May/June 2024

What does the term free good mean?

The nature of the economic problem

In the same company, one worker receives a higher wage than another worker. Which explanation for the gap in their wage could be classed as discrimination?

Workers

The diagram illustrates the labour demand and labour supply curves for a firm. The starting wage rate is shown by $W_0$ and the equilibrium quantity of labour employed is $L_0$. A trade union representing all of the workers negotiates an increase in the wage rate to $W_1$. What amount of unemployment is caused by this rise in wages?

Workers

A farmer brings in machinery to assist workers during harvest time. The farmer also cuts the number of workers by 50%. As a result, total harvest rises by 25%. What has occurred?

Firms and production

A firm faces fixed costs of $20 and the total variable costs shown below. What happens to average total cost across this range of output?

Firms’ costs, revenue and objectives

The table gives the firm’s costs and output. What is the firm’s average fixed cost?

Firms’ costs, revenue and objectives

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

Market structure

What is likely to occur if a market that was once competitive turns into a monopoly?

Market structure

Which macroeconomic objective, if it is met, is most likely to raise a government budget surplus?

The macroeconomic aims of government

The table sets out the income tax rate paid by workers at various income levels in selected years in a developed economy. What economic objective was the government most likely trying to achieve by altering the tax rates between year 1 and year 2?

Fiscal policy

A government tries to boost economic growth by lowering interest rates. Which other government objective is most likely to benefit in the short run?

Monetary policy

A firm must choose whether to make good X or good Y over the next five years. The forecast revenue for good X is $\$20000$ per year, whereas for good Y it is $\$18000$ per year. What is the opportunity cost of producing good X?

Opportunity cost

What does the term supply-side policy mean?

Supply-side policy

Subsistence farming refers to producing crops and keeping livestock only to meet one’s own needs, with no excess left to sell or exchange. Why does this make it hard for a government to assess economic growth in an economy that depends on subsistence farming?

Economic growth

What conditions must be satisfied for a worker to be classified as unemployed?

Employment and unemployment

What is most likely to rise when the inflation rate gradually moves from $2\%$ to $8\%$ over one year?

Inflation and deflation

Introducing a minimum hourly wage in an industry is intended to cut poverty among low-paid workers. What is one benefit to workers of an effective national minimum wage?

Workers

The chart illustrates the population pyramid for a country. What is the most likely reason for the population pyramid to have this shape?

Population

The table presents information about four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

What benefit does specialisation at a national level bring to a firm?

International specialisation

What is one desired result of shielding infant industries from free trade?

Globalisation, free trade and protection

In the diagram, curves $D_1$ and $S_1$ show the demand for and supply of the US dollar ($\$$) in relation to the Chinese yuan. What is the most likely reason for the demand curve for US dollars to move from $D_1$ to $D_2$?

Foreign exchange rates

The diagram illustrates a production possibility curve (PPC) for an economy. Why does the economy shift from point M to point N?

Production possibility curve (PPC) diagrams

Brazil recorded a current account deficit on its balance of payments of US$23.5 billion. Which policy is most likely to cut Brazil’s current account deficit?

Current account of balance of payments

Which factor is allowed to vary when a demand curve is drawn for a good or service?

Demand

The diagram illustrates a movement in the supply curve for New Zealand’s airlines from $S_1$ to $S_2$. What is the most likely reason for this shift?

Supply

What might lead to an increase in the price of tea?

Price changes

A business alters the price of its product and discovers that its revenue rises. Which pair of price change and price elasticity of demand would explain this?

Price elasticity of demand (PED)

What would be impossible in a market economic system?

Market economic system

Which definition correctly describes a demerit good?

Market failure

Why is scarcity bound to exist forever?

The nature of the economic problem

The diagrams illustrate the wage rates paid to cleaners (OWc) and nurses (OWn). What happens if a national minimum wage of $OM$ is brought in?

Workers

What factor would result in households spending less in a country?

Households

Which pairing shows the advantages that a small firm has over a larger firm?

Firms

What do we mean by a variable cost for a firm?

Firms’ costs, revenue and objectives

The table presents the daily average revenue and number of units sold for a firm producing bicycles across a five-day period. What conclusion can be drawn from the table?

Firms’ costs, revenue and objectives

Which function of money serves as a measure of value?

Money and banking

What characteristics does a highly competitive market have when it is compared with a monopoly market?

Market structure

Which of the following is not a function of central government in a mixed economy?

The role of government

A government wants to prevent deflation. Which policy combination would be the most effective in helping to achieve this aim?

Inflation and deflation

The diagram illustrates the effect of a tax imposed on a product. Which area shows the amount of tax paid by the consumer?

Price changes

A student chooses to begin a two-year apprenticeship that pays $\$10\,000$ each year. Once this ends, she expects to receive $\$25\,000$ per year. Instead of doing the apprenticeship, she could take an unskilled job that pays $\$16\,000$ per year. What is the opportunity cost over the two years spent completing the apprenticeship?

Opportunity cost

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

Supply-side policy

Which change is most likely to result in faster economic growth in the short run?

Economic growth

In what way is the pattern of employment likely to change as a country becomes more developed?

Differences in economic development between countries

Which item would be the least likely to appear in the Consumer Prices Index (CPI)?

Inflation and deflation

The table presents statistics for four countries, A, B, C and D. From the data given, which country has the lowest standard of living?

Living standards

Economic development in country X has advanced more quickly than in country Y. What is the most likely reason for this gap in economic development between country X and country Y?

Differences in economic development between countries

An increase in which factor would lead to a higher population growth rate in a country?

Population

The diagram illustrates the market for an imported good, with equilibrium at point X. The country places a tariff on this good. Does the new equilibrium lie at point A, B, C or D?

Globalisation, free trade and protection

The diagram illustrates the market for the Chinese yuan (¥), quoted in US dollars ($). What might have led to the shift in demand for the yuan from $D_1$ to $D_2$?

Foreign exchange rates

The table gives the average exchange rate for the UK pound (£) against the US dollar ($), meaning the number of $ that may be obtained with £$1$. What is one likely effect of this change on the UK economy?

Foreign exchange rates

The diagram illustrates a country’s production possibility curve (PPC). Which present mix of capital and consumer goods would result in the highest quantity of consumer goods in the future?

Production possibility curve (PPC) diagrams

The table presents components of Japan’s current account balance in trillion yen (¥) for 2 years. Which balance increased between year 1 and year 2?

Current account of balance of payments

Which is not a macroeconomic topic?

Microeconomics and macroeconomics

What is likely to result in an extension of demand for a firm’s fruit drink?

Demand

Some supermarkets sell petrol (gas) from pumps outside their shops. To draw in extra shoppers, they lower petrol prices below those of other suppliers, hoping that customers will also purchase more goods inside the store. If this strategy succeeded, how could it be represented on demand and supply diagrams?

Demand

Which statement describes a market that is in disequilibrium?

Price determination

When the price rose from $\$5$ per kg to $\$6$ per kg, a farmer raised supply from $400$ kg to $500$ kg each week. What is the price elasticity of supply?

Price elasticity of supply (PES)

Which government policy is most likely to lead to a decrease in both price and quantity traded?

Price determination

How may the economic problem be described?

The nature of the economic problem

What role does a central bank play in an economy?

Money and banking

A company moves away from making single items of wooden furniture by hand and begins a mechanised production method that uses the division of labour. Which combination of outcomes is most likely to follow?

Firms and production

Which definition best describes a trade union?

Trade unions

Which is most likely to be a disadvantage of running a small firm?

Firms

A firm raised output from $Q_1$ to $Q_2$ and gained economies of scale. How is this represented on the firm's average total cost curve (ATC)?

Firms’ costs, revenue and objectives

A busy restaurant uses a large team of highly skilled chefs to prepare high quality meals one by one. What is one advantage to the restaurant of using this type of production?

The factors of production

How do you calculate the average cost of a product?

Firms’ costs, revenue and objectives

Why could steps taken to reduce unemployment also cause inflation to increase?

The macroeconomic aims of government

The diagram illustrates selected categories of government expenditure for a country. What was the total government expenditure on merit goods?

The role of government

Which statement correctly describes how monetary policy measures affect macroeconomic aims?

Monetary policy

What items would be counted under the factor of production called land?

The factors of production

What is the most likely effect of reduced direct taxes on demand and supply?

Fiscal policy

The table presents the yearly change in Gross Domestic Product (GDP) before inflation adjustments and the yearly inflation rate in four countries. Which country has the greatest growth rate in real GDP?

Economic growth

Which kind of unemployment is generally considered by economists to be the least serious for the economy?

Employment and unemployment

In a country, the Consumer Prices Index (CPI) increased over one year from $125$ to $150$. What was the country's rate of inflation?

Inflation and deflation

What is indicated by the Human Development Index (HDI)?

Living standards

Which option most accurately describes relative poverty?

Poverty

The table presents population statistics for three countries in a specific year. What conclusion can be drawn from the table?

Population

Which factor is most likely to encourage international specialisation?

International specialisation

What happens to price and equilibrium quantity when an import tariff is imposed on a good?

Globalisation, free trade and protection

The diagram illustrates the market for the Indian rupee in US$. What would make the demand curve for rupees move from $D_1$ to $D_2$?

Foreign exchange rates

A shale oil deposit is found beneath land currently used for farming. The estimates below are for a ten-year period. • If the land is kept for farming alone, it would generate income after tax of $10 billion. • If the land is used only for shale oil extraction, it would generate income after tax of $40 billion. • The government would collect $5 billion in taxes from farming and $10 billion in taxes from shale oil extraction. What opportunity cost arises if the land is used only for farming?

Opportunity cost

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

Current account of balance of payments

Which three key questions determine resource allocation?

The nature of the economic problem

In the diagram, X shows the starting equilibrium point in the labour market for engineers. If the skills of engineers increase, productivity rises. Which point shows the new equilibrium in the labour market for engineers?

Workers

A blast in a major oil pipeline makes the world price of a barrel of oil rise from $50 to $100. Prior to the blast, world demand for oil was 100 million barrels per day. The world price elasticity of demand for oil is $-0.2$. What is the new worldwide demand for oil (barrels per day) following the blast?

Price elasticity of demand (PED)

What does the study of microeconomics cover?

Microeconomics and macroeconomics

A product has a price elasticity of supply (PES) of $1.0$. This product is priced at $10 and the quantity supplied is 200 units. If the price of the product rises to $11, by how many units will the quantity supplied rise?

Price elasticity of supply (PES)

The government wants to cut the damaging emissions produced by road transport. Which measure would be effective in helping to achieve this aim?

Market failure

Read the source material carefully before you answer Question 1. Source material: What might lie ahead for Nicaragua? Nicaragua is Central America’s largest country. It has a substantial agricultural sector, and coffee is one of its main exports. It has been estimated that if the price of coffee changes by 10%, the quantity of coffee demanded changes by 3%. The country’s agricultural output, including coffee, is frequently affected by natural disasters such as droughts and earthquakes. Nicaragua has the lowest Gross Domestic Product (GDP) per head in Central America. Pay is especially low in rural areas of the country. Income inequality is high, and firms usually make lower profits than those in other Central American countries. The number of Nicaraguans who were willing and able to work but could not find a job increased, as measured by both the claimant count and the labour force survey, in 2020. In 2020, the purchasing power of Nicaraguan consumers fell because prices rose by more than incomes. Even so, the country’s currency, the cordoba, remained generally acceptable. It continued to function as a medium of exchange and a store of value. Nicaragua’s future economic performance will be shaped by several factors. These include the proportion of the labour force employed in agriculture, the size of firms in the country and the types of output the country produces. Table 1.1 shows the percentage of the labour force employed in agriculture and GDP per head in selected countries in 2020. Nicaraguan firms are generally quite small. They often learn the needs of individual customers, but many are not large enough to benefit from economies of scale. In recent years, coffee shops have boomed in Nicaragua. Between 2015 and 2020, the number of coffee shops in the country more than doubled. These shops set themselves apart through their customer service and the quality of the coffee they serve. Nicaragua is the world’s twelfth largest producer of coffee. Global coffee consumption continues to rise. This trend may increase Nicaragua’s coffee output and exports.

Price elasticity of demand (PED)

In recent years, labour mobility, the number of women in the labour force and GDP have all risen in Bangladesh. In 2019, Bangladesh’s central bank authorised three additional commercial banks. In that year, women earned, on average, 77% of men’s pay in Bangladesh. The nation recorded the world’s seventh highest economic growth rate, with GDP increasing by 7.4%.

Living standards

Indonesia uses a mixed economic system. Bank Indonesia, the central bank of Indonesia, targets stable prices. Changes in population size can affect the country’s price level. Indonesia’s population is still rising, although the pace of growth has slowed. A number of industries in the country are expanding, with Indonesian domestic and international air travel growing especially quickly.

Mixed economic system

Healthcare is part of the tertiary sector. Healthcare generates both private and external benefits. In 2019, there were five mergers involving large US healthcare firms. Alongside their operations in the US, US healthcare firms also work in a number of host countries, including Singapore.

Firms

During 2020, the price of gold declined in Vietnam. In that year, Vietnam was among Asia’s strongest-performing economies. In contrast with some other Asian economies, Vietnam did not go into recession. Total output, exports and imports all rose. Unemployment did rise from 2.0% to 2.3% but it still stayed very low. One possible aim of fiscal policy is to reach full employment.

Fiscal policy

Study the source material closely before you answer Question 1. Source material: The difficulties facing the Tunisian government Tunisia fact file For several years, Tunisia ran a government budget deficit. From 2015 to 2020, the Tunisian government introduced reforms designed to cut the tax burden, depend more heavily on indirect taxes, and make the tax system more efficient and less costly. In addition to taxing a variety of goods, the Tunisian government also controls the prices of some products, such as flour and milk. State regulation of the price of flour and milk can help to lower poverty and stop monopoly firms using their market power to exploit consumers. The Tunisian government also provides subsidies for electricity production. The subsidy changes the cost of producing electricity, and any change in the price of electricity affects the costs faced by other firms. This kind of public spending can help ease inflationary pressure, but it can also reduce the efficiency of electricity production. Although some firms gain from the subsidy on electricity production, they also go through periods when their other production costs rise. Tunisian shoe manufacturers have recently faced higher wage costs and a fall in the number of workers they employ. The average wage paid to Tunisian workers and the Tunisian inflation rate changed between 2014 and 2020, as shown in Fig. 1.1. Fig. 1.1 is a line graph with the title: "Change in average wage and the inflation rate in Tunisia 2014-2020". The vertical axis is labelled: "Percentage (%)" and extends from 0 to 9. The horizontal axis is labelled: "Year" and includes 2014, 2015, 2016, 2017, 2018, 2019 and 2020. The key shows a solid line labelled: "Change in average wage" and a dashed line labelled: "Inflation rate". Unemployment has been a long-standing issue in Tunisia. In 2020, the government introduced a law that guaranteed public-sector jobs for workers who had been unemployed for ten years or longer. To cut the time workers spend moving from one job to another, it improved the labour market information available to workers and employers and did not increase unemployment benefit in line with inflation. Tunisia’s foreign exchange rate moved around during 2020. This influenced the prices of the country’s exports and imports. It also affected the current account of its balance of payments, economic growth, inflation and unemployment.

Fiscal policy

In 2020, pay to Mexican workers, including those in the primary sector, declined. This decline helped cause a 9% increase in poverty across the country. In that same year, many small and medium-sized firms shut down. The country also faced traffic congestion. Its capital, Mexico City, is the world’s most congested city.

Opportunity cost

South America is a vast geographical region containing millions of microeconomic decision-makers. In a recent pandemic, schools remained shut for longer than in any other part of the world. Consequently, students obtained less education. The World Bank estimated that the average student would earn $24000 less over their lifetime. Some students may earn only the minimum wage. In 2020, South America recorded an inflation rate of 6.3% and an economic growth rate of only 1.8%.

Microeconomics and macroeconomics

Tajikistan is among Asia’s low-income economies. Its currency, the somoni, has the main features of money. More than one million Tajik workers are employed overseas, mainly in Russia. In 2020, the Tajik government feared that the country might enter a recession, which could lead to lower tax revenue. Even with this risk, some Tajik firms purchased new capital equipment.

Money and banking

In Poland, people use both free goods and economic goods. In 2020, demand rose in Poland for economic goods as well as factors of production. For instance, Polish consumers wanted more football shirts, and the Polish government increased spending on housing for the country’s population.

The nature of the economic problem

Background material: Indonesia and climate change Indonesia fact file (2021) Indonesia GDP: $1100bn Indonesia economic growth rate: 3.7% Jakarta GDP: $300bn Jakarta economic growth rate: 2.4% From 1945 until 2024, Jakarta served as Indonesia’s capital city, and it is among the fastest-sinking and most polluted cities in the world. A sharp drop in real Gross Domestic Product (GDP) per head is forecast for the city, which may bring about a decline in living standards. The free market can be held responsible for air pollution and rising sea levels in parts of Indonesia. Schools and other buildings have been flooded and roads have been damaged. Floods have also caused a rise in diseases spread by water and mosquitoes that breed in water. Farmland has gone underwater, removing an important income source for many farmers. As a result, internal migration (people moving between regions of the same country) has taken place. For instance, some farmers have relocated to places where climate change has made it possible to grow different crops. Regions that people have left have faced less pressure on both natural resources and local government resources. Even so, such movements could cause whole communities to break down and widen inequality between workers who can move more easily and those who cannot. Governments across the world have responded to climate change by increasing spending on the environment. Table 1.1 gives the GDP and environmental government spending of selected countries in 2019. Table 1.1 GDP and government spending on the environment of selected countries in 2019: France - GDP $2730bn, government spending on the environment $27.03bn Indonesia - GDP $1120bn, government spending on the environment $2.58bn Japan - GDP $5150bn, government spending on the environment $58.20bn Switzerland - GDP $730bn, government spending on the environment $4.02bn Thailand - GDP $540bn, government spending on the environment $0.32bn The Indonesian government has also reacted to environmental concerns by moving its capital city. Nusantara is set to replace Jakarta as the capital in 2024. The new city is expected to cost $32.5 billion to build. Besides creating employment, this city could also lessen inequality between Indonesia’s different regions. Jakarta is on Java, which is a wealthier region than Kalimantan. Nusantara, the new capital, will be situated in the Kalimantan region. In addition, the government plans for the new capital to be carbon-neutral. However, critics of the project argue that the expense is excessive. They also say the scheme will favour only a small number of rich and influential people.

Living standards

Once a fishing village, Shenzhen is now among China’s wealthiest cities and has a large secondary sector. This change was made possible because nearby villages pooled resources to improve their area. For instance, they built new housing to rent to migrants who work in the city’s factories. Even so, housing supply has not kept pace with demand, so the government is now imposing a maximum price on housing.

The nature of the economic problem

Since 2020, revenue in the video gaming industry has been greater than revenue in the film industry. The most rapidly expanding section of the video gaming industry is mobile gaming, which substitutes for console gaming. Young people are spending many hours on video games and some governments worry that this could harm their health and educational progress. For that reason, regulations have been introduced to cut the amount of time young people spend playing these games.

Market failure

During 2021, the US recorded a deficit in trade in goods on the current account of its balance of payments. The US contains many firms across a broad variety of industries. Import tariffs are applied to shield some of those industries. That year, the US government also increased spending on healthcare to $797bn, which had an impact on many industries in the country.

Globalisation, free trade and protection

During 2020, spending on vaccine production was extremely high. A proposal existed for a large vaccine producer to horizontally merge with another firm, yet the proposal was dropped. That was unsurprising because a similar merger between two firms in the same industry had collapsed the year before. Even so, most firms in this industry are still achieving their targets and also generating many external benefits for the wider economy.

Market structure