2024 Cambridge IGCSE Economics (0455) Practice Paper with Answers

The total labour force represents 100%. To find the percentage employed in the tertiary sector, subtract the percentages of the other two sectors from 100%: \(100\% - 11\% - 16\% = 73\%\).

73% (1) or 73 (1)

The two methods of trade protection introduced by Vietnam's government identified in the text are: 1. Tariffs (or import tariffs on vehicles) and 2. Quotas (or import quotas on electronic components).

Award 1 mark for each of two correct methods identified: Tariffs / import tariffs (1) and Quotas / import quotas (1). Do not accept generic answers such as 'restrictions' or 'barriers'.

An explanation of a deficit on trade in goods requires demonstrating understanding that the value of imported physical products is greater than the value of exported physical products (1 mark). To secure the second mark, reference must be made to the specific context in Arcadia: its import expenditure on tangible consumer electronics ($12 billion) was higher than its agricultural export revenue ($9 billion) (1 mark).

Award marks as follows:
- 1 mark for explaining that visible imports (imports of goods) exceeded visible exports (exports of goods).
- 1 mark for relating this to the source context (Arcadia spending $12bn on imports of electronics compared to $9bn earned from agricultural exports).

Arcadia experienced a trade in goods deficit because import expenditure of $12bn was greater than export revenue of $9bn.

Award marks as follows:
- 1 mark for identifying trade in goods deficit.
- 1 mark for referencing imports exceeded exports by $3bn or imports were $12bn and exports were $9bn.

Award 1 mark for each of two advantages identified and 1 mark for each of two logical explanations. Possible advantages include: - Lower prices / cheaper fares (1): may increase tourism, raise GDP, or improve living standards (1). - Economies of scale / greater efficiency (1): reduces average total costs or increases international competitiveness (1). - More international routes / increased connectivity (1): may attract foreign direct investment (FDI) or increase export revenue from services (1).

One mark each for each of two advantages identified and one mark for each of two explanations. Points can be linked as follows: - Identification: Economies of scale / cost savings (1 mark) - Explanation: leads to lower fares for consumers, boosting tourism and economic growth (1 mark) - Identification: Expanded route network / increased international flights (1 mark) - Explanation: attracts more foreign business travelers and tourists, improving the balance of payments (1 mark)

Expected relationship (up to 2 marks):
There is an inverse (negative) relationship between female literacy rate and birth rate. As the female literacy rate increases, the birth rate tends to decrease.

Supporting evidence (up to 2 marks):
- Niger has the lowest female literacy rate at 29% and the highest birth rate at 45 births per 1,000 people.
- Japan has the highest female literacy rate at 99% and the lowest birth rate at 7 births per 1,000 people.

Analysis of the relationship (up to 2 marks):
- Better-educated women tend to have improved career opportunities, which increases the opportunity cost of raising children and delays the age of marriage/childbearing.
- Higher literacy is often linked with greater awareness, access, and usage of contraception and family planning methods.

Exception (up to 2 marks):
- India and Kenya represent an exception to the expected trend. India has a lower female literacy rate (77%) than Kenya (82%) but also has a lower birth rate (16 births per 1,000 people compared to 27 births per 1,000 people).

Award up to 4 marks for coherent analysis:
- Identifying the expected inverse/negative relationship (1 mark).
- Providing supporting evidence from the data (e.g., Niger having the lowest literacy and highest birth rate, or Japan having the highest literacy and lowest birth rate) (1 mark).
- Providing economic/social analysis of the expected relationship (e.g., link between education, career opportunities, and family planning) (1 mark).
- Identifying and explaining an exception in the data (e.g., India having a lower literacy rate but a lower birth rate than Kenya) (1 mark).

Expected relationship (up to 2 marks):
There is an inverse (negative) relationship between female literacy rate and birth rate. As the female literacy rate increases, the birth rate tends to decrease.

Supporting evidence (up to 2 marks):
- Niger has the lowest female literacy rate at 29% and the highest birth rate at 45 births per 1,000 people.
- Japan has the highest female literacy rate at 99% and the lowest birth rate at 7 births per 1,000 people.

Analysis of the relationship (up to 2 marks):
- Better-educated women tend to have improved career opportunities, which increases the opportunity cost of raising children and delays the age of marriage/childbearing.
- Higher literacy is often linked with greater awareness, access, and usage of contraception and family planning methods.

Exception (up to 2 marks):
- India and Kenya represent an exception to the expected trend. India has a lower female literacy rate (77%) than Kenya (82%) but also has a lower birth rate (16 births per 1,000 people compared to 27 births per 1,000 people).

Award up to 4 marks for coherent analysis:
- Identifying the expected inverse/negative relationship (1 mark).
- Providing supporting evidence from the data (e.g., Niger having the lowest literacy and highest birth rate, or Japan having the highest literacy and lowest birth rate) (1 mark).
- Providing economic/social analysis of the expected relationship (e.g., link between education, career opportunities, and family planning) (1 mark).
- Identifying and explaining an exception in the data (e.g., India having a lower literacy rate but a lower birth rate than Kenya) (1 mark).

When consumer incomes rise, purchasing power increases. Since organic vegetables are assumed to be a normal good, consumers will buy more of them at any given price. This shifts the demand curve outward to the right from D1 to D2. As a result, the equilibrium price rises from P1 to P2, and the equilibrium quantity traded rises from Q1 to Q2. The supply curve remains unchanged.

Demand and Supply diagram (Up to 4 marks):
- Axes correctly labelled as Price (P) and Quantity (Q) (1 mark).
- Original demand (D1) and supply (S1) curves correctly labelled (1 mark).
- Demand curve shifted to the right (D2) (1 mark).
- Equilibriums clearly shown by lines P1 and Q1 and P2 and Q2, or marked as E1 and E2 (1 mark).

Written analysis (1 mark):
- Explains that a rise in consumer incomes will increase demand / shift the demand curve to the right and lead to higher price and quantity (1 mark).

Why the government should impose tariffs:
- It protects domestic electronics manufacturers from foreign competition, which can save local jobs and reduce unemployment.
- It helps improve the current account balance of the balance of payments by reducing the value of imports.
- The tariff acts as a tax, generating revenue for the government to spend on public services.
- It allows domestic infant industries to grow and gain economies of scale.

Why the government should not impose tariffs:
- Domestic consumers will face higher prices for electronics and fewer choices.
- It may lead to retaliation from trading partners, who might impose tariffs on Zambara's exports, harming export industries.
- Lack of foreign competition might make domestic firms inefficient and reduce their incentive to innovate.
- Imported electronics may be used as capital goods or inputs; higher costs would increase domestic production costs.

Award up to 4 marks for logical reasons why the government should impose tariffs, which may include:
- protection of domestic infant industries (1) allowing them to grow (1)
- reduction in imports to improve the current account position (1)
- preservation of domestic jobs / lower unemployment (1)
- generation of government tax revenue (1).

Award up to 4 marks for logical reasons why the government should not impose tariffs, which may include:
- risk of retaliation by other nations (1) harming domestic export sectors (1)
- higher prices for consumers (1) reducing their purchasing power / consumer surplus (1)
- loss of efficiency among domestic firms due to lack of competition (1)
- cost-push inflation if electronics are inputs for other businesses (1).

Maximum of 6 marks in total (max 4 marks for either side).

Why the government should spend more:
- It increases the skills and productivity of workers, making them more attractive to employers.
- It enhances the occupational mobility of the labour force, reducing structural unemployment.
- It can attract foreign direct investment (MNCs) seeking skilled labour, leading to economic growth.
- Improved skills can lead to higher wages and better living standards in the long run.

Why the government should not spend more:
- There is a high opportunity cost, as these funds could have been spent on healthcare or infrastructure.
- Training programs take time to design and complete, meaning there is a significant time lag before unemployment falls.
- It is expensive and may require the government to increase taxes or borrow, which could reduce aggregate demand.
- There is no guarantee that there will be vacancies in the specific fields where workers are trained.

Award up to 4 marks for logical reasons why the government should spend more on vocational education, which may include:
- increases skills and productivity of the workforce (1) shifting the PPC outward / promoting economic growth (1)
- improves occupational mobility of workers (1) which reduces structural unemployment (1)
- makes the country more attractive to foreign direct investment / multinational companies (1)
- raises worker wages and long-term living standards (1).

Award up to 4 marks for logical reasons why the government should not spend more, which may include:
- high opportunity cost (1) e.g. spending on healthcare or infrastructure forgone (1)
- significant time lag (1) as education and training take years to show results (1)
- cost of funding (1) may lead to higher taxes or increased national debt (1)
- risk of mismatch (1) if workers are trained in skills that are no longer demanded by the market (1).

Maximum of 6 marks in total (max 4 marks for either side).

A quota is a trade protection measure that places a direct physical limit on the total volume or quantity of a specific product that can be imported into a country during a given period.

1 mark for stating it is a limit or restriction. 1 mark for specifying it is on the quantity or volume of imports.

Two examples of capital in a manufacturing firm are machinery or equipment used on the production line and the factory buildings or tools.

Award 1 mark for each correct example identified, up to a maximum of 2 marks. Acceptable answers include: machinery, tools, computers, factory buildings, assembly equipment, delivery trucks. Do not accept raw materials (land) or workers (labour).

Structural unemployment occurs when there is a long-term decline in demand for a certain type of labor, leading to a mismatch between the skills of the unemployed workers and the requirements of new job vacancies.

1 mark for mentioning a mismatch of skills or labor immobility. 1 mark for linking this to a decline in a specific industry or structural changes in the economy.

1. Environmental awareness (1 mark): Electric vehicles produce zero tailpipe emissions, which appeals to consumers looking to reduce their carbon footprint / reduce pollution (1 mark).

2. Lower running costs (1 mark): Electricity is typically cheaper than petrol or diesel per mile, lowering the ongoing cost of transport (1 mark).

3. Government incentives (1 mark): Subsidies, tax reliefs, or free parking schemes make EVs cheaper to purchase or run, encouraging consumers to switch (1 mark).

One mark for each of two reasons identified and one mark for each of two explanations.

1. Fall in income tax revenue (1 mark): Unemployed people earn less or no income, so they pay less or no personal income tax (1 mark).

2. Fall in indirect tax revenue / VAT (1 mark): Unemployed individuals have lower disposable incomes, leading to reduced spending on goods and services, which lowers revenue from sales taxes or VAT (1 mark).

3. Reduced corporation tax revenue (1 mark): Lower consumer spending reduces firms' sales and profits, resulting in lower corporation tax paid by firms (1 mark).

One mark for each of two reasons identified and one mark for each of two explanations.

1. High demand for exports (1 mark): If the country's goods and services are high quality or competitively priced, export revenue will exceed import expenditure (1 mark).

2. Low demand for imports (1 mark): Domestic consumers may prefer home-produced goods or have low incomes, reducing import spending (1 mark).

3. Net primary income surplus (1 mark): Domestic residents may receive significant investment income, such as interest or dividends, from assets owned abroad (1 mark).

One mark for each of two reasons identified and one mark for each of two explanations.

An increase in unemployment means fewer people are in work, leading to a fall in personal income. This reduces the amount of income tax collected by the government. With lower incomes, consumer spending falls, which reduces the government's revenue from indirect taxes, such as value-added tax (VAT) or sales tax. Furthermore, firms may experience lower sales and profits, which decreases corporation tax revenue. On the expenditure side, the government will experience an increase in spending on unemployment benefits and other welfare support. It may also increase public spending on retraining programmes or job-creation schemes. The combination of lower tax revenues and higher government expenditure will worsen the government's budget balance, either by increasing a budget deficit or reducing a budget surplus.

Award up to 6 marks for a coherent analysis: Fewer people in employment means lower income tax revenue (1 mark); Lower household income leads to less consumer spending, reducing indirect tax revenue (e.g. VAT/sales tax) (1 mark); Lower consumer demand reduces firm profits, leading to lower corporation tax revenue (1 mark); Government spending on unemployment benefits/welfare payments will rise (1 mark); Government may increase spending on training schemes or expansionary policies to stimulate jobs (1 mark); The combination of falling revenues and rising expenditure worsens the budget balance / increases a budget deficit / reduces a budget surplus (1 mark).

A depreciation of a country's foreign exchange rate means that the value of the currency has fallen against other currencies. This makes exports cheaper to foreign buyers, which is likely to increase the quantity demanded of exports. At the same time, imports become more expensive to domestic consumers, which is likely to reduce the quantity demanded of imports. If the price elasticity of demand for both exports and imports is price elastic (or if the Marshall-Lerner condition is satisfied), the total revenue earned from exports will increase, and the total expenditure on imports will decrease. Since the trade in goods and trade in services are major components of the current account, a rise in export revenue and a fall in import expenditure will lead to an improvement in the current account balance, either by reducing a current account deficit or increasing a surplus.

Award up to 6 marks for a coherent analysis: Depreciation reduces the price of exports in foreign currencies (1 mark); This leads to an increase in the quantity demanded of exports (1 mark); Depreciation increases the price of imports in the domestic currency (1 mark); This leads to a decrease in the quantity demanded of imports (1 mark); If demand is price elastic, total export revenue increases and/or total import expenditure decreases (1 mark); Since trade in goods/services are key components of the current account, this improves the current account balance by reducing a deficit or increasing a surplus (1 mark).

A rise in household incomes increases consumers' purchasing power. For normal goods, an increase in income leads to an increase in demand, causing the demand curve to shift to the right. This occurs because consumers can afford to buy more of the goods they prefer, such as fresh foods or recreation. For luxury goods, the demand may increase more than proportionately as incomes rise, as these are non-essential high-end items. Conversely, for inferior goods, a rise in income leads to a decrease in demand, causing the demand curve to shift to the left. This is because consumers have the financial means to switch to higher-priced, superior-quality substitutes, such as buying private cars instead of using public transport, or choosing premium brands over basic brand products.

Award up to 6 marks for a coherent analysis: Higher household incomes increase consumers' purchasing power (1 mark); For normal goods, demand increases as income rises (1 mark), shifting the demand curve to the right (1 mark); For luxury goods, demand rises more than proportionately as income rises (1 mark); For inferior goods, demand decreases as income rises (1 mark), shifting the demand curve to the left (1 mark); This decrease in demand for inferior goods is due to consumers switching to superior-quality substitutes (1 mark).

Government intervention to reduce structural unemployment can bring significant benefits, but also carries several economic limitations.

Why it might benefit the economy:
- Occupational mobility: Retraining programmes and vocational training improve the occupational mobility of workers, allowing them to shift from declining industries to expanding ones.
- Economic growth: Equipping workers with new skills increases productivity and shifts the production possibility curve (PPC) outwards, fostering long-term economic growth.
- Fiscal benefits: As structurally unemployed workers find jobs, they pay more income tax and purchase more goods (increasing sales tax revenue). Concurrently, government spending on unemployment benefits falls.
- Social benefits: Reducing structural unemployment decreases poverty, improves living standards, and reduces social problems associated with long-term joblessness.

Why it might not benefit the economy:
- Opportunity cost: Funding retraining schemes or giving subsidies to firms to locate in depressed areas requires substantial government expenditure. This money could have been spent on other key areas like healthcare or infrastructure.
- Time lags: Retraining workers to acquire complex new skills (e.g., IT or engineering) takes a long time, meaning structural unemployment will not fall immediately.
- Risk of government failure: Governments might misjudge which industries will grow in the future, resulting in workers being trained for jobs that do not exist.
- High national debt / inflation: If the intervention is funded by borrowing, it can lead to higher national debt and may cause demand-pull inflation if total demand rises too quickly.

Level 3 (6-8 marks): A reasoned discussion of both sides of the argument. The candidate clearly explains why government intervention to reduce structural unemployment is beneficial (e.g., skills acquisition, occupational mobility, PPC shift, fiscal improvements) and balanced against why it might not be beneficial (e.g., opportunity cost, time lags, risk of government failure/mismatched training, inflation/debt risks). There is a logical economic analysis.

Level 2 (3-5 marks): A discussion that either lacks depth or is one-sided. The candidate may focus only on the benefits of government retraining and subsidies, or only on the drawbacks, or fail to develop the economic reasoning behind the points raised.

Level 1 (1-2 marks): Simple attempt using basic economic definitions. The candidate may define structural unemployment or identify a policy without discussing its benefits or drawbacks in a structured way.

A persistent current account surplus is often viewed as a sign of economic strength, but it is not always entirely beneficial.

Why it might be beneficial:
- Higher domestic employment: A surplus indicates high demand for a country's exports, which can boost production and create jobs in export-related industries.
- Economic growth: Net exports are a component of aggregate demand. A surplus represents an injection into the circular flow of income, stimulating economic growth.
- Accumulation of foreign reserves: The surplus allows the central bank to build up foreign currency reserves, strengthening national financial stability.
- Debt reduction: Countries with persistent surpluses can use their foreign earnings to pay off external debts or invest in assets abroad (outward foreign direct investment).

Why it might not be beneficial:
- Risk of inflation: A continuous inflow of money from export sales can increase the domestic money supply, potentially causing demand-pull inflation.
- Currency appreciation: A strong demand for exports increases demand for the domestic currency, causing it to appreciate. This makes exports more expensive and imports cheaper, which may eventually hurt exporting firms.
- Lower domestic consumption: If the surplus is caused by low domestic consumption (high savings), it suggests that households are consuming fewer goods and services, which can indicate lower current living standards.
- Retaliation from trading partners: Persistent surpluses can lead to trade tensions and protectionist measures (e.g., tariffs) from countries experiencing current account deficits.

Level 3 (6-8 marks): A reasoned discussion of both sides of the argument. The candidate clearly explains the benefits of a persistent current account surplus (e.g., export-led economic growth, job creation, foreign reserves) and balances this with the potential drawbacks (e.g., inflationary pressures, currency appreciation, lower domestic consumption, trade partner retaliation).

Level 2 (3-5 marks): A discussion that is one-sided or lacks depth. The candidate might explain only the advantages of having a surplus, or provide a brief overview of both sides without developing the underlying economic links.

Level 1 (1-2 marks): Simple attempt using basic economic definitions. The candidate may define the current account or identify exports and imports without evaluating the surplus.

Imposing tariffs on all imported goods is a highly protectionist policy that has strong arguments both for and against.

Why the country should impose tariffs:
- Protection of domestic industries: Tariffs make foreign imports more expensive, encouraging consumers to buy domestically produced goods. This protects domestic businesses and saves jobs.
- Infant industry argument: Tariffs can protect newly established domestic industries from competition with larger, foreign firms until they achieve economies of scale.
- Government revenue: Tariffs generate tax revenue for the government, which can be spent on public services like education, healthcare, and infrastructure.
- Correction of a trade deficit: By reducing the quantity of imports demanded, tariffs can help improve a country's current account balance.

Why the country should not impose tariffs:
- Higher prices for consumers: Tariffs raise the retail price of imported goods, reducing consumer purchasing power and lowering living standards.
- Increased costs for domestic firms: Many domestic producers rely on imported raw materials or components. Tariffs on these inputs increase their costs of production, making them less competitive globally.
- Retaliation and trade wars: Trade partners are likely to retaliate by imposing tariffs on the country's exports, harming domestic exporting industries.
- Inefficiency: Without foreign competition, domestic firms have less incentive to innovate, reduce costs, or improve quality, leading to market inefficiency.

Level 3 (6-8 marks): A reasoned discussion of both sides of the argument. The candidate explains clearly why tariffs might be imposed (e.g., protecting domestic jobs, infant industries, raising government revenue, correcting a deficit) and balances this with the arguments against (e.g., higher consumer prices, higher production costs for domestic firms, retaliation, loss of economic efficiency).

Level 2 (3-5 marks): A discussion that is one-sided or lacks depth. The candidate might only describe the benefits of protectionism or fail to explain the economic consequences of tariffs on domestic businesses and consumers.

Level 1 (1-2 marks): Simple attempt using basic economic definitions. The candidate may define tariffs or identify protectionism without any real evaluation of the impacts.