Government macroeconomic policy objectives play a pivotal role in shaping a country's economic landscape. Understanding objectives such as inflation, balance of payments (BoP), unemployment, economic growth, development, sustainability, and redistribution is essential for AS & A Level Economics students. These objectives guide policymakers in implementing strategies that promote economic stability, growth, and equitable distribution of resources.

Key Concepts

Inflation

Definition: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It erodes purchasing power, meaning that each unit of currency buys fewer goods and services than before. Theoretical Explanation: Inflation can be categorized into demand-pull inflation, cost-push inflation, and built-in inflation.

Demand-Pull Inflation: Occurs when aggregate demand exceeds aggregate supply, leading to higher prices. It is often summarized by the equation:
$$ AD > AS \Rightarrow \text{Inflation} $$
Cost-Push Inflation: Results from an increase in the cost of production, such as wages or raw materials, which producers pass on to consumers in the form of higher prices.
Built-In Inflation: Linked to adaptive expectations, where workers demand higher wages to keep up with rising living costs, leading to a wage-price spiral.

Examples: The oil crisis of the 1970s led to cost-push inflation globally. Similarly, robust consumer spending can drive demand-pull inflation in a growing economy. Implications for Policy: Governments may use monetary policies, such as adjusting interest rates, or fiscal policies, like changing taxation and government spending, to control inflation.

Balance of Payments (BoP)

Definition: The Balance of Payments is a comprehensive record of a country's economic transactions with the rest of the world over a specific period. It includes the current account, capital account, and financial account. Theoretical Explanation: The BoP must balance, meaning that a deficit in the current account must be offset by a surplus in the capital and financial accounts, and vice versa.

Current Account: Includes trade in goods and services, primary income, and secondary income.
Capital Account: Covers capital transfers and the acquisition/disposal of non-produced, non-financial assets.
Financial Account: Records investment flows, such as foreign direct investment (FDI), portfolio investment, and other investments.

Equations: $$ \text{Current Account} + \text{Capital Account} + \text{Financial Account} = 0 $$ Examples: A country exporting more goods than it imports will have a current account surplus. Conversely, borrowing from abroad to finance investment can lead to a current account deficit and a financial account surplus. Implications for Policy: Policymakers monitor the BoP to assess economic stability. Persistent deficits may lead to depreciation of the national currency, while surpluses can indicate strong economic health.

Unemployment

Definition: Unemployment measures the percentage of the labor force that is willing and able to work but is unable to find employment. Theoretical Explanation: Unemployment can be categorized into frictional, structural, cyclical, and seasonal unemployment.

Frictional Unemployment: Short-term unemployment during the transition between jobs.
Structural Unemployment: Long-term unemployment arising from changes in the economy that create mismatches between workers' skills and job requirements.
Cyclical Unemployment: Unemployment resulting from economic downturns and reduced aggregate demand.
Seasonal Unemployment: Occurs due to seasonal fluctuations in certain industries, such as agriculture or tourism.

Equations: $$ \text{Unemployment Rate} = \left( \frac{\text{Number of Unemployed}}{\text{Labor Force}} \right) \times 100\% $$ Examples: The Great Recession saw a significant rise in cyclical unemployment. Technological advancements can lead to structural unemployment as certain job roles become obsolete. Implications for Policy: Governments may implement job training programs, education initiatives, and fiscal stimulus to reduce unemployment rates.

Economic Growth

Definition: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is typically measured by the growth rate of real Gross Domestic Product (GDP). Theoretical Explanation: Economic growth can be driven by factors such as increases in capital stock, labor force, technological advancements, and improvements in productivity.

Production Function: $$ Y = A \cdot F(K, L) $$ where $ Y $ is output, $ A $ is total factor productivity, $ K $ is capital, and $ L $ is labor.
Solow Growth Model: Highlights the role of technological progress and capital accumulation in driving long-term economic growth.

Examples: The rapid industrialization of East Asian economies in the late 20th century exemplifies significant economic growth driven by investment and export-oriented policies. Implications for Policy: Policies promoting investment in infrastructure, education, and technology can foster sustained economic growth.

Economic Development

Definition: Economic development refers to the process by which a country improves the economic, political, and social well-being of its people. It encompasses qualitative aspects of growth, such as improved living standards, education, and healthcare. Theoretical Explanation: Economic development involves structural transformations, including shifts from agriculture to industry and services, as well as improvements in governance and institutions.

Human Development Index (HDI): A composite index measuring average achievement in key dimensions of human development, including life expectancy, education, and per capita income.
Lewis Model: Describes the transition from a traditional agricultural economy to a modern industrial economy.

Examples: Scandinavian countries are often cited as examples of high economic development, characterized by robust social welfare systems and high standards of living. Implications for Policy: Policies focused on education, healthcare, and equitable income distribution are essential for fostering economic development.

Sustainability

Definition: Sustainability refers to the ability to maintain economic growth and development without depleting natural resources or causing long-term environmental damage. Theoretical Explanation: Sustainable development balances economic, social, and environmental objectives, ensuring that current needs are met without compromising future generations' ability to meet their own needs.

Triple Bottom Line: Focuses on social, environmental, and financial performance.
Green Growth: Economic growth that is environmentally sustainable.

Examples: Investment in renewable energy sources like wind and solar power exemplifies sustainable practices aimed at reducing carbon emissions. Implications for Policy: Governments may implement regulations and incentives to promote sustainable practices, such as carbon pricing and subsidies for green technologies.

Redistribution

Definition: Redistribution involves policies aimed at reducing economic inequalities by adjusting the distribution of income and wealth within a society. Theoretical Explanation: Redistribution can be achieved through progressive taxation, social welfare programs, and public services that provide support to lower-income groups.

Progressive Taxation: Tax rates increase with income, ensuring that higher earners contribute a larger share of their income.
Social Welfare Programs: Include unemployment benefits, pensions, and housing assistance to support vulnerable populations.

Examples: The implementation of a progressive income tax system in many developed countries aims to achieve a more equitable distribution of wealth. Implications for Policy: Effective redistribution policies can reduce poverty and inequality, but must be balanced to avoid disincentivizing work and investment.

Advanced Concepts

Inflation: Philips Curve and Expectations

In-Depth Theoretical Explanations: The Philips Curve illustrates an inverse relationship between inflation and unemployment, suggesting that higher inflation can lead to lower unemployment in the short run. However, in the long run, this trade-off may not hold as expectations adjust. $$ \pi = \pi^e - \alpha (u - u_n) $$ where $ \pi $ is the inflation rate, $ \pi^e $ is the expected inflation rate, $ u $ is the unemployment rate, and $ u_n $ is the natural rate of unemployment. Complex Problem-Solving: Analyze scenarios where central banks aim to exploit the short-term trade-off between inflation and unemployment, considering the impact of adaptive versus rational expectations. Interdisciplinary Connections: Linking inflation control to psychological factors in behavioral economics, such as how expectations influence consumer spending and wage negotiations. Examples: The stagflation of the 1970s challenged the traditional Philips Curve, incorporating expectations and supply shocks into the analysis.

Balance of Payments: Exchange Rate Mechanisms

In-Depth Theoretical Explanations: Explore how fixed versus floating exchange rate regimes impact the BoP. Under a fixed system, the government intervenes to maintain the currency's value, while a floating system allows the market to determine exchange rates based on supply and demand.

Monetary Approach to BoP: Focuses on the role of money supply and demand in determining BoP equilibrium.
Portfolio Balance Approach: Examines how investors allocate their portfolios across different countries, affecting capital flows and exchange rates.

Complex Problem-Solving: Calculate the impact of a depreciation in a country's currency on its BoP, considering both short-term and long-term effects on trade balance and capital flows. Interdisciplinary Connections: Connect BoP analysis with international relations, examining how geopolitical stability influences capital flows and exchange rates. Examples: The European Exchange Rate Mechanism (ERM) aimed to reduce exchange rate variability and achieve monetary stability in Europe before the adoption of the Euro.

Unemployment: Natural Rate and NAIRU

In-Depth Theoretical Explanations: The natural rate of unemployment is the level of unemployment consistent with a stable rate of inflation, incorporating frictional and structural unemployment. The Non-Accelerating Inflation Rate of Unemployment (NAIRU) represents the specific natural rate at which inflation does not accelerate. $$ \text{NAIRU} = u_n $$ Complex Problem-Solving: Analyze the effects of policies aimed at reducing unemployment below the natural rate and the potential for accelerating inflation as a result. Interdisciplinary Connections: Integrate insights from labor economics and sociology to understand how demographic changes impact the natural rate of unemployment. Examples: Technological advancements may lower the NAIRU by increasing labor market flexibility, while demographic shifts such as aging populations can increase it.

Economic Growth: Endogenous Growth Theory

In-Depth Theoretical Explanations: Endogenous Growth Theory emphasizes the role of internal factors, such as human capital, innovation, and knowledge, in driving economic growth. Unlike the Solow Model, it posits that policy measures can have a long-term impact on growth rates.

Human Capital: Investment in education and training enhances workers' productivity, contributing to sustained economic growth.
Research and Development (R&D): Innovation leads to technological advancements that improve production processes and create new industries.

Equations: $$ Y = A \cdot K^\alpha \cdot L^{1-\alpha} $$ where $ Y $ is output, $ A $ represents technology, $ K $ is capital, and $ L $ is labor. Complex Problem-Solving: Evaluate the impact of increased R&D spending on the long-term growth rate of an economy using endogenous growth models. Interdisciplinary Connections: Link to education policy and its effects on labor markets, as well as the role of intellectual property rights in fostering innovation. Examples: South Korea's investment in education and technology has been a significant factor in its rapid economic growth over the past few decades.

Economic Development: Sustainable Development Goals (SDGs)

In-Depth Theoretical Explanations: The United Nations' Sustainable Development Goals provide a comprehensive framework for economic development, emphasizing the integration of economic growth with social inclusion and environmental protection.

Goal 1: No Poverty
Goal 4: Quality Education
Goal 13: Climate Action

Complex Problem-Solving: Assess how achieving multiple SDGs simultaneously can create synergies or trade-offs in economic development strategies. Interdisciplinary Connections: Incorporate perspectives from environmental science, public health, and political science to address the multifaceted nature of economic development. Examples: Programs that combine microfinance with education initiatives aim to address both economic and social dimensions of development.

Sustainability: Circular Economy

In-Depth Theoretical Explanations: The circular economy model focuses on minimizing waste and making the most of resources through recycling, reuse, and sustainable design, contrasting with the traditional linear economy of "take, make, dispose."

Closed-Loop Systems: Ensuring that products are designed for longevity, reparability, and recyclability.
Resource Efficiency: Optimizing the use of raw materials to reduce environmental impact.

Complex Problem-Solving: Design a circular economy strategy for a manufacturing industry, identifying potential challenges and solutions in implementing closed-loop systems. Interdisciplinary Connections: Collaborate with engineering and environmental policy to develop sustainable production methods and regulatory frameworks. Examples: The automotive industry's shift towards electric vehicles and the use of recycled materials in production exemplify circular economy principles.

Redistribution: Policy Impacts and Trade-Offs

In-Depth Theoretical Explanations: Redistribution policies aim to balance equity and efficiency. While progressive taxation and welfare programs promote income equity, they may also create disincentives for work and investment, leading to potential economic inefficiencies.

Taxation Models: Comparing flat taxes versus progressive taxes and their impact on income distribution.
Welfare Economics: Evaluating the effectiveness of social safety nets in reducing poverty without compromising economic incentives.

Complex Problem-Solving: Analyze the effects of increasing progressive taxation on income inequality and economic growth, considering both short-term and long-term outcomes. Interdisciplinary Connections: Integrate political science to understand how redistribution policies are shaped by political ideologies and public opinion. Examples: The Nordic model exemplifies extensive redistribution policies combined with high levels of economic freedom, aiming to achieve both equity and efficiency.

Comparison Table

Objective	Definition	Policy Tools	Advantages	Limitations
Inflation	Increase in general price levels	Monetary policy, fiscal policy	Price stability, predictability	Can lead to unemployment, reduced purchasing power
Balance of Payments	Record of a country's economic transactions	Exchange rate adjustments, trade policies	Economic stability, currency stability	Trade restrictions can lead to retaliation
Unemployment	Percentage of the labor force without jobs	Job training programs, fiscal stimulus	Increased employment, economic growth	Cost of programs, potential inflation
Economic Growth	Increase in real GDP	Investment in infrastructure, education	Higher living standards, increased wealth	Potential environmental degradation, inequality
Economic Development	Improvement in living standards and welfare	Education, healthcare, infrastructure	Enhanced quality of life, reduced poverty	High costs, long-term implementation
Sustainability	Economic growth without environmental harm	Regulations, green technologies	Long-term resource availability, environmental protection	Higher short-term costs, technological challenges
Redistribution	Adjusting income and wealth distribution	Progressive taxes, welfare programs	Reduced inequality, poverty alleviation	Potential disincentives for work, economic inefficiency

Summary and Key Takeaways

Government macroeconomic objectives guide policies for economic stability and growth.
Inflation control is crucial for maintaining purchasing power and economic predictability.
Balance of Payments reflects a country's economic interactions globally and influences currency stability.
Addressing unemployment requires targeted policies to enhance job creation and workforce skills.
Economic growth and development focus on increasing output and improving living standards.
Sustainability ensures that growth does not compromise environmental resources.
Redistribution policies aim to achieve a more equitable society while balancing economic incentives.

Examiner Tip

Tips

• **Use Mnemonics:** Remember the macroeconomic objectives with the acronym "BIG GURDS" - Balance of payments, Inflation, Growth, Government policy, Unemployment, Redistribution, Development, Sustainability.
• **Understand Key Equations:** Familiarize yourself with important formulas like the Unemployment Rate and Philips Curve to apply them confidently in exams.
• **Real-World Examples:** Always link theoretical concepts to current events or historical examples to better understand their applications and implications.
• **Practice Diagram Analysis:** Be comfortable drawing and interpreting diagrams such as the Philips Curve and BoP components, as they are commonly tested.

Did You Know

1. The concept of the Balanced Budget Multiplier shows that increasing government spending can boost GDP without increasing the deficit. This counterintuitive principle underscores the complexity of fiscal policy.
2. Some countries, like Switzerland, maintain a very low unemployment rate through highly efficient labor market policies and strong vocational training systems.
3. Sustainable economic growth can sometimes be at odds with short-term economic gains, requiring careful policy balancing to achieve long-term benefits.

Common Mistakes

1. **Confusing GDP with Economic Growth:** GDP measures total output, while economic growth refers to the increase in GDP over time.
**Incorrect:** Believing that a high GDP always means high economic growth.
**Correct:** Understanding that GDP levels and growth rates are related but distinct concepts.

2. **Overlooking the Natural Rate of Unemployment:** Assuming unemployment can be reduced indefinitely without consequences.
**Incorrect:** Policies aimed at pushing unemployment below the natural rate without considering inflation.
**Correct:** Recognizing the trade-offs between unemployment and inflation.

3. **Misunderstanding Redistribution Effects:** Thinking redistribution only has positive effects without potential downsides.
**Incorrect:** Believing that higher taxes on the wealthy always lead to greater economic efficiency.
**Correct:** Balancing equity with incentives for investment and work.

FAQ

What is the primary goal of controlling inflation?

The primary goal of controlling inflation is to maintain purchasing power, ensure economic stability, and create a predictable environment for investment and savings.

How does a current account deficit affect a country's economy?

A current account deficit indicates that a country is importing more goods and services than it is exporting, which can lead to borrowing from abroad and potential currency depreciation if persistent.

What are the main types of unemployment?

The main types of unemployment are frictional, structural, cyclical, and seasonal, each arising from different economic conditions and labor market dynamics.

Why is economic growth important for a country?

Economic growth is important because it leads to higher living standards, increased employment opportunities, and greater national wealth, enabling investments in public services and infrastructure.

What distinguishes economic development from economic growth?

Economic development encompasses qualitative improvements in living standards, education, and healthcare, whereas economic growth strictly refers to the increase in a country's GDP.

How does redistribution impact economic incentives?

Redistribution can impact economic incentives by potentially reducing the motivation for higher earnings and investment if taxes are perceived as too burdensome, though it aims to achieve greater 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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Government Macroeconomic Policy Objectives: Inflation, Balance of Payments, Unemployment, Growth, Development, Sustainability, Redistribution

Introduction