Cambridge A Level Economics 9708 — 2020 May/June Paper 4 · Variant 1

1 In pursuit of well-being It has been said that the mark of success of a government is raising the quality of life or the well-being of the people in the country. This is sometimes measured by the Human Development Index (HDI). Table 1.1 shows the rank order of selected countries by the HDI and compares it with the rank by Gross Domestic Product (GDP) of that country. In order to understand how people make decisions, governments in the United States (US), the United Kingdom (UK) and Australia established Behavioural Insights Teams. They came to be known as the Nudge Units as they used nudge theories from behavioural economics. It was hoped that this approach would help to achieve an increase in well-being as well as in economic growth and GDP. Nudge policies were used, with some success, to get people back to work, encourage them to pay their taxes on time and give them good reasons to save for future pensions or to study for improved qualifications. They were not, however, sufficient to eliminate government budget deficits which remained at a high level. There was an ever-rising demand for public services but this was not matched by an equal rise in tax revenues so the deficit increased. Eliminating the government budget deficit continued to be a problem. One method of dealing with the problem was to increase taxation. However, tax rates were already high and even higher tax rates would not result in the increase in revenue that was needed. An alternative option was to increase government borrowing. There might be a strong case to support economic growth, but increasing the deficit in order to achieve this could risk causing another financial crisis. A third option was to reduce government expenditure on public services. This could be achieved without causing a reduction in the quality of the service and a reduction in well-being if increases in productivity took place. Without continued increases in productivity, however, further cuts in spending could have serious long-term detrimental effects, especially in health provision and education. Table 1.1 Rank of selected countries by HDI and GDP in 2017 Rank HDI Rank GDP (millions US$) Norway 1 0.89 29 391 959 Australia 3 0.86 13 1 359 723 Germany 5 0.85 4 3 423 287 UK 13 0.83 5 2 496 757 Thailand 70 0.58 26 432 898 Botswana 103 0.43 115 15 564 Pakistan 117 0.38 43 251 487 Eswatini 121 0.36 157 3 938 Sources: RSA Issue 1, 2017 (a) What is meant by nudge theory? [2] (b) Consider whether the information provides any evidence that nudge theory could increase an economy’s GDP. [6] (c) Distinguish between demand-side and supply-side policies and identify and explain one demand-side policy and one supply-side policy from the information. [6] (d) The information is entitled ‘In pursuit of well-being’. Discuss whether the information supports the idea that GDP is a good measure of well-being. [6]

Mark scheme: Question Answer Marks 1(a) What is meant by nudge theory? 2 Policies designed to influence behaviour by persuasion or example in order to achieve one of the main government economic policy aims. 1(b) Consider whether the information provides any evidence that nudge 6 theory could increase an economy’s GDP. • paying taxes increases revenue which might be spent on projects to increase GDP • more people working reduces unemployment which increases income and might help economic growth • increasing saving for education might increase skill levels in the economy and improve productivity. 1(c) Distinguish between demand-side and supply-side policies and identify 6 and explain one demand-side policy and one supply-side policy from the information. Distinction (2) identify (2) explain (2) demand side – changes in tax rates, supply side – improving infrastructure, training, productivity, borrowing could be used to stimulate either demand or supply 1(d) The information is entitled ‘In pursuit of well-being’. Discuss whether the 6 information supports the idea that GDP is a good measure of well-being. HDI is said to be a measure of well-being. Countries are ranked by HDI. Some countries with low HDI also have low GDP, but some with higher HDI do not have highest GDP. Examples should be given. But the GDP is not by per capita and does not use PPP. There is no real evidence that GDP is a comparable accurate measure of well-being.

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2 Discuss whether competitive markets in the private sector are the best way to achieve an efficient allocation of resources. [25]

Mark scheme: 2 Discuss whether competitive markets in the private sector are the best 25 way to achieve an efficient allocation of resources. Explanation of efficiency. Discussion of what is meant by competitive markets and whether this means only perfect competition. Efficiency is achieved in perfect competition but other competitive markets may not and individual actions are not always best for society as a whole. Discussion of reasons for market failure and necessity/desirability of government intervention to achieve efficiency. L4 (18–25 marks): For an accurate discussion of efficiency, competition and market failure, with examples and a conclusion about the need for government intervention. No conclusion – maximum 21. L3 (14–17 marks): For a competent explanation of productive and allocative efficiency and more limited discussion of different competitive markets. Still expect a consideration of the reasons for market failure and the need for government. L2 (10–13 marks): For a briefer analysis of efficiency and of market failure with few examples and no comment about different types of competitive markets. No conclusion. L1 (1–9 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

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3 (a) Explain what is meant by a ‘consumer’s equilibrium position’ in indifference curve theory and how it can be used to form a demand curve. [12] (b) One of the world’s first filmed singing commercials advertised a soft drink. It stated that, for the same price, consumers would get twice as much of that drink than that of its major rival. This made it cheaper and was similar to a price reduction. Its rival responded by an advertising campaign stating that its own drink was superior to the first firm’s inferior product. Discuss whether it is possible to use diagrams from indifference curve theory to illustrate how a consumer might react to these two advertising campaigns. [13]

Mark scheme: 3(a) Explain what is meant by a ‘consumer’s equilibrium position’ in 12 indifference curve theory and how it can be used to form a demand curve. Explanation of consumer equilibrium using indifference curves. Equilibrium position should be determined initially, then for a change in price. L4 (9–12 marks): For a sound explanation of the analysis and a clear comment on how a demand curve is formed. A clear understanding of the principles involved. L3 (7–8 marks): For an accurate reference to the question but with a more limited analysis probably without a good explanation of the construction of a demand curve. L2 (5–6 marks): For a briefer explanation of the analysis and equilibrium position but with no link to the demand curve. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 3(b) One of the world’s first filmed singing commercials advertised a soft 13 drink. It stated that, for the same price, consumers would get twice as much of that drink than that of its major rival. This made it cheaper and was similar to a price reduction. Its rival responded by an advertising campaign stating that its own drink was superior to the first firm’s inferior product. Discuss whether it is possible to use diagrams from indifference curve theory to illustrate how a consumer might react to these two advertising campaigns. Analysis of income and substitution effects. The first drink could possibly be represented by a shift in the budget line for a price reduction. The consumer might substitute it for the rival drink. But the notion of a more superior drink might result in a negative income effect. L4 (9–13 marks): For a clear analysis of income and substitution effects and a reasoned account of the changes in consumer equilibrium using both effects. Accurate diagrams. L3 (7–8 marks): For a weaker analysis of the two effects or diagrams which contain slight inaccuracies. L2 (5–6 marks): For a poor analysis and weak diagrams confusingly presented. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

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4 ‘A firm is fully aware of market conditions and its best rational interest would be achieved by pursuing the clearly defined objective of maximising profits.’ Consider whether this statement has any merit in different market structures. [25]

Mark scheme: 4 ‘A firm is fully aware of market conditions and its best rational interest 25 would be achieved by pursuing the clearly defined objective of maximising profits.’ Consider whether this statement has any merit in different market structures. Candidates should consider each of the assumptions. Is the firm aware of market condition, is its best interest achieved by maximising profits and in which market structure might that be true. L4 (18–25 marks): For a sound discussion of under what market structure the firm will be fully aware of market conditions, and whether it is always best to aim to maximise profits. Consideration of contestable markets, alternative aims, price leadership, lack of information, degrees of competition and lack of information. Maximum 21 no conclusion. L3 (14–17 marks): For a competent comment but with consideration of only part of the assumptions and a less developed analysis. L2 (10–13 marks): For a weak comment on the assumptions and only a brief explanation of alternative aims. L4 (1–9 marks): For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

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5 After negotiation, the workers in an industry obtained from employers higher wage rates. The employers’ spokesperson said ‘the cost of the deal would have to be met through improved productivity or by reductions in other costs’. Analyse whether this deal can be incorporated into the economic theory of wages and consider the possible outcome for employment of such a deal. [25]

Mark scheme: 5 After negotiation, the workers in an industry obtained from employers 25 higher wage rates. The employers’ spokesperson said ‘the cost of the deal would have to be met through improved productivity or by reductions in other costs’. Analyse whether this deal can be incorporated into the economic theory of wages and consider the possible outcome for employment of such a deal. Candidates should discuss how the theory might incorporate a negotiated wage rate and the effect of this on profits and employment. Discussion of how the improvement in productivity and reductions in costs might influence the outcome. L4 (18–25 marks): For recognition of the theory applied to imperfect competition and a discussion of the effect on profits and employment of fixing a wage above the market rate. Consideration of shifting the MRP curve and/or the cost curve. L3 (14–17 marks): For a competent explanation of the theory but with a more limited discussion of the shifts in MRP and/or costs. L2 (10–13 marks): For a correct but very brief analysis and some poor evaluation. L4 (1–9 marks): For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant

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6 (a) Explain what economists mean by an inflationary gap and discuss why this is considered to be an economic problem. Use a diagram(s) to support your answer. [12] (b) How far would you agree that the use of monetary policy is the most effective way to solve the problem of an inflationary gap? [13]

Mark scheme: 6(a) Explain what economists mean by an inflationary gap and discuss why 12 this is considered to be an economic problem. Use a diagram(s) to support your answer. A clear definition of the meaning of the term ‘inflationary gap’ will be supported by an accurate, clearly labelled supporting diagram which identifies the inflationary gap. Some attempt should then be made to consider why this might cause economic problems. References might be made to the negative effect on expectations, private investment, the exchange rates, savers and debtors plus any other relevant effects. L4 (9–12 marks): For an answer that explains the meaning of an inflationary gap and which refers to at least three potential negative effects. The relative importance of each identified effect should be considered. L3 (7–8 marks): For an answer that identifies at least two negative effects associated with an inflationary gap and considers their relative importance or analyses three potential impacts on the economy associated with an inflationary gap. L2 (5–6 marks): For an answer that describes what is meant by an inflationary gap and supports this with a reasonably accurate diagram and some brief comment regarding potential negative effects on the economy. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 6(b) How far would you agree that the use of monetary policy is the most 13 effective way to solve the problem of an inflationary gap? Responses should indicate a clear understanding of what is meant by monetary policy and alternative methods of monetary control should be explained. References should then be made to the problems associated with an inflationary gap and an attempt made to discuss the effectiveness of alternative monetary policies used to reduce an inflationary gap. The effectiveness of these polices should be evaluated and compared with alternative fiscal/supply side policies. L4 (9–13 marks): For a detailed explanation of why monetary policies might solve problems associated with an inflationary gap. At least two types of monetary policy should be considered. Alternative policy measures should then be explained and discussed. A conclusion should then consider the relative effectiveness of monetary policy options compared to fiscal/supply side alternatives. L3 (7–8 marks): For analysis of how monetary policy might work in order to reduce an inflationary gap. A clear diagram will be provided and problems associated with an inflationary gap will be identified. Only a brief comment will be provided regarding alternative policy approaches. L2 (5–6 marks): For an answer that focuses upon explaining what is meant by an inflationary gap and describes alternative monetary policy options but does not discuss the effectiveness of either monetary policy or alternative policy options. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

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7 (a) ‘Developing countries have low levels of productivity and a high dependency ratio.’ Explain the meaning of these two characteristics and consider whether they are linked. [12] (b) Assess the view that foreign direct investment remains the key to economic growth in developing countries. [13]

Mark scheme: 7(a) ‘Developing countries have low levels of productivity and a high dependency ratio.’ Explain the meaning of these two characteristics and consider whether they are linked. Candidates should provide clear explanation of the terms productivity and dependency ratio. It is essential that the characteristics of both terms are established within the context of undeveloped countries. Responses might suggest that the two terms are linked, for example high dependency ratio might be associated with low productivity or an increase in productivity might lead to a reduction in the death rate and a reduction in the birth rate, due to its effect on the overall level of increase of GDP. Alternatively, it could be argued that the two are not necessarily related. A range of alternative responses would be acceptable provided they are supported by an acceptable economic rationale. L4 (9–12 marks): an answer that clearly explains both characteristics in the context of an underdeveloped country and then discusses how each characteristic might be linked. Responses should examine links which work both ways, for example, why an increase in productivity might affect the dependency and vice versa. Different approaches are acceptable but a conclusion should be provided. L3 (7–8 marks): For a clear explanation of both characteristics and their relation to an underdeveloped economy. Some attempt to establish links between these characteristics but the argument will not be fully developed. L2 (5–6 marks): For a limited attempt to describe the two characteristics but only provides a brief explanation of their relevance to an underdeveloped economy. A brief outline of potential links might be described but not discussed. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 7(b) Assess the view that foreign direct investment remains the key to economic growth in developing countries. Foreign direct investment should be explained referring specifically to the role of private multinational corporations (MNCs) including references to improving labour skills, building factories, promoting research and development. Economic growth should be clearly defined as the increase in real GDP in a specific time period. Alternative growth strategies such as export led growth, direct government investment, structural change might be considered. The importance of foreign direct investment should then be compared with the alternative strategies identified. L4 (9–13 marks): For an answer that clearly explains both characteristics in the context of an underdeveloped country and then discusses how each characteristic might be linked. Responses should examine links which work both ways, for example, why an increase in productivity might affect the dependency and vice versa. Different approaches are acceptable but a conclusion should be provided. L3 (7–8 marks): For a clear explanation of both characteristics and their relation to an underdeveloped economy. Some attempt to establish links between these characteristics but the argument will not be fully developed. L2 (5–6 marks): For a limited attempt to describe the two characteristics but only provides a brief explanation of their relevance to an underdeveloped economy. A brief outline of potential links might be described but not discussed. L1 (1–4 marks): For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

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