Understanding the classification of countries based on development and national income is pivotal in the study of economic development. This framework aids in analyzing and comparing the economic performance of nations, providing insights essential for policymakers and economists. For students of AS & A Level Economics (9708), mastering these classifications is fundamental to grasping broader international economic issues.

Key Concepts

1. Classification by Development

Classification by development categorizes countries based on their economic progress, social structures, and overall living standards. This approach goes beyond mere income metrics, encompassing various indicators that reflect the multifaceted nature of development. a. Developed Countries Developed countries, often referred to as high-income countries, exhibit advanced technological infrastructure, diversified economies, and high standards of living. These nations typically have robust healthcare systems, comprehensive education frameworks, and stable political environments. Examples include the United States, Germany, and Japan. Key Indicators:

Gross Domestic Product (GDP) per capita: High GDP per capita indicates substantial economic output relative to the population.
Human Development Index (HDI): Combines life expectancy, education, and per capita income indicators.
Industrialization Level: Dominance of the tertiary and secondary sectors over the primary sector.
Infrastructure Quality: Advanced transportation, communication, and utilities systems.

Example: The United States boasts a high GDP per capita, cutting-edge technology, and a comprehensive healthcare system, positioning it firmly within the developed category. b. Developing Countries Developing countries are in the process of industrialization and improving their economic indicators but have lower GDP per capita compared to developed nations. They may face challenges such as inadequate infrastructure, limited access to education, and healthcare deficiencies. Examples include India, Brazil, and Nigeria. Key Indicators:

Moderate GDP per capita: Reflects growing but still limited economic output.
HDI Levels: Medium-range scores indicating room for improvement.
Economic Structure: Significant reliance on the primary sector with growing secondary and tertiary sectors.
Infrastructure Development: Ongoing improvements but with gaps in coverage and quality.

Example: India's economy has been rapidly growing, with significant advancements in technology and infrastructure, yet it still contends with substantial income disparities and areas with limited access to basic services. c. Underdeveloped or Least Developed Countries (LDCs) LDCs face severe challenges in achieving sustainable economic growth. These nations often have very low GDP per capita, limited industrialization, high levels of poverty, and vulnerability to economic and environmental shocks. Examples include Chad, Haiti, and Afghanistan. Key Indicators:

Low GDP per capita: Indicates minimal economic activity and output.
Low HDI: Reflects poor health, education, and income levels.
Economic Structure: Predominantly reliant on agriculture and natural resource extraction.
Infrastructure Deficiencies: Limited access to basic services such as clean water, electricity, and healthcare.

Example: Haiti struggles with political instability, natural disasters, and limited access to education and healthcare, placing it among the least developed countries.

2. Classification by National Income

Classification by national income focuses on the economic output and income generated within a country. It provides a quantitative measure of a nation's economic performance and standard of living. a. High-Income Countries High-income countries have substantial national income, reflecting robust economic activities and high standards of living. They often lead in global markets and have significant influence in international economic institutions. Key Indicators:

GDP per capita: Typically exceeds $12,536 (World Bank classification).
Economic Diversification: Extensive involvement in various economic sectors.
Poverty Rates: Generally low levels of poverty.

Example: Switzerland, with its high GDP per capita and diversified economy, is classified as a high-income country. b. Middle-Income Countries Middle-income countries are categorized into lower-middle and upper-middle income based on their GDP per capita. These nations are experiencing economic growth, industrialization, and improvements in living standards. Key Indicators:

GDP per capita: Ranges from $1,036 to $12,535.
Economic Growth: Rapidly expanding industrial and service sectors.
Poverty Rates: Moderate levels of poverty with ongoing efforts to reduce it.

Example: Brazil, with a GDP per capita of around $9,130, fits within the upper-middle-income category, showcasing significant industrial growth alongside persistent social challenges. c. Low-Income Countries Low-income countries have minimal national income, reflecting limited economic activities and challenges in achieving sustainable development. These nations often require significant support for development initiatives. Key Indicators:

GDP per capita: Less than $1,036.
Economic Dependence: Heavy reliance on agriculture and extractive industries.
Poverty Rates: High levels of poverty and income inequality.

Example: Afghanistan, with a GDP per capita of approximately $508, is considered a low-income country, facing ongoing economic and political challenges.

3. Measurement of National Income

National income measurement is crucial for classifying countries by income levels. It encompasses various approaches to quantify the economic performance and standard of living. a. Gross Domestic Product (GDP) GDP represents the total market value of all final goods and services produced within a country in a specific period. It serves as a primary indicator of economic health. Types of GDP:

Nominal GDP: Calculated at current market prices without adjusting for inflation.
Real GDP: Adjusted for inflation, providing a more accurate measure of economic growth.
GDP per capita: GDP divided by the population, indicating average economic output per person.

Formula: $$ GDP = C + I + G + (X - M) $$ Where:

**C** = Consumption
**I** = Investment
**G** = Government Spending
**X** = Exports
**M** = Imports

Example: If a country has consumption (C) of $500 billion, investment (I) of $200 billion, government spending (G) of $150 billion, exports (X) of $100 billion, and imports (M) of $80 billion, then: $$ GDP = 500 + 200 + 150 + (100 - 80) = \$870 \text{ billion} $$ b. Gross National Product (GNP) GNP measures the total economic output produced by a country's residents, both domestically and internationally. It includes income earned by citizens abroad and excludes income earned by foreign residents within the country. Formula: $$ GNP = GDP + \text{Net Income from Abroad} $$ Example: If a country's GDP is $1 trillion and the net income from abroad is $200 billion, then: $$ GNP = 1 \text{ trillion} + 200 \text{ billion} = \$1.2 \text{ trillion} $$ c. Net National Income (NNI) NNI is derived by subtracting depreciation (the wear and tear of capital assets) from GNP. It represents the total income available to a nation's residents for consumption and saving. Formula: $$ NNI = GNP - \text{Depreciation} $$ Example: If GNP is $1.5 trillion and depreciation is $300 billion: $$ NNI = 1.5 \text{ trillion} - 0.3 \text{ trillion} = \$1.2 \text{ trillion} $$ d. Per Capita Income Per capita income assesses the average income earned per person in a country, providing insights into the standard of living. Formula: $$ \text{Per Capita Income} = \frac{NNI}{\text{Population}} $$ Example: With an NNI of $600 billion and a population of 50 million: $$ \text{Per Capita Income} = \frac{600 \text{ billion}}{50 \text{ million}} = \$12,000 \text{ per person} $$

4. Factors Influencing National Income Levels

Several factors determine the national income levels of a country, influencing its classification by income and development. a. Human Capital The education, skills, and health of a country’s workforce significantly impact productivity and economic output. Example: Countries investing in education and healthcare, like Germany, typically exhibit higher GDP per capita. b. Physical Capital Infrastructure, machinery, and technology facilitate production processes and economic activities. Example: Japan's advanced infrastructure supports its high economic output and classification as a developed nation. c. Natural Resources Abundance and efficient utilization of natural resources can bolster a country's economic status. Example: Saudi Arabia’s wealth in oil reserves contributes to its high national income despite other economic challenges. d. Political Stability Stable political environments attract investment and foster economic growth. Example: Switzerland’s political neutrality and stability have contributed to its economic prosperity. e. Economic Policies Policies promoting free trade, investment, and innovation can enhance economic performance. Example: Singapore’s open economic policies have transformed it into a high-income, developed nation.

Advanced Concepts

1. Economic Indices and Their Role in Classification

Economic indices provide comprehensive measures that facilitate the classification of countries by development and income. These indices aggregate various indicators to offer a holistic view of a nation's economic and social well-being. a. Human Development Index (HDI) The HDI, developed by the United Nations, combines data on life expectancy, education, and per capita income to assess human development levels. Components:

Life Expectancy at Birth: Reflects overall health and longevity.
Mean Years of Schooling: Indicates educational attainment.
Gross National Income (GNI) per Capita: Measures economic productivity and standard of living.

Formula: $$ HDI = \frac{1}{3}(I_{\text{health}} + I_{\text{education}} + I_{\text{income}}) $$ Where each index component is normalized between 0 and 1. Example: A country with high life expectancy, extensive education, and substantial GNI per capita will have a higher HDI, classifying it as highly developed. b. Gini Coefficient The Gini Coefficient measures income inequality within a country, ranging from 0 (perfect equality) to 1 (complete inequality). Formula: $$ G = \frac{\sum_{i=1}^{n}\sum_{j=1}^{n} |x_i - x_j|}{2n^2 \mu} $$ Where $ x_i $ and $ x_j $ are individual incomes, and $ \mu $ is the mean income. Example: A Gini Coefficient of 0.3 indicates moderate income inequality, whereas 0.6 suggests significant disparity. c. Multidimensional Poverty Index (MPI) The MPI assesses poverty beyond income, considering health, education, and living standards. Components:

Health: Child mortality and nutrition.
Education: Years of schooling and school attendance.
Living Standards: Access to clean water, sanitation, electricity, and housing quality.

Formula: The MPI is calculated based on the weighted sum of deprivations in each dimension. Example: A country may have a low MPI despite moderate income levels, indicating improvements in health and education.

2. The Kuznets Curve and National Income

The Kuznets Curve hypothesizes an inverted U-shaped relationship between economic development and income inequality. As an economy develops, inequality first increases and then decreases after reaching a certain level of income per capita. Stages:

Pre-Industrial Stage: Low income and low inequality.
Early Industrial Stage: Rising income with increasing inequality due to capital accumulation benefiting a limited segment.
Advanced Industrial Stage: As per capita income continues to grow, wealth spreads more evenly through structural transformations and social policies, reducing inequality.

Mathematical Representation: $$ I = aY - bY^2 $$ Where $ I $ represents income inequality and $ Y $ is national income. The curve peaks at $ Y = \frac{a}{2b} $, indicating the turning point. Example: During the industrialization phase, countries like the United States experienced rising inequality, which later decreased as social welfare policies and higher education spread benefits more broadly.

3. The Lewis Model and Dual Economy

The Lewis Model explains the transition of a developing economy from a traditional agricultural sector to a modern industrial sector, addressing issues of national income and development. Assumptions:

Dual Economy Structure: Existence of a traditional, overpopulated agricultural sector and a modern, underemployed industrial sector.
Unlimited Labor Supply: Surplus labor exists in the agricultural sector, allowing for capital mobility without affecting agricultural output.

Stages of Development:

Pre-Industrial Stage: Limited industrial activity with surplus labor in agriculture.
Industrial Expansion: Capital investment in the industrial sector attracts labor from agriculture, increasing industrial output.
Steady-State Equilibrium: Labor absorption by the industrial sector reduces unemployment, leading to sustained economic growth.

Implications for National Income: As labor shifts to higher productivity industrial jobs, national income increases, facilitating further development and reducing poverty levels. Example: China's economic reforms since the late 20th century reflect the Lewis Model, transitioning millions from agriculture to manufacturing, significantly boosting national income.

4. Sustainable Development and National Income

Sustainable development integrates economic growth with environmental stewardship and social equity, ensuring long-term national income stability without depleting resources. Three Pillars of Sustainable Development:

Economic Sustainability: Steady growth, efficient resource use, and stable income levels.
Environmental Sustainability: Protection of ecosystems, reduction of pollution, and sustainable resource management.
Social Sustainability: Equity, education, healthcare, and community development.

Measuring Sustainable National Income: The Genuine Progress Indicator (GPI) adjusts traditional GDP by accounting for environmental and social factors, providing a more accurate measure of sustainable national income. Formula: $$ GPI = GDP - \text{Environmental Degradation} - \text{Social Costs} + \text{Positive Contributions} $$ Example: A country with high GDP but significant environmental damage and social inequality may have a lower GPI, indicating challenges in sustainable development.

5. Interdisciplinary Connections

The classification by development and national income intersects with various other disciplines, enriching the understanding of economic phenomena. a. Political Science: Political stability and governance structures influence economic policies and development outcomes. Example: Democratic governance in Scandinavian countries correlates with high HDI and low income inequality. b. Sociology: Social structures, cultural norms, and education systems impact economic productivity and income distribution. Example: Societies valuing education tend to have higher skilled labor forces, contributing to higher national income. c. Environmental Science: Sustainable development emphasizes the relationship between economic growth and environmental conservation, crucial for long-term national income. Example: Investment in renewable energy can drive economic growth while mitigating environmental impacts. d. Geography: Geographical location affects access to resources, trade routes, and vulnerability to natural disasters, all influencing national income. Example: Landlocked countries may face trade challenges, impacting their economic development and income levels.

Comparison Table

Classification	High-Income Countries	Middle-Income Countries	Low-Income Countries
GDP per Capita	Above $12,536	$1,036 - $12,535	Below $1,036
Human Development Index (HDI)	0.800 and above	0.550 - 0.799	Below 0.550
Economic Structure	Diversified with strong tertiary sector	Growing industrial and service sectors	Predominantly agricultural
Infrastructure	Advanced and widespread	Developing with ongoing improvements	Limited and underdeveloped
Poverty Levels	Low	Moderate	High

Summary and Key Takeaways

Countries are classified by development and national income using indicators like GDP, HDI, and Gini Coefficient.
Developed, developing, and least developed categories provide a framework for economic analysis.
Advanced concepts include economic indices, the Kuznets Curve, the Lewis Model, and sustainable development.
Interdisciplinary connections enhance the understanding of economic classifications.
Accurate classification aids policymakers in crafting targeted economic strategies.

Examiner Tip

Tips

• Use the acronym HDP-G to remember key indicators: HDI, Desirable GDP, and Poverty levels.

• Create flashcards for different classifications and their indicators to reinforce memory.

• Relate each classification to real-world countries you are familiar with to better understand and recall the differences.

Did You Know

1. The concept of national income classification was first introduced during the post-World War II era to aid in global economic planning.

2. Singapore transformed from a low-income country in the 1960s to a high-income powerhouse within just a few decades, showcasing the impact of strategic economic policies.

3. Bhutan uses the Gross National Happiness index alongside GDP to measure its development, emphasizing well-being over purely economic indicators.

Common Mistakes

Mistake 1: Confusing GDP with GNI.
Incorrect: Assuming GDP includes only domestic production.
Correct: GNI includes income from abroad, while GDP focuses on domestic output.

Mistake 2: Overlooking non-economic indicators in development classification.
Incorrect: Classifying countries solely based on GDP per capita.
Correct: Considering HDI, education, and healthcare alongside GDP for accurate classification.

Mistake 3: Ignoring the impact of income inequality.
Incorrect: Relying only on average income measures.
Correct: Using the Gini Coefficient to understand income distribution within a country.

FAQ

What is the primary difference between GDP and GNI?

GDP measures the total economic output within a country's borders, while GNI includes GDP plus net income from abroad, reflecting the total income earned by residents.

How does the Human Development Index (HDI) differ from GDP per capita?

HDI incorporates health, education, and income indicators to provide a broader understanding of development, whereas GDP per capita solely measures average economic output per person.

Why is the Gini Coefficient important in economic classification?

The Gini Coefficient measures income inequality, offering insights into the distribution of wealth within a country, which is crucial for understanding social and economic dynamics beyond average income levels.

Can a country transition from low-income to high-income status?

Yes, through strategic economic policies, investment in education and infrastructure, and fostering industrial growth, countries can significantly improve their national income and development classification.

What role do economic policies play in a country's development?

Economic policies, such as trade liberalization, investment incentives, and education funding, are critical in shaping economic growth, attracting investment, and improving living standards, thereby influencing a country's development status.

How does sustainable development impact national income?

Sustainable development ensures that economic growth does not compromise environmental and social resources, leading to long-term stability in national income by balancing growth with conservation and equity.

1. The price system and the microeconomy

1.1 Types of cost, revenue and profit, short-run and long-run production

1.1.1 Short-run cost function: TC, AC, MC, TFC, TVC, AFC, AVC

1.1.2 Long-run production and returns to scale

1.1.3 Long-run cost curve and minimum efficient scale

1.1.4 Economies and diseconomies of scale

1.1.5 Revenue definitions and calculation: TR, AR, MR

1.1.6 Normal, subnormal and supernormal profit

1.1.7 Short-run production function and law of diminishing returns

1.2 Different market structures

1.2.1 Market types: perfect, monopoly, monopolistic, oligopoly, natural monopoly

1.2.2 Structure: number of firms, product type, barriers to entry

1.2.3 Performance in different markets: revenues, output, profit, supply curve, efficiency

1.2.4 Oligopoly: collusion, price/non-price competition, Prisoner's Dilemma

1.2.5 Concentration ratio

1.3 Growth and survival of firms

1.3.1 Reasons for different firm sizes

1.3.2 Internal and external growth: horizontal, vertical, conglomerate

1.3.3 Cartels and their consequences

1.3.4 Principal–agent problem

1.4 Differing objectives and policies of firms

1.4.1 Profit-maximisation and alternative objectives

1.4.2 Price discrimination: types, conditions, consequences

1.4.3 Other pricing policies: limit, predatory, price leadership

1.4.4 PED and firm revenue in different demand curves

1.5 Utility

1.5.1 Definition and calculation of total and marginal utility

1.5.2 Diminishing marginal utility

1.5.3 Equi-marginal principle

1.5.4 Derivation of individual demand curve

1.5.5 Limitations of marginal utility theory

1.6 Indifference curves and budget lines

1.6.1 Meaning of indifference curve and budget line

1.6.2 Causes of shifts in budget line

1.6.3 Income, substitution, and price effects

1.6.4 Limitations of indifference curve model

1.7 Efficiency and market failure

1.7.1 Productive and allocative efficiency

1.7.2 Pareto optimality and dynamic efficiency

1.7.3 Definition and causes of market failure

1.8 Private costs and benefits, externalities and social costs and benefits

1.8.1 Calculation of social, private and external costs and benefits

1.8.2 Positive and negative externalities in consumption and production

1.8.3 Deadweight welfare losses and asymmetric information

2. The Macroeconomy

2.1 Price stability

2.1.1 Consequences of inflation

2.1.2 Definition of inflation, deflation, disinflation

2.1.3 Measurement: CPI and difficulties

2.1.4 Nominal vs real values

2.1.5 Causes of inflation: cost-push and demand-pull

2.2 National income statistics

2.2.1 Meaning of national income

2.2.2 Measurement: GDP, GNI, NNI

2.2.3 Adjustment from market to basic prices

2.2.4 Adjustment from gross to net values

2.3 Circular flow of income

2.3.1 Circular flow in closed and open economies

2.3.2 Injections and leakages (multiplier not required)

2.3.3 Equilibrium and disequilibrium (no propensities)

2.4 Aggregate Demand and Aggregate Supply analysis

2.4.1 Definition and components of Aggregate Demand

2.4.2 Shape and shifts of AD curve

2.4.3 Definition and determinants of Aggregate Supply

2.4.4 Shape of AS in short run and long run

2.4.5 Shifts in AS in short and long run

2.4.6 Movement along vs shift in AD and AS

2.4.7 Establishing equilibrium in AD/AS model

2.4.8 Effects of AD/AS shifts on output, price level, and employment

2.5 Economic growth

2.5.1 Meaning and measurement of economic growth

2.5.2 Nominal vs real GDP growth

2.5.3 Causes and consequences of economic growth

2.6 Unemployment

2.6.1 Meaning and measures of unemployment

2.6.2 Causes and types: frictional, structural, cyclical, seasonal, technological

2.6.3 Consequences of unemployment

3. International economic issues

3.1 Relationship between countries at different levels of development

3.1.1 External debt: causes and consequences

3.1.2 Role of IMF and World Bank

3.1.3 International aid: forms, reasons, effects

3.1.4 Trade and investment

3.1.5 Multinational companies: definition, activities, consequences

3.1.6 Foreign Direct Investment: definition and consequences

3.2 Globalisation

3.2.1 Meaning, causes, and consequences of globalisation

3.2.2 Free trade area, customs union, monetary union, economic union

3.2.3 Trade creation and trade diversion

3.3 Policies to correct disequilibrium in the balance of payments

3.3.1 Balance of payments accounts: current, financial, and capital

3.3.2 Impact of fiscal, monetary, supply-side, protectionist and exchange rate policies

3.3.3 Expenditure-switching vs expenditure-reducing policies

3.4 Exchange rates

3.4.1 Measurement of exchange rates: nominal vs real

3.4.2 Trade-weighted exchange rates

3.4.3 Fixed and managed exchange rate determination

3.4.4 Revaluation vs devaluation of fixed exchange rate

3.4.5 Effects of exchange rate changes: Marshall-Lerner and J curve

3.5 Economic development

3.5.1 Classification by development and national income

3.5.2 Indicators of living standards and development: monetary, non-monetary, composite

3.5.3 Comparison of growth and living standards across countries and over time

3.6 Characteristics of countries at different levels of development

3.6.1 Population: birth/death rate, infant mortality, migration, urbanisation

3.6.2 Income distribution: Gini coefficient, Lorenz curve

3.6.3 Economic structure: employment sectors, trade patterns

4. The macroeconomy

4.1 Economic growth and sustainability

4.1.1 Positive and negative output gaps

4.1.2 Business (trade) cycle: phases, causes, stabilisers

4.1.3 Policies to promote economic growth and their effectiveness

4.1.4 Definition and effects of inclusive economic growth

4.1.5 Definition and effects of sustainable economic growth

4.1.6 Policies to mitigate impact of growth on environment

4.1.7 Actual vs potential growth

4.2 Employment/unemployment

4.2.1 Full employment: definition

4.2.2 Equilibrium and disequilibrium unemployment (including hysteresis)

4.2.3 Voluntary and involuntary unemployment

4.2.4 Natural rate of unemployment: definition, determinants, policy implications

4.2.5 Trends in employment and unemployment

4.2.6 Labour mobility: geographical and occupational

4.2.7 Policies to reduce unemployment and their effectiveness

4.3 Money and banking

4.3.1 Definition, functions, and characteristics of money

4.3.2 Definition of money supply and quantity theory of money (MV=PT)

4.3.3 Functions and objectives of commercial banks

4.3.4 Causes of changes in money supply in open economy

4.3.5 Credit creation, central bank role, government deficit financing, quantitative easing

4.3.6 Policies to reduce inflation and their effectiveness

4.3.7 Demand for money: liquidity preference theory

4.3.8 Interest rate determination: loanable funds and Keynesian theory

4.4 The circular flow of income

4.4.1 The multiplier: definition and calculation in different economies

4.4.2 Propensities: APS, MPS, APC, MPC, APM, MPM, ART, MRT

4.4.3 National income determination using AD and income approach

4.4.4 Effect of AD changes on national income using the multiplier

4.4.5 Components and determinants of AD: consumption, savings, investment, government spending, net export

4.4.6 Full employment and equilibrium level of national income

4.4.7 Inflationary and deflationary gaps

5. The price system and the microeconomy

5.1 Price elasticity of supply

5.1.1 Factors affecting PES

5.1.2 Implications for speed of response to market changes

5.1.3 Definition of PES

5.1.4 Formula and calculation of PES

5.1.5 Interpretation of PES coefficients

5.2 The interaction of demand and supply

5.2.1 Market equilibrium and disequilibrium

5.2.2 Shifts in demand and supply affecting equilibrium

5.2.3 Relationships between markets: complements, substitutes, derived demand, joint supply

5.2.4 Functions of price: rationing, signalling, incentivising

5.3 Consumer and producer surplus

5.3.1 Meaning and significance of consumer surplus

5.3.2 Meaning and significance of producer surplus

5.3.3 Causes of changes in consumer and producer surplus

5.3.4 Elasticity’s role in determining surplus changes

5.4 Demand and supply curves

5.4.1 Effective demand

5.4.2 Individual and market demand and supply

5.4.3 Determinants of demand

5.4.4 Determinants of supply

5.4.5 Causes of a shift in the demand curve

5.4.6 Causes of a shift in the supply curve

5.4.7 Shift vs movement along demand/supply curves

5.5 Price elasticity, income elasticity and cross elasticity of demand

5.5.1 Definitions of PED, YED, XED

5.5.2 Formulae and calculation of PED, YED, XED

5.5.3 Interpretation of elasticity coefficients

5.5.4 Types of elasticity: elastic, inelastic, unitary

5.5.5 Variation in PED along a straight-line demand curve

5.5.6 Factors affecting PED, YED, XED

5.5.7 Relationship between PED and total expenditure

5.5.8 Decision-making implications of PED, YED, XED

6. Government macroeconomic intervention

6.1 Government macroeconomic policy objectives

6.1.1 Using policy to achieve price stability, low unemployment, and economic growth

6.2 Fiscal policy

6.2.1 Meaning of government budget

6.2.2 Government budget deficit vs surplus

6.2.3 Meaning and significance of national debt

6.2.4 Types of taxes and tax rates

6.2.5 Reasons for taxation

6.2.6 Types and reasons for government spending

6.2.7 Expansionary vs contractionary fiscal policy

6.2.8 AD/AS analysis of fiscal policy impact

6.3 Monetary policy

6.3.1 Definition and tools of monetary policy

6.3.2 Expansionary vs contractionary monetary policy

6.3.3 AD/AS analysis of monetary policy impact

6.4 Supply-side policy

6.4.1 Meaning and objective of supply-side policy

6.4.2 Tools of supply-side policy

6.4.3 AD/AS analysis of supply-side policy impact

7. Basic economic ideas and resource allocation

7.1 Scarcity, choice and opportunity cost

7.1.1 Fundamental economic problem of scarcity

7.1.2 Need to make choices at all levels (individuals, firms, governments)

7.1.3 Nature and definition of opportunity cost, arising from choices

7.1.4 Basic questions of resource allocation: what, how, for whom

7.2 Economic methodology

7.2.1 Economics as a social science

7.2.2 Positive and normative statements

7.2.3 Meaning of the term ceteris paribus

7.2.4 Importance of the time period (short run, long run, very long run)

7.3 Factors of production

7.3.1 Definition of land, labour, capital and enterprise

7.3.2 Human capital vs physical capital

7.3.3 Rewards to the factors of production

7.3.4 Division of labour and specialisation

7.3.5 Role of the entrepreneur: risk and organisation

7.4 Resource allocation in different economic systems

7.4.1 Decision-making in market, planned and mixed economies

7.4.2 Resource allocation processes in different systems

7.5 Production possibility curves

7.5.1 Nature and meaning of a production possibility curve (PPC)

7.5.2 Shape of PPC: constant and increasing opportunity costs

7.5.3 Causes and consequences of shifts in a PPC

7.5.4 Significance of a position within a PPC

7.6 Classification of goods and services

7.6.1 Free goods and private goods (economic goods)

7.6.2 Public goods: nature and definition

7.6.3 Merit goods and under-consumption due to imperfect information

7.6.4 Demerit goods and over-consumption due to imperfect information

8. Government microeconomy intervention

8.1 Reasons for government intervention in markets

8.1.1 Addressing the non-provision of public goods

8.1.2 Addressing over-consumption of demerit goods and under-consumption of merit goods

8.1.3 Controlling prices in markets

8.2 Methods and effects of government intervention in markets

8.2.1 Impact and incidence of specific indirect taxes

8.2.2 Impact and incidence of subsidies

8.2.3 Direct provision of goods and services

8.2.4 Maximum and minimum prices

8.2.5 Buffer stock schemes

8.2.6 Provision of information

8.3 Addressing income and wealth inequality

8.3.1 Difference between income as a flow and wealth as a stock

8.3.2 Measuring inequality: Gini coefficient

8.3.3 Economic reasons for income and wealth inequality

8.3.4 Policies to redistribute income and wealth: minimum wage, transfer payments, progressive taxes, stat

9. International economic issues

9.1 The reasons for international trade

9.1.1 Absolute vs comparative advantage

9.1.2 Benefits of specialisation and free trade

9.1.3 Terms of trade: measurement, causes, impact

9.1.4 Limitations of trade theories

9.2 Protectionism

9.2.1 Meaning and context of protectionism

9.2.2 Tools of protection: tariffs, quotas, subsidies, embargoes, red tape

9.2.3 Arguments for and against protectionism

9.3 Current account of the balance of payments

9.3.1 Components of the current account

9.3.2 Calculation of trade balances and CAB

9.3.3 Causes and consequences of imbalances

9.4 Exchange rates

9.4.1 Definition and determination of floating exchange rates

9.4.2 Depreciation vs appreciation of exchange rates

9.4.3 Causes of exchange rate changes

9.4.4 Impact of exchange rate changes using AD/AS

9.5 Policies to correct imbalances in the current account

9.5.1 Objective of stability in current account

9.5.2 Use of fiscal, monetary, supply-side and protectionist policies

10. Government microeconomic intervention

10.1 Government policies to achieve efficient resource allocation and correct market failure

10.1.1 Application and effectiveness of taxes and subsidies

10.1.2 Use of price controls and production quotas

10.1.3 Prohibitions, licences, and direct provision

10.1.4 Pollution permits and property rights

10.1.5 Nationalisation and privatisation

10.1.6 Provision of information and behavioural insights

10.1.7 Definition, causes and consequences of government failure

10.2 Equity and redistribution of income and wealth

10.2.1 Equity vs equality

10.2.2 Equity vs efficiency

10.2.3 Absolute vs relative poverty

10.2.4 Poverty trap

10.2.5 Policies: negative income tax, universal and means-tested benefits, basic income

10.3 Labour market forces and government intervention

10.3.1 Derived demand and factors affecting labour demand

10.3.2 Shifts vs movement along labour demand curve

10.3.3 Marginal revenue product and labour demand

10.3.4 Factors affecting labour supply: wage and non-wage

10.3.5 Shifts vs movement along labour supply curve

10.3.6 Wage determination in perfect labour markets

10.3.7 Imperfect markets: trade unions, minimum wage, monopsony

10.3.8 Wage differentials from market forces

10.3.9 Transfer earnings and economic rent

11. Government macroeconomic intervention

11.1 Government macroeconomic policy objectives

11.1.1 Objectives: inflation, BoP, unemployment, growth, development, sustainability, redistribution

11.2 Links between macroeconomic problems and their interrelatedness

11.2.1 Internal vs external value of money

11.2.2 Balance of payments and inflation

11.2.3 Growth and inflation

11.2.4 Growth and balance of payments

11.2.5 Inflation and unemployment: traditional and expectations-augmented Phillips curve

11.3 Effectiveness of policy options to meet all macroeconomic objectives

11.3.1 Fiscal, monetary, supply-side, exchange rate and trade policies

11.3.2 Policy conflicts and problems

11.3.3 Macroeconomic government failure

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Classification by Development and National Income

Introduction