CAIE IGCSE Economics 1.1.2 Resource allocation decisions

Read the source material carefully before answering Question 1.

Oil makes up one third of Ecuador's exports. Ecuador has, however, decided to produce less oil and more of other goods and services. This decision has affected how products are made in Ecuador. For example luxury textile production, such as luxury scarves and jumpers, uses fewer capital goods than oil production. Tourism relies on natural resources including sunshine and beaches.

One reason Ecuador's government has encouraged less reliance on oil, is the large changes that often occur in the oil market. Between 2014 and 2016, demand for Ecuador's exports fell which caused a significant reduction in export revenue. This reduction, combined with a decrease in government spending, caused the country's output to decline.

Between 2016 and 2019, there was some improvement in Ecuador's economy. Incomes and household spending increased and more cars were purchased. Table 1.1 shows the GDP per head ($) and car ownership (per 1000 people) in selected countries in 2019.

Ecuador's government borrowed from China to spend on building more roads. The construction of these roads increased employment and was expected to influence transport costs in the long run.

Between 2016 and 2019, Ecuador's textile industry benefited from the improvement in the road network. Despite strong competition from foreign textile firms, Ecuador's textile firms increased the scale of their production. Wages paid in the textile industry did not rise significantly. A very small wage increase can affect trade union activity and emigration.

Some of Ecuador's workers emigrate to find jobs in other countries, particularly Italy, Spain and the US. These workers have a range of skills and they work in a variety of jobs abroad, some of which provide training. Many, but not all, workers send money home to their families.

Identify two key resource allocation questions.