Cambridge International as and a level Economics Ebook

market mechanism
are the ‘best’ 
way of handling economic problems. Th
is notion can 
Market mechanism:
 
where decisions on price and 
quantity are made on the basis of demand and supply alone.
KEY TERM
SELF-ASSESSMENT TASK 
1.3
India
Pakistan
Total output (%)
Labour force (%)
Total output (%)
Labour force (%)
Agriculture
17
53
21
45
Industry
20
19
22
14
Services
63
28
57
41
Table 1.1 
Economic structures of India and Pakistan in 2012
Source:
Economy Watch and Pakistan Economic Survey 2012/13.
Table 1.1
shows a broad comparison of the economic structures of India and Pakistan in 2012.
1
Using the information above, compare the 
economic structure of Pakistan with that 
of India.
2
In which country:
a
is agriculture more effi
cient?
b
are services more effi
cient?
3
Explain how you have arrived at your 
answers.
4
Discuss whether countries such as Pakistan 
and India might be concerned if a large 
proportion of the labour force got new 
employment in industry or in the service 
sector (such as call centres).
A call centre in India
21
Chapter 1: Basic economic ideas and resource allocation

---

be particularly attributed to the Scottish economist 
Adam Smith, who is remembered for his reference to an 
‘invisible hand’ (the price system) that brings together 
private and social interests in a harmonious way. Th
is is 
the fundamental philosophy underpinning the workings 
of the market economy.
Th
e government has a very restricted part to play 
in a market economy. For example, in Smith’s view, it 
should control national defence, act against monopolies, 
issue money, raise taxes and so on, while protecting the 
rights of the private sector. It certainly should not try to 
infl uence the dealings of individuals in the market or to 
regulate the workings of that market. 
Figure 1.3
 is a simple 
representation of these functions.
Before moving on, it must be made clear that the 
market economy is an ideal that does not exist in 
today’s complex, globalised economy. Arguably, its most 
important representation is the United States of America, 
and it should be stressed that here federal and state 
governments play important roles in the economy and 
society, as well as in providing defence, law and order and 
other public services. Hong Kong provides an interesting 
case of what at one time was a near perfect example of a 
market economy. Virtually all businesses are privately 
owned; its public transport services and road tunnels 
are similarly operated by private companies. Th
ere is, 
however, rather more regulation that is being introduced 
to control aspects of their operations since the 1997 
handover to China.