Economics

2iec & 1iec

Overview of 2iec

Basic economic ideas and resource allocation
The price system and the microeconomy
Government microeconomic intervention
The macroeconomy
Government macroeconomic intervention
International economic issues

Overview of 1iec

The price system and the microeconomy
Government microeconomic intervention
The macroeconomy
Government macroeconomic intervention
International economic issues

Structured Writing - Simple Model

Structured Writing - Intermediate Model

Structured Writing - Advanced Model

sample essays on ...

monopoly
labour supply
protectionism
globalisation
interest rate
development

monopoly

Read: Tesla holds 80% of US EV market despite losing federal tax credit
Evaluate whether a monopoly is likely to operate efficiently. Refer to at least one monopoly of your choice.

labour supply

Read: The five UK sectors grappling with acute labour shortages
Evaluate the factors that might influence the supply of labour in an occupation of your choice.

protectionism

Read: IMF warns there is 'limited ammunition' to fight recession
Evaluate the likely impact of an increase in protectionism on the global economy.

globalisation

Read: The modern era of globalisation is in danger
Evaluate the likely impact of globalisation on the global economy.

interest rates

Evaluate the microeconomic and macroeconomic effects of decreasing interest rates in Kenya, or another developing country of your choice.

development

Evaluate the microeconomic and macroeconomic strategies that could be used to promote development in Kenya, or another developing country of your choice.

Flipped classroom - Video ressources

List of videos on economic concepts

Study plan (2iec)

Part 1: Basic economic ideas and resource allocation

Scarcity, choice and opportunity cost
Economic methodology
Factors of production
Resource allocation in different economic systems
Production possibility curves
Classification of goods and services

Chapter 1: Scarcity, choice and opportunity cost

fundamental economic problem
resources
wants
needs
scarcity
choice
factors of production
firm
opportunity cost

Chapter 1: Scarcity, choice and opportunity cost

wants
needs
resources
economic problem
opportunity cost
scarcity and choice

fundamental economic problem

scarce resources ...
... but unlimited wants.

resources

inputs available ...
... for the production ...
... of goods and services

wants

the goods and services ...
... that people may like to have ...
... but are not always realised

needs

things that are necessary for survival ...
... such as food

scarcity

a situation ...
... in which wants and needs ...
... are greater than ...
... the resources available

choice

resources are scarce ...
... so individuals, firms and governments ...
... have to consider alternatives

factors of production

resources or inputs ...
... available in an economy ...
... that are used in the production ...
... of goods and services

firm

any business ...
... that hires factors of production ...
... to produce good and services

opportunity cost

the cost expressed ...
... in terms of ...
... the next best alternative forgone ...
... when a choice is made

basic economic problem

choices and tradeoffs

budget constraint

resources

inputs available ...
... for the production of goods and services

opportunity cost

scarcity

situation that arises because

people have unlimited wants
in the face of limited resources

scarcity and choice

choices are made

by different agents : households, firms, government, banks, ...
at different levels : microeconomic level, macroeconomic level

Japan's population decline

Suggest the likely effect of the changes in Japan's population on:

what to produce
how to produce
for whom to produce

Chapter 2: Economic methodology

positive statement
normative statement
value judgement
ceteris paribus
economic law
microeconomics
macroeconomics
short run
long run
very long run

positive statement and normative statement

Economics seeks to describe economic behavior as it actually exists. Philosophers draw a distinction between positive statements, which describe the world as it is, and normative statements, which describe how the world should be.

Positive statements are factual. They may be true or false, but we can test them, at least in principle.
Normative statements are subjective questions of opinion.

value judgement

a statement based on your opinion or belief, ...
... rather than on facts

ceteris paribus

other things being equal
analyse the changes in one variable ...
... while holding other influences constant

model

a simplified view of reality ...
used to explain economic problems and issues

microeconomics

the study of individual markets

households
firms

microeconomics - consumer's behaviour

What determines how households and individuals spend their budgets?

What combination of goods and services will best fit their needs and wants, given the budget they have to spend?

How do people decide whether to work, and if so, whether to work full time or part time?

microeconomics - producer's behaviour

What determines the products, and how many of each, a firm will produce and sell?

What determines the prices a firm will charge?

What determines how a firm will produce its products?

What determines how many workers it will hire?

How will a firm finance its business?

macroeconomics

the study of an economy or a group of economies

short run

time period ...
... when a firm can change at least one ...
... but not all factor inputs

long run

time period ...
... when all factors of production are variable ...
... but with a constant, ...
... such as the state of technology

very long run

time period ...
... when all key inputs into production ...
... are variable

Chapter 3: Factors of production

primary sector
secondary sector
tertiary sector
land
labour
capital
enterprise
entrepreneur
human capital
physical capital

Chapter 3: Factors of production

rent
wage
salary
interest
profit
specialisation
division of labour
Adam Smith
enterprise culture

circular flow diagram

circular flow diagram : model with 2 agents

factors of production

land
labour
capital
enterprise

entrepreneur

individual ...
... who seeks out new business opportunities ...
... and is willing to take risks

land

factor of production ...
... natural resources in an economy

labour

factor of production
human resources available in a country

capital

factor of production
physical resource ...
... made by humans ...
... that aids the production ...
... of goods and services

enterprise

factor of production
organising production, and ...
... taking risks

physical capital

factor of production
Examples

machinery
buildings
infrastructure

human capital

value of labour ...
.. to the productive potential (future growth) of an economy
Examples:

education
health
skills

production

obtained by combining factors of production

$\text{Quantity Produced} = f( \text{land}, \text{labour}, \text{capital}, \text{enterprise} ) $

production depends on the quantity and quality of these factors of production

low-income economies

economies where ...
... income per head ...
... was 1025 USD or less in 2018 (World Bank)

low middle-income economies

economies where ...
... income per head ...
... was between 1026 USD and 3995 USD in 2018 (World Bank)

high income economies

economies where ...
... income per head ...
... was 12.376 USD or more in 2018 (World Bank)

specialisation

the process by which ...

... individuals, firms and economies ...

... concentrate on producing those goods and services ...

... where they have an advantage over others

division of labour

where a manufacturer process ...
... is split into a sequence of individual tasks

Division of Labor: Workers on an assembly line are an example of the divisions of labor.
Credit: "Red Wing Shoe Factory Tour" by Nina Hale/Flickr Creative Commons, CC BY 2.0

Adam Smith

1. The Wealth of Nations by Adam Smith
2. The Division of Labour

Adam Smith

Chapter 4: Resource allocation in different economic systems

allocative mechanism
market economy or market system
market
planned (or command) economy
mixed economy
transitional economy
private sector
public sector
privatisation
emerging economy

allocative mechanism

choices have to be made ...

... because of the problem of scarcity.

How choices are made ...

... depends on the economic system

3 main types of economic system

market economy : decisions driven by market mechanism
planned economy
mixed economy

planned economy

A Command Economy — Ancient Egypt was an example of a command economy.
Credit: "Pyramids at Giza" by Jay Bergesen/Flickr Creative Commons, CC BY 2.0

market economy

index of economic freedom

price mechanism

excess supply of firms

$\longrightarrow$ fall in price

$\longrightarrow$ firms less willing to supply

$\longrightarrow$ increase in price

$\longrightarrow$ more firms now willing to supply

$\longrightarrow$ increase in supply

$\longrightarrow$ fall in price ...

market economy: role of the government

role of watching that the price mechanism works efficiently
market failure: if price mechanism does not work efficiently

market economy: role of the government

role of watching that the price mechanism works efficiently
market failure: if price mechanism does not work efficiently
Examples of market failure:

healthcare being underprovided by private sector
private sector not providing fire services
...

planned economy: Commissariat général du Plan (1946-2006)

planned economy

central government is responsible ...
... for the allocation of resources.
Examples of controls:

production targets are set
prices and wages are controlled

mixed economy

both private sector and public sector play a role
decision is result of interaction between firms, labour and government
private and public ownership coexist
privatisation: trend over the past decades

private sector

that part of an economy ...
... under private ownership

public sector

that part of the economy ...
... under government ownership

privatisation

where there is a change in ownership ...
... from the public ...
... to the private sector

emerging economy

one that is making quick progress ...
... towards becoming a high-income economy

Chapter 5: Production possibility curves

production possibility curve (or frontier)
scarcity and choice
economic growth
trade-off
productive capacity

learning objectives

meaning and purpose of PPC
shape of PPC: constant opportunity costs vs. increasing opportunity costs
causes and consequences of a shift of PPC

resources and the PPC

high-income economies: wide availability of factors of production
low-income economies: few ressources and poor quality of resources

trade-off

what is involved in deciding ...
... whether to give up one good ...
... for another good

productive capacity

the maximum output ...
... that can be produced ...
... when all resources are used fully

A Healthcare vs. Education Production Possibilities Frontier

This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education.
At A all resources go to healthcare and at B, most go to healthcare. At D most resources go to education, and at F, all go to education.

Productive and Allocative Efficiency

Production Possibility Frontier for the U.S. and Brazil

The Tradeoff Diagram

shape of PPC

constant opportunity cost:
increasing opportunity cost:

tutorial video 1

production possibilities curve as a model of a country's economy

tutorial video 2

PPCs for increasing, decreasing and constant opportunity cost

tutorial video 3

opportunity cost and comparative advantage using a PPC and an output table

Chapter 6: Classification of goods and services

free good
private good
rivalry
excludability
public good
non-excludability
non-rivalry
free rider

Chapter 6: Classification of goods and services

government expenditure
non-rejectability
merit good
information failure
market imperfection
market failure
demerit good

learning objectives

meaning of:

free goods and private goods
public goods
merit goods and demerit goods
imperfect information in the market

excludability

a good is excludable ...
... if other consumers can be prevented ...
... from using or consuming it.

streaming services — Streaming services are excludable services

rivalry

a good is rival ...
... if only one person can consume it ...
... and therefore the good is not available for other consumers

non-rival good

a good is non-rival ...
... when the amount available to others ...
... does not diminish.

determining the type of good

	excludable	non-excludable
rival	private good	quasi-public good
non-rival	quasi-public good	public good

private good

private goods are bought and consumed ...
... by individual consumers or firms ...
... for their own benefit.
private goods have two characteristics:

excludability (i.e. by charging a price)
rivalry (reduces availability)

free good

goods that have zero opportunity cost ...
... since consumption is not limited by scarcity.

public good

goods that have two characteristics ...

non-excludable
non-rival

street lights — Street lights are a public good

quasi-public good

goods that have two characteristics ...

excludable
non-rival

toll road — Toll roads are quasi-public goods

merit goods

a good that is thought to be desirable ...
... but which is underprovided by the market.

demerit goods

a good that is thought to be undesirable ...
... but which is overprovided by the market.

Positive externalities and public goods

Introduction to public good (Voyager and NASA)

Part 2: The price system and the microeconomy

Demand and supply curves
Price elasticity, income elasticity and cross elasticity of demand
Price elasticity of supply
The interaction of demand and supply
Consumer and producer surplus

Chapter 7: Demand and supply curves

price mechanism
consumers
market
demand
supply
supply chain
notional demand
effective demand
demand curve (D)
market demand

Chapter 7: Demand and supply curves

demand schedule
movement along a demand curve
normal goods
inferior goods
substitute
complement
joint demand
supply curve (S)
supply schedule
subsidies

Chapter 7: Demand and supply curves

indirect tax
extension of demand or supply
contraction of demand or supply

Chapter 7: Demand and supply curves

effective demand
demand
law of demand
demand curve
demand schedule
derived demand
supply curve
supply schedule
change in quantity demanded
extension in demand

Chapter 7: Demand and supply curves

contraction in demand
change in quantity supplied
extension in supply
contraction in supply
change in demand
composite demand
normal good
inferior good
indirect taxes
subsidy

price mechanism

the means of allocating resources ...
... in a market economy

consumers

individuals or households ...
... who buy goods and services ...
... for their own use or for others

market

where buyers and sellers ...
... get together to trade

demand

the quantity of a product ...
... that consumers are willing and able ...
... to buy at different prices ...
... per period of time ...
... other things equal, ceteris paribus

supply

the quantity of a product ...
... that producers are willing and able ...
... to sell at different prices ...
... within a time period ...
... other things equal, ceteris paribus

supply chain

all the stages of a product's progress ...
... from raw materials, production ...
... and distributions ...
... until it reaches the consumer

notional demand

where buyers may want to buy a product ...
... but which is not always backed up ...
... by the ability to pay

effective demand

demand that is supported ...
... the ability to pay

demand curve (D)

a line plotted on a graph ...
... that represents the relationship between ...
... the quantity demanded ...
... and the price of a product

market demand

the total amount demanded ...
... by consumers

demand schedule

the data from which ...
... a demand curve is drawn on a graph

movement along a demand curve

shows how quantity demanded ...
... responds to a change in price

normal goods

where the quantity demanded ...
... increases as income increases

inferior goods

where the quantity demanded ...
... increases as income decreases

substitute

an alternative good

complement

a good consumed with another

joint demand

when two goods ...
... are consumed together

supply curve (S)

a line plotted on a graph ...
... that represents the relationship ...
... between the quantity supplied ...
... and the price of the product

supply schedule

the data from which ...
... a supply curve is drawn on a graph

subsidies

direct payments ...
... made by governments ...
... to producers of goods and services

indirect tax

a tax levied ...
... on goods and services ...
... such as a general sales tax

extension of demand or supply

an increase in the ...
... quantity demanded ...
... or quantity supplied

contraction of demand or supply

a decrease in the ...
... quantity demanded ...
... or quantity supplied

price mechanism

the means of allocating resources ...
... in a market economy

consumers

individuals or households ...
... who buy goods and services ...
... for their own use or for others

market

where buyers and sellers ...
... get together to trade

demand

the quantity of a product ...
... that consumers are willing and able to buy ...
... at different prices per period of time ...
... other things equal, ceteris paribus

supply

the quantity of a product ...
... that producers are willing and able to sell ...
... at different prices per period of time ...
... other things equal, ceteris paribus

supply chain

all the stages of product's progress ...
... from raw materials, production and distribution ...
... until it reaches the consumer

notional demand

where buyers may want to buy a product ...
... but which is not always backed up by the ability to pay

effective demand

demand that is supported by the ability to pay

demand curve (D)

a line plotted on a graph ...
... that represents the relationship between ...
... the quantity demanded and the price of a product

market demand

total amount demanded by consumers

demand schedule

data from which a demand curve is drawn on a graph

normal goods

where the quantity demanded increases ...
... as income increases

inferior goods

where the quantity demanded increases ...
... as income decreases

normal and inferior goods

inferior goods

substitute goods

an alternative good

complement goods

a good consumed with another

supply curve (S)

a line plotted on a graph ...
... that represents the relationship between ...
... the quantity supplied and the price of the product.

supply schedule

the data from which ...
... a supply curve is drawn on a graph

subsidies

direct payments made by governments ...
... to producres of goods and services

indirect tax

a tax levied on goods and services, ...
... such as a general sales tax

A Choice between Consumption Goods

How a Change in Income Affects Consumption Choices

How a Change in Price Affects Consumption Choices

The Foundations of a Demand Curve

An Example of Housing (a) As the price increases from P0 to P1 to P2 to P3, the budget constraint on the upper part of the diagram rotates clockwise. The utility-maximizing choice changes from M0 to M1 to M2 to M3. As a result, the quantity demanded of housing shifts from Q0 to Q1 to Q2 to Q3, ceteris paribus. (b) The demand curve graphs each combination of the price of housing and the quantity of housing demanded, ceteris paribus. The quantities of housing are the same at the points on both (a) and (b). Thus, the original price of housing (P0) and the original quantity of housing (Q0) appear on the demand curve as point E0. The higher price of housing (P1) and the corresponding lower quantity demanded of housing (Q1) appear on the demand curve as point E1.

Farmer’s Market

Weirdest Celebrity Items Sold At Auction

Britney Spears' Gum, Brad Pitt's Breath And More (Huffpost)

A Demand Curve for Gasoline

A Supply Curve for Gasoline

Shifts in Demand: A Car Example

Demand Curve

Demand Curve with Income Increase

Demand Curve Shifted Right

Factors That Shift Demand Curves

Shifts in Supply

Supply Curve

Setting Prices

Increasing Costs Leads to Increasing Price

Supply Curve Shifts

Factors That Shift Supply Curves

videos and tutorial

supply, demand and market equilibrium
(Khan Academy)

law of demand

market demand as the sum of individual demand

supply, demand and market equilibrium

Chapter 8: Price elasticity, income elasticity and cross elasticity of demand

elasticity
elastic
inelastic
price elasticity of demand (PED)
price elastic
price inelastic
perfectly inelastic
perfectly elastic

Chapter 8: Price elasticity, income elasticity and cross elasticity of demand

unit elasticity
income elasticity of demand (YED)
necessity good
superior good
cross elasticity of demand (XED)

Chapter 8: Price elasticity, income elasticity and cross elasticity of demand

price elasticity of demand
income elasticity of demand
cross elasticity of demand (or cross-price elasticity of demand)
substitute goods
complementary goods
perfectly inelastic

Chapter 8: Price elasticity, income elasticity and cross elasticity of demand

inelastic
unitary elasticity
elastic
perfectly elastic
total revenue

elasticity

a numerical measure of responsiveness ...
... of one variable following ...
... a change in another variable ...
ceteris paribus or other things equal

elastic

where the relative change ...
... in the quantity demanded ...
... is greater than ...
... the change in price, income ...
... or the prices of substitutes ...
... and complements

inelastic

where the relative change ...
... in the quantity demanded ...
... is less than ...
... the change in price, income ...
... or the prices of substitutes ...
... and complements

price elasticity of demand (PED)

measures of the responsiveness ...
... of the quantity demanded ...
... for a product following ...
... a change in the price of the product

price elastic

when the relative change ...
... in the quantity demanded ...
... is greater than ...
... the change in price of the product

price inelastic

when the relative change ...
... in the quantity demanded ...
... is less than ...
... the change in price of the product

perfectly inelastic

where a change in price ...
... has no effect on the quantity demanded

perfectly elastic

where all that is produced ...
... is sold at a given price

unit elasticity

where the change in price ...
... is relatively the same as ...
... the change in quantity demanded

income elasticity of demand (YED)

measures the responsiveness ...
... of the quantity demanded ...
... for a product following ...
... a change in income

necessity good

a type of normal good ...
... with a YED ...
... that is close to zero

superior good

a good with ...
... a YED ...
... greater than 1

cross elasticity of demand (XED)

measures the responsiveness ...
... of the quantity demanded ...
... for one product ...
... following a ...
... change in the price ...
... of another product

On-Demand Media Pricing

elasticity

a numerical measure of responsiveness ...
... of one variable following a change in another variable ...
... ceteris paribus

pulling the rubber band — The elasticity concept can be illustrated using the rubber band

elastic

where the relative change ...
... in the quantity demanded is greater ...
... than the change in price, income ...
... or the prices of substitutes and complements .

inelastic

where the relative change ...
... in the quantity demanded is less ...
... than the change in price, income ...
... or the prices of substitutes and complements .

price elasticity of demand (PED)

measures of the responsiveness ...
... of the quantity demanded for a product ...
... following a change in the price of the product.

price elastic

when the relative change in the quantity demanded ...
... is greater than ...
... change in price of the product.

price inelastic

when the relative change in the quantity demanded ...
... is less than ...
... change in price of the product.

perfectly inelastic

where a change in price ...
... has no effect ...
... on the quantity demanded

perfectly elastic

where all that is produced ...
... is sold at ...
... a given price

unit elasticity

where the change in price is ...
... relatively the same as ...
... the change in quantity demanded

price elasticity explained using a diagram

elasticity diagram — In this image, demand for products A and B changes to a greater extent than alterations in price. Products D, E, and F have smaller demand changes than alterations in price. With product C, demand and prices change by the same proportion. Product A is a non-essential good (such as a weekend in a spa), product F is an essential good (such as milk or bread), while product C might be a Coke (people would turn to Pepsi if Coke’s price rose).

income elasticity of demand (YED)

measures the responsiveness ...
... of the quantity demanded for a product ...
... following a change in income.

necessity good

a type of normal good with a YED ...
... that is close to zero

superior good

a good with a YED greater than 1

relationships between a change in income and quantity demanded

cross elasticity of demand (XED)

measures the responsiveness of the ...
... quantity demanded ...
... for one product following ...
... a change in the price of another product.

Calculating the Price Elasticity of Demand

Four part question (1/3)

Define price elasticity of demand and explain how it is calculated. Provide two hypothetical examples of luxury goods, one with elastic demand and one with inelastic demand. Justify your classification for each example.
Suppose the government imposes a significant tax increase on luxury cars to generate revenue. Analyze how this tax increase is likely to affect the price, quantity demanded, and total revenue in the luxury car market. Support your analysis with the appropriate elasticity concept.

Four part question (2/3)

Calculate income elasticity for luxury cars if, over a year, the average income in the country increased by 10%, and the quantity demanded of luxury cars increased by 15%.
Additionally, calculate the cross elasticity of demand between luxury cars and economy cars if the price of economy cars increased by 8%, and the quantity demanded of luxury cars decreased by 12%.

Four part question (3/3)

Discuss the implications of the calculated income and cross elasticities for luxury car manufacturers. What do these elasticities reveal about the nature of luxury cars as normal or inferior goods and their relationship with economy cars?
Provide recommendations for luxury car manufacturers based on your analysis.

Chapter 9: Price elasticity of supply

price elasticity of supply
price elastic supply
price inelastic supply
stocks
perishability

price elasticity of supply (PES)

a numerical measure ...
... of the responsiveness of the quantity supplied ...
... to a change in the price of the product

$PES = \frac{ \text{% change in quantity supplied} }{ \text{% change in price} }$

price elastic supply

the quantity supplied ...
... responds more than proportionately ...
... to a change in its price

price inelastic supply

the quantity supplied ...
... responds less than proportionately ...
... to a change in its price

factors affecting price elasticity supply

number of producers
amount of stocks
time period
existence of spare capacity
length of the production period
degree of factor mobility

Price Elasticity of Supply

Infinite Elasticity

Zero Elasticity

A Constant Unitary Elasticity Demand Curve

A Constant Unitary Elasticity Supply Curve

Passing along Cost Savings to Consumers

Passing along Higher Costs to Consumers

Elasticity and Tax Incidence

How a Shift in Supply Can Affect Price or Quantity

Chapter 10: The interaction of demand and supply

equilibrium
disequilibrium
equilibrium price
equilibrium quantity
joint demand
alternative demand
derived demand

Chapter 10: The interaction of demand and supply

joint supply
rationing
signalling
price mechanism
transmission of preferences
incentivisation
scarcity and choice

Demand and Supply Curves

Fall in supply

Good Weather for Salmon Fishing: The Four-Step Process

The Print News Market: A Four-Step Analysis

Higher Compensation for Postal Workers

Combined Effect of Decreased Demand and Decreased Supply

Shifts of Demand or Supply versus Movements along a Demand or Supply Curve

Demand and Supply Curves

The figure displays a generic demand and supply curve.

Demand and Supply Curves

The horizontal axis shows the different measures of quantity: a quantity of a good or service, a quantity of labor for a given job, or a quantity of financial capital.

Demand and Supply Curves

The vertical axis shows a measure of price: the price of a good or service, the wage in the labor market, or the rate of return (like the interest rate) in the financial market.

Demand and Supply Curves

We can use the demand and supply curves to explain how economic events will cause changes in prices, wages, and rates of return.

Impact of Increasing Demand for Nurses 2020–2030

In 2020, the median salary for nurses was 75,330 USD. As demand for services increases, the demand curve shifts to the right (from $D_0$ to $D_1$) and the equilibrium quantity of nurses increases from $Qe_0$ to $Qe_1$. The equilibrium salary increases from $Pe_0$ to $Pe_1$.

Impact of Decreasing Supply of Nurses between 2020 and 2030

The increase in demand for nurses shown in the figure leads to both higher prices and higher quantities demanded. As nurses retire from the work force, the supply of nurses decreases, causing a leftward shift in the supply curve and higher salaries for nurses at $Pe_2$. The net effect on the equilibrium quantity of nurses is uncertain, which in this representation is less than $Qe_1$, but more than the initial $Qe_0$.

The effect of a 30% salt tax

The initial equilibrium. Initially the market equilibrium is at point A. The price is $P^*$ and the quantity of salt sold is $Q^*$.

The effect of a 30% salt tax

A 30% tax. A 30% tax is imposed on suppliers. Their marginal costs are effectively 30% higher at each quantity. The supply curve shifts.

The effect of a 30% salt tax

The new equilibrium. The new equilibrium is at B. The price paid by consumers has risen to $P_1$ and the quantity has fallen to $Q_1$.

The effect of a 30% salt tax

The tax paid to the government. The price received by suppliers (after they have paid the tax) is $P_0$. The double-headed arrow shows the tax paid to the government on each unit of salt sold.

Chapter 11: Consumer and producer surplus

consumer surplus
producer surplus

consumer surplus

the difference between ...
... the price ...
... a consumer is willing to pay for a product ...
... and its market price

producer surplus

the difference between ...
... the price ...
... a producer is willing to accept ...
... and what is actually paid

Demand and Supply for Gasoline

The demand curve (D) and the supply curve (S) intersect at the equilibrium point E, with a price of 1.40 dollar and a quantity of 600. The equilibrium price is the only price where quantity demanded is equal to quantity supplied. At a price above equilibrium like 1.80 dollar, quantity supplied exceeds the quantity demanded, so there is excess supply. At a price below equilibrium such as 1.20 dollar, quantity demanded exceeds quantity supplied, so there is excess demand.

Consumer and Producer Surplus

The somewhat triangular area labeled by F shows the area of consumer surplus, which shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of 90 dollar, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of producer surplus, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at a price of 45 dollar, firms would have been willing to supply a quantity of 14 million.

Efficiency and Price Floors and Ceilings

(a) The original equilibrium price is 600 dollar with a quantity of 20,000. Consumer surplus is T + U, and producer surplus is V + W + X. A price ceiling is imposed at 400 dollar, so firms in the market now produce only a quantity of 15,000. As a result, the new consumer surplus is T + V, while the new producer surplus is X. (b) The original equilibrium is $8 at a quantity of 1,800. Consumer surplus is G + H + J, and producer surplus is I + K. A price floor is imposed at 12 dollar, which means that quantity demanded falls to 1,400. As a result, the new consumer surplus is G, and the new producer surplus is H + I.

The effect of a 30% salt tax

Identify the consumer surplus and producer surplus

before the introduction of the tax
after the introduction of the tax

Discuss how taxes affect both surpluses.

consumer surplus and producer surplus

Part 3: Government microeconomic intervention

Reasons for government intervention in markets
Methods and effects of government intervention in markets
Addressing income and wealth inequality

Chapter 12: Reasons for government intervention in markets

market failure
how governments intervene in markets
controlling prices in markets

Chapter 13: Methods and effects of government intervention in markets

impact & incidence of specific indirect taxes
impact & incidence of subsidies
direct provision of goods & services
maximum & minimum prices
buffer stock schemes
provision of information

Chapter 14: Addressing income and wealth inequality

income and wealth
measuring income and wealth inequality
economic reasons for inequality of income and wealth
policies to redistribute income and wealth

Chapter 12: Reasons for government intervention in markets

market failure

market failure

when the free market ...
... does not make the best use ...
... of scarce resources

how do governments intervene in markets

non-provision of public goods

free rider problem
private sector lack of interest
opportunity cost of funding public goods

over consumption of demerit goods
under consumption of merit goods

controlling prices in markets

set maximum prices
use rent controls
set minimum prices for agricultural products

controlling prices in markets - maximum prices

controlling prices in markets - minimum prices

A Price Ceiling Example—Rent Control

European Wheat Prices: A Price Floor Example

Chapter 13: Methods and effects of government intervention in markets

incidence
maximum price
minimum price
buffer stock scheme

Chapter 13: Methods and effects of government intervention in markets

indirect tax
excise duty
impact of tax
incidence of tax
specific tax
subsidy
impact of a subsidy

Chapter 13: Methods and effects of government intervention in markets

incidence of a subsidy
direct provision of goods and services
maximum price
minimum price
price stabilisation
buffer stock

incidence

the extent to which ...
... the tax burden is borne ...
... by the producer ...
... or the consumer or both

maximum price (or price ceiling)

a price that is fixed.
the market price ...
... must not exceed this price.

minimum price (price floor)

a price that is fixed.
the market price ...
... must not go below this price.

buffer stock scheme

a type of commodity agreement ...
... designed to limit price fluctuations

types of indirect taxes

ad valorem : proportion or percentage of the price
specific taxes : fixed amount per unit purchased

impact of indirect tax

goal : discourage production and consumption of demerit goods
tax imposed on the producer ...
... but passed on to consumers

impact of taxation

incidence of an indirect tax

extent to which the tax burden is ...
... borne by the producer, ...
... by the consumer ...
... or by both

incidence of an indirect tax depends on ...

... the price elasticity of demand for the product

the more inelastic the PED
$\longrightarrow$ easier it is to pass tax to the consumer
$\longrightarrow$ essential products are highly taxed
the more elastic the PED
$\longrightarrow$ consumer buys less as price $\uparrow$
$\longrightarrow$ producer will absorb tax

impact and incidence of subsidies

Chapter 14: Addressing income and wealth inequality

wealth
Gini coefficient
informal economy
minimum wage
transfer payment
progressive tax
inheritance tax
capital tax

Chapter 14: Addressing income and wealth inequality

income
wealth
Gini coefficient
minimum wage
transfer payment

wealth

a stock of assets ...
... that has been built up over time

Gini coefficient

a numerical measure ...
of income inequality

informal economy

the part of the economy ...
... that is not regulated, protected or taxed ...
... by the government

minimum wage (expressed as wage per hour)

the least amount ...
... an employer can ...
... legally pay one of its workers

transfer payment

a payment made by ...
... the government ...
... to certain members of the community ...
... who may be unable to work ...
... or are in need of assistance

progressive tax

one where the rate of taxation ...
... rises more than proportionately ...
... to the rise in income

inheritance tax

a progressive tax ...
... on an inheritance or gift

capital tax

a progressive tax paid ...
... annually ...
... on the difference between ...
... the buying and the selling price ...
... of an asset

difference between income and wealth

income : reward for the services of a factor of production

wages, salaries, bonuses
rent, interest, profits

wealth : stock of assets that someone has built up over time

businesses, property
shares, gold

flow vs. stock
income $\longrightarrow$ flow concept
wealth $\longrightarrow$ stock concept

measuring income and wealth inequality

Gini coefficient

value $\longrightarrow$ 0 : equally distributed
value $\longrightarrow$ 1 : inequality

economic reasons
for inequality of income & wealth

no formal employment opportunities
poor vocational training
no investment in education & health sector
poor infrastructure
low rate of savings
no access to loans

policies to redistribute income and wealth

reduce income inequality
redistribute wealth

$\longrightarrow$ dependent on tax revenues

policies to redistribute income and wealth

minimum wage rates
transfer payments
taxation
state provision of goods & services

minimum wage

advantages

reduces poverty

disadvantages

workers in informal sector are excluded
self-employed workers are excluded

critics say that it may create unemployment
European countries by minimum wage

wage determination - minimum wage

transfer payment

payment from tax revenue to vulnerable individuals
examples

pensions
unemployment benefits
housing allowances
food coupons
child benefits

advantages vs. disadvantages

progressive tax

high earners tax rate : 80%
low earners tax rate : 20%-40%
see real values for Luxembourg

$\longrightarrow$ reduces income differential

Part 4: The macroeconomy

National income statistics
Introduction to the circular flow of income
Aggregate demand and aggregate supply analysis
Economic growth
Unemployment
Price stability

Chapter 15: National income statistics

national income
gross domestic product (GDP)
gross national income (GNI)
net national income (NNI)
at current market prices
at constant prices

Chapter 15: National income statistics

GDP deflator
exports
imports
depreciation (of capital)
net domestic product (NDP)
net national product (NNP)

What is gross domestic product?

national income

a country's total output

explore the national accounts data for Luxembourg (Statec)

national income statistics

measures of the total output ...
... (income and expenditure) ...
... of an economy

gross domestic product (GDP)

the total output ...
... produced in a country

gross domestic product (GDP)

gross national income (GNI)

GDP ...
... plus net income ...
... from abroad

gross national income (GNI)

net property income from abroad

receipts ...
... of profit, rent and interest ...
... earned on the ownership ...
... of foreign assets minus the payments ..
... of profit, rent and interest
... to non-residents

compensation of employees

income of workers ...
... who work in another country ...
... for a short period of time

gross national disposable income

GNI ...
... plus net transfers of workers' income ...
... to their relatives ...
... to and from other countries

multinational companies (MNCs)

firms that operate ...
... in more than one country

circular flow of income

a simplified view of ...
... how income flows ...
... around the economy

methods of measuring GDP

output method
income method
expenditure method

output method

a way of measuring GDP ...
... by calculating the total production ...
... of goods and services ...
... used in their production

value added

the difference between ...
... the price at which products are sold ...
... and the price of goods and services ...
... used in their production

income method

a way of measuring GDP ...
... by totalling all the incomes earned ...
... in producing the country's output

expenditure method

a way of calculating GDP ...
... by totalling all the spending ...
... on the country's output

market prices

prices paid ...
... by consumers ...
... that take into account ...
... indirect taxes and subsidies

basic prices

prices charged by producers ...
... before the addition of indirect taxes ...
... and the deduction of subsidies

gross investment

total spending on capital goods

net domestic product (NDP)

GDP minus depreciation

net national income (NNI)

gross national income (GNI) minus depreciation

net investment

additions to the capital stock

depreciation (of capital goods)

the value of capital goods ...
... that have worn out or become out-of-date

Chapter 16: Introduction to the circular flow of income

circular flow of income
closed economy
open economy
injection
leakage (or withdrawal)

equilibrium income

Equilibrium point is where the savings line intersects with the investment line.

injection and leakage (or withdrawal)

Equilibrium income in a four-sector economy.

injection and leakage (or withdrawal)

At Y$_1$, we have leakages $>$ injections. Spending in the economy will decrease and therefore income will fall restoring the initial equilibrium.

injection and leakage (or withdrawal)

At Y$_2$, we have injections $>$ leakages. Spending in the economy will increase and therefore income will start rising restoring the initial equilibrium.

equilibrium income

The equality total investment $=$ total savings is essential for macroeconomic stability.

disequilibrium income

If savings exceed investment, it may indicate an excess of available funds, ... .

disequilibrium income

... which could lead to a decrease in interest rates or increased investment in the economy.

disequilibrium income

Excess saving and limited investment opportunities. There is an excess supply of funds in the financial markets ...

disequilibrium income

... borrowers are in a favourable position because lenders are competing to lend out their savings ...

disequilibrium income

... therefore lenders may be willing to accept lower interest rates.

disequilibrium income

In the context of lower interest rates, ...

disequilibrium income

... it becomes more attractive for borrowers to take out loans for investment projects.

Chapter 17: Aggregate demand and aggregate supply analysis

aggregate demand (AD)
aggregate supply (AS)

aggregate demand (AD)

the total demand ...
... for an economy's goods and services ...
... at a given price level ...
... in a given time period

aggregate demand (AD)

$ \text{AD} = \text{C} + \text{I} + \text{G} + (\text{X}-\text{M}) $

$\text{C}$ : consumer expenditure
$\text{I}$ : investment
$\text{G}$ : government spending
$\text{X}$ : exports of goods and services
$\text{M}$ : imports of goods and services

consumer expenditure

spending by households ...
... on goods and services

net exports

exports minus imports
$\text{NX} = \text{X} - \text{M}$

exchange rate

the price ...
... of one currency ...
... in terms of ...
... another currency

aggregate supply (AS)

the total output (real GDP) ...
... that producers in an economy ...
... are willing and able ...
... to supply ...
... at a given price level ...
... in a given time period

short-run aggregate supply (SRAS)

the total output of an economy ...
... that will be supplied ...
... when there has not been enough time ...
... for the prices of factors of production ...
... to change

long-run aggregate supply (LRAS)

the total output of a country ...
... supplied in the period ...
... when prices of factors of production ...
... have fully adjusted

average cost

the cost ...
... per unit of output

supply-side shocks

large and unexpected changes ...
... in short-run aggregate supply

Keynesians

people who agree with the view of ...
... the economist John Maynard Keynes ...
... that government intervention ...
... is needed to achieve full employment

John Maynard Keynes (1883-1946)

new classical economist

economists who think that ...
... the LRAS curve is vertical ...
... and that the economy will move towards ...
... full employment ...
... without government intervention

Keynesian Economics vs. Classic Economics

Keynesian Economics

increase consumer demand through government spending on:

infrastructure
unemployment benefits
education

government spending is necessary to maintain full employment

Classic Economics

promotes laissez-faire
limit government intervention
target firms not consumers

macroeconomic equilibrium

the output and price level ...
... achieved where ...
... AD equals AS

aggregate demand and supply

Macroeconomic equilibrium: The point of equilibrium is where AD and AS intersect.

aggregate demand and supply

The Keynesian long-run aggregate supply curve.

aggregate demand and supply

The new classical long-run aggregate supply curve.

Chapter 18: Economic growth

economic development
nominal (or money) GDP
real GDP
base year
constant prices
price index
GDP deflator
efficiency and inefficiency
recession
scarcity and choice

Chapter 18: Economic growth

economic growth
business cycle (or trade cycle)
labour-intensive production
capital-intensive production

Economic growth

economic development

an increase ...
... in welfare and ...
... quality of life

nominal (or money) GDP

total output ...
... measured in ...
current prices

real GDP

total output ...
... measured in ...
... constant prices

base year

the reference point ...
... in time.
it is the starting year ...
... in an index and ...
... is given a value of 100

constant prices (real prices)

prices ...
in a base year

current prices (nominal prices)

prices ...
indicated at ...
... a given moment in time

price index

a way of comparing ...
... changes in the price level ...
... over time.
the value of the first year ...
... in the index (base year) ...
... is set at 100 and ...
... the value of each following year ...
... is a percentage of it.

GDP deflator

the price index ...
... of all domestically produced ...
... goods and services.

efficiency and inefficiency

when an economy ...
... is producing ...
... inside its PPC, ...
... it is inefficiency

recession

a decline in ...
... real GDP ...
... over at least ...
... two consecutive quarters

GDP Growth Calculation

GDP Growth Rate is calculated by the percentage increase in GDP from one period to the next

\[ \text{GDP Growth Rate (%)} = \left( \frac{\text{GDP}_{\text{current period}} - \text{GDP}_{\text{previous period}}}{\text{GDP}_{\text{previous period}}} \right) \times 100 \]

productive capacity

Inefficieny point.

productive capacity

Increase in productive capacity.

AD/AS diagram

AD and AS curve.

AD/AS diagram

Economic growth resulting from higher aggregate demand (AD).

AD/AS diagram

Economic growth resulting from higher aggregate supply (AS).

Chapter 19: Unemployment

unemployment
unemployment rate
labour force
working population
dependency ratio
participation rate
claimant count
labour force survey

Unemployment rate

Labor market

Labor Market Example

Technology and Wages: Applying Demand and Supply

A Living Wage: Example of a Price Floor

labour force participation rate

percentage of ...
... the total population of working age ...
... who are actually classified as ...
... being part of the labour force

level of unemployment

total number of workers...
... who are unemployed

$ \text{unemployment rate} = \frac{ \text{nber. of people unemployed} }{ \text{nber. of people in the labour force} } \times 100 $

unemployment and employment

employment rate is the ...
proportion of the working age population ...
... who are in work ...
... and not ...
... the proportion of labour force in work.

$ \text{unemployment rate} + \text{employment rate} \neq 100\% $

stock vs. flow

stock: measured at a particular time period
flow: measured over a period of time period

methods of measuring unemployment

claimant count measure:
count the registered unemployed (e.g. for benefits)
labour force survey measure:
survey-based by asking people

What are advantages and disadvantages of each method?

causes of unemployment

frictional unemployment
structural unemployment
cyclical unemployment

frictional unemployment

job-to-job search
voluntary unemployment
search unemployment
casual unemployment
seasonal unemployment

structural unemployment

regional unemployment
technological unemployment
international unemployment

cyclical unemployment

demand-deficient unemployment
AD falls

consequences of unemployment

workers: income $\downarrow$
unemployed:
- duration uf unemployment makes it harder to find a new job
- decline in physical and mental health
firms:

not faced with wage rises
lower demand for goods and services

Chapter 20: Price stability

barter
price stability
inflation rate
inflation
price level
creeping inflation
hyperinflation
deflation
disinflation

Chapter 20: Price stability

annual average method
year-on-year method
consumer price index (CPI)
money values
real data
cost-push inflation
wage-price spiral
demand-pull inflation
monetarists

Chapter 20: Price stability

menu costs
shoe leather costs
fiscal drag
inflationary noise
total costs
debtors

Chapter 20: Price stability

inflation
creeping inflation
accelerating inflation
hyperinflation
deflation
disinflation
general price level

Chapter 20: Price stability

cost of living
consumer price index (CPI)
sampling
household expenditure
weights
base year
nominal value

Chapter 20: Price stability

real value
demand-pull inflation
monetary inflation
cost-push inflation
anticipated inflation
unanticipated inflation
imported inflation

Chapter 20: Price stability

menu costs
shoe lether costs
fiscal drag
stagflation

Inflation of consumer prices

Consumer price index

inflation

a general increase ...
... in the average level of prices ...
... in an economy ...
... over a period of time

creeping inflation

a situation where ...
... the rate of inflation ...
... is reasonably low ...
... say about 2%

accelerating inflation

a situation where ...
... the rate of inflation ...
... is rising ...
... over a period of time

hyperinflation

a situation where ...
... the rate of inflation ...
... is becoming very high ...
... and is damaging confidence ...
... in the country’s economy

deflation

a general decrease ...
... in the average level of prices ...
... in an economy ...
... over a period of time

disinflation

a general increase ...
... in the average level of prices ...
... in an economy ...
... over a period of time ...
... where the rate of increase ...
... is less than ...
... in the previous time period

general price level

the average level of prices ...
... of all consumer goods and services ...
... in an economy ...
... at a given time

cost of living

the cost of ...
... a selection of goods and services ...
... that are consumed by ...
... an average household ...
... in an economy ...
... at a given time

consumer price index (CPI)

a way of measuring changes in the prices ...
... of a number of ...
... consumer goods and services ...
... in an economy ...
... over a period of time

sampling

the use of a representative sample ...
... of goods and services ...
... consumed in an economy ...
... to give an indication of changes ...
... in the cost of living

household expenditure

a survey is taken on ...
... a regular basis (usually every month) ...
... to record changes in the prices ...
... of a selection of goods and services ...
... that constitutes a representative basket

weights

the items in a representative sample ...
... of goods and services ...
... bought by people in an economy ...
... will not all be of the same importance; ...
weights are given ...
... to each of the items ...
... to reflect the relative importance ...
... of the different components in the basket ...
... and so a price index ...
... involves a weighted average

base year

a year chosen so that comparisons ...
... can be made over a period of time;
the base year for an index ...
... is given a value of 100

nominal value

the value of a sum of money ...
... without taking into account ...
... the effects of inflation

real value

the value of a sum of money ...
... after taking into account (removing) ...
... the effects of inflation

demand-pull inflation

a rise in the ...
... general level of prices ...
... in an economy ...
... caused by too much demand ...
... for goods and services

causes of inflation

cost-push inflation
demand-pull inflation

consequences of inflation

costs of inflation
benefits of inflation
factors affecting the consequences of inflation
recent reductions in global inflation

consequences of inflation: costs of inflation

$(X-M) \downarrow$
unplanned redistribution of income
menu costs
shoe leather costs
fiscal drag
discouragement of investment
inflationary noise
inflation causing inflation

consequences of inflation: benefits of inflation

output $\uparrow$
burden of debt $\downarrow$
some unemployment $\downarrow $ (pause wage rises)

consequences of inflation: factors affecting

cause of inflation : demand-pull vs. cost-push
rate of inflation : high vs. low
rate of inflation : accelerating vs. stable
expected vs. unexpected inflation rate
relative inflation rate to other countries

consequences of inflation: recent reductions in global inflation

advances in technology : costs $\downarrow$ $\longrightarrow$ AD $\uparrow$
increased international competition
changes in the labour market

Causes & consequences of deflation

deflation $\longrightarrow$ burden of debt $\uparrow$
$\longrightarrow$ real rate of interest $\uparrow$ $\longrightarrow$ menu cost

good deflation : as a result of AS $\uparrow$
price level $\downarrow$ & real GDP $\uparrow$
bad deflation : as a result of AD $\downarrow$
price level $\downarrow$ & real GDP $\downarrow$

[add diagram]

Extract: How should you fight inflation?

read How should you fight inflation?
by Joseph Stiglitz

aggregate demand and aggregate supply.

Video: Inflation (Bank of England)

Extract: Global Inflation

read Peak inflation? The new dilemma for central banks from FT

$ AD = C + I + G + (X-M) $

Part 5: Government macroeconomic intervention

Government macroeconomic policy objectives
Fiscal policy
Monetary policy
Supply-side policy

Chapter 21: Government macroeconomic policy objectives

inflation target
unemployment
economic growth

Annual budget of NASA

Central government expenditure as share of GDP

Chapter 22: Fiscal policy

fiscal policy
government budget
budget deficit
budget surplus
balanced budget
national debt

Chapter 22: Fiscal policy

direct tax
income tax
indirect tax
specific tax
ad valorem tax
progressive taxation

Chapter 22: Fiscal policy

regressive taxation
proportional taxation
flat-rate tax
marginal tax rate
average tax rate
canons of taxation

Chapter 22: Fiscal policy

capital spending (or investment spending)
current spending
discretionary fiscal policy
automatic stabilisers
expansionary fiscal policy
contractionary fiscal policy

fiscal policy

the use of ...
... taxation and government spending ...
... to influence aggregate demand

budget

an annual statement ...
... in which the government ...
... outlines plans for its ...
... spending and tax revenue

budget surplus

government revenue ...
... exceeding ...
... government expenditure

budget deficit

government expenditure ...
... exceeding ...
... government revenue

balanced budget

government revenue ...
... equalling ...
... government expenditure

automatic stabilisers

changes in ...
... government spending and taxation ...
... that occur to ...
... reduce fluctuations ...
... in aggregate demand ...
... without any alteration ...
... in government policy

cyclical budget deficit

a budget deficit ...
... caused by a decline ...
... in economic activity

structural budget deficit

a budget deficit ...
... caused by an imbalance between ...
... government spending and taxation

tax base

the coverage of ...
... what is taxed

national debt

the total amount ...
... of government debt

specific taxes

taxes that are charged ...
... as a set amount ...
... per unit

sin taxes

taxes on products ...
... considered harmful to consumers

direct taxes

taxes on ...
... income and wealth

tax avoidance

the legal bending ...
... of the rules of the tax system ...
... to pay less tax

tax evasion

the illegal non-payment ...
... or underpayment of a tax

regressive tax

a tax which takes ...
... a larger percentage ...
... of the income or wealth ...
... of those on low incomes

proportional tax

a tax which takes ...
... the same percentage ...
... of the income or wealth ...
... of all income groups

marginal rate of taxation (mrt)

the proportion of ...
... extra income taken in tax

average rate of taxation (art)

the proportion of income ...
... that is taxed

current government spending

government spending ...
... on providing goods and services

capital government spending

government spending ...
... on investment

exhaustive government spending

government spending ...
... which makes use of resources

non-exhaustive government spending

government spending ...
... which allows others to decide ...
... how resources are used

expansionary fiscal policy

increases in ...
... government spending and ...
... cuts in taxes ...
... designed to increase aggregate demand

contractionary fiscal policy

decreases in ...
... government spending and ...
... increases in taxes ...
... designed to reduce ...
... the growth of aggregate demand

discretionary fiscal policy

deliberate changes in ...
... government spending and taxation

Chapter 23: Monetary policy

monetary policy
hot money
quantitative easing
open market operations
expansionary monetary policy
contractionary monetary policy

Chapter 24: Supply-side policy

supply-side policy
productivity
productive capacity
labour productivity

Part 6: International economic issues

The reasons for international trade
Protectionism
Current account of the balance of payments
Exchange rates
Policies to correct imbalances in the current account of the balance of payments

Chapter 25: The reasons for international trade

absolute advantage
comparative advantage
trading possibility curve
bilateral trade
multilateral trade
globalisation
specialisation
free trade
trade liberalisation
trade creation
World Trade Organization
terms of trade

absolute advantage and comparative advantage

absolute advantage

the ability to produce a good ...
... more efficiently (e.g. with less labour)

comparative advantage

the ability to produce a good ...
... relatively more efficiently ...
... (i.e. at lower opportunity cost) ...

comparative advantage : example

comparative advantage 1 — USA more efficient than Bangladesh.

comparative advantage : example

law of comparative advantage

a theory arguing that there may be ...
... gains from trade arising ...
... when countries (or individuals) ...
... specialise in the production of goods ...
... or services in which they have ...
... a comparative advantage

trading possibilities curve

shows the consumption possibilities ...
... under conditions of free trade

trade liberalisation

a process of moving towards ...
... freer trade by ...
... removing restrictions on trade

terms of trade

the ratio of ...
... export prices to ...
... import prices

income terms of trade

the value of a ...
... country's exports ...
... divided by the ...
... price of its imports.
measures the purchasing power ...
... of a country's exports in terms of ...
... the price of its imports

bilateral trade

where trade takes place ...
... between two countries

multilateral trade

where trade takes place ...
... between a number of countries

globalisation

the process whereby there is ...
... an increasing world market ...
... in goods and services ...
... making an increase in multilateral trade ...
... more likely

specialisation

the process whereby ...
... individuals, firms and economies ...
... concentrate on producing those products ...
... in which the have an advantage

free trade

trade that is not restricted ...
... or limited ...
... by different types of ...
... import or export control

trade liberalisation

the removal or reduction ...
... of restrictions or barriers ...
... to the free exchange of ...
... goods and services ...
... between countries

trade creation

the creation of new trade ...
... as a result of ...
... the reduction or elimination ...
... of trade barriers

terms of trade

the price of a ...
... country's exports in relation to ...
... the price of the country's imports

$$ \small\frac{ \text{index number showing the average price of exports} }{ \text{index number showing the average price of imports} } \times 100 $$
$\longrightarrow$ check data at OECD
$\longrightarrow$ check commodities TOT at IMF

causes of changes in the terms of trade

demand for and supply of exports and imports
inflation rate
exchange rate

Prebisch-Singer hypothesis

IED of manufactured goods
is far greater than
IED of primary products
as income rises ...
... the demand for manufactured goods ...
... increase more than ...
... the demand for primary products

benefits of specialisation and free trade

efficient allocation of resources
factor endowment
lower prices & better quality
higher output
economies of scale
choice of products

...
... ...
... ...
... ...
...

Chapter 26: Protectionism

protectionism
tariff
absolute poverty
quota
embargo
voluntary export restraint
exchange control
infant industries
dumping
monopoly
current account

Chapter 26: Protectionism

absolute advantage
protectionism
tariff
import duty
quota
export subsidy
exchange controls

Chapter 26: Protectionism

embargo
voluntary export restraint (VER)
infant industry argument
sunrise industries
sunset industries
dumping

protectionism

protecting domestic producers ...
... from foreign competition

tariff

a tax imposed ...
... on imports

absolute poverty

a condition where ...
... people's income ...
... is too low ...
... to enable them ...
... to meet their basic needs

quota

a limit ...
... on imports

embargo

a ban ...
... on imports and/or exports

voluntary export restraint

a limit placed on imports ...
... reached with the agreement ...
... of the supplying country

exchange control

restrictions on the purchases ...
... of foreign currency

infant industries

new industries that have ...
... a low output ...
... and a high average cost

monopoly

where one firm dominates the market ...
... due to having a large market share.
A pure monopoly is a ...
... single seller with ...
... 100% market share

current account

a record of the ...
... trade in goods, ...
... trade in services, ...
... primary income, ...
... and secondary income

protectionism

measures taken by a country ...
... to restrict international trade

tariff

a tax imposed on ...
... imported goods

quota

an agreement by a country ...
... to limit its exports ...
... to another country ...
... to a given quantity

non-tariff barrier

an obstacle to free trade ...
... other than a tariff

dumping

where domestic producers ...
... face competition from imported goods ...
... that are priced ...
... below marginal cost, ...
... perhaps as a result of ...
... export subsidies

sunset industry

an industry in decline ...
... that needs protection ...
... for its displaced workers

infant industry

an industry that needs ...
... protection from international competition ...
... in the short run so that ...
... it can learn to become competitive

pro-free trade poster

source: Wikipedia

anti-free trade poster

source: Wikipedia

tools of protection

tariffs : taxes, usually on imports
import quotas : limits on the quantity of imports
export subsidies : subsidies given to exporters and domestic firms
embargoes : a total ban on the imports of a particular product
excessive administrative burdens (red tape)

impact of tariffs

a. market without trade

impact of tariffs

b. market with trade

impact of tariffs

c. market with trade : P $\downarrow$ and Q $\uparrow$

impact of tariffs

d. market with trade and after introduction of tariffs

Chapter 27: Current account of the balance of payments

dividend payments
exchange rate
balance of payments account
capital account
financial account
imbalance (in the current account of the balance of payments)

Chapter 27: Current account of the balance of payments

current account deficit (of the balance of payments)
current account surplus (of the balance of payments)
balance (in the current account of the balance of payments)

Chapter 27: Current account of the balance of payments

current account of the balance of payments
balance of trade in goods account
exports
imports
balance of trade in services account
primary income
net investment income

Chapter 27: Current account of the balance of payments

secondary income
current transfers
deficit
surplus
external balance
marginal propensity to import

The Balance Sheet

dividend payments

a share of ...
... a firm's profits ...
... paid to its shareholders

exchange rate

price of one currency ...
... in terms of another currency

balance of payments account

a record of ...
... a country's economic transactions ...
... with the rest of the world ...
... over a year

capital account

within the balance of payments, ...
... a record of the sale and purchase of ...
... copyrights, patents, trademarks, ...
... and money brought into the country ...
... by immigrants and taken out by emigrants

financial account

within the balance of payments, ...
... a record of the transfer of ...
... financial and capital assets ...
... between the country ...
... and the rest of the world

imbalance

debit items ...
... in the current account ...
... not equalling ...
... credit items

current account deficit

the value of debit items ...
... on the current account ...
... exceeding ...
... the value of credit items

current account surplus

the value of credit items ...
... on the current account ...
... exceeding ...
... the value of debit items

balance

debit items ...
... on the current account ...
... equalling ...
... credit items

cumulative current account balance 1980-2008 (US$ billions)

source: Wikipedia

Chapter 28: Exchange rates

floating exchange rate
depreciation
appreciation
hot money flows

Chapter 28: Exchange rates

exchange rate
floating exchange rate
depreciation
appreciation

floating exchange rate

an exchange rate ...
... that is determined ...
... by the market forces ...
... of demand and supply

depreciation

a decrease ...
... in the international price ...
... of a currency ...
... caused by market forces

appreciation

an increase ...
... in the international price ...
... of a currency ...
... caused by market forces

hot money flows

flows of money ...
... moved around the world ...
... to take advantage of ...
... changes in interest rates ...
... and exchange rates

most traded currencies

determination under floating exchange rate

determined through market forces
determined on the foreign exchange market

effect of an increase in the supply of currency

a. equilibrium value of the currency

effect of an increase in the supply of currency

b. supply of the currency in foreign exchange market increases

effect of an increase in the supply of currency

c. fall in the value of currency : depreciation

causes of changes in the floating exchange rate

relative inflation rate $\downarrow$
relative productivity $\uparrow$
quality of products $\uparrow$
incomes abroad $\uparrow$

$\uparrow$ value of exports $\rightarrow$ demand for currency $\uparrow$

causes of changes in the floating exchange rate

foreigners demand for domestic shares
demand for local currency to open accounts
$\rightarrow$ benefit from higher interest rates
short-term movements of money around the world $\rightarrow$ hot money flows

demand for currency $\uparrow$ $\rightarrow$ currency appreciates

interest rates and exchange rates

Chapter 29: Policies to correct imbalances in the current account of the balance of payments

policy objective of stability
fiscal policy
monetary policy
supply-side policy
protectionist policy

essay-style questions (s23)

PPC, public good and merit good (s23_21)

With the help of a diagram, explain the difference between the causes of a movement along, and a shift of, a production possibility curve (PPC) and consider which is likely to have the most immediate impact on an economy. [8 marks]
Assess whether education should be classified as a public good rather than classified as a merit good. [12 marks]

cross-elasticity of demand and buffer stock scheme (s23_21)

With the help of a formula, explain the meaning of cross elasticity of demand and consider which determinants are most important in establishing the size and sign of its coefficient. [8 marks]
With the help of a diagram, assess whether the benefits of a buffer stock scheme for an agricultural product always outweigh its disadvantages. [12 marks]

AD/AS diagram, cost-push inflation, demand-pull inflation, monetary policy, supply-side policy and inflation (s23_21)

With the help of an AD/AS diagram(s), explain cost-push inflation and demand-pull inflation in an economy and consider in what circumstances one may be more damaging than the other. [8 marks]
Assess whether monetary policy or supply-side policy is likely to be more successful in reducing the rate of inflation in an economy. [12 marks]

depreciation, floating exchange rate, protectionism and international trade (s23_21)

With the help of a diagram(s), explain the likely causes of a depreciation of a floating exchange rate and consider whether such a depreciation is always beneficial to an economy. [8 marks]
Assess whether the arguments for protectionism in the context of international trade are always stronger than the arguments against. [12 marks]

consumer surplus, producer surplus, maximum price, transfer payments and low-income households (s23_22)

With the help of a diagram(s), explain what is meant by consumer surplus and producer surplus and consider whether a rise in the price of a product because of higher costs of production is likely to always reduce the consumer surplus. [8 marks]
A government wishes to keep the price of an essential food, such as rice, affordable to help low-income households.
Assess whether a policy of fixing the maximum price for an essential food is likely to be more effective than a policy of making transfer payments to low-income households. [12 marks]

equilibrium price, equilibrium quantity, market equilibrium, wages, labour market, economic growth and entrepreneurship (s23_22)

With the help of a diagram(s), explain what is meant by equilibrium in a market and consider the extent to which the equilibrium price and equilibrium quantity are likely to change for a product following an increase in the wages for labour across the whole economy. [8 marks]
Entrepreneurs are vital in an economy to achieve long run economic growth.
Assess whether encouraging entrepreneurship or increasing another of the factors of production will be a more effective way to achieve long-run economic growth. [12 marks]

trade, absolute advantage, comparative advantage, protectionism, deficit in the current account, and balance of payments (s23_22)

Two countries each produce two products and wish to trade with each other.
Explain the difference between the principles of absolute advantage and comparative advantage and consider whether the principle of comparative advantage is always the more important influence when each country is deciding whether to trade with each other. [8 marks]
Assess whether protectionism is the best way to correct a deficit in the current account of the balance of payments. [12 marks]

cost-push inflation, demand-pull inflation, depreciation, exchange-rate, and monetary policy (s23_22)

Explain the difference between cost-push and demand-pull inflation and consider which is more likely to occur if there is a depreciation in the exchange rate of a country with few natural resources. [8 marks]
Assess whether monetary policy is the only way to control a high rate of inflation. [12 marks]

income elasticity of demand, classification of goods, consumer surplus, and price elasticity of demand (s23_23)

Explain, with the help of examples, the significance of the size and sign of the coefficient of income elasticity of demand for the classification of a good and consider how confident you are of this classification. [8 marks]
When the price of a product changes, it usually changes the consumer surplus in the market.
Assess how variations in price elasticity of demand for a product determine the extent of changes in consumer surplus in a market. [12 marks]

government intervention, merit goods, and buffer stock schemes (s23_23)

Explain why government intervention may be required to provide merit goods and consider why such intervention may not always be successful. [8 marks]
Assess the effectiveness of government intervention through buffer stock schemes in agricultural markets. [12 marks]

circular flow of income, open economy, budget deficit, trade deficit, and investment in infrastructure (s23_23)

With the help of a circular flow of income diagram, explain how equilibrium is determined in an open economy and consider whether a budget deficit or a trade deficit is more likely to cause lasting disequilibrium. [8 marks]
Assess whether an increase in investment in new infrastructure projects will always have a positive impact on the circular flow of income in an economy. [12 marks]

monetary policy, inflation rate, macroeconomic objectives, and macroeconomic intervention (s23_23)

Explain how monetary policy may be able to reduce the rate of inflation in an economy and consider the likely success of this policy. [8 marks]
Assess how governments use macroeconomic intervention to achieve their macroeconomic objectives. [12 marks]

case study (s23)

Unemployment in India (extract and s23_21)

Using the data in Fig. 1.1, calculate the change in India's unemployment rate between July 2020 and May 2021. [2 marks]
Using the information provided, explain how agriculture caused seasonal unemployment in India in December 2020. [2 marks]
Consider the extent to which difficulties may arise in the measurement of unemployment in India. [4 marks]
Assess whether seasonal unemployment is likely to be a more serious problem than frictional unemployment for India's economy. [6 marks]
Assess the possible measures that could be taken to increase employment in a country such as India. [6 marks]

Is Nigeria being held back by its dependence on oil and gas? (extract and s23_22)

Compare the government budget balance of Nigeria in 2016 with the government budget balance in 2020. [2 marks]
Using a production possibility curve (PPC) diagram, demonstrate the impact of the rising level of unemployment on the Nigerian economy. [2 marks]
Consider the extent to which the removal of fuel subsidies in Nigeria would lead to an increase in inflation. [4 marks]
Assess whether using supply-side policy is the best way to diversify the Nigerian economy away from its dependence on oil and natural gas exports. [6 marks]
Assess whether adjusting the collection of direct tax or indirect tax is likely to be more effective in increasing the tax revenue collected by the Nigerian government. [6 marks]

Are doughnuts demerit goods? (extract and s23_23)

Using the data in Fig. 1.1, calculate the percentage change in the value of sales of doughnuts in the US from 2011 to 2019. [2 marks]
Explain one reason why the US market for doughnuts contracted in 2020. [2 marks]
Comment on whether the demand for doughnuts in the US is income elastic or income inelastic. [2 marks]
Explain why a doughnut might be regarded as a demerit good. [2 marks]
With the help of a diagram, assess how the market for sugary foods in the UK might be affected by a ban on online advertising. [6 marks]
Assess the likely effects on UK consumers and the UK government of a ban on online adverts for sugary foods. [6 marks]

case study (s22)

Inflation in Bangladesh (extract and s22_21)

Describe the trend in the annual inflation rate of Bangladesh between 2009 and 2019. [2 marks]
Explain why price changes in the food and the non-food sectors in Bangladesh are treated differently when calculating the CPI. [2 marks]
Explain one domestic consequence and one external consequence for Bangladesh of having 'a relatively high rate of inflation'. [4 marks]
Analyse, with the help of aggregate demand and aggregate supply diagrams, how increasing wages can cause both demand-pull and cost-push inflation in Bangladesh. [6 marks]
'However, there is always the possibility that tough monetary policies could do more harm than good to an economy, compared with the possible use of fiscal policy.'

Discuss whether monetary policy or fiscal policy is more likely to be effective in controlling inflation. [6 marks]

Economic growth in Russia has slowed to well below the global average (extract and s22_22 and original article )

Using Fig. 1.1
1. Compare the rate of inflation in Russia in March 2015 with that in March 2020. [1 mark]
2. What has happened to the price level over this period? [1 mark]
3. Explain what could have caused real wages in Russia to decline between 2016 and 2018. [2 marks]
Explain whether school lunches provided free-of-charge by the Russian government would be classified as private goods or public goods. [4 marks]
Assess, using aggregate demand and aggregate supply analysis, the likely impact of the changes shown in Table 1.1 upon the rate of inflation in Russia. [6 marks]
Discuss whether the 'huge decrease in the price of oil' and the fall in the value of the rouble might bring more opportunities than threats to the Russian economy. [6 marks]

The changing market for avocados (extract and s22_23)

Describe the change in the level and source countries of the US’s imports of avocados from 2013 to 2018. [2 marks]
1. Calculate the percentage change in the wholesale price of Mexican avocados between April 2019 and the end of July 2019. [1 marks]
2. Explain one possible demand reason and one possible supply reason for this change in price. [4 marks]
Using the information provided, consider whether the supply of avocados is price elastic or price inelastic in the short run and in the long run. [4 marks]
Explain, with the help of a production possibility curve diagram, the opportunity cost to a New Zealand farmer of converting from dairy to avocado production. [3 marks]
Discuss whether the price mechanism in the avocado market is working to allocate resources successfully. [6 marks]

general tips for your exam (2iec)

general tips for essay writing

ensure that you oﬀer a clear judgement that answers the question.
draw upon your wide-ranging knowledge of economic concepts and terms to provide a coherent chain of reasoning.
avoid narrow responses or superficial answers by practising going beyond two stage chains of reasoning
ensure you are evaluating what you have written in the context of the question set.
make eﬀective use of a knowledge organiser so that your knowledge and understanding is precise.
spend time planning your essay response in terms of the key points and evaluation that you want to make to avoid the risk of repetition
ensure that examples given link tightly to the economic concept you are trying to address
remember a judgement is expected to get the very top marks for evaluation
plan out your answer - feeling your way through an answer risks an overlong ﬁrst paragraph which lacks a precise understanding of the key concept

general tips for case studies

whilst it is good to spend time on case studies looking at a specific firm, market or industry, it is essential that the focus is on showing an ability to link knowledge and understanding in context using appropriate examples
start with the key concepts and see how they are applied to the case study you are looking at
try to apply yourself to the context of the question - imagine yourself problem solving as an economist : contexts are often chosen that are relatable to you

general tips for short answers

ensure you have mastered key knowledge of economic terms and concepts to avoid generic responses
making eﬀective use of supply and demand diagrams can help lock in knowledge and analysis marks or may provide a way into evaluation.
make eﬀective use of the data
for calculate questions, numerical responses are the most simplest expected answer - it is important to show your workings to secure marks in case your final answer is incorrect
for short 2 mark explain questions, an example will often help in securing a second mark
fully label externalities diagrams.
draw diagrams clearly and large enough for ease of interpretation
for shifts in supply and demand consider the non-price determinants as identified in the data. Do not confuse shifts in supply with extensions in supply.

Rise in unemployment in period march 2023 to april 2024

*see* Notebook

Part 7: The price system and the microeconomy

Utility
Indifference curves and budget lines
Efficiency and market failure
Private costs and benefits, externalities and social costs and benefits
Types of cost, revenue and profit, short-run and long-run production
Different market structures
Growth and survival of firms
Differing objectives and policies of firms

Chapter 30: Utility

utility
law of diminishing marginal utility
total utility
marginal utility
equi-marginal principle
individual demand curve

utility

the satisfaction ...
... received from ...
... consumption

law of diminishing marginal utility

as consumption increase, ...
... the satisfaction from consumption ...
... decreases

total utility

the total satisfaction ...
... received from ...
... consumption

marginal utility

the utility ...
... derived from the ...
... consumption of ...
... one more unit of ...
... the good or service

total utility and marginal utility

Image source: University of Minnesota Open Textbook Library

equi-marginal principle

consumers ...
... maximise their utility ...
... where their marginal valuation ...
... for each product consumed ...
... is the same

$ \frac{MU_A}{P_A} = \frac{MU_B}{P_B} = \frac{MU_C}{P_C} = \ldots \frac{MU_N}{P_N} $

consequences of equi-marginal principle

$ \frac{MU_A}{P_A} = \frac{MU_B}{P_B} = \frac{MU_C}{P_C} = \ldots \frac{MU_N}{P_N} $

total utility cannot be increased
consumer equilibrium is achieved
equi-marginal principle based on following assumptions :

consumers have limited incomes
consumers behave in a rational manner
consumers seek to maximize utility

illustration of equi-marginal principle

$ \frac{MU_A}{P_A} = \frac{MU_B}{P_B} = \frac{MU_C}{P_C} = \ldots \frac{MU_N}{P_N} $

product x ($1/pc)			product y ($2/pc)
MU	MU/P	quantity	MU	MU/P
60	60	1	42	21
40	40	2	32	16
25	25	3	24	12
12	12	4	18	9
5	5	5	14	7
2	2	6	12	6

illustration of equi-marginal principle

$ \frac{MU_x}{P_x} = \frac{MU_y}{P_y} $

product x ($1/pc)			product y ($2/pc)
MU	MU/P	quantity	MU	MU/P
60	60	1	42	21
40	40	2	32	16
25	25	3	24	12
12	12	4	18	9
5	5	5	14	7
2	2	6	12	6

illustration of equi-marginal principle

$ \frac{MU_x}{P_x} = \frac{MU_y}{P_y} $

consumer equilibrium is achieved where

4 units of x, and
3 units of y

total utility score
$\underbrace{(60+40+25+12)}_{\text{sum of } MU_x} + \underbrace{(42+32+24)}_{ \text{sum of } MU_y } = 235$

how to calculate the total utility score

The total utility is equal to the sum of utilities gained from each unit of consumption.

In the previous table, each unit of consumption is expected to have slightly less utility as more units are consumed.

derivation of individual demand curve from a given consumer equilibrium

product x ($1/pc)			product y ($2/pc)
MU	MU/P	quantity	MU	MU/P
60	60	1	42	21
40	40	2	32	16
25	25	3	24	12
12	12	4	18	9
5	5	5	14	7
2	2	6	12	6

derivation of individual demand curve from a given consumer equilibrium

product x ($1/pc)			product y ($1/pc)
MU	MU/P	quantity	MU	MU/P
60	60	1	42	?
40	40	2	32	?
25	25	3	24	?
12	12	4	18	?
5	5	5	14	?
2	2	6	12	?

What is the new consumer equilibrium? (Fig 30.3)

derivation of individual demand curve from a given consumer equilibrium

product x ($1/pc)			product y ($1/pc)
MU	MU/P	quantity	MU	MU/P
60	60	1	42	42
40	40	2	32	32
25	25	3	24	24
12	12	4	18	18
5	5	5	14	14
2	2	6	12	12

What is the new consumer equilibrium? (Fig 30.3)

derivation of individual demand curve from a given consumer equilibrium

limitations of the marginal utility theory

this theory relies on the following assumptions

consumers are capable of ranking their wants
consumers are able to assign a value to the satisfaction
consumers act in a rational way

Chapter 31: Indifference curves and budget lines

indifference curves
marginal rate of substitution
budget line
substitution effect
income effect
Giffen good

indifference curves

this shows ...
... all of the ...
... combinations of two goods ...
... that give a consumer ...
... equal satisfaction

Image source: University of Minnesota Open Textbook Library

indifference curves

this shows ...
... all of the ...
... combinations of two goods ...
... that give a consumer ...
... equal satisfaction

Image source: University of Minnesota Open Textbook Library

marginal rate of substitution

the rate at which ...
... a consumer ...
... is willing to substitute ...
... one good for another

Image source: University of Minnesota Open Textbook Library

budget line

the combinations of two goods ...
... that can be purchased ...
... with given income and ...
... given prices

Image source: University of Minnesota Open Textbook Library

illustration: substitution effect

apples (A) : 2€/kg
oranges (O) : 1€/kg

consumption so that the
utility-maximizing condition
holds for the two goods

$ \frac{MU_A}{2€} = \frac{MU_O}{1€} $

illustration: substitution effect

apples (A) : 2€/kg $\rightarrow$ 1€/kg
oranges (O) : 1€/kg

$ \frac{MU_A}{1€} > \frac{MU_O}{1€} $ : disequilibrium
$\longrightarrow$ consumption of apples $\uparrow$
$\longrightarrow$ $MU_A$ $\downarrow$

illustration: substitution effect

apples (A) : 2€/kg $\rightarrow$ 1€/kg
oranges (O) : 1€/kg

$ \frac{MU_A}{1€} > \frac{MU_O}{1€} $ : disequilibrium
$\longrightarrow$ consumption of oranges $\downarrow$
$\longrightarrow$ $MU_O$ $\uparrow$

substitution effect

where, ...
... following a price change, ...
... a consumer will substitute ...
... the cheaper good for the one ...
... that is now relatively more expensive.

income effect

where following a price change of a good, ...
... a consumer has higher real income and ...
... will purchase more of this good.

Giffen good

a type of inferior good ...
... where the quantity demanded falls ...
... as price falls and ...
... the quantity demanded increases ...
... as price increases

effect of an increase in income on consumption of goods X and Y

effect of an increase in price of good X on consumption of goods X and Y

effect of an decrease in price of an inferior good X on consumption of goods X and Y

effect of an decrease in price of an Giffen good X on consumption of goods X and Y

Chapter 32: Efficiency and market failure

economic efficiency
productive efficiency
allocative efficiency
marginal cost
Pareto optimality
dynamic efficiency

economic efficiency

where scarce resources ...
... are used in the most efficient way to ...
... produce maximum output

productive efficiency

when a firm ...
... is producing at the ...
... lowest possible cost

allocative efficiency

where price is equal to marginal cost;

firms are producing those ...
... goods and services ...
... most wanted by consumers

marginal cost

the addition to total cost ...
... when making one extra unit of output

$ MC = \frac{\Delta \text{total cost} }{ \Delta \text{quantity produced} } $

Pareto optimality

where it is impossible to ...
... make someone better off without ...
... making someone else worse off

dynamic efficiency

when resources are...
... allocated efficiently ...
... over time

market failure

occurs whenever a free market ...
... fails to make the best use of ...
... scarce resources

market failure can be caused by :

externalities
merit and demerit goods
public and quasi-public goods
information failure
adverse selection and moral hazard
monopoly power

Chapter 33: Private costs and benefits, externalities and social costs and benefits

externality
third parties
negative externality
positive externality
private costs (PC)
private benefits (PB)
external costs (EC)
external benefits (EB)
social costs (SC)

Chapter 33: Private costs and benefits, externalities and social costs and benefits

social benefits (SB)
deadweight welfare loss
asymmetric information
adverse selection
moral hazard
cost-benefit analysis
shadow price
benefit:cost ratio

externality

where the actions of ...
... a producer or consumer ...
... give rise to side effects on others ...
... not directly involved in the action

third parties

those not directly involved ...
... in the decision-making

negative externality

where the side effects of an action ...
... have a negative impact that ...
... imposes costs on third parties

positive externality

where the side effects of an action ...
... have a positive impact that ...
... provides benefits to third parties

private costs (PC)

costs that are incurred ...
... by a consumer or by the firm ...
... that produces a good or service

private benefits (PB)

benefits that accrue ...
... to the consumer or to the firm ...
... that produces a good or service

external costs (EC)

costs incurred and paid for ...
... by a third party ...
... not involved in the action

external benefits (EB)

benefits that are received ...
... by a third party ...
... not involved in the action

social costs (SC)

the total costs ...
... of a particular action

social benefits (SB)

total benefits ...
... of a particular action

deadweight welfare loss

the loss in welfare ...
... arising from an inefficient ...
... allocation of resources

asymmetric information

where one party ...
... has more or better information ...
... than another ...
... in a business transaction

adverse selection

when sellers have information that ...
... buyers do not have on ...
... product quality or ...
... when buyers have information that ...
... sellers do not have ...
... on product quality

moral hazard

the temptation to take risks ...
... when some other party ...
... is covering these risks

cost-benefit analysis

a method of decision-making ...
... that takes into account ...
... the costs and benefits involved

shadow price

one that is applied where ...
... there is no established ...
... market price available

benefit:cost ratio

net benefits ...
... as a proportion of ...
... net costs

Chapter 34: Types of cost, revenue and profit, short-run and long-run production

economies of scale
isoquant
total product
production function
marginal product
law of diminishing returns
average product
profit maximisation
fixed costs (FC)

Chapter 34: Types of cost, revenue and profit, short-run and long-run production

variable costs (VC)
increasing returns to scale
decreasing returns to scale
isocosts
minimum efficient scale
diseconomies of scale
external economies of scale
total revenue (TR)

Chapter 34: Types of cost, revenue and profit, short-run and long-run production

average revenue (AR)
marginal revenue (MR)
price taker
price maker
profit
normal profit
supernormal profit
subnormal profit

economies of scale

the benefits gained from ...
... falling long-run average costs ...
... as the scale of output ...
... increases

Image source: Wikipedia

isoquant

a curve showing ...
... combinations of labour and capital ...
... to produce a given level of output

total product

the same as total output

production function

the maximum possible output from ...
... a given set of factor inputs

Image source: Wikipedia

marginal product (MP)

the change in output ...
... arising from the use of ...
... one more unit of a factor of production

$ MP = \frac{ \Delta \text{output} }{ \Delta \text{factor of production} }$

law of diminishing returns
or law of variable proportions

where the output from ...
... an additional unit of input leads to ...
... a fall in the marginal product

Image source: Wikipedia

average product

total product divided by ...
... the number of workers employed.

a simple measure of productivity

Image source: Wikipedia

profit maximisation

objective of a firm

the difference between ...
... total revenue and ...
... total cost ...
... is at a maximum

Image source: Economics Help

fixed costs (FC)

costs ...
... that are independent of output ...
... in the short run

Image source: Intelligent Economist

variable costs (VC)

costs ...
... that vary directly with output ...
... in the short run

Image source: Mungfali

increasing returns to scale

where output increases ...
... at a proportionately faster rate ...
... than the increase in factor inputs

Image source: ResearchGate

decreasing returns to scale

where factor inputs increase ...
... at a proportionately faster rate than ...
... the increase in output

Image source: ResearchGate

isocosts

lines of constant relative costs ...
... for factors of production

Image source: Wikipedia

minimum efficient scale

lowest level of output ...
... at which costs are minimised

Image source: Wikipedia

diseconomies of scale

where long-run average costs ...
... increase as the ...
... scale of output increases

Image source: Wikipedia

external economies of scale

cost savings ...
... accruing to all firms ...
... as the scale of the industry increases

Image source: Economics Help

total revenue (TR)

a firm's total sales ...
... or earnings ...
... over a given period of time

Image source: Economics Help

total revenue (TR)

a firm's total sales ...
... or earnings ...
... over a given period of time

Image source: Economics Help

average revenue (AR)

revenue per unit of output

$ AR = \frac{ \text{total revenue} }{ \text{output} } $

marginal revenue (MR)

the additional ...
... or extra revenue ...
... gained from the sale of ...
... one more unit of output

$MR = \frac{ \Delta \text{total revenue} }{ \Delta \text{output} }$
or
$MR = \frac{ \Delta TR }{ \Delta Q }$

price taker

a firm that is not able ...
... to influence market price

Image source: Economics Online

price maker

a firm that can choose ...
... what price to sell its goods ...
... in the market

profit

the difference between ...
... total revenue and ...
... total costs

normal profit

a cost of production that ...
... is just sufficient for a firm to ...
... keep operating in a particular industry

supernormal profit

that which is earned ...
... above normal profit

subnormal profit

that which is earned ...
... below normal profit

Chapter 35: Different market structures

market structure
perfect competition
imperfect competition
monopolistic competition
oligopoly
barriers to entry
pure monopoly
natural monopoly

Chapter 35: Different market structures

concentration ratio
predatory pricing
limit pricing
collusion
barrier to exit
shut-down price
price competition
non-price competition

Chapter 35: Different market structures

kinked demand curve
price rigidity
price leadership
cartel
X-efficiency
contestable market
contestability
deregulation

market structure

the way in which a market is organised ...
... in terms of certain characteristics ...
... which can be used to explain ...
... the behaviour of firms ...
... in a market

market structure

Market Structure	Number of buyers and sellers	Degree of product differentiation	Degree of control over price
Monopolistic Competition	Many buyers and sellers	Some	Some
Oligopoly	Few sellers and many buyers	Some	Some
Duopoly	Two sellers and many buyers	Complete	Complete
Monopoly	One seller and many buyers	Complete	Complete

perfect competition

an ideal market structure that has :

many buyers and sellers
identical products
no barriers to entry

sometimes referred to as total competition

perfect competition

Image source: Economics Help

imperfect competition

any market structure ...
... except for perfect competition

monopolistic competition

a market structure where there :

are many firms
differentiated products
few barriers to entry

monopolistic competition (short-run)

Image source: Economics Help

monopolistic competition (short-run)

Image source: Economics Help

monopolistic competition (long-run)

Image source: Economics Help

oligopoly

a market structure with

few firms
high barriers to entry

oligopoly

Image source: Economics Help

barriers to entry

restrictions that ...
... prevent new firms ...
... entering an industry

pure monopoly

where there is just ...
... one seller in the market

pure monopoly

Image source: Economics Help

natural monopoly

where with falling long-run average costs, ...
... it makes sense to have only one firm ...
... providing the good or service

concentration ratio

a measure of the combined market share ...
... of the biggest three, four or five firms ...
... in a market

predatory pricing

where a firm sells its goods ...
... below average variable cost ...
... to force competitors out of the market

limit pricing

where firms deliberately lower prices and ...
... abandon a policy of profit maximisation ...
... to stop new firms entering a market

collusion

an anti-competitive action ...
... by producers

barrier to exit

a restriction that prevents ...
... a firm leaving a market

shut-down price

a firm will stop production ...
... when price falls ...
... below average variable cost

price competition

where firms compete on price ...
... to attract customers

non-price competition

when firms use methods other than price ...
... to attract customers ...
... from rival producers

kinked demand curve

a traditional model ...
... of a firm's behaviour ...
... in oligopoly

price rigidity

where prices are unchanged ...
... despite a change in costs

price leadership

a situation in a market whereby ...
... a particular firm has ...
... the power to change prices, ...
... the result of which is that ...
... competitors follow this lead

cartel

a formal agreement between firms ...
... to limit competition ...
... by limiting output ...
... or fixing prices

X-efficiency

where the firm's costs are ...
... above those experienced in ...
... a more competitive market

contestable market

a market where ...
... entry is free and ...
... exit is costless

contestability

the extent to which ...
... barriers to entry into a market are free ...
... and exit from the market is costless

deregulation

when barriers to entry ...
... into an industry ...
... are removed

Chapter 36: Growth and survival of firms

conglomerate
economies of scope
diversification
horizontal integration
vertical integration
principal-agent problem

conglomerate

a company with ...
... a large number of ...
... diversified businesses

BASF (Germany) : Chemicals, plastics, performance chemicals, catalysts,
coatings, crop technology, crude oil and natural gas exploration and production

TotalEnergies (France) : Petroleum, natural gas, LNG, oil refining, chemicals, solar,
biomass

economies of scope

where a reduction in ...
... average total cost ...
... is made possible by ...
... a firm changing the ...
... different goods it produces

diversification

where a firm grows through ...
... the production or sale of ...
... a wide range of ...
... different products

horizontal integration

where a firm ...
... merges or acquires another ...
... in the same line of business

vertical integration

where a firm ...
... grows by producing ...
... backwards or forwards ...
... in its supply chain

principal-agent problem

where one person (the agent) ...
... makes decisions ...
... on behalf of ...
... another person (the principal)

Chapter 37: Differing objectives and policies of firms

profit satisficing
sales maximisation
cross-subsidisation
revenue maximisation

objectives of firms

sales maximisation
revenue maximisation
satisficing
profit maximisation
survival / loss minimisation

profit maximisation

slope of TC and TR

	Q1	Q2	Q3
slope of TC	0.8	0.5	0.8
slope of TR	1.2	1.1	0.8

profit maximisation

profit satisficing

a firm's objective to ...
... make a reasonable or ...
... minimum level of profit

sales maximisation

a firm's objective to ...
... maximise the ...
... volume of sales

cross-subsidisation

profits ...
... from one part of a firm are ...
... used to offset losses ...
... made elsewhere in the business

revenue maximisation

a firm's objective to ...
... maximise total revenue

price discrimination

monopoly

price discrimination

monopoly

price discrimination

Part 8: Government microeconomic intervention

Government policies to achieve efficient resource allocation and correct market failure
Equity and redistribution of income and wealth
Labour market forces and government intervention

Chapter 38: Government policies to achieve efficient resource allocation and correct market failure

regulations
property rights
pollution permits
provision of information
production quotas
'nudge' theory
nationalisation
government failure

regulations

a wide range of legal and other restrictions that come from government or regulatory bodies

property rights

where owners have a right to decide how their assets may be used.

pollution permits

a form of licence given by governments that allows a firm to pollute up to a given level.

provision of information

when governments directly provide information to correct market failure.

production quotas

a physical limit on what can be produced

'nudge' theory

influencing choice by 'nudging' individuals towards making more effective decisions.

nationalisation

when a government takes over a private sector business and transfers it to state ownership

government failure

where government intervention to correct market failure leads to a net loss of economic welfare

Chapter 39: Equity and redistribution of income and wealth

equality
extreme poverty
relative poverty
means-tested benefits
poverty trap
universal benefits
universal basic income
negative income tax

equality

where everyone is treated in the same way.

extreme poverty

where a household exists on less than $1.90 a day.

relative poverty

where household income is 50% or less than the average income.

means-tested benefits

benefits that are paid only to those whose incomes fall below a certain level.

poverty trap

where an individual or a family are better off on means-tested benefits rather than working.

universal benefits

benefits available to all irrespective of income or wealth.

universal basic income

a regular unconditional cash payment made by the government.

negative income tax

money paid out by the government to those earning below an agreed annual fixed benefit limit.

Chapter 40: Labour market forces and government intervention

marginal revenue product (MRP)
trade unions
monopsony
wage differentials
transfer earnings
economic rent

marginal revenue product (MRP)

the addition to total revenue as a result of employing one more worker.

trade unions

an organisation of workers that aims to protect and enhance the well-being of its members through collective negotiations with employers and government.

monopsony

where there is a single buyer in a market

wage differentials

difference in pay between workers with different skills and responsibilities.

transfer earnings

the amount that is earned by a factor of production in its best alternative use.

economic rent

a payment made to a factor of production above that which is necessary to keep it in its current use.

Part 9: The macroeconomy

The circular flow of income
Economic growth and sustainability
Employment and unemployment
Money and banking

Chapter 41: The circular flow of income

multiplier
marginal propensity to save
marginal propensity to consume
aggregate expenditure
marginal propensity to import
consumption
average propensity to consume (apc)
average propensity to import
aggregate expenditure

Chapter 41: The circular flow of income

consumption function
savings function
autonomous investment
induced investment
accelerator theory
capital-output ratio
inflationary gap
deflationary gap

multiplier

a numerical estimate ...
... of a change in spending ...
... in relation to the ...
... final change in spending

$ \text{multiplier} = \frac{ \text{change in income} }{ \text{change in injection} } $

$= \frac{ {\Delta Y} }{ \Delta J }$

multiplier

$ \text{multiplier} = \frac{ 1 }{ \text{marginal propensity to withdraw} } $

marginal propensity to save

the proportion of ...
... extra income which ...
... is saved

marginal propensity to consume

the proportion of ...
... extra income that ...
... is spent

aggregate expenditure

the total amount spent ...
... in the economy ...
... at different levels of income

marginal propensity to import

the proportion of ...
... extra income spent ...
... on imports

consumption

spending by ...
... households on ...
... goods and services

average propensity to consume (apc)

the proportion of ...
... income that is ...
... consumed

average propensity to import

the proportion of ...
... income that is ...
... spent on imports

the proportion of ...
... income that is ...
... spent on imports

Keynesian 45° diagram

at equilibrium

consumption function

the relationship between ...
... income and consumption

$C = a + bY$

where $C$ is consumption,
$Y$ is disposable income,
$a$ is autonomous consumption,
$b$ is the marginal propensity to consume ($mpc$)

savings function

the relationship between ...
... income and saving

$S = -a + sY$

where $S$ is saving,
$s$ is the marginal propensity to save,
$a$ is autonomous dissaving

macroeconomic models

simple 2-sector model (closed economy)

agents : households and firms
withdrawal : savings ($S$)
injection : investment ($I$)
$ \text{multiplier} = \frac{1}{mps} $ or $ \text{multiplier} = \frac{1}{1 - mpc} $
where $ mpc = \frac{ \text{change in consumption} }{ \text{change in income} } = \frac{ \Delta C }{ \Delta Y }$
equilibrium income will occur :
$Y = C + I$ : output = aggregate expenditure
$I = S$ : injection = withdrawal

macroeconomic models

simple 3-sector model (closed economy)

agents : households, firms and government
withdrawal : savings ($S$), taxes ($T$)
injection : investment ($I$), gov. spending ($G$)
$ \text{multiplier} = \frac{1}{mps + mrt} $
where $mrt$ : marginal rate of taxation
equilibrium income will occur :
$Y = C + I + G$ : output = aggr. expenditure
$I + G= S + T$ : injection = withdrawal

macroeconomic models

simple 4-sector model (open economy)

agents : households, firms, government, foreign trade sector
withdrawal : $S$, $T$, import ($M$)
injection : $I$, $G$, exports ($X$)
$ \text{multiplier} = \frac{1}{mps + mrt + mpm} $
where $mpm$ : marginal propensity to import
equilibrium income will occur :
$Y = C + I + G + (X-M)$
$I + G + X= S + T + M$

autonomous investment

investment that is made ...
... independent of income

induced investment

investment that is made ...
... in response to changes in income

accelerator theory

a model that suggests ...
... investment depends on the ...
... rate of change in income

capital-output ratio

a measure of the ...
... amount of capital used to ...
... produce a given amount, or value, ...
... of output

inflationary gap

the excess of ...
... aggregate expenditure ...
... over potential output ...
... (equivalent to a positive output gap)

Keynesian 45° diagram

inflationary gap

deflationary gap

a shortage of ...
... aggregate expenditure so that ...
... potential output is not reached ...
... (equivalent to a negative output gap)

Keynesian 45° diagram

deflationary gap

Keynesian 45° diagram

eliminating the deflationary gap through government intervention

application: marginal propensity to consume

In 2022 it was estimated that an increase in government spending of 25 billion dollar in an economy would eventually result in an increase in the country's national income of 100 billion dollar.
Based on this information, calculate the marginal propensity to consume (MPC) in this economy.
Show your workings.

solution: marginal propensity to consume

marginal propensity to consume is the proportion of individual's, firm's income spent on consumption

multiplier $= \frac{ 100 \text{ billion dollar} }{ 25 \text{ billion dollar} } = 4$

$\frac{1}{1 - mpc} = 4 \iff 1 - mpc = 0.25 $

$ mpc = 0.75$

Chapter 42: Economic growth and sustainability

actual economic growth
potential economic growth
output gap
negative output gap
positive output gap
business cycle
depression

Chapter 42: Economic growth and sustainability

gig economy
sustainable economic growth
climate change
greenhouse gases
global warming
polluter pays principle

actual economic growth

an increase ...
... in real GDP

potential economic growth

an increase ...
... in the productive capacity ...
... of the economy

output gap

a gap between ...
... actual and ...
... potential output

negative output gap

a situation where ...
... actual output is ...
... below potential output

$ \text{ actual output } < \text{ potential output } $

positive output gap

a situation where ...
... actual output is ...
... above potential output

$ \text{ actual output } > \text{ potential output } $

business cycle (or trade cycle)

fluctuations in ...
... economic activity

National Bureau of Economic Research (NBER)

business cycle (or trade cycle)

depression

a fall ...
... in real GDP that ...
... lasts several years

gig economy

a labour market based on ...
... short-term contracts

The *gig worker* transporting
Deliveroo food

sustainable economic growth

economic growth that ...
... does not threaten ...
... future generations' ability to ...
... experience economic growth

climate change

a change ...
... in the weather ...
... of a region over ...
... a period of time

greenhouse gases

carbon dioxide, ...
... methane, ...
... nitrous oxide

global warming

a rise ...
... in the temperature ...
... of the world's atmosphere ...
... arising from the emission of ...
... greenhouse gases

polluter pays principle

a policy ...
... that makes those responsible ...
... for causing damage to the environment ...
... pay for that damage

Chapter 43: Employment and unemployment

full employment
equilibrium unemployment
voluntary unemployment
disequilibrium unemployment
natural rate of unemployment
hysteresis
long-term unemployed
labour mobility
self-employed
occupational mobility
geographical mobility

equilibrium unemployment

disequilibrium unemployment

equilibrium and disequilibrium unemployment

full employment

the level of employment ...
... corresponding to where ...
... all who wish to work ...
... have found jobs, excluding ...
... frictional unemployment

equilibrium unemployment

the unemployment which exists ...
... when the labour market is in equilibrium.
It includes :

voluntary
frictional
structural unemployment

voluntary unemployment

unemployment that arises ...
... when workers are not willing to work ...
... at the current wage rate

disequilibrium unemployment

unemployment that arises ...
... when the aggregate supply of labour ...
... is greater than the ...
... aggregate demand for labour ...
... at the current wage rate

$ ASL > ADL $

natural rate of unemployment

the rate of unemployment that exists ...
... when the aggregate demand for labour ...
... equals ...
... the aggregate supply of labour ...
... at current wage rate and price level

$ ADL = ASL $

natural rate of unemployment

determining supply-side factors

value of unemployment benefits
minimum wage
quality of education
impact on unemployed workers
information about

job vacancies
workers' skills
qualifications

hysteresis

unemployment causing unemployment ...
... due to workers becoming ...
... deskilled and demotivated ...
... when they are out of work ...
... for a long time

long-term unemployed

those who have been unemployed ...
... for a year or longer

labour mobility

ability of workers to change ...
... where they work and ...
... in which occupation

self-employed

those working for themselves

occupational mobility

the ability of workers ...
... to move from one occupation ...
... to another occupation

geographical mobility

the ability of workers ...
... to move to a job ...
... in a different location

Chapter 44: Money and banking

money
double coincidence of wants
money supply
narrow money
broad money
quantity theory of money
Fisher equation

Chapter 44: Money and banking

demand deposit account
savings deposit account
government securities
equities
overdraft
loan
reserve ratio

Chapter 44: Money and banking

capital ratio
liquidity
bank credit multiplier
quantitative easing
total currency flow
economic and monetary union
liquidity preference

Chapter 44: Money and banking

transactions motive
precautionary motive
active balances
speculative motive
idle balances
liquidity trap

money

an item which is generally acceptable as a means of payment

double coincidence of wants

a situation where two people each have something the other one wants

money supply

the total amount of money in an economy.

narrow money

money that can be spent directly.

broad money

money used for spending and saving.

quantity theory of money

the theory that links inflation in an economy to changes in the money supply

Fisher equation

the statement that MV = PT.

demand deposit account

a bank account that allows the holder to make and receive payments.

savings deposit account

a bank account which pays interest and may require notice to be given before money can be withdrawn from it

government securities

bills and bonds issued by the government to raise money.

equities

shares in firms

overdraft

permission to spend more than is in a demand deposit account

loan

a sum of money lent at an agreed rate of interest for a specific time period.

reserve ratio

the proportion of liquid assets to total liabilities.

capital ratio

a bank's available financial capital as a percentage of its riskier assets.

liquidity

the ability to turn an asset into cash quickly and without loss.

bank credit multiplier

the process by which banks can make more loans than deposits available

quantitative easing

a situation where a central bank buys government and private securities from the private sector in order to increase the money supply and so stimulate economic activity

total currency flow

the net amount of money that flows into or out of the country as a result of international transactions.

economic and monetary union

co-ordination of policies and the operation of a single currency by a group of countries.

liquidity preference

a Keynesian concept that explains why people demand money

transactions motive

the desire to hold money for the day-to-day buying of goods and services

precautionary motive

a reason for holding money for unexpected or unforeseen events

active balances

the amount of money held by households or firms for possible near-future use.

speculative motive

a reason for holding money with a view to make future gains from buying financial assets.

idle balances

the amount of money held temporarily as the returns from holding financial assets are too low.

liquidity trap

a situation where interest rates cannot be reduced any more in order to stimulate an upturn in economy activity

Part 10 : Government macroeconomic intervention

Government macroeconomic policy objectives
Links between macroeconomic problems and their interrelatedness
Effectiveness of policy options to meet all macroeconomic objectives

Chapter 45: Government macroeconomic policy objectives

inflation
balance of payments
unemployment
economic growth
economic development
sustainability
redistribution of income and wealth

Chapter 46: Links between macroeconomic problems and their interrelatedness

Phillips curve
expectations-augmented Phillips curve

Phillips curve

a curve that shows the relationship between the unemployment rate and the inflation rate over a period of time.

expectations-augmented Phillips curve

a diagram that shows that while there may be a trade-off between unemployment and inflation in the short run, there is no trade-off in the long run.

Chapter 47: Effectiveness of policy options to meet all macroeconomic objectives

crowding out
crowding in
Laffer curve
government macroeconomic failure
counter-cyclically

crowding out

the idea that higher public sector spending will just replace private sector spending.

crowding in

the idea that higher public sector spending will increase private sector spending.

Laffer curve

a curve showing tax revenue rising at first as the tax rate is increasing and then falling beyond a certain rate.

government macroeconomic failure

government intervention reducing rather than increasing economic performance.

counter-cyclically

going against the fluctuations in economic activity

Part 11 : International economic issues

Policies to correct disequilibrium in the balance of payments
Exchange rates
Economic development
Characteristics of countries at different levels of development
Relationship between countries at different levels of development
Globalisation

Chapter 48: Policies to correct disequilibrium in the balance of payments

net errors and omissions
expenditure switching policy
expenditure reducing policy

net errors and omissions

a figure included to ensure the balance of payments balances; sometimes called the balancing item.

expenditure switching policy

policy tools designed to encourage people to switch from buying foreign-produced products to buying domestically produced products.

expenditure reducing policy

policy tools designed to reduce imports and increase exports by reducing demand

Chapter 49: Exchange rates

real exchange rate
trade-weighted exchange rates
fixed exchange rate
devaluation
revaluation
managed system
Marshall-Lerner condition
J curve effect

real exchange rate

a currency's value in terms of its real purchasing power.

trade-weighted exchange rates

the price of one currency against a basket of currencies

fixed exchange rate

an exchange rate set by the government and maintained by the central bank.

devaluation

a decision by the government to lower the international price of the country's currency

revaluation

a decision by the government to raise the international price of the country's currency.

managed system

where the exchange rate is influenced by state intervention.

Marshall-Lerner condition

the requirement that for a fall in the exchange rate to be successful in reducing a current account deficit, the sum of the price elasticities of demand for exports and imports must be greater than 1

J curve effect

a fall in the exchange rate causing an increase in a current account deficit before it reduces it due to the time it takes for demand to respond.

Chapter 50: Economic development

poverty cycles
development traps
purchasing power parity (PPP)
Human Development Index (HDI)
Measurable Economic Welfare (MEW)
Multidimensional Poverty Index (MPI)
Kuznets curve
shadow economy

poverty cycles

the links between, for example, low income, low savings, low investment and low productivity.

development traps

restrictions on the growth of developing economies that arise from low levels of savings and investment

purchasing power parity (PPP)

a way of comparing international living standards by using an exchange rate based on the amount of each currency needed to purchase the same basket of goods and services.

Human Development Index (HDI)

a composite measure of living standards that includes GNI per head, education and life expectancy

Measurable Economic Welfare (MEW)

a composite measure of living standards that adjusts GDP for factors that reduce living standards and factors that improve living standards

Multidimensional Poverty Index (MPI)

a composite measure of deprivation in terms of the proportion of households that lack the requirements for a reasonable standard of living

Kuznets curve

a curve that shows the relationship between economic growth and income inequality.

shadow economy

the output of goods and services hidden from the authorities

Chapter 51: Characteristics of countries at different levels of development

demographers
birth rate
death rate
infant mortality rate
net migration
natural increase in population
positive net migration

Chapter 51: Characteristics of countries at different levels of development

net migration rate
dependency ratios
optimum population
Lorenz curve
primary sector
secondary sector
tertiary sector

demographers

people who study changes in the structure of human populations.

birth rate

the number of live births per thousand of the population in one year.

death rate

the number of deaths per thousand of the population in one year.

infant mortality rate

the number of deaths of children aged under one per thousand live births in one year.

net migration

the difference between immigration and emigration

natural increase in population

the number of live births exceeding the number of deaths

positive net migration

more people coming to live in the country than people leaving the country to live

net migration rate

the number of migrants per thousand of the population in one year.

dependency ratios

the proportion of the economically inactive compared to the labour force

optimum population

the size of population that maximises GDP per head

Lorenz curve

a diagram illustrating the extent of income or wealth inequality.

primary sector

industries involved in farming and extracting natural resources.

secondary sector

industries that manufacture products.

tertiary sector

industries that produce services.

Chapter 52: Relationship between countries at different levels of development

International Monetary Fund (IMF)
aid
tied aid
untied aid
bilateral aid
multilateral aid
virtuous cycle
emerging economies
foreign direct investment (FDI)

International Monetary Fund (IMF)

an international organisation that promotes free trade and helps countries in balance of payments difficulties.

aid

assistance given to other countries on favourable terms.

tied aid

aid with conditions attached.

untied aid

aid without conditions attached.

bilateral aid

aid given by one country to another country

multilateral aid

aid given by international organisations to a country or countries.

virtuous cycle

the links between, for example, an increase in investment, increase in productivity, increase in income and increase in saving.

emerging economies

economies that are making quick progress towards becoming high-income economies

foreign direct investment (FDI)

the setting up of production units or the purchase of existing production units in other countries.

Chapter 53: Globalisation

globalisation
trade blocs
free trade area
customs union
monetary union
full economic union
trade creation
trade diversion

globalisation

the process by which the world is becoming increasingly interconnected through trade and other links.

trade blocs

a regional group of countries that have entered into trade agreements

free trade area

a trade bloc where member governments agree to remove trade restrictions among themselves.

customs union

a trade bloc where there is free trade between member countries and a common external tariff on imports from non-members

monetary union

a trade bloc which involves member countries operating the same currency, having one exchange rate and the same interest rate.

full economic union

a trade bloc where there is free trade between member countries, a common external tariff, common economic policies and the same currency.

trade creation

where high-cost domestic production is replaced by more efficiently produced imports from within the customs union

trade diversion

where trade with a low-cost country outside a customs union is replaced by higher-cost products supplied from within the customs union.