2023 Cambridge IGCSE Economics (0455) Practice Paper with Answers

To calculate the government tax revenue as a percentage of GDP, divide the tax revenue by the GDP and multiply by 100:

$$\text{Tax revenue as a % of GDP} = \frac{\\$0.36\text{bn}}{\\$2.0\text{bn}} \times 100 = 18\\%$$

1 mark for the correct answer: 18% (accept 18).

Calculation: \$0.36bn / \$2.0bn

According to the source material, the examples of capital goods used in Soland are:
1. Tractors
2. Automated irrigation systems
3. Wind turbines
4. Factories

Identifying any two of these will earn the full 2 marks.

Award 1 mark for each correct capital good identified from the source material, up to a maximum of 2 marks:
- Tractors (1)
- Automated irrigation systems (1)
- Wind turbines (1)
- Factories (1)

If a government wishes to raise significant tax revenue, it will choose to tax goods with price-inelastic demand (1). Since consumers are relatively unresponsive to price changes, the quantity demanded will fall by a smaller percentage than the price increase, maintaining high sales and generating a large tax yield (1).

Alternatively, if the government's aim is to significantly reduce the consumption of a demerit good, it may focus on goods with elastic demand (1). For these goods, a price increase due to the tax will cause a more than proportionate reduction in the quantity demanded, effectively discouraging consumption (1).

1 mark for identifying the choice/objective based on PED (e.g., taxing inelastic goods to maximize tax revenue OR taxing elastic goods to reduce consumption).
1 mark for explaining the impact of the PED on quantity demanded (e.g., quantity demanded falls by a smaller percentage than the price rise for inelastic goods OR quantity demanded falls by a larger percentage than the price rise for elastic goods).

If a government wishes to raise significant tax revenue, it will choose to tax goods with price-inelastic demand (1). Since consumers are relatively unresponsive to price changes, the quantity demanded will fall by a smaller percentage than the price increase, maintaining high sales and generating a large tax yield (1).

Alternatively, if the government's aim is to significantly reduce the consumption of a demerit good, it may focus on goods with elastic demand (1). For these goods, a price increase due to the tax will cause a more than proportionate reduction in the quantity demanded, effectively discouraging consumption (1).

1 mark for identifying the choice/objective based on PED (e.g., taxing inelastic goods to maximize tax revenue OR taxing elastic goods to reduce consumption).
1 mark for explaining the impact of the PED on quantity demanded (e.g., quantity demanded falls by a smaller percentage than the price rise for inelastic goods OR quantity demanded falls by a larger percentage than the price rise for elastic goods).

Based on the text:
1. One change is the movement of workers from public sector jobs to private enterprises. This pattern shifted because the Zandorian government chose to privatise its state-owned mining utilities.
2. Another change is the transition from agricultural (primary) employment to the financial services (tertiary) sector. This shift occurred because of government investment in digital infrastructure and the migration of young rural workers to cities in search of higher pay.

Award 1 mark for each of two changes identified from the text, and 1 mark for each of the two corresponding explanations.

Identified changes (maximum 2 marks):
- Workers moving from the public sector to the private sector / private enterprises (1)
- Decrease in agricultural employment / increase in financial services (tertiary sector) employment (1)

Explanations (maximum 2 marks):
- Private sector growth is due to the privatisation of state-owned mining utilities (1)
- Agricultural decline/financial sector growth is due to digital infrastructure investment / rural-to-urban migration of young workers seeking higher wages (1)

Based on the text:
1. One change is the movement of workers from public sector jobs to private enterprises. This pattern shifted because the Zandorian government chose to privatise its state-owned mining utilities.
2. Another change is the transition from agricultural (primary) employment to the financial services (tertiary) sector. This shift occurred because of government investment in digital infrastructure and the migration of young rural workers to cities in search of higher pay.

Award 1 mark for each of two changes identified from the text, and 1 mark for each of the two corresponding explanations.

Identified changes (maximum 2 marks):
- Workers moving from the public sector to the private sector / private enterprises (1)
- Decrease in agricultural employment / increase in financial services (tertiary sector) employment (1)

Explanations (maximum 2 marks):
- Private sector growth is due to the privatisation of state-owned mining utilities (1)
- Agricultural decline/financial sector growth is due to digital infrastructure investment / rural-to-urban migration of young workers seeking higher wages (1)

The diagram should include:
1. Vertically labelled axis for Price (P) and horizontally labelled axis for Quantity (Q).
2. Downward-sloping demand curve (D) and upward-sloping supply curve (S) intersecting at an initial equilibrium price (Pe) and quantity (Qe).
3. A horizontal line below the equilibrium price labelled as 'Maximum Price' or 'Pmax'.
4. At Pmax, the quantity supplied (Qs) is shown to be less than the quantity demanded (Qd), creating a shortage (excess demand).

Award up to 4 marks for the diagram:
- Axes correctly labelled – price and quantity or p and q (1)
- Original demand and supply curves correctly labelled (1)
- Maximum Price / Price ceiling line set below the equilibrium and correctly labelled – accept Pmax or Max Price but not P2 (1)
- Demand shown as greater than supply e.g. labelling of Qd > Qs or shortage (1)

Note: No mark for showing maximum price if it also shows a shift in the supply or demand curve. Ignore all written comments.

To analyse the relationship from Table 1.1:
1. **Identify the expected relationship**: There is a positive (direct) relationship between the national savings rate and the current account balance. As the national savings rate increases, the current account balance tends to improve (moving from a deficit to a surplus or having a smaller deficit).
2. **Provide supporting evidence**: Laos has the lowest savings rate of 10% and the largest current account deficit of -4.8%. Cambodia also has a low savings rate of 12% and a deficit of -3.5%. Conversely, Malaysia and Vietnam have high savings rates (26% and 29% respectively) and both record current account surpluses (+2.1% and +1.5%).
3. **Identify and explain the exception**: The Philippines is the exception. It has a lower national savings rate (15%) than Thailand (20%), yet it records a current account surplus of +0.8%, whereas Thailand has a current account deficit of -1.0%.

Award marks based on the following breakdown (up to a maximum of 5 marks):

**Expected relationship (Max 2 marks):**
* **1 mark** for identifying a positive / direct relationship.
* **1 mark** for explaining that higher national savings rates are generally associated with a better/more positive current account balance (or lower national savings rates are associated with a larger current account deficit).

**Supporting evidence (Max 2 marks):**
* **1 mark** for citing countries with low savings rates and deficits (e.g., Laos at 10% savings and -4.8% deficit, or Cambodia at 12% savings and -3.5% deficit).
* **1 mark** for citing countries with high savings rates and surpluses (e.g., Malaysia at 26% savings and +2.1% surplus, or Vietnam at 29% savings and +1.5% surplus).

**Exception (Max 2 marks):**
* **1 mark** for identifying the Philippines as the exception.
* **1 mark** for explaining that the Philippines has a lower national savings rate (15%) than Thailand (20%) but has a better current account balance (+0.8% surplus) compared to Thailand's deficit (-1.0%).

A merger between the two largest tour operators could benefit consumers if it allows the merged firm to achieve economies of scale, such as bulk purchasing of transport or marketing. This lowers average costs, which may be passed on to consumers in the form of lower prices. Additionally, higher profits could be reinvested to improve the quality and safety of tours. However, it might not benefit consumers if the increased market power (60% control) allows the firm to act as a monopoly, raising prices and restricting choices. Without competition, the firm may also become complacent, leading to lower quality services.

Award up to 4 marks for logical reasons why it might benefit consumers, which may include: economies of scale lowering average costs and leading to lower prices (1); higher profits reinvested into improving quality/safety of services (1); greater efficiency from combining resources (1). Award up to 4 marks for logical reasons why it might not benefit consumers, which may include: increased monopoly power allowing the firm to restrict supply and raise prices (1); lack of competition leading to complacency / lower quality (1); reduced consumer choice (1). Award 1 mark for a clear definition of a merger or explanation of economies of scale (1).

The removal of import tariffs on agricultural products could benefit the economy by lowering food prices for consumers, which increases real disposable incomes and allows them to spend more on other domestic sectors, promoting economic growth. It also increases consumer choice and can force local farmers to become more efficient to survive. However, it might harm the economy if local farmers are driven out of business by cheap foreign imports, which can lead to high structural unemployment in rural areas, a worsening of the current account balance of payments due to increased imports, and a loss of tariff revenue for the government to spend on public services.

Award up to 4 marks for logical reasons why it might benefit the economy, which may include: lower prices of agricultural imports reducing the cost of living (1); increase in real disposable income boosting overall spending (1); wider consumer choice (1); local farmers forced to improve efficiency (1). Award up to 4 marks for logical reasons why it might not benefit the economy, which may include: local farmers going out of business causing structural unemployment (1); increase in imports worsening the current account balance (1); loss of tariff revenue for the government (1). Award 1 mark for an accurate definition of tariffs or free trade (1).

Fiscal policy refers to the decisions made by a government regarding its levels of taxation and public expenditure. Its primary objective is to manage the level of aggregate demand to achieve macroeconomic goals such as price stability, economic growth, and low unemployment.

1 mark for identifying it involves government spending and taxation (revenue and expenditure).
1 mark for explaining that its purpose is to influence aggregate demand / the level of economic activity / achieve macroeconomic goals.

Public goods are non-rival (one person's consumption does not reduce availability for others) and non-excludable (it is impossible to stop people who haven't paid from consuming them). Classic examples are street lighting, flood defence systems, lighthouses, and national defence.

Award 1 mark for each valid example identified, up to a maximum of 2 marks.
Acceptable examples include: national defence, street lighting, lighthouses, flood defences.
Reject: merit goods such as public education, healthcare, or public parks.

Structural unemployment occurs when there is a mismatch between the skills of the workers looking for jobs and the skills required for the jobs available. This is typically caused by long-term changes in the structure of the economy, such as the decline of traditional manufacturing industries or technological advances, combined with occupational or geographical immobility.

1 mark for stating that it is caused by changes in the structure of the economy / decline of a specific industry.
1 mark for noting the mismatch of skills / occupational or geographical immobility of labour.

First, if the price elasticity of demand for imports and exports is price inelastic, a depreciation will not reduce the trade deficit. Even though import prices rise, the quantity demanded of imports falls very little, and although export prices fall, the quantity demanded of exports rises very little, causing total import expenditure to rise relative to export revenue. Second, domestic firms may face supply-side constraints. If exporting firms do not have spare capacity, they cannot increase production to meet the higher foreign demand created by the cheaper currency, leaving the trade balance unchanged.

One mark each for each of two reasons identified: - Price inelastic demand for exports or imports / Marshall-Lerner condition not met (1) - Lack of spare capacity / supply-side constraints in exporting industries (1) - Foreign protectionist measures / trade barriers (1) - Rising costs of imported raw materials / cost-push inflation offsets competitive gain (1). One mark each for each of two explanations: - Explanation of inelastic demand: despite price changes, import spending may increase or export revenue may not rise sufficiently because quantities demanded change by a smaller percentage than prices (1) - Explanation of supply constraints: firms cannot physically increase output to supply the extra exports demanded (1) - Explanation of foreign barriers: tariffs or quotas set by other countries prevent them from buying more exports even if they are cheaper (1) - Explanation of raw materials: higher costs of imported inputs raise domestic production costs, forcing export prices back up (1).

First, technological advancements can cause structural unemployment through automation. When new technology is introduced, it can perform tasks more efficiently than workers, making their skills obsolete and leading to job losses. Second, a structural decline in demand for a particular industry's products can lead to unemployment. If consumer preferences shift away from a product permanently (such as away from fossil fuels to renewable energy), firms in that industry will contract, causing long-term unemployment for workers who lack transferable skills.

One mark each for each of two causes identified: - Technological change / automation (1) - Decline of a specific industry / changes in consumer tastes (1) - Geographical immobility of labor / relocation of industries (1) - Inadequate education or training systems (1). One mark each for each of two explanations: - Technological explanation: machines or software replace human tasks, leaving workers without the modern skills needed for alternative jobs (1) - Industry decline explanation: a permanent fall in demand forces firms to downsize or shut down, leaving specialized workers unemployed as their skills are not easily transferable (1) - Geographical explanation: workers cannot move to areas where jobs are available due to high housing costs or family ties (1) - Education explanation: mismatch between the skills taught in schools and the skills demanded by employers in growing sectors (1).

First, specialising in a single primary product exposes a country to extreme price volatility. Primary products, such as agricultural crops or minerals, are highly susceptible to fluctuations in supply (due to weather conditions) and global demand, leading to unstable export revenues and economic instability. Second, if the primary product is a non-renewable resource, there is a risk of depletion. Once resources like oil or metals are exhausted, the economy faces a severe structural decline and a permanent drop in export earnings unless it diversifies.

One mark each for each of two disadvantages identified: - Price volatility / unstable export revenues (1) - Resource depletion (for non-renewable resources) (1) - Low income elasticity of demand (1) - Competition from synthetic substitutes (1). One mark each for each of two explanations: - Volatility explanation: shifts in global demand or supply cause wild swings in prices, making government planning and investment difficult (1) - Depletion explanation: extracting non-renewable resources means they will eventually run out, leading to long-term economic decline and unemployment (1) - Income elasticity explanation: as global incomes rise, demand for primary products may not increase proportionally, limiting long-term economic growth (1) - Substitute explanation: development of artificial alternatives by other countries reduces the global demand for the natural primary commodity (1).

An outward shift of the production possibility curve (PPC) is shown. The axes should be labelled with two different goods or categories of output, such as consumer goods and capital goods. The original curve, sloping downwards to the axes, is shifted parallelly or non-parallelly outwards to the right, indicating an increase in productive capacity. Arrows or clear labels (PPC1 to PPC2) show this change.

An influx of skilled workers increases both the quantity and quality of the available labour force. Quality rises because skilled workers are more productive, efficient, and skilled. Quantity rises because of the increase in the overall number of workers. These factors combine to increase the maximum potential output (productive capacity) of the economy, which is represented by an outward shift of the PPC, illustrating long-run economic growth.

Up to 4 marks for the PPC diagram:
- Axes correctly labelled with different outputs / categories of goods (1 mark)
- Original curve drawn sloping downward to both axes (1 mark)
- New curve drawn shifting outwards/to the right (1 mark)
- Shift indicated by an arrow or clear letter labels (1 mark)

Up to 2 marks for coherent analysis:
- Analysis of why an increase in skilled migration increases the quantity and/or quality of labour (1 mark)
- Analysis of how this increases the economy's productive capacity / potential output / long-term growth (1 mark)

A market diagram is shown with a rightward shift of the supply curve. The axes must be labelled price (P) and quantity (Q). A downward-sloping demand curve (D) and an upward-sloping supply curve (S) are drawn. The introduction of the subsidy shifts the supply curve to the right from S to S1. The equilibrium price falls from P0 to P1, and the equilibrium quantity transacted increases from Q0 to Q1.

A subsidy is a financial grant given by the government to producers. It directly reduces the cost of production for electric vehicle manufacturers. As costs of production fall, firms find it more profitable to produce electric vehicles at every price level, leading to an increase in supply. This outward shift in supply creates a surplus at the original price, forcing the price down to a new, lower equilibrium, which in turn encourages consumer demand and increases the total quantity sold.

Up to 4 marks for the diagram:
- Axes correctly labelled with price and quantity (1 mark)
- Original demand and supply curves correctly drawn and labelled with original equilibrium (1 mark)
- Supply curve shifted to the right (1 mark)
- New lower equilibrium price and higher equilibrium quantity clearly shown (1 mark)

Up to 2 marks for coherent analysis:
- Explaining that a subsidy is a government grant that lowers the cost of production for firms (1 mark)
- Explaining that lower costs lead to an increase in supply, which drives down the market price and increases the quantity sold (1 mark)

A market diagram is shown with a rightward shift of the demand curve. The axes must be labelled price (P) and quantity (Q). A downward-sloping demand curve (D) and an upward-sloping supply curve (S) are drawn. A successful advertising campaign shifts the demand curve to the right from D to D1. The equilibrium price rises from P0 to P1, and the equilibrium quantity sold increases from Q0 to Q1.

Advertising aims to persuade consumers and build brand loyalty. A successful campaign changes consumer tastes and preferences in favour of this specific brand of coffee, making them more willing and able to purchase it at any given price. This shifts the demand curve to the right. At the original price, a shortage is created because demand exceeds supply, which bids up the market price until a new higher equilibrium price and quantity are established.

Up to 4 marks for the diagram:
- Axes correctly labelled with price and quantity (1 mark)
- Original demand and supply curves correctly drawn and labelled with original equilibrium (1 mark)
- Demand curve shifted to the right (1 mark)
- New higher equilibrium price and higher equilibrium quantity clearly shown (1 mark)

Up to 2 marks for coherent analysis:
- Explaining that a successful advertising campaign alters consumer tastes/preferences, thereby increasing demand (1 mark)
- Explaining that the increase in demand causes a shortage at the original price, pushing the equilibrium price and quantity up (1 mark)

An increase in the national minimum wage can reduce poverty in several ways: 1) It directly increases the income of low-paid workers, allowing them to purchase basic necessities such as food, healthcare, and education. 2) It helps to reduce relative poverty by narrowing the income gap between low-wage earners and higher-wage earners. 3) It can increase work incentives, encouraging inactive individuals to seek employment rather than relying on state welfare benefits. 4) Higher wages can boost worker motivation and productivity, which can lead to higher output and economic growth. However, it may not reduce poverty and could even worsen it because: 1) It increases the costs of production for firms. To maintain profit margins, firms may lay off workers, leading to higher unemployment among the low-skilled workforce, pushing them into absolute poverty. 2) Firms may pass the higher wage costs onto consumers in the form of higher prices. This causes inflation, which reduces the real purchasing power of all consumers, particularly those on low or fixed incomes. 3) Firms might replace labor with capital (such as automated machinery), reducing job opportunities for low-skilled workers in the long term. 4) Some small businesses may be unable to afford the higher wages and may close down, leading to more job losses.

Level 3 (6–8 marks): A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis. Level 2 (3–5 marks): A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. Level 1 (1–2 marks): There is a simple attempt at using economic definitions and terminology, with occasional understanding. Level 0 (0 marks): A mark of zero should be awarded for no creditable content.

A depreciation of the foreign exchange rate can improve the current account balance in several ways: 1) It makes domestic exports cheaper in foreign currency, increasing foreign demand and export quantity. 2) It makes foreign imports more expensive in local currency, discouraging domestic consumers from buying imports and shifting consumption toward domestically produced goods. 3) If the Marshall-Lerner condition holds (where the sum of price elasticities of demand for exports and imports is greater than one), the overall export revenue will rise and import expenditure will fall, leading to an improvement in the current account. However, it may not improve the current account because: 1) In the short run, demand for imports and exports is often price-inelastic, as buyers need time to adjust their habits (leading to a temporary worsening of the current account, known as the J-curve effect). 2) Depreciation increases the local currency cost of imported raw materials and capital goods, raising domestic production costs and causing cost-push inflation, which erodes international competitiveness. 3) Foreign buyers may not buy more exports if their own economies are in recession, regardless of the cheaper prices.

Level 3 (6–8 marks): A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis. Level 2 (3–5 marks): A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. Level 1 (1–2 marks): There is a simple attempt at using economic definitions and terminology, with occasional understanding. Level 0 (0 marks): A mark of zero should be awarded for no creditable content.

Providing subsidies to domestic manufacturing firms can increase economic growth in several ways: 1) Subsidies lower the costs of production for firms, allowing them to lower prices, which increases domestic demand and output (shifting the aggregate demand curve to the right). 2) Lower prices make exports more competitive globally, potentially increasing export sales and improving the balance of trade. 3) Subsidies can encourage investment in advanced machinery, technology, and staff training, which increases productivity and expands the country's productive capacity (long-run aggregate supply). 4) Subsidised industries may expand, creating new jobs and reducing unemployment. However, subsidies may not increase economic growth because: 1) There is a significant opportunity cost; the money spent on subsidies could have been used for infrastructure, education, or healthcare, which might have generated greater long-term economic growth. 2) Subsidies can breed inefficiency and dependency, as firms lack the competitive pressure to cut costs or innovate. 3) Higher government spending on subsidies might require higher taxes, which could reduce consumer spending and investment elsewhere in the economy. 4) International trade partners might view the subsidies as unfair competition and retaliate with tariffs, harming the export sector.

Level 3 (6–8 marks): A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis. Level 2 (3–5 marks): A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. Level 1 (1–2 marks): There is a simple attempt at using economic definitions and terminology, with occasional understanding. Level 0 (0 marks): A mark of zero should be awarded for no creditable content.