May/June 2023

What leads to scarcity in an economy?

The nature of the economic problem

A government aims to cut air pollution in city centres by offering financial support to bus companies, which lowers their production costs and the fares charged to passengers. Which policy measure type is being described here?

Supply-side policy

Which would be least likely to function as a store of value during a period of rapid inflation?

Money and banking

The central bank of a country increased the interest rate from $1\%$ to $4\%$ per year. How would this change have affected how much individuals saved and the cost of borrowing?

Monetary policy

Which factor would not make a trade union's bargaining power stronger when trying to increase wages?

Trade unions

Which market conditions are most likely to encourage small firms to enter a market?

Market structure

The diagram illustrates a firm’s total cost (TC) curve. Calculate the average variable cost when the firm produces $10$ units of output.

Firms’ costs, revenue and objectives

The table gives the number of units of factors of production that a firm must use at two different output levels. What is the firm experiencing?

Firms and production

Name one example of a government macroeconomic aim?

The macroeconomic aims of government

Government policy measures can influence economic activity in a country. Which pair of monetary policy measures would be most likely to raise employment?

Monetary policy

Which factor would be most likely to promote saving?

Households

What does a point on a production possibility curve indicate for an economy?

Production possibility curve (PPC) diagrams

A country’s government, while the economy is at full employment, raises expenditure on education and training. How does this change the chance of obtaining low inflation in the short run and in the long run?

Supply-side policy

A government has imposed a tax on an essential good. Producers have transferred a large share of this tax to consumers by charging higher prices. Which row is correct?

Price elasticity of demand (PED)

Which factor is most likely to cause structural unemployment to increase in a country?

Employment and unemployment

Which citizens are most likely to gain during a time of rapid inflation?

Inflation and deflation

Which of the following statements is correct regarding the Human Development Index (HDI) and real GDP?

Differences in economic development between countries

If all other factors stay the same, what will lead a population to both grow and get older?

Population

Which change would be least likely to occur in a country as it develops?

Differences in economic development between countries

For developed economies, it is less expensive to import some cereals from developing economies than to grow them themselves. What could lessen international trade in cereals?

Globalisation, free trade and protection

A country sets a quota on imported cars. What is the most likely result of this measure?

Globalisation, free trade and protection

A product from Argentina is first sold in the US at $50, while the exchange rate between the two countries is 5 pesos to 1 dollar. The exchange rate then shifts to 10 pesos to 1 dollar, and the product’s price in Argentina stays the same. What is the product’s new US price?

Foreign exchange rates

Which change is most likely to raise enterprise as a factor of production within an economy?

The factors of production

Which policy measure would be most likely to cut the current account deficit in an economy’s balance of payments?

Current account of balance of payments

Which economic activity would be classified under macroeconomics?

Microeconomics and macroeconomics

The diagram illustrates the effect that a fall in price has on the demand for a product. What is shown by the arrow on the diagram?

Demand

Which formula is used to calculate price elasticity of supply?

Price elasticity of supply (PES)

What is the most probable reason for a product to have a price elasticity of demand above one?

Price elasticity of demand (PED)

For certain illnesses, wearing a face mask is beneficial because it may stop people from becoming infected. However, not everyone is prepared to wear face masks. Using the statement above, why would the free market lead to an inefficient allocation of face masks?

Market failure

What would cause an upward movement along the supply curve for rice?

Supply

What forms part of the economic definition of scarcity?

The nature of the economic problem

Setting a ceiling price for a good is an example of what kind of government policy?

The role of government

People who save are harmed as inflation increases to $4.4\%$. Which function of money is mainly involved in this statement?

Money and banking

A function of money is to serve as a measure of value. What is meant by this?

Money and banking

Which trade union activity would be advantageous for firms?

Trade unions

Which item is not a variable cost of production?

Firms’ costs, revenue and objectives

What does the term firm's revenue mean?

Firms’ costs, revenue and objectives

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

Firms’ costs, revenue and objectives

A government chooses not to alter direct taxes, but instead raises indirect taxes. What is this policy designed to achieve?

Fiscal policy

What is the most probable reason for raising government subsidies?

Market failure

Which groups of people are most likely to benefit during a period of inflation?

Inflation and deflation

A country's production possibility curve (PPC) shifts from $\text{PPC}_1$ to $\text{PPC}_2$. What might bring about this change in the PPC?

Production possibility curve (PPC) diagrams

The government of country Z announces that it will raise spending on work-place training. What effect is this supply-side policy likely to have?

Supply-side policy

The table presents real GDP in US$ billion for a country over a three-year period. What do the GDP figures show for the country from year 1 to year 3?

Economic growth

What is a probable effect of a reduction in unemployment?

Employment and unemployment

The diagrams illustrate Italy’s unemployment rate and GDP per head. At what point do Italy’s unemployment rate and GDP per head increase together?

Employment and unemployment

In a recession, lots of people in a city lose their jobs and their incomes decrease. As a result, some are no longer able to pay the rent on their homes or purchase the food they require. What effect does the recession have on the city?

Poverty

The Peruvian government set a target of lowering the proportion of its population living in poverty. Which change would not show that the Peruvian government had made progress towards this target?

Poverty

Which of the following is not a reason for the decline of manufacturing industries in developed economies in recent years?

Globalisation, free trade and protection

The table lists a country's exports and imports. Exports of goods: $200$ $\text{m}$ Imports of goods: $190$ $\text{m}$ Exports of services: $35$ $\text{m}$ Imports of services: $38$ $\text{m}$ What was the country's balance of trade in goods and services?

Current account of balance of payments

Country X sells steel to country Y at a price that is lower than the cost of producing it. As a result, demand for steel made in country Y has fallen. What is one trade protection measure that country Y could use to reduce steel imports from country X?

Globalisation, free trade and protection

What factors could raise demand for a country's currency in the foreign exchange market?

Foreign exchange rates

A government allocates $100\text{m}$ to subsidise the construction of wind farms rather than using it to increase healthcare spending. Which economic concept is shown by this spending choice?

Opportunity cost

Country X is facing a continuing deficit on the current account of the balance payments. Which policy measure would be most likely to reduce this problem?

Current account of balance of payments

Give one example of a macroeconomic indicator.

The macroeconomic aims of government

The demand for X exists in two locations, Y and Z. The table gives the quantity of X demanded in these locations at different prices. What conclusion can be drawn from the table?

Demand

Which price elasticity of demand (PED) would lead to an increase in total revenue if the price of the good rose?

Price elasticity of demand (PED)

The diagram illustrates the supply curve for coffee. The price of coffee rises from $P_1$ to $P_2$. In what way would this advantage firms in the coffee industry?

Price changes

What could be one external benefit if the number of university graduates in an economy rises?

Market failure

The price of a good rises. What might lead to this?

Price changes

GDP per capita in Switzerland is high. Why do Swiss citizens still encounter the basic economic problem?

The nature of the economic problem

A government thinks that people consume too much sugar but too little fruit. Which set of policies would the government put in place?

Market failure

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

Money and banking

At what point will a central bank serve as lender of last resort for a commercial bank?

Money and banking

What is likely to strengthen the bargaining power of a trade union?

Trade unions

What is one likely reason that firms do not increase in size?

Firms’ costs, revenue and objectives

The table sets out the activities of four firms. Which pairing of firms would illustrate horizontal integration?

Firms

What is one reason why firms that produce similar products may choose to locate close to one another?

Firms

A government wants to raise its expenditure on public goods. Which sector should receive a rise in spending to make this happen?

The role of government

Which government policy would directly cause exports of goods to increase?

Foreign exchange rates

A government wants to encourage economic recovery. Which action would help achieve this?

Fiscal policy

A country’s production possibility curve has moved from $\text{PPC}_1$ to $\text{PPC}_2$. What might have led to this change?

Production possibility curve (PPC) diagrams

What is the most probable impact on an economy of a successful supply-side policy?

Supply-side policy

An economy is seeing rapid growth because consumer spending has risen. What are the most likely effects on inflation and unemployment?

Economic growth

Which pair is most likely to be supplied by the private sector in a mixed economy?

Mixed economic system

An economy is seeing a prolonged decrease in the overall price level. Which term is used to describe this?

Inflation and deflation

Which factor is most likely to lead to a rise in relative poverty?

Poverty

What could account for rapid population growth in some developing countries?

Population

Which combination of factors could lead a country to be classified as developing instead of developed?

Differences in economic development between countries

What is guaranteed to encourage a higher level of international trade?

Globalisation, free trade and protection

The bringing in of a product from a different country has been prohibited. Which term is used to name this form of protection?

Globalisation, free trade and protection

Fishing and tourism are the two main ways a developing country earns income from international trade. If the country’s exchange rate were to depreciate, what would be the most likely outcome?

Foreign exchange rates

What is most likely to improve the geographical mobility of labour?

Workers

What is the correct formula used to calculate the current account of the balance of payments?

Current account of balance of payments

Which is not a microeconomic decision?

Microeconomics and macroeconomics

What is one characteristic of a market in equilibrium?

Price determination

The diagram illustrates the supply curve for a good. What is the name and cause of the movement from X to Y?

Supply

In the diagram, which supply curve represents perfectly inelastic supply?

Price elasticity of supply (PES)

The diagram illustrates the market for petrol (gasoline). $S_p$ represents the supply of petrol based on the private cost of petrol production and $S_s$ represents the supply of petrol based on the social cost of production. Which distance represents the market failure caused by the production of petrol?

Market failure

During one year, the world output of coal stood at 3.94 billion metric tonnes with an average yearly price of $252\text{ per metric tonne}$. A few years afterwards, world output had fallen to 3.66 billion metric tonnes while the average yearly price dropped to $120\text{ per metric tonne}$. What could account for this decrease in the price of coal?

Price changes

Study the source material closely before you answer Question 1. Source material: Is there a future for Australian coal? Australia is one of the world's major coal producers. Most of this coal is burned to generate electricity, and carbon dioxide is released in the process. In recent years, worldwide demand for coal has decreased because countries have tried to cut pollution. As a result, there has been a move towards alternatives such as gas, offshore wind and solar power. Coal is extracted in all six of Australia’s states, although the greatest output comes from Queensland and New South Wales. In Queensland, some firms are extremely large. They hire both low-paid, unskilled staff and highly paid specialist mining engineers, site managers and accountants. These firms rely on the newest excavators, mining drills, crushing equipment, earth movers and drones to spot maintenance problems. Coal may be kept in storage so that firms can respond to changes in market conditions, but storage can be costly. It can also take several years to build a new coal mine. Table 1.1 gives the output and consumption of the seven biggest producers in 2020. World coal production has dropped in recent years as most countries have switched to renewable energy. Even so, coal output is expected to rise in some countries. For instance, both Australia and India plan to open new coal mines. The Indonesian government fixes a maximum coal price so that its power stations are encouraged to use coal. The Australian coal industry adds to government tax revenue. However, Australia’s budget balance is also affected by other factors, including changes in tax rates and state assistance for some industries in the country.

The factors of production

Living standards, education included, have risen for most people in South Africa in recent years. Most households now have greater disposable income and the government collects more tax revenue. Even so, income inequality remains very large. In 2020, 36% of the population were living in poverty. Raising unemployment benefit payments could help to cut this poverty.

Poverty

Germany’s death rate is above that of several other countries, including Sweden, Cuba and the Maldives. Between 2011 and 2021, Germany’s labour force grew in size and has become more productive. The country has also had low inflation and a rising surplus on the current account of its balance of payments.

Population

A large number of people from the Philippines are employed in another country, often in industries that supply merit goods and public goods. In 2020, the Philippine government collected more tax revenue. Part of this was used on policy measures to raise life expectancy and part on policy measures to reduce unemployment. The country’s unemployment rate was also influenced by an increase in the country’s foreign exchange rate.

Fiscal policy

In Greece, households with high incomes spend more than the typical household. The level of spending in an economy affects whether production is located on or within its production possibility curve (PPC). In 2020, household spending in Greece declined. This influenced some firms’ intentions to merge. It also raised unemployment. More than half of the unemployed people in Greece had been jobless for over a year.

Production possibility curve (PPC) diagrams

Study the source carefully before you start Question 1. Source material: How will oil change Guyana? Guyana had the world’s fastest-growing economy in 2020. For a considerable period, sugar, gold and timber have made up a fairly large share of the nation’s output and exports. In 2020, the sugar industry suffered from adverse weather and a drop in worldwide demand. By comparison, the output of gold and timber rose. The chief explanation for the sharp rise in Guyana’s real GDP was the expansion of oil production. Oil was found offshore by a foreign multinational company (MNC) in 2015 and the MNC began producing in 2019. It is forecast that Guyana will be the world’s biggest oil producer per head by 2025. The Guyanese government plans to direct some of the tax income it will gain from oil towards education and upgrades to the country’s infrastructure. Proposed schemes include additional railway lines and stations. A larger and less expensive rail network may allow more people to take jobs farther from home and could affect the market for substitutes, such as car transport. The Guyanese government also intends to use some of the tax income to improve the country’s internet access. Table 1.1 shows GDP per head and internet access in seven countries in 2020. Guyana’s population size has grown only slowly in recent years. In 2020, its birth rate was 16.5, its death rate was 6.8 and its net migration rate was -7.7. As oil output rises, emigration may fall and the country may begin to record net immigration. A larger population could influence Guyana in several ways, including altering the size of its labour force and having an impact on the environment.

Economic growth

During 2020, Thailand’s biggest commercial bank combined with a smaller Thai commercial bank. The merger was predicted to influence both the fee charged for bank services and the amount that would be lent. Thai commercial banks belong to the private sector. As the private sector expands, an economy can move closer to a market economic system.

Market economic system

Canada’s private sector firms have several different objectives. The amount and the quality of land used by these firms, including farms, has risen. There has also been greater investment, with firms purchasing more capital goods. In 2021, the Canadian government promoted higher investment and wanted to stop unemployment from rising.

Firms’ costs, revenue and objectives

In 2020, Australia had a comparatively high national minimum wage (NMW). Some workers on Australian dairy farms received the NMW. Australia produces milk and soft drinks. Some consumers buy milk as a substitute for soft drinks. In 2020, a number of dairy farms and small firms closed down. That year also brought a rise in the value of the country’s floating foreign exchange rate.

Firms’ costs, revenue and objectives

In 2019, China recorded an economic growth rate of 6.1%, and households in China spent more. Attendance at sports events among Chinese people rose, so the income of leading sportspeople also went up. China exported more even though tariffs increased on some of its products. For instance, the US raised tariffs on imports of Chinese tea and coffee.

Opportunity cost

New Zealand is a fairly small economy and it aims to become carbon-neutral by 2050. Carbon-neutrality means that a country removes from the atmosphere the same amount of carbon dioxide that it gives off, or cuts carbon dioxide emissions to zero entirely. A range of policies is now in place to cut external costs in industries such as milk production and the car industry. Both industries are major causes of air pollution, and milk production also damages the surroundings in which many wild animals live. The government plans to end imports of petrol-powered cars by 2032 and also restrict the number of cows that each farmer can keep. Even so, suitable alternatives will need to be found if these goals are to be achieved. Consumers will want a cheaper replacement for petrol-powered cars, while farmers will need another source of income instead of cows. Whether the government’s plans succeed will be important for New Zealand’s macroeconomic performance. New Zealand exporters depend on a clean and green image, and this can support economic growth and cut the deficit on the current account of the balance of payments. However, not every firm will gain from government action to achieve carbon-neutrality and inflation rates may also rise. A shift to a carbon-neutral economy could also increase unemployment because of major job losses in the coal, oil and gas industries. This may raise poverty in some communities and create large losses for the firms that supply these communities. However, these changes may be short-lived and an economy with high mobility of factors of production could avoid these problems. The good news is that New Zealand already has a low level of carbon dioxide emissions. Even so, not all countries can take the path New Zealand plans to follow. For selected countries, Table 1.1 shows their share of world GDP (%) and their share of world carbon dioxide emissions (%) in 2018.

Market failure

Liechtenstein is a high-income economy in the centre of Europe. Because the country has low tax rates and limited regulation, it is an appealing location for foreign firms and individuals to set up bank accounts. Production costs for firms in Liechtenstein are high, but this is partly balanced by low indirect taxation.

Differences in economic development between countries

In 2020, the number of Chinese restaurants in the UK was about 7% lower than in the previous year. This happened because demand for Chinese food was falling and competition from other kinds of food was growing. Some small firms that sell Chinese food are also reluctant to invest in the newest technology because doing so could create opportunity costs.

Firms

After the recession Albania went through in 2013, emigration rose sharply. Albanian workers and students living in other countries have shown very little intention of going back. Even so, the government is trying to introduce policy measures that could persuade more people to return to the country.

Population

The food processing, tourism and education industries each make an important contribution to the government budget of the US state of Wisconsin. The education industry contributes more than the other industries because wages in education are higher. It also helps to increase the state’s population. This generates not only private benefits but external benefits as well.

Market failure