Cambridge A Level Economics 9708 — 2023 Oct/Nov Paper 4 · Variant 1

1 Economic decline in 2020 In 2020, Japan suffered its third quarterly decline in gross domestic product (GDP) in a row. The size of its real GDP shrank to its lowest level since 2011 when the country was suffering from 20 years of deflation and economic stagnation. In 2020, the economy was not helped by a previous increase in sales tax, the COVID-19 pandemic and the trade war between the world’s biggest economies, the United States (US) and China. They were Japan’s two most significant trading partners; 19.9% of exports went to the US and 19% to China. Table 1.1 gives some economic indicators for Japan for selected years. Table 1.1 Selected economic indicators for Japan, 2016–2019 2016 2017 2018 2019 Central bank rate of interest (% per year) 0.1 0.1 0.1 0.1 Change in industrial production (% per year) 0.0 3.1 1.1 0.1 Change in retail sales (% per year) 0.6 1.9 1.7 0.1 National debt (% of GDP) 236 234 236 237 Economic growth (% change in GDP per year) 0.5 2.2 0.3 0.7 In 2020, the International Monetary Fund (IMF) warned that the global economy was facing its worst recession since the world depression in the 1930s. Japan’s economy shrank by 7.8% between April and June of 2020, while the US economy contracted by 9.5% and China’s by 3.2%. Japan, which was the world’s fourth largest exporter, incurred an overall trade deficit of US$15.2 billion for 2019, an increase of almost 50% on the trade deficit for 2018. In 2020, exports fell by a further 18.5% in the third quarter, mainly caused by a decline in Japan’s motor vehicle exports. In that quarter, its main car producer, one of the world’s biggest car companies, made its smallest quarterly profit in nine years as sales halved. The government of Japan used expansionary fiscal and monetary policies to try to stimulate the economy. Low interest rates had been used by the central bank since 2016. In August 2020, economists said that despite this stimulus to encourage growth there was a chance economic activity may stagnate even further if major nations again adopted more restrictive measures, such as lockdowns, to combat any reoccurrence of the pandemic. Source: ‘Japan’s economy slides into record decline under pandemic pressure’, Martin Strydom, The Times, 18 August 2020 (a) With reference to Table 1.1, what indicates that Japan’s government had borrowed substantially? [2] (b) Although Japan was the world’s fourth largest exporter, it had suffered trade deficits. Explain how this might have happened. [4] (c) Consider whether the evidence provided shows that Japan’s economic decline in 2020 was caused by the COVID-19 pandemic. [6] (d) Low interest rates have been used by Japan’s Central Bank since 2016. Analyse how low interest rates might stimulate an economy and evaluate whether their use has been successful in stimulating Japan’s economy since 2016. [8]

Mark scheme: Question Answer Marks 1(a) With reference to Table 1.1, what indicates that Japan’s government has 2 borrowed substantially? Since 2016 Public Debt (1) has been more than twice the size of GDP (1) 1(b) Although Japan is the world’s fourth largest exporter, it has suffered 4 trade deficits. Explain how this might have happened. 1 mark for identification of reason + 1 mark for development (2  2) Value of imports must have exceeded value of exports – could have been affected by different price elasticities for exports and imports (1) Loss of export sales reflected in declining industrial production in Japan eg. Toyota cars. (1) Tensions between trade giants, USA and China, could have also affected their trade partners – 19% of exports go to each of these countries. Lower world trade volumes caused by virus (2) Accept any other relevant reason. 1(c) Consider whether the evidence provided shows that Japan’s economic 6 decline in 2020 was caused by the COVID-19 pandemic. Answers need to see Japan’s economic decline in 2020 exaggerated by the coronavirus (1) IMF figures on the global economy (1) 2020 lockdown worsened domestic consumption and export trade in industrial goods such as cars. (1) But the decline was part of a much longer-term decline in the economy. Quote figures from table. Reference to two decades of decline before 2011 due to deflation and economic stagnation. (2) Sales tax imposed in 2019 could help to explain declining retail sales; table 1 (1) 1(d) Low interest rates have been used by Japan’s Central Bank since 2016. 8 Analyse how low interest rates might stimulate an economy and evaluate whether their use has been successful in stimulating Japan’s economy since 2016. Up to 4 marks for theory response Up to 4 marks for application of data In theory, low interest rates would boost the economy by encouraging consumers and investors to take more risks when borrowing. (2) In theory the low interest rates should discourage saving and increased consumption but the pattern of retail sales seems to contradict this expectation. (2) Also, low interest rates should encourage borrowing for industrial investment to expand capital assets but industrial production has declined significantly after 2017 (2) Policy appears to have worked best in 2017 when industrial production and retail sales improved significantly linked to the highest rate of economic growth year-on-year. However the fall in exports, trade wars (US − China) and high levels of public debt have continued to lead to more stagnation. This has been made worse by the coronavirus pandemic in 2020 (2)

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2 The provision of health care by the public sector is inefficient and therefore all health care should be provided by firms operating in the private sector. Evaluate this comment. [20] OR

Mark scheme: 2 The provision of health care by the public sector is inefficient, therefore 20 all health care should be provided by firms operating in the private sector. Evaluate this comment. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • The distinction between public and private ownership should be clearly explained. • Health care should be identified as a merit good and the significance of merit goods explained. • The links between a merit good, positive externalities and allocative efficiency should be analysed. • Analysis of the relationship between the public provision of health care and efficient outcomes should be provided. • Analysis of the possible causes of inefficiency relating to the provision of health care by the public sector 2 AO3 Evaluation • Private providers of health care are unlikely to provide an allocatively efficient level of health care because of a failure to take into account the additional benefits of positive externalities. • Private firms are likely to aim for profit maximization and this might lead to a higher cost of receiving health care. • If access to health care in the private sector is based on an ability to pay, this might create inequitable outcomes in society. • The pursuit of profit might lead private firms to cut costs and reduce any unnecessary bureaucracy thus leading to a more efficient use of scarce resources. • The substitution of public provision by private provision might enable additional resources to become available in the public sector. • A conclusion should be attempted which examines the net benefits of each alternative ie private or public sector provision of health care. • Also, the impact on price and output in some circumstances takes a long time to become effective. • Advertising is often costly and it is not always certain that it will have a sufficiently persuasive effect to ensure the correct level of output/consumption is reached. • It is possible to show that government intervention can reduce the level of inefficiency caused by the existence of negative externalities but it is not clear whether the net effect of government intervention will always be positive. Some types of intervention will be more effective than others depending on the nature of the good/service under consideration. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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3 A government allows the merger of two large firms in the same industry. With the help of a diagram, evaluate the view that this merger should not have been allowed. [20] Section C Answer one question. EITHER

Mark scheme: 3 A government allows the merger of two large firms in the same industry. 20 With the help of a diagram evaluate the view that this merger should not have been allowed. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • This merger is an example of horizontal integration where two firms merge at the same level in the production cycle. • Mergers of two large firms producing similar goods, at the same level in the production cycle is likely to lead to a monopoly market structure. • Monopoly providers, through market dominance, can raise prices and drive smaller firms out of business. A diagram might provide supporting analysis. • Given the nature of the goods provided, this merger might also lead to significantly less choice. • A large, dominant organization might have less incentive to operate efficiently and X inefficiencies might occur. • Analysis of the potential negative impact on the local labour market. NOTE: Limit of Level 2 if no relevant diagram AO3 Evaluation • Merging firms might argue that an increase in size will lead to more opportunities to provide a wide range of goods and therefore more consumer choice. • Also, it is possible that the merger will lead to an increase in dynamic efficiency and this increase would allow long term more investment and ultimately lower prices. A supporting diagram can be provided. • Such a merger will enable the firms to benefit from economies of scale. For example, reducing managerial inefficiencies. This could also lead to lower prices. • Any potential negative effects of this merger can be accounted for by government intervention and regulation when the merger takes place. • A conclusion should refer to the preceding analysis and then make some attempt to make a judgement whether, on balance, the merger should proceed. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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4 Assess the extent to which monetary policy can be used effectively to solve the problem of unemployment. [20] OR

Mark scheme: 4 Assess the extent to which monetary policy can be used effectively to 20 solve the problem of unemployment. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • Knowledge of different types of monetary instruments, including: the use of interest rate changes; changes in the money supply and the use of exchange rate changes. • Reference to problems associated with unemployment, primarily the inefficient use of national resources • Explanation of some of the different causes of unemployment • Analysis of the links between changes in interest rates and unemployment • Analysis of the links between control of the money supply and or the use of exchange rates to reduce the level of unemployment AO3 Evaluation • The effectiveness of monetary policy is likely to depend to some extent upon the cause of unemployment. Monetary policy can be used to influence aggregate monetary demand which will be more effective dealing with cyclical unemployment. • The use of some monetary instruments might have a negative effect on macroeconomic aims. For example, reducing interest rates might depreciate the currency and potentially promote either cost push or demand-pull inflation. • Alternative policies might be more effective if structural factors are responsible for unemployment. In this case, supply-side policies might be more effective. • Lowering interest rates might cause problems for specific industries within an economy. For example, low interest rates might cause a boom in the housing market. • A conclusion should make an attempt to make an overall comparison between the use of monetary policy and alternative fiscal or supply side policies. A judgement should be made which directly addresses the statement in question. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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5 To what extent do you agree with the view that globalisation benefits high-income countries at the expense of low-income countries? [20]

Mark scheme: 5 To what extent do you agree with the view that globalisation benefits 20 high-income countries at the expense of low-income countries? Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • Globalisation would promote free trade, free movement of capital and labour and the transfer of technology. Cultural and political ties would be strengthened. • Key characteristics of low-income countries would include: low levels of productivity; high dependency ratios; low GDP per capita; significant dependence on producing and exporting primary goods. • High-income countries are likely to benefit from access to a wide range of goods and services and access to good health care and education. • Comparative advantage allows high-income countries to increase their standard of living by providing access to cheap raw materials produced in low-income countries. • Globalisation can lead to economic dependency and significant imbalances of trade which, in the long run, might have a negative effect on living standards in low-income countries. Assess the contribution of Foreign Direct Investment (FDI) to the improvement of the standard of living in low-income countries. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis Key terms ‘Foreign Direct Investment’ (FDI) and ‘low-income countries’ may be identified and explained before considering the main issues that might influence the discussion. • FDI is long-term investment usually by multinational companies (MNCs) in countries abroad. • This type of investment would normally be in fixed capital such as machinery and building factories. 5 • Key characteristics of low-income countries would include: low levels of productivity; high dependency ratios; low GDP per capita; significant dependence on producing and exporting primary goods. • Low living standards are generally associated with: high poverty levels; inequality; poor housing, education and health; and rapid population growth. • An improvement in living standards is very closely linked with an improvement in economic performance. An improvement in economic performance is measured by increases in GDP per capita and changes in productivity which enable changes in GDP to be achieved. • FDI mainly takes place in the secondary (manufacturing) sector of a low- income economy and focuses on the provision of new technology, building new factories and training the work force. As a result of this type of investment it is likely that productivity, output, employment and income levels will rise. • More real wealth will be created and higher levels of tax revenue are likely to be received by a low-income country’s government. This will enable more expenditure on health, housing and education as well as increased access to more consumer goods. These improvements are generally associated with a rise in the standard of living. However, an overreliance on FDI by a low-income economy might mean neglecting more important domestic macroeconomic policies, which might have a negative impact on the economy in the long run. AO3 Evaluation • The links between globalization and the costs/benefits imposed on low- income countries is not clear. For example, low-income countries might benefit significantly from the transfer of new technology from high income countries. • Higher skilled work might be provided through the global transfer of labour therefore helping to train the indigenous population. • Globalisation through trade and technology transfer should provide opportunities to create more real wealth which can then be used to provide merit goods such as health care and education. • In some cases, individual firms in low-income countries might gain access to large markets in high-income countries which will subsequently allow new businesses to grow. • In conclusion, it is clear that there is a potential role for globalisation to benefit both high and low-income countries, but this will depend on many factors which have been referred to above, some of which might have an overall positive impact. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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