Paper 3: 15 Mark Synoptic Questions (AQA A Level Economics): Exam Questions

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Extract C: Growth of the world economy is set to slow in 2019

The International Monetary Fund has forecast that world growth will fall from 3.7% in 2018 to 3.5% in 2019, affecting the markets for UK exports. Increasing protectionism risks reducing investment and global trade flows. If all tariffs currently under consideration were implemented by all countries, they would affect about 5% of global trade. Growth in the US has remained strong but economic activity in the eurozone and China has been weaker than expected. With continuing uncertainty regarding the UK’s future relationship with the EU, a slowdown in the world economy is not good news for living standards in the UK. Exports are important for UK firms, for employment and people’s incomes. However, since 2015, the pound has depreciated against most major currencies and this is expected to boost net trade and make a positive contribution to UK economic growth.

Explain how a sustained slowdown in the world economy is likely to affect living standards in the UK.

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Extract D: Falling oil prices hit the oil-exporting countries hard

In 2014, despite the rapid fall in the price of oil, Saudi Arabia and the other OPEC countries did not cut production. Some believe that they wanted to make shale oil production in the US unprofitable to weaken a growing threat to OPEC’s domination of the world oil market.

A fall in oil prices leads to a contraction of the oil sector in oil-exporting countries and also has other effects on their economies. For example, in the Middle East and North Africa, oil-based revenues often account for more than half of government revenue. A significant loss of government revenue may require a substantial reduction in public spending. A decline in oil prices reduces export revenues, leading to a deterioration in the current account of their balance of payments, usually causing a depreciation in their exchange rates. This is an important mechanism through which the economy can adjust, but it makes imports more expensive, adds to inflationary pressures and is likely to reduce living standards. It may also make it difficult to attract capital inflows and to finance both the balance of payments and budget deficits.

The Nigerian economy has been hit hard by low oil prices and falling oil production. The country went into recession in 2016, with real national income contracting by 1.5%. The annual inflation rate doubled to 18.6%, reflecting the weakness of the Nigerian currency. Even after cuts in capital spending, the budget deficit increased from 3.5% of GDP in 2015 to 4.7% of GDP in 2016.

Venezuela derives over 95% of its export earnings and almost half of government revenue from oil-related sectors. Falling oil prices aggravated Venezuela’s economic crisis and it is estimated that the economy contracted by 10% in 2016 after a similar fall in real GDP in 2015. In 2016, its inflation rate was around 275%. Worsening shortages of food, medicines and other consumer goods are a symptom of the country’s very fragile economy. Deteriorating public finances mean that Venezuela is a high-risk debtor, making it hard for the country to attract foreign capital. These difficulties are not all down to the fall in the price of oil. Nevertheless, a fall in the oil price makes it harder to deal with problems that are common to many less economically developed countries. 

Source: News reports, April 2017

Explain how a sustained low world market price for oil would be likely to affect the economic development of a less economically developed oil-producing country such as Nigeria or Venezuela.

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Explain why, in advanced economies, economic growth is usually accompanied by a fall in employment in manufacturing but an increase in employment in the service sector.