IB Economics Syllabus 2020 (New)

The new IB Economics syllabus and curriculum for 2020 is listed below, for first assessment in 2022. Y12 students (or new IBDP students) in 2020 will be studying this new syllabus instead of the old one. It is extracted directly from the new, official IB Economics guide published by the IBO. If you are starting Y13 in 2020 or taking the IB Economics exam in 2021, you should use this syllabus instead. Content for HL Economics only is noted in orange colour.

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 teachingDiagrams
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
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
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, AO4Diagram: 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, AO4Diagram: 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
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

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 DemandDepth of teachingDiagrams 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
Demand curveAO4Diagram: downward- sloping demand curve
Relationship between an individual consumer’s demand and market demandAO2
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
Movements along the demand curve and shifts of the demand curveAO2, AO4Diagram: 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
Supply curveAO4Diagram: upward-sloping supply curve
Relationship between an individual producer’s supply and market supplyAO2
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
Movements along and shifts of the supply curveAO2, AO4Diagram: movements along and shifts of the supply curve
2.3 Competitive market equilibrium
Demand and supply curves forming a market equilibriumAO4Diagram: 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, AO4Diagram: showing changes in equilibrium/ role of price mechanism
Functions of the price mechanism
• Resource allocation
▪ Signalling
▪ Incentive
• Rationing
Consumer and producer surplusAO2, AO4Diagram: 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 surplusAO2, 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
Behavioural economics in action (HL only)
• Choice architecture—default, restricted, and mandated choices
• Nudge theory
Business objectives (HL only)
• Profit maximization
• Alternative business objectives
▪ Corporate social responsibility
▪ Market share
▪ Satisficing
▪ Growth
2.5 Elasticities of demand
Concept of elasticityAO1, AO4Diagram: 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, AO4Diagram: 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- makingAO3
• 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, AO4Diagram: 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.
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, AO4Diagram: 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 microeconomicsDepth of teachingDiagrams 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.
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, AO4Diagram: 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 stakeholdersAO3
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, AO4Diagram: 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, AO4Diagram: 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
Importance of international cooperation
• Global nature of sustainability issues
• Challenges faced in international cooperation
• Monitoring, enforcement
2.9 Market failure—public goods
Public goods
• Non-rivalrous, non-excludable
• Free rider problem
Government intervention in response to public goods
• Direct provision
• Contracting out to the private sector
2.10 Market failure—asymmetric information (HL only)
Asymmetric information
• Adverse selection
• Moral hazard
Responses to asymmetric information
• Government responses: legislation and regulation, provision of information
• Private responses: signalling and screening
2.11 Market failure—market power (HL only)
Perfect competition–many firms, free entry, homogeneous productsAO2
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
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, AO4Calculation (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, AO4Diagram: 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
• 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, AO4Diagram: 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
• 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, AO4Diagram: 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, AO4Diagram: 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
Risks in markets dominated by one or a few very large firms
• Risks in terms of output, price, consumer choice
Government intervention in response to abuse of significant market power
• Legislation and regulation
• Government ownership
• Fines
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 wealthAO2Diagram: 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 variationsDepth of teachingDiagrams and calculations
National income accounting as a measure of economic activityAO2, AO4Diagram: 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 modelAO2, AO4
[Nominal] Gross domestic product (GDP) as a measure of national outputAO2, AO4Calculation: [nominal] GDP from sets of national income data, using the expenditure approach
[Nominal] Gross national income (GNI) as a measure of national outputAO2, AO4Calculation: [nominal] GNI from data
Real GDP and real GNIAO2, AO4Calculation: 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, AO4Calculation: real GDP per capita and real GNI per capita
Business cycle: short-term fluctuations and long-term growth trend (potential output)AO2, AO4Diagram: 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
Alternative measures of well-being
• OECD Better Life Index
• Happiness Index
• Happy Planet Index
3.2 Variations in economic activity—aggregate demand and aggregate supply
Aggregate demand (AD)
• Aggregate demand curve
AO2, AO4Diagram: 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
Shifts of the AD curve caused by changes in determinantsAO2, AO4Diagram: 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, AO4Diagram: SRAS curve
Shifts of the SRAS curveAO2, AO4Diagram: 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, AO4Diagram: 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, AO4Diagram: 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, AO4Diagram: macroeconomic equilibrium in both the short run and long run
Assumptions and implications of the monetarist/new classical and Keynesian modelsAO3
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, AO4Diagram: 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
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, AO4Calculation: 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, AO4Calculation (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 inflationAO3
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
• 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
▪ Trade-off between unemployment and inflation (HL only)
▪ Short-run and long-run Phillips curve
AO3, AO4Diagram (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 equityAO2
The meaning of economic inequality
• Unequal distribution of income
• Unequal distribution of wealth
Measuring economic inequality
• Lorenz curve and Gini coefficient (index)
AO2, AO4Diagram: 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
Measuring poverty
• Single indicators including:
▪ international poverty lines
▪ minimum income standards
• Composite indicators including the Multidimensional Poverty Index (MPI)
Difficulties in measuring povertyAO2
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
The impact of income and wealth inequality on:
• economic growth
• standards of living
• social stability
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, AO4Calculation (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

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 policyDepth of teachingDiagrams and calculations
Monetary policy
• Control of money supply and interest rates by the central bank
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
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
Demand and supply of money—determination of equilibrium interest rates (HL only)AO2, AO4Diagram (HL only): showing the determination of equilibrium interest rates
Real versus nominal interest ratesAO2Calculation: real interest rates from given data
Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gapsAO3, AO4Diagram: 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
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
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
Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gapsAO3, AO4Diagram: 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, AO4Calculation (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
▪ crowding out (HL only)AO4Diagram (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
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
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, AO4Diagram: 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
Demand-side effects of supply-side policiesAO2
Supply-side effects of fiscal policiesAO2
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

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 tradeDepth of teachingDiagrams 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, AO4Diagram: 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, AO4Diagram (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
• Effects on markets and stakeholders
AO3, AO4Diagram: 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
• Effects on markets and stakeholders
AO3, AO4Diagram: 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, AO4Diagram: 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
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
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
Free trade versus trade protectionAO3
4.4 Economic integration
Preferential trade agreements
• Bilateral
• Regional
• Multilateral (the World Trade Organization)
Trading blocs
• Free trade areas/agreements
• Customs unions
• Common markets
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
Monetary unionAO2
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
4.5 Exchange rates
Floating exchange rates
• Determination
▪ Depreciation and appreciation of a currency
AO2, AO4Diagram: 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, AO4Calculation: 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, AO4Diagram: 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, AO4Diagram: showing how a fixed exchange rate is maintained
Managed exchange rates
• Overvalued currencies
• Undervalued currencies
AO2, AO4Diagram: 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, AO4Calculation: 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
Interdependence between the accounts
• Zero balance in the balance of payments
• Credits matched by debits
• Deficits matched by surpluses
Relationship between the current account and the exchange rate (HL only)AO2, AO4Diagram (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
Methods to correct a persistent current account deficit (HL only)
• Expenditure switching
• Expenditure reducing
• Supply-side policies
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, AO4Diagram (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

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 developmentDepth of teachingDiagrams and calculations
The meaning of sustainable developmentAO2
Sustainable Development GoalsAO2
Relationship between sustainability and poverty (HL only)AO2
4.8 Measuring development
The multidimensional nature of economic developmentAO2
Single indicators
• GDP/GNI per person (per capita) at PPP
• Health and education indicators
• Economic/social inequality indicators
• Energy indicators
• Environmental indicators
Composite indicators
• Human Development Index (HDI)
• Gender Inequality Index (GII)
• Inequality adjusted Human Development Index (IHDI)
• Happy Planet Index
Strengths and limitations of approaches to measuring economic developmentAO3
Possible relationship between economic growth and economic developmentAO3
4.9 Barriers to economic growth and/or economic development
Poverty traps/poverty cyclesAO2, AO4Diagram: 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
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
Significance of different barriers to economic growth and/or economic developmentAO3
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, AO4Diagrams: 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 developmentAO3
Strengths and limitations of government intervention versus market-oriented approaches to achieving economic growth and economic developmentAO3
Progress toward meeting selected Sustainable Development Goals in the context of two or more countriesAO3

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