Oct/Nov 2022

The Chinese government is worried about poverty levels and the requirement for additional resources in the country’s low-income areas. Consequently, it is raising spending in those areas while cutting it in high-income areas. Which economic concept is shown by this government policy?

Poverty

What advantage do coins possess that makes them more suitable than paper banknotes for serving as money?

Money and banking

Which statement about various income groups is correct?

Households

A musician can take up an orchestra position in either Germany or England. Which pairing of income and cost of living is most likely to make her decide on the German orchestra?

Living standards

A firm sells 50 units at a price of $3 per product. What are the firm’s total revenue and average revenue?

Firms’ costs, revenue and objectives

A business makes bicycles by using both workers and machines. The table sets out the output achieved from different mixes of workers and machines. Which mix has the highest labour productivity?

Firms and production

Two large firms engaged in chemical manufacturing want to merge. Why could the government choose to block the merger?

Market structure

What items are included in a government budget calculation?

Fiscal policy

Which alteration is an example of monetary policy?

Monetary policy

What is the most probable effect of a rise in the rate of interest?

Monetary policy

Which method is the most effective for a government to increase national output?

Economic growth

An airline requires staff and equipment. These may be grouped into factors of production. What is matched to the correct factor of production?

The factors of production

The table gives the real GDP and the population for four countries. Which country has the greatest real GDP per head?

Living standards

A shop employee lost their job because self-service checkouts were introduced. What type of unemployment is this?

Employment and unemployment

A fall in which variable is most likely to make the rate of inflation rise?

Inflation and deflation

What kind of goods must be financed by a government?

Market failure

The table presents the percentage changes in earnings and consumer prices for four countries over one year. Which country is most likely to have had the largest rise in real income during that year?

Inflation and deflation

The table presents the Human Development Index (HDI) for a country in two years. Year 1: HDI score $0.467$. Year 2: HDI score $0.609$. Which factor would not account for the changes in the HDI?

Differences in economic development between countries

The table gives the percentage (%) contribution made by agriculture to the GDP of three countries in one year. What conclusion can be drawn from the table?

Differences in economic development between countries

The table presents some information from a country’s balance of payments where there is no secondary income (current transfers). What is the balance on the country’s current account?

Current account of balance of payments

Vietnamese companies purchase insurance from companies in the US. In the Vietnamese balance of payments, how will this transaction be shown?

Current account of balance of payments

Which row indicates the possible advantages of free trade for consumers, producers and the economy?

Globalisation, free trade and protection

The diagram depicts a production possibility curve (PPC) for country Z. The government’s policy aims to shift the economy from point X to point Y on the PPC. What is the most likely result of this policy?

Production possibility curve (PPC) diagrams

A manufacturing company in a country with a low income level has chosen to shut down. What factor is most likely to have led to this decision?

Firms’ costs, revenue and objectives

The table gives examples of changes in an economy. Which combination contains two microeconomic changes?

Microeconomics and macroeconomics

The diagram illustrates the supply of motor vehicles. What would lead to the supply curve moving from $S_1$ to $S_2$?

Supply

The diagram illustrates the demand for, and supply of, plastic bags. The initial equilibrium price is $P$. In what way would the introduction of a unit tax on plastic bags be represented?

The role of government

What importance does price elasticity of demand have for firms?

Price elasticity of demand (PED)

In a free market, market failure leads to a misallocation of resources. Which of these is not an example of market failure?

Market failure

Which organisations are able to provide direct finance for firms' growth?

Firms

The Chinese government is worried about poverty levels and the need for extra resources in the country’s low-income regions. Consequently, it is raising spending in those regions and cutting it in the high-income regions. Which economic concept is shown by this government policy?

The role of government

What advantage do coins possess that makes them better suited than paper banknotes to serve as money?

Money and banking

Which statement about different income groups is accurate?

Living standards

A musician can accept a position with an orchestra in either Germany or England. Which mix of income and cost of living would be most likely to lead her to select the German orchestra?

Living standards

A country’s central bank lowers interest rates in order to support the economy during a recession. How is this cut in interest rates most likely to change the amounts saved and borrowed from the country’s commercial banks?

Monetary policy

Which outcome of firms and workers becoming more specialised is most likely to lead to difficulties for an economy?

Firms and production

Which statement is accurate when small firms are compared with large firms?

Firms

Which two items are part of a government budget?

Fiscal policy

The table sets out the rate of income tax payable at different income levels. Which term describes this kind of tax?

Fiscal policy

A central bank lowers interest rates. Which outcome would not follow from this action?

Monetary policy

The diagram illustrates a country’s economic growth rate across a 5-year period. What conclusion can be drawn from the diagram?

Economic growth

An airline requires both workers and equipment. These may be grouped under factors of production. What belongs to the correct factor of production?

The factors of production

A person chooses to hire a professional decorator instead of purchasing the materials and decorating her house on her own. Why would this choice cause GDP to increase?

Economic growth

What does the term unemployment rate mean?

Employment and unemployment

What is the most probable cause of inflation?

Inflation and deflation

The table illustrates changes in economic growth and inflation. Which of these changes are most likely to be caused by increasing unemployment?

Employment and unemployment

The table gives the percentage changes in earnings and consumer prices for four countries over one year. Which country is most likely to have seen the largest rise in real income during that year?

Living standards

Which components are included in the Human Development Index (HDI)?

Differences in economic development between countries

A decrease in the level of absolute poverty can be most effectively achieved by reducing

Poverty

The table presents some information from a country’s balance of payments. This country has no secondary income (current transfers). The items listed are: exports of goods ($280 million), imports of goods ($350 million), exports of services ($110 million), imports of services ($60 million), and net primary income ($-40 million). What is the country’s balance on its current account?

Current account of balance of payments

Companies in Vietnam purchase insurance from firms based in the US. In the Vietnamese balance of payments, how should this transaction be shown?

Current account of balance of payments

What term is used for a limit on the quantity of imports?

Globalisation, free trade and protection

The diagram presents a production possibility curve (PPC) together with several combinations of tea and coffee output. Which of these combinations of tea and coffee can the economy produce at present?

Production possibility curve (PPC) diagrams

Which combination of factors would encourage a multinational company (MNC) that produces smartphones to set up operations in a low-income country?

Globalisation, free trade and protection

What is one drawback of a market economy?

Market economic system

The workers get a higher pay rate, but their productivity does not rise. The workers do not purchase the product they make. How would this alteration be shown on a demand and supply diagram for the product?

Supply

The diagrams illustrate changes in market conditions. Which diagram indicates a shortage at price $P$?

Price determination

What is meant by price elasticity of demand?

Price elasticity of demand (PED)

To ease traffic congestion, a government chooses to construct a new road. A toll is charged for using the new road. What is the primary aim of this government intervention?

Market failure

Which organisations are able to directly finance the expansion of firms?

Firms

The Chinese government is worried about the extent of poverty and the demand for extra resources in low-income areas of the country. Therefore, it is increasing expenditure in those areas and lowering it in high-income areas. Which economic concept is shown by this government policy?

The role of government

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

Money and banking

Which statement concerning different income groups is correct?

Households

A musician can decide to perform with an orchestra in either Germany or England. Which combination of income and cost of living would be most likely to make her select the German orchestra?

Living standards

A trade union says that, over the last five years, its members have seen their real income fall. What must have occurred for this to be true?

Inflation and deflation

A business gives its customers a personal service. It chooses to stay labour-intensive instead of moving to production that is more capital-intensive. Which feature of remaining labour-intensive would justify this choice?

Firms and production

For what reason might one profitable oil-drilling company want to acquire another profitable oil-drilling company?

Firms’ costs, revenue and objectives

A government decides to stimulate the economy by using a budget deficit. Which target should it choose in order to achieve this aim?

Fiscal policy

A government chooses to introduce a fiscal policy measure. What would be an example of this?

Fiscal policy

What would the government cut in order to lower inflation?

Fiscal policy

A country wants to promote economic growth. Which policy measure is most likely to help achieve this objective?

Economic growth

An airline requires staff and equipment. These may be grouped into factors of production. Which item has been matched to the correct factor of production?

The factors of production

In what way is a country's Gross Domestic Product usually measured?

Economic growth

What is the most likely result of higher unemployment?

Employment and unemployment

Why is deflation harmful to an economy?

Inflation and deflation

What is the reason a government provides public goods?

Market failure

The table presents the percentage changes in earnings and consumer prices for four countries over one year. Which country is most likely to have had the largest rise in real income during that year?

Inflation and deflation

Which combination of government measures is most likely to increase the living standards of lower income groups in an economy?

Living standards

What is the typical impact of net immigration for a high-income country?

Population

The table gives selected information from a country’s balance of payments. The country has no secondary income (current transfers). What is the balance on the country’s current account?

Current account of balance of payments

Vietnamese firms purchase insurance from companies in the US. In the Vietnamese balance of payments, how would this transaction be entered?

Current account of balance of payments

Country X manufactures cars and also brings in cars from abroad. Which group is the least likely to gain from the introduction of an import tariff on cars?

Globalisation, free trade and protection

The diagram illustrates production possibility curves (PPC) for an economy producing two goods: sweet potatoes and onions. At first, the economy is operating on PPC$_1$. Which combination of changes could move PPC$_1$ to PPC$_2$?

Production possibility curve (PPC) diagrams

What could be a cost to the country where it is based when a multinational company (MNC) expands overseas?

Globalisation, free trade and protection

A government chooses to shift towards a market economy by privatising state-owned enterprises. What could be a reason for doing this?

Mixed economic system

The diagrams illustrate the demand curves of the only two purchasers in a market. What shape will the market demand curve for the good take?

Demand

Consumers in a country become concerned about a sudden and severe increase in air pollution, so they purchase extra food in case they need to remain indoors. As the air pollution spreads, supermarket workers fall ill and the supermarkets find it difficult to keep their food shelves stocked. X was the starting equilibrium in the market for food in supermarkets. What will the new equilibrium be as a result of the situation described above?

Price determination

Which factor can affect the price elasticity of supply of a product?

Price elasticity of supply (PES)

State one possible consequence of market failure.

Market failure

Which organisations are able to provide direct finance for firms’ growth?

Firms

Source material: Mauritius’s global reach Mauritius fact file 2019 Tertiary sector as a % of GDP: 76% Total GDP: $14.2 billion Population: 1.26 million Mauritius is an island country in the Indian Ocean. Mauritius’s economy has expanded since it moved away from a primary-sector-based economy and became one dominated by the tertiary sector. This economic growth did more than raise income per head; it also improved healthcare in Mauritius. Life expectancy has risen and the infant mortality rate (number of infant deaths per thousand births) has dropped sharply. Mauritius is famous for many tourist attractions, such as its stunning beaches, and more than a million tourists arrive each year. Visitors from most countries need only a passport to enter Mauritius because a visa is not needed. The tourism industry not only provides many jobs, it also increases tax revenue for the government. Tax revenue from tourism is used to pay for development projects that help the whole population, not only people employed in tourism. There are also over 32 000 foreign firms located in Mauritius. Firms established in Mauritius because of its rapid growth and political stability, as well as the limited regulations needed to start and operate a firm. The government seeks to draw in more investment by supplying high-quality infrastructure. In 2019, the government spent more than $1 billion on infrastructure development. It improved the island’s international airport, seaport, and public transport links across the island. This may lower the cost of doing business in Mauritius and enlarge a firm’s market size. However, critics fear that the money has gone into projects that have helped the economy less than spending on education or healthcare would have done. The government is also searching for fresh sources of economic growth, including greater international trade and foreign investment. International trade is viewed as essential to economic growth. Table 1.1 gives the percentage of international trade to GDP and GDP per head in selected countries in 2019. The Mauritian government supports both inward and outward investment. By country, Mauritius is among the biggest foreign investors in India. Mauritian firms intend to invest in the new Special Economic Zones (SEZs) being established in Kenya. Outward investment allows Mauritian firms to enter new markets in other countries, buy imports at a lower cost and gain greater access to foreign technology. On the other hand, profits earned overseas may not be reinvested in the domestic economy. Any changes in the international economy may also influence possible profits.

Living standards

Medan ranks as the third largest city in Indonesia by population. It is sometimes called the city of a million shop-houses because many people launch small firms on the ground floor of their homes. As a result, the market supply in industries such as cafes and clothes shops has increased. Also, because demand for food delivery has grown, the unemployment rate has fallen. However, labour mobility is restricted both within Medan and across Indonesia.

Workers

Jordan uses a fixed foreign exchange rate against the US dollar. As a result, Jordan’s monetary policy is closely tied to the monetary policy of the US. Because confidence in the world economy was low in 2019, central banks across the world, including Jordan and the US, lowered interest rates to encourage growth. However, this could have run against the macroeconomic objective of low inflation.

Foreign exchange rates

A number of firms have social welfare as their chief objective. Across the world, the number of such firms is rising. Consumers are also beginning to alter their spending habits by shifting towards environmentally friendly products such as solar energy. Firms that damage the environment are now less able to earn profits, and some of these firms have to merge if they are to survive.

Market structure

Although Bulgaria is a member of the European Union (EU), its corporation tax rates are much lower than those in other EU member states. However, regulation imposed by the Bulgarian government has put off foreign investment in Bulgaria. In addition, Bulgaria’s economic growth rate has fallen in recent years, partly because its quantity of labour has been steadily declining.

Economic growth

Read the source material thoroughly before you answer Question 1. Source material on bank mergers In 2019, three Nigerian commercial banks merged to create Nigeria’s largest commercial bank. Also in 2019, two US commercial banks combined to form the US’s 6th largest commercial bank. In the US, the three biggest banks held 32% of the market. In both the US and Nigeria, larger banks responded by opening more branches, running advertising campaigns and improving online banking. Bank mergers can lead to some bank employees being made redundant. Unemployment did rise in Nigeria in 2019. This was likely to have had an effect on the government’s budget because both government tax revenue and government spending would have changed. Most commercial bank workers are highly educated. The number of years people spend in education can influence a country’s birth rate. Fig. 1.1 displays average years of schooling and the birth rate in selected countries in 2019. Fig. 1.1 Average years of schooling and birth rate in selected countries 2019. The vertical axis is labelled Average years of schooling and goes from 0 to 16. The horizontal axis is labelled Birth rate and goes from 0 to 50. The plotted points are labelled as follows: Germany (about 10 on birth rate and about 15 average years of schooling), US (about 12 on birth rate and about 14 average years of schooling), Argentina (about 18 on birth rate and about 11 average years of schooling), Eritrea (about 27 on birth rate and about 4 average years of schooling), Nigeria (about 32 on birth rate and about 6 average years of schooling), and Chad (about 42 on birth rate and about 3 average years of schooling). Some households in both Nigeria and the US, where spending is greater than income, borrow from commercial banks. In Nigeria, some children in low-income households do not get enough food because food prices are high. A government subsidy to farmers could be used to support low-income Nigerian households. The subsidy could also help to reduce the deficit on the current account of its balance of payments. Whether this happens will depend on Nigeria’s inflation rate compared with other countries and on incomes at home and overseas. In the US, nearly 35% of children are overweight. One reason is the consumption of foods and drinks that contain a lot of sugar. The US government could set a minimum price on these products, including chocolate. A minimum price could move the market nearer to the point where social benefit equals social cost. However, some consumers think this would be unfair and some firms think it would cut profits. A minimum price may also create a cost for the government, and how successful it is would depend on how high the minimum price is fixed.

Market structure

The economic problem creates choices and opportunity cost. People must decide which job to take and where to live. In recent years Australia has hired teachers from several countries, including Canada, the UK and the US. Most of these teachers focus on only one subject.

Opportunity cost

During 2019, Russia's unemployment rate stood at 4.6%. Russia had previously reached full employment. Its government wants unemployment to be lower. In 2018, the Russian government reduced spending, and this may have pushed poverty up. In both 2018 and 2019, the government kept its income tax rate unchanged. Russia uses a proportional tax rate system.

Employment and unemployment

Technological progress has altered the ways trees (wood) are felled, moved and used in making furniture, such as tables. Wood is in inelastic supply. Wood may be supplied under every economic system. However, public goods are not supplied in a market economic system.

Price elasticity of supply (PES)

Although 15% of US exports are sold to Mexico, Mexico sends 80% of its exports to the US. In 2019, the US government introduced some protection methods to cut imports from Mexico. That US move led to a decline in Mexico’s foreign exchange rate. Even though inflation rose, Mexico’s central bank lowered the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.

Globalisation, free trade and protection

Case-study source: Changes in Ecuador’s economy Ecuador fact file Population: 18m (2019) Number of Ecuadorans living and working abroad: 3m (2019) Change in price in Ecuador’s oil (2014-2016): -50% Change in supply of Ecuador’s oil (2014-2016): -8% Oil accounts for one third of Ecuador’s exports. However, Ecuador has chosen to make less oil and to produce more of other goods and services. This choice has changed the way products are made in Ecuador. For instance, luxury textile output, such as luxury scarves and jumpers, uses fewer capital goods than oil production does. Tourism depends on natural resources, including sunshine and beaches. A reason why Ecuador’s government has promoted less dependence on oil is the big swings that often happen in the oil market. From 2014 to 2016, demand for Ecuador’s exports fell, which led to a marked drop in export revenue. That fall, together with lower government spending, caused the country’s output to shrink. From 2016 to 2019, Ecuador’s economy showed some recovery. Incomes and household spending rose and more cars were bought. Table 1.1 gives the GDP per head ($) and car ownership (per 1000 people) in selected countries in 2019. Table 1.1 GDP per head ($) and car ownership (per 1000 people) in selected countries 2019: Ecuador: GDP per head $6200, Car ownership 160 New Zealand: GDP per head $44 000, Car ownership 865 Senegal: GDP per head $1600, Car ownership 50 Spain: GDP per head $32 000, Car ownership 650 Switzerland: GDP per head $83 000, Car ownership 720 Uruguay: GDP per head $18 000, Car ownership 300 Ecuador’s government took out loans from China to finance the building of more roads. Constructing these roads created jobs and was expected to affect transport costs in the long run. From 2016 to 2019, Ecuador’s textile industry gained from the improved road network. Even though foreign textile firms were strong competitors, Ecuador’s textile firms expanded production. Wages in the textile industry did not increase much. A very small rise in wages can influence trade union activity and emigration. Some Ecuadorian workers migrate to look for jobs in other countries, especially Italy, Spain and the US. These workers have different skills and do a range of jobs overseas, some of which offer training. Many, though not all, send money back to their families.

The factors of production

Washington State is the US state that produces the greatest number of apples. In 2019, apple output rose in Washington State, yet the market remained in disequilibrium. Apple farming is a labour-intensive industry because apples are harvested by hand. The US apple market is competitive.

The role of markets in allocating resources

Romania’s indirect tax rate stood at 19% from 2017 to 2019. Romania also has a large share of foreign multinational companies (MNCs), particularly US MNCs. These MNCs have contributed to higher productivity in Romania and a lower unemployment rate. MNCs also provide benefits to their home countries.

Globalisation, free trade and protection

Poland is the leading exporter of toothpaste in the world, and toothpaste is a product with inelastic demand. In 2019, several Polish firms that manufactured toothpaste considered carrying out a horizontal merger. Also in 2019, dentists' wages rose worldwide. That rise was especially large in the UK, where dentists were paid, on average, 25% more.

Price elasticity of demand (PED)

Palau is a small island nation in the Pacific Ocean. It has been given substantial financial assistance by the US. Living standards are believed to be lower in Palau than in the US. Palau applies some of the highest tariffs in the world. These trade tariffs influence Palau’s current account within its balance of payments. In 2019, commercial bank lending to firms and households in Palau rose.

Current account of balance of payments