2 Since 1990, the population of Lithuania has fallen by one fifth because of net emigration. People usually leave in search of better living standards. In 2015, there were signs of improved macroeconomic performance as real GDP per head rose and unemployment fell. People expected that the decline in unemployment would affect the country's inflation rate and might also turn the government's budget deficit into a budget surplus. (a) Define budget deficit. (b) Explain two reasons why a country may experience a decline in living standards at the same time as an increase in real GDP per head. (c) Analyse how a fall in unemployment may increase a country's inflation rate. (d) Discuss whether or not a country will gain from the emigration of some of its people. 3 India and Ecuador are two major producers of bananas. India is the world's largest producer of bananas while Ecuador is the world's largest exporter. Multinational companies (MNCs) produce some of the bananas in both countries. The World Health Organization (WHO) recommends that each person should eat 400 grams of fruit and vegetables a day. To encourage people to eat more fruit and vegetables governments may use policy measures such as maximum prices and subsidies. (a) Define maximum price. (b) Explain two reasons why the supply of bananas may decrease. (c) Analyse the factors which lead an MNC to produce in particular countries. (d) Discuss whether or not a government subsidy given to fruit producers will benefit consumers.There is a range of factors that influence the supply of economic goods, including natural disasters. Recently a series of earthquakes in one country destroyed buildings, including factories and offices. One factory that survived has since increased its scale of production. This firm has employed more factors of production and has experienced a fall in its average cost of production. (a) Define economic good. (b) Explain two influences on what factors of production a firm uses. (c) Analyse, using a production possibility curve diagram (PPC), the effect of the destruction of some of its resources on an economy. (d) Discuss whether or not the average cost of production always falls when a firm increases its scale of production.1 Workers in Sri Lanka More people are being employed in Sri Lanka's service sector. A number of skilled workers are, for instance, employed in the country's banking industry. The manufacturing sector is also growing in importance. For example, the country's clothing industry employs more than a quarter of a million workers out of a labour force of eight million people. Most of the workers in the clothing industry are young women, some of whom are relatively unskilled. In recent years, the industry has employed more capital goods, which has raised fixed costs as a proportion of total costs. The rise in investment has unsettled the industry and caused workers to become more concerned about their job security. Wage rates in the industry are low although bonuses increase the amount clothing workers can earn. The largest clothing company in Sri Lanka is Brandix Lanka Limited. It uses its resources to produce both clothes and clothing accessories such as hangers. It sells its products to clothes shops in the European Union and in the United States of America. Brandix Lanka provides its workers with good medical facilities, as do many other clothing firms. Sri Lankan workers and trade unions are pressing for wage rises for clothing workers. However, Brandix Lanka and the other clothing firms are concerned that higher wages may reduce their competitiveness against clothing firms in other countries, including Bangladesh, where wages are lower. The firms claim that increasing the wage they pay may cause unemployment and inflation. In 2010 there were half a million unemployed workers in Sri Lanka and its inflation rate was 5.9%. Receiving higher wages might influence clothing workers in a number of ways. It might cause them to reduce the large amount of overtime they work. It may reduce the gap between their pay and the pay of bankers who, on average, are older than clothing workers. In addition, it might change their spending and saving patterns. Table 1 shows the income per head and the average amount saved per head in Sri Lanka from 2005 to 2010. Year GDP per head (US$) Amount saved per head (USS) 2005 4300 777 2006 4700 799 2007 4000 704 2008 4300 598 2009 4500 810 2010 5000 855(a) What is meant by 'fixed cost'? (b) Using a production possibility curve, explain how Brandix Lanka may allocate its resources between clothes and clothing accessories. (c) Using Table 1, comment on whether economists would expect to see the relationship shown between the changes in GDP per head and amount saved per head. (d) Using information from the extract, identify three reasons why someone may choose to work for a clothing firm despite the low wage. (e) Using information from the extract, calculate Sri Lanka's unemployment rate in 2010. (f) Discuss whether trade unions increase unemployment. (g) Using information from the extract, explain two reasons why clothing workers are paid less than bankers. (h) Discuss whether an increase in wages paid to clothing workers will cause inflation. 2 The equilibrium price of some newspapers rose in both India and the United Kingdom in 2011. However, demand for newspapers rose in India and fell in the United Kingdom. (a) What is the difference between equilibrium price and disequilibrium price? (b) Explain why the demand for newspapers may rise in one country but fall in another country. (c) Discuss whether an advertising campaign would increase the profit earned by a newspaper firm. 3 Traffic congestion is a problem in many cities. Among the possible ways of reducing congestion are allocating more resources to building roads, taxing petrol and subsidising bus travel. (a) Describe how resources are allocated in a market economy. (b) Explain why the social costs of car use are greater than the private costs. (c) Using a demand and supply diagram, analyse the effect of a tax on petrol on the market for petrol. (d) Discuss whether bus travel should be subsidised