Read the source material carefully before answering Question 1. Source material: changes in the Nigerian economy Nigeria fact file 2017 Government spending $19.5bn Tax revenue $12.9bn Balance of trade in goods $10.4bn Imports of goods $32.7bn Nigeria produces a range of products including delivery vehicles, footwear, machines, maize and office equipment. It does, however, depend heavily on oil for its exports. The government tries to encourage an increase in the output and export of other products. To achieve this, it uses a range of policy measures including changes in taxation and government spending e.g. subsidising the training of construction workers. Successful training can increase job opportunities and wages. The government’s aims are to improve Nigeria’s macroeconomic performance and to raise living standards. Table 1.1 shows data on living standards in Nigeria and Ethiopia in 2017. Table 1.1 Selected data on living standards in Nigeria and Ethiopia in 2017 Country GDP per head ($) Life expectancy at birth (years) Average years spent at school % of children aged under 5 who are underweight Nigeria 5,900 59 9 31.5 Ethiopia 2,200 63 8 23.6 Investment in Nigeria has been growing slowly. Some firms are discouraged from spending on capital goods by the relatively high interest rate, high corporation tax rate and economic uncertainty. Nigeria’s population is increasing rapidly. The birth rate is high and the death rate is falling but it has net emigration. Nigeria’s population was 191 million in 2017 and is forecast to grow to 402 million by 2050. An increase in its population size will create both challenges and opportunities. It will affect the level of demand in the economy, may harm the environment and more food will be needed. The Nigerian government increased the tariff on imported rice in 2016, to encourage an increase in its own rice production. Nigeria is Africa’s largest producer of rice but also its largest importer. In 2018, Nigeria imported almost 50% of the rice it consumed. Nigerian farmers produce less rice for every unit of land used than Asian farmers and Nigerian farmers have high costs of production. Answer all parts to Question 1. Refer to the source material in your answers. 1 (a) Calculate the value of Nigeria’s exports of goods in 2017. [1] (b) Identify two examples of capital goods. [2] (c) Explain whether Nigeria had a budget deficit or a budget surplus in 2017. [2] (d) Explain how government spending on training may increase tax revenue in the long run. [4] (e) Analyse how living standards in Nigeria compare with living standards in Ethiopia in 2017. [4] (f) Analyse how a government could encourage firms to increase their investment. [5] (g) Discuss whether or not an increase in Nigeria’s population will benefit its economy. [6] (h) Discuss whether or not an increase in Nigeria’s import tariff on rice would increase the output of Nigerian rice. [6]

1(a) Calculate the value of Nigeria’s exports of goods in 2017. $43.1bn 1 $ is not essential. 1(b) Identify two examples of capital goods. Two from: • [delivery] vehicles • machines • [office] equipment 2 1(c) Explain whether Nigeria had a budget deficit or a budget surplus in 2017. • budget deficit (1) • government spending exceeded tax revenue (1) • government spending was $19.5bn and tax revenue was $12.9bn (1) 2 1(d) Explain how government spending on training may increase tax revenue in the long run. Logical explanation which might include: • Training may increase skills of workers (1) raise productivity (1) raise wages / incomes (1) increase job opportunities / employment / reduce unemployment (1) increase income tax revenue (1). • Higher wages may increase spending / demand (1) increase indirect tax revenue (1). • A more productive labour force may reduce costs of production (1) raise profits (1) increase corporation tax revenue (1). 4 1(e) Analyse how living standards in Nigeria compare with the living standards in Ethiopia in 2017. Coherent analysis which might include: • Nigeria’s higher GDP per head (income) (1) suggests Nigerians may have been able to enjoy more goods and services (1). • Nigeria has a lower life expectancy (1) suggesting poorer healthcare (1). • Nigeria has a higher average number of years spent at school (1) suggesting the labour force may be more educated (1). • Nigeria has a higher percentage of underweight five-year olds (1) suggesting poor nutrition / income inequality (1). • Overall comment: Nigeria’s income per head and average years spent at school suggests a higher living standard but life expectancy and percentage of five years underweight suggests a lower living standard (1). 4 1(f) Analyse how a government could encourage firms to increase their investment. Coherent analysis which might include: • Reduce the rate of interest (1) making it cheaper to borrow (1) encouraging borrowing as consumer spending is likely to rise (1). • Lower corporation tax (1) increasing the funds available to invest (1) increasing the incentive to invest as return from investment would rise (1). • Create greater economic certainty / confidence (1) by e.g. keeping inflation low and stable / not changing government spending and taxation frequently (1) making it easier for firms to plan / it can take time to get a return from investment (1). • Provide subsidies/grants/loans (1) decreasing cost of investments (1) encouraging MNCs (1). • Raise tariffs (1) increasing demand for home produced goods (1). • Less government regulation/policies (1) reduces costs for firms (1) more willing to invest (1). 5 1(g) Discuss whether or not an increase in Nigeria’s population will benefit its economy. Award up to 4 marks for why it might: • Fall in death rate (1) may indicate improved healthcare (1). • Total (aggregate) demand will increase (1) may enable existing firms to expand / increase output (1) new firms to set up (1) attract MNCs (1). • Labour force may increase (1) causing total (aggregate) supply to increase / raise productive capacity (1) increase output / GDP (1). • May move country towards optimum population (1) if there are unused resources (1). • Net immigration will increase labour force (1) and reduce dependency ratio (1) • More tax revenue (1) can be spent on improving e.g., public services (1). Award up to 4 marks for why it might not: • Birth rate is rising (1) will increase dependency (1) resources which may have increased economic growth may have to be devoted to rearing the children (1). • Labour force may fall in the short run (1) to look after the children (1). • Pressure will be put on the environment (1) there may be more pollution (1) causing overcrowding / poor health (1). • If food output cannot be increased (1) may be more malnourishment/famine / poverty (1) more food is required / food may have to be imported (1) food prices may increase (1). 6 Apply this example to all questions with the command word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 1(g) • Population is rising but age structure may be changing (1) as there is net emigration of young people (1) may result in reduction in labour force (1). • [Opportunity] cost for government (1) which has to spend on health/education rather than infrastructure (1). • Increase in output to meet demand (1) results in faster usage of resources in country (1) and shortages (1). 1(h) Discuss whether or not an increase in Nigeria’s import tariff on rice would increase the output of Nigerian rice. Award up to 4 marks for why it might: • A higher tariff may raise the price of imported rice (1) may reduce demand for / consumption of imported rice (1) may cause Nigerians to demand more home- produced rice as it is cheaper (1) effect would be greater, the greater the elasticity of demand for the import of rice (1) may enable Nigerian rice farmers to raise their price / make more profit (1). • A tariff may raise government tax revenue (1) some of this could be used to subsidise Nigerian rice farmers / modernise farming methods and so raise productivity (1). Award up to 4 marks for why it might not: • Nigerian farmers are less productive than Asian competitors (1) have high(er) costs of production (1) Nigerian price may still be higher even with the higher import tariff (1). • The supply of Nigerian rice may be price-inelastic (1) so even if Nigerian farmers could sell their rice for more, they may have difficulties adjusting supply (1). • More Nigerian rice will not be sold if quality is poor (1) consumers my prefer the varieties of rice produced in other countries (1) other countries retaliate by imposing higher tariffs (1) current account surplus may be reduced (1). • Increase in import tariffs may be small (1) making little difference to import prices and consumption (1). • Not enough resources/ factors of production e.g., farmers (1) to produce more rice in Nigeria (1). 6

2 India has experienced a relatively high economic growth rate in recent years. This growth has been driven by increases in government spending and exports, including exports of textiles. India’s unemployment rate has, however, increased. The government is concerned that trying to reduce unemployment may increase India’s inflation rate. (a) Define economic growth. [2] (b) Explain the possible opportunity cost to India of exporting more textiles. [4] (c) Analyse how higher government spending could increase economic growth. [6] (d) Discuss whether or not a government can reduce unemployment without increasing inflation. [8]

2(a) Define economic growth. An increase in the country’s / economy’s output (2). An increase in real (1) GDP (1) over time (1). An increase in output (1). An increase in a country’s / economy’s productive capacity (2). An increase in productive potential (1). 2 Allow one mark for higher income / average income / GDP per head. 2(b) Explain the possible opportunity cost to India of exporting more textiles. Logical explanation which might include: Opportunity cost is the (next) best alternative (1) forgone (1). Textiles that have been exported might have been sold on the home market (1) may have increased choice (1) lowered price (1). Resources may have been moved to producing the textile exports / resources used to produce textiles could have been used to produce other products (1) output / exports of other products may have been reduced (1) these products may provide more revenue / lose revenue from not exporting these products (1). 4 2(c) Analyse how higher government spending could increase economic growth. Coherent analysis which might include: Higher government spending can increase total (aggregate) demand / government spending is a component of GDP (1). Higher government spending on education and training / healthcare / infrastructure (1) can raise productivity / skills / efficiency / quality of labour (1) attract MNCs (1) increase productive potential (1) lower costs of production (1) increase employment / reduce unemployment (1) lower prices (1) increase output (1) increase exports (1). Government spending on benefits (1) will increase purchasing power of the poor (1) raising consumer expenditure (1). Increased government subsidies (1) could reduce costs of production (1) increase investment (1) increase profits (1) provide an incentive for firms to produce more (1). 6 A maximum of 3 marks for a list-like approach. 2(d) Discuss whether or not a government can reduce unemployment without increasing inflation. In assessing each answer, use the table opposite. Why it might: • workers who have been unemployed for some time may accept jobs without a rise in wages • government spending on education and training may increase both total (aggregate) demand and total (aggregate) supply / may reduce costs of production • government subsidies may encourage firms to produce more and take on more workers and lower prices • tax revenue may be raised to finance any increase in government spending • government may reduce trade union power which could encourage employers to take on more workers Why it might not: • may increase total (aggregate) demand causing demand-pull inflation • inflation more likely to occur if economy is initially close to full employment • may increase wages and costs of production, causing cost-push inflation • cuts in taxes may not lead to higher consumer expenditure and investment if there is a lack of confidence • government may instruct central bank to lower foreign exchange rate which could increase price of imports 8 Level Description 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 2(d) Example of L3 Answer Yes, a government can reduce unemployment without increasing inflation. If the government spends money on training and education more people would be skilled enough to do jobs and firms would hire more people due to the return from greater productivity. This would also increase the productive potential of the economy as it would enable firms to produce more goods per worker. Hence unemployment could reduce without inflation as it would be accompanied with an increase in the productive potential of the economy and greater output. Also, if there is spare capacity in the economy due to under-utilisation of resources, the increased income due to lower unemployment would not lead to inflation as there would be room for better, more efficient utilisation of resources. Hence a rise in the price level can be avoided by greater productive potential. However, if the economy is operating close to full capacity, a reduction in unemployment could cause inflation if the rise in income and the money supply rise is greater than the increase in productive potential, Government spending to reduce unemployment might cause a much greater rise in total demand. This could lead to demand-pull inflation. It may also lead to cost-push inflation if the unemployment rate is so low firms have to compete for workers leading to a wage- price spiral. Workers tend to take up a greater proportion of costs of firms. Hence scarcity of workers could cause the costs of firms to greatly increase and so the total supply would reduce leading to cost-push inflation. Level Description 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 2(d) Example of an L2 answer Yes, the government can reduce unemployment without increasing inflation by using supply-side policy measure. This includes providing education and training to workers. Due to this the efficiency of workers who will be able to produce better quality goods in large amount reducing the average costs to the firm. This will also help in reducing the selling price or keeping it the same which might not cause inflation. Although if using measures like expansionary fiscal or monetary policy will raise the demand for workers, offering them higher wages could add to firms’ average cost hence selling price might increase, causing inflation. Also, by using supply-side policy measure the improved skills and productivity will want them to charge higher wages to hire them. This will increase the average cost and the selling price of the firm, causing inflation. Example of an L1 answer Yes government can reduce unemployment without increasing inflation by attracting more MNCs. By keeping policies such as this, the amount of people you have to employ is increased. By providing subsidy of jobs, providing financial help to firms which are in a loss so that they can reduce the chances of increasing the rate of inflation when employing more workers.

2 A number of countries, including Morocco, capture water from fog. Water is used in the primary, secondary and tertiary sectors. In recent years, Morocco has increased the quantity and quality of its resources and has moved more of them into the tertiary sector. The quantity, quality and composition of a country’s resources are influenced by a number of factors, including its birth rate. Morocco’s birth rate fell from 19.9 in 2016 to 18.7 in 2018. (a) Define a free good. [2] (b) Explain, with examples, the difference between the secondary sector and the tertiary sector. [4] (c) Analyse, using a production possibility curve (PPC), the effect of an increase in the quality of its resources on an economy. [6] (d) Discuss whether or not a fall in a country’s birth rate will benefit an economy. [8]

2(a) Define a free good. No opportunity cost (1) a good that takes no resources/factors of production to produce / naturally abundant in supply / does not use scarce resources (1). 2 No marks for an example. 2(b) Explain, with examples, the difference between the secondary sector and the tertiary sector. Logical explanation which might include: Secondary sector covers manufacturing (and construction) / converts primary products into finished goods (1) e.g. car industry (1). Tertiary sector covers services / final stage of production (1) e.g. insurance (1). 4 For tertiary sector, it is not sufficient to just have the sector which sells products as this is only part of the sector. But for the tertiary sector example accept the sale of a product e.g. the sale of jewellery. 2(c) Analyse, using a production possibility curve (PPC), the effect of an increase in the quality of its resources on an economy. Up to 4 marks for the diagram: Axes correctly labelled with different outputs (1). Initial curve drawn as a curve / line sloping downward to the axes (1). New curve drawn as a curve / line sloping downward to the axes (1). Shift indicated by arrow or letter (1). Up to 2 marks for coherent analysis which might include: Better quality resources will increase productivity (1) enable more of both types of goods to be produced (1) with a given quantity of resources (1) increase productive potential / productive capacity / total supply (1) cause economic growth (1). 6 Nothing for higher output, higher GDP as this is uncertain. 2(d) Discuss whether or not a fall in a country’s birth rate will benefit an economy. In assessing each answer, use the table opposite. Why it might: • reduce the number of dependents • fewer workers away from work to bring up children • enable resources to be used to increase economic growth / raise living standards • reduce pressure on the environment • move towards the optimum population Why it might not: • reduce the size of the labour force in the longer term • reduce labour mobility • create an ageing population • reduce size of markets 8 Level Description 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at u sing economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 2(d) Level Description 0 A mark of zero should be awarded for no creditable content. 0

3 In the Netherlands in 2018, there were 1.3 bicycles per person and the world’s largest underground bicycle parking area was built in the capital city. Land is scarce in city centres, where most cycling takes place. Demand for bikes in the Netherlands is price-inelastic. Only a few people in the Netherlands borrow money to buy bikes. The government encourages cycling by spending on both bike parking areas and leisure cycle parks. (a) Identify one difference between land and labour. [2] (b) Explain two reasons why demand for a product may be price-inelastic. [4] (c) Analyse why households in one country may borrow more than households in another country. [6] (d) Discuss whether or not a government should encourage more people to cycle. [8]

3(a) Identify one difference between land and labour. Land is a natural resource (1) labour is a human resource / people (1). Reward for land is rent (1) reward for labour is wages (1). Land is likely to be more geographically immobile than labour (2). Land may be more occupationally mobile than labour (2). Land may be in more fixed supply / scarcer than labour (2). 2 For human resource / people not accepting workers. Accept raw materials for natural resource, 3(b) Explain two reasons why demand for a product may be price-inelastic. Logical explanation which might include: Lack of close substitutes (1) not able to switch to other products if the price of the product rises (1). A necessity (1) difficult to do without (1). Takes up a small part of income (1) change in price will not be significant (1). Addictive (1) people find it difficult to stop consuming it (1). New trend (1) brand loyalty being enforced by advertising (1). Time / short period of time (1) may take time to find an alternative (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. 3(c) Analyse why households in one country may borrow more than households in another country. Coherent analysis which might include: A lower interest rate (1) reduces the cost of borrowing (1). Financial institutions may have more funds available to lend in one country (1) making it easier to borrow (1). Households / financial institutions may be more confident that they can repay (1) employment / income may be rising in one country (1). Borrowing may be more socially acceptable in one country (1) people may not mind getting into debt (1). Younger households (1) may be less worried about debt (1). Rise in unemployment / fall in GDP / recession in one country / lower income (1) may result in borrowing to buy basic necessities (1). Inflation (1) borrowers will gain if the rate is higher than the rate of interest (1). 6 Accept an approach that analyses why households in the other country borrow less. A maximum of 3 marks for a list-like approach. This might be in the form of e.g. lower, interest rate, more confidence and more culturally acceptable to borrow. Or In the form of e.g. difference in interest rates, differences in confidence, differences in cultural acceptability of borrowing. 3(d) Discuss whether or not a government should encourage more people to cycle. In assessing each answer, use the table opposite. Why it should: • reduce external costs • improve the environment • improve people’s health • reduce traffic congestion • may reduce need to import petrol Why it should not: • may involve costs e.g. building cycle paths • may result in unemployment in car industry • may lead to more imports of bicycles • market forces will result in the most efficient allocation of resources Example of an L3 answer External benefits are benefits enjoyed by the third party who are neither involved in production or consumption of goods and services. The private benefit of cycling, enjoyed by cyclists, is their fitness will increase. But government can enjoy a more healthy labour force which means it can result in better quality of goods and services, which can be exported to increase export revenue. Moreover, cycling increases fitness, which could also mean that the government will not have to spend more on healthcare. This finance can be used somewhere else, like infrastructure. Lastly, increased cycling would mean that pollution levels will decrease, which not only promotes sustainability, but also reduces external costs such as traffic and noise. 8 Level Description 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 3(d) However. If cycling is promoted, the government will have to build cycling parks and parking, increasing the costs and opportunity cost as same money could be used for retraining and reskilling. In addition, if the land is used for cycling parks, opportunity cost will be high as land is scarce, and it could be used for housing. Finally, since cycles are 2-wheelers, they are less safe than cars. So, chances of accidents rises. This means the government will have to spend more on healthcare, which can reduce a budget surplus. Less cars may be bought and lower car production could increase unemployment. Example of an L2 answer If people in Netherlands buy cycles to commute, external costs such as pollution will be lower which means people will fall less ill and less money will be needed for healthcare. Lower pollution in a country means that tourists might also be attracted. If more people bought cycles in a country like Netherlands there will be less congestion on roads which might improve productivity. However, if the government does encourage cycling, it means that they will also have to spend building leisure parks and bike paths across the country which might outweigh costs such as pollution. Sale of low-priced cycles means that the government might also generate less indirect tax e.g. VAT, decreasing the surplus of the government. Example of an L1 answer They should as cars are polluting the world. If people are riding bikes it is good for their health and there will be fewer accidents and they will lose weight. But the government will have to build cycle parks and this will cost money. Level Description 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Cambridge IGCSE Economics · 0455

IGCSE Economics (0455) The basic economic problem past paper questions

Questions on scarcity, choice, opportunity cost, and the factors of production.

200 free questions from 2016–2021, each with its marking scheme. Open the full topical bank to filter by subtopic, paper, and year.

The basic economic problem in IGCSE Economics 0455 exams, 2020–2025

Across 2020–2025, The basic economic problem accounted for 188 questions worth 1,536 marks in Cambridge IGCSE Economics (0455) papers.

By year
Year	Questions	Marks
2020	38	363
2021	27	227
2022	34	235
2023	29	239
2024	30	232
2025	30	240

Most-tested subtopics

1.2 Factors of production610 marks
1.4 Production possibility curve (PPC) diagrams510 marks
1.3 Opportunity cost360 marks

Appears in

Paper 1 · 126 qs
Paper 2 · 62 qs

All most-tested Economics topics

2021 May/Jun · Paper 2 · Q1 · 30 marks
Marking scheme
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2021 Feb/Mar · Paper 2 · Q2 · 20 marks
Marking scheme
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2021 Oct/Nov · Paper 2 · Q2 · 20 marks
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2021 Feb/Mar · Paper 2 · Q3 · 20 marks
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2021 May/Jun · Paper 1 · Q1 · 1 mark
Marking scheme
Mark scheme — 2021 Paper 1 Q1
Answer: D
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