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May/June 2008 P2 Q3 (a) - Safia

Explain what determines the size of a countrys

labour force. (8)

Labour force is one of the factors of production when

needed to use to produce goods and/or services. It is also
defined as the total number of people employed or
seeking in a country or region which can also refer as
employed and unemployed. Employed is defined as able
and willing to work and has a job whereas unemployed
simply means able and willing to work but has no job.
One of the elements that determine the size of a
countrys labour force is the duration of education process
that was implied by the government. The shorter the
duration of education, the larger the size of a countrys
labour force. For example, in country A the secondary
education is 5 years, whereas in country B is 4, the one-
year difference in education may seem negligible but in
the long run, it is significant in numbers.
Next, the retirement age of a country also determines
the size of a countrys labour force. The older the
retirement age, the bigger the size of a countrys labour
force. If country As retirement age is 55 whereas country
Bs retirement age is 60, the difference in age may
contribute to the size of the countrys labour force thus
country B may have a larger labour force than country A.
Following to that, higher education opportunities
influence the amount of labour force in a country. When
offered higher education opportunity, the duration of
education process is longer leading to becoming a labour
force later compared to not obtaining a higher education
opportunity. Thus when pursuing higher education, it leads
to a smaller size of a countrys labour force.
Lastly, employers attitude towards women working
may also determine the size of a labour force as in certain
countries; gender equality may seem as an offence to the
male gender. They prefer the male gender to be more
superior compared to the females. If this attitude is
applied in a country, job opportunities may be lesser for
women thus leading to a smaller size of a countrys labour
May/June 2012/ P21- Q2 (b) ShuQi
Discuss the difficulties involved in changing a
planned economy to a successful market economy
Definition: Planned economy is a centrally-planned
economy, where there is no privatization and all trading
are under the government. Government will allocate
resources and there is direct provision of goods. The
whole economy and assets are owned by the state.
Market economy is an economy where
everything is left to the invisible hand and market forces.
There is limited government intervention and all
enterprises are owned privately and they are profit
Knowledge: In changing from a planned economy to a
successful market economy, there are a lot of factors that
are needed to be changed. There must be competition
between the firms, entrepreneurs must be able to
innovate and create their own product without much help
from the government, the extent to which merit goods
and public goods should be provided by the government,
privatization of companies, existence of market, taking
risk and profit-motivated. The goods might become more
expensive and there will be unemployment.
Application: Some are easily changed while some may
take years to change. Selling off state owned companies
do not take a long time and can be done easily. However,
to encourage entrepreneurs to take risk and to innovate
is quite difficult and take many years to change their
mindset. They may be used to the instructions by
government on what, how much and how to produce.
When they are suddenly left on their own, they may find
it too difficult to adapt and their business may go
haywire. Unemployment may also happen as private
companies are profit-motivated and will not provide jobs
to many in order to decrease cost of production. Prices of
goods may increase and this will cause social unrest
when consumers feel burdened and their livelihood is
affected. When there is limited government intervention,
it may be hard for them to set maximum and minimum
prices and they may not be able to control the production
of demerit goods. Merit goods such as healthcare and
education are also privatized and it will become more
expensive to the consumers. It is also hard to encourage
competition between the firms as they might still be
dependent on the government.
Conclusion: In conclusion, there are some difficulties
when changing from planned economy to a successful
market economy. Some of them can be changed easily
while some may take years. It is impossible to set a
guideline on how to change to a market economy, as it is
different for every country.

O/N 2011/P22 Q2(b) Terence

2. (b) Discuss whether the combination of improved

technology and globalisation will result in solving
the basic economic problem.
Define Basic Economic Problem:
For whenever a decision is required to be made,
there will always result in an opportunity cost which
is present which is the next best alternative forgone.
This is because people have unlimited wants when
the world only has limited and scarce resources.
Improved Technology:
Use resources more efficiently, able to produce more
per unit of resource.
Find newer ways of recycling and reusing old
Allows for specialisation of products, countries may
focus solely on producing one good, being more
efficient with their resources.
Improved Technology and Globalisation:
There will always be substitutes to all kinds of
products (globalisation causes countries producing
the same product to compete)
Wants are always infinite, and it is impossible to fill
up an infinitely deep cup.


May/June 2004 Question 3 (a)(b) Austin
3 (a) Increasing raw material costs cause the price
of a good to rise. Explain the effect of this price rise
for the good on the markets for its substitute and
complementary goods.[8]
Substitutes goods are different goods that, at least partly,
satisfy the same needs of the consumers and, therefore,
can be used to replace one another. Price of such goods
shows positive cross-elasticity of demand. Thus, if the
price of one good goes up the sales of the other rise, and
vice versa.

Complementary goods is a good or service that is used in

conjunction with another good or service. Usually, the
complementary good has little to no value when
consumed alone but, when combined with another good or
service, it adds to the overall value of the offering. Also,
good tends to have more value when paired with a
complement than it does by itself.

Substitutes and complements may be described or

analysed via XED. A price rise reduces the quantity
demanded of the good itself. The demand for
complementary goods will also decline, reducing their
price. The higher price will make substitutes more
demanded, causing their price and output to rise.
Examples can illustrate this and demand and supply
diagrams can show the process.
Cross price elasticity of demand analysis diagrams

(b) Discuss the usefulness to businesses of a

knowledge of price elasticity of demand and income
elasticity of demand
Price elasticity of demand (PED or Ed) is a measure used
in economics to show the responsiveness, or elasticity, of
the quantity demanded of a good or service to a change in
its price.
Income elasticity of demand measures the responsiveness
of the demand for a good to a change in the income of the
people demanding the good
Price and income elasticity affect the response of quantity
demanded to changes in the respective variables. For a
firm this will affect its revenue and the markets it serves.
Firms can use price elasticity of demand (PED) estimates
to predict:

* The effect of a change in price on the total revenue &

expenditure on a product.
* The likely price volatility in a market following
unexpected changes in supply this is important for
commodity producers who may suffer big price
movements from time to time.
* The effect of a change in a government indirect tax on
price and quantity demanded and also whether the
business is able to pass on some or all of the tax onto the
* Information on the price elasticity of demand can be
used by a business as part of a policy of price
discrimination (also known as yield management). This is
where a monopoly supplier decides to charge different
prices for the same product to different segments of the
market e.g. peak and off peak rail travel or yield
management by many of our domestic and international

The concept of PED is important to firms because;

* The more close substitutes in the market, the more
elastic is the demand for a product because consumers
can more easily switch their demand if the price of one
product changes relative to others in the market.

* The degree of necessity or whether the good is a luxury

goods and services deemed by consumers to be
necessities tend to have an inelastic demand whereas
luxuries will tend to have a more elastic demand because
consumers can make do without luxuries when their
budgets are stretched. I.e. in an economic recession we
can cut back on discretionary items of spending

* The % of a consumers income allocated to spending on

the good goods and services that take up a high
proportion of a households income will tend to have a
more elastic demand than products where large price
changes makes little or no difference to someones ability
to purchase the product.
* Whether the good is subject to habitual consumption
when this occurs, the consumer becomes much less
sensitive to the price of the good in question. Examples
such as cigarettes and alcohol and other drugs come into
this category
The producer would also want to understand and
evaluate the reaction of consumers to the product that
they are producing when the income of people increases
whether through economic booming or economic growth
for further business strategies. For example, if the
producer is producing jewellery, when the income of the
people increases, people would buy more jewellery
However estimates may be inaccurate, circumstances
may change and there may be little use of or trust in the

O/N 2002 Question 4 (b) Hazri

How does government increase the provision of

public and merit goods
Public goods non-excludable, non rival
the individual usage wont consume
example, national defense, light house
Merit goods goods which are judged on the basis
of same concept of the s same needs and
example, health service,
education, subsidies

Can be supply according to the priorities
G needs to identify the provision and the current
supply detect and avoid surplus of public goods
Priorities including education and health system in
the country
eg, fortify the education system (build more schools,
trainings for teachers) & improving the health system
(free vaccinations, more clinics)

Subsidize private firms
- helps to produce more goods, especially merit
- in terms of education, G needs to intervene the
private college or at least maximize the
involvement to avoid oppression to the citizens
- allows to increase the subsidy given to the people,
more production will be made in return
- minimize the free-rider problem
Impose taxation
- prominent and major funding for public goods
- increase in tax correspond with the increment in the
provision of public goods
- More funds are needed and necessary to increase
the provision
- Eg of tax Direct Tax and Indirect Tax
- Direct Tax compulsory tax on products
- Indirect Tax Specific (based on quantity) and
Advelarem (per unit tax on percentage price of a
- Can be passed down the burden to consumer
- Increase the tax to increase G revenue
- Graphs shifting in Equilibrium Price (pertaining to
tax increase)
Unfunded mandates
- An example is the requirement that every car be fit
with a catalytic converter
- This may be executed in the private sector, but the
end result is predetermined by the state: the
individually involuntary provision of the public
good clean air

Different government have different approach to
increase the provision of public and merit goods
Eg, Malaysian G uses GST to increase GR (thus
increasing public goods in the long run)
Eliminate the free rider that caused market failure to
make it more efficient
October/November 2004 Question 4(b) Suanne
4b) Discuss whether economic actions by
individuals always result in a net benefit to society.

Def: Individuals can be buyers or sellers that make

all the main economic decisions at his or her own

The benefits
1. Make decisions
-free to make decisions
-able to maximise satisfaction from consumption
-motivated by the profits

2. Competitions
-producers will look for new innovations to compete
with the others
-many firms producing a variety of goods and
-create efficiency in productions
-wider choices for the consumers
-more efficient use of scarce resources

The harmful effects

1. Public goods (free rider problems)

-not profitable for the firms
-difficult to prevent people who dont pay for it from
using it
-no one is willing to pay for it
-producers will consider only those benefits and
costs that directly affect him or her.

2. Merit goods (under-consumed)

-which are socially desirable
-under-provided by the market mechanism
-individuals lack of informations and do not
appreciate the benefits that would occur
Both public and merit goods may not be provided or
be under provided by the individuals.


Goods which are not profitable are mostly provided

by the government.
But mostly private firms benefit more to the society
due to the wider choices, making decisions to
maximise consumers utility.
May/June 2013/P21 2(a) - Paul

M/J 13/P21 2(a)

Explain, using a diagram, how the social cost of
consuming some goods can exceed the private cost
of consuming them. [8]

The private marginal cost (PMC) of consuming an item is

the total monetary and non-monetary cost to the
consumer. The social marginal cost (SMC) is the total
private marginal cost and negative externalities added up
together. The negative externalities causes a divergence
between the PMC and the MSC, and this results in a
market failure.

A prime example of a good with high negative

externalities is cigarettes. When the consumer purchases
a packet of cigarettes, it would cost him or her the price of
the packet of cigarettes (monetary) and also the health
problems that are caused by it (non-monetary). That is the

However, when the consumer smokes the packet of

cigarettes, negative externalities will also be suffered by
the society. For example, the second-hand smoke might
cause health problems to the people around the smoker.
The ash from the cigarettes might stain the walls and
ceilings of buildings. People around the smoker will also
need to endure the irritation from the cigarette smoke
when they are around the smoker.

Because of these externalities, a deadweight loss is

created as more than the efficient amount is produced. A
responsible government will try to make up for it by
introducing taxes to shift the supply curve so that it is the
same as the SMC. By doing so, a social equilibrium can be
O/N 2010/P23 - Q2(a) - Terence

O/N 11/23
2. (a) Explain the difficulties of carrying out a cost-
benefit analysis.
Define Cost Benefit Analysis:
-Determining whether a particular action should be done
after analysing its social costs and benefits.
-A technique for assessing the monetary social costs
and benefits of a capital investment project over a
given time period.
Why do we use a CBA?
-To simplify major decisions made by big public sectors for
things such as new motorways, vaccinations or factory
-To determine if a market failure is present in the economy.

Problems with the CBA:

Some events are monetary such as running
cost(hiring staff) + capital cost(new equipment), but
some costs are non-monetary such as damage to the
environment and are very difficult for a value to be
put to it.
Not everyone may be affected by the same problem.
Are future generations taken in to consideration as
stakeholders? What about non-human stakeholders
such as animals?
Costs and Benefits are both completely opposite
things. This means that a cost or benefit will affect
people differently depending on their current income
state. If the costs are borne by the poor and the
benefits received by the rich then there is that factor
to be compensated as well.
Some CBAs require the evaluation on human life.
The CBA is a good thing to use in order to make big
decision, especially major ones such as construction
of new airports. However, there are many difficulties
in carrying out a CBA as mentioned above. Not all
cost and benefits may be calculated effectively or

May/June 2003 Question 4 (a)(b) Azaki

4a) Explain the difficulties of measuring inflation

Meaning of inflation
Inflation can be defined as a continuous increase in the
general price level of goods and services in the economy.
The consumer price index is used to measure the rate of
inflation. The consumer price index ( CPI ) is an index that
measure changes in the average price of consumer goods
and services. The CPI is also called the cost of living
goods. The following formula shows how the rate of
inflation is computed.

Inflation rate = CPI this year CPI previous year x 100

CPI previous year

Since we need to used CPI to calculate inflation, we can
say that the problems in constructing the CPI are also the
difficulties of measuring inflation accurately.
1) Selection of the base year
- The base year is the year where prices are stable
and other factors are constant.
1) Selection of basket of goods
- Occur due to the selection of goods to be put in
the basket. Some of the goods might not be those
that from part of the real consumer spending.
1) Prices of the selected goods
- The prices of goods changes at certain times in a
year, thus giving rise to the problem of choosing
the right price level to be considered.
1) Weightage
- Different people have different tastes and
preferences. The weight given for each item differs
from one person to another.

4b) Discuss whether inflation is necessarily

Meaning of inflation
Inflation can be defined as a continuous increase in the
general price level of goods and services in the economy.

A continuous substantial rise in the general price level is
injurious to the communitys social economic interests, in
terms of current welfare and future economic
development. Inflation affects the consumers real
disposable personal income and their expenditure pattern
because the money value has fallen and lesser goods can
be purchased.

Inflation tends to be harmful to these group of people :
1) Distribution of income
a) Fixed income earners
o Constant nominal income
o Real income decrease
o They tend to spend more
o Purchasing power decrease
a) Holders of :-
o Government bonds
o Fixed deposits in banks
o Life insurance policies
o Money
a) Creditors
o When they received the money owed to
them, the real value of the money will be less
a) Savers
o They lose often nominal income rate is
lower than that inflation rate
o When they received their money back, the
value of money has been decrease
1) Savings
- The value of fixed deposits, bonds, life insurance
policies and money would depreciate in terms of
real income ( purchasing power ). Since inflation
depreciate those value, people will save less and
invest in non-financial sector houses and land.
We also can gain a few benefits from the inflation :
1) Distribution of income
a) Businessman/profit earners
- Gain even higher profit from the rising prices
a) Property owners
- Eg. Real estate owner, land owner they gain
when the property prices increase
a) Shareholders
- Shareholders who receive higher dividends since
companies profit are higher
a) Debtors
- The real value of money has changed ( decrease )

1) Production
- General level of prices rises producers make
higher profit (they hold old stocks).
- Producers will increase their level of production
and investment create more job opportunities
and reduce unemployment.

O/N 2006 Question 4(a)(b) - Jun

4 a) Explain the difference between cost-push
inflation and demand-pull inflation. [8]

Define inflation A sustained rise in the general price level

which leads to a reduction in the value of

Cost push inflation Inflation caused by the increase in

cost of production such as land, labour, capital and
e.g.-Increase in price of raw materials.
-Increase in wages

Demand pull inflation Inflation caused by increases in

aggregate demand.
Most likely happen when the
economy is healthy.
-change in consumer spending
-change in G expenditure
-too much money in the market

4 (b) pending..
May/June 2008 P2 Q3 (b) - Safia
Discuss whether a widespread shortage of labour
might be a major cause of inflation

Inflation measures the annual rate of change of the
general price level in the economy. Inflation is a
sustained increase in the average price level.
There are different types of inflation and the most
common ones are mild inflation and hyperinflation.
Mild inflation is when general price level shows mild
rising trend (e.g. 1 to 5 percent per year). Hyper
inflation is when the general price level increases
extremely rapidly.

A shortage of labor might also be caused by rising
wages. If wages rise, firms will try to pass on the cost
increases to customers leading to cost push inflation.
If wages rise, workers have an increase in income
leading to higher disposable income and higher
spending. this can cause demand pull inflation. Both
could contribute to inflation

In contrary to that, with a shortage of labour, inflation
can be avoided. If the underlying causes of inflation are
ignored, a shortage of labour puts upward pressure on
wage increases, but, other factors affect inflation.
If interest rates are being increased and the economy is
experiencing efficiency savings, overall inflation may
not be affected very much.

In conclusion, there are other factors that should be
put to consideration as they might be more
significant on the influence on inflation such as
money supply increases, increases in aggregate
demand, price of materials for production cost
increase and etc.
May/June 2010/P23 Q3 (a)(b) Danial

3 (a) Explain why unanticipated inflation is often

considered more of a problem than anticipated
inflation. [8]
> Introduction:
-Inflation : a sustained rise in the general price of
goods and services
- 2 types of inflation :-
@ anticipated an accurately predicted rate of
@ unanticipated an inaccurately predicted rate of
> Point 1:
- understanding anticipated inflation
@ an inflation rate that was predicted
accurately by firms/economists etc
@ measures can be taken effectively counter
the effects of the inflation
@ price increase, wage increase, interests rate.
> Point 2:
- understanding unanticipated inflation
@ occurs when the real inflation rate is well
below or higher than the expected inflation rate
@ inflation gets volatile from year to year,
harder to predict and errors are easily made
@ measures that had been taken becomes
> Point 3
- effects of anticipated inflation
@ creditors are able to set the right interest
rates for debtors and not lose out
@firms can readily plan out on the percentage
increase of wages
@savers can determine wether or not and how
much they should save money in banks in order
to gain a win in this situation.
> Point 4
-effects of unanticipated inflation rates
@ if higher than anticipated, money lenders will
lose out easily. If lower than anticipated ,
debtors lose out too much.
@ firms face problems in determining the
structure of their market.
@ savers will opt to not save due to the
uncertainty of future inflation rate
> Closure:
Inflations can be volatile
Can be determine easily in the early years
It gets harder as years passed by
Unanticipated are problematic
Measures taken becomes ineffective and irreversible
Can easily lead to a big loss.
Inflations rates are not easy to be predicted

(b) Discuss whether inflation is more likely to be

caused by domestic or international influences. [12]
> types of inflation:
- cost push inflation
- associated with rises in the cost of industry
- e.g raw materials
- demand pull inflation
- aggregate demand is outpaces aggregate
- full employment, aggregate demand rises high
- Causes of inflation are classified as monetary,
cost- push and demand-pull

Point 1:
> Domestic influences :
High average earnings in the society, higher
purchasing power thus leading to a high aggregate
Firms in the country increases profit margins
Full employment in the country leading to high
aggregate demand and demand pull inflation
Increase in price of raw materials in the country (e.g
oil) cost push inflation
Declining productivity that allows costs to rise.

Point 2:
> international influences:
Inflation in the linked countries. We import goods
from countries that are facing inflation
Inflation is imported into the country as well. Pay a
high price
Shortage in supply of one raw material all over the
world. Price have to be increased in order to control.
Both results in cost push inflation.

> every factor is either under the demand pull
inflation or cost push inflation
> as much as the inflation is affected by
international influences, the domestic factors has a
bigger play in this


Discuss whether the effect of the rate of inflation
on the exchange rate is more or less important than
the effect of the exchange rate on the rate of

Define the rate of inflation and the exchange rate.
Inflation : a sustained increase in the cost of
living or the average / general price
level leading to a fall in the purchasing power of

Rate of inflation : the rate is measured by the annual

percentage change in consumer prices.

Exchange rate : the rate at which one currency

trades against another on the foreign exchange

Effect of the rate of inflation on the exchange rate:
o High inflation rates
Country becomes less competitive in
international trade
Exports fall, imports rise, current balance
may worsen
International confidence on currency may
fall (less investment and financial flow will
be disrupted)
Less demand and increased supply on
currency (currency will depreciate)
o Low inflation rates
May not have a noticeable effect

Effect of exchange rate on the inflation rate:

o Depreciating exchange rate
Imports will become much more expensive
Exports will become cheaper
o Appreciating exchange rate
Reduce inflationary pressure

Both the exchange rate and the inflation rate affect each
other. However, the impact of both rates varies at how
high or low these rates are.


Rate of productivity output per labor per hour.
Rate of Inflation -the rate at which the general price of
goods and services increases. A high rate of inflation
would reduce purchasing power as the price of goods and
services would be too high for consumers to purchase.

The governments motive in the end is to apply a model

that better ensures social economic welfare of its people.

Governments should Raise the economys rate of

-Increase Specialization: Opening and investing
specialized industries, Specializing labour

- Increase Training : Giving training to labour so they

have greater skill sets and are able to perform tasks
more efficiently (skilled labour also has a greater chance
of employment compared to unskilled labour)

-Better Resource management Ensuring that limited

resources are utilized effectively and efficiently

All these measures, when applied, would ensure that a

country would foster economic growth but a country would
not be able to even carry out these methods if its level of
inflation fluctuates drastically.

Therefore, Governments should prioritize controlling a

countrys rate of inflation rather than raise its economic

When a countrys inflation rate is mild and stabile
then it ensures that distribution of wealth amongst
consumers is kept in check.
Individuals would be more confident when to invest
as well as save.
People dependent on fixed income would also be able
to retain their purchasing power.
This ensures that there is still a flow of money within
the economy hence giving confidence to individuals to
invest in the economy.
When investment occurs there would be an increase
in industries and job opportunities hence ensuring the
social economic welfare of consumers are protected.

Although a government prioritise controlling its rate of
inflation raising the economys rate of productivity is
equally as important. Nonetheless, this is only a simplistic
assumption to make as there are many other factors that
should be taken into consideration when trying to
maintain social economic welfare of a country.

October/November 2004 Question 2(a) 4(b) Suanne
2a) Explain how inflation affects the functions of

Def: Inflation- a continuous increase in the general level

price of goods and services
Money- purchasing power

1. A medium of exchange
-money will lose its value
-people will lose their confidence in money and this will
discourage them to purchase less.

2. A unit of account
-change in the P of goods and services
-the value of the money falls, the prices will no longer true
representative of the actual value of the goods.
-P will change constantly

3. A store of value
-people prefer holding assets like lands
-Assets wont depreciate
-when the value of money depreciated, this will affect the
consumers future spending
-also discourage saving due to the low interest rate

4. A standard of deferred payment

-individuals will be reluctant to lend anything based on

High rate of inflation affects the function of money in
every possibly ways however low rate of inflation will keep
the functions of money performing properly in an
M/J 13/P23 3(b) - Paul

Explain the effects on the functions of money of a

significant rise in the general price level and
discuss which you consider to be most damaging for
a modern economy. [12]

Money is any item that is readily accepted as a unit of

payment. It has four functions:

a) Medium of exchange

b) Unit of account

c) Store of value

d) Standard of deferred payment

A sustained rise in the general price level is called

inflation. A high inflation rate will have several effects on
the functions of money.

High inflation reduces the effectiveness of money as a

medium of exchange. As the value of money decreases,
people start to lose confidence in it and would be reluctant
to accept it in exchange for goods and services.

Money also becomes inefficient to be used as a unit of

account when there is high inflation because as the value
of money falls, it is no longer a true representative of the
actual value of the goods or services. So there is a high
menu cost, as frequent updates need to be made to the
value of the goods and services if they persist on using
that ever-decreasing value of money as a unit of account.
Communication between buyers also get a lot more
complicated and it becomes difficult to make comparison
between products.

Inflation causes money to be a poor store of value. The

amount of goods or services that can be purchased with
the same amount of money decreases. The longer they
hold on to their cash, the more value it loses. People
would prefer to spend it immediately or invest in an asset
that is less likely to depreciate in value this quickly.

It would also be tough to use money as a standard of

deferred payment. Sellers will not be willing to lend or sell
anything on credit basis because the decrease in the value
of money is much greater than the interest rate. Lenders
will always lose when there is high inflation.
Among the four functions of money that is affected by
high inflation, the difficulty in using money as a medium of
exchange is the most damaging for a modern economy.
When people do not accept fiat money, they would have
to revert to the barter system or use commodity money
for trade. This would be highly inefficient because neither
of these systems are as divisible, portable and
recognizable as fiat money. Both domestic and
international trade will be heavily impaired and the
country will be at an economic standstill.

In conclusion, high inflation affects the functions of money

in every possible way, with moneys inability to function as
a medium of exchange being the most detrimental
impediment to the growth of the country. This will only
cause the people in the country to suffer. Therefore, the
government has to use whatever means necessary to
maintain a low inflation rate.
May/June 2012/ P21- Q2 (a) ShuQi
Explain how the loss of confidence in money will
affect and economys PPC (8)
Definition: Money serves as a medium of exchange to
solve the shortcomings of the barter system. It is a
generally acceptable means of payment and has four
functions, namely as medium of exchange, unit of
account, store of value and standard of deferred
payments. Production possibility curve shows
combinations of two goods a country can produce using
up all factors of production; that is at full employment.

Knowledge: -Loss in confidence of money may be caused

by inflation as the real value of money decreases.
-General price level rises and goods become very
-Rise in wages and interest rates do not match the
increase in the price of the goods.
-Consumers and producers do not want to carry out
transaction using money as money cannot carry out its
function effectively. It cannot serve as a medium of
exchange because it is no longer trusted and the value of
goods do not match the amount of money paid for it. It
also cannot serve as a unit of account as it is now an
inaccurate yardstick for measuring the value of goods. It
is not a store of value anymore as people would rather
invest in gold rather than saving up money as its value
decrease. Sellers would also not accept money as a
standard of deferred payments.
-Supply will also decrease and specialization will be

Application: #Whole PPC shifts inwards#

The PPC will shift inwards as there are less output
and restricted specialization. The resources might not be
used optimally and cost of production increases due to
the difficulty in getting raw materials for production.
Producers may not want to expand production and will
decrease production as all the factors of production
become hard to get.
#PPC shifts inwards for consumer
goods but remain the same for capital goods#
When there are less output and consumers have less
confidence in trading for consumer goods, the PPC shifts
this way as producers will decrease their output for
consumers goods. Producers will also specialize less in
this sector.
#PPC shifts inwards for capital goods but remain
the same for consumer goods#
When consumer good is a necessity for consumers,
producers will not decrease output for consumer good.
However, the value of capital goods decreases and they
will not want to supply it.
Conclusion: In conclusion, loss in confidence of money
will restrict specialization and output. It affects the whole
economy as a whole as trading and transaction can no
longer be carried out and economy might revert back to
using barter system.

M/J 2012/P22- Q2 (a) - PAS

Question 2a (M/J 2012 SUMMER PAPER 22) - PAS

Explain why all type of economic system benefit
from the existence and use of money.

Define money and three types of economic system
Money : anything that is generally accepted as
payment for goods and services and repayment of
Planned economic system : an economic system
where the factors of production are owned and
managed by the government.
Market economic system : this system works such
that it is the producers and consumers who decide
how to utilise the resources.
Mixed economic system : an economic system that
incorporates aspects of both the planned and market
economic system.

1) Money as a medium of exchange
2) Money as a store of value
3) Money as a unit of account
4) Money as a standard of deferred payment

In conclusion, money does bring benefits to the respective
economic system. However, there are also some cons as
money is easily influenced by economic conditions such as
inflation or recession.
2005 (October/November) - Hazri

Question 3(b) Discuss whether free international trade in

goods should be encourage

International trade refers to the exchange of goods and
service between people of two countries
Free Term given to trade between nations that takes
place without the imposition of barriers in the form of
tariffs, quotas or other measures by governments or
international organizations
Economic progress of a nation would depend upon its ties
with other countries
Absolutely essential to form specialization in the
production and gives consumers a greater variety of
Application (Arguments to support free
international trade)
The theory of comparative advantage
- The ability of one country to produce goods at a lower
opportunity cost than another country
- Free trade enables countries to specialize in those goods
where they have a comparative advantage.

Shared knowledge and technology

- Encourage the exchange of workforce among countries,
hence the exchange of knowledge and skills occur
- Eg, Malaysia import new and advanced technology from
Indirect motivation for domestic producers
- increases competition as domestic industries must
compete with foreign firms in the same industry as well as
other firms in their own country.
- gives them an incentive to innovate and look for improved
products, processes and marketing methods
- thus, enable them to compete in foreign international
Application (Arguments against free international
Depletion of countrys reserves
- The country that are specialized in terms of comparative
advantage over goods may be threaten by depletion in
- Usually happens in long run, eg excessive export of oil by
Malaysia will deplete its oil reserves

Uneven distribution of income

- Some countries will be able to take advantage of natural
resources, skilled workforce or economies of scale to sell
their goods
- The rich elites of a country will benefit the most since the
international trade is made free
Cultural identities issues
- Culture promotes and displays the lifestyle of a particular
- The "culture consumer" in other countries is sometimes
American ideas
- Eg, Coca-Cola, McDonalds, Nike, and Microsoft all
sell products that symbolize American values and reflect
American corporate culture

Countries cannot live in isolation
They have to mutually share their prosperity, technical
know-how and undertake trade in order to sell their
surplus products
However, the execution of this system is based on the
priority of the country because a lot of aspects need to be
O/N 2007 Question 4 (a)(b) Chong Yao

A) Explain how a rapid rate of inflation affects a

countrys floating exchange rate
1. Rapid rate of inflation indicates higer than mild
inflation, undesirably high inflation rate
2. Floating exchange rate- Determined by trading in the
forex market, through the forces of supply and
demand without government interference
Inflation rate is high->inflation rate in other countries
lower->Real value of money of the country depreciates-
> Export to other country is cheaper->Encourages more
export->Demand pull inflation->Import to other country
is more expensive->Discourages import->Supply pull
inflation->Supply of currency increases-> Demand for
currency falls-> Exchange rate depreciates

(b)Discuss whether a government should operate a fixed

exchange rate system

- Different methods of maintaining fixed exchange rate
- Pegging on a single currency or a basket of
currencies or on gold
- Central bank required to maintain exchange rate
through market mechanism by buying and selling
1. For
- Confidence in trading between the pegged and
pegging countries because of less risk, less
fluctuations and more predictable outcome (example:
when signing contracts and forex trading)
- When there is confidence in trading, more investment
pours into the country
- Discourages speculations, thus discourages ditching
and excessive buying

2. Against
- Holding large amount of reserves, high opportunity
cost for holding such a large amount of money
(example: public goods and merit goods)
- Optimum exchange rate is hard to determine,
therefore possess tendency to over value or under
value the pegged rate
- Over value leads to uncompetitive export because
price of good is higher compared to the same goods
- Undervalue leads to inflation because price of goods
is lower ,more export and less import, demand for
currency increase but supply for currency decrease,
therefore GPL increase

- Fixed exchange rate is hard to impose and had been
eliminated through passage of time
- Managed exchange rate is what commonly used
throughout the world
- Intervention from time to time
- Freedom to float around
M/J 2009/P22 Question 4(a)(b) Aaron Luke

a) Explain the infant industry and anti-dumping

arguments for the introduction of tariffs.
1) Define tariffs:
Tariffs are a tax on imports.
They can be specific (per unit purchased) or ad
valorem (percentage of price).
Tariffs are meant to reduce the supply of imported
good, thus raising the equilibrium price of the
imported goods. This encourages the consumption of
domestic goods instead.
Tariffs distort market forces and prevent consumers from
enjoying the full benefits of international trade. Because of
this, there are a few arguments to justify the use of tariffs
in spite of this.
2) Explain the infant industry argument
An infant industry is an industry that is new to an
Because these industries are new and still fledgling, a
new firm in this industry will struggle to compete with
well-established, large firms in the same industry in
more developed economies.
Why do these newer firms in developing economies
o They lack economies of scale that bigger firms
have, so they are not as competitive at this
point of time.
o Established firms might try to drive new firms
out of business by aggressively cutting prices to
retain market share newer firms cannot
survive in these conditions.
While these new firms might struggle now, they have
the potential to develop and become efficient in the
future, perhaps even more competitive than existing
firms. This increases competition, which is a positive
However, to get to that position, these new firms first
need support. Tariffs make imported goods more
expensive; thus new domestic goods are in a better
position to compete with imported goods. Firms in
the meantime can grow and become mature, no
longer needing tariffs to compete in the future.
Therefore, the introduction of tariffs is justified to
help infant industries. This is the infant industry
Example: The introduction of tariffs on imported cars in
Malaysia. This was done to protect the infant automobile
industry in Malaysia (Proton, Perodua).
3) Explain the anti-dumping argument.
Dumping is when a firm sells their product in a
foreign market at a price below the cost of
Why do they do this?
o They hope to destroy existing competition in the
foreign market. By selling their goods at a prices
below the cost of production, local firms cannot
compete. This means the firm can now
monopolize this foreign market with their
o They hope to prevent new firms in these
markets from becoming established.
How do they do this?
o The firm may receive an export subsidy from
their government. This allows them to produce
below the normal cost of production.
o Consumers at home may pay a higher price.
Thus, they cover the cost of selling the product
cheaper overseas.
o The firm might be fine with making a loss short-
term, if it means long term they can make more
profits by destroying competition.
Dumping therefore is a form of anti-competitive
behaviour that prevents the full benefits of
international trade. Because of this, tariffs can be
introduced to increase the price of imported goods to
a fairer, more competitive price.
This is called the anti-dumping argument.
Example: Chinese companies allegedly dump clothes in
European markets, thus forcing some European companies
out of business.
4) Conclude
In conclusion, both these arguments provide a reasonable
justification for temporary tariffs. However, it should be
noted that there are problems with these arguments as
well. In the case of the infant industry argument, upon
becoming well-established, these firms have a vested
interest in keeping tariffs on imported goods. In the case
of the anti-dumping argument, it can be hard to determine
whether a firm is dumping goods in market or whether
they are merely more efficient than their competitors.

b) Discuss whether trade arrangements, such as

the European Union or the South Asian Free Trade
Area, encourage or discourage the benefits of free
1) Define trade arrangements
Trade arrangements are a form of economic
integration meant to promote free trade between
countries, usually within a specific region or bloc.
There are 3 forms of trade arrangements:
o Free trade area: A group of countries that come
together to promote free trade amongst
themselves, usually through the removal of
things such as tariffs or quotas within the group
(e.g. NAFTA)
o Customs Union: Similar to a free trade area, but
the members also enact a common external
tariff on trade with countries outside the group.
o Economic union: A step further than a customs
union, where countries integrate their
economies even more through regulation and
laws. They may move towards adopting a
common currency (e.g the European Union).

2) Define the benefits of free trade

The benefits of free trade include increased
competition and efficiency through comparative
advantage, lower prices, greater choice for
consumers and generally higher standards of living
for all.
3) Discuss the Encourage side.
Firstly, these trade arrangements are a form of trade
creation. They allow for countries in that trade
agreement to specialize more and thus become more
efficient. This leads to lower costs of production and
greater choice for all those in the trade agreement.
Secondly, consumers get to enjoy a wider variety of
goods from other countries in the trade agreement.
Furthermore, these goods are cheaper than before
due to the removal of quotas and tariffs. Thus,
consumers get to enjoy the direct benefits of free
Thirdly, by removing trade barriers such as tariffs,
both domestic and foreign firms have to compete on
an equal playing field. This means that less efficient
firms are weeded out and replaced by firms that can
provide cheaper and better goods.
Fourthly, trade agreements lead to lower trading
costs in that bloc. For example, the Eurozone
members adopt a similar currency. This allows good
and services to be exchanged without a having to
worry about exchange rate costs.
4) Discuss the Discourage side.
Firstly, rather than creating trade, trade agreements
may result in trade diversion. This means that trade
from outside the group is replaced by trade from
within the group. This is especially true if the group
imposes restrictions on trade with non-members, as
customs unions do.
This discourages the benefits of free trade because it
prevents greater free trade on the open world
market. Instead, members of the group are inclined
to trade only with each other. This leads to higher
prices/less choice for those goods, as trade with non-
members might actually be more efficient were
external restrictions not imposed.
o For example, when the UK joined the EU, trade
with Commonwealth nations was diverted to the
EU. For Commonwealth nations in Asia and
Africa, this was particularly harmful and led to
them enjoying less benefits of free trade.
Secondly, the benefits of free trade may not be
shared equally within the trade arrangement. Some
countries may face problems when their domestic
industries are incapable of competing on an equal
playing field. This leads to these industries crumbling
due to outside pressure, and the people within those
industries being left jobless and unable to enjoy the
cheap and wide variety of goods free trade produces.

5) Conclude
In general, trade arrangements are a good idea.
However, trade arrangements that confine trade to a
specific region at the expense of wider free trade are
harmful and prevent the full benefits of trade from
being realized. Thus, trade arrangements should
avoid imposing external restrictions (e.g. tariffs) on
non-members, and should be as inclusive as
possible. Furthermore, trade arrangements should
continue to push for greater economic integration so
that the full benefits of free trade are realized.