CXC Economics Study Guide (Topic 1): The Nature of Economics What is Economics? Economics is the study of how individuals, businesses, governments and societies as a whole, employ resources to satisfy competing wants and needs, in light of scarcity. What are the three basic economic problems/ questions? ● What goods and services will be produced? ● How would these goods and services be produced? ● Who would consume these goods and services? List five (5) economic goals. ● Economic Efficiency: Making the most of resources without waste is an economic goal. ● Economic Freedom: Being able to make choices about which goods and services to produce and distribute without government interference or intervention is an economic goal. This freedom allows entrepreneurs to take risks and make choices to start various businesses. ● Economic Security: Knowing that goods and services will be available when needed. Having a safety net that protects individuals in a time of economic disaster. ● Economic Equity: A fair distribution of wealth. ● Economic Growth and Innovation: Using new ideas and ways of creating goods and services leads to growth and a higher standard of living or way of life for all. What is an economy? An economy is the system in which available resources are distributed to meet society’s wants and needs. What are the four (4) basic types of economies? 1) Traditional Economies: In a traditional economy, traditions, customs, and beliefs help shape the goods and the services the economy produces, as well as the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm- based. Advantages: - Each family is aware of their respective role in sustaining the economy. - Leaders are impartial in the distribution of food, shelter and health care. Disadvantages: - Not usually receptive to the introduction of new technology. 2) Planned/Command Economies – In a command economy, governmental planning groups make the basic economic decisions. They determine such things as which goods and services to produce, their prices, and wage rates. Cuba and North Korea are examples of command economies. Advantages: - Equality is focused on as the government seeks to distribute all resources impartially, whether it is properties, jobs, incomes, social services such as, health care and education, resulting in everybody belonging to the same social class. - The ability to direct a nation’s resources in line with national goals. - Economy is usually stable, with the economy not subjected to high unemployment and inflation rates. Disadvantages: - The enforcement of policies despite how unpopular they are with the masses. - There is little freedom, as people are not allowed to choose where to seek employment, negotiate pay rates or to purchase goods of choice. - Quality is normally compromised to meet quantity requirements. 3) Free Market Economies – In a free market economy, economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place. As such, this type of economy is often referred to as a price system. Other names for the market system are free enterprise, capitalism, and laissez-faire. The economies of the United States, Singapore, and Japan are identified as market economies since prices play a significant role in guiding economic activity Advantages: - It functions freely, and firms and sectors of the economy are not obligated to coordinating plans in line with government economic decisions. - Companies are able to easily respond to day to day changes in demand and supply without having to adhere to too much government protocol. - Inhabitants have total responsibility over their own well-being, and are expected to find their own jobs, negotiate salaries, purchase goods of their choice etc. Disadvantages: - The basic needs of the populous are not always provided, such as food, shelter and health care, resulting in the development of a class structure and poverty. - Economy tends to be unstable with periods of unemployment, inflation and even recessions. - Lack of job security, due to uncertainty in the business world and companies not producing efficiently, thus not meeting projected profit targets. 4) Mixed Economies –. To some degree, all modern economies exhibit characteristics of both systems and are, therefore, often referred to as mixed economies. For example, in the United States the government makes many important economic decisions, even though the price system is still predominant. Even in strict command economies, private individuals frequently engage in market activities, particularly in small towns and villages. Advantages: - Social, political, business ownership and profit earning freedoms are maintained. - Higher quality products and services are offered due to competition among firms/companies and strict regulatory standards. - The public and private sector in most cases work in tandem to ultimately increase the production of the country/region. Disadvantages: - The government is in some cases very influential in the economy, engineering policies which alter interest rates, taxes and (the) money supply in an effort to achieve its targets. - In some countries the economy is driven by the private sector, with them being responsible for the overall growth of the economy, the at times instability, and due to changes in their respective markets, unemployment, inflation and recession. - Some sectors in the economy operate as a monopoly, whether they are run privately or by the government. These monopolies stand a greater risk of being inefficient, which can lead to higher prices for the consumer. What is the relationship between scarcity and choice? The recurring theme that makes a problem an economic one is the problem of scarcity. All the factors of production, that is, land, labour and capital are all limited. It is this lack of what is available, relative to that wanted, that leads to the reality of us all making choices. What is an opportunity cost? The opportunity cost of a decision is the value of the next best alternative this decision forces a person to do without, while the monetary cost is the market price of goods. Therefore, the opportunity cost of buying a blackberry is not its market price, but the value of the other things that could be purchased instead. What is a monetary cost? A monetary cost is the amount of liquid funds that a product or service costs a consumer to buy. What is a production possibility frontier? A production possibility frontier which perfectly illustrates the principle of opportunity cost is a graph that shows the possible combinations of goods that a producer can manufacture given the available resources and the current level of technology. The table below lists the combination of oranges and sugarcanes depicted in the production possibility frontier. Tonnes of Oranges 40000 0 Tonnes of Sugarcane Points A 30000 25000 B 20000 42000 C 10000 54000 D 0 65000 E The production possibility frontier shows that the greater the quantity of one good that is produced, the smaller the quantity that can be produced of the other good. If the agriculturer decides to grow only oranges, the yield will be 40,000 tonnes, but if he/she decides to grow 30,000 tonnes, then 25,000 tonnes of sugarcane can also be yielded. Therefore, the opportunity cost of obtaining 25,000 tonnes of sugarcane is the 10,000 tonnes of oranges the agriculturer must forgo. (Topic 2): Production, Economic Resources and Resource Allocation What is the Difference between production and productivity? ● Production is defined as the means by which resources (whether tangible, such as, raw materials or intangible, such as, ideas/information) are transformed into goods (tangible) and services (intangible). ● Productivity however, is the measure of the efficiency of the production process, and is calculated as the ratio of what is produced to what is required to produce it. What are the factors of production? Factors of production are the inputs/resources required for the production of goods and services, namely; ● Land: includes all the world’s natural resources such as, unimproved land, mineral deposits, oil and bauxite. It is rewarded by rent ● Labour: is the physical and mental input contributed by humans to the production process. It is rewarded by wages or salaries ● Capital: is the collection of man-made inputs used in the production of other goods. These include factories and machines and are awarded by interest on investment. ● Entrepreneurial talent Identify three (3) advantages and disadvantages of division of labour. Division of labour which refers to the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency, has a number of advantages and disadvantages. Some of these would be addressed as follows: Advantages: ● The repetitive nature of one’s task will ultimately lead to mastery in the area, and persons being more efficient. This leads to another advantage on the side of the worker, he/she can now negotiate higher pay for the specialised work. ● Cuts production time, as workers do not have to switch between tasks. ● Leads to more inventions in specific fields. Disadvantages: ● Very monotonous and will lead to a loss of interest. ● Does not promote employee diversification as it requires workers to focus on a particular task, thus limited their capacity to function in other areas. ● Risk of unemployment, due to the limitation of being skilful in only one area. List and explain the main types of costs that a firm faces. ● Variable costs, are those which increase and decrease with the productivity of a firm. ● Fixed costs are costs which exist regardless of the level of production of the firm. Fixed costs do not fluctuate with productivity. ● Total cost is the sum of total fixed costs and total variable costs (TC= TFC + TVC). ● Average cost is defined as total cost divided by output or quantity produced (AC= TC/Q). ● Marginal cost is defined as the increase in total cost that arises from the production of an additional unit of output (MC=∆TC/∆Q). What is the difference between economies of scale and diseconomies of scale? ● Economies of scale (increasing returns to scale) occurs when the inputs into the production of a certain good increases by an amount/percentage, X, and the quantity of output rises by more than X percent. ● A diseconomy of scale refers to a rise in the average total cost as output increases. (Topic 3): Markets and Prices What are Market Systems? Market systems are those in which decisions relating to resource allocation, production, consumption and price levels are left up to individuals and organizations, who act in their own best interest. What is the difference between demand and supply? ● Demand refers to how much quantity of a good or service is desired by consumers. ● Supply is the amount of a good or service producers are willing to offer at a particular price. What is meant by ceteris paribus? Ceteris paribus means all other things being unchanged or constant. Explain the law of demand. The law of demand states that, the higher the price of a good or service, the less of these products consumers are willing to purchase, ceteris paribus. As the price of these goods and services fall, the more of these products consumers are willing to purchase. Above is a demand curve; it shows the relationship between price and quantity demanded, ceteris paribus. The demand curve depicts the law of demand, and shows that, when the price of a good or service is at a high price, P1, the quantity demanded will be low, Q1. When the price is lower at P3, the quantity demanded will increase to Q3. Explain the law of supply. The law of supply states that, as the price of a commodity rises, so does the quantity supplied, ceteris paribus. As the price falls, the quantity supplied also falls. Above is a supply curve; it shows the relationship between price and quantity supplied, ceteris paribus. The supply curve is a graphical representation of the law of supply, and shows that, when the price of a commodity is low at P1, the quantity supplied will also be low at Q1. As the price of the commodity increases to P3, the quantity supplied also increases to Q3. What factors shift the demand curve? These factors are non-price determinants and include: ● Disposable income ● Consumer preferences ● Changes in population size ● Changes in the price of substitutes or complements. A rightward shift will occur as a result of an increase in the price of substitutes, decrease in the price of complements and an increase (or decrease) in income where the good is a normal good (or inferior good). A leftward shift of the demand curve will occur if there is a decrease in the price of a substitute or increase in the price of a complement, or a decrease in income (where the good is normal) or increase in income (where the good is an inferior good). What factors shift the supply curve? The factors which impact quantity supplied are the price of inputs, improvements in technology, the number of suppliers and prices of related goods. A fall in the price of inputs, increase in the level of technology, increase in the number of suppliers, rise in the price of a complementary good or fall in the price of a substitute will result in a rightward shift of the supply curve as shown in the graph below. On the other hand, a rise in the price of inputs, rise in the price of a substitute, fall in the price of a complement or decrease in the number of suppliers cause a leftward shift in the supply curve. This is also shown in the diagram below. What is market equilibrium? A market equilibrium is the intersection where the supply and demand curves meet. At this point, for a given price, the quantity supplied is equal to the quantity demanded and the market is most efficient. What is meant by the term market failure? Market failure occurs when the market does not provide the most efficient allocation of resources in the economy. What is price elasticity of demand? Price Elasticity of demand serves to determine just how responsive quantity demanded is to changes in price. It is defined as the percentage change in quantity demanded divided by the percentage change in price, that is, If customer demand is very responsive to a change in price, the response is said to be elastic. This occurs where elasticity calculated using the above formula is greater than 1. This also implies that the demand curve is relatively flat as demonstrated below. The response is deemed inelastic when the elasticity is calculated to be less than 1 and when the demand curve is steep as shown below. What are the determinants of price elasticity of demand? - The availability of substitutes: the more substitute goods available, the greater the elasticity of that good. - Degree of necessity: goods of necessity are inelastic, while luxury goods are elastic. - Time period: elasticity is generally higher in the long run than in the short run. What is price elasticity of supply? The price elasticity of supply measures the response of quantity supplied to a change in price. It is defined as the percentage change in quantity supplied to the percentage change in price. The price elasticity of supply, like demand, deems a change elastic if the elasticity is greater than 1 and in this case the supply curve is flat. The reaction is inelastic if the elasticity is less than 1 and the supply curve is steep. What is income elasticity and cross elasticity of demand? ● Income elasticity shows how changes in consumer income affect the quantity of products demanded. It is defined as the percentage change in quantity demanded to the percentage change in income. ● Cross elasticity of demand measures how the demand for a good is affected by the change in price of another good. It is defined as the percentage change in quantity X demanded/ the percentage change in price of Y. The cross elasticity of demand also determines whether goods are complements (used together) or substitutes (used instead of each other). If the cross elasticity is negative, they are complements, if positive, they are substitutes. (Topic 4): The Financial Sector Define the financial sector. The financial sector is the interaction of markets and all therein, within a regulatory framework. This interaction usually entails lending and borrowing both long and short term. This is accomplished through financial intermediaries (banks and other financial institutions) providing a link between households, firms and governments in transferring funds from savers to borrowers, for consumption and investment purposes. What are the five (5) main functions of the financial sector? - Mobilisation of savings: Financial intermediaries allow individuals to save money in a secure place, which when accumulated is lent to firms and individuals. - Risk management: Financial Intermediaries manage risk by lending to a large number of borrowers. They are able to cover risk and absorb the defaults through interest earned on other loans. - Expert advice: Financial Intermediaries are able to acquire information about competing investment opportunities and relay the information to individuals, reducing their information cost. This also aids in ensuring capital are allocated efficiently and to the right projects. - Monitoring borrowers: Financial intermediaries monitor the performance of firms, individuals and other borrowers. - Facilitating the exchange of goods and services: This is accomplished via the ability of financial intermediaries to reduce information and transaction costs, which spurs an increase in transactions. What is money? Money is defined as anything that is used or accepted as payment for goods and services. What are the four (4) main functions of money? - Medium of exchange: To pay for goods and services. - Unit of account: The unit, in which values are stated, recorded and settled. - Standard of deferred payment: The unit in which debt contracts for future payments are stated. - Store of value: Used to maintain the value of wealth. Identify some characteristics of money. - Liquidity: This is the ease in which it is transferred into the medium of exchange. - Transportable/Storable: It is light weight, malleable and easily transportable/storable without depreciation. - Uniformed: It is of standardized size and quality. - Easily Recognized: It is easily recognized by the eye and touch. What is money supply? Money supply is the total supply of money in circulation in a given country’s economy at any moment. What is a Central Bank and why does it play to an important roles in the financial sector? A Central bank is a nation’s primary monetary authority. It wears the hats of, regulator (of commercial banks, building societies, merchant banks, financial houses and other financial institutions), lender of last resort (lends money to financial institutions, at higher interest rates), implementer of monetary policies (the management of money supply and interest rates), implementer of fiscal policies(through which it determines appropriate levels of government spending and taxation) and it also is a reserve(it holds a percentage of the total deposits, made to each financial institution). List and explain the various types of financial institutions. ● Commercial Banks: These are institutions whose main objective is to raise funds. They accomplish this by accepting deposits (they usually have a variety of deposit accounts), using these deposits to make consumer, business and mortgage loans and also buy government securities and bonds. ● Credit Unions: These are non-profit financial institutions which are owned and operated by its members. They offer services to members of a particular group; employees of the same firm, members of the same union, people who reside in a certain geographic area etc. They obtain funds called shares through deposits and use these deposits to issue loans and in some cases mortgages to members. ● Insurance Companies: These companies obtain funds from premiums which are paid annually or in instalments and provide protection to clients through life, health and automobile insurance among others. ● Mutual Funds: These are investment companies which raise money from selling shares to shareholders and invest these funds by buying stocks, bonds and money market instruments. ● Building Societies: These are institutions which raise funds through deposits and use the funds to issue loans, in most cases mortgages. ● Development Banks: These are government owned institutions whose priority is to fund new and upcoming businesses which facilitate growth and development in all areas of the economy. They issue these loans either directly or through Approved Financial Institutions (AFIs). They also offer financial structuring and in the case of the Development Bank of Jamaica, also lead the privatisation of Government of Jamaica assets. ● Stock Exchange: This institution provides a medium through which companies who are registered with the stock exchange board, can buy and sells stock and common stock equivalents in other companies. Identify and explain the various types of bonds and securities in a money market. ● Treasury bonds are long term debt obligations which have maturities of over 7 years and receive interest payments semi-annually. ● Corporate bonds are those issued by corporations and yield higher rates than municipal bonds. These bonds mature anywhere between 1 to 30 years, with the principal being repaid to bond holders on maturity. ● Municipal bonds are those issued by governments, to raise capital for specific projects being undertaken. The bond holders receive interests which are exempt from taxes. ● Equity securities are shares which represent ownership of a firm. Owners of shares receive dividends which fluctuate in market value. (Topic 5): Economic Management- Policies and Goals The following are the definitions of terms used in regards to economic policies and goals. ● National budget: This is the total amount of money forecasted to be spent by the government to cover all of its expenses over a particular period (usually a year). ● National income: This is the sum of the incomes earned by all individuals in an economy before income tax deductions, in the form of wages, profit, interests, rent and pensions. ● Disposable income: This is the amount of income available for an individual to spend after the deduction of all taxes. ● National debt: This is the total outstanding borrowings of a government, whether from internal or external (foreign) creditors. ● Fiscal policy: is a policy which determines appropriate levels of government spending and taxation in a bid to achieve lower unemployment and inflation, and to achieve sustained economic growth. ● Fiscal deficit: occurs when the government will/has spent more money than it has collected. ● Monetary policy: asset of policies which manage the money supply and interest rates in maintaining stability and or growth of the economy. ● Economic growth: is an increase in the level of production of goods and services in a particular country over a specified period of time. ● Economic development: Refers to changes in the socio-economic structure of a country which leads to an increase in the standard of living of the population. ● Balance of payments: is an accounting record of all the transactions made by a country over a specified period of time, comparing the amount of domestic currency paid out, to foreign currency taken in. ● Gross Domestic Product (GDP): This refers to the total money value of all final goods and services produced in a domestic economy in a given year. This is equal to total consumption, investment and government spending, plus the value net exports (value of exports minus the value of imports) GDP = C + I + G + (EX-IM). ● Gross National Product (GNP): This is the total value of all final goods and services produced in a given domestic economy in a given year, minus the income of nonresidents located in that economy, plus income earned by citizens residing abroad. What is unemployment? In economics, unemployment refers to a situation in which an individual is willing and able to work but cannot find a job. Identify the types of unemployment. - Frictional Unemployment: occurs when people are moving between jobs, changing careers, relocating, made redundant or any circumstance that results in persons being unemployed for a period of time, while they are looking for new jobs. - Structural Unemployment: occurs when workers are left without jobs due to changes in the economy/industry they work, due to reduction in demand or technological improvements (methods of production). - Cyclical Unemployment: is the type of unemployment that is caused by a reduction in an economy’s production. Cyclical unemployment thus rises as GDP falls. - Seasonal Unemployment: is the type of unemployment which occurs in industries where the demand for labour or lack thereof, is linked to certain times of the year. - Real wage Unemployment: occurs when wages for services in a particular firm or industry are forced above normal market level. What is the difference between inflation and deflation? ● Inflation: occurs where there is a general and sustained increase in prices in the economy over a period of time. This increase must be measured across a large number of consumer goods. ● Deflation: This occurs when there is a continued decrease in general price levels. Identify three major causes of inflation. - When demand is growing faster than supply which leads to increase in prices (demand- pull inflation). - When companies operational costs increase due to increases in either the inputs, wages etc, which results in an increase in the price of their products in order to maintain a profit margin (cost-push inflation). - Changes in exchange rates. Identify five (5) consequences of inflations. - Creditors lose, as their money has less value when loans are repaid. - Borrowers generally gain from inflation, as they pay back dollars with less purchasing power than when they borrowed it. - Persons with fixed income such as pensioners, experience a decrease in their purchasing power and hence their standard of living. - It leads to even more inflation in terms of the costs that must be shouldered by consumers to cover increasing operational costs due to retailers having to re-price items regularly. - Leads to exports becoming less competitive on the international market, if domestic inflation is higher than that of competing countries. Identify three (3) ways in which government can reduce inflation. - Implementing appropriate fiscal policies: Governments reduce their spending and increase taxes. This policy works in combating demand- pull inflation. - Implementing a monetary policy: Central banks would reduce the money supply available for spending or increase interest rates. This policy works in combating demandpull inflation. - By designing policies which will spur productivity/reduce operational costs, such as giving grants to firms and giving tax breaks and other incentives. What is savings and investment? ● Savings: This is the portion of disposable income that has not been spent on consumption. ● Investment: is the level by which the stock of capital in an economy (factoriesmachinery etc), increases. What is the difference between nominal and real output? Nominal and real output, refer to what prices are used in valuing different outputs produced in an economy over a specified time period. ● Nominal output values goods and services at the price at which they were sold. ● Real output values goods and services of different years at the same prices (this method takes into account yearly rates of inflation). What is a recession? A recession can be defined as a period of general economic decline. This is usually observable through a drop in GDP for two or more quarters. Identify five (5) consequences of a recession. - Decline in economic growth. - An increase in the unemployment rate. Firms are forced to cut the operational costs incurred by paying wages. - Collapse or poor performance of the stock exchange markets. - Failure of businesses. - Financial market failure. Identify three (3) ways in which government can reduce the effect of a recession. - Implementing appropriate fiscal policies: Government would increase government spending and decrease taxes. - Implementing monetary policies: Central banks would increase the money supply available for spending or decrease interest rates. - Creating jobs: Government would try to create as many jobs as possible to reduce the unemployment rate, increasing productivity and ultimately increasing spending. What is a trade union? Trade Unions are organizations created to represent/protect the rights of their members in negotiations with their respective employers/managers. What are the roles of a trade union? - Representing their members in wage negotiations. - Questioning the grounds on which members are suspended, fired or made redundant. - Representing members who have been harassed or victimized. (Topic 6): International Trade Below are definitions of some terms and concepts used in international trade: ● Balance of trade- is the difference in value of a country’s exports and its imports. ● Current account- is the sum of the balance of trade (value of exports minus imports), cross border interest and dividends payments, and gifts from both individuals and governments from other countries such as foreign aid. It measures trade in goods and services as well as income and current transfers. ● Capital account- reflects the change in ownership of fixed assets and the acquisitions or disposal of non-financial assets. ● Financial account – records inward and outward flows of investment. This account includes direct investment, portfolio investment, changes in reserves and other investments. ● Balance of payments (BOP)- is an accounting record summarizing international transactions between a country and foreign territories over a period of time. The balance of payments has three major components, a current account, capital account and the financial account. The BOP can either have a surplus (which occurs when a country sells more to foreign countries than it buys from them or a deficit (when a country buys more from a foreign country than it sells to them. ● Tariff- is a tax imposed by a country’s government on imported products. ● Common External Tariff (CET) – is a uniform tariff implemented by member countries of a customs union, on all imported products from territories outside the union, to any member country. ● Quota (non-tariff barrier) – is the maximum amount of foreign products that are permitted to enter a domestic economy over a specific period of time. ● Exchange rate- is the price at which one currency can be exchanged for another. ● Exchange rate regime- is the means by which exchange rates between different currencies are determined. ● World Trade Organization (WTO) – is the international trade body which regulates and enforces set standards regulating the trading of goods between countries on an international level. What is comparative advantage? A country has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower than producing any other good or service in that country, compared to other countries. Both trading countries can then gain from trade (this is the benefit each party receives) when they both export the goods in which they have a comparative advantage. What is terms of trade? A country’s terms of trade represents the relationship between the price it pays for imported goods and the price it receives for its exported goods. If the prices received for exports exceeds what it pays for imports, a country’s terms of trade is said to be favourable as it means fewer exports have to be sacrificed to obtain a given amount of imports. If the prices received for exports are lower than that paid for the imports, then the terms of trade is not favourable and more exports have to be sold to purchase a given amount of imports. What is an exchange rate? Exchange rate is the price at which one currency can be exchanged for another. What factors influences the level of an exchange rate? - Inflation: the currency of a country with low inflation rates would appreciate, due to extra demand for their products because of cheaper prices and vice versa. - Interest rate: a country which offers high interest rates on deposits will experience increased demand for that currency as persons seek to take advantage of the higher interest rates. - Political and economic factors: majority of investors are risk-averse and as such will not invest in countries that are politically unstable and have low levels of expected growth. The currency for such a country would depreciate. - Current account: a country with a trade surplus would experience a high demand for its currency and the exchange rate would increase. Identify the three (3) types of exchange rates. ● Fixed exchange rate is an exchange rate that is set at a predetermined level and maintained at this level. ● Floating exchange rate is an exchange rate that is allowed to be determined by the market forces of supply and demand. ● Managed exchange rate is a country’s exchange rate that is not fixed or floating, but is influenced by monetary authorities’ actions in the foreign exchange market. What is the difference between currency appreciation and currency depreciation? A currency appreciates when its value increases in respect to other currencies, it depreciates when it losses value in respect to other currencies. (Topic 7): Caribbean Economies and their Global Environment Below are definitions of terms and concepts associated with this section: ● Debt burden- is the amount of money that has to be paid in terms of interest on accumulated debt. ● Structural adjustments- are the changes governments must make on receiving developmental aid, to their political and economic practices. For example, the adjustments mandated by the IMF (International Monetary Fund) to the Jamaican government on issuing the loan. ● Economic integration- is the term used to describe the merging of the economies of two or more countries by reducing barriers to trade, such as tariffs on imports. ● Protectionism- is the means by which respective governments seek to protect domestic industries from global competition by implementing tariffs and quotas on imported products and any other regulations. ● Economic union- is a group which has the characteristics of a common market, combined with monetary and fiscal policies, controlled by a central authority, selected by member countries. ● Customs union- is an association of countries which allows free trade between member countries and has an agreed tariff rate for non-member countries. ● Globalization- is the means by which economies, societies and cultures have become interconnected through trade and communication, through the movement of goods, capital, labour and technology. ● Trade liberalization- refers to the reduction of government invention in trade through tariffs, quotas and other regulations which hinder the free flow of goods and services between countries. ● Bi-lateral agreement- is a binding contract between two countries, through which each country is granted favourable trading terms with the other. ● Multi-lateral agreement- is a binding contract between several countries, through which all involved countries outline general trading preferences with each other. ● International Monetary Fund (IMF) – is an international organization of 186 countries that has the goal of allowing member countries the means to overcome the macro- economic instabilities of unemployment and low economic growth, to facilitate international trade, to obtain financial stability and to reduce poverty. ● Caribbean Community (CARICOM) – is an organization comprising of 15 Caribbean countries, which together have formed a common market. The objectives of this organization are; to coordinate economic policies and development plans, and handling regional trade disputes. ● African, Caribbean and Pacific Group (ACP) – is an organization comprised of 79 countries, and was formed by the Georgetown Agreement in 1975. This organization serves to obtain sustainable economic development in all member countries and to coordinate the implementation of partnership agreements among many other duties. ● Free Trade Area of the Americas (FTAA) – this is a multilateral agreement established to reduce trade barriers among all countries in the Americas with the exception of Cuba. ● Association of Caribbean States (ACS) – is an association of 25 member states with the aim of promoting consultation, cooperation and concerted action among all countries of the Caribbean. ● Caribbean, Canada Trade Agreement (CARIBCAN) – this is an agreement between countries of the Commonwealth Caribbean and Canada that allows duty free access of most commodities between Canada and the Caribbean. ● Caribbean Single Market and Economy (CSME) – is the name of the common market formed by the CARICOM countries. The key features of this market are; free movement of goods and services, a common external tariff( duty levied on goods coming from countries outside the group), free movement of capital, a common trade policy, free movement of labour and the harmonisation of laws. ● World Bank- is one of the United Nations specialized agencies, made up of 184 member countries, that serves to assist developing countries by issuing loans to finance projects on request at very low interest rates, in a bid to help those countries alleviate poverty and attain sustainable economic growth. ● Organisation of Eastern Caribbean States (OECS) – comprises of 9 member countries and seeks to promote unity and solidarity (through cooperation of its members) among the member countries and to defend their sovereignty, territorial integrity and independence. ● European Union- is an organization of European countries which have formed an economic and political union. This EU promotes regional integration and the harmonization of economic regulations, currencies and external trade policies among its members. ● Caribbean Basin Initiative (CBI) – this is a set of policies aimed at fostering economic development and export diversification among countries in Central America and the Caribbean. ● Caribbean Development Bank (CDB) – is a financial institution that serves to aid its member countries in reducing poverty, through social and economic development by mobilising financial resources from within as well as outside the region and by providing technical assistance to its borrowing members. ● Foreign Direct Investment (FDI) – investment made by country A into country B over a long term period which may include technical and technology assistance, building of infrastructure, management and policy support. Name three (3) factors that Caribbean economies are characterized by. ● Market Size ● Resources ● Nature of Dependency Identify five (5) economic problems that Caribbean economies are faced with. ● High inflation rates ● High unemployment rates ● Devaluating exchange rate ● Social problems such as escalating crime and violence levels ● Low rates of growth. What is a preferential trade tariff and how does it benefit importers and exporters? A preferential tariff is a reduction or elimination of custom duty levied on imported goods from countries with which it has a free trade agreement. Preferential tariffs benefit importer countries by making imported goods more affordable to the population. They are also beneficial to the exporter country as the trade agreement will encourage consumers in the importer country, to continue purchasing their products. Preferential tariffs however, also protect the economy of the exporter country. The exporter has a guaranteed market despite the quality of their goods since similar products from other countries would attract higher tariffs. What is E-commerce? E-commerce refers to the buying and selling of goods through electronic medium such as the internet or other computer networks and has become increasingly popular with the widespread use of technology. Identify (3) advantages and (3) disadvantages of E-commerce. Advantages - Reduces production cost: this technology reduces or eliminates labour costs, office rentals, utility bills etc. - Eliminates processing errors: which in most cases are due to human errors. - It increases the operational efficiency of a business, by reducing time taken to carry out services (processing cost), operational cost, advertising and marketing costs, distribution cost etc. Disadvantages - Customers have to rely on reputation of companies, as they are not able to physically examine a product before purchasing it. - Delivery concerns: the time taken for the product to reach its intended destination if it reaches at all, and whether the correct product sent is an issue of concern for customers. - Credit Card risk: customers are conscious of the risks of providing personal data and making payments electronically since this form of business is susceptible to hackers.
