Oct/Nov 2023

Economists refer to resources as being ‘scarce’. What has to result from scarce resources?

The nature of the economic problem

Freshly constructed houses usually have an inelastic supply. The government wants supply to become more elastic by easing building regulations. Why is the government unlikely to succeed in this straight away?

Price elasticity of supply (PES)

When preparing for old age, a person keeps savings as money instead of as goods. Which function of money is being performed in this situation?

Money and banking

Which task is not usually carried out by a country’s central bank?

Money and banking

What is a trade union most likely to safeguard?

Trade unions

A person opens a street food stall. What is needed for the food stall to remain viable in the long term?

Firms’ costs, revenue and objectives

A large privately owned firm is the only provider of electricity in a city. Which pair of characteristics is likely to apply to this firm?

Market structure

If a firm makes $200$ units, its total variable cost comes to $\$600$ and its total fixed cost is $\$2000$. What is the average cost at this level of output?

Firms’ costs, revenue and objectives

As part of its fiscal policy, the government of country Z announces that the budget is expected to be in deficit by $\$234$ billion. What is this forecast budget deficit likely to cause?

Fiscal policy

People in low-income groups do not pay income tax, yet they can still access healthcare services supplied by the state. What does this illustrate?

The role of government

The government applies monetary policy and lowers the interest rate. What could be a result of this?

Monetary policy

The diagram presents the production possibility curve (PPC) for an economy that produces consumer goods and capital goods. At present, the economy is producing OM consumer goods and OG capital goods. It then chooses to expand capital-goods production to OH. What is the opportunity cost of this choice measured in consumer goods?

Opportunity cost

What would be a likely objective of supply-side policy?

Supply-side policy

Which economic indicator is best used to describe economic growth?

Economic growth

How is full employment generally understood?

Employment and unemployment

Which group is most likely to gain during a period of rapid inflation?

Inflation and deflation

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

Living standards

Which circumstance is required to result in an ageing population?

Population

The table presents the unemployment rate in three developed economies during one year. What is the principal cause of high unemployment rates in developed economies during recession periods?

Employment and unemployment

What is the most likely outcome of increasing specialisation in manufacturing?

International specialisation

A country introduces a tariff on an imported product. What effect does this change have?

Globalisation, free trade and protection

Global demand for oil is price-inelastic, and oil is bought and sold in US dollars. If the price of oil drops sharply, what effect might this have on the US dollar?

Foreign exchange rates

A hospital has used up every part of the budget it set aside for hiring doctors. What is the opportunity cost to the hospital of hiring one additional doctor?

Opportunity cost

What benefit do multinational companies (MNCs) provide to their home country?

Globalisation, free trade and protection

Demand for wheat has risen. As a result, the demand for labour needed to harvest the wheat has also risen. Which branch of economics deals with these two concepts?

Microeconomics and macroeconomics

In the United Kingdom (UK), the cost of timber used for house building rose. This was caused by a surge in the UK house building industry and a lack of drivers available to transport the timber. What change occurred in the UK timber market that led to this rise in price?

Price determination

What does a supply curve indicate?

Supply

A worldwide pandemic leads to a drop in demand for air travel. Which figure for the price elasticity of supply of air travel would make the number of tickets sold for air travel fall by the greatest amount?

Price elasticity of supply (PES)

State one disadvantage of a market economy.

Market economic system

In some countries, droughts reduced the wheat supply. This pushed wheat prices up, creating a chance for wheat producers in other countries to raise their output. Why could the price of wheat remain high in the year after the drought?

Price elasticity of supply (PES)

Which of the following statements is correct?

Microeconomics and macroeconomics

What leads to a change in the price of a product in a free market economy?

Price changes

Methods of making and taking payments keep changing. Today, people can pay using smartphones, as well as cash, debit cards and credit cards. Which payment method for goods gives sellers no details about their customers?

Money and banking

In most countries, which organisation is responsible for regulating the banking system?

Money and banking

Which of the following is not a reason why airline pilots in a particular country earn different amounts?

Workers

An airline acquires an online clothing company. What benefit could the airline gain from this move?

Firms’ costs, revenue and objectives

In which kind of industry is a firm most likely to earn a high profit in both the short run and the long run?

Market structure

A company makes five units of output with an average cost of $\$20$ per unit. The cost of the sixth unit is $\$26$. What is the average cost of six units?

Firms’ costs, revenue and objectives

What is one example of a government macroeconomic policy?

Fiscal policy

Why might a devaluation in the international value of an economy’s currency help to reduce unemployment?

Foreign exchange rates

What is likely to occur when the rate of interest rises?

Monetary policy

Country X’s economy is always operating on its production possibility curve (PPC). At what time will the goods and services produced by country X be less plentiful?

Production possibility curve (PPC) diagrams

Which of the following is not a supply-side policy measure?

Supply-side policy

The table presents the real GDP per head for a country in 2021 and 2022. 2021: $\$20000$ 2022: $\$21000$ What is most likely to have changed between 2021 and 2022?

Living standards

Which alteration to fiscal policy is most likely to cut cyclical unemployment in an economy?

Fiscal policy

What must have taken place in a country if it recorded an annual inflation rate of $100\%$?

Inflation and deflation

The Human Development Index (HDI) can be used to assess human development in countries. Which measure would not be included in its calculation?

Differences in economic development between countries

What is the most probable effect of an ageing population on a high-income economy?

Population

In certain developing countries, a high proportion of the population works in subsistence farming. What conclusion can be drawn from this?

Differences in economic development between countries

A small country that exports only oil decides to cut the speed at which it is taking out its finite oil reserves by a large amount. What is the most likely explanation for this decision?

The nature of the economic problem

Country X thinks that country Y is exporting steel at a price lower than the average cost of production. As a result, country X places a higher tariff on steel imports from country Y. What does country X expect to achieve by introducing this higher tariff?

Globalisation, free trade and protection

Which factor would lead to a fall in a country’s exchange rate?

Foreign exchange rates

What does capital mean?

The factors of production

A number of European companies hire employees from the Philippines. These employees transfer some of their earnings to family members in the Philippines. In which section of the Philippines' balance of payments current account would these transactions be entered?

Current account of balance of payments

What characteristics does a market economy have?

Market economic system

Cars and public transport are substitute goods. The price of public transport increases. What happens to the demand for cars?

Demand

The markets for four products are each in equilibrium. The table shows the price elasticity of supply (PES) value for every product. For each product, demand moves rightward by 5000 units at every price. Which product will experience the greatest rise in price?

Price elasticity of supply (PES)

What is the value of price elasticity of demand (PED) for a product when total revenue stays unchanged after the price is lowered?

Price elasticity of demand (PED)

A hotel owner in Malaysia discovers that the price elasticity of demand (PED) for accommodation in the area is $-1.7$. If the hotel owner reduces the price of a room by $5\%$, what change would occur in the demand for a room?

Price elasticity of demand (PED)

Fine weather causes the demand for tomatoes to rise. It also causes the supply of tomatoes to rise. What must be the consequence of this?

Price determination

A consumer has $10 available to spend. A meal is priced at $9 and a drink is priced at $5. Which term would describe the situation if the consumer does not have enough money to buy both the meal and the drink?

The nature of the economic problem

At a price of $10 for a good, the quantity demanded is 100 units per day. Which pair of price change and price elasticity of demand will lead to the greatest rise in the quantity demanded for the good?

Price elasticity of demand (PED)

One role of money is to serve as a measure of value. What does this mean?

Money and banking

During 2008-2009, the central bank of a developed country cut interest rates from $5\%$ to $0.5\%$ per year in order to stimulate the economy. What effect would this policy have had on the level of saving and on individuals’ borrowing costs?

Monetary policy

A number of small energy suppliers have gone out of business because costs have increased. What is the most probable impact of this on energy prices and the range of energy suppliers available to consumers, if the government does not intervene?

Supply

What is the most likely objective of a state-owned enterprise that provides health services?

Firms’ costs, revenue and objectives

In some countries, monopoly markets are permitted to operate. What is one reason for this?

Market structure

The table sets out the costs incurred by a firm that produces computers. What are the fixed costs when $3000$ computers are produced?

Firms’ costs, revenue and objectives

A government raises more revenue by increasing direct taxation on both personal incomes and company profits. What is the most likely explanation for this increase?

Fiscal policy

Income tax in a country provides every individual with an initial tax-free allowance. Any income above this allowance is then taxed at higher rates as people’s incomes increase. Which alteration to this income tax would make it regressive?

Fiscal policy

The government cuts the rate of interest. Who is most likely to lose out from this policy?

Monetary policy

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

Production possibility curve (PPC) diagrams

What does the phrase supply-side policy measure refer to?

Supply-side policy

What is the most probable effect of economic growth?

Economic growth

In high-income economies, cereal farming is very productive, yet it employs only a small number of workers. What might explain this employment pattern?

The factors of production

Which person is most likely to gain during a time of inflation?

Inflation and deflation

The table presents some economic indicators. Which rise in the first indicator is most likely to cause a rise in the second indicator?

Living standards

Which combination would be most likely to lead to an increase in a country’s population?

Population

Which economic effect is most likely to arise from a growing share of the population being older than 65?

Population

Which factor is most likely to encourage international specialisation?

International specialisation

Country X has put in place free trade agreements with other countries. What benefit were these agreements meant to bring to Country X?

Globalisation, free trade and protection

A country’s foreign exchange rate rises sharply. Which group in that country will gain directly from this change?

Foreign exchange rates

A railway track belongs to what type of factor of production?

The factors of production

What does the secondary income balance measure in a country’s current account of the balance of payments?

Current account of balance of payments

Which statement has to be true if a market is not in equilibrium?

Price determination

Which factor is a determinant of price elasticity of demand (PED)?

Price elasticity of demand (PED)

What factors would make the supply curve for an agricultural product move to the right?

Supply

What factors would make the price elasticity of supply (PES) of a product greater?

Price elasticity of supply (PES)

The diagram illustrates a demand curve. What does the shift from X to Y indicate?

Demand

In a market, there is a surplus of a good. Which change would bring the market to equilibrium?

Price determination

Source material: Cambridge (UK) and Education Cambridge sits at number one among all UK cities for the proportion of workers holding a university qualification. It is also placed number two in the UK for the proportion of people aged 18-29. This reflects the very large student population in Cambridge universities. Even though the city’s population is relatively small, its share in the total size of the UK economy is substantial. A lot of firms in Cambridge are active in education, healthcare, research and development, and hi-tech manufacturing. Cambridge firms’ exports are strongly knowledge-intensive, so they are expensive and price-inelastic in demand. Rising incomes around the world have also pushed up demand for services such as education from Cambridge. An expansion in the education industry could help to cut poverty. A more educated labour force can earn higher wages and can also obtain more information about health. Table 1.1 gives the percentage of the population aged 25-64 with a university degree and the GDP per head in selected countries in 2019. Many residents of Cambridge strongly back globalisation and free trade between countries. A large number of firms in Cambridge rely on export earnings. Cambridge is an appealing place for expanding firms because many highly skilled and educated workers are available from across the world. It also has strong infrastructure, including access to ultra-fast broadband and transport links to other cities and international airports. However, firms may have to deal with high land and office costs. In 2019, Cambridge had the third highest house prices in the UK city ranking. Poor air quality may also put workers off moving to Cambridge.

Poverty

One third of the world’s ski resorts are in the Alps. Holiday prices in the Alps are comparatively higher than in other regions. The recent pandemic, however, reduced revenues for many large and small firms in the tourism industry during the winter season of 2020/2021. Many blamed strict government regulations for that. However, government intervention also enabled many firms to survive.

Firms’ costs, revenue and objectives

Digital money, for example cryptocurrencies, is being adopted more widely. Transactions using digital money are carried out on electronic devices such as computers and smartphones. However, market failure may arise because external costs are created by the heavy energy consumption of non-renewable sources. One way to lower external costs is to tax the product.

Market failure

Malaysia used to focus mainly on producing and exporting natural rubber. Making natural rubber was highly labour-intensive. Even though it is still among the world’s top 5 exporters of natural rubber, Malaysia has shifted towards manufacturing goods that use natural rubber rather than simply producing and exporting this primary product.

International specialisation

One factor behind very high house prices in cities such as Hong Kong, London, and New York is the low price elasticity of supply of houses. In some of these cities, trade unions are campaigning for housing that is more affordable for workers. Governments are also attempting to introduce a range of microeconomic policy measures to bring house prices down. Furthermore, the stability of the housing market can influence how effective monetary policy is.

Price elasticity of supply (PES)

Study the source material thoroughly before you answer Question 1. Source material: Will Honduras become a more successful economy? Honduras is a lower middle-income country that depends very heavily on trade with the US. Over half of Honduran exports are sent to the US, and 40% of its imports come from the US. A large number of Hondurans are employed in the US and transfer money back to their relatives at home. In the past, Honduras focused on bananas and coffee, building expertise and a strong reputation in these industries. Today, Honduras makes a wider variety of products, including clothes, chemicals and paper. This wider range has reduced the uncertainty caused by sudden shifts in demand and supply. For instance, tariffs might be placed on Honduran coffee, or there could be a report claiming that bananas are healthy to eat. Although employment in agriculture is falling, it is rising in Honduras’s clothes industry. Workers in the clothes industry are expected to receive more training and to experience better working conditions. The firms are also making greater use of capital goods. However, it is still uncertain what will happen to the prices of cotton, wool and other materials needed to produce clothes. A thriving clothes industry could help reduce poverty in Honduras. The Honduran government tries to cut poverty by, for example, paying unemployment benefit. One important reason for the government wanting to reduce poverty is to raise life expectancy. Table 1.1 shows poverty levels (the percentage of the population living on less than $1.90 a day) and life expectancy in selected countries. If the Honduran economy becomes more successful, incomes would rise. Because the country uses a progressive income tax system, tax revenue could increase significantly. A stronger economy would also be likely to attract more investment. Unemployment would be expected to decrease which, in turn, could affect consumer spending.

Globalisation, free trade and protection

Botswana combines capital goods with labour in its diamond-mining sector. From 2015 to 2019, its average economic growth rate stood at 3.8%, whereas the world average was 2.8%. During this period, the country had low inflation and moved away from protectionism towards free international trade.

Globalisation, free trade and protection

During 2020, several firms in Suriname, a country in South America, ceased producing. This happened because they were unable to meet their variable costs, and also some of their fixed costs. As the nation’s output fell, its unemployment rate increased. The government applied supply-side policy measures to lower unemployment. In 2021, the number of firms in some markets declined again, although this occurred while output was increasing.

Supply-side policy

In the US, the supply of meat from emus, a large bird, is price-elastic. More recently, US farmers have moved from keeping other livestock and growing crops, which has altered their demand for labour. Their decisions are affected by government subsidies for producing chosen food items. Some people are unwilling to work on farms because they believe rural living standards are low.

Price elasticity of supply (PES)

In 2020, Singapore saw both its population size and its labour force fall. That year brought major changes in several Singaporean markets; some shifted from disequilibrium to equilibrium. Even so, Singapore still managed to raise its exports of goods and services.

Population

Source text: Changes in the economy of Montenegro Montenegro is a European country where the private sector has grown in importance. By 2020, 90% of state-owned firms had been privatised. All commercial banking, telecommunications and aluminium production has moved into private ownership. The country's banks now possess more computers, more employees and more office buildings. In most years, Montenegro receives three times as many tourists as the size of its resident population. Tourism is a highly competitive market. Holiday demand is price-elastic, which affects firms' pricing decisions in the industry. The share of workers in tourism and other tertiary sector industries has risen. In 2020, 75% of Montenegro's labour force were employed in the tertiary sector. Some workers in the primary sector assist with growing and exporting oranges. A minimum price has been proposed for oranges and some other crops. Movements in the price of a country's exports can influence both the trade in goods and services balance and the current account balance of its balance of payments. Table 1.1 shows selected information on the balance of payments of six East European countries in 2020. A country's position in international trade is affected by the amount and pattern of consumer expenditure. Privatisation has influenced consumer spending. The shift to the private sector has changed investment, the number of workers employed and competition in those industries. It has also changed firms' aims, prices and how quickly they react to changes in consumer demand. In 2020, Montenegro had very low inflation. It was anticipated that this might become deflation. A drop in the price level could affect the country's output, employment and balance of payments.

Mixed economic system

In 2019, Mozambique was struck by a severe storm that wrecked bridges, factories, roads and electricity lines. Nearly 60% of Mozambique’s population live in absolute poverty. The country’s people are eager to raise Mozambique’s economic development. Government intervention in Mozambique’s economy is high. Although Mozambique does not use import quotas, it does apply a range of import tariffs.

Differences in economic development between countries

Saudi Arabia’s economic structure could alter in the future. The country’s central bank is working alongside a larger number of private sector banks. In 2020, the average age of the population was 31.8, only a little higher than the world average of 31.2. During that same year, plans were made public for a city in which cars would neither be needed nor permitted. A change like this could make Saudi Arabia more appealing to younger people who might choose to move there.

Money and banking

In Ecuador, people purchase goods and services with several different kinds of money. The Ecuadorian government transfers public sector workers’ pay straight into their bank accounts. In 2019, advances in technology affected the profits of some Ecuadorian firms. In that year, the Ecuadorian government reduced the hours of public sector workers and, in 2020, it cut spending. Economists were unsure what impact the fall in government spending would have on unemployment.

Fiscal policy

In 2020, Paraguay’s Consumer Prices Index increased by 3% and its foreign exchange rate moved up and down. Every year Paraguay has net emigration. People depart from a country for several reasons. These include a low rate of economic growth and a high degree of market failure. The Paraguayan government does intervene in the economy in an effort to lessen market failure.

Market failure