Paper 3 type questions on national income (answers)

Maximum mark for this question is 30

1. Zarundi is a small Pacific island nation whose income is derived primarily from the export
of rare metals used in mobile phones as well as tourism. They are reliant on imports for most
of the goods and services that they consume. Their economic figures are as follows:
Net property
Year GDP (M$) Population income from Interest rate
abroad (M$)
2016 2,005 400,100 300 6%
2017 1,775 355,000 450 7%
2018 1,593 325,000 700 9%
2019 1,401 295,000 975 10%

(a) Complete the following table by completing the following blanks: [2 marks]. The
numbers in brackets indicate negative amounts.

GDP GNI GDP per GNI per

Year GDP (M$) GNI (M$)
growth % growth % capita $ capita $
2016 2,005 2,305 - - 5,011 5,761

2017 1,775 2,225 (11.47) (3.47) 5,000 6,267

2018 1,593 2,293 (10.25) 3.06 4,901 7,055

2019 1,401 2,376 (12.1) 3.62 4,749 8,054

(b) Calculate the % change in both GDP per capita and GNI per capita in the period
2016 to 2019? [2 marks]
The change in GDP per capita between 2016 and 2019 is (5.23%)
The change in GNI per capita between 2016 and 2019 is (39.8%)

(c) Explain why Zarundi's GNI is significantly higher than the nation's GDP figures? [2
marks]

The answer can be explained by very high rates of net property income from abroad which
have contributed significantly to GNI but not GDP. This is probably the result of residents
leaving the island in significant numbers, as shown by the falling population figures. With
many Zarundi citizens leaving the island we would expect significant monies to be
repatriated back to family members who have remained in Zarundi. It is highly likely that the
majority of those leaving the island are young, fit, economically active people who have
found work in neighbouring countries - perhaps Australia or New Zealand. As more
economically active people leave the island the impact on GDP is likely to be negative (as

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shown by the table) but the effect on GNI positive. A statement also supported by the
information in the table.

(d) Explain whether living standards have improved or worsened for the citizens of
Zarundi between 2016 and 2019? [2 marks]
2 marks for a recognition that it is unclear from the information above. While there has been
a significant increase in income levels in the economy we do not know the rate of price
changes or the distribution of income within families. The increased income levels may
simply have been eaten up by higher prices or simply be in the hands of a small number of
households whose family members are sending significant remittances back to their families.
2 marks for a recognition of the impact of economic growth on sustainability within the
economy. Before answering this question we would also need additional information on the
sustainability of economic growth in the country. The country relies heavily on tourism and
the mining of rare metals which may be unsustainable long term and be degrading the natural
environment of the nation.

(e) Using an appropriate diagram explain whether the mining of rare earths might lead
to market failure in Zarundi. [4 marks]
2 marks for a suitable diagram illustrating a good where the MSC is higher than the MSB of
production. The diagram should illustrate an output level of Q1, above the socially optimum
level of Q2. The green triangle represents the welfare loss through over production of the
mineral.
2 marks for an explanation that the mining of rare earths might lead to market failure in the
small island nation, if the production of the mineral leads to significant costs to a third
party. For example, this might be in the form of pollution, which may damage the beauty of
the natural environment or degradation of the soil, which might otherwise be used for
agriculture purposes.

(f) The trading balance of Zarundi is summarised in the following table:

Net trade Net trade as a

Year Exports (M$) Imports (M$)
balance (M$) % of GDP
2016 150 130 20 0.99

2017 190 145 45 2.53

2018 200 170 30 1.88

2019 235 195 40 2.86

(i) Complete the following table by completing the following blanks: [2 marks].
One correct mark for a correct calculation of net trade balance and two for a correct
calculation of net trade as a % of GDP.

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InThinking www.thinkib.net/Economics 2
(ii) Provide two reasons why the trade balance may have improved between 2016 and
2019? [2 marks]
Given the nations reliance on the production and export of the rare metal found in smart
phones, the only plausible explanation for the growth in net trade is a result of a rise in either
the price and / or volume of sales of the metal.

(g) Outline two steps that the Zarundi government could make to encourage greater
domestic demand in the country? [2 marks]
To reduce their dependence on remittances from expatriate family members and encourage
both domestic consumption and investment, the government could place a tax on remittances
and ensure that the revenue gained contributes towards improvements in the domestic
economy - improvements in education, health and infrastructure. [2 marks]
The government could also reduce interest rates in the economy to encourage greater
consumption levels - interest rates rose throughout the period. [2 marks]

(h) Explain the impact of the rise in interest rates between 2016 and 2019 on the
Zarundi economy? [2 marks]
The government has increased interest rates in the economy significantly, reducing private
consumption and investment levels in the domestic economy. This will have caused a
negative impact on aggregate demand, contributing to the falls in GDP during this
period. However, it will have encouraged savings levels and also reduced inflationary
pressures in the economy. [2 marks]
Higher interest rates will also have contributed to the large levels of remittances sent back to
the island by expatriates working abroad. This is because Zarundi citizens living overseas
may have been attracted to high interest rates in their home country and therefore chose to
send their money back to Zarundi rather than depositing it in banks, where they are currently
employed - presuming that those nations offered lower interest rate than Zarundi. [2 marks]

(i) Using the data provided and your knowledge of economics, recommend a policy
which the government of Zarundi could introduce that might lead to increased levels of
economic growth in an economy. [10 marks]
Possible policies may include (but are not restricted to):
• demand side policies
• supply side policies
• policies aimed at deregulation of the labour market
• policies aimed at protection of domestic markets
• a combination of policies.

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Responses in section (i) should be graded according to the following mark bands:
Maximum mark 10

Criteria Mark
There is no clear policy answer to the question but some limited: 1-2
• Appropriate policy
• Use of economic terms
• Application of economic theory
• Use of information from the text to support the recommendation
• Evaluation / balance
There is a policy answer to the question with limited: 3-4
• Appropriate policy
• Use of economic terms
• Application of economic theory to support the recommendation
• Evaluation / balance
There is a clear policy answer to the question with satisfactory: 5-6
• Appropriate policy
• Use of economic terms
• Application of economic theory
• Use of information from the text to support the recommendation
• Evaluation / balance
There is a clear policy answer to the question with good: 7-8
• Appropriate policy
• Use of economic terms
• Application of economic theory
• Use of information from the text to support the recommendation
• Evaluation / balance
There is a clear policy answer to the question with excellent: 9-10
• Appropriate policy
• Use of economic terms
• Application of economic theory
• Use of information from the text to support the recommendation
• Evaluation / balance

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InThinking www.thinkib.net/Economics 4