Tag: AQA A-level Economics Specification

Based on AQA A-level Economics (7136) Official Specification 4.1 Individuals, firms, markets and market failure 4.1.1 Economic methodology and the economic problem 4.1.1.1 Economic methodology Economics as a social science. Similarities to and differences in methodology from natural and other sciences. The difference between positive and normative statements. How value judgements influence economic decision making and policy. People's views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements. Additional information: Students should understand how thinking as an economist may differ from other forms of scientific enquiry. 4.1.1.2 The nature and purpose of economic activity The central purpose of economic activity is the production of goods and services to satisfy needs and wants. The key economic decisions are: what to produce, how to produce and who is to benefit from the goods and services produced. 4.1.1.3 Economic resources The economists' classification of economic resources into land, labour, capital and enterprise, which are the factors of production. The environment is a scarce resource. 4.1.1.4 Scarcity, choice and the allocation of resources The fundamental economic problem is scarcity and that it results from limited resources and unlimited wants. Scarcity means that choices have to be made about how scarce resources are allocated between different uses. Choices have an opportunity cost. 4.1.1.5 Production possibility diagrams Production possibility diagrams illustrate different features of the fundamental economic problem, such as: resource allocation, opportunity cost and trade-offs, unemployment of economic resources, economic growth. Why all points on the boundary are productively efficient but not all points on the boundary are allocatively efficient. Additional information: Students should be able to use production possibility diagrams to illustrate these features. 4.1.2 Individual economic decision making 4.1.2.1 Consumer behaviour Rational economic decision making and economic incentives. Utility theory: total and marginal utility, and the hypothesis of diminishing marginal utility. Utility maximisation. The importance of the margin when making choices. Additional information: Students should appreciate that the hypothesis of diminishing marginal utility supports a downward sloping demand curve but they are not expected to understand the principle of equi-marginal utility or to use this principle to explain why there is likely to be an inverse relationship between price and quantity demanded. 4.1.2.2 Imperfect information The importance of information for decision making. The significance of asymmetric information. Additional information: Students should recognise that imperfect information makes it difficult for economic agents to make rational decisions and is a potential source of market failure. 4.1.2.3 Aspects of behavioural economic theory Bounded rationality and bounded self-control. Biases in decision making: rules of thumb, anchoring, availability and social norms. The importance of altruism and perceptions of fairness. Additional information: Students should appreciate that behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who endeavour to maximise their utility. They should understand some of the reasons why an individual's economic decisions may be biased. 4.1.2.4 Behavioural economics and economic policy Choice architecture and framing. Nudges. Default choices, restricted choice and mandated choice. Additional information: Students should appreciate that insights provided by behavioural economists can help governments and other agencies influence economic decision making. 4.1.3 Price determination in a competitive market 4.1.3.1 The determinants of the demand for goods and services A demand curve shows the relationship between price and quantity demanded. The causes of shifts in the demand curve. 4.1.3.2 Price, income and cross elasticities of demand Be able to calculate price, income and cross elasticities of demand. The relationship between income elasticity of demand and normal and inferior goods. The relationship between cross elasticity of demand and substitute and complementary goods. The relationships between price elasticity of demand and firms' total revenue (total expenditure). The factors that influence these elasticities of demand. Additional information: Students should be able to interpret numerical values of these elasticities of demand. 4.1.3.3 The determinants of the supply of goods and services A supply curve shows the relationship between price and quantity supplied. Understand that higher prices imply higher profits and that this will provide the incentive to expand production. The causes of shifts in the supply curve. Additional information: Students should also know that, under perfect competition, the supply curve is the marginal cost curve. 4.1.3.4 Price elasticity of supply Be able to calculate price elasticity of supply. The factors that influence price elasticity of supply. Additional information: Students should be able to interpret numerical values of price elasticity of supply. 4.1.3.5 The determination of equilibrium market prices How the interaction of demand and supply determines equilibrium prices in a market economy. The difference between equilibrium and disequilibrium. Why excess demand and excess supply lead to changes in price. Additional information: Students should be able to use demand and supply diagrams to help them to analyse causes of changes in equilibrium market prices. They should be able to apply their knowledge of the basic model of demand and supply to a variety of real-world markets. They should be aware of the assumptions of the model of supply and demand. 4.1.3.6 The interrelationship between markets Changes in a particular market are likely to affect other markets. The implications of joint demand, competitive demand, composite demand, derived demand and joint supply. Additional information: Students should, for example, be able to explore the impact of changes in demand, supply and price in one market upon other related markets. 4.1.4 Production, costs and revenue 4.1.4.1 Production and productivity Production converts inputs, or the services of factors of production such as capital and labour, into final output. The meaning of productivity, including labour productivity. 4.1.4.2 Specialisation, division of labour and exchange The benefits of specialisation and division of labour. Why specialisation necessitates an efficient means of exchanging goods and services, such as the use of money as a medium of exchange. 4.1.4.3 The law of diminishing returns and returns to scale The difference between the short run and the long run. The difference between marginal, average and total returns. The law of diminishing returns. Returns to scale. The difference between increasing, constant and decreasing returns to scale. Additional information: Students should appreciate that both the law of diminishing returns and returns to scale explain relationships between inputs and output. They should also understand that these relationships have implications for costs of production. 4.1.4.4 Costs of production The difference between fixed and variable costs. The difference between marginal, average and total costs. The difference between short-run and long-run costs. The reasons for the shape of the marginal, average and total cost curves. How factor prices and productivity affect firms' costs of production and their choice of factor inputs. Additional information: Students should be able to calculate different costs from given data. They should also be able to draw and interpret cost curves. 4.1.4.5 Economies and diseconomies of scale The difference between internal and external economies of scale. Reasons for diseconomies of scale. The relationship between returns to scale and economies or diseconomies of scale. The relationship between economies of scale, diseconomies of scale and the shape of the long-run average cost curve. The L-shaped long-run average cost curve. The concept of the minimum efficient scale of production. Additional information: Students should be able to categorise and give examples of both internal and external economies of scale. Students should understand the significance of the minimum efficient scale for the structure of an industry and barriers to entry. 4.1.4.6 Marginal, average and total revenue The difference between marginal, average and total revenue. Why the average revenue curve is the firm's demand curve. The relationship between average and marginal revenue. The relationship between marginal revenue and total revenue. Additional information: Students should be able to calculate marginal, average and total revenue from given data. They should also be able to draw and interpret revenue curves. 4.1.4.7 Profit Profit is the difference between total revenue and total costs. The difference between normal and abnormal (supernormal) profit. The role of profit in a market economy. 4.1.4.8 Technological change The difference between invention and innovation. Technological change can affect methods of production, productivity, efficiency and firms' costs of production. Technological change can lead to the development of new products, the development of new markets and may destroy existing markets. Technological change can influence the structure of markets. Additional information: Students should understand how the process of creative destruction is linked to technological change. 4.1.5 Perfect competition, imperfectly competitive markets and monopoly 4.1.5.1 Market structures The spectrum of competition ranging from perfect competition at one end of the spectrum to pure monopoly at the other end of the spectrum. Factors such as the number of firms, the degree of product differentiation and ease of entry are used to distinguish between different market structures. 4.1.5.2 The objectives of firms The models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. The profit-maximising rule (MC=MR). The reasons for and the consequences of a divorce of ownership from control. Firms have a variety of other possible objectives. The satisficing principle. Additional information: Students should recognise that firms have a range of possible objectives including survival, growth, quality, maximising their sales revenue and increasing their market share. Students should be able to discuss how the divorce of ownership from control may affect the objectives of firms, their conduct and performance. 4.1.5.3 Perfect competition The formal diagrammatic analysis of the perfectly competitive model in the short and long run. The implications of the following for the behaviour of firms and the industry: large numbers of producers, identical products, freedom of entry and exit, and perfect knowledge. Firms operating in perfectly competitive markets are price takers. The proposition that, given certain assumptions, relating for example to a lack of externalities, perfect competition will result in an efficient allocation of resources. Additional information: Students should be aware that perfect competition, in both product and labour markets, provides a yardstick for judging the extent to which real world markets perform efficiently or inefficiently, and the extent to which a misallocation of resources occurs. Students should also be able to assess critically the proposition that perfectly competitive markets lead to an efficient allocation of resources. 4.1.5.4 Monopolistic competition The formal diagrammatic analysis of the monopolistically competitive model in the short and long run. The main characteristics of monopolistically competitive markets. Monopolistically competitive markets will be subject to non-price competition. 4.1.5.5 Oligopoly The main characteristics of oligopolistic markets. Oligopolistic markets can be very different in relation to, for example, the number of firms, the degree of product differentiation and ease of entry. Oligopoly can be defined in terms of market structure or in terms of market conduct (behaviour). Concentration ratios and how to calculate a concentration ratio. The difference between collusive and non-collusive oligopoly. The difference between cooperation and collusion. The kinked demand curve model. The reasons for non-price competition, the operation of cartels, price leadership, price agreements, price wars and barriers to entry. The factors which influence prices, output, investment, expenditure on research and advertising in oligopolistic industries. The significance of interdependence and uncertainty in oligopoly. The advantages and disadvantages of oligopoly. Additional information: Students should be aware of the various factors which affect the behaviour and performance of firms in a variety of real world markets. The factors include different barriers to entry and the degree of concentration and product differentiation. The kinked demand curve model should be used as an illustration of the interdependence between firms and not taught as if it is the only model of oligopoly. Students should recognise that collusion may allow oligopolists to act as a monopolist and maximise their joint profits. 4.1.5.6 Monopoly and monopoly power The formal diagrammatic analysis of the monopoly model. That monopoly power is influenced by factors such as barriers to entry, the number of competitors, advertising and the degree of product differentiation. The advantages and disadvantages of monopoly. Additional information: Students should appreciate that firms operating in monopolistically competitive and oligopolistic markets are price makers and have varying degrees of monopoly power. 4.1.5.7 Price discrimination The conditions necessary for price discrimination. The advantages and disadvantages of price discrimination. Additional information: Students should be aware of real-world examples of price discrimination and be able to assess its impact on producers and consumers. A diagrammatic analysis of price discrimination is expected. 4.1.5.8 The dynamics of competition and competitive market processes Both the short-run and long-run benefits which are likely to result from competition. That firms do not just compete on the basis of price but that competition will, for example, also lead firms to strive to improve products, reduce costs, improve the quality of the service provided. The process of creative destruction. Additional information: Students should understand that if firms have monopoly power and are making large profits, over time there will be an incentive for new firms to enter the market and to innovate to overcome the existing barriers to entry. Students should understand that this process of creative destruction is a fundamental feature of the way in which competition operates in a market economy. 4.1.5.9 Contestable and non-contestable markets The significance of market contestability for the performance of an industry. Concepts such as sunk costs and hit-and-run competition. 4.1.5.10 Market structure, static efficiency, dynamic efficiency and resource allocation The difference between static efficiency and dynamic efficiency. The conditions required for productive efficiency (minimising average total costs) and allocative efficiency (price = marginal cost). Dynamic efficiency is influenced by, for example, research and development, investment in human and non-human capital and technological change. Additional information: Students should be able to apply efficiency concepts when comparing the performance of firms in markets with different structures. They should understand how conduct and performance indicators can be used to compare market structures. 4.1.5.11 Consumer and producer surplus Be able to apply these concepts when discussing economic efficiency and welfare issues, such as price discrimination and the dead-weight losses associated with monopoly. Additional information: Diagrammatic analysis is expected. 4.1.6 The labour market 4.1.6.1 The demand for labour, marginal productivity theory The demand for a factor is derived from the demand for the product. The marginal productivity theory of the demand for labour. The demand curve for labour shows the relationship between the wage rate and number of workers employed. The causes of shifts in the demand curve for labour. The determinants of the elasticity of demand for labour. 4.1.6.2 Influences upon the supply of labour to different markets The supply of labour to a particular occupation is influenced by monetary and non-monetary considerations. Non-monetary considerations include job satisfaction and dissatisfaction and working conditions. The supply curve for labour shows the relationship between the wage rate and number of workers willing to work in an occupation. The causes of shifts in the market supply curve for labour. Additional information: Students will not be required to understand the determinants of an individual's supply of labour or the backward-bending supply curve. 4.1.6.3 The determination of relative wage rates and levels of employment in perfectly competitive labour markets The economists' model of wage determination in a perfectly competitive labour market. Role of market forces in determining relative wage rates. Additional information: Students should appreciate that all real-world markets are imperfectly competitive to a greater or lesser extent. 4.1.6.4 The determination of relative wage rates and levels of employment in imperfectly competitive labour markets How various factors such as monopsony power, trade unions and imperfect information contribute to imperfections in a labour market. How, in a monopsony labour market, the employer can use market power to reduce both the relative wage rate and the level of employment below those that would exist in a perfectly competitive labour market. Additional information: The use of relevant diagrams is expected. 4.1.6.5 The Influence of trade unions in determining wages and levels of employment The various factors that affect the ability of trade unions to influence wages and levels of employment in different labour markets. How wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market and into a monopsony labour market. Additional information: The use of relevant diagrams is expected. 4.1.6.6 The National Minimum Wage The effects of a national minimum wage upon labour markets. The advantages and disadvantages of a national minimum wage. 4.1.6.7 Discrimination in the labour market The conditions necessary for wage discrimination. The impact of gender, ethnicity and other forms of discrimination on wages, levels and types of employment. Additional information: Real-world examples should be used to illustrate wage discrimination. Students should be able to assess the advantages and disadvantages of wage discrimination for workers, employers and the economy as a whole. 4.1.7 The distribution of income and wealth: poverty and inequality 4.1.7.1 The distribution of income and wealth The difference between income and wealth. The various factors which influence the distribution of income and wealth. The difference between equality and equity in relation to the distribution of income and wealth. The Lorenz curve and Gini coefficient. The likely benefits and costs of more equal and more unequal distributions. Additional information: Some knowledge of the distribution of household income and wealth in the United Kingdom is expected. Students should understand that the degree of inequality can be measured but that whether or not a given distribution of income is equitable (fair and just) involves a value judgement. Students will be expected to interpret measures of inequality such as the Gini coefficient but they will not be expected to calculate the Gini coefficient. Students should understand that excessive inequality is both a cause and consequence of market failure. They should also appreciate that value judgements will influence people's views of what constitutes an equitable distribution of income and wealth and that these views will influence policy prescriptions. 4.1.7.2 The problem of poverty The difference between relative and absolute poverty. The causes and effects of poverty. 4.1.7.3 Government policies to alleviate poverty and to influence the distribution of income and wealth The policies which are available to influence the distribution of income and wealth and to alleviate poverty. The economic consequences of such policies. Additional information: Students should be able to evaluate the various approaches to redistributing income and wealth and alleviating poverty, recognising the moral and political perspectives. 4.1.8 The market mechanism, market failure and government intervention in markets 4.1.8.1 How markets and prices allocate resources The rationing, incentive and signalling functions of prices in allocating resources and coordinating the decisions of buyers and sellers in a market economy. The advantages and disadvantages of the price mechanism and of extending its use into new areas of activity. Additional information: Students should understand how economic incentives influence what, how and for whom goods and services are produced. Students should be able to assess the view that the price mechanism is an impersonal method of allocating resources. They should also be able to assess the view that introducing the price mechanism and markets into some fields of human activity may be undesirable and is likely to affect the nature of the activity, eg introducing a market for blood changes the nature of the transaction and the incentives involved. 4.1.8.2 The meaning of market failure Market failure occurs whenever a market leads to a misallocation of resources. The difference between complete market failure (resulting in a missing market) and partial market failure (where a market exists but contributes to resource misallocation). How public goods, positive and negative externalities, merit and demerit goods, monopoly and other market imperfections, and inequalities in the distribution of income and wealth can lead to market failure. Additional information: Students should be able to provide examples to inform their discussion of each of these causes of market failure. 4.1.8.3 Public goods, private goods and quasi-public goods Pure public goods are non-rival and non-excludable and recognition of the significance of these characteristics. The difference between a public good and a private good. Circumstances when a public good may take on some of the characteristics of a private good and become a quasi-public good. The significance of technological change, eg television broadcasting is now excludable. The free-rider problem. The tragedy of the commons. Additional information: Students should appreciate the relevance of the 'tragedy of the commons' for environmental market failures. 4.1.8.4 Positive and negative externalities in consumption and production Externalities exist when there is a divergence between private and social costs and benefits. Why negative externalities are likely to result in over-production and that positive externalities are likely to result in under-production. Why the absence of property rights leads to externalities in both production and consumption and hence market failure. Additional information: Students should be able to illustrate the misallocation of resources resulting from externalities in both production and consumption, using diagrams showing marginal private and social cost and benefit curves. 4.1.8.5 Merit and demerit goods The classification of merit and demerit goods depends upon a value judgement. Such products may be subject to positive and negative externalities in consumption. How under-provision of merit goods and over-provision of demerit goods may also result from imperfect information. Additional information: Students should be able to illustrate the misallocation of resources resulting from the consumption of merit and demerit goods using diagrams showing marginal private and social cost and benefit curves. It should be understood that not all products that result in positive or negative externalities in consumption are either merit or demerit goods. 4.1.8.6 Market imperfections Why imperfect and asymmetric information can lead to market failure. Why the existence of monopoly and monopoly power can lead to market failure. Why the immobility of factors of production can lead to market failure. 4.1.8.7 Competition policy The general principles of UK competition policy and some awareness of EU competition policy. The costs and benefits of such policies. Additional information: Examples of real-world applications of such policies should provide contexts in which students can evaluate the use of economic models to explore economic behaviour and further develop their appreciation of the behaviour of firms. Detailed knowledge of UK and EU competition law is not required. 4.1.8.8 Public ownership, privatisation, regulation and deregulation of markets The arguments for and against the public ownership of firms and industries. The arguments for and against the privatisation of state-owned enterprises. The arguments for and against the regulation of markets. The arguments for and against the deregulation of markets. The problem of regulatory capture. Additional information: Students should be able to assess the application of such policies in the United Kingdom and be able to evaluate their effects on economic performance. 4.1.8.9 Government intervention in markets The existence of market failure, in its various forms, provides an argument for government intervention in markets. Governments influence the allocation of resources in a variety of ways, including through public expenditure, taxation and regulation. Governments have a range of objectives and these affect how they intervene in a mixed economy to influence the allocation of resources. The use of indirect taxation, subsidies, price controls, state provision and regulation, the extension of property rights and pollution permits to correct market failure. Additional information: Students should be able to apply economic models to assess the role of markets and the government in a variety of situations. Students should be able to explain, analyse and evaluate the strengths and weaknesses of the market economy and the role of government within it. Students should be able to evaluate the case for and against government intervention in particular markets and to assess the relative merits of different methods of intervention. 4.1.8.10 Government failure Government failure occurs when government intervention in the economy leads to a misallocation of resources. Inadequate information, conflicting objectives and administrative costs are possible sources of government failure. Governments may create, rather than remove, market distortions. Government intervention can lead to unintended consequences. Additional information: Students should appreciate that the possibility of government failure means that, even when there is market failure, government intervention will not necessarily improve economic welfare. 4.2 The national and international economy 4.2.1 The measurement of macroeconomic performance 4.2.1.1 The objectives of government economic policy The main objectives of government macroeconomic policy: economic growth, price stability, minimising unemployment and a stable balance of payments on current account. The possibility of conflict arising, at least in the short run, when attempting to achieve these objectives. Additional information: Students should be aware that governments may also have other objectives of macroeconomic policy, such as balancing the budget and achieving an equitable distribution of income. They should be aware that the importance attached to the different objectives changes over time. 4.2.1.2 Macroeconomic indicators Data which is commonly used to measure the performance of an economy, such as: real GDP, real GDP per capita, Consumer Prices and Retail Prices Indices (CPI/RPI), measures of unemployment, productivity and the balance of payments on current account. 4.2.1.3 Uses of index numbers How index numbers are calculated and interpreted, including the base year and the use of weights. How index numbers are used to measure changes in the price level and changes in other economic variables. Additional information: A detailed technical knowledge is not expected of indices such as the Retail Prices Index (RPI) and Consumer Prices Index (CPI), but students should have an awareness of their underlying features, for example, the concept of the 'average family' and a 'basket of goods and services'. 4.2.1.4 Uses of national income data The use and limitations of national income data to assess changes in living standards over time. The use and limitations of national income data to compare differences in living standards between countries. The importance of using purchasing power parity (PPP) exchange rates when making international comparisons of living standards. 4.2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts 4.2.2.1 The circular flow of income What national income measures. The difference between nominal and real income. Real national income as an indicator of economic performance. The circular flow of income concept, the equation income = output = expenditure, and of the concepts of equilibrium and full employment income. The difference between injections and withdrawals into the circular flow of income. The effect of changes in injections and withdrawals on national income. Additional information: Students are not expected to have a detailed knowledge of the construction of national income accounts. 4.2.2.2 Aggregate demand and aggregate supply analysis Changes in the price level are represented by movements along the aggregate demand (AD) and aggregate supply (AS) curves. The various factors that shift the AD curve and the short-run AS curve. The factors which affect long-run AS and distinguish them from those which affect short-run AS. Underlying economic growth is represented by a rightward shift in the long-run AS curve. How to use AD/AS diagrams to illustrate macroeconomic equilibrium. How both demand-side and supply-side shocks affect the macroeconomy Additional information: Students should be able to use AD and AS analysis to help them explain macroeconomic problems and issues. For example, they should be able to use AD and AS diagrams to illustrate changes in the price level, demand-deficient (cyclical) unemployment and economic growth. Students should also understand how global economic events can affect the domestic economy. 4.2.2.3 The determinants of aggregate demand What is meant by AD. The determinants of AD, ie the determinants of consumption, investment, government spending, exports and imports. The basic accelerator process. The determinants of savings. The difference between saving and investment. Additional information: Students will not be required to undertake calculations to illustrate the operation of the accelerator. Students should understand how changes in net exports affect aggregate demand and economic performance. 4.2.2.4 Aggregate demand and the level of economic activity The role of AD in influencing the level of economic activity. The multiplier process and an explanation of why an initial change in expenditure may lead to a larger impact on local or national income. The concept of the marginal propensity to consume and use the marginal propensity to consume to calculate the size of the multiplier. Why the size of the marginal propensity to consume determines the magnitude of the multiplier effect. Additional information: Students will only be required to calculate the multiplier from the marginal propensity to consume. Calculations from the marginal propensities to withdraw will not be expected. 4.2.2.5 Determinants of short-run aggregate supply The price level and production costs are the main determinants of the short-run AS. Changes in costs, such as: money wage rates, raw material prices, business taxation and productivity, will shift the short-run AS curve. 4.2.2.6 Determinants of long-run aggregate supply The fundamental determinants of long-run AS such as technology, productivity, attitudes, enterprise, factor mobility, and economic incentives. The position of the vertical long-run AS curve represents the normal capacity level of output of the economy. The importance of the institutional structure of the economy in determining aggregate supply, such as the role of the banking system in providing business investment funds, should also be understood. The Keynesian AS curve. 4.2.3 Economic performance 4.2.3.1 Economic growth and the economic cycle The difference between short-run and long-run growth. The various demand-side and supply-side determinants of short-run growth of real national income and the long-run trend rate of economic growth. The costs and benefits of economic growth. The impact of growth on individuals, the economy and the environment. The concept of the economic cycle and the use of a range of economic indicators, such as real GDP, the rate of inflation, unemployment and investment, to identify the various phases of the economic cycle. The difference between positive and negative output gaps. The causes of changes in the various phases of the economic cycle, including both global and domestic demand-side and supply-side shocks. Additional information: Students should be able to use a production possibility curve and AD/AS diagrams to illustrate the distinction between short-run and long-run economic growth. Students should understand that long-run economic growth occurs when the productive capacity of the economy is increasing and is a term used to refer to the trend rate of growth of real national output in an economy over time. Students should be able to discuss the sustainability of economic growth. Students should understand that a positive output gap occurs when real GDP is above the productive potential of the economy, and a negative output gap occurs when real GDP is below the economy's productive potential. Students should be able to discuss causes of cyclical instability such as: excessive growth in credit and levels of debt, asset price bubbles, destabilising speculation and animal spirits or herding. 4.2.3.2 Employment and unemployment The main UK measures of unemployment, ie the claimant count and the Labour Force Survey measure. The concepts of voluntary and involuntary unemployment. The terms seasonal, frictional, structural and cyclical unemployment. How employment and unemployment may be determined by both demand-side and supply-side factors. The concept of, and the factors which determine, real wage unemployment. The concept of, and the factors which determine, the natural rate of unemployment. The consequences of unemployment for individuals and for the performance of the economy. Additional information: Students should appreciate that unemployment has a variety of causes and hence the appropriate policies to reduce unemployment depend on the cause. They should understand that a negative output gap is linked to cyclical unemployment and that supply-side causes of unemployment affect the position of the long-run aggregate supply curve. 4.2.3.3 Inflation and deflation The concepts of inflation, deflation and disinflation. Demand-pull and cost-push influences on the price level. Fisher's equation of exchange MV = PQ and the Quantity Theory of Money in relation to the monetarist model. The effects of expectations on changes in the price level The consequences of inflation for both individuals and the performance of the economy. The consequences of deflation for both individuals and the performance of the economy. How changes in world commodity prices affect domestic inflation. How changes in other economies can affect inflation in the UK. Additional information: Students should understand that deflation exists when the price level is falling, whereas disinflation is when the rate of inflation is falling. Students should appreciate that deflationary policies are policies to reduce aggregate demand and do not necessarily result in deflation. Students can use T instead of Q in the Fisher equation but using Q means that PQ is nominal national income and overcomes the difficulties associated with the inclusion of intermediate transactions. 4.2.3.4 Possible conflicts between macroeconomic policy objectives How negative and positive output gaps relate to unemployment and inflationary pressures. Both the short-run Phillips curve and the long-run, L-shaped Phillips curve. The implications of the short-run Phillips curve and the long-run, L-shaped Phillips curve for economic policy. How economic policies may be used to try to reconcile possible policy conflicts both in the short run and the long run. Additional information: Students should be able to use macroeconomic models, including the AD/AS model, to analyse the causes of possible conflicts between policy objectives in the short run and long run. They should be able to discuss approaches to reconciling these conflicts and the monetarist/supply-side view that the major macroeconomic objectives are compatible in the long run. The L-shaped Phillips curve is also known as the vertical long-run Phillips curve. 4.2.4 Financial markets and monetary policy 4.2.4.1 The structure of financial markets and financial assets The characteristics and functions of money. Definitions of the money supply and the distinction between narrow money and broad money. The difference between the money market, the capital market and the foreign exchange market. The role of financial markets in the wider economy. The difference between debt and equity. Why there is an inverse relationship between market interest rates and bond prices. Additional information: Students should know that ways in which firms raise finance include: issuing shares, issuing corporate bonds and borrowing from a bank. Students should know the terms coupon and maturity in relation to government bonds and be able to calculate the yield on a government bond. 4.2.4.2 Commercial banks and investment banks The difference between a commercial bank and an investment bank. The main functions of a commercial bank. The structure of a commercial bank's balance sheet. The objectives of a commercial bank, ie liquidity, profitability and security. Potential conflicts between these objectives. How banks create credit. Additional information: Students should be aware of the differences between a commercial bank and an investment bank but they do not need a detailed knowledge of the activities and functions of an investment bank. They should also be aware that many banks are engaged in both investment banking and commercial banking activities and that this may increase systemic risk. Students should be aware that there are other institutions that operate in financial markets but they do not need to know about their activities or their functions. Students will not be required to calculate the credit multiplier. 4.2.4.3 Central banks and monetary policy The main functions of a central bank. That monetary policy involves the central bank taking action to influence interest rates, the supply of money and credit and the exchange rate. The current objectives of monetary policy set by the government. The role of the Monetary Policy Committee of the Bank of England (MPC) and how it uses changes in bank rate to try to achieve the objectives for monetary policy, including the government's target rate of inflation. The factors considered by the MPC when setting the bank rate. How changes in the exchange rate affect aggregate demand and the various macroeconomic policy objectives. The monetary policy transmission mechanism, including the relationship between changes in interest rates and the exchange rate. How the Bank of England can influence the growth of the money supply. Additional information: Students should understand current and recent instruments of monetary policy such as: quantitative easing, Funding for Lending and forward guidance. Students should understand how the MPC of the Bank of England uses changes in bank rate to try to achieve the objectives for monetary policy, including the government's target rate of inflation. 4.2.4.4 The regulation of the financial system Regulation of the financial system in the UK, eg the role of the Bank of England, the Prudential Regulation Authority (PRA), the Financial Policy Committee (FPC) and the Financial Conduct Authority (FCA). Why a bank might fail, including the risks involved in lending long term and borrowing short term. Liquidity ratios and capital ratios and how they affect the stability of a financial institution. Moral hazard. Systemic risk and the impact of problems that arise in financial markets upon the real economy. Additional information: An in-depth knowledge of the PRA, FPC and the FCA is not expected but students should appreciate their role in trying to maintain the stability of the financial system. Students will not be required to calculate liquidity or capital ratios. 4.2.5 Fiscal policy and supply-side policies 4.2.5.1 Fiscal policy Fiscal policy involves the manipulation of government spending, taxation and the budget balance. Fiscal policy can have both macroeconomic and microeconomic functions. How fiscal policy can be used to influence aggregate demand. How fiscal policy can be used to influence aggregate supply. How government spending and taxation can affect the pattern of economic activity. The types of and reasons for public expenditure. Why governments levy taxes. The difference between direct and indirect taxes. The difference between progressive, proportional and regressive taxes. The principles of taxation, such as that taxes should be equitable. The role and relative merits of different UK taxes. The relationship between the budget balance and the national debt. Cyclical and structural budget deficits and surpluses. The consequences of budget deficits and surpluses for macroeconomic performance. The significance of the size of the national debt. The role of the Office for Budget Responsibility. Additional information: Students should be able to assess the economic significance of changes in the level and distribution of both public expenditure and taxation. They should be able to discuss the issue of the budget balance and be able to evaluate the possible economic consequences of a government running a budget deficit or budget surplus. They should be able to assess the impact of measures used to rebalance the budget. 4.2.5.2 Supply-side policies The difference between supply-side policies and supply-side improvements in the economy. How supply-side policies can help to achieve supply-side improvements in the economy. How supply-side policies, such as tax changes designed to change personal incentives, may increase the potential output of the economy and improve the underlying trend rate of economic growth. How supply-side policies can affect unemployment, the rate of change of prices and UK external performance, as reflected in the balance of payments on current account. The role of supply-side policies in reducing the natural rate of unemployment. Free market supply-side policies include measures such as: tax cuts, privatisation, deregulation and some labour market reforms. Interventionist supply-side policies include measures such as: government spending on education and training, industrial policy, subsidising spending on research and development. Supply-side policies can have microeconomic as well as macroeconomic effects. Additional information: Students should recognise that supply-side changes in the economy often originate in the private sector, independently of government, eg through productivity improvements, innovation and investment. Students should recognise that supply-side policies can involve government intervention to deal with market failures such as short-termism, as well as policies to improve economic incentives and the operation of markets. 4.2.6 The international economy 4.2.6.1 Globalisation The causes of globalisation. The main characteristics of globalisation. The consequences of globalisation for less-developed and for more-developed countries. The role of multinational corporations in globalisation. 4.2.6.2 Trade The model of comparative advantage. The distinction between comparative and absolute advantage. The model shows that specialisation and trade can increase total output. Other economic benefits of trade, such as the ability to exploit economies of scale and increased competition. The costs of international trade. The reasons for changes in the pattern of trade between the UK and the rest of the world. The nature of protectionist policies, such as: tariffs, quotas and export subsidies. The causes and consequences of countries adopting protectionist policies. The main features of a customs union. The main characteristics of the Single European Market (SEM). The role of the World Trade Organisation (WTO). Additional information: Students should be able to use a simple numerical example to illustrate the principle of comparative advantage and the associated benefits of trade. Students should be able to use a diagram to illustrate the effects of imposing a tariff on imports. 4.2.6.3 The balance of payments The difference between the current, capital and financial accounts on the balance of payments. The current account comprises trade in goods, trade in services, primary income and secondary income. The meaning of a deficit and a surplus on the current account. The factors that influence a country's current account balance such as productivity, inflation and the exchange rate. The consequences of investment flows between countries. The policies that might be used to correct a balance of payments deficit or surplus. Expenditure-switching and expenditure-reducing policies. The effect policies used to correct a deficit or surplus may have upon other macroeconomic policy objectives. The significance of deficits and surpluses for an individual economy. The implications for the global economy of a major economy or economies with imbalances deciding to take corrective action. Additional information: Students should have a detailed knowledge of the structure of the current account of the balance of payments but only need a general appreciation of the other sections of the balance of payments account. Students should appreciate the difference between foreign direct investment (FDI) and portfolio investment. 4.2.6.4 Exchange rate systems How exchange rates are determined in freely floating exchange rate systems. How governments can intervene to influence the exchange rate. The advantages and disadvantages of fixed and floating exchange rate systems. Advantages and disadvantages for a country of joining a currency union, eg the eurozone. 4.2.6.5 Economic growth and development The difference between growth and development. The main characteristics of less-developed economies. The main indicators of development, including the Human Development Index (HDI). Factors that affect growth and development, such as: investment, education and training. Barriers to growth and development, such as: corruption, institutional factors, poor infrastructure, inadequate human capital, lack of property rights. Policies that might be adopted to promote economic growth and development. The role of aid and trade in promoting growth and development. Additional information: Students should appreciate the links between this and other parts of the specification, such as: globalisation, trade, the determinants of economic growth and inequality. Students should be able to compare market-based strategies and interventionist strategies for promoting growth and development. References https://www.aqa.org.uk/subjects/economics/a-level/economics-7136/specification/specification-at-a-glance