CAIE A-Level Economics 2.2.7 PED & total expenditure

Practise linking PED to total expenditure and revenue, using tables, diagrams and price-change scenarios to predict outcomes.

[Maximum number: 3]

The Fiji economy: a positive outlook

Fiji is a small island country in the Pacific with a population of 860000 . In 2014 its economy was reported to be continuing to grow steadily. It remained on course for a fifth consecutive year of expansion, boosted by high tourist arrivals and visible export earnings, particularly from sugar. The factors that were expected to restrict growth in 2015 included ongoing dry weather conditions causing lower output of agricultural goods, with the exception of sugar.

Table 1: Selected economic indicators for Fiji

Consumption remained strong in the first five months of 2014, and imports of consumer goods, mainly vehicles, rose by 15.6%. Personal remittances increased, boosting consumption expenditure.

The tourism sector - Fiji's main source of foreign exchange - continued to perform strongly. Visitor arrivals increased by 4.0% year-on-year, with 4.6% more visitors from Australia and 11.6% more from New Zealand, but there was a significant fall in visitor arrivals from Japan.

Sugar production increased, aided by government investments in new technology that improved efficiency of production and reduced price.

Despite higher growth, inflationary pressures were eased by declining international commodity prices. However, annual average inflation in 2014 was not expected to fall below 3.0%, as economic activity was expected to revive. In addition, continuing dry weather was affecting the food supply.

Despite the positive growth outlook, increased investment is needed to improve productivity and address supply-side capacity constraints.

Explain what the changes in sugar's contribution to visible export earnings and in the price of sugar might suggest about the price elasticity of demand for sugar.

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2.2.7—PED and total expenditure question 1