If the Bank of England cuts interest rates by 0.50% from 1.5% to 1.0%. This is a cut of 50 basis points.

Basis points are often used to talk about small movements in exchange rates, interest rates and bond yields

Not to Be confused with

• Base Years.

When talking about an index such as the consumer price index. We start off with a base year, where the index is set to 100. This makes it easy to compare % changes since the initial base year.

See also

• How to calculate a percentage

Keynesianism emphasises the role that fiscal policy can play in stabilising the economy. In particular Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker. Keynesians say it is a mistake to wait for markets to clear like classical economic theory suggests.

Monetarism emphasises the importance of controlling the money supply to control inflation. Monetarists are generally critical of expansionary fiscal policy arguing that it will cause just inflation or crowding out and therefore not help.

• Keynesian vs Monetarist theories
• John Maynard Keynes
• The debate over Keynesian Economics

Video on Keynesian Economics

Elasticity of demand measures the responsiveness of demand to a change in price. See: Price Elasticity Demand 

In the short run demand is likely to be more inelastic (low = less than 1).

If people are used to buying a good, then when the price goes up, they will buy it out of habit. However, when they realise the price rise is permanent they will expend energy in looking for alternatives.

PRice Elasticity of Demand for Oil.

If the price of oil increases people with petrol cars will still buy petrol. However, over time people may increasingly start to buy cars which use alternative energy sources such as natural gas, hydrogen or solar panels. But it will take time to make the switch

It’s a difficult AS question. Some ideas might include:

Advantages of Government Intervention

The existence of Negative externalities lead to overconsumption. A negative externality causes a harmful effect to a third party. Therefore the social cost is greater than the private cost. However, people ignore the costs to others and so in a free market there is overconsumption. Negative externalities of a factory closing down include the costs to the rest of society in the nearby town. It is not only workers who are adversely affected but local shops.

Immobility of labour can lead to geographical unemployment. i.e. jobs are available but workers find it difficult to move to these areas. Government interevention can subsidise firms who move to areas of high unemployment or subsidise workers who move to areas of low unemployment. THis can help overcome market failure in the labour market and reduce the problem of geographical unemployment resulting from a factory closing down.

If workers are made unemployed when a factory closes down they will have no income creating great inequality therefore there is a justification for paying benefits to workers.

Arguments Against Government Intervention.

It is expensive to subsidise firms and workers to move. Demand may be quite inelastic because people have family ties therefore, the money may be better spent on retraining workers.

If the government do too much to reduce income inequalities it may reduce incentives for people to look for new jobs. It may create a poverty trap.

It is hard to measure the negative externalities of a factory closing down, they may be less than estimated. Given time new firms may take advantage of the surplus labour.

An effective mosquito eradication program is an example of a public good.

If you exterminate all the mosquitos it has the characteristics of

1. Non rivalry. – When you benefit from living in an area free of mosquito’s it doesn’t reduce the benefit to anyone else. (unlike a private good where if you consume it, you reduce the amount available)
2. Non Excludability – Once provided you can’t stop anybody benefitting from it. I

If you get rid of all mosquitoes and prevent malaria, then everyone in the community will benefit.

However, in a free market the service may not be provided; this is because you will benefit even if you don’t pay and contribute to the program. Therefore there is an incentive to wait for others to pay for the program and then ‘free ride’ on the efforts of others.

A private firm will therefore, struggle to get sufficient people to pay.

This is why the government can pay for it out of general taxation. This forces everyone to pay.

This contrasts to a private good, where the benefits accrue to a certain individual and there are market incentives to pay for it.

Definition: Marginal cost is the change in total cost of producing one extra unit of output.

For example, suppose the cost of producing 10 bikes is £2,000. If you produce 11 bikes and the total cost increases to  £2,150.

This means the marginal cost of the 11th bike is £150. (Note, the marginal cost is less than the average cost of the first 10 bikes)

See: Diagram of marginal cost 

• Black Monday 

• Black Wednesday 
• Black Thursday 
• Booms 
• Beggar My Neighbour 
• Bounded Rationality
• Bank of England Interest Rates 
• Banking System 
• Bank Notes 
• Buffer Stocks 
• Brand Loyalty 
• Bretton Woods System 
• List of Building Societies in UK 

Definition of Primary products: Raw materials and resources used in the productive process. Examples include: metals, agricultural products and minerals.

Advantages of Producing Primary Products

1. What Ghana will have a comparative advantage in producing
2. Important source of export revenue
3. Creates Jobs

Disadvantages of Relying on Primary Products

1. Prices are Volatile due to inelastic demand. e.g a fall in price of primary product would lead to a fall in revenue.
2. Limited resources. One day Ghana may run out of its primary products and the economy will be vulnerable to this lack of diversification
3. Discourages investment in other aspects of the economy. Concentrating on primary products does not help the long term development of an economy because there is a lack of investment in other aspects such as education. Comparative advantage can change over time

See: Procedure of CBA 

Potential Benefits of Education Spending

• Increased Labour Productivity in the long run. i.e. more literate and numerate workforce should be more efficient enabling higher rates of economic growth
• Decreased Unemployment. In a modern economy it is important workers have relevant skills. Structural unemployment is often caused by a lack of skills and training. Education aims to reduce structural unemployment, especially amongst young workers.
• Higher wages for workers. More educated workforce can command higher salaries (see MRP model of wage determination)

Costs of Education

Higher taxes

• Opportunity cost of spending. If the government spend more on education it means less can be spent on other types of investment such as infrastructure spending. e.g. Building new roads may be more efficient
• Spending may not increase productivity (especially if workers are unreceptive to education
• Education aims to increase labour productivity in the long run.

Difficulties of CBA Analysis for Eduction

• Difficult to isolate whether productivity increases due to education
• Time Factor. Most benefits are long time in future.

China and other Asian economies have seen a particular marked rise in food inflation. This creates various problems. Firstly, it particularly affects the rural poor who experience a decline in living standards. Secondly, the rise in food prices indirectly increase the cost of production for the manufacturing sector; many firms feed workers directly.

Imposing price controls enables the government to keep a lid on prices making life more affordable. This is done in countries such as India. However, the basic economic problem is that imposing price controls reduces the incentive for firms to supply more. Therefore, it can actually make the situation worse in the long term because if lower prices discourage investment, the fall in supply will raise future prices. It would be better to allow market forces to raise prices and (hopefully) increase supply.

Can Price controls ever be justified?

One case where price controls may be justified is if rising prices are caused by monopoly power. If prices are kept high by monopolies then a reduction in price will not cause lower supply.