Cambridge International as and a level Economics Ebook

Progress and development: 
Governments aim for 
both economic progress and economic development. 
It is easier to assess their performance in achieving 
economic progress as, for example, economic growth, 
unemployment, inflation and the balance on the current 
account position can be measured. There are measures of 
economic development, such as the Human Development 
Index, but no measure captures all the influences on 
economic development and some of the measures are 
hard to measure as they are subjective.
KEY CONCEPT LINK
TOP TIP
Remember that a government is likely to prioritise its aims 
according to its current macroeconomic performance.
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Chapter 10: Government macro intervention 

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SELF-ASSESSMENT TASK 
10.1
At the start of 2014 India was experiencing a decline 
in its economic growth rate, a rise in its infl ation 
rate and a decline in its current account defi cit. Th
e 
IMF recommended that the Indian government and 
central bank should raise interest rates, reduce the 
budget defi cit and improve bank supervision and 
invest more in infrastructure.
1
Explain why a decline in a country’s economic 
growth rate might be expected to reduce rather 
than increase its infl ation rate.
2
Explain whether increasing interest rates would 
suggest that economic growth or infl ation is the 
top macroeconomic objective.
3
Discuss what eff ect an increase in government 
spending on the country’s infrastructure may 
have on the budget defi cit.
The relationship between the 
internal and external value 
of money
Th
e internal value of a country’s currency and its external 
value may be closely connected. Th
e internal value will fall 
as a result of infl ation. Each unit of the currency will buy 
less in the domestic market.
If the internal value of a country’s money falls as 
a result of a rise in its infl ation rate above that of rival 
countries, demand for its products will fall. As a result, 
demand for the country’s currency will fall as foreigners 
buy fewer of the country’s exports, while the supply of the 
currency on the foreign exchange market will rise as more 
imports are purchased. Th
e reduced demand and higher 
supply of the currency will cause a depreciation, as shown 
in 
Figure 10.1
A change in the external value of the currency – the 
exchange rate – will, in turn, aff ect the internal purchasing 
power of a country’s money. A fall in the exchange rate will 
raise the price of a country’s imports in terms of the home 
currency. Th
is will directly and indirectly reduce the value of 
the country’s money. Each unit of the currency will now buy 
fewer of the now more expensive fi nished imported products. 
For example, originally US$1 may exchange for 8 Argentine 
pesos. If the value of the US dollar then falls to 6 Argentine 
pesos, an Argentine import priced at 480 Argentine pesos, 
will rise in price from US$60 to US$80. Purchasing power 
may also be reduced as a result of the increase in the price 
of imported raw materials and the reduction in competitive 
pressure, driving up the prices of domestically produced 
products. So the internal and external values of a country’s 
money tend to be directly related, with a fall in the internal 
value leading to a fall in the external value and vice versa.
TOP TIP
Remember that, while the internal and external values 
of a currency are likely to be connected, this may 
not always be the case. For example, a country may 
experience inflation, but if it has a fixed exchange rate 
or if its inflation rate is below that of rival countries, its 
external value may not even fall. Indeed, it may rise.