Economics Notes PDF
Economics Notes PDF
Economics Notes PDF
Contents
The Basic Economic Problem ............................................................................................................................................................................................ 2
Economic Systems ............................................................................................................................................................................................................ 2
How Markets Work........................................................................................................................................................................................................... 3
Social Costs and Benefits .................................................................................................................................................................................................. 4
Money and Finance .......................................................................................................................................................................................................... 5
Occupations and Earnings ................................................................................................................................................................................................ 5
The Role of Trade Unions ................................................................................................................................................................................................. 6
Spending, Saving and Borrowing ...................................................................................................................................................................................... 6
Types of Business Organization ........................................................................................................................................................................................ 7
Organization of Production .............................................................................................................................................................................................. 7
The Growth of Firms ......................................................................................................................................................................................................... 8
Integration and Economies of Scale ................................................................................................................................................................................. 8
Competition ...................................................................................................................................................................................................................... 9
Role of Government in an Economy ................................................................................................................................................................................. 9
Taxation .......................................................................................................................................................................................................................... 10
Price Inflation ................................................................................................................................................................................................................. 11
Employment and Unemployment .................................................................................................................................................................................. 12
Output and Growth ........................................................................................................................................................................................................ 12
Developed & Less Developed Economies ....................................................................................................................................................................... 12
Population ...................................................................................................................................................................................................................... 13
International Specialization and Trade ........................................................................................................................................................................... 13
Balancing International Payments .................................................................................................................................................................................. 14
June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
%
The higher the price, the higher =
%
the quantity supplied. Price elasticity and revenue
o When demand is price inelastic, an increase in price would
EQUILIBRIUM PRICE raise revenue.
When supply and demand o When demand is price elastic, a decrease in price would raise
are equal the economy is revenue.
said to be at equilibrium. Factors that affect PEd:
At this point, the o The number of substitutes
allocation of goods is at its o The period of time
most efficient because o The proportion of income spent on the commodity
amount of goods being o The necessity of the product
supplied is exactly the Special Demand Curves
same as amount of goods Perfectly price inelastic:
being demanded. demand remains
Thus, everyone is satisfied with the current economic condition. constant whatever the
price
EXCESS SUPPLY EXCESS DEMAND
If the price is set too high, excess Excess demand is created
supply will be created within the when price is set below the
economy and there will be equilibrium price. Because the Infinitely price inelastic:
allocative inefficiency. price is so low, too many there is unlimited
consumers want the good demand but at only one
while producers are not price
making enough of it.
Unitary elasticity:
revenue remains
constant at every
possible price
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Skilled workers are more Single union agreement: a firm agrees a single union can
Skilled or Skilled
productive represent all its workers
unskilled workers
Some specialist skills are in short
workers? paid more
supply
COLLECTIVE BARGAINING
Process of negotiating wages and other working conditions
Agricultural has become more
between trade unions and employers
capital intensive so demand has
declined A trade unions will be in a strong bargaining position to
Employees Agricultural negotiate higher wages and better conditions if:
Manufacturing and service
in different workers o It represents most or all of the workers in a firm or industry
industry have expanded
industries paid less o If union members provide goods and services that consumers
Shortage of supply of labor with
need and for which there are few alternatives, e.g. electricity
specialist skills for many
manufacturing sectors INDUSTRIAL ACTION
SPECIALIZATION Industrial action is taken when collective bargaining fails to result
in an agreement
Division of labor: system whereby workers concentrate on
Taking industrial action can help a union increase its bargaining
performing a few tasks and then exchange their production for
strength to force employers to agree to their demands.
other goods and services.
Industrial actions:
Specialization: where individuals, firms and economies do this;
o Overtime ban: Workers refuse to work more than their normal
production process broken up into a series of different tasks
hours
Advantages for Individual Disadvantages for Individual
o Work to rule: Workers deliberately slow down production by
Employees can make best use Doing same job or repetitive
complying with every rule and regulation
of their particular talents/skills tasks is boring and stressful
o Go slow: Workers deliberately work slowly
and can increase them by Individuals must rely on
o Strike: Workers refuse to work and may protest outside their
repeating tasks others to produce goods and workplace to stop deliveries or non-unionized workers from
Employees can produce more services they want but cannot entering
output and reduce business produce themselves
Consequences of industrial action:
costs Many repetitive tasks can now o Firms suffer higher costs and lose output, and may lose big and
More productive employees be done by machines, leading regular customers to rival firms.
can earn higher wages to unemployment of low- o Union members may lose wages during a strike and even lose
skilled workers their jobs if employers cut back demand for labor.
THE ROLE OF TRADE UNIONS o Consumers may be unable to obtain the goods/services they
need and may have to pay higher prices if firms pass on their
A trade union is an organization of workers formed to promote
increased costs.
and protect the interest of its members concerning wages,
o Reputation of an economy as a good place for business may be
benefits and working conditions.
damaged. Firms may decide to set up businesses elsewhere,
FUNCTIONS increasing unemployment and lower incomes.
Negotiating wages and other non-wage benefits with employers Possible Advantages Possible Disadvantages
Defending employee rights and jobs Could help to bring about Might cause lack of flexibility in
Improving working conditions, e.g. better hours of work and minimum working standards working practices
health & safety Could help keep pay higher Could be major problem as
Improving pay and other benefits, including holiday entitlement, Could help maintain fashions change very quickly
sick pay and pensions Employment/enhanced job Could lead to some firms going
Encouraging firms to increase worker participation in business security out of business
decision-making Could lead to improvement in Workers made redundant
Developing skills of union members, by providing training and health and safety. Workers will need to pay union
education courses membership fees.
Supporting members taking industrial action
SPENDING, SAVING AND BORROWING
TYPES OF TRADE UNIONS Disposable income: amount of income left to spend or save after
General Unions: represent workers across many different direct taxes have been deducted.
occupations Spending: enables a person to buy goods and services to satisfy
Industrial Unions: represent workers of the same industry their needs and wants.
Craft Unions: represent workers with the same skill across Saving: involves delaying consumption. As interest rates rise,
different industries people may save more and spend less.
Non-manual unions/Professional Unions: represent workers in Borrowing: allows a person to increase their current level of
non-industrial and professional occupations spending; enabling them to buy goods they cannot afford now.
People with low disposable incomes may spend less in total than
UNION REPRESENTATION IN THE WORKPLACE people with high incomes but will tend to spend all or most of
Closed shop: all workers in a place of work must belong to a trade their income meeting their basic needs.
union
Open shop: firm can employ both unionized and non-unionized
labor
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The amount of income we earn tends to rise as we get older, until
we retire, because:
COOPERATIVES
o Employees earn more in wages as they learn more skills and Owned and controlled by its members
become more productive Each member has an equal share of ownership
o Tend to save more as they get older and earn interest in saving Worker co-ops are owned and controlled by their workers.
o Entrepreneurs may become more experienced in business and Consumer co-ops are retail businesses owned by their consumers
can earn more profit Advantages Disadvantages
Limited liability Many consumer co-operatives
SPENDING AND SAVING PATTERNS Workers in worker co- have been forced out of
Increase in Spending Saving Borrowing operatives take business business by larger companies.
Real income decisions and share profits. Worker co-operatives may be
Direct tax Members of consumer co- badly run.
Wealth operatives enjoy profit
Interest rates dividends or lower prices
Availability of
saving scheme
MULTINATIONALS
Availability of Operates in more than one country and are some of the largest
companies in the world.
credit
Consumer Governments often compete to attract multinationals because
they can provide jobs, incomes, business knowledge, skills and
confidence
technologies which can help other firms, as well as pay taxes on
Young single people tend to spend more on music and fashion.
their profits to boost government revenue.
People with families will spend more on their children & homes.
Headquarters are based in one country.
Elderly people may spend more on health care.
Advantages Disadvantages
TYPES OF BUSINESS ORGANIZATION Can reach many more They can switch their profits to
consumers globally and sell other countries to avoid
SOLE TRADER far more than other types paying taxes on their profits.
Owned and controlled by one person It can minimize transport Can force smaller firms out of
Advantages Disadvantages costs by locating plants in business.
A sole trader is his own boss. Full responsibility - may lose different countries to be near May exploit workers in low
Can choose hours of work. revenue if off sick or on the sources of raw materials wage economies.
Receives all profits. holiday. or big consumer markets. May use their power to get
Easy to set up Unlimited liability Minimize wage costs by generous subsidies and tax
Lacks capital for business locating operations in advantages from the
growth. countries with low wages. government.
Can enjoy low average
PARTNERSHIP production costs
Legal agreement between two or more people to own/finance
/run a business. PUBLIC CORPORATION
Unlimited liability unless its a silent/sleeping partner. Owned and controlled by the government.
Advantages Disadvantages Some aim to make a profit while others will deliver public services
Easy to set up. Disagreements A board of directors runs the corporation
Ownership
More capital. Can lack capital to finance Committees may be set up to monitor and
and Control
Partners bring new skills, growth. investigate any irregularities or complaints
ideas & share responsibility. Has a legal identity separate from its directors
Legal status
and the government
JOINT STOCK COMPANIES
From taxes and other government revenues
Private Limited Companies Public Limited Companies
From profits re-invested in the organization
Only sells shares to people Shares are advertised and sold Finance
Any profits may be used by government to
known to existing publicly on the stock market
finance other public services
shareholders. through stock exchange to
Managed by Board of many investors FEATURES
Directors Managed by a BoD Board of Directors: elected by the many thousands of
Advantages Disadvantages shareholders who manage business
Shareholders have limited Companies must publish Controlling Interest: a shareholder with more than 50% of shares
liability & receive dividends. annual accounts. holds; they can out-vote all other shareholders.
Companies have a separate Original business owners can Sleeping/silent partner: partner that provides money to be in
legal identity. lose control. partnership in return for a share of profits, but will not be
Share sales can raise Directors may run the business involved in management of organization and has limited liability.
significant capital. in their own interests rather
Public Limited Companies can than for shareholders. ORGANIZATION OF PRODUCTION
sell shares to many more Primary industries: produces natural resources e.g. mining
investors on stock market. Secondary industries: include all manufacturing industries and
construction.
Tertiary industries: produce and supply services.
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Small Size of the market is Markets cannot raise
FACTORS FOR DEMAND OF FACTORS OF PRODUCTION small and local enough capital to expand
Demand for goods and services by consumers: the higher the
Consumers like tailored their business
demand, the more labor/capital firms will need
goods/services
Price of labor and capital: the higher the cost, the less labor and
Owners may choose to
capital demanded. Firms may also decide to substitute labor for
keep businesses small
more capital and vice versa depending on its productivity levels.
Governments may
Productivity of labor and capital: more output/revenue labor and
provide help
capital help to produce, more profit they will generate over and
above cost of employing them. INTEGRATION AND ECONOMIES OF SCALE
COSTS, REVENUES AND PROFITS INTEGRATION
Fixed costs: dont vary with level of output e.g. interest on loans Growth by takeover or merger involves integration with other
Variable cost: vary directly with level of output e.g. electricity firms.
Breakeven: where total revenue = total cost A takeover occurs when a company acquires ownership and
=
= +
control of another company by purchasing its shares.
A merger occurs when two or more firms agree to form a new
=
company and issues new shares.
=
= TYPES OF INTEGRATION
Horizontal integration: occurs between firms at the same stage of
production producing similar products
Vertical integration: Occurs between firms at different stages of
production. Forward integration means taking over a firm at a
later stage of production. Backward integrations the opposite
Lateral integration or conglomerate merger: occurs between
firms at the same stage of production but producing very different
products
PRINCIPLE GOAL
The aim of production for most private sector firms is to make as
ECONOMIES AND DISECONOMIES OF SCALE
much profit as possible Economy of Scale Diseconomy of Scale
Some productive organizations may have other motives: Cost savings due to increasing Rising costs because a firm has
o Public service: aim to provide services people need but cannot scale of production, resulting become too large
pay for. Costs are funded from government revenues falling average costs
o Charity: provide services to people or animals in need or to Financial economies: larger Management diseconomies:
help protect environment. Cover costs from donations firms often have access to Occurs when larger firms have
o Not for profit: aim to make enough revenue to cover their cost more and cheaper sources of to manage so many different
and any surplus is re-invested; e.g. local clubs, cooperatives finance departments in different
Marketing economies: larger locations, making
THE GROWTH OF FIRMS firms buy materials in bulk at communication and decision-
discounted prices, employ making difficult
MEASURING FIRM SIZES specialist buyers to secure Labor diseconomies:
Number of employees: less than 50 are classed as small. best quality materials at best Demotivated workers lead to
Amount of capital employed: large firms often invest millions of prices and spread advertising decrease in productivity due to
dollars in fixed assets such as machinery and equipment costs over a large output boring, repetitive tasks.
Market share: relative size of firms can be compared according to Technical economies: larger Agglomeration diseconomies:
their percentage share of total market supply/revenue. firms afford to invest in Occur if a company takes over
Organization: large firms may be divided up into many different specialized methods of or merges with too many other
departments and have offices, shops and/or factories spread over production and equipment, firms producing different
many locations highly skilled workers, and products, making it hard for
Size Advantages Disadvantages research and develop new business owners and managers
Large Can enjoy significant If it gets too big, firm may products and processes to co-ordinate all the different
economies of scale experience diseconomies Risk-bearing economies: the activities.
Can make it well known, of scale ability to spread financial risks
produce and sell on a Going public may make over many investors and
larger scale and have the company become reduce market risks by selling
wider range of markets subject to a hostile a range of products in
Can draw talented takeover (controlling different locations
people from around the interest)
world to work for them
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Smaller firms set their prices at a similar level to
COMPETITION Price
a larger, more dominant firm; helps to avoid
Competition between firms is good for consumer as profit- Leadership
aggressive price competition and price wars
seeking firms will compete to attract consumers Aggressive price cutting by a large dominant firm
Price competition involves using pricing strategies to attract Predatory intended to drive smaller firms out of business
consumers from rival producers Pricing because they have higher costs and wont be
Non-price competition includes offering better quality products able to match the price cuts.
than rival firms, improving customer services or by using
persuasive advertising BARRIERS
Natural Barriers to Entry Artificial Barriers to Entry
COMPETITIVE MARKETS Cost savings from large scale Using predatory pricing
Firms will compete with each other for consumer demand to: production strategies to force smaller
Increase number of customers buying their products Lots of capital equipment that firms out of business.
Achieve product superiority over rival products (quality & sales) other firms cant afford. Preventing their suppliers
Expand their share of total market sales Large customer base built up from selling materials and
Increase their sales revenue over many years. components to other firms by
Maximize their profits Developed advanced products threatening to switch to rival
or processes that are suppliers.
PERFECT COMPETITION protected by patents Forcing retailers to stock and
Businesses will charge the same price, a price that would be the sell only their product
minimum they could charge without going out of business.
The price will be equivalent to the lowest average cost of COMPETITION POLICY
producing goods. Governments may introduce laws and regulations known as
At the market price, the average cost of production would be the competition policy and can involve:
same as the average revenue for selling. Imposing fines on large firms who abuse their market power
No firm would risk charging more than the market price. Forcing oligopolies and monopolies to break up into smaller
This is perfect competition. Under this, a business would be a competing firms
price taker; it would take its price from the market Setting maximum prices levels that firms are allowed to charge
their customers
MONOPOLIES Taking monopolies into public ownership to be run by a public
Firms with monopolistic powers control at least 25% of the corporation
market share.
This makes them able to influence price; price makers. ROLE OF GOVERNMENT IN AN ECONOMY
They can restrict competition by making artificial barriers to entry As a Producer As an Employer
and other pricing strategies. Produce essential goods and The government is also a
Oligopoly Pure Monopoly services such as healthcare major employer.
A handful of firms dominate One firm controls the entire and education Some people work directly for
the market supply. market supply. Supply merit goods the government as civil
To avoid price wars, firms may A monopoly may use To supply public goods such as servants, (e.g. tax collectors)
act together to maximize their predatory pricing and other road repairs and traffic lights or provide public services (e.g.
profits, setting market price artificial barriers to entry to Control natural monopolies; education).
high by restricting their force competing firms out of they may take over companies Employees in public sector:
combined market supply. the market. providing necessity goods e.g. o Secure employment
A cartel is a formal agreement Other firms may be deterred electricity or water o May have state pension
between firms to control from competing because of its Money earned by government
market supply and price. inability to match its size in employees is mainly spent in
They may create barriers to terms of its capital national economy
entry together employed/market share
Disadvantages of Monopolies and Oligopolies
MACRO-ECONOMIC OBJECTIVES
They may supply less and charge higher prices. Main objectives:
They offer less consumer choice and lower quality products than o Achieve low and stable rate of inflation in general levels of
if they had to compete with other firms. price
o Achieve high and stable level of employment; therefore low
They may have higher production costs because they are poorly
unemployment
managed. This is called X-Inefficiency.
o Encourage economic growth in national output and income
They restrict competition using barriers to entry.
o Encourage trade and secure favorable balance of international
PRICING STRATEGY transactions
Pricing Additional objectives:
About o Reduce poverty and inequalities in income and wealth
Strategy
Penetration Setting price low to encourage sales. Used to o Reduce pollution and waste; sustainable economic growth
Pricing attract demand for a new product.
Expansion Setting price low to expand demand for an
Pricing existing product.
Market Initially charging a high price for a new product
Skimming to maximize profit.
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TAXATION INFLATION
Taxes discourage certain activities as well as to raise revenue. General and persistent/sustained increase in the level of prices of
Seen as a cost to business and causes supply curve to shift left. goods/services in an economy over a period of time.
The incidence of tax refers to who pays the major part of the tax. Causes:
In an elastic good, the incidence of tax mainly falls on the seller. o Demand-pull Inflation: caused by total demand rising faster
In an inelastic good however, the incidence of tax mainly falls on than total output, causing market prices to rise
the buyer o Cost-push Inflation: caused by an increase in cost of
production (e.g. higher wages) so firms will try to pass these
costs onto consumers through higher prices.
o Imported Inflation: results from rising prices of goods and
services imported overseas. This can be due to an increase in
the costs of overseas producers and/or a fall in the exchange
rate of the currency of the importing country.
Hyperinflation: extremely high rates of inflation resulting in
money failing to be a good store of value or becoming virtually
worthless
Personal and economic consequences:
o Inflation reduces the purchasing power; especially difficult for
people on low and fixed incomes e.g. pensioners, unemployed
PRIVATIZATION o Inflation reduces the real value of savings
In the past, governments nationalized industries: o Inflation reduces the real value of loans
o To control monopolies o Inflation may help boost tax revenues as they are a % of price
o For safety (e.g. nuclear industry) o Inflation increases government spending as it will also have to
o To protect employment pay more for goods/services it buys
o To maintain a public service o Inflation can reduce company profits; especially if it is caused
Privatization involves private sector firms taking over public by rising costs or a reduction in demand.
sector activities in the following ways: o Inflation may cause unemployment; as prices rise, demand
o The sale of public sector assets will fall and firms sell less and make less profit. They will cut
o Joint ventures with private firms production and size of their labor to reduce their costs.
o Contracting out (giving private firms contracts) DEFLATION
o Removing barriers to competition (private & public compete) Deflation is a decrease in the general price level of goods and
For Privatization Against Privatization services and occurs when the inflation rate falls below 0%.
If industries are forced to Private sector organizations As things become cheaper:
compete, prices will be lower will not protect public services o People stop spending as they expect prices to fall further
& quality will improve. and may cut services and raise o As such, firms start making less revenue.
Wider variety of goods costs in the long run. o Firms start to produce less as less is demanded.
Sale of shares raises Privatized industries still o Employers begin to hire fewer workers as they are no longer
government revenue and can dominate markets they needed anymore.
be used to lower taxes. supply; able to raise prices o This causes the economy to eventually go bust.
and cut services
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Consequences:
o Firms are able to sell fewer goods/services and so cut their
OUTPUT AND GROWTH
prices and lose profits Gross Domestic Product (GDP) is the main measure of total value
o Firms will reduce workforce due to lower production of all the goods and services produced in a given period of time.
o Household incomes fall as unemployment rises; demand falls An increase in prices will increase nominal GDP but this is
o Value of debts rise in real terms causing bankruptcy measured in current dollars thus it includes inflations
o Economy goes into deep recession as demand, output and = 100
demand for labor continue to fall.
=
EMPLOYMENT AND UNEMPLOYMENT However, if an economy has an extremely rich person and
Indicator Recent Trends everyone else is poor, the rich person would bring up the level of
Labor force Risen as world population has grown. the Real GDP per capita.
Participation Rate Risen in many countries especially
Labor force as a among females as it is now socially
ECONOMIC GROWTH
proportion of total acceptable. Poverty and rising living costs Economic growth is when there is an increase in real output over
population of in developing countries has forced many time, i.e. there is in increase in real GDP and national income
working age women to work. Also an increase in productive potential/possibilities
Employment by Employment in services has been Important as it can increase the standard of living in an economy.
Industry growing while employment in agriculture Economic recession: a significant decline in economic activity
Number of people and other primary sector industries has spread across the economy, lasting more than a few months,
employed in different fallen. normally visible in real GDP growth, real personal income,
industrial sectors employment, industrial production, and wholesale-retail sales
Employment Status Most employees work full-time. HUMAN DEVELOPMENT INDEX (HDI)
Number of full- Part-time employees have grown rapidly, Used by the United Nations to make broader comparisons of
timers, part-timers or especially among female employees. human and economic development in different countries
with temporary
Combines three different measures for each country
contracts
o A decent standard of living, measured by average incomes
Unemployment Tends to rise during economic o Being educated, measured by adult literacy rate
Number of people recessions. o Living a long and healthy life, measured by life expectancy
registered as being Almost half the unemployed are young Single index with a value between 0 and 1
without work unskilled workers.
Greater than 0.8 = high human development
Unemployment Rate Relatively stable in the recent years but Less than 0.5 = low human development
Unemployment as a did increase in 2008 during a global
proportion of the financial crisis. DEVELOPED & LESS DEVELOPED ECONOMIES
labor force Developed Economy: advanced/industrialized economy; has a
TYPES OF UNEMPLOYMENT relatively high average income per person, a well-developed road
Cyclical Unemployment: occurs during an economic recession and rail network, modern communications systems, produces a
due to falling consumer demand and falling incomes. Firms will wide variety of goods and services, has a stable government and
reduce their output and lay off workers. legal system; and a healthy and educated population. Examples
include Norway, England, France and Japan.
Structural Unemployment: caused by changes in the industrial
structure of an economy. Entire industries may decline or close Less Developed/Developing Economy: low level of economic
due to a permanent fall in demand for their goods and services. development, low average income per person, under-developed
transport and communications systems, relies on agriculture for
Frictional Unemployment: refers to short-lived unemployment
many jobs and incomes, and has low levels of health care and
that occurs when people leave jobs they dislike, move to higher
education provision. Examples include Africa, Central American
paid jobs, move home or are made redundant.
and the Caribbean.
Seasonal Unemployment: occurs because consumer demand for
Rapidly Developing/Emerging Economies: countries that are
goods and services changes with the seasons. For example, no
quickly developing their industries, workforce skills and living
job for ski-instructor during summer (no ice)
standards, but are not yet developed. Examples include China,
COSTS OF UNEMPLOYMENT India and Brazil.
Personal Costs Costs to the Economy
ECONOMIC INDICATORS
Loss of income and reduced Unemployment is a waste of
Main indicator used is GDP per capita.
ability to buy goods & services human resources: fewer
Problems with using GDP:
Unemployed people de-skill if goods & services produced.
o A country may have high GDP per capita but also high prices
long out of work Total output and income in
o Distribution of income unequal; high elite class and the poor
Unemployed people may the economy will be lower.
Other Measures of Living Standards & Economic Development
become depressed and ill. Government tax revenues will
Strain on family relationships also be lower. People in work Population living on less than Prevalence of underweight
and health services. may have to pay more tax. $1 per day children
Government spending on Life expectancy at birth School and college enrolment
welfare payments to the Adult literacy rate rates
unemployed may have to rise. Population without access to Population with HIV/AIDS
clean water Share of women in paid
employment
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Benefits of Trade Current Account Capital Account Financial Account
For Consumers To Producers To Governments Payment for visible Payments involving Investments flows
Cheaper products Larger markets Exports increase and invisible imports the sale for capital including loans and
Better products Economies of scale jobs, GDP, and exports, plus goods or fixed assets loan repayments,
Workers more More produced, incomes net income flows such as buildings and the sale of
productive lower average per But imports take and transfers and machinery shares
International unit cost them away STRUCTURE OF THE CURRENT ACCOUNT
Trade International trade
Visible trade account: the difference between the export
Increased increases number
revenue and import spending on physical goods, e.g. cars,
competition from of products you
washing machines
international make
Invisible trade account: measures the difference between export
companies
revenue from and import spending on services, e.g. banking,
Lower Prices insurance and tourism
Better Qualities
Income flows: e.g. interest, profit and dividends flowing in and
TRADE BARRIERS out of the country
Tariffs: tax on imports to raise its price and make them more Current transfers: e.g. grants for overseas aid.
expensive than local goods to stop people buying them Balance of Payments Deficit Balance of Payments Surplus
Subsidies: grant given to an industry by government so industry Money flowing out greater Money flowing in greater than
will lower its prices encouraging consumers to stop buying than in. out.
foreign imports by making home-produced goods cheaper. Current + Capital + Financial is Current + Capital + Financial is
Quota: limit on number of imports allowed into country per year, negative. positive.
reducing quantity of imports without changing their prices. PROBLEMS OF A TRADE DEFICIT
Embargo: complete ban on imports of certain goods. An embargo
It means people are buying more imports and may be spending
may be used to stop imports of dangerous drugs.
less on products made by domestic firms
PROTECTIONISM Deficit may be a symptom of a declining industrial base
Arguments For Arguments Against The foreign exchange for the national currency is likely to fall.
Protection of a young industry Other countries will retaliate This will increase prices of imports and cause imported inflation.
To prevent unemployment with trade barriers REDUCING TRADE DEFICIT
To prevent dumping It protects inefficient domestic
Contractionary fiscal policy, by reducing taxes and cutting
Because other countries use firms
government expenditure can reduce total demand for imports
barriers to trade The loss of domestic jobs from
Raising interest rates can attract an inflow of savings from
To prevent over-specialization overseas competitions will
overseas, and reduce borrowing by consumers which they might
only be temporary
otherwise spend on imports
Trade barriers have increased
Trade barriers can be used to restrict imported goods
the gap between rich and
Allow the exchange rate to depreciate. A large deficit will cause
poor countries
foreign exchange rate of national currency to fall. Imports will
BALANCING INTERNATIONAL PAYMENTS become more expensive but exports will be cheaper for overseas
consumers to buy. As consumer demand for imports falls and
VISIBLE AND INVISIBLE TRADE overseas demand for export rise, the trade deficit will disappear
Visible trade is the selling and buying of natural of natural
resources, parts and components of goods in production, and
EXCHANGE RATE
finished products. Exchange rate is the price of a countrys currency in terms of
another countrys currency.
= Most countries have a floating exchange rate, which means no
set value for their currency compared with any other currency
Invisible trade is the selling and buying of services. with a freely floating exchange rate, the government does not get
involved in the foreign exchange market.
= Currency is a commodity thus the value of a currency is totally
Imports: money flows out of the country negative impact dependent on demand and supply of that currency in the foreign
Exports: money flows into the country positive impact exchange market.
> An appreciation in the value of currency means its exchange rate
< against other countries has risen
A depreciation in the value of currency means its exchange rate
THE BALANCE OF PAYMENTS against other countries has fallen
The balance of payments of a country records all financial
transactions between the country and all others DETERMINING VALUE OF MONEY
It consists of three main accounts: Demand for a currency comes from foreign money flowing into
the country. If demand rises, the currencys value will rise in
relation to the other currency.
Supply of the currency comes from domestic money flowing out
of the country. If supply rises, the currencys value will fall.
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
A currency might depreciate A currency might appreciate
because: because:
There is a balance of There is a balance of
payments deficit payments surplus
Demand for other currencies Demand for the currency rises
rises as domestic consumers as overseas consumers buy
buy more imports more exports
Interest rates fall relative to Interest rates rise relative to
other countries. People move other countries. This attracts
their savings to bank accounts savings from overseas
overseas residents
Inflation rises relative to other Inflation is lower than in other
countries. This makes exports countries so exports will be
more expensive and demand cheaper and overseas demand
for them, and the currency for them, and the currency
needed to buy them, falls required to pay for them, will
People speculate that the rise
currency will fall in value and People speculate that the
they sell their holdings of the currency will rise in value and
currency. they buy more of the currency
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