Cambridge IGCSE Economics 0455 — 2022 Oct/Nov Paper 2 · Variant 3

1 (a) Calculate the price elasticity of supply of Ecuador’s oil. [1] (b) Identify two key resource allocation questions. [2] (c) State why sunshine has no opportunity cost. [2] (d) Explain two reasons why Ecuador experienced a recession between 2014 and 2016. [4] (e) Analyse how building more roads can increase a country’s economic growth rate. [4] (f) Analyse the relationship between GDP per head and car ownership. [5] (g) Discuss whether or not the profits of Ecuador’s textile firms are likely to have increased between 2016 and 2019. [6] (h) Discuss whether or not Ecuador benefits from the emigration of some of its workers. [6]

Mark scheme: Question Answer Marks Guidance 1(a) Calculate the price elasticity of supply of Ecuador’s oil. 1 Do not accept 16% 0.16 (1). 1(b) Identify two key resource allocation questions. 2 Do not accept: How much to produce or for whom to produce What to produce / produce less of one product and more of another product / less oil and more textiles (1). How to produce it / how products are made / using fewer capital goods (1). 1(c) State why sunshine has no opportunity cost. 2 It is a free good (1). In unlimited supply / not scarce / a renewable source of energy (1). Does not take resources to produce it / nothing needs to be sacrificed to use it / no alternative / substitute so no opportunity cost (1). It is there naturally (1). 1(d) Explain two reasons why Ecuador experienced a 4 One mark for each of two reasons identified and one mark recession between 2014 and 2016. for each explanation. Logical explanation which might include: Fall in demand for exports [of oil] (1) lower export revenue / increase current account deficit / lower output of oil / lower total demand / lower GDP (1). Decrease in government spending (1) lower employment / lower output / lower income from benefits / lower total demand / lower GDP (1). 1(e) Analyse how building more roads can increase a 4 country’s economic growth rate. Building more roads would increase employment )1) lower unemployment (1) increase demand for road building materials (1) increase in government spending on roads (1) increase incomes (1) leading to higher demand / expenditure on goods and services e.g. education / cars (1). Less congestion (1) easier to transport goods / better infrastructure (1) quicker to work / increases labour mobility / longer working hours / more productive / efficient workforce (1) output rises (1). Lower transport costs (1) encourage firms to increase output / attract MNCs / foreign investment (1). Lower costs may increase international competitiveness (1) increase demand for country’s exports (1). 1(f) Analyse the relationship between GDP per head and car 5 There must be a comparison between countries and/or GDP ownership. per head and car ownership. Merely describing the data gets no marks as it is not analysis. Coherent analysis which might include: A direct comparison between two countries e.g. GDP per Overview head is higher in Switzerland than Senegal and car Generally, a direct relationship / the higher the income, the ownership is higher in Switzerland than Senegal is worth the higher the car ownership / the lower the income, the lower 2 marks. the car ownership (1). Supporting evidence – two comparison examples Senegal has the lowest GDP per head and the lowest car ownership (1). Ecuador has the second lowest GDP per head and the second lowest car ownership / Spain has higher GDP per head and car ownership than Uruguay (1) Exception New Zealand / Switzerland (1) Switzerland has a higher GDP per head but lower car ownership than New Zealand (1). OR Switzerland has highest GDP per head but only second highest car ownership (1) OR New Zealand has second highest GDP per head but highest car ownership (1). Comments Higher income would increase ability to purchase cars / high income countries often have more than one car per household (1) For exception other influences on demand e.g. cost of public transport / road space / congestions (1). 1(g) Discuss whether or not the profits of Ecuador’s textile 6 Apply this example to all questions with the command firms are likely to have increased between 2016 and word DISCUSS 2019. (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why they Each point may be credited only once, on either side of an might, which may include: argument, but separate development as to how/why the Incomes / household spending increased in Ecuador (1) outcome may differ is rewarded. increasing demand for textiles (1) revenue increases (1). Generic example Mark Costs of production may have fallen (1) due to lower transport costs (1)’. Tax revenue may decrease… 1 Increase in scale of production (1) increased ability to take ...because of reason e.g. incomes may be lower. 1 advantage of economies of scale (1) average cost falls (1) profits may rise if prices unchanged but costs fall / profit is Tax revenue may increase because incomes 0 revenue – costs (1). may be higher i.e. reverse of a previous argument. Low increase in wage costs (1) revenue may have increased by more than costs (1). Tax revenue may increase because of a 1 different reason i.e. not the reverse of a previous Incomes abroad may have increased (1) increasing demand argument e.g. government spending on for Ecuadorean textiles (1) especially of luxury textiles (1). subsidies may stimulate the economy more than spending on education. Award up to 4 marks for logical reasons why they might not, which may include: The firms may have lost skilled workers abroad (1) which could have reduced productivity (1) increased costs / production falls (1). Strong competition from abroad (1) they may have lost sales to competitors (1) reducing revenue and or prices (1). Low wage increase (1) workers may leave industry / lower productivity (1) trade unions / workers may take action (1) may strike / disrupting the firms’ supply/ lead to higher costs (1). 1(h) Discuss whether or not Ecuador benefits from the 6 emigration of some of its workers. Award up to 4 marks for logical reasons why it might, which may include: Some may be unskilled (1), may have been unemployed (1) others leaving jobs create vacancies to be filled by unemployed (1) and so the government would spend less on unemployment benefit / more for other public spending (1) less poverty as a result (1). Some may be trained abroad (1) and may bring back skills and ideas into the country (1) increasing output (1). Some may send money home (1) improve the current account balance (1) will increase spending / total demand (1) leading to economic growth (1). Net emigration results in lower population / reduces overpopulation (1) less depletion of resources / pollution / shortage of resources e.g. housing (1). Award up to 4 marks for logical reasons why it might not, which may include: May lose skilled workers (1) lower productivity (1) low quality products / reduce output / economic growth (1) a relatively high proportion of people lost (1) makes it more difficult to attract MNCs (1). If some will not support families at home (1) dependency ratio will rise (1) place more burden on the government (1). Large proportion / 3 million already working abroad (1) shortage of workers / large reduction in size of labour force / increase (unit) wage costs (1) less income (1) less government tax revenue (1) less government spending e.g. education, health (1). Younger workers emigrating (1) leads to an ageing population (1).

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2 Washington State is the state which grows the most apples in the US. In 2019, apple production increased in Washington State but the market was in disequilibrium. Apple farming is a labour- intensive industry because apples are picked by hand. The market for apples in the US is competitive. (a) Define market disequilibrium. [2] (b) Explain opportunity cost and how it can influence a farmer’s decision to grow apples. [4] (c) Analyse how labour-intensive production can benefit an economy. [6] (d) Discuss whether or not consumers benefit from a competitive market. [8]

Mark scheme: 2(a) Define market disequilibrium. 2 A market where demand and supply are not equal / balanced / matched (2). A market where there is a surplus / excess supply (1) or a shortage / excess demand (1). 2(b) Explain opportunity cost and how it can influence a 4 farmer’s decision to grow apples. Logical explanation which might include: Opportunity cost is the (next) best alternative / choice / option (1) sacrificed / forgone / given up (1). A farmer could grow another crop (1) size of opportunity cost / choice made is influenced by revenue / cost / profit / resources available / weather (1). 2(c) Analyse how labour-intensive production can benefit an 6 This is a static analysis so do not reward answers that write economy. about higher government revenue and expenditure and rise in total demand and economic growth. Coherent analysis which might include: Labour-intensive production uses a high proportion of labour (1) it may increase employment (1) lower unemployment (1) raise incomes (1) raise standard of living / reduce poverty (1). The country may have a large supply of labour (1) the labour force may be relatively unskilled (1) which is cheap to employ / cheaper than using capital (1) saving money for firms (1) more flexible than capital in adjusting supply (1) less pollution / more environmentally friendly (1). Labour-intensive production may provide individually made products / handcrafted / higher quality (1) raise skills level of workforce (1) may be in high demand internationally (1) increase exports / reduce deficit on current account balance (1). 2(d) Discuss whether or not consumers benefit from a 8 Level Description Marks competitive market. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why they might: economic information and clear and • give consumers some power logical analysis to evaluate economic • may lower prices issues and situations. One side of the argument may have more depth than • may raise quality the other, but overall both sided of the • increase choice argument are considered and • goods and service may be readily available. developed. There is thoughtful evaluation of economic concepts, Why they might not: terminology, information and/or data • firms may be too small to take advantage of economies appropriate to the question. The of scale discussion may also point out the • firms may not have much profit to invest in research possible uncertainties of alternative and development decisions and outcomes. • there may be wasteful duplication • there may be wasteful expenditure on advertising 2 A reasoned discussion which makes 3–5 • there may a reduction in quality because of cost-cutting use of economic information and clear • there may be too much choice, taking time to make analysis to evaluate economic issues and situations. The answer may lack decisions some depth and development may be • consumers may benefit more from monopoly where one-sided. There is relevant use of economies of scale result in lower prices than in a economic concepts, terminology, competitive market information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content. 2(d) This is a discussion of a market not of an economic system so public goods and merit goods are not relevant.

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3 Romania’s indirect tax rate was 19% between 2017 and 2019. There is a high proportion of foreign multinational companies (MNCs), especially US MNCs, in Romania. MNCs have helped to increase productivity in Romania and lower its unemployment rate. There are also benefits of MNCs to their home countries. (a) Define, with an example, an indirect tax. [2] (b) Explain two benefits of MNCs to their home countries. [4] (c) Analyse how an increase in productivity can affect unemployment. [6] (d) Discuss whether or not a decrease in a country’s unemployment rate will reduce poverty. [8]

Mark scheme: 3(a) Define, with an example, an indirect tax. 2 Allow an example of a product that is taxed for the example mark e.g. motor cars. A tax on goods and services / tax on sales / purchases / consumer spending (1) Allow an answer that explains that the tax is levied on a VAT / GST / import tariff (1). producer but passed onto consumers to pay. Do not reward answers that refer to a tax levied on a third party. 3(b) Explain two benefits of MNCs to their home countries. 4 One mark for each of two benefits identified and one mark Logical explanation which might include: for each explanation. Increasing income / improving the current account balance / raise living standards /higher tax revenue (1) if profits Note: common error is to confuse host and home country so returned to home county (1). before awarding marks be clear that the candidate is not writing about the host country. Reduces prices in the home country (1) if goods now produced at lower costs in host countries (1). Reduce unemployment (1) employment of workers from the home countries in host countries / may employ more in head office (1). Higher revenue for firms (1) which may increase their profits (1) can gain subsidies/grants from host countries governments (1) May e.g. be able to dump waste materials / reduce pollution (1) host countries may have fewer rules and regulation (1). 3(c) Analyse how an increase in productivity can affect 6 Candidates need to be clear about distinction between unemployment. productivity and production. Coherent analysis which might include: An increase in productivity will lower average costs of production (1) may increase output / revenue (1) raise firms’ profits (1) may encourage firms to expand / attract MNCs (1) employ more workers (1) reducing unemployment (1). An increase in productivity will make firms more competitive internationally (1) leading to more exports (1) and higher demand for labour further reducing unemployment (1). May enable the same or more output to be produced with fewer workers (1) saving money / increasing profits (1) may increase unemployment (1). Higher productivity may mean higher wages (1) raising consumption / demand for goods and services (1) more incentive to seek employment / leading to more employment (1). Increase productivity may be due to capital investment / better equipment /technology (1) could reduce demand for labour (1). 3(d) Discuss whether or not a decrease in a country’s 8 Level Description Marks unemployment rate will reduce poverty. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the Why it might: economic argument, making use of • may increase employment economic information and clear and • may raise incomes logical analysis to evaluate economic issues and situations. One side of the • may enable people to buy more goods and services argument may have more depth than • may reduce the gap between the high-paid and the low- the other, but overall both sided of the paid argument are considered and • More government tax revenue to spend on developed. There is thoughtful benefits/services for poor. evaluation of economic concepts, terminology, information and/or data Why it might not: appropriate to the question. The • may not be an increase in employment – unemployed discussion may also point out the may have left the labour force e.g. emigrated, retired possible uncertainties of alternative • may be in low-paid jobs decisions and outcomes. • may be in part-time jobs • some of the poor are not in the labour force e.g. 2 A reasoned discussion which makes 3–5 homemakers, sick and informal economy use of economic information and clear • may result in inflationary pressures reducing real analysis to evaluate economic issues and situations. The answer may lack incomes • may reduce absolute poverty but may not reduce some depth and development may be one-sided. There is relevant use of relative poverty. economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

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4 Poland is the world’s top exporter of toothpaste, a product that is in inelastic demand. In 2019, some Polish firms producing toothpaste considered a horizontal merger. Also in 2019, the wages of dentists increased globally. This increase was particularly high in the UK where dentists received, on average, a 25% wage rise. (a) Identify two determinants of price elasticity of demand. [2] (b) Explain two advantages to a firm of a horizontal merger. [4] (c) Analyse, using a demand and supply diagram, how the market for toothpaste would be affected by an increase in population. [6] (d) Discuss whether or not an increase in the wages of dentists will increase the number of dentists employed. [8]

Mark scheme: 4(a) Identify two determinants of price elasticity of demand. 2 Availability of substitutes (1) Availability of complements (1) Proportion of income (1) Whether the product is a luxury or a necessity / essential (1) Whether it is addictive (1) Whether the purchase can be postponed (1) Impact of advertising / brand loyalty (1). 4(b) Explain two advantages to a firm of a horizontal merger. 4 One mark for each of two reasons identified and one mark for each explanation. Logical explanation which might include: To gain market power or share / monopoly power / become larger (1) by eliminating a competitor / controlling more of the market (1) can increase prices as fewer competitors (1). To reduce average costs of production (1) by being able to take greater advantage of economies of scale (1) example of economy of scale (1) more competitive internationally (1) may decrease prices / profits (1). To keep up with competitors (1) to avoid being driven out of the market (1). 4(c) Analyse, using a demand and supply diagram, how the 6 Diagram does not need to refer to toothpaste but if not; the market for toothpaste would be affected by an increase analysis must refer to increase in demand toothpaste. in population. Coherent analysis which might include Up to 4 marks for the D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New demand curve shifted to the right (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points E1 and E2 (1). Up to 2 marks for written analysis which might include: An increase in population will mean there are more people to buy / demand toothpaste (1). Price will rise / quantity traded will increase (1). 4(d) Discuss whether or not an increase in the wages of 8 Level Description Marks dentists will increase the number of dentists employed. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why it might: economic information and clear and • increase in demand may cause supply to extend logical analysis to evaluate economic • may encourage more people to train to be dentists issues and situations. One side of the argument may have more depth than • higher pay may increase the standard of living of the other, but overall both sided of the dentists argument are considered and • may persuade current dentists not to leave the developed. There is thoughtful occupation / delay retirement. evaluation of economic concepts, • may cause increased inward migration of qualified terminology, information and/or data dentists appropriate to the question. The discussion may also point out the Why it might not: possible uncertainties of alternative • decrease in supply may cause demand to contract long decisions and outcomes. period of training may discourage people • people may lack qualifications / skills 2 A reasoned discussion which makes 3–5 • people may not find the job enjoyable use of economic information and clear • people may think the job will be too physically analysis to evaluate economic issues demanding e.g. backache and situations. The answer may lack • wages may rise more in other occupations some depth and development may be • may increase costs for dental firms employing dentists / one-sided. There is relevant use of economic concepts, terminology, consumers reducing demand for dentists information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

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5 Palau is a small island country in the Pacific Ocean. It has received considerable financial support from the US. Living standards are thought to be lower in Palau than in the US. Palau imposes some of the highest tariffs in the world. These trade tariffs affect Palau’s current account of its balance of payments. In 2019, commercial bank lending to firms and households in Palau increased. (a) Identify two components of the current account of the balance of payments. [2] (b) Explain two reasons for differences in living standards between countries. [4] (c) Analyse the reasons why a country may impose tariffs on imports. [6] (d) Discuss whether or not an increase in commercial bank lending will increase economic growth. [8]

Mark scheme: 5(a) Identify two components of the current account of the 2 Also accept visible balance, invisible balance, income and balance of payments. current transfers. Trade in goods (1) In addition, accept exports and imports. Trade in services (1) Primary income (1) Secondary income (1). 5(b) Explain two reasons for differences in living standards 4 One mark for each of two reasons identified and one mark between countries. for each explanation. Logical explanation which might include difference in: Rate of employment /level of income (GDP per head) (i) will influence the ability to buy goods and services (1). Productivity (1) resulting in differences in ability to enjoy a different quantity of goods and services (1). Availability of resources / factors of production (1) resulting in differences in productive capacity (1). Level of technology (1) resulting higher quality of goods and services / better sanitation / clean water (1). Healthcare (1) resulting in differences in life expectancy (1). Education (1) causing differences in skills / job outcomes (1). International trade (1) resulting in differences in GDP per head (1). Cost of living (1) affecting ability to buy goods and services (1). Environment (1) level of pollution / density of housing (1). War/conflict (1) causing reduced welfare / opportunity / diverted resources (1). 5(c) Analyse the reasons why a country may impose tariffs 6 on imports. Coherent analysis which might include: To increase the price of imports (1) may reduce demand for imports (1) reduce import expenditure (1) improve the current account position / balance of payments (1) increase demand for domestic firms (1) reduce unemployment (1) increase economic growth (1). To protect infant industries (1) enabling them to take advantage of economies of scale / stop them from being driven out by foreign firms with much lower costs due to size (1). To protect declining industries (1) prevent unemployment rising (1). To protect strategic industries (1) ensure self-sufficiency (1). To discourage demerit goods (1) to improve health / welfare of consumers (1). To stop dumping of overseas goods (1) where goods sold at below cost price / aimed at driving out domestic firms (1). As a source of government revenue (1) e.g. to use to subsidise domestic producers (1). As a countermeasure / retaliation (1) in response to unilateral imposition of tariffs by another country (1). 5(d) Discuss whether or not an increase in commercial bank 8 Level Description Marks lending will increase economic growth. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why it might: economic information and clear and • households may spend more on goods and services logical analysis to evaluate economic • higher total demand may increase output issues and situations. One side of the argument may have more depth than • firms may invest more leading to higher employment the other, but overall both sided of the • higher investment will increase total demand and argument are considered and productive capacity. developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • economy may already be at full employment appropriate to the question. The • higher total demand may increase prices / rate of discussion may also point out the inflation rather than output possible uncertainties of alternative • households and firms may spend on imports decisions and outcomes. • households and firms may borrow to repay past debts • variable interest rate increase could then affect level of 2 A reasoned discussion which makes 3–5 future consumption and investment use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

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