Endorsed by

University of Cambridge International Examinations

Economics
Robert Dransfield
Terry Cook
for
IGCSE
Jane King

Sample pages
Sample
Introduction
Nelson Thornes are proud to present you with a sample section of our new title, Economics
for IGCSE. Economics for IGCSE has been endorsed by University of Cambridge International
Examinations.

This completely new text follows on from our Cambridge endorsed Business Studies for IGCSE
and the Science series, using all of the best features while catering for the specific requirements
of international schools following the Cambridge 0455 Economics syllabus. Having been planned
and reviewed by Cambridge IGCSE Principal and Senior Examiners, the content is presented in a
clear, concise visual manner.

Key features of Nelson Thornes Economics for IGCSE

Double-page spread features
Ǧ Learning outcomes are clearly stated at the start of each spread.
Ǧ Exam Tips – notes written by Cambridge IGCSE Principal and Senior Examiners to help students
overcome common errors and misconceptions.
Ǧ Did you know? – features that use contexts relevant to international school students.
Ǧ Practical Activities allow students to take an active approach to the study of Economics.
Ǧ Case Studies – accompanied by questions, these short contextualised scenarios are directly linked to
topics in the text to improve understanding. Additional, longer case studies are also provided at the end
of the book.
Ǧ Summary questions – test and consolidate students’ learning.
Ǧ Key points at the end of the spread relate directly to the learning objectives and highlight the key
information students need to understand.
Ǧ Content is supplemented by tables and diagrams that present information in a visual manner.

Additional book features

Ǧ End-of-unit question spreads – Each chapter concludes with a double page spread of questions,
consisting of a balance exam-style questions from each paper. These have been written by Cambridge
IGCSE Principal and Senior Examiners.
Ǧ Glossary of command terms to help students familiarise themselves with terms they will meet in the
exams.
Ǧ Glossary of terms provides clear definitions for students.
Ǧ Fully indexed to help navigate the text

Author credentials
Rob Dransfield has taught Business Studies in schools, further education colleges and
universities. He currently works at Nottingham Trent University where his role involves teacher
training. He has written many Business Studies books and has contributed to both conferences
and journals in areas related to business education.
Terry Cook has been an examiner with the University of Cambridge since 1979 and is currently
a Principal Examiner in IGCSE Economics Papers 2 & 3. He has been involved in the IGCSE
qualification since its introduction in 1988. Terry has run training courses for Cambridge in IGCSE,
O Level and A Level Economics all over the world as well as remotely through the internet. He has
recently assumed responsibility for the coordination of the CIE Economics Discussion Forum.
Jane King has over 16 years’ experience as a teacher of Business Studies and Economics and is
currently head of Business Studies and Economics at an independent girls’ school. She is a Senior
Examiner with extensive experience on both the Cambridge IGCSE and A Level Business Studies
papers. Jane has travelled worldwide undertaking consultancy work for Cambridge. Experiences in
countries as diverse as Zambia, Pakistan and the Maldives, have contributed to the materials for
Business Studies for IGCSE.

i
Contents

How to use the practice exam questions iv 3.10 Motives for spending, saving and
borrowing 64
Unit 1 The basic economic problem: 3.11 Income and expenditure patterns 66
choice and the allocation Practice exam questions 68
of resources
Unit introduction 1 Unit 4 The private firm
1.1 The economic problem 2 Unit introduction 71
1.2 Factors of production 4 4.1 Sole proprietors and partnerships 72
1.3 Opportunity cost 6 4.2 Private companies 74
1.4 Opportunity cost in action 8 4.3 Public companies 76
Practice exam questions 10 4.4 Multinationals 78
4.5 Cooperatives 80
Unit 2 Allocating resources: the market 4.6 Public corporations 82
at work and market failure 4.7 Effects of changes on business
Unit introduction 13 growth 84
2.1 Allocating resources in an economy 14 4.8 The demand for factors
2.2 Demand 16 of production 86
2.3 Supply 18 4.9 Fixed and variable costs 88
2.4 Equilibrium price 20 4.10 Total and average costs 90
2.5 Causes of changes in demand and 4.11 Output and costs 92
the effect on the market 22 4.12 Total and average revenue 94
2.6 Causes of changes in supply and 4.13 Profit maximisation 96
the effect on the market 24 4.14 Price and output in perfect
2.7 Price elasticity of demand 26 competition 98
2.8 Price elasticity of supply 28 4.15 Pricing and output policies
2.9 Usefulness of price elasticity in monopoly 100
of demand 30 4.16 Different sizes of firms 102
2.10 Merits of the market system 32 4.17 Different forms of integration 104
2.11 Market failure 34 4.18 Economies and diseconomies of scale 106
2.12 Private and social costs and benefits 36 4.19 Advantages and disadvantages
2.13 Conflict between private and social of monopoly 108
interests 38 Practice exam questions 110
Practice exam questions 40
Unit 5 The role of government in an
Unit 3 The individual as producer, economy
consumer and borrower Unit introduction 113
Unit introduction 43 5.1 The government as a producer
3.1 The functions of money 44 and employer 114
3.2 Commercial banks 46 5.2 Government policy: full employment 116
3.3 Central banks 48 5.3 Government policy: price stability 118
3.4 Stock exchanges 50 5.4 Government policy: economic growth 120
3.5 Choice of occupation 52 5.5 Government policy: redistribution
3.6 Changes in earnings over time for of income 122
an individual 54 5.6 Government policy: balance of
3.7 Differences in earnings between payments stability 124
occupations 1 56 5.7 Conflicts between government aims 126
Differences in earnings between 5.8 Types of taxation 128
occupations 2 58 5.9 Government influence on private
3.8 Trade unions 60 producers: regulation 130
3.9 Specialisation 62

ii
 Contents

5.10 Government influence on private 7.6 The effect of changing size of

producers: subsidy 132 population on an economy 176
5.11 Government influence on private 7.7 Changes in population structure and its
producers: taxes 134 effect on an economy 178
Practice exam questions 136 7.8 Living standards 1: differences
within countries 180
Unit 6 Economic indicators Living standards 2: differences
Unit introduction 139 between countries 182
6.1 The Retail Price Index 140 Practice exam questions 184
6.2 Causes of inflation 144
6.3 Consequences of inflation 146 Unit 8 International aspects
6.4 Patterns and levels of employment 148 Unit introduction 185
6.5 Causes of unemployment 152 8.1 Benefits and disadvantages of
6.6 Consequences of unemployment 154 specialisation 186
6.7 Gross Domestic Product 156 8.2 The current account of the
6.8 Comparing living standards 158 balance of payments 188
Practice exam questions 162 8.3 Exchange rates 190
8.4 Causes of exchange rate
Unit 7 Developed and developing fluctuations 192
economies 8.5 Consequences of exchange
Unit introduction 165 rate fluctuations 194
7.1 What is development? 166 8.6 Methods of protection 196
7.2 Policies to reduce poverty 168 8.7 The merits of free trade 198
7.3 Factors that affect population 8.8 The merits of protection 200
growth 170 Practice exam questions 204
7.4 Reasons for different rates of
Glossary 205
population growth 172
7.5 Problems of population change 174 Index 210

iii
6 Economic indicators

Unit 6 explains how economic indicators provide good measures of

major changes taking place in economies, showing how quickly an
economy is growing and indicating possible problems, such as rising
prices and unemployment.
The unit explains how indicators such as the Retail Price Index are
used to decide policies, such as setting the rate of interest, and
points out that businesses and trade unions use these as a basis for
setting wage increases. Reference is made to charts that show how
governments use indicators, such as numbers employed, as a basis
for devising policies that will attempt to create jobs.
The material in Unit 6 also shows how some indicators, such as Gross
Domestic Product and the Human Development Index, move in the
same direction as the economy, while others, such as unemployment,
move in the opposite direction to the economy.

LEARNING OUTCOMES

With regard to prices, candidates should be able to:

• describe how the Retail Price Index is calculated
• discuss causes and consequences of inflation.

With regard to employment, candidates should be able to:

• describe changing patterns and levels of employment
• discuss causes and consequences of unemployment.

With regard to output, candidates should be able to:

• define Gross Domestic Product (GDP)
• describe simple measures and indicators of comparative
living standards, such as GDP per head, and the Human
Development Index (HDI).

139
 6.1 The Retail Price Index

Average prices are measured by governments using the Retail

LEARNING OUTCOMES
Price Index (RPI) or the Consumer Price Index (CPI). This index
With regard to prices, measures changes in average prices over a year. Measurements are
candidates should be able to: made by recording prices of goods and services that most people
will be expected to buy, or put in an imaginary shopping basket.
• describe how the Retail Price Government statisticians decide what goods to include in this
Index is calculated. basket. This list should be updated to take account of changing
spending patterns.
Most governments measure prices in similar ways. This unit uses
the example of Kenya. The examples show some of the difficulties
involved in accurately measuring average price changes.

A basket of goods
The imaginary shopping basket for a typical family in Kenya contains,
for example, milk, bottled water, sugar, tea, meat, cooking fuel,
school books and mobile phone charges. The contents included in
the basket are fixed in the short term, but the prices of individual
goods change.

Shopping in a supermarket in Kenya. The

Consumer Price Index (CPI) measures general
increases in the prices of a basket of goods.
Changes in food prices are particularly
important in Kenya as this is the largest item
of household expenditure (and how these
prices change over time).

DID YOU KNOW?

Food prices (especially for
rice, maize, flour and coffee)
have a prominent weighting
in the price index in Kenya.
When they rise, this will have
a major impact on inflation as
measured by the price index. Figure 6.1.1 A helpful way of thinking about the price index is to imagine the
contents of a shopping basket bought by a typical household

140
A price index uses a single number to indicate changes in prices of a
number of different goods. This is calculated by comparing the price of EXAM TIP
buying the basket of goods with a starting period, called the base year.
The base year is given a figure of 100. So if the average price of goods in The examination may
the basket today is 10 per cent higher than the base year, the price index require you to define
will be 110. Changes in average prices (the cost of the basket of goods) inflation, so make sure
can be measured on a monthly, quarterly or annual basis. you are able to give
Inflation
a full and accurate
definition.
Inflation is a persistent or sustained rise in the general level of prices
over a period of time. So not every price will rise, but average prices
will. The effect of this rise on ordinary people will vary, depending on
what they buy.
Price inflation in Kenya is measured by the Kenya National Bureau of
Statistics (KNBS). One of its responsibilities is to decide on the 221 goods
and services to be included in the price index, or ‘basket’. The selection
is made after carrying out a survey of spending patterns – that is, what
most people in Kenya are buying. From time to time the items in the
basket will change: in 2010 the basket was ‘widened’ to include internet
DID YOU KNOW?
charges, computers and primary and secondary school transport fees.
The ‘average annual’ rate of
Statistics covering the prices of all items in the CPI are gathered each
inflation is computed as a
month in 10 areas of the capital, Nairobi, and 15 other price collection
percentage change of a twelve-
zones across Kenya selected for their high expenditure levels.
month average of the CPI. The
Weighting ‘year-on-year’ inflation rate
is calculated as a percentage
The weighting is a figure given to a category of goods according to change of the CPI between the
the percentage of a typical household’s income that is spent on it. current month (e.g. April 2011)
Statisticians have found that typical families in Kenya spend 40 per and the same month a year
cent of their income on food, so this is given a weighting of 40 per ago (e.g. April 2010).
cent in the price index.

CASE STUDY Rising inflation in Kenya

In 2008, inflation rose sharply in Kenya, largely as a result of rising

food prices. The overall annual average inflation was 26.2 per cent,
compared to 9.8 per cent in 2007. The main causes of this were:
• an increase in average food prices of 37.5 per cent
• an increase in average oil prices of 18 per cent.
DID YOU KNOW?
Questions From time to time, weighting
1 What effect do you think that a rate of inflation of 26.2 per of items in the basket needs
cent is likely to have on people in Kenya? to be adjusted. For example,
more frequent use of mobile
2 Why do you think that changes in food prices are so phones in Kenya between
important to people living in Kenya? 1993–4 and 2005–6 meant
3 Are some Kenyans likely to have been more affected than that the weight attached to
others by the high inflation figure? Explain how. spending on mobile phone use
was increased from 5.75 to
4 Suggest a way of measuring inflation in Kenya. 12.7 per cent.

141
 Calculating average price changes
Calculating average price changes will give the rate of inflation. The
calculation involves two sets of data:
• The price data (collected each month).
• The weights (representing patterns of spending, updated each
year).
Category Percentage Weight With this data it is possible to construct a weighted price index.
spend A consumer spending survey has been carried out that shows the
percentage spend of typical households in an imaginary country. The
Food 40 4
table on the left shows how the percentage spend forms the basis of
Clothing 20 2 the weighting given to the categories.
Transport 10 1
The next stage is to identify price changes in each of these product
Other 30 3 categories. Let us suppose that surveys carried out in supermarkets,
household shops and other retail outlets across the country show the following
goods changes since the base year:
Total 100 10 • Food prices have increased by 20 per cent.
The weighting for food is twice that for • Clothing has increased by 10 per cent.
clothing because typical households spend
• Transport has fallen by 10 per cent.
twice as much on food as on clothes
• Other household goods have increased by 30 per cent.
To find out the average change in price we need to take account
of each of these price changes in terms of how much consumers
spend on that item (the weight). For example, the increase in food
prices of 20 per cent will have a major impact on average prices
because 40 per cent of household income is spent on food. In
contrast, even though transport prices have fallen by 10 per cent, this
will have a smaller impact on average prices because consumers only
spend a tenth of their income on transport.
To create a weighted price index we need to multiply the weight
for each item by the price index for that item. This is shown in the
EXAM TIP table below.

Make sure you Product category Weight price index Weighted price index
understand this Food 4 × 120 = 480
difference: the price Clothing 2 × 110 = 220
index shows how much Transport 1 × 90 = 90
the price of that item
Other goods 3 × 130 = 390
has risen by compared
with a base year of 100; Total 1180
the weighted price inde
x Finally, divide the weighted price index by the total number of
shows the price index
times the weight attach weights:
ed 1180
to the product category
. = 118
10
This shows that prices have risen on average by 18 per cent (i.e. from
the base year figure of 100 to 118 in the new year).

142
Problems involved in using a price index
The price index is designed to show general increases in prices and
how they affect consumers. There can be some problems, however,
with its use as an indicator:
• The index does not necessarily show how price changes affect
DID YOU KNOW?
typical consumers. For example, in Kenya the weighting attached
to food in the index was reduced from 50 per cent to 40 per cent. In Kenya separate indexes are
However, food purchases for a poor person in Kenya may make up calculated for low-income
80 per cent or more of their spending. households and medium- to
• The index makes comparisons with a base year. However, if prices high-income households in
were low at the base year, the comparison may exaggerate the recognition of the way that
price rise. If prices were high at the base year, the index comparison they purchase different baskets
may suggest that subsequent price changes have been low of goods each week.
(especially if the base year is at the top or bottom of the trade cycle
fluctuation).
• Some items, for example fuel and food, are subject to quite a lot of
variation.
For indicators to provide useful information, it is essential that the
statistics gathered are accurate.

ACTIVITY KEY POINTS

Working in a group, find out the monthly inflation rate of your 1 Inflation is a persistent or
country, or a large country in your part of the world. You should sustained rise in the general
find this information published each month by your national level of prices over a period
statistical office. With your teacher’s help, try to find the rate of time.
on the internet or in a national newspaper. Plot the current rate
2 A price index can be used to
on a large chart and display this in your classroom to monitor
measure price increases by
ongoing changes. Then try to find the inflation rate of another
reducing prices to a single
country and compare it with your own.
number starting at 100 in a
base year.
3 The price index measures
changes in an average
SUMMARY QUESTIONS
basket of goods bought by a
typical consumer or family.
1 What items are likely to be included in a basket of goods
bought by a typical consumer in your country? Which 4 Weighting items in the
categories of items should be given the greatest weights? basket makes it possible to
take account of the relative
2 What two sets of data are required to calculate a CPI?
importance of spending
3 Why is it necessary periodically to alter the list of items on different items when
included in a country’s ‘shopping basket’ of items included in measuring average price
the CPI? changes.

143
 6.2 Causes of inflation

LEARNING OUTCOMES Causes of inflation

A cause is a factor that has an effect on something else. For example,
With regard to prices,
a cause of inflation might be that people increase the amount of
candidates should be able to:
money they spend. The effect might be an increase in prices.
• discuss causes of inflation.
Inflation is usually the result of a number of causes. It may occur
when a number of prices rise at the same time, say for oil, food and
housing or rented accommodation.
In examining inflation, economists distinguish between cost-push
and demand-pull factors. These are explained below.

Cost-push factors
Cost-push refers to the costs that a business has to meet, such as wages
and raw materials. As costs rise, the business will often pass these on to
consumers by increasing the prices for the product they are selling.

Food costs
In the previous Unit we saw that 40 per cent of the weighting in
Kenya’s Consumer Price Index (CPI) is allocated to food. In the years
Rising oil and energy costs are a major cause
of cost-push inflation that affects many 2000–10 the food supply in Kenya has been badly affected by
businesses across an economy droughts in the north of the country.
At the same time, the price of basic foodstuffs, including the price
of cereal crops on global markets, has been increasing. There is
increased competition for cereal crops as a result of the growth of
huge economies like China and India, and also as a result of cereals
being used as alternative biofuels. Whatever the cause, high food
prices lead to higher costs for other businesses.

Raw material costs

Despite the world recession in 2008 and 2009, the costs of raw
materials such as steel, copper, oil and gas have risen. These raw
materials are at the centre of modern economies, so as their prices
rise, there is an effect on many other prices.
EXAM TIP
Wage costs
In the examination, Wage costs are another major cause of cost-push inflation. If
you need to show that food and fuel prices rise for workers in Kenya, they will press their
you understand that employers for higher wages. If, however, the wage increase is not
inflation can be the matched by higher labour productivity, in other words, if the workers
result of more than on do not produce more goods to sell, production costs will rise.
e
cause.
Land costs
Land prices in many countries have risen as land is used more
intensively. For example, the Ethiopian government has granted

144
long-term leases to overseas companies to use land for large-
scale agricultural production of grain and other crops. Land is
also increasingly being used for housing as the world population
increases. This leads to land price inflation.

Exchange rate costs

Changes in the exchange rate between currencies can have a major
impact on business costs. For example, if the Kenyan Shilling (KES)
loses value against the South African Rand (ZAR), people will have to
pay more for imported goods, oil and food from South Africa.

Demand-pull inflation
Demand-pull inflation occurs when rising demand pushes up the
price of goods. This happens when people have more to spend.
This is most likely when an economy is near to full employment.
Businesses compete for resources and this will lead to a rise in prices.

CASE STUDY Monetary inflation

Monetary inflation provides a good explanation of demand-pull

inflation. It illustrates clearly the impact of economic indicators KEY POINTS
on the economy.
1 Causes of inflation can be
The idea of monetary inflation is not new. One of the best split into cost-push and
explanations was provided by the American economist Milton demand-pull factors.
Friedman in the book he wrote with Anna Schwartz, A Monetary
2 Rising costs include
History of the United States, 1867–1960, published in 1971.
agricultural prices, raw
Friedman and Schwartz argued that if governments increase the material costs, labour costs
quantity of money, there is more to spend on new goods. If, and weakening exchange
however, there are not enough goods being produced for the rates.
people who want to buy them, manufacturers will be able to
3 Demand-pull occurs when
put up prices. The authors concluded that price levels are linked
demand increases and is
to the quantity of money available. In their words, ‘inflation is
usually associated with
always and everywhere a monetary phenomenon.’
monetary inflation.
This work was published in 1971 and became a model of good
practice in using detailed statistical analysis over a long period
(in this case in the US) to make the link between prices and the SUMMARY QUESTIONS
quantity of money.
1 Define cost-push inflation,
Questions explaining one type of cost-
1 What connection did Friedman and Schwartz identify between push inflation.
the quantity of money and the level of prices? 2 How is an increase in the
2 What statistics did the authors study and use to make their quantity of money in the
claim? economy likely to affect price
levels?
3 How can monetary inflation also be described as demand-pull
inflation? 3 When the exchange value
of a country’s currency falls,
4 With what economic indicators was Milton Friedman primarily how is this likely to impact
concerned? on import prices?

145
 6.3 Consequences
of inflation

Inflation is a sustained rise in the general level of prices. Mild

LEARNING OUTCOMES
inflation of one or two per cent is not particularly harmful because it
With regard to prices, encourages producers to supply more to the market. When inflation
candidates should be able to: rises more quickly it can disrupt economic decision-making because
it becomes difficult for businesses, governments and even ordinary
• discuss consequences of people to make plans. Inflation results in a loss of value of units of
inflation. currency. The reverse of inflation is deflation, when prices start to
fall. Deflation (negative inflation) discourages businesses, who may
restrict supply to markets.
There are many historical examples of rapid inflation. When prices
rise rapidly governments are often tempted to print more money.
Where the quantity of money increases, people lose confidence in
it and businesses push up prices because they see money as being
less valuable. The government is forced to print more money, but
it becomes worthless. In the first decade of the 21st century, the
government of Zimbabwe printed so much money that citizens
started exchanging goods and services rather than use money to
make payments.
The table below shows how inflation affects people in different
circumstances.
Maize grain is a major staple food in many
countries. An increase in the price of maize Income level Effect of inflation
and other food staples can have a major
impact on the livelihoods of the poorer Low income They can afford fewer goods, including basic
members of society necessities. People resort to buying the lowest-
priced products available.
Fixed income There is a fall in real income (what can be afforded
with money coming in). Because money loses value,
people on fixed incomes save less and spend more.
High income There is less income to spend on some luxury items.
People may, therefore, switch to cheaper alternatives
and cut back on some extravagant purchases. They
may save less and spend more.

DID YOU KNOW?

Who loses out in a period of inflation?
Deflation can be as harmful
The poor
as rapidly rising prices. When
prices are falling business Poor people are the first to suffer in times of inflation. For example,
income from sales falls. in Kenya, an important part of people’s diet is maize grain. In recent
Businesses become reluctant years there have been several droughts, reducing the supply, and so
to invest and they reduce the raising the price of maize. Drought has hit Kenya every two or three
numbers of employees. years and this has forced the country to buy expensive imports to
meet its people’s needs. This has pushed up inflation.

146
People on fixed incomes
People on fixed incomes are those whose incomes remain the same, or EXAM TIP
nearly the same, during periods of inflation. They may be poorly paid
workers who are not in a trade union, or pensioners. Workers who are Make it clear in the
unskilled and so have less bargaining power, such as office cleaners examination that
and car park attendants, also suffer in times of inflation. Skilled workers you understand that
in well-paid jobs may be able to bargain with their employers to receive inflation can have
wage increases. This is often the case for people who work for the varying effects on
government: civil servants, teachers, the police and armed forces. different groups of peop
le
in an economy.
Savers
Many people like to save some money each month for future needs.
Their savings may be deposited in a bank or kept in a safe place.
However, during a period of inflation savings lose their value. When
the money comes to be spent it is not worth as much as when it was
first saved. Similarly, money saved in a pension scheme can lose value KEY POINTS
by the time the saver becomes old enough to draw on it. 1 In a period of inflation the
economy becomes less
Businesses
stable. Groups such as the
A lot of business activity involves supplying goods on credit, perhaps poor and those on fixed
to other businesses. Payment may be required one month, three incomes suffer most.
months or six months later. When money starts to lose value quickly,
2 Rapidly rising prices can
businesses become reluctant to supply on credit. Therefore, inflation
quickly destroy business
is very harmful to business activity.
confidence and the
In contrast, people who borrow money in a period of inflation willingness of business
are likely to gain. When they come to pay back the sum they have people to supply goods on
borrowed, the value of their repayment will have fallen. credit.
3 A mild level of inflation can
Mild inflation have a positive effect on
As mentioned above, a small level of inflation is not necessarily a business confidence.
bad thing. Gently rising prices encourage businesses to supply more
to the market and help to increase profits. In fact Milton Friedman
argued that the government should increase the quantity of money.
SUMMARY QUESTIONS
However, this should be done in a planned way that anticipates
growth in production in the economy. 1 Which two of the following
groups would suffer least in
Deflation a period of high inflation?
Deflation refers to a general fall in the level of prices. Typically, this Savers, pensioners, poor
will occur when there is a general fall in demand for goods – for households, employees
example, if people are spending less through uncertainties over whose skills are in great
rising unemployment. This is likely to be harmful to the economy as demand, borrowers, or the
businesses will start to lay off workers and reduce levels of production. government? Explain your
answers.
ACTIVITY 2 Explain why a period of very
Argentina and Turkey have both experienced rapid inflation. mild inflation may not be
Carry out some internet research to find out when these periods harmful for an economy.
of inflation occurred and how the governments in the two 3 Explain why high inflation
countries managed to stabilise prices. Try to find out what can be damaging for long-
caused the inflation in these countries. term business planning.

147
 6.4 Patterns and levels
of employment

LEARNING OUTCOMES Employment

Employment is the work that people do in an economy. Over time,
With regard to employment,
patterns of employment change: some industries go into decline and
candidates should be able to:
jobs disappear while new types of industries and jobs develop.
• describe changing patterns
Government statistics provide indicators showing what jobs people do
and levels of employment.
and how many are employed. These are important for governments.
(Ideally everyone who wants a job should be able to find work that
meets their own needs, as well as the needs of the economy as a whole.)

CASE STUDY Labour force indicators in the UK

The table below presents a picture of employment in the UK from

May to July 2009.

All aged 16 and Total in employment Employment

over (thousands) (thousands) rate (%)
Men 24,109 15,461 64.1
Women 25,340 13,430 53.0
Source: Labour Force Survey

Skilled full-time workers producing modern The table is extracted from data in the Labour Force Survey. It
products are best placed to earn high wages shows that out of a possible 50 million people in the UK over 16,
and to help an economy to grow
about 29 million are in work. The employment rate among men
is higher than among women.
The survey also shows the breakdown of employment by age
structure. For example, almost 11 million jobs are held by people
in the age category 35–49. Over 80 per cent of people in this age
category are employed, compared with only 25 per cent for the
age category 16–17.
There are over 18 million people in full-time jobs, 6.5 million
doing part-time jobs and almost 4 million people who are self-
employed (i.e. working for themselves, perhaps running a small
DID YOU KNOW? enterprise).
Core workers are at the heart There are 23 million people working in the private sector, while
of an organisation. They have just over 6 million people work in the public sector.
full-time well paid jobs. Their
work is supported by a more Questions
flexible labour force of part-
time and temporary contract 1 What reasons would you put forward to explain why only 29
workers. Terms of employment, million people aged over 16 are working in the UK? What will
such as wage rates and job the others be doing?
security, are less good for 2 What is meant by the employment rate? Why do you think that
contract workers. the employment rate is higher among men than among women?

148
 3 What is the difference between the public and private sectors? Type of
Who pays employees in these two sectors? employee

4 Why is the self-employed sector of the economy likely to be Full time Very important to
important for the future development of the UK economy? (core the economy. They
workers) may work for the
same employer for a
The table (right) shows the different status of employees in a workforce. number of years and
develop increased
Participation rates knowledge and skills,
enabling them to
The number of people available to work in an economy depends on:
produce high-quality
• the number within the working age range products for the
• the number within that age range who are prepared to participate economy.
in work. This is the participation rate. Part time Able to combine
number who are prepared to work work with other
participation rate = commitments, such as
number within working age range
bringing up a family.
Participation rates vary from country to country, depending on
Self- Work for themselves.
various factors:
employed The businesses they set
• Social attitudes: in some countries it is acceptable for women to go up may take on others
out to work. In others they may be expected to stay at home and and grow to become
focus on looking after their children and the home. major employers in the
• Number going to school and university. future.
• Age at which people stop work and retire. Employed Work for someone
• Facilities available to enable groups to work. In some countries, workers else (e.g. large
shops, offices and industrial premises are adapted to enable people businesses or the
with disabilities to participate in work. government).
Private Work for businesses.
The industrial structure sector Most employees
workers in developed
Another way of examining patterns of employment is to look at the
economies, such
industrial structure of the economy.
as the US, UK or
The table below gives some statistics from the UK, from June 2009: Germany, work for
jobs are divided into 14 categories (A–O), using a classification large companies,
known as the Standard Industrial Classification. some of which
employ thousands of
Job Category Number workers.
All jobs (A–O) 30,997 Public Employed by the
Agriculture, forestry and fishing A–B 488 sector government, for
Mining, energy and water supply C–E 191 workers example, in the Civil
Service. In India the
Manufacturing D 2,885 biggest employer is
Construction F 2,170 the government-run
Distribution, hotels and restaurants G–H 6,816 Indian Railways.
Transport and communications I 1,854 Skilled Have developed skills
employees through training and
Finance and business services J–K 6,409 practice. Typically,
Education, health and public administration L–N 8,193 they are relatively well
Other services O 1,991 paid compared with
unskilled workers.
Total services G–O 25,263

149
 By studying the chart opposite, you should be able to see that most
DID YOU KNOW?
jobs in the UK are in service occupations.
In many countries, tourism is a
The industrial structure is split into three main areas:
major provider of employment
that swells the size of the tertiary • Extractive (primary industry)
industry. Hotel work, excursions • Manufacturing and construction (secondary industry)
and trips are all ‘services’.
• Services (tertiary industry)
These areas are outlined below.

Extractive industries
Extractive industries use natural resources. Examples include farming,
mining and drilling for sources of oil. Farmers grow and harvest
crops and farm livestock, miners take out, or extract, fuel and
minerals from the ground. Extractive industries sometimes produce
raw materials like iron ore (for making steel) and oil (for making
petrol, plastics, fibres, and so on). Some primary products can be
sold direct to consumers, for example fish and oranges sold by a
grower at the farm gate.

Manufacturing and construction industries

Manufacturing and construction industries use raw materials and
parts from other industries to make and assemble new products,
such as chocolate, furniture, cars and oil rigs. House, factory and
bridge building are examples of construction industries. Semi-
manufactured refers to goods that are partly made and will need
further processing by manufacturing industries.

Service industries
ACTIVITY
Service industries are particularly important in the modern world.
Societies have developed in Services give something of value to people, but are not physical
three stages, sometimes also goods. Examples of services are being served in a restaurant, or
called ‘waves’. Group the having a bank look after your money for you. Society has gone
following activities under the through three waves of development. In modern third wave societies
headings of primary, secondary services dominate employment in advanced economies.
and tertiary industry.
In the first stage, countries are dominated by agriculture and
Cinema Sign farming. This is still the case for many developing countries, such as
attendant Electrician writing such as Côte D’Ivoire and Ghana in West Africa, where over 90 per
Building cent of the population live in rural areas.
Cloth Coal Laundry
making mining In the second stage, countries are dominated by manufacturing,
Fire Book Civil when industries such as coal, steel, car manufacture and engineering
fighting publishing service become important.
Selling Oil In the third stage, services become the most important sector of the
lottery tickets Banking
drilling economy, with many people working in insurance, banking, leisure
Key Public entertainment, tourism and hotels. This can lead to countries being
Food Fishing
manufacture cutting
transport highly developed in some areas, while still having districts where
Food people live in considerable poverty.
Retailing selling
In modern, third-wave societies, computers and robotised machinery
have replaced many manufacturing jobs.

150
 CASE STUDY Employment by major industry sector in the US ACTIVITY

The US is frequently given as an example of a third-wave society. Find statistics for your own
The following data is drawn from information provided by the economy to find out how
US Bureau of Labour Statistics. It shows percentages of people the working population (i.e.
employed in the three sectors. The table includes a prediction for people who are of working
the future. age) is distributed between
primary, secondary and tertiary
1996 (%) 2006 (%) 2016 (%) occupations. You will need
Primary industry 2.4 1.8 1.6 to examine statistics from
Secondary industry 16.9 14.5 12.7 the government department
responsible for collecting
Tertiary industry 81.7 83.7 85.7 employment statistics. Obtain
Source: US Bureau of Labour Statistics some information from the past
five years so that you can see
Questions the trends in the three sectors.
1 Describe the key trends that are taking place in the data.
2 Why do you think that the figures for primary and secondary
industries show a decrease?
3 Do you think that the patterns of change from 1996 to 2016
are likely to continue?

The data shown for the US is very different from Newly Industrialised
Countries (NICs). Brazil is a NIC and roughly 20 per cent of the
working population there is still engaged in agriculture and other
primary industries, and a further 15 per cent in manufacturing, with the
remainder working in services. In Ghana in West Africa, over half the
working population still works in primary industries, including cocoa
growing and other forms of small-scale agriculture. About 25 per cent of
Ghana’s population is engaged in services.
In all countries, the percentage of people employed in tertiary
industries tends to be higher in urban than in rural areas.

KEY POINTS SUMMARY QUESTIONS

1 The structure of employment 1 Explain the difference between the primary,

refers to the employment secondary and tertiary sectors of an economy.
rate, proportions of men and Give examples of industries that would fit into
women working, differences each sector.
between public and private
2 What is meant by the ‘participation rate’?
sector employment and other
What are the key factors influencing rates of
structural differences.
participation?
2 The structure of employment in
3 Between 1990 and 2005 the employee
an economy changes over time.
percentage working in manufacturing fell in these
3 As economies develop, the countries: Australia, Barbados, China, Colombia,
main change is an increasing Finland, France, Iceland, Ireland, Japan, Poland,
proportion of jobs in the Republic of Korea and the UK. Give four reasons
service sector. why you think this may have occurred.

151
 6.5 Causes of
unemployment

LEARNING OUTCOMES What is unemployment?

As we have seen, employment usually refers to the use and payment
With regard to employment,
of labour. Unemployment typically occurs when people who want to
candidates should be able to:
work are not able to find jobs.
• discuss causes of
unemployment.
Measuring unemployment
The International Labour Organization (ILO), an agency of the United
Nations, defines unemployed people as those who are:
• without a job, but who want a job and have actively sought work
in the last four weeks and are available to start work in the next
two weeks
• out of work, have found a job and are waiting to start it in the next
two weeks.
There are two major statistics to look at when examining unemployment:
1 The total number of unemployed people in an economy. Is this
Machines taking jobs away from humans is rising or falling over time?
an example of technological unemployment
2 The unemployment rate. This rate measures the percentage of the
working population who are unemployed. Note that the ‘working
population’ consists of those with jobs as well as those who are
unemployed. Is this rate rising or falling over time?

What causes unemployment?

Unemployment and inflation are two of the most serious economic
problems. It is not surprising that governments pay so much
attention to indicators that measure unemployment.
Unemployment is caused by a range of factors, some of which are
ACTIVITY
more harmful than others in that they affect more people and have
Identify the current rate of a longer-term impact on the economy. Figure 6.5.1 shows the range
unemployment in your country. of unemployment types: the factors that cause them are explained in
How does this compare with the next paragraphs.
figures for your region and for
the world? Study news reports Less serious More serious
(shorter term, (longer term,
to get the figures for your affecting fewer people) affecting more people)
country. Do newspaper reports
suggest any of the causes for
unemployment? As a group,
collect monthly statistics for
Temporary Seasonal Technological Frictional Structural Cyclical
unemployment in your country
and display these on a poster in Figure 6.5.1 Types of unemployment
your classroom.

152
Temporary unemployment
Temporary unemployment is short term, occurring usually while
people are leaving one job to go to another, or perhaps when they
are leaving school or university before going on to work.

Seasonal unemployment
Seasonal unemployment occurs in countries where there are distinct
DID YOU KNOW?
seasons and harvest times. For part of the year there will be plenty of
jobs, such as harvesting sugar cane or picking fruit and vegetables. In In Mauritius the sugar cane
the rainy season or winter, fewer jobs will be available. harvest depends on weather
conditions. Once the hurricane
Technological unemployment season starts (usually in
New technology frequently replaces older methods that might have December) there are fewer
required more labour. For example, the use of tractors and giant available jobs in this industry.
harvesting equipment on modern farms has reduced the demand
for agricultural labour. Automatic bottling, canning and packaging
equipment has reduced the need for factory labour. However, new
technology also helps to create new jobs by leading to economic
growth. Computer technology has taken away the need for many
factory workers, but it has created new opportunities for office KEY POINTS
workers and people setting up small businesses from home.
1 ‘Unemployment’ refers to
Frictional unemployment people seeking work who
are unable to find a job.
Frictional unemployment occurs when the market system does not
work as smoothly as it should – as its name suggests, there are 2 Some of the causes of
frictions in it. This sort of unemployment occurs when there is a unemployment are more
mismatch between the demand for, and supply of, labour. This might serious and long term than
occur when employers are trying to recruit highly skilled construction others.
workers but too few workers have been trained with the skills required.
3 Structural and cyclical
Another cause of frictional unemployment might be search unemployment are the most
unemployment. This occurs when workers who have lost their deep-seated causes of long-
previous jobs are searching for new ones, but are unable to find them term unemployment.
because there is too little information about availability.

Structural unemployment
Structural unemployment arises when there are longer-term changes
in the economy, affecting specific industries, regions and occupations.
In the previous Unit we saw that one of the main structural changes SUMMARY QUESTIONS
in economies has been the move away from primary and secondary
industry to services. This has led to rural and urban poverty in areas 1 What type of unemployment
where agriculture and manufacturing industry are in decline. is caused by:
a the decline of an industry
Cyclical unemployment
b the end of the
On a larger scale, a major cause of unemployment across the agricultural harvest?
globe is cyclical unemployment, also called demand-deficient
unemployment. This is unemployment resulting from a substantial fall 2 What is the difference
in demand that affects the economy as a whole. between the level of
unemployment and the rate
Dealing with unemployment of unemployment?
Because there are many causes of unemployment, governments need 3 Why is structural
to identify cures, that is, policies to deal with them. These are shown unemployment likely to have
in Figure 6.5.1. The more serious the type of unemployment, the long-term consequences?
more it will cost the government to provide a cure.

Please see the full text for the remainder of this chapter.
153
Unit 6 Practice exam questions

SECTION 1: Multiple-choice questions

Each question has ONE correct answer. 6 What does the participation rate for workers
in an economy measure?
1 Which of the following is NOT usually used as
an indicator of the overall health of the whole a The total number of people of working
economy? age
a The level of unemployment b The percentage of people of working age
who are prepared to work
b The level of economic growth
c The percentage of workers who are in full-
c The level of retail sales
time jobs
d The level of inflation
d The number of retired people who
2 What is inflation? continue working
a An increase in the population of a country 7 Which of the following works in a secondary
b An increase in the value of a country’s industry?
currency a A school teacher
c An increase in a country’s interest rate
b A restaurant chef
d An increase in a country’s general level of
c A car factory worker
prices
d A mobile phone salesman
3 If the Retail Price Index at the start of 2006 is
100 and increases to 130 by the end of 2009, 8 Which of the following is a disadvantage
what is the average yearly inflation rate for of increasing rates of employment for the
the time period? population of a country?
a 10 per cent a Rising prices for goods and services
b 11 per cent b Rising wage rates
c 15 per cent c Rising levels of income
d 30 per cent d Falling level of benefit payments

4 Which of the following may be an advantage 9 Which economic indicator measures the total
of an increasing rate of inflation for the output of an economy?
population of a country? a Gross Domestic Product
a People who borrow money find that the b Human Development Index
real value of repayments falls c Gross Domestic Product per head
b People on fixed incomes find that their d Retail Price Index
spending power decreases
10 Which of the following is a problem with
c Poor people must pay higher prices for
using GDP to measure the total output of a
basic foodstuffs
country?
d People who save money find that the real
a Workers’ incomes are not equal
value of their savings have fallen
b Prices are different in different areas
5 Unemployment may cause a negative
‘multiplier effect’ because: c Some incomes are not reported
a People spend less so businesses close down d Higher earners pay more income tax
b People may claim welfare benefits
c People have out-of-date skills
d People suffer from low self-esteem

162
SECTION 2: Structured questions

Country A is a developing nation, whose 3 In the capital city of Country A, 30 per cent of
population, due to better health care, is now people are estimated as being unemployed.
growing at 10 per cent per year. There are two There are increasing numbers of jobs in
major cities and several large towns, but the secondary employment in new factories,
majority of the population live in rural areas and but people moving into the city do not
farm small areas of land. There is an increasing have appropriate skills, as they only have
trend for people to move to the cities, but there experience in primary farming occupations.
are not enough jobs, so many people end up a Why might it be difficult to measure the
living in poverty. The increasing population unemployment rate in the capital city of
is also putting pressure on resources. Gross Country A? (4)
Domestic Product (GDP) is only increasing at 2
b Explain the economic causes of
per cent yearly, causing average prices to rise by
unemployment of the people moving into
an average of 12 per cent per year.
the capital city of Country A. (6)
1 a Explain why ‘better health care’ may lead c Describe likely changes in the structure of
to an increase in population. (4) industry and types of occupation that will
b Country A’s government measures price be available to Country A’s population as
changes using a Retail Price Index. Explain it becomes more developed. (4)
how this is constructed. (6) d How might the government of Country A
c Using the information given, explain how decrease the level of unemployment in its
you would expect the measure of ‘GDP capital city? (6)
per head’ to have changed. (4)
4 The President of Country A has been quoted
d Discuss whether GDP might be an as saying ‘this increase in our population can
accurate way to measure living standards only be good for living standards in the long
in Country A. (6) run, as we will have more workers’.
2 The government of Country A is worried a Explain what is meant by ‘living
about the rising prices. The Minister of standards’. (3)
Finance is quoted as saying ’12 per cent b Explain the president’s view that
inflation per year is far too high’. ‘more workers will lead to better living
a Explain why the increasing population standards’. (3)
of Country A is causing prices to rise at c Apart from using GDP to measure output,
12 per cent per year. (A suitable diagram how might living standards in a country
may be used here.) (4) be measured? (6)
b Why are some types of products, such d Discuss which will be the most important
as basic foodstuffs, given a ‘prominent factors that will determine whether the
weighting’ in the Retail Price Index in President will be proved correct in his
Country A? (4) assumption. (8)
c Explain the effects of 12 per cent inflation Total: 80 marks
on the different population groups of
Country A. (6)
d Discuss why the RPI may not provide an
accurate measure of the level of price rises
suffered by all citizens in Country A. (6)

163
 SECTION 3: Analysis and critical evaluation

Country B is a developed nation, whose working population are

mainly employed in jobs in the tertiary sector. The country has
been suffering from an economic recession and the government
has reported the following indicators for the third quarter (three-
month period) of 2009:
• A fall in GDP of 0.2 per cent for this quarter, which is the sixth
successive quarter of falling GDP.
• A population which has increased by 408,000 to 61,383,000
from the previous year. This is noted to be due to ‘increase
in births, decrease in deaths and changing patterns of
international migration’.
• An unemployment rate of 7.8 per cent, having increased by
0.1 per cent over the quarter, indicating that unemployment is
still increasing but at a slower rate than in previous quarters.
However, there are ‘over one million employed and self-
employed people working part-time, as they are unable to
find a full-time job’.
• An inflation rate of 0.3 per cent as measured by the Retail
Price Index, or 1.9 per cent as measured by the Consumer Price
Index, the government’s preferred measure. It is noted that the
largest upward pressure on inflation is due to the rising price
of oil leading to increasing transport costs for businesses and
individuals.
1 a Explain what ‘A fall in GDP’ means. [2]
b Why might the government of Country B be worried by ‘six
successive quarters of falling GDP’? [2]
2 a ‘Most of the working population in Country B are employed
in the tertiary sector’. Give examples of one occupation in
each of the industrial sectors. [2]
b Explain ONE likely reason for the increase in employment in
the tertiary sector. [2]
3 Discuss whether ‘over one million people working part-time’
may benefit the economy of Country B. [5]
4 a Explain what is measured by the ‘HDI’ or Human
Development Index. [2]
b Discuss the benefits to an economist of using the HDI to
compare Country B with another country. [5]
5 Using a diagram and written explanation, show how ‘the rising
price of oil causes transport costs to increase’. [5]
6 Using all the information in the text, write an assessment of
the health of the economy of Country B. [7]
Total: 32 marks

164
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