May/June 2018

Instead of using the profits earned from oil to improve roads, railways and other infrastructure at home, the Norwegian government invested them in stocks, bonds and property. Domestic infrastructure, as a result, was not developed. Which economic concept is shown most clearly here?

Opportunity cost

Under what circumstances is a trade union likely to have greater power to raise its members’ wages?

Trade unions

The table gives the percentage (\%) of income that is saved by different age groups. What can be concluded from the table?

Households

Which feature may be found in both a monopoly and perfect competition?

Market structure

An industry is facing diseconomies of scale. What is happening to long run average cost and total cost?

Firms’ costs, revenue and objectives

A firm sells its product at $6$ per unit and has the following total costs. Which statement is correct?

Firms’ costs, revenue and objectives

Which statement regarding fixed costs is correct?

Firms’ costs, revenue and objectives

What would a government cut as part of an expansionary monetary policy in order to raise employment?

Monetary policy

What is one objective of government policy?

The macroeconomic aims of government

The table displays the tax amount payable at different weekly incomes. Which statement describes how the income tax system changes as income increases over this range?

The role of government

Which situation in the building industry would be most likely to be examined by a government agency established to regulate restrictive practices?

Market structure

What would an economist regard as the factor of production called land?

The factors of production

An economy has recorded negative economic growth for two quarters in a row. What is this economy experiencing?

Economic growth

What is taken into account when calculating a consumer prices index (CPI)?

Inflation and deflation

Business investment spending fell in the third quarter of $2015$. What would be the most likely outcome of this?

Economic growth

The table presents units of output, output value and the number of workers employed in an industry across three years. What conclusion can be drawn from the table?

Firms and production

Which characteristics are present in a typical developed country?

Differences in economic development between countries

Which characteristic would indicate that a country has substantial absolute poverty?

Poverty

A developing country's government permits a multinational mining company to extract minerals so that the local population's standard of living can be raised. Which action by the multinational company (MNC) would not result in a higher standard of living for the local people?

Living standards

A country has chosen to expand free trade with the nations it trades with. Which action would help it to achieve this aim?

Globalisation, free trade and protection

The UK hosted the Olympic Games in 2012, and this drew a large number of visitors from overseas. Which item in the UK’s current account balance would have gained directly from this event?

Current account of balance of payments

The Mexican currency (the peso) has declined in value relative to the US dollar. What effect will this have on the Mexican economy?

Foreign exchange rates

What causes the economic problem experienced by every country?

The nature of the economic problem

The table presents the rice yield for four countries. What conclusion can be drawn from this information?

International specialisation

Which type of activity is carried out in the tertiary sector?

Firms and production

In the diagram, suppliers have fixed the price of a product at $P_s$. Economic theory predicts that the product’s equilibrium price will increase to $P_e$. What explains this change in price?

Price determination

A government gave approval for a new railway line linking major cities to be built. A private company would construct it, while part of the cost would be met through taxation. The scheme would provide many jobs. People living along the route were concerned about damage to their environment. Which concepts are directly involved in this statement?

Market failure

The diagram illustrates the supply curve for a good. What is the price elasticity of supply as the price rises from $\$2$ to $\$4$?

Price elasticity of supply (PES)

What is one role of a central bank?

Money and banking

What is most likely to cause university lecturers’ wages to rise?

Workers

In economics, natural sunlight is regarded as a free good. Why is this the case?

The nature of the economic problem

Which factor is most likely to support a trade union’s request for wage increases in an industry?

Trade unions

The table gives some details about a computer engineer in 2015. Income tax is fixed at $20\%$. The engineer put aside $10\%$ of the disposable income. How much money was saved?

Households

Which feature is typical of a firm operating under perfect competition?

Market structure

What is one possible reason for diseconomies of scale?

Firms’ costs, revenue and objectives

A firm that charges $6 a unit for its product has the following total costs. Which statement is correct?

Firms’ costs, revenue and objectives

Which of the following statements about fixed costs is correct?

Firms’ costs, revenue and objectives

Which of these is a supply-side policy?

Supply-side policy

What is one aim of government policy?

The macroeconomic aims of government

A government records the following sources of revenue. What is the total amount of indirect tax revenue?

Fiscal policy

Which situation in the building industry is most likely to be looked into by a government body established to regulate restrictive practices?

Market structure

Which item would count as the factor of production capital for an airline?

The factors of production

The table shows how Gross Domestic Product (GDP) has changed in four countries. Which country has gone through a recession?

Economic growth

What is used to determine the weights in the consumer prices index (CPI)?

Inflation and deflation

Business investment spending fell in the third quarter of 2015. What outcome was most likely to follow?

Economic growth

The table presents units of output, the value of output and the number of people employed in an industry across three years. What conclusion can be drawn from the table?

Firms and production

Which characteristic is associated with a developed country rather than a developing country?

Differences in economic development between countries

More than two-thirds of the world’s poorest people are found in rural regions. Most of them depend on subsistence agriculture. What factors explain why poverty stays at a high level for families in subsistence farming?

Poverty

A developing country’s government permits a multinational mining company to extract minerals so that the living standards of local people can be raised. Which action taken by the multinational company (MNC) will not improve the living standards of the local people?

Living standards

A country wants to adopt a policy of trade protection. Which action would it take?

Globalisation, free trade and protection

In 2012, the UK hosted the Olympic Games, and this drew a large number of visitors from overseas. Which part of the UK's current account balance would have gained directly from this event?

Current account of balance of payments

In 2015, the South African currency, the rand, fell in value relative to the US dollar. What impact did this have on the US economy?

Foreign exchange rates

The diagram depicts a production possibility curve (PPC). Which point is most likely to result in the largest outward movement of the PPC?

Production possibility curve (PPC) diagrams

The table presents the rice yield in four countries. Japan: 64 kilos per hectare China: 53 kilos per hectare Bangladesh: 20 kilos per hectare Thailand: 20 kilos per hectare What conclusion can be drawn from this information?

Differences in economic development between countries

What is one major advantage of a market economic system compared with a mixed economic system?

Market economic system

The diagram illustrates the market for beef in the US, with the initial equilibrium at X. If incomes in the US increase, where will the new equilibrium be?

Demand

The table presents government estimates for the private and external benefits and costs involved in constructing a new dam. What is the difference between the social benefits and social costs of building the dam?

Market failure

The diagram illustrates the supply curve for a good. What is the price elasticity of supply when the price increases from $\$2$ to $\$4$?

Price elasticity of supply (PES)

Which service is not offered by a commercial bank?

Money and banking

What is likely to lead to higher wages for airline pilots?

Workers

The use of robots has meant that many firms now need fewer workers to make their goods and provide their services. From this statement, which factor of production is taking the place of workers?

The factors of production

What is the most probable reason a business may welcome the arrival of a trade union for its employees?

Trade unions

Which factor is least likely to cause consumer spending on a new car to rise?

Demand

Which feature is typical of perfect competition?

Market structure

A television manufacturer says that its production is the most technologically advanced in the industry. Compared with rival producers, what is this most likely to imply?

Firms and production

A company charges $6$ per unit for its product and has these total costs. Output, in units: $0, 10, 20, 30$. Total costs ($\$$): $40, 100, 120, 150$. Which of the following statements is correct?

Firms’ costs, revenue and objectives

Which of the following statements about fixed costs is correct?

Firms’ costs, revenue and objectives

In many countries, governments give financial assistance to firms that want to generate electricity using wind turbines. What type of policy measure is this?

Supply-side policy

What does government policy aim to achieve?

The macroeconomic aims of government

A government wants to transfer income from richer people to poorer people. Which mix of policy measures is most likely to achieve this objective?

Fiscal policy

Which building industry situation is most likely to be examined by a government body established to regulate restrictive practices?

Market structure

In economics textbooks, scarcity is presented as the main economic problem. Why does scarcity count as a problem?

The nature of the economic problem

What is one possible result of economic growth?

Economic growth

A basket of goods is used to work out a country’s rate of inflation. What items are included in the basket of goods?

Inflation and deflation

Business investment spending fell in the third quarter of 2015. What would most likely be the consequence of this?

Economic growth

The table lists units of output, the value of output and the number of people employed in an industry across three years. What conclusion can be drawn from the table?

Firms and production

In developing countries, services are usually provided in rural districts after they have been introduced in urban areas. For which service would this statement be incorrect?

Differences in economic development between countries

The table presents a country’s historical and forecast age structure, given as a percentage (%), for 2000 to 2150. The working age range is $15-64$. Which statement describes how the dependency ratio changes across the period?

Population

The government of a developing country gives a multinational mining company permission to extract minerals so that the living standards of the local population can be raised. Which action taken by the multinational company (MNC) would not result in a higher standard of living for the local people?

Living standards

What would place the greatest restriction on the amount of international trade in steel?

Globalisation, free trade and protection

In $2012$ the UK hosted the Olympic Games, drawing a large number of visitors from overseas. Which item in the UK’s current account balance would have gained directly from this event?

Current account of balance of payments

This table is about a country’s balance of payments on current account. The figures shown are: - goods exports: $100\,\text{bn}$ - goods imports: $125\,\text{bn}$ - services exports: $60\,\text{bn}$ - services imports: $50\,\text{bn}$ - income and transfers balance: $+10\,\text{bn}$ What conclusion can be drawn from the table?

Current account of balance of payments

The diagram illustrates a country’s initial production possibility curve XX. What might lead the country’s production possibility curve to shift from XX to XY?

Production possibility curve (PPC) diagrams

The table sets out rice yields for four countries. Rice yield, measured in kilos per hectare: - Japan: $64$ - China: $53$ - Bangladesh: $20$ - Thailand: $20$ What conclusion may be drawn from this information?

Differences in economic development between countries

What is one advantage of the free market system?

Market economic system

The diagram illustrates the demand curve $D_1$ and supply curve $S_1$ for healthcare in an economy. The initial equilibrium is X. What will be the new equilibrium if the economy undergoes continuous economic growth and the government eases planning restrictions on constructing new hospitals?

Price determination

A private company is among only a small number of electricity suppliers in an economy. The government penalises it for pollution caused by its coal-fired power stations, which harms the health of people living close by. What does this situation involve?

Market failure

The diagram illustrates the supply curve for a good. Calculate the price elasticity of supply when the price increases from $\$2$ to $\$4$?

Price elasticity of supply (PES)

Which of the following is not a function of a central bank?

Money and banking

What change would lead a manufacturing company to substitute labour for capital in order to preserve the most efficient mix of factors of production?

The factors of production

Morocco’s banking sector has been described as one of Africa’s strongest. It contains some of the continent’s biggest commercial banks, yet three of the nineteen hold over two-thirds of the market between them. Most of the expansion of these three banks has come through mergers, and further mergers among Moroccan banks are expected in the future. The banks use brand names, decide their own interest rates on loans and offer some different services. The larger banks usually lend to big firms. Small and medium-sized firms find it harder to obtain loans. More than 60% of the population now use commercial banks’ services. The share of families opening savings accounts with commercial banks is rising. Moroccan banks now operate branches in 22 African countries and in several European countries as well. They are also growing within Morocco, which is creating more jobs. Morocco has a fairly high unemployment rate. Fig. 1 shows the unemployment rate in 2015 for a selection of African countries, including Benin, which is a relatively poor country. Benin has a large labour-intensive, subsistence farming sector. Fig. 1 also shows youth unemployment and population growth. Unemployment rates differ across groups. Youth unemployment is often twice the overall unemployment rate. Fig. 1 The unemployment rate, youth unemployment rate and population growth rate in selected African countries in 2015. The vertical axis is labelled “rate (%)”. The horizontal axis lists the countries: Benin, Egypt, Morocco, Nigeria and Uganda. The legend shows three bars for each country: Unemployment rate; Youth unemployment rate; Population growth rate. In Morocco, population growth is faster than the rate at which new jobs are being created. The increase in unemployment is affecting wage rates in the country. As with unemployment, wage rates are not the same for all groups. For instance, older workers are usually paid more than younger workers.

Market structure

In England, football stadiums are generally constructed and funded by the private sector, whereas in some countries the government constructs and funds the stadiums. Many football stadiums in the English Premier League are sold out on match days. In the short run, the supply of seats is perfectly inelastic. Football clubs could even increase prices, continue to sell their tickets and therefore increase their profits. Premier League footballers at present earn very high wages.

Supply

In 2014, Kazakhstan's government cut the value of its currency, the tenge. One year on, the country still had a current account deficit. As a result, in 2016 it looked at adopting a floating exchange rate, which could help eliminate the deficit. However, it was worried that this could influence the country’s inflation rate, which was already high at 17%.

Foreign exchange rates

The Tripartite Free Trade Area (TFTA) was created in 2015. It spans 26 countries and is Africa’s largest free trade area. When trade barriers are removed, economies can exploit economies of scale more fully. However, some economists think that improving Africa’s roads would be more effective and would do more to cut a current account deficit on the balance of payments and improve living standards.

Globalisation, free trade and protection

Slovenia’s government has put in place several supply-side policy measures to affect the nation’s inflation rate. Another factor shaping the economy is a shift in trade union membership and influence.

Supply-side policy

Well over 80% of Qatar’s population are immigrants. Net immigration has supported the nation’s need for labour. Alongside the shortage of workers, there is also a shortage of drinking water. The government has launched public campaigns to stop people using their free drinking-water supply to fill swimming pools and irrigate gardens. In 2016, government spending was raised to boost the country’s economic growth rate.

Workers

Several governments are introducing taxes on unhealthy food and drinks. These taxes are generally regressive. In addition, some of these governments are raising spending on healthcare. In other nations, healthcare is supplied by the private sector. The number of state-owned enterprises is falling in many countries because of privatisation.

Fiscal policy

Vanilla is used to make soft drinks, cakes and perfumes. Its chief use, though, is in ice cream production. Fig. 1 illustrates the different costs of making ice cream for one firm. Fig. 1 shows the costs of producing ice cream for one firm. The diagram labels are: raw materials including vanilla; wages; insurance; security; rent; lighting; other. Madagascar is the world’s biggest supplier of vanilla, with Mexico and Tahiti next. At the beginning of 2016, economists forecast that the price of ice cream would rise because the price of vanilla had increased by 130% in 2015. This was mainly due to poor harvests in Madagascar, which cut vanilla output in 2015. In most countries, ice cream is regarded as a luxury good. It has many substitutes, and this is one reason why producers do not always pass higher costs on to consumers. In 2015, several other changes affected ice cream production, including an increase in worker productivity. Alongside vanilla, Madagascar makes a number of other primary products such as coffee and sugar. Almost 80% of the country’s labour force works in the primary sector. The country has a fairly low Gross Domestic Product (GDP) per head and a fairly low Human Development Index (HDI) value, as shown in Table 1. This restricts how much people in Madagascar save. Table 1 shows GDP per head and HDI for selected countries in 2015.

Firms’ costs, revenue and objectives

In Swaziland, a small African country, six in ten people live in poverty and most firms are small, using very little capital equipment. A new airport was opened in October 2015. Some economists argue that constructing the airport had a high opportunity cost and brought several external costs. Building the airport is one element of the government’s programme to transform the country from developing into developed.

Market failure

US farms are growing larger. One dairy farm in Indiana has over 38 000 cows. US farms compete with farms in both developed and developing countries. The value of the farms’ milk exports is shown in the trade in goods part of the USA’s balance of payments current account.

Current account of balance of payments

In the UK, bus trips outside London have declined by almost 40% since 1980. The drop in demand has mainly been caused by higher bus fares, rising incomes and shifts in the price and quality of substitutes. On some routes there are monopolies in operation, and this absence of competition can drive up the price.

Market structure

In October 2015, the Chinese government changed from the one child policy to a two child policy partly because an ageing population was causing difficulties. The birth rate was already declining because more women were taking part in the labour force, education levels were improving, marriages were happening later, and housing prices were rising rapidly.

Population

In February 2016, share prices on stock exchanges declined across the world. This occurred for several reasons, including worries about a slowdown in world growth, the risk of deflation and unemployment, and fears that some commercial banks might fail.

Inflation and deflation

World output has increased in recent years, yet a number of countries have slipped into recession. The easing of trade barriers such as import tariffs has also slowed, which has reduced the growth of world trade.

Globalisation, free trade and protection

In 2015, the World Economic Forum named the water crisis as the largest global risk. In many Asian and African countries, water supplies were down at critically low levels and could not satisfy the growing demand. This demand has increased because cities have expanded and population numbers have risen, creating a much larger need for agricultural output. Water scarcity affects many developing countries, where life expectancy is low. It is estimated that one third of all healthcare facilities in these countries do not have access to safe water or basic sanitation. Shortages of water damage public health - 80% of all illnesses in developing countries are caused by poor water and sanitation conditions. Water shortages also limit the level of food production. Table 1 presents the risk of water shortage (with the highest risk being 5) and Gross Domestic Product (GDP) per head in US$. Because of water shortages, a number of countries and regions have tried privatising supply. However, since water is a necessity, private provision has in some cases caused consumers to face major price rises. It is estimated that a 10% rise in the price of water leads to only a 0.7% fall in quantity demanded. This suggests that governments need to regulate water markets in order to safeguard consumers. Some economists believe that water has been consistently undervalued, which has caused it to be used inefficiently. The reason is that prices do not take into account the long-term effects of failing to conserve this valuable resource. As climate change leaves much of the world facing a hotter and drier future, water is likely to become even scarcer. More than 663 million people are estimated to be living without access to clean water. The World Bank provides finance for a range of projects aimed at dealing with this and, in doing so, lowering absolute poverty. Better access to natural resources is regarded as vital for encouraging economic development in some of the world’s poorest countries.

Market failure

In 2016, the UK trade union for doctors was negotiating collectively with the government over proposed alterations to doctors’ contracts. The union believed the purpose of the changes was to lower the government’s cost of supplying healthcare. They could also mean fewer people train to become doctors in the future.

Trade unions

In the 1990s, Cambodia shifted to a mixed economy. A consequence of this was greater specialisation in the clothing industry. In 2005, clothing import quotas in the main USA and EU markets were lifted. Clothing now makes up 80% of Cambodia’s exports. A larger private sector has led to more malnutrition in Cambodia.

Globalisation, free trade and protection

At the beginning of 2016, the central bank of the Republic of Turkey reduced interest rates on five occasions. This happened even though inflation stood at 7.6%. The economy combined a low saving rate with weak investment. To boost economic growth, the Turkish government announced a reform package that included subsidies for research and investment.

Money and banking

California in the USA has the most progressive tax system. This tax structure helps to cut high poverty rates. Policymakers are thinking about changing sales tax in the state so that services are included, while relying less on direct taxes.

Fiscal policy

Oil production is capital-intensive. Because it creates pollution, it is one cause of environmental market failure. In Nigeria, an oil monopoly is beginning to make more environmentally friendly liquefied petroleum gas (LPG) instead of kerosene in order to cut pollution. The Nigerian government plans to break the monopoly firm into separate companies to raise efficiency.

Market failure

Back in 2016, there were worries that the Singaporean economy might tip into recession because demand from China, its largest export destination, was weakening. A likely effect of a recession is a drop in consumer spending. In an earlier recession in 2008, unemployment had climbed from 1.6% to 3.4%. Singapore’s central bank therefore chose to step into the foreign exchange market to affect the currency’s value.

The macroeconomic aims of government