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Eco Notes

The document discusses living standards, including definitions, measures like GDP and HDI, and the causes and consequences of poverty. It explains the impact of exchange rates on a country's economy, including how demand for exports and interest rates influence currency value. Additionally, it outlines the differences between fixed and floating exchange rate systems and their implications for trade and macroeconomic goals.

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4 views

Eco Notes

The document discusses living standards, including definitions, measures like GDP and HDI, and the causes and consequences of poverty. It explains the impact of exchange rates on a country's economy, including how demand for exports and interest rates influence currency value. Additionally, it outlines the differences between fixed and floating exchange rate systems and their implications for trade and macroeconomic goals.

Uploaded by

navya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 5

What is meant by living standards?


Standard of living refers to the social and economic wellbeing of individuals in a
country at a particular point in time.

How does real GDP per head differ from GDP per head?
●​ GDP measures do not take the population into account, hence GDP per
capita is more accurate.
●​ Inflation erodes the value of GDP because the overall value of money
decreases.
●​ Real GDP is the GDP of a country adjusted to the inflation rate, hence real
GDP per capita is more accurate than GDP per capita.

What is HDI?
The HDI is the United nations’ composite indicator of living standards in a
country. It is an alternative measure of living standards that looks at factors
beyond real GDP.
The HDI combines three dimensions of human development:
●​ Healthcare
●​ Education
●​ Income levels

What are the limitations of using HDI as a measure of living standards?


●​ The main advantage is that it considers several key indicators of standards
of living.
The limitations include:
●​ Qualitative factors (such as gender inequalities and human rights)
●​ Income distribution
●​ Environmental issues
●​ Cultural differences

What are the main reasons for differences in living standards and income
distribution with and between countries?
●​ Productivity levels
●​ Role of governments
●​ Size of population
●​ Distribution of national income
●​ Regional differences
●​ General price level
●​ Level of education
●​ Level of freedom (civil liberties, political rights, religious freedom)

What is meant by poverty and what are the signs that there is poverty in the
economy?
Poverty is a condition that exists when people lack adequate income and wealth
to sustain a basic standard of living.
Signs that there is poverty in the economy include:
●​ Hunger and malnutrition
●​ Ill health and mortality from illness
●​ Limited or lack of access to education and other basic services
●​ Homelessness and inadequate housing
●​ Unsafe environments
●​ Social discrimination and exclusion

How does absolute poverty differ from relative poverty?


●​ Absolute poverty is a condition where a person's income is too low to
enable them to meet their basic needs.
●​ Relative poverty is a condition where people are poor in comparison to
others in the country and their income is too low to enable them to enjoy
the average standard of living in their country.

What are the main causes of poverty?


(Try to include ‘limits the ability of a country to create income and wealth’ and
‘hinders the growth of the economy’ because they are the consequence for most
of these points)
●​ Unemployment
●​ Low wages
●​ Illness
●​ Age
●​ Poor healthcare
●​ Low literacy rates
●​ HIgh population growth
●​ Poor infrastructure
●​ Low foreign direct investment
●​ High public debt
●​ Reliance on primary sector output (low prices and profit margins)
●​ Corruption and instability (huge opportunity costs of civil war, dishonest
government officials, and fraudulent behaviour.)

What are the main policies that can be used to alleviate poverty and redistribute
income in the economy?
●​ Promoting economic growth
●​ Improving education
●​ Providing more generous state benefits
●​ Using progressive taxation (similar to the previous point)
●​ Introducing/increasing the national minimum wage
Chapter 6
What is an exchange rate?
An exchange rate refers to the price of one currency measured in terms of other
currencies.

What is the likely impact on a country’s exchange rate following an increase in


the demand for its exports?
With an increase in demand, there will be an increase in the demand for the
country’s currency. Therefore, this increases the exchange rate.

What is the likely impact on a country’s exchange rate following a decision of its
government to cut interest rates?
A fall in interest rates is likely to drive investors away as they search for
investments that generate better financial return. Hence, the demand falls which
reduces the price/exchange rate (depreciation).
​
How does a fixed exchange rate system differ from a floating exchange rate
system?
A floating exchange rate system means that the currency is allowed to fluctuate
against other currencies according to market forces, without any government
intervention.
A fixed exchange rate system exists when the central bank/ monetary authority
buys and sells foreign currencies to ensure the value of its currency stays at the
pegged value. This reduces uncertainties for international trade, and as a result,
it will encourage international trade and exchange as firms are certain about
future costs and prices.
●​ It reduces the country’s ability to use monetary policy changes in order to
effect the economy
●​ There is a huge opportunity cost in using large amounts of foreign
exchange reserves to maintain the fixed rate.

What are the causes of exchange rate fluctuation?


●​ Changes in demand for exports
●​ Changes in demand for imports
●​ Prices and inflation
●​ Foreign direct investment
●​ Speculation
●​ Government intervention

What are the consequences of exchange rate fluctuation for importers,


exporters and customers?
●​ Consumers have greater purchasing power when the exchange rate
decreases.
●​ Exporters face more difficult trading conditions when exchange rate
increases.
●​ Importers gain from a strong dollar

How does a strong currency impact a country’s macroeconomic aims?


●​ If a currency appreciation has a larger impact on exports than imports the
balance of payments worsen.
●​ A fall in net exports and deteriorating profits will, in the long run, cause job
losses in export-oriented businesses.
●​ Lower levels of spending in the economy, caused by higher unemployment,
will tend to reduce the rate of inflation. If the county relies heavily on
certain imports, then the higher exchange rate will help to reduce the
general price level even further.

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