ASRJC 2022 A Level H1 economics CSQ2 answers

H1 GCE A Level Examinations 2022 Question 2: Price Stability and Growth Suggested Answers (a) With reference to Table 2 what can be concluded about projected government spending relative to government revenue in Botswana and Zimbabwe? [2] For both countries, government spending is projected to be larger than government revenue. i.e. both countries are projected to have a budget deficit. But Zimbabwe is projected to have a larger budget deficit than Botswana. (b) Explain the relationship you would expect between the adult literacy rate and the real GDP per capita and comment on the extent to which Figure 3 supports the expected relationship. [6] We would expect a positive relationship between the adult literacy rate and the real GDP per capita. With a higher adult literacy rate, it is likely that the labour force is more productive as they can apply their knowledge and skills in their jobs. The higher efficiency and productivity of these skilled workers lead t o higher profit for firms as workers can produce more output per hour and per unit cost of production would be lowered . Investor’s confidence will be enhanced, and this could increase the AD . The rise in Ad would lead to a shortage and upward pressure on GPL. The autonomous increase in I will lead to a more than proportionate increase in the real GDP per capita via the multiplier process. Alternative response: With higher real GDP per capita, the government could collect more tax revenues from income and corporate tax which is a percentage of income and corporate profit respectively. The government could use to provide and subsidise education to a larger number of people in the population. Hence, with the provision of more schools in many parts of the country, there will be a higher adult literacy rate. Figure 3 supported this relationship to some extent. For instance, Mali has the lowest real GDP per capita and the lowest adult literacy rate whilst Botswana and Namibia have one of the highest adult literacy rates and also highest real GDP per capita. However this is not the case for Zimbabwe. It has a high adult literacy rate but a low real GDP per capita relative to the rest. Its low real GDP per capita could be because there are other factor, beyond labour productivity, influencing the level of investor confidence. I and hence AD, could be falling if the overall investor confidence is low i n the country. This could lead to a more than propionate fall in the real GDP per capita leading to a situation of high literary rates but low real GDP per capita. Hence, adult literacy rate is only one determinant of real GDP per capita. There are other influences on real GDP per capita such as the size of capital stock and level of technology. (c) The global price of diamonds changed significantly between December 2019 and March 2020. Using an aggregate demand and aggregate supply diagram, explain the impact this change might be expected to have on real GDP in Botswana. [6] The global price of diamonds fell between December 2019 and March 2020. The price elasticity of demand for diamonds is between 0 and 1, i.e. demand is price inelastic. The fall in price of diamonds leads to a less than proportionate increase in its quantit y demanded. This results in a fall in total revenue earned by diamond producers. Botswana exports diamonds and so this fall in the price of diamonds will lead to a fall in the country’s total export earnings.

Since export earnings is a component of AD, the fall in export earnings thus leads to a fall in AD, creating a surplus in the economy. As shown in the diagram below, the fall in Botswana’s export earnings leads to a fall in AD. The AD curve shifts from AD 0 to AD1 resulting in a surplus which then exerts a downward pressure on the general price level. As prices fall, firms reduce production due to falling profits. The economy reaches a new equilibrium where AD=AS. The fall in export earnings thus results in a fall in Botswana’s real GDP from Y0 to Y1. The decrease in Botswana’s real GDP is much greater than the initial decrease in its export earnings because of the multiplier effect. When export earnings from the sale of its diamonds fall, incomes of those in the diamond industry also falls. With a decrease in their incomes, these households will reduce their consumption expenditures such as on food and clothing. The amount of decrease in consumption due to the fall in incomes is determined by the value of marginal propensity to consume (MPC). The higher the value of MPC, the greater is the decrease in consumption and hence the larger will be the decrease in real GDP eventually. In the case above, the multiplier effect is somewhat smaller. The decrease in consumption spending is mitigated to some extent by the fall in the general price level, causing a smaller fall on the real GDP of Botswana. (d) With reference to the extracts, explain which information would be most useful when considering the standard of living of Botswana and comment on the reliability of this information. [7] Standard of living refers to the material and non -material well -being of the average person in the country. One piece of information that would be most useful when considering the standard of living of Botswana is real GDP per capita. It is a measure of the average income per person. From the extract, income is used to rank countries. We can infer from it that Botswana enjoys a fairly high standard of living as it belongs to the “upper middle income” country. It was also mentioned that poverty has fallen and this is a result of increase in per capita incomes. As a country that enjoys a high real GDP per capita, the people could afford more goods and services such as food and housing with “improved living conditions”. Thus there is a fairly high level of material well-being. But the use of real GDP per capita as an indicator of living standard has its limitations. We see that its Gini coefficient has risen significantly in 2020 and its value is large. This reflects a high level of income inequality. Thus the value of real GDP per capita is high due to the small number of individuals who earn very high incomes whilst a large majority AD1 Real GDP General Price Level P1 Y1 AS E1 0 AD0 P0 Y0 E0

are earning incomes that are very low. Thus, the real GDP per capita may not be a reliable indicator of standard of living. The real GDP per capita may also be a less reliable measure of the standard of living of Botswana as it does not provide information on the non -material aspect of the standard of living. While Botswana is in the upper middle-income country, the quality of life of its people may not be high. For example, although it has a high literacy rate, there could also be a high level of pollution, traffic congestion and lack of good healthcare facilities. As such, the non-material standard of living may be lower despite the high real GDP per capita. Despite its limitations, the real GDP per capita is still the most useful information to infer about standard of living of a country. It is relatively easy to obtain its monetary value from the economic transactions that take place in the country unlike pollution levels and other non-material aspect of living standards. To get a more accurate assessment of living standard, this indicator must be supplemented with Gini coefficient, literacy rates and life expectancy to obtain the Human Development Index – an attempt to take into account both material and non-material living standard. (e) (i) Explain how the management of the Singapore dollar could counteract the inflationary pressure predicted in Extract 4 [4] The inflation in Singapore is expected to increase quickly in 2021. The Singapore government could appreciate the value of the Singapo