IGCSE Economics · ⁨כלכלה IGCSE⁩

Economics is about how people use resources 资源 to meet their needs and wants. The main idea is simple. People want a lot, but there are not enough resources to make everything. This is the economic problem 经济问题.

Two facts cause the economic problem:

• Resources are finite 有限的. There is only a limited amount of them.
• People's wants 欲望 are unlimited. People always want more and better things.

Because wants are unlimited but resources are limited, resources are scarce 稀缺. We call this problem scarcity 稀缺性. Scarcity is the root of all economics.

Goods, services, and choices

We use resources to make goods 物品 (things you can touch, like food and phones) and services 服务 (jobs done for you, like a haircut or a bus ride).

Because resources are scarce, we cannot have everything. So everyone must make choices. Scarcity forces four groups to choose:

• consumers 消费者 — people who buy and use goods and services. They choose what to buy.
• workers 工人 — they choose which job to do.
• producers 生产者, also called firms 企业 — they make goods and services. They choose what to produce.
• governments 政府 — they choose what to provide and how to spend public money.

Economic goods and free goods

Most things are economic goods 经济物品. They are scarce, so making or using one means giving something else up. Economic goods have an opportunity cost 机会成本 (explained below).

A few things are free goods 免费物品. They are not scarce — there is enough for everyone and they cost nothing to use. Examples are the air you breathe and sunlight. A free good has no opportunity cost.

Be careful: a "free" sample or a "free" gift is not a free good. Resources were used to make it, so it is still an economic good.

To make goods and services, firms use four types of resource. We call them the factors of production 生产要素.

The four factors

The person who provides enterprise is the entrepreneur 企业家. They bring the other factors together and risk their own money to start and run a business.

The reward to each factor

Each factor earns a reward 报酬 — the income it gets for being used:

Mobility, quantity and quality

The mobility 流动性 of a factor means how easily it can move to a different use or place. A worker with many skills can change jobs easily, so labour is mobile. A worker with only one skill, or a factory that cannot be moved, is less mobile.

The quantity and quality of factors can change:

• Quantity can rise or fall. The amount of labour grows if the birth rate rises or people move into the country to work. Land can be lost to the sea or gained by draining it.
• Quality can rise. Training and education make labour better. New technology makes capital better. Higher quality means each factor can produce more.

When you choose one thing, you give up the next best choice. That is the real cost of your decision.

Opportunity cost is the next best alternative 替代选择 you give up when you make a choice.

It affects every decision-maker:

• A consumer who buys a game gives up the book they could have bought instead.
• A worker who takes one job gives up the pay of the next job they could have done.
• A producer who makes more cars uses factors that could have made trucks.
• A government that builds a hospital gives up the school it could have built with the same money.

Opportunity cost matters because resources are scarce. Every choice has a cost, even when no money changes hands.

A production possibility curve 生产可能性曲线 (PPC) shows the largest amounts of two goods a country can make when it uses all its resources fully.

Imagine an economy that makes only two types of good, one on each axis:

• capital goods — used to make other goods, like machines.
• consumer goods — used up by people, like food and clothes.

The PPC is the line joining every point where the economy uses all its resources to make the most it can.

Reading the diagram

Picture the two goods on the two axes. The PPC is a curve that bends from one axis down to the other (it usually bows outward, away from the corner):

• A point on the curve: all resources are used fully. The economy makes the most it can.
• A point inside the curve: resources are wasted or not all used — for example, there is unemployment 失业. The economy could make more.
• A point outside the curve: this is impossible now. There are not enough resources to reach it.

Movements along the curve

If the economy already uses all its resources (a point on the curve), making more of one good means making less of the other. You must move factors from one good to the other. This is a trade-off 取舍.

The amount of the second good you give up is the opportunity cost of the extra first good. This is why the PPC is a clear picture of opportunity cost.

Worked example. An economy on its PPC makes 40 machines and 60 tonnes of food. To make 50 machines it must cut food to 45 tonnes. Give the opportunity cost of the extra machines. Then say what a point of 30 machines and 40 tonnes of food would tell you. The economy is already on the curve, so more of one good must mean less of the other: the 10 extra machines cost 60 − 45 = 15 tonnes of food. That lost food is the opportunity cost, so quote it in tonnes of food - never in money. The second point lies inside the curve, which means resources are idle or wasted, most likely through unemployment; from there the economy could make more of both goods, so moving out to the curve costs nothing at all. Opportunity cost only bites once you are on the curve.

Shifts of the curve

The whole curve can move:

• It shifts outward (to the right) when the country can make more of both goods. This is economic growth 经济增长. Causes: more resources (a bigger workforce, more land discovered) or better-quality resources (training, new technology).
• It shifts inward (to the left) when the country can make less. This is economic decline 经济衰退. Causes: fewer or worse resources — for example a war, a natural disaster, or using up non-renewable resources 不可再生资源 (resources like oil and coal that cannot be replaced once used).

Do not confuse the two. Moving from inside the curve to the curve (by using idle resources) is a short-term gain. Moving the whole curve outward is a long-term change.

• Scarcity (unlimited wants, limited resources) forces choice, and every choice has an opportunity cost — the next best alternative you give up.
• Learn the four factors of production and the reward each earns: land–rent, labour–wages, capital–interest, enterprise–profit.
• On a PPC, a point on the curve uses all resources fully, inside wastes some (e.g. unemployment), and outside is impossible for now. Moving along the curve shows opportunity cost.
• Moving to the curve (using idle resources) is a short-term gain; shifting the whole curve outward is long-term economic growth from more or better resources.

Economics is split into two parts:

• microeconomics 微观经济学 — the study of single parts of the economy, such as one industry or one product.
• macroeconomics 宏观经济学 — the study of the whole economy, like total jobs, prices, and growth.

A market 市场 is any place or system where buyers and sellers meet to trade. It does not need a building — it can be online or over the phone.

When a market is free, no one is in charge of deciding what to make. Instead, the price mechanism 价格机制 (the free movement of prices) allocates 配置 resources 资源 — it decides what is made, how, and for whom. Price does three jobs:

• the signalling 信号 function — a price change tells buyers and sellers what is happening. A rising price signals "make more"; a falling price signals "make less".
• the incentive 激励 function — a higher price gives firms 企业 a reason to produce more, because they can earn more.
• the rationing 配给 function — when a product is scarce, its price rises. The high price shares out the limited amount to those willing to pay.

Demand 需求 is the amount of a good 物品 that consumers 消费者 (buyers) are willing and able to buy at each price, in a period of time.

The law of demand 需求定律 says: when the price of a good rises, the quantity demanded falls; when the price falls, the quantity demanded rises. Price and quantity move in opposite directions — an inverse relationship 反向关系. This is true ceteris paribus 其他条件不变 (a Latin phrase meaning "all other things stay the same").

Movements and shifts

It helps to separate two ideas:

• quantity demanded 需求量 — the amount bought at one price.
• demand — the whole pattern of buying at every price.

On a demand diagram, price is on the up axis and quantity on the across axis. The demand curve 需求曲线 slopes downward from left to right: high price, low quantity; low price, high quantity.

• A change in the good's own price causes a movement along the demand curve. You slide to a new point on the same line.
• A change in any other condition causes a shift 移动 of the whole curve. A rightward shift means more is demanded at every price; a leftward shift means less.

Conditions of demand

These are the things (other than the good's own price) that shift the demand curve:

• income 收入 — more income usually means more demand.
• tastes 偏好 — if a good becomes popular, demand rises.
• price of substitutes 替代品 — goods used instead of each other (tea and coffee). If coffee gets dearer, demand for tea rises.
• price of complements 互补品 — goods used together (cars and fuel). If cars get dearer, demand for fuel falls.
• population 人口 — more people means more demand.
• advertising 广告 — good adverts raise demand.

Supply 供给 is the amount of a good that firms are willing and able to sell at each price, in a period of time.

The law of supply 供给定律 says: when the price rises, the quantity supplied rises too. Price and quantity move the same way — a direct relationship 正向关系. Firms supply more at a high price because they can earn more.

Movements and shifts

• quantity supplied 供给量 — the amount offered at one price.
• The supply curve 供给曲线 slopes upward from left to right.
• A change in the good's own price → a movement along the curve.
• A change in any other condition → a shift of the whole curve.

Conditions of supply

• costs of production 生产成本 — if costs rise, firms supply less (curve shifts left).
• technology 技术 — better technology lowers costs, so supply rises.
• taxes and subsidies — a tax 税收 on a good raises firms' costs (supply falls); a subsidy 补贴 (money from the government) lowers costs (supply rises).
• weather — important for farm goods.
• number of firms — more firms means more supply.

The price of a good is set where demand and supply meet. Draw both curves on one diagram. They cross at a single point. This point gives:

• the equilibrium 均衡 price — the price where the amount buyers want to buy exactly equals the amount firms want to sell.
• the equilibrium quantity — the amount traded at that price.

At equilibrium, quantity demanded equals quantity supplied. There is no good left over and no buyer left waiting.

When a curve shifts, the crossing point moves, so price and quantity change:

• Demand rises (shifts right): price rises and quantity rises.
• Demand falls (shifts left): price falls and quantity falls.
• Supply rises (shifts right): price falls and quantity rises.
• Supply falls (shifts left): price rises and quantity falls.

Disequilibrium

If the price is not at equilibrium, the market is in disequilibrium 非均衡:

• If price is below equilibrium, buyers want more than firms supply. This is excess demand 超额需求, also called a shortage 短缺. Buyers compete, so the price is pushed up until equilibrium returns.
• If price is above equilibrium, firms supply more than buyers want. This is excess supply 超额供给, also called a surplus 过剩. Sellers cut the price until equilibrium returns.

Price elasticity of demand 需求价格弹性 measures how much the quantity demanded changes when the price changes.

PED = (% change in quantity demanded) ÷ (% change in price)

(We usually ignore the minus sign and read the size of the number.) The determinants 决定因素 (the things that decide PED) include whether the good has close substitutes, whether it is a need or a luxury, and what share of income it takes.

Worked example. When the price of a good rises by 20%, the quantity demanded falls by 10%. Find the PED.

PED = (% change in quantity demanded) ÷ (% change in price) = 10 ÷ 20 = 0.5.

Because 0.5 is less than 1, demand is inelastic — the quantity changed by a smaller percentage than the price.

Reading the value

• PED greater than 1: demand is elastic 富有弹性. Quantity changes by a large %. (Goods with many substitutes, like one brand of crisps.)
• PED less than 1: demand is inelastic 缺乏弹性. Quantity changes by a small %. (Needs with few substitutes, like petrol or salt.)
• PED equal to 1: unit elastic 单位弹性. Quantity changes by the same % as price.

PED and total revenue

Total revenue 总收益 is the money a firm gets from sales: price × quantity sold. (To the buyer, the same money is total expenditure 总支出.) PED tells a firm what happens to revenue if it changes its price:

• If demand is inelastic, raising the price raises total revenue (quantity falls only a little).
• If demand is elastic, raising the price lowers total revenue (quantity falls a lot).

This is useful. A firm sets prices knowing how buyers will react. A government taxes inelastic goods (like cigarettes) because people keep buying them, so the tax raises a lot of money.

Worked example. A bus company sells 1,000 tickets a day at £2 each. It raises the price by 10% to £2.20, and daily sales fall by 5% to 950. Find the PED and what happens to total revenue.

• PED = 5 ÷ 10 = 0.5, so demand is inelastic (less than 1).
• old revenue = £2 × 1,000 = £2,000.
• new revenue = £2.20 × 950 = £2,090.

Total revenue rose by £90. Because demand is inelastic, the price rose by a bigger percentage than the quantity fell, so raising the price raised revenue.

Price elasticity of supply 供给价格弹性 measures how much the quantity supplied changes when the price changes.

PES = (% change in quantity supplied) ÷ (% change in price)

Supply is elastic if PES is greater than 1, and inelastic if PES is less than 1.

Worked example. When the price of a good rises by 10%, the quantity supplied rises by 30%. Find the PES.

PES = (% change in quantity supplied) ÷ (% change in price) = 30 ÷ 10 = 3.

Because 3 is greater than 1, supply is elastic.

The determinants of PES are:

• time — supply is more elastic over a long time, because firms can change how much they make.
• spare capacity 闲置产能 — if a firm has unused machines and workers, it can raise output quickly, so supply is elastic.
• stocks 库存 — goods kept in store can be sold quickly, making supply elastic.
• ease of switching factors — if a firm can move factors of production to make this good easily, supply is more elastic.

Farm goods often have inelastic supply in the short run, because crops take a season to grow.

In a market economy 市场经济, the price mechanism makes all the choices. There is no government planning. (The opposite is a planned economy 计划经济, where the government makes the choices.)

Advantages of the market system:

• Prices guide resources to where they are wanted, without anyone planning.
• Firms compete, so they cut costs and create new and better goods.
• Consumers have wide choice.

Disadvantages:

• Some useful goods are not made because they earn no profit.
• The strong (rich firms and people) do well; the weak may be left with nothing.
• Markets can fail (see below).

Market failure 市场失灵 happens when the price mechanism leads to an inefficient 低效率 use of resources — resources are not shared out in the best way for society. The main causes:

External costs and benefits

When you produce or consume something, the cost or benefit to you is not always the cost or benefit to everyone.

• a private cost 私人成本 is the cost to the person doing the activity.
• an external cost 外部成本 is a cost paid by other people — for example, smoke from a factory harms nearby families.
• the social cost 社会成本 is the private cost plus the external cost (the cost to the whole of society).

In the same way:

• a private benefit 私人效益 is the benefit to the person doing the activity.
• an external benefit 外部效益 is a benefit that others get for free — for example, your neighbour's tidy garden is nice for you too.
• the social benefit 社会效益 is the private benefit plus the external benefit.

Markets fail because firms and consumers only think about their private costs and benefits, not the external ones.

Merit, demerit and public goods

• merit goods 有益物品 are better for you than you realise, so the market makes too few (education, healthcare).
• demerit goods 有害物品 are worse for you than you realise, so the market makes too many (cigarettes, alcohol).
• public goods 公共物品 are things everyone can use and no one can be stopped from using, like street lights or national defence. The market makes none, because firms cannot charge for them.

Abuse of monopoly power

A monopoly 垄断 is a single firm that controls a market. With no competition, it can charge high prices and make poor-quality goods. This is another market failure.

A mixed economy 混合经济 has both:

• a private sector 私营部门 — firms owned by people, guided by the price mechanism.
• a public sector 公共部门 — activity run by the government.

Most real economies are mixed; China's, for example, is a socialist market economy. The government steps in to correct market failure. This is government intervention 干预. The main methods:

Judging intervention

Intervention can fix market failure, but it has costs. Taxes and rules cost money to collect and check. Governments can get things wrong too (this is called government failure). So you should always weigh the good effects against the bad ones before deciding.

• A change in a good's own price is a movement along the curve; a change in anything else (income, tastes, related prices) shifts the whole curve.
• Equilibrium is where demand meets supply. Below it there is excess demand (a shortage, so price rises); above it there is excess supply (a surplus, so price falls).
• PED = %ΔQ ÷ %ΔP. Demand is inelastic if PED < 1 (raising price raises revenue) and elastic if PED > 1 (raising price lowers revenue).
• Market failure (external costs, merit/demerit/public goods, monopoly) means resources are used badly; the government corrects it with taxes, subsidies, rules and direct provision.

Long ago, people swapped goods directly. This is called barter 物物交换. Barter is hard: you must find someone who has what you want and wants what you have. Money 货币 solves this problem.

The functions of money

Money does four jobs:

• a medium of exchange 交换媒介 — you swap money for goods, so you do not need barter.
• a store of value 价值储藏 — you can hold money now and spend it later, because it keeps its value.
• a unit of account 记账单位 — money measures and compares the value of things (this is the price).
• a means of deferred payment 延期支付手段 — you can buy now and pay later.

The characteristics of money

Good money must be:

• durable 耐用的 — it lasts a long time.
• portable 便于携带的 — easy to carry.
• divisible 可分割的 — can be split into small amounts for small payments.
• limited in supply, hard to copy, and accepted by everyone.

Banks

• A central bank 中央银行 is the government's bank. It issues notes, looks after the banking system, and sets interest rates 利率. There is one in each country.
• commercial banks 商业银行 are the ordinary banks that people and firms 企业 use. They keep savings safe, lend money, and let people pay each other.

A household 家庭 is a person or group living together and making money decisions. Each household must choose how much to spend, save, and borrow.

• saving 储蓄 is income that is not spent now.
• borrowing 借贷 is spending money you do not have yet, and paying it back later (usually with an extra charge).

Three main things change these choices:

• income 收入 — with more income, people spend and save more.
• interest rates — a higher interest rate makes saving more rewarding and borrowing dearer. So saving rises and borrowing falls.
• confidence 信心 — if people feel sure about their jobs and the future, they spend and borrow more. If they are worried, they save more.

Choosing a job

When a worker chooses an occupation 职业 (a type of job), two kinds of factor matter:

• wage factors — the pay. The wage 工资 is the money you earn. Higher pay attracts more workers.
• non-wage factors — everything else: working hours, holidays, how safe or pleasant the job is, whether you enjoy the work, distance from home, and the chance to move up to a higher job.

Why workers earn different amounts

Workers are not all paid the same. The reasons include:

• skill 技能 and qualifications 资格 — workers who are hard to replace, or who studied for years, earn more.
• danger — risky or dirty jobs may pay more to attract workers.
• trade unions 工会 — a trade union is a group of workers who join together to bargain for better pay and conditions. Strong unions can raise pay.
• discrimination 歧视 — unfair treatment because of gender, race, or age can cause unfair pay gaps.

Division of labour

Division of labour 劳动分工 (also called specialisation 专业化) means splitting a job into small tasks, with each worker doing one task again and again.

Advantages: workers get faster and better at their one task; less time is wasted moving between tasks; this raises output.

Disadvantages: doing one task is boring, so workers may make mistakes or leave; if one worker is absent, the whole line can stop; each worker learns only one skill.

The size of firms

Firms come in many sizes, from one person to huge companies. We can measure size by the number of workers, the amount of capital 资本 used, or the output.

Some firms stay small because: the market 市场 is small; the product is personal (like a hairdresser); the owner wants to stay in control; or there is little money to grow.

How firms grow

Firms grow by selling more, or by joining with other firms. When two firms join, it is a merger 合并 (or takeover). There are three types:

• horizontal merger 横向合并 — two firms at the same stage of the same industry join (two car makers).
• vertical merger 纵向合并 — two firms at different stages of the same industry join (a car maker and a tyre maker). "Backward" is towards the supplier; "forward" is towards the seller.
• conglomerate merger 混合合并 — two firms in different industries join (a car maker and a food company).

Business failure

Firms can suffer business failure 企业倒闭 (they close down) for many reasons: costs too high, too few sales, poor management, too many rivals, not enough cash, or a fall in demand 需求.

Labour-intensive and capital-intensive

• labour-intensive 劳动密集型 production uses a lot of labour 劳动 (many workers) and little machinery — for example, hand-made crafts.
• capital-intensive 资本密集型 production uses a lot of capital (machines) and few workers — for example, a modern car factory.

Productivity

Productivity 生产率 means output per worker (or per machine) in a set time. Higher productivity means each worker makes more, so the cost of each unit falls. Training, better machines, and good management all raise productivity.

Demand for and supply of factors

Firms buy factors of production 生产要素 (land 土地, labour, capital, and enterprise 企业家才能). The price and amount of each factor are set by its own demand and supply, just like any market. For example, if many firms want skilled workers, the wage for those workers rises.

Economies and diseconomies of scale

As a firm grows and makes more, the cost of each unit can change:

• economies of scale 规模经济 — as output rises, the average cost of each unit falls. Reasons: buying materials in bulk is cheaper, big machines work more efficiently, and large firms borrow money cheaply.
• diseconomies of scale 规模不经济 — if a firm grows too big, the average cost of each unit starts to rise. Reasons: a huge firm is hard to manage, messages travel slowly, and workers may feel less important.

These can be internal (caused by the firm's own size) or external (caused by the whole industry growing).

Costs

A cost 成本 is money a firm spends to produce. Costs split into:

• fixed costs 固定成本 — costs that do not change with output, such as rent and insurance. You pay them even if you make nothing.
• variable costs 可变成本 — costs that change with output, such as materials and power. More output means more variable cost.
• total cost 总成本 — fixed cost plus variable cost.
• average cost 平均成本 — the cost of each unit: total cost divided by the number of units made.

Revenue

Revenue 收益 is the money a firm gets from selling its goods.

• total revenue 总收益 — the price multiplied by the quantity sold.
• average revenue 平均收益 — total revenue divided by the quantity sold (this is the same as the price).

Profit and other objectives

Profit 利润 is what is left after costs:

profit = total revenue − total cost

Worked example. A firm has fixed costs of £2,000 and variable costs of £3 per unit. It makes 500 units and sells them at £10 each. Find its total cost, total revenue, profit and average cost.

• variable cost = 3 × 500 = £1,500, so total cost = 2,000 + 1,500 = £3,500.
• total revenue = 10 × 500 = £5,000.
• profit = 5,000 - 3,500 = £1,500.
• average cost = total cost ÷ units = 3,500 ÷ 500 = £7 per unit.

The firm makes a profit because the price (£10) is above the average cost (£7).

Most firms want as much profit as possible. But firms can have other objectives 目标:

• survival 生存 — a new firm first just wants to stay open.
• growth 增长 — getting bigger, to gain economies of scale and market power.
• social objectives — some firms aim to help people or protect the environment, not only to earn profit.

Markets differ by how many firms there are and how hard it is for new firms to join.

Competitive markets

A competitive market has many firms selling similar goods, and it is easy for new firms to enter. This is strong competition 竞争. In such a market:

• firms must keep prices low and quality high, or buyers go elsewhere.
• firms work hard to cut costs and make new products.

This is good for consumers: low prices, wide choice, and good quality.

Monopoly

A monopoly 垄断 is a market with only one firm, or one firm that controls most of it. New firms find it hard to enter because of barriers to entry 进入壁垒 — for example, very high start-up costs, or the one firm controlling key supplies.

In a monopoly:

• the firm can charge high prices, because buyers have no other choice.
• there is little pressure to improve quality or cut costs.
• but a large monopoly may gain economies of scale, and may use its profit to pay for research.

Competition versus monopoly

• Money's four functions: a medium of exchange, a store of value, a unit of account, and a means of deferred payment.
• Key formulas: profit = total revenue − total cost; total revenue = price × quantity; average cost = total cost ÷ number of units.
• Fixed costs do not change with output (rent, insurance); variable costs do (materials, power). Total cost = fixed + variable.
• Economies of scale make average cost fall as a firm grows; growing too big brings diseconomies of scale (average cost rises).
• Know the merger types: horizontal (same stage of the same industry), vertical (different stages of one industry), conglomerate (different industries).

Countries trade 贸易 with each other: they sell some goods and buy others. Just as one worker can focus on one task, a whole country can focus on making the goods it is best at. This is specialisation 专业化 at a national level.

When a country specialises, it sells the goods it makes well (exports 出口) and buys the goods other countries make well (imports 进口).

Free trade

Free trade 自由贸易 means trade between countries with no barriers — no taxes or limits on imports. Its benefits:

• countries can buy some goods more cheaply from abroad than by making them at home.
• consumers get a wider choice of goods.
• firms can sell to bigger markets, so they gain economies of scale.
• more competition makes domestic 国内的 firms (firms in your own country) work harder and improve.

All of this can raise living standards 生活水平: lower prices and more goods for everyone.

Free trade also has disadvantages:

• domestic firms may not be able to compete 竞争 with cheaper foreign goods, so they close. This causes job losses.
• a country can become too dependent 依赖 on other countries for important goods.
• new, small industries may never grow if they face strong foreign rivals from the start.

Globalisation 全球化 is the way the world's economies are becoming more and more joined together — through trade, travel, the internet, and firms working across borders.

Multinational companies

A multinational company 跨国公司 (MNC) is a firm that produces in more than one country — for example, a car maker with factories in several countries. The country an MNC sets up in is the host country 东道国.

• Benefits to the host country: new jobs, investment, new skills and technology, and more tax.
• Drawbacks: profits may flow back to the MNC's home country; local firms may be pushed out; and some MNCs pay low wages or pollute (for example, by sending waste to poorer countries).

Trade protection

Trade protection 贸易保护 is a government putting up barriers to limit imports and protect its own firms. The main methods:

• a tariff 关税 — a tax on imports, which makes them dearer.
• a quota 配额 — a limit on the amount of a good that can be imported.
• a subsidy 补贴 — money paid to domestic firms so they can sell more cheaply than foreign rivals.
• an embargo 禁运 — a total ban on trade in a good, or with a country.

Reasons for protection: to protect jobs; to protect an infant industry 幼稚产业 (a new industry too small to compete yet); to stop dumping 倾销 (foreign firms selling below cost to destroy local rivals); and to raise government revenue from tariffs.

But protection has costs. Prices rise and choice falls for consumers; protected firms stay weak and lazy; and other countries may hit back with their own barriers — a trade war.

The exchange rate 汇率 is the price of one currency 货币 in terms of another — for example, £1 = 1.30 US dollars.

How the rate is set

In a floating exchange rate 浮动汇率 system, the rate is set by the demand 需求 for and supply 供给 of the currency, just like any market.

• if more people want a currency — to buy that country's exports, or to invest there — demand for it rises, so its price (the exchange rate) rises.
• for example, if a country's interest rates rise, foreigners want to save money there, so demand for its currency rises and the rate goes up.

Appreciation and depreciation

• appreciation 升值 — the currency rises in value (it buys more foreign money).
• depreciation 贬值 — the currency falls in value.

A change in the rate changes the price of exports and imports:

• if a currency appreciates (rises), its exports become dearer for foreigners and its imports become cheaper. So exports fall and imports rise.
• if a currency depreciates (falls), its exports become cheaper for foreigners and its imports become dearer. So exports rise and imports fall.

Worked example. The exchange rate is £1 = 1.30 US dollars. (a) A UK firm sells a machine for £2,000 — what is its price to a US buyer? (b) A US laptop costs 650 dollars — what does it cost a UK buyer?

• (a) price in dollars = 2,000 × 1.30 = 2,600 dollars.
• (b) price in pounds = 650 ÷ 1.30 = £500.

To change pounds into dollars you multiply by the rate; to change dollars into pounds you divide. Now suppose the pound appreciates to £1 = 1.50 dollars. The same £2,000 machine then costs a US buyer 2,000 × 1.50 = 3,000 dollars — dearer than before, which is why a stronger pound makes a country's exports harder to sell abroad.

The balance of payments 国际收支 is a record of all the money flowing into and out of a country. Its main part is the current account 经常账户, which has four sections:

• trade in goods 货物贸易 — exports and imports of physical goods (cars, food, oil).
• trade in services 服务贸易 — exports and imports of services (tourism, banking, shipping).
• primary income 初次收入 — wages, interest, and profit earned from abroad.
• secondary income 二次收入 — money sent with nothing given in return, such as aid and gifts.

Deficit and surplus

• a current account deficit 逆差 — more money flows out than in (the country buys more from abroad than it sells).
• a current account surplus 顺差 — more money flows in than out.

Correcting a deficit

A country with a large deficit must borrow money or sell assets to pay for it. To correct a deficit, a government can:

• cut total demand, so people buy fewer imports.
• let the currency depreciate, to make exports cheaper and imports dearer.
• use trade protection (tariffs and quotas) to cut imports.
• use supply-side policy to improve the competitiveness 竞争力 of its firms, so exports rise.

• To convert currency: pounds → dollars, multiply by the rate; dollars → pounds, divide by the rate.
• When a currency appreciates, its exports become dearer and its imports cheaper (so exports fall, imports rise); a depreciation does the opposite.
• Trade protection (tariffs, quotas, subsidies, embargoes) can protect jobs and infant industries, but it raises prices, cuts choice, and can start a trade war.
• A current account deficit means more money flows out than in. It can be reduced by cutting demand, letting the currency depreciate, or improving competitiveness.