Cambridge IGCSE Economics 0455 — 2023 Feb/March Paper 2 · Variant 2

1 (a) Calculate the value of US imports from China in 2020. [1] (b) Identify two causes of the increase in the quantity of US factors of production. [2] (c) Explain one way that import tariffs could improve the US economy. [2] (d) Explain two reasons why the US inflation rate fell in 2020. [4] (e) Draw a demand and supply diagram to show the effect of an increase in the price of a complement on the market for ice cream. [4] (f) Analyse the relationship between government spending and unemployment. [5] (g) Discuss whether or not a central bank should aim for a low inflation rate. [6] (h) Discuss whether or not economic growth benefits everyone in the US. [6]

Mark scheme: Question Answer Marks Guidance 1(a) Calculate the value of US imports from China in 1 Accept the correct figure without the $ sign. 2020. 560 000 000 000. 5.6  10^11 $560bn (1). 1(b) Identify two causes of the increase in the quantity 2 If more than two causes given, consider the first three. of US factors of production. Accept increase in labour for increase in the labour force. Land reclamation (1) increase in the labour force (1). 1(c) Explain one way that import tariffs could improve 2 One mark for a way identified and one mark for an explanation. the US economy. If more than one way identified, consider the first two. Could improve the current account / trade in goods / To gain two marks, one mark must come from improving the trade in goods and services / balance of payments (1) current account, increase output or raise tax revenue. by reducing imports / making domestic goods more competitive with imports / raising the price of imports Could raise more revenue is not sufficient – need more tax (1) revenue or more government revenue / income. Could increase output / cause economic growth (1) by increasing demand for US goods / raise employment (1). Could raise tax revenue (1) allowing the government to spend more on (e.g. education) / improve the (government budget position) (1). 1(d) Explain two reasons why the US inflation rate fell 4 One mark each for each of two reasons identified and one mark in 2020. each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. Fall in consumer expenditure (1) lower total demand / reduce demand-pull inflation (1). Reduction in bargaining power may also be linked to lower total Reduction in workers’ bargaining power (1) fall in demand. wage rises / wages / fall in rise in costs / fall in costs / reduce cost-push inflation (1). Higher unemployment (1) reduces confidence / lower total demand / fall in consumer spending (1). Fall in (real) GDP (1) lower incomes / purchasing power / lower total demand (1). Current account deficit (1) lower total demand / reduce demand-pull inflation (1). 1(e) Draw a demand and supply diagram to show the 4 effect of an increase in the price of a complement on the market for ice cream. Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Demand curve shifted to the left (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(f) Analyse the relationship between government 5 Alternatively, some candidates may argue that changes in spending and unemployment. unemployment, could lead to changes in government spending. Credit both responses. Coherent analysis which might include: Overview: Inverse relationship / negative relationship (1) generally, the higher government spending, the lower the unemployment rate (1). Supporting evidence: E.g. 2015 to 2019, government spending increased and unemployment fell / 2015 to 2017 government spending increased and unemployment fell (1) processing / interpreting of data e.g. between 2015 to 2019, government spending rose by $700bn and unemployment fell by 1.6% (points) (1). Analysis of the expected relationship: • higher government spending will increase total demand (encouraging firms to expand and employ more workers) (1) • higher government spending may be on e.g. education, training, infrastructure, subsidies which could increase workers’ chances of gaining jobs (1) • higher employment will provide more tax revenue for the government to spend / lower employment will reduce tax revenue for the government to spend (1). Exception: 2020 (1) both government spending and unemployment rose / government spending and unemployment both at their highest (1). 1(f) Analysis of the exception: • government spending on unemployment benefits may have increased / rise in government spending not enough to stop GDP / consumer expenditure falling / GDP fell / there may be a time delay before higher government spending reduces unemployment (1). 1(g) Discuss whether or not a central bank should aim 6 May approach the answer from the point of view of the for a low inflation rate. disadvantages of high inflation. 2nd side should examine either the possible negative effects of Award up to 4 marks for logical reasons why it should, what the central bank may do to reduce the inflation rate or the which may include: possible loss of any beneficial effects of high inflation. • can increase international price competitiveness (1) improve the current account balance / No marks for possible effects on the exchange rate. increase exports (1) increase employment / reduce unemployment (1) Apply this example to all questions with the • can create certainty (1) which may increase command word DISCUSS confidence (1) which may encourage investment / (1g, 1h, 2d, 3d, 4d and 5d) attract MNCs (1) which may increase output / result in economic growth (1) Each point may be credited only once, on either side of an • can prevent a random redistribution of income (1) argument, but separate development as to how / why the outcome e.g. protect savers (1) may differ is rewarded. • may protect purchasing power (1) by promoting price stability (1) Generic example Mark • maintain / increase living standards (1) if wages rise by more than the price level (1) Tax revenue may decrease… 1 • can avoid fiscal drag (1) prevent people being put in higher tax brackets (1) ...because of reason e.g. incomes may be lower. 1 • can reduce menu / shoe leather costs (1) reduce firms’ costs of production (1). Tax revenue may increase because incomes may be 0 higher i.e. reverse of a previous argument. Award up to 4 marks for logical reasons why it should not, which may include: Tax revenue may increase because of a different 1 • increases in the rate of interest (1) contractionary reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may monetary policy (1) can reduce consumer stimulate the economy more than spending on expenditure / can reduce investment (1) can education. reduce total demand (1) 1(g) • lower total demand can increase unemployment (1) cyclical unemployment (1) reduce economic growth (1) • low inflation can turn into deflation (1) leading to a recession (1) • makes it harder to pay off debt (1) increasing the risk of firms going out of business / households getting into difficulties (1) • central bank may aim for economic growth / low unemployment (1) higher demand-pull inflation may provide more encouragement to firms to expand (1). 1(h) Discuss whether or not economic growth benefits 6 everyone in the US. Award up to 4 marks for logical reasons why it might, which may include: • economic growth increases output / GDP (1) increases income per head / higher incomes / higher wages (1) enables more purchasing power / people to enjoy more goods and services (1) • economic growth can increase employment (1) raise living standards (1) may reduce poverty (1) • economic growth can increase tax revenue (1) enabling the government to spend more on e.g. education and healthcare (1) • economic growth may introduce better working conditions (1). Award up to 4 marks for logical reasons why it might not, which may include: • there may be an increase in unemployment due to lack of skills / some industries declining / greater use of capital / capital-intensive production (1) structural unemployment may occur (1) • income is unevenly distributed (1) those on low incomes e.g. the sick may not benefit (1) • higher output may result in external costs (1) e.g. pollution (1) people living near factories may suffer (1) • higher output may be the result of more resources being devoted to capital goods (1) may take time for consumers to benefit from more consumer goods (1) 1(h) • higher output may reduce natural resources (1) reducing future generations’ ability to benefit from them / reduce sustainability (1) • higher output may be the result of workers working longer hours (1) in poor working conditions (1) • may cause inflation (1) adversely affecting the poor / savers (1).

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2 Vietnam has a high number of female entrepreneurs. Some of their firms have grown and now compete with foreign multinational companies (MNCs) and public sector firms. The Vietnamese government encourages MNCs to locate in Vietnam as a host country. It also intervenes in the economy to encourage the consumption of merit goods. (a) Identify two reasons why people become entrepreneurs. [2] (b) Explain two benefits that an MNC can bring to its host country. [4] (c) Analyse how a government could encourage the consumption of merit goods. [6] (d) Discuss whether or not private sector firms are likely to charge lower prices than public sector firms. [8]

Mark scheme: 2(a) Identify two reasons why people become 2 If more than two reasons given, consider the first three. entrepreneurs. To make money / earn a profit (1) to be independent / not having to be told what to do (1) to follow an interest / be innovative / to run / own business (1) willingness to take risks (1) possess good leadership skills (1) easier to set up a firm / lower barriers to entry (1) for self-esteem / status / become well-known (1) flexible working hours (1) unable to find a job (1). 2(b) Explain two benefits an MNC can bring its host 4 One mark each for each of two benefits identified and one mark country. each for each of two explanations. Logical explanation which might include: If more than two benefits given, consider the first three. Increase employment (1) raise living standards / increase income / higher wages / reduce poverty (1). Increase skills (1) provide training to workers (1). Increase exports / reduce imports (1) improve the current account of the balance of payments (1). Increase GDP / output (1) raise economic growth (1). Increase competition (1) raise efficiency / reduce prices (1). Bring in new technology (1) raise quality / raise productive capacity / productivity / reduce costs of production (1). Increase the range of goods and services available in the country (1) raise living standards (1). Increase tax revenue (1) enable the government to spend more (1). Increase infrastructure (1) an MNC may build e.g. roads / reduce e.g. transport costs (1). 2(c) Analyse how a government could encourage the 6 Note: reference to measures to reduce consumption of demerit consumption of merit goods. goods can only be rewarded if clearly linked to switching to alternative merit goods. Coherent analysis which might include: Provide a subsidy (1) reduce any indirect tax (1) lower price (1) make the goods more affordable (1) raise quality (1). Provide information about the benefits of consuming the goods (1) e.g. health campaigns / advertisements (1) overcome information failure (1). Use regulation (1) make consumption compulsory / impose fines for non-consumption (1) e.g. school attendance (1). Provide services such as education / healthcare (1) free to consumers (1). Set maximum price (1) to make the goods more affordable (1) but may create a shortage (1). Measures to reduce demerit goods clearly linked to idea of encouraging substitution of merit goods (1) relevant example (1). 2(d) Discuss whether or not private sector firms are 8 Level Description Marks likely to charge lower prices than public sector firms. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why they might: to evaluate economic issues and • competition may encourage private sector firms to situations. One side of the argument may charge low prices have more depth than the other, but • private sector firms may seek to reduce waste overall, both sides of the argument are and costs to avoid going out of business considered and developed. There is • private sector firms may have more funds to thoughtful evaluation of economic invest concepts, terminology, information and / • higher investment may reduce costs of production or data appropriate to the question. The • may be an MNC with significant economies of discussion may also point out the scale possible uncertainties of alternative decisions and outcomes. Why they might not: 2 A reasoned discussion which makes use 3–5 • profit motive may encourage private sector firms of economic information and clear to charge high prices analysis to evaluate economic issues • private sector firms may be monopolies and situations. The answer may lack • public sector firms may be subsidised some depth and development may be • public sector firms may charge low prices to make one-sided. There is relevant use of the products affordable economic concepts, terminology, • public sector firms may produce on a large scale 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 no 0 creditable content.

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3 In 2019, India became the world’s largest producer of sugar. Sugar cane is grown in the country by a large number of mainly low‑income farmers. They sell sugar cane to mills which process the sugar cane into sugar. Processing the sugar cane is more capital‑intensive than growing it. The Indian government sets a minimum price for sugar cane and subsidises the export of sugar. (a) Define a minimum price. [2] (b) Explain two advantages of capital‑intensive production. [4] (c) Analyse why low‑income farmers are likely to have low living standards. [6] (d) Discuss whether or not a government subsidy on the export of sugar will help it achieve its macroeconomic aims. [8]

Mark scheme: 3(a) Define a minimum price. 2 A price set by e.g. government (1) above the equilibrium price (1). A price floor (1) to encourage higher supply (1) will result in a surplus (1). 3(b) Explain two advantages of capital-intensive 4 One mark each for each of two advantages identified and one production. mark each for each of two explanations. Logical explanation which might include: If more than two advantages are given, consider the first three. Lower costs of production (1) can produce on a large scale / may result in lower prices / higher profits (1). Raise productivity / efficiency (1) higher output / can Accepting lower costs of production as overall lower costs. produce faster (1). Nothing for lower labour costs. Quality may increase / consistency of quality may be greater (1) may increase demand (1). Absence of human error (1) less wastage (1). Capital goods can work long hours (1) need few breaks / no need for holidays (1). Capital goods will not take industrial action (1) will not disrupt production (1). Can eliminate boring / repetitive / physically demanding tasks (1) increase workers’ job satisfaction (1). 3(c) Analyse why low-income farmers are likely to have 6 low living standards. Coherent analysis which might include: May be unable to afford basic necessities / may spend a high proportion of income on basic necessities / low purchasing power / low ability to consume goods and services (1). Unable to save much (1) banks reluctant to lend to them (1) examples of items they may need to borrow to buy which could improve their quality of life (1). Unable to afford good quality housing (1) which can result in poor health / overcrowding (1). Unable to afford good health care (1) good nutrition / food (1) more likely to become ill (1) lower life expectancy (1). Unable to afford good education (1) reduce range of interests (1). Unable to buy good capital equipment for farms (1) making work hard (1). May have to reinvest into their farms giving them less to spend (1). May experience poor working conditions / physically demanding work (1) long hours (1) reducing health (1) Live in rural areas (1) which may lack infrastructure (1). 3(d) Discuss whether or not a government subsidy on 8 Level Description Marks the export of sugar will help it achieve its macroeconomic aims. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why it might: to evaluate economic issues and • lower price of exports and increase their supply situations. One side of the argument may • increase export revenue and improve the current have more depth than the other, but account balance overall, both sides of the argument are • higher output of sugar can contribute to economic considered and developed. There is growth thoughtful evaluation of economic • more people may be employed in growing sugar concepts, terminology, information and / and processing sugar cane or data appropriate to the question. The discussion may also point out the Why it might not: possible uncertainties of alternative • other countries’ sugar may still be cheaper decisions and outcomes. • may make farmers and mill owners lazy 2 A reasoned discussion which makes use 3–5 • sugar sellers may not lower their prices of economic information and clear • demand for sugar may be price-inelastic analysis to evaluate economic issues • introduction of capital equipment may lower and situations. The answer may lack employment some depth and development may be • other countries may retaliate against the subsidy one-sided. There is relevant use of and so current account position may not be economic concepts, terminology, improved information and data appropriate to the • higher exports may increase total demand question. resulting in inflation • opportunity cost – e.g. spending on education 1 There is a simple attempt at using 1–2 which may be more effective. economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

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4 Safiye Ali became the first female doctor in Turkey in 1923. By 2020, 40% of Turkish doctors were women. Over this period, labour productivity increased. Turkey also experienced advances in technology, a change in the current account balance on its balance of payments and a significant increase in the size of its population. (a) Identify two causes of an increase in labour productivity. [2] (b) Explain two reasons why someone may choose to become a doctor. [4] (c) Analyse how advances in technology may improve the current account balance on a country’s balance of payments. [6] (d) Discuss whether or not a country with a high population growth rate is likely to experience a high economic growth rate. [8]

Mark scheme: 4(a) Identify two causes of an increase in labour 2 Nothing for more motivated – TV. productivity. Two from: • improved education • improved training / higher skills • improved healthcare • higher pay / bonuses / lower income tax • better quality capital equipment / advances in technology • shorter working hours / longer holidays • better working conditions / better (fringe) benefits • increased experience • higher unemployment • specialisation 4(b) Explain two reasons why someone may choose to 4 One mark each for each of two reasons identified and one mark become a doctor. each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. High pay (1) resulting in high living standards / caused by low supply / high demand / high number of job vacancies / strong bargaining power / high qualifications / high skills (1). Vocation (1) wanting to help people (1). Interest / job satisfaction (1) enjoying the challenges involved (1). Status (1) doctors are highly regarded (1). Family tradition (1) parents may have been doctors (1). High pensions (1) enabling high living standards during retirement (1). May be good working conditions (1) working inside (1). Job security (1) difficult to replace / essential service (1). (Fringe / non-wage) benefits (1) e.g. pension schemes (1). 4(c) Analyse how advances in technology may 6 Reward but do not expect reference to gaining a comparative improve the current account balance on a advantage. country’s balance of payments. Coherent analysis which might include: Raise productivity / increase efficiency / increase speed of production / increase output (1) reduce costs of production (1) lower prices (1) raise quality (1) create new products (1) increase international competitiveness (1) increase exports (1) reduce imports (1) increase export revenue (1) reduce import expenditure (1) improve trade in goods (and services) balance / reduce a current account deficit / create a surplus / increase a surplus (1). Increase access to information about goods and services (1) promote sales (1). Increase foreign tourism (1) easier to book foreign holidays (1) increase speed of transport (1). Make it easier to keep in contact with branches abroad (1) encourage setting up branches in other countries (1) receive profits from other countries (1) increase primary income (1). 4(d) Discuss whether or not a country with a high 8 Level Description Marks population growth rate is likely to experience a high economic growth rate. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why it might: to evaluate economic issues and • may have an increasing labour force, capable of situations. One side of the argument may producing a higher output have more depth than the other, but • likely to have higher demand, encouraging higher overall, both sides of the argument are output considered and developed. There is • larger markets can enable greater advantage to thoughtful evaluation of economic be taken of economies of scale concepts, terminology, information and / • may have higher tax revenue, enabling the or data appropriate to the question. The government to spend more on e.g. education discussion may also point out the which can promote economic growth possible uncertainties of alternative decisions and outcomes. Why it might not: 2 A reasoned discussion which makes use 3–5 • may have an increase in the number of of economic information and clear dependents, reducing resources which can be analysis to evaluate economic issues devoted to increasing productive capacity and situations. The answer may lack • rise in birth rate may reduce the size of the labour some depth and development may be force as people leave the labour force to bring up one-sided. There is relevant use of children economic concepts, terminology, • resources may be depleted, reducing productive information and data appropriate to the capacity question. • external costs e.g. congestion and pollution may increase which may reduce productivity. 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 no 0 creditable content.

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5 Serbia is the world’s second largest producer of raspberries, a product with elastic demand. Consumers experience the economic problem when buying raspberries. Few raspberry farm workers are members of trade unions. Membership of trade unions in Serbia had fallen to 20% of all workers by 2020. In that year, Serbia had more state pensioners than workers. (a) Identify two determinants of price elasticity of demand. [2] (b) Explain how the economic problem results in consumers having to make choices. [4] (c) Analyse why some workers decide not to join a trade union. [6] (d) Discuss whether or not a government should reduce the amount of money it gives to each state pensioner. [8]

Mark scheme: 5(a) Identify two determinants of price elasticity of 2 If more than two determinants given, consider the first three. demand. Two from: • substitutes • whether a luxury or necessity • proportion of income taken • whether habit forming / addictive • whether the purchase can be postponed • time period • breadth of definition • brand loyalty • number of uses • complements 5(b) Explain how the economic problem results in 4 consumers having to make choices. Logical explanation which might include: The economic problem is unlimited / infinite wants (1) exceeding limited / finite / scare resources (1) resulting in scarcity (1). Consumers have limited incomes (1) and so cannot buy everything they want (1). Buying one product involves an opportunity cost (1) in the form of another product sacrificed / example (1). 5(c) Analyse why some workers decide not to join a 6 trade union. Coherent analysis which might include: Trade unions charge a subscription fee (1) workers cannot afford to join (1) may be unemployed / have low income (1). Government legislation may prevent trade union membership / government may discourage membership (1) may reduce the power of trade unions (1) less benefit from joining (1). Employers may discourage membership (1) may think it will reduce chance of employment / increase chance of unemployment (1) chance of promotion (1). May be satisfied with wages (1) working conditions (1) may have job security (1) no need for collective bargaining (1). May be employed in industries that do not have a history of trade union membership (1). May be reluctant to take industrial action (1) may lose pay during a strike (1). May not agree with the objectives of the trade union (1). May follow example of fellow workers (1). 5(d) Discuss whether or not a government should 8 Level Description Marks reduce the amount of money it gives to each state pensioner. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why it should: to evaluate economic issues and • ageing population can mean the amount of situations. One side of the argument may government spending on pensions rises have more depth than the other, but significantly overall, both sided of the argument are • a reduction in the state pension could reduce a considered and developed. There is budget deficit thoughtful evaluation of economic • may persuade people to work longer, raising concepts, terminology, information and / output and tax revenue or data appropriate to the question. The • paying pensions involves an opportunity cost, discussion may also point out the could spend more on e.g. education possible uncertainties of alternative decisions and outcomes. Why it should not: 2 A reasoned discussion which makes use 3–5 • will reduce living standards of pensioners of economic information and clear • may increase the numbers living in absolute analysis to evaluate economic issues poverty and situations. The answer may lack • will reduce total demand some depth and development may be • lower spending by pensioners could reduce one-sided. There is relevant use of output and increase unemployment. 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 no 0 creditable content.

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