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Productivity: Output per unit of labour employed

Costs of inflation: shoe leather (a cost when consumers spend time and money trying
to find the best prices), menu costs (additional costs incurred by businesses as a
conseq. of inflation)
Terms of Trade: a ratio of the index of export prices to import prices
(effects of high inflation) LEIUS: loss of PP, effects on savings, effects on
international competitiveness, uncertainty for investors, social unrest
Discuss whether it is the behaviour of producers, consumers or governments that is
most likely to cause inflation. [12]
Inflation is a sustained rise in the general price level and is measured by the CPI or RPI.
Each of the groups can contribute to inflation although in different ways. Producers may
increase prices to raise profit levels or to respond to higher import prices (cost push);
consumers may increase their spending and reduce their saving raising AD (demand pull);
governments may increase the money supply (monetary inflation), lower direct taxation and
run budget deficits (demand pull) and raise indirect taxation (cost push inflation); they may
also manipulate the exchange rate.
Candidates can argue for any group although government influence may be most
widespread.
For a definition of inflation 1 mark
For an understanding of different types of inflation 6 marks
Analysis of the influence of different groups 6 marks
(10 marks max.)
Discussion of the relative impact of the groups 4 marks
Explain the difference between cost-push inflation and demand-pull
inflation. [8]
Inflation is a sustained rise in the general price level with an accompanying reduction in the
real value of money. Cost-push inflation is caused by persistent rises in the costs of
production independent of demand, which cause firms to maintain or increase their profit
margins. Examples include increases in wage rates, indirect taxes and raw material costs.
These may be linked to monopoly power, government action and changes in exchange
rates.
Demand-pull inflation is caused by increases in aggregate demand (C+l+G+X-M) often when
the economy is close to full employment. Influences may be increases in consumer
spending, government expenditure, money supply, spending attitudes, export demand.
For knowledge of inflation up to 2 marks
For explanation of cost-push inflation up to 3 marks
For explanation of demand-pull inflation up to 3 marks

(b) Discuss whether a country experiencing inflation will always have a


balance of payments problem. [12]
Inflation may make export prices uncompetitive and import prices more
attractive. With reduced demand for exports and increased demand for imports
the trade balance may worsen. The extent will depend on the elasticities of
demand which need to be examined.
Confidence in the economy may be reduced with an impact on FDI and outflows
on the financial account. The rate of inflation compared to rival producers is also
important as is its stability.
Changes in the exchange rate may offset price differences. Trade only makes up
part of the balance of payments position, income flows, capital flows, service
income etc. may compensate for weakness in the trade position.

(b) Discuss whether the principle of comparative advantage is a


satisfactory explanation of the trade pattern of an economy with which
you are familiar. [10]
The theory predicts that gains will arise from trade in line with a country's
comparative
advantage. Candidates may outline a pattern of trade e.g. exports of primary
produce, reliance on tourism, export of manufactures, import of capital goods
etc. for their economy and relate this to the country's factors of production. They
may challenge the theory on the basis of its assumptions (no transport costs, 2
countries, mutual demands etc.) or on real world problems e.g. unequal trade
arrangements, obstacles to trade, inability to exploit resources etc.
For application of C.A. to a pattern of trade up to 6 marks
For discussion of limitations of C.A. theory up to 3 marks ]
For discussion of other explanations of trade up to 4 marks
Discuss the accuracy of the definition of public and merit goods as
goods that must
be provided by the government. [12]
Public goods are non-rival and non-excludable such as street lighting. Merit
goods are goods
underprovided by the market system. The consumers lack full information of
the
consequences of non-consumption. This might include healthcare and pension
provision.
Although the government provides public goods because it is not possible for the
market due
to free riders, merit goods are supplied to a greater or lesser extent by private
providers.
The government also provides other goods and services which are neither public
nor merit
goods. The definition fits public better than merit goods but is inadequate in
itself.

For an understanding of public goods and why they are provided by the
government
(up to 6 marks)
For an understanding of merit goods and why they are provided by the
government
(up to 6 marks)
(10 marks max.)
Discussion of the accuracy of the definition. (4 marks)

Discuss whether a current account deficit is always a serious economic


problem for a
country. [12]
A current account deficit occurs when financial outflows from goods, services,
income and
transfers outweigh inflows. This may be a serious problem if it is the result of a
fundamental
disequilibrium, if it requires unusual policy measures, if it is long term and if it is
not possible
to finance it without excessive borrowing or rundown of reserves. However, it
may not be
significant if it alternates with surplus years, there are sufficient reserves to
cover it, if it will
enable longer term development (via the importing of capital goods) and if it is a
small
percentage of GDP. Other economic problems (inflation or unemployment) may
be more
significant depending upon economic conditions.
For understanding of a current account deficit 4 marks
For discussion of circumstances when it is serious 4 marks
For discussion of circumstances when it is not serious 4 marks
(a) With the help of a diagram, explain why some goods are produced in quantities
greater than is socially desirable. [8]
Overproduction is usually associated with production of goods with negative externalities
and demerit goods. Negative externalities, such as pollution, impose a cost on third parties
which
is not reflected in the market outcome where the price is too low and quantity too great.
Demerit goods, such as cigarettes, are demanded in quantities which reflect the consumers
lack of information about the effects of consumption or the failure to act upon that
information. As the free market sets an equilibrium that only accounts for the private costs
and not the external and therefore social costs the socially desirable outcome will not be
achieved.
Understanding of externalities and demerit goods 4 marks
Explanation with diagram showing overproduction 4 marks

(b) Discuss whether national defence or a public park is the better example of a public
good. [12]
A public good possesses the properties of non-rivalry and non-excludability. Consumption
by one does not reduce the availability to others and it is not possible to restrict the benefit of
the good to selected groups. Non-rejectability, that is automatically having to consume the
good or service, can also apply. Defence is a classic example of a public good, as increases
in population do not reduce the protection for current consumers and it is not possible to
prevent consumers in some places from getting the benefit as it applies nationally. Everyone
is automatically protected. A public park is non-rival up to the (unlikely) point at which its
popularity causes it to become so crowded that others cannot enjoy it and the admission of
others would reduce the consumption of other users . While public parks are usually free to
enter, so no-one is excluded by price, it is possible to exclude people by admission systems
and the enforcement of charges. No-one is forced to enjoy the existence of the public park
as they are not compelled to use it. While defence always demonstrates the required
qualities, a public park usually does but not always or entirely.
Understanding of the properties of a public good 4 marks
Discussion of national defence as a public good 4 marks
Discussion of a public park as a public good 4 marks

(c) Discuss whether all countries should set annual inflation targets of around 3%. [6]
Case for includes e.g. stable and low rate desirable, active policy priority, retention of
competitiveness, avoidance of unwanted redistribution, maintenance of confidence and
risk taking.
Case against includes e.g. unrealistic (current high inflation), unnecessary (current low
inflation), more important priorities, ineffective control (lack of institutional framework) and
different circumstances in different economies.
4 marks maximum for one side
Explain two possible economic reasons for Indias introduction of export
restrictions.
[4]
Reasons include:
To transfer supply to the home market (1) to improve living standards (1)
To help lower income families in India (1) as rice is an important part of their diet
(1)
To reduce inflationary pressure in India (1) as rice has a large weight in the CPI
(1).
(ii) Analyse the social costs associated with the increased mining of Rare Earth
elements. [4]
Social costs are made up of private and external costs (1),
private costs are incurred by the producer while external costs (negative externalities) affect
3rd parties (1),
private costs of mining include e.g. labour costs (wages and training) and costs of equipment

(purchase and running) (1), external costs include e.g. pollution and environment
degradation with worsening health and living conditions.

The combination of rapid economic growth and inflation is no coincidence.


(Source: The Times)
(a) Explain why the rapid growth and high inflation might often occur at the same
time.
Explanation of meaning of economic growth and its effects on national income, consumer
spending, government spending and firms investment, or foreign demand for exports which
may have become cheaper. The effect on aggregate demand which will increase could
cause inflation especially if there is a pressure on resources.

(a) Analyse what might cause an increase in unemployment in a country. [12]


Analysis of the causes of an increase in unemployment. Although the information is
essentially the same as the static causes of unemployment candidates should make some
comment about the reasons for an increase in unemployment drawing attention to what
might have changed to result in such an increase.
L4 For a sound explanation with a clear understanding of the principles involved dealing
with at least four types of unemployment. (912)
L3 For an accurate but more limited explanation and minor errors in the analysis. Expect at
least four types briefly explained, or three types more fully explained. (78)

(b) Discuss what impact an increase in unemployment is likely to have on an


economy.
Discussion of the likely impact of unemployment reduced expenditure by consumers, but
possibly increased expenditure by governments on training programmes, benefit schemes,
reduced incomes, reduced rate of economic growth, social factors and impact of
unemployment.
L4 For a sound discussion with good explanation of the possible outcomes with a
conclusion. (913)
6 (a) explanation of the different causes of unemployment.
L4 For a clear explanation with accurate development of at least four causes of
unemployment, cyclical, structural, frictional, seasonal, voluntary. [912]
(a) Use economic analysis to explain the benefits of international trade. [8]
The benefits are based on comparative advantage. It exists when one economy can produce
a good at a lower opportunity cost than another. This is based on different factor
endowments. Specialisation and trade at a rate between the two opportunity costs will
increase output and raise living standards. The model is based on assumptions including
two products, two countries, no transport costs, constant returns to scale and
mobility of labour.
The benefit can be shown by a numerical example. An alternative approach would involve
explaining more general benefit of trade such as choice, lower prices, higher quality, ending
of local monopolies etc.
Understanding of comparative advantage 4 marks
Explanation of the operation of comparative advantage) 4 marks
General benefits of trade )
(b) Discuss whether restrictions on international trade can ever be justified. [12]
Restrictions on trade include tariffs, quotas, subsidies, voluntary export restraints (VERS)
and exchange controls. They are intended to raise the price or restrict the quantity of imports
and to lower the price of exports. The case against restrictions is that they prevent the
benefits of free trade, lower living standards, reduce choice, lower employment and may
provoke retaliation. There are some short-term arguments that are considered justifiable.
These include arguments for protecting infant industries, preventing dumping, slowing the
decline of sunset industries, improving the terms of trade, and raising revenue. Other
justifications tend to be non-economic (1 max).
Understanding of trade restrictions up to 4 marks) max. 6 marks
Analysis of the benefits of restrictions up to 4 marks)
Discussion of the limitations of restrictions 6 marks
(At least 2 marks reserved for conclusions or relevant evaluation

(ii) What differences were there in the types of goods traded between the two
countries? [2]
Australia exports mainly minerals and farm products (1), Thailand exports mainly
manufactured or processed (1), credit comment on petroleum, seafood or restricted
data.
(iii) Explain what might have caused these differences. [4]
Absolute and comparative advantage (1), meaning (1), differences in factors of
production (1), application e.g. Australia land rich, Thailand capital/technology rich
(2).
(b) (i) Name two protective measures, other than tariffs, which would restrict free

trade. [2]
Quotas, embargoes, VERs, subsidies, exchange control, licences, etc. any 2
Discuss whether Australia and Thailand should have abolished all tariffs
immediately. [6]
Case for based on free trade arguments (reduce poverty, living standards), welfare and
efficiency, with reference to data up to 4 marks.
Case against based on infant industry, need for adjustment, special circumstances etc.
with reference to data up to 4 marks. Credit reasoned conclusion up to 2 marks.
Discuss whether high indirect taxes are the best way to discourage smoking.
Operation of tax leaves choice to customer, raises revenue, targeted but is regressive,
ineffective and encourages evasion.
Compare to alternatives such as a ban or education.
Demand factors include prices of related goods, expected future prices,
incomes, tastes and preferences, population, government policies, climate
and weather, etc
Supply factors include costs of factors of production, expected future
prices, technology, government indirect taxes and subsidies, climate and
weather, etc
Explain the main determinants of price elasticity of demand for example,
availability and number of close substitutes, degree of necessity, proportion of
consumers income spent on good, time period

Explain the main determinants of price elasticity of supply for example, level
of stocks or inventories, availability of spare capacity, ease of factor
substitution, nature of product, time period
PES measures the responsiveness of supply to a change in price.
Factors which influence it include the existence of spare capacity,
availability of stocks, the time period involved and the mobility of
factors.
For understanding price elasticity of supply up to 3 marks
For identifying some influences up to 3 marks
For explaining the influences up to 2 marks

It is said that the standard of living in Orissa continues to be very low. Discuss
whether the

evidence you have been given is sufficient to support this view.


Evidence for: 48% poverty, low literacy, high debts, disease, hunger, floods. Against this
there has been some industrialisation, improved employment, use of natural resources, steel
production, increased incomes.
Need better figures of comparative living standards before and after development in the
area,
comparisons with other states, other information which is usually included in standard of
living comparisons involving social and economic indicators. [8]
Explain two possible economic reasons why Chinas international trade performance
was stronger than that of India. [4]
Up to three marks for any one reason well explained.
E.g. Productivity may have been higher in China (1 mark) because of higher levels of capital
in the production process (1 mark) making Chinese goods more competitive on world
markets (1 mark).
E.g. China may have an undervalued exchange rate (1 mark) because of the Chinese
authorities actions in the foreign exchange market (1 mark) which reduces the price of
Chinas exports, (or increases the price of Chinas imports) (1 mark).
Explain two likely economic effects of the 2009 recession on international trade. [4]
Up to three marks for any one effect well explained.
E.g. 1 During a recession incomes fall (1 mark), as a result purchasing power falls so that
less imports can be afforded (1 mark), as a result the volume of world trade falls (1 mark).
E.g. 2 During a recession incomes fall (1 mark*), as a result the demand for those goods
with
positive income elasticity falls and the demand for those goods with negative income
elasticity rises (1 mark), so some countries will gain and some countries will lose as the
pattern of world trade changes (1 mark).
Why might a current account surplus be an important economic objective for some
countries? [4]
For a clear understanding of current account surplus (1 mark).
and
For the benefits that result from a current account surplus.
E.g.s include:
It creates employment via net exports. (Up to 3 marks)
It avoids the problems that result from a current account deficit. (Up to 3 marks)
(Long-term unemployment due to poor domestic consumption and poor export demand)
(Fewer stocks of exotic imported consumer goods and range will be restricted (restricting
choice)
(Imports will likely have a higher tariffs to reduce consumption.)
It boosts confidence amongst foreign investors and promotes investment inflows.

(Up to 3 marks)
It results in an inflow of foreign currency that strengthens the exchange rate and foreign
currency reserves. (Up to 3 marks)
Notes: The suggested benefit must be fully explained for 3 marks.

Discuss the desirability of using an expenditure-reducing policy to decrease a current


account deficit. [6]
For an understanding of expenditure-reducing policy. (1 mark)
and
For the advantages of this approach. (up to 4 marks)
For the disadvantages of this approach. (Credit comment that expenditure-switching policy
is an alternative that avoids these disadvantages). (up to 4 marks)
With the help of diagrams, analyse the factors that will lead to an increase in
aggregate demand in an economy, and discuss whether this increase is more likely to
have an impact on inflation or unemployment in that economy. [12]
Candidates should show a good understanding of the components of aggregate demand and
be able to explain the factors that would cause an upward shift in the aggregate demand
curve. The diagram should be accurate and clearly labelled and explain the point of
equilibrium. Whether the impact is on inflation or unemployment depends upon the full
employment position and the shape of the aggregate supply curve
EVAL
The impact of an increase in the AD would depend on the slope of the AS curve. At low
levels of GDP where the AS curve is elastic there would be little or no impact on inflation as
there are so many unused factors in the economy. Unemployment would fall considerably as
more labour is employed to meet the higher demand. As the economy approaches the full
employment level the AS curve becomes steeper and any increase in AD will have an
increasing impact on inflation and a decreasing effect on unemployment. At full employment
level the AS curve becomes vertical, and any further increase in AD will have no effect on
unemployment as labour is already fully employed. But there would be a large effect on
inflation as there is excess demand in the economy which cannot be met by increased
production.
Economic analysis states that the aims of the government include
economic growth and
economic efficiency.
(a) Explain how achieving economic growth might conflict with other
government
macroeconomic aims. [12]
Explanation of government aims and the effect of growth on incomes, demand,
possible
trade patterns, prices, resource use. Growth could increase demand with possible
effects on

inflation; could increase imports with possible effects on balance of payments;


could use
resources with possible effects on conservation and long-term planning; could
change
incomes with possible effects on fiscal policy and expenditure.
L4 For a good explanation of the government aims and a comment on three or
more
conflicts presented in a reasoned argument. [912]