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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 deteriorated due to a significant decline in world coal prices as shown in Figure 4. The price per tonne of coal dropped from a peak of around 55 by 2016. Given that coal is a major export for Indonesia, this fall in price negatively affects the country's export revenues. The reduced earnings from coal exports will lead to a weakening of Indonesia's terms of trade, as imports may become relatively more expensive compared to the decreasing revenues from coal sales.
Step 2
Examine the likely effects on the profitability of Indonesian rice farmers of the government’s increased investments in areas (Extract E, lines 43-48). Use a cost and revenue diagram to explain your answer.
Answer
The government's increased investments in infrastructure will likely reduce production costs for rice farmers. Improved roads and irrigation systems can lead to lower transportation costs and better resource management. Consequently, the supply of rice may increase, leading to lower prices if demand remains constant. However, enhanced productivity may also lead to an increase in revenue for farmers, offsetting the price drop. A cost and revenue diagram will show a rightward shift in the supply curve due to increased efficiency, leading to a new equilibrium price and quantity but potentially decreasing profit margins per unit sold.
Step 3
Discuss the benefits of aid to Indonesia.
Answer
Aid can provide Indonesia with critical resources needed for development, especially in sectors like education, healthcare, and infrastructure. Such investment can promote economic growth by improving human capital and enhancing productivity. Moreover, aid can support emergency relief efforts during natural disasters, a common occurrence in Indonesia. This assistance can help stabilize the economy during downturns and can lead to better governance by promoting accountability and transparency in projects funded by foreign aid.
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
Volatility in commodity prices like coal can have severe microeconomic implications for producers who face uncertainty in their revenues, leading to reduced investments in operations and local economies. Macroeconomically, price fluctuations affect foreign exchange rates and can lead to unstable economic growth. A dependence on coal means that Indonesia's overall economic stability may be compromised during periods of low prices, affecting government budgets and public spending. Diversifying the economy and reducing reliance on commodity exports is essential for long-term stability.
Step 5
Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia.
Answer
Supply-side policies, including infrastructure investments, can enhance productivity and lower costs for businesses, fostering economic growth at the microeconomic level. By making it easier for firms to operate, these policies can encourage more investments and job creation. Macroeconomically, such measures can boost GDP growth and improve the balance of payments if exports increase due to improved efficiency. However, if not effectively targeted, these policies may also lead to short-term inflationary pressures as costs rise in the economy, potentially negating some positive effects over time.