effects of aid

Cambridge A‑Level Economics – Complete Syllabus Notes (Units 1‑11)

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1. Basic Economic Ideas (Unit 1)

1.1 Scarcity & Choice

• Resources are limited → societies must decide what to produce, how to produce and for whom to produce.
• Opportunity cost = value of the next best alternative foregone.

1.2 Economic Methodology

• Positive vs. normative statements.
• Use of models: simplified representations (e.g., PPC, circular flow).
• Assumptions & limitations – relevance to real‑world analysis.

1.3 Factors of Production

Factor	Definition	Examples
Land	Natural resources	Minerals, farmland, water
Labour	Human effort	Workers, managers, entrepreneurs
Capital	Man‑made productive assets	Machinery, factories, infrastructure
Enterprise	Risk‑bearing & organisational ability	Business owners, innovators

1.4 Economic Systems

• Market (capitalist) – decisions by households & firms via price mechanism.
• Command (planned) – central authority allocates resources.
• Mixed – combination of market forces and government intervention (most modern economies).

1.5 Production Possibility Curve (PPC)

• Shows maximum output combinations of two goods given fixed resources & technology.
• Key concepts: efficiency, inefficiency, unattainable points, economic growth (outward shift), opportunity cost (slope).

Diagram suggestion: draw a concave PPC, label points A (efficient), B (inefficient), C (unattainable), and show a rightward shift due to technological progress.

1.6 Classification of Goods

Good	Characteristics
Normal	Demand rises when income rises.
Inferior	Demand falls when income rises.
Public	Non‑rival & non‑excludable (e.g., national defence).
Club	Non‑rival but excludable (e.g., cable TV).
Common‑pool	Rival but non‑excludable (e.g., fisheries).

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2. The Price System (Microeconomics) – Unit 2

2.1 Demand & Supply

• Law of demand: inverse relationship between price and quantity demanded (ceteris paribus).
• Law of supply: direct relationship between price and quantity supplied.
• Market equilibrium where Qd = Qs; price adjusts to clear the market.

2.2 Elasticities

Elasticity	Formula	Interpretation
Price elasticity of demand (PED)	%(ΔQd) / %(ΔP)	|PED| > 1 = elastic; < 1 = inelastic; = 1 = unitary.
Price elasticity of supply (PES)	%(ΔQs) / %(ΔP)	Similar interpretation.
Income elasticity of demand (YED)	%(ΔQd) / %(ΔY)	Positive = normal good; negative = inferior good.
Cross‑price elasticity (XED)	%(ΔQd of good A) / %(ΔP of good B)	Positive = substitutes; negative = complements.

2.3 Consumer & Producer Surplus

• Consumer surplus = area above price & below demand curve.
• Producer surplus = area below price & above supply curve.
• Policy impact: tax reduces both surpluses, creates dead‑weight loss.

2.4 Market Failure & Government Intervention

• Externalities – positive (e.g., education) or negative (e.g., pollution). Instruments: taxes, subsidies, regulation.
• Public goods – free‑rider problem; solution: government provision.
• Information asymmetry – e.g., used‑car market; possible remedy: standards & warranties.
• Monopoly power – price‑setter; policies: price caps, competition law.

2.5 Evaluation (AO3)

• Consider equity vs. efficiency, administrative costs, time‑lag, unintended consequences.
• Use real‑world examples (e.g., UK carbon tax, US antitrust cases).

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3. Labour Market – Unit 3

3.1 Demand for Labour

• Derived demand – depends on product demand and marginal product of labour (MPL).
• Labour demand curve downward sloping because of diminishing MPL.

3.2 Supply of Labour

• Influenced by wage rates, population, education, preferences for leisure.
• Backward‑bending supply at high wages (substitution vs. income effects).

3.3 Equilibrium Wage & Employment

Intersection of labour demand & supply determines market wage (W*) and employment (E*).

3.4 Labour Market Imperfections

• Minimum wages – creates surplus of labour (unemployment) if set above equilibrium.
• Trade unions – can raise wages above equilibrium, causing unemployment.
• Discrimination – reduces efficiency, creates wage differentials.

3.5 Policy Measures

Policy	Goal	Mechanism	Potential Evaluation
Minimum wage	Raise low‑pay workers’ income	Legal floor on wages	May increase unemployment; reduces poverty if labour supply is inelastic.
Training & education programmes	Improve productivity	Increase MPL → shift demand right	Long‑run benefits; costly and time‑lag.
Unemployment benefits	Provide income support	Increase reservation wage → possible rise in unemployment	Reduces poverty but may reduce job‑search effort.

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4. Aggregate Demand & Aggregate Supply (AD‑AS) – Unit 4

4.1 Aggregate Demand (AD)

AD = C + I + G + (X‑M). Downward sloping because of:

• Real‑balances effect (wealth effect).
• Interest‑rate effect.
• Exchange‑rate effect.

4.2 Aggregate Supply (AS)

• Short‑run AS (SRAS) – upward sloping; price level and output can move together.
• Long‑run AS (LRAS) – vertical at potential output (full‑employment GDP).

4.3 Equilibrium, Gaps & Inflation

• Demand‑pull inflation: AD shifts right beyond LRAS.
• Cost‑push inflation: SRAS shifts left (e.g., wage hikes, oil shock).
• Deflationary gap: AD below LRAS → unemployment.

4.4 Policy Mix

Policy	Type	Effect on AD/AS	Evaluation
Expansionary fiscal policy	Demand‑side	Right‑shift AD	May increase debt; multiplier depends on crowding‑out.
Supply‑side reforms (e.g., deregulation)	Supply‑side	Right‑shift LRAS	Long‑run gains; short‑run adjustment period.
Monetary easing (lower interest rates)	Demand‑side	Right‑shift AD	Risk of asset‑price bubbles.

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5. Macroeconomic Objectives & Policies – Unit 5

5.1 Key Objectives

• Economic growth (real GDP per capita).
• Low unemployment.
• Price stability (low inflation).
• External balance (current‑account equilibrium).
• Equitable distribution of income.
• Sustainable development (environmental & social).

5.2 Policy Instruments

• Fiscal policy – government spending & taxation.
• Monetary policy – interest rates, reserve requirements, open‑market operations.
• Supply‑side policies – education, R&D, deregulation, tax reforms.
• Exchange‑rate policy – devaluation/revaluation, managed float.

5.3 Evaluation of Policy Effectiveness

• Time lags: recognition, decision, implementation, impact.
• Multiplier size depends on marginal propensity to consume (MPC) and openness of the economy.
• Policy conflicts – e.g., expansionary fiscal policy may worsen the current account.
• Credibility & expectations (especially for monetary policy).

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6. International Trade – Unit 6

6.1 Benefits of Trade

• Comparative advantage → specialization & higher global output.
• Gains from trade – illustrated by PPF diagram with two‑country, two‑good model.
• Access to larger markets, technology transfer, economies of scale.

6.2 Trade Barriers

Barrier	Purpose	Economic Effect
Tariff	Raise revenue / protect domestic industry	Higher domestic price, reduced imports, dead‑weight loss.
Quota	Limit quantity imported	Creates scarcity, raises price, rents to license holders.
Subsidy	Support domestic producers	Lowers export price, may trigger retaliation.
Non‑tariff barrier (NTB)	Health, safety, standards	Can be protectionist in disguise.

6.3 Trade Policies & Evaluation

• Free trade promotes efficiency but may increase short‑run adjustment costs (e.g., job losses in declining sectors).
• Protectionism can preserve strategic industries but usually reduces welfare overall.
• Regional trade agreements (EU, NAFTA) – trade‑creation vs. trade‑ diversion effects.

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7. Balance of Payments (BOP) – Unit 7

7.1 Structure of the BOP

• Current account: trade in goods & services, primary income (investment income), secondary income (transfers).
• Capital account: capital transfers, debt forgiveness.
• Financial account: direct investment, portfolio investment, other investment, reserve assets.

Diagram suggestion: three‑column BOP table with inflows (+) and outflows (–) for each account.

7.2 Causes of Disequilibrium

• Current‑account deficit: excessive imports, low export competitiveness.
• Financial‑account deficit: capital flight, loss of confidence.
• Exchange‑rate mis‑alignment, fiscal deficits, high inflation.

7.3 Adjustment Policies

Policy	Type	Mechanism	Potential Drawbacks
Contractionary fiscal policy	Expenditure‑reducing	Reduces domestic demand → lower import demand.	Higher unemployment.
Contractionary monetary policy	Expenditure‑reducing	Higher interest rates attract capital → improve financial account.	Currency appreciation may hurt exports.
Exchange‑rate devaluation	Expenditure‑switching	Exports become cheaper, imports more expensive.	Inflationary pressure; effectiveness depends on price elasticities (Marshall‑Lerner).
Import tariffs / quotas	Expenditure‑switching	Raise import prices → reduce import volume.	Risk of retaliation; welfare loss.

7.4 Evaluation (AO3)

• J‑curve effect: devaluation may initially worsen the current account.
• Marshall‑Lerner condition: |ε_X + ε_M| > 1 needed for a devaluation to improve the trade balance.
• Policy mix (fiscal restraint + modest devaluation) often yields the most stable adjustment.

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8. Exchange‑Rate Regimes & Movements – Unit 8

8.1 Key Concepts

• Nominal exchange rate (E): domestic currency per unit of foreign currency.
• Real exchange rate (R): R = E × (P_domestic / P_foreign).
• Trade‑weighted exchange rate: average of bilateral rates weighted by trade volumes.

8.2 Regime Types

Regime	Characteristics	Advantages	Disadvantages
Fixed (pegged)	Official parity; central bank intervenes with reserves.	Exchange‑rate stability; lower transaction costs.	Loss of monetary autonomy; reserve depletion risk.
Managed (dirty float)	Authorities intervene occasionally.	Some flexibility, limited volatility.	Uncertainty about future moves; possible speculation.
Floating	Market‑determined rates.	Monetary policy independence; automatic external adjustment.	Higher volatility; can affect trade predictability.

8.3 Revaluation vs. Devaluation

• Revaluation – upward adjustment of a fixed rate; makes imports cheaper, exports more expensive.
• Devaluation – downward adjustment; makes exports cheaper, imports more expensive.

8.4 Evaluation

• Fixed rates help trade but become unsustainable if fundamentals diverge.
• Floating rates buffer external shocks but can transmit volatility to inflation and growth.
• Choice depends on openness, inflation history, institutional capacity, and policy objectives.

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9. Economic Development – Unit 9

9.1 Classification of Economies (World Bank)

• Low‑income: GNI per capita < $1,085.
• Lower‑middle‑income: $1,086 – $4,255.
• Upper‑middle‑income: $4,256 – $13,205.
• High‑income: ≥ $13,206.

9.2 Development Indicators

Indicator	What it measures	Limitation
GDP per capita (constant US$)	Average economic output per person	Ignores distribution, non‑market activity.
GNI per capita	GDP + net primary income from abroad	Still monetary‑only.
Human Development Index (HDI)	Life expectancy, education, GNI	Weighting arbitrary; masks inequality.
Multidimensional Poverty Index (MPI)	Deprivations in health, education, living standards	Data‑intensive; threshold choices.
Gini coefficient	Income inequality (0‑perfect equality, 1‑perfect inequality)	Doesn’t show where inequality occurs.

9.3 Theoretical Perspectives on Development

• Kuznets curve – inverted‑U relationship between income and inequality.
• Structural change theory – shift from agriculture → manufacturing → services drives growth.
• Endogenous growth models – human capital, R&D, institutions as drivers.
• Sustainable development – integrates economic, social, environmental objectives.

9.4 Characteristics of Countries at Different Stages

Level	Typical Demography	Economic Structure	Common Development Issues
Low‑income	High birth rates, young population	Dominant primary sector	Food security, low productivity, poor health/education.
Middle‑income	Declining fertility, growing urbanisation	Rising manufacturing & services	Industrialisation bottlenecks, inequality, environmental pressure.
High‑income	Aging population, low fertility	Service‑dominant, high tech	Productivity slowdown, social security sustainability.

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10. International Economic Relationships – Unit 10

10.1 Trade Links

• Export‑led growth for many low‑income economies (primary commodities).
• Import dependence for capital goods, technology, food.
• Terms‑of‑trade volatility can affect growth stability.

10.2 Foreign Direct Investment (FDI)

• Motives: market‑seeking, resource‑seeking, efficiency‑seeking, strategic‑asset seeking.
• Benefits: technology transfer, job creation, BOP inflows.
• Risks: profit repatriation, crowding‑out of domestic firms, enclave economies.

10.3 Remittances

• Private transfers from migrants; often exceed ODA in low‑income countries.
• Positive: raise consumption, finance small‑scale investment.
• Negative: may reduce labour supply, create dependency.

10.4 Migration (Labour Mobility)

• Push factors: low wages, unemployment, political instability.
• Pull factors: higher wages, better living standards.
• Brain‑drain vs. brain‑gain – loss of skilled workers vs. diaspora networks, remittance flows.

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11. Aid – Official Development Assistance (ODA) – Unit 11 (International Economic Issues)

11.1 What Is Aid?

Transfer of resources from a donor (government, multilateral institution or NGO) to a recipient country without a direct commercial return. Forms include cash, goods, services and technical expertise.

11.2 Types of Aid

Type	Provider	Typical Use
Bilateral aid	One government to another	Infrastructure, health projects.
Multilateral aid	World Bank, IMF, UN agencies	Large‑scale development programmes, policy advice.
Humanitarian aid	NGOs, UN OCHA	Disaster relief, emergency food/medical aid.
Development aid	Both bilateral & multilateral	Education, agriculture, governance reforms.
Technical assistance	Specialised agencies (e.g., UNDP)	Training, technology transfer, capacity building.

11.3 Intended Economic Effects of Aid

1. Increase national income – aid multiplier (ΔY = α × Aid). Effectiveness depends on absorptive capacity.
2. Human‑capital improvement – higher school enrolment, better health → more productive labour.
3. Infrastructure development – lowers production costs; outward shift of the production‑possibility frontier.
4. Balance‑of‑payments stabilisation – finances current‑account deficits, reduces reserve pressure.
5. Structural transformation – supports shift from agriculture to manufacturing/services.

11.4 Observed Outcomes – Positive & Negative

Outcome	Positive Effects	Negative / Unintended Effects
Economic growth	Higher investment rates; can raise growth coefficient (g = g₀ + β × Aid).	Weak multiplier if institutions are weak; possible crowding‑out of private investment.
Poverty reduction	Improved health & education; can lower Gini coefficient.	Mis‑targeting – benefits may accrue to elites; aid dependency.
Fiscal balance	Offsets deficits, reduces need for borrowing.	May discourage revenue mobilisation; “soft budget constraint”.
Governance & institutions	Capacity‑building, policy advice.	Conditionality can undermine sovereignty; aid‑induced corruption.
Balance‑of‑payments	Finances current‑account deficits, stabilises reserves.	Temporary relief; does not address underlying competitiveness.

11.5 Key Debates (AO3)

• Effectiveness vs. Dependency – Does aid create a “culture of dependence” that discourages self‑financing reforms?
• Conditionality – Structural adjustment programmes (IMF/World Bank) vs. ownership of policies by recipient.
• Donor motives – Altruism, geopolitical influence, access to resources, “soft power”.
• Alternative financing – South‑South cooperation, remittances, private capital as substitutes or complements.

11.6 Evaluation Checklist for Case‑Study Exams

Dimension	Key Points to Address
Scale & source of aid	Absolute amount, % of GNI, bilateral vs. multilateral.
Sectoral allocation	Health, education, infrastructure, governance.
Absorptive capacity	Institutional quality, macro‑economic stability, corruption perception.
Economic impact	Growth rates, poverty indices, BOP position before & after aid.
Unintended consequences	Fiscal dependency, crowding‑out, aid‑linked inflation.
Policy recommendations	Improving aid effectiveness – alignment with national plans, strengthening institutions, monitoring & evaluation.

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Using These Notes Effectively (AO1‑AO3)

1. AO1 – Knowledge: Memorise definitions, formulas, and diagram shapes. Use the tables for quick recall.
2. AO2 – Application: Link each concept to a real‑world example (e.g., UK carbon tax for externalities, Kenya’s FDI in horticulture, Bangladesh’s remittance inflows).
3. AO3 – Evaluation: For every policy or theory, discuss benefits, costs, distributional effects, and feasibility. Use the “Evaluation” sections and the checklist for case‑study essays.

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Suggested Diagram Library (for exam practice)

• PPC with growth shift.
• Demand‑supply with elasticity annotations.
• Consumer & producer surplus with tax wedge.
• Labour‑market equilibrium with minimum‑wage impact.
• AD‑AS showing demand‑pull & cost‑push inflation.
• Three‑column BOP table.
• Exchange‑rate regime comparison matrix.
• Trade‑creation vs. trade‑division diagram (regional integration).
• Aid multiplier flowchart.

These notes cover the full Cambridge AS & A‑Level Economics syllabus, integrate the required technical detail, and provide clear evaluation frameworks to help you achieve top marks across all assessment objectives.