ECONOMY WORKBOOK THE ROLE OF GOVERNMENT IN AN ECONOMY

1. The role of government in an economy

1. Which of the following is an example of a merit good?
A) Street lighting B) Public fireworks displays
C) Public roads D) Public libraries

2. What is the name of the term used to determine the boundaries within which private producers
can operate?
A) Regulations B) Taxes
C) Intellectual property rights D) Tariffs

3. Which of the following is most likely to conflict with the government aim of high economic growth?
A) Employment opportunities B) Balance of payments deficit
C) Inflationary pressures D) Higher tax revenues

4. Which of the following is least likely to be a government aim?

A) Full employment B) Balance of payments stability
C) Price stability D) Provision of welfare services

5. Which of the following is not used explicitly by a government to influence private sector producers?
A) Investment B) Taxes
C) Regulations D) Subsidies

6. Most governments strive to achieve full employment. Describe what is meant by full employment.
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7. Match economic terms with their definitions. [4 marks]

1. Economic growth A. These regulations protect firms against rival firms for
imitating their products or inventions.
2. Public goods B. Charge imposed by a government to raise costs of
production
3. Merit good C. Support provided by a government to reduce the costs
of production for firms.
4. Subsidy D. These regulations protect the interests and safety
of employees
5. Tax E. It is the increase in a country's gross domestic. product
6. Employment legislation F. The proportion of a country's workforce who are
unemployed.
7. Intellectual property rights G. They are non-excludable and non-rivalrous in
consumption
8. Unemployment rate H. They are deemed to have social benefits yet are
under-consumed without government provision

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ECONOMY WORKBOOK THE ROLE OF GOVERNMENT IN AN ECONOMY
8. All countries aim to achieve economic growth by increasing real gross domestic product (real GDP).
Outline what is meant by real GDP. [2 marks]

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9. Explain why a government aims to redistribute income in the economy. [4 marks]

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10. In some countries, governments use subsidies to reduce the impact of inflation.
a) Define the term inflation. [2 marks]

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c) With the use of examples, discuss the benefits and drawbacks of intervening in a market through
the use of subsidies. [6 marks]

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ECONOMY WORKBOOK GOVERNMENT ECONOMIC POLICIES

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2. Government economic policies

1. The sale or transfer of public sector assets and industries to the private sector is known as
A) Public expenditure B) Monetary policy
C) Privatization D) Nationalization

2. If a government loosens fiscal policy in an attempt to expand the economy, what does this involve?
A) Raising taxes and raising government expenditure
B) Reducing taxes and reducing government expenditure
C) Reducing taxes and raising government expenditure
D) Raising taxes and reducing government expenditure

3. A government aims to expand aggregate demand in the economy to boost national output and
employment. Which of the following policies should it use?
A) Raise expenditure on education and health care B) Raise taxes and raise interest rates
C) Reduce taxes and reduce interest rates D) Reduce government spending and raise taxes

4. Which of the following does not outline how fiscal policy can be used to reduce unemployment in
the economy?
A) A cut in taxes may increase consumer spending
B) Lower interest rates increase the spending ability of households and encourages firms to invest more
C) Government spending can create jobs in both the private and public sectors
D) Greater government spending increases aggregate demand, causing the derived demand for labour
to rise

5. Government policies designed to improve the quantity and quality (productivity) of resources in the
economy by removing barriers to economic growth are known as
A) Monetary policy B) Fiscal policy
C) Demand-side policies D) Supply-side policies

6. Explain two reasons why the government might choose to increase public expenditure in the
economy. [3 marks)

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ECONOMY WORKBOOK GOVERNMENT ECONOMIC POLICIES

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7. Match economic terms with their definitions. [4 marks]

1. GDP A. There is a time delay between recognizing the need for

fiscal policy and actually implementing appropriate action
2. Contractionary monetary policy B. Total spending by the government

3. Supply-side policies C. This policy can be used to redistribute income and wealth
to benefit less wealthy members of society
4. Administrative lags D. It is used to stimulate the economy, by increasing
government spending or lowering taxes.
5. Impact lags E. Increase in interest rates rends to reduce spending and
investment in the economy
6. Expansionary fiscal policy F. Human capital , deregulation, tax reforms are the examples
of this policy
7. Fiscal policy G. There is a time delay between implementing fiscal policy
and seeing the actual effects on the economy.
8. Public expenditure H. The sum of consumer expenditure, investment
expenditure, public sector expenditure and spending on
exports

8. Suggest two policies the government could use if it wanted to reduce the amount of imports
coming into its country. [4 marks]

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9. Explain why a government might choose to use monetary policy. [4 marks]

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ECONOMY WORKBOOK TAXATION

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10. Discuss the effectiveness of supply-side policies in achieving economic growth. [5 marks]

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3. Taxation
1. What is the term used to describe taxes paid from the income, wealth and profits of individuals and
firms?
A) lncome tax B) Corporation tax
C) Direct tax D) lndirect tax

2. When does a budget surplus occur?

A) When public expenditure exceeds government revenues
B) When government revenues exceed public expenditure
C) When a country exports more than it imports
D) When a country imports more than it exports

3. Under which tax system does the percentage tax paid stay the same, irrespective of the taxpayer's
level of income, wealth or profits?
A) Direct tax B) Progressive tax
C) Regressive tax D) Proportional tax

4. Which of the following is not a direct tax?

A) lncome tax B) Customs duties
C) Corporation tax D) Capital gains tax

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ECONOMY WORKBOOK TAXATION
5. Which of the following is the most likely positive impact on the economy if taxes are increased?
A) Incentives to work B) Higher economic growth
C) Lower inflation D) Impact on business location

6. Explain the meaning of indirect taxes. [2 marks]

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7. Andorra, Brunei Darussalam, Oman and Qatar have a zero rate of income tax. The Bahamas and
Estonia have a zero rate of corporation tax. Explain two reasons behind such government decisions.
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8. Suppose in a country the progressive tax rates are 12% (for those earning between $10001 and
$50000 per year) and 17% (for those earning over $50000 per year).
a) Complete the table below and calculate the total amount of tax paid by an individual [2 marks]
Income level ($) Tax rate (%) Amount of tax paid ($)
10 000 0
10 001-50 000 12
50 001 + 17
Total tax:

b) Calculate the average rate of income tax paid by the individual. [1 marks]

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9. Some countries, such as Belgium and France, impose high rates of income tax and corporation tax.
a) Some economists argue that, if governments were to cut direct tax rates, they would actually receive
more tax revenue. Explain the reasons behind this argument. [3 marks]

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ECONOMY WORKBOOK TAXATION
b) Discuss whether imposing corporation taxes on the profits of multinational companies will
discourage them from setting up in a country. [5 marks]

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10. Study the data below and answer the questions that follow.
Income Tax paid per year ($)
($ per year) Tax A Tax B Tax C
10 000 1000 650 500
15 000 1650 650 750
20 000 2400 650 100
25 000 3250 650 1250

a) Identify the tax (A, B or C) that is progressive. [1 marks]

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b) Identify the tax (A, B or C) that is proportional. [1 marks]

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c) Distinguish between a regressive and a proportional tax. [2 marks]

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ECONOMY WORKBOOK INFLATION

4. Inflation
1. Which of the following will cause an increase in a country's rate of inflation?
A) Lower consumer and business confidence in the economy
B) Lower rates of interest
C) Discount food prices at the major supermarkets
D) Subsidised energy prices

2. Which of the following suggests why savers lose out during times of inflation?
A) Real interest rates become negative during inflationary periods
B) Real interest rates become positive during inflationary periods
C) Money loses its ability to act as a store of value
D) Money loses its ability to act as a unit of account

3. If the weighting for food in a country's consumer price index (CPI) exceeds that of shoes, what does
this indicate?
A) The average household buys more food than shoes
B) The average household buys more shoes than food
C) Food is deemed to be more important to the average household than shoes
D) On average, the price of food has increased more than the price of shoes

4. If the consumer price index in a country rises from 115.2 to 116.8 in the subsequent year, what is
the inflation rate?
A) 1.39% B) 1.6%
C) 1.6B% D) 16.B%

5. The tables below show the consumer price index (CPI) data. It can be concluded that prices were at
their lowest in
Year 1 2 3 4
CPI 102.2 104.6 103.9 1054

A) Year 1 B) Year2
C) Year3 D) Year4

6. Explain two reasons why governments calculate a consumer price index. [4 marks]

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ECONOMY WORKBOOK INFLATION
7. Explain why food and furniture have different weightings when calculating the consumer price
index. [4 marks]

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8. Calculate the rate of inflation if the consumer price index increases from 112.3 to 114.4. [2 marks]

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9. A basket of goods and services currently costs $1500. Calculate how much it would cost if the
consumer price index increased from 125.5 to 135.54. [3 marks]

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10. The data below is for a hypothetical country, Wonderland

Item RPI Weight
Clothing 120 15
Food 130 30
Housing 140 40
Other 125 15

a) Define what is meant by a retail prices index (RPI). [3 marks]

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ECONOMY WORKBOOK EMPLOYMENT
b) 'The typical household in Wonderland spends more money on food than on clothing.' Explain this
statement. [4 marks]

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Checked by: Mark:

5. Employment
1. What is the name given to the situation when people of working age are both willing and able to
work but cannot find employment?
A) Unemployment B) Unemployment rate
C) Voluntary unemployment D) Classical unemployment

2. Which government policy is best suited to deal with imperfections in the labour market?
A) Protectionist policies B) Supply-side policies
C) Fiscal policies D) Monetary policies

3. Which of the following types of unemployment is generally regarded as the most severe form of
unemployment?
A) Structural unemployment B) Voluntary unemployment
C) Cyclical unemployment D) Real wage unemployment

4. From the population data below for a particular country, calculate the number of unemployed
people if the unemployment rate is 7%.

Population: 66 million
Aged 0-14: 17 million
Aged 15--64: 38 million
Aged over 65: 11 million

A) 2.66 million B) 4.62 million

C) 10 million D) 28 million

5 What is the main cause of frictional unemployment?

A) People changing jobs B) Wages set higher than the market equilibrium
C) Changes in demand for certain goods and services D) People choosing not to work

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ECONOMY WORKBOOK EMPLOYMENT
6. a) Explain what is meant by the unemployment rate. [2 marks]

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b) Calculate the unemployment rate in a country that has a population of 46.6 million people, of
which 30 million are employed and 2.7 million are unemployed. [2 marks]

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7. Match unemployment types with their examples or definitions. [5 marks]

1. Technological unemployment A. A construction worker moving from Kansas to Arizona

2. Structural unemployment B. An ice cream shop by the beach

3. Cyclical unemployment C. A new graduate is searching for a job

4. Frictional unemployment D. Rural areas have relatively high rates of unemployment
5. Classical unemployment E. Different skills required by an employer to do the job
correctly.
6. Regional unemployment F. They'd rather collect government benefits instead of
working
7. Seasonal unemployment G. The number of job-seekers exceeds the demand for
labour when real wage rates are set above the market level
8. Voluntary unemployment H. When the economy is spiraling downward, the
unemployment rises
9. Youth unemployment I. Introduction of robots in production process of a firm

8. Explain which type of unemployment is most associated with the business cycle. [2 marks]

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9. Explain how the International Labour Organisation measures unemployment. [3 marks]

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ECONOMY WORKBOOK ECONOMIC GROWTH
10. Unemployment in Eurozone countries fell to record low towards the end of 2006. Explain two
economic advantages of a fall in unemployment. [6 marks]

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Checked by: Mark:

6. Economic growth
1. Economic growth can be defined as
A) An increase in a country's exports earnings
B) An increase in the productive capacity of an economy
C) An increase in a country's potential earnings
D) A reduction in the cost of living

2. An increase in which of the following best indicates whether a country has experienced economic
growth?
A) Real GDP per capita B) Consumer price inflation
C) Employment D) Current account on the balance of payments

3. As a country experiences economic growth, what is likely to fall?

A) Employment opportunities B) Infant mortality rates
C) National income per capita D) Average years of schooling

4. Which of the following is most likely to be a concern about rapid economic growth in a country?
A) Higher costs of production B) Resource depletion
C) Higher tax revenues D) Increased demand for imports

5. Which of the following is not part of the Human Development Index (HDI)?
A) Education B) Income levels
C) Health care D) Environmental issues

6. Define the term recession. [3 marks]

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ECONOMY WORKBOOK ECONOMIC GROWTH
7. Explain how a country's net exports are calculated. [2 marks]

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8. Briefly explain two causes of economic growth. [4 marks]

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9. The diagram below shows a typical business cycle. Define the business cycle and complete the
labels from the diagram. [2 marks]
Trend
GDP

Economic Activity

Time

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10. Study the Human Development Index (HDI) data below to determine the correct countries from the
following: Indonesia, Norway, Sierra Leone and Turkey. Briefly explain the reasoning behind your
answers. [6marks]

Country HDI Country HDI

A= 0.944 C= 0.684
B= 0.759 D= 0.363

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ECONOMY WORKBOOK STANDARDS OF LIVING

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7. Standards of living
1. Which of the following factors is not an indicator used to measure poverty within a country?
A) Homelessness and inadequate housing B) High mortality rates
C) Hunger and malnutrition D) High cost of living

2. Which of the following is a limitation of using real national income per capita as a measure of
standards of living in a country?
A) It does not consider the size of the population
B) It does not account for inflation over time
C) It does not reflect the distribution of income and wealth
D) It does not consider income earned in every industry

3. In an attempt to improve standards of living, which of the following is a government most likely to
cut?
A) Housing subsidies B) Tariffs on imports
C) lndirect taxes D) Corporation taxes

4. From the limited data below, which country is most likely to have the highest standard of living?

Country GDP ($ billion) Population (million)

A 129.7 18.5
B 153.6 150.0
C 43.2 15.2
D 89.9 9.2

A) Country A B) Country B
C) Country C D) Country D

5. Which of the following is not a direct criticism of using the Human Development Index (HDI) to
classify countries?
A) The definitions of economic development and standards of living are subjective
B) Longevity, education and income are not the only factors that affect human development
C) The components of the HDI are indiscriminately weighted equally
D) Inequalities in income and wealth are ignored

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ECONOMY WORKBOOK STANDARDS OF LIVING
6. Briefly explain three characteristics of less economically developed countries (LEDCs). [3 marks]

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7. Dhaka in Bangladesh is rated by the Economics Intelligence Unit as one of the least livable cities in the
world. Suggest and describe two reasons why this might be the case. [4 marks]

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8. Research and fill the following table with the required data for 2018. [5 marks]

Countries Life Adult GDP % women in in Total Employment Economic

expectancy literacy per employment in CO2 rate growth
at birth rate capita non-agricultural emission (%)
sector
Sierra
Leone
USA
Russia
Kyrgyzstan
Kazakhstan

India
China
Germany
Nigeria
UAE

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ECONOMY WORKBOOK STANDARDS OF LIVING
9. Look at the table of different development indicators above. Which countries do you think are
developed, developing and under-developed and why? [4 marks]

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10. Suggest why the measures and indicator values might contradict to each other. Discuss whether
economic growth in a country always results in higher standards of living for its people. [4 marks]

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ECONOMY WORKBOOK POPULATION

8. Population
1. Which of the following factors is most likely to raise the average age of a population?
A) A higher birth rate B) A higher death rate
C) Improved health technologies D) Net migration

2. Which of the following factors is likely to increase the population in a country?

A) Increased education expenditure B) Greater female participation in the workforce
C) Higher cost of living D) Higher fertility rates

3. The net migration rate is calculated by the formula

A) Number of immigrants - number of emigrants
B) Number of emigrants - number of immigrants
C) Birth rate - death rate
D) Death rate - birth rate

4. Which of the statements below about population distribution is correct?

A) Low income countries generally have a lower average age than high income countries
B) The gender split is uneven in most countries with more females being born
C) Most countries are experiencing ageing populations
D) Poorer countries tend to have lower dependency ratios

5. The median age of the UK population was 35.4 years in 1985 and is projected to be 42.2 by the year
2035. What does this suggest about the population in the UK?
A) It has a positive population growth rate B) It has an ageing population
C) It has a declining death rate D) It has a declining birth rate

6. Define the term dependency ratio. [2 marks]

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7. The chart below illustrates the growth in Mexico's population between 2003 and 2013.

120
Population (millions of people)

115

110

105

100
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Trading Economics

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ECONOMY WORKBOOK POPULATION
a) Outline what has happened to Mexico's population in the time period shown. [2 marks]

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b) Explain two economic problems which could be associated with the continual rise in the size of
Mexico's population. [3 marks]

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c) Discuss two measures the Mexican government could use to overcome the problems of population
growth in its country. [5 marks]

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ECONOMY WORKBOOK POPULATION
9. Japan has an average age of 46.1 years whereas it is only 29.2 in Indonesia. The average life
expectancy for women in Japan is 86 whilst it is 71 for women in Indonesia. Explain two reasons for the
average Japanese woman having a higher life expectancy than the average Indonesian woman.
[4 marks]
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10. Examine the effects of higher life expectancy on the economy. [4 marks]
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ECONOMY WORKBOOK SPECIALISATION

9. Specialisation
1. Which of the following is most likely to result from greater specialisation in manufacturing?
A) Consumers have more choice over individually made goods
B) Households benefit from a lower prices
C) Employees benefit from greater variety in the nature of their work
D) Employees benefit from greater job satisfaction
2. Which of the following is most likely to be a direct benefit of specialisation to workers in a specific
industry?
A) Employees become more skilled B) Reduced wastage
C) Improved labour productivity D) Improved competitiveness

3. Which of the following best explains why top Hollywood actors earn extremely high incomes?
A) There is low demand for Hollywood actors
B) There is a high supply of Hollywood actors
C) Top Hollywood actors work on one or two movies only each year
D) It takes a relatively long time to train to become a top Hollywood actor

4) Which of the following is a disadvantage of specialisation?

A) Efficiency gains B) Improved competitiveness
C) Increased labour turnover D) Economies of scale

5. Which of the following is an advantage of a high degree of specialisation?

A) Lower unit costs B) Low labour mobility
C) High labour mobility D) Greater variety for consumers

6. With the use of relevant examples, explain what is meant by the term specialisation. [3 marks]

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7. Assume that the countries of Kyrgyzstan and Kazakhstan both have same amount of labour and
produce two products, potato and wheat. The total output per year is shown below.

Potato (thousand tonnes) Wheat (thousand tonnes)

Kyrgyzstan 800 300
Kazakhstan 200 1000
Total output per period 1000 1100

a) Which country has an absolute advantage in production of potato and wheat? [2 marks]

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ECONOMY WORKBOOK SPECIALISATION
b) Calculate and show the output of the countries after they specialized in what they best able to
produce. [3 marks]

Potato (thousand tonnes) Wheat (thousand tonnes)

Kyrgyzstan
Kazakhstan
Total output per period

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c) Now the countries decided to engage in international trade. Assuming that the exchange rate for 1
kg of wheat equals to 1.5 kg of potato, show the output of the countries after the trade. [2 marks]

Potato (thousand tonnes) Wheat (thousand tonnes)

Kyrgyzstan
Kazakhstan
Total output per period

8. Explain two reasons why specialisation can lead to higher pay for workers. [4 marks]

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9. With the use of examples, discuss the advantages and disadvantages of specialisation for firms.
[6 marks]
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ECONOMY WORKBOOK BALANCE OF PAYMENTS

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Checked by: Mark:

10. Balance of payments

1. What is the name of the record of a country's exports and imports of physical goods?
A) The balance of payments B) The current account
C) Visible trade balance D) lnvisible trade balance

2. Which of the following is not part of a country's net income flows and transfers?
A) Interest, profits and dividends B) Bank deposits held in overseas banks
C) Money sent home from people working abroad D) Money spent on intangible products

3. What is the correct formula for calculating a country's current account on the balance of payments?
A) Visible balance+ invisible balance
B) Trade balance+ net exports
C) Visible trade balance+ invisible trade balance+ net income flows and transfers
D) Visible trade balance+ invisible trade balance - net income flows and transfers

4. Which of the following is a result of a sustained current account deficit for the domestic economy?
A) Higher aggregate demand B) Higher unemployment
C) Higher standards of living D) Higher exchange rate

5. Which of the following policies is least likely to result in an improvement in the current account of
the country?
A) Lower income taxes B) Lower exchange rate
C) Subsidies for export-driven firms D) Trade protection policies

6. Using the data below, explain what has happened to the country's balance of trade. [2 marks]
Year Trade in services ($bn) Trade in goods ($bn) Balance of trade ($bn)
1 15.2 12.3
2 16.7 13.4

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7. State the three components included in the current account of the balance of payments. [3 marks]

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ECONOMY WORKBOOK BALANCE OF PAYMENTS

8. Explain how it is possible for a country to have a deficit on its visible trade balance (trade in goods)
but still have a current account surplus on its balance of payments. [4 marks]

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9. Analyse how a fall in the exchange rate can reduce a country's current account deficit on its balance
of payments. [6 marks]

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10. Study the data below and answer the questions that follow.
Trade balance of the Country X ($ billions)
Exports 103
Goods 87
Services
Imports 113
Goods 87
Services
Visible Balance
Invisible Balance 10
Trade Balance

a) Define the term visible balance. [2 marks]

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ECONOMY WORKBOOK EXCHANGE RATES
b) Calculate the missing figures in the data above for Country X. [3 marks]
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Checked by: Mark:

11. Exchange Rates

1. Which of the following is a drawback of using a fixed exchange rate system?
A) A fall in the demand for exports
B) A rise in the demand for imports
C) The large opportunity cost of using foreign exchange reserves to maintain the fixed rate
D) The uncertainty it creates for international trade and exchange

2. In a floating exchange rate system, what is the name given to a rise in the value of an exchange
rate?
A) Appreciation B) Depreciation
C) Revaluation D Devaluation
3. In which exchange rate system does the government intervene in the foreign exchange market to
maintain its exchange rate at a predetermined level against other currencies?
A) Floating B) Fixed
C) Devalued D) Revalued

4. In which exchange rate system does the exchange rate get determined by the market forces of
demand for and the supply of the currency?
A) Floating B) Managed
C) Fixed D) Mixed

5. With reference to the diagram below, identify the option that does not explain the change in the
exchange rate of the New Zealand dollar.

S
Price (GBP to NZD)

0.65

0.55 D2

D1

Quantity (NZD)

A) An increase in interest rates in New Zealand

B) Greater demand from British households for New Zealand exports
C) More British tourists visiting New Zealand
D) More firms from New Zealand investing in Britain

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ECONOMY WORKBOOK EXCHANGE RATES
6. Define the term exchange rate. [2marks)

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7. Suppose the exchange rate between the US dollar (USO) and the Euro (EUR) is USD1 = EUR0.73.
Calculate the price for customers in Europe of buying textbooks priced at USD70 from the USA.
[2marks]

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8. Suppose the exchange rate between the British pound (GBP) and the Hong Kong dollar (HKD) is
GBP1 = HKD12.5. How much does it cost the British tourist (in pounds) to buy an iPad in Hong Kong
that is priced at HKD6000? [2 marks)

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9. Suppose that the exchange rate between the Australian dollar (AUD) and the British pound (GBP) is
AUD1 = GBP0.55 and the Hong Kong dollar (HKD) is AUD1 = HKD7.25. Calculate the exchange rate of the
British pound against the Hong Kong dollar. [2 marks]

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10. Although the Chinese government controls the value of its exchange rate, it has been known to allow
the Yuan (the Chinese currency) to appreciate.
a) Explain what is meant by an appreciation in the value of a currency. [2marks]

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b) Examine the likely effects of China's currency appreciation on its exports and imports. [6 marks]

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ECONOMY WORKBOOK TRADE PROTECTIONISM

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Checked by: Mark:

12. Trade protectionism

1. Which of the following is an objective of trade protection?
A) To reduce the costs of international trade
B) To increase the demand for domestically produced goods and services
C) To improve the economic efficiency of domestic industries
D) To create domestic jobs

2. Which of the following methods of trade protection is used to reduce the price of exports?
A) Tariffs B) Quotas
C) Embargoes D) Subsidies

3. What is the name given to the act of selling exports at artificially low prices, below those charged
by domestic firms, and often less than the cost of production?
A) Embargoes B) Dumping
C) Administrative barriers D) Subsidies

4. International trade that takes place without any form of protection (barriers to international trade)
is called
A) International relations B) Dumping
C) Free trade D) Exchange
5. Which of the following is not a benefit of free international trade and exchange?
A) Transportation costs B) Economies of scale
C) Choice D) Efficiency gains

6. Define the term trade protectionism. [2 marks]

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7. Explain two economic reasons why Americans might import fewer cars from the European Union.
[4 marks]

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ECONOMY WORKBOOK TRADE PROTECTIONISM

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8. Explain two benefits to an economy that engages in free international trade. [4 marks]
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9. Discuss whether the government should protect domestic industries from foreign competition.
[5 marks]

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ECONOMY WORKBOOK TRADE PROTECTIONISM
10. a) Which international organization possess this given logo. [1 marks]

b) Write about this organization and explain its functions. [4 marks]

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ECONOMY WORKBOOK
KEY TERMS

Key terms
1. The role of government in an economy

Public goods are products are non-excludable as employment laws, consumer protection
and non-rivalrous in consumption. Examples are legislation and environmental protection laws.
national defense, law, etc. Subsidies are financial support from the
An employer is a person or a firm that hires government to reduce the costs of private-sector
other workers to an organisation. firms. They are used to encourage output and
Merit goods are products are deemed to have consumption of certain goods or services, such
social benefits yet are under-consumed without as public transport.
government provision. Examples are education, Taxes are levies or charges imposed by a
health care services, etc. government to raise the costs of production and
Intellectual property rights give private-sector reduce the consumption of certain goods or
firms legal protection against rival firms copying services, such as tobacco, alcohol and
or imitating their products or inventions. petroleum.
A producer is any firm that deals in the Welfare services are provided by the
production and/or provision of goods and government to people in need. These include
services. transfer payments such as unemployment
Regulation refers to the rules and laws that benefits and state pension
govern business behavior in the economy, such

2. Government economic policies

Administrative lags is a time delay between Fiscal policy is the use of taxes and government
recognizing the need for fiscal policy spending to affect macroeconomic objectives
intervention and actually implementing such as economic growth and employment.
appropriate action Impact lags is a time lag between implementing
Contractionary fiscal policy is used to reduce fiscal policy and seeing the actual effects on the
the level of economic activity by decreasing economy.
government spending and/or raising taxes. Monetary policy refers to the use of interest
Contractionary monetary policy, also known as rates, exchange rates and the money supply to
tight monetary policy, is used reduce spending control macroeconomic objectives and to affect
and investment in the economy by increasing the level of economic activity.
interest rates. Recognition lags is a time lag in recognizing that
Deregulation is a supply-side policy of making government intervention is needed to affect the
markets more competitive by removing barriers level of economic activity.
to entry and other market imperfections. Privatization is a supply-side policy of selling off
Expansionary fiscal policy is used to stimulate state-owned assets to the private-sector.
the economy, by increasing government Supply-side policies are the long-term
spending and/or lowering taxes. strategies aimed at increasing the productive
Expansionary monetary policy, also known as capacity of the economy by improving the
loose monetary policy, aims to boost economic quality and/or quantity of factors of production.
activity by expanding the money supply. This is
done mainly by lowering interest rates.

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ECONOMY WORKBOOK KEY TERMS
3. Taxation
Capital gains tax is a tax on the earnings made Progressive taxation is a tax system that deducts
from investments such as buying shares and a greater proportion of tax as a person's income
private property level increases. Progressive taxes include income
Carbon tax is a tax imposed on vehicle tax and capital gains tax.
manufacturers or firms that produce excessive Proportional taxation is a tax system that
carbon emissions. deducts the same proportion of tax at all income
Corporation tax is a direct tax on the profits of levels.
businesses. Regressive taxation is a tax system that deducts
Custom duties are indirect cross-border taxes on a smaller proportion of tax as a person's income
foreign imports. increases. Regressive taxes include sales taxes
Direct taxes are government charges imposed and stamp duties.
on income and wealth, such as income tax and Tax avoidance is the legal act of minimizing
inheritance tax. payment of taxes, such as by avoiding pending
Excise duties are indirect inland taxes imposed on items with a large sales tax.
on certain goods and services, such as alcohol, The tax burden is the amount of tax that
tobacco, petrol, gambling households and firms have to pay.
Income taxes are levied on personal incomes Taxes are government levies on income and
{wages, interest, rent and dividends}. In most expenditure, used to fund government
countries, this is the main source of tax expenditure and to affect economic activity.
revenues. Tax evasion is the illegal act of not paying the
Indirect taxes are taxes imposed on correct amount of tax, perhaps due to a firm
expenditure-for example, sales taxes such as under-declaring its profits.
value added tax (VAT). Windfall tax is a tax charged on individuals and
Inheritance tax is a tax on the transfer of income firms that gain an unexpected one-off amount of
and wealth such as property when passed on to money, such as a person winning the lottery or a
another person firm gaining from a takeover bid

4. Inflation

The base year refers to the starting year when falls, but is above zero - prices are generally still
calculating a price index. rising, only at a slower rate.
The consumer prices index (CPI) is a weighted Hyperinflation refers to very high rates of
index of consumer prices in the economy over inflation that are out of control, causing average
time. Lt is used to measure the cost of living for prices in the economy to rise very rapidly.
an average household. Imported inflation is triggered by higher import
Cost-push inflation is inflation triggered by prices, forcing up costs of production and thus
higher costs of production, forcing up prices. causing domestic inflation.
Deflation is a sustained fall in the general price lnflation is a sustained rise in the general level of
level in an economy overtime-the inflation rate prices of goods and services overtime, as
is negative. measured by a consumer price index.
Demand-pull inflation is inflation triggered by The retail prices index (RPl) is used to calculate
higher levels of aggregate demand in the the rate of inflation. Unlike the CPl, the RPI
economy, driving up the general price level. includes the cost of housing, such as mortgage
Disinflation occurs when the rate of inflation interest payments and other housing costs, but

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ECONOMY WORKBOOK KEY TERMS
excludes low-income pensioners and high- with inflation but this simply causes more
income households. inflation as firms raise prices to maintain their
A wage-price spiral occurs when trade unions profit margins.
negotiate higher wages to keep income in line

5. Employment

Classical (real-wage) unemployment occurs Technological unemployment occurs when

when real wage rates are set above the market- workers Jose their jobs due to firms opting to use
clearing level capital-intensive technologies
Cyclical unemployment occurs due to dynamics Unemployment occurs when people of working
of the business cycle. age are both willing and able to work but cannot
Employment refers to the use of factors of find employment.
production in the economy, such as labour. The unemployment rate is a measure of the
Frictional unemployment is transitional percentage of a country's workforce that is out
unemployment that occurs when people change of employment.
jobs, due to the time delay between leaving a job Voluntary unemployment occurs when workers
and finding or starting a new one. choose not to work.
Regional unemployment occurs when The working population (or labour force) is the
unemployment affects specific geographical number of people in an economy who are of
areas of a country. working age and who are willing and able to
Seasonal unemployment is caused by regular work.
and periodical changes in demand for certain Youth unemployment affects members of the
products. working population aged 21 and below. They
Structural unemployment occurs when the have relatively fewer skills and less experience,
demand for products produced in a particular so they are the most likely to be affected during
industry falls continually, often due to foreign an economic downturn.
competition.

6. Economic growth

Business cycle describes the fluctuations in the unemployment benefits and state pension
economic activity of a country over time, thus schemes.
creating a long-term trend of economic growth Gross domestic product (GDP) is the monetary
in the economy. value of goods and services produced within a
Consumption expenditure is the value of all country in a given period of time, usually 1 year.
private household consumption within a Human Development Index (HDI) is a composite
country. indicator of living standards in a country,
Economic growth is the increase in the level of obtained by measuring three dimensions of
national output-that is, the annual percentage human development: education, health care and
change in GDP. income.
GDP per capita is the gross domestic product of Investment expenditure is the sum of capital
a country divided by the population size. Lt is a spending by all businesses within a country.
key measure of a country's standards of living. Net exports refers to the monetary value of the
Government expenditure is the total value of a difference between a nation's exports earnings
government's consumption and investment and its import expenditure.
spending and transfer payments, such as

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ECONOMY WORKBOOK KEY TERMS
Real GDP refers to the value of national income Recession occurs in the business cycle when
(GDP) adjusted for inflation to reflect the true there is a fall in GDP for two consecutive
value of goods and services produced in a given quarters.
year.

7. Standards of living

Absolute poverty is an extreme form of poverty per capita, so their standards of living are
indicating the number of people who cannot generally good.
afford minimal standards of basic human needs Poverty is a condition that exists when people
(food, clothing, health care and shelter). lack adequate income and wealth to sustain
Foreign aid is a form of financial assistance for basic standards of living.
economic development from other countries or The poverty line, which is also sometimes called
non-government organisations such as Oxfam the poverty threshold, is the smallest amount of
and Unicef. money a person or a family needs to live on; to
Foreign direct investment (FDI) refers to cross- buy what is needed
border investment made by multinational Relative poverty is a comparative measure of
companies and other investors. poverty. Those in relative poverty have a lower
The Human Development Index (HDI) is the standard of living in comparison with the
UN's measure of wellbeing, obtained by using average member of society.
three criteria: life expectancy, educational Standards of living refer to the social and
attainment and income per capita. economic wellbeing of individuals in a country at
Less economically developed countries (LEDCs) a point in time.
are developing countries with low GDP per The Millennium Development Goals (MDGs) are
capita, so their standards of living are generally eight goals with measurable targets and clear
poor. deadlines for improving the lives of the world's
More economically developed countries poorest people.
(MEDCs) are developed countries with high GDP

8. Population
The birth rate measures the number of live Life expectancy measures the number of years
births per thousand of the population in a year. an average person in the country is expected to
The death rate measures the number of deaths live.
per thousand of the population in a year. The net migration rate measures the difference
Demographics is the study of population between immigration and emigration rates for a
distribution and trends. country, thus indicating the physical movement
The dependency ratio is a comparison of the of people into and out of the country.
number of people who are not in the labour Optimum population exists when the output of
force with the number of people in active paid goods and services per head of the population is
employment. maximised.
The fertility rate measures the average number Population refers to the total number of
of births per woman. It is used as a component inhabitants of a particular country.
in the measurement of population growth. Population growth refers to the rate of change
in the size of a country's population.

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Population pyramids are a graphical Working population refers to the active labour
representation of the age and gender force aged 15- 65, i.e. those who are willing and
distribution of a country's population. able to work. This consists of those in paid
The replacement fertility rate is the number of employment, the self-employed and the
children whom the average women must have to unemployed.
replace the existing population and maintain a
stable population size.

9. Specialisation

Absolute advantage theory refers to the ability Overspecialisation occurs when an individual,
of a party (an individual, or firm, or country) to firm, region or country concentrates too much
produce a greater quantity of a good, product, or on producing a very limited number of goods and
service than competitors, using the same services. This exposes the economic agent to a
amount of resources. far higher degree of risk.
Comparative advantage is an economic term Regional specialilsation occurs when certain are
that refers to an economy's ability to produce as concentrate on the production of certain
goods and services at a lower opportunity cost goods or services. For example, Hollywood, in
than that of trade partners. Los Angeles, is famous for its motion pictures
International specialisation occurs when certain industry.
countries concentrate on the production of Specialisation occurs when individuals, firms,
certain goods or services due to cost advantages, regions or countries concentrate on the
perhaps due to their abundant production of a particular good or service.

10. Balance of payments

The balance of payments is a financial record of Invisible exports refer to the earnings from
a country's transactions with the rest of the selling services to foreign customers.
world for a given time period. Invisible imports refer to the spending on
The balance of trade (or simply the trade services provided by firms in overseas countries.
balance) is the difference between a country's The invisible trade balance is a record of the
total export earnings and its total import trade in services, such as transportation and
expenditure. financial services.
The current account is a component of the Net income flows are a record of a country's net
balance of payments that records all exports and income earned from capital flows.
imports of goods and services and net income Transfers are money flows from one country to
flows and transfers with other countries another, e.g. income sent by a foreign worker to
between a country and the rest of the world. their home country, or a gift of money from one
A current account deficit occurs when a government to another.
country's financial outflows are greater than its Visible exports are goods that are sold to foreign
financial inflows. customers.
A current account surplus occurs when a Visible imports are goods bought by domestic
country's financial inflows are greater than its customers from foreign sellers.
financial outflows. The visible trade balance is a record of the
export and import of physical goods.

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11. Exchange Rates
Appreciation of a currency occurs when there is A fixed exchange rate system exists when the
an increase in the value of the exchange rate central bank (or monetary authority) buys and
relative to another currency operating in a sells foreign currencies to ensure the value of its
floating exchange rate system. currency stays at the pegged value.
Deprecation of a currency occurs when there is A floating exchange rate system means that the
a fall in the value of the exchange rate relative to currency is allowed to fluctuate against other
another currency operating in a floating currencies according to market forces without
exchange rate system. any government intervention.
A foreign exchange market is the marketplace
Devaluation occurs when the price of a currency where foreign currencies can be bought and
operating in a fixed exchange rate system is sold.
officially and deliberately lowered. Revaluation occurs when the price of a currency
The exchange rate is the price of one currency operating in a fixed exchange rate system is
measured in terms of other currencies. officially and deliberately increased.

12. Trade protectionism

Barriers to trade are obstructions to free trade, International trade refers to the exchange of
imposed by a government to safeguard national goods and services beyond national borders.
interests by reducing the competitiveness of A quota is a type of protection that sets a
foreign firms. numerical limit on the number of imports
Dumping is the act of selling exports at artificially allowed into a country over a specified time
low prices, below those charged by domestic period.
firms, and often less than the costs of Subsidies are a form of financial support from
production. the government to lower the production costs of
An embargo is a type of protection that involves domestic firms, thereby raising their
placing a ban on the trade of a certain good or competitiveness.
with a particular country. Tariffs are import taxes that are imposed on
Exports are goods and services sold to overseas foreign goods.
buyers. Trade protection is the use of trade barriers to
Free trade is international trade without any safeguard a country against excessive
protectionist barriers between countries. international trade and foreign competition.
Imports are foreign goods and services bought
by domestic households and firms.

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