IGCSE Economics 3.4. Firms Topic Practice

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Source material: Is there a future for Australian coal?

Australia is a major producer of coal. Most coal is used to produce electricity. In this process, carbon dioxide is emitted. Global demand for coal has declined in recent years as countries have tried to reduce pollution. There has been a switch to, for example, gas, offshore wind and solar power.

Coal is mined in each of Australia's six states but most is mined in Queensland and in New South Wales. In Queensland, some of the firms are very large. These firms employ both low-paid, unskilled workers and high-paid, specialist mining engineers, site managers and accountants. The firms use the latest excavators, mining drills, crushing equipment, earth movers and drones to detect maintenance issues.

Coal can be stored to meet changes in market conditions but storage costs can be high. It can also take years to construct a new coal mine. Table 1.1 shows the output and consumption of the seven largest producers in 2020.

Global coal production has fallen in recent years with most countries switching to renewable sources of energy. However, there are some countries where coal production is set to increase. There are plans in both Australia and India, for example, to open new coal mines. The Indonesian government sets a maximum price on coal to encourage the country's power stations to use it.

The Australian coal industry contributes to its government's tax revenue. There are, however, other influences on Australia's government's budget balance including changes in tax rates and state support for some of the country's industries.

Explain one economy of scale that could benefit a coal-mining firm.

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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.

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.

Answer any three questions.

Each question is introduced by stimulus material. In your answer you may refer to this material and/or to other examples that you have studied.

Read the source material carefully before answering Question 1.

St. Kitts and Nevis is a small, two-island country in the Caribbean. The country's three main industries are tourism, financial services and agriculture. Tourists are attracted by the country's beaches, coral reefs, forts, rainforests and shipwrecks. However, if rainforests continue to be cut down and soil erosion continues to pollute the coral reefs, killing off marine life, tourism may be discouraged. The St. Kitts and Nevis Government is also concerned that the social costs of tourism exceed the private costs.

St. Kitts and Nevis's financial services include a growing banking sector. Among the country's commercial banks are a few foreign multinational companies (MNCs). These MNCs are attracted by the country's relatively high incomes, the absence of personal income tax and a relatively high literacy rate.

Some of the country's main agricultural products are carrots, onions, peanuts and sweet potatoes. In 2017, the St. Kitts and Nevis Government introduced a training scheme to raise the productivity of onion farmers.

Other important industries in St Kitts and Nevis include healthcare and fishing. Table 1.1 shows healthcare spending as a percentage of GDP and life expectancy in six selected countries in 2022.

The small size of St. Kitts and Nevis's fishing industry means that it imports large quantities of fish. The country's fishing boats are small and some lack up-to-date equipment. A larger fishing industry, with bigger boats, may bring a number of benefits to the country.

Changes in the structure and performance of industries in St. Kitts and Nevis may alter the country's price level. Between 2018 and 2020, the country experienced deflation. This affected people's purchasing power, saving and debts. It also affected the country's exports and firms' investment decisions.

Discuss whether or not an increase in the size of its fishing industry would benefit St. Kitts and Nevis.

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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.

Discuss whether or not the profits of Ecuador's textile firms are likely to have increased between 2016 and 2019.

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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 $10 \%$ change in the price of coffee will cause a $3 \%$ 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.

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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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.

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Cambridge ranks number one amongst all UK cities in terms of the percentage of workers with a university qualification. It is also ranked number two in the UK in terms of the percentage of people aged 18-29. This is due to the high number of university students in Cambridge. Although the city has a relatively small population, its contribution to the overall size of the UK economy is significant.

Many firms in Cambridge operate in the education, healthcare, research and development, and hi-tech manufacturing industries. Cambridge firms' exports are highly knowledge-intensive, making them highly priced and price-inelastic in demand. Increasing global incomes have also increased the demand for services such as education from Cambridge.

The increase in the size of the education industry has the potential to reduce poverty. This is because a more educated labour force is able to earn higher wages and also have access to more information on health. Table 1.1 shows the percentage of population aged 25-64 with a university degree and the GDP per head in selected countries in 2019.

Many of the people who live in Cambridge are strong supporters of globalisation and free trade between countries. A large number of firms in Cambridge depend on export revenues.

Cambridge is an attractive location for growing firms because of the availability of many highly skilled and educated workers from all over the world. It has good infrastructure including access to ultra-fast broadband and transport links to other cities and international airports. However, firms may be faced with high land and office costs. In 2019, Cambridge was the city with the third highest house prices in the UK. Poor air quality may also discourage workers from moving to Cambridge.

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Mauritius is an island nation in the Indian Ocean. The economy of Mauritius has grown since it changed from an economy based on the primary sector to one based on the tertiary sector. The growth of the economy not only increased income per head but also improved healthcare in Mauritius. Life expectancy has increased and the infant mortality rate (number of infant deaths per thousand births) has fallen significantly.

Mauritius is known for many attractions, including its beautiful beaches, and more than a million tourists visit each year. Tourists from most countries only need their passport to visit Mauritius as a visa is not required. The tourism industry not only creates many jobs, it also raises tax revenue for the government. The tax revenue from the tourism industry is used to fund development projects that benefit the entire population, not just those working in tourism. There are also more than 32000 foreign firms based in Mauritius. Firms set up in Mauritius due to its fast growth and political stability, as well as having few regulations to set up and run a firm.

The government tries to attract more investment by providing good infrastructure. The government spent more than $\$ 1$ billion on infrastructure development in 2019. It upgraded the international airport on the island, the seaport, and public transportation around the island. This could reduce the cost of doing business in Mauritius and increase the size of a firm's market. Critics are worried, however, that the money has been used to fund projects which have not benefited the economy as much as spending on education or healthcare would have.

The government is also looking for new sources of economic growth, including increasing international trade and foreign investment. More international trade is seen as key to economic growth. Table 1.1 shows the percentage of international trade to GDP and the GDP per head in selected countries in 2019.

The Mauritian government encourages both inward and outward investment. By country, Mauritius is one of the largest foreign investors in India. Mauritian firms plan to invest in the new Special Economic Zones (SEZs) being set up in Kenya. Outward investment enables Mauritian firms to enter new markets in other countries, to import at a lower cost and increase access to foreign technology. However, the risk is that profit earned abroad may not be reinvested back to the domestic economy. Any changes in the international economy may also affect potential profits.

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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.

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Source Material: The eSports industry and Malta

eSports is now recognised as a sports competition, just like playing other competitive sports such as football and basketball. In eSports, participants compete through video games either as an individual or as part of a team. eSports also attracts large audiences who watch these online competitions. eSports is growing rapidly, both in terms of revenue generated and in the number of viewers. Demand has increased because of increases in incomes and decreases in the price of the technology needed to play or watch eSports. A change in social attitudes has also increased female participation in eSports.

The fast growth in this industry has attracted both private and public sector investment. Private sector firms sponsor various eSports teams and also advertise their products during eSports competitions. Public sector investment has come from the governments of China, Denmark, Malaysia and Malta, mainly in development and training programmes for young eSports participants. The government of Malta, a small island country, hopes to make Malta a main centre for eSports in Europe, to attract visitors for eSports events. The aim is for the eSports industry to contribute $1 \%$ to Malta's GDP, provide 3000 more jobs and improve the current account of its balance of payments.

Malta's service sector has always been important and contributes approximately $90 \%$ of its GDP. Malta is an attractive tourist destination due to its mild weather. The island is used as a location for many movies and TV series, which also attracts visitors who want to see the filming locations. However, to ensure growth is sustainable, the government sees the importance of economic diversification and does not want the economy to overspecialise.

To achieve this, the labour force has to be adaptable and the government has to invest in education and training. The government provides new scholarship schemes, organises work placements and brings in professionals from other countries to help train Maltese students. However, there are concerns that these measures may be too expensive and take too long to have a significant impact on the economy.

Female participation in the labour force is also encouraged. Table 1.1 shows the proportion of women in the labour force (\%) and GDP per head ($) of selected countries in 2019.

Explain two differences between private sector investment and public sector investment.