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2 (a) Using the data in Figure 4 and other information provided, explain the likely change to Indonesia's terms of trade since 2011 - Edexcel - A-Level Economics A - Question 2 - 2018 - Paper 3
Question 2
2 (a) Using the data in Figure 4 and other information provided, explain the likely change to Indonesia's terms of trade since 2011. (b) Examine the likely effects ... show full transcript
Worked Solution & Example Answer:2 (a) Using the data in Figure 4 and other information provided, explain the likely change to Indonesia's terms of trade since 2011 - Edexcel - A-Level Economics A - Question 2 - 2018 - Paper 3
Step 1
Using the data in Figure 4 and other information provided, explain the likely change to Indonesia's terms of trade since 2011.
Answer
Since 2011, Indonesia's terms of trade have likely experienced a decline due to fluctuating global coal prices. In Figure 4, we observe a downward trend in coal prices from around 60 per tonne in subsequent years. Given that coal is one of Indonesia's major exports, this reduction impacts the value of exports, leading to unfavorable trade balances. Additionally, as Indonesia's economy is heavily reliant on commodity exports, the depreciation of commodity prices likely affected the purchasing power of the Indonesian rupiah, worsening terms of trade as the price of imports remained stable or increased.
Step 2
Examine the likely effects on the profitability of Indonesian rice farmers of the government's increased investment in dams (Extract E, lines 43-48). Use a cost and revenue diagram to support your answer.
Answer
The government's increased investment in dams will likely enhance the profitability of Indonesian rice farmers by improving irrigation and agricultural productivity. With better water management, farmers can expect higher yields, reducing the cost per unit of production. For the cost and revenue diagram:
- Draw the average total cost (ATC) curve, which shifts downwards due to lower variable costs.
- The average revenue (AR) curve remains constant if market prices stay stable, leading to a potentially higher profit margin area. This investment not only allows for increased output but also stabilizes rice supply, contributing to more predictable revenue streams for farmers.
Step 3
Discuss the benefits of aid to Indonesia.
Answer
Aid to Indonesia provides multiple benefits, particularly in infrastructural development and poverty alleviation. Financial assistance can facilitate projects that improve education and healthcare, addressing significant social issues. Moreover, aid often supports economic growth initiatives, enhancing trade stability through better infrastructure such as roads and irrigation systems. These improvements can lead to increased foreign investment, boost local industries, and create jobs. Furthermore, the development of social programs funded by aid can strengthen the social fabric, contributing to long-term economic stability.
Step 4
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal.
Answer
The volatility of commodity prices like coal has distinct microeconomic and macroeconomic effects on Indonesia. Microeconomically, fluctuations can lead to instability in the income of firms reliant on coal production, affecting their operating decisions and potentially leading to layoffs or reduced investments. Increased uncertainty may deter new entrants into the market. Macroeconomically, sharp declines in coal prices can lead to lower GDP growth rates, impacting government revenues and restricting public spending. This can exacerbate economic problems like unemployment and inflation, particularly in regions dependent on coal mining.
Step 5
Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia.
Answer
The supply-side policies introduced in Indonesia are likely to enhance productivity through improved infrastructure and investment in human capital. Microeconomically, these policies may lower production costs for businesses, incentivizing expansion and innovation. Increased efficiency can lead to higher output and competitiveness. On a macroeconomic level, these policies should drive economic growth by increasing the productive capacity of the economy, potentially attracting foreign investment. However, the effectiveness of these policies depends on proper implementation and sustainability. If poorly administered, they could lead to resource misallocation or increased public debt.