Term 2 CA 2 Economics 0455

Form 5 Paper 2

Q2
(a) Define Foreign exchange rate.
The foreign exchange rate is the value or price of a currency expressed in terms of another
currency.
(b) Explain two reasons why the value of a country's exports may be greater than the
value of its imports
value of a country's exports may be greater than the value of its imports may be due to
the following reasons
• If the value of exports exceeds the value of imports, it is said that there is a trade surplus
• Improved competitiveness: exports may have become more price-competitive in the
international market, due to perhaps, better labour productivity or low prices.
• Growth in foreign countries: export demand may have risen due to trading partners
experiencing growth and higher incomes.
• High foreign direct investment: strong export growth can be the result of a high level of
foreign direct investment.
• Depreciation: a trade surplus might result from currency depreciation.
• High domestic savings rates: high levels of domestic savings and low domestic
consumption of goods and services cause more products to be exported and imports to
fall.
• Closed economy: some countries have a low share of national income taken up by
imports, perhaps because of a range of tariff and non-tariff barriers.

(c) Analyse how an increase in income tax can affect a country's inflation rate.

A tax on income is a direct tax

If the government raises the income tax rate, people pay a higher portion of their income
in taxes—which means there is little disposable income to spend on goods and services -
A higher rate of income tax could reduce spending, demand, and inflationary pressures-
policies reduce inflation by reducing the growth of aggregate demand-
If economic growth is rapid, reducing the growth of AD can reduce inflationary pressures
without causing a recession.
(d) Discuss whether or not the government should aim for an economic growth

Why it might be

Higher incomes for workers and firms.

Increased tax revenue for the government which can be spent on public services, e.g.
education, pensions, and healthcare.
Reduced government debt. Higher economic growth usually reduces the government’s
budget deficit because of the improved tax revenues.
Economic growth creates employment and helps to reduce unemployment.
Economic growth creates a positive feedback loop. Higher growth encourages firms to
invest. The increased investment enables higher growth in the future.
Economic growth enables a reduction in absolute poverty.

Why it might not be

Inflation. If growth is too fast, we could experience inflation.

Boom and bust economic cycles. If economic growth is unsustainable then high
inflationary growth may be followed by a recession.
Current account deficit. If growth is unbalanced, we could see a growing current account
deficit as people buy more imports.
Environmental costs. Economic growth leads to higher resource consumption and
pollution.
Higher rates of economic growth have often resulted in increased inequality because
growth can benefit a small section of society more than others.
A decline in living standards. Economic growth does not always increase living standards.
Higher growth could cause new problems such as congestion, increased crime, increased
dissatisfaction and more pollution.
Q3
(a) Identify two influences on what products a person buys.
Products people buy can be influenced by Income, taxes, subsidies, and health reports.

(b) Explain two ways a government could decrease the consumption of demerit goods
One way to reduce the consumption of demerit goods is to place indirect taxes on them.
Producers raise prices as the tax adds to their cost of production, in turn reducing the
quantity demanded of the good.
Taxes are applied to goods like tobacco and alcohol in most countries, and the money
raised can fund efforts to deal with the negative externalities, such as the treatment of
lung cancer patients in hospitals or the policing required because of drunken behavior.
Banning is the approach taken with those goods or industry practices that government
feels to be particularly on demerit goods. One common example is the banning of smoking
in public areas indoors.

(c) Why do workers join trade unions?

Workers might join a trade union because

• They believe that there is strength in number and they will be listened to when they
are in a group.
• To negotiate better pay, more holidays, and fewer hours of work.
• To pressurize the employer to provide them with a healthier and safer working
environment.
• Improved benefits for retrenched workers
• To get the benefits of advice, financial support, and welfare activities carried out by
Trade Unions.
• Many workers may also join a trade union because there is a closed shop policy.
(d) Discuss whether or not tertiary sector workers are paid more than primary sector
workers
Workers in the primary sector work in mines, farms, and fishing.
• The works they do are physical work and low skill levels.
• Need lower-level skills like unskilled workers.

Workers in the tertiary sector work in giving medical treatment, or financial services.
• They studied at university.
• Require a high skill level.

Why they might be:

• skilled workers may be in shorter supply as they may require training and qualifications
• skilled workers may be in inelastic supply and demand for them may be inelastic
• skilled workers may be in higher demand as they will be more productive
• skilled workers may have stronger bargaining power
• skilled workers may be more likely to work in the tertiary sector
• Skilled workers may be more mobile.

Why they might not be:

• skilled workers may have less experience and may be in less promoted positions
• skilled workers may be in declining industries
• skilled workers may place more importance on non-wage factors when deciding what
jobs to do
• skilled workers in poorer countries may have lower wages than some unskilled workers
in richer countries.