Use ownership and industry evidence to classify firms, then evaluate growth through mergers or larger-scale production by tracing effects on average cost, workers and consumers.
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Source material: What does the future hold for Nicaragua?
Nicaragua is the largest country in Central America. It has a large agricultural sector with one of its main exports being coffee. It has been estimated that a change in the price of coffee will cause a change in the quantity of coffee demanded. The country's agricultural output, including coffee, is often affected by natural disasters including droughts and earthquakes.
Nicaragua is the country with the lowest Gross Domestic Product (GDP) per head in Central America. Wages are particularly low in the rural areas of the country. There is a high degree of income inequality and firms tend to earn lower profits than in other Central American countries. The number of Nicaraguans who were willing and able to work but could not find a job increased as calculated by both the claimant count and the labour force survey in 2020.
The purchasing power of Nicaraguan consumers fell in 2020 as prices rose by more than incomes. However, the country's currency, the cordoba, was still generally acceptable. It continued to act as a medium of exchange and store of value.
Nicaragua's future economic performance will be influenced by a number of factors. These include the proportion of the labour force employed in agriculture, the size of the country's firms and what the country produces. Table 1.1 shows the percentage of the labour force employed in agriculture and GDP per head in selected countries in 2020.
Table 1.1 The percentage of the labour force employed in agriculture and GDP per head in selected countries in 2020
Nicaraguan firms tend to be relatively small. These firms often get to know their individual customers' requirements but many are not large enough to benefit from economies of scale. In recent years, there has been a boom in coffee shops in Nicaragua. Between 2015 and 2020, the number of coffee shops more than doubled in the country. These shops differentiate themselves through their customer service and the quality of the coffee they serve.
Nicaragua is the world's twelfth largest producer of coffee. Global coffee consumption continues to increase. This trend may increase Nicaragua's coffee output and exports.
Discuss whether or not small firms benefit Nicaraguan consumers.
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Source material: The Swiss economy
Although inflation in Switzerland in 2022 was above its target of , it was below the inflation rate of other high-income economies, such as the US ( ), the UK ( ) and Germany ( ). Price levels are more stable because of a combination of microeconomic and macroeconomic policy measures. These include maximum prices, subsidies and a contractionary monetary policy.
To encourage the production of solar energy, the Swiss Government has provided more than million in subsidies to producers. This is part of the government's plan to move away from non-renewable sources of energy which are mainly imported. Overdependence on foreign markets could lead to the economy becoming more exposed to external shocks.
Switzerland's current account of the balance of payments has been in surplus from 2015 to 2022. Low inflation, along with the production of very high-quality products, may have contributed to this surplus. A strong currency has also kept the cost of imported raw materials low in Switzerland.
The Swiss franc is one of the more stable currencies in the world. During times of economic uncertainty, the Swiss franc usually strengthens. Fig. 1.1 shows global growth rate (\% change in GDP) and the percentage change in the value of the Swiss franc, against the USD($), from 2018-2022.
Fig. 1.1 Global growth rate (\% change in GDP) and the percentage change in the value of the Swiss franc against the USD(\$) from 2018-2022
Although inflation was not high compared to other countries, the Swiss central bank increased interest rates in 2022. This was done to reduce inflationary pressures. However, there was a risk that higher interest rates might increase unemployment.
The rise in interest rates affected some firms negatively. The Swiss Government had to organise a merger between the two largest banks in Switzerland. This was to avoid one of them collapsing which would have reduced confidence in the whole banking system. A merger might also have helped the merged bank to gain greater economies of scale. However, the merger resulted in some workers losing their jobs and gave the merged bank greater monopoly power.
Discuss whether or not a bank merger will benefit Swiss consumers and workers.
Each question is introduced by stimulus material. In your answers you may refer to the material and/or other examples you have studied.
Read the source material carefully before answering Question 1.
Source material: Gabon's industries and labour force
Gabon is a small West African country. Its rainforests reduce air pollution, provide wood for timber production, protect against floods and reduce soil erosion. The Gabonese Government wants to conserve the country's rainforests. It has created some national parks which has increased tourism, affecting the current account of the balance of payments.
The Gabonese Government wants to reduce the country's reliance on timber production, oil production and agriculture. The country is Africa's fifth-largest oil producer but its resources of oil are running out. The oil industry causes water pollution. The country has other natural resources, including gold. In 2022, new deposits of gold were found in Gabon.
Gabon's agricultural industry employs a high proportion of the country's labour force. Fig. 1.1 shows the literacy rate and the percentage of the labour force employed in agriculture in six selected countries in 2022.
Fig.1.1 The literacy rate and the percentage of the labour force employed in agriculture in selected countries in 2022
In recent years, Gabon has experienced a high rate of unemployment among 15-24 year olds. High rates of youth unemployment can result in young people not gaining the skills and experience needed to achieve high productivity. It can also have a harmful effect on their confidence. Some governments pay private sector firms to give work experience to unemployed young people. The quality of this experience can vary.
The Gabonese Government wants to develop its textile industry, encouraging firms to grow in size. The output of the industry will be affected not only by possible government support but also by its use of technology and specialisation of workers.
Discuss whether or not a growth in the size of firms in Gabon's textile industry will reduce their average cost of production.