Oct/Nov 2020

What is the fundamental economic problem?

The nature of the economic problem

The table indicates how household expenditure varies as income rises. What is the minimum income level at which savings are positive?

Households

What can a central bank raise to cut consumer borrowing?

Monetary policy

In the short run, a firm works out its total fixed cost, total variable cost and total cost. It then draws a graph to show how these change as output rises. What happens to the lines for total variable cost and total cost as output rises?

Firms’ costs, revenue and objectives

A company has fixed costs of $1000$. The table lists the variable cost at different output levels. Output (units): $1, 2, 3, 4$ Variable cost ($): $100, 190, 270, 350$ If the goods are sold for $500$ each, what profit is earned from selling $4$ units?

Firms’ costs, revenue and objectives

At what point is the demand for labour in an industry most likely to rise?

Workers

What factors might lead to internal diseconomies of scale for a firm?

Firms’ costs, revenue and objectives

What are two objectives that a government typically seeks when it manages the performance of the whole economy?

The macroeconomic aims of government

Which of the following is most likely to fall under the responsibility of a central government?

The role of government

Which indicator would show that the government is using an expansionary fiscal policy?

Fiscal policy

The diagram illustrates the way a government policy affects the market for biofuel crops in the private sector. From the diagram, which policy is used by the government, and what impact does it have on the market?

The role of government

Innovation depends directly on which factor of production?

The factors of production

Several governments within the European Union are seeking to cut unemployment. What needs to rise in order to make this happen?

Employment and unemployment

In $2016$, Romania experienced a rise of $4.8\%$ in its real gross domestic product. What does this imply about the Romanian economy?

Economic growth

The economy is facing increasing prices. Which government policy would help to cut consumer spending?

Fiscal policy

Some goods make up a larger proportion of an average household’s total expenditure than others. How is this reflected when a consumer prices index is constructed?

Inflation and deflation

A country with low income suffers from extreme poverty in its rural regions. What is one possible cause of this?

Poverty

Which factor constrains economic development in the world’s low-income countries?

Differences in economic development between countries

The table presents the percentage of employment in the primary, secondary and service sectors for four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

A government is dealing with an undesirable deficit on the current account of its balance of payments. Which measure would be most likely to cut the deficit?

Current account of balance of payments

What does the term depreciation in the foreign exchange rate mean?

Foreign exchange rates

The table gives data from a country’s current account within its balance of payments. Exports of goods: $20$ ($\text{billion}$) Imports of goods: $24$ ($\text{billion}$) Net services: $+5$ ($\text{billion}$) Net primary income: $-8$ ($\text{billion}$) Net secondary income: $-8$ ($\text{billion}$) What is the country’s current account balance?

Current account of balance of payments

The diagram illustrates an economy’s production possibility curve (PPC). The economy shifts from point X to point Y. What is the most likely consequence of this change?

Production possibility curve (PPC) diagrams

The diagram illustrates the values of a country’s exports and imports of goods across five years. Between which two years did the country record a higher value of imports and a more favourable balance of trade in goods?

Current account of balance of payments

Which person is responsible for making macroeconomic decisions?

Microeconomics and macroeconomics

What is one role of the price mechanism?

The role of markets in allocating resources

The diagram illustrates a movement of the supply curve for cars in China from $S_1$ to $S_2$. What is the most probable reason for this movement in the supply curve?

Supply

The price elasticity of supply for a good is $2$. The good’s price then decreases by $10\%$. What change occurs in quantity supplied?

Price elasticity of supply (PES)

A German car manufacturer sets up a factory in India. Some Indian employees at the factory become members of a trade union. What would the trade union be expected to do for these workers?

Trade unions

What are the reasons that, on average, women earn less than men?

Workers

What makes economic agents choose?

The nature of the economic problem

The table illustrates how household spending varies as income rises. At what minimum income level are savings positive?

Households

What can a central bank raise in order to cut consumer borrowing?

Monetary policy

The table gives the output and total costs for a small firm. What is the average fixed cost when 10000 units are produced?

Firms’ costs, revenue and objectives

A company has fixed costs of $1000. The table gives the variable cost at various output levels. If each good is sold for $500, how much profit will be gained from selling 4 units?

Firms’ costs, revenue and objectives

Firm X supplies bricks and chooses to merge with firm Y, which also supplies bricks. Which type of merger has occurred?

Market structure

Who is the owner of a public sector organisation?

Mixed economic system

What are two objectives that a government typically seeks when overseeing the performance of the entire economy?

The macroeconomic aims of government

Which of the following is most likely to fall under the responsibility of a central government?

The role of government

The table displays the tax an individual would pay at various levels of disposable income. Which type of tax is shown in the table?

Fiscal policy

The government aims to cut cigarette consumption. Which policy would be most likely to achieve this?

Fiscal policy

Which pairing of a factor of production with its factor income is incorrect?

The factors of production

Which group should be excluded from the measurement of unemployment?

Employment and unemployment

The table gives the unemployment rate and real GDP growth rate for an economy in 2014 and 2018. Which combination of policy measures would be the most effective in restoring the economy to the 2014 level of economic activity?

The macroeconomic aims of government

An economy is facing a rise in prices. Which government policy will reduce consumer expenditure?

Fiscal policy

Some goods account for a larger proportion of a typical household’s total spending than others. How is this taken into account when a consumer prices index is constructed?

Inflation and deflation

In countries where absolute poverty exists, low incomes can trigger a cycle that leaves incomes low. What stages make up this cycle?

Poverty

What factor restricts the economic development of low-income countries around the world?

Differences in economic development between countries

The table presents the percentage of employment in the primary, secondary and service sectors across four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

What factors lead to a country’s birth rate falling?

Population

A country wants to raise its current account surplus in the balance of payments. Which action would it choose?

Current account of balance of payments

The table presents a country’s exports and imports. What was the country’s balance of trade in goods and services?

Current account of balance of payments

The diagram illustrates a production possibility curve (PPC) for a country. The country shifted from point X to point Y on the PPC. What is the most likely explanation for this change?

Production possibility curve (PPC) diagrams

The diagram illustrates the value of a country’s exports and imports of goods across five years. Between which two years did the country experience a rise in the value of imports and an improvement in its balance of trade in goods?

Current account of balance of payments

Can you give one example of a macroeconomic aim?

The macroeconomic aims of government

Why may a market economy not achieve the most efficient use of scarce resources?

Market failure

The diagram illustrates the worldwide copper market, where the equilibrium is at X. After copper producers’ costs rise and the world economy grows quickly, which point shows the new equilibrium?

Price determination

The diagram illustrates the supply curve for a good. What is the price elasticity of supply when the price increases from $10$ to $12$?

Price elasticity of supply (PES)

Which task is not one of the functions of a trade union?

Trade unions

Which factor has no influence on wages in a free market economy?

Workers

Why must consumers choose how to spend their income?

The nature of the economic problem

The table illustrates how household spending varies as income changes. At what minimum income level do savings become positive?

Households

What can a central bank raise to lower consumer borrowing?

Monetary policy

The table gives the total cost for firm X at each output level. At what level of output does total variable cost become greater than total fixed cost?

Firms’ costs, revenue and objectives

A firm incurs fixed costs of $1000$. The table gives the variable cost at different output levels. If each good is sold for $500$, what profit will result from selling $4$ units?

Firms’ costs, revenue and objectives

Which combination is normally found in a monopoly?

Market structure

What is commonly regarded as one benefit to a firm of applying division of labour?

Firms and production

What are two objectives that a government usually seeks when overseeing the performance of the whole economy?

The macroeconomic aims of government

Which task is most likely to fall under the responsibility of a central government?

The role of government

A government cut the tax on every good made within its country. What is the most likely result of this?

Fiscal policy

Which government policy measure would lead to a rise in a country’s supply of labour?

Workers

What is the main role of an entrepreneur?

The factors of production

Because the number of retired people has increased, demand for certain government spending has gone up. Which type of government expenditure is most likely to be affected directly?

The role of government

The diagrams display Italy’s unemployment rate and GDP per head. In which period do Italy’s unemployment rate and GDP per head increase together?

Employment and unemployment

An economy is experiencing a rise in prices. Which government policy would help to reduce consumer spending?

Fiscal policy

Some items make up a larger share of the total spending of an average household than others. How is this allowed for when a consumer prices index is constructed?

Inflation and deflation

The Human Development Index (HDI) is one measure used to indicate living standards. What is excluded from the calculation of the HDI?

Living standards

Which factor limits economic development in the world’s low-income countries?

Differences in economic development between countries

The table presents the percentage of employment in the primary, secondary and service sectors for four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

Which item would not appear in the current account of the balance of payments?

Current account of balance of payments

What is most likely to reduce international specialisation and trade in an economy?

International specialisation

Many low-income countries depend on multinational companies (MNCs) to support economic development. What is one disadvantage of this dependence for such a country?

Differences in economic development between countries

The diagram illustrates the production possibility curve (PPC) for an economy operating at point X. What opportunity cost would arise if production moved from point X to producing only consumer goods?

Opportunity cost

The diagram illustrates a country's export and import values for goods across five years. During which two years did the country see higher import value and a better balance of trade in goods?

Current account of balance of payments

Economics can be split into two branches: microeconomics and macroeconomics. statement 1: If the price of oil decreases, demand expands. statement 2: The Organization of the Petroleum Exporting Countries (OPEC) is able to affect the price of oil. Which option correctly describes these two statements?

Microeconomics and macroeconomics

What is one drawback of a market economic system?

Market economic system

The diagram illustrates the demand curve for coffee in the US. Why did quantity demanded change from $Q_1$ to $Q_2$?

Price changes

In an African country that contains large regions of tropical desert, the price elasticity of demand for salt is highly inelastic. This will lead to higher consumer expenditure on salt when the price changes from $P_1$ to $P_2$. Which diagram shows this situation?

Price elasticity of demand (PED)

In which type of occupation would wages be likely to rise?

Workers

Which row presents a characteristic of money and a function of money?

Money and banking

Istanbul has the biggest population of any city in Turkey. By 2014, its population was around 14 times the 1955 figure. This may have been caused by stronger movement from rural districts into cities and by better healthcare. Istanbul also has the highest output per head among all regions in Turkey. Well-developed transport connections have helped Istanbul’s economy to expand. Along with strong land transport, Istanbul also has the 14th largest airport in the world when measured by passenger numbers. From Istanbul, access is available to a market worth $24 trillion and 1.5 billion people within a flight time of 4 hours. In addition to cheap international air travel to and from Istanbul, domestic air travel is also very inexpensive. This is most likely because of economies of scale. Competition in this sector is also intense, which affects prices and the quality of service. Expansion in transport industries, together with growth in financial services, has made a large contribution to Istanbul’s growth rate, as shown in Table 1.1. Foreign investment is going into Istanbul. Multinational companies (MNCs) are viewing Istanbul as an appealing place to invest because the cost of living is low. These MNCs affect employment, the level of technology and wages in Istanbul. However, there is concern that this confidence in the Turkish economy may not continue. Many firms have relied on borrowing to fund expansion. Higher interest rates around the world may make it more difficult for such firms to keep borrowing and also to win new customers. If worries about tourist safety in Turkey rise in the future, fewer people may book flights to Turkey.

Population

The 2018 election of a new president in South Africa improved both business confidence and consumer confidence. Even though total demand rose, inflation rates declined. One government policy introduced special areas called economic zones, in which firms pay lower taxes, or no taxes at all. These zones are intended to help domestic firms become more internationally competitive, which may cut the deficit on South Africa’s current account in the balance of payments.

Current account of balance of payments

Malaysia’s ongoing economic growth is helped by higher consumer spending and by its capacity to adjust to shifts in global demand. For instance, when the price of natural rubber dropped, most rubber plantations switched to palm oil production. The government has aimed to encourage expansion in different sectors, including the primary sector.

Economic growth

Tariffs between South east Asian countries have been lowered by the ASEAN Free Trade Agreement. ASEAN member countries are also getting rid of non-tariff protection methods. The purpose is to boost economic growth through greater international trade. This should allow small and medium-sized firms in ASEAN countries to expand and raise their exports.

Globalisation, free trade and protection

Free trade has enabled the Mexican economy to specialise in low-cost manufacturing. Unemployment nationwide is fairly low, but about 50 million people were still judged to be in poverty in 2016. In addition, there are concerns that technological advances will soon substitute capital for labour.

International specialisation

Read the source material closely before you answer Question 1. Source material: The destruction of forests in Indonesia Indonesia is the biggest producer of palm oil in the world. The production costs of palm oil include land rent, fertiliser, palm oil seeds, upkeep of irrigation systems and casual labour. Forests are cleared by setting fires to create space for palm oil plantations. These fires destroy the habitats of many wildlife species and release harmful gases into the air. Since 2011, the Norwegian government has paid Indonesia to conserve its forests. Although Indonesia is the largest producer of palm oil, it ranks third for rice production. Indonesia exports 85% of its palm oil, but at times it must import rice to satisfy domestic demand. Its overseas trade in palm oil and rice is affected by movements in its foreign exchange rate. The value of the Indonesian currency, the rupiah, fell in 2017. Rice growing also adds to air pollution. After harvesting, rice farmers burn the stubble that remains to clear the fields and increase the fertility of the land so that they can grow more rice. Some environmentalists say that stubble burning ought to be banned. The Indonesian economy, together with the world economy, keeps expanding. Economic growth can create pollution. It can also influence a country’s GDP per head ranking and Human Development Index (HDI) ranking, as shown in Table 1.1. Indonesia has net emigration. Some Indonesians work overseas and remit money to their families at home. People also arrive from abroad to work in Indonesia, including some in comparatively well-paid jobs in the country’s growing tourism industry. Indonesia currently receives fewer tourists than its neighbours, Singapore and Malaysia. However, it has many natural tourist attractions and is presently price competitive.

Market failure

Mexico has a long record of trade deficits. The government is trying to move the economy nearer to free trade in order to improve macroeconomic performance. In 2017, it was forecast that Mexico’s economy would see a slight increase in its unemployment rate. During 2017 the inflation rate in the economy stood at 6.6%, the highest level since 2001. Several policy actions could be used to cut inflation, including raising the rate of income tax.

Globalisation, free trade and protection

Hungary has the highest obesity rate in Europe. Hungarians consume fewer vegetables than most other Europeans and a larger quantity of foods that may be viewed as demerit goods. In 2017, the Hungarian government brought in a tax on unhealthy food called the chips tax. This tax has been partly successful in shifting demand towards healthier foods. Some economists argue that governments ought to use price controls, as well as taxes, to affect the food market.

Market failure

Italy is the home of the world’s oldest bank, together with some of the world’s longest-established car producers. In world markets, both industries are encountering several difficulties. Pay for bank staff and car workers is rising. Demand for bank loans and for cars is also changing, partly because population size is changing. It is forecast that the price elasticity of demand (PED) for cars will alter in the future.

Money and banking

Recently, wage rate growth in Kazakhstan has risen, whereas its economic growth rate has weakened. One reason for this is a drop in exports. In order to lift the economic growth rate, the government has raised spending on investment. In August 2015, it introduced a floating foreign exchange rate system in an effort to strengthen the country’s macroeconomic performance.

Foreign exchange rates

Source material: Traffic congestion in the Philippines Manila, the Philippines' capital, is very crowded and has almost no unused land left for construction. It is widely known for heavy traffic jams (congestion). Journeys of only a short distance can take people hours. The Philippine government worries that congestion could harm health, put off multinational companies (MNCs) from investing in the country and slow economic growth. It would also prevent the country from reaching full employment and would lower labour productivity. Entrepreneurs and workers regularly reach their firms stressed and exhausted. More Philippine workers are relocating to Manila to work in the growing computer, retail and education industries. One benefit of the Philippine economy is its youthful and well-educated population. Improvements in the skills of Philippine workers are making it simpler for workers to move from declining industries into expanding ones. Growth in the country's population is raising the number of cars on Philippine roads. Low parking charges and the ease of finding parking also encourage driving, as does the poor standard of public transport. Manila has too few trains but too many buses. By 2017, deregulation had pushed the number of bus companies in the city to over 1100. Taxes in the Philippines are relatively high, but disposable income has increased. Consequently, consumer spending, including spending on cars, has grown. Some of the cars bought are imported. Table 1.1 shows consumer expenditure and imports in selected countries in 2017.

Economic growth

Changes in tobacco output and use can produce both microeconomic and macroeconomic consequences. Tobacco is cultivated in at least 124 countries with different levels of development. A greater share of the poor than the rich use tobacco products. The cigarette market, which is made from tobacco, is also changing. In a number of countries, demand for cigarettes and some other demerit goods is falling.

Differences in economic development between countries

Russia’s birth rate declined by 11% in 2017, reaching its lowest point for ten years. Over the next 30 years, Russia’s population is predicted to fall from 144 million to 107 million. The government announced steps intended to reverse this drop in population. In 2017, it also announced privatisation plans and measures designed to reverse a decline in investment that could result in a fall in the quantity of capital goods. Privatisation can reduce monopoly power in a market.

Mixed economic system

By applying supply-side policy measures, such as deregulation, China is being shifted nearer to a market economic system. Certain supply-side policies, including education and subsidies, may also lift a country’s economic growth rate. China became a member of the World Trade Organisation in 2001 and has afterwards removed some import quotas and cut some import tariffs. These actions could affect the size of its current account surplus.

Market economic system

It was reported in November 2016 that 500 and 1000 rupee banknotes could no longer be used in shops in India. The central bank, an institution that makes extensive use of division of labour, replaced these notes. In India, cash still remains an important form of money for economic transactions. Replacing the banknotes placed pressure on banking staff and tertiary-sector workers, and had an effect on the general price level.

Money and banking