CHAPTER 1 INTRODUCTION TO ECONOMICS

BASIC ECONOMIC PROBLEMS

WHAT TO PRODUCE AND HOW TO PRODUCE? FOR WHOM TO PRODUCE

HOW MUCH?
Depends on society’s Depends on which one is less costly Depends on the distribution of
demand (Labour/Capitalist Extensive Method) society’s income

CHAPTER 2 SUPPLY DEMAND

DETERMINANT OF DEMAND

PRICE FACTOR: The price of the good itself

NON-PRICE FACTORS: Shift in Demand Curve

1. Consumers’ Preferences Preferences taste is influenced by types of advertising, information, trends, more.
Changes in taste causes change in demand.
Favourable change = demand increase = shift curve to right.
Unfavourable change = demand decrease = shift curve to left.
2. Consumers’ Income Higher income = demand increase = shift curve to right.
Demand for normal & superior goods increase, inferior goods decrease.
Low income = demand decrease = shift curve to left.
3. Population of Buyers High number of buyers = demand increase = shift curve to right.
Low number of buyers = demand decrease = shift curve to left.
4. Prices of Related Goods Substitute Goods = Price A increase = Demand B increase
(Substitute & = Price A decrease = Demand B decrease
Complementary) Complementary = Price A increase = Demand B decrease
Goods = Price A decrease = Demand B increase
5. Consumers’ Expectation Speculation Price of Goods A will increase soon = demand increase
of Future Prices
6. Government Policy & Economy recession = low income = spend less = demand for goods decrease. Ex:
Socio-Economic War
Conditions Economy blooming = high income = spend more = demand for goods increase.

DETERMINANT OF SUPPLY

PRICE FACTOR: The price of the good itself

NON-PRICE FACTORS: Shift in Demand Curve

1. Cost of Production Wages increase = cost of production increase = suppliers’ profits decrease =
supply of goods decrease = shift to the left.
Wages decrease = cost of production decrease = suppliers’ profits increase =
supply of goods increase = shift to the right.
2. Number of Supplier Supplier increase = supply increase = shift to the right.
Supplier decrease = supply decrease = shift to the left.
3. Level of Technology Technology increase = quantity of resources used decrease = cost of production
decrease
 Technology decrease = quantity of resources used increase = cost of production
increase
4. Prices of Related Goods Substitute Goods = Price A increase = Supply B decrease
(Substitute & = Price A decrease = Supply B increase
Complementary) Complementary = Price A increase = Supply B increase
Goods = Price A decrease = Supply B decrease
5. Producers’ Expectation of Speculation Price of Goods A will increase soon = supply decrease to avoid lose.
Future Prices
6. Government Policy & Taxed = cost of production increase = profit decrease = supply decrease.
Socio-Economic Subsidied = cost of production decrease = profit increase = supply increase.
Conditions

CHAPTER 3 ELASTICITY

ELASTICITY OF DEMAND

1. PRICE

FORMULA: Qdx1-Qdx0 x Pxo , if midpoint, change Qdx0 = (Qdx1+Qdx0)/2

Qdx0 Px1-Px0 Px0 = (Px1+Px0)/2

Perfectly Inelastic Inelastic Unitary Elastic Elastic Perfectly Elastic

Ed=0 0<Ed<1 Ed=1 Ed>1 Ed=oo
Medical needs Petrol Shampoo
for patient
Vertical D.Curve Steeper slope Hyperbola Flater slope Horizontal D.Curve
D.Curve D.Curve D.Curve
Perfectly Not very Responsive Very responsive Perfectly
unresponsive responsive responsive

Price elasticity of demand and its effect on total revenue

Elastic Rise Fall

Fall Rise 1<Ed<oo
Unitary Rise Unchange
Fall Ed=1
Inelastic Rise Rise
Fall Fall 0<Ed<1

FACTOR INFLUENCING PRICE ELASTICITY OF DEMAND

Availability of Proportion of Nature of Consumers’ Complementa Time frames Level of income

goods income spend goods habit ry goods
on goods
 2. INCOME

FORMULA: Qdx1-Qdx0 x Yo , if midpoint, change Qdx0 = (Qdx1+Qdx0)/2

Qdx0 Y1-Y0 Y0 = (Y1+Y0)/2

Negative Zero Inelastic Elastic

Ed=0 Ey=0 0<Ey<1 Ey>1
Inferior goods Essential goods Normal goods Luxury goods
Steeper slope D.Curve \ Vertical D.Curve Steeper slope D.Curve / Flater slope D.Curve /

3. CROSS

FORMULA: Qdx1-Qdx0 x Pyo , if midpoint, change Qdx0 = (Qdx1+Qdx0)/2

Qdx0 Py1-Py0 Py0 = (Py1+Py0)/2

Negative Zero Positive

Ex<0 Ex=0 Ex>1
Complementary goods Independent goods Substitute goods
Steeper slope D.Curve \ Vertical D.Curve Steeper slope D.Curve /

ELASTICITY OF SUPPLY

FORMULA: Qsx1-Qsx0 x Pxo , if midpoint, change Qdx0 = (Qdx1+Qdx0)/2

Qsx0 Px1-Px0 Px0 = (Px1+Px0)/2

Perfectly Inelastic Inelastic Unitary Elastic Elastic Perfectly Elastic

Es=0 0<Es<1 Es=1 Es>1 Es=oo
Vertical S.Curve Steeper slope Hyperbola Flater slope Horizontal S.Curve
S.Curve S.Curve S.Curve

FACTOR INFLUENCING PRICE ELASTICITY OF SUPPLY

Availability of Perishables & Surplus Level of Mobility & Time frames Ease entry into
inventory non perishables capacity technology availability of the market
resouces
CHAPTER 5 MARKET STRUCTURE

MARKET STUCTURE

The size and distribution of sellers an buyers in the market producing various of goods and servivces.

CHARACTERISTIC OF MARKET STUCTURE

1. Perfect competition
Large number of sellers, homogenous/identical products, price taker, easy entry exit
2. Monoply
Single seller and large num of buyers, unique product, price maker, barrier to entry,
minimum advertising needed
3. Monopolistic
Large number of sellers, differentiated products, less control over price, easy entry exit,
advertising need
4. Oligopoly
Few large firms or producers, differentiated products, barriers to entry, control over price

CHAPTER 6 NATIONAL INCOME

 CHAPTER 7 MONEY BANKING FINANCIAL SYSTEMS

MONEY

Any commodities that is accepted as a payment for goods and services. An item can be labelled as
money if it is accepted as a medium of exchange. Money is valuable because everybody indirectly
accepts it as a form of payment to buy goods and services.

BARTER SYSTEM

A system introduced before the invention of money. It is an old method of exchanging goods and
services for other goods and services. It is inefficient due to several limitations.

LIMITATION OF BARTER SYSTEM

1. Must have a double coincidence, meaning both parties needs to have what the other wants.
2. There is no standard measurement of the valuefor how each goods or servivces.
3. Certain goods cannot be divided into smaller quantity due to its perishability.
4. Due to the goods perishability, it is hard to look for potential buyers in a short amount of time.
5. Seller faced mobiliy issues of transporting bulky and fragile goods.

EVOLUTION OF MONEY

Commodity money A wide variety of items or commodities used as payment such as sheep, tea etc
Metallic money Nickel, copper, silver and gold. Due to its scarcity, metallic money is not use as a medium
of exchange.
Paper money Refers to the legal tenders approved by the government for circulation as means of
payment. It is unlimited legal tenderand can be used without limit.
Token money Also known as coins, its face value is greater than the metallic content of the coins, and it
is limited legal tender. Limited legal tender means that it is made by legal governement
decree, which it must be accepted as amedium of exchange and in settlement of debts.
Fiat money Items that issued by the central bank, declared by the government as money. Consist of
both coins and notes, as their face value is greater than their own values.
Bank money Also known as demand, sight, bank, cheques and current deposit. They are translatable
from one person to another through cheques. A cheques is not money, it only instructs
the bank to transfer money from one account to another.
Plastic money Includes credit, debit, loyalty cards etc that are used for a cashless transactions. Also the
most convenient mode of payment used in modern form of banking facility.

CHARACTERISTICS OF MONEY

Acceptability Accepted and recognised for its value and as a medium of exchange for goods and services.
People are self-assured that money is tradable for goods and services.
Durability Money must be strong enough to be kept for a long period of time. It cannot easily
decompose, deteriorate, degrade or change its form. Eg gold.
Divisibility Able to be divided for people can buy wide range of goods and services with different values.
In fact, the smaller the division, the better its functions as money.
Transportablili Must be easily transported and carried out (portable) anywhere. People needs to bring along
ty & money to purchase goods compared to bringing gold around. Money cheques also can be
portability example, instead bringing large amount of money, cheques are convenient.
Relatively Must be relatively scarce for people to obtain and money supply controlled by the central
scarcity bank. Government prevent money from being duplicate or copied.
Uniformity Must be standard in weight and design. Eg sheeps as money in barter system = diff size shape
 FUNCTIONS OF MONEY

A medium Demanded for transaction purposes, money acts as a medium of exchange for goods and services
of accepted by people. Money is considered as the liquid form of wealth since it can be use as a means
exchange of payment directly.
Buyers are certain that seller will accept their payment of money and sellers are willing to release
their goods in exchange of money.
A store of Money can be change into many forms of wealth and did not suffer from physical deterioration. Eg
value land houses. Money is the most effective way to maintain value and able to be saved, stored, and
retrived to serve as a function as a store of value. Money can get affected to by inflation, as it erode
the purchasing power of money, thus money is not always perfect for a store of value.
A unit of Money served as a standard measurement value in term of monetary units for goods and services.
account Through money, society able to make comparison about the market value of different goods and
services and allow them to retain accurate financial statement including profit and loss.
A standard Money can be used as a payment at a later date and not necessarily during the goods and services
for are purchased. Money can be use a payment in future dates as it is stable, durable and always
deferred recognised. With the practices of interest contract, money act as a standard for deferred payment.
payment Eg the contract of housing loa, where people can obtain a loan to buy a house, and make the
settlement of loan with deferred payment later.

KEYNESIAN DEMAND FOR MONEY

Transaction The transaction motive refers to the demand as a medium of exchange whereby people wants to
motives hold money for daily expenses like food, petrol, and other goods and services.
Firms also demand money to pay for goods, services. dividends, taxes, interest and factor of
productions such as labour. Money can be hold in form of cash or in checkable deposits or
demand deposits to conduct regular transactions. The amount held depends on the size of their
income and depending on the amount of things they wish to buy, and not related to interest
rates. so the higher the income, the higher the demand for transaction money.
The quantity of money is positively related with income level.
Precautionary The precautionary motive is the demand for money to act as a precaution against unexpected or
motives emergency events such as accidents, medical bills, or urgent repairs. Firms also precautionary
balances (extra cash) as a standby to manage uncertainties in payments and receipts, such as
delayed customer payments or supply issues. This demand for money depends on income levels
and not related to interest rates. The higher income leads to more money held for precuationary
motive. Eg a debtor is unable to pay debt settlement after 14 days.
Speculative Speculative motive is the demand to hold money to invest in financial assets like bonds and
motives shares. The quantity of money depends on interest rates, not income level. When people expect
asset prices to fall, they hold cash instead of investing. They buy assets when prices are low and
sell when prices rise. The money they hold for this reason are called idle. Idle money is used to
store wealth temporarily. The relationship between interest rates and speculative demand is
negative.
When interest rates increase, the opportunity cost of holding money will increase and people will
hold less money, thus speculative balances decrease.
When interest rates decrease, the opportunity cost of holding money will decrease and people
will hold more money for speculative purposes.
SUPPLY MONEY

Generally classified as M1 M2 aM3 and controlled by the central bank. The supply curve is perfectly
inelastic to the changes in the interest rates and the curve is often vertical.

M1 : Money that can be used directly for transactions.

FORMULA : Fiat money (currency in circulation) + demand deposit in financial institutions.

M2 : Consist of M1 + narrow quasi-money/savings and fixed accounts at commercial banks and

BNM, negotiable biils and BNM’s certificates.

FORMULA : M1 + savings and fixed deposits in comercial banks + NCDs + BNM certificates + repos +
foreign deposits in commercial banks or BNM

M3 : Includes all the M2 money supply + saving and fixed deposits at other financial institutions,
merchant banks and discount bonuses.

FORMULA : M2 + savings and fixed deposits in other financial institutions + NCDs in other financial
institutions + repos in other financial institutions

Narrow quasi-money = M2-M1

Broad quasi-money = M3-M1

THE CENTRAL BANK AND ITS MONETARY POLICY

FINANCIAL SYSTEMS IN MALAYSIA

Bank Institutions Non-bank financial institutions Non-bank financial intermediaries

Central bank Finance companies Development financial institution
Commercial bank Islamic banks Employee provident fund
Merchant banks
Discount houses

THE CENTRAL BANK : FUNCTIONS

1. To issue currency and safeguard the external value of the currency.

Central bank has been the sole issuer of currency since 1967, ensuring its stability and unformity
while safeguarding its external value.

2. Bankers to the government.

Central bank manages the government’s principle bank account, handles revenue and payments,
offers short-term advances, manage national debt and handles bonds and treasury bills.

3. Bankers to the banks.

Central bank holds cash reserves of commercial banks and supports the country’s banking and credit
system.

4. Promotes money stability of the country.

Central bank controls money supply and credit using various tools to maintain low inflation and
support economic growth.

5. Holder of the country’s stock of gold and foreign currency reserves.

 Central bank manages gold and foreign currency reserves and implements exchange rate and
balance payment policies.

6. Lender of last resort to commercial banks and government.

Central bank provides emergency funds to banks and the government during liquidity shortages to
maintain financial stability.

THE CENTRAL BANK : MONETARY POLICY TYPES AND TOOLS

TYPES

EXPANSIONARY MONETARY POLICY

1. Aims to increase money supply

2. To control unemployment during recession
3. The instruments used are: buying government securities and bonds through open market
operations, decreasing the required reserve ratio and decreasing the bank rate
4. Cause the supply curve shift rightwards, leading to an increase in real domestic gross
product (GDP), hence lowering the unemployment level

CONTRACTIONARY MONETORY POLICY

1. Aims to decrease money supply

2. To control inflation
3. The instruments used are: selling government securities and bonds through open market
operations, increasing the required reserve ratio and increasing the bank rate
4. Cause the supply curve shift leftwards, leading to a decrease in real domestic gross product
(GDP), hence lowering the inflation rate

TOOLS

QUANTITATIVE MONETARY POLICY

Discount rate The interest rate charged by the central bank on loans to banks. Increase discount rate makes cost
of borrowing increase, thus reduce loan demand and decrease money supply in the economy.
Open market Central bank buys and sells government securities and bonds to influence commercial bank
operation reserves. Buying securities increase reserves, lower interest rates, and boost loan demand, raising
money supply
Legal reserve This is the minimum cash ratio banks must hold. Decrease the reserve ratio allows banks to loan
requirement more, thus increase money supply.
Funding Funding converts shrot-term loans into long-term ones to slow down credit creation. This reduces
commercial bank reserves and loan demand, decreasing money supply.

QUALITATIVE MONETARY POLICY

Selective To curb inflation, central bank persuade commercial banks to to be more selective in giving out
credit control loans, by limit loans for non-productive purposes and focus on productive purposes to avoid bad
loans.
Special Central bank can influence commercial banks to tighten lending such as requiring guarantors that
directives will lead to decrease loan demand, decrease money supply to help control inflation.
 ISLAMIC BANKING PRODUCT
A banking system that comply with Islamic Shari’ah principles to achieve the goals and objectives of
an Islamic economy
PRODUCTS

Al-Wadiah (custody Means goods or deposits which have been deposited with another person or bank as the
and guarantee) custodian for safekeeping.
Al-Mudharabah Is a contract made between two parties to finance a business venture, in which the investor
(profit-sharing) solely provides the capital and the bank acts as an enterpreneur that solely manages the
project.
Al-Bai Bithaman Ajil Is a contract on sale and purchase transaction for the financing of assets on deferred and
(deferred payment instalment basis at a pre-agreed payment period.
sale)
Al-Musyarakah (patnership Is a partnership arrangement between two parties or more to finance a
arrangement of profit and loss sharing) business venture.
Al-Ijarah (lease or Means leasing contract whereby a lessor or owner, leases out an asset or equipment to a
rental) client at an agreed rental fee for a pre-determined lease period.

CHAPTER 8 PUBLIC FINANCE

PUBLIC FINANCE

A branch of economics that studies the government finances and how the government increases its
resources to counter its increasing expenditure.

COMPONENTS OF GOVERNMENT BUDGET

GOVERNMENT REVENUE

Money collected by government from various sources such as income taxes (tax revenue) and fee
and penalties (non tax revenue).

MAJOR FUNCTIONS OF PUBLIC FINANCE

Allocation functon Government has to allocate its resources between private and public goods. Public goods are
essential to consumers such as public healthcare, national defense and made available to
everyone. While private goods are limited to individuals who can afford to purchase.
Distribution function Government affect the income distribution by heavily taxed rich. The poor benefit from this.
Stabilisation function Aims to counter situations such as inflation and unemployment.

CONVENTIONAL GOVERNMENT REVENUES

TYPES
Tax revenue Major and important source of revenue for government. It is a compulsory tax imposed by
government for individuals and organisations in order to increase its revenue that later used to
finance for public and private goods.
Direct tax: tax burden fall only to the tax payer @ tax cannot be shift to someone else (income tax,
road tax, company income tax)
Indirect tax: tax burden can be shift to someone else (export duties, sales tax, service tax)
Non tax revenue Arise from other sources beside tax term. (interest, services fees, permits fees)
Non revenue Refunds of the expenditure, reimbursement.
receipts

TYPES OF GOVERNMENT EXPENDITURES

OPERATING EXPENDITURE

Expenditure of various government departments that is necessary to main their services such as
salaries for civil servants, pensions, service charges.

DEVELOPMENT EXPENDITURE

Expenditure related to projects that boost economic growth or strengthens the productivity of
capacity in the economy such as armed forces, educations, agriculture development, transport)

TYPES OF TAX STRUCTURE

FORMULA : Tax rate = Total tax x 100% Tax rate

Income

Income

Progressive tax / Tax rate increase as income increase. Eg income tax

Proportional tax -- Tax rate remain constant even income changes. Eg corporation atx
Regressive tax \ Tax rate decrease as income increase. Eg ? Poor suffer at this.

TYPES OF GOVERNMENT BUDGETS

Budget deficit Government expenditure exceeds tax revenue ( G>T )

The budget is where government plan to spend more than it receives.
Can be done by reducing tax or increase government expenditure.
This budget is used when economy is in recession (Covid-19)
Budget surplus Tax revenue exceeds government expenditure ( G<T )
The budget is where government to overcome inflation.
Can be done by increase its tax revenue or reducing government expenditure.
Balanced budget A balanced budget policy where government expenditure equals to its tax revenue ( G=T )
This budget is when it does not want to change the level of economic activities @ has reach full
employment.

FISCAL POLICY

TYPES OF FISCAL POLICY

Contractionary A policy used by central bank or finance ministry to slow down the economy.
fiscal policy This policy is used to reduced government spending, higher taxes, and lower transfer payments to slow
down excessive economic growth and control inflation. When GDP exceeds its long-run level, creating an
inflationary gap, the government may cut spending and raise taxes. This decrease aggregate demand by
reducing both public and consumer spending. Cutting government wages can also decrease demand,
helping stabilize prices.
Expansionary A policy used by central bank or finance ministry to stimulate economic activites.
fiscal policy This policy is used during economy recession to boost economic activity by increasing government
spending and lowering taxes. When actual GDP is below its long-run level, this creates a recessionary
gap. Higher government spending directly increase aggregate demand, while tax cuts give consumers
more money to spend, indirectly increase aggregate demand. This stimulates production, raises national
income through the multiplier effect, and shifts the aggregate demand curve rightward, helping close the
gap and promote growth.

ROLES OF FISCAL POLICY

1. Stabilizes the economy during recession and blooms.

2. Prevents prolonged recessions.
3. Raises real income and aggregate demand during downturns.
4. Helps control inflation.
5. Smooths business cycle fluctuations by:
Increasing government spending @ cutting taxes during recessions.
Reducing government spending @ raising taxes when the economy overheats.

CHAPTER 9 MACROECONOMICS PROBLEMS UNEMPLOYMENT INFLATION

Major problems in macroeconomic is inflation and unemployment

INFLATION
A persistent and sustained increase in the aggregate or average price level of goods and services in
an economy.
Price
TYPES AND CAUSE OF INFLATION

Output

Demand- Based on Keynes theory, excess demand can cause inflation in a fully employed economy early on WW2.
pull Inflation occurs when aggregate demand > aggregate supply. AD = C+I+G+(X-M). If any of these variables
inflation increase then AD increase. G is the most important factor as it has direct multiplier effects on AD.
According to Keynes, 3 stages happened in an economy,
1. Recessionary stage
Output increase, unemployment decrease, price constant
2. Normal economy stage
Idle resources decrease, unemployment decrease, price increase. Inflation is mild and creeping.
3. Booming economy stage
Resources in full-employment, output constant. Excess demand will pull prices up.
 Cost-push Decrease AS can cause inflation. Inflation occurs when there is a shortage supply of labour, raw
inflation materials, crop failures, thus increase cost of production, decrease AS, increase price. AD constant.
Price increase before resources in full-employment, resulting supply-shock inflation.
Cause of the inflation :
1. Increase in wages (wage-push inflation)
2. Increase in import prices (import-push inflation)
3. Exhaustion of natural resources or natural disasters
4. Fall in exchange rates
5. Increase in government regulations or taxation (tax-push inflation)
6. Increase in supplier profit (profit-push inflation)
Monetary Caused by the expansion of money supply. Money supply increase through expansionary fiscal policy.
inflantion

EFFECTS OF INFLATION

Inflations effect economy in both positive and negative ways. The seriousness of adverse effect
depends on whether the inflation is anticipated or unanticipated.

ANTICIPATED

An inflation that people more or less prepard for.

POSITIVE EFFECTS OF ANTICIPATED INFLATION NEGATIVE EFFECTS OF ANTICIPATED INFLATION:

People spend and invest more, stimulating market growth Increases menu costs as firms must frequently update
prices.
Leads to higher profits, increased production, and reduced Reduces the real value of tax burdens, affecting
unemployment government revenue
Lowers the real burden of debt (public and private) as Lowers standard of living by reducing real income and
wages rise over time while loan payments stay fixed. purchasing power
At high inflation, people avoid holding money and rush to
spend, but true hyperinflation is hard to fully predict

UNANTICIPATED

An inflation that come as a surprise and people more or less unprepard for. It may also come before
the people had time to fuly adjust to its presence.

Restribution of income or wealth Discourages Affects Balance Breakdown in

Investment and of Payments Money’s
Savings Functions
GAINERS 1. Inflation increases 1. Exports 1. In
1. Businessmen: Gain higher profits from rising prices. the cost of holding become less hyperinflati
2. Debtors: Repay loans with money of lower value, reducing money, reducing competitive on, money
debt burden. savings. ; imports loses its role
3. Property Owners: Benefit as property values often rise 2. Consumers may appear as a
faster than inflation. hoard goods; firms cheaper. medium of
4. Shareholders: Receive higher dividends as company face planning 2. Worsens exchange
profits increase. uncertainty. trade and store of
LOSERS balance and value.
reduces
1. Creditors: Lose as repayments have lower real value than 3. Investment shifts employmen 2. May lead to
when loaned. from productive t in export a return
2. Wage Earners: Real income falls as wages lag behind use to speculation. sectors. to barter sys
inflation. 4. Trade union tem.
3. Pensioners: Worst affected, as fixed incomes lose demands and
purchasing power. strikes may
4. Savers: Fixed deposits lose value as inflation erodes disrupt
purchasing power. production.
MEASURES OF INFLATION

Control inflation caused by an excessive aggregate demand, by decreasing it.

1. CONTRACTIONARY FISCAL POLICY

Government reduces inflationary pressure by implementing budget surplus. 2 tools of budget

surplus is (1) reduce government expenditure (G) and (2) increase taxation (T) to decrease aggregate
demand (AD).

AD = C + I + G + ( X – M )

Decrease G

Government should postpone some development projects and reduce operational expenses
during inflation.
This will decrease G, which bring the muliplier effects on aggregate demand, causing AD
decrease, price decrease, inflation decrease.

Increase T

Government should implemented regressive tax or increase direct tax to reduce disposable
income of individual duriang inflation.
This will decrease C, price decrease and inflation decrease.

2. CONTRACTIONARY MONETARY POLICY

The central bank decrease money supply through open market operations, increasing rate of
interest. This will also decrease consumptions, investments, hence decrease AD, price fall.

3. DIRECT CONTROL

UNEMPLOYMENT
Occurs when people who are in a working age group, are able and willing to work, but are unable to
find a suitable job
@ represent the number of people in the labour force who want to work but unable to get a job.
Labour force : 15-64 yo who are available to work.

Total population
Economically active Economically inactive
Employed Unemployed Not in labour force
Employees Quit jobs Patients
Self employed workers Fresh graduates Millitary
Temporary laid off Lost jobs Full time student
 Lazy to work Housewives
Discouraged workers
Full employment is achieved when no more than 3% of the working population is unemployed.

MEASURING UNEMPLOYMENT

1. LABOUR FORCE PARTICIPATION RATE

FORMULA: Labour force participation rate = Economically active x 100%

Working age population

2. UNEMPLOYMENT RATE

FORMULA: Unemployment rate = Number of unemployment x 100%

Labour force (economically active)

TYPES OF UNEMPLOYMENT AND MEASURES TO CONTROL UNEMPLOYMENT

Classical Frictional Seasonal Structural Technological Cyclical

unemployment unemployment unemployment unemployment unemployment unemployment

EFFECTS OF UNEMPLOYMENT

Individual effects Economic effects Social effects

1. Erodes self esteem, conflict 1. There will be a waste of resources 1. May lowered
2. Unable to earn money to pay, 2. An economy with high unemployment is not morale
may lead to homelessness. using all of its resources such as labour. 2. Social problem arise
3. Higher rate of medication use, 3. High unemployment means government receive if unemployment
depression, anxiety, drug use less tax revenue. Thus, government spend less turns to drug or
4. If unemployment persist for so on public goods such as healthcare and crime
long, job skills will get rusty and education.
loss.
 CHAPTER 10 INTERNATIONAL TRADE

INTERNATIONAL TRADE

The exchange of goods and services between one country to another.

ABSOLUTE & COMPARATIVE ADVANTAGES MODELS

1. Adam Smith model

2. Ricardin model
3. Heckscher-Ohlin model

ABSOLUTE ADVANTAGE

ASSUMPTIONS :

1. Just 2 countries in the world, Young Land & Happy land

2. Only 2 goods are produced, wheat & cloth
3. Only 1 unit of resources is used
4. Free trade exist between these 2 countries
5. No transportation cost incurred
6. Production is under the constant cost

Wheat Cloth
Young Land 500 2000
Happy land 750 1800
Total Production 1250 3800

COMPARATIVE ADVANTAGE

Wheat Cloth
Young Land 500+500=1000 2000+2000=4000
Happy land 750 1800
Total Production 1750 5800

To Produce 1 Wheat To Produce 1 Cloth

Young Land Gives up 4 Cloth Gives up 0.25 Wheat
Happy land Gives up 2.4 Cloth Gives up 0.42 Wheat

ADVANTAGES FROM INTERNATIONAL TRADE

1. Increase in world Each countries have different production abilities and product demand across
output boundaries. Free trade boost output when the countries specialize at where they
have an advantage. Specialization and division help countries produce more with the
same resources.
2. Enjoy varieties of Some countries have a surplus of a certain goods, while others have deficits of their
goods needs. Trade let countires exchange surplus goods for what they need. This gives
customers access to more products and improved their living standards.
3. Increase in efficiency International competition pushes firms to improve efficiency, resulting in lower
costs. This benefits the consumers with a lower prices and help prevent monopolies.
 4. Enjoy economies of Exporting abroad expands a country’s market. This allows industries to produce at a
scale lower and with an increasing profits.
5. Higher income & International trade generate higher income and brings an economic growth. Higher
higher rate of export demands leads to the expansion of production, thus create more
economic growth employment, helping the economy to grow.
6. Earn foreign exchange Countries earn foreign currency by exporting goods. This helps them afford imports
and reduce deficits in the balance of payments.
7. Benefits to politicial, Trade builds politicial and social ties between countries. It encourages travel,
economy, social & cooperation, sharing of knowledge, research and development, information and
technology link technology, strengthening relationship and reducing differences.

DISADVANTAGES FROM INTERNATIONAL TRADE

1. Depletions of the Constantly exporting raw materials such as oil, iron and steel can reduce a
country’s reserves country’s reserved resources thus affecting the country’s growth in the long run.
This may make the country search for a new sources to preserve its natural
resources to stabilise its economy.
2. Economics and politicial International trade may leads to economics and politicial dependance. This
dependence makes a country rely too much on the other countries for goods and services.
Fluctuations in price can affect employment and economic growth. A country
may even limit exports if ties worsen.
3. Transportation costs If transportation costs are too high, trade might not be profitable, reducing any
real benefits.

ARGUMENTS OR REASONS FOR PROTECTIONISM

1. Reduce deficits in the Trade perfectionism use tariffs and quotas to restrict imports.
balance of payments
2. Increase in Through protectionism’s tools, revenue for government is raised such as tariff and taxes.
government revenue
3. Protect infant Must be protected during first few years of operations as they are new industries in the
industries country as they cant compete with wellknown industries that compete at economic level
4. Prevent dumping A situation where goods are sold abroad at lower prices compared to origin market. May also
happen if there is excessive in supply of goods.
5. Diversify the economy To prevent the country from depend on only one sector. Local producers will have to diversify
their goods for domestic market, creating wide range of goods.
6. Create more job Through protectionism, local producers produce more goods, leading to more job
opportunities opportunities.

PROTECTIONISM TOOLS

Tariff Instrument used by government to protect local producers, where tax imposed on imports.
When price increase, consumption for import products decrease.
Quota Restriction on the volume of imports. Import price increase, demand for import decrease.
Subsidies on export Local producers receive subsidies to encourage exports to be competitive, help decrease price.
Exchange controls Restrict the supply of foreign currencies in the country to restrict amount of imports as imports’
payment are made using their respective country’s currencies.
Embargo Direct control to prohibit or ban certain goods entering the country.