3.2 How the economy works

Students are introduced to the wider economy from the perspective of the main economic groups: consumers, producers and government. Students explore the significance of interest rates including their impact on saving, borrowing and spending.

The core of this unit will focus on government objectives and their role in managing the economy. A range of policies will be explored in relation to the objectives, highlighting the fact that pursuing one objective can have a detrimental effect on other objectives.

Students also examine why countries trade, and the significance of the global economy, including free-trade agreements. Finally, students will explore the role of money and the significance of the financial markets in modern economies.

Students should be encouraged to explore the moral, ethical and sustainability issues that underpin all aspects of managing an economy.

Introduction to the national economy

Students explore how government spending and taxation can influence the level of economic activity. Interest rates will be introduced briefly in order to illustrate the effect on saving, borrowing and spending.

Interest rates, saving, borrowing, spending and investment

Content	Additional information
Interest rates How interest rates affect consumers' decisions to save, borrow or spend How interest rates affect producers' decisions to save, borrow or invest	Students should be able to understand: what is meant by an interest rate the factors that influence the different rates of interest how changes in interest rates affect consumers' decisions to save, borrow or spend how changes in interest rates affect producers' decisions to save, borrow or invest how to calculate interest on savings.

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Additional information

Interest rates
How interest rates affect consumers' decisions to save, borrow or spend
How interest rates affect producers' decisions to save, borrow or invest

Students should be able to understand:

what is meant by an interest rate
the factors that influence the different rates of interest
how changes in interest rates affect consumers' decisions to save, borrow or spend
how changes in interest rates affect producers' decisions to save, borrow or invest
how to calculate interest on savings.

Government income and expenditure

Content	Additional information
UK government revenue and spending Indirect and direct taxation Progressive taxation	Students should be able to understand: the main sources of UK government revenue the main areas of UK government spending the difference between direct and indirect taxation that some taxes can be progressive and others regressive.

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UK government revenue and spending
Indirect and direct taxation
Progressive taxation

Students should be able to understand:

the main sources of UK government revenue
the main areas of UK government spending
the difference between direct and indirect taxation
that some taxes can be progressive and others regressive.

Government objectives

Students study the principal economic objectives of stable prices, economic growth, full employment and the Balance of Payments. For each of the government objectives, students look at how they are measured, the factors that cause them and their implications, both positive and negative, for an economy. Students will learn that policies designed to achieve one of the objectives can often impact positively or negatively on achieving the other objectives.

Economic objectives of the government

Content	Additional information
The main economic objectives of the government Conflicts arising from the pursuit of government objectives Other government objectives Moral, ethical and sustainability considerations	Students should be able to understand: the principal objectives of government policies (maintaining full employment, ensuring price stability, achieving economic growth and having a balance of payments) that policies used to achieve one objective can have a negative impact on achieving other objectives that there are other government objectives such as reducing inequality and managing environmental change how the pursuit of a government objective can negatively affect groups of people and conflict with other objectives.

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Additional information

The main economic objectives of the government
Conflicts arising from the pursuit of government objectives
Other government objectives
Moral, ethical and sustainability considerations

Students should be able to understand:

the principal objectives of government policies (maintaining full employment, ensuring price stability, achieving economic growth and having a balance of payments)
that policies used to achieve one objective can have a negative impact on achieving other objectives
that there are other government objectives such as reducing inequality and managing environmental change
how the pursuit of a government objective can negatively affect groups of people and conflict with other objectives.

Economic growth

Content	Additional information
The significance of economic growth to economies Causes, costs and benefits of economic growth Government policies to achieve economic growth	Students should be able to understand: what is meant by economic growth and its significance to economies the difference between GDP and real GDP and GDP per capita and be able to perform simple calculations involving these measurements.

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Additional information

The significance of economic growth to economies
Causes, costs and benefits of economic growth
Government policies to achieve economic growth

Students should be able to understand:

what is meant by economic growth and its significance to economies
the difference between GDP and real GDP and GDP per capita and be able to perform simple calculations involving these measurements.

Employment and unemployment

Content	Additional information
Employment and unemployment and how they are measured Types, causes and consequences of unemployment Government policies to reduce unemployment	Students should be able to understand: the main types of unemployment, such as structural, seasonal, frictional and cyclical, and be able to explain the factors that cause these the consequences of unemployment for different groups within the economy.

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Additional information

Employment and unemployment and how they are measured
Types, causes and consequences of unemployment
Government policies to reduce unemployment

Students should be able to understand:

the main types of unemployment, such as structural, seasonal, frictional and cyclical, and be able to explain the factors that cause these
the consequences of unemployment for different groups within the economy.

Inflation and price stability

Content	Additional information
What is inflation? Measures of inflation Causes of inflation Consequences of inflation Government policies to manage inflation	Students should be able to understand: what is meant by inflation and the rate of inflation how the rate of inflation can be measured using the Consumer Price Index (CPI) how to perform simple calculations using CPI figures the causes of inflation, including cost-push and demand-pull inflation the consequences of inflation to different groups within the economy.

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What is inflation?
Measures of inflation
Causes of inflation
Consequences of inflation
Government policies to manage inflation

Students should be able to understand:

what is meant by inflation and the rate of inflation
how the rate of inflation can be measured using the Consumer Price Index (CPI)
how to perform simple calculations using CPI figures
the causes of inflation, including cost-push and demand-pull inflation
the consequences of inflation to different groups within the economy.

Balance of payments

Content	Additional information
Balance of trade and balance of payments Balance of payments surpluses and deficits on the current account Government policies to influence the balance of payments	Students should be able to understand: how to perform simple calculations using current account balance of payments figures the meaning and significance of a balance of payments deficit and surplus on the current account the reasons for a balance of payments deficit or surplus on the current account.

Content

Additional information

Balance of trade and balance of payments
Balance of payments surpluses and deficits on the current account
Government policies to influence the balance of payments

Students should be able to understand:

how to perform simple calculations using current account balance of payments figures
the meaning and significance of a balance of payments deficit and surplus on the current account
the reasons for a balance of payments deficit or surplus on the current account.

Distribution of income

Content	Additional information
Income and wealth inequality Causes of income and wealth inequality Consequences of income and wealth inequality Government policies to redistribute income and wealth and their consequences	Students should be able to understand: the distribution of income in the UK how inequality in the distribution of income can occur how redistribution of income and wealth can be achieved through taxation and government spending.

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Income and wealth inequality
Causes of income and wealth inequality
Consequences of income and wealth inequality
Government policies to redistribute income and wealth and their consequences

Students should be able to understand:

the distribution of income in the UK
how inequality in the distribution of income can occur
how redistribution of income and wealth can be achieved through taxation and government spending.

How the government manages the economy

Students examine the tools available to government to manage the economy. Government economic policies will be looked at, with a focus on monetary, fiscal and supply-side policies. Each policy will be examined in turn to show how they can be used to influence economic performance. Government policies to affect the distribution of income and the correction of negative externalities are also addressed.

Fiscal policy

Content	Additional information
Fiscal policy The government budget	Students should be able to understand: how fiscal policy can affect levels of income and expenditure within the economy how fiscal policy can be used to achieve government objectives the meaning of a balanced budget and explain the consequences of operating a budget surplus and deficit.

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Additional information

Fiscal policy
The government budget

Students should be able to understand:

how fiscal policy can affect levels of income and expenditure within the economy
how fiscal policy can be used to achieve government objectives
the meaning of a balanced budget and explain the consequences of operating a budget surplus and deficit.

Monetary policy

Content	Additional information
Monetary policy	Students should be able to understand: what is meant by monetary policy how monetary policies can be used to achieve the government objective of controlling inflation how monetary policies can be used to achieve other government economic objectives.

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Additional information

Monetary policy

Students should be able to understand:

what is meant by monetary policy
how monetary policies can be used to achieve the government objective of controlling inflation
how monetary policies can be used to achieve other government economic objectives.

Supply-side policies

Content	Additional information
Supply-side policies	Students should be able to understand: the advantages and disadvantages of supply-side policies supply-side policies such as: investment in education and training, lower direct taxes, lower taxes on business profits, trade union reform and privatisation/de-regulation how supply-side policies can be used to help achieve government objectives.

Content

Additional information

Supply-side policies

Students should be able to understand:

the advantages and disadvantages of supply-side policies
supply-side policies such as: investment in education and training, lower direct taxes, lower taxes on business profits, trade union reform and privatisation/de-regulation
how supply-side policies can be used to help achieve government objectives.

Policies to correct positive and negative externalities

Content	Additional information
Externalities	Students should be able to understand government policies designed to influence positive and negative externalities.

International trade and the global economy

Students look at why countries trade and the importance of international trade to the UK. The measurement of UK trade through the balance of trade is examined, as are the causes of current account surpluses and deficits within the overall balance of payments. Students consider how exchange rates are determined as well as the impact that changes in exchange rates have on producers and consumers. Students also explore the advantages of free-trade agreements, their impact and the significance of the European Union. The benefits and drawbacks of globalisation will be looked at, including the moral and ethical aspects associated with the increase in global trade, and the role of the multinational corporations.

Why countries trade and the importance of international trade to the UK

Content	Additional information
Benefits of trade to countries UK's exports and imports	Students should be able to understand: the importance of trade to economies the main types of exports from, and imports to, the UK economy the advantages of trade and the consequences of global interdependence to the UK economy.

Content

Additional information

Benefits of trade to countries
UK's exports and imports

Students should be able to understand:

the importance of trade to economies
the main types of exports from, and imports to, the UK economy
the advantages of trade and the consequences of global interdependence to the UK economy.

Exchange rates

Content	Additional information
How exchange rates are determined The effects of changes in the exchange rate on consumers and producers	Students should be able to understand how exchange rates are determined through the interaction of demand and supply.

Free-trade agreements including the European Union

Content	Additional information
Free-trade Free-trade agreements such as the EU	Students should be able to understand: the arguments for and against free-trade the significance and benefits of free-trade agreements, such as the EU.

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Free-trade
Free-trade agreements such as the EU

Students should be able to understand:

the arguments for and against free-trade
the significance and benefits of free-trade agreements, such as the EU.

Globalisation: benefits and drawbacks

Content	Additional information
Main features of globalisation Benefits and drawbacks of globalisation to producers, workers and consumers in developed countries Benefits and drawbacks of globalistion to producers, workers and consumers in less developed countries Moral, ethical and sustainability considerations	Students should be able to understand: the factors that have contributed to the growth of globalisation, including new technology and the operations of multinational companies the benefits and drawbacks of globalisation to producers, workers and consumers in the UK that there are moral, ethical and sustainability considerations when UK producers trade with other countries.

Content

Additional information

Main features of globalisation
Benefits and drawbacks of globalisation to producers, workers and consumers in developed countries
Benefits and drawbacks of globalistion to producers, workers and consumers in less developed countries
Moral, ethical and sustainability considerations

Students should be able to understand:

the factors that have contributed to the growth of globalisation, including new technology and the operations of multinational companies
the benefits and drawbacks of globalisation to producers, workers and consumers in the UK
that there are moral, ethical and sustainability considerations when UK producers trade with other countries.

The role of money and financial markets

Students look at the role of money, its functions and the role and importance of the financial markets. The importance to consumers, producers and government with respect to saving, borrowing and spending will be examined.

The role of money

Content	Additional information
Functions of money Definition of money	Students should be able to understand: the use of money as a means of deferred payment, store of value, a unit of account and a medium of exchange that money can be defined as more than the amount of banknotes and coins in circulation.

Content

Additional information

Functions of money
Definition of money

Students should be able to understand:

the use of money as a means of deferred payment, store of value, a unit of account and a medium of exchange
that money can be defined as more than the amount of banknotes and coins in circulation.

The role and importance of the financial sector for the economy

Content	Additional information
The financial sector The role of the Bank of England The role of other institutions in the financial sector	Students should be able to understand: the main agents in the financial sector such as the Bank of England, commercial banks and building societies the role of the Bank of England in influencing interest rates and ensuring stability of the financial system the role of high street banks in helping to fund investment and providing a service for savers and borrowers.

Content

Additional information

The financial sector
The role of the Bank of England
The role of other institutions in the financial sector

Students should be able to understand:

the main agents in the financial sector such as the Bank of England, commercial banks and building societies
the role of the Bank of England in influencing interest rates and ensuring stability of the financial system
the role of high street banks in helping to fund investment and providing a service for savers and borrowers.

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3.1 How markets work

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Scheme of assessment