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Knowledge Point Reference
知识点自查手册
Utility is a measure of the level of happiness or satisfaction that someone receives from the consumption of a good.
Marginal Utility (MU) is the additional utility derived from the consumption of one more unit of a good.
Total Utility (TU) is the overall satisfaction derived from consuming all units of a good combined.
As consumption of a good increases, the marginal utility will get smaller within a given period.
Example: The first slice of pizza is most satisfying. As one consumes more and becomes full, each additional slice gives less satisfaction — willingness to pay declines accordingly.
Consumer equilibrium is when it is not possible to switch any expenditure from one product to another to increase total utility. Achieved when:
If price of A rises → MU_A / P_A falls → A becomes less attractive → consumer substitutes → quantity demanded for A falls.
- Rational consumer assumption：Consumers may act irrationally due to cognitive biases, bounded rationality, lack of information.
- Cannot distinguish normal vs inferior goods：MU analysis cannot separate substitution and income effects.
- Requires precise numerical MU values：Difficult to measure in practice.
- One-off purchases：Doesn't apply to houses or vehicles where equi-marginal logic breaks down.
Indifference Curve (IC)：Shows all combinations of two goods providing equal utility to the consumer.
Budget Line (BL)：Shows all possible combinations of two goods a consumer can purchase with a given income and given prices.
- Transitivity：Rational consumer always opts for the highest IC (highest utility).
- Non-intersecting：Different ICs represent different utility levels — they never cross.
- Convex to origin：Due to diminishing MRS as more of Good X is consumed.
MRS decreases as more of X is consumed — reflects diminishing marginal utility.
Equilibrium is where the budget line is tangent to the highest indifference curve. At this point the consumer cannot reach higher utility with their current income.
Normal good：Price of X falls → BL pivots out. SE (positive) + YE (positive) → Q demanded rises → downward sloping demand curve.
Inferior good：YE is negative (real income rises → demand falls), but SE > |YE| → demand still rises when price falls → demand curve still downward sloping.
Giffen good：Special inferior good where |YE| > SE → when price falls, demand falls → demand curve slopes upward.
Indirect tax：Raises price of X → BL pivots inward on X-axis → consumer moves to lower IC.
Advertisement：Increases MU for all units of X → MRS rises at all points → IC steepens → new equilibrium on higher IC with more Good X consumed, even at same income.
Allocative efficiency：Resources allocated to maximise social welfare. Criterion: P = MC.
Productive efficiency：Firm produces at minimum possible cost. Criterion: AC = MC (minimum of AC).
Dynamic efficiency：Improvement in product range, quality, and costs over time via R&D and investment.
X-inefficiency：Firm not producing at the lowest possible cost for a given output level — caused by lack of competitive pressure (e.g. monopoly complacency).
Internal EoS：Technical, purchasing (bulk buying), financial (cheaper loans), managerial, marketing. → LRAC falls as output rises.
Internal diseconomies：Coordination problems, worker demotivation, bureaucracy → LRAC rises.
External EoS：Benefit from growth of whole industry — shared skilled labour pool, infrastructure, R&D. → All firms' LRAC falls.
External diseconomies：Land and labour become scarce/expensive, congestion → all firms' LRAC rises.
MES (Minimum Efficient Scale)：Lowest output at which LRAC is minimised. Large MES relative to market → tendency toward monopoly.
Normal profit：AR = AC. Minimum return to keep firm in industry (zero economic profit).
Supernormal profit：AR > AC. Positive economic profit — signals new entry in competitive markets.
Subnormal profit / Economic loss：AR < AC. Firm may exit in the long run.
Conditions：Many buyers/sellers, homogeneous product, no barriers to entry/exit, perfect information, profit maximisers.
SR：Price taker, horizontal D curve. Profit max at MC=MR. May earn supernormal profit or loss.
LR equilibrium：Entry/exit erodes supernormal profit until P = AR = AC = MC. Both productively and allocatively efficient.
Conditions：Many firms, differentiated products, no barriers to entry, limited market power.
SR：Downward sloping demand, MC=MR, supernormal profit possible.
LR：New entrants with similar products → demand curve shifts left → tangency at AR=AC (normal profit). P = AC but P > MC → neither allocatively nor productively efficient.
Definition：Sole supplier, high barriers to entry (patents, licences), price setter with significant market power.
Diagram：Profit max at MC=MR → produce Qm, charge Pm (from AR). AR > AC → supernormal profit persists in LR.
Efficiency：P > MC → allocatively inefficient. Not at min AC → productively inefficient. Deadweight loss exists. But: dynamic efficiency argument — supernormal profits fund R&D.
Definition：Few large dominant firms, high barriers to entry, interdependence.
Formal collusion (Cartel)：Firms agree to jointly profit maximise at MC=MR → act as monopoly. Example: OPEC.
Tacit collusion：Price leadership — dominant firm sets price, others follow.
Kinked demand curve：If price raised → rivals don't follow → elastic demand (lose customers). If price cut → rivals match → inelastic demand (few gains). Result: prices are rigid/stable.
Price competition：Limit pricing, predatory pricing, price war.
Price Discrimination：Charging different prices to different consumers/groups for the same product, not based on cost differences.
1st degree：Each consumer pays maximum willingness to pay. All consumer surplus extracted. (e.g. personalised pricing, auctions)
2nd degree：Different prices based on quantity purchased. (e.g. bulk discounts)
3rd degree：Separate markets by different PED. Higher price to inelastic group, lower to elastic group. (e.g. student/senior discounts, peak/off-peak rail)
MRP is the additional revenue from hiring one more worker. Due to diminishing returns, MRP curve slopes downward — this IS the firm's labour demand curve.
Wage & employment determination：Set by intersection of market ADL and ASL. Individual firm is wage taker at equilibrium W, hires where W = MRP.
Monopsony：Sole buyer of labour. Faces upward sloping labour supply → MCL > supply curve. Profit max at MRP = MCL → fewer workers at lower wage (Wm < Wc) vs competitive market.
Trade Union (competitive market)：Acts as monopoly supplier. Raises wage above equilibrium → reduces employment. Extent depends on elasticity of labour demand.
Bilateral Monopoly：TU vs Monopsony. Outcome depends on relative bargaining power. TU can raise both wages AND employment if wage set between Wm and Wc.
Competitive market：Wmin > Wc → creates unemployment (supply > demand). Extent depends on elasticity of D and S of labour.
Monopsony：If Wmin set between Wm and Wc → can raise both wages AND employment simultaneously. If Wmin > Wc → creates unemployment like competitive case.
Transfer earnings：The minimum a factor must receive to remain in current use (opportunity cost).
Economic rent：Any payment above transfer earnings. Workers with rare unique skills (top footballers, surgeons) have low supply elasticity → large economic rent component → explains very high wages.
Externalities：Costs or benefits experienced by third parties not directly involved in the economic transaction.
- Negative consumption externality：MSC > MPC → over-consumption at market output. (e.g. alcohol, cigarettes)
- Positive consumption externality：MSB > MPB → under-consumption. (e.g. vaccination → herd immunity)
- Negative production externality：MSC > MPC (supply side) → over-production. (e.g. factory pollution)
- Positive production externality：MSC < MPC → under-production. (e.g. training workers who move to other firms)
In all cases: deadweight loss = triangle between Q_market and Q_social optimal.
- Indirect tax：Shifts MPC up → internalises negative externality. Eval: hard to set correct level; regressive impact.
- Subsidy：Shifts MPC down → increases output for positive externality. Eval: costly, opportunity cost.
- Regulation / Ban：Direct prohibition. Eval: effective if enforceable; may drive underground.
- Tradable permits：Cap-and-trade — pollution rights allocated and traded. Total pollution capped; efficient firms sell excess permits.
- Property rights (Coase theorem)：Clear property rights → parties negotiate efficient outcome. Eval: high transaction costs in practice.
- Information provision：Correct information failure. Cheap but people may ignore it.
- Nationalisation / Privatisation：Government ownership to internalise externalities vs private competition for efficiency.
Profit maximisation：MC = MR. Main shareholder incentive. Funds R&D. Diagram: produce Qm, supernormal profit rectangle.
Sales maximisation：Maximise output subject to normal profit constraint (AR = AC). Larger market share → managerial prestige. Qsales > Qm.
Revenue maximisation (Baumol)：Produce at MR = 0 (max TR). Managers' pay often linked to revenue. Qrev > Qm.
Profit satisficing：Make "satisfactory" profits to satisfy shareholders while pursuing other goals (Divorce of Ownership from Control — Principal-Agent Problem).
Reasons to stay small：Local/niche market, personal control, personalised service requires small scale, capital constraints.
Reasons to expand：Economies of scale, greater market power, diversification, new markets, managerial incentives.
Horizontal integration：Same industry, same stage. → EoS, market share. Risk: monopoly power, CMA scrutiny.
Vertical integration：Same industry, different stages. → Supply chain control. Risk: lack of expertise, regulation.
Conglomerate integration：Different industries. → Risk diversification. Risk: shared reputation risk, management spread thin.
If MPC = 0.8 → Multiplier = 5. A $1 increase in G → national income rises by $5.
Essay：↑G → AD rises → real output rises by multiplied amount (re-spending of income through rounds of consumption) → employment rises → income rises → further ↑C → multiplier effect continues until leakages absorb the injection.
Actual growth：Increase in real GDP — short-run increase in production.
Potential growth：Outward shift of LRAS/PPC — long-run increase in productive capacity.
Positive output gap：Y > Yfe → demand-pull inflationary pressure.
Negative output gap：Y < Yfe → unemployment, deflationary gap.
Business cycle：Boom → Recession (2+ quarters of falling GDP) → Trough/Slump → Recovery.
Neo-classical LRAS：Vertical at Yfe. In LR, economy always returns to Yfe through automatic price/wage adjustment. AD changes only affect price level in LR.
Full employment：No cyclical unemployment. Some frictional, structural, voluntary still exists = Natural Rate of Unemployment (NRU).
Voluntary unemployment：Workers choose not to work at going wage (e.g. benefits make non-work attractive).
Involuntary unemployment：Workers want to work but cannot find jobs — caused by demand deficiency or structural mismatch.
Equilibrium unemployment：Exists when ADL = ASL. Includes voluntary + frictional + structural = NRU.
Disequilibrium unemployment：Real wage above market clearing → cyclical unemployment.
Definition：Use of taxation and government spending to manage aggregate demand and achieve macroeconomic aims.
Expansionary FP：↑G or ↓tax → ↑AD (C+I+G+X-M shifts right). Multiplier effect amplifies impact.
AS effects：Investment in infrastructure/education (supply-side FP) → shifts LRAS right → ↑productive potential.
- Unexpected responses：Consumers may save tax cuts if confidence low; liquidity trap limits effectiveness.
- Time lags：Recognition + implementation + effectiveness lags — takes time from decision to impact.
- Crowding out：Government borrowing raises interest rates → private investment falls (Neo-classical view).
- Automatic stabilisers：Unemployment benefits, progressive tax — reduce need for discretionary FP.
- Laffer Curve：High tax rates may reduce revenue if above optimal rate.
- Spare capacity：Near full capacity → mainly raises prices, not output.
Definition：Use of interest rates, money supply, and exchange rate by the central bank to manage AD.
↓ Interest rates：↑ borrowing → ↑C and I → AD shifts right. Also ↓ exchange rate → ↑ exports → AD rises.
QE (Quantitative Easing)：Central bank buys bonds from commercial banks → ↑ money supply → ↓ interest rates → ↑ AD. Used when rates near zero.
QT (Quantitative Tightening)：Sells assets → ↓ money supply → ↑ rates → ↓ AD. Combats inflation.
AS effects：Low interest rates → ↑ investment in capital → ↑ productivity → LRAS shifts right over time.
Monetarist：V and T stable in LR → ↑M → proportional ↑P (inflation). Control money supply to control inflation.
Keynesian：V is unstable — in recession, V falls (liquidity trap). ↑M may not raise P proportionally. Fiscal policy more effective.
- Liquidity trap：Near-zero rates → further cuts can't stimulate borrowing. QE needed but uncertain.
- Bank behaviour：Banks may hold excess reserves rather than lend (risk aversion).
- Confidence：Businesses may not invest even at low rates if expectations pessimistic.
- Exchange rate complications：Capital flows and exchange rate effects may offset intended outcome.
- Spare capacity：Impact on output vs price depends on position vs LRAS.
Interventionist SSP：Government invests to shift LRAS right. Examples: education & training, infrastructure, industrial policy, R&D subsidies.
Market-based SSP：Remove distortions. Examples: deregulation, privatisation, income tax cuts (↑ work incentive), trade union reform, flexible labour markets.
Evaluation：Long time lags; high opportunity cost; deregulation may cause negative externalities; tax cuts may worsen inequality; politically difficult (short-term costs, long-term benefits).
Expenditure-reducing：↓ total domestic AD to correct current account deficit or inflation. Tools: contractionary FP (↑tax, ↓G) or contractionary MP (↑ rates).
Expenditure-switching：Switch spending from imports to domestic goods without reducing total AD. Tools: devaluation, tariffs/quotas, subsidies to domestic firms, SSP to improve competitiveness.
Devaluation：Government lowers fixed exchange rate → exports cheaper, imports more expensive → improves current account (if ML holds).
Only then does devaluation improve the current account balance.
J-curve：Short run — existing contracts prevent volume adjustment → CA worsens first (only prices change). Long run — volumes adjust → CA improves. Path traces a J-shape.
Traditional Phillips Curve (SPC)：Inverse relationship between inflation and unemployment in the short run. Government can trade off between the two via demand management.
Expectations-Augmented (LPC)：Any attempt to reduce unemployment below NRU → rising inflation expectations → SRAS shifts left → unemployment returns to NRU at higher inflation. LPC is vertical at NRU.
Evaluation：Breaks down in stagflation (1970s oil shock — both high inflation and unemployment). Relies on stable expectations. Policy may shift expectations and reduce effectiveness.
GNI：Total income earned by residents from domestic + foreign sources. ▸ Easy to measure, comparable. × Ignores distribution, informal sector, non-market activity, environment.
HDI：Composite of GNI per capita + education (expected + mean years schooling) + life expectancy (0–1 scale). ▸ Broader than GNI, guides policy. × Misses inequality within country, infrastructure, freedom.
MPI：Measures deprivation across 10 indicators in health, education, living standards. Multidimensionally poor if deprived in ≥33% of indicators. ▸ Targeted policy tool. × Complex, data costly, indicator selection arbitrary.
MEW：GNI + leisure + non-market production − negative externalities − defensive expenditures. ▸ Most complete welfare measure. × Very difficult to quantify, not standardised.
Poverty cycle：Low income → low savings → low investment → low capital → low productivity → low income.
Globalisation：Trade (export markets, specialisation gains, but structural unemployment); FDI (jobs, technology transfer, but profit repatriated); Migration (brain drain, but remittances).
Trade blocs：FTA → Customs Union → Monetary Union → Full Economic Union. Trade creation (within bloc) vs Trade diversion (away from efficient non-members). Loss of independent monetary policy in monetary union.
International Aid：+ Breaks poverty cycle, funds infrastructure/education, technical assistance. − Aid dependency, tied aid serves donor, corruption may divert funds.
Lorenz Curve：Shows cumulative % of income vs cumulative % of population. More bowed from 45° line → more inequality.
Gini coefficient：Area between Lorenz curve and line of perfect equality / total triangle below 45° line. 0 = perfect equality, 1 = perfect inequality.
Kuznets Curve：Inverted-U relationship between inequality (Gini) and income per capita. As countries first industrialise, inequality rises. As they become richer, inequality falls (education, welfare state). Empirical evidence is mixed.
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Developments in the Global Economy
全球经济发展 · 知识点自查
Globalisation 全球化: the ever-increasing integration of the world's economies into a single international market. 全球各国经济不断融合成统一的国际市场。
- FDI 外国直接投资: cross-border flows where one firm buys or sets up a firm in another country.
- TNC 跨国公司: a company with significant production operations in at least two countries.
- Trade liberalisation 贸易自由化: a move towards freer trade by removing protectionist barriers.
- Trading bloc 贸易组织: a group of countries that agree to reduce/remove tariffs, quotas and barriers between themselves.
- Lower transport costs 交通成本下降: containerisation, transport economies of scale, fuel efficiency, better infrastructure.
- Trade liberalisation 贸易自由化: WTO work, fewer tariffs/barriers.
- More & larger trading blocs 区域贸易组织增多 (e.g. EU).
- Lower communication costs 通讯成本下降: internet, mobile, 5G.
- Political change 政治开放: opening up of China and the former USSR.
- Rise of TNCs 跨国公司增多 (offshoring & outsourcing) & opening of global financial markets (removal of capital controls).
- Comparative advantage → specialisation → higher world output & living standards.
- Consumers: lower prices, more choice → higher consumer surplus.
- Firms: larger markets, economies of scale → higher revenue/profit.
- Technology transfer; higher tax revenues; reduced absolute poverty in LEDCs; labour migration reduces geographical inequality.
- Over-dependence on trade → current-account imbalance & economic contagion (e.g. 2008).
- Exploitation of labour (sweatshops); negative externalities & faster use of non-renewable resources.
- Higher inequality between & within countries; structural unemployment from displaced workers.
- Pressure on public services from migration / brain drain; TNC tax avoidance & transfer pricing reduce tax revenue.
Transfer pricing 转移定价: a TNC accounting technique that shifts profits by selling internally at a low price from a high-tax country to a part of the firm in a low-tax country, cutting tax owed.
Control 管控: governments regulate transfer pricing and use tax-base rules to ensure the profit declared is 'fair'.
Absolute advantage 绝对优势: a country can produce a good more cheaply (in absolute terms) than another.
Comparative advantage 比较优势: a country can produce a good at a lower opportunity cost than another.
Even if one country has absolute advantage in everything, both gain by specialising where opportunity cost is lowest — total output rises.
- Opportunity cost 机会成本: the benefit forgone of the next best alternative.
- Specialisation 专业化: countries concentrate on certain goods/services and trade the surplus.
- Theory of CA: if opportunity costs of production differ, trade is mutually advantageous and shifts the PPF outward.
- Ignores transport costs; assumes constant costs & perfect factor mobility (no diminishing returns).
- Over-specialisation → vulnerability to external shocks & over-dependence on imports.
- May worsen terms of trade; risk of structural unemployment & long supply-chain disruption.
- Gains only arise if terms of trade lie between the two opportunity-cost ratios.
Pattern of trade 贸易模式: the composition (goods/services) and geographical distribution of exports & imports.
- Emerging economies export more manufactures → run trade surpluses.
- Developed economies move to importing goods & exporting services/high-tech → trade deficits.
- Drivers: comparative advantage, trading blocs, exchange rates/currency wars, protectionism, FDI, deindustrialisation.
Terms of trade (ToT) 贸易条件: the ratio of average export prices to average import prices.
A rise (improvement) means each unit of exports buys more imports. ToT changes feed into the current account (effect depends on PED).
- Relative inflation rates; relative productivity; relative labour costs.
- Exchange-rate depreciation/devaluation (lowers export prices, raises import prices).
- Capital investment; commodity price changes (e.g. oil for net exporters/importers); protectionist policies; competition in key markets.
- Free trade area: free trade between members; each sets its own external tariff.
- Customs union: free internal trade + a common external tariff.
- Common market: customs union + free movement of factors of production.
- Economic union: common market + harmonised economic policy (often fiscal & monetary union).
Benefits: trade creation, economies of scale, more competition (↓X-inefficiency), consumer surplus, higher GDP & employment, improved current account, more innovation, lower transaction costs.
Costs: trade diversion, loss of comparative advantage & sovereignty, greater external-shock interdependence, domestic firms unable to compete with TNCs → unemployment.
- Tariff 关税: a tax on imports raising their domestic price.
- Quota 配额: a physical limit on import quantity.
- Subsidy 补贴: payment to domestic producers to lower their costs/prices.
- Non-tariff barriers 非关税壁垒: regulations/standards/admin barriers. Also dumping: selling below cost price abroad.
A tariff shifts world supply up from Sw to Sw+t. Domestic consumption falls, domestic production rises, and imports fall.
- Consumer surplus falls; producer surplus rises.
- Government gains tariff revenue; there is a net welfare (deadweight) loss.
- Protect infant industries (朝阳) & geriatric industries (夕阳); protect employment.
- National security; prevent dumping; correct a current-account deficit.
- Raise government revenue; limit imports from countries with weak health/safety/environmental laws.
Balance of payments 国际收支: a record of all financial transactions between residents of one country and the rest of the world.
- Current account: trade in goods, trade in services, primary & secondary income.
- Capital account: non-produced, non-financial assets & capital transfers.
- Financial account: FDI, portfolio investment, other investment & reserves.
Current-account deficit: debits > credits (进口大于出口). Surplus: credits > debits.
- Overvalued currency → exports dear, imports cheap (国际竞争力下降).
- Low productivity / weak human capital → high unit costs, uncompetitive exports.
- Strong economic growth → high marginal propensity to import.
- High relative inflation; slowdown in trading partners; rising protectionism abroad.
- High productivity / low unit costs; currency depreciation; low relative inflation.
- Low regulation, strong infrastructure, reputation for quality, prior tech investment.
- Rising world demand / commodity prices; weak imports (low real incomes or protectionism).
- Fixed 固定汇率: rate held constant; Floating 浮动汇率: set by free-market forces.
- Managed / dirty float 管理浮动: market-determined but central banks intervene at times (£, $, €, ¥).
- Adjustable peg, crawling peg; PPP theory: long-run rates driven by inflation differentials.
- Appreciation / Depreciation: a rise/fall in currency value via free-market forces (or a managed float).
- Revaluation / Devaluation: a government/central bank officially fixing a new higher/lower rate in a fixed or pegged system.
- Exports cheaper, imports dearer → improved current account & competitiveness (出口便宜，进口贵).
- Higher net exports → higher AD → growth & lower unemployment.
- Cost-push inflation from dearer imported inputs; more inward FDI.
J-curve 效应: after a devaluation/depreciation the current account first worsens (short-run demand is inelastic; contracts/quantities slow to adjust) before improving in the long run.
Marshall–Lerner condition 马歇尔-勒纳条件: a devaluation improves the current account only if the combined price elasticities of exports and imports exceed 1.
To raise the currency's value, the central bank buys the excess supply (AB) using foreign-currency reserves — shifting demand right. To lower it, the bank sells its own currency to plug the shortage — shifting supply right.
International competitiveness 国际竞争力: the ability of a firm/country to compete effectively in international markets.
- Relative unit labour costs 相对单位劳动成本; relative export prices; productivity (output per worker/hour).
- Non-price factors 非价格因素: quality, design, reliability, after-sales service.
Factors: productivity, exchange rate, relative wage/non-wage costs, regulation, infrastructure, inflation, tax rates, non-price factors.
Measures: spending on education/training, export incentives (tax breaks/subsidies), measures to lower the currency, privatisation/deregulation/trade liberalisation, healthcare & infrastructure, attracting FDI, supporting entrepreneurship.
Absolute poverty 绝对贫困: when individuals cannot consume sufficient necessities to survive (无法满足基本生存需求).
Relative poverty 相对贫困: poverty defined relative to average living standards — often incomes below 50% of the country's median household income.
The Lorenz curve 洛伦兹曲线 plots cumulative % of income against cumulative % of households. The further it lies from the 45° line of equality, the greater the inequality.
The Gini coefficient 基尼系数 is a statistical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality). The Gini index = Gini × 100.
The Kuznets curve 库兹涅茨曲线 hypothesises an inverted-U relationship: in early development inequality rises with growth, then falls once a certain income level is reached.
- Progressive 累进税: % of income paid in tax rises as income rises (e.g. income tax).
- Regressive 累减税: % paid falls as income rises (e.g. indirect/consumption taxes).
- Proportional 比例税: % stays the same as income changes.
Also: direct tax levied on income/profit; indirect tax on a good/service.
- Widening wage/skill differentials; education premium; disproportionate rise in top-1% earnings.
- Tax changes (↑indirect, ↓wealth/income tax); globalisation & immigration pressure on low-skill wages.
- Eroded trade-union power; deregulation/privatisation concentrating asset ownership; cuts to benefits; wealth inequality.
- More progressive tax & higher means-tested benefits; higher minimum wage.
- Education & training; measures to cut unemployment; lower regressive taxes.
- Better public services (health, education, social housing, pensions); stronger unions; subsidies/price caps on essentials.
- Capital expenditure 资本性开支: investment goods — new roads, hospitals, infrastructure.
- Current expenditure 费用性开支: short-term goods/services — teachers' salaries, heating; includes debt interest.
- Transfer payments 转移支付: spending with no corresponding output — pensions, child benefit, welfare.
Crowding out 挤出效应: at full employment, extra government spending raises interest rates and uses up resources, reducing private-sector investment & consumption (AB crowds out CD).
Crowding in 挤入效应: when there is spare capacity (unemployment), extra public spending raises the economy's productive potential and attracts additional private-sector spending — both public & private spending can rise together.
Causes of an increase: GDP changes & automatic stabilisers, external shocks, higher expectations, ageing/larger population, discretionary policy, higher interest payments, wider tax base.
Effects of a fall: lower AS (if on infra/education), negative multiplier, higher unemployment & inequality, lower inflation, less crowding out, improved budget balance.
- Direct tax 直接税: levied directly on income/profit (income tax, corporation tax — progressive).
- Indirect tax 间接税: on goods/services (VAT — regressive).
- An income-tax rise ↓disposable income ↓consumption ↓AD; a VAT rise ↑firms' costs → SRAS shifts up.
The Laffer curve 拉弗曲线: at low tax rates, raising rates increases tax revenue; beyond an optimum rate T*, further rises discourage work & investment so total revenue falls.
- Cyclical deficit 周期性赤字: caused by a demand deficiency in recession; temporary, self-correcting as the economy recovers.
- Structural deficit 结构性赤字: persists even at full employment; permanent unless tax rises / spending cuts are made — more serious.
National debt 国债: the total accumulated government borrowing still owed to lenders.
- Higher interest payments → cost & opportunity cost for future generations.
- Financial crowding out; lower credit rating → higher borrowing costs & less FDI.
- Loss of currency confidence; possible inflationary pressure (printing money); may need IMF/ECB help.
- Fiscal 财政政策: government spending & taxes. Monetary 货币政策: interest rates & money supply.
- Supply-side 供给侧: raise productive potential. Exchange-rate & direct controls.
- Automatic stabilisers 自动稳定器; fiscal austerity 财政紧缩; reflationary (↑AD) vs deflationary (↓AD) policy; QE.
Economic development 经济发展: improvement over time in a wide range of indicators (GNI, life expectancy, education, clean water, connectivity).
HDI 人类发展指数: a UN measure based on three components — health, education and income.
Harrod–Domar model: growth depends on the savings ratio and the capital-output ratio (technological progress).
Savings gap 储蓄缺口: the shortfall between actual savings and the savings needed to fund the investment required for higher growth → low savings, low investment, low capital accumulation, low growth.
Lewis structural dual-sector model: an economy has a low-productivity traditional (agricultural) sector with surplus labour and a higher-productivity modern (industrial) sector. Growth comes from transferring labour from agriculture to higher-value industry. 工业部门的劳动生产率高于农业。
Prebisch–Singer hypothesis: over the long run, prices of primary commodities fall relative to manufactured goods, so countries dependent on primary-product exports suffer a continuously worsening terms of trade (低收入弹性).
- Foreign-currency gap 外汇缺口: export earnings fall short of the level needed to fund imports for higher growth.
- Capital flight 资本外逃: savings sent abroad → worsens savings & FX gaps and shrinks the tax base.
- Dutch disease 荷兰病: resource exploitation raises the exchange rate and harms competitiveness of other sectors.
- Resource curse 资源诅咒: abundant resources are exploited yet little development follows.
Economic 经济因素: commodity-price volatility, primary product dependency, savings gap, foreign-currency gap, capital flight, demographics, debt, weak access to credit/banking, poor infrastructure, low education/skills.
Non-economic 非经济因素: corruption, weak institutions, war, terrorism — often more significant than economic factors.
- Trade liberalisation; promotion of FDI; removal of government subsidies.
- Privatisation; floating exchange rates; developing the financial sector (microfinance).
- Development of human capital (education & health); protectionism; managed exchange rates.
- Infrastructure development; promoting joint ventures with TNCs; buffer-stock schemes.
Aid/debt relief can fill the savings gap & foreign-currency gap, fund infrastructure & human capital, and reduce absolute poverty (↑HDI).
Types: bilateral, multilateral, tied aid, grants, concessionary loans, microfinance.
Joint venture 合资企业: a firm owned by two major firms (or a firm + government). Benefits: shared costs & risk, access to technology/finance/markets, economies of scale, tax revenue & positive externalities (skill/capital transfer).
A buffer stock scheme 缓冲库存计划: an agency buys and sells in the open market to keep a commodity price between a minimum and maximum. Below the floor → buy to raise price; above the ceiling → sell to lower it.
- IMF: fosters monetary cooperation, ensures exchange-rate stability, provides temporary finance to ease balance-of-payments adjustment, plus capacity development & debt relief.
- World Bank: grants, interest-free credit & low-interest loans; strengthens the private sector; debt relief — funds education, infrastructure, healthcare (↑HDI).
- NGOs: promote development through community-based projects.