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.