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Mark Scheme Summer 2009

GCE

GCE Economics (8121/9121)

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Summer 2009
Publications Code UA021260
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Contents

1. General Marking Guidance 4

2. 6351 Mark Scheme 5

3. 6352 Mark Scheme 13

4. 6353 Mark Scheme 21

5. 6354 Mark Scheme 31

6. 6355_01 Mark Scheme 51

7. 6355_02 Mark Scheme 59

8. 6356 Mark Scheme 71

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General Marking Guidance

• All candidates must receive the same treatment. Examiners must


mark the first candidate in exactly the same way as they mark
the last.
• Mark schemes should be applied positively. Candidates must be
rewarded for what they have shown they can do rather than
penalised for omissions.
• Examiners should mark according to the mark scheme not
according to their perception of where the grade boundaries may
lie.
• There is no ceiling on achievement. All marks on the mark
scheme should be used appropriately.
• All the marks on the mark scheme are designed to be awarded.
Examiners should always award full marks if deserved, i.e. if the
answer matches the mark scheme. Examiners should also be
prepared to award zero marks if the candidate’s response is not
worthy of credit according to the mark scheme.
• Where some judgement is required, mark schemes will provide
the principles by which marks will be awarded and
exemplification may be limited.
• When examiners are in doubt regarding the application of the
mark scheme to a candidate’s response, the team leader must be
consulted.
• Crossed out work should be marked UNLESS the candidate has
replaced it with an alternative response.

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6351 Mark Scheme

1. If incorrect option is selected, a maximum of 2 marks


are available for explanation.

2. Up to 2 marks are available for candidates explaining two


incorrect options.

3. If option is left blank, but correct option is referred to in


the text, then the mark for the correct key is available.

Question Answer Mark


Number
1 A (1)

Definition of positive statement as one that is


testable/verifiable (1 mark), reference to statement
A as a positive statement and some justification for
this assertion (‘will’/can measure growth) (1 mark).

Definition of normative statement as one that is a


value judgement (opinion is not enough) (1 mark),
reference to statement B as a normative statement
and some justification for this assertion (‘should’) (1 (4)
mark).

Question Answer Mark


Number
2 C (1)

Definition of production possibility frontier the


maximum output an economy can produce using
available resources fully (2 marks).

Explanation that point Q is unobtainable as it is


outside the boundary of the PPF (1 mark). To achieve
this would necessitate shifting the PPF, ie economic (4)
growth (1 mark).

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Question Answer Mark
Number
3 B (1)

Candidates can refer to absolute and/or comparative


advantage in the definition (total of 2 marks
available).
Recognition that France has an absolute advantage (1
mark).
Definition of absolute advantage (1 mark).
Comparative advantage is when a country can produce
a good more efficiently than others (1 mark) based on
differing opportunity cost ratios (1 mark) leading
them to specialise (1 mark).
Maximum of two marks for definition.

Calculation of the opportunity cost ratios as 3 : 1 for (4)


both Belgium and France (1 mark) and therefore no
trade should take place (1 mark).

Question Answer Mark


Number
4 A (1)

European tour campaign causes a shift in demand to


the right (1 mark) from D1 to D2 (1 mark).

Increase in the cost of CDs causes the supply curve to (4)


shift to the left (1 mark) from S1 to S3 (1 mark).

Question Answer Mark


Number
5 B (1)

Definition/formula for Price elasticity of demand (2


marks).

Explanation that demand is price inelastic because


response of demand is less than the price change or
the value lies between 0 and -1 (1 mark) and
continues to show how this will cause how total
revenue will rise (1 mark).

This can be done diagrammatically (2 marks) if there (4)


is an explanation in the text.

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Question Answer Mark
Number
6 A (1)

Definition/formula for Income Elasticity of Demand (2


marks).

Explanation of a normal good – as incomes rise


demand rises (1 mark). This implies a positive income
elasticity of demand (1 mark). (4)

Question Answer Mark


Number
7 D (1)

Definition/formula for Cross price elasticity of demand


(2 marks).

Reference to the negative cross price elasticity of


demand (1 mark).

Explanation of complementary goods (1 mark).


(4)

Question Answer Mark


Number
8 B (1)

Definition of subsidy – A payment made by government


with the aim of increasing output (1 mark) by
reducing cost of production (1 mark).

Diagram to show the impact of the subsidy being


abolished clearly showing price rising and output
declining (2 marks).
Or written explanation to the same effect with clear (4)
reference to the shift in the supply curve (2 marks).

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Question Answer Mark
Number
9(a) Correct diagram showing shift in demand curve to the
right and supply curve to the left and therefore an
increase in price of gold. The price and quantity
equilibrium points must be shown (4 marks).

Written explanation of why demand for Gold has


increased – reference to increased demand by central
banks (1 mark). Written explanation why supply has
(6)
declined – fewer mines producing (1 mark).

Question Answer Mark


Number
9(b) Rising price of gold will cause costs of production of
jewellery to increase and/or a rise in price of
jewellery (1 mark). This will cause demand for
jewellery to fall (1 mark).

Evaluation: The effect on demand will depend on


price elasticity or the proportion of gold costs in total
costs or on the reaction of Signet to the higher costs. (4)
Any one point explained (2 marks).

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Question Answer Mark
Number
9(c) As firms leave the industry supply will fall (1 mark)
and therefore the price of jewellery will increase (1
mark).

Evaluation: The extent of the price increase will


depend on the price elasticity of demand or the
number of firms that leave the industry. (4)
Any one point explained (2 marks).

Question Answer Mark


Number
9(d) Define cross price elasticity of demand or use of
formula (1 mark). Impact of rising gold prices on
substitutes – demand for silver or other substitutes
might increase. Impact on complements – demand for
diamonds or other complements may fall (up to 3
marks for explanation of the process) – must
consider both types of product.

Evaluation: The extent of the impact on substitutes


and complements will depend on the closeness of
these to gold ie gold is irreplaceable in some
processes and therefore has no close substitutes. The
impact will also depend on the extent to which prices
rise. The impact will also depend on the level of the
prices of other goods in the first place (any one point (6)
explained 2 marks).

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Question Answer Mark
Number
10(a) Correct diagram showing supply curve shifting to the
right and identifying the new lower equilibrium price (2
marks).

Written explanation referring to lower costs of


production (1 mark) and resulting in increased output (1
mark).

(4)

Question Answer Mark


Number
10(b) This response can be answered in one of two ways,
or a combination of both:

Candidate could draw a diagram showing;


• original producer surplus (1 mark)
• correct shift of supply curve (1 mark)
• new producer surplus. (1 mark)

OR

Candidate could give a written explanation which


shows clear understanding of the concept of producer
surplus and explains how producer surplus changes as
a result of a shift in the supply curve.

Evaluation: A general idea that the size of the decline


in producer surplus will depend on the elasticity of
demand and/or supply curves (1 mark), if this is (5)
clearly explained (2 marks).

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Question Answer Mark
Number
10(c) Definition/Formula for Price elasticity of supply: A
measure of the responsiveness of quantity supplied to
a change in price (1 mark). Comment on implications
for resources (increase use of resources/resources are
constrained) (1 mark) and comment on implication on
output (1 mark).

This could be shown diagrammatically.

Evaluation: Recognition of differing short run and long


run effect (1 mark) and any development of the (5)
difference between inelastic and elastic (1 mark).

Question Answer Mark


Number
10(d) Two marks for diagram showing:
• inward shift of supply curve
• original and new equilibrium points (price and
quantity).

Written explanation which refers to rising costs of


production (1 mark) leading to increase in final price
of the product (1 mark).

Evaluation:
Are there substitutes to corn in the feed process?
How significant is the cost of corn in the overall cost of
the product?
Is the pressure for the price increase coming from the
demand side? (6)
Any one point explained (2 marks).

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6352 Mark Scheme
Question Answer Mark
Number
1(a)(i) 120/397 x 100 = 30.2%. Accept 30%. 1 mark if
method correct but calculation incorrect. Award
2 marks if correct answer is written down without (2)
calculations.

Question Answer Mark


Number
1(a)(ii)
Factors which might explain the increase in waste
include:

• increase in income per head, leading to increased


consumption of goods

• change in tastes and fashions – more consumption


of fast foods, ready meals resulting from lifestyle
changes

• population changes: increase in number of


households, for example resulting from divorce.
Also, increase in single person households
resulting from increased life expectancy and more
young people choosing to live alone

• increased packaging associated with change in


shopping patterns – greater use of supermarkets.

2 marks for identification of any 2 relevant factors, 4 (6)


for application and analysis.

Question Answer Mark


Number
1(b)
Factors include:
• differences in cost of landfill sites resulting from
differences in availability and of landfills sites
and taxes on landfill
• differences in costs of recycling, eg nearness to
recycling centres; government provision for
collection
• differences in laws and regulations.
2 marks for identification of any 2 relevant factors, 1
(4)
for application (reference to figure 2) and 1 for
analysis.

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Question Answer Mark
Number
1(c)
Consideration of factors such as:

• external costs of waste disposal in landfills sites, eg methane gas;


pollution of water table and discussion of impact on third parties

X: free market equilibrium; Y: socially efficient level of waste disposal

• Analysis could include effects of tax on local authorities of dumping


waste in landfill sites, eg higher council tax; reduction in services.

Evaluation could include:

• prioritisation of factors

• impact depends on magnitude of methane gas emissions; significance


of methane gas for global warming

• significance of tax on dumping in landfill sites.

4 marks for diagram (2 for basic diagram, 1 for identifying free market
and socially optimal levels of waste; and 1 for explaining that YX
represents over-production or for explaining welfare loss area ABD; 2
marks for examples and 4 marks for any two evaluative points (2 + 2 or (10)
3 + 1).

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Question Answer Mark
Number
1(d)
Definition of external benefits: benefits to third
parties not involved in the transaction; difference
between social benefits and private benefits (2) 1
mark for imprecise definition e.g. benefit to society
or benefits to consumers not involved in the
transaction.
Examples of possible external benefits: employment in
recycling industries; innovation leading to economic (6)
growth (1 + 1) and explanation (1 + 1) .

Question Answer Mark


Number
1(e) Pay-as-you-throw schemes would:

• provide an incentive for greater recycling


• take account of the external costs of waste

but…

• might encourage fly tipping

• householders to put waste in someone else’s bin


• would adversely affect households with a large
number of people.

Tax on packaging would:

• internalise the externality


• raise the costs of producers who may pass on
these higher costs to consumers
• reduce the need for landfill and so reduce
external costs of waste

but:

• less packaging might lead to contamination of


food or damage to products
• less incentive for consumers to reduce waste.

2 x 6 marks: each block of 6 marks to be awarded


(12)
as follows: 2 marks for knowledge/identification;
1 mark for application of schemes to reduction of
waste; 1 for analysis and 2 marks for any
evaluative points.

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Question Answer Mark
Number
2(a)

Diagram showing minimum guaranteed price above the free


market price (2 marks + 1 mark for showing surplus of XY).

4 marks for application and analysis: MGP leads to excess


supply – extension of supply and contraction in demand).

Maximum 5/7 marks if no reference to context – dairy (7)


products and milk powder.

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Question Answer Mark
Number
2(a)(ii)
Reasons include:
• reduction of minimum guaranteed price
but some surplus would have remained if the MPG
was above the market price
• increased demand, for example from Asia
this could be very significant because it appears to
be a long term trend
• decreased supply (because of droughts such as
those in Australia)
this would probably be a short term problem only
unless climate change causes permanent
problems.
Also allow factors from extract 2, eg use of crops for
biofuel (but no application marks for these factors).
2 marks for identification of any 2 factors; 2 marks
for application to context eg specific reference to
extract; 2 marks for analysis and 4 marks for any (10)
two evaluative points (2 + 2 or 3 + 1).

Question Answer Mark


Number
2(b)(i) 72/10 x 100 = 720%.

Also allow: 73/10 x 100 = 730% or 71/10 x 100 = 710%.

1 mark for correct method but inaccurate


calculation. Award 2 marks if correct answer is (2)
written down without calculations.

Question Answer Mark


Number
2(b)(ii) External costs are those affecting third parties who
are not part of the transaction; or difference between
social costs and private costs (2 marks). 1 mark for
imprecise definition eg cost to society; or cost to
consumers not involved in the transaction.

Examples include: loss of rainforest threatening


wildlife eg orang-utans and associated problems of
climate change; threat of increasing hunger for the
poor because of higher food prices associated with the
production of biofuels.
(4)
(1 + 1 marks for examples).

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Question Answer Mark
Number
2(c)

3 marks for diagram; 1 for application to biofuel production; 2


marks for explanation e.g. under a free market there would be
over production of YX (just 1 for identifying free market level
of production, Y, and socially efficient level, X).

Also allow external benefits diagram and analysis – mark as


above. (5)

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Question Answer Mark
Number
2(d)
Tighter legal regulations – fixed limits can be placed
on the amount of pollutants discharged and enforced
with financial penalties.
But..
• enforcement costs might be significant
• difficulty of measuring discharge of pollutants.
Higher taxes – a means of making the polluter pay for
carbon emissions – could be illustrated with a supply
and demand diagram. Taxes bring in revenue for the
government.
But..
• the impact of taxes depends on the price
elasticity of demand
• difficult to measure precisely the external costs of
carbon emissions and therefore of setting the
appropriate tax.
2 x 6 marks: each block of 6 marks to be awarded as
follows: 2 marks for knowledge/identification; 1 mark
for application of schemes to reduction of carbon
emissions; 1 mark for analysis and 2 marks for any
(12)
evaluative points.

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6353 Mark Scheme

Question Answer Mark


Number
1(a)(i) ILO definition (1 mark). Might include:
• involves a telephone/paper questionnaire
• survey
• of a sample
• asking whether respondents have been out of
work in the last four weeks and/or ready to
start in the next two weeks.

Claimant count definition (1 mark) is a register of


those who claim and/or receive (not just eligible) JSA
or ‘dole’

Up to (3 marks) for differences. Might include:


• ILO more inclusive
• ILO 16-65, CC 18-60/65
• quarterly/monthly
• survey /raw data
• ILO might be better for international
(3)
comparison.

(1 mark) for reference to data.

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Question Answer Mark
Number
1(a)(ii) Allow any one valid reason for divergence (1 mark for
identification 1 mark for explanation of the different
directions).

Reasons might include:

• changes in rules of claiming JSA, eg savings


threshold
• changes in savings ratio might make some
people ineligible (JSA falls) but people might
be saving more as confidence falls
• ease of claiming incapacity benefits – may
involve discussion of real values of JSA
• stigma issues when people become
unemployed (for example no stigma for ILO
but high stigma for JSA)
• increases in frictional employment would
increase ILO but may show no change in JSA eg
in an economic boom
• state of the economic cycle. More vacancies
in a boom so it is harder to claim JSA. (2)

Question Answer Mark


Number
1(b)(i) Sterling price change: 5*100/38 = 13.2% (2 marks)
Allow 13%
Correct base: identified but incorrect arithmetic. (1
mark) (2)
Incorrect base: no reward.

Question Answer Mark


Number
1(b) (ii) The dollar has weakened against the pound. (2 marks)
Allow the pound has strengthened. (2 marks)

General reference to currency changes. (1 mark) (2)

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Question Answer Mark
Number
1(b)(iii) AS analysis, up to (3 marks): Aggregate supply will
decrease (1 mark) with increased costs of production
(1 mark) with further explanation, eg all firms use
gas and oil to some extent, or demand is inelastic. (1
mark)

Aggregate demand analysis, up to (3 marks): AD


changes (must be via (X-M)) because the UK is a
net oil/gas importer or net exporter.

Diagram showing an appropriate AS shift (1 mark)


with changes in price level and equilibrium real
output. (1 mark)

Data reference (use of Figure 2). (1 mark)

Reserve (1 mark) for reference to AD shift (must


be via (X-M)) and this will fall when prices rise as
we are net importers of both OR data reference.

Evaluation (2 marks) (1 x 2 marks or 2 x 1 mark) –


points might include:

• gas prices have risen far more than oil prices


(50%)
• other comment on the magnitude of the shifts
• context of previous price rises
• depends on time lag
• other things are not equal
• AD shift might outweigh AS shift or similar (but (8)
the AD shift must be correct).

Question Answer Mark


Number
1(c)(i) A supply side policy is any attempt by governments or
other policy decision-makers to increase the
productive capacity, or cut costs for all firms in the
economy, or increase incentives or to improve
productivity. (2 marks)

Allow simple AS curve, shifting to the right, as


part of explanation, or outward shifting PPF. (2)
Diagram must have a macro feel. (1 mark)

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Question Answer Mark
Number
1(c)(ii) For each policy:

Identification of policy. (1 mark)

Explaining the policy or for use of data in the passage


or from own knowledge of the UK economy. (1 mark)

Reserve one mark for impact on employment or


unemployment. (1 mark)

Policies might include:

• labour market reform


• investment
• using tax system to increase incentives eg
lowering corporation tax or income tax
• deregulation/privatisation, eg Royal Mail
• increasing productivity, eg by cutting the red
tape
• trade union reform
• changes in National Minimum Wage.

Do not include reference to health or education


spending.Do not allow answers related to subsidies
unless there is the clear macroeconomic
implication that AS will shift, rather than one firm (6)
benefiting at the expense of others.

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Question Answer Mark
Number
1(d) Concept of increasing government spending as an
element of fiscal policy and/or supply side policy (this
might be implicit). (1 mark)

Diagram (or equivalent analysis) showing both an AD


shift rightwards or upwards (1 mark) and an AS shift
rightwards or downwards (1 mark) Allow both short
run and long run diagrams.

Analysis (6 marks) either ( 3 x 2 marks) or ( 2 x 3


marks) of the spending might include:

• Short run AD effects of increased spending


such as:
1. Analysis of multiplier effects
2. Increased employment in the short run
as schools and hospitals are being built.
• Long run AS effects as supply side improves
such as:
1. Education spending can increase
employability and flexibility
2. Healthcare spending can reduce the
amount of days lost through illness
3. Healthcare can increase the working
population as more work beyond
retirement age.

Cap at 6/9 if either short run or long run ignored.

Evaluation (6 marks) either ( 3 x 2 ) marks or ( 2 x 3


marks) might include

• depends on the elasticity of AD or AS


• time lags/implementation lags
• other things might not be equal eg depends on
immigration of skilled workers
• negative effects of paying for the spending, eg
increasing tax to finance the extra spending
• size of the multiplier
• shifts in AD and AS might cancel out price
effect magnify output effect, or similar. (15)

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Question Answer Mark
Number
2(a)(i) A permitted range for the increase in the price levels,
measured by changes in the CPI OR range of +/-1% OR
aim to keep prices stable (1 mark).

2% (1 mark). Allow RPIX 2.5% or ECB 2% ceiling. (1


mark)

Target is a government-determined goal set for the


MPC. (1 mark)

Reference to data (for example ‘the rate of inflation


has been above its target since June 2007’ Ext.1 Line
8) (1 mark) (1 mark for stating, 1 mark for context or
brief explanation).

Role of MPC by setting interest rates. (1 mark) (2)

Question Answer Mark


Number
2(a)(ii) Weights are based on proportion of spending.
Award Expenditure and Food Survey or similar. (1
mark)

Reserve 1 mark for an explanation about food:


food is a major expenditure, and prices of food
rose by 1.5% in a month. (1 mark) (2)

Question Answer Mark


Number
2(a)(iii) Factors (2 marks – 1 x 2 marks or 2 x 1 mark) might
include:
• negative wealth effect or reduced mortgage
equity withdrawal
• falls in confidence
• credit problems
• consumers may defer current spending.

Role of MPC – it is likely to reduce interest rates or


not raise them (1 mark) to reflate or bring general or
average price level rises back to target not just
house prices. (1 mark) (4)

Question Answer Mark


Number
2(b)(i) Imports or components are cheaper (1 mark) reducing
inflationary pressure. (1 mark)

Exports are more expensive (1 mark) reducing


inflationary pressure. (1 mark) (2)

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Question Answer Mark
Number
2(b)(ii) Effect of interest rate cut on exchange rate (up to 4
marks):
Fall in interest rates should weaken the value of the
pound (1 mark) with mechanism to explain this. (up
to 3 marks)

Other mechanisms (up to 4 marks):


relating the interest rate to the price or quality of
imports and exports (1 mark) with mechanism to
explain this eg level of investment might rise
improving quality of exports. (up to 3 marks)

A relevant and contextualised diagram (ie must be


related to international trade) may earn. (2 marks)

Reserve (2 marks) for effect on current account of


Balance of Payments, eg it improves because exports
are relatively cheap. If the answer merely states that
there will be a surplus then (1 mark) may be
awarded.

Evaluation (2 marks) (1 x 2 marks or 2 x 1 mark).


• Not necessarily true that the currencies will
respond
• The response to price changes of exports and
imports is likely to be inelastic in the short run
• The interest change is very small
• Depends on interest rates in other countries
• Other things are not equal
• Not enough information
• Credit crunch (8)

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Question Answer Mark
Number
2(b)(iii) Award (1 mark) for valid factor, (2 marks) for
explanation which may include use of data or use of
the word ‘deficit’.
Reasons might include:
• quality problems and other loss of
competitiveness
• high unit labour costs
• high incomes
• increased prices of goods that the UK tends to
import
• overspending in the UK
• confidence issues
• other countries making progress more quickly
than the UK
• changes in comparative advantage or other
opportunity issues.

Do not award exchange rate or interest rate


changes.
Unless linked to X and M, award no marks for
(3)
government or budget deficit reasons.

Question Answer Mark


Number
2(c) Award 2 reasons, (2 marks) each:

Identification of each factor (1 mark); explanation of


link to UK AD. (1 mark)

Factors might include:


• confidence
• as US businesses close down this might
increase market scope for UK firms?
• US produces will cut their prices therefore
imports to the UK will increase
• credit crunch, eg decreased inter-bank credit
availability
• wealth effects through the stock markets
• pension funds – loss of confidence
• effect on UK exports (fall in aggregate
demand) as incomes fall in the US
• direct effect on multinationals outlets
(4)
• fall in investment from USA.

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Question Answer Mark
Number
2(d) Concept of cutting the cost of borrowing money (this
might be implicit). (1 mark)

Diagram (or equivalent analysis) showing both an AD


shift rightwards and/or AS shift rightwards (1 mark)
and correct annotations to show change in price level
and output. (1 mark)

Analysis (6 marks) either ( 3 x 2 ) marks or ( 2 x 3


marks) of the policies might include:

• increase in C (wealth effects, loans, savings


etc)
• increase in I
• falling value of the pound and effect via X-M
• AS shift to the right.

Evaluation (6 marks) either ( 3 x 2 ) marks or ( 2 x 3


marks ) might include:

• depends on the elasticity of AD or AS


• discussion of the size of the rate cut
• time lags/implementation lags
• other things might not be equal
• size of the multiplier
• fiscal or supply side policies might be better
• failure of monetary policy in the current
climate.

Reserve 2 marks of the evaluation for reference to


the contradiction of cutting rates when there is
(15)
inflation.

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6354 Mark Scheme

NB Award a maximum of 2 explanation marks if the incorrect key is


chosen
NB Award a maximum of 2 marks (1 + 1) for valid explanations of 2
incorrect options (1 + 1).

Question Answer Mark


Number
1 C
• Definition of horizontal integration (firms merge
in the same industry and at the same stage of
production). (1)
Definition or diagram of economies of scale(long
run average costs fall as output increases). (1)
NB Must state long-run.

• Application to any type of economy of scale to


sportswear: (1 + 1)

¾ Purchasing (bulk buying of sportswear from


suppliers).
¾ Technical (larger machinery to produce sports
clothing / footwear).
¾ Managerial (specialist labour for example
accountants / lawyers).
¾ Risk bearing (diversifying into UK market).
¾ Financial (easier to raise funds at lower cost).
¾ Marketing (lower unit cost of advertising). (4)

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Question Answer Mark
Number
2 C
• Correct completion of column to show rising
marginal costs (at least three figures to be shown).
(1)
• Correct completion of column to show constant
marginal revenue (at least three figures to be
shown). (1)
• Correct definition or formula for marginal cost,
marginal revenue or average revenue. (MC is the
addition to total cost from producing one more unit
of a good or MC = ∆TC ÷ ∆TQ). (MR is the addition to
total revenue from production of one more unit of a
good or MR = ∆TR ÷ ∆TQ). (AR is revenue per unit of
good or AR = TR ÷ TQ). (1)
• Perfect competition since marginal revenue equals
average revenue or firm is price taker or demand is
perfectly price elastic. (1)

Total Total Total Marginal Marginal


Output Cost Revenue Cost Revenue
(£) (£) (£) (£)
0 40 0 --- ---
1 80 100 40 100
2 140 200 60 100
3 220 300 80 100
4 320 400 100 100
5 440 500 120 100
The MR can also be labelled AR.

Also award:
• Diagram of perfectly competitive firm with
horizontal MR curve and rising MC curve (accept SR
and LR).(1)
NB No marks for other characteristics of perfect (4)
competition.

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Question Answer Mark
Number
3 A
• Role of OFT or Competition Commission
investigate anti-competitive practices / protect
the consumer or public interest / the powers of
the OFT, for example fine firms up to 10% of
annual revenue. (1)
• Identification of price fixing / collusion / cartel.
(1)
• Price fixing is against interest of consumers since
it leads to higher prices / lower consumer surplus.
(1) (4)

Question Answer Mark


Number
4 B
• Allocative efficient pricing is where marginal cost
equals average revenue (MC = AR or MC = Price).
(1)
• Definition of supernormal profit (where total
revenue exceed total costs / profits in excess of
that required to keep resources in their current
use / profits greater than normal profits). (1)
• At output level Q4, price (average revenue)
exceeds average cost and so supernormal profit is
made. (1)

Also award:
• Annotation of diagram, for example, shading in
area of supernormal profit. (1)
• Be prepared to award knock-out marks, for
example option A is incorrect since revenue
maximisation output of Q2 is greater than profit
maximisation output of Q1. (1) (4)

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Question Answer Mark
Number
5 C
• Definition of price discrimination (a firm charging
different prices to different consumers for the
same product). (1)
• Apple is able to charge a higher price in UK since
it has lower price elasticity of demand (less
elastic / more inelastic demand) than for the
US. (1)
• Diagrammatic analysis depicting different price
elasticities of demand, with UK market having a
higher price than US market. (1 + 1)

Also award:
Apple is able to separate the two markets and so
there is little leakage or has monopoly power /
market power. (1) (Only 1 mark available here.) (4)

Question Answer Mark


Number
6 E
• Data reference for example, UK gas market
appears more competitive in terms of ‘price’ – it
has the lowest price of gas for the three countries
shown / a higher proportion of consumers have
been able to switch gas suppliers. (1) NB award a
maximum of 1 mark for data reference. (4)
• Award for development of these points, for
example this implies significant consumer choice
exists for UK gas consumers / more firms are
likely to exist in UK gas market / lower
concentration ratio / higher consumer surplus in
the UK / less brand loyalty in UK / lower unit
costs of production in the UK. (1 + 1)

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Question Answer Mark
Number
7 B
• Role of Competition Commission, for example, to
promote competition in markets / protect
consumer or public interest. (1)
• A patent on Microsoft’s technological information
is an entry barrier. (1)
• Definition of contestable market in terms of low
entry and exit barriers/ low sunk costs / hit and
run competition. (1)
• Patents enable firms to exploit consumers through
high prices / less choice OR removal of patents /
consumer welfare through lower prices, more
choice and improved quality. (1)
• Sharing of patents allows rival firms to have
increased technical information and compete. (1) (4)

Question Answer Mark


Number
8 E
• Definition or formula of average revenue
(revenue per unit of output or TR ÷ TQ) or
average variable cost (variable cost per unit of
output or TVC ÷ TQ) or variable cost (costs which
vary directly with output). (1)
• Examples of variable costs to motor vehicle
manufacture – labour, electricity, vehicle
components. (1)
• By remaining in production the firm can reduce
its losses by contributing to part of its fixed costs
or fixed costs only need to be covered in long run
as they are sunk into the firm. (1)

Also award:
• Diagram showing firm making loss (1) but
covering average variable costs. (1)
• Numerical example of loss making firm where
revenue exceeds variable costs. (1)
• In the long-run the firm will exit the industry if it
cannot cover both fixed and variable costs. (1)
• Identification of shut-down position when AR =
AVC or AR is below AVC. (1) (4)

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Question Answer Mark
Number
9 E
• Outline of product differentiation applied to
games consoles, for example different quality /
unique good / different games played on consoles
/ different graphics / different speed of
characters / different functions of consoles /
colour / packaging. (1 + 1)
• A higher price is likely to reflect higher
production costs per unit. (1)
• Product differentiation creates brand loyalty /
demand is more price inelastic / higher prices
may lead to higher profits. (1 + 1) (4)

Question Answer Mark


Number
10 A
• Allocative inefficiency since MC does not equal AR
(accept answers which state the firm is not
allocative efficient since it is not producing where
MC = AR or MC = Price). (1)
• Any characteristic of low entry barriers, for
example rent out a building / employ staff on
temporary basis / purchase beauty products from
wholesaler at low cost / low level of skills / low
level of technology. (1)
• Low entry barriers mean supernormal profits are
competed away in the long run so only normal
profits made. (1)
• Any characteristic of product differentiation, for
example location / décor / type of beauty
treatments available / staff uniforms / opening
hours. (1)

Also award:
• Correct diagram showing firm in monopolistic
competition – long run. (1)

NB No marks awarded for other characteristics of


monopolistically competitive markets. (4)

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Question Answer Mark
Number
11(a)(i) • Understanding of a ‘price cap / explain RPI-X’, for
example, the regulator puts a limit on the
increase in rail fares. (1)
• Price capping helps to protect consumer interest
/ regular travellers. (1)
• Train operators have (natural) monopoly power /
so can exploit customers by raising rail fares to
very high levels / obtaining high supernormal
profits /demand is price inelastic for commuters /
capturing consumer surplus – any two points (1 +
1)

Also award:
• Train operators have an incentive to increase
efficiency in order to make profits / if ‘–X%’ price
cap set. (1 + 1)

Note: Accept a combination of ideas from the two


factors. (3)

Question Answer Mark


Number
11(a)(ii) • Understanding of the ‘X’ factor change , for
example: improvement in the prices that rail
operators can charge / relaxation of price cap or
‘RPI - 1%’ means rail fares rise by 1% below rate
of inflation and ‘RPI + 1%’ mean rail fares rise by
1% above the rate of inflation. (1 + 1)
• One reason for the relaxation of price capping.
(3)

¾ Train operators require more funds for investment


purposes / to increase capacity / to keep up with
the growth in passenger numbers / to improve
quality of service, for example more trains
running on time / frequency of service / reduce
overcrowding / to avoid increase in government
subsidies.

¾ Data use such as explicit reference to growth in


passenger kilometres from 38 billion in 2000 to 47
billion in 2007 / figure 2 refers to the age of
trains. (1)

Also award up to 3 marks:


¾ There has been a reduction in the efficiency
savings train operators can make over the time
period / train operators have been successful in
achieving efficiency savings (so little scope for
further efficiency gains). (4)

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Question Answer Mark
Number
11(b) • Train operator should be able to increase price or output. (1)
• The increase in demand means the AR and MR curves shift
outwards. (1)
• One further comment, for example, train operator is likely to
have spare capacity on its off-peak services to raise output. (1)

Diagram (up to 5 marks)

¾ Original position with costs and revenue curves for a monopoly.


(1)
¾ Average revenue curve shifting outwards to AR2. (1)
¾ Marginal revenue curve shifting outwards to MR2.(1)
¾ Original and new price / increase in price (Pe to P2). (1)
¾ Original and new output / increase in output (Qe to Q2). (1)
¾ Also accept increase in supernormal profits. (1)

Cost / revenue

NB Accept diagram showing constant AC and MC curves.


NB Award a maximum of 1 mark for a basic supply and demand
diagram where demand curve shifts outwards.
NB Award a maximum of 2 marks if no diagram showing cost and
(6)
revenue provided.

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Question Answer Mark
Number
11(c) • Definition of price discrimination. (1)
• Data use, eg reference to figure 1 where consumers are
separated into different markets according to time of booking /
Application of PED to advance booking and buying on the day /
other examples. (1 + 1)
• Purpose of price discrimination is to capture consumer surplus
where demand is price inelastic. (1)
• Conditions necessary for price discrimination: monopoly power /
ability to separate markets and prevent leakage / different PEDs
between markets. (1 + 1 + 1)

Diagram(s) (up to 5 marks)


¾ Different price elasticity of demand between markets. (1)
¾ Accompanying marginal revenue curves for each market. (1)
¾ Higher price where demand is inelastic / lower price where
demand is elastic. (1)
¾ Costs – shown as same (may be horizontal marginal costs curve /
average costs curve). (1)
¾ Areas of profit. (1)

Also award for single diagram depicting price discrimination –


where different prices are shown for capturing consumer surplus.

NB Award a maximum of 1 mark for simple demand and supply


diagrams.
Award a maximum of 4 marks if no diagram for KAA.
NB There is a maximum of 7 marks for KAA.

Evaluation (3 + 2 or 2 + 2 + 1)
Effectiveness of price discrimination depends on various factors:
• Extent of monopoly power - many train operators are regional
monopolies with little effective competition / for example road
travel may be very poor / profits can be high.
• Extent of preventing leakage - train operators can prevent

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leakage between markets by enforcement for example ticket
inspectors / ticket barriers / time of booking / and therefore
profits can be high.
• Costs of separating consumers into different markets should not
exceed the extra revenue generated.
• Spare capacity is required on train services where a lower price is
charged / Extract 1 indicates that spare capacity remains even
after price discrimination / therefore profits might be increased
through further price discrimination.
• Issue of price capping by regulator – may limit ability of train
operator to increase rail fares and profits / 40% of rail fares are
price capped.
• Internet usage increase consumer knowledge which impact on
price discrimination as a means of affecting profits.
• Duration of the rail franchise – the longer this is the greater the
possibility of gaining profits from price discrimination. (12)

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Question Answer Mark
Number
11(d) NB Candidates may argue an increase or decrease
in welfare for analysis marks. Evaluation is when
both sides of the argument is presented.

• Consumer welfare may have increased since.


(2 + 2 + 2)
¾ Growing passenger numbers (Extract 1)
/ from 38 billion in 2000 to 47 billion in
2007.
¾ Increase in punctuality of trains (Figure
3) / from 79.1% of trains arriving on
time in 2000 to 90.8% in 2007 / this
implies that fewer people are late for
work or meetings.
¾ Fall in passenger complaints (Figure 3)
/ from 131 per 100,000 in 2000 to 52 in
2007 / this implies fewer problems or
people resigned to the quality of
service.
¾ Fall in age of trains (Figure 3) / from
20.67 years in 2000 to 13.95 years in
2007 / this implies more comfortable
and reliable journeys.
¾ Lower rail fares if book well in advance
/ use of data in figure 1 such as London
– Newcastle where fares were as low as
£16 eleven weeks before departure but
as high as £92 on day of departure /
this enables more consumers to be able
to afford rail travel / increase
consumer surplus.
¾ Government subsidy of £4.6 billion to
rail industry – could finance investment
/ run unprofitable services for rail
consumers. These gain at expense of
other consumers who do not use rail
network.

• Consumer welfare may have decreased


(2 + 2 + 2)
¾ Overcrowding on peak time train
services / this suggest too few trains to
cope with rising demand.
¾ Uncertainty over train fares and
consumers do not always get the lowest
price possible / over 70 different fare
types.
¾ Significant increase in unregulated train
fares above inflation rate (accounting
for 60% of journeys) / consumer surplus
is captured.
¾ Since 2004 regulated train fares have

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increased by 1% above inflation rate –
so a real increase in fares.
¾ Issue of regulated fares linked to RPI
rather than CPI. Note RPI has been
higher than CPI over recent years.
¾ Government subsidy of £4.6 billion has
implications / higher taxes /
opportunity cost associated with the
subsidy.

• Weighing up the overall argument and


justifying conclusion arrived at.
• Reliability of the data / further information
which could help make an evaluation.
• Difficulty in measuring consumer welfare.
• Time issue – perhaps improvement may / may
not continue.
• Issue of too short franchises for train operators
to invest sufficiently into new rolling stock. (10)

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Question Answer Mark
Number
11(e) NB Presenting both arguments for and against the
train operating market being contestable can be
considered as evaluation.

NB If no application to train operating market then


award a maximum of 3 marks.

• Definition of contestable / uncontestable market,


for example a contestable market has low entry &
exit barriers / low sunk costs / hit and run entry.
(1)
• Train operating market unlikely to be contestable
since: (1+1)

¾ Government licence required.


¾ Limited time allocation slots on rail track.
¾ Dependant on government subsidy or purchase of
franchise.
¾ Economies of scale / natural monopoly.
¾ Limit pricing of existing franchise holder.
¾ High start up costs in terms of purchasing /
renting rolling stock.
¾ High exit costs in terms of loss of rolling stock /
weak second hand market.
¾ Redundancy payments on exit could be quite high.
¾ Recruitment of train drivers could be hard.
¾ Brand loyalty to specific rail services.

Evaluation (up to 2 marks)


• Contestable once the franchise is due for
renewal on existing franchise.
• Magnitude of the entry barrier - impossible
without franchise.
• Company can rent rolling stock which reduces
entry cost.
• Company rents time slot along track, signalling
& stations so reduces entry cost.
• Large firms may have the funds to enter the
train operating market.
• Government can subsidise new entrants to help
reduce entry barriers.
• Firm can buy / sell trains and carriages on
(5)
entry and exit.

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Question Answer Mark
Number
12(a)(i) • Identification: the market structure is an
oligopoly. (1)
• Definition: an oligopoly (few sellers and many
buyers or a few large firms dominate the market).
(1)
• Application: the 4-firm concentration ratio is
74.5% or the 3-firm concentration ratio is 64.2% or
the 2-firm concentration ratio is 48.5%. (1)

Also award
• Identification: the market structure is
monopoly. (1)
• Definition: a monopoly (a single producer in a
market / a legal definition where firm has 25%
or more market share).
• Application Universal has 31.9% market share
which exceeds the legal definition of a
monopoly having 25% market share. (1)

NB Maximum of 1 identification mark available. (3)

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Question Answer Mark
Number
12(a)(ii) • Consideration of one type of collusive practice
and development of it for example, price fixing /
allocating market shares / limits to marketing
budgets / sharing market information / tacit
collusion. (1+1)
• An oligopolistic market structure may make it
conducive to collusion, eg relatively few major
firms to reach an agreement / high barriers to
entry. (1+1)
• Tacit collusion may occur since Universal is
market leader with 31.9% share and so other firms
might follow its pricing and marketing decisions
(price leadership). (1)

Evaluation (2 marks for one factor)


• Collusion is unlikely due to the severe penalties
firms may face, for example, fines of up to 10% of
revenue / possible imprisonment of directors.
• Collusion is unlikely since Competition laws
encourage whistle blower since main informant is
treated leniently.
• Collusion less effective when cheating occurs and
is likely to break down.
• Collusion is unlikely since 25% of the market
contains independent music companies – who
could expand their market share if the major
firms undertake price fixing.
• Collusion is unlikely since the pace of
technological change is so fast, undermining any
price and output agreements for a specific mode
of music, eg internet downloads.
• Tacit collusion may occur as it is very difficult to
prove by the competition authorities.
• Collusion unnecessary if a music firm has top
(5)
artists under contract / PED is inelastic.

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Question Answer Mark
Number
12(b) ¾ Explicit reference to data using figures for both
CD sales increasing and CD revenue decreasing
(accept reasonable approximations) (2). If
candidates just refer to CD sales increasing and
CD revenue decreasing just award 1 mark.
¾ CD prices must be falling. (1)
¾ Reasons for falling CD prices include: increase in
internet downloads / improvements in
technology. (1)
¾ Demand is price inelastic (1) the percentage fall
in price is greater than the percentage increase in
sales of CDs. (1)
¾ Also award for diagram showing falling price & (4)
revenue. (1)

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Question Answer Mark
Number
12(c)

Diagram which explicitly shows: (up to 6 marks)

¾ Original position with cost and revenue curves which


shows profit maximisation (1)
¾ inward shift of Average Revenue and Marginal Revenue
curves (both required)(1)
¾ falling price level (1)
¾ falling output level (1)
¾ original profit level (1)
¾ new profit level.(1)
NB Allow pivotal shift in AR and MR curves.

NB Candidate must show a fall in price, a fall in output and


a fall in profits to obtain maximum marks from the diagram.
Otherwise award a maximum of 4 marks for the diagram.

• Written explanation of falling demand causing a


decrease in price, output and profits. (1)
• Reference to CD sales decreasing by 11% in 2007. (1)

Note: Award a maximum of 1 mark for diagram showing an


inward shift in demand and fall in price if a basic demand
and supply diagram is used.

Evaluation (2 + 1 or up to 3 marks for one point well


developed)
• Magnitude: the extract indicates an 11% fall in CD sales
in 2007 and so is likely to have a significant impact on
price, output and profits.
• Time factor: the question asks candidates to consider
2007 – but this decline in sales is likely to be part of a
long term trend. It seems appropriate for candidates to

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assume the situation will worsen in the long term.
• However, a music company may diversify into other
methods of music sales and so may not be affected too
seriously in terms of price, output and profits for its
music. For example, legal download sales have risen
from 5 million in 2004 to 73 million in 2007.
• A music company may be able to reduce its production
costs / reduce its CD operations to offset the decline in
CD sales / an increase in productivity could also help
restore profits.
• Firms might switch strategies, eg from profit
maximisation (MC = MR) to sales maximisation (AC =
AR). (10)

Question Answer Mark


Number
12(d) Award a maximum of 8 marks out of 12 if only the
music industry or consumers considered.

(KAA 3 + 3 + 2 or 2 + 2 + 2 + 2)
Music industry (producers) positive effects:
• Once the system is set up – very low marginal
costs of supplying tunes.
• Internet download is growing rapidly as people
become more proficient with new technology –
so a lucrative market for music producers.
• New technology is opening up new markets, for
example, mobile ringtones & USB memory
sticks.
• Lower marketing costs for new artists and new
releases.
• Lower production costs, eg less stores and staff
required.
• A huge audience using the internet – so
potential market for songs is enormous.
• Immediate payment system online.

Music industry (producers) negative effects:


• Spread of illegal internet downloads – around
10% of music market / lower revenue and
profits.
• Fighting illegal downloads is time consuming,
expensive to monitor and hard to prosecute
offenders. Prosecution of minor offenders is
bad for public relations.
• Requires support from Trading Standards and
authorities to enforce.
• Legal internet downloads undermines music
sales in CD market.

Consumers – positive effects:


• Downloads are cheaper / greater consumer
surplus / consumers can purchase individual

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songs rather than whole albums.
• Highly convenient to purchase online in own
home rather than going to shop. Instant
collection of purchase via internet.
• Vast choice of music on internet websites.
• Improved consumer knowledge, for example,
price discrimination is made more difficult for
firms.

Consumers – disadvantages:
• Question mark over the safety of online
payments.
• Some consumers desire a physical product like
a CD.
• Closure of music stores in shopping centres.
• Some consumers may not have access to
internet or lack skills to use it.

Evaluation (2 + 2)

There are 4 evaluation marks and these may be


awarded for discussing both the positive and
negative impact on either the music industry or
consumers.

Evaluation also includes:


• Prioritise: discussion of who gains most –
consumers or producers.
• Prioritise: discussion of whether the
advantages of the internet outweigh
disadvantages.
• Magnitude: the change to internet shopping is
very rapid; note the growth in legal music
downloads from 5 million to 73 million
between 2004 and 2007.
• Time factor: The internet is revolutionising the
way producers sell and consumers shop - music (12)
downloads is at the forefront of this change.

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Question Answer Mark
Number
12(e) Identification (1 + 1) development / analysis of two
barriers to entry (1 + 1).
Barriers to entry include: start up costs eg
recording studios / research into developing
new artists / contracts with artists /
advertising expenditure / brand loyalty of
artists to existing music firms / technological
skills in setting up internet download website /
marketing costs / limit pricing of the ‘big four’
music companies.

Evaluation (2)
Prioritise over the greatest entry barrier:
¾ Research into developing new artists might
involve element of luck and be very
significant.
¾ The internet makes it easier for companies
to enter the music recording industry.
¾ Music recording studios can always be hired
out for artists so less significant.
¾ Marketing costs can be kept down through
use of internet.
¾ Limit pricing is illegal and so the ‘big four’
are unlikely to carry this out.

• Magnitude of entry barriers, for example, many


small independents record labels exist (6)
suggesting lack of brand loyalty to large firms.

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6355_01 Mark Scheme

Question Answer Mark


Number
1(a) KAA 9 marks (3 + 3 + 3).

Award three reasons.


Reasons might include:
• many workers, who can be easily replaced –
PED/PES
• not directly employed – easier to ‘hire and fire’
or fee taken by agency
• permanent workers are paid more as a financial
incentive for retention
• sellers of labour have less market power -
monopsony
• and less unionisation
• MRP or productivity analysis, for example lower
MPP or MRP
• not comparing ‘like with like’
• permanent workers might be receiving more
training and other investment in human capital
• temporary workers may lack expertise,
experience and/or skills
• discrimination, eg ethnic minorities, gender –
reward data use.

Evaluation 6 marks (2 + 2 + 2). Factors might


include:
• questioning of MRP analysis
• the degree of monopsony power
• these wage differentials are a reward for
loyalty for those in permanent jobs
• it may be that permanent staff have more
access to promotion (glass ceiling)
• permanent workers are currently more
expensive to remove so they are offered more
incentives to work hard
• productivity may change with rates of pay
• degree of elasticity (PED/PES) (15)
• prioritisation with justification.

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Question Answer Mark
Number
1(b) KAA 9 marks (3+3+3).

Award three aspects:


Wage changes: 3 marks
• wages increase
• need to match the level of workers doing
equivalent work
• increasing costs for firms
• use of data.
Employment changes: 3 marks
• employment levels decrease
• firms’ demand for labour contracts
• agencies cut back on recruitment
• use of data.

Do not reward changes to unemployment.

Diagram: 3 marks
• accept higher wage floor diagram
• accept shift left in demand for agency workers
as firms adapt their employment policies
• accept monopsony diagram.

Alternative approach: accept well argued


monopsony analysis with diagram up to 9 KAA
marks.

If no valid diagram award maximum of 6 out of 9


KAA marks.

Evaluation 6 marks (3 x 2 marks or 2 x 3 marks)


might include:
• supply of agency workers is likely to fall if
agencies start going out of business
• depends on the degree of monopsony power
of employers
• possible increased participation levels might
mean increased employment if there are jobs
available
• changes over time
• small businesses may be affected more than
large ones
• impact depends on the state of the economy
• degree of elasticity of PED/PES
• questioning the validity of the data
• reaction of full time staff, eg pay demands to
maintain differentials
• efficiency wage theory, eg that higher wages (15)
might increase productivity.

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Question Answer Mark
Number
1(c) KAA 9 marks (3 x 3 marks or fewer points well
developed).

Analysis of three likely effects of Working Time


Directive opt-out on the UK economy. Effects might
include:
• labour market flexibility – lower unit costs,
relatively, in UK rather than EU. May be
linked to monopsony, which could benefit from
exploitation of workers
• increased employment in the UK as firms are
attracted by the labour market and less in the
EU
• increased unemployment, eg firms less
inclined to take on unemployed as those
currently in work can have their hours
increased
• increased overall productivity rates, eg more
efficient use of labour and capital combined
• reduced demand for part-time workers
• social implications, eg quality of life, family
breakdown
• award macro benefits, eg higher incomes of
employees have multiplied effects, inflow of
investment
• weakening of trade union power.

Evaluation 6 marks (3 x 2 marks or 2 x 3 marks)


points might include:
• WTD might improve morale and incentives in
the workforce
• WTD preserves quality of human capital over
time
• opting out of European agreements
marginalises the effectiveness of UK in other
policy matters
• hourly productivity might fall, although per
worker productivity might be higher in the UK
• potential weakness in the economy in need to
compromise over agency workers’ rights
• worsening relations for the UK within the EU (15)
• workers might not opt to work the extra hours.

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Question Answer Mark
Number
1(d) KAA 9 marks (3 x 3 marks or fewer points well
developed).

Accept answers either narrowly focused on agency


workers or more widely argued. Factors might
include:
• membership of trade unions tends to rise as
hardship increases but falls in very high rates of
unemployment
• trade unions are more effective if demand for
labour is strong ie in an economic boom
• trade unions less effective in recession if there
are fewer profits to redistribute
• analysis of monopoly supply of labour
• priorities of trade unions vary depending on the
economic cycle
• agency workers less likely to get their requests
fulfilled as employers are more cautious in
recessionary times
• WTD may cause problems for firms, and
employment might fall further
• involvement of multinational corporations
• PED/YED analysis; derived demand.
Mark cap 6/9 marks if no reference to both wages
and employment.

Evaluation 6 marks (3 x 2 marks or 2 x 3 marks).


Factors might include:
• increased rights of workers diminishes scope of
trade unions
• depth and longevity of the slowdown in the UK
• inaccurate or misleading data
• depends on size and influence of trade unions and
sector
• changing role of trade unions as they become
stakeholders
• questioning the degree of PED for final product
eg to what extent labour can be replaced with
capital.

Other factors apart from the state of the


economic cycle determine the effectiveness of
trade unions eg increasing in importance amongst (15)
part time workers and women.

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Question Answer Mark
Number
2(a) KAA 6 marks (3 + 3).

Accept any two reasonable factors (3 marks each).


Factors might include:
• strength of unions or other bargaining power
issues. Reward use of data in Figures 1 and 2
• state of the economic cycle/level of GDP
• state of economic development, for example
secondary/tertiary comparisons
• whether or not the country is part of the euro
will determine the purchasing power – Czech
Rep and Poland figures represent higher
effective wages
• MRP analysis of the value of a workers’ output
and the value of the final product. This could
count as two factors
• priority given to income equality in
government policy
• cost of living
• index linking
• size of the welfare state, eg level of benefits.

Evaluation 4 marks (2 + 2).

Factors might include:


• unreliable, missing or misleading data, eg use
of euro as common currency, no reference to
source year in Figure 1; no reference to
comparative productivity; no reference to the
percentage affected by NMW or exemptions
• hidden economy
• Luxembourg (or other countries in the Figures)
has unique factors which cannot simply be
explained using the labour markets analysis
• exceptions in data, eg Greece has high union
density but relatively low minimum wage
• factors which might change the data in the
future, eg skilled Polish workers returning (10)
home

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Question Answer Mark
Number
2(b) KAA 9 marks. Award three factors (3 + 3 + 3).

Factors might include:


• lack of minimum wage – ‘recent pay awards
have been lower than elsewhere’ – Extract 1
lines 19 to 20
• trade unions and employers with strong powers
of negotiation without interference from
government – Extract 1 Lines 10-11
• MRP analysis, eg executive salaries - Extract 1
line 4 - and/or marginal cost analysis
• state of the economic cycle – widens
differentials when growth rates high?
• union density below average in Germany (Fig
2)
• monopoly and monopsony theory, eg in
different sectors such as hairdressers - Extract
1 Line 2
• job insecurity by the low paid owing to fear of
international competition - Extract 1 Line 14
• discrimination
• temporary workers with lower pay - Extract 1
Line 20
• working conditions
• PED/PES analysis; derived demand
• skills, education, experience and training.

Evaluation 6 marks (2 + 2 + 2) Factors might include:


• extract 1 line 27 - minimum wage would wipe
out 1.1m low-wage jobs. While this might
appear to narrow wage differentials it will
worsen income differentials
• Luxembourg has high correlation between
union density and minimum wage – reinforces
union argument
• other things might not be equal, eg the high
level of manufacturing in Germany which is
particularly sensitive to globalisation,
increasing competitiveness hence forcing down
wages
• factors which might change the data in the
future, eg government policy, introduction of (15)
minimum wage.

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Question Answer Mark
Number
2(c) KAA 12 marks (4 x 3 marks or fewer points well
developed).

Accept four factors for or against the case for


minimum wages, or a combination of both. The
following three implications must be included, though
they may be combined as a result of one factor:

Answers must address the 3 aspects: ‘blunt tool’,


‘stifle competition’ and ‘destroy jobs’.

Factors might include:


• blunt tool for fighting poverty – that is, effects
not specifically on the poor. Reward
definitions, eg absolute/relative poverty, 60%
median incomes
• stifle competition – that is, create inflexibility
in the labour market, increased costs, loss of
international competitiveness against lower
wage countries
• could destroy jobs – effects on levels or
employment. Award use of an NMW diagram
• minimum wages might only affect second or
third earners in a household
• they have no impact if people cannot find work
• people might lose their jobs which would
worsen poverty
• an NMW can provide an incentive to look for
work
• Efficiency wage theory – people will work
harder if they are paid more, and/or firms will
have to become more efficient
• other macro impact of NMW, eg multiplied
growth, inflationary pressures.

Mark cap 9/12 marks if all three aspects are not


referred to.

Evaluation 8 marks (4 x 2 marks or 2 x 4 marks):


• depends on PED and PES
• depends on the demand for the final product
• monopsony argument
• other policies might be more effective – or
other prioritisation
• moving in and out of jobs is thought to be more
a cause of poverty than joblessness itself
• poverty is a multi-dimensional concept and
very hard to measure, and questioning of other
definitions (20)
• possible benefits of Regional Minimum Wages.

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Question Answer Mark
Number
2(d) KAA 9 marks (3+3+3).

Award three policies.


Policies might include:
• action by government as an employer, eg
Positive discrimination
• regional policy if linked to poor regions
• income support
• subsidies to firms
• other benefit changes
• tax - award use of Lorenz curve to illustrate
this
• legislation
• reduction in working time (if this increases
employment) or increase in working time (if
this increases final take-home pay)
• education and training.

Allow wider macro policies such as import


substitution, leaving the euro, cutting the interest
rate.

Evaluation 6 marks (2+2+2).

Factors might include:


• poverty is a multi-dimensional concept and
very hard to measure
• prioritisation of policies, with justification
• consideration of side effects which might limit
the effectiveness of the policies, eg the need
to increase tax rates might act as an
impediment to poverty reduction
• consideration of the magnitude of wage or
price elasticity of demand or supply
• time lag and other dynamic analysis
• other things are not equal, for example the EU
might make policies which counteract the (15)
effectiveness, eg fiscal constraints.

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6355_02 Mark Scheme

Question Answer Mark


Number
1(a) KAA 9

Award 3 marks for three factors identified, analysed


and applied or award fewer points very well developed
up to a maximum of 9 marks. These for or against the
argument, or both. These might include:

Factors may include:


• increased economic growth
• increased opportunities for domestic investment
• increased opportunities for FDI
• increased employment
• ability to increase exports – generates foreign
currency
• ability to sell excess electricity to neighbouring
countries
• reduces primary product dependency
• move away from subsistence agriculture
• concept of balanced growth
• local added value
• increase in government receipts increasing scope
for government spending
• reward appropriate use of development models,
such as Rostow or Lewis.

A link must be made to how the above can contribute to


reducing poverty through increased development and
economic growth.

If no explicit reference to the concept of absolute


poverty then mark cap 7/9.

E6 Award up to 6 marks for evaluation, ( 3 x 2 marks or


fewer more developed points up to 4 marks each).

Evaluation may consider points for or against


effectiveness of elimination of poverty:
• human cost, for example displacement of 50 000
people to poor land for Merowe dam
• environmental costs
• destruction of local heritage
• local objections
• lack of fair distribution of income
• FDI may employ foreigners
• FDI may exploit workers
• expense of building dams has an opportunity cost,
e.g. financing issues or tax rises in the future
• can only be effective if other things are in place,
eg health education

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• the ‘drive towards’ might not be successful, eg
wastefulness, corruption, ignorance or poor
governance
• the produce may face protectionism in export
markets
• may be leading away from areas of comparative
advantages, eg oil/gold/cotton
• reference to the elimination of poverty being
more than just a rise in incomes – development is (15)
a holistic concept.

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Question Answer Mark
Number
1(b) KAA 12 3 + 3 + 3 + 3

Award 3 marks for four factors identified, analysed and


applied up to a maximum of 12 marks. These might
include:
• infrastructure problems, eg lack of access to
the internet Fig. 4
• consequences of colonial background, eg
national boundaries formed without reference
to ethnicity
• dependency on agriculture
• debt as a constraint
• land-locked, therefore increasingly strained in
globalised world
• missing capital markets / lack of domestic
investment
• lack of FDI
• inability to exploit natural resources, eg oil
• civil war/political infighting, eg Darfur and
therefore the opportunity cost involved,
waste of human capital
• low levels of educational attainment, eg Fig.
2 literacy
• corruption, governance and mismanagement
of economic policies
• international isolation resulting from political
issues
• poor healthcare, eg Fig. 3 life expectancy
• gender inequalities
• skill shortages
• lack of property rights.

Evaluation 4 Award up to 8 marks for evaluation (2 + 2


+ 2 + 2) Responses may consider:
• significance of colonial background depends
on individual circumstances, eg Egypt has had
successes
• cultural norms may mean that educational
attainment will be limited
• oil can be a cause of conflict not a solution to
backwardness, eg Nigeria
• the factors which have caused the
backwardness are now being alleviated, eg
China effect
• short run impacts but in the long run these
may not be insurmountable
significance of one factor over another, or (20)
relative to another country, with justification.

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Question Answer Mark
Number
1(c) KAA 6

Award 3 marks each for two factors identified, analysed and


applied or award fewer points very well developed up to a
maximum of 6 marks. Responses may consider:
• advantages of specialisation – reference to
international trade, comparative advantage or
economies of scale
• promotes employment
• direct input of infrastructure and/or technology
• allows greater trade opportunities
• promotes investment
• gives Sudanese government resources to improve
technological uptake and infrastructure
• non-tangible benefits, for example advice,
expertise
• ability to increase exports – generates foreign
currency
• indirect effects of China’s demand pushing up the
price of oil
• plugging the savings gap, eg ref to $15bn Extract 2
Line 4. Reward reference to Harrod-Domar
• political support – ‘ally and commercial partner’
Extract 2 Line 1.

E4 Award up to 4 marks for evaluation, ( 2 + 2 marks or fewer


more developed points up to 4 marks each). Responses may
consider:
• primary product dependency
• difficulties of trying to access new markets for any
exports that result from diversification eg EU
• exploitation of the economy by FDI
• how the money is spent – Responses may refer to
arms shipments from China to Sudan and the Darfur
conflict
• keeps a government in place that provides
fundamentally inefficient market conditions
• the international sanctions make the revenues from
exports even more significant
• distortion of local markets
• corruption
• comment on the magnitude of $15bn relative to the
cost of a dam
• development is a holistic concept – free choice
(Sen) which will not be achieved with abuse of
human rights
• China itself is suffering from global slowdown so it
may not need as much oil in the future. (10)

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Question Answer Mark
Number
1(d) KAA 9

Award 3 marks for three factors, either for or against


compatibility, or both, identified, analysed and applied or
award fewer points very well developed up to a maximum of 9
marks. These might include:
Not compatible, ie negative externalities:
• pollution
• attracting people into cities causing slums
• pollutants into the Nile, damaging crops in Sudan and
into Egypt
• higher incomes mean more meat eating with effects on
carbon emissions
• dams – flora and fauna
• impact of global warming on agricultural output.

Compatible:
• growing awareness that care for the planet is
incompatible with economic growth – and natural
disasters can be mitigated through sustainable economic
growth
• China’s economic growth has continued but there has
been reduced damage to the environment
• new technology will reduce pollution, eg new processes
• new technology will reduce demand for fossil fuels.

E6 Award up to 6 marks for evaluation, ( 3 x 2 marks or fewer


more developed points up to 4 marks each). Responses may
consider:
• the main evaluation points will be for or against
compatibility
• depends on the sector in which the growth takes place eg
services might be ‘greener’ than manufacturing
• LDCs destroy the environment in any event eg Nepal and
deforestation to provide firewood
• depends upon the strength of the government in standing up
to the MNCs
• growing importance of Kyoto protocols
• global awareness and payments to preserve the environment
• information failure – people might not know what they are
doing
• effects might be localised or cross border
• the money gained from growth might cross subsidise
environmental cleaning
• eco-tourism
• there is no alternative to growth – the only way to exit
absolute poverty, which is worse than environmental (15)
damage.

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Question Answer Mark
Number
2(a) KAA 9 (3 + 3 + 3)

Award 3 marks for three factors identified, analysed and


applied up to a maximum of 9 marks. Responses may consider:
• infrastructure issues, eg problems with power
supplies, Extract 1 line 9
• labour costs
• education levels
• health care
• stability of government
• political issues, eg level of corruption, democracy
• red tape/bureaucracy
• economic policy macro issues, eg inflation control,
exchange rate
• tax levels
• access to raw materials
• access to markets – are there tariffs imposed on
goods from this market
• potential for profits
• distance from ports. Land Locked countries have far
lower FDI
• conflicts such as civil unrest or war
• cluster effect – one occurrence of FDI leads to much
more (Krugman)
• global confidence/recession/credit issues.

If no explicit reference to Southern Africa (as a region or


individual countries) then mark cap 7/9.

E6 Award up to 6 marks for evaluation, ( 3 x 2 marks).


Responses may consider:
• only a short run phenomenon, ie there have been
steady improvements in infrastructure and education
in South Africa
• consider the influence of the attractiveness of Asia
for FDI
• example of failing states in SSA doesn’t inspire
confidence
• conflict in local area reduces confidence
• in a specific country some issues are more important
than others, eg oil over democracy in Sudan
(15)
• prioritisation with justification.

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Question Answer Mark
Number
2(b) KAA 9

Award 3 marks for three factors identified, analysed


and applied or award fewer points very well
developed up to a maximum of 9 marks. Responses
may consider:
• improved infrastructure
• corporate tax revenue increases
• increased employment
• income tax revenue increases
• increased competition leading to increased
efficiency
• access to markets
• potential for profits
• better management skills
• access to new technology
• improved human capital as firms train
labour
• health care may be provided by the firm
• government actions on health and
education to attract inflows, ie human
capital investment
• plugs the savings gap
• allow macro benefits, eg economic growth,
multiplier, support of currency valuation
• tends to be a higher value added
• improves export performance, improving
the current account of balance of
payments and a source of foreign
exchange.

E6 Award up to 6 marks for evaluation, ( 3 x 2 marks


or fewer more developed points up to 4 marks each).
Responses may consider:
• consider the significance of one factor over
another, with justification
• increased competition may lead to failure of
domestic firms or markets
• exploitation of workers. Depends on the
nature of FDI.
• use of imported foreign labour, especially at
the skilled end
• employment of indigenous workers in low
skilled menial tasks therefore not improving
human capital, eg dual economy
• environmental degradation
• few profits kept in the country
• tax incentives negotiated which can cost the
government and unfair on other firms
• footloose and cannot be relied upon
• can damage government policies as reduce

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intervention to attract FDI
• Oppenheimer says FDI is better than aid
because if we’re in we stay Extract 1 lines 26-
28
• over-dependence – vulnerable to global
recession
• time lags. (15)

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Question Answer Mark
Number
2(c) KAA 9

Award 3 marks for three factors either for or against


the failure of aid, identified, analysed and applied or
award fewer points very well developed up to a
maximum of 9 marks. Candidate may consider the
benefits of aid and therefore why it has been a
success - these might include:
• Why aid has failed (accept the reverse
arguments):
• NGOs and media might have short attention
spans so no continuity. ‘Aid fatigue’
• other factors are more important than aid, eg
Africa has become poorer despite being the
biggest recipient of aid
• aid fatigue has started to become more evident
– becoming less significant
• role that corruption plays in reducing
effectiveness of aid
• dependency culture is built up
• lack of infrastructure reduces effectiveness of
aid
• it might be temporary and can destroy local
industry or provide illusion of improvement
that is not sustained (for example temporary
drug relief only withdrawn later, Bill Gates’s
imported mosquito nets)
• can encourage corruption
• moral hazard
• government failure – even if there is aid it isn’t
channelled through.

E6 Award up to 6 marks for evaluation, (3 x 2 marks


or fewer more developed points up to 4 marks each).
Responses may consider the following:

• it depends of size, conditionality and type of


aid/better healthcare
• better education/better sanitation
• cleaner water
• better access to food
• greater stability in the home and in sources of
income
• economic growth and employment
• improvements in infrastructure and therefore
encourage FDI
• responses may reference Harrod-Domar model
– if so this needs to be explained for full marks
• depends on level of monitoring and
accountability.

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Responses could also support the assertion that aid
has been a success and may consider some of the
failures as evaluation. (15)

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Question Answer Mark
Number
2(d) KAA 9

Award 3 marks for three factors identified (3 + 3 + 3),


analysed and applied or award fewer points very well
developed up to a maximum of 9 marks. Responses
may consider:
• greater primary product dependency – possible
reference to Prebisch-Singer thesis, as there is
an increase the price of diamonds this is
improving Botswana’s terms of trade OR accept
declining terms of trade argument as prices of
a countries’ primary product exports fall
relative to world prices
• vulnerability to global recession, eg falls in
income in developed economies will cause
demand for diamonds (highly income elastic
goods) to fall
• long-term potential for unemployment, fall in
economic growth
• conflicts surrounding extraction of resources,
eg ‘blood diamonds’
• risk of corruption
• protectionism placed on exports may destroy
the industry
• can attract FDI if shown to have expertise in
one area may result in acquiring of
transferable skills
• conflicts over ownership of resources, eg
diamonds
• the employment that is required may be
essentially unskilled.

E6 Award up to 6 marks for evaluation, ( 3 x 2 marks


or fewer more developed points up to 4 marks each).
Responses may consider:
• dependency might arise owing to comparative
advantage
• when primary product prices rise the country
does very well (a benign Prebisch-Singer
scenario) or the reverse argument if the benign
scenario argued as part of KAA
• local sources removes some of the
vulnerability, by adding value
• magnitude issues, eg depends on the size of
the country as to whether there are economies
of scale in many products
• Dutch disease; leading to higher exchange rate
that destroys local industry
• provides the revenue to allow Botswana to
diversify and protect themselves from future
changes in demand

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• impact of changes in global demand depends
on the product
• likelihood of demand falling is low
• Botswana possesses almost monopoly power
• two-thirds of Botswana’s GDP is not diamond
related – comment on the magnitude of
dependency
• depends on area of concentration: cars v
diamonds
• FDI evaluation eg MNCs can distort democracy
by asserting influence on governments. (15)

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6356 Mark Scheme

Question Answer Mark


Number
1(a) Possible effects include:


fall in consumption – negative wealth
effect
but...correlation between house prices and
consumer spending may not be high
• rising unemployment as aggregate demand
falls, especially in those sectors related to
housing
but other components may increase so offsetting
the fall in consumption
• impact on related industries including
rented accommodation
• impact of public finances
• impact on banks and building societies has
been very significant, for example resulting
in part-nationalisation of several banks.

For a L5 mark (28-31): Consideration of 3 factors


together with 1 evaluative point.
A Level 5* mark (32-40) should be awarded for
answers which meet the Level 5 criteria convincingly
eg 3 points and 2 pieces of evaluation.
Max 28 marks if no evaluation.
Award a L4 mark (24-27 marks) if only 2 factors +
evaluation.
Award a L2 mark (16-19 marks) for identification of
points only or for narrow response focussing on one or (40)
two points.

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Question Answer Mark
Number
1(b) • Understanding of the meaning of supply side
policies: definition and diagram. Understanding
of recession: 2 successive quarters of negative
economic growth.

Examples of specific supply side policies:


• reduction in trade union power
but...if earnings are held down then the
chances of recession might increase
• cuts in income tax rates to increase
incentives to work
this could have beneficial demand-side effects by
increasing disposable income, although the tax
cuts might just be saved. Also, danger of
increased inflationary pressures
• cuts in rates of corporation tax – Ireland only
12.5% compared with UK of 28%
might help to increase investment and FDI but
unlikely if fear of recession is great. Also danger
that the increased injection could exacerbate
inflation
• further reductions in unemployment benefits
and/or limiting benefits to those who
demonstrate willingness to take a job
but…this would reduce the incomes of those on
low incomes so further reducing consumption and
making recession more likely
• reduction in red tape – EU regulations have
increased admin burden on most firms, for
example health and safety
but...no guarantee that this would prevent
recession although such measures would reduce
cost
• reduce employment protection and
employment rights; abolish maximum working
time directive
• improvements in infrastructure
but…take considerable time to implement.

Also: for evaluation – supply side policies are only


likely to have an impact in the long run.
Therefore, they are unlikely to alleviate an
imminent recession.
And: Supply side policies would be ineffective in
preventing a recession if AD is very low (this may
be illustrated with a diagram).

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For a L5 mark: Discussion of 4 points and 2
evaluative points.
A Level 5* mark (48-60) should be awarded for
answers which meet the Level 5 criteria convincingly,
for example 4 points and 3 pieces of evaluation.
Award a L4 mark (36-41 marks) if only 3 points +
evaluation.
Max 42 marks (top L4) if no evaluation.
Award a L2 mark (24-29 marks) for identification of
points only or for narrow response focussing on one or (60)
two points.

Question Answer Mark


Number
2(a) Possible factors include:
• fall in UK interest rates relative to rates in
eurozone and expectations of further cuts
• UK has a significant balance payments deficit on
current account
but...UK has attracted significant sums into its
financial account as a result of FDI
• UK’s greater exposure to the credit crunch given
its greater dependency on housing – and Northern
Rock
but..other factors may be more significant
• UK economy slowing down more rapidly than
eurozone economies
but.. this is short term evidence only
• pound had been overvalued in recent years
this may be significant given the PPP calculations
• relative inflation rates: The UK has experienced a
higher rate of inflation than many eurozone countries
but…rate of inflation was expected to fall rapidly
• speculation.
If reference is not made to both recession and
inflation:
For a L5 mark (28-31): Consideration of 3 factors
together with 1 evaluative point.
A Level 5* mark (32-40) should be awarded for
answers which meet the Level 5 criteria convincingly,
eg 3 points and 2 pieces of evaluation.
Max 28 marks if no evaluation.
Award a L4 mark (24-27 marks) if only 2 factors +
evaluation.
Award a L2 mark (16-19 marks) for identification of
points only or for narrow response focussing on one or
two points. (40)

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Question Answer Mark
Number
2(b) Possible effects include:
• reduction in cost-push inflationary pressures
(increase in AS)
• higher aggregate demand – given that UK is
now a net oil importer
• possibility of higher rate of economic growth
• improvement in the balance of trade in goods
• danger of increase in external costs, eg
increase in use of fuel inefficient cars
• impact on real income and consumption –
increase in AD
• impact on profits and investment – increase
in AD.

Evaluation could include:


• businesses might increase profit margins and
so inflation may be less likely
• fall in oil prices reflects world recession so
few benefits to the UK economy
• short run/long run effects
• consideration of whether or not fall in price
is temporary.

For a L5 mark: Discussion of 4 points and 2


evaluative points.
A Level 5* mark (48-60) should be awarded for
answers which meet the Level 5 criteria convincingly
eg 4 points and 3 pieces of evaluation.
Award a L4 mark (36-41 marks) if only 3 points +
evaluation.
Max 42 marks (top L4) if no evaluation.
Award a L2 mark (24-29 marks) for identification of
points only or for narrow response focussing on one or (60)
two points.

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Question Answer Mark
Number
3(a) Implications on public finances could include:

• increased expenditure on for example


healthcare
• increased expenditure on pensions and tax
credits for elderly
but...more targeted benefits might not result in
significant rise or retirement age could be
increased
• increased dependency ratio; higher tax
burden on those working
but...could be offset by increased immigrants of
working age
• danger that structural fiscal deficit will
increase and rising national debt
but country may be able to afford extra burden
if economic growth continues.

Implication for the UK’s competitiveness include:


• older people less geographically and
occupationally mobile leading to a slower growth
rate
but...many elderly people have become IT
literate
• low levels of productivity
but…older workers have more experience and be
more productive
• less dynamic/efficient economy
• higher inflation if ageing population causes
increased public expenditure.

For a L5 mark (28-31): Consideration of 3 factors


together with 1 evaluative point. At least one factor
must relate to public finances and one to
competitiveness.
A Level 5* mark (32-40) should be awarded for
answers which meet the Level 5 criteria convincingly
eg 3 points and 2 pieces of evaluation.
Max 28 marks if no evaluation.
Award a L4 mark (24-27 marks) if only 2 factors +
evaluation.
Award a L2 mark (16-19 marks) for
identification of points only or for narrow
response focussing on one or two points.
If focus is on either public finances or (40)
competitiveness, then maximum mark is 27.

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Question Answer Mark
Number
3(b) Effects could include:
• increase in working population and in
aggregate supply
but...may only be temporary
• source of increased aggregate demand when
they spend their earnings in UK economy
but... money may be repatriated to families in
home country
• increased burden on public services, for
example health and education leading to higher
public expenditure in these areas
but...immigrants also source of tax revenue for
government
• implications for housing market – both for
rent and purchase
• wage costs may be held down so helping to
increase competitiveness of UK goods –
improvement in the current account of balance
of payments
but…firms might simply raise profit margins and
increase dividends
• income transferred abroad
• increased unemployment among UK workers.

For a L5 mark: Discussion of 4 points and 2
evaluative points.
A Level 5* mark (48-60) should be awarded for
answers which meet the Level 5 criteria convincingly,
eg 4 points and 3 pieces of evaluation.
Award a L4 mark (36-41 marks) if only 3 points +
evaluation.
Max 42 marks (top L4) if no evaluation.
Award a L2 mark (24-29 marks) for identification of
points only or for narrow response focussing on one or (60)
two points.

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Question Answer Mark
Number
4(a) Identification of trends:
Savings ratio: falling since 1992 from nearly 14% to
3.5%
Debt ratio: doubled from just over 80% to 160%.

Explanations could include:


• reduction in interest rates
• high consumer confidence – based on long
period of continuous economic growth & job
security
• rising house prices leading to increase in
mortgage equity withdrawal
• ease of obtaining credit and mortgages (until
mid-2007).

2 marks for identification of factors; 2 for


application (1 mark for reference to savings ratio
falling + 1 mark for reference to household debt (6)
rising) and 2 for analysis.

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Question Answer Mark
Number
4(b) • lower savings rate and/or increased debt
implies increased consumer expenditure which
implies increased imports
• UK has a high marginal propensity to import
• continuous economic growth; rising real
incomes leading to higher imports

Other explanations include:


• value of pound has been high until 2007
• industrialisation of China and cheap imports
from this low wage economy
• UK has relatively low productivity. Therefore,
its goods are not so price competitive
• foreign goods more competitive in non-price
terms.

2 marks for identification; 2 for application (1


data ref. to B/P; 1 for relationship) and 3 for
analysis and 3 for any evaluative comment (or
2+1).

Candidates may take either viewpoint, ie their


answers might be based on factors other than
declining saving ratio and increasing debt as the
main reasons for the rising current account
deficit. As long as this is evaluated, then this
approach is acceptable.

Evaluative comments could include:


• Identification of most significant factor,
with justification.
• Consideration of the ‘other explanations’
(10)
listed above.

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Question Answer Mark
Number
4(c) A wide range of responses may be expected but
candidates could consider:
• implications for employment – which has been
increasing steadily until 2008
but much employment part-time
• implications for inflation – with lower savings
and higher debts a consumer boom could cause
inflationary pressures
but downward price pressures because of Chindia
effect; slow growth of wages associated with net
migration
• asset price bubbles – possibly leading to
financial crisis
certainly true for the housing market e.g. buy-
to-let but less so for share prices
• shortage of funds for investment
but not a problem because of FDI and access to
global credit markets
• improvement in public finances.

2 marks for identification; 1 for application (UK


context); 4 for analysis and 3 for any evaluative
comment (or 2+1). (10)

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Question Answer Mark
Number
4(d) Possible effects include:
• fall in exports to US, leading to worsening of
current account
significant because about 17% of UK’s exports go
to US; but UK may be able to increase exports to
emerging economies which are still growing
strongly
• rising unemployment
• slowdown in economic growth or recession
again, this may not happen if growth in emerging
markets continues to be rapid
• credit crunch has not only affected US but
also UK housing market (Northern Rock; LIBOR).
Less availability of loans implies less spending
but consumers could use savings to maintain
current living standards
• fall in retail sales; lower profits made by
firms.

Evaluation may also include:


• length of slowdown in the US
• magnitude of slowdown/recession in US.

2 marks for identification of factors (must be


related to context); 1 mark for reference to US
being a major trading partner of UK: 3 for analysis
and 4 for any 2 evaluative comments (2 + 2; 3 + (10)
1).

Question Answer Mark


Number
4(e)(i) When public expenditure is greater than tax
revenue. (2)

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Question Answer Mark
Number
4(e)(ii) Definition or implicit understanding of fiscal
stimulus: for example tax rebates, higher
government expenditure (1 mark).

Case for:
• ineffectiveness of monetary policy in current
financial crisis
• provides a means of helping consumers to
increase spending
• use of passage with regard to US: ‘employment
is falling, consumers spending is growing very
slowly and credit conditions are tightening’
• to avoid danger of deep recession
• use of AD/AS analysis and multiplier to
demonstrate impact.

Case against: (evaluation)


• danger of inflation
• increased government borrowing
• crowding out
• fine tuning has failed in past – led to
stagflation
• automatic stabilisers are already in place in
many countries so not necessary
• tax rebates may simply be used to repay debts
or saved.

1 mark for identification; 6 for application and


analysis and 5 for any 2 or 3 evaluative comments
(3 + 2; 2 + 2 + 1). Maximum 10/12 if not related
(12)
to UK or US.

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Question Answer Mark
Number
5(a) Fixed exchange rate: one which has a set value
against another currency.
(2)

Question Answer Mark


Number
5(b) Meaning of devaluation/depreciation.
Analysis: impact on export prices and import
prices.
Effect on demand for imports and exports.
Effect on balance of payments.

Evaluation:
• Time lags: J curve effect; reference to extract
for application marks.
• Significance of PEDs: Marshall-Lerner condition.
• Significance of PES of exports.

2 marks for definition; 2 for application (ie


reference to devaluation of £ from $2.80 to $2.40
OR effect on current account) and 3 for analysis
(10)
and 3 for any evaluative comment (or 2 + 1).

Question Answer Mark


Number
5(c) Effects include:
• inflation: increased cost of imported raw
materials and manufactured goods
• higher investment resulting from increased
domestic demand and exports, or increased
uncertainty could cause a fall in investment
• higher employment resulting from increased
aggregate demand
• positive impact on tourism.

2 marks for identification; 4 for application and


analysis. If no specific reference to UK then
maximum 5/6. (6)

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Question Answer Mark
Number
5(d)(i) Factors could include:
• high value of pound
• rising real incomes
• cheap air flights/more package deals to exotic
destinations
• ageing population – baby boomer cruisers
• cost of holiday accommodation in UK/fashion.

Evaluation:
• Short run/long term trend?
• Significance of rising real incomes – income
elastic demand.
• Prioritisation.

2 marks for identification; 2 for application (1


mark for noting general trend; 2 marks if figures
are used) and 2 for analysis and 4 for any 2
evaluative comments (2 + 2 or 3 + 1). (10)

Question Answer Mark


Number
5(d)(ii) Factors include:
• 2012 Olympics
but…Olympics might actually deter some
potential visitors to London in 2012
• promotion of UK as tourist destination
but…costs involved might be considerable – how
will this be financed?
• improvements in hotel accommodation
but…hotels have reputation for being relatively
expensive compared with e.g. France
• fall in value of pound
but…this could raise costs e.g. food
• increased cost of air travel
but…budget airlines are still likely to offer
attractive prices
• recession in UK
but…evidence that people are unwilling to cut
back on holidays – they are more likely to reduce
expenditure on consumer durables.

2 marks for identification; 4 for application and


analysis but only 3/4 if not related to UK. 4 for
(10)
any 2 evaluative comments (2 + 2; 3 + 1).

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Question Answer Mark
Number
5(e) Cause for concern:
• Could reflect serious overvaluation of currency
• Might indicate fall in competitiveness of UK
goods
• Could cause a rise in unemployment
• May lead to fall in foreign currency reserves
• Could lead to fall in value of currency

Not a cause for concern:


• If financed by inflows into financial account
• Adjustment easy under a system of floating
exchange rates
• If imbalance caused by imports of capital
goods
• If imbalance is temporary in nature
1 mark for definition or implicit understanding of
current account deficit; 6 for application and
analysis and 5 for any 2 or 3 evaluative
comments (3 + 2 or 2 + 2 + 1) For maximum
marks at least 2 issues should be discussed and
evaluated.

Candidates may take either viewpoint, ie they


could argue that it is or is not a cause for
concern. As long as the approach is evaluated, (12)
full marks could be obtained.

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General Guidelines

What follows is an attempt to identify different levels of responses across different


mark bands. The performance criteria are based on the five assessment objectives
for the paper as a whole. They are intended to be used in conjunction with the mark
scheme and indicative content for each question.

Mark band Performance criteria


40 60 ¾ Displays a wide range of knowledge of economic principles,
concepts and theories together with a rigorous analysis of
issues.
¾ Demonstrates skill in interpreting different types of data and an
outstanding ability to select and apply economics ideas both to
economic problems and to data.
Level 5* 32-40 48-60 ¾ Evaluation is well balanced and critical, leading to valid
conclusions.
¾ Material is presented in a relevant, clear and coherent way with
evidence fully and reliably integrated.
¾ At this level excellence is displayed across all assessment
objectives.
¾ Displays a very good answer based in knowledge of economic
principles, concepts and theories together with an analysis of
the issues involved.
¾ Demonstrates skill in interpreting data, and an ability to select
Level 5 28-31 42-47 and apply economic ideas, relating them both to economics
problems and to data.
¾ Alternative approaches are evaluated, leading to reasoned
conclusions which are presented in a relevant, coherent and
integrated way.
¾ Displays a basic knowledge with a sound understanding of
economic principles, concepts and theories as well as some
analysis issues.
Level 4 24-27 36-41 ¾ Can interpret data and select and apply some economic ideas,
relating them to economic problems and to data.
¾ Employs different approaches to reach conclusions, presenting
evidence with some relevance and coherence.
¾ Displays some knowledge of economic principles, concepts and
theories with an attempt at providing an analysis of alternative
views.
Level 3 20-23 30-35 ¾ Some ability to use data and select and apply economic ideas,
relating them to economic problems and data.
¾ Employs different approaches to reach conclusions, presenting
evidence with some relevance and coherence.
¾ Displays elementary knowledge of well learnt economic facts
and a generalised understanding together with limited analysis.
Level 2 16-19 24-29 ¾ A limited ability to use data and to select and apply different
economics ideas in order to provide some relevant opinion.
¾ Evidence is presented which has a basic relevance.
¾ Displays knowledge presented as facts without any awareness of
other viewpoints.
Level 1 0-15 0-23 ¾ Demonstrates limited understanding with little or no analysis.
¾ Attempts at selecting, applying, evaluating and presenting
material are irrelevant and unclear.
¾ None of the assessment objectives are covered satisfactorily.

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