Economic Growth, Unemployment and Inflation: Economics 0455 (Cambridge O Level / IGCSE)

A ski instructor is employed by a mountain hotel every winter, when snow allows the resort to open for tourists. Each spring, once the ski season ends and the resort closes for several months, the instructor is laid off. The same instructor is re-employed by the same hotel when the ski season begins again the following winter, and this pattern repeats every year.

Which type of unemployment does this describe?

Boravia is a small economy that measures its economic growth using real Gross Domestic Product (GDP).

Real GDP in Boravia was:

• Year 1: B$240 billion
• Year 2: B$252 billion
• Year 3: B$246 billion

(a) Define economic growth. Calculate the percentage change in Boravia's real GDP between Year 2 and Year 3, and state whether this shows that Boravia's economy grew or experienced a recession in Year 3. [3]

(b) Other than a fall in total demand, explain two other possible causes of a fall in real GDP such as the one identified in (a). [4]

(c) Explain two consequences of this recession for firms (producers) in Boravia. [4]

A labour force survey in the country of Calderin found that the labour force totalled 2,400,000 people, of whom 2,220,000 were in employment.

(a) Define unemployment. Use the labour force survey data above to calculate Calderin's unemployment rate. [3]

(b) In Calderin, a car factory closes permanently after the country stops producing petrol-engine cars, making 500 assembly-line workers redundant. These workers' existing skills do not match the skills needed in the industries now expanding in Calderin. Identify and explain the type of unemployment being described. [3]

(c) Explain two consequences of unemployment for the government of Calderin. [4]

The Consumer Prices Index (CPI) for the country of Fenlow rose from 180 in Year 1 to 189 in Year 2.

(a) Define inflation. Calculate Fenlow's rate of inflation between Year 1 and Year 2. [4]

(b) In Fenlow, total spending in the economy grew rapidly because of a sharp rise in consumer confidence and higher government spending, at a time when factories were already producing at full capacity. In the neighbouring country of Astoria, inflation was instead caused by a sharp rise in the world price of imported oil, which raised firms' fuel and production costs. Identify which country is experiencing demand-pull inflation and which is experiencing cost-push inflation. Explain your answer for each country. [4]

(c) Explain one consequence of Fenlow's inflation for savers, and one consequence for borrowers. [4]

A government wants to reduce structural unemployment among factory workers whose jobs disappeared after their factories automated production. These workers' existing skills no longer match the skills that employers in the country's expanding industries now require.

Which policy is most likely to directly address this specific cause of unemployment?

Larenth is a small economy.

• Real GDP: Year 1 = L$180 billion; Year 2 = L$189 billion
• Population: Year 1 = 40 million; Year 2 = 45 million

(a) Calculate the percentage change in Larenth's real GDP between Year 1 and Year 2. [2]

(b) Calculate real GDP per capita in Year 1 and in Year 2, and the percentage change in real GDP per capita between Year 1 and Year 2. [4]

(c) Using your answers to (a) and (b), explain why a rise in real GDP does not always mean that living standards in Larenth are rising. [2]

(d) Other than an increase in total spending, explain one other possible cause of an increase in real GDP such as the one calculated in (a). [3]

Aiden works as a bank teller but decides to resign because he wants to find a better-paid job elsewhere. He spends three weeks updating his CV, attending interviews and comparing job offers before starting a new position at a different bank.

Which type of unemployment does this describe?

Solvane's labour force survey recorded a labour force of 5,000,000 people. Before a recession began, 4,850,000 of these people were in employment. One year later, after the recession had taken hold, only 4,700,000 of the same 5,000,000-strong labour force were in employment.

(a) Calculate Solvane's unemployment rate before the recession and one year later, after the recession. [4]

(b) The rise in unemployment followed a fall in total spending across Solvane's whole economy, and affected many different industries at the same time, not just one. Identify and explain the type of unemployment shown by this rise. [3]

(c) Explain two consequences of this rise in unemployment for the workers who lose their jobs. [4]

Statisticians in Kestria track the cost of living using the Consumer Prices Index (CPI). The CPI is built from a "basket" of goods and services that a typical household buys, with each item weighted according to how much of a typical household's spending it represents, and the whole basket's cost compared with its cost in a base year, when the index is set to 100.

Kestria's CPI rose from 200 in Year 1 to 214 in Year 2. Over the same period, the CPI of Kestria's main trading partner, Doverth, rose by only 2%.

(a) Explain what is meant by the Consumer Prices Index (CPI), and describe briefly how it is constructed. [3]

(b) Calculate Kestria's rate of inflation between Year 1 and Year 2. [3]

(c) Using your answers, explain the likely effect of the difference between Kestria's and Doverth's inflation rates on the price competitiveness of Kestria's exports to Doverth. [3]

(d) Explain one consequence of Kestria's inflation for workers in Kestria whose wages stay the same in Year 2 as they were in Year 1. [2]

A country's labour force survey classifies every adult as either "employed", "unemployed" or "not in the labour force" (economically inactive).

Which one of these four people would be classified as unemployed by the survey?