paper 3

Question 1

theory of comparative advantage

Answer 1

states that countries find specialisation mutually advantageous if the opportunity costs of production are different

Question 2

absolute advantage definition

Answer 2

exists when a country can produce a good more cheaply in absolute terms than another

Question 3

comparative advantage

Answer 3

exists when a country is able to produce a good more cheaply relative to other goods produced

Question 4

3 types of exchange rates

Answer 4

free floating- price purely determined by supply and demand
managed floating - determi9ned by market supply and demand but CB will try to prevent large changes in exchange rate on a day to day basis
fixed system - when government sets their currency against another and the exchange rate doesn’t change

Question 5

factors effecting floating exchange rates

Answer 5

interaction of demand and supply
exports and imports 
investment 
speculation ( most important in short term)

Question 6

impact of a change in the exchange rate

Answer 6

current account of balance of payments - marshall-lerner condition states that the sum of the Price Elasticities must be more than 1 to have a positive impact of the trade balance
j curve
economic growth and unemployment= increase exports decrease exports, increasing AD and employment
rate of inflation increases
FDI - cheaper to invest but may show that the economy in that country is failing

Question 7

factors influencing the demand for labour

Answer 7

wage rates 
demand for the product, derived demand 
prices of other factors of production
wages in other countries 
technology 
regulation

Question 8

factors affecting PED of labour

Answer 8

directly correlated to PED of the product
proportion of wages to the total costs of production
substitutes such as machinery
time

Question 9

supply of labour definition

Answer 9

ability and willingness of people to make themselves available to work at different wage rates

Question 10

Factors influencing supply of labour

Answer 10

wages
population size and distribution of age
non-monetary benefits
education/training/ qualification
trade unions and barriers to entry ( degree for teaching)
wages and conditions of other jobs
legislation - school leaving age / retirement age

Question 11

market failure in the labour market

Answer 11

occupational immobility - lack of skills
geographical immobility
excess supply
excess demand

Question 12

factors influencing elasticity of labour supply

Answer 12

level of qualifications and training
availability of suitable labour in other industries - if labour can be poached it is more elastic
time = elastic
vocational = inelastic

Question 13

wage determination in a perfectly competitive market

Answer 13

wages are determined by supply and demand and all workers are paid the same

Question 14

wage determination in the monopsony labour market

Answer 14

1 buyer of labour
mc , ac curve upwards
demand curve downwards
in order to attract more workers wage rate must be raised for all workers

Question 15

wage determination in monopoly labour market

Answer 15

existence of trade unions means they can operate as the only seller of labour
there are 2 ways they could increase wages:
set barriers to entry, or set wages at a specific rate and ensure members are not willing to work for less

Question 16

labour market issues

Question 16

labour market issues

Answer 16

skills shortages -
young workers -
retirement -
wage inequality -
zero-hour contracts - uncertain how much money people will earn each week
the gig economy - self employed people take short term contracts , may sacrifice their rights and their pay is unreliable
migration -

Question 17

public sector wage setting

Answer 17

• as trade unions are weak in the short run government can make whatever wage decisions they please
• 2010-2015 pay freeze puts downwards pressure
• in the long run if private sector wages rise people will leave the public sector so government must raise wages
• in the SR wages can be different but LR they are similar

Question 18

how government tackles immobility in the supply of labour

Answer 18

supply of houses
improve transport links
national advertising so people know about available jobs
introduce subsidies on houses / taxes in areas where there is labour shortages
moving public sector agencies out of London, preventing excess demand / supply in areas
improve occupational mobility:
vocational training can be increased, particularly for younger students
encourage further study, engineering degrees
training within work
targeted education

Question 19

Micro effects of expansionary fiscal policy

Answer 19

Crowing out
Solve market failures ( positive externalities / improves allocative efficiency)
Public sector impact ( where is the government spending)
X inefficiency
Profits for firms = dynamic efficiency

Question 20

Micro effects of contractionary fiscal policy

Answer 20

Less chance Crowing out ( loanable funds market )
Less chance of X inefficiency
Public sector/services impact
Inequality