Oct/Nov 2016

Every factor of production receives an income. Which option correctly gives the incomes for labour and capital?

The factors of production

Nazmin Uddin works in a nearby office as a secretary for three days a week. She lives with her parents in a compact apartment. Meer Ali owns a profitable fitness centre that employs about twenty people. He owns a big house. Which statement is most likely to be true?

Firms

The table indicates how household spending varies as income rises. At the first income level shown, at which savings become positive, what is it?

Households

A survey of managers in the USA showed that most businessmen believe a company’s responsibility is ‘to serve the interests of owners, employees, customers and the public’. By contrast, the idea of profit maximisation suggests that a company’s chief responsibility should be to the

Firms’ costs, revenue and objectives

Some agricultural co-operatives have switched from labour-intensive to capital-intensive production methods. What could be a reason for this change?

Firms and production

For a firm, the fixed costs for its daily output are $200$. The table gives its daily total variable costs. Output (units): $1, 2, 3, 4$ Total variable costs ($): $300, 400, 700, 800$ What conclusion can be drawn about the firm’s average total cost?

Firms’ costs, revenue and objectives

The table presents the growth rate of output ($\%$) in four sectors of an economy. Construction sector: first quarter of 2014 $0.9$, second quarter of 2014 $0.5$ Energy sector: first quarter of 2014 $0.1$, second quarter of 2014 $1.6$ Manufacturing sector: first quarter of 2014 $-0.7$, second quarter of 2014 $-0.5$ Services sector: first quarter of 2014 $-3.4$, second quarter of 2014 $0.5$ Which two sectors experienced an increase in the growth rate in the first half of 2014?

Economic growth

A government chooses to transfer the monopoly supply of gas to households to a private firm. How might the government safeguard the interests of households after transferring a large company to the private sector?

The role of government

During 2015, an extra $70000$ people became unemployed, yet overall employment increased by $75000$. What might account for this?

Employment and unemployment

The table gives tax figures as a percentage of Gross Domestic Product (GDP) for four countries. Income tax ($\%$), tax on business profits ($\%$), tax on dividends ($\%$), tax on goods and services ($\%$): A: $12, 14, 2, 5$ B: $14, 15, 2, 14$ C: $17, 13, 5, 10$ D: $18, 10, 1, 10$ From this data, which country had the greatest share of direct taxation as a percentage of GDP?

Fiscal policy

A government pays farmers a subsidy of $\$5$ for each kilo supplied of food in the open market, where $X$ marks the initial equilibrium position. The outcome is shown in the diagram. What are the new equilibrium price and the quantity supplied after the subsidy is introduced?

Supply

What might the opportunity cost of a nuclear power station be?

Opportunity cost

What does the construction of a Retail Price Index involve?

Inflation and deflation

Why is nominal Gross Domestic Product not a suitable measure for comparing the standard of living in a country across two years?

Living standards

In 2010, net emigration from Ireland rose. What was the most likely reason for this rise?

Population

Certain goods represent a larger share of the average household’s total expenditure than others. How is this reflected when a Retail Price Index is built?

Inflation and deflation

Which outcome is least likely to occur alongside greater economic development?

Differences in economic development between countries

A government brings in state benefits for people without jobs and raises the highest rate of income tax to fund those benefits. What impact will these changes have on poverty and the tax system?

Fiscal policy

The chart presents total world carbon emissions in 1995 and projected emissions for 2035. If the chart is accurate, what will have changed by 2035?

Market failure

What motivates international specialisation?

International specialisation

A Japanese car manufacturer decided to make its cars in a factory in Europe. Which of the following would not be a reason for making this choice?

Globalisation, free trade and protection

A government abolished the quota on goods brought into the country. What is the most likely outcome of this?

Globalisation, free trade and protection

The diagram illustrates a production possibility curve for maize and cotton. Unfavourable weather leads to a low yield of both crops. Which movement could be used to show this change?

Production possibility curve (PPC) diagrams

The table presents the components of Japan’s current account balance, measured in trillion Yen, for 2011 and 2012. Which balance became better between 2011 and 2012?

Current account of balance of payments

A market for a product was originally in equilibrium. Then a change took place, leading to a new equilibrium with a higher price for the product and a smaller quantity traded. What alteration could have led to this?

Price determination

A demand curve illustrates the connection between quantity demanded and

Demand

A government provides subsidies for pineapple production. This is likely to

Supply

What shows that external costs are present in an economy?

Market failure

What could be a drawback for a trade union when it negotiates for higher pay for its members?

Trade unions

Which of the following gives the correct examples of income and wealth?

Living standards

Which item is not regarded as a factor of production?

The factors of production

Nazmin Uddin works as a secretary in a local office for three days each week. She lives with her parents in a small apartment. Meer Ali is the owner of a successful fitness centre that employs about twenty people. He owns a large house. Which statement is the most likely to be correct?

Living standards

The table illustrates how household spending varies as income rises. At what first income level shown do savings become positive?

Households

A survey of managers in the USA showed that most businessmen believe a company’s responsibility is to look after the interests of owners, employees, customers and the public. By contrast, the idea of profit maximisation suggests that a company’s chief responsibility ought to be to the

Firms’ costs, revenue and objectives

Why does a firm in perfect competition act as a price taker?

Market structure

A company made 200 cars each week and had 50 employees. Because demand fell, output was cut to 160 cars per week and the workforce to 32. What percentage change occurred in the firm’s productivity?

Firms and production

A firm incurs fixed costs of $100 for its daily output. The table gives its daily total variable costs. What conclusion can be drawn about the firm’s average total cost?

Firms’ costs, revenue and objectives

A government decides to transfer the monopoly supply of gas to households to a private firm. How might the government safeguard the interests of households after selling a large company to the private sector?

Market failure

A government chooses to raise the income tax rate and use the additional revenue to fund training colleges. How could this be described?

Fiscal policy

A government places a $12 per kilo tax on farmers when they supply food in the open market, with X marking the original equilibrium position. The effect is shown in the diagram below. What will be the new equilibrium price and quantity supplied after the tax is introduced?

Supply

The table gives taxes as percentages of Gross Domestic Product (GDP) for four countries. Using this information, which country had the smallest percentage of direct taxation as a proportion of GDP?

Fiscal policy

What might the opportunity cost of a nuclear power station be?

Opportunity cost

A newspaper states that an economy has experienced an economic slump. What immediate effect would an economist anticipate?

Employment and unemployment

In what way is the pattern of employment likely to change as a country develops further?

Differences in economic development between countries

In 2010, net emigration from Ireland rose. What was the most likely reason for this rise?

Population

The table presents some economic indicators. Which rise in the first indicator is most likely to cause a rise in the second indicator?

Economic growth

What would be most likely to make the population fall if all other factors stay the same?

Population

In developed countries, the share of people aged $65$ and above is large and continues to rise. Which economic consequence is most likely to arise from this type of change in population structure?

Population

The chart displays total world carbon emissions in $1995$ and the emissions forecast for $2035$. If the chart is accurate, what will have occurred by $2035$?

Market failure

What factors encourage international specialisation?

International specialisation

A Japanese car manufacturer decided to make its cars in a factory in Europe. Which of these would not be a reason for choosing to do this?

Globalisation, free trade and protection

A government abolished the quota on goods brought into the country. What is the most likely outcome of this?

Globalisation, free trade and protection

In 2014, private companies started drilling in parts of the country in order to exploit natural gas supplies that were already known to be present. How could this decision be shown on the diagram that illustrates a production possibility curve for the country?

Production possibility curve (PPC) diagrams

In $2009$ the exchange rate for the Singapore dollar shifted from $1.49$ Singapore dollars $= 1$ US dollar to $1.43$ Singapore dollars $= 1$ US dollar. What effect would this have on Singapore's import prices and export prices?

Foreign exchange rates

The market for a good was originally in equilibrium. A shift then took place, leading to a new equilibrium in which the good’s price was higher and the quantity traded was lower. What change could have brought this about?

Price determination

The demand for cocoa beans is price-inelastic. Which thing is most likely to fall if demand for cocoa beans rises?

Price elasticity of demand (PED)

A government provides a subsidy for pineapple production. This is likely to

Supply

Cars being used in many cities lead to negative externalities. The diagram indicates the free market equilibrium $X_1$ and the socially efficient market equilibrium $X_2$. From the diagram, which statement is correct?

Market failure

What factors could strengthen a trade union’s power to secure a pay rise for its members in a coat factory?

Trade unions

What is the meaning of net income?

Households

In 2013 China moved ahead of the United States of America (US) to become the biggest importer of oil. The increase in Chinese demand pushed the oil price upward. That dearer oil made production methods used in the US, such as hydraulic fracking, viable and has supplied more oil for US domestic use. US oil firms have bought bigger, costlier capital equipment and are hiring more specialist engineers. The growth of the US oil industry helped bring the country’s unemployment rate down to 6.1% in 2014. Although China is the largest importer of oil, it is still not the world’s largest consumer. In 2013 the US oil industry produced 10.5 million barrels a day, exported 3.4 million barrels a day and imported 10.9 million barrels a day. These numbers are expected to alter in the future. For instance, in 2013 the US had 250 million vehicles and China had only 100 million. It is predicted that by 2030 China will have 350 million vehicles. If that does happen, China will become more exposed to oil price changes and interruptions to oil supply. Even though US oil output is rising, its use is falling. More oil is being found in the country and more advanced techniques are being used to extract it. At the same time, fewer young people in the country are learning to drive, vehicle ownership per household is declining and average mileage is dropping. In addition, US cars are becoming more fuel efficient because of tighter fuel economy rules and consumers are moving towards cheaper vehicles. US consumers are becoming more responsive to oil price changes, but a price rise still causes oil producers’ revenue to rise. Shifts in oil price, oil output and oil consumption also continue to have a major impact on the US economy. For example, the discovery of additional oil in the country usually influences the value of the US dollar. Changes in consumption and production affect China’s and the US’s current account positions on their balance of payments. At present China has the world’s largest current account surplus while the US has the world’s largest current account deficit. It is worth noting that both countries have been seeking to raise their economic growth rate. The US central bank, the Federal Reserve, has attempted to increase the growth of the country’s output by lowering the rate of interest.

Demand

In 2014, Ghana’s currency, the cedi, altered in value by 40% against the US dollar. As the cedi depreciated, inflation increased. The economy’s demand conditions were shifting, while government spending rose faster than taxation. A number of economists warned that higher taxes could lead to deflation.

Inflation and deflation

A 2014 United Nations report advised governments to try to halve meat consumption. It was argued that cutting meat consumption would lessen the market failure created by pollution from chemical fertilisers and manure. If meat consumption fell, large areas of land would become available for growing vegetables, cereals and fruit to feed a growing population. The supply of a number of agricultural products is inelastic.

Market failure

In Egypt during both 2011 and 2012, GDP per head and investment both decreased. One cause of the fall in investment was that firms found it hard to get loans from the country’s commercial banks. Another was the ending of some government subsidies, including the subsidy paid to producers of petrol.

Economic growth

In 2014, worldwide steel demand weakened after China, the largest market for steel in the world, saw its consumption growth cut by half. The world’s largest steel-producing company predicted stronger profits for 2014, although it believed production might need to be reduced. The firm was deepening its specialisation in the steel market. Employment in this industry has fallen because firms have tried to lower capacity.

Firms’ costs, revenue and objectives

Most countries have a population made up of more women than men. Iran, though, is an exception. In the 1990s, the Iranian Government aimed to bring the country’s birth rate down. The policies it introduced were highly effective and the birth rate declined. In 2012, however, the government changed its aim and is now trying to encourage people to have more children. The reason for this policy change is concern about the consequences of an ageing population caused by a falling death rate.

Population

As laser eye surgery develops, the demand for spectacles is falling in several countries. Sight problems are being treated with more capital equipment and less labour. Some economists predict that opticians’ wages may decline in the future. If wages fall, some opticians may be prompted to retrain for other occupations.

The factors of production

Mexico, Indonesia, Nigeria and Turkey, called the Mints, are four emerging economies forecast to expand quickly. These four countries have fairly large populations, ranging from 75 million in Turkey to 242 million in Indonesia in 2014. Their birth rates are also high, varying from 17 in Turkey to 41.5 in Nigeria per 1000 people. Both income per head and the countries’ Human Development Index ranking are rising. However, these changes do not mean that all people in the four countries are content. As incomes rise, so do people’s wants, and what people would like to consume is greater than the maximum output the countries are able to produce. Output and consumption are rising in each of the four countries. Nigeria, for instance, is expected to rank among the world’s 20 largest economies by 2020. Productivity is increasing in most parts of the Nigerian economy, although it is still low in agriculture. Even with some security worries, more multinational companies are establishing themselves in the country because they are attracted by its growing markets. Nigeria and Turkey both recorded annual inflation rates above 8% in 2014. Indonesia’s was 5.7% and Mexico’s 5.2%. In that year, the Mexican Government used monetary policy measures to hold inflation down. In August 2014 it opened its energy market, letting private sector firms compete with the country’s state-owned petroleum firm. It also raised spending on state-provided health care, which works alongside private medical care. The four countries experienced exchange rate changes in 2014. Indonesia’s currency, the rupiah, moved from 10 685 per US$ the previous year to 11 450 per US$ in 2014. Turkey’s currency, the Turkish Lira, showed a similar pattern. Exchange rate changes can influence firms’ production costs, just as industrial action can. In June 2014 Turkish trade unions arranged several strikes in an attempt to secure better wages and working conditions for their members. However, Turkish trade unions have limited power because of restrictive trade union laws and low membership, with only 9% of workers in trade unions. As a result, collective bargaining is not a major feature of Turkish labour markets and Turkish trade unions have little influence on economic policy.

The nature of the economic problem

Several producers of jeans compete with one another. They now also have to face new sportswear that is intended to be worn as leisurewear too. As a result, competition has intensified and demand for jeans has become more price-elastic. For example, a government report has estimated that the price elasticity of demand for one of the oldest firm’s jeans in Asia is $-2.5$.

Price elasticity of demand (PED)

In recent years, productivity growth in Brazil has been weak, so average costs have stayed relatively high. Some economists argue that this weak productivity growth is caused by protectionism. The Brazilian Government places high tariffs on many imports, including smartphones; it says this protectionism protects Brazilian jobs.

Globalisation, free trade and protection

Household debt in South Korea in 2014 was rising to record highs. People were borrowing more and saving less: the savings ratio fell from 19% in 1985 to 4% in 2014. Even with such low saving, there was little demand-pull or cost-push inflation. In fact, in 2014 the country came close to deflation.

Inflation and deflation

The unemployment rate in Wales declined from 8.2% in March 2013 to 6.8% in March 2014. One in four workers in Wales is employed in the public sector. A large share of workers are employed by multinational companies, including a Japanese car producer and a South Korean electronics firm.

Employment and unemployment

Indonesia's biggest aviation company is a public corporation that began production in 1976. It makes use of a comparatively large amount of capital goods and holds a monopoly over aircraft construction in Indonesia. For some time it has produced parts for overseas firms, but it is now attempting to market aircraft to other countries. That means it is competing in a market where most firms are public limited companies.

Firms and production

In Germany, tax revenue from direct and indirect taxes climbed to US$860 billion in 2013. This rise was mainly the result of lower unemployment. Germany uses a progressive tax system. In 2014, German politicians debated whether tax rates ought to be raised. Altering tax rates affects both the level of tax revenue collected and the type of tax system.

Fiscal policy

In March 2014, teachers in Argentina went on strike after their unions were unable to agree wage rates. The government proposed a 25% pay rise, but the unions were seeking an increase above the country’s 32% inflation rate. The government argued that very large pay rises would create unemployment. It also said that the economy’s outlook would shortly improve because of its devaluation of the country’s exchange rate at the start of the year.

Trade unions

In 2014 the United States’ second-largest cigarette producer submitted a bid to acquire the country’s third-largest cigarette producer. If the merger took place, cigarette prices were expected to rise. How quantity demanded would respond to a price rise would depend on the price elasticity of demand.

Market failure

Peru has been shifting in recent years from a mixed economic system towards a more market-based one. One result has been that more small firms have been started. The short-run objective of some small firms is profit maximisation, whereas others are focused on growth. In the long run, both of these objectives may be achieved. Some small firms expand into large firms that are quoted on their country’s stock exchange.

Mixed economic system

In the 48 countries with the lowest Human Development Index (HDI) scores, 28 million people are employed overseas. They put aside part of what they earn so they can send it back to family members at home. Studies indicate that most of this money transfer is used by families for food and housing, which improves their living standards. In 2013, these remittances were worth twice as much as the foreign direct investment received by these countries.

Differences in economic development between countries

Microfinance means providing small loans at a low interest rate to poor people. These people are usually unable to obtain loans from commercial banks. It is intended to support development and began in Bangladesh. A World Bank study in 2014 found that microfinance raises consumer expenditure, the value of household assets, the size of the labour force and spending on children’s education.

Money and banking

Mozambique is a developing economy with a relatively fast economic growth rate. In recent years, the metical has depreciated against the US dollar. That has affected the country’s unemployment rate. Some economists in Mozambique have argued for higher tariffs on imports in order to cut unemployment.

Globalisation, free trade and protection