5O concise pages covering all of year 1 and year 2 macroeconomic content for edexcel as/a level economics. Enough detail for A* Written by two students: Student 1- 10 9's at GCSE and 5 predicted A*'s in maths, further maths, economics, chemistry and EPQ Student 2- 10 A*'s, 4 achieved A* in maths, f...
-MACROECONOMICS-
Economic Growth and Development
Economic growth – the expansion of the productive capacity of the economy, an outwards shift
of the LRAC curve or PPF curve. Can be potential growth (increase in Yf) or actual growth
(increase in A.D.)
Economic development – an increase in the economic, political and social wellbeing of its
people. A more moral side of economic growth and is normative.
Sustainable development – development that meets the needs of the present, without
compromising the ability of future generations to meet their own needs
Growth is sustainable when the rate of economic growth can be maintained into the long run.
-too fast means resources could be depleted (create environmental problems). Lead to inflation
or excessive credit if there is too much demand in the economy.
-occurs when there is a downturn/recession
Recession – a period of negative economic growth, in the UK it is two consecutive quarters-
income tends to fall during a recession and so does consumption; governments try to avoid
recession.
Real GDP – value of GDP that is inflated (can draw comparisons more accurately between
countries)
Nominal GDP – value of GDP unadjusted for inflation
Sectors of the economy
Primary sector – refers to the extraction of raw materials e.g. coal and agriculture
Secondary sector – refers to manufacturing, turning raw materials into goods
Tertiary sector – the supply of commercial services that can support the production and
distribution process
The relationship between economic growth, changes in the structure of an economy and sustainable
development
Assumes that in the agricultural industry there is a surplus of unproductive labour. Lewis model
suggests that one should move the workers from agricultural industry to more modern ones to
increase economic growth.
Wages in manufacturing are fixed (not in reality) so workers from agriculture are attracted to
higher wages in manufacturing sector (no opportunity cost)
Manufacturers charge prices above the wage rate (making profits). Use this to invest in more
fixed capital
This increases demand for labour as the productive capacity of firms has increased. Increases
unemployment in manufacturing over agricultural.
However:
-firms may not reinvest
-firms may invest in capital that replaces labour
-not easy to move from agriculture to manufacturing when skills/workers are inflexible
Benefits:
-jobs in secondary and tertiary sectors tend to be higher skilled and higher paid
-economic growth more stable with secondary/tertiary sectors since production can be harmed
by weather, the YED for sec./tert. products is higher than primary, agricultural products often
face tariffs from developed countries (to protect their own industries). The idea is that raw
materials such as oil are very volatile, so their prices will fluctuate a lot.
-tends to be poor productivity in subsistence agriculture due to poor irrigation techniques, lack
of land and large people :land means a surplus of labour
Costs:
, -the relative expansion of the sec./tert. sector may lead to rural-urban migration. This can put
strain on social capital or lead to housing shortages- e.g. the industrial revolution.
-increased pollution
-can result in structural unemployment, depending on how geographically/occupationally
mobile the workers are
Evaluation:
-as people move to urban areas there may become an informal sector when some work in small-
scale, unorganised, and unregulated activities (majority of people employed in India work in
such industries)
-informal sector may have higher incomes but there is reduced job security, poor working
conditions, employ children
-the formal sector provides training, capital, all of which increase productivity and economic
growth
Objectives of sustainable growth
Social progress which recognises the needs of everyone, everyone benefitting from the benefits
of prosperity. Needs may not be met if it involves treating others or future generations unfairly
Effective protection of the environment
Prudent use of natural resources
Maintenance of high/stable economic growth and unemployment so everyone can share
benefits of increased living standards and job opportunities
Measuring GDP/difficulties
It is measured to see whether the economy is growing over time. Can show competitiveness
internationally, and allows govs to decide what policies to implement
Doesn’t tell you about the externalities of consumption/production.
Doesn’t tell you anything about the distribution of income
Doesn’t compensate for price differentials between countries, needs to be recalculated to
accommodate for PPP (comparing the price of a representative basket of goods in different
countries and then deriving an exchange rate from here).
Hidden economies are not considered, as only items sold through the market are included e.g.
doesn’t consider subsistence farming
Real GDP is measured using a base year, if this base year is out of date then inaccurate
Causes of economic growth
In the short run it is any increase in SRAS or AD
In the long run it is an increase in the quality or quantity of factors of production
Quantity:
-increased population/migration
-increased participation rate
-access to natural resources
Quality: INVESTMENT
-training
-technology change
Increased efficiency e.g. competition, reducing corruption
Trade liberalisation
FDI
Microfinance schemes – borrowing small amounts of money to finance enterprise, usually for
unbankable people- interesting work by Professor Yunus on the Grameen bank.
Privatisation
Develop human capital – skill base of economy improves. Improve productivity. Businesses
struggle to expand when there’s skill shortages. Can move from primary sector to sec./tert.
sector
, Infrastructure – reduce costs of production, increase labour mobility
Benefits of economic growth
Increased living standards – increased incomes (firms make more profit) as increased output
means firms employ more. Can purchase more consumer goods, unless demerit. Consumers
are more confident so increase consumption. May not increase happiness due to Easterlin
Paradox- the idea of diminishing marginal sensitivity to wealth and happiness.
Increased public sector provision – more output means more tax revenue through corporation
tax on increased consumption. More spending on public services. Gov will also pay less to
benefits
Increased investment – firms have high levels of confidence so will receive rewards for
investment (expected). Develop tech, improve productivity which can lower costs
Costs of economic growth
Living standards don’t increase when GDP increase more than population, or workers have to
work longer hours
Tech advancements may mean labour is replaced resulting in technological unemployment
May damage environment when there’s negative externalities, congestion, less natural
resources. Could be handled through increased development meaning increase innovation in
green tech
Consequences of recession
Less AD means reduced output which increases unemployment and increases welfare
Less consumption due to less confidence, means less indirect tax revenue.
Less investment due to less confidence
Create hysteresis – a variable doesn’t return to its original state. Can cause when recession
means unemployment causing many to be out of work. Over time their skills fall which reduces
human capital, meaning their productivity has fallen and the productive capacity of the economy
has fallen
Recession are bad for A.D- investment falls as does consumption, A.D moves inwards and
unemployment and negative Keynesian output gaps are exacerbated.
Savings gap/Harrod-Domar model
A savings gap limits growth because high levels of poverty mean low incomes so there is less
savings, so lack of funds for capital investment. Means a reliance on tied foreign aid so they can
borrow to finance investment (creates debt)
Harrod-Domar model uses interest rates and investment as means of increasing development,
suggests policy makers can use these as stimulants to the economy.
Why economic growth may cause development
Creates jobs as firms expand output, which increases incomes so they can purchase more
goods/services e.g. nutrition which increases living standards
Increased incomes creates savings, plugging savings gap and allowing for further growth, even
investment in things like healthcare
Can accelerate structure of the economy to sec./tert.
Higher incomes and consumption mean higher tax revenues for gov which can be spent on
health/education
Counter-analysis:
-unequal distribution of income (inequality)
-capital intensive growth may not reduce unemployment
-corrupt governments
-hard to increase development in both rural and urban areas logistically
-if growth is due to FDI then profits of growth may not stay in country
Overall, growth is necessary for development. But depend on:
, -how tax revenue is spent
-how income gains are distributed
-causes of growth
Overseas Development Aid
Promote poverty alleviation, economic welfare and development in recipient country
Foreign Exchange Gap – when a country doesn’t have enough foreign currency coming in to
spend on the imports necessary for growth/development
Aim to fill savings/f.e. gap
Currency gap exists in low-income countries because their exports lack substance (usually
primary commodities), so don’t generate much foreign revenue that they need to import,
remember demand for currency comes from exports and supply from imports.
How can aid lead to development
It can plug the savings gap, leading to funds being made available for investment
Increased investment can make country’s exports more price competitive internationally
Aid in form of technical assistance can increase human capital
Development aid can lead to direct improvements in healthcare
How aid doesn’t lead to development
Tied aid? May come with certain conditions like having to import from the giving country –
which may be more expensive. Unable to find the best terms for capital/resources from other
places which could limit growth
Can lead to increased dependence on aid. Could create a debt burden since all loans will have to
be paid back, even if at a low interest rate. The possibility of a loan default can damage credit
rating and harm ability to borrow at more favourable terms. Firm reliance on aid could create
inefficiency
Aid in the form of commodities can be ‘dumping’. This is because it floods the market at a
low/no price, which reduces demand for domestically produced commodities
Aid distribution left in the hands of corrupt officials mean it could end up in the wrong places.
Could worsen inequality
Some argue that constant aid discourages self-sufficiency (the government receiving the aid
knows that aid will solve their issues).
Evaluation
Depend on: how well its targeted, type of aid, how its distributed (e.g. corruption)
May be better ways of plugging the savings gap such as FDI
FDI not possible if a country is unattractive for FDI
Erratic levels of aid don’t provide stability to an economy
Measurements of Development
Problems with measuring
Disagreements about which indicators should be given greatest weightings when making an
assessment
Some measures are quantitative and simple so easy to collect accurate data but may miss
important faucets
More broad measures try to include these, but may be measuring qualitative data so may have
inaccuracy
Human Development Index
HDI – measures health, education and income (equally weighted)
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