Questions

[Link].TZ0.1
Note that widgets and pidgets are imaginary products.

In the country of Burbia, the demand and supply of widgets are given by the functions

Qd = 249 − 4P
Qs = 150 + 14P

where Qd is the quantity demanded per month, Qs is the quantity supplied per month and
P is the price per widget in dollars ($).

The final of the 2018 Football World Cup is expected to be held in the Luzhniki stadium,
Moscow.
The capacity of the stadium is 80 000. The expected cost of holding the final is US$12
million, which is not dependent on the number of people attending the match. All tickets
will be sold for the same price.
a. Calculate the equilibrium price and quantity per month. [2]

b.

Calculate the excess demand/excess supply (state which of these) at a price of $8.50.

[2]

c. Calculate the price at which excess demand of 18 widgets would result. [2]

d. A demand curve is drawn under the assumption of ceteris paribus.

Using an example, outline why the assumption of ceteris paribus is necessary when
analysing the effect of a change in price on the quantity demanded of a product.

[2]
 e.

Widgets and Pidgets have negative cross price elasticity of demand (XED).
Explain how the demand function for Widgets, Qd = 249 − 4P, is likely to change as a
result of an increase in the price of Pidgets.

[2]

f. The demand for widgets is considered to be unit elastic at the current price.

Outline the meaning of the term unit elastic demand. [2]

g. Explain two determinants of the price elasticity of demand (PED). [4]

h.

Two products are in competitive supply. Using an example, outline how the supply for
one of them is likely to be affected by an increase in the price of the other.

[2]

i.

State the value of the price elasticity of supply (PES) for tickets to the 2018 Football
World Cup final.

[1]

j.

On the diagram draw and label the supply curve for tickets at the 2018 Football World
Cup final.

[1]

k.

Draw and label the marginal revenue (MR) curve for the 2018 Football World Cup final.

[1]

l.

Using the diagram and your answers to parts (j) and (k), explain how the organizers
could achieve their goal of profit maximisation.

[4]

[Link].TZ0.1
Note that widgets are an imaginary product.

In Country X, the supply and demand for widgets are given by the functions

Qs = − 45 + 4.5P
Qd = 180 − 3P

where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied
(thousands per year) and Qd is the quantity of widgets demanded (thousands per year).

The supply (S) and demand (D) functions are represented in Figure 1.

An increase in costs of production has resulted in a new supply function:

Qs1 = − 60 + 3P

Figure 2 shows the demand for and supply of widgets in Country Y.

Figure 2
The government of Country Y decides to impose an indirect tax of $10 per widget.

A music concert is to take place in Country Z. 40 000 tickets are available for the concert.
Figure 3 shows the demand (D) for tickets at this concert.
Figure 3
The fixed costs for the concert have been calculated as $3 million, while it is expected that
there will be no variable costs.

a. Identify the slope of the supply curve. [1]

b. Outline the reason why the quantity supplied increases as the price rises. [2]

c. Draw and label the new supply curve on Figure 1. [1]

d.

Using your answer to part (c), outline the reason why an increase in costs of
production has resulted in a new supply function.

[2]

e.

Calculate the change in producer surplus resulting from the increase in costs of
production.

[2]
 f. Define the term price elasticity of supply. [2]

g.

The time taken to produce goods is an important determinant of the price elasticity of
supply.

Apart from time, explain two factors which influence the price elasticity of supply.

[4]

h.

With reference to Figure 2, explain how the incidence of taxation on consumers

and/or producers will be influenced by the price elasticity of supply.

[4]

i. Draw and label the marginal revenue (MR) curve for the concert on Figure 3. [1]

j.

Calculate the maximum revenue that could be earned from selling tickets for the
concert.

[2]

k.i. Calculate the average fixed cost per ticket if all tickets are sold. [1]

[Link].

Assuming the event organizers aim to maximize profit, calculate the profit that will be
made from the concert.

[3]

[Link].TZ0.2
Country X and Country Y are capable of producing both apples and bananas. Assume a
two-country, two-product model.

Country Y has absolute advantage in the production of both apples and bananas, and
comparative advantage in the production of bananas.

The market for oranges in Country Z is illustrated on Figure 5.

Figure 5
The domestic demand and supply for oranges are given by the functions

Qd = 300 − 100P
Qs = − 60 + 60P

where P is the price of oranges in dollars per kilogram ($ per kg), Qd is the quantity of
oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied
(thousands of kg per month). The world price of oranges is $2 per kg.

Due to increased awareness of the possible health benefits of vitamin C, the demand for
oranges in Country Z increases by 60 000 per month at each price.

Tanya is a currency speculator. She buys and sells currencies with the intention of making
gains as a result of changes in the exchange values of currencies. Currently, she is holding
US$300 000, but she expects that in the next few months the euro (EU€) (the currency of
the eurozone) will appreciate against the US dollar (US$).
At present, EU€1 = US$1.20.

Tanya exchanges her US$ for EU€.

The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€,
Tanya exchanges her EU€ for US$.

a.

Sketch and label a diagram to illustrate comparative advantage between Country X

and Country Y on Figure 4.

Figure 4

[2]

b.

Outline the reason why Country X should specialize in the production of apples and
Country Y should specialize in the production of bananas.

[2]

c.
Outline one reason why it might not be in a country’s best interests to specialize
according to the principle of comparative advantage.

[2]

d.

Calculate the change in expenditure on imported oranges as a result of the increase in

demand.

[2]

e.i.

Calculate the change in consumer surplus in Country Z as a result of the increase in

demand for oranges.

[2]

[Link].

Calculate the change in social (community) surplus as a result of the increase in

demand for oranges.

[2]

f.

State one administrative barrier that Country Z could use in order to restrict imports.

[1]

g.

Explain two possible economic consequences for the eurozone if the euro
appreciates.

[4]

h. Calculate the quantity of EU€ she will receive for her US$300 000. [1]

i. Calculate, in US$, the loss made by Tanya as a result of these transactions. [3]

j.

Explain two reasons why a government might prefer a floating exchange rate system
for its currency.

[4]
[Link].TZ0.3
Pakistan and the International Monetary Fund
Pakistan is a low-income country with a rapidly growing population and widespread
poverty. As of 2019, it has a large budget deficit due to high levels of military spending and
high costs of debt servicing (35 % of the deficit is interest payments). It is also experiencing
a widening current account deficit and is heavily dependent on foreign aid.

Pakistan’s government is negotiating a loan from the International Monetary Fund (IMF).
Amongst its conditions, the IMF has said that the government must decrease private-sector
regulation such as regulations on financial institutions. The government must also sell state-
owned enterprises and government revenue must be raised by increasing indirect taxes
and improving tax collection systems. Furthermore, the IMF insists that the government
cuts its spending further.

The government has stated that the IMF loan is essential to restore confidence in Pakistan’s
economy. This would help to attract foreign direct investment (FDI) to encourage economic
growth and help break out of the poverty cycle. High debt levels and slowing economic
growth in 2018 discouraged FDI. The IMF loan is also needed to help persuade other
multilateral lenders such as the World Bank and the Asian Development Bank to provide and
extend loans.

In the past, Pakistan has had 21 agreements with the IMF with limited success—any balance
of payments or external debt improvement has been temporary. The IMF states that this is
because Pakistan has not always met the conditions of the loans, while other stakeholders
argue it was the lack of support given to Pakistan to implement the conditions and to
allocate the loan funds appropriately.

Economists say that there needs to be a focus on improving human capital to provide the
large number of young people entering the labour force with the skills to grow businesses.
The quality of education needs to improve and to be combined with an effort to provide
girls with greater access to education—female participation in the labour force is the
lowest in the region.

The World Bank has financed education and infrastructure, such as renewable energy
projects, in poor regions of Pakistan. However, critics of the World Bank argue that the
projects are not making a significant difference and the construction of hydroelectric dams
leads to environmental damage.

The government believes that the macroeconomic concerns of the IMF should be
addressed first, and poverty issues in Pakistan can be dealt with later.

[Source: © International Baccalaureate Organization 2020.]

a.i. State two functions of the International Monetary Fund (IMF) (paragraph [2]).

[2]
 [Link]. Define the term human capital indicated in bold in the text (paragraph [5]). [2]

b.

Using a poverty cycle diagram, explain how the government of Pakistan could
intervene to “break out of the poverty cycle” (paragraph [3]).

[4]

c.

Using an externalities diagram, explain how “greater access to education” for girls in
Pakistan could reduce market failure (paragraph [5]).

[4]

d.

Using information from the text/data and your knowledge of economics, evaluate the
potential impact of the IMF and the World Bank on economic development in
Pakistan.

[8]

[Link].TZ0.2
The following diagram illustrates the market for bananas in Country A. D and S represent
the domestic demand and supply for bananas, while bananas can be imported at the
current world price of $3 per kg.
The government of Country A decides to impose a quota on banana imports of 150 000kg
per month.

The demand and supply functions for the currency of Country A (the dollar ($)) are given by:

Qd = 1900 - 18P

Qs = 580 + 12P

where Qd is the quantity of dollars demanded per month, Qs is the quantity of dollars
supplied per month and P is the price of the dollar, measured in yen (¥).

The following table provides selected items of the balance of payments for Country A in
2015.

Table 1
a.i.

Assuming that there are no restrictions on the importing of bananas into Country A:

State the quantity of bananas which will be purchased each month in Country A. [1]

[Link].

Assuming that there are no restrictions on the importing of bananas into Country A:

Calculate the monthly expenditure on bananas imported into Country A. [1]

[Link].

Assuming that there are no restrictions on the importing of bananas into Country A:

Calculate the domestic producer surplus. [1]

b.i.

Identify the price which would be paid by consumers in Country A per kg of bananas
following the imposition of the quota.

[1]

[Link].

Identify the quantity of bananas which would be purchased in Country A per month
following the imposition of the quota.

[1]

[Link].

Calculate the change in revenue earned by domestic producers of bananas in Country

A as a result of the quota.
 [3]

c.

With reference to the diagram, explain why the welfare loss from the imposition of the
quota is likely to be greater than the welfare loss resulting from a tariff of $2 per kg.

[4]

d.i.

Outline the reason why a fall in the price of the dollar should lead to an increase in the
quantity of dollars demanded.

[2]

[Link].

Assume that the dollar/yen exchange rate is in equilibrium. Using the functions,
calculate the cost, in dollars, of a motorbike which costs ¥552 640.

[3]

e.i.

Using examples from Table 1, outline the difference between debit items and credit
items in the balance of payments.

[2]

[Link]. Calculate the current account balance from the data given in Table 1. [2]

[Link]. Explain two implications of a rising current account surplus. [4]

[Link].TZ0.1
Firm A, a firm with monopoly power, is producing at a level of output Q’ equal to 150 000
units per month for which the following are true (all figures are in dollars ($)):

Table 1
The values in Table 1 imply the following:

P = AR > MR > AC > MC

a. Define the term monopoly power. [2]

b.

Using the figures provided in Table 1, calculate the monthly level of profits Firm A is
making at the current level of output, Q’.

[3]

c.i. Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:

State the reason Firm A cannot be a perfect competitor. [1]

[Link].

Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:

Determine whether Firm A should increase or decrease its level of output in order to
maximize profits. You must give a reason for your choice.

[2]

[Link].

Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:

Determine whether total revenue collected will increase, decrease or remain

unchanged if Firm A increases its level of output. You must give a reason for your
choice.

[2]

[Link].

Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:

Describe how average cost will be affected if Firm A increases its level of output. [2]

c.v.

Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:

Determine whether Firm A is productively efficient at the current level of output. You
must give a reason for your choice.
[2]

d. Using the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
Explain why allocative efficiency is achieved, in the absence of externalities, at a level
of output where price (average revenue) is equal to marginal cost.

[4]

e.

On the following axes, sketch a fully labelled diagram showing the level of output Q’
for which the relationship
P = AR > MR > AC > MC is true. The use of figures provided in Table 1 is not required.

[3]

f.
 Now assume that the market in which Firm A operates has evolved into an oligopoly
with only two firms, Firm A and Firm B. Each firm can cut price or maintain the current
price. The following payoff matrix shows the profits they face. The profit payoffs for
Firm A are in bold.

Using the profit figures in the payoff matrix, explain why strategic interdependence
will lead both firms to cut price.

[4]

[Link].TZ0.03
Angola and Namibia
Angola and Namibia are neighbouring countries on the west coast of Africa.
Angola
Angola’s economy is driven by its oil sector. It is the second largest oil producer in Africa.
Oil production and its supporting activities contribute about 50% of gross domestic
product (GDP), more than 70% of government revenue and more than 90% of the country’s
exports. Diamonds contribute an additional 5% to exports. Subsistence agriculture provides
the main livelihood for most people in Angola, but half of the country’s food is still
imported.

Since 2005, the Angolan government has borrowed billions of US dollars from China, Brazil,
Portugal, Germany, Spain and the European Union (EU) to help rebuild Angola’s
infrastructure. The global recession that started in 2008 slowed economic growth. In
particular, lower prices for oil and diamonds during the global recession slowed GDP
growth to 2.4% in 2009, and many construction projects stopped.

Falling oil prices and slower than expected growth in non-oil sectors have reduced growth
prospects for 2015. Angola has responded by reducing government subsidies and by
proposing import quotas and making it more difficult to import. Domestic fuel subsidies
have been eliminated. Corruption, especially in the mining sector, is a major long-term
challenge.
Namibia
Namibia’s economy is heavily dependent on the mining and processing of minerals for
export. Mining accounts for 11.5 % of GDP, but provides more than 50% of foreign
exchange earnings. Namibia is a primary source for high-quality diamonds. In addition,
Namibia is the world’s fifth-largest producer of uranium, produces large quantities of zinc
and is a smaller producer of gold and copper. The mining sector employs less than 2% of
the population. Namibia normally imports about 50% of its grain requirements.
A high per capita GDP, relative to the region, hides one of the world’s most unequal income
distributions. The Namibian economy is closely linked to South Africa with the Namibian
dollar pegged one-to-one to the South African rand. Namibia receives 30% to 40% of its
revenues from the countries in the Southern African Customs Union (SACU). Angola is not a
member of the SACU.

Namibia’s economy remains vulnerable to world commodity price fluctuations and drought.
The rising cost of mining diamonds, increasingly from the sea, has reduced profit margins.
Namibian authorities recognize these issues and have emphasized the need for
diversification.

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

[Sources: adapted from [Link], 14 August 2014; The World

Factbook, Country Reports,
Central Intelligence Agency, 2015; [Link], accessed 13 August 2015
and [Link], accessed 13 August 2015]

a.i. Define the term infrastructure indicated in bold in the text (paragraph 3). [2]

[Link]. Define the term customs union indicated in bold in the text (paragraph 6). [2]

b.

Angola and Namibia have different Gini coefficient values. Using a Lorenz curve
diagram, explain what this means (Figure 1).

[4]

c.
 Using a demand and supply diagram, explain the effect on the price and quantity of
fuel consumed in Angola, caused by the elimination of domestic fuel subsidies
(paragraph 4).

[4]

d.

Using information from the text/data and your knowledge of economics, compare and
contrast factors that are likely to lead to economic development in Angola and
Namibia.

[8]

[Link].TZ0.04
Sri Lanka’s economic reforms

After Sri Lanka’s 25-year civil war ended in 2009 it became one of the world’s fast-growing
emerging markets, helped by billions of US dollars worth of infrastructure investment from
China. Sri Lanka’s new government plans to implement a range of market-oriented policies
to open up its financial system, liberalize the Sri Lankan rupee (Sri Lanka’s currency) and
make new trade deals with both India and China.

Sri Lankan economists and corporate leaders are urging “tough” economic decisions,
reducing the bureaucracy and eliminating costly inefficiencies in state enterprises. 300
state-owned firms dominate the economy, and there is pressure for them to enhance their
competitiveness. One realistic option is a policy of privatization. Another policy is the
establishment of 46 economic zones across the country with low tax rates. This should
encourage the private sector to invest in setting up these zones.

Improving infrastructure is also a priority. Power supply is unreliable and broadband speeds
are slow in rural areas.

Another priority is to reduce controls on exchanging currency. Sri Lankans find it difficult to
obtain foreign exchange, limiting tourism and business overseas. Improving access to
foreign currencies would make people’s lives easier and encourage more business.

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

advantage of this, the government should now implement a strategy to further promote
tourism.

A major challenge for the government is that more than 25% of the population lives below
US$2.50 per day. This is caused largely by the fact that 30 % of the population is involved in
agriculture, which contributes less than 10% of gross domestic product. In addition,
tackling youth unemployment and increasing household incomes are challenges.
But perhaps the greatest problem confronting the government is the country’s massive
debt burden, which is equivalent to 700% of its tax revenue. This creates a significant debt
servicing problem, especially because much of the debt is foreign owned.

Another problem is a current account crisis. Sri Lanka needs to replace its reliance on
payments from Sri Lankans employed overseas with export revenues. And instead of relying
on borrowing from overseas to finance its current account deficit, the country needs to
attract foreign direct investment.

There is also a need for the government to try to improve the ability for companies to do
business, such as by reducing the time it takes to register a business and by improving
access to credit for small companies, which would significantly stimulate the economy.
Business confidence has to improve in order to stimulate new investments and economic
growth.

[Sources: adapted from Sunday Times, Sri Lanka, [Link], 23 August 2015, and

James Crabtree, 2015, Sri Lanka plans ‘big bang’ reforms, Financial Times, [Link], 19
August. Used under licence from the Financial Times. All Rights Reserved.]

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

[Link]. Define the term privatization indicated in bold in the text (paragraph 2). [2]

b.

Using a production possibilities curve (PPC) diagram, explain how “billions of US

dollars worth of infrastructure investment from China” may affect potential economic
output (paragraph 1).

[4]

c.

Using a definition of the term opportunity cost and information from the text, explain
how the servicing of debt has an opportunity cost that may affect economic
development in Sri Lanka.

[4]

d.

Using information from the text/data and your knowledge of economics, discuss the
possible effects of the proposed market-oriented reforms on Sri Lanka’s economic
development.

[8]
[Link].TZ0.03
Indonesia’s economy

Indonesians hope that their new president will be able to speed up reforms to stimulate
economic growth and economic development. These reforms include upgrading
infrastructure, reducing red tape (excessive regulations) and reducing corruption. It is also
hoped that he will increase Indonesia’s global competitiveness, create new jobs and
educate one of the world’s youngest workforces.

Some government policies are already being implemented. These include a large power
plant construction programme, tax incentives to infant industries and tax cuts for industries
like transport, telecommunications, metal production and agricultural processing. In
addition, there has been a decision to reduce fuel subsidies in order to contribute funds
towards the government’s record US$22 billion investment in infrastructure projects. The
subsidies had kept fuel prices low in a country where millions of people live in poverty.

Despite the policies, Indonesia is struggling. Economic growth is slow and consumer
confidence has deteriorated. Indonesia’s main export commodities are coal, gold and palm
oil, for which prices have fallen. The inflation rate is 7.26%, which is above the central bank’s
target range of 3 to 5%. Slower growth in the world economy makes the situation even
worse for Indonesia’s struggling economy.

Economists have said that the president must put his efforts into improving export
competitiveness by making investments in education and training.

The costs of doing business in Indonesia are high due to paperwork and confusing
regulations. The government has adopted policies to improve this. These policies aim to
create certainty and transparency for foreign investors and to empower small businesses,
which play a critical part in Indonesia’s economy. Other policies, such as obtaining loans
and encouraging micro-credit institutions, make it easier to gain access to credit.

Trade protection and intervention are increasing as policymakers look to reduce imports,
manage markets and promote domestic industries.

Figure 1 – Indonesian development statistics

 [Sources: adapted from World Bank and Statistics Indonesia; [Link],
accessed 18 September 2015; [Link], accessed 23 August 2015;
[Link], accessed 23 August 2015; [Link], accessed 9
August 2015; [Link], accessed 9 August 2015; [Link],
accessed 23 August 2015 and [Link], accessed 23 August 2015]

* signifies no data available

a.i. Define the term infrastructure indicated in bold in the text (paragraph 1). [2]

[Link]. Define the term micro-credit indicated in bold in the text (paragraph 5). [2]

b.

Using a demand and supply diagram, explain the impact on the market for fuel of the
government’s decision to reduce fuel subsidies (paragraph 2).

[4]

c.

Using a production possibilities curve (PPC) diagram, explain how “the government’s
record US$22 billion investment in infrastructure projects” will affect Indonesia’s
production possibilities (paragraph 2).

[4]

d.

Using information from the text/data and your knowledge of economics, discuss the
possible impacts of market-oriented and interventionist policies on Indonesia’s
economic development.

[8]

[Link].TZ0.02
 Australia’s terms of trade

Australia’s terms of trade fell sharply in the three months through to June 2015, the largest
fall since the global financial crisis of 2008. Official trade price data released by the
Australian Bureau of Statistics (ABS) imply the terms of trade slumped by about 5.8% from
the March quarter. This may worsen the current account deficit.

The terms of trade index is now significantly below its September 2011 peak because of
ongoing falls in the prices of iron ore, coal and energy. This is of critical importance given
Australia’s growing reliance on income from exports of liquefied natural gas.

“The golden age of commodity-driven income growth is long gone,” said an economist at
Commonwealth Bank. “The continued fall in the terms of trade reflects a pronounced fall in
the purchasing power of Australian households and businesses. This has been a familiar
theme over the past few years,” he said. “Basically, falling commodity prices, namely iron
ore and coal, have weighed heavily on export revenues and therefore, real gross national
income growth.”
Falling prices for exports are likely to damage the Australian government’s revenue
expectations and to damage hopes for any rebound in economic strength in the near
future.

While the quantity of export shipments – chiefly iron ore – continues to break records,the
revenues received by the nation’s biggest exporters continue to fall and several key
economists fear that this may lead to a recession. This would break a 24-year run of
unbroken economic growth.

The Australian dollar’s 0.4% fall in the exchange rate has done little to offset this effect, and
the Reserve Bank of Australia continues to signal that it may take further measures to lower
its current price of around AU$1 = US$0.73.

The ongoing terms of trade collapse highlights the urgency for governments and
companies to accelerate efforts at encouraging productivity. The manager of the Reserve
Bank of Australia said, “Australia’s dreadful productivity effort over the last decade was
masked by the rapidly increasing terms of trade up until 2013. This kept our income
growing but the weakness now is harshly exposed as commodity prices slide”.

Figure 1 – Export and import indices for Australia

 [Sources: Extract: Adapted from Fairfax Syndication, [Link]/news, 30 July 2015 Table:
ABS data used with permission from the Australian Bureau of Statistics, July 2015,
[Link]]

a.i.

Define the term current account deficit indicated in bold in the text (paragraph 1).

[2]

[Link].

Define the term gross national income indicated in bold in the text (paragraph 3). [2]

b.

Using a definition of price elasticity of demand, explain why “the revenues received
by the nation’s biggest exporters continue to fall” (paragraph 5).

[4]

c.

Using a definition of the terms of trade, explain the terms of trade change in Australia
from 2011 to 2015 (Figure 1).

[4]

d.

Using information from the text/data and your knowledge of economics, discuss the
possible effects of the fall in Australia’s terms of trade on the Australian economy.

[8]

[Link].TZ0.04
Zambia’s reliance on copper exports

Due to its economic success, Zambia has recently been classified as a middle-income
country by the World Bank. According to the United Nations (UN) classification, Zambia is in
the medium human development category. However, outside mining and export areas, the
standard of living remains extremely low for Zambians.

Zambia is one of the world’s top producers of copper. The country’s economy is reliant on
copper exports, which make up 80% of export earnings. Mining employs approximately 90
000 people and contributes approximately 25–30% of government revenue in Zambia.
From 1997 to 2013, mining attracted US$12.6 billion in foreign direct investment, helping
Zambia become one of Africa’s top economic performers, with average annual gross
domestic product (GDP) growth of 6.4% over the last decade.

But now foreign and local businesses, including giant multinational mining corporations and
small Zambian companies, have been hit hard by a rapid fall in the price of copper. In
January 2015, the price reached a five-and-a-half year low of approximately US$5353 per
tonne, below the estimated marginal cost of production of US$5500. Sadly for many
domestic Zambian mines, their marginal costs are even higher because their mines are old,
deep and expensive to operate.

The fall in commodity prices is linked to the slowdown in Chinese economic growth. China
accounts for 45% of global copper consumption. The situation highlights the vulnerability of
Africa’s resource-dependent nations to changes in China’s economy. This is an indicator of
the need for Zambia to diversify its economy away from primary commodities. This will
require the government to implement structural reforms to improve the supply side of the
economy.

Zambia is facing other economic problems as well as the falling price of copper. Most of
Zambia’s electricity is produced from hydropower, but a severe drought has led to
widespread power cuts, further threatening copper mining. The power problems and fall in
copper prices have driven the Zambian kwacha (Zambia’s currency) to record lows due to a
widespread selling of currencies which are linked to commodities. It lost 17% of its value
against the US dollar from December 2014 through to the end of March 2015. The
weakness of the Zambian kwacha is raising import costs and feeding into inflation.

The governing Patriotic Front party, which has been in power since 2011, attracted voters
by promising to share the country’s mineral wealth more equitably, raise wages and
improve infrastructure. But now the government is struggling to maintain fiscal discipline,
as the budget deficit has risen to an unacceptable level of approximately 10% of GDP.

There has also been much attention to the unsustainable mining practices of foreign and
domestic mines in Zambia. These have added to Zambia’s challenges of poverty alleviation,
economic growth and economic development.

[Sources: adapted from [Link], 8 September 2015; Financial Times, “Zambia’s

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

Figure 1 – Selected economic indicators for Zambia, Malawi, Sub-Saharan Africa and
middle income countries
 a.i.

Define the term foreign direct investment indicated in bold in the text (paragraph 3).

[2]

[Link]. Define the term marginal cost indicated in bold in the text (paragraph 4). [2]

b.

Using an AD/AS diagram, explain how the falling value of the Zambian kwacha
(Zambia’s currency) is “feeding into inflation” (paragraph 6).

[4]

d.

Using information from the text/data and your knowledge of economics, discuss the
possible impacts of Zambia’s reliance on copper production on its economic
development.

[8]

[Link].TZ0.1
a.

Explain two reasons why the demand for manufactured goods might be price elastic.

[10]

b.

Evaluate the importance of cross price elasticity of demand for a business selling a
good if the price of a related good increases.

[15]

[Link].TZ0.2
a.
 Explain the view that the best allocation of resources occurs when consumer surplus
and producer surplus are maximized.

[10]

b. Discuss the implications of the direct provision of public goods by a government.

[15]

[Link].TZ0.1
American shrimp farmers taste victory
American shrimp farmers have received good news from a United States (US) ruling that
could lead to tariffs being imposed on imports from competing countries.

US producers in the Gulf Coast were suffering from a significant oil spill in 2010. The higher
fuel costs as a result of the spill have made it hard to compete with foreign shrimp farms,
which they say receive government subsidies. The US producers claim such subsidies
threaten to destroy the domestic shrimp business. The US imported 1200 million pounds
(lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically.

The US Department of Commerce ruled that five countries – China, Ecuador, India, Malaysia
and Vietnam – improperly subsidized shrimp that were exported to the American market.
The department rejected accusations of improper subsidies by Thailand and Indonesia, two
of the biggest US shrimp suppliers.

The US International Trade Commission will now have to decide whether the subsidies
harmed the American industry. If so, the US would impose tariffs on shrimp imports from the
five countries. The proposed US tariffs could be as much as 54.5 %.

The US shrimp farmers claim that the Indian government pays extra to cover shipping costs
on shrimp going to the US and that China provides subsidized loans to its shrimp farmers.
They argue that these violate World Trade Organization (WTO) rules.

The five countries disputed the US Department of Commerce’s decision. The Vietnamese
producers state that, “This is an unfair decision affecting the lives of more than 600 000
shrimp farmers and processors in Vietnam”. Chinese officials have said that there was no
evidence of improper Chinese subsidies and that US tariffs on Chinese shrimp would violate
WTO rules.

The US shrimp farmers say they need tariffs to allow them to compete fairly with Asian
farmers, noting that high fuel prices are keeping some shrimp boats at the dock. “The price
received by our farmers is not enough to cover their variable costs,” said a lawyer, who
represents the US shrimp farmers.
Large US retailers and food distributors oppose the tariffs saying that the US shrimp
industry had support from the oil company, BP, which has paid billions of US dollars to
those affected by its 2010 oil spill.

US politicians and shrimp farmers commented on problems they are facing, saying that,
“not only is shrimping an industry, but it is a way of life”.

Figure 1: Amount of shrimp imported to the US compared with domestic catch

(thousands of tons)

a.i. Define the term subsidies indicated in bold in the text (paragraph [2]). [2]

[Link]. Define the term variable costs indicated in bold in the text (paragraph [7]). [2]

b.

Using a supply and demand diagram with international trade values from the text,
explain the statement that “The US imported 1200 million pounds (lb) of shrimp last
year and produced 100 million pounds (lb) of shrimp domestically” (paragraph [2])
(Does not need to be to scale).

[4]
c.

Using an average costs diagram, explain the short-run consequence for shrimp
farmers if the price received “is not enough to cover their variable costs”
(paragraph [7]).

[4]

d.

Using information from the text/data and your knowledge of economics, discuss the
view that the US should impose tariffs on the imported shrimp.

[8]