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UNIT 7_THE PRICE SYSTEM AND THE MICROECONOMY

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Free Cambridge (CIE) AS and A Level Business 9609 Notes that cover the whole 2023 / 2024 Syllabus and Learner Guide.

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Accounting Rate of Return Calculation | Investment Appraisal | A Level Business 9609

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Topical Past Papers with Worked Solutions and CIE papers solved for the 9709 Maths A-Level

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9709 Mechanics 1 Topical Exam Questions and Worked Solutions CIE M1 Questions by Topic Kinematic Graphs Suvat – Horizontal Suvat – Vertical Resolving Coplanar Forces 1 Resolving Coplana…

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NOTES UNIT 11 _ International economic issues

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NOTES UNIT 10 _ Government macroeconomic policy objectives

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BUSINESS STUDIES AS

LEVEL NOTES 9609

Contents

Contents...........................................................................................................................................................................

Business &amp; Its Environment..........................................................................................................................................

1 Enterprise................................................................................................................................................................

1 Business Structure..................................................................................................................................................

1 Size of Business....................................................................................................................................................

1 Business Objectives..............................................................................................................................................

1 Stakeholders in A Business...................................................................................................................................

2 People in Organisations...............................................................................................................................................

2 Management &amp; Leadership...................................................................................................................................

2 Motivation..............................................................................................................................................................

2 Human Resource Management (HRM).................................................................................................................

3 Marketing.....................................................................................................................................................................

3 What Is Marketing?...............................................................................................................................................

3 Market Research...................................................................................................................................................

3 The Marketing Mix.................................................................................................................................................

4 Operations &amp; project management..............................................................................................................................

4 The nature of operations.......................................................................................................................................

4 Operations planning..............................................................................................................................................

4 Inventory management..........................................................................................................................................

5 Finance &amp; accounting..................................................................................................................................................

5 The need for business finance..............................................................................................................................

5 Sources of finance................................................................................................................................................

5 Costs.....................................................................................................................................................................

5 Accounting fundamentals......................................................................................................................................

5 Forecasting &amp; managing cash flows......................................................................................................................

Revision and How to Answer Questions.....................................................................................................................

Credits.........................................................................................................................................................................

 the nature of economic activity - The item of lesser value is left out when making a choice (due to scarcity) - It is the purpose of economic activity to provide for as many of our wants as possible, yet we are still left wanting more.

Needs - things that we cannot survive without. The basic human needs can be classified as: a. Social - entertainment b. Physical - food, warmth, shelter c. Status - sense of achievement, good job, large house, etc. d. Security - privacy, steady job, secure homes, etc.

Wants - are the things that we can survive without e. Cell phones, radios, jewellery etc. Human wants are unlimited but the resources to satisfy them are limited in supply. This gives rise to the basic economic problem.

 the problem of choice - (youtu/suecepimwre) - The economic problem - there are insufficient goods to satisfy all of our needs &amp; wants at any one time - Shortage of products &amp; resources = having to make choices. - As we cannot satisfy all of our wants, then we must choose those which we will satisfy now &amp; those which we will forgo. If we are careful &amp; rational, we will choose those things that give us the greatest benefit, leaving out those things of less value to us. - This need to choose is not exclusive to people as consumers. All economic units have to make choices - governments, businesses, workers, charities &amp; so on.

 opportunity cost - Opportunity cost : the benefit of the next most desired option which is given up. - E. If a consumer chose to buy salad over fries, fries would be the opportunity cost - In deciding to purchase one item, we must give up other goods as they cannot all be purchased. - The next most desired product given up becomes the 'lost opportunity' / opportunity cost. - This concept exists for all economic decision makers - consumers, businesses &amp; government.

 business environment is dynamic - Setting up a new business is risky because the business environment is dynamic (constantly changing) - The risk of change can make the original business idea much less successful. - New businesses may turn from successful to loss-making (fail) due to -(let b)  Competitors (other b usinesses)  L egal changes-outlaw products, e. Outlawing the product altogether  Market/customers has less to spend ( e conomic)  Obsolesce ( t echnological), the methods used become old-fashioned &amp; expensive.

 why many businesses fail early on - Lack of record keeping - Lack of cash &amp; working capital - Poor management skills - Changes in the business environment

 what a business needs to succeed

1.1 The Role of The Entrepreneur (youtu/xzvjvdy-Dhk)  qualities of successful entrepreneur

Commitment &amp; self-motivation

Risk taking

Innovation

Leadership skills

Multiskilled

Self-confidence &amp; an ability to bounce back

 the role of the entrepreneur - Have an idea for a new business - Invest some of their own savings &amp; capital - Accept the responsibility of managing the business - Accept the possible risks of failure.

 challenges faced by entrepreneurs - (youtu/_o3fyhwx0ro) - Identifying successful business opportunities - Sourcing capital - Determining a location - Competition - Building a customer base

Secondary sector : firms that manufacture &amp; process products from natural resources.  E. Computers, brewing, baking, clothes-making &amp; construction

Tertiary sector : firms that provide services to consumers &amp; other businesses.  E. Retailing, transport, insurance, banking, hotels, tourism &amp; telecommunications

 the public &amp; private sectors

(youtu/dr_ohenquqk)

Public sector : comprises of organisations accountable to &amp; controlled by central / local government (the state).

Private sector : comprises businesses owned &amp; controlled by individuals / groups of individuals.

 changes in business activity

(youtu/fcqrc88tyse)

Industrialisation : a growing importance of the secondary sector manufacturing industries in developing countries.

The relative importance of each sector is measured in terms either of employment levels / of output levels as a proportion of the whole economy.

In developed economies, there is a decline in the importance of secondary-sector activity &amp; an increase in the tertiary sector. This process is termed deindustrialisation.  Rising incomes due to higher living standards = consumers spend on services rather than more goods = growth in tourism, hotels &amp; restaurant services, financial services, etc.  The rest of the world industrialises making manufacturing businesses in developed countries less competitive because developing countries are more efficient &amp; use cheaper labour = rising imports of goods (smaller market for domestic secondary sector firms).

Economy : the state of a country / region in terms of the production &amp; consumption of goods &amp; services, &amp; the supply of money

Mixed economy : economic resources are owned &amp; controlled by both private &amp; public sectors.

Free-market economy : economic resources are owned largely by the private sector w/ very little state intervention.

Command economy : economic resources are owned, planned &amp; controlled by the state.

1.2 Legal Structures

 different types of legal structure

Unlimited liability a. Sole trader : a business in which one person provides the permanent finance &amp;, in return, has full control of the business &amp; is able to keep all of the profits (youtu/lljb9nb07xa)

b. Partnerships: a business formed by two / more people to carry on a business together, w/ shared capital investment &amp;, usually, shared responsibility (youtu/LM1DvORE9KY)

Other forms of business organisation

a. Cooperatives : business organisations owned &amp; controlled by a group of people to undertake an economic activity for mutual benefit (youtu/90FL_bBE4mw)  Consumer cooperatives: members buy goods in bulk, sell them, &amp; divide the profits between members  Worker cooperatives : workers buy the business &amp; run it; decisions &amp; profits are shared by the members.  Producer cooperatives : producers organise distribution &amp; sale of products themselves

b. Franchises : a business that uses the name, logo &amp; trading systems of an existing successful business; based upon the purchase of a franchise licenser from the franchiser (youtu/kooewuilbng)

c. Joint ventures : where two / more businesses agree to work closely together on a particular project &amp; create a separate business division to do so.

d. Holding companies : a business organisation that owns &amp; controls a number of separate businesses, but does not unite them into one unified company. They often have separate businesses in different markets w/ diversified interests. e. Public corporations : businesses enterprise owned &amp; controlled by the state. They often do not have profit as a main objective.

 concept of limited liability &amp; its importance - Limited liability : the only liability - potential loss - a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder. This has two important effects:  People are prepared to provide finance to enable companies to expand.  The greater risk of the company failing to pay its debts is now transferred from investors to creditors.  As a result, they are very interested in both checking whether the word 'limited' appears in the business name &amp; scrutinising the company's accounts for signs of potential future weakness.

 problems resulting from changing from one legal structure to another - Changing from sole trader to partnership  Sharing profits  Interference in decision-making  Bad decision of one partner affects all partners - Changing from partnership to limited company  Owners may lose control  Legal work required  Financial accounts have to be made public  Decrease in privacy

1 Size of Business....................................................................................................................................................

1.3 Measurements of Business Size

different methods of measuring the size of a business (profit is not an acceptable measure of business size)

(youtu/gqgarfdpx1c)

Capital employed - generally the larger the business, the greater the value of capital needed. However, comparisons in different industries may be misleading e. A hair dresser &amp; an optician  Capital employed : the total value of all long-term finance invested in the business

Other measure - e. Occupied hotel rooms, number of shops, total floor space

Market capitalisation - businesses w/ higher market capitalisation are generally larger, however it can only be used w/ businesses that have shares on the stock exchange. Due to the fluctuations, it can be very unstable to compare.  Market capitalisation : the total value of a company's issued shares  Market capitalisation = current share price × current no. Of shares

Number of employees - a larger number of employees suggests a larger business. It is the simplest method &amp; easy to understand, however it does not represent a business which requires little amounts of workers.

the importance of small businesses &amp; their role in the economy

Job creation - small businesses usually employ a significant proportion of a working population

Entrepreneurs - small businesses are normally run by entrepreneurs; creates variety &amp; choice in the market

Competition - more competition for larger businesses causes an increase in quality of goods

Specialist goods - they may form niche markets

Lower average costs - small firms do not have to pay as much as big firms to produce their products

Supplier to larger businesses - small firms can supply goods to larger firms

government assistance for small businesses

Reduced rate of tax on profits (corporation tax)

Loan guarantee scheme

Information, advice &amp; support

Financing workshops e. Training, unemployment

Helping particular issues e. Specialist management expertise, start-up finance, marketing risks, finding the correct location

1.3 Internal Growth

why &amp; how a business might grow internally

Internal growth : expansion of a business by means of opening new branches, shops / factories (also known as organic growth).

&lt;

benefits of business growth

Increased profits - expanding the business &amp; achieving higher sales is one way of becoming more profitable.

Increased market share - this will give a business a higher market profile &amp; greater bargaining power w/ both suppliers (e. Lower prices) &amp; retailers (e. Best positions in the shop).

Increased economies of scale

Increased power &amp; status of the owners &amp; directors - e. The opportunities to gain publicity / influence government policy will increase if the business controlled by the owners / directors is large &amp; well-known.

Reduced risk of being a takeover target - a larger business may become too large a target for a potential 'predator' company.

1 Business Objectives

1.4 Business Objectives in The Private Sector &amp; Public Sector

the nature &amp; importance of business objectives

Why set aims? (youtu/2x-equux-lq)  They highlight key areas of development  They help businesses keep a focus upon key areas  They outline the 'destination' of where the company wants to reach

 Provides a framework which strategies &amp; plans can be drawn up

Why set objectives?  Objectives give the business a clearly defined target  Enables businesses to measure progress towards its aims  Can help motivate employees

Hierarchy of objectives : the aims &amp; objectives of a firm are placed in descending order of strategic importance. (youtu/bpasq6gv0r0)  Aim - where the business wants to go in the future; its goals.  Mission - the result that an organization is trying to achieve through its plans / actions  Corporate objectives - the long-term goals of the corporation that give focus &amp; direction to the business. These form the foundation for the strategic plans for the business.

Smart  S - specific : objectives should be focused on what the business does, applied directly &amp; be specific to that business. A hotel may set an objective of 75% bed occupancy over the winter period.  M - measurable : objectives that have a quantitative value are likely to be more effective for employees to work towards. E. To increase sales in the south-east region by 15% this year.  A - achievable : setting objectives that are almost impossible in the time frame given will demotivate staff  R - realistic &amp; relevant : objectives should be realistic when compared w/ the resources of the company &amp; should be expressed in terms relevant to the people who have to carry them out. So, informing a factory cleaner about 'increasing market share' is less relevant than a target of reducing usage of cleaning materials by 20%.  T - time-specific : It will be impossible to assess if the objective has actually been met without a time limit

corporate social responsibility (CSR) as a business objective

Corporate social responsibility : the concept that accepts that businesses should consider the interests of society in their activities &amp; decisions, beyond the legal obligations that they have.

relationship between mission statement, objectives, strategy &amp; tactics

Mission statement : a statement of the business's core aims, phrased in a way to motivate employees &amp; to stimulate interest by outside groups.

Change in legislation - a change in government laws can force a business to come up w/ new objectives in a new environment

translation of objectives into targets &amp; budgets

Management by objectives : a method of coordinating &amp; motivating all staff in an organisation by dividing its overall aim into specific targets for each department, manager &amp; employee (youtu/a9m6K73Omsc)

the communication of objectives &amp; their likely impact on the workforce

If employees are unaware of the business objectives then how can they contribute to achieving them?

Communication of corporate objectives - &amp; translating these into individual targets - is essential for the effective setting of aims &amp; objectives.

If employees are communicated w/ - &amp; involved in the setting of individual targets - then these benefits should result in:  Employees &amp; managers achieving more - through greater understanding of both individual &amp; companywide goals.  Employees seeing the overall plan - &amp; understanding how their individual goals fit into the company's business objectives.  Creating shared employee responsibility - by interlinking their goals w/ others in the company.  Managers more easily staying in touch w/ employees' progress - regular monitoring of employees' work allows immediate reinforcement / training to keep performance &amp; deadlines on track.

how ethics may influence business objectives &amp; activities

Ethical code (code of conduct): a document detailing a company's rules &amp; guidelines on staff behaviour that must be followed by all employees. (youtu/xntkjqxceie)

Ethics - the moral guidelines that determine decision making

For: Against: Avoid court-cases &amp; fines Increases costs Good PR &amp; increased sales volume Reduction in pester power Attract ethical customers No price fixing → reduction in prices &amp; profits Gov. Contract likely Fair wages increase costs &amp; reduces competitiveness Attract well qualified staff

1 Stakeholders in A Business...................................................................................................................................

1.5 Business Stakeholders

individuals / groups interested in the activities of business

Stakeholders : people / groups of people who can be affected by - &amp; therefore have an interest in - any action by an organisation.

Stakeholder concept : the view that businesses &amp; their managers have responsibilities to a wide range of groups, not just shareholders

roles, rights &amp; responsibilities of stakeholders (youtu/t1m0zffibju)

2 People in Organisations

2 Management &amp; Leadership...................................................................................................................................

2.1 Management &amp; Managers

the functions of management, including mintzberg's roles of management

Manager : responsible for setting objectives, organising resources &amp; motivating staff so that the organisation's aims are met.

Mintzberg's management roles (youtu/ngkqyrqxkts)

**Role title Description of role activities

Interpersonal roles:** dealing w/ &amp; motivating staff at all levels of the organisation Figurehead Symbolic leader, takes on social / legal natureLeader Motivating subordinates, selecting &amp; training staffLiaison Linking w/ managers &amp; leaders of other divisions of the business &amp; other organisations2. Informational roles: acting as a source, receiver &amp; transmitter of informationMonitor (receiver) Collecting data relevant to the business operationsDisseminator Sending information collected from internal &amp; external sources to the relevant people within the organisationSpokesperson Communicating information about the organisation, i. Current position &amp; achievements, to external groups &amp; people3. Decisional roles: taking decisions &amp; allocating resources to meet the organisations' objectivesEntrepreneur Looking for new opportunities to develop the businessDisturbance handler

Responding to changing situations that may put the business at risk, assuming responsibility when threatening factors develop Resource allocator Deciding on the spending of the organisation's financial resources &amp; allocation of physical &amp; human resources Negotiator Representing the organisation in all important negotiations

Functions of management: Setting objectives &amp; planning - establishing of overall strategic objective translated into tactical objectives. Planning needed to put the objectives into effect also made. Organising resources to meet the objectives - recruitment, giving authority &amp; accept accountability. Clear division of tasks for each section/dept. To work towards common objectives Directing &amp; motivating staff - guiding, leading &amp; overseeing employees to ensure organizational goals are met. Staff development included. Coordinating activities - ensure consistency &amp; coordination between different parts of the firm. Establish common sense of purpose &amp; ensure resources are used correctly. Controlling &amp; measuring performance against targets - appraising performance against targets, take appropriate action &amp; provide feedback.

2.1 Leadership

functions, roles &amp; styles

Leadership : the art of motivating a group of people towards achieving a common objective.

Delegation : passing authority down the organisational hierarchy

Empowerment : allows workers some degree of control over how their task should be undertaken

the purpose of leadership

The purpose of leadership is to guide the people in an organization to work towards the attainment of common organizational goals. The leader brings the people &amp; their efforts together to achieve common goals.

leadership roles in business (directors, managers, supervisors, worker representatives)

Directors - head of major functional department, elected senior members, objective meeting, communication

Manager - manage people, resources, decision making. Direct, motivate &amp; discipline.

Supervisor - management appointed, responsible for goal achievement, work in a cooperative manner.

Worker representative - worker elected, discuss concerns.

qualities of a good leader

Desire to succeed &amp; natural self-confidence that they will succeed.

Ability to think beyond the obvious - to be creative - &amp; to encourage others to do the same.

Multitalented, so that they can understand discussions about a wide range of issues affecting their business.

Have an incisive mind that enables the heart of an issue to be identified rather than unnecessary details.

2.1 Choice of Leadership Style

leadership styles: autocratic, democratic, laissez-faire

(youtu/olmmdmm52pq)

Autocratic : a style of leadership that keeps all decision making at the centre of the organisation. Lower levels of the hierarchy are given little delegated authority &amp; communication is usually just one way. &lt;

Democratic : a style of leadership that allows the majority opinion of staff to influence decisions. It involves a great deal of participation from the workforce but can be time consuming.

,

Laissez-faire : a style of leadership that leaves much of the running &amp; decision making of the business to the workforce. This may be appropriate in research &amp; development departments staffed by skilled specialists that are self-motivated.

Paternalistic leadership : a leadership style based on the approach that the manager is in a better position than the workers to know what is best for an organisation.

McGregor's leadership styles

McGregor's theory x - managers believe the workers dislike work, will avoid responsibility &amp; are not creative

McGregor's theory y - managers believe that workers can derive as much enjoyment from work as from rest &amp; play, will accept responsibility &amp; are creative

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Business Studies AS Level Notes 9609 - 2020 Syllabus - BUSINESS STUDIES AS LEVEL NOTES 9609 Contents - Studocu

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On Studocu you find all the lecture notes, summaries and study guides you need to pass your exams with better grades.

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FORMAT TO ANSWER 9609 BUSINESS STUDIES PAST PAPERS

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a level economics definitions by wei seng

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a level economics (macro) notes by calvin wong

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Essay samples

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English Essay Examples | A level, GCSES and GCE O level

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Examples of narrative essays, descriptive essays, argumentative essays, letters, reports and speech. Perfect for AQA and Cambridge (CIE) exams

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activities
Activity 1.1
Learners' own answers.

Think like an economist

Learners' discussion might include:
1
There are two possible sources of additional funding for healthcare: governments of high-income
countries and non-governmental organisations (NGOs). (NGOs are private organisations that

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions: Multiple choice

1 A D makes no reference to scarce resources. C does but links scarce resources to needs and not to
wants. B is irrelevant.
2 A A is correct because wants are what people would like to have but cannot always have because of
limited income. The other options do not address this fundamental issue.
3 A A government has to tackle the fundamental economic problem as stated in A. The other options
are specific issues that face a government.
4 C The key point is that opportunity cost is the next best alternative that is foregone when a choice
is made. This is the $900 fee that the teacher would receive for marking examination papers.
Although the teacher saves $600 by doing the maintenance work herself, it is at the expense of the
loss of the fees from marking
examination papers.
5 B The same argument applies as in question 4. Playing football is the opportunity that is the next
best alternative that is being foregone. The opportunity cost of this is the money that would have
been spent on bus fares. There is no guarantee that the student will get a higher mark for the
assessment.
6 C Options A, B and D are the three key questions that have to be addressed in any economy because
of the fundamental economic problem.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Think like an economist

Learners' discussion might include:
UK:
a Consumers are not as attracted by low interest rates as might be expected. Consumers are
reluctant to spend borrowed money on expensive 'Big Ticket' consumer goods such as cars and
electronics goods even though savings are losing value when left in banks.
b The chief executive is unwilling to commit new capital investment due to uncertain future
economic prospects.
c The Finance Minister is likely to get criticism from savers and would not be willing to reduce
interest rates further.
Japan: Negative interest rates mean that money held in banks as savings is actually losing value.
a Consumers tend to hold back on many purchases in anticipation of further price reductions.
b The chief executive would be wise to look to invest elsewhere in an economy where economic
prospects are more certain than in Japan.
c The Finance Minister is likely to look to other policies to stimulate the economy.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

The economist's models are a simplified view of what can be expected. The problem is that what is expected
does not necessarily match reality. This is especially true of Japan's economic experience over many years.

Exam-style questions: Multiple choice

1
B All other options include statements that involve a value judgement.
2
A A normative statement is one that is subjective and cannot be tested using real world evidence.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' discussion might include:
In some cases, wealth may have been passed down in the family from one generation to the next. In other
cases, someone from a poor background may have 'been in the right place at the right time' and taken risks
in pursuit of an ambition. Others may have had the foresight to invest in a new opportunity such as IT,
software or online retailing.
The main reason many people are poor is likely to be because of their family background. Another
factor is the lack of education and skills which can restrict the earning capacity of many people. In some
countries, where one lives can determine whether a person is destined to be poor. This is especially the case
in rural areas in most low-income countries.

Exam-style questions: Multiple choice

1 B A and D are examples of different factors of productions. The wording of the question requires a
more general answer. C is not correct since it is not concerned with current resources in
an economy.
2 A A recognises that factors of production are required to produce goods and services in an economy.
B, C and D consider capital in its monetary context; as a factor of production capital has a
wider meaning.
3
D All options could apply to an entrepreneur. D is the 'best' one since it relates to the wider function
of an entrepreneur, in particular the willingness to take risks.
4
B A and C are labour and capital respectively. Aircraft fuel is not strictly land as it has been
processed by other factors of production.
5
C The point about specialisation is that it can only occur when a firm has an advantage over another
firm in the same type of business. These advantages make the firm more efficient.
6
C Before specialisation, each worker produced 180 shoes, a total of 540 shoes. If each worker
specialises in that part of the production process where they are most efficient, each can produce
3 × 100 or 300 shoes, a total of 900 shoes. The increase in production is therefore 360 shoes.
7
B All options are acceptable reasons why an entrepreneur is prepared to take risks. The 'most likely'
one is B since this is why an entrepreneur is prepared to take risks to develop a business.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activities
Activity 4.1

Increased demand
from consumers

Rise in price

Firms more
willing to supply

Fall in price

Less firms now

willing to supply

Less supply

The price mechanism

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' answers might include:
1 For example, Mauritius (rank 25) Index of Economic Freedom 73.0; compares to New Zealand
(rank 3) Index of Economic Freedom 84.4.
2 The Index is compiled from 12 different measures split between four groupings. Not all of the data is
easy to quantify. Comparisons will in part depend on the quality of data available. Some of the data
estimates are not easy to quantify accurately. Comparisons are most meaningful for countries at about
the same level of development.

Exam-style questions: Multiple choice

1 D The characteristics given in the question can only apply to a planned economy. All other types of
economy have some role for the market.
2 C B and D are consequences of the emphasis when producing capital goods rather than consumer
goods. A is a general statement only. C is a common criticism of a planned economy.
3 C The second sentence of the question gives a strong hint as to the correct answer. It refers to the
'composition' of what is produced. A, B and D may well come true, but they are not consequences
of the changing composition of an economy.
4 A B, C and D are all features of a mixed economy. In contrast, A is the correct answer as it is looking
at the mixed economy in an overall way.
5 D D is the most likely option since it recognises that market forces will now determine rail fares
following privatisation. A, B and C may well be particular outcomes from privatisation, but they
are by no means certain.
6 B A fall in the proportion of household income that is saved means that there will be an increase
in the proportion of income that is consumed. B is indicative of how the increased proportion
could be spent. C is ruled out because not all consumers will need increased consumption of merit
goods. D is not possible since a fall in income will lead to less consumption of superior goods.
A is irrelevant.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' discussion might include:
1 The data indicates that the agricultural sector is inefficient when compared to other sectors of the
economy. Oil is relatively the most efficient and yet has been subject to rationalisation and cutbacks.
2 Government policy should focus on making agriculture more efficient, especially as Nigeria has an
expanding population. The export potential for agricultural products should be assessed. Private
sector investment, especially from other countries, in service industries and manufacturing should be
encouraged through a range of fiscal incentives.

Exam-style questions: Multiple choice

1 B B states the standard assumptions for the PPC model. C is only partially correct as it lacks
reference to the state of technology. D is incorrect as production can take place within the PPC
when not all resources are used. A is incorrect since the PPC is drawn on the assumption that there
are limits to the production of both goods.
2 D A point within the PPC indicates that more of each good could be produced with no increase in
the resources available. A fall in unemployment means that additional workers can produce more
of each type of good. A and B involve an outward shift of the PPC; C requires a movement
along the PPC.
3 D D is the correct option since A, B and C could apply to a straight line PPC. D is the only option
that explains why a PPC can curve outwards from the origin.
4 A The outward shift of the PPC means that more of each of the two goods can be produced.
The discovery of a new valuable oil reserve will improve the efficiency of production of each
of the goods.
5 B The opportunity cost of producing OC cars increases as more smartphones are produced. PM was
the opportunity cost before the increase in smartphone production. This is now QN.
6 C The increased production of smartphones has increased the opportunity cost of producing cars
since more smartphones can now be produced for the same amount of cars. There are increasing
returns for producing smartphones.

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2 Over-consumption of junk food:

a Public service information and social media posts.
b No cause to doubt the information.
c Growing obesity in young adults which can lead to health problems.

Think like an economist

Learners' discussion might include:
1 The reasons for funding could be historical since many roads were built with public funding. Variations
between countries may depend on the extent that fuel is taxed; a high rate of fuel tax usually generates
funds for road maintenance and construction; funding may be a function of the priorities in the
government's budget; there is a possibility of external funding.
2 Singapore's ERP system is unique in the way it funds roads:
* A charge is paid by drivers when vehicles are used within a designated area;
* The charge depends on the time of day, the volume of traffic and time spent in the designated area;
* Revenue from the ERP is also used to subsidise a mass transit system;
* There are measures in place to make it expensive for residents to own a car;
* It is not easy to copy such a system elsewhere although there have been experiments in other cities.

Exam-style questions: Multiple choice

1 B A pure public good is one which is non-excludable and non-rival. This therefore rules out A
where consumption is rival. A pure public good can be produced by the government although
the government can produce many other types of goods and services. This excludes C. A pure
public good is free of charge at the point of use but this can also apply to other goods such as
an art gallery which is funded by the government. This excludes D. B includes reference to non-
excludability which is one of the two characteristics of a pure public good.

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Exam-style questions: Essay

2 a Learners' answers might include:
Knowledge and understanding
* description of what is shown on a PPC C

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3 a Learners' answers might include:

Knowledge and understanding
* definition of non-excludable - once provided it is not possible to stop everyone
from benefiting
* definition of non-rival - as more is consumed, the benefit to those already consuming it is not
diminished or reduced; explanation of free rider issue; source of funding for public goods.
Analysis points
* why flood defences are a public good
* problem of funding if a private good
* application of non-excludable to flood defences
* application of non-rival to flood defences.
Evaluation points
* how producers may benefit from provision of flood defences, for example, employees will be
able to continue to work
* how consumers may benefit from provision of flood defences, for example, homes no longer
susceptible to flooding, justification of which is most important.
b Learners' answers might include:
Knowledge and understanding
* characteristics of merit goods
* characteristics of private goods
* why libraries and museums are both merit goods and private goods.
Analysis points
* why information failure leads to under-consumption of merit goods
* why there is no under-consumption of private goods due to the factors that determine
their consumption
* explanation of why governments provide libraries and museums as merit goods
* income distribution and wider economic benefits
* opportunity cost issues with government provision
* why governments have little control over the benefits of private goods to the community.
Evaluation points
* case for and against government provision of libraries and museums
* need to be more specific over what each should cover
* private sector can have a complementary role alongside government
* much depends on the type of country where provision is made.

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Think like an economist

Learners' discussion might include:
1
The use of machinery to harvest coffee beans may not be an ethical solution because it will be likely to
cause unemployment among coffee pickers who may have no other job prospects. The production and
use of these machines will increase greenhouse gas emissions compared to when the coffee beans were
harvested by hand.
2
There is too much supply in the market. Established producers may have increased their coffee bushes
and new producers may have entered the market in a bid to benefit from high prices. Another reason
could be that there has been an exceptional harvest.

Exam-style questions: Multiple choice

1
B A and C refer to supply. D refers to a market demand curve and not an individual's demand curve.
2
D See answer to Q1 above.
3
A B and D refer to demand and not to supply. C refers to a market supply curve and not to an
individual's supply curve.
4
C See answer to Q3 above.
5
C B is incorrect because a fall in price will lead to an increase and not a fall in the quantity
demanded. D refers to demand and not quantity demanded. It therefore relates to a shift of the
demand curve. A is incorrect because the quantity demanded changes at a different rate to a
change in price.
6
D Iced tea and cola can be assumed to be substitutes. An increase in the price of one of them
will lead to an increase in demand for the substitute. This is shown by a shift to the right of the
demand curve for the substitute product.
7
C A and D will be likely to shift the demand curve for Range Rover Evoques to the right, not to the
left. B will result in a movement down the demand curve and not a shift of the demand curve.
8
C B and D will cause a shift to the right of the supply curve. A leads to a movement up the supply
curve. An increase in the wages of production workers increases costs and a shift to the left of the
market supply curve.
9
C This is the correct option as a subsidy leads to a shift to the right of the market supply curve.
10
C Imposing an indirect tax has the opposite effect to a subsidy. This means that the market supply
curve will shift to the left.

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Activity 8.3
1 The PED estimates are 10, 9.1, 4, 2.4, 1.6, 1, 0.64, 0.43, 0.24, and 0.
2 Learners' demand curves should be similar to Figure 8.6

Activity 8.6
Learners' answers might include:

Activity 8.7
This is a challenging activity which requires learners to use all three measures of elasticity to put forward a
meaningful set of findings. Learners' answers might include:

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Think like an economist

1 The PED estimates seem to confirm that the demand for natural gas is price elastic in the short run, an
increase in price leading to a fall in the quantity demanded.
2 The long-run estimate is unusual because of its positive sign - this means that an increase in the price
of natural gas will lead to an increase in the quantity demanded. This could be due to consumers of
energy seeing natural gas as a superior item.
3 Learners' discussion might include: the government should try to increase the use of natural gas for
production of electricity; this could be done by price or maybe regulations that limit use of coal and oil
in the generation of electricity; consumers could be provided with information on how their electricity
is generated; estimated long-term data are inconclusive.

Exam-style questions: Multiple choice

1 D A is incorrect since the item refers to 'change in demand' and not change in quantity demanded.
B is also incorrect because it has the relationship between price and quantity the wrong way round.
The last part of C refers to a change in in price rather than a percentage change in price.
2 A The PED is elastic when the price of the good is high. PED then becomes more inelastic as the
quantity demanded increases. B is incorrect as the relationship is the wrong way round. C is also
incorrect as the PED is not constant at every point on the demand curve. The level of expenditure
is irrelevant, so D is wrong.
3 C A is arrived at by getting the equation for PED the wrong way round, (a common mistake). With
B, the calculation for the numerator is incorrect. The new quantity and not the original quantity
has been used. A numerical error has been made in D.
−20%
The correct calculation is PED = . This gives a PED of −2.
10%
4 B The correct answer follows from an understanding of the significance of a PED of 1. This means
that the % change in quantity demanded and the % change in price are the same. It then follows
that total spending on the product is unchanged irrespective of price or quantity demanded. This
therefore rules out A, C and D.
5 B The question states when 'its price' increases. This should immediately rule out C and D which
refer to the prices of other goods. An increase in the price of a price elastic product would see a
fall in the quantity demanded and therefore, a fall in total spending. This rules out A.
6 C The point about an inferior good is that the quantity demanded falls as income increases or the
quantity demanded increases as income falls. This definition is consistent with C. A is incorrect
as it refers to a normal and not an inferior good. D refers to a necessity and not an inferior good.
Supply is irrelevant and so B is incorrect also.
7 C A necessity is a type of good where the YED is low and can be close to zero. A and D are both
normal goods as the YED is positive and greater than 1. A visit to KFC or McDonalds may be a
necessity for some people, but petrol is more of a necessity as it has a lower value of YED.
8 C The question hints that the two brands are substitutes; this is confirmed by the + sign for XED.
This therefore rules out A and B. The value of XED is elastic since it is above 1. It is not inelastic
so D is not correct.

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Think like an economist

Learners' discussion might include:
1 The three growing seasons make it difficult to store onions. The farmers' produce goes straight to
market. Volatility of prices also shows that PES is price inelastic.
2 More information is required on actual prices and quantities traded. A reasonable estimate can be
made for early 2017 using the percentage data. There is no information on quantities supplied for
November 2017.
3 Supply and demand can be assumed to be price inelastic. An increase in supply will see prices change
to a relatively greater extent than when there is a fall in supply.
4 It is not possible for an individual farmer or even a small co-operative of farmers to influence prices. This is
due to the way in which onions are traded in a big open market. Farmers are unable to control the weather.

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Exam-style questions: Multiple choice

1 D A refers to a change in supply and not to a change in the quantity supplied. B and C contain no
indication of percentage change.
2 B The calculation for A uses the new supply and not the old supply. The answer for C uses the
correct data but has been inserted the wrong way round in the formula for PES. For D, the new
price rather than the old price has been used.
X
3 B Given PES = 4, applying the formula for PES, 4 = , where x is the % change in quantity
25%
supplied. x is therefore 100%, meaning that a total of 20 units will now be supplied at $60 per unit.
4 A This is most likely as the supply can be expected to be price inelastic.
5 D Green beans in principle can be stored longer than cut flowers which are more perishable.
6 B This is the correct answer since a perfectly elastic PES is where a product has infinite supply.
This is not the case for A, C and D.
7 B PES is zero when the price increases since the ice cream manufacturer is unable to increase supply.
After one week, although supply increases, the percentage increase in supply is less than the
percentage change in price.

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Activity 10.2
The new demand curve will shift downwards from D. 1000 less PCs will be demanded at each price. Price
will therefore be lower and the quantity demanded lower compared to the former equilibrium position.

Activity 10.3
In a and b, the demand curve shifts left. In c and d the demand curve shifts right.

Activity 10.5
1 The outbreak of chicken flue is expected to lead to a decrease in demand for chicken. The demand
curve for chicken will shift downwards to the left. The price and quantity traded will fall.

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2 The demand for this type of tea will increase. The demand curve will shift outwards to the right.
The market price and quantity traded will increase.

Think like an economist

Learners' discussion might include:
1 The volatility in the world price of coffee would seem to be mainly on the supply side - supply is
unpredictable due to extreme weather conditions that can affect coffee growing regions. The global
demand for coffee seems to be increasing year on year.
2 The answer should be 'Yes' but the majority of coffee drinkers may not think about this issue.
Big retailers like Starbucks and Costa are said to pay a fair price to their suppliers, but not all coffee
farmers will benefit in this way.
3 Governments, coffee retailers and processors could do more to stabilise the market. With higher
guaranteed prices, the well-being of coffee farmers could be improved. In addition to a fair price,
multinational companies could provide housing and welfare facilities in areas that supply them with coffee.

Exam-style questions: Multiple choice

1 B The supply curve will shift to the right. The equilibrium price will fall and there will be an increase
in the quantity of goods traded.
2 A A fall in supply is represented by a shift to the left of the supply curve. The increase in demand
should increase the quantity traded. The combined effect is an increase in both equilibrium price
and equilibrium quantity.
3 B The equilibrium price is where demand and supply are equal. So, 100 - 5p = −20 + 10p.
Therefore p = $8.
4 D A fall in production costs of Red Bull will shift the supply curve downwards to the right. The rise
in price of the substitute drink shifts the demand curve for Red Bull to the right.
5 A The definition of disequilibrium in a market is when demand and supply are not equal. B, C and D
make no mention of this essential requirement.
6 D Lemon juice comes from a lemon. So the demand for lemon juice is derived from the demand for
lemons. Lemon juice and lemons are not in joint supply - only the lemons are supplied. They are
not substitutes as lemon juice comes from the lemon fruit.
7 C A derived demand is one where the demand for a good or service depends on the use that can
be made of it. A train journey is not demanded other than to provide a means of transport for
someone to get to work.

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Activities
Activity 11.1
1 a

New consumer surplus

P2 X
Loss of consumer surplus
P1 Y

0 Q2 Q1
Quantity demanded
Change in consumer surplus

b Consumer surplus falls to the shaded triangular area. Consumers in area P1P2XY lost their
consumer surplus when the price increased.

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P2 X Loss of
producer surplus

0 Q1 Q
Quantity demanded

Think like an economist

Learners' discussion might include:
1 In theory, low knock-down prices should increase consumer surplus.
2 The media excitement associated with Singles Day could result in some consumers paying higher prices
than if they had bought the goods at another time. Producers would then be turning consumer surplus
into producer surplus. Not all prices may be bargain prices.

Exam-style questions: Multiple choice

1 B This is consistent with the definition of consumer surplus. C is true but only to a limited extent.
A and D are irrelevant.
2 C This is consistent with the definition of producer surplus. The other options make no reference to
the price that the producer is willing to accept.
3 B The gain in consumer surplus is the difference between the old consumer surplus and that when the
price has fallen. At P, the consumer surplus is area 'a'. The new consumer surplus is the area under
the demand curve. The gain is therefore this area minus 'a'.
4 B Producer surplus is the triangular area above the supply curve and below the equilibrium price.
The area of a triangle is 0.5 × base × height, that is 0.5 × 30 × 200.
5 C Consumer surplus can be turned into producer surplus if the producer can identify a consumer
or group of consumers who are willing to pay a price above the producer's minimum acceptable
price. A unique product or restricting supply does not guarantee that the product will be bought
by consumers at a higher price. D will result in a loss of producer surplus.

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S1
Price of cocoa beans

0 Q1 Q
Quantity

Knowledge and understanding

* supply and demand diagram with correctly labelled axes
* inelastic supply curve.
Analysis points
* shift to left of inelastic supply curve
* leads to increase in price of cocoa and less quantity traded.

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e Learners' answers might include:

Knowledge and understanding
* fall in demand could be due to a fall in incomes
* there could be new concerns about the link between chocolate consumption and obesity
* a good harvest in the main producing countries will increase supply of cocoa
* a release of stocks can also increase supply.
f Learners' answers might include:
Analysis points
* the fall in demand will lead to a fall in the price of cocoa beans
* the increase in supply will also lead to a fall in the price of cocoa beans.
Evaluation points
* the fall in price will depend on the relative strength of the fall in demand and the increase
in supply
* in the short run, supplies of cocoa beans could be restored
* the change in demand for chocolate is a more long-term justification for choice.

Exam-style questions: Essay

2 a Learners' answers might include:
Knowledge and understanding
* definition of consumer surplus - difference between the price a consumer is willing to pay
for a good and its market price
* diagram showing consumer surplus as area under the demand curve above the market price.
Analysis points
* the increase in price leads to a fall in the quantity demanded
* the change will depend on the slope of the demand curve
* consumer surplus is reduced.
Evaluation points
* whether this occurs will depend on how flexible prices are in the market
* it also depends on the time gap between purchasing the good and when it is consumed.
b Learners' answers might include:
Knowledge and understanding:
* change in consumer surplus depends on whether price has decreased or increased
* change in consumer surplus depends on the extent of the price change in relation to the
original price
* change in consumer surplus depends on the price elasticity of demand for the good or service.
Analysis points
* how consumer surplus changes where there is a large or small proportionate change in price
* change in consumer surplus differs depending on whether the good or service is price elastic
or price inelastic
* application to different types of goods and services
* why there may be no change in consumer surplus for certain types of goods or services.

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Activities
Activity 12.1
Learners' own answers.

Think like an economist

Learners' discussion might include:
1 Various possibilities include a tax on private health care providers or an increase in certain indirect
taxes. A more direct method would be to charge those who can afford to pay for healthcare services.
2 Benefits include: greater worker productivity, hence greater output and economic growth; less risk of
spreading diseases, especially with increased immunisation; better health in the population can produce
benefits for education in terms of improved attendance at schools and colleges.

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Costs include: additional government funding may have to be paid for through increased taxation;
some funding may have to be re-allocated from other forms of government spending.

Exam-style questions: Multiple choice

1 C A and D are plausible but not the reason why governments provide public goods. B is not true as
public goods are freely available to all.
2 C B and D are plausible but the point about a merit good is that it is so-called because of
information failure. A is not true because private firms often provide healthcare services alongside
those provided by the government.
3 C To be effective, a maximum price must be below the equilibrium market price. This is used to
support low-income families who may consume a lot of staple food like bread. A and B are
consequences of imposing a maximum price. D may still occur because of shortages but is not the
reason for a government's action.
4 D A minimum price for agricultural goods is set to provide farmers with the security of a guaranteed
income depending on the volume of crops produced. A minimum price is a way of trying to
stabilise farm income as supply is variable. B and C may still happen but they are not the reasons
for a minimum price. A will be the result of a maximum price.
5 C This is the only option that recognises that demerit goods are so-called because of information
failure relating to their consumption. The other options are possible but not consistent with the
definition of demerit goods.

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Think like an economist

Learners' discussion might include:
1 The OECD's data might appear to support the argument put forward by Australian farmers. Subsidies
from other developed economies, like the USA, EU, Norway and Switzerland are a much higher
percentage of gross farm receipts. Compared to farmers in other high-income economies, farmers in
Australia do not appear to receive much government support.
2 The argument will be helped with further data such as the prices farmers in Australia receive for their
products and, significantly, comparable data for low- and middle-income countries that are important
producers of agricultural products. It is invariably these countries that complain to the WTO about
subsidies paid to farmers in high-income countries.

Exam-style questions: Multiple choice

1 C To be effective, the maximum price of rice should be below the equilibrium price. Potentially, this
can lead to a shortage of rice. This rules out option 2 and therefore D. A subsidy will encourage
rice farmers to produce more rice since at the maximum price, demand is greater than supply.
Rationing is also a valid policy since there are likely to be shortages in the market. So, given both
are relevant, C is the correct response.
2 B At the minimum price, above the equilibrium, supply is greater than demand. This rules out both
of the selling options, C and D. To retain P1 as the minimum price, the government must buy all
of the excess supply in the market. This must be Option B, KR; just buying KL would still lead to
more supply in the market than is demanded.
3 B Imposing a new specific tax will lead to the supply curve shifting to the left. This rules out options
A and D. The crucial point from the diagram is that the demand curve is price elastic and the
supply curve price inelastic. This means that the producer is unable to shift much of the tax
incidence onto consumers; most will therefore fall on producers.
4 C The inelastic supply curve is the most important thing to look out for with this style of question.
This means that consumers pay a higher percentage of total tax receipts than producers. The area
P1 YZP2 represents total tax receipts of which consumers have paid P1YWP.
5 C The payment of a subsidy will increase corn production. The effect on corn prices is uncertain as
there is no indication of the likely change in supply. This rules out A and B. The effect on corn oil
prices cannot be determined.
6 A The market price for wheat will only fall when there is an increase in supply. B is not correct
since buying more supplies will increase the market price. C and D are not components of a
buffer stock scheme.

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Activity 14.2
Learners' own answers. The list of policies will depend on the choice of country. Comparisons are likely to
be most meaningful when made between two countries with a similar level of income.

Think like an economist

Learners' own discussion might include:
This is an important issue for many countries, Malaysia included. The distribution of income appears
to be becoming more equal. A high rate of growth benefits most people as it is through growth that
living standards in most economies have increased. At the same time, it is important that enterprise and
innovation continue to be encouraged and that high incomes can be achieved by those who merit or deserve
them. Perhaps in the future growth will have to be sacrificed for greater inclusivity.

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Exam-style questions: Multiple choice

1 B This is the correct description of a Gini coefficient. It should not be confused with A, which
refers to wealth inequality. C and D are off the point.
2 C A lower Gini coefficient indicates a more equal distribution of income. B and D are incorrect
as they are outside the specific scope of the Gini coefficient. A is not correct as the income
distribution in Zambia is more equal than in Botswana.
3 C The key to reaching the correct answer is to be very clear that a progressive income tax seeks to
make the distribution of income more equal. A sales tax is regressive. This last point should then
rule out A and B. Looking at C and D together, D would not produce a more equal distribution
of income since a lowering of the top rate of income tax would give more money to top earners.
4 D Remember this question is about 'wealth', not income. This should immediately rule out A, B
and C since these policies are designed to achieve a more equal distribution of income.
5 D A lower middle-income country is likely to have a large elderly population. Providing free meals
to this group is a way of increasing their real incomes. The benefits of the other options are
less quantifiable.
6 D A more equitable distribution of income and wealth provides an incentive for people to work
harder. They can see the inequality gap narrowing. The other options contain too
many uncertainties.

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S
S1
Price of fertilisers

0 Q Q1
Quantity

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e Learners' answers might include (any two):

Knowledge and understanding
* a minimum price for a staple crop, such as maize
* cheap finance to purchase better quality seeds and farm machinery
* improvement to water supplies and irrigation
* better advice on how to improve crop yields
* increased transfer payments.
Analysis points
* minimum price will increase supply
* quality seeds and use of machinery should increase productivity
* crop yields will increase with better water supplies
* crop yields should increase as farmers get more advice
* government handouts will increase income of small farm holders.
f Learners' own answers might include:
Knowledge and understanding
* benefits of reduced costs to farmers and reduced prices to consumers
* improves distribution of income
* reduces dependence on imports
* safeguards food supplies.
Analysis points
* reduction of poverty among poor farmers in middle-income countries
* cheaper food for consumers in middle-income countries
* benefits of guaranteed income to farmers in other countries
* cheaper food and guaranteed supplies for consumers in other countries.
Evaluation points
* comparison of relative benefits to farmers
* comparison of relative benefits to consumers
* assessment of which is likely to be greatest
* assessment as to which groups in which countries have biggest benefit.

Exam-style questions: Essay

2 a Learners' answers might include:
Knowledge and understanding
* definition of a merit good - one that is desirable but underprovided in the market due to
information failure
* understanding of information failure
* examples of merit goods such as healthcare and certain types of education.

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b Learners' answers might include:

Knowledge and understanding
* meaning of income inequality
* description of a range of fiscal and other policies available to redistribute income.
Analysis points
* effects of a progressive income tax on redistribution of income
* minimum wage - impact on wage rates, employment and the distribution of income
* use of transfer payments and direct state provision to reduce income inequality.
Evaluation points
* limited scope for using progressive income tax in middle-income countries
* need for state to provide some essential services to protect low-income earners
* policies to reduce income inequality take time and tend to have had only a modest impact
* judgment on which policy might be most effective in a middle-income country.

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Activity 15.2
Learners' own answers.

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Activity 15.5
$980 billion − $60 billion (NDP at basic prices) + $30 billion (GDP at basic prices) +
$40 billion − $15 billion = GDP at market prices = $975 billion.

Think like an economist

Learners' discussion might include:
1 Whether all the national income measures place Vietnam ahead of Laos. The information may be
gathered from a number of sources such as The World Factbook (CIA), World Bank, IMF.
2 National income figures can be used to compare economic activity over time and to help in
determining government policy.

Exam-style questions: Multiple choice

1 D A, B and C are all measures of GDP and are different ways of measuring what is produced in a
country. In contrast, wealth is a stock of assets that have been built up over time.
2 B Net property income from abroad includes profit, interest and dividends.
3 B Net income from abroad is included in GNI but not GDP. If there is no property income from
abroad, the two measures would be equal. Both measures are adjusted for indirect taxes and
subsidies. Transfer payments are not included in either measure.
4 C $500bn − $20bn. This converts GNI at basic prices to GDP at basic prices.
$480 + $40bn − $10bn change GDP at basic prices to GDP at market prices. Unemployment
benefits are transfer payments and so are not included in either GNI at basic prices or GDP at
market prices.
5 C GNI is GDP plus net income from abroad. If net income from abroad is negative, a figure would
be deducted from GNI. Capital goods, consumer goods, net exports and indirect taxes are treated
the same in GDP at basic prices and GNI at basic prices.
6 B There is a loss of $200 000 from loss of initial jobs but an extra plus $108 000 from the new jobs
gained. A state pension and unemployment as transfer payments and so are not included.
7 D GDP, measured by the expenditure method, is consumer expenditure, government spending,
investment and net exports. In this case, this is $490bn + $80bn + $100bn + ($50bn - ?) = $640bn.
8 A To convert from basic prices to market prices, indirect taxes are added and subsidies are deducted.
To go from net to gross, depreciation has to be added and to go from national income to domestic
income, net income from abroad has to be deducted.
9 C Consumer expenditure plus investment plus government spending plus expenditure minus imports
is GDP at market prices. In this case, this is $700bn + $2000bn + $100bn − $50bn = $950bn.
GDP at market prices - indirect taxes and subsidies = GDP at basic prices. Here this is
$950bn - $30bn + $15bn = $935bn. A is NDP at basic prices, B is NNI at market prices and
D is GNP at basic prices.
10 C In calculating GDP by the output method, it is important to avoid double counting. Measuring
the value of finished products would mean that image processors would already have been counted
in the output of the smartphones industry.

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Leakages Saving Saving and taxation Saving, taxation and

Activity 16.3
Learners' own answers.

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Think like an economist

Learners' discussion might include:
1 A decrease in export revenue and an increase in import expenditure, with no other changes, would
decrease GDP as it would mean that less income would be entering the circular flow and more would
be leaving it.
2 If government spending is greater than tax revenue, the government will be adding more spending to
the circular flow than it is taking out of it - a net injection.
3 To make a full assessment to what was happening to Venezuela's circular flow, it would also be
necessary to know what was happening to investment and saving in the country.

Exam-style questions: Multiple choice

1 C Injections add to a country's income, output and expenditure. As leakages reduce a country's
income, output and expenditure, a fall in leakages will effectively act as an injection. For example,
if injections were initially $50bn and leakages were $40bn, there would be a net injection into the
circular flow of $10bn. If then leakages fall to $30bn, there would be a net injection of $20bn.
2 B Leakages involve income that leaves the circular flow of income. This means that it is income
which is not used to purchase the country's goods and services.
3 C A, B and D are all injections. C is a leakage.
4 D Spending by Mauritian firms on capital goods from France involves importing goods into
Mauritius and so is a leakage. A and B are flows of income within the circular flow of Mauritius.
C is an injection of government spending.
5 B The economy is in equilibrium when injections equal leakages, that is when G + I + X = S + T + M.
In this case, this is $90bn + ? + $60bn = $65bn + $75bn + $50bn. So $150bn + ? = $190bn.
6 D An open economy has an international trade sector. It is also assumed that it will have a
government sector. All economies have households and forms.
7 B An injection is an addition of spending that enters the circular flow. A is an example of a leakage
and D is a general description of a leakage. C arises within the circular flow.
8 D Households provide their factor services to firms and pay for the products that firms sell them. A is
two flows from firms to households. B and C each have one flow from households to firms and one
from firms to households.
9 B A decrease in tax on income will allow more to be spent. More spending will lead to more output
and more income. A is a decrease in an injection and C and D are leakages. A decrease in an
injection and an increase in a leakage will reduce the income flowing around an economy.
10 D An open economy has three injections and three leakages. A would give equilibrium in a closed
economy without a government sector. B would give equilibrium in the unlikely situation of an
economy that is open to international trade but has no government sector. C would mean there is
equilibrium in a closed economy with a government sector.

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Activity 17.3
Learners' own answers.

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Think like an economist

Learners' discussion might include:
1 Information would be needed on the percentage of GDP accounted for by investment, government
spending and imports.
2 Investment can increase both AD and AS. Using AD/AS analysis, including a diagram, would suggest
an increase in output. The effect on the price level would depend on the size of relative size of the two
shifts and the initial level of economic activity.

Activity 17.4
Learners' own answers.

Exam-style questions: Multiple choice

1 A A fall in the price level will enable people to buy more with any savings they have. This will be
likely to cause an extension along the AD curve as price falls. B is not the answer as the rate of
interest usually moves in the same direction as the price level. C would mean a rise in the price
level would be likely to reduce imports and D would mean an extension in aggregate supply.
2 A Lower government spending would reduce the total amount of spending in an economy. Imports
make a negative contribution to a country's aggregate demand. A reduction in imports can
increase net exports. Investment also makes a positive contribution to aggregate demand. An
increase in wages would be likely to raise consumer expenditure and so increase aggregate demand.

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may be different.

Bangladesh India Pakistan

Economic growth rates of Bangladesh, India and Pakistan, 2012-2018

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Improved skills

Higher productivity

Higher wages Higher productive potential

Increased aggregate demand Increased aggregate supply

Actual economic growth Potential economic growth

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Think like an economist

1 and 2 Learners' own answers.
3 Sources might include: The World Factbook (CIA), World Bank, African Development Bank.
4 Learners' answers might include: the primary sector will continue to decline, population will continue to
increase, the world economy will continue to grow, demand for chocolate will continue to increase.

Exam-style questions: Multiple choice

1 D Changes in real GDP show how a country's output has altered over time. Real GDP can be
measured in terms not only of output but also income and expenditure. However, consumer
expenditure is only one component of total expenditure. Economic growth is often accompanied by
a rise in living standards but not in every case. Changes in population size indicate how population
has grown or declined rather than how the country's output has changed.
2 D Real GDP is adjusted for inflation whereas nominal GDP has not been. If growth in nominal GDP
is the same as the growth in real GDP, it must mean that no adjustment had to be made for inflation.
3 A Economic growth caused by an increase in aggregate demand is shown by the movement of a
production point within a PPC towards or on to the PPC. An increase in a country's productive
capacity is illustrated by a shift to the right of the PPC. A movement from a point on one curve to
a point on or inside a PPC to the right of the original one would show that both aggregate demand
and productive capacity have increased.
4 D If a higher proportion of income is saved, consumer expenditure may fall, resulting in a slowdown
in economic growth. In the long run, more available funds for investment may make it easier and
cheaper to borrow. This could encourage more investment and an increase in economic growth.
A decrease in government spending on healthcare is likely to reduce output by lowering aggregate
demand. It will also be likely to reduce aggregate supply by lowering labour productivity. A decrease
in the size of the labour force would reduce productive capacity and the ability of the economy to
produce goods and services. An increase in the inflation rate will be likely to increase nominal GDP
but may reduce real GDP if it results in the country's firms losing their price competitiveness.
5 A A decrease in business optimism may reduce investment. It may also cause some firms to reduce their
output and dismiss some workers. Such actions would reduce aggregate demand which could lower
the price level. In contrast, B, C and D would all increase aggregate demand.
6 A Advances in technology would increase aggregate supply. This may reduce the price level and
increase output. In contrast, B, C and D would be likely to reduce aggregate demand which may
cause deflation.
7 C An increase in labour productivity would mean that more could be produced with fewer workers.
For unemployment not to increase, economic growth would have to match the increase in labour
productivity. A and B would tend to increase the demand for labour, D would reduce unemployment.
8 C A rise in real GDP occurs when output rises. Higher output may reduce poverty but may also be
associated with greater income inequality. Higher output may be achieved as a result of aggregate
supply rising in line with aggregate demand and so the price level may not rise. An increase in
population, especially if it involves an increase in the working age population is likely to increase
output. This, however, may not occur if employment does not rise or if productivity falls.

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The labour force participation rate is 70.84% ( 14.94 m

21.09 m )
The labour force figure is given. The working

age population is calculated by adding the males and females in the 15-64 age groups.
2 Learners' own answers.

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Think like an economist: Unemployment in Greece

Learners' answers might include:
1 Aggregate demand and aggregate supply, demand and supply of a particular product, efficiency,
market failure (including information failure and lack of geographical and occupational mobility of
labour), production possibility curves and opportunity cost.
2 Possible suggested reasons: fewer job vacancies available, so the period of unemployment may be
longer; no state benefit or lower state benefits, so standard of living may fall; low or no savings held
by the unemployed to support them before they get another job; low labour mobility which is likely to
mean the unemployment will last longer.

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Think like an economist: Long-term unemployment

Learners' discussion might include:
It is important to compare different countries' unemployment data from one source as unemployment taken
from different sources may use different measures and may have taken the figures at different time periods.

Exam-style questions: Multiple choice

1 D An increase in a country's unemployment rate, by definition, must mean that there is an increase
in the proportion of the labour force without jobs. A is a cause rather than a consequence of a rise
in the unemployment rate. In the case of B, the unemployed are not economically inactive. C - an
increase in the unemployment rate may mean an increase in the number of people unable to find
jobs. However, this is not always the case since there could be an increase in the unemployment
rate and fewer people unable to find jobs if the size of the labour force has fallen.
2 B A fall in a country's unemployment rate means greater utilisation of existing resources. This is
shown by a movement from within the PPC towards the PPC. A shows a change in the allocation
of resources with the economy operating at full employment. C shows an increase in productive
capacity resulting from an increase in the quantity or quality of resources. D indicates an increase
in a country's ability to produce consumer goods due to, for instance, greater productivity of
workers employed in the consumer goods industries.
3 B A reduction in gender discrimination in labour markets is likely to mean that more women will
enter the labour force. A rise in the size of the labour force could mean that both the number
of people employed and unemployed could rise. A, C and D would all reduce the size of the
labour force.
4 B Workers are frictionally unemployed when they are in between jobs. The farm workers may
gain new jobs when they find out about the job vacancies. A and C are examples of structural
unemployment, arising from changes in the pattern of demand (A) and the pattern of supply (C).
D is an example of cyclical unemployment.
5 A Cyclical unemployment is caused by a decrease in aggregate demand.
6 C One of the causes of frictional unemployment is information failure.
7 D Structural unemployment occurs when workers who have lost their jobs due to changes in the
structure of the economy experience difficulties switching from one type of job to another type
of job.
8 D Output is sacrificed as a result of unemployment. A and B are financial costs of unemployment.
In the case of C, more not less leisure may be experienced as a result of unemployment.

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China India Myanmar

Selected countries' inflation rates, 2014-2019

2 Learners' own answers.

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3 No. Prices, on average, have risen by more in the Philippines than in Japan. The prices, however, may
have started significantly lower in the Philippines. As a result, it is possible that prices may have been
lower in the Philippines than in Japan.

Activity 20.3
1
Year Inflation rate %

2013 7.6

2014 7.1
2015 6.7

2 2013
3 2018.

Activity 20.4
Possible suggested example:

Category Weight Price change Weighted price change

10 ( 200 )
1 20
Entertainment −5% −0.5%

5 ( 200 )
2 80
Miscellaneous 2½ 1%

All items 100 5.5%

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Activity 20.8
Learners' own answers.

Think like an economist

Learners' answers might include: loss of faith in the currency leading people to resort to barter,
discouragement of investment, loss of value of savings, inflationary noise, long queues for, for example,
food and petrol, empty supermarket shelves, higher costs for firms.

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Exam-style questions: Multiple choice

1 D Deflation will mean that each unit of money will buy more goods and services. The price level will
fall. The effect on the exchange rate and unemployment are uncertain.
2 B The group of workers will have less actual money but the amount they have will buy more goods
and services as prices have fallen by a greater percentage.
3 C Product Weight Price change (%) Weighted price change (%)

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Exam-style questions: Essay

2 a Learners' answers might include:
Knowledge and understanding
* definition of aggregate demand.
* components of aggregate demand.
Analysis points
* how changes in disposable income can influence the components of aggregate demand (AD).
* how changes in the interest rate can affect the components of aggregate demand.
* how expectations about future economic prospects can influence AD.
* how AD can be affected by other influences including changes in population size and
structure, wealth and advances in technology.

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3 a Learners' answers might include:

Knowledge and understanding
* definition of the circular flow of income.
* definition of injections and leakages.
Analysis points
* all countries have a similar circular flow of income in terms of the economic agents involved,
the flows within the economy and the injections and leakages. The circular flow diagram will
contain the same features for each country as shown in the diagram.
Direct
taxes
Households
Investment

Saving

Imports

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Activities
Activity 21.1
Suggested possible answer for New Zealand and South Africa:

Year New Zealand's New Zealand's South Africa's South Africa's

inflation target inflation rate (%) inflation target inflation rate (%)
range (%) range (%)
2019 1-3 1.5 3-6 4.5
2018 1-3 1.6 3-6 4.6
2017 1-3 1.9 3-6 5.3
2016 1-3 −0.6 3-6 6.3
2015 1-3 −0.3 3-6 4.6

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Think like an economist

Learners' reasons might include:
1 Unemployment may be at a low level.
2 It may be considered that the unemployment is temporary.
3 It may be thought that lowering unemployment will conflict with price stability.

Exam-style questions: Multiple choice

1 B An increase in aggregate demand will mean more spending. This could encourage firms to increase
their output and take on more workers. The higher demand may result in demand-pull inflation.
If it results in a shortage of resources, it may also push up costs of production.
2 A In the short run, if people save more, they will spend less. This would reduce demand-pull
inflation. If people place their savings in financial institutions, there will be more funds available
for firms to borrow to buy capital goods. The increase in demand for capital goods would first
increase aggregate demand and then, when the capital goods are put to use, productive capacity
will increase. An increase in saving may increase exports as firms seek to sell abroad products they
can no longer sell on the home market. Higher exports and the resulting higher demand may,
however, increase inflation. More saving may reduce imports of capital goods but a decrease in
aggregate supply will increase inflation.
3 A Low unemployment should mean that workers can keep their skills up to date. Governments
usually want output to increase. Price stability is another government macroeconomic policy
objective but one that low unemployment does not ensure will occur. Indeed, there is a risk that
low unemployment may put upward pressure on prices. It is also likely to increase wages as firms
will find it more difficult to recruit additional workers.
4 D The economy is operating with considerable spare capacity. There is no upward pressure on prices.
However, the lack of aggregate demand will mean there is cyclical unemployment and output
will be below what the economy is capable of producing. Higher national income will mean the
economy is growing.
5 B Price stability makes it easier for firms to estimate future costs, prices and profits. If this increases
investment, aggregate demand and aggregate supply will rise, resulting in economic growth.
A and D would cause aggregate demand to fall and would be likely to reduce the economic
growth rate. Price stability would not mean deflation and deflation is more likely to discourage
consumer expenditure.
6 C A more skilled labour force could raise productivity and lower costs of production. This could
enable an economy to grow without creating inflationary pressure. A more productive labour force
is likely to be in higher demand and a more skilful labour force will find it easier to move from
declining to expanding industries.
7 D A and B are reasons why Country Y should have experienced a more rapid economic growth rate
than Country Z. Fluctuations in the economic growth rate, C, are not desirable. D is a reason
why Country Z would be expected to have a higher economic growth rate than Country Y even if
Country Y is performing well.

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Think like an economist

Learners' answers might include:
rguments for include: encouraging more people to enter the labour force, workers to work more hours,
A
more multinational companies to set up in the country and people to save more.
rguments against include: sales taxes are regressive and place a greater burden on the poor. When
A
someone buys a product with a tax on it, no consideration is taken of the ability of the poor person to bear
the burden of the tax. A poor person will pay the same tax rate as a rich person.

Exam-style questions: Multiple choice

1 B A, C and D are all government macroeconomic aims. A government will aim for low
unemployment. This is sometimes referred to as full employment. A government would
not aim for the same level of employment if that level is low and is accompanied by a high
unemployment rate.
2 C A budget surplus will increase if tax revenue rises and/or government spending falls. A rise in
employment would be likely to increase income tax revenue as more people will be working and
wage rates may increase. It is also likely to increase indirect tax revenue, as with higher incomes,
spending will rise. If higher employment is accompanied by lower unemployment, government
spending on unemployment benefits will fall.
A rise in the retirement age will mean that people work longer. This should raise their incomes
and, so again, more tax revenue will be raised. A higher retirement age is also likely to reduce
government spending on pensions.

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Think like an economist

Learners' own answers.

Exam-style questions: Multiple choice

1 B onetary policy is a demand-side policy. For instance, it aims to reduce aggregate demand when
M
too much demand is causing inflation. It will try to increase aggregate demand when there is a low
level of economic activity. A is an aim of fiscal policy and C is the aim of supply-side policy. D is
incorrect as central banks aim to achieve price stability and not reduce it.
2 D onetary policy is concerned with influencing the quantity and price of money. Restrictions on
M
bank lending may reduce the money supply or, at least, the growth of the money supply. A and C
are fiscal policy tools and B is a form of price control.
3 C n increase in the money supply would make more money available for spending. Higher spending
A
may reduce unemployment but may also cause inflation. Increased government spending may
cause a rise in the money supply, if the government borrows to finance some of its spending.
4 A xpansionary monetary policy seeks to increase aggregate demand. The main expansionary
E
monetary policy measure is a reduction in the interest rate. Such a change will not generate more
demand if it does not encourage firms to borrow to invest. B, C and D are likely to either leave
aggregate demand unchanged or increase it.
5 B central bank will increase the money supply when it wants to increase aggregate demand.
A
Cyclical unemployment arises when there is a shortage of aggregate demand, so a government may
try to reduce it by raising aggregate demand. C and D may benefit from lower aggregate demand.
In the case of A, spending may be deceasing as the government will have raised more in taxation
than it has spent.
6 A higher interest rate is likely to reduce consumer expenditure and investment as it will be more
A
expensive to borrow to finance consumer expenditure and investment and because saving will be
more rewarding.
7 D n expansionary monetary policy will increase aggregate demand. If an economy is close to full
A
employment, an increase in aggregate demand is likely to be inflationary. A, B and C would benefit
from higher aggregate demand.
8 A contractionary monetary policy will involve a higher interest rate or a reduction in the money,
A
possibly the result of a reduction in bank lending. A higher interest rate will discourage borrowing
as borrowing will become more expensive.
9 A o reduce unemployment, an expansionary fiscal policy tool and an expansionary monetary
T
tool are likely to be used. A decrease in income tax and a decrease in the interest rate will tend to
increase consumer expenditure and investment.
10 D contractionary monetary policy tool is one which reduces aggregate demand. Restricting bank
A
lending is likely to reduce consumer expenditure and investment. A, B and C are all expansionary
monetary policy tools.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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Think like an economist

1 Learners' answers might include: Benefits: reduction in accidents, reduced transport time, reduced
need for car parking spaces, less need for fuel, reduced transport congestion, accessibility for those
who cannot drive. Costs: initial high cost, unemployment of taxi drivers and delivery drivers, may be
accidents during transition phase when a mixture of driverless cars and driven cars.
2 Learners' own answers.

Exam-style questions: Multiple choice

1 A Supply-side policy seeks to increase the maximum output an economy can produce. Such a policy
may reduce upward pressure on the price level. It does not try to reduce aggregate demand. If it
does succeed in increasing aggregate supply, it may enable higher aggregate demand to be matched
by higher aggregate supply. Supply-side policy does not seek to reduce unemployment.
2 C If some workers gain jobs abroad, the size of the labour force will fall and aggregate supply will be
reduced. A, B and D would cause aggregate supply to increase.
3 B If there is considerable spare capacity, an increase in aggregate supply may raise potential output
but not actual output. A budget surplus would give a government more opportunity to spend
money and cut taxes in support of trying to increase aggregate supply. Flexibility of resources
would increase the speed of response to supply-side policy. In a mixed economy, there is an
opportunity for a range of supply-side policy measures including privatisation, deregulation and
government spending on education.
4 D A government may spend on investment to increase aggregate demand (fiscal policy) and/or to
increase aggregate supply (supply-side policy). A cut in bank lending and the interest rate are
monetary policy tools. A cut in the rate of interest may also be considered a supply-side policy
measure as it is likely to encourage an increase in investment which would result in an increase in
aggregate supply. C is a fiscal policy tool that is likely to reduce aggregate supply.
5 B Infrastructure development improves the quality of capital resources whereas training increases
the quality of labour. Both tools seek to increase aggregate supply. They both involve government
spending, and both will increase tax revenue if successful. Neither infrastructure development nor
training have an increase in competition as their main focus.
6 C A successful supply-side policy tool should reduce cost-push pressures. For instance, a successful
training scheme would reduce labour costs by raising productivity. It may also reduce structural
unemployment by increasing occupational labour mobility.
7 B Firms are more likely to run their own training schemes if the workers they train stay with them
for longer. A, C and D are all likely to increase the need for training and all are likely to result in
more pressure being put on the government to subsidise training schemes.
8 D Increased competition may put pressure on firms to raise productivity so as to keep their costs
lower and the quality of their products higher than their competitors. A may reduce productivity
as it is likely to reduce the motivation of workers. B may also reduce productivity as workers
may get tired. C may mean that firms do not undertake much investment which, again, may
reduce productivity.
9 A Supply-side policy has the potential to reduce unemployment, reduce inflation and promote
economic growth. It is not, however, designed to reduce a budget surplus.
10 C C
ontractionary fiscal policy is designed to reduce aggregate demand. If aggregate demand
decreases, the increase in productive capacity, resulting from supply-side policy, may not be
used. A would increase the chance of factors of production responding efficiently to the changes
caused by supply-side policy tools. C would make it more likely that an increase in potential
output would turn into an increase in actual output. D could reduce costs of production and
increase competition.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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Exam-style questions: Essay

2 a Learners' answers might include:
Knowledge and understanding
* definition of a budget surplus.
* tax revenue comes from both direct taxes and indirect taxes.
Analysis points
* reasons why a government may experience a budget surplus during a high level of economic
activity.
* reasons why the government may decide to spend less and increase taxation.
Evaluation points
* a government may aim for a structural budget surplus but in practice, a budget surplus is
most likely to be a cyclical surplus.
* a budget surplus will reduce aggregate demand. This can be useful when the economy is
working at full capacity as it can prevent demand-pull inflation.
* a budget surplus can be harmful when there is a low level of economic activity. This is because
the resulting lower AD may increase cyclical unemployment and slow down economic growth.
b Learners' answers might include:
Knowledge and understanding
* definition of demand-pull inflation.
* what fiscal policy designed to reduce demand-pull inflation would involve.

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3 b Knowledge and understanding points

* aims of government spending on training schemes.
* how a country's economic performance can be assessed.
* indicators of an improvement in a country's economic performance.
Analysis points
* more government spending on training schemes may increase workers' skills and their
productivity.
* the effects of a more productive labour force may increase the country's output of goods and
services, inflation, structural unemployment and the balance of payments.
* the effects of an increase in government spending on AD and cyclical unemployment.
Evaluation points
* increased government spending on training may result in a fall in government spending on
other areas such as healthcare which may reduce macroeconomic performance.
* increased government spending on training may just replace private sector spending on
training resulting in no overall improvement in productivity.
* more workers may emigrate if they become better trained. This could reduce AD,
LRAS and real GDP.
* increased government spending on training may not be effective if it is poorly delivered or it is
in skills which are no longer in demand.
* if increased government spending on training raises AD by more than LRAS, it could result
in demand-pull inflation.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 25.2
Learners' own answers.

Think like an economist

Learners' own answers.

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Exam-style questions: Multiple choice

1 D If all the factors of production were perfectly mobile between countries, then there would be a
movement of factors of production rather than products to the countries where demand is high.
In practice, some factors of production are immobile. For instance, South African gold mines cannot
be moved and so countries have to import the gold from South Africa.
Lower transport costs and lower taxes on imports would be likely to increase international trade
but their existence does not stop international trade. If opportunity cost ratios were the same,
there would be no basis for international trade.
2 B If Country Y's ability to produce smartphones falls to 30, it would be able to produce fewer
smartphones than Country Z. As a result, it would lose its absolute advantage in producing
smartphones. A decrease in Country Z's ability to produce shoes to 30 pairs would mean its
absolute advantage in producing shoes would be lost. As a result of the changes in B, the absolute
advantage in producing smartphones would switch from Country Y to Country Z. The absolute
advantage in producing shoes moves from Country Z to Country Y. The changes mentioned in A,
C and D leave Country Y being able to produce more smartphones than Country Z and Country
Z being able to produce more shoes than Country Y.
3 C Country Y has the comparative advantage in producing refrigerators as its opportunity cost of
producing one fridge is 1/3 car whereas it is ½ car in the case of Country X. It can also produce
2.4 times as many fridges but only 1 3/5 times more cars than Country X.
Country X has the absolute advantage in producing both products. It has the comparative
advantage in producing electric cars so it will export rather than import them. Trade will benefit
both countries as there is a difference in their opportunity cost ratios.
4 C To benefit both countries, the exchange rate has to lie between the two countries' opportunity cost
ratios. In this case, this is 1 tractor for more than 12 clothes and less than 19.2 clothes.
5 A A country may be very good at producing a product, but it still may be the case that its domestic
demand for the product may exceed what it is capable of producing. Other countries imposing a
tax on imports of rice from Country X would tend to increase the amount of rice Country X sells
at home and so reduce the need for imports. C would tend to encourage exports from Country X
rather than imports. D would tend to encourage Country X to rely on its own production of rice.
6 A An unfavourable movement in the terms of trade occurs when the number gets smaller. This will
be the case if export prices fall relative to import prices. The terms of trade are concerned with
the price rather than the volume of exports relative to imports. An increase in a surplus on the
current account of the balance of payments is likely to raise the exchange rate, which will cause an
increase in the price of exports and a fall in the price of imports. The effect of a budget surplus on

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Year Index of export Index of import Terms of trade

prices prices
2019 95 104 91.3
2020 98 106 92.5
2021 102 112 91.1
2022 105 120 87.5
2023 100 110 90.9

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' answers might include:
1 to improve the balance of payments
2 to protect an infant industry
3 to prevent dumping
4 to protect a declining industry.

Activity 26.4
Learners' own answers.

Exam-style questions: Multiple choice

1 D There is a risk that imposing an import tariff will increase inflation. It is likely to increase the price
of imports and reduce pressure on domestic firms to restrict rises in their costs and prices. A, B
and C are all possible reasons why a government may impose an import tariff.
2 C Initially 84 000 units were consumed. 35 000 units were supplied by domestic producers. So 49 000
units were imported. When the tariff is imposed, domestic consumption falls to 70 000 units. Now
46 000 units are supplied by domestic producers. So, imports fall to 24 000, So the reduction in
imports is 49 000 - 24 000 = 25 000.
A is the reduction in consumption, B is the new quantity imported and D is the increase in
domestic supply.
3 A The removal of tariffs on imported food will be likely to reduce the price of imported food. This
will enable domestic consumers to enjoy a greater gap between what they actually pay and what
they are willing to pay.
With increased competition from imports, the output of domestic food producers is likely to fall.
Foreign producers may divert some food from their home markets to the country's market.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

1 a Exports (net exports) are a component of aggregate demand.
b The opportunity cost of exporting products is domestic consumption.
c Exports are an injection into the circular flow of income.
d Exports of goods and services minus imports of goods and services gives the trade in goods and
services balance.
2 A possible suggested answer for Lesotho 2008-2018:

10
Current account balance as % of GDP

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-5

-10

-15

Lesotho's current account balance as a % of GDP, 2008-2018

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Exam-style questions: Multiple choice

1 A A credit item brings money into the country. A describes employees' compensation and this
appears in the primary income. B would also appear in primary income but as a debit item as it
involves money flowing out of the country. C is a debit item appearing in trade in goods. D is a
credit item but one which would appear in trade in services.
2 C The trade in goods section of the current account balance shows the value of exports and imports
of goods. That is the price multiplied by the quantity of exports of goods and the price multiplied
by the quantity of imports of goods. A surplus means that more money is flowing into the country
than leaving it, so the value of exports of goods exceeds the value of imports of goods.
3 A Spending by French people on holiday in Mauritius would appear as a credit item in trade in
services. B appears in the budget balance rather than the current account balance. C appears in
another part of the balance of payments - the financial sector. D is internal trade. It is any profit
that may be made by the Chinese firm and that is sent to China which would appear in the
current account.
4 D P
rofits sent out of the country would appear as a debit item in primary income of Botswana's
current account. If these increase, Botswana's current account surplus would get smaller. A, B and
C would all increase a current account deficit. A and B would reduce Botswana's imports while C
would increase its exports.
5 D The credit items total to $117m while the debit items shown come to $107m. These would give
a balance of $10m. To give a current account balance of − $30m, imports of services must be
$30m, so that − $30m + $10m = − $20m. A is the difference between the credit and debit items
excluding imports of services. B is the trade in goods balance and C is the trade in goods and
services balance.
6 D A debit item is money leaving the country. Money transferred back to the US by US citizens
working in Mauritius is workers' remittances and will appear as a debit item in secondary income.
A and B will be in primary income, a credit item and a debit item. C would not appear in the
current account as it involves a flow of money within a country and not between countries.
7 C The payment of interest on foreign loans appears in primary income. It is a debit item and, on its
own, an increase in the payment would worsen the current account position. Workers' remittances
appear in secondary income and a higher value will mean more money coming into the country.
8 B Country X has a surplus on the current account of the balance of payments as its GDP exceeds
its domestic expenditure (C + I + G) by $380m. Country W and Country Y have current account
deficits − $1,352m and $1,460m. Country Z's current account is in balance.
9 B A larger current account deficit will reduce aggregate demand in an economy. With low demand,
output is likely to fall or grow more slowly. As a result, unemployment is likely to rise.
10 A A
n expanding aircraft industry may also result in more exports being sold. B would suggest that
the country's products are becoming less internationally competitive, either because of a rise in
relative prices or a decline in relative quality. C would be making the country's products less price
competitive and D would be likely to make the country's products less quality competitive.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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Activity 28.3
Learners' own answers.

Think like an economist

Learners' own answers.

Exam-style questions: Multiple choice

1 C The Chinese firm will sell renminbi to purchase Chilean peso. As a result, there will be an increase
in the supply of renminbi on the foreign exchange market and an increase in demand for the
Chilean peso.
2 A The product would have originally sold in the domestic economy for 400 rupees (20 x 10). After
400
the depreciation the product would sell in the USA for $16 ( ).
15
3 A A depreciation in the Norwegian krona will mean that fewer US dollars will have to be given to
buy a given quantity of krona. For example, before the depreciation 150 krona would have cost
$15. After the depreciation, 150 krona could be purchased for $10.
A fall in the exchange rate will increase import prices which may increase raw material costs and
lead to cost-push inflation.
The fall in export prices may also increase demand for exports and increase export
revenue. The higher aggregate demand may cause demand-pull inflation if the economy is close to
full capacity.
It is not possible to conclude, without more information, whether the US dollar is undervalued.
US imports from Norway (and so Norwegian exports to the US) will fall rather than rise in price.
4 D If Egypt experiences a higher inflation rate than the USA, Egyptians are likely to buy more US
goods and services. They will sell Egyptian £s to get US$s to spend on US products. The higher
inflation is also likely to reduce US demand for Egyptian products. As a result, demand for
Egyptian products will fall. The increase in Egyptians visiting the USA is also likely to increase
demand for US$s and so the supply of Egyptian £s on the foreign exchange market.
5 B A decrease in US interest rates may encourage more US citizens to place more money in foreign
financial institutions including possibly Japanese financial institutions. They will sell US dollars
to buy foreign currency, increasing the supply of the $. With lower domestic interest rates, some
Japanese may place less money in US financial institutions and so will buy fewer $s. B and C
would be likely to increase Japanese demand for US products and so demand for $s would
increase. D would probably increase Japanese demand for US products (increasing demand for
the $) and reduce US demand for Chinese products (decreasing the supply of the $).
6 A The changes in the trade in goods and the trade in services combined with less money flowing out
in terms of primary income would increase demand for and reduce supply of the currency, leading
to an appreciation.
7 C If demand for imports is price inelastic, a fall in price would result in a fall in import expenditure.
This would decrease the trade in goods and services deficit. A would increase the deficit and C and
D would reduce a current account deficit but not the trade in goods and services section.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' answers might include:
Policy tool Objective Policy tool Objective
Cut in corporate tax Increase economic Imposition of import Reduce current account
growth tariffs deficit
Cut in general sales tax Reduce unemployment Increase in the money Reduce unemployment
supply
Cut in government Reduce current account Limit on bank lending Reduce inflation
spending on public deficit
sector pay
Cut in income tax Reduce current account Privatisation Increase economic
deficit growth
Deregulation Reduce inflation Rise in government Increase economic
spending on education growth
Fall in the exchange rate Reduce unemployment Rise in government Reduce current account
spending on infrastructure deficit
Government subsidies to Reduce unemployment Rise in the interest rate Reduce inflation
declining industries
Imposition of export Reduce inflation Rise in the school leaving Increase economic
tariffs age growth

Exam-style questions: Multiple choice

1 B If productivity rises, the price and quality competitiveness of domestic products could increase. This
will increase export revenue and reduce import expenditure. A could result in a rise in spending on
imports and could reduce export revenue as more products could be diverted to the export market.
C would be expected to make domestic products less price competitive and so decrease exports and
increase imports. D would be likely to increase imports, at least in the short run.
2 C An increase in income tax will reduce disposable income. This is likely to reduce consumer
expenditure. This lower spending is likely to reduce both imports and demand-pull inflation.
B and D would be likely to reduce a current account deficit but would likely to increase inflation.
A depreciation would make domestic products more price competitive which should help reduce
a current account deficit. However, as it would make imports more expensive and would raise
aggregate demand, it is likely to result in inflation. Tariffs on imports may increase costs of
production and reduce pressure on domestic firms to keep prices low. A would be likely to increase
a current account deficit as exports are likely to fall.
3 B Exchange control could limit spending on imports which would increase a current account surplus.
A, C and D would all tend to reduce a current account surplus. A would be likely to reduce
spending in importing countries which could reduce the value of imports they buy. C would permit
more imports to come into the country and D would reduce the price of imports.
4 C Increasing a budget surplus would involve reducing government spending and raising tax revenue.
These changes would reduce aggregate demand. This would lower demand-pull inflation. Lower
spending is also likely to reduce imports and may cause some firms to switch their focus from
the home to the export market. A would be likely to reduce a current account deficit but increase
demand-pull inflation. B may reduce demand-pull inflation in the short run but increase it in the
long run as well as increasing a current account deficit as lower investment may reduce innovation

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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e Learners, answers might include:

Knowledge and understanding
* fiscal policy is designed to influence aggregate demand.
* definition of a current account deficit.
* fiscal policy can influence the demand for imports and the supply of exports.
Analysis points
* Cambodia used an expansionary fiscal policy in 2018 as the government increased its
spending and its spending was greater than its tax revenue.
* an expansionary fiscal policy may increase a deficit on the current account of the balance
of payments.
* the expanding domestic market may also mean that some products are switched from export
to the domestic market.
Evaluation points
* how the current account balance will be affected is influenced by what the government
spends the extra money on. In the case of Cambodia, the government spent more money
on roads, electricity power stations, education and healthcare. Such spending is likely to
have increased productivity and the international price and quality competitiveness of the
country's products.
* any beneficial effects on the current account balance are likely to have taken some time. They
will also have been influenced by whether the country had spare resources which could have
increased domestic output and if domestic firms lowered their prices when their costs fell.

Exam-style questions: Essay

2 a Learners' answers may include:
Knowledge and understanding
* an import tariff will impose an extra cost on firms purchasing products from other countries.
* an import quota directly seeks to reduce the number or value of imports. It puts a limit on
what can be imported.
* both an import tariff and an import quota are forms of trade protection.
Analysis points
* firms buying the imports are likely to raise the price they charge on the domestic market to
cover at least some of the import tariff. This is likely to reduce demand for imports.
* an import tariff has the advantage that it can raise tax revenue. It can also be used to offset
the price advantage foreign firms may be seeking to gain by dumping products on the
domestic market.
* using a quota means that a government can, in theory, restrict imports to the specific amount
it wants. Import quotas do not raise revenue unless they are enforced by licences that are sold.
Evaluation points
* both an import tariff and an import quota can lead to smuggling of goods to avoid paying
the tariffs and to get round the limitation on imports. They can also both provoke retaliation.
* if demand for imports is price inelastic, demand for imports may not fall significantly.
* if a quota on the quantity of imports is imposed, any reduction in supply may drive up price
and the country may end up spending more on imports.

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b Learners' answers might include:

Knowledge and understanding
* definition of protectionism.
* tools of protectionism.
* one of the aims of protectionism can be to reduce unemployment.
Analysis points
* how protection of an infant industry could create jobs.
* how a government may be able to stop unemployment increasing by protecting a
declining industry.
* how protecting a domestic industry against dumping could prevent structural unemployment.
Evaluation points
* if protectionism does improve the balance of trade position, aggregate demand will increase.
This would reduce cyclical unemployment. However, it may only be a short-term reduction
if the country's industries do not respond to the opportunity given to them to improve
their performance.
* protectionism may increase unemployment if there is retaliation.
* by preventing full advantage being taken of comparative advantage, world output and
employment may be below the potential levels.
* in practice, it is difficult to identify which industries have the potential to grow and become
efficient, how long an inefficient industry should be given to wind up and whether foreign
industries are engaged in dumping.
* protectionism can reduce the competitive pressure on domestic firms to keep their costs low
and to innovate. If relative prices do rise and relative quality falls, demand for the country's
products is likely to fall, causing cyclical unemployment.
3 a Learners' answers might include:
Knowledge and understanding
* definition of international trade.
* what the theory of comparative advantage suggests.
Analysis points
* how international trade enables firms to specialise, buy and sell in larger markets and take
advantage of economies of scale. There are a number of advantages a country may gain from
engaging in international trade. Selling to a global market can allow the country's producers
to specialise in those products in which the country has a comparative advantage. The
products it no longer produces can be imported from countries that also specialise.
* how international trade can give consumers more choice, lower prices and better quality.
* comparative advantage explains a greater proportion of international trade than absolute
advantage.
Evaluation points
* comparative advantage does not explain all of international trade. There are a number of
reasons for this. One is that it can be difficult to determine comparative advantage. In the real
world, there are many countries and a vast number of products.
* the relative quantity and quality of countries' resources are constantly changing.
* there is not always constant returns to scale.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Total utility

12

10 20

0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7
Days Days

3 Possible suggested answer: Revision that takes place closest to the examination is likely to be
most productive.

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Think like an economist

Learners' discussion might include:
1 An increase in the sales of tinned food will increase employment in this branch of the food processing
industry, both in the UK and elsewhere. Going back down the supply chain, employment should
increase among certain types of food producer and manufacturers of tin containers. There could be a
negative impact on other food producers, both in the UK and elsewhere in countries that supply the
UK with fresh food. The net effect is difficult to determine. Much will depend on whether the increase
in sales of tinned food is sustained.

Exam-style questions: Multiple choice

1 D Marginal utility falls as the consumption of a good increases. When marginal utility becomes zero,
the consumer will not derive any more satisfaction by increasing consumption of that good. Total
utility is therefore maximised at this point.
MU
2 B A rational consumer will consume to the point where is the same for all goods purchased. For
P
MU 2
clothing, = 2. So, for food, = 2, meaning that P = $1.
P P
3 D The question refers to the equimarginal principle. D is the correct definition.

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may be different.

a Price of X has increased by 25%

b Price of Y has decreased by 100%
2 a An increase in the price of normal goods, such as restaurant meals, reduces the real income of
consumers. Fewer meals will be purchased (income effect). A consumer will now purchase cheaper
meals instead of the more expensive ones from a restaurant (substitution effect).
b A decrease in price of an inferior good such as a meal from a street vendor will increase the real
income of a consumer (income effect). The increase in real income allows the consumer to buy
more normal goods such as restaurant meals (substitution effect).

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Activity 31.2
1 Less of both goods will be consumed.
Good Y

B2 B1

0 X2 X1
Good X (normal good)

2 More of the inferior good X will be consumed but less of good Y.

Y2

B2 B1
0 X1 X2
Good X (inferior good)

Activity 31.3
1 The negative income effect is greater than the substitution effect.

I2

E2

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Think like an economist

Learners' discussion might include:
1 The likely economic effects are a reduction in the demand for meat and an increase in demand for
plant-based food. Not all farmers will be able to adapt to these changes due to climate and
other limitations.
Food retailers are likely to find it easier to adapt to changing consumer needs and tastes. As stated in
the information, this is happening and will continue as the number of vegetarians and vegans increases.
2 A positive global outcome is a reduction in greenhouse gas emissions from rearing livestock. It is also
more efficient in resource terms to raise crops rather than livestock. With less meat consumed, there
will be fewer animals and meat products to be transported. Increased plant production could have a
negative effect on water supply in some countries.

Exam-style questions: Multiple choice

1 C The new budget line shows that more of good X and less of good Y can be bought with the same
level of income. This means that the price of good Y has increased. Money income has increased
since more of good X can be purchased.
2 B The substitution effect is always positive since following a price change; a consumer will always
substitute the cheaper good for one that is relatively more expensive.
3 B Consumer equilibrium is where the budget line touches, or is at a tangent to, the highest
indifference curve.
4 C A Giffen good is a type of inferior good where the quantity demanded falls when the price falls;
the quantity demanded increases as price increases. This means that the income effect is negative
but is greater than the substitution effect.
5 B The negative income effect and a positive substitution effect lead to a fall in consumption of
good X. Normal and superior goods have a positive income effect; with Giffen goods the income
effect is negative and greater than the substitution effect so C is not correct.

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Think like an economist

Learners' discussion might include:
1 The economic and social impact is likely to be felt most in regions or countries that have a high
dependence on receipts from international tourists who would normally travel by air. There is likely to
be a fall in employment in tourism and a knock-on effect throughout the economy. Investment from
elsewhere for new hotels and for upgrading other tourist facilities will fall. There will be an indirect
effect of more general unemployment. A form of social impact could be where displaced locals and
college students migrate to cities in search of a better life. Holiday destinations are likely to be less
crowded - the local population will be able to live a more normal lifestyle.
A similar impact could be for business travel. This impact would be felt most in capital cities and in
cities that are centres of banking, finance and manufacturing.
2 Fewer aircraft could counter globalisation. Aircraft carry freight as well as passengers. This function is
important for lower middle-income and middle-income countries that supply perishable food products
and high-value parts and components to high-income countries. The overall effect could be negative
and felt most strongly in exporting lower middle-income and middle-income countries in Africa and
SE Asia.

Exam-style questions: Multiple choice

1 B The definition of productive efficiency is where goods and services are made using least resources
and at lowest possible cost. B is the only response to refer to minimising average costs.
2 C Y and X are both on the PPC and are therefore productively efficient points of production. This
therefore excludes A and B. Allocative efficiency has increased since firms producing at X are now
making more of the goods that consumers want.
3 D A, B and C are examples of government intervention where an individual has no choice but to
accept what is offered. A merit good, D, is different since consumption is left to the individual.
4 C This is a statement of Pareto inefficiency and is an inefficient state of affairs. B and D refer only to
sectors and not to the whole economy. A is about inequality and not inefficiency.
5 A B, C and D are situations where there has been a change in supply or demand in a market. A is
the only example of market failure due to costs being imposed on third parties not involved in
generating the traffic noise.

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Think like an economist

Learners' discussion might include:
Pakistan: wider economic benefits would seem to be positive relative to the cost to the government.
Longer-term benefits will be to create further types of jobs and other activities alongside the new road but
particularly at interchanges. The nature of the jobs created could be an issue as Chinese workers at present
appear to be more skilled than those from Pakistan. The CPEC seems to tie Pakistan down to a longer-
term economic relationship with China. There could be opportunities for increasing exports to China.
China: immediate jobs for skilled workers and suppliers. The numbers employed will be likely to reduce as
Chinese companies become established and train more local people. There are ongoing opportunities for
Chinese firms to boost their exports to Pakistan. The relationship between the two countries is crucial for
realisation of China's Belt and Road initiative.

Exam-style questions: Multiple choice

1 B See the definition in the text.
2 D A, B and C are all private benefits. A is positive externality since workers will no longer be away
from work and therefore still able to produce goods for their employer.
3 A Marginal social cost is greater than marginal private cost. C and D would occur if there was a
divergence between MPB and MSB.
4 B The socially efficient output is where MSC = MSB. Any other level of output is socially inefficient.
5 D This is the project with the biggest net benefits calculated as total benefits - total costs.
6 A The deadweight loss occurs when there is a welfare loss due to an inefficient allocation of
resources. B can be rejected. D is incorrect as it makes reference to benefits as well as costs. C is
wrong as it implies no external costs.
7 C Asymmetric information applies in a situation where in a transaction one side has more or better
information than the other side. A and B are therefore not correct. D is of no relevance.

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80

40

Marginal
20 product

0 1 2 3 4 5 6
Number of workers

2 Both curves slope downwards. MP is below AP and decreases at a greater rate than AP.

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3 A clothing firm will be aware that total product should increase as more workers are employed. The
fall in MP is important since it measures the additional output produced with one more worker. This
worker will be retained if the value of output produced is at least equal to the wage of that worker.

Think like an economist

Learners' answers might include:
A useful starting point is to analyse the cost structure in terms of fixed and variable costs. The fixed costs
are primarily overheads at around 36% of total costs net of sales tax. Costs that depend directly on units
of coffee sold are about 18%. The remaining costs are not easy to classify as they will depend on how many
cups of coffee are sold.
The biggest problem for the owner will be to make sure that sales cover all costs except for fixed costs in the
short run. Any contribution to fixed costs would be good. If it is not possible to cover these costs, then the
owner would be advised to shut down the coffee shop.
In the long run, the owners are looking to be the main beneficiaries. This is the point about
entrepreneurship. It is unlikely that the coffee grower will get much benefit unless growers have a deal to
supply the coffee shop owners directly.

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Exam-style questions: Multiple choice

1 A Returns to scale is a long run concept so C is not correct. D is concerned with consumption
and not with production. B is wrong because there is greater output so the scale of production
increases not reduces.
2 B Let Q be the quantity produced. Total costs = total fixed costs + total variable costs.
Therefore, 120 000 = 50Q + 10Q. So Q is equal to $2000.
Total variable costs are 10 × $2000 = $20 000.
3 A The average costs as output increases are: 100, 67.5, 53.3, 45, 40. So average cost falls by $5 as
output increases from 4 to 5 units.
4 D This is correct for a firm in a perfectly competitive market. This is the only market structure where
a firm is a price taker.
5 C A is an example of an internal economy of scale. B is where a firm receives a subsidy. D is a cost
saving paid by a firm directly to a supplier.
6 B A firm in a perfectly competitive market requires normal profit to stay in the market. This is
therefore the opportunity cost if a firm takes up the best alternative.

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Think like an economist

Possible suggested examples:
a Microsoft Windows operating system and Office software: these are widely used by billions of students
and people in workplaces. There is little or no competition. Microsoft has contributed to widening
knowledge and to increasing the efficiency of the economy.
b The national rail system is a monopoly that transports students to get to college every day and for family
members to get to work. It is a vital resource as few families own cars. It has a wider economic effect.
c This is another example of where the economist's role is to identify the benefits (and likely costs). It
is typical of tasks undertaken by regulatory bodies such as the Competition and Markets Authority
in the UK. Putting monetary values on all the advantages is difficult since many have no market price
attached to them.

Exam-style questions: Multiple choice

1 D This is because there are very many firms in a perfectly competitive industry. In other market
structures, firms are price makers and have their own individual supply curves.
2 A B, C and D apply to both perfect competition and to monopolistic competition. In perfect
competition, marginal revenue is equal to price; in monopolistic competition price is greater than
marginal revenue.
3 C Abnormal profits are being earned as AR>AC. This rules out A and D. The firm has excess
capacity since it is operating above the minimum point on the AC curve.
4 A B, C and D apply to both market structures. Abnormal profits are only earned in the short run in
monopolistic competition.
5 C The four-firm concentration ratio has increased, indicating that the market power of the top four
firms has strengthened. This excludes A, B and D.
6 C This is the natural response in the market due to non-price competition. A and B apply to markets
where there is price competition. If D is applied, the firm will lose market share.
7 B This is the rationale that underpins why a cartel is formed. A, C and D may affect a cartel's
operations but they are not a requirement for successful operation.

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Think like an economist

1 Learners' answers might include:
Studying economics opens up a wide range of employment opportunities. Examples include banking
and finance, insurance, government, supply chain management and logistics, retail management,
business journalism, IT systems and data management.
2 Learners' own answers.
3 Learners' answers might include: Developing any business opportunity involves risks. Only a small
percentage of new ventures succeed. It is really up to individuals to decide if they want to take risks.
Being an economist is not a 'soft touch' as most economists have responsible roles.

Exam-style questions: Multiple choice

1 B A and C may be true but they are not why small firms are able to compete with larger firms. D is
not true as all firms have to be prepared to take risks.
2 D It is implied that the small firm is the typical business unit in a low-income country. Option C
would mean that small firms would find it even more difficult to survive. A and B are true but not
why small firms can survive.
3 D An increase in net capital employed results in growth in the size or scale of operation of a firm.
A, B and C refer to a firm which is operating within its existing size limit.
4 B A, C and D are examples of horizontal integration. B is an example of vertical integration since
the car manufacturer is moving forward in its supply chain.
5 D The principal-agent problem is where one person is making decisions on behalf of another
person. B and C have no relevance. A is not correct since the principal-agent problem only occurs
when managers in small firms make decisions.

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Activities
Activity 37.1
Learners' own answers.

Think like an economist

Learners' answers might include:
1 It does not matter that there are no real-world examples because the model of perfect competition acts
as a benchmark for comparing the efficiency of any other market structure. This comparison is made
using characteristics that are applied to all market structures.
2 The Forex market has some characteristics that make it a near perfect market. These include no
barriers to entry, many buyers and sellers, prices determined by supply and demand. The individual
currencies are identical although some, like the US dollar and the Chinese RMB, have more influence
than others in the market. It is highly unlikely that all buyers and all sellers have access to the
same information.

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Exam-style questions: Multiple choice

1 D This is correct since salaried managers are in a better position to determine a firm's objectives.
A and B are not correct since decisions in a firm with a large number of shareholders would not be
taken solely by an entrepreneur or owner. For C, external consultants will advise on decisions and
not actually make decisions.
2 D A is not correct as the profit maximisation output is 20 units. B is not correct as the sales
maximisation output is 50 units. Minimising average cost, C, is at 20 units of output.
3 C A, B and D make no reference to stopping new firms from entering a market. This is the whole
point about limit pricing.
4 B A, C and D can be applied to an entire market. The point about third-degree price discrimination
is that it is only effective when the market can be segmented, each segment having a different price
elasticity of demand.
5 B A is not correct since if MR is positive, the firm should increase its output to increase revenue. D is
not correct since the firm should reduce its output to increase revenue. C is wrong because if PED
is zero, the quantity demanded is not responsive at all to a price change.

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Exam-style questions: Essay

2 Learners' answers might include:
Knowledge and understanding
* definition of oligopoly
* characteristics of an oligopolistic market: barriers to entry, nature of product
* explanation of interdependence
* use of concentration ratio
* oligopoly as a price maker
* examples of oligopoly.
Analysis points
* clearly labelled diagram of a kinked demand curve (see, for example, Figure 35.12 in the
Coursebook), explained
* explanation of how diagram indicates interdependence
* explanation of price rigidity as costs change
* scope for non-price competition
* co-operation and collusion between oligopolists
* scope for price leadership.
Evaluation points
* criticism of model in terms of position of kink
* recognition that price competition is a feature of many oligopolistic markets
* other ways in which oligopolies compete.
3 Learners' answers might include:
Knowledge and understanding
* definition of profit maximisation
* explanation of conditions why this occurs when MC = MR
* statement of other aims of firms with brief description.
Analysis points
* use of diagram to show profit maximisation level of output (see, for example, Figure 37.3
in the Coursebook)
* analysis of, say, two aims of firms such as survival and satisficing
* application of ethical and environmental aims.

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Costs and benefits

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Activity 38.2
1 S'

S = MPC = MSC
Costs and benefits

MEC

D = MPB
MSB = MPB - MEC

0 Qm Q1
Quantity

2 The minimum price is now Pm and the quantity consumed is Qm. The new price is higher and the
quantity consumed is lower than for the previous equilibrium position.

Activity 38.4
Learners' own answers.

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Think like an economist

Learners' own discussion might include:
The diverse ownership creates a competitive market. The government is keen for companies to inject
investment and innovation into the rail system. The bidding process is open to all, including UK
companies. Franchises are awarded on the basis of providing the best value for money for the taxpayer.
It is important for there to be a regulatory framework in place to prevent unfair competition and business
practices. It is difficult to know whether Brexit (the UK's departure from membership of the European
Union) will deter EU companies from future participation in the provision of rail services.

Exam-style questions: Multiple choice

1 A The profit maximising output is 5 and is where MC = MR. The social optimum output is 4 and
determined where MSC = MSB. The difference is 1.
2 B A green tax is based on the 'polluter pays' principle. C and D are part of a green tax but are not
reasons why such a tax is levied. A is of no relevance.
3 D The point is that it is not possible to get any information since you have no experience of either
job. The satisfaction gained is a behavioural matter that rests with the individual.
4 B The government will subsidise goods that produce positive externalities which rules out C. D is a
consequence of subsidising merit goods but not the reason for the subsidy. A is a general reason
why a government may have more money to spend in all sorts of ways, not just on subsidies.
5 C This is the welfare gain triangle. All other options are wrong.

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Think like an economist

Learners' discussion might include:
1 More funding is essential. This could be used to use supply more efficiently by improving the means
of storage and water accumulation. Local network services could be improved by replacing leaks and
unsafe water pipes. Resources should also be used to monitor the purity of supplies.
2 Nationalisation is something to be considered. If water is recognised as a social good, then there is an
argument that it should not be provided by profit-driven private sector companies. There is also a case
for water to be provided free of charge to those who cannot afford to pay for it.

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Exam-style questions: Multiple choice

1 D Fairness and equity are essentially the same. There can be an equal distribution of income if the
underlying system is fair for all. This rules out A. For B, it is difficult and subjective to decide what
a worker is worth and therefore unlikely to be fair. C is not relevant.
2 C A rise in income tax will be felt most by those on high incomes. This rules out A and B. A fall in
GST is most likely to benefit low-income earners who will spend a high proportion of their income
on goods and services, many of which will be subject to GST. D is therefore not correct.
3 B Initially, a negative income tax provides all families with the same benefit. This rules out C and D.
As there is no empirical evidence to go on, the effect on the incentive to work is uncertain.
4 A Decreasing means tested benefits affects those on low incomes. Income is therefore redistributed
to higher-income families to the exclusion of C and D. A decline in the other two types of benefit
affects all groups in the population. So, B is not correct.
5 A This is the correct answer because it is the only answer where there is an unintended outcome.
B, C and D can all be expected after it has been decided to increase means-tested benefits.

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0 Q Q1
No. of workers employed
a: Skilled workers

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L2

W1
Wage rate ($)

0 Q Q1
No. of workers employed
b: Unskilled workers

S1
Wage rate ($)

0 Q Q1
No. of workers employed
a: Influx of migrant workers

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S1

0 Q1 Q
No. of workers employed
b: Migrant workers return home

Think like an economist

1 Learners' discussion might include: Employers should be concerned about skill shortages since this
could affect their productivity and business competitiveness. It is also likely to affect their ability to
recruit appropriately qualified staff, meaning they may have to pay higher wages to do so.
Governments should also be concerned about competitiveness relative to trading rivals. Exports may
decline while imports increase as they are more competitive in price. A lack of skilled labour could
hold back the benefits of technological change and result in a lower standard of living and reduced
rate of economic growth.
2 Learners' own answers.

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Exam-style questions: Multiple choice

1 D This is correct. It is the addition to total revenue of employing one more unit of labour.
2 C No worker will be paid less than W1 so the new supply curve is horizontal until it meets the former
labour supply curve.
3 B A and C are not correct as the minimum wage is above the equilibrium wage rate, reducing the
number of workers employed. D cannot be proven.
4 D The power of a single buyer in the labour market is that, compared to a competitive market, fewer
people will be employed and the wage rate will be lower.
5 A D is not correct since it is the definition of economic rent. B and C are of no relevance.

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Evaluation points
* overall conclusion as to whether subsidy should be reduced.

Exam-style questions: Essay

2 Learners' answers might include:
Knowledge and understanding
* definition of income and wealth
* difference between income and wealth
* broad description of the inequality of income and wealth in high-income countries
* comparison with other countries
* description of policies to reduce income and wealth inequality.
Analysis points
* use of progressive income tax; include an example known to you
* use of state benefits; include an example known to you
* means tested benefits, universal benefits (for example, helicopter money)
* scope for universal basic income and negative income tax
* inheritance tax and property/asset taxes to reduce wealth inequality.
Evaluation points
* critique of progressive tax system
* critique of state benefits; poverty trap
* issues of tax avoidance and evasion
* limited relevance of some policies in low- and middle-income countries
* time problem of reducing income and wealth inequality
3 Learners' answers might include:
Knowledge and understanding
* determination of wages in a perfect labour market
* why a labour market can be imperfect
* meaning of a minimum wage rate in principle and possibly in practice
* aim of a minimum wage rate.
Analysis points
* diagram to show effects of introducing a minimum wage rate (see, for example, Figure 40.13
in the Coursebook)
* analysis of effects depending on elasticities of demand and supply of labour
* recognition of excess supply of labour at minimum wage rate.
Evaluation points
* how to determine the right minimum wage rate
* variations in cost of living when dealing with a national minimum wage rate
* advantages to an employer
* benefits to government of reduced welfare payments.

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Activity 41.2
Learners' own answers.

Activity 41.4
Learners' own answers.

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Think like an economist

Learners' answers might include: An inflationary gap has the disadvantages that can arise from inflation
including a random redistribution of income and menu costs. It can also increase a deficit or reduce a
surplus on the current account of the balance of payments due to rising prices. However, an inflationary
gap is associated with high output and low unemployment. In contrast, a deflationary gap means
that output is lower than possible and unemployment will occur. There is also a risk that a downward
deflationary spiral may occur.

Exam-style questions: Multiple choice

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Activities
Activity 42.1
Learners' own answers.

Activity 42.3
Learners' own answers.

Activity 42.4
Learners' own answers.

Think like an economist

Learners' discussion might include: whether the capital is on higher land than other parts of the country;
how quickly sea levels are rising since may be planning to work for only a short time in the country;
whether willing to accept that accommodation may be flooded; whether the pay offered would compensate
for the risk of being flooded; whether currently live in an area at a greater risk from flooding.

Activity 42.5
Learners' own answers.

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Exam-style questions: Multiple choice

1 A During a depression, a country's output (real GDP) will decrease. Its potential output is also likely
to decrease as some worn out capital equipment will not be replaced and some of the unemployed
may decide to leave the labour force.
2 D If workers reduce the number of hours of overtime they work, short-run aggregate supply will
contract. The economy will move back to the long-run maximum potential output. A, B and C
could all increase a positive output gap. A and B would increase aggregate demand and C could
cause short-run aggregate supply to extend beyond the maximum potential output.
3 B The peak is the top of the business cycle. It is also the turning point where confidence switches
from optimism to pessimism. During the downturn, pessimism increases. It reaches its lowest point
during the trough. It then switches to optimism which continues to rise during the upturn.
4 C Automatic stabilisers smooth out economic fluctuations. They reduce the scale of economic booms
and the depth of any recession. They reduce tax revenue during a recession. They can create
cyclical deficits during a downturn and cyclical surpluses during an economic boom. Automatic
stabilisers do not directly affect the international competitiveness of the country's exports.
5 A If firms expect aggregate demand will rise, they may hold on to workers during a recession. This
is because it can be difficult and expensive to recruit during an upturn when competition for
workers will increase. If governments cut back on subsidies to firms to train their workers, the
unemployment rate is more likely to rise. If, for example, the size of the labour force falls from
100m to 90m and the number unemployed falls from 90m to 70m, the unemployment rate would
rise from 10% (10m/100m × 100) to 22% (20m/90m × 100). If the labour force falls by 10% to 45m
and the number unemployed falls by 4% to 4.8m, the unemployment rate would rise to 10.67%. If
workers' pay falls by less than productivity, labour costs will rise. This would be likely to increase
the unemployment rate.
6 D A cut in the rate of interest is likely to encourage a rise in consumption. This is because both the
cost of borrowing and the reward from saving will fall. The resulting rise in aggregate demand
will increase national output if there is initially spare capacity in the economy. A lower interest
rate may also increase potential economic growth as firms will be encouraged to buy more
capital equipment. This will be because the cost of borrowing to buy it will fall and the higher
aggregate demand will lead firms to expect higher profits. More capital equipment will increase the
economy's ability to produce goods and services.
7 C A reduction in the male/female pay gap would mean that women would be likely to gain from
economic growth. A would be likely to result in unskilled workers experiencing a decrease in wages
and so they may not gain from an increase in national output. B would mean that people in some
areas of the country would be affected differently by economic growth. Some could lose out by
experiencing higher unemployment. D would result in some young people not receiving any benefit
from economic growth.
8 A Cutting down trees in rainforests will increase economic growth in the short run. In the long
run, however, it will reduce the earth's ability to absorb carbon dioxide. This can increase global
warming which, in turn, can cause flooding and reduce agricultural output. An increase in
vegetarianism would reduce the consumption of clean water which is in short supply and would
reduce the release of methane gas. A switch from car travel to travel by public transport would
reduce traffic congestion and the use of petrol. These effects would reduce pollution and the
depletion of a non-renewable resource. The replacement of coal by wind power would also
reduce pollution.
9 D The polluter pays principle aims to make those who cause pollution to pay for it. If it is successful,
external cost would be turned into private cost and the social cost would be made up of just
private cost.
10 D Solar panels will generate electricity in a way that does not harm the environment and threaten
future economic growth. A, B and C could all result in a rise in greenhouse gases.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 43.3
Learners' own answers.

Activity 43.4
Learners' own answers.

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Activity 43.6
Learners' own answers.

Think like an economist

Learners' own answers.

Exam-style questions: Multiple choice

1 D If unemployment is below the full employment rate it means the economy is operating beyond
its long-run maximum capacity. This means there will be a positive output gap. The high level of
economic activity is likely to result in a government budget surplus as tax revenue will be high
while spending on unemployment and welfare benefits will be low. The 1.5% who are unemployed
are likely to be frictionally unemployed. Aggregate demand will be higher than long-run aggregate
supply which will result in inflation rather than deflation.
2 C The economy can move away from the equilibrium level of unemployment and so is not necessarily
stable. The equilibrium level of unemployment occurs when ADL equals ASL rather than ALF.
At this point there will be no pressure on the real wage rate to change. Some unemployment
(voluntary, frictional and structural) will exist at the equilibrium level.
3 A If the real wage rate in the economy is above the equilibrium level, the aggregate supply of labour
will exceed the aggregate demand for labour. The shortage of aggregate demand will cause cyclical
unemployment. Equilibrium, frictional and structural unemployment will occur when the labour
market is in equilibrium.
4 B Disequilibrium unemployment is shown by the gap between the aggregate supply of labour and
the aggregate demand for labour. In this case, RT represents disequilibrium unemployment.
5 D Hysteresis describes a situation where workers remain unemployed even when, for example,
aggregate demand picks up. This happens because some workers lose their skills and motivation,
and become less attractive to firms. Structural unemployment is likely to be more of a problem
than frictional unemployment but this is because it lasts longer. Cyclical unemployment arises
because of a shortage of aggregate demand rather than aggregate supply. New classical economists
do think that economies will move towards full employment in the long run but this tendency is
not called hysteresis.
6 D Low qualifications are likely to reduce the range of jobs a worker can do. Most firms want to
employ workers who can get on well with fellow workers and the firm's customers. As a result, low
social skills are likely to reduce a worker's job opportunities. If a worker is reluctant to move to
another part of the country, it will restrict the job opportunities available.
7 B An increase in labour mobility will enable workers to move more smoothly and more quickly
between jobs. This will reduce the voluntary, frictional and structural unemployment which will
occur in equilibrium unemployment. It will not help disequilibrium unemployment as in this case
the problem is a shortage of jobs due to a lack of aggregate demand.
8 B A decrease in the school leaving age is likely to reduce the skills of the labour force. If this is
the result, this will probably make it more difficult for workers to change jobs. A would increase
the geographical mobility of labour. C would raise the quantity of information available and D
would enable more people to access information on job vacancies. C and D could increase the
occupational mobility of labour.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Think like an economist

1 Reasons might include: students may stay as customers over a long period of time; students may be
high earners and so may keep large amounts in their deposit accounts; students may be well informed
and so may make use of a wide range of banking services.
2 Learners' research might include: how financially sound the bank is; what interest rate the bank charges
on loans and overdrafts and pays on loans; whether it imposes bank charges on deposit accounts; the
range and quality of services; the location of its branches (less significant now with online banking).
3 Learners' own answers.

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Activity 44.6
Learners' own answers.

0 Q Q1
Quantity of money

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Exam-style questions: Multiple choice

1 B Money has to be generally acceptable to act as money. If it is not, people would, for example, not
accept it as payment for a good or service. The vast majority of money is not backed by gold.
Money has to divisible so that different values of payment can be made and change can be given.
It also has to be limited in supply since if not people would refuse to accept it.
2 C The quantity theory suggests that, as the real GDP and velocity of circulation are constant (in the
short run), a rise in the money supply will increase the price level by the same percentage. The level
of employment does not appear in the quantity theory.
3 C The velocity of circulation is the number of times money changes hands. If national income is $40bn
$40bn
and there is a money supply of 10bn, on average each dollar would be spent 4 times ( ). The
$60bn $10bn
velocity of circulation then rises to = 5.
$12bn
MV 120
4 C The quantity theory of money is MV = PT or P = . In this case, P = 150 ×
T 125
which is 144. So the price level has increased from 120 to 144, that is by 24. A is the new money
supply minus the velocity of circulation. B is based on a confused arrangement of
MP = VT. D is also based on a confused arrangement, this time MT = VP.
5 C The bank credit multiplier is 100 = 20. So total deposits will be able to rise by 20 × $10 000 =
5
$200 000. Bank lending will be able to increase by $200 000 − $10 000 = $190 000.
6 D If households and firms use less cash, more money is likely to be kept at commercial banks. This
will increase their ability to lend. It may also reduce the reserve ratio commercial banks need to
keep. B, in contrast, would be likely to increase the reserve ratio they keep. A larger reserve ratio
will reduce the bank credit multiplier. C would not directly affect the bank credit multiplier but it
would reduce bank lending.
7 D The central bank will give money in exchange for the securities. The increase in the money supply
is likely to reduce the rate of interest.
8 B Liquidity preference is the desire to hold wealth in a money form. Those dealing in financial
markets will hold more money if they expect the prices of bonds to fall (the rate of interest to rise)
in the future. Expectation that the price level will not change will have no effect. If people are paid
more frequently, they would not need to hold so much money for transaction purposes. If people
take out more insurance, they are likely to hold less money for transaction purposes.
9 B If demand for money is perfectly interest elastic, any extra money will be held. This will occur
when the rate of interest is low and expected to rise. People dealing in financial markets will not
want to purchase more government bonds as they will expect their price to fall. This is the
liquidity trap.
10 D T
he loanable funds theory suggests that the rate of interest is determined by demand for loans
and the supply of loans. The supply of loans is based on the savings of households, firms and the
government. If firms and households save more in commercial banks, they will have more funds
available to lend. A would cause a fall in the rate of interest according to the liquidity preference
theory. B would reduce the amount banks can lend. C would be likely to increase the desire for
loanable funds which would increase the rate of interest.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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Exam-style questions: Essay

2 Learners' answers might include:
Knowledge and understanding
* definition of the multiplier.
* how the multiplier can be calculated.
* significance of the size of the marginal propensity to withdraw.
Analysis points
* similarity in ways of calculating the multiplier.
* influences on mps in different countries.
* influences on mrt in different countries.
* influences on mpm in different countries.
Evaluation points
* all countries have the same formula for the multiplier but the size of the withdrawals vary, and so
the size of the multiplier varies.
* why mps is likely to be different in high-income and low-income countries.
* why mpm is likely to be different the more open countries' economies are.
* why mrt can vary between countries.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Learners' answers might include:

Knowledge and understanding
* definition of the business cycle.
* phases of the business cycle.
* definition of investment.
* link between investment and AD and AS.
Analysis points
* investment causes national income to change by a multiple amount.
* changes in national income can cause greater percentage change in demand for capital goods.
This is explained by the accelerator theory.
* influences on investment.
* how investment is likely to change over the phases of the business cycle.
* advances in technology can result in bursts of investment.
Evaluation points
* investment is the most volatile component of aggregate demand.
* through the interaction of the multiplier and accelerator effects, changes in investment can have a
significant impact on economic activity.
* investment is strongly linked to business confidence and so can reinforce upturns and downturns.
* other possible causes of business cycles.
4 Learners' answers might include:
Knowledge and understanding
* function of commercial banks.
* banks have three main objectives: profitability, liquidity and security.
* key indicators of macroeconomic performance.
Analysis points
* how commercial banks can encourage saving and the effects of saving on the macroeconomy.
* the effects of bank lending on economic growth, unemployment and inflation.
* how commercial banks can influence the balance of payments.
* the ethical policies commercial banks can follow.
Evaluation points
* key role of commercial banks in implementing monetary policy.
* how the size and sophistication of the commercial banking sector varies between high-income and
low-income countries.
* influence of commercial banks' aims on how they can impact macroeconomic performance.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 45.3
Learners' own answers.

Think like an economist

Learners' own answers.

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Exam-style questions: Multiple choice

1 A An increase in aggregate demand is likely to result in a rise in GDP and an increase in
employment. There is a risk that it might increase demand-pull inflation and reduce price stability.
It is unlikely to reduce cost-push inflation and no government will seek to increase
frictional unemployment.
2 A People with low income are likely to spend a higher proportion of their income than those
with high income. This means that transferring money from those with low income would raise
consumption and aggregate demand. The redistribution of income may reduce the incentive to
be an entrepreneur as the top rates of income tax may be high. Redistribution of income is more
likely to reduce the value of leakages from the circular flow as it is likely to reduce savings. It will
not affect the rate of automatic stabilisers.
3 A A decrease in any limits on bank lending is likely to increase borrowing by both households and
firms. Higher consumer expenditure and investment may increase employment. A lower school
leaving age may raise unemployment as fewer teachers would be employed and workers will have
lower skills and mobility. An increase in income tax will reduce disposable income which is likely
to lower consumer expenditure and increase unemployment. An increase in the exchange rate
will raise export prices and lower import prices. This is likely to reduce spending on the country's
output and so cause more unemployment.
4 D An increase in productivity may mean that more can be produced with fewer resources. A and C
would be likely to increase aggregate demand which could reduce unemployment. A decrease
in the size of the labour force during a period of economic growth is more likely to reduce the
unemployment rate. This is because if more is being done with a smaller labour force, it probably
means that a greater number of workers are employed.
5 D Reducing the value of the currency would be likely to increase net exports and so increase
aggregate demand. Higher aggregate demand will increase demand-pull inflation. A, B and C are
all likely to reduce aggregate demand, or at least reduce the growth in aggregate demand.
6 C NY = C + I + G + (X - M) . In this case, C would be $100bn + 0.6 × $800bn = $580bn. Net
exports are $90bn - $150bn = - $60bn. So $800bn = $580bn + $120bn + G + - $60bn. So $800bn -
$640bn = $160bn.
7 B Deforestation will provide trees for production in the short run and may enable crops to be grown
on the cleared land. However, in the long run it will contribute to global warming. This would be
likely to result in more flooding and hurricanes which would reduce output. Cleaning up polluted
rivers, education and recycling will generate economic activity and income and will be sustainable.
8 C Inheritance tax is a tax on money left on the death of a person to their family and friends. High
income people can leave considerable sums to their family and friends. Increasing inheritance
tax will even out incomes. Transfer payments include unemployment benefits and child benefit.
These are more likely to be given to those on low income and will form a larger percentage of
their income.
9 C Borrowing from private individuals will be making use of existing money and will not increase the
money supply. Borrowing from foreign commercial banks will bring more money into the country.
Borrowing from its central bank, effectively, involves printing money.
10 B A decrease in the unemployment rate is likely to raise the income of the previously unemployed.
Paid employment normally provides higher income than unemployment benefits. A would mean
that the children of those with low incomes will receive less education and so would be less likely
to gain a significantly higher income as a result of economic growth. C would mean some people
would be worse off. D would take a greater percentage of the income of the poor.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Think like an economist

Learners' answers may include:
A high inflation rate may have a number of disadvantages including greater difficulty in planning,
confusion over what is happening to relative prices, the possibility of not being able to buy so many goods
and services if income rises by less than prices, and a fall in the value of savings if the inflation rate rises
more than the rate of interest. However, there is the possibility that income may rise more than prices.
If interest rates rise in line with inflation, the real value of savings can be protected.
High unemployment will lower tax revenue and some government spending may go on supporting the
unemployed. As a result, spending on, for example, healthcare may be reduced, which can lower living
standards. High unemployment means significantly fewer goods and services are produced than the
country is capable of making. It will reduce the chance of people gaining a job and earning an income.
It is also possible that high unemployment may result in an increase in the crime rate.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

0 Unemployment %

Activity 46.3
Learners' own answers.

Exam-style questions: Multiple choice

1 A A progressive income tax is one which takes a higher proportion of the income of the rich than
that of those on lower incomes. However, if everyone has the same income, no one group would
pay a higher percentage. An absence of tax evasion would increase the amount of tax received but,
as most are still likely to pay, it would not prevent the redistribution of income. Private ownership
would generate income which could be taxed in a progressive way. State ownership of industry
does not guarantee that income will be equal.
2 C A country's output will rise if injections exceed leakages, which they do in C. Higher output is
likely to result in a rise in employment.
3 B An increase in a trade surplus would increase aggregate demand. If the country has a high
rate of demand-pull inflation, it would not want aggregate demand to increase further. Higher
aggregate demand would reduce cyclical unemployment. It would increase the rate of economic
growth if there is spare capacity in the economy. It could also increase incomes which may
increase development.
4 A High cost-push inflation will make the country's products less price competitive. An appreciation
of the currency will increase the price of exports and so make the country's products even less
price competitive. A rise in export prices will increase the country's terms of trade. The likely
reduction in demand for the country's products will probably result in a rise in unemployment and
a fall in employment. It is also likely to discourage investment.
5 C If productivity increased by more than the average wage rate, employers would have received
a better return from employing workers. The country's products could have become more
internationally competitive and so could have increased export revenue and reduced import
expenditure. Cost-push inflation could also have been reduced.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 47.2
Learners' own answers.

Activity 47.3
Learners' own answers.

Activity 47.5
Learners' own answers.

Think like an economist

Learners' own answers.

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Exam-style questions: Multiple choice

1 B The expectations-augmented Phillips curve suggests that in the short run, higher government
spending can reduce unemployment. However, this is at the expense of higher inflation. The rise
in inflation means real wages and real profits have not risen. Some workers become voluntarily
unemployed and some are made redundant. Unemployment returns to the natural rate
of unemployment.
2 B Lower taxation and a lower interest rate will increase aggregate demand. This would raise the price
level and increase spending on imports.
3 D An increase in the rate of interest would offset the expansionary effect of lower taxation, possibly
leaving aggregate demand and employment unchanged. A, B and C are all likely to increase
aggregate demand and may cause an increase in inflation.
4 B Quantitative easing increases the quantity of money in the economy, which would be expected to
increase aggregate demand. A is a contractionary monetary policy measure. C is a fiscal policy
measure and D is a supply-side policy measure.
5 A An increase in government spending on education would reduce inflation in the long run. This is
because it could increase productivity and lower costs of production. B would add to aggregate
demand but not directly increase aggregate supply. C would mean that aggregate demand may
increase by a significant amount as a result of an injection. D would mean that inflation is already
likely to be high.
6 D A, B and C are all likely to increase aggregate supply. A and B will create a greater incentive to
work and enterprise. C will be likely to reduce costs of production and increase the reliability of
production. In contrast, an increase in the rate of interest may reduce investment and so lower
productive capacity.
7 C Automatic stabilisers smooth out fluctuations in economic activity. They do not balance the
internal and external value of money or ensure that government spending equals tax revenue. They
result in a lower and not higher tax revenue during a recession.
8 A A structural deficit is the deficit that will occur even when the economy is operating at full
employment. In this case, the full employment deficit would be $190bn − $70bn − $20bn.
9 D If investment becomes more interest inelastic, it means that a change in the rate of interest will
cause a greater percentage change in investment. This means lowering or raising the rate of interest
will have a significant effect on aggregate demand. To increase the effectiveness, consumption
should also become more interest elastic. Monetary policy works through changes in the interest
rate and the money supply rather than directly targeting income.
10 B Higher tariffs are likely to increase tax revenue. This can be used to finance extra government
spending. An increase in government spending will raise aggregate demand. This could reduce
cyclical unemployment. Government spending on education, training and infrastructure could
reduce frictional and structural unemployment. A would increase unemployment in those who
lose their jobs in declining industries and who cannot find jobs in other industries. C would reduce
exports, which would counter the reduction in imports. D could increase the costs of production
of domestic firms which could decrease demand for domestic products. This could reduce the
country's output and increase unemployment.

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Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions: Essay

2 Learners' answers might include:
Knowledge and understanding
* description of government policy tools that can be used to reduce unemployment.
* how inflation can be linked to unemployment through changes in aggregate demand and aggregate
supply.
Analysis points
* what the traditional Phillips curve suggests about the trade-off between reducing unemployment
and increasing inflation.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Think like an economist

Learners' answers might include:
1 A surplus. The financial account balances out the current and capital accounts. The current account
is in deficit and the capital account balance is likely to be low. There is also a net outflow of profits,
interest and dividends which suggest an inflow of direct investment, portfolio investment and loans.
2 Yes, India should diversify the service sector as it is heavily dependent on one service, software services,
and on three main destinations.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Activity 48.4
Learners' own answers.

Exam-style questions: Multiple choice

1 B The purchase and sale of shares between countries appears in the financial account as portfolio
investment. It is the income earned and paid on portfolio and direct investment and loans that
appears in the primary income balance of the current account.
2 C An increase in corporate tax may reduce an inflow of direct investment which would reduce a
surplus on the financial account of the balance of payments. A, B and D are all likely to encourage
more multinational companies (MNCs) to set up in the country and foreigners to buy shares in the
country's firms and so increase the surplus. A would be expected to raise the skills of workers.
B would be likely to increase aggregate demand and so profits. D would provide a financial
incentive for MNCs to set up in the country.
3 C Investment in a branch abroad is direct investment and appears in the financial account.
Copyrights are non-produced, non-financial assets. The purchase of copyrights is one of the items
in the capital account.
4 B The trade balance is - $4m and the effect on the financial account is + $6m, totaling $2m.
5 B A government subsidy involves government spending and so may be regarded as a fiscal policy
tool. The subsidy could also be designed to reduce imports of steel and so may be a protectionist
policy tool. A is an exchange rate policy tool if brought about by the action of a central bank and
C is a monetary policy tool. D is a protectionist policy tool but not a fiscal policy tool.
6 D If 10 000 cars, for example, are usually imported in each year and a quota is set at 12 000 cars
a year, there will be no effect on the number of cars imported. A and C would increase the
effectiveness of the quota. B would have no impact on its effectiveness.
7 D The balance of payments should balance. If there is a deficit on the current account, the other two
components should have an overall surplus. A deficit will reduce aggregate demand which is likely
to increase unemployment. It is also likely to cause an appreciation of the currency.
8 A An increase in a country's interest rate may reduce consumption as it will be more expensive to
borrow and more rewarding to save. It may increase the exchange rate as it may attract hot money
flows. A higher interest rate may increase government spending as more will have to be paid in
interest on the national debt. It is more likely to increase the exchange rate. It will be likely to
reduce lending and increase saving.
9 C An expenditure-reducing measure is one designed to decrease imports and increase exports by
reducing domestic spending on all goods and services, wherever they come from. It does not
discriminate between imports and domestically produced products. A limit on bank lending
would be likely to reduce borrowing and spending on products from all sources. A, B and D are
all expenditure-switching measures, designed to encourage spending to switch from foreign to
domestically produced goods and services.
10 B An expenditure-switching policy may increase employment by raising exports. Both expenditure-
switching and expenditure-reducing policies may increase a current account surplus but this will
not be their aim. An expenditure-reducing policy may reduce economic growth and inflation.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' answers might include:
1 It would be expected that the price of the somoni would have fallen. It had been coming under
downward pressure. More imports were purchased which would have increased the supply of
the currency.
2 Learners' own answers.

Activity 49.4
Learners' own answers.

Exam-style questions: Multiple choice

1 D She would initially have sent home $300 × 10 rupee = 3000 rupee. After the devaluation she would
have sent home $300 × 15 rupee = 4500 rupee.
2 A A revaluation will increase the price of the country's exports and lower the price of imports.
Higher expenditure on imports would reduce a current account surplus. A lower price of imports
would lead to higher demand for imports. For this demand to be met, it is important that more
imports can be supplied. B is not significant as the country's output would not need to increase.
C and D would be likely to increase the current account surplus.
3 D A devaluation is likely to increase the domestic price level as the price of imported raw materials
and capital goods will increase and aggregate demand will rise. So, a government is unlikely to
want to devalue the currency when there is high inflation. In contrast, it may want to devalue the
currency when unemployment is high. This is because a devaluation may increase net exports
which could create more jobs.
4 D A central bank will be responsible for maintaining the exchange rate at its target price. The central
bank may finance a budget deficit, but it does not try to influence the size of the budget deficit.
An improvement in the terms of trade may involve either the exchange rate rising in value or the
internal value of the currency falling. The first is what the central bank is trying to avoid in the
case of a fixed exchange rate and the second would put downward pressure on the currency, again
something the central bank would try to avoid. The central bank may provide loans to commercial
banks but not to firms and households.
5 B Reserves are used to support a currency's price when it is under downward pressure. The reserves
will be used to purchase the currency to maintain its price. A decrease in workers' remittances
received from other countries would result in a reduction in demand for the currency. Less foreign
currency would be sold to purchase the domestic currency. A, C and D would all put upward
pressure on the exchange rate. In these cases, the central bank may sell the currency to keep its
price down. The foreign currency gained would be added to the reserves.
6 B Downward pressure on the currency occurs when the demand for the currency falls and/or the
supply of the currency rises. A net outflow of primary income would increase the supply of the
currency on the foreign exchange market. For example, interest paid on deposits held in the
country's banks by residents of other countries will require foreign currency to be purchased.
A would increase demand for the currency as the loans would be given in the domestic currency.
C would decrease the supply of the currency and D would be likely to increase demand for
the currency.
7 C An exporting firm can take advantage of devaluation by allowing its prices, in terms of foreign
currency, to fall. This is because it is likely to gain higher sales and increased revenue when it is
converted back into the domestic currency. It could also keep the price the same in terms of the
foreign currency. This would mean its sales would be unlikely to change. In this case, its revenue
in terms of foreign currency would also be unchanged but a higher value will be earned when it is
converted back into the domestic currency.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activities
Activity 50.1
Learners' own answers.

Think like an economist

Learners' discussion might include:
1 Among the range of policy tools are increased government spending on healthcare, education and
training, increased state benefits, anti-discrimination legislation and a progressive tax system.
2 Learners' own answers.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Activity 50.4
Learners' own answers.

Exam-style questions: Multiple choice

1 A If income has become more unevenly distributed, it is possible that most people may not have
benefited from the higher income. B would mean that real income has risen, which will be more
beneficial than just a rise in nominal income. C would result in a rise in GNI per head. D would be
likely to increase the quality of life, at least in the short run.
2 D Country D is likely to have the highest level of development as it has the highest income per head,
the joint highest % of the population with access to the internet and the smallest percentage of the
population who are homeless.
3 A This is a definition of purchasing power parity. D is a definition of the real exchange rate. In
the case of B, a floating exchange rate may move to a position where there is equilibrium on the
current account of the balance of payments. In the case of C, there is no exchange rate which will
ensure that incomes in two trading partners are equal.
4 A A decrease in the death rate is likely to be associated with an increase in life expectancy. A higher
life expectancy would increase the HDI value. An increase in emigration is likely to reduce output
by more than population as emigrants are often of working age. A reduction in average years of
schooling would directly reduce the HDI value and a recession would reduce the HDI value as it
will lower GNI per head.
5 D Over time, life expectancy increases in most countries. If life expectancy stays the same in one
country, it is likely to be overtaken by other countries. Expected years of schooling is usually
greater than mean years of schooling as the number of years of schooling usually increases over
time. If GNI falls by less than population, it means that GNI per capita has increased which may
have caused a rise in relative development. Income distribution is not included in HDI.
6 B High productivity can result in high income per head. The other three characteristics are more
likely to be found in a country with low development. A country with high development will be
likely to have high income per head, high investment and a high literacy rate rather than a high
illiteracy rate.
7 B Sanitation is one of the indicators of living standards in the MPI. It does not appear in the HDI.
Leisure time appears in MEW but not in either MPI or HDI. Years of schooling appears in both
MPI and HDI. Tax revenue does not appear as an item in either MPI or HDI.
8 C While HDI takes GNI per head into account, MEW starts with GDP.
9 D An increase in income per head will directly increase HDI and MEW. It is likely to decrease MPI
as for example health and nutrition are likely to improve.
10 D The Kuznets curve suggests that as countries develop, income inequality first increases, peaks and
then decreases. The initial rise in inequality could be seen as unfair. A is the Phillips curve, B the
J curve and C is an environmental Kuznets curve.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 51.3
Learners' own answers.

Activity 51.4
1 Percentage of the population % share of income Cumulative % of income

Poorest 20% 7 7

Next poorest 20% 14 21

Middle 20% 18 39
Next richest 20% 23 62

Richest 20% 38 100

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

80
Cumulative percentage of income

60

40

20

0 20 40 60 80 100
Cumulative percentage of population
Lorenz curve showing income distribution in Sweden, 2015

Think like an economist

Learners' own answers.

Activity 51.5
Learners' own answers.

Exam-style questions: Multiple choice

1 A There would have been 12 (28 - 16) more people per thousand. So, the increase in population
10 m
would have been × 12 = 120 000.
1000
2 C If children have to spend longer in school, the cost of raising children will increase. This may
discourage some people from having children. A, B and C are all likely to increase the birth rate.
3 D A country with a high level of development is likely to have a low population growth rate. A, B
and C are all likely characteristics of a country with low development.
4 A If income is more evenly distributed in Country Y, more of the country's residents may have access
to good healthcare. B, C and D would all be likely to result in lower life expectancy in Country Y.
5 B A greater quantity or quality of resources will mean that a higher output could be produced for
any given level of population.
6 A A rise in a country's Gini coefficient indicates that income inequality has risen and vice versa.
Income is still more unevenly distributed in Country Z, although the gap in inequality has
narrowed. The Gini coefficient does not show how income has changed in absolute amount nor
how the total income in one country compares with the total income in another country.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Activity 52.2
Learners' own answers.

Think like an economist

Learners' own answers.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Activity 52.4
Learners' own answers.

Exam-style questions: Multiple choice

1 C If a country has a large supply of unskilled labour, it may be beneficial to help the country build
up a labour-intensive industry. A would not have a direct influence on the outcome. B would make
it more likely that the country's workers would be able to make full use of the capital equipment.
D would be a possible reason why the country could not afford the capital equipment and would
need assistance to obtain it.
2 A A decrease in the country's infant mortality rate would indicate an improvement in healthcare and
so an increase in development. Higher tax revenue and greater price stability are more likely to
promote economic growth and development rather than the opposite. A fall rather than a rise in
the death rate would indicate higher development.
3 C The demand for and the supply of primary products tend to be inelastic. This means that any
change in demand and supply will have more of an impact on price rather than on quantity
traded. If, for example, there is a good harvest of cherries, the price of cherries may fall by a
considerable amount.
4 C An increase in external debt will mean that there will be the need to repay more to the country's
lender. This money represents a claim on the country's resources as it can be used to buy some
of its goods and services. More interest will have to be paid. Demand-pull inflation may occur as
there will be money in the country. The more the country owes, the less people and institutions are
likely to be willing to lend to it.
5 A Repaying debt involves money leaving the country. It will benefit those who receive the payments.
B, C and D will be likely to result in both higher economic growth and an improvement in
living standards.
6 A A decrease in the country's exchange rate would increase the amount the government would have
to repay in its own currency. For instance, if the exchange rate was initially 5 rupees = $1, the
government would have expected to repay 100 million rupees. If the exchange rate fell to
8 rupees = $1, it would now have to repay 160 million rupees. B would reduce the cost of the
loan, C would make it easier for the country to repay and D does not directly affect the cost of
the loan or the country's ability to repay the debt.
7 D An MNC is a firm that has its headquarters in one country that produces in another country or
countries. A, B and C are examples of firms and a school selling goods and services to another
country rather than producing in another country.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners' own answers

Exam-style questions: Multiple choice

1 D An increase in protectionism is likely to reduce the growth of international trade. A would be likely
to increase foreign direct investment. B would be likely to increase international trade and C would
be likely to increase the development of a single international labour market.
2 D Tighter immigration controls could make it more difficult for workers to move to another country.
B, C and D would increase the international mobility of labour.
3 A Globalisation can allow countries to concentrate on what they are best at producing. Globalisation
is likely to reduce tariff revenue as one of the reasons why the world is becoming one market is the
removal of trade restrictions. C and D would be likely to reduce output.
4 B An external debt to GDP ratio can change as a result of globalisation although the direction of
change each country may experience is uncertain. It is not, however, an indicator of globalisation.
A, C and D are all indicators.
5 C Low-income countries tend to lack capital goods and saving. An increase in the capital-to-labour
ratio would suggest a country has more capital goods and that, on average, each worker is working
with more capital equipment. More saving would provide more funds for investment.
6 A If the country's firms become less competitive because of the removal of trade protection,
aggregate demand is likely to decrease as fewer exports will be sold. As a result, cyclical
unemployment will increase. Some industries will decline causing structural unemployment.
Frictional unemployment is unlikely to be affected.
7 B The removal of a high external tariff would mean entering the customs union would result in
imports from the customs union falling in price by a significant amount. A small cost difference
would mean that before entry, the products of other member countries may have been only slightly
higher in price. Now, without the imposition of a tariff, they may be more price competitive.
8 C A free trade area removes tariffs between member countries but allows the members to decide their
own tariff barriers on non-members. Both a customs union and a full economic union require
member countries to impose the same external tariff.
9 A If a country is a member of a monetary union or a full economic union, it will not be able to set
its own exchange rate and interest rate. Population policy is not determined by a trade bloc. Most
members of a trade bloc usually have a similar income per head and are geographically close.
10 D A country in a monetary union would not have its own currency. It would not have its own
currency to devalue and so a current account deficit could continue. A current account deficit
would reduce aggregate demand. This may result in cyclical unemployment and a reduction in
inflationary pressure.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

d Learners' answers might include:

Knowledge and understanding
* definition of HDI.
* definition of living standards of a country.
* the HDI is a well-known measure of living standards.
Analysis points
* the HDI measures three of the key influences on living standards of a country.
* what a long life expectancy suggests about living standards.
* what a high number of mean and expected years of schooling would suggest about living
standards.
* how a high GNI per capita can affect living standards.
Evaluation points
* actual and expected educated years may turn out to be different.
* the HDI is a well-established measure that has been used since 1990 and is a better measure of
living standards than GNI or GDP per capita on its own.
* what influences on living standards the HDI does not take into account.
* the significance of HDI being based on averages.
* there are other measures, for example MEW and MPI, but they all have their shortcomings.

Exam-style questions: Essay

2 Learners' answers might include:
Knowledge and understanding
* definition of external debt.
* interest has to be paid and eventually the sum borrowed has to be repaid.
* definition of economic growth.
* a high level of external debt means that debt is high as percentage of a country's GDP.
Analysis points
* the connection between the level of savings and external debt.
* how external debt can help a country increase its economic growth rate.
But
* opportunity cost of servicing and paying off external debt.
* relationship between a high level of external debt and foreign banks', foreign governments' and
international organisations' reluctance to lend to the country.
* effect of a high level of external debt on a country's credit rating.
* how an upward spiral may arise.
Evaluation points
* whether a high external debt would make it more difficult for a country to increase its economic
growth rate will depend on what the money has been borrowed for.
* a high external debt will be less of a problem when the rate of interest is low. This could be an
appropriate time for a low-income country to borrow.
* why some high-income countries are able to sustain high levels of external debt.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021

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ASAL Economics Coursebook Answers - Free ebook download as PDF File (.pdf), Text File (.txt) or read book online for free.

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BUSINESS PLAN

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Cambridge International AS  A Level Business Coursebook  4th edition (Peter Stimpson, Alastair Farquharson) (1)

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What are business aims and objectives - Setting business aims and objectives - AQA - GCSE Business Revision - AQA - BBC Bitesize

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Learn about and revise business aims and objectives with BBC Bitesize GCSE Business - AQA.

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KEY TERMS

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Cambridge International as and a Level Business Workbook Answers - PDFCOFFEE.COM

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Citation preview Answers Unit 1  Business and its environment 1 Enterprise Key skills exercises 1-8 See textbook for all answers. 9 One reason is that Sami wants to be independent by owning his own business. [K] This is shown by the fact that 'he feels he is being watched over all the time by his manager' which does not give him any independence at all.

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This is the most common question been asked by the Edexcel & Cambridge A Level Students of Business. Good news is that I have opened the Student Forum. There you can find the Exam Style Answers (A Level Business). You can also post your own questions there too.

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We will gradually cover all Exam Style Questions from the following chapters. Major Reference is from the book of Peter Stimpson and Alastair Farquharson:

1: Enterprise - Exam Style Answers

2: Business structure - Exam Style Answers

3: Size of business - Exam Style Answers

4: Business objectives - Exam Style Answers

5: Stakeholders in a business - Exam Style Answers

6: Business structure (A Level) - Exam Style Answers

7: Size of business (A Level) - Exam Style Answers

8: External influences on business activity (A Level) - Exam Style Answers

9: External economic influences on business behavior (A Level) - Exam Style Answers

10: Management and leadership - Exam Style Answers

11: Motivation - Exam Style Answers

12: Human resource management - Exam Style Answers

13: Further human resource management (A Level) - Exam Style Answers

14: Organisation structure (A Level) - Exam Style Answers

15: Business communication (A Level) - Exam Style Answers

16: What is marketing? - Exam Style Answers

17: Market research - Exam Style Answers

18: Th e marketing mix - product and price - Exam Style Answers

19: Th e marketing mix - promotion and place - Exam Style Answers

20: Marketing planning (A Level) - Exam Style Answers

21: Globalization and international marketing (A Level) - Exam Style Answers

Unit 4 Operations and project management

22: Th e nature of operations - Exam Style Answers

23: Operations planning - Exam Style Answers

24: Inventory management - Exam Style Answers

25: Capacity utilization (A Level) - Exam Style Answers

26: Lean production and quality management (A Level) - Exam Style Answers

27: Project management (A Level) - Exam Style Answers

Unit 5 Finance and accounting

28: Business finance - Exam Style Answers

29: Costs - Exam Style Answers

30: Accounting fundamentals - Exam Style Answers

31: Forecasting and managing cash flows - Exam Style Answers

32: Costs (A Level) - Exam Style Answers

33: Budgets (A Level) - Exam Style Answers

34: Contents of published accounts (A Level) - Exam Style Answers

35: Analysis of published accounts (A Level) - Exam Style Answers

36: Investment appraisal (A Level) - Exam Style Answers

Unit 6 Strategic management

37: What is strategic management? (A Level) - Exam Style Answers

38: Strategic analysis (A Level) - Exam Style Answers

39: Strategic choice (A Level) - Exam Style Answers

40: Strategic implementation (A Level) - Exam Style Answers

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This is the most common question been asked by the Edexcel & Cambridge A Level Students of Business. Good news is that I have opened the Student Forum. There you can find the Exam Style Answers (A Level Business). You can also post your own questions there too.

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Cambridge International AS  A Level Business Coursebook  4th edition (Peter Stimpson, Alastair Farquharson) (1)