Activities and Exercises for GCSE Economics

Transcription

1 Activities and Exercises for GCSE Economics Amy Chapman & Innes Robinson Anforme Limited

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3 Contents The basic economic problem True or false Crossword Data response Demand and supply Missing words Shifts in the demand and supply curves Crossword Which curve, which way? Data response Costs, revenues and profits Definitions of key terms Objectives and consequences How firms grow Data response Market failure Crossword Poster design task Data response Saving, borrowing and managing your money Crossword Data response Economic growth The economic cycle The causes of economic growth Circle the correct option Data response Unemployment Fill in the blanks Costs of unemployment Policies to reduce unemployment Data response Inflation True or false Complete the flow diagram Consequences and cures of inflation Data response Fiscal policy Activities & Exercises for GCSE Economics iii

4 Match the definition Direct and indirect taxes The government budget Data response Taxation of alcohol speech writing Create a test Monetary policy Which statement is correct? Complete the flow diagram Interest rates Data response Supply side policies True or false How policies increase supply Policies that affect labour and industry Match the head to the tail Sorting the policies The UK in recession: policy choices Data response Balance of payments Fill in the blanks Exports and imports Calculate the balance of payments Data response Exchange rates True of false Fill in the blanks The value of the pound Data response Protectionism Protectionist policies Evaluate methods of protection Data response The Euro Article for a newspaper The European Union Data response Globalisation Fill in the blanks For and against Absolute advantage Costs and benefits of trade Data response Activities & Exercises for GCSE Economics iv

5 Activities & Exercises for GCSE Economics Amy Chapman Head of Economics and Business Studies, Cheltenham College. Innes Robinson Head of Economics and Director of the Business School, Highbury Grove School, Islington. Published by Anforme Ltd., Stocksfield Hall, Stocksfield, Northumberland NE43 7TN. Tel: Fax: ISBN March 2010

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7 The basic economic problem Activity 1 True or false Statement True or False 1. Farming is a primary sector business 2. The NHS is a private organisation 3. A hairdressing salon is a secondary sector business 4. Thomas Cook holidays is a tertiary sector business 5. Opportunity cost occurs because of the basic economic problem 6. Oil is a scarce resource 7. Our wants are scarce 8. Capital is money Activities & Exercises for GCSE Economics 1

8 The basic economic problem: Activity 2 Crossword ACROSS 1. The basic economic problem is about resources. (6) 3. The basic economic problem is about wants. (8) 5. Next best alternative foregone. (11,4) 7. Sector of industry which provide services. (8) 8. Human input into the production process. (6) 14. Someone who risks their ideas and money when starting a business. (12) 15. Scarce resources means that these have to be made. (7) 16. What has to be met for basic survival. (5) DOWN 2. Machinery is an example of this. (7) 4. Type of economy where both the government and private firms allocate resources. (5) 6. The sector of industry which includes extraction of raw material. (7) 9. When an individual, group or country produce what they are best at. (14) 10. What to produce is a question asked when resources. (10) 11. Natural resources on the planet. (4) 12. Organisations owned and run by individuals or groups are called this. (7) 13. Organisations owned and run by the government are in this sector of the economy. (6) Activities & Exercises for GCSE Economics 2

9 Suggested answers The basic economic problem: Activity 1 True or false Statement True or False 1. Farming is a primary sector business True 2. The NHS is a private organisation False 3. A hairdressing salon is a secondary sector business False 4. Thomas Cook holidays is a tertiary sector business True 5. Opportunity cost occurs because of the basic economic problem True 6. Oil is a scarce resource True 7. Our wants are scarce False 8. Capital is money False Activity 2 Crossword S C A R C E I N F I N I T E A O P P O R T U N I T Y C O S T M I X T P T E R T I A R Y L A B O U R D S L I A P L M L E A A P P L C E N T R E P R E N E U R O I D Y I B C A V L A L A I T I 15 T C H O I C E S N E E D S N A 10 G T I O N Activities & Exercises for GCSE Economics 3

10 The basic economic problem: Data response 1. Tick the two correct statements: (2) More machinery was introduced to help with specialisation Roy s cars is in the public sector Roy s cars is a primary sector organisation Production rose when specialisation was introduced 2. (i) For the two incorrect statements rewrite them to make them correct. (2) (ii) Explain why they were incorrect. (2) 3. Using the newspaper article describe an opportunity cost Roy s cars may face. (2) 4. Explain what is meant by specialisation. (2) 5. Using the article explain how the workers have specialised. (4) 6. Explain how profits may have soared with the introduction of specialisation at Roy s cars. (6) 7. Discuss the costs and benefits of specialisation for Roy s cars. (10) Total marks = 30 Activities & Exercises for GCSE Economics 4

11 Suggested answers The basic economic problem: Data response 1. More machinery was introduced to help with specialisation Roy s cars is in the public sector Roy s cars is a primary sector organisation Production rose when specialisation was introduced 2. (i) Roy s cars is in the private sector Roy s cars is a secondary sector organisation (ii) Roy s cars is owned and run by an individual not by the government. Roy s cars manufactures cars he uses raw materials to produce his cars. 3. The opportunity cost of increasing machinery may have been to increase the number of workers. 4. Specialisation is when individuals, firms, regions or countries produce what they are best at. 5. For example Dan only works on the gearbox, other workers will specialise in a particular part of the production process. 6. Increased productivity (1), define productivity (1) due to better understanding of the job and getting better over time (1) increased productivity leads to lower average costs (1) define average costs (1) lower average costs means profit margins will rise (1). 7. Costs of specialisation boredom for employees, extra training costs, poor quality products as employees become complacent, lack of motivation for employees. (5) Benefits of specialisation increased productivity, lower average costs, increased profit. (5) Activities & Exercises for GCSE Economics 5

12 Demand and supply Activity 1 Fill in the missing words Demand is the quantity a buyer is and able to buy at a given price in a given period of time. The demand curve is -sloping. There is an relationship between price and quantity i.e. as price rises quantity demanded. A change in the price of the good itself causes a along the demand curve. Supply is the quantity a producer is willing and able to supply at a given price in a given period of time. The supply curve is -sloping. There is a relationship between price and quantity supplied i.e. as price quantity supplied also rises. A change in the price of the good itself causes a movement along the supply curve. A market is where the forces of demand and supply allocate resources. Where the demand and supply curves meet it is called the. This is also the market-clearing. Word Box downward equilibrium falls inverse positive price rises willing movement upward Activities & Exercises for GCSE Economics 6

13 Demand and supply: Activity 2 Shifts in the demand and supply curves For each scenario decide whether it will cause the demand or supply curve to shift, then will it shift right or left. The final part of step one is to briefly explain why this will happen. Once this step one is complete use the demand and supply diagram to show how it will affect price and quantity. 1. I want to buy an iphone because all my friends have one. This will cause the curve to shift to the because Market for iphones 2. The UK national minimum wage has increased, I now have to pay my workers more. (Market for cars) 3. I like to drink fizzy drinks, I don t mind drinking either Pepsi or Coke. Coke have decreased their price. (Market for Pepsi) 4. The government have increased the tax on petrol. (Market for petrol) Activities & Exercises for GCSE Economics 7

14 Suggested answers Demand and supply: Activity 1 Fill in the missing words Demand is the quantity a buyer is willing and able to buy at a given price in a given period of time. The demand curve is downward-sloping. There is an inverse relationship between price and quantity i.e. as price rises quantity demanded falls. A change in the price of the good itself causes a movement along the demand curve. Supply is the quantity a producer is willing and able to supply at a given price in a given period of time. The supply curve is upward-sloping. There is a positive relationship between price and quantity supplied i.e. as price rises quantity supplied also rises. A change in the price of the good itself causes a movement along the supply curve. A market is where the forces of demand and supply allocate resources. Where the demand and supply curves meet it is called the equilibrium. This is also the market-clearing price. Activity 2 Shifts in the demand and supply curves Scenario 1 This will cause the DEMAND curve to shift to the RIGHT because the iphone has come into fashion so more people will want to buy it. Diagram to be drawn Demand curve to shift to the right and new equilibrium shown. Scenario 2 This will cause the SUPPLY curve to shift to the LEFT because costs of production will rise as wages are a cost of production so firms will supply less. Diagram to be drawn supply curve to shift to the left. Scenario 3 This will cause the DEMAND curve to shift to the LEFT because Coke and Pepsi are substitutes, the price of Coke falling will mean an increase in demand for Coke which will take consumers away from Pepsi. Diagram to be drawn demand curve to shift to the left. Scenario 4 This will cause the SUPPLY curve to shift to the LEFT because a tax on petrol is an indirect tax which adds to the costs of production for the firm, this means that the firm will supply less. Diagram to be drawn supply curve to shift to the left. Activities & Exercises for GCSE Economics 8

15 Demand and supply: Activity 3 Crossword ACROSS 1. Demand is said to be this if the buyer is both willing and able. (9) 4. The quantity a producer is willing and able to produce at a given price. (6) 6. A tax on spending. (8) 10. Price x Quantity sold. (5,7) 11. A sum of money given to a firm by the government to reduce the price paid by consumers. (7) 12. Demand is this when it is very responsive to a change in price. (7) 13. Price elasticity of supply for sporting events. (9,9) DOWN 1. The responsiveness of demand or supply to a change in price. (10) 2. The relationship between price and quantity demanded. (7) 3. One seller in a market. (8) 5. Percentage change in quantity demanded divided by Percentage change in price as an acronym. (3) 7. An increase in this factor input cost will cause the supply curve to shift to the left. (5) 8. An increase in this long term determinant of demand will cause the demand curve to shift to the right. (10) 9. When demand and supply meet. (11) Activities & Exercises for GCSE Economics 9

16 Demand and supply: Activity 4 Which curve, which way? The situations below relate to the market for private new houses for sale. Put a tick in the correct column identifying whether the situation will affect the demand or supply curve, causing a shift right or left. Which curve? Shift Demand Supply Right Left 1. Construction workers wages increase 2. Cost of renting increases 3. Cost of bricks falls 4. New government legislation allows planning permission to be quicker 5. Increase in the cost of solicitors fees when buying a house 6. Bank of England reduce interest rates by 0.5% 7. The government offers new house builders a subsidy to increase the number of new houses. 8. Increase in the population 9. A new house builder called My eco home enters the market 10. Average incomes in the UK fall Activities & Exercises for GCSE Economics 10

17 Suggested answers Demand and supply: Activity 3 Crossword E F F E C T I V E L 2 3 A I M S U P P L Y I N D I R E C T O T E V N 7 8 I D W E P O C A R O E P I G S P Q O T O T A L R E V E N U E U L Y S L S U B S I D Y A L T I E L A S T I C B O R P E R F E C T L Y I N E L A S T I C 9 U M Activity 4 Which curve, which way? Which curve? Shift Demand Supply Right Left 1. Construction workers wages increase 2. Cost of renting increases 3. Cost of bricks falls 4. New government legislation allows planning permission to be quicker 5. Increase in the cost of solicitors fees when buying a house 6. Bank of England reduce interest rates by 0.5% 7. The government offer new house builders a subsidy to increase the number of new houses. 8. Increase in the population 9. A new house builder called My eco home enters the market 10. Average incomes in the UK fall Activities & Exercises for GCSE Economics 11

18 Demand and supply: Data response Thousands of fans turned out to see the Spice Girls burst onto the stage at London s O2 arena for their first UK concert in December Kicking off the UK leg of their 19-date reunion world tour Geri Halliwell was reported to have said: What a crowd! We love you London! They went on to perform all their biggest hits during a two-hour show that included eight costume changes. More than a million people registered for the chance to get tickets for the show, which sold out in 38 seconds! At 75 a ticket and a capacity of 23,000 at the O2 the Spice Girls made a lot of money. 1. Explain what is meant by the term demand. (2) 2. Using the Spice Girls concert tickets as an example, explain what is meant by effective demand. (4) 3. Explain what is meant by price elasticity of supply. (3) 4. With the aid of a demand and supply diagram explain why the price elasticity of supply for the O2 arena is said to be perfectly inelastic. (5) 5. UK government announces new tax on concert tickets. With the aid of a demand and supply diagram explain how the new tax would affect the market for Spice Girl tickets. (5) 6. Price elasticity of demand for the Spice Girls was very price inelastic. With the aid of a demand and supply diagram explain what this means. (5) 7. With the aid of a demand and supply diagram explain how a maximum price set below the equilibrium would affect the demand for Spice Girls tickets. (6) Total marks = 30 Activities & Exercises for GCSE Economics 12

19 Suggested answers Demand and supply: Data response 1. The quantity a buyer is willing and able to buy at a given price in a given period of time. 2. Effective demand is when a buyer is both willing (wants to buy) and able (has the money to buy) a product. Tickets sold out in 38 seconds showing that people were willing and they all paid the 75 for each ticket showing they were able. 3. Price elasticity of supply measures the responsiveness of quantity supplied to a change in price of the good. Percentage change in quantity supplied Percentage change in price 4. Perfectly inelastic supply means that supply is not responsive to a change in price, at the O2 arena supply is fixed, at 23,000, no more tickets can be supplied in the short term. P S 23,000 Q 5. A tax on concert tickets is an indirect tax which will usually shift the demand curve to the left. This will cause the quantity to fall (the fall in quantity will depend on the elasticity of demand). However given the high price of the O2 tickets already the tax in this case may barely shift the demand curve. P P1 P2 S D2 D1 Q 6. Price elasticity of demand measure the responsiveness of quantity demanded to a change in price of the good. Inelastic demand means that demand is not very responsive to a change in price. Demand for Spice Girls tickets is likely to be very price inelastic because there are no strong substitutes and it was a one-off reunion. P D Q 7. A maximum price is a price ceiling set below the equilibrium which aims to give a fairer price to concert goers. P S P1 D Excess Demand Q Activities & Exercises for GCSE Economics 13

20 Costs, revenues and profits Activity 1 Link the definitions with the key terms Total Revenue Profit Average Revenue Variable Cost Average Cost Fixed Cost Total Cost A Fixed costs + Variable costs E Costs that vary directly with output B Costs that do not vary with output C Price x Quantity D Total revenue Output F Total cost Output G Total revenue Total cost Activity 2 Objectives and consequences Link the objective to the strategy used to achieve it and then think of a problem arising from the strategy and fill in the final box: Objective Strategy Problem Decrease total cost Lower price Increase productivity Find a cheaper raw material Increase sales Workers specialise Activities & Exercises for GCSE Economics 14

21 Suggested answers Costs, revenues and profits: Activity 1 Link the definitions with the key terms Total Revenue Profit Average Revenue Variable Cost C G D E Average Cost Fixed Cost Total Cost F B A Costs, revenues and profits: Activity 2 Objectives and consequences Link the objective to the strategy used to achieve it and then think of a problem of the action and fill in the final box: Objective Strategy Problem Decrease total cost Lower price Profit may fall. Other firms may follow. Increase productivity Find a cheaper raw material May reduce quality. Increase sales Workers specialise Workers may become bored. Expensive to train. Activities & Exercises for GCSE Economics 15

22 Costs, revenues and profits: Activity 3 How firms grow, fill in the blanks Backward vertical integration Horizontal integration Honda car manufacturer Production process Ice cream company Activities & Exercises for GCSE Economics 16

23 Suggested answers Costs, revenues and profits: Activity 3 How firms grow, fill in the blanks Tyre-making company Backward vertical integration Toyota car manufacturer Horizontal integration Honda car manufacturer Production process Conglomerate integration Forward vertical integration Ice cream company Car sales company Activities & Exercises for GCSE Economics 17

24 Costs, revenues and profits: Data response Jasmin and Ryan own and run a cake-making business. Jasmin and Ryan rent a shop on the High Street in Cheltenham, the rent is 200 a week. They also have a loan from the bank. To make the cakes Jasmin orders the ingredients every week from a wholesaler firm. She must buy flour, sugar, eggs, butter and icing. Jasmin has calculated that the variable cost per cake is 15p. 1. State one fixed cost that Jasmin and Ryan must pay. (1) 2. State one variable cost that Jasmin and Ryan must pay. (1) 3. Explain what is meant by total cost. (2) 4. Fill in the blanks in the following table: (10) Price Quantity Fixed Variable Total Total Profit ( ) costs ( ) costs ( ) costs ( ) revenue ( ) ( ) Using the table above calculate average revenue when Jasmin and Ryan sell 500 cakes a week. Show your working. (2) 6. Using the table above calculate average cost when Jamin and Ryan make 50 cakes a week. Show your working. (2) 7. What is meant by productivity? (2) 8. Explain the difference between production and productivity. (2) 9. Jasmin and Ryan can make 750 cakes a week but Jasmin is concerned that this amount is not enough to make a profit. Discuss how Jasmin could increase the number of cakes she makes every week. (8) Total marks = 30 Activities & Exercises for GCSE Economics 18

25 Suggested answers Costs, revenues and profits: Data response 1. Rent or bank loan. 2. Sugar, eggs etc. 3. Total cost is fixed cost + variable cost. 4. Price Quantity Fixed Variable Total Total Profit ( ) costs ( ) costs ( ) costs ( ) revenue ( ) ( ) Productivity is defined as output per person per period of time. 8. Production is total output whereas productivity is production divided by the number of workers. 9. Ideas may include Ryan and Jasmin could go on a cake-making course, or increase the number of ovens in their kitchen, or employ another person. Jasmin and Ryan could specialise in particular parts of the production process, for example, Ryan might weigh out all the ingredients and Jasmin could mix them together. Activities & Exercises for GCSE Economics 19

26 Market failure Activity 1 Crossword ACROSS 1. The benefit to the individual of consuming or producing. (7,7) 4. A negative by-product of production and/or consumption felt by a third party. (8,11) 5. The market failure occurring when there is just one seller in the market. (8) 6. An example of a demerit good. (7) 7. A good that would be over-consumed and over-provided if left to the free market. (7,4) 9. An example of a public good. (7) 10. Example of a merit good (as an acronym). (3) DOWN 1. A good which is non-rivalrous and non-excludable. (6,4) 2. A good that would be under-consumed and under-provided if left to the free market. (5,4) 3. Private cost + negative externality when added together. (6,4) 8. One method of government intervention when there is environmental degradation. (5,3) Activities & Exercises for GCSE Economics 20

27 Market failure: Activity 2 Design a poster Imagine you work for the National Health Service and you are trying to stop the negative externalities associated with smoking. Design a poster to warn people of the dangers. Use pictures to make your poster stand out. Use the information below to help you. According to Cancer Research UK, passive smokers are per cent more likely to develop lung cancer than people not exposed to smoke. Passive smokers who are exposed to tobacco smoke breathe in over 400 chemicals, and over 60 are known or suspected to be carcinogenic (cancercausing). Treating smokers costs the NHS in England 2.7bn a year. Children of parents who smoke inhale between 60 to 150 cigarettes worth of nicotine a year, or about 1.5 cigarettes worth of nicotine each week. Smoking is the biggest cause of litter in the UK. Negative Externalities of Smoking Activities & Exercises for GCSE Economics 21

28 Market failure: Activity 3 Data response Smoking is estimated to have cost the NHS 2.7bn in Due to this and other negative externalities, the government is looking at a number of policies to reduce smoking in the UK. Cigarette packs already have anti-smoking slogans on the front and smokers pay over 9bn a year in tax. Other measures have been suggested such as putting cigarettes under the counter and removing branding and logos from the packaging. Many observers feel people will still smoke. Paul, a smoker for 20 years says the only way the government can stop smokers is to ban cigarettes, I m addicted. Source: Smoking costs the NHS billions, BBC News, Thursday 11 June, Explain what is meant by the term negative externality. (2) 2. According to the article, how much has smoking cost the NHS in 2008? (1) 3. According to the article, how much do smokers pay in tax per year? (1) 4. State one other negative externality associated with smoking. (1) 5. State two strategies mentioned in the text that aim to reduce the consumption of cigarettes. (2) 6. Explain the negative externalities associated with the production or consumption of two other products. (6) 7. Explain how an improvement in healthcare produces positive externalities. (6) 8. Explain one other strategy the government could use to reduce smoking. (3) 9. The only way the government can stop smokers is if they ban cigarettes. Do you agree with this statement. Give reasons for your answer. (8) Total marks = 30 Activities & Exercises for GCSE Economics 22

29 Suggested answers Market failure: Activity 1 Crossword 4 1 P R I V A T E B E N E F I T U B 2 M L E S I R O C I C N E G A T I V E E X T E R N A L I T Y O G A 5 6 M O N O P O L Y A L C O H O L D O C 7 8 D E M E R I T G O O D O 9 R S D E F E N C E T 10 E N H S T A X 3 Activity 3 Data response 1. A negative by-product of production and/or consumption borne by a third party. An example is noise pollution bn. 3. 9bn a year. 4. Passive smoking, or the smell or tobacco. 5. Measures that have been suggested include putting cigarettes under the counter and removing branding and logos from the packaging, anti-smoking slogans on the front and taxation. 6. Cars noise pollution, air pollution, congestion and accidents. Alcohol violence, crime, accidents. 7. Healthcare is a merit good, it can be provided by the free market but if left solely to the free market would be under-consumed and under-provided. So the government have intervened to provide healthcare free at the point of use. Healthcare has benefits to people who are not involved in the economic activity of being cared for by the NHS. If healthcare is made better the work force are likely to be more healthy and therefore take fewer sick days, thus increasing national income. People are more likely to live longer and therefore be able to work longer. 8. Ban smoking, regulation (under 21 s are not allowed to buy cigarettes), education and better information to warn smokers of the health danger involved. 9. Agree stops people from being able to buy them, takes away temptation. Disagree may create a black market, massive loss in tax revenue for the government, take time to see affects in the health of the population, cost of policing the ban. Activities & Exercises for GCSE Economics 23

30 Saving, borrowing and managing your money Activity 1 Crossword This is a crossword with a difference, the answers are already there! You have to think of the clues to complete it. 1 2 S I A N 3 O V E R D R A F T ` 4 H I E I N R 5 M O R T G A G E E E S P 6 B U D G E T U R 7 A P R A C T H E 8 L O A N S 9 C R E D I T C A R D ACROSS DOWN Activities & Exercises for GCSE Economics 24

31 Saving, borrowing and managing your money: Activity 2 Data response The number of mortgages approved for house purchases in the UK rose to its highest level in more than a year in June 2009 to 47,584. The figure is up 74% on November 2009, when the number of approvals for homebuyer loans dropped to just 27,000, and is the highest since April last year. The rise in approvals for purchases may have been driven by an increase in the number of first-time buyers able to enter the market, as lenders have begun to offer higher loan-to-value mortgages again. Lender reports of rising house prices may also have encouraged buyers back into the market. However, despite the increase the number of buyers remains well below the high it reached at the top of the property market. This is in part due to the large deposit required. Many lenders require a 25% deposit. This can be very difficult for home buyers, especially first time buyers who have not had long to save the money. Many first time buyers have to take out extra personal loans to pay the other costs associated with buying a house. 1. What is meant by the term mortgage? (2) 2. What is meant by the term interest rate? (2) 3. Why do banks require a deposit when people buy a house and take out a mortgage? (2) 4. Explain, using an example why it will be difficult for first time buyers to save the deposit required to buy a house. (4) 5. Explain, using an example, what is meant by opportunity cost? (4) 6. State two costs associated with buying a house. (2) 7. When people buy their first house there are a number of things they must pay for every month, such as gas and electricity. They must therefore draw up a budget. What is meant by the term budget? (2) 8. In addition to those mentioned above state six items that might appear in a first time buyer s budget. (6) 9. Using your answers in question 7 decide which items are necessities and which are luxuries, using the table below. (6) Necessities Luxuries Total marks = 30 Activities & Exercises for GCSE Economics 25

32 Suggested answers Saving, borrowing and managing your money: Activity 1 Crossword ACROSS 3. Occurs when withdrawals from a bank account exceed the available balance giving a negative balance. (9) 5. Money borrowed to buy a property, usually paid back over 25 years. (8) 6. Planned expenses and revenues. (6) 7. Interest rate for the whole year (as an acronym). (3) 8. Type of debt such as used to buy a car or holiday. Paid back in less than 25 years. (4) 9. Small plastic card which entitles owner to buy goods now and pay later usually a month later. (6,4) DOWN 1. Money put a bank for safe-keeping which usually the depositor receives a reward for doing so (interest). (6) 2. Amount paid extra when borrowing money or the reward received for saving. (8,4) 4. Allows a buyer to obtain use of goods on payment of a sum over several months. (4,8) Activity 2 Data response 1. A sum of money borrowed from a bank or financial institution, to buy a house or property. It is usually paid back over 25 years. In addition to repaying the amount borrowed interest is charged. 2. This is the reward for saving and the extra paid when borrowing money, expressed as a percentage. 3. Mortgages tend to be large sums of money borrowed. Banks are concerned that borrowers could quickly be in negative equity if they do not have a deposit and also to be seen to be more responsible lenders. 4. If a first time buyer is aged 25 trying to buy a 150,000 house he (or she) will require a deposit of 37,500. This is a lot of money for someone to have amassed by the age of Opportunity cost is the next best alternative forgone when making a choice. Opportunity cost occurs due to scarce resources and infinite wants. For a first time buyer their scarce resource is money as they must make difficult choices with limited funds available, e.g. between buying a new TV or a new table. 6. Stamp duty, solicitors fees, removals, furniture. 7. A budget is a statement of all planned revenue and expenditure in a period of time. 8 & 9. Necessities Luxuries Water rates Sky TV Gas and electricity Internet Council tax Gym membership Food Eating out Petrol Leisure activities Activities & Exercises for GCSE Economics 26

33 Economic growth Activity 1 The Economic Cycle The cycle is made up of four sections. Label the diagram using the words below. Boom Recession Recovery Slump Output B R S R Use an arrow to match up the boxes to the correct section of the business cycle and fill in the missing words. Time GDP is starting to. People are spending less which means less and will be produced. Firms will need fewer workers. This is called. There may be as companies reduce their prices to increase. Word Box deflation goods decline services demand cyclical unemployment GDP is still rising but at a slower. The government may decrease to encourage people to keep and stop a. Word Box interest rates rate recession spending When GDP is rising more and services will be made which could lead to a reduction in. will be high as people will go out and spend. Too much demand however could cause prices to rise which is called. Word Box inflation demand goods unemployment GDP starts to recover after a. Businesses will start taking on workers and consumers will be more prepared to. This increase in growth could have been caused by the government reducing to stimulate. Word Box spend interest rates demand recession Activities & Exercises for GCSE Economics 27

34 Suggested answers Economic growth: Activity 1 The Economic Cycle The cycle is made up of four sections. Label the diagram using the words below. Boom Recession Recovery Slump Output Boom Recovery Slow Down Recession Use an arrow to match up the boxes to the correct section of the business cycle and fill in the missing words. Time GDP is starting to decline. People are spending less which means less goods and services will be produced. Firms will need fewer workers. This is called cyclical unemployment. There may be deflation as companies reduce their prices to increase demand. Recession Word Box deflation goods decline services demand cyclical unemployment GDP is still rising but at a slower rate. The government may decrease interest rates to encourage people to keep spending and stop a recession. Slow Down Word Box interest rates rate recession spending When GDP is rising more goods and services will be made which could lead to a reduction in unemployment. Demand will be high as people will go out and spend. Too much demand however could cause prices to rise which is called inflation. Boom Word Box inflation demand goods unemployment GDP starts to recover after a recession. Businesses will start taking on workers and consumers will be more prepared to spend. This increase in growth could have been caused by the government reducing interest rates to stimulate demand. Recovery Word Box spend interest rates demand recession Activities & Exercises for GCSE Economics 28

35 Economic growth: Activity 2 The causes of economic growth Economic growth is when the productive capacity of a country increases. It can be achieved by improving the quality or increasing the quantity of resources. It is measured using GDP, which is the total amount of goods and services produced in a country in a year. Put the following strategies for increasing economic growth into the correct column. Improved education Increasing the minimum wage More business investment Training Reducing benefits New technology Cutting down forests Make more machines Increased efficiency Improve the quality of resources Increase the quantity of resource Activity 3 Circle the correct option An increase in GDP is more likely to cause Prices to fall Prices to rise Why do you think this will happen? An increase in GDP is more likely to lead to Pollution An improvement in living standards Why do you think this will happen? Activities & Exercises for GCSE Economics 29

36 Suggested answers Economic growth: Activity 2 The causes of economic growth Economic growth is when the productive capacity of a country increases. It can be achieved by improving the quality or increasing the quantity of resources. It is measured using GDP, which is the total amount of goods and services produced in a country in a year. Put the following strategies for increasing economic growth into the correct column. Improve the quality of resources Training Increased efficiency More business investment Improved education Increase the quantity of resource Cutting down forests Increasing the minimum wage Reducing benefits Make more machines New technology Activity 3 Circle the correct option An increase in GDP is more likely to cause Prices to fall Prices to rise Why do you think this will happen? Increasing economic activity is likely to lead to rising costs and then prices. An increase in GDP is more likely to lead to Pollution An improvement in living standards Both of the above. Why do you think this will happen? Economic growth should mean rising incomes for most people but may well also harm the environment. Activities & Exercises for GCSE Economics 30

37 Economic growth: Data response China s growth of GDP rose very rapidly from $268bn to $3280bn from 1987 to This was in part the result of investment in capital goods which has allowed the country to make better use of its huge population. The country has seen the benefits of this growth with living standards increasing as more of the population are able to afford healthcare and food. However China is now considered to be the world s biggest emitter of CO2. There are also worries that increased international trade has forced many Chinese people into low paid jobs where working standards are very poor. Worryingly for the Chinese government, there have been signs recently that the bubble in the economy has burst with unemployment rising as their export market slows down. Source: China grows faster amid worries, BBC News, Thursday 16 July Explain what is meant by the term economic growth? (3) 2. (i) State two benefits of economic growth that are mentioned in the information above. (ii) State two costs of economic growth that are mentioned in the information above. (2) (2) 3. China s growth has been caused by an improvement in the quality of their capital resources. Explain one other way of increasing economic growth. (5) 4. Using the data and your own economic knowledge, do you think the Chinese population has benefited from economic growth? (8) 5. The data suggests China s economic growth is slowing down. Evaluate the possible options for the Chinese government to stimulate economic growth. (10) Total marks = 30 Activities & Exercises for GCSE Economics 31

38 Suggested answers Economic growth: Data response 1. When the productive capacity of a country increases. It is measured by the change in real gross domestic product (GDP). 2. (i) Better living standards/improvements in healthcare. (ii) Pollution/low paid jobs. 3. Improve the quality of education and training. 4. Benefits Better living standards, better healthcare, more goods and services to choose from. Costs Pollution, poorly paid jobs, possible inflation. 5. Solutions: Reduce interest rates Advantage Should increase spending as people will have more disposable income. Disadvantages Could cause inflation, takes time to have an effect. Introduce supply side polices Advantages Should improve efficiency and productivity in the UK. Disadvantages Expensive, not guaranteed to work. Reduce taxes and increase public spending Advantages Increase in demand in the economy. Disadvantages Less government income could cause a budget deficit. Activities & Exercises for GCSE Economics 32

39 Unemployment Activity 1 Fill in the blanks A person is unemployed when they are and to work but do not have a job. Unemployment can be measured in two ways. Using the C C or the L F S (I ). Word Box able ILO labour count survey claimant willing force The information below shows different types of unemployment. Fill in the boxes using the word box provided. There are no jobs around here, I m moving to London! I can work for hours and I don t need breaks! Word Box Seasonal Cyclical Regional Technological Sectoral Activities & Exercises for GCSE Economics 33

40 Suggested answers Unemployment: Activity 1 Fill in the blanks A person is unemployed when they are willing and able to work but do not have a job. Unemployment can be measured in two ways. Using the Claimant Count or the Labour Force Survey (ILO). Word Box able ILO labour count survey claimant willing force The information below shows different types of unemployment. Fill in the boxes using the word box provided. Cyclical Sectoral There are no jobs around here, I m moving to London! I can work for hours and I don t need breaks! Regional Technological Seasonal Word Box Seasonal Cyclical Regional Technological Sectoral Activities & Exercises for GCSE Economics 34

41 Unemployment: Activity 2 Costs of unemployment Sort the following into cost to the individual, cost to the government and cost to the local area. Try to add some of your own. Lack of self-esteem Crime may increase Less money from income tax Cost to the local area Cost to the individual Cost to the government Activities & Exercises for GCSE Economics 35

42 Suggested answers Unemployment: Activity 2 Costs of unemployment Sort the following into cost to the individual, cost to the government and cost to the local area. Try to add some of your own. Lack of self-esteem Crime may increase Less money from income tax Cost to the local area 1. Crime may increase 2. Shops close Cost to the individual 1. Lack of self-esteem 2. Less disposable income 3. Stress Cost to the government 1. Less money from income tax 2. More money spent on unemployment benefit Activities & Exercises for GCSE Economics 36

43 Unemployment: Activity 3 Policies to reduce unemployment Different policies are required to solve different types of unemployment. Match up the correct response for each type of unemployment. Then explain how these policies will reduce unemployment. A. General Motors given huge bail-out. B. Government promises more money towards education and training. C. The job centre opens up online. D. Bank of England cuts interest rates to 0.5%. E. Millions spent on improving Belfast s town centre. Policy used (A-E) How this will help reduce unemployment Cyclical D If interest rates are cut, demand will increase as more people spend. Companies will have to produce more to cope with demand and they will have to take on workers. Frictional Sectoral Regional Technological Activities & Exercises for GCSE Economics 37

44 Suggested answers Unemployment: Activity 3 Policies to reduce unemployment Different policies are required to solve different types of unemployment. Match up the correct response for each type of unemployment. Then explain how these policies will reduce unemployment. A. General Motors given huge bail-out. B. Government promises more money towards education and training. C. The job centre opens up online. D. Bank of England cuts interest rates to 0.5%. E. Millions spent on improving Belfast s town centre. Policy used (A-E) How this will help reduce unemployment Cyclical D If interest rates are cut, demand will increase as more people spend. Companies will have to produce more to cope with demand and they will have to take on workers. Frictional C More awareness of available jobs should reduce the time of the gap between people being in and out of work. Sectoral A General Motors are a big employer of workers in the USA. A money injection from the government will allow the company to maintain their workforce and will stop them from going into administration Regional E Improving Belfast s city centre attracts companies to invest in the area, creating job opportunities. Technological B Education and training aims to provide potential workers with the skills required to work with technological advances. Activities & Exercises for GCSE Economics 38

45 Unemployment: Data response In January 2009 UK unemployment reached a record high. This has been caused by firms letting workers go as they had lower demand for their products. Steve from CGL Motors remarked, I had the worst Christmas sales in 10 years, I had to lose some workers to stop myself from going bankrupt! Many of the job cuts were made in the North East of England where unemployment rose to 8.6%. Workers in the area are struggling to cope. Sally, an unemployed hairdresser from Middlesbrough said, It was bad enough losing my job, but there doesn t seem to be any information on how to get another one. The government has pledged to increase spending on training and recently the Bank of England dropped the base rate to 0.5%. Ian from Nottingham is still furious that not enough is being done. I ve got a mortgage to pay and have received no help. My house also got broken into last week what is this country coming to? Source: UK unemployment hits 1.92 million, BBC News, Wednesday 21 January, Tick the types of unemployment that are shown in the data. (2) Seasonal Cyclical Sectoral Regional Technological Frictional 2. State the level of the base rate in the extract. (1) 3. State two consequences of unemployment that are shown in the data (2) 4. State two ways in which unemployment is measured. (2) 5. Explain how a reduction in the base rate is intended to reduce unemployment. (3) 6. In the extract, Sally is finding it hard to get information about new jobs. Explain the type of unemployment this will cause and discuss two ways in which the problem could be solved. (5) 7. Explain how an increase in spending on training could reduce unemployment in the North East. (3) 8. Explain two consequences of unemployment for the government. (4) 9. In the data the government have tried two solutions to reduce unemployment. Evaluate whether these policies will be effective or if other solutions are required. (8) Total marks = 30 Activities & Exercises for GCSE Economics 39

46 Suggested answers Unemployment: Data response 1. Regional, cyclical, frictional %. 3. Crime, people unable to pay mortgages. 4. Labour Force Survey (ILO), Claimant Count. 5. Increase in spending causes multiplier effect which leads to companies requiring more workers to cope with the increased demand. 6. Frictional unemployment. Ways to help reduce this include an increase in job centres, increase in the use of the internet to advertise jobs. 7. Extra training provision should provide workers with the skills to move into different sectors and also provide occupational mobility. 8. Increase in spending on benefits, decrease in income tax. 9. Increase in spending on training Advantage Increase in occupational mobility. Disadvantage Takes time, not guaranteed to work, Expensive. More suited to supply side causes of unemployment. Reduce the base rate to 0.5% Advantage This should increase demand in the economy which should lead to companies requiring more workers. Disadvantage Base rate changes take time to have an affect. Not guaranteed to work. More suited to demand side causes of unemployment. Other options Improve information using Job centres this will help frictional unemployment. Provide subsidies for companies to set up in areas with high levels of unemployment this will help regional unemployment. Conclusion A good conclusion will recognise that different policies are required to solve different causes of unemployment. Activities & Exercises for GCSE Economics 40

47 Inflation Activity 1 True or false Statement It s not inflation unless every product increases in price Inflation will cause everyone to spend more Inflation is measured by looking at every price of every product An increase in the price of oil could cause inflation The Bank of England try to control inflation using interest rates Pensioners are delighted when there is inflation because their savings are worth more Inflation is measured by taking a basket of goods which contains the most typical goods of a typical consumer The Bank of England s key strategy is to try to control inflation using taxes When my favourite chocolate bar increases in price it s called inflation Inflation is a sustained rise in the general price level True or False Activities & Exercises for GCSE Economics 41

48 Suggested answers Inflation: Activity 1 True or false Statement It s not inflation unless every product increases in price Inflation will cause everyone to spend more Inflation is measured by looking at every price of every product An increase in the price of oil could cause inflation The Bank of England try to control inflation using interest rates Pensioners are delighted when there is inflation because their savings are worth more Inflation is measured by taking a basket of goods which contains the most typical goods of a typical consumer The Bank of England s key strategy is to try to control inflation using taxes When my favourite chocolate bar increases in price it s called inflation Inflation is a sustained rise in the general price level True or False False False False True True False True False False True Activities & Exercises for GCSE Economics 42

49 Inflation: Activity 2 Complete the flow diagram by writing these labels in the correct boxes As demand outstrips supply, firms put up their prices Businesses have to put up their prices to maintain their profit margins The prices of raw materials increase There are only so many goods for them to buy Costs for business firms increase People have more money to spend causing demand to increase Cost push inflation Demand pull inflation Prices Activities & Exercises for GCSE Economics 43

50 Suggested answers Inflation: Activity 2 Complete the flow diagram by adding these labels in the correct boxes As demand outstrips supply, firms put up their prices Businesses have to put up their prices to maintain their profit margins The prices of raw materials increase There are only so many goods for them to buy Costs for business firms increase People have more money to spend causing demand to increase Cost push inflation Demand pull inflation The prices of raw materials increase People have more money to spend causing demand to increase Costs for business firms increase There are only so many goods for them to buy Businesses have to put up their prices to maintain their profit margins As demand outstrips supply, firms put up their prices Prices Activities & Exercises for GCSE Economics 44

51 Inflation: Activity 3 Consequences and cures of inflation In the speech bubble, explain how inflation will affect the person. Fixed income Menu costs Pensioner Restaurant owner Less spending International competitiveness Shopper Tourist Activities & Exercises for GCSE Economics 45

52 Suggested answers Inflation: Activity 3 Consequences and cures of inflation In the speech bubble, explain how inflation will affect the person. Fixed income Money buys less goods so standard of living reduces Menu costs As prices change, people have to change their menus at a cost Pensioner Restaurant owner Less spending Shoppers will spend less as prices are higher International competitiveness Goods will be more expen - sive abroad reducing demand for them Shopper Tourist Activities & Exercises for GCSE Economics 46

53 Inflation: Data response 6% 5% 4% 3% 2% 1% 0 Feb 2007 May 2007 Aug 2007 Nov 2007 Feb 2008 May 2008 Aug 2008 Nov 2008 Feb 2009 Source: Oil prices up after record falls, BBC News, Friday 31 October Describe the trend of inflation in the graph. (2) 2. The graph above shows the retail price index. Explain how this is measured. (2) 3. Using the information above, explain what is meant by cost push inflation. (2) 4. Explain why pensioners will be worried about rising inflation. (2) 5. Explain two possible reasons for falling inflation in (4) 6. The Bank of England s target rate of inflation is 2%. Discuss the possible methods the Bank and the government could have used to reduce inflation in (8) 7. Inflation only brings problems to the economy. Do you agree with this statement? Give reasons for your answer. (10) Total marks = 30 Activities & Exercises for GCSE Economics 47

54 Suggested answers Inflation: Data response 1. One mark for stating the two price movements. There was an increase between April 2008 and April 2009 followed by a falling rate of inflation thereafter. The second mark is for using data as in this comment. 2. A basket of 650 goods are collected which reflect the spending of average UK consumers. 3. When the cost of raw materials such as petrol or metal increase causing firms costs to increase. They then put up their prices to maintain their profit margins. 4. Many pensioners are on a fixed income so will be unable to buy as many goods as prices rise causing their living standards to reduce. 5. A reduction in the price of oil, reduced demand for a large number of goods and services. 6. Possible methods: Bank of England change the base rate / The government use fiscal policy. 7. Benefits of inflation Borrowed money costs less to pay back. Assets such as houses rise in price. Costs Fixed income, wage price spiral, loss of international competitiveness, reduced demand due to loss of confidence. Activities & Exercises for GCSE Economics 48

55 Fiscal policy Activity 1 Match the tax with its correct definition Council Tax A tax which is paid on the things of value you leave behind when you die. VAT A tax placed on your annual income. Corporation Tax A tax placed on households based on the estimated value of the property and the number of people living in it. Excise Duties A tax on the profits of companies and other organisa - tions including clubs, societies and associations. National Insurance A tax on the consumption of goods and services. Income Tax A tax placed on an individual good or service. The government often place higher excise duties on goods such as alcohol and cigarettes. Inheritance Tax A tax placed on wages and salaries which is used to fund state benefits. Direct or indirect Select whether the taxes above are direct or indirect taxes and write in the lines below. Direct taxes Indirect taxes Activities & Exercises for GCSE Economics 49

56 Suggested answers Fiscal policy: Activity 1 Match the tax with its correct definition Council Tax A tax which is paid on the things of value you leave behind when you die. VAT A tax placed on your annual income. Corporation Tax A tax placed on households based on the estimated value of the property and the number of people living in it. Excise Duties A tax on the profits of companies and other organisa - tions including clubs, societies and associations. National Insurance A tax on the consumption of goods and services. Income Tax A tax placed on an individual good or service. The government often place higher excise duties on goods such as alcohol and cigarettes. Inheritance Tax A tax placed on wages and salaries which is used to fund state benefits. Direct or indirect Select whether the taxes above are direct or indirect taxes and write in the lines below. Direct taxes Corporation Tax Income Tax Indirect taxes VAT Excise Duties National Insurance Inheritance Tax Activities & Exercises for GCSE Economics 50

57 Fiscal policy: Activity 2 Direct and indirect taxes Income tax is direct as it comes directly out of a person s salary. It is considered to be progressive as the higher the income of the taxpayer, the larger the percentage of their total income paid in tax. For example someone earning less than 6,000 will not have to pay any income tax but someone earning over 40,000 will have to pay 40% on anything over that amount. The advantage is it is easy for the government to collect however some well off people feel they have to pay too much. Another example of a direct tax is corporation tax. VAT is an example of an indirect tax as it is a tax on what people spend rather than what they earn. Indirect taxes can be used to try to stop people consuming or producing products which are bad for them which is one of the reasons cigarettes are so highly taxed. Indirect taxes are often considered to be regressive as the higher income earners pay a lower percentage of their income in tax compared to low income earners. Use the information above to sort the statements into direct and indirect taxes. Direct or Indirect Often considered to be progressive Placed on a person s income A good way of reducing consumption of goods which have negative external effects Income tax Placed on profits of companies Often considered to be regressive VAT Easy for the government to collect Activities & Exercises for GCSE Economics 51

58 Suggested answers Fiscal policy: Activity 2 Direct and indirect taxes Income tax is direct as it comes directly out of a person s salary. It is considered to be progressive as the higher the income of the taxpayer, the larger the percentage of their total income paid in tax. For example someone earning less than 6,000 will not have to pay any income tax but someone earning over 40,000 will have to pay 40% on anything over that amount. The advantage is it is easy for the government to collect however some well off people feel they have to pay too much. Another example of a direct tax is corporation tax. VAT is an example of an indirect tax as it is a tax on what people spend rather than what they earn. Indirect taxes can be used to try to stop people consuming or producing products which are bad for them which is one of the reasons cigarettes are so highly taxed. Indirect taxes are often considered to be regressive as the higher income earners pay a lower percentage of their income in tax compared to low income earners. Use the information above to sort the statements into direct and indirect taxes. Direct or Indirect Often considered to be progressive Placed on a person s income A good way of reducing consumption of goods which have negative external effects Income tax Placed on profits of companies Often considered to be regressive VAT Easy for the government to collect Direct Direct Indirect Direct Direct Indirect Indirect Direct Activities & Exercises for GCSE Economics 52

59 Fiscal policy: Activity 3 The Government budget Government spending by function in Total managed expenditure: 671bn Other expenditure 72bn Debt interest 28bn Public order and safety 35bn Housing and environment 29bn Industry, agriculture, employment and training 20bn Defence 38bn Social protection 189bn Personal social services 31bn Education 88bn Health 119bn Transport 23bn What are the three main areas of government spending? What percentage of government spending is on transport? What percentage of government spending is on health? Government receipts in Other 67bn Total receipts: 496bn Council tax 25bn Income tax 141bn Business rates 24bn VAT 64bn Corporation tax 35bn National insurance 98bn Excise duties 44bn What are the three main areas of government revenue? What percentage of taxation is income tax? What percentage of taxation is VAT? What proportion of total government spending is matched by tax receipts? Activities & Exercises for GCSE Economics 53

60 Suggested answers Fiscal policy: Activity 3 The Government budget Government spending by function in Total managed expenditure: 671bn Other expenditure 72bn Debt interest 28bn Public order and safety 35bn Housing and environment 29bn Industry, agriculture, employment and training 20bn Defence 38bn Social protection 189bn Personal social services 31bn Education 88bn Health 119bn Transport 23bn What are the three main areas of government spending? 1. Social Protection 2. Health 3. Education What percentage of government spending is on transport? 3.4% What percentage of government spending is on health? 17.7% Government receipts in Other 67bn Total receipts: 496bn Council tax 25bn Income tax 141bn Business rates 24bn VAT 64bn Corporation tax 35bn National insurance 98bn Excise duties 44bn What are the three main areas of government revenue? 1. Income Tax 2. National Insurance 3. VAT What percentage of taxation is income tax? 28% What percentage of taxation is VAT? 13% What proportion of total government spending is matched by tax receipts? 74% Activities & Exercises for GCSE Economics 54

61 Fiscal policy: Data response UK government borrowing a record 90bn in the financial year % increase in both alcohol and tobacco tax 50% income tax rate for people earning 150,000 in 2011 The government s benefits bill rose 1.8% Fuel duty to rise by 2p a litre Unemployment, which has risen to 2.1 million, has contributed to the 9% fall in income tax revenue 1. Explain the difference between progressive and regressive taxes. (4) 2. Explain the difference between direct and indirect taxes, giving an example of each. (6) 3. State one example of a progressive tax using the information above. (1) 4. State one example of a regressive tax using the information above. (1) 5. One reason for the high price of alcohol and tobacco is the high level of taxation. Do you think this high tax is justified? Give reasons for your answer. (6) 6. Using the information above, explain how a recession can cause an increase in the budget deficit. (4) 7. The UK government may have to increase taxes in order to improve education and training to make UK workers more employable. Do you think this should come from direct or indirect taxes? Give reasons for your answer. (8) Total marks = 30 Activities & Exercises for GCSE Economics 55

62 Suggested answers Fiscal policy: Data response 1. A progressive tax is one where the average rate of tax rises as income rises, i.e. the proportion of your income taken in tax rises as you become richer. A regressive tax is a tax that takes a greater percentage of income from less well off people. 2. A direct tax is one which cannot be avoided e.g. Income tax. An indirect tax is non avoidable e.g. VAT % income tax rate for people earning over 150, % increase in alcohol and tobacco tax 5. Justified Smoking and alcohol cause negative externalities. The tax yield provides extra money for the government, especially as demand for cigarettes and alcohol is price inelastic. Unjustified It would have a greater effect on less well-off people as it is a regressive tax. 6. Less money from income tax due to unemployment, less money from VAT due to less spending, more spending from the government on benefits. 7. Pro s for direct Unavoidable, easy to collect, often progressive. Con s for direct High income taxes could cause highly-paid workers to leave the country for lower taxes. Pro s for indirect Can reduce demand for demerit goods. Con s for indirect Regressive, avoidable, could cause reduction in spending. Activities & Exercises for GCSE Economics 56

63 Fiscal policy: Activity 4 Taxation of alcohol The Chancellor has been invited to meet with a pub group for a debate with landlords about taxation of alcohol using excise duties. You must first write a speech for the chancellor explaining why a tax on alcohol is needed. Use the information below and your own economic knowledge to help you. Alcohol is estimated to be responsible for at least 33,000 deaths in the UK each year Around 6% of road casualties and 17% of all deaths on the road occur when someone has been drinking over the legal limit Measures will raise 66bn by 2012 An estimated 17 million working days are lost each year due to people missing work due to the effects of alcohol Activities & Exercises for GCSE Economics 57

64 You must now write a speech for the pub group which opposes the tax. Try to think of other options to reduce alcohol consumption instead of a tax. Alcohol tax will have a negative effect on less well off people as it is a regressive tax A record 2,000 British pubs have closed with the loss of 20,000 jobs since the chancellor, Alistair Darling, increased beer tax in the 2008 budget 75,000 more jobs in the drinks industry are at risk Activities & Exercises for GCSE Economics 58

65 Fiscal policy: Activity 5 Create a test Create a test for the person sitting next to you. Make up three questions about direct and indirect taxes using the information above. Question: Answer: Question: Answer: Question: Answer: Activities & Exercises for GCSE Economics 59

66 Monetary policy Activity 1 Which of these statements are correct? Put a tick in the box next to the correct statement. A. The interest rate is decided by the government B. The interest rate is decided by the Bank of England C. The interest rate is decided by the tax payers A. Interest rates may not move if there is inflation B. Interest rates may be increased if there is inflation C. Interest rates may be reduced if there is inflation A. The government s target for inflation is 3.5% B. The government s target for inflation is 5% C. The government s target for inflation is 2% A. A reduction in interest rates will most likely lead to an increase in growth B. A reduction in interest rates will most likely weaken a country s currency C. A reduction in interest rates will cause both of the above to happen Activities & Exercises for GCSE Economics 60

67 Suggested answers Monetary policy: Activity 1 Which of these statements are correct? Put a tick in the box next to the correct statement. A. The interest rate is decided by the government B. The interest rate is decided by the Bank of England C. The interest rate is decided by the tax payers A. Interest rates may not move if there is inflation B. Interest rates may be increased if there is inflation C. Interest rates may be reduced if there is inflation A. The government s target for inflation is 3.5% B. The government s target for inflation is 5% C. The government s target for inflation is 2% A. A reduction in interest rates will most likely lead to an increase in growth B. A reduction in interest rates will most likely weaken a country s currency C. A reduction in interest rates will cause both of the above to happen Activities & Exercises for GCSE Economics 61

68 Monetary policy: Activity 2 Fill in the blanks in this flow diagram If interest rates go up Fewer people will buy using c as it will cost to pay back. S will as money in the bank will gain a amount of interest. Mortgage interest repayments are. People will have less income. Firms are also less likely to spend less on i. This means there be less s in the economy. This dampens inflationary pressure. Activities & Exercises for GCSE Economics 62

69 Suggested answers Monetary policy: Activity 2 Fill in the blanks in this flow diagram If interest rates go up Fewer people will buy using credit as it will cost more to pay back. Savings will increase as money in the bank will gain a larger amount of interest. Mortgage interest repayments are higher. People will have less disposable income. Firms are also less likely to spend less on investment. This means there be less spending in the economy. This dampens inflationary pressure. Activities & Exercises for GCSE Economics 63

70 Monetary policy: Activity 3 Interest rates Scenario 1 Inflation is well above the UK target of 2%. Should the Bank of England: Increase interest rates? Decrease interest rates? Explain how this decision will affect the following groups. Savers Mortgage payers People will be likely to save as they will get a rate of interest on their money. This will demand in the economy causing the inflation rate to. Shoppers Business investment Demand for goods will as fewer people will use credit cards because the cost of paying back the money will. This will reduce demand causing the inflation rate to. Activities & Exercises for GCSE Economics 64

71 Suggested answers Monetary policy: Activity 3 Interest rates Scenario 1 Inflation is well above the UK target of 2%. Should the Bank of England: Increase interest rates? Decrease interest rates? Explain how this decision will affect the following groups. Savers Mortgage payers People will be more likely to save as they will get a higher rate of interest on their money. This will decrease demand in the economy causing the inflation rate to fall. Mortgage payers will pay a larger rate of interest which will decrease their disposable income. This should decrease demand in the economy. Shoppers Demand for goods will decrease as fewer people will use credit cards because the cost of paying back the money will increase. This will reduce demand causing the inflation rate to fall. Business investment Businesses will invest less because they will pay a higher rate of interest on any machines they bought on credit. This will decrease demand in the economy, and reduce jobs for workers. Activities & Exercises for GCSE Economics 65

72 Scenario 2 The country is in a deep recession with very low demand. Should the Bank of England: Increase interest rates? Decrease interest rates? Explain how this decision will affect the following groups. Savers Mortgage payers Mortgage payers will pay a rate of interest which will their disposable. This should help to demand in the economy which would increase. Shoppers Business investment Businesses will be more encouraged to invest because they will pay a rate of interest on any machines they bought on credit. This will demand in the economy, and provide jobs for workers. This should help stimulate. Activities & Exercises for GCSE Economics 66

73 Suggested answers Monetary policy: Activity 3 Interest rates Scenario 2 The country is in a deep recession with very low demand. Should the Bank of England: Increase interest rates? Decrease interest rates? Explain how this decision will affect the following groups. Savers Mortgage payers People will be less likely to save as they will get a lower rate of interest on their money. They may feel they might as well spend their money as saving is discouraged. Mortgage payers will pay a lower rate of interest which will increase their disposable income. This should help to increase demand in the economy which would increase economic growth. Shoppers Demand for goods could increase as more people will use credit cards because the cost of paying back the money will decrease. This stimulus to spending will help offset the effect of the recession. Business investment Businesses will be more encouraged to invest because they will pay a lower rate of interest on any machines they bought on credit. This will increase demand in the economy, and provide jobs for workers. This should help stimulate economic growth. Activities & Exercises for GCSE Economics 67

74 Monetary policy: Data response UK Base Rate, % Explain what is meant by interest rates. (2) 2. Briefly describe the trends in the base rate shown in the graph. (3) 3. Interest rate control is part of which of the following policies? (1) Policy Tick Fiscal policy Monetary policy Supply-side policies 4. Who decides the base rate? (1) 5. State the government s target rate for inflation. (1) 6. Explain how an increase in interest rates would affect inflation? (4) 7. Explain two reasons why a drop in interest rates will increase demand in the economy. 8. The graph shows that the Bank of England reduced interest rates to 0.5% in Evaluate the impact of this decision on the government s main macroeconomic objectives. (8) (10) Total marks = 30 Activities & Exercises for GCSE Economics 68

75 Suggested answers Monetary policy: Data response 1. An interest rate is the price a borrower pays for the use of money they do not own. 2. One mark for stating trend. One mark for using data to support answer. 3. Monetary Policy. 4. The MPC. 5. 2%. 6. Inflation should begin to decrease as the level of demand decreases. 7. Increase in mortgage payment. Less people will buy on credit. Increased saving. 8. Inflation may increase if the low interest rate begins to stimulate the economy. Unemployment Would decrease as there would be more spending in the economy and firms would employ workers to keep up with demand. Growth Growth should increase as demand increases. Activities & Exercises for GCSE Economics 69

76 Supply side policies Activity 1 True of false True or False Supply side polices aim to increase demand in the market Supply side policies aim to increase supply in the economy Supply side policies cause cost push inflation Supply side policies reduce demand pull inflation Increasing unemployment benefit will increase supply of labour in the market A cut in income tax will increase supply of labour in the market A decrease in corporation tax would encourage investment Education and training would have no effect on supply in the market Reducing the power of trade unions is a supply side policy Privatisation can lead to more efficient production and increased competitiveness Activities & Exercises for GCSE Economics 70

77 Suggested answers Supply side policies: Activity 1 True of false True or False Supply side polices aim to increase demand in the market Supply side policies aim to increase supply in the economy. Supply side policies cause cost push inflation Supply side policies reduce demand pull inflation Increasing unemployment benefit will increase supply of labour in the market A cut in income tax will increase supply of labour in the market A decrease in corporation tax would encourage investment Education and training would have no effect on supply in the market Reducing the power of trade unions is a supply side policy Privatisation can lead to more efficient production and increased competitiveness False True False True False True True False True True Activities & Exercises for GCSE Economics 71

78 Supply side policies: Activity 2 Explain how the following polices increase supply Policy Lower rates of income tax How this will increase supply Lowering income tax would provide an for people to work because they would get to keep a higher percentage of the money they earn. This will increase output in the economy. Education and training Remove barriers to entry in an industry Removing barriers to entry will allow small firms to enter a market which will increase the amount of goods and services being produced and the increased should make companies more. Reduce corporation tax Privatisation Privatisation is the transfer of control from to the private sector. This will increase supply because privately-owned companies are more efficient because they aim to make a. Reduce state welfare benefits Word Box profit efficient competition incentive public Activity 3 Sort the six policies above into factors that affect labour and factors that affect industry Labour Industry Activities & Exercises for GCSE Economics 72

79 Suggested answers Supply side policies: Activity 2 Explain how the following polices increase supply Policy Lower rates of income tax Education and training Remove barriers to entry in an industry How this will increase supply Lowering income tax would provide an incentive for people to work because they would get to keep a higher percentage of the money they earn. This will increase output in the economy. Education and training will improve employees skills which would make them more efficient so more can be supplied. Removing barriers to entry will allow small firms to enter a market which will increase the amount of goods and services being produced and the increased competition should make companies more efficient. Reduce corporation tax Companies will have more money available to invest in new machinery or training of workers which will increase production. Privatisation Privatisation is the transfer of control from the public to the private sector. This will increase supply because privately-owned companies are more efficient because they aim to make a profit. Reduce state welfare benefits Reducing benefits will provide an incentive for unemployed people to get a job which would increase the supply of labour in the market. Activity 3 Sort the six policies above into factors that affect labour and factors that affect industry Labour Lower rates of income tax Education and training Reduce state welfare benefits Industry Remove barriers to entry in an industry Reduce corporation tax Privatisation Activities & Exercises for GCSE Economics 73

80 Supply side policies: Activity 4 Match the head to the tail Monetary policy involves changes increase a country s productive capacity by making markets and industries more efficient Supply side policies aim to government spending and borrowing which aim to influence economic activity Fiscal policy involves changes in taxation in interest rates and the money supply which influence demand in the economy Activity 5 Sort the following policies into monetary, fiscal or supply side policies Policy An increase in government spending Rules limiting the power of trade unions A decrease in the rate of unemployment benefit Measures to remove barriers to entry A fall in the bank of England base rate Financial incentives such as EMA to encourage students to attend collage Increasing the money supply A reduction in corporation tax Monetary, fiscal or supply side Activities & Exercises for GCSE Economics 74

81 Suggested answers Supply side policies: Activity 4 Match the head to the tail Monetary policy involves changes increase a country s productive capacity by making markets and industries more efficient Supply side policies aim to government spending and borrowing which aim to influence economic activity Fiscal policy involves changes in taxation in interest rates and the money supply which influence demand in the economy Activity 5 Sort the following policies into monetary, fiscal or supply side policies Policy An increase in government spending Rules limiting the power of trade unions A decrease in the rate of unemployment benefit Measures to remove barriers to entry A fall in the bank of England base rate Financial incentives such as EMA to encourage students to attend collage Increasing the money supply A reduction in corporation tax Monetary, fiscal or supply side Fiscal Supply side Supply side Supply side Monetary Supply side Monetary Fiscal Activities & Exercises for GCSE Economics 75

82 Supply side policies: Activity 6 Scenario The UK economy is in a deep recession with low demand and high unemployment in the economy. Exports are struggling due to a lack of productivity and efficiently in UK companies Explain how you would solve this issue using monetary, fiscal and supply side policies. Monetary policy A reduction in the base rate would reduce the amount people have to pay on their m and on anything they buy on c. It would also discourage s as you would get a lower rate of interest. This should increase d in the economy leading to economic growth and a reduction in u. Fiscal policy Supply side policy Activities & Exercises for GCSE Economics 76

83 Suggested answers Supply side policies: Activity 6 Scenario The UK economy is in a deep recession with low demand and high unemployment in the economy. Exports are struggling due to a lack of productivity and efficiently in UK companies Explain how you would solve this issue using monetary, fiscal and supply side policies. Monetary policy Fiscal policy Supply side policy A reduction in the base rate would reduce the amount people have to pay on their mortgage and on anything they buy on credit. It would also discourage saving as you would get a lower rate of interest. This should increase demand in the economy leading to economic growth and a reduction in unemployment. A reduction in income tax would provide people with more disposable income and a reduction in VAT would encourage people to spend. The government could use supply side polices such as education and training to improve people s skills and increase their productivity. Activities & Exercises for GCSE Economics 77

84 Supply side policy: Data response On 10th June 2009 the Rail, Maritime and Transport (RMT) Union called a strike, asking for improved pay and guaranteed jobs. Millions of commuters were affected as their normal route to work was closed. The strike cost London an estimated 100 million as Oxford Street saw 100,000 less customers and refunds had to be given to football fans that were unable to attend the England game at Wembley. The RMT strike increases unit labour costs and reduces efficiency making the tube more expensive for consumers. The Mayor of London, Boris Johnson aims to make tube workers sign a declaration in their contract that they will not strike which will hopefully stop any future action. This would be considered a supply side policy as it aims to improve efficiency. Source: Tube strike disruption continues, BBC News, Thursday 11 June, Supply side polices in the 2009 budget Funding to give people work experience in growing industries Money available for over 50,000 new places in sixth forms Training or a job available for under-25s who have not been in work for over 1 year 750 million to help emerging technology industries 1. Define the term supply side polices. (2) 2. Using examples from above, explain two supply side policies that aim to improve quantity and quality of labour in the economy. (6) 3. Explain two supply side policies that aim to improve the productivity of industry in the economy. (6) 4. Explain why reducing the power of the Rail, Maritime and Transport (RMT) Union is considered a supply side policy. (4) 5. Supply side policies are the only way to reduce a trade balance deficit. Do you agree? Give reasons for your answer and try to discuss the following other options: Encourage a fall in the value of the sterling Increase interest rates Introduce tariffs (12) Total marks = 30 Activities & Exercises for GCSE Economics 78

85 Suggested answers Supply side policies: Data response 1. Supply side policies aim to increase the productive capacity of the economy by increasing productivity 2. Training or jobs for under 25 s who have not been in work for over 1 year. This will increase the quantity of labour in the market. Work experience in growth industries This will help people gain the skills to become more productive. 3. An increase in spending on research and development could improve the efficiency of industry, allowing more goods to be produced. Reduction in the power of trade unions. 4. Workers will be unable to strike as easily, reduction in labour costs, improvement in effect as they will not have to always comply with the unions. 5. Encourage a fall in the value of the sterling Pro s our goods will become more competitive abroad. Con s Goods are not improved. Increase interest rates Pro s This will reduce demand for imports as people will have less disposable income. Con s It will also reduce demand for domestic goods. Introduce tariffs Pro s Foreign goods will become more expensive so domestic goods will be more competitive. Con s Membership of the WTO limits the ability of a country to freely impose tariffs. Activities & Exercises for GCSE Economics 79

86 Balance of payments Activity 1 Match, explain and fill in the blanks Below are four causes of a balance of a payment deficit. 1. Match up the solutions below to the cause of the deficit. 2. Explain how these solutions could work and describe the possible drawbacks. 3. Use the word box to fill in the blanks. Possible solutions to a balance of payments deficit Increase interest rates Introduce tariffs on foreign goods Increase spending on education and training Encourage the pound sterling to fall against other currencies Word Box tariffs training economic growth education weaker unemployment competitive Cause of balance of Possible solution How this solution Possible payments deficit (pick from table above) could help drawbacks Poor quality goods An increase in spending on High costs. and Not guaranteed to work. would make UK goods more Takes time to have an abroad which effect. would encourage spending on UK goods. Strong pound A pound would make If done using a fall in UK exports cheaper for interest rates it could customers abroad. cause demand to increase. Goods won t be any better than they were before. Cheap goods from abroad Economic growth in the UK causing an increase in spending on imports Other countries would not be happy about an increase in and could do the same back to the UK. Reducing could have a negative impact as there would be less spending in the UK economy which could increase. Activities & Exercises for GCSE Economics 80

87 Suggested answers Balance of payments: Activity 1 Match, explain and fill in the blanks Below are four causes of a balance of a payment deficit. 1. Match up the solutions below to the cause of the deficit. 2. Explain how these solutions could work and describe the possible drawbacks. 3. Use the word box to fill in the blanks. Possible solutions to a balance of payments deficit Increase interest rates Introduce tariffs on foreign goods Increase spending on education and training Encourage the pound sterling to fall against other currencies Word Box tariffs training economic growth education weaker unemployment competitive Cause of balance of Possible solution How this solution Possible payments deficit (pick from table above) could help drawbacks Poor quality goods Increase spending on An increase in spending on High costs. education and training. education and training Not guaranteed to work. would make UK goods more Takes time to have an competitive abroad which effect. would encourage spending on UK goods. Strong pound Encourage the pound A weaker pound would make If done using a fall in sterling to fall against UK exports cheaper for interest rates it could other currencies. customers abroad. cause demand to increase. Goods won t be any better than they were before. Cheap goods from abroad Introduce tariffs on By increasing the prices of Other countries would not foreign goods. imported goods, it will be happy about an cause UK consumers to increase in tariffs and switch their spending away could do the same back from imports and towards to the UK. domestically produced goods. Economic growth in the UK Increase interest rates. Raising interest rates will Reducing economic causing an increase in make borrowing more growth could have a spending on imports expensive and reduce negative impact as there consumer and business would be less spending in spending on imported the UK economy which goods. could increase unemployment. Activities & Exercises for GCSE Economics 81

88 Balance of payments: Activity 2 Balance of Payments At GCSE the most important part of the balance of payments is called the. It consists of two main areas. Trade in and trade in. Economists use the current account to see how many goods and services the UK is importing and exporting in a year. For a number of years the UK has been importing more goods and services than it exports. This is called a current account. For each of the situations below state whether it is example of an import or export. (Hint: is money flowing into or out of the UK?) Situation A company from Manchester sells a table to a customer in Paris A UK consumer buys a Mercedes from Germany A UK consumer buys an insurance service from the USA HSBC sells banking services to a company based in Korea A UK individual goes on holiday to Japan An Italian tourist visits the UK Import or Export Activities & Exercises for GCSE Economics 82

89 Suggested answers Balance of payments: Activity 2 Balance of Payments At GCSE the most important part of the balance of payments is called the current account. It consists of two main areas. Trade in goods and trade in services. Economists use the current account to see how many goods and services the UK is importing and exporting in a year. For a number of years the UK has been importing more goods and services than it exports. This is called a current account deficit. For each of the situations below state whether it is example of an import or export. (Hint: is money flowing into or out of the UK?) Situation A company from Manchester sells a table to a customer in Paris A UK consumer buys a Mercedes from Germany A UK consumer buys an insurance service from the USA HSBC sells banking services to a company based in Korea A UK individual goes on holiday to Japan An Italian tourist visits the UK Import or Export Export Import Import Export Import Export Activities & Exercises for GCSE Economics 83

90 Balance of payments: Activity 3 Calculate the balance of payments for the following examples A Exports Imports ( millions) ( millions) Goods 84, ,000 Services 100, ,000 Country A (Show your working) B Exports Imports ( millions) ( millions) Goods 112,000 95,000 Services 96, ,000 Country B (Show your working) C Exports Imports ( millions) ( millions) Goods 120, ,000 Services 92, ,000 Country C (Show your working) D Exports Imports ( millions) ( millions) Goods 109,000 42,000 Services 21,000 50,000 Country D (Show your working) 1. Which country has the biggest surplus on its current account? 2. Which country has the biggest deficit on its current account deficit? Activities & Exercises for GCSE Economics 84

91 Suggested answers Balance of payments: Activity 3 Calculate the balance of payments for the following examples A Exports Imports ( millions) ( millions) Goods 84, ,000 Services 100, ,000 Country A (Show your working) (84, ,000) (102, ,000) = 34,000m B Exports Imports ( millions) ( millions) Goods 112,000 95,000 Services 96, ,000 Country B (Show your working) (112, ,000) (95, ,000) = + 11,000m C Exports Imports ( millions) ( millions) Goods 120, ,000 Services 92, ,000 Country C (Show your working) (120, ,000) (162, ,000) = 56,000m D Exports Imports ( millions) ( millions) Goods 109,000 42,000 Services 21,000 50,000 Country D (Show your working) (109, ,000) (42, ,000) = + 38,000m 1. Which country has the biggest surplus on its current account? Country D 2. Which country has the biggest deficit on its current account deficit? Country C Activities & Exercises for GCSE Economics 85

92 Balance of payments: Data response Some good has come from the economic crisis that hit Britain in Exports have soared 12.8% on the back of the weakened British pound. Imports have also dropped 5.4%. These have combined to shrink the UK s deficit from 7.8 billion to 7.3 billion. However there are still worries that demand could deteriorate in USA and Europe as their own economic problems increase billion Percentages Q4 Current Balance (lhs) Current Balance as percentage of GDP (rhs) 05 Q1 05 Q2 05 Q3 05 Q4 06 Q1 06 Q2 06 Q3 06 Q4 07 Q Q2 Q32 07 Q4 08 Q1 08 Q2 08 Q3 08 Q Source: ONS 1. State the current UK Balance of Payments using the information above. (1) 2. Describe the trend in the UK balance of payments since (2) 3. Explain what is meant by the current account on the balance of payments. (3) 4. What is meant by a deficit on the current account? (2) 5. Explain how the weakened pound caused exports to increase and imports to decrease. (4) 6. Explain how a high minimum wage could cause a balance of payments deficit. (4) 7. Explain one other cause of a balance of payments deficit. (4) 8. Discuss the advantages and disadvantages of possible solutions to a balance of payments deficit. (10) Total marks = 30 Activities & Exercises for GCSE Economics 86

93 Suggested answers Balance of payments: Data response bn. 2. A worsening deficit (1) quote data (1). 3. The difference between the value (1) of goods and services (1) exported minus the value of goods and services imported (1). 4. The value of exports of goods and services is less than (1) the value of imports of goods and services (1). 5. A weaker makes exports cheaper (1) leading to an increase in demand for exports (1). It also makes imports dearer (1) leading to a decrease in demand for imports (1). 6. A high minimum wage adds to the costs of production (1) which may lead to increased prices of UK goods (1), possibly reducing demand for exports (1) and if there is also increasing demand for imports (1), then the balance of payments could worsen. 7. Example: Poor quality goods (1) leads to non-price lack of competitiveness (1) resulting in less demand for UK exports (1) and increased demand for better quality imports (1). 8. Identify at least 2 alternative solutions (1 mark each). Explain how each will achieve a reduction in the deficit (2 marks each). Comment on advantages and disadvantages of each (4 marks). Activities & Exercises for GCSE Economics 87

94 Exchange rates Activity 1 True or false Using the data below and your own economic knowledge decide whether the following statements are true or false Dollars per sterling May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Source: Bank of England Statement An exchange rate is the value of one currency in terms of another In January 2009 the 1 was worth $2.20 The value of a currency is determined by the demand and supply of that currency Between May 2008 and January 2009 the value of the weakened January 2009 would have been a good time for a UK citizen to go on holiday to the USA In July 2008 I would have received more dollars for my pounds compared with January 2009 When the is weak exports are less competitive abroad I am a person from the UK going on holiday to the USA. The best time for me to go would be January 2009 The interest rate in the UK affects the value of the True or False Activities & Exercises for GCSE Economics 88

95 Exchange rates: Activity 2 Fill in the blanks An increase in interest rates in the UK will lead to more US money being in UK banks. This is because it is more to save in UK banks as they will get a return on their savings. US dollars must be for UK pounds. This means that there is an demand for pounds. This causes the value of the pound against the dollar to. We say that the pound has against the dollar. Word Box strengthened exchanged increased beneficial better saved increase Activity 3 How the value of the pound is determined Using the diagram below to explain how an increase in the UK interest rate would affect the value of the pound. (Hint use the information in Activity 2 to help you.) P S P1 D1 Q1 Q Activities & Exercises for GCSE Economics 89

96 Suggested answers Exchange rates: Activity 1 True or false Statement An exchange rate is the value of one currency in terms of another In January 2009 the 1 was worth $2.20 The value of a currency is determined by the demand and supply of that currency Between May 2008 and January 2009 the value of the weakened January 2009 would have been a good time for a UK citizen to go on holiday to the USA In July 2008 I would have received more dollars for my pounds compared with January 2009 When the is weak exports are less competitive abroad I am a person from the UK going on holiday to the USA. The best time for me to go would be January 2009 The interest rate in the UK affects the value of the True or False True False True True False True False False True Activity 2 Fill in the blanks An increase in interest rates in the UK will lead to more US money being saved in UK banks. This is because it is more beneficial to save in UK banks as they will get a better return on their savings. US dollars must be exchanged for UK pounds. This means that there is an increased demand for pounds. This causes the value of the pound against the dollar to increase. We say that the pound has strengthened against the dollar. Activities & Exercises for GCSE Economics 90

97 Suggested answers Exchange rates: Activity 3 How the value of the pound is determined P S P2 P1 D2 D1 Q1 Q2 Q Activities & Exercises for GCSE Economics 91

98 Exchange rates: Data response The British are being missed in France this summer as they stay away in numbers that have sparked dismay in the French tourist industry. As the value of the pound against the euro has weakened, British holidaymakers have found it too expensive to go on holiday in France. A hotel in Lyon, which in the summer months is usually full of Britons has had to act following concerns. We ve lost half our British holidaymakers, said the manager. And since the beginning of July, their absence is being felt enormously. The hotel has had to cut the price of its rooms from 85 to 75 in an attempt to fill the hotel. 1. If 1 = 1.16 how much cheaper in pounds will the hotel room be when the price is reduced? Show your working. (3) 2. Explain what is meant by the term exchange rate. (3) 3. With the aid of a demand and supply diagram explain how the value of the pound is determined. (3) 4. (i) State two factors which might cause the value of the pound to strengthen. (2) (ii) Using one of the factors you gave in 4.(i) explain how it would cause the value of the pound to strengthen. (3) 5. If the pound is said to be weak against the euro what does this mean? You may want to use examples in your answer. (6) 6. Is reducing the price of hotel rooms the best method for the hotel to use to attract more British tourists? Give reasons for your answer. (10) Total marks = 30 Activities & Exercises for GCSE Economics 92

99 Suggested answers Exchange rates: Data response 1. When the room is 85 the price in pounds is When the room is 75 the price in pounds is The room is now 8.62 cheaper per night. 2. An exchange rate is the value of one currency in terms of another. For example 1 = The value of a currency is determined by the demand and supply of that currency. Factors that cause the demand and supply curves to shift include international trade and interest rate changes and speculation. P S P1 Q1 D Q 4. (i) Increase in the interest rate, speculation, a rise in export sales. (ii) Speculation This occurs when foreign investors expect returns on investment are to be higher in the UK soon. So they buy pounds to invest. 5. If the pound is weak against the euro it means you do not get as many euros when exchanging your pounds. Example 1 = This impacts negatively on international trade making exports more competitive and imports less competitive. 6. Yes attracts customers easily, if demand is price elastic will increase total revenue. No reduces profit margins, may suggest poor quality to potential customers. Other methods increase advertising, special offers. Total marks = 30 Activities & Exercises for GCSE Economics 93

100 Protectionism Activity 1 Protectionist policies How would the following react to the UK imposing protectionist policies? Tick the relevant face A small start up car company The textile sector in the UK which cannot compete with the cheap labour costs of foreign firms Explain why they would react this way Protectionist policies would allow the firm to without having to worry about from large firms. Domestic consumers Protectionist policies would limit domestic consumers and may cause them to pay higher because domestic firms may be less and unable to have as low prices as were previously available from abroad. Chinese companies A microchip company worried about dumping of cheap imports Some countries firms so they can produce goods below the price of nonsubsidised firms in competitor companies. This would make it impossible for the microchip firm to. Protectionist policies would stop these firms from being able to their goods in the market. Workers in developing countries Inefficient firm with a huge monopoly Protectionist policies allow monopoly producers to be as they face no competition. This is bad for consumers as goods may be more and quality. Word Box dump choice prices multinational subsidise competitive expensive compete inefficient grow lower competition Activities & Exercises for GCSE Economics 94

101 Suggested answers Protectionism: Activity 1 Protectionist policies How would the following react to the UK imposing protectionist policies? Tick the relevant face A small start up car company The textile sector in the UK which cannot compete with the cheap labour costs of foreign firms Domestic consumers Chinese companies A microchip company worried about dumping of cheap imports Workers in developing countries Inefficient firm with a huge monopoly Explain why they would react this way Protectionist policies would allow the firm to grow without having to worry about com - petition from large multinational firms. Protectionist policies would protect the textile sector which is unable to reduce their costs to compete with the cheap foreign imports. Protectionist policies would limit domestic consumers choice and may cause them to pay higher prices because domestic firms may be less competitive and unable to have as low prices as were previously available from abroad. Chinese companies that possess the advantage of a large, cheap labour force are able to produce goods cheaper. They will be unhappy about not being able to compete in the UK market. Some countries subsidise firms so they can produce goods below the price of nonsubsidised firms in competitor companies. This would make it impossible for the microchip firm to compete. Protectionist policies would stop these firms from being able to dump their goods in the market. Many workers in developing countries depend on the job provided by com - panies which produce goods for the UK market. They may be unable to get alternative jobs if tariffs reduce trade. Protectionist policies allow monopoly producers to be inefficient as they face no competition. This is bad for consumers as goods may be more expensive and lower quality. Word Box dump choice prices multinational subsidise competitive expensive compete inefficient grow lower competition Activities & Exercises for GCSE Economics 95

102 Match the type of protectionist policy to the definition Quotas A tax placed on imported goods Regulations Government providing tax break, cheap finance or other aid to make domestic firms more competitive Tariffs A ban on goods and services from a country Embargoes A restriction on the number of goods and services that can be imported into a country Subsidies Tactics that make it difficult to export to a country, e.g. demanding a complex set of forms to be filled in Activities & Exercises for GCSE Economics 96

103 Suggested answers Match the type of protectionist policy to the definition Quotas A tax placed on imported goods Regulations Government providing tax break, cheap finance or other aid to make domestic firms more competitive Tariffs A ban on goods and services from a country Embargoes A restriction on the number of goods and services that can be imported into a country Subsidies Tactics that make it difficult to export to a country, e.g. demanding a complex set of forms to be filled in Activities & Exercises for GCSE Economics 97

104 Protectionism: Activity 2 Evaluate methods of protection Imagine you are the international advisor for the president of a developing country. You have decided to use tariffs, subsidies, quotas or regulations to protect your infant industries from multinational competition and to create jobs. You must write a report explaining the advantages and disadvantages of each option and make a judgement as to which one the president should use. Use the information provided to help you. President of the United States If you put tariffs on our goods, we will do the same for you! Managing Director of Zoom, your country s new car industry Tariffs will allow us to compete with international firm s prices Struggling start up clothing company If we were given cheap finance, we may be able to buy the machines to compete in the international market International car firm Following ridiculous regulations and filling in complex forms makes exporting to some countries a nightmare! Advantages Report Tariffs Disadvantages WTO If you use subsidies we will find out and fine you Advantages Advantages Subsidies Quotas Disadvantages Disadvantages News report There are reports that corruption is rife in countries using quota systems, with officials taking bribes to increase quotas Advantages Regulations Disadvantages Consumer Judgement I buy foreign goods as they are cheaper and much better quality. Tariffs and quotas will force me to buy domestic goods Activities & Exercises for GCSE Economics 98

105 Protectionism: Data response The global recession of 2009 could cause a rush to protectionist policies as countries try to protect their own markets using policies such as tariffs and quotas. There are worries that this would affect developing countries the most as they would be unable to access the large, wealthy markets that they rely on. The graph below shows the severe drop in trade in merchandise goods since the economic crisis. Protectionism would have a negative effect on consumers who may have to accept higher prices and less choice. Large companies will not be able to benefit from economies of scale whilst growth in the world economy could slow as countries no longer specialise and then trade. Quarterly world merchandise export developments, (2005 Q1 = 100, in current US dollars) Q1 05 Q2 Source: WTO 05 Q3 05 Q4 06 Q1 06 Q2 06 Q3 06 Q4 07 Q1 07 Q2 07 Q32 07 Q4 08 Q1 08 Q2 08 Q3 08 Q4 09 Q1 1. Describe the changes in world trade for merchandise goods from 2005 to (3) 2. Explain the advantages of using protectionist policies during a recession. (4) 3. Explain three methods of protectionism. (9) 4. Explain why protectionist polices could cause higher prices and less choice for consumers. (4) 5. Using protectionist policies will have a beneficial effect on an economy. Do you agree? Give reasons for your answer. (10) Total marks = 30 Activities & Exercises for GCSE Economics 99

106 Suggested answers Protectionism: Data response 1. One mark for describing the trend, one mark for using data to support answer. 2. Allows domestic firms to grow without competition from abroad. 3. Tariff A tax placed on imported goods. Subsidies Government providing tax break, cheap finance or other aid to make domestic firms more competitive. Embargo A restriction on the number of goods and services that can be imported into a country. 4. Cheaper foreign goods will become more expensive so less choice, domestic firms could take advantage of a monopolistic position. 5. Pro s Infant firms are now able to grow without threat of competition. Domestic industries which provide employment in a country are protected. Con s Less choice for customers and higher prices. Other countries may impose protectionist policies in retaliation which could have a detrimental effect on UK exports. Activities & Exercises for GCSE Economics 100

107 The Euro Activity 1 Imagine that you are the economics editor for a major British newspaper. You have been asked to write an article for the front page which explains the advantages and disadvantages of joining the Euro. You must come up with a conclusion which is based upon your argument. Use the information boxes to help you. UK tourist Joining will mean I won t have to pay the transaction costs involved with changing currency. UK consumer Prices would be transparent. I could easily see if something is cheaper abroad. UK car firm Finally we could look towards the long term without worrying about exchange rate risk. THE DAILY NEWS Advantages of joining the EU Disadvantages of joining the EU Headline The worldʼs favourite newspaper Summary of main arguments Conclusion American car firm We would be much more interested in investing in the UK if they joined the Euro. UK Citizen The pound is as important as the Queen. We cannot let it go! The Bank of England How will we control inflation if we can no longer change our interest rates? The Treasury It will cost a fortune to design, and distribute the new currency. Has no one thought of these transitional costs? Activities & Exercises for GCSE Economics 101

108 Activity 2 The European Union 1. Shade in the member states of the EU on the map. 2. Shade in the other European countries in a different colour of the EU members use the Euro. Write down as many as you can in the box below. Member states of EU Other European countries Activities & Exercises for GCSE Economics 102

109 Suggested answers Activity 2 The European Union 1. Shade in the member states of the EU on the map. 2. Shade in the other European countries in a different colour of the EU members use the Euro. Write down as many as you can in the box below. Belgium Germany Ireland France Luxembourg The Netherlands Italy Austria Portugal Spain Finland Greece Cyprus Malta Slovakia Slovenia Member states of EU Other European countries Activities & Exercises for GCSE Economics 103