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Economics Mock Exam
Question Paper
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Question 1
1. Explain how the value of the cross price elasticity of demand (XED) for a [10]
particular good is determined by its relationship to other goods.
2. Examine the significance of both cross price elasticity of demand and income [15]
elasticity of demand for a firm.
Question 2
1. Explain why monopoly power may be considered a type of market failure. [10]
2. Examine the role of barriers to entry in making monopoly a less desirable [15]
market structure than perfect competition.
Question 3
1. Explain the possible impact of an increase in wealth and consumer confidence [10]
on aggregate demand.
2. Examine why, in contrast to the monetarist/new classical model, the economy [15]
will not automatically return to the full employment level of output in the
Keynesian model.
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Question 4
Japan–European Union Economic Partnership Agreement (JEEPA)
1. In July 2017, the Japan–European Union Economic Partnership Agreement

(JEEPA) was announced and it may come into force in 2019. Jointly, Japan
and the European Union (EU) currently account for 28 % of global gross
domestic product (GDP). The trade agreement could raise the EU’s exports
to Japan by 34 % and Japan’s exports to the EU by 29 %. Economists say
that this trade agreement marks a determined effort to combat rising
protectionism and sends a powerful signal that cooperation, not trade
protection, is the way to tackle global challenges.
2. The largest benefit to Japan will be for Japanese car manufacturers, as

Europe will gradually lower tariffs from 10 % on Japanese cars. Car tariffs
are a big concern for Japanese car manufacturers, who struggle to
compete with South Korean car manufacturers. South Korean cars are sold
to the EU tariff-free thanks to a free trade agreement signed in 2011.
Within Europe, car manufacturers are one of the largest sources of jobs.
Car manufacturers in the EU are concerned that cutting tariffs on car
imports from Japan may lead to a large increase of Japanese cars into the
European market.
3. The trade agreement will also resolve non-tariff barriers, such as technical
requirements and regulations. More importantly, however, the EU and
Japan will make their environmental and safety standards on cars the
same, which will make trade easier.
4. Japanese politicians have been defending their relatively inefficient farmers

for a long time. Now, Japan will lower tariffs on European meat, dairy
products and wine, cutting 85 % of the tariffs on food products coming
into Japan. This includes removing the current 30 % tariff on some
European cheeses, such as cheddar and gouda cheese. However, imported
camembert cheese will face a quota. This may be because Japan produces
some camembert cheese.
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5. JEEPA is particularly alarming for United States (US) beef and pork farmers
because Japan has been the biggest export market for US beef and the
second biggest export market for US pork. Any preferential tariff that EU
farmers receive will make it much tougher for American farmers to sell
meat in Japan.
6. With this trade agreement, the EU and Japan are trying to promote the
values of economic cooperation and environmental conservation, which
are both important for long-term economic growth and sustainability.
However, JEEPA faces significant challenges because it will have to be
passed by the Japanese Parliament, the European Parliament and European
national governments. There is no guarantee that all governments will
agree to the economic partnership.
[Source: adapted from The Japan-EU Trade Agreement: Pushing Back Against
Protectionism, http://globalriskinsights.com,
15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by
Katherine Hyunjung Lee, Jul 12, 2017, Medill
News Service, https://dc.medill.northwestern.edu; and A new trade deal
between the EU and Japan, The Economist (London,
England), Jul 8th 2017, https://www.economist.com/finance-and-
economics/2017/07/08/a-new-trade-deal-between-the-eu-andjapan.
© The Economist Newspaper Limited, London, July 8th 2017]
1. Define the term quota indicated in bold in the text (paragraph [4]). [2]
2. Define the term sustainability indicated in bold in the text (paragraph [6]). [2]
3. Using an AD/AS diagram, explain the impact of the trade agreement between [4]
Japan and the EU (JEEPA) on Japan’s economic growth (paragraph [1]).
4. Using an international trade diagram, explain the likely impact of Japan [4]
“removing the current 30 % tariff” on the level of cheddar cheese imports.
(paragraph [4]).
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5. Using information from the text/data and your knowledge of economics, [8]
evaluate the possible consequences of the trade agreement between Japan
and the EU (JEEPA).
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Question 5
Pakistan and the International Monetary Fund
1. Pakistan is a low-income country with a rapidly growing population and

widespread poverty. As of 2019, it has a large budget deficit due to high
levels of military spending and high costs of debt servicing (35 % of the
deficit is interest payments). It is also experiencing a widening current
account deficit and is heavily dependent on foreign aid.
2. Pakistan’s government is negotiating a loan from the International

Monetary Fund (IMF). Amongst its conditions, the IMF has said that the
government must decrease private-sector regulation such as regulations
on financial institutions. The government must also sell state-owned
enterprises and government revenue must be raised by increasing indirect
taxes and improving tax collection systems. Furthermore, the IMF insists
that the government cuts its spending further.
3. The government has stated that the IMF loan is essential to restore
confidence in Pakistan’s economy. This would help to attract foreign direct
investment (FDI) to encourage economic growth and help break out of the
poverty cycle. High debt levels and slowing economic growth in 2018
discouraged FDI. The IMF loan is also needed to help persuade other
multilateral lenders such as the World Bank and the Asian Development
Bank to provide and extend loans.
4. In the past, Pakistan has had 21 agreements with the IMF with limited
success—any balance of payments or external debt improvement has been
temporary. The IMF states that this is because Pakistan has not always met
the conditions of the loans, while other stakeholders argue it was the lack
of support given to Pakistan to implement the conditions and to allocate
the loan funds appropriately.
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5. Economists say that there needs to be a focus on improving human

capital to provide the large number of young people entering the labour
force with the skills to grow businesses. The quality of education needs to
improve and to be combined with an effort to provide girls with greater
access to education—female participation in the labour force is the lowest
in the region.
6. The World Bank has financed education and infrastructure, such as

renewable energy projects, in poor regions of Pakistan. However, critics of
the World Bank argue that the projects are not making a significant
difference and the construction of hydroelectric dams leads to
environmental damage.
7. The government believes that the macroeconomic concerns of the IMF

should be addressed first, and poverty issues in Pakistan can be dealt with
later.
[Source: © International Baccalaureate Organization 2020.]
1. State two functions of the International Monetary Fund (IMF) (paragraph [2]). [2]
2. Define the term human capital indicated in bold in the text (paragraph [5]). [2]
3. Using a poverty cycle diagram, explain how the government of Pakistan could [4]
intervene to “break out of the poverty cycle” (paragraph [3]).
4. Using an externalities diagram, explain how “greater access to education” for [4]
girls in Pakistan could reduce market failure (paragraph [5]).
evaluate the potential impact of the IMF and the World Bank on economic
development in Pakistan.
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Question 6
1. Explain the concepts of consumer surplus and producer surplus. [10]
2. Examine the view that the best allocation of resources, from society’s point of [15]
view, occurs where the marginal private benefit equals the marginal private
cost.
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Question 7
Current account deficit poses a challenge to Pakistan’s economy
1. The president of Pakistan has expressed his concern at the significant

increase in Pakistan’s current account deficit. The current account deficit
grew to US12.12billioninthef iscalyearof 2016/17comparedtoU S
4.86 billion in 2015/16. The deficit was caused by rising imports and falling
exports. The increasing current account deficit may result in Pakistan
having to request a new International Monetary Fund (IMF) loan to fund
the deficit. To avoid this, the president is proposing that the importing of
luxury, non-essential items needs to be reduced.
2. The governor of Pakistan’s central bank agreed with the president’s

concern. He said that the “rapidly growing current account deficit is the
biggest challenge facing the country’s economy”. He agreed that the
problem is made worse because many non-essential imports are being
purchased, which requires borrowing from abroad. However, he stressed
that while rising non-essential imports are a problem, “32 % of imports are
capital goods” and are necessary for the continued growth of small to
medium enterprises (SMEs), agriculture, housing and construction.
3. Central bank advisors have also recommended depreciating the rupee

(Pakistan’s currency) to reduce the trade deficit. The value of the rupee is
currently controlled through a managed exchange rate system. It has been
suggested that the rupee is overvalued by as much as 20 %. However, the
central bank governor claims that a “depreciation has a number of
negative effects”.
4. In 2016, Pakistan’s economic growth reached 5.3 %, its highest point for 10
years. The government has estimated that it will be 6 % in 2017. According
to the central bank governor, loans to SMEs are currently only 7 to 8 % of
all loans to businesses in Pakistan. He believes that if loans to SMEs were
increased to 15 to 17 % of all loans to businesses in Pakistan, there would
be even higher economic growth.
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5. Along with the current account deficit, fiscal policy decisions have also led
to a significant budget deficit. The budget deficit increased in 2016,
resulting in greater public debt. The central bank recommends the
government’s debt to be limited to 60 % of gross domestic product (GDP).
[Source: adapted from Current account deficit may lead to IMF loan: FPCCI
chairperson, https://www.thenews.com.pk/
print/226102-Current-account-deficit-may-lead-to-IMF-loan-FPCCI-
chairperson and Current account deficit poses biggest
challenge to economy: SBP, https://www.thenews.com.pk/print/225481-
Current-account-deficit-poses-biggest-challenge-toeconomy-
SBP. Copyright © The News International, Karachi, Pakistan.]
1. List two functions of the central bank (paragraph [2]). [2]
2. Define the term fiscal policy indicated in bold in the text (paragraph [5]). [2]
3. Using an exchange rate diagram, explain how the central bank might [4]
depreciate the value of the rupee(paragraph [3]).
4. Explain the difference between a current account deficit and a budget deficit [4]
(paragraph [5]).
discuss the effects of the increasing current account deficit on Pakistan’s
economy.
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Question 8
1. Explain why governments impose price floors in the market for agricultural [10]
products.
2. Evaluate the effectiveness of government regulations in achieving a reduction [15]

in the consumption of demerit goods.
Question 9
1. Explain two causes of structural unemployment. [10]
2. Discuss the consequences of different types of unemployment. [15]
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Question 10
Angola and Namibia
1. Angola and Namibia are neighbouring countries on the west coast of

Africa.
Angola
2. Angola’s economy is driven by its oil sector. It is the second largest oil
producer in Africa. Oil production and its supporting activities contribute
about 50% of gross domestic product (GDP), more than 70% of
government revenue and more than 90% of the country’s exports.
Diamonds contribute an additional 5% to exports. Subsistence agriculture
provides the main livelihood for most people in Angola, but half of the
country’s food is still imported.
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3. Since 2005, the Angolan government has borrowed billions of US dollars

from China, Brazil, Portugal, Germany, Spain and the European Union (EU)
to help rebuild Angola’s infrastructure. The global recession that started in
2008 slowed economic growth. In particular, lower prices for oil and
diamonds during the global recession slowed GDP growth to 2.4% in 2009,
and many construction projects stopped.
4. Falling oil prices and slower than expected growth in non-oil sectors have
reduced growth prospects for 2015. Angola has responded by reducing
government subsidies and by proposing import quotas and making it
more difficult to import. Domestic fuel subsidies have been eliminated.
Corruption, especially in the mining sector, is a major long-term challenge.
Namibia
5. Namibia’s economy is heavily dependent on the mining and processing of

minerals for export. Mining accounts for 11.5 % of GDP, but provides more
than 50% of foreign exchange earnings. Namibia is a primary source for
high-quality diamonds. In addition, Namibia is the world’s fifth-largest
producer of uranium, produces large quantities of zinc and is a smaller
producer of gold and copper. The mining sector employs less than 2% of
the population. Namibia normally imports about 50% of its grain
requirements.
6. A high per capita GDP, relative to the region, hides one of the world’s most
unequal income distributions. The Namibian economy is closely linked to
South Africa with the Namibian dollar pegged one-to-one to the South
African rand. Namibia receives 30% to 40% of its revenues from the
countries in the Southern African Customs Union (SACU). Angola is not a
member of the SACU.
7. Namibia’s economy remains vulnerable to world commodity price

fluctuations and drought. The rising cost of mining diamonds, increasingly
from the sea, has reduced profit margins. Namibian authorities recognize
these issues and have emphasized the need for diversification.
Figure 1: Selected economic data for Angola and Namibia (2014)

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[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The

World Factbook, Country Reports,
Central Intelligence Agency, 2015; www.databank.worldbank.org, accessed 13
August 2015 and www.cia.gov, accessed 13 August 2015]
1. Define the term infrastructure indicated in bold in the text (paragraph 3). [2]
2. Define the term customs union indicated in bold in the text (paragraph 6). [2]
3. Angola and Namibia have different Gini coefficient values. Using a Lorenz curve [4]
diagram, explain what this means (Figure 1).
4. Using a demand and supply diagram, explain the effect on the price and [4]
quantity of fuel consumed in Angola, caused by the elimination of domestic
fuel subsidies (paragraph 4).
compare and contrast factors that are likely to lead to economic development
in Angola and Namibia.
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Question 11
1. Explain why there is a possible trade-off between the unemployment rate and [10]
the inflation rate in the short run.
2. Discuss the view that the redistribution of income is the most important impact [15]
that inflation has on an economy.
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Question 12
1. Relief as Kenya raises tariff for steel and iron imports [4]
1. Steel manufacturers in Kenya are set to benefit as the government moves

to protect the local manufacturing industry from cheap steel and iron
imports.
2. In 2014 a government official announced an increased tariff on steel and

iron imports. “Our steel mills are closing down due to unfair competition
from cheaper imported iron and steel products,” he explained. “To protect
and create more jobs in the iron and steel industries, tariffs on a wide
range of imported iron and steel products will be increased from 0 % and
10 % to 25 %,” he said. The government official further stated that as well
as protecting the local industries from cheaper imports, the protectionist
measures would raise an additional 2.6 billion Kenyan shillings (Kenya’s
currency) annually in government revenue and support economic growth.
3. The potential of local industries to expand and create jobs through trade
has been held back by a number of administrative barriers. The
government remains focused on improving the business environment.
Over the past six months, the government has made it easier to register a
company and trade across borders. The time taken to move goods out of
the main harbour has fallen sharply; non-tariff barriers such as roadblocks
have also been reduced. Importers of refined industrial sugar and wheat
are also pleased after the government scrapped requirements to pay
unnecessary administrative charges.
4. However, there is a belief among manufacturers that there is a need for

more deregulation to lower their costs of production and in effect reduce
the cost of doing business.
Kenya sees gross domestic product (GDP) growth picking up but current
account a concern
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5. Good economic growth rates in neighbouring countries like Uganda help

to boost Kenyan exports, particularly for agriculture that makes up nearly a
quarter of the Kenyan economy. The government suggests that the main
risks to growth are the slow performance of developed economies that are
key export markets for Kenyan goods and services, and Kenya’s large and
persistent current account deficit of over 10 % of gross domestic product
(GDP) in the last three years. This is a major concern for sustained
economic growth and the value of the Kenyan shilling.
[Sources: adapted from www.standardmedia.co.ke, 13 June 2014;

www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November
2013]
Question 13
1. Explain two factors that would lead to an increase in the demand for a product. [10]
2. Discuss the view that competitive markets will always achieve allocative [15]
efficiency.
Question 14
1. Explain how a natural monopoly may arise. [10]
2. Discuss how governments restrict monopoly power. [15]
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Question 15
1. Explain why a monopolistically competitive firm can make economic (abnormal) [10]
profit in the short run, but not in the long run.
2. Discuss the consequences of a perfectly competitive market becoming a [15]

monopoly market.
Question 16
1. Explain how an increase in investment might lead to economic growth. [10]
2. Discuss the possible consequences of economic growth on living standards, [15]

unemployment and inflation.
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Question 17
Trade war with the United States puts pressure on China’s currency
1. As a trade war between the United States (US) and China worsens, a
central bank official has said that China will not use its currency to deal
with trade conflicts and will continue with the market-based reforms of its
exchange rate system. In the past, the US has accused China of being a
currency manipulator that has maintained a fixed exchange rate to keep
the renminbi (RMB, China’s currency) undervalued. According to a US
trade official, “a depreciating currency is good for the Chinese economy”.
2. The value of the renminbi has fallen 9 % against the US dollar (US$) in the
past six months. Expansionary domestic monetary policy, concerns about
economic growth and an escalating trade war continue to put downward
pressure on the renminbi. Allowing the value of the renminbi to fall
suggests that the central bank is currently maintaining a managed
exchange rate rather than a fixed peg to the US dollar.
3. The cause of the lower value of the renminbi—aside from a slowdown in

Chinese economic growth—is a shrinking current account surplus. The US
has imposed tariffs on US$250 billion worth of Chinese imports. The US
president has also threatened to impose tariffs on the remaining imports
from China. This, along with a widening trade deficit in services, caused
mainly by the rise in Chinese tourists travelling abroad, would further
reduce China’s current account surplus. In 2017, China’s current account
surplus was 1.6 % of gross domestic product (GDP). By the first quarter of
2018, the surplus became a small deficit.
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4. There is international concern about the potential damage that a

prolonged trade war with the US could cause to the Chinese economy.
Central bank officials in China are concerned about the depreciating
currency but are trying to avoid central bank intervention. To support the
export sector, the Chinese government is considering measures such as
subsidies and exemptions from some indirect taxes. These measures, along
with a falling renminbi will allow Chinese exporters to avoid passing on
some of the tariff costs to US consumers.
5. To complicate matters for China, economic growth in the US is causing US

interest rates to rise and the US dollar to strengthen. This, along with
China’s first current account deficit in 20 years, is negatively affecting
China’s financial account. Responding to the rising US interest rates with
increases of its own is not a good option for China’s central bank, because
Chinese companies have a heavy debt burden that is slowing economic
growth. Recently, a government official advised against increasing China’s
interest rate because of its impact on borrowing costs in China.
[Source: Michael Smith, The Australian Financial Review, 2018. China risks
further US fire as currency hits 10-year low. [online] Available at:
https://www.afr.com/markets/currencies/china-risks-further-us-fire-as-
currency-hits-10year-low20181030-h17agp [accessed 30 October 2018]. Source
adapted.
Financial Times: Tom Mitchell, 2018. US rate rises compound trade pressure on
China. Available at: https://www.ft.com/content/27a73392-c534-11e8-bc21-
54264d1c4647 2 October. Used under license from the Financial Times. All
Rights Reserved. [Accessed 1 October 2018]. Source adapted.
Trading Economics, 2018. China Current Account. Available at:

https://tradingeconomics.com/china/current-account [accessed 31 October
2018]. Source adapted.]
1. Define the term fixed exchange rate indicated in bold in the text (paragraph [1]). [2]
2. Define the term monetary policy indicated in bold in the text (paragraph [2]). [2]
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3. Using an exchange rate diagram, explain why the “widening trade deficit in [4]
services” could lead to a depreciation of the renminbi (paragraph [3]).
4. Using an AD/AS diagram, explain how “increasing China’s interest rate” could [4]
affect its economic growth (paragraph [5]).
discuss the view that a depreciating currency is good for the Chinese economy.
Question 18
1. Explain why demerit goods are an example of market failure. [10]
2. Evaluate the effectiveness of using indirect taxation to correct market failure. [15]
Question 19
1. With reference to the concept of excess demand, explain how a decrease in [10]
supply of a good would lead to a new market equilibrium.
2. A government decides to impose an indirect tax on unhealthy drinks. Discuss [15]

the consequences for the stakeholders in these markets.
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Question 20
1. Explain the cause of cyclical (demand-deficient) unemployment. [10]
2. Discuss the view that the most significant consequence of unemployment is the [15]
loss of tax revenue for the government.
Question 21
1. Explain why a government might decide to impose a price ceiling on goods [10]
and services such as essential foods or rented housing.
2. Evaluate the view that the most effective way in which the government can [15]
encourage the consumption of merit goods is through direct provision.
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Question 22
Australian economy feels the effects of falling iron ore price
1. Iron ore is Australia’s largest export and the double effect of slowing
growth in China and higher levels of production in Australia has driven the
price of iron ore lower. In addition, the Australian dollar (AU
)hasexperienceda10). These two factors combined have caused a
dramatic worsening in the current account.
2. Australian mining companies are losing significant revenue from falling

commodity prices and this is further worsened by the rapidly depreciating
currency. The Australian dollar traded at US$0.7375 on Wednesday, nearly
at a six-year low.
3. Australia recorded a monthly balance of trade deficit of AU

2.61billioninM ay2015, comparedwithadef icitof AU 1.61 billion a
year earlier. The increasing deficit in Australia’s balance of trade is an
indicator of potential declines in growth and employment, according to a
foreign currency expert.
4. The price of iron ore has fallen more than 67% between February 2013 and
July 2015. In Australia, falling iron ore prices create downward pressure on
economic growth. Australia’s real gross domestic product (GDP) grew 2%
in 2015, down from 2.5% in 2014. Some economists noted that falling
commodity prices reduced Australia’s export revenues by more than 2% of
GDP in 2015.
5. An expanding group of Australian-based economists argue that the central

bank should further cut interest rates because of global economic
uncertainty, falling commodity prices, weak consumer demand, and
persistent weakness in non-mining sectors, such as tourism and education
exports. Australia has been a popular destination for tourists and attracts
many international students.
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[Sources: Sydney Morning Herald: adapted from

http://www.smh.com.au/business/markets/china-panic-feeds-into-
australiansharemarket-20150708-gi7nyk.html
Marketwatch: adapted from www.marketwatch.com, accessed 26 July 2015.
Reprinted with permission of MarketWatch, Copyright © 2015 Dow Jones &
Company, Inc. All Rights Reserved Worldwide.]
1. Define the term depreciation indicated in bold in the text (paragraph 1). [2]
2. Define the term current account indicated in bold in the text (paragraph 1). [2]
3. Using an exchange rate diagram, explain why “slowing growth in China” may [4]
have caused a depreciation of the Australian dollar (paragraph 1).
4. Using a demand and supply diagram, explain why “the double effect of slowing [4]
growth in China and higher levels of production in Australia has driven the
price of iron ore lower” (paragraph 1).
discuss the possible consequences for the Australian economy of the fall in the
value of the Australian dollar.
Question 23
1. Explain why governments provide subsidies. [10]
2. Evaluate the effectiveness of price floors in achieving a reduction in the [15]

consumption of demerit goods.
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Question 24
Sri Lanka’s economic reforms
1. After Sri Lanka’s 25-year civil war ended in 2009 it became one of the
world’s fast-growing emerging markets, helped by billions of US dollars
worth of infrastructure investment from China. Sri Lanka’s new government
plans to implement a range of market-oriented policies to open up its
financial system, liberalize the Sri Lankan rupee (Sri Lanka’s currency) and
make new trade deals with both India and China.
2. Sri Lankan economists and corporate leaders are urging “tough” economic
decisions, reducing the bureaucracy and eliminating costly inefficiencies in
state enterprises. 300 state-owned firms dominate the economy, and there
is pressure for them to enhance their competitiveness. One realistic option
is a policy of privatization. Another policy is the establishment of 46
economic zones across the country with low tax rates. This should
encourage the private sector to invest in setting up these zones.
3. Improving infrastructure is also a priority. Power supply is unreliable and

broadband speeds are slow in rural areas.
4. Another priority is to reduce controls on exchanging currency. Sri Lankans

find it difficult to obtain foreign exchange, limiting tourism and business
overseas. Improving access to foreign currencies would make people’s
lives easier and encourage more business.
5. On a positive note, improved international relations has increased tourism.

To take advantage of this, the government should now implement a
strategy to further promote tourism.
6. A major challenge for the government is that more than 25% of the
population lives below US$2.50 per day. This is caused largely by the fact
that 30 % of the population is involved in agriculture, which contributes
less than 10% of gross domestic product. In addition, tackling youth
unemployment and increasing household incomes are challenges.
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7. But perhaps the greatest problem confronting the government is the

country’s massive debt burden, which is equivalent to 700% of its tax
revenue. This creates a significant debt servicing problem, especially
because much of the debt is foreign owned.
8. Another problem is a current account crisis. Sri Lanka needs to replace its
reliance on payments from Sri Lankans employed overseas with export
revenues. And instead of relying on borrowing from overseas to finance its
current account deficit, the country needs to attract foreign direct
investment.
9. There is also a need for the government to try to improve the ability for
companies to do business, such as by reducing the time it takes to register
a business and by improving access to credit for small companies, which
would significantly stimulate the economy. Business confidence has to
improve in order to stimulate new investments and economic growth.
[Sources: adapted from Sunday Times, Sri Lanka, www.sundaytimes.lk, 23

August 2015, and
James Crabtree, 2015, Sri Lanka plans ‘big bang’ reforms, Financial Times,
www.ft.com, 19 August. Used under licence from the Financial Times. All Rights
Reserved.]
1. List two characteristics of an economically less developed country. [2]
2. Define the term privatization indicated in bold in the text (paragraph 2). [2]
3. Using a production possibilities curve (PPC) diagram, explain how “billions of [4]
US dollars worth of infrastructure investment from China” may affect potential
economic output (paragraph 1).
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4. Using a definition of the term opportunity cost and information from the text, [4]
explain how the servicing of debt has an opportunity cost that may affect
economic development in Sri Lanka.
discuss the possible effects of the proposed market-oriented reforms on Sri
Lanka’s economic development.
Question 25
1. Explain the causes of economic growth in terms of an increase in actual output [10]
and an increase in potential output.
2. Discuss the view that the consequences of economic growth are always [15]
beneficial.
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Question 26
Zambia’s reliance on copper exports
1. Due to its economic success, Zambia has recently been classified as a

middle-income country by the World Bank. According to the United
Nations (UN) classification, Zambia is in the medium human development
category. However, outside mining and export areas, the standard of living
remains extremely low for Zambians.
2. Zambia is one of the world’s top producers of copper. The country’s

economy is reliant on copper exports, which make up 80% of export
earnings. Mining employs approximately 90 000 people and contributes
approximately 25–30% of government revenue in Zambia.
3. From 1997 to 2013, mining attracted US$12.6 billion in foreign direct

investment, helping Zambia become one of Africa’s top economic
performers, with average annual gross domestic product (GDP) growth of
6.4% over the last decade.
4. But now foreign and local businesses, including giant multinational mining
corporations and small Zambian companies, have been hit hard by a rapid
fall in the price of copper. In January 2015, the price reached a five-and-a-
half year low of approximately US
5353pertonne, belowtheestimated ∗ ∗marginalcost ∗
∗of productionof U S 5500. Sadly for many domestic Zambian mines,
their marginal costs are even higher because their mines are old, deep and
expensive to operate.
5. The fall in commodity prices is linked to the slowdown in Chinese

economic growth. China accounts for 45% of global copper consumption.
The situation highlights the vulnerability of Africa’s resource-dependent
nations to changes in China’s economy. This is an indicator of the need for
Zambia to diversify its economy away from primary commodities. This will
require the government to implement structural reforms to improve the
supply side of the economy.
about:blank 28/52
6. Zambia is facing other economic problems as well as the falling price of

copper. Most of Zambia’s electricity is produced from hydropower, but a
severe drought has led to widespread power cuts, further threatening
copper mining. The power problems and fall in copper prices have driven
the Zambian kwacha (Zambia’s currency) to record lows due to a
widespread selling of currencies which are linked to commodities. It lost
17% of its value against the US dollar from December 2014 through to the
end of March 2015. The weakness of the Zambian kwacha is raising import
costs and feeding into inflation.
7. The governing Patriotic Front party, which has been in power since 2011,
attracted voters by promising to share the country’s mineral wealth more
equitably, raise wages and improve infrastructure. But now the
government is struggling to maintain fiscal discipline, as the budget deficit
has risen to an unacceptable level of approximately 10% of GDP.
8. There has also been much attention to the unsustainable mining practices
of foreign and domestic mines in Zambia. These have added to Zambia’s
challenges of poverty alleviation, economic growth and economic
development.
[Sources: adapted from www.reuters.com, 8 September 2015; Financial Times,

“Zambia’s copper belt reels as price falls”, 26 January 2015; Financial Times,
“Zambia bears the brunt of China’s economic slowdown”, 9 September 2015;
Wall Street Journal, “Copper Mine Shutdown Threatens Zambia’s Economy”, 3
August 2015 and World Bank, “Making Mining Work for Zambia”, 17 June 2015]
Figure 1 – Selected economic indicators for Zambia, Malawi, Sub-Saharan

Africa and middle income countries
about:blank 29/52
1. Define the term foreign direct investment indicated in bold in the text [2]
(paragraph 3).
2. Define the term marginal cost indicated in bold in the text (paragraph 4). [2]
3. Using an AD/AS diagram, explain how the falling value of the Zambian kwacha [4]
(Zambia’s currency) is “feeding into inflation” (paragraph 6).
discuss the possible impacts of Zambia’s reliance on copper production on its
economic development.
Question 27
1. Explain the impact that a fall in the world price of oil might have on aggregate [10]
supply and gross domestic product (GDP) in an economy.
2. Evaluate the view that economic growth is best achieved through [15]
improvements in technology.
about:blank 30/52
Question 28
Fiji’s challenges and opportunities
1. In 2016, the island nation of Fiji suffered from cyclone Winston (a tropical
storm), costing more than 40 lives and damaging its infrastructure. One of
the country’s four sugar mills was severely damaged, harming raw sugar
processing. Processed sugar is, in addition to bottled water and tourism, a
major export in Fiji. A recent study found that the damage from the
cyclone continues to have a lasting effect on communities as fisherwomen
report fewer and smaller crabs and fishes. The social safety net is limited
and there are calls for the government to help the citizens who have been
affected by the cyclone. However, the government had to use its budget to
rebuild infrastructure.
2. The government has prepared several strategies to strengthen the

economy. These include financial support for sugar cane producers,
diversification of its agricultural produce, better access to finance and
encouragement of investment. The government has committed to provide
equal opportunities for all: promoting the participation of women in
education and political leadership, because Fiji has one of the lowest
female participation rates in politics in the world.
3. To support its sugar cane farmers, the government provides a 55 % subsidy

on pesticides (products that kill weeds) used in farming. However, small
farmers are complaining about the excessive paperwork that needs to be
completed to receive the subsidy and there is potential for corruption. Fiji
competes with Brazil, which has an absolute advantage, in the world
market for sugar.
about:blank 31/52
4. To diversify, the government plans to expand the ginger and coconut

industries. Both industries are economically and environmentally
sustainable. The industries provide an increased number of Fijians with a
worthwhile income. Coconut production plays a very important role in Fiji’s
economy, particularly in the more isolated rural communities, where
formal employment is scarce and where alternative cash crops (crops
grown to be sold for profit) do not exist. Coconut is a staple food and is
vital for food security (ensuring that people have access to enough food),
but is also important for health, economic and cultural reasons. New
market opportunities have emerged in high-value products – green
coconut products, such as coconut water, are becoming increasingly
popular throughout the world.
5. The Asian Development Bank encourages Fijian farmers to access “green

finance”. These financial investments support economic development
through sustainable development initiatives and policies. Under the
government’s new reforms, farmers are able to use assets such as crops
and contracts as collateral for loans, creating improved access to finance.
However, to increase incomes, farmers will also need to improve their
financial knowledge.
6. To create an investment-friendly environment, the government must

develop more infrastructure, create market access through greater
economic integration and reduce asymmetric information between
farmers and wholesale buyers. Australia has decided to help Fiji by
financing infrastructure through grants and concessional loans.
1. Define the term absolute advantage indicated in bold in the text (paragraph [2]
[3]).
2. Define the term asymmetric information indicated in bold in the text [2]
(paragraph [6]).
3. Using a costs diagram, explain how the expansion of the coconut industry [4]
could lead to economies of scale (paragraph [4]).
about:blank 32/52
4. Using a production possibility curve (PPC) diagram, explain how damage to [4]
Fiji’s infrastructure has affected its production possibilities (paragraph [1]).
discuss the view that government intervention is the best way to achieve
economic development in Fiji.
Question 29
1. Using the concept of the multiplier, explain how an increase in investment [10]
might affect aggregate demand.
2. Discuss the effectiveness of supply-side policies in reducing unemployment. [15]
Question 30
1. Explain how an increase in unemployment might lead to a loss of gross [10]

domestic product (GDP) and a budget deficit.
2. Discuss the view that there will always be a trade-off between the [15]
unemployment rate and the inflation rate.
about:blank 33/52
Question 31
Economic development in Honduras and Guatemala
Honduras
1. Honduras is a developing country in Central America. While historically

dependent on the export of primary products, Honduras has more recently
diversified its exports to include clothing and automobile components.
Honduras’ economy depends heavily on exports to the United States (US)
and, to a lesser extent, on remittances (money sent by a foreign worker to
their home country).
2. In rural areas, approximately one out of five Hondurans lives in absolute

poverty. The country is also vulnerable to external shocks and has
experienced worsening terms of trade. Revenue earned by the agricultural
sector has decreased by one-third over the past two decades. This is
partially due to the declining prices of the country’s export crops,
especially bananas and coffee beans.
3. The Dominican Republic-Central America Free Trade Agreement (CAFTA-

DR) has helped attract foreign direct investment (FDI). However, a threat to
future FDI inflows is Honduras’ high level of crime and violence. It has one
of the highest murder rates in the world.
Guatemala
4. Guatemala shares a border with Honduras. Guatemala has the largest

population and the biggest economy in Central America. Guatemala is the
top remittance recipient in Central America as a result of large numbers of
Guatemalans living and working in the US. These inflows on the current
account are equivalent to two-thirds of the country’s export revenue and
about 10 % of its gross domestic product (GDP).
about:blank 34/52
5. The agricultural sector employs 31 % of Guatemala’s labour force. Key

agricultural exports include sugar, coffee, bananas and vegetables. The
CAFTA-DR has reduced the barriers to FDI, resulting in increased
investment and diversification of exports, particularly in iron, steel and
non-traditional agricultural exports (such as high-priced fruits and
vegetables). While the free trade agreement has improved the conditions
for investment, FDI continues to be limited by concerns over security, the
lack of skilled workers and poor infrastructure.
6. With some of the worst poverty, malnutrition and infant mortality rates in
the region, Guatemala’s economic development is slowing. Those worst
affected live in rural areas. Faster economic growth is crucial to achieving
the country’s medium- and long-term poverty reduction objectives.
Table 2: Selected economic data for Honduras and Guatemala
[Source: Central Intelligence Agency, 2018. The World Factbook. Available at:
https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html
[accessed 1 November 2018]. Source adapted.
about:blank 35/52
United Nations Human Development Reports, Guatamala

(http://hdr.undp.org/en/countries/profiles/GTM) and Honduras
(http://hdr.undp.org/en/countries/profiles/HND). Licenced under Creative
Commons 3.0 IGO,
https://creativecommons.org/licenses/by/3.0/igo/legalcode.\]
1. Define the term absolute poverty indicated in bold in the text (paragraph [2]). [2]
2. Define the term investment indicated in bold in the text (paragraph [5]). [2]
3. Using a perfectly competitive firm diagram, explain the effect of declining [4]
prices of coffee beans on the profits of Honduras’ coffee farmers in the short
run (paragraph [2]).
4. With reference to the data in Table 2, explain why the GNI per capita for [4]
Guatemala is lower than its GDP per capita.
contrast the potential for economic development in Guatemala and Honduras.
Question 32
1. Explain why a reduction in interest rates might lead to an increase in aggregate [10]
demand.
2. Evaluate the view that expansionary monetary policy is the most effective way [15]
to achieve economic growth.
about:blank 36/52
Question 33
Argentina’s currency keeps falling
1. The year 2018 started badly for Argentina when the worst drought in 50
years negatively affected its export revenues from maize and soybeans,
both important exports. The economy suffered several additional
problems: a stronger United States dollar (US$), international investors
selling Argentinian assets due to a lack of confidence in the economy,
rising inflation from 25 % to nearly 50 % (Figure 1) and a significant
depreciation of the peso, Argentina’s currency.
2. When Argentina’s president was elected in 2015, inflation was at 25 %. He

gave the central bank freedom to raise interest rates, which encouraged
foreign investors to buy government bonds. The government had
borrowed a lot of money from overseas to finance the persistentbudget
deficit, but by 2018, foreign investors were interested in other markets.
3. As the peso was overvalued in 2015, it kept demand for imports high and
made it hard for exports to compete. The current account deficit rose to
more than 5 % of gross domestic product (GDP) but slowly narrowed in
2018, because the president allowed the peso to float freely.
4. In May 2018, in an attempt to control the inflation rate and stop the fall in
the peso’s value, the Argentinian central bank raised interest rates to 40 %.
In addition, it started selling foreign currency reserves. However, there
were concerns that if the selling of foreign currency reserves continued,
they would be depleted quickly. To address this concern, the president
negotiated a US$50 billion loan from the International Monetary Fund
(IMF). Yet the peso continued to fall. The IMF loan means that most of
Argentina’s debt-servicing requirements are covered until 2020. However,
under IMF loan conditions, the budget deficit must be cut by postponing
infrastructure projects, subsidies must be cut, and government jobs must
be cut.
about:blank 37/52
5. A spokesperson from the IMF said “Argentina has a floating, market-

determined exchange rate, and the IMF fully supports that. The exchange
rate should continue to be determined by market forces.”
6. The peso’s weakness causes imported oil prices to go up, further raising
inflation. The falling real incomes of households combined with higher
interest rates will affect the economy negatively, possibly leading to a
recession. Interest rates will remain high for some time, discouraging
investment. Economists expect Argentina to fall into recession, for the fifth
time in a decade.
Figure 1: Argentina’s inflation rate
[Source: Adapted from Anon, n.d. Argentina Current Account, Trading

Economics,
https://tradingeconomics.com/argentina/current-account.]
1. Define the term budget deficit indicated in bold in the text (paragraph [2]). [2]
2. Define the term gross domestic product (GDP) indicated in bold in the text [2]
(paragraph [3]).
3. Using an exchange rate diagram, explain how raising interest rates would “stop [4]
the fall in the peso’s value” (paragraph [4]).
about:blank 38/52
4. Using an AD/AS diagram, explain how the peso’s weakness is “raising inflation” [4]
(paragraph [6]).
about:blank 39/52
Question 34
São Tomé and Príncipe Economic Development Challenges
1. São Tomé and Príncipe (STP) is an island nation and is one of the smallest
economies in Africa. STP faces many economic development challenges
including: a limited range of export products (mostly commodities) and
markets, limited human capital, insufficient infrastructure, vulnerability to
supply-side shocks due to climate change, limited access to credit, political
instability and poor governance. All these challenges have led to a high
dependence on foreign aid.
2. International organizations estimate that approximately 50 % of STP’s

population is living in relative poverty. Its economic growth rate has been
consistent at 4–5 % between 2013 and 2018, but the International
Monetary Fund (IMF) suggests that STP will need an economic growth rate
of 6 % to have an impact on the poverty rate.
about:blank 40/52
3. To increase economic growth and reduce its dependence on foreign aid

and cocoa exports (80 % of its total exports), STP is planning to extract
offshore oil and develop the comparative advantage it has in tourism. Over
50 % of its exports go to the European Union. It is hoped that diversifying
STP’s exports will increase the number of its potential trading partners. To
achieve this aim, STP is seeking membership with the World Trade
Organization (WTO) and the Central African Economic and Monetary
Community. Developing export markets could help STP benefit from
economies of scale and overcome the restrictions of its geographical
remoteness and high transport costs. However, STP will need help from
multinational oil companies to exploit its oil reserves, and the government
needs to improve transparency to ensure that oil revenues are used to
support economic development.
4. In STP, foreign aid accounts for 57 % of gross domestic product (GDP) and
93 % of public investments, including a significant portion of health and
education spending. In addition, concessional loans have been provided
by the IMF. However, STP had to agree to decrease the budget deficit as a
condition of the loan from the IMF.
5. There are some government officials who believe that aid will not solve the
economic development challenges in STP. It did not meet the nutrition
targets set by the Millennium Development Goals and continues to
struggle with providing adequate clean water and nutritional intake for its
population. Clean water is becoming scarce in STP due to business
pollution and poor household sanitation, which is also spreading diseases.
Other environmental concerns are climate change, deforestation and
erosion of coastal areas due to the sand extracted for the construction of
roads and buildings.
[Source: Adapted from Jennings, R., 2018. Taiwan cannot compete with China
on Aid to keep foreign allies. VOA News.
Available at: https://www.voanews.com/east-asia-pacific/taiwan-cannot-
compete-china-aid-keep-foreign-allies.\]
1. Define the term relative poverty indicated in bold in the text (paragraph [2]). [2]
about:blank 41/52
2. Define the term economies of scale indicated in bold in the text (paragraph [3]). [2]
3. Using an externalities diagram, explain why “business pollution” is leading to [4]

market failure in STP (paragraph [5]).
discuss the role of aid in achieving economic development in STP.
Question 35
1. Explain why the under-consumption of merit goods causes market failure. [10]
2. Discuss whether there should always be direct provision of public goods by the [15]
government.
Question 36
1. Explain why some firms might choose the goal of profit maximization while [10]
others might choose to adopt satisficing behaviour.
2. Discuss whether price will always be lower and output will always be higher in [15]
perfect competition compared to monopoly.
about:blank 42/52
Question 37
1. Explain why price elasticity of demand varies along the length of a straight-line [10]
demand curve.
2. Examine the significance of price elasticity of demand for the decision-making [15]
of firms and governments.
Question 38
1. Explain two factors that might give rise to economies of scale for a firm. [10]
2. Discuss the view that legislation is the best way of dealing with the problem of [15]
monopoly power.
Question 39
1. Explain two reasons why the demand for manufactured goods might be price [10]
elastic.
2. Evaluate the importance of cross price elasticity of demand for a business [15]
selling a good if the price of a related good increases.
about:blank 43/52
Question 40
1. Using an appropriate externalities diagram, explain why a government might [10]

decide to impose a price floor on a demerit good.
2. Evaluate the view that the most effective way in which the government can [15]
discourage the consumption of demerit goods is through government
regulations.
Question 41
1. Explain why public transport, such as buses and trains, might be under- [10]
provided in a market economy.
2. Discuss the view that imposing an indirect tax on gasoline (petrol) is the most [15]
effective way of reducing the market failure caused by cars.
about:blank 44/52
Question 42
The World Bank reports on economic growth in Kenya
1. The World Bank’s recent overview of Kenya has given a positive

assessment of Kenya’s growth prospects, based on domestic and
international factors. The East African nation of Kenya has a population of
approximately 46.1 million, which increases by an estimated one million
per year. The World Bank projected 5.9 % economic growth in 2016, rising
to 6 % in 2017. This positive outlook is based on continued low oil prices,
growth in the agricultural sector, expansionary monetary policy and
ongoing infrastructure investments.
2. The World Bank has identified other key contributing factors to Kenya’s
short-term growth. These include an expanding services sector, higher
levels of construction, currency stability, low inflation, a growing middle-
class and rising incomes, a surge in remittances (money sent by a foreign
worker to their home country) and increased public investment in energy
and transportation.
3. Tourism, information and communications and public administration are

among the sectors that have registered the highest growth. Inflation has
been at an average of 6.3 %, which is within the Kenyan central bank’s
target range.
4. The World Bank also predicted that, of 82 countries investigated, Kenya

would have the highest long-term growth and that its real gross domestic
product (GDP) in 2050 should be seven times larger than it is today. Fast
population growth, a modest improvement in the business environment,
urbanization and fast-growing neighbouring countries are all contributing
factors to the positive prediction.
about:blank 45/52
5. While the growing Kenyan economy is creating more jobs now than in the
past, these are mainly in the informal services sector and are low
productivity jobs. 9 million young people will join the labour market in the
next 10 years. Given the scarcity of formal sector jobs, they will continue to
find jobs in the informal sector. These jobs are usually in very small
businesses, often run from homes.
6. The World Bank suggests that there is a need to increase the productivity
of jobs in the informal sector. It says that this could be achieved by
increasing work-related skills through training schemes, increasing
communication and learning between formal and informal firms, and
helping small-scale firms to become suppliers for firms in the formal
sector. To create more and higher-skilled jobs, it is also essential to reduce
the cost of doing business.
7. According to the World Bank, Kenya has made significant structural and
economic reforms that have contributed to sustained economic growth in
the past decade. However, economic growth does not always mean
economic development. The main development challenges facing Kenya
include poverty, inequality, climate change, low commodity prices and the
vulnerability of the economy to internal and external shocks.
[Source: adapted from The World Bank Country Overview,

http://www.worldbank.org/en/country/kenya/overview,
7 March 2017; Kenya in 2050, The Economist Intelligence Unit,
https://www.eiu.com/public/topical\_report.
aspx?campaignid=ForecastingTo2050, 13 July 2017, data reused by permission
of The Economist Intelligence Unit; and World
Bank economic updates, Kenya’s Economy Strong in a Challenging Global
Environment, http://www.worldbank.org/en/country/
kenya/publication/kenya-economic-update-economy-strong-challenging-
global-environment, March 2016.]
1. Define the term investment indicated in bold in the text(paragraph [2]). [2]
2. Define the term productivity indicated in bold in the text (paragraph [5]). [2]
about:blank 46/52
3. Using an AD/AS diagram, explain how expansionary monetary policy might [4]
lead to economic growth (paragraph [1]).
4. Explain the difference between economic growth and economic development [4]
(paragraph [7]).
discuss the extent to which continued economic growth may lead to economic
development in Kenya.
about:blank 47/52
Question 43
United States (US) tin can manufacturers seek tariff exemption on tinplate
steel
1. The Can Manufacturers Institute (CMI) has asked the US Department of

Commerce to take away tariffs and other trade protection measures that
are currently applied to imports of tinplate steel. Tinplate steel is used to
make tin cans as packaging for food. The CMI represents the tin can
manufacturing industry and its suppliers in the US.
2. The tin can manufacturing industry accounts for the annual domestic
production of approximately 124 billion tin cans. The industry employs
more than 28 000 people, with factories in 33 US states, Puerto Rico and
American Samoa. It generates revenue of around US$17.8 billion. The CMI
claims that the tariff on imports of tinplate steel has a severe economic
impact on the tin can manufacturing industry.
3. Approximately 2 % of all US steel is tinplate. Currently, there is excess

demand that is causing a disequilibrium in the domestic US tinplate steel
market. In 2016, US demand for tinplate steel was 2.1 million tons, while
domestic supply was 1.2 million tons, meaning that only 57 % of domestic
demand was met by US tinplate steel producers. Not only is there a
domestic shortage of tinplate steel, but also the CMI claims that there has
been a noticeable decline in the quality of domestically-produced tinplate
steel.
4. The CMI claims that even a small increase in the price of raw materials
could create a competitive disadvantage, forcing some tin can
manufacturing plants to shut down. This would create structural
unemployment for 10 000 workers in regionally-based factories. The CMI
also claims that the tariff puts food can producers at a competitive
disadvantage with other food packaging substitutes, such as plastic and
glass. These substitutes are not subject to tariffs.
about:blank 48/52
5. According to the CMI, canned fruits and vegetables cost 20 % less than
fresh food. Because of this, people on low incomes consume canned foods
at a higher rate than the average American. Canned food offers a low-cost
solution to feeding the nation; especially the 42 million Americans who live
in low-income households. The figure includes 13 million children. The
CMI further claims that tariffs, or any trade barriers, have harsh
consequences for those living in relative poverty.
[Source: adapted from www.prnewswire.com, accessed 27 August 2017]
1. Define the term excess demand indicated in bold in the text (paragraph [3]). [2]
2. Define the term structural unemployment indicated in bold in the text [2]
(paragraph [4]).
3. Using a supply and demand diagram and data from the text, explain how a [4]
“disequilibrium in the domestic US tinplate steel market” would occur if there
were no imports (paragraph [3]).
4. Using an international trade diagram, explain the effect of a tariff on the [4]
imports of tinplate steel(paragraph [1]).
discuss possible economic impacts of the tariff on tinplate steel.
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Question 44
China’s increasing presence in Bolivia
1. Between 2000 and 2014, annual bilateral trade between China and Bolivia
increased dramatically from US$75.3 million to US$2.25 billion. China has
become the fifth-largest market for Bolivian exports, which mostly consist
of raw materials such as minerals, hydrocarbons, wood and soybeans.
2. At the same time, China has become Bolivia’s main source of imports.
China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones,
computers and other electronics. Bolivia’s expenditure on Chinese imports
significantly exceeds the revenue that is received from its exports to China.
Since 2014, Bolivia has experienced significant current account deficits with
China.
3. In recent years, the Bolivian government has taken loans from Chinese
banks to support the purchase of Chinese imports of goods and services,
along with Chinese-built roads, bridges, railways, hydroelectric power
plants and mining facilities. In 2015, the Bolivian government owed more
than US$600 million to Chinese banks.
4. The socialist Bolivian government wants to implement an ambitious Five-

Year National Development Plan from 2016 to 2020. Faced with sharply
declining export revenues and commodity prices, it will rely increasingly on
foreign capital to fund its projects.
5. All projects financed by Chinese loans must be awarded to Chinese

companies, which come with their own materials, equipment and
technology, and often their own labour. The new loans will have a
combination of commercial interest rates, between 2.5 % and 4 %, and
concessional interest rates, up to 1 %. The Bolivian government is
expecting to be able to repay the loans through continued growth of the
economy.
about:blank 50/52
6. China’s foreign direct investment (FDI) is mostly being aimed at energy

and infrastructure development. Chinese firms are currently involved in
major road-building projects, hydroelectric power station projects,
expanding airports and developing a steel-producing plant. These projects
have created problems for local communities in terms of water
contamination and the overuse of Bolivia’s scarce water supply.
7. This FDI strategy generates profits for Chinese firms in the short term, as
they build and improve the infrastructure. Since Bolivia is a resource-rich
country, Chinese firms will be looking to invest in profitable mining
projects in the future, once the infrastructure is in place.
[Source: adapted from Financial sovereignty or a new dependency? How China is

remaking Bolivia,
http://nacla.org/blog/2017/08/11/financial-sovereignty-or-new-dependency-
how-china-remaking-bolivia,
10 August 2017, this article was originally published by NACLA; and Trading
Economics, Bolivia Current Account,
https://tradingeconomics.com/bolivia/current-account, accessed 9 October
2017]
1. Define the term interest rates indicated in bold in the text (paragraph [5]). [2]
2. Describe the nature of foreign direct investment (paragraph [6]). [2]
3. Using information from the text, explain two reasons why Chinese [4]
multinational corporations (MNCs) are investing in Bolivia.
4. Using an externalities diagram, explain how the Chinese infrastructure projects [4]
have caused negative externalities (paragraph [6]).
discuss the possible effects of Chinese involvement on economic growth and
development in the Bolivian economy.
about:blank 51/52
about:blank 52/52

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Economics Mock Exam

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Japan–European Union Economic Partnership Agreement (JEEPA)

1. In July 2017, the Japan–European Union Economic Partnership Agreement

2. The largest benefit to Japan will be for Japanese car manufacturers, as

4. Japanese politicians have been defending their relatively inefficient farmers

Pakistan and the International Monetary Fund

1. Pakistan is a low-income country with a rapidly growing population and

2. Pakistan’s government is negotiating a loan from the International

5. Economists say that there needs to be a focus on improving human

6. The World Bank has financed education and infrastructure, such as

7. The government believes that the macroeconomic concerns of the IMF

[Source: © International Baccalaureate Organization 2020.]

1. Explain the concepts of consumer surplus and producer surplus. [10]

Current account deficit poses a challenge to Pakistan’s economy

1. The president of Pakistan has expressed his concern at the significant

2. The governor of Pakistan’s central bank agreed with the president’s

3. Central bank advisors have also recommended depreciating the rupee

1. List two functions of the central bank (paragraph [2]). [2]

2. Evaluate the effectiveness of government regulations in achieving a reduction [15]

1. Explain two causes of structural unemployment. [10]

2. Discuss the consequences of different types of unemployment. [15]

Angola and Namibia

1. Angola and Namibia are neighbouring countries on the west coast of

3. Since 2005, the Angolan government has borrowed billions of US dollars

5. Namibia’s economy is heavily dependent on the mining and processing of

7. Namibia’s economy remains vulnerable to world commodity price

Figure 1: Selected economic data for Angola and Namibia (2014)

[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The

1. Steel manufacturers in Kenya are set to benefit as the government moves

2. In 2014 a government official announced an increased tariff on steel and

4. However, there is a belief among manufacturers that there is a need for

5. Good economic growth rates in neighbouring countries like Uganda help

[Sources: adapted from www.standardmedia.co.ke, 13 June 2014;

1. Explain how a natural monopoly may arise. [10]

2. Discuss how governments restrict monopoly power. [15]

2. Discuss the consequences of a perfectly competitive market becoming a [15]

1. Explain how an increase in investment might lead to economic growth. [10]

2. Discuss the possible consequences of economic growth on living standards, [15]

3. The cause of the lower value of the renminbi—aside from a slowdown in

4. There is international concern about the potential damage that a

5. To complicate matters for China, economic growth in the US is causing US

Trading Economics, 2018. China Current Account. Available at:

1. Explain why demerit goods are an example of market failure. [10]

2. A government decides to impose an indirect tax on unhealthy drinks. Discuss [15]

1. Explain the cause of cyclical (demand-deficient) unemployment. [10]

Australian economy feels the effects of falling iron ore price

2. Australian mining companies are losing significant revenue from falling

3. Australia recorded a monthly balance of trade deficit of AU

5. An expanding group of Australian-based economists argue that the central

[Sources: Sydney Morning Herald: adapted from

1. Explain why governments provide subsidies. [10]

2. Evaluate the effectiveness of price floors in achieving a reduction in the [15]

Sri Lanka’s economic reforms

3. Improving infrastructure is also a priority. Power supply is unreliable and

4. Another priority is to reduce controls on exchanging currency. Sri Lankans

5. On a positive note, improved international relations has increased tourism.

7. But perhaps the greatest problem confronting the government is the

[Sources: adapted from Sunday Times, Sri Lanka, www.sundaytimes.lk, 23

1. List two characteristics of an economically less developed country. [2]

Zambia’s reliance on copper exports

1. Due to its economic success, Zambia has recently been classified as a