IGCSE Economics 3.4.2—Mergers Topic Practice

Read the source material carefully before answering Question 1.

Although inflation in Switzerland in 2022 was above its target of $2 \%$, it was below the inflation rate of other high-income economies, such as the US ( $9.1 \%$ ), the UK ( $11.1 \%$ ) and Germany ( $7.9 \%$ ). 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 $\$ 500$ 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.

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.

Answer any three questions.
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.

In 2019, there was a merger between three Nigerian commercial banks to form Nigeria's largest commercial bank. In 2019, two US commercial banks merged to form the US's 6th largest commercial bank. In the US, the three largest banks controlled $32 \%$ of the market. In the US and Nigeria, large banks have opened more branches, carried out advertising campaigns and improved online banking.

Bank mergers can result in some bank employees losing their jobs. Unemployment did rise in Nigeria in 2019. This is likely to have affected the government's budget as both government tax revenue and government spending will have changed. Most commercial bank workers are well-educated. The number of years of education people receive can affect a country's birth rate. Fig. 1.1 shows average years of schooling and the birth rate in selected countries in 2019.

Some households in both Nigeria and the US, who spend more than they earn, borrow from commercial banks. Some children in Nigeria, in low-income households, do not have enough to eat due to the high price of food. A government subsidy to farmers could be used to help low-income Nigerian households. The subsidy could also help to reduce the deficit on the current account of its balance of payments. This will depend on Nigeria's inflation rate compared with other countries and incomes at home and abroad.

In the US, nearly $35 \%$ of children are overweight. One cause of this is the consumption of high-sugar food and drinks. The US government could impose a minimum price on such products, including chocolate. A minimum price could move the market closer to where social benefit equals social cost. However, some consumers think it would be unfair and some firms think it would reduce profits. A minimum price may also impose a cost on the government and its success would be influenced by how high the minimum price is set.

State why a merger between two commercial banks is a horizontal merger.

Read the source material carefully before answering Question 1.

In 2020, Jordan had a deficit on the current account of its balance of payments. This deficit contributed to a decline in Jordan's total demand in that year. This lower total demand was the most important reason why the number of workers was greater than the number of jobs available. Employment fell in most of Jordan's industries.

One of Jordan's main industries is tourism. Recent years have seen mergers between some of Jordan's tourism firms. These mergers reduced the prices of some holidays and raised their quality.

Jordan's population continues to grow. This is mainly because of net immigration, but also because the country's birth rate exceeds its death rate. Table 1.1 shows the birth rate and average age in six countries in 2020.

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Changes in the size of a country's population affect the market for a range of products including clothing. An increase in population size also puts pressure on the country's sources of energy. The Jordanian government has several large renewable energy projects, and plans to spend even more on such projects. Greater reliance on renewable energy, including wind and solar power, can reduce environmental damage and can be relatively cheap in the long run. However, most renewable energy generators, including hydroelectric power stations, are expensive to build. Also, wind turbines and solar panels rely on favourable weather conditions.

Some of the spending by the Jordanian government is financed by borrowing. At the start of 2021, the Jordanian central bank was expected to raise the rate of interest. This was because total demand was predicted to increase and there would be a return to positive economic growth. A higher interest rate might affect Jordan's foreign exchange rate and investment.

Explain two advantages the Jordanian economy may gain from the mergers between its tourism firms.

In 2020, the largest Thai commercial bank merged with a smaller commercial Thai bank. It was expected that the merger would affect the price charged for bank services and the amount that would be lent. Thai commercial banks operate in the private sector. A growing private sector can move an economy towards a market economic system.

Explain two reasons why a merger may result in higher prices for consumers.

The world's four largest accountancy firms experienced a decline in demand for their services at the start of 2023. One cause of this lower demand was a decline in mergers in other industries, including the chocolate industry. Three of the accountancy firms reduced the number of new workers they hired and the other accountancy firm announced job losses. The ability of workers to gain new jobs is influenced by their mobility.

Identify two advantages a firm may gain from merging with another firm.

What shows a forwards vertical merger?

A fast-food multinational bought a food-ordering website, in order to allow the multinational's customers to download menus and make advance payments.

Which term best describes this merger?

A clothes retailer borrows money to finance the opening of another clothes shop.
Which type of growth is this?

An airline takes over an online clothing company.
What is an advantage of such a move by the airline?

To be able to produce a car tyre, rubber is required.
If a car tyre manufacturer merges with a supplier of rubber, which type of merger is this?