Trade and foreign direct investment (FDI) have propelled Costa Rica from an agriculture-dependent nation into a sophisticated exporter of medical devices and IT services. Active participation in regional trade agreements has kept the economy resilient. Even during global economic slowdowns, Costa Rica's high-tech manufacturing export hub has continued to expand. Between 2010 and 2022, the nation maintained a steady average annual GDP growth rate exceeding 4%.
Costa Rica's openness to commerce has integrated it tightly into North American supply chains. According to the World Bank, it has successfully transitioned to an upper-middle-income economy. The government now aims to solidify its position as a high-income, high-skill knowledge economy by 2035.
To attract multinational corporations (MNCs), Costa Rica established specialized free trade zones. A key pillar of this strategy has been fiscal incentives. The highly competitive corporation tax regime has been a cornerstone of both short-run and long-run economic growth. Additionally, its stable political climate and highly educated workforce have made it highly attractive compared to regional competitors. However, some economists warn that this has created a dual economy, where high-tech MNCs thrive while traditional domestic sectors struggle to compete.
Extract F states: 'The highly competitive corporation tax regime has been a cornerstone of both short-run and long-run economic growth.'
With the help of an AD/AS diagram, explain how a low rate of corporation tax may cause short-run and long-run economic growth.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.