Cambridge IGCSE Economics 0455 — 2007 Oct/Nov Paper 4 · Variant 1

1 The Royal Mail The following is adapted from a leaflet the UK Royal Mail sent to its customers in 2005. We are investing in the postal service so that it is consistent and reliable and remains one of the best in Europe. You can trust the Royal Mail with your post. 99.9 % of all mail gets delivered safely and quickly to the right address. Sometimes letters have the incorrect address or no address at all. At least 92.5 % of the First Class letters arrive by lunchtime the next working day. (In France barely 80 % of the First Class mail is delivered on time.) We are determined to manage this better and are investing in technology and training. Our prices are rising by less than inflation and are amongst the lowest in Europe. In April the price of First Class post will go up from £0.28 to £0.30 which compares well with a price of £0.26 ten years ago. In Italy First Class could cost you £1.12, in Germany up to £1. There will now be only one delivery a day. Previously, when mail was sorted by hand, it was impossible to sort and deliver it all at once. Now, more mail is sorted automatically and overnight. A single delivery helps us to keep our costs down. We need to make profits so that we can invest in better equipment, better technology and better offices, and also pay our staff more for doing a responsible job. (a) Explain what is meant by factors of production. [4] (b) How has the Royal Mail’s use of these factors of production changed? [2] (c) Explain how the proposed new investment will change the Royal Mail’s fixed cost and variable cost. [4] (d) Discuss how the rise in price from £0.28 to £0.30 might affect demand for substitute methods of communication. [4] (e) Is there enough evidence in the article to support the Royal Mail’s statement that it is one of the best in Europe? [6]

Mark scheme: 1 (a) Explanation of land, labour, capital, and enterprise. [4] A list of four factors, 2 marks only. A list of three factors, 1 mark only. (b) More capital and more investment but less labour. [2] (c) Explanation of fixed and variable costs. Fixed cost will increase with new technology. Labour may be a fixed or a variable cost but likely delivery staff are thought to be a variable cost. As labour may be replaced by machines, this will decrease. However, if labour is paid more, the overall effect is uncertain. [4] (d) Price rises usually cause demand to fall and switch to other substitutes. This may not be thought to be a sufficient increase to cause many to switch to alternative means of communication. Extended candidates could mention price elasticity of demand. [4] (e) Only comparison on price is with Italy and Germany. No real information about rate of inflation, only a general statement about price comparing well. Delivery figures do seem to support the claim that Royal Mail is providing good service (but only comparison is with France). Only one delivery a day now, no comparison on that with other countries. Statement about investing in training and technology. Does say it needs to make profits. Not sure how much will be re-invested. The conclusion is uncertain as there is insufficient evidence. [6] A maximum of 4 marks for a one-sided answer.

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2 A multi-national was described as a large company that employs people from different countries and is controlled by a government. (a) Explain whether this is a correct description. [4] (b) If a company is large and employs many people it often has to deal with trade unions. What is a trade union and what is its role in an economy? [6] (c) How might a company become large? [4] (d) Multi-national car companies are sometimes said to have economies of scale. Analyse what this means for such companies. [6]

Mark scheme: 2 (a) May employ people from different countries but this is not the definition. Has to operate in different countries. Governments may be involved in multi-national companies but this again is not the definition and most would be privately owned. [4] (b) Group of people working together in a similar occupation, promote welfare, safety, negotiate wages. [6] (c) Merger, integration, take-over, advertising, internal growth financed through retained profits, share issues, borrowing, marketing and advertising which lead to increased demand. Need to consider both internal and external factors to gain the maximum 4 marks. If one or the other is considered, maximum 2 marks. [4] (d) Explanation of principle of reduced cost per unit and description of different types of economies of scale. [6] Up to a maximum of 4 marks if no reference to the car industry. IGCSE – October/November 2007 0455 04

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3 (a) Explain how the principle of opportunity cost might be relevant when a person chooses a new job. [3] (b) Some service sector occupations pay very well, others have low rates of pay. Discuss why this might be so. [7] People often borrow by using a credit card. This notice was issued by a credit card company: ‘For the next four months the interest rate charged on outstanding amounts has been reduced to the equivalent of 1.9 % per year.’ (c) Explain what motives people have for saving rather than spending. [4] (d) How might a reduction in interest rates on credit card borrowing affect the way that people choose to save or spend? [6]

Mark scheme: 3 (a) Explanation of principle. Must mention ‘next best’ or ‘best’ for 2 marks. Application in terms of what might be given up – for example, might get higher pay but give up shorter journey, might give up possible alternative job, might give up holidays by switching employment, 1 mark. [3] (b) Could be a range of non-wage factors, could be amount of skill required, may be a manager or a clerical worker, differences in male and female, extent of union activity, supply of and demand for labour can be mentioned. [7] Maximum of 5 marks if not related to a service sector occupation. (c) Comment on long term rather than short term view, reasons for saving – for particular item, for big occasion, to pay previous debts as a precaution. Could comment on overall level of income; higher proportion saved with higher income. [4] (d) Traditionally, lower rates discourages saving and encourages borrowing. Credit card purchases not paid immediately are equivalent to borrowing. There is likely to be an increase in spending on those goods financed by credit cards. This is fairly short term so unlikely to affect savings, but might. Spending might increase if can pay the debt within the four months. Will not affect those who pay everything as the accounts arrive. [6] Accept discussion on interest rates.

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4 1 in 5 adults have not been educated to read or write; 98 % of them live in developing countries and 66 % of them are women. (a) Explain three other differences that you might find between the population of a developed country and a developing country. [3] (b) Another indicator of living standards, apart from education, is GDP. Discuss how useful this is in comparing the living standards between two countries. [7] (c) Explain two reasons why education in a developing country is often provided by the public sector. [4] (d) Discuss what effect investment in the education system might have in a developing country. [6]

Mark scheme: 4 (a) Any three which could be connected with age distribution, birth rate, death rate; occupational distribution; dependency ratios, extent of malnutrition. [3] (b) Comment on validity of using GDP. Difficulties of comparison over time and between countries, problems of informal economy, inflation, income per head, non-economic factors influencing standard of living, exchange rates. [7] (c) External benefits; low income so cannot afford private education; long-term nature of benefit from education for country. [4] (d) Increased skills; increased income; increased productivity; consequent increased growth and development; less reliance on foreign help and support, improved health education and awareness. [6] IGCSE – October/November 2007 0455 04

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5 It was reported that farmers in Malawi were being discouraged from specialising in growing the staple crop of maize. Instead they were encouraged to diversify into other crops. (a) Explain what is meant by specialisation. [4] (b) Discuss whether there are any benefits from specialisation rather than diversification. [6] (c) Distinguish, with examples, between the primary, secondary and tertiary sectors of the economy. [3] (d) As countries develop they often rely less on exports of agricultural products and more on exports from other sectors. Discuss the possible benefits of this. [7]

Mark scheme: 5 (a) Concentration on a particular skill, or in this case a particular product, which it is thought the country is better suited to providing. [4] (b) Text books will tell you that specialisation will produce greater efficiency. However, this has implications in terms of the human cost of this through loss of income, employment, impoverishment of regions and general disaffection of those who are not involved in the specialised areas. [6] (c) Explanation of the three sectors with examples. [3] If no examples given, maximum of 2 marks. (d) Potential increase in incomes, employment, less reliance on products with greatly variable prices, difficulties of storage and transportation. Better opportunities for economic growth. [7]

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6 In recent years many countries have put greater emphasis on the market system and less emphasis on trade protection. (a) Explain what is meant by a market system. [4] (b) Discuss the advantages and disadvantages of placing a greater emphasis on the market system. [8] (c) Discuss whether countries should use trade protection. [8]

Mark scheme: 6 (a) Explanation of allocation through the price system, role of demand and supply, role of consumer sovereignty, lack of government intervention. [4] (b) Market economies theoretically allow choice, competition, consumer sovereignty. They also have market failure, no account of externalities, and social benefits and costs. [8] Maximum of 5 marks if one-sided. (c) Pro: encourage home industry, aid balance of payments, support strategic industries, prevent dumping. Con: it counters comparative advantage, interferes with market mechanism and efficiency allocations. [8] Maximum of 5 marks if one-sided.

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7 Three government policy aims are the redistribution of income, economic growth and price stability. (a) Explain what these aims mean. [6] (b) What might a government do to try to redistribute income? [6] (c) How might a government affect economic growth in a country? [8]

Mark scheme: 7 (a) Explanation of the aim of reducing inequalities in income between groups, promoting economic growth and on controlling the rate of inflation. [6] (b) Taxes, indirect, direct. Subsidies, grants, transfer payments. [6] (c) Increased spending, employment programmes, encourage exports, trade protection, tariffs, tax changes, interest rate changes. [8]

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