May/June 2019

What would an economist consider an example of the factor of production capital?

The factors of production

Which factor has the greatest influence on the amount a family is able to save?

Households

The table illustrates how real incomes changed for a range of occupations from 1985 to 2015. What conclusions can be drawn from the table?

Workers

A large bakery purchases a flour mill. What form of integration is this?

Market structure

Why do very large firms dominate the energy supply industry in many economies?

Market structure

In the diagram, the firm’s fixed costs, variable costs and total costs are shown. Which distance indicates the firm’s fixed costs?

Firms’ costs, revenue and objectives

A entrepreneur purchases a workshop costing $200\,000 in order to produce plastic boxes. During the first year of trading, he pays $70\,000 for materials, hires ten production workers who are paid according to the quantity made (piece rate) at an overall cost of $80\,000, and acquires two delivery vehicles costing $10\,000 each. What is the total amount of his variable costs?

Firms’ costs, revenue and objectives

A government raises the rate of income tax to fund extra transfer payments, including cash benefits for the poor. What must happen as a consequence of this?

Fiscal policy

In a country, the standard Value Added Tax (sales tax) rate is $20\%$. Every consumer who purchases the same product pays the same tax amount. What type of tax is this?

Fiscal policy

The diagram illustrates the demand curve $D_1$ and supply curve $S_1$ for a good. The government then grants a subsidy to stimulate production. What will be the government’s total cost of providing the subsidy?

The role of government

Which statement concerning changes in the interest rate is correct?

Monetary policy

The diagram illustrates a production possibility curve (PPC). Why is the curve normally shown in this shape?

Production possibility curve (PPC) diagrams

In Uganda, the inflation rate decreased from $5\%$ in 2014 to $2\%$ in 2015. What conclusion may be drawn from this information?

Inflation and deflation

Which factor would not lead to an increase in a country’s Human Development Index (HDI)?

Living standards

A country is currently at full employment. Which factor is most likely to cause demand-pull inflation to rise?

Inflation and deflation

The table sets out the percentage change from 2015-2016 in gross domestic product (GDP) and consumer prices for selected countries. Which country was experiencing economic recession and inflation?

Inflation and deflation

Which policy is most likely to cut relative poverty?

Poverty

Using the information provided, which country is most likely to have the highest standard of living?

Living standards

In a country, the birth rate rose, yet the population fell. What might have happened to other factors to lead to this?

Population

The US government chooses to cut the size of the quota on a good that it purchases from China. What is likely to occur?

Globalisation, free trade and protection

Which definition best describes a foreign exchange rate?

Foreign exchange rates

In 2013, the European Union (EU) imposed a $48\%$ tariff on inexpensive Chinese solar panels because their low cost was caused by subsidies paid by the Chinese government. Which protectionism argument was the EU applying?

Globalisation, free trade and protection

Over the past few years, additional golf courses, which require large amounts of water, have opened in China. What could the opportunity cost of this be?

Opportunity cost

Floods damaged a large quantity of the agricultural products in a country. What is likely to have happened to the price of agricultural products and the volume of imports of agricultural products?

Supply

Which situation shows a mixed economy?

Mixed economic system

What leads to market failure?

Market failure

A newspaper stated that ‘The world market for coffee has returned to equilibrium’. Which situation would support this claim?

Price determination

The table gives the demand schedule for a good at a range of prices. The current market price of the good is $\$10$. After a $20\%$ rise in price, what change will there be in the quantity demanded?

Demand

Carlos has received an offer of a new job from a large multinational company. He is not sure whether to take the post. What is one non-wage factor that he may take into account?

Workers

In contrast with the UK and US, a substantial share of the stocks traded on the stock exchanges of China and Russia belongs to state-owned enterprises. What conclusion about China and Russia can be drawn from this information?

Mixed economic system

A government wants to raise agricultural output. It provides farmers with equipment so that they can irrigate their fields. Which factors of production are supplied by the farmers?

The factors of production

Which factor has the greatest effect on how much a family saves?

Households

The table presents how real incomes changed across several occupations from 1985 to 2015. What conclusion can be drawn from the table?

Workers

In what way does capital-intensive production differ most from labour-intensive production?

The factors of production

What does the term diseconomies of scale mean?

Firms’ costs, revenue and objectives

The diagram illustrates the fixed costs, variable costs and total costs of a firm. Which distance indicates the firm’s fixed costs?

Firms’ costs, revenue and objectives

An entrepreneur purchases a workshop for $200000 in order to make plastic boxes. In the first year of trading, he pays $70000 for materials, hires ten production workers who are paid according to the number produced (piece rate) at a total cost of $80000, and buys two delivery vehicles at $10000 each. What is the total of his variable costs?

Firms’ costs, revenue and objectives

What is the most likely factor to lead to an increase in the inflation rate in an economy?

Inflation and deflation

The government raises taxation so that it can finance a rise in spending on government training schemes. Which combination of policies does this describe?

Fiscal policy

The diagram illustrates the effect of a tax being imposed on a product. Which area shows the part of the tax paid by consumers of the product?

Price changes

Why could a government choose to subsidise a steel industry with high production costs?

The role of government

The diagram illustrates a production possibility curve (PPC) for an economy producing both capital goods and consumer goods. At which point will the economy have the greatest potential for sustained long run economic growth?

Production possibility curve (PPC) diagrams

The table lists possible patterns linking the rate of interest with other economic variables. Which pattern is most likely?

Monetary policy

Why is the Human Development Index (HDI) a more effective indicator of living standards than GDP per head?

Living standards

How is frictional unemployment described?

Employment and unemployment

During January 2016, a country’s inflation rate fell from $3\%$ to $2\%$. In March 2016, the inflation rate was $4\%$. What change took place in the price level in January and March?

Inflation and deflation

What generally occurs as a developing country grows more developed?

Living standards

Using the information provided, which country is most likely to have the highest standard of living?

Living standards

In a country, the birth rate rose yet the population fell. What might have happened to the other factors to bring about this?

Population

If the US government cuts the quota on a product imported from China, what is likely to happen?

Globalisation, free trade and protection

Global demand for oil is price inelastic and oil is bought using US dollars. If the price of oil falls sharply, what effect could this have on the exchange rate of the US dollar?

Foreign exchange rates

What is the most likely drawback of international specialisation?

International specialisation

In recent years, a greater number of golf courses, which consume large amounts of water, have been built in China. What could the opportunity cost of this be?

Opportunity cost

Floods damaged a large proportion of a country's agricultural products. What is likely to happen to the price of agricultural products and to the quantity of agricultural products imported?

Supply

Cuba is introducing free market reforms. What is a probable advantage of this?

Market economic system

By using larger aircraft, an airline enhances its services. The airline says that this will cut catering waste and decrease carbon ($\text{CO}_2$) emissions for each passenger journey, although fares could increase. What is a private cost and an external benefit of this decision?

Market failure

What conclusion can be drawn from the demand curve for the product in the diagram?

Demand

A mobile (cell) phone provider raises the charge for calls made on its network. Following the price increase, the operator’s revenue decreases by $10\%$. What is the price elasticity of demand (PED) for the service offered by the mobile operator?

Price elasticity of demand (PED)

Why does specialisation raise the productivity of employees?

Firms and production

In recent years, some central banks have lowered interest rates to below $1\%$ per year. What is the aim of this monetary policy?

Monetary policy

In farming, what is one example of what economists refer to as capital?

The factors of production

Which factor has the greatest influence on how much a family saves?

Households

The table presents the variation in real incomes for several occupations between 1985 and 2015. What conclusion can be drawn from the table?

Workers

Identify the business organisation that is most likely to have unlimited liability.

Firms

What is one illustration of a technical economy of scale?

Firms’ costs, revenue and objectives

The diagram illustrates a firm’s fixed costs, variable costs and total costs. Which distance shows the firm’s fixed costs?

Firms’ costs, revenue and objectives

An entrepreneur purchases a workshop for $200\,000 in order to manufacture plastic boxes. During the first year of trading, he spends $70\,000 on materials, hires ten production workers who are paid according to output (piece rate) at a total cost of $80\,000, and purchases two delivery vehicles costing $10\,000 each. What are his total variable costs?

Firms’ costs, revenue and objectives

Which type of tax always takes a larger proportion of the taxpayer’s income as income rises?

Fiscal policy

What is the most likely consequence of a government cutting the money supply?

Monetary policy

At times, the government controls the market in order to safeguard consumers' interests. Which type of regulation would provide this protection?

The role of government

The diagram illustrates percentage (%) changes in prices and wages across time. What information does the diagram show?

Inflation and deflation

What would lead to an outward movement of a country’s production possibility curve (PPC)?

Production possibility curve (PPC) diagrams

What factors could cause GDP per head to be underestimated in a developed economy?

Living standards

Which components make up the Human Development Index (HDI)?

Differences in economic development between countries

What is the most likely cause of a long-term fall in the number of people employed in the banking sector of an economy?

Workers

What could make prices increase as a result of cost-push inflation?

Inflation and deflation

What measure could an economy adopt to produce a wider variety of products?

The factors of production

Using the information below, which country is most likely to have the highest standard of living?

Living standards

In a country, the birth rate went up but the population went down. What change in other factors could have led to this?

Population

The US government chooses to lower the size of the quota on a good it imports from China. What is likely to happen?

Globalisation, free trade and protection

A shift in a country's foreign exchange rate led to a fall in the value of its currency. Which outcome is not likely to occur?

Foreign exchange rates

Which item will be recorded as an outflow in the services section of the current account of the US balance of payments?

Current account of balance of payments

Over the past few years, more golf courses that consume large amounts of water have been built in China. What could be the opportunity cost of this?

Opportunity cost

A country's agricultural products were heavily damaged by floods. What is likely to have happened to the price of agricultural products and the volume of imports of agricultural products?

Supply

What is one characteristic of tertiary industries?

Firms and production

China has constructed a new railway in Kenya linking the capital city, Nairobi, with the port of Mombasa. Kenya has to pay back the railway’s cost to China. Travel time has fallen a great deal, but ticket prices have risen and farmers have lost farmland beside the new route. Who carries the external costs of this scheme?

Market failure

What does equilibrium mean in a market?

Price determination

A product has a price elasticity of demand of $-0.5$. How does the demand for a product change if its price decreases from $1 to $0.80?

Price elasticity of demand (PED)

Gas demand in a country becomes price inelastic. What happens as a result?

Price elasticity of demand (PED)

What advantage do coins have that makes them more suitable than banknotes for use as money?

Money and banking

UBI is a system in which the government gives every person a payment, no matter what their circumstances are. A scheme like this can support several groups, including the sick and the old. In 2016, the Indian government was considering UBI as a replacement for its current state benefits system. A politician in Costa Rica suggested a UBI of $337.5. Finland launched a two-year trial of a version of UBI in 2017. A guaranteed minimum income may help some poor people who currently receive no state benefits and may also cut inequality. In many countries, income and wealth inequality is rising. For example, in Russia 16% of the population live below the official poverty line and 10% of the population own 87% of the country’s wealth. State benefits are relatively low in Russia and the country has one income tax rate of 13%. One reason for the growing gap between rich and poor in Russia has been the impact on prices and profits caused by the privatisation of several state monopolies. Variations in annual average incomes (annual GDP per head) between countries can influence life expectancy, as shown in Table 1.1. In Finland, where average monthly income per head is $3500, the trial UBI is $600 per month. In a country with high prices, high taxes and periods of very cold weather, this does not meet everyone’s needs. In India, the average monthly income per head is almost the same as Finland’s UBI. A UBI could support unemployed people, including those who are only unemployed for a short time. Governments welcome lower unemployment. This is because output rises and governments can spend less on state benefits for the unemployed. They could then raise spending in other areas such as education and healthcare.

Poverty

The Saudi Arabian government is promoting expansion of the private sector. It produces oil at low cost, yet its exports to South Africa have declined lately. South Africa has a floating foreign exchange rate, although its central bank has recently attempted to stop a sharp drop in its foreign exchange rate.

Foreign exchange rates

In February 2017, Europe had a shortage of fresh vegetables because of bad weather. For some time, the markets for several vegetables, such as broccoli and lettuces, were out of equilibrium. Food prices usually vary more than the prices of manufactured goods and services. These variations affect the inflation rate.

Price determination

A change in the supply of enterprise can lead to the creation of new firms. In 2016, a theme park in Hong Kong recorded a loss as visitor numbers fell by 9%. In 2017, the same public limited company opened another, larger theme park in Shanghai. The new theme park is expected to gain from both internal and external economies of scale.

Firms’ costs, revenue and objectives

In February 2017, China’s central bank increased the interest rate. It aimed to curb borrowing and slow the growth of the money supply, although it was concerned that a higher interest rate could lower the country’s economic growth rate. The rise in interest rates is likely to have added to the workload of skilled workers in commercial banks.

Monetary policy

Several book publishers are active in Pakistan, and this group includes multinational companies (MNCs). They employ a wide variety of specialist staff. Some of these specialists calculate the price elasticity of demand (PED) for their firms’ books. There is debate over whether the government ought to subsidise certain books.

Price elasticity of demand (PED)

It was forecast that world unemployment would increase by more than two million in 2017. However, unemployment rates differ from country to country. To cut unemployment, some governments rely on fiscal policy measures, while others choose supply-side policy measures. Trade protection can also affect the unemployment rate.

Employment and unemployment

At the beginning of February 2017, the Japanese government launched its ‘Premium Friday’ scheme. Under this plan, employers are encouraged to let workers finish at 15:00 on the final Friday of every month without any reduction in pay. The Japanese government wants to cut the number of hours people work. One reason is to improve workers’ health and possibly their productivity. Fig. 1.1 shows the average number of hours worked and productivity (GDP per hour worked in US $) in six selected countries. Fig. 1.1 is a bar chart showing six countries: France, Germany, Japan, Mexico, Russia and South Korea. For each country there are two bars. One bar shows average hours worked per week. The other bar shows productivity (GDP per hour worked in US $). Almost one quarter of Japanese workers work more than 50 hours a week, and some do more than 25 hours overtime a week. The average Japanese worker takes only half of their paid holidays. Nearly 20 years of weak economic growth and deflation have produced a feeling of job insecurity. Trade unions in Japan have been focusing on trying to secure shorter working hours. The government believes that fewer working hours would leave people with more time to bring up a child and care for elderly relatives. Japan’s birth rate has dropped every year for the last 36 years, and it has fallen more quickly than the death rate, causing the size of the population to fall. The government hopes that more leisure time will lead to higher consumer spending. Increased consumer spending would help Japanese firms and would lower the risk of deflation returning. The first reaction to Premium Friday was disappointing. By the end of February 2017, only 4% of Japanese workers left work early. In the longer term, however, the scheme may work better. This is because unemployment in the country had fallen, with only 2 million out of a labour force of 66 million being unemployed at the end of February 2017. Low unemployment raises job security and usually pushes wages up. In Japan’s case, however, the increased demand for labour has been matched by a greater supply. Some of this extra supply has come from migrant workers, but a larger share has come from more Japanese people working beyond retirement age and more women taking paid work.

Workers

The car market and the tyre market are tightly connected. The five biggest tyre companies once accounted for 66% of all tyres. When more than 250 Chinese firms entered, the combined global share of the top five firms fell to below 50%. That also altered the price elasticity of demand (PED) for the tyres sold by individual firms. Some of these firms are state-owned enterprises, while others belong to the private sector.

Market structure

There was a worldwide steel surplus in 2017. In mid-2017, the US government was considering tariffs on steel imports to shield its shrinking steel industry. Low-cost imports from other countries were cutting jobs in the US steel industry. Changes in education were also shaping the pattern of US employment.

Globalisation, free trade and protection

In March 2017, Peru was struck by floods and the strongest winds in decades. Roads, bridges, houses and capital goods were ruined. It is expected that the resulting damage will affect Peru’s Human Development Index (HDI) and economic growth rate. In 2016, Peru recorded an economic growth rate of 4%, which was higher than the growth rate of the USA.

Economic growth

Moldova has the lowest-income economy in Europe, and many of its citizens live in poverty. The economy is based mainly on agriculture, with many small farms. Its retail outlets are also small. The government has used a variety of policies, including supply-side policy, to improve economic performance. This has largely worked. For example, unemployment has fallen.

Supply-side policy

Within a mixed economic system, such as Portugal’s, the government has a role in the economy. Government intervention can be used to deal with market failure and to meet economic aims, such as keeping inflation under control. In 2017, one-fifth of Portugal’s population was living in poverty and government spending increased.

Mixed economic system

For sugar in most countries, the price elasticity of demand (PED) is below 1. In 2017, sugar prices declined. Even so, specialised, higher-quality sugar grown in countries such as Mauritius saw a smaller fall than the average world price. Efficient producers, including some farmers in Brazil with low fixed production costs, were also less exposed to the price drop.

Price elasticity of demand (PED)

Historically, the people of Iceland relied mainly on farming and fishing for their income. By 2008, the Icelandic economy was also extremely reliant on its financial sector. Even so, the country is now widely recognised around the world for tourism. Although the primary sector now provides employment for only a small share of the labour force, it still has a very strong influence on policy decisions. For instance, the fishing industry is subject to many government rules. Restrictions on foreign investment in the fishing industry both protect domestic fishermen and preserve the fish stock in Icelandic waters. Regulation also influences the price elasticity of supply (PES) of fish. The quantity supplied usually changes by a smaller percentage than the change in price. From 2002 to 2007, Iceland’s average yearly economic growth rate was 5%. In 2006, Iceland’s Gross Domestic Product (GDP) was US$17 billion and in 2007 it rose by 9%. This rapid growth was caused by greater access to bank loans and by rising incomes in its main trading partners, including the European Union (EU) and Norway. It was during this time of fast economic expansion that the financial sector became a major part of the Icelandic economy. The leading commercial banks helped to increase consumer spending and large construction projects, both of which raised the standard of living of Icelanders. In addition, commercial banks also expanded into overseas markets. These international markets grew quickly between 2002 and 2007, which brought more money back into Iceland’s financial sector. However, Iceland experienced a major financial crisis in 2008, when all three of its main privately owned commercial banks collapsed. This caused total output to fall and unemployment to rise. Fig. 1.1 shows the economic growth rate and unemployment rate in Iceland from 2002 to 2014. Fig. 1.1 Economic growth rate and unemployment rate in Iceland from 2002 to 2014. Recovery from 2010 to 2017 was first made possible by loans from international organisations. More recently, it was also supported by successful tourism campaigns that have turned Iceland into a 'must-see' place for tourists.

Price elasticity of supply (PES)

Germany has one of the strongest-performing economies in the European Union (EU). Unemployment is low, and the current account of the balance of payments is in surplus. However, single parents, the long-term unemployed, immigrants, the elderly and low-skilled workers have not always shared in Germany’s economic success. This has led to rising levels of relative poverty.

Current account of balance of payments

Confidence in the government’s reform agenda produced very rapid growth in India’s stock exchange index during 2017. Businesses welcomed the supply-side policy measures that had been put in place, including government spending on infrastructure projects such as constructing new motorways. Nevertheless, critics argued that the government was giving priority to one government aim at the expense of others.

Supply-side policy

After the UK decided to leave the European Union (EU) in June 2016, the British currency, the pound (£), lost value. Even so, in August 2016, despite the fall in the £, the Bank of England cut interest rates from 0.5% to 0.25%. This was intended to stimulate more spending and borrowing so that economic growth would not slow further.

Monetary policy

South Korea’s economy was once dominated by many family-owned businesses that have now grown into large public limited companies. To help domestic firms expand, the government offered subsidies and used trade protection. From 2010, average earnings in South Korea have increased.

Firms

Non-renewable energy (e.g. coal) is believed to create a larger social cost than renewable energy (e.g. solar or wind power). Excessive demand for non-renewable energy leads to a failure of the market economic system. By contrast, producers of renewable energy, some of which specialise in one form of energy, are starting to produce on a larger scale.

Market failure

Many economists have suggested that the 21st century may turn into the ‘African century’ because the working-age population there is expanding. Projections indicate that by 2030, Africa’s share of the rise in the global labour force will be larger than that of the rest of the world. This will influence incomes, saving, and economic policies in African countries.

Population