Cambridge IGCSE and O Level Economics Workbook Answers ● ● 1 The basic economic problem 1 The correct answer is Option B. Resources in and therefore represent maximum output in the an economy are scarce and needs and wants economy. Point E is unattainable given the current (of individuals, firms and governments) are resources in the economy. unlimited. Option A states that wants are limited 6 Country X could invest in machinery and/or and resources are unlimited which is incorrect technology and this will increase the productive as wants are unlimited and resources limited. capacity of the economy as more oil and wheat See pages 2–3 in the textbook for a more detailed can be produced with the same amount of explanation of the basic economic problem. resources. 2 The correct answer is Option A. Public domain Country X could train workers to increase their web pages are available to anybody with access skills and this may increase their productivity as to the internet. Access therefore is unlimited. workers become more efficient at producing oil The other options (running shoes, housing and and wheat. tennis rackets) are all limited in supply and are therefore economic goods. See page 2 in the Award 2 × 2 marks for stating and explaining textbook for more examples of economic and two ways to increase the productive capacity of free goods. Country X. 3 The correct answer is Option C. Selling and See pages 132–133 and 217–218 in the textbook distributing olive oil is in the tertiary sector of the for more information on how to increase the economy. Options A and D are in the secondary productive capacity of the economy. sector as both are part of the manufacturing 7 Examples of capital-intensive industries: car process. Option B (growing of olive trees) is in the manufacturing and glass making. primary sector. See pages 5–6 in the textbook for Examples of labour-intensive industries: garment more detailed information on the three sectors of manufacturing and teaching. industry. Award 1 mark for each relevant example of each 4 The correct answer is Option C . To increase type of industry, up to the maximum of 2 marks. production of wheat from W to W it is necessary 2 1 to decrease production of oil from O to O . This is 8 Opportunity cost is the cost of the next best 2 1 because the PPF represents the maximum amount of alternative foregone when making a decision. wheat and oil that can be produced at each level of For example, if a school spends money on a new output, with all resources used efficiently. Options sports hall, the opportunity cost might be a new A and B are incorrect because to increase production science laboratory which could have been built of wheat it is necessary to decrease oil production. instead. See page 7 in the textbook for a more Option D requires an increase in the productive detailed explanation of opportunity cost. capacity of the country. See pages 7–9 in the 9 The agricultural sector has become less valuable textbook for more detailed information on PPFs . as a percentage of GDP for Country Y because 5 The correct answer is Option B . It is possible the price of goods being produced may have to increase production within the economy fallen or people may be leaving the agricultural without incurring an opportunity cost, i.e. it is industry. Instead, with economic development, possible to increase both production of wheat these people have entered the manufacturing or and oil without any opportunity cost. Options service sector because earnings are higher in these C and D are on the production possibility curve industries. 1 Cambridge IGCSE ® and O Level Economics Workbook Answers

Cambridge IGCSE and O Level
Economics Workbook Answers
● ● 1 The basic economic problem
1 The correct answer is Option B. Resources in and therefore represent maximum output in the
an economy are scarce and needs and wants economy. Point E is unattainable given the current
(of individuals, firms and governments) are resources in the economy.
unlimited. Option A states that wants are limited
6 Country X could invest in machinery and/or
and resources are unlimited which is incorrect
technology and this will increase the productive
as wants are unlimited and resources limited.
capacity of the economy as more oil and wheat
See pages 2–3 in the textbook for a more detailed
can be produced with the same amount of
explanation of the basic economic problem.
resources.
2 The correct answer is Option A. Public domain
Country X could train workers to increase their
web pages are available to anybody with access
skills and this may increase their productivity as
to the internet. Access therefore is unlimited.
workers become more efficient at producing oil
The other options (running shoes, housing and
and wheat.
tennis rackets) are all limited in supply and are
therefore economic goods. See page 2 in the Award 2 × 2 marks for stating and explaining
textbook for more examples of economic and two ways to increase the productive capacity of
free goods. Country X.
3 The correct answer is Option C. Selling and See pages 132–133 and 217–218 in the textbook
distributing olive oil is in the tertiary sector of the for more information on how to increase the
economy. Options A and D are in the secondary productive capacity of the economy.
sector as both are part of the manufacturing
7 Examples of capital-intensive industries: car
process. Option B (growing of olive trees) is in the
manufacturing and glass making.
primary sector. See pages 5–6 in the textbook for
more detailed information on the three sectors of Examples of labour-intensive industries: garment
industry. manufacturing and teaching.
Award 1 mark for each relevant example of each
4 The correct answer is Option C . To increase
type of industry, up to the maximum of 2 marks.
production of wheat from W to W it is necessary
2 1
to decrease production of oil from O to O . This is 8 Opportunity cost is the cost of the next best
2 1
because the PPF represents the maximum amount of alternative foregone when making a decision.
wheat and oil that can be produced at each level of For example, if a school spends money on a new
output, with all resources used efficiently. Options sports hall, the opportunity cost might be a new
A and B are incorrect because to increase production science laboratory which could have been built
of wheat it is necessary to decrease oil production. instead. See page 7 in the textbook for a more
Option D requires an increase in the productive detailed explanation of opportunity cost.
capacity of the country. See pages 7–9 in the
9 The agricultural sector has become less valuable
textbook for more detailed information on PPFs .
as a percentage of GDP for Country Y because
5 The correct answer is Option B . It is possible the price of goods being produced may have
to increase production within the economy fallen or people may be leaving the agricultural
without incurring an opportunity cost, i.e. it is industry. Instead, with economic development,
possible to increase both production of wheat these people have entered the manufacturing or
and oil without any opportunity cost. Options service sector because earnings are higher in these
C and D are on the production possibility curve industries.
1
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers The service sector may have increased in value The introduction of the internet café causes due to growth in the tourism industry and related the PPF curve for the village to shift outwards, trades. For example, an increase in tourism will from PPC to PPC . 1 2 bring about income for the hotel industry, airlines, Award 2 × 1 marks for drawing and correctly restaurants, retail outlets (shops) and tourist labelling the axes. attractions. Award 1 mark for drawing the original PPF The change in the structure of industry in curve. Country Y could be due to economic growth Award 1 mark for drawing the new PPF curve caused by an increase in the tourism industry to the right of the original PPF curve. typical of a less economically developed country See pages 7–9 in the textbook for further such as Cambodia or Laos. information about production possibility curves. Award 2 × 2 marks for stating and explaining two b The shift is due to the increased productivity reasons for the change in the structure of industry. of farmers who can now get the best price 10 a for their produce and increase yields of their crops due to improved production techniques. Existing and new businesses can communicate more easily with suppliers and customers, e.g. by using email and Skype. They can also research the market, their competitors Goods and potentially access finance available for PPC2 investment. PPC 1 Award 2 × 2 marks for identifying and explaining two possible reasons for increased O Services productivity. ● ● 2 Economic systems 1 The correct answer is Option C. See page 12 in options are disadvantages of operating a planned the textbook for an overview of the three main economy. See pages 14–15 in the textbook for an types of economic systems. Refer to Chapter 1 in explanation of these disadvantages. the textbook for details about the basic economic 5 The correct answer is Option C. Production problem (Option A) and scarcity (Option B). takes place to fulfil people’s needs and wants, Economic agents (Option D) refers to households irrespective of the prevailing economic system. and firms involved in economic activities. Hence, why production should take place is 2 The correct answer is Option B. In a mixed not a fundamental economic question. See economy there is both a private sector page 13 in the textbook for an explanation of (comprising of both households and firms) and a why the other options are key questions that public sector (the government). See pages 17–18 economists ask. in the textbook for an explanation of a mixed 6 Features of a planned economic system include: economy. production decisions are made by the ● ● 3 The correct answer is Option B. In a planned government economy, the government oversees production production schedules are devised on a long-term ● ● decisions (what, how and for whom production basis should take place). See page 12 in the textbook for wage differentials are minimal an explanation of the various types of economic ● ● systems. the economy prefers to be self-sufficient. ● ● 4 The correct answer is Option D. In a free market See pages 13–14 in the textbook for an explanation ● economy, resources are allocated on the basis of of the above features of a planned economy. demand and supply, e.g. highly skilled workers 7 An explanation that prices are determined by the are paid more than those with a lack of desirable interacting forces of demand (consumers) and work skills. This can result in huge inequalities supply (producers). Prices are determined when in income and wealth (Option D). The other 2 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
The service sector may have increased in value The introduction of the internet café causes
due to growth in the tourism industry and related the PPF curve for the village to shift outwards,
trades. For example, an increase in tourism will from PPC to PPC .
1 2
bring about income for the hotel industry, airlines, Award 2 × 1 marks for drawing and correctly
restaurants, retail outlets (shops) and tourist labelling the axes.
attractions.
Award 1 mark for drawing the original PPF
The change in the structure of industry in curve.
Country Y could be due to economic growth Award 1 mark for drawing the new PPF curve
caused by an increase in the tourism industry to the right of the original PPF curve.
typical of a less economically developed country
See pages 7–9 in the textbook for further
such as Cambodia or Laos.
information about production possibility curves.
Award 2 × 2 marks for stating and explaining two b The shift is due to the increased productivity
reasons for the change in the structure of industry. of farmers who can now get the best price
10 a for their produce and increase yields of their
crops due to improved production techniques.
Existing and new businesses can communicate
more easily with suppliers and customers,
e.g. by using email and Skype. They can
Goods also research the market, their competitors
and potentially access finance available for
PPC2
investment.
PPC 1
Award 2 × 2 marks for identifying and
explaining two possible reasons for increased
O Services
productivity.
● ● 2 Economic systems
1 The correct answer is Option C. See page 12 in options are disadvantages of operating a planned
the textbook for an overview of the three main economy. See pages 14–15 in the textbook for an
types of economic systems. Refer to Chapter 1 in explanation of these disadvantages.
the textbook for details about the basic economic
5 The correct answer is Option C. Production
problem (Option A) and scarcity (Option B).
takes place to fulfil people’s needs and wants,
Economic agents (Option D) refers to households
irrespective of the prevailing economic system.
and firms involved in economic activities.
Hence, why production should take place is
2 The correct answer is Option B. In a mixed not a fundamental economic question. See
economy there is both a private sector page 13 in the textbook for an explanation of
(comprising of both households and firms) and a why the other options are key questions that
public sector (the government). See pages 17–18 economists ask.
in the textbook for an explanation of a mixed
6 Features of a planned economic system include:
economy.
● ● production decisions are made by the
3 The correct answer is Option B. In a planned government
economy, the government oversees production
● ● production schedules are devised on a long-term
decisions (what, how and for whom production
basis
should take place). See page 12 in the textbook for
wage differentials are minimal
an explanation of the various types of economic ● ●
systems. ● ● the economy prefers to be self-sufficient.
4 The correct answer is Option D. In a free market ● See pages 13–14 in the textbook for an explanation
economy, resources are allocated on the basis of of the above features of a planned economy.
demand and supply, e.g. highly skilled workers 7 An explanation that prices are determined by the
are paid more than those with a lack of desirable interacting forces of demand (consumers) and
work skills. This can result in huge inequalities supply (producers). Prices are determined when
in income and wealth (Option D). The other
2
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers the demand for and supply of a product are equal 9 A planned economic system enables basic needs (in equilibrium). See page 15 in the textbook for to be met for everyone in society. By contrast, an explanation. An appropriate example must be production is disproportionately geared towards provided for full marks. those with high incomes and wealth in market economies. See page 16 in the textbook for a more 8 a An economic system that comprises both a detailed explanation. public sector and a private sector. Alternatively, a combination of planned and 10 Arguments in favour of a free market economy, free market economies. include: See page 12 in the textbook for a definition greater efficiency ● of a mixed economy, and pages 17–18 for an freedom of choice/more competition ● explanation of mixed economies. incentives to work and to innovate. ● b Reasons why most countries operate mixed Possible disadvantages of a free market economy economies include: include: misallocation of resources under a free ● ● environmental issues market economy (see Chapter 5 in the ● ● textbook to read more about market income and wealth inequalities ● failures), e.g. merit goods, demerit goods, social hardship, i.e. inequalities in the ● public goods and externalities distribution of income and wealth government intervention is required for wasteful competition ● ● ● numerous reasons, e.g. environmental the existence of unregulated monopolies. ● protection and to redistribute income and See pages 16–17 in the textbook for an explanation wealth (through the tax system) of the advantages and disadvantages of market government intervention is also required to ● ● economies. regulate and control the activities of private sector firms in mixed economies, e.g. Award up to 5 marks for a one-sided answer. employment rights and anti-competitive Award up to 8 marks for a balanced answer that business activities. considers both advantages and disadvantages of a Award 1–3 marks for a brief explanation which free market economic system. ● shows a limited understanding. Award 4–6 marks for an explanation which ● shows a good level of understanding. The use of appropriate examples should be demonstrated. ● ● 3 Demand and supply 1 The correct answer is Option A. Effective demand for an explanation of why an increase in interest is used to suggest that demand is backed by both rates will affect borrowing, spending and saving. the ability and the willingness of customers to pay 4 The correct answer is Option A. Customers who a certain price to buy a particular good or service. buy shampoo are likely to need conditioner See page 20 in the textbook for further guidance. too. Option C is incorrect as sugar is not jointly demanded with tea (indeed, not all tea drinkers 2 The correct answer is Option D. If consumers use sugar, and it really depends on the type of tea become more aware of the health issues related being considered). Options B and D are examples to sugar, they are less likely to buy sugar, shifting of substitute products. the demand curve to the left. See pages 23–24 in the textbook to read about the differences 5 The correct answer is Option D. At $10 per unit, between shifts and movements in demand. supply is 21 000 units whilst demand is only 18 000 units, i.e. there is excess supply (a surplus, 3 The correct answer is Option C. Higher interest rather than a shortage) of 3000 units. rates in China make it more expensive to borrow money to buy cars and encourage more saving 6 A movement along the demand curve is caused rather than spending. See page 104 in the textbook by changes in the price of a good or service. 3 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
the demand for and supply of a product are equal 9 A planned economic system enables basic needs
(in equilibrium). See page 15 in the textbook for to be met for everyone in society. By contrast,
an explanation. An appropriate example must be production is disproportionately geared towards
provided for full marks. those with high incomes and wealth in market
8 a An economic system that comprises both a economies. See page 16 in the textbook for a more
public sector and a private sector. detailed explanation.
Alternatively, a combination of planned and 10 Arguments in favour of a free market economy,
free market economies. include:
See page 12 in the textbook for a definition greater efficiency
●
of a mixed economy, and pages 17–18 for an freedom of choice/more competition
●
explanation of mixed economies.
● incentives to work and to innovate.
b Reasons why most countries operate mixed
Possible disadvantages of a free market economy
economies include:
include:
● ● misallocation of resources under a free
environmental issues
market economy (see Chapter 5 in the ● ●
textbook to read more about market ● income and wealth inequalities
failures), e.g. merit goods, demerit goods, social hardship, i.e. inequalities in the
●
public goods and externalities distribution of income and wealth
● ● government intervention is required for ● wasteful competition
numerous reasons, e.g. environmental
● the existence of unregulated monopolies.
protection and to redistribute income and
wealth (through the tax system) See pages 16–17 in the textbook for an explanation
of the advantages and disadvantages of market
● ● government intervention is also required to
economies.
regulate and control the activities of private
sector firms in mixed economies, e.g. Award up to 5 marks for a one-sided answer.
employment rights and anti-competitive Award up to 8 marks for a balanced answer that
business activities. considers both advantages and disadvantages of a
Award 1–3 marks for a brief explanation which free market economic system.
●
shows a limited understanding.
● Award 4–6 marks for an explanation which
shows a good level of understanding. The
use of appropriate examples should be
demonstrated.
● ● 3 Demand and supply
1 The correct answer is Option A. Effective demand for an explanation of why an increase in interest
is used to suggest that demand is backed by both rates will affect borrowing, spending and saving.
the ability and the willingness of customers to pay
4 The correct answer is Option A. Customers who
a certain price to buy a particular good or service.
buy shampoo are likely to need conditioner
See page 20 in the textbook for further guidance.
too. Option C is incorrect as sugar is not jointly
2 The correct answer is Option D. If consumers demanded with tea (indeed, not all tea drinkers
become more aware of the health issues related use sugar, and it really depends on the type of tea
to sugar, they are less likely to buy sugar, shifting being considered). Options B and D are examples
the demand curve to the left. See pages 23–24 of substitute products.
in the textbook to read about the differences 5 The correct answer is Option D. At $10 per unit,
between shifts and movements in demand. supply is 21 000 units whilst demand is only
18 000 units, i.e. there is excess supply (a surplus,
3 The correct answer is Option C. Higher interest
rather than a shortage) of 3000 units.
rates in China make it more expensive to borrow
money to buy cars and encourage more saving 6 A movement along the demand curve is caused
rather than spending. See page 104 in the textbook by changes in the price of a good or service.
3
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Higher prices cause contractions in demand, Award up to 2 marks for an answer that does not whereas lower prices cause expansions in include a diagram but shows understanding of demand. However, a shift in demand is caused by excess demand. changes in non-price factors that affect demand, Award up to 5 marks for a correct explanation e.g. changes in income, advertising and the price of excess demand, with an accurately labelled of substitute products. See pages 23–24 in the diagram that shows excess demand exists at all textbook for further guidance. prices below the equilibrium. 7 A normal supply curve is upwards sloping, See page 31 in the textbook for an explanation of showing a positive correlation between price and excess demand. the quantity supplied. This is because at higher prices, firms are more willing and more able to 10 The imposition of a tax on suppliers causes an supply at each given price level. See page 25 in increase in their costs, thus shifting the market the textbook for further guidance. supply curve to the left from S to S . This raises the 1 2 equilibrium price from P to P and subsequently 8 Equilibrium price occurs where demand and 1 2 reduces the quantity traded from Q to Q . supply are equal, i.e. surpluses and shortages do 1 2 not exist, so there is no pressure on the price to change. By contrast, disequilibrium price exists S S 2 1 when demand and supply are not equal: there is a surplus when price is above the market P 2 equilibrium and a shortage when price is below Tax per unit P Price ($) 1 the equilibrium. Note : the demands of the question do not require D students to draw a demand and supply diagram, although if students choose to do so they should O Q Q 2 1 be credited accordingly. Quantity traded 9 Excess demand occurs when demand exceeds Imposition of a tax on oil suppliers supply because the price is lower than the market See page 30 in the textbook for an explanation equilibrium, resulting in a shortage. of how the imposition of taxes affects market equilibrium. S A shortage occurs when demand exceeds supply because the Price ($) price is lower than the P e Excess market equilibrium demand P 1 D O Q Q Q s e d Quantity traded ● ● 4 Price elasticity 1 Price elasticity of demand 3 The correct answer is Option B. Knowing the percentage change in quantity demanded PED for a particular product enables firms to = percentage change in price know more about how consumer spending %∆QD −5 is likely to change following a change in the PED = = = −0.5 %∆P +10 price of the product. For example, if demand Hence, the correct answer is Option C. is price inelastic, then an increase in the price will not cause consumers to change their 2 Price elasticity of demand spending by very much due to the lack of percentage change in quantity demanded = substitutes. percentage change in price %∆QD −2 4 The correct answer is Option B. In the short run, PED = = = −0.25 %∆P +8 hairdressers could work overtime if the market Hence, the correct answer is Option A. 4 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Higher prices cause contractions in demand, Award up to 2 marks for an answer that does not
whereas lower prices cause expansions in include a diagram but shows understanding of
demand. However, a shift in demand is caused by excess demand.
changes in non-price factors that affect demand,
Award up to 5 marks for a correct explanation
e.g. changes in income, advertising and the price
of excess demand, with an accurately labelled
of substitute products. See pages 23–24 in the
diagram that shows excess demand exists at all
textbook for further guidance.
prices below the equilibrium.
7 A normal supply curve is upwards sloping,
See page 31 in the textbook for an explanation of
showing a positive correlation between price and
excess demand.
the quantity supplied. This is because at higher
prices, firms are more willing and more able to 10 The imposition of a tax on suppliers causes an
supply at each given price level. See page 25 in increase in their costs, thus shifting the market
the textbook for further guidance. supply curve to the left from S to S . This raises the
1 2
equilibrium price from P to P and subsequently
8 Equilibrium price occurs where demand and 1 2
reduces the quantity traded from Q to Q .
supply are equal, i.e. surpluses and shortages do 1 2
not exist, so there is no pressure on the price to
change. By contrast, disequilibrium price exists
S 2 S 1
when demand and supply are not equal: there
is a surplus when price is above the market P
2
equilibrium and a shortage when price is below Tax per unit
P
the equilibrium. Price ($) 1
Note : the demands of the question do not require
D
students to draw a demand and supply diagram,
although if students choose to do so they should O Q Q
2 1
be credited accordingly.
Quantity traded
9 Excess demand occurs when demand exceeds Imposition of a tax on oil suppliers
supply because the price is lower than the market
equilibrium, resulting in a shortage. See page 30 in the textbook for an explanation
of how the imposition of taxes affects market
equilibrium.
S
A shortage occurs
when demand exceeds
supply because the
Price ($) P price is lower than the
e Excess market equilibrium
P demand
1
D
O Q Q Q
s e d
Quantity traded
● ● 4 Price elasticity
1 Price elasticity of demand 3 The correct answer is Option B. Knowing the
percentage change in quantity demanded PED for a particular product enables firms to
=
percentage change in price know more about how consumer spending
%∆QD −5 is likely to change following a change in the
PED = = = −0.5
%∆P +10 price of the product. For example, if demand
Hence, the correct answer is Option C. is price inelastic, then an increase in the price
2 Price elasticity of demand will not cause consumers to change their
percentage change in quantity demanded spending by very much due to the lack of
= substitutes.
percentage change in price
%∆QD −2 4 The correct answer is Option B. In the short run,
PED = = = −0.25
%∆P +8 hairdressers could work overtime if the market
Hence, the correct answer is Option A.
4
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers price of haircuts increased; in the long run more b Factors that affect the PED for cigarettes include: hairdressers could be hired. It is relatively more the degree of substitution for smokers ● difficult to increase the output of organic oranges the degree of habits/addiction of smokers ● (Option D), at least in the short run. Increasing the proportion of a consumer’s income that the number of season tickets (Option C) is very ● is spent on cigarettes difficult due to the fixed capacity of the stadium (unless Real Madrid Football Club moved to the effectiveness of advertising, e.g. anti- ● larger premises in the long run). There is a smoking campaigns finite/fixed number of original paintings by the period of time under consideration for ● Picasso so this has the lowest value of PES. See smokers to change their habits, given price pages 43–44 in the textbook to read more about changes. the value of PES. See pages 39–40 in the textbook for an 5 Price elasticity of demand explanation of how the above factors affect percentage change in quantity demanded PED. = percentage change in price Award 1 mark for identifying a factor that %∆QD +15 affects the demand for cigarettes and up to PED = = = −0.6 %∆P 2 further marks for an explanation of the low −25 Hence, the correct option is D. price elasticity. 6 a Price elasticity of demand 8 Award 1 mark for a correct definition of price percentage change in quantity demanded elasticity of demand (PED). = percentage change in price Award 1 mark for stating that, if demand is price 8640 – 8000 % ∆ QD = = +8% elastic, a reduction in price will increase revenue. 8000 Award 1 mark for stating that, if demand is price 225 – 250 % ∆ P = = −10% inelastic, a reduction in price will reduce revenue. 250 %∆QD +8 Award up to 2 additional marks for a developed PED = = = −0.8 %∆P −10 analysis, e.g. different flights have different PED Note : it is not necessary for students to show at different times of the day/week/year; the effect the formula for PED in this question. of lower prices on profit will also depend on costs b Students can take alternative approaches to to the airline company. answering this question. 9 a Price elasticity of demand The PED = −0.8 so the demand for HTC percentage change in quantity demanded = smartphones in Taiwan is price inelastic. This percentage change in price means it is not a good decision to reduce 215 – 240 prices, i.e. the percentage change in quantity %∆QD = = −10.4% 240 demanded (+8%) is less than the percentage 280 – 250 change in price (−10%). Hence, the firm will %∆P = = +12% 250 lose revenue. %∆QD −10.4 PED = = = −0.867 Total revenue has fallen from $2m per week %∆P +12 ($250 × 8000) to $1.944m per week ($225 × b Knowledge of PED can help Shanchez 8640). Hence, the decision to cut prices was not Sunglasses in several ways, for example: a good business decision as HTC has seen a knowing the PED for its best-selling drop of $56 000 in sales revenue per week. ● sunglasses is price inelastic (0.867), the Award 1–2 marks for an explanation that firm can raise its price knowing that shows limited understanding. total revenue will increase, from $60 000 Award 3–4 marks for an answer that ($240 × 250) to $60 200 ($280 × 215) demonstrates a good level of understanding in knowledge of PED can also inform ● the context of the question. Calculations and/or Shanchez Sunglasses about the extent to the use of quantitative techniques are correct. which the firm has market power, e.g. 7 a Award up to 2 marks for an explanation that if demand becomes more price elastic as PED = −0.55, a 10% increase in price causes (its PED is not too far off from a value demand for cigarettes to drop by only 5.5% of 1.0) the firm may need to improve the because the demand is price inelastic. marketing of its sunglasses to customers. 5 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
price of haircuts increased; in the long run more b Factors that affect the PED for cigarettes include:
hairdressers could be hired. It is relatively more the degree of substitution for smokers
●
difficult to increase the output of organic oranges
● the degree of habits/addiction of smokers
(Option D), at least in the short run. Increasing
the proportion of a consumer’s income that
the number of season tickets (Option C) is very ●
is spent on cigarettes
difficult due to the fixed capacity of the stadium
(unless Real Madrid Football Club moved to ● the effectiveness of advertising, e.g. anti-
larger premises in the long run). There is a smoking campaigns
finite/fixed number of original paintings by the period of time under consideration for
●
Picasso so this has the lowest value of PES. See smokers to change their habits, given price
pages 43–44 in the textbook to read more about changes.
the value of PES.
See pages 39–40 in the textbook for an
5 Price elasticity of demand explanation of how the above factors affect
percentage change in quantity demanded PED.
=
percentage change in price Award 1 mark for identifying a factor that
%∆QD +15 affects the demand for cigarettes and up to
PED = = = −0.6
%∆P −25 2 further marks for an explanation of the low
Hence, the correct option is D. price elasticity.
6 a Price elasticity of demand 8 Award 1 mark for a correct definition of price
percentage change in quantity demanded elasticity of demand (PED).
=
percentage change in price
Award 1 mark for stating that, if demand is price
8640 – 8000
% ∆ QD = = +8% elastic, a reduction in price will increase revenue.
8000
225 – 250 Award 1 mark for stating that, if demand is price
% ∆ P = = −10%
inelastic, a reduction in price will reduce revenue.
250
%∆QD +8 Award up to 2 additional marks for a developed
PED = = = −0.8
%∆P −10 analysis, e.g. different flights have different PED
Note : it is not necessary for students to show
at different times of the day/week/year; the effect
the formula for PED in this question.
of lower prices on profit will also depend on costs
b Students can take alternative approaches to to the airline company.
answering this question.
9 a Price elasticity of demand
The PED = −0.8 so the demand for HTC percentage change in quantity demanded
smartphones in Taiwan is price inelastic. This =
percentage change in price
means it is not a good decision to reduce
215 – 240
prices, i.e. the percentage change in quantity %∆QD = = −10.4%
240
demanded (+8%) is less than the percentage
280 – 250
change in price (−10%). Hence, the firm will %∆P = = +12%
250
lose revenue.
%∆QD −10.4
PED = = = −0.867
Total revenue has fallen from $2m per week %∆P +12
($250 × 8000) to $1.944m per week ($225 ×
b Knowledge of PED can help Shanchez
8640). Hence, the decision to cut prices was not
Sunglasses in several ways, for example:
a good business decision as HTC has seen a
knowing the PED for its best-selling
drop of $56 000 in sales revenue per week. ●
sunglasses is price inelastic (0.867), the
Award 1–2 marks for an explanation that
firm can raise its price knowing that
shows limited understanding.
total revenue will increase, from $60 000
Award 3–4 marks for an answer that ($240 × 250) to $60 200 ($280 × 215)
demonstrates a good level of understanding in
● knowledge of PED can also inform
the context of the question. Calculations and/or
Shanchez Sunglasses about the extent to
the use of quantitative techniques are correct.
which the firm has market power, e.g.
7 a Award up to 2 marks for an explanation that if demand becomes more price elastic
as PED = −0.55, a 10% increase in price causes (its PED is not too far off from a value
demand for cigarettes to drop by only 5.5% of 1.0) the firm may need to improve the
because the demand is price inelastic. marketing of its sunglasses to customers.
5
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Accept any other reasonably explained answer the number of producers in the industry ● in the context of Shanchez Sunglasses. the ease and cost of factor substitution, e.g. ● Award 1–2 marks for an answer that shows using machinery instead of labour limited understanding. the time period under consideration. ● Award 3–4 marks for an answer that See pages 46–47 in the textbook for an demonstrates a good level of understanding, explanation of how the above factors affect written in the context of Shanchez Sunglasses. PES. There is application of the answer from Award up to 2 marks for an explanation of each Question 9a. factor that affects PES. For maximum marks, 10 Factors that affect the value of PES include: there must be use of relevant examples. the degree of spare productive capacity ● the level of (spare) stocks ● ● ● 5 Market failure 1 The correct answer is Option C. Car parks are petrol-fuelled cars more expensive. Option B (a not an example of market failure because car subsidy) would make electric cars cheaper and parks and cars are complementary goods, with therefore more attractive and Option D (increased their demand and supply determined by market advertising) should increase the demand for forces. Options A and B both have impacts on electric cars, assuming the advertising is successful. third parties who do not drive cars or produce the 5 The correct answer is Option A. Public housing air pollution. Option D is incorrect because the funded by the government is an example of supermarket charges higher prices than if it public expenditure and provides private benefits operated in a competitive market. See page 49 to those who are given public housing to live in the textbook for a definition and examples of in. Options B, C and D all provide external market failure. benefits to society. Option B provides leisure 2 The correct answer is Option B. A tax on cars facilities and a source of education for citizens, increases the cost of owning a car and therefore thus is of benefit to the general public. Option the demand for cars should decrease (this may C provides the public with a park to enjoy and of course not happen due to price or income the plants and green space improve the natural inelastic demand for cars in some countries). environment. In Option D, people are trained Options A and C would encourage car ownership and educated so become more occupationally and therefore the number of cars on roads. Option mobile, thus benefiting firms. They may also D would not have a direct impact on the demand train others, thus increasing the skills of a larger for cars. pool of workers. 3 The correct answer is Option D. Resources are 6 Examples of goods/services provided by a not conserved as land is built upon to create the government because they would otherwise be new airport terminal. Option A (external costs) under-consumed by society include: includes traffic congestion and noise and air health care ● pollution caused by building the addition airport education ● terminal. Option B (external benefits) includes public libraries the employment and business opportunities ● parks created which may increase standards of living ● and incomes in the area. Option C (opportunity museums ● cost) refers to the loss of land and the alternative roads ● projects which the government could have spent refuse/garbage collection. ● the money on. Award 1 mark for each example. 4 The correct answer is Option C. A fall in the See pages 56–57 in the textbook for a more price of petrol would make petrol-fuelled cars detailed explanation of public versus private more attractive than electric cars. Options A, B expenditure. and D would all increase the demand for electric cars. Option A (an increase in tax) would make 6 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Accept any other reasonably explained answer ● the number of producers in the industry
in the context of Shanchez Sunglasses. the ease and cost of factor substitution, e.g.
●
Award 1–2 marks for an answer that shows using machinery instead of labour
limited understanding. the time period under consideration.
●
Award 3–4 marks for an answer that See pages 46–47 in the textbook for an
demonstrates a good level of understanding, explanation of how the above factors affect
written in the context of Shanchez Sunglasses. PES.
There is application of the answer from
Award up to 2 marks for an explanation of each
Question 9a.
factor that affects PES. For maximum marks,
10 Factors that affect the value of PES include: there must be use of relevant examples.
● the degree of spare productive capacity
● the level of (spare) stocks
● ● 5 Market failure
1 The correct answer is Option C. Car parks are petrol-fuelled cars more expensive. Option B (a
not an example of market failure because car subsidy) would make electric cars cheaper and
parks and cars are complementary goods, with therefore more attractive and Option D (increased
their demand and supply determined by market advertising) should increase the demand for
forces. Options A and B both have impacts on electric cars, assuming the advertising is successful.
third parties who do not drive cars or produce the
5 The correct answer is Option A. Public housing
air pollution. Option D is incorrect because the
funded by the government is an example of
supermarket charges higher prices than if it
public expenditure and provides private benefits
operated in a competitive market. See page 49
to those who are given public housing to live
in the textbook for a definition and examples of
in. Options B, C and D all provide external
market failure.
benefits to society. Option B provides leisure
2 The correct answer is Option B. A tax on cars facilities and a source of education for citizens,
increases the cost of owning a car and therefore thus is of benefit to the general public. Option
the demand for cars should decrease (this may C provides the public with a park to enjoy and
of course not happen due to price or income the plants and green space improve the natural
inelastic demand for cars in some countries). environment. In Option D, people are trained
Options A and C would encourage car ownership and educated so become more occupationally
and therefore the number of cars on roads. Option mobile, thus benefiting firms. They may also
D would not have a direct impact on the demand train others, thus increasing the skills of a larger
for cars. pool of workers.
3 The correct answer is Option D. Resources are 6 Examples of goods/services provided by a
not conserved as land is built upon to create the government because they would otherwise be
new airport terminal. Option A (external costs) under-consumed by society include:
includes traffic congestion and noise and air health care
●
pollution caused by building the addition airport
● education
terminal. Option B (external benefits) includes
public libraries
the employment and business opportunities ●
created which may increase standards of living ● parks
and incomes in the area. Option C (opportunity ● museums
cost) refers to the loss of land and the alternative roads
●
projects which the government could have spent
● refuse/garbage collection.
the money on.
Award 1 mark for each example.
4 The correct answer is Option C. A fall in the
price of petrol would make petrol-fuelled cars See pages 56–57 in the textbook for a more
more attractive than electric cars. Options A, B detailed explanation of public versus private
and D would all increase the demand for electric expenditure.
cars. Option A (an increase in tax) would make
6
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 7 External costs/negative externalities include: similarly, people cannot make work-related ● calls so this may reduce productivity and negative effects of gambling, alcohol ● therefore output consumption and smoking in the casinos; for example, social consequences of gambling people may ignore the ban, so it becomes ● for families of people who become indebted, difficult to enforce negative health effects of alcohol and potential officials need to be employed to check whether ● anti-social behaviour caused by excessive people are following the ban on mobile drinking, effect of cigarette smoke on non- phone usage on public transport and this will smokers increase costs loss of vegetation and green spaces due to ● people may use mobile phones outside train ● construction of hotels and tourist attractions carriages or bus stops and this may cause loss of local culture to casino culture as local congestion and noise pollution there. ● restaurants and shops are lost to multinational Award 1–2 marks for an answer that shows chains and old buildings are demolished to limited understanding. make way for new hotels with casinos Award 3–4 marks for explaining the noise and air pollution caused by construction ● advantages and disadvantages of a ban on and increased traffic. using mobile phones on public transport. There External benefits/positive externalities include: may be a lack of detail and/or use of relevant employment opportunities providing income examples. ● for workers who then spend the income in Award 5–6 marks for a detailed analysis of other businesses the advantages and disadvantages of a ban on higher tax revenues which may result in a ● using mobile phones on public transport. There greater provision of public and merit goods for is appropriate use of terminology and use of the citizens of Macau examples. an increase in economic growth which may ● See pages 51–52 in the textbook for a more lead to increased standards of living for the detailed analysis of the advantages and citizens of Macau. disadvantages of using regulation and fines as a Award 2 marks for identifying and explaining solution to market failure. each example of an external cost and/or an 9 Social costs of the dam include: external benefit. loss of land and damage to the environment ● See pages 49–51 in the textbook for further caused by the construction of the dam explanations of external costs and pages 55–56 for displacement and reallocation of over 1 million ● further explanations of external benefits. people, causing disruptions to their lives and 8 Advantages of regulation and fines include: livelihood the fine will act a deterrent for using mobile loss of cultures of local villages and towns. ● ● phones on public transport Social benefits of the dam include: money collected from fines can be used to ● the production of a large amount of ● fund educational campaigns to reduce mobile hydroelectric power which may lower costs phone use and produce a reliable energy supply travelling on public transport may become ● creation of jobs for the construction and ● more pleasant/peaceful as there is less noise management of the project. pollution Award 1–2 marks for an answer that shows people may arrive at work more relaxed/less ● limited understanding. stressed. Award 3–5 marks for a balanced discussion of Disadvantages of regulation and fines include: the social costs and benefits of the project. There people cannot use phones, which may reduce ● may be a lack of detail and/or use of relevant their productivity because, for example, they examples. may need to make personal phones calls at work instead (which they could previously do Award a maximum of 5 marks if only social costs whilst travelling to/from their workplace) or benefits are discussed. 7 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
7 External costs/negative externalities include: ● similarly, people cannot make work-related
negative effects of gambling, alcohol calls so this may reduce productivity and
●
consumption and smoking in the casinos; for therefore output
example, social consequences of gambling ● people may ignore the ban, so it becomes
for families of people who become indebted, difficult to enforce
negative health effects of alcohol and potential officials need to be employed to check whether
●
anti-social behaviour caused by excessive people are following the ban on mobile
drinking, effect of cigarette smoke on non- phone usage on public transport and this will
smokers increase costs
● loss of vegetation and green spaces due to people may use mobile phones outside train
●
construction of hotels and tourist attractions carriages or bus stops and this may cause
● loss of local culture to casino culture as local congestion and noise pollution there.
restaurants and shops are lost to multinational
Award 1–2 marks for an answer that shows
chains and old buildings are demolished to
limited understanding.
make way for new hotels with casinos
Award 3–4 marks for explaining the
● noise and air pollution caused by construction
advantages and disadvantages of a ban on
and increased traffic.
using mobile phones on public transport. There
External benefits/positive externalities include: may be a lack of detail and/or use of relevant
● employment opportunities providing income examples.
for workers who then spend the income in
Award 5–6 marks for a detailed analysis of
other businesses
the advantages and disadvantages of a ban on
● higher tax revenues which may result in a using mobile phones on public transport. There
greater provision of public and merit goods for is appropriate use of terminology and use of
the citizens of Macau examples.
● an increase in economic growth which may See pages 51–52 in the textbook for a more
lead to increased standards of living for the
detailed analysis of the advantages and
citizens of Macau.
disadvantages of using regulation and fines as a
Award 2 marks for identifying and explaining solution to market failure.
each example of an external cost and/or an
9 Social costs of the dam include:
external benefit.
● loss of land and damage to the environment
See pages 49–51 in the textbook for further caused by the construction of the dam
explanations of external costs and pages 55–56 for
● displacement and reallocation of over 1 million
further explanations of external benefits.
people, causing disruptions to their lives and
8 Advantages of regulation and fines include: livelihood
● the fine will act a deterrent for using mobile ● loss of cultures of local villages and towns.
phones on public transport
Social benefits of the dam include:
● money collected from fines can be used to the production of a large amount of
fund educational campaigns to reduce mobile ●
hydroelectric power which may lower costs
phone use
and produce a reliable energy supply
● travelling on public transport may become creation of jobs for the construction and
more pleasant/peaceful as there is less noise ●
management of the project.
pollution
Award 1–2 marks for an answer that shows
● people may arrive at work more relaxed/less
limited understanding.
stressed.
Award 3–5 marks for a balanced discussion of
Disadvantages of regulation and fines include:
the social costs and benefits of the project. There
● people cannot use phones, which may reduce may be a lack of detail and/or use of relevant
their productivity because, for example, they
examples.
may need to make personal phones calls at
work instead (which they could previously do Award a maximum of 5 marks if only social costs
whilst travelling to/from their workplace) or benefits are discussed.
7
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 6–8 marks for a detailed discussion of the social costs and benefits of the project. S 1 There is appropriate use of terminology and S 2 use of examples. For full marks, there must be a reasoned judgement/conclusion made. P 1 10 a Social benefits are the societal gains from Subsidy P the consumption or production of a good or 2 service. For example, university education D can lead to increased productivity due to Price of a university education ($) increased skills and knowledge (human O Q Q 1 2 capital). Social benefits arise when the Quantity of university education external benefits of an activity are greater than the private benefits. Award 1 mark for identifying the level of subsidy. Award 1 mark for an accurate definition. See page 56 in the textbook for more information on the impact of governments Award 1 mark for a relevant example. subsidising merit goods such as education. See page 55 in the textbook for more e The short-term and long-term benefits of a information on social benefits. government subsidising university education b An advantage of charging people for a include: university education is that there is no the price of attending university will fall opportunity cost incurred by the government ● and therefore the demand for a university as people are responsible for the private costs education will increase; this should result of their own education. in more people going to university Another advantage is that people are more university graduates are likely to have likely to study hard because they are paying ● higher earnings and this will lead to higher for their education. consumption of goods and services in the Award 2 marks for identifying and explaining long term which should increase GDP and each advantage of charging people for a therefore economic growth university education. an increase in the number of people with a ● c A disadvantage of charging people for a university education will cause the human university education is that people on low capital in an economy to increase in the incomes may be unable to afford to go to long term and this should increase the university and this will discourage people productive capacity of the economy in the from attending university. long term Another disadvantage is that the high price increased consumption and productivity ● may discourage many people from going will increase GDP in the long term. to university and in the long term this may The short-term and long-term disadvantages lower the level of skills and expertise in the of a government subsidising university economy. education include: Award 2 marks for identifying and explaining no immediate increase in human capital each disadvantage of charging people for a ● in the economy as it takes time to increase university education. skills and knowledge d If a government subsidises the cost of a possible surplus of university graduates university education, the supply curve will ● and therefore many unemployed graduates increase from S to S and the price of the 1 2 due to the over-consumption of university university education will fall from P to P . 1 2 education Subsequently, the quantity demanded will rise from Q to Q . the opportunity cost of the government ● 1 2 funding university education because the Award 1 mark for a shift in the supply curve. money spent could have been spent on Award 1 mark for identifying the new lower alternative programmes, e.g. health care, price. public housing, roads, airports or public Award 1 mark for identifying the new higher transport. quantity demanded/supplied. 8 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 6–8 marks for a detailed discussion
of the social costs and benefits of the project. S
1
There is appropriate use of terminology and S
2
use of examples. For full marks, there must be a
reasoned judgement/conclusion made. P
1
10 a Social benefits are the societal gains from Subsidy
the consumption or production of a good or P 2
service. For example, university education
D
can lead to increased productivity due to Price of a university education ($)
increased skills and knowledge (human O Q Q
1 2
capital). Social benefits arise when the Quantity of university education
external benefits of an activity are greater than
the private benefits. Award 1 mark for identifying the level of subsidy.
Award 1 mark for an accurate definition. See page 56 in the textbook for more
information on the impact of governments
Award 1 mark for a relevant example.
subsidising merit goods such as education.
See page 55 in the textbook for more
e The short-term and long-term benefits of a
information on social benefits.
government subsidising university education
b An advantage of charging people for a
include:
university education is that there is no
the price of attending university will fall
opportunity cost incurred by the government ●
and therefore the demand for a university
as people are responsible for the private costs
education will increase; this should result
of their own education.
in more people going to university
Another advantage is that people are more
university graduates are likely to have
likely to study hard because they are paying ●
higher earnings and this will lead to higher
for their education.
consumption of goods and services in the
Award 2 marks for identifying and explaining
long term which should increase GDP and
each advantage of charging people for a
therefore economic growth
university education.
● an increase in the number of people with a
c A disadvantage of charging people for a
university education will cause the human
university education is that people on low
capital in an economy to increase in the
incomes may be unable to afford to go to
long term and this should increase the
university and this will discourage people
productive capacity of the economy in the
from attending university.
long term
Another disadvantage is that the high price
● increased consumption and productivity
may discourage many people from going
will increase GDP in the long term.
to university and in the long term this may
The short-term and long-term disadvantages
lower the level of skills and expertise in the
of a government subsidising university
economy.
education include:
Award 2 marks for identifying and explaining
no immediate increase in human capital
each disadvantage of charging people for a ●
in the economy as it takes time to increase
university education.
skills and knowledge
d If a government subsidises the cost of
a possible surplus of university graduates
university education, the supply curve will ●
and therefore many unemployed graduates
increase from S to S and the price of the
1 2 due to the over-consumption of university
university education will fall from P to P .
1 2 education
Subsequently, the quantity demanded will rise
from Q to Q . ● the opportunity cost of the government
1 2
funding university education because the
Award 1 mark for a shift in the supply curve.
money spent could have been spent on
Award 1 mark for identifying the new lower
alternative programmes, e.g. health care,
price.
public housing, roads, airports or public
Award 1 mark for identifying the new higher transport.
quantity demanded/supplied.
8
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 1–2 marks for an answer that shows discussed, or if an unbalanced argument is limited understanding. presented. Award 3–5 marks for a balanced discussion Award 6–8 marks for a detailed discussion of the short-term and long-term effects of a of the short-term and long-term effects government subsidising university education. of a government subsidising university There may be a lack of detail and/or use of education. There is appropriate use of terminology and use of examples. For full relevant examples. marks, there must be a reasoned judgement/ Award a maximum of 5 marks if only short- conclusion made. term or long-term impacts of a government subsidising university education are ● ● 6 Money Functions of money: medium of exchange, 1 The correct answer is Option C. Durability is a ● measure of value, store of value and a characteristic of money, not a function of money. standard of deferred payment. See page 62 in the textbook for an explanation of the four functions of money: measure of Characteristics of money: durability, ● value, store of value, medium of exchange and a portability, scarcity, uniformity, divisibility and standard of deferred payment. acceptability (as legal tender). 2 The correct answer is Option D. Bartering See pages 60–61 in the textbook for an explanation (swapping) enables trade and exchange to take of the characteristics of money and page 62 for an place in the absence of money. See page 62 in the explanation of the functions of money. textbook for an explanation of why Options A, B Award up to 2 marks for each reason that is and C are problems associated with bartering. explained clearly, up to the maximum of 4 marks. 3 The correct answer is Option D. The central 8 Functions of a central bank include: bank is not involved with commercial lending responsibility for overseeing the country’s of money to facilitate the growth of companies – ● monetary policies this is the role of commercial banks and the stock exchange (see page 65 in the textbook). See pages the sole issuer of bank notes and coins in the ● 63–64 in the textbook for an explanation of the country function of central banks. to act as the government’s bank ● 4 The correct answer is Option C. The other options to act as the bankers’ bank and oversee the ● are primary functions of commercial banks. See commercial banking sector pages 68–69 in the textbook for an explanation being the lender of last resort. ● of both primary and secondary functions of See pages 63–64 in the textbook for an explanation commercial banks. of the functions of central banks. 5 The correct answer is A. Stock exchanges enable Award up to 2 marks for each reason that is institutions and individuals to buy and sell shares explained clearly, up to the maximum of 4 marks. in listed companies (public limited companies). See pages 65–67 in the textbook for an explanation 9 Functions of commercial banks include: of the functions of stock exchanges. accepting bank deposits of money and savings ● 6 Money is any commodity that can be used as making advances, i.e. making personal and ● a medium of exchange that is accepted for the commercial loans purchase of goods and services. It must therefore helping customers to make and receive ● be acceptable, durable, divisible and recognisable. payments, including cheque clearance See pages 60–61 in the textbook for a more providing financial advice, e.g. savings and thorough explanation. ● retirement plans 7 Explanations could include how bank notes credit creation, e.g. providing overdraft ● function as money and/or the characteristics that facilities and credit card facilities. make bank notes suitable as money. 9 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 1–2 marks for an answer that shows discussed, or if an unbalanced argument is
limited understanding. presented.
Award 3–5 marks for a balanced discussion Award 6–8 marks for a detailed discussion
of the short-term and long-term effects of a of the short-term and long-term effects
government subsidising university education. of a government subsidising university
There may be a lack of detail and/or use of education. There is appropriate use of
relevant examples. terminology and use of examples. For full
marks, there must be a reasoned judgement/
Award a maximum of 5 marks if only short-
conclusion made.
term or long-term impacts of a government
subsidising university education are
● ● 6 Money
1 The correct answer is Option C. Durability is a ● Functions of money: medium of exchange,
characteristic of money, not a function of money. measure of value, store of value and a
See page 62 in the textbook for an explanation standard of deferred payment.
of the four functions of money: measure of ● Characteristics of money: durability,
value, store of value, medium of exchange and a portability, scarcity, uniformity, divisibility and
standard of deferred payment. acceptability (as legal tender).
2 The correct answer is Option D. Bartering See pages 60–61 in the textbook for an explanation
(swapping) enables trade and exchange to take of the characteristics of money and page 62 for an
place in the absence of money. See page 62 in the explanation of the functions of money.
textbook for an explanation of why Options A, B
Award up to 2 marks for each reason that is
and C are problems associated with bartering.
explained clearly, up to the maximum of 4 marks.
3 The correct answer is Option D. The central
8 Functions of a central bank include:
bank is not involved with commercial lending
of money to facilitate the growth of companies – ● responsibility for overseeing the country’s
this is the role of commercial banks and the stock monetary policies
exchange (see page 65 in the textbook). See pages the sole issuer of bank notes and coins in the
●
63–64 in the textbook for an explanation of the country
function of central banks. to act as the government’s bank
●
4 The correct answer is Option C. The other options to act as the bankers’ bank and oversee the
●
are primary functions of commercial banks. See commercial banking sector
pages 68–69 in the textbook for an explanation being the lender of last resort.
●
of both primary and secondary functions of
commercial banks. See pages 63–64 in the textbook for an explanation
of the functions of central banks.
5 The correct answer is A. Stock exchanges enable
institutions and individuals to buy and sell shares Award up to 2 marks for each reason that is
in listed companies (public limited companies). explained clearly, up to the maximum of 4 marks.
See pages 65–67 in the textbook for an explanation 9 Functions of commercial banks include:
of the functions of stock exchanges.
● accepting bank deposits of money and savings
6 Money is any commodity that can be used as making advances, i.e. making personal and
●
a medium of exchange that is accepted for the commercial loans
purchase of goods and services. It must therefore
● helping customers to make and receive
be acceptable, durable, divisible and recognisable.
payments, including cheque clearance
See pages 60–61 in the textbook for a more
providing financial advice, e.g. savings and
thorough explanation. ●
retirement plans
7 Explanations could include how bank notes
● credit creation, e.g. providing overdraft
function as money and/or the characteristics that
facilities and credit card facilities.
make bank notes suitable as money.
9
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Other services or functions include: providing safety of transactions, boosting ● confidence in the trading of shares. helping customers to buy and sell shares ● Award full marks for the clear identification providing bureau de change facilities for ● and explanation of any two functions of a foreign exchange stock exchange. storing valuables in safe deposit boxes in bank ● Read pages 65–67 in the textbook for an vaults explanation of the functions of stock exchanges. internet banking facilities. ● c Reasons for Alibaba.com choosing to float See pages 68–69 in the textbook for an explanation (sell) its shares on the stock exchange in the of the functions of commercial banks. USA include: Note : there is no need for students to distinguish the NYSE provides a platform for ● between primary and secondary functions of individuals, organisations and commercial banks in this question. governments to buy shares in Alibaba. com, thus raising share capital for the Award up to 2 marks for each reason that is e-commerce business explained clearly, up to the maximum of 4 marks. the flotation of Alibaba.com shares (the ● main source of finance for public limited 10 a An initial public offering (IPO) occurs when a companies) can raise huge amounts of firm decides to ‘go public’ by selling its shares finance for the company to fund its growth on a stock exchange for the first time. The IPO enables the firm to raise much-needed capital share ownership can create much wealth ● for its operations. for the founders, owners and investors of Alibaba.com b Functions of a stock exchange include: the efficient functioning of the NYSE raising share capital for businesses ($25 ● ● helps to create business and consumer billion in the case of Alibaba.com) confidence in Alibaba.com, further boosting facilitating company growth ● investment opportunities. acting as a market for trading shares ● Accept any other reasonable answer in the facilitating the sale of government bonds ● context of Alibaba.com. ● ● 7 Labour markets 1 The correct answer is Option C. Some more attractive. Option C is an advantage to professional footballers are rewarded because firms, whilst Option D is an advantage for the of their superior talent and skills. Option A is government. Option B is a possible advantage to incorrect because the relatively short working life individual firms and to the economy in general as of a footballer is not considered when deciding national output should increase. upon their salary. Option B is incorrect because 4 The correct answer is Option C. Some women football is not a dangerous profession. Option work part-time or flexible hours to fit in with D is also incorrect because, although football is childcare or to look after relatives and therefore seasonal, this is not considered when deciding their wages tend to be lower on average. upon salaries. See page 128 in the textbook for a Options A, B and D are all reasons why women list of the top-paid footballers according to Forbes can earn similar wages to men. See pages magazine. 82–83 in the textbook for more information on 2 The correct answer is Option D. Public sector jobs differences in earning between male and female tend to offer greater job security and a pension workers. after retirement (although due to public sector 5 The correct answer is Option B. If a production budget cuts in many countries this may change in process becomes too dependent upon a particular the future). Options A, B and C are all advantages worker and the worker leaves the firm or is absent of working in the private sector. from work, then the production process will slow 3 The correct answer is Option A. Unemployed down and productivity will fall. Options A, B and workers may have a greater incentive to seek D are all advantages of specialisation of labour to work, i.e. an increase in the NMW makes work a firm. 10 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Other services or functions include: providing safety of transactions, boosting
●
helping customers to buy and sell shares confidence in the trading of shares.
●
providing bureau de change facilities for Award full marks for the clear identification
●
foreign exchange and explanation of any two functions of a
stock exchange.
● storing valuables in safe deposit boxes in bank
vaults Read pages 65–67 in the textbook for an
explanation of the functions of stock exchanges.
● internet banking facilities.
c Reasons for Alibaba.com choosing to float
See pages 68–69 in the textbook for an explanation
(sell) its shares on the stock exchange in the
of the functions of commercial banks.
USA include:
Note : there is no need for students to distinguish the NYSE provides a platform for
●
between primary and secondary functions of individuals, organisations and
commercial banks in this question. governments to buy shares in Alibaba.
Award up to 2 marks for each reason that is com, thus raising share capital for the
explained clearly, up to the maximum of e-commerce business
4 marks. ● the flotation of Alibaba.com shares (the
10 a An initial public offering (IPO) occurs when a main source of finance for public limited
firm decides to ‘go public’ by selling its shares companies) can raise huge amounts of
on a stock exchange for the first time. The IPO finance for the company to fund its growth
enables the firm to raise much-needed capital ● share ownership can create much wealth
for its operations. for the founders, owners and investors of
b Functions of a stock exchange include: Alibaba.com
raising share capital for businesses ($25 ● the efficient functioning of the NYSE
●
billion in the case of Alibaba.com) helps to create business and consumer
confidence in Alibaba.com, further boosting
● facilitating company growth
investment opportunities.
● acting as a market for trading shares
Accept any other reasonable answer in the
● facilitating the sale of government bonds context of Alibaba.com.
● ● 7 Labour markets
1 The correct answer is Option C. Some more attractive. Option C is an advantage to
professional footballers are rewarded because firms, whilst Option D is an advantage for the
of their superior talent and skills. Option A is government. Option B is a possible advantage to
incorrect because the relatively short working life individual firms and to the economy in general as
of a footballer is not considered when deciding national output should increase.
upon their salary. Option B is incorrect because
4 The correct answer is Option C. Some women
football is not a dangerous profession. Option
work part-time or flexible hours to fit in with
D is also incorrect because, although football is
childcare or to look after relatives and therefore
seasonal, this is not considered when deciding
their wages tend to be lower on average.
upon salaries. See page 128 in the textbook for a
Options A, B and D are all reasons why women
list of the top-paid footballers according to Forbes
can earn similar wages to men. See pages
magazine.
82–83 in the textbook for more information on
2 The correct answer is Option D. Public sector jobs differences in earning between male and female
tend to offer greater job security and a pension workers.
after retirement (although due to public sector
5 The correct answer is Option B. If a production
budget cuts in many countries this may change in
process becomes too dependent upon a particular
the future). Options A, B and C are all advantages
worker and the worker leaves the firm or is absent
of working in the private sector.
from work, then the production process will slow
3 The correct answer is Option A. Unemployed down and productivity will fall. Options A, B and
workers may have a greater incentive to seek D are all advantages of specialisation of labour to
work, i.e. an increase in the NMW makes work a firm.
10
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 6 Wage factors may include: earnings rise with experience and therefore ● people aged 35–44 years typically earn wage rate or salary ● significantly more than those aged between bonuses ● 20–24 years, as shown in the table fringe benefits or perks ● people tend to reach the peak of their career in ● profit-related pay ● their mid-forties and their wages tend to stay commission earned on sales. the same after that time ● Non-wage factors may include: people tend to retire at or around 65 years old, ● so their earnings fall when they reach this age, career prospects ● as shown in the table. level of experience and education required ● See page 73 in the textbook for more information training opportunities ● about why earnings typically change over a lifetime. working hours ● 9 Factors that might affect the demand for labour in level of responsibility ● Koh Lanta include: level of challenge ● the number of tourists visiting Koh Lanta as ● personal satisfaction gained from the job ● this will impact upon the number of workers social environment ● required to work in the hotel and tourism level of danger. industries ● economic growth in the rest of the world will Award 2 marks for stating and explaining each ● impact upon the number of tourists visiting wage and non-wage factor that affects a person’s Thailand as low growth would suggest fewer choice of occupation. overseas trips to places like Koh Lanta, thus See pages 71–72 in the textbook for more negatively impacting on the demand for detailed information about wage and non- labour wage factors which affect a person’s choice of the cost of labour in Koh Lanta will affect the occupation. ● demand for labour 7 Ways a government can influence the supply of the productivity of workers will affect the ● labour in an economy include: demand for labour. provision of training and education for ● Factors that might affect the supply of labour in workers to increase their skills and enable Koh Lanta include: them to develop new ones average wages and benefits (perks) that can be introduction of a national minimum wage ● ● earned in the tourism industry as compared to (NMW) or an increase in the NMW to other industries encourage more people to join the workforce the labour participation rate in Koh Lanta lowering welfare payments to the unemployed ● ● or Thailand, e.g. the number of women in in order to encourage them to join the the workforce, the retirement age, the school workforce instead leaving age and number of full- and part-time raising the retirement age to increase the ● workers in the workforce number of people in the workforce the availability of welfare benefits in Koh ● provision of childcare facilities to encourage ● Lanta, as it may prove more attractive to claim more women to join the workforce. welfare benefits rather than to work Award 2 marks for identifying and explaining the seasonal nature of the work might not ● each way a government can influence the supply appeal to some workers because they need/ of labour. want to find full-time employment rather than seasonal work in the tourism industry; these See pages 77–80 in the textbook for more workers might move to other parts of Thailand information about factors which affect the supply to find work of labour. the availability of alternative work in Koh ● 8 Reasons why average earnings change over a Lanta outside of the tourism industry. person’s lifetime include: 11 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
6 Wage factors may include: ● earnings rise with experience and therefore
wage rate or salary people aged 35–44 years typically earn
●
significantly more than those aged between
● bonuses
20–24 years, as shown in the table
● fringe benefits or perks
● people tend to reach the peak of their career in
● profit-related pay their mid-forties and their wages tend to stay
● commission earned on sales. the same after that time
Non-wage factors may include: ● people tend to retire at or around 65 years old,
so their earnings fall when they reach this age,
● career prospects
as shown in the table.
● level of experience and education required
See page 73 in the textbook for more information
● training opportunities
about why earnings typically change over a lifetime.
● working hours
9 Factors that might affect the demand for labour in
● level of responsibility
Koh Lanta include:
● level of challenge
● the number of tourists visiting Koh Lanta as
● personal satisfaction gained from the job
this will impact upon the number of workers
● social environment required to work in the hotel and tourism
● level of danger. industries
Award 2 marks for stating and explaining each ● economic growth in the rest of the world will
wage and non-wage factor that affects a person’s impact upon the number of tourists visiting
choice of occupation. Thailand as low growth would suggest fewer
overseas trips to places like Koh Lanta, thus
See pages 71–72 in the textbook for more
negatively impacting on the demand for
detailed information about wage and non-
labour
wage factors which affect a person’s choice of
the cost of labour in Koh Lanta will affect the
occupation. ●
demand for labour
7 Ways a government can influence the supply of
● the productivity of workers will affect the
labour in an economy include:
demand for labour.
● provision of training and education for
Factors that might affect the supply of labour in
workers to increase their skills and enable
Koh Lanta include:
them to develop new ones
average wages and benefits (perks) that can be
introduction of a national minimum wage ●
● earned in the tourism industry as compared to
(NMW) or an increase in the NMW to
other industries
encourage more people to join the workforce
the labour participation rate in Koh Lanta
lowering welfare payments to the unemployed ●
● or Thailand, e.g. the number of women in
in order to encourage them to join the
the workforce, the retirement age, the school
workforce instead
leaving age and number of full- and part-time
● raising the retirement age to increase the workers in the workforce
number of people in the workforce
● the availability of welfare benefits in Koh
● provision of childcare facilities to encourage Lanta, as it may prove more attractive to claim
more women to join the workforce.
welfare benefits rather than to work
Award 2 marks for identifying and explaining the seasonal nature of the work might not
●
each way a government can influence the supply appeal to some workers because they need/
of labour. want to find full-time employment rather than
See pages 77–80 in the textbook for more seasonal work in the tourism industry; these
information about factors which affect the supply workers might move to other parts of Thailand
of labour. to find work
● the availability of alternative work in Koh
8 Reasons why average earnings change over a
Lanta outside of the tourism industry.
person’s lifetime include:
11
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 1–2 marks for a brief answer that shows her potential earnings may increase as a result ● limited understanding. of the above. Award 3–4 marks for explaining the factors that Disadvantages of specialisation to Frederica include: affect the demand and supply of labour in Koh the work may become repetitive and boring for ● Lanta. There may be a lack of detail and/or use of her relevant examples. Frederica may become too specialised and if ● Award 5–6 marks for a detailed analysis of the demand for hand-knitted garments decreases demand and supply factors that affect the labour she will earn less income market in Koh Lanta. There is appropriate use of Frederica may lose skills or be unable to ● terminology and use of examples. develop skills in other areas. See pages 74–80 in the textbook for more detailed Award 1–2 marks for a brief answer that shows information about factors that affect the demand limited understanding. for and supply of labour. Award 3–4 marks for explaining the advantages 10 Advantages of specialisation for someone like and disadvantages of specialisation of labour for Frederica include: Frederica. There may be a lack of detail and/or she becomes an expert in knitting and use of relevant examples. ● therefore is more efficient and productive Award 5–6 marks for a detailed analysis of the the quality of her work may increase ● advantages and disadvantages of specialisation of her expertise may gain her a reputation for labour for Frederica. There is appropriate use of ● producing hand-knitted garments so her work terminology and use of examples. may be in great demand See page 86 in the textbook for more information on specialisation of labour. ● ● 8 Trade unions 1 The correct answer is Option B. If there is high See page 91 in the textbook for more detailed demand for toys produced in the factory then explanations of the different types of industrial there is a demand for workers to make the action. toys, so a pay rise may be justified. Option A is 4 The correct answer is Option B. Trade unions are incorrect because if inflation is low in an economy established to protect the rights of workers and then it may be difficult for the trade union to to improve their pay and working conditions. negotiate a pay rise to cover increased cost of Option A is incorrect because, although action living. Option C is incorrect because if there is from trade unions may increase publicity for a large number of people willing to work in the their members, it is not their main aim. Options C factory, the labour supply is high so there is no and D occur if negotiations do not bring about need to increase wages to keep people in the job. satisfactory solutions to work-related disputes Option D is also incorrect because if workers and discussions. A trade union may call its become less productive there is little justification members out on strike and may cause disruption to increase their wages. to an economy but these are not aims of a trade 2 The correct answer is Option A. Increased profits union. See page 90 in the textbook for a more in an industry may justify a wage increase as detailed explanation of the role of trade unions. workers have clearly contributed to this. Option B 5 The correct answer is Option C. Workers are is incorrect because lower productivity would working to the ‘rules’ of their contract. They are increase production costs to a firm so higher pay not committing any offences and therefore cannot would not be justified. Option C is incorrect because face disciplinary action. Options A, B and D are a fall in inflation suggests a fall in the cost of living all other forms of industrial action. See page 91 in and Option D suggests that there are surplus the textbook for more detailed explanations of the workers in the labour market willing to work; hence different types of industrial action. higher wages cannot be justified. See page 90 in the textbook for a more detailed explanation. 6 Collective bargaining is the process between members of a trade union (who elect a 3 The correct answer is Option C. Options A, B representative to meet with the management and D are incorrect examples of industrial action. 12 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 1–2 marks for a brief answer that shows her potential earnings may increase as a result
●
limited understanding. of the above.
Award 3–4 marks for explaining the factors that Disadvantages of specialisation to Frederica include:
affect the demand and supply of labour in Koh the work may become repetitive and boring for
●
Lanta. There may be a lack of detail and/or use of her
relevant examples.
● Frederica may become too specialised and if
Award 5–6 marks for a detailed analysis of the demand for hand-knitted garments decreases
demand and supply factors that affect the labour she will earn less income
market in Koh Lanta. There is appropriate use of Frederica may lose skills or be unable to
●
terminology and use of examples. develop skills in other areas.
See pages 74–80 in the textbook for more detailed Award 1–2 marks for a brief answer that shows
information about factors that affect the demand limited understanding.
for and supply of labour.
Award 3–4 marks for explaining the advantages
10 Advantages of specialisation for someone like and disadvantages of specialisation of labour for
Frederica include: Frederica. There may be a lack of detail and/or
● she becomes an expert in knitting and use of relevant examples.
therefore is more efficient and productive
Award 5–6 marks for a detailed analysis of the
● the quality of her work may increase advantages and disadvantages of specialisation of
● her expertise may gain her a reputation for labour for Frederica. There is appropriate use of
producing hand-knitted garments so her work terminology and use of examples.
may be in great demand See page 86 in the textbook for more information
on specialisation of labour.
● ● 8 Trade unions
1 The correct answer is Option B. If there is high See page 91 in the textbook for more detailed
demand for toys produced in the factory then explanations of the different types of industrial
there is a demand for workers to make the action.
toys, so a pay rise may be justified. Option A is
4 The correct answer is Option B. Trade unions are
incorrect because if inflation is low in an economy
established to protect the rights of workers and
then it may be difficult for the trade union to
to improve their pay and working conditions.
negotiate a pay rise to cover increased cost of
Option A is incorrect because, although action
living. Option C is incorrect because if there is
from trade unions may increase publicity for
a large number of people willing to work in the
their members, it is not their main aim. Options C
factory, the labour supply is high so there is no
and D occur if negotiations do not bring about
need to increase wages to keep people in the job.
satisfactory solutions to work-related disputes
Option D is also incorrect because if workers
and discussions. A trade union may call its
become less productive there is little justification
members out on strike and may cause disruption
to increase their wages.
to an economy but these are not aims of a trade
2 The correct answer is Option A. Increased profits union. See page 90 in the textbook for a more
in an industry may justify a wage increase as detailed explanation of the role of trade unions.
workers have clearly contributed to this. Option B
5 The correct answer is Option C. Workers are
is incorrect because lower productivity would
working to the ‘rules’ of their contract. They are
increase production costs to a firm so higher pay
not committing any offences and therefore cannot
would not be justified. Option C is incorrect because
face disciplinary action. Options A, B and D are
a fall in inflation suggests a fall in the cost of living
all other forms of industrial action. See page 91 in
and Option D suggests that there are surplus
the textbook for more detailed explanations of the
workers in the labour market willing to work; hence
different types of industrial action.
higher wages cannot be justified. See page 90 in the
textbook for a more detailed explanation. 6 Collective bargaining is the process between
members of a trade union (who elect a
3 The correct answer is Option C. Options A, B
representative to meet with the management
and D are incorrect examples of industrial action.
12
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers representatives of the firm or leaders of the attempt to achieve better pay and working industry) to negotiate improved terms and conditions through union membership. working conditions on behalf of the members Award 2 marks for identifying and explaining of the labour union. A collective voice is each reason why more women may be joining a more powerful than each worker negotiating trade union, up to a maximum of 4 marks. individually with an employer. 9 The main functions of trade unions include: 7 Possible reasons why trade union membership bargaining with employers for pay rises and has fallen in the UK are: ● better terms and conditions of employment for changes to legislation have reduced the ● their members powers of trade unions so less people may ensuring equipment at work is safe to use have joined ● (supported by Health and Safety legislation) some people have a negative viewpoint of ● and that workers are given sufficient training trade unions and therefore have not become to enable them to perform their role at work members safely there has been a decline in the manufacturing ● ensuring members are given legal advice when ● industry, which was typically unionised necessary there has been an increase in employment ● giving support to members when they are ● in jobs which are not unionised*, e.g. jobs in made redundant the retail sector (shop workers), office work, providing financial and legal support to employment in small businesses (such as ● workers who may have been unfairly hairdressers) and independent shops dismissed or disciplined there has been an increase in part-time ● to persuade the government to pass legislation employment ● in favour of workers, such as legislation there has been an increase in employment ● covering minimum wages, maximum working in professional jobs which typically do not hours, health and safety, pension rights and have a trade union as they are managed by the retirement age. professional organisations Award 2 marks for describing each main function loss of jobs in the public sector, which is ● of trade unions, up to a maximum of 4 marks. unionised. See page 88 in the textbook for more information *unionised = a job or trade which has a trade about the role of trade unions. union to represent workers 10 Benefits of trade unions to an economy include: Award 2 marks for stating and explaining each possible reason for a fall in trade union better pay and working conditions for ● membership, up to a maximum of 4 marks. workers, which may lead to improved efficiency and higher productivity in the See pages 93–94 in the textbook for more economy information on factors which affect trade union trade unions provide a channel of membership. ● communication between employees, 8 Possible reasons why more women are becoming employers and governments and this may lead members of trade unions include: to better relationships between these parties; more women are entering the workforce this helps to improve motivation and to reduce ● absenteeism at work, thus benefiting the there is a disproportionately large number of ● whole economy women in low paid jobs if trade unions negotiate a higher minimum there are more women in jobs with poor ● ● wage then more people may be encouraged to working conditions, so union membership work and the unemployment rate may fall. becomes more desirable there are more women on flexible and part- Costs of trade unions to an economy include: ● time contracts who require protection from a trade unions tend to ask for higher pay and ● trade union better working conditions which will increase there is an increase in the wealth gap (the gap costs to businesses so fewer workers may be ● between rich and poor) so women wish to employed 13 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
representatives of the firm or leaders of the attempt to achieve better pay and working
industry) to negotiate improved terms and conditions through union membership.
working conditions on behalf of the members
Award 2 marks for identifying and explaining
of the labour union. A collective voice is
each reason why more women may be joining a
more powerful than each worker negotiating
trade union, up to a maximum of 4 marks.
individually with an employer.
9 The main functions of trade unions include:
7 Possible reasons why trade union membership
bargaining with employers for pay rises and
has fallen in the UK are: ●
better terms and conditions of employment for
● changes to legislation have reduced the their members
powers of trade unions so less people may
ensuring equipment at work is safe to use
have joined ●
(supported by Health and Safety legislation)
● some people have a negative viewpoint of and that workers are given sufficient training
trade unions and therefore have not become
to enable them to perform their role at work
members
safely
● there has been a decline in the manufacturing ensuring members are given legal advice when
industry, which was typically unionised ●
necessary
● there has been an increase in employment giving support to members when they are
in jobs which are not unionised*, e.g. jobs in ●
made redundant
the retail sector (shop workers), office work,
providing financial and legal support to
employment in small businesses (such as ●
workers who may have been unfairly
hairdressers) and independent shops
dismissed or disciplined
● there has been an increase in part-time
to persuade the government to pass legislation
employment ●
in favour of workers, such as legislation
● there has been an increase in employment covering minimum wages, maximum working
in professional jobs which typically do not
hours, health and safety, pension rights and
have a trade union as they are managed by
the retirement age.
professional organisations
Award 2 marks for describing each main function
● loss of jobs in the public sector, which is
of trade unions, up to a maximum of 4 marks.
unionised.
See page 88 in the textbook for more information
*unionised = a job or trade which has a trade
about the role of trade unions.
union to represent workers
10 Benefits of trade unions to an economy include:
Award 2 marks for stating and explaining
each possible reason for a fall in trade union ● better pay and working conditions for
membership, up to a maximum of 4 marks. workers, which may lead to improved
efficiency and higher productivity in the
See pages 93–94 in the textbook for more
economy
information on factors which affect trade union
trade unions provide a channel of
membership. ●
communication between employees,
8 Possible reasons why more women are becoming employers and governments and this may lead
members of trade unions include: to better relationships between these parties;
● more women are entering the workforce this helps to improve motivation and to reduce
there is a disproportionately large number of absenteeism at work, thus benefiting the
●
women in low paid jobs whole economy
there are more women in jobs with poor ● if trade unions negotiate a higher minimum
●
working conditions, so union membership wage then more people may be encouraged to
becomes more desirable work and the unemployment rate may fall.
● there are more women on flexible and part- Costs of trade unions to an economy include:
time contracts who require protection from a trade unions tend to ask for higher pay and
●
trade union better working conditions which will increase
● there is an increase in the wealth gap (the gap costs to businesses so fewer workers may be
between rich and poor) so women wish to employed
13
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers industrial action brought about by trade unions There may be a lack of detail and/or use of ● may cause disruptions to the economy because relevant examples. of working days lost or fewer hours worked. Award 6–8 marks for a detailed discussion of the costs and benefits of trade unions to an Award 1–2 marks for a brief answer that shows economy. There is appropriate use of terminology limited understanding. and use of examples. There must be a reasoned Award 3–5 marks for a balanced discussion of the judgement/conclusion made for full marks. costs and benefits of trade unions to an economy. ● ● 9 Income and expenditure 1 The correct answer is Option B. Higher interest proportion of their income as well as take can be earned on savings, thus creating an advantage of borrowing opportunities. Option B incentive to save. Option A would reduce could be a person nearing retirement age who is incentives to save as less interest is earned on trying to save a high proportion of their income savings. Option C would result in less disposable and spend little. See page 103 in the textbook for income for people as they have to pay more more information about patterns of spending, income tax so they would save less. Option D saving and borrowing at different stages in a would encourage people to increase their person’s lifetime. borrowing and therefore they would save less. See 5 The correct answer is Option A. An increase pages 104–105 in the textbook for a more detailed in the rate of inflation will cause a decrease in explanation on incentives for saving. the purchasing power of money so the cost of 2 The correct answer is Option B. Residential goods and services increases which leads to property will have a high value so the money lower consumption. Options B and D will lead borrowed will be paid back over a long period of to an increase in consumer spending. Option C time. Options A and D are current spending and should mean that people will have to spend less therefore would not require a large amount of of their income on health care and education. See borrowing. It is unlikely that a bank would lend page 101 in the textbook for more information on money for a holiday as there would be no security the impact of inflation on consumer spending. on the loan unlike on a loan for residential 6 An increase in interest rates will cause spending property, therefore Option C is incorrect. See to decrease because: pages 106–107 in the textbook for a more detailed explanation of motives for borrowing. the cost of borrowing increases and therefore ● the demand for loans will fall 3 The correct answer is Option B. An increase in a higher cost of borrowing will cause existing real wages may mean an increase in real incomes ● repayments on loans to increase and therefore in the economy and therefore people may consumer spending will fall. experience a positive wealth effect and increased standards of living. They may feel confident about An increase in interest rates will cause saving to borrowing and therefore borrowing increases in increase because: the economy. Options A and D would discourage there is a higher return to be earned on savings ● borrowing due to the fall in disposable income. there is a greater opportunity cost of spending. Option C would also discourage borrowing ● because the outlook for the economy is negative. An increase in interest rates will cause borrowing See pages 106–107 in the textbook for a more to decrease because the cost of borrowing has detailed explanation of motives for borrowing. increased and therefore demand for loans will fall. 4 The correct answer is Option D. Retired people tend to be dissaving (i.e. spending their savings) Award 1–2 marks for a brief answer that shows whilst borrowing will be low. Spending will limited understanding. represent a high proportion of their income. Award 3–4 marks for explaining how an increase Option C is likely to be the pattern of a person in interest rates will affect spending, saving and aged 35–45 because they are saving for their borrowing. There may be a lack of detail and/or retirement and likely to be purchasing property. use of relevant examples. Option A is likely to be that of a 25–35 year old because they are having to spend a high 14 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
● industrial action brought about by trade unions There may be a lack of detail and/or use of
may cause disruptions to the economy because relevant examples.
of working days lost or fewer hours worked. Award 6–8 marks for a detailed discussion of
Award 1–2 marks for a brief answer that shows the costs and benefits of trade unions to an
limited understanding. economy. There is appropriate use of terminology
and use of examples. There must be a reasoned
Award 3–5 marks for a balanced discussion of the
judgement/conclusion made for full marks.
costs and benefits of trade unions to an economy.
● ● 9 Income and expenditure
1 The correct answer is Option B. Higher interest
proportion of their income as well as take
can be earned on savings, thus creating an
advantage of borrowing opportunities. Option B
incentive to save. Option A would reduce
could be a person nearing retirement age who is
incentives to save as less interest is earned on
trying to save a high proportion of their income
savings. Option C would result in less disposable
and spend little. See page 103 in the textbook for
income for people as they have to pay more
more information about patterns of spending,
income tax so they would save less. Option D
saving and borrowing at different stages in a
would encourage people to increase their
person’s lifetime.
borrowing and therefore they would save less. See
pages 104–105 in the textbook for a more detailed 5 The correct answer is Option A. An increase
explanation on incentives for saving. in the rate of inflation will cause a decrease in
the purchasing power of money so the cost of
2 The correct answer is Option B. Residential
goods and services increases which leads to
property will have a high value so the money
lower consumption. Options B and D will lead
borrowed will be paid back over a long period of
to an increase in consumer spending. Option C
time. Options A and D are current spending and
should mean that people will have to spend less
therefore would not require a large amount of
of their income on health care and education. See
borrowing. It is unlikely that a bank would lend
page 101 in the textbook for more information on
money for a holiday as there would be no security
the impact of inflation on consumer spending.
on the loan unlike on a loan for residential
property, therefore Option C is incorrect. See 6 An increase in interest rates will cause spending
pages 106–107 in the textbook for a more detailed to decrease because:
explanation of motives for borrowing. ● the cost of borrowing increases and therefore
the demand for loans will fall
3 The correct answer is Option B. An increase in
real wages may mean an increase in real incomes ● a higher cost of borrowing will cause existing
in the economy and therefore people may repayments on loans to increase and therefore
experience a positive wealth effect and increased consumer spending will fall.
standards of living. They may feel confident about An increase in interest rates will cause saving to
borrowing and therefore borrowing increases in increase because:
the economy. Options A and D would discourage
● there is a higher return to be earned on savings
borrowing due to the fall in disposable income.
there is a greater opportunity cost of spending.
Option C would also discourage borrowing ●
because the outlook for the economy is negative. An increase in interest rates will cause borrowing
See pages 106–107 in the textbook for a more to decrease because the cost of borrowing has
detailed explanation of motives for borrowing. increased and therefore demand for loans will
fall.
4 The correct answer is Option D. Retired people
tend to be dissaving (i.e. spending their savings) Award 1–2 marks for a brief answer that shows
whilst borrowing will be low. Spending will limited understanding.
represent a high proportion of their income.
Award 3–4 marks for explaining how an increase
Option C is likely to be the pattern of a person
in interest rates will affect spending, saving and
aged 35–45 because they are saving for their
borrowing. There may be a lack of detail and/or
retirement and likely to be purchasing property.
use of relevant examples.
Option A is likely to be that of a 25–35 year
old because they are having to spend a high
14
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 5–6 marks for a detailed analysis of Status attached to owning goods, e.g. if people ● how an increase in interest rates will impact attach status to owning designer goods or upon spending, saving and borrowing. There expensive cars then spending will tend to is appropriate use of terminology and use of increase. See page 100 in the textbook for relevant examples. more information on the effect of conspicuous consumption on spending. 7 The advantages of a high savings ratio include: If there has been an increase in wealth in the people have funding for their retirement, so ● ● economy, e.g. if the value of property and the government does not need to fund this investments has increased, people will tend to people have funds for university education for ● spend more. See page 100 in the textbook for their children or to support themselves if they more information on the effect of wealth on lose their job or face an emergency; again, this spending. means the government does not have to spend Low inflation may cause people to spend more money on education and unemployment ● of their income. See page 101 in the textbook benefits for more information on the effect of inflation saving a proportion of income helps to prevent ● on spending. demand–pull inflation caused by excessive The age of the population will affect spending spending ● patterns as an ageing population will have the banks have deposits to lend to borrowers ● to spend their savings whereas a youthful which may include individuals, firms and population will have to spend a large governments, which can contribute to proportion of their income. See page 103 in the economic growth. textbook for more detailed information on the See page 107 in the textbook for more information impact of age on expenditure patterns. about the impact of a low savings ratio on an Income levels within the economy, e.g. high ● economy. income earners tend to be able to spend a higher proportion of their income on luxury Award 1–2 marks for a brief answer that shows goods and services whereas low income limited understanding. earners will spend a larger proportion of Award 3–4 marks for explaining the benefits of their income on necessities. See page 97 in the saving. There may be a lack of detail and/or use textbook for a more detailed explanation of of relevant examples. expenditure patterns of low, middle and high income earners. Award 5–6 marks for a detailed explanation of the benefits of saving to an economy. There Award 1–2 marks for a brief answer that shows is appropriate use of terminology and use of limited understanding. relevant examples. Award 3–5 marks for a balanced discussion of 8 Factors which affect the level of domestic the factors which influence spending. There spending in an economy include the following: may be a lack of detail and/or use of relevant Lower interest rates. See page 102 in the examples. ● textbook for more information on the effect of Award 6–8 marks for a detailed discussion interest rates on consumer spending. of the factors that influence spending. There Lower direct and indirect taxation. See pages ● is appropriate use of terminology and use of 186–187 in the textbook for further information examples. There must be a reasoned judgement/ on the effect of taxation on consumer spending. conclusion made for full marks. Decreasing government spending on health ● 9 High income earners are able to save a greater care, education and pensions so that people proportion of their income than low income would have to spend their own money on earners. They can also afford to spend a larger these services. amount on luxuries as well as necessities. Level of confidence in the economy, e.g. if ● They will not need to borrow to cover current the economy is predicted to grow and the expenditure but may find it relatively easy to economic outlook is positive then confidence borrow money to purchase property and other will be high so people will spend more. See valuable assets because they have assets to page 102 in the textbook for more information provide security for the loans. on the effect of confidence levels on spending. 15 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 5–6 marks for a detailed analysis of Status attached to owning goods, e.g. if people
●
how an increase in interest rates will impact attach status to owning designer goods or
upon spending, saving and borrowing. There expensive cars then spending will tend to
is appropriate use of terminology and use of increase. See page 100 in the textbook for
relevant examples. more information on the effect of conspicuous
consumption on spending.
7 The advantages of a high savings ratio include:
If there has been an increase in wealth in the
people have funding for their retirement, so ●
● economy, e.g. if the value of property and
the government does not need to fund this
investments has increased, people will tend to
● people have funds for university education for spend more. See page 100 in the textbook for
their children or to support themselves if they
more information on the effect of wealth on
lose their job or face an emergency; again, this
spending.
means the government does not have to spend
Low inflation may cause people to spend more
money on education and unemployment ●
of their income. See page 101 in the textbook
benefits
for more information on the effect of inflation
● saving a proportion of income helps to prevent on spending.
demand–pull inflation caused by excessive
The age of the population will affect spending
spending ●
patterns as an ageing population will have
● the banks have deposits to lend to borrowers to spend their savings whereas a youthful
which may include individuals, firms and
population will have to spend a large
governments, which can contribute to
proportion of their income. See page 103 in the
economic growth.
textbook for more detailed information on the
See page 107 in the textbook for more information impact of age on expenditure patterns.
about the impact of a low savings ratio on an Income levels within the economy, e.g. high
●
economy. income earners tend to be able to spend a
Award 1–2 marks for a brief answer that shows higher proportion of their income on luxury
limited understanding. goods and services whereas low income
earners will spend a larger proportion of
Award 3–4 marks for explaining the benefits of their income on necessities. See page 97 in the
saving. There may be a lack of detail and/or use textbook for a more detailed explanation of
of relevant examples. expenditure patterns of low, middle and high
Award 5–6 marks for a detailed explanation income earners.
of the benefits of saving to an economy. There Award 1–2 marks for a brief answer that shows
is appropriate use of terminology and use of limited understanding.
relevant examples.
Award 3–5 marks for a balanced discussion of
8 Factors which affect the level of domestic the factors which influence spending. There
spending in an economy include the following: may be a lack of detail and/or use of relevant
● Lower interest rates. See page 102 in the examples.
textbook for more information on the effect of
Award 6–8 marks for a detailed discussion
interest rates on consumer spending.
of the factors that influence spending. There
● Lower direct and indirect taxation. See pages is appropriate use of terminology and use of
186–187 in the textbook for further information examples. There must be a reasoned judgement/
on the effect of taxation on consumer spending. conclusion made for full marks.
● Decreasing government spending on health
9 High income earners are able to save a greater
care, education and pensions so that people
proportion of their income than low income
would have to spend their own money on
earners. They can also afford to spend a larger
these services.
amount on luxuries as well as necessities.
● Level of confidence in the economy, e.g. if They will not need to borrow to cover current
the economy is predicted to grow and the expenditure but may find it relatively easy to
economic outlook is positive then confidence borrow money to purchase property and other
will be high so people will spend more. See valuable assets because they have assets to
page 102 in the textbook for more information provide security for the loans.
on the effect of confidence levels on spending.
15
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Middle income earners will save a smaller b The proportion of income saved will vary proportion of their income and spend a larger because of: proportion of their income on necessities and the age of the population, e.g. if the average ● other goods and services than high income age of the population is under 25 (or over earners. They will borrow to fund large items 65 years old) then the proportion of saving of expenditure, e.g. a mortgage to purchase will be lower than if the population is property. older because young people do not have the income to save (and retired people are Low income earners will spend a large spending their savings, i.e. dissaving) proportion of their income on current expenditure and may only be able to save a small savings ratios (proportion of disposable ● proportion of their income (or in some cases be income saved) may be higher in Mexico unable to save at all). They may borrow to fund because people may need to save for large capital items of expenditure but banks may retirement and may be concerned about the be unwilling to lend them money because they future in terms of unemployment and low are considered to be at risk of not being able to business and consumer confidence pay back the loan. government policies such as interest rates ● and taxation, e.g. in Mexico the interest rate Note that some high income earners may have may be high and this will encourage saving high levels of borrowing and may save a small proportion of their income because they spend government’s attitude to savings, e.g. a ● a large proportion of their income repaying debt government may wish its citizens to save to and spending on luxury goods and services. Some fund their own pensions in retirement low and middle income earners may save a larger and may provide tax efficient schemes to proportion of income because they are saving up facilitate this for their retirement and/or are concerned about the amount of merit goods provided ● the threat of unemployment. by the government, e.g. state pensions and university education; in Finland the See page 97 in the textbook for detailed government may provide free health information on different expenditure patterns of care and welfare benefits for the elderly, high, middle and low income earners. including a state pension and hence, Award 1–2 marks for a brief answer that shows citizens of Finland do not need to save for limited understanding. these services Award 3–5 marks for a balanced discussion of the the level of income of citizens will impact ● spending, saving and borrowing patterns of low, on the level of savings, e.g. Australian middle and high income earners. There may be a citizens may be able to save more than lack of detail and/or use of relevant examples. those in the UK because of higher income levels. Award 6–8 marks for a detailed discussion of the spending, saving and borrowing patterns Award 1–2 marks for a brief answer that of low, middle and high income earners. There shows limited understanding. is appropriate use of terminology and use of Award 3–5 marks for a balanced discussion of examples. There must be a reasoned judgement/ the reasons for the differences in savings ratios conclusion made for full marks. between countries. There may be a lack of 10 a Possible reasons people save are: detail and/or reference to the data. for retirement Award 6–8 marks for a detailed discussion ● of the reasons for the differences in savings to have reserves if they become ● ratios between the countries. There is unemployed appropriate use of terminology, use of to buy a large item of capital expenditure, ● examples and reference to the data. There e.g. a car, or to go on a foreign holiday or must be a reasoned judgement/conclusion get married made for full marks. to fund their children’s education ● to earn money on savings through interest ● rates. 16 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Middle income earners will save a smaller b The proportion of income saved will vary
proportion of their income and spend a larger because of:
proportion of their income on necessities and the age of the population, e.g. if the average
●
other goods and services than high income age of the population is under 25 (or over
earners. They will borrow to fund large items 65 years old) then the proportion of saving
of expenditure, e.g. a mortgage to purchase will be lower than if the population is
property. older because young people do not have
Low income earners will spend a large the income to save (and retired people are
proportion of their income on current spending their savings, i.e. dissaving)
expenditure and may only be able to save a small savings ratios (proportion of disposable
●
proportion of their income (or in some cases be income saved) may be higher in Mexico
unable to save at all). They may borrow to fund because people may need to save for
large capital items of expenditure but banks may retirement and may be concerned about the
be unwilling to lend them money because they future in terms of unemployment and low
are considered to be at risk of not being able to business and consumer confidence
pay back the loan. government policies such as interest rates
●
Note that some high income earners may have and taxation, e.g. in Mexico the interest rate
high levels of borrowing and may save a small may be high and this will encourage saving
proportion of their income because they spend government’s attitude to savings, e.g. a
●
a large proportion of their income repaying debt government may wish its citizens to save to
and spending on luxury goods and services. Some fund their own pensions in retirement
low and middle income earners may save a larger and may provide tax efficient schemes to
proportion of income because they are saving up facilitate this
for their retirement and/or are concerned about the amount of merit goods provided
●
the threat of unemployment. by the government, e.g. state pensions
See page 97 in the textbook for detailed and university education; in Finland the
information on different expenditure patterns of government may provide free health
high, middle and low income earners. care and welfare benefits for the elderly,
including a state pension and hence,
Award 1–2 marks for a brief answer that shows
citizens of Finland do not need to save for
limited understanding.
these services
Award 3–5 marks for a balanced discussion of the the level of income of citizens will impact
●
spending, saving and borrowing patterns of low, on the level of savings, e.g. Australian
middle and high income earners. There may be a citizens may be able to save more than
lack of detail and/or use of relevant examples. those in the UK because of higher income
Award 6–8 marks for a detailed discussion of levels.
the spending, saving and borrowing patterns Award 1–2 marks for a brief answer that
of low, middle and high income earners. There shows limited understanding.
is appropriate use of terminology and use of Award 3–5 marks for a balanced discussion of
examples. There must be a reasoned judgement/ the reasons for the differences in savings ratios
conclusion made for full marks. between countries. There may be a lack of
10 a Possible reasons people save are: detail and/or reference to the data.
for retirement Award 6–8 marks for a detailed discussion
●
of the reasons for the differences in savings
● to have reserves if they become
ratios between the countries. There is
unemployed
appropriate use of terminology, use of
● to buy a large item of capital expenditure, examples and reference to the data. There
e.g. a car, or to go on a foreign holiday or must be a reasoned judgement/conclusion
get married made for full marks.
● to fund their children’s education
● to earn money on savings through interest
rates.
16
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers ● ● 10 Business organisation 1 The correct answer is Option B. A private 6 The main differences between a partnership and a limited company can only sell shares to family private limited company include: and friends. Option A is a government funded a partnership has unlimited liability whilst a ● organisation and therefore does not sell shares private limited company has limited liability to raise finance. A public limited company a private limited company can raise money ● (Option C) can sell shares to the general public. by selling shares to family and friends whilst A partnership (Option D) cannot sell shares. a partnership can raise money through the 2 The correct answer is Option B. Firms may use partners’ personal funds and bank loans internal accounting procedures to declare profits profits in a partnership are shared between ● in another country with a lower tax rate than the partners whereas shareholders in a private the UK (Starbucks, Amazon and Google have limited company may receive dividends from all been accused of tax evasion in the UK; they the profits of the company. have tried to pay less tax in the UK by declaring Award 2 marks for each difference identified and profits elsewhere). Option A may be an advantage explained, up to a maximum of 4 marks. because it encourages local firms to innovate and be efficient. Option C is a reason why firms may See pages 110–116 in the textbook for more locate in the UK and is therefore an advantage to detailed information on partnerships and private foreign firms. Option D is an advantage of foreign limited companies. firms locating in an economy. 7 The reasons an individual might buy shares in a 3 The correct answer is Option A. Farmers might public limited company include: group together to have more bargaining power they receive dividends (a share of the profits) ● when they buy agricultural supplies in bulk than based on the number of shares they own; this if each famer bought their supplies individually. is a form of income for the individuals Option B is incorrect because producer purchasing shares is a form of investment ● co-operatives promote co-operation rather than as buyers hope that the value of the shares reduce competition. Option C is incorrect because will rise in the future so that they can make a a producer co-operative is designed to reduce capital gain when they sell the shares. costs for farmers and not for farmers to form a monopoly. Option D is incorrect because the Award 2 marks for each reason identified and producer co-operative benefits farmers and not explained. the wider society. 8 Business organisations in an economy may: 4 The correct answer is Option C. Co-operatives are produce goods and services which satisfy the ● based on the principle of being owned and run needs and wants of individuals in society by their members with the aim of creating value provide employment opportunities for ● for them. Option A is incorrect because a public workers and therefore an income for corporation is funded by the government and individuals provides a service for the general public. Option purchase goods and services from other B is incorrect because private limited companies ● businesses in the economy and therefore are obliged to make a profit for their shareholders. increase the earnings of other firms Option D is incorrect because, although produce goods and services which contributes partnerships are owned and controlled by the ● to the country’s GDP and economic growth partners, their main aim is to produce profits. pay tax on profits to the government and thus 5 The correct answer is Option C. Both a ● contribute to government revenue partnership and a sole trader have unlimited sell products abroad (to other countries) and liability. Option A is incorrect because it applies ● therefore increase export earnings, thereby to a sole trader and not a partnership. Option B improving the current account on the balance is incorrect because this applies to a partnership of payments. only. Option D is incorrect because neither a sole trader nor a partnership can sell shares, not even Business organisations in an economy may also: to family and friends. 17 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
● ● 10 Business organisation
1 The correct answer is Option B. A private 6 The main differences between a partnership and a
limited company can only sell shares to family private limited company include:
and friends. Option A is a government funded a partnership has unlimited liability whilst a
●
organisation and therefore does not sell shares private limited company has limited liability
to raise finance. A public limited company
● a private limited company can raise money
(Option C) can sell shares to the general public.
by selling shares to family and friends whilst
A partnership (Option D) cannot sell shares.
a partnership can raise money through the
2 The correct answer is Option B. Firms may use partners’ personal funds and bank loans
internal accounting procedures to declare profits profits in a partnership are shared between
●
in another country with a lower tax rate than the partners whereas shareholders in a private
the UK (Starbucks, Amazon and Google have limited company may receive dividends from
all been accused of tax evasion in the UK; they the profits of the company.
have tried to pay less tax in the UK by declaring
Award 2 marks for each difference identified and
profits elsewhere). Option A may be an advantage
explained, up to a maximum of 4 marks.
because it encourages local firms to innovate and
be efficient. Option C is a reason why firms may See pages 110–116 in the textbook for more
locate in the UK and is therefore an advantage to detailed information on partnerships and private
foreign firms. Option D is an advantage of foreign limited companies.
firms locating in an economy.
7 The reasons an individual might buy shares in a
3 The correct answer is Option A. Farmers might public limited company include:
group together to have more bargaining power
● they receive dividends (a share of the profits)
when they buy agricultural supplies in bulk than
based on the number of shares they own; this
if each famer bought their supplies individually.
is a form of income for the individuals
Option B is incorrect because producer
● purchasing shares is a form of investment
co-operatives promote co-operation rather than
as buyers hope that the value of the shares
reduce competition. Option C is incorrect because
will rise in the future so that they can make a
a producer co-operative is designed to reduce
capital gain when they sell the shares.
costs for farmers and not for farmers to form
a monopoly. Option D is incorrect because the Award 2 marks for each reason identified and
producer co-operative benefits farmers and not explained.
the wider society.
8 Business organisations in an economy may:
4 The correct answer is Option C. Co-operatives are produce goods and services which satisfy the
●
based on the principle of being owned and run needs and wants of individuals in society
by their members with the aim of creating value
● provide employment opportunities for
for them. Option A is incorrect because a public
workers and therefore an income for
corporation is funded by the government and
individuals
provides a service for the general public. Option
purchase goods and services from other
B is incorrect because private limited companies ●
businesses in the economy and therefore
are obliged to make a profit for their shareholders.
increase the earnings of other firms
Option D is incorrect because, although
partnerships are owned and controlled by the ● produce goods and services which contributes
partners, their main aim is to produce profits. to the country’s GDP and economic growth
pay tax on profits to the government and thus
5 The correct answer is Option C. Both a ●
contribute to government revenue
partnership and a sole trader have unlimited
liability. Option A is incorrect because it applies ● sell products abroad (to other countries) and
to a sole trader and not a partnership. Option B therefore increase export earnings, thereby
is incorrect because this applies to a partnership improving the current account on the balance
only. Option D is incorrect because neither a sole of payments.
trader nor a partnership can sell shares, not even Business organisations in an economy may also:
to family and friends.
17
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers import goods and services used in their Award 1–2 marks for a brief answer that shows ● production process and this may worsen the limited understanding. current account on the balance of payments Award 3–5 marks for a balanced discussion of cause external costs to the economy through ● the impact of Intel’s closure on the Costa Rican creating pollution, producing unhealthy/ economy. There may be a lack of detail and/or harmful products, generating litter or causing use of relevant examples. congestion in a local area Award a maximum of 5 marks if only positive or damage the local business culture by causing ● negative effects are discussed. closures of smaller businesses because they are large multinational firms so can sell goods Award 6–8 marks for a detailed discussion of more cheaply. the impact of Intel’s closure on the Costa Rican economy. There is appropriate use of terminology Award 1–2 marks for a brief answer that shows and use of examples. There must be a reasoned limited understanding. judgement/conclusion made for full marks. Award 3–4 marks for analysing the role of See pages 116–118 in the textbook for more business organisations in an economy. There detailed information on the advantages and may be a lack of detail and/or use of relevant disadvantages of multinationals. examples. 10 a Advantages of IKEA remaining a private Award 5–6 marks for a detailed analysis of the limited company include: role of business organisations in an economy. there is no threat of a takeover as shares are ● There is appropriate use of terminology and use not sold on a public stock market of examples. IKEA has privacy because it does not need ● 9 Negative effects of Intel’s closure on Costa Rica’s to make its financial accounts available to economy include: the general public loss of jobs in Costa Rica and therefore higher ● IKEA can remain in the control of ● unemployment family members and a small number of loss of income for workers may result in lower shareholders ● spending and this may negatively impact on decision-making may be easier and there ● the country’s economic growth tends to be a close relationship between loss of business for domestic firms that ownership and control. ● supplied Intel with goods and services, e.g. Award 2 marks for each advantage identified firms in the banking, marketing and transport and explained, up to a maximum of 4 marks. industries See page 116 in the textbook for more detailed loss of tax revenue paid to the Costa Rican ● explanations of the advantages of private government on Intel’s profits limited companies. loss of training opportunities for employees of ● b Benefits to the Chinese economy of IKEA Intel opening its stores in the country include: potential relocation out of Costa Rica for other ● foreign firms bring new products and ideas ● foreign companies. to the Chinese economy which can be used/adapted by local firms Positive effects of Intel’s closure on Costa Rica’s economy may include: the competition created in the furniture ● market may give local firms the incentive more opportunities for local Costa Rican firms ● to be innovative and more efficient to attract skilled and experienced workers IKEA creates employment opportunities for skilled and experienced workers who worked ● ● workers in China for Intel may bring their expertise to local Costa Rican firms IKEA pays tax on its profits earned in China ● Intel may have introduced new technologies to IKEA’s output adds to the GDP of China. ● ● Costa Rica which local firms could use Disadvantages to the Chinese economy Intel may have trained workers and this include: ● training can be passed on and used in other local firms may face fierce competition and ● domestic firms. lose business 18 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
import goods and services used in their Award 1–2 marks for a brief answer that shows
●
production process and this may worsen the limited understanding.
current account on the balance of payments
Award 3–5 marks for a balanced discussion of
● cause external costs to the economy through the impact of Intel’s closure on the Costa Rican
creating pollution, producing unhealthy/ economy. There may be a lack of detail and/or
harmful products, generating litter or causing use of relevant examples.
congestion in a local area
Award a maximum of 5 marks if only positive or
● damage the local business culture by causing negative effects are discussed.
closures of smaller businesses because they
are large multinational firms so can sell goods Award 6–8 marks for a detailed discussion of
more cheaply. the impact of Intel’s closure on the Costa Rican
economy. There is appropriate use of terminology
Award 1–2 marks for a brief answer that shows
and use of examples. There must be a reasoned
limited understanding.
judgement/conclusion made for full marks.
Award 3–4 marks for analysing the role of
See pages 116–118 in the textbook for more
business organisations in an economy. There
detailed information on the advantages and
may be a lack of detail and/or use of relevant
disadvantages of multinationals.
examples.
10 a Advantages of IKEA remaining a private
Award 5–6 marks for a detailed analysis of the limited company include:
role of business organisations in an economy.
● there is no threat of a takeover as shares are
There is appropriate use of terminology and use
not sold on a public stock market
of examples.
● IKEA has privacy because it does not need
9 Negative effects of Intel’s closure on Costa Rica’s to make its financial accounts available to
economy include: the general public
● loss of jobs in Costa Rica and therefore higher IKEA can remain in the control of
●
unemployment family members and a small number of
loss of income for workers may result in lower shareholders
●
spending and this may negatively impact on decision-making may be easier and there
●
the country’s economic growth tends to be a close relationship between
loss of business for domestic firms that ownership and control.
●
supplied Intel with goods and services, e.g. Award 2 marks for each advantage identified
firms in the banking, marketing and transport and explained, up to a maximum of 4 marks.
industries
See page 116 in the textbook for more detailed
● loss of tax revenue paid to the Costa Rican explanations of the advantages of private
government on Intel’s profits limited companies.
● loss of training opportunities for employees of b Benefits to the Chinese economy of IKEA
Intel opening its stores in the country include:
● potential relocation out of Costa Rica for other foreign firms bring new products and ideas
●
foreign companies. to the Chinese economy which can be
Positive effects of Intel’s closure on Costa Rica’s used/adapted by local firms
economy may include: ● the competition created in the furniture
more opportunities for local Costa Rican firms market may give local firms the incentive
●
to attract skilled and experienced workers to be innovative and more efficient
skilled and experienced workers who worked ● IKEA creates employment opportunities for
●
for Intel may bring their expertise to local workers in China
Costa Rican firms ● IKEA pays tax on its profits earned in China
Intel may have introduced new technologies to IKEA’s output adds to the GDP of China.
● ●
Costa Rica which local firms could use Disadvantages to the Chinese economy
Intel may have trained workers and this include:
●
training can be passed on and used in other local firms may face fierce competition and
●
domestic firms. lose business
18
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers workers may wish to work for IKEA and Award a maximum of 5 marks if only positive ● not for local firms or negative impacts are discussed. IKEA could exploit workers by taking Award 6–8 marks for a detailed discussion ● advantage of low wages and other costs of of the impact of IKEA on the Chinese production in China economy. There is appropriate use of terminology and use of examples. There must the jobs created may be low paid and low ● be a reasoned judgement/conclusion made skilled so therefore new skills and ideas are for full marks. not passed on to workers in China. See pages 116–118 in the textbook for more Award 1–2 marks for a brief answer that detailed information on the advantages and shows limited understanding. disadvantages of multinationals. Award 3–5 marks for a balanced discussion of the impact of IKEA on the Chinese economy. There may be a lack of detail and/or use of relevant examples. ● ● 11 Production 1 The correct answer is Option C. Whilst money 6 Capital-intensive production takes place when is an example of capital (man-made goods used a firm spends proportionately more money to produce other goods and services), other on capital costs than on any other factor of examples include tools, machinery, vehicles, production (such as land or labour). See page 129 computers, factories and roads. The four factors in the textbook for an explanation and examples of production are land, labour, capital and of capital-intensive production. enterprise. 7 Derived demand means that labour (or any 2 The correct answer is Option D. Labour-intensive other factor of production) is demanded for the production requires spending proportionately goods and services it is used to produce rather more on labour than any other factor of than being demanded for itself. For example, production. Options A, B and C require intensive bakers are demanded for the bread they bake, use of labour whereas Option D relies on capital- not for the sake of hiring bakers. See page 74 in intensive technologies for mass production. See the textbook for an explanation of the derived page 127 in the textbook for an explanation of demand for labour. Hence, the demand for factors labour-intensive production. of production is dependent on the demand for 3 The correct answer is Option B. Productivity the goods and services which they will be used measures how well resources are used in the to produce. See page 126 in the textbook for an production process, e.g. labour productivity explanation of derived demand. measures the efficiency of the workforce in terms 8 Productivity is a measure of how well resources of output per worker. See page 130 in the textbook are used in the production process. for an explanation of productivity and the input– Investment in human resources (e.g. training) output process. and/or other resources (e.g. automation or more 4 The correct answer is Option A. Innovations capital-intensive technologies) helps to improve such as tablet computers and smartphones have the productivity of scarce resources. transformed the way many people work, for See page 130 in the textbook for an explanation of example. Innovation is an important source of productivity and how it is calculated. productivity. See page 132 in the textbook for an explanation of innovation. Award 1–2 marks for an explanation that shows limited understanding. 5 The correct answer is Option B. Factors of production are demanded for their use in the Award 3–4 marks for a concise and coherent production process of creating output of goods explanation that shows a good level of and services. The demand for these goods and understanding. Relevant examples are likely to services determines the demand for the factors of be used. production needed. See page 126 in the textbook 9 a Monthly sales per worker at Morganics Cars for an explanation. = $284 850 ÷ 5 = $56 970 19 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
workers may wish to work for IKEA and Award a maximum of 5 marks if only positive
●
not for local firms or negative impacts are discussed.
IKEA could exploit workers by taking Award 6–8 marks for a detailed discussion
●
advantage of low wages and other costs of of the impact of IKEA on the Chinese
production in China economy. There is appropriate use of
the jobs created may be low paid and low terminology and use of examples. There must
●
skilled so therefore new skills and ideas are be a reasoned judgement/conclusion made
not passed on to workers in China. for full marks.
Award 1–2 marks for a brief answer that See pages 116–118 in the textbook for more
shows limited understanding. detailed information on the advantages and
disadvantages of multinationals.
Award 3–5 marks for a balanced discussion of
the impact of IKEA on the Chinese economy.
There may be a lack of detail and/or use of
relevant examples.
● ● 11 Production
1 The correct answer is Option C. Whilst money 6 Capital-intensive production takes place when
is an example of capital (man-made goods used a firm spends proportionately more money
to produce other goods and services), other on capital costs than on any other factor of
examples include tools, machinery, vehicles, production (such as land or labour). See page 129
computers, factories and roads. The four factors in the textbook for an explanation and examples
of production are land, labour, capital and of capital-intensive production.
enterprise.
7 Derived demand means that labour (or any
2 The correct answer is Option D. Labour-intensive
other factor of production) is demanded for the
production requires spending proportionately
goods and services it is used to produce rather
more on labour than any other factor of
than being demanded for itself. For example,
production. Options A, B and C require intensive
bakers are demanded for the bread they bake,
use of labour whereas Option D relies on capital-
not for the sake of hiring bakers. See page 74 in
intensive technologies for mass production. See
the textbook for an explanation of the derived
page 127 in the textbook for an explanation of
demand for labour. Hence, the demand for factors
labour-intensive production.
of production is dependent on the demand for
3 The correct answer is Option B. Productivity the goods and services which they will be used
measures how well resources are used in the to produce. See page 126 in the textbook for an
production process, e.g. labour productivity explanation of derived demand.
measures the efficiency of the workforce in terms
8 Productivity is a measure of how well resources
of output per worker. See page 130 in the textbook
are used in the production process.
for an explanation of productivity and the input–
output process. Investment in human resources (e.g. training)
and/or other resources (e.g. automation or more
4 The correct answer is Option A. Innovations
capital-intensive technologies) helps to improve
such as tablet computers and smartphones have
the productivity of scarce resources.
transformed the way many people work, for
example. Innovation is an important source of See page 130 in the textbook for an explanation of
productivity. See page 132 in the textbook for an productivity and how it is calculated.
explanation of innovation. Award 1–2 marks for an explanation that shows
5 The correct answer is Option B. Factors of limited understanding.
production are demanded for their use in the Award 3–4 marks for a concise and coherent
production process of creating output of goods explanation that shows a good level of
and services. The demand for these goods and understanding. Relevant examples are likely to
services determines the demand for the factors of be used.
production needed. See page 126 in the textbook
9 a Monthly sales per worker at Morganics Cars
for an explanation.
= $284 850 ÷ 5 = $56 970
19
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Monthly sales per worker at Agent Cars = Thus, the choice of measurement of $366 440 ÷ 8 = $45 805 productivity can determine how efficient firms are interpreted to be. Thus, the sales team at Morganics Cars is more productive as the average sales person sells an Award up to 2 marks for identifying and extra $11 165 worth of cars. explaining alternative ways to measure productivity. Award up to 2 marks for the correct calculations and a further 2 marks for the Award up to 2 marks for examining why it commentary. is difficult to determine the most productive firm because of alternative ways of measuring b Although Morganics Cars has higher productivity. productivity as measured by monthly sales per worker ($56 970 compared to $45 805 from There must be reference to the data for Agent Cars), Agent Cars might be considered 4 marks. to be more productive as each sales staff sold 10 Productivity is vital for the survival of firms a greater number of cars in the same time because: period. a lack of productivity causes average costs ● Morganics Cars workers sold an average of to rise and thus reduces the competitiveness, 3 cars each (15 cars sold by 5 sales staff). profitability and survival of the firm Agent Cars workers sold an average of high productivity helps firms to achieve ● 3.75 cars each in the same time period (30 cars economies of scale, further improving their sold by 8 sales staff). competitiveness, profitability and survival. Hence Agent Cars workers sold more cars. Accept any other reasonable explanation of why Also, the data does not provide any productivity is vital for the survival of firms. information on the type of car being sold, e.g. Relevant examples should be used for full marks. Morganics Cars has an average price of $18 990 Award 2 marks for explaining, with an example, ($284 850 ÷ 15) compared to Agent Cars’ each reason why productivity is vital for the average price of $12 215 (366 440 ÷ 30), which survival of firms, up to a maximum of 4 marks. might explain its higher sales volume. ● ● 12 Costs, revenues and profits 1 The correct answer is Option A. Irrespective of the 4 AC = TC ÷ Q level of output, the manufacturer has to pay rent AC = (20 000 + 10 000) ÷ 2000 for the land and/or building in which it operates. Wages, overtime pay and electricity charges AC = $15 are all dependent on the level of output, so are Hence, the answer is Option C. classified as variable costs. See pages 136–137 in the textbook for an 2 The correct answer is Option A. Fixed costs are explanation of average costs and how to calculate those that have to be paid regardless of the firm’s this. output or sales level. See page 135 in the textbook 5 The correct answer is Option C. Salaries for an explanation of fixed costs. (Option A) is a form of financial payment to 3 The correct answer is Option B. Total costs consist employees. It is a form of income (Option B), the of both fixed and variable costs. So, the total costs collective term for the earnings of the four factors = fixed costs when there is no output (meaning of production. Total costs (Option D) represent there are no variable costs of production). Hence, outflow of money from a business whereas the total cost line intersects the vertical axis at the revenue (Option C) represents an inflow of value of the fixed costs. See Figure 12.3 on page money. See pages 138–139 in the textbook for an 136 in the textbook for an explanation of this explanation of revenue. diagram. 20 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Monthly sales per worker at Agent Cars = Thus, the choice of measurement of
$366 440 ÷ 8 = $45 805 productivity can determine how efficient
Thus, the sales team at Morganics Cars is more firms are interpreted to be.
productive as the average sales person sells an Award up to 2 marks for identifying and
extra $11 165 worth of cars. explaining alternative ways to measure
Award up to 2 marks for the correct productivity.
calculations and a further 2 marks for the Award up to 2 marks for examining why it
commentary. is difficult to determine the most productive
b Although Morganics Cars has higher firm because of alternative ways of measuring
productivity as measured by monthly sales productivity.
per worker ($56 970 compared to $45 805 from There must be reference to the data for
Agent Cars), Agent Cars might be considered 4 marks.
to be more productive as each sales staff sold
10 Productivity is vital for the survival of firms
a greater number of cars in the same time
because:
period.
● a lack of productivity causes average costs
Morganics Cars workers sold an average of
to rise and thus reduces the competitiveness,
3 cars each (15 cars sold by 5 sales staff).
profitability and survival of the firm
Agent Cars workers sold an average of
● high productivity helps firms to achieve
3.75 cars each in the same time period (30 cars
economies of scale, further improving their
sold by 8 sales staff).
competitiveness, profitability and survival.
Hence Agent Cars workers sold more cars.
Accept any other reasonable explanation of why
Also, the data does not provide any
productivity is vital for the survival of firms.
information on the type of car being sold, e.g.
Relevant examples should be used for full marks.
Morganics Cars has an average price of $18 990
Award 2 marks for explaining, with an example,
($284 850 ÷ 15) compared to Agent Cars’
each reason why productivity is vital for the
average price of $12 215 (366 440 ÷ 30), which
survival of firms, up to a maximum of 4 marks.
might explain its higher sales volume.
● ● 12 Costs, revenues and profits
1 The correct answer is Option A. Irrespective of the 4 AC = TC ÷ Q
level of output, the manufacturer has to pay rent
AC = (20 000 + 10 000) ÷ 2000
for the land and/or building in which it operates.
Wages, overtime pay and electricity charges AC = $15
are all dependent on the level of output, so are
Hence, the answer is Option C.
classified as variable costs.
See pages 136–137 in the textbook for an
2 The correct answer is Option A. Fixed costs are
explanation of average costs and how to calculate
those that have to be paid regardless of the firm’s
this.
output or sales level. See page 135 in the textbook
for an explanation of fixed costs. 5 The correct answer is Option C. Salaries
(Option A) is a form of financial payment to
3 The correct answer is Option B. Total costs consist
employees. It is a form of income (Option B), the
of both fixed and variable costs. So, the total costs
collective term for the earnings of the four factors
= fixed costs when there is no output (meaning
of production. Total costs (Option D) represent
there are no variable costs of production). Hence,
outflow of money from a business whereas
the total cost line intersects the vertical axis at the
revenue (Option C) represents an inflow of
value of the fixed costs. See Figure 12.3 on page
money. See pages 138–139 in the textbook for an
136 in the textbook for an explanation of this
explanation of revenue.
diagram.
20
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 6 Hence the level of output required to maximise profits is 50 units. 9 a Total fixed costs are $1000 as this is the amount payable irrespective of the output level, i.e. when output is zero, the firm still has to pay $1000. Average costs Cost ($) b The price (or average revenue) is calculated by dividing the total revenue by the level of output. For instance, $4500 is earned from O selling 300 tonnes, so the price is: 4500 ÷ 300 = Output level $15 per tonne. See pages 136–137 in the textbook for an c To calculate average costs, divide total costs by explanation of this diagram. the level of output. 7 Output (tons) Total cost ($) Average cost ($) Output Fixed Variable Total Average (units) costs ($) costs ($) costs ($) costs ($) 0 1000 – 100 2000 400 2400 24.00 100 2000 20 200 2000 760 2760 13.80 200 2800 14 300 2000 1200 3200 10.67 300 3600 12 400 2000 2320 4320 10.80 400 5200 13 Hence, the output level with the lowest average Hence, average costs are minimised at costs of production is at 300 units of output, 300 tonnes of output. where the average cost = $10.67. d Profit is calculated by taking away total costs 8 a Average cost is calculated by dividing the total from total revenue. cost by the quantity produced. Output Total cost Total revenue Profit ($) Quantity produced 20 30 40 50 (tonnes) ($) ($) (units) 0 1000 0 (1000) Total cost ($) 200 285 360 460 100 2000 1500 (500) Average cost ($) 10.0 9.5 9.0 9.2 200 2800 3000 200 Hence the level of output required to minimise 300 3700 4500 800 average costs is 40 units. 400 5200 6000 800 b Profit is calculated by taking away total 10 a Total costs = Fixed costs + Variable costs costs from total revenue (which is calculated = $8000 + ($3 × 20 500) = $69 500 by multiplying the price by the quantity b Average costs = Total costs ÷ Output sold), i.e. profit = (price × quantity) − total costs. AC = $69 500 ÷ 20 500 = $3.39 Accept answers that show an average cost Quantity 20 30 40 50 = $3.40. produced (units) c Profit = Total revenue − Total costs Total 20 × 20 20 × 30 20 × 40 20 × 50 Profit = ($5.5 × 25 000) − [($3 × 25 000) + $8000] revenue ($) = $400 = $600 = $800 = $1000 = $137 500 − $83 000 = $54 500 Total cost ($) 200 285 360 460 Or Profit ($) 200 315 440 540 Profit = [($5.5 − $3) × 25 000] − $8000 = $54 500 ● ● 13 Perfect competition and monopoly 1 The correct answer is Option B. In perfect See pages 142–143 in the textbook for an competition, firms produce or supply a explanation of the main characteristics of perfect homogeneous (undifferentiated) product. competition. 21 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
6 Hence the level of output required to
maximise profits is 50 units.
9 a Total fixed costs are $1000 as this is the amount
payable irrespective of the output level, i.e. when
output is zero, the firm still has to pay $1000.
Cost ($) Average costs
b The price (or average revenue) is calculated
by dividing the total revenue by the level of
output. For instance, $4500 is earned from
O selling 300 tonnes, so the price is: 4500 ÷ 300 =
Output level
$15 per tonne.
See pages 136–137 in the textbook for an c To calculate average costs, divide total costs by
explanation of this diagram. the level of output.
7 Output Fixed Variable Total Average Output (tons) Total cost ($) Average cost ($)
(units) costs ($) costs ($) costs ($) costs ($) 0 1000 –
100 2000 400 2400 24.00 100 2000 20
200 2000 760 2760 13.80 200 2800 14
300 2000 1200 3200 10.67 300 3600 12
400 2000 2320 4320 10.80 400 5200 13
Hence, the output level with the lowest average Hence, average costs are minimised at
costs of production is at 300 units of output, 300 tonnes of output.
where the average cost = $10.67.
d Profit is calculated by taking away total costs
8 a Average cost is calculated by dividing the total from total revenue.
cost by the quantity produced.
Output Total cost Total revenue Profit ($)
Quantity produced 20 30 40 50 (tonnes) ($) ($)
(units) 0 1000 0 (1000)
Total cost ($) 200 285 360 460 100 2000 1500 (500)
Average cost ($) 10.0 9.5 9.0 9.2 200 2800 3000 200
Hence the level of output required to minimise 300 3700 4500 800
average costs is 40 units. 400 5200 6000 800
b Profit is calculated by taking away total
10 a Total costs = Fixed costs + Variable costs
costs from total revenue (which is calculated
= $8000 + ($3 × 20 500) = $69 500
by multiplying the price by the quantity
b Average costs = Total costs ÷ Output
sold), i.e. profit = (price × quantity) − total
costs. AC = $69 500 ÷ 20 500 = $3.39
Accept answers that show an average cost
Quantity 20 30 40 50 = $3.40.
produced
(units) c Profit = Total revenue − Total costs
Total 20 × 20 20 × 30 20 × 40 20 × 50 Profit = ($5.5 × 25 000) − [($3 × 25 000) + $8000]
revenue ($) = $400 = $600 = $800 = $1000
= $137 500 − $83 000 = $54 500
Total cost ($) 200 285 360 460
Or
Profit ($) 200 315 440 540
Profit = [($5.5 − $3) × 25 000] − $8000 = $54 500
● ● 13 Perfect competition and monopoly
1 The correct answer is Option B. In perfect See pages 142–143 in the textbook for an
competition, firms produce or supply a explanation of the main characteristics of perfect
homogeneous (undifferentiated) product. competition.
21
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 2 The correct answer is Option C. In this market 8 structure, a monopolist is able to protect its S S prestigious position because customers and 1 2 rivals have imperfect knowledge, such as the P 1 monopolist’s ability to protect its intellectual P property rights and trade secrets. See page 145 Price ($) 2 in the textbook for an explanation of the main characteristics of monopoly. D 3 The correct answer is Option D. Although O Q Q 1 2 consumer protection laws need to be observed, these laws apply to all publishers in the industry, Quantity traded not just those attempting to enter the industry. Increased competition shifts The consumer protection laws are unlikely to be a the market supply curve outwards to the right. This significant deterrent (barrier). causes the market price to fall from P to P , thereby causing 4 The correct answer is Option C. A monopolist is 1 2 the quantity demanded to the sole supplier of a particular good or service. increase from Q to Q . 1 2 Monopolists are price makers, also known as Increased competition shifts the market supply price setters (Options A and B). A market leader curve outwards to the right. This causes the (Option D) suggests there are other rivals in the market price to fall from P to P and the industry. Besides, not all market leaders enjoy 1 2 equilibrium output to increase from Q to Q . monopoly power. 1 2 Award up to 4 marks for drawing a correct diagram: 5 The correct answer is Option A. Firms with monopoly power are able to charge different 1 mark for correctly labelled axes ● prices to different customers, e.g. adult and child 1 mark for correctly labelled demand and ● fares at the cinema or peak and off-peak travel supply curves and identifying and labelling prices. Although monopolies have price setting the original equilibrium price and quantity power (Option B), it does not necessarily mean 1 mark for shifting the supply curve to the ● they use price discrimination. See pages 146–147 right in the textbook for an explanation of the different 1 mark for identifying the new price and pricing strategies used by monopolists. ● equilibrium quantity. 6 Market structure refers to the key characteristics Award up to 2 marks for explaining the reasons of a particular market, such as the number for the shift in the supply curve. and size of firms in the market, the degree and intensity of price and non-price competition, and 9 the nature of barriers to entry. S S 2 1 Award 2 marks for a detailed definition containing at least one characteristic of a market. P 2 7 Disadvantages of monopoly include: P Price ($) 1 inefficiency ● high entry barriers that prevent competition ● D higher prices as monopolists are price makers ● O Q Q 2 1 imperfect knowledge ● Quantity traded fewer incentives due to the lack of ● competition. Due to the lack of competition, a monopolist is able to restrict market supply, as shown by the See pages 148–149 in the textbook for an shift in supply from S to S and thus equilibrium explanation of the disadvantages of monopoly. 1 2 output falls from Q to Q . As the monopolist 1 2 Award up to 2 marks for each disadvantage that limits the supply of its good or service, the price is is explained, up to the maximum of 4 marks. higher (at P rather than P ). 2 1 22 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
2 The correct answer is Option C. In this market 8
structure, a monopolist is able to protect its
S S
prestigious position because customers and 1 2
rivals have imperfect knowledge, such as the P
1
monopolist’s ability to protect its intellectual
P
property rights and trade secrets. See page 145 Price ($) 2
in the textbook for an explanation of the main
characteristics of monopoly.
D
3 The correct answer is Option D. Although O Q Q
1 2
consumer protection laws need to be observed,
these laws apply to all publishers in the industry, Quantity traded
not just those attempting to enter the industry. Increased competition shifts
The consumer protection laws are unlikely to be a the market supply curve
significant deterrent (barrier). outwards to the right. This
causes the market price to fall
4 The correct answer is Option C. A monopolist is from P 1 to P 2 , thereby causing
the quantity demanded to
the sole supplier of a particular good or service. increase from Q to Q .
1 2
Monopolists are price makers, also known as
price setters (Options A and B). A market leader Increased competition shifts the market supply
(Option D) suggests there are other rivals in the curve outwards to the right. This causes the
industry. Besides, not all market leaders enjoy market price to fall from P to P and the
1 2
monopoly power. equilibrium output to increase from Q to Q .
1 2
5 The correct answer is Option A. Firms with Award up to 4 marks for drawing a correct diagram:
monopoly power are able to charge different 1 mark for correctly labelled axes
●
prices to different customers, e.g. adult and child 1 mark for correctly labelled demand and
●
fares at the cinema or peak and off-peak travel supply curves and identifying and labelling
prices. Although monopolies have price setting the original equilibrium price and quantity
power (Option B), it does not necessarily mean
● 1 mark for shifting the supply curve to the
they use price discrimination. See pages 146–147
right
in the textbook for an explanation of the different
1 mark for identifying the new price and
pricing strategies used by monopolists. ●
equilibrium quantity.
6 Market structure refers to the key characteristics
Award up to 2 marks for explaining the reasons
of a particular market, such as the number
for the shift in the supply curve.
and size of firms in the market, the degree and
intensity of price and non-price competition, and
9
the nature of barriers to entry.
S 2 S 1
Award 2 marks for a detailed definition
containing at least one characteristic of a market. P
2
7 Disadvantages of monopoly include: P
Price ($) 1
● inefficiency
● high entry barriers that prevent competition D
● higher prices as monopolists are price makers O Q Q
2 1
● imperfect knowledge
Quantity traded
● fewer incentives due to the lack of
competition. Due to the lack of competition, a monopolist is
able to restrict market supply, as shown by the
See pages 148–149 in the textbook for an
shift in supply from S to S and thus equilibrium
explanation of the disadvantages of monopoly. 1 2
output falls from Q to Q . As the monopolist
Award up to 2 marks for each disadvantage that 1 2
limits the supply of its good or service, the price is
is explained, up to the maximum of 4 marks. higher (at P rather than P ).
2 1
22
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award up to 4 marks for drawing a correct the greater R&D expenditure can lead to more ● diagram. innovation and better quality output 1 mark for correctly labelled axes competition can be wasteful. ● ● 1 mark for correctly labelled demand and ● Students might consider how prices, costs, the supply curves and identifying and labelling range of products, profit and innovation under the original equilibrium price and quantity monopoly compare with a more competitive 1 mark for shifting the supply curve to the left market structure. ● 1 mark for identifying the new price and ● Award 1–2 marks for a brief answer that shows equilibrium quantity. limited understanding. Award up to 2 marks for explaining the reasons Award 3–5 marks for a balanced discussion of the for the shift in the supply curve. costs and benefits of monopoly. There may be a lack of detail and/or use of relevant examples. 10 Arguments why consumers may be disadvantaged due to the lack of competition include: Award up to 5 marks for a one-sided argument, higher prices i.e. monopolies are either good or bad for ● consumers. poorer quality ● a lack of consumer choice Award 6–8 marks for a two-sided discussion that ● considers both the benefits and disadvantages of a lack of innovation. ● monopoly for consumers. There is good use of On the other hand, consumers can benefit from terminology and relevant examples. monopolies for reasons including: See pages 148–149 in the textbook for an lower prices due to low economies of scale, as ● explanation of the various advantages and monopolists operate on a large scale disadvantages of monopoly. greater spending on research and development ● (R&D) due to the larger profits earned by the monopolist ● ● 14 Business growth 1 The correct answer is Option A. Facebook and See pages 153–157 in the textbook for more WhatsApp are both in the tertiary sector of information about types of integration. an economy and in the same industry (social 4 The correct answer is Option D. Small shops networking), therefore it is an example of have the capacity to offer a personalised service horizontal integration. Facebook purchased because of the size of their operations (they WhatsApp and therefore it is an example of a are not too busy/large so can get to know takeover. See pages 153–157 in the textbook for customers better). Option A is incorrect because more information about the various types of the statement is not necessarily true. Option B is integration. incorrect because small firms are unable to take 2 The correct answer is Option B. The size of a advantage of economies of scale to the same firm can be measured by capital employed, the extent as their larger rivals. Option C is incorrect number of employees, market size (market share) because often small firms charge higher prices and sales revenue (sales turnover). See page 151 than large firms. See page 158 in the textbook in the textbook for more information about for more information about why small and large measuring the size of firms. firms co-exist. 3 The correct answer is Option C. The purchase 5 The correct answer is Option A. The new firm can of cotton farms by the clothing manufacturer take advantage of discounts for bulk purchases involves a firm in the secondary sector of industry (such as shampoo, conditioner and hair gel) and purchasing farms in the primary sector, so is advertising for the new company will be more therefore backwards vertical integration. The efficient. Option B is an external economy of purchase of the retail shops involves a firm in the scale. Option C is not an economy of scale; a more secondary sector purchasing shops in the tertiary productive workforce is not necessarily caused sector, so is therefore forward vertical integration. by larger scale operations. Option D is a potential 23 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award up to 4 marks for drawing a correct ● the greater R&D expenditure can lead to more
diagram. innovation and better quality output
● 1 mark for correctly labelled axes ● competition can be wasteful.
● 1 mark for correctly labelled demand and Students might consider how prices, costs, the
supply curves and identifying and labelling range of products, profit and innovation under
the original equilibrium price and quantity monopoly compare with a more competitive
● 1 mark for shifting the supply curve to the left market structure.
● 1 mark for identifying the new price and Award 1–2 marks for a brief answer that shows
equilibrium quantity. limited understanding.
Award up to 2 marks for explaining the reasons Award 3–5 marks for a balanced discussion of the
for the shift in the supply curve. costs and benefits of monopoly. There may be a
10 Arguments why consumers may be disadvantaged lack of detail and/or use of relevant examples.
due to the lack of competition include: Award up to 5 marks for a one-sided argument,
● higher prices i.e. monopolies are either good or bad for
poorer quality consumers.
●
● a lack of consumer choice Award 6–8 marks for a two-sided discussion that
a lack of innovation. considers both the benefits and disadvantages of
●
monopoly for consumers. There is good use of
On the other hand, consumers can benefit from
terminology and relevant examples.
monopolies for reasons including:
See pages 148–149 in the textbook for an
● lower prices due to low economies of scale, as explanation of the various advantages and
monopolists operate on a large scale
disadvantages of monopoly.
● greater spending on research and development
(R&D) due to the larger profits earned by the
monopolist
● ● 14 Business growth
1 The correct answer is Option A. Facebook and See pages 153–157 in the textbook for more
WhatsApp are both in the tertiary sector of information about types of integration.
an economy and in the same industry (social
4 The correct answer is Option D. Small shops
networking), therefore it is an example of
have the capacity to offer a personalised service
horizontal integration. Facebook purchased
because of the size of their operations (they
WhatsApp and therefore it is an example of a
are not too busy/large so can get to know
takeover. See pages 153–157 in the textbook for
customers better). Option A is incorrect because
more information about the various types of
the statement is not necessarily true. Option B is
integration.
incorrect because small firms are unable to take
2 The correct answer is Option B. The size of a advantage of economies of scale to the same
firm can be measured by capital employed, the extent as their larger rivals. Option C is incorrect
number of employees, market size (market share) because often small firms charge higher prices
and sales revenue (sales turnover). See page 151 than large firms. See page 158 in the textbook
in the textbook for more information about for more information about why small and large
measuring the size of firms. firms co-exist.
3 The correct answer is Option C. The purchase 5 The correct answer is Option A. The new firm can
of cotton farms by the clothing manufacturer take advantage of discounts for bulk purchases
involves a firm in the secondary sector of industry (such as shampoo, conditioner and hair gel) and
purchasing farms in the primary sector, so is advertising for the new company will be more
therefore backwards vertical integration. The efficient. Option B is an external economy of
purchase of the retail shops involves a firm in the scale. Option C is not an economy of scale; a more
secondary sector purchasing shops in the tertiary productive workforce is not necessarily caused
sector, so is therefore forward vertical integration. by larger scale operations. Option D is a potential
23
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers diseconomy of scale. See pages 158–161 in the there are no intermediary firms, such as ● textbook for more information about economies distributors, involved, so L’Occitane can and diseconomies of scale. charge lower prices or enjoy higher profit margins. 6 A conglomerate merger occurs when firms from However, the costs to L’Occitane include: different sectors of industry, which operate in different areas of business, merge as one costs of running the farm in the primary ● company. An example of a conglomerate merger sector increases total costs as more land, is the takeover of a furniture manufacturer by a labour and capital resources are required sportswear manufacturer. transport costs increase for the integrated ● firm as raw materials were previously Award 1 mark for a definition. delivered by external suppliers but this is an Award 1 mark for an example. additional cost for the newly formed firm Note : students do not have to give a real world managing more operations as a larger, ● example of a conglomerate merger for full marks. integrated firm can lead to diseconomies of scale. See pages 156–157 in the textbook for more detailed information on conglomerate mergers Award 1–2 marks for a brief answer that (integration of firms). shows limited understanding. Award 3–4 marks for explaining the 7 A takeover occurs when a firm buys a majority advantages and disadvantages of L’Occitane share in another business, e.g. in 2011 Kraft, the selling its products in its own shops. There US food manufacturer, purchased Cadbury, the may be a lack of detail and/or use of UK chocolate manufacturer. Cadbury is owned by examples. Kraft. Takeovers can be hostile or friendly. Award 5–6 marks for a detailed analysis of the A merger takes place when two firms agree to join advantages and disadvantages of L’Occitane to form a new company. For example, Microsoft, selling its products in its own shops. There the US software producer, merged with Nokia, is appropriate use of terminology and use of the Swedish mobile phone producer, in 2014 to relevant examples. form a new company. Another example is Exxon See page 155 in the textbook for more and Mobil merging to become ExxonMobil. detailed information on the advantages and Award 2 × 2 marks for explaining the meaning of disadvantages of forward vertical integration. takeovers and mergers and giving an example of 9 Advantages of having only small independent each to distinguish between the two terms. shops in a town are: See page 153 in the textbook for more detailed personal service because shop owners know ● information on takeovers and mergers. the customers 8 a Backward vertical integration has taken place the possibility of unique products being ● because L’Occitane is a manufacturer in the supplied which may attract visitors to the secondary sector of the economy and a retailer town in the tertiary sector of the economy and it smaller shops can adapt more quickly to purchased shea butter farms which are in the ● changing tastes primary sector of the economy. local business owners benefit from sales, rather See page 155 in the textbook for more ● than profits being sent to headquarters in an information on backward vertical integration. out-of-town location b Advantages of L’Occitane buying farms in money circulating in the local economy and Africa which produce shea butter include: ● staying within the community. the firm in the secondary sector has control ● over the quality of raw materials and Disadvantages of having only small independent ingredients (such as shea butter) that it is shops are: supplied with less choice of products because larger shops ● the price of raw materials falls as and supermarkets have a greater range of ● L’Occitane does not have to pay another products (external) firm for the raw materials higher prices as small shops cannot take ● advantage of economies of scale 24 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
diseconomy of scale. See pages 158–161 in the there are no intermediary firms, such as
●
textbook for more information about economies distributors, involved, so L’Occitane can
and diseconomies of scale. charge lower prices or enjoy higher profit
margins.
6 A conglomerate merger occurs when firms from
different sectors of industry, which operate However, the costs to L’Occitane include:
in different areas of business, merge as one costs of running the farm in the primary
●
company. An example of a conglomerate merger sector increases total costs as more land,
is the takeover of a furniture manufacturer by a labour and capital resources are required
sportswear manufacturer. transport costs increase for the integrated
●
Award 1 mark for a definition. firm as raw materials were previously
delivered by external suppliers but this is an
Award 1 mark for an example.
additional cost for the newly formed firm
Note : students do not have to give a real world managing more operations as a larger,
●
example of a conglomerate merger for full marks. integrated firm can lead to diseconomies of
See pages 156–157 in the textbook for more scale.
detailed information on conglomerate mergers Award 1–2 marks for a brief answer that
(integration of firms). shows limited understanding.
7 A takeover occurs when a firm buys a majority Award 3–4 marks for explaining the
share in another business, e.g. in 2011 Kraft, the advantages and disadvantages of L’Occitane
US food manufacturer, purchased Cadbury, the selling its products in its own shops. There
UK chocolate manufacturer. Cadbury is owned by may be a lack of detail and/or use of
Kraft. Takeovers can be hostile or friendly. examples.
Award 5–6 marks for a detailed analysis of the
A merger takes place when two firms agree to join
advantages and disadvantages of L’Occitane
to form a new company. For example, Microsoft,
selling its products in its own shops. There
the US software producer, merged with Nokia,
is appropriate use of terminology and use of
the Swedish mobile phone producer, in 2014 to
relevant examples.
form a new company. Another example is Exxon
and Mobil merging to become ExxonMobil. See page 155 in the textbook for more
detailed information on the advantages and
Award 2 × 2 marks for explaining the meaning of disadvantages of forward vertical integration.
takeovers and mergers and giving an example of
each to distinguish between the two terms. 9 Advantages of having only small independent
shops in a town are:
See page 153 in the textbook for more detailed
● personal service because shop owners know
information on takeovers and mergers.
the customers
8 a Backward vertical integration has taken place
● the possibility of unique products being
because L’Occitane is a manufacturer in the
supplied which may attract visitors to the
secondary sector of the economy and a retailer
town
in the tertiary sector of the economy and it
purchased shea butter farms which are in the ● smaller shops can adapt more quickly to
primary sector of the economy. changing tastes
See page 155 in the textbook for more ● local business owners benefit from sales, rather
information on backward vertical integration. than profits being sent to headquarters in an
out-of-town location
b Advantages of L’Occitane buying farms in
Africa which produce shea butter include: ● money circulating in the local economy and
staying within the community.
● the firm in the secondary sector has control
over the quality of raw materials and Disadvantages of having only small independent
ingredients (such as shea butter) that it is shops are:
supplied with less choice of products because larger shops
●
the price of raw materials falls as and supermarkets have a greater range of
●
L’Occitane does not have to pay another products
(external) firm for the raw materials higher prices as small shops cannot take
●
advantage of economies of scale
24
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers shops may not sell basic products needed financial economies of scale – the combined ● ● by local customers. Any imported products firm may be able to raise more finance because would be even more expensive as small of having more assets to act as security for shops do not have the capacity to enjoy huge loans or being more attractive to investors economies of scale. technological economies of scale – the combined ● accountancy firm may be able to afford to Award 1–2 marks for a brief answer that shows purchase new technically advanced ICT systems. limited understanding. Disadvantages of two firms of accountants Award 3–4 marks for explaining the advantages merging may include: and disadvantages of having only small shops in a town. There may be a lack of detail and/or use diseconomies of scale arising from a culture ● of relevant examples. clash between the two firms which causes communication problems and demotivated staff Award 5–6 marks for a detailed analysis of the diseconomies of scale arising from the advantages and disadvantages of having only ● new firm being too large and making small shops in a town. There is appropriate use of communication difficult and therefore slowing terminology and use of examples. down decision-making 10 Advantages of two firms of accountants merging diseconomies of scale arising from the loss of may include: ● staff morale and staff demotivation as some bulk-buying economies of scale – they will ● workers are made redundant due to duplication be able to buy stationery and computing of their role in the new firm, e.g. there is no equipment in larger quantities and take need for two human resource managers. advantage of bulk discounts Award 1–2 marks for a brief answer that shows marketing economies of scale – they may ● limited understanding. be able to take advantage of a combined marketing budget to spend on more Award 3–5 marks for a balanced discussion of sophisticated marketing campaigns, or spend the advantages and disadvantages of two firms less on marketing but gain greater exposure merging to form one firm. There may be a lack of because of the newly created firm detail and/or use of relevant examples. risk-bearing economies of scale – a greater ● Award up to 5 marks if only the advantages or number of clients may spread the risk of some disadvantages are discussed. clients defaulting on payment or going out of Award 6–8 marks for a detailed discussion of business; the clients may also be spread across the advantages and disadvantages. There is a larger geographical area and this will also appropriate use of terminology and examples. spread risk There must be a reasoned judgement/conclusion managerial economies of scale – the new firm ● made for full marks. may be able to pay higher wages to attract See pages 158–161 in the textbook for more employees who are experts in their field, e.g. detailed information on economies and marketing experts, ICT experts, accountants diseconomies of scale. and managers ● ● 15 Government aims and influences 1 The correct answer is Option D. Public libraries regulations, whilst tariffs (Option D) is an bring about external benefits to society and example of taxes. would be under-consumed without government 3 The correct answer is Option C. With higher rates intervention or provision. The other options are of economic growth, spending in the economy public goods. See page 164 in the textbook for an rises, hence creating inflationary pressure in the explanation of public goods. economy. Economic growth creates employment 2 The correct answer is Option A. Regulation refers opportunities (Option A) and the extra spending to the rules, guidelines and laws that determine in the economy generates more tax revenues what businesses can and cannot do. Intellectual (Option D). It is not possible to determine property rights (Option C) is an example of whether the balance of payments will go into 25 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
● shops may not sell basic products needed ● financial economies of scale – the combined
by local customers. Any imported products firm may be able to raise more finance because
would be even more expensive as small of having more assets to act as security for
shops do not have the capacity to enjoy huge loans or being more attractive to investors
economies of scale. technological economies of scale – the combined
●
Award 1–2 marks for a brief answer that shows accountancy firm may be able to afford to
limited understanding. purchase new technically advanced ICT systems.
Award 3–4 marks for explaining the advantages Disadvantages of two firms of accountants
and disadvantages of having only small shops in merging may include:
a town. There may be a lack of detail and/or use ● diseconomies of scale arising from a culture
of relevant examples. clash between the two firms which causes
communication problems and demotivated staff
Award 5–6 marks for a detailed analysis of the
advantages and disadvantages of having only ● diseconomies of scale arising from the
small shops in a town. There is appropriate use of new firm being too large and making
terminology and use of examples. communication difficult and therefore slowing
down decision-making
10 Advantages of two firms of accountants merging
diseconomies of scale arising from the loss of
may include: ●
staff morale and staff demotivation as some
● bulk-buying economies of scale – they will workers are made redundant due to duplication
be able to buy stationery and computing
of their role in the new firm, e.g. there is no
equipment in larger quantities and take
need for two human resource managers.
advantage of bulk discounts
Award 1–2 marks for a brief answer that shows
● marketing economies of scale – they may
limited understanding.
be able to take advantage of a combined
marketing budget to spend on more Award 3–5 marks for a balanced discussion of
sophisticated marketing campaigns, or spend the advantages and disadvantages of two firms
less on marketing but gain greater exposure merging to form one firm. There may be a lack of
because of the newly created firm detail and/or use of relevant examples.
● risk-bearing economies of scale – a greater Award up to 5 marks if only the advantages or
number of clients may spread the risk of some disadvantages are discussed.
clients defaulting on payment or going out of
Award 6–8 marks for a detailed discussion of
business; the clients may also be spread across
the advantages and disadvantages. There is
a larger geographical area and this will also
appropriate use of terminology and examples.
spread risk
There must be a reasoned judgement/conclusion
● managerial economies of scale – the new firm made for full marks.
may be able to pay higher wages to attract
See pages 158–161 in the textbook for more
employees who are experts in their field, e.g.
detailed information on economies and
marketing experts, ICT experts, accountants
diseconomies of scale.
and managers
● ● 15 Government aims and influences
1 The correct answer is Option D. Public libraries regulations, whilst tariffs (Option D) is an
bring about external benefits to society and example of taxes.
would be under-consumed without government
3 The correct answer is Option C. With higher rates
intervention or provision. The other options are
of economic growth, spending in the economy
public goods. See page 164 in the textbook for an
rises, hence creating inflationary pressure in the
explanation of public goods.
economy. Economic growth creates employment
2 The correct answer is Option A. Regulation refers opportunities (Option A) and the extra spending
to the rules, guidelines and laws that determine in the economy generates more tax revenues
what businesses can and cannot do. Intellectual (Option D). It is not possible to determine
property rights (Option C) is an example of whether the balance of payments will go into
25
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers deficit from the limited information. See pages example, inflation reduces the international 169–170 in the textbook for an explanation of competitiveness of a country as its prices will conflicting government aims. be relatively higher. This will lead to lower export sales, which causes potential job losses. 4 The correct answer is Option D. Depending See Chapter 18 in the textbook to read about on the economic system in a country, not all price stability in more detail. governments strive to provide welfare services in 10 a A subsidy is a form of financial aid from the their country. In a free market economic system, government to a producer in order to reduce resources are allocated based on the market forces the costs of production. Alternatively, it can of demand and supply with minimal government be granted to consumers to reduce the price of intervention. See pages 167–169 in the textbook consumption. for more information about government aims. b Inflation is the sustained rise in the general 5 The correct answer is Option A. Only the level of prices of goods and services in government can impose taxes and regulations an economy over time, as measured by a on private sector firms (Options B and C), and consumer price index (CPI). it approves or gives subsidies (Option D) to c Benefits of using subsidies include: encourage output. Both public and private sector firms can use investment expenditure to influence greater levels of supply as producers are ● output. Hence, investment is not exclusive or able to increase supply at every price level explicit to the government. lower prices due to the increase in supply, ● thus benefiting consumers 6 Full employment exists when everyone who is able and willing to work at a given wage is in lower prices having an impact on keeping ● employment, i.e. any unemployment that exists is inflation under control voluntary. subsidies for food, housing, transportation, ● education and other socially desirable Note : the term can also refer to other factors of products helps to improve standards of living. production, i.e. the full employment of resources in the economy. Possible drawback of subsidies include: the opportunity cost of using taxpayers’ 7 Real gross domestic product refers to the value ● money to finance the subsidies of a country’s goods and services produced in a given year, after the effects of inflation have been subsidies can distort competition, giving ● taken into account. some firms an unfair advantage they might also encourage some producers See page 222 in the textbook for an explanation of ● to become complacent and/or inefficient real gross domestic product. they can cause overproduction, i.e. excess 8 Over time, as an economy grows, the gap ● supply, which leads to wastage between the rich and poor tends to widen, such not all producers pass on the benefits of as earnings by top executives in the corporate ● subsidies (in the form of lower prices) to world compared to low income workers earning their consumers. the minimum wage. This causes greater income inequalities in the economy, so the government Award 1–2 marks for a brief answer that intervenes to redistribute income to low-income shows limited understanding. households. See page 169 in the textbook for an Award 3–5 marks for a one-sided answer or an explanation, including an exam practice question. answer that lacks depth and/or use of relevant Also see page 171 for a list of some of the world’s examples. richest people. Award up to 6–7 marks for a balanced 9 Price stability refers to the control of inflation answer that considers both the benefits and in the economy. Low and sustainable rates of drawbacks of using subsidies to intervene in inflation are vital in order to achieve stable markets. There is good use of terminology and economic growth and social wellbeing. For appropriate examples. 26 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
deficit from the limited information. See pages example, inflation reduces the international
169–170 in the textbook for an explanation of competitiveness of a country as its prices will
conflicting government aims. be relatively higher. This will lead to lower
export sales, which causes potential job losses.
4 The correct answer is Option D. Depending
See Chapter 18 in the textbook to read about
on the economic system in a country, not all
price stability in more detail.
governments strive to provide welfare services in
their country. In a free market economic system, 10 a A subsidy is a form of financial aid from the
resources are allocated based on the market forces government to a producer in order to reduce
of demand and supply with minimal government the costs of production. Alternatively, it can
intervention. See pages 167–169 in the textbook be granted to consumers to reduce the price of
for more information about government aims. consumption.
b Inflation is the sustained rise in the general
5 The correct answer is Option A. Only the
level of prices of goods and services in
government can impose taxes and regulations
an economy over time, as measured by a
on private sector firms (Options B and C), and
consumer price index (CPI).
it approves or gives subsidies (Option D) to
encourage output. Both public and private sector c Benefits of using subsidies include:
firms can use investment expenditure to influence greater levels of supply as producers are
●
output. Hence, investment is not exclusive or able to increase supply at every price level
explicit to the government. lower prices due to the increase in supply,
●
6 Full employment exists when everyone who is thus benefiting consumers
able and willing to work at a given wage is in lower prices having an impact on keeping
●
employment, i.e. any unemployment that exists is inflation under control
voluntary. subsidies for food, housing, transportation,
●
Note : the term can also refer to other factors of education and other socially desirable
production, i.e. the full employment of resources products helps to improve standards of living.
in the economy. Possible drawback of subsidies include:
7 Real gross domestic product refers to the value ● the opportunity cost of using taxpayers’
of a country’s goods and services produced in a money to finance the subsidies
given year, after the effects of inflation have been subsidies can distort competition, giving
●
taken into account. some firms an unfair advantage
See page 222 in the textbook for an explanation of ● they might also encourage some producers
real gross domestic product. to become complacent and/or inefficient
they can cause overproduction, i.e. excess
8 Over time, as an economy grows, the gap ●
supply, which leads to wastage
between the rich and poor tends to widen, such
as earnings by top executives in the corporate ● not all producers pass on the benefits of
world compared to low income workers earning subsidies (in the form of lower prices) to
the minimum wage. This causes greater income their consumers.
inequalities in the economy, so the government Award 1–2 marks for a brief answer that
intervenes to redistribute income to low-income shows limited understanding.
households. See page 169 in the textbook for an Award 3–5 marks for a one-sided answer or an
explanation, including an exam practice question. answer that lacks depth and/or use of relevant
Also see page 171 for a list of some of the world’s examples.
richest people.
Award up to 6–7 marks for a balanced
9 Price stability refers to the control of inflation answer that considers both the benefits and
in the economy. Low and sustainable rates of drawbacks of using subsidies to intervene in
inflation are vital in order to achieve stable markets. There is good use of terminology and
economic growth and social wellbeing. For appropriate examples.
26
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers ● ● 16 Government policies 1 The correct answer is Option C. Privatisation using trade barriers to protect domestic ● is a type of supply-side policy (Option D). See industries from foreign competition (see page page 177 in the textbook for an explanation of 213 in the textbook for an explanation) privatisation. using exchange rate policies, e.g. a devalued ● exchange rate will tend to raise the demand 2 The correct answer is Option C. To expand (boost) for exports and reduce the demand for the economy, fiscal policy can be used by reducing imports (see page 272 in the textbook for an taxes (to encourage consumption expenditure) explanation). and raising government spending (which fuels economic activity). See page 173 in the textbook Award up to 2 marks for each reason that is for examples of expansionary fiscal policy. clearly explained, up to the maximum of 4 marks. 3 The correct answer is Option C. By reducing 8 Possible reasons for using monetary policy could taxes, consumer demand should be encouraged include: as households have more disposable income. reducing interest rates to stimulate the ● Cutting interest rates also enables households and economy during a recession (or vice versa for firms with existing loans to spend more money, an economic boom) and encourages new borrowing which also boosts intervention in the foreign exchange market national output and employment. Option A is ● to influence gross domestic product and a supply-side policy. See pages 177–179 in the economic stability textbook for an explanation. direct control over the money supply to ● 4 The correct answer is Option B. Reducing influence the rate of inflation. interest rates can create more spending power (as households with existing loans and mortgages See pages 175–176 in the textbook for an have more disposable income), but this is explanation of how monetary policies are used by monetary policy. Fiscal policy involves changes to governments. taxes and government expenditure. Award 1–2 marks for a vague answer that 5 The correct answer is Option D. Supply- demonstrates some understanding. side policies are long-term strategies of the Award 3–4 marks for demonstrating a clear government aimed at increasing the productive understanding of why a government might capacity of the economy by using policies to choose to use monetary policy. improve the quality and/or quantity of factors of 9 a Supply-side policies are the long-term production. See pages 177–178 in the textbook for strategies aimed at increasing the productive an explanation of supply-side policies. capacity of the economy by improving 6 Possible reasons to increase government spending the quality and/or quantity of factors of (public expenditure) could include: production. See page 177 in the textbook for an to redistribute income and wealth in the explanation of how supply-side policies work. ● economy b Possible impacts that could be examined include: to alleviate poverty incentives to work, e.g. lower incomes taxes ● ● to provide public goods and services, e.g. street and lower welfare benefits ● lighting, public libraries, schools, hospitals, investment expenditure, e.g. spending on ● national parks and affordable housing infrastructure and lower corporation tax to to steer the economy out of recession. attract foreign investment ● human capital expenditure, e.g. on Award up to 2 marks for each reason that is ● education and training. clearly explained, up to the maximum of 4 marks. See page 174 in the textbook for an explanation 7 Possible policies could include: of how fiscal policies can be used to impact on using contractionary fiscal and/or monetary ● the supply-side of an economy. policies to reduce demand for imports Award 1–2 marks for a brief answer that (see pages 174 and 176 in the textbook for shows limited understanding. explanations) 27 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
● ● 16 Government policies
1 The correct answer is Option C. Privatisation using trade barriers to protect domestic
●
is a type of supply-side policy (Option D). See industries from foreign competition (see page
page 177 in the textbook for an explanation of 213 in the textbook for an explanation)
privatisation. using exchange rate policies, e.g. a devalued
●
2 The correct answer is Option C. To expand (boost) exchange rate will tend to raise the demand
the economy, fiscal policy can be used by reducing for exports and reduce the demand for
taxes (to encourage consumption expenditure) imports (see page 272 in the textbook for an
and raising government spending (which fuels explanation).
economic activity). See page 173 in the textbook Award up to 2 marks for each reason that is
for examples of expansionary fiscal policy. clearly explained, up to the maximum of 4 marks.
3 The correct answer is Option C. By reducing 8 Possible reasons for using monetary policy could
taxes, consumer demand should be encouraged include:
as households have more disposable income.
● reducing interest rates to stimulate the
Cutting interest rates also enables households and
economy during a recession (or vice versa for
firms with existing loans to spend more money,
an economic boom)
and encourages new borrowing which also boosts
intervention in the foreign exchange market
national output and employment. Option A is ●
to influence gross domestic product and
a supply-side policy. See pages 177–179 in the
economic stability
textbook for an explanation.
● direct control over the money supply to
4 The correct answer is Option B. Reducing
influence the rate of inflation.
interest rates can create more spending power (as
households with existing loans and mortgages See pages 175–176 in the textbook for an
have more disposable income), but this is explanation of how monetary policies are used by
monetary policy. Fiscal policy involves changes to governments.
taxes and government expenditure.
Award 1–2 marks for a vague answer that
5 The correct answer is Option D. Supply- demonstrates some understanding.
side policies are long-term strategies of the
Award 3–4 marks for demonstrating a clear
government aimed at increasing the productive
understanding of why a government might
capacity of the economy by using policies to
choose to use monetary policy.
improve the quality and/or quantity of factors of
9 a Supply-side policies are the long-term
production. See pages 177–178 in the textbook for
strategies aimed at increasing the productive
an explanation of supply-side policies.
capacity of the economy by improving
6 Possible reasons to increase government spending the quality and/or quantity of factors of
(public expenditure) could include: production. See page 177 in the textbook for an
to redistribute income and wealth in the explanation of how supply-side policies work.
●
economy b Possible impacts that could be examined include:
● to alleviate poverty ● incentives to work, e.g. lower incomes taxes
to provide public goods and services, e.g. street and lower welfare benefits
●
lighting, public libraries, schools, hospitals, investment expenditure, e.g. spending on
●
national parks and affordable housing infrastructure and lower corporation tax to
to steer the economy out of recession. attract foreign investment
●
human capital expenditure, e.g. on
Award up to 2 marks for each reason that is ●
education and training.
clearly explained, up to the maximum of 4 marks.
See page 174 in the textbook for an explanation
7 Possible policies could include:
of how fiscal policies can be used to impact on
● using contractionary fiscal and/or monetary the supply-side of an economy.
policies to reduce demand for imports
Award 1–2 marks for a brief answer that
(see pages 174 and 176 in the textbook for
shows limited understanding.
explanations)
27
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 3–4 marks for an answer that An increase in national output creates jobs in demonstrates good understanding of how the economy in the long term, further fuelling fiscal policy can impact on the supply-side economic growth. of an economy. There might be a lack of The main criticism of supply-side policies is explanation and/or use of examples. the time that it takes to reap the benefits. For Award 5–6 marks for an answer that example, it might take decades for a nation to demonstrates a good level of understanding get the benefits of an improved education system of how fiscal policy can be used to impact or infrastructure in the country, thus limiting on the supply-side of the economy. There economic growth in the short run. is effective use of terminology and relevant Award 1–2 marks for a brief answer that shows examples. limited understanding. 10 Supply-side policies can be used to achieve Award 3–5 marks for a balanced discussion. There sustainable economic growth by increasing the may be a lack of detail and/or use of relevant productive capacity of the economy. Examples examples. should be given. Award 6–8 marks for a detailed discussion of the As supply-side policies increase the productive effectiveness of supply-side policies in achieving potential of the economy, they help to prevent the economic growth. There is appropriate use of general price level from rising beyond control, terminology and use of examples. There must be thereby fostering economic stability. a reasoned judgement/conclusion made for full marks. ● ● 17 Taxation 1 The correct answer is Option C. Direct taxes 6 Indirect taxes, such as VAT or GST, are levied on are imposed on earnings, such as income and expenditure. They are regressive in nature. See profits. Income tax (Option A) and corporation pages 182–183 in the textbook for an explanation tax (Option B) are examples of direct tax. See of different types of taxes. Table 17.1 on page 185 in the textbook for an Award 1 mark for a correct definition of indirect explanation of the various types of taxes. taxes and up to 2 further marks for an explanation 2 The correct answer is Option B. The government (including relevant examples). will have a budget surplus if it spends less than 7 Reasons for imposing zero rate taxes could the sum of its sources of revenue. Options C and include: D refer to the balance of payments, not the budget to boost aggregate demand (boosting spending itself. ● in the economy) 3 The correct answer is Option D. Proportional to encourage multinational companies to set ● taxes such as value-added tax (an example of up business in these countries a sales tax) have the same percentage charge to increase incentives to work irrespective of the buyer. See pages 182–183 in ● the textbook for an explanation of the differences to encourage risk taking and entrepreneurship. ● between progressive, regressive and proportional 8 a Income level ($) Tax rate Amount of tax paid ($) taxes. (%) First $10 000 is tax 4 The correct answer is Option B. Customs duties $10 000 0% free = $0 are imposed on imported goods. Hence, these Next $40 000 is taxed at are indirect taxes (imposed on expenditure rather $10 001–$50 000 12% 12% = $4800 than earnings). See Table 17.1 on page 185 for an Remaining $30 000 is $50 000+ 17% explanation of the various examples of taxes. taxed at 17% = $5100 Total tax: $9900 5 The correct answer is Option C. Higher taxes tend to slow down the economy (so Option B is b Average tax rate = total tax ÷ income incorrect). This tends to lower inflation (Option C). $9900 ÷ $80 000 = 12.37% It is unlikely that higher taxes create incentives to work (Option A) or that higher taxes have a positive impact on business location (Option D). 28 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 3–4 marks for an answer that An increase in national output creates jobs in
demonstrates good understanding of how the economy in the long term, further fuelling
fiscal policy can impact on the supply-side economic growth.
of an economy. There might be a lack of
The main criticism of supply-side policies is
explanation and/or use of examples.
the time that it takes to reap the benefits. For
Award 5–6 marks for an answer that example, it might take decades for a nation to
demonstrates a good level of understanding get the benefits of an improved education system
of how fiscal policy can be used to impact or infrastructure in the country, thus limiting
on the supply-side of the economy. There economic growth in the short run.
is effective use of terminology and relevant
Award 1–2 marks for a brief answer that shows
examples.
limited understanding.
10 Supply-side policies can be used to achieve
Award 3–5 marks for a balanced discussion. There
sustainable economic growth by increasing the
may be a lack of detail and/or use of relevant
productive capacity of the economy. Examples
examples.
should be given.
Award 6–8 marks for a detailed discussion of the
As supply-side policies increase the productive
effectiveness of supply-side policies in achieving
potential of the economy, they help to prevent the
economic growth. There is appropriate use of
general price level from rising beyond control,
terminology and use of examples. There must be
thereby fostering economic stability.
a reasoned judgement/conclusion made for full
marks.
● ● 17 Taxation
1 The correct answer is Option C. Direct taxes 6 Indirect taxes, such as VAT or GST, are levied on
are imposed on earnings, such as income and expenditure. They are regressive in nature. See
profits. Income tax (Option A) and corporation pages 182–183 in the textbook for an explanation
tax (Option B) are examples of direct tax. See of different types of taxes.
Table 17.1 on page 185 in the textbook for an
Award 1 mark for a correct definition of indirect
explanation of the various types of taxes.
taxes and up to 2 further marks for an explanation
2 The correct answer is Option B. The government (including relevant examples).
will have a budget surplus if it spends less than
7 Reasons for imposing zero rate taxes could
the sum of its sources of revenue. Options C and
include:
D refer to the balance of payments, not the budget
itself. ● to boost aggregate demand (boosting spending
in the economy)
3 The correct answer is Option D. Proportional
● to encourage multinational companies to set
taxes such as value-added tax (an example of
up business in these countries
a sales tax) have the same percentage charge
irrespective of the buyer. See pages 182–183 in ● to increase incentives to work
the textbook for an explanation of the differences ● to encourage risk taking and entrepreneurship.
between progressive, regressive and proportional 8 a
Income level ($) Tax rate Amount of tax paid ($)
taxes. (%)
4 The correct answer is Option B. Customs duties $10 000 0% First $10 000 is tax
free = $0
are imposed on imported goods. Hence, these
Next $40 000 is taxed at
are indirect taxes (imposed on expenditure rather $10 001–$50 000 12%
12% = $4800
than earnings). See Table 17.1 on page 185 for an
Remaining $30 000 is
explanation of the various examples of taxes. $50 000+ 17% taxed at 17% = $5100
5 The correct answer is Option C. Higher taxes Total tax: $9900
tend to slow down the economy (so Option B is
b Average tax rate = total tax ÷ income
incorrect). This tends to lower inflation (Option C).
$9900 ÷ $80 000 = 12.37%
It is unlikely that higher taxes create incentives
to work (Option A) or that higher taxes have a
positive impact on business location (Option D).
28
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 9 a Reasons for reducing direct taxes include: demand in the economy may be increasing, ● thus creating incentives for MNCs to set up to boost aggregate demand (spending in ● in the country the economy); thus raising more indirect (sales) taxes there may be government subsidies to ● entice MNCs to increase incentives to work, so more ● people would be paying income tax availability of cheaper and/or more ● productive labour can also attract MNCs. to encourage multinational companies to ● set up business in these countries due to 10 a Tax A is progressive. the low corporation taxes; thus boosting At $10 000 the tax paid = $1000 (10%) overall tax revenues At $15 000 the tax paid = $1650 (11%) to discourage tax avoidance and tax ● At $20 000 the tax paid = $2400 (12%) evasion; thus boosting overall tax revenue. At $25 000 the tax paid = $3250 (13%) b Award 1–2 marks for a brief answer that b Tax C is proportional. shows limited understanding. At all levels of incomes, 5% tax is charged. Award 3–5 marks for explaining why imposing corporation taxes on the profits c A regressive tax charges those on lower of multinational companies (MNCs) may incomes a higher rate of tax. Tax B is regressive discourage them from setting up in a country, as the same $650 is charged irrespective of the e.g. a reduction in company profits or reduced income level. international competitiveness. At $10 000 the tax paid = $650 (6.5%) Award 6–7 marks for acknowledging that At $15 000 the tax paid = $650 (4.33%) imposing corporation taxes may discourage At $20 000 the tax paid = $650 (3.25%) MNCs but then considering factors why it At $25 000 the tax paid = $650 (2.6%) might not, such as: By contrast, a proportional tax charges all corporation taxes may still be lower than in ● income earners the same percentage tax rate other countries (5% in the case of Tax C). ● ● 18 Inflation 1 The correct answer is Option B. Lower interest i.e. spending more on food means the typical rates will make borrowing cheaper and boost household values food more than shoes. It is not household disposable income (e.g. those with possible to determine from statistical weights how existing bank loans and mortgages pay less much (the quantity) households buy (Options A interest on their outstanding debts). Thus, and B) or the price (Option D). See pages 193–194 consumer and producer confidence levels should in the textbook for an explanation of weights in rise, causing greater economic activity and an the CPI. increase in the inflation rate. See pages 195–196 in 4 The correct answer is Option A. To calculate the the textbook for an explanation of the causes of rate of inflation, it is necessary to work out the inflation. percentage change in the CPI: 2 The correct answer is Option C. Savers place their (116.8 − 115.2) ÷ 115.2 = 1.39% money in the bank in an attempt to gain some See page 194 in the textbook for an explanation interest and to keep its value, i.e. to act as a store of how to calculate the CPI. There are further of value. Inflation reduces the value of money, calculation exercises on page 195 to test students’ even if placed in a savings account. People are understanding. generally less able to save during inflationary periods as they pay higher prices for goods and 5 The correct answer is Option A (Year 1). The data services. See page 197 in the textbook for an shows an overall increase in the CPI, so there explanation of the impact of inflation on savers, has been inflation during the period shown. and other consequences of inflation. Prices were lowest in Year 1 when the CPI stood at 102.2 (i.e. 2.2% inflation from the base year), 3 The correct answer is Option C. Economists deem whereas the CPI is higher in all subsequent years. ‘importance’ to be determined by the percentage Although the rate of inflation drops from Year 2 of household income spent on particular items, 29 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
9 a Reasons for reducing direct taxes include: ● demand in the economy may be increasing,
to boost aggregate demand (spending in thus creating incentives for MNCs to set up
●
the economy); thus raising more indirect in the country
(sales) taxes ● there may be government subsidies to
to increase incentives to work, so more entice MNCs
●
people would be paying income tax ● availability of cheaper and/or more
to encourage multinational companies to productive labour can also attract MNCs.
●
set up business in these countries due to 10 a Tax A is progressive.
the low corporation taxes; thus boosting At $10 000 the tax paid = $1000 (10%)
overall tax revenues
At $15 000 the tax paid = $1650 (11%)
● to discourage tax avoidance and tax At $20 000 the tax paid = $2400 (12%)
evasion; thus boosting overall tax revenue.
At $25 000 the tax paid = $3250 (13%)
b Award 1–2 marks for a brief answer that
b Tax C is proportional.
shows limited understanding.
At all levels of incomes, 5% tax is charged.
Award 3–5 marks for explaining why
imposing corporation taxes on the profits c A regressive tax charges those on lower
of multinational companies (MNCs) may incomes a higher rate of tax. Tax B is regressive
discourage them from setting up in a country, as the same $650 is charged irrespective of the
e.g. a reduction in company profits or reduced income level.
international competitiveness. At $10 000 the tax paid = $650 (6.5%)
Award 6–7 marks for acknowledging that At $15 000 the tax paid = $650 (4.33%)
imposing corporation taxes may discourage At $20 000 the tax paid = $650 (3.25%)
MNCs but then considering factors why it
At $25 000 the tax paid = $650 (2.6%)
might not, such as:
By contrast, a proportional tax charges all
● corporation taxes may still be lower than in
income earners the same percentage tax rate
other countries
(5% in the case of Tax C).
● ● 18 Inflation
1 The correct answer is Option B. Lower interest i.e. spending more on food means the typical
rates will make borrowing cheaper and boost household values food more than shoes. It is not
household disposable income (e.g. those with possible to determine from statistical weights how
existing bank loans and mortgages pay less much (the quantity) households buy (Options A
interest on their outstanding debts). Thus, and B) or the price (Option D). See pages 193–194
consumer and producer confidence levels should in the textbook for an explanation of weights in
rise, causing greater economic activity and an the CPI.
increase in the inflation rate. See pages 195–196 in 4 The correct answer is Option A. To calculate the
the textbook for an explanation of the causes of rate of inflation, it is necessary to work out the
inflation. percentage change in the CPI:
2 The correct answer is Option C. Savers place their (116.8 − 115.2) ÷ 115.2 = 1.39%
money in the bank in an attempt to gain some
interest and to keep its value, i.e. to act as a store See page 194 in the textbook for an explanation
of value. Inflation reduces the value of money, of how to calculate the CPI. There are further
even if placed in a savings account. People are calculation exercises on page 195 to test students’
generally less able to save during inflationary understanding.
periods as they pay higher prices for goods and 5 The correct answer is Option A (Year 1). The data
services. See page 197 in the textbook for an shows an overall increase in the CPI, so there
explanation of the impact of inflation on savers, has been inflation during the period shown.
and other consequences of inflation. Prices were lowest in Year 1 when the CPI stood
3 The correct answer is Option C. Economists deem at 102.2 (i.e. 2.2% inflation from the base year),
‘importance’ to be determined by the percentage whereas the CPI is higher in all subsequent years.
of household income spent on particular items, Although the rate of inflation drops from Year 2
29
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers to Year 3 (from 104.6 to 103.9), these figures are 9 Inflation rate = (135.54 − 125.5) ÷ 125.5 = 8% higher than the CPI in Year 1 (102.2). Hence, the price of the basket = $1500 × 1.08 = $1620 6 Answers could include an explanation of: 10 a A retail prices index (RPI) is used to calculate using the CPI as a measure of inflation ● the rate of inflation in a country. low and stable inflation as a government ● Unlike the CPI, the RPI includes the cost macroeconomic objective of housing (including mortgage interest calculating the CPI to enable governments to ● payments and other housing costs). make international comparisons of inflation It excludes low-income pensioner households rates over time and very high-income households, as neither using the CPI as a basis for interest rate (anti- ● are regarded as being ‘average’ households in inflation) policy, i.e. raising interest rates when the economy. there are inflationary pressures. b The weight for food is 30 whilst it is 15 for 7 Weightings are based on the importance of clothing, i.e. the typical household spends the item in the average household and this is 30% of their income on food and just 15% on determined by how much they spend on the item. clothing. Hence, the average household in The greater the proportion spent on an item, the Satcolbe spends more money on food than it higher the weighting. does on clothing. Food and furniture are given different weightings c Item Retail Weight Weighted index as different proportions are spent on them by the prices typical (average) household; a higher proportion index of the average household’s expenditure goes on Clothing 120 15 120 × 0.15 = 18 food than on furniture. Food 130 30 130 × 0.3 = 39 Housing 140 40 140 × 0.4 = 56 See pages 193–194 in the textbook for an Other 125 15 125 × 0.15 = 18.75 explanation of how to calculate a statistically weighted CPI. Weighted RPI 100 131.75 8 The inflation rate is calculated by the percentage See pages 193–194 in the textbook for an change in the CPI: explanation of how to calculate a statistically weighted CPI. [(114.4 − 112.3) ÷ 112.3] × 100 = 1.87% ● ● 19 Employment 1 The correct answer is Option A. In economics, causes of unemployment. The consequences of unemployment occurs when people of working unemployment are explained on page 210. age are both able and willing to work but cannot 4 Unemployment rate = 7%. find work. Working age population = 38 million. 2 The correct answer is Option B. Examples of Unemployed total = 38 m × 0.07 = 2.66 million supply-side policies that can rectify labour market people. imperfections include investments in education and training, reduction in labour union powers, Hence, the correct answer is Option A. incentives to seek employment opportunities 5 The correct answer is Option A. Frictional and reforms to welfare benefits (such as unemployment occurs when people change jobs, unemployment benefits). See pages 211–212 in the causing temporary unemployment due to the textbook for further information about supply- time delay between leaving a job and finding side policies. or starting a new job. See pages 207–209 in the 3 The correct answer is Option C. Cyclical textbook for a description of the different types unemployment is associated with an economic and causes of unemployment. recession, which typically affects every 6 The unemployment rate refers to the percentage industry. See pages 207–209 in the textbook for a of the labour force (the working population) description of the different types and without a job. In some countries, it is the number 30 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
to Year 3 (from 104.6 to 103.9), these figures are 9 Inflation rate = (135.54 − 125.5) ÷ 125.5 = 8%
higher than the CPI in Year 1 (102.2). Hence, the price of the basket = $1500 × 1.08
6 Answers could include an explanation of: = $1620
using the CPI as a measure of inflation 10 a A retail prices index (RPI) is used to calculate
●
the rate of inflation in a country.
● low and stable inflation as a government
macroeconomic objective Unlike the CPI, the RPI includes the cost
of housing (including mortgage interest
● calculating the CPI to enable governments to
payments and other housing costs).
make international comparisons of inflation
rates over time It excludes low-income pensioner households
and very high-income households, as neither
● using the CPI as a basis for interest rate (anti-
are regarded as being ‘average’ households in
inflation) policy, i.e. raising interest rates when
the economy.
there are inflationary pressures.
b The weight for food is 30 whilst it is 15 for
7 Weightings are based on the importance of
clothing, i.e. the typical household spends
the item in the average household and this is
30% of their income on food and just 15% on
determined by how much they spend on the item.
clothing. Hence, the average household in
The greater the proportion spent on an item, the
Satcolbe spends more money on food than it
higher the weighting.
does on clothing.
Food and furniture are given different weightings c
Item Retail Weight Weighted index
as different proportions are spent on them by the prices
typical (average) household; a higher proportion index
of the average household’s expenditure goes on Clothing 120 15 120 × 0.15 = 18
food than on furniture. Food 130 30 130 × 0.3 = 39
See pages 193–194 in the textbook for an Housing 140 40 140 × 0.4 = 56
explanation of how to calculate a statistically Other 125 15 125 × 0.15 = 18.75
weighted CPI. Weighted RPI 100 131.75
8 The inflation rate is calculated by the percentage
See pages 193–194 in the textbook for an
change in the CPI:
explanation of how to calculate a statistically
[(114.4 − 112.3) ÷ 112.3] × 100 = 1.87% weighted CPI.
● ● 19 Employment
1 The correct answer is Option A. In economics, causes of unemployment. The consequences of
unemployment occurs when people of working unemployment are explained on page 210.
age are both able and willing to work but cannot
4 Unemployment rate = 7%.
find work.
Working age population = 38 million.
2 The correct answer is Option B. Examples of
supply-side policies that can rectify labour market Unemployed total = 38 m × 0.07 = 2.66 million
imperfections include investments in education people.
and training, reduction in labour union powers, Hence, the correct answer is Option A.
incentives to seek employment opportunities
5 The correct answer is Option A. Frictional
and reforms to welfare benefits (such as
unemployment occurs when people change jobs,
unemployment benefits). See pages 211–212 in the
causing temporary unemployment due to the
textbook for further information about supply-
time delay between leaving a job and finding
side policies.
or starting a new job. See pages 207–209 in the
3 The correct answer is Option C. Cyclical textbook for a description of the different types
unemployment is associated with an economic and causes of unemployment.
recession, which typically affects every
6 The unemployment rate refers to the percentage
industry. See pages 207–209 in the textbook for a
of the labour force (the working population)
description of the different types and
without a job. In some countries, it is the number
30
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers of registered unemployed as a percentage of there is no official upper limit so this varies from the labour force. Refer to pages 206–207 in the country to country. textbook for an explanation of unemployment 10 Economic advantages might include: and how it is calculated. greater national output (GDP) ● 7 Unemployment rate = 2.7 m ÷ (30 m + 2.7 m) × 100 reduced poverty ● = 8.25% increased tax revenue (from income tax and ● 8 Cyclical unemployment (or demand-deficient expenditure taxes) unemployment) is associated with an economic reduced government spending on welfare ● recession. See page 211 in the textbook for an benefits (which has an opportunity cost) explanation of cyclical unemployment and pages extra tax revenue might be spent on further 220–221 for an explanation of the business cycle. ● improving the economy, e.g. investment in 9 The International Labour Organisation (ILO) infrastructure or reducing a budget deficit. measures unemployment by calculating the Accept any other valid advantage. number of people of working age who are both willing and able to work but cannot find Award up to 2 marks for each advantage that is employment. The ILO states the lower age limit clearly explained, up to a maximum of 4 marks. for those of working age as 15 years old, but ● ● 20 Economic growth 1 The correct answer is Option B. An increase 5 The correct answer is Option D. Education, in the productive capacity of the economy income levels and health care are the three enables the country to boost its gross domestic indicators used to compile the HDI. The lack of product (GDP), thereby leading to economic consideration for environmental issues (Option D) growth. is one of the main criticisms of using the HDI to measure standards of living. 2 The correct answer is Option A. Economists use real GDP per capita (calculated as GDP adjusted 6 A recession occurs in the business cycle when for inflation, divided by the population size) as a a country’s gross domestic product (GDP) measure of economic growth. See page 222 in the falls for two consecutive quarters. A recession textbook for an explanation. is associated with a decline in consumption, investment and net exports (due to falling export 3 The correct answer is Option B. With economic earnings). growth, standards of living in the country tend to rise, so infant mortality rates will decline (see 7 Net exports = X − M , i.e. the numerical difference page 230 in the textbook for a brief explanation). between the value of a country’s exports ( X ) and With higher national income, it is likely that its imports ( M ). X measures the monetary value employment opportunities will rise, as will GDP of all goods and services sold to foreign buyers, per capita and the average number of years whereas M measures the monetary value of all children attend school. payments for imported goods and services. See page 216 in the textbook for an explanation of 4 The correct answer is Option B. With rapid exports and imports. economic growth, there is huge demand for the world’s scarce resources, i.e. growth is not 8 Causes of economic growth include: necessarily sustainable. Whilst costs might factor endowments ● increase (Option A), this is not necessarily a size, skills and mobility of the labour force ● problem (not all inflation is harmful). Higher labour productivity tax revenues (Option C) can be beneficial for the ● economy. Higher demand for imports (Option D) investment expenditure. ● might not necessarily be a concern, especially if See pages 217–218 in the textbook for an explanation rapid economic growth is fuelled by higher export of the above causes of economic growth. earnings. 31 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
of registered unemployed as a percentage of there is no official upper limit so this varies from
the labour force. Refer to pages 206–207 in the country to country.
textbook for an explanation of unemployment
10 Economic advantages might include:
and how it is calculated.
● greater national output (GDP)
7 Unemployment rate = 2.7 m ÷ (30 m + 2.7 m) × 100
● reduced poverty
= 8.25%
● increased tax revenue (from income tax and
8 Cyclical unemployment (or demand-deficient expenditure taxes)
unemployment) is associated with an economic
● reduced government spending on welfare
recession. See page 211 in the textbook for an
benefits (which has an opportunity cost)
explanation of cyclical unemployment and pages
extra tax revenue might be spent on further
220–221 for an explanation of the business cycle. ●
improving the economy, e.g. investment in
9 The International Labour Organisation (ILO) infrastructure or reducing a budget deficit.
measures unemployment by calculating the
Accept any other valid advantage.
number of people of working age who are
both willing and able to work but cannot find Award up to 2 marks for each advantage that is
employment. The ILO states the lower age limit clearly explained, up to a maximum of 4 marks.
for those of working age as 15 years old, but
● ● 20 Economic growth
1 The correct answer is Option B. An increase 5 The correct answer is Option D. Education,
in the productive capacity of the economy income levels and health care are the three
enables the country to boost its gross domestic indicators used to compile the HDI. The lack of
product (GDP), thereby leading to economic consideration for environmental issues (Option D)
growth. is one of the main criticisms of using the HDI to
measure standards of living.
2 The correct answer is Option A. Economists use
real GDP per capita (calculated as GDP adjusted 6 A recession occurs in the business cycle when
for inflation, divided by the population size) as a a country’s gross domestic product (GDP)
measure of economic growth. See page 222 in the falls for two consecutive quarters. A recession
textbook for an explanation. is associated with a decline in consumption,
investment and net exports (due to falling export
3 The correct answer is Option B. With economic
earnings).
growth, standards of living in the country tend
to rise, so infant mortality rates will decline (see 7 Net exports = X − M , i.e. the numerical difference
page 230 in the textbook for a brief explanation). between the value of a country’s exports ( X ) and
With higher national income, it is likely that its imports ( M ). X measures the monetary value
employment opportunities will rise, as will GDP of all goods and services sold to foreign buyers,
per capita and the average number of years whereas M measures the monetary value of all
children attend school. payments for imported goods and services. See
page 216 in the textbook for an explanation of
4 The correct answer is Option B. With rapid
exports and imports.
economic growth, there is huge demand for
the world’s scarce resources, i.e. growth is not 8 Causes of economic growth include:
necessarily sustainable. Whilst costs might factor endowments
●
increase (Option A), this is not necessarily a
● size, skills and mobility of the labour force
problem (not all inflation is harmful). Higher
labour productivity
tax revenues (Option C) can be beneficial for the ●
economy. Higher demand for imports (Option D) ● investment expenditure.
might not necessarily be a concern, especially if
See pages 217–218 in the textbook for an explanation
rapid economic growth is fuelled by higher export
of the above causes of economic growth.
earnings.
31
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 9 ) Trend $ Boom (or Peak) Economic activity Recession Slump Gross domestic product ( O Time 10 the lowest standards of living of the four listed Country HDI Country HDI countries. Norway 0.944 Indonesia 0.684 Turkey 0.759 Sierra Leone 0.363 Turkey, being relatively more economically developed than Indonesia, is likely to have a HDI Source: http://hdr.undp.org/en/content/ of 0.759 compared to Indonesia’s 0.684. human-development-report-2014 Note : there is no need to explain the HDI for all Norway is most likely to have a HDI of 0.944 four countries as the lines of reasoning will be because the high HDI suggests it has the highest similar. standards of living (as measured by the composite index of health care, education and income levels Award 1 mark for each correctly identified for the country). country, up to 4 marks. By contrast, Sierra Leone is likely to have a HDI Award up to further 2 marks for the explanation. of 0.374 because the low HDI suggests it has ● ● 21 Standards of living 1 The correct answer is Option D. Those suffering tariffs and corporation taxes (Options B and D from poverty suffer from homelessness and respectively) tend to benefit businesses far more poor housing (Option A), high mortality rates than households. (Option B) and hunger (Option C). Inflation (see 4 The correct answer is Option D. Economists Chapter 18) is found in most economies, with use real GDP per capita as a key indicator many high-income countries experiencing a high of standards of living. This is calculated by cost of living. Hence, a high cost of living is not an dividing the GDP figure by the country’s indicator of poverty. population. 2 The correct answer is Option C. Real national income accounts for inflationary effects, whilst Country GDP Population GDP per capita ($ billion) (million) ($) per capita income accounts for the size of the A 129.7 18.5 7010.81 population. However, it does not account for the fact that the ‘average’ person is potentially B 153.6 150.0 1024.00 highly unrepresentative due to inequalities in the C 43.2 15.2 2842.10 distribution of income and wealth. A minority D 89.9 9.2 9771.74 of the population is likely to earn a significant Country D has the largest GDP per capita (by proportion of the country’s national income. quite a significant margin compared to Countries 3 The correct answer is Option C. By cutting B and C). expenditure taxes (Option C), the relatively poor 5 The correct answer is Option A. Although population have greater affordability (spending the statement is correct (that the nature of power), thus boosting their standards of living. development and living standards are both Cutting housing subsidies (Option A) will clearly subjective), this is not a criticism of using the harm poorer members of society, whilst cutting 32 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
9
) Trend
$ Boom (or Peak)
Economic
activity
Recession
Slump
Gross domestic product (
O Time
10 the lowest standards of living of the four listed
Country HDI Country HDI
countries.
Norway 0.944 Indonesia 0.684
Turkey 0.759 Sierra Leone 0.363 Turkey, being relatively more economically
developed than Indonesia, is likely to have a HDI
Source: http://hdr.undp.org/en/content/
human-development-report-2014 of 0.759 compared to Indonesia’s 0.684.
Note : there is no need to explain the HDI for all
Norway is most likely to have a HDI of 0.944
four countries as the lines of reasoning will be
because the high HDI suggests it has the highest
similar.
standards of living (as measured by the composite
index of health care, education and income levels Award 1 mark for each correctly identified
for the country). country, up to 4 marks.
By contrast, Sierra Leone is likely to have a HDI Award up to further 2 marks for the explanation.
of 0.374 because the low HDI suggests it has
● ● 21 Standards of living
1 The correct answer is Option D. Those suffering tariffs and corporation taxes (Options B and D
from poverty suffer from homelessness and respectively) tend to benefit businesses far more
poor housing (Option A), high mortality rates than households.
(Option B) and hunger (Option C). Inflation (see 4 The correct answer is Option D. Economists
Chapter 18) is found in most economies, with use real GDP per capita as a key indicator
many high-income countries experiencing a high of standards of living. This is calculated by
cost of living. Hence, a high cost of living is not an dividing the GDP figure by the country’s
indicator of poverty. population.
2 The correct answer is Option C. Real national
income accounts for inflationary effects, whilst Country GDP Population GDP per capita
per capita income accounts for the size of the ($ billion) (million) ($)
population. However, it does not account for A 129.7 18.5 7010.81
the fact that the ‘average’ person is potentially B 153.6 150.0 1024.00
highly unrepresentative due to inequalities in the C 43.2 15.2 2842.10
distribution of income and wealth. A minority D 89.9 9.2 9771.74
of the population is likely to earn a significant
proportion of the country’s national income. Country D has the largest GDP per capita (by
quite a significant margin compared to Countries
3 The correct answer is Option C. By cutting
B and C).
expenditure taxes (Option C), the relatively poor
population have greater affordability (spending 5 The correct answer is Option A. Although
power), thus boosting their standards of living. the statement is correct (that the nature of
Cutting housing subsidies (Option A) will clearly development and living standards are both
harm poorer members of society, whilst cutting subjective), this is not a criticism of using the
32
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers HDI itself, the statement applies to other Award 1 mark for each method that is correctly measures too, such as GDP per capita. identified and a further 2 marks for the explanation, up to the maximum of 6 marks. 6 Characteristics of LEDCs include: c In general, economic growth in a country low real GDP per capital ● results in higher standards of living for its low life expectancy ● people. However, other considerations linked low literacy rates to living standards include: ● high population growth what type of goods and services are being ● ● poor infrastructure produced, e.g. health care products or arms ● and weapons? low foreign direct investment ● whether longer working hours caused the poor health care ● ● increase in national income low labour productivity ● whether working conditions and terms of ● high public debt ● employment (such as women’s rights in the over-reliance on primary sector output ● workplace) are improving a high degree of corruption. ● whether the size of the informal sector has ● increased See pages 229–230 in the textbook for an explanation of these characteristics of LEDCs. how the extra national income is ● distributed Award up to 2 marks for each characteristic that whether higher economic growth is causing is correctly identified and explained, up to the ● greater levels of pollution and other forms maximum of 6 marks. of environmental damage 7 Possible reasons could include: how much of the additional national ● the limited access to and availability of goods ● income is spent or saved. and services in Dhaka Award 1–2 marks for a brief answer that high crime rates and issues to do with ● shows limited understanding. personal safety Award 3–5 marks for an answer that shows good poor infrastructure. ● understanding, but the answer is unbalanced Accept any other plausible reason that suggests and/or lacks the use of relevant examples. why the standard of living in Dhaka is low. Award 6–7 marks for a balanced answer, with evidence of critical thinking that clearly Award up to 2 marks for each reason that is demonstrates the difficulty is measuring correctly described, up to the maximum of standards of living based only on economic 4 marks. growth data. 8 a Standard of living (SOL) refers to the social and economic wellbeing of individuals in 9 Absolute poverty is an extreme form of poverty a country at a particular point in time. In indicating the number of people who cannot economics, this is often based on real GDP per afford minimal standards of basic human capita, indicating the amount of income with needs (food, clothing, health care and shelter). which the average person can consume goods People in absolute poverty are undeniably and services over a period of time. impoverished. Relative poverty is a comparative measure of poverty. Those in relative poverty Accept answers that refer to the Human have a lower standard of living in comparison Development Index (HDI) as an alternative to the average person in society. Although real measure of SOL. GDP may have increased in a country, the gains See page 231 in the textbook for the definition are not necessarily evenly distributed across of standard of living and page 227 for an the population, leaving the poorer members of explanation of the HDI. society in relative poverty. b Possible ways to improve the standard of Award 1–2 marks for an answer that shows some living in a country include: understanding, although the distinction is not made lower rates of income tax/expenditure taxes ● clear. Award up to 2 marks if no examples are used. lower interest rates ● increased government spending on merit ● goods and public goods 33 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
HDI itself, the statement applies to other Award 1 mark for each method that is correctly
measures too, such as GDP per capita. identified and a further 2 marks for the
explanation, up to the maximum of 6 marks.
6 Characteristics of LEDCs include:
c In general, economic growth in a country
● low real GDP per capital
results in higher standards of living for its
● low life expectancy people. However, other considerations linked
● low literacy rates to living standards include:
● high population growth ● what type of goods and services are being
poor infrastructure produced, e.g. health care products or arms
●
low foreign direct investment and weapons?
●
poor health care ● whether longer working hours caused the
●
increase in national income
● low labour productivity
● whether working conditions and terms of
● high public debt
employment (such as women’s rights in the
● over-reliance on primary sector output workplace) are improving
● a high degree of corruption. whether the size of the informal sector has
●
See pages 229–230 in the textbook for an increased
explanation of these characteristics of LEDCs. how the extra national income is
●
distributed
Award up to 2 marks for each characteristic that
is correctly identified and explained, up to the ● whether higher economic growth is causing
maximum of 6 marks. greater levels of pollution and other forms
of environmental damage
7 Possible reasons could include:
● how much of the additional national
● the limited access to and availability of goods income is spent or saved.
and services in Dhaka
Award 1–2 marks for a brief answer that
● high crime rates and issues to do with shows limited understanding.
personal safety
Award 3–5 marks for an answer that shows good
● poor infrastructure. understanding, but the answer is unbalanced
Accept any other plausible reason that suggests and/or lacks the use of relevant examples.
why the standard of living in Dhaka is low. Award 6–7 marks for a balanced answer,
Award up to 2 marks for each reason that is with evidence of critical thinking that clearly
correctly described, up to the maximum of demonstrates the difficulty is measuring
4 marks. standards of living based only on economic
growth data.
8 a Standard of living (SOL) refers to the social
and economic wellbeing of individuals in 9 Absolute poverty is an extreme form of poverty
a country at a particular point in time. In indicating the number of people who cannot
economics, this is often based on real GDP per afford minimal standards of basic human
capita, indicating the amount of income with needs (food, clothing, health care and shelter).
which the average person can consume goods People in absolute poverty are undeniably
and services over a period of time. impoverished. Relative poverty is a comparative
Accept answers that refer to the Human measure of poverty. Those in relative poverty
Development Index (HDI) as an alternative have a lower standard of living in comparison
measure of SOL. to the average person in society. Although real
GDP may have increased in a country, the gains
See page 231 in the textbook for the definition
are not necessarily evenly distributed across
of standard of living and page 227 for an
the population, leaving the poorer members of
explanation of the HDI.
society in relative poverty.
b Possible ways to improve the standard of
living in a country include: Award 1–2 marks for an answer that shows some
understanding, although the distinction is not made
● lower rates of income tax/expenditure taxes
clear. Award up to 2 marks if no examples are used.
● lower interest rates
● increased government spending on merit
goods and public goods
33
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 3–4 marks if the meaning of absolute and Population growth – Malawi will find it more ● relative poverty are made clear so that the two difficult to sustain its SOL given its relatively concepts are evidently distinguished. Relevant higher population growth rate. Although the examples are used. data does not show it, Malawi’s population is already much larger (16.4 million compared to 10 Standard of living (SOL) refers to the social and 6.2 in Sierra Leone). economic wellbeing of individuals in a country at a point in time. Various indicators can be used However, it is difficult to be definitive about to measure the standards of living in a country. which country has the lower standard of living, These include the following: given the limited data. GDP per capita – both countries have extremely ● See page 228 in the textbook for a discussion of low GDP per capita figures; Malawians live on the limitations of using the Human Development $1 per day, whereas Sierra Leoneans live on just Index (life expectancy, income and education) as a over $1 per day ($1.02) so there is basically no measure of standard of living. difference in their SOL based on GDP per capita. Award 1–3 marks for an answer that shows Life expectancy – Malawians live an extra 6 ● limited understanding. years on average. This suggests the country has a higher SOL, perhaps through better Award 4–5 marks for an answer that shows good health care provision and/or healthier diets. understanding but is unbalanced and/or lacks the use of relevant examples. Adult literacy rate – Malawi has a significantly ● higher adult literacy rate, suggesting a higher Award 6–8 marks for a balanced answer SOL, mainly due to better access to an education that considers a minimum of three of the system. four economic indicators. At the top end, the discussion shows evidence of critical thinking. ● ● 22 Population 1 The correct answer is Option C. Improved health ratio or percentage of the total population. The technologies mean that people, on average, live higher the dependency ratio, the greater the burden longer, thereby raising the average age of the on taxpayers to support the dependent population. population. 7 Possible factors include the following: 2 The correct answer is Option D. Fertility rates Birth rate – the number of live births per ● measure the average number of children born thousand of the population in a year. The per woman and thus indicate the potential for higher a country’s birth rate, the greater its population change in a country. The other options population growth will tend to be. are likely to reduce the birth rate in the country. Death rate – the number of deaths per ● 3 The correct answer is Option A. The net migration thousand of the population in a year. The rate measures the difference between the number lower a country’s death rate, the greater its of people entering (immigrants) and leaving population growth will tend to be. (emigrants) a country per 1000 of the population Fertility rate – the average number of children ● in a year. born per woman. Fertility rates tend to fall as an economy develops, due to the higher 4 The correct answer is Option A. In low income opportunity costs of raising children. countries, the population distribution can be shown using a traditional population pyramid Net migration rate – the physical movement of ● with far more young people than elderly people. people in and out of a country also affects the See Figures 22.2 and 22.3 on page 241 in the rate of population growth. The net migration textbook for further guidance. rate measures the difference between the number of people entering and leaving a 5 The correct answer is Option B. An ageing country per 1000 of the population in a year. population occurs when the average age of a population increases. It is not possible to infer the See pages 237–238 in the textbook for further other three options from the data given about the guidance. median age of the UK population. Award up to 2 marks for each correctly explained 6 This refers to the number of dependents (children, factor that affects the rate of population growth. the unemployed and the elderly) expressed as a 34 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 3–4 marks if the meaning of absolute and Population growth – Malawi will find it more
●
relative poverty are made clear so that the two difficult to sustain its SOL given its relatively
concepts are evidently distinguished. Relevant higher population growth rate. Although the
examples are used. data does not show it, Malawi’s population is
already much larger (16.4 million compared to
10 Standard of living (SOL) refers to the social and
6.2 in Sierra Leone).
economic wellbeing of individuals in a country
at a point in time. Various indicators can be used However, it is difficult to be definitive about
to measure the standards of living in a country. which country has the lower standard of living,
These include the following: given the limited data.
● GDP per capita – both countries have extremely See page 228 in the textbook for a discussion of
low GDP per capita figures; Malawians live on the limitations of using the Human Development
$1 per day, whereas Sierra Leoneans live on just Index (life expectancy, income and education) as a
over $1 per day ($1.02) so there is basically no measure of standard of living.
difference in their SOL based on GDP per capita.
Award 1–3 marks for an answer that shows
● Life expectancy – Malawians live an extra 6 limited understanding.
years on average. This suggests the country
has a higher SOL, perhaps through better Award 4–5 marks for an answer that shows good
health care provision and/or healthier diets. understanding but is unbalanced and/or lacks the
use of relevant examples.
● Adult literacy rate – Malawi has a significantly
higher adult literacy rate, suggesting a higher Award 6–8 marks for a balanced answer
SOL, mainly due to better access to an education that considers a minimum of three of the
system. four economic indicators. At the top end, the
discussion shows evidence of critical thinking.
● ● 22 Population
1 The correct answer is Option C. Improved health ratio or percentage of the total population. The
technologies mean that people, on average, live higher the dependency ratio, the greater the burden
longer, thereby raising the average age of the on taxpayers to support the dependent population.
population.
7 Possible factors include the following:
2 The correct answer is Option D. Fertility rates Birth rate – the number of live births per
●
measure the average number of children born thousand of the population in a year. The
per woman and thus indicate the potential for higher a country’s birth rate, the greater its
population change in a country. The other options population growth will tend to be.
are likely to reduce the birth rate in the country.
● Death rate – the number of deaths per
3 The correct answer is Option A. The net migration thousand of the population in a year. The
rate measures the difference between the number lower a country’s death rate, the greater its
of people entering (immigrants) and leaving population growth will tend to be.
(emigrants) a country per 1000 of the population Fertility rate – the average number of children
●
in a year. born per woman. Fertility rates tend to fall
4 The correct answer is Option A. In low income as an economy develops, due to the higher
countries, the population distribution can be opportunity costs of raising children.
shown using a traditional population pyramid Net migration rate – the physical movement of
●
with far more young people than elderly people. people in and out of a country also affects the
See Figures 22.2 and 22.3 on page 241 in the rate of population growth. The net migration
textbook for further guidance. rate measures the difference between the
number of people entering and leaving a
5 The correct answer is Option B. An ageing
country per 1000 of the population in a year.
population occurs when the average age of a
population increases. It is not possible to infer the See pages 237–238 in the textbook for further
other three options from the data given about the guidance.
median age of the UK population.
Award up to 2 marks for each correctly explained
6 This refers to the number of dependents (children, factor that affects the rate of population growth.
the unemployed and the elderly) expressed as a
34
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 8 A country that is under-populated does not have Award 4–6 marks for an answer that displays sufficient labour resources to make the best use good understanding, although lacks detail in of its other resources, thus GDP per head is lower places. than it could be. By contrast, over-population Award up to 4 marks if only one measure is means the population is too large, given the discussed. available resources of the country, i.e. there are Award 7–8 marks for a detailed answer insufficient resources to sustain the population. See that is well balanced and clearly discusses pages 244–245 in the textbook for further guidance. two appropriate measures to overcome the 9 a The chart shows that the population of Mexico problems of population growth. increased from just over 100 million in 2003 10 a Life expectancy measures the number of years to almost 117 million by 2013, a increase of the average person in a country is expected approximately 17%. to live. Hence, the average woman in Japan is b Possible economic problems associated with the expected to live to 86 years. continual rise in Mexico’s population include: b Factors that lead to a higher life expectancy in threats to the environment due to rapid Japan include the following: ● increases in economic activity, e.g. better health care in Japan, including ● deforestation and fragmentation of land education, nutrition and health technologies competition for limited (scarce) resources, ● higher overall standards of living and ● e.g. food, housing, health care and education quality of life in Japan, including income more widespread poverty due to there not levels and better housing ● being enough goods and services for the higher fertility rates in Indonesia ● rapidly rising population higher absolute poverty in Indonesia ● urbanisation and its related problems, ● there may be more natural disasters, diseases, ● e.g. traffic congestion, pollution, housing crime (violence) and war in Indonesia. shortages and higher demand for Accept any other relevant reason that is clearly infrastructure (such as road and transport discussed. networks), especially in large cities Award up to 2 marks for each reason that increased government expenditure on ● is clearly explained, up to a maximum of infrastructure, housing, education and 4 marks. health care c Possible effects could include: unemployment problems due to many of ● the problems above. increased government spending on hospitals, ● health care and housing for the elderly Accept any other clearly explained economic problem of over-population in Mexico. lower income tax revenues if the ● dependency ratio increases Award up to 2 marks for each economic problem that is clearly explained, up to a deteriorating fiscal position due to the ● maximum of 4 marks. combination of falling tax revenues and rising government spending, i.e. the c Measures that the Mexican government could government is likely to experience budget use to overcome over-population include: deficits investment in sex education and family ● the extent to which these effects happen planning services ● will depend on the numerical value of life investment in education ● expectancy (65 or 80 years, for example) subsidising birth control/contraception ● and the rate of change in life expectancy. reducing the economic benefits of having a ● Accept any other relevant effect that is clearly larger family, e.g. reductions or removal of examined. state welfare benefits Award 1–2 marks for a brief answer that measures to boost investment and ● shows limited understanding. productivity in the economy. Award 3–4 marks for an examination that Accept any other relevant measure that is shows some understanding of the effects clearly discussed. of higher life expectancy on government Award 1–3 marks for an answer that shows expenditure and revenue. limited understanding. 35 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
8 A country that is under-populated does not have Award 4–6 marks for an answer that displays
sufficient labour resources to make the best use good understanding, although lacks detail in
of its other resources, thus GDP per head is lower places.
than it could be. By contrast, over-population Award up to 4 marks if only one measure is
means the population is too large, given the discussed.
available resources of the country, i.e. there are
Award 7–8 marks for a detailed answer
insufficient resources to sustain the population. See
that is well balanced and clearly discusses
pages 244–245 in the textbook for further guidance.
two appropriate measures to overcome the
9 a The chart shows that the population of Mexico problems of population growth.
increased from just over 100 million in 2003 10 a Life expectancy measures the number of years
to almost 117 million by 2013, a increase of the average person in a country is expected
approximately 17%. to live. Hence, the average woman in Japan is
b Possible economic problems associated with the expected to live to 86 years.
continual rise in Mexico’s population include: b Factors that lead to a higher life expectancy in
threats to the environment due to rapid Japan include the following:
●
increases in economic activity, e.g. better health care in Japan, including
●
deforestation and fragmentation of land education, nutrition and health technologies
● competition for limited (scarce) resources, higher overall standards of living and
●
e.g. food, housing, health care and education quality of life in Japan, including income
more widespread poverty due to there not levels and better housing
●
being enough goods and services for the higher fertility rates in Indonesia
●
rapidly rising population
● higher absolute poverty in Indonesia
● urbanisation and its related problems, there may be more natural disasters, diseases,
e.g. traffic congestion, pollution, housing ●
crime (violence) and war in Indonesia.
shortages and higher demand for
Accept any other relevant reason that is clearly
infrastructure (such as road and transport
discussed.
networks), especially in large cities
Award up to 2 marks for each reason that
● increased government expenditure on
is clearly explained, up to a maximum of
infrastructure, housing, education and
4 marks.
health care
c Possible effects could include:
● unemployment problems due to many of
the problems above. ● increased government spending on hospitals,
health care and housing for the elderly
Accept any other clearly explained economic
problem of over-population in Mexico. ● lower income tax revenues if the
dependency ratio increases
Award up to 2 marks for each economic
problem that is clearly explained, up to a ● deteriorating fiscal position due to the
maximum of 4 marks. combination of falling tax revenues and
rising government spending, i.e. the
c Measures that the Mexican government could
government is likely to experience budget
use to overcome over-population include:
deficits
● investment in sex education and family
the extent to which these effects happen
planning services ●
will depend on the numerical value of life
● investment in education expectancy (65 or 80 years, for example)
● subsidising birth control/contraception and the rate of change in life expectancy.
● reducing the economic benefits of having a Accept any other relevant effect that is clearly
larger family, e.g. reductions or removal of examined.
state welfare benefits
Award 1–2 marks for a brief answer that
● measures to boost investment and shows limited understanding.
productivity in the economy.
Award 3–4 marks for an examination that
Accept any other relevant measure that is shows some understanding of the effects
clearly discussed. of higher life expectancy on government
Award 1–3 marks for an answer that shows expenditure and revenue.
limited understanding.
35
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers Award 5–6 marks for a detailed and clearly tend to be more geographically and examined response that considers the effects of occupationally mobile higher life expectancy on the government. opportunity costs of government expenditure ● d Possible effects could include: to cater for the needs of an ageing population due to higher life expectancy. changing patterns of household ● consumption, e.g. higher life expectancy Again, the extent to which these effects will means that elderly people might spend happen depend on value of life expectancy of proportionately more of their money on the population and its rate of change. health care products and services Accept any other relevant effect that is clearly slower economic growth partly due to a examined. ● smaller workforce and lower productivity, Award 1–2 marks for a brief answer that resulting in a fall in GDP and standards of shows limited understanding. living Award 3–4 marks for an examination that skills mismatch in a fast-changing global ● shows some understanding of the effects of economy – higher life expectancy suggests higher life expectancy on economic growth. an ageing population yet younger people Award 5–6 marks for a detailed and clearly examined response that considers the effects of ● ● 23 Specialisation higher life expectancy on economic growth. 1 The correct answer is Option B. Specialisation 6 Specialisation occurs when individuals, firms, leads to greater levels of output and in a regions or countries concentrate on the production quicker time, thereby reducing average costs of of a particular good or service. Production production. Firms are therefore able to charge processes are split into a sequence of different lower prices to their customers. tasks or activities, e.g. Hodder Education focuses on the production of education publications. 2 The correct answer is Option A. By specialising in their jobs, employees become more skilled. This Award 1–2 marks for an answer that shows a can also help them to benefit from higher wages. limited understanding of specialisation. The other options are benefits to firms (employers). Award 3–4 marks for an answer that 3 The correct answer is Option D. As the training demonstrates a good level of understanding, period to become a top actor is a long process, including the appropriate use of examples. there is a very limited supply of top Hollywood See pages 252–253 in the textbook for an explanation actors. The combination of high demand and low and examples of specialisation. Read page 86 to see supply means that Hollywood actors generally how specialisation applies to the labour market. earn very high incomes. 7 Division of labour refers to the specialisation of 4 The correct answer is Option C. A disadvantage labour by getting workers to focus on a specific of specialisation is the monotony (boredom) aspect of the production process. Production is associated with repetitive roles, causing broken down into separate tasks so that workers workers to seek alternative jobs that are more become proficient in their part of the process. challenging. See pages 253–254 in the textbook Each worker concentrates on what they are good for an explanation of the advantages of at, developing their skills and expertise, thereby specialisation, such as efficiency gains, improved raising output per worker. See page 252 in the competitiveness and economies of scale. textbook for some examples. 5 The correct answer is Option A. Firms that Award 1–2 marks for an answer that demonstrates specialise are usually able to benefit from limited understanding and/or if no examples are economies of scale (lower unit costs) by operating used. at a higher capacity. Highly specialised capital Award 3–4 marks for an answer that demonstrates equipment, labour or firms find it difficult a good level of understanding and relevant to switch to alternative uses (Option B), yet examples used. specialisation limits factor mobility (Option C). See pages 255–256 in the textbook for an explanation 8 Reasons why specialised workers can receive of the disadvantages of specialisation. higher pay include: 36 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
Award 5–6 marks for a detailed and clearly tend to be more geographically and
examined response that considers the effects of occupationally mobile
higher life expectancy on the government. opportunity costs of government expenditure
●
d Possible effects could include: to cater for the needs of an ageing population
changing patterns of household due to higher life expectancy.
●
consumption, e.g. higher life expectancy Again, the extent to which these effects will
means that elderly people might spend happen depend on value of life expectancy of
proportionately more of their money on the population and its rate of change.
health care products and services Accept any other relevant effect that is clearly
slower economic growth partly due to a examined.
●
smaller workforce and lower productivity, Award 1–2 marks for a brief answer that
resulting in a fall in GDP and standards of shows limited understanding.
living
Award 3–4 marks for an examination that
● skills mismatch in a fast-changing global shows some understanding of the effects of
economy – higher life expectancy suggests higher life expectancy on economic growth.
an ageing population yet younger people
Award 5–6 marks for a detailed and clearly
examined response that considers the effects of
● ● 23 Specialisation higher life expectancy on economic growth.
1 The correct answer is Option B. Specialisation 6 Specialisation occurs when individuals, firms,
leads to greater levels of output and in a regions or countries concentrate on the production
quicker time, thereby reducing average costs of of a particular good or service. Production
production. Firms are therefore able to charge processes are split into a sequence of different
lower prices to their customers. tasks or activities, e.g. Hodder Education focuses
on the production of education publications.
2 The correct answer is Option A. By specialising in
their jobs, employees become more skilled. This Award 1–2 marks for an answer that shows a
can also help them to benefit from higher wages. limited understanding of specialisation.
The other options are benefits to firms (employers).
Award 3–4 marks for an answer that
3 The correct answer is Option D. As the training demonstrates a good level of understanding,
period to become a top actor is a long process, including the appropriate use of examples.
there is a very limited supply of top Hollywood See pages 252–253 in the textbook for an explanation
actors. The combination of high demand and low and examples of specialisation. Read page 86 to see
supply means that Hollywood actors generally how specialisation applies to the labour market.
earn very high incomes.
7 Division of labour refers to the specialisation of
4 The correct answer is Option C. A disadvantage labour by getting workers to focus on a specific
of specialisation is the monotony (boredom) aspect of the production process. Production is
associated with repetitive roles, causing broken down into separate tasks so that workers
workers to seek alternative jobs that are more become proficient in their part of the process.
challenging. See pages 253–254 in the textbook Each worker concentrates on what they are good
for an explanation of the advantages of at, developing their skills and expertise, thereby
specialisation, such as efficiency gains, improved raising output per worker. See page 252 in the
competitiveness and economies of scale. textbook for some examples.
5 The correct answer is Option A. Firms that Award 1–2 marks for an answer that demonstrates
specialise are usually able to benefit from limited understanding and/or if no examples are
economies of scale (lower unit costs) by operating used.
at a higher capacity. Highly specialised capital
Award 3–4 marks for an answer that demonstrates
equipment, labour or firms find it difficult
a good level of understanding and relevant
to switch to alternative uses (Option B), yet
examples used.
specialisation limits factor mobility (Option C). See
pages 255–256 in the textbook for an explanation 8 Reasons why specialised workers can receive
of the disadvantages of specialisation. higher pay include:
36
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers specialisation (or specialised work) means Award 1–2 marks for an answer that shows ● customers pay for the skills and expertise of limited understanding. workers, e.g. plumbers, lawyers, accountants Award 3–4 marks for consideration of the and car mechanics problems for only firms or the economy. The specialised workers also get tasks/jobs done ● definition should also be provided. more quickly and/or to a higher standard Award 5–6 marks for an answer that shows higher pay is needed to compensate for the ● a good level of understanding. There is higher level of education and training required consideration of the problems for both firms and for specialised work the economy. limited supply of highly specialised workers also ● 10 Advantages of specialisation for firms include: means that they can earn higher levels of pay. efficiency gains ● Award up to 2 marks for each reason that is increased labour productivity clearly identified and explained, up to the ● maximum of 4 marks. increased productive capacity ● economies of scale 9 Overspecialisation occurs when a firm or country ● concentrates too much on producing a very improved competitiveness. ● limited number of goods or services. This exposes Disadvantages of specialisation for firms include: the firm or economy to a far higher degree of risk. overspecialisation, i.e. over-reliance on a ● Overspecialisation increases the level of risk for limited range of output firms, especially during an economic recession possibility of higher labour turnover due to ● when they do not have a large range of products monotonous nature of the job to rely on. lower labour occupational mobility ● Overspecialisation can also limit choice for lack of variety (choice) for consumers ● consumers, reducing the competitiveness of firms. higher costs for hiring specialised labour and ● Due to limited choice, domestic customers may capital equipment. look at alternative imported products from See pages 254–256 in the textbook for an foreign suppliers that overspecialise. explanation of the above. Similarly, countries that overspecialise also suffer Award 1–3 marks for an answer that the most during an economic downturn as they demonstrates limited understanding. do not have a variety of goods and services that they can rely on to survive, e.g. adverse weather Award 4–5 marks for an unbalanced answer or conditions could wipe out agricultural production one that does not include any relevant examples. thus severely harming economies that over-rely Award 6–8 marks for a balanced answer that on agricultural output. considers both the advantages and disadvantages of specialisation to firms. Relevant examples are Overspecialisation in a country can lead the used effectively. economy to become over-reliant on others for particular commodities. ● ● 24 Balance of payments 1 The correct answer is Option C. The visible trade 3 The correct answer is Option C. The three balance is calculated by deducting the value of a components of the current account on the balance country’s imports of goods from the value of its of payments are: exports of goods. See page 259 in the textbook for visible trade balance ● an explanation of the visible trade balance. invisible trade balance ● 2 The correct answer is Option D. Money spent on net income flows and transfers. ● intangible products (services) is part of the invisible See page 259 in the textbook for an explanation of trade balance on the current account. See pages 258– the three components of the balance of payments. 259 in the textbook for a more detailed explanation of the components of the balance of payments. 37 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
● specialisation (or specialised work) means Award 1–2 marks for an answer that shows
customers pay for the skills and expertise of limited understanding.
workers, e.g. plumbers, lawyers, accountants
Award 3–4 marks for consideration of the
and car mechanics
problems for only firms or the economy. The
● specialised workers also get tasks/jobs done definition should also be provided.
more quickly and/or to a higher standard
Award 5–6 marks for an answer that shows
● higher pay is needed to compensate for the a good level of understanding. There is
higher level of education and training required
consideration of the problems for both firms and
for specialised work
the economy.
● limited supply of highly specialised workers also
10 Advantages of specialisation for firms include:
means that they can earn higher levels of pay.
● efficiency gains
Award up to 2 marks for each reason that is
increased labour productivity
clearly identified and explained, up to the ●
maximum of 4 marks. ● increased productive capacity
economies of scale
9 Overspecialisation occurs when a firm or country ●
concentrates too much on producing a very ● improved competitiveness.
limited number of goods or services. This exposes
Disadvantages of specialisation for firms include:
the firm or economy to a far higher degree of risk.
● overspecialisation, i.e. over-reliance on a
Overspecialisation increases the level of risk for limited range of output
firms, especially during an economic recession possibility of higher labour turnover due to
●
when they do not have a large range of products monotonous nature of the job
to rely on.
● lower labour occupational mobility
Overspecialisation can also limit choice for lack of variety (choice) for consumers
●
consumers, reducing the competitiveness of firms.
● higher costs for hiring specialised labour and
Due to limited choice, domestic customers may capital equipment.
look at alternative imported products from
See pages 254–256 in the textbook for an
foreign suppliers that overspecialise.
explanation of the above.
Similarly, countries that overspecialise also suffer
Award 1–3 marks for an answer that
the most during an economic downturn as they
demonstrates limited understanding.
do not have a variety of goods and services that
they can rely on to survive, e.g. adverse weather Award 4–5 marks for an unbalanced answer or
conditions could wipe out agricultural production one that does not include any relevant examples.
thus severely harming economies that over-rely Award 6–8 marks for a balanced answer that
on agricultural output. considers both the advantages and disadvantages
of specialisation to firms. Relevant examples are
Overspecialisation in a country can lead the
used effectively.
economy to become over-reliant on others for
particular commodities.
● ● 24 Balance of payments
1 The correct answer is Option C. The visible trade 3 The correct answer is Option C. The three
balance is calculated by deducting the value of a components of the current account on the balance
country’s imports of goods from the value of its of payments are:
exports of goods. See page 259 in the textbook for visible trade balance
●
an explanation of the visible trade balance.
● invisible trade balance
2 The correct answer is Option D. Money spent on net income flows and transfers.
●
intangible products (services) is part of the invisible
See page 259 in the textbook for an explanation of
trade balance on the current account. See pages 258–
the three components of the balance of payments.
259 in the textbook for a more detailed explanation
of the components of the balance of payments.
37
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers 4 The correct answer is Option B. With a sustained 9 A fall in the exchange rate can reduce a country’s current account deficit, there is a net outflow of current account deficit because: cash as households and firms spend more on export prices fall, thus raising the demand for ● foreign goods and services. This will tend to exports reduce aggregate demand, standards of living as the exchange rate falls, import prices are ● and the exchange rate. relatively higher, thereby reducing the demand 5 The correct answer is Option A. Lowering income for imports. taxes helps to increase household disposable The net effect of higher export revenues and income, which can result in higher demand for lower import expenditure will tend to improve imports (thus worsening the current account). the country’s current account. See page 263 in the textbook for an explanation of how the other policies (Options B, C and D) are Students may consider the concept of price likely to improve the country’s current account. elasticity of demand for exports and imports in analysing the effectiveness of lowering the 6 The balance of trade has worsened, as calculated exchange rate to reduce the current account deficit. by the difference between the trade in goods (visible balance) and services (invisible balance). Award 1–2 marks for a brief answer that shows limited understanding. Year Invisible Visible Balance of balance ($bn) balance ($bn) trade ($bn) Award 3–4 marks for explaining how a fall in 1 15.2 12.3 −$2.9 the exchange rate can reduce a country’s current account deficit. There may be a lack of detail and/ 2 16.7 13.4 −$3.3 or use of examples. 7 The three components of the current account of Award 5–6 marks for a detailed analysis of how the balance of payments are: a fall in the exchange rate can reduce a country’s the trade in goods (visible trade balance) ● current account deficit on its balance of payments. the trade in services (invisible trade balance) ● There is appropriate use of terminology and use net income flows and transfers. of relevant examples. ● 10 a The visible balance (or the balance of trade in Award 1 mark for correctly stating each component. goods) is a record of a country’s exports and See pages 258–259 in the textbook for an imports of physical goods, e.g. oil, vehicles, explanation of these components in the current foodstuff and computers. account of the balance of payments. b Trade balance for Country D ($billion) 8 It is possible to have a deficit on the visible trade Exports 103 balance but still have a current account surplus if: Goods 87 another component or other components (e.g. ● Services 16 trade in services) of the current account are in Imports 113 surplus Goods 87 the surplus of the other components are greater ● Services 26 than the deficit on the visible trade balance. Visible balance 0 Reference could be made to net income flows and Invisible balance 10 transfers. Trade balance (10) Award 2 marks for stating and explaining each See page 260 in the textbook for further exam reason why it is possible to have a deficit on practice on calculating the balance of payments. the visible trade balance but still have a current Award 1 mark for each correct calculation, up account surplus, up to a maximum of 4 marks. to 4 marks. Apply error carried forward rule as appropriate. ● ● 25 Exchange rates 1 The correct answer is Option C. Governments is an opportunity cost in this money. With a spend a huge amount of money on a daily fixed exchange rate system, Options A and B basis to maintain (fix) the exchange rate. There materialise for reasons other than changes in 38 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
4 The correct answer is Option B. With a sustained 9 A fall in the exchange rate can reduce a country’s
current account deficit, there is a net outflow of current account deficit because:
cash as households and firms spend more on export prices fall, thus raising the demand for
●
foreign goods and services. This will tend to exports
reduce aggregate demand, standards of living
● as the exchange rate falls, import prices are
and the exchange rate.
relatively higher, thereby reducing the demand
5 The correct answer is Option A. Lowering income for imports.
taxes helps to increase household disposable
The net effect of higher export revenues and
income, which can result in higher demand for
lower import expenditure will tend to improve
imports (thus worsening the current account).
the country’s current account.
See page 263 in the textbook for an explanation of
how the other policies (Options B, C and D) are Students may consider the concept of price
likely to improve the country’s current account. elasticity of demand for exports and imports
in analysing the effectiveness of lowering the
6 The balance of trade has worsened, as calculated
exchange rate to reduce the current account deficit.
by the difference between the trade in goods
(visible balance) and services (invisible balance). Award 1–2 marks for a brief answer that shows
limited understanding.
Year Invisible Visible Balance of
balance ($bn) balance ($bn) trade ($bn) Award 3–4 marks for explaining how a fall in
1 15.2 12.3 −$2.9 the exchange rate can reduce a country’s current
2 16.7 13.4 −$3.3 account deficit. There may be a lack of detail and/
or use of examples.
7 The three components of the current account of
Award 5–6 marks for a detailed analysis of how
the balance of payments are:
a fall in the exchange rate can reduce a country’s
● the trade in goods (visible trade balance)
current account deficit on its balance of payments.
● the trade in services (invisible trade balance) There is appropriate use of terminology and use
● net income flows and transfers. of relevant examples.
Award 1 mark for correctly stating each component. 10 a The visible balance (or the balance of trade in
goods) is a record of a country’s exports and
See pages 258–259 in the textbook for an
imports of physical goods, e.g. oil, vehicles,
explanation of these components in the current
foodstuff and computers.
account of the balance of payments.
b Trade balance for Country D ($billion)
8 It is possible to have a deficit on the visible trade Exports 103
balance but still have a current account surplus if:
Goods 87
● another component or other components (e.g. Services 16
trade in services) of the current account are in
Imports 113
surplus
Goods 87
● the surplus of the other components are greater
Services 26
than the deficit on the visible trade balance.
Visible balance 0
Reference could be made to net income flows and
Invisible balance 10
transfers.
Trade balance (10)
Award 2 marks for stating and explaining each
See page 260 in the textbook for further exam
reason why it is possible to have a deficit on
practice on calculating the balance of payments.
the visible trade balance but still have a current
Award 1 mark for each correct calculation, up
account surplus, up to a maximum of 4 marks.
to 4 marks. Apply error carried forward rule as
appropriate.
● ● 25 Exchange rates
1 The correct answer is Option C. Governments is an opportunity cost in this money. With a
spend a huge amount of money on a daily fixed exchange rate system, Options A and B
basis to maintain (fix) the exchange rate. There materialise for reasons other than changes in
38
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers the exchange rate. The key advantage of fixed 9 AUD 1 = GBP0.55 = HKD7.25 exchange rates is the certainty (stability) created Hence GBP1 = 7.25 ÷ 0.55 HKD for international trade and exchange (thus Option D is incorrect). Hence GBP1 = HKD13.18 2 The correct answer is Option A. The term Accept answers that show HKD1 = GBP0.075 depreciation (Option B) refers to a fall in the value 10 a An appreciation means that the value of the of the exchange rate against other currencies currency has increased. An example is the in a floating exchange rate system. The terms Yuan rising in value against the US dollar from revaluation and devaluation (Options C and D) apply $1 = 6.35 Yuan to $1 = 6.15 Yuan. when referring to a fixed exchange rate system. b The likely effects of China’s currency 3 The correct answer is Option B. The government appreciation include: buys and sells currencies in the foreign exchange a reduction in exports from China as ● market to stabilise the exchange rate (at the foreign buyers need more Chinese Yuan to fixed rate). See page 268 in the textbook for an pay for Chinese exports explanation of how fixed exchange rates work. Chinese households and firms are more ● 4 The correct answer is Option A. When currencies likely to buy imported products as their are free to fluctuate (or float), the demand for a currency is worth more on the foreign currency and its supply determine the equilibrium exchange market. exchange rate. Governments intervene in the This will tend to cause a current account foreign exchange market to fix or manage their deficit on the balance of payments for China. currencies (Options C and B). Economists do not However, this depends on the price elasticity refer to ‘mixed’ exchange rate systems (Option D). of demand for Chinese exports and imports. 5 The correct answer is Option D. If there are more Award answers that consider other relevant firms from New Zealand investing in Britain, approaches, e.g. time lags involved in this raises the demand for pound sterling (the currency appreciation, the size of the currency diagram shows an increase in the demand for appreciation or consideration of non-price NZ dollars). See pages 269–270 in the textbook for determinants of demand for China’s exports an explanation of the causes of an increase in the and imports (such as product quality). exchange rate. Award 1–2 marks for a brief answer that shows limited understanding. 6 The exchange rate refers to the price of one currency measured in terms of other currencies, Award 3–4 marks for explaining the likely e.g. $1 = €0.75 or £1 = ¥173. effects of China’s currency appreciation on its exports and imports. There may be a lack of 7 USD1 = EUR0.73 so USD70 = EUR51.1 detail and/or use of examples. Therefore the price of the textbooks = EUR51.1 Award 5–6 marks for a detailed examination of the likely effects of China’s currency 8 £1 = HKD12.5 appreciation on its exports and imports. There 6000 ÷ 12.5 = 480 is appropriate use of terminology and use of relevant examples. Therefore the price of the iPad = £480 ● ● 26 Trade protectionism 1 The correct answer is Option B. Trade protection are quantitative limits on the amount of imports. increases the costs (and hence the prices) of Embargoes are bans on imports. Subsidies are imports, thus increasing the demand for home- used to cut production costs of domestic firms, produced goods and services. Whilst this can thus helping them to reduce the prices of their protect domestic jobs, it doesn’t actually create exports. jobs (Option D). Protection can make domestic 3 The correct answer is Option B. Dumping occurs firms complacent rather than efficient (Option C). when foreign firms sell their exports at prices 2 The correct answer is Option D. Tariffs raise the deliberately below those charged by domestic costs (and hence prices) of imports, whilst quotas firms. Hence, trade protection is needed to 39 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
the exchange rate. The key advantage of fixed 9 AUD 1 = GBP0.55 = HKD7.25
exchange rates is the certainty (stability) created
Hence GBP1 = 7.25 ÷ 0.55 HKD
for international trade and exchange (thus
Option D is incorrect). Hence GBP1 = HKD13.18
2 The correct answer is Option A. The term Accept answers that show HKD1 = GBP0.075
depreciation (Option B) refers to a fall in the value 10 a An appreciation means that the value of the
of the exchange rate against other currencies currency has increased. An example is the
in a floating exchange rate system. The terms Yuan rising in value against the US dollar from
revaluation and devaluation (Options C and D) apply $1 = 6.35 Yuan to $1 = 6.15 Yuan.
when referring to a fixed exchange rate system.
b The likely effects of China’s currency
3 The correct answer is Option B. The government appreciation include:
buys and sells currencies in the foreign exchange a reduction in exports from China as
●
market to stabilise the exchange rate (at the foreign buyers need more Chinese Yuan to
fixed rate). See page 268 in the textbook for an pay for Chinese exports
explanation of how fixed exchange rates work.
● Chinese households and firms are more
4 The correct answer is Option A. When currencies likely to buy imported products as their
are free to fluctuate (or float), the demand for a currency is worth more on the foreign
currency and its supply determine the equilibrium exchange market.
exchange rate. Governments intervene in the This will tend to cause a current account
foreign exchange market to fix or manage their deficit on the balance of payments for China.
currencies (Options C and B). Economists do not However, this depends on the price elasticity
refer to ‘mixed’ exchange rate systems (Option D). of demand for Chinese exports and imports.
5 The correct answer is Option D. If there are more Award answers that consider other relevant
firms from New Zealand investing in Britain, approaches, e.g. time lags involved in
this raises the demand for pound sterling (the currency appreciation, the size of the currency
diagram shows an increase in the demand for appreciation or consideration of non-price
NZ dollars). See pages 269–270 in the textbook for determinants of demand for China’s exports
an explanation of the causes of an increase in the and imports (such as product quality).
exchange rate. Award 1–2 marks for a brief answer that
shows limited understanding.
6 The exchange rate refers to the price of one
currency measured in terms of other currencies, Award 3–4 marks for explaining the likely
e.g. $1 = €0.75 or £1 = ¥173. effects of China’s currency appreciation on its
exports and imports. There may be a lack of
7 USD1 = EUR0.73 so USD70 = EUR51.1
detail and/or use of examples.
Therefore the price of the textbooks = EUR51.1 Award 5–6 marks for a detailed examination
8 £1 = HKD12.5 of the likely effects of China’s currency
appreciation on its exports and imports. There
6000 ÷ 12.5 = 480 is appropriate use of terminology and use of
Therefore the price of the iPad = £480 relevant examples.
● ● 26 Trade protectionism
1 The correct answer is Option B. Trade protection are quantitative limits on the amount of imports.
increases the costs (and hence the prices) of Embargoes are bans on imports. Subsidies are
imports, thus increasing the demand for home- used to cut production costs of domestic firms,
produced goods and services. Whilst this can thus helping them to reduce the prices of their
protect domestic jobs, it doesn’t actually create exports.
jobs (Option D). Protection can make domestic
3 The correct answer is Option B. Dumping occurs
firms complacent rather than efficient (Option C).
when foreign firms sell their exports at prices
2 The correct answer is Option D. Tariffs raise the deliberately below those charged by domestic
costs (and hence prices) of imports, whilst quotas firms. Hence, trade protection is needed to
39
Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers prevent dumping (see page 276 in the textbook 9 Methods of trade protection include: for an explanation). tariffs ● 4 The correct answer is Option C. Free trade means quotas ● that international trade and exchange takes subsidies ● place free from government intervention. Hence, administrative barriers ● there is an absence of tariffs and other non-tariff embargoes. barriers to international trade and exchange. ● See page 280 in the textbook for an explanation of 5 The correct answer is Option A. Even though free each of these methods. international trade does not impose any barriers to entry, it does not eliminate the huge need for Award up to 2 marks for each method of trade transporting exported goods all over the world. protection that is clearly explained, up to a Transportation costs can therefore act as a natural maximum of 4 marks. barrier to international trade and exchange. 10 Arguments for protecting domestic industries 6 Trade protectionism is the use of trade barriers to from foreign competition include: safeguard a country from excessive international to protect infant and declining industries from ● trade and foreign competition. See pages 278–280 in foreign competition the textbook for an explanation of trade protection. to protect strategic industries from foreign ● 7 Reasons might include: competition, e.g. ammunition and weaponry the US government imposes higher tariffs on to protect domestic industries from unfair ● ● imported cars from the EU foreign competition the US government imposes a lower quota of to protect domestic employment ● ● imported cars from the EU to improve the current account on the balance ● the US government subsidises domestic car of payments. ● producers Arguments against protecting domestic industries the US dollar depreciates against the euro, ● from foreign competition include: making EU imports more expensive trade protection reduces competition, so can ● the US government raises income tax rates, ● damage efficiency thereby reducing the propensity to import reduced choice for domestic consumers ● higher interest rates in the USA mean that ● foreign firms that are more efficient and/ American consumers have less disposable ● or provide competition would have reduced income to purchase imports. prices for domestic consumers Award up to 2 marks for each reason that is other countries may retaliate by imposing their ● clearly explained, up to the maximum of 4 marks. own trade barriers. 8 Benefits of free international trade to the economy Award 1–2 marks for a brief answer that shows include: limited understanding. access to resources ● Award 3–5 marks for explaining the arguments economies of scale and lower prices ● for and against protecting domestic industries greater choice from foreign competition. There may be a lack of ● employment opportunities detail and/or use of examples. ● increased market size Award 6–7 marks for a thorough discussion of ● improved international relations. whether the government should protect domestic ● industries from foreign competition. There See page 277 in the textbook for an explanation of is appropriate use of terminology and use of the above benefits. relevant examples. For full marks, there is clear Award up to 2 marks for each reason that is evidence of critical thinking. clearly explained, up to the maximum of 4 marks. 40 Cambridge IGCSE ® and O Level Economics Workbook Answers

Answers
prevent dumping (see page 276 in the textbook 9 Methods of trade protection include:
for an explanation). tariffs
●
4 The correct answer is Option C. Free trade means quotas
●
that international trade and exchange takes subsidies
●
place free from government intervention. Hence,
● administrative barriers
there is an absence of tariffs and other non-tariff
embargoes.
barriers to international trade and exchange. ●
See page 280 in the textbook for an explanation of
5 The correct answer is Option A. Even though free
each of these methods.
international trade does not impose any barriers
to entry, it does not eliminate the huge need for Award up to 2 marks for each method of trade
transporting exported goods all over the world. protection that is clearly explained, up to a
Transportation costs can therefore act as a natural maximum of 4 marks.
barrier to international trade and exchange.
10 Arguments for protecting domestic industries
6 Trade protectionism is the use of trade barriers to from foreign competition include:
safeguard a country from excessive international
● to protect infant and declining industries from
trade and foreign competition. See pages 278–280 in
foreign competition
the textbook for an explanation of trade protection.
● to protect strategic industries from foreign
7 Reasons might include: competition, e.g. ammunition and weaponry
● the US government imposes higher tariffs on ● to protect domestic industries from unfair
imported cars from the EU foreign competition
● the US government imposes a lower quota of ● to protect domestic employment
imported cars from the EU
● to improve the current account on the balance
● the US government subsidises domestic car of payments.
producers
Arguments against protecting domestic industries
● the US dollar depreciates against the euro, from foreign competition include:
making EU imports more expensive
● trade protection reduces competition, so can
● the US government raises income tax rates, damage efficiency
thereby reducing the propensity to import
● reduced choice for domestic consumers
● higher interest rates in the USA mean that
foreign firms that are more efficient and/
American consumers have less disposable ●
or provide competition would have reduced
income to purchase imports.
prices for domestic consumers
Award up to 2 marks for each reason that is
● other countries may retaliate by imposing their
clearly explained, up to the maximum of 4 marks.
own trade barriers.
8 Benefits of free international trade to the economy
Award 1–2 marks for a brief answer that shows
include:
limited understanding.
● access to resources
Award 3–5 marks for explaining the arguments
● economies of scale and lower prices for and against protecting domestic industries
● greater choice from foreign competition. There may be a lack of
employment opportunities detail and/or use of examples.
●
● increased market size Award 6–7 marks for a thorough discussion of
improved international relations. whether the government should protect domestic
●
industries from foreign competition. There
See page 277 in the textbook for an explanation of
is appropriate use of terminology and use of
the above benefits.
relevant examples. For full marks, there is clear
Award up to 2 marks for each reason that is evidence of critical thinking.
clearly explained, up to the maximum of 4 marks.
40
Cambridge IGCSE ® and O Level Economics Workbook Answers