May/June 2019

Which item would an economist consider to be an example of the factor of production capital?

The factors of production

Which factor has the greatest influence on the amount a family saves?

Households

The table presents how real incomes changed for several occupations from 1985 to 2015. What can be concluded from the table?

Workers

A large bakery purchases a flour mill. What type of integration is this?

Firms

Why do very large firms dominate the energy supply industry in many economies?

Market structure

The diagram illustrates the fixed costs, variable costs and total costs of a firm. Which distance corresponds to the firm’s fixed costs?

Firms' costs, revenue and objectives

An entrepreneur purchases a workshop for $\$200\,000$ in order to produce plastic boxes. During the first year of trading, he spends $\$70\,000$ on materials, hires ten production workers who are paid according to output (piece rate) at a total cost of $\$80\,000$, and acquires two delivery vehicles costing $\$10\,000$ each. What are his total variable costs?

Firms' costs, revenue and objectives

A government raises the income tax rate so that it can finance additional transfer payments, such as cash benefits for poor people. What has to happen as a consequence of this?

Fiscal policy

In a country, the standard rate of Value Added Tax (sales tax) is $20\%$. Different consumers who purchase the same product must each pay the same tax amount. What kind of tax is this?

Fiscal policy

The diagram illustrates the demand curve $D_1$ and the supply curve $S_1$ for a good. The government puts in place a subsidy to encourage production. What will be the total cost of the subsidy to the government?

The role of government

Which statement regarding changes in the interest rate is correct?

Monetary policy

The diagram represents a production possibility curve (PPC). Why is the curve normally shown in this shape?

Production possibility curve (PPC) diagrams

In Uganda, the inflation rate decreased from $5\%$ in 2014 to $2\%$ in 2015. Which conclusion may be inferred from this information?

Inflation and deflation

Which factor would not raise a country's Human Development Index (HDI)?

Living standards

A country is going through a period of full employment. What is most likely to cause demand-pull inflation to rise?

Inflation and deflation

The table presents the percentage variation from 2015-2016 in gross domestic product (GDP) and consumer prices for a selection of countries. Which country was experiencing economic recession and inflation?

Inflation and deflation

Which policy would be most likely to lower relative poverty?

Poverty

Using the information below, which country is most likely to have the highest standard of living?

Living standards

In a country, the birth rate rose but the population fell. What might have happened to the other factors to lead to this?

Population

The US government decides to lower the quota on a good that it purchases from China. What is likely to happen?

Globalisation, free trade and protection

Which definition best describes a foreign exchange rate?

Foreign exchange rates

In 2013, the European Union (EU) imposed a 48% tariff on inexpensive Chinese solar panels because their low price was due to subsidies from the Chinese government. Which argument for protectionism was the EU applying?

Globalisation, free trade and protection

Over recent years, more golf courses that require large amounts of water have opened in China. What could be the opportunity cost of this?

Opportunity cost

Floods damaged a large quantity of the country’s agricultural products. What is likely to have happened to the price of agricultural products and the volume of imports of agricultural products?

Supply

Which situation shows a mixed economy?

Mixed economic system

What gives rise to market failure?

Market failure

A newspaper stated that ‘the world market for coffee has moved back into equilibrium’. Which situation would support this claim?

Price determination

The table sets out the demand schedule for a good at a range of prices. The current market price for the good is $10$. If the price rises by $20\%$, how will quantity demanded change?

Demand

Carlos has been given a new role at a large multinational company. He is unsure whether to take the job. What non-wage factor might he take into account?

Workers

In contrast to the UK and US, a large share of the stocks listed on the stock exchanges of China and Russia belongs to state-owned enterprises. What conclusion about China and Russia can be drawn from this information?

Mixed economic system

A government wants to raise agricultural output. It supplies farmers with the equipment needed to irrigate their fields. Which factors of production are contributed by the farmers?

The factors of production

What is the single most significant factor that influences how much a family saves?

Households

The table illustrates how real incomes changed for several occupations between 1985 and 2015. What conclusion can be drawn from the table?

Workers

What is the key distinction between capital-intensive production and labour-intensive production?

The factors of production

What does the term diseconomies of scale mean?

Firms' costs, revenue and objectives

The diagram illustrates a firm’s fixed costs, variable costs and total costs. Which distance shows the firm’s fixed costs?

Firms' costs, revenue and objectives

A businessman purchases a workshop for $200000 in order to produce plastic boxes. During its first year of trading, he spends $70000 on materials, hires ten production workers who are paid according to output (piece rate) at a total cost of $80000, and buys two delivery vehicles for $10000 each. What is the total of his variable costs?

Firms' costs, revenue and objectives

Which factor is most likely to lead to a higher inflation rate in an economy?

Inflation and deflation

The government raises taxation to finance a rise in spending on training schemes run by the government. Which policy combination does this describe?

Fiscal policy

The diagram illustrates the impact of a tax being imposed on a product. Which area shows the part of the tax paid by consumers of the product?

Price changes

Why may a government choose to subsidise a steel industry with high costs?

The role of government

The diagram illustrates a production possibility curve (PPC) for an economy producing both capital goods and consumer goods. At which point would this economy have the greatest potential for sustained long run economic growth?

Production possibility curve (PPC) diagrams

The table sets out possible relationships between the rate of interest and other economic variables. Which sequence is most likely?

Monetary policy

Explain why the Human Development Index (HDI) is a more effective way of measuring living standards than GDP per head?

Living standards

What is meant by frictional unemployment?

Employment and unemployment

During January 2016, a country's inflation rate fell from 3% to 2%. By March 2016, inflation had risen to 4%. What change occurred in the price level in January and in March?

Inflation and deflation

What normally happens when a developing country develops further?

Differences in economic development between countries

Using the information provided, which country is most likely to have the highest standard of living?

Living standards

In a country, the birth rate rose but the population fell. What changes in other factors could have caused this?

Population

The US government chooses to cut the quota size for a good that it imports from China. What outcome is most likely?

Globalisation, free trade and protection

The global demand for oil is price-inelastic and oil is purchased in US dollars. If the price of oil were to drop sharply, what effect might this have on the exchange rate of the US dollar?

Foreign exchange rates

Which is the most likely disadvantage of international specialisation?

International specialisation

In recent years, more golf courses, which require large amounts of water, have opened in China. What could be the opportunity cost of this?

Opportunity cost

A substantial proportion of a country’s agricultural products was damaged by floods. What is likely to have happened to the price of agricultural products and to the volume of imports of agricultural products?

Supply

Cuba is introducing free market reforms. What is one likely advantage of this?

Market economic system

An airline improves its service by using larger aircraft. The airline says this will cut catering waste and reduce carbon ($\text{CO}_2$) emissions per passenger journey, even though fares may increase. State a private cost and an external benefit of this decision?

Market failure

What conclusion can be drawn from the demand curve for the product shown in the diagram?

Demand

A mobile (cell) phone operator raises the charge for calls made on its network. Following the price rise, the operator’s revenue decreases by $10\%$. What is the price elasticity of demand (PED) for the mobile operator’s service?

Price elasticity of demand (PED)

How does specialisation raise employees’ productivity?

Firms and production

Over the last few years, some central banks have cut interest rates to under $1\%$ per year. What is the aim of this monetary policy?

Monetary policy

UBI is a plan under which a government gives a payment to everyone, whatever their personal situation. A scheme like this can assist several groups, including the sick and the old. In 2016, the Indian government was considering UBI as an alternative to its present system of state benefits. A politician in Costa Rica suggested a UBI of $337.5. Finland began a two-year trial of a version of UBI in 2017. A guaranteed minimum income could support some poor people who do not currently receive state benefits and could also lessen inequality. In many countries, income and wealth inequality is rising. For example, in Russia 16% of the population live below the official poverty line and 10% of the population own 87% of the country’s wealth. State benefits are comparatively low in Russia and the country has one income tax rate of 13%. One reason for the widening gap between the rich and the poor in Russia has been the impact on prices and profits caused by the privatisation of several state monopolies. Differences in annual average incomes (annual GDP per head) between countries can influence life expectancy as shown in Table 1.1. In Finland, a country with an average monthly income per head of $3500, the trial UBI is $600 per month. This does not meet everyone’s needs in a country with high prices, high tax rates and periods of very cold weather. In India, the average monthly income per head is almost identical to Finland’s UBI. A UBI could support the unemployed, including those who are only temporarily unemployed. Governments welcome lower unemployment because it raises output and allows governments to cut spending on state benefits for the unemployed. Governments could then raise spending in other areas, including education and healthcare.

Poverty

The Saudi Arabian government is promoting the expansion of the private sector. It is a low-cost producer of oil, yet its exports to South Africa have declined lately. South Africa uses a floating foreign exchange rate, although its central bank has recently attempted to stop a sharp drop in that foreign exchange rate.

Foreign exchange rates

In February 2017, Europe faced a temporary shortage of fresh vegetables because of bad weather. During that period, the markets for several vegetables, such as broccoli and lettuces, were not in equilibrium. Food prices usually vary more than the prices of manufactured goods and services, and these variations affect the inflation rate.

Price changes

A change in the supply of enterprise can lead to the creation of new firms. In 2016, a theme park in Hong Kong recorded a loss as visitor numbers dropped by 9%. In 2017, the same public limited company opened a second, larger theme park in Shanghai. The new theme park is expected to gain from both internal and external economies of scale.

Firms and production

In February 2017, China’s central bank increased the interest rate. Its aim was to cut borrowing and slow the expansion of the money supply, although it was concerned that a higher interest rate could lower the nation’s economic growth rate. This change in interest rate is likely to have added to the workload of skilled commercial bank workers.

Monetary policy

A number of book publishers are based in Pakistan, and this group includes multinational companies (MNCs). They hire several categories of specialist employees. Some of these specialists estimate the price elasticity of demand (PED) for the books produced by their firms. There is disagreement over whether certain books ought to be subsidised by the government.

Firms

Global unemployment was forecast to rise by more than two million in 2017. However, unemployment rates differ from country to country. To bring unemployment down, some governments apply fiscal policy measures, while others use supply-side policy measures. Trade protection can also have an effect on the unemployment rate.

Employment and unemployment

At the beginning of February 2017, the Japanese government launched its ‘Premium Friday’ scheme. Under this policy, employers are encouraged to let workers leave at 15:00 on the final Friday of each month without any reduction in pay. The Japanese government wants people to work fewer hours. One aim is to improve workers’ health and possibly their productivity. Fig. 1.1 shows average hours worked and productivity (GDP per hour worked in US $) in six selected countries. Almost one quarter of Japanese workers work more than 50 hours a week, and some do more than 25 hours overtime a week. The average Japanese worker uses only half of their paid holidays. Nearly 20 years of low economic growth and deflation have created a feeling of job insecurity. Trade unions in Japan have been focusing on trying to secure shorter working hours. The government believes that fewer working hours would give people more time to bring up a child and care for elderly relatives. Japan’s birth rate has dropped every year for the last 36 years, and it has fallen faster than the death rate, leading to a smaller population. The government hopes that extra leisure time will encourage higher consumer spending. Greater consumer spending would support Japanese firms and reduce the risk of deflation returning. The first reaction to Premium Friday was disappointing. By the end of February 2017, only 4% of Japanese workers left early. In the longer term, however, the scheme may prove more successful. This is because unemployment in the country had fallen, with only 2 million out of a labour force of 66 million being unemployed at the end of February 2017. Low unemployment increases job security and usually pushes wages up. In Japan’s case, however, the higher demand for labour has been matched by a larger supply. Some of this extra supply has come from migrant workers, but a greater share has come from more Japanese people working beyond retirement age and more women joining the workforce.

Workers

The car and tyre markets are closely linked. The five biggest tyre companies once produced 66% of all tyres. Since more than 250 Chinese firms entered, the combined global share of the top five has fallen to below 50%. This has also altered the price elasticity of demand (PED) for tyres sold by individual firms. Some of these businesses are state-owned enterprises and others belong to the private sector.

Market structure

A worldwide surplus of steel existed in 2017. During mid-2017, the US government was considering the use of tariffs on steel imports to shield its declining steel industry. Inexpensive imports from other countries were cutting jobs in the US steel industry. Changes in the US employment pattern were also being influenced by improvements in education.

Globalisation, free trade and protection

During March 2017, Peru suffered flooding and the strongest winds seen in decades. Roads, bridges, houses and capital goods were ruined. The resulting damage is expected to reduce Peru’s Human Development Index (HDI) and economic growth rate. In 2016, Peru recorded an economic growth rate of 4%, which was above the growth rate of the USA.

Production possibility curve (PPC) diagrams

Moldova is Europe’s poorest economy, and a large share of its population lives in poverty. Its economy is mostly agricultural, with many small farms, and its retail sector is made up largely of small shops. The government has introduced a variety of policies, including supply-side policy, to raise the economy’s performance. These measures have largely worked. For example, unemployment has decreased.

Supply-side policy

In a mixed economy like Portugal’s, the state takes action in the economy. Government intervention may be used to remedy market failure and to meet economic objectives, for example keeping inflation under control. In 2017, one-fifth of Portugal’s population was in poverty, and government spending rose.

Mixed economic system

In most countries, the price elasticity of demand (PED) for sugar is below 1. During 2017, sugar prices decreased. Even so, the decline was smaller for specialised, higher quality sugar produced in places such as Mauritius than for the average world price. Efficient producers, including some farmers in Brazil with low fixed costs of production, were also less heavily affected by the price drop.

Price elasticity of demand (PED)