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Economic Notes
Scarcity
...
4
Types of Economies
...
5
Command Economy
...
7
Money
...
7
Key Concepts
...
8
Price Elasticity of Demand
...
8
Income Elasticity of Demand
...
8
Price Elasticity of Supply
...
8
Consumer Surplus
...
12
Market failure
...
13
Correcting Market Failure
...
16
Key Concepts
...
17
Assumptions for both theories
...
18
Example 1
...
18
Comparative Advantage
...
19
Protectionism
...
19
Arguments for Protectionism
...
20
Free trade Area
...
20
Economic Union
...
20
Occurrence of Trade Creation
...
21
Trade Diversion
...
21
Downside of Trade Diversion
...
22
Terms of Trade
...
24
Key Concepts
...
27
Causes of Inflation
...
27
Anticipated and Unanticipated Inflation
...
29
Balance of Payments Problem
...
30
Causes of BOP Disequilibrium
...
32
Exchange Rates
...
32
Real Exchange Rate
...
32
Trade Weighted Exchange Rate
...
32
Floating Exchange Rate Systems
...
33
Managed Exchange Rate Systems
...
33
Marshall Lerner Condition
...
34
Example of nominal fiscal drag
...
36
Labour Force
...
37
Unemployment
...
38
Expenditure Switching Policies
...
39

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Economic Problem
Scarcity




Unlimited Wants
Limited Resources
Alternative Use

Thus decision has to be made of what should be produced, how should be produced and for
whom should it be produced
...

This can be represented on a diagram of production possibility curve

In considerations we take the curve as first one, as in examples of comparative advantage
however the production possibility curve can never be linear
...

Machines required to make diamonds also cannot be replaced by machines of cheese
Therefore there is never 100% efficiency in transfer of resources from 2 goods thus curve
cannot be linear
This extent is also known as the mobility of the factors of production, the more immobile the
less the efficiency in the transfer of resources
Example at beginning the more able resources for B good or less able for A good is
transferred so opp cost is low, however nearing the end the more able resource for A are
transferred to B thus opp cost is high

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




Shifts in production possibility growth outwards means economic growth and inwards mean
recession
Partial outwards shifts in PPC means that the efficiency in producing that good has increased
and the opportunity cost has decreased however it still means there is some economic
growth in the economy
The curve is bowed outwards due to diminishing returns and increasing opportunity costs

Types of Economies
Market Economies







It is decided by firms , consumers and individuals on what should be produced and for whom
should it be produced
Freedom Of Choice
Minimal Govt intervention
Self Interest
Private Property
Price mechanism(rationing) Adam Smith
‘Theory of invisible hand’


...

He generally, indeed, neither intends to promote the public interest, nor knows how much he is
promoting it
...
Nor is it always the worse for the society
that it was no part of it
...
I have never known much good done by those
who affected to trade for the public good
...
An invisible
hand process is one in which the outcome to be explained is produced in a decentralised way, with
no explicit agreements between the acting agents
...
The agents' aims are neither coordinated nor identical with the actual
outcome, which is a by-product of those aims
...
This is why the process is called invisible
...
Adam
Smith assumed that consumers choose for the lowest price, and that entrepreneurs choose for the
highest rate of profit
...
Remember that this is the industry producing the goods most highly valued by
consumers, so in general economic well-being is increased
...
Smith saw this as a large part of what was good about the invisible hand
mechanism
...
The first way is to appeal to the benevolence and goodwill of others
...
The second way is to appeal instead to other
people's self-interest
...
He will be more likely to prevail if he can interest their self-love in his
favour, and show them that it is for their own advantage to do for him what he requires of them
...
Give me what I want, and you
shall have this which you want, is the meaning of every such offer; and it is the manner that we
obtain from one another the far greater part of those good offices which we stand in need of
...
We address ourselves, not to their humanity but to their self-love
...
When you carry out the exchange, it means the other person
recognises that what you can do or that what you have is of value
...







Market Failure
Inequality of Income, rich will get richer
Instability
Dominant Firms
Welfare, those who are fortunate will only get the provision

Command Economy




6

Government take responsibility for
o Allocation of resources
o Determination of production targets for all sectors of the economy
o Distribution of income and determination of wages
o Ownership of most productive resources and poverty
o Planning long term growth of the economy
Problems
o Allocative inefficiency
o High Costs
o Tends to act like ‘jail’ effect
o Firms not as successful as profit motive is not target so individual would not be
spirited to work as hard
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Mixed Economy
Tends to combine the advantages of both the economies and remove the disadvantages
...

2
...

4
...

Ceterus Peribus: other things being equal
Positive Statements: they are statistical data that represent data
Normative Statements: statements that make value judgements
Capital: Money put into business is capital
Fixed Capital: It is a physical capital (fixed asset) that is not used up in the production of a product
and is contrasted with circulating capital such as raw materials, operating expenses and the like
...

Fixed Capital Formation: It basically refers to the net additions to the (physical) fixed capital stock in
an accounting period, or, to the value of the amount of increase of the fixed capital stock
...
The
working capital ratio is calculated as:

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Price System
Demand
Market Demand, Aggregate Demand is attained by aggregating individual demand curves
horizontally
...

 When above one it is more elastic
 Below 1 less elastic

Supply
Definition: the quantities of a product that suppliers are willing and able to sell at various prices per
period of time, other things remaining the same
Market Supply or Aggregate Supply is attained by individually adding the supply curves horizontally
Shifts occur due to change in factors like technological progress, costs of factors of production, taxes
and subsidies and size and nature of industry

Price Elasticity of Supply
% change in qty supplied/ % change in price= price elasticity of supply

Prices as rationing mechanism
See above Adam smith example
...

Consumer surplus is the difference between the total amount that consumers are willing and able
to pay for a good or service (indicated by the demand curve) and the total amount that they actually
do pay (i
...
the market price for the product)
...
This is most likely to
happen in highly competitive markets where each individual firm is assumed to be a ‘price taker’ in
their chosen market and must sell as much as it can at the ruling market price
...
Demand is totally
invariant to a price change
...
Are there
any examples of products that have such a low price elasticity of demand?
The majority of demand curves are downward sloping
...
This is shown in the diagram below:

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Changes in demand and consumer surplus

When there is a shift in the demand curve leading to a change in the equilibrium market price and
quantity, then the level of consumer surplus will alter
...
In the
left hand diagram, following an increase in demand from D1 to D2, the equilibrium market price

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rises to from P1 to P2 and the quantity traded expands
...

In the diagram on the right we see the effects of a cost reducing innovation which causes an
outward shift of market supply, a lower price and an increase in the quantity traded in the market
...

Consumer surplus can be used frequently when analysing the impact of government intervention in
any market – for example the effects of indirect taxation on cigarettes consumers or the introducing
of road pricing schemes such as the London congestion charge
...
How has the London congestion charge
affected the consumer surplus of drivers?

Transport for London has details on the impact of the congestion charge
Consider the entry of Internet retailers such as Last Minute and Amazon into the markets for travel
and books respectively
...
If a business can identify
groups of consumers within their market who are willing and able to pay different prices for the
same products, then sellers may engage in price discrimination – the aim of which is to extract from
the purchaser, the price they are willing to pay, thereby turning consumer surplus into extra
revenue
...
You will always
get a better deal / price with airlines such as Easy Jet and Ryan Air if you are prepared to book weeks
or months in advance
...
The nearer the time to
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take-off, the higher the price
...

One of the main arguments against firms with monopoly power is that they exploit their monopoly
position by raising prices in markets where demand is inelastic, extracting consumer surplus from
buyers and increasing profit margins at the same time
...


Key Concepts
Ad valorem Tax: a tax that percentage of the price
Composite Demand: demand for something that has more than one use, eg mobile for calls, mp3
player, camera etc
...

Demand for ipod causes demand for hard drive microphone etc, eg transport uses of transport are
not for the service itself but to be able to consume another service or good
Perishability: for how long may a good maintain its value?
Specific tax: a tax levied at a rate per physical unit of the good regardless of its price, contrast to ad
valorem
Rectangular Hyperbola: when the % change in values of both y and x axis is constant, for eg demand
curve with unitary price elasticity, or variation of average costs and qty

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Government Intervention in the Price
System
Market failure is when the self-regulating mechanism of the invisible hand tends not to
allocate resources in the most efficient manner
...
In Panel (a), we assume that a
private market produces Qmunits of a public good
...
Panel (b) shows
that if the production of a good generates an external cost, the supply curve S1 reflects only the
private cost of the good
...
If the public
sector finds a way to confront producers with the social cost of their production, then the supply
curve shifts to S2, and production falls to the efficient level Qe
...
Panel (c)
shows the case of a good that generates external benefits
...
The market quantity isQm
...
That would shift the market demand curve to D2, which intersects the
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market supply curve at the efficient quantity
...
The efficient level of output, Qe, could be achieved
by imposing a price ceiling at P2
...


Panel (a) of Figure 15
...
The market
will produce some of the public good; suppose it produces the quantity Qm
...
Public sector provision of a public good may move the quantity closer
to the efficient level
...
Absent government intervention, these costs
will not be reflected in the market solution
...
The market will produce Qm units of the good at a price P1
...
The quantity would fall to the efficient level, Qe, and the price would rise to P2
...
The demand curve revealed in
the market, D1, reflects only the private benefits of the good
...
The market’s
output of Qm units of the good falls short of the efficient level Qe
...

Finally, Panel (d) shows the case of imperfect competition
...
The government may seek to move the solution closer to the
efficient level, defined by the intersection of the marginal cost and demand curves
...
Government officials may
lack the information they need to select the efficient solution
...
Each instance of government
intervention involves an interaction with utility-maximizing consumers and profit-maximizing firms,
none of whom can be assumed to be passive participants in the process
...

The late George Stigler, winner of the Nobel Prize for economics in 1982, once remarked that people
who advocate government intervention to correct every case of market failure reminded him of the
judge at an amateur singing contest who, upon hearing the first contestant, awarded first prize to
the second
...
Government may improve on what the market does; it
can also make it worse
...
We will examine the
nature of public sector choices later in this chapter and explore an economic explanation of why
government intervention may fail to move market solutions closer to their efficient levels
...

2
...

4
...
It is a tax on the production or sale of a good
Free Rider: free riders" are those who consume more than their fair share of a public resource, or
shoulder less than a fair share of the costs of its production
...


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International Trade
Intro
International trade is the exchange of goods and services between countries
...

Different countries have different factor endowments eg climate, skilled labour
force, and natural resources vary between nations
...

Economic theory predicts all countries gain if they specialise and trade the goods
in which they have a comparative advantage
...

The Role of International Trade
International trade allows increased specialisation so that higher output allows
economies of scale:
- A larger market allows domestic producers greater scope for economies of scale
...
Access to overseas
markets means Q2 output at lowest unit cost
- International competition stimulates competition
...


Absolute advantage occurs when a country or region can create more of a product
with the same factor inputs
...


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Assumptions for both theories
1
...

3
...


Only two countries involved in the trade
Each can produce just two products
Productivity differs between them so varying quantities are produced
Production costs and opportunity costs are constant

Absolute Advantage




The curves tend to intersect
Clear-cut advantage
Totally varying gradients of the line

Example 1
Party B has the absolute advantage
...




Party B can produce 10 widgets per hour with 3 employees
...
This is because Party B can produce twice as many
widgets as Party A can with the same number of employees
...



Country A can produce 1000 parts per hour with 200
workers
...




Country C can produce 10000 parts per hour with 200 workers
...
Country B has an absolute advantage over Country A because it can produce more
parts per hour with the same number of employees
...


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Comparative Advantage




The curves will never touch or meet as one country is better off producing both goods
When curves are parallel, opportunity cost ratios are equal there is no benefit from
international trade
Countries will specialise in goods that they have greatest efficiency and lowest opportunity
cost
Examine the following

Assumptions for comparative advantage
1
...
Constant returns to Scale –because specialization might lead to diminishing returns or
increasing returns as the scale of production is varied, thus linear curve, production costs to
be constant
3
...
Zero or insignificant transport costs
5
...
2 country , 2 product
7
...

Import licensing - governments grants importers the license to import goods
...

Because other countries use barriers to trade

Economic Integration
1
...
Customs Union
3
...


Economic Union
o
o

As above but with more harmonization and centralization of policies
EU has gone beyond with single currency and European Central Bank

Trade Creation
Trade creation is an economic term related to international economics in which trade is created by
the formation of a customs union
...
As a result, the member nations
establish greater trading ties between themselves now that protectionist barriers such
as tariffs, quotas, and non-tariff barriers such as subsidies have been eliminated
...


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Downside of Trade Creation
The creation of trade is important to the nation entering the customs union in that
increased specialization may hurt other industries
...
However, customs unions are typically formed with friendly nations, eliminating
the national defence argument, and in the long run serves to create more jobs and output due to
specialization
...


Occurrence of Trade Diversion
When a country applies the same tariff to all nations, it will always import from the most efficient
producer, since the more efficient nation will provide the goods at a lower price
...
If the
agreement is signed with a less-efficient nation, it may well be that their products become cheaper
in the importing market than those from the more-efficient nation, since there are taxes for only one
of them
...
In other words, this would cause a trade diversion

Downside of Trade Diversion
Diverted trade may hurt the non-member nation economically and politically and create a strained
relationship between the two nations
...
It is widely believed by economists that
trade diversion is harmful to consumers

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Examples of Trade Creation and Diversion
1
...
Zambia has a domestic
supply curve for maize Sz
...
The world output of maize is shown by the horizontal supply curve Sw
...


Assuming no trade the domestic price of maize in Zambia would be Pz and the quantity would be Q1
...
The triangle AEB represents the resulting welfare gain or trade creation effect
...
This has been prevented from happening by the formation of the trade bloc with South
Africa, and the imposition of some form of trade barrier
...
This is the trade diversion effect
...
The welfare implication of the trade creation and trade diversion effect
are summarised in the table below:
With no trade With trade bloc With free trade
Price and Quantity Pz Q1

Pz+sa, Qz+sa

Pw

Trade Creation

-

EAB

DAC

Trade Diversion

ADC

BFC

-

From the point of view of LDCs the existence of trading blocs depends rather on firstly whether the
country is in the trading bloc and secondly which other countries are also members
...
Zambian textile producers will face trade barriers such as tariffs into the European Union and
consequently be disadvantaged
...
If the country joins a trade bloc with a MDC then there may be real advantages to the
LDC as resources flow within the bloc to the countries where there are cost advantages and the
potential market for exports is significantly expanded
...
Original Scenario
In the diagram S and D represent the country's domestic Supply and Demand for good X
...
In this case, the Non Members countries S (nm) are the low cost producers compared to Member countries S (m)
The distance between X0 and X1 represents the country's imports of good X
...
While
the Member nations
are the high-cost
produces, their goods
are not subject to a
tariff, giving them an
advantage over lowcost Non Member
goods
...
The amount of good X the
country imports increases to the distance between X2 and X3
...


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Producer surplus transferred to consumers
Efficiency gain (trade creation)
Formerly tariff revenue, now consumer surplus
Increased consumption (trade creation)
Lost tariff revenue (trade diversion)
Conclusion:

The net benefit (loss) to a country can be determined by comparing the trade creation and trade diversion effects
...
In the case of the European Union, most economist agree that trade creation far exceeds trade dive

Terms of Trade
In international economics and international trade, terms of trade or TOT is the relative prices of a
country's export to import
...
An improvement in a nation's terms of trade (the increase of the ratio) is good for that
country in the sense that it has to pay less for the products it imports
...


Balance of Payments
The balance of payments consists of

Current Account
o Trade in Goods- balance of trade, visible imports and exports
o Trade in Services- invisible balance, invisible imports and exports
o Income
o Current Transfers
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Capital Account
o Transfer or Ownership of Fixed Assets
o Acquisition or disposal of non-financial assets
Financial Account
o Investments overseas
o Inward flow of investments from foreign residents
Note: Making an investment is recorded in financial account
...
Bilateral trade agreements often aim to keep trade deficits at minimum by
keeping a clearing account where deficit would accumulate
Internal balance in economics is a state in which a country maintains full employment and price
level stability
...

External balance signifies a condition in which the country's current account, its exports minus
imports, is neither too far in surplus nor in deficit
...
It is notated by
External balance = the right amount of surplus or deficit in the current account
...
That is one reason why floating exchange rates may be superior to fixed exchange rates
...
Under
floating rates, countries can use both
Globalization describes an ongoing process by which regional economies, societies and cultures
have become integrated through a globe-spanning network of exchange
...

Multilateral Trade: Multilateral trade agreements are between many nations at one time
...
The primary benefit of multilateral agreements is that all nations get treated equally,
and so it levels the playing field, especially for poorer nations that are less competitive by nature
...

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Sunrise Industry sunrise industry is one that is new or relatively new, is growing fast and is expected
to become important in the future
...

Sunset Industry: A sunset industry is an industry in decline, one that has passed its peak or boom
periods
...

Trading Possibility Curve

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Macroeconomic Problems
Inflation
Persistent Increase in the general average level of prices of goods and services

Causes of Inflation





Cost-Push Inflation – due to the increase in prices of factors of production , land labour ,
capital,
Demand Pull inflation – Due to the increase in demand for products
Imported Inflation – Increase in prices of imported materials that are used as raw materials
Monetary Inflation – Increase in the total money supply in the economy

MV = PT
M is money supply, velocity of circulation, (the number of times it changes hands), P is prices and T is
the number of transactions

Consequences of Inflation














27

Disadvantages
Tends to accelerate
Affects the distribution of income
Borrowers Gain at Expense of Lenders
Affects the balance of payments
Reduces purchasing power
Shoe- leather costs, moving money from one financial asset to another, in search of greatest
interest rate , or lowest prices
Menu Costs , costs involved in changing prices , bar codes catalogues etc
Advantages
Pensioners who have fixed income gain by index-linking
Demand Pull Inflation profits tend to increase to an extent
Reasonable Rate can build business confidence
May stimulate consumption as real interest rates may be low or negative , debt burdens fall
and people will be encouraged to spend more
Inflation would help firms who need to reduce costs survive, as they can reduce real cost of
factors of production

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Anticipated and Unanticipated Inflation
Anticipated inflation:
When people/businesses can make accurate predictions of inflation, they can take steps
to protect themselves from its effects
...
For
example, banks can vary their interest rates and workers can negotiate contracts that include
automatic wage hikes as the price level goes up
...
Actual inflation may end up well below, or significantly above
expectations
...

Usually results from an increase
in price of raw materials
...

Secondly it leads to
unemployment as businesses
are less profitable (stagnation)
...
[1] Deflation
occurs when the inflation rate falls below zero percent, resulting in an increase in the real value of
money – a negative inflation rate
...
e
...
[2] Inflation reduces the
real value of money over time; conversely, deflation increases the real value of money
...

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Reflation
Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes
...
It can refer to an economic policy whereby a government uses fiscal
or monetary stimulus in order to expand a country's output
...
Just
as disinflation is considered an acceptable antidote to high inflation, reflation is considered to be an
antidote to deflation

Key Concepts
Hyperinflation: In economics, hyperinflation is inflation that is very high or "out of control", a
condition in which prices increase rapidly as a currency loses its value
...
" [2] In informal usage the term is often applied to much lower rates
...

Menu Costs: In economics, menu costs are the costs to firms of updating menus, price lists,
brochures, and other materials when prices change in an economy
...
Generally, the effect on the firm of small shifts in price (by changes
in supply and/or demand, or else because of slight adjustments in monetary policy) are relatively
minor compared to the costs of notifying the public of this new information
...

Shoe Leather Costs Shoe leather cost refers to the cost of time and effort (more specifically
the opportunity cost of time and energy) that people spend trying to counter-act the effects
of inflation, such as holding less cash and having to make additional trips to the bank
...
The
actual cost of reducing money holdings is the additional time and convenience that must be
sacrificed to keep less money on hand than would be required if there were no inflation
...
Nominal value refers to any price or value expressed in money of the day, as
opposed to real value, which adjusts for the effect of inflation
s

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Balance of Payments Problem
Equilibrium and Disequilibrium
Balance of payments equilibrium is defined as a condition where the sum of debits and credits from
the current account and the capital and financial accounts equal to zero; in other words, equilibrium
is where

This is a condition where there are no changes in Official Reserves
...
As a consequence the exchange rate has to either
be overvalue or undervalued
1
...
Export of Goods just exceed imports but there is a financial account deficit
3
...
These various causes may
be broadly categorized into:
(i) Economic factors ;
(ii) Political factors; and
(iii) Sociological factors
...
These are:
Development Disequilibrium:
Large-scale development expenditures usually increase the purchasing power, aggregate demand
and prices, resulting insubstantially large imports
...


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Cyclical Disequilibrium:
Cyclical disequilibrium occurs because of two reasons First two countries may be passing through
different paths of business cycle
...
f prices rise in prosperity
and decline in depression, a country with price elasticity for imports greater than unity will
experience a tendency for decline in the value of imports in prosperity; while those for which import
price elasticity is less than one will experience a tendency for increase
...
Conversely, as prices decline in
depression, the elastic demand will bring about an increase in imports, the inelastic demand a
decrease
Secular Disequilibrium:
Sometimes, the balance of payments disequilibrium persists for a long time because of certain
secular trends in the economy
...
At the same time,
production costs are very high because of the higher wages
...
These two factors - high aggregate demand and higher domestic prices may result in the
imports being much higher than the exports
...

Structural Disequilibrium:
Structural changes in the economy may also cause balance of payments disequilibrium
...

Political Factors:
Certain political factors may also produce balance of payments disequilibrium
...
These factors may, sometimes, cause disequilibrium in
the balance of payments
...
, may
also produce balance of payments difficulties
...
For instance, changes in tastes,
preferences, fashions, etc
...


External Economy



Put pressure in govt to edit protectionist policies
Devaluation of exchange rate

Exchange Rates
Nominal Exchange Rate
It is simply the price of one currency in terms of the other
...
While two currencies may have a
certain exchange rate on the foreign exchange market, this does not mean that goods and services
purchased with one currency cost the equivalent amounts in another currency
...
Real exchange rates are thus calculated as
a nominal exchange rate adjusted for the different rates of inflation between the two currencies
...

The relative version of PPP is calculated as:

Trade Weighted Exchange Rate
Multilateral rate that measures the overall nominal value of a currency in the foreign exchange
market
...
In the index countries that
are larger percent of trade are given greater weightage in the index

Determination of Exchange Rates
Totally dependant on the free market for the foreign exchange market
...

Floating Exchange Rate Systems
These are the basic ones with which it follows the market forces without any intervention
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Advantage


Government is free to carry other objectives

Disadvantage



It discourages trade as rate can become very unstable, sudden fluctuations can affect
company’s calculations and costs and there would always be a risk factor
...
They can do this buying their own currency or selling the foreign
currency reserves to increase the supply in the market
Managed Exchange Rate Systems
This is where the exchange rate mostly varies with market forces however there is some level of govt
intervention
...
However
if it crosses these limits govt intervention takes place

J- curve effect
In the short term a devaluation or depreciation of the exchange rate may not improve the current
account deficit of the balance of payments
...
The diagram below
shows this possibility
...
Initially the volume of imports will remain steady partly
because contracts for imported goods will have been signed
...
Export demand will also be inelastic in response to the exchange rate change in the short term;
therefore the earnings from exports may be insufficient to compensate for higher spending on
imports
...
This is shown by the movement
from A to B on the diagram
...
Imports become cheaper and exports more expensive in overseas
markets
...


Marshall Lerner Condition
If a balance of payments disequilibrium is to be restored then it is important that the PED coefficient
for exports is greater than 1 and that the PED coefficient for imports is greater than 1
...
"
If the Marshall Lerner Condition is not met and the sum of the price elasticity of demand for exports
and imports is less than one, then a fall in the exchange rate will bring about a worsening of the
balance of payments
...
Both of these factors will contribute to a deterioration
of the balance of payments
...

Depreciation: is a fall of a currency in a floating exchange rate
Devaluation: Devaluation is a reduction in the value of a currency with respect to other monetary
units
...
In contrast, depreciation is used for the
unofficial decrease in the exchange rate in a floating exchange rate system
...


Fiscal drag refers to the process where tax thresholds are either not adjusted for inflation, or fail to
keep pace with earnings growth, causing in either case an automatic rise in tax revenues
...
Then they pay (20000-5000)*0
...
Now suppose
that due to inflation, their wage goes up by 5%, but the government only increases the tax threshold
by 2%
...
2 = $3180 or 15
...
The proportion of income as tax
has increased - this is fiscal drag
...
e
...


(Needs to be revised)
International Monetary Fund : The International Monetary Fund (IMF) is an international
organization that oversees the global financial system by following the macroeconomic of its
member countries, in particular those with an impact on exchange rates and the balance of
payments
...
[2] It also offers highly leveraged loans mainly to poorer countries
Velocity Of Circulation: the speed with which money whizzes around the economy, or, put another
way, the number of times it changes hands
...
It is an important ingredient of the quantity theory of money
...

This is due to increases in overtime, or upgrading of job descriptions
...
This includes all people who are able and willing to work, employed
and unemployed, those who have searched for job in past 4 weeks, but not those who haven’t
...

Size of Labour Force depends on demographic, economics, social and cultural factors such as





Total Size of the population of working age
The number of people who remain in full-time education after leaving secondary school
The normal retirement age for males and females
Number of women who join the labour force on a full or part time basis

Another Measure used is
Labour Force Participation Rate
This refers to the % of total population or working age that are actually classified as being part of the
labour force
...
of people opting for early retirement
Comparable Statistics with Developing economies are unreliable as:





Existence of large subsistence sector
Differences in official secondary school leaving age
Differences In attitude towards married woman seeking paid employment
Practical Problems of Data Collection

Demographic Trends affecting labour force in developing countries




36

Birth Rates Exceed Death Rates
Dependency Ratio are high as consequence of high birth rates and increasing life expectancy

Rapid Growth In Urban Populations , due to migration, urbanisation has made it very
difficult for such economies to provide enough jobs to meet labour force

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Labour Productivity:
Quantity of goods and services that a worker is able to produce in a given period of time
...


Unemployment
An economic condition marked by the fact that individuals actively seeking jobs remain unhired
...
This does not include those receiving a form of disability benefit, or those who do
not claim unemployment allowance, only those that are willing and able to find work, and do claim
...
This
counts everyone without a job of any kind who has looked for a job in the past month and is willing
to start working within the next fortnight
...

Generally, the ILO's LFS measure is higher than the claimant count, for the reasons mentioned
above
...


37

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General Level Of Prices; Inflation
Difference between CPI and RPI


The RPI (Retail price index) includes mortgage interest payments
...
If interest rates are cut, it will reduce mortgage interest
payments
...




The RPI also includes council tax and some other housing costs not included in CPI



The CPI includes some financial services not included in the RPI

 The CPI is based on a wider sample of the population for working out weights
...
, to which we find the average and RPI is determined

Cost of Living

38

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Correcting Balance of Payments
Disequilibria
Expenditure Switching Policies
1
...
I
2
...

3
...
These include







Tariffs
Quotas
Exchange Controls
Export Subsidies
Embargoes
Voluntary Export Restraints

However these all lead to disadvantages to consumers and interfere with market forces and prevent
the benefit of specialisation of trade
...
Aim to reduce gross expenditure
2
...

 Domestic producers find domestic market ‘dampened’ and thus will try increase
sales abroad
...
Therefore less imports and more exports
4

---