Collins Cambridge IGCSE Economics sample

Role of government in an economy

5

This chapter looks at the role of the government in managing the economy. It begins by describing the types of goods and services typically provided by governments. It then goes on to consider the various macroeconomic aims governments may set for themselves and the policies they can use to achieve these aims. Finally, it looks at the use of regulations, subsidies and indirect taxes by government to influence the behaviour of private producers.

5.1 Government as a producer and an employer 5.2 Aims of government economic policy 5.3 Fiscal, monetary and supply-side policies 5.4 Possible policy conflicts 5.5 Types of taxation 5.6 Government’s influence on private producers

Chapter 5 . Unit 1

Government as a producer and an employer Learning objective By the end of this unit, you should be able to: • describe the government as a producer of goods and services, and as an employer

Starting point

Answer these questions in pairs.

1

Explain the difference between the following terms: a) Private sector and public sector b) A good and service c) A consumer good and a producer good d) A merit good and a demerit good e) A private good and a public good f) Positive externality (external benefit) and negative externality (external cost)

2

Provide an example of each of the above.

Exploring Discuss these questions in pairs.

2

1

What goods and services are provided by the government in your country?

2

How do these compare to the goods and services produced by private firms?

3

Why does the government choose to produce these types of goods and services?

Chapter 5: Role of government in an economy

5.1 Developing Government as a producer of goods and services Sample text for sub heading One of the main roles of the government is to manage the economy. An important part of this is deciding what goods and services to produce so that the living standards of the population are improving and the economy is able to grow sustainably (continually over a long period of time). Goods and services provided by the government include: Type of good or service

Description

Examples

Merit goods

Merit goods are goods and services that have both private benefits for the user and external benefits to third parties (Chapter 2.x). Merit goods tend to be underprovided by the market. Governments therefore seek to produce merit goods in order to make them affordable and accessible for everyone.

Education, vaccinations, health services, food stamps to support nutrition

Public goods

Public goods are non-excludable and non-rival (Chapter 2.x).

As nobody can be excluded from benefiting from public goods once they are provided, private firms are unable to profit from producing them. It is therefore left to the government to provide public goods which are essential to the growth and development of a country.

Street lighting, national defence, city flood defences

Welfare services

In many countries, the government provides welfare services to financially support individuals and their families who are unable to work for reasons including sickness, unemployment or old age.

Unemployment benefit, sickness benefit, child benefit, pensions

Public services

Public services are services which are considered to be essential in order for a modern society to function effectively.

They are provided by the government for the general public.

Police force, fire service, rubbish collection

Infrastructure

Governments spend money on the development of infrastructure, essential facilities such as roads and a reliable power supply, in order to facilitate economic activity within the country.

Roads, sanitation, communication networks, power grids, transport links

1 Give two examples of government provided goods and services which fall into more than one of the above categories.

Government as an employer The government employs workers in a wide range of occupations to ensure that the goods and services they produce reach the people who need them. For example, civil servants working in large government departments and agencies are responsible for areas including education, healthcare and welfare payments within the country. Police officers, teachers and nurses are also

Unit 5.1: Government as a producer and an employer

3

Key concepts Private benefits – The benefit to individuals, groups or firms resulting from a transaction they are directly involved.

External benefits – The benefit to third parties of a transaction they are not directly involved in.

Social benefits – The total benefit to society from a transaction which includes both private benefits and external benefits.

Non-excludable – Nobody can be excluded from benefiting from the good or service once it has been provided.

Non-rival – Consumption of a good or service by one individual does not reduce the amount of the good available for other individuals. employed in the public services sector and military personnel are employed in the provision of national defence.

As well as employing workers directly, the government also creates jobs for people by contracting projects out to private firms. For example, a private firm may be contracted to build a new hospital which is being funded by the government. This will create jobs for the architects, engineers and construction workers involved in the building of the hospital. Once complete, the government will need to employ doctors, nurses, managers and support staff to operate the hospital.

Case study

Government funded mega projects in Thailand

In 2014, the Thai government announced a plan to spend 2.4 trillion baht ($69 billion) on developing infrastructure in the country. The plan involved investment in transportation, including the construction of a high speed rail network to link Thailand with neighbouring countries and southern China. An extensive metropolitan rail system for Bangkok was also envisaged. The plan also allocated funds to the development of ICT and the building of fibre-optic networks to link up with other countries.

1 Why do you think the Thai government decided to spend money on the provision of the goods and services mentioned in the text?

2 What jobs will be created in both the public sector and private sector from the provision of these goods and service?

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Chapter 5: Role of government in an economy

5.1 Applying Project work Using the internet, research a good or service provided by the government in your country.

Answer the questions below.

1. Describe the good or service.

2. Discuss whether you think the provision of this good or service is the best use of the government’s resources. Justify your opinion.

Knowledge check questions 1 Give three examples of goods and service produced by the government.

[3]

2 Define merit good and give an example.

[2]

3 Using examples, explain the difference between a public good and a public service.

[4]

4 Identify three jobs provided by the government as an employer.

[3]

5 Extension: Discuss whether healthcare should be provided by the government or by the private sector.

[8]

Check your progress Read the unit objectives below and reflect on your progress in each I struggle with this and need more practice.

I can do this reasonably well.

I can do this with confidence.

• describe the government as a producer of goods and services, and as an employer

Unit 5.1: Government as a producer and an employer

5

Chapter 5 . Unit 2

Aims of government economic policy Learning objective By the end of this unit, students should be able to: • describe the aims of government policies, such as full employment, price stability, economic growth, redistribution of income, balance of payments stability.

Starting point Answer these questions in pairs.

1

Using the pictures below, identify: a) examples of each of the factors of production b) characteristics of a strong economy

Exploring Discuss these questions in pairs.

1

What are some problems countries commonly face?

2

Which problems do you think governments should focus on improving first?

Justify your answer.

Developing The macroeconomic aims of government Macroeconomic aims are the targets that the government seeks to achieve at a national level. There are five main macroeconomic aims of government.

1. Full employment (low unemployment) In theory, full employment means that all individuals in the economy who are willing and able to work have jobs.

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Chapter 5: Role of government in an economy

5.2 However, at any point in time there is likely to be a small amount of unemployment as there will always be some individuals who are in the process of finding work or moving between jobs. Economists therefore accept that an economy is at ‘full employment’ when almost all individuals who are willing and able to work have jobs. Thus, the government aims to keep unemployment as low as possible. Unemployment is discussed more in unit XX.

Why does the government aim for full employment?

Full employment (low unemployment) is likely to result in higher incomes leading to an increase in consumer spending and rising standards of living within the economy. Higher consumer spending may also benefit producers who are likely to expand production and receive higher profits.

2. Price stability (low and stable inflation) In an economy, the prices of goods and services tend to rise over time. Even in your lifetime, you are likely to have noticed a gradual increase in the prices of some of the goods and services you buy. Economists refer to this sustained rise in the general level of prices as inflation. An important objective of government is to ensure that inflation is kept low and stable.

Key term Inflation – the sustained rise in the general level of prices in an economy over time.

Why does the government aim for price stability?

Price stability (low and stable inflation) is important as it creates a degree of certainty for consumers and producers.

They can be reasonably confident that the money they earn today will buy about the same amount of goods and services in the future. This encourages consumer spending and business expansion leading to higher economic growth and living standards in the economy. Inflation is discussed more in unit XX.

3. Economic growth Economic growth refers the change in the total production of goods and services in an economy over a period of time (usually a year). Governments aim for positive and sustainable economic growth - ‘positive’ because they want the economy to be producing more and more goods and services each year and ‘sustainable’ because they want the growth to be maintained over a long period of time.

Why does the government aim for economic growth?

Economic growth is likely to lead to lower unemployment as jobs are created when firms increase their production. This is likely to lead to higher incomes and increased consumer spending which, if sustained over a long period of time, should lead to higher living standards for the population. Economic growth is discussed more in unit XX.

Unit 5.2: Aims of government economic policy

7

1

What might governments aim to achieve when unemployment is low and economic growth is high?

4. Redistribution of income Redistribution of income refers to the transfer of income (from labour) and wealth (from ownership of property) between individuals within an economy. Governments aim to create a more equal distribution of the income and wealth between individuals through taxation, welfare payments and the provision of public services.

Why does the government aim for a more equal distribution of income?

Creating a more equal distribution of income and wealth within the population helps to reduce poverty in an economy.

Poverty is undesirable due to the hardship and suffering it creates for individuals and their families. Poverty is also a waste of resources as it prevents some individuals from contributing to the economy to their full potential. Poverty is discussed more in unit XX. 5. Balance of payments stability The balance of payments refers to the difference between the revenue a country earns from its exports (locally-made goods sold abroad) and the money it spends on imports (foreign-made goods purchased locally). The government aims to maintain a stable balance of payments meaning it tries to avoid large deficits and surpluses between the value of exports and the value of imports. A trade deficit on the balance of payments is when spending on imports is greater than revenue from exports. A trade surplus, on the other hand, is when export revenue is greater than import expenditure.

Why does the government aim for a more equal distribution of income?

While small differences between a country’s export revenue and import expenditure are not normally of concern, large differences which persist over a long period of time can become unsustainable and result in various macroeconomic problems. The balance of payments is discussed in more detail in unit XX.

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Chapter 5: Role of government in an economy

Key terms Exports – the goods and services of a country which are sold abroad Imports – goods and services brought into a country from abroad to be sold Trade deficit – occurs when the value of imports is greater than the value of exports Trade surplus – occurs when the value of exports in greater than the value of imports

5.2

Case study

Export-led growth in China

Throughout the 1990s and early 2000s, China’s relatively cheap labour force enabled it to sell exports to advanced economies at highly competitive prices. As a result, the Chinese government was able to achieve one of its main aims of increasing economic growth which reached 14.2% in 2007. This rapid growth led to higher wages, particularly for factory workers employed in export industries. Consequently, consumer spending and the living standards of the population significantly improved.

However, the financial crisis of 2008, which saw a reduction in the demand for Chinese exports, as well as increased competition from other lower cost countries, has resulted in falling economic growth in China which dropped to 6.5% in 2017, the lowest rate since 1990.

Economic growth has also resulted in dangerously high levels of air pollution from the country’s numerous coal-fired power stations.

1 What are the advantages and disadvantages of China’s higher economic growth mentioned in the case study?

2 Other than selling exports, explain one other way in which China could increase economic growth?

Applying Project work Using the internet, research the government aims of a country of your choice.

1.

Identify three of government’s aims.

2. Explain why each government aim is important for the economy you have chosen.

Unit 5.2: Aims of government economic policy

9

Knowledge check questions 1 Identify the five macroeconomic aims of governments.

[5]

2 Explain why full employment (low unemployment) is desirable for a country.

[4]

3 Explain how high inflation might affect consumers.

[4]

4 Extension: Discuss whether economic growth should be a government’s main economic aim.

[6]

Check your progress Read the unit objectives below and reflect on your progress in each I struggle with this and need more practice.

I can do this reasonably well.

I can do this with confidence.

• describe the aims of government policies, such as full employment, price stability, economic growth, redistribution of income, balance of payments stability.

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Chapter 5: Role of government in an economy

5.2

Chapter Review Multiple choice questions 1

A government uses tax revenue to produce goods and services.

Which types of goods and services is it least likely to produce?

2

A

merit goods

B

consumer goods

C

public goods

D

public services

A government wants to improve the economy.

Which is least likely to be an aim of government policy?

3

A

balance of payments deficit

B

full employment

C

price stability

D

economic growth

A government decides to aim for higher economic growth.

What is a likely disadvantage of this?

4

A

higher unemployment

B

a more equal distribution of income

C

a fall in the living standards of the population

D

an increase in the cost of living

A government decides to decrease spending and raise interest rates.

Which aims might it be trying to achieve?

5

A

price stability and full employment

B

economic growth and redistribution of income

C

balance of payments stability and price stability

D

balance of payments and full employment

A government wants to use a supply-side policy increase the productive potential of the economy.

Which is policy might it use?

A

increase income taxes

B

decrease interest rates

C

impose higher taxes on imports

D

reduce the power of trade unions

Chapter Review

11

6

A government decides to subsidise technological development in order to stimulate investment by firms.

How might this be described?

7

A

as monetary and supply-side policy

B

as fiscal and monetary policy

C

as fiscal and supply-side policy

D

as fiscal, monetary and supply-side policy

A government uses a progressive system to tax workers’ income.

Which best describes a progressive tax?

Tax rate (%)

B Tax rate (%)

A

Income ($)

Income ($)

Tax rate (%)

D Tax rate (%)

C

Income ($)

8

Income ($)

A government increases the highest rate of income tax from 38% to 40% and increases the tax on food.

How do these changes affect the regressive nature of the tax system?

9

Higher income tax

Higher food tax

A

more regressive

more regressive

B

less regressive

more regressive

C

more regressive

less regressive

D

less regressive

less regressive

A government subsidies the production of rice.

What is likely to increase?

12

A

the price of rice

B

the cost of producing rice

C

the demand for rice at every price

D

the supply of rice at every price

Chapter 5: Role of government in an economy

5.2 10

The diagram shows the imposition of a tax of SU on a good.

S2 Price S1

Which area represents the incidence of the tax on the consumer?

A

RSTW

B

RSVU

C

RSXW

D

WTUV

R W V

S T

X

U D Q2

Q1

Quantity

Structured questions 1

The Australian Economy One of the largest mixed economies in the world, has Australia experienced over two decades of positive economic growth, low inflation and low unemployment. This was largely due to two factors: Structural reforms - Throughout the 1980s and 1990s the Australian government implemented a range of structural reforms, including the privatisation of the telecommunications, electricity, water, road and rail; the removal of tariffs (taxes on imports); the lowering of income tax rates and the deregulation of industries, including domestic aviation.

Strong demand for exports - Australia has experienced strong demand for its mineral and energy resources, especially iron ore (used to make steel), coal and uranium. Demand was particularly high from China throughout much of the 2000s and early 2010s as it required a steady supply of mineral and energy resources to support its rapidly growing economy.

In 2012, the Australian government introduced a Minerals Resource Rent Tax (MRRT) of 30 percent on the profits generated by large mining firms from iron ore and coal production.

The additional revenue raised from the MRRT enabled the government to reduce corporate tax rates paid by small businesses in other industries throughout the economy. The Australian government also has regulations in place to control the activities of mining firms, including restrictions on the dumping of waste and the location of mining sites. (a)

Using the information in the extract, identify two supply-side policies implemented by the Australian government.

[2]

(b)

Using information from the extract, explain two reasons why inflation in Australia has remained low.

[4]

(c)

Explain how strong demand for Australia’s exports of minerals and energy may have helped to reduce unemployment and increase economic growth.

[4]

(d)

Discuss whether government should always regulate producers.

[6]

Chapter Review

13

2

3

14

The macroeconomic aims of the New Zealand government include sustainable economic growth, full employment of and price stability. Monetary policy is controlled by the central bank, the Reserve Bank of New Zealand (RBNZ), which aims to maintain inflation between 2% and 3%. By targeting low and stable inflation the RBNZ seeks to encourage strong economic growth. (a)

Define monetary policy.

[2]

(b)

Explain how monetary policy can be used to lower inflation.

[4]

(c)

Explain one other policy the Australian government could use to lower inflation.

[4]

(d)

Discuss whether there is likely to be a conflict between the government aims of low inflation and strong economic growth.

[6]

From 1 January 2018, the government of the United Arab Emirates (UAE) introduced a 5% value added tax (VAT) on most goods and services. The VAT was introduced to provide the government with a new source of revenue to reduce its dependence on revenue earned from oil exports. The new revenue is being use to improve public services for the population. (a)

Identify two public services provided by the government.

[2]

(b)

Using a demand and supply diagram, show the effect of the imposition of an indirect tax on the equilibrium price and equilibrium quantity of a good.

[4]

(c)

Explain how the imposition of the VAT might impact the economy.

[4]

(d)

Discuss whether education should be provided by the public sector or the private sector.

[6]

Chapter 5: Role of government in an economy

Chapter 1 The basic economic problem

The natu ure of th he econo omic pro oblem By the end of this topic you must be able to: explain the meaning of resources explain what is meant by economic agents distinguish between a free good and an economic good.

• • •

The resources of an economy are inputs into the production process. They are: land, labour, capital and enterprise. Most resources are finite; this means that once used they cannot be replaced, for example, if coal and oil are used up they cannot be replaced.

Renewable resources are commodities such as solar energy, fish stocks or forestry that are replaceable and can continue over time provided the rate of extraction is less than the rate of renewal.

At any moment resources are fixed in terms of their quantity and quality.

This means there is a limit to what can be produced. This affects all the different groups in the economy (called ‘economic agents’): •

consumers have limited income and have to choose how to use it

•

employees (workers) have limited time and must decide how to use it

•

producers have limited funds and must decide what to do with them, e.g. new machine vs. new office space

•

governments have limited funds and must decide what to spend them on, e.g. education or healthcare.

Revision tip Remember to think of the effect of any change on the different economic agents when you are answering a question: consumers, employees, producers and government. A given policy may be good for some agents but not others.

Consumers

Governments

Economic agents

Employees or workers

Producers

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Finite resources limit what can be produced. However, human wants (what we would like) and needs (what we must have, e.g. water and food) are unlimited. This means resources are scarce and choices have to be made what to do with them.

What to produce

Basic economic problem

Who to produce it for

How to produce it

Economic goods involve an opportunity cost. This means that to produce them, resources have to move from the production of one thing to another.

For example, to produce more laptops, employees might move from producing PCs. We have more of one product but have sacrificed something in return.

A free good does not involve an opportunity cost, e.g. air. Air exists and generally does not require other goods to be sacrificed to have more of it.

Revision tip Sometimes free goods become economic goods, e.g. if the air becomes polluted and we have to clean it up this involves resources and has an opportunity cost.

Quick test 1. Explain the difference between an economic and a free good.

2. Explain what is meant by a finite resource.

3. State three economic agents.

4. Explain what is meant by the basic economic problems.

5. Explain what is meant by a renewable resource.

The basic economic problem

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Chapter 1 The basic economic problem

Factors of produ uction By the end of this topic you must be able to: explain what is meant by factors of production explain what is meant by the mobility and immobility of factors of production explain why the factors of production might change over time

• • •

The factors of production are used in the production process to produce goods and services.

Factors of production

Land

Labour

Capital

Enterprise

The factors of production in economy are: •

land – this includes natural resources such as oil

•

labour – this refers to the size and skills of the workforce

•

capital – this refers to the quality and quantity of machinery and equipment

•

enterprise – this involves management expertise to think of new products and processes, and combine resources to set up a new project or business enterprise.

Revision tip The word capital can sometimes be confusing because it has different meanings. It can mean capital goods such as machines or equipment; however, people also talk about money as ‘capital’.

Factor mobility refers to how easily factors can move from one business or industry to another. Immobility means it is difficult for resources to reallocate.

Labour immobility may occur as a result of: •

occupational immobility – because there are differences in the skills needed, e.g. a plumber cannot easily become a doctor – it would take several years to re-train

•

geographical immobility – when there are problems moving areas, e.g. houses in the southeast of the UK are generally more expensive than in Wales, so relocating from Wales to southeast UK is difficult.

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The amount of output that can be produced with the factors of production depends on their quantity and quality. For example, the more people there are in the workforce and the better their training and skills, the more productive they can be. Machinery that has the latest technology may be more productive than older machinery.

Revision tip Remember – resources are fixed in term at any moment, but can change over time.

Changes in factors of production can occur over time, for example: •

investment in technology and equipment can improve the amount and quality of capital

•

better training and education can improve the quality of the workforce; a growth in the population size can increase the number in the workforce

•

the use of better technology can improve the productivity of the land, e.g. use of fertilisers on farmland or better technology to access shale gas in the land.

Quick test 1. State three factors of production.

2. Explain how the quantity of capital might be improved over time.

3. Explain what is meant by labour immobility.

4. Explain how the quality of labour might be improved over time.

The basic economic problem

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Chapter 1 The basic economic problem

Opportu unity cosst By the end of this topic you must be able to: explain the meaning of opportunity cost explain the significance of opportunity cost understand the meaning of the production possibility curve (PPC) show the concept of opportunity cost on a production possibility curve.

• • • •

Opportunity cost refers to what is sacrificed in the next best alternative when a decision is made, for example, if resources are put into the provision of more schools, the opportunity cost may be less for hospitals.

Given the fact there are limited resources at any given moment it is impossible to have more of everything; something has to be sacrificed to have more of one product – this means there is an opportunity cost. When making any decision, the decision maker should consider what else could have be done with these resources i.e. what is the opportunity cost.

Revision tip Remember that any policy decision will involve an opportunity cost. This is worth considering when deciding whether to go ahead with it.

The Production Possibility Curve (PPC) shows the maximum goods and services that can be produced given the existing resources and technology.

A Y

Product A

B

Revision tip X

C

When drawing the PPC, remember to label the axes with Product A and Product B.

Product B

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If the economy is producing on the PPC it is productively efficient; more of one product can only be produced if less of another is produced.

There is an opportunity cost. For example, if resources are moved out of industry A and into industry B, the economy might move from X to Y. The opportunity cost of the extra units of B are the 10 units of A.

If the economy is producing within the frontier (e.g. Z) the economy is productively inefficient; more of one product could be produced without using less of another. This is because resources are being used inefficiently.

Revision tip Remember the PPC is an important concept in Economics.

Make sure you can use it to show a reallocation of resources between industries, a growth in the economy and economic inefficiency.

Over time the PPC can shift outwards if there is an improvement in the quality and quantity of resources. This shows economic growth.

Output of capital goods

PPC2

PPC1

B

A

C Consumer goods

D

Quick test 1. Explain what is meant by opportunity cost.

2. Explain what is meant by the Production Possibility Curve (PPC).

3. Explain how opportunity cost can be shown on a PPC. 4. Explain why operating on the PPC is productively efficient.

5. Explain how the PPC can move outwards over time.

The basic economic problem

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The basic economic problem 1

Which change is most likely to increase the demand for imports?

A B C D

2

an increase in the competitiveness of domestic goods an increase in the earnings of foreign investors in domestic companies an increase in the number of overseas visitors to the country an increase in quotas

to encourage self-sufficient production within an economy to lower the general price level within the economy to protect a new and growing domestic industry to reduce the current account deficit on the balance of payments [1]

It will sell its currency if there is excess supply in the foreign exchange market.

It will sell its currency if there is excess demand in the foreign exchange market.

It will buy its currency if there is excess demand in the foreign exchange market.

It will buy its currency if there is a shortage in the foreign exchange market.

Define ‘current account deficit of the balance of payments’.

Explain two methods of trade protection that a country could use.

Analyse why a country may be concerned about having a current account deficit.

Discuss whether trade protection is always preferable to free trade.

[2] [4] [6] [8]

One aim of government economic policies is stability of balance of payments. The position of a country’s current account is influenced by a number of factors, including its exchange rate and its government’s trade policies. (a) Define ‘exchange rate’. (b) Explain how a country might have a deficit in its trade in goods (i.e. its visible trade) but still have an overall current account surplus on its balance of payments. (c) Analyse the possible effect of a fall in the external value of a country’s currency on its current account on the balance of payments. (d) Discuss whether a government should protect its industries from competition from overseas businesses.

18

[1]

Trade protection and changes in exchange rates are two ways a country can try to reduce a current account deficit of the balance of payments. (a) (b) (c) (d)

6

[1]

What action will the government take in a fixed exchange rate system?

A B C D

5

an increase in the cost of consumer borrowing an increase in income tax rates an increase in the exchange rate an increase in tariffs imposed by the government

Which of the following could not be a reason for imposing tariffs on imported goods?

A B C D

4

[1]

Which of these is likely to lead to an increase in the size of a country’s current account deficit?

A B C D

3

Exam-sttyle pracctice que estions

[2] [4] [6] [8]

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Test

Trade between Japan and the EU

7

In 2017, the European Union (EU) and Japan, two of the world’s biggest economic areas, agreed a deal that would allow free trade between them.

Japan is the EU’s second biggest trading partner in Asia after China. It is also the seventh biggest export market for European producers. Imports from Japan to the EU are mainly machinery, electrical equipment, motor vehicles, optical and medical instruments, and chemicals. EU exports to Japan are mainly motor vehicles, machinery, pharmaceuticals, optical and medical instruments, and electrical equipment.

One of the most important trade categories for the EU is dairy goods. The EU’s dairy farmers have been struggling due to falling prices within Europe. Farmers say they are paid less than the cost of production.

They sell their milk mainly to the large supermarkets. However, demand for milk and milk-based products in Japan has been growing steadily in recent years.

Exporters from the EU pay €1 billion ($1.1 billion) in export duties to Japan each year, with tariffs of around 20% on agricultural products. The trade deal will reduce Japanese tariffs on beef, pork, wine, textiles, clothing and shoes. Meanwhile tariffs on Japanese cars sold in the EU will be lowered from their present 10% over seven years.

Fig. 1: Japan’s income and population, 2016

Some commentators think the deal might increase the value of the EU’s exports to Japan by 34%, and Japan’s to the EU by 29%. Because of the potential impact on domestic industries, the deal is likely to have long transition clauses of up to 15 years to allow sectors in both countries to adjust.

Income

$4.932 trillion

Population

127 million

Fig. 2: EU–Japan trade and investment EU–Japan: Trade in goods

EU–Japan: Trade in services 40 Billions

Billions

100 50 0 -50

2014

2015

20

0

2016

2013

2014

Years EU imports

2015

Years

EU exports

EU imports

Balance

EU exports

Balance

EU–Japan: Foreign direct investment

2015

-150

-100

-50 Inward stocks

0

50

Outward stocks

100

150

200

Balance

(a) Describe what is meant by the European Union. (b) Describe what is meant by free trade. (c) Explain why the EU–Japan trade deal is likely to have a 15-year transition period for businesses to adjust. (d) Calculate the average income per person in Japan in 2016. (e) Explain why the EU may export motor vehicles to Japan and import motor vehicles from Japan. (f) Explain why the price of milk might have been falling in the EU. (g) With reference to Fig. 2, discuss whether the EU–Japan trade deal is a good idea.

The basic economic problem

IGCSE Economics new RG sample.indd 19

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19

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