Practice paper · IGCSE Economics 0455 · Paper 2 (Structured Questions)
Original IGCSE Economics 0455 Paper 2 practice paper: 2 hours, 80 marks, a compulsory 20-mark case study and three of four 20-mark questions, with a full mark scheme.
Paper details Level: S4–S5 (IGCSE) | Subject: Economics 0455 | Time: 120 minutes | Marks: 80 (structured questions)
Paper structure and marks
| Part |
Questions |
Marks |
Notes |
| Question 1 (compulsory, parts (a)–(f)) |
1 |
20 |
Unseen case material; use the data |
| Questions 2–5, answer any three (each parts (a)–(d)) |
3 of 4 |
60 |
20 marks each; part (d) marked by levels |
| Total answered |
4 |
80 |
paper prints 100 marks of questions |
Section A source material
Source 1: The Republic of Santara
The Republic of Santara is a small open economy with a population of 15 million. Coffee accounts for 40% of its export earnings and employs a large number of rural workers. The table shows selected economic data for 2024 to 2026.
| Item |
2024 |
2025 |
2026 |
| Gross domestic product (nominal, US$bn) |
120 |
132 |
145 |
| Consumer prices index (2015 = 100) |
200 |
210 |
224 |
| Unemployment rate (%) |
9.0 |
8.2 |
7.5 |
| Coffee exports (thousand tonnes) |
400 |
380 |
350 |
| World price of coffee (US$ per tonne) |
3 000 |
3 400 |
3 700 |
| Government spending on education (US$bn) |
4.0 |
4.6 |
5.2 |
Other information: in 2026 the government imposed a 15% tariff on imported machinery, and US$60 million of machinery was imported that year. US$1 = 25 santara dollars (SD); during 2026 the santara dollar depreciated to US$1 = 28 SD.
The population in 2026 was 15 million, so GDP per head was about US$9 667 (US$14.5bn / 15 million).
The price of a packet of local rice rose from US$2.50 to US$3.00 and quantity demanded fell from 800 000 packets to 720 000 packets.
Section A questions (compulsory)
Answer all parts (a) to (f) of Question 1. You must use the information in Source 1.
(a) Define opportunity cost and illustrate it with an example of the government using farmland to grow coffee.(2 marks)
(b) Using Source 1, calculate the percentage change in coffee export earnings between 2024 and 2026.(2 marks)
(c) Using Source 1, calculate the inflation rate in 2026 and explain one effect of a rising inflation rate on the living standards of Santara’s workers.(4 marks)
(d) Explain two reasons why the government of Santara might increase its spending on education.(4 marks)
(e) Analyse the likely effects on Santara’s economy of the unemployment rate falling from 9.0% in 2024 to 7.5% in 2026.(4 marks)
(f) Discuss whether the government of Santara should tax coffee exports in order to reduce the economy’s dependence on a single export.(4 marks)
Section B questions (answer three of four)
Question 2: scarcity, opportunity cost and market systems (20 marks)
The city government of Minda has decided to replace a 400-space car park in the city centre with a shopping mall. The car park charges US$8 per space per day and opens 300 days a year, giving annual revenue of US$960 000. The mall is expected to generate US$2.5 million of rent a year, but nearby streets are already congested at peak times.
(a) Using the car park redevelopment as an example, explain the concepts of scarcity and opportunity cost.(4 marks)
(b) Explain how a market economic system allocates resources through the price mechanism.(6 marks)
(c) Analyse the possible effects of replacing the car park with a shopping mall on other road users nearby.(4 marks)
(d) Discuss whether the city government of Minda should use the land for public housing instead of a shopping mall.(6 marks)
Question 3: firms, costs and objectives (20 marks)
Sweet Bake is a small bakery with fixed costs of US$3 000 a month (rent and machinery) and variable cost of US$2 per loaf. It currently bakes 2 000 loaves a month at an average total cost of US$3.50; at 3 000 loaves the average total cost would fall to US$3.00. Sweet Bake employs 4 full-time workers, each working 500 hours a month at US$8 an hour, a wage bill of US$16 000 a month.
(a) Explain two factors that influence the demand for labour at this bakery.(4 marks)
(b) Explain why average total cost falls from US$3.50 to US$3.00 when output rises from 2 000 to 3 000 loaves a month.(6 marks)
(c) Analyse the effect on Sweet Bake of the national minimum wage rising from US$8 to US$9.50 an hour.(4 marks)
(d) Discuss whether a small firm should aim to maximise profit rather than sales revenue.(6 marks)
Question 4: government and the macroeconomy (20 marks)
In the city of Luoshan the inflation rate is 7% and the unemployment rate is 8%. Most government revenue comes from a 20% income tax: a worker earning US$2 000 a month pays US$400. Mortgage rates have risen from 4% to 6%, so the annual interest on a US$200 000 mortgage has gone from US$8 000 to US$12 000. The government is considering raising the income tax rate to 25%.
(a) Explain the difference between a budget deficit and a budget surplus.(4 marks)
(b) Explain how raising the income tax rate from 20% to 25% might reduce the inflation rate.(6 marks)
(c) Analyse the effect on households with a mortgage of mortgage rates rising from 4% to 6%.(4 marks)
(d) Discuss whether the government of Luoshan should give priority to reducing unemployment rather than reducing inflation.(6 marks)
Question 5: economic development and international trade (20 marks)
The Republic of Tara is a developing country with a population of 20 million, a birth rate of 32 per 1 000 and a death rate of 9 per 1 000. Textiles provide 40% of export earnings and employ 25% of the labour force. US$1 = 40 tara dollars, and after a depreciation US$1 = 44: an export shirt priced at 800 tara dollars was worth US$20.00 before and US$18.18 after.
(a) Explain two reasons why Tara’s population may be growing rapidly.(4 marks)
(b) Explain how a depreciation of the tara dollar might improve Tara’s current account of the balance of payments.(6 marks)
(c) Analyse how specialisation in textile production might raise living standards in Tara.(4 marks)
(d) Discuss whether free trade is always beneficial for a developing country.(6 marks)
Mark scheme and answers
Section A (compulsory, 20 marks)
(a) 2 marks
• （1）Definition: opportunity cost is the value of the next best alternative given up.
• （1）Application: using the farmland for coffee forgoes the next best use (for example growing food or building houses) and the value of that output.
(b) 2 marks
• （1）Method: 2024: 400 000 tonnes x US$3 000 = US$1.20bn; 2026: 350 000 tonnes x US$3 700 = US$1.295bn.
• （1）Answer: (1.295 − 1.20) / 1.20 x 100% = +7.9%, an increase of 7.9%.
(c) 4 marks
• （2）Calculation: (224 − 210) / 210 x 100% = 6.7% (1 mark method, 1 mark answer).
• （2）Effect: if wages rise by less than 6.7%, the real wage falls, purchasing power drops and living standards fall; the real value of cash savings is also eroded, hitting workers on fixed incomes hardest. Nominal GDP rose 9.8% that year but real GDP only 3.0%, so much of the measured growth was simply higher prices.
(d) 4 marks
• （2）Reason 1: education raises skills and human capital, so labour is more productive and potential output and growth rise (education was only 3.6% of GDP in 2026, so there is room to expand).
• （2）Reason 2: education is a merit good with positive externalities and is under-provided by the market; state funding widens access for low-income families and reduces inequality and poverty across generations.
(e) 4 marks
• （2）Benefits: more people in work raises household income and consumption, so aggregate demand, output and growth rise; tax revenue increases and welfare payments fall, improving the budget position.
• （2）Costs and limits: a tighter labour market pushes wages up and adds to cost-push inflation (inflation had already risen to 6.7% in 2026); the fall may also reflect discouraged workers leaving the labour force rather than more jobs being created.
(f) 4 marks
• （2）For: an export tax raises revenue that can subsidise other industries (tourism, light manufacturing) and diversify exports, reducing the impact of price volatility on income and employment.
• （1）Against: coffee is 40% of exports and a large rural employer, so a tax cuts farmers’ incomes and may destroy jobs; in 2026 earnings were only held up because price rose 23.3% while volume fell 12.5%.
• （1）Conclusion: it depends on how the revenue is used and on supporting measures such as retraining and compensation; justified if it funds genuine diversification, otherwise it mainly reduces efficiency.
Question 2: scarcity, opportunity cost and market systems (20 marks)
(a) 4 marks
• （2）Scarcity: resources are limited while wants are unlimited; there is only one plot of city-centre land, so it cannot be a car park and a mall at the same time and a choice must be made.
• （2）Opportunity cost: choosing the mall forgoes the car park; the value of the next best alternative is the US$960 000 a year of parking revenue (plus the parking convenience lost).
(b) 6 marks
• （2）Price as a signal: when consumer demand rises, price rises, signalling producers to supply more.
• （2）Price as an incentive: higher prices raise profit and attract resources (labour, capital, land) away from low-profit uses; falling prices drive resources out.
• （2）Price as a rationing device: only consumers willing and able to pay obtain the good; the market clears at the equilibrium price and resources move to their most highly valued uses without central planning.
(c) 4 marks
• （2）Negative externality: with 400 spaces gone, shoppers park on the street or circle looking for space, so congestion, journey times and fuel use rise, with more pollution and accident risk.
• （2）The cost falls on third parties (residents, delivery drivers, bus passengers): private cost is below social cost, a case of market failure that may require extra parking, a congestion charge or better public transport.
(d) 6 marks
• （3）For housing: shelter is a basic need and low-income households cannot afford private rent; public housing raises living standards and health and reduces homelessness, and a central site cuts commuting time and cost, bringing positive externalities such as community stability.
• （2）For the mall: US$2.5 million of annual rent is 160.4% more than the car park’s US$960 000 and can fund public services, and the mall creates jobs, business activity and tax revenue; city-centre land has a high commercial value, so the opportunity cost of forgoing it is large.
• （1）Judgement: it depends on the severity of the housing shortage, whether alternative sites exist and whether the rent really funds public services; if housing need is urgent, building the mall elsewhere and housing here is preferable.
Question 3: firms, costs and objectives (20 marks)
(a) 4 marks
• （2）Factor 1: the demand for bread. Higher demand means more output and more workers; falling demand means fewer hours or redundancies (derived demand).
• （2）Factor 2: labour productivity and the relative price of capital. If machinery can replace workers more cheaply, employers substitute capital for labour; a rise in the wage from US$8 to US$9.50 also makes employers want fewer hours.
(b) 6 marks
• （2）Fixed costs do not change with output: the US$3 000 of rent and machinery is the same at both output levels.
• （2）Average fixed cost is spread over more units: US$3 000 / 2 000 = US$1.50, but US$3 000 / 3 000 = US$1.00, a fall of US$0.50.
• （2）Average variable cost stays at US$2.00, so ATC falls from US$1.50 + 2.00 = 3.50 to US$1.00 + 2.00 = 3.00; total cost rises from US$7 000 to US$9 000 but cost per loaf is lower (economies of scale).
(c) 4 marks
• （2）Costs rise: the wage bill goes from US$16 000 to US$19 000, up 18.8%; with unchanged prices, profit falls and the bakery could make a loss.
• （2）Possible responses: raise prices (risking lost customers), cut hours or jobs, invest in machinery to raise productivity, or outsource; in the short run low-skilled jobs may go, though higher pay can improve morale and staff retention.
(d) 6 marks
• （3）For profit maximisation: profit funds survival and investment, builds retained earnings for machinery and downturns, rewards owners and pressures the firm to control costs and use resources efficiently.
• （2）For sales maximisation: market share brings economies of scale (as here, where higher output cuts ATC to US$3.00), brand recognition and bargaining power, which can raise long-run profit; small firms may also pursue non-profit objectives such as reputation and community ties.
• （1）Judgement: it depends on the firm’s stage and market structure. A cash-strapped small bakery should protect profit and cash flow first; where economies of scale exist and price competition is fierce, chasing market share can be rational.
Question 4: government and the macroeconomy (20 marks)
(a) 4 marks
• （2）Budget deficit: government spending exceeds its revenue (taxation) over the year, and the gap must be financed by borrowing, adding to national debt.
• （2）Budget surplus: revenue exceeds spending, so the government can repay debt or cut taxes; both are annual flows, unlike the stock of national debt.
(b) 6 marks
• （2）Disposable income falls: the worker on US$2 000 pays US$500 instead of US$400, i.e. US$100 less a month to spend, so consumption falls.
• （2）Aggregate demand falls: consumption is a large part of AD, so the AD curve shifts left, easing demand-pull pressure and slowing price rises.
• （2）Limits: if inflation is cost-push (energy or import prices), fiscal tightening does little; higher taxes may trigger wage claims and a wage-price spiral, and the policy works with a time lag.
(c) 4 marks
• （2）Payments rise: annual interest on a US$200 000 mortgage goes from US$8 000 to US$12 000, i.e. US$4 000 more a year (+50%), about US$333 a month.
• （2）Effects: lower disposable income and cuts to other spending (AD falls); some households fall into arrears or are forced to sell, pressuring house prices; with 7% inflation part of the burden is offset in real terms, but households on unchanged incomes still lose real living standards.
(d) 6 marks
• （3）For unemployment first: joblessness means lost income, poverty, skills decay and social problems; at 8% resources are idle, so expanding aggregate demand can raise output and employment together, and the unemployed bear the most direct cost.
• （2）For inflation first: 7% inflation erodes real wages (a 5% pay rise leaves real pay about 1.9% lower) and savings, hurts those on fixed incomes and export competitiveness; once expectations set in it is harder to reverse, and high inflation often ends in higher unemployment.
• （1）Judgement: there is a short-run trade-off (Phillips curve), but supply-side policies such as training, infrastructure and deregulation can improve both; with inflation at 7% and rising, stabilising prices first may avoid harsher measures later.
Question 5: economic development and international trade (20 marks)
(a) 4 marks
• （2）Reason 1: the birth rate far exceeds the death rate. With 32 births and 9 deaths per 1 000, the natural rate of increase is 23 per 1 000, about 2.3% a year.
• （2）Reason 2: better healthcare and sanitation cut the death rate and lengthen life expectancy, while the need for farm labour, limited access to contraception and education, and early marriage keep the birth rate high.
(b) 6 marks
• （2）Export prices fall: the 800-tara shirt drops from US$20.00 to US$18.18 (−9.1%), so foreign buyers demand more and export volume rises.
• （2）Import prices rise: imports cost more in tara dollars, so consumers switch to domestic goods and import volume falls; exports up and imports down improve the current account.
• （2）Conditions (Marshall-Lerner): export earnings rise only if the price elasticities of exports and imports sum to more than 1; if foreign buyers are price-insensitive, or exports use imported inputs whose costs also rise, the improvement is limited.
(c) 4 marks
• （2）Benefits: specialisation exploits comparative advantage and economies of scale, lowering costs and raising output and export earnings (textiles are 40% of exports); jobs and wages rise (25% of the labour force) and higher tax revenue can fund education and health.
• （2）Risks: dependence on one industry means a fall in foreign demand, cheaper rivals or new trade barriers hits exports and jobs together; low-skill assembly work can also hold wages down and limit upgrading.
(d) 6 marks
• （3）Benefits: free trade lets a country specialise by comparative advantage, giving consumers cheaper and more varied goods; exports bring foreign currency, jobs and technology transfer, and competition forces local firms to raise efficiency and exploit economies of scale.
• （2）Drawbacks: infant industries cannot compete with established foreign firms and may disappear with their jobs; primary-product prices are volatile and the terms of trade may worsen; multinationals may dominate and repatriate profits.
• （1）Judgement: free trade generally raises world output, but whether a developing country gains depends on its industrial structure, supporting policies (education, infrastructure, social protection) and how fair the rules are; temporary protection of an infant industry can be justified, permanent closure rarely is.
Levels of response for part (d) (6 marks each)
| Level |
Marks |
Descriptor |
| 4 |
5–6 |
Both sides analysed in depth with a clear, justified judgement; accurate use of economic concepts, logical development and relevant examples. |
| 3 |
3–4 |
Both sides discussed but analysis is limited, or only one side is developed; some attempt at a judgement with weak support. |
| 2 |
1–2 |
Only one side described, with little analysis or judgement and limited economic terminology. |
| 1 |
0 |
No relevant content, or the answer is entirely off the point. |
Grade guide (out of 80)
| Level |
Marks |
Descriptor |
| A* |
72–80 |
Accurate use of concepts on unseen material; balanced discussion with strong judgement. |
| A |
64–71 |
Clear analysis and accurate calculation; judgement present but occasionally thin. |
| B |
56–63 |
Good knowledge and analysis; calculations mostly right; limited evaluation. |
| C |
48–55 |
Basic concepts correct with simple explanation, but analysis lacks depth. |
| D |
40–47 |
Can describe points; calculation errors; little economic terminology. |
| E |
32–39 |
Fragmented correct knowledge; answers poorly organised. |
| F |
24–31 |
A little relevant knowledge with several misunderstandings. |
| G |
16–23 |
Can recognise only isolated terms. |
| U |
0–15 |
Below grade G standard. |
Suggested timing (120 minutes)
| Stage |
Minutes |
| Read Source 1 and plan the length of each answer |
10 |
| Section A, Question 1 (20 marks, six parts) |
30 |
| Section B, first question (20 marks) |
25 |
| Section B, second question (20 marks) |
25 |
| Section B, third question (20 marks) |
25 |
| Check calculations and question numbers |
5 |
Notices
• This paper follows the 0455 Paper 2 structure: 2 hours, 80 marks. Section A, Question 1 is compulsory (20 marks, parts (a) to (f)); in Section B candidates answer three of Questions 2 to 5, each worth 20 marks with parts (a) to (d). The paper prints 100 marks of questions; a candidate answers 80.
• Answers in Section A must use the data in Source 1; in calculation questions show your working, as a bare answer scores no marks.
• Part (d) of each Section B question is marked using the levels of response below; you must discuss both sides and reach a judgement.
• Calculators may be used. Answers and the mark scheme are in the answer PDF; sit the whole paper before checking.
• All questions are original and are not Cambridge past-paper questions; the grade bands are this paper’s own guide.
Related papers | 0455 Paper 1 multiple choice | 0455 Paper 2 exam technique
Other IGCSE practice papers | Maths 0580 Paper 2 | Physics 0625 Paper 2 | Chemistry 0620 Paper 2
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This is original TutorZone practice material, not Cambridge past-paper content. The structure quoted (2 hours, 80 marks, a compulsory 20-mark Section A and three of four 20-mark Section B questions) is taken from the Cambridge IGCSE Economics 0455 syllabus for 2027–2029, “Details of the assessment”.
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