1a) The surplus in trade in goods accounts might be offset by the deficit in trade in services

and primary income accounts, “9.2% fall in revenue from copper exports” creating an overall
deficit in the current account on the balance of payment.

1b) One policy Chile can use to reduce imports is by increasing tariffs on imported goods. A
tariff is a tax that raises the price of imported goods for consumers. This price increase may
discourage the purchase of imported goods, with the reduction in imports depending on the
price elasticity of demand for these goods. If demand is elastic, the reduction in imports will
be significant; if inelastic, the reduction will be less.

Higher tariffs can also increase government revenue from the taxes collected on imports.
This additional revenue can fund government expenditures, such as education, which in turn
boosts Aggregate Demand (AD) and fosters economic growth.

However, there are potential downsides. Retaliation from trading partners is a significant
risk, as they may impose tariffs on Chilean exports, potentially escalating into a trade war.
This could have adverse effects, especially since mining is a key sector of Chile’s economy.
Additionally, if the demand for imported goods is inelastic, Chileans may continue
purchasing them despite higher prices, leading to inflationary pressures. Overall, while tariffs
can reduce imports and generate government revenue, they may also create economic
challenges through trade disputes and inflation.

1c) The decrease of Chile’s Gini coefficient indicates that the level of income inequality
decreased during the period, more the population is receiving a fairer share of the national
income. The Gini coefficient is a way to measure how unequal things are in a group of
values, like income or profits. It ranges from 0, which means everyone is equal, to 1, which
means there is a lot of inequality. However, 44.4 still indicates that the income inequality in
Chile is more significant than lower income countries such as Haiti and El Salvador.

1d) Increasing government spending on education in Chile can positively impact the income
of poorer households by stimulating economic growth. As the government boosts spending,
it increases Aggregate Demand (AD), driving economic growth as long as the country is not
at its production bottleneck. Additionally, infrastructure projects and subsidies for education
can lead to higher employment rates by creating jobs.

However, there are limitations. The benefits of increased spending on education, such as
improved social mobility and reduced inequality, take time to materialise due to a time lag.
Furthermore, simply increasing spending does not guarantee a higher employment rate if
there is a mismatch between the skills acquired through education and the available job
opportunities. Therefore, the positive effects on poorer households may be limited without
aligning educational outcomes with market demands.

1e) The rise in copper prices is likely to benefit Chile’s economy in several ways. Firstly, the
increase in export revenue will directly contribute to GDP growth, driving economic
expansion. As mining accounts for 11% of Chile's GDP, the higher copper prices will lead to
greater profits for mining companies, which, in turn, will result in increased tax revenue for
the government. These funds can be used to reduce public debt or finance long-term growth
measures.
However, challenges may arise. The Dutch Disease risk could occur, where overreliance on
copper exports drives up the national currency, making other sectors less competitive and
hindering economic diversification. Additionally, the rise in copper prices could cause
inflationary pressures as aggregate demand increases, potentially leading to demand-pull
inflation.

In conclusion, while the rise in copper and lithium prices since 2020 is likely to significantly
boost Chile’s economic growth through higher exports and tax revenue, it also presents risks
related to economic imbalances and inflation.

2 a) A demand curve shows how the price of a product changes how many people want to
buy it. It typically goes down, which means when the price drops, more people want to buy it,
and when the price rises, fewer people want to buy it. The cause of a movement along the
demand curve is usually the price change of the good itself, as seen from the diagram, the
good is originally sold at 6, and its quantity sold is 6 units. When the price of the good
increases to 8, its quantity sold decreases to 4 units, when the price of the good decreases
to 4, its quantity sold increases to 4 units. The proportion of change in quantity demanded
changes is constant when there is a movement along the demand curve.

The cause of a movement of the demand curve is usually the price change of related goods,
either substitute or complement. For example, when the price of substitutes increases, the
demand for the particular good increases entirely, shifting the demand curve to the right,
hence the quantity demanded at the same price would increase. As seen from the diagram,
the good was previously traded at 6 with a quantity demanded of 6 units, when the demand
curve shifts to the right due to the increase in price of its substitutes, the good is now trading
at 6 with a quantity demanded of 8 units, therefore, the demand for the good is said to be
increased.
The effect that price changes in one product have on the demand for another product is
called Cross Elasticity of Demand (XED). XED looks at how much the demand for one
product changes when the price of another product changes. Substitute products will have a
positive relationship in demand, while complementary products will have a negative
relationship in demand. Disconnected goods will have no effect on each other's demand.

2b)
Income elasticity of demand (YED) measures how the quantity demanded of a product
changes in response to changes in consumer income. It is calculated by dividing the
percentage change in quantity demanded by the percentage change in income. If the
quantity demanded increases more than proportionally to the increase in income, the
product is income elastic, typically luxury goods. If the demand increases less than income,
the product is income inelastic, typically necessities. When economic growth, as consumer
incomes rise, products with income elastic demand, like luxury cars, will likely see a
significant increase in demand. On the other hand, products with income inelastic demand,
such as food and water, may not experience a major demand boost, as consumers already
purchase these necessities regardless of their increased disposable income. Understanding
YED helps businesses adapt their strategies to changes in income and consumer behavior.

Price elasticity of demand (PED) measures how much the quantity demanded of a product
changes in response to a change in price. If the percentage change in quantity demanded is
greater than the percentage change in price, the product is considered price elastic, usually
luxury goods. Conversely, if the percentage change in demand is less than the price change,
the product is price inelastic, typically necessities. During economic growth, inflation tends to
push prices up. Products with price elastic demand, like luxury cars, may experience a sharp
decline in demand as consumers hesitate to spend on non-essential goods. In contrast,
products with price inelastic demand, such as food and water, will likely see minimal demand
changes because consumers must purchase these necessities regardless of price
increases.

Income elasticity of demand (YED) is particularly valuable for businesses that sell goods
sensitive to changes in consumer income. YED helps predict demand shifts as incomes rise,
allowing businesses to adjust pricing, production, and marketing strategies to maximize
revenue. While PED is important for pricing decisions, especially when demand is highly
responsive to price changes, YED plays a more significant role during economic growth. By
understanding both YED and PED, businesses can optimize their pricing strategies and
adapt to changing economic conditions effectively.

4 a) The Labor Force Survey (LFS) is a common method for measuring unemployment. It is
based on internationally agreed definitions by the International Labour Organization (ILO)
and involves a household survey that asks a sample of the population about their
employment status. Individuals who worked at least one hour in paid employment or self-
employment are considered employed. Those without a job, but who have actively looked for
work in the last four weeks, are considered unemployed. People not looking for work, such
as students or retirees, are classified as economically inactive.

Another possible method could be the claimant count, it measures the unemployment by
counting the number of people who are claiming unemployment benefits from the
government. This method only includes those who are eligible for receiving benefits within
the country. The claimant count is relatively easier to obtain, however, it may not necessarily
reflect the true unemployment rate of the country.

A key challenge in both methods is hidden or informal employment. Workers in part-time or

temporary jobs, or those informally employed without contracts, may not be accurately
counted. These workers might be underutilized or excluded from official statistics, leading to
inaccurate unemployment and employment rate estimates. In conclusion, both methods face
challenges in capturing true unemployment, especially with hidden and underemployment.

4 b) Supply-side policies aim to boost an economy's productive capacity and enhance

market efficiency by shifting the Aggregate Supply (AS) curve to the right, helping reduce
production bottlenecks. Structural unemployment arises from a mismatch between workers'
skills and employer demands, often driven by technological changes, globalization, and
geographical immobility. Cyclical unemployment, on the other hand, occurs during economic
downturns when demand for goods and services falls, leading businesses to cut costs by
laying off workers.

To address structural unemployment, supply-side policies such as education and training

programs can help workers acquire skills needed in emerging industries, aligning their
abilities with market needs. Additionally, supporting expanding industries through research
and development, infrastructure investments, and innovation creates new job opportunities,
which can absorb workers displaced from other sectors. Infrastructure projects can also
mitigate geographical immobility, making it easier for skilled workers to move to areas with
higher demand for their expertise. These policies help reduce both structural and cyclical
unemployment by improving labor market efficiency and fostering new industries.

However, supply-side policies are less effective in addressing cyclical unemployment, which
is caused by a demand deficit. To reduce cyclical unemployment, expansionary fiscal and
monetary policies are more effective. Expansionary fiscal policies, such as increased
government spending, foreign investment, and exports, raise aggregate demand, creating
more job opportunities. Expansionary monetary policies, like lowering interest rates, make
borrowing cheaper, encouraging firms to invest and consumers to spend, thus boosting
demand and reducing unemployment.

In conclusion, while supply-side policies effectively address structural unemployment by

improving skills and labor market efficiency, expansionary fiscal and monetary policies are
better suited for reducing cyclical unemployment during economic downturns.