Economics Real World Examples

Contents
Microeconomics..................................................................................................... 1
2.4 Critique of the maximising behaviours of consumers and producers...........1
2.5 Elasticities of Demand.................................................................................. 1
2.7 Role of Government in Microeconomics........................................................2
2.8 Market Failure: Externalities and Common Pool Resources...........................2
2.9 Market Failure: Public Goods.........................................................................3
2.10 Market Failure: Asymmetric Information.....................................................3
2.11 Market Failure: Market Power......................................................................4
Macroeconomics.................................................................................................... 5
3.1 Measuring Economic Activity........................................................................5
3.3 Macroeconomic Objectives...........................................................................6
3.4 Economics of Inequality and Poverty............................................................7
3.5 Demand Management: Monetary Policy....................................................8
3.6 Demand Management: Fiscal Policy..........................................................9
3.7 Supply-side Policies.................................................................................... 10
The Global Economy............................................................................................ 12
4.1 Benefits of International Trade....................................................................12
4.2 Types of Trade Protection............................................................................12
4.3 Arguments For/Against Protectionism.........................................................13
4.4 Economic Integration.................................................................................. 13
4.5 Exchange Rates.......................................................................................... 15
4.6 Balance of Payments.................................................................................. 16
4.7 Measuring Development............................................................................. 16
4.9 Barriers to Economic Growth/Development................................................17
4.10 Economic Growth/Development Strategies..............................................17

Microeconomics
2.4 Critique of the maximising behaviours of consumers
and producers
 Behavioural economics (biases, bounded rationality/self-control/selfishness,
imperfect information), choice architecture, nudge theory.
 Business objectives (profit maximising, corporate social responsibility, market
share, satisficing, growth)

POINT EXAMPLE
Biases Preference towards iPhones
Bounded selfishness: people donating to charity (global
charity industry was worth around $330B in 2021)
Choice Spain Organ donation is opt-out (high donation rate)
architecture
UK 2012 Used language such as “9/10 people in the UK
pay their taxes on time” to nudge people to
pay their taxes
Business Profix maximising, growth, Apple
objectives market share
Corporate social The Body Shop (sustainable,
responsibility cruelty-free, vegan…)
Satisficing Costco: low-cost, focus on
employee
satisfaction/consumer
loyalty

2.5 Elasticities of Demand

 Importance of PED for firms and government decision-making
 Importance of YED for firms and in explaining changes in the sectoral
structure of the economy

POINT EXAMPLE
PED Uber, airlines.
 On rainy days, PED is more inelastic, as people want to get home
no matter the cost.
 Therefore they can make journeys more expensive – “surge
pricing”
Government might use PED to gauge a correct tax (“sugar tax” on
fizzy drinks) or price ceiling/floor – they need to know if goods are
elastic enough for it to have an impact
YED Case Study – South Korea
 Mid-20th century: Mainly agricultural sector
 1960s/70s  industrialisation (thanks to government policies),
incomes began to rise, demand for manufactured goods (with
elastic YED!) rises
 Therefore primary sector shrank, secondary/tertiary (e.g. retail,
technology) increased
2.7 Role of Government in Microeconomics
 Government intervention in markets (consequences for markets and
stakeholders)
 Note: I purposefully excluded indirect taxes & subsidies as they will be
shown in 2.8

POLICY EXAMPLE
Price Country & Cons. Market Cons. Stakeholders
Ceiling Market
USA, Housing Many veterans were  Consumer surplus
Market (post- looking to start increased: Relief
WW2) families, therefore for tenants
huge demand and  Producer surplus
huge rent increases. decreased:
Market carried on Landlords couldn’t
suffering from set high prices
shortages  May have led to non-
price discrimination
Price Floor Country & Cons. Market Cons. Stakeholders
Market
USA, Less  Consumer: Had to
Agricultural demand/recession pay higher price
market post- caused farmers to  Producer: Relief for
Great sell below costs. farmers
Depression Minimum price led to  Government: Had to
surplus of wheat pay and store
and allocative surplus
inefficiency

2.8 Market Failure: Externalities and Common Pool

Resources
 Strengths/limitations of government policies to correct externalities
 Indirect tax, carbon tax, legislation/regulation, education, tradable
permits, international agreements, collective self-governance, subsidies,
government provision
 Challenges involved in measurement of externalities, degree of
effectiveness, consequences
 Approaches to managing common pool resources
 Importance of international cooperation (global nature of sustainability issues,
challenges, enforcement/monitoring)

POLICY EXAMPLE
Indirect Country & Strengths Limitations
Tax Market
Mexico 2014, Two years later, May switch to other
sugary drinks Mexico saw a 9.7% sugary alternatives,
(10% tax) drop in sales attacks lower-income
(reducing obesity households
 rate in children),
government revenue
Carbon Country & Strengths Limitations
Market
Carbon Tax: Tax returned to Faced resistance
Canada households and Not high enough to
helping make a difference
businesses/schools (inelastic demand)
to reduce fossil fuel
consumption
Tradable Sets cap, if business Only in EU?
permits: EU doesn’t reach cap, it
(European can sell to other
Union's businesses. -->
Emissions Since 2005, the EU
Trading System ETS has helped bring
(EU ETS)) down emissions from
power and industry
plants by 37%.
Subsidies Country & Strengths Limitations
Market
China, solar Increased production Government has to pay
panels by 25%
Singapore, (Financial Assistance
education Scheme - FAS) on
textbooks/education
al resources to
promote education
and reduce
inequality
Quotas Country & Strengths Limitations
Market
New Zealand, Quotas allocated to Sometimes tricky to
Fishing (Fish fishers for specific measure/might be easy
Quota species and fishing to bypass
Management areas, fined
System) otherwise.
Sustainability

2.9 Market Failure: Public Goods

 Government intervention of public goods (direct provision, contracting out
private sector)

NHS: National Healthcare in the UK

 Provides free healthcare (merit good)
 Had to work with private sector during the pandemic to increase
capacity
2.10 Market Failure: Asymmetric Information
 Responses to asymmetric information
 Government responses: legislation/regulation, provision of information
 Private responses: signalling and screening

ACTOR RESPONSE
Governm Legislation: In USA (Nutrition Labeling and Education Act (NLEA)
ent Food labels made compulsory
Provision of information:
Private Signalling: “Fair trade” certification signals to consumers that
response product complies with certain standards
s Screening: Uninformed party finds information  e.g. company
may request to see credit score before investing, to make sure
they won’t default on loan. Banks/financial institutions use this

2.11 Market Failure: Market Power

 Perfect competition
 Monopoly
 Oligopoly
 Monopolistic competition
 Advantages of firms having significant market power (economies of scale e.g.
natural monopolies, abnormal profits lead to R&D)
 Risks of markets being dominated by one/few large firms
 Government intervention in response to abuse of significant market power
 Legislation, regulation (anti-trust laws)
 Government ownership
 Fines

STRUCTU EXAMPLE
RE
Monopoly Name Government Evaluation
Intervention
Telecommunication Birth of new Increased innovation,
s industry, USA, technologies caused created various
1980s government to want regional bell
to increase operating companies
innovation;
therefore, it broke
down AT&T and
deregulated the
industry to increase
competition.
Natural Nationalisation High fixed costs (e.g.
monopoly: (government- tunnelling) so benefit
TfL (Transport for owned) from economies of
London), UK scale
More convenient for
Most transport, consumers (one
sewage,
 water/electricity ticket/pass for
lines etc. are everything)
natural monopolies Reduces the overall
costs of
inefficiencies,
lowering prices for
consumers and
reducing a welfare
loss, but reduces
competition
Oligopoly Name Explanation Evaluation
Non-collusive Main 3 companies Compete on price of
oligopoly: make up 43.8%, their cellular
Bangladesh 30.2%, and 22.4% subscriptions, as well
Telecom of the market share as non-price
each = 96.4% as a elements, such as
concentration ratio. amount of gigabytes,
extra features,
discounts on new
phones, etc.

An oligopoly causes a
welfare loss, as the
price of cellular
subscriptions is
above what is socially
optimum.
Collusive Price rigidity: Lack of equity,
oligopoly: decided on a price government
Rangers, JD Sports, for Rangers kits, as intervention fined the
Elite sports tacit kits were inelastic three companies
collusion (2022 UK) due to the fans, (exploited
earned revenue consumers)
Perfect Market Explanation
Competiti
on Commodities Homogenous products, perfect information
(wheat, (consumers know about price/supply of oil),
agriculture, fruit, price takers (market forces), many buyers
oil etc.) and sellers
Monopolis Market Explanation
tic
competiti Restaurant Little market power
on chains e.g. Some product differentiation
McDonalds Some barriers to entry (it costs quite a lot to
open a restaurant but it is not impossible)
Price makers (sets a high price and maximies
profits rather than providing what is best for
society = causes a welfare loss)
Macroeconomics

3.1 Measuring Economic Activity

 Use of GDP/GNI to measure:
 Comparisons over time
 Comparisons between counties

GDP vs GNP stats

Developing countries have lower GNP than GDP, as much of their GDP is
contributed by multinational corporations

 Bangladesh GDP 2017: 250 billion USD

 Bangladesh GNI 2017: 120 billion USD

Half of Bangladesh’s GDP is from foreign firms owing productive capacity in

Bangladesh. This income is likely not spent in the country, so does not
affect economic growth

Total GDP/GNI vs GDP/GNI per capita

 India GDP: 2.6 trillion USD

 France GDP: 2.6 trillion USD
 India GDP per capita: 2,000 USD
 France GDP per capita: 38,000 USD

3.3 Macroeconomic Objectives

 Consequences of economic growth
 Impact on living standards
 Impact on environment
 Impact on income distribution
 Unemployment versus inflation
 High economic growth and low inflation, high economic growth and
environmental sustainability, high economic growth and equity in income
distribution

Country Impact on living Impact on Impact on

standards environment income
distribution
China: In 2019, Positive: GDP Negative: Negative:
growth totaled per capita has Severe air Disparities
$22.5 trillion, the increased, more pollution and loss between
largest in the infrastructure, of natural habitats rural/urban areas,
world reduced poverty and state-owned
enterprises and
connected elites
have often
 benefited
disproportionately

Unemployment versus inflation: Theoretically, less unemployment (more

workers) = more inflation.

Yes, there is a tradeoff:

 Greece debt crisis

Government was in debt, therefore had to decrease government spending
and increase revenue = implemented contractionary policy -> reduced AD -
> reduced price levels therefore low inflation -> BUT high
unemployment, because businesses made less revenue and cut workers.
 It was successful in correcting its budget deficit though (2009: 15% of GDP,
2010: 11% of GDP, 2011: 8%)
 Argentina
1950s import substitution  shut off imports to increase domestic
supply/protect domestic producers (therefore increasing domestic
employment) but prices were much higher  low unemployment, high
inflation

No, there is not a tradeoff: Called “stagflation” (increase in inflation and

increase in unemployment simultaneously)

 COVID-19: High unemployment, high inflation

 1973- US oil crisis. Members of the Organization of Arab Petroleum
Exporting Countries proclaimed an oil embargo (ban on trade). By the end
of the embargo in March 1974, the price of oil had risen from US$3 per
barrel to nearly $12 globally; US prices were significantly higher. The high
import costs meant businesses costs were higher, and many people lost
their jobs as there was very little supply and demand of oil because of the
spike in price.

3.4 Economics of Inequality and Poverty

 Role of taxation in reducing poverty (progressive taxes, direct taxes…)
 Further policies to reduce poverty/inequality
 Policies to reduce inequalities of opportunities, such as investment in
human capital
 Transfer payments
 Targeted spending
 Universal basic income
 Policies to reduce discrimination
 Minimum wages

Further policies:
 Investment in human capital: Education reform in Finland (retraining
teachers, funding for schools in impoverished areas
 Policies to reduce discrimination: Brazil increased access to higher
 education for underrepresented groups by establishing quotas

Role of Taxation:

Country Impact on Pros Cons

details stakeholders
Wealth Tax: AIM: To reduce  More tax Discouragement of
Argentina inequality in revenue for the wealthy individuals
2021 Argentina by government immigrating and
Progressive broadening the tax  Greater equality investing in
Wealth Tax base for across Argentina Argentina
with rates Argentinians. as richer people
up to Government:
have less
1.75% for Gains more
disposable
those with revenue from the
over tax, but has to income, and the
3,000,000 spend more on tax Argentine
ARS in compliance government is
wealth. Wealthy able to spend
Gini Argentines: Have taxes on
Coefficient to pay more tax beneficial
has based on their programs.
decreased accumulated
by 0.71% wealth than
before, loses more
income than
before.
Argentines: Gain
more revenue for
public services,
have to comply
with wealth tax
requirements
Indirect Richer  Basically same
tax: USA Americans: as above
November  Have to pay Gini coefficient
1991 more for luxury decreased by 0.78%
Imposition of goods
an indirect  Wouldn’t often
tax of 10% mind paying for
on luxury extra, as some
goods such goods are more
as watches, desirable if
expensive their prices
furs, boats, increases
yachts, United States
private jet Government
planes,
jewellery and
expensive
cars.
3.5 Demand Management: Monetary Policy

 Expansionary and contractionary monetary policies to close recessionary and

inflationary gaps
 Effectiveness of monetary policy
 Strengths (incremental, flexible and easily reversible short time lags)
 Strengths and limitations in promoting growth, low unemployment, and low
and stable rate of inflation

POLICY EXAMPLE DETAILS EVALUATION SUMMARY

Expansionary Great Recession USA Long Term Short Term:

monetary  Who: Federal Reserve  Short Term: Stabilised
policy System (the Fed) market, increased
 Where: US consumption
 When: 2007-2009  Long Term:
 What & Why: To Pros and Cons:
stimulate economic Pros: Recovery for
activity and counteract businesses/consumers/invest
the effects of the ment, short time lags
recession Cons: Possible risk of
 How: inflation, market distortion
 Interest rate
reductions
 Quantitative
easing: Purchased
government
bonds/financial
assets from open
market to ‘inject’
money into economy;
increased supply of
money lowers
interest rates

Contractionar
y monetary
policy

3.6 Demand Management: Fiscal Policy

 Expansionary and contractionary fiscal policies in order to close
deflationary/recessionary and inflationary gaps
 Effectiveness of fiscal policy:
 Constraints (political pressure, time lags, sustainable debt, crowding
out)
  Strengths (targeting of sectors, automatic stabilisers)
 Strengths and limitations in promoting growth, low unemployment, and low
and stable rate of inflation

POLICY EXAMPLE DETAILS EVALUATION SUMMARY

Expansionary COVID-19 - Hong Kong Long Term Short Term:

fiscal policy  Who: HK Government  Short Term: Economic
 Where: Hong Kong growth for Hong Kong
 When: Covid-19 (2020- after stagnation due
2022) to COVID-19, reduced
 What & Why: unemployment,
Supplementing the higher inflation than
domestic economy in during COVID-19,
order to promote increase in revenue
economic activity and and profits for Hong
maintain or boost GDP Kong businesses.
during a time where  Long Term: Job
propensity to save would retention and training
increase. has supply side
 How: effects that increases
 Transfer Payments: the quality and
Cash handouts to quantity of labour,
citizens and thus leading to long
businesses, totaling term economic
USD 38.6 billionto growth. Increased
support households economic activity
and businesses that could bring in more
have been negatively investors into Hong
impacted by the Kong.
pandemic.  Assumptions:
 Subsidies:  Keynesian
o Rent Subsidies assumptions of
(specific focus getting stuck in a
on the tourism deflationary gap.
and hospitality  Pros and Cons:
sectors) Pros: Businesses gain
o Operating revenue, consumers feel
Subsidies more confident to purchase
(aviation, goods and services in the
construction, etc economy. Employment
to cover increases. Job retention and
operating costs) training has long term
 Job retention & training supply side effects that are
(HAS SUPPLY-SIDE beneficial for the Hong Kong
INTERVENTIONIST economy.
EFFECTS)  help Cons: Great spending
workers upskill and re- increases the deficit of the
skill in response to budget and reduces the
changing market revenue reserves by the
 conditions, so they Hong Kong Government.
would be better Businesses could only be
prepared to find new temporarily supported by
job opportunities if the fiscal stimulus and still
necessary. collapse. Inflationary
pressures are a possible risk
of fiscal policy.

Contractionary Greece debt crisis  Temporarily eased

fiscal policy Who: The Greek government. government budget
Where: Greece deficit
When: 2000s-2010s  But… Greece's GDP
Why: Address budget deficit contracted by around
(to regain fiscal health / 25% between 2008 and
market confidence) 2016, high
How: unemployment, still
 Cutting public sector indebted, social unrest
wages, pensions, benefits
 Reducing government
spending
 Increasing taxes
 Implementing supply-side
structural reforms

3.7 Supply-side Policies

 Effectiveness of supply-side policies
 Constraints:
 Market-based: equity issues, time lags, vested interests, environmental
impact
 Interventionist: cost, time lags
 Strengths
 Market-based: improved resource allocation, no burden on government
budget
 Interventionist: direct support of sectors
 Strengths and limitations in promoting growth, low unemployment, and low
and stable rate of inflation

POLICY EXAMPLE DETAILS EVALUATION SUMMARY

Interventionist  Who: President Mitterand  Possibly good for

 Where: France workers, as labour
 When: 1980s market reforms
 What & Why: Combat enhanced working
high inflation, conditions/security
unemployment and slow  Bad for private
economic growth businesses who were
nationalised
 How:
 Fiscal challenges (debt),
 Nationalisation: Of
nationalisation and
banking, finance, etc.
  Government spending: wage controls may
 Increased taxes: To be have hindered growth
able to spend more (less innovation),
and to reduce income business confidence
inequality decreased
 Increased price  Overall regarded as a
‘flop’; Mitterand later on
controls
switched to market-
 Labour market reforms
based policies
Market-based “Thatcherite” Economic  Pros:
Reforms  More competitive,
 Who: Margaret Thatcher more efficient (shifts
 Where: UK LRAS)
 When: 1980s  Favourable to
 What & Why: Same as businesses
above (deregulation) and
 How: consumers
 Deregulation of  Reduced inflation,
financial market stimulated
 Privatisation of state- investment, and
owned enterprises boosted productivity
(British Telecom,  However, criticised
British Gas) for increasing
 Tax cuts income inequality
 Labour market reforms (weakening of trade
(reduced trade union unions, tax cuts for
power + increased well-off, etc.)
flexibility)

The Global Economy

4.1 Benefits of International Trade
 Limitations of the theory of comparative advantage

 Leads to overspecialisation, which harms global competition:

 Taiwan’s specialisation in semiconductor chips makes it so that
nobody else can compete with them (lack of choice) even though
they can make faster/cheaper processors
 Transport costs are ignored:
 Australia has comparative advantage in beef production but it is far
from most countries therefore it may ultimately be cheaper to
produce elsewhere
4.2 Types of Trade Protection
 Tariffs (effect on markets and stakeholders)
 Quota (effect on markets and stakeholders)
 Subsidy (effect on markets and stakeholders)
 Administrative barriers (standards and regulations)

POLICY EXAMPLE
Tariff Country & Effect on Market Effect on
Market Stakeholders
Who: US Increased price of Consumers: Less CS
What: Tariff on steel (price of cars
European steel Generated increased)
When: 2018 government revenue Producers: More PS
Why: Protect However, caused a due to decreased
steelmaking retaliation from EU competition
states such as on American goods
Ohio and (until Biden
Pennsylvania established an
agreement)
Quota Country & Effect on Market Effect on
Market Stakeholders
Who: US As above, increased
What: Quota price of sugar 
on sugar increased price of
When: 1980s, foods, beverages,
still active etc.
today
Why: Protect
domestic
producers
How: Specific
quotas by
country
Subsidies Country & Effect on Market Effect on
Market Stakeholders
Who: EU Overproduction of  Benefitted farmers
What: agricultural (domestic
Common commodities within producers),
Agricultural EU, resulting in stabilised incomes
Policy surpluses  Consumers had to
When: 1962 Made EU agricultural pay higher prices
Why: Protect products artificially (less CS)
European competitive in  Opportunity cost of
farmers and global markets tax
maintain Higher prices for
economic agricultural products
viability of rural within EU, reducing
communities incentives for
How: Farmers efficiency/innovation
received
subsidies
based on size
 of agriculture,
type of crops,
compliance
with
environmental
standards
Administra Country & Pros Cons
tive Market
barriers Who: China Sustainability: Western countries who
What: Ban on reduced waste in shipped trash have to
imports China find other alternative
destined for destinations (though
landfill this might be good for
When: 2018 innovation?)
Why: So other
countries
wouldn’t dump
their waste
How:
Legislation

4.3 Arguments For/Against Protectionism

 Free trade vs. Trade protection
Shown below – use steel tariff as trade protection measure

4.4 Economic Integration

 Advantages/disadvantages of trading blocs
 Advantages: Trade creation, economies of scale, greater employment,
increased reliability, political stability
 Disadvantages: Trade diversion, loss of sovereignty, etc.
 Advantages/disadvantages of monetary union

TRADE BLOC STRENGTHS WEAKNESSES

FREE TRADE AREA:  Harnesses  Production usually
Who: US, Canada, comparative shifted to lower-cost
Mexico advantage of each Mexico, which led to
What: NAFTA (North nation (increased job losses
American Free Trade efficiency)  Environmental impact
Agreement)  Increased trade  Social disparities
When: 1994  Economic growth,
Why: Increase less unemployment
efficiency
How: Reduced tariffs,
trade restrictions, etc.
CUSTOMS UNION:  Trade facilitation  Asymmetric
Who: 5 south African  Increased development/depend
countries, Botswana, investment/job ency on South Africa:
Swatini, Lesotho, creation structure and
Namibia, South Africa operations are heavily
What: South African influenced by SA,
Customs Union (SACU) which dominates the
When: 2002 union both
Why: Foster economically and
cooperation, enhance politically, potentially
development/trade etc
limiting the autonomy
How: Common external
of smaller member
tariff, eliminating
internal tariff states.
 External Trade
Challenges: SACU's
common external
tariff does not always
align with the trade
interests of all
member countries,
leading to tensions
and disagreements
COMMON MARKET:  This has  EEA members lose
Who: EU + Iceland, standardized many autonomy over their
Liechtenstein, Norway regulations, own markets
What: European improving well-being  EEA members
Economic Area (EEA): of consumers and become heavily
Tariff-free goods and confidence in reliant on other EEA
FOPs flow freely markets economies for trade
When: 1994  This added 
Why: Facilitate trade confidence and
with non-EU countries stability has
How: Harmonising increased foreign
legislation/regulation on investment
free movement of
goods, services, capital,
etc.

MONETARY UNION:  Price and XR stability The currency is

Who: Group of 27 (reduces currency controlled by one central
European nations risks) bank, who will have to
What: Member states  Enhanced trade make decisions on every
use the Euro – country's behalf
coordination of Not every country is in
monetary policies the same situation, so
When: 2002
when Greece
Why: Promote economic
integration, financial experienced a financial
stability, trade, crisis, the central bank
investment, reduce XR could not just print
uncertainties money to bail them out
How: Via European as this could have
Central Bank (ECB) caused inflation in other
Eurozone member
countries
4.5 Exchange Rates
 Consequences of changes in exchange rates (both increase/decrease in
exchange rates)
 Inflation rate, economic growth, unemployment, current account balance,
living standards
 Fixed versus floating exchange rates

Increased XR:

 Country: United States (Post-Plaza Accord)

 Context: Following the Plaza Accord in 1985, the US dollar depreciated
significantly against major currencies, including the Japanese yen and
the German mark. By getting its own, as well as other countries', central
banks to sell their dollar reserves, this should have in theory helped
exports and turn the US current account deficit into a surplus, which it
did compared to Western countries.

 Consequences:
 Inflation Rate: Decreased due to lower import costs and increased
purchasing power of the US dollar.
 Economic Growth: Initially slowed down due to reduced
competitiveness of US exports, leading to concerns about job losses
and higher unemployment rates.
 Unemployment: Increased temporarily as industries reliant on
exports faced challenges, leading to layoffs.
 Current Account Balance: Deteriorated as imports became cheaper,
leading to increased import expenditure.
 Living Standards: Improved due to lower inflation and increased
purchasing power of consumers

Decreased exchange rate:

 Country: UK post-Brexit Referendum (2016)

 Context: British pound depreciated significantly against major
currencies (due to decreased political stability), including the US dollar
and the euro
 Consequences:
 Opposite of above

Fixed vs. Floating

 Most countries have floating
 However: Thailand's central bank had imposed a fixed exchange rate with
the dollar in the years leading up to 1997
 + This increased stability in the economy, and thanks to increased
investment, they had economic growth of over 9% a year in the decade prior
 - However, speculators wanted to see how much dollar reserves the Thai
central bank really had, and therefore sold lots and lots of Thai Baht to cause
an oversupply of Baht in the market (in an attempt to break the fixed rate).
 This meant the central bank had to sell USD to buy the Baht again, trying to
make sure it wasn’t going to lose its value (devaluation). But speculators kept
on doing so, until the Thai bank stopped propping the value up because they
had run out of funds. The Thai economy collapsed, and caused the 1997
Asian financial crisis.

4.6 Balance of Payments

 Implications of a persistent current account deficit on:
 Exchange rates, interest rates, debt, credit ratings etc.
 Effectiveness of measures to correct a persistent current account deficit
(expenditure switching, expenditure reducing, supply-side policies)

COUNTRY + POLICY MEASURES

Australia – Expenditure  Exchange rate depreciation (Reserve Bank of
Switching, 1980s, aimed Australia lowered interest rates = less investors to
to make imports more buy AUD —> more supply of currency —> cheaper
expensive and exports currency, OR buying foreign currencies 
more competitive, thus increased supply of currency)
encouraging consumers  This meant
to switch to domestic
products
Greece debt crisis – As outlined above in 3.3.
Expenditure reducing Successful in correcting current account deficit BUT
(lower AD) high unemployment, decrease in GDP
South Korea – Supply As outlined in 2.5.
side policies Industrialisation in 1980s (investment in education,
R&D etc.) caused their economy to innovate and
develop, which in turn made their exports more
attractive and domestic goods more attractive to
domestic consumers = correcting their current
account deficit
However: Not good for short-term correction, takes a
long time to have an effect

 Implications of a persistent current account surplus on:

 Domestic consumption and investment, exchange rates, inflation,
employment, export competitiveness

Germany is a country with one of the biggest current account surpluses.

This is due to its popular exports (e.g. cars) and industrial base. However, a
surplus may lead to currency appreciation which would in turn make
their exports less competitive.

4.7 Measuring Development

 Strengths/limitations of approaches to measuring economic development
 Single vs. composite indicators
 Relationship between economic growth and economic development
(examples where they are equivalent, examples where growth ≠
development)

South Korea (again): Industrialisation post the Korean War (1960s/70s)

caused economic growth while also increasing human capital, causing
significant improvements in various indicators of economic development:
rising GDP per capita, increased access to education and healthcare,
reduced poverty rates, and improved infrastructure.

South Africa: Despite economic growth, little progress in economic

development. Gini Coefficient: 0.63 (over half of population in poverty, bad
income distribution)
Not enough new jobs are being created, and the jobs that are being created
are high-skill jobs, not accessible to those in poverty --> effects of
apartheid = low education, poverty trap, political/social unrest etc.

4.9 Barriers to Economic Growth/Development

 Economic barriers and political/social barriers
 Significance of different barriers

 Dependence on primary commodities: Fluctuations in prices lead to

economic instability, e.g. Venezuela’s dependency on oil exports 
when oil prices crashed, it suffered a crisis
 Human capital deficiencies: Only 29% of adults are literate in
Afghanistan  bad for economic growth

4.10 Economic Growth/Development Strategies

 Strengths/limitations of strategies to promote growth/development:
 Trade strategies (import substitution, export promotion, economic
integration), diversification, provision of merit goods (education, health,
infrastructures), inward FDI, foreign aid, institutional change (less
corruption, more rights, etc.)
 Strengths/limitations of government intervention vs. market-oriented
approaches to achieving growth/development:
 Market-based policies (trade liberalisation, privatisation, deregulation)
 Interventionist policies (redistribution policies),
 Progress toward meeting selected Sustainable Development Goals in the
context of two or more countries

All covered above:

Import substitution: Argentina wanting to produce more in-country (but this led
them to not being competitive globally)
Export promotion: Australia’s expenditure switching  they devalued their
currency to make their exports seem cheaper, which made their economy
grow
Economic integration: Any country joining the EU. Take Turkey for example.
Benefits of economic integration
Merit goods: Singapore’s subsidised textbooks to increase human capital.
Foreign aid: Ukraine war
Interventionist: Mitterand
Market-oriented: Thatcher

Not covered:
Institutional change:
China: China's transition from a centrally planned economy to a more market-
oriented system since the late 1970s has led to significant economic growth
and development.
Progress towards meeting SDGs: Most Nordic countries (Norway, Sweden,
etc.) have strong equality and education