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With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015 - Edexcel - A-Level Economics A - Question 1 - 2017 - Paper 3
Question 1
With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015. Figure 2: US dollar per 100 Chile pesos ... show full transcript
Worked Solution & Example Answer:With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015 - Edexcel - A-Level Economics A - Question 1 - 2017 - Paper 3
Step 1
With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015.
Answer
One likely reason for the change in the Chile peso exchange rate during this period is the fluctuation in copper prices, as reflected in the charts. Since copper is a significant export for Chile, a decrease in global copper prices can lead to a weakening of the peso against the US dollar. In 2014, a sharp decline in copper prices occurred, negatively affecting the country's income from exports and causing the peso to depreciate.
Step 2
Examine the likely impact of externalities of copper mining on firms and communities within Chile.
Answer
Copper mining in Chile generates both positive and negative externalities. Positive externalities may include job creation and increased local investment by mining companies, which can bolster economic activity in communities. Conversely, negative externalities such as environmental degradation and water scarcity can detrimentally affect local farming and fishing industries, leading to community unrest. The health impacts related to mining pollution can affect labor productivity, further complicating economic benefits for those communities dependent on mining.
Step 3
Apart from externalities, discuss the problems that Chile faces as a result of dependency on copper mining.
Answer
Chile's dependency on copper mining renders its economy vulnerable to price fluctuations. When copper prices plummet, government revenue declines, leading to budget shortfalls that impact public services and investments. This economic vulnerability may slow down diversification efforts, leaving Chile overly reliant on a single commodity. Additionally, the focus on mining can lead to neglect in other sectors, such as technology or agriculture, resulting in an unbalanced economy.
Step 4
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile.
Answer
To stimulate economic growth in Chile, policies could focus on diversifying the economy away from copper dependency. Microeconomic policies might include incentives for small and medium enterprises (SMEs) in sectors such as tech and agriculture. On the macroeconomic side, government investment in infrastructure and education can enhance productivity and innovation. Such diversification efforts would help buffer against shocks in global copper prices and promote sustainable economic development.
Step 5
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile's economy of changes in the level of investment.
Answer
Changes in the level of investment can significantly impact both microeconomic and macroeconomic aspects of Chile's economy. Increased foreign direct investment (FDI) can lead to technology transfer and job creation, bolstering productivity. On a macroeconomic level, higher investment levels contribute to GDP growth and can improve the trade balance, especially if investments lead to increased exports. Conversely, reduced investment may lead to stagnation, limiting economic growth and deteriorating living standards.