Based on Edexcel International Advanced Levels Economics (2018) Official Specification

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Unit 1: Markets in action

• Check out our own Unit 1: Markets in action Content Overview.

1.3.1 Introductory concepts

1 The nature of economics

• Economics as a social science: inability to conduct scientific experiments.
• The development of models in economics based on assumptions.
• The use of the ceteris paribus assumption in building models and drawing conclusions based on them.

2 Positive and normative economics

• The distinction between positive statements and value judgements on economic issues.
• The role of value judgements in influencing economic decision making and policy.

3 Scarcity

• The problem of unlimited wants and finite resources.
• The distinction between renewable and non-renewable resources.
• The link between scarcity and opportunity cost.
• The distinction between free goods and economic goods.

4 Production possibility frontiers

• The use of production possibility frontiers to depict:
  • the maximum productive potential of an economy
  • efficient or inefficient allocation of resources
  • possible and unobtainable production
  • opportunity cost (using marginal analysis)
  • economic growth and decline.
• The distinction between movements along, and shifts in, production possibility frontiers, and their possible causes.
• The distinction between capital goods and consumer goods.
• The significance of capital goods for productivity and economic growth.

5 Specialisation and the role of money and financial markets

• The advantages and disadvantages of specialisation and the division of labour in organising production; Adam Smith’s views on the division of labour.
• The function of money as a medium of exchange, a measure and store of value, and a method of deferred payment; the significance of these functions for specialisation.
• The role of financial markets:
  • to facilitate saving
  • to make funds available to businesses and individuals
  • to facilitate the exchange of goods and services
  • to provide forward markets in commodities and currencies
  • to provide a market for equities.

6 Free market, mixed and command economies

• The distinction between free market, mixed and command economies.
• The advantages and disadvantages of free market and command economies.
• The role of the state in a mixed economy.

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1.3.2 Consumer behaviour and demand

1 Rational decision making

• The assumption of rationality in decision making: consumers aim to maximise utility by making rational choices; firms aim to maximise profits.
• Reasons why consumers may not aim to maximise utility:
  • the influence of other people’s behaviour (herding)
  • habitual behaviour
  • inertia
  • poor computational skills
  • the need to feel valued
  • framing and bias.

2 The demand curve

• The concept of ‘demand’.
• The distinction between movements along a demand curve and shifts of a demand curve.
• The concept of diminishing marginal utility and its significance for the shape of the individual demand curve.
• Factors that may cause a shift in the demand curve:
  • changes in the price of substitutes or complementary goods
  • changes in real income
  • changes in tastes
  • changes in size and age distribution of the population
  • advertising.

3 Price, income and cross-elasticities of demand

• The concepts of ‘price’, ‘income’ and ‘cross-elasticities of demand’.
• How to use formulae to calculate price, income and cross-elasticities of demand.
• Interpretation of numerical values of price elasticity of demand:
  • perfectly price elastic demand
  • price elastic demand
  • unitary price elastic demand
  • price inelastic demand
  • perfectly price inelastic demand.
• The factors influencing price elasticity of demand:
  • availability of substitutes
  • branding
  • percentage of total expenditure
  • addictiveness of product
  • durability of product.
• How to calculate total revenue.
• How price elasticity of demand varies along a straight line demand curve.
• The relationship between price elasticity of demand and total revenue.
• Interpretation of numerical values of income elasticity of demand:
  • perfectly income elastic demand
  • income elastic demand
  • income inelastic demand
  • perfectly income inelastic demand
  • the distinction between normal goods and inferior goods.
• Interpretation of numerical values of cross elasticity of demand. Significance for the degree to which goods are:
  • substitutes
  • complements
  • unrelated.
• The significance of price, income and cross-elasticities of demand for firms, consumers and the government.

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1.3.3 Supply

1 The supply curve

• The concept of ‘supply’.
• The distinction between movements along a supply curve and shifts of a supply curve.
• Factors that may cause a shift in the supply curve:
  • changes in the costs of production
  • the introduction of new technology
  • indirect taxes (specific and ad valorem)
  • government subsidies
  • natural disasters.

2 Price elasticity of supply

• The concept of ‘price elasticity of supply’.
• Calculation and interpretation of numerical values of price elasticity of supply:
  • perfectly elastic supply
  • elastic supply
  • unitary elastic supply
  • inelastic supply
  • perfectly inelastic supply.
• Factors that influence price elasticity of supply:
  • the time period
  • availability of stock/perishability
  • mobility of factors of production
  • legal constraints
  • capacity.
• The distinction between the short run and long run in economics and its significance for price elasticity of supply.

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1.3.4 Price determination

1 Determination of market equilibrium

• Equilibrium price and quantity, and how they are determined.
• Causes of changes in the equilibrium price and quantity as a result of shifts in demand and supply curves.
• The operation of market forces to eliminate excess demand and excess supply.

2 Consumer and producer surplus

• The distinction between consumer and producer surplus.
• How changes in demand or supply might affect consumer and producer surplus.

3 Functions of the price mechanism

• The rationing, incentive and signalling functions of the price mechanism for allocating scarce resources.
• The price mechanism in the context of different types of markets, including local, national and global markets.

4 Indirect taxes and subsidies

• The impact of indirect taxes on consumers, producers and the government.
• The incidence of indirect taxes on consumers and producers.
• The impact of subsidies on consumers, producers and the government.
• The incidence of subsidies on consumers and producers.

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1.3.5 Market failure

1 Sources of market failure

• Why market failure occurs: too much or too little of a good is produced and/or consumed compared to the socially optimal level of output.
• Sources of market failure:
  • externalities
  • the free-rider problem; non-provision of public goods
  • imperfect market information
  • moral hazard
  • speculation and market bubbles.

2 Positive and negative externalities

• The distinction between private benefits, external benefits and social benefits.
• The distinction between private costs, external costs and social costs.
• The distinction between:
  • external benefits of production
  • external benefits of consumption
  • external costs of production
  • external costs of consumption.
• The use of diagrams, using marginal analysis, to illustrate:
  • the external benefits from consumption
  • the external costs from production
  • the distinction between the market and social optimum positions; identification of the welfare loss or gain areas.
• The impact of externalities in various contexts:
  • transport
  • health
  • education
  • environment
  • financial.

3 Non-provision of public goods

• The distinction between public and private goods:
  • private goods: rival and excludable
  • public goods: non-rival and non-excludable.
• Why public goods may not be provided by the private sector making reference to the free-rider problem.

4 Imperfect market information

• The distinction between symmetric and asymmetric information.
• The significance of information gaps.
• How imperfect market information may lead to a misallocation of resources in various contexts:
  • healthcare
  • education
  • pensions
  • insurance.

5 Moral hazard

• How moral hazard can occur.
• The impact of moral hazard on consumers, producers, workers and governments in:
  • insurance
  • banking.

6 Speculation and market bubbles

• How market bubbles may arise.
• The impact of market bubbles on consumers, producers, workers and governments in various contexts:
  • housing
  • stocks and shares.

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1.3.6 Government intervention in markets

1 Purpose and methods of government intervention

• The purpose of government intervention, including reference to market failure.
• Methods of intervention:
  • indirect taxation (ad valorem and specific)
  • subsidies
  • maximum and minimum (guaranteed) prices.
  • tradeable pollution permits
  • extension of property rights
  • state provision
  • regulation
  • provision of information.
• Contexts in which governments may intervene:
  • health
  • housing
  • education
  • transport
  • environment
  • energy
  • agriculture
  • commodities.

2 Government failure

• ‘Government failure’ as intervention that results in a net welfare loss.
• Causes of government failure:
  • information gaps
  • lack of incentives
  • unintended consequences
  • excessive administrative costs
  • moral hazard.

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Unit 2: Macroeconomic performance and policy

2.3.1 Measures of economic performance

1 Economic growth

• The rate of change of real Gross Domestic Product (GDP) as a measure of economic growth and living standards.
• Gross National Income (GNI) as an alternative measure of national income.
• The distinction between the following measures of GDP/GNI:
  • real and nominal
  • total and per capita
  • value and volume.
• Comparison of GDP/GNI rates of growth between countries and over time.
• The concept of Purchasing Power Parities (PPPs) in making international comparisons of real GDP/GNI.
• The distinction between positive economic growth rates and negative economic growth rates.
• The concept of ‘recession’ as two consecutive quarters of negative economic growth.
• The limitations of using GDP/GNI to compare living standards between countries and over time.
• National happiness and wellbeing:
  • indicators of national happiness and wellbeing
  • the relationship between real incomes and subjective happiness.

2 Inflation

• The concepts of inflation, deflation and disinflation.
• Calculating inflation using a consumer price index (CPI), including role of weighted basket of goods and services.
• Limitations of the CPI as a measure of the rate of inflation.
• The producer (wholesale) price index as an indicator of future trends in the rate of inflation.
• Causes of inflation:
  • demand-pull
  • cost-push
  • excessive growth of money supply.
• Causes of deflation:
  • falling aggregate demand (AD)
  • increase in aggregate supply (AS)
  • fall in the money supply.
• Effects of inflation and deflation on:
  • Consumers
  • the government
  • firms
  • workers
  • income distribution
  • investment
  • competitiveness
  • the current account of the balance of payments.

3 Employment and unemployment

• How unemployment is measured, using the International Labour Organization (ILO) definition.
• The causes of unemployment:
  • frictional
  • seasonal
  • structural
  • demand deficiency
  • real wage inflexibility.
• The effects of unemployment on:
  • consumers
  • firms
  • workers
  • public finances
  • resource utilisation and production possibility frontier
  • society.
• The distinction between unemployment and underemployment.
• The significance of changes in rates of employment, unemployment and economic inactivity.
• The significance of net migration for employment and unemployment.

4 Balance of payments

• Components of the balance of payments, with particular reference to the current account.
• The distinction between deficits and surpluses in the trade in goods and services balance.
• The distinction between balance of payments deficits and surpluses on the current account.

2.3.2 Aggregate demand (AD)

1 The characteristics of AD

• The concept of AD.
• Components of aggregate demand:
  • C + I + G + (X – M) =
  • the AD curve.
• The distinction between a movement along, and a shift of, the AD curve.

2 Consumption (C)

• Influences on consumption:
  • disposable income
  • interest rates
  • consumer confidence
  • level of welfare payments
  • wealth effects
  • availability of credit.
• The relationship between savings and consumption.
• The definition of the ‘savings ratio’.
• Causes and effects of changes in the savings ratio.

3 Investment (I)

• The distinction between gross investment and net investment.
• Influences on investment:
  • the rate of economic growth
  • interest rates
  • business confidence and expectations
  • availability of credit
  • tax on company profits.
• Government policy to promote investment:
  • tax relief
  • subsidies
  • reductions on the rate of corporation tax.

4 Government expenditure (G)

• Influences on government expenditure:
  • fiscal policy
  • the level of economic activity
  • correction of market failures
  • political priorities.

5 Net trade balance (X−M)

• The impact on the net trade balance of changes in:
  • real income
  • the exchange rate
  • the state of the global economy
  • degree of protectionism
  • non-price factors.

2.3.3 Aggregate supply (AS)

1 The characteristics of AS

• The concept of AS.
• The AS curve.
• The distinction between a movement along and a shift of the AS curve.

2 Short-run AS (SRAS)

• Factors influencing SRAS. Changes in:
  • costs of raw materials and energy
  • exchange rates
  • tax rates.

3 Long-run AS (LRAS)

• Different shapes of AS curve:
  • Keynesian
  • classical.
• Factors influencing LRAS. Changes in:
  • the state of technology
  • productivity
  • education and skills
  • government regulations and tax
  • demography and net migration
  • competition policy.

2.3.4 National income

1 National income

• The circular flow of income.
• The distinction between income and wealth.

2 Injections and withdrawals

• The distinction between injections and withdrawals.
• Injections:
  • investment
  • government expenditure
  • exports.
• Withdrawals:
  • savings
  • taxation
  • imports.
• The impact of net injections into, and net withdrawals from, the circular flow of income.

3 Equilibrium level of real output

• The concept of equilibrium level of real national output.
• Causes of changes in equilibrium real national output, as a result of shifts in AD and/or AS curves.

4 The multiplier

• The multiplier and multiplier process.
• Marginal propensities and their effects on the multiplier:
  • the marginal propensity to consume (MPC)
  • the marginal propensity to save (MPS)
  • the marginal propensity to tax (MPT)
  • the marginal propensity to import (MPM).
• Calculations of the multiplier using the formula 1/(1-MPC) and 1/MPW, where MPW = MPS + MPT + MPM.
• The significance of the multiplier for shifts in AD and the level of economic activity.

2.3.5 Economic growth

1 Causes of growth

• The distinction between actual and potential growth.
• Actual growth caused by an increase in the components of AD.
• The importance of international trade for export-led growth.
• Causes of potential growth:
  • domestic investment and foreign direct investment (FDI)
  • innovation
  • growth in size of labour force, including net migration
  • the degree of competition.
• The importance of productivity for the rate of economic growth.

2 Benefits of growth

• Possible benefits of growth:
  • higher living standards
  • lower unemployment
  • increased profits for firms
  • higher levels of investment
  • increased tax revenues
  • improved public services.

3 Costs of growth

• Possible costs of growth:
  • opportunity costs
  • environmental costs
  • balance of trade deficits
  • increased inequality
  • inflation.

4 Output gaps

• The difference between actual growth rate and long-term trends in growth.
• The distinction between positive and negative output gaps.
• Characteristics of positive and negative output gaps.
• Difficulties of measuring output gaps.

2.3.6 Macroeconomic objectives and policies

1 Macroeconomic objectives

• Economic growth.
• Low and stable rate of inflation.
• Low unemployment.
• Balance of payments equilibrium on current account.
• Balanced government budget.
• Greater income equality.

2 Possible conflicts between macroeconomic objectives

• Inflation and unemployment, including the short-run Phillips curve.
• Economic growth and protection of the environment.
• Inflation and equilibrium on the current account of the balance of payments.
• Economic growth and income equality.

3 Macroeconomic supply-side policies

• Supply-side policies designed to increase productivity, competition and incentives.
• Free market policies:
  • deregulation of product and labour markets
  • privatisation
  • reduction in taxation
  • changing the levels of welfare payments
  • cutting the costs of bureaucracy for firms.
• Interventionist policies:
  • investment in education, training and skills
  • incentives to encourage investment: tax incentive or subsidies
  • infrastructure investment
  • finance for business start-ups
  • regional policy.
• Strengths and weaknesses of different supply-side policies.

4 Macroeconomic demand-side policies

• Demand-side policies:
  • the distinction between fiscal and monetary policy
  • the distinction between reflationary and deflationary policies.
• Fiscal policy instruments:
  • government spending and taxation.
• Monetary policy instruments:
  • interest rates
  • asset purchases to increase money supply (quantitative easing)
  • changes in lending criteria
  • reserve asset (liquidity) requirements.
• The role of central banks in the conduct of monetary policy:
  • implementation of monetary policy
  • achieving an inflation target
  • as banker to the government
  • as banker to the banks – lender of last resort.
• Strengths and weaknesses of different demand-side policies.

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Unit 3: Business behaviour

3.3.1 Types and sizes of businesses

1 Types of business

• Types of businesses:
  • private sector organisations
  • state-owned enterprises (public sector)
  • for-profit and not-for-profit organisations
  • co-operatives
  • joint ventures.

2 Size of businesses

• The size of businesses:
  • SMEs (small- and medium-size enterprises)
  • large corporations.
• How businesses grow:
  • organic growth
  • merger/takeover:
  • forward vertical integration
  • backward vertical integration
  • horizontal integration
  • conglomerate integration.
• Advantages and disadvantages of each type of merger/takeover.
• Constraints on business growth:
  • size of market
  • access to finance
  • owner objectives
  • government regulation and bureaucracy.
• Reasons some firms tend to remain small and others grow.
• Impact of growth of firms on businesses, workers and consumers.
• Demergers:
  • reasons for demergers
  • impact of demergers on businesses, workers and consumers.

3 Business objectives

• Different business objectives:
  • profit maximisation
  • revenue maximisation
  • sales volume maximisation.
  • behavioural theories: satisficing.
• The significance of the divorce of ownership from control for business objectives: the principal-agent problem.
• Formulae for different business objectives:
  • profit maximisation
  • revenue maximisation
  • sales volume maximisation.

3.3.2 Revenue, costs and profits

1 Revenue

• Formulae to calculate and understand the relationship between:
  • total revenue
  • average revenue
  • marginal revenue.
• Price elasticity of demand and its relationship to revenue concepts, including calculations.

2 Costs

• Derivation of short-run cost curves from the assumption of diminishing marginal productivity.
• The law of diminishing returns.
• Formulae to calculate and understand the relationship between:
  • total cost
  • total fixed cost
  • total variable cost
  • average (total) cost
  • average fixed cost
  • average variable cost
  • marginal cost.
• The relationship between:
  • marginal product and marginal costs
  • average products and average cost
  • total product and total cost
  • short-run and long-run costs.

3 Economies and diseconomies of scale

• The relationship between long-run cost curves and economies/diseconomies of scale.
• Minimum efficient scale.
• Distinction between internal/external economies of scale.
• Sources of internal economies of scale:
  • financial
  • technical
  • managerial
  • marketing
  • purchasing
  • risk bearing.
• Sources of external economies of scale:
  • availability of skilled labour
  • access to transport links
  • sharing knowledge.
• Sources of diseconomies of scale:
  • communication problems
  • coordination problems
  • X-inefficiency.

4 Profits and losses

• The distinction between normal profit, supernormal profit and losses.
• Short-run and long-run shutdown points.

3.3.3 Market structures and contestability

1 Efficiency

• The concepts of:
  • allocative efficiency
  • productive efficiency
  • dynamic efficiency
  • X-inefficiency
  • efficiency/inefficiency in different market structures.

2 Concentration ratio

• Calculation of n-firm concentration ratios.
• The significance of concentration ratios.

3 Perfect competition

• Assumptions of perfect competition.
• Profit-maximising equilibrium in the short run and long run.
• The short-run shutdown point.
• Productive and allocative efficiency in the short run and long run.

4 Monopolistic competition

• Assumptions of monopolistic competition.
• Types of product differentiation:
  • physical – product features
  • marketing – advertising, packaging
  • distribution – shop, online, telephone.
• Profit-maximising equilibrium in the short run and long run.
• Productive and allocative efficiency in the short run and long run.

5 Oligopoly

• Assumptions of oligopoly.
• Barriers to entry and exit:
  • economies of scale
  • limit pricing
  • patents
  • branding
  • sunk costs
  • legal.
• Interdependence of firms:
  • simple game theory – two firm/two outcome model
  • reasons for collusive and non-collusive behaviour
  • cartels
  • price leadership
  • price wars.
• Costs and benefits of collusion to producers, consumers, workers and governments.
• Price competition:
  • price wars
  • predatory pricing
  • limit pricing.
• Non-price competition:
  • advertising and branding
  • quality
  • endorsement
  • product placement
  • after-sales service.
• Costs and benefits of price and non-price competition to firms, consumers, employees and suppliers.

6 Monopoly

• Assumptions of monopoly.
• Barriers to entry and exit.
• Profit-maximising equilibrium.
• Costs and benefits of monopoly to firms and consumers.
• The concept of ‘natural monopoly’ and its implications.
• Conditions necessary for third-degree price discrimination.
• Costs and benefits of price discrimination to firms and consumers.
• Productive, allocative and dynamic efficiency.

7 Monopsony

• Assumptions and conditions for a monopsony to operate.
• Costs and benefits of a monopsony to firms, consumers and employees.

8 Contestability

• Characteristics of contestable markets.
• Implications of contestable markets for behaviour of firms on:
  • profitability
  • pricing decisions (limit pricing).
• Costs and benefits of contestability for firms and consumers.
• The significance of sunk costs for contestability.

3.3.4 Labour markets

1 The demand for labour

• Factors that influence the demand for labour to a particular occupation:
  • demand for the final product (labour as a derived demand)
  • productivity of labour
  • price of the product
  • wage rate relative to price of capital.
• Factors that influence the elasticity of demand for labour.

2 The supply of labour

• Factors that influence the supply of labour to a particular occupation:
  • size of population
  • net migration
  • income tax rates
  • level of welfare benefits
  • government regulations
  • trade unions.
• Factors that influence the elasticity of supply of labour.

3 The determination of wage rates in competitive and non-competitive markets

• Labour market equilibrium.
• Causes of changes in the equilibrium wage rate and quantity of labour as a result of shifts in demand curves and supply curves.
• Wage setting in the public sector/state-owned enterprises.

4 Market failure in the labour market

• Causes and consequences of the geographical immobility of labour.
• Causes and consequences of the occupational immobility of labour.

3.3.5 Government intervention

1 Government intervention in product markets

• The case for government intervention.
• Measures to control monopolies and mergers:
  • price regulation
  • profit regulation
  • quality standards
  • performance targets
  • referral to regulatory authorities
  • legislation to control mergers and takeovers.
• Measures to promote competition and contestability:
  • tax incentives and grants to promote small businesses and FDI
  • deregulation
  • privatisation
  • competitive tendering for public sector contracts
  • trade liberalisation.
• Measures to protect suppliers and employees:
  • local sourcing of raw materials and components
  • employment legislation to protect workers from exploitation
  • barriers to entry of foreign firms
  • restrictions on the monopsony power of firms
  • nationalisation.
• The impact of each measure on:
  • price
  • profit
  • efficiency
  • quality
  • choice.
• Limits to government intervention:
  • regulatory capture
  • asymmetric information/information gaps
  • inadequate resources
  • lack of regulatory power.

2 Government intervention in labour markets

• The case for government intervention.
• Types of government intervention in labour markets and their effects:
  • maximum wage controls
  • minimum wage controls
  • direct taxes e.g. national insurance contributions; corporation tax
  • measures to reduce geographical and occupational immobility of labour
  • measures to reduce discrimination and exploitation.

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Unit 4: Developments in the global economy

4.3.1 Causes and effects of globalisation

1 Characteristics of globalisation

• Increase in trade as a proportion of GDP.
• Increase in importance of transnational companies (TNCs) and foreign direct investment (FDI).
• Increase in migration.

2 Causes of globalisation

• Factors contributing to increased globalisation in the last 50 years:
  • trade liberalisation
  • increased number and size of trading blocs
  • political change (breakdown of the Soviet system and opening up of China)
  • reduced cost of transport and communications
  • increased significance of TNCs.
• FDI by TNCs:
  • reasons for FDI
  • the impact of FDI on recipient countries.

3 Effects of globalisation

• Possible benefits of globalisation:
  • increased economic growth
  • increased tax revenue
  • economies of scale
  • lower prices and higher consumer surplus
  • more choice
  • higher living standards.
• Possible costs of globalisation:
  • displaced workers
  • exploitation of workers
  • environmental impact of increased trade
  • loss of tax revenue from transfer pricing
  • increased income inequality within countries
  • the influence of TNCs on domestic economic policy.

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4.3.2 Trade and the global economy

1 Specialisation and comparative advantage

• Benefits and costs of specialisation and trade in the international context.
• The theory of comparative advantage:
  • the distinction between absolute and comparative advantage
  • assumptions underlying the theory of comparative advantage
  • limitations of the theory of comparative advantage.

2 Patterns and volume of world trade

• Factors influencing patterns of trade between countries and causes of changes in these patterns:
  • impact of emerging economies
  • changes in comparative advantage
  • growth in trading blocs and bilateral trading agreements
  • changes in relative exchange rates
  • changes in protectionism between countries.
• Changes in trade flows between countries, and the reasons for these changes.

3 Terms of trade

• Understanding and calculation of the terms of trade.
• Factors influencing a country’s terms of trade, changes in:
  • relative inflation rates
  • relative productivity rates
  • relative labour costs
  • the exchange rate
  • the prices of imports and exports.
• The impact of changes in a country’s terms of trade on:
  • export revenues
  • living standards
  • balance of trade.

4 Trade liberalisation and trading blocs

• The role of the World Trade Organization (WTO) in trade liberalisation.
• Types of trading blocs:
  • free-trade areas
  • customs unions
  • common markets
  • economic and monetary unions.
• Costs and benefits of membership of a trading bloc:
  • trade creation
  • trade diversion
  • costs and prices
  • economies of scale
  • transaction costs
  • movement of factors of production.
• Possible conflicts between trading blocs and the WTO.

5 Restrictions on free trade

• Reasons for restrictions on free trade:
  • to protect infant and geriatric industries
  • to protect domestic industries and employment
  • to protect national security
  • to prevent dumping
  • to correct a deficit on the current account of the balance of payments
  • to raise revenue.
• Types of restrictions on free trade:
  • tariffs
  • quotas
  • non-tariff barriers
  • subsidies to domestic producers.
• Impact of protectionist policies on:
  • consumers
  • producers
  • governments
  • living standards
  • equality.

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4.3.3 Balance of payments, exchange rates and international competitiveness

1 Balance of payments

• Components of the balance of payments:
  • the current account
  • the capital and financial accounts.
• Causes of deficits and surpluses on the current account.
• Measures to reduce a country’s imbalance on the current account.
• The significance of global trade imbalances.

2 Exchange rates

• The distinction between fixed, managed and floating exchange rates.
• Government intervention in currency markets through:
  • foreign currency transactions
  • the use of interest rates
  • quantitative easing.
• Factors influencing floating exchange rates:
  • relative interest rates
  • relative inflation rates (purchasing power parity theory)
  • current account of the balance of payments
  • strength of the economy
  • capital flight
  • expectations and speculation
  • global factors, e.g. falls in commodity prices.
• The distinction between revaluation and appreciation of a currency.
• The distinction between devaluation and depreciation of a currency.
• The impact of changes in exchange rates on:
  • the current account of the balance of payments (with reference to Marshall-Lerner condition and to the J-curve effect)
  • the capital and financial accounts of the balance of payments
  • economic growth
  • employment and unemployment
  • rate of inflation
  • FDI flows.
• Competitive depreciations/devaluations and their consequences.

3 International competitiveness

• Measures of international competitiveness:
  • relative productivity rates
  • relative unit labour costs
  • relative export prices.
• Factors influencing international competitiveness:
  • productivity
  • quality of human capital
  • exchange rate
  • wage and non-wage costs
  • regulations
  • quality of infrastructure
  • non-price factors.
• Measures to increase international competitiveness:
  • policies to improve education and training
  • investment incentives
  • privatisation and deregulation
  • measures to reduce the exchange rate of the currency
  • trade liberalisation.
• The significance of international competitiveness:
  • advantages for an economy of being internationally competitive
  • problems for an economy of being internationally uncompetitive.

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4.3.4 Poverty and inequality

1 Poverty

• The distinction between absolute and relative poverty.
• Measures of absolute and relative poverty.
• Causes of changes in absolute and relative poverty:
  • economic growth
  • education and training
  • welfare benefits
  • changes in tax structure
  • structural changes in the economy
  • aid
  • civil wars and conflict.

2 Inequality

• The distinction between wealth inequality and income inequality.
• Measurements of inequality:
  • the Lorenz curve
  • the Gini coefficient.
• Causes of inequality in income and wealth within countries and between countries.
• The impact of inequality on:
  • enterprise
  • incentives
  • savings
  • education
  • migration
  • life expectancy.
• The impact of economic change and development on inequality.
• The significance of the free market economy (capitalism) for inequality.

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4.3.5 The role of the state in the macroeconomy

1 Public expenditure

• The distinction between capital expenditure, current expenditure and transfer payments.
• Reasons for the changing size and pattern of public expenditure in an international context:
  • changing incomes
  • changing age distributions
  • changing expectations.
• The significance of differing levels of public expenditure as a proportion of GDP on:
  • productivity and growth
  • crowding out
  • levels of taxation.

2 Taxation

• The distinction between, and examples of, direct and indirect taxes.
• The distinction between progressive, proportional and regressive taxes.
• The economic effects of changes in direct and indirect tax rates on:
  • incentives to work
  • tax revenues: Laffer curve analysis
  • income distribution
  • real output and employment
  • the price level
  • the trade balance
  • FDI flows.

3 Public sector borrowing and public sector debt

• The distinction between:
  • fiscal deficits and fiscal surpluses
  • automatic stabilisers and discretionary fiscal policy
  • a fiscal deficit and the national debt
  • structural and cyclical fiscal deficits.
• Factors influencing the size of fiscal deficits and national debts.
• The significance of the size of fiscal deficits and national debts:
  • impact on interest rates
  • debt servicing
  • intergenerational equity.

4 Macroeconomic policies

• How governments use fiscal policy, monetary policy, exchange-rate policy, supply-side policies and direct controls to:
  • reduce fiscal deficits and national debts
  • control the rate of inflation
  • respond to external shocks in the global economy
  • reduce poverty and inequality.
• Use of demand-side policies in response to the global financial crisis of 2008.
• Measures to control TNCs:
  • to reduce tax avoidance
  • the regulation of transfer pricing
  • limits to government ability to control TNCs.
• The impact of policy changes on:
  • local economies
  • national economies
  • the global economy.
• Problems facing policymakers when applying policies:
  • inaccurate information
  • risks and uncertainties
  • inability to control external shocks.

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4.3.6 Growth and development in developing, emerging and developed economies

1 Measures of economic development

• The three components of the Human Development Index (HDI): education, health, income; how they are measured.
• Advantages and limitations of the HDI in comparing living standards between countries and over time.
• Other measures of development:
  • the percentage of adult male labour in agriculture
  • access to clean water
  • energy consumption per capita
  • access to internet per thousand of population
  • access to mobile phones per thousand of population
  • access to doctors per thousand of population.

2 Constraints on growth and development

• The impact of economic factors in different countries:
  • volatility of commodity prices
  • primary product dependency (the Prebisch-Singer hypothesis)
  • savings gap (the Harrod-Domar model)
  • foreign currency gap
  • capital flight
  • demographic factors (size and age distribution of population; migration)
  • debt (household and overseas)
  • access to credit and banking
  • infrastructure
  • education and skills.
• The impact of non-economic factors in different countries:
  • corruption
  • poor governance
  • civil wars
  • migration
  • terrorism.

3 Measures to promote growth and development

• The impact of market-orientated strategies:
  • trade liberalisation
  • promotion of FDI
  • removal of government subsidies
  • privatisation
  • floating exchange rate systems
  • microfinance schemes.
• The impact of interventionist strategies:
  • development of human capital
  • protectionism
  • managed exchange rates
  • infrastructure development
  • promoting joint ventures with TNCs
  • buffer stock schemes.
• The impact of other strategies:
  • industrialisation (the Lewis structural dual-sector model)
  • development of tourism
  • development of primary industries
  • debt relief
  • aid.
• The role of international institutions:
  • the World Bank
  • the International Monetary Fund (IMF)
  • non-government organisations (NGOs).

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References

• Pearson Edexcel International Advanced Levels Economics (2018) Specification https://qualifications.pearson.com/en/qualifications/edexcel-international-advanced-levels/economics-2018.html
• https://qualifications.pearson.com/content/dam/pdf/International%20Advanced%20Level/Economics/2018/Specification-and-Sample-Assessment/International-A-Level-Economics-spec.pdf

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