Activities and Exercises for GCSE Economics amy cha… · Activities and Exercises for GCSE...

Anforme Limited

Activities and Exercises for GCSE Economics

Amy Chapman & Innes Robinson

Contents

The basic economic problemTrue or false . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Crossword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Demand and supplyMissing words . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Shifts in the demand and supply curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Crossword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Which curve, which way? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Costs, revenues and profitsDefinitions of key terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Objectives and consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14How firms grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Market failureCrossword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Poster design task . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Saving, borrowing and managing your moneyCrossword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Economic growthThe economic cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27The causes of economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Circle the correct option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

UnemploymentFill in the blanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Costs of unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Policies to reduce unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

InflationTrue or false . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Complete the flow diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Consequences and cures of inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Fiscal policy

Activities & Exercises for GCSE Economics iii

Match the definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Direct and indirect taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51The government budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Taxation of alcohol speech writing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Create a test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Monetary policyWhich statement is correct? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Complete the flow diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Supply side policiesTrue or false . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70How policies increase supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Policies that affect labour and industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Match the head to the tail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Sorting the policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74The UK in recession: policy choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Balance of paymentsFill in the blanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Exports and imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Calculate the balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Exchange ratesTrue of false . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Fill in the blanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89The value of the pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

ProtectionismProtectionist policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Evaluate methods of protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

The EuroArticle for a newspaper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101The European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

GlobalisationFill in the blanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106For and against . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108Absolute advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110Costs and benefits of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112Data response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Activities & Exercises for GCSE Economics iv

Activities & Exercises for GCSE Economics

Amy ChapmanHead of Economics and Business Studies,

Cheltenham College.

Innes RobinsonHead of Economics and Director of the Business School,

Highbury Grove School, Islington.

Published by Anforme Ltd., Stocksfield Hall, Stocksfield, Northumberland NE43 7TN.Tel: 01661 844000 Fax: 01661 844111 e-mail: [email protected] www.anforme.co.uk

ISBN 978-1-905504-40-4 March 2010

The basic economic problem

Activity 1 – True or false

Statement True or False

1. Farming is a primary sector business ___________

2. The NHS is a private organisation ___________

3. A hairdressing salon is a secondary sector business ___________

4. Thomas Cook holidays is a tertiary sector business ___________

5. Opportunity cost occurs because of the basic economic problem ___________

6. Oil is a scarce resource ___________

7. Our wants are scarce ___________

8. Capital is money ___________

Activities & Exercises for GCSE Economics 1

The basic economic problem: Activity 2 – Crossword

ACROSS1. The basic economic problem is about ____________ resources. (6)

3. The basic economic problem is about ____________ wants. (8)

5. Next best alternative foregone. (11,4)

7. Sector of industry which provide services. (8)

8. Human input into the production process. (6)

14. Someone who risks their ideas and money when starting a business. (12)

15. Scarce resources means that these have to be made. (7)

16. What has to be met for basic survival. (5)

DOWN2. Machinery is an example of this. (7)

4. Type of economy where both the government and private firms allocate resources. (5)

6. The sector of industry which includes extraction of raw material. (7)

9. When an individual, group or country produce what they are best at. (14)

10. What to produce is a question asked when ____________ resources. (10)

11. Natural resources on the planet. (4)

12. Organisations owned and run by individuals or groups are called this. (7)

13. Organisations owned and run by the government are in this sector of the economy. (6)


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Suggested answers

The basic economic problem: Activity 1 – True or false


1. Farming is a primary sector business True

2. The NHS is a private organisation False

3. A hairdressing salon is a secondary sector business False

4. Thomas Cook holidays is a tertiary sector business True

5. Opportunity cost occurs because of the basic economic problem True

6. Oil is a scarce resource True

7. Our wants are scarce False

8. Capital is money False

Activity 2 – Crossword


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The basic economic problem: Data response

1. Tick the two correct statements: (2)

More machinery was introduced to help with specialisation

Roy’s cars is in the public sector

Roy’s cars is a primary sector organisation

Production rose when specialisation was introduced

2. (i) For the two incorrect statements rewrite them to make them correct. (2)(ii) Explain why they were incorrect. (2)

3. Using the newspaper article describe an opportunity cost Roy’s cars may face. (2)

4. Explain what is meant by specialisation. (2)

5. Using the article explain how the workers have specialised. (4)

6. Explain how profits may have soared with the introduction of specialisation at Roy’s cars. (6)

7. Discuss the costs and benefits of specialisation for Roy’s cars. (10)

Total marks = 30


Suggested answers

The basic economic problem: Data response

1. More machinery was introduced to help with specialisation

Roy’s cars is in the public sector

Roy’s cars is a primary sector organisation

Production rose when specialisation was introduced

2. (i) Roy’s cars is in the private sectorRoy’s cars is a secondary sector organisation

(ii) Roy’s cars is owned and run by an individual not by the government.Roy’s cars manufactures cars he uses raw materials to produce his cars.

3. The opportunity cost of increasing machinery may have been to increase the number ofworkers.

4. Specialisation is when individuals, firms, regions or countries produce what they are best at.

5. For example Dan only works on the gearbox, other workers will specialise in a particularpart of the production process.

6. Increased productivity (1), define productivity (1) due to better understanding of the joband getting better over time (1) increased productivity leads to lower average costs (1)define average costs (1) lower average costs means profit margins will rise (1).

7. Costs of specialisation – boredom for employees, extra training costs, poor quality productsas employees become complacent, lack of motivation for employees. (5)

Benefits of specialisation – increased productivity, lower average costs, increased profit. (5)


✓

✓

Demand and supply

Activity 1 – Fill in the missing words

Demand is the quantity a buyer is ____________ and able to buy at a given price in a givenperiod of time. The demand curve is ____________-sloping. There is an ____________ relationshipbetween price and quantity i.e. as price rises quantity demanded ____________ .

A change in the price of the good itself causes a ____________ along the demand curve.

Supply is the quantity a producer is willing and able to supply at a given price in a given periodof time. The supply curve is ____________ -sloping. There is a ____________ relationship betweenprice and quantity supplied i.e. as price ____________ quantity supplied also rises.

A change in the price of the good itself causes a movement along the supply curve.

A market is where the forces of demand and supply allocate resources. Where the demand andsupply curves meet it is called the ____________ . This is also the market-clearing ____________ .


Word Boxdownward equilibrium falls

inverse positive price riseswilling movement upward

Demand and supply: Activity 2 – Shifts in the demand and supply curves

For each scenario decide whether it will cause the demand or supply curve to shift, then willit shift right or left. The final part of step one is to briefly explain why this will happen. Oncethis step one is complete use the demand and supply diagram to show how it will affect priceand quantity.

1.

Market for iPhones

2. The UK national minimum wage has increased, I now have to pay my workers more.(Market for cars)

3. I like to drink fizzy drinks, I don’t mind drinking either Pepsi or Coke. Coke have decreasedtheir price. (Market for Pepsi)

4. The government have increased the tax on petrol. (Market for petrol)


I want to buy an iPhone because

all my friendshave one.

This will cause the________ curve to

shift to the ________because

________________________________________________________________________________________________________________________________________________________________________________________________________

Suggested answers

Demand and supply: Activity 1 – Fill in the missing words

Demand is the quantity a buyer is willing and able to buy at a given price in a given periodof time. The demand curve is downward-sloping. There is an inverse relationship betweenprice and quantity i.e. as price rises quantity demanded falls.

A change in the price of the good itself causes a movement along the demand curve.

Supply is the quantity a producer is willing and able to supply at a given price in a given periodof time. The supply curve is upward-sloping. There is a positive relationship between priceand quantity supplied i.e. as price rises quantity supplied also rises.

A change in the price of the good itself causes a movement along the supply curve.

A market is where the forces of demand and supply allocate resources. Where the demand andsupply curves meet it is called the equilibrium. This is also the market-clearing price.

Activity 2 – Shifts in the demand and supply curves

Scenario 1 – This will cause the DEMAND curve to shift to the RIGHT because the iPhonehas come into fashion so more people will want to buy it.

Diagram to be drawn – Demand curve to shift to the right and new equilibrium shown.

Scenario 2 – This will cause the SUPPLY curve to shift to the LEFT because costs ofproduction will rise as wages are a cost of production so firms will supply less.

Diagram to be drawn – supply curve to shift to the left.

Scenario 3 – This will cause the DEMAND curve to shift to the LEFT because Coke and Pepsiare substitutes, the price of Coke falling will mean an increase in demand forCoke which will take consumers away from Pepsi.

Diagram to be drawn – demand curve to shift to the left.

Scenario 4 – This will cause the SUPPLY curve to shift to the LEFT because a tax on petrolis an indirect tax which adds to the costs of production for the firm, this meansthat the firm will supply less.

Diagram to be drawn – supply curve to shift to the left.


Demand and supply: Activity 3 – Crossword

ACROSS1. Demand is said to be this if the buyer is both willing and able. (9)

4. The quantity a producer is willing and able to produce at a given price. (6)

6. A tax on spending. (8)

10. Price x Quantity sold. (5,7)

11. A sum of money given to a firm by the government to reduce the price paid byconsumers. (7)

12. Demand is this when it is very responsive to a change in price. (7)

13. Price elasticity of supply for sporting events. (9,9)

DOWN1. The responsiveness of demand or supply to a change in price. (10)

2. The relationship between price and quantity demanded. (7)

3. One seller in a market. (8)

5. Percentage change in quantity demanded divided by Percentage change in price as an acronym. (3)

7. An increase in this factor input cost will cause the supply curve to shift to the left. (5)

8. An increase in this long term determinant of demand will cause the demand curve to shift to the right. (10)

9. When demand and supply meet. (11)


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Demand and supply: Activity 4 – Which curve, which way?

The situations below relate to the market for private new houses for sale. Put a tick in thecorrect column identifying whether the situation will affect the demand or supply curve,causing a shift right or left.

Which curve? Shift

Demand Supply Right Left

1. Construction workers wages increase

2. Cost of renting increases

3. Cost of bricks falls

4. New government legislation allows planning permission to be quicker

5. Increase in the cost of solicitors fees when buying a house

6. Bank of England reduce interest rates by 0.5%

7. The government offers new house builders a subsidy to increase the number of new houses.

8. Increase in the population

9. A new house builder called My eco home enters the market

10. Average incomes in the UK fall


Suggested answers

Demand and supply: Activity 3 – Crossword

Activity 4 – Which curve, which way?

Which curve? Shift

Demand Supply Right Left

1. Construction workers wages increase ✓ ✓2. Cost of renting increases ✓ ✓3. Cost of bricks falls ✓ ✓4. New government legislation allows

planning permission to be quicker ✓ ✓

5. Increase in the cost of solicitors fees when buying a house ✓ ✓

6. Bank of England reduce interest rates by 0.5% ✓ ✓

7. The government offer new house builders a subsidy to increase the number of new houses.

✓ ✓

8. Increase in the population ✓ ✓9. A new house builder called

My eco home enters the market ✓ ✓

10. Average incomes in the UK fall ✓ ✓


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Demand and supply: Data response

Thousands of fans turned out to see the Spice Girls burst onto the stage at London’s O2 arenafor their first UK concert in December 2007.

Kicking off the UK leg of their 19-date reunion world tour Geri Halliwell was reported to havesaid: “What a crowd! We love you London!”

They went on to perform all their biggest hits during a two-hour show that included eightcostume changes.

More than a million people registered for the chance to get tickets for the show, which soldout in 38 seconds!

At £75 a ticket and a capacity of 23,000 at the O2 the Spice Girls made a lot of money.

1. Explain what is meant by the term demand. (2)

2. Using the Spice Girls concert tickets as an example, explain what is meant by effective demand. (4)

3. Explain what is meant by price elasticity of supply. (3)

4. With the aid of a demand and supply diagram explain why the price elasticity of supply for the O2 arena is said to be perfectly inelastic. (5)

5. “UK government announces new tax on concert tickets.” With the aid of a demand and supply diagram explain how the new tax would affect the market for Spice Girl tickets. (5)

6. Price elasticity of demand for the Spice Girls was very price inelastic. With the aid of a demand and supply diagram explain what this means. (5)

7. With the aid of a demand and supply diagram explain how a maximum price set below the equilibrium would affect the demand for Spice Girls tickets. (6)

Total marks = 30


Suggested answers

Demand and supply: Data response

1. The quantity a buyer is willing and able to buy at a given price in a given period of time.

2. Effective demand is when a buyer is both willing (wants to buy) and able (has the moneyto buy) a product.

Tickets sold out in 38 seconds showing that people were willing and they all paid the £75for each ticket showing they were able.

3. Price elasticity of supply measures the responsiveness of quantity supplied to a change inprice of the good.

Percentage change in quantity suppliedPercentage change in price

4. Perfectly inelastic supply means that supply is notresponsive to a change in price, at the O2 arena supplyis fixed, at 23,000, no more tickets can be supplied inthe short term.

5. A tax on concert tickets is an indirect tax which willusually shift the demand curve to the left. This will causethe quantity to fall (the fall in quantity will depend onthe elasticity of demand). However given the high priceof the O2 tickets already the tax in this case may barelyshift the demand curve.

6. Price elasticity of demand measure the responsivenessof quantity demanded to a change in price of the good.Inelastic demand means that demand is not veryresponsive to a change in price. Demand for Spice Girlstickets is likely to be very price inelastic because thereare no strong substitutes and it was a one-off reunion.

7. A maximum price is a price ceiling set below theequilibrium which aims to give a fairer price to concertgoers.


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Excess Demand

Costs, revenues and profits

Activity 1 – Link the definitions with the key terms

Activity 2 – Objectives and consequences

Link the objective to the strategy used to achieve it and then think of a problem arising fromthe strategy and fill in the final box:

Objective Strategy Problem


ProfitAverageRevenue

VariableCost

TotalRevenue

FixedCost

TotalCost

AverageCost

A Fixed costs + Variable costs

B Costs that do not vary with output

C Price x Quantity

D Total revenueOutput

E Costs that vary directly with output

F Total costOutput

G Total revenue – Total cost

Lowerprice

Find a cheaper raw material

Workers specialise

Decreasetotal cost

Increaseproductivity

Increasesales

Suggested answers

Costs, revenues and profits: Activity 1 – Link the definitions with the key terms

Costs, revenues and profits: Activity 2 – Objectives and consequences

Link the objective to the strategy used to achieve it and then think of a problem of the actionand fill in the final box:

Objective Strategy Problem


C G D E

F B A

Profit may fall.Other firms may follow.

May reducequality.

Workers maybecome bored.

Expensive to train.

Lowerprice

Find a cheaper raw material

Workers specialise

Decreasetotal cost

Increaseproductivity

Increasesales

ProfitAverageRevenue

VariableCost

TotalRevenue

FixedCost

TotalCost

AverageCost

Costs, revenues and profits: Activity 3 – How firms grow, fill in the blanks


_______________

_______________

Honda carmanufacturer

_______________

_______________

Ice creamcompany

_______________

_______________

Backwardverticalintegration

_______________

_______________

_______________

_______________

Horizontalintegration Production

process

Suggested answers

Costs, revenues and profits: Activity 3 – How firms grow, fill in the blanks


Tyre-makingcompany

Honda carmanufacturer

Toyota carmanufacturer

Ice creamcompany

Car sales company

Backwardverticalintegration

Forwardverticalintegration

Conglomerateintegration

Horizontalintegration Production

process

Costs, revenues and profits: Data response

Jasmin and Ryan own and run a cake-making business. Jasmin and Ryan rent a shop on theHigh Street in Cheltenham, the rent is £200 a week. They also have a loan from the bank. Tomake the cakes Jasmin orders the ingredients every week from a wholesaler firm. She must buyflour, sugar, eggs, butter and icing. Jasmin has calculated that the variable cost per cake is 15p.

1. State one fixed cost that Jasmin and Ryan must pay. (1)

2. State one variable cost that Jasmin and Ryan must pay. (1)

3. Explain what is meant by total cost. (2)

4. Fill in the blanks in the following table: (10)

Price Quantity Fixed Variable Total Total Profit(£) costs (£) costs (£) costs (£) revenue (£) (£)

0.50 0 0 300

0.50 50 7.50

0.50 100 315 50

0.50 250 300

0.50 500 250

0.50 750 112.50 -37.50

0.50 1000 300

5. Using the table above calculate average revenue when Jasmin and Ryan sell 500 cakes a week. Show your working. (2)

6. Using the table above calculate average cost when Jamin and Ryan make 50 cakes a week. Show your working. (2)

7. What is meant by productivity? (2)

8. Explain the difference between production and productivity. (2)

9. Jasmin and Ryan can make 750 cakes a week but Jasmin is concerned that this amount is not enough to make a profit. Discuss how Jasmin could increase the number of cakes she makes every week. (8)

Total marks = 30


Suggested answers

Costs, revenues and profits: Data response

1. Rent or bank loan.

2. Sugar, eggs etc.

3. Total cost is fixed cost + variable cost.

4.

Price Quantity Fixed Variable Total Total Profit(£) costs (£) costs (£) costs (£) revenue (£) (£)

0.50 0 300 0 300 0 -300

0.50 50 300 7.50 307.50 25 -282.50

0.50 100 300 15 315 50 -265

0.50 250 300 37.50 337.50 125 -212.50

0.50 500 300 75 375 250 -125

0.50 750 300 112.50 412.50 375 -37.50

0.50 1000 300 150 450 500 50

5. £0.50.

6. £6.15.

7. Productivity is defined as output per person per period of time.

8. Production is total output whereas productivity is production divided by the number ofworkers.

9. Ideas may include – Ryan and Jasmin could go on a cake-making course, or increase thenumber of ovens in their kitchen, or employ another person. Jasmin and Ryan couldspecialise in particular parts of the production process, for example, Ryan might weigh outall the ingredients and Jasmin could mix them together.


Market failure


ACROSS1. The benefit to the individual of consuming or producing. (7,7)

4. A negative by-product of production and/or consumption felt by a third party. (8,11)

5. The market failure occurring when there is just one seller in the market. (8)

6. An example of a demerit good. (7)

7. A good that would be over-consumed and over-provided if left to the free market. (7,4)

9. An example of a public good. (7)

10. Example of a merit good (as an acronym). (3)

DOWN1. A good which is non-rivalrous and non-excludable. (6,4)

2. A good that would be under-consumed and under-provided if left to the free market.(5,4)

3. Private cost + negative externality when added together. (6,4)

8. One method of government intervention when there is environmental degradation. (5,3)


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Market failure: Activity 2 – Design a poster

Imagine you work for the National Health Service and you are trying to stop the negativeexternalities associated with smoking. Design a poster to warn people of the dangers.

Use pictures to make your poster stand out. Use the information below to help you.


Negative Externalities of Smoking

According to Cancer Research UK,passive smokers are 20-30 per centmore likely to develop lung cancerthan people not exposed to smoke.

“Children of parents who smokeinhale between 60 to 150cigarettes’ worth of nicotine ayear, or about 1.5 cigarettes’worth of nicotine each week.”

Treating smokerscosts the NHS inEngland £2.7bna year.

Smoking is thebiggest cause oflitter in the UK.

Passive smokers who are exposed totobacco smoke breathe in over 400chemicals, and over 60 are known orsuspected to be carcinogenic (cancer-causing).

Market failure: Activity 3 – Data response

Smoking is estimated to have cost the NHS £2.7bn in 2008. Due to this and other negativeexternalities, the government is looking at a number of policies to reduce smoking in the UK.Cigarette packs already have anti-smoking slogans on the front and smokers pay over £9bn ayear in tax. Other measures have been suggested such as putting cigarettes under the counterand removing branding and logos from the packaging. Many observers feel people will stillsmoke. Paul, a smoker for 20 years says ‘the only way the government can stop smokers is toban cigarettes, I’m addicted.’Source: ‘Smoking “costs the NHS billions”’, BBC News, Thursday 11 June, 2009.

1. Explain what is meant by the term negative externality. (2)

2. According to the article, how much has smoking cost the NHS in 2008? (1)

3. According to the article, how much do smokers pay in tax per year? (1)

4. State one other negative externality associated with smoking. (1)

5. State two strategies mentioned in the text that aim to reduce the consumption of cigarettes. (2)

6. Explain the negative externalities associated with the production or consumption of two other products. (6)

7. Explain how an improvement in healthcare produces positive externalities. (6)

8. Explain one other strategy the government could use to reduce smoking. (3)

9. “The only way the government can stop smokers is if they ban cigarettes.“ Do you agree with this statement. Give reasons for your answer. (8)

Total marks = 30


Suggested answers

Market failure: Activity 1 – Crossword

Activity 3 – Data response

1. A negative by-product of production and/or consumption borne by a third party. Anexample is noise pollution.

2. £2.7bn.

3. £9bn a year.

4. ‘Passive’ smoking, or the smell or tobacco.

5. Measures that have been suggested include putting cigarettes under the counter andremoving branding and logos from the packaging, anti-smoking slogans on the front andtaxation.

6. Cars – noise pollution, air pollution, congestion and accidents.Alcohol – violence, crime, accidents.

7. Healthcare is a merit good, it can be provided by the free market but if left solely to the freemarket would be under-consumed and under-provided. So the government haveintervened to provide healthcare free at the point of use. Healthcare has benefits to peoplewho are not involved in the economic activity of being cared for by the NHS. If healthcareis made better the work force are likely to be more healthy and therefore take fewer sickdays, thus increasing national income. People are more likely to live longer and thereforebe able to work longer.

8. Ban smoking, regulation (under 21’s are not allowed to buy cigarettes), education andbetter information to warn smokers of the health danger involved.

9. Agree – stops people from being able to buy them, takes away temptation.Disagree – may create a black market, massive loss in tax revenue for the government, taketime to see affects in the health of the population, cost of policing the ban.


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P R I V A T E B E N E F I T

U

B M

L E S

I R O

C I C

N E G A T I V E E X T E R N A L I T Y

O G A

M O N O P O L Y A L C O H O L

D O C

D E M E R I T G O O D O

R S

D E F E N C E T

E

N H S

T

A

X

Saving, borrowing and managing your money


This is a crossword with a difference, the answers are already there! You have to think of theclues to complete it.

`

ACROSS

3.

5.

6.

7.

8.

9.

DOWN

1.

2.

4.


1 2

3

4

5

6

7

8

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S I

A N

O V E R D R A F T

H I E

I N R

M O R T G A G E E

E S

P B U D G E T

U R

A P R A

C T

H E

L O A N

S

C R E D I T C A R D

Saving, borrowing and managing your money: Activity 2 – Data response

The number of mortgages approved for house purchases in the UK rose to its highest level inmore than a year in June 2009 to 47,584. The figure is up 74% on November 2009, when thenumber of approvals for homebuyer loans dropped to just 27,000, and is the highest sinceApril last year. The rise in approvals for purchases may have been driven by an increase in thenumber of first-time buyers able to enter the market, as lenders have begun to offer higherloan-to-value mortgages again. Lender reports of rising house prices may also have encouragedbuyers back into the market.

However, despite the increase the number of buyers remains well below the high it reached atthe top of the property market. This is in part due to the large deposit required. Many lendersrequire a 25% deposit. This can be very difficult for home buyers, especially first time buyerswho have not had long to save the money. Many first time buyers have to take out extrapersonal loans to pay the other costs associated with buying a house.

1. What is meant by the term mortgage? (2)

2. What is meant by the term interest rate? (2)

3. Why do banks require a deposit when people buy a house and take out a mortgage? (2)

4. Explain, using an example why it will be difficult for first time buyers to save the deposit required to buy a house. (4)

5. Explain, using an example, what is meant by opportunity cost? (4)

6. State two costs associated with buying a house. (2)

7. When people buy their first house there are a number of things they must pay for every month, such as gas and electricity. They must therefore draw up a budget.What is meant by the term budget? (2)

8. In addition to those mentioned above state six items that might appear in a first time buyer’s budget. (6)

9. Using your answers in question 7 decide which items are necessities and which are luxuries, using the table below. (6)

Necessities Luxuries

__________________________ __________________________

__________________________ __________________________

__________________________ __________________________

__________________________ __________________________

__________________________ __________________________

Total marks = 30


Suggested answers

Saving, borrowing and managing your money: Activity 1 – Crossword

ACROSS3. Occurs when withdrawals from a bank account exceed the available balance giving a

negative balance. (9)

5. Money borrowed to buy a property, usually paid back over 25 years. (8)

6. Planned expenses and revenues. (6)

7. Interest rate for the whole year (as an acronym). (3)

8. Type of debt such as used to buy a car or holiday. Paid back in less than 25 years. (4)

9. Small plastic card which entitles owner to buy goods now and pay later usually a monthlater. (6,4)

DOWN1. Money put a bank for safe-keeping which usually the depositor receives a reward for

doing so (interest). (6)

2. Amount paid extra when borrowing money or the reward received for saving. (8,4)

4. Allows a buyer to obtain use of goods on payment of a sum over several months. (4,8)

Activity 2 – Data response

1. A sum of money borrowed from a bank or financial institution, to buy a house or property.It is usually paid back over 25 years. In addition to repaying the amount borrowed interestis charged.

2. This is the reward for saving and the extra paid when borrowing money, expressed as apercentage.

3. Mortgages tend to be large sums of money borrowed. Banks are concerned that borrowerscould quickly be in negative equity if they do not have a deposit and also to be seen to bemore responsible lenders.

4. If a first time buyer is aged 25 trying to buy a £150,000 house he (or she) will require adeposit of £37,500. This is a lot of money for someone to have amassed by the age of 25.

5. Opportunity cost is the next best alternative forgone when making a choice. Opportunitycost occurs due to scarce resources and infinite wants. For a first time buyer their scarceresource is money as they must make difficult choices with limited funds available, e.g.between buying a new TV or a new table.

6. Stamp duty, solicitors fees, removals, furniture.

7. A budget is a statement of all planned revenue and expenditure in a period of time.

8 & 9. Necessities LuxuriesWater rates Sky TVGas and electricity InternetCouncil tax Gym membershipFood Eating outPetrol Leisure activities


Economic growth

Activity 1 – The Economic Cycle

The cycle is made up of four sections. Label the diagram using the words below.

Boom Recession Recovery Slump

Use an arrow to match up the boxes to the correct section of the business cycle and fill in themissing words.


Output

Time

B_________

R_________

S_________R_________

GDP is starting to ____________ . Peopleare spending less which means less____________ and ____________ will beproduced. Firms will need fewerworkers. This is called ________________________ . There may be___________ as companies reduce theirprices to increase ____________ .

Word Boxdeflation goods decline services

demand cyclical unemployment

GDP is still rising but at a slower____________ . The government maydecrease ____________ ____________ to encourage people to keep____________ and stop a ____________ .

Word Boxinterest rates rate recession

spending

When GDP is rising more ____________and services will be made which couldlead to a reduction in ____________ .____________ will be high as people willgo out and spend. Too much demandhowever could cause prices to risewhich is called ____________ .

Word Boxinflation demand goods

unemployment

GDP starts to recover after a____________ . Businesses will starttaking on workers and consumers willbe more prepared to ____________ .This increase in growth could havebeen caused by the governmentreducing ____________ ____________ tostimulate ____________ .

Word Boxspend interest rates demand

recession

Suggested answers

Economic growth: Activity 1 – The Economic Cycle

The cycle is made up of four sections. Label the diagram using the words below.

Boom Recession Recovery Slump

Use an arrow to match up the boxes to the correct section of the business cycle and fill in themissing words.


GDP is starting to decline. People arespending less which means less goodsand services will be produced. Firmswill need fewer workers. This is calledcyclical unemployment. There maybe deflation as companies reducetheir prices to increase demand.

Recession

Word Boxdeflation goods decline services

demand cyclical unemployment

GDP is still rising but at a slower rate.The government may decreaseinterest rates to encourage peopleto keep spending and stop arecession.

Slow Down

Word Boxinterest rates rate recession

spending

When GDP is rising more goods andservices will be made which could leadto a reduction in unemployment.Demand will be high as people willgo out and spend. Too much demandhowever could cause prices to risewhich is called inflation.

Boom

Word Boxinflation demand goods

unemployment

GDP starts to recover after arecession. Businesses will start takingon workers and consumers will bemore prepared to spend. Thisincrease in growth could have beencaused by the government reducinginterest rates to stimulate demand.

Recovery

Word Boxspend interest rates demand

recession

Output

Time

Boom

Recession

Slow DownRecovery

Economic growth: Activity 2 – The causes of economic growth

Economic growth is when the productive capacity of a country increases. It can be achievedby improving the quality or increasing the quantity of resources. It is measured using GDP,which is the total amount of goods and services produced in a country in a year.

Put the following strategies for increasing economic growth into the correct column.

Improved education Increasing the minimum wage More business investment

Training Reducing benefits New technology

Cutting down forests Make more machines Increased efficiency

Improve the quality of resources Increase the quantity of resource

________________________________________ ________________________________________

________________________________________ ________________________________________

________________________________________ ________________________________________

________________________________________ ________________________________________

________________________________________ ________________________________________

Activity 3 – Circle the correct option

An increase in GDP is more likely to cause

Prices to fall Prices to rise

Why do you think this will happen?

An increase in GDP is more likely to lead to

Pollution An improvement in living standards



Suggested answers

Economic growth: Activity 2 – The causes of economic growth

Economic growth is when the productive capacity of a country increases. It can be achievedby improving the quality or increasing the quantity of resources. It is measured using GDP,which is the total amount of goods and services produced in a country in a year.

Put the following strategies for increasing economic growth into the correct column.

Improve the quality of resources Increase the quantity of resource

Training Cutting down forests

Increased efficiency Increasing the minimum wage

More business investment Reducing benefits

Improved education Make more machines

New technology

Activity 3 – Circle the correct option

An increase in GDP is more likely to cause

Prices to fall Prices to rise


Increasing economic activity is likely to lead to rising costs and then prices.

An increase in GDP is more likely to lead to

Pollution An improvement in living standards

Both of the above.


Economic growth should mean rising incomes for most people but may well alsoharm the environment.


Economic growth: Data response

China’s growth of GDP rose very rapidly from $268bn to $3280bn from 1987 to 2007. Thiswas in part the result of investment in capital goods which has allowed the country to makebetter use of its huge population. The country has seen the benefits of this growth with livingstandards increasing as more of the population are able to afford healthcare and food. HoweverChina is now considered to be the world’s biggest emitter of CO2. There are also worries thatincreased international trade has forced many Chinese people into low paid jobs whereworking standards are very poor. Worryingly for the Chinese government, there have beensigns recently that the bubble in the economy has burst with unemployment rising as theirexport market slows down.Source: ‘China grows faster amid worries’, BBC News, Thursday 16 July 2009.

1. Explain what is meant by the term economic growth? (3)

2. (i) State two benefits of economic growth that are mentioned in the information above. (2)

(ii) State two costs of economic growth that are mentioned in the information above. (2)

3. China’s growth has been caused by an improvement in the quality of their capitalresources. Explain one other way of increasing economic growth. (5)

4. Using the data and your own economic knowledge, do you think the Chinese population has benefited from economic growth? (8)

5. The data suggests China’s economic growth is slowing down. Evaluate the possible options for the Chinese government to stimulate economic growth. (10)

Total marks = 30


Suggested answers

Economic growth: Data response

1. When the productive capacity of a country increases. It is measured by the change in realgross domestic product (GDP).

2. (i) Better living standards/improvements in healthcare.(ii) Pollution/low paid jobs.

3. Improve the quality of education and training.

4. Benefits – Better living standards, better healthcare, more goods and services to choosefrom.Costs – Pollution, poorly paid jobs, possible inflation.

5. Solutions:

Reduce interest ratesAdvantage – Should increase spending as people will have more disposable income.Disadvantages – Could cause inflation, takes time to have an effect.

Introduce supply side policesAdvantages – Should improve efficiency and productivity in the UK.Disadvantages – Expensive, not guaranteed to work.

Reduce taxes and increase public spendingAdvantages – Increase in demand in the economy.Disadvantages – Less government income could cause a budget deficit.


Unemployment

Activity 1 – Fill in the blanks

A person is unemployed when they are _____________ and _____________ to work but do nothave a job. Unemployment can be measured in two ways. Using the C_____________C_____________ or the L_____________ F_____________ S_____________ (I_____________).

The information below shows different types of unemployment. Fill in the boxes using theword box provided.


Word Boxable ILO labour count survey

claimant willing force

Word BoxSeasonal Cyclical Regional

Technological Sectoral

There are no jobs around here,

I’m moving toLondon!

I can workfor hours and I don’t need

breaks!

Suggested answers

Unemployment: Activity 1 – Fill in the blanks

A person is unemployed when they are willing and able to work but do not have a job.Unemployment can be measured in two ways. Using the Claimant Count or the LabourForce Survey (ILO).

The information below shows different types of unemployment. Fill in the boxes using theword box provided.


Word Boxable ILO labour count survey

claimant willing force

Word BoxSeasonal Cyclical Regional

Technological Sectoral

Cyclical

Seasonal

Sectoral

Regional Technological

There are no jobs around here,

I’m moving toLondon!

I can workfor hours and I don’t need

breaks!

Unemployment: Activity 2 – Costs of unemployment

Sort the following into cost to the individual, cost to the government and cost to the localarea. Try to add some of your own.


Lack of self-esteem

Crime may increase

Less money from income tax

Cost to the local area

1. ________________________________________

2. ________________________________________

Cost to the individual

1. ________________________________________

2. ________________________________________

3. ____________________

Cost to thegovernment

1. ________________________________________

2. ________________________________________

Suggested answers

Unemployment: Activity 2 – Costs of unemployment

Sort the following into cost to the individual, cost to the government and cost to the localarea. Try to add some of your own.


Lack of self-esteem

Crime may increase

Less money from income tax

Cost to the local area

1. Crime may increase2. Shops close

Cost to the individual

1. Lack of self-esteem2. Less disposable income3. Stress

Cost to thegovernment

1. Less money fromincome tax

2. More money spenton unemploymentbenefit

Unemployment: Activity 3 – Policies to reduce unemployment

Different policies are required to solve different types of unemployment. Match up the correctresponse for each type of unemployment. Then explain how these policies will reduceunemployment.

A. General Motors given huge ‘bail-out’.

B. Government promises more money towards education and training.

C. The job centre opens up online.

D. Bank of England cuts interest rates to 0.5%.

E. Millions spent on improving Belfast’s town centre.

Policy used How this will help reduce unemployment(A-E)

Cyclical D If interest rates are cut, demand will increase as more people spend. Companies will have to produce more to cope with demand and they will have to take on workers.

Frictional

Sectoral

Regional

Technological


Suggested answers

Unemployment: Activity 3 – Policies to reduce unemployment

Different policies are required to solve different types of unemployment. Match up the correctresponse for each type of unemployment. Then explain how these policies will reduceunemployment.

A. General Motors given huge ‘bail-out’.

B. Government promises more money towards education and training.

C. The job centre opens up online.

D. Bank of England cuts interest rates to 0.5%.

E. Millions spent on improving Belfast’s town centre.

Policy used How this will help reduce unemployment(A-E)

Cyclical D If interest rates are cut, demand will increase as more people spend. Companies will have to produce more to cope with demand and they will have to take on workers.

Frictional C More awareness of available jobs should reduce the time of the gap between people being in and out of work.

Sectoral A General Motors are a big employer of workers in the USA. A money injection from the government will allow the company to maintain their workforce and will stop them from going into administration

Regional E Improving Belfast’s city centre attracts companies to invest in the area, creating job opportunities.

Technological B Education and training aims to provide potential workers with the skills required to work with technological advances.


Unemployment: Data response

In January 2009 UK unemployment reached a record high. This has been caused by firmsletting workers go as they had lower demand for their products. Steve from CGL Motorsremarked, “I had the worst Christmas sales in 10 years, I had to lose some workers to stopmyself from going bankrupt!” Many of the job cuts were made in the North East of Englandwhere unemployment rose to 8.6%. Workers in the area are struggling to cope. Sally, anunemployed hairdresser from Middlesbrough said, “It was bad enough losing my job, butthere doesn’t seem to be any information on how to get another one.”

The government has pledged to increase spending on training and recently the Bank ofEngland dropped the base rate to 0.5%. Ian from Nottingham is still furious that not enoughis being done. “I’ve got a mortgage to pay and have received no help. My house also gotbroken into last week – what is this country coming to?”Source: ‘UK unemployment hits 1.92 million’, BBC News, Wednesday 21 January, 2009.

1. Tick the types of unemployment that are shown in the data. (2)Seasonal Cyclical SectoralRegional Technological Frictional

2. State the level of the base rate in the extract. (1)

3. State two consequences of unemployment that are shown in the data (2)

4. State two ways in which unemployment is measured. (2)

5. Explain how a reduction in the base rate is intended to reduce unemployment. (3)

6. In the extract, Sally is finding it hard to get information about new jobs. Explain the type of unemployment this will cause and discuss two ways in which the problem could be solved. (5)

7. Explain how an increase in spending on training could reduce unemployment in the North East. (3)

8. Explain two consequences of unemployment for the government. (4)

9. In the data the government have tried two solutions to reduce unemployment. Evaluate whether these policies will be effective or if other solutions are required. (8)

Total marks = 30


Suggested answers

Unemployment: Data response

1. Regional, cyclical, frictional.

2. 0.5%.

3. Crime, people unable to pay mortgages.

4. Labour Force Survey (ILO), Claimant Count.

5. Increase in spending causes multiplier effect which leads to companies requiring moreworkers to cope with the increased demand.

6. Frictional unemployment. Ways to help reduce this include an increase in job centres,increase in the use of the internet to advertise jobs.

7. Extra training provision should provide workers with the skills to move into different sectorsand also provide occupational mobility.

8. Increase in spending on benefits, decrease in income tax.

9. Increase in spending on trainingAdvantage – Increase in occupational mobility.Disadvantage – Takes time, not guaranteed to work, Expensive.More suited to supply side causes of unemployment.

Reduce the base rate to 0.5%Advantage – This should increase demand in the economy which should lead to companiesrequiring more workers.Disadvantage – Base rate changes take time to have an affect. Not guaranteed to work.More suited to demand side causes of unemployment.

Other optionsImprove information using Job centres – this will help frictional unemployment.Provide subsidies for companies to set up in areas with high levels of unemployment – thiswill help regional unemployment.

ConclusionA good conclusion will recognise that different policies are required to solve differentcauses of unemployment.


Inflation



It’s not inflation unless every product increases in price ___________

Inflation will cause everyone to spend more ___________

Inflation is measured by looking at every price of every product ___________

An increase in the price of oil could cause inflation ___________

The Bank of England try to control inflation using interest rates ___________

Pensioners are delighted when there is inflation because their savings are worth more ___________

Inflation is measured by taking a ‘basket of goods’ which contains the most typical goods of a typical consumer ___________

The Bank of England’s key strategy is to try to control inflation using taxes ___________

When my favourite chocolate bar increases in price it’s called inflation ___________

Inflation is a sustained rise in the general price level ___________


Suggested answers

Inflation: Activity 1 – True or false


It’s not inflation unless every product increases in price False

Inflation will cause everyone to spend more False

Inflation is measured by looking at every price of every product False

An increase in the price of oil could cause inflation True

The Bank of England try to control inflation using interest rates True

Pensioners are delighted when there is inflation because their savings are worth more

False

Inflation is measured by taking a ‘basket of goods’ which contains the most typical goods of a typical consumer

True

The Bank of England’s key strategy is to try to control inflation using taxes False

When my favourite chocolate bar increases in price it’s called inflation False

Inflation is a sustained rise in the general price level True


Inflation: Activity 2 – Complete the flow diagram by writing these labels in the correct boxes

As demand outstrips supply, firms put up their prices

Businesses have to put up their prices to maintain their profit margins

The prices of raw materials increase

There are only so many goods for them to buy

Costs for business firms increase

People have more money to spend causing demand to increase


Cost pushinflation

Demand pullinflation

Prices

Suggested answers

Inflation: Activity 2 – Complete the flow diagram by adding these labels in the correct boxes


Businesses have to put up their prices to maintain their profit margins

The prices of raw materials increase

There are only so many goods for them to buy

Costs for business firms increase

People have more money to spend causing demand to increase


Cost pushinflation

Demand pullinflation

Prices

The prices of raw materials increasePeople have more money to spend

causing demand to increase

Costs for business firms increaseThere are only so many goods for

them to buy

Businesses have to put up their pricesto maintain their profit margins


Inflation: Activity 3 – Consequences and cures of inflation

In the speech bubble, explain how inflation will affect the person.


Fixed incomeMenu costs

Less spending Internationalcompetitiveness

Pensioner

Shopper

Restaurant owner

Tourist

Suggested answers

Inflation: Activity 3 – Consequences and cures of inflation

In the speech bubble, explain how inflation will affect the person.


Fixed income

Money buys less goods so standard of living reduces

Menu costs

As prices change,people have to change

their menus ata cost

Less spending

Shoppers will spendless as prices are

higher

Internationalcompetitiveness

Goods will be more expen -sive abroad reducing

demand for them

Pensioner

Shopper

Restaurant owner

Tourist

Inflation: Data response

Source: ‘Oil prices up after record falls’, BBC News, Friday 31 October 2008.

1. Describe the trend of inflation in the graph. (2)

2. The graph above shows the retail price index. Explain how this is measured. (2)

3. Using the information above, explain what is meant by cost push inflation. (2)

4. Explain why pensioners will be worried about rising inflation. (2)

5. Explain two possible reasons for falling inflation in 2009. (4)

6. The Bank of England’s target rate of inflation is 2%. Discuss the possible methods the Bank and the government could have used to reduce inflation in 2008. (8)

7. “Inflation only brings problems to the economy.” Do you agree with this statement? Give reasons for your answer. (10)

Total marks = 30


Feb2007

May2007

Aug2007

Nov2007

Feb2008

May2008

Aug2008

Nov2008

Feb2009

0

1%

2%

3%

4%

5%

6%

Suggested answers

Inflation: Data response

1. One mark for stating the two price movements. There was an increase between April 2008and April 2009 followed by a falling rate of inflation thereafter. The second mark is for usingdata as in this comment.

2. A basket of 650 goods are collected which reflect the spending of average UK consumers.

3. When the cost of raw materials such as petrol or metal increase causing firms costs toincrease. They then put up their prices to maintain their profit margins.

4. Many pensioners are on a fixed income so will be unable to buy as many goods as pricesrise causing their living standards to reduce.

5. A reduction in the price of oil, reduced demand for a large number of goods and services.

6. Possible methods: Bank of England – change the base rate / The government – use fiscalpolicy.

7. Benefits of inflation – Borrowed money costs less to pay back. Assets such as houses rise inprice.Costs – Fixed income, wage price spiral, loss of international competitiveness, reduceddemand due to loss of confidence.


Fiscal policy

Activity 1 – Match the tax with its correct definition

Direct or indirect – Select whether the taxes above are direct or indirect taxes and write in thelines below.

Direct taxes Indirect taxes

_____________________________________ _____________________________________

_____________________________________ _____________________________________

_____________________________________ _____________________________________

_____________________________________ _____________________________________


Council Tax A tax which is paid on the things of value you leavebehind when you die.

A tax placed on your annual income.

A tax placed on households based on the estimatedvalue of the property and the number of people livingin it.

A tax on the profits of companies and other organisa -tions including clubs, societies and associations.

A tax on the consumption of goods and services.

A tax placed on an individual good or service. Thegovernment often place higher excise duties on goodssuch as alcohol and cigarettes.

A tax placed on wages and salaries which is used tofund state benefits.

VAT

Corporation Tax

Excise Duties

National Insurance

Income Tax

Inheritance Tax

Suggested answers

Fiscal policy: Activity 1 – Match the tax with its correct definition

Direct or indirect – Select whether the taxes above are direct or indirect taxes and write in thelines below.

Direct taxes Indirect taxes

Corporation Tax VAT

Income Tax Excise Duties

National Insurance

Inheritance Tax


Council Tax A tax which is paid on the things of value you leavebehind when you die.

A tax placed on your annual income.

A tax placed on households based on the estimatedvalue of the property and the number of people livingin it.

A tax on the profits of companies and other organisa -tions including clubs, societies and associations.

A tax on the consumption of goods and services.

A tax placed on an individual good or service. Thegovernment often place higher excise duties on goodssuch as alcohol and cigarettes.

A tax placed on wages and salaries which is used tofund state benefits.

VAT

Corporation Tax

Excise Duties

National Insurance

Income Tax

Inheritance Tax

Fiscal policy: Activity 2 – Direct and indirect taxes

Income tax is direct as it comes directly out of a person’s salary. It is considered to be progressiveas the higher the income of the taxpayer, the larger the percentage of their total income paidin tax. For example someone earning less than £6,000 will not have to pay any income tax butsomeone earning over £40,000 will have to pay 40% on anything over that amount. Theadvantage is it is easy for the government to collect however some well off people feel theyhave to pay too much. Another example of a direct tax is corporation tax.

VAT is an example of an indirect tax as it is a tax on what people spend rather than what theyearn. Indirect taxes can be used to try to stop people consuming or producing products whichare bad for them which is one of the reasons cigarettes are so highly taxed. Indirect taxes areoften considered to be regressive as the higher income earners pay a lower percentage of theirincome in tax compared to low income earners.

Use the information above to sort the statements into direct and indirect taxes.

Direct or Indirect

Often considered to be progressive ___________

Placed on a person’s income ___________

A good way of reducing consumption of goods which have negative external effects ___________

Income tax ___________

Placed on profits of companies ___________

Often considered to be regressive ___________

VAT ___________

Easy for the government to collect ___________


Suggested answers

Fiscal policy: Activity 2 – Direct and indirect taxes

Income tax is direct as it comes directly out of a person’s salary. It is considered to be progressiveas the higher the income of the taxpayer, the larger the percentage of their total income paidin tax. For example someone earning less than £6,000 will not have to pay any income tax butsomeone earning over £40,000 will have to pay 40% on anything over that amount. Theadvantage is it is easy for the government to collect however some well off people feel theyhave to pay too much. Another example of a direct tax is corporation tax.

VAT is an example of an indirect tax as it is a tax on what people spend rather than what theyearn. Indirect taxes can be used to try to stop people consuming or producing products whichare bad for them which is one of the reasons cigarettes are so highly taxed. Indirect taxes areoften considered to be regressive as the higher income earners pay a lower percentage of theirincome in tax compared to low income earners.

Use the information above to sort the statements into direct and indirect taxes.

Direct or Indirect

Often considered to be progressive Direct

Placed on a person’s income Direct

A good way of reducing consumption of goods which have negative external effects Indirect

Income tax Direct

Placed on profits of companies Direct

Often considered to be regressive Indirect

VAT Indirect

Easy for the government to collect Direct


Fiscal policy: Activity 3 – The Government budget

Government spending by function in 2009-10

Government receipts in 2009-10


What are the three main areasof government spending?

1. _________________________________2. _________________________________3. _________________________________

What percentageof governmentspending is on

transport?


health?

What are the three main areasof government revenue?

1. _________________________________2. _________________________________3. _________________________________

What percentage of taxationis income tax?

What percentage of taxation is VAT?

What proportion of totalgovernment spending ismatched by tax receipts?

Other expenditure £72bn

Housing andenvironment £29bn

Social protection £189bnPublic orderand safety £35bn

Industry, agriculture,employment and

training £20bn

Debt interest £28bn

Defence £38bn

Education £88bn

Transport £23bn

Health £119bn

Personal socialservices £31bn

Total managed expenditure: £671bn

Business rates £24bn

VAT £64bn

Other £67bn

Corporation tax £35bn

Excise duties £44bn

National insurance £98bn

Income tax £141bnCouncil tax £25bn

Total receipts: £496bn

Suggested answers

Fiscal policy: Activity 3 – The Government budget

Government spending by function in 2009-10

Government receipts in 2009-10


What are the three main areasof government spending?

1. Social Protection2. Health3. Education


transport?

3.4%


health?

17.7%

What are the three main areasof government revenue?

1. Income Tax2. National Insurance3. VAT

What percentage of taxationis income tax?

28%

What percentage of taxation is VAT?

13%

What proportion of totalgovernment spending ismatched by tax receipts?

74%

Other expenditure £72bn

Housing andenvironment £29bn

Social protection £189bnPublic orderand safety £35bn

Industry, agriculture,employment and

training £20bn

Debt interest £28bn

Defence £38bn

Education £88bn

Transport £23bn

Health £119bn

Personal socialservices £31bn

Total managed expenditure: £671bn

Business rates £24bn

VAT £64bn

Other £67bn

Corporation tax £35bn

Excise duties £44bn

National insurance £98bn

Income tax £141bnCouncil tax £25bn

Total receipts: £496bn

Fiscal policy: Data response

1. Explain the difference between progressive and regressive taxes. (4)

2. Explain the difference between direct and indirect taxes, giving an example of each. (6)

3. State one example of a progressive tax using the information above. (1)

4. State one example of a regressive tax using the information above. (1)

5. One reason for the high price of alcohol and tobacco is the high level of taxation. Do you think this high tax is justified? Give reasons for your answer. (6)

6. Using the information above, explain how a recession can cause an increase in the budget deficit. (4)

7. The UK government may have to increase taxes in order to improve education and training to make UK workers more employable. Do you think this should come from direct or indirect taxes? Give reasons for your answer. (8)

Total marks = 30


UK government borrowing a record£90bn in the financial year 2008-09

2% increase in both alcohol andtobacco tax

50% income tax rate for peopleearning £150,000 in 2011

The government’s benefits bill rose 1.8%

Fuel duty to rise by 2p a litreUnemployment, which has risen to2.1 million, has contributed to the

9% fall in income tax revenue

Suggested answers

Fiscal policy: Data response

1. A progressive tax is one where the average rate of tax rises as income rises, i.e. theproportion of your income taken in tax rises as you become richer.A regressive tax is a tax that takes a greater percentage of income from less well off people.

2. A direct tax is one which cannot be avoided e.g. Income tax.An indirect tax is non avoidable e.g. VAT.

3. 50% income tax rate for people earning over £150,000

4. 2% increase in alcohol and tobacco tax

5. Justified – Smoking and alcohol cause negative externalities. The tax yield provides extramoney for the government, especially as demand for cigarettes and alcohol is price inelastic.Unjustified – It would have a greater effect on less well-off people as it is a regressive tax.

6. Less money from income tax due to unemployment, less money from VAT due to lessspending, more spending from the government on benefits.

7. Pro’s for direct – Unavoidable, easy to collect, often progressive.Con’s for direct – High income taxes could cause highly-paid workers to leave the countryfor lower taxes.

Pro’s for indirect – Can reduce demand for demerit goods.Con’s for indirect – Regressive, avoidable, could cause reduction in spending.


Fiscal policy: Activity 4 – Taxation of alcohol

The Chancellor has been invited to meet with a pub group for a debate with landlords abouttaxation of alcohol using excise duties.

You must first write a speech for the chancellor explaining why a tax on alcohol is needed. Usethe information below and your own economic knowledge to help you.


Alcohol is estimated to be responsible for at least 33,000

deaths in the UK each year

Measures will raise £66bn by 2012

Around 6% of road casualties and17% of all deaths on the road

occur when someone has beendrinking over the legal limit

An estimated 17 million working days are lost each year due to people missing work due to

the effects of alcohol

You must now write a speech for the pub group which opposes the tax. Try to think of otheroptions to reduce alcohol consumption instead of a tax.


Alcohol tax will have a negative effect on less well off people as

it is a regressive tax

75,000 more jobs in the drinksindustry are at risk

A record 2,000 British pubs haveclosed with the loss of 20,000 jobs

since the chancellor, Alistair Darling,increased beer tax in the 2008 budget

Fiscal policy: Activity 5 – Create a test

Create a test for the person sitting next to you. Make up three questions about direct andindirect taxes using the information above.

Question:

Answer:

Question:

Answer:

Question:

Answer:


Monetary policy

Activity 1 – Which of these statements are correct?

Put a tick in the box next to the correct statement.

A. The interest rate is decided by the government

B. The interest rate is decided by the Bank of England

C. The interest rate is decided by the tax payers

A. Interest rates may not move if there is inflation

B. Interest rates may be increased if there is inflation

C. Interest rates may be reduced if there is inflation

A. The government’s target for inflation is 3.5%

B. The government’s target for inflation is 5%

C. The government’s target for inflation is 2%

A. A reduction in interest rates will most likely lead to an increase in growth

B. A reduction in interest rates will most likely weaken a country’s currency

C. A reduction in interest rates will cause both of the above to happen


Suggested answers

Monetary policy: Activity 1 – Which of these statements are correct?

Put a tick in the box next to the correct statement.

A. The interest rate is decided by the government

B. The interest rate is decided by the Bank of England

C. The interest rate is decided by the tax payers

A. Interest rates may not move if there is inflation

B. Interest rates may be increased if there is inflation

C. Interest rates may be reduced if there is inflation

A. The government’s target for inflation is 3.5%

B. The government’s target for inflation is 5%

C. The government’s target for inflation is 2%

A. A reduction in interest rates will most likely lead to an increase in growth

B. A reduction in interest rates will most likely weaken a country’s currency

C. A reduction in interest rates will cause both of the above to happen


✓

✓

✓

✓

Monetary policy: Activity 2 – Fill in the blanks in this flow diagram


Fewer people will buy usingc_________ as it will cost _________

to pay back.

S _________ will _________ asmoney in the bank will gain a_________ amount of interest.

Mortgage interest repayments are _________. People will have

less _________ income.

Firms are also less likely to spendless on i_________.

This means there be less s_________ in the economy.

This dampens inflationarypressure.

If interest rates go up

Suggested answers

Monetary policy: Activity 2 – Fill in the blanks in this flow diagram


Fewer people will buy usingcredit as it will cost more to pay

back.

Savings will increase as moneyin the bank will gain a larger

amount of interest.

Mortgage interest repayments arehigher. People will have less

disposable income.

Firms are also less likely to spendless on investment.

This means there be lessspending in the economy.

This dampens inflationarypressure.

If interest rates go up

Monetary policy: Activity 3 – Interest rates

Scenario 1 – Inflation is well above the UK target of 2%.

Should the Bank of England:

Explain how this decision will affect the following groups.

Savers Mortgage payers

Shoppers Business investment


Increase interest rates? Decrease interest rates?

People will be _________ likely tosave as they will get a _________ rateof interest on their money. This will_________ demand in the economy

causing the inflation rate to_________.

____________________________________

____________________________________

____________________________________

____________________________________

Demand for goods will _________ asfewer people will use credit cardsbecause the cost of paying back

the money will _________. This willreduce demand causing theinflation rate to _________.

____________________________________

____________________________________

____________________________________

____________________________________

Suggested answers


Scenario 1 – Inflation is well above the UK target of 2%.







People will be more likely to saveas they will get a higher rate ofinterest on their money. This will

decrease demand in the economycausing the inflation rate to fall.

Mortgage payers will pay alarger rate of interest whichwill decrease their disposableincome. This should decrease

demand in the economy.

Demand for goods will decrease asfewer people will use credit cards

because the cost of paying back themoney will increase. This willreduce demand causing the

inflation rate to fall.

Businesses will invest lessbecause they will pay a higher

rate of interest on anymachines they bought oncredit. This will decrease

demand in the economy, andreduce jobs for workers.

✓ ✗

Scenario 2 – The country is in a deep recession with very low demand.







____________________________________

____________________________________

____________________________________

____________________________________

Mortgage payers will pay a _________rate of interest which will _________

their disposable _________. Thisshould help to _________ demand inthe economy which would increase

_________ _________.

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

Businesses will be more encouraged to invest because they will pay a_________ rate of interest on anymachines they bought on credit. This will _________ demand in theeconomy, and provide jobs for

workers. This should help stimulate_________ _________.

Suggested answers


Scenario 2 – The country is in a deep recession with very low demand.







People will be less likely to saveas they will get a lower rate ofinterest on their money. Theymay feel they might as wellspend their money as saving

is discouraged.

Mortgage payers will pay a lowerrate of interest which will increase

their disposable income. This shouldhelp to increase demand in theeconomy which would increase

economic growth.

Demand for goods couldincrease as more people willuse credit cards because the

cost of paying back the moneywill decrease. This stimulus tospending will help offset the

effect of the recession.

Businesses will be more encouraged to invest because they will pay a

lower rate of interest on anymachines they bought on credit. This

will increase demand in theeconomy, and provide jobs for

workers. This should help stimulateeconomic growth.

✗ ✓

Monetary policy: Data response

1. Explain what is meant by interest rates. (2)

2. Briefly describe the trends in the base rate shown in the graph. (3)

3. Interest rate control is part of which of the following policies? (1)

Policy Tick

Fiscal policy

Monetary policy

Supply-side policies

4. Who decides the base rate? (1)

5. State the government’s target rate for inflation. (1)

6. Explain how an increase in interest rates would affect inflation? (4)

7. Explain two reasons why a drop in interest rates will increase demand in the economy. (8)

8. The graph shows that the Bank of England reduced interest rates to 0.5% in 2009.Evaluate the impact of this decision on the government’s main macroeconomicobjectives. (10)

Total marks = 30


18

16

14

12

10

8

6

4

2

0

UK

Bas

e R

ate,

%

’09’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 ’04 ’08’74 ’78 ’82 ’86 ’90 ’94 ’98 ’02 ’06

Suggested answers

Monetary policy: Data response

1. An interest rate is the price a borrower pays for the use of money they do not own.

2. One mark for stating trend. One mark for using data to support answer.

3. Monetary Policy.

4. The MPC.

5. 2%.

6. Inflation should begin to decrease as the level of demand decreases.

7. Increase in mortgage payment.

Less people will buy on credit.

Increased saving.

8. Inflation – may increase if the low interest rate begins to stimulate the economy.

Unemployment – Would decrease as there would be more spending in the economy andfirms would employ workers to keep up with demand.

Growth – Growth should increase as demand increases.


Supply side policies

Activity 1 – True of false

True or False

Supply side polices aim to increase demand in the market ___________

Supply side policies aim to increase supply in the economy ___________

Supply side policies cause cost push inflation ___________

Supply side policies reduce demand pull inflation ___________

Increasing unemployment benefit will increase supply of labour in the market ___________

A cut in income tax will increase supply of labour in the market ___________

A decrease in corporation tax would encourage investment ___________

Education and training would have no effect on supply in the market ___________

Reducing the power of trade unions is a supply side policy ___________

Privatisation can lead to more efficient production and increased competitiveness ___________


Suggested answers

Supply side policies: Activity 1 – True of false

True or False

Supply side polices aim to increase demand in the market False

Supply side policies aim to increase supply in the economy. True

Supply side policies cause cost push inflation False

Supply side policies reduce demand pull inflation True

Increasing unemployment benefit will increase supply of labour in the market False

A cut in income tax will increase supply of labour in the market True

A decrease in corporation tax would encourage investment True

Education and training would have no effect on supply in the market False

Reducing the power of trade unions is a supply side policy True

Privatisation can lead to more efficient production and increased competitiveness True


Supply side policies: Activity 2 – Explain how the following polices increase supply

Policy How this will increase supply

Lower rates of income tax Lowering income tax would provide an __________for people to work because they would get to keepa higher percentage of the money they earn. Thiswill increase output in the economy.

Education and training

Remove barriers to entry in an industry Removing barriers to entry will allow small firms toenter a market which will increase the amount ofgoods and services being produced and theincreased __________ should make companies more__________.

Reduce corporation tax

Privatisation Privatisation is the transfer of control from __________to the private sector. This will increase supplybecause privately-owned companies are moreefficient because they aim to make a __________.

Reduce state welfare benefits

Activity 3 – Sort the six policies above into factors that affect labour andfactors that affect industry

Labour Industry

________________________________________ ________________________________________

________________________________________ ________________________________________

________________________________________ ________________________________________


Word Boxprofit efficient competition

incentive public

Suggested answers

Supply side policies: Activity 2 – Explain how the following polices increase supply

Policy How this will increase supply

Lower rates of income tax Lowering income tax would provide anincentive for people to work because theywould get to keep a higher percentage of themoney they earn. This will increase output in theeconomy.

Education and training Education and training will improveemployees skills which would make themmore efficient so more can be supplied.

Remove barriers to entry in an industry Removing barriers to entry will allow small firmsto enter a market which will increase the amountof goods and services being produced and theincreased competition should make companiesmore efficient.

Reduce corporation tax Companies will have more moneyavailable to invest in new machinery ortraining of workers which will increaseproduction.

Privatisation Privatisation is the transfer of control from thepublic to the private sector. This will increasesupply because privately-owned companies aremore efficient because they aim to make aprofit.

Reduce state welfare benefits Reducing benefits will provide anincentive for unemployed people to get ajob which would increase the supply oflabour in the market.

Activity 3 – Sort the six policies above into factors that affect labour andfactors that affect industry

Labour Industry

Lower rates of income tax Remove barriers to entry in an industry

Education and training Reduce corporation tax

Reduce state welfare benefits Privatisation


Supply side policies: Activity 4 – Match the head to the tail

Activity 5 – Sort the following policies into monetary, fiscal or supply side policies

Policy Monetary, fiscal or supply side

An increase in government spending ____________________

Rules limiting the power of trade unions ____________________

A decrease in the rate of unemployment benefit ____________________

Measures to remove barriers to entry ____________________

A fall in the bank of England base rate ____________________

Financial incentives such as EMA to encourage students to attend collage ____________________

Increasing the money supply ____________________

A reduction in corporation tax ____________________


Monetary policy involveschanges …

Supply side policies aim to …

Fiscal policy involveschanges in taxation …

increase a country’s productive capacity bymaking markets and industries more efficient

government spending and borrowing whichaim to influence economic activity

in interest rates and the money supply whichinfluence demand in the economy

Suggested answers

Supply side policies: Activity 4 – Match the head to the tail

Activity 5 – Sort the following policies into monetary, fiscal or supply side policies

Policy Monetary, fiscal or supply side

An increase in government spending Fiscal

Rules limiting the power of trade unions Supply side

A decrease in the rate of unemployment benefit Supply side

Measures to remove barriers to entry Supply side

A fall in the bank of England base rate Monetary

Financial incentives such as EMA to encourage students to attend collage Supply side

Increasing the money supply Monetary

A reduction in corporation tax Fiscal


Monetary policy involveschanges …

Supply side policies aim to …

Fiscal policy involveschanges in taxation …

increase a country’s productive capacity bymaking markets and industries more efficient

government spending and borrowing whichaim to influence economic activity

in interest rates and the money supply whichinfluence demand in the economy

Supply side policies: Activity 6

Scenario – The UK economy is in a deep recession with low demand and high unemploymentin the economy. Exports are struggling due to a lack of productivity and efficiently in UKcompanies

Explain how you would solve this issue using monetary, fiscal and supply side policies.

Monetary policy A reduction in the base rate would reduce the amount people have topay on their m__________ and on anything they buy on c__________.It would also discourage s__________ as you would get a lower rate of interest. This should increase d__________ in the economy leading toeconomic growth and a reduction in u__________.

Fiscal policy

Supply side policy


Suggested answers

Supply side policies: Activity 6

Scenario – The UK economy is in a deep recession with low demand and high unemploymentin the economy. Exports are struggling due to a lack of productivity and efficiently in UKcompanies

Explain how you would solve this issue using monetary, fiscal and supply side policies.

Monetary policy A reduction in the base rate would reduce the amount people have topay on their mortgage and on anything they buy on credit. It wouldalso discourage saving as you would get a lower rate of interest. Thisshould increase demand in the economy leading to economic growthand a reduction in unemployment.

Fiscal policy A reduction in income tax would provide people with moredisposable income and a reduction in VAT would encouragepeople to spend.

Supply side policy The government could use supply side polices such aseducation and training to improve people’s skills and increasetheir productivity.


Supply side policy: Data response

On 10th June 2009 the Rail, Maritime and Transport (RMT) Union called a strike, asking forimproved pay and guaranteed jobs. Millions of commuters were affected as their normal routeto work was closed. The strike cost London an estimated £100 million as Oxford Street saw100,000 less customers and refunds had to be given to football fans that were unable toattend the England game at Wembley. The RMT strike increases unit labour costs and reducesefficiency making the tube more expensive for consumers. The Mayor of London, Boris Johnsonaims to make tube workers sign a declaration in their contract that they will not strike whichwill hopefully stop any future action. This would be considered a supply side policy as it aimsto improve efficiency.Source: ‘Tube strike disruption continues’, BBC News, Thursday 11 June, 2009.

Supply side polices in the 2009 budget

1. Define the term supply side polices. (2)

2. Using examples from above, explain two supply side policies that aim to improve quantityand quality of labour in the economy. (6)

3. Explain two supply side policies that aim to improve the productivity of industry in theeconomy. (6)

4. Explain why reducing the power of the Rail, Maritime and Transport (RMT) Union isconsidered a supply side policy. (4)

5. Supply side policies are the only way to reduce a trade balance deficit. Do you agree? Givereasons for your answer and try to discuss the following other options:– Encourage a fall in the value of the £ sterling– Increase interest rates– Introduce tariffs (12)

Total marks = 30


Funding to give people workexperience in growing industries

Training or a job available for under-25s who have not been

in work for over 1 year

Money available for over 50,000 new places in sixth forms

£750 million to help emergingtechnology industries

Suggested answers

Supply side policies: Data response

1. Supply side policies aim to increase the productive capacity of the economy by increasingproductivity

2. Training or jobs for under 25’s who have not been in work for over 1 year. This will increasethe quantity of labour in the market.Work experience in growth industries – This will help people gain the skills to become moreproductive.

3. An increase in spending on research and development could improve the efficiency ofindustry, allowing more goods to be produced. Reduction in the power of trade unions.

4. Workers will be unable to strike as easily, reduction in labour costs, improvement in effectas they will not have to always comply with the unions.

5. Encourage a fall in the value of the £ sterlingPro’s – our goods will become more competitive abroad.Con’s – Goods are not improved.

Increase interest ratesPro’s – This will reduce demand for imports as people will have less disposable income.Con’s – It will also reduce demand for domestic goods.

Introduce tariffsPro’s – Foreign goods will become more expensive so domestic goods will be morecompetitive.Con’s – Membership of the WTO limits the ability of a country to freely impose tariffs.


Balance of payments

Activity 1 – Match, explain and fill in the blanks

Below are four causes of a balance of a payment deficit.

1. Match up the solutions below to the cause of the deficit.

2. Explain how these solutions could work and describe the possible drawbacks.

3. Use the word box to fill in the blanks.

Possible solutions to a balance of payments deficit

Increase interest rates Increase spending on education and training

Introduce tariffs on foreign Encourage the pound sterling goods to fall against other currencies

Cause of balance of Possible solution How this solution Possible payments deficit (pick from table above) could help drawbacks

Poor quality goods An increase in spending on High costs.__________ and __________ Not guaranteed to work.would make UK goods more Takes time to have an__________ abroad which effect.would encourage spending on UK goods.

Strong pound A __________ pound would make If done using a fall inUK exports cheaper for interest rates it could customers abroad. cause demand to increase.

Goods won’t be any better than they were before.

Cheap goods from abroad Other countries would notbe happy about anincrease in __________ andcould do the same backto the UK.

Economic growth in the UK Reducing __________causing an increase in __________ could have a spending on imports negative impact as there

would be less spending inthe UK economy which could increase __________.


Word Boxtariffs training economic growth education

weaker unemployment competitive

Suggested answers

Balance of payments: Activity 1 – Match, explain and fill in the blanks

Below are four causes of a balance of a payment deficit.

1. Match up the solutions below to the cause of the deficit.

2. Explain how these solutions could work and describe the possible drawbacks.

3. Use the word box to fill in the blanks.

Possible solutions to a balance of payments deficit

Increase interest rates Increase spending on education and training

Introduce tariffs on foreign Encourage the pound sterling goods to fall against other currencies

Cause of balance of Possible solution How this solution Possible payments deficit (pick from table above) could help drawbacks

Poor quality goods Increase spending on An increase in spending on High costs.education and training. education and training Not guaranteed to work.

would make UK goods more Takes time to have ancompetitive abroad which effect.would encourage spending on UK goods.

Strong pound Encourage the pound A weaker pound would make If done using a fall insterling to fall against UK exports cheaper for interest rates it could other currencies. customers abroad. cause demand to increase.

Goods won’t be any better than they were before.

Cheap goods from abroad Introduce tariffs on By increasing the prices of Other countries would notforeign goods. imported goods, it will be happy about an

cause UK consumers to increase in tariffs andswitch their spending away could do the same backfrom imports and towards to the UK.domestically produced goods.

Economic growth in the UK Increase interest rates. Raising interest rates will Reducing economiccausing an increase in make borrowing more growth could have a spending on imports expensive and reduce negative impact as there

consumer and business would be less spending inspending on imported the UK economy which goods. could increase

unemployment.


Word Boxtariffs training economic growth education

weaker unemployment competitive

Balance of payments: Activity 2 – Balance of Payments

At GCSE the most important part of the balance of payments is called the __________ __________.It consists of two main areas. Trade in __________ and trade in __________. Economists use thecurrent account to see how many goods and services the UK is importing and exporting in ayear. For a number of years the UK has been importing more goods and services than itexports. This is called a current account __________.

For each of the situations below state whether it is example of an import or export.(Hint: is money flowing into or out of the UK?)

Situation Import or Export

A company from Manchester sells a table to a customer in Paris ____________

A UK consumer buys a Mercedes from Germany ____________

A UK consumer buys an insurance service from the USA ____________

HSBC sells banking services to a company based in Korea ____________

A UK individual goes on holiday to Japan ____________

An Italian tourist visits the UK ____________


Suggested answers

Balance of payments: Activity 2 – Balance of Payments

At GCSE the most important part of the balance of payments is called the current account.It consists of two main areas. Trade in goods and trade in services. Economists use thecurrent account to see how many goods and services the UK is importing and exporting in ayear. For a number of years the UK has been importing more goods and services than itexports. This is called a current account deficit.

For each of the situations below state whether it is example of an import or export.(Hint: is money flowing into or out of the UK?)

Situation Import or Export

A company from Manchester sells a table to a customer in Paris Export

A UK consumer buys a Mercedes from Germany Import

A UK consumer buys an insurance service from the USA Import

HSBC sells banking services to a company based in Korea Export

A UK individual goes on holiday to Japan Import

An Italian tourist visits the UK Export


Balance of payments:Activity 3 – Calculate the balance of payments for the following examples

1. Which country has the biggest surplus on its current account?

2. Which country has the biggest deficit on its current account deficit?


A Exports Imports(£ millions) (£ millions)

Goods 84,000 102,000

Services 100,000 116,000

Country A – (Show your working)

B Exports Imports(£ millions) (£ millions)

Goods 112,000 95,000

Services 96,000 102,000

Country B – (Show your working)

C Exports Imports(£ millions) (£ millions)

Goods 120,000 162,000

Services 92,000 106,000

Country C – (Show your working)

D Exports Imports(£ millions) (£ millions)

Goods 109,000 42,000

Services 21,000 50,000

Country D – (Show your working)

Suggested answers

Balance of payments:Activity 3 – Calculate the balance of payments for the following examples

1. Which country has the biggest surplus on its current account? Country D

2. Which country has the biggest deficit on its current account deficit? Country C


A Exports Imports(£ millions) (£ millions)

Goods 84,000 102,000

Services 100,000 116,000

Country A – (Show your working)

(84,000 + 100,000) – (102,000 + 116,000)= – £34,000m

B Exports Imports(£ millions) (£ millions)

Goods 112,000 95,000

Services 96,000 102,000

Country B – (Show your working)

(112,000 + 96,000) – (95,000 + 102,000)= +£11,000m

C Exports Imports(£ millions) (£ millions)

Goods 120,000 162,000

Services 92,000 106,000

Country C – (Show your working)

(120,000 + 92,000) – (162,000 + 106,000)= –£56,000m

D Exports Imports(£ millions) (£ millions)

Goods 109,000 42,000

Services 21,000 50,000

Country D – (Show your working)

(109,000 + 21,000) – (42,000 + 50,000)= +£38,000m

Balance of payments: Data response

Some good has come from the economic crisis that hit Britain in 2009. Exports have soared12.8% on the back of the weakened British pound. Imports have also dropped 5.4%. Thesehave combined to shrink the UK’s deficit from £7.8 billion to £7.3 billion. However there arestill worries that demand could deteriorate in USA and Europe as their own economic problemsincrease.

Source: ONS

1. State the current UK Balance of Payments using the information above. (1)

2. Describe the trend in the UK balance of payments since 2004. (2)

3. Explain what is meant by the current account on the balance of payments. (3)

4. What is meant by a deficit on the current account? (2)

5. Explain how the weakened pound caused exports to increase and imports to decrease. (4)

6. Explain how a high minimum wage could cause a balance of payments deficit. (4)

7. Explain one other cause of a balance of payments deficit. (4)

8. Discuss the advantages and disadvantages of possible solutions to a balance of payments deficit. (10)

Total marks = 30


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-8

-12

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Current Balance (lhs)Current Balance as percentage of GDP (rhs)

Per

cent

ages

Suggested answers

Balance of payments: Data response

1. £7.3bn.

2. A worsening deficit (1) quote data (1).

3. The difference between the value (1) of goods and services (1) exported minus the valueof goods and services imported (1).

4. The value of exports of goods and services is less than (1) the value of imports of goods andservices (1).

5. A weaker £ makes exports cheaper (1) leading to an increase in demand for exports (1). Italso makes imports dearer (1) leading to a decrease in demand for imports (1).

6. A high minimum wage adds to the costs of production (1) which may lead to increasedprices of UK goods (1), possibly reducing demand for exports (1) and if there is alsoincreasing demand for imports (1), then the balance of payments could worsen.

7. Example: Poor quality goods (1) leads to non-price lack of competitiveness (1) resulting inless demand for UK exports (1) and increased demand for better quality imports (1).

8. Identify at least 2 alternative solutions (1 mark each). Explain how each will achieve areduction in the deficit (2 marks each). Comment on advantages and disadvantages ofeach (4 marks).


Exchange rates


Using the data below and your own economic knowledge decide whether the followingstatements are true or false.

Source: Bank of England


An exchange rate is the value of one currency in terms of another ___________

In January 2009 the £1 was worth $2.20 ___________

The value of a currency is determined by the demand and supply of that currency ___________

Between May 2008 and January 2009 the value of the £ weakened ___________

January 2009 would have been a good time for a UK citizen to go on holiday to the USA ___________

In July 2008 I would have received more dollars for my pounds compared with January 2009 ___________

When the £ is weak exports are less competitive abroad ___________

I am a person from the UK going on holiday to the USA. The best time for me to go would be January 2009 ___________

The interest rate in the UK affects the value of the £ ___________


2.1

2.0

1.9

1.8

1.7

1.6

1.5

1.4

1.3May’08

Jun’08

Jul’08

Aug’08

Sep’08

Oct’08

Nov’08

Dec’08

Jan’09

Feb’09

Mar’09

Apr’09

May’09

Jun’09

Dol

lars

per

£ s

terli

ng

Exchange rates: Activity 2 – Fill in the blanks

An increase in interest rates in the UK will lead to more US money being __________ in UKbanks. This is because it is more __________ to save in UK banks as they will get a __________return on their savings.

US dollars must be __________ for UK pounds. This means that there is an __________ demandfor pounds. This causes the value of the pound against the dollar to __________. We say thatthe pound has __________ against the dollar.

Activity 3 – How the value of the pound is determined

Using the diagram below to explain how an increase in the UK interest rate would affect thevalue of the pound. (Hint – use the information in Activity 2 to help you.)


P

Q

P1

S

D1

Q1

Word Boxstrengthened exchanged increasedbeneficial better saved increase

Suggested answers

Exchange rates: Activity 1 – True or false


An exchange rate is the value of one currency in terms of another True

In January 2009 the £1 was worth $2.20 False

The value of a currency is determined by the demand and supply of that currency True

Between May 2008 and January 2009 the value of the £ weakened True

January 2009 would have been a good time for a UK citizen to go on holiday to the USA False

In July 2008 I would have received more dollars for my pounds compared with January 2009 True

When the £ is weak exports are less competitive abroad False

I am a person from the UK going on holiday to the USA. The best time for me to go would be January 2009 False

The interest rate in the UK affects the value of the £ True


An increase in interest rates in the UK will lead to more US money being saved in UK banks.This is because it is more beneficial to save in UK banks as they will get a better return ontheir savings.

US dollars must be exchanged for UK pounds. This means that there is an increased demandfor pounds. This causes the value of the pound against the dollar to increase. We say that thepound has strengthened against the dollar.


Suggested answers

Exchange rates: Activity 3 – How the value of the pound is determined


P

Q

P1

S

D1

Q1 Q2

D2

P2

Exchange rates: Data response

The British are being missed in France this summer as they stay away in numbers that havesparked dismay in the French tourist industry. As the value of the pound against the euro hasweakened, British holidaymakers have found it too expensive to go on holiday in France.

A hotel in Lyon, which in the summer months is usually full of Britons has had to act followingconcerns.

“We’ve lost half our British holidaymakers,” said the manager. “And since the beginning ofJuly, their absence is being felt enormously.” The hotel has had to cut the price of its rooms –from €85 to €75 – in an attempt to fill the hotel.

1. If £1 = €1.16 how much cheaper in pounds will the hotel room be when the price is reduced? Show your working. (3)

2. Explain what is meant by the term exchange rate. (3)

3. With the aid of a demand and supply diagram explain how the value of the pound is determined. (3)

4. (i) State two factors which might cause the value of the pound to strengthen. (2)(ii) Using one of the factors you gave in 4.(i) explain how it would cause the

value of the pound to strengthen. (3)

5. If the pound is said to be weak against the euro what does this mean?You may want to use examples in your answer. (6)

6. Is reducing the price of hotel rooms the best method for the hotel to use to attract more British tourists? Give reasons for your answer. (10)

Total marks = 30


Suggested answers

Exchange rates: Data response

1. When the room is €85 the price in pounds is £73.28.When the room is €75 the price in pounds is £64.66.The room is now £8.62 cheaper per night.

2. An exchange rate is the value of one currency in terms of another. For example £1 = €1.16.

3. The value of a currency is determined by the demand and supply of that currency. Factorsthat cause the demand and supply curves to shift include international trade and interestrate changes and speculation.

4. (i) Increase in the interest rate, speculation, a rise in export sales.

(ii) Speculation – This occurs when foreign investors expect returns on investment are to be higher in the UK soon. So they buy pounds to invest.

5. If the pound is weak against the euro it means you do not get as many euros whenexchanging your pounds. Example £1 = €1.10.

This impacts negatively on international trade making exports more competitive andimports less competitive.

6. Yes – attracts customers easily, if demand is price elastic will increase total revenue.

No – reduces profit margins, may suggest poor quality to potential customers.Other methods – increase advertising, special offers.

Total marks = 30


P

Q

P1

S

D

Q1

Protectionism

Activity 1 – Protectionist policies

How would the following react to the UK imposing protectionist policies?

Tick the relevant face Explain why they would react this way

A small start up car company Protectionist policies would allow the firm to__________ without having to worry about__________ from large __________ firms.

The textile sector in the UK whichcannot compete with the cheap labour costs of foreign firms

Domestic consumers Protectionist policies would limit domesticconsumers’ __________ and may cause themto pay higher __________ because domesticfirms may be less __________ and unable tohave as low prices as were previouslyavailable from abroad.

Chinese companies

A microchip company worried Some countries __________ firms so they canabout ‘dumping’ of cheap imports produce goods below the price of non-

subsidised firms in competitor companies.This would make it impossible for themicrochip firm to __________. Protectionistpolicies would stop these firms from beingable to __________ their goods in the market.

Workers in developing countries

Inefficient firm with a huge Protectionist policies allow monopolymonopoly producers to be __________ as they face no

competition. This is bad for consumers asgoods may be more __________ and__________ quality.


☺ ☹

Word Boxdump choice prices multinational subsidise competitive expensive compete inefficient grow lower competition

Suggested answers

Protectionism: Activity 1 – Protectionist policiesHow would the following react to the UK imposing protectionist policies?

Tick the relevant face Explain why they would react this way

A small start up car company Protectionist policies would allow the firm togrow without having to worry about com -petition from large multinational firms.

The textile sector in the UK which Protectionist policies would protectcannot compete with the cheap the textile sector which is unable to labour costs of foreign firms reduce their costs to compete with

the cheap foreign imports.

Domestic consumers Protectionist policies would limit domesticconsumers’ choice and may cause them topay higher prices because domestic firmsmay be less competitive and unable tohave as low prices as were previouslyavailable from abroad.

Chinese companies Chinese companies that possess theadvantage of a large, cheap labourforce are able to produce goodscheaper. They will be unhappy aboutnot being able to compete in the UKmarket.

A microchip company worried Some countries subsidise firms so they canabout ‘dumping’ of cheap imports produce goods below the price of non-

subsidised firms in competitor companies.This would make it impossible for themicrochip firm to compete. Protectionistpolicies would stop these firms from beingable to dump their goods in the market.

Workers in developing countries Many workers in developing countriesdepend on the job provided by com -panies which produce goods for theUK market. They may be unable to getalternative jobs if tariffs reduce trade.

Inefficient firm with a huge Protectionist policies allow monopolymonopoly producers to be inefficient as they face no

competition. This is bad for consumers asgoods may be more expensive and lowerquality.


Word Boxdump choice prices multinational subsidise competitive expensive compete inefficient grow lower competition

☺ ☹✓

✓

✓

✓

✓

✓

✓

Match the type of protectionist policy to the definition


Quotas

Regulations

Tariffs

Embargoes

Subsidies

A tax placed on imported goods

Government providing tax break, cheap finance or otheraid to make domestic firms more competitive

A ban on goods and services from a country

A restriction on the number of goods and services thatcan be imported into a country

Tactics that make it difficult to export to a country, e.g. demanding a complex set of forms to be filled in

Suggested answers

Match the type of protectionist policy to the definition


Quotas

Regulations

Tariffs

Embargoes

Subsidies

A tax placed on imported goods

Government providing tax break, cheap finance or otheraid to make domestic firms more competitive

A ban on goods and services from a country

A restriction on the number of goods and services thatcan be imported into a country

Tactics that make it difficult to export to a country, e.g. demanding a complex set of forms to be filled in

Protectionism: Activity 2 – Evaluate methods of protection

Imagine you are the international advisor for the president of a developing country. You havedecided to use tariffs, subsidies, quotas or regulations to protect your infant industries frommultinational competition and to create jobs. You must write a report explaining theadvantages and disadvantages of each option and make a judgement as to which one thepresident should use. Use the information provided to help you.


ReportTariffs

Advantages Disadvantages

SubsidiesAdvantages Disadvantages

QuotasAdvantages Disadvantages

RegulationsAdvantages Disadvantages

Judgement

President of the United States

If you put tariffs on our goods, we will do the same for you!

Managing Director of Zoom,your country’s new car industry

Tariffs will allow us to compete withinternational firm’s prices

Struggling start up clothing company

If we were given cheap finance, we may be able to buy the machines tocompete in the international market

International car firm

Following ridiculous regulations andfilling in complex forms makes exporting

to some countries a nightmare!

WTO

If you use subsidieswe will find out and

fine you

News report

There are reportsthat corruption isrife in countries

using quotasystems, withofficials taking

bribes to increasequotas

Consumer

I buy foreign goodsas they are cheaperand much betterquality. Tariffs and

quotas will force meto buy domestic

goods

Protectionism: Data response

The global recession of 2009 could cause a rush to protectionist policies as countries try toprotect their own markets using policies such as tariffs and quotas. There are worries that thiswould affect developing countries the most as they would be unable to access the large,wealthy markets that they rely on. The graph below shows the severe drop in trade inmerchandise goods since the economic crisis. Protectionism would have a negative effect onconsumers who may have to accept higher prices and less choice. Large companies will notbe able to benefit from economies of scale whilst growth in the world economy could slow ascountries no longer specialise and then trade.

Quarterly world merchandise export developments, 2005-09

(2005 Q1 = 100, in current US dollars)

Source: WTO

1. Describe the changes in world trade for merchandise goods from 2005 to 2009. (3)

2. Explain the advantages of using protectionist policies during a recession. (4)

3. Explain three methods of protectionism. (9)

4. Explain why protectionist polices could cause higher prices and less choice for consumers. (4)

5. Using protectionist policies will have a beneficial effect on an economy. Do you agree? Give reasons for your answer. (10)

Total marks = 30


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190

180

170

160

150

140

130

120

100

110

Suggested answers

Protectionism: Data response

1. One mark for describing the trend, one mark for using data to support answer.

2. Allows domestic firms to grow without competition from abroad.

3. Tariff – A tax placed on imported goods.

Subsidies – Government providing tax break, cheap finance or other aid to make domesticfirms more competitive.

Embargo – A restriction on the number of goods and services that can be imported into acountry.

4. Cheaper foreign goods will become more expensive so less choice, domestic firms couldtake advantage of a monopolistic position.

5. Pro’s – Infant firms are now able to grow without threat of competition.Domestic industries which provide employment in a country are protected.

Con’s – Less choice for customers and higher prices. Other countries may imposeprotectionist policies in retaliation which could have a detrimental effect on UK exports.


The Euro

Activity 1

Imagine that you are the economics editor for a major British newspaper. You have been askedto write an article for the front page which explains the advantages and disadvantages ofjoining the Euro.

You must come up with a conclusion which is based upon your argument. Use the informationboxes to help you.


THE DAILY NEWS

Headline

Advantages of joining the EU

Disadvantages of joining the EU Conclusion

UK tourist

“Joining will mean I won’t have to paythe transaction costs involved with

changing currency.”

UK consumer

“Prices would be transparent. I could easily see if something is

cheaper abroad.”

American car firm

“We would be muchmore interested ininvesting in the UK if they joined

the Euro.”

UK car firm

“Finally we could look towards the long term without worryingabout exchange rate risk.”

UK Citizen

“The pound is asimportant as the

Queen. We cannotlet it go!”

The Bank ofEngland

“How will wecontrol inflation

if we can nolonger changeour interest

rates?”

The Treasury

“It will cost afortune to design,and distribute thenew currency. Hasno one thought ofthese transitional

costs?”

www.dailynews.com The worldʼs favourite newspaper

Summary of main arguments

✓

✓

✓

✓

✗

✗

✗

✗

Activity 2 – The European Union

1. Shade in the member states of the EU on the map.

2. Shade in the other European countries in a different colour.

3. 16 of the EU members use the Euro. Write down as many as you can in the box below.

Member states of EU

Other European countries


Suggested answers

Activity 2 – The European Union

1. Shade in the member states of the EU on the map.

2. Shade in the other European countries in a different colour.

3. 16 of the EU members use the Euro. Write down as many as you can in the box below.

Member states of EU

Other European countries


Belgium Germany Ireland France

Luxembourg The Netherlands Italy Austria

Portugal Spain Finland Greece

Cyprus Malta Slovakia Slovenia

EU: Data response

The American president Barack Obama recently backed Turkey’s troubled bid for EUmembership. He said “Turkish membership would broaden and strengthen Europe’sfoundation.”

However, not everyone agrees with this view. The French president said “I have always beenopposed to this entry and I remain opposed”

The issue of Turkey joining the EU has divided opinions for a number of years. Supportersargue that Turkey’s strong economic growth and large workforce make them excellentadditions to the community.

Those against the move argue that Turkey is still a poor country with low living standardscompared to the EU and as such would become an economic drain on other EU countriesespecially as a flood of migrants would be expected to move from Turkey to more prosperousareas of the EU.

The Turkish question does not look like one which will be answered soon, despite Mr Obama’swishes.Source: ‘Obama reaches out to Muslim world’, BBC News, Monday 6 April 2009.

1. How many countries are there in the EU? (1)

2. Name five members of the European Union. (3)

3. Name two countries who have adopted the Euro. (2)

4. Explain one reason why Obama would like Turkey to join the EU. (2)

5. Explain two main features of the European single market. (4)

6. Explain how Turkey’s strong economic growth and large workforce could be beneficial to other EU countries. (4)

7. Discuss the impact on the Turkish economy if they were to join the EU. (6)

8. Evaluate the impact of Turkey joining the EU on British companies. (8)

Total marks = 30


Suggested answers

EU: Data response

1. 27.

2. France, Germany, Italy, Ireland, UK etc.

3. Spain, Germany etc.

4. Turkey would be more likely to maintain good links with the West.

5. No internal tariffs, common external tariffs, free movement of people.

6. Turkey’s increasingly rich population could spend their income on goods from the EU.

7. A good answer must include identification and explanation of 2 benefits and 2 costs.

Benefits – Access to EU market with no protectionist policies, financial support from the EU,FDI.

Costs – Possible ‘Brain drain’, workers may be given low paid jobs in multinational factories.

8. A good answer must include identification and explanation of 2 benefits and 2 costs. A conclusion must be reached.

Benefits – Access to a new market, migrants from Turkey could provide cheap labour.

Costs – More competition, Turkey could produce cheaper goods due to low labour costs.


Globalisation


Globalisation is the rapid increase in ___________ ___________ , coupled with the growth oflarge ___________ ___________. The pace of globalisation has exploded in the past 25 years fora number of reasons. Improvements in ___________ such as the ___________ has allowedcompanies to spread across the globe with products designed, produced and sold in a numberof different countries. Reduced costs of ___________ has also had a big impact as have reductionsin ___________ ___________. Many view globalisation as positive pointing towards increased___________ ___________ in developed countries and improved ___________ ___________.However there are opponent to globalisation who believe ___________ ___________ are beingtake advantage of with workers receiving ___________ ___________ and poor ______________________.


Word Box

economic growth communication transport developing countries

internet low pay working conditions trade barriers

international trade living standards multi-national companies

Suggested answers

Globalisation: Activity 1 – Fill in the blanks

Globalisation is the rapid increase in international trade, coupled with the growth of largemulti-national companies. The pace of globalisation has exploded in the past 25 years fora number of reasons. Improvements in communication such as the internet has allowedcompanies to spread across the globe with products designed, produced and sold in a numberof different countries. Reduced costs of transport has also had a big impact as have reductionsin trade barriers. Many view globalisation as positive pointing towards increased livingstandards in developed countries and improved economic growth. However there areopponents to globalisation who believe developing countries are being take advantage ofwith workers receiving low pay and poor working conditions.


Word Box

economic growth communication transport developing countries

internet low pay working conditions trade barriers

international trade living standards multi-national companies

Globalisation: Activity 2 – For and against

Imagine you are an anti-globalisation protester. You must try to think of arguments thatcounter the pro-globalisation arguments below.

Pro globalisation argument Opposing view from anti globalisationprotester

Large firms will be able to take advantage of economies of scale leading to cheaper prices

More choice of products There is less choice as companies such as Coca Cola dominate

Income will be shared between all countries so there will be smaller differences in wealth

Countries will become more dependent on each other so there may be fewer wars

Now imagine you are a large multinational company. You must try to think of argumentsthat counter the anti-globalisation arguments below.

Opposing view from large Anti globalisation argumentmultinational company

Globalisation causes pollution in developingcountries

Large multinational companies takeadvantage of cheap labour and providepoor working conditions and low salariesto their workers in developing countries

People are more understanding of Globalisation takes away the culture ofdifferent countries as they are able to developing countriesvisit them


Suggested answers

Globalisation: Activity 2 – For and against

Imagine you are an anti-globalisation protester. You must try to think of arguments thatcounter the pro-globalisation arguments below.

Pro globalisation argument Opposing view from anti globalisationprotester

Large firms will be able to take advantage Large firms will exploit their monopolyof economies of scale leading to cheaper power setting higher pricesprices

More choice of products There is less choice as companies such as Coca Cola dominate

Income will be shared between all Increased income inequality as the richcountries so there will be smaller benefit more than the poordifferences in wealth

Countries will become more dependent Competition for scarce resources,on each other so there may be fewer wars e.g. oil increases the risk of war

Now imagine you are a large multinational company. You must try to think of argumentsthat counter the anti-globalisation arguments below.

Opposing view from large Anti globalisation argumentmultinational company

Large companies have the profits to Globalisation causes pollution in developingpay for technology to reduce countriespollution

Large companies will train workers Large multinational companies takeproviding them with improved skills advantage of cheap labour and provideand a better chance of increased pay poor working conditions and low salariesand working conditions to their workers in developing countries

People are more understanding of Globalisation takes away the culture ofdifferent countries as they are able to developing countriesvisit them


Globalisation: Activity 3 – International trade

Absolute advantage – State which of the following countries has an absolute advantage in theproduction of each product.

Without trade using 50% of resources on each product.

Germany has an absolute advantage in ________ China has an absolute advantage in ________

Spain has an absolute advantage in ________ France has an absolute advantage in ________

If each country was to specialise, how many more goods would be produced?

________ more oranges would be produced ________ more wine would be produced

________ more cars would be produced ________ more clothes would be produced


Spain Germany

Oranges 320 140

Cars 250 400

Spain Germany Total

Oranges 640 0

Cars 0 800

China France Total

Wine

Clothes

China France

Wine 210 600

Clothes 900 120

Suggested answers

Globalisation: Activity 3 – International trade

Absolute advantage – State which of the following countries has an absolute advantage in theproduction of each product.

Without trade using 50% of resources on each product.

Germany has an absolute advantage in cars China has an absolute advantage in clothes

Spain has an absolute advantage in oranges France has an absolute advantage in wine

If each country was to specialise, how many more goods would be produced?

180 more oranges would be produced 390 more wine would be produced

150 more cars would be produced 780 more clothes would be produced


Spain Germany

Oranges 320 140

Cars 250 400

Spain Germany Total

Oranges 640 0 640

Cars 0 800 800

China France Total

Wine 0 1200 1200

Clothes 1800 0 1800

China France

Wine 210 600

Clothes 900 120

Globalisation: Activity 4 – Costs and benefits of trade

Explain the following benefits of international trade in one sentence for each aspect.

Economies of scale

Choice

Specialisation

Innovation

Increased competition

Explain the following costs of international trade.

Loss of monetary policy

Overdependence

Loss of employment

Pollution

Loss of culture

Extension – To what extent do you agree that the benefits of international trade outweigh the costs? Justify your answer. (10)


Globalisation: Activity 5

International trade and globalisation – Data response

1. Use the boxes above to explain two advantages of international trade. (4)

2. Explain what is meant by globalisation (3)

3. Use the information above and your own economic knowledge to explain the costs of globalisation. (4)

4. Explain what is meant by absolute advantage. (2)

5. Explain the role of the WTO. (3)

6. The case for international trade is stronger than the case against. Do you agree? In your answer you could refer to particular groups such as:– Consumers– Firms– Developing countries (14)

Total marks = 30


The richest 10% of households in theworld have as much yearly income as

the bottom 90%.

Poverty, on the other hand, iswidespread across the developing

countries – which have over 80% of the world’s population.

The rich are concentrated in the US,Europe and Japan, with the richest

1% alone owning 40% of the world’swealth.

Competition from international tradeforces firms to be more efficient.

Poverty, on the other hand, iswidespread across the developing

countries – which have over 80% of the world’s population.

International trade gives more choice to consumers.

International trade allows countries tospecialise in producing goods andservices that they have an absolute

advantage in.

Suggested answers

Globalisation: Activity 4 – Costs and benefits of trade

Extension – To what extent do you agree that the benefits of international trade outweigh the costs? Justify your answer. (10)

For maximum marks, both advantages and disadvantages must be explained and weighed upto give a conclusion.

Activity 5 – International trade and globalisation – Data response

1. Identify two advantages (2) and explain each (2).

2. Any good definition, highlighting the interdependence of countries due to expansion ofworld trade.

3. Any two costs identified (2) and explained (2).

4. Absolute advantage occurs when a country is capable of producing more goods thananother country with the same resources.

5. Refer to the WTO website, where their purpose is described as facilitating world trade.

6. A good answer will refer to both the good and bad effects of trade on at least three groups.There will be a reasoned conclusion.

ConsumersBenefits – More choice, cheaper goods.Costs – Possibility of large monopolies increasing prices.

FirmsBenefits – Larger market to sell their products, can take advantage of economies of scale.Costs – Small firms may not be able to compete, workers may lose jobs.

Developing countriesBenefits – Access to goods from across the world, jobs.Costs – Loss of culture, pollution, low paid jobs in ‘sweat shops’.


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