2025 Cambridge IGCSE Economics (0455) Practice Paper with Answers

A fall in the cost of raw coffee beans increases the supply of coffee, shifting the supply curve to the right. A fall in the price of tea (a substitute) reduces the demand for coffee, shifting the demand curve to the left. Since both shifts put downward pressure on price, the equilibrium price will definitely fall. However, the increase in supply increases quantity, while the decrease in demand decreases quantity, making the net change in equilibrium quantity uncertain without knowing the magnitude of the shifts.

1 mark for identifying that both supply shifting right and demand shifting left will cause the equilibrium price to fall, while the net change in equilibrium quantity depends on the relative size of the shifts and is therefore uncertain.

Specialisation of labour allows workers to focus on a narrow range of tasks, enabling them to become highly skilled and efficient, which can lead to higher wages. However, it increases boredom, increases the risk of structural unemployment, and reduces occupational mobility.

1 mark for identifying the correct benefit of specialisation to a worker (Option B).

Demand-pull inflation is caused by excessive aggregate demand. An increase in government spending directly increases aggregate demand, and a decrease in interest rates encourages borrowing and spending by consumers and firms, further shifting aggregate demand to the right.

1 mark for identifying the policy combination that increases aggregate demand (Option B).

A depreciation of the exchange rate means the currency loses value. This makes exports cheaper in foreign currency, leading to an increase in export volume. Imports become more expensive, which might increase inflation, making Option A incorrect.

1 mark for identifying that currency depreciation lowers the foreign currency price of domestic exports, leading to an increase in export volume (Option C).

At 2,000 units, the total fixed cost is still $5,000. The total variable cost is 2,000 units multiplied by $5, which equals $10,000. The total cost is $15,000. Therefore, the average total cost is $15,000 divided by 2,000 units, which equals $7.50.

1 mark for calculating the new Total Cost ($15,000) and dividing by 2,000 units to find the new average total cost of $7.50 (Option B).

A mixed economic system features both a private sector and a public sector. The government intervenes to provide public and merit goods (such as street lighting and healthcare) that are underprovided or not provided at all by the free market.

1 mark for identifying government intervention to correct market failure as the characteristic unique to a mixed economy compared to a pure market economy (Option C).

Structural unemployment occurs when there is a mismatch between the skills of the unemployed and the skills required for available jobs, often caused by the permanent decline of an industry. Since the mine closed permanently and the workers have industry-specific skills, this is structural unemployment.

1 mark for correctly identifying that job loss due to permanent decline in an industry and skill mismatch is structural unemployment (Option D).

Reducing income tax rates increases disposable income and consumer spending, while increasing infrastructure spending directly increases aggregate demand. This expansionary fiscal policy boosts economic growth in the short run. However, lower tax revenues and higher government spending both act to increase a government's budget deficit.

1 mark for identifying that expansionary fiscal policy increases short-run economic growth but worsens the budget balance by increasing the budget deficit (Option B).

A subsidy to manufacturers shifts the supply curve of electric bicycles to the right, which tends to reduce price and increase quantity. A decrease in the price of a substitute (public transport) causes demand for electric bicycles to shift to the left, which tends to reduce both price and quantity. Combining these two shifts: the equilibrium price will definitely fall, but the net effect on the equilibrium quantity depends on the relative size of the shifts, making it uncertain.

1 mark for the correct answer (B). No partial marks.

An improvement in working conditions and non-wage benefits makes the occupation more attractive, encouraging more workers to apply, thereby increasing the supply of labour. Higher qualifications required, higher travel costs, and lower wages would all reduce or discourage the supply of labour to that occupation.

1 mark for the correct answer (C). No partial marks.

An increase in the cost of imported raw materials raises the costs of production for firms, leading to cost-push inflation. Simultaneously, an increase in government spending increases total demand (aggregate demand) in the economy, leading to demand-pull inflation. Therefore, both types of inflation are likely to occur.

1 mark for the correct answer (C). No partial marks.

The change from $1 = ‐1.20 to $1 = ‐1.10 represents a depreciation of the US dollar. This means European buyers need fewer euros to purchase US goods, so US exports in Europe become cheaper. Conversely, US buyers must spend more dollars to buy European goods, so European imports in the US become more expensive.

1 mark for the correct answer (B). No partial marks.

First, find the total fixed cost (TFC) by multiplying the average fixed cost (AFC) by the output: \(AFC \times Q = 15 \times 100 = 1500\). Total cost (TC) is the sum of total fixed cost and total variable cost (TVC): \(TC = TFC + TVC\). Therefore, \(TVC = TC - TFC = 5000 - 1500 = 3500\).

1 mark for the correct calculation and answer (B). No partial marks.

A mixed economic system combines features of both market and planned economies. While both market and mixed economies use the price mechanism and allow private ownership and consumer choice, only a mixed economic system features state intervention and public sector provision to address market failures and provide public goods.

1 mark for the correct answer (C). No partial marks.

Unemployment that occurs at regular times of the year due to changes in the seasons or weather-related demand patterns (such as farming, tourism, or harvesting) is classified as seasonal unemployment.

1 mark for the correct answer (C). No partial marks.

To reduce demand-pull inflation, the government needs to reduce aggregate demand. This is achieved through contractionary fiscal policy, which involves decreasing government spending (directly reducing demand) and increasing income tax rates (reducing disposable income, which lowers consumer spending).

1 mark for the correct answer (B). No partial marks.

An increase in consumer preference increases the demand for organic vegetables, which shifts the demand curve to the right, causing price and quantity to rise. An unusually warm summer increases the yield (supply) of organic vegetables, shifting the supply curve to the right, which causes price to fall and quantity to rise. Together, both changes cause the quantity to rise. However, the effect on price is unpredictable as the demand shift pushes price up while the supply shift pushes price down.

1 mark for the correct option (C). Correct identification of the combined effect of shifting both curves to the right.

Highly specialised jobs like software engineering require specific education and training, which reduces the number of qualified workers available (shifting supply to the left/making it relatively inelastic), resulting in a higher equilibrium wage. Other options do not explain a higher wage or are economically incorrect.

1 mark for the correct option (D). Recognising how specialised skills limit supply and raise wages.

The weighted CPI is calculated as: \(((110 \times 4) + (105 \times 3) + (120 \times 3)) / (4 + 3 + 3) = (440 + 315 + 360) / 10 = 1115 / 10 = 111.5\).

1 mark for the correct calculation and selecting option (B).

Higher domestic inflation makes exports more expensive and less competitive abroad, reducing demand for the currency. Simultaneously, foreign imports become relatively cheaper, increasing demand for foreign currencies (thus increasing the supply of the domestic currency on the forex market). Both forces lead to a depreciation of the currency.

1 mark for selecting option (C). Understanding how relative inflation levels affect trade competitiveness and exchange rates.

Average variable cost (AVC) = Average total cost (ATC) - Average fixed cost (AFC) = $15 - $3 = $12. Total variable cost (TVC) = AVC * Output = $12 * 500 = $6,000. Alternatively, Total Cost = $15 * 500 = $7,500, and Total Fixed Cost = $3 * 500 = $1,500. Total Variable Cost = $7,500 - $1,500 = $6,000.

1 mark for calculating and identifying option (B).

Public goods, such as national defense or street lighting, are non-excludable and non-rival. Because of the free-rider problem, private firms cannot profitably provide them, so they are typically provided only by the public sector (government).

1 mark for the correct answer (C), understanding the role of the public sector in correcting market failure related to public goods.

Structural unemployment occurs when there is a mismatch between the skills of the unemployed and the skills required for the available jobs, often caused by the long-term decline of specific industries.

1 mark for selecting option (D), correctly defining structural unemployment based on industrial decline and occupational immobility.

An increase in income tax reduces consumer disposable income and spending, while a reduction in government spending directly lowers demand in the economy. This contractionary fiscal policy reduces aggregate demand, which lowers demand-pull inflation but causes unemployment to rise as economic activity and output slow down.

1 mark for selecting option (A). Correctly identifying the contractionary effect of fiscal policy on inflation and employment.

An increase in the cost of production (such as higher wages or raw material prices) causes the supply curve to shift to the left. This leftward shift in supply results in a higher equilibrium price and a lower equilibrium quantity.

- Option A: An increase in consumer incomes shifts the demand curve for a normal good to the right, which increases both equilibrium price and quantity.
- Option C: A reduction in indirect tax shifts the supply curve to the right, lowering the equilibrium price and increasing the equilibrium quantity.
- Option D: An improvement in technology shifts the supply curve to the right, reducing the equilibrium price and increasing the equilibrium quantity.

Award 1 mark for the correct option (B).
- Reject A, C, and D as they do not lead to both a higher price and a lower quantity.

Non-wage factors are crucial when individuals choose an occupation. If Job Y offers a lower wage, it must have superior non-wage benefits to attract workers. A more generous pension scheme and better prospects for promotion (Option B) are non-wage benefits that increase the overall attractiveness of Job Y.

- Option A makes Job Y less attractive because of longer working hours and fewer holidays.
- Options C and D make Job X more attractive because of its better non-wage conditions (shorter commute, safety, subsidized meals, and healthcare), meaning the worker would be even less likely to choose Job Y.

Award 1 mark for the correct option (B).
- Reject A, C, and D as they make the lower-paying Job Y relatively less attractive.

To calculate the new weighted Consumer Price Index (CPI):

Multiply each component's new index by its respective weight, then sum them up:
- Food component contribution: \(110 \times 0.40 = 44\)
- Housing component contribution: \(105 \times 0.60 = 63\)

Overall CPI = \(44 + 63 = 107.0\).

Award 1 mark for the correct calculation and option (B).
- Reject A, C, and D as they represent mathematical errors in applying the weights to the indices.

A depreciation of Country Z's currency means it takes more units of the domestic currency to buy foreign goods. Thus, the prices of imported raw materials and finished goods rise in domestic terms, which can lead to cost-push inflation (Option B).

- Option A is incorrect because depreciation makes export prices in foreign currency fall, not rise.
- Option C is incorrect because imports become more expensive, leading to a decrease in the demand for imports.
- Option D is incorrect because the current account might not improve immediately due to short-run inelasticities (the J-curve effect).

Award 1 mark for the correct option (B).
- Reject A, C, and D as they represent incorrect economic reasoning regarding the effects of exchange rate depreciation.

Variable costs are costs that change directly with the level of output. The wages paid to production-line workers based on the number of units they assemble (piece-rate wages) vary directly with how many bicycles are produced, making it a variable cost (Option C).

- Options A, B, and D are fixed costs because they do not change in the short run when output levels vary.

Award 1 mark for the correct option (C).
- Reject A, B, and D as these are fixed costs that do not vary with output.

A mixed economic system combines elements of both market and planned economies. The key difference from a pure market economy is the active intervention of the government (the state), which includes providing public goods (like national defense) and regulating or subsidizing merit goods (like education and healthcare) (Option D).

- Options A, B, and C are present in both systems, but they are primary characteristics of the market mechanism itself.

Award 1 mark for the correct option (D).
- Reject A, B, and C because they represent elements of private sector activity that exist in both market and mixed economies, rather than the unique distinguishing role of government intervention.

### Detailed Solution & Guidance

**(a) (i)**
- Locate 'GDP growth rate (%)' in Table 1.
- In 2023, the growth rate is negative (-0.8%), indicating that real GDP contracted.
- **Correct answer:** 2023.

**(a) (ii)**
- Formula: \(\frac{\text{New Value} - \text{Original Value}}{\text{Original Value}} \times 100\)
- Original (2021) price = $9,500; New (2023) price = $7,100
- \(\frac{7,100 - 9,500}{9,500} \times 100 = -25.26\%\)
- **Correct answer:** -25.26% or -25.3% (accept a decrease of 25.26%).

**(b)**
- Explain the process clearly. Depreciation \(\rightarrow\) import prices rise in local currency \(\rightarrow\) raw materials/inputs cost more \(\rightarrow\) higher production costs for firms \(\rightarrow\) cost-push inflation passed to consumers.

**(c)**
- Read the extract closely: "Trade unions argue that this [minimum wage] will raise living standards and motivate workers, leading to higher productivity."
- Extract two explicit benefits: 1) campaigning/supporting minimum wage increases to raise living standards; 2) helping to motivate workers / increase worker productivity.

**(d)**
- State the overall relationship (inverse/negative).
- Provide data-backed evidence: link the falling copper prices over all three years ($9,500 \rightarrow $8,200 \rightarrow $7,100) directly to the rising unemployment rates (7.2% \rightarrow 8.5% \rightarrow 11.2%).
- Provide economic analysis: explain why this occurs (copper-dependent economy, falling export revenues, budget impacts, layoffs, and negative multiplier effects leading to cyclical unemployment).

**(e)**
- Draw/describe a standard D/S diagram showing the supply curve shifting to the right.
- Explain that a subsidy reduces a firm's unit cost of production. This encourages domestic battery firms to supply more, lowering the market price and expanding the quantity demanded/supplied.

**(f)**
- A balanced discussion is required.
- Identify pros: protecting infant EV firms, creating manufacturing jobs, improved current account, and tariff tax revenue.
- Identify cons: retaliation against agricultural exporters, high domestic inflation (9.0% makes further price rises dangerous), reduced competition, consumer welfare loss.
- Conclude with a reasoned judgment on whether the net benefits outweigh the costs.

### Marking Scheme

**(a) (i)**
- **1 mark** for identifying the correct year: **2023**.

**(a) (ii)**
- **1 mark** for correct working: \(\frac{7,100 - 9,500}{9,500} \times 100\) (or equivalent).
- **1 mark** for correct calculation: **-25.26%** or **-25.3%** (or a **decrease of 25.26% / 25.3%**). (Accept -25% if rounded correctly).

**(b)**
- **1 mark** for stating that depreciation makes the ZND weaker, meaning imports become more expensive in local currency terms.
- **1 mark** for stating that firms face higher costs for imported raw materials/inputs.
- **1 mark** for linking this to higher domestic production costs (cost-push inflation).
- **1 mark** for explaining that firms pass these costs onto consumers, causing imported inflation.

**(c)**
- **1 mark** for identifying a benefit from the text: Trade unions argue for/negotiate a higher national minimum wage to raise living standards.
- **1 mark** for identifying a second benefit from the text: Trade unions can help motivate workers / increase their productivity.
- **1 mark** for appropriate development/link of how these actions benefit workers in the context of Zendia.

**(d)**
- **1 mark** for identifying the inverse/negative relationship.
- **2 marks** for using specific data points from Table 1 showing the trends (e.g., as copper prices fell from $9,500 in 2021 to $7,100 in 2023, unemployment rose from 7.2% to 11.2%).
- **3 marks** for detailed economic analysis linking the copper sector's decline to job losses, lower export revenue, lower domestic aggregate demand, and GDP contraction (-0.8%).

**(e)**
- **3 marks** for the diagram:
- **1 mark** for correctly labeled axes (Price, Quantity) and curves (D, S).
- **1 mark** for shifting the supply curve to the right (S to S1).
- **1 mark** for showing the decrease in equilibrium price (P to P1) and increase in equilibrium quantity (Q to Q1).
- **3 marks** for written analysis:
- **1 mark** for defining a subsidy as a government payment that reduces production costs.
- **1 mark** for explaining that the shift in supply occurs because producers can now supply more at every price.
- **1 mark** for explaining the resulting market outcome (lower battery prices and higher quantities traded).

**(f)**
- **Up to 4 marks** for arguments that tariffs will benefit the economy (e.g., protects infant EV industry, preserves/creates jobs, improves balance of payments, yields tax revenue).
- **Up to 4 marks** for arguments that tariffs will not benefit the economy (e.g., trade retaliation against agricultural exporters, higher prices for consumers, exacerbating existing 9.0% inflation, promoting inefficiency).
- *Note: Maximum 5 marks if only one side of the argument is discussed.*

(a) Price elasticity of demand (PED) is a measure of the responsiveness of the quantity demanded of a product to a change in its price.

(b) Determinants of PED:
1. Availability of substitutes: If a product has many close substitutes (e.g., brand-name sugary drinks), its demand will be price elastic because consumers can easily switch to another brand if the price rises. If there are few substitutes, demand is inelastic.
2. Proportion of income spent: Products that consume a large proportion of a consumer's income (e.g., a car) tend to have more elastic demand. In contrast, products that cost a small fraction of income (e.g., a can of soda) tend to have price inelastic demand.

(c) Diagram and Analysis:
- The diagram should show a downward-sloping demand curve (D) and an upward-sloping supply curve (S0).
- An indirect tax increases the cost of production, shifting the supply curve vertically upwards/to the left to S1.
- This shift leads to a higher equilibrium price (from P0 to P1) and a lower equilibrium quantity (from Q0 to Q1).

(d) Discussion:
Arguments that indirect taxes are beneficial:
- Reduces consumption of demerit goods: Taxes on sugary drinks, alcohol, or tobacco discourage consumption, reducing healthcare costs and negative externalities.
- Raises government revenue: This revenue can be spent on public services like education, healthcare, or infrastructure, boosting long-term economic growth.
- Environmental benefits: Taxes on polluting industries can reduce carbon emissions.

Arguments that indirect taxes are not beneficial:
- Regressive nature: Indirect taxes take a larger percentage of income from low-income earners, worsening income inequality.
- Cost-push inflation: Rising taxes increase the cost of goods, driving up the general price level.
- Impact on employment: If demand falls sharply, domestic firms may suffer lower revenue, leading to job losses and unemployment.
- Ineffectiveness: If demand is price inelastic, a tax increase will not significantly reduce consumption, only increasing the tax burden on consumers.

Conclusion: The overall benefit depends on whether the tax is targeted at goods with elastic or inelastic demand and how the government redistributes the tax revenue.

(a) 2 marks for full definition (responsiveness of quantity demanded to a change in price). 1 mark for a partial definition.

(b) 4 marks:
- Up to 2 marks for identifying two determinants (1 mark each).
- Up to 2 marks for explaining how each determinant affects elasticity (1 mark each).

(c) 6 marks:
- Up to 3 marks for a correct demand and supply diagram (1 mark for axes and curves correctly labelled, 1 mark for shifting supply to the left, 1 mark for showing the change in equilibrium price and quantity).
- Up to 3 marks for written analysis explaining that the tax increases production costs, shifting supply left, raising price, and lowering quantity.

(d) 8 marks (Level-based marking):
- Level 3 (6-8 marks): Balanced discussion of both benefits and drawbacks of indirect taxes, with appropriate economic terminology and a reasoned conclusion.
- Level 2 (3-5 marks): One-sided discussion, or limited explanation of both sides.
- Level 1 (1-2 marks): Simple identification of points without economic development.

(a) Functions of a trade union include:
1. Negotiating wages and financial benefits (collective bargaining).
2. Improving working conditions (health and safety at work).
3. Protecting workers' rights and providing legal support/representation.
4. Defending job security and protecting against unfair dismissal.

(b) Reasons for not joining a trade union:
1. Cost of membership: Workers must pay annual or monthly subscription fees, which they may feel are too high relative to the perceived benefits.
2. The 'Free-Rider' problem: Non-union members often benefit from wage increases and better working conditions negotiated by the union without having to pay any fees.
3. Disagreement with union actions: Some workers may oppose going on strike or taking industrial action, as it leads to lost income during the strike period.
4. Good relationship with employers: Workers may believe they can negotiate better wages individually or that their employer already treats them fairly.

(c) Analysis:
- Trade unions use collective bargaining and the threat of industrial action (such as strikes) to demand higher wages for their members.
- If trade unions successfully push wages above the market rate without a corresponding increase in productivity, the costs of production for firms will rise.
- Wages represent a significant component of total costs for many firms.
- To maintain profit margins, firms will pass these higher production costs onto consumers by raising the prices of their goods and services.
- This sustained rise in the general price level is known as cost-push inflation, which can trigger a wage-price spiral as workers demand even higher wages to keep up with inflation.

(d) Discussion:
Arguments that trade union power benefits an economy:
- Higher productivity: Unions can motivate workers by improving morale, reducing labor turnover, and cooperating with management to implement training.
- Reduced inequality: Unions support low-paid workers, helping to narrow the gap between high and low earners.
- Safety and health benefits: Improving working conditions reduces workplace injuries and boosts labor health.

Arguments that trade union power does not benefit an economy:
- Wage-push unemployment: If unions force wages above the market equilibrium, firms may reduce their demand for labor, leading to classical unemployment.
- Loss of international competitiveness: Higher labor costs increase export prices, making domestic firms less competitive globally, which can harm the current account balance.
- Disruptive industrial action: Strikes halt production, leading to lost output, reduced GDP, and consumer inconvenience.

Conclusion: The net effect of increased trade union power depends on whether unions work constructively with management to increase productivity or engage in disruptive disputes.

(a) 2 marks for identifying two valid functions (1 mark each).

(b) 4 marks:
- Up to 2 marks for identifying two reasons (1 mark each).
- Up to 2 marks for explaining each reason (1 mark each).

(c) 6 marks:
- Up to 6 marks for a logical chain of analysis showing how collective bargaining leads to higher wages (1-2 marks), increased production costs for firms (1-2 marks), shifting aggregate supply/raising retail prices (1-2 marks), resulting in cost-push inflation (1 mark).

(d) 8 marks (Level-based marking):
- Level 3 (6-8 marks): Balanced discussion of both the positive and negative economic consequences of trade union power, using sound economic terminology and reaching a logical conclusion.
- Level 2 (3-5 marks): One-sided analysis, or limited coverage of both perspectives.
- Level 1 (1-2 marks): Simple points identified without analytical development.

(a) Depreciation is a decrease in the value of a currency against other currencies in a floating exchange rate system, determined by market forces of demand and supply.

(b) Causes of currency depreciation:
1. Fall in demand for exports: If foreign demand for domestic exports drops, foreigners will buy less of the domestic currency to pay for them, shifting the demand curve for the currency to the left and lowering its value.
2. Increase in demand for imports: If domestic residents buy more imports, they will sell their own currency to purchase foreign exchange, shifting the supply curve of the domestic currency to the right, reducing its value.
3. Decline in interest rates: Lower domestic interest rates relative to other countries will discourage hot money inflows and encourage financial capital outflows, reducing demand and increasing the supply of the currency.

(c) Analysis of depreciation improving the current account:
- A currency depreciation makes domestic exports cheaper in terms of foreign currencies.
- This cheaper price leads to an increase in the quantity demanded of exports, boosting total export revenue (if demand is price elastic).
- Simultaneously, depreciation makes imported goods more expensive in terms of the domestic currency.
- Higher prices discourage domestic consumers from buying imports, leading to a fall in import expenditure.
- As export revenue increases and import expenditure falls, the trade balance improves, which reduces the current account deficit.
- This adjustment is more successful if the Marshall-Lerner condition holds (the sum of PED of exports and imports is greater than 1).

(d) Discussion:
Arguments that tariffs are the best way:
- Direct impact: Tariffs directly increase the price of imported goods, encouraging consumers to switch to domestic alternatives (expenditure switching).
- Protects infant industries, maintaining domestic employment and output.
- Government revenue: Tariffs generate tax revenue, which can be reinvested in supply-side improvements.

Arguments that tariffs are not the best way / drawbacks:
- Risk of retaliation: Trading partners may impose retaliatory tariffs on the country's exports, reducing export revenue and leaving the deficit unchanged or worse.
- Inefficiency: Tariffs protect inefficient domestic firms from foreign competition, reducing incentives to innovate or lower costs.
- Increased cost of raw materials: If domestic firms rely on imported inputs, tariffs will raise their production costs, making domestic exports less competitive.
- World Trade Organization (WTO) rules may restrict the use of tariffs.
- Alternatives may be superior: Supply-side policies (improving education/infrastructure) can address the underlying competitiveness of exports in the long run, and monetary policies (increasing interest rates) can reduce overall consumption of imports.

Conclusion: Tariffs are a quick, short-term fix but carry a high risk of retaliation. Supply-side policies, though slower, address the structural root causes of the deficit and are generally a better long-term option.

(a) 2 marks for full definition (fall in currency value, floating exchange rate system/market forces). 1 mark for partial definition.

(b) 4 marks:
- Up to 2 marks for identifying two causes (1 mark each).
- Up to 2 marks for explaining how each cause shifts demand or supply of the currency (1 mark each).

(c) 6 marks:
- Up to 2 marks for explaining that exports become cheaper and imports become more expensive.
- Up to 2 marks for explaining the impact on export revenue and import expenditure.
- Up to 2 marks for analysing how these changes improve the current account balance (referring to price elasticity/Marshall-Lerner condition is highly rewarded).

(d) 8 marks (Level-based marking):
- Level 3 (6-8 marks): Balanced discussion of tariffs versus other policy alternatives to correct a current account deficit, using precise economic concepts and reaching a well-reasoned conclusion.
- Level 2 (3-5 marks): One-sided discussion, or a limited analysis of both views.
- Level 1 (1-2 marks): Simple points identified without analytical depth.