Paper 3 Recap Delete after

1. Demand
   1. PIRATES
   2. related goods
   3. substitutes and complements
2. PED
   1. SANDPIT
3. XED
   1. substitutes and complements
4. YED
   1. luxury or inferior or normal
5. Supply
   1. PCTWINS
   2. indirect tax and subsidies
6. PES
7. Demand for labour
   1. demand for the good, price of capital, productivity
8. PEDlabour
   1. inelastic product, capital substitute?, cost of labour as a proportion of total costs
9. Supply of labour
   1. wages in substitute jobs, barriers to entry, population, value of leisure
10. PESlabour
    1. vocational element, length of training period, skills
11. AD
    1. C I G X-M
    2. disposable incomes, consumer confidence, interest rates, business confidence, state of the economy, exchange rates
12. SRAS
    1. cost of production
    2. raw material prices, wages, exchange rates
13. LRAS
    1. supply side policies, incentives, technology, education and training
14. Y1 TO Y2. PL1 TO PL2
15. ALWAYS RELATE TO THE FOUR MACROECONOMIC OBJECTIVES

Is it recommended to have a weak currency? Yes or No

1. YES
2. exports become more competitive
3. this would improve balance of trade
4. AD shifts right because AD = C + I + G + (X-M)
5. Evaluation: inflation
6. NO
7. imports become more expensive
8. this is bad for two reasons
9. SRAS will shift to the left
10. LINK TO 4 OBJECTIVES
11. Y1 TO Y2
12. PL1 TO PL2
13. we import raw materials
14. raw materials become more expensive
15. however raw materials are inelastic
16. therefore we spend more on the same amount of imports
17. so our costs of production rise
18. our standards of living as we cannot afford some nice imports
19. incentive to produce ourselves

Is it recommended to have a very strong currency? Yes or No

Recommended policy to fix a current account deficit

1. lower interest rates
   1. lower exchange rates
2. tariff EXPENDITURE REDUCING
   1. imports go down
   2. diagram
   3. exports go down because of retaliation
3. supply side policies
   1. LRAS shifts right
   2. y1 to y2
   3. PL1 to PL2
   4. 4 objectives
   5. cost and time lag
   6. £100 billion HS2
   7. 15 years +
4. contractionary monetary policy EXPENDITURE REDUCING
   1. raise interest rates
   2. cost of borrowing increases
   3. AD shifts to the left
   4. deflation happens
   5. UK prices fall
   6. exports more competitive
   7. and imports more expensive
   8. HOWEVER: exchange rates would go up if interest rates would go up and surely this would worsen the balance of payments.
5. contractionary fiscal policy EXPENDITURE REDUCING
   1. reduce spending
   2. AD shifts to the left
   3. deflation happens
   4. UK prices fall
   5. exports more competitive
   6. and imports more expensive
   7. HOWEVER: it impacts the other 3 macro objectives
   8. LRAS shifting left e.g. if u cut spending on health/ education/ infrastructure or if u raise taxes, it reduces incentives

Is a current account deficit important to fix or should it left?

1. Yes
   1. X is low and M is high so AD is low
   2. AD left diagram
   3. Unemployment y1 to y2
   4. Deflation
2. Yes
   1. sign of over-dependence
   2. vulnerable to currency shocks
   3. SRAS shift left
3. No
   1. AD = C + I+ G + (X-M)
   2. u might still have really high incomes, really high output, high economic growth, high investment
   3. boom
4. No
   1. Self-regulating
   2. If imports are higher than exports
   3. Then value of the pound would fall
   4. so exports would automatically rise.

Development

1. Economic development is most commonly measured by the HDI
   1. living standards: through real GDP per capita
   2. health: life expectancy at birth
   3. education: average years of schooling
2. Economic growth is essential for economic development but NOT ENOUGH ON ITS OWN
3. Market supply side policies
   1. reduce income tax/ corporation tax/ privatisation/ get rid of minimum wage
      1. lower costs of production
      2. attracts FDI
      3. this is when an MNC brings technology into a country to establish a long lasting relationship in that country
      4. thus providing transfer of skills and technology and creating jobs
      5. MORE INCOMES. MORE SPENDING ON HEALTH AND EDUCATION
      6. HARROD DOMAR MODEL: HIGH CAPITAL STOCK LEADS TO HIGH GROWTH LEADS TO HIGH INCOMES LEADS TO HIGH SAVINGS LEADS TO HIGH INVESTMENT LEADS TO HIGH CAPITAL STOCK
      7. HOWEVER: exploitation of workers means low wages and poor working conditions. WORSEN HEALTH
4. Interventionist supply side policies
   1. spending money on health or education or infrastructure or higher minimum wage
      1. DEVELOPMENT TRAP means: poor health means poor incomes means poor growth means poor development means poor health
      2. HOWEVER: HIGH OPPORTUNITY COST, NATIONAL DEBT. country can ask for FOREIGN AID
   2. tariffs
      1. developing countries always end up having a comparative advantage in PRIMARY COMMODITIES.
      2. THIS IS BAD BECAUSE
         1. primary sector prices are too volatile e.g. weather
         2. primary sector is INCOME INELASTIC
      3. it is better for them if they had comparative advantage in manufacturing sector
      4. it is cheaper to import manufactured goods
      5. there is no business for people selling them in the country
      6. More demand for local businesses
      7. more jobs created
      8. more incomes
      9. more tax revenue
      10. MORE SPENDING ON HEALTH AND EDUCATION

Should the government intervene to fix inequality or leave it

1. LEAVE IT
   1. government failure
      1. progressive taxes: Laffer curve
      2. minimum wage: excess demand (unemployment)
   2. inequality is arguably fair because it is dependent on MRP. more inequality also creates incentives
2. FIX IT
   1. negative externalities: crime/ anxiety
   2. this burdens the taxpayer
   3. unemployment benefits
   4. Macro point: low consumer confidence

What is the best way to reduce inequality

1. progressive tax and benefits system
2. education and training increases demand for labour