p results in a small change in q demanded =
inelastic good
- Behavioral economists might explain this in terms of status quo
bias
- Time period considered
 - Short term, + inelstatic
- Long term, + elastic
- Importance of PED
- Firms: Useful to predic effects of pricing on q demanded and total revenue
- Govs
- Need to be aware of possible consequences on a number of
economic variables when imposing indirect taxes since it increases
prices therefore, affects their revenue
- Need to consider employment in the industry concerned (elastic
products will result in unemployment if + prices)
- YED (Income elasticity of demand)
- Measure of how much the demand for a product changes when there is a change
in the consumer’s income
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- YED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑖𝑛𝑐𝑜𝑚𝑒

- Range of values of YED

- Negative to positive
- Positive: YED > 0 | Normal goods, + income, + q demanded
- Income-inelastic: 0 > YED > 1 | Necessity goods, increase in q demanded
is proportionally smaller than increase in income
- Income-elastic: 1 > YED | Superior goods, increase in q demanded is
proportionally greater than the increase in income
- Negative: 0 > YED | For inferior goods, + income, - q demanded
- Engel Curve shows relationship between income and demand for a product over
time
- Income in a country rises over time, demand may increase, then become
constant, then begin to fall as people begin to buy superior products
instead
Unit 5: Supply
- Definition: Quantity of a good/service that producers are willing and able to supply in a
given period of time
- Law of supply: + price, + supply, ceteris paribus
- Supply curve shows the sum of all individual producers’ supply
- In neoclassicals, it is assumed that producers are rational ‘maximizers’ →Their goal is to
maximize profit

- Non-price determinants of supply (always ceteris paribus)

- Cost of factors of production (left or rightward shift)
- + p(FoP), - s
 - - p(FoP), +s

- Price of related goods–competitive and joint supply (movement along the curve)
- Competitive supply: If the price of one of the products (a) by a firm
increases in price, supply for their other products (b) will decrease since
they will produce more of a→Products compete. Ex. + price for
skateboards, + q supplied of skateboard, - q supplied for roller skates

a) Skateboards b) Roller skates

- Joint supply: The creation of by-products; 2 goods are produced in the

creation of one. Ex. When producing petrol (a), diesel (b) is created. When
the supply for one increases, so does that for the other
 a) Petrol b) Diesel
- Government intervention-indirect taxes and subsidies
- Taxes increase cost of production for firms→ - supply
- Subsidies reduce costs of productions to firms→ +supply
- Expectations of future prices
- + expected demand in future (therefore +p), - s now (products might be
stored to supply more in the future and gain from the higher price)
- - expected demand in future, + s now
- Changes in technology
- Better technology, + s
- Worse “ “, - s
- Weather or natural disasters
- Favorable weather, + s
- Bad weather/natural disaster occuring, - s
- Difference between movement along the supply curve and shift of supply curve
- Change in price of the good itself→Movement along curve since price is on 1 axis
- Change in any other determinant→Shift of curve since supply moved on both
axes
Unit 6: A closer look at supply: Price elasticity of supply (PES)
- Definition: Measure of how much the supply of a product changes when there is a change
in price of the product
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

- Range of values of PES

- Perfectly elastic: PES = 0 | change in price does not affect supply
- It is possible because until new factors of production can be employed,
supply remains the same for a while
 - Ex. Set amount of tickets for a stadium being sold

- Perfectly elastic: PED = ∞ | Quantity supplied is infinite at that price

- It thought as possible in international trade for products like wheat
available since it is constantly produced

- Inelastic supply: 0 > PES > 1 | Change in price causes a proportionally smaller
change in supply

- Elastic supply: 1 > PES > ∞ | Change in price causes a proportionally larger
change in supply
 - Unit elastic supply: PES = 1 | Change in price causes a proportional change in
quantity supplied

- Determinants of PES
- Increase in cost as output increases
- If total costs arise significantly when producers attempt to increase supply
(it is likely that they will not raise supply)→Inelsatic
- If costs do not arise significantly, producers will + s and make more profit
- Factors that assist in preventing significant rises in costs
- Existence of unused capacity: If firms have unused capacity they
can use it without increasing costs→High elasticity of supply. Else,
vice versa
- Mobility of factors of production: If FoP are easily moved from
one productive use to another→High elasticity. If costs for 1L
bottles rise, FoP might be moved to make 1.5L bottles that cost
less to produce
- Time period considered: Longer time causes more elasticity since it is
time-consuming to increase quantities of FoP to produce more
 - Ability to store stock: Firms with high capacity can better react to price
changes→ Relatively elastic

Unit 7: Market Equilibrium, the price mechanism and market efficiency

- Equilibrium: A state of rest, self-perpetuating in the absence of outside disturbance
- Equilibrium is found at the same amount where people wish to buy and consumers wish
to sell, at that price

- Market clearing price is where everything produced in the market will be sold
- Anywhere outside equilibrium there would be excess demand or supply

- If producers tried to raise their prices, demand would decrease and there would be
excess supply→they would need to decrease prices until reaching equilibrium
- If producers lowered prices, demand would increase but suppliers would be able
to produce less and there would be excess demand→They would need to increase
prices to lower demand and reach equilibrium
- Changes in equilibrium
- Caused by ‘outside disturbances’ →Change in determinants of supply/demand
- Whenever either curve shifts, there is excess demand or supply, the market ‘fixes
itself’, reaching a new equilibrium

- Ex. In this case, demand shifted rightwards, causing excess demand,

producers increased prices accordingly, reaching equilibrium at p1*q2
- Price mechanism and its functions
- Price mechanism is what was previously mentioned, the way the forces of supply
and demand move markets to equilibrium
- Price mechanism helps allocate scarce resources
- Functions
- Signal information to consumers and producers: Prices reflect the
changing circumstances in markets, acting as signals to those in the market
to act some way
- Ration scarce resources: Prices help allocate and ration scarce resources
according to what want to and are able to pay for (high prices will cause to
ration supply between those prepared to pay it)
- Incentive consumers and producers: Lower pricers incentive consumers to
buy more, higher prices incentive producers to supply more→Producers
will allocate more resources towards goods demanded in order to make
more profit
- Market efficiency
- Consumer surplus: Extra satisfaction (or utility) gained by consumers from paying
a price lower than what they were prepared to pay
 - Producer surplus: Excess of actual earning that a producer makes from a given
quantity of output, over and above the amount the producer would be prepared to
accept for that output

- Social surplus: When a market is in equilibrium, with no external influences or

effectsm it is socially efficient/ in a state of allocative efficiency
- Resources are allocated in the most efficient way from society’s POV
- Social surplus is maximized at market equilibrium
- When the costs of the industry = costs to society, supply curve represents
Marginal Social Cost (MSC)
- When the benefits to the market = benefits to society, demand curve
represents Marginal Social Benefit (MSB)
- Surplus = producer surplus + consumer surplus

Unit 8: Methods of government intervention in markets

- Govs may intervene in microeconomic markets to:
- Support households/firms
- Influence consumption and/or production
- Protect consumers from monopoly-associated problems
- Promote well-being and equity
- Earn gov revenue
- Indirect taxes
- Indirect tax: One imposed upon expenditure
- Ex. IVA (Impuesto de Valor Agregado) = VAT (Value Added Tax)
- Provides gov with revenue needed to carry out their responsibility
- Other tax→Direct tax
- Taxes discourage consumption of certain goods (when specifically placed on
those)
- Placed upon the selling price of a product→Raises firm’s costs and shifts supply
curve upwards by the tax amount→Less product supplied at every price
- Types of indirect taxes
- Specific tax: Fixed amount that is imposed upon a product
- Ex. 1$ per unit
- Shifts supply curve vertically upwards by the amount of the tax

- Percentage tax: Tax is a percentage of the selling price

- Supply curve gap between s and s+tax will be bigger at larger
prices
- Ex. 20%
- Effects of taxes

- Producer surplus: d + b + c→ d¿
- Gov revenue: nothing → a + b
- Consumer surplus: a + d + e→(after) e
- Welfare loss: nothing→d + c
- Price for the consumer rises from p1 to pc (price consumer). Producers now
receive at pp (price producer)
- Unemployment increases
- Who pays what share of the tax?
- Varies depending on price elasticity of demand and supply for the product,
gov revenue and effect on the size of the market
- If p elasticity of demand (PED) is > p elasticity of supply (PES)→burden
for producers > burden for consumers
- That is because producers cannot pass the burden to consumers
since they will stop consuming
 - Consumer price: pc
- Producer price: pp
- If PED < PES→Burden for producers < burden for consumers
- That is because no matter the price, consumers are likely to buy so
producers can pass on the burden

- If PED = PES, burden is = for consumers and producers

- Producer subsidy
- Subsidy: Amount of money paid by the government to a firm, per unit of output
- Reasons to place subsidies:
- Lower p of essential goods to consumers→Hopes to + C. Ex. Rice
- Guarantee the supply of products that the gov believes to be essential to
the economy→Creates employment. Ex. Coal supply
- To enable producers to compete with international trade→Protect home
industry
- Helps low-income consumers
 - Protects against imports
- Diagram

- Consumer surplus: e + a → e + a + b + c
- Producer surplus: b → a + g + b + c (porque es del pp a las supply (f esta
excluded))
- Welfare loss: f
- Downward vertical shift on supply curve
- Producers lower price and increase output
- Price for consumers falls from p1 to pc, get to buy more at less p
- Producers revenue increases from p1 to pp
- Disadvantages
- Welfare loss
- Misallocation of resources
- Whether sub will mean that firms are not incentivized to gain efficiency if
they do not have to compete with foreign producers in a free market
- Opportunity cost
- Subsidies lead to overproduction, which has implications for sustainability
- Damaging to small scale producers who do not receive the subsidies
themselves→Equity
- Possible dumping
- Price controls
- The free market does not always lead to the best outcomes for all producers and
consumers, that is why price controls exist
- Price ceilings (maximum prices)
- When govs set a maximum price, below meq price, preventing producers
from raising above it
- Usually set to help consumers
- Normally placed in markets where the product is a necessity/merit good.
Ex. Food markets during food shortages

- q1 will be supplied, causing excess demand→May lead to emergence of

illegal markets, queues at shops
- Due to excess demand, gov will intervene to try to fix it
- Attempt to shift demand curve to the left (but would - C)
- Attempt to shift supply curve right by
- Offering subsidies to firm to encourage them to produce +
- Direct provision (Compensate with government
production)
- If gov had stored products, release some of the stored
goods onto the market (not possible for perishable goods)
- Price floors (Minimum prices)
- Gov sets a min price, above meq price, preventing producers from
reducing the price below it
- Reasons to set them
- Attempt to + income for producers of goods and services the gov
thinks are important (and good is subject to large fluctuations, or
there are lots of foreign competition) Ex. agricultural products
- Protect workers by setting a min wage, ensuring a decent earning
leading to a reasonable existence→Equity
- Protect producers who would struggle to survive at meq
- Prevent people from consuming a product in order to help people
make better choices. Ex. Alcohol and cigarretes

- Q2 is demanded because price has + →excess supply q3-q2

- Gov would buy up the surplus products at min price, shifting d to the
right→They could store or destroy the products or try to sell them abroad
- Disadvantages: Storage is expensive (opportunity cost), destroying
is wasteful, selling often causes anger from foreign govs due to
dumping that will harm their domestic industries

- Ways that min price can be maintained

- Producers could be limited by quotas, restricting supply→Only a
limited number of producers would receive licences in order to
eliminate excess supply

- Gov could attempt to + demand for the product by advertising the

product or restricting supplies of imported ones
- Disadvatages:
- Firms may think they do not have to be cost conscious→Would
lead to inneficiency and misallocation of resources
 - May lead to firms producing more of the protected product and
less of the others that they could produce more efficiently
- Excess supply creates problems: Producers will find that they have
surpluses and will be tempted to try to get around the price controls
and sell their excess supply for a - price →Gov will intervene
- Examples of countries that have min wage: Argentina, Uruguay, USA
- Reasons for govs to intervene in markets
- To help consumers make better choices
- Make certain goods less attractive, - C
- Increase C of healthy products, + C
- To promote sustainability
- Ex. Carbon taxes
- Subsudies may be given to produces whose methods are favorable to the
environment
- To promote equity and wellbeing
- Min wages→Fair payment
- Min prices ensure producers are paid enough
- Max prices ensure consumers can afford
Unit 9: Market Failure
Definition: Markets fail to achieve allocative efficiency.
- MB:
- MPB (marginal private benefit), based on the utility or benefits to consumers
- MSB (marginal social benefit)
- MC:
- MPC (marginal private cost), based on the firm’s cost of production
- MSC (marginal social cost)
- 3 types of market failure:
- Externalities
- Common pool resources
- Lack of public goods
- Externalities:
- Occurs when production or consumption of a good or service has an effect upon a
third party, whose interests are not taken into account.
- No externalities are when MPB=MSB and MPC=MSC
- Positive externality of consumption (beneficial effect):
- Certain goods or services that benefit those who consume them, but will
also provide external benefits to third parties.
- Ex: People consuming health care
- People are aiming to make their own health better, but they also
create a positive externality for society since they will not make
other people sick, can be better workers improving the workforce
meaning a higher level of human capital therefore, a more
productive economy
- People will consume at MPC=MPB, but society has an optimum level of
consumption, Qopt, where MSC=MSB (S.O.E)
- Market fails because there is underallocation of resources. Q1<
Qopt→welfare in society will increase.
- Society loses potential benefits that could be gained if the market operates
at MSC = MSB.
- Graph
People consume at s curve meets MPB curve at q1*p1
However, the socially optimum point of consumption would be where S
meets MSB at qopt*popt
There is a welfare loss because MPB<MSB→Market fails because too
little of the product is produced creating an underallocation of resources
 - Merit goods: Goods desirable for consumers but people do not consume
enough of them, either because they underestimate its potential benefits or
they choose to ignore them→They are positive externalities of
consumption
- Ex. Sports facilities. It's possible private benefit: enjoyment of
physical activity. Better health. It's possible benefit to society: a
“fitter” population is a more productive population.
- How can the government achieve the potential welfare gain related to
positive externalities of consumption and an underconsumption of merit
goods?
- Subsidies (or direct provision by gov): Government could
subsidise the supply of health care. Shift MSC curve downwards
→ socially efficient level of consumption at Qopt could be reached,
with a price of P2

- Problem: Opportunity cost, political considerations, and

time involved
- Improving info about benefits of products through public
campaigns. Would shift MSB curve, increasing welfare
- Problem: Cost of advertisement, long time to have effects
- Legislation: Gov could pass laws insisting on health
- Problem: Would only be successful if health care involved
would be free. People may also see it as an imposition,
infringing their civil liberties
- Negative externalities of consumption (negative effects)
- When consumed by individuals, they adversely affect third parties.
- Example: cigarettes and “second-hand smoking”.
- MSB < MPB → those who smoke, enjoy the private benefit of smoking,
reducing the benefit of passive smokers.
- Smokers will consume MPC=MPB, ignoring the negative externality that
they are creating→ over-consume cigarettes, smoking Qm at Pm without
considering what is optimum for society. Even at Qopt, MSC > MSB.
- There is welfare loss and market failure since too many resources are
allocated to this market and it is overproduced

- Demerit goods: Goods considered harmful to consumers, but people who

consume them are either unaware of the possible harm, or ignore possible
risks. Therefore, the demand for the good is higher than it “should” be
from society's perspective. Not all demerit goods create negative
externalities
- How can the government reduce or eliminate the welfare loss related to
negative externalities of consumption and an overconsumption of demerit
goods? (solutions):
- Market based approach–Indirect taxes: Pigouvian tax (tax imposed
on markets that create negative externalities in order to eliminate
them) to reduce consumption, ideally up to Qopt by doing a leftward
shift of MPC curve.
 - Problems:
- Inelastic demands tends to mean that taxes do not
manage to reduce quantity demanded very much,
hence, while gov. revenue is raised, quantity
demanded does not fall to the socially efficient
level.
- If taxes are raised too much, people may look for
other sources of supply in other places.
- Indirect taxes are regressive
- Government Legislation: Alter consumer's behaviour creating
legislation (laws).
- Ex. in cigarettes: the government may take approaches to
age restrictions.
- Problems:
- Takes away consumers rights to choose for
themselves
- Has negative effects on producers
- Difficult to enforce and control.
- Education/Raising awareness: Offer information about the
consequences of demerit goods to possibly cause consumers to
decrease demand
- Problems: Long term solution, cost, doubtful effectiveness
(people may not want to become conscious of it, therefore,
ignore the knowledge)
- Positive externality of production
- Production of a good or service creates external benefits that are
favourable for third parties.
- Example: firm that provides high quality training for its employees. When
the employees leave and join another firm, they won't have to spend on
training those people. That will provide benefits.
- Firms produce where MPC=MPB at q1 which is below the socially
efficient level, Qopt. MPC < MSC.
- It is a underallocation of resources

- Solutions:
- Subsidy: Govs could subsidize firms that offer positive
externalities. Would create a shift in the MPC curve downwards by
the amount of the subsidy, reaching the socially optimal level

- Problem: It is difficult to estimate the level of subsidy

deserved by every firm. Implies an opportunity cost
 - Direct government provision: Gov could provide the goods and
services that create externalities. Gov would supply at MSC,
popt*qopt
- Problem: High costs, may dissuade firms from providing
the goods and services themselves
- Negative externalities of production:
- Production of a good or service creates external costs that are damaging to
third parties. Tend to relate to sustainability
- Example: polluting factory that emits smoke to the air and dumps its waste
in the ocean.
- Over and above the firm's private cost of production, there are additional
costs that spill over onto society with negative consequences. May happen
because firms are profit-maximizing and do not care about society
- For all units of output greater than Qopt, MSC < MPC, therefore society
would be better off if less were produced.
- Firms produce at p1*q1 because they ignore costs to society
- Welfare loss happens because there is an misallocation of resource; Too
much of a product if being produced at a price too low

- Solutions (related to common pool resources deprivation)

- International agreements: Given the global nature of problems,
effective international cooperation and agreements are essential.
- International enviornmental agreement: Intergovernal
document intended as legally binding with a primary stated
 purpose of preventing or managing human impacts on
natural resources. Ex. Cut emissions of greenhouse gases
- Tradable permits: Market-based approach to reduce the ability of
people to degrade a common pool resource. A governing body sets
a limit on the ability of users to access a resource. Ex. Max amount
of fish to catch per firm.
- If firms/countries do not use up all their units, they are
allowed to sell the excess to other firms/countries that are
over their target
- Carbon taxes (impossed when fossil fuels are burned): Way of
making firms pay for external costs not included in the market
price. Market-based approach→Higher tax raises price but
polluters still have a freedom of choice to either keep producing
that amount at a higher price or reduce emissions
- Legislation and regulations: Can prevent impact. In some cases, an
activity needs to be banned or restrited if there is no amount of
acceptable output, in others, reduced. Ex. Ban of plastic bags sold
at supermarkets
- Problems:
- Establishment requires access to information gov
may not have or may not be able to realistically
process
- Different industries and different ecosystems
require different regulations (takes gov lots of
consideration)
- + regulation, +p, -competitiveness with foreign
producers
- Require monitoring which is time consuming and
expensive
- Discourages development of technologies
- Govs are resistant to change
 - Govs are subject to intense lobbying by
stakeholders and may favor some areas over others
due to that or to win votes
- Subsidies: Greater use of renewable energy sources, will greatly
reduce greenhouse gases emission→Govs could provide money to
incentivize firms to change their energy sources
- Common pool resources
- Typically natural resources (Ex. fishing grounds, forests, pastures) where it is very
difficult/expensive, to exclude people from using them
- Considered non-excludable
- Rivalrous: If one persons uses the good, it reduces the value of it to others
- In the absence of effective management, they are inevitably degraded
- Tragedy of commons: Cumulative effect of all rational producers acting in their
own self-interest, resulting in a fall of social welfare
- Some producers might see the issue and stop their behavior to prevent
degradation of the resource→Might give rise to “free rider problem”
where those who do not change their behavior are benefited by those who
do
- Ex. Profit-seeking forestry companies want more profit and ignore issues
associated to deforestation
- Atmosphere as a common pool resource: What is put into the atmosphere affects
everyone. People ‘use it up’ with pollution, firms should consider this
- Collective self-governance
- Tragedy of commons result is that everybody looses; to prevent this, govs
can take over the management of resources and set strict regulations or
privatize land with managameent to be determined by owners OR
- Individuals and communities could work together without top-down
regulations to develop rules and institutions to manage shared resources in
a sustainable and equitable manner→Since each circumstance of each
community is difference, each should set up their system
- Public goods
- Definition: Goods that would not be provided at all in a free market
- Examples: National defence, flood barriers, streetlights
- Non exlcudable (impossible to stop other people of consuming it when provided)
and non rivalarous (One person consuming it does not prevent other from doing
so as well): Pointless for private individuals to provide the goods themselves
- Free rider problem: If a person puts a flood barrier to protect a house, the
others in the area are benefited even if they haven’t paid nothing. No one
will pay for it, in hope others will
- Technology is making it easier to charge public goods, making them private. (Ex.
Peajes para pagar calles)
- How can govs increase supply for public goods?
- Direct provision: Use taxpayers’ money to fund the provision spreads that
cost over a large number of people who would not be prepared to pay
individually
- Gov partnership with private sector (public-private partnership): Providing
financing and letting private producers run the project
Macroeconomics
Unit 13: The level of overall economic activity
- Study of the national economy. Is concerned about the allocation of a nation's resources
and about five main variables.
- Economic growth: A steady rate of increase of national income
- Employment: A low level of unemployment
- Price stability: A low and stable rate of inflation
- National debt: A sustainable level of government (national) debt
- Income distribution: An equitable distribution of income
- How is national income measured? Circular Flow Of Income Model (Look at Unit 1 for
explanation)
- Measuring economic activity:
- Gross Domestic Product (GDP) and Gross National Income (GNI) are the most
often used indicators
- Gross Domestic Product (GDP): Total value of all final goods and services
produced within physical borders of a country over a time period, regardless of
who owns the FoP.
- How is it measured:
- Output approach: Measures the actual value of the goods and
services produced. It is calculated by summing all the value added
by all the sectors in an economy.
- GDP = Primary sector (agriculture and mining) +
secondary sector (manufacturing) + tertiary sector
(services)
- Expenditure approach: Measures the value of all spending on
goods and services in the economy. It is calculated by summing up
the spending by all the different sectors in the economy.
- GDP = C + I + G + (X-M)
- Income approach: Measures the value of all the incomes earned in
the economy. How much money goes into household
- GDP = wages + rent + interests + profits
- Gross National Income (GNI):
- Total income earned by a country's FoPs regardless of where the assets are
located.
- GNI = GDP + net property income from abroad (property income from
abroad - property income sent abroad)
- Nominal vs Real (GDP or GNI)
- Nominal: Value measured in terms of prices that exist at the time of the
measurement
- Real: Nominal value adjusted for price changes (inflation) →Used to
measure GDP/GNI changes in an accurate way regarding only output,
without inflation distorting numbers (GDP/GNI deflator)
- Per Capita: Indication of average or per person output or income in the economy.
 - In GDP: (total GDP / size of the population) * 100
- In GNI: (total GNI / size of the population ) * 100
- National Income Statistics:
- Report card for a country. These statistics are used to judge whether or not
a government has been successful in achieving its macroeconomic
objective of increased growth.
- Used to
- Develop policies (governments)
- Develop models of the economy and make forecasts about the
future (economists)
- Make forecasts about future demand (businesses)
- Basis for comparing performance of a country
- Basisis for evaluating living standards of a country’s population
- Basis for comparing different countries
- Weaknesses & limitations
- Inaccuracies: Data come from a vastly wide range of sources which can
lag errors (taxes, output and sales data)
- Unrecorded economic activity
- Informal markets: GDP does not include any DIY work or other
work done at home. Ex. Painting one’s own home→More common
in developing countries
- Parallel markets: GDP does not consider any unrecorded activity
such as illegal markets or legal things done illegaly. Ex. Drug
trafficing, buying cigarettes from producers who evade taxes
- Sustainability: GDP does not take into account the costs of resource
depletion.
- Other quality of life concerns: GDP accounting does not include free
activities such as volunteer work or people caring for the elderly and
children at home, which might lead to a better society but are discouraged
in the pursuit of economic growth
 - Composition of output: Possibility that a large part of a country’s output is
in goods that do not benefit consumers, hence it would be hard to argue
that a higher GDP will raise living standards.
- Business cycle:
- Periodic fluctuations in economic activity measured by changes in real GDP.

- Consist of short-term fluctuations in the growth of real output, which are

alternative periods of expansion and contraction.
- Phases:
- Expansion: Economic expansion. Positive growth in real GDP.
Employment of resources increases and the general price level of the
economy rises more rapidly. Largely driven by increases in AD, making
output increase. Inflationary pressure rise with price
- Peak: Cycles maximum real GDP. Marks the end of an expansion.
Economy is likely to have inflation. Actual GDP > Potential GDP, there is
an output gap since unemployment < natural rate of unemployment
- Trough: Cycle´s minimum real GDP. Widespread unemployment. Actual
GDP < Potential GDP, unemployment > natural rate of unemployment. As
some consumption will always exist, (foreigners demand exports, and
govs continue spending) contraction cannot go on forever. Low demand
for money lowers interest rates, making AD +
 - Recession: When real GDP falls for at least two consecutive
quarters.
- The difference between rGDP and potential GDP is called an output gap. A
negative gap means unemployment over natural rate of unemployment, a positive
one is the opposite
- What other measures of economic well being exist?
- Better life index (BLI): Allows for the comparison of well being across 11
different topics identified as essential in terms of material living
conditions (housing, income, jobs) and quality of life (community,
education, environment, governance, health, life satisfaction, safety,
work-life balance)
- Happiness Index: Data drawn from the Gallup World Poll as well as other
sources; Mainly considers GDP per capita, social support, healthy life
expectancy, freedom of choice, genoristy, perceptions of corruption
- Happy Planet Index (HPI): Measures sustainable wellbeing and how well
countries are achieving long and happy lives, taking into account
sustainability
Unit 14: Aggregate demand
- Definition: Total spending on goods and services in a period of time at a given price
level.
- The AD diagram illustrates the inverse relationship between the APL and the total real
output demanded; at a lower average price level, a higher quantity is demanded.
- Components: AD = C + I + G + (X - M)
- Consumption (C): Total spending by consumers on domestic goods and services.
- Durable good: Used by consumers over a perdiod of time. Ex. Cars,
computers, mobile phones
- Non-durable good: Used up immediately or over a short period of time.
Ex. Rice, toilet paper
- Investment (I): Additions of capital stock to the economy, carried out by firms.
Economy’s capital stock includes all goods made by people used to produce other
goods and services
 - Replacement investment: Firms spend on capital in order to maintain the
productivity of their existing capital
- Induced investment: Firms spend on capital to increase their output to
respond to higher demand in the economy
- Government Spending (G): Governments at a variety of levels spend on a wide
variety of goods and services. The amount of government spending depends on
the policies and objectives of the government.
- Net exports (X-M): Exports - Imports. Exports are domestic goods and services
that are brought by foreigners. Imports on the other hand are goods and services
that are bought from foreign producers.

- Causes of changes in AD
- Consumption
- Income taxes: + taxes, - disposable income, -consumption. -taxes, +
disposable income, +C
- Interest rates: When people borrow money from the bank to pay for goods
and services, they must pay interest to the bank. + i, - borrowing, - C. -i, +
borrowing, +C
- Wealth
- Change in house prices: + p houses, consumers feel more wealthy,
+ likely to feel confident to consume more (by saving less or
borrowing more). - p houses, - feeling of wealthiness, - likely to
consume
- Change in value of stocks and shares: Many consumers hold shares
in companies. + value shares, people feel wealthier, + C or they
sell them and use earning to increase consumptions. - value shares,
 less feeling of welathiness, -C OR they sell them but at a low price
and can’t use the earning to consume
- Consumer confidence/expectations:
- If people are optimistic about the future, they will +C now. If
people are pessimistic, they will save the money, -C now
- If consumers think + p in future, +C now. If consumers thing - p
future, -C now
- Levels of household indebtedness: If it is easy to borrow money and/or
interest rates are low, household will take on more debt by getting loans or
using their credit card, +C. If it is difficult to borrow money and/or interest
rates are high, households will not take debts, -C
- Investment
- Interest rates: +i, -I. -i, +I
- Business taxes: -taxes, +I. +taxes, -I (because if firms pay higher taxes
they have less money available to invest with)
- Technological change: If there is rapid change in technology, firms have to
keep up and therefore, invest on technology for their own firm. No/slow
change in technology, no I
- Change in business confidence/expectation: If demand is likely to fall in
the future, -I (would be a waste of money). If demand is likely to increase,
+I (to be ready to meet that demand)
- Levels of corporate indebtedness: Easy credit (borrow money) and/or low
interest rates, +I. Not easy credit and/or high interest rates, -I (firms spend
their money on debt).
- Gov spending: Depend on political and economic priorities of gov
- If govs is committing to supportinng a certain industry, +G
- If gov is obliged to spend on a market failure, +G
- New education or health polcies requires spending on schools or hospitals,
+G
- Net Exports
- Exports
 - + income in foreign countries, + C of exported goods and services,
+X
- Currency appreciation, X more expensive to foreigners, -X.
Currency depretiation, + competitive exports, +X. (Ex. If 1 dollar
used to be 1000 argentinian pesos and is now 1200, argentina will
need more money to be able to buy the same exported goods and
services as before)
- Free trade in other countries, + X to those countries.
+protectionism in other countries, -X to those countries
- If inflation is higher in trading partners’ countries, +X to those
countries (because domestic prices<foreign prices). -inflation in
trading partners’ countries, -X to those countries
- Imports
- + domestic growth, +C, + M (imports) (because people have more
income and will consume more, excess demand is supplied by
foreign producers). -domestic growth, -C, -M
- Currency appretiation makes imported goods and services less
expensive, +M. Currency deppretiation makes imports more
expensive, -M.
- + liberized trade policies, +M. +protectionism, -M
- If inflation is higher in trading partners’ countries, -M. -inflation in
trading partners’ countries, +M
Unit 15: Aggregate supply
- Definition: Total amount of goods and services that all industries in the economy will
produce at every given price level.
- In contrast to the theory of aggregate demand, we distinguish between the short run and
the long run in looking at aggregate supply.
- Short-run aggregate supply (SRAS): The period of time when the prices of the FoP do
not change, most importantly the price of labour (wages) is fixed.
- What will shift the SRAS curve?
- Prices: +p (producers get paid more), +y (they will produce more). -p, -y
- Supply side shocks (Change in any of the factors other than price level)
- Wages: +w, + costs of production, - s. -w, -costs, +s
- Cost of raw materials: + cost raw materials (ex. oil), -s (ex. food). -cost
raw materials, +s
- Price of imports: +p of M, + cost of production (if imported goods are
used to make other products), -s. -p of M, -costs, +s
- Indirect taxes: + taxes, - s. -t, +s
- Subsidies offered to businesses: + sub, + s. -sub/no sub, -s
- Long run aggregate supply
- New classicals belive in a perfectly inelastic, full employment level of output
curve, representing the potential output that could be produced if the economy
were operating at full capacity (yp), based on the quantity and quality of FoP–not
price

- Keynesian AS
 - Section I: Aggregate demand can increase, increasing level of output, without
affecting price level sinde there is spare capacity in the economy and producers
can employ unused FoP→No inflationary pressures
- Section II: AD increases result in some inflationary preassures as available FoP
become scarcer and prices increase
- Section III: AD increases are purely inflationary→Output does not increase but
price does since it is impossible for the economy to produce further (no capacity
available)
- What will shift LRAS and AS (economic growth)

FoP Increase in quantity Improvement in quality

Land (all natural resources) - Land reclamation - Technological advancements (that allow to
 - Increased access to supply of resources access more/new resources)
- Discovery of new resources - Fertilizers
- Irrigation

Labor + entrepreneurship - Increase in birth rate - Eduaction

- Immigration - Training
- Decrease in natural rate of unemployment - Re-training
- Appretinceship programs

Capital - Investment - Technological advancements that

contribute more more efficient capital
- Research and development

Unit 16: Macroeconomic equilibrium

- Short-run equilibrium: When AD = SRAS
- Output produced is exactly = to total demanded in the economy, there is no reason
for consumers to change their output levels
- There are no pressures on price level

- Long-run equilibrium
- Where AD meets AS
- Recessionary gap: When economy producing below Yp (potential output)
- Inflationary gap: “ ” above Yp

- New-classical: Where AD = LRAS

- Impacts of change in AD will be only on APL

- According to new-classicals, economy will always return to long-run full

level of output by itself
- Explanation for increases in AD:
 Initially, economy at y1*p1, there is an increase in AD (AD1→AD2)
because increase in C, I, G, Net exports, increasing output in the
short run, causing an inflationary gap.
In efforts to increase their output, firms are competing for
increasingly scarce labour and capital (since they have less than the
natural level of unemployment, meaning more employment),
resulting in an increase in price (p1→p2).
Since APL includes all prices it means + price for the costs of
production too, resulting in a shift in the SRAS (SRAS1→SRAS2),
returning output to full level of employment at y1

- Explanation for decreases in AD:

Originally economy producing at p1*y1, there is a fall in AD
(AD1→AD2) due to changes in C, I, G or net exports, decreasing
output and prices, causing a recessionary gap
All prices fall meaning that so do costs of production, resulting in a
shift in SRAS (SRAS1 →SRAS2) returning the economy to full
emplotment level of output at a lower price

- Keynesian: Where AD = AS
Unit 17: Ddemand-side policies
- Government/public spending: Total spendings by all level of government in a country,
including the central, regional and local governments
- Categories:
- Capital expenditure: Spending that adds to the capital stock of the economy
(schools, hospitals, highways)
- Current expenditure: On-going spending (textbooks, wages to public sector
employees)
- Transfer payment: Benefits paid to people in the economy for which no goods and
services are provided in return (unemployment benefits, child support, pensions)
- Governments recive income from taxes, social security payments, tariffs, profit of
nationalized businesses or industries, and from renting gov-owned land

- Aim of policies
- Maintance of low and stable rate of inflation
- Low unemployment rate
- Stable economic environment for long-term growth
- Reduce fluctuations in business cycle
 - Promote an equitable distribution of income
- Achieve an external balance between export revenue and import expenditure
- Fiscal policy: Set of government’s policies relating to its expenditure and taxation rates
- Fiscal: Pertraining to goverment revenue and expenditure
- Expansionary fiscal policies to + AD
- To encourage consumption: Govs lower taxes to increase disposable
income
- To encourage investment: Lower corporate taxes so firms have higher
profits that may be used for I
- For gov project: Govs increase government spending (G)
- Effects:
There is a shift in AD (AD1→AD2) that causes inflationary pressures as
APL increases (p1→p2) but there is also output increase (y1→y2) meaning
economic growth and a decrease in unemployment

Involves a trade-off between lower unemployment and higher inflation

- Contractionary/deflationary fiscal policies to -AD
- To discourage consumption: Govs increase taxes to decrease disposable
income
- To discourage investment: Increase corporate taxes so firms have lower
profits that reduce I
- For gov project: Govs decrease government spending (G)
- Effects: There is a shift in AD (AD1→AD2) that causes deflationary
pressures as APL decreases (p1→p2), there is a decrease in output (y1→y2)
and an increase in unemployment which pulls the economy back to natural
rate of unemployment, closing the inflationary gap
- How effective are fiscal policies
- Helps deal with a deep recession. Ex. In the Great Depression of the
1930s, USA adopted expansionary fiscal policies (by increasing G) and
came through the recession
- Can target specific sectors (using G in tax cuts, and gov investment in
funds). Ex. American Recovery and Investment Act: Fiscal stimulus by
Obama in 2009; $787 billion put into the pocket of families and small
businesses aiming to boost demand and install confidence.
- Constraints of fiscal policies
- Time lags: Most changes must go through democratic processes governing
the country that take time to get approved + it will take time to work and
the economy might have already recovered becoming purely inflationary
- Political pressure: Gov spending and taxation are often influences by
political factors rather than economic ones
- Sustainable debt: Govs may have to run budget deficits to fund the fiscal
policies which, over time, may accumulate into unsustainable national
debt, damaging future generations
- Crowding out effect: If spending comes from increased borrowings, govs
monopolize the funds available to the economy and interest rates rise,
meaning that firms loose access to funds for investment, resulting in a fall
for investment, causing a fall in AD
- Gov borrows from CB→ - money supplied in economy, + interest
rates, - I, -AD
- Inability to achieve specific targets: It is almost impossible to finely adjust
fiscal policy to achieve sepcific targets since gov expenditure and tax
 changes affect many areas of the economy, so predicting precise outcomes
is difficult
- Effect on net exports: May lead to increase in interest rates, aprreciates
exchange rates, making exports less (because they are more expensive)
and imports more attractive→Possibly causing an fall in net exports which
works against the desired outcome of expansion
- Macroeconomic objective: Sustainable level of government (national) debt
- National debt: Accumulation of all budget deficit over the years, represents the
total amount of money the government owes to its creditors, both domestic and
foreign
- Gov debt tends to be calculated as a percentage of GDP
- Costs of having high levels of government debt
- In the short-term, many stakeholders will be benefited from deficit
spendings as it drives economic growth, but as national debt gets greater
with time, long-term costs are born
- Increase in debt servicing (amount of $ needed repay obligation) costs:
Will lead to more government spending on interest costs
- Crowding out of private investments (explained previously)
- Damage to other areas: As interest rates increase with gov expenditure,
other areas of spending are damaged since benefits and services previously
provided may need to be cut
- If gov tries to maintain the benefits and services, higher taxation to
fund the expenditure will be required, possibly causing a fall in
output and income
- Decreases gov ability to respond to emergencies: If gov debt is too big,
less resources will be available to respond to financial crises, natural
disasters, and military actions. Ex. After financial crisis in 2008, US gov
had a total dept to GDP ratio of around 68% →If needed, they had money
to respond to emergencies
- Monetary policies
- Definition: Set of official policies governing the supply of money and the level of
interest rates in an economy
- Interest rates: Base rate (discount rate or prime rate) set by a country’s central
bank (ultimate authority in control of the money supply in an economy)
- Expansionary monetary policy
- To encourage consumption and investment: Lower interest rates to reduce
cost of borrowing | Increase supply of money (print money) to lower
prices, therefore interest rates
- Effects: Lower interest rates causes +C and +I, leading to a shift in AD
(AD1→AD2), causing inflationary pressures on APL (p1→p2) but an
increase in output (y1→y2) which means an increase in national income,
economic growth and a decrease in unemployment

- It is a trade off between lower unemployment an higher inflation

- Contractionary/deflationary monetary policy
- To discourage consumption and ivnestment: Increase interest rates to
increase cost of borrowing | Decrease money supply (Increase reserve
requirement) to increase pricer, therefore interest rates
- Effects: Higher interest rates causes -C and -I, leading to a shift in AD
(AD1→AD2), causing deflationary pressures on APL (p1→p2) but a
decrease in output (y1→y2) which closes a recessionary gap returning the
economy to natural rate of unemployment
- Effectiveness of monetary policies
- Relatively quick to put in place: Because interest rates are set by the
central bank when necessary
- No political intervention: Central bank is independant, not under
government power so it can implement policies although they may be
policitacally unpopular (however most countries’ govs influence the bank)
- Absence of “crowding-out”
- Ability to make small changes: Targets are more precise than that of fiscal
policies
- Disadvantages
- Time lags: Take time to have an effect, by the time it works maybe
economy has already changed
- Ineffectiveness when interest rates are low: Eventually interest rates will
approach 0 and there will be no room left for more cuts
- Low consumer and business confidence: Effect on expenditure may be
dampened by low consumer and business confidence, especially if the
economy is in deep recession
- Nominal vs Real Interest Rates
- Nominal: Rate of interest available in the money market, not allowing for
inflation.
- Real: If the rate of interest is adjusted for inflation
- Nominal: Real - inflation rate
- EXAMPLE: Argentina during the 1990s, implemented a monetary policy known
as convertibility where an argentinian peso was convertible into a dollar and
backed by central banks reserves.
Unit 18: Supply-side policies
- Designed to increase aggregate supply (AS/LRAS) by increasing the quantity and/or
quality of FoP

- Goals
- Achieve long-term economic growth by increasing the productive capacity of the
economy
- Improve competition and efficiency
- Reduce labor costs and unemployment through increased labor market flexibility
(if market-based)
- Reduce inflation to imporve international competitiveness
- Increase firm’s incentives to invest in innovation by reducing costs
- Market-based
- Focus on allowing markets to operate more freely with min. gov intervention
- Reduction in household income taxes: Low taxes are larger incentive to workers
to become more productive and work harder
- Reduction in corporate taxes: If businesses are able to keep more profit, they are
more incentivized to use their profit for research and development and employee
training, leading to advantages in technology, and produce more efficiently
- Labor market reforms
- Reduction in trade union power: Would reduce the trade union's power to
negotiate higher costs of labor, therefore reducing the costs of production
for firms and increase the number of workers they may hire
- Reduction/elimination of minimum wages: Would decrease labor costs
 - Reduction in unemployment benefits: It is argued that giving
unemployment benefits, reduces incentives to find jobs. Only works if
there are jobs available
- Deregulation: Remove regulationts placed on the operations of businesses which
might increase costs of production. Regulations include enviornmental laws,
health and safety regulations and laws concerning working hours, leave and
holidays
- Privatization: Sale of public government-owned firms to the private
sector→Argued that private enterprises are more efficient since they are
profit-maximizing
- Policies to increase competition: Competition increases efficiency. Policies
include anti-monopoly laws
- Trade liberalization: Elimination of subsidies, tariffs and quotas to reduce
government interventation and promote free trade. It means that exporting firms
would need to increase efficiency to compete with foreign firms
- Limitations of market-based
- Reduction in household income taxes may not lead to increased incentive
to work and may benefit higher wage earners more than lower earning
wage earners, leading to inequality
- Reducing corporate taxes will benefit the wealthy shareholders, leading to
inequality
- Labor-market reforms may lead to a possible reduction in living standards
for low-income/unionized workers, leading to inequality
- Deregulation might:
- Lead to negative impacts on the environment, creating more
negative externalities of production
- Reduce worker safety if health and safety regulations are relaxed
- Worsen working conditions if regulations concerning working
hours are changed
 - Privatization may increase prices and reduce supply if not done correctly,
and may take-part in corruption where government connections get firms
at lower costs
- Time lags involved before effects are filtered in outcome
- Interventionists
- Based on the idea that govs play a fundamental role in encouraging growth
- Investment in human capital: Investing on education and training, and quality and
quantity of health care
- Research and development: To seek improved methods of production, spending is
required (tax incentives, guaranteeing intellectual property rights such as patents
and copyrights, public research facilities and universities)
- Provision and maintenance of infrastructure (roads, electricity, water supply,
sanitation, waste management, railways, ports, telecommunication, internet
access, transportation): Production relies on infrastructure, improved
infrastructure will lead to larger production
- Direct support for businesses/Industrial policies: Govs have agencies/ministries
responsible for developing policies that support and encourage the development
of industry, who could work towards improving the competitive nature of
industries, helping small and medium size enterprises, supporting export
companies, advising govs, supporting certain industries through subsidies
- Limitations
- Monetary cost involved: Opportunity cost, and increased expenditure may
increase levels of national indebtedness and have future negative effects
- Time lags
- Extent to which interventionist policies are provided depends on the
ideological aims of the gov and the power of various interest groups.
Changes in gov may lead to significant changes in policies
- Controversies may arise concerning the provision and funding of
education and healthcare. Ex. How much money should be spent on each
area of education? Is one area more worthy than the other?
- Connection of supply and demand-side policies
 - Supply-side happen on the long run but has short term-effects, demand-side
effects.
- Reducing corporate and income taxes have expansionary fiscal effects. Thus, in
the short run, can lead to +AD, economic growth and low unemployment at the
cost of increased inflationary pressures
- Similarly, expansionary fiscal policies that reduce coorporate and income
taxes may lead to a larger incentive to work and increased investment
and/or research and development, affecting AS
- Government spending also affects AD→+G, +AD
- Similarly, gov expenditure aimed at the provision of infrastructure,
investment in human capital and increasing research and development will
affect AS
- Demand-side effects will happen faster than supply-side
- EXAMPLE: Ronald Reagen, US president, implemented the Economic Recovery Tax
Act in the 1980s, which slowered the growth of government spending, reduced personal
income tax rates and cut corporate taxes. It increased GDP and reduced unemployment
Unit 19: Macroeconomic objective: Low unemployment
- Unemployment: People of working age, who are without work, available for work, and
actively seeking employment”
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
- Unemployment rate: 𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
* 100

- Labor force = Unemployed + employed

- Prolems in measuring level of unemployment
- Differen national systems for measuring unemployment and different definitions
across countries lead to inaccuracies
- Does not include hidden unemployment
- Discouraged workers: Those who have looked for jobs for a long time and
haven’t found one, they have given up
- Part-time workers/temporary contracts who would rather work
full-time/permanent contracts: Since they work they are not unemployed
but they are not earning as much as they would want or need to
- Underemployed: Those working in jobs for which they are over-qualified
 - Does not reflect disparities
- Geographical disparities: Unemployment varies remarkably among
regions in a country→Measurement does not reflect disparities
- Age disparities: Unemployment rates are higher in the under-25-age
groups
- Ethnic differences: Ethnic minorities often suffer from higher
unemployment which may result in differences in educational
opportunities or prejudice of employers
- Gender disparities: Unemployment rates are higher among women
- Costs of unemployment
- To the unemployment people themselves: Receive less income (if they are
recieving unemployed benefits), lowers standard of living for them and their
families, costs worsen with time, can lead to high levels of stress, anxiety and
depression, even suicide
- To society: High levels of unemployment may be in the forms of poverty,
homelessness, higher rates of crime, vandalism, increased gang activity, etc.
- To economy: Underallocation of resouces, gov must spend on them
- Factors that affect the level of unemployment
- It is a flow between people gaining and losing jobs
- Factors that may cause unemployment to rise:
- People losing jobs
- People who have resigned
- People who have left school, but have yet not found work
- People trying to return to work after having left it
- People who have immigrated to a country and have yet not found work
- Factors that may cause unemployment to fall:
- People who find jobs
- People who retire
- People who go (back) into education
- People who become stay-at-home parents
- People who emigrate to other countries
 - People who give up searching for jobs
- People who pass away
- Labor market
- Level of wages adjusted for inflation
- Demand: Firms who demand workers (labor)
- Supply: Households who provide workers (labor)
- As wage levels increase, firms attempt to reduce the amount of labor they
use
- As wage levels decrease, producers are more likely to take on more labor
- As wage levels increase, more workers are willing to work (+SLabor) and
vice versa
- Causes of unemployment
- Cyclical (demand-deficient)
- Associated with the business cycle
- As economy moves into slower growth, - AD as -C, causing a fall in
output and therefore, labor
- In graph: Economy initially producing at AD1*AS but as economy moves
into contractionary period of business cycle, AD1→AD2
- Labor market: The demand for workers falls since production
decreases but wages remain the same since they are “sticky
downwards” (Firms realize that paying lower wages will lead to
discontent and reduced motivation amongst workers, there are also
labor contracts and trade union power that prevents falls in wages).
There will be excess supply of workers, unemployment is created
at a-b
 - Solution: Government intervention or interest rates decrease to increase
AD (expansionary fiscal or monetary policies)
- Structural
- Comes from changes in the structure of an economy
- Causes
- Permanent fall in demand for a particular type of labor
- In a naturally growing economy, new types of jobs would
be created if others disappeared, adjusting to the change
- Lack of occupational mobility: If the unemployed who lost
their jobs lack the skills to take on the new ones, it results
in long-term unemployment
- Lack of geographic mobility: If the jobs created differ in
location to the previous ones, the unemployed will be left
behind
- Technological change which makes workers redundant. +
machinery, + unemployment
- Globalization which makes it possible for companies to set
up their operations in countries where labor costs are lower
and/or regulations are less strict which results in fall for
domestic demand for labor
- Changes in consumer taste
- Change in institutional framework of the economy
- Laws governing the labor market (ex. Minimum wage)
- Laws governing trade unions (ex. Prohibition to hire
non-union members)
- Cyclical unemployment could result in structural unemployment if caused
by a long time of economic activity
- Solutions
- Interventionist policies
- Educational system that trains people to be occupationally
flexible
 - Spending on adult upskilling or retraining programs to help
people acquire the necessary skills to match available jobs
- Subsidies to firms that provide worker training
- Encourage people to move to areas that provide jobs by
providing subsidies or tax breaks
- Support apprenticeship programs
- Job centres providing information about job vacancies
- Disadvantages to these policies: High opportunity cost,
only effective in the long term
- Market-based policies
- Lower unemployment benefits to encourage unemployed
people to find jobs
- Deregulate labor markets
- Disadvantages to these policies: Increase inequity, prevent
unfair treatment
- Frictional
- Short-term unemployment that occurs when people are in between jobs, or
they have finished school and are entering the labor force
- Solution (to reduce)
- Market-based: Reduce unemployment benefits to motivate people
to find jobs faster
- Interventionists: Improving the flow of communication from
potential employers to people looking for jobs
- Seasonal
- Workers employed on a seasonal basis
- Solution to decrease:
- Encourage people to take different jobs in their “off season”
- Improve flow of communication from potential employers to to
people looking for jobs
- Natural rate of unemployment
 - Even in equilibrium, there might still be unemployed people (either not able or
willing to take the jobs available)
- Natural rate of unemployment= structural + frictional + seasonal
- What is most effective to solve unemployment?
- If demand comes from demand-defficient→Demand-side policies
- Unemployment even at full employment→Supply-side
Unit 20: Macroeconomic objective: Low and stable rate of inflation
- Inflation: Stable increase in the average price level in the economy, over a given period of
time
- Consequences of high inflation
- Loss of purchasing power: + inflation, + prices at = income (for those with fixed
incomes or low bargaining power), less capacity to buy goods and services
- Effect on saving: Devaluates the amount of money saved (it is worth less if there
is more money supply), discourages saving
- Effect on economic growth: Lack of saving means less investment in the long
term
- Effect on interest rates: + rate of inflation, + nominal interest rates from banks (in
order to keep the real rate they earn positive)
- Effects on international competitiveness: + rate of inflation makes exporters less
competitive and imports from lower-inflation partners more attractive
- Uncertainty: -I due to the uncertainty associated with inflation
- Labor unrest: if workers feel their wages and salaries to do not keep up with
inflation, there will be disputes between unions and managements

Winners Losers

Index-linked income people→Their income increases with inflation Fixed-income people→Suffer a fall in purchasing power over time

High wage-bargaining people since they can negotiate their income to increase Low wage-bargaining power since they cannot negotiate the increase

Borrower since real interest rates lower with inflation, decreasing the amount of Savers/Lenders: Vice versa to borrowers, they will receive less money in
money they need to return return
“Asset rich” people since inflation increases their value Cash rich: Money looses value

Importers: Domestic price increases so imports are more attractive Exporters: Higher prices will lower demand, and decrease their
competitiveness in international markets

- Low and stable rates of inflation are good because it results in a reduction in inflationary
pressures→If people have faith in the central bank’s ability to contain inflation, they will
not expect higher interest rates and therefore, will not make demand for increases in
wages higher than what is expected→Will keep costs of labor from rising excessively
- Measurement of inflation: Consumer Price Index (CPI)
- Made by creating a representative “basket” of consumer goods and services and
measuring how much its price changes over time
- In each country the agency of the typical good and services consumed by the
average household grouped into categories. Some categories “weight” more than
others due to importance
- Prices of each month are used to calculate the price of the basket
- Isues in using CPI as a measurement
- The purchasing habits of a “typical” household is not applicable to all
people→Elderly couple vs large families vs disabled persons
- Not an accurate representation of different areas which might vary→Rural vs
Urban
- There may be errors in the collection of data, limiting final results→Samples
collected are skewed to that group of people’s situation | Large sampling is timely
and costly
- Removing or adding certain goods to the basket to make it more accurate requires
time but if it is not done, it limits the ability of the analysts to make comparisons
in time periods
- Quality of goods changes over time which might cause prices to rise→not
considered in the basket
- Different measurements in different countries makes international comparisons
ineffective
 - Prices may change for reasons that are not sustained which does not reflect
inflation→Statitians reduce error by identifying a “core” rate of inflation that uses
CPI excluding food and energy prices
- There are more than just CPI indicators to judge economic health→Producer
Price Index (PPI) may be used to track the price of goods as they leave the
factories and before distributors/wholesalers or retailers add their profit margin
- Causes of inflation
- Demand-pull
- Caused by an increase in AD, pulls price levels higher
- Can come from changes in the components of AD (C, I, G, (X-M)

- Cost-push
- Result of an increase in costs of production, which decreases SRAS
- Wage-push inflation: When increase in APL comes from increase in costs
of labor
- Import-push inflation: When costs of imported capital, raw materials
increase

- Merge
- Inflation tends to perpetuate itself→Inflationary spiral
- Explanation graph
 If +AD, demand-pull inflation
But higher costs of production will make workers negotiate higher wages
further increasing it
SRAS will decrease as a result of cost-push pressures
Higher wages will give households the illusion of higher spending power,
encouraging consumption
AD will shift again

- Gov solution to reduce inflation

- Demand-pull inflation→Demand side policies→Contractionary fiscal and
monetary to reduce AD
- Cost-push inflation→Demand side policies since policy makers have little control
over costs of prodution
- Problem are all disadvatges previously named in Chapter 17
- Deflation: Persistent fall in average price level prices in the economy, over a given period
of time
- Good deflation
- Comes from improvements in supply side of the economy and/or
increased productivity
- An increase in LRAS (due to imrpovement in quality/quantity of FoP)
results in +output at -p
- Increases employment
- Bad deflation
- Comes from the demand side of the economy
- A fall in AD results in an decrease in APL and a fall in output
- Increases unemployment as firms need less workers to produce

- Consequences of bad deflation

- Unemployment: -output, -workers needed, +unemployment→Will
further reduce AD possibly leading to deflationary spiral
- Deferred consumption: Deflation means lower prices in the future,
causing current consumption to decrease→Will further reduce AD
possibly leading to deflationary spiral
- Falling consumer confidence/uncertainty: If households become
pessimistic or uncertain about the economic future, consumer
confidence falls→Will further reduce AD possibly leading to
deflationary spiral
- Effect on investment: With deflation, businesses make less profit,
even losses. Business confidence is likely to be low which reduces
investment→Negative implications for economic growth
- Costs to debtors: Those who take loans suffer because their debt
rises, which worsens with low profits that make it difficult to pay
 back loans, possibly leading to bankruptcy→Worsens business
confidence
- Policy ineffectiveness: Deflation makes the use of monetary policy
ineffective since it is assosiated with low or negative interest rates
which cannot be cut any further
- Disinflation: When the rate of inflation decreases
Unit 21: Macroeconomic objective: Economic growth
- Economic growth can help achieve the first two goals of macroeconomics (Lows and
stable rate of inflation, low unemployment)
- Economic growth: Increase in real GDP over time
- Can be by moving AD closer to LRAS since it means more employment of resources

- Can be by moving LRAS to the right or keynesian AS to the right

- Deflationary gaps may result from negative economic growth in the short run which may
be solved using expansionary fiscal and monetary policies
𝑟𝐺𝐷𝑃 𝑦𝑒𝑎𝑟 2 − 𝑟𝐺𝐷𝑃 𝑦1
- Growth rate = 𝑟𝐺𝐷𝑃 𝑦1
* 100

- Positive consequences of economic growth

 - Pushing the LRAS curve causes economies to experience non-inflationary
economic growth when the AD increases with it due to growing populations and
rising incomes
- Lower unemployment
- Increase in national output is equivalent to increase in national income→Income
of average person increases possibly creating higher living standards

- Contributes to leaps in technology that have the possibility of make life easier and
more pleasurable, contributing to living standards
- Higher incomes lead to higher tax revenues which make it possible to increase
government spending on merit and public goods, improving living standards
- May make country more competitive in exports and increase imports
- + national income, better education and human capital
- Negative consequences of economic growth
- Higher income means sacrificing leisure time and neglect of personal
relationships (because + hours of work required)
- Ongoing insatisfaction of always wanting more goods and services
- People might be more unhappy due to worrying about material wants
- Likely to result in structural unemployment
- Might cause growing inequality
- Rapid economic growth results in higher emissions of greenhouse gases
- Higher national income results in increasingly higher levels of waste
- Depletion of non-renewable resources in order to increase output
Unit 22: Economics of Inequality and poverty
- Equality: Where economic outcomes are the same for different people/social groups
- Some degree of inequality is inevitable, and even necessary, within a market
 economy:
- Gives incentives to work harder and to gain better education
- Encourages entrepreneurship; those who innovate and do well can gain the
financial benefits of their risk-taking
- Equity: Recognizing everyone is different, it relates to fairness. Despite differences,
everyone should be given the same opportunities to succeed

- Poverty
- Absolute poverty: When the income of a person, or household, is not enough for
them to meet even their basic needs for shelter, food, safe drinking water, health
and education
- World Bank sets an International Poverty Line; if a person earns less than
this international measure, they are living in absolute/extreme poverty
- Since exchange currencies differ, economists use purchasing power parity
(PPP) exchange rates, otherwise known as “international dollars” which
would buy approximately the same amount of goods and services in any
country
- Poverty line currently stands at $US 1.90 PPP
- Relative poverty: Comparative measure based on the living standard of a
particular country.
- Standard measure: People who earn less than 50% of the median income
- Inequality is the result of discrimination against certain people due to different factors
(gender, race, ethnicity, age, religion, sexual orientation, socio-economic status)
- Income: All the money people earn from wages, salaries, interest from savings and
 bonds, dividends earned from the ownership of stock and shares, rent and capital gain
- Wealth (like net worth): Value of all of a person’s total assets (houses, property, savings,
investments, retirement saving) minus their liabilities (debt including mortgages, student
loans, car loans, credit card debts)
- Types of inequality
- Inequality in outcome: Inequalities in income and wealth
- Inequality of opportunity: When a person cannot earn as much, or afford to buy as
many assets as other people simply because they do not have the same
opportunties. Includes education, health care access, possible jobs, amount of
income they can earn based on the circumstances at birth (based on gender,
ethincity, birth location, profession, socio-economic background)
- Measurement of income inequality: Lorenz curve
- Construction:
- Graphical representation of data about the household income gathered in
national surveys
- Households are ranked in ascending order of income levels and the share
of total income going to groups of households is calculated
- Line of absolut equality indicates a perfectly equal distribution of income. Ex.
Every 20% of the people (Lowest to highest households) earns 20% of the income
in the economy
- Usefulness
- Can be used to compare countries in term of income distribution (you
make two curves on the graph, each for each country, and compare)
- May be used to compare the change in income distribution for a single
country over time (two curves on the graph, each for each year, and
compare)
 - GiNi Index
- Derrived from Lorenz curve; Ratio between the line of absolute equality
and the Lorenz curve (Area a)
- The higher the index, the more inequality
- There is no hard and fast correlation between a country’s Human
Development Index (HDI) and its GiNi index
- Mesearement of poverty: National poverty line
- Reflects relative poverty of a country
- National poverty line sets an arbitrary percentage of median income
- Chart provides a total poverty rate, indicating the total population living beneath
the poverty line
- Also indicates the separate age groups

- An alternative approach is to set a poverty line at the min amount of income

households need to meet their basic needs for goods and services considering an
 amount to enjoy certain ‘basic’ standards of living deemed acceptable→Like the
basket of goods for CPI
- Multidimensional Poverty Index (MPI)
- People in extreme poverty lack clean water, sanitation, adequate nutrition,
primary education and poort health (aside from income) → Their poverty is
multidimensional
- MPI is known as a “composite” indicator as it aims to measure many dimensions
of poverty
- MPI gives equal value to health, education and living standards; it uses indicators
and notes what it means to be poor in each

MPI

Dimension Indicator Deprived if living in the household where… Weight

Health Nutrition An adult under 70 years of age or a child is undernourished 2/18

Child mortality Any child has died in the family in the five-year period preceding the survey 2/18

Education Years of schooling No household member aged 10+ has completed 6 years of schooling 2/18

School attendance Any school-aged child is not attending school up to the age at which he/she would complete class 8 2/18

Living Cooking fuel Household cooks with dung, wood, charcoal, or coal 1/18
standards
Sanitation The household does not have access to improved sanitation or it is improved but shared with another household 1/18

Drinking water Household does not have access to improved drinking water or safe one is at least 30-min walk awat from home, 1/18
round trip

Electricity Household has no electricity 1/18

Housing Housing materials for at least one of roof, walls and floor are inadequate: floor is of natural materials and/or 1/18
roof and/or walls are of natural or rudimentary materials

Assets Household does not own more than one of these assets: Radio, TV, telephone, computer, animal cart, bicycle, 1/18
motorbike, refrigerator, does not own a car or truck
- Person is considered multidimensionally poor of they experience at least 6/18 of
the indicators
- Difficulties in measuring poverty
- There are many different types of poverty and definitions vary from country to
country, making it difficult to measure correctly
 - Some of the elements of poverty (like feeling of uncertainty, vulnerability, fear)
are impossible to measure
- Measures of poverty are usually based on household surveys which requires an
enormous amount of resources which might lead to poor quality of results in
countries with few resources
- Govs might bias results since it is convenient for them to reduce their national
poverty lines
- Causes
- Inequality of opportunities:
- People born into different conditions face different unequal opportunities
(education, employment (income), aging, health care)
- Poverty trap: When a child is already born in poverty they may struggle to
reach their potential and will enjoy fewer opportunities to move out of
poverty because of disadvantages
- Invokes: health challenges, malnutrition, parents working long
hours, indecent standards of living, quitting education because they
are unmotivated, difficulty getting a job, and inability to save→
lower life expectancy
- Social mobility: Ability of people/households to move up or down the
economic ladder
- Intragenerational social mobility: Ability of an individual to move from
one income level to a higher income level within their lifetime
- Intergenerational social mobility: Ability of a person to move to a higher
level of income than their parents.
- OECD stated that intragenerational and intergenerational mobility is on
decline because there are a lot of challenges and few opportunities for
children with disadvantaged backgrounds (Those living in absolute
poverty have practically no opportunities to improve their standard of
living).
- The more unequal societies are, the less likely people are to be socially
mobile.
- Discrimination
- Definition: Unfair treatment against certain people due to a number of
factors
- It manifests itself in the opportunities they face and the outcomes they
obtain
- Lower-income children → discriminated against since they do not receive
the same opportunities and are unable to secure higher-paying jobs
- Wage discrimination: When workers in similar positions receive different
wages based on the factors not related to their skills or productivity
- Differences in human capital
- Skilled workers= + salary
- Unskilled workers= - salary
- This leads to even more inequality because unskilled workers do not have
job security or protection from lower wages since trade-union power has
been reduced
- Ownership of resources
- The higher a person’s income, the more physical and financial capital they
will own
- Lower income people tend to not own capital and the majority of their
income comes from wages and salaries, not capital
- The value of share prices (capital) have risen much faster than the average
wage and salary that the concentration of wealth in rich people have
increased.
- Globalization and technological progress
- Structural unemployment
- + efficient machinery, - breaks, cheaper (than manual labor) → those who
once did the job that the machine does will probably lose their job.
- + machines and specialized equipment, + demand for workers with a
higher education level (+ salaries for them)
- Leads to - middle class, with few people having higher incomes, and a lot
having low incomes.
 - Market based supply-side policies
- Most policies benefit those already wealthy
- Removes power from those who fight for the rights of the average worker
- Ex. People with a lot of economic power may see an even greater increase
in income from their investments, while trade unions may see themselves
being taken less into account in reunions with firms, which may be
reflected in workers salaries and working conditions.
- Firms may take advantage of a more flexible labor market, offering more
non-standard employment→associated with almost no labor security, low
salaries and uncertainty for the workers.
- Government tax and benefits policies
- Capital owners benefit from corporate profits→typically taxed at a lower
rate than income taxes.
- Governments typically impose lower taxes on capital gains, dividends, and
savings income than they do on wages and salaries→increases inequality.
- Shift toward "austerity" measures as govs cut back on expenditure to
lessen public debt = less money being spent on child benefits, housing
allowances, and employment insurance, which has worsened standards of
living for those with lower incomes.
- Unequal status and power
- Richer people may have an outsized influence on how government
policies are developed since a tiny section of the population owns the
majority of the resources and income in an economy.
- People with low incomes are also less likely to be involved in politics due
to the lack of social networks, education, and background
- Consequences
- For economic growth :
- Arguments for inequality and poverty:
- Significant economic disparities between rich and low-income
groups might encourage innovation and entrepreneurship.
- The pool for savings is needed for investment, less inequality
 means less money available for I
- Smaller gaps means smaller incentives to work harder and increase
salaries
- Arguments against inequality and poverty:
- Inequality harms economic expansion since + uneven opportunities
result in a vicious cycle generationally→Children with lack of
skills and training result in lower productivity levels, damaging
economic growth
- Social and political instability are assosiated with high levels of
poverty→can damage growth
- People have - $ to buy things and consume them, - I, - productive
workforce→Causes a leftward shift in GDP
- For Living-standards and Social Stability:
- People in poverty need to make difficult decisions regarding how they will
use their limited incomes.
- Neighborhoods in the country are divided by “rich” and “poor” depending
on where people live. If government-subsidized housing, poverty would
get even more concentrated in particular areas→These areas might have
fewer job opportunities, poorer schools, and fewer resources compared to
wealthier areas, increasing inequality of opportunity
- Gap between rich and poor people in a society may cause instability→Can
lead to:
- Social Tension: People might feel angry or frustrated because they
see others living much better lives than them.
- Increased Crime: Some people might turn to crime because they
feel desperate or see no other way to get what they need.
- When many people feel poor compared to others and think the system is
unfair, they can lose trust in the government and democracy→political
problems and instability.
- Role of taxation in reducing poverty and inequalities
- Many taxes have property taxes as a form of a tax on wealth; The higher the value
 of a person’s property, the higher the amount of tax to be paid
- Tax deductions exist, reducing the amount of tax a household or firm pays as a
result of spending on certain things. Ex. Businesses that donate to charity can
claim their tax deductions
- Regressive taxes
- Definition: Indirect taxes that take a larger share of income from
lower-income people than from higher-income people.
- Indirect taxes are all regressive. Ex. VAT
- Used to discourage the consumption of goods that create negative
externalities.
- Worsen income inequality

- Progressive Taxes
- Definition: Direct tax which rises with income.
- A person earning a low income might pay a small percentage of their
income to the government.
- Arguments for:
- Fairness: It reduces the tax burden on those with lower incomes
who can least afford it.
- Narrows the gap between low and high-income people: Helps to
redistribute wealth→ + equity
- Gives government funds to finance expenditures and redistributive
policies.
- Economic Stability: During economic booms, higher taxes on
increased incomes can help cool down excessive growth, while
during recessions, the reduced tax burden on lower incomes can
help maintain consumer spending.
- Against
- Creates disincentives
- To work harder (individuals may not be motivated to earn
more if a significant portion of their income is taxed)
- For entrepreneurship (Same as to working harder and could
even motivate them to leave the country in search of more
‘favorable’ tax climates)
- For savings (Could depress saving and purchasing of stocks
and shares→Could deprive financial markets from funds)
- Despite the arguments against, there is little evidence that this possible
 disincentives would have a notable effect on the economic well-being of
the rich.
- Other Policies
- Transfer payments/Welfare payments/Security payments
- Definition: Governments use tax revenues to redistribute income and
provide different types of assistance to groups in the economy to improve
their living standards and opportunities
- The name comes from the income being transferred between groups
- Types of transfer payments
- Child support
- Maternity/paternity benefits
- Old age pensions
- Housing allowances
- Universal vs Means tested
- Universal: Given to everyone. Ex. Child support
- Means-tested: For those who earn below a certain level.
- Investment in human capital
- What is important is the nature and quality of the spending for improving
the human capital, not only the quantity of that spending.
- Govs need to ensure equal opportunities for people at all income levels,
and therefore, design policies such as targeted subsidies, transfers, and
programs that support lower-income households who are currently locked
out of many opportunities.
- Govs need to create opportunities for improved health and education at all
age levels
- Examples:
- Public health insurance.
- Pre and post-natal care to low-income families.
- Access to good-quality child care and preschool programs.
- Conditional cash transfers (CCTs): Payments to families given on
the condition that the parent/s meet certain requirements related to
 their children’s education and health
- Recruiting quality teachers and more educational sources for
schools in disadvantaged areas
- Training and work experience programs.
- Resources targeted towards elder care.
- School food policies, and health education to improve nutrition.
- After-school programs and financial support.
- Targeted support for low-performing students to prevent school
droputs
- Apprenticeships for older students to help preparate for the
workplace
- Financial support, counselling, tutoring to help students from low
income families attend and stay in higher education
- Training and work experience programs to increase the
employability of adults who lose their jobs
- Community programs to provide parenting supports
- Resources targeted toward elder care to help senior citizens
struggling on low pensions
- Reduce discrimination
- Policies to reduce gender and other discrimination
- It is the govs responsibility to have effective policies in place to prevent
any unfair treatment→Work to decrease inequality which can damage
people’s living standards | Companies can also have policies in place
- Policies could include
- Equal pay laws: Equal salaries and wages despite of gender in
work of equal value
- Encouragement to increase diversity in workplaces:
Positive/affirmative action to encourage business and government
bodies→Provide opportunities for previously discriminated groups
- Legislations about discrimination: Make it illegal to discriminate
against individuals
 - Diversity quotas (or targets): Required percentage of people from
previously discriminated groups working in a particular capacity
- Governments might mandate that a certain percentage of company
boards of directors be women
- Requirements for accessibility so that a person cannot be excluded
due to disabilities
- Increase min wage
- Definition: Minimum amount of remuneration that an employer can
legally pay a worker→Made to protect workers from poverty (Low pay)
- Can also be one element of a policy to overcome poverty and reduce
inequality
- Many countries face the problem of “working poverty”: People have jobs
yet live below the country’s national poverty line
- In some countries, the national minimum wage is not sufficient to ensure a
reasonable standard of living→Solution: Increase the minimum wage
- Argument against:
- It might harm workers as firms need to pay higher wages
increasing unemployment.
- Employers replace workers with machines because they are
cheaper.
- + wages, + costs of production, +APL
- Businesses that cannot afford higher wages will go out of business
and increase unemployment.
- Arguments in favor:
- No empirical relationship between minimum wage and
unemployment.
- Much work done by minimum wage people cannot be done by
machines.
- Motivates people to work harder meaning higher productivity
which offsets the higher wages
- Encourages people to stay longer in their work, reducing the hiring
 and training costs of new workers.
- Encourages people to join the labor market→reduce
unemployment
- Results in increased consumption by low-wage workers→+ AD, -
unemployment.
- May allow low-skilled workers to escape their poverty trap and
provide better opportunities for their children by giving them a
better education
- Can narrow the wage gap between men and women since many of
minimum-wage jobs are done by women.
- Reduces inequality
- Universal Basic Income (UBI)
- Definition: Where every citizen is provided with a fixed amount of money with
no conditions or eligibility requirements→The amount of income would be
enough to keep people above the poverty line and would be the same for
everyone, regardless of their income level and working situation.
- Many programs require significant amounts of paperwork, conditions, and
resources to make sure that people are eligible for benefits and sanctions for those
who “cheat” the system→Solution: UBI
- Arguments against
- Giving people money will make them more lazy, and they will stop
working or not look for work.
- Too expensive for the gov
- There is no point in giving it to the ones who are not in need
- Arguments for
- Amount given would be enough to meet basic needs, preventing people
from living in poverty.
- It gives opportunities that can be good for the people and the wider
community/economy. (Returning to school to improve skills, looking after
family members, starting a business)
- Inequality and poverty is a worldwide problem, not just for the poor. The
 rich are also interested in reducing poverty and inequality→ marginal tax
rates for the very rich could be increased to help finance UBI.
- Removing many of the country’s conditional welfare payments and
replacing them with an unconditional UBI may free up resources.
- It needs to be universal and seen as a right for everyone→By being
unconditional, UBI simplifies the process, ensuring everyone receives the
same support without bureaucratic complexities
Global Economics
Unit 23: Why do countries trade?
- International trade: Exchange of goods and services between countries
- Advantages
- Lower prices: Consumers can buy less expensive products and producers can
purchase less expensive raw materials and semi-manufactured goods (Other
countries may have better access to natural resources, differences in quality of
labor forces or capital and levels of technology)
- Greater choice: Consumers now have access not only to domestic products but
also to ones produced internationally
- Difference in resources:
- There are some resources a country may need but doesn’t have; they can
import them (they have to export goods and services in order to earn
foreign currency and be able to pay)
- There are resources a country may have but doesn’t need; they can export
them
- Economies of scale: + size of the market, thus, + demand, increasing level of
production and efficiency
- Allows amount of specialization to increase
- Leads to greater scope for the division of labor
- Should lead to a reduction in lon-run average costs due to efficiency
- Increased competition: Domestic firms compete with foreign ones, leading to
competition that guides efficiency→May increase quality and variety of goods
available to consumers
 - More efficient allocation of resources: Countries that are best producing certain
goods and services will produce them; provide lower costs and take advantage of
efficiency when free trade is taking place
- Source of foreign exchange: International trade enables countries to obtain foreign
exchange→Exporting will be paid in foreign currencies
Unit 24: Free trade and protectionism
- Free trade: Takes place between countries when there are no barriers to trade put in place
by govs or international organizations. Goods and services are allowed to move freely
between countries
- Arguments in favor of protectionism
- Protects domestic employment: Some industries cannot compete with foreign
competition; If they are in decline it leads to high levels of structural
unemployment→Gov wants to prevent it
- Counterargument: It is likely that those industries continue to decline and
protection simply prolongs the process→It would be better to let those
resources go where necessary
- Protects economy from low-cost labor: The main reason for declining domestic
industries is the low cost of labor in exporting countries
- Counterargument: Preventing low cost labor would go against the concept
of comparative advantage since domestic consumers would have to pay
higher prices due to inefficient producers, plus the country wishing to
export would loose trade causing their economy to suffer
- Protects infant industries: Developing industries may not have the economies of
scale that larger ones do which means will not be as competitive against foreign
imports until it can gain the advantages of economies of scale→They need to be
protected until achieving size
- Counterargument: Most developed countries have very efficient capital
markets allowing them access to large amounts of capital; There is no
basis for the idea that industries in developed countries will set up in a
relatively small way, not benefiting from economies of scale
 - Avoid risks of over-specialization: Countries would become over-dependant on
the export sales of one/two countries if they were over-specialized they would
face serious consequences if anything changed in the world market
- Strategic reasons: Certain industries need to be protected in case needed in war
times
- Counterargument: It is unlikely that a coutnry will go into war and, if they
do so, they will be completely cut off from all supply.
- Prevent dumping (selling by a country of large quantities of a commodity, at a
lower price than its production cost, in another country: Dumping damages
industries since it may ruin the domestic producers in the developing country
- Counterargument: Difficult to prove whether or not a foreign industry has
been guilty of dumping, a gov that subsidizes a domestic industry may
support dumping
- To protect product standards: A gov may want to impose safety, health,
enviornment standards on goods being imported into domestic markets to ensure
the imports match standards of domestic products. WTO accept these band under
empirical evidence of the claim
- Counteragument: Many reasons given for bands are simply excuses for
protectionism. Another problem is that meeting product standards elevates
costs
- Raise gov revenue: Import duties are taxes on consumers in the country buying
the imported goods
- Coutnerargument: It is difficult to collect taxes in developing countries so
govs import tariffs→Elevates costs
- Correct balance of payments deficit: Govs impose protectionist measures
attempting to reduce import expenditure and thus improve current amount of
deficit (countries tend to spend more on imports than it is earning from exports)
- Counterargument: Only works in the short run, does not fix deficit. It also
makes it likely that other countries will retaliate measures of their own
- Arguments against protectionism
- Raises prices to consumers, and to producers (in imported goods)
 - Less choice for consumers
- Competition diminishes
- Domestic firms become inefficient without incentive to minimize cost
- Innovation is discouraged
- Distorts comparative advantage
- Specialization is reduced, reducing world potential
- May lead to retaliation by other countries, may lead to “trade war” with escalating
tariffs
- May hinder economic growth
- Trading countries
- Countries that import: Price of world is lower than domestic price, causing
countries to import goods

- Countries that export: Prices of world are higher than domestic price, causing
countries to export goods

- Main types of protectionism

- Tariffs
- Tax charged on imported goods
 - Shifts world supply curve upwards since placed on foreign producers of
the good and not the domestic producers
- Before
Price of the world (Pw) is below the domestic price (Pd)→ country imports
goods to solve the excess demand (Q2 > Q1) at a lower cost (Pw < Pd).
The amount that is produced domestically before the tariff is Q1, where
the domestic supply curve (Sd) intersects with the world supply (Sw) and
Q2 is the quantity consumed domestically, where the domestic demand
curve (Dd) intersects Sw→quantity imported is Q2 - Q1.

- Effects:
Supply of the world would shift upwards by the amount of the tariff
Price would move to Pw+ t.
Quantity demanded would fall from Q2 to Q4.
Quantity supplied would increase from Q1 to Q3→imports would be Q4 -
Q3
Government revenue would be at (Q4 - Q3)*((Pw + t )- Pw).
- Surplus
- Consumer surplus: c+b+d+e+f+g→c+f
- Producer surplus: a→a+b
- Government revenue: nothing→ e (imported quantity x tarif)
- Welfare loss: d+g (no longer consumed)
- Tariffs are the most common anti-dumping measures because they
eliminate the cost advantage of the dumped imports
- Subsidies
- Producer subsidy
- Gov gives subsidy to a firm, per unit of output, lowering domestic
firm’s costs so they can be more competitive in international
markets
- Before
Price of the world (Pw) is below the domestic price (Pd)→ country
imports goods to solve the excess demand (Q2 > Q1) at a lower cost
(Pw < Pd).
The amount that is produced domestically before the subsidy is Q1,
where the domestic supply curve (Sd) intersects with the world
supply (Sw) and Q2 is the quantity consumed domestically, where
the domestic demand curve (Dd) intersects Sw→quantity imported
is Q2 - Q1.

- Effects
Domestic producers increase production to q3 because they now
receive at pw+sub per unit produced
Foreign producers now supply from q3 to q2
The effective cost (opportunity cost) represents pw + sub (but no
one is producing at that price)
Consumers keep demanding at q2*pw
Producers now supply at q3*pw (they get paid the same but they get
to produce more, replacing, up to q3, imports)
- Surplus
 - Consumer surplus: c+b+d+f+g→c+f+g (indirectly affected
by taxes used to fund the subsidy)
- Producer surplus: a→a+e
- Government spending: b+d
- Welfare loss: d because thre is misallocation of resources,
more world resources are being used to produce more than
necessary
- Quotas
- Physical limit on the number or values of goods that can be imported into
a country
- Before
Price of the world (Pw) is below the domestic price (Pd)→ country imports
goods to solve the excess demand (Q2 > Q1) at a lower cost (Pw < Pd).
The amount that is produced domestically before the quota is Q1, where
the domestic supply curve (Sd) intersects with the world supply (Sw) and
Q2 is the quantity consumed domestically, where the domestic demand
curve (Dd) intersects Sw→quantity imported is Q2 - Q1.

- Effects
Domestic producers supply at q1*pw
Importers produce their quota at q1 to q3
There is an excess demand of q2-q3, causing price to rise to pquota which is
supplied by domestic producers shifting the sd to the right at pquota
Consumers now demand at (pquota*dd), q4(demand decreases due to higher
prices)
 - Surplus
- Consumer surplus: c+b+d+e+f+g→c+e
- Producer surplus: a→a+b+d
- Welfare loss: f due to inefficient producers (who need a larger
revenue than foreign) and g because it is not consumed anymore
- Adminisrative barriers
- Red tape (administrative processes to be undertaken when importing): If
lengthy and complicated, may act as a restriction to imports (time-taking
and costly)
- Health and safety standards and environment standards: Various
restrictions may be placed on imports to be sold in domestic markets, or
on the methods used to manufacture them to restrict their entry
- Embargoes (extreme quotas): Complete ban on imports, usually put in
place as form of political punishment
- Nationalistic campaings
- Gov sometimes run marketing campains to encourage people to buy domestic
goods instead of foreign ones
Unit 25: Economic integration
- Economic Integration: When countries coordinate their economic policies. When this
increases, trade barriers decrease (fiscal and monetary policies are more harmonized)
- Bilateral agreement: Trade agreement between two countries (aim: to reduce
tariffs and quotas)
- Multilateral “ ”: Trade agreement trade between multiple countries (aim: to
reduce tariffs and quotas)
- Trading bloc: Group of countries that have an agreement to increase trade and gain
economic benefits from cooperation.
- Six stages of economic integration:
- Preferential trading areas (PTA)
- Trading block that gives preferential access to certain products from
certain countries
- Usually carried out by reducing, not eliminating tariffs
 - Ex. EU and African, Caribbean and Pacific Group States (ACP)→ Enables
EU to guarantee regular supplies of raw materials and the ACP countries
to gain tariff preferences and access to special funds used to try to achieve
price stability in agricultural and mining markets
- Reciprocal trade agreement: Equal changes from both blocs
- Free-trade areas
- Agreement made between countries, where countries agree to trade freely
among themselves, but can trade with countries outside of the free-trade
area in any way.

- Ex. North American Free Trade Area (NAFTA) →Compromises USA,

Canada, Mexico.
- Custom Unions
- Agreement made between countries, where countries agree to trade freely
among themselves, and they also agree to adopt common external barriers
against any country attempting to import into the customs unions
 - If a country exported by D enters either A, B, C, the trading ‘rules’ will be
the same
- All common markets and economic and monetary unions are custom
unions
- Ex. EU | Mercosur: Argentina, Bolivia, Brazil, Paraguay, Uruguay
- Common markets
- Custom unions with common policies on product regulation, and free
movement of goods, services, capital, and labor
- Ex. EU | CARICOM Single Market and Economy (CSME): Barbados,
Belize, Guyana, Jamaica, Suriname, Trinidad and Tobago, Antigua and
Barbuda, Dominicana, Grenada, St Kitts and Nevis, St Lucia, St Vicent
and the Grenadines, Montserrat
- Economic and Monetary Union
- Common market with a common currency and a common central bank
- Ex. Eurozone: Members of the EU that have adopted the euro as their
currency and have the European Central Bank (ECB)
- Advantages of membership of a trading bloc
- Depends on the degree of integration
- + size market, potential for larger export markets and economies of scale for
producers as they + their production
- Some producers will gain from larger markets, others will not be able to
compete
- + competition→+ efficiency, + choice, - prices
- + stimuli for investment due to larger market size, foreign investment might be
attracted from outside the bloc
- (if trading bloc includes free movement of labor) + Employment opportunities for
individuals in member countries
- Will foster + political stability and cooperation
- Trade negotiations may be easier in a world made of large trading blocs
- Disadvantages of membership of Trading Block
 - Enact discriminatory policies against non-mebmers→Can be damaging to the
achievemets of multilateral trade negotiations of the WTO
- More integrations means less degree of economic and political sovereignty
- In a custom union, induvidual govs lose power to make desicions on how
to deal with trade outside the union
- In a common market, there are common policies on product regulation and
free movement
- In a monetary union, individual govs loose ability to manage interest rates
and exchange rates
- World Trade Organization (WTO)
- International organization that sets rules for global trading and resolves disputes
between its member countries
- All WTO members need to grant “most favored nation” status to one
another→Trade concessions granted by a member to another must be granted to
all members
- Aims
- Non-discrimination: Countries should not discriminate between their own
products, services and nationals and those of foreign countries. Should
also not discriminate between their trading partners
- More open trade: Lower trade barriers
- Predictability and transparency: All economic stakeholders should be
confident that trade barriers will not rise, providing confidence to invest,
create jobs, increase consumer choice and lower prices
- Engourage fair competition: Discourages unfair practices including
provision of export subsidies and dumping of products in foreign markets
- Benefit developing countries: Gives them extra time to adjust to WTO
provisions, greater flexibility and special privileges (when appropriate)
- Protect environment: Allows member countries to legislate to protect the
environment, public, animal and plant health. Must be applied equally to
domestic and foreign firms
- Functions
 - Administer WTO trade agreements
- Be a forum for trade negotiations
- Handle trade disputes among member countries
- Monitor national trade policies
- Provide technical assistance and training for developing countries on trade
issues
- Cooperate with international organizations
- Factors that limit its effectiveness
- Unequal bargaining power of member countries: Some economies with
larger markets are though to have too much power in the WTO and its
negotiations→Views of developing countries may be ignored in favor of
the others
- Trade rules unfair to developing countries: Since protectionist measures
are reduced, developing countries are prevented from protecting “infant
industries” and diversification
- Growing number of trade deals negotiated outside WTO: Exclude other
countries and diminish the importance of WTO by taking place outside its
jurisdiction
Unit 26: Exchange rates
- Definition: Value of one currency expressed in terms of another currency. Ex. £1 = USD
1.12
- Currencies are exchanged on the foreign exchange market, largest market in the world in
terms of cash movements→Includes trade between govs, central bank, private
commercial banks, MNCs and other financial institutions
- Fall in exchange rate: Fall in the value of a currency in terms of its exchange rate versus
other currencies. Ex. If 1000 pesos argentinos used to buy 1 USD, and can now buy 0.85,
it would be said that the exchange rate for argentinian pesos fell in terms of dollars as
pesos are worth less dollars
- Rise in exchange rate: Rise in the value of a currency in terms of its exchange rate versus
other currencies. Ex If 1000 pesos argentinos used to buy 1 USD, and can now buy 1.15,
 it would be said that the exchange rate for argentinian pesos rose in terms of dollars as
pesos are worth more dollars
- Exchange rate system
- The way that a country manages its exchange rate
- Fixed exchange rate system
- Currency is fixed to the value of another currency, to the average value of
a selection of currencies or to the value of some other commodity such as
gold
- Usually carried out by the gov or the central bank
- Revaluation: If the value of the currency is raised
- Devaluation: If the value of the currency is lowered
- Maintained by gov intervention in the foreign exchange market
- Ex. Barbadian (Bds$) has been fixed against the US dollar at rate
2Bds$=1USD; 1Bds$=50centsUS
- Graph explanation for how to maintain rate when supply increases
(for any reason, people are trading their currency for Bds, +Bds
circulating in the market)

Supply for Bds is increasing on the foreign exchange market

because for, example Barbadians are purchasing more imports
(which are payed in foreign exchange)
Supply curve shifts from s1 to s2 increasing quantity supplied.
Without gov intervention, exchange rate would fall
In order to maintain the fixed rate, gov needs to buy the excess
supply of its own currency (by using previously accumulated
 reserves of foreign currency), shifting demand from d1 to d2. Ex.
Barbadian gov buys Bds$, in exchange for dollars, increasing
demand for their own currency
- Graph explanation for how to maintain rate when demand
increases

Demand for Bds increases on the foreign exchange market

because, for example, more foreigners are visiting Barbados (so
they buy Bds and trade in their currency)
Demand curve shifts from d1 to d2 and there is excess demand for
Bds of q2-q1. Without gov intervention, exchange rate would rise.
In order to maintain fixed rate, gov needs to sell its own currency
in order to satisfy the demand, shifting supply curve from s1 to s2,
increases Bds reserved of foreign currencies. Ex. Barbadian gov
buys dollars, trading for Bds, increasing supply for their currency
- Floating exchange rate system
- Value of the currency is allowed to be determined solely by the demand
for, and supply of, the currency on the foreign exchange market
- No gov intervention
- Ex. Market for US dollars in term if euros.
- Demand is for US dollars from EU people
- Supply comes from those with US dollars
- Equilibrium price is 1USD=£0.8
 - Appreciation: If the value of USD in euros were to rise
- Deppretation: If the value of USD in euros were to fall
- Appreciation of the US dollar against the euro = depreciation of
euro against US dollar
- Conversley: Depreciation of US dollar against euro =
appreciation of euro against US dollar
- Possible questions to calculae
- To calculate exchange rate prices, use rule of three

- Ex. US dollar is currently trading against euro at a rate of

USD1=£0.8. What is the rate for £1 in USD?
0.8 → 1
1→x x= (1*1)/0.8 = USD 1.25
- To calculate how much something would cost in a currency if the
good was selling at a certain price of the other, multiply by the
opposite exchange rate
- Ex. With an exchange rate of USD1=£0.8, what would be
the cost in £ of a good selling for USD 75
75*0.8=£60
- Determinants of changes in the value of currencies in terms of others.
Using example of US dollars and £
- Rise in demand for US dollar (appretiation; Each US dollar will be
exchanged by a larger amount of euros)
- US inflation < EU inflation makes US goods and services
relatively cheaper than EU goods and services
- + production in EU, +demand for everything, including
imports from US
- Change in taste in the EU favoring US products
- + travels to US
- Investment in US firms due to strong economic growth or
implementation on new business-friendly policies
- People saving their money in US banks because US interest
rates increase
- EU speculators thinking US dollar will rise in future, will
make them buy more US dollars now to sell them later at a
higher price, making profit

- Rise in supply of US dollar (depretiation) happens when american

wish to (because in order to do these they will trade their dollars
for euros):
- Buy EU goods and services because US inflation>EU
inflation, thus US goods and services are relatively more
expensive
- Travel to the EU
- Increase in income in US because + demand for everything,
including EU imports
 - Investment in EU firms
- Save their money in EU banks because interest rates
increases, making it more attractive to save there
- Make money speculating on the euro (US speculators
expect £ to rise in future, buy more now to sell in future at
a higher price, making profit)
- Change in taste favorable to EU products

- Managed exchange rate system

- Currency is allowed to float, but with some level of interference from the
gov
- In reality, no currency is fully floating. There are times where intervention
is necessary because freely floating exnchage rates may cause uncertainty
for businesses, which is not good for trade.
- Most commonly, central bank sets an upper and lower limit for the
exchange rate value up to which the currency is allowed float.
- If it is getting close to the limit, the central bank will intervene in
the market for its currency
- Limits do not tend to be public, for fear of speculation
- Considerations of values of the exchange rate
- Advantages of high exchange rate
- Downward pressure on inflation: A high exchange rate means low price
for imported goods and raw materials which will decrease costs of
production to firms, possibly decreasing costs for consumers
 - Forces domestic producers to improve efficiency: Since high exchange
rates threaten international competitiveness, producers will be forced to
lower costs and become more efficient.
- More imports can be bought: Each unit of the currency will buy more
foreign exchange, therefore, more foreign goods and services
- Disadvantages of a high exchange rate
- Damage to export industries: Exports may be difficult to sell at a high
exchange rate, because prices are relatively high→Could lead to
unemployment in an attempt to decrease costs of production
- Damage to domestic industries: If there are more imports, domestic
producers are less demanded→May lead to further unemployment
- Advantages of a low exchange rate
- More employment in export industries: Low exchange rate means that
exports from the country will be relatively cheaper, meaning more
competitive
- More employment in domestic industries: Low exchange rate means
higher prices of imports, leading consumers to buy domestically
- Disadvantages of a low exchange rate
- Inflation: Low exchange rate makes imports more expensive, meaning that
costs of raw materials increase, therefore costs of production rise, leading
to higher prices in the economy.
- Why do govs intevene in the exchange rate maket
- Lower exchange rate in order to increase employment
- Raise exchange rate to fight inflation
- Achieve relative stability to improve business confidence
- Improve current account deficit (when spending on goods and services > revenue
received from exported goods and services)
- Methods for gov intervention in exchange rate market
- Using gov reserves of foreign currencies to buy, or sell, foreign currencies
- If gov wishes to + value of the currency, they can buy its own currency on
the foreign exchange market, creating demand, + rate
 - If gov whises to - value of currency, they can buy foreign currency on the
foreign exchange market, increasing supply of its currency on the market,
lowering its rate
- Changing interest rates
- If gov wishes to + value of the currency, they can rise interest rate (%
return money when people save in your bank) in the country, attracting
financial investment from abroad, increasing demand for the currency,
+rate
- If gov wishes to - value of the currency, they can lower interest rate in the
country, making citizens invest abroad, buying foreign currency,
exchanging their own, therefore, increasing supply, -rate
Unit 27: The balance of payments
- The balance of payments account: Record of the value of all the transactions between the
residents of a country and the residents of all other countries over a given period of time
(usually a year, although monthly accounts are also made)
- Credit item: Transactions that enter the country from abroad→Given a positive value
- Debit item: Transactions that leave the country to go abroad→Given a negative value
- X>M→Surplus in balance
- M>X→Deficit in balance
- Current account
- Balance of trade in goods/Visible trade balance/Merchandise account
- X of goods - M of goods over a given period of time
- Exports lead to an inflow of money into the country. Imports to an outflow
of money from the country
- Balance of trade in services/Invisible balance/Service balance
- X of services - M of services over a given period of time
- Ex. An Italian tourist on holiday in Vienna would be spending money that
represents an invisible export to the Austrian economy and an invisible
import to the Italian economy
- Income/Net investment income
 - Profit, interest and profits moving into the country - (profit, interest and
profits moving out of the country) over a given period of time
- Result of financial investment abroad
- Domestic firms set up branches in other countries; Their profits are a
positive item on the account
- The profits from a foreign firms in a country are a negative item on the
account
- The dividends paid by residents and institutions purchasing shares in
foreign companies is a negative item on the account
- Dividends paid by domestic firms to foreign stakeholders will count as a
negative item
- Current transfers/Net unilateral transfers
- Inflow of gifts, remittances, pensions and aid - (outflow of gifts,
remittances, pensions and aid) over a given period of time
- Payments made between countries when no good or services are
exchanged
- At gov level: Things such as foreign aids and grants
- At individual level: Foreign workers sending money back to their families
in their country home (remittances) or private gifts sent from person in one
country to a person in another
- Current account balance = Balance of trade of goods + balance of trade in
services + net income flows + net transfers
- May be in surplus or deficit at any given time
- Capital account
- Relatively small part of the balance of mayments account, does not have a
significant effect on it
- Elements
- Capital transfer
- Debt forgiveness, non-life insurance claims, investment grands
(money given by govs as a gift to finance physical capital)
- Transactions in non-produced, non-financial assets
 - Net purchase/use of natural resources (land, mineral rights, fishing
rights) and net sales intangible assets (patents, copyrights, brand
names, and franchises, etc)
- Fiancial account
- Net change in foreign ownership of domestic financial assets
- In regards to ownership of domestic financial assets
- Foreign>Domestic→Financial account deficit
- Foreign<Domestic →Financial account surplus
- Elements
- Direct investment
- Purchase of long-term assets, where purchaser aims to gain lasting
interest in a company in another country
- Includes purchasing property, businesses or stock/shares in a
business.
- Assets that are supposed to have a positive return in the future, by
increasing value over time
- The buyers of assets is taking a risk as profit is not guaranteed
- Much of this activity is in the form of FDI (Foreign Direct
Investment)
- Portfolio investment
- Stock and bond purchases (not a direct investment since they do
not lead to lasting interest in a company), where investor is pulling
forward the money in order to purchase the asset, expecting that
interest will be paid in the investment and money will be repaid at
a given point in time
- Includes buying and selling of treasury bills and gov bonds (assets
are borrowing and lending on the international market)
- Reserve asset
- Reserves of gold and foreign currencies which all countries own
- Official borrowing: Loan from one country to another
- Balance of balance of payments
 - Not actually balanced since too many transactions take place every second and it
is impossible to be completely accurate→To resolve it, ‘net errors and emissions’
is used; Put into account to ensure balance
- Current balance = Capital account + financial account + net errors + omissions
Unit 28: Economic development and sustainable development
- Growth ≠ development
- Economic development is a multidimensional concept that involves growth that must
benefit all people in the economy, and the improvement of living standards, or economic
wellbeing, or welfare. It is about increasing people’s freedom, reducing poverty,
providing public education, health and maintenance of law and order, guaranteening civil
liberties and the opportunity of civic participation
- Economic growth will not always lead to economic development, and especially not
sustainable development
- Sustainable development: Development that meets the needs of the present without
compromising the ability of future generations to meet their own needs
- As economies growth, so does demand for more and more goods and services,
requiring factories, power plants and households to all consume vast amounts of
resources and energy to meet their demands, resulting in earth-threatening global
problems
- Effects on humans of unstustainable economic growth affect developing countries
the most
- Access to safe water will become more precarious
- Tropical diseased may spread further
- Droughts will become more frequent and intense, and flooding is liley to
become a bigger problem in temperate and humid regions→Food
production is likely to suffer
- Rising sea levels
- Sustainable development Goals (SDGs)

Goal Detail

No poverty End poverty in all its forms everywhere

Zero hunger End hunger, achieve food security and improved nutrition and promote sustainable agriculture

Good health and well-being Ensure health lives and promote well being for all at all ages

Quality education Enure inclusive and equitable quality education and promote lifelong learning opportunities for all

Gender equality Achieve gender equality and empower all women and girls

Clean water and sanitation Ensure availability and sustainable management of water and sanitation for all

Affordable and clean energy Ensure access to affordable, reliable, sustainable and modern energy for all

Decent work and economic growth Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent
work for all

Industry, innovation and infrastructure Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

Reduced inequalities Reduce inequalities within and among countries

Sustainable cities and communities Make cities and human settlements inclusive, safe, resilient and sustainable

Responisble consumption and production Ensure sustainable consumption and production patterns

Climate action Take urgent action to combat climate change and its impacts

Life below water Conserve and sustainably use the oceans, seas and marine resources for sustainable development

Life on land Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat
desertification, and halt and reserve land degradation and halt biodiversity loss

Peace, justice and strong institutions Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and
build effective, accountable and inclusive institutions at all levels

Partership for the goals Strengthen the means of implementation and revitalize the global partnership for sustainable development
- Common characteristic of developing countries
- Low standards of living characterized by low incomes, inequality, poor health,
and inadequate education
- Low levels of productivity (output per person) due to low education standards,
low levels of health workers, lack of investments in physical capital and lack of
access to technology
- High rates of population growth and dependency burdens:
- The crude birth rate is calculated as the annual number of live births per
1000 of the population. In developing countries, crude birth rates are on
average more than double than the rates in developed countries→raises the
 child dependency ratio, as adults in the working population have to
support more and more children.
% 𝑜𝑓 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑢𝑛𝑑𝑒𝑟 15
- Child dependency ratio= % 𝑜𝑓 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 15 𝑡𝑜 64

% 𝑜𝑓 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑣𝑒𝑟 65
- Old age dependency ratio = % 𝑜𝑓 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 15 𝑡𝑜 64

- High and rising levels of unemployment and underemployment

- Dependence on agricultural production and primary product exports: Many
developing countries are heavily dependent on the exports of one or two primary
commodities, making their economies extremely vulnerable to price volatilities
and natural catastrophes that might ruin the crops→make it highly difficult to plan
effectively for the future.
- Imperfect markets and limited information: May lack necessary factors that
enable market to work efficiently; Lack a developed legal system (ensures
business in fair and structured manner), adequate infrastructure (transport routes),
information systems (leads to misallocation of resources and misinformed
desicions)
- Vulnerability in international relations: Mostly dominated by developed countries
because of their economical and political power; They are also dependant upon
them in trade, access to technology, aid and investment. They have no control
over decisions
- Diversity among developing countries
- Resources: Whilst human resources tend to be undernourished and poorly
educated, physical resources can vary immensely; Some own oil and diamonds,
some fiber and metals, some are manufacturers of synthetic materials. However,
they may still remain unproductive
- Historical backgrounds: Most of them were once colonies of developed countries,
they differ in the time and the way they obtained their independence (were they
freed or did they fight for it), and the different result set the countries apart
socially, politically and economically
- Geographic and demographic factors: They differ hugely in terms of geographical
size and population size
 - Ethnic and religious breakdown: They have a wide range of ethnic and religous
diversity which can increase chances of political unrest and internal conflict
- Structures of industry: Some depend upon production and exportation of primary
products whilst others are exporters of manufastured products and others, like
services in the form of tourism
- Per capita income levels: There are marked differences in per capita income from
developing countries to developing countries; Not all of them have low income
per capita although it is a common misconception
- Political structure: Including democracies, monarchies, military rule, single-party
states, theocracies, transitional political systems; It is difficult to establish
one-size-fits all system to fix developmental problems
Unit 29: Measuring economic progress
- Single indicator: Solitary measures that may be used to assess development. May be
financial, health, education or institutional measures
- Financial measures
- GDP per capita and GNI per capita are often used to asses growth and/or
development
- Foreign Direct Investment (FDI): If a developing country has a large
amount of FDI, then its GDP figures will be significantly larger than its
GNI since it will include profits that may be returned to the other country
- For developing countries inflow of FDI < outflow of FDI so because the
FDI profits not not remain in the economy, it cannot be used to contribute
to the country’s progress→GNI is used
- An import inflow, however, is the worker remittance (money sent
home from workers of other countries)
- For developed countries, outlow of FDI < inflow of FDI so their GDP will
be lower than their GNI (because money GNI considers money sent from
abroad)
- GNI per capita figures at PPP (Purchasing Power Parity)
 - If it were not used, goods and services would not have cost the
same, making the measurement inaccurate since the purchasing
power of a person’s income will be different in different countries
- Health measures
- Life expectancy at birth: Measure of the average number of years a person
may expect to live from the time they were born
- Factors that affect it: Health care and health services, provision of
clean water supplies and adequate sanitation, education, food
supply, diet and lifestyle, poverty levels, conflict (wars or civil
wars)
- Infant mortality rate: Measure of number of deaths of babies under the age
of one year per thousand live births in a given year.
- Factors that affect it: Health care and health services, provision of
clean water supplies and adequate sanitation, food supply, poverty
levels
- Education measures
- Expected years of schooling (that a child of school entrance age may
expect to receive)
- Mean years of schooling: Average years of schooling that have been
received by citizens aged 25 years or older
- Other single indicators
- Economic/Social inequality indicators: Income and wealth distribution,
pay inequality, asset ownership, access to credit
- Energy indicators: Energy poverty (Inability to maintain a home at an
adequate temperature or to provide essential energy services to ensure
decent living conditions), access to electricity, impact of energy bills on
household budgets
- Enviornmental Indicators: Air pollution, climate change, biodiversity, waste,
water resources, etc
- Composite indicator: Combine a number of single indicators with weighing to give a
single, combined figure
 - Human Development Index (HDI)
- Brings together 3 values that are the basic goals of development that can
be ‘measured’:
- Long and healthy life: Measured by life expectancy (considering
those who live longer access better health care)
- Education: Measured by mean years of schooling and expected
years of schooling,
- Standard of living: Measured by GNI per capita at PPP
- Value given is between 0 and 1; Higher levels, higher development
- Countries are classified between categories based on their HDI

Category HDI range value

Very high human development 0.8+

High human development 0.7 to 0.799

Medium human development 0.555 to 0.699

Low human development Less than 0.555

- It is used to consider economic growths in terms of development (more

effective than just GNI and GDP)
- Other indices
- Gender inequality index (GII)
- It is important because gender inequality is a major barrier to human
development
- It measures in three main aspect:
- Reproductive health: Measured by maternal mortality ratio and
adolescent birth rates
- Empowerment: Measured by proportion of parliamentary seats
occupied by females and proportion of male and female adults over
25 with at least some secondary education
 - Economic status: Expressed as labor market participation,
measured by labor force participation rate of female and male
populations 15 years or older
- Build in the same framework as IHDI to better expose differences
- The higher the value, the more disparities

- Inequality adjusted Human Development Indices (IHDI)

- HDI but taking into account the human development costs of inequality
- All components are adjusted by its level of inequality
- Countries with perfect equality: IHDI = HDI. Else, IHDI<HDI

- Happy Planet Index (HPI): Measures how well countries are achieving long and
happy lives, taking into account sustainability
 𝑊𝑒𝑙𝑙𝑏𝑒𝑖𝑛𝑔*𝐿𝑖𝑓𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦*𝑖𝑛𝑒𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑜𝑓 𝑜𝑢𝑡𝑐𝑜𝑚𝑒
- HPI: 𝑒𝑐𝑜𝑙𝑜𝑔𝑖𝑐𝑎𝑙 𝑓𝑜𝑜𝑡𝑝𝑟𝑖𝑛𝑡

- Wellbeing: How satisfied residents of each country are from 1 to 10

- Life expectancy: Average number of years a person is expected to live in
each country
- Inequality of outcome: Inequalities in term of how long people within a
country live, and how happy they are. Expressed in percentage
- Ecological footprint: Average impact that each resident places on the
environment. Expressed in global hectares per person
- Multidimensional Poverty Index (MPI): Measures deprivations experienced by
poor people in a country based on health, education and living standards
- Further explanation in Unit 22
- Inclusive Department Index (IDI)
- Annual assessment of 103 countries’ performance that measures how they
perform on 11 dimensions of economic progress in addition to GDP
- Pillars: Growth and development, inclusion, intergenerational equity and
sustainability

- It separates countries into: Advanced economies and emerging economies

- It uses a color coded dashboard, representing quintiles, to show the
relative position of a country in terms of other countries in its group, for
each performance indicator
- Genuine Progress Indicator (GPI)
 - Attempts to measure whether a country’s growth has actually led to an
improvement in the welfare of the people
- It adds measures of befits of household work, parenting and volunteer
work to GNI numbers.
- It deducts costs from GNI of:
- Environmental factors: Air, water, noise pollution, loss of
farmland, wetlands and forests resource depletion (ozone and
pollution)
- Social costs: Family breakdowns, crime, personal security, loss of
leisure time
- Commuting
- Automobile accidents
- More aimed for developed countries
Unit 30: Barriers to development (Considers developing countries)
- Poverty traps

- Rising economic income

- Causes low levels of saving→Low investment→Low growth
- Pro-poor growth caused by the rich dominating politics and economies causing
policies to favor them
- Generally, the rich move large amount of funds out of the economy in the form of
capital flight
- Large proportion of the goods purchased by the rich are foreign produced (does
not help domestic industry)
 - Lack of access to infrastructure
- Improvements in infrastructure lead to better wellbeing of the people

Category Transport Public utilities Public services Communication services

Examples - Roads - Electricity - Police service - Postal system

- Railways - Gas - File service - Telecommunication
- Seaports - Water supply - Education service - Radio and television
- Airports - Sewers - Health service
- Public transport - Waste management
- Sidewalks

- Lack of access to appropriate technology (appropriate for use with existing factors
provided; to production and consumption)
- Production: Modern countries urge to modernize and industrialize their output but
it might not be appropriate since machinery replaces workers→Appropriate
technology would be, in that case, cheap equipment that requires manual labor for
its use
- Consumption: Technology that helps ease tasks without damaging environments
- Lack of access to education
- + education, + wellbeing →Provides positive externalities both of consumption
and production
- Imrpove role of women in society: There are high correlation between women’s
education and child survival rates and fertility rates
- Improve levels of health: + education, + literacy, people are able to communicate
better and become aware of hazards and opportunities. They can get informed
about AIDS, poor sanitary habits and poor dietary habits
- What prevents education is lack of funding, disparities in geographical areas, the
need for some children to stay at home and watch for siblings, child labor
- Lack of access to healthcare
- Better healthcare, + life expectancy, + productivity, better living conditions
- Dependence on primary sector
- Mentioned in Unit 28
 - Many developing countries rely mostly on primary commodities for a significant
portion of their export revenues
- Rising commodity prices may be beneficial to them as it will increase their
revenue which can flow back into the economy in the form of education, health,
infrastructure, causing development BUT if they fall, these economies are likely
to increase their current account deficit, difficulting the possibility of importing
and financing expenditure.
- They face uncertainty and vulnerability
- Since commodities are quite inelastic, a change in demand or supply leads to a
large price fluctuation→Price volatility makes it difficult for producers in
developing countries to plan ahead, impacting investments, thus growth, gov
planning, thus development

- Lack of access to international markets

- Protectionist measures from developed countries affect greatly developing
countries, limiting their possitbilites to export, thus earn foreign exchange.
- Small-scale producers in developing countries are deprived from the ability to
earn a living, therefore provide their families with living standards, schooling, etc,
thus the economy will not develop
- Cost of selling in international markets is high because products and services need
to go through procedures to meet certain standards
- Many developing countries have non-convertible currencies and use a fixed
exchange rate→Traders are not likely to trade with them and currencies are often
over-valued which tends to result in a black market for floating currency
- Existence of an informal economy
 - Not considered in GNI or GDP, thus affect measures of development
- -education, + informality- +education, -informality
- Workers involved in the informal economy lack social protection, rights at work,
and decent working conditions
- Businesses in the informal economy have low levels of productivity and
difficulties in accessing investment
- Non-payment of taxes impacts gov revenues and the ability to fund programs that
may lead to development
- Capital fight
- Movement of large sums of money out of a country as a reaction to events such as
political or economic instability
- Risks of economic/political instability in devleoping countries include
- Danger of hyperinflation
- Government compulsory purchase of assets
- Devaluation fue to insecurities of the banking industry
- It is very common in developing countires which restricts growth and depretiates
currency (people trade in their money for foreign currencies, increasing supply,
lowering the price)
- Indebtedness
- Developing countries tend to incur debt whenever borrowing from abroad, which
is mostly done by govs→Although short run benefits are good, loans need to be
repaid and interests along with it
- Debt servicing: Repayment of interest on a loan
- When govs service debts, they cannot spend on other areas
- In developing countries, debts have often been used, not for development, but for
infrastructure projects that failed, arms, and private bank accounts of corrupt
polititians. Many countries have not been able to repay debt
- Geographical factors
- Landlocked countries
- Trade less and grow slower than countries with coasts
- Have to pay more and have a longer waiting time for imports
 - Have difficulty with exports due to transport costs, bribery and border
delays
- Tropical climate and endemic climate
- Tend to be less developed countries partially because of their climate
- Production technology development for agriculture and health is slower
due to soil formation and erosion, pests and parasites, water availability
and the effects of climate on plant resp
- Lower productivity may lead to poor nutrition, thus health, affecting
quality of human resources
- Weak institutional frameworks
- Legal system and property rights
- There is no way to uphold property rights
- Property rights include the right to
- Own assets
- Establish the use of the assets
- Befit from the assets
- Sell the assets
- Exclude others from using or taking over the assets
- Lack of property rights disincentivizes people to improve or own property,
reducing investment and growth
- Dead capital: Assets that cannot easily be bought, sold, valued or used
because no one has rights over them
- Ineffective taxation structure
- Lack of gov revenue means lack to finance necessary public services, thus
reduce development
- It is difficult to collect taxes in developing countries because of
- Tax exemptions or corrupt administration
- Low corporate taxes due to low productivity
- Low revenue from custom duties since they do not have high
amounts of foreign trade
- Weak institutional framework
 - Corruption
- Informal market workers who do not pay taxes since their income
is not recorded, they do not pay taxes
- Banking system
- Most developing countries have dual financial markets
- Official financial markets tend to be small and dominated by foreign
commercial banks which often restrict lending to foreign businesses and
established manufacturing local businesses
- Unofficial/illegal market: Usually lend money, at high interest rates, to
those desperate and poor enough to have to borrow it
- Saving is difficult where there is nowhere safe with good returns; Weak
and untrustworthy financial institutions will lead to people buying assets
or doing capital flight
- It is difficult to start businesses since people tend to lack assets to use as
collateral, are often unemployed and lack savings, which limits access to
financial systems and traditional banking
- Gender inequality
- Explained in Unit 22 (its importance to development)
- Welfare gained from increasing empowerment to women, leading to development
- Their families’ wellbeing is improved, especially the health of their
children (because they are more infomred on healthcare hygiene and diet)
- Education of their children is improves (women pass on their education
and they also value it more, striving to achieve it for their children)
- Quality of the workforce will improve over time
- Women earn more money, can help the first two points
- Women have more control over contraception, marry later, have smaller
families, thus lowering the rate of population growth
- Lack of good governance
- Corruption
- Definition: Dishonest exploitation of power for personal gain
- Occurs everywhere to some extent, developing countries have high levels
of it
- Prevalent where
- Govs are not accountable to people, especially military govs
- Govs spend a large amount on large-scale capital investment
projects
- Official accounting practices are not well formulated or controlled
- Gov officials are not well paid
- Political elections are not well controlled, or are non-existent
- Legal structure is weak
- Freedom of speech is lacking
- Effects of corruption
- Electoral corruption→Whishes of people unheard, gov is not the
majority of votes and it will not adopt policies to benefit the voters;
It will not be equitable or inclusive
- Reduces effectiveness of the legal system; If people can ‘buy’ their
way out, crime is incetivized
 - Leads to unfair allocation of resources; Contracts will go to highest
bidder not most efficient producer→Market faiuliure that harms
sustainable development
- Bribes increase costs (in money and negotiation time) →Higher
prices
- Reduces trust in economy→Countries may find it harder to attract
FDI
- Increases risks of contracts not being honored→ -I internal and
FDI
- Reduces quality of gov services for people since officials will often
divert public investments into capital projects where bribes are
more likely (not education or health care)
- Officials turn a bling eye to regulations (like those regarding
construction / environment) →Unstustainable development
- Monetary gains from corruption tends to go in capital flights,
reducing capital available for I
- Constant paying of small bribes reduces economic well being of
ordinary citizens
- Political instability
- Less likley to attract FDI and aid
- Citizens are less likely to contribute input to the economy
- Gov planning is likely to be unstructured, short-term, and unenforceable
- Causes uncertainty and possibly, even, economic breakdown
- Bound to lead to high levels of poverty and low living standards for the
majority
- May result in wars as a result of ethnic and/or religous based conflicts, or
border conflicts
- Unequal political power and status
- Stated in Unit 22
- Devloping countries have high inequality where richer people may have a
disproportionate say in the development of government policies
 - Many developing countries lack democract and govs fail to display most
elements of good governance
- Politians are likely to develop policies out of self-interest
Unit 31: Strategies to promote economic growth and economic development
- Trade strategies
- Import substitution Industrialization (ISI) / Inward-oriented strategy
- Startegy that says that, a developing country should, whenever possible,
produce goods domestically rather than import them
- Industries would grow, therefore the economy, they will become more
competitive as they gain from economies of scale
- It requires some conditions to work
- Gov needs to adopt policy of organizing the selection of goods to
produce domestically
- Subsidies should be made available to encourage domestic
production
- Gov needs to implement a protectionist system with tariff barriers
to keep out foreign imports
- Advantages
- Protects jobs in the domestic market since foreign firms are
prevented from competing→Domestic firms can dominate the
market
- Protects local culture and social habits by practically isolating the
economy from foreign influence
- Protects the economy from the power, and possible influence, of
multinational corporations
- Disadvantages
- May only protect jobs in the short run
- Countries do not enjoy the benefits gained from comparative
advantage and specialization→Production is relatively inefficient
as they should be imported from efficient foreign producers
 - May lead to inefficiency since there is no competition to incentive
R&D
- May lead to high rates of inflation due to domestic AS constraints
- May cause other countries to take retaliatory protectionist
measures
- Export promotion
- Outward oriented growth strategy based on openness and increased
international trade
- Growth is achieved increasing exports to increase AD which in turn,
should lead to +GDP, higher incomes
- They may also try to manage their exchange rate, keeping it as low as
possible to make their exports more attractive
- It requires some conditions to work
- Liberalized trade
- Liberalized capital flow: Reduce restrictions on FDI
- Floating exchange rate
- Investment in the provision of infrastructure to enable trade to take
place
- Deregulation and minimal gov intervention
- Developing countries may attempt to export either primary products
and/or manufactured products
- Differences involved using the export of primary or manufactured
products as engine of growth
- Export of primary products is likely to go down as protectionism
increases and prices go up (for primary products)
- There is historic success of export-led growth on increasing
manufacturing exports
- Problems associated
- In response to the competitive advantages of developing countries
(low cost labor), protectionists measures have increased in
developed countries→Prices increased as a result and the
 competitive advantage was eliminated, also affecting their exports
of manufactured goods
- The role of the state has proven to be successful export-led growth:
Infrastructure, subsidies, promoting savings and improvements in
technology, protecting “infant industries” until ready for
competition in market.
- If countries attempt to kick-start their growth by attracting
multinational corporations (MNCs), it is possible that they become
too powerful, leading to problems
- May increase inequality in the country
- Economic integration
- Explained in unit 25
- Advantages
- Larger export markets may allow producers to gain from
economies of scale
- Larger markets may encourage diversification and reduce
dependence on a narrow range of commodities
- Integration is likely to encourage regional cooperation in areas
such as infrastructure
- For landlocked countries, regional integration may offer links to
ports and other infrastructure
- Stimulus for inward FDI, as the investing companies will benefit
from the market size
- In free movement of labor, workers can have work opportunities in
member countries, and send remittances home
- In free movement of capital, companies can invest in other
member countries
- Larger political stability and cooperation, resulting in more
investment
- + efficiency because domestic producers will have to compete with
lower priced imports of other member countries
 - Individual countries may increase bargaining power in multilateral
trade negotiations
- Disadvantages
- Role of WTO allows mebmer countries to look inwards
- Trade can become more complicated with agreements with other
trading blocs
- Unemployment may arise, as less efficient companies may not be
able to compete
- Diversification of economic activity
- Aim is to move export production from primary commodities to manufactured
and semi-manufactured goods to protect themselves from price volatility and
stabilize increase in employment, promoting the use of technology and demand
for skilled labour
- Barriers
- Tariff escalation (lower tariff on raw materials, higher on manufactured as
to not increase costs of production in the domestic industry)
→Disincentivizing to developing countries that export raw materials
- Need for highly qualified workforce to produce more sophisticated
products→Developing countries have low education standards and it is
difficult to find funding
- Market based supply-side policies
- Trade liberalization
- Belief is that liberalization will increase world trade and enable
developing countries to concentrate their production on what they have a
comparative advantage
- Advantages covered in Unit 23
- Disadvantages
- Many countries lack the infrastructure and institutions necessary to
gain full benefits
- Protectionist policies in developed countries block developing
countries
 - Subsidies in developed countries eliminate competitive advantages
of developing countries
- Privatization
- Adavantages covered in Unit 18
- Disadvantages
- Will only generate gain if process carried out and managed well
- Requires careful design and sequencing, creation of regulatory
infrastructure, assessment of possible poverty and social impacts,
and transparent public communication
- May be necessary for some goods and services to be provided by
nationalized firms in order that they be affordable to everyone. Ex.
Water
- Deregulation
- Disadvantages seen in Unit 18 + if deregulation of labor laws changes, it
damages safety and rights of workers→Not inclusive growth + if
deregulation of banking system leads to debt-driven growth it is not
sustainable growth
- FDI
- Advantages
- Growth tends to suffer from saving gaps which FDI helps fill
- MNCs provide employment and sometimes education and training
- MNCs allow developing countries greater access to R&D, technology and
marketing expertise which can enhance industrialization
- + employment and earnings stimulate growth in host countries (the ones
recieving the money)
- Hosts countries may gain tax revenue from the profit of the MNC, which
can be used to invest in infrastructure and public services
- MNCs inject foreign capital when buying existing companies in
developing countries, increasing AD
- MNCs may improve infrastructure or act as a motivation for governments
to do so, to attract them
 - MNCs provide more choice and lower price for consumers
- MNC activities along with liberalized trade can lead to better allocated
resources
- Disadvantages
- MNCs usually bring their own management teams, simply use inexpensive
low skilled workers for basic production, without providing education or
training
- MNCs may have too much domestic power, gaining tax advantages or
even subsidies, reducing gov revenue
- MNCs may have too much international power, influencing policy
desicions taken in institutions such as WTO
- MCCs practice transfer pricing (selling goods and services from one
division to another of the company in a separate country), taking
advantage of different tax rates on corporate profit, limiting tax earnings to
gov
- MNCs may situate themselves in countries where legislation on pollution
is not as effective, thus reducing private costs while creating external costs
- MNCs may situate themselves in countries where labor laws are weak,
exploiting workers at low wage levels and poor working conditions
- MNCs may enter a country in order to extract particular resources, take
them, and leave
- MNCs may use capital-intensive production methods to make use of
abundant natural resources, which will not create employment
- When MNCs buy domestic firms, they tend to pay previous owners in
shares, which does not put actual money into the economy
- MNCs may repatriate their products
- FDI and MNCs are good depending on the type of investment and the ability of
the host country gov to to regulate their behavior and use the benefits to achieve
development objectives
- Social enterprise
 - Definition: Organizations that have specific social objectives as their primary
goal.
- Most aim for the creation of social wealth, a viable business model and
environmentally responsible operations
- Principle objective: Overcome/alliviate, a global/local issue; Poverty, lack of
education/healthcare, technology access, enviornmental problem
- They are gender sensitive
- Institutional change
- Improved access to the banking system
- See the issues of a lack of banking system accessibility in Unit 30
- Microfinance: Type of financial service geared specifically for the
poor→Provision of small loans (micro-credit), savings accounts, insurance
and even check books to enable poor people to start up small scale
businesses (micro-enterprises) and to, in general, be able to maintain
income and start to build wealth
- Mobile phone banking: A person who wants to send money does so by
sending the amount via text to the receiver’s phone number. The receiver
goes to an authorized local shop and withdraws the cash. Govs may use it
to send money to people, or people to their family members, remittances
- Increasing women’s empowerment
- Remebmer from Unit 30
- Increasing support for the education of females
- Increasing access to healthcare for women
- Creating a safe environment in the home, workplace and society
- Establishing the right for women to own property and other assets
- Increasing female involvement in decision making
- Reducing corruption
- Seen in Unit 30
- Invest in high levels of transparency and independent external scrutiny:
Allow audit agencies and public at large to oversight
 - Reform institutions: Design reforms to tackle from all angles. Ex. Tax
admin
- Build a professional civil services: Transparent, merit-based hiring and
pay reduce opportunities for corruption; Heads of agencies, ministries and
public enterprises must promote ethical behavior by setting a clear tone at
the top
- Focus on areas of higher risks; Technology procurement, revenue
administration, management of natural resources and internal control
- Cooperation: Countries can join efforts to make it harder for corruption to
cross borders, they can also pursue anti-money laundering activities and
reduce transnational opportunities to hide corrupt money in opaque
financial centers
- Gender and corruption
- Collect, analyze and disseminate gender desegragated data
- Recognize and address specific gendered forms of corruption
(Sexual extortion and other forms)
- Include women in anti-corruption desicion making
- Empower women
- Gender sensitive reporting mechanisms
- Promoting secure property rights and land tenure rights
- See in Unit 30
- Secure land rights to improve agriculture: Incentive farmers to invest in
their land and borrow money for agricultural inputs or to improve land
- Secure land rights to promote urban development: Effective urban
planning is needed to avoid the formation of slums
- Secure property rights to protect the environment: If people are motivated
to look after their land, they ensure sustainability
- Secure property rights and access to land to develop the private sector and
job creation: Give collateral to companies to help them finance operations,
expand or open the businesses, creating more jobs
 - Secure property rights to empower women: Many legal systems require
for men to be involved in the process of acquiring or owning property
- Secure property rights to help indigenous people: Many countries do not
recognize their rights, and take away the land without their
consent→Having rights will allow them to use their resources and land
sustainably, improving economic and social status as a constructive force
in society
- Secure property rights to keep peace
- Interventionist strategies
- Whilst other strategies for growth may be effective, this one is inclusive and aims
to ensure that assets and capabilities of poor people are improved
- Startegies aimed at (direct target in order to involve them in the process):
- Sectors of the economy in which the poor work
- Areas in which the poor live
- FoP which the poor possess (unskilled labor)
- Products which they consume
- Redistributive fiscal policies
- Govs can earn money from taxes and redistribute through transfer
payments
- Developing countries have limited fiscal capacity, so they can’t
redistribute

Increasing tax revenue to promote development

Challenge Strategy

Large size of informal economy Startegies to mobilize informal workers and enterprises to formal sector

Reliance on income taxes, which are regressive and generate Impose higher taxes on negative externality products and luxury goods (more
low revenue, due to easy collectivility consumed by high-income people)

Extensive tax exemptions and loopholes in tax structure Improve tax structure

High tax rates on high leveled income incentivizes tax evasion Lower tax rates for high income people

Tax evasion (non-compliance) Reduce corruption, provide transparency to gov budget to improve
confidence, empower people to engage in discussions about the use of taxes
 - Transfer payments
- Conditional Cash Transfers (CCT): Transfer payments targeting low
income people, aiming to reduce poverty by making welfare programs
conditional upon the actions the person receiving the money→Money is
only transferred in return for fulfilling specific behavioral conditions
- Conditions include children’s school attendance, up-to-date vaccinations,
visits to health care facilities
- They do not create jobs but they increase chances that children from CCT
receiving families will have better opportunities, taking them out of
poverty
- The difficulties regarding transfer payments are the complexity of
administering them and the opportunity costs
- Minimum wage: Established in Chapter 22
- Provision of merit goods
- Access to quality health care and education have the potential to raise human
capital
- Merit goods are discussed in Unit 9
- Challenges include identifying the priorities of the country, people’s needs,
choosing appropriate services, financing and ensuring that all people have access
to them, having the necessary infrastructure to provide them
- Increased supply of merit goods may be provided through domestic gov I, FDI,
microfinance, social enterprise or international cooperation through foreign aid
- Foreing aid (Assistance given to a country that would not be provided through normal
market forces)
- Humanitarian aid: To help people who have experiences some form of natural
disaster or war
- Official development assistance (ODA): To help developing countries achieve
economic development and welfare
- Bilateral aid: Gov to gov aid
- Multilateral aid: Gov to international agency (Ex. UN, WTO, World
Health Organization, World Bank, etc)
 - There are elegibility requires: Must be provided by official agencies, must
by concessional (either a grant or soft loan (interest-free or very low
interests)), and its main goal must be development and welfare of the
developing country
- To fill saving gaps that exist in developing countries
- To strengthen institutions
- To improve technology levels
- To fund development projects
- To enable a country to increase their capacity to benefit from international trade
opportunities
- To help meet Sustainable Development Goals
- Development aid: To alleviate systematic poverty and promote the economic,
social or political development in recipient countries
- Concerns
- Govs may not prioritize the general welfare of its citizens, misallocating
the aid into a small sector of the economy or the population that does not
need the support
- Aid is sometimes motivated by political reasons and not actual need
- Aid is often linked to the political views of the donor govs, if they change,
it could greatly affect the reciever country
- Tied aid: A form of bilateral aid where the receiver country can only get
the money in exchange for buying the goods and services of the donor
country→Reduces other developing countries opportunities and may make
receiver country pay unnecessary high prices
- Long term provision of large quantities of food may force down domestic
prices, making domestic producers losers
- It may create a dependency culture that can limit long term development
- If aid is focused on modern industrial sector it may cause income gaps
between them and traditional agricultural sectors
- Donor countries may make only agreements if the recipient country is one
with ‘sound’ economic policies skewed to liberalization→May motivate
 recipient countries to change their policies in order to get the aid; It may
not be aligned to their best interests
- Aids need to be repaid which may cause indebtedness to developing
countries
- Non-governmental organizations (NGOs)
- Have major roles in promoting sustainable development and humanitarian ideals
- Although some may receive gov funding, they work independently
- Their work may be to provide emergency relief in cases of disasters or long-term
development assistance
- Ex. Greenpeace, Doctors without borders, Oxfam
- They carry 2 main activities
- Operational: They plan and implement socially targeted projects in
developing countries
- Advocacy: Trying to influence public policies in areas like poverty
reduction, workers’ rights, human rights and the eviornmental
- They actively raise funds and awareness→Preassuring govs in regards of ODAs
and influencing buying patters of consumers, contributing to better working
conditions and promoting sustainable development
- May help in areas that official aid cannot reach and work with groups that may be
isolated from official aid
- They may especially focus on women; Raising their income and status
- Critisism
- Rely on funding which limits its effectiveness
- Theoretically, NGOs and govs work separately but a significant amount of
their funding comes from govs, meaning their activities are impacted by
political views
- It is possible that there are many NGOs working in developing ocuntries,
resulting in uncoordinated and wasteful activities
- It is possible that NGOs draw workers away from local gov projects,
undermining the local govs ability to determine how to address an issue
- May be biased, promoting their bias to communities
 - They are unaccountable; They are not elected by the people they represent
- Sometimes accused of spending more money on advertising and
promoting rather than actual projects
- Multilateral assistance
- World Bank
- Made up of the International Bank for Reconstruction and Development
(IBRD) and the International Development Agency (IDA)
- Provides financial support and technical assistance to developing countries
- Aim: Reduce poverty and support development
- IBRD
- Currently makes loans to middle-income and credit worthy
developing countries
- The funds for the loans are generated by the issue of World Bank
loans in global capital markets.
- Repayment of the bonds is guaranteed by the member states and
the gov of the borrowing countries
- Relatively low interests rates
- IDA
- Work with the world’s poorest countries
- The poorer the country, the more favorable the loan conditions
(very low to no interest rates)
- International Monetary Fund (IMF) (FMI in Spanish)
- An organization of countries
- Main purpose: Ensure the stability of the international monetary system
- Responsibilities
- Promote international monetary cooperation
- Facilitate the expansion and balanced growth of the international
trade
- Promote exchange stability
- Assist in establishing multilateral system of payments
 - Ensure resources are available to members experiencing
difficulties with their balance of payment
- Uses 3 practices to achieve the goals
- Surveillance: Annual in-depth survey of each of its member
countries and their economic performance and a discussion of it
with the gov in place for each regarding whether the policies are
the best suited to achieve stable exchange rates and economic
growth→Resports are normally published to encourage
transparency
- Financial assistance: In the form of loans, usually free of charge in
areas such as fiscal, monetary, exchange rate policies, baking and
finance and statistic
- Funded by a system of ‘quotas’, where each country
deposits money according to their size in economic terms
- Condition to receiving loan: Implementation of a policity
program, agreed by the gov of the country and the IMF,
support continues while these are carried out
- Capacity development: Technical assistance and training
- Concerns (regarding Wold Bank and IMF)
- Have been accused of promoting free market, business friendly policies
which mainly help companies in developed countries and high-income
people in developing countries
- Since the head of the World Bank is chosen by the American president,
there are concerns that the chosen person will direct policies in the interest
of the US
- The policies required by the IMF to lend loans were based mostly on free
market reforms which has had consequences seen as damaging the poor
and failures in terms of contributing to economic development which has
caused to them to change, but concerns remain
- Debt relief
 - Frees up resources for social spending: Helps address the needs of low-income
countries, additional money can be spent on programs to benefit the poor
- Boosting social spending: Expenditure can go to health, education and other
social services
- Reducing debt service
- Improving public debt management: Improves the debt position of
post-completion point countries, lowering debt indicators.
Unit 32: Assessment Advice
- Show clear understanding of all the key terms. (make sure you know accurate definitions
of economic words)
- Draw diagrams (memory)
- Remember real life examples:
- Negative externalities of consumption: External costs of consuming sugary foods
- International trade barriers: Specific protectionist measures taken by the US
against Chinese tyres.
- Unemployment: Note key facts about the OECD country
- Draw diagrams: Draw as many diagrams to make your point clear.
- Accurate labels on axes and all the curves
- Draw arrows if there are shift
- Provide explanations and references to diagram while writing.
- Titles not required but can make it more organized
- Small diagrams may be difficult to interpret (its better big than small)(make it
clear)
- PAPER 1 (1hr 15mins)
- 30% of final grade
- 3 questions; you CHOSE ONE
- They let you read them in 5 mins
- Read carefully, many students write a lot of economic theory but it isn’t relevant to the
question
- Once the 5 minutes are over it is a great idea to PLAN YOUR ESSAY. (you may
think there is not enough time but there is) (should take you 10 mins each part)
 - You do not want to sidetrack or lose focus on the question.
- For part A list terms to define, theory explained, diagrams.
- For part B the same but add real life examples and the evaluation. (pros and cons)
- Each essay question consists in two parts:
- Part A (10 points)
- Most common command is explain:
- Explain: means to give detailed account, including reasons or causes.
- Analyze: means to break down in order to bring out the essential elements
or structure
- Suggest: propose a solution, hypthesis or other possible answer
Very important to define terms accurately and use them appropriately, explain correct theory,
provide relevant diagram, and relevant explanation.

- Part B (15)
- Do not need to repeat the information from part A, likely to add new terms
to define.
- You can refer to diagrams in part A but its best if you redraw them
- Examples:
- Using real world examples, evaluate…
- To make an appraisal by weighting the strengths and
limitations
- Using real world example discuss…
 - To present a considerate and balanced review that includes
a range of arguments, factor or hypothesis.
- Opinions and conclusions should be presented clearly and
supported by evidence
- Using real world examples to what extent…
- Merits or an otherwise of an argument or concept
- Include opinions and conclusions
- Using real world examples, compare and contrast…
- Similarities and differences btw 2+ items or situations
- Refer to them all throughout essay
- If, for example, analyizing policies, always evaulate other possible options