Tuesday 24 June 2014

Home Work for Grade 9C and 9F


 Download this worksheet and get it solved in the next class.........


Demand Worksheet            NAME: ______________________



1.  Create a demand graph using the following table of values:
 


PRICE
QUANTITY
10
500
20
450
30
400
40
350
50
300
60
250
70
200





























Determinant of demand
Demand increases or decreases?
Explanation
Population increases



Population decreases



Increase in most peoples’ income



Decrease in most peoples’ income



Price of substitute increases



Price of substitute decreases



Price of complementary good increases



Price of complimentary good decreases


Product becomes a popular fad (change in taste of buyers)


Product now out of fashion (change in taste of buyers)


There is an expectation that the price of the product will soon fall


There is a fear that the economy will go into a recession where many firms will fail and unemployment will increase














Monday 23 June 2014

EXCHANGE RATE NOTES FOR IGCSE

Dear IGCSE Grade 10 Students,
you can use this notes to write answers from this topic. please use this notes as reference only......

Factors which influence the exchange rate
An exchange rate is determined by supply and demand factors. These are the various factors which determine the demand and supply of a currency.
1. Inflation
If inflation in the UK is lower than elsewhere, then UK exports will become more competitive and there will be an increase in demand for £s. Also foreign goods will be less competitive and so UK citizens will supply less £s to buy foreign goods.
Therefore the rate of £ will tend to increase.
2. Interest Rates
If UK interest rates rise relative to elsewhere, it will become more attractive to deposit money in the UK, Therefore demand for Sterling will rise. This is known as “hot money flows” and is an important short run determinant of the value of a currency.
3. Speculation
If speculators believe the sterling will rise in the future, they will demand more now to be able to make a profit. This increase in demand will cause the value to rise.
Therefore movements in the exchange rate do not always reflect economic fundamentals, but are often driven by the sentiments of the financial markets.
For example, if markets see news which makes an interest rate increase more likely, the value of the Pound will probably rise in anticipation.
4. Change in competitiveness
If British goods become more attractive and competitive this will also cause the value of the Exchange Rate to rise. This is important for determining the long run value of the Pound.
5. Relative strength of other currencies
Between 1999 and 2001 the £ appreciated because the Euro was seen as a weak currency.
6. Balance of Payments
A large deficit on the current account means that the value of imports is greater than the value of exports. If this is financed by a suplus on the financial / capital account then this is OK. But a country who struggles to attract enough capital inflows will see a depreciation in the currency. (For example current account deficit in US of 7% of GDP was one reason for depreciation of dollar in 2006-07)

The Determination of Exchange Rates in a free market 

· The rate of exchange is determined by supply and demand
· When a UK citizen wishes to purchase goods from US, he supplies pounds. The higher the exchange rate the more dollars he will get for a pound
· When a US citizen wishes to purchase UK goods they supply dollars and demand pounds.
If you are going on holiday to the US it is best if there is an appreciation in Sterling so that you get more dollars for your £
Economic Effects of an Appreciation
An appreciation means an increase in the value of a currency. It means a currency is worth more in terms of foreign currency.
e.g. If £1 = €1 An appreciation of Pound could mean £1 =€1.2

Effects of an Appreciation

·         Exports more expensive, therefore less UK exports will be demanded
·         Imports are cheaper, therefore more imports will be bought.
·         A fall in AD, causing lower growth.
·         Lower inflation because:
·         import prices are cheaper
·         Lower AD and less demand pull inflation
·         More incentives to cut costs







Economic Effect of a Devaluation of the Currency
A devaluation occurs in a fixed exchange rate. A depreciation occurs in a floating exchange rate system. Both mean a fall in the value of the currency.
Economic Revision Notes on Devaluation
1. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports
2. A devaluation means imports will become more expensive. This will reduce demand for imports.
3. Higher economic growth. Part of AD is X-M Therefore higher exports and lower imports will increase AD. Higher AD is likely to cause higher Real GDP and inflation.
4. Inflation is likely to occur because:
·                      i) Imports are more expensive causing cost push inflation.
·                      ii) AD is increasing causing demand pull inflation
·                      iii) With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time costs may increase.
Evaluation:
The effect on inflation will depend on other factors such as:
·         iv) Spare capacity in the economy. E.g. in a recession, a devaluation is unlikely to cause inflation
·         v) Do firms pass increased import costs onto consumers? Firms may reduce their profit margins, at least in the short run.
·         vi) Import prices are not the only determinant of inflation. Other factors affecting inflation such as wage increases may be important
5. There is likely to be an improvement in the current account balance of payments.
This is because exports are increasing and imports are falling

Government Intervention  in the Foreign Exchange market
Under certain circumstances, the government might want to intervene in the foreign exchange markets to influence the level of the exchange rate.
Methods to Influence the Exchange Rate
1.   Reserves and Borrowing. If the value of an exchange rate is falling and the government wants to maintain its original value it can use its foreign exchange reserves - e.g. selling its dollars reserves and purchase pounds. This purchase of Pound sterling should increase its value.
2.   Borrow The government can also borrow foreign currency from abroad to be able to buy sterling.
3.                  Changing interest rates (In UK this is now done by the MPC) higher interest rates will cause hot money flows and increase demand for sterling. Higher interest rates make it relatively more attractive to save in the UK.
4.   Reduce Inflation
·   Through either tight fiscal or Monetary policy Aggregate Demand and hence inflation can be reduced.
·   By decreasing AD consumers will spend less and  purchase less imports and so will supply less pounds. This will increase the value of the ER
·   Lower inflation rate will also help because British goods will become more competitive. Thus the demand for Sterling will rise.

However this policy has an obvious side effect because lower AD will cause lower growth and higher unemployment
5.   Supply side measure to increase the competitiveness of the economy. This will take along time to have an effect.










Fixed Exchange Rates

Definition of a Fixed Exchange Rate: This occurs when the government seeks to keep the value of a currency fixed against another currency. e.g. the value of the Pound is fixed at £1 = €1.1
Semi Fixed Exchange Rate. This occurs when the government seeks to keep the value of a currency between a band of exchange rate. In other words, the exchange rate can fluctuate within a narrow band.
E.g. the Pound Sterling could fluctuate between a target exchange rate of £1 = €1.1 and £1 = €1.2
Definition of a Floating Exchange Rate: this is when the govt does not intervene in the foreign exchange market but allowss market forces to determine the level of a currency.
· Exchange Rate Mechanism ERM. This was a semi fixed exchange rate where EU countries sought to keep their currencies fixed within certain bands against the D-Mark. The ERM was the forerunner of the Euro
Advantages of Fixed Exchange Rate
1. If the value of currencies fluctuate significantly this can cause problems for firms engaged in Trade.
·         For example if a firm is exporting to the US, a rapid appreciation in sterling would make its exports uncompetitive and therefore may go out of business.
·         If a firm relied on imported raw materials a devaluation would increase the costs of imports and would reduce profitability
2. The uncertainty of exchange rate fluctuations can therefore reduce the incentive for firms to invest in export capacity. Some Japanese firms have said that the UK's reluctance to join the Euro and provide a stable exchange rates maker the UK a less desirable place to invest.
3. Governments who allow their exchange rate to devalue may cause inflationary pressures to occur. This is because AD increases, import prices increase and firms have less incentive to cut costs.
4. A rapid appreciation in the exchange rate will badly effect manufacturing firms who export, this may also cause a worsening of the current account.
5. Joining a fixed exchange rate may cause inflationary expectations to be lower

Disadvantage of Fixed Exchange Rates
1. To maintain a fixed level of the exchange rate may conflict with other macroeconomic objectives.
· If a currency is falling below its band the govt will have to intervene. It can do this by buying sterling but this is only a short term measure.
· The most effective way to increase the value of a currency is to raise interest rates. This will increase hot money flows and also reduce inflationary pressures.
· However higher interest rates will cause lower AD and economic growth, if the economy is growing slowly this may cause a recession and rising unemployment
2. It is difficult to respond to temporary shocks. For example an oil importer may face a balance of payments deficit if oil price increases, but in a fixed exchange rate there is little chance to devalue





Monday 16 June 2014

INDICATORS OF ECONOMIC DEVELOPMENT...

Hi dear students of my IGCSE final year students.....
please go through this note....


Measurement of economic development and express in definite index is very difficult task in economics. So many opinions are found to indicate level of economic development of a nation. However, some common and popular indicators that used to measure development are discussed below:

Volume of Per Capita Income
Per Capita Income is first and most important indicators of economic development of a nation. It is commonly used by all nations in the world along with UN while measuring economic position of the nation. The PCI of Least Developed Countries (LDCs) is less than $400. There are 49 countries LDCs across the globe.

Rise in Factor Productivity
Development means rise in production and productivity of factors of production. Productivity implies increased per unit of production of factors of production land, labor, capital and organization in terms of rent, wages, interest and profit.

Rise in Living Standard 
Another indicator of development is living standard of common people which should go on rising to higher levels. The very objective of development is to provide better life to people. It refers to increase in average consumption level of individual and society.

Physical Quality of Life Index
Physical Quality of Life Index is a common indicator of development. It is computed from life expectancy at birth, infant mortality rate and literacy rate of a country. If people live longer and are literate, PQLI value will be high. It is measured in scale of 1 to 100.

Human Development Index
The Human Development Index as an indicator was introduced by UNDP in the World Human Development Report in 1990. Since then, it has been the most popular indicator of development. Its range of measurement is in between 0 to 1.

Poverty Alleviation and Inequality Reduction
As a nation develops, poverty must be reduced and the gap between the rich and poor must be narrowed down . Poverty limits opportunities of common people to uplift their life. It weakens their income earning capability. Their access to health, education and skill development is most essential to minimize poverty rate.




Hi dear students of Grade 10B,
This is for you on your demand......
Q.What is a developed country and what re the characteristics of a developed
country?
Ans.
Developed countries are those countries whose GDP is very high, better standard of living,
low population growth, Better Infrastructure, better transport and communications facilities
etc. In other word we can say the country which have higher level of social welfare measures
are developed countries,that is measured in terms of HDI(Human Development index)
Following are the main characteristics of developed country:
1. Higher level of GDP: Most of the developed countries are having a very high level of
GDP with compared to developing country. e.g USA, Japan ,Canada etc are
developed countries whose GDP is very much higher than the developing countries
like India,Sri Lanka etc.
2. Higher level of PCI: The per capita income of developed countries are very high.
This is because these countries are having higher level of GDP and lower level of
population growth.
3. Less growth of population: The growth rate of population is very less in developed
countries. This is because there is low birth rate and better education facilities are
available.
4. Lower birth rate: The birth rate in developed countries are very less because of
better medical facilities, Availability of contraception,better education facilties and
women empowerment.
5. Lower Death Rate: Due to better medical facilities, availability of enough doctors
,better quality of food, safe drinking water.The death rate in developed countries are
less and more aging population.
6. Less dependency ratio: In developed countries the dependency ratio are very less
because there is less no. of children and more working age population.So their PCI
is also high.
7. Dominating tertiary sector: In developed countries maximum populations are
working in tertiary sector and negligible work force are into primary sector.
8. Human Development Index (HDI): In HDI ranking list most of the developed
countries are at the top which indicates that most of the social welfare indicators are
very good in developed countries.
9. Better Transport and Communication system: There is better infrastructural
development in developed countries,Transport and communication systems are very
modern and fast.
10. Standard of Living: The standard of living of developed countries are very high so
they can afford better quality of goods & services.Better health care facilities,
availability of safe drinking water,better international relations leads to improve the
standard of living.
Welcome to the new Academic year.

This is for grade 10. you can refer this notes for the knowing how CPI is calculated....
Q. How the inflation / CPI is calculated?

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indexes and sub-sub-indexes are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation.

The Proportion of total household expenditure sent on each good or services is used to weight their individual price. For example, if the price of a loaf of bread is $2 & the typical household spent 5% of their weekly or annual spending on bread, then the weighted average price will be $2 X 0.05 = $0.10. Prices are weighted in this way because the more a household spends on a particular goods or services the more an increase in the price of that product will matter.

In the first year of measurement – the Base Year -  the weighted average price of all goods & services in the CPI basket is calculated & set equal to 100. Monthly or annual changes in the weighted average price of the basket are then compared to the base year.

Calculating a CPI – a simple example
Imagine the ‘basket’ used to calculate a CPI consists of three main products: food, travel & clothing.
YEAR1 ( Base Year)
Products
Avg. Price($)
Proportion of household expenditure spent on each product(%)
Weighted average price
Price index
Food
$60
60%
0.60 X $60 = $36

Travel
$20
10%
0.10 X $20 = $2

Clothing
$40
30%
0.30 X $40 = $12



Total =100%
Average price of basket = $50
=100

YEAR1 ( Base Year)
Products
Avg. Price($)
Proportion of household expenditure spent on each product(%)
Weighted average price
Price index
Food
$70
60%
0.60 X $70 = $42

Travel
$40
15%
0.15 X $40 =  $6

Clothing
$48
25%
0.25 X $48 = $12



Total =100%
Average price of basket = $60
=120


Weighted average price year2            $60
CPI Year2 = --------------------------------------------    =   ------- X 100  = 120 i.e. the annual inflation is 20%.
                       Weighted average price year1            $50


The CPI also has a number of specific applications:

(1) It is used to escalate a given dollar value, over time, to preserve the purchasing power of that value. Thus, the CPI is widely used to adjust contracted payments, such as wages, rents, leases and child or spousal support allowances. Private and public pension programs (Old Age Security and the Canada Pension Plan), personal income tax deductions, and some government social payments are also escalated using the CPI.

(2) It is used as a deflator of various economic aggregates, either of income flows, to obtain constant dollar estimates of income, or of expenditure flows, to obtain personal expenditure estimates at constant prices.

(3) It is used to set and monitor the implementation of economic policy. The Bank of Canada, for example, uses the CPI, and special aggregates of the CPI, to monitor its monetary policies and to gauge their effectiveness in containing inflation within its target range. The CPI and its component indexes may also be used to assess the effect of various public policies (e.g., agricultural policy and food prices).

(4) Business analysts and economists use the CPI for economic analysis and research on various issues, such as the causes and effects of inflation, and understanding regional disparities in price movements.

Price movements of the goods and services represented in the CPI are weighted according to the relative importance of goods and services in the total expenditures of consumers. Each good or service is considered to be an element in a fictitious basket, and price movements are assigned a basket share or weight commensurate with the proportion of total consumption expenditure they account

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