Pearson Edexcel International Advanced Level Economics: Development strategies (YEC11) – Practice Questions

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 – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018, section 4.3.6 item 3, points a and b. The specification labels Units 1 and 2 as the International AS and Units 3 and 4 as the extra International A2 content, so this is Unit 4 material for the full International A Level only. All countries and figures are invented. Teaching is in the study guide and revision notes. See also the Edexcel economics hub and the printable checklist.

Questions

1. Country B cuts its tariff on imported tractors from 25% to 10%. The world price is 300.

(a) Calculate the percentage fall in the landed price. [2] (b) Price elasticity of demand for imported tractors is -2. Calculate the percentage change in quantity demanded. [1]

2. A floating currency moves from 20 to 25 local currency units (LCU) per dollar.

(a) Calculate the percentage fall in the dollar value of one LCU. [2] (b) Calculate the new LCU price of an import costing 40 dollars. [1]

3. A microfinance lender gives a loan of 500, repaid in six monthly instalments of 95.

(a) Calculate the total interest and the flat interest rate. [2] (b) The borrower’s small business earns an extra 105 a month. Calculate the monthly net gain. [1] (c) Explain why the flat rate understates the true cost of borrowing. [1]

4. A state railway is sold for 900m. The government borrows at 4%. The buyer expects annual profit of 117m.

(a) Calculate the annual interest the government saves. [1] (b) Calculate the buyer’s expected return on the price paid. [1] (c) Calculate the annual amount the government gives up if the forecast is right. [1] (d) State one policy to protect consumers after the sale. [1]

5. Country C trains technicians at a cost of 2,000 each. Each earns an extra 360 a year for 12 years. Use a 6% discount rate.

(a) Calculate the annuity factor and the present value of one technician’s extra earnings. [2] (b) Calculate the net present value per technician. [1] (c) State what your answer shows. [1]

6. A road costs 450m and brings benefits of 70m a year for 12 years. Use a 7% discount rate.

(a) Calculate the net present value. [3] (b) Calculate the net present value if costs overrun by 30%. [1] (c) Give one benefit of the road not captured in the 70m. [1]

7. Country D pegs its currency at 8 LCU per dollar. The market rate would be 10.

(a) An export is priced at 2,000 LCU. Calculate its dollar price at the peg and at the market rate, and the percentage by which the peg raises the price. [2] (b) The central bank loses 400m dollars of reserves a year and holds 1,600m. State how many years the reserves last. [1] (c) State one way to support the peg other than using reserves. [1]

8. A buffer stock authority faces demand Qd = 600 - 4P.

(a) After a good harvest, supply is 200 + 4P and the floor price is 56. Calculate the quantity bought and the cost. [3] (b) After a poor harvest, supply is 40 + 4P and the ceiling price is 64. Calculate the quantity released and the revenue. [3]

9. A joint venture in Country E earns pre-tax profit of 360m. Tax is 30%. The local firm owns 45% and a TNC owns 55%.

(a) Calculate profit after tax and the TNC’s share. [2] (b) Show that a larger share of pre-tax profit stays in Country E than if the plant were wholly foreign-owned. [3]

10. Country F puts a 40% tariff on imported car parts. The world price is 50. The domestic firm’s unit cost is 70 and falls 10% a year.

(a) Show that the tariff makes the landed price equal to the firm’s cost. [1] (b) Calculate the first year in which the firm’s cost is below the world price. [2] (c) Evaluate protectionism as a strategy for this industry. [6]

11. Country A: 70% of export earnings come from one crop with volatile prices. Fuel subsidies cost 18% of government revenue. Average schooling is 5 years. Only 12% of adults hold a bank account. Many state firms make losses, and rural roads are poor.

Assess whether market-orientated or interventionist strategies would do more for development in Country A. [12]

Answers

1. (a) Before: 300 x 1.25 = 375. [1] After: 300 x 1.10 = 330, so the change is (330 - 375)/375 = -12%, a fall of 12%. [1] (b) -2 x -12% = +24%. [1] [3] Examiner insight: Show both landed prices before the percentage. A bare 12% invites doubt about whether you used the tariff-inclusive price or the world price.

2. (a) 1/20 = 0.05 and 1/25 = 0.04 dollars. [1] (0.04 - 0.05)/0.05 = -20%. [1] (b) 40 x 25 = 1,000 LCU, up from 800. [1] [3] Examiner insight: The fall in the currency (20%) is not the same as the rise in the price of the dollar (25%). Say which one you are calculating.

3. (a) Total repaid 6 x 95 = 570, so interest = 70. [1] 70/500 = 14% flat. [1] (b) 105 - 95 = 10 a month. [1] (c) The balance owed falls each month, so the borrower has the use of less than 500 on average; the true annual rate is higher than 14%. [1] [4] Examiner insight: Explanations are stronger when they say why the rate is higher, not just that it is. Mention the falling balance.

4. (a) 0.04 x 900m = 36m. [1] (b) 117/900 = 13%. [1] (c) 117m - 36m = 81m a year. [1] (d) A price cap set by an independent regulator. [1] [4] Examiner insight: A policy to protect consumers must address the monopoly problem. “Fair prices” alone is too vague.

5. (a) Annuity factor = (1 - 1.06^-12)/0.06 = 8.384. [1] PV = 360 x 8.384 = 3,018. [1] (b) NPV = 3,018 - 2,000 = +1,018. [1] (c) Discounted benefits exceed the cost, so training is worthwhile on this basis. [1] [4] Examiner insight: Interpret the sign. A calculated NPV with no comment is weaker than one that links the sign to the decision.

6. (a) Annuity factor = (1 - 1.07^-12)/0.07 = 7.943. [1] PV = 70 x 7.943 = 556. [1] NPV = 556 - 450 = +106m. [1] (b) Cost 450 x 1.3 = 585, so NPV = 556 - 585 = -29m. [1] (c) For example, access for rural households or the attraction of FDI. [1] [5] Examiner insight: Name a specific benefit with a clear link to development. “It helps the economy” is too general.

7. (a) Peg: 2,000/8 = 250 dollars. Market: 2,000/10 = 200 dollars. [1] The peg raises the price by 50/200 = 25%. [1] (b) 1,600/400 = 4 years. [1] (c) Raise interest rates, or use capital controls. [1] [4] Examiner insight: Work out which way the peg is out of line. Here the currency is overvalued, so exports are dearer, not cheaper.

8. (a) At 56: Qd = 600 - 224 = 376. [1] Qs = 200 + 224 = 424, so the authority buys 48. [1] Cost = 48 x 56 = 2,688. [1] (b) At 64: Qd = 600 - 256 = 344 and Qs = 40 + 256 = 296. [1] Release 48. [1] Revenue = 48 x 64 = 3,072. [1] [6] Examiner insight: Use the support price, not the free-market price, to find both quantities. Using the market equilibrium is a common slip.

9. (a) Tax = 108m, so profit after tax = 252m. [1] TNC share = 0.55 x 252 = 138.6m. [1] (b) Local share = 0.45 x 252 = 113.4m. [1] Stays in the country = 108 + 113.4 = 221.4m, which is 221.4/360 = 61.5%. [1] A wholly foreign-owned plant leaves only the tax, 30%. [1] [5] Examiner insight: “Show that” needs both figures and a comparison. Giving only 61.5% leaves the claim unproven.

10. (a) 50 x 1.40 = 70, equal to the unit cost. [1] (b) Costs: year 3 = 70 x 0.9^3 = 51.0 (above 50); year 4 = 70 x 0.9^4 = 45.9 (below 50). [1] The first year is year 4. [1] (c) Credit these six points:

• Tariff gives time for learning to cut costs; the cost falls 10% a year. [1]
• The tariff needed falls each year, about 40%, 26%, 13%, 2%, so it can be phased out. [1]
• Consumers pay 20 extra per unit in year 0 (70 against 50). [1]
• Risk: firms lobby to keep protection and never become efficient. [1]
• Retaliation could hurt exporters, and other users of car parts face higher costs. [1]
• Judgement: justified if time-limited and the industry shows falling costs; weaker if cost falls stop. [1] [9] Examiner insight: A strong evaluation uses the data (the falling cost) and reaches a judgement conditional on time limits and results.

11. Credit developed points such as:

• Removing fuel subsidies frees 18% of revenue for schools or roads. [1]
• It raises prices for poor households, so cash transfers are needed. [1]
• Compensation requires administration that may not exist. [1]
• Privatising loss-making firms may cut losses and raise efficiency. [1]
• A private monopoly needs regulation, and job losses may follow. [1]
• Microfinance reaches the 88% without bank accounts, but rates are high and loans small. [1]
• A buffer stock band for the main crop stabilises export earnings and farm incomes. [1]
• Funds, storage and forecasting limit it, and a floor set too high builds stock. [1]
• Education spending raises productivity, but payback is slow and skilled workers may emigrate. [1]
• Road building lowers costs and links farms to markets, but is costly and prone to corruption. [1]
• Judgement: a mix, with subsidy reform helping to pay for schooling and roads, and a price band for the crop. [1]
• Justification: the crop dependence and low schooling are the binding constraints in Country A, so interventionist measures carry more weight, while market reforms fund them. [1] [12] Examiner insight: Use the data in the stem (70% crop dependence, 5 years schooling, 88% without accounts) and make a judgement about priority rather than listing strategies.

Where marks are usually lost

• Using the world price instead of the tariff-inclusive landed price.
• Confusing the fall in a currency’s value with the rise in the price of the dollar.
• Quoting a flat microfinance rate as the true cost.
• Using the market price instead of the floor or ceiling in buffer stock questions.
• Giving a sign for NPV without saying what it means for the decision.
• Treating all of a TNC’s profit as lost to the country, ignoring tax and local ownership.
• Describing strategies in turn with no comparison or judgement for the country in the stem.
• Forgetting that the effects depend on time, institutions and the size of the economy.

Next steps

• Review the revision notes and the study guide.
• Visit the Edexcel economics hub and tick off the printable checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics, Specification, Issue 2, June 2018, published by Pearson Education Limited. Section 4.3.6, Growth and development in developing, emerging and developed economies, item 3, points a and b.