Saturday, June 30, 2018
How To Study Unit 2 Managing the Economy Edexcel Effectively
How To Study Unit 2 Managing the Economy Edexcel Effectively
After many years of critical coaching, thorough observation and some analysis, I managed to arrive at a conclusion of why many candidates fail to perform in Unit 2: Managing the Economy and perhaps also in Unit 4: The Global Economy. As all of you are aware, these two units are classified as macroeconomics and they have a distinct feature that separates them from the other two which are Unit 1: Competitive Markets-How They Work and Why They Fail and Unit 3: Business Economics and Economics Efficiency
My experience tells me that generally students do either very well in Microeconomics or excel in Macroeconomics. Frankly, I seldom come across candidates that are good in all the units. It is either they are good in Unit 1 and 3 or Unit 2 and 4. HOWEVER, students that exhibit sharp understanding of Macroeconomics (Unit 2 and 4) usually do not have much problems coping with Microeconomics (Unit 1 and 3). It is always those who seem to have a promising start in Unit 1 that end up struggling along the way up to Unit 4
Why is that so? These are the following reasons:
Unit 1 and 3 tend to have �more memorising� elements. It works wonder if you rot-memorise. You may even get away with distinction by memorising terms/ definitions despite not having any proper understanding/ appreciation of the terminologies. As a matter of fact, many of these keywords do repeat themselves in the exam e.g. production possibility frontier, opportunity cost, PED, XED, YED, PES, taxation, subsidy, market failure, government failure, productive efficiency, allocative efficiency, profit maximisation, revenue maximisation, sales maximisation and many more. In Unit 1, almost every question carries definition mark. We have about 15 questions (8 MCQs and 7 in data response) and that may be a whooping 12/13 marks just for definitions. While I don�t deny that Unit 2 and 4 do test candidates on definitions, they somehow carry lesser marks/ weightage/ appear with lesser frequency. Even if they do, they may appear in many bewildering forms that often require candidates to do some critical thinking. Consider real GDP per capita, real GDP growth, annual real GDP growth, nominal GDP, GDP at current prices, real GDP, GDP at constant prices etc. Sometimes, they may appear in the form of phrase such as �sterling�s trade-weighted index� or �government spending increasing only 0.5% in real term� and students have to use their understanding to gauge the meaning of the phrase. Conclusion is, memorising does not work that well in Macroeconomics
In Unit 1 and 3, candidates do not have to explain how things work/ transmission mechanism and that is why answers are so much shorter. The beauty is, the type of questions that can be asked seem to be �limited�. Do more past year papers and you will undeniably agree with me. They are repetitive and the questions just manipulate themselves in different phrasings. In Macroeconomics, situations may not go that smooth. There are �endless� possibilities of how macroeconomic variables affect one another. For instance, house prices can affect price level, economic growth, global trade, employment level, public finances and many more. Using LOGIC combined with some economic theories, you will have to explain how those variables are affected and perhaps argue why they may not be affected too at the same time. The combinations are just too great. Here, memorising will not work and not at all. However, I don�t imply that macroeconomics is necessarily harder. It just functions differently. It is equivalent to telling directions. There are just too many ways for you to move from point A to point B and you must be a good direction-informer
Besides, do take note that ALL Economics textbooks of all level are organised in such a way where candidates are exposed to the concept of GDP, inflation, balance of payments, unemployment, fiscal policy, monetary policy, supply side policies etc when it is crystal clear that examinations test us far beyond that. They want us to know the TRANSMISSION MECHANISMS but they never taught that to us, at least not in a direct way
Here, I will organise your revision for Unit 2: Managing the Economy in the most systematic way which will definitely enhance your understanding in the shortest time. How fast you improve and much of information you can grab will have to depend on you yourself. Please bear another thing in mind. It will not be sufficient reading what I�m about to post. Use it. Practice the newly earned-skills
Basic transmission mechanisms:
1. Economic growth leads to lower unemployment
Growth -->rising income per capita --> greater spending into the economy --> AD for goods and services increase --> more manpower needed � lower unemployment
2. Economic growth leads to higher inflation
Growth -->increase in wages/ bonuses --> greater spending into the economy --> increase in AD --> price level increases --> demand-pull inflation
3. Economic growth leads to the worsening of current account deficit
Growth -->increase in wages/ bonuses --> UK people have high marginal propensity to import --> rise in imports and assume exports unchanged --> worsening of the current account deficit
4. Economic growth leads to income inequality
Growth --> wages for low/ middle class earners will usually increase but at a slower rate --> probably worse off after adjustment for inflation, student loan repayments, income tax and NICs (National Insurance Contributions) --> rich people may be subjected to higher income tax BUT there are other non-income gains that are taxed at much lower rate e.g. capital gain and share dividends --> widening income inequality
5. Growth leads to deterioration of environment
Growth -->increase in wages --> greater AD for goods and services --> more lands cleared to give way for residential homes, business parks and factories/ more cars on the road --> deforestation and rise in global warming
6. Lower unemployment leads higher growth
Low unemployment --> AD for goods and services will increase -->higher real output --> growth
7. Lower unemployment leads to higher inflation
Low joblessness --> greater spending into the economy --> AD shifts rightward --> price level increases --> demand-pull inflation
8. Lower unemployment leads to worsening of current account deficit
Low joblessness --> unemployed people now have income to spend --> UK people have high marginal propensity to import --> rise in imports and assuming exports unchanged -->current account deficit widens
9. Lower unemployment leads to deteriorating environment
Fewer jobless people --> greater spending into the economy --> more lands to be cleared to construct houses, leisure areas and factories/ more cars and busses on the roads --> deforestation and emission of CO2
10. Lower unemployment reduces income inequality
Fewer unemployed people --> jobless people now have income and assume that their income is more than their previous benefits and UK government implements progressive taxation --> narrowing the gap between the rich and poor
11. Lower unemployment leads to higher inflation
Fewer jobless people --> total expenditure into the economy increases --> AD shifts rightward --> increase in price level --> higher demand-pull inflation
Fewer jobless people --> total expenditure into the economy increases --> AD shifts rightward --> increase in price level --> higher demand-pull inflation
12. High inflation leads to lower growth
Supposed that the inflation creeps beyond the targeted level of CPI 2% +/- 1% --> Bank of England may consider an increase in base rate --> if this happens, cost of borrowing will increase --> lower consumption and investment --> fall in AD � lower growth
13. High inflation leads to increase in unemployment
Increase in inflation � falling real income --> limiting the spending ability of households --> AD for goods and services will fall --> fewer workers needed
14. High inflation leads to the worsening of current account deficit
Increase in production costs --> less competitive pricing --> export prices increase and assuming import prices unchanged --> fall in demand for British manufactured goods -->widening current account deficit
15. High inflation leads to widening income inequality
Rise in price level --> wages growth rate is usually lower than the rate of inflation --> falling real income --> consumers/ households are priced-out --> every pound purchases lesser goods and services
17. High inflation leads to less deterioration of environment
Increase in price level --> falling real income --> limiting the ability of households to spend elsewhere --> fall in AD for goods and services --> factories operate shorter hours and economic activities come to a slowdown --> less severe congestion, deforestation and flights --> improve the conditions of the environment
18. Large current account deficit leads to lower economic growth
Huge current account deficit --> imports of goods outweigh exports of goods --> net withdrawal from the UK�s circular flow of income --> falling net exports/ resulting in net imports --> AD shifts leftward -- lower real output --> faltering growth
19. Large current account deficit leads to lower inflation
Rising current account deficit � imports of goods are greater than exports of goods � net withdrawal from the circular flow of income � falling (X-M) --> AD shifts leftward --> price level falls --> lower inflation for the UK economy
20. Large current account deficit leads to rising unemployment
Huge current account deficit --> indicator that British people have high marginal propensity to import (M increases) and at the same time UK manufactured goods are losing its price competitiveness (X falling) --> decline in factory orders both from domestic and international market --> factories no longer need so many manpower as before --> retrenchment --> rising unemployment
21. Large BOP deficit leads to improvement in the environmental condition
Large BOP deficit is due to the ongoing current account deficit --> imports of goods far outweigh exports of goods --> demand from both domestic and international market falling --> greater spare capacity e.g. heavy equipments are not in used and factories dispose lesser waste, thrash and smog --> cleaner environment within UK
22. Large BOP deficit leads to increase in income inequality
Huge current account deficit --> imports greater than exports -->falling factory orders both from domestic and international market --> factories will need to get rid of surplus of workers --> those retrenched will fall into greater poverty
More to come, stay tune!! Remember, you dont have to study textbooks. It is incredibly sufficient if youre able to understand transmission mechanisms alone. LOGIC is the word. Please dont rot memorise
Now, lets roll for demand management policies
Fiscal policy
1. Increase in government spending leads to economic growth
Larger budget e.g. building of new schools and hospitals --> direct injection into the circular flow of income --> increase in AD --> rise in real output -->economic growth
2. Increase in government spending leads to falling unemployment
The UK government spends more money onto public sector e.g. enlargement of existing departments and build more roads and bridges --> create jobs e.g. teachers, surgeons and nurses in NHS, road builder etc --> lower unemployment within UK
3. Increase in public sector expenditure leads to rising inflation
Direct injection into the circular flow of income --> government spending is a component of AD --> AD shifts to the right � price level increases --> demand-pull inflation
4. Increase in budget deficit le
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