A Level Economics success – using the economist’s toolkit

Sarah Phillips, Business and Economics Subject Advisor

We often refer to the ‘economist’s toolkit’ when considering economics problems. The examiner’s report for H460/03 – Themes in economics in June 2022 (Teach Cambridge login needed) highlighted its importance with the comment ‘…this approach allowed candidates to score marks for good knowledge and understanding but they did not display analysis and evaluation using the economist’s toolkit of terms, concepts and theories.’

So what do we actually mean? What is this toolkit and how can we explain it to our students to help them use this when evaluating economics problems?

The economist’s toolkit refers to theories, models, and methods that economists use to gain a deeper understanding of how the economy functions and make informed decisions about economic policy.

What do we mean by ‘theories and models’?

In economics, theories and models are tools used to explain and predict economic behaviour and outcomes.

A theory is a big idea that helps us understand how different things in the economy are connected. It usually involves a set of assumptions and principles that help us explain and predict what will happen. For example, the theory of comparative advantage tells us that countries can be better off by specialising in what they are good at and trading with other countries.

A model is a simplified representation of a real-world economic situation, that shows us what might happen in the economy if things change. It uses relationships and equations to help us make predictions. For example, a supply and demand model can be used to predict how changes in the price of a good will affect the quantity of that good that is produced and consumed.

Theories and models are both important tools for economists because they help to explain and predict economic behaviour in a way that is methodical and reliable. They are often used together to provide a more complete understanding of economic outcomes, with theories providing the general framework for understanding, and models providing more specific predictions and analysis. Here are a few examples of models commonly used in economics:

1. Microeconomic models: these models examine the behaviour of individual ‘agents’ in the economy, such as consumers, firms, and workers. Examples include: supply and demand, the production possibility frontier (PPF), cost curve models, market structure models and game theory.
2. Macroeconomic models: these models examine the behaviour of the entire economy, including the level of output, employment, inflation, and interest rates. Examples include aggregate demand and supply, business cycle model, classical model, the Keynesian model, and the monetarist model.

These are just a few examples. The specific tools and models used will vary depending on the question, its context and the data being analysed.

What do we mean by economic concepts?

Economic concepts are ideas and theories that help economists understand how the economy works and how it can be improved. These concepts can range from basic principles to more complex ideas such as macroeconomic policy. Some examples of economics concepts include:

• Opportunity cost: the idea that the cost of one choice is the benefit forgone from the next best alternative choice.
• Elasticity: measuring the responsiveness of demand or supply to changes in price, income, or other factors.
• Market structure: the characteristics of a market, including the number of firms, the ease of entry and exit, and the degree of competition.
• Externalities: the effects that economic transactions have on people or things that are not involved in the transaction.
• Incentives: factors that motivate and influence people’s behaviour and decision-making.
• Inflation: the rate at which the general price level of goods and services in an economy is increasing.
• Efficiency: the allocation of resources in a way that results in the highest possible level of well-being for society.
• Economic growth: an increase in an economy’s ability to produce goods and services over time. Often used to gauge the health of a country's economy.

These are just a few examples of the many economics concepts used by economists in their work. A solid understanding of concepts in the course specification is essential for success in A Level economics and beyond.

Therefore we need to prepare students to dip into and use these tools to help them demonstrate the required skills of knowledge (AO1,) application (AO2), analysis (AO3) and evaluation (AO4) when approaching any economic question or issue.

Example in practice

Let’s consider it with an example question from the June 2022 Macroeconomics (02) paper:

‘Using information from the stimulus material, evaluate whether an increase in national debt will harm an economy.’

Possible terms and concepts to know and use

For evaluating the impact of an increase in national debt on an economy, the following economics terms and concepts are important to understand:

• National debt: the total amount of money owed by a government.
• Budget deficit: the amount by which a government's expenditures exceed its revenues in a given year.
• Interest rate: the cost of borrowing money, often expressed as a percentage of the amount borrowed.
• Gross Domestic Product (GDP): the total value of goods and services produced by a country’s economy in a given period.
• Debt-to-GDP ratio: a measure of a country’s debt in relation to its overall economic output.
• Public debt: the total amount of money owed by a government.
• Inflation: a sustained increase in the general price level of goods and services in an economy over a period of time.
• Aggregate demand: the total amount of goods and services demanded by an economy at a given price level and time period.
• Crowding out/crowding in: the effect on private sector investment caused by an increase/decrease in government borrowing.
• Economic growth: the increase in a country’s real GDP over a period of time.

By understanding these terms and concepts, students can analyse the relationship between an increase in national debt and its impact on various aspects of an economy such as demand, investment, inflation, output, and economic growth.

Possible theories and models

For evaluating the impact of an increase in national debt on an economy, the following economics theories are relevant:

• The Keynesian model: this suggests that government spending can stimulate economic growth and reduce unemployment, particularly during recessions, by increasing aggregate demand. This model could be useful in evaluating the potential positive effects of national debt on the economy.
• The classical model: this suggests that argues that markets are self-correcting and increases in government borrowing and spending can lead to inflation and higher interest rates, which can reduce economic growth.Therefore government intervention should be limited. This model could be useful in evaluating the potential negative effects of national debt on the economy.
• Crowding out effect: this theory argues that an increase in national debt can harm an economy by “crowding out” private investment, leading to lower economic growth and lower interest rates.
• The fiscal multiplier model: this model looks at the impact of government spending on economic growth and can be used to evaluate the potential impact of an increase in national debt on the overall economy. The model suggests that government spending can have a multiplier effect on economic activity, which could offset the negative effects of increased debt.

By considering these concepts, theories and models, students can get a more comprehensive view of the potential effects of an increase in national debt on an economy and arrive at a more informed evaluation.

It is important to note that students would not be expected to use ALL the content mentioned here. They would choose what to discuss based on the information in the stimulus material and their own knowledge. They should then use key terms, data, theories and models to develop their argument and reach an overall conclusion and judgement.

It is also important to note that marks are awarded according to their ‘level of response’, so the quality of the discussion and the development of each point is more important than the number of points mentioned. Therefore, one well developed strand will score higher than three simple statements. More guidance on structuring and developing answers can be found in our extended response questions and developing chains of reasoning blogs.

Stay connected

Share your thoughts in the comments below. If you have any questions you can email support@ocr.org.uk, call us on 01223 553998 or tweet us @OCR_BusEcon. You can also sign up to subject updates and receive information about resources and support.

About the author

Sarah joined the Business and Economics team in September 2022. She has over 20 years’ experience as a teacher of Business, Economics and Finance and in leadership roles including Head of Department, Head of Sixth Form and Assistant Principal. She has been an assessor for A Level Economics and holds a degree in Business Economics and the RSA Certificate in English Language Teaching to Adults (CELTA).

Related blogs

• A Level Economics success – extended response questions
• A Level Economics success – developing chains of reasoning