ECONOMICS IGCSE NOTES

LINKS 2

NOTES 2
The Basic Economic Problem 2
The allocation of resources 4
The individual as a producer, consumer and borrower 12
The private firm as a producer and employer 19
Role of government in an economy 25
Economic Indicators 30
Developed and Developing economies 33

PAST PAPERS BY TOPIC 38

Section 1: Basic Economic Problem 38
Section 2: Allocation of Resources 38
Section 3: The individual as producer, consumer and borrower 42
Section 4: The private firm as producer and employer 47
Section 5: Role of government in an economy 58
Section 6: Economic indicators 64
Section 7: Developed and Developing Economies 73
Section 8: International Aspects 81
NOTES
The Basic Economic Problem
Define the nature of the Scarcity: A situation where there is not enough to satisfy everyone’s wants, because there are finite resources
economic problem (finite and unlimited wants that keep growing everyday.
resources & unlimited wants)

Define the factors of Factors of Production: The economic resources of capital, land, labour and enterprise
production (land, labour,
capital, enterprise) Land: Gifts of nature available for production
● Occupationally Mobile
● Geographically Immobile
● Supply does not increase or decrease much over time
● Paid rent

Labour: the physical and mental effort produced by people to make goods/services
● Supply of labour is affected by
○ Numbers of hours they work
■ Length of average working hours
■ Part Time vs Full Time
■ Duration of over time
■ Length of holidays
■ Amount of time lost through sickness
○ Number of available workers
■ Size of the population
■ Retirement age
■ School leaving age
■ Attitude to working women
 ● Geographically Immobile
○ Housing Prices in different area
○ Family Ties
○ Different education systems
○ Lack of information
● Occupationally Immobile
● Paid Wages

Capital: Human-made goods used in production

● Supply of capital increases with time
● Geographically Mobile
● Occupationally Mobile
● Paid interest

Enterprise: Risk bearing and decision making in a business

● Supply of entrepreneurs is increasing as education gets better
● Geographically Mobile
● Occupationally Mobile
● Paid profits

Define opportunity cost and Opportunity Cost: The next best alternative forgone.
analyse particular
circumstances to illustrate the ● Opportunity cost and consumers
concept ○ Consumers: Buyers of goods and services
○ Choice made by the consumers as to what to buy
○ The closer the quality of the products the harder the choice
● Opportunity cost and workers
○ Undertaking a job involves opportunity cost
○ A choice would be influenced by factors such as
■ Wages paid
■ Chances of promotion
■ Job Satisfaction

● Opportunity cost and producers

○ Producers have to decide what to make
○ Factors that influence what producers produce
○ Firms tends to choose the option which will give them maximum profit
○ The demand for the product
○ The costs of producing the product

● Opportunity cost and the government

○ Carefully consider its expenditure

● Economic Good is product which does require resources to produce it, for this reason it has an
opportunity cost.

● Free Good is a product which does not require any resources to produce it and therefore has no
opportunity cost.
Demonstrate how production
possibility curves can be used
to illustrate choice and resource
allocation

●
● Production Possibility Curve: A curve that shows the maximum output of two types of products and a
combination of these products can be produced using existing resources and technology.
● Society can use all its scarce resources to produce this combination.

Evaluate the implications of ● Opportunity cost happens not only when we buy things, but when we choose which goods and
particular courses of action in services to produce. For example, in deciding to use a piece of land to build a new sports complex,
terms of opportunity cost we may be going without the benefit or new houses, or farmland to grow food.

The allocation of resources

Describe the allocation of All economies have to answer 3 fundamental questions
resources in market & mixed ● What to produce
economic systems; describe ● How to produce
primary, secondary and ● Who is to receive the products produced
service sector in an economy
Different Economic Systems
● Planned Economy: An economy where the government makes crucial decisions, land and capital are
state owned and resources are only allocated by directives.
○ Gives instructions or directives to State owned enterprises on what to produce and how to
produce it
○ Usually provides basic necessities free or at a low price
■ Housing
■ Education
■ Transport

● Market Economies: An economy where consumers decide what is produced, resources are allocated by
the price mechanism and land and capital are privately owned.
○ Resources switch from those becoming less popular to ones that are becoming popular
○ Government intervention is minimum
○ Firms use the method which leads to least cost of production
■ Capital Intensive
■ Labour Intensive
○ Economic Sectors
■ Primary: The extraction of natural resources
■ Secondary: The manufacturing of goods using natural or man made resources
■ Tertiary: The provision of services to consumers or producers
■ The provision of Research and Development, software and information processing
○ Advantages of a Market Economy
■ Responsive to changes
■ Choice in where and what to buy
■ Profit Motive and Competition increases efficiency
■ High incomes provide incentive
 ○ Disadvantages of a Market Economy:
■ There is a risk that market forces don’t do well and cause market failure.
■ Consumers only take in account the cost and benefit for themselves and not others
■ Competition may increase efficiency but overtime one firm can dominate and have most
of the market powers causing the other firms to run out of business
■ Firms may not be able to attract workers- geographically immobile
■ Firms will not make products unless they can charge for them.
■ They won’t make free riders
■ Advertising can distort consumer choice and cause them to buy the wrong products
■ Can cause income inequality
■ Those earning high incomes can buy shares and their savings and shares will gradually
give them interests and dividends.
■ The children of the rich may receive higher incomes because of better education

● Mixed Economy: An economy in which both private and public sectors play an important role
○ Combination of features from market and planned economies
○ Some prices are determined by market forces and some by government
○ Advantages of Mixed Economies
■ The government would take care of the cost and benefits that occur due to their decisions,
ex. if railway lines don’t do well in private sector the government can maintain it.
■ Government can encourage consumption of products by granting subsidies
■ Government can finance for products that cannot be charged directly
■ Government can seek to prevent private firms exploiting prices
■ Government can help ensure maximum use of resources, by helping people get jobs
■ Government can help vulnerable groups, ensuring they have basic necessities. This will
also reduce income inequality.
Demonstrate the principle of ● Demand is the willingness and ability to buy a product
equilibrium price and analyse ○ Individual demand is the amount of a product an individual would be willing and able to buy, at
simple market situations with different prices.
changes in demand and ○ Market Demand is the total demand for a product at different prices
supply ○ The effect of change in price on demand
■ A fall in price is likely to lead to a rise in demand: Extension of demand
■ Rise in price would decrease the demand: Contraction in demand

● Supply is the willingness and ability to sell a product

○ Individual supply is the supply of one firm
○ Market supply is the supply of the total product produced by firm in an industry
○ The effect of change in price on supply
■ Directly related to price
■ Rise in price will cause an extension in supply ( an increase in quantity due to increase in
price)
■ Fall in price would cause a contraction (a fall in quantity caused by a fall in price)

● Equilibrium price is where demand and supply are equal

● At this point, the allocation of goods is at its most efficient because amount of goods being supplied is
exactly the same as amount of goods being demanded.
● How is equilibrium price achieved?
○ Excess Supply is a surplus of good where the prices of a good are too high and not enough
people are willing to buy it and therefore the prices will be lowered until equilibrium is achieved
○ Excess demand is a shortage of a good where the prices are too low and everyone is able to
afford it but there is not enough supply to produce it and the prices will be decreased till
equilibrium is achieved
 ○

Describe the causes of ● Changes in demand

changes in demand and ○ Increase in demand is shift to the right
supply conditions and analyse ○ Decrease in demand is shift to the left
such changes to show effects ○ Causes of changes
in the market ■ Changes in disposable income
● Normal Goods
● Inferior Goods
■ Changes in price of related products
● Substitute
● Complement
■ Advertising
■ Changes in population
■ Changes in taste and fashion
■ Other factors
● Weather
● Expectation of future prices
 ● Changes in supply
○ Decrease in supply will cause supply to shift to the left
○ Increase in supply will cause supply to shift to the right
○ Causes of changes in supply
■ Costs of production
■ Improvements in technology
■ Taxes
● Rise in tax will make it more expensive to supply
■ Subsidies
■ Weather conditions and health of livestock and crops
■ Prices of other products
■ Disasters and wars
■ Discoveries and depletion of commodities

● Changes in demand and supply

○ Demand shifting more than supply = prices are higher
○ Supply shifting more than demand = price is lower

Define price elasticity of ● Price elasticity of demand : The responsiveness of demand to a change in price (Change in quantity
demand and supply and demanded/ change in price demanded)
perform simple calculations ○ Perfectly Inelastic Demand
■ Had a PED lower than 0
○ Inelastic Demand
■ Has a PED less than 1
■ The necessity of the product is high
■ A change in price has little change in demand
■ An increase in price would raise revenue
 ○ Elastic Demand
■ Has a PED greater than 1
■ The necessity of the product is relatively low
■ Demand would respond quickly to price change
■ A decrease in price would raise revenue

● Factors that affect PED

○ The number of substitutes
○ The period of time
○ The proportion of income spent on the good
○ The necessity of the product

● Price Elasticity of supply

○ Perfectly Inelastic Supply
■ Had a PED lower than 0
○ Inelastic Supply
■ Has a PED less than 1
 ■ The necessity of the product is high
■ A change in price has little change in demand
○ Elastic Supply
■ Has a PED greater than 1
■ The necessity of the product is relatively low
■ Demand would respond quickly to price change
○ Factors that affect PES
■ Time
■ Cost of altering its supply
■ Feasibility of storing it

Demonstrate the usefulness of ● Usefulness of Price Elasticity

price elasticity in particular ○ Tax
situations such as revenue ■ A tax will increase the cost of production to the producer. It makes it more expensive to
changes, consumer produce. It is likely the producer will produce less; so the supply curve shifts to the left.
expenditure ■ If people are really keen to buy the product (price inelastic) demand will stay fairly high
(e.g. cigarette). So if most people still buy the taxed good, the government can make
more revenue.
○ Subsidy
■ It is made by the government to encourage producers to produce or supply a certain
good or service. It is likely that the producer will be encouraged to produce more
therefore the supply curve will shift to the right.

Evaluate the merits of the Importance of Competition and Incentives

market system ● Potential competition = when it is easy for firms to enter and leave the market
● Actual competition = rival firms in the industry
● Both these help lower the price of goods making the economy more efficient
 Efficiency
● Allocative Efficiency
○ This occurs when goods and services are distributed according to consumer preferences. So
when demand meets supply
● Productive Efficiency
○ When a firm produces with lowest cost per unit
○ Not wasting resources
● Dynamic Efficiency
○ Dynamic efficiency occurs over time and is strongly linked to the pace of innovation within a
market and improvements in both the range of choice for consumers and also the performance /
reliability / quality of products.

Advantages of a market system

● Gives producers incentive to produce goods that consumers want
● Provides an incentive to acquire useful skills
● Encourages producers and consumers to conserve scarce resources
● Competition pushes businesses to be efficient
● High degree of economic freedom

Describe the concept of Market failure occurs when the market mechanism fails to allocate scarce resources efficiently, so social costs
market failure and explain the are greater than social benefits = Inefficient Markets
reasons for its occurrence Types of market failure
● Information failure = Markets may not provide enough information because, during a market
transaction, it may not be in the interests of one party to provide full information to the other party.
● Merit goods = People underestimate the benefit of good, e.g. education
○ Due to information failure and social costs and benefits being greater than private benefits of
cost
 ● Consumption of demerit goods
● Public Goods
● Abuse of market power (monopolies)
○ If one firm dominates the market it may abuse the power and provide low quality goods on high
prices
● Immobility of resources
● Short Termism
● Unfairness
● Government Failure

Define private and social Costs and Benefits

costs and benefits and discuss ● Private Benefit/ Cost: costs/benefits the business or consumer
conflicts of interest in relation ● External Benefit/ Cost/: advantages/disadvantages society receives because of consumption of a certain
to these costs and benefits in good/service
the short-term and long-term
through studies of the ● Social Cost and Benefit
following issues: ○ Social costs = Private costs + External costs
● conserving resources ○ Social benefits = Private benefits + External benefits
versus using resources ○ Social costs > Social benefits, producing product is uneconomic
● public expenditure ○ Social costs < Social benefits, producing product is economic
versus private
expenditure ● Conflicts of interest
○ Conserving Resources: Conservationists argue that this generation should pass on to future
generations at least as many resources as our own generation has inherited and not exploit
everything
○ Using Resources: Businesses and firms try to maximize profits and therefore want use as many
resources they can get their hands on to do so.
 ○ Public Expenditure:
■ Government can provide public goods and merit goods that the market would not provide
■ Public sectors workers may be more likely to spend money in a way that is fair to all

○ Private Expenditure
■ Government can only guess how we would like to spend the money
■ When the government spends money, it can be wasteful

The individual as a producer, consumer and borrower

Describe the functions of money ● Functions of Money
and the need for exchange ○ A medium of exchange
■ Money overcomes the problem of needing a double coincidence of wants. It can
be used to exchange and is therefore a comparative object, a tertium
comparationis ("a third comparative unit").
○ A unit of account
■ Money acts as a measuring unit for value. Thus different commodities can be
expressed in terms of money uniformly. This simplifies the comparison of the
value of two products or services.
○ A store of value
■ Money can be used to store value. Unlike barter system where the commodities
could not be saved over time, money can be stored as it does not lose value over
time.
○ A standard of deferred payment
■ Money can be used to pay over time for commodities. Goods and services can be
paid for in instalments over a period of time e.g hire purchase. This was much
more difficult and complicated in the barter system.
 ● Characteristics Money needs to have:
○ Acceptable: everyone must accept it as a form of payment at its set value.
○ Portable: it must be easily carried without being bulky or heavy.
○ Durable: it must last for a long time and withstand much use without devaluing. Many
countries are making plasticized bank notes now in an effort to increase their durability.
○ Divisible: it must be easily divided in small denominations to make it suitable for all types
of transactions.
○ Scarce: it must be limited in its supply or it will quickly lose value and become worthless.

Describe the functions of central Central Bank: Central banks act as the government’s bank and are not accessible for individuals and
banks, stock exchanges, businesses (except commercial banks).
commercial banks
● The Government’s tax receipts go into the central bank and its holds any gold and foreign currency
reserves the government has.
● They print the notes and coins.
● They set the base rate of interest; this can be a powerful tool in managing the economy.
● Central banks also play a very important role in regulating commercial banks and making sure that
the banking system is functioning correctly.
● In a financial emergency a central bank can act as a lender of last resort to a commercial bank that
is in trouble.

Commercial Banks: High street banks that we are familiar with such as HSBC, Barclays and Citibank.
Profit maximization is their main aim and they are usually privately owned. They traditionally make most
of their money by offering savers a lower rate of interest than they charge for lending out that money to
others as loans. Individuals and businesses are their customers and they provide a range of services:

● Checking/current accounts: this is a standard account for depositing money in that allows you to
 access the money instantly if you need it. Due to the flexibility of this type of account the interest
rates are usually very low.
● Savings accounts: higher interest rates but customers don’t have an ATM card for withdrawing cash
instantly.
● Overdrafts: a pre-agreed debt facility which allows customers to spend more than they have in their
account.
● Loans and mortgages: commercial banks offer a range of loans and mortgages that vary in the
amount lent and the timescale for repayment.
● Credit cards: most commercial banks have a link with a credit card company such as Visa or
Mastercard and link these to your bank account.

Stock Exchange: Stock exchanges play an important role in economies since they facilitate the buying and
selling of shares in Public Limited Companies. This enables companies to raise capital for investment.
Stock exchanges regulate the selling of shares and provide a secure marketplace.

Only Public Limited Companies can trade shares on the stock exchange. To buy and sell shares companies
and individuals must use a stockbroker. A stockbroker is someone who is registered to trade in the stock
exchange on behalf of clients.

● Dividend payments: these are financial payments to all shareholders by the company from some of
the profits it has made.
● Capital gains: the rising value of shares (hopefully)
● Gaining control of the company: big investors and companies may use the stock exchange to buy
significant proportions of a company to gain influence in its management decisions or even to
completely purchase it.
Identify the factors affecting an Wage Factors:
individual’s choice of occupation
(wage factors and non-wage ● Salary: This is a pre-agreed total for the year, split into monthly sections. Because it is a set amount
factors) of money it does not depend on the hours worked – this may be a good or bad thing. Advantages of
a salary are that it gives security and people can make plans based on the monthly income.
● Wage: this is when workers’ pay is based on the number of hours they work at an agreed hourly
rate. This has the advantage that workers may be able to do extra hours and increase their income.
● Piece rate: this is when workers’ pay is based on their production. Often found in primary
agriculture at harvest time. Coffee pickers are paid based on the weight of coffee cherries that they
pick per day. If a worker is efficient they can make more money.
● Commission: this is a method of pay that is often found in sales jobs. Usually the basic salary/ wage
is very low but the employee will receive a percentage of the value of the sales they make.
● Bonuses: these are financial rewards for good performance. These have the potential to significantly
increase the yearly pay.

Non Wage Factors:

● Geographical location: the proximity to the where the worker lives is likely to be important since
longer journeys to work cost time and money.
● Working hours: the number of hours required to work is important. But the timing of the shift is
often also very important. Some jobs require night shifts or weekend shifts.
● Working conditions: the physical demands of the job and the working environment are often
important.
● Job satisfaction: will the job stimulate the interest and provides a sense achievement.
● Holiday entitlement: how many holiday days are provided? Some professions such as teaching have
very favourable holiday provision. Some countries offer more holiday entitlement than others.
● Pension provision: jobs that have a company pension scheme and one that offers a good pension on
retirement are an attractive prospect.
describe likely changes in ● Change in demand for labour
earnings over time for an ○ Consumer Demand for Goods and Services: if consumer demand rises, firms may expand
individual output in response. This will tend to increase their demand for labor.
○ Increasing Productivity [Growth]: if labor becomes more productive and adds more value to
output over and above their wage cost, then firms may demand more labor
○ Changes in Price and Productivity of Capital: if machinery and equipment become cheaper
or more productive, labor may be replaced by capital-intensive techniques
○ Changes in Other Employment Costs: if the government adds more employment costs e.g.
social security contributions or health/safety regulations it may become unprofitable to keep
too much labor.

● Changes in supply for labour

○ Fringe Benefits/Net Advantages
○ Demographic Changes: changes in size and age distribution of the population in a country
will also cause changes in labor supply to different occupations
○ Education and Training: changes in the level and type of education and training courses
offered can increase the supply of workers with different skills
○ For jobs which are difficult to enter because of certain natural abilities, education or finance,
supply will be inelastic
○ For jobs which require few skills, supply of labor will be elastic
Describe the differences in ● Different abilities and qualifications: people with skills that are very short in supply relative to the
earnings between different groups demand for those skills will tend to be offered very high wages e.g. actors, doctors
of workers (male/female; ● “Dirty” jobs: workers must be paid more in order to attract them towards these jobs, these are called
skilled/unskilled; private/public; compensating differentials e.g. nighttime guards paid more than daytime
agricultural/manufacturing/servic ● Unsociable hours
es) ● Satisfaction: certain jobs are thought by some people to be very satisfactory even without high pay
e.g. nurses
● Lack of information about jobs and wages: they simply do not know about better-paid jobs
● Immobility: do not want or cannot afford to move to a different area/occupation
● Fringe benefits: lower wages but higher perks
● Experience

Describe trade unions and analyse ● Trade unions exist primarily to promote and protect the interests of their members with the purpose
their role in an economy of improving their wages and working conditions

● Functions of a trade union

○ Defending their employee rights and jobs
○ Securing improvements in working conditions
○ Less hours of work
○ Better health and safety regulations
○ Improving pay and other benefits
○ Improving sick pay, pensions etc.
○ Encouraging firms to increase worker participation in decision making
○ Developing and protecting the skills of union members
○ They negotiate with and put pressure on employers on behalf of all their members to secure
these aims
 ● Types of trade unions
○ General Unions: people from many different occupations and industries e.g. commercial
workers
○ Industrial Unions: people from the same industry e.g. telecommunications
○ Craft Unions: people with the same skills across different industries e.g. artists
○ Non-manual Unions: people with professional occupations e.g. doctors

● Industrials Disputes
○ Overtime ban
○ Work to rule
○ Go slow
○ Sit in
○ Strike
○ Protesting

Describe the benefits and ● Division of labor: system whereby workers concentrate on performing a few tasks and then
disadvantages of specialisation for exchange their production for other goods and services.
the individual
● Specialization: where individuals, firms and economies do this; production process broken up into
a series of different tasks

● Advantages of division of labour

○ Practise makes perfect: Worker specialises in a particular task and gives in the best, thus
producing goods faster and less wastage of material. (FASTER)
○ Use of machinery: Specialised machinery can be used which is further increase the
productivity.
○ Increased Output: with improvement in efficiency and use of machinery output is
 increased.
○ Saves time: There is no time wasted in switching of jobs and thus the momentum of
production can be maintained which leads to less wastage of time.

● Disadvantages of division of labour

○ Boredom: Performing the same task over and over again may lead to boredom for the
workers.
○ Lack of variety: Though the number of goods produced increases but they are identical or
standardized.
○ Low motivation for worker: Repeatedly performing the same task may lead to low
motivation level for the worker. The worker might not have the sense of fulfilling a
complete task as he is performing only a part of the job.
○ Lack of mobility: Due to specialisation workers might find it difficult to switch between
occupations.

Analyse the different motives for ● Saving

spending, saving and borrowing. ○ Target saving: saving for future purchase such as a car, a house or maybe a TV.
discuss how and why different ○ Contingency saving: many people save to have a sum of money to fall back on in the case of
income groups have different an emergency or unforeseen event. Medical bills, car repairs etc.
expenditure patterns (spending, ○ Retirement saving: pension plans and specialist saving accounts are often used to save for
saving and borrowing). the time when there is no longer an income from working.
○ Those on low wages will inevitably spend a large proportion of their income on necessities.
This leaves little money for luxuries and saving
○ People receiving higher incomes are unlikely to spend significantly more on the necessities
and subsequently have a larger proportion of their income available for saving.
 ● Borrowing
○ Borrowing money is likely to feature in most people’s lives at some point. Most people
borrow money to buy their first house.
○ Others borrow money more frequently to purchase smaller items such as cars and to pay for
holidays.
○ Interest rates affect borrowing. These represent the cost of borrowing money. If interest
rates are it will dissuade people for borrowing money since the repayments will be high.
○ If however interest rates are low then borrowing becomes cheap and many people will be
enticed to buy now and pay later through borrowing.

● Spending
○ If disposable income decreases for any reason, people are likely to reduce their level of
spending.
○ Interest rates often affect spending. If interest rates are rising or high, loans become
expensive and people are unlikely to borrow money for large purchases
○ If interest rates are low or credit is easy to obtain people are likely to increase their
expenditure level.

The private firm as a producer and employer

Describe the type of business ● Sole Trader: A business that is owned by a single person is known a sole trader business. The
organisation in the public and owner may employ other people to work in the company but they have no ownership of the
private sectors: sole trader firm. Usually small in size and has low set up costs.
(proprietor), public limited
companies, multinationals, ○ Benefits
cooperatives, state-owned ■ the owner gets to keep the profit and make any decisions.
enterprises (public corporations) ■ They be responsive the consumers demands and also establish good customer
relationships.
 ○ Disadvantages
■ the owner is usually liable for any debts that the company has.
■ Having a single owner may limit the range of skills and ideas in the decision
making processes.
■ The amount of capital/money that a single person can raise is also likely to be
relatively small low.

● Partnership: These are companies that have 2 or more owners (partners) and usually not more
than 20.
○ Benefits
■ Increased capital injections,
■ Wider range of skills and ideas in the decision making processes
■ Liability is shared between more people.
○ Disadvantages
■ Profits are shared between the partners.
■ There may disagreements about the decisions made.
■ Between the partners there is still liability for any debts.

● Private Limited Company (Ltd): Private Limited Companies are owned by several people
through the sale of shares. The shares are not available to the public through the stock
exchange, but sold privately to friends and family. Private Limited companies must publish
annual reports for their shareholders giving details about the company’s performance.
○ Advantages
■ Ability to raise more capital (although it is limited to the finance that friends and
family have and are willing to invest).
■ The company itself is liable for any losses and this means the shareholders only
have limited liability.
 ■ Shareholders can only lose the value of their shares
○ Disadvantages
■ They tend to remain relatively small since the levels of capital that can be raised
from friends and family is usually fairly low.

● Public Limited Company (Plc): Public Limited Companies are listed on a stock exchange and
their shares are available for anyone to buy through a stockbroker. They are often relatively
large in size.
○ Advantages
■ They can usually raise large sums of capital due to the global supply of
investors.
■ They can grow quickly and/ or invest in the necessary capital.
■ Shareholders have limited liability and can vote at meetings about the decisions
being made.
○ Disadvantages
■ Higher administrative costs of informing all investors about extraordinary
meetings and publishing yearly reports.
■ The owners of the company may lose control of the decision making since all
investors can vote at the AGM (annual general meeting) if they are not happy
with the performance or decisions being taken.

● Cooperative: These are organizations that are owned jointly by their members and run in the
members’ interests.
○ Advantages
■ Limited Liability
■ Workers take decisions
 ○ Disadvantages
■ Many consumer cooperatives have been forced out of business by large
companies
■ Worker co-operatives may be badly run.

● Public Corporations: These are government run organizations and tend to be large in size. They
are funded by the government and are not profit orientated. Their main aim is to provide the
best service to the public.
○ Advantages
■ Making the decisions that are in the public’s interest rather than for profit
maximization.
■ In some situations such as railways and public water infrastructure it makes
economic sense to just have one set of rails and pipes rather than duplicating
them for different private companies.
○ Disadvantages
■ Inefficiencies since the corporation will be subsidized if it fails to cover its costs.
■ The lack of competition may lead to lower levels of innovation and possibly
quality.
■ The size of public corporations can often lead to inefficient communication
within the company.

● MNC’s: Operates in more than one country and are some of the largest companies in the world
○ Advantages
■ Can reach many more consumers globally and sell far more than other types
■ It can minimize transport costs by locating plants in different countries to be
near the sources of raw materials or big consumer markets.
■ Minimize wage costs by locating operations in countries with low wages.
 ■ Can enjoy low average production costs
○ Disadvantages
■ They can switch their profits to other countries to avoid paying taxes on their
profits.
■ Can force smaller firms out of business.
■ May exploit workers in low wage economies.
■ May use their power to get generous subsidies and tax advantages from the
government.

Describe the aims of a private The public sector

sector and a public sector ● Made up of organizations which are owned and controlled by local or central government
● Most of the services listed below are funded from tax revenue.
● The government also borrows money and charges for some services directly (e.g. entrance fees
into swimming pools).

The public sector includes:

Central government departments
● Ministry of defense
● Department of health
● Department of transport
Local authority services
● Local councils
● Recreation services (e.g. libraries, swimming pools, etc.)
Other public sector organizations
● BBC
● Post offices
Public sector aims:

● Most of its services are provided free at the point of delivery.

● Most are funded from tax revenue.

Survival
● Initial and most basic aim for every firm.

Profit maximization
● Firms will make as much profit as they possibly can in a period of time
● Companies pay their shareholders dividends, which is a share of the profit.
● Many of these shareholders want dividends to be high as possible and therefore profit
maximization is an important objective.

Sales revenue maximization

● Similar to profit maximization

Growth

● Many firms aim to expand because bigger businesses generally have more benefits, such as:
○ Bigger firms can exploit economies of scale.
○ Profits will be higher in the future.
○ Growth will also benefit other stakeholders such as workers, managers and directors
because job may be more secure.
● However a problem with growth is that profit is often used to fund it, so shareholders will not like
this because it lowers the dividends.
Social responsibility
● In order to receive approval from the general public and become better 'citizens'

Profit satisficing

● This means that firms make just enough profit to keep owners 'satisfied'.

The private sector:

● Goods and services are provided by businesses that are owned by individuals or groups of
individuals.
● In most economies, most goods and services are provided by the private sector.
● Most businesses are small sole traders, partnerships and companies; a minority of businesses are
large.
● Some are multinationals- this means that they have factories and other production facilities all
over the world.

The private sector includes:

Sole traders

● Businesses owned and controlled by one person

● Examples: taxi drivers, plumbers, electricians, etc.
Partnerships
● Businesses owned and controlled by two or more people working together
● Often found in the professions
● Examples: accountants, doctors, lawyers, estate agents, architects, solicitors, etc.
Companies

● Owned by shareholders who elect a board to run the business on their behalf
● Vary in size
● Can be found in many different business sectors such as manufacturing, construction, public
transport, media, financial services, oil and gas, engineering, etc.

Private sector aims

Improving the quality of services

● Performance indicators are used to measure the quality of services.

● Performance indicators focus on reliability, professionalism, levels of customer service and speed
of service.

Minimizing costs

● Government resources are scarce, so it is important that waste is minimized.

● In the past, public sector organizations have been criticized for being inefficient. This is because,
unlike private sector firms, public sector firms are not profit-motivated.

Allow for social costs and benefits

● Aim is not to make a profit

● Instead they take into account the needs of a wide range of stakeholders.
● As a result, when making decisions, they must take into account externalities.
Describe the effects of moving Nationalization (moving from private to public sector/the taking over of a private industry by state):
firms from the public sector to
● Advantages:
the private sector and vice versa
○ Equal Distribution of Wealth - ​The government nationalized the industries and banks to
provide equal distribution of wealth.

○ End of Monopoly -​ To remove the monopolies government nationalized the industries, so that
goods should be provided to the public at lower price.

○ Fair Distribution of Credit - ​All the classes of the public will enjoy the credit facilities. Small
farmer and small businessman was ignored by the banks before nationalization.

○ Effective Planning + Economic growth - ​It was also argued that after nationalization government
will prepare the plans more effectively and the rate of output will rise, this increasing economic
growth.

● Disadvantages:
○ Increase in Corruption - ​The nationalized industrial units were handed over to the government
officials and it increased the corruption in this sector. Efficiency of the units reduced after
nationalization.

○ Fall in Production - A​fter the nationalization production of various units decreased and rate of
profit removed. The managers of those units did not pay proper attention.

○ Private Sector Discouraged - ​The nationalization policy discouraged the private sector, and due
to this rate of investment decreased.

● Privatization (moving from public to private sector/ selling of a nationalized industry to owners)

○ Improved efficiency due to the profit incentive.​ Private companies will ensure they improve
their operational efficiency in order to reduce their costs and improve on profits.
 ○ Urges improvements in the company through competition​ - When a state owned entity is
privatized it loses its government protection and is forced to adapt to the market by providing
better services or products in order to survive and thrive.

● Disadvantages:
○ Create single monopolies - ​These may eventually seek to increase prices at the detriment of the
consumer with no controls.

○ Government loses dividends after privatization -​ this is seen with most successful companies
that are developed through privatization. These dividends are instead channeled to wealthy
individuals.

Describe and evaluate the effects (Refer to Economics by Paul Hoang, Chapter. Business Organizations, pg.123)
of changes in the structure of
business organisations

Describe what determines the ● Demand for goods and services by consumers: the higher the demand, the more labor/capital
demand for factors of production firms will need
● Price of labor and capital: the higher the cost, the less labor and capital demanded. Firms may
also decide to substitute labor for more capital and vice versa depending on its productivity
levels.
● Productivity of labor and capital: more output/revenue labor and capital help to produce, more
profit they will generate over and above cost of employing them.

Distinguish between ● Labour intensive - this is where the proportion of labour used in producing the product is
labour-intensive and relatively high. Labour will usually be used instead of capital. production in which a large amount
capital-intensive production of labour is used relative to capital.
 ○ Labour-intensive processes are those that require a relatively high level of labour
compared to capital investment.
○ These processes are more likely to be used to produce individual or personalised products,
or to produce on a small scale
○ It requires very less capital investment,
○ Manual labour is given more importance than the machinery.

● Capital intensive - this is where techniques are used to produce that use relatively more capital
than labour. Production in primary and secondary industrial sectors has become increasingly
capital-intensive. As more and more capital is used, labor productivity increases, but at the same
time employment in these industries falls.
○ Capital-intensive processes are those that require a relatively high level of capital
investment compared to the labour cost.
○ These processes are more likely to be highly automated and to be used to produce on a
large scale.
○ Capital-intensive production is more likely to be associated with flow production but any
kind of production might require expensive equipment.

Define productivity and ● Fixed costs: don’t vary with level of output e.g. interest on loans
recognise the difference between
● Variable cost: vary directly with level of output e.g. electricity
productivity and production.
○ Total Variable Cost = Variable Costs × Output
define total and average cost,
fixed and variable cost and ● Break Even: where total revenue = total cost
perform simple calculations. ○ Total Cost = Total Variable Cost + Total Fixed Cost
define total and average revenue ○ Total Revenue = Price Per Unit × Quantity Sold
and perform simple calculations ○ Average cost = Total Cost/ Output
○ Profit or Loss = Total Revenue − Total Cost
Describe the principle of profit ● The aim of production for most private sector firms is to make as much profit as possible
maximisation as a goal and Some productive organizations may have other motives:
recognise that business ○ Public service: aim to provide services people need but cannot pay for. Costs are funded
organisations may have different from government revenues
goals ○ Charity: provide services to people or animals in need or to help protect environment.
Cover costs from donations
○ Not for profit: aim to make enough revenue to cover their cost and any surplus is
reinvested; e.g. local clubs, cooperatives
● Ways to increase profit
○ Reduce Costs of production

Describe the characteristics of Perfect Competition:

perfect competition and ● Firms in perfect competition cannot compete on price. In this type of market situation the price
monopoly. discuss the elasticity of demand is perfectly elastic. If a firm raises its price consumers will not buy from it.
advantages and disadvantages of ● Products are identical and consumers have complete knowledge of the other suppliers prices they
monopoly will all buy from somewhere else.
● Firms make what is known as ‘normal profit’ in the long-run.
● They are unable to reduce their price since this would result in them making a loss.
● Firms must accept the market price which is set by the forces of supply and demand.
● Perfect competition makes the best use of resources as it allocates the resources to the production
of goods that are in demand & profitable. Inefficient producers will quickly go out of business.
● If there is an increase in the demand then in the short run the suppliers will make higher than
normal profits (super-normal profits). Others quickly join this market which will increase the
supply and push the price back down to a point at which normal profit is again being made.
● If there is a decrease in demand then the price will fall. This will quickly result in some suppliers
leaving the industry and switching to something that is more profitable. This will reduce the
supply.
 Monopolies
● The firm has 100% share of the market.
● High barriers to entry.
● The firm controls supply and subsequently the price level
Monopolies might have complete control over the supply and therefore be able to set prices, but they
cannot control the demand. This leaves them with an important choice. They can either:
1. Decide the price level they want to achieve and supply the quantity that would achieve this.
2. Decide the quantity they want to sell and accept the market price.
Disadvantages of monopolies
● Inefficiency: the lack of competition allows monopolies to operate less efficiently than companies
in a competitive market would.
● Lack of innovation/poor quality: they can offer a poorer service/product without losing many
customers.
● Higher prices: they can set the price and earn super-normal profit levels.

Describe pricing and output Characteristics of a perfectly competitive market:

policies in perfect competition
and monopoly Perfect competition suggests that the best use of resources is being made by firms in markets where they
face many competing firms. The firms providing the best quality goods and services at the lowest prices
will be the most successful.
● Homogenous products​ – That means all firms produce the same product. No one produces a
unique product.
● Price takers​ – There are so many buyers and sellers in the market. No buyer or seller is strong
enough to influence the price. They must take the prevailing market price.
● Freedom of entry and exit​ – There is no barriers to entry. firms can easily enter and leave the
industry if they wish.
● Perfect information​ – All buyers will know all about the prices and products on sale, and all the
sellers have all the information on the latest production techniques.
 Characteristics of a monopoly:

The opposite extreme to the perfect competition is the situation of ​monopoly​. A firm is a pure monopoly
if it is the only supplier of a particular good or service. Let us look at the characteristics of a monopoly.
● No competition ​– being the only supplier of a good or service, a monopoly faces no competition
from other firms.
● Abnormal profits – Because there is no competition, the monopolist is able to permanently earn
high profits, often known as abnormal profits.
● Price makers – Because the monopolist produces all of a particular good or service for a market,
it can raise the price of its product by supplying less of it.
● High barriers to entry – It is very difficult to enter and exit the industry. It could be due to high
capital investment required. Sometimes other firms are prevented from entry by a firm acquiring
parents to be the only producer of a particular product, since they researched and developed it.

Describe the main reasons for the ● Number of employees: less than 50 are classed as small.
different sizes of firms (size of ● Amount of capital employed: large firms often invest millions of dollars in fixed assets such as
market, capital, organisation) machinery and equipment
● Market share: relative size of firms can be compared according to their percentage share of total
market supply/revenue.
● Organization: large firms may be divided up into many different departments and have offices,
shops and/or factories spread over many locations

Describe and evaluate Factors influencing a firm’s size

integration, economies and ● Age of the firms
diseconomies of scale ● Availability of financial capital
● Types of business organisation
● Internal Economies and Diseconomies of scale
● Size of the market
 Growth of the firms
● Internal Growth
● External Growth
○ Horizontal Integration
○ Vertical Integration
○ Conglomerate integration

Advantages of small firms

● Demand for expensive items
● Friendlier and more personal service
● No loss of control
● Flexibility
● Technical Factors
● Cooperation between small firms

Role of government in an economy

Describe the government as a ● Aggregate Demand: This is the total demand in the economy
producer of goods and services ○ It is made up of:
and as an employer ■ Consumption
■ Investment
■ Government Expenditure
■ Exports - Imports
 ● Aggregate Supply: This is the total supply in the economy.
○ It is initially flat due to the ability to employ more resources (labour) and increase supply.
○ It becomes steeper & then vertical when the economy reaches full employment which
means we cannot increase supply.
○ At this stage prices increase if AD increases (inflation)

● Government Production
○ Governments may provide goods/services that are a natural monopoly (water/electricity).
○ Essential goods such as health care, education and police forces are often provided by the
government.
○ Governments may provide merit goods such as public swimming pools, libraries and
sports centres.

describe the aims of government Government Aims

policies, such as full ● Full employment: having all the people who are able to work and looking for work in
employment, price stability, employment. Usually there will be some frictional unemployment existing.
economic growth, redistribution ● Price stability: governments aim to keep inflation at a steady rate (around 2%). This allows firms
of income, balance of payments and individuals to plan for the future more accurately.
stability ● Economic growth: increasing the output of the economy (Real GDP). In the long run they aim to
push the PPB (Production Possibility Boundary) outwards.
● Redistribution of Income: governments may aim to take money from the rich (through higher
taxes rates) and give it to the poorer population (through unemployment and social benefit
schemes).
● Balance of Payments stability: keep imports and exports balanced swell as flows of finance.

explain fiscal, monetary and ● Monetary policy: This focuses on controlling changes in the money supply, interest rates and
supply-side policies. analyse the exchange rate.
use of fiscal, monetary and ○ Key Characteristics
supply-side policies ■ Money Supply: changed by printing money & encouraging/discouraging lending
by commercial banks. Increased money supply = Increased Aggregate Demand
(AD).
■ Interest Rates: Central Bank raises or lowers these. Raised interest rates make
saving more attractive and borrowing more expensive. This should lower AD &
therefore firms are also likely to invest less.
■ Exchange Rates: these can be fixed to another currency (dollar) to control inflation
or they can be floating
■ Contractionary Monetary Policy: raising interest rates and reducing money supply
to reduce AD.
○ Contractionary Monetary Policy: raising interest rates and reducing money supply to
reduce AD.
○ Expansionary Monetary Policy: reducing interest rates and increasing the money supply to
increase AD.

● Fiscal Policy: This focuses on changes in government expenditure and taxation

○ Key Characteristics
■ Government Expenditure: increases in spending will increase AD, decreases in
spending decrease AD.
■ Taxation: increases in taxation will leave people with less money to spend and so
reduce AD.
■ Budget: the government has a surplus when it takes more money than it spends & a
deficit when it spends more than it takes.
○ Reflationary Fiscal Policy: increasing gov spending and reducing taxation to increase AD.
○ Contractionary Fiscal Policy: reducing gov spending and increasing taxation to reduce AD.
 ● Market Orientated Supply Side Policies
○ Getting rid of red-tape and bureaucracy – oftentimes firms produce less than they ought to
because they have so many forms and rules they have to follow. Getting rid of these makes
it faster to produce, saving time and money.
○ Reducing the power of trade unions – trade unions keep wages high. Wages are a big part
of a firm's’ costs of production. If trade unions were made less important, firms could
spend less on their workers by reducing the wage.
○ Changing laws and legislations – if previously firms were only allowed to supply a certain
amount, then when this is changed they are free to produce more.
○ Reducing taxes on firms – this allows them to produce more at the same price.

● Interventionist Supply Side Policies

○ Investment in healthcare – this makes the workforce able to produce more as they are
healthier.
○ Research and Development – can lead to new ways of doing things, or the discovery of
new production techniques like genetically modifying crops.
○ Investment in technology – combine harvesters do a lot more work, at a faster rate, than
humans. Car plants in Tokyo are now almost all totally automated.
○ Subsidizing entire industries – this allows firms to spend money on the above, or to buy
more factors of production which make them more productive.

Discuss the possible conflicts Conflicting Aims

between government aims ● Spending more money to stimulate growth can lead to rising prices as a result of increased
demand. If spending is reduced to stop inflation, this will lead to a fall in growth.
○ If government tries to create full employment, labor becomes increasingly scarce.
Employers have to compete more strongly to attract labor. They raise wages, which
 leads to wage inflation.
○ If the government tries to redistribute income, which may involve taxing richer people
at higher rates, the richer workers may feel that they are unfairly penalized for working
hard and may decide to migrate. This in turn, may slow down economic growth.

Describe the types of taxation ● Taxation Aims

(direct, indirect, progressive, ○ To reduce income inequalities
regressive, proportional) and the ○ To increase government revenue
impact of taxation ○ To increase merit and public goods and services
○ To reduce external and social costs

● Indirect Taxes
○ Service Tax
○ VAT

● Types of Direct Taxes

○ Progressive taxes:
■ A progressive tax is a tax imposed so that the tax rate increases as the amount
subject to taxation increases. In simple terms, it imposes a greater burden
(relative to resources) on the rich than on the poor. It can be applied to individual
taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax
incidence of people with a lower ability-to-pay, as they shift the incidence
disproportionately to those with a higher ability-to-pay. The result is people with
more disposable income pay a higher percentage of that income in tax than do
those with less income
 ○ Regressive Tax
■ The opposite of a progressive tax is a regressive tax , where the tax rate
decreases as the amount subject to taxation increases. It imposes a greater
burden (relative to resources) on the poor than on the rich. Regressive taxes
attempt to reduce the tax incidence of people with higher ability-to-pay, as they
shift the incidence disproportionately to those with lower ability-to-pay.
■
○ Proportional Tax
■ A proportional tax is one that imposes the same relative burden on all taxpayers
grow in equal proportion. In simple terms, it imposes an equal burden (relative
to resources) on the rich and poor. Proportional taxes maintain equal tax
incidence regardless of the ability-to-pay and do not shift the incidence
disproportionately to those with a higher or lower economic well-being.

Discuss the government’s ● If demand is inelastic most tax burden will be borne by the consumer whereas if demand is
influence (regulation, subsidies, elastic most tax burden will be borne by producer
taxes) on private producers. ● A good tax is
○ Fair
○ Certain
○ Convenient
○ Flexible
● Direct taxes may discourage effort, enterprise and saving but they can help redistribute income
● Indirect taxes tend to be regressive

Economic Indicators
Prices Measuring Inflation
● Describe how a consumer The Retail price Index (RPI)
 prices index/retail prices ● This is a price index that shows the general change in prices over time as a %.
index is calculated ● A hypothetical basket of goods and services which represents a normal households spending.
● discuss the causes and ● The items are ‘weighted’ to reflect the % of income spent on them.
consequences of inflation ● Each month the prices of the goods & household spending patterns are monitored and the RPI is
● discuss the causes and calculated.
consequences of deflation ● The index has a ‘base year’ and the % change is measured from this.

Causes of Inflation
Cost-Push Inflation
● Increases in wages & raw material costs push production costs up and result in higher prices.
● If increases in wages are matched by an increase in worker productivity then unit costs should not
rise.
● A ‘wage spiral’ may occur when workers demand higher wages leading to higher prices & so
workers then demand higher wages again & so on.
Demand-Pull Inflation
● Excess demand (an increase in demand without an equal increase in supply) pulls prices higher.
● Usually output can be increased to match demand but if there is full employment then extra
workers cannot be employed to increase output. It could also be a shortage of a raw material that
limits supply.
Monetary
● Increases in the money supply that are greater than increases in output (more money chasing same
output).
● Can be classed as demand-pull inflation.
Effects of Inflation
● The value of money falls (each $ buys less). Hyperinflation may lead to loss in confidence of the
currency.
● Redistribution of income:
 ○ savers lose out as their savings lose ‘real’ value & borrowers gain as they repay less in
‘real terms’ than they borrowed.
○ People on fixed incomes (pensioners, students) see their real income fall unless it is
‘index-linked’ (linked to the changes in the rate of inflation).
● Increased costs for firms: changing prices, labels, working out future costs.
● Balance of Payments: increased prices make a country’s exports less desirable & imports seem
comparatively cheaper. This can lead to further issues such as unemployment.

Deflation is a decrease in the general price level of goods and services and occurs when the inflation rate
falls below 0%.

● As things become cheaper:

○ People stop spending as they expect prices to fall further

● As such, firms start making less revenue.

○ Firms start to produce less as less is demanded.
○ Employers begin to hire fewer workers as they are no longer needed anymore.
○ This causes the economy to eventually go bust.

Employment Measuring Unemployment

● Describe the changing Measured as the % of the labour force who are willing & able to work and looking for a job.
patterns and levels of Methods for measuring unemployment vary & generally the official rate is lower than the actual number
employment of people looking for work.
● Discuss the causes and
consequences of Types of Unemployment
unemployment. ● Frictional unemployment​: people between jobs - tends to be short term.
 ● Structural unemployment​: industrial change over the long term can leave sectors of the labour
force with skills that the economy no longer demands.
● Seasonal unemployment​: labour only demanded at certain times of the year (fruit pickers/ tour
guides).
● Cyclical unemployment​: high unemployment in times of recession.
● Immobility of labour​: workers are generally fairly immobile (home, family) & only seek work in
their region.
● Technology​: increases in technology have replaced some jobs and reduced number of workers in
others.
● Minimum wage​: increased labour costs may force employers to hire less workers.

Effects of Unemployment
● Increases in unemployment lead to higher costs for the Government (support & benefits) & at the
same time less income for the Government (income tax). This could mean higher taxes for the
working population or reduced spending on schools/hospitals/emergency services etc.
● Increased unemployment means less output & so less goods and services for people to share.
● Increased costs to society through higher crime rates, higher health bills (alcoholism/depression),
increased rates of divorce.

Output Measuring Output

● Define Gross Domestic
Product (GDP) Gross Domestic Product (GDP)
● Describe and have a Definition: The total value of the goods and services produced in an economy over a given time period.
general understanding of This is the standard measurement but there are several variations that are used to provide a clearer picture
the causes and of what is happening in the economy.
consequences of economic
growth ● Nominal GDP​: GDP valued using the current prices (no inflation consideration).
 ● Define the term recession
● Describe and evaluate ● Real GDP​: GDP that has had the effect of inflation removed.
measures and indicators of
comparative living ● Real GDP per capita​: average Real GDP per person in the country. This allows any changes in
standards, such as GDP the population size to be reflected.
per head, Human
Development Index (HDI)

Developed and Developing economies

Describe why some countries are ● Stages of development
classified as developed and others ○ Developed Economies
are not ■ High incomes
■ High living standards
■ High level of people employed in tertiary sector
■ High level of productivity
■ High levels of investment
○ Developing Economies
■ low incomes
■ low living standards
■ low level of people employed in tertiary sector
■ low level of productivity
■ low levels of investment
● Measures of development
○ United Nations divides into four levels of development
■ Very High Human development
■ High Human development
 ■ Medium Human development
■ Low Human development
○ World bank
■ High income
■ Middle income
■ Low income
○ HDI- human development index (characteristics of low development)
■ Low incomes per head
■ Low levels of saving
■ Low life expectancy and high infant mortality rate
■ High rates of population growth
■ Low levels of education and health care
■ Low levels of capital and poor infrastructure
■ Relatively high number of workers in the primary sector
■ Concentration on a narrow range of exports
● Why governments seem to achieve development
○ Higher real GDP
○ Higher living standards
○ Expansion in a range of social and economic choices

Describe the difference between ● Wealth: stock of assets which have a financial value
absolute and relative poverty ○ More workers in a house = higher income
○ Wealth is unevenly distributed due to
■ Inheritance
■ Wealth creates wealth
● Absolute Poverty
○ Number of people living below a certain income threshold or number of households
 unable to afford certain basic goods & services
○ Occurs when people do not have access to basic food clothing and shelter
● Relative Poverty
○ Measures extent to which household’s financial resources fall below average income
level
○ Occurs when people are poor relative to other people in the country, unable to
participate in the fully normal activities in society

Recognise and discuss policies to ● Government can influence the distribution in a number of ways
alleviate poverty ○ Taxation
○ The provision of cash benefits
○ The provision of free state education and health care
○ Using labour and macroeconomic policies

● Measures to reduce poverty

○ Improving the quantity and quality of education
○ Increasing aggregate demand to increase employment
○ Introducing or raising national minimum wage
○ Encouraging more MNCs set up in the country
○ Providing benefits or more generous state benefits
○ Making ownership of land more equal

● Measuring income inequality

○ Cumulative frequency is plotted
○ Then compared to a 45 degree line
○ The gap between the 45 degree line and the cumulative line is the income inequality
gap
 ● Government intervention to alleviate poverty
○ Food aid
■ Poor farming = insufficient output
■ Problem: Farmers would go out of business
○ Financial Aid
○ Technological Aid
○ Debt Relief
○ Removing barriers from overseas trade
○ Economic advice

Describe the factors that affect ● Causes of population growth

population growth (birth rate, ○ The age at which women marry
death rate, fertility rate, net ○ The number of women pursuing higher education
migration) and discuss reasons for ○ Participation rate of women in the labour force
the different rates of growth in ○ Socio-economic status of women
different countries ○ Availability of family planning services
○ Provision of benefits for the sick and elderly

● The age distribution of population can be illustrated on a population graph

● People emigrate to look for better living standards

Analyse the problems and Positive Effects of increase in population

consequences of these population ● Better use of resources
changes for countries at different ● Increased market size = more economies of scale
stages of development ● Increase in factor mobility
● Extra demand will be generated which will lead to investment
● A rise in labour force
Disadvantages
● Concerns about famine
● Restrictions of improved living standards
● Overcrowding
● Environmental Pressure
● Pressure on government for employment training
● More imports

Ways of reducing birth rates

● Educating women
● Decreasing immigration
● Improving healthcare
● Provide benefits to families that restrict the number of children they have

Effects of ageing population

● Rise in dependency ratio
● Change in labour force
● High demand for health and care
● Greater need for welfare services
● Rise in cost of state and private pensions
● Change in demand

Ways to deal with ageing population

● Raise retirement age
● Making it compulsory to save for retirement
● Increase in immigration
Describe the effects of changing Developing economies and problems
size and structure of population on ● High growth of population
an economy. discuss differences ● High levels of international debt
in standards of living within ● Reliance on export
countries and between countries, ● Lack of investment in human capital and capital goods
both developed and developing. ● Emigration of key workers
● Unbalanced economies

LEDC
● High and rising population
● High BR increased number of children and young people
● Low life expectancy, poor skills & education, and lack of an industrial base means less growth
in working population
● Outward migration to MEDCs reduces working population

MEDC
● Low but rising
● Low BR and DR increasing no. of older and retired people
● Life expectancy is high and rising.
● Net inward migration boosted working populations but also increased pressure on housing,
education, healthcare and welfare system

Relationship between the two types of economies

● One developed economy can help a developing economy
● Increased incomes
● More holidays between countries
PAST PAPERS BY TOPIC
Section 1: Basic Economic Problem
Section 2: Allocation of Resources
● Discuss whether the building of more roads will benefit an economy.
It will It won’t

● Up to 3 marks for: identifying it may create employment (1) in ● Up to 2 marks: it will involve an opportunity cost (1), could
the short term building the roads and in the long term have built more schools, etc. (1).
maintaining them (1) and so raise incomes (1). ● Up to 2 marks: may generate external costs (1), e.g. noise, air
● Up to 4 marks for: may lower congestion (1) and so lower pollution (1).
transport costs (1), lower transport costs will reduce inflation (1) ● Up to 2 marks: may lower revenue for train companies (1), as
and so will increase international competitiveness (1). passengers and freight may switch from rail to road (1).
● Up to 3 marks: may make it more attractive for MNCs to set up ● Up to 2 marks: may not be sufficient to keep up with demand
in the economy (1) as it will lower transport costs for MNCs (1) for road use (1) as incomes rise, demand for road use may
and will increase the market in the country that the MNCs can exceed the increase in capacity (1).
sell to (1). ● Up to 2 marks for: there may not be sufficient demand (1) and
so resources will be wasted (1).

● Discuss whether devoting more of its resources to fishing would benefit an economy.
Will Benefit Won’t benefit

● may allow an economy to specialise (1) in a product in which it ● risk that demand may fall (1) reasons why demand may fall e.g.
has a cost/comparative rise in price/quality competitiveness of other economies (1);
advantage (1); ● the country may be better at producing other products (1) this
● may increase the output of the country/GDP (1) increasing would result in a high opportunity cost of devoting more
incomes/living standards (1); resources to fishing (1);
● may allow greater advantage to be taken of economies of scale ● may result in diseconomies of scale (1) examples of
(1) examples of economies of scale (up to 2); diseconomies of scale (up to 2);
● demand for fishing may be increasing (1) will raise revenue (1) ● may result in overfishing (1) depleting fish stocks (1).
reason why demand may be increasing e.g. greater awareness of
health benefits (1);
 ● may increase exports of fish/reduce imports of fish (1) improve
the position on the current account of the balance of payments
(1);
● may build up a reputation for fishing (1).

● Analyse what determines a firm’s demand for capital goods.

● The expected demand for the product produced (1) the higher the output, the more capital goods needed (1).
● Advances in technology (1) new capital equipment is likely to be more productive (1).
● The price of the capital equipment (1) the cheaper the price, the more capital equipment that is likely to be bought (1).
● The rate of interest (1) firms often borrow to buy capital equipment (1).
● The level of profits (1) higher profits increase firms’ willingness and ability to buy capital goods (1).
● Corporation taxes (1) lower taxes will increase firms’ willingness and ability to buy capital goods (1).
● Government subsidies (1) these provide funds for firms to buy capital goods (1).

● Discuss whether the average cost of production always decreases when a firm increases the total output that it produces.
Why it might Why it won’t

● The firm may experience economies of scale (1) total cost will ● The firm may experience diseconomies of scale (1) total cost
rise by less than total output (long run average cost may fall as may rise by more than total output (long run average cost may
output increases) (1). increase as output increases) (1)
● The firm may experience buying/purchasing economies of scale ● The firm may experience diseconomies of scale (1) this may
(1) may be offered a discount price when buying raw materials make the firm slower to respond to changing market conditions /
in bulk (1). more difficult to keep costs down (1).
● The firm may experience technical economies of scale (1) ● The firm may experience communication problems (1) ideas
larger, more cost efficient technological equipment may be may not be communicated or may be misunderstood (1).
purchased to produce a higher output (1). ● The firm may experience poor industrial relations (1) e.g. strikes
● The firm may experience managerial economies of scale (1) may increase costs of production (1).
specialist staff may be employed when output is high (1) ● External diseconomies of scale may occur (1) e.g. pushing up
● The firm may experience financial economies of scale (1) as the costs of production(1).
output increases, it may be able to borrow more cheaply / or sell ● Allow up to 2 marks for a correctly labelled average cost
its shares at a lower price (1) diagram which shows economies and diseconomies of scale as
● The firm may experience R & D economies of scale (1) the R & an alternative to describing average costs rising / falling as
D expenditure can be spread over a higher output (1). output increases
● The industry may also be growing in size (1) enabling advantage
 to be taken of external economies of scale (1).

● Discuss whether the social benefits of building flood defences will exceed the social costs involved.
Why social benefits may be greater Why social costs may be greater

● Social benefits are private benefits plus external benefits (1). ● Social costs are private costs and external costs (1).
● Explain private benefits (1) e.g. greater employment, greater ● Explain private costs (1) e.g. cost of land, raw material labour
revenue for firms, protection of homes / reduction in high risk of and buildings, may only be a low risk of flooding (up to 3)
flooding (up to 3) ● Explain external costs (1) e.g. pollution, destruction of wildlife
● Explain external benefits (1) e.g. increase in house prices in the habitats, opportunity cost of resources (up to 3).
area, greater tourism, reduced cost to emergency services and
benefit payments (up to 3)

● Discuss whether living standards are likely to be higher in a mixed economy or a market economy.
Mixed Market

● The government may protect vulnerable groups (1) e.g. provide ● People may have more choice (1) firms may provide a range of
pensions for the elderly (1). products (1).
● The government may seek to achieve full employment (1) ● There will be no rules and regulations (1) reducing what people
avoiding people having low income due to being unemployed can consume (1) and what firms can produce (1).
(1). ● Output/incomes may be high (1) quality may be high (1) due to
● The government may provide health care/education/housing free profit motive (1) and competition (1).
to consumers (1) ensuring everyone has access to essential
products (1).
● External costs may be reduced by government action (1) there
may be less pollution (1).

● Discuss whether the advantages of a market economy are greater than its disadvantages.

● consumer sovereignty (1) consumers determine the goods and ● may be inequality of income (1) the rich can increase their
services produced (1) earning potential through
producers make what consumers want (1) saving/receiving a better education (1) some vulnerable groups,
• may be more choice (1) people can decide who to work for (1) e.g. the sick may find it
 may be choice of difficult to earn an income (1)
suppliers (1) • private sector monopolies may develop (1) these may charge
• may be efficient (1) due to competition (1) drive down costs high prices (1) reduce
(1) lower prices (1) profit quality (1) restrict choice (1)
incentive (1) ability to earn high wages (1) • decisions will be based on private costs and benefits (1)
existence of external costs and
benefits (1) can cause inefficient choices (1)
• certain beneficial products (merit goods) (1) may be
under-consumed and so under-
produced (1)
• certain harmful products (demerit goods) (1) may be
over-consumed (1) and so over-
produced (1)
• some products (public goods) (1) may not be produced (1)
difficult to stop non-buyers
consuming the product (1)
• advertising can distort choice (1) producers can influence what
consumers want to
buy (1)

● Analyse the causes of market failure.

● market failure arises when markets are inefficient/right products are not produced in the right quantities (1)
● • abuse of market power (1) monopoly (1) may result in output being restricted (1) high price charged (1) low quality (1)
● • decisions based on private costs and benefits/failure to take into account external costs (negative externalities) and benefits (1) results in
underconsumption and overconsumption of some products (1) leading to inefficient overproduction and underproduction (1)
● • lack of information (1) causes consumers and producers to make inefficient choices (1) harmful products may be over-consumed (1)
beneficial products may be under- consumed (1)

● Discuss whether an economy will benefit from its forests being cut down.

● generate income/raise GDP (1) raise living standards (1) ● will exhaust the supply of wood and other products from the
● • increase production of e.g. paper (1) increase employment (1) forest (1)
● • increase exports (1) improving the current account position (1) ● • conserving the forests will enable future generations to benefit
● • the price of wood may fall in the future (1) so advantage of the from the income (1)
 wood might need to be ● • cutting down forests could cause external costs/negative
● taken advantage of now (1) externalities (1) e.g. noise
● • government tax revenue will increase (1) which could be used ● pollution/environmental damage (1)
to e.g. subsidise new ● • the price of wood may be higher in the future (1) if demand for
● industries (1) the product increases (1)
● • the land could be used for other purposes e.g. housing (1) ● • conflict between different groups/stakeholders (1) could lead
● • clearing forests for roads/rail could make transportation of to increased police costs
goods easier (1) reducing the ● (1)
● average costs of firms (1) ● • will damage (eco) tourism (1) reducing export of services (1)

● Analyse why economic growth may increase demand for electricity.

● economic growth will increase income (1) higher income will increase demand for e.g. televisions and laptops (1) electricity is a
complement to televisions etc./used to operate televisions (1)
● • with higher income, some people may switch from other fuels to electricity (1)
● • economic growth involves higher output (1) electricity is used in the production of a
● variety of products (1) higher output will require more electricity (1)
● • economic growth involves investment in capital equipment (1) e.g. new machines will
● require electricity to run them/electricity is a complement (1)
● • economic growth often involves new technologies (1) which use electricity to function (1)
● • with economic growth more people will now have access to electricity (1) more towns
● and villages may now be on the grid/electricity may have reached more areas (1)

Section 3: The individual as producer, consumer and borrower

● Discuss whether the activities of trade unions are likely to increase or decrease a country’s economic growth rate.
Increase Decrease

● Trade unions may cut firm's costs of production (1) by reducing ● Trade unions may push up wages (1) higher wages will increase
the time and effort involved in negotiating with workers (1) firms’ costs of production (1) this may encourage them to cut
lower costs can increase profits (1) higher profits can encourage production (1).
expansion (1). ● Trade unions may engage in industrial action (1) e.g. strikes (1)
● Trade unions may push up wages (1) boosting total (aggregate) this will disrupt production (1) sales may be lost (1).
demand in the economy (1) ● The presence of trade unions may discourage MNCs setting up
● Trade unions may help with training and education systems (1) in the country (1) MNCs contribute to economic growth (1).
such schemes may raise productivity (1) higher productivity can
 cut costs of production (1) and increase productive potential (1).
● By promoting workers’ rights (1) trade unions may increase the
motivation of workers / workers may gain more job satisfaction
(1) which will raise productivity (1).

● Analyse why households and firms may borrow more during times of rapid economic growth.
● Households may borrow more because they are more optimistic about the future (1) they may expect their income will continue to rise (1)
which will make it easier to repay loans (1).
● Unemployment is likely to be lower (1) banks are more likely to lend to those in work (1) those in work may offer banks greater security for
loans (1) and have more assets (1)
● Firms will be producing more (1) will borrow to expand production (1) will be more confident in their ability to repay (1).

● Analyse how a central bank might reduce household borrowing. (w16-22)

● It might increase the rate of interest (1) this would increase the cost of borrowing (1) this may discourage households from buying
items/encourage saving (1) that would require them to take out a loan (1).
● It might impose restrictions on the amount that banks can lend (1) these may limit the size of a loan a household can get (1) or increase the
conditions that have to be met before a loan is given (1).
● It might reduce the money supply (1) which may reduce spending (1) and so may reduce demand for loans (1).

● Discuss whether a government should encourage an increase in saving. (w16-22)

Why it should Why it shouldn’t

● Would provide funds for bank lending (1) this may increase ● Lowering consumer expenditure (1) may increase
investment (1) leading to economic growth (1). unemployment (1) cyclical unemployment (1).
● May enable people to save for their retirement (1) which may ● May lower economic growth/cause a recession (1) a government
reduce the need for state pensions (1). may need to encourage spending rather than saving (1).
● May enable people to save in case of financial difficulties in the ● If there is deflation (1) higher saving could drive the price level
future/avoid getting into debt (1) which may reduce their lower (1).
dependency on the state should unexpected events/problems
occur (1).
● May reduce inflation (1) by reducing consumer expenditure (1).
● May correct a current account deficit (1) lowering spending on
imports (1).
● Discuss whether an increase in consumer expenditure would be beneficial for an economy. (w16-23)
Why it might be Why it won’t be

● May increase living standards (1) as people will be enjoying ● The spending may go on imports (1) may divert production from
more goods and services (1). the export market to the home market (1) worsen the current
● Firms increase output (1) may increase economic growth (1) if account position (1). GDP may fall (1).
spare capacity (1) without causing inflation (1). ● Demand may increase faster than output (1) causing
● May increase employment (1) firms may take on more workers demand-pull inflation (1).
to expand production (1). ● Increased consumer spending through borrowing (1) may
● May increase government income through indirect taxes (1) increase debt (1).
enabling expenditure on e.g. infrastructure/education/health (1).

● Analyse how a country’s stock exchange can benefit an economy.

● It enables firms to raise finance (1) as shares are sold on the stock exchange (1).
● It enables firms to merge with/take over other firms (1) this enables them to grow in size (1) leading to economic growth (1) and increased
employment (1).
● It enables the government to raise finance (1) by selling government bonds (1) example of government expenditure (1).
● It provides a destination for savings (1) which may be used for investment (1) or more disposable income (1).
● It may encourage more firms to set up in the country (1) due to a strong financial sector (1).

● Analyse how the spending, saving and borrowing patterns of young workers may differ from those of older workers.
● Young workers may spend more as they may not have a family to save for (1) old workers may spend a smaller proportion of their income
(1) as they may be paid more and so can afford to save (1).
● Young workers may save more to e.g. purchase a house (or other valid reason) (1) older workers may already have sufficient savings (1).
● Younger workers may spend more on high tech products (1) older workers more on healthcare (1)
● Young workers may save less as they do not have sufficient income (1) older workers may save more as they are preparing for retirement
(1).
● Young workers may borrow more because they may be buying a car/house (1).
● Young workers may borrow less because banks may be more reluctant to lend to young workers/young workers may have less collateral/job
security (1).

● Analyse how the growth in the size of commercial banks may benefit their customers.
● Growth of commercial banks may enable them to take greater advantage of economies of scale (1) example (1) lower average cost of
production (1) this may result in lower prices (1).
 ● Growth of commercial banks may increase their profits (1) this may enable them to spend more on research and development (1) innovate
(1) improve quality of services (1) provide a greater range of services (1).
● Growth of commercial banks may reduce their chance of them going out of business (1) possibly greater security for their customers’
savings (1).

● Discuss whether an increase in output always reduces average cost.

Why it Might Why it might not

● May enable firms to enjoy economies of scale (1) examples (2). ● May experience diseconomies of scale (1) examples (2).
● Average fixed costs fall as output rises (1) fixed costs are spread ● Accept but do not expect: Diminishing returns/less efficient
over a larger output (1). Accept but do not expect: Increasing combination of resources (1) Diagram showing economies
returns (1). and/or diseconomies of scale (1).

● Discuss whether governments should encourage households to borrow more.

should shouldn’t

● encourage an increase in demand/spending (1) firms produce ● households may get into debt (1) as a result lose
more (1) resulting in economic growth (1) lower unemployment houses/possessions (1) reduce spending in the future (1);
(1); ● higher spending may result in inflation (1) demand-pull inflation
● enjoy a higher standard of living (1) households can spend more (1);
than their income (1); ● may increase demand for imports (1) cause a current account
● enable households to spend more on education and health care deficit (1);
(1) increase future earning potential (1). ● an increase in demand for loans may push up the rate of interest
(1) this may make it more difficult for the poor to borrow (1).

● Discuss whether a firm will benefit from encouraging its workers to join a trade union.
Will benefit Won’t benefit

● Up to 2 marks: may encourage more workers to apply for jobs ● Up to 4 marks: may push up wages (1), as the union can use its
(1), as they may expect better working conditions/job security power to bid up wage rates for its members (1). This will
(1). increase the firm’s costs of production (1) and reduce the firm’s
● Up to 2 marks: reduces costs of negotiating with workers (1) as competitiveness.
negotiations can take place with one organisation rather than ● Up to 3 marks: may reduce flexibility (1) as a union may insist
possibly many individual workers (1). that its members only undertake the tasks in their job
 ● Up to 2 marks: provides a channel of communication (1), so descriptions (1) and are not to work outside the standard hours
information on, e.g. new working practices can be spread more (1).
quickly (1). ● Up to 3 marks: may take industrial action (1), e.g. a strike will
● Up to 3 marks: may promote training (1), increasing labour disrupt production (1) and lose customers/reduce revenue/profits
productivity (1) and so lower costs of production (1). (1).
Up to 2 marks: may reduce conflict (1) as workers’ discontents
can be taken to management and possibly resolved (1).

● Analyse three reasons why trade union membership may decrease in a country
● trade union subscriptions may increase (1) making it more expensive for people to join a trade union (1)
legislation may reduce the power of trade unions (1) this would make membership less valuable (1)
employers may not recognise trade unions/be reluctant to employ members of trade unions (1) this may make people reluctant to join as it
would reduce their employment opportunities
• unemployment may mean that there are fewer people in employment to belong to trade unions (1) it will weaken the power of trade unions
(1)
• in a boom period/high level of economic activity (1) workers may gain wage rises/better working conditions without belonging to a trade
union (1)
• workers may be satisfied with pay and conditions (1) may not agree with actions of trade union (1)
• government action to improve the pay and/or conditions of workers e.g. introduction of national minimum wage (1) reduces the need for
collective bargaining (1)

● Discuss whether the growth of a commercial bank will benefit its customers.

● a larger commercial bank may be more financially sound (1) ● a larger commercial bank may have more market power/may
less likely to go out of business (1) have become a monopoly (1) it may have grown by eliminating
● a larger bank may have more funds available (1) this may enable competition (1) this may result in it charging higher interest to
customers to borrow more (1) borrowers/increase price (1) lower interest rate it pays to savers
● a larger commercial bank may be able to take advantage of (1) lower the quality of its services (1)
economies of scale (1) example (1) this will reduce costs of ● a larger commercial bank may experience diseconomies of scale
production (1) with lower costs, the bank may lower the interest (1) example (1) this will raise costs of production (1) this may
it charges borrowers/reduce prices to customers (1) increase lead the bank to increase interest rate charged to borrowers/price
interest rate it pays savers (1 (1) lower the interest rate it pays savers (1) reduce quality of
● a larger bank may open more branches (1) have longer opening services (1)
hours (1)
 ● a larger bank may be more able to invest in new technology (1),
e.g. online banking (1)
● a larger commercial bank may offer a greater range of services
(1) a better quality of services (1) take greater advantage of risk
bearing economies of scale (1)

● Discuss whether the poor are more likely to borrow than the rich.

● lower income (1) may mean the poor have to borrow to buy ● banks may be reluctant to lend to them (1) because they are
basic necessities (1) worried they will not be repaid (1)
● • the poor may be more inclined to get into debt (1) so may ● • banks may charge a higher interest rate (1) to those who they
borrow to cover debt repayments (1) think may be a high risk (1)
● • the poor may have to borrow to cover medical costs (1) ● • the poor may lack the ability/confidence they will be able to
● • the poor may have to borrow to educate their children (1) repay loans (1) as they may not expect their incomes to rise (1)
● • the poor are more likely to need to borrow for large purchases ● • the poor may be reluctant to borrow because of previous bad
e.g. furniture (1) experience of being in debt (1)
● • the poor are less likely to have savings to enable purchases (1) ● • it depends on whether the poverty is absolute or relative (1)
● • as a proportion of income the poor may borrow more (even if ● • the poor are less likely to have a bank account / access to
they do not in absolute terms) (1) borrowing (1)

● Discuss whether an economy would benefit from a foreign producer setting up in the country.

● • increase GDP (1) raise living standards (1) ● may drive local producers out of business (1) so not adding to
● • create new jobs (1) lower unemployment (1) less spent on GDP, employment, etc. (1)
benefits (1) ● may create external costs (1) e.g. pollution (1) may set up in the
● • pay higher than local wages (1) country to get round regulations at home (1)
● • bring new knowledge and skills (1) boosting productivity (1) ● top jobs may be taken by workers from the MNC’s home
● • pay (corporation) taxes (1) increasing government revenue (1) country (1) jobs created for locals may be unskilled (1)
● • increased (inward) investment (1) ● profits earned from the firm may be sent home (1) so not
● • creates competition for domestic firms (1) making them cut benefiting the home economy (1)
costs/become more efficient (1) ● it may have powerful influence on the government (1) reducing
● • contribute to the country’s exports (1) improve the current budget revenues by demanding tax relief/subsidies (1)
account position (1)
 ● • sell more cheaply in the country (1) as lower transport costs(1)
● • country benefits from improved infrastructure (e.g. roads) built
by foreign producer (1)
● • creates demand for products of local firms e.g. components(1)

Section 4: The private firm as producer and employer

● Analyse how an increase in international travel may influence incomes.
● likely to increase incomes (1)
• more jobs are likely to be created in the tourist/travel industry (1) previously unemployed
people who gain jobs will now have an income (1) people already in the industry may
gain higher wages (1)
• more jobs are likely to be created in industries linked to the tourist/travel industry e.g.
insurance, banking, retailing (1)
• the increased spending of people in the tourist/travel industry (1) is likely to increase
demand for a range of other goods and services (1) leading to higher employment and
incomes in other industries (1)
• increases geographical mobility of labour (1) workers can move in search of higher
incomes (1)
• more people visiting a country may raise government tax revenue (1) enabling the
government to pay higher wages to workers in the public sector (1).

● Analyse how an increase in the size of a firm can increase its profit.
● the increase in size may have resulted from the firm selling more products/increasing output (1) if revenue rises by more than costs, profit
will increase (1)
● • a larger firm may be able to take greater advantage of economies of scale (1)
● • fall in average costs (1) e.g. buying, managerial, technical, risk bearing (2)
● • a firm may have grown in size by merging/taking over rival firms (1) this will give it
● greater market power (1) allowing it to push up price (1)

● Discuss whether a rise in the wages a firm pays would reduce its profits.

will won’t
 ● higher wages will mean a higher wage bill (1) if output does not ● paying higher wages may prevent strikes (1) this can reduce
increase by more than wages, labour costs per unit will increase costs of production (1)
(1) costs of production will increase (1) profit is revenue minus • higher wages may motivate workers (1) this can increase
costs (1) with higher costs and the same revenue, profit will fall productivity (1) reduce costs of
(1) production (1)
• higher wages may make it easier to recruit workers (1) this can
reduce costs of production (1)
• higher wages may make it easier to recruit skilled workers (1)
this will raise productivity
(1) reduce costs of production (1)
• other costs may be falling (1) e.g. rent, corporation tax (1)
• demand for the firm’s products may be increasing (1) this will
raise revenue (1)
• higher wages may be paid to a smaller labour force (1)
reducing the wage bill (1)

● Discuss whether a merger between two shipbuilding firms will improve the quality of ships built.

Why it might Why it might not

● The merged firm might be able to take advantage of economies ● Reduction in competitive pressure (1) firms may not spend
of scale (1) lower average cost of production (1) higher profits money on research and development (1) consumers have less
(1) more funds to spend on research and development / afford choice (1).
better resources (1) share ideas / increase innovation (1) ● Internal diseconomies of scale may be experienced (1) e.g. may
eliminates wasteful duplication (1) be a lack of communication between workers and managers (1).

● Analyse why doctors are paid more than nurses.

● Doctors need higher qualifications (1) take longer to train (1) reduces supply (1) makes supply more inelastic (1).
● Doctors are more skilled (1) more productive / efficient (1) in higher demand (1).
● Doctors may have a more powerful professional organisation / trade union (1) giving them greater bargaining power (1).
● Doctors maybe a different gender to nurses (1) discrimination may occur (1)

● Discuss whether long-established and well-known firms are likely to be more successful than firms that are new to an industry. (w16-22)

Why it Might Why it won’t

● May have built up brand loyalty (1) their names and products ● May have become complacent/new firms may have more drive
 may be well known (1) this may attract more customers (1). (1) not spending money on R&D and innovation/new firms may
● May have built up market power (1) may be a monopoly or introduce new versions of the product (1).
moving towards a monopoly (1) may enable the firms to earn ● May have out of date capital equipment/new firms may have
more profit (1). new capital equipment (1) low labour productivity/high labour
● May have lower average cost of production (1) due to productivity in new firms (1).
economies of scale (1) example (1). ● May have higher average cost of production/new firms may
have lower costs of production (1) due to diseconomies of scale
experienced by old firms (1) example (1).
● New firms are likely to be small and so may be more flexible (1)
have more/better contact with customers/give more personal
attention (1) specialise in a particular part of the market (1).
● New firms may be subsidised (1) and so may enjoy lower costs
of production (1).

● Discuss whether it is better to work in the public sector or the private sector. (w16-22)

why it may be better to work in the public sector why it may be better to work in the private sector

● There may be greater job security (1) a government may be ● Working conditions/wages may be better in the private sector
reluctant to dismiss workers (1) as it will increase (1) if firms are competing for workers (1).
unemployment (1) greater job security may put less pressure on ● Private sector firms may earn high profits (1) enabling them to
workers (1). Working conditions may be better (1) and wages pay high wages/provide good working conditions (1).
higher (1) as the government is not profit motivated (1). ● There may be greater diversity of jobs in the private sector (1),
● May be able to enjoy longer holidays (1) if the government is a e.g. could work for a small firm (1).
generous employer (1). Promotion chances may be higher (1) if
there is a large public sector (1).
● May be more able to join a trade union (1) to protect rights (1).
● May be paid higher pensions (1).

● Discuss whether the quality of products is likely to be higher in a monopoly or in a perfectly competitive market. (w16-22)

Why it might Why it might not

● A monopoly can earn higher profits (1) some of the higher ● A monopoly may lack competitive pressure to produce a good
profits could be spent on research and development (1). quality product (1) consumers may still buy the product even it
● A monopoly knows it can protect any profits it makes (1) due to is of a poor quality (1) as they have no choice (1).
high barriers to entry and exit (1) this may encourage it to ● A monopoly may experience diseconomies of scale (1)
produce high quality products (1). management problems (1) poor industrial relations (1) may
 ● A monopoly may enjoy economies of scale (1) including R&D result in lower quality products (1).
economy (1).

● Discuss whether a merger between two large firms in the same industry will increase the price of the product. (w16-23)

Why it might Why it may not

● Increase in size firm / reduction in competition (1) the firms ● The firm may experience economies of scale (1) example (1)
may be able to raise price as consumers may have no alternative lowering average cost of production (1) example (1) and lowers
/ dominate the market (1). The firm may become a monopoly (1) prices without affecting profits (1).
becoming a price maker (1). ● The firm may still face considerable competition in the industry
● Firm becomes too large (1) may experience diseconomies of (1) other mergers may have taken place/may still be a high
scale (1) example (1) increases average cost of production (1) number of firms in the industry (1).
and passes on higher costs in higher prices (1). ● The firm may not be seeking to maximise profits (1) may be
● Firms may produce higher quality products (1) as a result of trying to increase the share of the market (1) may do this by
increased spending on research and development/new keeping price relatively low (1).
technology (1) so demand for the products may be higher (1). ● Government may intervene (1) and limit price increases (1).

● Discuss the advantages and disadvantages of small firms. (w16-23)

Advantages Disadvantages

● Able to provide a personal / specialised service (1) meet ● May be too small to take advantage of economies of scale (1)
individual requirements / produce unique goods (1). example (1) as a result prices are higher than larger firms (1)
● May be quick to respond to changes in consumer demand (1) as cannot compete on prices / profit margins are lower (1).
owner can make decisions without consulting anyone (1) has ● May have some difficulty raising finance (1) may not be able to
greater flexibility than bigger firms (1). sell shares (1) banks may be reluctant to lend to them (1).
● More personal contact with staff (1) staff more motivated (1) ● Some small businesses may be sole proprietors and so may have
higher productivity (1). unlimited liability (1) may risk losing personal wealth (1).
● Easy to set up (1) Able to cater for a small market (1) demand ● May lack a range of ideas (1) which may reduce innovation (1)
for the product may be low (1). may lack variety of goods compared to large firms (1).
● May be able to cater for a local market (1) has greater ● Small firms may not be well-known (1) and so may find it
knowledge of local market (1) low transport costs (1). difficult to attract consumers (1).
● May receive subsidies from the government (1) making it easier ● Small firms may find it difficult to attract specialist staff (1) less
to compete with bigger firms (1). ability to pay high wages (1) less opportunities for promotion
(1).
● Discuss whether small car manufacturing firms can compete with large car manufacturing firms.

Why they might Why they might not

● Small firms can specialise in luxury models (1) cater for a small ● Average costs may be higher (1) as large firms may experience
market (1). May provide specialist parts for bigger firms (1) economies of scale (1) example (1).
● Small firms can provide a specialised product (1) build cars to ● Large firms may have brand loyalty (1) well known/high
suit individual customer spending on advertising (1) high spending on research and
needs (1). development (1)
● Small firms may be subsidised / have taxes reduced by the ● Large firms may force small firms out of the market (1) by
government (1) reduce costs lowering prices (1)
of production (1).
● Large firms may experience diseconomies of scale (1) example
(1) giving small firms a cost advantage (1).
● May experience external economies of scale (1) example (1).

● Analyse how a fall in a firm’s revenue may influence its spending on capital goods.

● A fall in revenue may reduce a firm’s profit (1).

● Lower profits will reduce the funds (1) a firm has to reinvest / spend on capital goods (1).
● Lower profit will reduce the incentive to spend on capital goods (1) the expected return will be lower (1).
● Lower revenue / profit may make it more difficult for a firm to borrow (1) sell shares (1) to finance spending on capital goods (1).
● Lower revenue may make a firm realise it needs to cut costs of production (1) improve quality of products (1) and this may require the firm
to buy new capital equipment (1).
● If the fall is the result of a strike the firm may seek to replace labour by capital equipment(1).

● Analyse two internal diseconomies of scale that a large firm may experience.

● Difficulties controlling/managing the firm/managerial diseconomies (1) there are more layers of management in a large firm (1) may take
longer to make decisions (1).
● Communication problems (1) there are more layers of communication/communication may be indirect (1) messages may be
misinterpreted/take time to reach recipients (1).
● Labour diseconomies (1) Workers may feel less appreciated/have low morale (1) so may become demotivated (1) which could reduce labour
productivity/efficiency (1).
● Poor industrial relations (1) industrial action e.g. strikes may occur (1) due to the time it takes to address workers’ grievances (1) more
people to argue with (1).
● Discuss whether consumers benefit from horizontal mergers.
Why it might Why it might not

● They may enable the firms to take greater advantage of ● They may result in the firms experiencing diseconomies of scale
economies of scale (1) example (1) this will reduce average cost (1) example (1) this will increase average cost of production (1)
of production (1) this may lower prices to consumers (1). this may raise prices to consumers (1).
● They may enable the firms to earn more profit (1) which they ● The firms may gain greater market share (1) move it closer to
can spend on research and development (1) increasing monopoly (1) this may result in higher prices (1).
innovation (1) raising the quality of the product (1).

● Analyse how consumers may suffer as a result of a fall in the profits firms earn.

● Some firms may decide to stop production (1) this may reduce competition (1) raise price (1) lower quality (1) reduce choice (1).
● Some firms may reduce output (1) may lower availability of products (1).
● Firms will have less funds available to put back into the firm/invest (1) spend less on research and development (1) so the quality of the
product may not improve (1).
● Firms may try to cut costs of production (1) may use lower quality raw materials (1) reduce quality of product produced (1).

● Discuss whether a decrease in wage rates and an increase in working hours will always reduce the supply of workers to a firm.

Why it might Why it might not

● Wage rates are a key influence on the supply of workers (1) a ● Wage rates and working hours may not be better elsewhere (1)
decrease in wages would reduce the financial return from there may be a lack of job vacancies (1) during an economic
working (1) workers may decide to switch to another firm (1) or downturn/recession/period of high unemployment (1). Earnings
to another occupation (1). may still be high despite a fall in wage rates (1) if e.g.
● Longer working hours would reduce leisure time (1) this may bonuses/overtime payments increase (1).
make the job less attractive (1). ● Workers take into account job satisfaction (1) may stay in the
job if they enjoy it (1). Workers may stay in the job if working
conditions are good, there are long holidays, good promotion
chances, good pensions and good fringe benefits (up to 2).

● Analyse why price can be lower in a monopoly market than in perfect competition.

● It can be lower if the monopoly enjoys economies of scale/perfect competition unable to enjoy economies of scale (1) examples (2) if
possible to enjoy economies of scale would lower average costs (1).
● It can be lower if the monopoly is subsidised (1) e.g. state owned enterprises (1)
● It can be lower if the monopoly avoids wasteful duplication/perfect competition may result in wasteful duplication (1) e.g. provision of water
 pipes (1).
● It can be lower if a monopoly keeps price low as a barrier to entry (1) making it difficult for new firms with high average costs (1) to enter
the market (1).
● A monopoly is a price maker/can influence price (1) a perfectly competitive firm is a price taker/unable to influence price (1).
● A state monopoly may not be trying to maximise profit (1) may be trying to promote economic welfare (1) keep prices low to make the
product affordable (1)

● Analyse why workers with the same skills may be paid different wage rates.

● Some workers may have stronger bargaining power (1) because they are in trade unions/ in stronger trade unions (1).
● Some workers may be more willing to accept lower paid jobs (1) because they e.g. regard job security to be more important (1).
● The demand for workers may be different in different countries/areas/industries (1) the demand for labour may be different in the different
industries/countries (1).
● The supply of workers may be different in different countries/areas (1) the wage rate will tend to be higher where supply is lower (1).
● Workers may be in the public or the private sector (1). In some countries, the public sector is better paid (1).
● Workers may have more experience (1) may have more responsibility (1).
● A group of workers may be discriminated (1) example of such a group (1).
● Some workers may not be aware similarly skilled workers are being paid more (1) and so may remain in a lower paid job (1).
● Overtime may be paid at a higher rate (1).

● Analyse what determines in which countries a multinational company produces.

● Size of market (1) if demand for the product/s produced is high in the country (1) higher revenue may be earned (1).
● Costs of production (1) e.g. low wages/low raw material costs may attract multinational companies (MNCs) (1).
● Availability of raw materials (1) certain raw materials e.g. copper may be found in a small number of countries (1).
● Trade protection (1) MNCs may set up in a country to get round tariffs (1).
● Government subsidies (1) financial help may be given to companies setting up in some countries (1).
● Fewer government regulations (1) MNCs may set up in countries with fewer rules and laws (1).
● Skills of workers (1) highly skilled workers will produce products of a good quality (1).

● Analyse why the pattern of employment in a country may change over time.

● Changes in the pattern of demand (1) income levels may change (1) tastes may alter (1).
● Changes in government policy measures (1) e.g. the government may subsidise certain industries encouraging them to expand (1).
● Decrease in the role of the government in the economy (1) reducing public sector employment (1).
● Emergence of rival industries in other countries (1) leading to some industries declining (1).
● Advances in technology (1) creating new jobs (1).
● Changes in education (1) creating new skills/influencing proportion of younger workers(1).
 ● Changes in social attitudes (1) resulting in more women in the labour force (1).
● Rise in retirement age (1) resulting in more older workers (1).
● Firms/workers wanting more flexibility (1) resulting in more part-time jobs (1).
● Change in laws/rise in relative income in the country (1) attracting more migrant workers(1).
● Improvement in facilities/change in social attitudes (1) enabling more people with disabilities to work (1).
● Changes in business opportunities (1) influencing the number of people self-employed(1).
● Change in laws/minimum wages (1) influencing the proportion employed in organised and unorganised sectors of the labour market (1).
● As countries become more developed (1) employment in the primary sector/agriculture tends to decline (1) employment in the secondary
sector/manufacturing at first increases and then tends to decline (1) employment in the tertiary sector/services increases (1).

● Analyse the advantages of vertical integration.

● 1 mark for a definition of vertical integration/for a distinction between backwards integration and forwards integration.
● Up to 2 marks: ensures supply of raw materials at a reasonable price/reduces the chain of production “cuts out the middleman” (1) as the
firm can directly provide raw materials for manufacture (1).
● Up to 2 marks: may restrict access of competitors to raw materials (1) which may make their prices higher or restrict their output (1).
● Up to 2 marks: ensures outlets for products (1), which ensures products get to market (1).
● Up to 2 marks: ensures products are well displayed and promoted (1) which can increase demand (1).
● Up to 2 marks: may enable economies of scale to be gained (1), relevant example, e.g. financial economies.

● Discuss what impact a rise in output is likely to have on a farmer’s profit.

Increase Decrease

● Up to 2 marks: if demand has increased at the same time (1), ● Up to 2 marks: there may be no demand for the extra output (1)
revenue may rise (1). and so revenue may not change (1).
● Up to 2 marks: if price has been lowered to sell more (1), ● Up to 2 marks: if price has been lowered and demand is inelastic
revenue will rise if demand is elastic (1). (1), revenue will fall (1).
● Up to 2 marks: higher output may reduce average costs (1) as ● Up to 2 marks: higher output may increase average costs (1),
greater advantage may be taken of economies of scale (1). diseconomies of scale may be experienced (1).
● 1 mark for profit will rise if revenue increases by more than ● 1 mark for profit may fall if costs rise by more than revenue.
costs.

● Analyse how an increase in the size of farms may affect the cost of producing food.

● larger farms may produce higher output (1) this will increase total cost (1)
• larger farms may be able to take advantage of economies of scale (1) examples of
economies of scale available to farmers e.g. buying (purchasing seed in bulk), technical (using e.g. combine harvesters), managerial
 (specialist workers e.g. shepherds) up to (2) will lower average costs (1)
• larger farms may experience diseconomies of scale (1) examples e.g. worse labour relations (1) will increase average costs (1)
• larger farms are likely to have higher fixed and variable costs (1) but their average fixed costs are likely to be lower (1) as these costs will
be spread over a higher output (1) their average variable costs may be lower due to economies of scale/or higher due to diseconomies of
scale (1)

● Analyse what effect an increase in output will have on fixed, variable and average costs.

● fixed costs will remain unchanged (1) these costs do not change with output (in the short run) (1) example of a fixed cost (1) costs which are
still present when output is zero (1) up to 2 marks
• variable costs will rise (1) vary with output (1) example of a short run variable cost (1) all costs are variable in the long run (1) up to 2
marks
• effect on average cost is uncertain (1) average cost may fall if economies of scale are experienced (1) average cost may rise if diseconomies
of scale are experienced (1) up to 2 marks

● Discuss whether a rise in the wages paid by an industry will encourage more people to work in that industry.

● higher wages enable workers to enjoy more goods and services ● wages may still be below those in other industries (1)
(1) increase living standards (1) • earnings may be higher in other industries (1) because of, e.g.
• higher wages enable people to borrow more (1) banks are more higher bonuses or
likely to lend to high earners (1) overtime payments (1)
• higher wages will enable workers to save more (1) increase • workers may not be aware of the wage rise (1)
ability to, e.g. finance children’s education/provide for • workers may lack the appropriate skills/qualifications (1)
retirement (1) • workers take into account other factors/non-pecuniary factors
• higher wages may motivate some workers to work in the (1)
industry/wages are a key influence (1) increase workers’ self • may not work in that industry in that industry if, e.g. working
esteem (1) hours are longer, holidays
• workers will be encouraged to switch from other industries (1) are shorter, worse working conditions, less chance of promotion,
to undertake training to work in the industry (1) to gain the lower pensions, fewer fringe benefits, less job security, less job
necessary qualifications to work in the industry (1) satisfaction, industry is based some distance away (maximum of
3 marks for reasons identified).

● Analyse why engaging in division of labour may increase a firm’s costs of production.

● division of labour involves workers specialising in particular tasks (1)

• workers may become bored (1) they may make mistakes (1) products may have to be
 rejected (1) productivity may fall (1)
• there may be a high turnover of workers (1) this will increase the cost of hiring
workers (1)
• workers may not be employed on tasks they are best at (1) this will mean productivity will
be below potential (1)
• if key workers are sick or leave (1) it may be difficult to cover for their absence (1) this
can disrupt the production process (1)
• more specialised workers may demand higher wages (1) increasing labour costs (1)

● Discuss whether coal miners are likely to be paid more than car assembly workers.

● demand for the labour of coal miners might be higher (1) ● some coal miners may be in less promoted posts than some car
because demand for coal may be increasing whilst demand for workers (1)
cars may be falling (1) ● • it might be easier to substitute workers with capital in the coal
● • the supply of coal miners may be lower (1) due the industry (1) making
skills/qualifications needed (1) and the greater physical ● demand for labour more wage elastic in the coal industry (1)
risks/dangers involved (1) and non-wage benefits enjoyed by car ● • the average age of coal miners may be lower than the average
workers being higher (1) of car workers (1) making
● • coal miners may have more bargaining power than car workers ● the workers less experienced (1)
(1) this may be because e.g. a higher proportion of coal miners ● • the coal industry may be declining whilst the car industry may
belong to a union (1) be increasing (1) this may
● • coal mining may provide essential energy for a country and be ● alter relative demand (1)
subsidised by the government (1) lower costs will enable firms ● • car workers may be more skilled (1) these skills may be in
to pay coal miners more (1) higher demand (1)

● Discuss whether a company will have to raise wage rates to attract more workers.

● • wages are a key influence on people’s choice of where to work ● unemployment may be high (1) so the offer of a job may be
(1) sufficient to attract workers (1)
● • there may be a shortage of workers (1) ● the company may already be paying more than other companies
● • companies compete for workers (1) (1) so again just the offer of jobs may be sufficient (1)
● • to attract workers from other companies, wages may have to be ● the company can offer non-wage (non-pecuniary) benefits/fringe
raised (1) benefits (1) e.g. better promotion chances, longer holidays, good
● • higher wages could attract workers from a long distance away pensions, job security (up to 2 marks)
 who otherwise would not
● be able to afford the transport costs (1)

● Discuss whether the social costs of operating power stations are likely to be greater than the social benefits.

● private costs are costs to producers/consumers (1) examples: ● private benefits are benefits to producers/consumers (1)
labour costs, rent, examples: revenue, satisfaction gained from consuming the fuel
● insurance (up to 2) generated, reduction in risk of power outages (up to 2)
● • external costs are harmful effects on third parties/social costs ● • external benefits are beneficial effects on third parties/social
minus private costs (1) benefits minus private benefits (1) examples: rise in
● examples: air pollution, noise pollution, risk of accidents, fall in employment in the area, improved transport links in the area (up
price of nearby houses (up to 2) to 2)

● may be influenced by whether the power stations are run by the state or the private sector (1) state sector may be more inclined to base
decisions on social costs and benefits (1)
● • may be influenced by the government policy measures (1) designed to reduce market failure (1) external costs may be minimised by e.g.
taxes, laws (1)
● • may be influenced by the age of the equipment used (1) old equipment may be more likely to cause external costs (1)
● • private costs are likely to be very high for a power station (1) because of the large and expensive capital equipment involved (1)

● Discuss whether workers benefit from specialising.

● • their specialism may be in high demand (1) leading to good ● demand for specialism may decrease (1) leading to
employment opportunities (1) high wages (1) unemployment (1) may be difficult to get another job (1)
• specialisation allows workers to develop their skills (1) specialists have low occupational mobility (1)
increasing their productivity/efficiency (1) which enables ● • time has to be spent acquiring specialist skills (opportunity
employers to pay them more (1) for the value of their extra cost) (1) this time could have been spent earning money (1)
output (1) ● • doing the same task may be boring (1) reducing the quality of
• enable workers to concentrate on areas they most enjoy (1) e.g. life (1)
history lecturers specialising in particular periods of history (1) ● • alienation reduces productivity (1) reducing the amount firms
• specialised jobs may be less demanding (1) may need less are able to pay workers (1)
training (1) ● • may not find out what other talents they have (1)
● • specialist tasks can depend heavily on other workers (1) if
 those workers perform badly
● then productivity falls (1) and wages may fall (1)

● Analyse three advantages of small firms.

● flexible (1) can adjust quickly to changes in market conditions as fewer people to consult (1)
● • better communication with workforce (1) because of simple structure of firm (1)
● • can provide a more personalised service (1) more contact with consumers so can meet
● specific needs (1)
● • can specialise in niche markets (1) demand for particular products/types of products may
● be low and a large firm may not cater for such a small market (1)
● • may have low transport costs (1) located close to customers (1)
● • may receive government subsidies (1) to encourage new firms/because they generate
● jobs (1)
● • may be charged a lower rate of tax (e.g. corporation tax) (1) reducing the firm’s costs (1)
● • easy to set up (1) initially not much capital may be involved in the form of e.g. factory
● buildings (1)
● • less likelihood of trade unions (1) wage costs will be lower (1)

Section 5: Role of government in an economy

● Discuss whether health care should be provided by the public sector or private sector.
Public Sector Private Sector

● If left to market forces it will be under-consumed (1) people do ● The private sector will have a profit motive (1) to produce what
not appreciate the full benefits to themselves of healthcare (1). consumers want/to be more responsive to changes in consumer
● Healthcare provides significant external benefits (1) a healthy demand (1).
labour force (1) will be more productive (1). ● The private sector will have competition (1) an incentive to keep
● Healthcare is a basic service (1) which the poor may not be able costs low (1) improve quality (1) cut out unnecessary waste (1).
to afford (1). ● Some forms of medical treatment are cosmetic (1) more of a
● Consumers may not be adequately informed about the cost of luxury/not a necessity (1).
healthcare (1) may be charged high prices by the private sector ● Government expenditure on health care involves an opportunity
(1). cost (1) tax revenue could be used for other purposes (1).
● Profit motive of private sector (1) keeps prices higher (1) ● The public sector may be too bureaucratic / inefficient (1)
● Discuss whether a government should increase tax rates. (w16-22)
Why it should Why it shouldn’t

● Higher tax rates may increase tax revenue (1) this would enable ● Higher direct taxes may act as a disincentive to work (1)
the government to spend more on, e.g. education and health care reducing employment (1).
(1). ● Higher direct taxes may act as a disincentive to enterprise (1)
● Higher tax rates may reduce demand (1) this could lower reducing output (1).
demand-pull inflation (1). ● Higher taxes may encourage tax evasion (1) and this may cause
● Higher tariffs could reduce imports (1) improve the current tax revenue to fall (1). Higher corporation/indirect tax rates
account position (1) demand for imports may also fall when increase firms’ costs of production (1) causing cost-push
income tax rates are raised (1). inflation (1).
● Higher tax rates on, e.g. cigarettes and alcohol (1) could ● Higher tax rates may reduce total demand (1) causing
improve people’s health (1). Higher taxes on products that unemployment (1).
create external costs/demerit goods (1) may result in a better ● Higher income tax rates may cause workers to press for wage
allocation of resources (1). rises (1) this may increase labour costs (1) or may provoke
● Higher taxes on monopolies (1) may encourage competition. (1). industrial action (1) which can disrupt production (1).

● Discuss whether a declining industry should be protected by the government.

Why it should Why it shouldn’t

● Will save jobs / prevent unemployment (1) this can prevent ● An inefficient use of resources (1) involves an opportunity cost
living standards falling (1) prevent government spending on (1) resources would be better devoted to infant industries /
unemployment benefits rising (1) prevent loss of tax revenue (1) expenditure on health and or education (1).
give workers time to find other jobs (1) ● May provoke retaliation (1) other countries may impose trade
● Will stop real GDP / output falling (1) avoid a recession / fall in restrictions (1) this may raise the cost of other firms/make it
economic growth (1). difficult for them to sell abroad (1).
● Will assist exports / reduce imports (1) positive effect on ● Industry becomes too dependent on government support (1)
Balance of Payments on current account (1) making it less competitive (1)
● Industry may be a strategic industry (1) such industries are
important for the survival of
the country (1)

● Analyse the effect of a decrease in resources on government economic aims.

● Fewer resources will make it more difficult to achieve economic growth (1) there will be fewer factors of production to produce goods and
 services (1) output may fall or rise more slowly (1).
● Fewer resources may increase costs of production (1) supply may fall by more than demand/there may be a shortage of e.g. raw materials (1)
cost-push inflation may occur (1).
● Natural disasters (1) can lead to cost push inflation (1) loss of employment (1) government expenditure exceeding government income (1)
● The current account may move into a deficit/larger deficit (1) as exports may decline (1) while e.g. food may have to be imported (1).
● Destruction of factories may reduce unemployment opportunities (1) which may increase unemployment (1) but more workers may be
needed to e.g. rebuild factories (1).

● Analyse how a fall in unemployment may increase inflation.

● A fall in unemployment may increase incomes (1) this may increase consumer spending (1) increasing total (aggregate) demand (1) causing
demand-pull inflation (1).
● A fall in unemployment may result in a shortage of workers (1) this may raise wages (1) increasing firms’ costs of production (1) causing
cost-push inflation (1).

● Discuss whether a government should spend more than it raises in taxation

Why it should Why it should not

● If it wants to increase employment (1) increase economic ● If it wants to reduce inflation (1) reduce a current account deficit
growth (1) government spending more than it raises in (1) the government raising more in taxation than it is
taxation/operating a budget deficit will raise total demand (1) spending/operating a budget surplus will lower total demand (1)
higher demand may encourage an increase in output (1) higher ● lower demand may reduce demand-pull inflation (1) lower
output may increase economic growth (1) to produce more demand may include lower demand for imports (1) lower
goods and services, firms may employ more workers (1). demand may encourage domestic firms to export more(1).
● In the long run a government is likely to want to match
government spending and taxation (1).
● Interest which must be paid on a budget deficit (1) is a long term
burden / a burden for future generations (1) may lead to higher
taxes in future (1)

● Discuss whether a government should regulate supermarket firms.

It should It shouldn’t

● to prevent market failure (1); ● complying with regulations may increase supermarket costs (1)
● a supermarket may have monopoly power (1) which may drive reduce their output (1) lower employment (1);
 up prices (1) reduce quality (1) reduce choice (1) make it ● may discourage MNCs setting up in the country (1) may
difficult for small shops to enter the market/survive encourage firms to move overseas (1);
(1); ● may lead to inefficiency (1) may reduce responsiveness to
● supermarkets may not take into account external costs and changes in market conditions (1) may reduce innovation (1) may
external benefits (1) may e.g. disturb people living nearby by reduce choice e.g. to shop late at night (1) may be government
staying open for long hours (1); failure (1).
● supermarkets may sell harmful products (1) to people who do
not realise their effects e.g. cigarettes;
● supermarkets may exploit workers (1) e.g. making them work
long hours (1) working in an unsafe environment (1).

● Discuss whether the building of houses should be subsidised.

Should Should not

● subsidising houses will provide an incentive to build houses (1) ● would involve an opportunity cost (1) government spending
increase the supply of houses (1) reduce the price of houses (1) could be used on other areas e.g. education/health care (1)
this may make it easier for the poor to buy houses (1) increase • may generate external costs (1) for example, pollution and
the quality of the lives of the poor (1) destruction of the natural environment (1)
• subsidising houses will increase economic activity (1) to • there may be no demand for extra houses (1) in this case there
produce more houses would require more labour (1) this would will be an oversupply of houses/inefficient use of resources (1)
reduce unemployment (1) • building firms may become reliant on subsidies (1) and this
• housing is a necessity (1) so building more houses may reduce increase inefficiency (1)
poverty/homelessness (1)

● Discuss whether a reduction in government spending on education will reduce living standards.
Won’t reduce Will Reduce

● instead of spending money on education, the government might ● it may reduce the quality/availability of education (1) this could
spend money on e.g. health care (1) a healthier population can reduce the skills of workers (1) lower their chances of getting a
enjoy life more and live longer (1) a healthier labour force may job (1) getting a well-paid job (1) reduce income (1) reduce
raise productivity (1) increase wages (1) increase the goods and goods and services people can enjoy (1)
services people can buy (1) this could increase the HDI value • it may reduce people’s access to knowledge about good
(1) nutrition/health care (1) this could increase illness (1) lower life
• instead of spending money on education, the government expectancy (1)
might spend money on e.g. infrastructure (1) better • a less skilled labour force (1) may discourage multinational
 infrastructure can reduce firms’ costs of production (1) make companies setting up in the country (1) this could reduce
domestic firms more internationally competitive (1) encourage employment opportunities/reduce wages (1) reduce incomes (1)
firms to expand (1) raise employment (1) increase incomes (1) reduce goods and services people can buy (1)
increase the goods and services people can buy (1) • a reduction in government spending e.g. education may reduce
• a country’s birth rate may be falling (1) so there may be fewer aggregate demand (1) lower aggregate demand may reduce
children in education (1) the amount spent per child may still be output and incomes (1)
rising (1) improving productivity (1) raising wages (1) • it will reduce the country’s HDI value (1) which is an indicator
increasing consumption (1) of living standards
• less may be spent but it might be spent more effectively (1)
this will raise the quality of education (1) raise productivity (1)
raising employment (1) increasing consumption (1)

● Analyse how supply-side policy measures could increase productivity

● improved education/training (1) may raise workers’ skills (1) increase output per worker hour (1)
• privatisation (1) may increase competitive pressure on firms to keep costs low (1) encourage more investment (1) increase output per factor
hour (1)
• reforming trade unions (1) may reduce restrictive practices (1) this may allow firms to use their workers more efficiently (1) increase
output per worker hour (1)
• cutting corporation tax (1) may increase profit (1) increase investment (1) increase output per factor hour (1)
• giving subsidies (1) to encourage firms to invest in advanced technology, engage in research and development and/or train workers (1)

● Discuss whether graduates should pay the full cost of their university education.

● graduates will learn new skills/gain qualifications (1) their ● more educated labour force (1) leading to higher output (1)
employment opportunities are reduced unemployment (1)
likely to increase (1) they are likely to earn a high wage (1) the increased living standards (1) generating external benefits (1)
private benefits of increasing tax revenue in
education are likely to be high (1) the long run (1)
• subsidising graduates involves an opportunity cost (1) • people from poor families may not be able to afford the cost
requiring students to pay the full (1) this could reduce the
cost may enable more to be spent on, e.g. health care (1) number of graduates (1) lowering potential output (1) increasing
government has limited income inequality (1)
finance (1) • there is an argument for the government paying part of the cost
• subsidising graduates may result in a budget deficit (1) or high (1), e.g. based on the
 taxes (1) ability to pay (1)
• charging the full cost may ensure prospective students consider
the opportunity cost to
themselves carefully (1)
• some graduates may come from relatively rich families (1) and
so may not need to be
helped (1)
• some graduates may emigrate (1) and so other countries may
receive the benefit (1)

● Analyse how two supply-side policy measures could improve the performance of an airline industry.
● privatisation (1) may introduce competition (1) increase profit incentive (1) encourage firms to be efficient/reduce costs (1)
● • cut in corporation tax/tax incentives given (1) increase funds available for investment (1) improve technology (1) raise productivity (1)
lower costs of production (1)
● • Improved education and training (1) raise skills of workers (1) increasing productivity (1) lower costs of production (1)
● • cut in income tax (1) increase the motivation of workers (1) raise productivity (1) lower costs of production (1)
● • deregulation (1) removing laws and rules may reduce firms’ costs (1) enabling them to invest more (1)
● • subsidies (1) may encourage firms to invest in advanced technology, engage in research and development and/or train workers (1) lower
costs of production/increase productive capacity (1)

● Analyse how monetary policy could increase the price level.

● a decrease in the rate of interest (1) may increase borrowing (1) reduce saving (1) increase demand (1) cause demand-pull inflation (1)
● • increase money supply (1) raise spending/total demand (1) cause demand-pull/monetary inflation (1)
● • reduce the exchange rate (1) increase price of imported materials (1) reduce pressure on domestic firms to keep costs down (1) cause
cost-push inflation (1)
● • reducing the exchange rate will reduce export prices (1) increase total demand (1) cause demand-pull inflation (1)

● Discuss whether an increase in the rate of a sales tax would benefit an economy

● ● likely to fall more heavily on the poor (1) increase income

● • may provide more government tax revenue (1) enable the inequality (1)
government to spend more (1) e.g. may raise educational ● • increases firms’ costs of production (1) raises price of products
standards (1) (1) causing cost-push
 ● • may discourage consumption of harmful products (1) those ● inflation (1)
that cause external costs (1) may reduce e.g. health care costs ● • may reduce spending (1) reducing output (1) increasing
from smoking (1) unemployment (1)
● • may discourage the purchase of imports (1) improve current ● • may be placed on products that are already under-consumed
account position (1) (1) increase inefficiency (1)
● • could be used to reduce a budget deficit/increase a surplus (1)
● • could be used to reduce (aggregate) demand (1) thus reducing
inflation (1)

● Discuss the effectiveness of possible government policy measures to reduce the growth of population.

● improved/increased education (1) raise the cost of having ● improved/increased education may also lower death rate (1) is
children (1) people in education tend to delay having children more likely to lead to healthier lives e.g. eat more nutritious
(1) more educated women are likely to work and have fewer food (1) have higher incomes and so better living standards (1)
children (1) increase information about contraception (1) lower may also reduce emigration (1) as may be more job
birth rate (1) opportunities (1)
● • improved/increased healthcare (1) lower infant mortality rate ● • improved/increased healthcare is also likely to reduce death
may reduce number of children people have (1) as more rate (1) if death rate falls by more than birth rate, population
expected to survive (1) may continue to increase (1)
● • improved/increased state provision of healthcare and pensions ● • tighter immigration restrictions may make it difficult for firms
(1) reduce need to have children to support adults in old age (1) to obtain skilled labour (1) may increase dependency ratio (1)
● • tighter immigration restrictions (1) may reduce inward may be difficult to stop people entering the country (1)
migration (1) ● • remove state benefits for having children may increase poverty
● • remove state benefits for having children (1) may increase the (1) as poor families may have a large number of children/be less
cost to families of bringing able to afford to raise children (1) this may increase infant
● up children (1) mortality (1) and as a result people may have more children (1)
● • adopt a “one child per family” policy, such as in China (1) ● • adopting a “one child policy” causes problems with population
directly reducing population structure (1) e.g. lack of young people to support the elderly
● growth (1) population (1)

Section 6: Economic indicators

● Analyse how a fall in unemployment can increase tax revenue.
● A fall in unemployment will increase income (1) more people working and people earning higher wages (1) this will increase income tax
 revenue (1).
● Spending will increase (1) more products will be purchased (1) which will increase indirect taxes (1) example (1).
● Higher spending will increase firms’ revenue (1) this may increase firms’ profits (1) which will increase corporation/direct tax revenue (1)

● Analyse how wage increases may cause unemployment.

● Wage rises may increase costs of production (1) if rise more rapidly than productivity (1) higher costs of production may increase prices (1)
higher prices may reduce demand (1) lower demand will reduce firms. revenue/profits (1) firms may reduce output (1) fewer workers will be
needed to make a lower output (1). Higher wages may increase costs of production (1) firms reduce costs by substituting capital for labour
(1).
● Firms may relocate to areas where wages are lower (1) to reduce costs (1). Expect higher skills if pay higher wages (1) so may make some
unskilled workers redundant (1) as return from their labour is not sufficient (1). Higher wages may affect particular industries (1) resulting in
structural unemployment (1).

● Analyse two ways, apart from imposing an indirect tax, a government could discourage smoking.
● Regulation (1) a ban could be imposed on smoking (1) e.g. in public areas or raise age limit (1) this could be backed up by law (1) fines
would be imposed on those who smoke (1).
● Provision of information (1) a health campaign could be undertaken (1) informing people of the harmful effects of smoking (1) may include
pictures of effects of smoking (1) reducing demand for cigarettes/ consumption of cigarettes (1).
● Government subsidy of alternatives/ substitutes (1) e.g. nicotine patches (1) will help reduce consumption (1).
● Quota on imports may be imposed (1) to restrict the supply of cigarettes (1).

● Analyse how an increase in spending on education could increase inflation in the

short run but decrease it in the long run.
● In the short run an increase in spending on education will increase total (aggregate) demand (1) higher total (aggregate) demand may cause
inflation (1) demand-pull inflation (1) if close to or at full capacity (1).
● In the long run an increase in education spending may improve the quality/quantity of education (1) this may increase the skills of workers
(1) this will increase labour productivity (1) output can increase by more than costs (1) this will reduce costs of production (1) reduce
cost-push inflation (1).

● Analyse how the pattern of employment within an economy tends to change as the country develops.
● The number/proportion employed in the primary sector tends to decline (1) productivity rises meaning fewer workers are needed (1).
● The number/proportion employed in the secondary sector tends to rise at first (1) and then falls (1).
 ● The number/proportion employed in the tertiary sector increases (1) most workers in developed countries are employed in tertiary sector (1).
● The number/proportion of skilled workers increases (1) as education levels develop (1).
● The number/proportion of women employed increases (1) as social attitudes change (1).
● The number/proportion of migrant workers may change (1) as income levels rise (1).

● Discuss whether an increase in taxes will reduce inflation.

Why it might Why it might not

● Increases in income tax (1) will reduce disposable income (1) ● Consumers and firms may respond by reducing saving (1) rather
spending may fall (1) lower demand will reduce demand-pull than spending (1).
inflation (1). ● Higher indirect taxes and corporation tax (1) increase costs of
● Increases in corporation tax (1) reduces profits firms can keep production / higher prices (1) may cause cost-push inflation (1).
(1) reduces demand for capital goods/investment (1). ● Higher income tax may encourage workers to press for wage
● Increases in indirect taxes (1) will reduce spending (1) lowering rises (1) increasing costs of production (1) causing cost-push
demand-pull inflation(1) inflation (1).

● Discuss whether an increase in a country's labour force will increase income per head.
Why it might Why it won’t

● A larger labour force may enable greater advantage to be taken ● Population may increase by more than the labour force (1) this
of division of labour/specialisation / economies of scale (1) this will increase the dependency ratio (1).
can reduce average costs of production (1) as workers can ● The labour force may increase but demand for labour may not
concentrate on what they are best at (1) can be trained more (1) so the unemployment rate may increase (1) so income
quickly (1) reduces the amount of capital equipment needed (1) divided by population may fall (1).
lower costs may increase sales at home and abroad (1) ● The quantity of the labour force may increase but the quality of
increasing output and raising incomes (1). the labour force may fall (1) productivity may decline (1)
● A larger labour force may reduce the dependency ratio (1) a reducing output and incomes per head (1).
higher proportion of workers to non-workers will increase ● An increase in the labour force may increase competition in the
income per head (1). labour market (1) lowering wages (1).
● A larger labour force will enable successful firms to expand (1)
this will increase GDP (1).
● Multinational companies may be attracted to set up in the
country by a larger labour force (1) this may result in a rise in
wages (1).
● Discuss whether a country’s economy would be harmed if multinational companies moved out.
Why it might Why it won’t

● Employment may fall (1) and output/income/GDP/economic ● The MNC may have been depleting the country’s resources (1)
growth may decline (1). reducing its ability to grow in the future (1).
● The current account position may worsen (1) as the MNC may ● More domestic firms may set up/expand (1) to meet the demand
have contributed to exports (1). that had previously been supplied by the MNC (1).
● Wages may fall (1) if the MNC was paying above wages paid by ● The MNC have been sending profits home (1) and so tax
domestic employers (1). revenue may not fall significantly (1).
● Government tax revenues may fall (1) reducing its ability to ● The MNC may have been putting pressure on the government to
spend on e.g. education (1). follow policies not in the country’s interest.
● Less variety of products may be available to consumers (1). ● The MNC may have not have created much employment (1)
• Discourage other MNCs setting up (1). keeping top jobs for workers from own country (1).
● MNCs may have been subsidised (1) can use tax revenue for
other purposes (1)

● Analyse what may cause an increase in a country’s labour force.

● Net immigration (1) of people of working-age (1) will increase the supply of potential workers (1).
● A decrease in the number of people of working-age who are economically inactive (1) reduction in those who are
students/retired/homemakers/sick and disabled (1) this may be the result of e.g. a fall in the school leaving age (1) or rise in the retirement
age (1).
● An increase in the size of the population (1) due to a fall in death rate/rise in birth rate/rise in the birth rate some years before (1).
● An increase in the cost of living (1) may force more family members to work/seek work (1).

● Discuss whether an economy will benefit from having a younger labour force.
Why it might Why it might not

● A younger labour force may be more adaptable to new ideas (1) ● A younger labour force may be less experienced (1) not built up
more up to date with advances in technology (1) received up to skills (1) less productive (1).
date education (1). ● A younger labour force may require more training (1) increasing
● A younger labour force may be occupationally mobile (1) more firms’ costs of production (1).
willing and able to switch jobs (1) enabling the economy to ● A younger labour force may be less reliable and patient than the
adjust to changes in demand (1) reducing older population (1) this may reduce demand for some products
structural unemployment (1). (1).
 ● A younger labour force may be more geographically mobile (1)
reducing structural unemployment (1).
● A younger labour force may be physically stronger (1) have less
health problems (1) be more productive/efficient (1) be prepared
to work longer hours (1) increase output/GDP (1).
● A younger labour force may work for lower wages (1) reduce
firms’ costs of production (1).

● Analyse how an increase in investment may affect unemployment.

● It may increase unemployment if workers and capital goods are substitutes (1) machines will replace workers (1).
● Investment is a component of total (aggregate) demand (1) higher investment increases total demand (AD) (1) higher AD can reduce cyclical
unemployment (1).
● It may reduce unemployment if workers and capital goods are complements (1) more workers will be taken on to work with the capital
goods (1).
● Investment can increase labour productivity (1) this can make labour more attractive (1) can make products more internationally competitive
(1) raise total demand further (1) encouraging firms to expand further (1).

● Discuss whether supply-side policy measures will reduce inflation.

Supply-side policy measures include government policy measures designed to increase total (aggregate) supply/quality of resources/quantity of
resources (1). They include government spending on education and training, privatisation, regulation, cuts in direct taxes, cuts in unemployment
benefits and trade union reforms (1).

Why it will Why it won’t

● Supply-side policy measures may reduce costs of production (1) ● Some policy measures e.g. education spending will increase
e.g. cuts in corporation tax will lower costs (1). total (aggregate) demand (1) this may rise by more than total
● They may increase labour productivity (1) e.g. education (1). supply (1) causing demand-pull inflation (1).
Lower costs and higher productivity will increase aggregate ● The policy measures may not work e.g. privatisation may lead to
supply/productive potential (1) higher aggregate private sector monopolies developing (1) these may push up
supply/productive potential may reduce cost-push inflation (1) prices (1).
allow total demand to increase without causing inflation (1). ● Spending on education may not improve labour productivity (1).
● Some supply-side policy measures take time to work e.g.
education spending (1) by that time inflation may not be a
problem or people may have got so used to inflation they act in
a way that causes further inflation (1).
● Analyse how monetary policy can reduce the rate of inflation.
● Deflationary/contractionary monetary policy may be used (1).
● A rise in the rate of interest (1) may reduce consumer expenditure (1) lower investment (1) as borrowing is more expensive (1) saving more
rewarding (1) lower demand (1) reduce demand-pull inflation (1).
● A reduction in the money supply/reduction in the growth of the money supply (1) will reduce demand (1) lower demand-pull inflation (1).
● A rise in the exchange rate (1) will lower import prices and raise export prices (1) reduce
costs of imported raw materials (1) put pressure on domestic firms to lower costs (1) reduce cost-push inflation (1).

● Discuss whether deflation always harms an economy.

It does It doesn’t

● consumers may reduce the amount they spend (1) in expectation ● it will increase purchasing power if incomes do not fall (1);
that prices will be lower in the future (1) this may reduce firms’ ● it may increase the value of savings (1) and lenders may gain if
output (1) lower investment (1) increase the money they are repaid will have a higher value (1);
unemployment (1) lower economic growth (1); ● if it results from advances in technology (1) costs of production
● increases the burden of debt (1) the amount people will have to will fall (1) may make the country’s products more
pay back will have more purchasing power (1). internationally competitive (1) increase exports and reduce
imports (1) improve current account position (1) raise
employment (1) increase output (1).

● Discuss whether a government should aim for an unemployment rate as low as 0.5%.
Why they should Why they shouldn’t

● result in high output/GDP (1) high incomes/high living ● 0.5% is usually regarded as being below full
standards (1); employment/difficult to achieve (1) always likely to be some
● lead to high government tax revenue (1) this could be spent on frictional unemployment (1);
e.g. education/health care (1); ● at 0.5% unemployment, the level of demand is likely to be high
● cause low government spending on unemployment benefits (1) (1) economy operating at full capacity (1) may cause inflation
reduce opportunity cost/allow tax revenue to be spent on other (1) demand-pull inflation (1) may also drive up
items (1); wages due to a shortage of labour (1) cost-push inflation (1);
● full employment is one of the main aims of government policies ● higher level of demand may increase demand for imports (1)
(1). causing a current account deficit (1).
● Discuss whether a rise in incomes in a country will always increase tax revenue.
Will Won’t

● Up to 2 marks: higher incomes can increase income tax revenue ● Up to 2 marks: spending may not rise (1) if the additional
(1), how much tax revenue rises will be influenced by whether it income is saved (1).
is progressive or regressive (1). ● Up to 2 marks: profits may not increase (1) if the extra spending
● Up to 2 marks: higher incomes can increase spending (1) and so goes on imports/costs rise as output increases/firms experience
increase sales tax revenue (1). diseconomies of scale (1).
● Up to 2 marks: higher incomes can increase firms’ profits (1) ● Up to 2 marks: tax rates/coverage may be cut (1) and so even
and so increase corporation tax revenue (1). with higher incomes tax revenue does not increase (1).
● Up to 2 marks: higher incomes can increase spending on imports ● Up to 2 marks: tax avoidance and evasion may increase (1) and
(1) and so revenue from tariffs increases (1). so for every ‘dollar’ earned/spent less revenue is collected (1).

● Discuss whether a government should increase the tax on cigarettes.

● Up to 2 marks: the tax may increase government revenue (1), ● Up to 2 marks: demand may be inelastic (1), and so a rise in
this would enable the government to spend more on (e.g.) price will not have much impact on consumption (1).
education (1). ● Up to 3 marks: cigarettes may represent a higher proportion of
● Up to 6 marks: put up price (1) to discourage smoking (1), spending for people with lower incomes (1) so tax may be
smoking damages people’s health (1) this is both for smokers regressive (1) and so fall more heavily on the poor (1).
and non-smokers/passive smoking (1) and so increases spending ● Up to 2 marks: may contribute to inflation (1) as one of the
on health care (1) and reduces labour productivity (1) and products bought by consumers will rise in price (1).
reduces life expectancy (1). ● Up to 3 marks: may encourage smuggling of cigarettes (1) if
● Up to 3 marks: cigarettes may be imported (1), imports of cigarettes are cheaper/less heavily taxed abroad (1) and reduce
cigarettes count in trade in goods component (1) and may tax revenue (1).
contribute to a current account deficit (1). ● Up to 4 marks: may harm domestic cigarette producers (1), if
● Up to 2 marks: smoking causes external costs (1), e.g. air consumers switch from domestic to foreign cigarettes (1), may
pollution (1). be an adverse effect on domestic employment (1), may also
harm the balance of payments (1).

● Discuss whether a government should increase or decrease taxes to reduce inflation.

Increase Decrease
 ● Up to 7 marks: higher (income) taxes will reduce the amount ● Up to 5 marks: will increase disposable income/amount of
people have to spend (1), and this is likely to lead to lower money people have to spend from working (1) and the profit
spending (1). Higher indirect taxes may also reduce spending firms can keep (1). This may act as an incentive to effort (1),
(1). Higher taxes on firms’ profits may reduce firms’ investment which may increase output (1) and so reduce cost-push inflation
(1) and this will lower the demand for capital goods (1). Lower (1).
overall spending will reduce total (aggregate) demand (1). With ● Up to 3 marks: lower taxes on firms will reduce their costs of
less pressure from demand, prices may rise more slowly/fall (1). production (1), this can increase total (aggregate) supply (1) and
This may reduce demand-pull inflation (1). so reduce cost-push inflation (1).
● Up to 4 marks: lower inflation may make a country’s products ● Up to 6 marks: may encourage MNCs to set up in the country
more internationally competitive (1) and so may raise (1) as their profits may rise (1) due to higher consumer spending
employment (1) and economic growth (1) and improve the (1) and possibly lower corporate tax (1). MNCs may use more
balance of payments (1). advanced technology (1) and this can reduce cost-push inflation
● Up to 5 marks: may be adverse side effects of increasing taxes – (1).
lower demand may cause unemployment (1), lower demand ● Up to 3 marks: lower income tax may reduce wage claims (1);
may reduce economic growth (1), higher taxes may increase this will reduce the increase in firms’ costs of production (1) and
firms’ costs (1), may encourage workers to ask for pay rises (1) so lower cost-push inflation (1).
and so may cause cost-push inflation (1). ● Up to 2 marks: lower taxes on firms’ profits, which increase
investment, will in the long run increase productive capacity (1),
which should lower cost-push inflation (1).
● Up to 4 marks: may be adverse side effects of decreasing taxes –
higher demand (1) may cause demand-pull inflation (1), may
increase imports (1) and cause a current account deficit (1).
● Up to 2 marks for lower indirect taxes (e.g. sales tax) will
reduce prices (1) in the short run (1).

● Analyse two reasons why unemployment may increase.

● a fall in total (aggregate demand) (1) will cause firms to reduce their output (1) lower their need for labour (1) increase cyclical
unemployment (1)
• a reduction in the skills/mobility of workers (1) may result in firms being unable or unwilling to employ workers (1) leading to structural
unemployment (1)
• a rise in unemployment benefits (1) may lead to workers taking longer moving between jobs/less willing to search for work (1) causing an
increase in frictional/voluntary unemployment (1)
• an increase in a country’s exchange rate (1) will make exports more expensive and imports cheaper (1) this will reduce international
competitiveness (1) reduce demand for labour in affected industries (1) cause international/structural unemployment (1)
• a rise in wages above the equilibrium level (1) this may be the result of industrial action/ imposition of a national minimum wage (1)
workers may be replaced by machines (1) firms may reduce the size of their labour forces in order to cut costs of production (1)
 • advances in technology (1) may make certain skills redundant (1) leading to structural unemployment (1)
● Analyse why a fall in the inflation rate may reduce a country’s unemployment rate.
● a fall in the inflation rate may make the country’s products more internationally competitive (1)
• purchasing power will be higher than in the case of a higher inflation rate (1)
• demand for the country’s products may increase (1)
• to produce more, a higher number of workers will be employed (1)
• cyclical unemployment may fall (1)
• a lower inflation rate may reduce the growth in wage rates (1) this may encourage firms to take on more workers (1)
• a lower inflation rate may attract multinational companies to set up in the country (1) this may create new jobs (1)
• a lower inflation rate may enable a country to have a lower interest rate (1) this would reduce the cost of borrowing/may encourage
investment/encourage more total demand (1)

● Discuss whether a decrease in government spending will reduce inflation.

● lower government spending is contractionary fiscal policy (1) it ● lower government spending on education and health care (1)
will reduce demand for may reduce the quality of
goods and services (aggregate demand) (1) the labour force (1) this could lower productivity (1) raise wage
• lower demand may discourage firms from raising prices (1) costs (1) cause cost-push
reduce demand-pull inflation inflation (1)
(1) • lower government spending on infrastructure (1) will increase
• lower government spending may increase unemployment (1) firms’ transport costs (1)
this could put downward causing cost-push inflation (1)
pressure on wages (1) lower cost-push inflation (1) • lower government spending may be offset by other causes of
inflation (1), e.g. a lower
exchange rate/consumer boom (1)
• reduction in government subsidies to firms (1) will raise costs
of production (1) causing
cost-push inflation (1)
• inflation may be caused by other factors (1) identification of
another cause (1) policy
measure to correct other cause (1) explanation of how policy
measure would work (1)

● Analyse why people may migrate to a country with a high unemployment rate.
 ● the unemployment rate may still be below that in the countries they are migrating from (1)
• the unemployment rate may be falling whilst it may be rising in their own countries (1)
• there may still be job vacancies in areas that they have skills in (1)
• people may move to set up a firm (1) as wage cost may be lower (1)
• living conditions (1), e.g. health care/education may be better in the country (1)
• people may be escaping persecution/wars/famines or moving due to family ties (1)
• people may not be aware of the high unemployment rate (1)
• there may be fewer restrictions on migrating to the country than to other countries (1)
• unemployment benefits may be higher in the country (1)
• the people may be rich and not have to work (1) and may be attracted by lower prices in
the country (1)

● Analyse how a subsidy to farmers may affect the market for food
● a subsidy is a payment/government help to encourage production (1)
• a subsidy is similar to a reduction in costs of production/makes production less
expensive (1)
• it allows investment in capital (1)
• it will cause an increase in supply (1)
• supplying more food will reduce price (1)
• a lower price will cause demand to rise/an extension in demand (1)

● Discuss whether a rise in unemployment will cause a fall in inflation.

● ● demand may still rise despite an increase in unemployment (1)

• a rise in unemployment will reduce incomes (1) with lower government spending or exports may be increasing (1)
incomes, people will spend less (1) lower demand will reduce • a rise in unemployment reduces national output (AS) (1)
demand-pull inflation (1) increasing inflationary pressures (1)
• with a rise in unemployment workers are easily replaced/there • other costs of production could be rising (1) for instance, raw
is now a large pool of workers (1) the increased supply of labour material costs (1) for instance, a fall in the exchange rate may
(1) will force down wage rates (1) increase the price of imported raw materials (1)
• a rise in unemployment may discourage workers from asking • a rise in unemployment could mean fewer skilled workers (1)
for wage rises (1) weaken the power of trade unions (1) lower this lowers productivity (1) causing average costs to rise for
wage rises will mean that firms’ costs of production will firms (1)
increase more slowly (1) this may reduce cost-push inflation (1) • trade unions may still press for wage rises despite an increase
 in unemployment (1)
• inflation can lead to people expecting prices to rise faster in the
future (1) this can lead
them to act in ways that cause inflation (1) they may buy more
products now (1) ask for
wage rises (1)
• people may receive an income in unemployment benefits (1)
and still spend the same
amount as before

● Analyse the possible effects of an increase in bank lending on economic growth.

● increase in bank lending may increase spending by households (1) the higher demand may encourage firms to produce more (1) economic
growth arises when output increases (1)
● • more loans may be given to firms e.g. to start new businesses (1) the bank loans may be used to finance expenditure on capital goods/more
resources(1)
● • more investment will raise productive capacity/potential economic growth (1) this will increase total output/GDP
● • more lending can lead to inflation (1) this could damage economic growth (1)
● • consumers could borrow to buy more imports (1) reducing economic growth (1)

● Analyse the effect of a rise in unemployment on living standards in a country.

● higher unemployment reduces the income of the unemployed (1) the unemployed will not be able to buy so many goods and services (1)
● • unemployment involves an opportunity cost (1) output will be lower than possible (1)
● • the unemployed may experience health care problems (1) this would put a burden on
● health services (1)
● • higher unemployment may increase crime (1) crime and the fear of crime lowers the
● quality of people’s lives more resources e.g. prisons, have to be devoted to tackling
● crime which involves an opportunity cost (1)
● • the unemployed may not be able to afford to educate their children (1) less educated
● people tend to enjoy a lower quality of life (1)
● • spending on unemployment benefits (1) means less money for e.g. hospitals (1)

● Discuss whether unemployment always harms an economy.

 ● lower output/incomes (1) lower living standards (1) increased ● unemployment may be low (1) frictional unemployment is
poverty (1) always present (1)
● • lower demand (1) from consumers who are now unemployed ● • duration of unemployment may only be short term (1)
(1) ● • some unemployment provides flexibility (1) enables firms to
● • loss of tax revenue (1) lower expenditure on e.g. transport expand (1)
infrastructure (1) ● • may put downward pressure on inflation (1) lower demand (1)
● • increased government spending on benefits (1) involves an workers more reluctant to
opportunity cost (1) ● ask for wage rises (1)
● • not using factors of production efficiently (1) waste of
resources/opportunity cost (1)
● output below potential output (1)

Section 7: Developed and Developing Economies

● Discuss whether Lesotho would benefit from more of its people working abroad.

● wages are higher abroad (1) they may send more income home ● more skilled workers may emigrate (1) this will reduce
(1) Lesotho residents will be able to spend more on goods and productivity (1) raise firms’ costs (1) reduce international
services (1) may help to reduce poverty in the country (1) competitiveness (1) lower output/economic growth (1) cause
• it will make a positive contribution to the current unemployment (1)
account/reduce the country’s current account deficit (1) • fewer people working in Lesotho would reduce
• it may reduce unemployment in the short run (1) if emigrants output/spending (1) reduce tax revenues (1) less available for
had been unemployed before leaving (1) reduce costs of government spending on e.g. hospitals (1)
unemployment benefits (1) • the absence of skilled workers may discourage multinational
• more workers may later return to the country bringing more companies setting up in the country (1) this would reduce
skills with them (1) thus reducing training costs for firms in potential output (1)
Lesotho (1) bring more ideas about production methods and • the absence of skilled workers may make it difficult to open
products (1) this could increase productivity (1) new mines/increase the size of the tourist industry (1)
• more workers may leave dependants behind (1) this will
increase the dependency ratio (1) tax revenue will fall (1)
government spending on support of dependants may rise (1) this
will involve an opportunity cost (1)
• workers may spend (all) of their income whilst abroad (1)
• Lesotho may become too dependant on other countries for
employment (1)
● Discuss whether a country will benefit from the emigration of some of its people.
Will Will not

● emigration of dependents (1) would reduce the burden on the ● skilled workers may emigrate (1) this will reduce the quality of
working population (1) reduce government spending on the labour force (1) lowering productivity (1) discouraging
benefits/pensions (1) which means government spending on multinational companies setting up in the country (1)
other items can increase (1) ● if people of working age emigrate (1) the dependency ratio will
● if there is overpopulation/population above the optimum level increase (1)
(1) output per head should rise/more efficient use can be made ● if there is under-population/population below the optimum level
of resources (1) (1) output per head would fall/less efficient use can be made of
● workers who emigrate may send money back to relatives (1) this resources (1)
may increase living standards (1) ● with lower output less advantage can be taken of economies of
● emigrants may later return to the country bringing new skills scale (1)
with them (1) this may raise the productivity of the labour force
(1)

● Discuss whether a fall in GDP may reduce living standards.

Why it will Why it won’t

● if GDP falls and the population stays the same or increases (1) ● if population falls by more than GDP (1) GDP per head may rise
GDP per head will fall (1); (1);
● lower incomes may reduce the goods and services people can ● incomes may fall but working conditions may improve (1)
buy (1) lowering material living standards (1); working hours may decline (1) environmental conditions may
● a fall in GDP may indicate higher unemployment (1) the improve (1);
unemployed are likely to have low incomes (1); ● incomes may fall but life expectancy may increase (1) quality of
● a fall in GDP may reduce tax revenue (1) lowering availability education may rise (1);
and quality of public services (1); ● the distribution of income may become more even (1) this may
● a fall in GDP may reduce the amount of health care/education mean that the living standards of many people may rise (1);
people can enjoy (1) lower living standards indicated by lower ● if there is deflation (1) people may be able to buy more goods
HDI value (1). and services (1).

● Analyse how a rise in tax rates may influence poverty.

● A rise in progressive taxes (1) taking a higher proportion of the income of the rich (1) may reduce relative poverty (1) may increase absolute
poverty (1) as may reduce the incomes of the poor (1).
 ● A rise in regressive taxes (1) taking a higher proportion of the income of the poor (1) may increase relative (1) and absolute poverty (1).
● Tax revenue may be used to help the poor (1) e.g. provide benefits/housing/education/ health care (1) lower absolute poverty (1).
● A rise in indirect taxes will increase price of products (1) a rise in direct taxes will reduce disposable income (1) which may mean the poor
will not be able to afford basic necessities (1) lower demand may increase unemployment (1).
● A rise in direct taxes may reduce the incentive to work (1) increasing unemployment (1).

● Discuss whether a government should encourage some of the country’s people to work abroad. (w16-23)
Why it should Why it shouldn’t

● Income can be sent back home (1) to support dependents (1) ● Highly skilled workers may go abroad (1) vacancies may be left
increase incomes (1) raising their standard of living (1). unfilled (1) labour productivity may fall (1) wages may rise (1)
● May reduce unemployment (1) if people’s skills at not in causing cost push inflation (1).
demand at home (1) may reduce government expenditure on ● The reduction in the quantity and quality of the labour force (1)
benefits (1). may discourage MNCs setting up in the country (1) creates
● Workers can learn skills abroad (1) which they can bring back to greater dependency on those remaining (1).
increase labour productivity ● Fall in working population (1) may reduce aggregate demand
(1). (1) may reduce government revenue (1) less money for
education/ health care / reducing income inequality etc. (1).

● Analyse the three ways a country’s HDI value could increase.

● Better health care (1) increase life expectancy (1).
● Increased spending on education (1) would increase mean and expected years of schooling (accept literacy) (1).
● Increased employment/economic growth (1) would increase GNI/GDP per head/average income (1).

● Analyse how an increase in exports could increase a country’s employment rate and inflation rate.
● An increase in exports may mean a higher total demand (1). Higher demand may encourage firms to increase their output (1) to produce
more products firms may take on more workers (1) reducing cyclical unemployment (1).
● Higher demand may cause demand-pull inflation (1). A higher demand for workers may push up wages (1). Higher demand for raw
materials may push up the price of raw materials (1). Costs of production may increase (1) causing cost-push inflation (1)

● Discuss whether living standards are always lower in developing countries than in developed countries.
Why they might be Why they won’t be
 ● Developing countries tend to have lower income per head / ● Some people in developed countries may experience lower
greater poverty (1) reducing the goods and services their people living standards (1) as income may be unevenly distributed /
can buy (1). there is relative poverty (1).
● Developing countries tend to have higher population growth (1) ● Working hours may be lower in developing countries (1) which
this can increase the dependency ratio (1) reducing resources increases leisure time (1).
available to e.g. improve housing conditions (1) ● The informal economy may be greater in some developing
● Developing countries tend to have lower life expectancy (1) countries (1) meaning that output may be higher (1).
health care tends to be less readily available / lower quality (1). ● Obesity may be more of a problem in developed countries (1)
● Developing countries tend to have a lower standard of education reducing the health of the population (1).
(1) children likely to have fewer years at school / attend ● Some jobs in the primary sector are well paid (1) e.g. in the oil
university / gain well paid employment / more industry (1).
productive (1)
• Developing countries tend to have more people employed in
the primary sector (1) work
in the primary sector tends to be more physically
demanding/lower paid (1).

● Discuss whether a cut in the rate of interest would end deflation.

Why it might Why it might not

● A reduction in the rate of interest will reduce the return from ● Households may be pessimistic about the future/may expect
saving/discourage saving (1) instead of saving households may prices to fall further in the future or that a recession will occur
spend (1). (1) and so may not spend more despite a lower interest rate (1).
● A lower interest rate will cut the cost of borrowing (1) this may May choose to repay past debts (1).
encourage households to take out loans and spend (1). ● Firms may be pessimistic about the future/may expect prices to
● Firms may spend more on capital goods/invest (1) as it will be fall in the future (1) and so may not borrow/ invest more despite
cheaper to borrow (1) they may expect a rise in consumer a lower interest rate (1).
expenditure (1). ● The interest rate may initially have been low (1) and so a cut
● Higher total (aggregate) demand (1) may push up the price level may make little difference (1).
(1). ● Households and firms may not expect the cut to last (1) and so
will not alter their spending and investment plans (1).
● Banks may be reluctant to lend (1) may be a lack of
creditworthy borrowers (1).

● Analyse how an increase in bank lending can increase economic growth.

 ● An increase in bank lending to households may increase consumer expenditure (1) higher total (aggregate) demand (1) may encourage firms
to increase their output (1) this will raise real GDP (1).
● An increase in bank lending may increase investment/spending on capital goods/ expand business (1) this will increase demand for capital
goods (1) it will also increase productive capacity (1) causing potential economic growth (1).
● An increase in bank lending to people undertaking education/training (1) may increase labour productivity (1) increasing GDP (1) and
potential economic growth (1).

● Discuss whether developing countries should encourage foreign tourism.

Why they should Why they shouldn’t

● Foreign tourism brings in foreign currency (1) it is an export of ● Foreign tourism may create external costs (1) e.g. destroy areas
services (1) improves the current account balance (1). of natural beauty (1).
● Foreign tourism may increase government tax revenue (1) this ● Foreign tourism may deplete resources (1) e.g. water (1).
could be spent on e.g. education which could improve living ● Foreign tourism may only provide low-paid (1) low skilled jobs
standards (1). (1) better paid and high skilled jobs may be undertaken by
● Foreign tourism creates jobs (1) in e.g. hotels (1) reduces workers from the country of foreign holiday firms (1).
unemployment (1). ● Foreign tourist firms may send profits home (1) foreign hotels
● Foreign tourism increases output (1) contributes to economic may be supplied by foreign firms (1).
growth (1). ● A higher exchange rate may reduce exports/international
● Foreign tourism may attract MNCs/foreign investment (1) e.g. competitiveness (1).
foreign hotel chains may set up in the country (1). ● Foreign tourism may increase demand in the economy (1)
● More revenue from tourism may result in a rise in the exchange pushing up the prices
rate (1) this may reduce the price of imports (1). the local population have to pay (1).

● Discuss whether increased spending on education will always reduce absolute poverty
Why it might Why it won’t

● Education may increase labour productivity (1) this may raise ● Education may be of poor quality/be in inappropriate areas (1)
income (1) allowing people to buy more basic goods and and so may not increase productivity (1) and so not raise
services (1) employment and income (1).
● Education may increase people’s skills and qualifications (1) ● The increased spending on education may be on a small
this may reduce unemployment (1) raising incomes(1). proportion of the population (1) the poor may not benefit (1).
● Education may reduce the birth rate (1) reducing the ● The increased spending on education may involve an
dependency ratio (1). opportunity cost (1) spending on healthcare may be reduced (1)
 ● Education spending creates jobs (1) e.g. teachers, school spending on other areas may be more effective in reducing
cleaners (1) poverty (1) e.g. housing provision (1)
● Workers may be better educated (1) but there may still be
unemployment if there is a lack of demand in the economy (1).

● Discuss whether food subsidies reduce poverty.

Why it might Why it might not

● A subsidy reduces the cost of production (1) increases supply ● The subsidies may not be passed on to the consumers (1) one
(1) lowers price (1) (increase in supply and lower price may be possible reason is corruption (1).
shown on a diagram) makes food more affordable for the poor ● Food prices may still be too high for the poor to afford (1).
(1) the poor spend a high proportion of their income on food (1). ● Farmers may produce more food but it may be of a lower quality
● Food subsidies could raise the incomes of farmers (1). In some (1) it may have a lower nutritional value (1).
countries many farmers have low incomes themselves (1) may ● There is an opportunity cost involved (1) government spending
increase employment (1). on e.g. education might reduce poverty more effectively (1).
There may be over-production of food (1).
● If one country subsidises food it could lead to \ unemployment
in agricultural workers abroad (1) causing their incomes to fall.
(1)
● Food subsidies may not be sufficient to reduce poverty (1) as
poverty has many causes e.g. lack of education (1)

● Discuss whether an increase in a country’s population size will cause an increase in living standards.
Why it might Why it won't

● If there is an increase in the labour force (1) more output can be ● If the birth rate falls or the death rate declines (1) there may be
produced (1) increasing the goods and services available/raising an increase in the dependency ratio (1).
incomes (1) will lower the dependency ratio (1). ● There may be a shortage of resources (1) may put pressure on
● Market size will increase (1) which may enable firms to take e.g. health care/housing (1). Population may increase more
greater advantage of economies of scale (1). rapidly than output (1) lowering GDP per head (1).
● The higher total demand (1) may attract multinational ● There may be external costs caused (1) e.g. congestion/pollution
companies to set up in the country (1). A larger population may (1).
lead to specialisation (1) in e.g. education and health care (1).
● A fall in the death rate will increase life expectancy (1) a key
influence on living standards (1). Net immigration of workers
 (1) may bring in new skills (1).
● Discuss how population problems in developing countries may differ from those in developed countries.
Developed Countries Developing Countries

● Some developed countries have a decreasing death rate/falling ● Some developing countries have a high population growth rate
birth rate (1) and so an ageing population (1) increase (1) this may put pressure on resources (1).
dependency ratio (1) increase cost of pensions/health care (1). ● Some developing countries have a high birth rate (1) this
● Some developed countries experience net immigration (1) this increases the dependency ratio (1) and may reduce the size of
may pressure on resources (1) may be a mismatch between skills the labour force (1) and may result in products/resources that
of immigrants and job vacancies (1). might have been used to increase living standards/economic
● Problems may be less severe in developed countries (1) longer growth being used to e.g. feed the higher population (1)
life expectancy/less risk of overpopulation (1). ● Some developing countries have a high infant mortality rate (1)
lower quality of life (1). Some developing countries experience
net emigration (1) may lose skilled workers (1).

● Analyse how an increase in average incomes may influence a country’s population size.
● Up to 2 marks: there will be more income/resources to support people in old age (1) so there may be less need to have a high number of
children (1).
● Up to 2 marks: there may be greater availability of contraception (1) and greater spending power to buy contraception.
● Up to 2 marks: people may stay in education longer which may increase the cost of having children (1) and may delay the age at which
people have children (1).
● Up to 2 marks: higher income is linked to better health care/nutrition (1) so there may be a fall in infant mortality (1).
● Up to 2 marks: due to better health care and nutrition (1), the death rate may fall (1).
● Up to 2 marks: may encourage immigration (1), due to expectation of higher pay/greater job opportunities/higher living standards (1).
● Up to 2 marks: higher incomes may encourage some families to have more children (1) as now they can afford it (1).

● Discuss whether a government should be concerned about a fall in the country’s population size.
Should be Should Not be

● Up to 3 marks: may result in a less efficient use of resources ● Up to 3 marks: may result in a more efficient use of resources
(below the optimum population) (1), as there may not be enough (towards the optimum population) (1), as there will now be
workers to make full use of the other factors of production (1), more workers to make full use of the other factors of production
and so output per head will fall (1). (1), and so output per head will rise (1).
● Up to 3 marks: will experience a fall in total (aggregate) demand ● Up to 3 marks: may reduce overcrowding (1), giving people
 (1), as there will be fewer consumers (1) and lower demand may more living space (1) and reducing stress/ill health (1).
reduce employment (1). ● Up to 3 marks: labour force may still be increasing (1). If the
● Up to 3 marks: labour force may be reduced (1). If the fall in fall in population size is due to a fall in the birth rate (1) this will
population size is due to emigration, there may be fewer mean a reduction in the dependency ratio (1).
workers to dependents (1) and this will increase the dependency ● Up to 2 marks: may reduce environmental problems (1), e.g.
ratio (1). traffic congestion/pollution (1). Up to 2 marks: may reduce the
● Up to 3 marks: may reduce factor mobility (1), if there are fewer need for social capital (1), e.g. hospitals/schools (1).
young workers, there may be less occupational mobility (1) and
geographical mobility (1).
● Up to 2 marks: a rise in the death rate may indicate serious
health problems/a natural disaster (1). This would indicate a
need for greater government spending on health care/better
disaster response (1).

● Discuss whether a fall in the unemployment rate will reduce poverty.

Why it might Why it might not

● a lower unemployment rate may mean that more people are in ● a fall in unemployment may not increase the number of people
work (1) employed (1) the rate
• more employment may mean higher incomes (1) more people may have fallen because some of those who were previously
earning may reduce unemployed may have
relative poverty (1) retired/emigrated/entered education (1)
• more people will have access to basic necessities/enjoying • a reduction in unemployment may raise the wages of skilled
more goods and services (1) workers more than unskilled
being able to enjoy more products may increase living standards workers (1) increasing relative poverty (1)
(1) access to more • the resulting higher demand may result in inflation (1) wages
goods and services should reduce absolute poverty (1) may rise by less than
• more people will be able to afford education/health care (1) prices (1) leading to a fall in real incomes (1) which may
increasing their earning increase poverty (1)
potential and the earning potential of their children (1) • other causes of poverty may increase (1), e.g. increase in
• lower unemployment can increase tax revenue/reduce sickness/increase in the
spending on welfare benefits (1) number of dependants/reduction in skills (1)
government may be able to spend more on, e.g. education and • some people may earn very low wages (1) which may be less
health care, which can reduce poverty (1) than they received in
benefits (1)
 ● Analyse how the population structure of a developing country is likely to differ from that of a developed country.
● a developing country is likely to have a younger population (1) may have a higher birth
● rate (1) due to e.g. lower cost of raising children/need for children to support their
● parents later in life (1)
● • a developing country may experience net emigration whereas a developed country may
● experience net immigration (1) due to differences in living standards (1)
● • a developed country is likely to have small families (1) due to e.g. social attitudes (1)
● • a developed country is likely to have more awareness of contraception (1) due to greater
● educational/healthcare provision (1)
● • a developed country is likely to have an older population (1) a developed country may
● have a lower death rate (1) due to e.g. better healthcare/nutrition (1)

Section 8: International Aspects

● Discuss whether protectionism saves jobs. (w16-22)
Why it might Why it may not

● Tariffs raise the price of imports (1) quotas places a limit on ● Foreign products might still be cheaper (1) better quality (1).
imports/other method of protectionism described (1) higher ● There may be retaliation (1) with governments of other
price of imports/lower quantity (1) may make imports less countries imposing trade restrictions (1) which may reduce
competitive (1) consumers may switch from imports to domestic exports (1) causing unemployment in the export industries (1).
products/reduce quantity of imports produced (1) maintain ● Tariffs may increase raw material costs (1) domestic firms may
domestic production (1) stop unemployment occurring in have to switch to more lower quality imported raw materials (1)
domestic firms (1). domestic firms’ international competitiveness could fall (1)
● Protectionism may stop declining (sunset) industries closing causing unemployment in, e.g. car industry dependent on
quickly (1) causing structural unemployment (1). imported steel (1).
● Demand for labour may fall for other reasons (1), e.g.
introduction of new technology by domestic firms may result in
structural unemployment (1).
● May protect jobs in the home country but create unemployment
in other countries (1) by making their products less price
competitive (1).
● Discuss whether a government should devalue the country’s exchange rate. (w16-23)
Why it should (Write Devaluation Definition) Why it should not

● Export revenue may increase (1) and import expenditure may ● It may cause inflation (1) rise in price of finished imported
fall (1) improving the current account position/reducing a goods (1) rise in price of imported raw materials (1) higher costs
current account deficit (1). of production (1) higher total demand (1) because of rise in net
● May increase total demand (1) causing economic growth (1) exports (1).
reducing unemployment (1). ● The currency may have initially been undervalued (1) there
● The currency may initially be overvalued (1) foreign reserves would have been upward pressure on the exchange rate (1).
may have to be used to buy the currency (1). ● If a large devaluation other countries may retaliate (1) by putting
● Some MNCs may be attracted by a lower exchange rate (1) on tariffs (1) making exports less price competitive (1).
make exports from the country more competitive (1). ● If country is reliant upon imported raw materials (1) may result
in imported inflation (1) will make exports less competitive (1).
● If exports are inelastic in demand (1) export revenue may not
rise (1).
● Higher demand for exports without matching increase in
production (1) can result in demand pull inflation (1).
● May result in loss of confidence in MNCs (1) resulting in lower
FDI and economic growth (1).

● Discuss whether an increase in tariffs on imports would reduce unemployment. (w16-23)

Why it may Why it may not

● Tariffs impose extra costs on importers (1) prices may rise (1) ● Consumers may still buy imports (1) if their price is still lower
causing a fall in demand for imports (1) with some consumers (1) or quality is still higher (1).
switching to domestically produced products (1) domestic firms ● Domestic firms may expand output (1) by employing more
may expand output (1) taking on more workers (1). capital goods (1) getting existing workers to work overtime (1).
● Tariffs on imports may lead to other countries imposing tariffs
on the country’s exports (1) jobs may be lost in the exporting
industries (1).
● Tariffs increase costs of production (1) imported raw materials
may rise in price (1) this may cause cost-push/imported inflation
(1) firms cut costs by reducing workers (1) thereby increasing
unemployment (1).
● Analyse the advantages that a country may gain from specialising in a product such as smartphones. (w16-22)
● Output/GDP/GDP per head may be higher (1) resulting in higher living standards (1) as a country can concentrate on what it is best at
producing (1) make best use of resources (1). Providing a product in a large quantity (1) may lower average cost/ enable advantage to be
taken of economies of scale (1) example of an economy of scale (1).
● World demand for smartphones is high/increasing (1) smartphones are increasing in popularity/becoming more of a necessity (1). t
● May gain a good reputation for producing the product (1) which will increase demand (1). Specialising encourages countries to trade (1)
providing consumers with more variety/cheaper products (1).

● Analyse three ways in which international trade differs from internal trade.
● International trade usually covers greater distances (1) which increases the cost of transport (1) may take longer for delivery (1).
● International trade means a bigger market than the internal market (1) and more competitive (1) enabling firms to gain economies of scale
(1)
● Internal trade involves using the same currency (1) international trade may involve two or more currencies (1) increasing transaction costs
(1).
● International trade means a wider range of goods & services (1) this gives consumers greater choice (1)
● Trade restrictions may be imposed on products traded internationally (1) raising costs of production (1).
● Tastes and cultures may differ (1) requiring differences in products offered (1).
● Regulations may differ (1) requiring adjustments in products (1).
● Languages may differ (1) e.g. incurring costs of translation (1).

● Discuss whether an increase in exports will increase the exchange rate.

Why it might Why it won’t

● An increase in exports may increase export revenue (1) this will ● Exports may increase but export revenue may not (1) more
increase demand for the currency (1) higher demand pushes up exports may be bought for a lower price (1) and so demand for
the price of the currency (1) raising the value of a floating the currency will not rise (1).
exchange rate (1) which is determined by market forces (1). ● (1)An increase in exports may be offset by an increase in
imports / lower interest rate (1) or government intervention by
selling domestic currency (1) so demand and supply of the
currency will increase (1) which may leave the exchange rate
unchanged (1).
● Discuss whether free trade always benefits producers.
Why it does Why it doesn’t

● Enables producers to specialise/expand (1) selling to a large ● Increases competition from other producers (1) if cannot
market (1) can take advantage of economies of scale (1). compete due to higher costs may
● May be able to purchase raw materials more cheaply from go out of business (1) may need protection to survive (1).
foreign suppliers (1) lowering costs of production/increase ● If there is inflation in the countries they import from (1) will
efficiency/not having to pay tariffs on e.g. imported raise costs of production (1).
raw materials (1) buy better quality raw materials (1). ● Will not be able to compete when there is dumping (1) will go
● May be able to import new technology (1) ideas on new out of business (1).
production methods (1) which could lower costs of production
(1).

● Discuss whether consumers would benefit from an increase in imports.

Why they might Why they won’t

● Imports may make available products not produced in the ● Imports may drive domestic firms out of business may be
country (1) due to e.g. differences in climate/resources (1) created and this may increase prices in the long run (2)
● Imports may increase choice (1) provide differentiated products ● A monopoly may be created which may reduce quality in the
(1) provide good quality products (1) long run (2)
● Imports may be cheaper (1) this may also put pressure on ● Foreign firms may be engaging in dumping (1).
domestic firms to improve the quality of their products (1). ● Imports may be of harmful products/demerit goods (1) example
● The price of imported raw materials may be cheaper (1) this (1) such products would harm people’s health(1).
could lower costs of production (1) lowering prices (1)

● Analyse how a fall in the value of a currency may increase a current account surplus on the balance of payments.
● A fall in the value would mean that more of the currency has to be sold to buy a given unit of another currency (1).
● A fall in the value of the currency would reduce export prices (1) and increase import prices (1).
● Demand for exports may increase/more exports (1) this may increase export revenue (1) if demand for exports is price elastic (1).
● Demand for imports may fall/lower imports (1) this will reduce import expenditure (1) if demand for imports is price elastic (1).
● A rise in export revenue and/or a fall in import expenditure will increase a trade in goods/ and services surplus (1).
● Trade in goods and trade in services appear in the current account (1) credit items in the current account would increase (1) while debit items
 would fall (1).
●
● Discuss whether improving the quality of coffee that a country produces will result in a surplus on the current account of its balance of payments.
Why it might Why it might not

● The high quality coffee may be in high demand abroad (1) this ● The coffee may not be exported if demand is high at home (1)
may increase exports (1) export revenue will increase (1) the trade restrictions are placed on the country’s exports of coffee
trade in goods balance will improve (1). (1) the quality may still be below that of other countries (1) the
● The high quality coffee may be in high demand at home (1) this price may be high (1).
may reduce imports of coffee (1) reducing import expenditure ● Other countries may be improving the quality of their coffee (1)
(1). ● Coffee may still be imported (1) due to differences in taste (1).
● An increase in net exports (1) may not be sufficient to reduce a
current account deficit / produce a surplus (1).
● Coffee is only one product and there may still be a trade in
goods deficit (1) there are other components of the current
position e.g. trade in services (1) which may be in
deficit (1).
● If the country has a strong / strengthening currency (1) exports
of coffee will become expensive / imports of coffee will become
cheap (1) making the country’s coffee less demanded (1)

● Discuss whether a country exporting its raw materials always benefits its economy.
Why it will Why it won’t Effect on exchange Rate

● It will generate export revenue (1) this ● Exporting can cause demand-pull ● May lead to an appreciation in the
will appear in the trade in goods inflation (1) as it will increase total exchange rate (1) may be in an
balance (1) which may improve the demand (1) when an economy is advantage in that more imports can be
current account position (1). operating close to full capacity (1). purchased with the same volume of
● Exporting will increase total demand ● Exporting raw materials enables exports (1) may be a disadvantage as it
(1) increasing incomes (1) leading to foreign countries to compete with the may make domestic products less
economic growth (1) causing a rise in country’s finished products at home internationally competitive (1)
employment (1). and abroad (1) reducing the country’s
● Exporting will be more beneficial if finished exports (1) and increasing the
the raw materials are highly priced (1) country’s imports of finished products
and in inelastic demand (1). (1).
 ● Exporting raw materials may deplete
raw materials (1) reducing the
country’s ability to produce and export
in the future (1)

● Analyse how a more educated labour force could reduce a country’s current account deficit on its balance of payments.
● A more educated labour force is likely to be more skilled (1) and so more productive (1) leading to lower costs of production (1) may make
domestic products more price competitive (1) increase exports and lower imports (1).
● A more educated labour force may produce higher quality products (1) make domestic products more quality competitive (1) increase
exports and lower imports (1).
● A more educated work force could be more innovative (1) more entrepreneurial (1).

● Discuss whether a country’s exchange rate should be determined by market forces or by the government.
Government Market Forces

● a fixed exchange rate is maintained by the government/central ● an exchange rate determined by the demand and supply of the
bank (1) buying and selling the currency (1); currency (1) is a floating exchange rate (1);
● promotes certainty (1) this can enable firms to plan ahead (1) ● should automatically move the current account position to a
may encourage investment(1); balanced position (1) if e.g. a deficit, exchange rate will fall (1)
● the rate may be set low (1) to increase economic lowering export prices and raising import prices (1)
growth/employment (1); ● avoids the need for reserves to influence the exchange rate (1)
● the rate may be set high (1) to reduce inflation (1). foreign currency can be used for other purposes (1);
● avoids the exchange rate being a policy objective (1) can pursue
other policy objectives (1) e.g. can alter the interest rate to
influence the price level (1).

● Discuss whether a rise in a country’s exchange rate will reduce its international competitiveness.
Why it might Why it might not

● 1 mark for identifying that it will increase export prices. ● 1 mark for identifying that quality of domestically produced
● 1 mark for explaining that higher export prices are likely to products may rise.
reduce demand for exports. ● 1 mark for explaining that a rise in quality of domestically
● 1 mark for identifying that it will reduce import prices. produced products will make them more attractive to foreign
● 1 mark for explaining that reduced import prices are likely to buyers.
 increase demand for imports. ● 1 mark for identifying that domestic inflation rate may fall.
● Up to 2 marks for explaining that if the domestic inflation rate
falls below that of rival countries (1), exports may still be
relatively cheaper in the foreign market even though the
exchange rate has risen (1).
● Up to 2 marks for explaining that a reduction in the price of raw
materials or capital goods could reduce domestic firms’ costs (1)
and so make them more price competitive (1).
● 1 mark for identifying that labour productivity might rise.
● Up to 2 marks for explaining that higher labour productivity will
reduce costs of production (1), which may make exports
relatively cheaper in the foreign markets even though the
exchange rate has risen (1).
● Up to 3 marks for explaining that in the case of products where
a country has a monopoly (1) with an example of a monopoly
(1) demand may not be significantly affected by a rise in price
(1).
● Reward, but do not expect, answers that discuss that the
outcome will depend upon the PED of exports and imports.

● Discuss whether a reduction in its imports will always benefit an economy.

It will It won’t

● a reduction in imports may improve the trade in goods/trade in ● imports of capital goods/raw materials may decline (1) these
goods and services balance (1) this will improve the current might be cheaper/lower quality than domestically produced
account position/reduce a current account deficit (1) this may capital goods and/or raw materials (1) this will raise costs of
reduce a country’s debts (1) avoid downward pressure on the production (1) make the country’s products less internationally
exchange rate (1) competitive (1) lower output/reduce economic growth (1)
• spending on imports may be replaced by spending on worsen the current account position (1) raise unemployment (1)
domestically produced products (1) this would increase the ● • fewer imports may reduce choice (1) reduce competition (1)
country’s output/cause economic growth (1) this would increase may raise prices (1) lower quality of people’s lives (1)
demand for labour (1) raise employment/reduce unemployment ● • exports may be falling by more than imports (1) so current
(1) increase incomes and living standards (1) account position may be worsening (1)
• fewer imports may enable infant industries to grow (1) may ● • quantity of imports may be falling but value of imports may be
protect declining strategic industries (1) rising (1)
• may prevent dumping (1) explanation of what is meant by ● • if the reduction is caused by protectionist measures (1) this
 dumping (1) would reduce benefits of free
● trade (1)

● Discuss whether a fall in the international value of its currency will always benefit an economy.
Will Benefit Won’t benefit

● it will lower export prices (1) and raise import prices (1) make ● higher import prices may cause inflation (1) raise costs of raw
domestic products more internationally competitive (1) this may materials (1) increase costs of production (1) put less downward
raise export revenue and lower import expenditure (1) if demand pressure on domestic firms to be price competitive (1)
for exports and imports is elastic (1) this may improve the ● • lower prices of exports may be offset by low quality of exports
current account position/reduce a current account deficit (1) (1) fall in incomes abroad (1) increase in trade restrictions
• producing more domestic products (1) may raise output/GDP imposed by foreign governments (1)
(1) cause economic growth (1) raise employment/reduce ● • demand for exports and imports may be price inelastic (1) in
unemployment (1) increase income (1) and living standards (1) this case export revenue may fall (1) and import expenditure
• if the value was being maintained by the government above the may rise (1)
equilibrium level (1) reserves of foreign currency may not now
have to be used (1) these could be used for another purpose (1)
interest rate may not have to be as high (1) a lower interest rate
may stimulate economic activity (1)

● Analyse why countries specialise and trade.

● specialising allows countries to concentrate on what they are best at (1) influenced by factor endowment (1)
• specialisation can reduce the (average) costs of production (1) raise productivity (1) efficiency (1) enabling lower prices to be charged (1)
• specialisation could increase export revenue/improve trade position (1)
• specialisation can increase output/income/GDP (1)
• specialisation can improve the quality of output (1)
• higher output/income/GDP may raise living standards (1)
• increasing the size of the market (1) can lead to economies of scale (1)
• countries may import products from countries that can produce them more efficiently (1)
• countries may import products to gain a greater variety of goods and services (1)
• countries may import products they cannot produce themselves (1)

● Discuss whether a rise in demand for copper would cause Chile to experience a current account surplus.
 ● buyers may choose to buy copper from Chile (1) if Chilean ● the demand for copper may be the result of a fall in the price of
copper is price competitive (1), e.g. due to low exchange rate (1) copper (1) more may be
quality competitive (1) higher demand may increase exports (1) purchased but export revenue may fall (1)
this may increase export revenue (1) higher export revenue may • the demand for copper may rise but it may not be possible to
improve the trade in goods position (1) an improved trade supply more (1) as, e.g.
position may turn a deficit into a surplus (1) or increase a mines may be working at full capacity/there may be a lack of
surplus (1) skilled workers (1)
• other countries may have become more price (1) or quality
competitive (1) so the rise in
demand may affect other countries’ current account positions (1)
• Chile may have a large current account deficit (1) so even with
higher export revenue, a
surplus may not be generated (1)
• a trade in goods surplus may be offset by an increasing
deficit/lower surplus on another
part of the current account (1), e.g. trade in services position
may deteriorate (1) or by a
rise in imports (1)
• higher demand for copper may increase demand for labour (1)
this could push up wages
(1) increasing costs (1) making Chilean copper less competitive
in the longer run (1)
• higher demand for copper may push up the exchange rate (1)
and so may, in the longer
run, reduce a surplus (1)

● Discuss whether a reduction in a country’s trade protection will improve its economic performance.

● may increase competition (1) this may put pressure on domestic ● may drive infant industries out of business (1) reduce output and
firms to keep prices low employment in the long
(1) reduce inflation (1) run (1) may harm the current account position (1)
• price of imported raw materials may fall (1) this may lower • may cause declining industries to go out of business more
costs of production (1) reduce quickly (1) causing
 cost-push inflation (1) unemployment (1)
• finished imports may be cheaper (1) more imports can increase • may increase dumping (1) foreign firms may be selling below
choice for consumers (1) cost price (1) unfair
• other countries may reciprocate (1) lower trade protection competition that may drive domestic firms out of business (1)
measures (1) enable the • may lower government tax revenue (1) reduce expenditure on,
country to export more (1) raise output (1) increase employment e.g. health care,
(1) education (1)
• may become dependent on other countries (1) risk of a
supply-side shock (1)

● Discuss whether imposing tariffs will benefit an economy

● will raise revenue for the government (1) this could be spent on ● raise prices to consumers (1) may not have domestic products to
e.g. healthcare / education (1) switch to (1) any domestic substitutes may be of a lower quality
● • may reduce demand for imports (1) improve the trade in goods (1) reduces variety for consumers (1)
position (1) and so improve the current account position (1) ● • raise costs of imported raw materials (1) raise costs of
● • may protect infant industries (1) these may grow and take production (1) cause cost-push inflation (1)
advantage of economies of scale (1) become internationally ● • reduction in competitive pressure on domestic firms (1) may
competitive (1) create output and employment (1) lead to inefficiency (1)
● • may protect declining industries (1) preventing unemployment ● • there may be retaliation (1) with other countries imposing
(1) tariffs on the country’s exports
● • may prevent dumping (1) foreign firms selling at below cost ● (1)
price (1) prevent domestic ● • there may not be domestic substitutes for imports (1)
● firms being driven out of business (1) consumers may not stop buying
● • may protect consumers from harmful products (1) ● imports (1) because of inelastic demand (1)

● Analyse how free trade can reduce firms’ costs of production.

● can allow a country to specialise in what it’s best at (1) use resources more efficiently (1)
● • no tariffs charged on exports/imports (1)
● • increase competition (1) may force firms to reduce costs/increase productivity (1)
● • larger market (1) firms may be more able to take advantage of economies of scale (1)
● example(s) (1)
● • more sources of raw materials/capital goods (1) lower price or better quality (1)