Economics

1. 1.

   Explain why a country with an absolute advantage in both goods can still gain from trade.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The more productive country sacrifices some output when producing either good. It should compare those sacrifices with the partner's, not assume superior productivity removes all mutual gains.

   Marking points

   • Comparative advantage depends on relative opportunity costs, not absolute productivity.
   • Specialisation and exchange can benefit both countries when opportunity costs differ and terms lie between them.

   Examiner tip: The key comparison is opportunity cost, not output per worker alone.

2. 2.

   Fictional case: one worker-day produces either 12 cloth or 6 grain in Aro, and either 8 cloth or 8 grain in Beni. Calculate each country's opportunity cost of one cloth and identify comparative advantage in cloth.

   [3 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Use the alternative output forgone per unit of the chosen good. Aro sacrifices less grain for cloth, while Beni sacrifices less cloth for grain, so their comparative advantages differ.

   Marking points

   • Aro: 6/12 = 0.5 grain per cloth.
   • Beni: 8/8 = 1 grain per cloth.
   • Aro has the lower cloth opportunity cost and comparative advantage in cloth.

   Examiner tip: Keep the units on each opportunity-cost ratio.

3. 3.

   Fictional case: the exchange rate changes from 2 local units per dollar to 2.5. A machine costs 400 dollars with its dollar price fixed. Calculate its local price before and after, the percentage increase, and identify the currency movement.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The quotation is local currency per dollar, so multiply the dollar invoice by the quoted rate. The import-price rise is not the same percentage as the fall in the dollar value of one local unit.

   Marking points

   • Initial local price = 400 * 2 = 800.
   • New local price = 400 * 2.5 = 1000.
   • Import price increase = (1000 - 800)/800 * 100 = 25%.
   • The local currency depreciates: more local units buy one dollar.

   Examiner tip: Read the exchange-rate quotation direction before choosing multiplication or division.

4. 4.

   Fictional case: a tariff on imported steel helps domestic steelmakers but local appliance producers use imported steel. Analyse effects on both industries and consumers.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Protection benefits the upstream industry but can tax downstream production indirectly. Follow steel through the supply chain before judging the policy's overall effects.

   Marking points

   • A tariff raises imported steel's domestic price, encouraging substitution toward local steel.
   • Domestic steelmakers may gain sales and producer surplus.
   • Appliance producers face higher input costs and may lose export competitiveness.
   • Consumers may face higher appliance or steel prices; producer gains are not net national welfare gains.

   Examiner tip: Include domestic firms that consume the protected input.

5. 5.

   Fictional case: Lero relies on one crop export and proposes an infant-industry tariff for food processing. Evaluate the policy as a development strategy.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Diversification may reduce crop-price vulnerability, but a tariff cannot supply missing skills or electricity. Conditional, time-limited support is more defensible where learning gains can be demonstrated.

   Marking points

   • Indicative: temporary protection can permit learning and diversification.
   • Higher prices and weaker competitive discipline can create inefficient protected firms.
   • Skills, infrastructure and finance affect whether the industry becomes competitive.
   • A justified judgement considers time limits and measurable productivity goals rather than permanent protection.

   Examiner tip: Explain how the industry would graduate from protection.

6. 6.

   Fictional case: Mavi depreciates its currency to improve the trade balance, but imports essential medicines and exporters rely on imported components. Evaluate the likely outcome over time.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Initially quantities may be fixed by contracts while import values rise. Later demand substitution could help, but essential medicines and imported inputs limit that response; assess both values and volumes.

   Marking points

   • Indicative: cheaper foreign-currency export prices can increase export demand if quantities respond.
   • Essential import demand may respond little, raising the local-currency import bill.
   • Imported components raise exporters' costs and weaken the competitiveness gain.
   • A justified judgement distinguishes contract lags and long-run elasticities without guaranteeing improvement.

   Examiner tip: Depreciation is not a guaranteed trade-balance improvement.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.