3
CAMBRmvll
'-"'l\'1.IIU"M
11UU
Economics
for Cambridge International A.S& A.level
-----
CAMBRIDGE
UNIVERSITY PRESS
Economics
for Cambridge International AS & A Level
WORKBOOK
Colin Bamford
~~..,
DEDICATED
>TEACHER
L---.-J AWARDS
<
Teachers play an important part in shaping futures.
Our Dedicated Teacher Awards recognise the hard
work that teachers put in every day.
Thank you to everyone who nominated this year. We have been inspired and moved
by all of your stories. Well done to all of our nominees for your dedication to learning
and for inspiring the next generation of thinkers, leaders and innovators.
Congratulations
NewCambridgeSchool,
Colon"bl•
to our incredible winner and finalists!
RBKlnternationlllAcademy,
""'"
For more information about our dedicated teachers and their stories, go to
dedicatedteacher.cambridge.org
UCAMBRIDGE
V
UNIVERSITY PRESS
Building Brighter Futures Together
>Contents
How to use this book
Introduction
Introduction to command words
Basic economic ideas and resource allocation (AS Level)
Scarcity, choice and opportunity cost
Economic methodology
Factors of production
Resource allocation in different economic systems
Production possibility curves
Classification of goods and services
The price system and the microeconomy (AS Level)
7
Demand and supply curves
Price elasticity, income elasticity and cross elasticity of demand
Price elasticity of supply
10 The interaction of demand and supply
11 Consumer and producer surplus
Government microeconomic intervention (AS Level)
12 Reasons for government intervention in markets
13 Methods and effects of government intervention in markets
14 Addressing income and wealth inequality
4
The macroeconomy (AS Level)
15 National income statistics
16 Introduction to the circular flow of income
17 Aggregate demand and aggregate supply analysis
18 Economic growth
19 Unemployment
20 Price stability
5
Government macroeconomic intervention (AS Level)
21 Government macroeconomic policy objectives
22 Fiscal policy
23 Monetary policy
24 Supply-side policy
6
International economic issues (AS Level)
25 The reasons for international trade
26 Protectionism
27 Current account of the balance of payments
28 Exchange rates
29 Policies to correct imbalances in the current account of the balance of payments
7
The price system and the microeconomy (A Level)
30 Utility
31 Indifference curves and budget lines
32 Efficiency and market failure
33 Private costs and benefits, externalities and social costs and benefits
34 Types of cost, revenue and profit, short-run and long-run production
35 Different market structures
36 Growth and survival of firms
37 Differing objectives and policies of firms
Government microeconomic intervention (A Level)
38 Government policies to achieve efficient resource allocation and correct market failure
39 Equity and redistribution of income and wealth
40 Labour market forces and government intervention
9
The macroeconomy (A Level)
41 The circular flow of income
42 Economic growth and sustainability
43 Employment and unemployment
44 Money and banking
lO Government macroeconomic
intervention (A Level)
45 Government macroeconomic policy objectives
46 Links between macroeconomic problems and their interrelatedness
47 Effectiveness of policy options to meet all macroeconomic objectives
11 International economic issues (A Level)
48 Policies to correct disequilibrium in the balance of payments
49 Exchange rates
50 Economic development
51 Characteristics of countries at different levels of development
52 Relationship between countries at different levels of development
53 Globalisation
Acknowledgements
>How to use this book
Throughout this workbook, you will notice recurring features that are designed to help your learning. Here is a brief overview of
what you will find.
LEARNING INTENTIONS
Learning intentions open each chapter. These help you with navigation through the workbook and indicate the important
concepts in each topic. The learning intentions also map to the content in the Cambridge International AS & A Level
Economics Coursebook.
Key skills exercises
These are scaffolded exercises which support your progression through the course and enable you to put into practice what you
have learnt so far. The exercises have been clearly linked to the key skills that you need for economics.
For knowledge and understanding exercises, there will be key content that you need to know and understand.
For analysis exercises, you need to explain why or how something is important, or why or how it is an advantage or
disadvantage.
For evaluation exercises, you are required to make supported decisions, draw conclusions and give recommendations.
Tips are provided throughout this workbook to help with your learning. The tips provide you with additional practical guidance
and advice to avoid confusion and to enhance your understanding of AS Level and A Level Economics.
WORKEDEX\l\lPLES
Worked examples provide you with sample answers (written by the author), in order to help you understand how to respond to
questions using key skills. The answers are annotated with an abbreviated version of the relevant key skills:
[Kl Knowledge and understanding
[A] Analysis
[El Evaluation.
PRACTICE QUESTIONS
These are more demanding questions that provide you with an opportunity to further practise what you have learnt in each
topic.
Improve this answer
This offers you an opportunity to evaluate a sample answer to a question, which has been written by the author. Advice and
guidance are provided in order to help you assess the answer. The relevant key skills are annotated as well.
Your challenge
After completing Improve this answer, you are then asked to apply the advice to your own answer.
You can find the answers to the exercises and practice questions in the digital workbook.
Note: Throughout the text, dollars ($) refer to US dollars, unless otherwise stated.
>Introduction
This workbook supports the Cambridge International AS & A Level Economics syllabus (9708) for examination from 2023. Its
purpose is to support your learning as you progress through your course. By working through the many exercises, you will feel
more confident about what you need to know to be a successful economics student.
The Workbook follows the syllabus in an exact way. Each chapter contains key skills exercises to remind you of the main subject
content. The subject content is then applied to a present day economic issue or problem. Many of these features are drawn from
countries where learners study this course. The questions are for each of the assessment objectives of the syllabus: knowledge and
understanding, analysis and evaluation.
A second feature of each chapter is practice questions. These draw upon the content of the section and allow you to respond to
multiple-choice, data response and essay questions. There is a mixture of these questions in each chapter. In addition, there is a
sample written answer to one question. You are provided with feedback on the quality of this answer and then invited to see if you
can improve it.
Answers to all key skills exercises, practice questions and improved answers are provided in the digital version of this resource
(see the inside front cover for access information). Some answers are supplied in full. Others are in an outline form so that you can
use the summary as the basis for writing your own answer.
As you progress through each chapter, you will realise that economics is not an exact science. Please bear this in mind when
considering the online answers, especially those involving analysis and evaluation.
So, enjoy your study of economics. You will find this workbook to be an invaluable resource. I hope it will help you to succeed.
Colin Bamford
>Introduction to command
words
The command words and definitions in this section are taken from the Cambridge International AS & A Level Economics syllabus
{9708)for examination from 2023. You should always refer to the appropriate syllabus document for the year of your examination
to confirm the details and for more information. The syllabus document is available on the Cambridge International website at
www.cambridgeinternational.org.
The purpose of command words is to make it clear how you should approach answering a question. It is important that you
understand what each command word is asking you to do.
These are the command words used in the Cambridge International AS & A Level Economics syllabus (9708) and in the practice
questions in this workbook. In time and with practice, you will find that you can understand what skills you have to demonstrate
in your answers to particular questions.
Command
word
What it means
Analyse
examine in detail to show meaning, identify You should write an answer that shows how the points in your answer
elements and the relationship between
link together, avoiding unnecessary detail.
them
Assess
make an informed judgement
You should write about both sides of a particular issue and then come
to a supported conclusion about which, if any, is best.
Calculate
work out from given facts, figures or
information
You should give a clear answer that includes the units involved (e.g.$).
Comment
give an informed opinion
You should give a view on a particular issue based on evidence and
not unsupported opinion.
Compare
identify/comment on similarities and/or
differences
You should make sure that your answer really does compare two
things in terms of their similarities and differences and not just state
what these things are.
Consider
review and respond to given information
You should make a brief point that contains some evaluation.
Define
give precise meaning
You should make sure that any definition is correct.
Guidance
Demonstrate show how or give an example
You should clearly show that your answer is drawn on evidence.
Describe
state the points of a topic/ give
characteristics and main features
You should give appropriate knowledge of a particular topic or issue.
Discuss
write about issue(s) or topic(s) in depth in a You should give a balanced account of both sides, for and against, an
structured way
issue or argument.
Evaluate
judge or calculate the quality, importance,
amount, or value of something
You should aim to make a reasoned judgement and include a
supported conclusion on the merits or otherwise of something.
Explain
set out purposes or reasons/ make the
relationships between things evident/
provide why and/or how and support with
relevant evidence
You should write an answer that contains clearly identifiable reasons;
you may have to draw upon data or other information to make your
explanation clear.
Give
produce an answer from a given source or
recall/memory
You should provide an answer from memory or from a source that is
familiar to you.
Identify
name/select/recognise
You should be precise about what you have identified.
Justify
support a case with evidence/argument
You should be confident that your justification is supported by
relevant evidence.
Outline
set out main points
You should write a clear answer avoiding detail.
State
express in clear terms
You should give an uncomplicated yet valid factual statement.
>Unit 1
Basic economic ideas and resource
allocation (AS Level)
>Chapter 1
Scarcity, choice and opportunity
cost
lnthischapterynuwill
explain the fundamental economic problem of scarcity
explaintheneedforind;viduals,firmsandgovernmentstomakechoices
define the meaning of opportunity cost
explain how opportunity cost results from the need to make choices
<·xplain the basic questions of resource allocation
Nidiii
I
Choice
Fundamental economic problem
Needs
Opportunity cost
Resources
Scarcity
Wants
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need lo know and understand:
what the fundamental economic probkm means
why there is a need for individuals, firms and i:ovcrnments to make choices
the mc,ming and signilkancc of o)Jµort,mity cost
why opport,mily cost is a cons.,qu<·nce of the need to make choices
thethreehaskfjuest;onsofresourceallocat;on
Learners sometimes confuse what is meant by a need and what is meant by a want. A need is something that is essential. A want
is something that someone would like to have.
I
Whal is the fundamental economic prnLlcm?
3
Describe the difference between" want ~nd a need
4
Whydoesscarcityoccur?
S
Expla;n why individuals, firms and governments have to make choices
6
D<'finetheterm
7
Describethethreebasicqueslionsofresourceallocation.
'oppmtunitycost'
Analysis
Gm·crnment spending in India, 2014-2020
The Union budget of India for 2019-2020 included measures to improve the rural economy, strengthen agriculture and help
those who arc economically less privileged.
Figure l. l shows the pattern of estimated spending compared to average spending over the previous five budgets
J 3.1%
J 0.3%
A lntere~t payments
B Centrallysponsored schemes
C Transfer to states (grants)
D Subsidy
E Agriculture
F Rural development
G Education
H Health
I Defence
Figure I. I: Government spending in India, 2014-2020
Source:CcntreforMonitoringlndianEconomy(CMIJ:)
The 2019-2020 budget is ;n df'fidt, with government spending more than govf'rnment income
&
Explain why thc Indian government faces a fundumcntal ceonomic problcm when plannin,: a budgct
9
What docs the Indian government need to think aOOut when setting its Ludgct?
10 Explain how opportunity cost can be applied lo the budgcl"ry choices lh.t! have !u be mad,·.
11 Expla;n whkh of the three resource allocat;on questions the Indian government has addressed in its budget
Datu response question
U1inii;th1 data in Figur1 l.l, d11crib1 throe waya in which th1 11tim1t1d 201,-2020 bu~•t
1p1ndinii;i•20H-201,.
h
dilkn
from 1vor11•
Explain possible rc;ison, for these lhrt.-c differences.
Threcd"f".
,cesare.
cxpcnditurc on defence is planned to fall
expenditure on agriculture is planned to increase
cxµ<·mliture on health is plannc·d lo incrc"s<'
IKJ
Essay question
I
lxplo.in ho"' th1 fundamu,tol 1conomic problem akt1
th1probl1no.ofr11ourc11l!ocation.
your family and con1id1r how opportunity coat can bi appli1d to
lmprornlh"er
This is a sample "nsw<'r to <'ssay QI
Th• fund•no.•nl•l •con<.>micprobl1m i• ,·ory import•nt ..,hon •ludyin11c<.>nomic•. lt •f!.;t1 firnu, 1o~•rnm111l1 ;1nd
f•miliQI, .lll f•c• lhQ problum blcu1• r•-.,urcH ar• 1e1rc1 and w•nl1 •nd 11Hd1 u1 unlimit1d [II. Thi1 m•;1n1 choicH
Jn th1 , .. 1 of 111.y
family, th1 inco111.1"''"' roc1iv1 ii limit..:! 1inc1 th1r. 1r1 only 1'1<'0
familJ' m1111bln lldlo •nn incom1 from
1mploym1nt. Our .,.ntl and n11d11r1 m1ny, IO w1h1v110 m1k1 choic11 to mob 1ur1 our limit•\ inoom1 it 1h1r1d in 1h1
bl1t •••y pouibl1 [Al
All of us want more things. l wuuld like a bener mobile device or a newer scooter [Al. Until I slut earning, the"" luxuries
Opportun;ty co1t ii rl1/ln1d n th1 co1t upruood in t1mll nfth1 not hoot 1lt1m1tiT• that io Hcri/lc1rl Jor "°111.1thin11IM
[AJ. Oppornmity coll c1n apply to our famii}' in •11aort1 ofw1y1. our limit..:! in~om1 mun, that 1h1r1i11 nnd ,um for
1roc1ri11 and othor up1nM1 but thor1 i, of11n oth1r money 11ft to ,pond. ld11lly th• dit'for1nt "'''}'' of 1p1ndin1 thi1
•ddition1l mon1y 1hou.ld bi rank..:! in ord1r ofth1ir bln1~t for th1 f1mily. Thi• will 1110"''inform..:! choicu to bi m•d•
[Al.
Your challenge
IH wh•theryou
can imprnv. thi1 1n1,Hr. Th• 1n1w1r conn th• main p1rt1 of th1 qu11tion. The flr1t pu11r1ph i1100d but
the remaindor of th• 1n1"''1n¥ould bln•flt from b•inii; writt•n In 111analytical atyl•. Th• 1n,...,'er ,hould 1110d1fln1 th1
di/Jerone• b•h~Mn ,nn ■ and n1oda. A bitter an .. nr i• 1inn in th• workbook 1n1...,·•ra- but -.rile your■ out flr,t
~
ASAL_Ernn_WB_Chapter_1_Answers.pdf
>Chapter 2
Economic methodology
I~ \l{\J\(,I\H\JIONS
In this chapter you will:
explain why economics ls a social science
differentiate between facts and opinions (positive and normative statements)
explain why economists use the term ceteris paribus
explain when to refer to a time period such as 'short run' , 'long run'
and
'very long run'
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
the difference between microeconomics and macroeconomics
why economists use models
the difference between a positive statement and a normative statement
the significance of the term ceten:5paribus
the difference bet\veen the short run, the long run and the very long run time periods.
l
What is microeconomics?
2
What is macroeconomics?
:l
Explain why economists use models.
4
What is a positive statement?
5
What is a normative statement?
6
What is the significance of the term ceteris paribus?
7
Explain the difference between the short run, the long run and the very long run time periods.
Analysis
What is economics?
In your first economics lesson, you may have had very little idea what the subject was about. You were probably aware that
economics has something to do with ·money' (but the subject is much wider) or even something to do with 'economical'
(again the subject is wider).
The American Economic Association explains the social science of economics:
Why are some countries rich and some countries poor?
Why do women earn less than men?
How can data help us understand the world?
Why do we ignore information that could help us make better decisions?
What causes recessions?
Economics can help us answer these questions.
Economics can be defined in a few different ways. It' s the study of scarcity, the study of how people use resources and
respond to incentives, or the study of decision-making. It often involves topics like wealth and finance, but it' snot all
about money. Economics is a broad discipline that helps us understand historical trends, interpret today' s headlines, and
make predictions about the coming years.
Economics ranges from the very small to the very large. The study of individual decisions is called microeconomics. The
study of the economy as a whole is called macroeconomics. A microeconomist might focus on families' medical debt,
whereas a macroeconomist might focus on sovereign debt*.
What do economists do?
Economists have all kinds of jobs, such as professors, government advisors, consultants, and private sector employees.
Using theoretical models or empirical data, they evaluate programs, study human behavior, and explain social phenomena.
And, their contributions inform everything from public policy to household decisions.
Economics intersects many disciplines. Its applications include health, gender, the environment, education, and
immigration.
Why should I care about economics?
Economics affects everyone' s lives. Learning about economic concepts can help you to understand the news, make
financial decisions, shape public policy, and see the world in a new way.
* Sovereign debt: the amount of money a country'
s government has borrowed
Source: American Economic Association, What is eronomic~? Understanding the discipline
Economists use both simple and complex models to represent real world situations. These models enhance our understanding
of economic relationships and allow economists to make forecasts. Economic models often require just one variable to change
- all other variables remain the same. This situation is called ceteris paribus.
8
Which of the questions in the bulleted list on the previous page can be classified as microeconomics?
9
Which of the questions in the bulleted list on the previous page can be classified as macroeconomics?
10 Explain why all of the questions in the bulleted list on the previous page are nonnative statements.
11 Convert each of the questions in the bulleted list on the previous page into positive statements.
Evaluation
12 Comment on why economics is a social science.
l'H \CJ lC:LOL LSJ JON
Multiple-choice question
I
Which of these best describes the definition of the long run time period in economics?
A
No change can be made to production.
B
All resources used in production can be changed.
C
It is possible to think even further ahead in time.
D Only one of the resources used in production can be changed.
B.
In the long run time period, all resources are variable. A is wrong and does not apply to any of the time periods used in
economics. C could apply to any of the time periods. D refers to the short run [KJ.
This chapter does not contain an
'Improve this answer'
Ii
~
" '
feature.
e
ASAL_Econ_WB_Chopter_2_Answers.pdf
[2l
>Chapter 3
Factors of production
lnthischapteryouwm·
define the meaning offocturs of production: land, labour, capilal and cnrcqnise
e~plain Theirnp'1rtanceofrhe
factorsofpnKlucrinn
describe the rewards to the factors of production
explain the difference between human capital and physical capit"l
cxplainthcdivisionoflabourandspccialisation
in the organisation of factors of production in 21st century economics and as a risk
explain the role of the entrepreneur
taker
Labour
Enterprise
Enlrq>rcncur
fa<:lon;ofprodoc\ion
Land
Low-income countries
Lower middle-income countries
Key skills exercises
Knowledge and understanding
To answer the q,wstions in this chapter, you nc,.-d lo know ,md undcn;land·
whatismcantbyafactorofproduction
the meaning of land, labour, capital and cn!<'rprisc as factors of production
whyfactorsofproductionareimportant
howtheuscoffactorsofproductionisrewardcd
thedifferencebetweenphysicalandhumancapital
theroleoftheentrepreneur.
I
Definetheterm
2
Define
:J
Define "labour" as a factor of production
•factorofproduction'
.
4
Define
S
Define 'enterprise"
6
l>es.cribe the differences be!ween a low-jncome coumry, a lower middle-income country, an upper middle-income coumry
and a high-income country.
7
Explain the difference between physical capital and human capital.
8
Dcfincthcterm
9
Explainthemeaningofsp,,cialisation
land" asafactorofproduction.
'capital"
asa factor of production
asa factorofproduCTion
"economicgrowth'
.
JO Explain the meaning of division of labour.
Analysis
Mauritius: an upper middle-income
eeonomy
11 Identifytwoexamplesof!andinMauritius.
12 Identify two examples of labour in Mauritius
l:J ldentifytwoexamplesofcapitalinMauritius
14 ExplaintherisksfacingentrepreneursinMauritius
Evaluation
1.~ Cons;der how the
lvl~> enrrepreneun,;
have "'1lanise<I rheir husinesStes T<>
minimise risk
Mult.iplc-choicc question
1
Hum"n capit"l i, ufren referred \u us a fom, uf invesrment. Why;, this'
J\
Labour;, required to pt<Hlu.-,.,all goo,h and ,~rvkes
li
Improved human capital can lead to increased economic growth
(;
Human capital is costly like any investment
I)
Top earner~ are able to ;nvest some of their earnings
Essayquestions
2
Explain the difference between human capital and physical capital and consider which is likely to be most important for
an cn(rcprcncur to haw·hcn
g,- ·ub , b" • icss
Fil
I
When writing essays avoid the use of 'J' . Try to make your answers impersonal
Improve this answer
Thisis:os"mpleanswerluessayQJ
Your challenge
yoursuutftrst
~
ASALErnnWBCMpt~r3Answers.pdf
>Chapter4
Resource allocation in different
economic systems
In this chapter you will:
explain d"ci.sion-making in market, planned und mixed economi<.:systems
analyse the advantages and disadvantages of resource allocation in market, planned and mixed economic systems
Asian Tig,n <a>conomy Econornii: system
Ern<c>rging
economy
Markel <a>connmy Market m<c'chanism
Mixed economy
Planned economy
Private sector
Privatisation
Productive resources
Public sector
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
why choices have to be made in any economic system
the mle of the maTkd mechanism in market, planm.><land mixed <.'conomi<.'s
the role of government in market, planned and mixed economics
the role of the private sector and the public sector in market, planned and mixed economies
l
Define the term
'market system·
2
Define the term
'market economy• . Give an example of a market economy.
3
Define the term
'planned economy'
4
Define t.h<a>
term
'mixed <a>conomy". Give ,in ex,imple of,i mix<a>d
economy.
5
Compare the roles of the market and government in:
. Give an example of a planned economy.
market economies
b
planned economies
c
mixed economics.
6
Compare the roles of the private sector and the public sector in a mixed economy.
7
Desai\,(, the tenn
"emerging economy'
. Give an example of an emerging e<:onomy.
Analysis
Poland'
s transformation
toa mixed economy
Poland is one of the fastest growing economies in the world. The country' s transformation
more market-orientated economy began in 1989 with the end of communism.
from a planned economy to a
Before 1989, Poland experienced the problems of most planned economies. Shops lacked supplies of meat, as well as everyday
items such as soap and razor blades. Queuing was an accepted part of daily life. In cities like Krakow, the air was badly
polluted from coal-burning steelworks and from the exhausts of poorly made Russian and East German vehicles
Since 1989, Poland" • GDP hu incroucd byon~r :nl1'. Govflmm<"nt cxixmditure u 1. p<"rcflnt•8" of GDP wu c1timated to be
41~ in 20111,a drop of l0'!li.1incc 20011.Thi• n8uro i1 now very 1imilar to that of the UJC.The tran1formation hu come about
throu1h for•i1n in~Htm1.nt, Poli•h onlr•pr•n1.uni prnp1.r•d to tak• ri•h 11ndth11motiv•tion ofh.rd-workin1 p11opl• k••n to
improY• th•ir ,tandnd ofliYin1. Poland" , •conomic 1rowth it ,l,o \inhd to th• million• of 1.1.lr<JI
in f1,mdin1 from lh•
El.lropean Union (EU).
Th• co,ta oftan•ition to• mor• m.rk1.t •conomy n .. d to b• contid•r•d. ~illiona ofjnb• ha"• h.•n lod from 1t1.l•·OWn•d
fnm,, food m•nl.lf1ctl.lrin1 •nd from h•uy ind1a1triH ,uch u coal, 1IHI ,nd c•m•nt production. llundr•d• ofthouHnd, of
l'oli,h p,opl• hu, mi1at,d to othu l':U col.lnhiH in Huch of• b,ttar !if,
l.lany form.-r migrant• hau no...,,r<"turntld to Poland. Th<"<"Conomyi1 r<"latinly 1tablfl, ll<"Wjob, I.Tflbein1 cnlat<"d and
manufacturin1 producfr,ity hu incroued. It i1 a mtluuro of 11.lcccn that car o,1mcnhip in Poland it at about thfl 11.moJoni u
in Franc<"and Germany.
8
Explain some of the resource allocation problems that Poland had with its pfanned economy
9
F.xplain how it i• 1•iHibl• to 1•11if an •conomy lik• Poland i• b•in1 tanJform•d
Kln:•• hu·• an incr•uin1 rol• in daci1ion-m,kin1
from a pl•nn1.d <1conomylo on• whar, mark1.1
10 Explain why Poland is now a mixed economy.
Analyse how free market forces have helped to increase Poland" s rate of economic growth.
ll
Evaluation
12 Consider the cosls ;md b<a>nefits
of Pofond' s transfonnat.ion to u market <a>conomy.
Multiple-choice
1
CJUCSlion
Which of these is a characteristic only of a pure market economy?
A
Prices are mainly determined by supply and demand.
B
International trade is not encouraged.
C
The governmP.nt should regulate mmµetition in markets
D
The public sector should only provide public goods
Essay questions
1
Com part, thfl way, in \'fhich r.-1oureM u.- allocat"d in a mark flt .-conomy and in a mix.-d tlconomy and con1idM in which
typtl of <"Conomycon1umM•
needs are best provided for
2
Explain how an economy moves from a planned lo a mixed economy and consider whether this can only succeed with
enterprise.
Improve this answer
This is a sample answer to essay Q2.
A planned economy is one that has a strong central government function. The government owns all industries and plans
the allocation of resources [K]. The private sector has little involvement apart from owning small shops and restaurants.
There is therefore no particular place for enterprise. Today, North Korea and to a lesser extent Vietnam arc planned
economics [Kl
A mix"d <"Conomyhu both a markflt and a goY<"rnm.-ntlflctor. Both allocat" rnol.lrctl1 forth<" btln"fit of thflir population,
The 80Vflrnmcnt proYido1 public good1 and 1omfl mflrit 800d1, tllptlci1.lly for tho1tl who l.nl in nc.-d. Th<"r.-may btl a littlfl
1t1.tflowncnhip but mo1t prod.uctivo r1.1ourcn arc own<"dby tho printo ltlctor k,llowing printi11.tion. In mix<"d
oconomic1 th<"rflI.T<"
opportunitic1 kir .-ntcrpri1in8 bu•incu pcopl<" to 1uccccd [A].
Your challenge
SH wh,thuyou
can improu thi1 anl\Hr. lt contain, tom, buic knO\¥l1dg• that i, r,l,Yant to th, qu11tion. Th, 1.n1w1r i1
,hort and lacb d,tail. It would b,n,fit from a dtl1cription of th• proc,11 of movin1 from a plann,d to a mind ,conomy. A f,,,,
.-:u.mpl"' of ,conomi"' to which th.- proc,11 can b.- applifld \'Jonld abo add to th, an11nr" s relevance. The second part of the
qu11tion i1 only dtlalt with nry brifltiy at thfl flnd. Th<"con1idM1.tion of th• import1.nc" of "nt<"rpri•" n"<"d1to be Mpandtld for
thfl 1.n1wer to dtlmon1trat<" Mall.l1.tion 1kil11.A btllt<"r1.n1\'JMi1 gfr.-n in the workbook an1wfln - but writ<"yo uni out nnt.
>Chapter 5
Production possibility curves
ll\l'\l\(
1\11\ll(J:\'-
lnthischapteryouwill
explain the meaning and purpose of a production possibility cun·e
explaintheshapeoftheproduction
increasingopponunitycosts
possibilitycurve,includingthedifferencebetweenconstantopportunitycostsand
analysethecausesandconsequencesofshiftsinaproductionpossibilitycurve
discuss the significance of a position within a production possibility curve.
hidiii
I Productivecapacity
Trade-off
Productionpossibilitycurve(PPC)
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand:
thefeaturcsofaPPC
why a PPC is sometimes referred to as a production possibility frontier
thesignificanceofanypointlocatedon
the PPC
thecausesandconsequencesofashiftin
thePPC
how opportunity cost can be applied to explain the shape of a PPC.
I
OutlinethecharncteristicsofaPPC
2
Why is a PPC also known as a production possibility frontier?
3
What is shown by a point on a PPC?
4
What is indicated by a movement along a PPC?
5
Why might an economy operate from a point within its PPC?
6
Explain why a point outside the PPC is not a possible outcome.
Analysis
Difficult choices facing a lower middle-income country
The production possibility curve in Figure 5.1 shows the choices that are facing a lower middle-income country that is seeking
toincreaseitsrateofeconomicgrowththroughdevelopingabiggermanufacturingsector.
•Y
Milnufactured
goods
~-igure S. l: Production possibility curve
Learners sometimes wrongly label the axes of a PPC diagram. A common error is to label them "Price' and 'Quantity'
can use labels like those in Figures.I, or you could use "Good A" and "Good 8' or any two other named goods
7
. You
ExplainwhatthePPCinFigureS.lshows.
8
ExplainthedifferencebetweenpointsYandZinFigureS.1
9
Analyse the trade-off if the economy moves along the PPC from point X
10 Analyse how an increase in productive capacity in manufacturing affects the shape of the PPC.
An increase in the productive capacity (productivity) in manufacturing is shown by a "pivot' of the PPC from its maximum
point on the vertical axis. This means that more manufactured goods can be produced with no change in resources IA). The
production of agricultural goods is unchanged.
11 Analyse how economic growth affects the position of the PPC.
12 Analyse how a change in employment affects point Z within the PPC.
13 Analyse how opportunity cost can be appli('d to explain the shape of the PPC
Evaluation
14 Considerthestrengthsandweaknessesofthecountry'
spolicytoexpanditsmanufacturingsector.
15 Consider the value and the limitations of th"' PPC model.
Multiple-choice question
I
Figure 5.1 shows a production possibility curve (PPC}.
What would be most likely to cause an outward shift of the PPC?
A
An increase in the General Sales Tax on manufactured goods.
H
lmprovementstothequalityofseedsavailabletofarmers.
C
Moreagriculturallandbeingusedforhousing.
D Anincreaseinthesecondaryschoolleavingage.
Essay questions
I
With the help of a production possibility diagram, explain how governments face increasing opportunity cost when
decidinghowtoallocateresourcesandconsideriftheopportunitycostinvolvediseverzero.
2
Discuss whether enterprise is th(' most important economic reason why the production possibility curve of a country
shifts outwards
Improve this answer
ThisisasampleanswertoessayQ2.
A production possibility cun·e {PPC)shows the maximum level of output that a country can achieve, given its current
resources and state of technology [KJ. These assumptions are important when considering how the PPC of an economy
mightshiftfromitscurrentposition.
Factors of production include land, labour, capital and enterprise. They are the main reasons why the PPC shifts outwards,
resulting in an increase in the maximum level of output of both products. The shift can come alxiut due to significantly
more lalxiur being employed, firms investing more resources in capital equipment or especially for agriculture, a
significant increase in the land available for cultivation to produce marketable produce [A].
ln some respects, enterprise is responsible for making the shift of the PPC happen. Through an entrepreneur, the factors
of production can be organised and put together in such a way to cause a shift outwards of the PPC [A]. This therefore
makes enterprise the most important factor in making the shift happen.
Your challenge
See whether you can improve this answer. The answer needs to be more detailed. The first two paragraphs cover some basic
ideas.Thefinalparagraphistoobrief-itfailstoaddressthekeypointofthequestion(theroleofenterpriseinshiftingthe
PPC outwards). There is little attempt to evaluate. Your challenge is to write tvw additional paragraphs. A better answer is
given in the workbook answers - but write yours out first.
~
ASALEconWB_Chapter_5_Answers.pdf
>Chapter6
Classification of goods and services
lnthi,chaptcryouwill
upbin
lhe meaning ondimportance
of frt,e g<.<.<band private g<.>Ods
(K·onomic· good,)
explainthemeaningandimportanc,,ofpublicgood,
explain the meaning and importance of merit goods and demerit ,;oods
rnalyse how underconsumptionof
analyse how owrcon,umption
Demeritgood
~on-cxd\ldable
meril good,; result,!rom
iml"'rf"'-·t infunnalion
in the market
of demerit gOOO,result., from imperfect information in the marl:ct
Disposableincome
Exdud,.bility
Freegoods
l'n-erider
~on-rival
Pri,otcgoods
Puhlicgoods
f'urnpuhlicgoo<l
lnformationfailme
Quasi-puhlicgood
Mcritgood
Hivalry
Key skills exercises
Knowledge and understanding
thedifferenceb.,1,-.....,nfr....,good,andpri,·ategood,
thecharactcristicsofpublicgoods
therea,,:mswhypnLlicgoodsareprov:ide<lbygownm1ent,
thecharac!eristic,ofmeritgood,
thecharacteristicsofdemeritgoods
thereason,whygovemmenlsseektoregulateuseofdemeritgoods
learnersoftencrmfusenoncxcludableandnonrival.'l'o,woidthi,eonfusion,1hinkofthcdiffercncehywayofancnmple
such a, a localfae ,..,,-vi<:e.lil'erybod)· can use it (non-eJ<dudable) and all will get the same h<,nefit from using it (non-rival).
1
Describ,,thechamderislinofafreegood
2
l)cscrihcthccl1,1r:ietcristicsofaprivatcgno<I
3
Describe
·non-excluJable"
l.lescrik
'non-rival'
inthecontextohpublicgood
inthee<>ntextofapubliegood
r;j,•cthccharnctcristicsofaquasipublicgood
F.xplainwhalismeantbya
'f=rider'
inthecontextofapublicgood
7
Explainlwoexample,ofapublicgaod
8
Describe
9
E.xplainhowinfonnationfoilureappliesloameri!good
"informationfail<ire
lixplaintwoe~amplcsofamcritgoo.-1
10
11 Explainhowinformationfailureapp]ie,toa
"demeritgood
F.xplainlwoexample,ofademeritgaod
12
Analysis
llealthcareexfJ"nditureinAfrica
l'ii;ure6.l showsthc,a>·erageexpcnditurcperhcadonhealthcarcinAfrieointerm,ofLSdollar<andasa
Both1nearnr,sare]owv.·hencompa!"0010,noredewlo{>c"deconon1ies
pcrcrntageofGDP.
Populatlon (2015, thOU!l.inds)
AVQI"~ current tlealth expenditure (CHE) as% of
GDP(2015)
AvQl";ig&current he~lth &xpend;w,e (CHE) per capita
(2015)
'2200
AvQl";,geGDPpercap;ta(201S)
e
Curr&nthe~lth
expeod;ture(CHE)
as%ofGDP
■ Currenthealth
ei,,penditure(CHE)
perc.ipit.i(USS)
Figuro6.1:Curn>nthea!theXj)<"ndilurespercapilaanda,shareofGDP,Africa2000--2015(in$)
rhe ""me i< true for m<>StAti-kan countries, where ea<h-.strapp,cd goYernmcnt< are <truAAling lo meet o huge shortfall in
fundin;;. Tu dos-c the gap, theynrnst look to private capital !oreliew the pr,ssure on o,•n-stretcl1ed government-run facilities.
13 F.xplainhowhealthcan,exl"'nditureinAfricaha,changetlsince2000
llowdocsinformotionfailurcapplyinthcprnvi.,ionofhcalthcarc'
1~
1~ Explain whether the pro,·i,ion of h~:Jthcan, se"-ic~•
b)'
lhe pri,·ate "-'.'lor i, • pri,·ate ~<.><>d.
Applyopportunityco,tlotheneedforAfrieangovemment,toincreasetheirexpenditureonhealtheare
lb
Evaluation
18 Discussthe\J.cnefitsandcoststoindMdualsandtheAfricrnoconomyofha,•jngahealthierpopulation
M11ltiple-choicequestion
1
V>'hich of the><eis=
appropriate n-a.wn for a gu,·emmen! in a middle-income country to fund uni,·er,,ily tuition[,...,,?
·\
Lessgovemmentfundingcanbeallocatedtodefence
ll
Moregraduateswillgoabroadtowork
C
There an- long~r-lerm Lene lit, for the ernnomy such as an increa,00 ,,:onomic growth rate
IJ
There will he a ncgatjw impact on the distrihutinn of income
Essa)·qucstions
1
Explain"·hydemerilguodsareon!ypn-"'id.,Jbytheprivate>1,:lorandt'onsiderwhetherth~privalesecloralone,hould
prn,•idemcritgcxxl.,
2
E.,plainthechara<leri,tic·,ofpurepublit"good,andrnnsiderwhysomegoodsareclassifietla,qua,i-publicguod,
J
E~plainwhyhigherc<Jucationisamcritgoodandconsidccwhetherinafre<:markctthcpri""chargcdrcHoctsthctrvc
,-aluelohighereducation>tudenl>.
L
I
Whyno1buildupalist.ofdifferen1type,ofgoodfromcoun1ric,thatarcknowntoynu'"l'hiswillhclpyoutoundcrstandthc
_ d1ff~rmttype,ofgood
Jrnprovethisans,,cer
rhisisa<amplean"~c,tocssayQ2
A public good;, something that;, provided hythe go>'emmem for the knetit of the people. It has 10 b<, paid for ow of
taxation. An example i, the army in myrnunlry. Other examples are ,tree! light, and public· libraries [K]
TI1cmaretwocharactcristicsastowhythcahovccx•mplc<arcpuhlicgoods.Thcscarccallc<Jnon-riYal•ndnon
exdudable[K].Le!menow~xplainwhateachmeam
Ynucchallen~e
~
~SAL_<con_WB_Ct.:iptcr_6j.rmw,rs.pdl
I
.
>Unit 2
The price system and the
microeconomy (AS Level)
>Chapter 7
Demand and supply curves
In this chapter you will
definelhemeaningofeffectivedemand
~xplaintheimportanceofindi,·idualandmarketd<'lllandandsupply
explainthefactorsthataff«:tdemand
explainthefactorsthataffect,upply
analys.,lhecau,e,ofa>hiftinthedemandcur,·~(D)
analyscthccauscsofashiftinthcsupplyC\lrw(S)
distin~i•h
between a shift in the demand nr supply curve and the movement along these curves
Key skills exercises
Knowledge and understanding
Toanswcrthequcstionsinthischapter,younoo<ltoknowandun<lcrstand·
h,t'c,
·c.cn.v'
•
we 1,·,.,ma,'C'
imli,idualand1n.s.rketsupplycun•..,,;
the reason fur a mm'Cmcnt up and down (along) a demand curve
lhefactoBthataffectthedemandforgood•and..,n,ices
the reason for a mowment up and down a supply curve
thcfactorsthataffcctthcsupplyofgoodsandscrvices
lhecauS<>ofashif!inasupplycun·e
J
Stalewhali,meantLy
4
Statewhatisnwantby
S
Rxplainthedifferencebctwecnnohonaldemandandeffecti,..,demand
6
Desctibe what;,
7
'supply'.
shown b:,.·a demand eun..,.
Des.:ribewhatissho"~lbyasupplycu,w
8
Whatisthc<liffcrcncc\x:twocnnormalgoodsandinfcriorg<:><><ls'
9
Whalcau,e,mo.ementalongademandcurve'
10 Whatcaus"5mosementalungasupplycurve?
11 Kxplainthefoctorsthataffcctthedcmandforgr>OO.,and><rviccs
12 Explainthefactorsthataffectthesupplyofgoodsandoer.-ic<es
Analysis
USconsumerslositllllasteforomngejuke
Theorangejuiceindustryaroundtheworldhadadiilicultye-rin20l7.Theindustryfaceddemandandsupplyconditionsona
scalenote,p<riencedformor,othantenycar<
]
::
'°~
t:: /0 \_
a,34
26
./
24----------0 1 2
2015-16
"'-.........
3
4
S
6
7
2018--19
.,_....,........__
8
9
10 11 12 13
4-weekperiod
Figure 7.1: Retail orange juice so.le, in million, of gallons in the USA, Wl5-16 and Wl8-19
1:1 Analy<ewhythe.,upplyoforangejuicei,un.stableandhowthi,affect<theglobalpriceofornngejuice
14 Analyschowareductioninthepriceoforangejuicei,likel,-toaffectthequantitydemanded
15 Analyse how inc!"<'asing awareness of obesity is likoelyto affect the demand for orange juice in the USA.
Evaluation
16 Comment on what i< lihlyto
17 Di=ss
be the most important '"""'n
whether demand-side
OT
for the declining sales of ornngejuia,
supply-side factoB ate mote important in determining
in the USA
the glob.al price of orange juice
Datarespon!Sequestion
Using the data in Figure7.l,
h
cornpatelheUSsale,oforangejuicebetween
2015-16and2018-19
El<plainffi'Oreasonsforthechan,;esyouhaveidentified.
l'he<ale,oforangcjuie<oin2018-19atecon,is!cntlylowcrthan<.ale,in2015•16IKI
The monthlypatt~mof
h
,ale, in 00th \·ear,; i, ,imilst eNcept for yerio<l Sin 2018-19 [K].
lncreasingconcemsaboutsugarconsumption[K].Theseconcemshavereducedthedemandfororangejuiceasthere
ha,..,be<,nconcern,thatdrinkingtoc,muchofthejuicecanleadlolhc<>n""1ofdiabetcsandobe,ityl,\I
Gwwingcon,umplion
of apple jui~e ant! smO<Jthi~, [K], The>e ptot!uc·l> are substitutes for orang<' juice. An incr~a,e in
thdrdcmondhoslc<ltoofallinconsumptionoforangcjuicclAJ
F.,.-.,,·qu~slions
l
Explainlhefactorsthatarelikelytodetetminethedemandforholiday,lryinlemalionaltouriststoanexoticislandsuc·h
as Mauritius and consider which of these factors is likely to 1:,e most imponam.
lmpn»·elhisanswer
rhi,i,a.,mplc,1nswcrtoc«ayQI
Acconling to economic lhcmy, there arcYariou< factors that determine the demand for a product. I will n<>wli<t the,c and
thenlakeeachoneinlurnloexplainlheirreles·anceintlelenniningthedemant!fotholidapbyintemaLionaltouri,L,lo
Mauritius.Thefactor,;are
pric·eandasailabilityofsubstilulesandc-omplemenl>
foshion,tastc,attit\ldcs[KJ
Mauritius i, an exotic destination ;n the Indian Ocean. I belie,..,, from what I haw read that it mainly attracts tourists from
Ofthes,, foctors, I fed tbatthc last ones (fashion, taste and .11:titu<les)arc going to be the most imp,ortant n,asons why
intemationaltouti,tswanttotakeaholida)'in\lamihu,
rourchallenge
~ ASAI. Ecoo we chapter 7 ~""""""pdf
>Chapters
Price elasticity, income elasticity
and cross elasticity of demand
lnthischaptcryouwill
definetherneaningofpriceela<ticiry,incomeelasticityandcrosselasticityofdemand(PED,YED,XED)
useformulaetocakulatepriceelasticity,incomeelas1icityandcrosselastidtyofdemand
cxplainthcimportanceofrclati,..,perccntagechangcs,thesizcandsignofthccoefficicntinrelationtopriceclasticity,
incomeelasticityandcrosselasticityofdemand
describeelasticityvalues:perfectlyelastic,(highly)elastk,unitaryelasticity,(highly)inelastic,perfectlyinelastic
cxplainthevariationinpriceelasticityofdernandalongth<:lengthofastraight-linedemandcur.·e
analysethefactorsthataffectprice,incomeandcrosselasticityofdemand
analysetherelationshipbetw,...npriceelastkityofdemandandtotalexpenditureonaproduct
discuss how estimates of price, income and cross elasticity of demand can affect decision-making
Cro«ela<ticity of demand (XED} Elastic Elas!icity Income elasticity of demand (YED) Inelastic
lnferiOTgood
Necessitygood
Normalgood
Pcrfectlyelastic
Pcrfectlyinelastic
Priceelastic
Priceelasticityofdemand(PED)
Priceinelastic
Superiorgood
Unitelasticity
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand
the meaning of price elasticity of demand, income elastici!yof demand and cross elasticity of demand
the formulae and how to calculate estimates of price elasticity of demand, income elasticity of demand and cross elasticity of
demand
thefactorsaffectingprkeelastidtyofdemand,incomeelastidtyofdemandandcrosselasticityofdemand
thedifferenceber.o,eennormalgoods,inferiorgoods,necessltygoodsandsuperiorgoods
thedifferenccbcr.o,eensubstitutesandcomplcments
the ways in which a business can make u&eof estimates of price elasticity of demand, income elasticity of demand and cross
elasticity of demand.
Learners often use the wrong formula for calculating cross elasticities of demand. It is useful to remember that this measure
looksa!changesinthepTiceandquantityofrwodifferentgoods.TheformulaeforpTiceelastidtyofdemandandincome
elasticityofdemandusechangesinquantityofonegood
I
Comparetheterms
2
DefinepTiceelasticityofdemandandgiveitoformula
J
Whatisthedifferencebetweenpriceelasticandpriceinela.stic1
'clas!ic'
and "inelastic"
Explainthelhre<!factorsthataffectthepriceelastidtyofdemandforagoodorservice
4
5
DefineincomeelasticityofdemandandgiveitsfoTmula
6
WhatisthediffeTencebetweenincomeelasticandincomeinelastic?
7
Explainhowgoodsaredassifiedinrelationtochangesintheincomeofconsumers
8
Definecrosselasticityofdemandandgiveitsformula
9
How does crnss elasticity of demand differen!iate between a ,mbstitute and a complement>
Analysis
MrPatelownsasmallrestaurantinLahore,Pakistan.Heisincreasinglyconcernedthatsalesoffoodhavebeenfallingsince
heincreasedpTice,afewmonthsago.Hisson,ancconomicsstudent,hasrecentlycollcctcddatarelatingtohisfather"
restaurantaspartofaclassactivity.Hehasfoundoutthefollowinginformation.
l'r~\mus
rupcn)
ruantityofmealsdemandedperweek
1500
s
W'l:illlllt1tlll~:(,
1iiW'lllltlll
11
~ ,._,
0
_
Mr Patel" s son has also estimated that the income elasticity of demand for meals at his father" s restaurant is --0.Sand that
thecTOSSelasticity of demand in relation loa change in pTice of meals al a neighboming restaurant i, ~l-2
10 Calculate the price elasticity of demand for meals at Mr Patel" s restaurant and explain what the estimate means.
11 Explain what Mr Patel' s son" s estimate of income elasticity of demand means
12 Explain what Mr Patel' • son" s estimate of cross elasticity of demand means
Evaluation
13 CommentonthereliabilityoftheelasticityestimatesmadebyMrPatel'
sson
Discuss what use Mr Patel might make of the three elasticity estimates and say which would beof most use to his res!aurant
businessinthelongrun.
14
Notehowthe•••ordingofQuestionslO-l4consistent1yreferstotheclasticitycalculationsas
"estimates" .Thisisbecauseofthc
difficulty of collecting data from two different time periods. Learners sometimes miss this important point.
The estimate of l.S for price elasticity of demand indicates that the quantity of meals demanded at Mr Patel" s restaurant is
price elastic. This means demand is µTice sensitive. Mr Patel' s meals also appear to be an inferior good as the income elasticity
ofdemandisnegative.ThecrosselasticityofdemandestirnateindicatestherearesubstitutemealsavailableataneighbouTing
restaurantlAI.NoneofthisisparticularlygoodnewsforMrPatel[lc].
One possibility might be to reduce the price of meals. A 10%reduction in price would lead to a 15%increase in the number of
meals taken. This would increa&e Tevenue and be likely lo aUTaci some customers from the competitoT IAIThis could be Ti,ky
asitwouldreinforcetheperceptionofMrPatel'
smealsbeingatypeofinferiorgood[E].
The income elasticity of demand estimate will be of mo,\ use in the long nm. lt indicates that Mr Patel should take a CTi!ical
look at his product to make it a normal good that is price inelastic in demand. This should set it apart from his competitor" s
meals(E]
Multiple-choice
I
question
The monthly income of a worker increases from $1000 to $1200. As a result their demand for pizzas incTeases from 5 !o 7
each month
Whichisthecorrcctcalculationandintcrpretationofincomcelasticityofdemand?
Essayqul'stions
I
Explainthefactorsthatcanaffectthepriceela.sticityofdemandforaproductandconsiderwhichoftheseismost
important
2
Explainhowincomeelasticityofdemandcanbeusedtodistinguishbet•••eennormal,inforiorandsuperiorgoodsand
consideranyproblemsofapplying!hiscla«ification
3
Discuss whether knowledge of income elasticity of demand is likely to be more useful than knowledge of cross elasticities
of demand to a government agency that is seeking to grnw its maTke( for international touTists
Jmpro,..-thisan.swer
ThisisasampleanswertoessayQ3.
lncomeelasticityiscakulatedbylookingatthewayinwhichthequantitythatisdemandedrespondstoachangein
income [K). ln this case, if the YEDis positive, the tourist place can expect more tourists when the income 1.,,...,]Tise• l,\I
Crosselasticityisdifferentandisusedtoshowhowthedemandforoneproductisaffectedbyachangeinpriceofanother
,,,
ManyresortsinAsiaattractintemationalvisitors.Thechangeinincomereferredtoisachangeinthe!ouTist"
,own
country,asthisaff<>Ctstheirdisposableincometospendonholidays.Whenthisincreases,theywillreallyliketogoto
places like Bali, Goa and Phuket, all of which represent a newexpeTience compared to where they li,•e, Knowing this
informationwitlhelpthegovcmmcntagcncy[A)
Crosselasticityhelpsalso.Thisisbecauseitcanbeusedtothrowlightonwhichdestinationscompetewitheachother.
Forexamp\e,thcplacesmentionedandCaribbeanislandstendtohavesimilarfaciliticsfortouTists.Governmentagencies
will again find this information useful as it helps them know who they are competing with [A]. If they know all ofthis they
canplanlogrowtheirnumbers
Your challenge
See whether you can improve this answer. The answer is well structured, but it is descTiptive Tathcr 1han analytical. The
answerlacksprecision,inparticularinthewaythetwoelasticityconceptsaredefinedandexplained.Thereneedstobemore
applicationofincomeelasticityofdemandandcro«ela.sticityofdemandtothccon!utofacountryseekingtod.,,.·elop
international tourism. The evaluation is not adequate. Ideally the evaluation should be a dear assessment of which of the two
elasticity measures is going to be most useful to the gm•ernment. A beuer answer is written in !he workbook answers - but
writeyoursoutfirst.
~ ASALEconWSChapt"1"
8M....,..,..,.pdf
>Chapter9
Price elasticity of supply
Jnthischapteryouwill:
define the meaning of price elasticity of supply (PES)
calculatepriceelasticityofsupplyusingtheformula
explain the significance of the relative percentage changes, the size and sign of the coefficient of price elasticity of supply
analyse the factors affecting price elasticity of supply
discuss how price elasticity of supply is related to the speed and ease with which producers react to changed market
conditions.
EIAIIM
I Price elastic supply
Price elasticity of supply (PES)
Price inelastic supply
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
the meaning of price elasticity of supply
the difference between
'price elastic'
and
'price inelastic'
supply
how to calculate price elasticity of supply using the formula
the factors affecting price elasticity of supply
the ways in which producers can make use of estimates of price elasticity of supply.
I
Define price elasticity of supply and give the formula of price elasticity of supply.
2
What is the difference between
3
Explain thrcc factors that affect the price elasticity of supply for a good or service.
"price elastic'
and
"price inelastic'
supply?
Analysis
The supply of solar-powered
water pumps in Kenya
A producer of solar-powered water pumps in Kenya believes that the firm can respond quickly to price changes in the market.
At a price of$1000 each, the producer is willing to supply 200 units. When price suddenly increases to $1250, the producer
supplies220units.
The Kenyan producer" s main competitor is a large German firm. At a price ofSIOOO,this producer can also supply 200 units.
At the new price of$1250 the company is confident that it can supply 300 units.
4
Calculate the price elasticity of supply for the Kenyan producer of water pumps and explain what the estimate means.
5
Calculate the price elasticity of supply for the German producer of water pumps and explain what the estimate means.
6
Explain the difference in the price elasticity of supply of water pumps between the Kenyan and German producers.
7
Explain how this difference affects the ability of Kenyan and German producers to change supply.
8
Analyse how a 10% fall in the price of water pumps would affect the quantities that each producer is willing to supply.
Unlike measures of elasticity of demand, price elasticity of supply is always positive. An increase in price will always lead to an
increase in the quantity supplied. Learners sometimes forget this when writing about price elasticity of supply.
Evaluation
Consider whether the Kenyan producer is correct to claim that it 'can respond quickly to price changes in the market'
9
The data indicate that both producers can increase supply when the price suddenly increases, but to a varying extent. This can
be shown by the calculations for price elasticity of supply. These estimates are 0.4 for the Kenyan producer and 2 for the German
producer [A]. This means that the German producer is able to respond with a greater increase than the Kenyan producer [E].
10 Comment on whether there is anything either producer can do to be more responsive to a change in the price of water pumps.
PH\{ 11{ I Ol l SJJ()'.\\
Multiple-choice question
I
A firm supplies SOObars of chocolate which the firm sells for $2 per bar. Due to a shortage in the market, the price
increases to $2.50 per bar. The firm now sells 800 bars of chocolate. Which of these is the correct calculation and
interpretation of price elasticity of supply?
2.4
price elastic
price inelastic
0.42
price elastic
0.42
price inelastic
Essay questions
I
Most agricultural products have an inelastic price elasticity of supply. Analyse how this affects the market and consider if
anything can be done to make the supply of these products less price inelastic.
2
Explain the factors that might affect the price elasticity of supply of goods from a garment producer in Bangladesh and
consider which factors are the most important.
lmpro\·ethisanswer
This is a sample answer to essay Q2.
The price elasticity of supply (PES) is the term used to measure the responsiveness of supply to a change in the price of a
product. It is a numerical measure that is always positive since it is assumed that a producer will supply more when the
priceincreases[K].
It can be assumed that, unlike an agricultural producer, the manufacturer of garments in Bangladesh will have a relatively
elastic price elasticity of supply [K]. This is because there are certain ways in which the quantity of garments can be
controlled depending upon the market price
The first factor that can make the PES more elastic is through building up stock and holding this in a warehouse [K). Stock
can be released or stored as the market price changes. If there is a surge in demand, the manufacturer has the means to
meet it. In the short term, production can be increased by operating an additional shift or by getting workers to work
longerhours[A].
A second and related factor is the time period. If a firm has spare manufacturing capacity, then this can be quickly put
into production, or removed from production, if market prices change [A]. It will also depend on whether there arc skilled
workerslookingforajob.
There may be a third longer-term option. This would be to increase the size of the business through an expansion in
capacity to produce garments. This will involve new investment and very likely, new technology (A]. It will also require the
manufacturer to be reasonably certain that there will be a future market for these products.
It is not easy to say which factor is likely to be most important (E).This is because each business has its own
characteristics - for some it may be to accumulate new stock, for others it may be to work longer hours [E].
Your challenge
See whether you can improve this answer. The answer is written in a clear analytical style, and covers the topic in an
appropriate way. The definition of PES could be supported by the formula and include a brief explanation of the difference
between elastic and an inelastic supply. The second paragraph could include more detail on how an elastic supply could help
the garment manufacturer. The conclusion includes some evaluation which could be developed further. A better answer is
given in the workbook answers - but write yours out first.
~
ASAL_Econ_WB Chapter_9 Answers.pd(
>Chapter
10
The interaction of demand and
supply
Ln1h;,,h,ptuyouwm
d<fi0<1hem.. ningofeq"il;briumondd;><'<!uilibriurninomofk<
uplainthe>hiftsindemand•nd,upplycu,.,,,.,.oneq"Hibriumprie<•ndquantity
expLtinth<,.lation>llipsb<lwttndiff,rent.,.,k"1s,including:jointd<mond(rompl"""n");•ltttnati,·•d<m•nd
(substitutff);d.triv.dd<m1nd;pnt,upply
•n•lpethefunc<ion,ofprie<inre,o,.,,,.,,llocotion;,ign,llmg(t,..n,rni,.ionofp,.,ference,),ndthcpro,i,ionof
'r,cen!'ve>Cnc v,ng).
Ml'Zlon-m1ax Chong,eindemond Changeinsupply
Equihbrium?l',c,
Equilibriurnquantity i:.c;..,duties
Spe<ilktu
Tnn,miHklnofpttffft'n<tt
Deri,'«ld,m,nd
Dis,quilibrium
Equilibrium
ll><fflti,,.. }oinuupply
Rotioning Sign>Jhng
Key skills exercises
Knowledge and understanding
To,n.,..rth,q,....tion,
in thi,ch,pter,you
.-wmow,nd
uOO<fl.tond:
whatism,antbyequihbriumanddi><'quilibriuminam.orl«t
howshiftsind<,.,..nd•ndsupplyni,vftatfoctequihbriumprie<1ndqu>ntity
th<m.,.ningofcornplom<nts,,ub<titute,,d<rl-id<mond,ndjoint,upply
hcwpric,acu,,,n,llocotiv,"""'h.>nisn,inma<l<cts
sign,.lling•ndthepnn';.\onofinc<mtiDefiMwha1ism<antby"equilibrium"inamork<t.
Defin,whatismoV1tby
"di""<!uilibrium" inoma<ket
l
E1'plainwho1i,m .. ntbyequWbriumpri«•ndequ;!ibriumqu,ntity.
4
F.:<ploin
what ;, m.. n, by• chang, in d<rn,nd ond 1he ,ff«!, on «[Uilibrium pm< or,d qu,ntity.
5
F.:<plainwha1ism,ontbyach.ang,in..,pplyandth<effoct:s0<>equilibriumpri«•ndquantity.
6
&p1a;nthen,...,...f0<ashiftinth<d<mandcutv0
7
F.:<pl.,inlher,,,,,on,for.,hHlinthc,upply""""
Analysis
In,ummer2019,theprkeofovoc,dosooth<worldmarklil>CT9>0dbyover500>inj"""~w«lu.l'igur,J0.l,how,wh,t
h,ppen<dtoth<whole>ol,pri<eof,vocadooprodoc«:linM<J<:iro,1heworkl'
>lorv,t,uppli,r,wh,reproduction'""'
b<li,-lto
"b<>tamaxirnum· .n..,upp1y ... ,o1,.,hitbyofollinprodoctioninth<USA,th<""'ld'
,oe<ondl•'l"""
,upp!...-.Onlb<d<mandsid<,forheol1h"•"""s,th<d<mandf0<avocadosh••incf'tt>Minrecentyean.Thjsislh<ca«in
th<USA,m..,hoflh<EuropeonUnion(EU).th<UKand•mon,:China"
sgrowingmiddl<d ...
I~
Ja.,
Fob
Mar
M•~
Apr
Jun
Jui
t"igun,IO.J;Thewholffal<pric<ofovocodosproduc<dinMexko,20l9(inMexkanp<""I
,,
o,
00 1
Ouantitytr..i.d
t'isun,10.2:Aredl>Clionin,upplyandonincreueindomandforovocadoo
8
F.:<plainwhyth<mm<lisindi,equilibriumotpric<PondquantityQ
9
Analpehowthi,m,rbtconr<tumroequilibrium
1.
I0E>:ploint.,opossibl,reasorufo,-alollinsupplyol,..-ocados.
II Expla;nt"<>"•"""forth<lncreu,indemandforavocado<.
12An•l)'>Otlw,off«:tof•nin<r<•,.indem,ndfo•OYOC"""'onp~•ndq"•n1i,y1nd<d
I~ Anol)'>etlw,elf«:tof•n in<:r<.., in.upplyof0'"0<¥looon pri« ,nd qu,ntitytr>d<d
14 Anolys<,thejmpactonth<El!rnarketfo,,vocodosiftheEUimposesospecilktHonth<importofovocadosfromth<USA.
Evaluation
1$Commentonth•d=-m>t•n«>whenani,,m,a.,in,upplyond,ninc...,...;nd<m,,ndl
11YOCodos1nd<dbutoochangeinpri<e
.. dani"'"'"'"inthequ,ntityof
Dataresponseques1ion
1
U,ingthed.,t,inflg\or<I0.l,de>crib<howthepri«of,vocodo>ch,ngedfromJ•nu,ryroJuly2019
•
b
Cakulat<the•P!"""im>techangeinprie<of,vocadosfromAprilto11,,,ndofJune20l9
has bttn ,,ubstantiol incr,uein th< p,i«of avocados fromJanuoryro)uly20l9jK]. The inc!'<'>S<inpm,
particularly.,«-pfromApril2(ll9IK).Thepm<ofa,'OCodo<w,sttlati....,Jyrubl<lromJ•nuoryto1h<<ndofM>r<h2019
•
Tott,
b
%,h>.t,g,inprioo-
,.,
.....
Z.,'":,;
- :;x JOO%
-
50?.lno,_
Essai•queslions
A....,.nltel..,.i>ionprugrarnmointheUKclaim,dthalfr,..l,,ndgroundtunnori<,...,,..,.,,
prnvidereli,,ffrum,wid<,..ngoofmodi<alp,ol,lem,,includingd<pr•"ion•nd•n•;.,,y.
2
'supo,,-food' th>tmay
•
With the help of• di•gram, •n•l)'>Ohow the d•im i, likely ro h,,,.. olf«ted 1he mork,t fo,- n,mw,,ic ,nd oon,id<r h<;,w
Cfft>in)')Umigh1b<aboutthemorhtou~me
b
Di,cu,.whe<httth<marketmightb<abletore<pondtothiscloim.
Mony-mment<hm,introd~
containinghighomountsol,ugar.
·,uga,wr«·
• =~::~::.
~;:,::~:e,:p:~i•:~~
b
inotd<rto,...tri<tcon,umptionofooftdrinkHndothttprodocts
•/fo:ct>on tlw,mark< of• n,... ,p,cifi< '"" on >Ug>fand con,ider whe!her •n
[)j,c.,.,whe1her•~rtui,th,b,,st,..yofffflrictin,;th<ron,ump1ionof,oftdrinluandotherproducu
ron1>inini,ugar
Wbenukedtou«adiagtam<>l'wt.e,,)')Uil'l<lud<adiagram,matc,,urethatyouref«toth<diogramin,cl<>rway.Thisi,
•nlidfonnof•nol)'ll;.,
lmpro,.:th;.,n,.-.·e,
Thisi••,.mpl<>n,,....,.ro...,yQJ
•
Thed,imthot1unncri<help,m<dic,lpmbl,m,lihd<pre,,;,,,,c,m,fromo...,.nln'P")llr>mme.The,ff«tof1he
TVpl"'Ollr>mmewillhav,bo,ontoinc="'th,dem,n<lthot,omeTVvi<wersh•"'fortunn<ri<.Thi,e,nb,,hownby
llnin<ttt><indemondon1hedi<,-;nLmlKl
Th<effectonthem.>l"Mli,thatth<inctt>S<indemandl>a<resultedin•niocn,a,.inquontitytra<lodinlheot>rket
butpri<•h.u•l<oinc,......i[,II.Th<il'l<ttu,i,shownby•mowme-ntupthcsupplycu,.,..
b
Themul<e<c•nreopondroth<cl•im.Mor<willb<d,,n,nd.t<tbyconsum<rsondthi,willrequir,prod\MOer>of
nofTTl<'ri<toprod"""roor,;nord..-rom..,th<inc,..,.,eindem,OO[Al
In1<nn,of .. wl},th<p,=ur,willb<onfonn<ntogrowmocetunneri<:.Theycon,cllthi,.,fre>ho,theycon...,d
it 10 • foctory for proc,<•ing into no,mmc powd,r. n.. l>f'Oducerun th<n ,upp!y th< m,rkl. It may b< 1h1t th<
l>f'Oduc,roboha>oome"ocbofturmerkthath,..,b,enbuiltuplAI
Ano!httooruid<rationi,wilhdem,nd.Con""""'",.,..Yfir>dth•lbel'.au,..ofth<ir,cre•>Mdrntond,thepri<,of
nortnffiCinctt...,.,lot,r>dismottthontheyc•n•ffor<ltopay(A).Thisinrolv,,,th<pri<,<l.,ticityofdemond.Toi,
cooldb<•ni«uef0<poo<"<"1"fatnili,swhofindth.atsimilarMolthcLa;msan,tn>dtforoth<f,pkttfAJ.
Sttwhe!h<fyouconimproveth<>,.,.._r,,Bothonswer,ar,shortandwrin,nin•de,criptiv,way.N<i1h,r,nsw,rcontain,
=luotiona,requiredbybothql>«tions.lnpart(>),thetti,nocl<aranolysi,of~diagr•m.lnpan(b),thetti,nor,f"""""'
tothepriceelasticityof,upply•ltl>oughthe...,ondparagraphindudnoom<ba•k•upplyron,id<rotion,.Abelter•n<weris
giwnintheworl<bool,;an,w,,.-butwritoyou,.ootfi,.,
la-""'--"''"-we-~_10_,...,,_,,.,
>Chapter 11
Consumer and producer surplus
LE \l\'l
'\G JN lr '\ 110'\S
In this chapter you will:
explain th" meaning and signifi<:ance of consumt:r surplus
explain the meaning and significance of producer surplus
explain the causes of changes in consumer and producer surplus
analyH th" ,ignificanc• of price "luticity of d"mand and ,upply in determining the "xt,mt of chang"• in con,umu
producM 1urplu1.
and
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
what is meant by consumer surplus
how consumer surplus is measured
how consumer surplus is represented on a diagram
what is meant by producer surplus
how product!r surplus is measured
how produ<.:t'Tsurplus is T<.'pres"nted on a diagram.
1
Define the tenn
"consumer surplus'
2
0<.'fine th<.'tenn
"producer surplus'
Analysis
The prices of concert tickets
Figure 11.l shows the price and quantity traded for tickets to a concert.
w
Supply
Demanc
Quantity
Figure 11.l: Supply and demand for concert tickets
3
What is the c,msumer surplus al the equilibrium position P1Q1?
4
Explain what happens to consumer surplus when the price of tickets increases to 1'4.
5
Explain what happens to consumer surplus when the price of tickets decreases to P2.
6
What is the producer surplus at the equilibrium position P1Q1?
7
Explain what happens to producer surplus when the price of tickets increases to 1'4
8
Explain what happens to producer surplus when the price of tickets decreases to P2.
9
Analyse what happens to consumer surplus when there is a decrease in the supply of tickets.
A decrease in supply is represented by a shift to the left of the supply curve. This leads to an increase in the price of concert
tickets and, therefore, a fall in consumer surplus [AJ.
10 Analyse what happens to producer surplus when there is an increase in the supply of tickets.
11 Analyse how consumer surplus changes wh1cn the demand curve becomes more price indastic.
12 Analyse how producer surplus changes when the supply curve becomes more elastic.
The concepts of consumer surplus and producer surplus are not easy to understand. Recall the definitions. The point to
remember is that consumer surplus is the price that consumers would be willing to pay and that producer surplus is the price at
which producers would be willing to supply relative to the actual market prices. In each case, it is what consumers or prioducers
arc willing to pay or produce, not. what ac1ually happens.
l'H'I.C !I( LOLLSIJO\S
l\fultiple-choice
l
question
Three friends meet at a restaurant. The information below shows what each of the friends is willing to pay for a meal.
Ayesha $14, Ruky $12, Neema $10
The tot.al bill is $18, whi<:h they decide lo split 1cvenly.
How much should each of the friends pay to obtain the same consumer surplus?
A
s,
B
S6
C
S8
,,
,,
D
$10
$6
SW
S6
$6
$4
$2
Essay question
1
Explain how consumer surplus is affocted by an increas1c in th1cprice ofa good and consider wheth1cr imposing a new
indirect tax increases or reduces consumer surplus
Improve this answer
l"his is a sample answ1cr to essay Ql.
Consumer surplus is when a consumer gets more for their money than they were expecting. A good example is at the
supermarket. Suppose the price of a packet of rice has been reduced to $2. If the consumer was expecting to pay $3 then
the consumer surplus is the difference, $1 [K].
Ifth,i pricl' incr<lHl'I, thl'n thi1i11h0Ym by• monm,int up and alon,11:
thl' d1"m1.ndcur. 1'. In thl' c1.1,iof ric,i, ifthl' n,iy;
pric• increHe1 to $2.50 con1uml'r1urplu1 \'Jill b. n-,duced. The con1umor may them buy fewer p1ckl't1 of rico [A].
0
Th• •ff•ct of 1.n indir•c:t taxi~ to 1hift t.h• 1upply curv1 to th• 11ft. Thi1 ~••• r.h• pric• inc:r1u• •ncl lh• qu1n1ity-uppli1d
.,.,ill f1ll lAJ. Th• con1um1r 1urplu11!10 f1lh u • rHuh
Your challenge
See whether you can improve this answer. The answer is too short and lacks some precision. The definition is weak. The
answer would be improved if it included a diagram. The final paragraph needs more analysis and also some evaluation to
make clear whether the new indirect tax actually increases or decreases consumer surplus .. A better answer is given in the
workbook answers - but write yours out first.
Iii
I
I
~ ASAL_Econ_WB_Chapler_
11_Amwers.p..
(2:
>Unit 3
Government microeconomic
intervention (ASLevel)
>Chapter
12
Reasons for government
intervention 1n markets
LE \R).;J'.\G 11\TENTIONS
In this chapter you will;
explain why there is the non-provision of public goods
explain why there is overconsumption
of demerit goods and the underconsumption
of merit goods
explain why governments control prices in markets.
Hl
IEH!i,lS
LMacket failcte
Key ski11sexercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
why market failure requires government intervention
why there is non-provision of public goods
why information failure leads to the over-consumption
of demerit goods and the under-consumption
of merit goods
how governments control prices in some markets.
1
Define the term
2
Justify three examples of market failure.
3
Explain why governments provide public goods.
4
'market failure'
Explain why demerit goods are over-consumed
Explain why merit goods are under-consumed
6
in a free market.
in a free market.
Describe three ways in which a government can control prices in an economy.
Analysis
Increasing
restrictions
on smoking tobacco products
There was a time when it was fashionable to be seen smoking a cigarette. This is no longer the case. Many countries have now
banned smoking in public places and added other restrictions on the sale and consumption of tobacco products.
In 2004, Bhutan was the first country not only to ban smoking in public places but to also ban the sale of tobacco. It did this in
order to raise its ranking in the Gross National Happiness Index.
In Malaysia, smoking is now banned in airports, restaurants, public toilets, government premises and private offices. If
anyone is found smoking in a private office where the building has air conditioning, there could be a large fine ofup to 10 000
Malaysian ringgits (approximately $2350).
The UK has been at the forefront of anti-smoking legislation to support the ban on smoking in public places including:
an increase from age 16 to 18 at which tobacco products can be purchased
picture warnings on cigarette packets
a ban on tobacco displays in large stores
standardised
(plain) packaging for cigarettes {this was first introduced in Australia).
7
Explain why smoking in public places is a demerit good.
8
Analyse how opportunity cost can be applied to a government'
tobacco products.
9
How might a government control the price of tobacco products?
s decision to fund measures to restrict consumption of
Evaluation
10 Consider why it has been necessary for the UK government to require standardised
lJ
packaging for cigarettes
Comment on the criteria an economist might use to assess whether restricting the sale and use of tobacco products has been
effective.
A good approach is to use cost-benefit analysis [K]. Some inputs arc:
Benefits: healthier population, less absenteeism
pressure on healthcare services
from work, increased economic growth, better social environment,
Costs: loss of tax revenue to government, cost uf applying regulations,jobs
services such as bars and restaurants. [A].
less
lost in tobacco industry and some leisure
It is not easy to apply these criteria, as past information is unlikely to be available [E].
Multiple-choice question
l
Not all goods and services provided by the public sector are classified as
"public goods'
Why is this?
A
There is a limit to government funding for public goods.
B
It is not possible to control
C
Some goods and services can be provided by both public and private sectors.
D
The public sector is nut aware of what goods and services it should provide.
'free-riders'
.
Essay questions
l
Discuss why it is often necessary for governments to provide goods and services.
2
Explain the difference between private goods and merit goods, and consider why a government only intervenes in the case
of merit goods.
Impro\'e this answer
This is a sample answer to essay Ql.
In all types of economy it is necessary for its government to provide certain goods and services. This is because private
enterprise is unwilling or possibly unable to do so [K].
A good example is that of government provision of public goods such as a police force, roads, flood control systems and
even lighthouses in some coastal areas. For such services, it is not possible or practical for the private sector to provide
them [A]. An exception is a toll road, but in the case of the other services, it is totally impractical to charge for tl1cm at
what is the 'point of use·
Take the case of the fire service in most cities. This is a government-funded service paid for out of tax revenue. When
there is an incident, it is absurd to suggest that the fire officer asks for your credit card before they will attempt to put out
the fire [KJ.
Central tu the context is the matter of "free riders' when it comes tu public goods. This is the term used to describe
someone who benefits from using a public good, hut who has not contributed any money towards its continuing operation
[A].
To conclude, it is very clear that it is essential for governments to provide public goods despite the obvious inequities
arising from free riders. If they were not to produce such goods, then they would not he provided by the private sector as it
would not be viable or feasible for them to do so [E].
Your challenge
See whether you can improve this answer. The answer has the potential to be an even better answer. The main omission is that
it does not consider issues relating to merit goods and the direct provision of services such as healthcare and education. See if
you can add another two paragraphs following paragraph 4, and also rewrite the final paragraph to make it more evaluative.
This should give a much more complete answer. A better answer is given in the workbook answers - but write yours out first.
~
ASAL Econ WB Ch<1pter 12_.Answers.p.
>Chapter 13
Methods and effects of government
intervention in markets
lnthischaplerlouwill
an,Jy,e,heirnpactan<lincidenceof,pe<ciJicimlirectlu•,
an,ly><"theirnpoctandincid<-nceof,ubsidie,
cxp1,;n,li,-,,dprovi<ionofH0<>dsand,.:,,..;«,.<
a,ialy"'n,»irtnHna,,dminitnumpricc,
cxplanprnv·,,,.
'ffi'.at'on.
Key skills exercises
Knowledge and understanding
Toanswc,thcqucstiominthi,chaptcr,}"Une<.'dtoknowandundcrstand
thcdi/fo,.,,nccbctwecnadv,/nn,mandspecifictaxc,
theexter.tto,.hkhtheinddcr.ceofanindirecttaxi,bornebythcproducerortheoon,umerorbyboth
theeffecuofo,uhsidyonamarket
wh)' w.,vemmenl> diredl~ pro,jde ""'m• g,;,xi, rnd s,r,·ic..,,
llweif«t,
ofminirnum ond maximum pric,,control,on
• marl<el
h<>wa huifor ,u,d sch~mc wnrh
T>etine,na(/1·,;/oromr,,>ml):i,·e,ne,ample
Dcfinca,pecifictaxandgivcancr.tmplc
ExplOn,'
1t'smcantb_;the'nc'''an·nd"roctta:ir
Lleocribcwhati,meontbyo,ul>,idy.
1'.xploinhowo,ub<.idyaffect,thepriceondquontitytradedinamorket
Analysis
My nmar.;
c nm~nlb,'
n,., \!)'I""'''
g<l\'enmw"t
n· "mump,·
fi,,.1 the minimum
Oc1obcr2\ll9. 'fh• ~vernment.,.
'
·c..,
price fo, rice •t _-,., ,,.,., k;-,1< fo, l [X) h«l.et,, of parlrly {$.1:;,7for •l>Cu1 ;, ton,) in
a minimum pric• ,o.,
toe5tabli,h a foirmarlet
price forthe<X>tmtry" , poddy former>
The farmer' s union wc!Nmcd the new minimum pric<e,while tokingthcviewthat
:',owshow1h·«·tuafoncanbc"'P"'"'"'cd·nernnom·
theory.
itrouldhave
bc<n higher. JL=
13.l
,,-~-----'.------------','
1.
I
---!---,,
l
!
I i
D
Fi~ure 13.1: A minimum priee forric•
UslngFigurclJ.J
a
Whati,theequilibriumprkeandquantityl
b
lfthe minimum pric,, is l't, how much i, ,upplied and demanded/
c
Whati,tO<>Urplu,;nthemacl:eC
Ai,alysc lrnwthe .,,arkct for rke m;gllt return toa,i c'<juilibrium po<iti,m
1'.xploin what would happen to the market for rice if the m:uimum pric,, wa, bclovnhc equilibrium price
h'valuation
10
rn«us, whieh 6'""P' ""' likely to benefit aM wh;ch groups are likely to lo.e out a,• result of a m;nimum prke for rice bc;ng
inlro<.h><•dinMy•nm,r.
11
O.>mm•nt
UJ>OTIony
,,.id<,, ~obal r•,ourc,, ;mplk•tions of inlnxhacin~ a minimum prie<, for ,~rirnlt"nd
product, in My,mm.r.
In whieh of the ,iruation, below ;, tbe consume, most likely to p,.y • greater proportion of the tox burden tha.n the
pr,•iuc•r'
ii!WiiiSif
ij@§@MEM
l.,,.,,,m
advakm,m
specific
11
Ps.s.1y<1ues1ions
Explain whether it i, fo»ible to charge a maximum price for bask f<><>dstuffs
for low in<omc familic,
Uiscu" wh~er
all form, of pa"enger tran,port {ma" tramit) ,hould be ,ubsidi,ed by the government of• middie
lnAprH2018,SouthAfrkab<camethelatestolagrowjnglistofcountric,tointroducea,ugartaxoncansof..,ftdrinh
Oth,.ru•rnt1·•,;·
·,
'····.,
a
r.,plainhowthc,ugartui,li):clytoaffectthcmar',:etforcan,ofsohdrinbinSouthAfri<aandcon,iderhowthetax
miRIHl,.n•><t,,ffe<ti,·,,
h
T}iS(;M<"hY""''""'""''iesh»·eintml"'"'!sugarta,.,;whilffoth.rum,t,i<:,hawrn_i•d'"ltl><>i<i"•
/\ote the wording of (,)2and (,)3,lt i, asking for wme °'"luation
'consider' whena.,kingforcvaluation
in your answer,. Question, in other chapters may say
hnpm,·<'thi,onswc,
Th;,;,,umpleanswerroc,.,.yQ2
!he diagram !,.,low shows (be impact of introducing• sul>,jd~· in • market. A ,ub,idy shifts the ,upply cun•~ to the right
meaningmorcwillbc,uppliedotthencwlowcr,uWidi>cdprice(KI.
a a,
A third majoT benefit i, thot ,ub,idi,ed public tran,port ,.rvic,,, are likely to mm it cheaper for worker,, ~,pecially low
po.id one>, to get ojob. Cheaper fore,olsowiden the geographic,! po,sibHitiedoremployment
[A]
Yourdiallenge
~
ASAI.._EconWB_CNpter1l_M,wer,,p
>Chapter 14
Addressing income and wealth
inequality
Jn this chapter yuu will·
explain the difference between income as a flow concept and wealth as a stock concept
measure inequality in income and wealth with a Gini cod!icient
expfoin the economic reasons for inequality in income and we.,Jth
diocun polid<t• th•t r.di,trib1,H<1incnm• and wulth, includi111th• minimum·•••&•, rn11d•r p,ym•tll•, pro1ru,iv•
incnma t1n1, inhuil.l.nca and capital lnH, and at&la pm,~ok,n of ••••nlial Jood• and HnicH
r·""
Copirnl '"'
Ci"i ,~fficieo<
Transferpaymenl
Wealth
,c,fo,mol ~o"omy
lnherirancetax
Minimumwage
l'rogressiwtax
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you n<•cd lo knuw and understand:
the difforence between income and wealth
whatismeasuredbytheGinicoefficienl
the economic reasons for inequality in income and wealth
policies tlwt are uble to redistril><.Ueincome ,1nd wealth
Describe the diffrrcncc bctw<·cn income and wealth
l
2
l)escribewhaTismeasuredhyaGinicoeffident
'.I
F.xplainthesignificanceofextremevaluesofoand
4
Explain the difference bctw<·cn the formal part of an economy and the informal (hidden) part of an economy
5
Explain the purpose of a minimum wage rate
b
Describe what is meant by a transfer payment and give an example
7
Explainthefearuresofaprogressivetaxsystem.
8
Explain two examples of tlll<csthat can reduce inequalities in the distriblltion uf wealth.
1 foraGinicoefficienr
Analysis
Income inequality in Vietnam
v·•tn•m·••m"ddle"ncomocount,
"th·,m•nt,
1oc·•l'1tc
no ,.A-,
•.. of
101 •
nd••:"alruJ:urm1,knownuDo'
1
J.foi, haY• b.•n r•1µon1ibl• K>rtran•formin1 Vi•lnam' • Kl>nomy from bein1 on• of lh• poon,,t in louthoa1! A.ii• lo on• th•t
hu uperienc•!
•ub1t;1nti•l 1ro'"1h o~•r Ill• p;11tXI Y••n
11le 'ewnomicmirade"
rho~1h hunot b.nef!ted •II oftheooun1ry· ,,sm JX>p~l•tion. Income in-i_u11ityhHincru-i,
••i-:i•lly amon1 •U,nic ,..inoritiu, •mall farm•nt, .,;,rant ,..ork•nt a•d '"'om,n. Fi1ur• 1•.1 oho- th• nt•nt of in1'o.,,
aqoaliryin2011.
Lower income distribution
Entire distribution
15.2
15
100
90,0
80
10
..
60
"
40
20
8,3
1.1 0.2 0.1 0.1 0.1
0 2 4 6 8101214161820+
Individual monthly income level (million VND)
0
20 40 60 80 100150200+
Individual monthly income level (million VND)
VND: the <long is the currency of Vietnam
Figure 14.J: Monthly incomedisrribulion,
Vietnam, 2018
Somce: Vietnam Provincial Governance ond Public Administrnlion l'«formance Index (!'Al'!)report
A nc,nt ntporr by od,m hu •~1in1,tld that the richat p•non in Vietn•m ••m• mor• i• a d•J thltl th• poon,11 Vi•tn,.,,.,
f"nlOn urn a in l~ yuro. In tum• of••••hh, 1hi1 rioh p,r..,n could 1pend $1t• -•rr day for •ilr yun lwrk>r••:rh1wo1in1 th,ir
wealth
O:rf•m b,Ji0Ye1 th,t i•com" in.,quality i1 holdi•1 b•ck Vfrtn1.m" • othn.,i1e he•lthy .-.;onomic pro1n.·11. Th" probkm
req.,in·• • moro pro1reniYo tu brack"t K>rbilion•ir,·1, impron·d public 1en·ico1 •nd bc-ttM .,ork<·ri" ri1ht1. Onl;· in tlli1 •••ay
c•n Vi•tn•m" 1 -=<>•omic miracl• bonoJit m"ny million• mor• than ii th• cu• •t pr•Hnt
9
Analyse the likdy cconomi<· reasons why income inequality among 1'crtain groups in the population ofVidnam
has increased
10 With the help of a diagrnm, analyse how a progressi,·e income llll<system can imprm·c the distribution of income, in Vietnam
11 Analyse how improved pub Ii" .sen·ices can reduce inequalities in income in Vietnam
Evaluation
12 Assess why it is believed that increasing income and wealth inequality could hold back Vietnam" s economic progress
Data response question
1
The Gini coefficient for Vietnam in 2018 was 0.307. Using the data in Figure 14.1, does this coefficient seem to be a fair
estimaleofVietnam·
sincomeinequality'
Essay question
I
~pl•in "'hi1'h tyi,,u of tu: mi1ht impro,·• th• di1trib.,tion of incom• in• country •nd con-id.r one tu lh•t c•n h1 moll
enily ,pplied in a Jo,..,r .,iddle-income co~ntry.
lmpro,·ethisanswcr
This is a sample answer to essay Qi
A ta:r i• a p•y.,•nt thll i1 mad• by individual• to th• 10\'arnmant. It c•n b, in the iorm of• ra11ular .. ukly or monthly
payment that i1 ta.hn out of '"'a1111,
or it c,n b. an im.,,di,ta paym•nl th•t i1 includad in the pric• of 11co:l•and HrticH
ouch u petrol, r"ataurant m.-al1, 1u1uy 10ft drinb and ,o on. Tho m•in purpc,10 of tantion i1 to fund i:oYcrnmcnt
•pondin1 on uduntion, ho•lthcan.·, ro•d•, tran1for p1ym.-nt1 to tho pour and oo on [I].
In tum• ofimpr0Yin1 th• di•tribulion of incom•, • n11n111i,·• tu 1y1!om io be1l. 11.ichpoopl• !t•nd lo buy mor• nJ.,abl•
1ood1 •nd ,..,,.,icu th•n Ju:.>rpoop!•. They thor.lon, P•Y root• ta.cution lo th• 10Y•mm••t ,•,h•n thty buy lllp•n•i•• c•n,
doth•• ,ndj•well1ry or 10 on untie holid•y• to A"1»trlii• •nd E~rop•. Jn conrrnt poor peopl• hu·, Jo., incomH •nd u,
not in a po1itinn to contrihut1 mud, .,on,y in th• l'.ortnoftuation
Th era ar• a\10 pro11rH1in t1n1 lih incoma tax. llith urn era obvioualy pay mora incoma tax th•n worlaoro on•
minimum .,a1<'. Tho-, \Yorkori ,,,ill not p•y any in corn" tu •t •ll on thdr low ,n1c1. Althou1h hi11horcarnora p•y more
tu, th• tot•l tu p•id i1 Jo., •nd much Ion than i1b<Jin11enoratod from tu<'I 1ueh u 1oneral Hio• tu. Thi, i1 bo:•un·
only• urmll porc•nt•1• of ,.,·orku• •ctu•lly P•)' incom• tu. Thu• io d10 th• inu• of th• inJ:urm•l •wnomy to e<.>n1idu.I!
can lh.r•fon1 l• oondc,d.:l th•t • Illlllll1i•• tn •Y•l•Jrt io by fn th• be1t -)'•l•m for r<ldc,cin1 incom• in•quality, ,inc• it
1en1r,1u th• hiaut ,rncn~of rnoHy for the 1ovemm,nt to p~t into r.:>liciu to improYe the ••11l-b.in1 ofth• poont1t
peopl,and1her1kinithedi1trihutionofinco.,,
Yourchallcni;c
5"" ,..h,Ther yo~ c•n ;.,prove Thi• •n•'"'lf- Thi 1n,-.•1r ;, v11rypoor. Thi l'lt11lpar11r1ph i• 1ul'Mci1nTon The purrc•
nftantion
l.i1tl1 •111 ;nth• •n•••er i• 1'orr..,I or ntloanl. In parHc~lar, the lurnu doa• not underotand th• difl'er•nc• b.N'1•n a
pm1ru1in ta:r •}•t•m and• ra11rauin 1.1:r1y1t,n1. Thi a i• a fundam•nt.a.l f•cttJal armr ,..hkh mah1 ll1• ,n,,..er munin11lu1
Ther• i• no nplicit llllmpt to applyth• ana,Yar to• lo,.., middl,-incorn• count')'. A bettar ,nawar i1 11inn in th• workbook
1n1war1 - but wrill youra out tlr.t.
~
ASAL..E<:on_WB_Chapter_14_Answers.p
>Chapter 15
National income statistics
lnthischapteryouwill:
definethemeaningofnationalincome
explain the purpose of national income statistics
explain the difference between gross domestic product (GD!'), gross national income (GNI) and net national income (NNI}
analyse the three methods of measuring GDP
explain how measures of national income are adjusted from market prices to basic prices
explain how measures of national income arc adjusted from gross wlucs to net values
Basic prices
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you nNd to know and understand:
what is meant by GDP
the differences between GDP, GNJ and NNI
the mc.,ning of ncl prnpcrl_y inc"<>mcfrom abrnad and how it is calculated
the difference between net income from abroad and net properly income from abroad
lhe lhrne ways in which C,01' can be measur1'<1
how~in:,fr
•"01''ncom,';
.. 1~~'•
nr'·,
·•,h',
•
,
how measures of national income are adjusted from gross values to net values
issuesassodatedwi1hcollectingnationalincomedara
1
DefineGDI'.
3
What is the difference between GDP and GNI?
4
What is the difference betw,,..,n GNI and NNI'
5
What is net proJ)<'rty income from abroad?
6
Explain the difference between net income from abroad and net property income from abroad
7
Explain the tlm.>e ways in which GDP is mc.,surcd
S
How arc mcasun:s of nalional income a,ljuslcd from market prices to basic prices?
9
How are measures of national income adju.sred from gro.ss values to net values'
Analysis
Nationalincomestatistics,Paki.stan
Table 15.l shows t\.vo key national income statistics for Pakistan in 2019. Table 15.2 shows the composition of gross domestic
pn~!ucrbysectnrforl'akistanin
2018
iiiii:116
IGmss domc><lc ero<lod (GDe)
1284210
Grnssn,itionalinc,,me(C.NI)
Tahk 15.1: Key national income statistics, Pakistan, 2019
Gro.ss domestic produc1 (c'Qnslant pri~-.,s)
CDl'fromagriculture
GDP from m"nufocturing
GDP from mining
Gill' fn,m trnns1~>rl
Note: the sector data is not equal to total GDP due to incomplete data
Table 15,2: Composition of gross domestic product by sector, Pakistan, 2018
10 Calculate Pakistan'
s net property income from abroad in 2019
11 Cakubre
, net inrnmc fn,m abrna,d ;r, 2019
l';,ki,lan'
12 Arn,lysc the rcl"1i,·c importance <.>f
the composition of Pakislan'
s GDP in 2018
Evaluation
1:1 Comment on some of the problems nf collecting data for estimating GDP in different types of economy
Data response
1
question
The following table shows information from the 2019 national accounts of Mauritius
GDPmarkctprices
GIJl'ba..skprices
Finalconsumers'
expcnrliturc
Importsofgoodsandscrviccs
c,lcula!ethenetreccipt,fo,mtil,esnnproduct,and.,ubsidies
h
C"kulat.,gov.,rnm.,nt,p.,n<lingongoo<lsand,crvi<:cs
c
Dis.cuss whether the Mauritian govemment should be concemed about its balilnce of trade in goods and services
Essay question
lmpro,cthisanswcr
This is a sample answer to essay Qi
5o it would s<,cm most likely 1!,.,1cslimat.,, of GDP will IH,mm" a~"<:un,ICin a high-in<:omc counlry than in""" which has
alowincomc[E]
Your challenge
~
ii.SALErnn WB Chapter 15 Mswers.p
>Chapter 16
Introduction to the circular flow of
income
lnthischapteryouwill:
definethccircularflowofincome
explain the difference between the circular flow of income in a closed economy and in an open economy: the flow of
income between households, firms and the government and the international economy
analyse the impact of injections and leakages on the circular flow of income
identify the difference between the country· s income being in equilibrium and being in disequilibrium.
Circular flow of income model
Closed economy
Injections
Leakages
Open economy
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
what is meant by the circular flow of income
the difference between an open economy and a closed economy
how the circular flow of income can be represented in a simple diagram
the difference between the circular flow of income in a closed economy and in an open economy
how a change in injections or leakages affects the equilibrium of the circular flow of income
how to determine when a country' s income is in equilibrium or disequilibrium.
A common mistake is for learners to mi)( up injections with withdrawals. A useful way of avoiding this mistake is to imagine a
tap over a bucket. Turning on the tap (injection) increases wilier in the bucket (income). A hole in the bucket (leakage) reduces
waterinthebuckct(income).
I
Draw a simple model of the circular flow of income in an economy.
2
What is the difference between a closed economy and an open economy?
3
Draw a model of the circular flow of income in an open economy.
4
Describe what is meant by an injection into the circular flow of income.
5
Gi,·e three examples of injections into the circular flow of income of an open economy.
6
Describe what is meant by a leakage from the circular flow of income.
7
Give three examples of leakages from the circular flow of income of an open economy.
8
Explain the equilibrium income in a two-sector economy.
9
Explain the equilibrium level of income in a four-sector economy.
Analysis
Output growth in Mauritius
Mauritius has experienced output growth of 3-4% since 2016. The service sector, which includes retailing, financial services
and the provision of accommodation and food seivkcs, has been the main contributor to this growth, mainly through the
servicesprovidedforinternationaltourists.
4.6
4.4
4.4
4.2
"
4.1
3.8
3.8
3.7
3.6
3.6
3.4
Jan 2017
Jui 2017
Jan 2018
Jui 2018
Jan 2019
Jui 2019
Figure 16.1: Quarterly percentage change in GDP for Mauritius, July 2016-July 2019
Source:Cen1ralStatistiC1;O/fice,Mauritius
1O Justify two e1Camplesof injections into the circular flow of income in Mauritius.
11 Justify two examples of leakages from the circular flow of income in Mauritius.
12 Analyse how a reduction in income taxes affects the circular flow of income in Mauritius.
13 Analyse how an increase in government spending on the country" sports affects the circular flow of income in Mauritius.
An increase in government spending on ports is an injection into the circular flow of income (Kl. This additional spending will
lead to increased spending by workers employed on the port project. There is also likely to be new investment by private sector
finns. Over time, increased spending on ports could auracl more cruise vessels to dock in Mauritius. So, over time, there will be
an increase in the circular !low of income [A].
Data response question
I
a
Use Figure 16.1 to describe the quarterly change in the growth rate of Mauritius from July 2016 to July 2019.
b
Comment on how seasonal fluctuations affect the circular flow of income in Mauritius.
Essay qucslion
I
Analyse how a sudden decrease in the number of international tourists leads to disequilibrium in the circular flow of
income in an economy and consider how a decrease could be avoided
Improve this answer
This is a sample answer to essay QI.
International tourists are an important source of income for many economics. Some of these economics have few other
sources of income. The income gained from international tourists is an export in the same way as if the economy were
selling agricultural goods overseas [K].
The money spent by international tourists provides an income for those people working in hotels, restaurants, bars, shops
and tourist attraclions. These people are consumers, and will spend a large proportion of their income on consumption
IA].This increases the circular flow of income.
decrease in the number of international tourists will cause disequilibrium in !he circular !low of income. Leakages will
increase and the level of income in the economy will fall [A].
A
The sudden decrease is likely to have been caused by an external shock, over which the economy receiving tourists will
have no control (El. This shock is likely to cause a fall in incomes with a reduciion in demand for international travel.
\'our challenge
See whether you can improve this answer. The answer meets the requirements of the question although ii could be enhanced
with a diagram of the circular flow of income in an open economy. The diagram is best placed be1ween the second and third
paragraphs of the answer. Your challenge is to draw the diagram - remember to include a short paragraph to explain the
diagram. A better answer is given in the workbook answers but write yours out first.
~ ASAL_Econ_WB_Chapter_16_Answers.p
...
>Chapter 17
Aggregate demand and aggregate
supply analysis
definethemcaningofogg,cgatedemand(AD)
uplaint1,•«"•1">••~t.•<>faa,
.. ,..,,...,,,1
,n,Jy..,thed<tcrminant,ofaggn,gatedemond
analy..,thccau>esofa,hiftintheaggregated<mandcurvc
delinethemeaningof,ggregate,upply(AS)
anoly..,thedet<rminantsofaggr,gate,upply
cxplainthe,hopoofthc.\Scurvcinthc,honrun
(SIL~S)andlongrun(UL~S)
•~plainthecau..,,ofa>hiftintheAScun·einthe,hortrun(SKAS)andinthelongrun(IBASI
identifythediifer,nc,,betwe<enamo,.,,mentilonganda,h.iftinaggrcgatedemandandaggregate,upply
nplain how '"9uilibrium is established in the AD;ASmodel and how the lev,l of red output, the price 1.-..,Jrnd
employment are determined
di,cu.s,theeffcct<ofshifuinthcADcurvoondthcAScurveonthclevelof"'•loutput,thepricclevelandemployment
Key skills exercises
Knowledge and unde~tanding
Toamwcrthcquc,tion,inthi,chaptcr,younc«ltoknowandundcrstand
theromponcnt>ofaggrcgatedcmand
thedeterminantsoftheromponentsofaggregatedemand
the,hopoo/thcaggrcgatedemandcurvc
themeaningofoggregatesupply
thedeterminantsofaggregate,upply
how to di>tifi,:uish h<tw...-n the ,hort-nm rnd lon,:-rnn •ggr<"gate supply cur,,..,,
cause,ofa,hiftinthe>hort-run•ndlong-runaggregote,upp!ycurve-s
lhe,lirfenmce l,etween • movernenl •Ion~ ,ml• shift in Ihe AD •nd AS cur,·.,
when the AD,·'.\Smod•! i, in «J<rilil>rivm and hen, this d<lennine, the lev•l of n-,1 output, the pric..-lewl and ernploymenl
tlh> effod, nf ,hift, in the ~D ,nd ~S cors•e,on the l.,vel "f "'"I "utp"t, 11,eprice 1-,,·el.,,,I en,ployn,ent
~atethefo«rcomponenlsof,ggr,,gatedem,nd
F:xplaii,wh,tc•u"-'<>
<hifti,,thi,Sft~Scufi•~
D:plainwhatcausc,,,hiftjnthel.ft,\Scurve
Analysis
r-~.GrOMJiuodcop,talfonnotion
J'able17.l:Totalexp,ond;n,r,cinKomibjain2tllR
t-.amibia" , loDPfoll i.,1.111, io 1111, on io,,rol'otoont on 21!7wl,,on <:.DPfoll •1•1.tlll. Ooopi10thio, <Hnn>er op,H4in1
i••--l•llhu•,;!1
•'"'•m., .. 1 •p•ndi .. n•l •p•r,di,-,m COJ<il•l-1,
••~'" both do.,·n. Tit• 1uio "'"""for•·•
i•1oro,·«I
•o1on« ef1ra• ll1•ro -•
llto iotcrHN io •-rt,.
!ni,-rto worou••-1•4
Jo,\0101tlllf,
tllo oxpo.ooioo •f*• Woloi, ••J ,-n projortwMNMplc..i.
'lhiooo"' o,olllo W..,.i, ... y!ho proforn,I ,-n f•r
•otho,o oM co,,tral Mric,,, l"1iotic•opoNh••
H '"" Wool c,-rofthecoi,tii,_,_
Tllio will loo•~• ,.-,..,ibi• '"""' t<••
•it i, .. 1.. ..,-•-••ry
,.01•
l<>•th .1,iri,·•·
•••i•
r.,..
9
~•plaii, how ta• foll i" • .,, •.,,,~,c•t
'P'""li,o• ii, i',o,•il,i• all.><t, th• otf,.,,. <0•1•m•n1'
nf
••,.i:"•,kmoo,1
10 Analy"' how the increa,,, in export, in C'iamibia h, 2018 affects thcothe,componcnt>ofagg,cgatc
11 With the help r,f adi:,g,am, anal)""' how the ''"•k•i• nay)'<)rt project ha, ,ff,'Ct,'<i ,~rcgatcde,na,id
demand
;,, r-amihi,
12 With the help of• diagram, analyse how the w,lvi, !lay port project has affected long run aggregate ,upply in Namibia
When drawing oggreg>te dem,nd and aggregate ,upply diagram,, remember to label 1he ,xe, rom,ctly. '!he """' >hould b<, real
GDP (horironrnl orx axis) and price level (Yertical ory axis). A rommon mist>~e i, to label the lle< ·quantity" and 'price'
Evaluation
13 A.<>e,sthecffect,of,noutward,hiftintheADcunceandthclong-runAScurvconthcle,,,elofrcaloutput.thcpriceleveland
.,-,,iplnyn,entin 'lamibi,
na1a,csponscqucslions
l'singthedatainfahlcl7.l
a
Cakubtc spe,idjng on imports in Namibia in 2tll8
b
Calculate aggregate demand in Namibia in 2018
The Walv;, Bay projecth,, boen funded by the Namihi"" gowrnmcntand the African Dc,;clopmcnt Bank. ln which of the
Calq;orie,nt,p,mding,hnwninT,h!.17.l
v,,."l,!thi,e,pe.tO(litunal"'l'l••·"•I'
Balane<eoftrade-Exports-lmports
-ll456-5-l:l5-l-lmports
lmporu-5435-1•2145!5
Jt rould be in !nth gross fixed capital formation or government sp<nding. dep<nding on wheth«the
thcpr",atc""°toror
·•m"b'an
,mcnt
0
fundin,:i, from
F.ssayr111es1ions
~~:t:;
i:~::::
•
change in agg,.,,g,tc demand
o, ,
d,,,,gc in ,gg,,:,gate ,upply in an C<:Oolomy
is likdy to '"""" a higher
2
R>:1,'·., tl o·mpadonogi•n
re,loutput
3
IJi,cu.,;whetheranincreaseinlong-rnnoggregate,upplyi>likelytobebeneficiilforaneconomy.
.,,·
','plynf
''"re," ·n • •
,m 'f
:an~·
,,,_·.-i.,,,.hy""y
\<~
I•.
·,
·,.
!hi,isa>ampleanswertoeo,..y(/3
J.a;ro1•t• .-.pply iotko t•• ""tl"'ttllot i, prcoi,,._. io on Nooo1r1y. T.olHtnm
iothotiroo pori..i wkoooll foctoNQf
pr..ioctiu i• tko 0<en••J rn M ,i._,,_.,.,
lon1•nt• •'"J•t•
••pplJ• i, tketetolo•tp•tprNuro,1
Woo oni•chootH
th,tloo,·.,l•'"""'"'l•l"••h,lof•llop1•orto11ityto,m,.,,l.,wtfl{)
r,,.- ••1 '"X'n"•')', ilo•no on, ''"1')' "'""Jn' wky tk, UA~ c,,, iu,o••·
A ~'-""I""'"'"' •x••1l'I• i, Qot,r, •l1or, oi.,,...,,,lf
efnci1n.nt _,k.,,
oro Mini oncployN to pMuc. u,o·forilitiH tkotON n...iod for(/01.-· , ocoooniir 4...-ol•p•oot [AJ
Thoyioc,o-llio
,;,. •ftko loNQr fo,ro and. i, t•rn, tcol ~u.utoftho
""'"°'•J·
A =ond lobourconi d .t'on •,here
more women _jo'n the labour force, often :u arcs
1,w,.,,,i;won,enin,rork.
Pnte,,tiallyrhi,it>c"''"'-"'"''l"utputii,tl,coc,:,nrm,)'i~l
• ofa rclox:at'on 'n att'ru,'
1}
a,
02
Quantity
Tko 1JLUron •itt nn,,u4, foretllor roo•n•. iodu•"I*•
•oc..-ory-•fo,wvolnl,lo
Miuncl ro•urce,. uw
ii,v.01,.,,,, 1,,-troi, oi,d hytho ,,.,,..,..., • ., i• ,no<I,, t"Oilw•y•,•"""••Mn,_•""'
1"'"'"' uppliH ,..i ,i.,-1A
pri,-.ti,oti<;n[AJ.
0,,,,,.11, "' inc,._a.,i~ T,IAJ """' 1,. 1.. ,,,~•i•I lo, •n "'"'""""1," Ok•"""""*{
, ""'l"I i"c'""""'· Tl,i, will l.,d tu""
iocroin oo,pl.,-rcoot II]. ·i•u Hly UfOtiv• u,-t
.. -.ul4 Mifit r••ltN in tko priro lovol inoreuio1itt••
iocroin
LUlauol•1•••mW.
.. ior-•i•
.....
ot,4oot.,4[1:]
Yourchallcng~
_ _.,.,,_J""•
<u i,ipoon th;, •~••r. Tlii, •~-.,
can """•p-..i
;~ fo.r•ayo. 1i,otl~•,tM 4o~,iitiH •f -•"•
'"l"l'ly i, ••••J. .... ·on•y, ihor• i••oHphcii "'~""
lo ihodi•~no• (■co Ill• •mon ·•"'J-Tlti .. y, lh• u■-lol,,ouTox•1r11>l•
•f•-·the
UlAlrnn-o ,.ii._ .-o!<IM oxploio..itanku.
¥nrthly, on4oi,.ilcontl_,. !horo i,o Hio•cotion
!hottko \Hlit:yu
••llutll•<1n~ti9"•/-.,rCMioi,..]Nrt•nt.
~loottoron"""'''•""'•i•thcw•dd1,w,l,u,_
l,,Jt,.,it•}'CII"""'',_
I·
~
'5Al_lwn_w8_Chapter_1/_AA<-,,;.p
'
>Chapter 18
Economic growth
Jn lhi,chapleT)'OU
will
de~ne the meaning of e<.~momic grnwth
cleS<:ribtehow t'Conomic growth is measur,,d
explain the dilTerence between growth in nominal GDP and real GDP
analysethecaus,,softtonomickrowth
c!iscuss the cunsequellCe> uf teeonornic ~ruwth
Ernnomic
growth
GDP denator
Nominal (or money) GDP
Key skills exercises
Knowledge and understanding
To ,mswcr th" questions in this ch,,ptcr, you nec<i to know ""d undcTSt,md·
thcmcaningofcconomicgrowth
howec.,rnomicgmwthi,mea_,ured
how to re<:ognisc !he ciiffcr@cc between nomin:,l GDP and real GDP
lhec·ause,ofeconumicgrowlh
theconsequenc,esnfeconomicgmwth
I
Dcfinccconomicgrowth.
2
Ocscrih<, the diffon,nc" Lerw,,en c,cnnnmic growth anci economic d"vclnpmcnt
3
Explainhowcconomicgro•mhisrncasurod
4
Explain the clilTerenc-., betwC"en nominal
GDP ancl real GDP.
Explainthedifferenc;,,bc:,twc;,,nactualandpotentiale<:onomi~grnw!h
Analysis
Nigcria'
'muted'
s
economicgro\\1h
Amajorproblernis!hatgro,,.thisfor<:>easttogrowrnorcslowlythanthcpopulation
6
Analyse the causes of economic growth in Nigeria
7
Analyse the likdyconsequcnccs
8
Analyse the bcncfits and costs of economic growth tot he people of Nigeria
of Nigeria' s r<:>ducedrate of economic growth since 2014.
Evaluation
9
Discuss whelhere,conumic
development
10 C~>mmenl on the 1-'forld &mk'
in Nigeria is impnNing
ec:onumic well-bein~
, view lhal ernnomic: growth in Nigeria remain,
'muled'
Data response question
I
UsingthedatainTabk
;,
18.1:
Isthcdatanominaldataorrcaldata?Justifyyouransv,cr.
Essay questions
population
2
Discu"
the criteria ec:on<>mist. use when a.<.se.ssing the benefits and co,l, of economic
ThisisasampleanswerluessayQl
Comumer
goods
It is difficult to s.1y which of the"" two options is likely to b<, more b<,neficial
Yourchallcng<0
11
~
1
~
ASAL_E:con_WB_(hapt
0
growth in an <economy
>Chapter 19
Unemployment
lnthi,chaptcryouwill
definethemeaningofunemploy,nmll
=plain
the difference bctmx,n the economically
active and economkally
in,,ctiYc population
mrpla;n1hedifforen,ebctwe<:nthefo,..,lofunemploymcmandtherateofui,employment
calculatcthcrntcofunemployment
mrpfainhow unemploynl<lnl;, measurnd
con,iderthcdifficultic_,ofmc,suringuncmploymcnt
an,lys,,thec>u,..,and1ypesofuncrnploymem:frictional,strucn1raJ,cydkal,s<»sonalandtochnological
Key skills exercises
Knowledge and understanding
Toanswertheque>tionsinthischap!er,;·<>Uneed!oknowondunder>tand:
what i> m~anl by unempluym~nl
lhe difference bet we.en lhe e<xmomirnlly adive and e<:onomically inactive population
huwunempluymenlismeasun,d
lhedifficultie,ofmeasuringunemployment
tht ililference b.,tw...,11the les•el o( unemployment and th nite of unemployment
the cau,.,, and typ,, of unemployment: frictional, ,truc1ural, cydical, ,,.,a,onal and technological
I
Defineunemployment
l>e>eribe the difference betwe;,n a p,non who i, economieally active and a perwn who i, eronomically inactive
J
D,e,-:ribehowunemploymentisusuo.llymeasured,
4
Explain the difference ~ween
the level of unemployment and the rate of unemployment
Describ;,fric1ionalunemploymentandgi,·eanexample
1><,,:ribe,tructuralunemploymentandgiveanernmple
7
Describecyclicalunemp!oymentandgiveanexample,
8
De,crib;,se>Wnalunemplo}'mentandgiveanexample
9
Describ;,te,:hnologicalunemploymenlandgiveanenmp!e,
Analysis
India'
•in~rcasin,:uncmploymcntratc
-ToUlllnQmployment
-----
Urb¥i unemploymQ!lt
-
Rur~I unemployment
Fii,;un,J~,1:Lnemploymentinlndia,Mayl017-April2019
1U
l(xplainlwopos,ibleeau'IOsofurbanunemploymentinlndia
11 Uplaintwopo,;,iblecrn><csofrnralunemploymenlinlndia
12 Arrnly.,theeffoct,ofincrea>Wunemploymenton!ndia'
Se<.,<.\!lorny
Evaluation
13 Commentonvchycolloc1ingd"taonunemvloymentinl"diaislikelytob.,difficult
U
Comment u11the vie.w that the
'main t'a""" for !he increase in unemvloyment (in Inilia) is the lac·~ o( ,kill, required for job,
IJatares[)Onsequestion
1
a
U,ing the data in Figure 19.l, de,cribe two change, in the pattern ofunemployment
in India from May20l7toApril
Essa~·questions
llxplain the main types of unemployment in your country (or in a country familiar to you) and consider which of these
typcsaccountsforthc~r"ato,s\p<-r<:entar,cofthoscwhoar<e"ncmployed
2
llxplain the difference betwcen the claimanteoont
whichis]ikelytogi,·cthchighe<tratcofuncmployoncnt
3
Dis,;uss the consequences of a high rate ofuHen1ployment for a lower middle-income ocooomy,
and the labour force .,ur,,cy mcasurcofunemployme111
lmpmYclhisanswcr
Thisisasainpleanswertoe,sayQ3
fourehallengc
~
ASAL<conWBCh.lpter19Answm.p
and consider
>Chapter 20
Price stability
Inthi<cl»pteryouwill
definethemeaningofinflation,detlohonanddisintl•tion
explainhowohangesinthepri01!le,·e\aremeasuredbytheconsumerpriceindex
considerthedifficulti.,.ofmea,uringchange,inthepricel"'"I
expl•inthedilfo<l!nceb<twe,rnmoneyvaluesandn,aldata
anal)"<lthec•u..,.andlYV"'Ofinflati<>n:Ct>St-pushonddemand-pullinllation
analys,,thecon""'luenc,,sofinflation
Annualaveragemethod
Barter
Consumerpri<eindex(CPI)
Cost-pushinflati<>n Creepinginflation
Debtors
D<eflation Dernand-pullintlation
Disinflation
l'iscaldrag
Hyperinflation
Inflation
lnllationarynoi ..
lnOationrate
Menucosl>
Monetarist,
Moneyvalues
PTictelev<el PTice,tability
Realdata
Shoelealherrost,
Wage-priu,,piral
Year--0n-~••rmethod
Key skills exercises
Knowledge and understanding and application
Toan,werlhequestion,inthi,chap1er,y<>un-loknowandunder31and
thomeaningofinflation,doflationanddisinflation
howchange,intheprie<elevelaremeasured
thodiffcrnncebetweonmonoyvaluosandn,aldata
theoon""'luene<esofinflotion
Youn-tobecarefulwhenlookingatdatooninflationrates.Manylearnersthinkthatafallintheinflationratemean>that
pricoshovefollen.Thisisn<>1true.Afallintheinflotionrateme1tnsthattherateofincrea.,inprioeshasfaUen
2
Explainwhatismeantbypricestability.
3
ExplainthedifferencebetWttndeOationanddisinflation
5
Explainhowooonsumerpri<eindexconbeusedtomeosurechaJ18eSinlhepricelevel
Exp!ainthedifferene<ebetWttnmoneyvalue,andreoldato.
Explainthecousesofinftatfon
8
Explainthecon""'luenc,,sofinflation.
Analysis
"~
r:+-----------~
2010
2012
2014
2016
2018
2019
Figun,20.l:CoreinflationrateinPaki<tan,2010-2019
l'igure20.2:ComparativoratosofinflationforSouthoastAsianeountiesin2019
Soum,;AsionDevelopm<ntS..nl;,
Inflation in Pakistan is increasing again. With it come, coola, particularly forth=
on low incomes. Given that mo,t people on
low income> h.-·e most oftheiro,.,ts
in cash, theirpurehuing power is being eroded oseveryday items increa.,in price
Risinginllotioncanoffectwhetherfamili,..canaffordhealthcareorwhethe,-achildgoestoochoolorhastowork.lnflation
al"" disrourag.., 1on~r-1erm investment by the pri,·ate ,ectoron project, that ore designed to raise Pakistan" , producfo'e
capacity
growthinthemonoy,upplywhileaggregatesupplyisfixed
risingimportpric
... ,e,peciallyforoil
domesticsupplyshocksresultingfrom,forexomple,cropfoilure
9
Thetextgiveslhn.>ecau,esofintlationinPaki,tan.Analys,eachofth...,cou>e>and
cou>e>ofinflati011(demand-pull,cost·pushandmonetary)
.. yhoweochm•tch""ther«ognised
lO Explainhrnway,inwhichpeopleonlowinromesaneadv,,...,Jyaffee1edbyorisingrateofinflation.
Peopleonlowincom..,wiUfindthotthepric..,ofbuicfooditem,areincrea>ingotafo,tern,tethantheirwage,.Theyho,..,
lit1leorTIObargainingpowertoincroosetheirwages.Mostpoorpeoplean,unlikelytohaveabankaceountandwillbelikely10
kttpaccumu!atedcashsaving,athome.Therealvalueofthe
.. savingswillfallwiththeincreaseininflation[A)
Evaluation
II Discu .. thebencfitstoPakistaJt·
12 Discu,. oomeoftheproblem<
,people,firmsandgovemmentofafallingrateofinflation
when con,tn,cting o con<umerprice index fora lower middle-income country ,uch"'
Pakistan.
Data n,sponsequ~,stion
l
Usingthedatainfigure20.l
•
Describethetrendinl'akistan·
b
ldentifyaperiodofrisinginllationandaperiodofdisintlation.
,eoreinflationratefrom2010102019
Essayquesiions
1
Explain1hemaincause,ofinflationinaCO\<ntryyouha,,.studieda1ldconsiderwhichofthesecausesisthemost
"m1,tatthepresentt'me
2
Di,cus,theron,equencesofa,harp,unexpectedincreaseintherateofinflotioninalow...,-middl..-incomecountryand
,,hethercon,umcrs,prod=rsorgovernmentswHlbemostaffe<:todbythi•incn,a.,
lmpro,·eyooranswer
Thisisos.ampleanswertoessayQ2
A basic definition ofinlhtion
i, that it is when pric,,s in an economy are increasing. Thi, i, a well-known phenomenon in
almost aU economies. Not all i1tflation i, bod. In foctoome inflation is good for an economy [K]. Much depends on the rate
ofinflationwearetalkingabout
In my country, last year thegovemmen1 ,.;d that the rateofinOation "''" S.2,0. Thiswa,a big iocrea>< on the previous
~ar' • figure of3.•'-· The main reason for1he increo .. wosthe increase in pri~ofoil import, (A]. These ore es-tiol
;::=~:~/s
w,, have no oil of our own. The figureof5.2,0 is not nec<essarilybad but there would be concerns ifit
Theunexpectedincreaseintherateofinflationhascon""'luene<esforconsumers,produe<ersandthegovernment.for
consumers, the prices of e>1'rydoyitems will increase a, the value of money decreose,. This could mean that they hove to
•pend more time comparing prices to get the best d,al, Anyone with savings in• bank will also los.e out as the rate of
interest is invariably below the rate of in/lotion. Altemoti•ely, debtors or those borrowing money are likely to gain. People
who rely 011go,..,rnmont handouts ore also likely to lose, •• the., tend not to K.,.p pace with • change in the rate of
inllation(AJ
lnfl•tionraisesproductioncosts,ospeciallyiftheinflotionisduetotherisingcostofimportedrawm•terials.Producers
canalsoexperienc,,menuoostsasacon,equenceofhavingtoregu!arlyalterthcpriceschargedtocustomers.For
bu,inesoes, inflation create, uncertainty, which tend, todixourage future im"estment plans. They also incur what are
calledshoeleotherc<>Stswhenmovinganyliquidassetsaroundfrom011eplocetoanotherinsear,:hofthehighestraleof
intcrestlAI
GovernmentsolsoeJtperiencecon,equences.AnincreaseintherateofinOotionisli~elytoredu<eoC01Jntry'
s
'ntffnat"onalcornpet"t"v.enes,Ttsra·'"nflat"on"smuchgreatcethanthatof'r
·'."ng
"vals.Th" can,.,sult'n,
'11
inexporte:xpenditurebyit,overse
.. customenandari><inimportexpenchturebyitsownpeople,.,,importedgood,
:;::me rather more competitive in the domestic market IAI.Inflation can also be politically dangerous ifit gets wt of
As can be "-"'n oho-,-.,, con>umers, producu, and the government experiencecon""'luenc"" ofoshup, unexpected
increoseintherateofinfl>tion.Wholosesoutmostwilln,al]ydep,,nd011theoctualextentofthechoJ18elndhowswif1ly
it has come about. In the ahsene,, of more information. it is not possible to say which ofthe thrtt loseo out the most [El
Your challenge
Seewhe1horyou can impro,·e thisansw•r. The answer improves a, it dovelops. The first paragraph iswoak and inflation is
poorlydefined.The,econdparagraphisvaguealthoughtheuseofactualdataispromising.Thereafter,themainproblemis
thaltheonswerisnotdirectedtoalowermiddle-incomecountry.Abetteran,,....risgi•enintheworkbookanswers-but
w·teyoursoutfirst
>Unit 5
Government macroeconomic
intervention (AS Level)
>Chapter21
Government macroeconomic policy
objectives
If \R\:l'\C.
l\lTf'\TIO'\S
In this chapter you will:
explain a government'
s macroeconomic
explain a government'
s macroeconomic
policy objective of price stability
policy objective of low unemployment
explain a government'
s macroeconomic
policy objective of economic growth.
r"'"*
Inflation tacg:
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
the macroeconomic
policy aims of a government.
has to prioritise its aims. These aims can vary over time.
1
What are a government'
2
Describe an inflation target.
s macroeconomic
policy aims?
3
Explain why a government has an inflation target.
4
Explain what low unemployment
5
Explain why economic growth is a macroeconomic
means.
policy aim.
Analysis
Vietnam'
s economic progress
GDP growth (% year on year)
6.8
7.1
6.8
6.5
Inflation (yearly average%)
3.5
3.6
3.6
3.8
Unemployment rate(%)
2.1
2.0
2.0
2.0
Table 21.1: Selected measures of Vietnam'
6.6-6.8
<4.0
s economic progress, 2017-2020
Vietnam is one of the fastest growing economies in the world. In 2019, Vietnam· s economic growth rate was at least 6.8%,
within its annual target. An important reason for Vietnam' s high growth rate has been the way the economy and its people
have benefited from the growth in exports of inexpensive clothing and foohvear.
Some multinational companies have moved from China into Vietnam. This has created a strong labour market with no
particular unemployment problems.
Vietnam' s President was very clear that macroeconomic
the target set by the National Assembly.
6
Analyse whether Vietnam'
\\OH.Jd:D L\ \~ll'l 1: JOH
stability had been maintained, while inflation had been kept below
s people are likely to be better off in 2020 compared to 2019.
~J1,
GDP grmvth in 2020 is projected to be below that for 2019, and also below target. This will mean a smaller than expected
increase in the consumption of goods and services that are available for the Vietnamese people JA]. The forecast for the rate of
inflation in 2020 is 0.2 percentage points higher than in 2019, but below the target. Unemployment is low and stable, with
continuing opportunities for new jobs to be created. It is unlikely that new jobs created by MNEs will be well-paid [A].
Overall, it seems that Vietnamese people will on average be marginally better off. This is mainly due to the healthy increase in
GDP growth, the benefits of which should offset the more negative aspects of increasing inflation [E].
f'I{ \Cl I() <Jll SI 1or--s
Essay questions
1
Explain why an increasing number of governments have set an inflation target and consider whether this is a realistic
macroeconomic policy objective.
2
Discuss the main domestic macroeconomic
policy objectives and say which of these should be the most important.
Improve this answer
This is a sample answer to essay QI.
An increasing number of governments have introduced the idea of setting a target for the rate of inflation. These countries
have been diverse - low, middle and high - income countries. In some cases, the target is fixed at say 2%, in other cases it
may be in the range of say 3%-5% [K].
Inflation is where there is a general rise in the price level in an economy. For most countries, the control of inflation is the
main priority on account of the serious effects that a high level of inflation can have on consumers, firms and the
economy lK]. Other macroeconomic policy objectives, though still relevant, tend to have a lower priority.
The UK was one of the first countries to set an inflation target. It was originally set by the government, but responsibility
was then transferred to a committee of economists and business leaders. The purpose of the target is for the government
to adopt monetary and fiscal policies that are consistent with achieving the given target. This is difficult (E]. The target is
unlikely to be matched each year, and is best seen as one to be met over a reasonable period of time.
An important side effect of an inflation target is that it is likely to reduce or control inflationary expectations. This is
especially valid with respect to cost-push inflation, which could arise from excessive demands for wage increases. The
target acts as a basis for negotiations between employers and trade unions. For public sector workers, the target is likely to
become the final increase in pay. An inflation target can also act as a guide to firms when projecting what future prices to
charge for their products (A].
An inflation target, therefore, can be a realistic policy objective for a government. The experience of many countries has
generally been a positive one, with the inflation target being central to achieving the full range of macroeconomic policy
objectives [E].
Your challenge
See whether you can improve this answer. This is an effective answer. It is well structured, informative and stays focused on
the point of the question. The final two paragraphs contain a reasonable amount of evaluation for an answer at this level. You
could make a useful addition to the beginning of the third paragraph by including an example of an inflation target from a
country you have studied and evaluate whether the target has been achieved. A better answer is given in the workbook
answers - but write yours out first.
~
ASALEcon WB_Chapter_21_Answers.p...
>Chapter22
Fiscal policy
lnthi,chapl"1")'0UWill:
definethemeaningoffi.,alpolicy
defincthemeaningofagovcrnment'
sbud!l"l
explain the differene<>betwwn a governmcn1 budget deficit and a government budget surplus
explainthemeaningandsignificanceofthenationaldebt
explainthedifferencebetweenindirNlanddirecttaxes
explainthedilferencebetweenprogressive,regressiveandproportionaltaxes
explainratesoftax:marginalandaverageratesoftaxation(mrt,art)
analysetheroasonsfortaxation
cxplainthedifferencebetw...,ncum:ntandcapitalgovcrnmcmspending
analysethereasonsforgovernmentspending
explainthedifferenc,,betweenexpansionaryandcontractionaryfiscalpolicy
discuss,using:AD/ASanalysis,theimpac1ofcxpansionaryandcontrac1ionaryfiscalpoHcyonequiHbriumlewlofnational
ine<:>me,1heJ.,,...,lof...,aloutput,1heprie<>levclandemployment
Autornaticstabilisers
Averagerateoftax
Balancedbud,:et
Budget Budgetdeficit
Bud,:etsurp!us
Gapitalgovernmentspending
C<>ntractionaryfiscalpolky
CUrrentgovernmentspending
Cyclicalbudgetdeficit
Directtaxcs
!>isc...,tfonaryfiscalpolicy
Exhaustivegovernmentspending
Expansionaryfiscalpolicy
F;scalpolicy
lndirectlax""
Marginalrateoftax
Nationaldebt
Non-exhaustivegovernmenl•J>"nding
Progressivelax
Proportional!ax
Regressivetax
Sintaxe< Specifictaxes
StructuralbudgetdeficitTaxavoidance
Taxbase
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand
what fiscal policy means
whatisindude<linagovernment'
sbudget
thedifferencebetweenprogressive,regressiveandproportionaltaxes
whygowrnmentsimposetaxes
the difference between cum,nt government spending and capital gm..,rnment spending
lhedilferencebelweenanexpansionaryfiscalpolicyandacontrac!ionaryfisca.lpolicy
theeffectsofexpansionaryandcontra<1ionaryfiscalpolicyontheequilibriumnationalincome,thelevelofrealoutput,the
pri<:<>levelandemployment
An error that many learners make is to confuse fiscal policy and monetary policy. The best way to amid any confusion is to keep
remindingyourselfthatfiscalpolicyisabouttaxationandgovernments,..,nding.
I
D<lscribethescopeoffiscalpolicy.
2
D<lscribethemeaningofagm·emment'
sbudget.
Withthehelpofexamplc,,explainthedifferene<>betweenindircctanddirecttaxes
5
Explainthedifferencebetweenprogressi,·e,regre<siveandproporlionaltaxe•
6
Describe the difference between current go,·ernment spending and capital government spending
7
Explainthedifferencebctweenanexpansionaryfiscalpolicyandaoontra<1ionaryfiscalpolicy.
Analysis
Malarsia' sresilienteconomy
Malaysia is an upper middle·income country. The country' s economy is one of the strongest, most diversifie<Iand fastest
growing in Southeast Asia. Malaysia has moved from an economy dependent on rubber and palm oil production to one that
produc"5lotsofpetroleumandnaturalgas,a.long,ideilssub.ta.ntialmanufacturingandservicesecton
Malaysia hao used an expansionary fiscal policy lo promote economic growth, create employment opportunities and impro,·e
thedistributionofincomewhile.,.,,kingtostrikeab.alancebetweentheseobjectives.
In August 2019, a meeting of economists concfode<Ithat Malaysia' s economy was facing uncenaintydue to growing
restric!ionsoninternationaltrade.Theeconomistsbeheve<lthat,despiteMalaysia'
•highdebtle>·el,iftheeconomywas
hadlyhitinthefuture,therewouldstillheanopportunitytopursuefurtherexpansionaryfiscalpolicymeasures.StrongGDP
growthhighlightedMa!aysia' sresiliencetothechallengingglobalenvironment
Economic growth
Unemployment rate
0.43(2018};0.46(2009)
Exports
9'98billionringgit1(2018)
Imports
878hillionringgi1(20!8}
Government spending
260billionringgit(2018)
227billionringgit(2018)
Note: 1TheringgitisMalaysia'
scurrency
Tuhle22.l:KeystahslicsforMalaysia'
seconomy,2019and20!8
8
Explain why Malaysia' s gm·ernment might want to implement an expan,ionary fi,cal policy.
9
!'J<plainwhy the Malaysian go,·ernment might want to increase government debt.
lO Analysethelikelyeffo<1sofincreasedgoYemmentspendingonMalaysia'
,economy.
Evaluation
II ConsiderwhetherMalaysia'
sfiscalpolicyismeetingilsstatedaim
The stated aim of Malaysia' s fiscal policy is to promote economic growth, create employment opponunities and improve
incomedistribution.C<>nsidc,ingthedatafor2019and2018,thcreisdearcvidcne<>thatthescthre<:objectivcsoffiscalpolicy
are being met (El, Economic growth is al a level associated with an emerging economy. Unemployment is low. The decrease in
theGinicoefficientindicatesthatthereisamoreequalincomedis1ributionin20l8oomparedtonineyearsearlier[~].This
assessment,though,isbasedononlyoneyear'
sdata.Datafor<>!herrecentyearsandforecastdatawouldbeusefulin
confirmingthisa,se.,mentlF,J.
12 Comment on the extent to which Malaysia' s economy is likely to be rcoilienl to the challenging global environment
Datal't'Spons,:,qul!Stinn
I
UsingthedatainTuble22.1:
a
StatewhethcrMalaysia'
sbudgctwasindcficitorinsurplusin2018.Justifyyouranswcr.
b
StatewhcthcrMalaysia'
sbalanceoftradewasindcficitorinsurplusin2018.)ustifyyouranswer.
Essay questions
I
Agovern,nentde,cidestodoubleilsexpenditureonitscountry'
sinfrastructure.
Withthehelpofaggregatedemandandsupplyanalysis,discusswhetherthiswillbebeneficialforitseconomy.
2
Explainwhyagovcrnmentmaynecdacontractionaryfiscalpolicyandconsiderwhysuchapolicyshouldonlybefora
shortperiodoftime
ln1prowthisanswer
Thisisasampleanswcr1ocssayQ1
Infrastructure is one of the ~•of
government spending. It coven: roach, railways, housing, airports for example. lfa
government decides to double its infrastructure spending, thi, will mean a big boost for the economy IK]. Aggregate
demandwiUalsodouble.Theeffectcanbeshownonadiagram.
ii~~
~
0
Aggregatedemandincrea..,.duetotheincreaseinG.ThisisshownbylheshiftofAD,withGDPalsoincreasing.The
result will he that more jobs are created in order to construct the new roach, houses and so on. These job• will be among
suppliers,aswellasinfirmswhoactuallydotheconstruction[Al,Uisgoingtobebetwficialfortheeconomy.
Wherethisincreasedexpenditureisnotgoingtobebenefidalisifitcreatesdcmand-puUinHation.lfso,itwillreducethe
benefits from the increased government spending and affect many people and businesses in the community (AJ
Your challenge
See whether you can improve this answer. The answer is weak in all respect; and ii is also short. Then, are variou• erron:
Aggregate demand will not double due to leakages from the cincular How of income. The diagram is incomplete and not
reforredtoinapositivewayintheanswer.Thereisno"'«luationastowhethertheeffectswillbebenefidal.Abetteranswer
isgiwnintheworl<l>ookanswen:-butwriteyoursoutfirst
~
ASAI..Econ WB Chapter U .o.ruwe,s.p
>Chapter23
Monetary policy
Jn this chapter you will:
define the meaning of monetary policy
explain the main tools of mm1etary policy, including interest rates, the money supply, credit regulations
explain the difference between expansionary and contrnctionary monewry policy
di.c1.1n, u1inr; AIJ/!1:'>
,nalpi1, the impact of np•nliiOtlUJ' and eontnctionary
n•tion,l incom", the real \eye] of output, the pric" \cyo] and employment.
r·IIIM
Ce,.,c,l hrnk
O,mmecc,,l
b,,.ks
Credit regulations
Interest rates
mon•tuy
Monetary policy
p<11icyun l(lllilibrium lHtl of
l,,loney supply
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
whaT monetary policy means
lh<·main lO<Jlsof monetary policy: interest rn!cs, the monq supply and credit wgulati"ns
the difTerenc<·between <'xpansi"nary and c"ntrncti"nary
I
m"nelary p<Jliey
Ik'scrib,, the scope of monetary policy.
2
Explain the meaning of an interest rate.
3
Give~ simple definition of the money supply.
4
Describe the meaning of credit regulations
Ik'scribc the role of a central bank in monetary policy.
Explain the difference between an expansionary and a contrnctionary monetary policy.
6
Analysis
Conducting monetary policy the Fed' sway
Th• U~ F•daral llaun•• 11,-,ard,1ha US c•ntral bank, io ruponoihl• for Iha USA' • mnnaury policy. lt io manda1•d by tha UI
con1nt .. to manar;• mon•tary policy •ubjact lo !WOoti;•ctiv ... Th••o ant lo prom"t' muim..,,o (or foll) ,mploya:,•n! u1d
11,blc prico1, ,.-ith • tu1•t of2._, iotl,tioo ovar th• pariocl 1ho,Yn in J'igure 23.1.
Dacioinn, on monatary policy lnt uken b}' tha l'1deral Open Mark11 Cnmmittu. Wo11notably, thio body dec.idu <>11wh11har to
r•i■<· "' luwtr the inttr~•t rat,. Lowuin1 th• in!er,1t r..!1, knu,,,11u the l«l•nl fund• rat•, i1 let•n u r,pr~wntin,; In ~uin1 uf
monetary policy. Raising the interest rate is a tightening.
Figure 23. l shows the changes in the federal funds rate from 2014 to late 2019
l~~L
2014
2016
2018
2020
Figure 23.1: US federal funds rate, 2014-2019
7
Pip lain ho,Y a 'lowering of the interest rate is seen as representing an easing of monetary policy. Raising the rate is
ti,:l:,l<·nin1' .
S
Analy•o how ,·on trolling the f.,dcral fund• nl• •llo,,.,·1th" U~ contnl b•nk to promo!<>the 1m·crnment'
obj..::tivH
s two macrocconumic
Evaluation
Comment on why mone1ary policy in the USA may nnt always wnrk as suggesTed by economic theory.
?
Data response question
I
Usini; the <la!a in Fiptrc 23.1:
Describe th<·chang<'S in th<· Fed' s Fund Rate from 2014 to 2019.
b
State a time per;od when the Fed was undertaking an expansionary mnnetary policy and give a possible reason for
thispo!icy.
S!ate a time period when the Fed was undertaking a contrncti"nary
this policy.
b
monetary policy and i;ive a µussiblc reasun for
During 2019. To offset fears of rising un<·mploymcnt and rcc<'ssion [A].
From late 2016 to the beginning of 2019. To control inflation to its 2% tal"]sct[Al
Essay questions
I
Explain how monetary policy could be used to counteract a period of deflation and consider whether this policy is likely to
be successful
2
Discuss whether monetary policy is the best way for a government of a middle-income country !o correct inflation
3
Discuss how an increase in the interest rate is likely to affect aggregate demand ,rnd supply and discuss why the effects
maynotalwaysbecertain
lmpm\"eyouranswer
This is a sample answer to essay Q3.
Tbc inl<'ro1t r•l" i• the pric<· ur coot uf borro,,.,·in,; mon.,y. It i• .Jiu th<' r~"'·utl ur bonolit for thu1e poopk wh" art' ablo tu
""'' and hold their u·,ing1 in financial in1tito1iona. U1ing intarut ra.tu to control the lenl of all'lragat• dam,nd in Iha
•conomy ii th• main ••yin which monitory policyworb in pr1ctic1 [K]
An increu<' in the inlero1I rate t.et·un -..·hen it hu l,c.,n dct<>rmin"d th•t • conlractionary or ddbtion•ry munolary policy
1hould i. adopt•d. Thi• \Yould i. don• if Iha mon•t•ry ,uthoritiH war• concerned that the rat• of in,,ation ,,... too hi1h
and h1.-in1 detrim•ntal atl'ect, on th• economy 1.nd on the foni1n nch1n1• rua [Al
A niore or 1111imm,diate ekt
of the riM in in!entll ratu i1 thll coo11.1m,n.ant likely to.,,,, mor, llld 1peod le11,
""l"''"io.lly if th<')' uo burrowin1 munoy lo fund comumptiun. Then' i1 en <>pp:,rtunity coil im·ol,·<>dIA.I.The ri10 in
inlarHt ratH ,.-ill al10 ,INct buoinH1 ,,rn,1 who tlnd th1.t the incruHd coot of borrowing no,Y mah ■ thair inva1tment
pl•n• rlr lu, attractiH. lo invutm,nt f•lt•n and •&&A&atedemand decrenu. Firm• ant alao intlu,nc,d by fallin&
eon•umer d,·m•nd and •ro likdy to b,, l,n confid<·nt about th.,ir futuro IA.I
lncreued intera1t ratu •ncourage 'hot .-,oney' to tlo,Y into an ..::onomy H o.-.n1eu invHton1 con gat I bettar r•t• of
return thro1.11htnn1ferrin1 thair invutmant1 from 1omewhant th•t i1 p•yin1 l•11 int,ntll. ·m,likely con11quence i1111
•ppr.,ci•lion of th<>dom.,•tic iorci1n e.xch1.n1e rate IAI. Thi1 i• nut good nO\n, ,inc" tho pri,-., of dumo•lic "-"p::>rt1will
incr•u•. The bi1har nchang• rat, will encour•g• con1umua to buy mar• 1co:l1 from abroad. Thi• -..·illonly•••'•• to fuel
intlation if thent ara. intarm.:liate &ood~that •re uHd in th• m1.m1foctllrin1 indu1try. So th• nil of ai:port, and imt<irtt i1
likclytufall lAI
ni., offuct• of an innoue in inler•·•t rat.,. m•y not al-..·•y• b,, 1tr1.ightfor.,.-ud. Con•um<·n m•y continue tu •pend,
Hp..::ially on ·bi1 tick•t' item,, if they expect, furthar incr•u• in interHt ratuto i. imminent. ~imiluly, ,,rm1 may
continu, to invut if thay ful confident about future rnuk•t opportuniti•• [[]. The imp.,ct Oil ai:port1 and impom will
,•ory much dq,,,nd upun their pric" ~luticitic• of d•m•nd I[]
Yoor challenge
-''" ,.-h•tbar you can improv. thia anawar. Th, content of Iha an_., i1 l'lne1althou1h it i1 not wrin,,, in an analytical atyle. An
AD/A.-'di11ram -..·ould anhanc• th• an1wer" I qnality. Th• !'Ina! pu11raph iocludu I littl• e.-alu•tion, which could i.
d<>Ydop:,dtu kcu• moro on th<·point uf tho Q"l'ltion, why tho etiuct• m•y n"t •l"'·•y• b,, cert•in. A botl..r an1w..r i1 :ri¥<>ll
in
th, ,.-orkbook 1n•,.-ar1 - but write your• out tlr1t
~
ASAL_Econ_WB_Chapter_23_Answers.p
..
>Chapter24
Supply-side policy
Jn thischapleryou
will:
define the meanin~
of supply-side
pulic)· in terms of it, dT,,ct, on LRAS curve,
explaintheobjectivesofsupply-sidepolicy(toincreaseproduc1ivityandproduc1ivecapadty)
analysethetoolsofsupply-sidepolicy,includingtraining,infrastructuredevelopmentandsuppor1fortechnological
impmvcmcnt
diS<·uss,using AD/ASanalysis, the impact of supply-side policy on !he equilibrium national income and the level of n,a]
output,thcpricclcvclandcmploymcnt
Key skills exercises
Knowledge and understanding
To answer tho questions in this chapter, you n<'W to know and und~rstand
wha1a.,upply-sidcpolicymean.,
howa,upply-sid<:policyaffectslhel.RIIScun,ein,mo,conomy
theobjec!iv,,.,,ofsupply-sidepulieytools
typi<·al..-xamplesofsupply-sidepolicytools
the cffe<:tsof supply-side policy on equilibrium national income and the level of real output, the price kwl and employment
I
Describethescop<lofasupply-sidepolicy.
2
Describe how a supply-side policy affecls the LI\AScurve in an economy.
A supply-,i,le poli9· lead, to a shift lo the righ1 of the l.R,\S curve. Thi, shif, will lea,! to an increase in real GDP [K]
ExplaintheoLjedivesofasupply-,id..-pulicy.
3
4
De,uil>O'fourtypicalsupply-,id..-pulicyt<><.>ls.
It will help you 1n n,memDCr that supply ,i,le-policy tool, always ,,,.,k lo increase aggregate supply. Ttwoulrl DCpointle.,s for
governments to do otherwise.
t\nalysis
l'orcignwurkcrsinSing:.,purc
■ Non-residents - migrant workers and their families
■ Permanoot residents
■ Citizens populatioo born in Singapore
.;, 5.0
]
4.0
I
~ 3.0
i-
2.0
a. 1.0
0.0
Figure24.1:ThecompositionofSingapore"
spopulation,2015-19
Source:SingaporeDeportmentofSta<lstk,
S
ExplainwhyauractingforeignworkerninSingaporeisasupply-sidepolicy.
6
Explain how ~ingaporc· s foreign workforce i, likely to change when there is a recession in the global e<:onomy.
Evaluation
7
rnscuss how c·han11..-,
in the numl>O'rof mi11rantworker,; alfe<-tsreal output, the pric..-le,•..-land employment in Siniapure
8
Discus. the benefits and costs to Siniapure" , e<·orwrnyof the 11rowini numkrn of foreign mi11rantworker,;.
Data response question
l
l'singthedatainFigure24.1:
a
DcscribcthechangingcompositionofSingapore'
b
Explain how the composition ofSingaporo' s population is likdyto change if there is recession in ~ingaporo" s
spopulationfrom2015to2019.
Ko;say qucslions
l
With the help of examples, consider how supply-,ide pulicie-sare primarily micrUffonumic policies aimed at makill)I
markets more efficient
lmpro,·,ethisanswer
ThisisaS<>mplcanswcrtocssayQ2
LRAS LRAS1
RealGDP
Your challenge
>Chapter25
The reasons for international trade
lnthischapteryouwill
explainthedifferencebetweenabsoluteandcomparativeadvantage
explain the benefits of specialisation and free trade (trade liberalisation), including the trading possibility curve
explain how the terms of trade are measured
analysethecausesofchangeandimpactofchangesinthetermsoftrade
discussthelimitationsofthetheoriesofabsoluteandcomparativcadvantage.
Absolute advantage
Comparative advantage
Economies of scale
Exports
Imports
Opportunity cost ratio
Trading possibility curve
Terms of trade
Factor endowment
Free trade
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand:
theprinciplcofabsoluteadvantage
theprincipleofcomparativeadvantage
what free trade means and why free trade can be beneficial to all economies
whatismeasuredbythetermsoftrade
reasons for a change in the terms of trade for an economy and the impact of the change
limitationsoftheprinciplesofabsoluteandcomparativeadvantage.
Learners often struggle lo understand the meaning of the terms of trade. A common mistake is to think that the terms of trade
are the same as the balance of trade or something to do with an agreement when firms or a country trade with each other. The
terms of trade are quite simply the relationship between export prices and import prices.
I
Describetheprincipleofabsoluteadvantage
2
Describetheprincipleofcomparativeadvantage.
3
Describethemeaningoffreetrade.
4
Definethetermsoftrade.
5
Statehowthetennsoftradearemeasured.
Analysis
The benefits and 1:osts oft he Comprehensi\·eund
Progressin• Agreement forTr,ms-Pacific
Purtnership
(CPTPI')
At the end of 2018, 11 countries went ahead with the CPTPP, a radical free trade agreement betv,een a group of countries,
mainly Asian, along the Pacific rim. The early enforcers were Japan, Singapore, Australia, New Zealand, Canada and Mexico.
Other members who have since ratified the agreement are Brunei, Chile, Malaysia, Peru and Vietnam.
CPTPP members are a powerful force in global trade, with 14% of world GDP. It is significant that most are in Asia, the fastest
growing region in the world and with a proven commitment to globalisation. It is also significant that the UKcould become a
member in the future.
The benefits of the CPTPP are to create more jobs and generate economic growth in the economies of its members. Exports of
vehicles, machinery and plastics are free of any restrictions, as are agricultural products such as dairy, beef and poultry. This
has been a huge boost to farmers in Canada, Australia and New Zealand
The CPTPP though is not without costs. Its free trade principles will lead to cheaper goods from low-wage countries such as
Vietnam and Mexico flooding into high-income members. This will lead to unemployment in manufacturing in high-income
countries, and was the main reason why the USA pulled out of an earlier Trans-Pacific Partnership agreement.
How might you determine whether a member of the CPTPP has an absolute or comparative advantage in the production of a
particular product?
6
A simple way is to look at the value or volume of a product that is being traded. Where a country" s exports are greater than its
imports for the same product, it is /ike/ythat the country has an absolute or comparative advantage [A]
7
Analyse how the CPTPP encourages members to specialise in the production of certain goods and services
8
Analyse why the CPTPP has led to increased concerns about Vietnamese goods entering the USA.
9
Proton is a large vehicle manufacturer based in Malaysia. Analyse the likely opportunities and threats to the company as a
result of Malaysia· s membership of the CTPP.
Evaluation
JO Discuss the likely benefits to members if the UKjoins the CPTPP.
Multiple-choice question
I
The terms of trade index for Indonesia in October 2019 was 105.9. In March 2020, the tenns of trade index was 102.l.
Whichoftheseisacorrectdescriptionofthischange?
,ho1\much
improved
improved
3.8%
deteriorated
3.6%
deteriorated
3.8%
Essay questions
I
Explain the benefits of free trade as suggested by the principle of comparative advantage and consider whether these
benefits can be identified in the real world.
2
Discuss the effects of a change in the domestic price level and an economy'
s exchange rate on the terms of trade.
lmpro\"ethisanswer
ThisisasampleanswertoessayQ2,
As the name suggests, the terms of trade is the basis on which two countries agree to trade. It covers things such as the
price for goods traded, the exchange rate, terms of delivery, payment requirements and so on. These terms must be
agreedbeforeanytransactionoccurs.
If the domestic price level changes, then this will affect the price of goods being exported. Any increase in the price could
lead to a fall in demand from countries buying exports. This would then reduce aggregate demand and could lead to loss
of jobs in businesses that produce goods for export. It may also ha~·e a negative effect on the balance of payments of a
country. On the other hand, if the domestic price level falls, this could mean that more exports are sold, as they are now
more price competitive compared to exports from trading rivals [K]. The reverse could occur - an increase in demand,
morejobsandabiggercreditinthebalanceofpayments.
Whether a country is successful in its trade also depends on the exchange rate. International trade uses US dollars to price
goods. The exchange rateof any currency such as the rupee against the US dollar varies, often on a daily basis. This is why
arateofexchangeisincludedinthetermsoftradeandisagreedbeforeanybusinesstransactiontakeplace.
If a currency loses some of its value, then its exports become more expensive and its imports become cheaper. This is bad
news for the economy, as it leads to a fall in aggregate demand and less credits in the country' s balance of payments.
When a currency appreciates against the US dollar, its exports become cheaper and more attractive to buyers. Goods
imported from other countries now cost more and so consumers will buy less of them. So, to conclude, a change in the
domestic price level and an economy' s exchange rate have an important impact.
Your challenge
See if you can improve this answer. This is a weak answer in all respects. The definition of terms of trade in the first paragraph
is wrong. This makes it very difficult to answer the point of the question. The second and third paragraphs are therefore very
general, although they do show some very basic knowledge. The third paragraph lacks clarity and contains wrong statements
The last paragraph contains many conceptual errors. There is no discussion, as required by the question. A better answer is
given in the workbook answers - but write yours out first
~
ASAL_Econ_WB_01apter_2s_Answers.p
..
>Chapter26
Protectionism
1 l \H\I\C,
J\ 11 \ ! 10\S
In this chapter you will:
define the meaning of protectionism as it relates to international trade
explain the different tools of protection: tariffs, import quotas, export subsidies, embargoes and excessive administrative
burdens ( 'red tape' )
analyse the impact of the different tools of protection
discuss arguments for and against protectionism.
Current account
Dumping
Embargo
Tariff Voluntary export restraint
Exchange control
Infant industries
Monopoly
Protectionism
Quota
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
what is meant by protectionism
the different tools of protection and how they work
the impact of the different tools of protection
arguments for and against protectionism.
l
Define the meaning of protectionism in the context of international trade.
2
Describe the meaning of a tariff and give an example.
3
Explain how a tariff works.
4
Describe the meaning of a quota and give an example.
5
Explain how a quota works.
6
State the purpose of exchange control.
7
State the purpose of an embargo.
8
State the purpose of voluntary export restraint.
9
Describe the term
'infant industries'
10 Describe the meaning of dumping and give an example.
Analysis
The USA lifts threat of tariffs on Brazilian metals
In a surprise move, the US government backed down from its threat to impose tariffs on Brazil" s exports of steel and
aluminium. The reason appears in part economic - US steel manufacturers require semi-finished Brazilian steel. It was also
political as the USAseeks to develop stronger links with this emerging economic powerhouse. Exports of these metals from
elsewhere are subject to tariffs of 25% (steel) and 10% (aluminium).
The US government had previously criticised Brazil for unfair trading practices. These included deliberately weakening the
real (Brazil' s currency) against the US dollar and hurting American farmers by selling increasing quantities of agricultural
goods, especially soybeans, to China.
11 Analyse the impact on the US economy of a tariff on imports of steel and aluminium products.
12 Explain the likely reasons why the US government has put a higher tariff on steel products compared to the tariff on
aluminium products.
The most likely reason is that the USAneeds imports of aluminium products more than it needs imports of steel products. Also,
US steel producers could be less efficient than aluminium producers and so need greater protection to stay in the market. There
could also be a greater need to protect jobs in the steel industry [A].
13 Analyse how a deliberate weakening of the real (Brazil" s currency) is a form of protection.
Evaluation
14 Discuss whether the USAis justified in imposing protectionist measures on trade with an emerging economy such as Brazil.
1 I{\( II( l (ll I SI JO\S
Multiple-choice question
l
In which of these situations will imposing a tariff on imported food be most effective?
A
Where the price elasticity of demand is inelastic.
B
Where the price elasticity of demand is elastic.
C
Where the income elasticity of demand is positive.
D
Where the cross elasticity of demand is negative.
Essay questions
I
Explain the difference between a tariff and a quota and consider which is best used by a high-income country.
2
Discuss whether the case for protectionism in international trade can ever be justified.
Improve this answer
This is a sample answer to essay QI.
A tariff is a tax that is levied by a government on imported goods. It can be specific in the form of a fixed amount per unit
imported or it can be ad valorem as a percentage of the price. The point about a tariff is that it pushes up the price of the
product, making it more expensive in the importing country. Its other purpose is to steer domestic consumers away from
an imported good to the same or similar product made by firms in the domestic market [KJ. A typical example of this is
the 10% tariff levied by the European Union on vehicles that are produced elsewhere or the 12% tariff on most imported
clothing.
A quota is different. It is a physical limit set by a government on particular imported goods. The idea behind it is by
restricting supply, the price of the imported goods will increase [K]. Depending on the price elastidty of demand, the
seller of the imported product could receive more revenue. A quota can often take the form of a licence which sets out
how many goods or what value of goods can be imported. Examples of quotas are the restrictions that India imposes on
the import of pulses and grains from a wide range of countries.
Tariffs and quotas have the same objective, to limit imported goods and to protect domestic producers. Both involve
interfering with market forces through taxing supply and restricting supply in the market. A tariff can raise revenue for a
government. A tariff will also increase the price of imported goods as will a quota. With a tariff, though, the consumption
of the imported product may not decrease if it is price inelastic. With a quota, consumption can be expected to decrease
[AJ.
Your challenge
This is an effective answer. It covers the main subject content ln a logical sequence and there are no particular errors. The
style is more analytical than descriptive. Your challenge is to write a final paragraph containing some appropriate evaluation.
A better version of the final paragraph is given in the workbook answers - but write yours out first.
~
ASAL_Econ_WB_Chapter_26_Answers.p
...
>Chapter 27
Current account of the balance of
payments
lnthi<chaptcryouwill
explainthecomponenlsofthemrrentaccountoflhehalanceofpayment,
calculalethebalanceoftmdeing<>Od,,inservice,;andingOC>dsandsetvicesandtheovemllcumentaccountbalanc..e
anaJy,.,thecaus.-sofdi"'<juilibriuminthecurrentaccountoftheOOlanceofpayments
discussthecons"'luencesofdiS<>quilibriun,inthecurrent•ccountoflhebalanceofpaymentsforthedu,ne,ticantl
externa\ccot:,
Cum,nlacrnunlsurplus
Key skills exercises
Knowledge and understanding
Toamwerlheques!ionsinthi,chapter,youneetltoknowandunder,tand
thepurpo,eoftheh.danceofpa:,·menls
thecon,ponentsofthebalanceofpaymentsaccount
thecomponentsofthecurremaccountofthebalanceofpaJm1ents
thcmeaningofbala.nccandimhalanccsinthccurrcntaccountoithchalanccot'paymcnts
thecau,esofimbalancesinthecurrenlaccountofthebalanceofpayment<
thecon""<luence,ofimbalancc.,inthecurrentaccountofthebalanceofpaymenl,
l
Whali,rernrdNinthebalanc-.,ofpayment,>
2
Statethefourstandartlwaysinwhichthel>alanceofpa)'menlsaccountsofarnunlryarepre,enled
J
D<-scribethefourpartsofthecurrentaccountofthebalanceofpa;~nents.
4
Explainwhatisn,eantbythebalanceoftradeingoodsandsen•kesan<.lhowitiscakulate<.l
S
l~plain what is meant by the current accoi,nt halancc and how it is calculate<!
6
.:Xplainthcrliffcrcnccbctwe<onh;,lanccanrlimbalancesinthecurrcntaccountofthPhabnccofpaymcnts
Analysis
China'
schangingtradcsurplus
For many years, China has sold more to the USAthan the USAhas sold to China {soo Figure 27.l)
■ US exportsto China
■ US importsfrom China
•
Balance
Fii:ure27.1:UStradebalanc-,,withChina,2014-2019(in$,billion,)
This has led to the CS.\ applyinphrec rounds of tariff, .sine,, the beginninR of 2018. These tariffs covered aerospaete, IT,
mdal>, chemic·al,, food produclsan<.l most other goo<.l,
- - - - - - - - - - =
2018
2018
2018
2018
Figurc27.2:China:cxportandimporttrends,January2018
2018
2018
2019
2019
2019
2019
2019
Octobcr2019
SoU"-'<':G<1><0ralAdministrationofCustom,oftheP<of>k',RcpublicofChina
7
Analyse the likely causes of imbalances in the current account oft he balance of payments of the US economy
8
Analyse the possible consequences for the US economy of imbalances in the current account of its balance of payments
Evaluation
Comment upon the implications for !he global economy of the USA' s deficits on the current account of its balance of
9
Data response questions
Using the data in Pigure 27.1, calculate the USA• s trade de~cit with China in 2019
Using the data in Pil(Ure 27.2, compare the year on year rercentagc changes in China" • imports and export., in 2018with
thechangesuptuOctuberW19
J
Explain what adilitional information you are likely to need to i;et a full recor<.lofthe Us.~· s <.lefidts on the cum,nt account
ofthebalanceofpayments?
Essayquestlons
1
Considcrwhetheraf"'rsistentsurplu,inthecurrentaccountofthebabnccofpaymentsi.,g<>Odforanc;:;onomy.
2
Explain why many low-income rnuntrie, ha,·e imbalance, in the current ac·countofthe
them<><tlikdyrr,a,s,:mfott!u,-,,irnba1"ncc"
balance of paym€nls and consider
lmpro,·ethi,answcr
Thi,isasarnpleanswertoessayQl
Tmbalance,inlhecurrentaccountofthebalanceofpayment,occur,whcnthcrearepersi.stentdcficit,occurringovera
period of lim~ [K]. There ar~ many re a.ons for thi,. These will now be e,plainN in the conlexl of a low-incum~ country.
It is ilifficult to say which is the most likely reason, as all apply. The most likely one sooms to be the loss of comparative
advantagcductoasustaincdrclianceonccrtaintypcsofagriculturalandmanufocmrcrlgoods[EJ
Your challenge
~ AW_Ernn_WBChapier27.,Mswecs.p
>Chapter28
Exchange rates
In this chapter you will:
define the meaning of an exchange rate
explain how a floating exchange rate is d...termined
explain the difference between depreciation and appreciation of a floating exchange rate
analyse the causes of changes in a floating exchange rate
discuss, using AD/ASanalysis, the impact of exchange rate changes on the domestic economy'
income and the level of real output, the price level and employment.
r..,..,
App<ecia<ion
Depcecia<ion
Exchange rate
Floating exchange rate
s equilibrium national
Hot money flows
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
the meuning of an <exchange rate
how a floating ex<.:hangerate i~ determined
the difference between depreciation and appreciation of a floating exchange rate
why a floating exchange rate changes
the impact of exchange rate changes on the domestic economy'
output, the price level and employment.
s eqllilibrium level of national income and the level of real
l
State the meaning of an exchange rate and give an example.
2
Why is an exchange rate usually expressed in terms of US dollars?
3
Describe the m!c'aning of a floating !c'Xchang"'rat!c'.
4
Explain th"' difTerenc"' b!c'tween a deprccialion and an appreciation of a floating exchange rate.
Describe the meaning of a hot money flow.
Analysis
Japanese }'"'n to US dollar exchange rnte
Figllre 28. 1 shows the c:,xchangerate of the Japanes,:, yc:,nagainst th,:, US dollar from 201Oto 2019.
0.Q135
2011
2012
2013
2014
2015
2016
2017
2018
2019
Figure 28.l;Japan!c'se y•m-US dollar exchange rate, 2010-2019
6
Analys,:,the causes of a change, in a floating c:,xchangcrate such as the J.ipanc:,seyc:,n
7
Analyse whether a depreciation or an appreciation of the US dollar against the Yen is likely to lead to an increase in the
number of US visitors to Japan.
An appreciation of the US dollar against the yen m<cansthat American visitors to Japan will get more yen for ev!c'T)'dollar th<cy
spend. This makes Japanese hotel prices and visits to tourist attractions relatively cheaper than when the yen was stronger [A].
D<cpendingon other factors such as the price dasticity of d<cmand for visits to Japan, there is lik0clyto be an increase in the
number of US visitors to Japan.
A d!c'preciation ofth"' dolfar against the y0cnwill have the reverse effect [Al
Evaluation
U1ing thll dat1 in Fip;unl 28.1, con1ider 1ome of the problom1 of the tlo1.tin;: Mch1ngll r1.lllfor J1p1ne1!l cu Mportera ,,,hen
tr1.ding with th• USA.
8
J IP,( JJ( J Ol ISJIO!';S
Data response questions
l
UsingthcdatainFigure28.l:
a
Stat<ca period wh<cnthe Y"'n has appreciated against the US dollar.
b
Stat<ca P"'riod wh<cnthe Y"'n has depreciated against the US dollar.
2
Describe lll'o reasons why the demand for US dollars may increase in Japan.
3
Describe t1,·o reasons why the supply of US dollars may increase in Japan
Essay questions
1
Explain how a depreciation of the exchange rate can cause cost-push and demand-pull inflation and consider which is
likely to be most damaging to the economy.
2
Discuss whether an appreciation of the exchange rate produces net benefits for an economy.
lmpro1·e this answer
This is a sample answer to essay QL
A depreciation of the exch1ngll rate occura when a currency lo1e1 value compu!ld to a forllign currllncy, u ■ ually thll U~
dol\n. A typic1.l 1..umpl• ii our M,l,y,ian
[K].
ringit. T0<l,y, th•r• .r, 1bout
◄
ringit1 to• dolln - 1 y.. r ,p;o thn• war•
◄ .2
The dCJpreci1tion i• not1ocid ne\'JI forth• U1lay1ian r~ople. Tt mean• that th• pric• of import• from countriu11uch u
Villtn1m 1.nd Au1trali1 fall, t'ncouraging u1 to buy morll clothing and mllat product• from thllm. Thi• will be inflationary
tho co1t ofli1'in1 ••ill incrouo u ther• m1y bo 1horta1•• in tho futuro.
1.1
Th.::fall in value of the ringgit also affects the price of ollr c:,xports to trading partners such as Indonesia and Singapore
Export prices will increase, and it is quite likely that this will then lead to demand-pull inflation in those countries. It is
also lik(']y to result in an incr.::ase in unc:,mployment in Malaysia.
A d•pr.ci1tion
of• curr•ncy thu•Klre can hav• inJ'\ationuy lll'i•ct1 on an f!Conomy. Wh•r• th• inflation i1 c1uHd by co1tpu1h facton, then it ••ill be moil damaging to an economy.
Your challenge
See whether you can improve this answer. This is a poor answer, full of errors and misconceptions. The first paragraph is a
promising start - the referenc<c to a local currency (and fat er lo trnding partners) shows that th<clearner is aware of th"' cont<cxt
of the question. The last three paragraphs lack detail and are full of fundamental errors. An AD/ASdiagram could be used to
support the text in an improved ans1,·!c'r.A bett<cranswer (excluding the first parngraph which does not need changing) is given
in the workbook answers but write yours out first.
~
ASAL_Econ_WB_Chapter_28_Answers.p
>Chapter29
Policies to correct imbalances in the
current account of the balance of
payments
InthischapleTyouwill
explainthegove,nmentpolicyobjecth'Cofstabilityofthecurrentaccount
analysetheeffectoffisca!,monetary,•upply-sideandprotectionistpoliciesonthecurrentacrounl
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand:
themeaningofstabilityinthecontextofthecurrentaccountofthebalanceofpayments
howfiscal,monetary,supply-sideandprotoctionistpolidescanaffoctthecurrentaccountofthebalanceofpayments.
A common error that some learners make is to think that the current account of the l>alance of payment, is the s.ame as the
balanceofpayments.Thecurrentaccoumisimportant,butitonlyindudestradeingoodsandservices,primaryandsecondary
income. The balane<>ofpaymentsco,·ers Olher ;terns•• well, making it a complete rccor<Iof all transactions bcm·cen a country
andallothercountries.Becarefultomakeitclearwhatyouarereferringto
l
£xplainthemcaningofstab;!;tyinthecurrentaccountofthebalanceofpaymcnts.
2
Explainthemeaningofimbalancesinthecurrentaccountofthebalanceofpayment.s
J
Explain how fiscal policies can correct imbalances in the current account of the balance of payments
4
Explain how monetary policies can correct imbalances in the current account of the balance of payments
5
Explain howsupply·side polidescan correct imbalances in the cummt account of the balance of payments
6
Explainhowprotectionistmeasurescancorrectimbalancesintbecurrentaccountofthebalanceofpayments
Analysis
In0ctober2019,Pakistann-cordedit,firstmonlhlysurplusonthecurrentaccountofthebalanceofpayment,ino,·erfour
y~ars. A small deficit followed in November, largely due to a fall in the amount of workers" remittances.
Figun' 29.1 showu.,implified
representation of Pakistan· , quarterly current account for July-September in 2018 and 2019
S14.3
"'
Figure29.l:Pakistan"
scurrentaccountdeficitinJuly-September20l8andJuly-September20l9(inS)
Go\'emmentpolicyha,beentoconcenlra!eonreducingthecurrentaccountdeficitinordertoretluc,,foreigndebt.Thepolicy
hasbeensuccessful-thedeficitfellby7MohetweenNovemher2018andNo,·emher2019.However,thi<successhasbeenat
thecostofamassivecutinimportsandthelowestrateofgrowthfornineyears.
Ec<:inomicdata is often presented in the media in the form of a picture. Figure 29.1 is a typical example, Learners will find this
formofrepresentationusefulinhighlightingthemainfeaturesindata.
7
Analysehowcultingimporl•i•likelytohaveaffectede<>nsumerSinP:tkistan
Cuttingimporlswillreducethequantityandvalueofgoodspurcha,Nlfromo!hcrcoun!rie,.Thereisalsolikelytobea
reductioninthequali!yofgoodsavailahletoPakistan'
spopulation.Someimportedgoodswillbereplacedhygood•thatare
produced domestically or cheaper good< from elsewhere, both of which may be of lower quality. It is also likely that the range of
goodsavailahletoconsumerswillheless.Non-.essentialluxuryproduct.sarelikelytohavebeensubjec1toanimportban(A].
Analysehowcuttingimport•hasledtoaretluctioninPaki,tan'
8
,rateofeconomicgrowth.
Evaluation
<J Using the data in Figure 29.1, comment on the importance of remittances forthe stability of the current account of
Pakis!an" sbalanc,,ofpayments
10 Discus,whatpol;cie,,otherthancutlingimports,!hePakislangovernmentcoultluoeloreduceitscurrentaccountdeficit
Data response
questions
I
us;ngthedatainFigure29.1,describcthemainfeaturesofPakistan"
2
ThedatainFigure29.lhasheensimplifiedforpublicationinanewspaper.Saywhy1hishasheendone.
3
Considerhowthedatainl'igure29.lisnotconsistentwiththetext
scurrentaccountofthebalanceofpayments
Essay questions
I
DiscusswhetheranappreciationoftheexchangeratewHlalwaysleadtoareductioninacurrentaccountsurplusonthe
balanceofpayments
2
Discusshowsupply·sidepolidescanheusedtoreduceadeficitonthecurrentaccountofthebalanceofpayments.
lmpro,·cthisanswcr
ThisisasampleanswertoessayQ2
A deficit occurs on the current account of the balance of payments when the receipts from goods and services traded
internationallyarelessthantheequivalentexpenditure[KI.Moresimply,whentheva]ueofimportedgoodsandservices
isgreaterthanthoseexported
Suchadeficitisnotofmajorconcernifitoccursoccasionally.ltisseriousthoughwhenthedeficitisrecordedovera
numbcrofyears,sinc,,itcanleadtotheerosionofforeigncurrencyreser••c•andtheaccumulationofforeigndebt
Repaying such debt is a common problem fadng many low• and middle•income countries that depend heavHyon imports
of oil and raw materials but trade mainly ;n agricultural good• for which prices have been declining IA!
Supply·•itlepolicie•shoultlheu<e<lwhereacountryhashatlpersislenttleficitsinit,currentaccounlbalance.These
policies,ifeffective,aimtoimpro,..,competilivenessbyshiftingtheagi;regatesupplycurvetotherightasshowninthe
diagram below.
]
p
.,,
l
f----------""-;
y
v,
TheshiftofLRASrepresentsanincreaseinthequantityorqualityofthefactorsofprotluction.Thisincreasesan
economy" s productive capacity, with output increasing from Y to Y1. Assuming no change in aggregate demand, there
wHlbcareductionininflationarypressureson!heeconomyasthepricelevelfallsfromPtoP
1.Thiswillbeavery
positivewayinwhichtoimproveacountry'
scompetitiveness[,\I
Thi,i,thetheory.Theprobleminprac!iceishowaneconomycanachievethisshiftofAS.ltisparticularlydifficultfor
low·incomecoun!ries.Thereare,·ariou••upply·sitlepolicie•thatcanheused,antl!heseindutleimprovededucationantl
training,encouragingmoreinvestment,hetterincentioestogctmorepeopletojointhelabourforceantlreformof1rade
unions.Mostofthesepoliciestendtohelong·termandnotshort-term[A].
Thislastpointisparticularlyrelevantforeducationandtraining.lflal>ourinaneconomyi,moreskilled,thequalityof
humancapitalimprooes.Relevantpoliciesincludechangingtheschoolleavingage,grantstogotouniversity,more
apprenticeshipopportunitiesandencouragingmorewomentojointhelabourforce.Thesesupplysidepoliciesshould
improvethequalityandquantityofhumanresources.lfapplied,theyoughttodc••elopthecxportsofacountryandtocut
backonimport,,sore<lucingthecurrentaccountdefidt[EJ
Your challenge
Seewhcthcryoucanimprovethisanswer.Thefirstparagraphconsistsofasoundintrotluctiontosupply·sidepolicies.Thisis
followed by a general account of how supply·side policies work. This is a weakness, given the wording of the question
Con>e<jucntly,thean""'·crlacksfocusonthepointofthequestion,whichishowoupply••idepoliciescanreduceadeficiton
thecurrentaccountoflhebalanceofpayments.Thereisahintofevaluationinthelastparagraph.Forthistypeofcssay
question, more explicit e...alualion is re<JUired.A better answer is given in the workbook answer, - but wri!e yours out first
>Unit 7
The price system and the
microeconomy (A Level)
>Chapter 30
Utility
Inthischapteryouwill:
dcfincthcmcaningoftotal
urilityandmarginalutility
calculate total utility and marginal utility
explain diminishing marginal utility
explaintheequi-marginalprinciplc
derive an individual demand curve
evaluate the limitations of marginal utility and its assumptions of rational behaviour.
Equi-marginal principle
Law of diminishing marginal utility
Marginal utility
Total utility
Utility
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand;
whatismeantbyutility
the meaning and calculation of total utility and marginal utility
the law of diminishing marginal utility
the significance of the equi-marginal principle
how to derive an individual demand curve
the limitations and assumptions of utility theory.
Utility can be measured, but it is important to remember that the benefit from consumption that a person gets varies from one
good to another. It also varies from one person to another person.
1
Definetheterm
2
Describe what is meant by total utility and how it is calculated.
3
Describe what is meant by marginal utility and how it is calculated.
'utility'
4
Explain the law of diminishing marginal utility.
5
Explain the equi-marginal principle.
Analysis
Precautionary
buying and utility
There have been many instances where panic buying has followed a natural disaster, such as a hurricane or a tsunami.
People' s reactions are understandable as future supplies will be seriously disrupted.
Consumers' reaction to the COVID-19 pandemic is not seen as panic buying. Economists and other experts have called this
'precautionary buying· . What happened is that consumers have rushed to stock up on necessities, particularly cleaning
products, toilet paper, cooking oil, pasta, rice and flour. Retailers have often been forced to limit sales of such essential items.
Precautionary buying makes consumers feel better. Consumers have the satisfaction of having a stock of critical supplies, even
if their behaviour has taken away supplies from others. The difference between precautionary buying and panic buying is that
the interruption of supplies is only short term. Within a few weeks, supplies will return to normal and many consumers will
be left with much of the stock that they rushed to buy as o precaution.
6
Analyse how the demand curve for a product is derived.
7
Explain how the demand curve for a necessity product is likely to be affected by precautionary buying.
1be demand curve for a necessity product will shift to the right assuming no change in price. This means that demand for the
product has increosed but ot the same price [1\]. It is likely thor retailers may increase prices or limit the quantity demondc<l in
order tu dampen demand [A].
Evaluation
8
Discuss the extent to which consumers arc acting rationally when precautionary buying necessities such as flour, rice and
cooking oil.
Multiple-choice question
1
A consumer gets 10 units of satisfaction when consuming a plzw that costs $2 and 2 units of satisfaction when consuming
an ice cream. Assuming the consumer is rational, what is the price of the ice cream?
,\
$0.20
H
$0.40
C
$2
D
Essay
$4
questions
l
Assess the extent to which marginal utility can be used to provide an accurate representation
curve for a product.
2
Assess whether the equi-marginal principle has any relevance in determining how consumer equilibrium is achieved.
of a consumer'
s demand
Improve this answer
This is a sample answer tu essay Q2.
The consumption of a good or service produces utility, which enables consumers to satisfy their wants. The term utility is
described as the satisfaction from consuming a particulor good or service. Economic theory ossumes that consumers ore
rational and that they will always strive to maximise the total utility from what they consume. A consumer is said to be in
consumer equilibrium where this is so [KJ.
When a consumer is in equilibrium, it is not possible to switch expenditure from one good to another in order to increase
total utility. Assuming a given level of income and prices that do not vary with consumption, consumer equilibrium
applies when the following is true:
MU, _
MU, _
1',IU, _
l!.IU,,
r:--"""r,'"-"'r;--""'r,'"
This is known as the equi-marginal principle. Jt states that consumer equilibrium applies when the ratio of the marginal
utility to price for all products consumed is equal. When this is reached, an individual is unable to re-allocate income to
increase utility any further [A].
It follows from the equation that if the price of any good changes, this will affect the marginal utility or satisfaction that is
gained from consumption of the product. In principle, this can have a ripple effect on the consumption of all other
products that are consumed (A].
This principle is based on the assumption that consumers have a limited income and are consistently seeking to maximise
their utility.
Your challenge
See whether you can improve this answer. The answer contains some sound economic analysis of the equi-marginal principle,
but it lacks evaluation, as required by the command word in the question ( 'Assess' ). The evaluation should stress the
assumptions that underpin the theory, ;,nd whether consumers really do behave in a rational way in making consumption
decisions. The answer is short for an essay question of this type and two concluding paragraphs of evaluation will help. A
better answer is given in the workbook answers - but write yours out first.
~
ASAL_Ernn_WB_Chapter_30_Answers.p
...
>Chapter 31
Indifference curves and budget lines
lnthischapteryouwill
defmelhemeaningofanindifferencecur,,eandabudgetline
explainthecause,ofa,hiftinthebudgetline
analyse the income, substinnion and price dfccts for normal, inferior and Giffen goods
!ndifferencecurve
Marginalratcofsul>stirution
Substirutioneifect
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youn"""1toknowandunderstand
whatanindiffen,nc·ecurverepresents
thenatureofahudgetline
whatismeantbytheincomecffectofapriNOchange
whatismeantbythesubstitu1ioneffec1ofaprkechange
thetneaningofaGiffengood
U-arners often haw difficulty drawing dia,\rams to show the incorne and substitution effects of a price change. A diagram is not
always n....:e,sary. You can exv!.in the inc-ume and substilu!iun effeds in wunl;
2
Statewhyindiffnencecurvesnevercross.
3
DescTil>ewhalismeantbythemary,inalm!eof,ubslitutiun
4
F..xpbintheincomeeffectufapricechange
5
Explainthesubstirutioncffcctofapricechange.
6
VdineaGilfongood
7
You will S<eelhal Pi;;ure 31.1 (""" next vage) is incumplele. !l is designed lu show what havpem when there is a rise in the price
of guo<lX, a nonnal guo<l.Copy !he diagmm and insert a full sel uflal>els
Analysis
Figure3l.l:JndiffeTenc·ecurves
Re<lrawFigure31.ltuanalysetheincome.ndsubslitutioneffectsofari,einpric·eof;;uo<lX.
8
Evaluation
Discuss the e~tent to which consumers bt,have in the rational way that is assun,e<l in indiffe,ence curve analysis.
9
Mullipk-choicc qucstinn
I
Which of these slalemenl.> is rnn,,d when Lhepric-.eof a Giffen ;;uo<lde,:reases'
A The positive income dfc~t is grcatcrthan the substit\ltion effect
B
The positive income effect is kss than 1he substimtion effect
C
The substitution diect is le-ssthan the negative income ~ffect.
I)
ThesubstilutionefiecLisgreaterthanthenegativeincomeeffecl
l'.ssayqu~stions
l
"!ndiffercnce curves and budget lines can be used to sh.owwhy consumers will normally buy more of a good at a lower
pricethanwhenthepriceofagoodincr,,ases"
Assess why this statement may not always be true.
2
Withthehelpofindiffereneternn·eanaly,is,e..-aluatethediffeTencebetweentheincomeand,ubstitutioneffec·tsufafall
inlhepriceofnOTmalg<>0dsand;nfeTiorgoods
11iisisasampleanswertoessayQ2
The above se<juence of effects may not always be true. This is b<acauseoftwoe,meme
goods and Giffen goods
Your challenge
~
..sAL_Econ_WB_Chaptef_3!_Arl,w1ars.p
cases: these are the cases ofinferior
>Chapter32
Efficiency and market failure
Tn1hi.,chap1c,youwill
dcfincthcmcaningofproductivccfficicncyanda!locati,•ccfficicncy
explain thc~"fln<litionsn~'Cdc<iforprorluc!iv"cfficicncyan<i alloc.ativcdficicncy
cxplainParctooptimality
dcfincthcmcaningofdyMrniccfficicncy
dcfincthcmcaningofmarkctfailurc
cxplainthcrcasonsformarkctfoilurc
faonomic
elTiciency
Pareto
optimality
Pmduclive
efficiency
Key skills exercises
Knowledge and understanding
Toamwerthequeslion.,inlhi,chapler,younee,lloknowandmulcrstand
lherneaningofe,xmornicefficiency
tficme,mingofprnduetivcefficicncyanrl,illoca1ivccfTici,ency
conclilionsneededforprodudiveeff,c.jency
con<iitionsn<,edcdfor,.lloca1i, 0ccfficicncy
1hemeaningofParelooplimalil)'
1hcmcaningofdynarniccfficicncy
conditionsfmdynamiceffici.,ncy
I
Dt,fme the term
2
Explainthemeaningofproductiveeffidency
3
bplainlhemeaningofallorntiveelliciency
'economic dliciency'
4
ExplainthemeaningofParetooptimality.
5
bplainlhemeaningofdynamicelliciency.
6
bplainther,,ason,formarketfailure
Analysis
lntenrntirmalcomparisonsoflabourproductivity
GDP p&r hour worlted KrOSs the total &eor.omy in 2017 ($)•
Average annual
hourswOfked
Ireland
99.5--0ll[l
-~
Norway
Germany
72.2
USA
72.0
~
~
~
[TI!!]
Switzerland
o:filJ
Australia
-
~
o:m:J
Italy
~
---
~
Cm.Ida
~
Japan
----ill!!]
Greece
~
SOuthKorea
Mexico --21.6----
-~
•s&1ect11dcountrim;(currentpricesaridPPPs)
No111:Purchasing power parity usas an exchange rate baSlld on th11amount of each amency nllllded to purchasa tt1'I
same basket of goods and S11N!c11S
In each country.
Figure32.l:Labourproductivityinsdcctcdcountrics,ZOJ7
7
/\11alysetheco11ditionsneededforproductiveeff1ciellcy.
8
Analysetheconditionsforallocatiweffidency.
9
llnaly,,.,lhecondilionsfmdynamicellic-iency.
10 Analysethecot1sequence-sofmarketfailure
llnalysethedilTerence,inlabourpnxluctivityfor1hecountrie,,howninFigure32.I
II
Evaluation
12 Evaluate the eUent lo which ,•ariatim,s in avera)\e annual huurs worked might explain the dilTer,,nces in labour prndudi,·ity
forthecountriesshowninFigure32.l.
Multiple-choice question
1rlili:liil
Essay questions
I
F.v-aluate the '"1cn1 to which the pri,·atisation nf a manufocturing
2
Asses., why ihe market mechanism increasingly fail, lo pn~!uc1' the most ellicient allocation of reS<,urr-.,,.
inrlu.,lry is likdy 10 lc:,rl to gn,a1"r C~'.flnom;cc,/\i<;i.,ncy.
Thi,i,asampleanswertoe,.saIQ2
The market mechanism i, where resources are allo,,ale<l bI lhe !win force, of demancl anJ supply and without
government intervention. When working as it should, the. market mechanism will produce the moot efficient allocation of
resourccs[K]
Yourchalk·ngc
[S
ASAI. Econ WI! Cti~pter 32 A.nswer,.p
>Chapter33
Private costs and benefits,
externalities and social costs and
benefits
lnthischapteryouw:ill
define the meaning of a negative cxtcrnality and a positiw cxtcrnality
Jefinethemeaningofprivatecostsandbenefits,externalcostsanJbenetitsandsocialcostsandbendits
cakulateprivatecostsandbenefits,externalcostsandbenefitsandsocialcostsandbenefits
analysern,galivean,I
jk>Siti,•ee,leTTialili",ofpmducti,mandconsumption
analyse the deadweight welfare losses arisjng from negative and positive externalities
explain asymmetric information and morn] hawrd
evalualetheu,eofco,lsat1dbene/it,inanaly,ingde<:isions
Key skills exercises
Knowledge and understanding
Tnanswerthcqucstiunsinthischaptcr,}'OUn<ecdtu1'nowandundcrsla,nd
whatismeantLyanexternality
the ,.,,rious types of costs and benefits arising from an action
lhe diffor~nce betwc"n rn,galj,·c "xternalities ,md 1xisitive exl<,m:,li(ie,
the difference between production externalities and consumption externalities
wh"t is meant by asymmetric information ,ond moral ha,ard
thenatureanduseofcost-benefitanalysis.
1
De-finethe term
'negative cxtcmality'
2
Detinetheterm
·positiveexternal;ry
3
State what is meant by a third party
4
faplainThedifferencebetweenprivale,ex!ernalan<l,ocialrn,r~
Expla;nthedifferencebetweenprivate,externalandsocialhenetits
h
Explainthcdiffcrenccbetwccnproductionan<lconsornptioncxtcrnalitics
7
Descti1"' what is m"ant Ly asyn,metric information
8
De-scribe what is meant by moral hazard
9
Explainthepur1x1scof,icost-hcnefi1analysis
Analysis
China' s new drin, to cut down on "white pollution"
10 Arn,lysc the negative externalities assocfotcd with the g!ob"l increase in plastic pollution
Analyse the positive. externalities associated with the increased production and use of biodegradable plastics in China
II
Evaluation
12 Comment on the costs and benefits involved in banning the US<'of single-US<'plastics in Chinese towns and cities
Multiple-choice question
I
A person discards a single-use plastic hag near a ri,·cr and the bag gels caught up in the net of a local fisherman
Which ofth"·"' term., hesl d"s,:ri)><-Srhi, ut.,rnaliry'
A
negativeproductioncxtcmality
II
ncgati,·econsumptionextcrnality
C
positiveproductionexternality
D
positi,·cconsumptioncxtemality
1,:ssayquestions
1
lValuate the extent 10 which cost-benefit analysis should be the only means for evaluating whether a publicly funded
projeet.shou\dproceed
2
Assess the ,•icw that there will always be a dcadwcight wdfare loss when there is a negative production extemality in the
market
Improve This answer
This is a sample answer to essay Q2.
distressanddiscomfortlothosepeoplewholivcdoseby.
A situation like that above can be shown in a diagram.
a a,
Ouantity
Your challenge
~
ASALEcon WB Chapter_33 Answers.p
>Chapter 34
Types of cost, revenue and 2rofit,
short-run and long-run proauction
lnthisc·haptecyuuwill:
explain lheshort-rnnprnduction
function, indudin)!:
pmduct and maC)!inal prnduct; the law of ,limini,hing
~xe<l and,·ariable factorsofprnduc\ion;
returns (law of ,•ariable proportions)
total product, a,·era11e
cakula!etotalproduct,averageproductandmarginalproduct
explaintheshort-runcostfunetion,induding:tixedcostsandYariaLlecosts;total,averageandmarginalcosts;theshap,
of,hurt-runaveragecostand,narginalc•ostcurves
cakulatcfix"'1costsandYariahkcosts,andtotal,aYcragcandmargjnalcosts
cxplainthclongrunproductionfunction,indudingnotixcdfactorsofprnductionandrcturnstoscak
explain lhe long-run wsl func·tiun, indudin11 the shapt, oflhe lon11-rnna,·era;:e c"Us!rnrw and the minimum efficient
scale
analy.sctherelationshipbctwceneC<>nomie.,ofscaleanddecTea.,inga,•erngecosts
expl.s"n"nternaleconom·esofscaleandexternalernnom·esofscale
explaininternaldis...conomiesofsc•aleandextemaldiseconomiesofscale
rlefine!heme.1ningoftotal,avcrngeandmarginalrevenue
cakulatetotal,avcragcandmarginalrc,;cnue
ddine the meanin,;of tlOTmal,subnormal and suµemormal pm fit
calcula(esuµernormalandsubnonnalprnfit
Key skills exercises
Knowledge and understanding
Tnanswertheguesticmsinthisc.hapter,ynunoc<ltoknmvandunrlerstanrl
thcshort-runandlong-runproductionfunction
lhe,hoTt-runandk,n,;-runco,tfunclion
therelationshipbetwe;ene,:onomiesofscaleanddecreasinga,era,;ecosls
thedifferencebctwe<'nintemalandextcrnaleconomiesofscale
thedifferenceb,>tweeninten,alandexternaldiseconomiesofscale
the difference between normal, subnonnal
and supernonnal
profits
I
Statetheiawofdiminishingrerums
2
Dcfinetheterm
4
Explainthedifferenceb<-tweenincreasingreturnstoscaleanddecreasingreturnstoscale
5
Distinguish belween internal and edernal e<conomie, of s,:a]e
•fixedca,tS
Explain the diffcrcnoc l>ctwecn normal profit, subnormal profit and SUJ>"l'llOrmalprofit
Analysis
Thepowerof\Valrnart
Small shop
$1 SOperri
l'igure34.l:Thec·ontainerprinciple
7
!inal)·sethelong-rnnrelationshipbetweenavern,;etotalcostsand<>utput
H
facludingthe
container
principle, analy<c thn.-c other type< of internal economics
of scale that may hcnefo large retailers
suchasll'almart
Analy><'how a lar;:e retaileT such a, WalmaT1might benefit
9
fwtn
external econmnies of ><:ale
!:.'valuation
10 Di,cus, whether larKe Telaile,-, such as WalmaTI are e,·er likely lo exµeTience diseconomies of scale
11 Comment on whether Walman;,
earning noTmal or supernormal
pmtit
Data resp,on!re question
1
UsingtheinformationinFigurc34.l,cxplainthccontaincrprinciplc
Essay questions
2
Thccostfixityproblcmocc\lrswhcnafirmhasahighproportionoftixc<lcoststo,<1riahlccostsinthcshortrun.
Evaluate the likely impact of the c0St fixity prubl~m on the prices and profitability of a firm.
!mprowthisanswer
!his is a sample answcrto
cssay()2
YonrchnHcngc
~ ASAL_Econ_WB_(hapter_34_Answers.p
)Chapter35
Different market structures
lnthischapteryouwill
describe the market structures ofperf<'ct competition and imperfect competjtion (monopoly, monopolistic competition,
oligopoly and natural monopoly)
cxplainthecharacteristicsofthemarketstructuresintermsofthenumberofbuyersandsellers,productdifferemiation,
degroooffreedomofentryandavailabilityofinformation
explainbarrierstoentryandexit(legal,rnarket,cost,physical)
analysetheperformanceoffirmsindifferentmarketstructuresthrough:
outputintheshortrunandinthelongrun
profitsintheshonrunandinthc!ongrun
shutdownpriceintheshortrunandinthelongrun
derivingafirm'
ssupplycurveinaperfeetlycompetitivemarket
effidencyandX-ineffidencyintheshortrunandinthelongrun
pricecompetitionandnon-pricecompetition
collusionandthePriwner'
sDilemmainoligopolisticmarket<(indudingatwo-playerpay-offmatrix)
definethcmcaningofaconcentrationratio
analysethefeaturesandimplicationsofcontestablemarkets.
Barriertoexit
Barrierstoentry
cartel
Collusion Concentrationratio
Contestability
Contestablemarket
Deregulation
lmperfed competition
Kinked demand curve Limit pricing
Market structure
Monopolisticcompetition
Monopoly Naturalmonopoly
Non-pricecompetition
Oligopoly Perfectcompetition
Predatorypricing
Pricecompetition
Priceleadership
Pricerigidity
Puremonopoly
Shut-downprice
X-inefficiency
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter.youneedtoknowandundcrstand
themeaningofmarketstructure
the characteristics of perfect competition, monopolistic competition, oligopoly, monopoly and natural monopoly
whati<meantbyharrierstoentryandexil
the short-and long-run performance of firms in perfect competition, monopolistic competition, oligopoly, monopoly and
natural monopoly
whati,meantbyaconcentmhonratioandhowtocalculatcit
thefeature,andimplicationsofconteotablemarketo
When diS<Cussingor writing about a monopoly, it is good practice to make clear what wrt of monopoly you aredeS<Cribing.In
wmeca.,.. this will be about a pure monopoly which ha, full 100,C,control owr the market. A firm is alw classed as a monopoly
whenilhasa,..-rylargemarketshare.ltisnotpo<Sibletoputafigureonthisasitvariesfromoneindustrytoanolherandfrom
onecoun1ry1oanother.
2
Explainthccharactcri,ticsofperfcctcompe1ition
3
Explainthecharac1eristicsofmonopolisticcompetition
4
Explainthecharacteristicsofoligopoly.
5
Explainthecharacteristicsofmonopolyandnaturalmonopoly.
6
Explainthepurposeofbarrientoentry.
7
Outlinecxample,ofbarrier.,toentry.
II
DeS<Crikwhatismeantbyabarrierloexil
9
Explainthecharacteristicsofacontestablemarket
10 Dcfineaconcentrationratioandstatehowitiscalculatc<:l
Analysis
Mobile subscriptions
in Malaysia
Malaysia has a population of around 32m. In 2018, remarkably, it had almost 43m mobile subscribers, making Malaysia one of
themostmobile-saturatedcountriesintheworld.
The market for mobile •ubscriplion< is shown in Table 35.1. Thi< table gives the market share of the four biggest supplier,
These <upplien own their own network infrastructure. Other firms are known as Mobile Virtual Network Operator, {MVKOs)
•incetheyprovidetheirservicesusingnetwork<providedbyothercompanies.
Others{incl.MVNOs)
Thblc35.J:'-markctshareofmobilesubS<Cribers.2015and2018
Providing mobile network subscriptions is a competitive businc<S, with firms mainly employing methods of non-price
competition
Explainthelikelymarket,tructureofthemobileoubscriptionsmarketinMalaysia.
JI
12 Analyse how you would expect /inns to compete in the mobile ,ubscription, market in Malaysia
Evaluation
13 Comment on what additional data or information you would need lo be more certain of the likely market structure of the
mobilesubscriptionsmarketinMalaysia.
Data response
question
UsingthedatainToble3S.l,analysethechange,intheprovisionofmobilcsubS<CriptionsinMalay<iabetwcen20l5
and20JS
b
Explainlwolikclyreawnsforthechangesyouhaveoboerved
The four firm concentration ratio decreased from 92"- lo~The 3 firm concentration ratio fell from 84"- in 2015 lo
72% in 2018. In lenn< of market share, the biggest change has been recorded by U Mobile. !ls market share has more
lhandoubledto17%.ThebiggestioserhasbeenMaxislA]
b
Theindicalion<arethatthechangesareduetonon-pric,,competition.Forexample,acompanylikeUMobilecouldbe
promotingabettercontractdealthanitscompetitors,orpossiblyofferingthelateslnewmodelofdevicetoattract
consumersfromcompetiton[A]
Essayqul>Stiuns
I
Asse« the view that monopolies do not work in the best interest< of consumer, or the economy as a whole.
2
Evaluate the extent to which, when markets are more contestable, this is beneficial forcon,umcr., and firms compared to
whenmarkctsarelc<Scompetitive
lmpm,·ethisan,wer
ThisisasamplcanswertoessayQ2.
The concept of a contestable market was developed by the US economist Baumol, who believed that the introduction of
more competition into the domestic airline market would produce substantial benefits for consumers. The underlying
principleofcontestabilityi,thatitrequirestheremovalofbarrierstoentryintoanindustry.Barriers,uchasregulations
or state ownership mean that new firms are prohibited from entering a market. The US experience has proved tobe an
important pointer for other economies. Gcwernments such as the UK" s ha,·e used the USA· ,evidence to develop
contestablemarketsintheirowneconomies[KI
The removal of barriers to entry is designed lo not only allow new firms lo enter an industry, but alw to encourage a pool
ofpotenlialentmntstobereadytoenterthisindustry.Thesefinnsmaydothisiftheyse,ethatsupernormalprofitsare
beingearnedbyexistingfirms.!tohouldalsobestressedthatthereshouldbenosunkcost<.Exitfromtheindustryi•
costless[AJ
Theideasunderpinningacontestablemarketareclosetothoseofperfecte-0mpetition,becausetherearenobarriersto
entryorexit.Economicefficiencyisbeingapplied,normalprofitsarebeingearnedinthelongrunand,inprinciple,there
isnolimittothenumberoffirmsinthemarket[A)
It i• dear that consumer., ,hould benefit when a market become, more contestable. Thi, would mo,t likely be through
deregulation or the privatioation of a fonner slate-run monopoly. Co,ts will be reduced, which in turn will mean lower
price,forconsumero.Experienceofwhenthi,ha,occurredha,,hownthatinnovationcantakeplace.Withairline•,for
example, new route, and operating ,ervi= from secondary airports have come about. So the greate,t benefit< for
consumer< will be in market< ,uch a, monopolisticcompetilion, where there are low barrier< lo entry. In other market<,
palent,andotherdevicescouldholdbackthemarketbecomingmoreconlestablelE].
Thebenefi1<tofinn,aremoredifficulttoa«ess.Forlhoseoperatinginaconlestablemarke1,normalprofitisthenonnin
thelongrun.Anyexce••profitswillbecompetedawaybynewentranl<.Anegati,·econsequenc,,,though,isthata
contestable market lend• itself to 'hit and nm' entry. This is the term used when firms only enter the market for a short
timewhilesupernormalprofitsarebeingeamedlEJ.
Your challenge
See whether you can improYe this am;,,...-r,This is a very good anS>wr. It is well written, authoritath-eand to the point of the
question.Thefinaltwoparagraphscontainrelevantevaluation.Afowmoreexampleswouldenhancetheanswcrandgi,..,
more depth and dCYe!opment to the am;,,...-r,Your challenge is to write a paragraph with examples from a country that you
haYestudic<:ltofollowthefirstparagraph.Abcueranswerisgivenintheworkbookanswer.,-butwriteyour.,outfirst
~
ASAl_l:cM_WB_Chaple.-_3S_Answen,p
>Chapter 36
Growth and survival of firms
lnthischapteryouwill:
explainreasonsforlhedifferenlsizesoffirms
explain the difference between internal and external growth of firms
analysclhemethods,reasonsandconsequcncesofintegration(hori:wntal,verlical,conglomerale)
analysetheconditionsandconsequencesforaneffectivecartel
discuss the principal-agent
problem.
r'""
Cooglomern<e Di.e~ifirnfoo
Vertical integration
Economiesofscopc
Horizontalintegration
Principal-agentproblem
Key skills exercises
To answer the questions in this chapter, you need to know and understand:
reasonsforthedifferentsizesoffirms
the difference between internal and external growth of firms
the difference between horizontal and vertical integration
thecharacteristicsofaconglomerate
the conditions and consequences for an effective cartel
the principal-agent
problem.
It is good practice to include real-world examples based on the growth and survival of firms, especially if these arc from your
owncountryoroneyouhavestudied.
I
Describewhatismeantbyaconglomerate.
2
Describe what is meant by small and medium-sized enterprises (SMEs}
:1
Explainwhatismeantbydiver,;ification.
4
Explain the difference between horiwntal and vertical integration.
5
Describe how a caTlel works
6
Explain the principal-agent
problem
Analysis
SmallfirmsinSouthKorea
Sm1.\l l.!'ld mcdiwm ,.,n1crpri1e1 {S).1E1)1ceounto<l for 1.n e11im1.ted 11II~of employm..,nt 1.nd JII~ of~owth J::on,1.' s exports in
2011. In tho c1.pit1\ Soowl, thcn-, wc,r..,1.1t1ai...rin~ 112:,0:0 5).H:,. T1blc J6. l 1hmn thoir main uc1.1 of bu1incu.
Wholesale and retail
Accommodation and food service
Transport
Personal services and repairs
Manufacturing
Professional and scientific services
Other
Table 36.l: Small and medium enterprises in Seoul, 2018
SMEs have tended to be eclipsed by South Korea' s conglomerates, such as Samsung Electronics, Hyundai Motors and POSCO
(a huge steel maker). These flagship companies have tended to attract South Korea' s young qualified workers. Very few of
tbeseworkershaveendedupbeingemployedinSMEs
Amor• worryin1 problum ~or ~Ml'..11
i• South J::ore.- • <l•dinin1 pnpul.tinn, which m1k•1 it incr1.uin1ly dil'l"icultf'.orth•m lo
fill job v•c•nci"•· Th• ~ovurnmunt hu r•co~ni1od thi, iHuo by announcin1 • n1.w pro1r.mm• offm•nci•I u1i1t•nc1. m•kin1
it cuior for ~Wl'..1lo mo'l'u into moro promi1inJ indu1tri..,1. Fin•nc1. i11.1101.nil1.bl1. J:or~MP'..1to improv"' Lh.,ir f1.ciliti"'•·
7
Analyse two reasons for the diffenmt sizes of firms in South Korea
8
Analyse how companies such as Samsung and Hyundai might have diversified to achieve growth.
Evaluation
Comment on the extent to which the principal-agent
9
problem affecL~different sizes offinns.
Data response question
1
UsingthedatainTable36.l,explainthecharactcristicsofSMEsinSeoulin2018.
The main charncteristic ofSMF.s is Lhat they are labour intensive businesses. Mos1will hav<c>
a V€ry small number of
employees. Owners may have just one or two business€s. SMRs in manufacturing may be rnther larger in siz<c>.
Some ofthes<c>
finns are likely to provide specialist services to conglomerates. The smallest firms, such as marke1 stalls and restauranL~, are
likely to be family-owned and in the same ownership for many years [A].
Essay questions
l
Evaluate why consumers lose out in markets where there are a small number of large firms, yet benefit in markets that
havealargenumberofsmallfirms.
2
Assess why it is possible for small firms to operate alongside large firms in all types of markets in all types of economy.
Improve this answer
ThisisasampleanswertoessayQl.
In all typ,.,, of ,.,conomy, 1m1.ll firm• tend to b..,th"' m1in form of bu1int"11 org1ni11.tion. In ~uth Ion,1., SM~• (d,.,n.n,.,d1.1
firm• with f,.,w,.,rth1.n 250 "'mploy,.,1.1)providt"d an Mtimatir-d M"" of "'mploymt"nt in 2011. Along1id"' SUE• u1. l1rg1.
multinational ,.,ntt"rpri,,.,, andconsl-omir-ratM [A]. Th"''"' compani,.,, tend to b..,th,., onM that 1ttract moil 1ttt"ntion.
On"' oftho m1.in ru1on1 for a difference in thc iii,., offtrm1 i1 buri"'lll to..,ntry. In puticulu, 111.ck ofcapit1I me1ni that it
it imJX>Hib]..,for ,mall nnn1 to enter an indu1try. An m:1mplo i1 th,., telecommwnication1 indu1try l'l'hich in mo1tcountric1
hu • 1m1.1lnumber of laric ftrm1. Thi1 indu1try i1 capital-inton1iv"', r"'1trictin~ it to nrm1 th1.t h1.vo1trong nnancial JX>?,'1.r
inacomp..,titi,·cmukot[A].
If th,., muk,.,t i1 an oli10JX>ly,con1um,.,r. may not a\way1 C,,.,n..,ntif th"'"' i1 no pric,., comp1.tition b1.ty,•1.ir-n
firm 1. Thi• would
b.....,,p1.cially th,., c1.11.if thir-r• wu iniormal collu1ion b1.tw1.1.nth,., main play...r1 [A)
Another namplc i1 tho cuo of grocery mukct:1. OwninJ a Jugo 1upormuk,.,t r,.,quirc11ub1t1.nti1.l capittL For a
1upermuket to rem1.in compotiti'l'o, it will hn"' to b..,able to ttk"' 1.dnnta~o of "'conomi,.,, of 1c1.lc, othcnriM it will bo
forced to clo10 down [A]. Thi, muk"'t 1110hu • place for 1m1.ll l\rm1, 1uch II loc1l com•,.,ni..,nc,.,1torn wher"' little c1.pit1l
i1roquir,.,dto1,.,tupabu1iM11.
Sm1.ll firm, 1.1'1.
dominant in muhtt th1.t u1. monopoli1tic1.lly comp1.titin. EnmplM indudir- food 1talb, ,mall hot1.b,
r1.1taur1.nt1,hairdr1.111.r. and driving 1choob. At ,.,,.,11.. capital, th• 1in of th• muht i1 a r1.l1.vantfactor. Muht1 for
th1.11.._,.,n'ic1.1t1.nd to b1.local and thu1.for1. limit1.d in 1in. B1.c1.u11.
of their comp1.titin n1.tur1.,firm• 1.1.rn only norm1.l
profit• in th1. long run. Thu• i1 th1.r1.for1.l1.11.chanc• of con1um1.n b1.in&uploit1.d !Al.
Not 1.11,mall nrm1 oper1t"' in a comp..,titi\·e muket. !om,., 1mall nrm1 may b..,a monopoly. Thi1 c1n occur wh..,re 1.nrm i1
th,., only produc,.,r in 1.loc1.l mu'.nt or ,.,h..,,..,a ftrm may b...a ,p,.,ciali1t pro'l'iding ,..,rvic,.,, for much lugM nrm1 [A].
Anoth,.,r "'nmplir- i1 wht"rt- • 1m1.ll l\nn m1y h1.n 1.n adnnt1.g,., ov,.,r a larg"' /Inn in • nich,., muk,.,t wh..,re X-int"fflcit"nCJ
maybe present.
Your challenge
!"'"' wh,.,thM you can impron thi1 an1wM. Th"' 1.n1\'l',.,rcontain• 1om,., r"'l"'\'ant cont,.,nt. Th"' linh to m1.rk..,t1tructure uir- an
,.,ff,.,ctin w1y of t"1tabli1hing:\'l'h,.,th"'r con1um,.,n Mn,.,l'lt. Th,., ftn1I puagraph 1hould b...Maluatin. Th"'r"' 1.r,.,two hint11.1
enluation (1mall l\rm1 m1y b.., 1.monopoly; 1m1.ll firm, may oper1.t"' in• nich,., mukir-1) but th"''"' hint1 anl not ad1.qu1.t,.,u 1n
enluation. A bt"tter 1.n1wMi1 ginn in th,., workbOC>kant\'1'1.1"1 but writ,., youn out tint
~
ASAL_Econ_WB_Chapter_36_Answers.p
...
>Chapter37
Differing objectives and policies of
firms
lnthjsdtapteryouwill·
analyse the traditional profit-maximising objective of firms
explain other objccti,•es of firms, including survival, profit satisficing, sales maximis;,tion and revenue maximisation
analyse price discrimination, including the conditiuns for effective price discrimination "nd the wnscqucnccs of price
d·sc ·m·nafon
.,,-,i)usre other pri(ing po Iides, including limit pricing, prcd,nury pricing and pric" leader;hip
explain lhe rdationship l>ctwe,,n price dasti<:ity of clcmand ~n<la firm' s rcvcnut for" downward sloping demand curve
and a kinked demand cur..·e.
Key skills exercises
To answer the questions in this chapter, you need to know and understand
the meaning of profit maximisation as an objfflive
otherobjecti,
pr"ce ••
'firm
h:
;•val,protit
·m·na1·on and 1hecond'f01
ti 'ic'ng,al,1>ax·,
': ·ef': :1·vepr"ce d'
• ri 1andrevenuemax·,
-·m·nat'on and the con
quen
• ··on
fpr"ce ,··
·m·nac'on
limit pricing, pre<latory pricing and price leadership
the relationship between price elasticity of demand and a firm' s re,•enue for" downward sloping demand curve and a kinked
demand curve
I
Explain the conditions for profit maximisation
2
Explain the meaning of survival as an objective for a firm.
'l
Explainthemeaningofprotitsatistidng.
4
F:xplainthemeaningofsalesmaximisation
5
Explain the meaning of revenue maximi,.,tion
6
Describe what is mean( by price discrimination
7
Explain the difference between limit pricing and predatory pricing.
8
Explain the meaning of price leadership.
Analysis
l.imonChaiplc
Limon Ch•i i, • m1nut:.dur~r of• pop.,lu cold to• drink. Thu 11.rmi1 o"'nod by• ,mall nu,nbc-r of inY01tor1, non~ of ,yhom i1
involv•d in lh• day-to-day runnin8 oftloa oomp1n:,; Th• invHtoro' only concern is that their investmenLs generate an
•cccptablorat<' ofroturn.
The three senior directors of the company cannot agree the firm' s strategic objective
The chief eucutin officer (CIO), "'ho h• ju1t compl•t«I an o•lin• economic• courH, i1 conTinc«I 1h1t the l'lrm' s objective
1huuld be on• of profit muimiHtiun . .lftu all, u 1h• t•ll• uthu im·Htur1, \hi• i• •·b•t -.conumi•t• hu• promut•d for m•ny
Th• mark1tin1 dir.ctor i1 not conTinc«I. He wan• lo 111• tari•t of 11,0 irn,.,,h in rnenu•
Tu ,chi••·• thi1, h• will n•d n incnwH in lh• cump1ny' • ,nubtin1 bud1•t, porticululy
per 1nn•m forth• nut f..,,. yun
k>r di1itol mork•tin1
The production dir•ctor i1 conc•ued. ih• remind.-d. her collHp,11 that th• ll.rn1"'"" "'orkin1 at 1lmo1t full capacity, "'ith
mod,i••ry 1h11Jood no•· l••• fully d•pro,:i11od. ~h• wu •l-"">a,ind(ul th•r tho worltoro W•l'I puohin1 fur" pay incl'luo •nd
boJ1tu.,.·orkln1 condition,. Iha mod• the point that ifth• con1panf 1111H war• incru1in1, the workon ,¥ould ,nnt a 1hu1
oftheaddedprotits
An ad,lirimial foetor wa.s that l,imon Chai' ~ main <>J,...p1titorhad rec•n1ly 1-n ...-,1,1
ro • u•-own..,I rr,ultination1l dri•h
comp1ny. The CIO beli•v11 that the board 1hould like thi1 into account ,¥hH 11tabli1hin1 "''hat th1 company' s objective
,hould bo. Har o,Tn Yiew •·u rloat 11,1eompony "houl,I r•duc1 cc•l• ,acl th• pric• o( it• cold ru drinl<
9
An,.Jyse the likely benefits of price discriminatiun
for Limon Chai
10 Analyse the relationship between price elasticity of demand and Limon Chai' s revenue.
Evaluation
1 l faalu,itc whelher pm fit sa(isfieing is the )x,st obje<.:(ivefor Limun Chai to pursue.
Multiple-choice question
1
Whichofthes.eisanexampleofpredatorypridng'
,\
Whenafim,sellsitsgoodsatalo.ss
B
Y>'hcn a firm buys more factors uf production than it needs in order to increase costs for competitors.
C.: When" firm lowers its prices to ste>pnew firms entering a market
D
When a firm lowers its prices to force a newly-established firm from the market.
Essayquestions
2
Evaluate the extent to which firms in the same industry arc likely to ha,·c different objectives.
Improve this "ns1n-r
This is a sample answer to essay Ql.
A -.i.rht ii monu1"-'li~tic•lly· cump•liti,'11 ·••h"n m•ny fir,.., •r• cump.,1in1 •·ith uc:h ulhu. ~inn, .r• pri<:• ,.."h.-., hur
compote \¥ith uch other throu•h non-price competition. Their product■ 1r1 dijkr•nti1t1d, and th•re i1 lia,ited
infou111ion 1nil1bl1 to llrm1 in the muht. Thu•._,.. many uampl11 of monopoli1tically compotitiv• ,nuke• ouch 11
rHl•umnr,, ,,..all loot•I•, dri,inl ...,l,ool,, J,a,hnc and l•b-;M;,y foo:I 1hop1. Th""" lira,, ,..."Y),. .. 1lin11imil1r procl.,<:t,,
hence Heh l'lrm hu • 1ortofmonopolyonrit1
own product, [Ill.
►:ttinomic th.,ry •••um•• 1h11the nrin'
1hown in tho dia~ram.
s objec1ive is one of profit maximjsaTion. '11,e short-run market equilibrium is
J
P1f----C.,.::""+--k,::--'
D•AR
8
a
Output
Th" !irm i~ •amin1 •uJ•ernura,•l pru/it. o,,,.r Tia,11,Thi, •t•t• of aJoin, will •Ttre<:tn•w lirm• tu 11nt.r th11a,.rhl. -n,,. •t'r..:r
of thi1 \¥ill be to 1hift the llrm' 1 d1m1,11dcurve to the left, • proc111 that "'ill continu• until only normal proll.t i1 b1in1
urn11d. Ku,--.,•I prufil ;, iac>Jrp<m•l•l into Th• c<.>1t•uf • firm_, it c:•n I• ,.,.u.i that fro,..• lun1-T•ra, 1t,nd1•Jint, thi,
,¥ill be 1ufflci1n110 kHp a ll.rm i• the market rAl
Other objectiTH of• monopoli1tically compelitin ll.rm 1hould ,J., be con1idu1d. ~.1.. mu:imiution involn1
moimioin11h11 ,,olu,... of ••l••- Thi• c;o•ld 1,. dil'!"kuh in .,..,.11firo,1 unJ,.., rh.,r• i, jpare "''l'•<:ity. ~inn, in munop<.>\iotic;
competition 1r1 ineflcient 1inc• price i1 abov• av•r11• coot. Thi1 could nlHn !lo.111pare c1pacity i1 ,,.il,ble to increw•
••l••lAJ
Profit maximisation would seem to be-the best objective for the firm, as it will produce a steady normal level of profit in
the long run
Your challenge
'-'• whethu }'OU can ia,pron thi1 an1wu. The ••l\nr hu only• limit«! kw::u1on th• qu•1tion. Too !1luclo.tim• hu bo•n 1pent
on writin1 •l><.>ut
monu1•>li,1ie competition •nd ,ln,v,in1 th• fi1u...,. Thi• b;,cl<1ro•nd cunt.,.! ,hould l• reduc,•d. Th•"' ii"
nud ther•for• to focu1 more on th• obj•ctin1 of ll.rm1, includin1tho1• not yet r•f•rr•d to. Thu• i1 no .,,,,J,.11ion in th•
answer. A better answer is gi,·cn in the workbook an~wer,; - bul write y"<>ur<
out fin;I
~
ASACEcor>W8Chapttr37Answers.p
>Unit 8
Government microeconomic
intervention (A Level)
>Chapter38
Government policies to achieve
efficient resource allocation and
correct market failure
lnthischapteryouwill
explain how a range <>ftools can be used to correct the different forms of market failure, including spe<eificand ad ,·alon:m
indirecttaxes,subsidies,pricecontrols,productionquotas,prohibitionsandlicences,regulationandderegulation,direct
provision,pol!utionpermits,propertyrights,nationalisationandprivatisation,provisionofinformationandlx>havioural
insightsand 'nudge' theory
define the meaning of government failure in microeconomic intervention
cxp\ainthecausesandconsequcncesofgovemmcntfailurc
Govcmmentfailure
Nationalisation
Provisionofinformation
Regulations
'Nudge'
1heory
Pollutionpennit
Productionquota
Propertyrigh1s
Key skills exercises
Knowledge and understanding
Toanswerthequestion,inthi,chapter,youneed!oknowandundentand·
government policies to corTe<clnegative and positive uternalities:
regulations,pollutionpermits,propertyrights,provisionofinforma1ion
behaviouralinsightsand
specific and ad w,/orcmindirect taxe,, subsidies,
"nudge' theory
directprovisionofgoodsandservices
nationali,ationandpriva1isation
thecause,andconsequencesofgovernmentfailureinmicro<..-conomicintcr,.·ention
Governments provide an ever-increasing amount of information. When writing about this topic, try to think about why this is
necessary and what the likely impact might be. There may well be government failure.
I
Explainthedifferencebetweenasl""'ificandanadrn/oremindirecttax.
2
Statcwhatismcantbyaregulation.
3
£xplainthcmeaningofpropertyrights
~
Explainthcpurposeofapollutionpermil.
5
Explainwhygovcrnmentsprovideinformation
6
Explainthepurposeof'nudge"
7
F..xplainwhatisrneantbygovernrnentfailure
theory.
Analysis
The growing need for information pm,·ision
There are many ways in which governments se.:k to correct market failure. Providing information is a rclatin:ly recent
rnethod.ltisalsobecorningincreasinglyused,e,sl""'iallytowarnconsumer<oftheconsequencesofo,·er-consumingdemerit
goods.Someexamplesareprovidedinl'igure:J-8.1.
Fi!;ure38.l:E,camplesofinformationprovisiononconsumcrgoods
Analysewhygovemmentsdirectlyprovidegoodsandservices
8
Governmentsdirecdyprovidcpublicgoods,suchasfireandrescueservices,flooddefencesandstreetlighting.ll\).Thisis
becauseitisnotpo$$ibletocha11;eforpublicgoods.G•»·ernmen\salsoprovidemeritgoodseitherfreeofcha11;eora\a
subsidised price. This is due to imperfect information. Families are often unaware of the benefits to themselves and the wider
community and economy of providing inoculations and healthcare and some types of education (Al
Analysewhynationali.sationmightcorrectmarketfailure.
'J
10 Analyse how the provision of information is exl""'ted 10 affect the consumption of demerit goods.
Evaluation
II
Discusswhethertheprovisionofinformationisthebestwayofreducingconsumptionofsugarydrinksandchocolatebars
Multiple-choice question
I
Whichofthesesituationsisacaseofgovernmentfailure?
A
When the government collects less revenue from the tax on sugar-heavy fi~iy drinks than it spends on providing
informationonthehealthdangersofover-consumptionofthesedrinks
B
Whenthegovernmentreducesthetaxonsugar-heavyfizzydrinksandincreasesspendingonprovidinginformation
onthedangcrsofover-consumptionofthcsedrinks
C
Whenthegovernmentincreasesthetaxonsugar-heavyfizzydrinksandincreasesspendingonprovidinginformation
onthedangcrsofover-consumptionofthcscdrinks
[)
Whenthegovernmentfails1odoanythingabou1theincreascintheconsumptionof,ugar-hcavylizzydrinksamong
teenagers
Essay questions
I
Evaluatethebestwayforagovernmenttocorrectproductionex!ernalities.
2
Assess wby government intervention in markets to correct market failure can lead to a loss of economic welfare.
lmpmwt1,·san
•
ThisisaSllrnpleanswertoe,s..,.yQ2
There are many reasons why governments inter,.•ene in markets to correct market failure. Typical situations are where
1hereareexternalities,wherethereisaneedforpublicgoodsandmeritgoodsandwherei1isneces.sarytocorrect
informationfailurc.lnter,.·entioncantaketheformofindirecttaxe,,subsidies,propertyrights,regulationsandother
fonnsofindirectanddirectinter,.•ention[KI
ltisoftenassurned,wrongly,thatallgovernmentinter,.•entionsaresuccessfulincorrectingmarketfailure.Suchcasesare
referred toas government failure, and involve a loss as against a gain in economic welfare IAJ.
One of the biggest problems being faced by governments is a lack of information, or more significantly, a lack of correct
information. Without this, governments are uncertain as to what the impact of their policies might be. Instead of
correcting market failure, the problems could be made ,,..orsc by a government" s action. An c,cample could be in the case
ofpollutionpermitsthatfeatureinthe
"capandtrade'
systemsthatoperateinsornecountries.Thebasicpriceofthe
pollution permit is critical. Jfthe price of permits is too low, there will be little incentive for polluting firms to reduce
po!lution,asitwillbechcaperforthemtopollutethantospcndcapitalonimprovingoutdatedpollutioncontrol
technologyinthecornpany[A)
A second problem that governments have to tackle is that at times, their actions and policies may produce what are called
unintended outcomes. A good example is in the case of an increase in the income tax rate, particularly for high earners
[A]. Suppose the government introduces a high income tax rate of 60% for incomes earned above a particular level
Assumealsothatthisisthefirsttimethatsucharatehasbeenlevied.Theoutcomeoftherisecouldbenomorethanan
increaseinrevenueforthegovernment.lfso,thiswouldbegood.Anunintendedconsequence,though,couldbewherea
high income earner decides to cut back on hours worked, preferring to spend more time on leisure IA). Another person in
thesameincornegroupmaydecidetoemigrateormovetoaso-called1axha,•cn.Theseeventsareunplanned,andno\in
thegovernment" sbestinterests.
four challenge
See whether you can improve this answer. The answer is sound. The content and examples are competent and provide the
basis for a much better answer. To achieve a higher quality answer, the learner nl!<!dsto provide at least one more example
and add a new concluding paragraph that clearly makes an evaluation. The 'louof economic welfare" aspect of the
questionmustbede,·eloped,especiallyintheconcludingparagraph.Yourchallengeistowritetwonewfinalparagraphs.A
bet1eranswerisgiveninthe••.orkbookanswers-butwriteyoursoutfirst.
~ ASALEcanWBCllapt~r38Mswe"·P
)Chapter39
Equity and redistribution of income
and wealth
lnthi,chapte,youwill
cxplainthediffe,enceb<:twe<:n"Guityandequality
cxplainthedifferencebctwe<:nequityandelliciency
analysethedistinctionbetw.,.,nabsolutepoYertyandrelativepo,·erty
describethepowrtytrap
ev~uat~ poli~i.e: t.o~a..ds equity and equality such
j:1111
Absolutepoverty
'''"'"e<>""Y
Equality
Extremepoverty
Uo>"='""'''"rom,
rui
negative income tax, uniwnal benefits and mean<-tested benefits
Means-testedl>enefits
Negative income tax
Poverty trap
Uo>"='""'""
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand:
thedifferencebetweenequityandequality
thedefinilionofextremepoverty
themeaningofabsolutepoverty
themcaningofrelati,..,povcrty
whysomehouseho!dsexperiencethepovertylrap
thedifferencebetweenmeans-testedanduni,·ersalbenefits
thernean·ngofun·versalbaSc'ncome
the>e<>peforanegativeincorneta,
Be aware that rnost of the content of this chapter is about policies to irnprove the distribution ofincorne. Sometimes you may
need to discuss policies to improve the distribution of wealth as we!! as income. All policies have had only a modest impact in
meetingtheirobjecti,·es.
l
Explainthedifferene<obetweenequityandequality.
2
HowdoestheWorldBankdefineextremepoverty?
3
Explainthedifferencebetweenabsolutepovertyandrelativepoverty.
4
Explainthereasonswhysomehou>ehold,experiencethepovertytrap
5
Explainthedifferene<ebetweenmeans-te,tedanduniversalbenefit,
6
Explainthemeaningofuniversalbasicincome
7
Explain how a negative income tax system works.
Analysis
SouthAfrica:themostunequaldistributionofincomeintheworld
South Africa has the most une<Jual distribution of income of any country in the world. The Gini coefficient was e,timated at
0.63in2019.lnl9'96itwa,0.61
TheextentofinequalityisshowninFigure39.l.
"J'hediffe...,ncebetweenpaylewls
Thedifferenceinincomebetweenthebo1tomand1opearner:sinSouthAfricai,massive.Afarmworkercanearnaslittle
asRl00perdaywhilesomehighlevelprofessionalscanearninuces,iofR3000perday.
SoulhAfricanwealthdistribution
]()4-of the population continues to earn more than SO,- of the household income jn the country.
Thepoorest~ofthepopulationaccountsforlessthan7.,.ofthehouseholdincome.
Thepoorest2°'"accountsforlessl.5.,.oftheincomeinSouthAfrica
Pigu...,39.1:SomeaspectsofinequalityinSouthAfrica
Wealth inequality in South Africa i• even more extreme. Research by an eronomist al Stellenbosch University has estimated
thatthewealthiestl.,.ofthepopulationowns67.,.ofal!ofthecountry·
•weahh.Thetopl()4-ofthepopulationha,•e93%of
the wealth. This means that 90'-ofthe population own just 7.,. of the country" s weal!h.
Although annual GDP growth has been between 0.8.,. and 1.3% since 2014, GDP per head has been doser lo nil. Thi• leaws
little scope for the gm•ernment lo reduce poverty. Unemployment is a key challenge. The unemployment rate was 27.,. in early
2019.ltwasevenhighera\55.,.foryouth•
A report by the Rawson Property Group recognised four ways in which the distribution of income could be improved, These
increasedjobcreation
higherlevelsofeducation
skills training
low cost housing
S
llasSouthAfrica"
9
UsingtheinfonnationinFigure39.!,analysethelikelyreasonsfortheunequaldistributionofincomeinSouthAfrica
sdistributionofincomcimprovedsince!996?Justifyyouranswcr.
10 ExplainthelikelyreasonswhythedistributionofwealthinSouthAfricaismoreunequalthanthedistributionofincome
Evaluation
II
EvaluatewhichofthefourpoliciesstatedintheRawsonPropertyGroupreportislikelytoproduceanimpro,..,mentinthe
distributionofincomeinSouthAfrica.
Data response
1
question
ExplainwhytheinformationinFigure39.lisinconsistentwiththatprovidedbelowitinthefeature
~I
4
;
.. ~, roofo~,,oromcao<we,.lth.
isacommonsourceofcon'\lon[EJ
The data inthefigureisforincomedistributionand
notw,:althdistribution.
This
P.ssayquestions
I
Assesstheextentlowhichthestateprovisionofbenefitsseekstoachie,•ebolhe<Juityande<Jua!ity.
2
:;~~•:i!~~:::
0~:tc::':t~:~c
growth is the most effective way of combating poverty in
ThisisasampleansW<JrtoessayQ2
Povertyoccursinalleconomies.Po,·ertyisa,ituationwhereafamilydoesnothaveenoughincomelobeableto
experience a rea..,nable standard of living. By this, it is where a family has sufficient food, ade<juate accommodation and
..,meacce .. tootherthing,suchaseducation,healthcareand,ani!ation[K]
Economish define poverty in various ways. The World Bank define, extreme poverty where a family i, forced toexi,t on
lessthan$J.90perday.Onthi,basis.thebiggestconc,,ntration,ofutremepovertyareinSub-SaharanAfricaandin
South Asia. Many millions of pe<>plehave moved out of this eJ<lreme form of poverty as a result of economic growth [Al
Abso!utepovertyisdifferent.ltisnotpossibletoputamonetaryvalueonitasitvariesfromonecountrytoanother.
Absolute poverty is where a household' s income is too low for its members to meet even their basic needs. Inevitably,
theyaretrappedintheviciouscydeofpoverty,andareunabletobenefitfromeconomicgrowthlAI
Relative poverty is where a household' s income is compared with the average income of the country. If their income is
lessthanhalfoftheaverage,thehouseholdissaidtobeinrelativepoverty.Thislevelofincomeallowsbasicneedstobe
met but access to healthcare, education and non-essential consumer goods is restricted by the low income. Economic
growth is the main way in which pe<>plein this type of household are able to move out of relath-e powrty through
becomingbeneroff.
Your challenge
See whe1hcr you can improve this answer. The answer is short for an essay of this type. The cont cm on the three forms of
povcrtyisgenerallysoundandprovidesthefoundationforaverygoodanswer.Themainproblcmisthatalthougheconomic
growthismentionedinthrceplaccs,thelinkbetwceneronomicgrowthandpovertyalleviationneedstobemuchdearcrand
analyse<! in more depth. This should be followed by a few sentences of evaluation of the extent to which eronomic growth is
the most effective way of combating the various forms of poVi!rtywith explicit reference to lower middle·income countries
Your challenge is to add three concluding paragraphs. A bem,,- answer is gi,-en in the workbook answers - but write yours out
fim
~
.......,.__Ec0<1_WB_O\ilpttt_l9_An<w<n.p
>Chapter40
Labour market forces and
government intervention
lnthischapteryouwill:
explain whyrheclemand
fotbbourisatleriveddernantl
definethemeaningofmarginalrevenueproductoflabour
cakulale lhe marginal n:venue pmduct oflal~iur and u,c marginal revenue product to derive an individual llrm • ,
dcmanclforla!k>Ut
analys.ethefactorsaffectingdernandforlabourinatirmorlnanoccupation
analyse the C-l\JS<,sofshifts in the rlcrnand curve and mov"m"nts along lhc ,lcm,md curv" for lal>our in a finn or in an
o<;cupation
analysethefactorsaffectingthesupplyoflabourinatirrnorinanoccupatlon,indudlngwageandnon-wagefactors
analyscthcc"uscsofshiftsinthcsupplycurvcantlmovcrncntsalongthcsupplycurvcforlabourinafirrnorinan
occupation
analys,, wage det1,rminatim1 in perfect marl<"1,, including equilibrium wage rate and employment ill a labour market
evaluate wage determination in imperfect markets, including the influence of trade unions, goYCmment and monopsony
employers
explain lhe cleterminanl., of wage differentials by labour markel for~es
define the meaning of transfer earnings and CC<Jnomicrent
,,_·aluate1h,,facl,><"lhataff.,c1trnn.,ferearningsand-,conomierenlin,m,,cc;upalion
D<,riveddem,md
Transfer earnings
Economic rent
M,irgirn1lrevenue product {MRP)
Wage differential
Key skills exercises
To answer the questions in this chapter, you need 1o know and understand:
whythedemandforlal~,urisaderiveddemand
the meaning of the marginal revenue product of labour
lhe factor, affecting the dem,md for lal~iur in a firm or in an c,ccupation
the factors affecting the supply of labour in a firm or in an occupation
how wages an: dct,,rminc:cl in pcrfod c,nd in impcrfo<;t mar~c,ts
whatdclC'rmineswagediffcrentials
1hed"ff..rcncc bowc:cn transf
0<."Cupalions
,.am'ngs ·,nd ~'<.'Qnom·cn.. 1 ·nexp1'1'n;;,.
··,t"01 ·n earn· .. ,; ·, the same ord'CC
I
Why is the demand for labour a derived demand'
2
Explain wh:,t is meant by the marginal rc,·cnue produc1 of labour.
3
Explain the factors that affect the demand for labour in a firm or in an occupation.
4
Explain the factors that affect the supply of labour in an occupation.
S
Explain how wages are determined in a perfect market.
6
Explain the difference bctv,ecn transfer earnings and economic rent in an occupation
nt
Analysis
ls low productivity holding back Malaysia" s growth?
Figure 40.1 shows two measures of how Malaysia' s productivity compares to that of other developing and advanced
a f>roductmty~elperM'lployee,2018
b Aver.tgep,oductivitygrowth,2001-2018
Figun,40.1:ProductivityinMalaysia
PPP-Purchasing power parity.
Explain!hedifferenceinthetwotypesofdatausedinFigure40.l.
7
dcsdc,,1,,
,wooo,lcs
omlo~ how Moloosla' s productivity level per employ,:,c in :/018 compared with that in other
aodlo ocl,.occd =>10mles
Explain how increased labour productivity might improve Malaysia" s competitiveness.
9
Evaluation
10 Comtnet\l on the likely obstacles facing the Malaysian government" s aspiration to be a high-income coum,yby 2024
Data response
question
Using the data in l'igurc 40.1, compare Malaysia" s productivity positions with those of South Korea and Japan
b
Explain {Wopossible reasons for the differences you ha,•e observed
Essay questions
2
Asse.« tl,e view that imperfect labour markets never benefit the employment of workers, but only benefit those who
employ them
Jmprovcihisanswter
rhisi,asamplean,,,.,·.,rToessayQI
Your challenge
~
AS.ALEcon,WB
Chapter.40.Answers,p
>Chapter41
The circular flow of income
lnthiochaptoryouwill
explainthemeaningofthemultiplier
c•kulate the multiplier u,ing formuloe in o dosed oconomy without • government sector, 1 closed economy with a
~
•ernment..,,;torand
an open o,;on,yw"th
a~
"1"nmcnt s«tor
calculatethea\1'rageandmarginalpropensitiesto>a,·e,con,umeandimJ>On
cakulatethe.-·erageandmarginalrotesoftax
analy.., how national income is determined, using aggregate demand and income approach
calculatetheeffectofchangingagg~tedemandonnationalinoomeusingthemultiplier
des,cribethodctorrninantsofaggregatedcmand
explainthecon<umptionfunction:outonomousandinducedcon,umerexponditun,
explainthe .. vingsfunction:outonomousandinducedoavings
explainthedeterminant.ofinv
....tment
explainthedifferencebetwoonautonomousandinducedinvestmen\
explainthemeaningoftheocr<elerator
analy;ethedetenninantsofgo-emmentsp<,nding
describethedeterminantsofnetexports
explaintherelationshipbetw....,nthefullemploymentl.,,...lofnationalincomeandtheequilibriumlevelofnational
analy..,inflationaryanddetlationarygaps
Acceleratorth<!(lry
Aggregatee,rp,mdin,re
,1.utonomou,investment
Aver•g•propcnsitytocon,ume(apc)
Averagepropensitytoimpon(apm)
Averagepropensitytosave(aps)
Averagerateoftox(an)
Capital-outputratio
Closedeconomy
Consumption
Con,umptionfunction
De!lationarygap
Disposableincome
Dissaving
()o,...,mmentspending
lndue«linvestment
lnflationarygap
lnve,tment
Marginolpropensitytoconsume(mpc)
Marginal propensity to import (mpm)
Marginal propensity to''"" (mp,)
Marginal rateoftox (mrt)
Multiplier
Nete,eports
Openeconomy
Saving S..vingsfunction
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,yoonee<ltoknowandundotstand·
themeoningofthemultiplie,-andhowiti,calculated
how notional income is determined, using the a,;gregate demand and income approach with the multiplier process
theeff<etofchangingoggregatedemandonnationalincomeusingthemultiplier
thecon,umptionfunction:autonomou,ondindu<edconsumerexp<,nditure
the"·
c 'nct"on:autonomousand':'
dsav'ngs
theacreleratortheory
thedetorminantsofncte,ports
thedifferencebetwe,enintlationaryanddeflationarygaps
Explainthemultiplierproc,,,s.
2
Howi,themultipliercak-uloted/
Diffe..,ntiatcbetweenaclosedeconomyandanopeneconomy.
l\lhoti,meantbyaggregateexpenditure?
Explainwhatdctcrmin.,.ronsurnption
Explain the difference betwttn autonomous and indu~
Explanwhatdetcrm·n
ron,umere,penditure
.. ·nvesrment
Explointhediffen,ncebetweenautonomou,andind~inv.,.tment
.,
E>plaintheocceleratorproc
IO
l\lhatarothcdctcrminantsofnctcxports'
!I
E>plainthediffcrencebetweenaninflahonarygapondodeflationorygap
.. ,
Analysis
T0<>Ti,mmulliplic,.,
measu,ing the economic impactoftouTism
Tourism is an imporhnt sot.m:e of income and employment in many countri ... Tourism· • economic impact con be measured
throughthemultiplier.Figuro41.Johow,theirnpactofUKtouTistspendingincuros(;:Jacro
.. theEuropcanUnion(EU)
Flgun,41.1:ThejmpactofaUKtouristspendingintheEU
Across the EU, the tourist income multiplier was estimated to be 2.46. The employment multiplierwu2.27.
The size of both multipliers varied aero;; the EU" • member ,ta1c,. For example, in Spain, the tourist income multiplier was
2.93, ye, in Luxembourg it was 1.67. The employment multipliers were 3.65 for Spain and 1.87 for Luxembourg
Tourism" ,economic impact i• usually even greater in low-income countries. !n South Africa, for example, it h .. bttn
es1imatedthotforeverynighta1ouriststay,ina
·high-cndgamelodge"
,14peopleinthesum>undingoreabenefit
12 ln an open economy, mpsis0.1, the mrt ;, O.lSand the mpm ;, O.IS·
a
Cakulatcthevalueofthemultiplicr.
b
Cakulatethefinalchangeinincomewhentherei,anincreaseof$l00minpri.alesectorinv""tmenl.
1.1 u,ing the data in Figure 41.I, analyse the way, ;n whkh UK toorist ,pending impacts on the eco~omie, of EU member state,
14 Explain the lik~ly reason> for the difference in the tourism income multiplie'3 for Spain and for Luxembourg
Thebestwaytoansworthisquestionistousethcmultiplierfonnula
K
-
-+..!.+-
MO!t learnen do not appreciate that very few real-world studie• have bttn made to calculate the value of the multiplie,-. A
::::dra.1-.:,~ni:,u~~::t•t
formosteconomi"", the multiplieri• low, typically around 1.3. In• w,ryopen economy the multiplier
IS Explain the likely reuon fort he employment multi pi i..,. in Spain to be biggc,than
the income multiplier.
16 Assuming a multiplier of 2, analyse the impact of a cut in gm·emment spending on national income
Evaluation
17 Comm,mton the benefitoandcosls
of "high-end game lodge" tourism for South Africo' • e<:onomy.
Multiple-choice question
The multiplier in an economy is 4. The mps i,O.l and the mrl is0.05. The valueofmpm
is:
E'.ssayqu<->stions
1
Anecon,1expcr"cncesar",e"nconsumerspend'ng
Evaluatetheextenttowhichthefinalimpactonnationalincomedepend,uponthe,izeofthemultiplier.
2
Assess the factors that affect a change in net exports and how this impacts on the circular flow of income in an economy.
Thisisasample•nswertoessayQ2
E>port,aregood,andservicesthotore.,,!dbyonecounlrytoanO!herrountry.lmportsorethegoodoandse,,,ic...lhol
on,purchasedfromallothercountri"".Theterm
'netexports" isthedifferencebetweenexportsandimports.Within
the circular flow of income, exports are an injection while imports are a withdrawal. So, if not •~ports increase, this
rep=nts
an "ncrea"' "n thec"rculartlowof"ncome,
a decrea,e 'n net exports·, a decre..., 'n the c"rcular flow'"ncome
[Kl
!twillbeu..,fultoc,plainwhatdetenninesnetexports.Mu<hdepcnd,onprice,espedallythecompelitivenessofone
country" spricescomparedtoitsmaintradingrompetiton.rfanexportingcountryi,cxpcriencinghighinHation,there
i, a danger that its expons will reduce in competitivenes• compa,M to rival producen. Much will depend on the price
ela,ticityofdemandforexport,[AJ.Thelikelihood,though,isthalthevalueofexportsmayfoU.
Otherfoctonneedtoberonsidered.Thequalityofexportsisimportontwhentradingagriculturalproductoandsome
typesofmanufacturedgoods.Anotherfactorwhichcanbecrudalistheforcigne.changerateoftheexporterandtho
countrythatispurchuingcxports.Adepreciatingcxchangernteforthecxportingcountryrelativetothcimporter"
s
exchangerateshouldproduceapositiveoutcomeforexponsales.Thenegative,idetothisi,thatadepreciatingexchange
rate could increue domestic inflation which in !urn could have • detrimental effect on the price competitiveness of
e,cporto!A].Thisisparticularlyrele>·antwherethemanufacturedexportsofacountryaredep<,ndentonimported
,upplie,
Aoshownobove,therearevariou,facto'3thataffectachangeinnetexport•.Pricei,arguablythem0!\imponant.
Anincreaseinnetexportsincreasesthecircularflowofincome.odecreaseinnetexportsreducesthecircularflowof
income I~]
four challenge
See whether yoo can improve this answer. The answer ho, the foundation to hecome a better answer. The first paragraph i,
d..criptiveondcouldbeshortened.ThiswiUallowmoretimetoanalysethesignificanceofGDPandbarrierstotradeinthose
countriesthatareaneconomy"
otradingpartners.Thecurrentfinalporai;raphcou!dberewrittentoincludemoreevaluation
andancwfinalparagraphadd<!<l.Yourchallengeistowriteancw/ir,;tparagraphandtwoconcl~dingparagraphs.Abottcr
answcr'sg·vcn'nthcworkbookanswcn-butwr"toyoonoutfirst
>Chapter42
Economic growth and sustainability
Inthischaptcryouwill
explain the difference between actual gro\\1h and potential gro,,.'lh in national output
explain the causesandconsequencesofpositiv-,
and negative output gaps
describethephasesofthebusiness(trade)cycle
analyse the cauM's of the business cycle
cxpbinthcrolcofautomaticstabiliscr;
evaluate the effectiveness of policies to promote economic growth
explain the meaning of inclusive economic growth
anal)"" lhc imp:,ct of cwnomicc growth on equity and c<iualily
na'y,~,r
·1opromnte"nd"veernnor
·D
,1h
explain the meaning of sustainable economic growth
cxp!ainthcdiffcrC'nccl>ctv•ccnusingandconscrvingrcsourccs
analyse the impact of economic growth on the environment and climate change
evaluate the policies to mitigate the impact of economic growth on the em~rontnem and cJjmate change.
Dcpr<"ssion
Key skills exercises
Knowledge and understanding
To an,wcr lh-, qu-,sti,m, in thi~ chapler. you n.,.,d lo know ,md uncl-,r:stand
thedifferencebetweenactualgro,,,thandpc,tentialgrnwth
thccaus,,sandcons,,qucnccsofoutputgaps
the phases and causes of the business cycle
polides1opromo1ee<:onomicgrowth
thcme·•n·r,b.Jf"nc'"
ccconom·~;;,v
th
lheimp,.ctofe,;onomicgrowlhonequilyand"'l""lily
the policies to promote inclusive economic growth
the meaning of sustainable economic growth
c/,g
dcorrv"ngre
the impact of econmnic growth on the environment and climate change
policies to mitigate the impact of economic growth on the environment and climate change.
I
Dcs<:ril>cthe diffcren<:c l>ctw,,en actual growth and potential growth
2
JJescribewhatismeantbyanoutputgap.
3
Describe the phases and causes of the business crcle
4
Explain lhc meaning vf indusive ~><:onnmicgmwth
5
Explain rhe ,neani11g of sus1ait1ahle "cnn<>mic growth
6
Explain the difference bctwe<>nusing and conserving resources
Analysis
lnclusi\·e and sustainable
economic growth in Azerbaijan
bu.<inesses to generate sustajnable economic growth for Azerbaija11
7
Analyse how au10ma,tic stabilisen, cam w<luce fluctuations in GDP.
H
Explain how i\',e1haijan has sought Topn>mot-, inclu.,iv,: cconumic gwwth
9
Explain how Azerbaijan has sought to promote sustainable economic growth.
10 Analyse the like!)' impact of the business cyd<' on Azerbaijan'
s economic growth rnle.
Evaluation
11 Comment on the extent to which Az.crbaijan' s de,•clopmcnt policy mitigates the impact on the em·ironmcnt and climate
change.
Multiple-choice question
I
Which of these ways of producing more electricity is likely to he most sustainable?
B
a new ~as-fired power station
C
anewcoal-fircdpowcrstation
Essay questions
I
Assess the extent to which it is realistic for middle-jncome countries to promote inclusive and sustainable economic
growthartht:sametime
2
Evaluate the view that it is not possible for economic growth to take place Y.~thout a net increase in resources
lmpro,·ethisanswer
This is a sample answer to essay Q2
Your challenge
~
ASAl<conWSChaptor4<An<~rs.p
>Chapter43
Employment and unemployment
lnth;,d,apt.,,-y<>uwill·
definelhemeaninKuffotlemploymenl
"i<J'l,in thedifferunce IK,t""'"'"l"il;l,tiotn•n,ldi,..1uilibtiu,nu,,~mploy,o,et>t
explsin lhe difference
b<,i w""n
,h,tinelhemeani,~:oflhetlalurol
,olunl.r)' ond im-c•hml•r)' unemplu)'menl
r,t.,ofu,,.m,ploy1n~nt
eJ<pl•inlhedelenninonl,ufthen•lural'"!•ufunem1~uyment
,nfil)"'" the poli9· in,µlicaliun,ofthe
nalural Meo I unemµlu)·menl
de>erit><pott,m,ondtrendsin(un),mpluymen!
,nfil)'"'thefoctonoff«tinglabourmobility
evslu,le lheefte<"tiwn<'» ufpolicW, lo n,<h1<e1mempluymenl.
l'ullemployment
\[·',-,.,,r,.,
GcographkalmohiHtyoflabour
..mp'·;.·
Key skills exercises
Tuansw,rtheque>1iominthischopter,yuune<'dtoknowandunderstand
"·ho<i,meanlhyfollemµloymenl
the difference betw..-n equihbrium rnd di,,quihbrium
unemployment
1hediff<n"nc-.,betw...-n;,;JunlarJ•ndin,·0Junlaryunemployment
themeaningofthenaturalrateofunemployment
the policy implic.iiomofthe
natu'"I rate of unemployment (incfodinghy>tere,i,)
howtod....cribep,nem,,ndtrendsinunemployrnentondemployrnent
theformsofhl>ourmobilih·
thefactonolfectinglohourmobHity
thepoliciesthotcanbeoppliedtoredu<O<'unemployrnent.
D<fincful\employmcnt
r:,cplointhediffcrenceh<tweencquilibrium•nddisequilibtiumunemployment
D<fincthcnaturalra1cofuncm)>loym.ont
r.,ploinwh:ttdet<rminc,then•<ur.ilr•tcofunemploymcnt
c,plainthcdifforu>eeh<twe,onmlunta,yond;m.,-,lunt•ryun<,n,pk~rt1ict'1
r.,plainthel)l"'>oflabourmobility.
Analysis
Y urhuncmpl ·"''''nt.nBmn~·
ln•mployment rate>inASl!AN member,totes were ot an •ll·timelow in 2018, 1heexc,,ption was l\runei, where il5 rate of
unemploym.omwasalmostdoublethatofanyothermcmbcrstotc(:=eFigure4J.l)
10
9.2
Ft;:un, 41.1: Unemployment rate,(¼) h}' ASJ,.,\N Member States, 200S.-20l8
The ntf abo =ogni>ed that youth unemployment wa, mor, :sen,itiv,,to economic growth thon adult unemployment due to
thcroncen1rationofjobsinthooepart,ofthceconomymo..tlikclytob.,alfcctcdbythcbusinc"cyclc
lnternationalcompooi,omofunemployment
rote, ,hould be handled with care. 'lbi,i, due to ,.,,ri,tiom in the method, of
collcctionondintcrprctationofthcdefinitionofwhcn<0mconci,unemploycd
7
Compare the unemployment rote, of Mabysia ,nd l'i~nam from 2000 to 2018.
~
Anolyse how youth unemployment is affected by economic growth in llrun<".i
9
Anoly,c how>tructural reform of the lobourm>.Ue: might reduc,,y,mth unemployment in llrunei
10 Analy"" the com of youth emigration from llrunei to other A~~ANmember,tote,
Evaluation
Oa1ares1>0nseqoes1ion
I
!Jsitlgrhcd;tainFigu,~«.1
,,,,pla;nnm,-.,a_.,,...,,whythc«:cur,cyofthc=ti>fic.islikclytobcvatiablc
l'.ssayqucstions
1
~v.luatethepoliciesth.i,governmentmightusetoredue<"thenatura!rateofunemployrnent.
lmpru,·elhi,answer
!bi,i,o,ampleon,werto.-.,oy(,)l.
\our challenge
>Chapter44
Money and banking
Jn this chapter you will:
define the meaning of money
explain the functions and c·haractcristics of money
define the meaning of money supply
analyse the· quantity theory of money
u:pl•in th• function11 of commercial banh, indL1din1 providint; d1po1it ,cco1mt1; l1ndin1 money; holdint; or providinr;
cuh, HcuritiH, loan,, d1p,nia, 1quity; rH1r,,1 ratio and c1pit1l ratio; th, obj ■ctivH of commuci,l bo.nlu
ui.aly• th1 c1u111 of ch1n111 in the money 1upply in an op,n econom:t includinr; credit crntion,
fin,ncinf!:, qu1ntit1tiH u1in1, ch,nf!:• in th, ba.l1nc1 of pa.ym1nt1
10Y1mm1nt d11l.cit
explain the rnlc of the· bank credit multiplier
explain theroleofthecentralbank
evaluate the cffcc·tivcness of policies to reduce inflation
expJa;n demand for money (l;quidity preference theory}
evaluate interest rate determination
according to both the loanable funds theory and the Keynesian theory.
Narrow money
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand
thefunctionsandcharacteristicsofmoney
the money supply
thequantitytheoryofmoney
Keynesian and monetarist theoretical approaches
thefunctionsandobjectivesofcommercialbanks
the eallses of changes in the money supply, indu<ling the bank e·re·dit muhiplier
the role of a central bank
the dfoctive·ne·ss of policies to reduce· inflation
the liquidity preference theory
interest rate determination,
including: loanabk funds thc·ory.
I
Descril,c the functions an<l characteristics of money.
2
Explain the difference between narrow money and bmad money
3
Explain the quantity the·ory of money
4
Explain the bank credit multiplier process.
5
Explain how quantitative casing works.
6
Explain liquidity preference theory.
7
Explain what is meant by "helicopter money'
.
Analysis
'Helicopter
money'
to the rescue?
!n rupon• to th• COYID-19 p•nd•mic, th• U~ •dminittr•tion rupond«l •••ith • $2 trillion retcu• du!. Thi• included lo•n•,
,id to 1n,all butinuHt and hulthcu•
pro.-idart and, 1i11nilkantly, direct paym•nl1 to indi.-idualt.
For tho11 •1rnin1 J,u thtn $W 000 • yur {do\lblt Jiorcn\lplu), th• ptck•1• proYidtd • dir.ct p•ym•nt by b.nk chtq\lt for
$1200 plu1 ISOO fur each child. In a.ddition, unemployment ben,lit ,,.,,.. bcc,,t-,d by kiOOp<"r,,.,••e,k 1nd cli11ibilityext-,nded to
cover more workers
Th• dir•ct pay1111nt. lo indi.-iduol Am.,.ic1n1 u• on •nmpl• of "h1licopt1r mon•y' , • t,ni, coin.! by th• mon1t1.ry
•conomi1t Wilton ,-r;•dmon. !to purpoH i1 to produc•• on•-offuninr•l
cuh inj.:ctio11to 1timulat1 con1um.,.1ptndin11 in
order to JUI •n ""'momy 01,1tof doup reccnion.
Unlih l'lacal and mon•t•ry policiu, direct p1ym•nl1 u• dui11n1d to pro::luc• • quick impact. ,-,.,,iliH ,fkct«l by
un•mploym•nt can u,., th• h•licopt•r tnon•y to p1y mortr;•~n and buy r;roc,riu. Thi, i• dn<t in princip!•. 'l'h, principl•
comH unotuck ,.-h,n individual, uv• th, h•licoptn .,on•y r11har thin 1ptnd it. Thi1 .-.ducu th, impoct on •81r•1at1
dem,nd and r"dllcl,1 output to 1,hal it '0/ould othen'li1e haw bl·tn, reducinJ e·mployment.
8
Analyse how the paynienT of helicopter money in the USA affecTed The supply of money.
9
Analyse reasons for a change in the money supply.
Evaluation
10 Discuss the extent to which hclfroptcr money alon<· might b<, able to move the US ,-c·onomy out of de·cp recession .
.\tulliple-choice question
1
Therateofin1erestinsomecoun1rieshasbeennegative.
A
The rate of inflation is negative.
B
The real value of savers'
C
The cost of borrowing from banks is negative
I)
There is an urgent need to reduce aggregate demand.
Whichoftheseistrue'
deposits is falling.
Rssay questions
I
E,'aluatc interest rate d<'lcrminalion according: to the• loanable funds and Keynesian theories.
2
A,sess the effectiveness of the ways in which government and centrnl bank policies are able to reduce inflation in an
lmpnn-ethisanswer
This is a sample answer to essay Q2
Ind•tion it• 1itu,tion whtrt th•re it, t\lllain•d incruu in the pric• l•.-•l in •n economy. Th• l•v•! of indation vuiu
bet,.-un •conomiH, and for thi1 r,uon a policy thll mi11htbe •ppli,d in on, .:conomy m•y not b• ,ntir•ly appropriate for
coml:ot.tinr;ind•tion in •nothtr .:conomy.
Th•.-. u• h<'o main 1mup1 of policy uo.d To ,-.due• innation. Th,y .,, controctionary mon•t•ry policy and d•nationary
lilcal pwlicy. lloth are likoly to C., """d •t the 1,m., time·. Thoou puliciu1 imul~" ruducin11 the· monuy oupply 1nd in the cue
of n.c,l poHcy, c\lttin1 back on 10.-arnm•nt •1,-ndin1 or incrtuin1 taut.ion or I mixtur• of both. ,upply-•ida polici••
could b., uoed tu control coot-puoh infla.tion 1lthou1h tho•o policie• ,..,j)l like· time to hue on dice\ IKI.
G,1tin11th, b.11 policy i, pot1nti1\ly difficult. It ,.-ill 1110d•ptnd on th• r,1,tionohip b.1\.-un a 1onrnm•nl and ito c•ntrol
b1nk., .,• .-,ci,lly iftho bonl hu • pnticuh,r doiro• of inde·.-,ndenc.,, Tho nalurc o( inflotion in on oconomy i• th•t
innation i• \IAuallyc1uHd bymor1th1n on, factor.~, d1m1nd-pull and cn•t-puoh CI\I.,.. comhin,to incru.,. in pric•
fo,·ol. A further complic,tiun i• ,,..,horu• depreei•tion in tho ox,·h•n;,:" rite cou•c• in!l,lion - lhia l)"p<.'of cool-p111hintl.1tion
cannot ,lw•y• h• corr1c11d by domntic policito
,uppoH intl.11ion i1 primorily cauHd by on incruH in th• mon,y 1upply. A r,uon for thia could b1 du• to quantit1.tiv1
Htinr; \Yh<tnint.,re1t ratu art low. Th• intention behind qu,ntitativ• 1uin1 it to •ncouni• th• commarcial b,nkt to l•nd
mor• mon•y lo bu1in11H1. Jf tco much l1ndin1i111r•1d by con,marciol b,nh, th, d1n1u i1 that th• rat, of inflotion i1
likely to •cct-1.,ratc, 10 oJ'J'.-nttin,; th• purpoi• of qu,ntit•tiv, u1in~. IAI
On• of th• bi1 unkno,,..·n• in economic policy i1 hm.- flrm1 .nd hou11hold1 ,,..,iJlr••pond to policiu to r•duc, in/lotion.
Suppo•• thtr• it• ri• in th• rat, of int•re•t. Contum•n could retpond by not reducin1 th•ir oontumption u th•y Mu
1h11further price incr•uu could follo,.-. Anothu •nmpl• could be in th, c1H of an incr■-11 in incom, t,x. Con1umer1
could work lonr;•r houn to m,intain Ji.-inr; 1t•ndudt or th•}' could drnr upon 1uin,:1, both of which ,,.ill increu•
1gre11at, demand 111 tim• wh,n th, moat 1ppropri11• policy ia to reduc• •N!"l"I• d1m1nd. [A]
\'our challenge
S.t wh•th•r you c,n impm.-• th;• •n-·•r. Th,.,,., ..., oho,"" 1n undar1t1ndin1 of th, point of th• quutjon. Hou•,.-•r, l•H
kcu1 could hu·o Wm •ponl on thc lint t·o,o p;m,~r•pha, whieh arc contoxlu1l ,nd could b" •hortonod. Your ch1llen10 io lo
prc.:luc• • britf optnin1 p1n1r1ph, • por•1raph with mor1 •nmplu
1nd • concludio1 plflllraph. A bett,r ln<"'"•r it 1ivan in
the workbook. •n•wen - but writo yuun 01,1\fin\.
~
ASAL_Econ_WB_Chapter_44 Answers.p ...
>Unit 10
Government macroeconomic
intervention (A Level)
>Chapter45
Government macroeconomic policy
objectives
J11thischapteryouwitl
a11aly1<'macr.,,..conomic policy objoctiv.-1 in t.-rm1 of inflation, b1l1nco of p1ym-,nt1, un-,mploymont, 11ro,¥th,
dcwlopmcnt,1u1t1in1bility1ndrndi1tributionofincom11nd,¥01lth.
IHI@
I
Labourforceparticipationrnk
Sustai11<1bledcvelopmcnt
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischapter,youneedtoknowandunderstand:
thcmcaningoflowandstablcinflation
balanccofpaymcnlsstability
low unemployment
sustained economic growth
economic development
th<·mcaningofsustainablcd<·vclopm<'nt
howroredistrihoteinc.omeandwealth
l
Explainwhatismeambylowandstableinflation
2
Expluinwhatismcantbyhalanccofpaymcnlsst.tbili!y
3
Explain the meaning of low unemployment
4
Explainthemeaningofsustainedeconomicgrowth
5
Explainwhatismeambysustainabledevelopment
6
Explainwhatismcantbythcrcdistributionofincomcandwcalth.
The redistribution of income and wealth occurs when, as a consequence of government policies, there is a more equitable
distribution amongst the population. rKl
Analysis
SouthKol"<'a:A.sia'
spowerhou.se
South Korea is now a high income coun\l)' with a GDP per head of around $26 000 in 2019. The economy has lx·cn transformed
thn,ulP' 1u1t1in•d onmomic xrowth. gucc,•ni,·• xov,·n,,nent1 h1w 1upportod domo1tic indu1trie1. Th-, printi11tion of k>rmor
1t•t•·<>,..n1d indu1lriH '""' do1ixnod lo prot•ct f1mily-o·•m0d bu1incllH from oul1id• comp•tition, • policy lno,.n u
cli.r.-bol. Unlih othn A1i1n countriH, multin1tiond c<>mpaniu (l-t:-IC1),,.,•.r, not al)o.,..·1dlo bid K>rlh0 n1ti0n1li11d
Figure 45.l show, an "ssesoment made in 2019 of South Korea· s economic policies
Ec=m;,a1;cy
GDPpo,cap;ta
Potential
output,
growth rate
Inflation
Gro_ssfixed
Realinterestrates
l'ii;urc45.l:SpiderchartshowingthesuccessofSouthKorea"
.
cap1talformat1on
seconomicpolicies
SuurcecBei-telsmannSlillung
South Korea' smacroeconomicpolicyobjectivesare
moderate,stableeconomicgrowth
maintainingacurrcntac,·ountsurplusonthcbalanceofpaym<'nts
ahcalthyratcofinflation
low interest rates
low,stablcuncmployment.
SouthKorcadocshavcpolicychallcngcs.Somcarc:
torf'duceyouthunemployment
toreforrnthelah<>urmarkerhymak;ngmorejohspermanent
Analyse how low interest rates in South Korea may lea cl to increased economic growth.
7
8
Analyse how low interest rntes in South Korea might affect other macroeconomic policy objectives.
9
Analyse how supply-side policies might be used to combat South Korea' s labour market challenges
Evaluation
10 Using the information in Figure 45.1, discuss South Kor<'a' s r,·ccnt economic performance.
Multiple-choice question
I
Thcannualrntcofinflationinan<'conomyisstabl<"al5%ovcratwo-ycarpcriod.
Whichoftheseistrue>
A
Thcn,isnochangcinthcpricclev<'lovcrthetwo·y<'arpcriod.
lJ
Thcratcofinllationislowin<'achofthctwoy<"ars.
C
ThepricelevelishigheraT!heendofthen-•.o-yearperio<1
n
The prkes That increase.I in The first year also increased hy the s.,sme amount in the second year.
Essay questions
"boo•omic 1ro,.,t1, i• • prim•ry obj..:tiv• of m,ny 1ov..,mm•ntt bm it crnnot ,,.,,nnt•
d•T•lopm,nt'
2
Assess whether maintaining a low rate of unemployment
policy.
• ri1in1 l•Y•l of .conor,ic
should always I><'the numb<'r one objectiv<' of macrO<'conomic
Improve this answer
This is a sample answer to essay Q2
Unemploym<·nt i~ • 1itu1lion ,,.,.h,·r0then ue poop),, ,•,ho U<' willi111and ablo to •••<>rlbut who do not hll·o a job.
U111mploymont i1 an i11uo in all 1conomi01. Jl i, ono of a •0rio1 of ,.•cnAc<>nomic obj1cti,·o• lh•t ,.,,,0mm1nt1 hu• It(]
Un1mploymont i, not xood J'.urth• .:onomy or for tho11 ,..ho do 110Ihn1 •job. P"or!ho .:onomy, it m1a111that thor• i,
•par• c•p•city - un,mploy•d worbr- u.>uld in principl• 1- contribulin1 mor• 0'-'1P'-'1.,or an indi1idu.1l who i,
1.m1mplo)·•d, n,.,-,,•r• tinui.cill •nd p.r.,n•l implic.tio11.1. Go1,mm1nl 1-ntlit~ .r• not• 1ub1titut• k>r • foir ntt• of P•Y
from,job
Anothu obj,ctin of th• aonrnm•nt i1 to control inflation. Thi• i1 1110important 1inc• high inflatjon c•n nllk• domHlic
ucpora t1ncomp.titivt. A hiah r•I• of inflation •110 undarminH hou11hold incoma, r,Hnin1 th•t l,11 c,n be hou1ht with
11\ud lav•l of incom,. Th, probl,m with inJ'luion i1 that it can dHtroy con1\d,nc• and lHd to othu prob),,.1
A third obj•ctin of .conomin i1 th•t of .-conomic 1ro,.·th. Thi1 i1 th• ulti,nat• obj.ctin in 10m• rnp.ct1 1inc, gro,1th
pro1idH for •n incrHH in li1ing ,u.ndud1. All .conomin u• 1tri1i11gto pro1id, thi1 for th•ir rHpacti,·• population,.
A httd obj1c(iY• i• to k•p • b•l•nc, in th• b•lmc• uf p•yr,•ntl. Thi, i1 oft,n dil'lic"1lt,•1paci•llt Jor d•11lopi11.1
..:onomio "''hicl1.r•ly on illlport1, hut oft•n h•v• un1t,blt nport TI.Ytn'-'•·A run of d•licito1 in th• b1J;,nc• oftro.d• hu
•vu\lu•llr 10 l• plid for. lt oft,n mun1 th11 • COUnll)' ii fon:•d to borrow 111on•r10 P•Yofrth• d•l>11from illlJIOT(I.llCJ
Your challenge
,.,.,,·,·r.
S.1 ,..h•lhor you c•n impron· thi,
Thi, i1 • ,.,w. •n1wor, 1lt houxh it con1id0u lour nn1 of m1nooconomic policy.
Tht• ~"<Jnt1nti• x•ncro.l •nd !ail• to r..:01:ni11 that in lorm1 of obj1cti•n thor• n .. d, to 1- • mono pnoci11 •xpl,m•tion. 1bt
npl•n•tion •hould be •n•lytinl. J\ co11.du1ion i• noquir•d lo pro•id• •n •-OJ!ltnt
ofth1 nt111t to ,,.,.hich• lo,. rn(1 .,f
un,,nploy111,nt 1houi<l be th• n .. ml•r 011.,oh;octiv, of 111,cr◊-:o•omic p<>liC}'.A benu 1n,,...r i• xiv,m itt Ill• workbook
rn1,..,n-but,..ri(•your1outllnt
~
ASALEconWBChapter45Answer,;.p ..
>Chapter46
Links between macroeconomic
problems and their interrelatedness
lnthi.,chaptc,youwill
deocribt>!herelationshipbetwoontheinternalvah,eofmoneyandtheexterna]val<,eofmoney
explainthen,lationshipbctweenthebalanc<eofpaymentsandintlatinn
explainthcrclationshipbctwecngro"1handinflMion
expbinthen,lationship~tweengrowthandthebaJanc-,,ofpayment,
expbintherclationshipbctwcenintlationandunemploymcnt
analy.., ihelradiliona!Phillip,rnre
explaintheexpectalion,-augmentedPhillipscurve(short-andlong-nmPhillip,curve)
Key skills exercises
Knowledge and understanding
Toanswerthequeslionsinthischapter,youneOOtoknowandunderstand·
lherelalionshipbetv....,nlheinlernalvalueofmoneyandthenlernal,alueofrnoney
therelatiomhiphctwc.,nthcbalanccofpaymcntsanrlintlation
therelationshipl.>etwoongrowthandinflation
therelationshipbetv;cengrowlhandthebolrnceofpayments
the relationship hctwc;:n inllati<>nand uncmploynicnt
whatis,hownbythetmditiono.lPhillip,rnrw
whatisshownhythcexpc,&.ltion,augmcntcd
Phillip,cu,,,.,
1
[)cscril.>ethe relationship h<,twc;:nthe internal ,•alue of money and the external value of money (curroncy)
2
Explaintherelationshipl;etw"<'nthebalanceofpajmlentsandinflation.
faplaintherclalion,hipbetv;e,ongmwlhandi11flotion
llxplainthcrdationshjphctwc;:ngroMhandthch,,lanccofpaymcnts
Explaintherelationshipbetw..,ninflationandunemployment
l'.xplainwhati,,hownhythctraditionalPhillip,curve
7
hplainwhati,,hownbylheexpt"Clalions-augmenie<lPhiUip>cune
Analysis
Whatfu15happ<'ncdtothcl'hillipscurs·c?
Figure 46. l .,hows the result< of an empirical ,rudy of the US economy from 19'/Rt<>the end of:!017. A,•ernge wage r,rnwth has
Mn unu,ualh· slow since 2010 in the USA.
uuuuuuuuuu~uuuuu=
U09mploym.mt r.ite
Figure46.l:Phillip,cun·efor\heUSA,IW8-l017
8
~•!nJs'.!'~;:;
9
Explainhowthisrclationshipchangedaftcr2010
i;1~~ure 46.l, outline the relstionshir, b.-tw""n the unemrloyment rate ~nd •~ernge hourly earnings growth in
0 0
Evaluation
10 Comment on the vnh,c of the information in Figure 46.l to macroe<:<Jnomicpolicymakcrs in the USA
Multipk-dwicc
question
The table below gi,·e, an economy"
, unemployment
r
rate and inflation rate for a five-year period
Whichchangcbctwccnconsccuhwycarsiscon,i.,tentwithlheundcrlyingprinciplenfthePhillip<cu"'-c'
Essayquestions
1
Assess whether a gowrnment might l.>eable to sustain a macroeconomic policy that at the same time promotes low
unemployment and low inflation
2
Evoluatewhetheranincrea""intherateofinflationinaneconomyi,likelytocausemoreharrntothebo.lanceof
paymentsthantooconomicgrowth
Improve this answer
rhisisasamplcanswertnessay(,)2
Yourchalkng<'
>Chapter 47
Effectiveness of policy options to
meet all macroeconomic objectives
In this chapter you will:
evaluate the dfoctivcncss of fiscal policy including Laffer nirvc analysis in relation lo different macroeconomic objectives
evaluate the effectiveness of monetary policy in relation to different macroeconomic objectives
evaluate the effectiveness of supply-side policy in relation to different macroeconomic objectives
evaluate the dfcctivcncss
of exchange rate policy in relation lo different macroeconomic
evaluate the effectiveness of international
objectives
trade policy in relation to different macroeconomic
objectives
analyse problems and conflicts arising from the outcome of the different policies
explain the existence of government failure in macroeconomic policies.
l'iiiii@
Coca<c,-,yclirnlly
Crnwdiag ia
Crowding out
Govcmm<'fll manocconomic
failure
Laffer curve
Key skills exercises
Knowledge and understanding
lo answer the questions
in this chapkr, you need to know and un<l<'rstand:
how fiscal policy relates to different macroeconomic
policy objectives
the feamres of a Laffer curve
how monetary policy relates to different macroeconomic policy objectives
how supply-side policies relate to different macroeconomic policy objec1ives
how exchange rate policy relates to different macroeconomic policy objectives
how international trade policy relates to diffrrcnl macroeconomic policy objectives
the problems and conflicts that arise from the outcome of different policy objectives
government failure in macl"O<'conomicpolicies.
1
Explain what is shown by a Laffer curve.
2
Explain how fiscal policy relates to different macroeconomic objectives .
.1
Explain how monetary policy relates to different macroeconomic policyohjectives
4
Explain ho,</supply-side policies relate to difTc!"('ntmacroc-,;onomic policy objectives.
5
Explain how exchange rnte policy relates lo different macrneconomic policy objectiv~·s
6
Explain how international trade policy relates to different macroeconomic policy objectives.
Analysis
Pakistan'
s economy is on the right track
In April 2020, a. r■port from th■ A ■ i■n On■lopm■nt l\ank (AD8}pm.-idad •oma 1oorl naw•on J>akiatan' • aconomy. Th■ r■porl
reco1niHd that 1tabili1■tion policiu wua pro.-idin1 • po1iti.-a contrib.ition to tha domHtic economy •nd to r«l1,1cin1tha
dalkit on th• currant account of th• bdanc• of payment,. Th, AD8 lorKut that, du pit, th, impact of th• COVID-19
pandemic, Pakistan' • economywu uptdtd
to 1ro,.- by 2.,M in 1020 and 3.21' in 2021
The positive assessment by the ADBwas based on:
The use of interest rates to counter inflationary pressures. The interest rate was reduced from 12.2S% to 11% to off.set the
effectsofCOVID-19
A forecast inflation rate of 11.5% in 2020, falling to 8.~% in 2021
A reduction in the current account deficit lo 2.8% GDP.This was achieved thrnugh the depreciation of the rupt•e and
import restrictions. Jmport substitution and export promotion must continue.
An increase in revenue from sales taxes on petrol, gas and electricity charges and an increase in the number of residents
filing:tax!"('\urns.
High interest rates that continue to attract
'hot money'
from corporate and privJte investors
7
Explain how a Laffer curve can be used to analyse the effectiveness of fiscal policy in Pakistan.
8
Analyse how Pakistan' s interest rate policy has managed to control inflation.
9
Analyse how the depredation
of Pakistan· s rupee has affected other macroeconomic objectives.
10 Analyse how Pakistan' s international trade policy has affected other macroeconomic objectives.
Evaluation
11 Comment on the ADR' s view that 'structural reforms of agriculture, industry and services are required to improve
Pakistan" s productivity and export competitiveness"
Oata response question
Discuss the benefits and costs of a high interest rate policy for Pakistan' s economy.
l
Essay questions
I
Evaluate the effectiveness of supply-side policies in achieving the macro,_>conomicobjectives of an economy.
2
Assess the view that fiscal policies alone cannot meet the macroeconomic objectives of low inflation and low
unemployment
Improve this answer
!"his is a sample answer to essay Ql.
!lupply-•ido policio1 .ro YUi"d but •ll h•ve then.me objective, th1.t of incrouini,; •l':l':ro!l•le•upply. "Jbe n•ture of the
policir• i• th•t they requiro • 110Yernmantto t■kr • bil':l':..rrol■ in lho m■n•1111mant of the• aconomy [JC]
A nryral■nnt and ,.-idaly l.lHd aupply-aida policyia kir • 110.-arnmant to incra■ H it. apandin11on ■duc■tion •nd trainin1
If auccH■ fol, thia policyc■ n hav■ •n important 1.l'l'ecton •ll macrneconomic policyohj'1.cti.-1.1.Th• purpoH b1.hind
fvndin1 education •nd tr,inin1 i• to pro.-idt • battar, mora qualifl..:! workforca. It c•n btNtn u a form ofin.- .. tmtnt that
can ,nhanc, • country' • future rat, of incr,u• in e,conomic 1rou1h [A]. lncr,u,d 1p1ndin1 on education and traininr; i1
al,o lihly to reduce unemployment. J. naw ,;roup of worker, will be e,quipped ,,.ith naw 1k:ill1that the labour market
require,. If the11 worker, had become unemployed for ,tructural reuon1, their r1-trainin1 will hav, made them much
more employaLlo. Youth unemployment it I. problem in m1.ny Aliil.n countriM. ~chool lenen •hould be providrd >rilh the
,·oc■tional •kill• thuy nuud to 11ut• job, •11•in rnducin111,1numploymenl [AJ.
Spandin1 on education and trainin1 over tima can impro.-, the producti.-ity of• country. A• Iha aconomy becomH more
tfflciant, producti.-itywill incr,ua and the prica of many 1ood, and HITic11 could f•ll. Tharafon, ■upply-,idt polici11
hne contributed to controllin11 inflation. A• the price of export• become11:nor, compatitin, thi• may hive• ben,tlcial
ct'/"c-ct
on the curl"l'.'ntaccount oft ho balance of p1.ymcnt1 throuJb increuod uport nle1 [A]. A 1urplu1 on the balance of
tndo could le•d lo •n approci•tion of• country' ■ for.,i11nei:chan11~nte.
A fin•l m■cro1.conomic objrcliYa that c■n ba inliuencad by aupply-,ida f"'.)lici11i ■ how to m■ke the diatrib1,1tionof incoma
mor• ■q1,1it•bl■. Ed1,1c■tion and tr■inin1, ■ap■ci■lly wh ■ra pro•idad fr■a of ch■r11a, c■n imprn..-a tha incom■a ■nd fut1,1ra
proa~u
ofthoa■ from lo,,,-incoma b■ck1rnund1. A battar tninad and hattar ■duc■ t1.d par■ on ahould ■hny1axpacl to
rac,i.-, hi1h•r p■ y thin ■omtontwho i, 1,1n1kil\ad■ nd ••ho hu had littl1•d1,1cation [A]
Jbi1 eumple of •upply-1ide policie1 i• hii,;hly rffcctiY", -ince incrnued •?cndin11 on cduc•tion •nd tninin!! can at'J'.ect•11
of tha m■cn•,conomic i->licy objecti•o• of• co1,1ntry.ll i• al•o worth •lrenin1 th•t in •ll cue•, th" impa.ct of education
■nd tninin11 i1 po•itiva [F.].
Your challenge
.'i■a
,.,hathar yo1,1can impro.-a thia anawar. Th• ana\nr pro.-id■a an nalu■tion ofhmY incrauad •pandin1 on aduc■tion •nd
tr1i11in1c■ n have• po■ iti.-• al'f•ct on ••eh of th1. m ■ cro1.conomic objecti.-a■. Thi ■ it ,.,n,, hut th• wordin1 of th• G"••tion
ma■ n, th1t it i, n1c11nry to con,id,r other typ11 of ,upply-,ida policy n ,.-all u education ■ nd train in 1. A di■1r•m ••ill
anhanca the quality of the an11•>■r. A bettar an,war it r;iv,n in the workbook an■"''"' - but ,.-rite youn out tint
~
ASAL_Econ_WB_Chapter_47_Answers.p
...
>Unit 11
International
Level)
economic issues (A
>Chapter48
Policies to correct disequilibrium in
the balance of payments
lnthischaptcryouwill:
explainthecomponentsofthebalanceofpayments:currentaccount,finandalaccountandcapitalaccount
evaluatetheeffectsoffiscal,monetary,supply-side,protectionistandexchangeratepoliciesonthebalanceofpayments
explainthcdiffcrcncebetwmmexpenditure-switchingandcxpenditure-roducingpolicics.
Key skills exercises
Knowledge and understanding
Toanswerthequestionsinthischaptcr,youneedtoknowandunderstand
thccomponcntsofthcbalanceofpaymcnts:currcntaccount,financialac<:ount,capi!alaccount
thccffectoffiscal,monctary,supply-sidc,protectionistandcxchangcratcpoliciesonthcba!anceofpaymcnts
thedifferencebetweenexpenditure-switchingande,rpenditure-redudngpolicies.
When looking at the balance of payments, it is use fol to remember that the financial account is very important for many
countriessince,ifinsurplus,itcanbeuse<ltooffsetadeficitinthecurrentaccount.Thisisnotalwaysagoodideasinceit
involvessellingassetstopayforforeigngoodsandservices
I
Dcscribewhatismeantbyneterrorsandomissionsinthebalanceofpayments.
The purpose of this item is to en sun, that the balance of payments always balances. It is required because of inaccuracies in
collectingthemassofdatathatisneeded[K]
2
E,rplainwhatisincludedinthefinanda!accountofthebalanceofpayments
3
E,rplainwhatisincludedinthecapitalamountofthebalanceofpayments
4
Explainthedifferencebctwe<>n<>,rpenditure-switchingandexpenditure-reducingpolici<>s.
Analysis
lndon<>sia' sunusualbalanceofpayments
Indonesia is a lower middle-income country that has e,rperienced substantial growth over the past ten years. The growth has
beenmainlyduetoitse,rportsofcrudepetroleumandnaturalgas.Indonesiaisalsooneoftheworld"
smaine,rportersof
rubber,alongwithagricu!turalproductssuchascoffee,palmoilandspices.
Anunusualfeatureoflndonesia"
sbalanceofpaymentsisthatithashadasubstantialovernllsurplus,butabalanceoftrade
deficitsince2018(seefigure48.l).lnthecarlymonthsof2020,thedeficitbe<:ameasurplus
3000
2000
1000
Ji
~
-1000
-2000
-3000
2016
Figure48.l:lndonesia"
2017
2018
2019
2020
sbalanceoftrade,2016-2020
Source:TradingEconomics/Statisticslndonesia
The current account deficit is affected by the oil and gas trade deficit and the non-oil and gas trade surplus. The government
hasusedimportcontrolstoreduceoilimports.
Thesurplusinthecapitalaccountandinfinancial
investors see a promising outlook for Indonesia·
from certain
transactionshascontinuedtoincrease.
Thisisseenasevidencethat
s domestic economy in a global economy where future prospects are far
5
Give two e,ramples of items that might be included in Indonesia·
6
Give two e,ramples of items that might be included in Indonesia" s capital account of the balance of payments
7
Analysetheeffectoffiscalpoliciesonthebalanceofpayments.
s financial account of the balan<:e of payments
8
Analysetheeffectofmonetarypoliciesonthebalanceofpayments.
9
Analysetheeffectofsupply-sidepo\iciesonthebalanceofpayments.
10 Analysetheeffectofprotectionistpoliciesonthebalaneeofpayments
11 Analysetheeffectofexchangeratepoliciesonthebalanceofpayments.
12 Explainwhylndonesiahasdisequilibriuminitsbalanceofpayments
Evaluation
13 Comment on whether import controls are the best way to reduce Indonesia'
Data
I
s current account deficit on the balance of trade.
response question
Explainwhylndonesiahasacurrentaccountsurplusintheearlypartof2020.
Essay questions
I
Evaluatetheextenttowhichexchangeratepoliciesarcthebcsttousewhenacountryhasdisequilibriuminthecurrcnt
acrountofthebalanceofpayments
2
Assesswhetherexpenditure-switchingore,rpenditure-reducingpoliciesarebestforamiddle-incomecountrytouseto
reduceadeficitinthecurrentaccountofthebalanceofpayments.
lmpro,·ethisanswer
This is a sample answer to essay Q2.
Many middle-income countries face a deficit on the current account of the balance of payments. This deficit arises since
theva!ueofimporlsofgoodsandservicese,rce<>dsthevalueoftheseexports.Theproblemisparticular!yseriouswhere
the deficit is persistent over a number of years. This usual!y indicates a structural imbalance in the economy. It is difficult
to implement change when a country is heavily reliant on exports of agricultural products and low-end manufactured
goods[K]
An expenditure-switching policy, as its name indicates, is designed to encourage consumers and firms to switch from
buyingforeign-producedproductstobuyingdomestieally-producedproducts.Expcnditure-switehingpoliciesinclude
controlsonimportssuehastariffsandquotas,depreciationoftheforeignexchangerateandsupply-sidepoliciesto
improve competitiveness IA].
Adeliberateorplanneddepreciationofthee,rchangeratewillincreasethepriceofimportedproductsrelativetothose
thataredomestically-produced.lfthelatleraregoodsubstitutesforimportsandifthedepreciationisstrongenough,
consumers can be expected to switch from foreign to home-produced goods. The extent of the switch will depend on the
price elasticity of demand for imports - the more elastic it is, then the more successful the impact of the depreciation. The
fallinthee,rchangerateisalsodesignedtomakeacountry"
se,rportpricesmoreattractivethanthoseoftradingrivals.
Again,dependingonthepriceelasticityofdemand,thereshouldbeanincrea.seinvalueofexports,withatimelagl,\).
Anexpenditure-reducingpolicyisdifferent.Thisreferstoanyactiontakenbythegovemmenttorcduceaggregate
demand or total spending in an economy. Fiscal policy in the fonn of cuts in government spending or an increase in
taxationcanachievetherequiredcontractioninaggregatedemandl,\].ltisatacost.Thelevelofemploymentcanbe
expectedtofallasaconsequenccofthercductioninaggregatedemand.Thedomcsticmarketforcertaingoodsand
services will contract. An interesting knock-on effect is that domestic firms may have an opportunity to increase their
exportsalesduetothecontractioninthedomesticmarket[E]
In the case of a middle-income country, the cost of increased unemployment due to a cut in aggregate demand should not
beunder-estimated.ltisalsorelevanttomakeclearthatthereislittlescopeforincreasingtaxation,exceptpossiblyinthe
caseofanincreaseinageneralsalestax(GST).Thesefactorshavetobeconsideredwhenacountrydecideswhichisthe
bestpolicyforittouse.Itismostlikelythatthispolicywillbeanexpenditure-switchingpolicy[EI.
Your challenge
See whether you can impro,,e this answer. This is a successful answer. The difference between an e,rpenditure-switching and
e,rpenditure-reducing policy is made clear, with examples. The answer focuses on a middle-income country- this aspect of
the question could be easily overlooked. The latter part of the answer includes relevant evaluation. The answer could be
improved by real-world examples from a country the learner has studied. Your challenge is to write a new, second paragraph
containing real-world e,ramples. A better answer is given in the workbook answers - but write yours out first
~
ASAL_Econ_WB_O1apter_48_Ar,swersp
>Chapter49
Exchange rates
.. ','ow
• .'
,,v./.r,
',•·
,·,,.,lurn'e
~.'
. Im
.:., 'y
·,.
°'pl,inlhedifference),.,lw••nre,.J«,<iunandd<e-,l"•liunuf,faedexdm1i;er.te
::!:
1
1:
,luaf,m
t1xedcxchangerntc
J-cun•ceffect
T,'"fo.wcigh1<:dtlchangc"!c
~lanaged>)"Stcm
Mar,lrnll-Lemcrcondition
l\ealachangcrate
Key skills exercises
,nswcrthcque<t'
T
ns'nth',chap
,.oune<dtoknowandul}(',:and
thcdiifercncebctw0<nanomin•lfonoigncxchangcr,tc•n<l•rcalcirch•ngcratc
whati,meantbyotndcweightedcxchangedrate
thcmcaningofafiircdcxchangerate
thcdiifen,nc,betweendevaluationo.ndr<>Valuationofalixedexchangcra<c
thcmcaningofamanagedsy,tcm
thccau,e,ofchar.ge,intheexchangerateunderdiifcren<exchangerate,y.tem,
thccffect,ofchangingcrrhangcratesonthccxtcrnalceonomy
LXplainhowarcalcxchangcwcdiifersfromanominalcxchangcrate
IJe,cribethemcrningofatradewdghtedexchangcrn<c.
D<scribethcmcaningofafaedcirchangcrate
l:xplainthcdiiferencobens-eendcvaluo.tionandrcvaluationofahxede<eh•ngcratc.
D:plainthemeaningofamanagcdfioat
l:xplainthcMarshall-LemerNndition
l:xplainthcJ-curvecife<t
Analysis
Jnmon::.-..""'nt.,,,.,.,,,J,
·ecoo1om·cp,
r ,.,, •--,,•·JcdecMon,·rs.A
&
'fi.ca1··mul',low·n··ratcs
•nd e,~n 'helic-opter mon•y' ho, failed to lift J•pan • , «:·onomy. Economic growth h•> t-n negligible
3:::::
&,00.0000
j
95.0000
l'igu"' 49.1: Yoo US,lolla,e~chaogo
rate, 20\0-20W
8
i:,ingthcd.atainl-1gure49.1,statewhethcrtheJapaneseyenopprcciatedordepreeiatcdagainstthcUSdollarovcrthcpcriod
W10to2020.Justjfyyooraml',ef
9
Analyscthclikclycau=ofchao1gc,inJ01>"-n·
.,cxchangcratcagain<tthcUSdollarforthcpcrlodcovercdinFigurc<9.!
Evaluation
JU !.'v•luatetholikelyeffect,ofochangingexchangeratoontheexternoleconomyo!Jopan.
Multiple-choice question
Figurc49.l>how,thcdollar-yencxchangcrateo,-erthcpcriod20l0-2<l20
Whkhofthe..,i,theb,,tezphnationofthe,trengthanddirectionofJopan'
,fureignexchang,ratem'ertheperiod?
Mild
1· I''"'"·.···
B
depredation
appredal!on
Essayquc,tions
I
Hv,h,-1~ lhe e,tenl lo "hid1 lh• M,rsh,11-Lemer cnndiliun ,ndJ-cur>e ,n•l)~;, •re ,till neliahle way,nf muni1orin~ (he
effect,ofchangingexchangerate,ontheextemal=nomy.
2
Ass,,, the b,nefits and
oo,;t,
of• lixed uchang<> rate ')~tern and of a managed system.
Thi,isasomplean,Wff1oe»•yQ2
\our challenge
~ ASAl_>coo_w,i_ct.,p«r_49_AA<·....,r,;.p
>Chapter
50
Economic development
ln1hischapteryouwill
describe how economies arc classified in terms of their development and level of national income
evaluate indicators of living standards and e...onomic <lcvclopmcnt including wal ix,r capita national income statistics,
purchasing power parity, non-mun<:lary indicators and <:omposilc indicators
explaintheKuwetscurve
compare economic gro,vth rates and living standards over time and between countries
Kuznetscurve
Measurable Economic Welfare (MEW)
Purchasing Power Parity (PPP) Shadow economy
Poverty cycles
Key skills exercises
Knowledge and understanding
To answCT the questions in this chapter, you nc<edto know and understand:
how an economy is classihed according to income
the meaning of a µoverty cycle
the components
of the Human Development Index (HD!)
the nature of Measurable r!.Conomic Welfare (MEW)
the indicators used for the Multidimensional
Poverty Index (MPI)
the significance of the shadow economy
theKuznctscurve
the meaning of Purchasing Power Parity (PPP).
1
Explain the meaning of the poverty cycle.
2
Explain the components
:J
Explain the meaning of Measurable Economic Welfare {MEW).
-I
Explain the measures u.sed for the Multidimensional
5
Describe what is meant by the shadow economy.
6
Explain the- Kuznets curve
of the Human Development Index (HDI)
Poverty Jndex (MPI)
Analysis
Bhutan'
s Gross National Happiness {Gr-.'H) Index
In 1,n, th• .-ourth Kini of llhutan otl.t•d that "GroH Nationol 1loppin•H ia mor■ important than Grou Domutic Product.'
.,inc• 1972, 8huton' • ■conomic pro1ru• ha• b.. n l"lrmly root•d in promotin1 •u•tainahl• d ■Y•lopm•11t, ,.,ith .qua]
importa11c• b.in11iv•n to non-•conomic np,9Ctt ofw•ll-b•in1, ""'•II n to •conomic m•n1aru tuch n liYin1 atand■ rd•
Non-aconomic lTIHIUfH includ ■ hulth, •duc,tion, cu\tw■ l div■ r,ity tnd rHili•nc•, tnd •colo1ical diY■ rtity tnd ruili•nca
l'abk SO.I shows the rank and value of the GNH lndex for selected countries drawn from Hhutan • s 2020 Gross National
Happiness Index
South Africa
Sri Lanka
Pakistan
Malaysia
Table 50. l: Gross National Happiness Index, scleded rnuntries
rhe GNII !ndex is used to support government policy-making in Hhutan. The potential effects on the Index arc measured
before any policies are implemented. The overall objective is to maximise the GN!I.
7
Analyse why some countries have a high J-ll)J nmking and why others have a low Hl)J ranking.
8
Explain ho,Y th ■ indax of )..1u,1anbl• lconomic
hHd
W■lfar■
(WEW) provid••,
full ■ r
pictur• of livin1 ,t,ndud,
than j1a1tODP par
Evaluation
9
Comment on how llhutan • s approach to policy making could be applied by other countries
Multiple-choice question
1
A basket of goods and services sells for 52000 in the USA, but the same basket sells for £1000 in the UK. In terms of
purchasing power parity, which of these statements is true?
A
The dollar-pound exchange rate is $2 equals £1.
ll
Therlollar-pound
C
The Lasket of guods and services is twin· the price in the USA compared to the UK
ll
The baske1 of goods and services is half the price io the USA compared to the UK
exchange rate is Sl equals £2.
Essay questions
I
Evaluate which is the best way of measuring differences in the level of development in middle-income
2
Assess the strengths and wealme.sses of the Human Development Index (HDJ) as a means of establishing policy priorities
for economic development
countries.
lmpro1·e 1hisanswer
rhis is a sample answer to essay Q2.
l':conomic d•v•lopm•nt ia, broad conc•pt. Hittoric■ ll}~ acononiau HW ..:anomic d...-alopm•nt ltr1•ly in tarma of
Y•riation, in GDP par hHd. Countriu U'ith, low GDP par h .. d \Y■r• H•n u bein1 Jen d"••lopad th,n countriu ,Yith •
hi1h•r GDP par hHd
The UN' • Human Dovclopmcnt Index ii •n e•t•bli•hed compu1ilo meuuro of "eonomic dnelopmenl. GDP per head i•
one ofit• nriablc1. OthuY■ri•bk1 r.,J,tc lo education 1.nd ho,,.,·lon1p,,opl., can cxpoct tu live. Th" HDJ i1 ■n U'M"!I:" of
th•n mcuurn and ia publi1h1d fur ovor 150 countri11. Th1 latnt r1porl ahmu that iouth A1i■ i• m■kin/1: th1 moil
pro/1:rHa in larma of human dn•lopm•nt.
A• mi1ht b■ •xi-ct•d, d•valopad WHt■ m •conomiH lik• Nor.ny and ,-inland
■r• at th•top ofth• rankin!!:•, with th ■ lHat d•v■lop•d 1ub-i■ h ■ ran African aconomiHat
th ■ bottom ofth ■ liat [K].
Th ■
purpo•• ofth• HDI ia from• policy atandpoinT. Jta purpou ia to 1•t thoa• r•1ponaibl• for makin1policyd•cioiona
to
... ho,,.what i1 propo1•d al'J■ ct1that country" • 1...-•l of human dn■ lopm,nt. A k•y i11u, forth•m to conaid•r i• \Yhy two
countriu with th ■ um• l•v■\ of GDP par hHd hn• wid ■ly ditr■ rina valuu for th•ir HDJ. Whar• thi, it th• cu•, the
10Y•rnm,m n .. d, to'"""
,Yh ■ th•r it i, p1anin1 it• ruo1arcH into projacll ,nd policiH th•t proYid• • wid•r b•n•l"lt k>r it,
population
Th" Hl)J ii• u1uful •nd rugululy •Yailable indie•tor uf human dcYelopmenl. Althou/1:h it cu,·on v■ri■ble1 ulher than GDI'
f"'.-Th•ad, it do"• not include data un 1ome of lhe widrr de,·olopmunt i11uo1 1uch u incom" di•tribution, unomploymrnt
■nd/1:cndninrqu■lity.[KJ
Your challenge
i.,., whethrr you can imprn;·., thi• ■n•w~'r. Thi ■ i1 a,,.,... ._ ■n•w"r. Th..rr ■rr 1umr valid poinbl, but their tund to bo made in a
•uparfici ■i "''"Y· Th• d11cription ofth• J!DI i• poor. Muri 1hould bu includ■ d on th~, UH ufth• l!DI m1uurn. H•klrnncc1 to
'atnrn&tha' and ·weakn~sses· udir•ct-1
by th• qu11tion ,,.ould •nh■nc• th• ■n•"'•n' s structure. A better answer is
!iv•n in th• ,,.orkbook ■n,w■ ra but writ• youra out flrat
~
ASAL_Econ_W8.Chapter_50.Aoswers.p
H nHH m
f t[i[i
!!ll!lll Iii
~
~-;
~
t
§ s.. i ~-
;!: 1-l li ii
t, ,~ H ii
Jf
'c.
!~i
ii i!!, I~ tll
1(
8l
•
:t
g.i {[
,._.• 1-
.~
ff!
!'
tl
;~ ;·~;=f
• " it i l f -
;f:
tJ~
la'[
~r!
L,
HHHH 1U
11 !IItIf I!
%.~·
ii
J
~
~ a.
i;
..
""'
"'
Jp
..
..,,,
'Ii
';a:tiJJJJJJ;~~
,L li. ii n
1 ii
I1.1_~1
I iHH ,:;nminu·li~~gj
.,.. .r.rmu
.• , "
[
g_~
qr
►
...-..
rcmmmmmm,
• :,H ji'O t
l ';
1•
rj.i
1
~
1
;j
j·
;J,i
~-: f
l •
~ !
""---··· 111111111 'µ•,,.,.,..,~nH j
l
~l
i
a S
!,
1.~~
!'
j
!
!'
-
-
~
►
• ----
t
H!
:.
~-l§
i
~
!
H,1,
f ?. t ~-gogie:~~ i il
ifl ~-J~jj
~
j
H ,:
I [~ i~
!r
g·~
~
l
'
~~
~·i
I I n iI
l
HH
~
;;..
E}
:
~ ~
~f
ri
[
~
~ ?~
Lf~;
i
Hi;
,:ir.~· t '! ;,
11 ,: H
il.
:
l ll!l
H·;
'
1l
[~
l1t
···.H
rcmmmmmm,
ii hIJ
~ it
·1;~
T
ii
~
8
,! :~··mn1111111nu~I
l l! l!
~,-f.,,,
im : -• ·, ,1ft
:11
l It~
p,j
~ ! ~l
ii~~~~
~•.I!..
...
i~
lj
~i
r&
-
i
~
J
i
~
t I~
t ig
i l ij
r[ tI ;
J
~
! l
i i'
:,~
i
i
i
'
f
!
!
:
! i
1
i"! i[
P...O
n
~p.,
'"1 '"1
"~
1-'•::r
(D
~
:::i r+
r+ (1)
(1)
>-"(°)-·
.a.1
8
~ q
~-j.
'
!
~
(D::l.
<~
111111111
a.
d
oo
~~
g"l
;
11 l II
~
g
~- ~
l-i
Vl
Vl
..........
P...ri
(1)
<
0
C:
~g
0"1
"Cl-·
s~
(1)
p.,
:::i r+
r+
>Chapter 52
Relationship between countries at
different levels of development
Tnthi,chapteTyouwill
explainreas.:msforgivin,:aitl
evaluatetheeffectsandimportanceofaid
analysetheroleoftradeandinvestmentbetweencountries
define the meaning of multinational C<Jmpanics
m·aluatcthcacliYiticsandconscqucnccsofmultinationalcompanics
d.,fineth<emcaningofforcigndire<;rinvestmcnt
"valuatcthcconscqucnccsofforcign<iircctinvestmcnt
explainlhecau,e,ofextemaldebt
e,·alualethecon..,quence,ofexlernaldeLI
explaintheroleofthelnten,ational1lonetaryFund
explaintheroleoftheWorldBank.
Aid Bilateral aid Emerging economies
Virtuous cycle
Foreign direct investment (FDJ)
Multilateral aid
Tied aid
Untie<l aid
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, yon need to know and understand
thetyp,-sofintemationalaid
thcmasonsforgi,·ingaid
the d'fexts and imponancc of aid
thcrncaningofamultinatjonalcornpany
theactiviliesandconse<iuen~esofmultinalionalcompanie,
themeaningofforeigndirectime,lmenl
theconse,quencesofforeigndirectinvestrnent
thecausesandconsequencesofex!ernalc!ebt
theroleofthelnternationalMonetarynmd
theroleoftheWorldllank.
J.earnen< s,:,metime, c~mfuse lhe roles oflhe lntemalional Monelary Fund and the World Bank. You ,hould l><e
clear"-' lo how
theirworkdiffers.llroaddetailsareusuallyai11hatisneeded
I
l>cs<:ribethcmainlypesofintcrnationalaid
2
E,cplainthereasonsforgi,•ingintemationala;rl
3
Des<erihcthe meaning of a multinational company.
4
F.xplaintheadivitiesofmullinaliunalcompanie,
Oescribe lhe meaning of foreign dire<.1im·eslment
Explainthecausesofexternaldebtforaneconomy.
6
7
Descril,.,theroleofthelMF
8
Ves<eribethero!eoftheWorldllank
Analysis
i\luhinatiorndcompaniesinlndia
JT ser.ices - Microsoft Corporation. lllM
J:lcctronics - Sony Corporation, LG, Somsung
\/chicles -Toyota. :).Jcrc11<ks-ll<lnz,
VW Group
Fc,c;,danrl drink-Coca
Cola, KFC, NestlC
1\nalys,,tl,.,mlenftnide,mdinv"stmenthctwc,:,nlnrliaandothercountries
9
10 Analyse the likely conwqucne<:s for the Indian c:,conomyof an increase in Fm by multinational companies
Evaluation
11 Dis<eusswhether the benefits of multinational companies lo the Jndian economy outweigh the likely costs
Multiplc•choicc qucs1ion
I
A Chinese multinational company finances investment for a new phannaceutical
factory in Pakistan.
Which of these explains tl1e effect of this investment on Pakistan· s balance of payments?
B acreditinthecapitalaccount
C
acrcditinthefinancialaccount
D acrcditinthetradeinscrvie<:s
Essay questions
I
'Trade not aid" is a long established view as to how growth should be achic,·cd in low and some middle-income
Assess the extent to which this view is still applicable.
Z
t;,,aluare the consequences ofh,creasing e~temal deht for low-income and lnwer middle-income muntrie,
Jmprowthisanswer
Thisi,a,ampleanswerlues.,ayQI
Your challenge
your>outfir.l
~
A'>Al_Econ_W8_Chap!er_5l_An<Wer>.p
>Chapter 53
Globalisation
lnthischapteryouwill:
definethemeaningofglobalisation
analyse1hecausesandconsequenccsofglobalisation
analyse the difference between a free trade area, a customs union, a monetary ,.mion and full economic union
explainthedifferencebeti.veentradecreationandtradediversion.
r·IIIM
Customsunion
Freetradearea
Tra<lc ma<iee
Tra<lc diw~iee
Full economic union
Globalisation
!,.fonetary union
Trade bloc
Key skills exercises
Knowledge and understanding
To answer the questions in this chapter, you need to know and understand:
the meaning of globalisation
thecausesandconsequencesofglobalisation
thech:·.e·
••
ftradebloc
-c·eldere,,·
.n·on,mom·,un'ontd'
11,,non·
n"on
thedi/TerencebetweentradecreationandtTadediversion.
l
Defineglobalisation
2
Explain the causes of globalisation
3
Explainthecharacteristicsofafreetradearea,acustomsunion,amonetaryunionandafulleconomicunion
4
Explainthedifferencebetweentradecreationandtradediversion
Analysis
Deglobalisation: An Unfortunate Reality
l'•w woulddi1put• th• ban ■ lit1 of1lobali1■ tion. Eop■cially throu11h th• 1rm.-th oft.nd ■, th• counlTiu ofth• ,.-oTld,with f•w
,uception,, h•v"' b!lcomll ftrmly intMconn1cted. Globalintion hn drinn !lconomic growth for much of the twenty-tint
century.
De11lob1.li11tioni• now an unlor1un1t1. re1.lity.Jn 2019, forth.., ffnit time in manyyun, world tr1.do kill ,huply. Wh1.t ,..._, th..,
m1in ru1on? lncrenin1 tr1d1 t1n1ion1, in puticubr b1twHn th1 USA1nd Kimi of it, tr1din,; putner1. The di1pute ,.-ith
Chin• ovor t1.rifl"11.ndthe nlue of tho yu1.n wu dra88ing on. The USAintroduc..,d t1.rifl"1on import• from Ar11ontin1.1.nd
Bruil, p•rtly to of1"1ettheir currency dev1\u1tion1. The UIU 1110thrut1111d 100'4 tuitft. on import, of l"rench ch•mp11111111d
new r1.tc1 of tuifl" on CI.Tlim1.nuf1ctur..,d in th.., EU. In A1i1, !ndia n,atrictod 01port1 of food and ph1.nn1.ccutic1.l1.Thill.,,._.
, .. n n • d1libu1t• 1ct of protection. While ,ll of thi, w11 happenin,;, th1 UII:,.-u 11n1alin1 to rHch • llruit d11l to \11n the
European Union.
Jn 2020, the 11lob1.leconomy wu hit unexpectedly by the COVI0-1, p■ndumic. ltl impact will b~ lon11-la11tin1,
thruwin11the
sJob1l economy into an era where further de~ob1li11tion i1 in1Yitabl1. Tnd1 r11lation1will inevitably become nen more
prokctioni1t.1lu, l'llorld Tr.de 0Tganixation appo1.r1lo be powerlen lo 1top thi• h11.ppenin11.
There an, ■ lio fear. th ■ l 1hippin11
,nd air fniplt chugH will incr1111 in rHl tum, u put of._ global ,tnt•~' to cut b,cll on cuOOn 1mi11ion1. All in ,ll,
dcglobali1■ tionwould111emtoOOanunfortunal~Teality.
S
Analyse the consequences of globalisation for low-income an<l lowcr mi<l<lle•income countries.
Evaluation
6
Assess the ,'iew that Im.de wars and the COVID-l9 pandemic have accdcrntc<l the demise of globalisation
l
I{
\Cfl( I ~ll fSTlUJ\S
Multiple-choice question
l
A new member joins a customs union.
Which of the following is an explanation of how trade diversion affects this new member?
cheaper
outside the customs union
more expensive
within the customs union
more expensive
outsidethecustomsunion
Essay questions
1
Evaluate the view that the benefits of globalisation are greater for high-income countries than for low• and middle-income
countries
2
Assess the view that free trade areas and free trade at,'Teements provide far more benefits than can be obtained from a
customs union.
lmpruw this answer
l'hisisasampleansweTtoessayQ2.
The World Trad.., Orii;1.nin.tion promote■• tndin11 ■ylitcm bued on free trade 1,.hcrcby all momt.,r. ue trutod fairly.
Economic theory 1tron1ly 1dYocatH multibtual fr11 tnd1 u pro.-idin1 th1 mo1t efficient alloc,tion of 1cuc1 rHourcH
In prindpl.., 1.nd in roality, fr~.- trad.., reduce• price• and the co■t of liTin11.Con1umco arc 1.ble to boncl'\t from• 11re1.ICT
choice of ,;ood, ,nd HrYicH. FrH tnd1 r1.i111incomH, incre1111 employment and 1timulat11 economic 1rowth [Ii.].
A fr■• trad ■ agr••m ■nt OTfr■• trad ■ ar•• con•i•t• of a 1rnup of counlTiH that 1radually ■11T•• to •limin•I• !rad• b1Tri•ni
betw11n thllm,..,Jn,. A r1c1nt cnmpl1 i, the Compnhlln1iv.., Agrllement for Tr1n1-Pacil'\c Putnenhip 1i1n1d by 11
counlriH ■nd which aim110 ■liminal• tariff• on all trad• b•tw••n th ■m1■ l~H. An uampl• i1 that fum•n in Canada,
Au1tnli1 and N..,,.. Z1.1land no,,. h•v• tuifl"-fr111.cc111 into th.., lucntiv.., J•p•n..,,c mullet, 1omllthin11th•t ,..._, prllYiou1ly
d•ni ■d. Thu• IT■ b■n•lit1 for oth1T memben 1uch H Vietn1.m and Malay1ia. Thu• countTiu ar• nm.- able to •xpoTI
manufacmred goods with few constraints to other members [K].
Thcre 1.n, numerou1 benel'\11 of free tr1.de 1.grMment1. lncreued competition b..,r-..een mem~n m11n1 that only the
mo•1 efficient producera will 1ur.-iv■. ·n,•r• i1 the added benefit ofbeinJ abl• to take adnnta1• of economie1 of1cal•,
therefor.., low..,rint: thc •ver1.t:e co1t1 of prOOuction u the 1c1le of the nrm incn,n..,,. Thi, i• 1.nothcr en.., of lo"'•er prico1
klr con1um1r1. Thi 1nlaTJ1d mnket wil\ 1l1n pTova to ba attractive for MNC1th1t ire lookinJ to expand th•ir •cti.-itiH to
an enlut:•d m1.rk1.t.,'ith no tr1.d1.buriMt [A].
A cu1tom1 union con1i1t1 of a 1roup of countriu that ,,r .. to remove all tr1.de buri1r11 ber-..un them11lv11. In 1ddition,
and thi1 ill th~ main difl"urcnc..,compued to I. fr.,., lr•do 1.rc1.,m~•mb~T■ 1.dopt I. common tr1.do policy tow■rd1 nonmemben. Centnl to thi1 policy i, th1 erection of._ CET, common u:tern•l tuitl". Thi CET i1 HI 1t Y1tiou1 level, 1nd i1
hi1hly prot..,cliYeof the trade intcrc1t1 of member. of tho cu1tom• union. ·r•rifl"■ tend to b..,high on produclll that can be
prcduc1d by cu1tom1 union memb1n. Thi, i110 in the l.U which •110 hu I common mullet 1nd l100ur mobility within
it11tructure. [A].
A cuotom• union by dolinition i• prnl•ctiv• of the int•ru•t of it• mumbcn. Thi1 m•an• that thoT• ITC~ITiou• form• of
di1erimin1tion \.-ith tnd1 with third-party countriH. Thi• limit, the banefft, of• cu11om1 union. In contrnt, • fno• trade
1Taa hu b•n•lit1 in tum• of•p•ci ■liution but without lh• ne111ti,·Hu•<ciat■d -,,,.itha C&T.Trad• policy -,,,.ithnon·
membeni1u1u•llyl1ftforindividualm1mbentodecide[El
Your challenge
Sec whuthoT you c■n impro.-e thi• •n•w~·r. Thi1 i• a 1ucc~Hful •n•••~r -,,,·hichcontain• •ound an1.ly1i1in context. Th• ■ n1wur
focu111 on the b1nen11 n directed by the wortling of th1 qu11tion. An 111111ment of th1 co1t1 of frH trade u1u •nd cu1tom1
union• i• not T1tquir•d. Th• lut p1T111raphcontain• 1om ■ limil•d •v■luation. A batter final par.gr.phi• 11iv•nin Lh• workbook
•n•"''•n-butwrit1your1outfln1.
~
ASAL Econ_WB Chapter_53 Answers.p ...
>Acknowledgements
The author and publishers acknowledge the following sources of copyright material and are grateful for the permissions granted.
While every effort has been made, it has not always been possible to identify the sources of all the material used, or to trace all
copyright holders. If any omissions are brought to our notice, we will be happy to include the appropriate acknowledgements on
reprinting.
Figure 1.1 Data from Centre for Monitoring Indian Economy (CMIE). Used with the permission of CMIE; Chapter 2 Excerpt from
'What is economics? Understanding the discipline' . Used with the permission of American Economic Association; Figure 14.1
from 'Poverty and economic inequality from Vietnamese citizens' perspective in 2018. Used with the permission of Vietnam
Law & Legal Forum; Figure 16.1 data from Statistics Mauritius. Used with the permission of Statistics Mauritius; Figure 19.1 Data
from Centre for Monitoring Indian Economy (CMIE). Used with the permission of CMIE; Table 21.1 Data from Trading Economics;
Figure 39.1 from Rawson Property Group blog article 2008. Used with the permission from Rawson Property Group; Figure 45.1 &
Chapter 45 excerpt from SGI (Sustainable Governance Indicators) South Korea, Economic Policies. Used with the permission of
Bertelsmann Stiftung; Figure 46.1 from 'The Phillips curve still holds' , Copyright 2017 National Bank of Canada. All rights
reserved. Reproduced with the permission. Data from BLS and Atlanta Fed; Figure 48.1 taken from Trading Economics
Cover image MirageC/Getty Images
From the author: I would like to thank Susan Ross of Ross Economics and Editorial Services Ltd for her fastidious work in
ensuring what I have produced is appropriate for international students. My thanks are also to Rosalyn Scott, Biljana Savikj and
Naomi Sklar at Cambridge University Press for their comments on the draft manuscript and for managing the production process.
Thanks also to my daughter Emily for assistance with word processing.
CAMBRIDGE
U IYERSlTY PRESS
University Printing House, Cambridge CB2 BBS, United Kingdom
One Liberty Plaza, 20th Floor, New York, NY 10006, USA
477 Williamstown Road, Port Melbourne, VIC 3207, Australia
314-321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi -110025, India
1103 Penang Road, #05-06/07, Visioncrest Commercial, Singapore 238467
Cambridge University Press is part of the University of Cambridge.
It furthers the University' s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international
levels of excellence.
www.cambridge.org
Information on this title: www.cambridge.org/9781108822794
© Cambridge University Press 2021
This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction
of any part may take place without the written permission of Cambridge University Press.
First published 2018
Second edition 2021
201918171615141312
ll 10 9 8 7 6 5 4 3 21
A catalogue record for this publication is available from the British Library
ISBN 978-1-108-82279-4Paperback with Digital Access (2 Years)
Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to
in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Information regarding
prices, travel timetables, and other factual information given in this work is correct at the time of first printing but Cambridge University Press
does not guarantee the accuracy of such information thereafter.
NOTICE TO TEACHERS IN THE UK
It is illegal to reproduce any part of this work in material form (including photocopying and electronic storage) except under the following
circumstances:
(i) where you are abiding by a licence granted to your school or institution by the Copyright Licensing Agency;
(ii) where no such licence exists, or where you wish to exceed the terms of a licence, and you have gained the written permission of Cambridge
University Press;
(iii) where you are allowed to reproduce without permission under the provisions of Chapter 3 of the Copyright, Designs and Patents Act 1988,
which covers, for example, the reproduction of short passages within certain types of educational anthology and reproduction for the
purposes of setting examination questions.
Cambridge International copyright material in this publication is reproduced under licence and remains the intellectual property of Cambridge
Assessment International Education.
Practice questions and sample answers have been written by the author. References to assessment and/or assessment preparation are the
publisher' s interpretation of the syllabus requirements and may not fully reflect the approach of Cambridge Assessment International
Education.
Cambridge International recommends that teachers consider using a range of teaching and learning resources in preparing learners for
assessment, based on their own professional judgement of their students' needs.
Third-party websites and resources referred to in this publication have not been endorsed by Cambridge Assessment International Education.
This resourceis endorsedby
CambridgeAssessmentInternationalEducation
✓ Provideslearnersupportfor the syllabusfor
examinationfrom 2023
✓ Has passedCambridge lnternational's
rigorousquality-assuranceprocess
✓ Developed by subject experts
✓ For Cambridgeschoolsworldwide