A Level Economics: International Economic Issues (A Level) — Practice Questions (Cambridge 9708)

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available from your board.

Each question practises a skill tested in the June 2024 Paper 42. After each answer there is an examiner insight, a mark-scheme insight or a tip, and, where one matches, the real question to try next.

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Questions

1. Explain what is meant by globalisation, giving one of its features. [2]

2. A low-income country has a real gross national income (GNI) of $45 billion and a population of 30 million. (a) Calculate real GNI per head. (b) Explain why real GNI per head is an incomplete measure of the standard of living. [3]

3. A multinational company builds a large clothing factory in a low-income country. Explain how this foreign direct investment could raise the country’s standard of living in both the short run and the long run. [3]

4. Explain what is meant by transfer pricing and why it could harm a low-income country that hosts a multinational company. [2]

5. The exchange rate changes from $1 = 80 rupees to $1 = 100 rupees. (a) State whether the rupee has appreciated or depreciated, and calculate the percentage change in the value of the rupee against the dollar. (b) Calculate the rupee price of an imported good costing $50, before and after the change. [4]

6. State the Marshall–Lerner condition and explain why it matters when a country devalues its currency to reduce a current account deficit. [3]

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Answers

1. Globalisation is the growing integration of the world’s economies through closer international links [1]. Any one feature, for example: larger cross-border flows of goods, services, capital and people; production processes split across several countries; the spread of multinational companies [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 5): the mark scheme’s definition of globalisation covers world-wide trade links, flows of goods, services, capital and people between countries, and manufacturing split into stages carried out in different countries.

Source for the mark-scheme insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 mark scheme for Paper 42 (9708/42), paraphrased. Cambridge’s 9708 past papers page publishes the Paper 41 mark scheme from this series, not the Paper 42 one.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 5.

2. (a) Real GNI per head = $45 billion ÷ 30 million [1] = $1,500 [1]. (b) It is an average, so it hides inequality, and it ignores non-material aspects of living standards such as health, education, working conditions and the environment (or the informal economy) [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 5): the mark scheme describes the standard of living in two parts: a material part (real GNI per head and what it can buy) and a non-material part (health, education, social and working conditions).

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 5.

3. Short run: the investment is an injection that raises aggregate demand, creating jobs and incomes, with a multiplier effect on national income (actual growth) [1]. Long run: the new capital, technology and training increase productive capacity (potential growth, aggregate supply shifts right) [1]. Higher real incomes and employment raise real GNI per head, and tax revenue can fund health and education, improving the standard of living [1].

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 5): the better answers analysed both actual and potential growth; weaker answers did not carry the analysis through to incomes and the standard of living.

Source for the examiner insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 Principal Examiner Report for Teachers, Paper 9708/42 section, paraphrased.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 5.

4. Transfer pricing is when a multinational sets the prices charged between its own branches in different countries so that profits are recorded in a low-tax country [1]. The host country collects less tax revenue, reducing what it can spend on education and health [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 5): one evaluation point in the mark scheme is transfer pricing: a multinational shifting profits to a tax haven, which leaves a developing country less able to invest in education and health.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 5.

5. (a) More rupees are needed to buy one dollar, so the rupee has depreciated [1]. Value of 1 rupee: before $1 ÷ 80 = $0.0125; after $1 ÷ 100 = $0.01 [1]. Percentage change = (0.01 − 0.0125) ÷ 0.0125 × 100 = −20% (a 20% fall) [1]. (b) Before: $50 × 80 = 4,000 rupees; after: $50 × 100 = 5,000 rupees [1].

Tip: a 25% rise in the price of the dollar in rupees is not the same as a 25% fall in the rupee. Work out the value of one rupee in dollars before and after.

6. The Marshall–Lerner condition states that a devaluation will improve the current account only if the sum of the price elasticities of demand for exports and imports is greater than 1 [1]. Devaluation makes exports cheaper abroad and imports dearer at home [1]. If demand is price-inelastic, export volumes rise too little to make up for each export earning less foreign currency, and import volumes fall too little to make up for each import costing more, so the deficit may not improve (in the short run, when elasticities are low, it may even worsen before improving: the J-curve) [1].

Tip: the elasticities are added together, ignoring the minus sign for demand.

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Where marks are usually lost

• Defining globalisation vaguely, without mentioning flows of goods, services, capital or people.
• Stopping at higher GDP and not explaining the effect on income per head and the standard of living.
• Giving only short-run effects of investment and missing potential growth.
• Calculating the percentage change of the wrong currency after an exchange-rate change.
• Stating that devaluation always improves the current account, without the Marshall–Lerner condition.