Oct/Nov 2021

To bring down the price of oil, additional supplies are required. However, opponents reject exploring new sites because of the environmental harm this could cause. Explain why this is an example of the basic economic problem?

The nature of the economic problem

Which government policies would both narrow the gap in income between low-paid and high-paid workers?

The role of government

Nurses’ wages fall, while pilots’ working hours also fall. If all other influences remain unchanged, what is the likely impact on the number of people deciding to become nurses or pilots?

Workers

The table presents a firm's average revenue at different output levels. Output and average revenue ($): 1 → 10, 2 → 8, 3 → 6, 4 → 4. How does total revenue change as output increases?

Firms’ costs, revenue and objectives

Over a period of several months, the price of petrol (gas) fell sharply. How would this influence a delivery firm that transports goods for other firms using vehicles powered by petrol (gas)?

Firms’ costs, revenue and objectives

The large scale of Japan’s domestic car industry has allowed Japanese car producers to be more price competitive than rival car producers. What is an explanation for this?

Firms’ costs, revenue and objectives

What is one key benefit of a horizontal merger when compared with a conglomerate merger?

Market structure

A recession occurs when there are two successive quarters (six months) of

Economic growth

The economy is currently using all of its resources fully. What would result from a substantial rise in government spending?

Fiscal policy

What leads to economic growth?

Economic growth

The table lists a government’s tax receipts as follows: air passenger duty $10$m, tax on firms’ profits $100$m, import duty $75$m, income tax $200$m, inheritance tax $50$m and sales tax (VAT) $300$m. What is the combined amount of revenue collected from indirect taxes?

Fiscal policy

The production possibility curve (PPC) indicates how many hours each day a student can spend on either entertainment or revision. At present, the student revises for 3 hours a day. As the exams get closer, the student chooses to revise for 9 hours a day. What opportunity cost results from this decision?

Opportunity cost

Which of the following statements about supply-side policy is correct?

Supply-side policy

For what reason is weighting applied in the Consumer Prices Index (CPI)?

Inflation and deflation

Which mix of policy measures is most likely to raise the level of employment?

Employment and unemployment

What is one specific cause of absolute poverty?

Poverty

The birth rate in a country is higher than the death rate. What factor could stop the country’s population from growing?

Population

The table presents data for four countries, A-D. Which country has the lowest standard of living?

Living standards

Why might specialisation result in economic growth?

International specialisation

The diagram illustrates China’s trade with Brazil over two years. How did China’s trade balance with Brazil change from year 1 to year 2? (Values are given in $\$~\text{billion}$.)

Current account of balance of payments

Why do some governments restrict the activities of multinational companies (MNCs) within their national economy?

Globalisation, free trade and protection

Helium is a scarce gas because it needs thousands of years to form. The US government owns 35% of the world’s supply of helium and has been selling its reserves. Helium is needed for medical scanners. It is also put into party balloons, which is a wasteful alternative use of a valuable resource. Which two concepts fit this statement?

The nature of the economic problem

What immediate effect does a country experience when its foreign exchange rate falls?

Foreign exchange rates

At what point is production certain to damage society?

Market failure

What part does the price mechanism play in a market economy?

The role of markets in allocating resources

What does the term macroeconomic concept mean?

Microeconomics and macroeconomics

The diagrams illustrate movements in the demand and supply curves for a good. Which diagram shows the effect of a government giving a subsidy for the good?

Supply

The price elasticity of demand (PED) for bottled water is $-0.9$. What is likely to happen to the quantity demanded for bottled water if its price rises by $10\%$?

Price elasticity of demand (PED)

What would cause the demand for labour in an industry to rise?

Workers

To bring down the price of oil, extra supplies are required. However, those who object are against searching for new locations because of the environmental harm this could create. Why is this an example of the basic economic problem?

The nature of the economic problem

The diagrams illustrate the wage rates of cleaners (OWc) and nurses (OWn). What effect would there be if a national minimum wage of OM were introduced?

Workers

Which outcome of greater specialisation in a firm is beneficial to the firm, but harmful to some workers in the firm?

Firms and production

The diagram illustrates a subsidy being imposed on a product supplied by a firm. Which area shows the firm’s total revenue, including the subsidy?

Firms’ costs, revenue and objectives

The diagram illustrates the total cost curve for a firm. What can be concluded about the firm?

Firms’ costs, revenue and objectives

The table presents a firm's average total cost across different output levels. What occurs once 4 units have been produced?

Firms’ costs, revenue and objectives

Two car manufacturers decide to merge. Which result would count as a disadvantage for customers?

Market structure

An economy experienced deflation for a second consecutive month. What is the meaning of this?

Inflation and deflation

State a cause of demand-pull inflation.

Inflation and deflation

What effect does economic growth have on individuals and on the economy?

Economic growth

The table presents a government's tax receipts. How much revenue in total is collected from indirect taxes?

Fiscal policy

What does opportunity cost mean for a consumer who spends money on a holiday?

Opportunity cost

Which supply-side policy measure could be used to align workers’ skills with available job vacancies?

Supply-side policy

In what way is the rate of inflation measured?

Inflation and deflation

Which combination of policy measures is most likely to raise the level of employment?

Employment and unemployment

Household poverty may be described in relative terms. What is a sign of relative poverty?

Poverty

What impact does net emigration of people aged $20-40$ have on an economy?

Workers

The table presents statistics for four countries, A-D. Which country has the lowest standard of living?

Living standards

A country concentrates on producing steel, toys and textiles. What disadvantage might specialisation bring for the country’s workers?

International specialisation

The diagram illustrates China’s trade with Brazil over two years. What happened to China’s trade balance with Brazil from year $1$ to year $2$?

Current account of balance of payments

The US introduced tariffs on cars and motorcycles imported from Germany. What effect do these tariffs have?

Globalisation, free trade and protection

Helium is a gas with a scarce supply because it needs thousands of years to be formed. The US government owns $35\%$ of the world’s supply of helium and has been selling off its stocks. Helium is vital for medical scanners. It is also used in party balloons, which is a wasteful alternative use of a valuable good. Which two concepts apply to this statement?

Opportunity cost

What is one immediate effect on a country when its foreign exchange rate falls?

Foreign exchange rates

Which combination of features best describes a public good?

Market failure

State one advantage of a market economy.

Market economic system

What does the term macroeconomic aim of a government mean?

The macroeconomic aims of government

An economy uses potash in the production of fertiliser. A fresh potash deposit is found. Which diagram illustrates this change in the market for potash?

Supply

The table lists the quantity demanded at several different prices. Prices and quantities demanded are: - price $\$6$, quantity $3$ - price $\$5$, quantity $4$ - price $\$4$, quantity $5$ - price $\$3$, quantity $7$ - price $\$2$, quantity $9$ For which reduction in price is demand price-inelastic?

Price elasticity of demand (PED)

Which government policy would raise productivity?

Supply-side policy

To bring down the price of oil, additional supplies are required. However, those who object are against the exploration of new locations because of the environmental harm it might create. Why does this statement illustrate the basic economic problem?

The nature of the economic problem

What is one benefit of labour-intensive production and what is one benefit of capital-intensive production?

The factors of production

The market equilibrium wage rate is $\$10$ per hour. Why might the wage rate that is actually paid be $\$12$ per hour?

Trade unions

A company brings in $20$ high quality bicycles to the US, paying $\$3000$ for each one. It sells every bicycle and earns a profit of $\$1000$ on each bicycle. What is the average revenue of the company?

Firms’ costs, revenue and objectives

The diagram illustrates total cost (TC), total fixed cost (TFC) and total variable cost (TVC). Which costs are represented by W, X and Y?

Firms’ costs, revenue and objectives

The table gives the output and total cost for a firm using four production methods, A-D. Which method results in diseconomies of scale when the firm increases production from $1000$ to $3000$ units?

Firms and production

A clothing manufacturer grows by acquiring a clothing retailer. What kind of merger is this?

Firms

What economic condition is present when an economy records negative growth for two consecutive quarters (six months)?

Economic growth

Why could measures aimed at reducing unemployment also lead to higher inflation?

Employment and unemployment

Which change in an economy’s labour market encourages economic growth?

Employment and unemployment

The table presents a government’s tax revenue. What is the total revenue collected from indirect taxes?

Fiscal policy

Which diagram illustrates an opportunity cost through movement from point X to point Y?

Opportunity cost

Which statement concerning supply-side policies is correct?

Supply-side policy

What does a rise in the Consumer Prices Index (CPI) always show?

Inflation and deflation

Which mix of policy measures is most likely to raise the level of employment?

Employment and unemployment

What might help to reduce poverty?

Poverty

The table presents data on four countries, A-D. Which country is most likely to experience a decline in population?

Population

The table presents statistics for four countries, A-D. Which country has the lowest standard of living?

Living standards

Malaysia and Indonesia focus on producing palm oil. What is one drawback of specialisation?

International specialisation

The diagram illustrates China’s trade with Brazil over two years. How did China’s trade balance with Brazil change from year 1 to year 2?

Current account of balance of payments

State one reason for trade protection.

Globalisation, free trade and protection

Helium is a gas in limited supply because it needs thousands of years to form. The US government controls $35\%$ of the world supply of helium and has been selling off its stocks. Helium is vital for medical scanners. It is also used in party balloons, which is a wasteful alternative use of a valuable good. Which two concepts apply to this statement?

The nature of the economic problem

What immediate effect does a fall in a country’s foreign exchange rate have?

Foreign exchange rates

Give one example of a public good.

Market failure

For what reason does a government supply certain goods and services in a mixed economy?

Mixed economic system

What does the term microeconomic decision mean?

Microeconomics and macroeconomics

The diagram illustrates a movement of the supply curve for New Zealand’s airlines from $S_1$ to $S_2$. What has caused this shift?

Supply

The diagram presents the demand curve for rice. What is the price elasticity of demand (PED) for rice when price rises from $\$1.0$ to $\$1.5$ per kilo?

Price elasticity of demand (PED)

The table presents cake output from four bakeries, A-D. Which bakery achieves the greatest labour productivity?

Firms and production

Read the source material carefully before answering Question 1. Source Material: Laos, a land-locked country Laos is a land-locked state, bordered by Vietnam, Cambodia, Thailand, Myanmar and China. Having access to seaports allows an economy to make the most of international trade. Since the government began free market reforms, Laos’s economy has expanded quickly, with an average annual growth rate of about 7% over the past 10 years. These free market reforms have helped Laos market its plentiful raw materials overseas and have also drawn in foreign investment. Laos has sizeable copper deposits, which are highly sought after by global manufacturing industries. A new rail connection between China and Laos is expected to make these transactions simpler. The government of Laos has also placed strong emphasis on education. Over the last 20 years, the adult literacy rate for both males and females has risen from 60% to 85%. The financial sector, including commercial banks, is expanding. This has allowed local entrepreneurs to borrow funds and has also encouraged more households to save. Even so, investors remain unsure about putting money into Laos. Foreign investors face tight rules and regulations, particularly in industries such as mining. The government states that these regulations are necessary to prevent market failures, including external costs, and the misuse of monopoly power. However, these rules and regulations are sometimes not clear. Laos is among the lowest ranked countries in the World Bank’s Ease of Doing Business index, which measures how simple it is to start and operate a business in a country. Fig. 1.1 presents the Ease of Doing Business ranking (1 = easy) and GDP per head of selected countries in 2018. A recent slowdown in China’s economy may have damaging consequences for Laos. China is Laos’s biggest trading partner and also the largest source of foreign investment into Laos.

Globalisation, free trade and protection

In 2019, the French government suggested a 3% levy on the revenue of large firms that market and sell goods online. This tax could cause income to be redistributed. There are worries that it could also cut France’s exports of services if the firms affected decide to relocate from France. However, the government expects supply-side policy measures to persuade these firms to remain in France.

Supply-side policy

Borneo is known worldwide for its rainforests, which create both private and external benefits. Even so, the economy depends heavily on oil, a finite resource. When oil reserves were discovered in other parts of the world, the world price of oil fell sharply. Oil producers in Borneo were affected by this.

Supply

In July 2018, Uruguay’s inflation rate stood at 8.4%. The central bank was considering raising the interest rate to bring inflation down. A higher interest rate may affect aggregate demand in an economy and cause the currency to appreciate. That could affect Uruguay’s exports, especially soybean exports. Uruguay’s soybean firms’ total revenue could change if the Uruguayan peso appreciates.

Monetary policy

Some economists argue that heavy government spending and trade unions can generate market disequilibrium. Even so, trade unions can also have an important part in economic development. Singapore has more than 60 trade unions, operating in both labour-intensive and capital-intensive industries.

Trade unions

Study the source material carefully before you answer Question 1. Source material: India’s airline industry Air India belongs to the Indian government. As new firms have entered India’s air travel market, Air India has become less able to choose the price. This state-owned business competes not only with other airlines but also with other transport options, including trains and ships. In 2017, the Indian government attempted, but failed, to sell Air India to the private sector. If the sale had succeeded, it would have brought in money for the Indian government and could have improved the airline’s efficiency. It is forecast that by 2025 India will have the third-largest airline industry. Expansion in the industry may influence India’s current account position in its balance of payments. Table 1.1 shows the current account position for India and four other countries. An increase in both the number of routes operated and the standard of the passenger experience may raise the number of tourists going to India. A bigger Indian airline industry is likely to make it easier for people and goods to move into and out of India. This could draw in more multinational companies (MNCs) and lower firms’ production costs. India’s air travel market faces several problems. India has the highest airline fuel tax in Asia. Some economists argue that this should be raised again to increase tax revenue and cut market failure. Airlines’ other costs are rising, but it is hard for them to put prices up. This is because India’s air passengers are among the least price-sensitive in the world. Some airlines prevent their costs from rising further by improving staff training, introducing new technology and improving pilots’ working conditions. Airlines’ ability to recruit pilots is affected, among other things, by the quality of education and by other job opportunities.

Mixed economic system

Several countries, Morocco among them, collect water from fog. Water is used in the primary, secondary and tertiary sectors. Over the last few years, Morocco has raised both the quantity and the quality of its resources and has shifted more of them into the tertiary sector. The quantity, quality and composition of a country’s resources are affected by a range of factors, including its birth rate. Morocco’s birth rate fell from 19.9 in 2016 to 18.7 in 2018.

Production possibility curve (PPC) diagrams

Cotton and gas are two of Uzbekistan’s leading industries. Uzbekistan ranks as the world’s seventh largest cotton producer and the fifth largest cotton exporter. The Uzbek government has attempted to affect the cotton industry’s price elasticity of supply. It has also almost eliminated child labour in cotton production. In 2018, gas output rose by 7% and the average cost of gas production declined.

Price elasticity of supply (PES)

In Tunisia, decisions about resource allocation are taken by both the public sector and the private sector. Tunisia’s GDP rose between 2014 and 2018, yet households saved less. Income levels can be influenced by changes in trade union activity and in the foreign exchange rate. From 2014 to 2018, Tunisia saw several strikes arranged by its biggest trade union, the Tunisian General Labour Union. Its foreign exchange rate also fell sharply.

Mixed economic system

The US has a largely market-based economic system. In 2017, US life expectancy dropped for the third successive year. Even though the US has a high GDP per head, income inequality is also high. The poor gained from the US’s low and stable inflation rate. Government supply-side policy measures helped to ease inflationary pressure.

Market economic system

In 2018, 54% of Russia’s population was female, and the government announced plans to increase the state retirement age. In Russia, the price mechanism is taking a larger role in dealing with the key resource allocation questions. However, the Russian government raised indirect taxes partly to cut market failure.

The role of markets in allocating resources

South Africa has a large number of workers who are unemployed. In recent years, South Africa’s inflation rate has stayed steady, in part because wages have also been fairly stable. If wages rise, inflation may increase, and the quantity of consumer goods bought and produced can also rise. To raise employment and cut South Africa’s current account deficit in its balance of payments, some economists argue that more foreign multinational companies (MNCs) should be encouraged to produce in South Africa.

Current account of balance of payments

During recent years, Norway has taken part in free trade to a larger extent. The country uses a floating foreign exchange rate. The pattern of employment in Norway has also altered. For instance, a greater number of Norwegians now hold jobs that require a university degree. Some of these graduates work as economists and lawyers who deal with mergers between firms. In 2017, there were 332 mergers, which was 23% above the figure for the previous year.

Globalisation, free trade and protection

Industries and markets in Vietnam are undergoing change. Division of labour is being used more widely across a range of industries. As competition rises in many markets, some firms are now making losses. In 2018, manufacturing was Vietnam’s strongest sector, and manufacturing output rose by 13%.

Market structure