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9708/21 Paper 2
Data Response and Essay
May/June 2020
1 hour 30 minute
Section A
Answer this question
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The recent increase in global oil prices has had a very large positive effect on the
country’s balance of trade and has also improved the country’s terms of trade
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It has used the
private sector to become the most productive and dynamic part of Nigeria’s economy
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” His company’s success shows what
private enterprise can achieve in a mixed economy especially if it is provided with the
right incentives by the government
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Start-up initiatives have been
encouraged and the need to be innovative has been increasingly recognised, leading to
the development of new goods, services and markets
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A ‘free trade zone’ on the edge of Lagos has been established where private sector
firms pay no business taxes to the government and there are now numerous start-up
enterprises that are thriving
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The
zone is located next to a deep sea port and has good road connections with both the
rest of Nigeria and other countries in the region
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In 2016 the output of Lagos was valued at US$136 billion
while Nigeria’s total national output was valued at US$405 billion
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In terms of an improved infrastructure and a supportive economic
environment, the government has given firms a greater opportunity to thrive
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[1]
In 2016, the output of Lagos was valued at US$136 billion while Nigeria’s total national
output was valued at US$405 billion
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58024%
1(b) Distinguish between a country’s balance of trade and its terms of trade
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The terms of trade refer to the average prices of a country's exports relative to the
average prices of its imports
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The balance of trade is concerned with the quantity and monetary value of goods
and services traded between countries
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In contrast, the terms of trade focus on the average prices of exports and imports
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An
improvement or deterioration in terms of trade indicates whether a country is receiving
more or less value for its exports concerning the cost of its imports
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[4]
The factor enterprise serves dual functions within an economy
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This organizational role is
crucial in facilitating the efficient use of resources
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The factor enterprise has been pivotal in driving the successful economic
transformation of Lagos
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Entrepreneurship plays a key role, actively encouraged through start-up initiatives,
resulting in a resilient and adaptable modern economy
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The city's
prominence in creative industries, such as music, fashion, film, and technology, not only
significantly contributes to the local economy but also positions Lagos as a cultural and
economic powerhouse in Africa
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[2]
Free Trade Zones (FTZ) can be considered a supply-side policy because they
primarily focus on improving the production capacity and efficiency of the economy,
which aligns with the goals of supply-side policy
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These start-up enterprises would help to
increase output and contribute to the Nigerian economy
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[4]
The measures to reduce protection through policies such as ‘free trade zones’ can
encourage specialisation and the development of comparative advantage in Nigeria
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In these zones, private
sector firms are provided with favourable conditions such as tax exemptions, reduced
bureaucracy, and improved efficiency
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For instance, in Lagos, the

establishment of a free trade zone next to a deep-sea port facilitates trade, making it
advantageous for businesses to specialize in activities related to international
commerce, logistics, and port services
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The favourable conditions within these zones
attract diverse start-up enterprises, fostering competition and innovation
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Through this diversification and innovation, the city and its free
trade zone develop unique capabilities, leading to the emergence of comparative
advantages
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1(e) Discuss whether government intervention to encourage private sector firms,
in a mixed economy such as Nigeria, is always likely to be successful
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The provision of the right incentives, as
highlighted in the case of Lagos, can stimulate economic progress
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Additionally, infrastructure development and a supportive
economic environment, as mentioned by the former governor of the Nigerian central
bank, showcase the positive impact of government intervention
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Private enterprise, particularly in Lagos, has
demonstrated its potential to drive economic transformation and become the most
productive part of the national economy
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The dynamism and innovation of the
private sector, especially in a mixed economy, contribute to the overall success of
government initiatives
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A

symbiotic relationship between a proactive government and a vibrant private sector is
essential for sustained economic growth and development
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[8]
The production possibility curve (PPC) shows the maximum level of output of each of
the two goods that can be produced with the available quantity and quality of resources,
using a given state of technology
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If the firm uses all its resources for the production of
cars, then it’ll be able to produce 1000 cars and no televisions
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Between these two extreme points, the firm can choose to produce any combination of
the two goods as represented by points A and B while maximising the total output
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However, it cannot do so because the point D
is outside the curve
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This indicates the scarcity of resources
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The points on the curve maximise the output
which means it has used the available resources efficiently
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Moving from one point to another on the PPC curve indicates opportunity cost
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This opportunity cost is
represented in the diagram by the movement from point A to point B
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[12]
The view that the only goods a government should produce are public goods is rooted
in economic theory and the rationale that certain goods and services exhibit
characteristics of non-excludability and non-rivalry, making them best suited for
government provision
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Public goods are characterized by non-excludability and non-rivalry, meaning that
individuals cannot be excluded from their benefits, and one person's consumption does
not diminish another's
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The
government is often the most efficient provider of public goods, as private markets may
fail to produce them due to the free-rider issue
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If a country invests in national
defence, all citizens benefit from the protection, irrespective of whether they contributed
financially
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However, limiting government production to public goods alone may overlook the
importance of merit goods
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While the
market may under-provide merit goods due to individuals not fully considering these
external benefits, government intervention can help ensure their adequate provision
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Governments may play a

crucial role in subsidising or directly providing education to address market
failures
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Overreliance on the
government for all goods may lead to inefficiencies and stifled innovation
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In conclusion, while the production of public goods is a vital role for governments, an
exclusive focus on them may overlook the potential benefits of government provision
of merit goods
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3(a) Explain, with the aid of a demand and supply diagram, two factors that might
cause an increase in the demand for foreign holidays
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When people experience an increase in their income levels, they tend to have more
disposable income available for discretionary spending, including leisure activities
such as travel
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Likewise, changes in exchange rates can significantly impact the cost of foreign
holidays
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A favourable exchange rate can make foreign holidays more affordable,
encouraging individuals to take advantage of the better value for their money in foreign
countries
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Higher incomes provide individuals with
more financial flexibility for discretionary spending, including travel, while favourable
exchange rates can make foreign holidays more affordable and attractive
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[12]
An indirect tax on foreign holidays can be effective in reducing the number of holidays
taken due to the increase in the overall cost of such holidays
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This is based on the economic principle that
as the price of a good or service rises, the quantity demanded tends to decrease
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However, the effectiveness of an indirect tax in reducing the number of holidays taken
may be limited
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People might
view holidays as essential for their well-being and quality of life, and a price increase
may not be sufficient to deter those who highly value the benefits of a vacation
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This group may be willing to absorb the increased
cost as it represents a small proportion of their overall income
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Thus, the elasticity of demand for foreign holidays plays a crucial role
in determining the effectiveness of the tax, and inelastic demand may result in only a
marginal reduction in the number of holidays taken
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If the demand for foreign holidays is elastic, meaning that consumers are
responsive to changes in price, the tax is more likely to achieve its intended purpose
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Moreover, the success of such a tax would also depend on the availability of viable
alternatives
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In conclusion, while an indirect tax on foreign holidays has the potential to influence
individuals' decisions by increasing the cost of such vacations, its effectiveness is
contingent on factors such as demand elasticity and individual preferences
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4(a) Explain, with the aid of a diagram, one demand factor and one supply factor
that can cause the depreciation of a foreign exchange rate
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The fall in the value of a currency caused by market forces is called depreciation
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One of the demand factors that cause the depreciation of a foreign exchange
rate is poor economic indicators of an economy
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For instance, a high inflation rate
decreases the export competitiveness of the economy
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The below graph shows
the depreciation of the dollar against the pound when the demand for the dollar
decreases
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When an economy’s imports increase, the
supply of its currency also increases as more foreign currencies are bought to finance
the imports
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The below graph shows
the depreciation of the dollar against the pound when its supply increases
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[12]

An appreciation of a country’s foreign exchange rate refers to a rise in the currency's
value caused by an increase in demand and/or a decrease in the supply of the currency
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Hence, net exports which is one of the components
of aggregate demand (AD), is likely to fall
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The figure below shows that if there was
no appreciation of the domestic currency, the AD might increase to AD1 causing the
price level to rise to P1
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Another way how a higher exchange rate may reduce inflationary pressure in an
economy is by shifting the aggregate supply curve to the right due to lower costs of
imported raw materials
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This will increase competitive pressure on domestic firms to restrict
price rises to maintain their sales at home and abroad
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This is because the fall in AD reduces economic activity
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They may not hire new workers or may not replace workers
who retire or might even lay off some workers
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Apparently, it is not likely to cause both a rise in inflation and

a decrease in employment because, with price levels rising moderately, profitability
increases and firms are likely to increase their investments which increases
employment
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For example, if many domestic firms rely
on imported raw materials and if their products are also consumed domestically, then
appreciation of the domestic currency is more likely to increase employment
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As a result, demand for exports will fall and consequently, employment will
fall too
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