May/June 2016

The diagram illustrates an original production possibility curve, $\text{PPC}_1$. Which factor could bring about the shift of the production possibility curve from $\text{PPC}_1$ to $\text{PPC}_2$?

Production possibility curve (PPC) diagrams

On the diagram, $D_1D_1$ and $S_1S_1$ show the demand for labour and the supply of labour. $W$ shows a legal minimum wage. If immigrant labour enters the market in large numbers, the labour supply curve moves from $S_1S_1$ to $S_2S_2$. How many workers will be employed if the minimum wage legislation is then removed?

Workers

The table illustrates how three people allocate their income. For these three people, what is the most likely sequence of income, from the highest income to the lowest income?

Households

In what way can a business ensure that it achieves the highest possible profit?

Firms’ costs, revenue and objectives

Which feature is shared by a firm under perfect competition and a monopoly?

Market structure

The table displays the quantities of units of factors of production that a firm must use at two different levels of output. What is the firm experiencing?

Firms and production

The diagram illustrates the demand for and supply of places in fee-charging independent (private) schools. The equilibrium position is $X$. The costs faced by independent (private) schools increase. In addition, a report is published stating that Government schools achieve very good examination results. What is the most likely new equilibrium position?

Price determination

A state administration wants to encourage economic recovery. Which measure would help with this?

Fiscal policy

What does expansionary monetary policy mean?

Monetary policy

A government chooses to introduce two alterations to its taxation policy. It cuts the tax on petrol and increases the tax on food. How will these alterations influence the regressive character of the taxes?

The role of government

The table gives a government’s revenue from taxation. What is the total amount of revenue collected from indirect taxes?

Fiscal policy

What factor of production is shown by a rise in the number of manufacturing robots used in the car manufacturing sector?

The factors of production

To calculate GDP per head, Gross Domestic Product (GDP) is divided by what?

Living standards

Who becomes worse off during a period of deflation?

Inflation and deflation

The table shows data for three economic indicators across four countries. What conclusion can be drawn from this information?

Differences in economic development between countries

What has to happen when a country undergoes economic growth?

Economic growth

Why might the figure obtained for a developing country’s Gross Domestic Product be inaccurate?

Differences in economic development between countries

The table presents information about four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

It is forecast that by 2050 China will have 53 million fewer children under 14, 100 million fewer workers and 234 million more people aged over 60. What is the likely effect in China of these changes?

Population

What could lead to an improvement in Mauritius’s current account balance?

Current account of balance of payments

A country states that it wants to strengthen its trade protection policies. What could this mean?

Globalisation, free trade and protection

It has been proposed that every country that manufactures arms should prohibit the export of weapons and reduce production so as to lower the danger of war. What would be the result if this took place?

Globalisation, free trade and protection

The diagram illustrates the trade-off an individual faces between leisure and earnings. What is the opportunity cost to the individual of the extra earnings gained as they move from position $X$ to position $Y$?

Opportunity cost

In India, 70% of the 10 million kilograms of tea produced is exported. The largest buyers are the UK, Japan, and Germany. In 2013, wholesale prices increased by $10\%$ because a strike limited supply. How would these events appear in international trade accounts?

Current account of balance of payments

A government imposes a tax on the production of cars. What is likely to fall?

Supply

In a market economy, which two economic institutions are present?

Market economic system

Developers are seeking to enlarge a significant shopping district in a city. It is believed that the plan would generate hundreds of jobs, make profits for the retailers, but lead to severe traffic congestion. Which economic concepts are directly involved in this statement?

Market failure

The diagram illustrates the market for rice. What might have led the equilibrium price to increase from $OP_1$ to $OP_2$?

Price determination

What would a trade union normally be expected to do for its members?

Trade unions

What is the common reason that citizens have confidence in their country’s banknotes?

Money and banking

Which economic concept must be operating when a country moves along its production possibility curve?

Opportunity cost

In the diagram, $D_1D_1$ and $S_1S_1$ show the demand for labour and the supply of labour respectively. $W$ shows a legal minimum wage. An inflow of immigrant labour shifts the labour supply curve from $S_1S_1$ to $S_2S_2$. How many people will be employed if the minimum wage law is then removed?

Workers

The table below indicates how three people allocate their income. For these three people, what is the most likely sequence of income, from the lowest income to the highest income?

Households

How can a firm ensure that it earns the highest possible profit?

Firms’ costs, revenue and objectives

Two firms agree to combine their activities. What has to follow?

Market structure

The table gives the number of units of factors of production that a firm must use at two different output levels. What is the firm experiencing?

Firms and production

By 2014, government subsidies to the Chinese steel industry had created 200 million tonnes of surplus output. The diagrams illustrate the market for Chinese steel. Which diagram would show the position after the subsidy, but before the market had adjusted?

Supply

A government wants to encourage economic recovery. Which measure will help with this?

Fiscal policy

A government sets income tax at $0.20$ for each dollar earned. Which term describes this form of taxation?

Fiscal policy

A government brings in a law aimed at reducing the restrictive practices of trade unions. What would this law most likely be intended to achieve?

Trade unions

The table presents a government's tax receipts. What is the overall amount of revenue generated by indirect taxes?

The role of government

The diagram illustrates the options available to a person between leisure and income. The person chooses employment that allows more leisure time. What is the opportunity cost for the person of moving from position Y to position X?

Opportunity cost

Which sign would best show that an economic boom is beginning?

Economic growth

A nation records a very high Gross Domestic Product and has a small population, yet its standard of living is low. What could be the reason for this low standard of living?

Living standards

The table provides information on three economic indicators for four countries. What can be concluded from this information?

Living standards

The weighting for a product within the consumer price index was raised. What is the most likely explanation for this change?

Inflation and deflation

China is described as a developing country. In recent figures, its Gross Domestic Product (GDP) came from agriculture 10%, construction 13%, manufacturing 32% and services 45%. Which contribution to GDP normally falls first as countries progress to a higher stage of development?

Differences in economic development between countries

Some people believe that the debts and interest payments owed by the world’s poorest countries ought to be written off. What could be one disadvantage for the poorest countries if this happened?

Differences in economic development between countries

Which country is most likely to have the highest standard of living?

Living standards

What could lead to an improvement in Mauritius’s current account balance?

Current account of balance of payments

A country states that it wants to strengthen its trade protection policies. What could this mean?

Globalisation, free trade and protection

It has been proposed that every country that manufactures arms should prohibit weapon exports and reduce output in order to lower the chance of war. What would happen if this took place?

Globalisation, free trade and protection

What is the clearest example of the existence of the economic problem?

The nature of the economic problem

At present, the US trades oil with the UK. If newly discovered oil and gas reserves in the US reduce its oil imports and raise its oil exports. Starting from the initial equilibrium at X, which letter shows the new equilibrium position for the US exchange rate?

Foreign exchange rates

A government imposes a tax on the production of cars. What is likely to fall?

Supply

In a market economy, which two economic institutions are most likely to be present?

Market economic system

Developers are planning to expand a large retail shopping district in a city. It is believed that this proposal would generate hundreds of jobs, bring profits for the shops, but also lead to serious traffic congestion. What economic concepts are directly involved in this statement?

Market failure

The diagram illustrates the price of a product in year 1 and year 2. Which changes in demand and supply are consistent with the price movement in year 2?

Price changes

A trade union reaches an agreement with employers in an industry to adopt a ‘closed shop’ policy. How does this work?

Trade unions

In what circumstances will a central bank serve as lender of last resort to a commercial bank?

Money and banking

Which of the following statements about a production possibility curve is correct?

Production possibility curve (PPC) diagrams

On the diagram, $D_1D_1$ and $S_1S_1$ show the demand for and the supply of labour. $W$ shows a legal minimum wage. If immigrant labour enters the market, the labour supply curve moves from $S_1S_1$ to $S_2S_2$. How many people would be employed if the minimum wage legislation were then removed?

Workers

The table below indicates the way three people divide up their income. food, clothing and housing: person X 30%, person Y 25%, person Z 50% entertainment and leisure: person X 35%, person Y 35%, person Z 25% luxury goods: person X 35%, person Y 40%, person Z 25% For these three people, what is the most probable sequence of income, starting with the lowest income and ending with the highest income?

Households

How can a business ensure that it achieves the highest possible profit?

Firms’ costs, revenue and objectives

What is correct when comparing a monopoly with a perfectly competitive firm?

Market structure

A manufacturing company expands the scale of its production. The diagram below shows its long-run average total cost curve (LRAC). At which point on the LRAC curve is the firm experiencing diseconomies of scale?

Firms’ costs, revenue and objectives

The table sets out the quantities of factors of production that a firm must use at two different output levels. land 4, labour 3, capital 5, output 20 land 8, labour 6, capital 10, output 40 What is happening to the firm?

Firms and production

A government wants to encourage economic recovery. Which action would help achieve this?

Fiscal policy

When a government wants to promote economic growth, it may introduce supply-side policies. Which policy is a supply-side policy?

Supply-side policy

The table gives a government’s tax receipts. air passenger duty $10\text{m}$ company profits tax $100\text{m}$ import duty $75\text{m}$ income tax $200\text{m}$ inheritance tax $50\text{m}$ sales tax (VAT) $300\text{m}$ What is the total revenue generated by direct taxes?

Fiscal policy

Which combination of policies would be the most effective if a government wanted to raise the level of employment?

Employment and unemployment

Which firm is likely to have the greatest difficulty in increasing the use of its main factor of production?

The factors of production

What is most likely to cause an increase in the rate of inflation?

Inflation and deflation

Besides Gross Domestic Product per capita, which other measures are part of the Human Development Index?

Living standards

The table presents data on three economic indicators for four countries. country W: inflation $1.4\%$, interest rates $3.4\%$, unemployment $10.2\%$ country X: inflation $3.7\%$, interest rates $8.7\%$, unemployment $12.3\%$ country Y: inflation $3.6\%$, interest rates $7.3\%$, unemployment $14.2\%$ country Z: inflation $2.1\%$, interest rates $6.0\%$, unemployment $7.7\%$ What conclusion may be drawn from this information?

The macroeconomic aims of government

Which sort of government policy would be most suitable for reducing external costs of production?

Market failure

The diagrams illustrate birth rate (BR) and death rate (DR) in three countries, X, Y and Z, during two years, 1 and 2. There was no migration. In which country did population increase in year 1 and decrease in year 2?

Population

How could workers emigrating benefit the economy of a developing country?

Differences in economic development between countries

Which pairing of changes to the birth rate and death rate would be most likely to raise a country’s dependency ratio?

Population

What could lead to an improvement in the balance on Mauritius’s current account?

Current account of balance of payments

A country states that it wants to strengthen its trade protection policies. What could this include?

Globalisation, free trade and protection

It has been proposed that every nation producing arms should forbid the export of weapons and reduce production in order to lower the risk of war. What would be the outcome if this were to happen?

Market failure

The diagram illustrates the options available to an individual between leisure and earnings. What is the opportunity cost to the individual of the additional earnings when moving from position X to position Y?

Opportunity cost

The Pakistani rupee’s exchange rate shifts from 60 rupees to US$1 to 50 rupees to US$1. What impact will this have on the price of Pakistani goods sold in the US and the price of US goods sold in Pakistan?

Foreign exchange rates

If a government imposes a tax on the production of cars, what is likely to fall?

Supply

Which two economic institutions are present in a market economy?

Market economic system

Developers plan to enlarge a major city retail shopping district. It is believed that the scheme would generate hundreds of jobs, be profitable for the shops, but lead to severe traffic congestion. Which economic concepts are directly involved in this statement?

Market failure

The diagram illustrates the demand and supply curves for a product. At first, the market is at equilibrium at point $X$. What would be the new equilibrium point if production costs declined and a rumour spread that the product might be unsafe in extreme weather conditions?

Price determination

What is meant by the term ‘closed shop’?

Trade unions

What role is performed by a central bank?

Money and banking

Car production is undergoing change. Up to recently, car manufacturing firms held the most market power. At present, however, firms making car parts are becoming more powerful. The markets for cars and for car parts both contain a fairly large number of firms ranging from very large to small. In 2014, the market was dominated by sixteen major car firms, with each selling more than one million cars a year. In that same year there were ten major car part firms, and these were increasing their influence over the car producers. The world's largest car part supplier by revenue says that it supplies at least one part in every car sold worldwide. The firm has expanded through mergers and is moving towards complete market control. It is aiming to build strong barriers to entry and to become the only producer. The ten largest car part firms made up 63% of total car part output in 2013, producing US$250 billion of car parts in that year. These ten firms now have the capacity to build 85% of a car's internal systems, leaving car manufacturing firms to do little more than make the engine. Car production is rising in several developing countries but falling in some developed countries. Car manufacturing increased in the UK between 2013 and 2014, although the industry had already been facing problems before 2013. In 2008 the average wage of car workers dropped. In that year the UK experienced a recession. Real wages in the UK car industry for the lowest paid workers also fell after 2008, and employment fell between 2008 and 2012. This was despite output per worker rising, partly because some less skilled workers lost their jobs and the industry replaced some of these workers with capital equipment. Car buyers often borrow money from commercial banks to pay for their purchases. In some cases buyers use their savings, which may be taken out of commercial banks, to buy cars. The conduct and performance of car firms are shaped by the economic system of the country where they operate. In countries with a market system, consumer sovereignty is likely to be greater. Car firms in such countries may be more inclined to innovate, bringing in new methods of production and developing higher-quality products.

Market structure

Burundi lies in Sub-Saharan Africa. In 2013 the government of Burundi brought in VAT, an indirect tax, while cutting corporation tax (the tax on firms’ profits) from 35% to 30%. The United Nations has urged Sub-Saharan African countries to raise tax revenue so that more money is available for spending on reducing poverty. However, there is debate over whether adding more taxes or removing some taxes is more advantageous for an economy.

Fiscal policy

In 2014, the Canadian economy was broadly performing well. Money was largely keeping its value, and unemployment was declining. Even so, the country had increasing household debt and a deficit on the current account of its balance of payments. In 2014, the Canadian Government aimed to boost exports while acknowledging that this could affect the exchange rate.

Foreign exchange rates

Rising demand from China has turned New Zealand into the world’s largest exporter of dairy products. Its milk exports to China rose by 45% in 2013. Since 2000, more than 300 000 hectares of land in New Zealand have been switched from other farming and forestry uses to dairy use. The rise in milk output has reduced the average cost of production, and changes in production methods have influenced the price elasticity of supply of milk.

Opportunity cost

In January and February 2014, there were demands for the UK Government to construct more flood defences. Floods damaged homes, factories and other resources, and some were destroyed. It was said that government intervention was necessary in this situation because there was evidence of market failure.

Market failure

The year 2014 brought the longest strike ever seen among platinum miners in South Africa. It affected 70 000 miners out of 200 000 people employed in the industry. Some of these miners were migrant workers from neighbouring countries, which had expanded the country’s labour force. The strike cost the world’s three largest platinum producing firms US$1.4 billion and cut South Africa’s platinum exports.

Workers

In 2014, Cuban doctors were awarded pay increases that raised their salaries substantially. As a result, doctors earned more than twice the pay of nurses. Cuba is allocating more resources to both medical care and tourism, which is changing the country’s production possibility curve. Living standards are rising in the country, although the pace is slower than in some other nearby countries.

Production possibility curve (PPC) diagrams

There are fears that chocolate prices could rise sharply over the next few years. This is due to stronger demand for chocolate, especially in emerging countries, alongside supply difficulties in the countries that grow cocoa beans. Cocoa beans, the key ingredient in chocolate, are produced mainly on the west coast of Africa by small farms using labour-intensive methods. In 2012 Côte d’Ivoire (Ivory Coast) accounted for 37% of the world’s output of cocoa beans, with Indonesia next at 13%. Côte d’Ivoire is increasingly recognised for supplying high-quality cocoa beans. Concentrating on the product that best suits its resources has increased output in the country. Gross Domestic Product per head rose to US$1240 in 2013. However, some farmers and farm workers still live on less than US$2 a day. In Indonesia, the earnings of most cocoa farmers and farm workers rose as the country’s average income increased between 2013 and 2014. Their purchasing power was nevertheless reduced by the consumer prices index rising from 108.0 in 2013 to 115.2 in 2014. Although medical care in Indonesia is improving, with more doctors per head, the government is trying to raise education standards. The problems being faced by cocoa bean producers include an ageing labour force, with the industry struggling to attract young farmers and farm workers. The industry also regularly experiences difficulties caused by pests and diseases, including black pod disease. At the same time, people in Asia, particularly China, are eating more chocolate and drinking more chocolate drinks. People in the United States of America and the European Union are also eating more chocolate, although worries about the health effects of eating large quantities of chocolate are beginning to affect demand. For many people, however, chocolate is addictive. Chocolate producers try to exploit this by widening the gap between revenue and costs. Most chocolate producers are based in developed countries and most are public limited companies trying to keep their shareholders happy. These producers use their market power to keep the price they pay for cocoa beans relatively low while the price they charge consumers who buy their chocolate is kept relatively high.

International specialisation

In 2013, the Mexican Government was weighing up the introduction of a sales tax of one peso per litre on fizzy drinks. The Government aimed to reduce excessive fizzy drink consumption - 40% more fizzy drinks per person are consumed than in the United States of America. Several multinational fizzy drinks companies warned that they would exit the country if taxes were raised.

Market failure

It is predicted that India’s working-age population, aged 15 to 64, will increase by 125 million from 2015 to 2025 and then by another 103 million over the next decade. However, people of working age are not all employed or looking for work. Changes in population and the labour force influence how well a government can meet its economic aims.

Employment and unemployment

Tuk-tuks, which are three-wheeled motorised rickshaws, are used in several countries. India is the biggest producer of this vehicle. The largest tuk-tuk producer in India competes with domestic firms and with imported tuk-tuks. The industry is becoming more capital-intensive and more competitive, although it remains far from perfect competition.

Market structure

In July 2016, Sweden’s central bank, the Sveriges Riksbank, reduced the rate of interest to 0.25%. Sweden was facing deflation, with the weighted price index having fallen by 0.2% compared with the previous year. The lower rate of interest weakened the krona, Sweden’s currency, and was expected to bring deflation to an end.

Monetary policy

Bank deposits in Dubai climbed by 40% in 2013. An increasing number of financial companies are choosing to locate in Dubai. Expansion in its financial sector is being matched by horizontal mergers among financial companies and by workers becoming more specialised. The economy is getting wealthier, but the economic problem will never be eliminated here or anywhere else in the world.

The nature of the economic problem

Countries must decide how to allocate their scarce resources. In some countries, a larger share of these resources is being directed towards tourism. However, many jobs in this sector are low-paid and provide little security. For instance, the average age of people working in hotels is quite young, even though some older employees have spent their whole working lives in the hotel industry.

The nature of the economic problem

China is now even more influential in the world shipbuilding industry. In 2013, it made up 45% of ships produced by tonnage. Its main focus is especially on container ships. In 2012 China constructed six of the biggest container ships at a total expense of US$870 million. In 2013 it made eight container ships of the same capacity, while total cost increased by a smaller proportion to US$1040 million. South Korea is the second-largest ship producer. One of its companies has built the biggest container ship in the world. That company is encountering growing rivalry from another major firm in the same country. In 2014 the two firms said they intended to merge, provided their shareholders approved. Both companies are quoted on the country’s stock exchange. A shipbuilding firm’s share of the world market is affected by several influences. These include the quality and size of the labour force employed. In 2013 China’s total labour force was 800 million, compared with South Korea’s 26 million. China’s unemployment rate of 3% was slightly below South Korea’s rate of 4%. Exchange rates also affect how many ships are produced and sold. In 2012 the South Korean currency, the won, was worth 1126 won per dollar. By 2013 this had changed to 1107 won per dollar. It was predicted that this movement in the value of the won would carry on into 2014, along with changes in the relative price of South Korean ships and a possible alteration in South Korea’s economic growth rate. Although shipbuilding is expanding in some countries, including China and South Korea, it is shrinking in others such as the UK. Some economists approve of the fall, arguing that making fewer ships has cut noise pollution in several cities and reduced traffic congestion in the places where the shipyards once worked. Other economists lament the decline in the shipbuilding industry, claiming that it is caused not only by UK shipbuilders failing to adapt to change but also by subsidies paid by foreign governments to their shipbuilders.

Firms’ costs, revenue and objectives

The 2014 crop of Arabica beans, which are used to make coffee, was cut by a drought in Brazil in early 2014. Lower output pushed the price of coffee upwards. That higher price affected the quantity of coffee demanded and the demand for its substitutes and complements. Demand for coffee is usually price-inelastic. Any change in the quantity and quality of coffee exports abroad affects Brazil’s current account in the country’s balance of payments.

Price elasticity of demand (PED)

An ever-growing number of Pakistani firms are hiring managers who studied at the country’s universities. Pakistan’s universities are also raising the number of entrepreneurs in the country. Each entrepreneur and each manager confronts a range of challenges, including obtaining finance, sometimes through borrowing. Some entrepreneurs and managers also bargain with trade unions. These organisations can affect a country’s economic growth rate.

Economic growth

In China, a smaller share of women are now dying during childbirth, and a greater number of infants are surviving. These gains have come from improved care at birth, nationwide immunisation and better living standards. The Government has given subsidies to mothers who deliver in hospitals. This has raised the standard of care received and has also made it easier to vaccinate babies so that they are protected against illnesses and diseases.

Population

In 2014, the Government of Bangladesh provided loans to the four large state-owned commercial banks after they had run into trouble from lending to high-risk customers. State-owned commercial banks are now less significant. Privately-owned commercial banks have grown in both scale and importance and now account for 75% of total deposits. The economy is shifting away from a mixed economy towards a market economy.

Money and banking

In 2014 Brazil’s inflation rate was rising while its unemployment rate was falling. In that year, government spending rose by 16% whereas tax revenue dropped by 8%. Consequently, the country’s budget deficit got larger.

Fiscal policy

Many economists think relative poverty will rise while absolute poverty will decline in both India and the United States of America. Poverty levels may be affected by factors such as education, the technology being used and the number of new businesses set up, including sole proprietorships.

Poverty