29 January – IB Economics

• Review• Inflation rates and exchange rates• Intro to Market Failure

Portfolio check on 27 February (Day 7)

What is inflation?

Inflation is a sustained increase in the general price level of an economy.

Differences in inflation ratesIf…• The Euro inflation rate is 3% per year.• The British inflation rate is 1% per year.

What happens to the price of EU goods relative to British goods?What effects would this inflation differential have on the GBP/EUR exchange rate?

Economics From a Global Perspective by Alan Glanville

“Inflation in a country will affect the exchange rate. As the price of goods and services rises imports become relatively cheaper and exports become relatively dearer [more expensive]. Thus the supply of the currency will rise and the demand for it will fall. Both of these forces will put downward pressure on the exchange rate (414-415).”

What would these shifts look like on a diagram? (Assume that before the inflation differential 1 EUR = 0.75 GBP.)

In Macroeconomics – Section 2.3

• How inflation is measured• Problems with measuring inflation• Causes and consequences of inflation (e.g.

“damage to export competitiveness”)

Syllabus Items 34 and 35• Analyse the concept of market failure as a failure of

the market to achieve allocative efficiency, resulting in an overallocation of resources (overprovision of a good) or an under-allocation of resources (under-provision of a good)

• Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC)

• Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC

What do these terms stand for?What do they mean?

How do they correspond to supply and demand?

• (MPB)• (MSB)• (MPC) • (MSC)

Negative Externalities of Production - 1

• What are examples of negative externalities of production (NEP)?

• How can NEP be shown on a diagram?

Negative Externalities of Production - 2

• How can a NEP be remedied? What are the advantages and disadvantages to each remedy?

Syllabus

http://ibeconomics-isd.weebly.com/