CAIE A-Level Economics 8 Government Microeconomic Intervention Question Bank

Inequality and globalisation

A government commission published a report saying that global poverty and inequality were worsening and there was a risk that the gap between the rich and the poor would increase.

But, according to a newspaper, a lot of what is said about inequality is wrong. It overlooks the fact that the past 50 years saw a period of dramatic reduction in global inequality. The normal measurement of relative inequality is the Gini coefficient. The figure for global inequality in 1975 was 0.75 , in 2020 it was 0.72 and in 2022 it was 0.67 .

It is important to understand this trend rather than make the mistake of the commission.
The fall in global inequality should not come as a surprise. For about two hundred years the benefits of industrialisation went mainly to countries in Europe and North America. Income inequality between these countries and poorer countries worsened. The spread of globalisation in recent decades has meant this difference has lessened. Countries such as China and India have benefited from large increases in per capita (average) income, as shown in Table 1.1.

With such an increase in per capita incomes maybe some level of inequality does not matter. Indeed, it might be a necessary condition for economic growth. Instead of concentrating on eliminating inequality perhaps the focus should be on the absolute position of the poorest.

If the attention is on the relief of poverty rather than the wealth of the richest, improvements can be seen. Life expectancy has increased, most noticeably by ten years in the past two decades in the poorest region of sub-Saharan Africa. Literacy rates have also increased. Those in absolute poverty across the world have fallen from more than a third to under a tenth of the world's population. And all this while the world's population has increased.

Critics of globalisation and foreign direct investment (FDI) by multinational companies point to the possible negative environmental effects, the weakening of individual cultures and the reliance on international financial institutions that can fail. They also claim there can be exploitation of workers leading to greater wage inequality and possible increases in domestic unemployment as cheaper goods are imported.

Distinguish between equity and equality.

Working overseas

Many low-income countries have large proportions of the population below the World Bank's absolute poverty level of $\$ 2.15$ per day (United States dollars, 2022). One way in which these countries try to reduce their poverty is by the migration of workers to richer countries. The migrants send a portion of their incomes, known as remittances, back home to support their families.

These overseas workers are a link between migration and development. The flow of remittance money is greater than the foreign direct investment and official development aid received by middle-income and low-income countries. Total remittances received by those countries in 2022 was $\$ 650$ billion, of which $45 \%$ ( $\$ 293$ billion) was received by only five countries.

About 50\% of migrants from low-income countries went to high-income countries.
Migrants can find their incomes increase significantly. A nurse may make seven times more in Australia than in the Philippines, adjusted for purchasing power parity (PPP).

Unlike official aid, remittances flow directly to their receivers and are a stable source of income. They can buy extra food and they may provide savings for the receiver. They may reduce child labour in disadvantaged families and allow for higher spending on education through higher enrolments and more years of completed schooling.

Migration can reduce unemployment and raise wages in home countries. Migration may lead to larger benefits for the home country by increasing the rates of return on human capital caused by the creation of better, more productive, and higher paying jobs.

When the flow of migrants goes to a host country whose population is ageing, it may reduce the average age of the population. This can lead to an increase in the size of the labour force, reduce the age dependency ratio and make a positive tax contribution. The migrants increase the demand for host country output and may utilise housing in less popular areas. Those with a high level of education make an even more significant contribution to economic output.

Sources: The Guardian, 23 August 2023
asia.nikkei.com, 3 March 2023
imf.org, March 2020

Developments in the electric vehicle (EV) industry
The advantage of the car is that it provides freedom for the consumer. However, the disadvantages of car use are that it creates congestion, carbon dioxide (CO2) and air pollution. These disadvantages led many countries to agree to replace internal combustion engine (ICE) cars with electric vehicles (EV) from 2030.
The successful introduction of EV is dependent on the development of battery technology and production of batteries to enable EV to drive a similar distance to ICE cars before they need re-charging. Better electrode design, battery assembly and chemistry are all technical aspects of battery production that could reduce costs, resulting in economies of scale from more efficient use of capital and labour. In addition to technical economies, there may well be purchasing economies of scale in battery production when buying raw materials and capital equipment in bulk.
Table 1.1 shows the estimated average costs of battery production for EV using two different technologies.

The shift to EV will cause redundancies for highly skilled mechanical engineers who have developed and refined the ICE. Often these workers are concentrated in specific areas, such as southern Germany.

The change from ICE cars to EV may also cause difficulties for governments in two ways. First, many countries rely on oil exports for a large part of their income. For example, Saudi Arabia receives 45 % of its gross national income (GNI) from oil exports. Secondly, other governments place an indirect tax on petrol (gasoline) and diesel as part of their general revenue. For example, Singapore charges S $ 0.41 per litre, approximately 17 % of the price.

Sources: Applied Energy 286 (2021) Economies of scale in battery cell manufacturing, 25 April 2022, and The Singapore Independent, 28 March 2022

Analyse, with the aid of a diagram, the likely impact of the change to EV on the labour market for workers producing ICE in southern Germany.

Evaluate whether the marginal revenue product theory (MRP) always explains the differences in wages.

Section C

Answer one question.

EITHER

What is the essential feature of nudge theory?

There has been an increase in labour productivity.

Which combination of effects is most likely?

Which policy is most likely to contribute to people ending up in a poverty trap?

A government has a policy where income tax is paid only after the first $ 20000 of income has been earned.

What would make the government's policy more equitable?

To reduce the damage done by cigarette smoking, the government of a country increases the indirect tax on cigarettes and makes it illegal to smoke in public.

Which combination of circumstances is most likely to result in government failure in its attempt to reduce the damage done by cigarette smoking?

When is a policy of income redistribution from rich people to poor people most appropriate?