IGCSE Economics 4.5. Economic growth Topic Practice

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Greece is the country that was worst affected by the European financial crisis that began in 2008. From the start of the crisis, no other European economy had such a large percentage fall in GDP. Greece's GDP fell by $9 \%$ in 2011 . One reason for this was a very strong foreign exchange rate.

Since 2014, other European economies have recorded positive economic growth rates. Among the reasons for this were successful supply-side policy measures and an improving global economy. The Greek government introduced market-friendly measures, including privatisation and labour market reforms. These measures brought back some investors and moved the Greek economy closer to a market economic system. However, Greece's output still fell. This may be due to the fact that none of the government policies have managed to change population trends.

The Greek population has been falling since 2010 . Greece has the third most rapidly ageing population in the world, behind Japan and Italy. The economy has not made good use of its older population because a significant percentage of workers retire earlier than the national retirement age of 67. For example, $74 \%$ of employees in the public sector retire before 61 years old. In addition, the crisis also led to high levels of emigration.

However, those living on some Greek islands have escaped the effects of the crisis. Income from tourism has continued to flow into the islands. An island called Ikaria has also managed to gain international attention as one of the healthiest places in the world. Approximately $30 \%$ of the people who live on this island, live until they are over 90 . Health problems are also much less frequent than those living elsewhere. Overall, however, Greece has managed to improve its Human Development Index (HDI) value as shown in Fig. 1.

Identify two reasons for the recovery of the European economies, other than Greece.

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Jakarta, Indonesia's capital city from 1945 to 2024, is one of the world's fastest sinking and most polluted cities. The city is expected to record a large decrease in real Gross Domestic Product (GDP) per head which could lead to a fall in living standards.

The free market can be blamed for air pollution and rising sea levels across some areas of Indonesia. Schools and other buildings have been flooded and roads have been destroyed. Floods have also led to an increase in diseases transmitted through water and mosquitoes which breed in water.

Farmland has been submerged, cutting off a vital source of income for many farmers. This has led to internal migration (people moving between regions of the same country). For example, some farmers have moved to areas where climate change has led to the production of different crops. There has been less pressure on both natural and local government resources in areas which people have left. However, these movements could lead to the collapse of entire communities and increase the inequality between workers who are more mobile and those who are less mobile.

Governments around the world have reacted to climate change by spending more on the environment. Table 1.1 shows the GDP and government spending on the environment of selected countries in 2019.

The Indonesian government has also reacted to environmental issues by relocating its capital city. The city of Nusantara will replace Jakarta as the capital city in 2024. The cost of building this new city is expected to be $\$ 32.5$ billion. This city will not only provide job opportunities but could also reduce the inequality between the different regions of Indonesia. Jakarta is located on the island of Java which is a wealthier region than Kalimantan. The new city, Nusantara, will be located in Kalimantan region. In addition, the government intends for the new capital city to be carbon-neutral. However, opponents of this project have said that the cost is too high. They also claimed that the project will only benefit a small number of wealthy and powerful people.

Calculate the percentage contribution of Jakarta to Indonesia's GDP in 2021.

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Source material: How will oil change Guyana?

Guyana was the fastest growing economy in the world in 2020. Sugar, gold and timber have accounted for a relatively high proportion of the country's output and exports for some time. In 2020, the sugar industry was hit by bad weather and falling global demand. In contrast, the output of gold and timber increased.

The main reason why Guyana's real GDP increased so rapidly was the increase in oil production. Oil was discovered offshore by a foreign multinational company (MNC) in 2015 and the MNC started production in 2019. It is predicted that Guyana will become the world's largest oil producer per head by 2025 .

The Guyanese government is planning to use some of the tax revenue it will raise from oil to spend on education and improvements to the country's infrastructure. Planned projects include new railway lines and stations. A more extensive and cheaper rail service may enable more people to work further from home and may influence the market for substitutes, such as car transport. The Guyanese government is also planning to spend some of the tax revenue on improving the country's access to the internet. Table 1.1 shows GDP per head and internet access in seven countries in 2020.

Guyana has experienced a slow growth in its population size in recent years. In 2020, its birth rate was 16.5 , its death rate was 6.8 and its net migration rate was -7.7 . With increases in oil production, emigration may decline and the country may start to experience net immigration. A higher population may affect Guyana in a number of ways including changing the size of its labour force and affecting the environment.

Explain how economic growth is measured.

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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.

Calculate the value of Gabon's oil production as a percentage of Gabon's GDP.

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Between 2009 and 2019, US real GDP increased every year. This was the result of, among other causes, low interest rates, land reclamation and an increase in the labour force. The higher US output brought a number of benefits but some workers lost their jobs. This was because while some industries expanded, others closed down. Income also became more unevenly distributed and pollution increased.

US exports and imports rose over this period. The growth of trade with China, a major trading partner of the US, was affected later in the period by increases in US tariffs on some Chinese imports. These increases were expected to change the US current account balance, output and tax revenue.

The US exports a range of products to China, including ice cream. China is the world's largest consumer of ice cream, buying a third of all ice cream consumed. Chinese consumers sometimes buy chocolate to eat with ice cream. In 2019, the price of chocolate increased.

In 2020, US macroeconomic performance changed. The country's price level rose more slowly, largely due to a decrease in consumer expenditure and a reduction in workers' bargaining power. The country's real GDP fell and unemployment rose. These changes influenced US macroeconomic policy. US government spending rose significantly as shown in Table 1.1.

The US central bank, the Federal Reserve, announced in September 2010 that it would allow the inflation rate to rise and would not increase the interest rate. In the past, central banks have aimed to keep the inflation rate low because of the effects that inflation can have on, for example, investment, exports, the distribution of income and tax revenue. The Federal Reserve stated that it wanted to raise economic growth which can increase income per head, employment and tax revenue.

Discuss whether or not economic growth benefits everyone in the US.

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.

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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.

Calculate the total financial sector contribution (in $) to Switzerland's GDP.

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Source material: Happiness

The United Nations has published a World Happiness Index every year since 2012. This index ranks countries according to life expectancy, freedom, social support, trust, generosity and GDP per head. New Zealand was ranked 8th in the World Happiness Index in 2019. The governments of both Bhutan and New Zealand now consider a number of influences on the happiness of their populations.

While more than half of Bhutan's labour force is employed in agriculture, most people in New Zealand are employed in the tertiary sector. Working conditions, working hours, the type of work and pay vary between the primary and tertiary sectors. Productivity is higher in all sectors in New Zealand than in Bhutan. This is partly the result of higher investment in capital goods and education in New Zealand. New Zealand also has a higher GDP per head. GDP per head ($) can influence net migration (number of people) as shown for selected countries in 2017 in Fig. 1.1.

In its 2019 budget, the New Zealand government said it would measure its progress not by increases in GDP but by increases in the quality of people's lives. To achieve this, it announced increased spending on some areas including mental health, child poverty and pollution. Some economists criticised this approach. They argued that the best way the government could improve living standards is to reduce income tax rates. This reduction could change government spending and the quantity of products that people buy, including cars.

Tax revenue had increased in New Zealand in 2019, partly because of a rise in revenue from corporation tax. It was, however, difficult to predict firms' future profits. This was because of uncertainty about what would happen to its GDP and its corporation tax rates.

Answer all parts to Question 1. Refer to the source material in your answers.

Calculate Bhutan's GDP in 2018.

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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.

Discuss whether or not an increase in the size of its coal industry will benefit the Australian economy.

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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.

Explain two reasons why Ecuador experienced a recession between 2014 and 2016.

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Istanbul is Turkey's largest city by population size. In 2014, its population was approximately 14 times more than it was in 1955. This could be due to increased migration from rural areas to cities and improved healthcare. Istanbul also has the highest output per head of all regions in Turkey.

Good transport links have contributed to Istanbul's economic growth. In addition to good land transport, Istanbul is also home to the $14^{\text {th }}$ largest airport in the world, measured by passenger numbers. From Istanbul, there is access to a market of $\$ 24$ trillion with 1.5 billion people within a flight time of 4 hours. In addition to affordable international air travel to and from Istanbul, domestic air travel is also very affordable. This is most likely due to economies of scale. There is also a high level of competition in this industry which influences prices and quality of service. The growth in transport industries, along with growth of financial services, has contributed greatly to Istanbul's growth rate as shown in Table 1.1.

Foreign investment is flowing into Istanbul. Multinational companies (MNCs) are finding Istanbul an attractive city to invest in because of the low cost of living. These MNCs are affecting employment, the level of technology and wages in Istanbul.

However, there is worry that such confidence in the Turkish economy may not last. Many companies have depended on borrowing for expansion. Increased interest rates around the world may make it harder for such companies to continue borrowing and also to attract new customers. If there are greater worries about safety for tourists in Turkey in the future, this may cause fewer people to book flights to Turkey.