Cambridge IGCSE Economics (0455) – Revision Notes
1. The Basic Economic Problem (1.1)
- Scarcity: limited resources vs unlimited wants.
- Choice: societies must decide what to produce, how to produce and for whom.
- Opportunity cost: the next best alternative fore‑gone when a decision is made.
- Economic efficiency: producing the maximum output from given inputs.
AO1 tip: Memorise the three‑part definition of scarcity and be able to give a clear example of opportunity cost.
2. Allocation of Resources (1.2)
- Market allocation – price mechanism, supply & demand, profit motive.
- Government allocation – taxes, subsidies, price controls, public provision.
- Mixed economy – coexistence of market forces and state intervention (required by the syllabus).
- Market failure – public goods, merit & demerit goods, externalities, monopoly.
AO2 tip: Use a labelled supply‑and‑demand diagram to show the effect of a tax or a price ceiling on equilibrium price and quantity.
3. Micro‑economic Decision Makers (2)
| Decision‑maker | Primary Objective | Key Tools/Constraints |
|---|
| Households | Maximise utility (satisfaction) | Income, prices, preferences |
| Firms | Maximise profit | Costs, technology, market structure |
| Government | Achieve macro‑economic aims & correct market failure | Fiscal policy, regulation, public services |
AO1 tip: Define “utility”, “profit” and “macro‑economic aim” in your own words.
4. Macro‑economic Objectives (3)
- Economic growth (increase in real GDP per head)
- Low unemployment
- Price stability (low inflation)
- Equitable distribution of income
- External balance (current‑account equilibrium)
- Sustainable development (environmental & social considerations)
AO3 tip: When evaluating a policy, comment on its impact on at least two macro‑economic objectives.
5. Economic Development (5)
5.1 Living Standards
- GDP per head – measure of average income; pros (easy to calculate) and cons (ignores inequality, unpaid work).
- Human Development Index (HDI) – combines life expectancy, education and income.
- Multidimensional Poverty Index (MPI) – assesses health, education and living standards.
5.2 Poverty (5.2)
5.2.1 Key Definitions
- Absolute poverty: living on less than the minimum needed for basic needs (food, shelter, clothing, health).
- Relative poverty: income significantly below the national average, leading to social exclusion.
5.2.2 Main Causes of Poverty
- Unemployment or under‑employment
- Low wages (including absence of a national minimum wage)
- Age‑related vulnerability (young children, elderly)
- Ill‑health and high medical costs
- Poor housing, unsafe water and sanitation
- Low levels of education and skills
- Inadequate state benefits or social protection
5.2.3 Policy Options for Poverty Alleviation & Income Redistribution (5.3)
Cambridge groups policies into five broad categories. The table below summarises each, with a detailed focus on **Improved Healthcare Provision**.
| Policy Group | Examples | Primary Aim |
|---|
| Promoting economic growth | Infrastructure investment, attracting FDI | Increase national income → higher living standards |
| Improved education provision | Free primary/secondary schooling, scholarships, adult‑learning | Raise human capital and future earnings |
| Improved healthcare provision | Universal primary health care, health vouchers, community health workers, national health insurance | Reduce medical‑expense poverty trap & boost productivity |
| More generous state benefits | Unemployment benefit, child allowance, pensions | Direct income support for the vulnerable |
| Progressive taxation & national minimum wage | Higher tax rates on high incomes, legally set wage floor | Redistribute income & raise low wages |
5.2.4 Why Improved Healthcare Helps Reduce Poverty
- Reduces out‑of‑pocket medical expenses → prevents households falling into a poverty trap.
- Healthier workers are more productive → higher output per hour.
- Improved child health increases school attendance and learning outcomes.
- Builds human capital, a long‑term driver of economic growth (see 4).
- Acts as a safety net, contributing to income redistribution (see 5.2.3).
5.2.5 Policy Instruments for Better Healthcare
| Policy Tool | Primary Objective | Key Features (Pros & Cons) |
|---|
| Universal Primary Healthcare (UPHC) |
Free or heavily subsidised basic services for all |
Broad coverage & equity; high fiscal cost; risk of over‑utilisation. |
| Health Vouchers for Low‑Income Households |
Targeted subsidies for specific services (e.g., maternal care) |
Cost‑effective targeting; administrative complexity; potential fraud. |
| Community Health Worker (CHW) Programmes |
Deliver preventive care and health education in remote areas |
Improves outreach & creates local jobs; needs continuous training & supervision. |
| National Health Insurance (NHI) Schemes |
Pool risk across the population to finance treatment |
Financial risk protection; can be progressive; implementation challenges and possible resistance from private insurers. |
5.2.6 Illustrative Examples
- India – Ayushman Bharat: Government‑funded health‑insurance covering ~500 million poor families; cashless secondary and tertiary care.
- Rwanda – Community Health Workers: >45 000 CHWs provide basic services; under‑five mortality fell from 152 to 44 per 1 000 live births (2000‑2020).
- Ghana – National Health Insurance Scheme: Financed by a levy on goods & services; outpatient utilisation rose 30 % since 2005.
5.2.7 Steps to Implement a Healthcare Policy (Ordered)
- Conduct a needs assessment to identify health gaps among the poorest groups.
- Choose a financing mix (tax‑based revenue, donor grants, social health insurance).
- Pass legislation setting service standards and eligibility criteria.
- Upgrade or construct primary health centres in underserved areas.
- Recruit and train medical staff and community health workers.
- Launch public‑information campaigns about entitlements.
- Monitor utilisation, health outcomes and fiscal sustainability; adjust as required.
5.2.8 Economic Impact (AO2 – Data & Illustration)
- Labour productivity – healthier workers produce more output per hour.
- Human‑capital accumulation – better child health improves future earnings.
- Reduced out‑of‑pocket spending – frees income for education, nutrition or savings.
Example: A study of India’s Ayushman Bharat scheme found households receiving cashless treatment cut medical‑related consumption by an average of **₹4,200** per year, redirecting the savings to education and food and raising the household’s standard‑of‑living index by 3 %.
5.2.9 Evaluation of Healthcare Policies (AO3)
| Evaluation Criterion | What to Assess |
|---|
| Effectiveness |
Changes in health indicators (infant mortality, life expectancy), reduction in out‑of‑pocket expenditure, impact on poverty rates. |
| Equity |
Whether the poorest benefit proportionally more than higher‑income groups (utilisation by income quintile). |
| Efficiency |
Administrative cost per beneficiary compared with alternatives such as cash transfers. |
| Sustainability |
Long‑term financing sources, fiscal burden on government, resilience to economic shocks. |
| Compatibility with Macro Aims |
Contribution to economic growth, income redistribution, social welfare; possible trade‑offs with fiscal stability. |
5.2.10 Potential Limitations
- High fiscal cost may crowd out other development spending.
- Risk of over‑utilisation → longer waiting times.
- Implementation difficulties in remote or conflict‑affected areas.
- Possible adverse effects on private health‑care providers if public schemes dominate the market.
5.2.11 Suggested Diagram (Exam Revision)
Draw a flow‑chart that shows the causal chain:
- Improved Healthcare Provision →
- Lower Medical Expenses for Poor Households →
- Higher Disposable Income & Better Nutrition →
- Increased Labour Productivity & School Attendance →
- Higher Earnings & Human‑Capital Accumulation →
- Reduced Poverty & More Equal Income Distribution.
Label arrows with “↑” for positive effects (e.g., ↑ productivity) and “↓” for reductions (e.g., ↓ out‑of‑pocket costs).
5.2.12 Summary
Improved healthcare tackles poverty from both supply and demand sides. By lowering the financial risk of illness, enhancing human capital and boosting productivity, it directly supports the government aims of income redistribution and economic growth. Successful reforms require:
- Clear targeting (or universal coverage where feasible)
- Sustainable financing (taxes, insurance premiums, donor aid)
- Effective implementation (infrastructure, trained staff, community outreach)
- Robust monitoring to ensure equity, efficiency and long‑term viability
When combined with other measures—education improvement, progressive taxation, a national minimum wage and generous state benefits—healthcare reforms become a powerful component of a comprehensive anti‑poverty strategy.
6. International Trade & Globalisation (6)
6.1 Specialisation and Gains from Trade
- Comparative advantage – countries specialise in goods with lower opportunity cost.
- Gains: higher real incomes, access to a larger variety of goods, economies of scale.
6.2 Trade Restrictions
| Restriction | Purpose | Typical Effect on Price & Quantity |
|---|
| Tariff | Protect domestic producers, raise revenue | Domestic price ↑, quantity imported ↓ |
| Quota | Limit quantity of imports | Domestic price ↑, total imports limited |
| Subsidy | Encourage export or domestic production | Domestic price ↓, exports ↑ |
| Embargo | Political sanction | Trade of the targeted good stops |
6.3 Exchange Rates
- Nominal vs real exchange rate.
- Depreciation makes exports cheaper and imports more expensive – can improve the current account.
- Appreciation has the opposite effect.
6.4 Current‑Account Balance
- Exports of goods & services + net income + net transfers.
- Surplus → net lender to the world; deficit → net borrower.
- Policy tools: exchange‑rate adjustments, trade‑policy changes, fiscal measures.
AO2 tip: When answering a data‑response question on trade, always label the axes, indicate the direction of shifts and state the impact on consumer/producer surplus.
7. Cross‑cutting Concepts (Environment, Sustainability & Market Failure)
- Scarcity – the fundamental economic problem (see 1).
- Market failure – when the market does not allocate resources efficiently.
- Public goods (e.g., street lighting)
- Merit goods (e.g., education, healthcare) – under‑consumed without intervention.
- Demerit goods (e.g., tobacco) – over‑consumed without intervention.
- Externalities – positive (e.g., vaccination) or negative (e.g., pollution).
- Monopoly – single seller can restrict output and raise price.
- Sustainable development – meeting present needs without compromising future generations; links to environmental protection, resource efficiency and equitable growth.
8. Exam‑style Practice
8.1 Multiple‑Choice Example
Which of the following is most likely to improve the equity of a health‑care system?
- Introducing a user‑fee for all outpatient visits.
- Providing health vouchers only to households in the lowest income quintile.
- Subsidising private hospitals in affluent areas.
- Reducing the number of community health workers in rural districts.
Answer: B – targeting vouchers to the poorest improves equity while limiting fiscal cost.
8.2 Structured‑question Outline (AO3)
Question: “Evaluate the likely impact of a national health‑insurance scheme on poverty in a developing country.”
- Define the scheme and its intended purpose (AO1).
- Explain the causal chain (health → lower medical costs → higher disposable income → reduced poverty) using a diagram (AO2).
- Evaluate using the five criteria:
- Effectiveness – evidence of reduced out‑of‑pocket spending.
- Equity – utilisation by poorest vs richest quintile.
- Efficiency – administrative cost per beneficiary.
- Sustainability – financing (taxes, premiums) and fiscal pressure.
- Compatibility with macro aims – impact on growth, fiscal stability.
- Weigh the strengths (e.g., risk‑pooling, human‑capital gains) against limitations (e.g., high fiscal cost, possible crowding‑out of private providers).
- Conclude with a balanced judgment.
9. Quick Revision Checklist (AO1‑AO3)
- AO1 – Know definitions, diagrams and the five policy groups.
- AO2 – Be able to draw and label:
- Supply‑and‑demand shifts for taxes, subsidies, price controls.
- Health‑policy impact diagram (as described in 5.2.11).
- Trade‑restriction diagrams (tariff, quota).
- AO3 – Practice structured evaluations using the five criteria; always link back to macro‑economic objectives.