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–8– M19/3/ECONO/HP3/ENG/TZ0/XX
1. Country X and Country Y are capable of producing both apples and bananas. Assume a
two-country, two-product model.
Country Y has absolute advantage in the production of both apples and bananas, and comparative
advantage in the production of bananas.
(a) Sketch and label a diagram to illustrate comparative advantage between Country X and
Country Y on Figure 4. [2]
Figure 4
Apples
Bananas
(This question continues on the following page)
20EP08
–9– M19/3/ECONO/HP3/ENG/TZ0/XX
(Question 2 continued)
(b) Outline the reason why Country X should specialize in the production of apples and
Country Y should specialize in the production of bananas. [2]
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(c) Outline one reason why it might not be in a country’s best interests to specialize
according to the principle of comparative advantage. [2]
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20EP09
– 10 – M19/3/ECONO/HP3/ENG/TZ0/XX
The market for oranges in Country Z is illustrated on Figure 5.
Figure 5
S
5
Price of oranges ($ per kg)
0
0 50 100 150 200 250 300
Quantity of oranges (thousands of kg per month)
The domestic demand and supply for oranges are given by the functions
Qd = 300 - 100P
Qs = - 60 + 60P
where P is the price of oranges in dollars per kilogram ($ per kg), Qd is the quantity of oranges
demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of
kg per month). The world price of oranges is $2 per kg.
Due to increased awareness of the possible health benefits of vitamin C, the demand for oranges
in Country Z increases by 60 000 per month at each price.
20EP10
(d) Calculate the change in expenditure on imported oranges as a result of the increase
in demand. [2]
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(e) (i) Calculate the change in consumer surplus in Country Z as a result of the increase
in demand for oranges. [2]
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(ii) Calculate the change in social (community) surplus as a result of the increase in
demand for oranges. [2]
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(f) State one administrative barrier that Country Z could use in order to restrict imports. [1]
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20EP11
Tanya is a currency speculator. She buys and sells currencies with the intention of making gains
as a result of changes in the exchange values of currencies. Currently, she is holding US$300 000,
but she expects that in the next few months the euro (EU€) (the currency of the eurozone) will
appreciate against the US dollar (US$).
At present, EU€1 = US$1.20.
(g) Explain two possible economic consequences for the eurozone if the euro appreciates. [4]
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Tanya exchanges her US$ for EU€.
(h) Calculate the quantity of EU€ she will receive for her US$300 000. [1]
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The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€,
Tanya exchanges her EU€ for US$.
(i) Calculate, in US$, the loss made by Tanya as a result of these transactions. [3]
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20EP12
(j) Explain two reasons why a government might prefer a floating exchange rate system
for its currency. [4]
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(k) Define the term fixed exchange rate
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(k) Distinguish between a devaluation and a depreciation of a currency.
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20EP13
2. Table 5 provides information relating to the Balance of Payments for Urbania for 2017.
Table 5
Item $ million
Exports of goods 1527
Imports of goods 1393
Exports of services V
Imports of services 954
Net income −35
Net current transfers −49
Net capital transfers 11
Net transactions in non-produced, non-financial assets 6
Net direct investment −196
Net portfolio investment 285
Reserve assets W
Urbania has a current account deficit of $125 million in 2017.
(a) Calculate the value of V (exports of services) for Urbania in 2017. [2]
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(b) Distinguish between direct investment and portfolio investment. [2]
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20EP18
(c) (i) Using the information in Table 5, calculate the financial account balance. [2]
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(ii) Using your answer to part (g)(i), calculate the value of W (reserve assets)
in Table 5. [1]
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(d) Using your answer to the above situation, describe how the level of reserve assets in Urbania
changed by the end of 2017. [1]
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The government of Urbania is concerned that the rate of inflation is significantly higher than
in its close trading partners.
(e) Outline how Urbania’s relatively high rate of inflation might affect its current account
balance. [2]
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Turn over
20EP19
(f)
Outline one method, other than attempting to reduce the value of its currency,
which may be used by the government of Urbania to reduce its current account deficit. [2]
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(g) Explain how a depreciation of the Urbanian dollar ($) might result in a J-curve effect. [4]
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20EP20
– 18 – 8820 – 5107
Figure 6 illustrates the demand and supply conditions for rice in Country B, where Dd is
domestic demand, Sd is domestic supply and Sw is world supply.
Figure 6
12
Sd
11
10
8
Price ($ per kilogram)
5
Sw
4
1 Dd
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of rice (millions of kilograms per year)
(h) (i) Using Figure 6, identify the equilibrium price when Country B engages in
free trade. [1]
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24EP18
– 19 – 8820 – 5107
(ii) Using Figure 6, calculate the consumer surplus and the producer surplus when
Country B engages in free trade. [2]
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Turn over
24EP19
– 20 – 8820 – 5107
Country B imposes a tariff on rice imports, which is illustrated on Figure 7.
Figure 7
12
Sd
11
10
8
Price ($ per kilogram)
6
Sw with tariff
5
Sw
4
1 Dd
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of rice (millions of kilograms per year)
24EP20
– 21 – 8820 – 5107
(i) (i) Using Figure 7, identify the equilibrium quantity being consumed following the
imposition of the tariff. [1]
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(ii) Using Figure 7, calculate the revenue received by the government as a result of
the imposition of the tariff in Country B. [2]
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(iii) Using Figure 7, calculate the change in consumer surplus as a result of

Country B imposing the tariff. [2]
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(iv) Using Figure 7, calculate the welfare loss as a result of Country B imposing
the tariff. [2]
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Turn over
24EP21
– 22 – 8820 – 5107
(j) Explain two methods that a government could use to correct a persistent current
account deficit. [4]
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24EP22

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–8– M19/3/ECONO/HP3/ENG/TZ0/XX

(This question continues on the following page)

(This question continues on the following page)

The market for oranges in Country Z is illustrated on Figure 5.

(This question continues on the following page)

(This question continues on the following page)

At present, EU€1 = US$1.20.

Tanya exchanges her US$ for EU€.

(This question continues on the following page)

(k) Define the term fixed exchange rate

(k) Distinguish between a devaluation and a depreciation of a currency.

Urbania has a current account deficit of $125 million in 2017.

(b) Distinguish between direct investment and portfolio investment. [2]

(This question continues on the following page)

(This question continues on the following page)

(This question continues on the following page)

(This question continues on the following page)

Country B imposes a tariff on rice imports, which is illustrated on Figure 7.

(This question continues on the following page)

(iii) Using Figure 7, calculate the change in consumer surplus as a result of

(This question continues on the following page)

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