Macroeconomic Objectives Definitions:

• Economic growth is defined as an increase in real GDP over time; whereas GDP refers to the total value of goods/services produced in an economy.
• Unemployment occurs when those that are willing and able to work is unable to find work in the economy.
• Inflation is defined as the increase in general price level of the economy over time.
• A balanced government budget is when total government spending is equal to the amount of government taxation for that year.
• The current account is a component within the balance of payments, consisting of the net international trade in goods/services, net investment income and net transfer payments.

Macroeconomic Objectives Explanation:
There are a few main economic objectives that nearly every government pursues. One macroeconomic objective is Economic growth, which aims to increase how much we produce as an economy and how much we earn. For example, if all of our labour combined can produce a giant pumpkin pie each year, the government will hope to increase the size, quantity or quality of the pie we make, so our production becomes more valuable – how wonderful! As a result, all of us should be able to earn higher incomes after selling the more valuable pie and dividing the amount of money we earned among ourselves.

Another economic objective is to ensure unemployment is low. When unemployment is low, it means more people are in work and earning an income, thus leading to better standards of living. During extraordinary times of Covid, unemployment is very high. There is a hesitation for many companies (e.g. restaurants, hotels) to keep staff employed as they are uncertain of their future profits. As a result, this will cause a spike in unemployment which the government would hope to keep low.

Usually when the economy is growing, there would be a rise in prices for goods and services in the economy. This is because our incomes and purchasing power rises and there is more demand for goods in the economy, hence making them more expensive. Did you know the price of a Big Mac increased more than 3 times throughout the past 30 years? Governments hope to keep inflation low so our cost of living do not spiral out of control, and to ensure businesses can confidently predict what prices/profits they should have.

Macroeconomic Objectives Notes:

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Of course, the government would also want to keep their finances in order as an economic objective. This usually means balancing government spending with the amount they earn via taxes in the long run. As UK national debt reaches over £2 trillion, it is important to be able to manage that debt sustainably so that businesses and investors do not lose confidence in the UK economy, and the government’s ability to pay that back. Otherwise, economic growth may be affected negatively.

Finally, the government may also aim to ensure a stable current account, so that the total value of our imports/exports do not affect our economy adversely. The current account is mainly a measure to indicate how much we import and export as a country in monetary terms. If we import too much goods/services, there will be an outflow of incomes from our economy to other countries, which can cause the economy to contract; vice versa. However, it is important to know that a current account deficit (total value of imports > total value of exports) is not always problematic given there are other factors which determine the health of an economy.

Macroeconomic Objectives Video Explanation – featuring EconPlusDal

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Macroeconomic Objectives Multiple Choice Questions

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Macroeconomic Objectives in the News

Related A-Level, IB Economics Resources

Full Employment as the Most Important Objective

Macroeconomic Goals and Conflicts
Measuring Economic Performance

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Public Goods Definitions:

• A public good is defined as a good which is non-excludable and non-rivalrous.
• A good is non-rivalrous if the consumption/use of it will not decrease the possibility of others doing so.
• A good is non-excludable if anyone can use or access it, without monetary payment.
• A quasi-public good is a good which is non-excludable but rivalrous; or excludable but non-rivalrous.
• A good in Economics is defined as anything which humans can derive utility from.
• A private good is defined as a good which is excludable and rivalrous.

Public Goods & the Free-Rider Problem Explanation:
In Economics, a public good does not mean something is under public ownership. Instead, a public good is something that is freely usable by anyone, without cost and exclusion, and does not reduce in quantity available when used. The Ozone layer in our atmosphere, for example, is a public good. It protects us from harmful radioactive rays from the Sun that can cause cancer (giving us utility), and anyone can benefit/access it (non-excludable) without taking away the opportunity for others to do so (non-rivalrous). Note that whenever there is a monetary cost to consume a good, it becomes excludable as there are people who cannot access the good. For example, private tuition is a private good. Because anyone can access a public good (like traffic lights), nobody is willing to produce it since they cannot reimburse the cost of production. This is called the free-rider problem. As a result, the government tends to provide public goods in order to tackle missing markets for these goods and to improve economic efficiency. Public goods often suffer from abuse (the ‘Tragedy of the Commons‘) as nobody is willing to pay the cost for maintaining it, as nobody owns it. Such is the case for the depletion of our Ozone layer and the gradual destruction of our environment via over-fishing, greenhouse gases and climate change.

Public Goods & the Free-Rider Problem Notes with Diagrams/Graphs:

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Public Goods & the Free-Rider Problem Video Explanation (Featuring EconPlusDal)

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Public Goods Multiple Choice Questions

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Public Goods in the News

Related A-Level, IB Economics Resources

Quasi-Public Goods
Market Failure from Public Goods

Public, Private and Free Goods

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Jump to: Unit 1: Introduction to Economics | Unit 2: Microeconomics | Unit 3: Macroeconomics | Unit 4: The Global Economy

Comparison with Old IB Economics Syllabus

Compared to the old syllabus, the new IB Economics curriculum brings in new topics within Behavioural Economics (e.g. consumer rationality / biases), and newer Monetary Policy Tools (e.g. quantitative easing, bank reserve regulations) for HL Economics students. This addition is similar to the A-Level Economics syllabus updated in 2015. The teaching in IB Economics should be focused on relating back to the key, recurring Economics concepts in the syllabus below in Unit 1. Whereas International and Development Economics are now forced together to form Unit 4. Finally, in terms of assessment, IB HL Economics students are now required to answer policy recommendation questions in Paper 3, and SL Economics students need to answer some quantitative questions in Paper 2. It is also important to be aware that the questions in the 3 Economics papers can be from any unit in the syllabus below. Hence, be sure to use our IB Economics notes & questions by topic for practicing and revising certain areas of the course.

Syllabus key concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention.

Unit 1: Introduction to Economics

Recommended teaching time: 10 hours
Conceptual understandings:
• Economics is a social science characterized by interdependence, which focuses on how people interact with each other to improve their economic well-being, influenced and enabled by their values and their natural surroundings.
• The economic world is dynamic in nature and constantly subject to change.
• Economic theories are based on logic and empirical data, using models to represent and analyse this complex reality. Individual and collective motivations and behaviours are complex and diverse, and their understanding entails the interaction of a variety of disciplines such as philosophy, politics, history, and psychology.
• Economic decision-making impacts the relative economic well-being of individuals and societies.
• The central problems of economics are scarcity and choice. This forces societies to face trade-offs, opportunity costs and the challenge of sustainability.
• Debates exist in economics regarding the potential conflicts between economic growth and equity and between free markets and government intervention.
• Endless economic growth, based on the consumption of finite resources, cannot continue indefinitely. New economic models and social movements have challenged mainstream opinion about the purpose of growth and how the economy could be redesigned to support long-term prosperity.

1.1 What is economics?	Depth of teaching	Diagrams
Economics as a social science • The social nature of economics • The basis of the study of economics: microeconomics and macroeconomics • Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention	AO2
The problem of choice • Factors of production—land, labour, capital and entrepreneurship • Scarcity Unlimited human needs and wants to be met by limited resources Scarcity and sustainability • Opportunity cost The cost of choice Free goods • The basic economic questions What/how much to produce, how to produce and for whom to produce? • Means of answering the economic questions Market versus government intervention Economic systems: free market economy, planned economy and mixed economy	AO2
The production possibilities curve model (PPC) • Assumptions of the model • Increasing versus constant opportunity cost • Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities	AO2, AO4	Diagram: PPC illustrating choice and opportunity cost, unemployment of resources, actual growth and growth in production possibilities Diagram: PPC showing increasing versus constant opportunity cost
Modelling the economy • The circular flow of income model • Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households) • Leakages and injections	AO2, AO4	Diagram: circular flow of income model, with leakages and injections
1.2 How do economists approach the world?
Economic methodology • The role of positive economics The use of logic The use of hypotheses, models, theories The ceteris paribus assumption Empirical evidence Refutation • The role of normative economics Value judgments in policy making The meaning of equity and equality	AO2
Economic thought • Origin of economic ideas in a historical context 18th century: Adam Smith and laissez faire 19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought 20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution 21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy	AO2

Unit 2: Microeconomics

Recommended time for teaching and inquiry: SL—35 hours, HL—70 hours

Real-world issue 1: How do consumers and producers make choices in trying to meet their economic objectives?

Conceptual understandings:
• Interaction between consumers and producers in a market is the main mechanism through which resources are directed to meet the needs and wants in an economy.
• Consumer and producer choices are the outcome of complex decision-making.
• Welfare is maximized if allocative efficiency is achieved.
• Constant change produces dynamic markets.

2.1 Demand	Depth of teaching	Diagrams and calculations
The law of demand—relationship between price and quantity demanded • Assumptions underlying the law of demand (HL only) The income and substitution effects The law of diminishing marginal utility	AO2
Demand curve	AO4	Diagram: downward- sloping demand curve
Relationship between an individual consumer’s demand and market demand	AO2
Non-price determinants of demand • Income • Tastes and preferences • Future price expectations • Price of related goods (in the cases of substitutes and complements) • Number of consumers	AO2
Movements along the demand curve and shifts of the demand curve	AO2, AO4	Diagram: movements along the demand curve and shifts of the demand curve
2.2 Supply
The law of supply—relationship between price and quantity supplied • Assumptions underlying the law of supply (HL only) The law of diminishing marginal returns Increasing marginal costs	AO2
Supply curve	AO4	Diagram: upward-sloping supply curve
Relationship between an individual producer’s supply and market supply	AO2
Non-price determinants of supply • Changes in costs of factors of production (FOPs) • Prices of related goods (in the cases of joint and competitive supply) • Indirect taxes and subsidies • Future price expectations • Changes in technology • Number of firms	AO2
Movements along and shifts of the supply curve	AO2, AO4	Diagram: movements along and shifts of the supply curve
2.3 Competitive market equilibrium
Demand and supply curves forming a market equilibrium	AO4	Diagram: market equilibrium
Shifting the demand and supply curves to produce a new market equilibrium, with reference to excess demand (shortage) and excess supply (surplus)	AO2, AO4	Diagram: showing changes in equilibrium/ role of price mechanism
Functions of the price mechanism • Resource allocation Signalling Incentive • Rationing	AO2
Consumer and producer surplus	AO2, AO4	Diagram: showing consumer surplus and producer surplus (social/ community surplus)— maximized at competitive market equilibrium Calculation (HL only): consumer surplus and producer surplus from a diagram
Social/community surplus	AO2, AO4
Allocative efficiency at the competitive market equilibrium: • social/community surplus maximized at equilibrium • marginal benefit (MB) equals marginal cost (MC)	AO2, AO4
2.4 Critique of the maximizing behaviour of consumers and producers
Rational consumer choice (HL only) • Assumptions—consumer rationality, utility maximization and perfect information • Behavioural economics—limitations of the assumptions of rational consumer choice Biases—rule of thumb, anchoring and framing, availability Bounded rationality Bounded self-control Bounded selfishness Imperfect information	AO3
Behavioural economics in action (HL only) • Choice architecture—default, restricted, and mandated choices • Nudge theory	AO3
Business objectives (HL only) • Profit maximization • Alternative business objectives Corporate social responsibility Market share Satisficing Growth	AO3
2.5 Elasticities of demand
Concept of elasticity	AO1, AO4	Diagram: relatively elastic and inelastic demand
Price elasticity of demand (PED) • PED = percentage   change   in   quantity   demanded percentage change in price • Degrees of PED—theoretical range of values for PED • Changing PED along a straight line downward sloping demand curve (HL only)	AO2, AO4	Diagram: constant PED—perfectly elastic, perfectly inelastic and unitary PED along a demand curve
• Determinants of PED—number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time • Relationship between PED and total revenue		Diagram (HL only): PED along the straight line demand curve Diagram: showing changes in revenue as a result of price changes when demand is price elastic and price inelastic Calculation: PED, change in price, quantity demanded or total revenue from data provided
• Importance of PED for firms and government decision- making	AO3
• Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)	AO2
Income elasticity of demand (YED) • YED = percentage   change   in   quantity   demanded percentage change in income • Income elastic demand (services and luxury goods) and income inelastic demand (necessities) • Significance of sign Positive YED (normal goods) and negative YED (inferior goods) Less than one (necessities) and greater than one (services and luxury goods)	AO2, AO4	Diagram: showing income elastic, income inelastic and inferior goods on an Engel curve Calculation: YED, change in income, quantity demanded from data provided
• Importance of YED (HL only): for firms in explaining changes in the sectoral structure of the economy.	AO3
2.6 Elasticity of supply
Price elasticity of supply (PES) • PES = percentage   change   in   quantity   supplied percentage change in price • Degrees of PES—theoretical range of values for PES • Determinants of PES—time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase	AO2, AO4	Diagram: relatively elastic and inelastic supply Diagram: constant PES —perfectly elastic, perfectly inelastic and unitary PES along a supply curve Calculation: PES, change in price or quantity supplied from data provided
• Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)	AO2

Real-world issue 2: When are markets unable to satisfy important economic objectives—and does government intervention help?

Conceptual understandings:
• The market mechanism may result in socially undesirable outcomes that do not achieve efficiency, environmental sustainability and/or equity.
• Market failure, resulting in allocative inefficiency and welfare loss.
• Resource overuse, resulting in challenges to environmental sustainability.
• Inequity, resulting in inequalities.
• Governments have policy tools which can affect market outcomes, and government intervention is effective, to varying degrees, in different real-world markets.

2.7 Role of government in microeconomics	Depth of teaching	Diagrams and calculations
Reasons for government intervention in markets • Influencing market outcomes in order to: earn government revenue support firms support households on low incomes influence level of production influence the level of consumption correct market failure promote equity.	AO2
Main forms of government intervention in markets • Price controls: price ceilings (maximum prices) and price floors (minimum prices) • Indirect taxes and subsidies • Direct provision of services • Command and control regulation and legislation • Consumer nudges (HL only)	AO2, AO4	Diagram: showing the following measures and the possible effects on markets and stakeholders • Price ceiling (maximum price) • Price floor (minimum price) • Indirect tax • Subsidy Calculation (HL only): the effects on markets and stakeholders of: • price ceilings (maximum prices) and price floors (minimum prices) • indirect taxes and subsidies.
Government intervention in markets—consequences for markets and stakeholders	AO3
2.8 Market failure—externalities and common pool or common access resources
Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC). (MSB = MSC): allocative efficiency; social/community surplus maximized • Positive externalities of production and consumption and welfare loss • Merit goods • Negative externalities of production and consumption and welfare loss • Demerit goods • Common pool resources Characteristics: Tragedy of commons, rivalrous but non-excludable Unsustainable production creating negative externalities	AO2, AO4	Diagram: allocative efficiency Diagram: showing market failure due to: • negative externalities of production • negative externalities of consumption • positive externalities of production • positive externalities of consumption. Calculation (HL only): welfare loss from a diagram
Government intervention in response to externalities and common pool resources including: • Indirect (Pigouvian) taxes • Carbon taxes • Legislation and regulation • Education—awareness creation • Tradable permits • International agreements • Collective self-governance • Subsidies • Government provision	AO2, AO4	Diagram: showing government responses to externalities • Indirect (Pigouvian) taxes • Carbon taxes showing effects on the market of a particular polluting industry • Subsidies • Legislation and regulation • Education
Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including: • challenges involved in measurement of externalities • degree of effectiveness • consequences for stakeholders	AO3
Importance of international cooperation • Global nature of sustainability issues • Challenges faced in international cooperation • Monitoring, enforcement	AO3
2.9 Market failure—public goods
Public goods • Non-rivalrous, non-excludable • Free rider problem	AO2
Government intervention in response to public goods • Direct provision • Contracting out to the private sector	AO3
2.10 Market failure—asymmetric information (HL only)
Asymmetric information • Adverse selection • Moral hazard	AO2
Responses to asymmetric information • Government responses: legislation and regulation, provision of information • Private responses: signalling and screening	AO3
2.11 Market failure—market power (HL only)
Perfect competition–many firms, free entry, homogeneous products	AO2
Monopoly—single or dominant firm, high barriers to entry, no close substitutes Imperfect competition • Oligopoly—few large firms, high barriers to entry, interdependence • Monopolistic competition—many firms, free entry, product differentiation	AO2
Rational producer behaviour—profit maximization (HL only) • Total revenue - Total costs (TR -TC) • Marginal cost = Marginal revenue (MC=MR) • Abnormal profit (AR > AC)* • Normal profit (AR = AC)* • Losses (AR < AC)* * AR = Average revenue, AC = Average cost	AO2, AO4	Calculation (HL only): profit, MC, MR, AC, AR from data
Degrees of market power • Meaning of market power • Perfect competition—no market power —firm as price taker profit maximization: in the short run in the long run Meaning of allocative efficiency, necessary conditions Imperfect competition—varying degrees of market power—firm as price maker	AO3, AO4	Diagram: perfectly competitive firm as price taker where, *P = D = AR = MR Diagram: perfectly competitive firm showing: • abnormal profit • normal profit • losses Diagram: equilibrium in perfectly competitive market with reference to allocative efficiency when P = MC or MB = MC, maximum social/ community surplus. *P = Price, D = Demand
Monopoly • Profit maximization • Allocative inefficiency (market failure) • Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price • Natural monopoly	AO3, AO4	Diagram: market power where AR > MC Diagram: monopolist showing: • abnormal profit • normal profit • losses Diagram: price/quantity comparison of a monopoly firm with a perfect competitive market. Also showing welfare loss under the monopoly. Diagram: natural monopoly
Oligopoly • Collusive versus non-collusive • Interdependence, risk of price war, incentive to collude, incentive to cheat • Allocative inefficiency (market failure) simple game theory payoff matrix • Price and non-price competition • Measurement of market concentration – concentration ratios	AO3, AO4	Diagram: collusive oligopoly acting as a monopoly
Monopolistic competition • Profit maximization: in the short run in the long run • Less market power due to many substitutes—more elastic demand curve compared with monopoly • Allocative inefficiency (market failure) • Less inefficiency, more product variety	AO3, AO4	Diagram: monopolistically competitive firm showing: • abnormal profit • normal profit • losses Diagram: monopolistic competition (with a more elastic demand curve compared to a monopoly)
Advantages of large firms having significant market power, including: • Economies of scale including natural monopolies • Abnormal profits may finance investments in research and development (R&D), hence innovation	AO3
Risks in markets dominated by one or a few very large firms • Risks in terms of output, price, consumer choice	AO3
Government intervention in response to abuse of significant market power • Legislation and regulation • Government ownership • Fines	AO3
2.12 The market’s inability to achieve equity (HL only)
• Workings of free market economy may result in an unequal distribution of income and wealth	AO2	Diagram: showing the circular flow model to illustrate why the free market results in inequalities

Unit 3: Macroeconomics

Recommended time for teaching and inquiry: SL—40 hours, HL—75 hours

Real-world issue 1: Why does economic activity vary over time and why does this matter?

Conceptual understandings:
• Change in the conditions of the demand and supply sides of the economy cause economic activity to vary over time.
• Fluctuations in economic activity impact the economic well-being of individuals and societies.
• Different schools of macroeconomic thought identify different causes and offer different solutions for macroeconomic problems.

3.1 Measuring economic activity and illustrating its variations	Depth of teaching	Diagrams and calculations
National income accounting as a measure of economic activity	AO2, AO4	Diagram: circular flow of income model showing the interactions between decision makers, leakages and injections
Equivalence of the income, output and expenditure approaches to national income accounting, with reference to the circular flow model	AO2, AO4
[Nominal] Gross domestic product (GDP) as a measure of national output	AO2, AO4	Calculation: [nominal] GDP from sets of national income data, using the expenditure approach
[Nominal] Gross national income (GNI) as a measure of national output	AO2, AO4	Calculation: [nominal] GNI from data
Real GDP and real GNI	AO2, AO4	Calculation: real GDP and real GNI, using a price deflator
Real GDP/GNI per person (per capita) Real GDP/GNI per person (per capita) at purchasing power parity (PPP)	AO2, AO4	Calculation: real GDP per capita and real GNI per capita
Business cycle: short-term fluctuations and long-term growth trend (potential output)	AO2, AO4	Diagram: business cycle showing short-term fluctuations and long-term growth trend (potential output)
Appropriateness of using GDP or GNI statistics to measure economic well-being—use of national income statistics for making: • comparisons over time • comparisons between countries	AO3
Alternative measures of well-being • OECD Better Life Index • Happiness Index • Happy Planet Index	AO2
3.2 Variations in economic activity—aggregate demand and aggregate supply
Aggregate demand (AD) • Aggregate demand curve	AO2, AO4	Diagram: AD curve
Components of AD: consumption (C) + investment (I) + government spending (G) + net exports (total exports [X] - total imports [M])	AO2
Determinants of AD components • C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level • I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness • G: political and economic priorities • X - M: income of trading partners, exchange rates, trade policies	AO2
Shifts of the AD curve caused by changes in determinants	AO2, AO4	Diagram: shifts of the AD curve
Short-run aggregate supply (SRAS) curve and determinants of the SRAS curve • costs of factors of production • indirect taxes	AO2, AO4	Diagram: SRAS curve
Shifts of the SRAS curve	AO2, AO4	Diagram: shifts of the SRAS curve
Alternative views of aggregate supply (AS) • Monetarist/new classical view of the long-run aggregate supply (LRAS) curve • Keynesian view of the AS curve • Inflationary and deflationary/recessionary gaps	AO2, AO4	Diagram: alternative views of the AS curve
Shifts of the AS curve over the long-run (monetarist/new classical LRAS) or over the long term (Keynesian AS) • Changes in the quantity and/or quality of factors of production • Improvements in technology • Increases in efficiency • Changes in institutions	AO2, AO4	Diagram: shifts of the LRAS or Keynesian AS
• Macroeconomic equilibrium • Short-run equilibrium • Equilibrium in the monetarist/new classical model Determination of long-run equilibrium at full employment level of output (potential output) Automatic adjustment to full employment equilibrium Unemployment at full employment equilibrium is equal to the natural rate of unemployment • Equilibrium in the Keynesian model Persistence of deflationary/recessionary gaps: equilibrium level of output might not equal the full employment level of output	AO2, AO4	Diagram: macroeconomic equilibrium in both the short run and long run
Assumptions and implications of the monetarist/new classical and Keynesian models	AO3
3.3 Macroeconomic objectives
Economic growth • Short-term growth Actual growth in the PPC model Role of AD in the AD/AS model • Long-term growth Shifts of the PPC (growth in production possibilities) Role of LRAS in the AD/AS model • Measurement of economic growth	AO2, AO4	Diagram: PPC model showing actual growth and growth in production possibilities Diagram: AD increases showing increases in real output Diagram: LRAS increases showing increases in full employment output Calculation: the rate of economic growth from a set of data
• Consequences of economic growth, including: impact on living standards impact on the environment impact on income distribution	AO3
Low unemployment • Measurement of unemployment and the unemployment rate • Difficulties of measuring unemployment • Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional • Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment • Costs of unemployment—personal costs, social costs, economic costs	AO2, AO4	Calculation: the unemployment rate from a set of data Diagram: minimum wage to show unemployment Diagram: showing a fall in the demand for labour for a particular market or geographical area Diagram: deflationary gap to show cyclical unemployment
Low and stable rate of inflation • Measuring the inflation rate, using consumer price index (CPI) data • The limitations of the CPI in measuring inflation • Causes of inflation—demand-pull and cost-push • Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation • Causes of deflation—changes in AD or SRAS • Disinflation and deflation • Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness	AO2, AO4	Calculation (HL only): a weighted price index, using a set of data provided Calculation: the inflation rate from a set of data using quantities purchased as weights in the CPI Diagram: demand-pull inflation Diagram: cost-push inflation Diagrams: deflation
Relative costs of unemployment versus inflation	AO3
Sustainable level of government (national) debt (HL only) • Measurement of government (national) debt as a percentage of GDP • Relationship between a budget deficit and government (national) debt • Costs of a high government (national) debt—debt servicing costs, credit ratings, impacts on future taxation and government spending	AO2
• Potential conflict between macroeconomic objectives Low unemployment and low inflation • High economic growth and low inflation • High economic growth and environmental sustainability • High economic growth and equity in income distribution	AO3
Trade-off between unemployment and inflation (HL only) Short-run and long-run Phillips curve	AO3, AO4	Diagram (HL only): AD/AS curves Diagram (HL only): Phillips curve showing the short-run and long- run relationship between inflation and unemployment
3.4 Economics of inequality and poverty
Relationship between equality and equity	AO2
The meaning of economic inequality • Unequal distribution of income • Unequal distribution of wealth	AO2
Measuring economic inequality • Lorenz curve and Gini coefficient (index)	AO2, AO4	Diagram: Lorenz curve showing the distribution of income and possible changes in the distribution of income Construction (HL only): a Lorenz curve from income quintile data
Meaning of poverty • Difference between absolute and relative poverty	AO2
Measuring poverty • Single indicators including: international poverty lines minimum income standards • Composite indicators including the Multidimensional Poverty Index (MPI)	AO2
Difficulties in measuring poverty	AO2
Causes of economic inequality and poverty, including: • inequality of opportunity • different levels of resource ownership • different levels of human capital • discrimination (gender, race and others) • unequal status and power • government tax and benefits policies • globalisation and technological change • market-based supply side policies	AO2
The impact of income and wealth inequality on: • economic growth • standards of living • social stability	AO3
The role of taxation in reducing poverty, income and wealth inequalities • Progressive, regressive and proportional taxes Average and marginal tax rates • Direct taxes Personal income Corporate income Wealth • Indirect taxes	AO3, AO4	Calculation (HL only): given the indirect tax rate, the amount of indirect tax paid from a given level/ amount of expenditure Calculation (HL only): total tax and average tax rates from a set of data
Further policies to reduce poverty, income and wealth inequality, including: • policies to reduce inequalities of opportunities/ investment in human capital • transfer payments • targeted spending on goods and services • universal basic income • policies to reduce discrimination • minimum wages	AO3

Real-world issue 2: How do governments manage their economy and how effective are their policies?

Conceptual understandings:
• Government intervention attempts to achieve macroeconomic objectives through a choice of policies.
• Political, economic, social and environmental factors are interdependent and will influence the effectiveness of government policies.

3.5 Demand management (demand-side policies)— monetary policy	Depth of teaching	Diagrams and calculations
Monetary policy • Control of money supply and interest rates by the central bank	AO1
Goals of monetary policy • Low and stable rate of inflation Inflation targeting • Low unemployment • Reduce business cycle fluctuations • Promote a stable economic environment for long-term growth • External balance	AO2
The process of money creation by commercial banks (HL only)	AO2
Tools of monetary policy (HL only) • Open market operations • Minimum reserve requirements • Changes in the central bank minimum lending rate (base rate/discount rate/refinancing rate changes) • Quantitative easing	AO2
Demand and supply of money—determination of equilibrium interest rates (HL only)	AO2, AO4	Diagram (HL only): showing the determination of equilibrium interest rates
Real versus nominal interest rates	AO2	Calculation: real interest rates from given data
Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps	AO3, AO4	Diagram: AD/AS curves showing expansionary and contractionary monetary policy
Effectiveness of monetary policy • Constraints on monetary policy, including: limited scope of reducing interest rates, when close to zero low consumer and business confidence • Strengths of monetary policy, including: incremental, flexible and easily reversible short time lags • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3
3.6 Demand management—fiscal policy
Fiscal policy • Sources of revenue—direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets • Expenditures—current expenditures, capital expenditures, transfer payments	AO2
Goals of fiscal policy • Low and stable inflation • Low unemployment • Promote a stable economic environment for long-term growth • Reduce business cycle fluctuations • Equitable distribution of income • External balance	AO2
Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gaps	AO3, AO4	Diagram: AD/AS curves showing expansionary and contractionary fiscal policy for both Keynesian and monetarist/new classical schools of thought
Keynesian multiplier (HL only) • 1 / (1 − MPC) or • 1 / (MPS + MPT + MPM) MPC— marginal propensity to consume MPS—marginal propensity to save MPT—marginal propensity to tax MPM—marginal propensity to import	AO2, AO4	Calculation (HL only): Keynesian multiplier Calculation (HL only): the effect on GDP of a change in an injection in investment, government spending or exports, using the Keynesian multiplier
Effectiveness of fiscal policy • Constraints on fiscal policy, including: political pressure time lags sustainable debt	AO3
crowding out (HL only)	AO4	Diagram (HL only): showing the crowding-out effect
• Strengths of fiscal policy, including: targeting of specific economic sectors government spending effective in deep recession • Automatic stabilizers: progressive taxes, unemployment benefits (HL only) • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3
3.7 Supply-side policies
Goals of supply-side policies • Long-term growth by increasing the economy’s productive capacity • Improving competition and efficiency • Reducing labour costs and unemployment through labour market flexibility • Reducing inflation to improve international competitiveness • Increasing firms’ incentives to invest in innovation by reducing costs	AO2
Market-based policies, including: • policies to encourage competition, such as: deregulation privatization trade liberalization anti-monopoly regulation • labour market policies, such as: reducing the power of labour unions reducing unemployment benefits abolishing minimum wages • incentive-related policies, such as: personal income tax cuts cuts in business tax and capital gains tax	AO2, AO4	Diagram: AD/AS model and LRAS curve to show the effect of supply-side policies Diagram: showing minimum wage
Interventionist policies, including: • education, training • improving quality, quantity and access to health care • research and development • provision of infrastructure • industrial policies	AO2
Demand-side effects of supply-side policies	AO2
Supply-side effects of fiscal policies	AO2
Effectiveness of supply-side policies • Constraints on supply-side policies Market based—equity issues, time lags, vested interests, environmental impact Interventionist—costs, time lags • Strengths of supply-side policies Market based—improved resource allocation, no burden on government budget Interventionist—direct support of sectors important for growth • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3

Unit 4: The Global Economy

Recommended time for teaching and inquiry: SL—45 hours, HL—65 hours

Real-world issue 1: Who are the winners and losers of the integration of the world’s economies?

Conceptual understandings:
• The increased interdependence of economies has benefits and costs.
• Increased economic integration may result in efficiency, welfare gains and improvements in economic well-being but the benefits may not result in equity.

4.1 Benefits of international trade	Depth of teaching	Diagrams and calculations
Benefits of international trade, including: • increased competition • lower prices • greater choice • acquisition of resources • more foreign exchange earnings • access to larger markets • economies of scale • more efficient resource allocation • more efficient production	AO2, AO4	Diagram: free trade illustrating exports when world price is above domestic price Diagram: free trade illustrating imports when world price is below domestic price Calculation (HL only): from a diagram, the quantity of exports, quantity of imports, import expenditure, export revenue
Absolute and comparative advantage (HL only) • Gains from trade • Sources of comparative advantage • Opportunity costs	AO2, AO4	Diagram (HL only): linear PPC showing differing opportunity costs and the potential gains from specialization and trade as a result of comparative advantage Calculation (HL only): opportunity costs from a set of data in order to identify comparative advantage
Limitations of the theory of comparative advantage (HL only)	AO3
4.2 Types of trade protection
Tariffs • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a tariff on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of tariffs
Quota • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a quota on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of quotas
Subsidy/export subsidy • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a subsidy on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of subsidies
Administrative barriers • Standards and regulations	AO3
4.3 Arguments for and against trade control/ protection
Arguments for trade protection/advantages of trade protection, including: • protection of infant (sunrise) industries • national security • health and safety • environmental standards • anti-dumping • unfair competition • balance of payments correction • government revenue • protection of jobs • Economically least developed country (ELDC) diversification	AO2
Arguments against trade protection/disadvantages of trade protection, including: • misallocation of resources • retaliation • increased costs • higher prices • less choice • domestic firms lack incentive to become more efficient • reduced export competitiveness	AO2
Free trade versus trade protection	AO3
4.4 Economic integration
Preferential trade agreements • Bilateral • Regional • Multilateral (the World Trade Organization)	AO1
Trading blocs • Free trade areas/agreements • Customs unions • Common markets	AO2
Advantages and disadvantages of trading blocs Advantages, including: • trade creation (HL only) • greater access to markets offer potential for economies of scale • with freedom of labour, there are greater employment opportunities • membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations • greater political stability and cooperation Disadvantages, including: • trade diversion (HL only) • loss of sovereignty • challenge to multilateral trading negotiations	AO3
Monetary union	AO2
Advantages and disadvantages of monetary union (HL only)	AO3
The World Trade Organization (WTO) • Objectives and functions • Factors affecting the influence of the WTO, including: difficulties of reaching agreement on services/ primary products unequal bargaining power of members	AO2
4.5 Exchange rates
Floating exchange rates • Determination Depreciation and appreciation of a currency	AO2, AO4	Diagram: showing the exchange rate determination and changes in equilibrium in a floating exchange rate system Calculation: using exchange rates, the price of a good in different currencies
Changes in demand and supply for a currency—factors including: • foreign demand for exports • domestic demand for imports • inward/outward foreign direct investment • inward/outward portfolio investment • remittances • speculation • relative inflation rates • relative interest rates • relative growth rates • central bank intervention	AO2, AO4	Calculation: changes in the value of a currency from a set of data
Consequences of changes in the exchange rate on economic indicators, such as: • the inflation rate • economic growth • unemployment • the current account balance • living standards	AO3, AO4	Diagram: AD/AS curves to show potential consequences of changes in the exchange rate on the economy
Fixed exchange rate • Devaluation and revaluation of a currency • How fixed exchange rates are maintained	AO2, AO4	Diagram: showing how a fixed exchange rate is maintained
Managed exchange rates • Overvalued currencies • Undervalued currencies	AO2, AO4	Diagram: showing the exchange rate determination and changes in equilibrium in a managed exchange rate system
Fixed versus floating exchange rate systems (HL only)	AO3
4.6 Balance of payments
Balance of payments • Credit and debit items • Surplus or deficit on an account	AO1, AO4	Calculation: elements of the balance of payments from a set of data
Components of the balance of payments • Current account Balance of trade in goods Balance of trade in services Income Current transfers • Capital Account Capital transfers Transaction in non-produced, non-financial assets • Financial account Foreign direct investment (FDI) Portfolio investment Reserve assets Official borrowing	AO2
Interdependence between the accounts • Zero balance in the balance of payments • Credits matched by debits • Deficits matched by surpluses	AO2
Relationship between the current account and the exchange rate (HL only)	AO2, AO4	Diagram (HL only): on exchange rate showing the relationship between the current account balance and the exchange rate
Relationship between the financial account and the exchange rate (HL only)	AO2
Implications of a persistent current account deficit in terms of: (HL only) • exchange rates • interest rates • foreign ownership of domestic assets • debt • credit ratings • demand management • economic growth	AO3
Methods to correct a persistent current account deficit (HL only) • Expenditure switching • Expenditure reducing • Supply-side policies	AO2
Effectiveness of measures to correct a persistent current account deficit (HL only).	AO3
The Marshall-Lerner condition and the J-curve effect (HL only)	AO2, AO4	Diagram (HL only): J- curve with reference to the Marshall Lerner condition
Implications of a persistent current account surplus in terms of (HL only): • domestic consumption and investment • exchange rates • inflation • employment • export competitiveness	AO3

Real-world issue 2: Why is economic development uneven?

Conceptual understandings:
• Perceptions of the meanings of development and equity change over time and vary across cultures.

4.7 Sustainable development	Depth of teaching	Diagrams and calculations
The meaning of sustainable development	AO2
Sustainable Development Goals	AO2
Relationship between sustainability and poverty (HL only)	AO2
4.8 Measuring development
The multidimensional nature of economic development	AO2
Single indicators • GDP/GNI per person (per capita) at PPP • Health and education indicators • Economic/social inequality indicators • Energy indicators • Environmental indicators	AO2
Composite indicators • Human Development Index (HDI) • Gender Inequality Index (GII) • Inequality adjusted Human Development Index (IHDI) • Happy Planet Index	AO2
Strengths and limitations of approaches to measuring economic development	AO3
Possible relationship between economic growth and economic development	AO3
4.9 Barriers to economic growth and/or economic development
Poverty traps/poverty cycles	AO2, AO4	Diagram: a poverty cycle showing any linked combination of factors that perpetuate poverty
Economic barriers • Rising economic inequality • Lack of access to infrastructure and appropriate technology • Low levels of human capital—lack of access to healthcare and education • Dependence on primary sector production • Lack of access to international markets • Informal economy • Capital flight • Indebtedness • Geography including landlocked countries • Tropical climates and endemic diseases	AO2
Political and social barriers • Weak institutional framework Legal system Ineffective taxation structures Banking system Property rights • Gender inequality • Lack of good governance/corruption • Unequal political power and status	AO2
Significance of different barriers to economic growth and/or economic development	AO3
4.10 Economic growth and/or economic development strategies
Strategies to promote economic growth and/or economic development • Trade strategies Import substitution Export promotion Economic integration • Diversification • Social enterprise • Market-based policies Trade liberalization Privatization Deregulation • Interventionist policies Redistribution policies including tax policies, transfer payments and minimum wages • Provision of merit goods Education programs Health programs Infrastructure including energy, transport, telecommunications, clean water and sanitation • Inward foreign direct investment • Foreign aid Humanitarian aid/development aid Debt relief Official Development Assistance (ODA) Non-governmental organizations (NGOs) • Multilateral development assistance The World Bank International Monetary Fund • Institutional change Improved access to banking, including microfinance and mobile banking Increasing women’s empowerment Reducing corruption Property rights Land rights	AO2, AO4	Diagrams: in this section students are expected to draw from the diagrams used in the other sections
Strengths and limitations of strategies for promoting economic growth and economic development	AO3
Strengths and limitations of government intervention versus market-oriented approaches to achieving economic growth and economic development	AO3
Progress toward meeting selected Sustainable Development Goals in the context of two or more countries	AO3

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Economies of Scale & Long-Run Average Cost (LRAC) Definitions:

• The LRAC is a a cost curve which shows the average cost per unit of production over varying amounts of output in the long-run, and can be calculated by total costs divided by total output.
• Economies of Scale is the condition where the firm is able to reduce average costs (LRAC) in the long run, when output of goods/services increases.
• Diseconomies of Scale is the condition where the firm’s average costs (LRAC) in the long run increases, when output of goods/services increases.
• The Minimum Efficient Scale is defined as the range of production outputs where the firm can produce at its lowest long-run average costs on the LRAC curve.

Economies of Scale & Long-Run Average Cost (LRAC) Explanation:
When businesses get bigger and produce more, they benefit from certain cost advantages, such as being able to negotiate bulk discounts from suppliers, or being able to afford more productive equipment. As a result, it is common for them to see their costs decrease, and experience Economies of Scale. For example, if you are a small Chinese takeaway during Covid, you may need to rely on Uber to make your deliveries, who take commission (fees) from you for each one. However, if you are a large Chinese restaurant with enough orders, you can hire your own driver, make your deliveries in one go and potentially reduce costs. As a result, the business experiences transport Economies of Scale. Similarly, this start-up connects restaurants with offices ordering in bulk to help reduce delivery costs.

However, note that expanding the restaurant kitchen, hiring and driver and getting a business vehicle takes time. This means it may not occur in the short-tun where fixed factors of production cannot be changed/increased. Hence, Economies of Scale is a long-run concept. Despite the cost savings from expanding, Diseconomies of Scale will eventually set-in for the restaurant when it gets too big and difficult to operate (imagine if you expanded from Chinese to other Asian cuisines and find it much costlier to manage the food quality and chefs). By that point, LRAC will start to increase again. Therefore, the LRAC Curve is U-shaped due to Economies/Diseconomies of Scale, whereas the short-run average cost (SRAC) curve & marginal cost (MC) curve is U-shaped due to diminishing marginal returns.

Economies of Scale & Long-Run Average Cost (LRAC) Notes with Diagrams/Graphs:

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Economies of Scale & Long-Run Average Cost (LRAC) Video Explanation – EconPlusDal

The left video explains Economies of Scale and Diseconomies of Scale, and the right video looks at the Long-Run Average Cost (LRAC) Curve).

Economies of Scale & Long-Run Average Cost (LRAC) Multiple Choice Questions

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Economies of Scale & Long-Run Average Cost (LRAC) in the News

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Numerical Example for Long-Run Average Cost
Uber’s Diseconomies of Scale

Types of Economies of Scale
Returns to Scale
Economies of Scale and Monopolies

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Monopsony Definitions:

• A pure monopsony is defined as a market where there is only one buyer for a good/service, or labour.
• Monopsony power occurs when a buyer faces little competition to purchase a good/service, or labour, and can reduce the prices or wages they pay compared to a competitive market.

Monopsony Examples & Explanation:
While a monopoly is when there is only one seller in the market, a monopsony is when there is only one buyer. For example, the UK Army is likely the only organisation buying nuclear warheads in the UK. Similarly, for the labour market, the UK Army is the only organisation recruiting soldiers in Britain. When there are limited buyers or employers, the bargaining power of the buyer enables them to suppress prices paid to suppliers (monopsony power). Such is the case for many agricultural products such as coffee bean or milk farmers, where they sell their products to large multinational corporations. When large corporations pressure suppliers (e.g. farmers) to reduce prices, this helps them create cost savings that can be passed onto consumers. However, it can also force suppliers out of business, causing them to reduce product quality to meet lower prices. For example, when supermarkets reduced prices they paid for beef, it contributed to the horsemeat scandal in the UK, where beef farmers substituted horsemeat for beef to sell to supermarkets so they do not go out of business. Similarly, when monopsony employers such as the National Health Service (NHS) in the UK suppress wages of nurses/doctors, this may damage the quality of the service when less employees are hired at a lower salary. This is because it may lead to staff being overburdened with work and a reduction in staff retention rates.

Monopsony Notes with Diagrams/Graphs:

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Monopsony Video Explanation – EconPlusDal

The left video explains the impact of a Monopsony in the labour market, and the right video explains how a trade union may be able to counteract that.

Monopsony Essay & Multiple Choice Questions

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Monopsony in the News

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Monopsony Power in Product Markets
Policies to Counter Monopsony Power

Numerical Example on Monopsony
Numerical Example on Labour Market

Monopsony Exploitation

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Types of Business Objectives and their Definitions:

• Profit Maximisation is when a business aims to generate the highest earnings possible. This is defined by producing at the output where a firm’s marginal cost equals marginal revenues i.e. MC = MR.
• Revenue Maximisation is when a business aims to maximise the total value of their sales. This is defined by producing at the output where marginal revenue equals zero. i.e. MR = 0
• Sales (Volume) Maximisation is when a business aims to maximise the number of goods sold without incurring a loss. This is defined by producing at the point where average revenue equals average costs i.e. AR = AC
• Satisficing is when a business aims to meet the expectations of its stakeholders (e.g. shareholders, employees, consumers, suppliers…), by generating an acceptable amount of profits rather than maximizing it.

Business Objectives Examples & Explanation:
Profit maximization is assumed to be the default business objective of most firms in Economics. However, firms can operate in a more strategic manner in the market. For example, Amazon made little to no profits from 1997-2015, when their total revenues grew from $0 to $100 billion. During that period, they sold Kindles at production cost in order to gain as much market share as possible by aiming for sales volume maximisation. As a result, they came to dominate the e-book market. Similarly, football clubs focus on winning games as long as they generate enough profits to operate (satisficing). They do not aim to maximise profits, or to generate a financial return to the club owner. The reason for buying a football club may most likely be due to its sentimental value or its ownership as a status symbol, as sometimes billions of dollars are spent on them and cannot be recovered. We can see different organisations/businesses can have different business objectives, although there is a trend for larger companies to embrace corporate social responsibility (be environmentally friendly, treat staff well etc.) and satisfice their stakeholders sustainably.

Business Objectives Notes with Diagrams/Graphs:

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Types of Business Objectives Video Explanation – EconPlusDal

The videos explain the different types of business objectives including profit, revenue and sales maximization, as well as satisficing. The left video is for A-Level and the right is for IB.

Business Objectives Essay & Multiple Choice Questions

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Business Objectives in the News

Related A-Level, IB Economics Resources

Explaining Business Objectives

Various Business Motives

Stakeholders in a Business
Do Firms Maximise Profits?

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Relevant resources:
View the Edexcel Economics A Syllabus and AQA Economics Syllabus online.
Visit our Economics notes & questions by topic for practicing and revising certain areas of the course.
Download 2018 Economics past-papers for the exam boards below.

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Download AQA A-Level Economics past papers for students studying A2 Economics in their second year.
Download the AQA Economics Specification for more information on the course.

AQA Microeconomics Syllabus

4.1 Individuals, firms, markets and market failure

4.1.1 Economic methodology and the economic problem	Additional Information
4.1.1.1 Economic methodology
• Economics as a social science. • Similarities to and differences in methodology from natural and other sciences. • The difference between positive and normative statements. • How value judgements influence economic decision making and policy. • People’s views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements.	Students should understand how thinking as an economist may differ from other forms of scientific enquiry.
4.1.1.2 The nature and purpose of economic activity
• The central purpose of economic activity is the production of goods and services to satisfy needs and wants. • The key economic decisions are: what to produce, how to produce and who is to benefit from the goods and services produced.
4.1.1.3 Economic resources
• The economists’ classification of economic resources into land, labour, capital and enterprise, which are the factors of production. • The environment is a scarce resource.
4.1.1.4 Scarcity, choice and the allocation of resources
• The fundamental economic problem is scarcity and that it results from limited resources and unlimited wants. • Scarcity means that choices have to be made about how scarce resources are allocated between different uses. • Choices have an opportunity cost.
4.1.1.5 Production possibility diagrams
• Production possibility diagrams illustrate different features of the fundamental economic problem, such as: resource allocation, opportunity cost and trade-offs, unemployment of economic resources, economic growth. • Why all points on the boundary are productively efficient but not all points on the boundary are allocatively efficient.	Students should be able to use production possibility diagrams to illustrate these features.
4.1.2 Individual economic decision making	Additional Information
4.1.2.1 Consumer behaviour
• Rational economic decision making and economic incentives. • Utility theory: total and marginal utility, and the hypothesis of diminishing marginal utility. • Utility maximisation. • The importance of the margin when making choices.	Students should appreciate that the hypothesis of diminishing marginal utility supports a downward sloping demand curve but they are not expected to understand the principle of equi-marginal utility or to use this principle to explain why there is likely to be an inverse relationship between price and quantity demanded.
4.1.2.2 Imperfect information
• The importance of information for decision making. • The significance of asymmetric information.	Students should recognise that imperfect information makes it difficult for economic agents to make rational decisions and is a potential source of market failure.
4.1.2.3 Aspects of behavioural economic theory
• Bounded rationality and bounded self-control. • Biases in decision making: rules of thumb, anchoring, availability and social norms. • The importance of altruism and perceptions of fairness.	Students should appreciate that behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who endeavour to maximise their utility. They should understand some of the reasons why an individual’s economic decisions may be biased.
4.1.2.4 Behavioural economics and economic policy
• Choice architecture and framing. • Nudges. • Default choices, restricted choice and mandated choice.	Students should appreciate that insights provided by behavioural economists can help governments and other agencies influence economic decision making.
4.1.3 Price determination in a competitive market	Additional Information
4.1.3.1 The determinants of the demand for goods and services
• A demand curve shows the relationship between price and quantity demanded. • The causes of shifts in the demand curve.
4.1.3.2 Price, income and cross elasticities of demand
• Be able to calculate price, income and cross elasticities of demand. • The relationship between income elasticity of demand and normal and inferior goods. • The relationship between cross elasticity of demand and substitute and complementary goods. • The relationships between price elasticity of demand and firms’ total revenue (total expenditure). • The factors that influence these elasticities of demand.	Students should be able to interpret numerical values of these elasticities of demand.
4.1.3.3 The determinants of the supply of goods and services
• A supply curve shows the relationship between price and quantity supplied. • Understand that higher prices imply higher profits and that this will provide the incentive to expand production. • The causes of shifts in the supply curve.	Students should also know that, under perfect competition, the supply curve is the marginal cost curve.
4.1.3.4 Price elasticity of supply
• Be able to calculate price elasticity of supply. • The factors that influence price elasticity of supply.	Students should be able to interpret numerical values of price elasticity of supply.
4.1.3.5 The determination of equilibrium market prices
• How the interaction of demand and supply determines equilibrium prices in a market economy. • The difference between equilibrium and disequilibrium. • Why excess demand and excess supply lead to changes in price.	Students should be able to use demand and supply diagrams to help them to analyse causes of changes in equilibrium market prices. They should be able to apply their knowledge of the basic model of demand and supply to a variety of real-world markets. They should be aware of the assumptions of the model of supply and demand.
4.1.3.6 The interrelationship between markets
• Changes in a particular market are likely to affect other markets. • The implications of joint demand, competitive demand, composite demand, derived demand and joint supply.	Students should, for example, be able to explore the impact of changes in demand, supply and price in one market upon other related markets.
4.1.4 Production, costs and revenue	Additional Information
4.1.4.1 Production and productivity
• Production converts inputs, or the services of factors of production such as capital and labour, into final output. • The meaning of productivity, including labour productivity.
4.1.4.2 Specialisation, division of labour and exchange
• The benefits of specialisation and division of labour. • Why specialisation necessitates an efficient means of exchanging goods and services, such as the use of money as a medium of exchange.
4.1.4.3 The law of diminishing returns and returns to scale
• The difference between the short run and the long run. • The difference between marginal, average and total returns. • The law of diminishing returns. • Returns to scale. • The difference between increasing, constant and decreasing returns to scale.	Students should appreciate that both the law of diminishing returns and returns to scale explain relationships between inputs and output. They should also understand that these relationships have implications for costs of production.
4.1.4.4 Costs of production
• The difference between fixed and variable costs. • The difference between marginal, average and total costs. • The difference between short-run and long-run costs. • The reasons for the shape of the marginal, average and total cost curves. • How factor prices and productivity affect firms’ costs of production and their choice of factor inputs.	Students should be able to calculate different costs from given data. They should also be able to draw and interpret cost curves.
4.1.4.5 Economies and diseconomies of scale
• The difference between internal and external economies of scale. • Reasons for diseconomies of scale. • The relationship between returns to scale and economies or diseconomies of scale. • The relationship between economies of scale, diseconomies of scale and the shape of the long-run average cost curve. • The L-shaped long-run average cost curve. • The concept of the minimum efficient scale of production.	Students should be able to categorise and give examples of both internal and external economies of scale. Students should understand the significance of the minimum efficient scale for the structure of an industry and barriers to entry.
4.1.4.6 Marginal, average and total revenue
• The difference between marginal, average and total revenue. • Why the average revenue curve is the firm’s demand curve. • The relationship between average and marginal revenue. • The relationship between marginal revenue and total revenue.	Students should be able to calculate marginal, average and total revenue from given data. They should also be able to draw and interpret revenue curves.
4.1.4.7 Profit
• Profit is the difference between total revenue and total costs. • The difference between normal and abnormal (supernormal) profit. • The role of profit in a market economy.
4.1.4.8 Technological change
• The difference between invention and innovation. • Technological change can affect methods of production, productivity, efficiency and firms’ costs of production. • Technological change can lead to the development of new products, the development of new markets and may destroy existing markets. • Technological change can influence the structure of markets.	Students should understand how the process of creative destruction is linked to technological change.
4.1.5 Perfect competition, imperfectly competitive markets and monopoly	Additional Information
4.1.5.1 Market structures
• The spectrum of competition ranging from perfect competition at one end of the spectrum to pure monopoly at the other end of the spectrum. • Factors such as the number of firms, the degree of product differentiation and ease of entry are used to distinguish between different market structures.
4.1.5.2 The objectives of firms
• The models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. • The profit-maximising rule (MC=MR). • The reasons for and the consequences of a divorce of ownership from control. • Firms have a variety of other possible objectives. • The satisficing principle.	Students should recognise that firms have a range of possible objectives including survival, growth, quality, maximising their sales revenue and increasing their market share. Students should be able to discuss how the divorce of ownership from control may affect the objectives of firms, their conduct and performance.
4.1.5.3 Perfect competition
• The formal diagrammatic analysis of the perfectly competitive model in the short and long run. • The implications of the following for the behaviour of firms and the industry: large numbers of producers, identical products, freedom of entry and exit, and perfect knowledge. • Firms operating in perfectly competitive markets are price takers. • The proposition that, given certain assumptions, relating for example to a lack of externalities, perfect competition will result in an efficient allocation of resources.	Students should be aware that perfect competition, in both product and labour markets, provides a yardstick for judging the extent to which real world markets perform efficiently or inefficiently, and the extent to which a misallocation of resources occurs. Students should also be able to assess critically the proposition that perfectly competitive markets lead to an efficient allocation of resources.
4.1.5.4 Monopolistic competition
• The formal diagrammatic analysis of the monopolistically competitive model in the short and long run. • The main characteristics of monopolistically competitive markets. • Monopolistically competitive markets will be subject to non- price competition.
4.1.5.5 Oligopoly
• The main characteristics of oligopolistic markets. • Oligopolistic markets can be very different in relation to, for example, the number of firms, the degree of product differentiation and ease of entry. • Oligopoly can be defined in terms of market structure or in terms of market conduct (behaviour). • Concentration ratios and how to calculate a concentration ratio. • The difference between collusive and non-collusive oligopoly. • The difference between cooperation and collusion. • The kinked demand curve model. • The reasons for non-price competition, the operation of cartels, price leadership, price agreements, price wars and barriers to entry. • The factors which influence prices, output, investment, expenditure on research and advertising in oligopolistic industries. • The significance of interdependence and uncertainty in oligopoly. • The advantages and disadvantages of oligopoly.	Students should be aware of the various factors which affect the behaviour and performance of firms in a variety of real world markets. The factors include different barriers to entry and the degree of concentration and product differentiation. The kinked demand curve model should be used as an illustration of the interdependence between firms and not taught as if it is the only model of oligopoly. Students should recognise that collusion may allow oligopolists to act as a monopolist and maximise their joint profits.
4.1.5.6 Monopoly and monopoly power
• The formal diagrammatic analysis of the monopoly model. • That monopoly power is influenced by factors such as barriers to entry, the number of competitors, advertising and the degree of product differentiation. • The advantages and disadvantages of monopoly.	Students should appreciate that firms operating in monopolistically competitive and oligopolistic markets are price makers and have varying degrees of monopoly power.
4.1.5.7 Price discrimination
• The conditions necessary for price discrimination. • The advantages and disadvantages of price discrimination.	Students should be aware of real-world examples of price discrimination and be able to assess its impact on producers and consumers. A diagrammatic analysis of price discrimination is expected.
4.1.5.8 The dynamics of competition and competitive market processes
• Both the short-run and long-run benefits which are likely to result from competition. • That firms do not just compete on the basis of price but that competition will, for example, also lead firms to strive to improve products, reduce costs, improve the quality of the service provided. • The process of creative destruction.	Students should understand that if firms have monopoly power and are making large profits, over time there will be an incentive for new firms to enter the market and to innovate to overcome the existing barriers to entry. Students should understand that this process of creative destruction is a fundamental feature of the way in which competition operates in a market economy.
4.1.5.9 Contestable and non-contestable markets
• The significance of market contestability for the performance of an industry. • Concepts such as sunk costs and hit-and-run competition.
4.1.5.10 Market structure, static efficiency, dynamic efficiency and resource allocation
• The difference between static efficiency and dynamic efficiency. • The conditions required for productive efficiency (minimising average total costs) and allocative efficiency (price = marginal cost). • Dynamic efficiency is influenced by, for example, research and development, investment in human and non-human capital and technological change.	Students should be able to apply efficiency concepts when comparing the performance of firms in markets with different structures. They should understand how conduct and performance indicators can be used to compare market structures.
4.1.5.11 Consumer and producer surplus
• Be able to apply these concepts when discussing economic efficiency and welfare issues, such as price discrimination and the dead-weight losses associated with monopoly.	Diagrammatic analysis is expected.
4.1.6 The labour market	Additional Information
4.1.6.1 The demand for labour, marginal productivity theory
• The demand for a factor is derived from the demand for the product. • The marginal productivity theory of the demand for labour. • The demand curve for labour shows the relationship between the wage rate and number of workers employed. • The causes of shifts in the demand curve for labour. • The determinants of the elasticity of demand for labour.
4.1.6.2 Influences upon the supply of labour to different markets
• The supply of labour to a particular occupation is influenced by monetary and non-monetary considerations. • Non-monetary considerations include job satisfaction and dissatisfaction and working conditions. • The supply curve for labour shows the relationship between the wage rate and number of workers willing to work in an occupation. • The causes of shifts in the market supply curve for labour.	Students will not be required to understand the determinants of an individual’s supply of labour or the backward- bending supply curve.
4.1.6.3 The determination of relative wage rates and levels of employment in perfectly competitive labour markets
• The economists’ model of wage determination in a perfectly competitive labour market. • Role of market forces in determining relative wage rates.	Students should appreciate that all real-world markets are imperfectly competitive to a greater or lesser extent.
4.1.6.4 The determination of relative wage rates and levels of employment in imperfectly competitive labour markets
• How various factors such as monopsony power, trade unions and imperfect information contribute to imperfections in a labour market. • How, in a monopsony labour market, the employer can use market power to reduce both the relative wage rate and the level of employment below those that would exist in a perfectly competitive labour market.	The use of relevant diagrams is expected.
4.1.6.5 The Influence of trade unions in determining wages and levels of employment
• The various factors that affect the ability of trade unions to influence wages and levels of employment in different labour markets. • How wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market and into a monopsony labour market.	The use of relevant diagrams is expected.
4.1.6.6 The National Minimum Wage
• The effects of a national minimum wage upon labour markets. • The advantages and disadvantages of a national minimum wage.
4.1.6.7 Discrimination in the labour market
• The conditions necessary for wage discrimination. • The impact of gender, ethnicity and other forms of discrimination on wages, levels and types of employment.	Real-world examples should be used to illustrate wage discrimination. Students should be able to assess the advantages and disadvantages of wage discrimination for workers, employers and the economy as a whole.
4.1.7 The distribution of income and wealth: poverty and inequality	Additional Information
4.1.7.1 The distribution of income and wealth
• The difference between income and wealth. • The various factors which influence the distribution of income and wealth. • The difference between equality and equity in relation to the distribution of income and wealth. • The Lorenz curve and Gini coefficient. • The likely benefits and costs of more equal and more unequal distributions.	Some knowledge of the distribution of household income and wealth in the United Kingdom is expected. Students should understand that the degree of inequality can be measured but that whether or not a given distribution of income is equitable (fair and just) involves a value judgement. Students will be expected to interpret measures of inequality such as the Gini coefficient but they will not be expected to calculate the Gini coefficient. Students should understand that excessive inequality is both a cause and consequence of market failure. They should also appreciate that value judgements will influence people’s views of what constitutes an equitable distribution of income and wealth and that these views will influence policy prescriptions.
4.1.7.2 The problem of poverty
• The difference between relative and absolute poverty. • The causes and effects of poverty.
4.1.7.3 Government policies to alleviate poverty and to influence the distribution of income and wealth
• The policies which are available to influence the distribution of income and wealth and to alleviate poverty. • The economic consequences of such policies.	Students should be able to evaluate the various approaches to redistributing income and wealth and alleviating poverty, recognising the moral and political perspectives.
4.1.8 The market mechanism, market failure and government intervention in markets	Additional Information
4.1.8.1 How markets and prices allocate resources
• The rationing, incentive and signalling functions of prices in allocating resources and coordinating the decisions of buyers and sellers in a market economy. • The advantages and disadvantages of the price mechanism and of extending its use into new areas of activity.	Students should understand how economic incentives influence what, how and for whom goods and services are produced. Students should be able to assess the view that the price mechanism is an impersonal method of allocating resources. They should also be able to assess the view that introducing the price mechanism and markets into some fields of human activity may be undesirable and is likely to affect the nature of the activity, eg introducing a market for blood changes the nature of the transaction and the incentives involved.
4.1.8.2 The meaning of market failure
• Market failure occurs whenever a market leads to a misallocation of resources. • The difference between complete market failure (resulting in a missing market) and partial market failure (where a market exists but contributes to resource misallocation). • How public goods, positive and negative externalities, merit and demerit goods, monopoly and other market imperfections, and inequalities in the distribution of income and wealth can lead to market failure.	Students should be able to provide examples to inform their discussion of each of these causes of market failure.
4.1.8.3 Public goods, private goods and quasi-public goods
• Pure public goods are non-rival and non-excludable and recognition of the significance of these characteristics. • The difference between a public good and a private good. • Circumstances when a public good may take on some of the characteristics of a private good and become a quasi-public good. • The significance of technological change, eg television broadcasting is now excludable. • The free-rider problem. • The tragedy of the commons.	Students should appreciate the relevance of the ‘tragedy of the commons’ for environmental market failures.
4.1.8.4 Positive and negative externalities in consumption and production
• Externalities exist when there is a divergence between private and social costs and benefits. • Why negative externalities are likely to result in over-production and that positive externalities are likely to result in under- production. • Why the absence of property rights leads to externalities in both production and consumption and hence market failure.	Students should be able to illustrate the misallocation of resources resulting from externalities in both production and consumption, using diagrams showing marginal private and social cost and benefit curves.
4.1.8.5 Merit and demerit goods
• The classification of merit and demerit goods depends upon a value judgement. • Such products may be subject to positive and negative externalities in consumption. • How under-provision of merit goods and over-provision of demerit goods may also result from imperfect information.	Students should be able to illustrate the misallocation of resources resulting from the consumption of merit and demerit goods using diagrams showing marginal private and social cost and benefit curves. It should be understood that not all products that result in positive or negative externalities in consumption are either merit or demerit goods.
4.1.8.6 Market imperfections
• Why imperfect and asymmetric information can lead to market failure. • Why the existence of monopoly and monopoly power can lead to market failure. • Why the immobility of factors of production can lead to market failure.
4.1.8.7 Competition policy
• The general principles of UK competition policy and some awareness of EU competition policy. • The costs and benefits of such policies.	Examples of real-world applications of such policies should provide contexts in which students can evaluate the use of economic models to explore economic behaviour and further develop their appreciation of the behaviour of firms. Detailed knowledge of UK and EU competition law is not required.
4.1.8.8 Public ownership, privatisation, regulation and deregulation of markets
• The arguments for and against the public ownership of firms and industries. • The arguments for and against the privatisation of state-owned enterprises. • The arguments for and against the regulation of markets. • The arguments for and against the deregulation of markets. • The problem of regulatory capture.	Students should be able to assess the application of such policies in the United Kingdom and be able to evaluate their effects on economic performance.
4.1.8.9 Government intervention in markets
• The existence of market failure, in its various forms, provides an argument for government intervention in markets. • Governments influence the allocation of resources in a variety of ways, including through public expenditure, taxation and regulation. • Governments have a range of objectives and these affect how they intervene in a mixed economy to influence the allocation of resources. • The use of indirect taxation, subsidies, price controls, state provision and regulation, the extension of property rights and pollution permits to correct market failure.	Students should be able to apply economic models to assess the role of markets and the government in a variety of situations. Students should be able to explain, analyse and evaluate the strengths and weaknesses of the market economy and the role of government within it. Students should be able to evaluate the case for and against government intervention in particular markets and to assess the relative merits of different methods of intervention.
4.1.8.10 Government failure
• Government failure occurs when government intervention in the economy leads to a misallocation of resources. • Inadequate information, conflicting objectives and administrative costs are possible sources of government failure. • Governments may create, rather than remove, market distortions. • Government intervention can lead to unintended consequences.	Students should appreciate that the possibility of government failure means that, even when there is market failure, government intervention will not necessarily improve economic welfare.

AQA Macroeconomics Syllabus

4.2 The national and international economy

4.2.1 The measurement of macroeconomic performance	Additional Information
4.2.1.1 The objectives of government economic policy
• The main objectives of government macroeconomic policy: economic growth, price stability, minimising unemployment and a stable balance of payments on current account. • The possibility of conflict arising, at least in the short run, when attempting to achieve these objectives.	Students should be aware that governments may also have other objectives of macroeconomic policy, such as balancing the budget and achieving an equitable distribution of income. They should be aware that the importance attached to the different objectives changes over time.
4.2.1.2 Macroeconomic indicators
• Data which is commonly used to measure the performance of an economy, such as: real GDP, real GDP per capita, Consumer Prices and Retail Prices Indices (CPI/RPI), measures of unemployment, productivity and the balance of payments on current account.
4.2.1.3 Uses of index numbers
• How index numbers are calculated and interpreted, including the base year and the use of weights. • How index numbers are used to measure changes in the price level and changes in other economic variables.	A detailed technical knowledge is not expected of indices such as the Retail Prices Index (RPI) and Consumer Prices Index (CPI), but students should have an awareness of their underlying features, for example, the concept of the ‘average family’ and a ‘basket of goods and services’.
4.2.1.4 Uses of national income data
• The use and limitations of national income data to assess changes in living standards over time. • The use and limitations of national income data to compare differences in living standards between countries. • The importance of using purchasing power parity (PPP) exchange rates when making international comparisons of living standards.
4.2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts	Additional Information
4.2.2.1 The circular flow of income
• What national income measures. • The difference between nominal and real income. • Real national income as an indicator of economic performance. • The circular flow of income concept, the equation income = output = expenditure, and of the concepts of equilibrium and full employment income. • The difference between injections and withdrawals into the circular flow of income. • The effect of changes in injections and withdrawals on national income.	Students are not expected to have a detailed knowledge of the construction of national income accounts.
4.2.2.2 Aggregate demand and aggregate supply analysis
• Changes in the price level are represented by movements along the aggregate demand (AD) and aggregate supply (AS) curves. • The various factors that shift the AD curve and the short-run AS curve. • The factors which affect long-run AS and distinguish them from those which affect short-run AS. • Underlying economic growth is represented by a rightward shift in the long-run AS curve. • How to use AD/AS diagrams to illustrate macroeconomic equilibrium. • How both demand-side and supply-side shocks affect the macroeconomy.	Students should be able to use AD and AS analysis to help them explain macroeconomic problems and issues. For example, they should be able to use AD and AS diagrams to illustrate changes in the price level, demand-deficient (cyclical) unemployment and economic growth. Students should also understand how global economic events can affect the domestic economy.
4.2.2.3 The determinants of aggregate demand
• What is meant by AD. • The determinants of AD, ie the determinants of consumption, investment, government spending, exports and imports. • The basic accelerator process. • The determinants of savings. • The difference between saving and investment.	Students will not be required to undertake calculations to illustrate the operation of the accelerator. Students should understand how changes in net exports affect aggregate demand and economic performance.
4.2.2.4 Aggregate demand and the level of economic activity
• The role of AD in influencing the level of economic activity. • The multiplier process and an explanation of why an initial change in expenditure may lead to a larger impact on local or national income. • The concept of the marginal propensity to consume and use the marginal propensity to consume to calculate the size of the multiplier. • Why the size of the marginal propensity to consume determines the magnitude of the multiplier effect.	Students will only be required to calculate the multiplier from the marginal propensity to consume. Calculations from the marginal propensities to withdraw will not be expected.
4.2.2.5 Determinants of short-run aggregate supply
• The price level and production costs are the main determinants of the short-run AS. • Changes in costs, such as: money wage rates, raw material prices, business taxation and productivity, will shift the short-run AS curve.
4.2.2.6 Determinants of long-run aggregate supply
• The fundamental determinants of long-run AS such as technology, productivity, attitudes, enterprise, factor mobility, and economic incentives. • The position of the vertical long-run AS curve represents the normal capacity level of output of the economy. • The importance of the institutional structure of the economy in determining aggregate supply, such as the role of the banking system in providing business investment funds, should also be understood. • The Keynesian AS curve.
4.2.3 Economic performance	Additional Information
4.2.3.1 Economic growth and the economic cycle
• The difference between short-run and long-run growth. • The various demand-side and supply-side determinants of short- run growth of real national income and the long-run trend rate of economic growth. • The costs and benefits of economic growth. • The impact of growth on individuals, the economy and the environment. • The concept of the economic cycle and the use of a range of economic indicators, such as real GDP, the rate of inflation, unemployment and investment, to identify the various phases of the economic cycle. • The difference between positive and negative output gaps. • The causes of changes in the various phases of the economic cycle, including both global and domestic demand-side and supply-side shocks.	Students should be able to use a production possibility curve and AD/AS diagrams to illustrate the distinction between short-run and long- run economic growth. Students should understand that long-run economic growth occurs when the productive capacity of the economy is increasing and is a term used to refer to the trend rate of growth of real national output in an economy over time. Students should be able to discuss the sustainability of economic growth. Students should understand that a positive output gap occurs when real GDP is above the productive potential of the economy, and a negative output gap occurs when real GDP is below the economy’s productive potential. Students should be able to discuss causes of cyclical instability such as: excessive growth in credit and levels of debt, asset price bubbles, destabilising speculation and animal spirits or herding.
4.2.3.2 Employment and unemployment
• The main UK measures of unemployment, ie the claimant count and the Labour Force Survey measure. • The concepts of voluntary and involuntary unemployment. • The terms seasonal, frictional, structural and cyclical unemployment. • How employment and unemployment may be determined by both demand-side and supply-side factors. • The concept of, and the factors which determine, real wage unemployment. • The concept of, and the factors which determine, the natural rate of unemployment. • The consequences of unemployment for individuals and for the performance of the economy.	Students should appreciate that unemployment has a variety of causes and hence the appropriate policies to reduce unemployment depend on the cause. They should understand that a negative output gap is linked to cyclical unemployment and that supply-side causes of unemployment affect the position of the long-run aggregate supply curve.
4.2.3.3 Inflation and deflation
• The concepts of inflation, deflation and disinflation. • Demand-pull and cost-push influences on the price level. • Fisher’s equation of exchange MV = PQ and the Quantity Theory of Money in relation to the monetarist model. • The effects of expectations on changes in the price level • The consequences of inflation for both individuals and the performance of the economy. • The consequences of deflation for both individuals and the performance of the economy. • How changes in world commodity prices affect domestic inflation. • How changes in other economies can affect inflation in the UK.	Students should understand that deflation exists when the price level is falling, whereas disinflation is when the rate of inflation is falling. Students should appreciate that deflationary policies are policies to reduce aggregate demand and do not necessarily result in deflation. Students can use T instead of Q in the Fisher equation but using Q means that PQ is nominal national income and overcomes the difficulties associated with the inclusion of intermediate transactions.
4.2.3.4 Possible conflicts between macroeconomic policy objectives
• How negative and positive output gaps relate to unemployment and inflationary pressures. • Both the short-run Phillips curve and the long-run, L-shaped Phillips curve. • The implications of the short-run Phillips curve and the long-run, L-shaped Phillips curve for economic policy. • How economic policies may be used to try to reconcile possible policy conflicts both in the short run and the long run.	Students should be able to use macroeconomic models, including the AD/ AS model, to analyse the causes of possible conflicts between policy objectives in the short run and long run. They should be able to discuss approaches to reconciling these conflicts and the monetarist/supply- side view that the major macroeconomic objectives are compatible in the long run. The L-shaped Phillips curve is also known as the vertical long-run Phillips curve.
4.2.4 Financial markets and monetary policy	Additional Information
4.2.4.1 The structure of financial markets and financial assets
• The characteristics and functions of money. • Definitions of the money supply and the distinction between narrow money and broad money. • The difference between the money market, the capital market and the foreign exchange market. • The role of financial markets in the wider economy. • The difference between debt and equity. • Why there is an inverse relationship between market interest rates and bond prices.	Students should know that ways in which firms raise finance include: issuing shares, issuing corporate bonds and borrowing from a bank. Students should know the terms coupon and maturity in relation to government bonds and be able to calculate the yield on a government bond.
4.2.4.2 Commercial banks and investment banks
• The difference between a commercial bank and an investment bank. • The main functions of a commercial bank. • The structure of a commercial bank’s balance sheet. • The objectives of a commercial bank, ie liquidity, profitability and security. • Potential conflicts between these objectives. • How banks create credit.	Students should be aware of the differences between a commercial bank and an investment bank but they do not need a detailed knowledge of the activities and functions of an investment bank. They should also be aware that many banks are engaged in both investment banking and commercial banking activities and that this may increase systemic risk. Students should be aware that there are other institutions that operate in financial markets but they do not need to know about their activities or their functions. Students will not be required to calculate the credit multiplier.
4.2.4.3 Central banks and monetary policy
• The main functions of a central bank. • That monetary policy involves the central bank taking action to influence interest rates, the supply of money and credit and the exchange rate. • The current objectives of monetary policy set by the government. • The role of the Monetary Policy Committee of the Bank of England (MPC) and how it uses changes in bank rate to try to achieve the objectives for monetary policy, including the government’s target rate of inflation. • The factors considered by the MPC when setting the bank rate. • How changes in the exchange rate affect aggregate demand and the various macroeconomic policy objectives. • The monetary policy transmission mechanism, including the relationship between changes in interest rates and the exchange rate. • How the Bank of England can influence the growth of the money supply.	Students should understand current and recent instruments of monetary policy such as: quantitative easing, Funding for Lending and forward guidance. Students should understand how the MPC of the Bank of England uses changes in bank rate to try to achieve the objectives for monetary policy, including the government’s target rate of inflation.
4.2.4.4 The regulation of the financial system
• Regulation of the financial system in the UK, eg the role of the Bank of England, the Prudential Regulation Authority (PRA), the Financial Policy Committee (FPC) and the Financial Conduct Authority (FCA). • Why a bank might fail, including the risks involved in lending long term and borrowing short term. • Liquidity ratios and capital ratios and how they affect the stability of a financial institution. • Moral hazard. • Systemic risk and the impact of problems that arise in financial markets upon the real economy.	An in-depth knowledge of the PRA, FPC and the FCA is not expected but students should appreciate their role in trying to maintain the stability of the financial system. Students will not be required to calculate liquidity or capital ratios.
4.2.5 Fiscal policy and supply-side policies	Additional Information
4.2.5.1 Fiscal policy
• Fiscal policy involves the manipulation of government spending, taxation and the budget balance. • Fiscal policy can have both macroeconomic and microeconomic functions. • How fiscal policy can be used to influence aggregate demand. • How fiscal policy can be used to influence aggregate supply. • How government spending and taxation can affect the pattern of economic activity. • The types of and reasons for public expenditure. • Why governments levy taxes. • The difference between direct and indirect taxes. • The difference between progressive, proportional and regressive taxes. • The principles of taxation, such as that taxes should be equitable. • The role and relative merits of different UK taxes. • The relationship between the budget balance and the national debt. • Cyclical and structural budget deficits and surpluses. • The consequences of budget deficits and surpluses for macroeconomic performance. • The significance of the size of the national debt. • The role of the Office for Budget Responsibility.	Students should be able to assess the economic significance of changes in the level and distribution of both public expenditure and taxation. They should be able to discuss the issue of the budget balance and be able to evaluate the possible economic consequences of a government running a budget deficit or budget surplus. They should be able to assess the impact of measures used to rebalance the budget.
4.2.5.2 Supply-side policies
• The difference between supply-side policies and supply-side improvements in the economy. • How supply-side policies can help to achieve supply-side improvements in the economy. • How supply-side policies, such as tax changes designed to change personal incentives, may increase the potential output of the economy and improve the underlying trend rate of economic growth. • How supply-side policies can affect unemployment, the rate of change of prices and UK external performance, as reflected in the balance of payments on current account. • The role of supply-side policies in reducing the natural rate of unemployment. • Free market supply-side policies include measures such as: tax cuts, privatisation, deregulation and some labour market reforms. • Interventionist supply-side policies include measures such as: government spending on education and training, industrial policy, subsidising spending on research and development. • Supply-side policies can have microeconomic as well as macroeconomic effects.	Students should recognise that supply-side changes in the economy often originate in the private sector, independently of government, eg through productivity improvements, innovation and investment. Students should recognise that supply-side policies can involve government intervention to deal with market failures such as short- termism, as well as policies to improve economic incentives and the operation of markets.
4.2.6 The international economy	Additional Information
4.2.6.1 Globalisation
• The causes of globalisation. • The main characteristics of globalisation. • The consequences of globalisation for less-developed and for more-developed countries. • The role of multinational corporations in globalisation.
4.2.6.2 Trade
• The model of comparative advantage. • The distinction between comparative and absolute advantage. • The model shows that specialisation and trade can increase total output. • Other economic benefits of trade, such as the ability to exploit economies of scale and increased competition. • The costs of international trade. • The reasons for changes in the pattern of trade between the UK and the rest of the world. • The nature of protectionist policies, such as: tariffs, quotas and export subsidies. • The causes and consequences of countries adopting protectionist policies. • The main features of a customs union. • The main characteristics of the Single European Market (SEM). • The consequences for the UK of its membership of the European Union (EU). • The role of the World Trade Organisation (WTO).	Students should be able to use a simple numerical example to illustrate the principle of comparative advantage and the associated benefits of trade. Students should be able to use a diagram to illustrate the effects of imposing a tariff on imports. Students should be able to discuss the arguments for and against the UK’s membership of the EU.
4.2.6.3 The balance of payments
• The difference between the current, capital and financial accounts on the balance of payments. • The current account comprises trade in goods, trade in services, primary income and secondary income. • The meaning of a deficit and a surplus on the current account. • The factors that influence a country’s current account balance such as productivity, inflation and the exchange rate. • The consequences of investment flows between countries. • The policies that might be used to correct a balance of payments deficit or surplus. • Expenditure-switching and expenditure-reducing policies. • The effect policies used to correct a deficit or surplus may have upon other macroeconomic policy objectives. • The significance of deficits and surpluses for an individual economy. • The implications for the global economy of a major economy or economies with imbalances deciding to take corrective action.	Students should have a detailed knowledge of the structure of the current account of the balance of payments but only need a general appreciation of the other sections of the balance of payments account. Students should appreciate the difference between foreign direct investment (FDI) and portfolio investment.
4.2.6.4 Exchange rate systems
• How exchange rates are determined in freely floating exchange rate systems. • How governments can intervene to influence the exchange rate. • The advantages and disadvantages of fixed and floating exchange rate systems. • Advantages and disadvantages for a country of joining a currency union, eg the eurozone.
4.2.6.5 Economic growth and development
• The difference between growth and development. • The main characteristics of less-developed economies. • The main indicators of development, including the Human Development Index (HDI). • Factors that affect growth and development, such as: investment, education and training. • Barriers to growth and development, such as: corruption, institutional factors, poor infrastructure, inadequate human capital, lack of property rights. • Policies that might be adopted to promote economic growth and development. • The role of aid and trade in promoting growth and development.	Students should appreciate the links between this and other parts of the specification, such as: globalisation, trade, the determinants of economic growth and inequality. Students should be able to compare market-based strategies and interventionist strategies for promoting growth and development.

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Year 1 Microeconomics Syllabus (Theme 1)

Theme 1: Introduction to Markets and Market and Market Failure

1.1 Nature of economics
1.1.1 Economics as a social science	a) Thinking like an economist: the process of developing models in economics, including the need to make assumptions b) The use of the ceteris paribus assumption in building models c) The inability in economics to make scientific experiments
1.1.2 Positive and normative economic statements	a) Distinction between positive and normative economic statements b) The role of value judgements in influencing economic decision making and policy
1.1.3 The economic problem	a) The problem of scarcity – where there are unlimited wants and finite resources b) The distinction between renewable and non-renewable resources c) The importance of opportunity costs to economic agents (consumers, producers and government)
1.1.4 Production possibility frontiers	a) The use of production possibility frontiers to depict: • the maximum productive potential of an economy • opportunity cost (through marginal analysis) • economic growth or decline • efficient or inefficient allocation of resources • possible and unobtainable production b) The distinction between movements along and shifts in production possibility curves, considering the possible causes for such changes c) The distinction between capital and consumer goods
1.1.5 Specialisation and the division of labour	a) Specialisation and the division of labour: reference to Adam Smith b) The advantages and disadvantages of specialisation and the division of labour in organising production c) The advantages and disadvantages of specialising in the production of goods and services to trade d) The functions of money (as a medium of exchange, a measure of value, a store of value, a method of deferred payment)
1.1.6 Free market economies, mixed economy and command economy	a) The distinction between free market, mixed and command economies: reference to Adam Smith, Friedrich Hayek and Karl Marx b) The advantages and disadvantages of a free market economy and a command economy c) The role of the state in a mixed economy
1.2 How markets work
1.2.1 Rational decision making	a) The underlying assumptions of rational economic decision making: • consumers aim to maximise utility • firms aim to maximise profits
1.2.2 Demand	a) The distinction between movements along a demand curve and shifts of a demand curve b) The factors that may cause a shift in the demand curve (the conditions of demand) c) The concept of diminishing marginal utility and how this influences the shape of the demand curve
1.2.3 Price, income and cross elasticities of demand	a) Understanding of price, income and cross elasticities of demand b) Use formulae to calculate price, income and cross elasticities of demand c) Interpret numerical values of • price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic • income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic • cross elasticity of demand: substitutes, complementary and unrelated goods d) The factors influencing elasticities of demand e) The significance of elasticities of demand to firms and government in terms of: • the imposition of indirect taxes and subsidies • changes in real income • changes in the prices of substitute and complementary goods f) The relationship between price elasticity of demand and total revenue (including calculation)
1.2.4 Supply	a) The distinction between movements along a supply curve and shifts of a supply curve b) The factors that may cause a shift in the supply curve (the conditions of supply)
1.2.5 Elasticity of supply	a) Understanding of price elasticity of supply b) Use formula to calculate price elasticity of supply c) Interpret numerical values of price elasticity of supply: perfectly and relatively elastic, and perfectly and relatively inelastic d) Factors that influence price elasticity of supply e) The distinction between short run and long run in economics and its significance for elasticity of supply
1.2.6 Price determination	a) Equilibrium price and quantity and how they are determined b) The use of supply and demand diagrams to depict excess supply and excess demand c) The operation of market forces to eliminate excess demand and excess supply d) The use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations
1.2.7 Price mechanism	a) Functions of the price mechanism to allocate resources: • rationing • incentive • signalling b) The price mechanism in the context of different types of markets, including local, national and global markets
1.2.8 Consumer and producer surplus	a) The distinction between consumer and producer surplus b) The use of supply and demand diagrams to illustrate consumer and producer surplus c) How changes in supply and demand might affect consumer and producer surplus
1.2.9 Indirect taxes and subsidies	a) Supply and demand analysis, elasticities, and: • the impact of indirect taxes on consumers, producers and government • the incidence of indirect taxes on consumers and producers • the impact of subsidies on consumers, producers and government • the area that represents the producer subsidy and consumer subsidy
1.2.10 Alternative views of consumer behaviour	a) The reasons why consumers may not behave rationally: • consideration of the influence of other people's behaviour • the importance of habitual behaviour • consumer weakness at computation
1.3 Market failure
1.3.1 Types of market failure	a) Understanding of market failure b) Types of market failure • externalities • under-provision of public goods • information gaps
1.3.2 Externalities	a) Distinction between private costs, external costs and social costs b) Distinction between private benefits, external benefits and social benefits c) Use of a diagram to illustrate: • the external costs of production using marginal analysis • the distinction between market equilibrium and social optimum position • identification of welfare loss area d) Use of a diagram to illustrate: • the external benefits of consumption using marginal analysis • the distinction between market equilibrium and social optimum position • identification of welfare gain area e) The impact on economic agents of externalities and government intervention in various markets
1.3.3 Public goods	a) Distinction between public and private goods using the concepts of non-rivalry and non-excludability b) Why public goods may not be provided by the private sector: the free rider problem
1.3.4 Information gaps	a) The distinction between symmetric and asymmetric information b) How imperfect market information may lead to a misallocation of resources
1.4 Government intervention
1.4.1 Government intervention in markets	a) Purpose of intervention with reference to market failure and using diagrams in various contexts: • indirect taxation (ad valorem and specific) • subsidies • maximum and minimum prices b) Other methods of government intervention: • trade pollution permits • state provision of public goods • provision of information • regulation
1.4.2 Government failure	a) Understanding of government failure as intervention that results in a net welfare loss b) Causes of government failure: • distortion of price signals • unintended consequences • excessive administrative costs • information gaps c) Government failure in various markets

Year 1 Macroeconomics Syllabus (Theme 2)

Theme 2: The UK Economy – Performance and Policies

2.1 Measures of economic performance
2.1.1 Economic growth	a) Rates of change of real Gross Domestic Product (GDP) as a measure of economic growth b) Distinction between: • real and nominal • total and per capita • value and volume c) Other national income measures: • Gross National Income (GNI) d) Comparison of rates of growth between countries and over time e) Understanding of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in international comparisons f) The limitations of using GDP to compare living standards between countries and over time g) National happiness: • UK national wellbeing • The relationship between real incomes and subjective happiness
2.1.2 Inflation	a) Understanding of: • inflation • deflation • disinflation b) The process of calculating the rate of inflation in the UK using the Consumer Prices Index (CPI) c) The limitations of CPI in measuring the rate of inflation d) The Retail Prices Index (RPI) as an alternative measure of the rate of inflation e) Causes of inflation: • demand pull • cost push • growth of the money supply f) The effects of inflation on consumers, firms, the government and workers
2.1.3 Employment and unemployment	a) Measures of unemployment: • the claimant count • the International Labour Organisation (ILO) and the UK Labour Force Survey b) The distinction between unemployment and under-employment c) The significance of changes in the rates of: • employment • unemployment • inactivity d) The causes of unemployment: • structural unemployment • frictional unemployment • seasonal unemployment • demand deficiency and cyclical unemployment • real wage inflexibility e) The significance of migration and skills for employment and unemployment f) The effects of unemployment on consumers, firms, workers, the government and society
2.1.4 Balance of payments	a) Components of the balance of payments, with particular reference to the current account, and the balance of trade in goods and services b) Current account deficits and surpluses c) The relationship between current account imbalances and other macroeconomic objectives d) The interconnectedness of economies through international trade
2.2 Aggregate demand (AD)
2.2.1 The characteristics of AD	a) Components of AD: C+I+G+(X-M) b) The relative importance of the components of AD c) The AD curve d) The distinction between a movement along, and a shift of, the AD curve
2.2.2 Consumption (C)	a) Disposable income and its influence on consumer spending b) An understanding of the relationship between savings and consumption c) Other influences on consumer spending: • interest rates • consumer confidence • wealth effects
2.2.3 Investment (I)	a) Distinction between gross and net investment b) Influences on investment: • the rate of economic growth • business expectations and confidence • Keynes and ‘animal spirits’ • demand for exports • interest rates • access to credit • the influence of government and regulations
2.2.4 Government expenditure (G)	a) The main influences on government expenditure: • the trade cycle • fiscal policy
2.2.5 Net trade (X-M)	a) The main influences on the (net) trade balance: • real income • exchange rates • state of the world economy • degree of protectionism • non-price factors
2.3 Aggregate supply (AS)
2.3.1 The characteristics of AS	a) The AS curve b) The distinction between movement along, and a shift of, the AS curve c) The relationship between short-run AS and long-run AS
2.3.2 Short-run AS	a) Factors influencing short-run AS: • changes in costs of raw materials and energy • changes in exchange rates • changes in tax rates
2.3.3 Long-run AS	a) Different shapes of the long-run AS curve: • Keynesian • classical b) Factors influencing long-run AS: • technological advances • changes in relative productivity • changes in education and skills • changes in government regulations • demographic changes and migration • competition policy
2.4 National income
2.4.1 National income	a) The circular flow of income b) The distinction between income and wealth
2.4.2 Injections and withdrawals	a) The impact of injections into, and withdrawals from, the circular flow of income
2.4.3 Equilibrium levels of real national output	a) The concept of equilibrium real national output b) The use of AD/AS diagrams to show how shifts in AD or AS cause changes in the equilibrium price level and real national output
2.4.4 The multiplier	a) The multiplier ratio b) The multiplier process c) Effects of the multiplier on the economy d) Understanding of marginal propensities and their effects on the multiplier: • the marginal propensity to consume (MPC) • the marginal propensity to save (MPS) • the marginal propensity to tax (MPT) • the marginal propensity to import (MPM) e) Calculations of the multiplier using the formulae 1/(1-MPC) and 1/MPW, where MPW=MPS+MPT+MPM f) The significance of the multiplier for shifts in AD
2.5 Economic growth
2.5.1 Causes of growth	a) Factors which could cause economic growth b) The distinction between actual and potential growth c) The importance of international trade for (export-led) economic growth
2.5.2 Output gaps	a) Distinction between actual growth rates and long-term trends in growth rates b) Understanding of positive and negative output gaps and the difficulties of measurement c) Use of an AD/AS diagram to illustrate an output gap (level of spare capacity) in an economy
2.5.3 Trade (business) cycle	a) Understanding of the trade (business) cycle b) Characteristics of a boom c) Characteristics of a recession
2.5.4 The impact of economic growth	a) The benefits and costs of economic growth and the impact on: • consumers • firms • the government • current and future living standards
2.6 Macroeconomic objectives and policies
2.6.1 Possible macroeconomic objectives	a) Economic growth b) Low unemployment c) Low and stable rate of inflation d) Balance of payments equilibrium on current account e) Balanced government budget f) Protection of the environment g) Greater income equality
2.6.2 Demand-side policies	a) Distinction between monetary and fiscal policy b) Monetary policy instruments: • interest rates • asset purchases to increase the money supply (quantitative easing) c) Fiscal policy instruments: • government spending and taxation d) Distinction between government budget (fiscal) deficit and surplus e) Distinction between, and examples of, direct and indirect taxation f) Use of AD/AS diagrams to illustrate demand-side policies g) The role of the Bank of England: • the role and operation of the Bank of England's Monetary Policy Committee h) Awareness of demand-side policies in the Great Depression and the Global Financial Crisis of 2008 • different interpretations • policy responses in the US and UK i) Strengths and weaknesses of demand-side policies
2.6.3 Supply-side policies	a) Distinction between market-based and interventionist methods b) Market-based and interventionist policies: • to increase incentives • to promote competition • to reform the labour market • to improve skills and quality of the labour force • to improve infrastructure c) Use of AD/AS diagrams to illustrate supply-side policies d) Strengths and weaknesses of supply-side policies
2.6.4 Conflicts and trade- offs between objectives and policies	a) Potential conflicts and trade-offs between the macroeconomic objectives b) Short-run Phillips curve c) Potential policy conflicts and trade-offs

Year 2 Microeconomics Syllabus (Theme 3)

Theme 3: Business Behaviour and the Labour Market (Year 2 Microeconomics)

3.1 Business growth
3.1.1 Sizes and types of firms	a) Reasons why some firms tend to remain small and why others grow b) Significance of the divorce of ownership from control: the principal-agent problem c) Distinction between public and private sector organisations d) Distinction between profit and not-for-profit organisations
3.1.2 Business growth	a) How businesses grow: • organic growth • forward and backward vertical integration • horizontal integration • conglomerate integration b) Advantages and disadvantages of: • organic growth • vertical integration • horizontal integration • conglomerate integration c) Constraints on business growth: • size of the market • access to finance • owner objectives • regulation
3.1.3 Demergers	a) Reasons for demergers b) Impact of demergers on businesses, workers and consumers
3.2 Business objectives
3.2.1 Business objectives	a) Different business objectives and reasons for them: • profit maximisation • revenue maximisation • sales maximisation • satisficing b) Diagrams and formulae to illustrate the different business objectives: • profit maximisation • revenue maximisation • sales maximisation
3.3 Revenues, costs and profits
3.3.1 Revenue	a) Formulae to calculate and understand the relationship between: • total revenue • average revenue • marginal revenue b) Price elasticity of demand and its relationship to revenue concepts (calculation required)
3.3.2 Costs	a) Formulae to calculate and understand the relationship between: • total cost • total fixed cost • total variable cost • average (total) cost • average fixed cost • average variable cost • marginal cost b) Derivation of short-run cost curves from the assumption of diminishing marginal productivity c) Relationship between short-run and long-run average cost curves
3.3.3 Economies and diseconomies of scale	a) Types of economies and diseconomies of scale b) Minimum efficient scale c) Distinction between internal and external economies of scale
3.3.4 Normal profits, supernormal profits and losses	a) Condition for profit maximisation b) Normal profit, supernormal profit and losses c) Short-run and long-run shut-down points: diagrammatic analysis
3.4 Market structures
3.4.1 Efficiency	a) Allocative efficiency b) Productive efficiency c) Dynamic efficiency d) X-inefficiency e) Efficiency/inefficiency in different market structures
3.4.2 Perfect competition	a) Characteristics of perfect competition b) Profit maximising equilibrium in the short run and long run c) Diagrammatic analysis
3.4.3 Monopolistic competition	a) Characteristics of monopolistically competitive markets b) Profit maximising equilibrium in the short run and long run c) Diagrammatic analysis
3.4.4 Oligopoly	a) Characteristics of oligopoly • high barriers to entry and exit • high concentration ratio • interdependence of firms • product differentiation b) Calculation of n-firm concentration ratios and their significance c) Reasons for collusive and non-collusive behaviour d) Overt and tacit collusion; cartels and price leadership e) Simple game theory: the prisoner's dilemma in a simple two firm/two outcome model f) Types of price competition: • price wars • predatory pricing • limit pricing g) Types of non-price competition
3.4.5 Monopoly	a) Characteristics of monopoly b) Profit maximising equilibrium c) Diagrammatic analysis d) Third degree price discrimination: • necessary conditions • diagrammatic analysis • costs and benefits to consumers and producers e) Costs and benefits of monopoly to firms, consumers, employees and suppliers f) Natural monopoly
3.4.6 Monopsony	a) Characteristics and conditions for a monopsony to operate b) Costs and benefits of a monopsony to firms, consumers, employees and suppliers
3.4.7 Contestability	a) Characteristics of contestable markets b) Implications of contestable markets for the behaviour of firms c) Types of barrier to entry and exit d) Sunk costs and the degree of contestability
3.5 Labour market
3.5.1 Demand for labour	a) Factors that influence the demand for labour b) Demand for labour as a derived demand
3.5.2 Supply of labour	a) Factors that influence the supply of labour to a particular occupation b) Market failure in labour markets: the geographical and occupational mobility and immobility of labour
3.5.3 Wage determination in competitive and non-competitive markets	a) Diagrammatic analysis of labour market equilibrium b) Understanding of current labour market issues c) Government intervention in the labour market: • maximum and minimum wages • public sector wage setting • policies to tackle labour market immobility d) The significance of the elasticity of demand for labour and the elasticity of supply of labour
3.6 Government intervention
3.6.1 Government intervention	a) Government intervention to control mergers b) Government intervention to control monopolies: • price regulation • profit regulation • quality standards • performance targets c) Government intervention to promote competition and contestability: • enhancing competition between firms through promotion of small business • deregulation • competitive tendering for government contracts • privatisation d) Government intervention to protect suppliers and employees: • restrictions on monopsony power of firms • nationalisation
3.6.2 The impact of government intervention	a) The impact of government intervention on: • prices • profit • efficiency • quality • choice b) Limits to government intervention: • regulatory capture • asymmetric information

Year 2 Macroeconomics Syllabus (Theme 4)

Theme 4: A Global Perspective

4.1 International economics
4.1.1 Globalisation	a) Characteristics of globalisation b) Factors contributing to globalisation in the last 50 years c) Impacts of globalisation and global companies on individual countries, governments, producers and consumers, workers and the environment
4.1.2 Specialisation and trade	a) Absolute and comparative advantage (numerical and diagrammatic): assumptions and limitations relating to the theory of comparative advantage b) Advantages and disadvantages of specialisation and trade in an international context
4.1.3 Pattern of trade	a) Factors influencing the pattern of trade between countries and changes in trade flows between countries: • comparative advantage • impact of emerging economies • growth of trading blocs and bilateral trading agreements • changes in relative exchange rates
4.1.4 Terms of trade	a) Calculation of terms of trade b) Factors influencing a country's terms of trade c) Impact of changes in a country's terms of trade
4.1.5 Trading blocs and the World Trade Organisation (WTO)	a) Types of trading blocs (regional trade agreements and bilateral trade agreements): • free trade areas • customs unions • common markets • monetary unions: conditions necessary for their success with particular reference to the Eurozone b) Costs and benefits of regional trade agreements c) Role of the WTO in trade liberalisation d) Possible conflicts between regional trade agreements and the WTO
4.1.6 Restrictions on free trade	a) Reasons for restrictions on free trade b) Types of restrictions on trade: • tariffs • quotas • subsidies to domestic producers • non-tariff barriers c) Impact of protectionist policies on consumers, producers, governments, living standards, equality
4.1.7 Balance of payments	a) Components of the balance of payments: • the current account • the capital and financial accounts b) Causes of deficits and surpluses on the current account c) Measures to reduce a country's imbalance on the current account d) Significance of global trade imbalances
4.1.8 Exchange rates	a) Exchange rate systems: • floating • fixed • managed b) Distinction between revaluation and appreciation of a currency c) Distinction between devaluation and depreciation of a currency d) Factors influencing floating exchange rates e) Government intervention in currency markets through foreign currency transactions and the use of interest rates f) Competitive devaluation/depreciation and its consequences g) Impact of changes in exchange rates: • the current account of the balance of payments (reference to Marshall-Lerner condition and J curve effect) • economic growth and employment/unemployment • rate of inflation • foreign direct investment (FDI) flows
4.1.9 International competitiveness	a) Measures of international competitiveness: • relative unit labour costs • relative export prices b) Factors influencing international competitiveness c) Significance of international competitiveness: • benefits of being internationally competitive • problems of being internationally uncompetitive
4.2 Poverty and inequality
4.2.1 Absolute and relative poverty	a) Distinction between absolute poverty and relative poverty b) Measures of absolute poverty and relative poverty c) Causes of changes in absolute poverty and relative poverty
4.2.2 Inequality	a) Distinction between wealth and income inequality b) Measurements of income inequality: • the Lorenz curve (diagrammatic analysis) • the Gini coefficient c) Causes of income and wealth inequality within countries and between countries d) Impact of economic change and development on inequality e) Significance of capitalism for inequality
4.3 Emerging and developing economies
4.3.1 Measures of development	a) The three dimensions of the Human Development Index (HDI) (education, health and living standards) and how they are measured and combined b) The advantages and limitations of using the HDI to compare levels of development between countries and over time c) Other indicators of development
4.3.2 Factors influencing growth and development	a) Impact of economic factors in different countries: • primary product dependency • volatility of commodity prices • savings gap: Harrod-Domar model • foreign currency gap • capital flight • demographic factors • debt • access to credit and banking • infrastructure • education/skills • absence of property rights b) Impact of non-economic factors in different countries
4.3.3 Strategies influencing growth and development	a) Market-orientated strategies: • trade liberalisation • promotion of FDI • removal of government subsidies • floating exchange rate systems • microfinance schemes • privatisation b) Interventionist strategies: • development of human capital • protectionism • managed exchange rates • infrastructure development • promoting joint ventures with global companies • buffer stock schemes c) Other strategies: • industrialisation: the Lewis model • development of tourism • development of primary industries • Fairtrade schemes • aid • debt relief d) Awareness of the role of international institutions and non-government organisations (NGOs): • World Bank • International Monetary Fund (IMF) • NGOs
4.4 The financial sector
4.4.1 Role of financial markets	a) To facilitate saving b) To lend to businesses and individuals c) To facilitate the exchange of goods and services d) To provide forward markets in currencies and commodities e) To provide a market for equities
4.4.2 Market failure in the financial sector	a) Consideration of: • asymmetric information • externalities • moral hazard • speculation and market bubbles • market rigging
4.4.3 Role of central banks	a) Key functions of central banks: • implementation of monetary policy • banker to the government • banker to the banks – lender of last resort • role in regulation of the banking industry
4.5 Role of the state in the macroeconomy
4.5.1 Public expenditure	a) Distinction between capital expenditure, current expenditure and transfer payments b) Reasons for the changing size and composition of public expenditure in a global context c) The significance of differing levels of public expenditure as a proportion of GDP on: • productivity and growth • living standards • crowding out • level of taxation • equality
4.5.2 Taxation	a) Distinction between progressive, proportional and regressive taxes b) The economic effects of changes in direct and indirect tax rates on other variables: • incentives to work • tax revenues: the Laffer curve • income distribution • real output and employment • the price level • the trade balance • FDI flows
4.5.3 Public sector finances	a) Distinction between automatic stabilisers and discretionary fiscal policy b) Distinction between a fiscal deficit and the national debt c) Distinction between structural and cyclical deficits d) Factors influencing the size of fiscal deficits e) Factors influencing the size of national debts f) The significance of the size of fiscal deficits and national debts
4.5.4 Macroeconomic policies in a global context	a) Use of fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls in different countries, with specific reference to the impact of: • measures to reduce fiscal deficits and national debts • measures to reduce poverty and inequality • changes in interest rates and the supply of money • measures to increase international competitiveness b) Use and impact of macroeconomic policies to respond to external shocks to the global economy c) Measures to control global companies' (transnationals') operations: • the regulation of transfer pricing • limits to government ability to control global companies d) Problems facing policymakers when applying policies: • inaccurate information • risks and uncertainties • inability to control external shocks

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