May/June 2017

Which pair of terms provides the general definition of the economic problem?

The nature of the economic problem

People made their own goods at first. Later, they chose to specialise. They came together as a group and exchanged their skills with one another, but no money was used. What is not likely to happen as a result for the group?

Money and banking

Tea is an extremely popular drink in Turkey and Morocco, whereas coffee is a substitute drink chosen by many people. Many cafés serve a small biscuit with a cup of tea or coffee. Some people add sugar to these drinks to make them sweeter. How would the relationship between these goods be classified?

Demand

For horizontal integration to occur, a tyre manufacturer could combine with another company that makes

Firms

Which cost would count as a variable cost for a bus company?

Firms’ costs, revenue and objectives

A monopoly comes to dominate an industry and replaces competitive firms. Which statement is unlikely to be true for a monopoly when it is compared with a competitive firm?

Market structure

The table illustrates the way a firm’s output changes when it hires additional workers. number of workers: 10, 20, 30, 40 total production (kilos): 50, 100, 300, 600 What occurs to productivity as the number of workers employed increases?

Firms and production

In what circumstances is a tax progressive?

Fiscal policy

A government plans to raise skills by providing school leavers aged 16 with free training until they are 18 years old. It suggests funding this through a tax on firms’ profits. Which policies are involved in these proposals?

Supply-side policy

When a government seeks to meet one of its aims, it may hinder the achievement of another aim. What is one example of such a conflict?

The macroeconomic aims of government

The charts are based on the Financial Statement of the government of New Zealand for 2014. What conclusion can be drawn?

Fiscal policy

Helium is a gas with a restricted supply. It forms over thousands of years from decaying radioactive rocks. The US government controls 35% of the world’s supply and has been releasing its stocks for sale. Helium is vital in medical scanners. It is also used in party balloons, which some people regard as a wasteful alternative use of a valuable good. Which concepts can be applied to the statement above?

Opportunity cost

A newspaper stated that a country’s economy expanded by 3% over the previous year. What must have risen during that year?

Economic growth

A nation has a low GDP and a large population, yet it is ranked relatively highly on the HDI. Which combination could be present in the country?

Living standards

The details below relate to an economy during a financial year. government expenditure = $2866 million government revenue = $1940 million What budget balance did the government record in that year?

Fiscal policy

In a developing country, real incomes have increased. Which situation would definitely have led to this?

Inflation and deflation

What characteristic is shared by developed and developing economies?

Differences in economic development between countries

The diagram presents population forecasts up to the year 2075 for a number of selected areas. If there is no migration, which condition must be present for the population to change in the way shown in the diagram?

Population

The table provides details about four countries. Which country is most likely to have the highest standard of living?

Living standards

Which government policy would be most likely to boost the volume of exports?

Globalisation, free trade and protection

What is always included in international free trade?

Globalisation, free trade and protection

Over the past few years, the US has recorded a deficit on the overall current account of its balance of payments. What might have caused the deficit to become larger?

Current account of balance of payments

The diagram illustrates a production possibility curve for an economy. Which point on the diagram represents the highest efficiency for producing both consumer goods and capital goods?

Production possibility curve (PPC) diagrams

During 2015, China was the world’s biggest exporter of manufactured goods and a significant importer of oil and minerals. China lowered the value of the yuan (renminbi) by $2\%$. According to economic theory, what consequence would this devaluation have caused?

Foreign exchange rates

The diagram illustrates the market for a product. Which statement about the labelled points on the diagram is correct?

Price determination

The diagram illustrates the demand for chocolate. What might explain the shift from point X to point Y?

Demand

A football club increases every stadium seat price by 5%. The stadium is split into four zones. Seat demand decreases by 1% in zone W, by 3% in zone X, by 5% in zone Y and by 6% in zone Z. In which zone is the demand for seats responsive enough to the price change to be elastic?

Price elasticity of demand (PED)

Plans were drawn up in Australia for a project to construct one of the world’s largest coal mines. The estimated cost of the project was $US12.5 million. It would generate employment, but it would also put endangered species at risk because large coal ships would harm the Great Barrier Reef. What effects would this project have on the following costs and benefits?

Market failure

What is most likely to occur when the rate of interest rises?

Monetary policy

In what kind of occupation are workers most likely to receive their highest earnings while still relatively young?

Workers

Which option is not a factor of production?

The factors of production

The government raises the income tax rate and lowers the rate of sales tax (VAT). Starting from the original equilibrium at $X$, which letter marks the new equilibrium point in the market for normal goods?

Fiscal policy

In South Africa, there is a comparatively small supply of skilled workers. Nevertheless, average wages in South Africa are twice the average wage in Brazil and Turkey, and they are $1.6$ times greater than in Malaysia. What can be concluded from this information?

Workers

For horizontal integration, a tyre-producing firm could combine with another firm making

Firms

Which costs are bound to decrease continuously as output rises?

Firms’ costs, revenue and objectives

A monopoly replaces competitive firms in an industry. Which statement is not likely to be true of a monopoly compared with a competitive firm?

Market structure

The table lists a firm’s costs. What is the value of the firm’s fixed costs?

Firms’ costs, revenue and objectives

At what point is a tax considered progressive?

Fiscal policy

A government wants to attempt to make income distribution in the country more equal. Which policy would be most likely to bring this about?

The role of government

When a government attempts to meet one of its aims, it may make it harder to meet another aim. What is one example of this conflict?

The macroeconomic aims of government

If a government wants to increase employment, which policy combination would be the most effective?

Employment and unemployment

Intense rainfall led to flooding in a section of a nation. What might be an opportunity cost of carrying out repairs to the damage caused?

Opportunity cost

A newspaper stated that a country’s economy expanded by 3% over the previous year. What must have risen during that year?

Economic growth

What does the term deflation mean?

Inflation and deflation

The details below relate to an economy in a financial year. Government expenditure = $2866 million. Government revenue = $1940 million. What was the government's budget balance in that year?

Fiscal policy

What was the change in GDP per head, after allowing for price increases (real change), between 2000 and 2013?

Economic growth

Which of the following statements about the poorest households in developing economies is least likely to be correct?

Poverty

The diagram presents population projections up to the year 2075 for selected areas. If there is no migration, which situation must be present for the population to change in the way shown in the diagram?

Population

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

Differences in economic development between countries

Which government policy is most likely to lead to a higher volume of exports?

Globalisation, free trade and protection

What factors could promote international specialisation among countries?

International specialisation

In 2015, Russia prohibited food imports, including milk, from the European Union (EU). Which outcomes are most likely to occur because of this?

Globalisation, free trade and protection

The diagram illustrates a production possibility curve for cars and furniture. A recession leads to lower output of both cars and furniture. Which movement would show this change?

Production possibility curve (PPC) diagrams

In 2010, Vietnam recorded a deficit in the value of its trade in goods (visible) even though it exported a larger quantity of goods than it imported. What might account for this?

Current account of balance of payments

As a result of the price rising from $\$5$ per kilo to $\$6$ per kilo, a chicken farmer increased supply from $400$ kilos to $500$ kilos per week. What is the price elasticity of supply?

Price elasticity of supply (PES)

The diagram illustrates the demand for chocolate. What might explain the movement from point $X$ to point $Y$?

Demand

A bee-keeper keeps hives of bees in order to make honey. The bees may pollinate neighbours’ fruit trees, but they can also inflict a painful sting on gardeners. If both of these events happen, what effect will this have on costs and benefits?

Market failure

In $2015$ the world price of petrol (gasoline) fell markedly. Which factor would not have been responsible for the drop in price?

Price changes

Which statement concerning financial matters is correct?

Money and banking

What is most likely to be used to justify a claim for wage increases in an industry?

Trade unions

Which of the following statements about factors of production is correct?

The factors of production

Which employee is most likely to be at risk of a falling income near the end of their working life?

Workers

What is the most likely explanation for why airline pilots receive higher pay than agricultural workers?

Workers

To carry out horizontal integration, a firm making tyres could merge with another firm that makes

Firms

A car manufacturer operates a very mechanised assembly line that uses robots together with a small number of skilled workers. An international exam board hires many thousands of examiners to mark candidates’ examination papers. Which row matches each of these activities?

Firms and production

A monopoly replaces competitive firms in an industry. Which statement is least likely to be true for a monopoly when compared with a competitive firm?

Market structure

The table gives a firm’s total costs. Each unit can be sold for $10. Output quantity (units): 7, 8, 9, 10 Overall cost ($): 10, 15, 20, 25 How many units will the firm produce to maximise profits?

Firms’ costs, revenue and objectives

At what point is a tax described as progressive?

Fiscal policy

Why may government spending be referred to as both a fiscal policy and a supply-side policy?

Fiscal policy

While a government is attempting to meet one of its aims, it may make it harder to meet a different aim. What is one example of this conflict?

The macroeconomic aims of government

A government reduces the income tax rate. What effect is this likely to have on tax evasion and revenue from indirect taxes?

Fiscal policy

A person is able to produce $10$ items for sale at a craft stall in one day. If the person chooses to paint a picture instead, what is the opportunity cost?

Opportunity cost

A newspaper stated that a country’s economy expanded by 3% over the previous year. What must have risen during that year?

Economic growth

In the poorest developing countries, it is hard to measure the size of GDP. What is the main reason for this?

Differences in economic development between countries

The data below describe an economy over one financial year. government expenditure = $2866 million government revenue = $1940 million What budget balance did the government record in that year?

Fiscal policy

The table contains some data from a developing country. Consumer prices: percentage change compared with the previous year 2011: 4% 2012: 5% 2013: 3% 2014: 2% Which statement has to be correct?

Inflation and deflation

What is most likely to indicate that a country is experiencing an increase in economic development?

Living standards

The diagram presents population projections up to the year 2075 for selected areas. If migration is assumed to be zero, which situation must be present for the population to change in the way illustrated in the diagram?

Population

A government in a developing country has provided additional funding to encourage trade in rural areas by supporting the opening of small shops. What is likely to rise as a consequence?

Employment and unemployment

Which government policy is most likely to raise the volume of exports?

Globalisation, free trade and protection

Which method would simultaneously cut imports and promote exports?

Globalisation, free trade and protection

The exchange rate for the South African rand and the Botswana pula decreased by $5.7\%$ between August 2014 and August 2015. What would be the immediate consequence of this?

Foreign exchange rates

The diagram illustrates a production possibility curve for agriculture and machinery. As a country develops, primary production falls while secondary production rises. Which movement would show this change?

Production possibility curve (PPC) diagrams

During 2015, China was the largest importer of oil in the world. In August 2015, China lowered the value of its currency. What was likely to have happened?

Foreign exchange rates

The table compares four people’s demand for t-shirts at two prices. Which person has the most elastic demand for t-shirts when the price increases from $\$10$ to $\$15$?

Price elasticity of demand (PED)

The diagram illustrates the demand for chocolate. What could lead to the movement from point X to point Y?

Price changes

A company makes an electric car that can travel much farther than other electric cars before it needs to be recharged. In contrast to petrol cars, it does not release the harmful fumes they give off. The batteries that power the car are extremely expensive, and the company is constructing a very large factory so that batteries can be produced more cheaply. Which concepts can be applied to the above statement?

Firms and production

Many people eat biscuits while having a cup of tea. From 2010 to 2015, demand for sweet biscuits declined because of health warnings concerning high sugar consumption. As a consequence, sales of tea also dropped. How would this be represented on demand and supply diagrams for biscuits and tea?

Demand

A student needs to borrow $\$60\,000$ to finance a five-year university course in medicine. What might encourage the student to borrow in order to pay for the course?

Households

The Congress of South African Trade Unions (COSATU) is South Africa’s largest trade union federation. It represents public sector workers. In 2010, its membership increased. In the same year, COSATU’s bargaining power fell. What could explain this?

Trade unions

In August 2015, the Egyptian Government launched a second Suez Canal beside the existing one so that more and larger ships could travel from the Mediterranean Sea to the Gulf of Suez. Construction cost more than US$8 billion, and land had to be bought, capital equipment purchased and wages paid to the workers building the canal. At the same time, there were demands for higher public spending on healthcare, especially to raise the standard of public hospitals, and on education, particularly adult literacy. The Egyptian Government expects the canal to draw in more ships, including those carrying goods and those carrying passengers. The amount of goods and people transported by sea is affected by a range of influences. These include how fast transport is, the level of economic activity and the price of other transport methods. Some goods must be moved rapidly, and recent years have shown how demand for sea transport is highly responsive to recessions and booms. Fig. 1 illustrates how the sea transport market has recently been influenced by changes in the air transport market. Fig. 1 The market for sea transport shows a vertical axis labelled “price of sea transport” and a horizontal axis labelled “quantity of sea transport”. The origin is labelled “O”. There are two horizontal price lines labelled $P_1$ (higher) and $P_2$ (lower). There are two vertical quantity lines labelled $Q_1$ (to the right) and $Q_2$ (to the left). An upward sloping supply curve is labelled “S”. There are two downward sloping demand curves, the original demand curve labelled “$D_1$” (to the right) and a new demand curve labelled “$D_2$” (to the left). The Egyptian Government hopes that new industries linked to shipping will be established along the canal. Developing infant industries may help bring down the country’s unemployment rate, which in 2015 was 12.5%. In 2015, the country had a population of 90 million, a population growth rate of 1.5% and a labour force of 28 million. Its death rate was falling. Government spending on healthcare was equal to 4% of Gross Domestic Product (GDP). 2015 also recorded GDP at US$280 billion and an economic growth rate of 5%.

Opportunity cost

Sales of bottled water in China were twice as high in 2015 as they had been in 2010. In 2013 China moved ahead of the USA to become the largest market for water by volume, though not by value because a bottle cost more in the USA. The rise in worldwide bottled-water consumption has increased the size of firms producing bottled water, but it has also raised pollution.

Market failure

Money and banking are strongly connected. Money has several roles, one of which is serving as a standard for deferred payments, and it is used to pay workers, often paid straight into their bank accounts. The amount workers receive varies according to the industry they work in. In some countries, lending by both private sector banks and public sector (state-owned) banks has risen in recent years.

Money and banking

Oil was found in Kenya in 2012, yet in 2014 an American firm abandoned its plans to explore for oil in the Arabuko Sokoke forest in the country. The relative proportions of Kenya’s primary, secondary and tertiary sectors are shifting. The stock of capital goods in the country is also rising.

Economic growth

In June 2015, the Swiss franc appreciated by 30% against the euro. Switzerland's export markets are also shifting. Sales to the USA, UK, India and South Korea are becoming more important, whereas sales to Germany, Italy and France are falling. One possible effect of an appreciation in the exchange rate is a lower inflation rate.

Foreign exchange rates

Japan’s birth rate is decreasing. Its population is getting older, and it is shrinking more rapidly than the population of any other country. This affects how much the Japanese Government spends on pensions. Its government is thinking about measures to raise the country’s birth rate and to promote immigration.

Population

Prices in Mexico have risen in recent years. Indirect taxes have also been increased. Bus fares and food have become more expensive. In 2015, the Mexican Government planned to reduce its spending by US$8.3 billion.

Fiscal policy

Botswana is the largest diamond producer in the world. In fact, in 2015 diamonds made up one third of the country’s Gross Domestic Product (GDP) of US$18 billion and 80% of its exports. At present, most of the nation’s earnings come from mining and selling rough (uncut) diamonds. For a 1.5 carat rough diamond, it receives only US$700. After that, the diamond is cut, polished and finished, usually in other countries. India leads the world market for cutting and polishing diamonds. The cost of cutting and polishing diamonds in India is only a quarter of the cost in Botswana. The worldwide average cost of finishing a 1.5 carat diamond is US$8000. The diamond is then sold to the customer with a 25% profit margin. Botswana is attempting to build up industries linked to diamond mining, including cutting, polishing and jewellery making such as diamond rings. Fig. 1 illustrates the way the global market for diamond rings changed in 2015. Fig. 1 The global market for diamond rings in 2015. The vertical axis is labelled "price of diamond rings" and the horizontal axis is labelled "quantity of diamond rings". The origin is labelled O. Two equilibrium prices are labelled $P_1$ and $P_2$. Two equilibrium quantities are labelled $Q_1$ and $Q_2$. There is an upward sloping supply curve labelled S. There are two downward sloping demand curves labelled $D_1$ and $D_2$. The Botswanan Government has also persuaded the world’s largest diamond company to establish itself in Gaborone, the capital of Botswana. However, some government ministers worry that Botswana relies too heavily on diamonds. They point out that the supply of diamonds is finite and call on the government to promote diversification. In addition to diamonds, the country has several other strengths. It benefits from good infrastructure, a developed education system and free hospital treatment.

International specialisation

Indonesia's output is shaped by its factors of production. A production possibility curve diagram can be used to illustrate the link between resources and output. Indonesia does have extensive fishing waters, yet it does not actually catch many fish. Most fishing firms are small, and they compete with much larger foreign firms. Those larger foreign firms have been drawn into Indonesia's waters because demand for fish is rising. The price elasticity of demand for different types of fish has changed over the last few years.

Production possibility curve (PPC) diagrams

In 2015, several German commercial banks cut the already exceptionally low interest rates on deposit accounts. The German Government wanted this change to persuade more Germans to purchase shares in German firms. The ability of German firms to buy capital goods would rise if they could issue more shares or borrow more from commercial banks.

Money and banking

As more people become billionaires, other people are still living in poverty. Some enjoy luxuries while others do not even have the essentials. To help more people reach a minimum living standard, some economists support the redistribution of income.

Living standards

From 2009 to 2014, Delaware was the sole US state where earnings fell. Over that same span, it also had unemployment below the national average and a larger share of workers in trade unions. Looking ahead to the next twenty years, the state is predicted to be among the fastest-ageing populations in the USA.

Employment and unemployment

In 2015, the world experienced many shifts in demand and important technological advances. People were adopting new methods of transferring money, and the number of stock exchanges increased. Some governments also increased the school-leaving age, meaning the lowest age at which children are legally allowed to leave school.

The role of markets in allocating resources

Spain has experienced one of Europe's highest unemployment rates. In addition, by 2015, 3.5 million of the unemployed had been without work for at least a year. To cut unemployment and poverty, the Spanish Government has used several policy measures, including higher government spending. It has also attempted to help firms make their products’ supply more elastic.

Employment and unemployment

Coal is burned directly to heat homes all over the world, and it generates more than 40% of the world’s electricity. Even so, the coal industry faces several difficulties. These include rising concerns about the environmental impact of coal use and greater competition from other fuels. Mining coal and using it to generate electricity creates air pollution. Coal-fired power stations release carbon dioxide, which has a damaging effect on people’s health. Wildlife habitats are harmed when new mines are opened and when coal waste is tipped on landfill sites. Even so, demand for coal has fallen recently. As a result, the price of a tonne of coal dropped from US$300 in 2010 to US$150 in 2015. In 2015, even China, the world’s biggest consumer of coal, bought less. Some high-cost deep mines were closed in the USA. In the same year, Europe’s largest producer, Poland, sold coal at a loss of US$37 a tonne. The decline in demand for coal is partly due to competition from renewable energy. For example, advances in technology are lowering the cost of generating energy from wind power. Fig. 1 shows how the wind power market changed in 2015. Fig. 1 The market for wind power in 2015 shows a vertical axis labelled “price of wind power” and a horizontal axis labelled “quantity of wind power”. The initial equilibrium price is labelled $P_1$ and the new equilibrium price is labelled $P_2$. The initial equilibrium quantity is labelled $Q_1$ and the new equilibrium quantity is labelled $Q_2$. A downward sloping demand curve is labelled $D_1$. Two upward sloping supply curves are shown, labelled $S_1$ (on the left) and $S_2$ (on the right).

Market failure

From 2014 to 2015, Sao Paulo, a major city in Brazil, built more than 120 km of cycle-only lanes next to roads. The city has a car culture, and demand for car travel is price-inelastic. By contrast, in Copenhagen, the capital of Denmark, 36% of commuter journeys are now made by bicycle, which has reduced the demand for car travel in the city.

Demand

In 2015, the money sent back home by Nepalese workers employed overseas made up 29% of Nepal’s total income. These remittances also had a favourable effect on the country’s current account position in its balance of payments. In Kerala, a state in India, remittances made up 36% of total income, with people from the state travelling abroad to do a variety of jobs including work as dentists and hotel cleaners.

Workers

2015 recorded mergers worldwide worth more than US$4000 billion, with many taking place in the USA and the UK. Some mergers happen between firms based in different countries. These are shaped by several influences, including the size and structure of the markets in the countries concerned and their exchange rates. Mergers affect the degree of competition in markets.

Market structure

Although the Central Bank of Nigeria had imposed a 9% ceiling for inflation, Nigeria’s inflation rate rose to 9.2% in August 2015. The Governor of the Central Bank said that he would support the use of fiscal policy to bring the inflation rate down and would oppose pressure to devalue the country’s exchange rate.

Inflation and deflation

Over recent decades, living standards have improved in several different ways. From 1990 to 2015, more than 2.5 billion people across the world gained access to improved water, and the share of undernourished people dropped from 24% to 13%. Different countries have advanced at different speeds, and this is shown in their Human Development Index (HDI) rankings.

Living standards

Argentina was once among the countries with the world’s highest GDP per head and had one of the fastest rates of economic growth. A large number of multinational companies were manufacturing there. Some people argue that, if Argentina is to return to the top ten richest nations, it must raise education spending and move towards free trade.

Economic growth