May/June 2016

The diagram depicts an initial production possibility curve, $\text{PPC}_1$. What might lead to the movement of the production possibility curve from $\text{PPC}_1$ to $\text{PPC}_2$?

Production possibility curve (PPC) diagrams

Within the diagram, $D_1D_1$ and $S_1S_1$ show the demand for labour and the supply of labour. $W$ represents a legal minimum wage. An inflow of immigrant labour increases the supply of labour, so the supply curve moves from $S_1S_1$ to $S_2S_2$. How many people will be employed if the minimum wage legislation is then removed?

Workers

The table illustrates how three people allocate their income. For these three people, what is the most probable ranking of income, from the highest income to the lowest income?

Households

In what way can a firm ensure that it earns the highest possible profit?

Firms' costs, revenue and objectives

What feature is shared by a firm in perfect competition and a monopoly?

Market structure

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

Firms and production

The diagram illustrates the demand for, and supply of, places in independent (private) schools that charge fees. The equilibrium point is X. The costs faced by independent (private) schools increase. In addition, a report is published saying that Government schools obtain very good examination results. What is likely to be the new equilibrium point?

Price determination

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

Fiscal policy

What does the term expansionary monetary policy mean?

Monetary policy

A government chooses to alter two of its taxation policies. It cuts the petrol tax and increases the food tax. How will these changes influence how regressive the taxes are?

Fiscal policy

The table presents a government’s receipts from taxation. What is the total revenue raised through indirect taxes?

Fiscal policy

A rise in the number of manufacturing robots in the car manufacturing industry indicates an increase in the amount of which factor of production?

The factors of production

Gross Domestic Product (GDP) is divided by what to calculate GDP per head?

Living standards

Who becomes worse off in a period of deflation?

Inflation and deflation

The table provides data on three economic indicators for four countries. What conclusion can be drawn from this data?

Differences in economic development between countries

What should occur when a country undergoes economic growth?

Economic growth

Why might the figure worked out for a developing country’s Gross Domestic Product be inaccurate?

Economic growth

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

Living standards

Predictions suggest that by 2050 China will have 53 million fewer children under 14, 100 million fewer workers and 234 million more people aged over 60. What is the likely effect in China of these changes?

Population

What factors could make Mauritius’s current account balance improve?

Current account of balance of payments

A country states that it wants to strengthen its trade protection policies. What could that include?

Globalisation, free trade and protection

It has been proposed that every country that manufactures arms should prohibit weapons exports and reduce output so as to lessen the chance of war. What would happen if this took place?

Globalisation, free trade and protection

The diagram illustrates the options available to an individual for leisure and earnings. What is the opportunity cost to the individual of the additional earnings when moving from position X to position Y?

Opportunity cost

70% of the 10 million kilograms of tea produced in India is exported. The largest purchasers are the UK, Japan, and Germany. Wholesale prices rose $10\%$ in 2013 because a strike restricted supply. How would these circumstances be recorded in international trade accounts?

Current account of balance of payments

A government imposes a tax on car production. What is most likely to fall?

Supply

In a market economy, which two economic institutions are present?

Market economic system

Planners aim to enlarge a large retail shopping district in a city. It is believed that the plan would generate hundreds of jobs, make the shops profitable, but lead to severe traffic congestion. Which economic concepts are directly involved in this statement?

Market failure

The diagram illustrates the market for rice. What might have led the equilibrium price to increase from $OP_1$ to $OP_2$?

Price determination

What would a trade union ordinarily be expected to provide for its members?

Trade unions

What is the normal reason that citizens have confidence in their country’s banknotes?

Money and banking

Which economic concept must be operating when a country moves along its production possibility curve?

Opportunity cost

Within the diagram, $D_1D_1$ and $S_1S_1$ show the demand for labour and the supply of labour respectively. $W$ denotes a legal minimum wage. An inflow of immigrant labour makes the labour supply curve move from $S_1S_1$ to $S_2S_2$. How many people will be employed if the minimum wage legislation is then abolished?

Workers

The table illustrates the way in which three people use their income. For these three people, what is the most probable ranking of income, from the lowest income to the highest income?

Households

In what way can a firm make sure that it earns the highest possible profit?

Firms' costs, revenue and objectives

Two firms agree to combine their operations. What must be the outcome?

Firms

The table indicates 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

By 2014, government subsidies given to the Chinese steel industry resulted in 200 million tonnes of surplus output. The diagrams illustrate the market for Chinese steel. Which diagram would show the situation after the subsidy but before the market had adjusted?

Supply

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

Fiscal policy

A government sets income tax at a rate of $0.20$ for each dollar earned. What term describes this form of taxation?

Fiscal policy

A government brings in legislation intended to cut back the restrictive practices used by trade unions. What would be the most likely aim of this legislation?

Trade unions

The table displays a government’s tax receipts. What is the total amount of revenue generated by indirect taxes?

Fiscal policy

The diagram illustrates the options available to an individual in terms of leisure and earnings. The person chooses a job that allows more leisure time. What is the opportunity cost for the individual when moving from position Y to position X?

Opportunity cost

Which sign would most clearly show that an economic boom has begun?

Economic growth

A nation has a very high Gross Domestic Product and a small population, yet its standard of living is low. What could explain this low standard of living?

Living standards

The table provides data on three economic indicators for four countries. What conclusion may be drawn from this information?

The macroeconomic aims of government

The weighting assigned to a product in the consumer price index was raised. What is the most likely reason for this change?

Inflation and deflation

China is regarded as a developing country. In recent data, the shares in its Gross Domestic Product (GDP) were agriculture 10%, construction 13%, manufacturing 32% and services 45%. Which contribution to GDP normally falls first as countries progress to a higher level of development?

Differences in economic development between countries

Some people believe that the debts and interest payments owed by the world’s poorest countries ought to be cancelled. What could be a disadvantage for these poorest countries if this happened?

Differences in economic development between countries

Which country is most likely to have the highest standard of living?

Living standards

What could make the balance on Mauritius’s current account improve?

Current account of balance of payments

A country states that it wants to strengthen its trade protection policies. What could that involve?

Globalisation, free trade and protection

It has been proposed that every country making arms should prohibit the export of weapons and reduce production so as to lower the likelihood of war. What would happen if this were to take place?

Globalisation, free trade and protection

Which option best illustrates the existence of the economic problem?

The nature of the economic problem

At present, the US trades oil with the UK. If new oil and gas deposits are found in the US, its oil imports will fall while its oil exports will rise. Starting from the original equilibrium position of X, which letter shows the new equilibrium position for the US exchange rate?

Foreign exchange rates

A government imposes a tax on car production. What is likely to fall?

Supply

Which two economic institutions are most likely to be found in a market economy?

Market economic system

Developers plan to expand a large retail shopping district in a city. It is believed that the scheme would generate hundreds of jobs, make the shops profitable, but lead to severe traffic congestion. What economic concepts are directly involved in this statement?

Market failure

The diagram illustrates the price of a product in year 1 and year 2. Which changes in demand and supply match the price movement in year 2?

Price changes

A trade union makes an agreement with employers in an industry about a ‘closed shop’ policy. What happens under this arrangement?

Trade unions

Under what circumstances will a central bank act as lender of last resort for a commercial bank?

Money and banking

Car production is changing. Until quite recently, car manufacturing firms had the strongest market power. At the moment, though, firms making car parts are becoming more powerful. The markets for both cars and car parts include a relatively large number of firms ranging from very large to small. In 2014 the market was led by sixteen major car firms, each of which sold more than one million cars a year. In that same year there were ten major car part firms and these were gaining more power over the car producers. The world’s largest car part supplier by revenue says that it supplies at least one part in every car sold across the world. The firm has expanded through mergers and is moving towards full control of the market. It is trying to build high barriers to entry and become the only producer. The ten largest car part firms made up 63% of total car part output in 2013, producing US$250 billion of car parts in that year. These ten firms now have the capacity to build 85% of a car’s internal systems, leaving the car manufacturing firms to make little more than the engine. Car production is rising in a number of developing countries but falling in some developed countries. Car manufacturing increased in the UK between 2013 and 2014, but the industry had already been facing problems before 2013. In 2008 the average wage of car workers fell. In that year the UK was in recession. Real wages in the UK car industry for the lowest paid workers also declined after 2008 and the number of workers employed fell between 2008 and 2012. This was despite output per worker increasing, partly because some less skilled workers lost their jobs and the industry replaced some of these workers with capital equipment. Car buyers often borrow money from commercial banks to pay for their purchases. In some cases buyers use their savings, which may be taken out of commercial banks, to buy cars. The behaviour and performance of car firms are affected by the economic system of the country in which they produce. In countries with a market system there is likely to be greater consumer sovereignty. Car firms in such countries may be more likely to innovate, introducing new methods of production and developing higher-quality products.

Market structure

Burundi is a country in Sub-Saharan Africa. In 2013 the government of Burundi introduced VAT, an indirect tax, while cutting corporation tax (the tax on firms’ profits), from 35% to 30%. The United Nations has urged Sub-Saharan African countries to raise their tax revenue so that they have more funds available to spend on reducing poverty. However, there is disagreement about whether adding more taxes or removing some taxes is more beneficial for an economy.

Fiscal policy

In 2014, the Canadian economy was, on the whole, performing well. The value of money was largely being maintained and unemployment was declining. Even so, the country had increasing household debt and a deficit on the current account of its balance of payments. In 2014, the Canadian Government wanted exports to rise while accepting that this could affect the exchange rate.

Foreign exchange rates

Stronger demand from China has pushed New Zealand into the position of the world’s largest exporter of dairy products. Its milk exports to China rose by 45% in 2013. Since 2000, more than 300 000 hectares of land in New Zealand have been switched from other farming and forestry uses to dairy production. The growth in milk output has reduced its average cost of production, and changes in production techniques have influenced the price elasticity of supply of milk.

Opportunity cost

During January and February 2014, pressure mounted on the UK Government to construct more flood defences. Flooding damaged homes, factories and other resources, and some were destroyed. It was argued that state intervention was necessary in this situation because there was evidence of market failure.

Market failure

In 2014, platinum miners in South Africa carried out the longest strike ever recorded. The action involved 70 000 miners from a total workforce of 200 000 in the sector. Among them were migrant workers from neighbouring countries, who had expanded the country’s labour force. The strike caused the world’s three largest platinum producing firms to lose US$1.4 billion and cut South Africa’s platinum exports.

Trade unions

In 2014, Cuban doctors received pay increases that lifted their salaries substantially. This meant that doctors’ earnings became more than twice those of nurses. Cuba is putting more resources into both medical care and tourism, which is changing the country’s production possibility curve. Living standards are rising in the country, although the increase is slower than in some other nearby countries.

Production possibility curve (PPC) diagrams

There are worries that chocolate prices could climb sharply over the next few years. This is being driven by growing demand for chocolate, especially in emerging countries, together with supply difficulties in the countries that grow cocoa beans. Cocoa beans, which are the key ingredient in chocolate, are produced mainly on the west coast of Africa by small farms that rely on labour-intensive methods. In 2012 Côte d’Ivoire (Ivory Coast) supplied 37% of the world’s output of cocoa beans, with Indonesia next at 13%. Côte d’Ivoire is increasingly recognised for providing high quality cocoa beans. Focusing on the product that the country’s resources suit best has raised output there. Gross Domestic Product per head increased to US$1240 in 2013. However, some farmers and farm workers still live on less than US$2 a day. In Indonesia, the income of most cocoa farmers and farm workers rose as the country’s average income increased between 2013 and 2014. Their purchasing power was nevertheless reduced by the consumer prices index rising from 108.0 in 2013 to 115.2 in 2014. Although healthcare in Indonesia is improving, with more doctors per head, the government is trying to improve education standards. Problems facing cocoa bean producers include an ageing labour force, and the industry has difficulty attracting younger farmers and farm workers. The industry also repeatedly suffers from pests and diseases, including black pod disease. Meanwhile, people in Asia, particularly China, are eating more chocolate and drinking more chocolate drinks. People in the United States of America and the European Union are also consuming more chocolate, although growing concerns about the health effects of eating large amounts are starting to affect demand. For many people, though, chocolate is addictive. Chocolate producers aim to exploit this by widening the difference between revenue and costs. Most chocolate producers are from developed countries and most are public limited companies trying to satisfy their shareholders. These producers use their market power to keep the price paid for cocoa beans fairly low while the price charged to consumers who buy their chocolate is kept relatively high.

International specialisation

In 2013, the Mexican Government was thinking about introducing a sales tax of one peso per litre on the selling price of fizzy drinks. The Government wanted to reduce fizzy drink consumption because people in Mexico drink 40% more fizzy drinks per person than in the United States of America. Several multinational fizzy drinks companies said they would leave the country if taxes were raised.

Market failure

It is projected that India’s working-age population aged between 15 and 64 will grow by 125 million from 2015 to 2025, and then by a further 103 million in the decade after that. Naturally, not every person of working age will have a job or be looking for one. Shifts in population and in the labour force influence how successfully a government can meet its economic aims.

Population

Tuk-tuks, which are three-wheeled motorised rickshaws, are used in several countries. India is the biggest producer of this vehicle. India’s largest tuk-tuk manufacturer competes with domestic firms and with imported tuk-tuks. The industry is becoming more capital-intensive and more competitive, although it is still not close to perfect competition.

Market structure

In July 2016, the Sveriges Riksbank, Sweden’s central bank, reduced the rate of interest to 0.25%. The Swedish economy was facing deflation, with the weighted price index down by 0.2% compared with the previous year. The lower rate of interest decreased the value of the krona, Sweden’s currency, and was predicted to end deflation.

Monetary policy

Bank deposits in Dubai increased by 40% in 2013. An increasing number of financial firms are setting up in Dubai. Expansion in the financial sector is being matched by horizontal mergers among financial companies, and workers are becoming more specialised. The economy is becoming wealthier, yet the economic problem will never be solved in Dubai or anywhere else in the world.

The nature of the economic problem

Each country must decide how to allocate its scarce resources. Several countries are assigning a greater share of their resources to tourism. However, some jobs in the industry are low-paid and provide little employment security. The average age of workers employed, for instance, in hotels is fairly young, even though some older workers have spent their working life in the hotel industry.

The nature of the economic problem