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A Level Economics - A/A* Grade Microeconomics Models, Analysis and Evaluation
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A/AS Level
PEARSON (PEARSON)
Economics A
Unit 4 - A global perspective (9EC0)
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Macroeconomics A* Analysis/Evaluations
1. Prebisch-Singer Hypothesis
Summary:
The Prebisch-Singer Hypothesis suggests that as world income rises, the prices of primary products
such as coal, coffee and cocoa decline in proportion to the prices of manufactured goods such as
trucks and washing machines. This will worsen a country’s terms of trade.
Explanation:
1. In most developing countries, there is a large emphasis on the production of primary
products e.g. cotton in Benin (4th largest cotton exporter in the world).
2. In developed countries, there is more of an emphasis on the production of manufactured
goods e.g. cars in Germany. This is due to advances in technology and industrialisation.
3. The income elasticity of demand for primary goods is inelastic while for manufactured goods
it is elastic.
4. This means that If incomes were to rise, the demand for primary products will only increase
by a tiny bit while manufactured goods like the iPhone will have a large increase in demand.
5. As shown above, the increase in demand price for manufactured goods is greater than
primary goods.
6. This will deteriorate the terms of trade of a country because when import prices are rising
faster than export prices.
,Macroeconomics A* Analysis/Evaluations
Effects:
Can constrain growth and development:
Imports more expensive → Reduced imports by firms of capital goods →Reduced investment (as
capital is expensive) → Reduced profit → Reduced corporation tax revenue → Reduced government
budget → Reduced public expenditure → E.g. no telephone lines in developing countries.
Evaluation:
Import expenditure is low → Supply of currency is low → Low exchange rate → Export cheaper →
High export revenue due to being internationally competitive → Positive BoP current account →
More money entering the country than leaving → Less susceptible to debt-trap diplomacy →
Therefore, countries like China cannot buy government bonds and pressure developing countries to
pay them back → E.g. The USA owe $1.2 trillion to China.
When can this be used?
- “Evaluate the possible benefits of such specialisation to a country or countries of your
choice.”
- “Discuss the likely economic effects of the Indonesian Government’s ban on the export of
unprocessed minerals.”
- Anything related to specialisation or exports of primary products or constrains in growth and
development
,Macroeconomics A* Analysis/Evaluations
2. The Lewis Model
Summary:
The Lewis Model explains how industrialisation can move agricultural workers into industrial jobs.
This will make a country more productive.
Explanation:
1. Land is a fixed resource while labour is variable.
2. As more and more people enter the agricultural industry, diminishing marginal returns
eventually sets in.
3. This made the agricultural industry very unproductive, with MRP = 0
4. As manufacturing firms move into the country (industrialisation), people will move to
manufacturing jobs because they will pay higher wages as they are producing higher quality
goods. MRP increases.
Effects:
Those who move to manufacturing will have increased wages → Increased savings → Reduce
savings-investment gap → Increase money supply means lower interest rates→ Increased
investment (Harrod Domar) → LRAS shift right → Higher economics growth.
Increased investment → Increased productivity → Increased profit → Increased corporation tax
revenue → Increased government budget → E.g. fund development projects such as power stations
→ Increase confidence in the country for investors → Increase in FDI → FDI can boost growth → E.g.
building a bridge would increase demand for jobs and wages thus increasing consumption.
, Macroeconomics A* Analysis/Evaluations
Evaluation:
If a country previously had a comparative advantage in the production of a good and people move
over to industrial work, the country can lose their comparative advantage in the production of the
primary product → When Coca-Cola set up in Swaziland, many workers who used to work on Sugar
farms moved to manufacturing jobs → Lower economies of scale → Higher prices → Less
internationally competitive → If reduction in exports is greater than the increase in exports from the
manufactured good, AD may fall → Reducing Real GDP
When can this be used?
- “Discuss the extent to which supply-side policies are the key to promoting economic growth
in a developing economy such as Zambia.”
- “Evaluate four ways in which economic growth and development might be promoted in
developing countries.”
- Anytime the question refers to growth in a developing country. If an infrastructure project is
mentioned, then this will attract manufacturing firms e.g. Porsche so the Lewis Model can be
mentioned.
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