Topic wise IGCSE Economics Solved Past Papers

3.1.1 money

 2024 May Paper 22

Solution

Question 4(b): Explain two characteristics of money.

Money has several key characteristics that make it effective for use in an economy. One of the most important characteristics is that it is generally acceptable. This means people are willing to accept it as a payment, reward, or in settlement of a debt, making it a universally recognized medium of exchange. Another important characteristic is portability, meaning that money is easy to carry, allowing individuals to make transactions conveniently in various locations without difficulty.

Additionally, money must be recognizable. It should be easy to identify as the currency of a particular country, which helps prevent fraud and confusion in transactions. Durability is another key characteristic of money; it must be able to withstand wear and tear, allowing it to last over time and be saved for future use without quickly degrading.

Money is also limited in supply, which helps maintain its value. If money were too plentiful, it could lose its purchasing power due to inflation. Divisibility is another characteristic, meaning money should be easily divided into smaller units of different values to facilitate transactions of all sizes. Finally, money is homogeneous, meaning that each unit of currency should be identical and not preferred over another unit of the same value, ensuring uniformity in its use.

Topic  3  Microeconomic decision makers

Question 2(b) [4 marks]

Explain two benefits that consumers may gain from having more commercial banks.

An increase in the number of commercial banks can provide consumers with more choices and greater competition. With more banks in the market, consumers can access a wider range of financial services such as savings accounts, loans, and investment options, which can lead to better quality services tailored to their specific needs. Additionally, competition among banks may result in lower bank charges and fees, making banking services more affordable and accessible.

Another significant benefit is the potential for lower interest rates on loans and higher interest rates on savings. As banks compete to attract customers, they may offer more attractive loan rates, making it easier for consumers to finance major purchases such as homes and cars at lower costs. At the same time, banks may increase interest rates on savings accounts to encourage deposits, enabling consumers to earn higher returns on their savings.

Furthermore, with more commercial banks available, it may become easier for consumers to obtain loans. A greater number of banks increases the likelihood of loan approvals, especially for individuals with lower credit ratings. This can enable consumers to purchase more products and services, ultimately improving their standard of living.

Lastly, the presence of more banks may lead to greater convenience for consumers. With a higher number of branches, banking services may become more accessible, reducing travel time and allowing customers to receive assistance closer to their homes. Additionally, the availability of local branches increases the likelihood of consumers being able to speak with bank representatives directly, fostering better communication and personalized financial advice.

Topic  3 Workers

Question 2(c) [6 marks]

Analyse why women may be paid less than men.

Women may be paid less than men due to differences in skill levels, qualifications, and productivity. In many cases, women may have received less education and training compared to their male counterparts, leading to lower skill levels and productivity in the workplace. This can result in fewer opportunities for high-paying jobs and reduced bargaining strength when negotiating salaries. If women possess fewer qualifications, employers may perceive them as less capable or suitable for higher-paying roles, further widening the pay gap.

Another contributing factor is the lower number of women in promoted positions. Women often take time off work to raise children or due to maternity leave, which can lead to interruptions in their careers and reduced experience compared to men who continue to gain skills and experience without breaks. These career interruptions may prevent women from attaining senior positions, which typically offer higher salaries and better benefits. Employers may also perceive women who have taken career breaks as less committed or less experienced, further affecting their chances of promotion and salary increases.

Occupational segregation also plays a crucial role in the wage gap. Women are often concentrated in low-paying occupations and industries such as retail, education, and garment manufacturing, where wages tend to be lower compared to sectors that employ more men, such as finance and engineering. Additionally, many women prefer or require part-time jobs due to family commitments, which generally offer lower wages and fewer benefits than full-time positions. This preference for flexibility can limit women's access to high-paying career opportunities.

Discrimination is another major factor contributing to the gender pay gap. Some employers may undervalue or underestimate the productivity and capabilities of women, leading to lower wages for female employees. In some cases, there may be no laws or ineffective regulations against discrimination in the workplace, allowing wage disparities to persist. For instance, women working in fields such as media and sports often face wage discrimination compared to their male counterparts despite performing similar roles and responsibilities.

Furthermore, market forces such as lower demand and higher supply for women in certain occupations can contribute to wage differences. Some industries that predominantly employ women, such as the textile industry, generate lower revenue compared to male-dominated industries. As a result, firms in these sectors may offer lower wages due to the relatively lower value of their products, further contributing to the gender pay gap.

In conclusion, a combination of factors including differences in qualifications, experience, occupational segregation, discrimination, and market forces contribute to the lower wages earned by women compared to men. Addressing these issues requires targeted efforts such as improving access to education and training for women, enforcing anti-discrimination laws, and promoting gender equality in career advancement opportunities.

3.2.1 the influences on spending, saving and  borrowing

Q:Analyse the influences on spending. [6] 0455_w20_ms_21

Spending is influenced by several factors, with income being a key determinant. Higher income increases individuals' ability to spend, thereby enhancing their purchasing power. Additionally, the rate of interest plays a significant role; a change in interest rates affects the proportion of income that is spent or saved, and it also influences borrowing behavior. Confidence in the economy and future job security encourages people to spend more, as they feel optimistic about their financial stability. Wealth also impacts spending, as individuals can use some of their assets, such as shares or property, as collateral to borrow more or simply sell assets to fund their purchases. Inflation can either increase or decrease spending; if prices rise faster than wages, people may cut back on spending, but inflation may also prompt people to purchase goods before their prices rise further. Finally, expansionary fiscal or monetary policy can stimulate spending by increasing disposable income or encouraging borrowing. These factors together shape an individual's or economy's overall spending patterns.

3.5.1 classification of firms 

May 2024 Paper 23 – Question 4(b)

Explain two ways firms can be classified. (Include other alternate explanations as well.)

One approach is to classify firms by stage of production—whether they operate in the primary, secondary, or tertiary sector. For example, a primary sector firm extracts raw materials (such as agriculture or mining), a secondary sector firm processes these materials into finished products (like manufacturing cars or packaging food), and a tertiary sector firm focuses on providing services (such as retail, banking, or tourism). This distinction helps policymakers, investors, and consumers understand where in the production chain a particular business operates.

Another common way to classify firms is by their sector of ownership: private sector versus public sector. A private sector firm is owned by individuals or shareholders aiming to generate profit, while a public sector firm is owned or controlled by the government to provide goods or services for society. Such classification shows who has ultimate authority, how the organization is funded, and who benefits from the firm’s operations and any profits or surpluses it generates.

Other possible ways (detailed explanations):

• By size: Firms can be categorized according to their output volume or by the number of employees they hire. Small or micro businesses might focus on serving local or niche markets, often relying on closer relationships with a smaller consumer base. In contrast, large enterprises may operate regionally or even globally, leveraging economies of scale, robust distribution channels, and more extensive brand recognition. The size of a firm can affect its cost structure, ability to raise finance, and competitive strategies.
• By location: A multinational corporation (MNC) operates in more than one country, often setting up subsidiaries, factories, or offices abroad to tap into international markets and access a variety of resources. This allows it to exploit cost advantages, diversify risks, and potentially increase profits. In contrast, a domestic firm operates mainly within a single country, focusing on serving local customers and complying with just one set of regulations. This classification underscores how geographical reach shapes a firm’s strategic decisions, cultural adaptation, and overall market presence.
• By level of competition: A firm might exist in a monopoly, where it is the sole provider in the market, and can therefore exert significant control over prices (though still potentially regulated by government). Alternatively, it may operate in a competitive market with numerous rivals, where each firm competes heavily on factors like price, quality, and marketing to attract consumers. This distinction can influence a firm’s pricing power, profitability, and long-term sustainability, as market structures vary in terms of barriers to entry, the presence of differentiated products, and the intensity of competition.
• By use of factors of production: Businesses may be capital intensive, relying heavily on machinery, advanced technology, and automation. Such firms can often achieve faster production rates and consistent quality, although they might face higher upfront costs for equipment. On the other hand, labour intensive operations depend primarily on human labor. While this can offer flexibility and adaptability, especially for customized or specialized tasks, it may also entail higher ongoing costs related to wages, training, and retention of skilled workers. In either case, the chosen factor combination influences a firm’s competitive edge, cost management, and capacity to innovate.
•  

3.5.4 mergers 

Question 4(c): Analyse why a government may prevent a horizontal merger.

A horizontal merger is a merger between two firms in the same industry and at the same stage of production. Governments may prevent such mergers for several reasons, primarily if they believe that the merger will result in significant negative consequences for the market and consumers.                   

                                  One of the primary concerns is that a horizontal merger could create a firm with monopoly power. This could result in market failure, as the newly merged firm may have the ability to control prices, limit output, and reduce competition. With less competition in the market, consumers may face higher prices, lower product quality, and fewer choices. Additionally, a reduction in competition could lead to job losses due to the rationalisation of operations as the new firm seeks to cut costs by reducing its workforce.

                                   Another reason the government may prevent a horizontal merger is the potential for the new firm to become too large, leading to diseconomies of scale. While economies of scale can make firms more efficient, diseconomies of scale can occur when firms become so large that they lose efficiency. A firm that grows too large may struggle with inefficiencies in management, coordination, and communication, making it less competitive internationally. This could result in lower exports and harm the country’s economic position in the global market.

                                   Furthermore, governments may be concerned about the reduction in the number of suppliers in the market. A merger between two firms could reduce the total number of competitors, leading to less choice for consumers. This could also stifle innovation, as firms with less competition may have less incentive to innovate and improve their products or services.

                                   In conclusion, while horizontal mergers may have potential benefits, governments may prevent them if they believe that the new firm would harm competition, consumers, and the overall economy. They aim to maintain a balance in the market to ensure fair competition, innovation, and consumer welfare.

3.6 Firms and production

(2)  May 2024/ Paper 21-Question 3(a) [2 marks]

 Explain two ways a firm could increase the productivity of its workers.

Answer:A firm could increase the productivity of its workers in several ways. First, it could raise wages or implement performance-related pay or commissions, which would increase the motivation of workers. Second, providing training would improve workers' skills and efficiency. Another method is the division of labour, which allows greater specialisation among workers, thereby increasing productivity. A firm could also invest in capital goods, enabling workers to use better equipment, which in turn boosts productivity. Reducing working hours could make workers feel fresher and more alert, leading to higher productivity during working hours. Improving working conditions would help reduce stress, thereby enabling workers to perform more effectively. Additionally, subsidising workers' healthcare could result in fewer days lost due to illness and overall better fitness. 

3.7 Firms’ costs, revenue and objectives

May 2024 Paper 23 – Question 3(b)

Explain two reasons why a firm’s revenue may increase.

One way a firm’s revenue can rise is through higher demand for its product. This increase in demand can stem from multiple factors, such as rising consumer incomes, successful advertising campaigns, or shifts in consumer tastes and fashion. When buyers have both the willingness and the financial ability to purchase more at the existing price, the firm will inevitably sell a greater quantity, leading to an uptick in total revenue. Additionally, if a firm can successfully differentiate its product—perhaps by emphasizing unique features or a strong brand image—consumer desire for that product can surge, thereby further boosting sales and revenue.

Another factor influencing revenue is the change in a product’s price in relation to the price elasticity of demand. When demand is relatively price inelastic (i.e., consumers are not highly sensitive to price changes), raising the price will only cause a small drop in quantity demanded, so overall revenue still climbs. Conversely, if demand is elastic, a strategic price reduction could lead to a proportionally larger increase in quantity sold, ultimately raising total revenue. By carefully assessing the nature of demand for its product—perhaps through market research and consumer feedback—a firm can adjust pricing to harness this elasticity effect and improve its overall revenue flow.

Other possible reasons (with explanations) include:

• Increased market power or monopoly: If a firm gains greater market share or achieves monopoly status, it can exert more control over pricing and output levels. This often allows it to charge higher prices or sell a larger volume, thereby generating increased revenue.
• Price of substitutes increased: When competing products become more expensive or fewer in number, consumers are likely to switch to the firm’s product. This shift in demand can directly translate into higher sales and a corresponding rise in revenue for the firm.
• Price of complements decreased: A reduction in the price of complementary goods (e.g., if printers become cheaper for ink producers) can stimulate additional purchases of the firm’s product. As demand increases alongside the complementary product, the firm benefits from higher sales volumes and revenue.
• Higher incomes of consumers: When average incomes in the economy go up, consumers have more disposable income to spend. This generally boosts the demand for both normal and luxury goods, enabling firms to sell more items or even charge a premium, thus elevating their revenue.
• Firm selling higher quality product: By improving the quality and reliability of its goods, a firm can attract consumers who are willing to pay more for better value. This can make the product stand out from its competitors, potentially leading to repeat purchases and stronger brand loyalty, both of which help increase revenue.
• Government subsidy received: If the firm qualifies for a government grant or subsidy, it obtains an additional stream of income, effectively raising its total revenue. This extra financial support can enable the firm to invest in product development or marketing, further driving up sales over time.

4.2 The macroeconomic aims of government

• Question 3(c): Analyse the advantages of a low rate of inflation.
• Solution:
• A low rate of inflation offers several advantages. First, it means prices are still rising, but not at a high rate, which helps maintain the purchasing power of consumers and ensures wages can keep pace with inflation. Additionally, low inflation can improve a country's international price competitiveness. This occurs when domestic inflation is lower than that of other countries, making exports more attractive and reducing imports, thus improving the current account position. Low inflation also creates greater certainty and stability in the economy, as businesses face less volatility in costs. This encourages investment from firms and multinational corporations, which can lead to increased output, GDP growth, and higher employment levels, thereby lowering unemployment. Moreover, low inflation may encourage saving, as the real value of savings is preserved, providing funds for future investments. In the case of demand-pull inflation, a low inflation rate can boost profits, prompting firms to expand their operations, further driving employment and reducing unemployment. Furthermore, a low rate of inflation can prevent a random redistribution of income, protecting savers from losing value in their savings. Finally, low inflation leads to lower menu costs for businesses, reducing the pressure on firms’ production costs.

4.6 Economic growth

Question 3(d) [8 marks]

Discuss whether or not the global economy would benefit from an increase in air travel.

An increase in air travel could bring several benefits to the global economy. One major advantage is the potential for job creation within the air travel industry. As demand for air travel rises, airlines may need to hire more pilots, cabin crew, and ground staff, thereby contributing to employment growth. This increased demand can also extend to related industries, such as tourism, hospitality, and logistics, further boosting job opportunities and economic output.

Additionally, air travel can lead to a reduction in firms’ production costs by providing a quicker and more efficient mode of transport compared to alternatives such as sea or road travel. Faster transportation of goods and personnel can enhance business operations, leading to increased productivity and profitability. Moreover, increased air travel may improve labour mobility, allowing skilled workers to travel quickly to different locations, addressing labour shortages and contributing to the growth of various industries.

Another important factor is the relative safety of air travel compared to road transport. With stringent safety regulations and advanced technology, air travel is considered one of the safest modes of transportation. This safety aspect can encourage businesses and individuals to travel more frequently, contributing to global economic development and cross-border collaborations.

Encouraging tourism through increased air travel can also stimulate economic development in many countries. Improved connectivity can attract international tourists, leading to higher revenues for local businesses, increased foreign exchange earnings, and the development of infrastructure such as hotels and recreational facilities, fostering economic growth.

However, an increase in air travel is not without its drawbacks. One of the most significant concerns is the environmental impact, as air travel contributes to noise and air pollution, increasing the carbon footprint and exacerbating climate change. The emissions from aircraft contribute to global warming, prompting concerns about sustainability and the need for greener alternatives.

Another potential downside is the requirement for building new airports or expanding existing ones, which could reduce the availability of land for other essential uses such as housing or agriculture. The construction and maintenance of airports require significant financial and environmental resources, which could be better utilized elsewhere.

Increased air travel may also lead to a decline in demand for other forms of transport, such as sea and rail travel. This shift could negatively impact businesses and workers within these industries, leading to job losses and economic instability. For example, industries that rely on sea transport for heavy goods movement may suffer due to the high costs associated with air transport, making it less viable for bulk transportation.

Additionally, while air travel may provide convenience and efficiency, it is often associated with high costs that make it unsuitable for transporting heavy goods. The reliance on air transport for freight may increase overall logistics costs, which could be passed on to consumers in the form of higher prices.

In conclusion, while increased air travel can offer numerous economic benefits such as job creation, enhanced productivity, and improved connectivity, it also poses significant environmental and economic challenges. Policymakers must strike a balance between promoting air travel and addressing its negative impacts to ensure sustainable economic growth.

5.1 Living standards

Question 2(d) [8 marks]

Discuss whether or not people living in countries with a high GDP enjoy higher living standards than people in countries with a low GDP.

People living in countries with a high Gross Domestic Product (GDP) might enjoy a higher standard of living due to several factors. A higher GDP often means that individuals can afford a better standard of housing, with access to modern amenities, improved sanitation, and overall better living conditions. This leads to enhanced comfort and well-being for the population.

In addition to better housing, higher GDP allows for improved nutrition and healthcare facilities. Individuals can afford a balanced diet, access high-quality medical care, and benefit from advanced healthcare technologies, leading to increased life expectancy and overall well-being. Furthermore, higher incomes in such countries enable people to purchase a greater variety and higher quality of products and services, enhancing their daily lives and offering more convenience and luxury.

Education is another crucial factor influenced by a high GDP. People in wealthier countries can afford better education, access to advanced learning facilities, and more opportunities for skill development. This often results in higher employability, better job prospects, and improved working conditions, which contribute to an overall higher standard of living.

However, having a high GDP does not necessarily guarantee better living standards for everyone. One limitation is that GDP per head may still be low if the population is large, meaning individual incomes might not reflect the country's overall wealth. Consequently, many people might still experience low living standards despite high national output.

Another concern is the unequal distribution of income in some high-GDP countries. Wealth may be concentrated in the hands of a few, leaving a significant portion of the population in poverty. As a result, even with a high GDP, many citizens might struggle with inadequate access to housing, healthcare, and education.

Moreover, high-GDP countries often have large informal sectors where incomes are under-recorded, leading to inaccurate representations of the actual wealth available to individuals. In such cases, a significant proportion of the population might still be struggling financially despite the country's high GDP.

Additionally, countries with higher GDP often experience higher price levels. The cost of living, including housing, healthcare, and everyday goods, may rise significantly, eroding the purchasing power of individuals and reducing their overall quality of life.

Other challenges in high-GDP countries include longer working hours and higher levels of stress. Employees might have to work extensive hours to maintain their standard of living, resulting in reduced leisure time, increased work-related stress, and overall dissatisfaction.

Furthermore, rapid industrialization and urbanization in high-GDP countries can lead to problems such as pollution and traffic congestion, negatively impacting the environment and the health of individuals. While the country might be wealthy, the quality of life may deteriorate due to environmental factors.

Lastly, as income levels increase, people’s expectations and wants for goods and services also grow at a faster rate. The more individuals have, the more they may desire, potentially leading to dissatisfaction and a perception of lower living standards despite economic prosperity.

In conclusion, while a high GDP can contribute to better living standards through improved access to housing, healthcare, and education, several factors such as income inequality, high living costs, and work-life balance challenges can offset these benefits. Therefore, high GDP alone does not guarantee higher living standards for everyone in a country.

5.3.3 the effects of changes in the size and structure of population on different countries

May 2024 Paper 23 – Question 3(c)

Analyse two economic consequences of having a large proportion of the population aged under 16.

One significant consequence is the requirement for substantial spending on education. A country with a large number of children typically needs more schools, teachers, and educational resources to meet the demand for schooling. Such high demand for teachers can strain the government’s budget, as more funds are allocated to recruit, train, and pay teaching staff. This spending can be viewed as an opportunity cost because it directs government resources away from other vital areas such as healthcare, infrastructure, or social welfare. Although this investment in human capital may yield long-term benefits—for instance, by producing a more educated workforce in the future—in the short run it can place pressure on public finances and potentially reduce the funds available for other developmental projects.

Another notable consequence is a high dependency ratio. In an economy where a large portion of the population is under 16, relatively few people in the labor force are available to generate income and pay taxes, while many dependents (children) require support. This imbalance can lead to reduced tax revenues, because fewer individuals are working and contributing income tax. As a result, lower living standards might arise if the total income has to be shared among a larger number of dependents. In addition, with fewer experienced workers available, some firms may struggle to fill positions that require advanced skills. Overall, a high dependency ratio can place constraints on economic growth: fewer income earners combined with many dependents can limit both consumer spending power and the capacity of the government to fund services, potentially inhibiting the country’s development prospects.

6.2.2 role of multinational companies (MNCs) 

Question 4(d):

Discuss whether or not a foreign multinational company (MNC) will continue to produce in a host country for many years.

A foreign multinational company (MNC) may continue to produce in a host country for many years if it finds the economic and business environment favorable. One major reason for continued production is the potential to earn high revenue and profit due to high demand for its products in the host country. If the market size is large and there is sustained consumer demand, the company may find it profitable to continue operations and even expand its production capacity.

Additionally, the host country may offer cost advantages such as low wages and inexpensive raw materials. Labour costs in developing economies are often lower than those in developed countries, making production more cost-effective. Similarly, the availability of affordable raw materials locally can further reduce production expenses and increase profit margins for the company.

Another factor that might encourage an MNC to stay is the availability of a skilled workforce. If the host country provides high-quality labour due to a strong education and training system, the company can benefit from improved productivity and innovation, which can help maintain competitive advantage in the global market.

Furthermore, government support in the form of subsidies, tax incentives, and infrastructure development can encourage an MNC to continue its operations in the host country. Financial incentives from the government can significantly lower operational costs and increase profitability, making it attractive for the company to sustain production over the long term.

However, despite these advantages, an MNC may decide to cease production in the host country due to several reasons. One of the primary concerns is the depletion of natural resources. If the MNC is engaged in resource extraction industries such as mining or oil, the exhaustion of resources may force the company to relocate to other regions where raw materials are still available.

Changes in government policies, such as an increase in corporate taxes, can also negatively impact the company's profitability. Higher tax rates can reduce net earnings and may make it financially unviable to continue operations in the host country. Similarly, a rise in the host country's foreign exchange rate can increase the price of exports, making the products less competitive in international markets and leading the company to reconsider its production strategy.

Labour-related challenges such as industrial action by trade unions can also disrupt production and lead to financial losses. If frequent strikes and demands for higher wages occur, it can increase labour costs and decrease operational efficiency, prompting the company to explore alternative locations with a more stable labour environment.

Moreover, if more profitable opportunities arise in other countries, the MNC may choose to relocate to benefit from better market conditions, lower production costs, or more favorable trade agreements. Companies constantly evaluate global opportunities and may move operations to regions that offer better long-term prospects.

Finally, changes in government regulations concerning environmental protection, labor laws, and trade policies may increase compliance costs and operational difficulties. Stricter regulations may require costly investments in sustainable production methods or changes in business practices, leading the company to reconsider its presence in the host country.

In conclusion, whether an MNC continues production in a host country depends on several factors, including profitability, resource availability, government policies, and market conditions. While favorable economic conditions and government incentives may encourage continued operations, challenges such as rising costs, regulatory changes, and better opportunities elsewhere may prompt the company to relocate its production facilities to more attractive locations.

6.2 Globalisation, free trade and protection

October 2022 - Paper 22 - Q No: 5(a) and 5(b)

5(a) Identify two methods of protection.

• Tariffs: Tariffs are taxes imposed on imported goods, making them more expensive. This helps protect domestic industries by encouraging consumers to buy locally produced goods instead of imports.
• Quotas: Quotas are limits on the quantity of goods that can be imported into a country. By restricting supply, this ensures that domestic producers face less competition and have a better chance of maintaining or increasing their market share.
• Subsidies: Subsidies are financial support given by the government to local industries. This lowers production costs for domestic firms, making their products more competitive compared to imports.
• Embargo: An embargo is a total ban on trade with a specific country or on a particular product. This method is often used for political or economic reasons to protect domestic industries or to achieve foreign policy objectives.

6.2.4 methods of protection   

0455_w20_qp_21

Explain two non-tariff methods of protection.  [4]

Two non-tariff methods of protection include quotas and subsidies.

1. Quotas: These are quantitative restrictions on the amount of imports that can enter a country. By limiting the quantity of imported goods, quotas help protect domestic industries from foreign competition and encourage consumers to purchase locally produced products.

2. Subsidies: These are grants given to domestic firms to reduce their production costs. By lowering production costs, subsidies help domestic products become more competitive in the market, reducing demand for imported goods and supporting local industries.

These methods help countries protect domestic industries without using tariffs, providing alternative means to limit foreign competition.

6.2.5 reasons for protection 

May 2024 Paper 23 – Question 4(c)

Analyse why a government may protect its country’s industries from foreign competition.

One motive is to improve or prevent the decline of the balance of payments by increasing exports or reducing imports. If the government can shelter domestic producers from overseas rivals, local firms may find it easier to sell their goods both domestically and abroad, thereby stimulating export-led growth. By restricting foreign competition, a country might reduce imported products, helping maintain or even improve its trade balance. In turn, this can bolster overall economic growth, as domestic firms expand output and employment to meet higher demand.

Governments may also intervene to protect infant (sunrise) industries. These are newly established industries that could be promising but are not yet equipped to compete directly with well-established foreign rivals. Protection gives them the opportunity to grow, reach larger scales of production, and potentially achieve economies of scale, leading to lower average costs and competitive prices in the long term. Without such measures, infant industries might be outcompeted before they can become viable on a global stage.

Meanwhile, some governments look to protect declining (sunset) industries that are no longer competitive in international markets. Such support can allow these industries to adjust gradually, rather than collapse abruptly. It may help businesses restructure, retrain workers, or shift into new product lines. This policy is often driven by the goal to protect jobs and avoid sudden spikes in unemployment, which could negatively affect social stability and the wider economy.

Another rationale is the protection of strategic industries. Certain sectors, such as agriculture, energy, or defense-related manufacturing, might be viewed as vital to national security and self-sufficiency. Ensuring continued domestic production of these goods helps safeguard against external disruptions (for example, economic sanctions or global supply chain crises). Governments may shield such industries with tariffs, quotas, or subsidies to guarantee their long-term survival.

Finally, a government may wish to shield domestic firms from unfair competition. This often involves imposing measures against “dumping,” which is when foreign producers sell goods below cost to gain market share and undermine local businesses. By applying anti-dumping duties or other barriers, the government can level the playing field. Likewise, if foreign manufacturers enjoy significant subsidies, domestic firms might struggle to compete on equal footing without similar support. Taken together, these policies help stabilize local industries against potentially harmful international trade practices.

6.3 Foreign exchange rates

5(b) Explain two reasons why a government may want to reduce imports.

• Improving the current account balance: Reducing imports can help decrease a current account deficit by lowering the outflow of money spent on foreign goods and services. This can move the balance of payments closer to a surplus or at least stabilize it, which enhances the country's economic strength.
• Promoting GDP and economic growth: By reducing imports, demand can be shifted towards domestically produced goods. This supports local businesses, encourages the growth of infant industries, and increases domestic production, thereby contributing to economic growth and higher GDP.
• Preventing dumping: Dumping occurs when foreign producers sell goods in the domestic market at prices below their cost of production. This can damage local industries by making it difficult for them to compete. By reducing imports, governments can protect domestic producers from these predatory practices.
• Increasing employment: A reduction in imports can lead to higher demand for domestically produced goods, which in turn increases the need for local labor. This helps to reduce unemployment and improve living standards within the country.
• Reducing dependence on foreign countries: By limiting imports, a country can become less reliant on foreign suppliers, reducing the risks associated with potential supply chain disruptions or price increases. This promotes greater economic independence and security.
• Stabilizing the exchange rate: When fewer imports are purchased, less domestic currency is sold in exchange for foreign currency. This can help prevent a fall in the exchange rate, stabilizing the value of the local currency and supporting the broader economy.

6.4 Current account of balance of payments

May 2024 Paper 23 – Question 4(a)

Define a trade in goods deficit.

A trade in goods deficit occurs when a country’s expenditure on importing physical goods exceeds the revenue it earns from exporting physical goods.

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