Netherlands HAVO 5 (eindexamenjaar) Economics

Chapters: 4

1. Cooperation and bargaining

Game theory · Cooperating and bargaining · Market failure in games

Game Theory: Making the Best Choice When Others Choose Too – Game theory studies decisions where your result depends on what others choose. A pay-off matrix lists each player's gain for every pair of choices. A dominated strategy is always worse and can be removed. A Nash equilibrium is a pair of choices where no player gains by changing alone; the prisoner's dilemma shows it can be worse for everyone than cooperating. In a zero-sum game, the play-safe (maximin/minimax) strategies meet at a saddle point when the game is stable; otherwise players use a mixed strategy, found by drawing expected-pay-off lines and taking the highest point of the lower edge.
Market Failure – A market fails when buying and selling on its own does not give the best result for society. Resources are used in the wrong amounts: too much of some goods (pollution, cigarettes), too little of others (street lights, vaccines, education). Main causes: externalities, public goods, merit and demerit goods, imperfect information, market power and unfair inequality. Governments try to fix it with taxes, subsidies, rules, direct provision and information, but government action can also fail.

2. Risk and information

Risk and insurance · Asymmetric information · Risk and interest

Insurance: Principles and Types – Insurance spreads the loss of a few over many people who each pay a small premium into a common pool. It works on six principles: utmost good faith, insurable interest, indemnity, contribution, subrogation and causa proxima (plus mitigation of loss). The main types are life, health, fire and marine insurance.
Asymmetric Information: When One Side Knows More – Information is asymmetric when one side of a deal knows more than the other. A used-car seller knows the car's faults, the buyer does not. A person who buys insurance knows more about their own habits than the insurer. Getting information costs money and time (transaction costs), so some of it stays hidden. Hidden information before a deal causes adverse selection: the buyer can only offer an average price, good sellers leave, and the market fills with bad quality. Hidden action after a deal causes moral hazard: once someone else bears the cost, a person takes less care. The same problem appears inside firms as the principal-agent problem, where an owner (principal) cannot watch what a manager or worker (agent) really does, and in finance, where lenders cannot see how risky a borrower is. Remedies are better information (inspection, reports, ratings), signals (warranty, certificates, reputation), screening, collateral, contracts that share the risk (an excess or deductible), incentive pay and supervision.
Interest Rates: Saving, Borrowing and Investment – An interest rate is the price of borrowing money, written as a percentage per year. Savers earn interest as a reward for waiting and for taking a risk; borrowers pay it. Rates depend on the central bank's base rate, on risk, on time and on collateral. Higher rates encourage saving and discourage borrowing, spending and investment.

3. Welfare and growth

Circular flow, national income and welfare · Economic growth · Inequality and redistribution · Labour market and unemployment

Circular Flow of Income and the Three Methods of Measuring National Income – In a two-sector economy households give factor services to firms and get factor payments (rent, wages, interest, profit); they spend this income on the firms' goods. Money moves in a circle opposite to the real flow of goods and services. Because the same money passes three points, national income can be measured three ways: value added by producers (product method), incomes paid to factors (income method) and spending on final goods (expenditure method). All three give the same total.
Economic Growth: How a Country Makes More Each Year – Economic growth is a rise in a country's real GDP: the value of all final goods and services it makes in a year, after removing the effect of price rises. The growth rate is the percentage change in real GDP. GDP per head tells us the average output per person. Growth goes up and down around a trend in the economic cycle, creating output gaps. Growth comes from more and better resources (workers, skills, machines, technology) and brings higher incomes and jobs, but can also cause pollution, inequality and inflation.
Income Inequality – Income inequality means income is shared unevenly between people. Economists rank people from poorest to richest, split them into five groups of 20% (quintiles) and compare their shares. The Lorenz curve plots the cumulative share of income against the cumulative share of people; the further it bends from the straight line of equality, the more unequal the society. The Gini coefficient = A ÷ (A + B) turns this into one number between 0 (perfect equality) and 1 (one person has everything). Wealth (what you own) is usually more unequal than income (what you earn). Causes include differences in skills, education, inherited wealth, discrimination and technology. Governments reduce inequality with progressive taxes, benefits, minimum wages and public services such as free schooling and health care.
Unemployment: Meaning, Rate, Types, Costs and Cures – A person is unemployed when they have no job, are able to work, and are actively looking for work. The labour force is everyone who is employed plus everyone who is unemployed. The unemployment rate is the unemployed divided by the labour force, times 100. Economists sort unemployment by its cause: frictional (moving between jobs), structural (skills or places no longer match the jobs), cyclical (a slump in total demand) and seasonal (work only in some months). Unemployment costs the person income, costs the country lost output and tax, and can harm health and society. Governments fight it with spending and interest-rate policy for cyclical unemployment and with training, information and mobility for the other types. Some unemployment always remains; the lowest sustainable level is called the natural rate.

4. Good times, bad times

Business cycle · Government, central bank and the cycle

The Business Cycle: Booms, Recessions and How Policy Helps – Real GDP grows along a long-run trend, but in the short run it swings above and below it. These swings are the business cycle: expansion, peak (boom), contraction and trough (recession). Booms bring low unemployment and rising inflation; recessions bring job losses and low inflation. Governments use fiscal policy and central banks use monetary policy to make the swings smaller.
Monetary Policy – Monetary policy is the use of interest rates and the money supply by a central bank to keep prices stable and support growth and jobs. Raising the policy rate makes borrowing dearer, cuts spending and aggregate demand, and lowers inflation (contractionary). Cutting it does the opposite (expansionary). Other tools include open market operations, quantitative easing, reserve requirements and forward guidance. Most central banks follow an inflation target and are independent of the government. Monetary policy works with time lags and is weaker when rates are already near zero.