Cambridge International as and a level Economics Ebook

1
Explain what is meant by purchasing power parity.
2
Explain what eff ect using an undervalued 
exchange rate for Indonesia would have when 
comparing the GDP of Indonesia with that of 
the USA.
Source
: Adapted from 
The Economist
, 25 January 2014.
revenue even during economic booms (a structural defi cit). 
In addition, military confl icts can result in signifi cant 
increases to the national debt.
Th
ere are disadvantages in having a large and 
increasing national debt. Th
ere is the opportunity cost of 
interest payments on the national debt. Th
e government 
revenue used to service the debt might have been used 
to fi nance, for instance, the building of new hospitals. A 
large national debt may make fi nancial institutions, fi rms, 
individuals and governments reluctant to lend and may 
push up the rate of interest that has to be paid. National 
debt is not the same as external debt as some of the debt 
will be owed to citizens of the country. For example, 
some households may have purchased government saving 
certifi cates and some domestic banks may have bought 
government bonds. Payments to foreign lenders to the 
government, however, will involve an outfl ow of money 
from the country.
TOP TIP
Be careful to avoid confusing national debt with a budget 
deficit. The former is built up over time whereas the latter 
occurs over the course of one year.
Other indicators of living 
standards and economic 
development
In assessing living standards and economic development, 
economists use a wide range of indicators. Some of these 
are measured in monetary terms, for instance education 
spending as a percentage of GDP, while others are 
mea sured in non-monetary terms including, for example, 
infant mortality rates and the number of doctors per 
1,000 of the population.
Figure 9.8 
The Big Mac index
Norway
Switzerland
Brazil
Canada
Euro area
†
Britain
United Statest
‡
Australia
Turkey
Japan
China