IGCSE Economics Paper-1: Specimen Questions with Answers 15 - 16 of 27

Question number: 15

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MCQ▾

Question

Developers want to increase the size of a major retail shopping area in a city. It is thought that the proposal would create hundreds of jobs, be profitable for the shops but cause major traffic congestion. What economic concepts are involved in this statement?

Choices

Choice (4)

a.

Social benefit and perfect competition

b.

Private investment and a decrease in supply

c.

External cost and private benefit

d.

Income distribution and inelastic demand

Answer

c.

Explanation

  • It creates hundreds of jobs and profitable for the shops in the shopping area. It benefits the people who are directly involved in this economic activity. It’s called as private benefit. But this activity creates more traffic. So people who are not directly involved in this activity are getting affected. This is called as external cost.

  • It didn’t mention about income distribution, demand, supply and perfect competition. None of the other income distribution and inelastic demand, private investment and a decrease in supply, social benefit and perfect competition are correct.

Question number: 16

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Short Answer Question▾

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Ireland has attracted a significant number of foreign multinational companies (MNCs) to set up production in the country. These firms employ approximately 10 % of the country’s labour force and make a high proportion of Ireland’s exports. The surplus on the current account of Ireland’s balance of payments fell in 2016 while government spending rose.

Discuss whether or not an increase in government spending will reduce a surplus on the current account of that country’s balance of payments. (Marks 8)

Explanation

  • If government’s expenditure is getting increased on importing goods and services, this will create imbalance in current account. E. g. Import of weapons for defense purpose. This may increase import and decrease export. This may reduce current account surplus. If government spends more on providing state benefits, people’s income will get increased. They may increase demand for imported products. This may again reduce current account surplus.

  • The increase in government expenditure will increase aggregate demand. Aggregate demand = Consumer expenditure + Investment expenditure + Government expenditure + Net exports. This may cause demand pull inflation. As the price level is high, demand for products in international market will get decreased. This decreases export revenue of the country. Export revenue may become lower than import expenditure.

  • But not all the increase in government spending will reduce a surplus on the current account. If government spends on education and healthcare, people will become skilled and healthy. Productivity of them will be high. This will increase quality and decrease cost of production. This may attract foreign customers as they can get better quality products at low price.

  • This will increase export and decrease import. The government can spend more on providing subsidies. This will decrease cost of production and increase supply of products. As supply is increased, producer may reduce price to boost demand. This will increase international competitiveness of the products. This will boost export and improve current account surplus.

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