- Labour markets 15 mark
- factors affecting supply and demand of labour
- demand: demand for the good itself, productivity, price of capital
- supply: wages in other jobs, value for leisure, barriers to entry, population, occupational mobility
- PED: elasticity of product, substitute with capital, cost of labour as proportion of total costs
- PES: vocational elements, length of training period, time
- Labour markets 25 mark
- Higher minimum wage
- Higher minimum wage in a monopsony
- Supply side policies that reduce immobility of labour e.g. education and training or HS2
- Market failure 15 mark
- Externalities diagram
- “Information failure”
- “Externalities are ignored”
- Behavioural economics
- Computational weakness
- Herd behaviour/ social norms
- Bounded self control
- Anchoring
- Free rider problem
- When a good is non excludable it means that people have no incentive to pay, so they free ride instead. This leads to a missing market
- Market failure 25 mark
- Indirect tax diagram: inelastic but revenue
- Subsidy: opportunity cost
- Provision of information: opportunity cost
- State provision: opportunity cost and excess demand and poor quality
- Government failure
- Market mechanism
- Market structures
- Monopoly: productive and allocatively inefficient
- Perfect competition: dynamically inefficient
- Monopolistic competition: productively, allocatively and dynamically inefficient but is contestable and does move closer to productive and allocative efficiency in LR
- Natural monopolies: should be nationalised as they profit maximise and exploit their economies of scale
- Macroeconomic objectives
- 2% inflation:
- deflation is bad because people delay spending and this causes a recession and unemployment.
- high inflation is bad because wages don’t go up in line with inflation and this can also cause unemployment
- Unemployment
- Structural unemployment: use supply side policies to improve geographical and occupational mobility of labour
- Cyclical unemployment: use demand side policies to increase AD
- Current account deficit
- Current account
- Trade in goods: exports and imports of manufactured goods etc. that are taken out of the country.
- Trade in services: tourism, university etc.
- Primary income: wages, interest payments,
- Secondary income: gifts
- Capital account: capital transfers (transferring of fixed assets or funds linked with them, or also of patents/ copyrights/ franchises etc.
- Financial account: an export equals an increase in the financial account.
- Policies to reduce this
- Tariffs (expenditure switching)
- Devaluation of currency (low interest rates)
- Supply side policies
- Contractionary demand side policies (expenditure reducing)
- Should a country worry about a current account deficit?
- Yes
- Over-dependence. Vulnerable to economic shocks
- It means that AD will be low and there would be unemployment and maybe deflation. Link to other 3 objectives.
- No
- Exchange rates will adjust and current account deficit will fix itself. Also creates incentives to improve supply-side.
- X-M is only a small percentage of the AD equation and a country's real GDP, and it naturally going to increase when living standards rise. So if the other 3 objectives are met, then it isn't a huge problem.
- Economic development
- Main barriers to economic development
- Poor savings (poverty trap)
- Poor savings means poor investment means more capital means more economic growth means poor incomes
- Poor economic growth means weaker development
- Low tax revenue and low government spending on infrastructure
- Poor infrastructure e.g. schools and hospitals
- Development trap means that poor health means that people cannot work and earn incomes and therefore a country cannot develop.
- Over-dependence on primary sector
- Primary sector (commodities) have very volatile prices and are not reliable to export continuously
- Dutch disease also means that if exports do grow, the currency would increase in value, so then the commodities become less competitive.
- Evaluation: countries can work together to keep prices high e.g. OPEC
- Corruption or poor knowledge
- Even if a government did receive tax revenue or aid, they do not know how to spend it in a way that can benefit the country and improve living standards
- Main ways to increase economic development
- Market-based policies
- Reduce income taxes
- Reduce corporation taxes
- Privatisation
- Remove minimum wages
- Lower cost of productions so SRAS shifts to the right and LRAS shifts to the right due to greater incentives to work
- These incentives also attract MNCs to take control of companies in the developing country. FDI.
- The MNC brings their own technology and knowledge and invests into this, increasing capital stock.
- Harrod Domar model says that greater capital stock leads to greater incomes which leads to more savings and further investment.
- Evaluation
- profits are an outflow from the economy. this is going to mean the multiplier effect from the FDI is low.
- the MNCs will only hire local labour for low skilled jobs, and even then, poor health and educaiton may be a barrier, no matter how low the cost of labour is.
- poor working conditions. low pay. low savings. low tax revenue.
- Interventionist policies
- Spend money on education and training
- Spend money on healthcare
- Increase taxes e.g. corporation tax
- Minimum wage
- The free-market under-provides health and education (positive externalities in consumption).
- Protects and improves the living standards of the workers of the developing country.
- Increases human capital and allows them to start working and generating incomes.
- Evaluation
- National debt would be a high % of GDP, so it is risky or not feasible to spend so much money on these policies.
- May ask for aid.
- Some of the tax revenue can be generated through the help of FDI (corporation and income tax)
- Tariffs
- Developing countries only have a comparative advantage in its commodities
- However commodities are very price volatile and there are no economies of scale to exploit.
- The manufacturing sector is much better to exploit.
- But, there is no comparative advantage so the country would import these goods.
- If the government place a tariff, it would increase demand for domestic goods.
- This would allow them to gain more profits and use the economies of scale over time to improve and become more competitive.