Visit this site and explore different possibilities on a supply/demand graph with varying levels of tax applied. Try answering the questions at the bottom. (Note – the graph also refers to Efficiency Loss which is not actually required on the IGCSE syllabus, but is necessary to IB Economics).
As we begin to explore macroeconomics, it is worth thinking about some of the key things that we will be looking at and how they apply to a real life country.
Economists agree that there are four main macroeconomic goals which most governments consider when managing their economy (and some governments, as we know, manage their economies more directly than others). The four macroeconomic goals are:
1) Growth (an increase in the country’s total output)
2) Low Unemployment (or put another way, high employment)
3) Stable General Price Level (while it is accepted that a small amount inflation is manageable, both high inflation and deflation are seen to be undesirable).
4) A Healthy Balance of Payments (for example, importing more goods and services than those that a country exports can be seen to be undesirable in the long run).
Sometimes, a fifth macroeconomic goal is added, although we should recognise that it clearly appears to be of variable importance to the different governments of the world:
5) Equity (an even distribution of wealth within the country)
There are other macroeconomic goals that are sometimes considered which you may come across in your research.
A good research task is to consider these macroeconomic goals for a country and gather data on a number of economic indicators for your country. Examples of such indicators include:
GDP and / or GNP
GDP per capita / and or GNP per capita
Rates of Inflation
Interest Rates
Unemployment Levels
Balance of Trade (Imports versus Exports)
Distribution of Wealth
You could choose a country that has signed up to the OECD. What does that stand for, and why would a country want to belong to this organisation?
Look at the economic health for your chosen country over the past ten years. Gather text, images and even video links to support your findings. If you can, try to see why they changes but don’t worry about this too much – this can be complicated and we haven’t even studied the theory yet.
A great way to present your findings would be to produce a ‘glog’ or online poster. You can host your glogs at http://www.glogster.com/ and teachers can even set up accounts for their class here: http://edu.glogster.com/
Make your glog as informative as possible. Try to mix up text, images, graphs and tables and possible short video clips (from youtube for example). Remember to give a title and explain your chosen country’s membership of the OECD.
These can sometimes be referred to as Production Possibility Curves (PPCs), to reflect their shape. Frontier is a better word to use … you will need to think about what it is that the term frontier implies.
This session assumes you have a basic knowledge of PPFs already and points you to resources to help strengthen your understanding of this important concept.
This link is very good for explaining
a) the reason that the PPF is a curve and not a straight line
b) how opportunity cost increases as an economy tends to specialise in one of the two goods
If you feel that you need to understand these concepts even further, read the following link. Note that this introduces the idea of an outward shift of the PPF. You can ignore section C which we look at later in the course (especially Higher Level candidates)
Finally – what assumptions does the PPF make? Try and list as many as possible and then consider how realistic these assumptions are – given reasons or examples as to why they may be unrealistic.
Scarcity • factors of production: land, labour, capital and management/entrepreneurship • payments to factors of production: rent, wages, interest, profit(we cover this later on in the course) Choice • utility: basic definition • opportunity cost • free and economic goods’
What do we mean by scarcity? First we need to know what we mean by needs and wants. These are easy concepts to understand …
Need more on this? …
Having watched the clips, make sure you can define needs and wants. It is always good to have examples as well as definitions.
Now we move on …
This excellent YouTube clip gives us an animated explanation of the concept of scarcity, while referring to Labo[u]r, Raw Materials and Capital. We need to be able to define these three things. Note that Raw Materials is often referred to as Land within Economics.
It is important to be able to give definitions for these three resources (or ‘factors of production’) – land, labour and capital. You should also be able to define a fourth – entrepreneurship (commonly referred to as enterprise’). Use this next YouTube clip to check your understanding of these:
This next YouTube clip develops the concept of scarcity and concentrates on how scarcity means that choices have to be made – this is essentially what economics is all about. (Note – it introduces some ideas that we will return to in more detail in a later section). Watch it and use it to define and give examples of the main concepts which are referred to as such as wants, economic goods, free goods.
The summary below helps us understand the above ideas, and leads us onto the concept of Opportunity Cost.
Opportunity Cost – "the value of the next best alternative forgone as the result of making a decision" [see wikipedia for fuller information]
So what do we mean by ‘next best’? This YouTube clip exemplifies:
This light-hearted YouTube clip demonstrates that it need not be about money, but that cost in this sense can be measured in time:
This YouTube video underlines the concept even further, and considers among other things, the opportunity cost of surfing the web.
It is clear that we have to be able to value the things that we choose to do/make/consume and the things we choose to forego. The money value of an opportunity cost can actually get very complicated. Try this activity:
You can see from this interactive image below that we have explored two of the basic economic principles in this section:
We are now beginning to consider some of the fundamental assumptions which are central to the ‘science’ of Economics. We should already understand that utility is a key idea, yet also a very vague term when one we consider how subjective this idea is.
Another key assumption of mainstream Economics is that people behave in a rational way. Remember the 6 Principles:
Look at principle 3. This assumes rational responses to a given situation.
Yet is this always the case?
The excellent TED Talks website has a number of interesting presentations that argue that we as humans do not always behave rationally. These arguments come from various connected disciplines (or subjects) such as behavioural economics and pyschology. It is worth knowing these more recent theories which seem to contradict the long standing assumption that we behave rationally. Note, if you study Theory of Knowledge, these arguments are really useful for when you study Reason as a Way of Knowing but also the Human Sciences as an area of Knowledge.
Suggested learning activity, if you are studying as part of a group. Divide yourselves up so that you take one of the following videos each (or as pairs, threes, whatever). Watch your chosen video and prepare a short summary (max 300 words) of the messages which are relevant to your studies of Economics, and be prepared to share your summary with the others in your group.
Note – the title above each video embedded below gives a direct link to the video. From the direct link you could download each video to your iPod / iPhone, for example.
Can you explain the difference between direct and indirect tax with example taxes?
Progressive, Regressive, and Proportional Tax
ONE Massachusetts demonstrates the different types of taxes:
The arguments surrounding and Impacts of these types of taxes (Progressive, Regressive, and Proportional)
An argument in favour of Progressive Taxes by David Cay Johnston:
An argument against progressive taxes by Mike Huckabee:
Specific Examples of Taxation
This mjmfoodie video includes specific examples of US taxes, then a section on how taxes relates to the government’s budget (which is worth understanding in general terms) and finally a section reviewing the general types of taxes.
A good overview of different taxes (some of which is a little complex):
A ‘tic tac toe’ game which puts sme of the above to the test but you may also need to use your common sense and a bit of guesswork. Play as two people.
McConnell Brue Economics – Online Learning Centre – Interactive Graphing Exercise – Tax Incidence
Suggested learning activity, if you are studying as part of a group. Divide yourselves up so that you take one of the following videos each (or as pairs, threes, whatever). Watch your chosen video and prepare a short summary (max 300 words) of the messages which are relevant to your studies of Economics, and be prepared to share your summary with the others in your group.
