CAPE ECON Study Guide 1.docx

CAPE ECON Study Guide 1.docx

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CAPEECONStudyGuide1

ForSelf-StudyandDistanceLearning

Thismaterialhasbeendevelopedfor

TheCaribbeanExaminationsCouncil®（CXC）

Copyright©2009CXC

Preparedby:

RogerHosein

Withcontributionsfrom:

SaceNarineandRebeccaGookool

TABLEOFCONTENTS

StudyGuides

Titles

Page

1

MODELSOFTHEMACROECONOMY（NATIONALINCOMEACCOUNTING）

1

2

MODELSOFTHEMACROECONOMY（CLASSICALMODELSOFTHEMACROECONOMY）

24

3

MACROECONOMICPROBLEMSANDPOLICIES（UNEMPLOYMENTANDINFLATION）

73

4

MACROECONOMICPROBLEMSANDPOLICIES（MONETARYANDFISCALTHEORIESANDPOLICIES）

96

5

GROWTH,SUSTAINABLEDEVELOPMENTANDGLOBALRELATIONS

137

INTRODUCTION

Purpose

TheCaribbeanExaminationsCouncil（CXC）,hasdevelopedSelf-StudyGuidesforanumberofCaribbeanSecondaryEducationCertificate（CSEC）andCaribbeanAdvancedProficiencyExamination（CAPE）subjects.ThemainpurposeoftheGuidesistoprovidebothin-schoolandout-of-schoolcandidateswithresourcematerialswhichshouldhelptheminpreparingforCXCexaminations.EachStudyGuideisstudentcenteredanditslanguageisstudentfriendly.

TheEconomicsUnit2courseisdesignedforpersonsovertheageofsixteenwhowishtofurthertheirstudies.Thecourseisequallyusefultopersonswhoarepursuingpart-timestudyandthoseenrolledfull-timeinaneducationalinstitution.

Youmayhavecompletedfiveyearsofsecondaryeducation,oryoumaybeamaturestudentwithworkexperience.Thecourseisbasedontheassumptionthatyouarealreadyabletodothefollowing:

1.interpret,accurately,materialintendedfortheinformedlay-person;

2.expresspersonalopinionsandfactualinformation,clearly,demonstratinglogicalsequencingandappropriateEnglishregistersuptotheleveloftheCSECGeneralProficiencyoritsequivalent.

CourseAims

Thecourseaimstoenablestudentsto:

1.promoteunderstandingofthebasicprinciplesandconceptsofeconomicswhichareacceptedinlargemeasurebyeconomistswhilerecognisingthatthefieldischangingcontinuously;

2.developanappreciationofthevariousmethodsusedbyeconomistsinanalysingeconomicproblems;

3.developanunderstandingoftheglobaleconomyandoftherelationshipsbetweenrichandpoornationswithrespecttointernationaltradeandfinanceandthemostimportantinternationalfinancialinstitutions;

4.encouragestudentstoapplyeconomicprinciples,theoriesandtoolstoeverydayeconomicproblems,forexample,inflation,unemployment,environmentaldegradation,sustainabledevelopmentandexchangerateinstabilityandtocontributemeaningfullytoanydialogueontheseissues;

5.encouragestudentstoapplyeconomictheorytothecriticalissueswhichaffectthesmallopenCaribbean-typeeconomy;

6.encouragestudentstoevaluatecontentiouseconomicissuessothatdecision-makingmaybeinformedbylogicalandcriticalthinking;

7.sensitizestudentstotheneedforethicalbehaviourintheconductofeconomictransactions.

CourseStructure

ThecourseconsistsoffiveStudyGuides,whichareallbasedontheCAPEEconomicsUnit2Syllabus.EachStudyGuideaddressestheskillsandcontentofaspecificModuleoftheSyllabus.TheModuleonwhichtheStudyGuideisbasedisalwaysindicatedatthebeginningoftheStudyGuide.However,thesequenceoftheStudyGuidesdoesnotmirrorthatofthesyllabusModulessincethesyllabusModulesarenotboundbyarigidsequence.Thesequenceoftopicsinthiscourseisdesignedtofacilitatestudybyleadingyouthroughtopicsinawaywhichwillenableyoutobuildonpreviouslylearntskills.

WhatResourcesWillYouNeed?

RememberthattheseStudyGuideswillnotbeallthatyouneedtocompletethesyllabusandprepareforyourexamination.Youareexpectedtomakeuseoftheresourceslistedattheendofthecoursebookaswellasengageinotherwide,generalreading,whichwillimproveyourgeneralknowledge,vocabularyandstructuralcompetence.

Youwillalsoneedbasicstudyequipment,forexample,paper,pens,pencils,andhighlightersformarkingimportantpartsofthetext.Agooddictionaryandathesaurusarealsoessentialtothisprogramme.

ManagingYourTime

Remembertoputasidespecialtimeeachdayforgeneralreadinginadditiontoyourstudytime.

StudyGuideStructure

EachStudyGuideisdividedintoeightsectionstofacilitateyourstudy,asindicatedbelow:

（i）

Introduction

ThisplaceswhatyouareabouttostudyinthecontextofyoureverydaylifeandrelatesittowhatyouhavedoneinpreviousStudyGuides.

（ii）

Content

ThisliststhetopicsthataretobecoveredintheStudyGuides.

（iii）

Objectives

ThesehelpyoutoidentifythespecificskillsthatyoushouldhaveacquiredbytheendoftheStudyGuide.YoushouldreadthesecarefullytoacquaintyourselfwithwhatyouaremeanttobelearningduringtheStudyGuide.

（iv）

Activities

Instructionsareprovidedatthestartofeachactivity.Readallinstructionscarefullybeforeyouattempttheactivity.Someactivitiesrequireyoutothinkaboutsomethingbeforeyoureadanyfurther.Youshouldtakethenecessarytimetodoso.Thethinkingactivityisdesignedtohelpyoufocusyourthoughtsinthedirectionwhichwillfacilitateyourabilitytocompletetheactivitiesthatfollow.

（v）

Feedback

Eachactivityhasafeedbacksectionthatallowsyoutodeterminehowwellyouhavedoneintheactivity.Ifyouhavenotcompletedtheactivitysuccessfully,youshouldre-readtheprecedingexamplesorinformationcarefully.

（vi）

Examples

Thesearemeanttoguideyoutoanunderstandingoftheconceptbeingtaught.Allexamplesshouldbereadcarefullybeforeyouattemptanyactivitiesthatfollow.

（vii）

EndTest

ThiscomesattheendofeachStudyGuideandisdesignedtoensurethatyouhaveacquiredthoseskillsidentifiedintheobjectives.ThereisafeedbacksectionfollowingtheEndTestwhichallowsyoutomeasuretheaccuracyofyouranswerstothetestsothatyouwillknowwhetherornotyouhaveacquiredthecompetencies.IftherearequestionsintheEndTestthatyouhavenotansweredsatisfactorily,ensurethatyoureturntotherelevantsectionoftheStudyGuideandreviewthoseareasuntilyouaresatisfiedthatyouhaveunderstoodtheconcept.

（viii）

KeyPoints

Thesesummarizeimportantconceptsthatyouneedtorememberandpayspecialattentiontoasyouworkthroughthecourse.

Assignments

Courseassignmentsareincludedinordertoallowyoutocheckyourprogressthroughthecourse.Theassignmentsenableyoutodetermineyourareasofweaknessandtocheckyourunderstandingoftheconcepts.

Examinations

Youmustensurethatyouhaveaccesstotheversionofthesyllabusthatoutlinesthestructureoftheexaminationfortheyearinwhichyouintendtowriteit.

STUDYGUIDE1

MODELSOFTHEMACROECONOMY

（NATIONALINCOMEACCOUNTING）

INTRODUCTION

WelcometotheCAPEEconomicsUnit2StudyGuide.WhiletheUnit1StudyGuidedealtwithmicro-economics,thisStudyGuidefocusesonmacro-economicissues.

Doyouknowthedifferencebetweenmicroandmacroeconomics?

TheWikipediaencyclopediastatesthatmicro-economicsis“thebranchofeconomicsthatstudieshowindividuals,householdsandfirmsmakedecisionstoallocatelimitedresources.”Macroeconomics,ontheotherhand,isthe‘thebranchofeconomicsthatdealswiththeperformance,structureandbehaviourofanationaloraregionaleconomyasawhole.”

ThisStudyGuidethereforeisdesignedtogiveyouathoroughunderstandingoftheprinciplesofeconomicsthatapplytoyourlocalandregionaleconomicsystemasawhole.LetusbeginbyexamininghowanationdealswithissuessurroundingNationalIncomeAccounting.

GENERALOBJECTIVE

OncompletionofthisStudyGuide,youshouldappreciatethenotionofNationalIncomeAccountingandtheimportanceoftheseaccountsformacroeconomictheoryandpolicy.

SPECIFICOBJECTIVES

Youshouldbeableto:

1.explainthecircularflowofincome;

2.usekeytermsassociatedwithNationalIncomeAccounting;

3.assessthedifferentwaysofderivingNationalIncomeAccounts;

4.interpretNationalIncomestatistics;

5.useNationalIncomeAccountstoanalyzetheperformanceonaneconomyasawhole;

6.deriverealGDPfromnominalGDP;

7.evaluatethelimitationsofGDP.

CONTENT

∙EconomicagentsintheCircularFlowofIncomeModel.

∙KeytermsassociatedwiththeCircularFlowofIncomeModel.

∙GrossDomesticProduct（GDP）,GrossNationalProduct（GNP）andothermeasures.

∙CalculationofGDP,GNPandtheircomponents（personalincome,disposableincome）,NetNationalIncome（NNI）,andpercapitaincome;avoidanceofdoublecounting.

∙Totalmeasuresof:

（a）GDPatmarketprices;

（b）GDPatfactorcosts.

∙UseofNationalincomeaccounts.

∙CalculationofrealandnominalGDPusingthepricedeflator.

∙LimitsofNationalIncomeAccountsasameasureofwell-being.

NATIONALINCOMEACCOUNTING

ECONOMICAGENTSINTHECIRCULARFLOWOFINCOMEMODEL

A.TwoSectorEconomyModel

Thecircularflowofincomeinmacroeconomicsreferstotheflowofincomesandexpendituresamongtheprincipaleconomicagentsinaneconomy.Inatwo-sectoreconomy,theeconomicagentsarehouseholdsandfirmswhilstinafour-sectoreconomytherearetwoadditionalplayers;thegovernmentandtheinternationalsector.

Oneofthebasicassumptionsofthismodelisthathouseholdsownallthefactorsofproduction,whilstfirmsundertaketheproductionofallgoodsandservices.Theotherfundamentalassumptionsarethatallincomesreceivedbyhouseholdsareeitherspentorsaved,andonlyfirmsundertakeinvestment.Savingsisawithdrawa