OxfordAQA International AS and A-level Economics: Policies to promote development (9640) – Revision Notes

These revision notes cover specification section 3.4.3.3 Policies to promote development in OxfordAQA International AS and A-level Economics (9640), version 1.2. Section 3.4 is extra International A2 content. For full explanations, read the study guide. Then use the practice questions, the course hub, the printable checklist and the free diagnostics. All figures here are invented and illustrative; “cu” means currency units.

Two sorts of policy

Type	Aim	Examples	Weakness
Demand-side	Raise aggregate demand	Government spending, tax cuts, cheaper credit	Little use if capacity, skills or infrastructure are the problem
Supply-side	Raise productive capacity	Education, health, roads, deregulation	Slow and costly up front

Market-based versus interventionist

	Market-based	Interventionist
Main idea	Prices, competition, private firms	The state leads and directs
Listed in the specification	Trade liberalisation, privatisation, deregulation, encouraging FDI, low taxes, minimal state involvement, floating exchange rates	Protectionism, public ownership, industrial strategies, spending on infrastructure, education and health care, managed exchange rates
Strength	Efficiency, incentives, investment	Corrects market failure, builds human capital
Weakness	Inequality, infant industries hurt, volatile currency	Government failure, cost, weak competition

Must-know point: the strategies are not always clear cut and can complement each other. Economists disagree on the best route. A good answer says which mix fits the country.

Method in steps: percentage change in price after a tariff change

1. New price = world price x (1 + new tariff rate).
2. Old price = world price x (1 + old tariff rate).
3. Percentage change = (new - old) / old x 100.

Worked reminder: world price 4,000 cu, tariff falls from 30% to 10%. Old price 5,200, new price 4,400. Change = -800 / 5,200 = -15.4%.

FDI

• For: capital, technology, jobs, exports, tax revenue, multiplier.
• Against: profit repatriation, imported inputs, low-skilled jobs, crowding out local firms, firm may leave.
• Multiplier = 1 / (1 - domestic MPC). With MPC 0.5, multiplier = 2. An injection of 80 cu raises income by 160 cu.

Buffer stocks

• Aim: stabilise commodity prices and farmers’ incomes.
• Floor price: authority buys the surplus. Ceiling price: authority sells stock.
• Steps: find the free-market price; compare with the floor and ceiling; read demand and supply at that bound; the gap is the amount bought or sold; cost = gap x price.
• Worked reminder: at a floor of 600 cu, quantity demanded is 400 and quantity supplied is 520 (thousand tonnes). The authority buys 120 thousand tonnes, costing 120 x 600 = 72,000 thousand cu, or 72 million cu.
• Problems: storage cost, funding, floor set too high leads to permanent surplus, perishable goods, hard to forecast the long-run price.

Microfinance and fair trade

	Microfinance	Fair trade
What	Small loans, savings, insurance for the poor	Guaranteed minimum price plus premium
Helps	Small enterprises, women, escape from moneylenders	Farmers’ income security, community projects
Limits	High interest, debt traps, few large firms	Only members gain, consumers must pay more, possible surplus

Worked reminder: a minimum price of 500 cu against a market price of 420 cu on 100 tonnes. Revenue is 50,000 against 42,000. Gain = 8,000 / 42,000 = 19.0%.

Aid and debt relief

• Types: bilateral, multilateral, NGO, grant, concessional loan, tied, project, emergency, debt relief.
• Role: fills the savings gap, funds infrastructure and health, relieves emergencies.
• Problems: dependency, corruption, tied conditions, short-term focus, donors’ interests.
• Tied aid: untied value = aid x (1 - tied share). Aid of 90 cu with 50% tied: 45 cu is free.
• Debt relief: frees money previously used for debt service. Debt service = ratio x export earnings.

Remittances

• For: raise household income, pay for schooling and health care, help the balance of payments, stable flow.
• Against: brain drain, dependence on foreign labour markets, spent on consumption, fees.
• Worked reminder: 50,000 migrants send 1,000 cu each, 50 million cu. A 10% fee costs 5 million cu.

Tourism

• For: jobs, foreign exchange, multiplier.
• Against: leakages, environmental damage, seasonal and low-paid work, vulnerability to shocks.
• Retained spending = total x (1 - leakage). Then multiply by the local multiplier.

International institutions and NGOs

Body	Role	Criticism
World Bank	Development project loans, technical advice	Projects may not fit local needs
IMF	Monitors the monetary system, lends for balance of payments problems, attaches conditions	Conditions such as spending cuts may harm the poor
NGOs	Local projects in health and education, campaigning	Limited funds, small scale, accountability

Must-know distinctions

• FDI is investment in real assets; portfolio flows are only shares and bonds.
• Aid is a transfer; remittances are private flows from individuals.
• Floor price is a minimum; ceiling is a maximum.
• Privatisation transfers ownership; deregulation removes rules.
• Protectionism shields; trade liberalisation opens.

Key definitions

Term	Meaning
Foreign direct investment	A lasting investment by a foreign firm in real assets such as a factory or farm
Buffer stock	A store of a commodity used to hold its price between a floor and a ceiling
Microfinance	Small loans and financial services for people excluded from banks
Fair trade	A scheme guaranteeing producers a minimum price, often with a community premium
Debt relief	Reducing, rescheduling or cancelling a country’s debt
Remittances	Money sent home by workers living abroad
Leakage	Spending that leaves the local economy, such as imports or profit sent abroad

More worked reminders

Tourism. 80,000 visitors spend 500 cu each: 40 million cu. Leakage is 30%, so 28 million cu is retained (40 x 0.70). With a local MPC of 0.5 the multiplier is 2, so the total gain is 56 million cu.

Debt relief. Exports are 800 cu and debt service takes 20%: 160 cu. Relief cuts it by 25%, freeing 160 x 0.25 = 40 cu. The freed money helps only if the government spends it on health, schools or infrastructure.

Evaluation chains to learn

Privatisation. Claim: it raises efficiency. Chain: profit motive, lower costs, better service, more investment. Counter: a private monopoly can raise prices, and poor households may lose access. Judgement: it works best with competition and a regulator.

Protectionism. Claim: it helps infant industries. Chain: tariff, higher import prices, domestic firms gain time to grow, costs fall, industry competes later. Counter: consumers pay more, firms may stay inefficient, other countries may retaliate. Judgement: temporary, targeted protection is more defensible than permanent, broad protection.

Aid. Claim: it fills the gap in savings and funds health and infrastructure. Counter: corruption, tied conditions and dependency. Judgement: the effect depends on how well it is targeted and monitored, and whether it supports the country’s own plans.

Using the structure above, finish every long answer with a reasoned conclusion about which factors matter most, such as the country’s stage of development, the time period and the strength of institutions.

Exam technique reminders

• Read the command word. Explain needs a chain of cause and effect; evaluate needs a judgement.
• Anchor each point in the country described. Say what the policy would do for that economy.
• Show every step of a calculation, and state units such as cu or per cent.
• Use the specification’s terms exactly: demand-side, supply-side, market-based, interventionist.

Quick self-test

1. Classify as market-based or interventionist: (a) privatisation, (b) industrial strategy.
2. Machine world price 6,000 cu. A tariff of 15% applies. What is the domestic price?
3. Domestic MPC is 0.75. What is the multiplier?
4. A firm earns 80 cu profit and repatriates 60%. How much is kept in the host country?
5. At the ceiling price, demand is 300 and supply is 240 (thousand tonnes). What does the authority do?
6. Give one weakness of microfinance.
7. Fair trade price 900, market price 750. Percentage gain in revenue per tonne?
8. What is tied aid?
9. Remittances are 120 cu million and GDP is 4,000 cu million. Express as a percentage of GDP.
10. Name one condition the IMF may attach to a loan.

Answers

1. (a) Market-based. (b) Interventionist.
2. 6,000 x 1.15 = 6,900 cu.
3. 1 / (1 - 0.75) = 4.
4. 80 x 0.40 = 32 cu kept.
5. Sells 60 thousand tonnes from stock (300 - 240).
6. High interest, or debt traps, or loans too small for large firms.
7. (900 - 750) / 750 = 20%.
8. Aid that must be spent on goods or services from the donor country.
9. 120 / 4,000 = 3%.
10. Cuts in government spending (other answers: tax reform, privatisation).

Where marks are usually lost

• Describing a policy without explaining how it promotes development.
• Calling every policy good, with no disadvantage or condition for success.
• Forgetting that the two strategies overlap.
• Quoting the multiplier but ignoring import leakage.
• Buffer stock answers with no floor, ceiling or buying and selling.
• Treating aid as one thing instead of separating types.
• Not stating the final judgement in an evaluation.
• Mixing up repatriated profits (an outflow) with retained profits.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, section 3.4.3.3 Policies to promote development. For International AS exams from May/June 2021 and International A-level exams from May/June 2022.