IB Economics Review Questions. Introduction to Economics

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1 IB Economics Review Questions Introduction to Economics 1. Why is the concept of scarcity important in rich countries as well as poor ones? 2. The choice between military products and the provision of health care illustrates the problem of opportunity cost. Explain the nature of the problem, using a production possibility frontier to help you. 3. Explain why countries with different economic systems face the same fundamental economic problems. 4. Economics is primarily concerned with the allocation of scarce resources which have alternative uses. Use a production possibility curve to help you explain this statement. 5. Use production possibility curve diagrams to explain the differences between actual output and potential output and between economic growth and economic development. 6. Explain what is meant by a production possibility curve and use a production possibility curve diagram to explain the concepts of scarcity, efficiency, choice and opportunity cost. 7. Explain how the three basic economic questions would be answered in a free market economy and in a centrally- planned economy. 8. Using a production possibility curve (PPC) diagram, explain the relationship between the economic concepts of economic goods, factors of production and opportunity cost. 9. With reference to the concept of economic growth, explain the difference between a movement along an existing production possibility curve (PPC) and an outward shift in a production possibility curve (PPC). SECTION ONE QUESTIONS (MICROECONOMICS) 1. What alternative solutions might an economist suggest to the problem of traffic congestion? What are the advantages and disadvantages of each of these solutions? 2. Under what conditions can a firm sell the same product at different prices? 3. European governments have a policy of supporting farm incomes with artificially higher prices for certain foodstuffs. What are the economic effects of this on Europe and the rest of the world? 4. Pollution is sometimes said to be an example of market failure. What is meant by this? How might governments encourage markets to work towards helping solve environ- mental problems? 5. In what circumstances might a government use price controls to influence a market?

2 6. Is the existence of monopoly in an industry likely to improve or worsen resource allocation? 7. Why are many industries, such as car manufacturing, becoming more oligopolistic? How are the price and output decisions of firms affected by this trend? 8. Economic theory makes certain assumptions about market conditions, in order to study how firms decide on prices and output. Are these assumptions realistic, and do firms always behave in the real world as Economics textbooks predict? 9. Briefly explain what economists mean by the word market. What kind of problems are markets good at solving, and what are they bad at solving? 10. Why does there appear to be a movement towards oligopoly in certain markets? How does this movement affect the way in which producers make decisions, and how does it affect the welfare of consumers? 11. Evaluate the roles of markets and planning in an economy today? How are these roles likely to change? 12. What are the assumptions behind the model of a perfectly competitive industry in long- run equilibrium? Why do economists make assumptions of this sort? Are such assump- tions realistic? 13. (a) Why are profits important in a market economy? (b) What problems might a country experience if it tries to use the profit motive to produce everything? 14. (a) What are economies of scale, and why have they become so important in modern economics? (b) In view of this importance, why do so many small enterprises operate successfully in the world today? 15. (a) Explain what externalities are and how they may arise. (b) Discuss whether governments should always involve themselves in markets with substantial externalities. 16. (a) What are the main features of an oligopolistic market? (b) Do oligopolies work in favor of, or against the interest of consumers? 17. (a) What do economists mean by externalities or spillover effects? (b) How does an understanding of externalities (spillover effects) assists economists in analyzing environmental problems? 18. (a) What are natural monopolies and why are they considered a danger if left unregulated? (b) Is nationalization of natural monopolies the best method of improving their economic efficiency?

3 19. (a) Distinguish between private costs and benefits and social costs and benefits. (8) (b) Explain how an increase in the number of cars n the roads of a country might lead to a misallocation of resources. (8) (c) Evaluate the ways in which a government might remedy this misallocation. (9) 20. (a) Carefully explain what is it that price, income and cross elasticities of demand are meant to measure. (b) Discuss the practical importance of the concept of price elasticity of demand for (i) business organizations (ii) the government 21. (a) Why do environmental issues cause problems to economists? (b) What solutions might an economist suggest to the problem of overfishing? 22. (a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve. (10) (b) Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on (i) The market for cars. (ii) The market for coal. (15) 23. Monopoly price is higher and output smaller than is socially ideal. The public is a victim. (J.K. Galbraith, 1974) (a) Explain to economic reasoning behind the statement that monopoly price is higher and output smaller than is socially ideal. (12) (b) Do you agree that the public is always the victim of monopoly? Justify your answer. (13) 24. (a) Why are environmental problems considered to be an example of market failure? (10) (b) To what extent can government intervention correct this failure? 25. (a) Under what conditions is price discrimination possible and profitable? (12) (b) Who gains and who loses from price discrimination? Illustrate your answer with examples. (13) 26. (a) Using suitable diagrams, explain why there is likely to be an absence of long run economic profits in perfect competition. (12) (b) To what extent might consumers benefit from increased competition between firms? (13) 27. (a) How does a monopoly maintain supernormal (or abnormal) profit in the long run? (12) (b) Is monopoly always undesirable? (13) 28. Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly. 29. (a) Why is pollution an example of market failure? (10) (b) To what extent can the market system protect the environment? (15) 30. (a) What does an economist mean by efficiency in the operation of a firm? (10)

4 (b) Discuss whether the achievement of efficiency is possible and desirable. (15) 31. (a) What role do prices play in the allocation of resources in free market economics? (b) Evaluate the options available to governments to overcome the failure of markets arising from the production and consumption of demerit goods. Illustrate your answer with the examples where possible. 32. (a) Outline the ways in which monopoly power might arise. (b) Evaluate the extent to which governments should seek to control the growth of monopoly power. 33. National policies and international agreements must be implemented in order to reduce global environmental problems. (a) Using the concepts of market failure, explain the statement above from an economist s point of view. (b) With references to both national policies and international agreements, present and evaluate three solutions that could be recommended by economists. 34. Discuss the economic arguments for and against imposing substantially higher levels of taxation on the sale of alcohol. 35. (a) In what ways do firms operating in different market structures compete? (b) Discuss the view that the more competition there is within each industry, the better. 36. (a) Explain the concepts of maximum and minimum price controls. (b) Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects. 37. (a) Explain how a monopolist may be able to earn supernormal (abnormal) profits in the long run (10 marks) (b) Production by a monopolist will always be against the interests of consumers. Discuss. (15 marks) 38. (a) Explain how profit is determined in perfect competition (10 marks) (b) Whatever the type of market structure, profit maximization will always be the only goal of firms. Discuss. (15 marks) 39. (a) Explain the differences between monopolistic competition and oligopoly as market structures (10 marks) (b) Discuss the differences between a collusive and a non- collusive oligopoly (10 marks) 40. (a) Carefully distinguish between merit goods, demerit goods and public goods (10 marks) (b) Evaluate the view that governments should always intervene in markets for such goods as cigarettes and alcohol (15 marks)

5 41. (a) Explain the necessary conditions for price discrimination to take place (10 marks) (b) Discuss the advantages and disadvantages of price discrimination for consumers and producers (15 marks) 42. (a) Explain how barriers to entry may affect market structure (10 marks) (b) Evaluate the view that monopoly is an undesirable type of market structure (15 marks) 43. (a) Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition (10 marks) (b) Perfect competition is a more desirable market form than monopolistic competition. Discuss. (15 marks) 43. (a) Explain how a firm operating in an oligopolistic market might attempt to increase its market share (10 marks) (b) Evaluate the view that producers, and not consumers, are the main beneficiaries of oligopolistic market structures 44. (a) Explain the determinants of price elasticity of demand. (10 marks) (b) A deterioration in a country s terms of trade will always be disadvantageous for the current account balance. Evaluate this statement using the concept of price elasticity of demand. (15 marks) 45. (a) Explain the concepts of allocative and productive (technical) efficiency. (10 marks) (b) Monopolies are inefficient and therefore always act against the public interest. Discuss this statement. (15 marks) Short Essays MICROECONOMICS 46. Compare the operation of a cartel with the operation of a competitive market. 47. Outline the factors, which determine the shape of a firm's cost curves, using diagrams and an example. 48. In what circumstances will price discrimination be profitable for a firm? 49. Why might the elasticity of supply for a given product vary over time? Give an example. 50. Explain why economists distinguish between the short- run and long- run when examining how the costs of a firm behave as output increases. 51. Use supply and demand analysis to demonstrate why lines of people often form when prices are controlled. 52. With the aid of a diagram describe how knowledge of supply and demand analysis might help a city council, which is looking for ways of reducing traffic congestion in its city centre.

6 53. Explain how the law of diminishing returns is relevant to the problem of insufficient food production in certain countries. 54. How might the elasticity of a demand curve affect the shape of its total revenue curve? 55. In the short- run, at what price level will a perfectly competitive firm be prepared to produce? 56. A government is thinking of raising revenue through expenditure taxes. Why would knowledge of price elasticity s of demand be useful? 57. Using supply and demand curves, explain how buffer stocks might be used to try to stabilize agricultural prices. 58. Under what circumstances might consumers benefit from the existence of a monopoly? 59. In many developed countries the price of house has risen steadily over the recent years, while more and more people have been buying houses. Use supply and demand analysis to explain why this has happened. 60. Explain the difference between diseconomies of scale in the long- run and diminishing returns in the short- run. 61. Define the word cartel and with an example explain what cartels try to achieve. 62. What would be the main externalities of a decision to build a new international airport near your school or home. 63. Discuss how a monopoly might produce a higher output at a lower price than a perfectly competitive industry. 64. Briefly state what is meant by the productivity of a factor. For what reasons might the productivity of land change over time? 65. A government tries to deal with the problem of homelessness by putting rent controls on housing. Use a supply and demand diagram to explain why other policies will also be necessary. 66. Explain why an oligopolistic firm might not wish to alter its prices. 67. What determines whether the supply of a product is price elastic or price inelastic? 68. A government imposes an indirect tax on the supply of a good with zero price elasticity of demand. Using a diagram, explain why consumers, not producers, could in the end pay this tax. 69. A monopolist decided to maximize total revenue instead of maximizing profit. Predict the effect this will have on price and output. Use a diagram to support your prediction. 70. Why is the concept of scarcity important in rich countries as well as poor ones?

7 71. A businessperson believes that halving her prices will double her revenue. Explain why this might not happen. 72. A perfectly competitive industry is turned into a monopoly. Predict the effect on price and output. 73. In what circumstances might the existence of a monopoly benefit the public? 74. In some countries the price of houses rises while the demand for houses rises. Using supply and demand analysis, explain why this statement does not contradict the law of demand. 75. How might a firm be able to stay in business in the short- run, even if it is not covering all of its costs? 76. What are the distinguishing features of a pure public good? 77. Show how a supply and demand diagram could be used by an economist to help predict the possible results of introducing a national minimum wage. 78. A survey among 200 passengers on an aircraft reveals that people might have paid 50 different prices. Why has this happened? 79. The choice between military products and the provision of health care illustrates the problem of opportunity cost. Explain the nature of the problem, using a production possibility frontier to help you. 80. Using a suitable diagram, predict what will happen to efficiency when a competitive industry is monopolized. 81. Explain why countries with different economic systems face the same fundamental economic problems. 82. Why might a firm be interested to know the various elasticities of demand for its product? 83. What is meant by market failure? Explain why pollution may cause market failure. 84. Explain why the price elasticities of both demand and supply of primary commodities tend to be relatively low in the short- run. 85. In what ways might a company operating within an oligopolistic market structure attempt to increase its share in the market? 86. Why does the weekly price of a hotel room in a popular holiday resort vary through the year? 87. What are the distinctions between decreasing returns to scale and diminishing marginal returns?

8 88. Distinguish between the law of diminishing returns and decreasing returns to scale. 89. Why is pollution an example of market failure? Use a diagram to illustrate your answer. 90. The price of tickets for a major tennis tournament is fixed by the organizing body. At the set price, many more people wish to attend the tournament than there are seats available. Draw a diagram to illustrate this situation and use your diagram to examine the likely consequences. 91. A bus company decided to reduce passenger fares. Explain the possible outcomes of this decision using economic concepts. 92. What is a positive externality? Give an example and illustrate your answer with a diagram. 93. Why do some oligopolistic firms engage in non- price rather than price competition? 94. Economics is primarily concerned with the allocation of scarce resources which have alternative uses. Use a production possibility curve to help you explain this statement. 95. Explain how indirect taxation may be an appropriate response to the problem of negative externalities. 96. Explain why firms operating in a perfectly competitive market would be able to make only normal profits in the long run. 97. Why do the prices of agricultural goods tend to fluctuate more than those of manufactured goods? 98. A government increases taxation on the sale of tobacco. Using a diagram explain how this might affect consumers and producers of tobacco. 99. Using a diagram explain how allocative and productive efficiency will be achieved in long run equilibrium in perfect competition As price falls, quantity supplied falls. As supply increases, price falls. Use supply and demand analysis to explain why these two statements do not contradict each other Why is the concept of income elasticity of demand likely to be important for a producer of an agricultural product? Use supply and demand analysis in your answer A firm in perfect competition is producing at the profit maximizing output but making a loss. Using diagrammatic analysis explain how this is possible Use a diagram to explain why the under provision of merit goods is considered to be an example of market failure.

9 104. Use a diagram to explain how producers and consumers might benefit from a government subsidy to an industry With the help of a diagram, explain how a buffer stock scheme is expected to work A monopolist decides to maximize profits rather than revenue. Using a diagram, explain how price and quantity will change a. Explain why Veblen goods are an exception to the law of demand b. To what extent can a firm in monopolistic competition earn supernormal (abnormal) profits? c. Compare the impact of an indirect tax on the market for cigarettes with the impact of an indirect tax on the market for holidays Use production possibility curve diagrams to explain the differences between actual output and potential output and between economic growth and economic development Explain the relationship in the short- run between the marginal costs of a firm and its average total costs Using appropriate diagrams, explain the difference between the law of diminishing returns and economies of scale Using demand and supply analysis, explain how resources are allocated through changes in prices in a market economy Define cross elasticity of demand and using diagrams explain what determines whether cross elasticity is positive or negative Using appropriate diagrams, discuss whether monopoly is more efficient or less efficient than perfect competition 114. Use a diagram to explain how the incidence (burden) of a tax is shared among producers and consumers when an ad valorem indirect tax is placed on a good which has relatively inelastic demand A monopoly firm decides to maximize revenue rather than profit. Use a diagram to explain what will happen to price and quantity Normally, it would be expected that more would be demanded at lower prices as opposed to higher prices, all other things being equal, but this may not always be the case. Explain this statement Explain the law of diminishing returns using average and marginal product curves Explain how scarce factors of production are allocated by the free market.

10 119. With the help of a diagram, explain when a firm should shut down in the short run Explain the concept of a natural monopoly 121. Explain what is meant by a production possibility curve and use a production possibility curve diagram to explain the concepts of scarcity, efficiency, choice and opportunity cost A concert is being held in a stadium with limited seating capacity. The organizers set the ticket prices at a level below the equilibrium price. Using a diagram, explain the possible consequences of their decision Using at least one diagram, explain the difference between profit maximization and sales revenue maximization as goals of the firm Explain how the three basic economic questions would be answered in a free market economy and in a centrally- planned economy Using diagrams, explain the difference between the short- run and long- run profit maximizing positions of a firm in monopolistic competition Explain how the burning of fossil fuels (e.g. coal) by industries could create a market failure and a threat to sustainable development Draw a diagram of a perfectly competitive firm in short- run equilibrium. Assume this firm is earning economic profits. Be sure to identify all relevant cost and revenue curves and the area of profit. SECTION TWO QUESTIONS (MACROECONOMICS) 1. Can government macroeconomic demand management policies raise the real output of an economy in the long- run? 2. Most nations tax personal income. What are the arguments for and against personal income taxes? At what rates would you recommend setting income taxes? How would considerations of equity and efficiency influence your decision? 3. Unemployment can either be structural or cyclical. How would government intervention differ in each case? 4. Under what conditions are high interest rates likely to benefit or damage a country's economy? 5. A reduction in unemployment is desirable, but it is certain to lead to other problems, such as inflation or balance of payments difficulties. Discuss.

11 6. Discuss the view that unemployment is a more serious economic problem that inflation. Why might Keynesian and Monetarist economists disagree on questions like this? 7. Distinguish between supply side policies and demand management policies. Why do many governments now appear to wish to focus increasingly on the supply side? 8. Discuss whether there is a relationship between money supply and inflation. 9. Why might knowledge of the value of the multiplier be useful to government policy makers? Should governments make more use of this and other Keynesian ideas, or should they adopt non- Keynesian policies? 10. Why is investment important to a country? Why do some countries have lower rates of investment than others and what is the role of the government in encouraging investment? 11. What are the social costs of unemployment? In view of these costs, why do some countries give higher priority to tackling other problems such as inflation and balance of payments difficulties? 12. A government introduces supply side policies in order to have a flexible work force. Describe the policies, which might be introduced. Consider whether such policies would be worthwhile. 13. (a) What is monetarism? (10) (b) How would a monetarist s view of economic problems (such as inflation and unemployment) and policies differ from that of a Keynesian? (15) 14. Evaluate the costs and benefits for a country if its government adopts privatization as a major policy. 15. (a) Is full employment possible? (b) Is full employment desirable (c) Do international trading blocks such as NAFTA or the EU increase or reduce unemployment? 16. To what extent is it wise for governments to follow a policy of always balancing their national budgets? 17. (a) Briefly explain the various objectives of macroeconomic policy. (b) Critically examine the view that the control of inflation should always be the most important objective of governments. 18. Is there a long- term trade- off between inflation and unemployment? 19. (a) Explain how governments can use fiscal policy to redistribute income. (b) Evaluate the advantages and disadvantages of policies aimed at reducing income inequalities

12 20. What is wanted is not inflation (a rise in the general price level) or deflation (a fall in the general price level) but price stability. Discuss. 21. (a) What are the consequences of unemployment in an economy? (b) Examine the strategies that may be used to reduce unemployment, referring to more developed countries and less developed countries in your answer. 22. (a) What are the main macroeconomic objectives of government? (b) Assume the government chooses to pursue one of these objectives. Evaluate the possible consequences for the other objectives. 23. Evaluate the view that the achievement of price stability should be the major objective of government economic policy. 24. (a) With the help of diagrams distinguish between demand- pull and cost- push inflation. (b) Explain which policies would be appropriate to deal with these two types of inflation 25. Unemployment remains persistently high in a majority of countries throughout the world (a) Explain the economic problems that high unemployment may cause for a country. (b) Discuss the reasons why governments find the goal of full employment difficult to achieve. 26. Evaluate the effectiveness of demand- side and supply- side policies in the short and long run. 27. (a) What are the possible causes of inflation? (b) Evaluate possible policies that might be used to lower the natural rate of unemployment 28. (a) Using suitable examples, explain the difference between the multiplier and the accelerator (b) Evaluate the proposition that the most effective way to reduce unemployment is through the use of demand- side policies. 29. (a) Explain the relationship between the Lorenz curve and the GINI coefficient (b) Evaluate the effectiveness of the various methods that government may use to redistribute income 30. (a) Explain the difference between demand- side and supply- side policies (b) Higher economic growth can only be achieved through the implementation of supply- side policies 31. (a) Explain how interest rates can be used to bring about an increase in economic activity (b) Discuss the strengths and weaknesses of demand- side policies

13 32. (a) What are the causes of inflation (b) Evaluate the possible effects of a persistently high inflation rate on a country s current account balance and its exchange rate 33. (a) Explain why a government might find it difficult to maintain a low rate of inflation as the economy approaches full employment (b) Evaluate the proposition that the priority in economic management should be the maintenance of low unemployment 34. (a) Using one or more diagrams, explain the difference between the equilibrium level of national income and the full employment level of national income (b) Evaluate the policies a government may use to increase the full employment level of national income 35. (a) The effect of a decrease in aggregate demand on output and the price level depends on the shape of the aggregate supply curve. Explain this statement. (b) Evaluate the likely effects of a falling rate of inflation on the performance of an economy 36. (a) Explain the difference between progressive taxation and regressive taxation. (b) Evaluate the possible effects of a decrease in direct taxation on a country s inflation rate, unemployment rate and balance of payments. Short Essay Questions MACROECONOMICS 37. What difficulties arise in measuring unemployment? 38. Outline the difference between a short- run long- run Phillips curve. (HL Only) 39. Once statisticians have collected data on the different types of expenditure within a country, what are the main problems that have to be overcome in order to use these figures to arrive at an estimate of national income? 40. Explain how the multiplier and the accelerator might be linked to each other. 41. Explain the concept of the Natural Rate of Unemployment. 42. Explain how double counting can occur in calculating national income, and how measuring value added can overcome this problem.

14 43. Explain why some countries might find it difficult to achieve full employment at the same time as avoiding a balance of payments problem. 44. Why might knowledge of the shape of a country s Phillips Curve might be useful to government officials? 45. What is demand- deficient (cyclical) unemployment and what can be done about it? 46. Keynesians and Monetarists have different views of the likely shape of a country s aggregate supply curve. Using diagrams, show how these shapes can affect macroeconomic policy. 47. What measures would you need to take in order to calculate the value of a country s multiplier? 48. How would a change in the marginal propensity of import affect the value of the multiplier? 49. Explain why a country coming out of a recession might experience a balance of payments deficit. 50. What are the main problems involved in obtaining a measure of inflation? 51. For what reasons might a country s Gross Domestic Product at factor cost be higher than its Gross National Product at factor cost? 52. State what Keynesian economists mean by the equilibrium level of income and the full employment level of income and explain why these two levels of income might not be equal to each other. 53. Discuss why higher interest rates may be good news for some people, but bad news for others. 54. Why might an increase in government expenditure have a greater multiplier effect than a corresponding reduction in direct taxes? 55. What is structural unemployment and what measures might governments take to combat it? 56. A company builds a new production unit in a certain country. Explain how this investment is likely to have a multiplier effect, and discuss reasons why this effect might take time to work. 57. Why might an increase in a country s budget deficit be followed by an increase in its external trade deficit? 58. What is crowding out and why do some economists consider it important? 59. What is the natural rate of unemployment? 60. What is demand pull inflation and what can governments do about it?

15 61. Define crowding out. What is its importance in macroeconomic policy modelling? 62. Use an aggregate demand/aggregate supply diagram to analyse the likely effects of an increase in interest rates. 63. Examine two reasons why a government might wish to control increases in its expenditure. 64. Use an aggregate demand / aggregate supply diagram to analyse the likely effects of an increase in income tax. 65. Explain why might the goal of full employment conflict with the goal of economic growth? 66. Use an aggregate demand/aggregate supply diagram to explain how cost push inflation may occur and outline two ways in which it might be controlled. 67. Explain two policies that a government might use to deal with the problem of demand- deficient (cyclical) unemployment. 68. What are the likely consequences of deflation for a country s economy? 69. Using an appropriate diagram, explain how economists measure income distribution. 70. Use the Phillips Curve to explain the concept of the natural rate of unemployment. 71. Explain the multiplier effect of an increase in government spending. 72. Using AD/AS diagrams, analyze the likely impact on an economy of the following: (a) a general rise in wage costs (b) the discovery of new raw material sources (c) capital stock increases. 73. Explain how an increase in government spending can lead to crowding out. 74. Explain how a progressive tax system may be used to redistribute income. 75. Macroeconomic equilibrium does not necessarily occur at full employment. Explain this statement using the concepts of inflationary and deflationary gaps. 76. With the use of example, explain the difference between a progressive and a regressive tax. 77. A government decides to raise personal income tax rates. Using diagrams, explain one possible demand side consequence and one possible supply side consequence of this decision. 78. Explain two ways a government can reduce its natural rate of unemployment.

16 SECTION THREE QUESTIONS (INTERNATIONAL ECONOMICS) 1. Outline the methods used by governments to stabilize exchange rates, and discuss their advantages and disadvantages. 2. A country wishes to appreciate its currency (to raise its value) against other national currencies. What are the alternative policy tools at its disposal? What are the advantages and disadvantages of each? 3. Why are monopolies and mergers a cause of international concern? 4. Balance of payments surpluses on current account are good; deficits are bad. Critically discuss this statement. 5. It has been observed that the world might be splitting into large trading blocks. What is a trading block, and how might this trend affect world trade and living standards? 6. How might a depreciation of an exchange rate affect the Balance of Payments on current account? 7. What factors determine the exchange rate of one currency against another? In what ways can changes in the exchange rate affect the domestic economy of a country? 8. What would be the main difficulties involved in establishing a common currency for the whole world? If such a thing were attempted, what would be the advantages and disad- vantages for an individual country, such as the one where you live or study? 9. Discuss why the idea of comparative advantage is important to developing countries, and explain how comparative advantage can change over time. 10. Why are many international markets becoming dominated by a relatively small number of large companies? What are the economic consequences of this trend? 11. A certain country experiences persistent balance of payments deficits. Why might this occur? Is it necessarily a serious economic problem? 12. If protectionism is such a bad thing, why have so many countries joined trading blocks? 13 (a) What is a floating exchange rate system and what factors influence the level of a country s exchange rate? (b) Do floating exchange rates accurately reflect the relative values of a country s goods and services? 14. Most modern mass production techniques can be performed in most countries and climates with almost equal efficiency. Consider this statement with respect to the theo- ries of comparative and absolute advantage.

17 15. (a) What problems might a country face if it experiences a persistent deficit in the current account of its balance of payments? (b) Evaluate the alternative ways in which such a deficit might be reduced or eliminated. 16. Whether the exchange rate rises or falls there are always losers. Evaluate this statement from a domestic and/or global perspective. 17. (a) Explain the various factors that could cause a change in the terms of trade for a country. (b) Discuss, with reference to less developed countries, the possible consequences of a deterioration in the terms of trade. 18. Evaluate the extent to which the international trading system has contributed to economic growth in developed countries? 19. Explain the factors which cause the value of a currency to change under a floating exchange rate. Evaluate the extent to which an appreciation of a currency may harm an economy? 20. (a) Explain the components of the balance of payments. (b)evaluate the extent to which the balance of payments may be controlled by the manipulation of interest rates. 21. (a) Explain the theory of comparative advantage (b) Given the benefits of specialization, evaluate reasons why countries might choose not to specialize 22. (a) Describe the factors which might cause a change in a country s terms of trade (b) Evaluate the significance for less developed countries of a deterioration in the terms of trade 23. (a) Explain the concepts of trade creation and trade diversion (b) Explain the advantages and disadvantages of joining a trading bloc 24. (a) Explain why an improvement in a country s terms of trade does not always lead to an improvement in its balance of payments on current account (10 marks) (b) An economy is currently experiencing a deficit on the current account of its balance of payments. The government is considering either allowing the exchange rate to fall or reducing aggregate demand. 25. (a) What are the causes of inflation (b) Evaluate the possible effects of a persistently high inflation rate on a country s current account balance and its exchange rate

18 26. (a) Explain the various factors which may affect an exchange rate in a floating exchange rate system (b) Evaluate a government decision to adopt a floating exchange rate system as opposed to a fixed exchange rate system 27. (a) Explain three factors that influence the value of a country s exchange rate (b) Evaluate government/central Bank intervention in the foreign exchange market to reduce the value of the exchange rate 28. (a) Explain the principle of comparative advantage and the benefits which might arise from free trade (b) Evaluate the importance of membership of a trading bloc for the export performance of a country Short Essays INTERNATIONAL ECONOMICS 29. Outline the principle of comparative advantage. Does it explain modern international trade? 30. Examine the argument that floating exchange rates are preferable to fixed exchange rates. 31. How do tariffs affect economic welfare? 32. What is meant by an improvement in the terms of trade? Does it necessarily improve a nation s balance of trade? 33. Explain why a current account balance of payments deficit may or may not be a problem. 34. Distinguish carefully between what is measured by the terms of trade and the balance of trade. 35. Using supply and demand curves, explain how a government might try to keep the exchange rate of a currency at an artificially high level. 36. What economic theories could be used to justify WTO s promotion of more free trade in services? 37. What are the main features of a free trade area? 38. A firm is trying to sell in export markets. What factors can influence its competitiveness? 39. Explain how changes in interest rates can be expected to affect exchange rates. 40. Many people never travel to another country and never need to exchange currencies. Explain how their everyday lives can still be affected by exchange rates. 41. Explain why, in theory, freely floating exchange rates would automatically correct a balance of payments disequilibrium?

19 42. With the aid of a supply and demand diagram explain how changes in imports and exports can be expected to affect a floating exchange rate. 43. A country wishes to improve its comparative advantage in producing manufactured goods. What does this mean and how it might be achieved? 44. Explain why deterioration in the terms of trade could bring about an improvement in the balance of payments on current account. 45. For what reasons might a country s exchange rate rise? 46. What factors determine the competitiveness of a country in international trade? 47. Use demand and supply analysis to explain the possible effects of currency speculation on a country s exchange rate. 48. A government decides to raise interest rates. How might this affect the external account? 49. Explain why deterioration in the terms of trade could bring about an improvement in the balance of payments on current account. 50. Explain why the depreciation of a country s exchange rate might not improve its balance of payments? 51. Explain the effects of inflation on a country s international competitiveness. 52. What is a voluntary export restraint and who is likely to benefit from it? 53. What impact is a substantial rise in the level of interest rates in a country likely to have on its balance of payments? 54. Why might a country s current account balance worsen as it approaches full employment? 55. Explain two benefits, which might arise from international trade. 56. Explain how in theory balance of payments deficits and surpluses on current account are automatically adjusted under a system of flexible exchange rates. Illustrate your answer using supply and demand analysis. 57. How would deterioration in the terms of trade affect the current account of a country? 58. Why are the concepts of trade creation and trade diversion important for a country that is considering joining a customs union? 59. Why might a government prefer to negotiate Voluntary Export Restraints (VERs) rather than impose tariffs as a means of restricting international trade?

20 60. Using an example, explain how the concept of opportunity cost is a key element in the theory of comparative advantage 61. With reference to the Marshall- Lerner condition, explain how the depreciation of a country s exchange rate might affect its current account balance. 62. Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff 63. Explain the link between the Marshall- Lerner condition and the J- curve effect. 64. Using the principle of comparative advantage, explain why economic theory suggests that countries should specialize and trade with each other. 65. Explain two reasons for an improvement in a country s terms of trade. 66. Explain why a depreciation of a country s exchange rate may not always lead to an improvement in its current account of the balance of payments. 67. Using a diagram or a numerical example, explain how the concept of comparative advantage determines which goods or services a country should export. SECTION FOUR QUESTIONS (DEVELOPMENT ECONOMICS) 1. How could industrialized countries best assist less developed countries to achieve higher levels of real income? 2. What are the determinants of economic growth? 3. Do the activities of multinational companies help or hinder the progress of economic development? Justify your answer. 4. Some economists have begun to refer to some countries as Newly Industrialized Countries (NICS). Explain and discuss the strategies that a Less Developed Country (LDC) might adopt if it wishes to become a NIC. 5. A multinational enterprise decides to make a large investment in Gondomar, a less developed country. Examine the possible economic costs and benefits of this decision for the economy of Gondomar. 6. Some countries, such as India, have tended to use inward orientated development strategies, while others, such as South Korea, have used outward orientated strategies. Describe the main features of each type of strategy, and discuss and evaluate their ad- vantages and disadvantages. 7. What government policies can encourage rapid and sustainable economic development? Is development possible without government intervention?

21 8. As an economist, how would you tackle the task of comparing the welfare of a citizen of a country like India with that of a citizen of a country like the United States? What would be the main problems involved? 9. What are the economic costs and benefits which a less developed country can expect when it receives aid from a more developed country? Explain whether aid or trade would be more effective. 10. Explain how and why economists are attempting to find ways of measuring economic development as distinct from growth. 11. (a) What are the different forms that international aid might take? (b) Discuss the view that giving aid simply creates the need for further aid. 12. (a) What are the main forms of aid provided for Less Developed Countries? (b) What is more effective in promoting development, aid or trade? 13. (a)what is foreign direct investment (FDI) and what role does it play in the economic development of less developed countries? (b) Compare the effectiveness of FDI with other sources of investment. 14. (a) What factors explain the growth in importance of multinational corporations over recent decades? Illustrate your answer where possible by making reference to your own or other countries. (b) Do multinational corporations work in favor of, or against the interests of Less Developed Countries? 15. A country decides to change from an inward oriented development strategy to an outward oriented development strategy. (a) What changes in economic policy would be made? (b) Discuss the likely consequences of this change in policy. 16. (a)discuss the main problems involved in measuring he national income of a country. (b) Why do many economists prefer to use composite indexes, such as the Human Development Index, as well as national income figures, to indicate living standards? 17. Is economic growth compatible with the protection of the environment? Discuss with reference to sustainable development. 18. (a) Under what circumstances might a country achieve economic growth without economic development? (b) Evaluate the effectiveness of outward- orientated strategies in achieving growth and development. 19. (a) Why have multinational corporations grown so rapidly in recent decades? (b) Do multi- national corporations help or hinder the less developed countries?

22 20. (a) What are the arguments in favor of unrestricted flows of financial capital between countries? (b) How might unrestricted capital flows be damaging to less developed countries? 21. According to the World Bank, an extra 10 billion dollars in aid could lift 25 million people a year out of poverty - so long as it went to poor countries that manage their economies well. The same sum spent across the current distribution of aid recipients would lift only 7 million out of poverty. (a) What are the economic arguments in favor of using aid as part of a development policy for less developed countries? (b) How far would you agree with the World Bank view that aid has failed as a development policy because of the poor economic management policies that less developed countries have adopted? 22. (a) Using examples, explain the difference between economic growth and economic development. (b) Is economic growth always a desirable policy objective for a government? 23. To what extent has the international trading system contributed to economic growth and development in less developed countries? 24. (a) Describe the main barriers to economic development that countries may experience. (b) Evaluate the view that countries with a more equal distribution of income and wealth are more likely to experience higher levels of development. 25. Evaluate the view that investment in human capital is the most effective way to promote economic development. 26. (a) Explain how economists might measures the extent to which living standards vary between countries. (b) Evaluate the ways in which More Developed Countries might help Less Developed Countries to raise living standards. 27. (a) Explain the different forms of aid that may be available to a developing nation. (b) To what extent is aid effective in terms of addressing the problems faced by LDCs? 28. (a) Using examples, describe various sources of funds available to developing countries through trade and aid (b) Evaluate trade and aid as a means of achieving economic growth and development. 29. (a) Explain the main characteristics of a market economy (b) Evaluate the proposition that economic development is best achieved through the market system

23 30. (a) Explain two significant barriers to economic growth in LDC s (b) Evaluate strategies that may be used to overcome the two barriers identified in (a) 31. (a) Explain how an increase in the quantity and quality of a nation s factors of production can promote economic development (b) Evaluate the impact of globalization on the economic development of developing countries 32. (a) explain why a firm may benefit from becoming a multinational corporation (b) evaluate the effectiveness of FDI as a means of achieving economic growth and economic development in a less developed country 33. (a) Explain the various types of aid which a developing country might achieve) (b) Aid is an effective means of promoting the development of poorer countries. Evaluate this statement. 34. (a) Explain three institutional factors that may contribute to potential economic growth in developing countries (b) Evaluate the view that economic growth will lead to economic development 35. (a) Explain how economic development might be measured (b) Evaluate the view that the most effective way that a government could improve the welfare of its citizens is through the pursuit of faster economic growth. 36. (a) Explain three barriers to economic development for developing countries (b) Evaluate the view that trade is more effective than aid in achieving economic development Short Essays DEVELOPMENTAL ECONOMICS 37. In 1980 Country A (a hypothetical economy) had a Gross National Product of $100 billion, and by 1988 its Gross National Product was $150 billion. What factors must be considered in comparing welfare in 1980 with that in Outline the operations of the International Monetary Fund in the world economy. 39. Why is the concept of income elasticity of demand useful to economists studying the economic development of countries? 40. How might an economy be affected by an increase in the average age of a population? 41. Gondomar and Bayona are two neighboring countries. Gondomar has a higher rate of investment whereas Bayona spends a higher proportion of its national income on consumer goods. How might these differences affect their relative growth rates in the future? 42. Which indicators, other than National Income, might be used to measure welfare?

24 43. How might the entrepreneur play a role in international development? 44. Briefly contrast the policies of export promotion and import substitution as growth strategies in developing countries. 45. Bayona is a less developed country with only one main export, rice. It imports virtually everything else. Explain how Bayona can be affected by changes in the terms of trade. 46. Using a production possibility curve, explain the difference between a country s actual growth rate and its potential growth rate. 47. Explain how income elasticity of demand can affect the balance of payments of a developing country. 48. Why growth is not exactly the same thing as development 49. As an economy develops, a movement is often observed from primary to secondary to tertiary industry. Suggest reasons why this happens. 50. Why might a less developed country find it difficult to increase investment as a percentage of GDP? 51. The government of a Less Developed Country introduces a national lottery in order to collect revenue. What are the advantages and disadvantages of doing this? 52. Why is the debt problem of Less Developed Countries also a problem for More Developed Countries? 53. Why are vegetables from Africa on sale in European shops, while many Africans are under- nourished? 54. Use a production possibility curve to explain the opportunity costs faced by a country choosing whether to consume or invest 55. A country with an inward oriented development strategy changes to an outward oriented strategy. Outline the differences, which will be noticed by its citizens. 56. Explain what is meant by the phrase sustainable development and discuss ways in which governments can encourage it to take place. 57. Outline the possible advantages of a country specialising in manufactured goods instead of primary products. 58. A Less Developed Country exports tea and imports most of its consumer durables. Explain why the terms of trade are likely to move against this country and discuss the consequences.