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Whether you're a current IB Economics student looking to get a deeper grasp of the syllabus or a prospective IB student weighing your Group 3 options, this post will be your guide. We'll break down the IB Economics syllabus to give you a clear understanding of what to expect in the course.
IB Economics Syllabus + Topics
The IB Economics syllabus is divided into four Units:
- Unit 1: Introduction to Economics
- Unit 2: Microeconomics
- Unit 3: Macroeconomics
- Unit 4: The Global Economy
In these Units, you will explore the following topics:
Unit 1: Introduction to Economics
1.1 What is economics?
- Economics as a social science
- The social nature of economics
- The basis of the study of economics: microeconomics and macroeconomics
- Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention
- The problem of choice
- Factors of production—land, labour, capital and entrepreneurship
- Scarcity
- Opportunity cost
- The basic economic questions
- Means of answering the economic questions
- The production possibilities curve (PPC)
- Assumptions of the model
- Increasing versus constant opportunity cost
- Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities
- Modelling the economy
- The circular flow of income model
- Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households)
- Leakages and injections
1.2 How do economists approach the world?
- Economic methodology
- The role of positive economics
- The role of normative economics
- Economic thought
- Origin of economic ideas in a historical context
Unit 2: Microeconomics
2.1 Demand
- The law of demand – relationship between price and quantity demanded
- Assumptions underlying the law of demand (HL only)
- Demand curve
- Relationship between an individual consumer’s demand and market demand
- Non-price determinants of demand
- Income
- Tastes and preferences
- Future price expectations
- Price of related goods (in the cases of substitutes and complements)
- Number of consumers
- Movements along the demand curve and shifts of the demand curve
2.2 Supply
- The law of supply – relationship between price and quantity supplied
- Assumptions underlying the law of supply (HL only)
- Supply curve
- Relationship between an individual producer’s supply and market supply
- Non-price determinants of supply
- Changes in costs of factors of production (FOPs)
- Prices of related goods (in the cases of joint and competitive supply
- Indirect taxes and subsidies
- Future price expectations
- Changes in technology
- Number of firms
- Movements along and shifts of the supply curve
2.3 Competitive market equilibrium
- Demand and supply curves forming a market equilibrium
- Shifting the demand and supply curves to produce a new market equilibrium, with reference to excess demand (shortage) and excess supply (surplus)
- Functions of the price mechanism
- Resource allocation
- Rationing
- Consumer and producer surplus
- Social/community surplus
- Allocative efficiency at the competitive market equilibrium:
- social/community surplus maximized at equilibrium
- marginal benefit equals marginal cost
2.4 Critique of maximizing behaviour of consumers and producers (HL only)
- Rational consumer choice (HL only)
- Assumption – consumer rationality, utility maximization and perfect information
- Behavioural economics – limitations of the assumptions of rational consumer choice
- Behavioral economics in action
- Choice architecture
- Nudge theory
- Business objectives
- Profit maximization
- Alternative business objectives
2.5 Elasticities of demand
- Concept of elasticity
- Price elasticity of demand (PED)
- PED formula
- Degrees of PED
- Changing PED along a straight line downward sloping demand curve (HL only)
- Determinants of PED – number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time
- Relationship between PED and total revenue
- Importance of PED for firms and government decision making
- Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)
- Income elasticity of demand (YED)
- YED formula
- Income elastic demand (services and luxury goods) and income inelastic demand (necessities)
- Significance of sign
- Importance of YED (HL only)
2.6 Elasticity of supply
- Price elasticity of supply (PES)
- PES formula
- Degrees of PES
- Determinants of PES
- Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)
2.7 Role of government in microeconomics
- Reasons for government intervention in markets
- Main forms of government intervention in markets
- Indirect taxes and subsidies
- Direct provision of services
- Command and control regulation and legislation
- Consumer nudges (HL only)
- Government intervention in markets – consequences for markets and stakeholders
2.8 Market failure – externalities and common pool or common access resources
- Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC).
- (MSB = MSC): allocative efficiency; social/community surplus maximized
- Positive externalities of production and consumption and welfare loss
- Merit goods
- Negative externalities of production and consumption and welfare loss
- Demerit goods
- Common pool resources
- Government intervention in response to externalities and common pool resources including:
- Indirect (Pigouvian) taxes
- Carbon taxes
- Legislation and regulation
- Education - awareness creation
- Tradable permits
- International agreements
- Collective self-governance
- Subsidies
- Government provision
- Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including:
- challenges involved in measurement of externalities
- degree of effectiveness
- consequences for stakeholders
- Importance of international cooperation
- Global nature of sustainability issues
- Challenges faced in international cooperation
- Monitoring, enforcement
2.9 Market failure - public goods
- Public goods
- Non-rivalrous, non-excludable
- Free rider problem
- Government intervention in response to public goods
- Direct provision
- Contracting out to the private sector
2.10 Market failure (HL only)
- Asymmetric information
- Adverse selection
- Moral hazard
- Responses to asymmetric information
- Government responses: legislation and regulation, provision of information
- Private responses: signalling and screening
2.11 Market failure – market power (HL only)
- Perfect competition: many firms, free entry, homogeneous products
- Monopoly: single or dominant firm, high barriers to entry, no close substitutes
- Imperfect competition
- Oligopoly: few large firms, high barriers to entry, interdependence
- Monopolistic competition: many firms, free entry, product differentiation
- Rational producer behaviour: profit maximization (HL only)
- Total revenue - Total costs (TR -TC)
- Marginal cost = Marginal revenue (MC=MR)
- Abnormal profit (AR > AC)
- Normal profit (AR = AC)
- Losses (AR < AC)
- Degrees of market power
- Meaning of market power
- Perfect competition
- Monopoly
- Profit maximization
- Allocative inefficiency (market failure)
- Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price
- Natural monopoly
- Oligopoly
- Collusive versus non-collusive
- Interdependence, risk of price war, incentive to collude, incentive to cheat
- Allocative inefficiency (market failure) simple game theory payoff matrix
- Price and non-price competition
- Measurement of market concentration – concentration ratios
- Monopolistic competition
- Profit maximization
- Less market power due to many substitutes: more elastic demand curve compared with monopoly
- Allocative inefficiency (market failure
- Less inefficiency, more product variety
- Advantages of large firms having significant market power, including:
- Economies of scale including natural monopolies
- Abnormal profits may finance investments in research and development (R&D), hence innovation
- Risks in markets dominated by one or a few very large firms
- Risks in terms of output, price, consumer choice
- Government intervention in response to abuse of significant market power
- Legislation and regulation
- Government ownership
- Fines
2.12 The market's ability to achieve equity (HL only)
- Workings of free market economy may result in an unequal distribution of income and wealth
Unit 3: Macroeconomics
3.1 Measuring economic activity and illustrating its variations
- National income accounting as a measure of economic activity
- Equivalence of the income, output and expenditure approaches to national income accounting, with reference to the circular flow model
- Gross domestic product (GDP) as a measure of national output
- Gross national income (GNI) as a measure of national output
- Real GDP and real GNI
- Real GDP/GNI per person (per capita) Real GDP/GNI per person (per capita) at purchasing power parity (PPP)
- Business cycle: short-term fluctuations and long-term growth trend (potential output)
- Appropriateness of using GDP or GNI statistics to measure economic well-being—use of national income statistics for making:
- comparisons over time
- comparisons between countries
- Alternative measures of well-being
- OECD Better Life Index
- Happiness Index
- Happy Planet Index
3.2 Variations in economic activity—aggregate demand and aggregate supply
- Aggregate demand (AD)
- Aggregate demand curve
- Components of AD: consumption (C) + investment (I) + government spending (G) + net exports (total exports [X] - total imports [M])
- Determinants of AD components
- C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
- I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness
- G: political and economic priorities
- X - M: income of trading partners, exchange rates, trade policies
- Shifts of the AD curve caused by changes in determinants
- Short-run aggregate supply (SRAS) curve and determinants of the SRAS curve
- Shifts of the SRAS curve
- Alternative views of aggregate supply (AS)
- Monetarist/new classical view of the long-run aggregate supply (LRAS) curve
- Keynesian view of the AS curve
- Inflationary and deflationary/recessionary gaps
- Shifts of the AS curve over the long-run (monetarist/new classical LRAS) or over the long term (Keynesian AS)
- Changes in the quantity and/or quality of factors of production
- Improvements in technology
- Increases in efficiency
- Changes in institutions
- Macroeconomic equilibrium
- Short-run equilibrium
- Equilibrium in the monetarist/new classical model
- Assumptions and implications of the monetarist/new classical and Keynesian models
3.3 Macroeconomic objectives
- Economic growth
- Short-term growth
- Long-term growth
- Measurement of economic growth
- Consequences of economic growth
- Low unemployment
- Measurement of unemployment and the unemployment rate
- Difficulties of measuring unemployment
- Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional
- Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment
- Costs of unemployment—personal costs, social costs, economic costs
- Low and stable rate of inflation
- Measuring the inflation rate, using consumer price index (CPI) data
- The limitations of the CPI in measuring inflation
- Causes of inflation—demand-pull and cost-push
- Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation
- Causes of deflation—changes in AD or SRAS
- Disinflation and deflation
- Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness
- Relative costs of unemployment versus inflation
- Sustainable level of government (national) debt (HL only)
- Measurement of government (national) debt as a percentage of GDP
- Relationship between a budget deficit and government (national) debt
- Costs of a high government (national) debt—debt servicing costs, credit ratings, impacts on future taxation and government spending
- Potential conflict between macroeconomic objectives
- Low unemployment and low inflation
- Trade-off between unemployment and inflation (HL only)
- Phillips curve (HL only)
- High economic growth and low inflation
- High economic growth and environmental sustainability
- High economic growth and equity in income distribution
3.4 Economics of inequality and poverty
- Relationships between equality and equity
- The meaning of economic inequality
- Unequal distribution of income
- Unequal distribution of wealth
- Measuring economic inequality
- Lorenz curve and Gini coefficient (index)
- Meaning of poverty
- Difference between absolute and relative poverty
- Measuring poverty
- Single indicators
- Composite indicators
- Difficulties in measuring poverty
- Causes of economic inequality and poverty
- The impact of income and wealth inequality on:
- economic growth
- standards of living
- social stability
- The role of taxation in reducing poverty, income and wealth inequalities
- Progressive, regressive and proportional taxes
- Direct taxes
- Indirect taxes
- Further policies to reduce poverty, income and wealth inequality
3.5 Demand management (demand-side policies): monetary policy
- Monetary policy
- Control of money supply and interest rates by the central bank
- Goals of monetary policy
- Low and stable rate of inflation
- Low unemployment
- Reduce business cycle fluctuations
- Promote a stable economic environment for long-term growth
- External balance
- The process of money creation by commercial banks (HL only)
- Tools of monetary policy (HL only)
- Demand and supply of money: determination of equilibrium interest rates (HL only)
- Real versus nominal interest rates
- Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps
Effectiveness of monetary policy
3.6 Demand management: fiscal policy
- Fiscal policy
- Sources of revenue: direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets
- Expenditures: current expenditures, capital expenditures, transfer payments
- Goals of fiscal policy
- Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gaps
- Keynesian multiplies (HL only)
- Effectiveness of fiscal policy
- Goals of supply-side policies
- Long-term growth by increasing the economy’s productive capacity
- Improving competition and efficiency
- Reducing labour costs and unemployment through labour market flexibility
- Reducing inflation to improve international competitiveness
- Increasing firms’ incentives to invest in innovation by reducing costs
- Markt-based policies including:
- Policies to encourage competition
- Labour market policies
- Incentive-related policies
- Interventionist policies
- Demand-side effects of supply-side policies
- Supply-side effects of fiscal policies
- Effectiveness of supply-side policies
Unit 4: The Global Economy
4.1 Benefits of international trade
- Benefits of international trade
- Absolute and comparative advantage (HL only)
- Gains from trade
- Sources of comparative advantage
- Opportunity costs
- Limitations of the theory of comparative advantage (HL only)
4.2 Types of trade protection
- Tariffs, quotas, and subsidies
- Effects on markets and stakeholders
- Administrative barriers
4.3 Arguments for and against trade control/ protection
- Arguments for trade protection/advantages of trade protection, including:
- protection of infant (sunrise) industries
- national security
- health and safety
- environmental standards
- anti-dumping
- unfair competition
- balance of payments correction
- government revenue
- protection of jobs
- Economically least developed country (ELDC) diversification
- Arguments against trade protection/disadvantages of trade protection, including:
- misallocation of resources
- retaliation
- increased costs
- higher prices
- less choice
- domestic firms lack incentive to become more efficient
- reduced export competitiveness
- Free trade versus trade protection
4.4 Economic integration
- Preferential trade agreements
- Bilateral
- Regional
- Multilateral (the World Trade Organization)
- Trading blocs
- Free trade areas/agreements
- Customs unions
- Common markets
- Advantages and disadvantages of trading blocs
- Advantages, including:
- trade creation (HL only)
- greater access to markets offer potential for economies of scale
- with freedom of labour, there are greater employment opportunities
- membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
- greater political stability and cooperation
- Disadvantages, including:
- trade diversion (HL only)
- loss of sovereignty
- challenge to multilateral trading negotiations
- Monetary union
- Advantages and disadvantages of monetary union (HL only)
- The WTO
4.5 Exchange rates
- Floating exchange rates
- Changes in demand and supply for a currency
- Consequences of changes in the exchange rate on economic indicators
- Fixed exchange rate
- Managed exchange rates
4.6 Balance of payments
- Balance of payments
- Credit and debit items
- Surplus or deficit on an account
- Components of the balance of payments
- Interdependence between the accounts
- Zero balance in the balance of payments
- Credits matched by debits
- Deficits matched by surpluses
- Relationship between the current account and the exchange rate (HL only)
- Relationship between the financial account and the exchange rate (HL only)
- Implications of a persistent current account deficit in terms of: (HL only)
- exchange rates
- interest rates
- foreign ownership of domestic assets
- debt
- credit ratings
- demand management
- economic growth
- Methods to correct a persistent current account deficit (HL only)
- Expenditure switching
- Expenditure reducing
- Supply-side policies
- Effectiveness of measures to correct a persistent current account deficit (HL only)
- The Marshall-Lerner condition and the J-curve effect (HL only)
- Implications of a persistent current account surplus in terms of (HL only):
- domestic consumption and investment
- exchange rates
- inflation
- employment
- export competitiveness
4.7 Sustainable development
- The meaning of sustainable development
- SDGs
- Relationship between sustainability and poverty (HL only)
4.8 Measuring development
- The multidimensional nature of economic development
- Single indicators
- GDP/GNI per person (per capita) at PPP
- Health and education indicators
- Economic/social inequality indicators
- Energy indicators
- Environmental indicators
- Composite indicators
- Human Development Index (HDI)
- Gender Inequality Index (GII)
- Inequality adjusted Human Development Index (IHDI)
- Happy Planet Index
- Strengths and limitations of approaches to measuring economic development
- Possible relationship between economic growth and economic development
4.9 Barriers to economic growth and/or economic development
- Poverty traps/poverty cycles
- Economic barriers
- Political and social barriers
- Significance of different barriers to economic growth and/or economic development
4.10 Economic growth and/or economic development strategies
- Strategies to promote economic growth and/or economic development
- Trade strategies
- Diversification
- Social enterprise
- Market-based policies
- Interventionist policies
- Provision of merit goods
- Inward foreign direct investment
- Foreign aid
- Multilateral development assistance
- Institutional change
- Strengths and limitations of strategies for promoting economic growth and economic development
- Strengths and limitations of government intervention versus market-oriented approaches to achieving economic growth and economic development
- Progress toward meeting selected Sustainable Development Goals in the context of two or more countries
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Whether you're a current IB Economics student looking to get a deeper grasp of the syllabus or a prospective IB student weighing your Group 3 options, this post will be your guide. We'll break down the IB Economics syllabus to give you a clear understanding of what to expect in the course.
IB Economics Syllabus + Topics
The IB Economics syllabus is divided into four Units:
- Unit 1: Introduction to Economics
- Unit 2: Microeconomics
- Unit 3: Macroeconomics
- Unit 4: The Global Economy
In these Units, you will explore the following topics:
Unit 1: Introduction to Economics
1.1 What is economics?
- Economics as a social science
- The social nature of economics
- The basis of the study of economics: microeconomics and macroeconomics
- Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention
- The problem of choice
- Factors of production—land, labour, capital and entrepreneurship
- Scarcity
- Opportunity cost
- The basic economic questions
- Means of answering the economic questions
- The production possibilities curve (PPC)
- Assumptions of the model
- Increasing versus constant opportunity cost
- Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities
- Modelling the economy
- The circular flow of income model
- Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households)
- Leakages and injections
1.2 How do economists approach the world?
- Economic methodology
- The role of positive economics
- The role of normative economics
- Economic thought
- Origin of economic ideas in a historical context
Unit 2: Microeconomics
2.1 Demand
- The law of demand – relationship between price and quantity demanded
- Assumptions underlying the law of demand (HL only)
- Demand curve
- Relationship between an individual consumer’s demand and market demand
- Non-price determinants of demand
- Income
- Tastes and preferences
- Future price expectations
- Price of related goods (in the cases of substitutes and complements)
- Number of consumers
- Movements along the demand curve and shifts of the demand curve
2.2 Supply
- The law of supply – relationship between price and quantity supplied
- Assumptions underlying the law of supply (HL only)
- Supply curve
- Relationship between an individual producer’s supply and market supply
- Non-price determinants of supply
- Changes in costs of factors of production (FOPs)
- Prices of related goods (in the cases of joint and competitive supply
- Indirect taxes and subsidies
- Future price expectations
- Changes in technology
- Number of firms
- Movements along and shifts of the supply curve
2.3 Competitive market equilibrium
- Demand and supply curves forming a market equilibrium
- Shifting the demand and supply curves to produce a new market equilibrium, with reference to excess demand (shortage) and excess supply (surplus)
- Functions of the price mechanism
- Resource allocation
- Rationing
- Consumer and producer surplus
- Social/community surplus
- Allocative efficiency at the competitive market equilibrium:
- social/community surplus maximized at equilibrium
- marginal benefit equals marginal cost
2.4 Critique of maximizing behaviour of consumers and producers (HL only)
- Rational consumer choice (HL only)
- Assumption – consumer rationality, utility maximization and perfect information
- Behavioural economics – limitations of the assumptions of rational consumer choice
- Behavioral economics in action
- Choice architecture
- Nudge theory
- Business objectives
- Profit maximization
- Alternative business objectives
2.5 Elasticities of demand
- Concept of elasticity
- Price elasticity of demand (PED)
- PED formula
- Degrees of PED
- Changing PED along a straight line downward sloping demand curve (HL only)
- Determinants of PED – number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time
- Relationship between PED and total revenue
- Importance of PED for firms and government decision making
- Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)
- Income elasticity of demand (YED)
- YED formula
- Income elastic demand (services and luxury goods) and income inelastic demand (necessities)
- Significance of sign
- Importance of YED (HL only)
2.6 Elasticity of supply
- Price elasticity of supply (PES)
- PES formula
- Degrees of PES
- Determinants of PES
- Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)
2.7 Role of government in microeconomics
- Reasons for government intervention in markets
- Main forms of government intervention in markets
- Indirect taxes and subsidies
- Direct provision of services
- Command and control regulation and legislation
- Consumer nudges (HL only)
- Government intervention in markets – consequences for markets and stakeholders
2.8 Market failure – externalities and common pool or common access resources
- Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC).
- (MSB = MSC): allocative efficiency; social/community surplus maximized
- Positive externalities of production and consumption and welfare loss
- Merit goods
- Negative externalities of production and consumption and welfare loss
- Demerit goods
- Common pool resources
- Government intervention in response to externalities and common pool resources including:
- Indirect (Pigouvian) taxes
- Carbon taxes
- Legislation and regulation
- Education - awareness creation
- Tradable permits
- International agreements
- Collective self-governance
- Subsidies
- Government provision
- Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including:
- challenges involved in measurement of externalities
- degree of effectiveness
- consequences for stakeholders
- Importance of international cooperation
- Global nature of sustainability issues
- Challenges faced in international cooperation
- Monitoring, enforcement
2.9 Market failure - public goods
- Public goods
- Non-rivalrous, non-excludable
- Free rider problem
- Government intervention in response to public goods
- Direct provision
- Contracting out to the private sector
2.10 Market failure (HL only)
- Asymmetric information
- Adverse selection
- Moral hazard
- Responses to asymmetric information
- Government responses: legislation and regulation, provision of information
- Private responses: signalling and screening
2.11 Market failure – market power (HL only)
- Perfect competition: many firms, free entry, homogeneous products
- Monopoly: single or dominant firm, high barriers to entry, no close substitutes
- Imperfect competition
- Oligopoly: few large firms, high barriers to entry, interdependence
- Monopolistic competition: many firms, free entry, product differentiation
- Rational producer behaviour: profit maximization (HL only)
- Total revenue - Total costs (TR -TC)
- Marginal cost = Marginal revenue (MC=MR)
- Abnormal profit (AR > AC)
- Normal profit (AR = AC)
- Losses (AR < AC)
- Degrees of market power
- Meaning of market power
- Perfect competition
- Monopoly
- Profit maximization
- Allocative inefficiency (market failure)
- Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price
- Natural monopoly
- Oligopoly
- Collusive versus non-collusive
- Interdependence, risk of price war, incentive to collude, incentive to cheat
- Allocative inefficiency (market failure) simple game theory payoff matrix
- Price and non-price competition
- Measurement of market concentration – concentration ratios
- Monopolistic competition
- Profit maximization
- Less market power due to many substitutes: more elastic demand curve compared with monopoly
- Allocative inefficiency (market failure
- Less inefficiency, more product variety
- Advantages of large firms having significant market power, including:
- Economies of scale including natural monopolies
- Abnormal profits may finance investments in research and development (R&D), hence innovation
- Risks in markets dominated by one or a few very large firms
- Risks in terms of output, price, consumer choice
- Government intervention in response to abuse of significant market power
- Legislation and regulation
- Government ownership
- Fines
2.12 The market's ability to achieve equity (HL only)
- Workings of free market economy may result in an unequal distribution of income and wealth
Unit 3: Macroeconomics
3.1 Measuring economic activity and illustrating its variations
- National income accounting as a measure of economic activity
- Equivalence of the income, output and expenditure approaches to national income accounting, with reference to the circular flow model
- Gross domestic product (GDP) as a measure of national output
- Gross national income (GNI) as a measure of national output
- Real GDP and real GNI
- Real GDP/GNI per person (per capita) Real GDP/GNI per person (per capita) at purchasing power parity (PPP)
- Business cycle: short-term fluctuations and long-term growth trend (potential output)
- Appropriateness of using GDP or GNI statistics to measure economic well-being—use of national income statistics for making:
- comparisons over time
- comparisons between countries
- Alternative measures of well-being
- OECD Better Life Index
- Happiness Index
- Happy Planet Index
3.2 Variations in economic activity—aggregate demand and aggregate supply
- Aggregate demand (AD)
- Aggregate demand curve
- Components of AD: consumption (C) + investment (I) + government spending (G) + net exports (total exports [X] - total imports [M])
- Determinants of AD components
- C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
- I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness
- G: political and economic priorities
- X - M: income of trading partners, exchange rates, trade policies
- Shifts of the AD curve caused by changes in determinants
- Short-run aggregate supply (SRAS) curve and determinants of the SRAS curve
- Shifts of the SRAS curve
- Alternative views of aggregate supply (AS)
- Monetarist/new classical view of the long-run aggregate supply (LRAS) curve
- Keynesian view of the AS curve
- Inflationary and deflationary/recessionary gaps
- Shifts of the AS curve over the long-run (monetarist/new classical LRAS) or over the long term (Keynesian AS)
- Changes in the quantity and/or quality of factors of production
- Improvements in technology
- Increases in efficiency
- Changes in institutions
- Macroeconomic equilibrium
- Short-run equilibrium
- Equilibrium in the monetarist/new classical model
- Assumptions and implications of the monetarist/new classical and Keynesian models
3.3 Macroeconomic objectives
- Economic growth
- Short-term growth
- Long-term growth
- Measurement of economic growth
- Consequences of economic growth
- Low unemployment
- Measurement of unemployment and the unemployment rate
- Difficulties of measuring unemployment
- Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional
- Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment
- Costs of unemployment—personal costs, social costs, economic costs
- Low and stable rate of inflation
- Measuring the inflation rate, using consumer price index (CPI) data
- The limitations of the CPI in measuring inflation
- Causes of inflation—demand-pull and cost-push
- Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation
- Causes of deflation—changes in AD or SRAS
- Disinflation and deflation
- Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness
- Relative costs of unemployment versus inflation
- Sustainable level of government (national) debt (HL only)
- Measurement of government (national) debt as a percentage of GDP
- Relationship between a budget deficit and government (national) debt
- Costs of a high government (national) debt—debt servicing costs, credit ratings, impacts on future taxation and government spending
- Potential conflict between macroeconomic objectives
- Low unemployment and low inflation
- Trade-off between unemployment and inflation (HL only)
- Phillips curve (HL only)
- High economic growth and low inflation
- High economic growth and environmental sustainability
- High economic growth and equity in income distribution
3.4 Economics of inequality and poverty
- Relationships between equality and equity
- The meaning of economic inequality
- Unequal distribution of income
- Unequal distribution of wealth
- Measuring economic inequality
- Lorenz curve and Gini coefficient (index)
- Meaning of poverty
- Difference between absolute and relative poverty
- Measuring poverty
- Single indicators
- Composite indicators
- Difficulties in measuring poverty
- Causes of economic inequality and poverty
- The impact of income and wealth inequality on:
- economic growth
- standards of living
- social stability
- The role of taxation in reducing poverty, income and wealth inequalities
- Progressive, regressive and proportional taxes
- Direct taxes
- Indirect taxes
- Further policies to reduce poverty, income and wealth inequality
3.5 Demand management (demand-side policies): monetary policy
- Monetary policy
- Control of money supply and interest rates by the central bank
- Goals of monetary policy
- Low and stable rate of inflation
- Low unemployment
- Reduce business cycle fluctuations
- Promote a stable economic environment for long-term growth
- External balance
- The process of money creation by commercial banks (HL only)
- Tools of monetary policy (HL only)
- Demand and supply of money: determination of equilibrium interest rates (HL only)
- Real versus nominal interest rates
- Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps
Effectiveness of monetary policy
3.6 Demand management: fiscal policy
- Fiscal policy
- Sources of revenue: direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets
- Expenditures: current expenditures, capital expenditures, transfer payments
- Goals of fiscal policy
- Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gaps
- Keynesian multiplies (HL only)
- Effectiveness of fiscal policy
- Goals of supply-side policies
- Long-term growth by increasing the economy’s productive capacity
- Improving competition and efficiency
- Reducing labour costs and unemployment through labour market flexibility
- Reducing inflation to improve international competitiveness
- Increasing firms’ incentives to invest in innovation by reducing costs
- Markt-based policies including:
- Policies to encourage competition
- Labour market policies
- Incentive-related policies
- Interventionist policies
- Demand-side effects of supply-side policies
- Supply-side effects of fiscal policies
- Effectiveness of supply-side policies
Unit 4: The Global Economy
4.1 Benefits of international trade
- Benefits of international trade
- Absolute and comparative advantage (HL only)
- Gains from trade
- Sources of comparative advantage
- Opportunity costs
- Limitations of the theory of comparative advantage (HL only)
4.2 Types of trade protection
- Tariffs, quotas, and subsidies
- Effects on markets and stakeholders
- Administrative barriers
4.3 Arguments for and against trade control/ protection
- Arguments for trade protection/advantages of trade protection, including:
- protection of infant (sunrise) industries
- national security
- health and safety
- environmental standards
- anti-dumping
- unfair competition
- balance of payments correction
- government revenue
- protection of jobs
- Economically least developed country (ELDC) diversification
- Arguments against trade protection/disadvantages of trade protection, including:
- misallocation of resources
- retaliation
- increased costs
- higher prices
- less choice
- domestic firms lack incentive to become more efficient
- reduced export competitiveness
- Free trade versus trade protection
4.4 Economic integration
- Preferential trade agreements
- Bilateral
- Regional
- Multilateral (the World Trade Organization)
- Trading blocs
- Free trade areas/agreements
- Customs unions
- Common markets
- Advantages and disadvantages of trading blocs
- Advantages, including:
- trade creation (HL only)
- greater access to markets offer potential for economies of scale
- with freedom of labour, there are greater employment opportunities
- membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
- greater political stability and cooperation
- Disadvantages, including:
- trade diversion (HL only)
- loss of sovereignty
- challenge to multilateral trading negotiations
- Monetary union
- Advantages and disadvantages of monetary union (HL only)
- The WTO
4.5 Exchange rates
- Floating exchange rates
- Changes in demand and supply for a currency
- Consequences of changes in the exchange rate on economic indicators
- Fixed exchange rate
- Managed exchange rates
4.6 Balance of payments
- Balance of payments
- Credit and debit items
- Surplus or deficit on an account
- Components of the balance of payments
- Interdependence between the accounts
- Zero balance in the balance of payments
- Credits matched by debits
- Deficits matched by surpluses
- Relationship between the current account and the exchange rate (HL only)
- Relationship between the financial account and the exchange rate (HL only)
- Implications of a persistent current account deficit in terms of: (HL only)
- exchange rates
- interest rates
- foreign ownership of domestic assets
- debt
- credit ratings
- demand management
- economic growth
- Methods to correct a persistent current account deficit (HL only)
- Expenditure switching
- Expenditure reducing
- Supply-side policies
- Effectiveness of measures to correct a persistent current account deficit (HL only)
- The Marshall-Lerner condition and the J-curve effect (HL only)
- Implications of a persistent current account surplus in terms of (HL only):
- domestic consumption and investment
- exchange rates
- inflation
- employment
- export competitiveness
4.7 Sustainable development
- The meaning of sustainable development
- SDGs
- Relationship between sustainability and poverty (HL only)
4.8 Measuring development
- The multidimensional nature of economic development
- Single indicators
- GDP/GNI per person (per capita) at PPP
- Health and education indicators
- Economic/social inequality indicators
- Energy indicators
- Environmental indicators
- Composite indicators
- Human Development Index (HDI)
- Gender Inequality Index (GII)
- Inequality adjusted Human Development Index (IHDI)
- Happy Planet Index
- Strengths and limitations of approaches to measuring economic development
- Possible relationship between economic growth and economic development
4.9 Barriers to economic growth and/or economic development
- Poverty traps/poverty cycles
- Economic barriers
- Political and social barriers
- Significance of different barriers to economic growth and/or economic development
4.10 Economic growth and/or economic development strategies
- Strategies to promote economic growth and/or economic development
- Trade strategies
- Diversification
- Social enterprise
- Market-based policies
- Interventionist policies
- Provision of merit goods
- Inward foreign direct investment
- Foreign aid
- Multilateral development assistance
- Institutional change
- Strengths and limitations of strategies for promoting economic growth and economic development
- Strengths and limitations of government intervention versus market-oriented approaches to achieving economic growth and economic development
- Progress toward meeting selected Sustainable Development Goals in the context of two or more countries
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