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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. Examine the likely impact of externaliti... 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
The change in the Chile peso exchange rate during this period can largely be attributed to fluctuations in copper prices, which are illustrated in the charts. As global copper prices dropped significantly around 2013, driven by reduced demand from major consumers like China, the Chilean economy—highly dependent on copper exports—likely experienced a decrease in foreign revenue. This decline would have exerted downward pressure on the Chile peso, causing it to depreciate against the US dollar as seen in Figure 2. Furthermore, decreased investment in the mining sector during this period could have compounded the peso's weakness.
Step 2
Examine the likely impact of externalities of copper mining on firms and communities in Chile.
Answer
Copper mining in Chile generates several externalities that significantly affect both firms and local communities.
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Environmental Impact: Mining operations are known to cause environmental degradation, including water shortages and soil contamination, which can adversely impact agricultural productivity in surrounding communities. This situation can lead to conflicts over water resources, affecting the livelihood of local farmers.
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Health Issues: The presence of mining firms may lead to increased health risks for local populations due to contamination and pollution. This can result in higher healthcare costs for families, straining public health resources.
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Economic Disparities: While mining firms contribute to economic activity and may provide jobs, they can also create income disparities as workers in the mining sector often earn higher wages compared to those in agriculture or local services. This inequality can foster social tensions in communities.
In conclusion, the externalities of copper mining can lead to long-term socio-economic challenges for Chilean communities, necessitating substantial policy interventions.
Step 3
Apart from externalities, discuss the problems that Chile faces as a result of dependency on copper mining.
Answer
Chile's heavy reliance on copper mining presents several significant challenges:
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Economic Vulnerability: The Chilean economy is highly susceptible to fluctuations in global copper prices. Any downturn in demand, such as that from China, can lead to economic slowdowns and reduced government revenues, exacerbating fiscal instability.
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Limited Diversification: The focus on copper mining limits economic diversification, making it challenging to cultivate other industries. This dependency can hinder innovation and the development of sectors such as technology and services.
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Labor Market Issues: With a significant portion of the labor force dedicated to copper mining, there is often a lack of workforce skills in other areas. This focus can lead to job scarcity in alternative sectors, particularly in times of economic downturn in mining.
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Environmental Sustainability: The environmental degradation associated with copper mining presents long-term sustainability issues. Diminished resources can lead to long-term economic challenges, including decreased tourism and agricultural productivity.
Considering these factors, Chile must develop strategies to diversify its economy and reduce dependency on copper to achieve sustained economic growth.