CIE IGCSE ECONOMICS (0455)

Contents
The Basic Economic Problem ............................................................................................................................................................................................ 2
Economic Systems ............................................................................................................................................................................................................ 2
How Markets Work........................................................................................................................................................................................................... 3
Social Costs and Benefits .................................................................................................................................................................................................. 4
Money and Finance .......................................................................................................................................................................................................... 5
Occupations and Earnings ................................................................................................................................................................................................ 5
The Role of Trade Unions ................................................................................................................................................................................................. 6
Spending, Saving and Borrowing ...................................................................................................................................................................................... 6
Types of Business Organization ........................................................................................................................................................................................ 7
Organization of Production .............................................................................................................................................................................................. 7
The Growth of Firms ......................................................................................................................................................................................................... 8
Integration and Economies of Scale ................................................................................................................................................................................. 8
Competition ...................................................................................................................................................................................................................... 9
Role of Government in an Economy ................................................................................................................................................................................. 9
Taxation .......................................................................................................................................................................................................................... 10
Price Inflation ................................................................................................................................................................................................................. 11
Employment and Unemployment .................................................................................................................................................................................. 12
Output and Growth ........................................................................................................................................................................................................ 12
Developed & Less Developed Economies ....................................................................................................................................................................... 12
Population ...................................................................................................................................................................................................................... 13
International Specialization and Trade ........................................................................................................................................................................... 13
Balancing International Payments .................................................................................................................................................................................. 14
June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia

THE BASIC ECONOMIC PROBLEM ECONOMIC SYSTEMS

An economic system determines how scarce resources are
NATURE OF THE ECONOMIC PROBLEM allocated
There are too few productive resources to make all the goods and
In a market economic system or market economy the decisions of
services that consumers need and want.
consumers and producers will determine what goods and services
Finite resources and unlimited wants are produced and who they are produced for
Scarcity of resources is the basic economic problem Producers in a market economy aim to maximize their profit from
FACTORS OF PRODUCTION producing and selling those goods and services that consumers
Consumers are people or firms who need and want goods and want
services A market for a particular good or service consists of all those
Resources or factors of production are used to make goods and producers willing and able to supply it and all those consumers
services willing and able to buy it
LLCE The price mechanism allocates scarce resources to the most
profitable uses in a market economic system
Land: all natural resources used in production (minerals from
ground, chemicals/gases from air, seas, forests etc.) Producers use market price to determine what is profitable. Rising
consumer demand for a product will tend to increase in price.
Labor: human effort used in the production of goods/services
Producing more could earn producers more profit
(works, physical labor etc.)
A market economy will produce a wide variety of goods and
Capital: the man-made resources that are used to produce
services if it is profitable to do so but only or those consumers that
goods/services. (tractor to plough land
are willing and able to pay for them.
Enterprise: the skills and willingness to take the risks required to
Market failures can cause scarce resources to be allocated to uses
organize productive activities
that are wasteful, inefficient or even harmful to people and the
Entrepreneurs organize and combine resources in firms to produce
environment.
goods and services
A mixed economic system has a private sector and a public sector
Durable consumer goods last long while (e.g. furniture) non-
A government can try to correct market failures in a mixed
durable consumer goods (e.g. food) do not
economic system. It can allocate scarce resources to provide goods
Capital goods and semi-finished goods or components are used up
and services that people need and introduce laws and regulations
in production
to control harmful activities
OPPORTUNITY COST Market economy Mixed economy
Opportunity cost is the cost of choosing between alternative uses Who decides
Producers and Producers, consumers &
of resources what & how
consumers governments
Choosing one use will always mean giving up the opportunity to to produce?
use resources in another way, and the loss of goods and services Who owns or
they might have produced instead controls most Private sector and
Private sector
The problem of resource allocation is choosing how best to use scarce public sector
limited resources to satisfy as many needs and wants as possible resources?
and maximize economic welfare How are
Market signals to Same as market but
The aim of economics is to find the most efficient allocation of resource
identify what goods and government may also
resources allocation
services consumers provide some goods and
decisions
PRODUCTION POSSIBILITY FRONTIER made?
want services e.g. merit
Opportunity cost can be shown using a production possibility Same as market plus:
Who are
frontier (PPF). Consumers with Government may
goods &
It shows the maximum combinations of goods and services that can services
greatest ability to pay provide goods and
be produced by an economy in a given time period with its limited for them services to people in
produced for?
need
resources.
Wide variety of goods
A PPF shows all the combinations of possibilities, involving two
and services. Same as market plus:
goods or options. Competition Government can
Society can use all its scarce resources to produce this combination. Main
encourages intervene to correct
advantages
development of new serious market
and more efficient failures
products & processes
Serious market failure
Worthwhile but Same as market plus:
Main unprofitable goods Taxes can be high
disadvantages not provided Public sector provision
Harmful goods may be may be inefficient
available to buy

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June 2014
HOW MARKETS WORK
Demand refers to how much of a product or service is desired by
buyers and supply represents how much the market can offer.
Demand Curve
The higher the price of a good,
the less people will demand that
good
1
Supply Curve
The higher the price, the higher
the quantity supplied.
EQUILIBRIUM PRICE
When supply and demand
are equal the economy is
said to be at equilibrium.
At this point, the
allocation of goods is at its
most efficient because
amount of goods being
supplied is exactly the
same as amount of goods
being demanded.
Thus, everyone is satisfied with the current economic condition.
EXCESS SUPPLY
If the price is set too high, excess
supply will be created within the
economy and there will be
allocative inefficiency.
CIE IGCSE ECONMOICS (0455) Zubair Junjunia
PRICE OF MECHANISM
Forces of demand and supply establish the market price of a
product
Factors that Affect Demand Changes in demand and supply will cause changes in price
Price An increase in demand will raise market price. This will be the
Consumer signal to producers to use more resources to supply more. In this
tastes/preferences way consumers get what they want.
Income available to Increase in supply of product lowers market price and enables
consumer more people to share increased supply
Prices of substitute/ PRICE ELASTICITY OF DEMAND
complementary goods The responsiveness of demand to a change in price.
Interest rates (price of Inelastic Demand Elastic Demand
borrowing money)
It has a PEd lower than 1. It has a PEd greater than 1.
Consumer population
The necessity of the product is The necessity of the product
(population increase =
high it is either essential or is relatively low.
demand increase)
habitual. Demand would respond
A change in price has little quickly and more drastically.
Factors that Affect Supply effect on the change in
demand.
Cost of factors of production
Prices of other
goods/services
Global Factors
Technology Advance
Business Optimism/
Expectations
%
=
%
Price elasticity and revenue
o When demand is price inelastic, an increase in price would
raise revenue.
o When demand is price elastic, a decrease in price would raise
revenue.
Factors that affect PEd:
o The number of substitutes
o The period of time
o The proportion of income spent on the commodity
o The necessity of the product
Special Demand Curves
Perfectly price inelastic:
demand remains
constant whatever the
price
EXCESS DEMAND
Excess demand is created
when price is set below the
equilibrium price. Because the Infinitely price inelastic:
price is so low, too many there is unlimited
consumers want the good demand but at only one
while producers are not price
making enough of it.
Unitary elasticity:
revenue remains
constant at every
possible price
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia

PRICE ELASTICITY OF SUPPLY MARKET FAILURE

The responsiveness of quantity supplied to a change in price. Market failure occurs when the market mechanism fails to allocate
Inelastic Supply Elastic Supply scarce resources efficiently, so social costs are greater than social
It has a PEs of less than 1. It has a PEs of over 1. benefits
A large price change will have A large price change will How markets can fail How a government intervenes
little effect on the amount have a large effect on the Only goods and services that Produce merit goods such as
supplied. amount supplied. are profitable to make will be education for the needy
produced It can provide public goods
Services such as street lighting such as street lighting
wont be provided as you are Public sector can employ
unable to separate it people and welfare benefits
Resources only employed if can be given to the needy
profitable people may be left Laws to make goods illegal or
unemployed without an income high taxes to reduce
Harmful goods may be consumption
produced and sold freely Laws and regulations would
%
= Producers may ignore protect natural environment
% environmental impacts Monopolies can be broken up
Factors that affect PEs: Monopolies dominate supply of or regulated to keep prices low
o Time products and charge high prices
o Availability of resources
o Supply available to meet demand MERITS OF THE MARKET SYSTEM
o Spare production capacity available Advantages Disadvantages
o Factor substitution available Gives producers incentive to May be unstable
Special Supply Curves produce goods that consumers (unemployment, inflation)
Perfectly price inelastic: want Prices may give
supply remains Provides an incentive to false/inadequate signals to
constant whatever the acquire useful skills producers
price Encourages producers and Markets do not work in some
consumers to conserve scarce areas (public and merit goods)
resources Monopolistic industries may
Competition pushes businesses restrict output and raise prices
to be efficient Large gap between rich and
High degree of economic poor
Infinitely price inelastic:
freedom
there is unlimited
supply but at only one SOCIAL COSTS AND BENEFITS
price
Private Benefit/Cost: costs/benefits the business or consumer
receives from consuming/producing the good
External Benefit/Cost: advantages/disadvantages society receives
Unitary elasticity: A because of consumption of a certain good/service
percentage change in
price will cause an
SOCIAL COST AND BENEFIT
equal percentage Social costs = Private costs + External costs
change in quantity Social benefits = Private benefits + External benefits
supplied Social costs > Social benefits, producing product is uneconomic
Social costs < Social benefits, producing product is economic
USEFULNESS OF PRICE ELASTICITY
Tax: CONFLICTS OF INTEREST
Charge placed on production of good/service by the government. Conserving Resources Using Resources
A tax will increase the cost of production to the producer. It Conservationists argue that this Businesses and firms try to
makes it more expensive to produce. It is likely that the producer generation should pass on to maximize profits and therefore
will produce less; therefore the supply curve shifts to the left. future generations at least as want use as many resources
If people are really keen to buy the product (price inelastic) many resources as our own they can get their hands on to
demand will stay fairly high (e.g. cigarette). So if most people still generation has inherited and do so
buy the taxed good, the government can make more revenue. not exploit everything
Subsidy: Public Expenditure Private Expenditure
A subsidy is a payment made to producers to help reduce their Government can provide public Government can only guess
costs of production. goods and merit goods that the how we would like to spend the
It is made by the government to encourage producers to produce market would not produce. money
or supply a certain good or service. It is likely that the producer Public sector workers may be When the government spends
will be encouraged to produce more therefore the supply curve more likely to spend money in a money, it can be wasteful.
will shift to the right. way that is fair to all

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia

MONEY AND FINANCE STOCK EXCHANGES

Institutions in which shares of stock are bought and sold.
FUNCTION OF MONEY A shareholder in a company is a part-owner of that company.
Medium of exchange generally accepted as means of payment. Shareholders will receive a payment known as a dividend, which
Unit of account - for placing a value on goods/services. is their reward and share of company profits.
Store of value you can save money because it keeps its value. Shareholders are protected by limited liability
Standard for deferred payment borrowers are able to borrow Stock exchanges also protect shareholders.
money and pay back later Functions:
NEED FOR EXCHANGE o Helps companies sell their stocks or equities
o Helps them to raise finance
Ancestor relied on direct swapping of goods and services
o Helps the public buy such stocks
Early form of exchange known as barter
o Produce a market price due to buying and selling of stocks
Bartering is the most inconvenient way to carry out business
o Provides an indicator of how generally an economy is doing.
Main problems of bartering:
o Fixing a rate of exchange OCCUPATIONS AND EARNINGS
o Finding someone to swap with
o Trying to save a good for long period of time CHOICE OF OCCUPATION
Wage Factors Non-wage Factors
CHARACTERISTICS OF GOOD MONEY Basic pay Job satisfaction
PADDS Earnings: total amount an Career prospects (promotion)
Portability - not too heavy individual receives Fringe benefits; non-financial
Acceptability Overtime pay incentives e.g.
Divisibility - without loss of value Bonuses o Payment of school fees
Scarcity Commission: payment made o Length of holidays
Stability it keeps its value as a percentage of sales a o Job security
salesperson makes. o Location of the job
COMMERCIAL BANKS
Keeping money safe: banks vaults more secure than a safe box in CHANGES IN EARNINGS
a private house. Individuals and businesses can open bank Entry: Young employee will receive low earnings due to lack of
accounts. Banks also keep documents and other valuables items work skills and experience, can become an apprentice or join a
in safe deposit boxes. management training scheme to become more skilled
Lending: Skilled workers: the more skilled a worker is, the more
o Loans: borrowing fixed sum for set period of time but opportunities he has for increasing his earnings. Bonuses will be
borrower must pay back interest given and higher rate of overtime paid.
o Overdraft: taking more than in account, but with interest End-of-career employees: if workers keep updating skills, they
o Credit cards: offered for users to buy goods and pay for them will continue to have opportunities to increase wages however
later. If they pay back the bill by a given date, no interest is set, when they stop this, their demand would fall and income would
but if not, they are charged with a high rate of interest. diminish, finally reaching a stop when retired.
o Mortgages: banks lend firms and households big amounts of
money. Usually for long periods of time and must be paid back RISE AND FALL
over years. Rise in Demand for Labor Fall in Demand for Labor
Means of Making Payment cheques so bank then transfers Increase in consumer demand Fall in consumer demand
money to recipients that the person needs to pay. Increase in labor productivity Fall in labor productivity
Providing Foreign Currency Increase in cost of employing Fall in cost of employing
capital equipment capital equipment
CENTRAL BANK Rise in Supply of Labor Fall in Supply of Labor
Printing notes and minting coins that are legal tender (accepted Improvement in net Decline in net advantages of
as payment) as well as destroying torn notes and worn-out coins. advantages of occupation occupation
Setting interest rates Rise in working population Fall in working population
Lender of last resort: if a bank needs cash in a hurry, they can Improved education and Employees lack good
borrow from central bank. training education and training
Supervising monetary policy: heads of the central bank holds
meetings with officials from other banks to determine interest WAGE DIFFERENTIALS
rate and quantity of money in economy. If there is too little Wage Who earns
Why?
spending in economy, banks might be requested to lend more. differential more?
Banker for commercial banks and the government: Government Public sector
Private Public sector workers enjoy more
accounts and spending are carried out with central bank. It helps or private
sector job security and more holiday
Government to borrow money. Total amount government owes sector
workers entitlement
to lenders is called national debt. employee?
Helping to manage international financial system (governments Women may take career break to
lending each other money) Male or Male raise children
female employees Most female workers work part
employee? earn more time or choose low-pay jobs e.g.
nursing, teaching

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Skilled workers are more Single union agreement: a firm agrees a single union can
Skilled or Skilled
productive represent all its workers
unskilled workers
Some specialist skills are in short
workers? paid more
supply
COLLECTIVE BARGAINING
Process of negotiating wages and other working conditions
Agricultural has become more
between trade unions and employers
capital intensive so demand has
declined A trade unions will be in a strong bargaining position to
Employees Agricultural negotiate higher wages and better conditions if:
Manufacturing and service
in different workers o It represents most or all of the workers in a firm or industry
industry have expanded
industries paid less o If union members provide goods and services that consumers
Shortage of supply of labor with
need and for which there are few alternatives, e.g. electricity
specialist skills for many
manufacturing sectors INDUSTRIAL ACTION
SPECIALIZATION Industrial action is taken when collective bargaining fails to result
in an agreement
Division of labor: system whereby workers concentrate on
Taking industrial action can help a union increase its bargaining
performing a few tasks and then exchange their production for
strength to force employers to agree to their demands.
other goods and services.
Industrial actions:
Specialization: where individuals, firms and economies do this;
o Overtime ban: Workers refuse to work more than their normal
production process broken up into a series of different tasks
hours
Advantages for Individual Disadvantages for Individual
o Work to rule: Workers deliberately slow down production by
Employees can make best use Doing same job or repetitive
complying with every rule and regulation
of their particular talents/skills tasks is boring and stressful
o Go slow: Workers deliberately work slowly
and can increase them by Individuals must rely on
o Strike: Workers refuse to work and may protest outside their
repeating tasks others to produce goods and workplace to stop deliveries or non-unionized workers from
Employees can produce more services they want but cannot entering
output and reduce business produce themselves
Consequences of industrial action:
costs Many repetitive tasks can now o Firms suffer higher costs and lose output, and may lose big and
More productive employees be done by machines, leading regular customers to rival firms.
can earn higher wages to unemployment of low- o Union members may lose wages during a strike and even lose
skilled workers their jobs if employers cut back demand for labor.
THE ROLE OF TRADE UNIONS o Consumers may be unable to obtain the goods/services they
need and may have to pay higher prices if firms pass on their
A trade union is an organization of workers formed to promote
increased costs.
and protect the interest of its members concerning wages,
o Reputation of an economy as a good place for business may be
benefits and working conditions.
damaged. Firms may decide to set up businesses elsewhere,
FUNCTIONS increasing unemployment and lower incomes.
Negotiating wages and other non-wage benefits with employers Possible Advantages Possible Disadvantages
Defending employee rights and jobs Could help to bring about Might cause lack of flexibility in
Improving working conditions, e.g. better hours of work and minimum working standards working practices
health & safety Could help keep pay higher Could be major problem as
Improving pay and other benefits, including holiday entitlement, Could help maintain fashions change very quickly
sick pay and pensions Employment/enhanced job Could lead to some firms going
Encouraging firms to increase worker participation in business security out of business
decision-making Could lead to improvement in Workers made redundant
Developing skills of union members, by providing training and health and safety. Workers will need to pay union
education courses membership fees.
Supporting members taking industrial action
SPENDING, SAVING AND BORROWING
TYPES OF TRADE UNIONS Disposable income: amount of income left to spend or save after
General Unions: represent workers across many different direct taxes have been deducted.
occupations Spending: enables a person to buy goods and services to satisfy
Industrial Unions: represent workers of the same industry their needs and wants.
Craft Unions: represent workers with the same skill across Saving: involves delaying consumption. As interest rates rise,
different industries people may save more and spend less.
Non-manual unions/Professional Unions: represent workers in Borrowing: allows a person to increase their current level of
non-industrial and professional occupations spending; enabling them to buy goods they cannot afford now.
People with low disposable incomes may spend less in total than
UNION REPRESENTATION IN THE WORKPLACE people with high incomes but will tend to spend all or most of
Closed shop: all workers in a place of work must belong to a trade their income meeting their basic needs.
union
Open shop: firm can employ both unionized and non-unionized
labor

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
The amount of income we earn tends to rise as we get older, until
we retire, because:
COOPERATIVES
o Employees earn more in wages as they learn more skills and Owned and controlled by its members
become more productive Each member has an equal share of ownership
o Tend to save more as they get older and earn interest in saving Worker co-ops are owned and controlled by their workers.
o Entrepreneurs may become more experienced in business and Consumer co-ops are retail businesses owned by their consumers
can earn more profit Advantages Disadvantages
Limited liability Many consumer co-operatives
SPENDING AND SAVING PATTERNS Workers in worker co- have been forced out of
Increase in Spending Saving Borrowing operatives take business business by larger companies.
Real income decisions and share profits. Worker co-operatives may be
Direct tax Members of consumer co- badly run.
Wealth operatives enjoy profit
Interest rates dividends or lower prices
Availability of
saving scheme
MULTINATIONALS
Availability of Operates in more than one country and are some of the largest
companies in the world.
credit
Consumer Governments often compete to attract multinationals because
they can provide jobs, incomes, business knowledge, skills and
confidence
technologies which can help other firms, as well as pay taxes on
Young single people tend to spend more on music and fashion.
their profits to boost government revenue.
People with families will spend more on their children & homes.
Headquarters are based in one country.
Elderly people may spend more on health care.
Advantages Disadvantages
TYPES OF BUSINESS ORGANIZATION Can reach many more They can switch their profits to
consumers globally and sell other countries to avoid
SOLE TRADER far more than other types paying taxes on their profits.
Owned and controlled by one person It can minimize transport Can force smaller firms out of
Advantages Disadvantages costs by locating plants in business.
A sole trader is his own boss. Full responsibility - may lose different countries to be near May exploit workers in low
Can choose hours of work. revenue if off sick or on the sources of raw materials wage economies.
Receives all profits. holiday. or big consumer markets. May use their power to get
Easy to set up Unlimited liability Minimize wage costs by generous subsidies and tax
Lacks capital for business locating operations in advantages from the
growth. countries with low wages. government.
Can enjoy low average
PARTNERSHIP production costs
Legal agreement between two or more people to own/finance
/run a business. PUBLIC CORPORATION
Unlimited liability unless its a silent/sleeping partner. Owned and controlled by the government.
Advantages Disadvantages Some aim to make a profit while others will deliver public services
Easy to set up. Disagreements A board of directors runs the corporation
Ownership
More capital. Can lack capital to finance Committees may be set up to monitor and
and Control
Partners bring new skills, growth. investigate any irregularities or complaints
ideas & share responsibility. Has a legal identity separate from its directors
Legal status
and the government
JOINT STOCK COMPANIES
From taxes and other government revenues
Private Limited Companies Public Limited Companies
From profits re-invested in the organization
Only sells shares to people Shares are advertised and sold Finance
Any profits may be used by government to
known to existing publicly on the stock market
finance other public services
shareholders. through stock exchange to
Managed by Board of many investors FEATURES
Directors Managed by a BoD Board of Directors: elected by the many thousands of
Advantages Disadvantages shareholders who manage business
Shareholders have limited Companies must publish Controlling Interest: a shareholder with more than 50% of shares
liability & receive dividends. annual accounts. holds; they can out-vote all other shareholders.
Companies have a separate Original business owners can Sleeping/silent partner: partner that provides money to be in
legal identity. lose control. partnership in return for a share of profits, but will not be
Share sales can raise Directors may run the business involved in management of organization and has limited liability.
significant capital. in their own interests rather
Public Limited Companies can than for shareholders. ORGANIZATION OF PRODUCTION
sell shares to many more Primary industries: produces natural resources e.g. mining
investors on stock market. Secondary industries: include all manufacturing industries and
construction.
Tertiary industries: produce and supply services.
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Small Size of the market is Markets cannot raise
FACTORS FOR DEMAND OF FACTORS OF PRODUCTION small and local enough capital to expand
Demand for goods and services by consumers: the higher the
Consumers like tailored their business
demand, the more labor/capital firms will need
goods/services
Price of labor and capital: the higher the cost, the less labor and
Owners may choose to
capital demanded. Firms may also decide to substitute labor for
keep businesses small
more capital and vice versa depending on its productivity levels.
Governments may
Productivity of labor and capital: more output/revenue labor and
provide help
capital help to produce, more profit they will generate over and
above cost of employing them. INTEGRATION AND ECONOMIES OF SCALE
COSTS, REVENUES AND PROFITS INTEGRATION
Fixed costs: dont vary with level of output e.g. interest on loans Growth by takeover or merger involves integration with other
Variable cost: vary directly with level of output e.g. electricity firms.
Breakeven: where total revenue = total cost A takeover occurs when a company acquires ownership and
=
= +
control of another company by purchasing its shares.
A merger occurs when two or more firms agree to form a new
=
company and issues new shares.
=
= TYPES OF INTEGRATION
Horizontal integration: occurs between firms at the same stage of
production producing similar products
Vertical integration: Occurs between firms at different stages of
production. Forward integration means taking over a firm at a
later stage of production. Backward integrations the opposite
Lateral integration or conglomerate merger: occurs between
firms at the same stage of production but producing very different
products
PRINCIPLE GOAL
The aim of production for most private sector firms is to make as
ECONOMIES AND DISECONOMIES OF SCALE
much profit as possible Economy of Scale Diseconomy of Scale
Some productive organizations may have other motives: Cost savings due to increasing Rising costs because a firm has
o Public service: aim to provide services people need but cannot scale of production, resulting become too large
pay for. Costs are funded from government revenues falling average costs
o Charity: provide services to people or animals in need or to Financial economies: larger Management diseconomies:
help protect environment. Cover costs from donations firms often have access to Occurs when larger firms have
o Not for profit: aim to make enough revenue to cover their cost more and cheaper sources of to manage so many different
and any surplus is re-invested; e.g. local clubs, cooperatives finance departments in different
Marketing economies: larger locations, making
THE GROWTH OF FIRMS firms buy materials in bulk at communication and decision-
discounted prices, employ making difficult
MEASURING FIRM SIZES specialist buyers to secure Labor diseconomies:
Number of employees: less than 50 are classed as small. best quality materials at best Demotivated workers lead to
Amount of capital employed: large firms often invest millions of prices and spread advertising decrease in productivity due to
dollars in fixed assets such as machinery and equipment costs over a large output boring, repetitive tasks.
Market share: relative size of firms can be compared according to Technical economies: larger Agglomeration diseconomies:
their percentage share of total market supply/revenue. firms afford to invest in Occur if a company takes over
Organization: large firms may be divided up into many different specialized methods of or merges with too many other
departments and have offices, shops and/or factories spread over production and equipment, firms producing different
many locations highly skilled workers, and products, making it hard for
Size Advantages Disadvantages research and develop new business owners and managers
Large Can enjoy significant If it gets too big, firm may products and processes to co-ordinate all the different
economies of scale experience diseconomies Risk-bearing economies: the activities.
Can make it well known, of scale ability to spread financial risks
produce and sell on a Going public may make over many investors and
larger scale and have the company become reduce market risks by selling
wider range of markets subject to a hostile a range of products in
Can draw talented takeover (controlling different locations
people from around the interest)
world to work for them

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Smaller firms set their prices at a similar level to
COMPETITION Price
a larger, more dominant firm; helps to avoid
Competition between firms is good for consumer as profit- Leadership
aggressive price competition and price wars
seeking firms will compete to attract consumers Aggressive price cutting by a large dominant firm
Price competition involves using pricing strategies to attract Predatory intended to drive smaller firms out of business
consumers from rival producers Pricing because they have higher costs and wont be
Non-price competition includes offering better quality products able to match the price cuts.
than rival firms, improving customer services or by using
persuasive advertising BARRIERS
Natural Barriers to Entry Artificial Barriers to Entry
COMPETITIVE MARKETS Cost savings from large scale Using predatory pricing
Firms will compete with each other for consumer demand to: production strategies to force smaller
Increase number of customers buying their products Lots of capital equipment that firms out of business.
Achieve product superiority over rival products (quality & sales) other firms cant afford. Preventing their suppliers
Expand their share of total market sales Large customer base built up from selling materials and
Increase their sales revenue over many years. components to other firms by
Maximize their profits Developed advanced products threatening to switch to rival
or processes that are suppliers.
PERFECT COMPETITION protected by patents Forcing retailers to stock and
Businesses will charge the same price, a price that would be the sell only their product
minimum they could charge without going out of business.
The price will be equivalent to the lowest average cost of COMPETITION POLICY
producing goods. Governments may introduce laws and regulations known as
At the market price, the average cost of production would be the competition policy and can involve:
same as the average revenue for selling. Imposing fines on large firms who abuse their market power
No firm would risk charging more than the market price. Forcing oligopolies and monopolies to break up into smaller
This is perfect competition. Under this, a business would be a competing firms
price taker; it would take its price from the market Setting maximum prices levels that firms are allowed to charge
their customers
MONOPOLIES Taking monopolies into public ownership to be run by a public
Firms with monopolistic powers control at least 25% of the corporation
market share.
This makes them able to influence price; price makers. ROLE OF GOVERNMENT IN AN ECONOMY
They can restrict competition by making artificial barriers to entry As a Producer As an Employer
and other pricing strategies. Produce essential goods and The government is also a
Oligopoly Pure Monopoly services such as healthcare major employer.
A handful of firms dominate One firm controls the entire and education Some people work directly for
the market supply. market supply. Supply merit goods the government as civil
To avoid price wars, firms may A monopoly may use To supply public goods such as servants, (e.g. tax collectors)
act together to maximize their predatory pricing and other road repairs and traffic lights or provide public services (e.g.
profits, setting market price artificial barriers to entry to Control natural monopolies; education).
high by restricting their force competing firms out of they may take over companies Employees in public sector:
combined market supply. the market. providing necessity goods e.g. o Secure employment
A cartel is a formal agreement Other firms may be deterred electricity or water o May have state pension
between firms to control from competing because of its Money earned by government
market supply and price. inability to match its size in employees is mainly spent in
They may create barriers to terms of its capital national economy
entry together employed/market share
Disadvantages of Monopolies and Oligopolies
MACRO-ECONOMIC OBJECTIVES
They may supply less and charge higher prices. Main objectives:
They offer less consumer choice and lower quality products than o Achieve low and stable rate of inflation in general levels of
if they had to compete with other firms. price
o Achieve high and stable level of employment; therefore low
They may have higher production costs because they are poorly
unemployment
managed. This is called X-Inefficiency.
o Encourage economic growth in national output and income
They restrict competition using barriers to entry.
o Encourage trade and secure favorable balance of international
PRICING STRATEGY transactions
Pricing Additional objectives:
About o Reduce poverty and inequalities in income and wealth
Strategy
Penetration Setting price low to encourage sales. Used to o Reduce pollution and waste; sustainable economic growth
Pricing attract demand for a new product.
Expansion Setting price low to expand demand for an
Pricing existing product.
Market Initially charging a high price for a new product
Skimming to maximize profit.
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia

DEMAND-SIDE POLICIES TYPES OF TAXATION

Policy About Types of
Description Examples
Reducing taxes to boost demand, so Taxation
Expansionary
employment and output rises. May be used to Tax rate rises with income.
Fiscal Policy Progressive
reduce recession. The higher the income, the Income tax
Tax
Increasing taxes to reduce demand, so higher the tax
Contractionary
employment and output rises. May be used to Tax rate falls with higher
Fiscal Policy Regressive
reduce price inflation. income. The higher the Indirect taxes
Tax
May be used to reduce price inflation by income, the lower the tax
Contractionary increasing interest rates charged by the central Proportional Everyone pays the same Corporate income
Monetary Policy bank. This means commercial banks will also Tax effective tax rate tax (35%)
raise interest to encourage more savings.
Expansionary May be used during a recession to &
DIRECT TAXES
Monetary Policy employment by cutting interest rates Levied on income or wealth of an individual/company including:
o Personal income tax: is levied on income including on interest
SUPPLY-SIDE POLICY payments on saving
Supply-side policies aim to increase economic growth by raising o Payroll taxes: including personal income taxes and social
the productive potential of the economy. security contributions
An increase in the total supply of goods and services will require o Corporation tax: levied on company profits, smaller
more labor and other resources to be employed. companies have lower/zero tax to encourage enterprise
It will reduce market prices & provide more goods and services to o Capital gains tax: tax on any gain in value from sale of assets
export. held by individuals/companies e.g. precious metals/property
Instrument Effect o Transfer taxes: applied to transfer of assets from one person
Reducing taxes on profits and small firms can to another
Tax incentives encourage enterprise. It can also encourage Advantages Disadvantages
investments in new equipment. Major source of tax revenue Income taxes can reduce work
To reduce production costs and help firms fund Many are progressive and incentive
Subsidies/Grants help reduce inequalities Taxes on profits reduce profit
research and development of new technologies.
Education and Teaching new/existing workers new skills to Take account of peoples available for reinvestment
Training make them more productive. ability to pay High tax rates can cause tax
Include minimum wage laws to encourage more evasion
Labor Market
people into work, and legislation to restrict the INDIRECT TAXES
Regulations
power of trade unions.
Added to prices of goods and services
Competition Regulations that outlaw unfair trading practices
o Ad valorem taxes: levied as a percentage of selling price of
Policy by monopolies and other large, powerful firms.
good/service however necessities (food) may be exempt
Removing barriers to international trade allow
Free trade o Tariffs: custom duties applied to price of imported goods to
countries to trade their goods and services
agreements protect domestic firms from oversea competition
more freely and cheaply
o Excise duties: applied to specific goods e.g. cigarette
Removing old, unnecessary and costly rules and o User charges: such as tolls for a bridge/motorway
Deregulation
regulations on business activities
Advantages Disadvantages
CONFLICTING AIMS They are cheap for a Cost of collecting taxes falls to
Spending more money to stimulate growth can lead to rising government to collect businesses
prices as a result of increased demand. If spending is reduced to Wide tax base They are regressive
stop inflation, this will lead to a fall in growth. Can be used to discourage Tax revenues are less certain
If government tries to create full employment, labor becomes consumption/production They add to price inflation
increasingly scarce. Employers have to compete more strongly to
attract labor. They raise wages, which leads to wage inflation.
REGULATIONS
Rules imposed by a government backed up by penalties.
If the government tries to redistribute income, which may involve
Can be laws governing actions of private firms and individuals.
taxing richer people at higher rates, the richer workers may feel
that they are unfairly penalized for working hard and may decide Inspections by qualified inspectors make sure that the businesses
to migrate. This in turn, may slow down economic growth. are complying with regulations.
Failure to do so can mean fines or loss of the license.
TAXATION Examples of Regulations:
Methods of Management of waste/pollution. Rules
REASONS TO TAX Production protecting health/safety of workers.
To finance public expenditure; building schools and infrastructure Setting Up A New Paperwork for filling in such as rules
To discourage certain activities; e.g. taxes on cigarette Business protecting shareholders and paying tax.
To discourage import of goods; tariffs are import taxes and can Quality of food products, labeling of
be levied as a % of value of imports or a set tax on each item Product Standards
contents of a product.
To redistribute income from the rich to the poor. Disclosure of Companies must produce reports to
To achieve other macro-economic objectives Information shareholders.
Supply of Harmful Health warnings on cigarettes.
Products
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Advantages Disadvantages
Improve efficiency and Over-regulated: spend too
PRICE INFLATION
redistribute income. much time and money HOW TO MEASURE INFLATION
Allows government to complying with regulations
Consumer Price Index (CPI): an index of prices of goods and
regulate firms where there are and cannot concentrate on
services typically purchased by urban consumers. It is compiled
monopoly powers. running business.
and published monthly by the government. It provides a
To limit effect of externalities. Loss of competitiveness relatively accurate indication of the average price level of
Possible to strike balance because of cost of complying consumer products in the economy, and thus inflation.
between interest of private with rules and regulations
Weightings are based upon the importance of the item in
firms and consumers average expenditure. The greater the proportion spent on an
SUBSIDIES item, the higher the weighting.
Incentives provided by the government to individuals & Base year: first year with which the prices of subsequent years
households in order to carry out desired activities. are compared
Other reasons for subsidies include: The inflation rate is defined as percentage change in annual CPI
o To encourage the production of goods of natural importance
= 100
o To encourage development of new products and industries
o To provide support for industries that are in decline and that Main uses of CPI:
are major employers of labor o A macro-economic indicator of price inflation in an economy
o To protect domestic industries against foreign competition o A price deflator to deflate value of wages and incomes by
When a supplier receives a subsidy, it will be encouraged to impact of price inflation
produce more for the market. This leads to a shift to the right of o To index-link income payments so their purchasing power
the supply curve increases at the same rate as inflation

TAXATION INFLATION
Taxes discourage certain activities as well as to raise revenue. General and persistent/sustained increase in the level of prices of
Seen as a cost to business and causes supply curve to shift left. goods/services in an economy over a period of time.
The incidence of tax refers to who pays the major part of the tax. Causes:
In an elastic good, the incidence of tax mainly falls on the seller. o Demand-pull Inflation: caused by total demand rising faster
In an inelastic good however, the incidence of tax mainly falls on than total output, causing market prices to rise
the buyer o Cost-push Inflation: caused by an increase in cost of
production (e.g. higher wages) so firms will try to pass these
costs onto consumers through higher prices.
o Imported Inflation: results from rising prices of goods and
services imported overseas. This can be due to an increase in
the costs of overseas producers and/or a fall in the exchange
rate of the currency of the importing country.
Hyperinflation: extremely high rates of inflation resulting in
money failing to be a good store of value or becoming virtually
worthless
Personal and economic consequences:
o Inflation reduces the purchasing power; especially difficult for
people on low and fixed incomes e.g. pensioners, unemployed
PRIVATIZATION o Inflation reduces the real value of savings
In the past, governments nationalized industries: o Inflation reduces the real value of loans
o To control monopolies o Inflation may help boost tax revenues as they are a % of price
o For safety (e.g. nuclear industry) o Inflation increases government spending as it will also have to
o To protect employment pay more for goods/services it buys
o To maintain a public service o Inflation can reduce company profits; especially if it is caused
Privatization involves private sector firms taking over public by rising costs or a reduction in demand.
sector activities in the following ways: o Inflation may cause unemployment; as prices rise, demand
o The sale of public sector assets will fall and firms sell less and make less profit. They will cut
o Joint ventures with private firms production and size of their labor to reduce their costs.
o Contracting out (giving private firms contracts) DEFLATION
o Removing barriers to competition (private & public compete) Deflation is a decrease in the general price level of goods and
For Privatization Against Privatization services and occurs when the inflation rate falls below 0%.
If industries are forced to Private sector organizations As things become cheaper:
compete, prices will be lower will not protect public services o People stop spending as they expect prices to fall further
& quality will improve. and may cut services and raise o As such, firms start making less revenue.
Wider variety of goods costs in the long run. o Firms start to produce less as less is demanded.
Sale of shares raises Privatized industries still o Employers begin to hire fewer workers as they are no longer
government revenue and can dominate markets they needed anymore.
be used to lower taxes. supply; able to raise prices o This causes the economy to eventually go bust.
and cut services

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Consequences:
o Firms are able to sell fewer goods/services and so cut their
OUTPUT AND GROWTH
prices and lose profits Gross Domestic Product (GDP) is the main measure of total value
o Firms will reduce workforce due to lower production of all the goods and services produced in a given period of time.
o Household incomes fall as unemployment rises; demand falls An increase in prices will increase nominal GDP but this is
o Value of debts rise in real terms causing bankruptcy measured in current dollars thus it includes inflations

o Economy goes into deep recession as demand, output and = 100

demand for labor continue to fall.
=

EMPLOYMENT AND UNEMPLOYMENT However, if an economy has an extremely rich person and
Indicator Recent Trends everyone else is poor, the rich person would bring up the level of
Labor force Risen as world population has grown. the Real GDP per capita.
Participation Rate Risen in many countries especially
Labor force as a among females as it is now socially
ECONOMIC GROWTH
proportion of total acceptable. Poverty and rising living costs Economic growth is when there is an increase in real output over
population of in developing countries has forced many time, i.e. there is in increase in real GDP and national income
working age women to work. Also an increase in productive potential/possibilities
Employment by Employment in services has been Important as it can increase the standard of living in an economy.
Industry growing while employment in agriculture Economic recession: a significant decline in economic activity
Number of people and other primary sector industries has spread across the economy, lasting more than a few months,
employed in different fallen. normally visible in real GDP growth, real personal income,
industrial sectors employment, industrial production, and wholesale-retail sales
Employment Status Most employees work full-time. HUMAN DEVELOPMENT INDEX (HDI)
Number of full- Part-time employees have grown rapidly, Used by the United Nations to make broader comparisons of
timers, part-timers or especially among female employees. human and economic development in different countries
with temporary
Combines three different measures for each country
contracts
o A decent standard of living, measured by average incomes
Unemployment Tends to rise during economic o Being educated, measured by adult literacy rate
Number of people recessions. o Living a long and healthy life, measured by life expectancy
registered as being Almost half the unemployed are young Single index with a value between 0 and 1
without work unskilled workers.
Greater than 0.8 = high human development
Unemployment Rate Relatively stable in the recent years but Less than 0.5 = low human development
Unemployment as a did increase in 2008 during a global
proportion of the financial crisis. DEVELOPED & LESS DEVELOPED ECONOMIES
labor force Developed Economy: advanced/industrialized economy; has a
TYPES OF UNEMPLOYMENT relatively high average income per person, a well-developed road
Cyclical Unemployment: occurs during an economic recession and rail network, modern communications systems, produces a
due to falling consumer demand and falling incomes. Firms will wide variety of goods and services, has a stable government and
reduce their output and lay off workers. legal system; and a healthy and educated population. Examples
include Norway, England, France and Japan.
Structural Unemployment: caused by changes in the industrial
structure of an economy. Entire industries may decline or close Less Developed/Developing Economy: low level of economic
due to a permanent fall in demand for their goods and services. development, low average income per person, under-developed
transport and communications systems, relies on agriculture for
Frictional Unemployment: refers to short-lived unemployment
many jobs and incomes, and has low levels of health care and
that occurs when people leave jobs they dislike, move to higher
education provision. Examples include Africa, Central American
paid jobs, move home or are made redundant.
and the Caribbean.
Seasonal Unemployment: occurs because consumer demand for
Rapidly Developing/Emerging Economies: countries that are
goods and services changes with the seasons. For example, no
quickly developing their industries, workforce skills and living
job for ski-instructor during summer (no ice)
standards, but are not yet developed. Examples include China,
COSTS OF UNEMPLOYMENT India and Brazil.
Personal Costs Costs to the Economy
ECONOMIC INDICATORS
Loss of income and reduced Unemployment is a waste of
Main indicator used is GDP per capita.
ability to buy goods & services human resources: fewer
Problems with using GDP:
Unemployed people de-skill if goods & services produced.
o A country may have high GDP per capita but also high prices
long out of work Total output and income in
o Distribution of income unequal; high elite class and the poor
Unemployed people may the economy will be lower.
Other Measures of Living Standards & Economic Development
become depressed and ill. Government tax revenues will
Strain on family relationships also be lower. People in work Population living on less than Prevalence of underweight
and health services. may have to pay more tax. $1 per day children
Government spending on Life expectancy at birth School and college enrolment
welfare payments to the Adult literacy rate rates
unemployed may have to rise. Population without access to Population with HIV/AIDS
clean water Share of women in paid
employment
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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia

POVERTY VARYING DEATH RATES

Absolute Relative MEDCs have better quality food, housing and sanitation which
Number of people living Measures extent to which a can improve life expectancy
below a certain income households financial Eating fatty foods, smoking and lack of exercise has increased
threshold or number of resources falls below an rates of diabetes, cancer and heart disease in many MEDCs.
households unable to afford average income level. Improved medicine and healthcare has prevented or cured many
certain basic goods & services Occurs when people are poor diseases and increased life expectancy.
Occurs when people do not relative to other people in the HIV/AIDS prevalent in LEDCs have reduced life expectancy.
have access to basic food, country; unable to participate Natural disasters, famines, wars and escalating violence also have
clothing and shelter fully in normal activities of the a big impact on death rates especially in many LEDCs
society they live in
DEPENDENCY
INTERVENTION TO ALLEVIATE POVERTY Dependency ratio: number of economically dependent people
Governments will use policies to help alleviate poverty in their relative to the economically active population in an economy
country, or in another country: Dependent = people who are too young, too old or too ill to
Policy Why is it needed? What are the problems? work, school and college
Poor farming methods Free supplies of food can
Food aid produce insufficient food force farmers out of =

supplies business Dependency Ratio
LEDCs lack capital to LEDCs MEDCs
Financial invest in an industrial High and rising Low but rising
Loans have to be repaid.
aid base, modern machinery High BR increased number of Low BR and DR increasing no.
and infrastructure. children and young people of older and retired people
LEDCs lack access to Most people lack skills to Low life expectancy, poor Life expectancy is high and
modern machinery, use modern technology. skills & education, and lack of rising.
Technol-
equipment and Instead of using more an industrial base means less Net inward migration boosted
ogical aid
knowledge of modern machinery, more jobs are growth in working population working populations but also
production methods. needed to employ people. Outward migration to MEDCs increased pressure on
Relieving LEDCs of their May encourage LEDCs to reduces working population housing, education,
debt will allow them to borrow more money or healthcare and welfare system
Debt relief
use money for economic money may be misused by Net migration is the difference between immigration and
development instead corrupt governments. emigration. Many people from less developed and developing
Removing LEDCs may have natural countries have been migrating to more developed countries to
barriers to commodities, which can MEDCs will force down enjoy better living standards and jobs with higher incomes.
overseas be exported to earn the price of them. Structural Feature LEDCs MEDCs
trade money
Children under 15
Advice not enough; LEDCs High average age
Governments in LEDCs account for 40-50%
Economic need more capital, Age Distribution and up to 25% over
lack economic while people over 60
Advice stability and a trained and 60
knowledge are less than 5%
healthy workforce.
Many live in rural Most live in cities
Geographic
POPULATION Distribution
areas but now more increased pollution
are moving to urban and congestion
The natural rate of increase in population is the difference
Most work in
between birth and death rates. Occupational Most work in
tertiary, few in
LEDCs MEDCs Distribution primary, up to 90%
primary
Birth rate High Low
Death rate High but falling Low INTERNATIONAL SPECIALIZATION AND TRADE
Natural rate Countries specialize in production of those goods and services in
High and rising Low or negative
of increases which they have an absolute advantage or comparative
VARYING BIRTH RATES advantage over other regions or countries
In LEDCs, poor have large families to help them produce food and A country has an absolute advantage if it can produce a given
work for money. amount of a good or service with far less resources and therefore
at an absolute cost advantage over any country
LEDCs have high infant mortality rate
A country has a comparative advantage in the production of a
LEDCs have lower supply of contraceptives or are forbidden to
good or service if it can produce it at a lower opportunity cost
use them due to religious beliefs.
relative to other countries
In MEDCs, people are marrying later in life and so birth rates have
fallen.

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June 2014 CIE IGCSE ECONMOICS (0455) Zubair Junjunia
Benefits of Trade Current Account Capital Account Financial Account
For Consumers To Producers To Governments Payment for visible Payments involving Investments flows
Cheaper products Larger markets Exports increase and invisible imports the sale for capital including loans and
Better products Economies of scale jobs, GDP, and exports, plus goods or fixed assets loan repayments,
Workers more More produced, incomes net income flows such as buildings and the sale of
productive lower average per But imports take and transfers and machinery shares
International unit cost them away STRUCTURE OF THE CURRENT ACCOUNT
Trade International trade
Visible trade account: the difference between the export
Increased increases number
revenue and import spending on physical goods, e.g. cars,
competition from of products you
washing machines
international make
Invisible trade account: measures the difference between export
companies
revenue from and import spending on services, e.g. banking,
Lower Prices insurance and tourism
Better Qualities
Income flows: e.g. interest, profit and dividends flowing in and
TRADE BARRIERS out of the country
Tariffs: tax on imports to raise its price and make them more Current transfers: e.g. grants for overseas aid.
expensive than local goods to stop people buying them Balance of Payments Deficit Balance of Payments Surplus
Subsidies: grant given to an industry by government so industry Money flowing out greater Money flowing in greater than
will lower its prices encouraging consumers to stop buying than in. out.
foreign imports by making home-produced goods cheaper. Current + Capital + Financial is Current + Capital + Financial is
Quota: limit on number of imports allowed into country per year, negative. positive.
reducing quantity of imports without changing their prices. PROBLEMS OF A TRADE DEFICIT
Embargo: complete ban on imports of certain goods. An embargo
It means people are buying more imports and may be spending
may be used to stop imports of dangerous drugs.
less on products made by domestic firms
PROTECTIONISM Deficit may be a symptom of a declining industrial base
Arguments For Arguments Against The foreign exchange for the national currency is likely to fall.
Protection of a young industry Other countries will retaliate This will increase prices of imports and cause imported inflation.
To prevent unemployment with trade barriers REDUCING TRADE DEFICIT
To prevent dumping It protects inefficient domestic
Contractionary fiscal policy, by reducing taxes and cutting
Because other countries use firms
government expenditure can reduce total demand for imports
barriers to trade The loss of domestic jobs from
Raising interest rates can attract an inflow of savings from
To prevent over-specialization overseas competitions will
overseas, and reduce borrowing by consumers which they might
only be temporary
otherwise spend on imports
Trade barriers have increased
Trade barriers can be used to restrict imported goods
the gap between rich and
Allow the exchange rate to depreciate. A large deficit will cause
poor countries
foreign exchange rate of national currency to fall. Imports will
BALANCING INTERNATIONAL PAYMENTS become more expensive but exports will be cheaper for overseas
consumers to buy. As consumer demand for imports falls and
VISIBLE AND INVISIBLE TRADE overseas demand for export rise, the trade deficit will disappear
Visible trade is the selling and buying of natural of natural
resources, parts and components of goods in production, and
EXCHANGE RATE
finished products. Exchange rate is the price of a countrys currency in terms of
another countrys currency.
= Most countries have a floating exchange rate, which means no
set value for their currency compared with any other currency
Invisible trade is the selling and buying of services. with a freely floating exchange rate, the government does not get
involved in the foreign exchange market.
= Currency is a commodity thus the value of a currency is totally
Imports: money flows out of the country negative impact dependent on demand and supply of that currency in the foreign
Exports: money flows into the country positive impact exchange market.
> An appreciation in the value of currency means its exchange rate
< against other countries has risen
A depreciation in the value of currency means its exchange rate
THE BALANCE OF PAYMENTS against other countries has fallen
The balance of payments of a country records all financial
transactions between the country and all others DETERMINING VALUE OF MONEY
It consists of three main accounts: Demand for a currency comes from foreign money flowing into
the country. If demand rises, the currencys value will rise in
relation to the other currency.
Supply of the currency comes from domestic money flowing out
of the country. If supply rises, the currencys value will fall.

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June 2014
A currency might depreciate
because:
There is a balance of
payments deficit
Demand for other currencies
rises as domestic consumers
buy more imports
Interest rates fall relative to
other countries. People move
their savings to bank accounts
overseas
Inflation rises relative to other
countries. This makes exports
more expensive and demand
for them, and the currency
needed to buy them, falls
People speculate that the
currency will fall in value and
they sell their holdings of the
currency.
CIE IGCSE ECONMOICS (0455) Zubair Junjunia
A currency might appreciate
because:
There is a balance of
payments surplus
Demand for the currency rises
as overseas consumers buy
more exports
Interest rates rise relative to
other countries. This attracts
savings from overseas
residents
Inflation is lower than in other
countries so exports will be
cheaper and overseas demand
for them, and the currency
required to pay for them, will
rise
People speculate that the
currency will rise in value and
they buy more of the currency
Page 15 of 15