Inflation and deflation — Paper 2 — IGCSE Economics 0455 topical questions

Question 1

Abu Dhabi is a rapidly developing economy. It is building three new museums in its new cultural district, which may attract more tourists a…

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5(a) Define ‘balance of payments’. Record of economic transactions (1) with other countries (1). Includes current account, capital account and financial account (2). Exports – imports (1). 2 5(b) Explain two characteristics of a rapidly developing economy. 1 mark each for each of two characteristics e.g.: • high increase in real GDP per head • significant improvements in healthcare • significant improvements in education • high proportion of workers employed in the tertiary sector • low rates of population growth • high spending on luxury products • encouragement of MNCs to set up • more use of advanced technology 1 mark each for each of two explanations: • a high increase in real GDP per head will increase living standards/be caused by e.g. higher investment • significant improvements in healthcare will increase life expectancy/be caused by e.g. higher spending on hospitals • significant improvements in education will raise workers’ skills/be caused by increased spending on universities • as countries develop, workers tend to move from the primary and secondary sectors to the tertiary sector • as countries develop, the birth rate tends to fall faster than the death rate • as countries develop, people may be able to spend on more than necessities • the attraction of MNCs may reduce unemployment • advances in technology due to more research and development and investment/will raise productivity. 4 May be able to establish high population growth, if argued that death rate will fall before fall in birth rate. Question Answer Marks Guidance 5(c) Analyse how an increase in tourism can increase a country’s inflation rate. An increase in tourism will increase demand for a range of products (1) higher demand may encourage firms to raise prices (1) leading to demand-pull inflation (1) especially if economy operating close to full employment (1). An increase in tourism may increase the money supply (1) leading to monetary/demand-pull inflation (1). An increase in tourism may increase demand for workers (1) to work in the tourist and related industries (1) this could raise wages (1) causing cost-push inflation (1). An increase in tourism will increase demand for the currency (1) this may cause a rise in the exchange rate (1) if demand for exports is inelastic (1) export revenue could rise (1) increasing total (aggregate) demand (1). 6 Do not expect but reward idea of a multiplier effect. 5(d) Discuss whether the rich always save more than the poor. Up to 5 marks for why they might: Rich have more income (1) greater ability to save (1) can purchase the products they want (1) and have money left to save (1). Rich may be able to save more and as a result may be paid a higher rate of interest (1) receive a higher reward from saving (1). Up to 5 marks for why they might not: Poor may have to save up to purchase products which the rich can buy from current income (1) e.g. a television (1). Poor may be less confident (1) may be anxious to save to cover e.g. health costs (1) may be concerned not to get into debt (1). Poor/unskilled may be concerned that they will lose their jobs (1) during an economic downturn may be the first to lose their jobs (1). 8 May approach the question from the perspective of whether the poor always save less than the rich.

Question 2

In June 2015 the value of the Swiss franc rose by 30% against the euro. The countries that Switzerland exports to are changing. Exports to …

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5(a) Define ‘inflation’. A rise in the price level/rise in average prices (2). A rise in prices (1). A change in the price of a good (1). 2 5(b) Explain why a country’s exports to one country may increase, while those to another country decrease. Exports to one country may increase because incomes in that country increase (1) increasing demand for products including imports (1) while incomes in the other country may fall (1) decreasing demand for products including imports (1). Exports to one country may increase because the country’s exchange rate may fall against that country (1) making exports cheaper (1) while the exchange rate may increase against another country (1) making exports more expensive (1). Exports to one country may increase because trade restrictions imposed on them may be reduced (1) e.g. tariffs lowered (1) while trade restrictions may be increased by the other country (1) to protect its industries (1). 4 Maximum of 2 marks if an explanation is a static cause e.g. may be high because the exchange rate is low. Explanations must relate to what causes the change. Reward but do not expect an explanation using comparative advantage. 5(c) Analyse how an appreciation of the exchange rate may reduce the country’s inflation rate. An appreciation in the exchange rate means a rise in the value of the currency (1) higher export prices (1) lower import prices (1) less competitive (1) may reduce net exports (1) may increase imports (1) lower total demand (1) reduce demand-pull inflation (1). Lower import prices will reduce the price of some of the products people in the country buy (1) may lower price of raw materials (1) lower costs of production (1) reduce cost-push inflation (1). Lower import prices and higher export prices will put pressure on domestic firms to keep prices low (1). 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 5(d) Discuss whether a low inflation rate always benefits an economy. Up to 5 marks for why it might: It may mean that domestic products may become more internationally competitive (1) exports may increase (1) current account position may improve (1) output may increase (1) employment may increase (1) resulting in higher economic growth/rise in GDP. A low inflation rate which is also stable (1) may create greater confidence (1) may promote investment/attract MNCs to set up in the country (1) may encourage production (1). It will mean menu and shoe leather costs will be low (1) keeping firms’ costs low (1). It may benefit savers (1) if the interest rate is above the inflation rate (1). It will mean that inflationary noise will not be significant (1) so firms and households can make efficient choices (1). Fiscal drag is unlikely to be a problem (1) people may not be dragged into higher tax brackets (1). Up to 5 marks for why it might not: It may be too low which may discourage production (1). There may be a risk of deflation (1) which may discourage consumption (1). Less tax revenue for the government (1) to spend on objectives such as better education and healthcare (1) It may still be higher than rival countries (1) leading to a current account deficit (1). It may harm certain groups including borrowers (1) who had expected debt to fall at a more rapid rate (1). To achieve low inflation a government may have used deflationary policy measures (1) which could reduce output (1) increase unemployment (1). 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list-like approach.

Question 3

The Central Bank of Nigeria has set a limit for inflation of 9%, but in August 2015 the country’s inflation rate reached 9.2%. The Governor…

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5(a) Define ‘Central Bank’. A government owned bank (1) acts as bank to government (1) acts as bank to commercial banks (1) operates monetary policy (1) lender of last resort (1) sets inflation target(s)/sets rate of interest (1). 2 5(b) Explain the difference between a fixed exchange rate and a floating exchange rate. • The value of a fixed exchange rate is set by the government (1) using purchases and sales of foreign currency/changes in interest rates (1) • The value of a floating exchange rate is determined by market forces (1) changes in demand and supply (1) e.g. a rise in demand causes currency to appreciate (1) 4 5(c) Analyse how fiscal policy could reduce the inflation rate. • Contractionary/deflationary fiscal policy could be used (1). • A reduction in government spending (1) may reduce total demand (1) reducing demand-pull inflation (1) • An increase in income tax (1) would reduce disposable income (1) this may lower consumer spending (1) reducing total demand (1) lowering demand-pull inflation (1) • Increased in spending on education/healthcare (1) may raise productivity (1) lower costs (1) and reduce cost-push inflation (1) 6 Increase in tax without type is acceptable. Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 5(d) Discuss whether inflation causes more problems than deflation. Up to 5 marks for disadvantages of inflation or advantages of deflation: • Inflation is a general rise in the price level, whereas deflation is a persistent fall (1) • Inflation reduces the value of money/spending power (1) increasing the cost of living (1) it may be of a high rate/hyperinflation (1) reducing the value of money significantly (1) • It may be fluctuating (1) creating uncertainty (1) • Savers are adversely affected (1) by the fall in the real value of their savings (1) • Living standards will fall (1) if price inflation exceeds wage inflation (1) • It may reduce international competitiveness (1) worsening the current account position (1) • Other costs e.g. menu costs, shoe leather costs (up to 2) • Deflation may be beneficial if it is caused by advances in technology (1) lower costs of production (1) can increase output (1) raise employment (1) improve the current account (1) Up to 5 marks for disadvantages of deflation or advantages of inflation: • Borrowers gain from inflation (1) which reduces the burden of debts (1) if inflation rate is higher than the interest rate (1) • Deflation may be caused by a decrease in total demand (1) consumers delay purchases (1) firms may reduce/delay output/(1) profits may fall (1) unemployment may increase (1) • Inflation at a low rate may stimulate production (1) producers encouraged by rising prices (1) 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list- like approach.

Question 4

Indonesia is rich in resources including such raw materials as copper, gold and coal. Indonesia is the second-largest exporter of coal. In …

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4(a) What is used to measure a country’s inflation rate? 2 CPI / RPI / other relevant named measure (2) A weighted (1) price index (1) 4(b) Explain two reasons for conserving resources. 4 1 mark each for each of two reasons identified: • scarcity / economic problem • protect them for future generations • to achieve sustainable growth • demand may increase in the future • risk of becoming too dependent on one product. 1 mark each for each of two explanations given: • unlimited wants but limited resources • conserving resources may mean output, income and employment can be higher in the future / habitats can be saved for future generations • there is a continuous need for resources • a higher revenue may be earned / prices may rise in the future • exploiting resources may mean that other products are not produced. 4(c) Analyse how subsidies given to farmers could raise living standards. 6 May increase supply (1) as extra payment received (1) higher supply will reduce price (1) lower price will make food more affordable (1) food is a basic necessity (1). Reduced costs for farmers (1) increases their profits/income (1). Subsidies for capital equipment e.g. tractors (1) improve productivity (1) increasing farm outputs / incomes (1). More/better quality food may make the poor healthier (1) increasing their earning capacity (1). The poor may be able to spend less on food (1) allowing them to buy other basic necessities (1). Note: reward increase in supply (1) lower price (1) if shown on a diagram. 4(d) Discuss whether a rise in direct taxes will reduce economic growth. 8 Up to 5 marks for why it might: A rise in income tax will reduce disposable income (1) this may reduce consumer expenditure (1) lower total demand (1) reduce firms’ output (1). A rise in income tax will reduce incentives to work (1) increase tax avoidance (1) leaving less revenue for government spending on e.g. health and education (1) reducing productive potential of workers (1). A rise in corporation tax (1) will increase costs of production (1) will reduce the profits firms can keep (1) reduce the incentive to produce (1) reduce the funds available for investment (1) to expand output (1). Up to 5 marks for why it might not: A rise in income tax may not reduce consumer expenditure if savings fall (1) wages increase by more than tax rise (1). A rise in corporation tax may not reduce investment if firms reduce savings/dividend payments (1). A rise in income tax may reduce spending on imports (1) this would reduce a current account deficit (1) increase net exports (1). The extra tax revenue earned (1) may increase government spending (1) this could offset any fall in consumer expenditure and investment (1).

Question 5

In 2008, Zimbabwe reached a record high rate of inflation of 500 trillion per cent. By 2015, it had fallen so much that there was even talk…

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6(a) Identify two ways in which a high rate of unemployment may affect 2 firms. Low demand for products (1) falling prices / lower revenue (1). Good supply of workers (1) downward pressure on wages (1). Trade union action (1) to protect workers’ jobs (1). 6(b) Explain two causes of deflation. 4 1 mark each for each cause identified: • fall in total demand • rise in unemployment • drop in consumer confidence • drop in business confidence • banking crisis • an increase in total (aggregate) supply • fall in costs of production • advances in technology. 1 mark each for each of two causes explained: • lower demand may cause firms to reduce their prices in order to attract more consumers • lower costs of production / advances in technology will enable firms to lower their prices and maintain/increase profits. 6(c) Analyse the disadvantages of a very high rate of inflation. 6 Fall in international price competitiveness (1) currency rapidly devalues (1) worsening current account position / reduced exports (1) if inflation rate is higher than rival countries (1). Discourages saving / savers lose (1) if inflation rate is higher than interest rate (1) redistribution of income from lenders to borrowers (1). Those on fixed incomes are disadvantaged (1) e.g. pensions do not buy as many goods and services as they did before (1). Inflationary expectations increase (1) discouraging investment (1) uncertainty created by inflation (1). Inefficient choices (1) due to difficulty in judging relevant prices (inflationary noise) (1). The cost of changing prices (menu costs) (1) e.g. price tags, menus (1). Costs of moving money around in search of the highest interest rate (1). People’s income dragged into higher tax brackets (fiscal drag) (1) reducing their disposable income (1). Unemployment (1) if caused by higher costs / cost-push inflation (1). Lower purchasing power / fall in values of money (1). Note: maximum 3 marks for a list-like approach. 6(d) Discuss whether increased government spending on training will 8 always reduce inflation. Up to 5 marks for why it might: Training may increase workers’ skills / specialisation (1) raise productivity (1) lower production costs (1) increase total supply (1) reduce cost-push inflation (1). Training may make workers more mobile (1) speed up adjustments to changes in demand (1) reduce shortages (1) lower demand-pull inflation (1). Up to 5 marks for why it might not: Training may be in the wrong areas (1) and not increase productivity (1). Government spending on training will increase total demand (1) if total demand rises by more than total supply (1) price level will rise (1) causing demand-pull inflation (1). Trained workers will find employment / better paid work (1) spend their wages and increase total demand (1). More highly trained workers may demand higher wages (1) if wages rise by more than productivity (1) costs will increase (1) cost-push inflation (1).

Question 6

From inflation to deflation For some time, many central banks have tried to achieve a target inflation rate of about 2%. A small and steady…

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1(a) Identify, from the extract, two aims of government policies. Price stability / low inflation / stopping inflation rate rising above target (1) full employment / low unemployment (1). 2 Question Answer Marks Guidance 1(b) Explain two problems caused by inflation. 1 mark each for each of two problems identified: • worsen current account position • redistribution of income • uncertainty • menu costs • shoe leather costs • inflationary noise • fiscal drag • higher unemployment • money may cease to carry out its functions • lower demand / lower output / lower economic growth • lower purchasing power / fall in the value of money • lower standards of living / higher cost of living. 1 mark each for each of two explanations: • export prices will rise – reduce international competitiveness • lenders / those on fixed incomes may lose and borrowers may gain • lack of certainty may discourage investment • cost of changing e.g. price labels • cost of moving money around in search of highest interest rate • confusion caused by not being able to work out change in relative prices • people’s income being dragged into higher tax brackets • costs of production may increase, causing firms to reduce the number of workers they employ • during periods of hyperinflation, money may cease to be generally acceptable • cost-push inflation will reduce total demand • purchasing power will fall if incomes rise by less than prices 4 Fall in the value of the currency on its own is too vague – must make clear reference to internal value. Question Answer Marks Guidance 1(c)(i) Calculate, using information from the extract, the percentage fall in the global price of a barrel of oil in 2015 45% (2) Correct working i.e. $54 / $120 × 100 (1) 2 1(c)(ii) Calculate, using information from the extract, the consumer prices index in China at the end of 2015. 102.51 (2) Correct working i.e. 100.5 × 2 / 100 + 100.5 or 2.01 (1) 2 Accept 102.5 Question Answer Marks Guidance 1(d) Analyse why an increase in unemployment might cause an increase in government spending. It may increase government spending on unemployment benefits (1) the unemployed may suffer worse health (1) this may increase government spending on healthcare (1) if crime rises, the government may spend more on law and order (1). To reduce unemployment, the government may adopt expansionary fiscal policy / policy to stimulate the economy / policy to increase economic growth (1) to increase total demand (1) to create more jobs (1). Government may provide subsidies to firms (1) to encourage them to increase output and employment (1). Government may spend more on education (1) to increase skills of workers (1) reduce structural unemployment (1). Unemployment may increase poverty (1) leading to more spending on other benefits (1). Government may employ more workers in the public sector (1) to reduce unemployment / will increase wage bill (1). Government may spend on infrastructure (1) to raise labour mobility (1). 5 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 1(e) Discuss whether the supply of workers for unskilled jobs will be high in a country. Up to 3 marks for why it might: Levels of education and training may be low (1) in some developing countries there is a relatively high illiteracy rate (1) workers may lack skills/qualifications (1). Unskilled jobs may provide good non-wage benefits (1) example e.g. short working hours (1). The supply may be high due to immigration of unskilled workers / high population (1) attracted by wages that are higher than the countries they come from (1). Most workers may be employed in the primary sector (1) which may offer largely unskilled jobs (1). May be high unemployment (1) so some skilled workers may have to apply for unskilled jobs (1). May be high unemployment benefit (1) discourages incentive to work (1). Up to 3 marks for why it might not: Unskilled jobs are likely to be relatively poorly paid (1) wage rate is a key influence on jobs workers select (1). Unskilled jobs may offer poor working conditions (1) example e.g. hard manual work (1). Unskilled workers may emigrate to other countries (1) if wages/working conditions are better in other countries (1). Work may be capital-intensive (1) requiring high skills (1). 5 Question Answer Marks Guidance 1(f) Explain, using information from the extract and Fig. 1, what happened to the market for food in 2015. The diagram shows supply increasing (1) price falling (1) demand extending / more food / higher quantity (1) costs of production falling due to lower transport costs (1) inelastic supply (1) inelastic demand (1). 4 1(g) Discuss whether a decrease in income tax would reduce deflation. Up to 4 marks for why it might: A reduction in income tax will increase disposable income (1) may raise consumer expenditure (1) may raise investment (1) increase total demand (1) higher demand may encourage firms to raise prices / demand-pull inflation (1). Up to 4 marks for why it might not: Consumers may not spend more / may save more (1) if concerned about the future (1) if expect prices to be lower in the future (1). A decrease in income tax may not reduce deflation caused by lower costs of production (1) e.g. advances in technology / investment may continue pushing down the price level (1). A decrease in income tax may reduce government spending (1) higher consumer spending may be offset by lower government spending (1). May act as incentive to work (1) may increase productivity / efficiency (1) lower costs of production / increase total (aggregate) supply (1). Consumers may spend on imports (1). 6

Question 7

Nauru is one of the smallest countries in the world with a population of only 10 000. Fifty years ago the population was one of the richest…

Accepted Answer

5(a) What is meant by a labour-intensive industry? An industry which has a high proportion of labour compared with the proportion of other factors of production used (2). An industry which uses a large amount of labour (1). 2 5(b) Explain two reasons why a country may stop exporting a product. 1 mark each for each of two reasons identified: • may be a shortage of the product in own country • may want to conserve resources • may be a fall in demand from other countries • may want to switch resources to another product • may lose international competitiveness • trade restrictions may be imposed on the product by trading partners • may be an appreciation of the currency. 1 mark each for each of two explanations: • may want to sell the product on the home market to prevent a shortage pushing up price • there may be concerns that e.g. deposits of gold are running out • exports can only be sold if there is a market for them / exports may have risen in price / may have fallen in quality • other products may have become more profitable and so resources may be switched away from the product • other countries may have discovered resources / improved the training of their workers giving them a cost advantage • there may be a tariff imposed which may make the product uncompetitive / an embargo may be imposed on the product stopping other countries importing it • a higher exchange rate will raise the price of exports which may make this product uncompetitive. 4 Question Answer Marks Guidance 5(c) Analyse the effects of an increase in unemployment on inflation. A rise in unemployment may reduce incomes (1) lower spending (1) lower total demand (1) lower demand-pull inflation (1). A rise in unemployment may reduce rises in wages / lead to a fall in wages (1) reduce costs of production (1) reduce cost-push inflation (1). A rise in unemployment will reduce tax revenue (1) this could cause the government to reduce subsidies (1) this could increase costs of production (1) causing cost-push inflation (1). 6 Question Answer Marks Guidance 5(d) Discuss whether having a relatively small population is an advantage or a disadvantage for an economy. Up to 5 marks for why it might be an advantage: A small population may mean that resources will last over a longer time period (1) enabling economic growth to continue (1). There may be less environmental damage (1) less risk of overcrowding (1). There may be fewer dependents (1) smaller proportion of children and elderly people (1) which can increase income per head (1) and may reduce the need for some forms of government spending (1). May be less imports (1). Up to 5 marks for why it may be a disadvantage: There may not be enough workers / low labour force (1) to take advantage of resources (1) low output (1) low tax revenue (1) reduces government ability to spend (1). The size of the market for the country’s products may not be large enough / low total (aggregate) demand (1) less ability to take advantage of economies of scale (1) may be less attractive to MNCs (1). May be less exports (1). 8 Reward but do not expect reference to the optimum population size.

Question 8

In 2015, the UK economy experienced an increase in production and relatively low unemployment. There was, however, little growth in labour …

Accepted Answer

7(a) Identify two causes of inflation. Demand-pull/consumer boom/higher government spending/increase in net exports/ increase in aggregate demand (1). Cost-push inflation/higher wages/higher raw material costs / depreciation or devaluation of domestic currency / imported inflation (1). 2 Question Answer Marks Guidance 7(b) Explain two reasons why government spending may be greater than tax revenue. 1 mark each for each of two causes identified: • low level of economic activity • government desire to increase economic activity • actual government expenditure higher than planned expenditure • ageing population. 1 mark each for each of two explanations of the causes: • if economic activity is low, spending on benefits may be high while, due to low incomes with low spending, tax revenue will be low • a government may be engaging in expansionary fiscal policy to increase total demand and raise revenue • planned expenditure and forecast tax revenue may not be achieved • more pressure on pensions and healthcare, while tax revenues may fall due to fewer workers. 4 Maximum of 2 marks if explanation is restricted to either why there may be high government expenditure, or low tax revenue. 7(c) Analyse how an increase in labour productivity can increase living standards. Higher productivity will lower costs of production (1) may lower prices (1) enabling people to consume more goods and services (1) greater supply (1). It may increase output (1) raise employment (1) increase incomes (1) greater purchasing power (1) e.g. greater access to healthcare / education / leisure (1) live longer (1) higher HDI (1). Increase in government revenue (1) higher spending on education/healthcare (1). 6 Question Answer Marks Guidance 7(d) Discuss whether monetary policy measures can increase economic growth. Up to 5 marks for why they might: A cut in interest rates (1) may discourage saving (1) increase borrowing (1) raise consumer spending (1) raise investment (1) increase total demand (1) increase output (1) higher investment will increase productive capacity (1). A reduction in the value of the exchange rate (1) will lower export prices and raise import prices (1) increasing demand for domestic products (1) increase output (1). An increase in the money supply (1) may stimulate higher spending (1) increasing output (1). Up to 5 marks for why they might not: Lower interest rates may not increase consumer spending and investment if confidence is low (1) households and firms may not spend extra disposable income if they think that incomes will fall in the future (1). A lower exchange rate will not lead to a rise in export revenue and a fall in import expenditure if demand is price-inelastic (1) there is an increase in import restrictions imposed by other countries/fall in incomes abroad (1). An increase in the money supply or other measure may lead to demand-pull inflation (1) the economy may not have the resources to produce more goods and services despite the rise in total demand (1). 8 Accept an argument that contractionary monetary policy leading to higher interest rates and lower domestic demand would reduce economic growth. Do not reward the same argument on both sides (mirror image) without additional relevant analysis.

Question 9

The government of Slovenia has introduced a range of supply-side policy measures to influence the country’s inflation rate. Among other fac…

Accepted Answer

5(a) Identify TWO price indices. RPI (1) CPI (1). other valid indices. 5(b) Explain TWO supply-side policy measures. Improvements in education/training (1) to raise skills/labour productivity (1). Cutting income tax (1) to encourage the reward for working (1). Cutting corporation tax (1) to encourage enterprise/increase investment/lower costs of production (1). Privatisation (1) transferring assets from the public to the private sector/to stimulate competition/improve efficiency (1). Deregulation (1) removing rules and restrictions/increase competition/lower costs of production (1). Subsidies (1) may reduce costs of production/stimulate output (1). 4 1 mark each for up to 2 identifications, plus up to 2 marks for explanation 5(c) Analyse why a government may want to reduce its country’s inflation rate. A lower inflation rate may increase a country’s international competitiveness (1) increase exports (1) reduce imports (1) improve the current account position (1). A lower inflation rate may create greater certainty (1) encourage investment (1) increase economic growth (1). A lower inflation rate may benefit savers (1) create funds for investment (1). A lower inflation rate will reduce the rate at which money loses its purchasing power/value (1) protect living standards (1) make products more affordable (1) helps people on fixed incomes (1). If cost-push inflation, total demand will fall/unemployment rise (1). Lower inflation tends to have larger benefits for the poor than the rich (1) and helps towards reducing inequality (1). There may be hyperinflation (1) which could lead to a breakdown in economic activity (1). 6 Reward an approach that analyses the disadvantages of inflation. Question Answer Marks Guidance 5(d) Discuss whether or not increasing the strength of trade unions will benefit an economy. Up to 5 marks for why it might: Stronger bargaining power with employers (1) may improve working conditions of workers (1) increase health and safety (1). May raise the wages of workers (1) may reduce poverty (1) may increase labour productivity (1) through increasing worker morale/motivation (1). May counterbalance the power of employers (1) protecting the rights of workers (1). May provide worker training (1) increasing skills/productivity (1). Up to 5 marks for why it might not: May lead to more industrial disputes (1) e.g. strikes/go slows (1) reduce output (1) may discourage investment/discourage MNCs (1) which would damage long run economic growth (1). May cause inflation (1) by raising labour costs (1) make products less internationally competitive (1) increasing a current account deficit/reducing a current account surplus (1). Higher wage costs could reduce profits (1) raise unemployment (1). 8 NB: Max 5 marks for a static answer (i.e. that discusses benefits and drawbacks of trade unions, not the impact of the increasing strength of TUs).

Question 10

In February 2016, share prices on stock exchanges fell throughout the world. There were a number of reasons for this; including concerns ab…

Accepted Answer

6(a) Define commercial bank. Two marks from: A financial institution (1) that offers services to people/households/firms (1) examples of services (1) that is profit orientated (1) (usually) in the private sector (1). 2 6(b) Explain how a stock exchange could encourage economic growth. A stock exchange enables firms to raise finance by issuing shares (1) by providing a market for shares / enables shares to be bought and sold (1) finance allows firms to invest (1) which increases their ability to produce more (1). A stock exchange helps firms merge (1) enabling firms to take greater advantage of economies of scale (1) reducing costs of production (1) increasing international competitiveness (1) capturing more market share (1). If stock exchange is doing well (1) wealth/dividends may rise (1) causing higher spending (1). Allows sales of government bonds/securities (1) money raised can be spent on e.g. infrastructure (1). 4 6(c) Analyse what can cause deflation. A fall in the price level could be caused by a fall in total (aggregate) demand (1). This may be due to a fall in consumer expenditure / rise in saving (1) a fall in borrowing (1) a fall in investment (1) due to e.g. a lack of confidence (1) spending may be delayed due to the expectation that prices may be lower in the future (1) deflationary demand-side policy measures (1) e.g. a rise in the rate of interest (1) rise in direct taxation (1). Exports may fall (1) due to e.g. fall in incomes abroad (1) a rise in exchange rate (1). A rise in total (aggregate) supply (1) due to e.g. advances in technology (1) increased investment (1) reduced costs of production (1) increase in productivity (1) supply-side policy measures (1) resulting from e.g. improvements in education and training (1). 6 6(d) Discuss whether or not government policy measures to reduce unemployment will cause inflation. Up to 5 marks for why they might: Increased government spending and/or lower taxes / expansionary fiscal policy (1) lower interest rates and/or increased money supply / expansionary monetary policy (1) will increase total (aggregate) demand/spending (1) may reduce cyclical unemployment / more workers may be employed to meet the higher demand (1) but may cause demand-pull inflation (1). Higher demand may also cause cost-push inflation (1) as demand for workers rises (1) firms may compete for workers (1) causing wage rates to rise (1). Up to 5 marks for why they might not: An increase in demand may not push up prices if unemployment is initially high (1) firms will be able to attract more workers by just offering jobs (1) they will not have to raise wages (1). The government may use supply side policy measures to reduce unemployment (1) e.g. improved education and training/privatisation/deregulation (1) such policy measures may reduce costs (1) may increase total (aggregate) supply by as much as total (aggregate) demand (1). The government may use price controls (1). 8

Question 11

In early 2016, the central bank of the Republic of Turkey cut interest rates five times. This was despite an inflation rate of 7.6%. The ec…

Accepted Answer

4(a) Identify two functions of a central bank. • Control money supply • Issue notes • Set interest rates • Maintain price stability / low inflation • Act as a lender of last resort / lend money to government / lends to commercial banks • Ensure stability of financial system • Manage foreign exchange reserves 2 4(b) Explain how the Consumer Prices Index (CPI) is calculated. A representative basket of most commonly purchased goods and services is constructed (1) the price of these goods and services is monitored over time (1) the goods and services are ‘weighted’ (1) according to the proportion of disposable income they account for (1) annual price changes are measured (1) and multiplied by weights (1) weighted price changes are measured against a base year (1). 4 Up to 2 marks for correct numerical examples. 4(c) Analyse the impact of a cut in interest rates on saving and investment. Saving is expected to fall (1) as the return from saving falls (1), reducing opportunity cost of spending (1), causing individuals to spend more (1) and borrow more (1). Investment will rise (1) as it becomes cheaper for firms to borrow (1), reducing the cost of investment (1) and making investment more profitable (1). 6 Question Answer Mark Guidance 4(d) Discuss the impact of supply-side policy measures on government expenditure and on government revenue. Up to 5 marks for why it might increase government expenditure and decrease tax revenue: Policies such as subsidies may be expensive (1) if funded through borrowing government spending on interest payments will increase (1) gains from supply side policies take a long time to materialise (1) meaning in the short run there may be no increase in tax revenue (1). Cut in income tax (1) may decrease income tax revenue in short run (1). Cut in corporation tax (1) may decrease corporation tax revenue in short run (1). Privatisation in the long run may reduce government revenue (1) if privatised firms have been profitable (1) Up to 5 marks for why it might decrease government expenditure and increase tax revenue: Supply side policies will increase the productive capacity of the economy (1) which will enable long run growth to be achieved (1) and more tax revenue from sales of goods and services (1) and from higher income (1). Income tax receipts may increase in the long run if more people are working (1) and corporation tax receipts may increase is firms are making bigger profits (1). Spending on education and training (1) is likely to increase employment (1) reducing spending on welfare benefits (1) increasing income tax revenue (1). Deregulation may not alter government spending and tax revenue in the short run (1) but may increase tax revenue in the long run if efficiency increases (1). Privatisation in the short run may increase government revenue (1) from the sale of shares (1). 8

Question 12

Russia’s struggle for economic recovery Shortly after the 2014 Winter Olympic Games in Sochi, Russia, the value of the Russian currency, th…

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1(a) Calculate, using the information in Table 1, the percentage change in the price of oil between 2010 and 2016. 54.9 (2) − $37 $82 $82 × 100 correct working (1) 2 1(b) Explain, using information from the extract, two reasons for falling oil prices. Saudi Arabia’s output of oil is growing (1) increasing the supply / shown on accurate diagram (1). (Global) demand for oil is weak/decreasing / shown on accurate diagram (1) due to global economic uncertainty / competition from renewable energy / price reduced to attract consumers (1). 4 1(c) Identify, using information from the extract, two ways a central bank could try to stop a fall in the international value of its currency. Increase interest rate (1). Sell its foreign reserves / buy its own currency (1). 2 1(d) Explain, using information from the extract, two reasons for Russia’s declining population. High death rate (1) e.g. low life expectancy / poor health of the population / poor healthcare system (1). Low fertility rate (1) e.g. low birth rate / birth rates below the replacement rate (1). High levels of emigration (1) e.g. better opportunities elsewhere, unemployment, poverty, domestic political, social, and economic instability (1). 4 Question Answer Marks Guidance 1(e) Analyse the extent to which a rise in oil prices will cause inflation. Rise in oil prices will increase costs of production (1) e.g. higher energy costs / transport costs (1) resulting in cost-push inflation (1). Demand for oil is price-inelastic (1) if prices rise most consumers will keep buying it (1) some producers and consumers however may switch to other products (1) The extent will depend upon the proportion of oil costs in the total costs of other products (1) other costs may be falling (1). Because of rising oil prices, workers may demand higher wages (1) causing cost-push inflation (1). Movements in exchange rates will affect the impact on inflation (1) a rise in the exchange rate would reduce the overall effect (1). For oil producing countries export revenue may rise (1) causing higher demand (1) and demand-pull inflation (1). 5 Question Answer Marks Guidance 1(f) Discuss whether or not increasing taxes on Russian oil producers will be harmful to those producers. Up to 3 marks for reasons why it would be harmful: Producers’ costs will rise (1) they will become less profitable (1) and they already struggled to make a profit (1) small producers will find it difficult to absorb the extra costs (1). They may need to cut production / stop production completely (1) or cut costs (1) causing unemployment of the workforce (1). They might pass on the tax (1) by raising prices (1) to maintain profits (1) but this could reduce demand (1) by making them less competitive with other countries e.g. Saudi Arabia (1) less competitive with other energies e.g. renewables (1) Investments in the oil industry may fall (1) due to less funds available (1). Up to 3 marks for reasons why it would not be harmful: Demand for oil is likely to be price inelastic (1) this may enable the producers to pass on the tax in higher price to consumers (1) without losing revenue (1). Most oil producers are large (1) and earn very high profits (1) paying extra tax will not harm them significantly (1). Some of the tax revenue may be used on e.g. education/training (1) which could increase productivity of workers (1) lowering oil producer’s costs (1). 5 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded. 1(g) Identify one way in which monetary policy differs from fiscal policy. Fiscal policy includes taxes / government spending (1) monetary policy includes interest rates / money supply / exchange rate (1). Fiscal policy is conducted by the government of the country (1) while monetary policy is conducted by the central bank of the country (1). 2 Maximum 1 mark for reference to only monetary OR fiscal. Question Answer Marks Guidance 1(h) Discuss whether or not the Russian government should have been concerned about the state of the Russian economy in 2016. Up to 4 marks for why they should have been concerned: Negative economic growth / recession (1) increasing unemployment (1) increasing poverty rates (1) possible policy measures to reduce poverty (1) e.g. costs of healthcare may rise (1) need for greater spending on benefits e.g. unemployment benefits (1) falling tax revenues (1) may have to increase taxes (1) opportunity cost(s) involved / reduced spending on other areas e.g. defence (1). Rising inflation (1) making goods and services less affordable (1). Emigration from Russia is increasing (1) reducing the available workforce (1). Export values are falling (1) so less foreign currency is earned (1) falling value of the rouble (1) causing imported inflation (1) leading to higher interest rates (1) higher cost of borrowing for government (1). Investors lacked confidence in the Russian economy (1) may have reduced productive potential (1). Up to 4 marks for why it is less of a cause for concern: Government spending may not need to rise (1) and tax revenue may increase (1). Domestic consumption is increasing (1) and domestic investment is increasing (1) this may create employment (1) and offset decreases in foreign investments and exports (1) therefore total (aggregate) demand might not decrease significantly (1). Inflation may be a sign of increasing demand (1) showing confidence in the economy (1). Emigration may be mainly of unskilled workers (1) who are less valuable to firms (1). The falling exchange rate may improve the current account (1) with no need for government / central bank action (1). 6 For all ‘Discuss’ questions Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded. Generic example Mark Economic growth will increase 1 because of reason« e.g. demand for services is increasing globally 1 Economic growth will decrease (reverse of 1st argument) 0 because of a different reason / not a reverse argument e.g. a country’s resources may be more suited to producing primary products. 1

Question 13

The largest airline in Pakistan was originally formed as a result of a merger between a state- owned airline and a private airline. In Apri…

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5(a) Define public limited company. A company whose securities/shares/stocks are traded on a stock exchange (1) can be bought and sold by anyone (1) has limited liability (1) makes its accounts public (1) legal entity separate to owners (1). 2 5(b) Explain the difference between productivity and production. Productivity is the output produced per factor / input, e.g. per worker (1) per period of time, e.g. per hour (1) measure of efficiency / how quickly products are produced (1). Production is the total output (1) the process of producing goods and services (1) in a period of time, e.g. per year (1) 4 5(c) Analyse how increased productivity could reduce inflation. An increase in productivity means that more could be produced / output increased (1) from a given set of factors/inputs (1) could also lower (average) costs of production (1) reducing prices (1). Increased productivity could reduce wage costs (1) reduce waste (1) increased profits of firms (1) increasing investments / expansion of business (1) new capital equipment could further lower costs of production (1) lowering cost-push inflation (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not a merger would make it easier for a firm to achieve its goals. Up to 5 marks for why it would be easier: It could be a horizontal merger (1) enabling easier exploitation of economies of scale (1) leading to lower average costs (1) examples of economies of scale (max 2) lower prices (1) leading to more demand (1) and higher profits (1). It could be a vertical merger (1) reducing the costs of obtaining materials / making it easier to distribute the firm’s products (1) Reduced competition / monopoly (1) a quick way to grow (1) the firm can set higher prices (1) without losing too many customers (1). Reduced risk (1) the loss of one part of the business could be offset by the other (1) it is easier for the firm to survive (1). Up to 5 marks for why it would not be easier: Reduced competition may cause complacency (1) may fail to control of costs (1). The merged firm may experience diseconomies of scale (1) average cost may increase as output increases (1) example (max 2) leading to higher prices (1) reduced demand (1) and lower profit (1). Large firms may lose customers due to lack of personal touch (1). Cost of integrating firms such as redundancies / fall in morale (1). Government may no longer support large firms (government support small firms) (1) removing tax advantages (1) and subsidies (1). 8 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded.

Question 14

Rubber production in Liberia Liberia is a west African country that has faced a number of serious problems in recent years. These have incl…

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1(a) Identify, from the extract, two goals of business organisations. Survival / growth / profit maximisation / diversification 2 1(b) Explain, using information from the extract, two reasons why the price of rubber fell between 2011 and 2016. Supply exceeding demand / diagram showing excess supply (1) the existence of unsold rubber will encourage rubber producers to lower price (1). Improved production methods (1) lowering costs of production / increasing supply (1). The imposition of import restrictions / diagram showing the effect of import reductions (1) lowering demand for rubber / rubber producers may reduce prices to ensure their rubber is still competitive (1). Government subsidies (1) lowering costs of production / increasing supply / diagram showing supply increasing (1). 4 1(c) Analyse how an increase in wages could cause inflation. Higher wages may increase consumer expenditure (1) increasing total (aggregate) demand / diagram showing total (aggregate) demand increasing (1) causing demand-pull inflation (1) if demand rises by more than money supply / the economy is at, or near, full capacity (1). Higher wages may increase costs of production (1) decrease total (aggregate) supply / diagram showing total (aggregate) supply decreasing (1) causes cost- push inflation (1) if wages rise by more than productivity / may cause a wage- price spiral (1). 5 Question Answer Marks Guidance 1(d) Analyse to what extent the information in Table 1 suggests that healthcare expenditure per head is an important influence on the infant mortality rate. Generally, yes, it would be expected that countries spending a higher amount would have a lower infant mortality rate (1) because e.g. they would be able to afford more midwives/doctors (1). Examples of supporting evidence e.g. Liberia spends the least and has the highest (1) UK spends the most and has the lowest (1). There is an exception, Cuba (1) spends the 4th lowest and has the 2nd lowest infant mortality rate (1). 4 Question Answer Marks Guidance 1(e) Discuss whether or not having more of its workers employed in the tertiary sector would benefit the Liberian economy. Up to 3 marks for why it might: Jobs in the tertiary sector tend to be better paid (1) may raise living standards (1) working conditions tend to be better (1) e.g. less dangerous (1) demand for services tend to increase more than demand for primary products (1) imports of services may be reduced (1) exports of services may increase (1) current account position may be improved (1). Productivity/skills may be higher in the tertiary sector (1) which may cause economic growth (1) may make the country more developed (1). A larger healthcare sector could reduce the infant mortality rate / increase life expectancy (1). May attract MNCs/FDI (1) increasing employment (1). Up to 3 marks for why it might not: The country may be better at producing primary or manufactured products (1) the country has a climate suited to agriculture (1) which may reduce economic growth (1). There may be an opportunity cost in terms of less resources being available in the primary and secondary sectors (1). Some jobs in the tertiary sector are low-paid (1) example (1) because they require fewer skills (1). Many tertiary industries are based in cities (1) this may lead to problems of rural-urban migration / overcrowding (1). Liberia’s resources are more suited to producing rubber (1) which can be exported and bring in foreign exchange (1). Imports of manufactured/primary products may increase (1). 5 For all ‘Discuss’ questions Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded. Generic example Mark Economic growth will increase 1 because of reason« e.g. demand for services is increasing globally 1 Economic growth will decrease (reverse of 1st argument) 0 because of a different reason / not a reverse argument e.g. a country’s resources may be more suited to producing primary products. 1 Reward but do not expect reference to comparative advantage as equivalent to better at producing. Question Answer Marks Guidance 1(f) Explain, using information from the extract, how the concept of opportunity cost affects all rubber farmers in Liberia. Opportunity cost is the (next) best alternative foregone (1). The US MNC could use its resources to produce rubber (1) or cocoa/coffee (1). The local farmers could sell rubber (1) or rubber wood / make furniture (1). The farmers could use the money to buy more land (1) example, e.g. diversify into other areas / education for their children (1). Subsidies to farmers (1) could be used to help them in other ways e.g. education (1). 4 Question Answer Marks Guidance 1(g) Discuss whether or not a high rate of unemployment would always cause emigration. Up to 4 marks for why it might: People may go to other countries in search of jobs (1). A high rate of unemployment is likely to mean wages are low in the country / there is poverty in the country (1) people may emigrate in search of higher wages (1). A high rate of unemployment may mean poor healthcare / education / other services in the country (1) people and governments not having the income to spend much on these services (1) people may emigrate to get a higher standard of living (1). People may have skills more appropriate to jobs in other countries / in greater demand in other countries (1). Up to 4 marks for why it might not: Jobs may not be available abroad (1) unemployment may be higher in other countries (1) there may be restrictions on immigration (1). People may lack the skills to take up any available jobs in other countries (1). People may have family ties (1) restricting their mobility (1). People may not be aware of jobs in other countries / lack of information (1). There may be generous unemployment benefits in the country (1). The costs of living may be low in the country (1) which may discourage e.g. the retired from emigrating (1). People may be deterred by cost of emigration (1). People may be deterred by cultural differences in other countries (1). Unemployment may be short term / believed to be short term / the unemployed may be optimistic about future economic prospects in the country (1) if seasonal or frictional unemployment (1). 6 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is expected.

Question 15

High technology (hi-tech) firms use a range of resources including labour and land. One US hi-tech firm has produced a new price index whic…

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7(a) Identify the reward received by labour and the reward received by enterprise. Labour = wages (1). Enterprise = profit (1). 2 7(b) Explain how inflation may affect borrowers and savers. Borrowers may gain (1) if the inflation rate exceeds the interest rate/the real value of what they repay may fall (1). Savers may lose (1) if the inflation rate exceeds the interest rate/the real value of their saving will fall (1). 4 7(c) Analyse why it is important to a government that inflation is measured accurately. It is important to ensure a government/central bank follows the right policies (1). If, for instance, a government overestimates inflation it may increase taxes (1) cut government spending (1) raise interest rates (1) which may increase unemployment (1) reduce economic growth (1). Measures of inflation e.g. CPI/RPI (1) can be the basis of wage claims (1) and rises in some state benefits/indexed linked state benefits (1). Helps planning (1) may encourage investment (1). 6 7(d) Discuss whether or not an increase in investment would reduce a deficit on the current account of the balance of payments. Up to 5 marks for why it might: May lower costs of production (1) make domestic products more internationally price competitive / lower export prices (1) so increasing demand for exports (1). Advanced technology / more efficient production (1) may increase the quality of products produced (1) increase demand for domestically produced products (1) reducing demand for imports (1). Investment in labour (human capital) (1) can increase skills (1) raise productivity (1) increase quality of products (1). Investment abroad could increase primary income/income (1). Up to 5 marks for why it might not: The investment may go on imported capital goods (1) in the short run would increase spending on imports (1). The investment may be in products which are not in demand abroad (1) are not substitutes for imports (1). In the short run investment may increase total (aggregate) demand by more than total (aggregate) supply (1) which may cause inflation (1) making domestic products less internationally competitive (1). Domestic products may become more competitive but net exports may not rise if offset by another change (1) e.g. import restrictions/fall in income abroad / rise in exchange rate (1). Investment may not be big enough to make a difference (1). 8 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded.

Question 16

India: a growing success In 2016, the Indian economy grew by 7.5%. This made it the world’s fastest growing large economy. In contrast, the…

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Question Answer Marks 1(a) Identify, using information from the extract, two reasons why India’s 2 inflation rate fell in 2016. Fall in oil prices (1). Monetary policy (1). 1(b) Explain, using information from the extract, whether demand for Indian 2 tractors was price-elastic or price-inelastic in 2015. Inelastic (1) price and revenue moved in the same direction (1). 1(c) Explain two internal economies of scale referred to in the extract. 4 • managerial/labour economies (1) employing specialised workers (1) • financial economies (1) easier to borrow from banks / lower borrowing costs (1). 1(d) Calculate, using information from the extract, the percentage of India’s 2 labour force that was employed in the vehicle industry in 2016. 5% (2). Correct working: (26m / 500m + 20m) × 100 / 520m (size of labour force) / 5.2% (percentage in 2014) (1). 1(e) Analyse, using Fig.1, the relationship between India’s economic 5 growth rate and population growth rate over the period shown. Output rose over the period / economic growth rate was positive over the period (1). Economic growth rate fell over the whole period (1). Economic growth rate fell from 2010 to 2012 (1). Economic growth rate rose from 2012 to 2016 (1). Economic growth rate is highest in 2010 (1). Population rose over the period (1). Population growth rate fell over the period / was on a downward trend (1). Population growth rate was relatively stable (1). Population growth rate is highest in 2010 (1). Economic growth rate was higher than population growth rate (1) every year (1). Economic growth fluctuated more than population growth rate (1). The data suggests that GDP per head / living standards would have risen over the period (1). 1(f) Discuss whether or not a government should aim for a low rate of 5 inflation. Up to 3 marks for why it should: A low rate of inflation may result in increased international competitiveness (1) improving the current account position (1). It may create certainty/stability (1) encouraging firms to invest (1) increasing output (1) increasing employment / lowering unemployment (1). It will not cause a random redistribution of income (1) protecting savers (1). It may raise profit (1) if demand-pull (1) encourage firms to expand (1) increasing employment (1). It stops purchasing power being eroded by too much (1). Up to 3 marks for why it should not: It may involve policy measures such as e.g. higher income tax (1) which reduce total (aggregate) demand (1) and so cause unemployment (1). Inflation can reduce debts (1) keeping firms in business (1) stopping households getting into difficulty (1). Employment may be protected (1) wages can be raised by less than inflation (1) enabling firms in difficulty to continue in production (1). A government may have other policy objectives (1). There is a risk that this could lead to deflation (1) have adverse macroeconomic effects / lose benefits of low rate of demand-pull inflation (1). 1(g) Explain, using information from the extract, two reasons why 4 consumer expenditure may increase in India in the future. The economy is growing / there is a rise in GDP per head (1) more income increases people’s ability to spend (1). There is growing optimism (1) which is likely to increase people’s willingness to spend as they may expect incomes/employment to be high in the future (1). The population is increasing (1) more people to buy goods and services (1). The labour force is increasing (1) more people with incomes to spend (1). The population is due to be relatively young (1) the young may spend a relatively high proportion of their income (1). Low/stable inflation (1) may enable interest rates to be low (1). 1(h) Discuss whether or not having a young population is a benefit to an 6 economy. Up to 4 marks for why it might: They may increase the size of the labour force (1) increase productive capacity / potential output (1). They may be more geographically mobile (1) allowing firms to fill vacancies (1). They may have up to date skills (1) may be fitter / physically stronger (1) raise productivity (1). A ready supply of young workers may attract MNCs (1) increase output (1). Up to 4 marks for why it might not: If a high proportion are aged below school leaving age (1) there will be a high dependency ratio (1) placing a burden on workers (1). There may be a need for more schools (1) resources could have been used for other purposes (1) opportunity cost (1). Young workers may be less experienced (1) less productive/skilled (1) may need more training (1) may emigrate (1). There may be a fall in parents working for a while (1) reduce output (1).

Question 17

The economic problem results in people having to make choices. In Bulgaria, in recent years, people have changed how much they spend. The B…

Accepted Answer

3(a) Identify two ways a government could encourage people to spend 2 more. • lower taxes • increase government spending / expansionary fiscal policy • increase money supply • reduce interest rates / expansionary monetary policy • raise subsidies 3(b) Explain how the economic problem results in people having to make 4 choices. The economic problem is unlimited wants (1) but limited resources (1). As resources are limited, people cannot have everything they want / not everything can be produced / there is scarcity (1) there is an opportunity cost (1). 3(c) Analyse why deflation may cause a fall in output. 6 A fall in the price level (1) may discourage spending / reduce total (aggregate) demand (1) households waiting for prices to fall further (1) the fall in demand may reduce firms’ output (1). Deflation may reduce firms’ profits (1) this may discourage investment (1) reduce demand for capital goods (1) lower the output of capital goods (1). 3(d) Discuss whether or not a country will suffer if its output falls. 8 Up to 5 marks for why it might: Lower output may mean that people will have fewer goods and services (1) this could reduce living standards / reduce incomes (1). Lower output may mean fewer workers are needed (1) unemployment may rise (1). If consumers cannot buy domestically produced products (1) they may buy imports (1) exports may fall (1) resulting in a current account deficit (1). MNCs may leave the country (1) reducing employment (1). Tax revenue may fall (1) reducing government’s ability to spend on e.g. education (1). Up to 5 marks for why it might not: Living standards may rise (1) if output falls by less than population (1). A lower output may reduce external costs (1) e.g. pollution (1) destruction of sights of natural beauty (1). Lower output may reduce demand for imports (1) improve the current account position (1).

Question 18

In February 2017, Europe experienced a shortage of fresh vegetables due to bad weather. For a period of time, the markets for a number of v…

Accepted Answer

3(a) When is a market in equilibrium? When demand equals supply / when there is no pressure for price to change (2). When it is in balance (1). 2 drawn demand and supply diagram showing equilibrium. 3(b) Explain how a rise in the price of food would affect a country’s consumer prices index (CPI). CPI is a measure of inflation (1) Demand for food is inelastic / necessity (1). A rise in price of food would cause an increase in inflation / CPI (1). Food is an item in the CPI (1) it has a relatively high weighting (1) people spend a relatively high proportion on food (1) proportion declines as income rises (1). 4 3(c) Analyse, using a demand and supply diagram, how bad weather is likely to affect the market for broccoli. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or P and Q (1). Demand and supply curves correctly labelled (1). Supply curve shifted to the left (1). Equilibriums – shown by lines or e.g. E1 and E2 (1). Up to 2 marks for written comments: Bad weather will destroy crops / reduce supply of broccoli / quantity traded falls (1). Weather is an important influence on the supply of agricultural products / cost of producing broccoli will rise / price will rise (1). 6 S2 S1 Q2 Q1 P1 P2 D O quantity of broccoli price of broccoli Question Answer Marks Guidance 3(d) Discuss whether or not a higher inflation rate will benefit producers. Up to 5 marks for why it might: Producers may receive higher prices / revenue for their products (1) if costs rise by less (1) profits will rise (1) may encourage investment (1) expand the business (1). Producers may be able to borrow more cheaply (1) the burden of past debts will fall (1) if the rate of inflation is above the rate of interest (1). An inflation rate may rise from a low or negative rate (1) and this would provide a greater incentive for producers (1). Higher inflation rate in other countries (1) will make this country’s products more competitive (1). If demand is inelastic (1) a rise in price will increase revenue (1). Higher inflation will reduce the cost of borrowing (1). Up to 5 marks it might not: If cost of production rises (1) output may fall (1) firms’ profits may fall (1). Producers may have to spend time adjusting prices (1) menu costs (1). A lower and stable rate of inflation (1) may increase the confidence of producers (1). Producers may find it more difficult to export abroad / exports may fall (1) lower revenue (1). Producers may find it harder to assess relative prices (1) and so may make inefficient decisions (1). 8

Question 19

In a mixed economic system, such as Portugal’s, the government intervenes in the economy. Reasons for government intervention include to co…

Accepted Answer

6(a) Identify two reasons why market failure may occur. The existence of external costs (1) and external benefits (1). Abuse of monopoly power (1) advertising distorting choice (1). Inefficient allocation of resources / not producing the right quantity / not producing at the lowest possible cost (1). 2 goods, public goods and information failure. 6(b) Explain how resources are allocated in a mixed economic system. Resources in the public sector (1) are allocated by government decisions/directives (1) products are produced by state-owned enterprises resources are allocated to overcome market failure (1). Resources in the private sector (1) are allocated by the price mechanism / market forces / demand and supply / firms / consumer sovereignty (1) profit provides an incentive for firms to produce what consumers demand (1). 4 Maximum of 3 marks for explaining how only one sector allocated resources. 6(c) Analyse how a high rate of inflation may harm the poor. Inflation may raise the price of basic necessities (1) reducing purchasing power of the poor (1) increasing absolute poverty (1). Inflation may reduce the value of any savings the poor have (1) reducing their ability to access e.g. healthcare, education and housing (1) reducing job opportunities (1). Inflation may reduce the country’s international competitiveness (1) lower output (1) increase unemployment (1) making it more difficult for the poor to gain jobs (1). Inflation may reduce the purchasing power of state benefits (1) e.g. pensions or unemployment (1). The poor may be less likely to belong to trade unions (1) less ability to raise wages (1). 6 Question Answer Marks Guidance 6(d) Discuss whether or not increasing government spending will enable a government to achieve its aims for the economy. Up to 5 marks for why it might: Government spending will increase total (aggregate) demand (1) this may encourage firms to produce more (1) economic growth may increase (1) deflation may be avoided (1) and unemployment may fall (1) the poor may gain jobs (1) making income more evenly distributed (1). Government spending on healthcare (1) may raise living standards / life expectancy (1). Government spending on education (1) may improve environmental standards (1). Government subsidies (1) may increase labour productivity (1) costs of production may fall (1) lowering cost-push inflation (1) increasing international competitiveness (1) improving the current account position (1). Government spending on state benefits (1) may reduce income inequality (1) may raise living standards (1). Up to 5 marks for why it might not: Higher government spending may cause inflation (1) if total supply does not rise in line with total demand (1). Some of the higher income created may be spent on imports (1) this may increase a current account deficit (1). An increase in government spending on unemployment benefits (1) may increase voluntary unemployment (1). 8

Question 20

In 2016, Argentina’s annual inflation was 20%, down from 40% in 2015. Inflation had been high since 2003. Wages were constantly adjusted up…

Accepted Answer

4(a) Identify two non-wage factors that could affect an individual’s choice of occupation. • opportunity for promotion • job security • satisfactory work • varied work • pleasant working conditions • fringe benefits • location • danger 2 4(b) Explain two causes of inflation. • demand-pull inflation (1) increase in total demand/ lower interest rate / increase business confidence / increase consumer confidence / depreciation of the currency / lower income tax / lower cost of borrowing / increase disposable income / increase exports (1) increase in money supply (1) • cost-push / increase in costs (1) increase price of commodities / increase cost of production / depreciation of the currency / increase indirect taxes (1) 4 4(c) Analyse the impact of strikes on an economy. Disrupted production (1) loss of output (1) decreased productivity (1) less economic growth (1) increased cost of firms (1) reduced profits (1) rising prices / inflation (1) unemployment (1). Better working conditions of the workers (1) higher wages (1). Exports decreasing (1) increase current account deficit / decrease current account surplus (1). Less investment by MNCs (1). There may be capital investment to replace workers (1). 6 Question Answer Marks Guidance 4(d) Discuss whether or not an increase in wages will reduce a firm’s profit. Up to 5 marks for why it might: Higher wages will mean a higher wage bill (1) if output does not increase by more than wages, labour costs per unit will increase (1) costs of production will increase (1) profit is revenue minus costs (1) with higher costs and the same revenue, profit will fall (1). Prices will rise (1) if demand is elastic, revenue will fall (1) Up to 5 marks for why it might not: Paying higher wages may prevent strikes (1) this can reduce costs of production (1). Higher wages may motivate workers (1) this can increase productivity (1) reduce costs of production (1). Higher wages may make it easier to recruit skilled workers (1) this will raise productivity (1) reduce costs of production (1) increase profits (1) Other costs may be falling (1) e.g. rent, corporation tax (1). Demand for the firm’s products may be increasing (1) this will raise revenue (1). Higher wages may be paid to a smaller labour force (1) reducing the wage bill (1). Replace workers with machines (1) may leave costs unchanged (1). 8 2 marks could be awarded for an accurately drawn Demand and Supply diagram.

Question 21

In 2017, the UK included bicycle helmets for the first time in its calculation of the consumer prices index (CPI). Many bicycle retailers n…

Accepted Answer

7(a) Define choice and provide an example. Two or more different alternatives that an economic agent may have OR the idea of sacrifice and opportunity cost (1) different coloured bicycle helmets / any example (1). 2 7(b) Explain how the CPI is calculated. CPI uses a basket of goods and services (1) weighted to account for the proportion of income (1) spent by the average household (1) found in a survey (1) uses a base year (1) for comparison (1) prices around the country surveyed (1) various types of firms / sources e.g. physical shops and also online (1) weights multiplied by price changes (1). 4 7(c) Analyse the possible reasons for the increase in global demand for bicycle helmets. Increase in popularity of cycling (1) helmets are complements to bicycles (1) quantity demanded for bicycles increasing would increase the demand for helmets (1). Increase in environmental awareness (1) less driving (1) more bicycles (1) thus, more demand for bicycle helmets (1). Increase in health and safety awareness (1) dangers of cycling (1) increased awareness of benefits of helmets (1). Increase in income (1) bicycle helmet is normal good (1) YED positive (1). Increase subsidies for bicycles (1) decrease price of bicycles (1). Increase demand for bicycles (1) increase demand for bicycle helmets Increase in population (1). Reduction in price of helmets (1). 6 2 marks could be awarded for an accurately drawn Demand and Supply diagram. Question Answer Marks Guidance 7(d) Discuss whether or not increasing sales of a product will be beneficial to a firm. Up to 5 marks why it will be: Increase sales revenue/income (1) increase profits (1) allowing firm to reinvest (1) into R&D (1) employ more labour (1) making new products (1) better quality products (1) profits increase even more (1). Revenue may increase if PED is elastic (1) as demand will rise by a greater proportion than price (1). Economies of scale (1) as output increases and average cost falls (1) efficiency arising from bulk buying / lower interest rates / indivisibility / division of labour (1). Up to 5 marks why it will not be: Price might be lower (1) revenue is lower (1) profit is lower (1) sales of product increase but sales of other products decrease (1) not enough to offset each other (1). Extra sales only achieved through higher costs of production (1) e.g. advertising (1). Diseconomies of scale (1) increase output and average costs increases (1) due to control and coordination problems (1). 8

Question 22

In 2015, the Malaysian government set out its objectives to increase productivity and savings. There has been higher consumer expenditure, …

Accepted Answer

3(a) Identify two ways a government could encourage saving. • raise the rate of interest • introduce tax-free saving schemes • provide information / education about the benefits of saving • introduce compulsory saving schemes • government measure that can increase income e.g. lower taxes 2 3(b) Explain two reasons why productivity may increase. Improvements in education and training (1) would increase the skills of workers (1). More capital equipment / investment (1) which may increase the speed / accuracy at which workers work / more efficient machinery (1). Increase in wages (1) which will motivate workers (1). Lower working hours (1) workers less tired (1). Better working conditions (1) less stressed (1). Better weather / improvements in the type of crops grown / better feed for animals (1) which can increase agricultural output / which may result from research and development (1). Immigration of workers (1) with better skills (1). Better healthcare (1) workers fitter (1). Successful supply-side policy measure (1) e.g. spending on infrastructure (1). Specialisation (1) workers concentrating on particular tasks may produce products more quickly / efficiently (1). 4 Question Answer Marks Guidance 3(c) Analyse how an increase in investment could influence inflation. Higher investment will mean higher spending on capital goods (1) it could increase total (aggregate) demand (1) this could increase demand- pull inflation (1) if total (aggregate) demand exceeds total (aggregate) supply (1). May increase demand for imported capital goods / raw materials (1) causing imported / cost-push inflation (1). Higher total (aggregate) demand could increase employment / decrease unemployment (1) which could increase total (aggregate) demand further (1). In short run may raise costs of production (purchase of machines) (1) causing cost-push inflation (1). In the long run it could increase output (1) may introduce advances in technology (1) increase efficiency / productivity (1) it could reduce costs of production (1) reducing cost-push inflation (1). Investment in human capital (1) raising workers’ skills (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not older workers are paid more than young workers. Up to 5 marks for why they might be: They have more experience (1) they are likely to have received more training (1) they may have higher productivity (1) more skilled (1) more reliable / make fewer mistakes (1) in higher demand (1) lower supply (1). They may have been with the same employer for some time (1) and may have been promoted (1). Some older workers may be rewarded for staying with the same employer / young workers may be at start of career (1) be paid a loyalty bonus (1). In some countries, the minimum wage may rise with age (1). Up to 5 marks for why they might not be: Some older workers in jobs requiring physical strength (1) may be less fit / young workers may be fitter (1). Older workers may be less occupationally mobile (1) geographically immobile (1) and so may not move to gain higher wages (1). Young workers may be more up to date with advances in technology / new methods / new ideas (1) their skills may be in higher demand (1). Young workers may be in expanding industries (1). Young workers may work more hours (1) may be better educated / more qualified (1). 8

Question 23

Between 2007 and 2017, the average wage in China tripled, while it fell in Brazil. The rise in average wage in China was particularly high …

Accepted Answer

2(a) Define tertiary sector and give an example of an industry operating in the tertiary sector. Services (1) e.g. banking (1). 2 2(b) Explain two reasons why farm workers may be low paid. • high supply / easily replaced / lower productivity / labour intensive / low value products (1) low skills/qualifications required (1). • low demand (1) can be replaced by capital equipment (1). • low bargaining strength (1) weak trade unions/low trade union membership (1) 4 2(c) Analyse how lower unemployment may cause inflation. • More people in work (1) incomes may rise (1) as more people are earning wages / higher purchasing power (1) this could increase spending (1) which may increase total (aggregate) demand (1) without a rise in output / supply (1) causing demand- pull inflation (1). • There may be a shortage of workers/increased competition for workers (1) wages may be raised (1) to attract workers (1) this increases the average cost of production (1) firms raise prices to maintain profit margins (1) causing cost-push inflation (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not a country with high wage rates will have a high unemployment rate. Up to 5 marks for why it might: • High wages may mean high cost of production (1) this may mean higher prices / inflation (1) international competitiveness may be low (1) exports may fall (1) imports may rise (1) net exports may fall (1) total (aggregate) demand may fall (1) causing cyclical unemployment / firms may lay off workers (1). • May encourage capital intensive production (1) particular industries may be driven out of business by foreign competition (1) causing structural unemployment (1). Up to 5 marks for why it might not: • High wages may motivate workers to work harder (1) making them feel appreciated (1) causing productivity to be high (1) resulting in high demand for labour (1). • Workers may be working with high value capital equipment (1) keeping cost per unit low (1). • High wages can mean high consumer spending (1) so total (aggregate) demand may be high (1) resulting in higher demand for workers (1). • Wages may rise above benefits (1) leading to less voluntary unemployment (1). • Higher tax revenue (1) allows government to increase spending on reducing unemployment e.g. training (1). 8

Question 24

(a) Calculate Vietnam’s GDP per head in 2017. [1] (b) Identify two rewards to factors of production. [2] (c) Explain what happened to Vietn…

Accepted Answer

Question Answer Marks 1(a) Calculate Vietnam’s GDP per head in 2017. 1 $6900 (1). 1(b) Identify two rewards to factors of production. 2 Wages (1) profits (1). 1(c) Explain what happened to Vietnam’s foreign exchange rate between 2 2010 and 2017. Logical explanation which might include: It fell/depreciated (1) more dong had to be given to buy one dollar (1). 1(d) Explain two benefits an economy may gain from having a young 4 labour force. Logical explanation which might include: May be more flexible (1) switch from doing different tasks (1). May be more mobile (1) able to switch from one job to another or from one place to another place (1). May be more up to date with advances in technology (1) more productive/able to use advanced technology (1). 1(e) Analyse why Vietnam’s budget deficit may decline in the future. 4 Coherent analysis which might include: High economic growth will raise incomes/wages rising (1) higher profits (1) more revenue from direct taxes (1) higher incomes is likely to result in more spending (1) more revenue from indirect taxes (1). Tax rates may be increased (1) reducing the gap between tax revenue and government spending (1). Deregulation / privatisation may increase profits (1) resulting in higher revenue from direct taxes /corporation tax (1). 1(f) Analyse the relationship between government spending on education 5 and the percentage of the labour force employed in the tertiary sector. Coherent analysis which might include: Generally the countries with the highest % spending on education have the highest percentage employed in the tertiary sector and vice versa (1) up to two examples e.g. Norway has the highest % spending and the highest % employed in the tertiary sector, Bangladesh has the lowest % spending and the lowest % employed in the tertiary sector (2) the main exception is Vietnam – second highest % spending but lowest % employed in the tertiary sector (1) there may be a time lag in this case (1). It is the expected relationship as some tertiary jobs require high skills (1) countries that can afford to devote a high percentage of resources to education may have achieved a relatively high level of development (1) a higher percent spent will create jobs in education (1). 1(g) Discuss whether or not an increase in competition is likely to benefit 6 Vietnamese consumers. Apply this example to all questions with the command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. 0 reverse of a previous argument. Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on 1 subsidies may stimulate the economy more than spending on education. Award up to 4 marks for logical reasons why it might, which may include: • prices may be reduced to attract more consumers (1) making them more affordable to consumers (1) • choice will be increased in terms of sellers (1) and possibly in terms of a greater range of products (1) • quality may rise (1) with pressure being put on producers to produce good products to attract consumers (1) • producers may respond more fully to changes in consumer demand (1) Award up to 4 marks for logical reasons why it might not, which may include: • firms may be smaller (1), less able to take advantage of economies of scale (1), so prices may be higher (1) • firms may have less profit (1) and so spend less improving the quality of the product (1) • some firms may be MNCs (1), less concerned about causing external costs (1) 1(h) Discuss whether or not the increase in borrowing is likely to have 6 caused inflation in Vietnam in 2017. Award up to 4 marks for logical reasons why it might, which may include: • higher consumer demand (1) and investment (1) will increase total (aggregate) demand (1) • higher total demand may cause demand-pull inflation/cause producers to raise prices (1) • government spending may rise, further adding to total (aggregate) demand (1) • the economy has very low unemployment/full employment (1) making it difficult for supply to respond to higher demand (1) • tax rates may rise (1) which may increase costs of production (1) causing cost-push inflation (1) Award up to 4 marks for logical reasons why it might not, which may include: • higher investment may reduce costs of production (1) lowering cost- push inflation (1) • higher consumer spending may enable firms to grow (1) and take greater advantage of economies of scale (1) • increased education (1) may raise labour productivity (1), reduce costs of production (1) and lower cost-push inflation (1) • privatised firms may be more efficient (1) • more competition may reduce price rises (1)

Question 25

Japan has a low immigration rate and a declining population. In recent years, it has experienced deflation and a rise in child poverty. By …

Accepted Answer

2(a) State two benefits a country may gain from immigration. 2 One mark each for two from: larger labour force, reduced dependency rate, higher demand, higher tax revenue, more skilled workers, greater utilisation of resources. 2(b) Explain two consequences of deflation. 4 Logical explanation which might include: Output may fall (1) if due to lower demand firms will cut back production (1). Unemployment may rise (1) fewer workers will be needed to produce fewer goods and services (1). Economic growth may decline / a recession may occur (1) due to lower total (aggregate) demand (1). Output may rise (1) if due to lower costs of production / advances in technology (1). Exports may increase (1) if domestic products have become more price- competitive (1). 2(c) Analyse why children from low-income families may have low incomes 6 as adults. Coherent analysis which might include: Likely to receive less education (1) likely to have lower quality healthcare (1) nutrition is likely to be poor (1) likely to gain fewer qualifications/skills (1) be less productive (1) have fewer employment opportunities (1) may be in low paid jobs (1) may be unemployed (1). 2(d) Discuss whether or not a national minimum wage will reduce poverty. 8 In assessing each answer, use the table below. Level Description Marks 3 A reasoned discussion which accurately examines both 6–8 sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other but, overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 2 A reasoned discussion which makes use of economic 3–5 information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using economic definitions 1–2 and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no creditable 0 content. Why it might: • is set above the equilibrium level, will raise the pay of the low-paid • may reduce relative poverty by reducing the gap between high and low- income earners • may reduce absolute poverty by enabling low paid workers greater access to basic necessities • may raise employment, if it motivates workers and raises productivity • may raise employment if it increases total (aggregate) demand. Why it might not: • may not have any impact if set below the equilibrium level • unemployment may rise as it may increase firms’ costs of production • will not help the poor who are unable to work • may not reduce relative poverty if it results in other workers pressing for, and getting, wage rises to maintain their wage differentials • some receiving it may not be in poor households. Reward, but do not expect, a national minimum wage diagram which shows the effect on pay and employment.

Question 26

(a) Calculate Pakistan’s trade in goods balance in 2017. [1] (b) Identify two possible causes of demand-pull inflation in Pakistan in 2017.…

Accepted Answer

Question Answer Marks 1(a) Calculate Pakistan’s trade in goods balance in 2017. 1 –$36.5bn (1). 1(b) Identify two possible causes of demand-pull inflation in Pakistan in 2 2017. Any two from: Higher government spending (1) higher consumer spending / rising population (1) increased investment (1). 1(c) Explain the opportunity cost to Pakistan of producing consumer 2 goods. Logical explanation which might include: Capital goods (1) resources that could have been used to produce capital goods are being used to produce consumer goods / (next) best alternative forgone (1). 1(d) Explain two reasons why education is a merit good. 4 Logical explanation which might include: People underestimate full benefit / private benefit (1) not appreciating health and job opportunity benefits (1). People not taking into account external benefits (1) e.g. better quality products/larger quantity of products or economic growth (1). 1(e) Analyse why the children of poor families tend to receive less 4 education than the children of rich families. Coherent analysis which might include: The children of the poor may not attend school (1) they may have to work (1) to help support their families (1). Poor families are likely to have difficulty paying to have their children educated (1) some schools in Pakistan are in the private sector (1) there seems to be a lack of low-cost schools (1). The children of the poor may leave school at a younger age (1) may miss more school days due to ill health (1). 1(f) Analyse the relationship between GDP per head and imports per head. 5 Coherent analysis which might include: Generally the countries with the highest GDP per head spend the most per head on imports (1) examples e.g. Norway has the highest income per head and the highest spending on imports per head and Haiti has the lowest income and the lowest spending on imports (up to 2) exception: Russia has a higher income per head than Mexico but a lower spending per head on imports (1). Expected relationship as income rises (1) people can afford more imports (1). The four countries with above average GDP per head spend above the global average on imports (1). The two countries with below average GDP per head spend more on imports (1). 1(g) Discuss whether or not the supply of teachers in Pakistan is likely to 6 increase in the future. Generic example mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. 0 reverse of a previous argument. Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on 1 subsidies may stimulate the economy more than spending on education. Award up to 4 marks for logical reasons why it might, which may include: • education standards may rise (1) which may increase those qualified to be teachers (1) • working conditions may improve (1) with better buildings (1) • population is increasing (1) which may increase the size of the labour force (1). Award up to 4 marks for logical reasons why it might not, which may include: • wages may not rise (1) teachers may switch to other jobs (1) • teachers may emigrate to other countries (1) • the qualifications required to be a teacher may increase (1) by more than educational standards rise (1). 1(h) Discuss whether or not an increase in its import tariffs would be likely 6 to benefit the Pakistani economy. Award up to 4 marks for logical reasons why it might, which may include: • may reduce the trade deficit (1) by reducing demand for imports (1) • tax revenue may increase (1) enabling the government to increase its spending (1) • may help protect infant industries (1) until they can take advantage of economies of scale (1). Award up to 4 marks for logical reasons why it might not, which may include: • demand for some finished imports may be price inelastic (1) • demand for capital goods / raw materials may be inelastic (1) • incomes may rise (1), leading to higher spending on imports (1) • other countries may impose trade restrictions (1) reducing Pakistan’s ability to export (1).

Question 27

The election of a new president in South Africa in 2018 led to improvement in business and consumer confidence. Inflation rates fell despit…

Accepted Answer

2(a) State two components of the current account. Any two from: • trade in goods • trade in services • primary income • secondary income 2 Any two components. Accept exports and imports for 1 mark. 2(b) Explain why inflation may fall even if there is an increase in total demand. Logical explanation which might include: There may have been an increase in total supply (1) which may be greater than the increase in total demand (1). There could be an improvement in productivity (1) better technology / capital (1). Costs of production could have gone down (1) e.g. lower taxes / lower costs of raw material, stronger exchange rates (1). 4 2(c) Analyse how a country’s current account deficit might be reduced if its firms become internationally competitive. Coherent analysis which might include: Being internationally competitive e.g. high productivity, low inflation, low exchange rates (max 2) increases production (1) reduces cost of production (1) decreases price of exports (1) increases quality of exports (1) increases demand for exports (1) increases value of exports / net exports (1). Imports relatively more expensive / other countries products more expensive (1) lower relative quality of imports (1) decreases imports (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not lower taxes on firms will be beneficial for an economy. In assessing each answer, use the table opposite. Why it might be beneficial: • will increase after tax profits • increase ability and incentive to invest • firms may expand output leading to higher employment and economic growth • higher investment may increase innovation and productivity which may improve the current account • will reduce cost of production. This may reduce inflation Why it might not be beneficial: • firms might not invest more and just keep the profits to themselves • government will get less revenue from firms, reducing ability to spend to improve the economy • may attract MNCs which may replace domestic firms • capital goods may replace labour, causing unemployment • higher output may result in external costs e.g. pollution. 8 Level Descriptors Mark 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Marks Guidance 2(d) Example of L3 answer: Lower taxes on firms will be beneficial for an economy, as this will reduce the production costs for firms and increase their profits. With greater profits, firms may invest in labour, which will decrease unemployment, and allow the firm to increase its output. With greater output, a firm’s exports may increase, and this will improve the current account position. Furthermore, lower taxes may allow for lower prices as the reduced production costs may be passed on to consumers. Also, lower taxes may allow a firm to increase its wages which not only increase average incomes, but also increase productivity and so economic output. On the other hand, low taxes may not be beneficial, as firms may use their increased income for expansion, but may also increase external costs such as pollution when they do this. Furthermore, lower taxes may allow firms to become monopolies, which will hurt competition and the potential for new firms. Moreover, with increased income, firms may choose to become capital-intensive rather than labour-intensive, which would increase unemployment. Principal Examiner comment: Strong on one side and reasonable on the other side.

Question 28

It was announced in November 2016 that 500 and 1000 rupee banknotes could no longer be used in shops in India. These were replaced by the c…

Accepted Answer

5(a) State two functions, other than issuing banknotes and coins, of a central bank. Two from: • manages monetary policy / sets the rate of interest • manages the national debt • controls the banking system • banker to commercial banks • banker to the government • lender of last resort • looks after reserves of gold and foreign currency 2 Allow banker to the banks Question Answer Marks Guidance 5(b) Explain two reasons why workers in the tertiary sector may be paid more than workers in the primary sector. Logical explanation which might include: Higher demand (1) due to e.g. higher productivity / more profitable / expansion of tertiary industries (1). Lower supply (1) due to e.g. higher qualifications/skills/education needed (1). Stronger bargaining power (1) due to stronger trade unions / professional organisations (1). Primary sector workers can be replaced by capital equipment (1) so bargaining strength is weak (1). More favoured by government policy (1) e.g. increased government spending on education/healthcare (1). Tertiary sector workers are mainly found in developed countries where wages / cost of living is generally high (1) whereas primary sector workers are mainly found in undeveloped countries were wages / cost of living are generally low (1). Lower value of goods and services being provided in primary sector (1) lower pay for primary sector workers (1). 4 One mark for each of two reasons identified and one mark for each of two explanations. 5(c) Analyse the advantages for firms of using division of labour. Coherent analysis which might include: Division of labour involves workers specialising (1) this can increase output / increase productivity (1) costs of production may be reduced (1) e.g. lower costs of training (1) e.g. less equipment needed (1). Specialisation can increase quality (1) lower costs can enable to charge lower prices (1) demand may rise (1) revenue/profits may increase (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not deflation will benefit an economy. In assessing each answer, use the table opposite. Why it might: • if due to lower costs of production, may be more internationally competitive • improve the current account position • may increase purchasing power if incomes do not fall • may raise living standards • may increase economic growth and employment Why it might not: • if due to lower total demand may result in a recession • consumers may postpone purchases • investment may fall • firms may reduce output, reducing demand for raw materials • unemployment may rise Example of Level 3 answer: When an economy undergoes deflation, the general price level in the economy falls resulting in goods and services in the country becoming cheaper. This results in a higher demand for the country’s goods and services from both those living in the country and abroad. The revenue from exports will increase due to greater international demand resulting in a current account surplus. Lower prices may improve standard of living for consumers as more can be bought than before. 8 Level Descriptors Mark 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information, and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Marks Guidance 5(d) However, an economy may not benefit from deflation as a prolonged deflation may result in unemployment. Firms may lose confidence in future sales as consumers wait for prices to fall further. Lower output may result in less employment further reducing demand and causing a recession. The government may have to intervene by cutting taxes and interest rates to encourage increased consumption. Principal Examiner comment: This is a concise answer with reasonable argument for the benefits and a strong answer for why there may not be benefits. Example of Level 1 answer: Deflation makes prices of goods and services to be low which will entice consumers to buy more as prices are cheaper than before. Principal Examiner comment: A basic understanding of deflation without any discussion of whether or not it is beneficial to the economy.

Question 29

In 2018, the US had its lowest unemployment rate for 18 years. Cyclical unemployment was very low and so was the rate of inflation. The US …

Accepted Answer

3(a) Define cyclical unemployment. • Workers without jobs (1) • due to a lack or fall in total (aggregate) demand (1) • more people unemployed than there are job vacancies (1) • in a recession / economic downturn (1). 2 Nothing for a fall in demand for a product. 3(b) Explain two ways a firm could increase the productivity of its workers. Logical explanation which might include: • Raise wages / performance related pay / commissions (1) increase motivation of workers (1). • Provide training (1) increase workers’ skills / efficiency (1). • Division of labour by firm (1) enables greater specialisation (1) • Buy capital goods / invest (1) workers will be working with better equipment (1). • Reduce working hours (1) workers may feel fresher / more alert (1). • Improve working conditions (1) reduce stress (1). • Subsidise workers’ healthcare (1) making them fitter / fewer days lost through illness (1). • Working from home (1) reduce stress from travelling (1). 4 One mark each for each of two ways identified and one mark each for each of two explanations. Question Answer Marks Guidance 3(c) Analyse the advantages of a low rate of inflation. Coherent analysis which might include: • Low inflation means prices are still rising (1) but not a high rate (1). • May stop purchasing power being reduced too much / wages may keep pace with inflation (1). • May increase international price competitiveness (1) as may be below the inflation rate of other countries (1) increasing exports (1) reducing imports (1) improving the current account position (1). • May create greater certainty / stability (1) as costs may not be rising significantly (1) encouraging firms / MNCs to invest (1) increasing output / GDP (1) increasing employment / lowering unemployment (1). • May encourage saving (1) as real value may be maintained (1) provide funds for investment (1). • It may raise profit (1) if demand-pull (1) encouraging firms to expand (1) increasing employment / lowering unemployment (1). • May stop a random redistribution of income (1) protecting savers (1). • Low menu costs (1) reduce pressure on firms’ costs of production (1). 6 ‘Increasing employment / lowering unemployment’ can only be credited once. Question Answer Marks Guidance 3(d) Discuss whether or not a fall in a country’s unemployment rate will reduce poverty in that country. In assessing each answer, use the table opposite. Why it might: • increase the income of those who gain jobs • absolute poverty may be reduced with more people being able to buy basic necessities • tax revenue may rise • the government could spend more on benefits for the poor • the government could spend more on education, reducing future poverty Why it might not: • jobs may be part-time, low-paid, at national minimum wage • jobs may be seasonal • relative poverty may increase if extra jobs are gained by the well-paid • the unemployment rate may fall but unemployment may rise if there are more people in the labour force • may be more retired people living in poverty • sick and disabled people may not be able to get out of poverty • unemployment is only one of a number of factors affecting poverty • absolute poverty may remain 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Question Answer Marks Guidance 3(d) Level Description Marks 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 30

Consumers in Uruguay are eating more processed foods. Factors of production, including enterprise, have responded to this change. Firms in …

Accepted Answer

3(a) Define enterprise. Risk bearing (1) setting up / owning a business (1) key decision making / organisation of the other factors of production (1) profit incentive / profit is the reward (1). 2 3(b) Explain the influence of opportunity cost on consumers’ decisions. Logical explanation which might include: Opportunity cost is the (next) best alternative (1) forgone / sacrificed (1). Consumers have limited income / time (1) have to make choices (1) cannot have everything they want (1) if buy more of one product may have to buy less of another / example of what product may be given up to buy another product (1). 4 Question Answer Marks Guidance 3(c) Analyse why a firm may become more capital- intensive. Coherent analysis which might include: The cost of capital may fall / the price of labour may rise (1) lowering costs of production (1) making the firm more price-competitive (1) may increase profits (1). Advances in technology (1) may improve the quality of capital (1) making it more productive / efficient (1) may increase the quality of products produced (1) raise demand for the products produced (1). Firms may want to reduce human error / more consistent quality / uniform products (1) reduce wastage (1). Firms may want to avoid disruption to production (1) caused by industrial action / strikes / sickness (1) capital equipment does not need to take breaks / can work 24 hours a day (1). There may be a shortage of labour (1) making it difficult to recruit workers (1). A government may reduce taxes on capital goods (1) provide subsidies (1) the rate of interest may be reduced (1) making capital goods more affordable (1). The firm’s output may rise (1) reducing the average fixed cost of capital / benefiting from economies of scale (1). 6 Question Answer Marks Guidance 3(d) Discuss whether inflation harms a country’s industries. In assessing each answer, use the table opposite. Why it might: • may increase costs of production • may reduce competitiveness, lowering sales at home and abroad • may upset industrial relations, workers pressing for wage rises • may make it difficult to plan • may discourage savings which can reduce funds available for investment • corporation tax may be moved into a higher tax bracket • may be menu costs / shoe leather costs Why it might not: • may be demand-pull inflation with demand for the firm’s products increasing • may be low and stable • may enable a firm to reduce the real cost of any debt • may enable the firm to cut the real cost of wages • may be lower than other countries’ inflation rates • may not be foreign substitutes • some industries may have inelastic demand 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 31

Latvia is one of the fastest growing economies in Europe. Although its GDP per head is below the European average, it is quickly catching u…

Accepted Answer

2(a) Identify two indicators of living standards. Two from e.g.: Real GDP per head Human Development Index (HDI) healthcare education Accept GDP per head. 2(b) Explain how a decrease in borrowing could reduce the chance of high inflation. Logical explanation which might include: Decrease in borrowing means people’s purchasing power would reduce / less money to spend (1) would lead to less consumption / less spending (1) or investment (1) this could lead to a decrease in total demand (1). Bank lending would be reduced (1) the money supply may be reduced / less money in circulation / less money in the economy. (1) price of goods and services will remain low / stop prices rising (1) less demand-pull inflation (1). 4 Question Answer Mark Guidance 2(c) Analyse how economic growth conflicts with balance of payments stability. Coherent analysis which might include: Economic growth may benefit from higher spending (1) whereas balance of payments stability does not (1). Less balance of payment stability because economic growth leads to higher income (1) higher employment (1) increases spending/consumption (1) increase the demand for goods and services (1) including imported goods (1) reducing net exports (1) increase trade deficit / reduce trade surplus (1). Economic growth could increase demand for imported raw materials (1) imported capital goods (1). Economic growth could lead to demand-pull inflation (1) wage rises (1) increase price of exports (1) reduce competitiveness of exports (1). 6 Question Answer Mark Guidance 2(d) Discuss whether or not having a lower GDP will be a disadvantage to an economy. In assessing each answer, use the table opposite. Why it might be a disadvantage: • lower income and lower purchasing power, lower standards of living • lower investment as less demand for goods and services, less production • lower healthcare and education standards • lower levels of employment • may be lower exports • lower tax revenue • may result in deflation Why it might be an advantage: • less production leads to less environmental problems • less work could lead to less stress • less income leads to less imports, better current account balance • less income leads to less inflation • GDP per head could rise if population fallen more than GDP 8 Accept discussion of low GDP. Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Question Answer Mark Guidance 2(d) Level Description Marks 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 32

Uruguay’s inflation rate reached 8.4% in July 2018. The central bank considered increasing the interest rate to reduce the inflation rate. …

Accepted Answer

4(a) Define total revenue. Total amount of money earned by firms (1) for selling their products (1). Price times quantity (2), P × Q (2) Total costs plus profit (2). 4(b) Explain two causes of inflation. Logical explanation which might include: Demand-pull inflation (1) increase in total demand (1) e.g. increase in consumption / increase in investment / government spending / net exports (1) e.g. cut in income tax / decrease interest rate / increase employment / increase in the money supply (1). Cost-push inflation (1) increase in costs of production (1) e.g. increase in wages / raw material cost / profit margin / tariffs (1) e.g. wages may rise more than productivity / fall in exchange rate would increase raw material costs (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. Full marks may be awarded for a detailed explanation of two causes of one type of inflation. 4(c) Analyse how an increase in interest rate could reduce total demand in an economy. Coherent analysis which might include: Increase in interest rate will lead to an increase in the cost of borrowing (1) there will be less borrowing (1) less consumption / spending (1) less investments (1) An increase in interest rate will lead to an increase in the returns from savings (1) there will be more savings (1) less consumption / less spending (1) An increase in interest rate may attract an inflow of money from other countries into the country’s banks (1) leading to an appreciation of the currency (1) leading to increase in price of exports / decrease in price of imports (1) increase exports / decrease imports (1) decrease net exports (1) 6 Question Answer Marks Guidance 4(d) Discuss whether or not an appreciation of a country’s domestic currency will have negative effects on its economy. In assessing each answer, use the table opposite. Why appreciation will have a negative impact: • Price of exports will be higher – decrease export revenue. • Price of imports will be lower – increase import spending. • Decrease demand for domestic products – decrease demand for labour. • Decrease current account surplus / increase current account deficit. • Lower economic growth. Why appreciation will not have a negative impact: • Price of imports cheaper – increase affordability of imports – increase standards of living. • Price of imported raw materials / machinery lower – lower cost of production – lower final price. • PED for exports and imports might be inelastic. • May encourage foreign investment as there may be increased confidence in the country’s future economic prospects 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 Question Answer Marks Guidance 4(d) Level Description Marks 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at u sing economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 33

South Africa has a high number of unemployed workers. South Africa’s inflation rate has been stable in recent years, partly due to relative…

Accepted Answer

3(a) Identify two ways unemployment is measured. • claimant count/claiming benefits • labour force survey/ILO measure/without a job and seeking work • formula for the unemployment rate/number of unemployed divided by labour force × 100/through the unemployment rate • total labour force minus those currently employed 2 3(b) Explain two ways an increase in wages can cause inflation. Logical explanation which might include: Increase in wages may increase total (aggregate) demand/consumption (1) causing demand-pull inflation (1). Increase in wages may increase costs of production (1) causing cost-push inflation (1). 4 One mark each for each of two ways identified and one mark each for each of two explanations. Allow 1 mark if refer to prices rise but no mention of demand-pull or cost-push inflation Question Answer Marks Guidance 3(c) Analyse, using a production possibility curve (PPC), the opportunity cost to an economy of producing more consumer goods. Up to 4 marks for the diagram: Axes correctly labelled with capital/consumer goods (1). Curve drawn as a curve/line sloping downward to the axes (1). Movement along the curve/along the axes (1). Reduction in capital goods/increase in consumer goods shown by numbers or letters or arrows (1). Up to 2 marks for coherent analysis which might include: Opportunity cost is the (next) best alternative forgone (1) resources used to produce consumer goods cannot be used to produce capital goods (1). Producing more consumer goods now may mean fewer consumer goods in the future (1) as there may be fewer capital goods to make them (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not an increase in foreign MNCs will reduce a deficit on the current account of the balance of payments of a host country. In assessing each answer, use the table opposite. Why it might: • MNCs tend to export a relatively high proportion of their output • may produce at a low cost of production/be efficient • may be internationally competitive • may produce products that were previously imported • may bring in new technology Why it might not: • may buy raw materials and capital goods from their home countries • MNC may send profits back to home country • workers/managers may send remittances back to home country • may eliminate firms in the host country that had a good export record • may deplete non-renewable resources reducing the ability to export in the long run 8 For level 3, an answer must look at both sides of whether a deficit on the current account would be reduced. Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Question Answer Marks Guidance 3(d) Level Description Marks 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 34

There was a significant increase in the money supply in Angola in 2019. The National Bank of Angola was concerned that this would keep infl…

Accepted Answer

2(a) Identify two forms of money. Two from: coins (1) bank notes / paper money (1) bank deposits / accounts (1) digital money (1). 2 Do not accept credit cards, debit cards or cheques. If more than two forms are given, consider the first three. Accept cash instead of coins and/or bank notes/paper money for 1 mark. Also accept commodity money, fiat money/legal tender and fiduciary money. Reward but do not expect identification of reserves at the central bank. Also accept examples of items that have been used as money e.g., salt, gold. Accept a currency as alternative to either coins or paper money. 2(b) Explain two functions a central bank performs for its government. Logical explanation which might include: The central bank acts as a banker for the government (1) it accepts tax payments to the government / provides facilities for the government to make payments / manages the national debt / lends to the government (1). It operates the government’s monetary policy (1) e.g. changing interest rates / to influence inflation (1). It holds reserves of foreign currency (1) to influence the foreign exchange rate (1). It manages the government’s debt (1) issuing government securities / paying interest on government securities (1). It issues bank notes (1) influencing the money supply (1). It may regulate commercial banks / banking system (1) to ensure they act responsibly (1). It acts as a lender of last resort (1) lending to commercial banks / to prevent banks going out of business / a financial collapse (1). 4 One mark for each of two functions identified and one mark for each explanation. Question Answer Marks Guidance 2(c) Analyse why a government may have lower unemployment as its main aim. Coherent analysis which might include: Unemployment may be at a high level (1) unemployment is an inefficient use of resources / waste of resources (1) not working at full capacity (1). Lower unemployment would increase output / economic growth (1) raise incomes / GDP per head (1) increase living standards (1) reduce poverty / more able to buy basic necessities (1) may reduce the crime rate (1) may increase exports (1). Lower unemployment will increase total demand / increase consumer spending / increase spending (1) increase tax revenue (1) lower government spending on unemployment benefits (1) increase the government’s ability to spend on (e.g. education) / reduce budget deficit / government spending on unemployment benefits involves an opportunity cost (1). Lower unemployment may reduce the chances of workers losing skills (1) being in work keeps workers up to date with e.g. advances in technology (1). 6 Accept an answer from the viewpoint of why unemployment may be harmful e.g., a government may want lower unemployment as unemployment reduces economic growth. Question Answer Marks Guidance 2(d) Discuss whether or not inflation will harm producers. In assessing each answer, use the table opposite. Why it might:  may increase costs of production – cost-push inflation – reducing profit  may reduce international competitiveness  may cause menu costs  may cause shoe leather costs  may make it difficult to plan ahead. Why it might not:  may be demand-pull inflation, increasing firms’ revenue  may be low and stable  may be lower than other countries’ inflation rates, increasing price competitiveness  may enable them to reduce real wages  may increase tax revenue, some of which may be spent on e.g. subsidies  cost of debt may fall / may be cheaper to borrow (in real terms)  some producers may be making products with inelastic demand. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 68 Question Answer Marks Guidance 2(d) 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 35 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 12 0 A mark of zero should be awarded for no creditable content. 0

Question 35

Voralberg, a region in Austria, has the highest income and best healthcare of any region in Austria. It benefits from its short distance to…

Accepted Answer

2(a) Define free trade. Free trade is when countries export and import between each other / countries exchange goods and services (1) without any restrictions / protection (1) such as tariffs or quotas (1). 2(b) Explain two possible causes of better healthcare. Logical explanation which might include:  More government expenditure on healthcare (1) e.g. on hospitals / training / due to higher tax revenue (1)  Higher incomes (1) can spend more on healthcare (1)  Better / more hospitals (1) better quality service / less waiting time (1)  Better (health) training / education (1) more qualified / specialised / doctors (1)  Better medical technology (1) better machines / life-saving equipment (1)  Easier access to medicine (1) more affordable (1) 4 One mark for each of two causes identified and one mark for each explanation. Question Answer Marks Guidance 2(c) Analyse why few MNCs may choose to locate in a particular region. Coherent analysis which might include: The region may have higher cost of production / inflation (1) than other regions. e.g. higher cost of labour / land (1) reduces potential profit (1). May also be higher taxation e.g. corporation tax (1) which may reduce the incentive of an MNC to locate in the region (1). May be more regulations e.g. labour laws (1) which may make it more difficult for an MNC to locate in that region / which may increase costs (1). May be a lack of skilled workers (1) due to poor education (1) may reduce productivity (1). May be low/lack of demand (1) limiting the revenues and profitability of the MNC (1). May be a lack of subsidies (1) which would reduce the incentive of an MNC to locate in the region (1). May be a lack of resources e.g. raw materials, labour (1) Major competitors may have already located in that region (1) The region may have corrupt government(s) (1) causing political instability / war (1) It may be outside a free trade area, e.g. the EU (1) unable to gain benefits (1) 6 Accept answers that analyse why MNC's may choose to locate in a region (rather than few choosing to locate there). Question Answer Marks Guidance 2(d) Discuss, whether or not, inflation is always a disadvantage to an economy. In assessing each answer, use the table opposite. Why it might be a disadvantage:  lower purchasing power for consumers – lower standards of living  lower price competitiveness of exports – lower exports / high imports  higher cost of production – lower profits  lose value of savings and lenders lose value of lending  difficult for consumers, firms, and governments to plan for the future.  shoe leather costs, menu costs  may discourage investment as may be difficult to plan  those on fixed incomes may lose Why it might be an advantage:  borrowers may benefit – value of debt decreases  may encourage investment as may be cheaper to borrow  may be a sign that an economy is growing  may be demand-pull inflation – increasing firms’ revenue / employment  if inflation is low and stable – it is better than prices decreasing (deflation)  may be lower than other countries’ inflation rates 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 Question Answer Marks Guidance 2(d) Level Description Marks 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 36

Jordan has a fixed foreign exchange rate with the US dollar. The monetary policy of Jordan, therefore, follows the monetary policy of the U…

Accepted Answer

3(a) Define inflation. 2 Increase (1) in price level (1) over time / persistent (1) Rise in price (1) 3(b) Explain the effects of low confidence on both spending and borrowing. 4 Maximum 2 marks for spending and maximum 2 marks for borrowing Logical explanation which might include: Low confidence will reduce spending (1) as consumers will save instead (1) e.g. lack of job security / risk of firms failing / asset prices falling (1). Falling confidence will reduce borrowing (1) risk of borrowing and investing is too high (1). 3(c) Analyse how a cut in interest rates could create conflicts between 6 Maximum 4 marks if only 1 conflict analysed macroeconomic aims. Also accept conflict between economic Coherent analysis which might include: growth and redistribution of income i.e. Cut Cut in interest rates could lead to conflicts between full employment versus in interest rates could lead to conflicts stable prices (1) because cut in interest rates lead to increase borrowing (1) between economic growth and redistribution decreased savings (1) and increased spending (1) this will lead to an of income (1) because a cut in interest rates increase in demand-pull (1) inflation (1). could lead to more spending and investment Cut in interest rates could lead to conflicts between economic growth versus (1) leading to more economic growth (1) balance of payments stability (1) because if people may also buy more and higher incomes for entrepreneurs (1) imports (1) and therefore current account deficit will increase / current but savers could get lower returns from account surplus will decrease (1). savings (1) profits may rise more than Cut in interest rates could lead to conflicts between full employment versus wages (1) leading to an increase in balance of payments stability (1) because a cut in interest rates could lead inequality (1). to more investments (1) more firms starting up (1) increasing demand for workers (1) increased wages (1) which would lead to increase in spending (1) including imports (1) which will increase current account deficit / decrease current account surplus (1). 3(d) Discuss whether or not a country will benefit from having a fixed 8 Level Description Marks foreign exchange rate system. 3 A reasoned 6–8 In assessing each answer, use the table opposite. discussion which accurately examines Why it might be an advantage both sides of the • Certainty - with a fixed exchange rate, firms will always know the economic argument, exchange rate and this makes trade and investment less risky. making use of • Absence of speculation - with a fixed exchange rate, there will be no economic speculation if people believe that the rate will stay fixed with no information and revaluation or devaluation. clear and logical • Constraint on government policy - if the exchange rate is fixed, then the analysis to evaluate government may be unable to pursue extreme or irresponsible macro- economic issues economic policies as these would cause a run on the foreign exchange and situations. One reserves and this would be unsustainable in the medium-term. side of the argument • Keep inflation low. Firms have an incentive to keep cutting costs to may have more remain competitive. Governments who allow their exchange rate to depth than the other, depreciate may cause inflationary pressures to occur. Depreciation can but overall both cause inflation because total demand increases, import prices increase sides of the and firms have less incentive to cut costs. argument are • Maintain competitiveness - a fixed exchange rate can ensure that considered and exports remain price competitive. A rapid appreciation in a floating developed. There is exchange rate system will badly affect manufacturing firms who export; thoughtful evaluation this may also cause a worsening of the current account. of economic concepts, Why it might be a disadvantage terminology, • The economy may be unable to respond to shocks - a fixed exchange information and/or rate means that there may be no mechanism for the government to data appropriate to respond rapidly to balance of payments crises. the question. The • Problems with reserves - fixed exchange rate systems require large discussion may also foreign exchange reserves and there can be international liquidity point out the problems as a result. possible uncertainties of alternative decisions and outcomes. 3(d) • Speculation – if foreign exchange markets believe that there may be a Level Description Marks revaluation or devaluation, then there may be a run of speculation. 2 A reasoned 3–5 Fighting this may cost the government significantly in terms of their discussion which foreign exchange reserves. makes use of • Policy conflicts - the fixed exchange rate may not be compatible with economic other economic targets for growth, inflation and unemployment and this information and may cause conflicts of policies. This is especially true if the exchange clear analysis to rate is fixed at a level that is either too high or too low. evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple 1–2 attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero 0 should be awarded for no creditable content.

Question 37

(a) Calculate the value of US imports from China in 2020. [1] (b) Identify two causes of the increase in the quantity of US factors of prod…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate the value of US imports from China in 1 Accept the correct figure without the $ sign. 2020. 560 000 000 000. 5.6  10^11 $560bn (1). 1(b) Identify two causes of the increase in the quantity 2 If more than two causes given, consider the first three. of US factors of production. Accept increase in labour for increase in the labour force. Land reclamation (1) increase in the labour force (1). 1(c) Explain one way that import tariffs could improve 2 One mark for a way identified and one mark for an explanation. the US economy. If more than one way identified, consider the first two. Could improve the current account / trade in goods / To gain two marks, one mark must come from improving the trade in goods and services / balance of payments (1) current account, increase output or raise tax revenue. by reducing imports / making domestic goods more competitive with imports / raising the price of imports Could raise more revenue is not sufficient – need more tax (1) revenue or more government revenue / income. Could increase output / cause economic growth (1) by increasing demand for US goods / raise employment (1). Could raise tax revenue (1) allowing the government to spend more on (e.g. education) / improve the (government budget position) (1). 1(d) Explain two reasons why the US inflation rate fell 4 One mark each for each of two reasons identified and one mark in 2020. each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. Fall in consumer expenditure (1) lower total demand / reduce demand-pull inflation (1). Reduction in bargaining power may also be linked to lower total Reduction in workers’ bargaining power (1) fall in demand. wage rises / wages / fall in rise in costs / fall in costs / reduce cost-push inflation (1). Higher unemployment (1) reduces confidence / lower total demand / fall in consumer spending (1). Fall in (real) GDP (1) lower incomes / purchasing power / lower total demand (1). Current account deficit (1) lower total demand / reduce demand-pull inflation (1). 1(e) Draw a demand and supply diagram to show the 4 effect of an increase in the price of a complement on the market for ice cream. Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Demand curve shifted to the left (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(f) Analyse the relationship between government 5 Alternatively, some candidates may argue that changes in spending and unemployment. unemployment, could lead to changes in government spending. Credit both responses. Coherent analysis which might include: Overview: Inverse relationship / negative relationship (1) generally, the higher government spending, the lower the unemployment rate (1). Supporting evidence: E.g. 2015 to 2019, government spending increased and unemployment fell / 2015 to 2017 government spending increased and unemployment fell (1) processing / interpreting of data e.g. between 2015 to 2019, government spending rose by $700bn and unemployment fell by 1.6% (points) (1). Analysis of the expected relationship: • higher government spending will increase total demand (encouraging firms to expand and employ more workers) (1) • higher government spending may be on e.g. education, training, infrastructure, subsidies which could increase workers’ chances of gaining jobs (1) • higher employment will provide more tax revenue for the government to spend / lower employment will reduce tax revenue for the government to spend (1). Exception: 2020 (1) both government spending and unemployment rose / government spending and unemployment both at their highest (1). 1(f) Analysis of the exception: • government spending on unemployment benefits may have increased / rise in government spending not enough to stop GDP / consumer expenditure falling / GDP fell / there may be a time delay before higher government spending reduces unemployment (1). 1(g) Discuss whether or not a central bank should aim 6 May approach the answer from the point of view of the for a low inflation rate. disadvantages of high inflation. 2nd side should examine either the possible negative effects of Award up to 4 marks for logical reasons why it should, what the central bank may do to reduce the inflation rate or the which may include: possible loss of any beneficial effects of high inflation. • can increase international price competitiveness (1) improve the current account balance / No marks for possible effects on the exchange rate. increase exports (1) increase employment / reduce unemployment (1) Apply this example to all questions with the • can create certainty (1) which may increase command word DISCUSS confidence (1) which may encourage investment / (1g, 1h, 2d, 3d, 4d and 5d) attract MNCs (1) which may increase output / result in economic growth (1) Each point may be credited only once, on either side of an • can prevent a random redistribution of income (1) argument, but separate development as to how / why the outcome e.g. protect savers (1) may differ is rewarded. • may protect purchasing power (1) by promoting price stability (1) Generic example Mark • maintain / increase living standards (1) if wages rise by more than the price level (1) Tax revenue may decrease… 1 • can avoid fiscal drag (1) prevent people being put in higher tax brackets (1) ...because of reason e.g. incomes may be lower. 1 • can reduce menu / shoe leather costs (1) reduce firms’ costs of production (1). Tax revenue may increase because incomes may be 0 higher i.e. reverse of a previous argument. Award up to 4 marks for logical reasons why it should not, which may include: Tax revenue may increase because of a different 1 • increases in the rate of interest (1) contractionary reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may monetary policy (1) can reduce consumer stimulate the economy more than spending on expenditure / can reduce investment (1) can education. reduce total demand (1) 1(g) • lower total demand can increase unemployment (1) cyclical unemployment (1) reduce economic growth (1) • low inflation can turn into deflation (1) leading to a recession (1) • makes it harder to pay off debt (1) increasing the risk of firms going out of business / households getting into difficulties (1) • central bank may aim for economic growth / low unemployment (1) higher demand-pull inflation may provide more encouragement to firms to expand (1). 1(h) Discuss whether or not economic growth benefits 6 everyone in the US. Award up to 4 marks for logical reasons why it might, which may include: • economic growth increases output / GDP (1) increases income per head / higher incomes / higher wages (1) enables more purchasing power / people to enjoy more goods and services (1) • economic growth can increase employment (1) raise living standards (1) may reduce poverty (1) • economic growth can increase tax revenue (1) enabling the government to spend more on e.g. education and healthcare (1) • economic growth may introduce better working conditions (1). Award up to 4 marks for logical reasons why it might not, which may include: • there may be an increase in unemployment due to lack of skills / some industries declining / greater use of capital / capital-intensive production (1) structural unemployment may occur (1) • income is unevenly distributed (1) those on low incomes e.g. the sick may not benefit (1) • higher output may result in external costs (1) e.g. pollution (1) people living near factories may suffer (1) • higher output may be the result of more resources being devoted to capital goods (1) may take time for consumers to benefit from more consumer goods (1) 1(h) • higher output may reduce natural resources (1) reducing future generations’ ability to benefit from them / reduce sustainability (1) • higher output may be the result of workers working longer hours (1) in poor working conditions (1) • may cause inflation (1) adversely affecting the poor / savers (1).

Question 38

Germany’s death rate is higher than some other countries, including Sweden, Cuba and the Maldives. Germany’s labour force increased in size…

Accepted Answer

3(a) Identify two reasons why death rates may vary between countries. Two from differences in:  income / standard of living  healthcare  education  nutrition  lifestyles / suicide rates  average age  spread of Covid / infectious diseases  war / conflict  natural disasters  air pollution / water pollution  conditions of work  level of crime 2 Do not accept differences in population size as these affect number rather than rate. If more than two reasons are given, consider the first three. 3(b) Explain two causes of an increase in the size of a country’s labour force. Logical explanation which might include: Change in the birth rate (1) rise will mean more people of working age in the long run / fall will enable more parents to be in the labour force (1). Immigration (1) many immigrants are of working age (1). Rise in retirement age (1) people will work for longer (1). Fall in school leaving age (1) people will be in education for a shorter period (1). Fall in the death rate / rise in life expectancy (1) fewer people dying before reaching retirement age (1). Changes in social culture (1) allowing more women to work (1). Increase in size of population of working age (1) reason (1). Rise in wage levels (1) attracts people to re-enter the labour market (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. Question Answer Marks Guidance 3(c) Analyse how an increase in labour productivity in a country can increase a surplus on the current account of its balance of payments. Coherent analysis which might include: Output per worker (hour) increases (1) may reduce average cost of production (1) lower prices (1) may increase the quality of exports (1). These changes may increase international competitiveness of exports / make exports cheaper (1) demand for exports may increase (1) export revenue may rise (1). Higher relative prices of imports (1) lower relative quality of imports (1) these changes may decrease international competitiveness of imports (1) demand for imports may decrease (1) import expenditure may fall (1). Output increases (1) allowing more exports (1) and less imports (1). 6 Question Answer Marks Guidance 3(d) Discuss why some countries may experience lower inflation in the future and some may not. In assessing each answer, use the table opposite. Why some might:  advances in technology may reduce costs of production  increases in education and healthcare could raise labour productivity  globalisation may increase international competition  trade union power may fall, lowering wage increases  successful government policy measures e.g. reducing demand Why some might not:  consumers may become optimistic and spend more  governments may increase their spending  the rate of interest may fall  total demand may increase  raw materials may run out  rising cost of energy and rising food prices. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and / or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 39

(a) Calculate what percentage of Honduran people did not have access to electricity in 2020. [1] (b) Identify two benefits the Honduran eco…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate what percentage of Honduran people did not 1 Accept 8.0 or 8.3. have access to electricity in 2020. 8.3%. 1(b) Identify two benefits the Honduran economy could gain 2 If more than two benefits are given, consider the first three. from a growth in the US economy. Accept increase trade for more exports. Sell more exports to the US (1). Receive more money from Honduran workers in the US (1). Accept increase employment / lower unemployment for More job opportunities for Honduran workers in the US (1). more job opportunities. 1(c) Explain one advantage of an economy specialising. 2 One mark for an advantage identified and one mark an explanation. Gain skills (1) raise productivity / raise efficiency / ‘practice Identification mark must come directly from the source makes perfect’ / lower costs of production / raise quality / material. increase output / supply / less waste (1). A relevant explanation mark can be given even in the Gain a good reputation (1) increase demand (1). absence of an identification. 1(d) Explain two ways a government could redistribute 4 One mark each for each of two ways identified and one income. mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. Provision of unemployment benefit / state benefit / welfare benefit / benefits (1) raise income of those on low or no One mark for taxing the rich and giving to the poor. income / enable the unemployed to buy basic necessities / reduce absolute poverty (1). Progressive income tax system (1) takes a higher proportion of the income of the rich / use some of tax revenue raised to increase spending to help those on low incomes (1). 1(e) Draw a demand and supply diagram to show how a 4 report stating that bananas are good for health would affect the market for bananas. Coherent analysis which might include: Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Demand curve shifted to the right (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). If a candidate draws two diagrams, they may be able to get 3 marks: 1 mark for axes 1 mark for D & S labelled correctly 1 mark for the demand curve shifted to the right. They would not get the mark for the equilibriums as the two diagrams are likely to conflict on this. 1(f) Analyse the relationship between the percentage of 5 Responses do not have to be in the format suggested but population living in poverty and life expectancy. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Coherent analysis which might include: and analyse the overall data. Expected relationship: Inverse / negative (1) the higher the level of poverty, the lower the life expectancy / the lower the level of poverty, the higher the life expectancy (1). Supporting evidence: Sweden has the lowest % of population living in poverty and the highest life expectancy / The country / two countries / three countries / four countries with the lowest levels of poverty head had the longest life expectancy (1) the two countries, Chad and South Sudan, with the highest level of poverty had the lowest life expectancy (1). Analysis of expected relationship: A high level of poverty is likely to mean poor healthcare (1) low nutrition / poor housing / poor sanitation / low levels of education (1). Exception: Chad / South Sudan (1) Chad had a lower level of poverty but also a lower level of life expectancy than South Sudan (1) Analysis of exception: Life expectancy is determined by other influences e.g. wars (1). 1(g) Discuss whether or not the cost of producing clothes in 6 Allow higher productivity / efficiency once either in Honduras will fall in the future. connection with labour or capital. Some points may be given in reverse e.g. price of raw Award up to 4 marks for logical reasons why it might, which materials may fall. may include: Not accepting subsidising the clothes industry as the source • more training (1) better working conditions (1) may material indicates that it is a successful industry. increase labour productivity / efficiency / skills (1) reduce labour costs (1) Apply this example to all questions with the command • more use of capital goods (1) may reduce disruption to word DISCUSS production / make fewer mistakes / less waste (1) speed (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) up production / increase productivity / efficiency (1) • improved working conditions (1) may reduce industrial Each point may be credited only once, on either side of an action (1) more motivation (1) argument, but separate development as to how/why the • successful clothes industry so firms may grow in size (1) outcome may differ is rewarded. more able to take advantage of economies of scale (1). Generic example Mark Award up to 4 marks for logical reasons why it might not, which may include: Tax revenue may decrease… 1 • price of raw materials may rise (1) may be subject to bad weather (1) exchange rate may fall / tariffs may be ...because of reason e.g. incomes 1 imposed on imported raw materials (1) reduce supply may be lower. (1) country has experience of inflation (1) • unemployment may fall (1) making it more difficult for Tax revenue may increase 0 the clothes industry to recruit labour (1) strengthening because incomes may be higher the bargaining power of workers (1) raising wages / i.e. reverse of a previous increasing labour costs (1) argument. • providing training (1) and better working conditions will involve a cost (1) Tax revenue may increase 1 • more use of capital goods may involve initial high because of a different reason i.e. not the reverse of a previous spending on equipment (1) firms may experience argument e.g. government diseconomies of scale (1) • higher indirect tax / tax may be imposed (on clothes / spending on subsidies may stimulate the economy more than clothes firms) (1). spending on education. 1(h) Discuss whether or not a fall in unemployment in 6 Honduras is likely to cause inflation. Award up to 4 marks for logical reasons why it might, which may include: • unemployment is already low (1) may move towards full employment (1) may push up wages (1) increase (average) costs (1) cause cost-push inflation / total supply less than total demand (1) • lower unemployment may increase incomes (1) causing a rise in consumer spending / purchasing power (1) increasing total demand (1) causing demand-pull inflation / total demand higher than total supply (1). • inflation already exists (1) which may lead workers to expect it to continue (1) increasing wage claims (1). Award up to 4 marks for logical reasons why it might not, which may include: • may be higher investment (1) could increase total supply / total supply may rise in line with total demand (1) reducing cost-push inflation (1) • lower unemployment could reduce spending on unemployment benefit (1) increase tax revenue (1) reduce the budget deficit (1) reduce the growth in total demand (1) some of higher tax revenue could be spent on supply-side policy / unemployment may have fallen due to supply-side policy (1) • the extra income may be saved / spent on imports (1) due to uncertainty about the future (1) • A fall in unemployment does not necessarily mean a rise in employment (1) the unemployed could have e.g. retired / emigrated (1).

Question 40

Botswana uses both capital goods and labour in its diamond mining industry. The country had an average economic growth rate of 3.8% between…

Accepted Answer

2(a) Define, with an example, a capital good. 2 If more than two examples are given, consider the first two. A good used to produce another good or service / a human- made good used for production (1) e.g. a machine (1). 2(b) Explain two reasons why a low inflation rate may 4 One mark each for each of two reasons identified and one increase a country’s economic growth rate. mark each for each of two explanations. Logical explanation which might include: • make the country’s products internationally competitive (1) sell more exports / buy fewer imports (1) • create greater certainty (1) encourage investment / attract MNCs (1) • keep increase in costs low (1) may reduce claims for higher wages/ higher profits (1) • increase confidence (1) may increase demand / increase profits 1). 2(c) Analyse how a government could reduce protectionism 6 Allow deregulation as an alternative to remove quotas or and move towards free international trade. embargoes. Coherent analysis which might include: Reward removing / reducing bureaucracy, voluntary export restraints. • remove tariffs (1) reduce price of imports (1) if firms have lower costs of production, they will be able to Reward but do not expect reference to exchange control. compete (1) • remove quotas / increase quota (limit) (1) remove bans / embargoes (1) increase quantity of imports / reduce limits on imports (1) • remove subsidies (1) firms’ products will not be artificially cheap (1) • other countries may remove their protectionism (1) enabling exports to be sold without restrictions (1). 2(d) Discuss whether or not a country will benefit from 8 Reward but do not expect reference to social welfare will be diamond mining. increased if social benefit exceeds social cost. In assessing each answer, use the table opposite. Leve Description Mark l s Why it might: • high global demand 3 A reasoned discussion which 6–8 • can improve the current account of the balance of accurately examines both sides of payments the economic argument, making • create employment, both skilled and unskilled jobs use of economic information and • increase output / economic growth clear and logical analysis to • may increase tax revenue. evaluate economic issues and situations. One side of the Why it might not: argument may have more depth • demand will fall in a recession than the other, but overall, both • price may fluctuate sides of the argument are • may be competition considered and developed. There • can be accidents is thoughtful evaluation of • can create external costs e.g. pollution economic concepts, terminology, • if mined by an MNC, profit may be sent to the home information and/or data appropriate country to the question. The discussion • supply may be depleted may also point out the possible uncertainties of alternative • price may increase in the future so better to conserve decisions and outcomes. diamonds now • may not be a large proportion of GDP. 2 A reasoned discussion which 3–5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 2(d) 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

Question 41

(a) Calculate Montenegro’s budget deficit as a percentage of its GDP. [1] (b) Identify two examples of capital goods in Montenegro. [2] (c)…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate Montenegro’s budget deficit as a percentage 1 Calculation is -$0.6 bn divided by $4.8 bn of its GDP. Allow 12.5 12.5%. 1(b) Identify two examples of capital goods in Montenegro. 2 These are the only two capital goods mentioned in the text but accept answers such as telecommunications equipment Computers (1) office buildings (1). and aluminium production factories 1(c) Explain one way price elasticity of demand may 2 One mark for the way identified and one mark for an influence firms’ decision making. explanation. If demand is price elastic / high (1) firms will know that if they Note: source material only mentions demand for holidays as raise price, revenue will fall / if they lower price, revenue will being price-elastic. rise (1). No mark for identifying price-inelastic but do allow second mark that price inelastic demand means if they raise price revenue will rise / if they lower price, revenue will fall. Do not reward impact on demand or on profits 1(d) Explain two ways the pattern of employment has 4 One mark each for each of two reasons identified and one changed in Montenegro in recent years. mark each for each of two explanations. Logical explanation which might include: Note: question requires a reason for the change in pattern Higher proportion of workers employed in the tourism of employment industry / tertiary sector (1) growth in tourism / lower proportion employed in primary and secondary sectors (1). More workers employed in the private sector / commercial banks / telecommunications / aluminium products (1) due to privatisation / less employed in state sector (1). 1(e) Draw a demand and supply diagram to show the effect 4 of a minimum price set above the equilibrium price on the market for oranges. Coherent analysis: Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Minimum Price / Price floor line set above the equilibrium and correctly labelled – accept Pmin or Pm or MP but not P2. Supply shown as greater than demand e.g. labelling of Qd<Qs (1). Note: No mark for showing minimum price if also shows a shift in supply or demand curve as it is no longer above market equilibrium. Ignore all written comments. 1(f) Analyse the relationship between countries’ trade in 5 Allow income for primary income and current transfers for goods and services balance and their current account secondary income. balances. Responses do not have to be in the format suggested but There are two approaches to answering this question: they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Approach A: Coherent analysis which might include: and analyse the overall data. Expected relationship: MAX 2 marks. Do not accept relationship is directly proportional. Positive / direct relationship (1). Countries which have a deficit on the trade in goods and services balance might be expected to have a deficit on the current account balance (1). Countries which have a surplus on the trade in goods and services balance might be expected to have a surplus on the current account balance (1). Supporting evidence: MAX 2 Marks Three countries / Bosnia & Herzegovina / Kosovo / Montenegro all have a deficit on the trade in goods and service balance also had a deficit on the current account balance (1) two countries / Bulgaria / Slovenia had a surplus on the trade in goods and service balance but also had a surplus on the current account balance (1). Exception: Max 2 marks Croatia (1) had a deficit on trade in goods and services balance but a surplus on the current account balance (1). Approach B: Expected Relationship: Max 2 marks. 1(f) There is no expected relationship as the current account balance contains other items which can either be positive or negative (1) and are not dependent on the trade in goods and services (1). Supporting evidence: Max 2 marks There are 5 countries where the current account balance is higher than the trade in goods and services balance (1) example (1). Exception: Max 2 marks Slovenia (1) where current account balance is worse that trade in goods and services balance / trade in goods and services is $4.6bn but current account balance is only $3.0bn (1). Analysis for both approaches: Max 3 marks Trade in goods and services is the largest component of the current account (1) current account also includes primary income and secondary income (1) Bosnia & Herzegovina, Bulgaria, Croatia, Kosovo and Montenegro must have had a surplus on the primary and secondary income (1) Slovenia must have had a deficit on the primary and secondary income (1). 1(g) Discuss whether or not privatisation is likely to have 6 Apply this example to all questions with the command word benefited consumers in Montenegro. DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, Each point may be credited only once, on either side of an which may include: argument, but separate development as to how/why the outcome may differ is rewarded. • Firms are profit driven (1) may have increased investment / research & development (1) raising quality Generic Example Marks of goods and services (1) lowered cost of production (1) • more firms entering the market (1) increased Tax revenue may decrease… 1 competition (1) may reduce prices (1) may give more choice to consumers (1) ...because of reason e.g. incomes 1 • firms may respond more quickly (1) to changes in may be lower. consumer demand (1). Tax revenue may increase 0 Award up to 4 marks for logical reasons why it might because incomes may be higher not, which may include: i.e. reverse of a previous argument. • state-owned firms may have been subsidised (1) investment may be now lower (1) Tax revenue may increase 1 • privatised firms may be profit maximisers (1) may because of a different reason i.e. become monopolies (1) and may restrict supply (1) to not the reverse of a previous push up prices (1) lowered quality of goods produced argument e.g. government (1) creates inequality as not all consumers can afford to spending on subsidies may buy (1) stimulate the economy more than • privatised firms may be smaller (1) and so not able to spending on education. take advantage of economies of scale (1) • privatised firms do not take account of external costs (1) Note: The question is about the impact on consumers. Do e.g. pollution (1). not reward answers that relate to the economy or the government. Award one mark for an accurate explanation of what is meant by privatisation. 1(h) Discuss whether or not deflation would benefit the 6 Reward but do not expect explanation of benign and malign Montenegro economy. deflation. Award up to 4 marks for logical reasons why it might, Allow reference to demand-side deflation but not demand- which may include: pull deflation or cost-push deflation as they are not acceptable terms. • could make products more internationally competitive (1) leading to greater exports (1) reducing imports (1) improving the current account balance / reducing a deficit on the current account (1) • if caused by advances in technology / supply side measures e.g. higher labour productivity (1) could increase output (1) and employment (1) and lead to economic growth / higher standard of living (1). Award up to 4 marks for logical reasons why it might not, which may include: • current inflation rate is only 0.4% (1) • greater uncertainty (1) could discourage consumer spending / investment by firms (1) as households and firms could expect prices to fall further (1) • if caused by a fall in total demand (1) could reduce output (1) and causing recession (1) firms make losses / go out of business (1) could cause more unemployment (1) and unemployment is already high at 18% (1) • could increase a budget deficit (1) due to lower tax revenue from lower sales taxes / income taxes (1) increase in unemployment benefits (1). Award one mark for an accurate explanation of what is meant by deflation e.g. a fall in the price level is sufficient here.

Question 42

In 2020, Paraguay’s Consumer Prices Index rose by 3% and its foreign exchange rate fluctuated. Each year Paraguay experiences net emigratio…

Accepted Answer

5(a) Define a Consumer Prices Index. 2 A measure of inflation / cost of living (1) using weights / basket of goods and services (1). 5(b) Explain two ways a government could intervene to 4 One mark each for each of two ways identified and one reduce market failure. mark each for each of two explanations. Logical explanation which might include: If more than two ways of government intervention are given, Subsidise merit goods (goods with positive externalities) (1) consider the first three. to encourage consumption / production (1). Tax on demerit goods (goods with negative externalities) (1) to discourage consumption / production (1). Apply maximum price on merit goods (1) to increase consumption (1) OR apply minimum price on demerit goods (1) to reduce consumption (1) Finance / produce public goods (1) as private sector firms will have no incentive to produce them (1). Regulate monopolies (1) to restrict exploitation of market power (1). Provide education / training / public information campaign (1) to raise awareness of benefits of a merit good / drawbacks of a demerit good (1) Provide education / training (1) to increase labour mobility (1). 5(c) Analyse how an increase in a country’s foreign 6 exchange rate could reduce inflation. Coherent analysis which might include: A rise in the exchange rate / appreciation of a currency (1) can increase export prices (1) lower import prices (1). Net exports may fall (1) exports form part of total demand (1) reducing demand-pull inflation (1). Lower import prices will increase pressure for firms to keep price rises low (1) lower imported raw material prices (1) reduce costs of production (1) reduce cost-push inflation (1). 5(d) Discuss whether or not an increase in a country’s 8 Level Description Marks economic growth rate will reduce emigration from the country. 3 A reasoned discussion which 6–8 accurately examines both sides of the In assessing each answer, use the table opposite. economic argument, making use of economic information and clear and Why it might: logical analysis to evaluate economic • employment may increase issues and situations. One side of the • people will not have to seek jobs abroad argument may have more depth than • incomes may rise / poverty may decrease the other, but overall, both sided of the • tax revenue may be higher, allowing the government to argument are considered and spend more on e.g. education and healthcare. developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • incomes may still be low appropriate to the question. The • income can be unevenly distributed discussion may also point out the • may not expect rise in growth rate to last possible uncertainties of alternative • there may be higher economic growth and job decisions and outcomes. opportunities in other countries • pollution levels may increase 2 A reasoned discussion which makes 3–5 • may lead to higher external costs e.g. pollution use of economic information and clear • economic growth comes at cost of worse working analysis to evaluate economic issues and situations. The answer may lack conditions some depth and development may be • there are other reasons for emigrating. one-sided. There is relevant use of economic concepts, terminology, Note: level 1 would be knowledge and understanding of information and data appropriate to the economic growth and emigration or just identification of question. points. 5(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

Question 43

Indonesia operates a mixed economic system. Indonesia’s central bank, Bank Indonesia, aims for stable prices. The country’s price level can…

Accepted Answer

3(a) Identify who allocates resources in a mixed economic system. Firms / producers (1) the government (1) OR The private sector / private firms (1) the public sector / nationalised firms (1) 3(b) Explain two benefits a firm may gain from an increase in the size of the country’s population. Logical explanation which might include: Higher demand / more consumers / larger market (1) which may increase revenue / profits (1). May increase ability to take advantage of economies of scale (1) lower average cost of production (1). May be higher supply of labour (1) may make it easier to employ workers / reduce wages (1) can increase output / supply (1). 4 One mark each for each of two benefits identified and one mark for each of two explanations. Question Answer Mark Guidance 3(c) Analyse the reasons why governments aim for stable prices. Coherent analysis which might include: Stable prices give consumers confidence to buy (1) prices remain affordable / knowing they can afford it (1). Stable prices attract MNCs (1) leads to greater employment (1) government / firms more able to plan use of resources (1) increases investment (1) and economic growth (1). To avoid inflation (1) which can discourage investment due to less certainty (1) could lead to lower wage demands (1) can make exports more / imports less price competitive (1) which may cause a current account deficit on the balance of payments (1). Inflation can cause a random redistribution of income (1) lenders / savers may lose (1) borrowers may gain (1). Inflation can cause menu costs (1) e.g. the cost of changing prices (1) and may cause shoe leather costs (1) e.g. cost of shopping around for lowest prices (1). To avoid deflation (1) which can result in a downward spiral of demand and prices (1) consumers and firms may delay their purchases (1) this can result in a rise in unemployment (1) and a recession (1). 6 Question Answer Mark Guidance 3(d) Discuss whether or not the global economy would benefit from an increase in air travel. In assessing each answer, use the table opposite. Why it might:  may increase employment in the air travel industry  may increase employment and output in related industries e.g. tourism  may reduce firms’ costs of production if quicker than other forms of transport  may increase mobility of labour  air travel is a safer form of travel than e.g. road travel  encourages tourism and economic development of some countries. Why it might not:  may cause noise and air pollution (carbon footprint)  may contribute to climate change  may need to build new airports / extend existing airports which may reduce land available for e.g. housing.  may reduce demand for other forms of transport  unemployment may increase in e.g. sea travel  high costs prevent movement of heavy goods. 8 See Guidance table at the end of the mark scheme.

Question 44

(a) Calculate Tunisia’s balance on the current account of its balance of payments. [1] (b) Identify two qualities of a good tax that the Tu…

Accepted Answer

1(a) Calculate Tunisia’s balance on the current account of its balance of payments. –$2.4bn 1 Accept –2.4bn. Also accept –6.8 or –6.9 billion TND. 1(b) Identify two qualities of a good tax that the Tunisian government aimed to achieve. Efficiency / efficient / the tax should improve market performance / reduce market failure (1). Economical / economy / the tax should raise more in revenue than it costs to collect it (1). 2 If more than 2 qualities are given, consider the first 3. 1(c) Explain one reason why the Tunisian government regulates the price of flour and milk. Reduce poverty (1) flour and milk are basic necessities /essential products / people may be able to buy enough basic necessities / make them affordable / keep price relatively low (1). Or Prevent monopoly firms exploiting their market power (1) stop the firms raising price to a high level (1). 2 One mark for a reason identified and one mark for an explanation. Question Answer Marks Guidance 1(d) Explain two ways the Tunisian government tried to reduce frictional unemployment. Logical explanation which might include: Increased the labour market information available to workers and employers (1) so workers would be more aware of job vacancies / skills and qualifications required / employers more aware of those seeking jobs / may enable workers to move more quickly/easily between jobs / reduce search time / increase mobility of workers (1). Did not raise unemployment benefit (in line with inflation) (1) so, the purchasing power of unemployment benefit would fall / increase the incentive to work (1). 4 One mark for each of two ways identified and one mark for each of two explanations. If more than 2 ways are given, consider the first 3. Question Answer Marks Guidance 1(e) Analyse the relationship between the change in Tunisia’s average wage and the inflation rate. Relationship (up to 2 marks) Direct relationship / positive relationship (1) as change in the average wage increases so does the inflation rate / if change in average wage / rise in average wage falls so does the inflation rate / both fall and rose together / same trend (1). Evidence (up to 3 marks) 2016 – 2017 / 2018 both the average wage / change in average wage and inflation rate rose (1). Between 2014 – 2018, the average wage rose more rapidly than the inflation rate (1) real wages would have increased between 2014 – 2018 (1). Between 2018 – 2020 / in 2019 – 2020, the inflation rate was higher than the rise in the average wage (1) real wages would have fallen (1). Between 2014 – 2015/2016 / 2018 – 2019/2020 both the change in average wage and inflation rate fell (1). 2018 had the highest rise in the average wage and the highest inflation (1). 2016 had the lowest increase in the inflation rate but not the lowest increase in the average wage / 2020 had the lowest increase in the average wage but not the lowest inflation rate (1). Over the whole period the inflation rate rose while the increase in the average wage fell (1). Explanation (up to 2 marks) A rise in the average wage may increase costs of production / cause cost push inflation / a higher inflation rate will encourage workers to press for a wage rise (1). A rise in the average wage may increase disposable income / consumer expenditure / total demand / cause demand-pull inflation (1). 4 Responses do not have to be in the format suggested but they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Note: average wage did not fall. Question Answer Marks Guidance 1(f) Analyse, using a demand and supply diagram, how an increase in wage costs would affect the market for shoes. Coherent analysis which might include: D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New supply curve shifted to the left (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). Written analysis: An increase in wage costs would increase costs of production which may raise price (1). 5 Note: higher price needs to be linked to higher costs of production/higher costs/higher wage costs. Question Answer Marks Guidance 1(g) Discuss whether or not the Tunisian government should continue to subsidise electricity production. Award up to 4 marks for logical reasons why it might, which may include:  reduce costs of producing electricity (1) increase supply of electricity (1) lower price of electricity (1) make electricity more affordable / reduce poverty (1)  lower costs of firms that use electricity (1) which may encourage them to expand / attract MNCs / increase output / increase GDP / cause economic growth (1) increase employment / lower unemployment (1)  reduce inflation / firms lower prices (1) make Tunisia’s products more internationally competitive / increase exports / lower imports / improve the current account balance (1)  may reduce pollution / external costs (1) if subsidising green sources of energy (1). Award up to 4 marks for logical reasons why it might not, which may include:  electricity firms may rely on the subsidy (1) may not keep costs low / become inefficient (1) may not pass on the subsidy in the form of lower price (1)  opportunity cost (1) government could spend money on e.g. healthcare (1)  may result in a budget deficit / increase in taxes (1)  may cause pollution / external costs (1) if e.g. coal powered / deplete non-renewable resources (1). 6 Apply this example to all questions with the command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(h) Discuss whether or not a rise in the value of the Tunisian dinar would benefit the Tunisian economy. Award up to 4 marks for logical reasons why it might, which may include:  may reduce inflation (1) imports would be cheaper (1) enable households to buy more imports / higher purchasing power (1) more choice (1) may lower price of some raw materials and/or capital goods (1) increase competitive pressure on domestic firms (1) lower costs of production (1)  lower total (aggregate) demand (1) which may reduce demand-pull inflation (1)  may be taken as an indicator of a strong economy / increase confidence (1) encourage investment / attract MNCs (1)  if demand for exports is price inelastic, export revenue may rise (1). Award up to 4 marks for logical reasons why it might not, which may include:  higher export prices / may reduce exports / export revenue (1) lower price of imports (1) may increase imports / import expenditure (1) reduce international competitiveness (1) increase the deficit / reduce surplus on the current account of Tunisia’s balance of payments (1)  lower net exports may reduce GDP / economic growth (1) which may increase unemployment / reduce employment (1)  may discourage MNCs / investment (1) because of higher cost of setting up in the country (1). 6 Note: lower total demand may be credited on either side but only once. Note: the generic advice above in terms of MNCs. One mark for attract or discourage MNCs. Another mark could be gained by explaining why they may be attracted and another mark for explaining why they may be discouraged.

Question 45

South America is a large geographical area with millions of microeconomic decision-makers. During a recent pandemic, schools stayed closed …

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3(a) Identify the difference between microeconomics and macroeconomics. Microeconomics is concerned with individual markets / individual decisions / individual firms / households (1). Macroeconomics is concerned with the whole economy (1). 2 3(b) Explain how less education can reduce a person’s lifetime earnings. Logical explanation which might include: May reduce qualifications (1) lower mobility (1) reduce chance of gaining employment / increase chance of experiencing unemployment (1) may lack information on job vacancies (1) may be more likely to work in the primary sector / do manual work (1). May reduce skills / adult literacy (1) lower productivity (1) reduce chance of gaining promotion (1). May have less bargaining power / less aware or less able to enforce labour market rights e.g. to a minimum wage (1) as easier to replace (1) lower demand for them / higher supply (1). May reduce understanding about the benefits of good nutrition / good healthcare (1) experience more time off work / shorter life expectancy (1). May have large families (1) be out of the labour force for some time (1). May lack financial awareness / lower savings (1) reduce ability to buy equipment e.g. a computer that could increase earnings (1). 4 Question Answer Marks Guidance 3(c) Analyse how the introduction of a minimum wage could affect unemployment. Coherent analysis which might include: A minimum wage is the lowest amount that an employer can pay a worker / price (wage) floor (1). Its introduction may result in the supply of labour exceeding demand for labour / surplus of labour (1) resulting in higher unemployment (1). Firms may have to pay higher wages / wages may increase (1) may want to cut costs of production / higher wages may increase their costs of production (1) this may reduce their profits (1) reduce output (1) they may fire some of their workers / increase unemployment (1) replace workers with machines / capital goods (1). Higher pay may increase productivity (1) increase total demand (1) which may encourage firms to increase output (1) take on more workers / increase employment (1) reduce cyclical unemployment (1). May increase the incentive to work (1) reduce frictional unemployment (1). If the minimum wage is set below the equilibrium level it will have no effect (1). 6 One mark in total for increase unemployment and / or increase employment. One mark for reduce output and / or increase output. Supply exceeding demand for labour / surplus supply of labour may be shown on a diagram. Award but do not expect a reference to lower real wage unemployment. Question Answer Marks Guidance 3(d) Discuss whether or not an economy with a high inflation rate will have a low economic growth rate. In assessing each answer, use the table opposite. Why it might:  may make the country’s products less internationally competitive  lower exports and increase imports  reduce total demand  may discourage investment  if caused by increases in costs of production (cost-push inflation may reduce output)  hyperinflation may result in a collapse in the economic system. Why it might not:  may be caused by increases in total demand / demand- pull inflation which may encourage higher output / GDP  may increase tax revenue which could be spent on e.g. education which could increase the economic growth rate in the long run  may reduce the real cost of borrowing which may increase consumer spending and investment  may be lower than rival countries’ inflation rates. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and / or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 Question Answer Marks Guidance 3(d) Level Description Marks 0 A mark of zero should be awarded for no creditable content. 0

Question 46

Hawaii’s economy has grown due to tourism but the growth in this sector has also increased inflation in this US island state. It is estimat…

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5(a) Define labour mobility. 2 The ability of workers to move (1) occupationally (1) or geographically (1) to take up another job (1). 5(b) Explain the effects of an ageing population on spending 4 Maximum of 3 marks for a relevant explanation of either and saving levels. spending or saving. Logical explanation which might include: An ageing population may mean fewer people are working and not earning an income (1) therefore savings need to be withdrawn to fund living (1) and therefore savings will decrease (1). An ageing population may mean people have reached an age where they do not need to save for the future (1) have accumulated savings (1) therefore spending increases (1). An ageing population may mean more people are approaching retirement / have reached retirement (1) there may be an increase in saving to support living standards in retirement (1) and decrease current spending (1). 5(c) Analyse how a rise in tourism can increase inflation an 6 economy. Coherent analysis which might include: Tourism leads to an increase in demand for resources (1) e.g. food or accommodation (1) therefore these prices will increase (1) causing demand-pull inflation (1). Tourists may have higher incomes (1) and higher purchasing power (1) therefore, producers are able to charge higher prices (1) and those living the country will have to pay higher prices as well (1). Depletion of resources due to tourism (1) decreases supply of these resources (1) increases the price of these resources for everyone (1). Increased demand for factors of production in tourism e.g. labour (1) increases costs of production (1) may cause cost- push inflation (1). 5(d) Discuss whether or not fiscal policy is effective in 8 Level Description Marks reducing poverty. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making Why it might: use of economic information and • policy measures to promote economic growth may clear and logical analysis to increase investment and create jobs evaluate economic issues and • increased spending on education providing more situations. One side of the qualifications / skills, making it easier to find jobs, higher argument may have more depth wages than the other, but overall both • more generous state benefits increasing income sided of the argument are • progressive taxation may increase government revenue considered and developed. There and allow more spending to reduce poverty. is thoughtful evaluation of • cuts in indirect taxation e.g. VAT, may lower prices of economic concepts, terminology, goods and services, enabling the poor to buy more and information and / or data reduce poverty. appropriate to the question. The discussion may also point out the Why it might not: possible uncertainties of • contractionary fiscal policy / increased taxes could lead alternative decisions and to more people losing jobs / income. outcomes. • expansionary fiscal policy / tax cuts may be inflationary, causing higher prices for essential items and increasing poverty • education may only be accessible to those not in poverty • state benefits may lead to a cycle of poverty • progressive taxation may lead to brain drain and therefore less government revenue. • cuts in higher income tax rates may not reduce absolute poverty but may increase relative poverty. 5(d) 2 A reasoned discussion which 3–5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

Question 47

(a) Calculate the average cost of producing a car in Belarus in 2021. [1] (b) Identify two reasons why Belarus is described as a mixed econ…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate the average cost of producing a car in Belarus 1 Accept 10 650 or 0.010650million or 0.1065m. in 2021. Needs to be to at least 2 dp e.g. 0.011m $10 650 (1). 1(b) Identify two reasons why Belarus is described as a 2 mixed economy. • There is a public sector / some people work in the public sector / there are state-owned firms / there is government intervention e.g. fining the unemployed (1). • There is a private sector (1). 1(c) Explain the type of inflation experienced by Belarus. 2 Cost-push (1) due to a rise in the price of energy / increase in costs of production of firms (1). 1(d) Explain two reasons why the production possibility 4 One mark each for each of two reasons identified and one curve (PPC) of Belarus may have shifted to the left mark for each of two explanations. between 2011 and 2021. No marks for drawing a PPC diagram. Logical explanation which might include: • a decline in the size of the country’s labour force (1) reduction in the quantity of resources / fewer workers will be likely to reduce country’s ability to produce products (1) • a decrease in the number of students going to university (1) reduce quality of resources / labour skills / productivity / (1). 1(e) Analyse the relationship between life expectancy and 4 Responses do not have to be in the format suggested but HDI value. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Coherent analysis which might include: and analyse the overall data. Expected relationship: Note: simply repeating the data is not enough for a mark as • a high life expectancy would be expected to be it is only description whereas the skill being tested is associated with a high HDI value (1) analysis. • positive relationship / direct relationship / move in the same direction (1). Supporting evidence: • two countries with the longest life expectancy have the highest HDI value OR two countries with the lowest life expectancy also have the lowest HDI value (1) • specific reference to a country e.g. Norway had the longest life expectancy and the highest HDI value (1). Analysis of expected relationship: • life expectancy is one of the components of HDI (1) accounts for a third of its value / explanation of how better health / life expectancy raises standard of living (1). Exception: • Belarus / Thailand (1) Belarus has a shorter life expectancy but a higher HDI value (1). Analysis of exception: • there are other components of the HDI: education / GDP (GNI) per head (1). 1(f) Analyse, using a demand and supply diagram, how 5 subsidising the production of milk would affect the market for milk. Coherent analysis which might include: D&S diagram: • axes correctly labelled – price and quantity or P and Q (1) • original demand and supply curves correctly labelled (1) • new supply curve shifted to the right (1) • equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). Written analysis: • reduction in cost of production / increase in supply / increase in quantity traded / reduction in price (1). 1(g) Discuss whether or not the construction of electric 6 Apply this example to all questions with the command vehicle charging stations would benefit an economy. word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d) Award up to 4 marks for logical reasons why it might benefit, which may include: Each point may be credited only once, on either side of an • likely to encourage use of electric vehicles (1) stations argument, but separate development as to how/why the and vehicles are complements (1) outcome may differ is rewarded. • improve the environment (1) reduce external costs (1) including air / noise pollution (1) reduce healthcare Generic example Mark costs / improve health of workers (1) • building the stations / building more electric cars may Tax revenue may decrease… 1 create employment (1) • government / private sector investment / purchase of ...because of reason e.g. incomes 1 electric vehicles may raise total (aggregate) demand (1) may be lower. causing higher output / economic growth (1). Tax revenue may increase 0 Award up to 4 marks for logical reasons why it might not because incomes may be higher benefit, which may include: i.e. reverse of a previous • other forms of transport may have more beneficial argument. effects on the environment (1) e.g. cycling / buses (1) • some people may be reluctant to switch (1) price of Tax revenue may increase 1 electric cars may be too high (1) resources are wasted because of a different reason i.e. (1) not the reverse of a previous • if people do switch, it may cause unemployment (1) in argument e.g. government e.g. oil firms / production of diesel and petrol cars / less spending on subsidies may public transport (1) stimulate the economy more than • Increase in electric vehicles on road (1) causes road spending on education. congestion (1) • Opportunity cost of government investment (1) monies could have been spent e.g. education /health / infrastructure (1) • If economy at full employment (1) investment may lead to demand-pull inflation (1). 1(h) Discuss whether or not people should be fined for being 6 unemployed. Award up to 4 marks for logical reasons why they should be fined, which may include: • if frictional unemployment (1) a fine would encourage workers to put more effort into finding a job (1) spend less time between jobs (1) help move economy towards full employment (1) higher output (1) and economic growth (1) • fines may increase government revenue (1) which could be spent on e.g. healthcare / support to find a job (1) • may not be seeking a job as receive benefits (1) fines may encourage them to find work and reduce government spending on unemployment benefits (1). Award up to 4 marks for logical reasons why they should not be fined, which may include: • may be a lack of suitable jobs available (1) the unemployed may have lacked the skills required (1) may not have been able to move to other areas of the country (1) may have disabilities / ill-health (1) providing support may reduce unemployment more quickly (1) • unemployment may be structural / cyclical (1) it would have been more effective to increase training (1) increase total demand (1) • unemployed may have little income to pay the fine (1) may increase their debt (1) lead to greater poverty / unable to pay for basic necessities (1) affect their mental health / wellbeing / causes depression (1) • may encourage the growth of the shadow/unofficial/informal economy (1) as not registered as unemployed (1) • may reduce wages (1) workers may be forced to accept low-paid jobs (1).

Question 48

Nigeria has a mixed economic system. In January 2023, Nigeria had a high unemployment rate of 33% which created a number of costs. Its high…

Accepted Answer

4(a) Identify two costs of unemployment. 2 If more than two costs given, consider the first three. Two from: • loss of output / low economic growth • loss of tax revenue / budget deficit • high government spending on benefits • higher government spending on measures to reduce unemployment / training the unemployed • loss of income / poverty / low living standards • loss of skills • health problems / high government spending on healthcare • more crime • movement of a production point inside the PPC / not producing at full capacity. 4(b) Explain how the key resource allocation decisions are made in a 4 Maximum of three marks if only one sector is mixed economic system. covered. Logical explanation which might include: For the last mark: accept, but do not expect reference to ‘may carry out a cost-benefit Private sector / individuals / households / firms / consumers (1) will use analysis’, price mechanism (1) demand and supply / demand / market forces (1) influenced by the profit motive (1) use most cost-effective methods of production (1). Public sector / government / state (1) will use its spending (1) taxation (1) regulation / maximum prices / minimum prices / directives (1) influenced by social costs / social benefits / economic welfare (1). 4(c) Analyse the causes of an increase in the demand for foreign 6 currency. Coherent analysis which might include: To buy more goods and services from that country / higher demand by other countries for that country’s products (1) increased foreign tourism (1) may be the result of higher inflation in the buying country (1) may be due to removal of trade restrictions (1) rise in quality of the other country’s products (1) higher incomes in the buying country (1). To speculate / increased confidence in the currency (1) that it will rise in price / value (1) make a profit (1). To invest more in that country (1) e.g. set up a branch of a MNC / FDI (1) MNC sending profit home (1). To send more money home to relatives (1) workers’ remittances (1). The government / central bank may buy it (1) to influence the exchange rate (1) add to the reserves (1). To take advantage of a rise in interest rates in that country (1) increase hot money flows (1) increase return on saving / financial investment (1). More people may migrate to that country (1) to e.g. buy a home in another country (1). 4(d) Discuss whether or not inflation will harm a country’s firms. 8 Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion 6–8 which accurately Why it might: examines both sides of the • may increase price of raw materials and capital goods economic argument, • increase costs of production making use of economic • increase menu and shoe leather costs information and clear and • workers may take industrial action to gain wage rises logical analysis to evaluate • increase costs and disrupt output economic issues and • cost-push inflation situations. One side of the • less internationally competitive argument may have more • profits may fall depth than the other, but • may make it difficult to plan. overall both sides of the argument are considered Why it might not: and developed. There is • demand-pull inflation can increase sales thoughtful evaluation of • revenue may rise by more than costs, increase profits economic concepts, • if lower than rival countries can make products more internationally terminology, information competitive and/or data appropriate to • if low and stable, may not be a problem the question. The • may reduce real value of debts discussion may also point out the possible • may be able to reduce real costs of wages. uncertainties of alternative decisions and outcomes. 4(d) Level Description Marks 2 A reasoned discussion 3–5 which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt 1–2 at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be 0 awarded for no creditable content.

Question 49

In 2023, India became the country with the largest population. This may affect the government’s macroeconomic aims. In 2018, the Indian Gov…

Accepted Answer

4(a) Identify two macroeconomic aims of government that 2 If more than two macroeconomic aims given, consider the may conflict. first three. • Full employment / low unemployment (1) and price Allow any macroeconomic aim. stability (1). • Economic growth (1) current account balance (1). • Price stability (1) redistribution of income / poverty reduction (1). • Economic growth (1) economic sustainability (1). 4(b) Explain two reasons why a country may have a high 4 One mark each for each of two reasons identified and one population growth rate. mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. • High birth rate (1) due to e.g. low age of marriage / lack of education on birth control (1). • Low death rate / high life expectancy (1) due to e.g. good quality healthcare (1). • Immigration /net immigration (1) due to e.g. high incomes (1). • High fertility rates (1) due to e.g. young female population (1). • Birth rate higher than the death rate (1) results in higher natural growth rate (1). 4(c) Analyse how a cut in the corporation (corporate income) 6 Do not credit answers that refer to income tax or any other tax rate can increase economic growth. tax than corporation tax. Coherent analysis which might include: • Cut in corporation (corporate income) tax will increase the amount of profits that can be kept by firms (1) may attract MNCs to country (1) this will increase the funds firms have to spend (1) on capital goods (1) and increase incentive to invest (1) more to spend on wages (1) may create job opportunities / reduce unemployment (1) raise consumer expenditure (1) firms grow faster (1). • Higher investment (1) will increase total demand (1). It may also increase the quality of capital goods (1) may introduce new technology (1) may increase productivity /productive capacity (1) increase output / GDP (1). • Provide an incentive to enterprise (1) as more profits can be retained / higher profits (1). 4(d) Discuss whether or not a decrease in government 8 Level Description Marks spending will reduce inflation. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it might: information and clear and logical • may reduce total demand analysis to evaluate economic issues • lower total demand may reduce demand-pull inflation and situations. One side of the • if near full employment, lower demand may have a argument may have more depth than significant impact on inflation the other, but overall both sides of the • may reduce need for taxes, lower indirect taxes may argument are considered and reduce prices. developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • lower government subsidies may raise prices appropriate to the question. The • lower government spending on education and training discussion may also point out the may reduce productivity and may increase cost of possible uncertainties of alternative production decisions and outcomes. • lower government spending on infrastructure could increase transport costs 2 A reasoned discussion which makes 3–5 • higher costs of production may increase cost-push use of economic information and clear inflation analysis to evaluate economic issues • may be other causes of inflation e.g. rise in wages and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 4(d) 8 Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

Question 50

(a) Calculate St. Kitts and Nevis’s government budget deficit in 2022. [1] (b) Identify two examples of the factor of production ‘land’ in …

Accepted Answer

Question Answer Mark Guidance 1(a) Calculate St. Kitts and Nevis’s Government budget 1 Accept 18m. deficit in 2022. ($)18 000 000 / – ($)18 000 000. $18 m / – $18 m (1). 1(b) Identify two examples of the factor of production land in 2 If more than two examples given, consider the first three. St. Kitts and Nevis. Two from: beaches (1), (coral) reefs (1), marine life / fish (1) rainforests (1) and soil (1). 1(c) Explain how tourism causes external costs in St. Kitts 2 One mark for explanation of external costs. and Nevis. One mark for example based on tourism. • Social costs are greater than private costs / social costs include private costs and external costs / harmful effects on third parties / those not directly involved in producing or consuming the product (1). • Example of an external cost caused by tourism in St Kitts and Nevis e.g. pollution / environmental damage / death of wildlife / death of marine life / overcrowding (1). 1(d) Explain two reasons why a foreign bank may open a 4 One mark each for each of two reasons identified and one branch in St. Kitts and Nevis. mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. • High incomes in the country (1) high demand for Most of the explanation points e.g. high profit could be banking services / high demand for loans / may save linked to any of the three identification points except high more / borrowers likely to be able to repay loans / high disposable income should be linked to absence of personal profit / high revenue (1). income tax. • Absence (low) of personal income tax (1) workers would be able to keep all of their income / more disposable Do not give two explanation marks for one identification. income / firms may be able to pay lower wages / increase workers’ motivation (1). Explanation marks here are dependent on the • Relatively high literacy rates (1) awareness of benefits identifications. of having a bank account / saving / skilled workers / high productivity (1). 1(e) Draw a demand and supply diagram to show the effect 4 of an increase in the productivity of onion farmers on the market for onions. D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New supply curve shifted to the right (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(f) Analyse the relationship between healthcare spending 5 Responses do not have to be in the format suggested but as a percentage of GDP and life expectancy. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Expected relationship: and analyse the overall data. Direct / positive relationship (1). Generally, the higher healthcare spending, the higher the life expectancy (1). Supporting evidence should involve interpretation, not just description. Supporting evidence: E.g.: Haiti has the second lowest % healthcare spending and the shortest life expectancy (1) Canada spends a higher % on healthcare than Egypt and has a longer life expectancy / Canada spends the highest percentage on health care and has the second highest longest life expectancy / Canada and Sweden spend a high % on healthcare and have long life expectancy (1). Analysis of the supporting information: Higher spending on healthcare would be expected to raise the health of the population / provide better quality healthcare (1) increase awareness of need for healthy living / provide more check-ups / preventative medical care / reduce the death rate (1). Exception: Monaco (1) spends the lowest % on healthcare but has the longest life expectancy (1). Analysis of exception: 1.9% of a very high GDP can mean higher spending than e.g. 12.9% of a lower GDP / Monaco may have a high GDP (1). There are other influences on life expectancy e.g. nutrition / education/housing/war (1). 1(g) Discuss whether or not an increase in the size of its 6 Award one mark in total for higher / lower average costs, fishing industry would benefit St. Kitts and Nevis. one mark for lower / higher fish prices, one mark for higher / lower profits (1). Award up to 4 marks for logical reasons why it might, which may include: Higher / lower profits should be linked to the fishing industry. • may reduce imports of fish (1) reduce risk of supply-side shocks / imports being cut off (1) enable fish to be Apply this example to all questions with the command exported (1) may improve the current account word DISCUSS balance / improve the balance of payments (1) (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) • may increase employment / increase job opportunities / reduce unemployment (1) raise incomes Each point may be credited only once, on either side of an (1) increase living standards (1) increase argument, but separate development as to how/why the GDP / increase output / cause economic growth (1) outcome may differ is rewarded. higher tax revenue (1) • may enable greater advantage to be taken of Generic example Mark economies of scale (1) example (1) lower average cost (1) lower fish prices (1) Tax revenue may decrease … 1 • (larger boats) may be more efficient / more productive (1) make the industry more profitable / increase profits ... because of reason e.g. incomes may be 1 from fishing (1). lower. Tax revenue may increase because incomes 0 may be higher i.e. reverse of a previous argument. Tax revenue may increase because of a different 1 reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1(g) Award up to 4 marks for logical reasons why it might not, which may include: • opportunity cost (1) could use resources in other industries / government can spend more on e.g. education / increase budget deficit (1) • over-fishing (1) deplete fish stocks / lose marine life / deplete resources (1) raise fish prices in the long run (1) • may experience diseconomies of scale (1) example (1) higher average cost (1) reduce profit (1) • may cause external costs / environmental harm (1) may damage coral reefs / cause pollution (1) harm tourism (1) • may be a dangerous occupation (1) may be low-paid (1) low-skilled (1) may experience seasonal unemployment (1) • risk of over specialisation / too great a dependency on the industry (1) may be harmed by a fall in demand for fish / rise in competition from other countries (1). 1(h) Discuss whether or not deflation is likely to have 6 Award one mark for malign (bad) deflation is harmful harmed St. Kitts and Nevis. whereas benign (good) deflation is beneficial. Award up to 4 marks for logical reasons why it might, which Mark for higher employment and mark for higher GDP can may include: only be awarded if come from higher total supply. • may have increased real value of debt (1) may default (1) may have decreased investment (1) ‘save more’ may be credited on either side but only once. • may have resulted in a deflationary spiral (1) may have resulted from lower total demand (1) lower GDP / lower output / reduce economic growth / may cause a recession (1) lower employment / increased unemployment (1) lowered wages / income (1) • may reduce confidence (1) may discourage MNCs (1) • may reduce consumer expenditure / save more / create uncertainty (1) delay buying goods and services (until price is lower) (1). Award up to 4 marks for logical reasons why it might not, which may include: • may have increased purchasing power / real income / with the same income more goods and services can be purchased (1) (some) people may spend / consume more (1) • value of saving may have increased (1) increasing wealth (1) • may be the result of higher total supply (1) due to advances in technology / lower costs of production (1) higher output / economic growth (1) higher employment (1) • may have increased international competitiveness of its products / lower export prices (1) increased exports / export revenue (1) reduced imports / import expenditure (1) improve current account balance (1).

Question 51

In 2023, the Chinese Government said that it would aim for an economic growth rate of 5% and a steady increase in both exports and imports.…

Accepted Answer

5(a) Identify two influences on household spending. 2 If more than two influences given, consider the first three. Two from: • income • interest rate • taxation • confidence • inflation rate / cost of living / prices / price • wealth • age • size of household • culture • advertising • quality • tastes 5(b) Explain two advantages of employing older workers. 4 One mark each for each of two advantages identified and one mark each for each of two explanations. Logical explanation which might include: If more than two advantages given, consider the first three. • May be more experienced (1) may have high productivity / high efficiency / high skills (1). There is an element of mix and match here with some • May make few mistakes (1) produce high quality explanations being linked with different identifications but do products (1). not reward the same point twice. • May be reliable / easy to manage (1) punctual / carry out duties carefully (1). Award increase in incomes rather than increase in wages. • May need little training / may have received more training (1) keep firms’ costs low (1). • May be less likely to take maternity / paternity leave (1) less disruption to output / lower costs (1). • May train young workers (1) pass on experience (1). • May be less likely to leave job (1) in search of a better paid job (1). • May keep older people healthy (1) lowering healthcare costs / increasing life expectancy (1). • May increase the incomes of older people (1) reducing poverty (1). • May increase the size of the labour force (1) encourage more older workers to seek employment / increase productive potential (1). • Make older people more financially independent (1)reduce financial burden on family / government (1). • May be prepared to work fewer hours (1) make firms more flexible (1). • May be prepared to work for relatively low wages (1) in order to e.g. stay active (1). • May relate better to older customers (1) a growing market in most countries (1). 5(c Analyse how an increase in household spending could 6 Formula AD = C + I + G + (X – M) can be taken as cause inflation. recognition that C is a component on total demand. Coherent analysis which might include: Higher total (aggregate) demand and prices being pushed up can be shown on a diagram – one mark each. Household spending / consumer expenditure / consumption is a component of total demand (1) An increase in Reward but do not expect reference to the multiplier effect. household spending would increase total demand (1). Total demand could exceed total supply (1) higher demand may encourage firms to raise prices (1) resulting in demand- pull inflation (1). An increase in household spending could encourage firms to invest / increase investment (1) increase their output (1) they may hire more workers (1) this may drive up wages (1) increase demand for raw materials / capital goods (1) raise price of raw materials / capital goods (1) increase costs of production (1) cause cost-push inflation (1) cause a wage price spiral (1). 5(d) Discuss whether or not a government should aim for an 8 Level Description Marks increase in imports. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic Why it should: argument, making use of economic • may save scarce resources information and clear and logical • may reduce shortages in the home market analysis to evaluate economic issues • may lower the exchange rate and situations. One side of the argument • may increase choice and quality of products in the may have more depth than the other, but home market overall both sided of the argument are • may import technology considered and developed. There is • may reduce firms’ costs by importing low price raw thoughtful evaluation of economic materials and capital goods concepts, terminology, information • may increase competition, making domestic firms more and/or data appropriate to the question. efficient The discussion may also point out the • may increase revenue from import tariffs possible uncertainties of alternative • may enable a country to consume more than it decisions and outcomes. produces in the short term • may increase incomes abroad raising demand for this 2 A reasoned discussion which makes use 3–5 of economic information and clear country’s exports. analysis to evaluate economic issues Why it should not: and situations. The answer may lack • may worsen the current account balance some depth and development may be one-sided. There is relevant use of • may cause some domestic firms to go out of business economic concepts, terminology, • may reduce exchange rate information and data appropriate to the • may reduce employment question. • may lower incomes / GDP per head • may lower living standards in the long term • will not want to import demerit goods. 5(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Question 52

Japan has faced significant periods of deflation in recent decades. Despite efforts to stimulate the economy through fiscal policy measures…

Accepted Answer

3(a) Identify two fiscal policy measures. 2 If more than two measures are given, consider the first three. • government spending (1) • taxation (1) Accept two types of spending, or two types of taxes. Allow contractionary (1) expansionary (1) measures. 3(b) Explain two influences on productivity. 4 One mark each for two influences identified and one mark each for two explanations. Logical explanation which might include the following. If more than two influences are given, consider the first Quality of factors of production (1) better quality improves three. efficiency / poor quality reduces efficiency (1). Working conditions / wages (1) influencing worker motivation (1) technology (1) machine speed / effects on capital productivity (1) education (1) skilled workers / effects on labour productivity (1). Healthcare (1) healthier workers capable of producing higher output / sick workers take time off work (1). Effectiveness of institutions (1) amount of bureaucracy affects efficiency (1) use of resources (1) whether wasted or used efficiently (1). 3(c) Analyse reasons why central banks are important for an 6 economy. Coherent analysis which might include: • control inflation (1) by implementing monetary policy (1) such as changes in interest rates (1) prevent prices from rising too much (1) prevents deterioration of purchasing power / affordability of goods and services (1) prevent deflation (1) • maintain financial stability (1) monitoring health of banks (1) preventing collapse of banks (1) assuring savings are protected (1) ensuring consumers have access to credit (1) ensuring liquidity of the economy (1) • provision of economic information (1) which can help decision-makers (1) • buying / selling currency (1) to influence exchange rates (1) • lenders of last resort (1) providing liquidity to commercial banks (1). 3(d) Discuss whether or not deflation is a problem for an 8 economy. Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which 6–8 accurately examines both sides of Why it might be a problem: the economic argument, making use of economic information and clear • decreases confidence in the economy and logical analysis to evaluate • deflationary cycle economic issues and situations. One • loss of jobs side of the argument may have more • delays in spending reduce demand depth than the other, but overall, • lower profits for firms from lower prices. both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 2 A reasoned discussion which makes 3–5 use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3(d) Why it might not be a problem: Level Description Marks • decreases prices, increasing affordability for consumers 1 There is a simple attempt at using 1–2 • if it is caused by decreases in cost, problems for the economic definitions and economy are less significant terminology. Some reference may be • increase in international competitiveness made to economic theory, with • it depends on the extent and duration of the deflation. occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

Question	Answer	Marks	From
1	see sheet	20	0455/22 Feb/March 2017
2	see sheet	20	0455/21 May/June 2017
3	see sheet	20	0455/23 May/June 2017
4	see sheet	20	0455/21 Oct/Nov 2017
5	see sheet	20	0455/21 Oct/Nov 2017
6	see sheet	30	0455/22 Oct/Nov 2017
7	see sheet	20	0455/22 Oct/Nov 2017
8	see sheet	20	0455/23 Oct/Nov 2017
9	see sheet	20	0455/21 May/June 2018
10	see sheet	20	0455/22 May/June 2018
11	see sheet	20	0455/23 May/June 2018
12	see sheet	30	0455/21 Oct/Nov 2018
13	see sheet	20	0455/21 Oct/Nov 2018
14	see sheet	30	0455/22 Oct/Nov 2018
15	see sheet	20	0455/23 Oct/Nov 2018
16	see sheet	30	0455/22 Feb/March 2019
17	see sheet	20	0455/22 Feb/March 2019
18	see sheet	20	0455/21 May/June 2019
19	see sheet	20	0455/22 May/June 2019
20	see sheet	20	0455/21 Oct/Nov 2019
21	see sheet	20	0455/21 Oct/Nov 2019
22	see sheet	20	0455/22 Oct/Nov 2019
23	see sheet	20	0455/23 Oct/Nov 2019
24	see sheet	30	0455/21 May/June 2020
25	see sheet	20	0455/21 May/June 2020
26	see sheet	30	0455/22 May/June 2020
27	see sheet	20	0455/21 Oct/Nov 2020
28	see sheet	20	0455/23 Oct/Nov 2020
29	see sheet	20	0455/21 May/June 2021
30	see sheet	20	0455/22 May/June 2021
31	see sheet	20	0455/23 May/June 2021
32	see sheet	20	0455/21 Oct/Nov 2021
33	see sheet	20	0455/23 Oct/Nov 2021
34	see sheet	20	0455/22 May/June 2022
35	see sheet	20	0455/23 May/June 2022
36	see sheet	20	0455/21 Oct/Nov 2022
37	see sheet	30	0455/22 Feb/March 2023
38	see sheet	20	0455/21 May/June 2023
39	see sheet	30	0455/22 Oct/Nov 2023
40	see sheet	20	0455/22 Oct/Nov 2023
41	see sheet	30	0455/23 Oct/Nov 2023
42	see sheet	20	0455/23 Oct/Nov 2023
43	see sheet	20	0455/21 May/June 2024
44	see sheet	30	0455/22 May/June 2024
45	see sheet	20	0455/22 May/June 2024
46	see sheet	20	0455/21 Oct/Nov 2024
47	see sheet	30	0455/23 Oct/Nov 2024
48	see sheet	20	0455/22 Feb/March 2025
49	see sheet	20	0455/21 May/June 2025
50	see sheet	30	0455/22 May/June 2025
51	see sheet	20	0455/22 May/June 2025
52	see sheet	20	0455/21 Oct/Nov 2025

Questions20 pages

Mark scheme52 answers

Another paper, or another topic

Questions as text

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Question 50 0455/22 May/June 2025

Q51 · In 2023, the Chinese Government said that it would aim for an economic growth rate of 5%… 0455/22 May/June 2025

Q52 · Japan has faced significant periods of deflation in recent decades 0455/21 Oct/Nov 2025