Note that widgets and pidgets are imaginary products.
\nIn the country of Burbia, the demand and supply of widgets are given by the functions
\nQd = 249 − 4P
Qs = 150 + 14P
where Qd is the quantity demanded per month, Qs is the quantity supplied per month and P is the price per widget in dollars ($).
\nThe final of the 2018 Football World Cup is expected to be held in the Luzhniki stadium, Moscow.
The capacity of the stadium is 80 000. The expected cost of holding the final is US$12 million, which is not dependent on the number of people attending the match. All tickets will be sold for the same price.
Calculate the equilibrium price and quantity per month.
\nCalculate the excess demand/excess supply (state which of these) at a price of $8.50.
\nCalculate the price at which excess demand of 18 widgets would result.
\nA demand curve is drawn under the assumption of ceteris paribus.
\nUsing an example, outline why the assumption of ceteris paribus is necessary when analysing the effect of a change in price on the quantity demanded of a product.
\nWidgets and Pidgets have negative cross price elasticity of demand (XED).
Explain how the demand function for Widgets, Qd = 249 − 4P, is likely to change as a result of an increase in the price of Pidgets.
The demand for widgets is considered to be unit elastic at the current price.
\nOutline the meaning of the term unit elastic demand.
\nExplain two determinants of the price elasticity of demand (PED).
\nTwo products are in competitive supply. Using an example, outline how the supply for one of them is likely to be affected by an increase in the price of the other.
\nState the value of the price elasticity of supply (PES) for tickets to the 2018 Football World Cup final.
\nOn the diagram draw and label the supply curve for tickets at the 2018 Football World Cup final.
\nDraw and label the marginal revenue (MR) curve for the 2018 Football World Cup final.
\nUsing the diagram and your answers to parts (j) and (k), explain how the organizers could achieve their goal of profit maximisation.
\n249 − 4P = 150 + 14P
99 = 18P
Any valid working is sufficient for [1].
\nP = $5.50, Q = 227
\nAn answer of 5.50, 227 (without working) is sufficient for [1].
\nQd = 249 − 4 × 8.50 = 215
Qs = 150 + 14 × 8.50 = 269
Any valid working is sufficient for [1].
\nThere will be excess supply or a surplus of 54.
\nAn answer of 54 (without working) is sufficient for [1].
\n249 − 4P = 150 + 14P + 18
81 = 18P
Any valid working is sufficient for [1].
\nP = $4.50
\nAn answer of 4.50 (without working) is sufficient for [1].
\nPrice elasticity of supply = 0
\nFor a vertical supply curve, labelled, at 80 000 tickets.
\nFor an accurate, labelled MR curve.
\nThe following information in parts (a) to (d) refers to the economy of Country Alpha.
\nTable 1
\nThe graph below shows the short-run Phillips curve (SRPC) for Country Alpha.
\nThe following data relate to Country Beta (all figures are in $ billions).
\nTable 3
\nCountry Beta is assumed to be a closed economy with no government sector. Consumption in Beta increases by $0.80 for every $1 increase in national income. In the first quarter of 2019, investment rises by $2 billion.
\nUsing Table 1, calculate the unemployment rate.
\nUsing the graph, determine short-run values for the unemployment rate in 2016 and the inflation rate in 2018. Enter your answers in Table 2 below.
\nTable 2
\nThe government in Country Alpha reduces income taxes in 2019.
Using information from the graph to support your answer, explain the likely effect on the inflation rate and the unemployment rate.
The natural rate of unemployment in Country Alpha is 5 %.
\nOn the diagram draw and label the long-run Phillips curve (LRPC).
\nThe price of oil is expected to rise significantly, causing a sustained increase in energy costs.
\nDescribe the likely effect of this sustained cost increase on the short-run Phillips curve (SRPC).
\nExplain the reason for your answer to part (d) (i).
\nUsing the data in Table 3, calculate the level of investment.
\nIn Country Beta, investment by firms increases in the first quarter of 2019.
\nState two possible reasons for the increase in investment by firms.
\nThe following diagram illustrates the long-run aggregate supply curve (LRAS), short-run aggregate supply curve (SRAS) and aggregate demand curve (AD) for Country Beta before the increase in investment.
\nThe increase in investment results in both short-run and long-run effects on the economy. On the diagram above, draw and label the two curves that illustrate these effects.
\nIn Country Beta, investment by firms increases in the first quarter of 2019.
\nThe following diagram illustrates the long-run aggregate supply curve (LRAS), short-run aggregate supply curve (SRAS) and aggregate demand curve (AD) for Country Beta before the increase in investment.
\nThe increase in investment results in both short-run and long-run effects on the economy. On the diagram above, draw and label the two curves that illustrate these effects.
\nCalculate the real growth rate in 2018 using the figures in Table 4 below.
\nTable 4
\nCalculate the maximum possible increase in gross domestic product (GDP) that could result from the rise in investment.
\nCountry Delta is an open economy with a government sector. Investment rises by $2 billion in both Delta and Beta. Explain how the size of the multiplier and the resulting effect on gross domestic product (GDP) might be different in the two countries.
\n\n
Any valid working is sufficient for [1]
\n= 7.55 %
\nAn answer of 7.55 (without workings) is sufficient for [1].
\nBoth cells must have the correct numbers entered for [1].
\nN.B.: A response which does not refer to AD (or to consumption) may be awarded a maximum of [2].
\nA correctly drawn LRPC earns [1].
\nA shift to the right or vertical upward shift or an outward shift of SRPC is sufficient for [1].
\n71 + l + 32 + 12 − 15 = 109
\nAny valid working is sufficient for [1].
\nl = $9 billion
\nAn answer of $9 billion or 9 billion (without workings) is sufficient for [1].
\nFor each correctly drawn and labelled shift [1] as shown below.
\nIf candidates show a left shift (or vertical upward shift) of SRAS instead of the right shift in LRAS (focusing on theory of high wages and input costs after AD shifts right and price level rises), they may be awarded full marks.
\nN.B.: The new short-run equilibrium could be to the left or right or on the intersection of the new LRAS and AD curve.
\nN.B.: A shift to the right of SRAS may also be shown, but to earn two marks, both AD and LRAS must shift.
\nN.B.: The new curves should be appropriately labelled.
\nFor each correctly drawn and labelled shift [1] as shown below.
\nIf candidates show a left shift (or vertical upward shift) of SRAS instead of the right shift in LRAS (focusing on theory of high wages and input costs after AD shifts right and price level rises), they may be awarded full marks.
\nN.B.: The new short-run equilibrium could be to the left or right or on the intersection of the new LRAS and AD curve.
\nN.B.: A shift to the right of SRAS may also be shown, but to earn two marks, both AD and LRAS must shift.
\nN.B.: The new curves should be appropriately labelled.
\n\n
\n
\n
\n
Any valid working is sufficient for [1].
\n= 3.72 %
\nAn answer of 3.71 % (due to no early rounding) should also be accepted.
\nAn answer without working is sufficient for [1].
\n\n
\n
Any valid working is sufficient for [1].
\n= $10 billion
\nAn answer of $10 billion or 10 billion is sufficient for [1].
\nNote that widgets are an imaginary product.
\nIn Country X, the supply and demand for widgets are given by the functions
\nQs = − 45 + 4.5P
Qd = 180 − 3P
where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied (thousands per year) and Qd is the quantity of widgets demanded (thousands per year).
\nThe supply (S) and demand (D) functions are represented in Figure 1.
\nAn increase in costs of production has resulted in a new supply function:
\nQs1 = − 60 + 3P
\nFigure 2 shows the demand for and supply of widgets in Country Y.
\nFigure 2
\nThe government of Country Y decides to impose an indirect tax of $10 per widget.
\nA music concert is to take place in Country Z. 40 000 tickets are available for the concert. Figure 3 shows the demand (D) for tickets at this concert.
\nFigure 3
\n\n
The fixed costs for the concert have been calculated as $3 million, while it is expected that there will be no variable costs.
\nIdentify the slope of the supply curve.
\nOutline the reason why the quantity supplied increases as the price rises.
\nDraw and label the new supply curve on Figure 1.
\nUsing your answer to part (c), outline the reason why an increase in costs of production has resulted in a new supply function.
\nCalculate the change in producer surplus resulting from the increase in costs of production.
\nDefine the term price elasticity of supply.
\nThe time taken to produce goods is an important determinant of the price elasticity of supply.
\nApart from time, explain two factors which influence the price elasticity of supply.
\nWith reference to Figure 2, explain how the incidence of taxation on consumers and/or producers will be influenced by the price elasticity of supply.
\nDraw and label the marginal revenue (MR) curve for the concert on Figure 3.
\nCalculate the maximum revenue that could be earned from selling tickets for the concert.
\nCalculate the average fixed cost per ticket if all tickets are sold.
\nAssuming the event organizers aim to maximize profit, calculate the profit that will be made from the concert.
\nSlope = 4.5 OR + 4.5 (or 1/4.5 or 2/9)
\nAn answer of 4.5 or + 4.5 (or 1/4.5 or 2/9) without any working is sufficient for [1].
\nNB Responses which outline only that producers are “more able to afford” to produce more should not be rewarded.
\n\n
Award [1] for an accurate, labelled supply curve.
\nNB Responses which make reference to producers being “less able to afford” resources should not be rewarded.
\nReference to the need to cut costs may be rewarded at level 1, but if the candidate refers to producers being unable to afford to supply, this should not be rewarded.
\nAn accurate numerical example, referring explicitly to data in the graph, should be rewarded.
\n\n
(0.5 × 20 × 60 000) − (0.5 × 20 × 90 000)
\nAny valid working is sufficient for [1].
\n= −$300 000 (or a decrease of $300 000)
\nAn answer of −$300 000 or −300 000 without any working is sufficient for [1].
\nThe time taken to produce goods is an important determinant of the price elasticity of supply.
\n\n
Factors may include:
\nAny other reasonable response should be rewarded.
\nAward [1] for an accurate, labelled marginal revenue (MR) curve.
\n150 × 30 000
\nAny valid working is sufficient for [1].
\n= $4 500 000
\nAn answer of $4 500 000, 4 500 000, $4.5 million or 4.5 million without any working is sufficient for [1].
\nOFR applies from part (i), depending on where the MR curve cuts the x axis.
\n$3 million / 40 000 = $75
\nAn answer of $75 or 75 is sufficient for [1].
\nAward [1] if the candidate identifies that profit will be maximized where:
\nMC = MR
\nOR
\nMC = 0
\nOR
\nTR − TC is maximized
\nie at 30 000 tickets and a price of $150.
\nTR = 30 000 × $150 = $4.5 million
TC = $3 million
Profit = 4.5 million − 3 million
\nAny valid working is sufficient for [1].
\n= $1.5 million
\nAn answer of $1.5 million or 1.5 million or 1 500 000 without any working is sufficient for [1].
\nOFR applies, provided either TR or TC is calculated correctly.
\nMost candidates were able to identify the slope. A significant minority identified as 2/9 or 0.22, which was rewarded given the generally accepted convention.
\nMany students simply stated the Law of Supply, or justified with reference to revenue rather than profit. In perfect competition revenue would increase with an increase in output whether price increased or not, so reference to revenue only was deemed a Level 1 response.
\nGenerally well-answered, with few errors.
\nFew candidates demonstrated an understanding of the underlying concepts relating to supply theory. Although the vast majority stated that “the costs of production” is a determinant of supply, few were able to explain why a new supply function arises with reference to incentives or profitability.
\nAlthough calculation of “300” was performed successfully by many, omission of “000”, “$” or reference to “a decrease” was extremely common. Several responses calculated the initial PS as 800 or 1350.
\nGenerally well-answered, although lower achieving responses merely stated or described the formula, while some referred to the responsiveness of producers, without referring to supply or quantity supplied.
\nThe majority of candidates were able to refer to “ability to store”, “mobility of factors of production” or “the rate at which costs of production increase” as factors other than time which influence PES. Lower achieving responses stated rather than explained, while some made basic errors such as explaining that factor mobility is the ability to physically move machinery. Others confused PES with PED and referred to factors such as the degree of necessity.
\nThe majority of candidates encountered difficulty with this question. Most stated that supply was perfectly inelastic, while a significant number identified the relevant learning outcome, “Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply” – but could not apply the theory to the context provided. As PES = 0, the producers would bear the whole incidence. Many candidates erroneously referred to a decrease on demand resulting from a higher price.
\nThe majority of candidates were able to draw a downward-sloping MR curve with double the slope of the demand curve, intersecting the vertical axis at $300, but a common error was for the curve to intersect the horizontal axis at 40 000 (the number of tickets available) rather than 30 000.
\nThe majority of candidates recognized that revenue is maximized where MR = 0 and therefore earned full marks here, either correctly or with application of the Own Figure Rule (OFR). A significant number, however, provided an answer of $4 million without any justification.
\nGenerally well-answered, with a small number of basic errors.
\nHigher achieving responses recognised that MC = 0, and so to meet the profit-maximizing condition MR must also be zero (i.e. at the revenue-maximizing level of output). Lower achieving responses appeared to assume that revenue maximization is equivalent to profit maximization and calculated accordingly.
\nCountry X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.
\nCountry Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.
\nThe market for oranges in Country Z is illustrated on Figure 5.
\nFigure 5
\nThe domestic demand and supply for oranges are given by the functions
\nQd = 300 − 100P
Qs = − 60 + 60P
where P is the price of oranges in dollars per kilogram ($ per kg), Qd is the quantity of oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of kg per month). The world price of oranges is $2 per kg.
\nDue to increased awareness of the possible health benefits of vitamin C, the demand for oranges in Country Z increases by 60 000 per month at each price.
\nTanya is a currency speculator. She buys and sells currencies with the intention of making gains as a result of changes in the exchange values of currencies. Currently, she is holding US$300 000, but she expects that in the next few months the euro (EU€) (the currency of the eurozone) will appreciate against the US dollar (US$).
\nAt present, EU€1 = US$1.20.
\nTanya exchanges her US$ for EU€.
\nThe EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€, Tanya exchanges her EU€ for US$.
\nSketch and label a diagram to illustrate comparative advantage between Country X and Country Y on Figure 4.
\nFigure 4
\nOutline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas.
\nOutline one reason why it might not be in a country’s best interests to specialize according to the principle of comparative advantage.
\nCalculate the change in expenditure on imported oranges as a result of the increase in demand.
\nCalculate the change in consumer surplus in Country Z as a result of the increase in demand for oranges.
\nCalculate the change in social (community) surplus as a result of the increase in demand for oranges.
\nState one administrative barrier that Country Z could use in order to restrict imports.
\nExplain two possible economic consequences for the eurozone if the euro appreciates.
\nCalculate the quantity of EU€ she will receive for her US$300 000.
\nCalculate, in US$, the loss made by Tanya as a result of these transactions.
\nExplain two reasons why a government might prefer a floating exchange rate system for its currency.
\nAward [1] for a sketch showing the PPC of Country Y above/further out than for Country X.
\nAward [1] for a sketch showing the PPC of Country X with a steeper gradient than for Country Y.
\nNB There is no set position for each of the curves. However, no marks may be awarded unless both curves are downward-sloping.
\nOFR applies.
\nReasons may include:
\nAny other reasonable response should be rewarded.
\n100 000 × 2 − 40 000 × 2
\nAny valid working is sufficient for [1].
\nNB Workings which measure market demand, rather than the demand for imports (so the calculation is 160 000 × 2 − 100 000 × 2 are not valid.
\n= $120 000
\nAn answer of $120 000 or 120 000 without any working or with invalid working as exemplified above is sufficient for [1].
\n(0.5 × 160 000 × 1.6) − (0.5 × 100 000 × 1.0)
\nAny valid working is sufficient for [1] (eg correct calculation of either initial or final consumer surplus).
\n= $78 000
\nAn answer of $78 000 or 78 000 without any working is sufficient for [1].
\nChange in producer surplus = 0
\nChange in community surplus = 78 000 + 0
\nAny valid working is sufficient for [1].
\n= $78 000
\nAn answer of $78 000 or 78 000 without any working is sufficient for [1].
\nOFR applies.
\nAdministrative barriers may include:
\nAward [1] for stating one administrative barrier.
\nAny other reasonable response should be rewarded.
\nConsequences may include:
\nAny other reasonable response should be rewarded.
\n= 250 000
\nAn answer of 250 000 without any working is sufficient for [1].
\nThe new exchange rate = €1 = US$1.20 × 0.9 = US$1.08
\nAny valid working is sufficient for [1].
\n€250 000 can be exchanged for 250 000 × 1.08 = US$270 000
\nAny valid working is sufficient for [1] (eg if an incorrectly calculated exchange rate is correctly applied to exchanging €250 000.
\nLoss = 270 000 − 300 000 = US$30 000
\nAn answer of US$30 000 or 30 000 without any working is sufficient for [1].
\nOFR applies.
\nNB A simple but accurate calculation, such as “10% × 300 000 = $30 000, may be fully rewarded.
\nReasons may include:
\nAny other reasonable response should be rewarded.
\nGenerally well-answered. Lower achieving responses drew intersecting PPCs or confused the relative gradients.
\nCandidates were invariably aware that each country should specialize in the product for which it has a lower opportunity cost, though quite a few implied or even stated that the “lower” opportunity cost referred to the other good (“for apples than bananas”), rather than the other country. However, they did not identify a positive consequence of such specialization.
\nMany candidates were able to explain a danger of over-specialization, while a minority focused on limitations of the model, such as transport costs or focus on a 2-country, 2-product model, which are limitations of the model rather than factors influencing the decision to specialize.
\nMost responses provided the correct answer of $120 000, although some focused on the total demand rather than the demand for imported oranges, so were awarded 1 mark only owing to invalid working.
\nCandidates commonly struggled to calculate the new consumer surplus. Some attempted to calculate via manipulation of the functions and were invariably unsuccessful.
\nHigher achieving responses identified that there would be no change in producer surplus, so the change in consumer surplus would be equal to the change in social surplus. Others successfully calculated the new social surplus. Lower achieving responses struggled to calculate, or even to recognise the term “social surplus”
\nThe term “administrative barrier” appeared to be unfamiliar to many candidates. “Quotas” was the most common response.
\nThe majority of candidates were able to explain the possible effect on exports, imports and thus the current balance. Lower achieving responses treated the effects on imports/exports as two separate points – but were awarded Level 1. Stronger responses referred to effects on aggregate demand (stated) and therefore on growth/unemployment. It was common for candidates to confuse the balance of trade with the terms of trade and to suggest that an appreciation might cause a depreciation, or even an increased demand for the currency.
\nWell-answered.
\nMany candidates were not able to calculate the new exchange rate correctly, but performed the rest of the calculation successfully.
\nLower achieving responses simply described how a floating exchange rate works, and implied that this was an advantage, while others stated that it was “easier” or “cheaper” for the government if the exchange rate was allowed to float. Several views were expressed as to the likelihood of currency speculation. In contrast, many responses explained clearly the advantages regarding independence of demand-side policies and the removal of a requirement to hold significant reserves of foreign currency (bearing an opportunity cost) under a fixed exchange rate system.
\nUnwanted consequences of United States–China trade war
\n[Source: Adapted from Tang, F. and Wang, O., 2019. China prepares for testing 2019 by freeing up US$210 billion in latest
move to boost ailing economy. South China Morning Post, https://www.scmp.com/economy/china-economy/
article/2180758/china-prepares-testing-2019-freeing-us210-billion-latest-move; and Donnan, S., 2019. U.S.-China
Negotiations Risk Shutting Out the Rest of the World. Bloomberg Businessweek, https://www.bloomberg.com/news/
articles/2019-02-28/u-s-china-negotiations-risk-shutting-the-rest-of-the-world-out. Used with permission of Bloomberg
LLP Copyright © 2021. All rights reserved.]
Define the term tariff indicated in bold in the text (paragraph [2]).
\nDefine the term trade war indicated in bold in the text (paragraph [3]).
\nUsing an international trade diagram, explain the outcome on US producers of the introduction of a tariff on imports from China (paragraph [2]).
\nUsing an AD/AS diagram, explain the desired impact of China’s “eased monetary policy” on its economic growth (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the arguments for and against the trade protection measures imposed by the US on China.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for an international trade diagram. The world supply curve must be labelled Sw, or Sworld or SChina. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be average (general) price level or price level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary. “AS” is a valid label for the SRAS curve.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nArguments for trade protection may include:
\nArguments against trade protection may include:
\nAny reasonable discussion.
\nBoth concepts were generally well defined with almost all candidates scoring level 2.
\nBoth concepts were generally well defined with almost all candidates scoring level 2.
\nAs for past questions on tariffs, the diagram was generally correctly labelled and explained but often came with a lot of unnecessary information (such as the government revenue and welfare losses). Nonetheless, the most crucial piece of information, which was necessary to explain why US producers increased production - namely, that the price received increased - was sometimes missing, even in the very long answers. Another common problem was the absence of labels for the world supply curves (Pw and Pw + tariff are not acceptable labels).
\nThis question was also very well answered, with most candidates identifying at least one component of AD which could increase as a result of lower interest rates. However, some candidates took the information, which was also in paragraph 5, about subsidised lending to firms and interpreted it as a reduction in the costs of production which would cause SRAS to shift down. Even if subsidised lending is viewed to be part of monetary policy, the correct shift remains a rightwards shift of AD since the intention of the subsidised lending is to increase Investment.
\nMost candidates scored marks in the mid/top range of level 2. Arguments both for and against the use of protectionist measures were generally well understood and explained, but many responses added minimal economic analysis to the text. For example, many stated that the trade war would affect business confidence, as taken from paragraph 4, but very few tried to explain why. To reach level 3, candidates need to use the text and their knowledge of economics to enrich arguments which are already mentioned in the text. This was sometimes done by considering the price elasticity of demand for aluminium and steel or the impact that an economic slowdown in the two largest economies could have on export-reliant nations. At times, candidates brought arguments that did not seem relevant. In particular, the idea that protectionism was necessary to protect infant industries in the US was a recurrent feature in many answers. To be considered as effective, this argument should be supported with examples of industries which could be considered as 'infant' in a mature economy such as the US.
\nArgentina’s currency keeps falling
\nFigure 1: Argentina’s inflation rate
\n[Source: Adapted from Anon, n.d. Argentina Current Account, Trading Economics,
https://tradingeconomics.com/argentina/current-account.]
\n
\n
Define the term budget deficit indicated in bold in the text (paragraph [2]).
\nDefine the term gross domestic product (GDP) indicated in bold in the text (paragraph [3]).
\nUsing an exchange rate diagram, explain how raising interest rates would “stop the fall in the peso’s value” (paragraph [4]).
\nUsing an AD/AS diagram, explain how the peso’s weakness is “raising inflation” (paragraph [6]).
\nNote: This question has been amended from the original exam, to remove reference to a second figure that could not be cleared due to copyright restrictions.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of pesos in USD, USD/peso, USD per peso. The horizontal axis should be quantity, or quantity of pesos.
\nA title is not necessary.
\nA diagram may show demand initially shifting left (and/or supply shifting right) causing the exchange rate to fall and then demand shifting right (or supply shifting left) to restore the value of the peso to its original level. If correctly drawn and explained, this can achieve full marks.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS the vertical axis may be average (general) price level, or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary. “AS” is a valid label for the SRAS curve.
\nMost candidates scored level 2 on both definitions. A small minority confused budget deficit and current account deficit.
\nMost candidates scored level 2 on both definitions. A small minority confused budget deficit and current account deficit.
\nAlmost all candidates reached level 2. The diagrams often depicted an increase in demand which was linked to an increase in foreign investment. However, fewer were clear about the type of investment. As higher interest rates typically deter investment in physical capital, it was thus necessary to specify that the higher interest rates would attract financial investment - in the form of savings in Argentinian banks/bonds/financial assets - or lead to increased inflows of \"hot money\". Some candidates also confused the 'external' supply of the currency with the 'internal' money supply.
\nThis question was also reasonably well attempted. Most candidates could link the weaker currency to a fall in SRAS or at least point to the more expensive imported oil. Some suggested that AD would rise as exports become cheaper and imports more expensive. While theoretically correct, this approach is not aligned to the context set in the referenced paragraph. Paragraph 6 did not suggest any alternative to imported (cost-push) inflation. For all part (b) and (c) questions, it is critical that candidates read carefully the passage of the text referenced.
\nPakistan and the International Monetary Fund
\n[Source: © International Baccalaureate Organization 2020.]
\nState two functions of the International Monetary Fund (IMF) (paragraph [2]).
\nDefine the term human capital indicated in bold in the text (paragraph [5]).
\nUsing a poverty cycle diagram, explain how the government of Pakistan could intervene to “break out of the poverty cycle” (paragraph [3]).
\nUsing an externalities diagram, explain how “greater access to education” for girls in Pakistan could reduce market failure (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, evaluate the potential impact of the IMF and the World Bank on economic development in Pakistan.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nExample of poverty cycle (any cycle, including investment and starting and ending with an indicator of poverty, is acceptable).
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe vertical axis may be price, but could be costs or benefits. The horizontal axis is quantity. P and Q is sufficient. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nMay promote/achieve economic development because:
\nAbove points should link to how these impacts will reduce poverty, increase living standards, reduce income inequalities and/or increase employment opportunities, improve health and education indicators, ie achieve economic development.
\nHowever, may not promote economic development because:
\nAny reasonable evaluation.
\nMany candidates seem to confuse the IMF and the World Bank. The provision of development aid was often listed as one of the functions of the IMF.
\nAlthough this term is rarely tested as a definition, candidates showed a good understanding of the term. The answers which were confined to level 1 were often those which saw the term as synonymous to 'labour'.
\nThe poverty cycle is often tested in paper two questions, so most candidates scored 2 marks on the diagram. Fewer could point to an actual government policy. Most confined themselves to broad statements and few candidates scored more than 3 marks. In many cases, candidates explained how the IMF loan might help the citizens of Pakistan break out of the poverty cycle but unfortunately did not link the access to the loan to any form of government intervention and hence could not achieve full marks.
\nA significant number of candidates skipped this question - more than any other question on this paper. Those who attempted it, however, mostly did well. Only a handful who drew a diagram with MSC lower than MPC (rather than MSB higher than MPB) did not get marks for the diagram. Most candidates did not label the demand and supply curves. While MPB and MPC were sufficient labels for this paper, it is advisable to add the labels demand/D and supply/S as well.
\nUnfortunately, there were not many good answers to this question. Candidates did not seem familiar with the work of the World Bank and the IMF. Those who had memorised the multilateral institutions' functions and aims, struggled to explain/analyse how they might affect development. Many answers were limited to the benefits of loans in terms of financing education and healthcare and tended to be rather one-sided, with relatively little analysis of why the actions of the IMF and World Bank might not promote economic development. The text was used, but often rather superficially.
\nTrade strategies in the Philippines
\n [Source: Adapted from Philippines News Agency, “Proposed Ph Export Plan Backs PDP 2017-2022 Targets”, June 21, 2018,
https://www.pna.gov.ph/articles/1039017.]
* ASEAN consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand and Vietnam.
\n\n
State two functions of the World Trade Organization (WTO) (paragraph [1]).
\nDefine the term inflation indicated in bold in the text (paragraph [2]).
\nUsing a Lorenz curve diagram, explain the possible impact on the distribution of income in the Philippines when “the income tax for the highest income earners has been raised from 30 % to 35 %” (paragraph [4]).
\nUsing an AD/AS diagram, explain the impact on the potential output of the Philippines of the government increasing its “spending on new airports, roads and bridges” (paragraph [4]).
\nUsing information from the text/data and your knowledge of economics, evaluate the use of export promotion as a means of achieving economic development in the Philippines.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor the vertical axis, the label may be cumulative percentage of (national) income or percentage of (national) income (GDP and GNI are valid alternatives to income but wealth is not acceptable). For the horizontal axis, the label may be cumulative percentage of population/people/households or percentage of population/people/households. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS the vertical axis may be average (general) price level, or price level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nAdvantages of export promotion may include:
\nDisadvantages/limitations of export promotion may include:
\nAny reasonable evaluation.
\nCandidates may argue that export promotion may lead to economic growth. As long as they have established a clear link between economic growth and economic development, such arguments should be fully rewarded.
\nCandidates struggled to give two valid functions of the WTO. A significant number of candidates thought that trade liberalization is a function of the WTO. Although this might be the ultimate objective, the WTO does not of itself take action to lower protectionism.
\nOn the other hand, inflation was often well defined, with most achieving level 2. Some answers were confined to level 1 for omitting 'persistent/sustained'.
\nMost candidates achieved full level 2. Some missed a mark due to poor labelling of axes (mostly missing '%' or reserved axes) or because they did not explain how a tax on high-income earners would make the distribution of income more equal. A number of candidates used 'wealth' and 'income' interchangeably, suggesting they did not know the difference between the two concepts.
\nAnswers to this question were variable. Many candidates correctly shifted the LRAS or Keynesian AS curve to the right and correctly explained that potential output would increase. A significant number provided irrelevant explanations linked to a shift of the SRAS and/or AD. Candidates who use the Keynesian AS curve need to be careful about where they label the potential output. Generally, candidates seemed to be confused between factors which bring about a shift of the SRAS curve and those that bring about a shift of the LRAS curve.
\nThe majority of responses to this question were in level 2. Most understood the concept of export promotion as a trade strategy but did not make the necessary connections between export promotion and economic development. Responses also tended to focus on the advantages of the trade strategy and were, therefore, rather one sided. They needed to explain both how development could be improved and how it could be hindered. Those who were confined to level 1 or low level 2 often did not seem to know that export promotion was more than a boost in a component aggregate demand. It seemed as though export promotion as a growth and development strategy had not been studied as much as other topics.
\nSouth Korea’s current account surplus
\n[Source: Adapted from: South Korea Current Account, Trading Economics, https://tradingeconomics.com/south-korea/currentaccount;
and Anon, 2018. S. Korean Won’s Appreciation 2nd Highest in G20 Last Year. KBS World Radio,
http://world.kbs.co.kr/service/news_view.htm?lang=e&Seq_Code=133432.]
* G20 members include: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea (South Korea), Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the US and the EU
\nDefine the term interest rate indicated in bold in the text (paragraph [2]).
\nList two components of the financial account (paragraph [4]).
\nUsing an exchange rate diagram, explain how South Korea’s current account surplus could have “helped increase the South Korean won’s value” (paragraph [2]).
\nUsing an AD/AS diagram, explain how the use of fiscal policy could lower “the high rates of youth unemployment” in South Korea (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the possible implications on South Korea’s economy of a current account surplus.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of Korean won in another currency, another currency/Korean won or other currency per Korean won. The horizontal axis should be quantity, or quantity of Korean won. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nCandidates who do not refer to the impact on youth unemployment in the explanation can be awarded a maximum of [3].
\nNB Full marks can be awarded if a student correctly applies a fiscal policy tool that has a supply side impact, such as subsidies for apprenticeships or education and training.
\nFor AD/AS, the vertical axis may be “price level” or any similar terms such as “average (general) price level”. For the horizontal axis, “real (national) output/income” or “real GDP”. Any relevant abbreviations are acceptable.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nEconomic analysis may include:
\nTo discuss:
\nAny reasonable discussion.
\nGenerally well answered.
\nMost answers included Foreign Direct Investment or reserve assets. Some students provided unnecessarily long answers.
\nStudents in the main clearly understood the impact of the current account surplus on the value of the won. Those who explained the reasons for the higher demand for the won earned full marks for their explanation. Some lost marks for incorrect labelling such as P or won/US dollar.
\nIn most instances, candidates understood the effect of expansionary fiscal policy on unemployment in general, but a significant minority produced generic answers. Furthermore, they did not explain the effects of expansionary fiscal policy or failed to refer to youth unemployment as required in the question.
\nOf all the part (d) questions, this was probably the best answered though the quality of analysis and evaluation was limited, resulting in the vast majority of the marks being at levels one and two. One of the main weaknesses was a tendency to focus on the reasons for a current account surplus or government policies to deal with that surplus rather than the implications of the surplus. Also, some students focused too much on the effect of the surplus on exchange rates to the exclusion of other implications.
\nTable 1 provides information about Fairland.
\nTable 1
\nFigure 6 illustrates Fairland’s demand (D) for and supply (S) of low-wage labour.
\nFigure 6
\nIn order to raise the living standards of low-wage workers, the government of Fairland has decided to impose a minimum wage of $10 per hour.
\nThe marginal rates of income tax in Fairland are given in Table 2.
\nTable 2
\nGovernment economists have estimated that citizens of Fairland spend 10 % of any additional income on imported goods and pay a tax rate of 20 % on every extra dollar of income. The marginal propensity to save for Fairland’s citizens is 10 %.
\nCalculate the unemployment rate in Fairland using Table 1.
\nOutline two difficulties in measuring unemployment.
\nDraw and label a curve that illustrates Fairland’s minimum wage on Figure 6.
\nCalculate the resulting unemployment among the low-wage workers.
\nDefine the term marginal rate of tax.
\nFred is a low-wage worker in Fairland. As a result of the minimum wage his income will increase from $15 000 per year to $19 000 per year.
\nCalculate how much additional income tax Fred will need to pay.
\nUsing an AD/AS diagram to support your answer, explain the mechanism through which monetary policy can help an economy reduce the level of unemployment.
\nState two interventionist supply-side policies that are likely to increase the demand for low-wage labour in Fairland.
\nState two market-based supply-side policies that are likely to increase the supply of labour in Fairland.
\nUsing this information, calculate the value of the Keynesian multiplier.
\nUsing your answer to part (i), calculate the increase in government spending necessary to increase nominal GDP by $100 billion.
\nUnemployment rate = × 100 = × 100 =
\n× 100 = × 100
\nAny valid working (such as the correct calculation of the labour force) is sufficient for [1].
\n= 26.57 % or 26.69 %
\n(this depends on when rounding has taken place)
\nAn answer of 26.57 or 26.69 without working is sufficient for [1].
\n\n
Possible difficulties may include:
\nAny other reasonable response should be rewarded.
\nAward [1] for an accurate, labelled minimum wage line.
\n\n
Unemployment = number of workers willing to supply their labour − number of workers demanded by firms = 40 million − 14 million
\nAny valid working is sufficient for [1].
\n= 26 million
\nAn answer of 26 million or 26 without working is sufficient for [1].
\n\n
3000 × 10 % + 1000 × 20 %
\nAny valid working is sufficient for [1].
\n= $500
\nAn answer of $500 or 500 without any working is sufficient for [1].
\nOR
\nInitial tax paid = 10 000 × 5 % + 5000 × 10 % = 1000
\nNew tax paid = 10 000 × 5 % + 8000 × 10 % + 1000 × 20 % = 1500
\nAny valid working is sufficient for [1].
\nChange in tax paid = 1500 − 1000
\n= $500
\nAn answer of $500 or 500 without any working is sufficient for [1].
\nNB Responses which apply the bands such that, for example, 10% is charged on $7 999 rather than $8 000 may be fully rewarded.
\n\n
Any form of aggregate supply curve (SRAS, LRAS or Keynesian AS) is acceptable.
\nCandidates who incorrectly label diagrams can receive a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be output, real output, national output, real national output, national income, or GDP. A title is not necessary.
Any other reasonable response should be rewarded. For example, a diagram showing the labour market, with axes labelled “wage rate” and “employment” or “quantity of labour”, with accurate explanation may be fully rewarded.
\nAward [1] for each appropriate policy stated.
\nPolicies may include:
\nExaminers should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded.
\nExaminers should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded eg cuts in employee social security contributions.
\n=
\nAny valid working is sufficient for [1].
\n= 2.5
\nAn answer of 2.5 without any working is sufficient for [1].
\nChange in government spending =
Any valid working is sufficient for [1].
= $40 billion
\nAn answer of 40 billion or 40 or $40 billion without any working is sufficient for [1].
\nOFR applies.
\nThis question proved difficult for candidates. Although many were able to calculate the size of the workforce, a common error was to use an incorrect denominator in the calculation of the unemployment rate.
\nLower achieving responses commonly described frictional and seasonal unemployment as a difficulty of calculation or stated that statistics were too complex for an accurate calculation. The majority of candidates identified hidden unemployment and underemployment as difficulties, although explanations were not always clear and accurate enough to achieve Level 2. Some responses neglected to show that part-time working is an issue only if the part-time nature of the employment is involuntary. Overall, a significant proportion of responses demonstrated a clear understanding of the inherent concepts.
\nWell-answered, with a small number of inaccurate or unlabelled curves.
\nA significant number of candidates were able to draw the curve representing the minimum wage but then calculated the resulting unemployment incorrectly. A common error was to provide an answer of 40 − 12 = 28, a consequence of misreading the graph.
\nRelatively few candidates were able to provide a clear and accurate definition. Responses which stated the idea that “it’s what you pay in the top bracket, or in different brackets” were common, as was the idea that it is the change in the rate of tax if income increases.
\nAlthough there were many accurate responses, a large number of candidates applied a single “rate of income tax” to each salary, resulting in an answer of $3800 − $1500 = $2300.
\nThis question was answered very well, reflecting the ability of candidates to explain how expansionary monetary policy works with use of a diagram. A small number of candidates neglected to refer to interest rates or components of aggregate demand.
\nA range of supply-side policies was suggested, with many being non-interventionist, such as a reduction in corporate taxes or a reduction in the minimum wage. There were also many responses which did not focus on low wage labour, such as “subsidies” or “help for infant industries”. In order to be rewarded for each policy, candidates were required to identify how these policies might influence the labour market. It is clear that many candidates were unable to do so.
\nAs for part (g), a range of policies suggested were not market-based nor would they influence the supply of labour. An increase in the minimum wage, for example, is not market-based.
\nGenerally well-answered by the majority of candidates.
\nWell-answered, with a number of candidates benefitting from the own-figure rule from part (i)
\nText D — Overview of Sierra Leone
\nText E — Sierra Leone’s new development plan
\nText F — Investment in Sierra Leone
\nTable 3: Economic data for Sierra Leone
\n[Text E: Sustainable Development Goals Knowledge Platform, n.d. [online] Available at: https://sustainabledevelopment.
un.org/memberstates/sierraleone [Accessed 20 April 2021]. Source adapted.
Text F: U.S. Department of State, n.d. 2018 Investment Climate Statements: Sierra Leone [online] Available at:
https://www.state.gov/reports/2018-investment-climate-statements/sierra-leone/ [Accessed 20 April 2021].
Source adapted.
Table 3: Data from The World Bank [online] Available at: https://data.worldbank.org/ [Accessed 20 April 2021]. Source adapted.]
\nDefine the term gross domestic product (GDP) indicated in bold in the text (Text D, paragraph [1]).
\nList two dimensions of the Inequality adjusted Human Development Index (IHDI) (Text D, paragraph [3]).
\nUsing the information in Table 3, calculate the change in Sierra Leone’s current account balance from 2017 to 2018.
\nUsing the information in Table 3, calculate Sierra Leone’s rate of economic growth between 2017 and 2018.
\nUsing an exchange rate diagram, explain how the fall in export revenue contributed to the depreciation of the leone (Text D, paragraph [4]).
\nUsing an AD/AS diagram, explain how the increase in the price of fuel might have contributed to inflation (Text D, paragraph [5]).
\nUsing a poverty cycle diagram, explain how the provision of free primary and secondary education may help households break the poverty cycle (Text E, paragraph [2]).
\nUsing a demand and supply diagram, explain how modern farming practices could affect the market for rice (Text E, paragraph [3]).
\nUsing information from the texts/data and your knowledge of economics, evaluate the impact of government intervention in promoting economic growth and economic development in Sierra Leone.
\nCurrent account balance in 2017 = 974 − 1796 − 101 + 400 = –523 [1]
Current account balance in 2018 = 714 − 1603 – 112 + 324 = −677 [1]
Change = (−677−(−523)) = −(US)$154 million [1]
An answer of −(US)$154 million or “a wider deficit (US)$154 million” without workings is sufficient for [1].
\nOFR applies provided at least one of the current account balances is correct.
\n(3617 − 3497)/3497 × 100 % [1]
\nAny valid working should be rewarded with [1]
\n= 3.43 % [1]
\nAward [1] for the correct economic growth rate without workings or without the % sign or for a figure rounded to less than 2 dp.
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of the leone in US$, US$/leone or US$ per leone. The horizontal axis should be quantity, or quantity of leones. A title is not necessary.
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. The SRAS curve may be labelled AS. Any abbreviation of the previous terms is acceptable. A title is not necessary.
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. A title is not necessary.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nBudget deficit (Text D, paragraph [7])
\nRemoval of fuel subsidy (Text D, paragraph [5])
\nProvision of healthcare services in tandem with the private sector and NGOs (Text D, paragraph [6])
\nFight against corruption (Text D, paragraph [8])
\nFree primary and secondary education, inclusive of technical education (text E, paragraph 2 and 4)
\nImprovement in infrastructure
\nTax benefits for foreign investment
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMost candidates achieved full marks on the definition of GDP. Those who missed the second mark were often those who defined the concept as the ‘number’ or ‘total amount’ instead of the ‘value’ of final goods and services produced in a country. On the other hand, very few candidates could provide the precise dimensions of the IHDI.
\nA surprising number of candidates did not know how to calculate a current account balance, often missing components in their workings or adding every item in the table. On the other hand, most could calculate the economic growth rate correctly. Those who did not score 2 marks on (b)(ii) were often those who did not show their workings or rounded the figure to less than 2 decimal places.
\nMost candidates did well for this question. Some lost one mark due to poor labelling of the horizontal axis, as was the case for question 1 (e), and/or a vague explanation – the direct link between the export revenue and the demand for the leone was often stated but not explained (e.g. that less foreigners would need to exchange their currency to pay for exports from Sierra Leone and this would thus lead to a fall in the demand for the leone).
\nThis was another well attempted question as most candidates could establish that the higher price of fuel would lead to higher cost-push inflation and that was very often accompanied by an adequate AS/AS diagram reflecting the leftward shift of the SRAS. However, quite a few candidates mixed up microeconomic and macroeconomic contents in their explanations. A number explained a fall in the supply of oil instead a fall in SRAS. There were cases of AD/AS diagrams with a correct leftward shift of the SRAS but with ‘price of fuel’ and ‘quantity of fuel’ as labels for the axes.
\nThis proved to be amongst the most challenging questions to candidates. Although a variety of poverty cycles were acceptable for this question, some candidates could not score any marks for their diagram because they did not use economic terms (e.g. ‘no job’ or ‘no money’ instead of ‘low income’, ‘no education’ instead of ‘low human capital’) and/or did not draw a self-perpetuating cycle (one which clearly establishes that poverty reinforces itself). The explanation was often muddled as candidates struggled to explain how intervention would provide residents with skills to increase productivity, how the money saved could finance the purchase of capital goods and thus lead to higher physical capital, or any other way in which the provision of free education may help break the self-perpetuating cycle of poverty drawn.
\nThe question did not seem to pose candidates any problem. The majority could establish that supply would increase, leading to lower prices and higher quantities. There were occasional loss of marks on the explanation as some candidates did not provide an adequate explanation for the increase in supply (e.g. increase in productivity, better quality factors of production).
\nMost candidates understood the difference between economic growth and economic development and could identify some relevant development issues such as the lack of diversification and the need for sustainable development. The responses which reached 10-12 marks and 13-15 marks were those where the discussion of implemented policies presented sufficient links to economic growth and development. Such links had to be explained rather than stated. It was not uncommon to read responses with some possibly good but unfortunately underdeveloped economic arguments. In such cases, a low score on the second descriptor often brought down the entire score as theory was ‘described’ rather than ‘explained’. Stronger responses distinguished between different types of government intervention/policies, while weaker responses only focused on one type of intervention/one specific policy (supply-side interventionist for example). A few candidates did not achieve high marks because their response mostly suggested/recommended policies (such as import substitution) rather than evaluating the impact of the intervention being implemented in Sierra Leone.
\nText A — Overview of Vietnam
\nText B — Trade and investment flows between Vietnam and Japan
\nText C — Roles of the central bank in Vietnam
\nTable 1: Economic data for Vietnam
\nTable 2: Development data for Vietnam
\nText A The World Bank, 2020.The World Bank in Vietnam [online] Available at: https://www.worldbank.org/en/country/vietnam/overview [Accessed July 2020]. Source adapted.
\nFood and Agricultural Organization of the United Nations, 2018. Small Family Farms Country factsheet: Vietnam [online] Available at: http://www.fao.org/publications/card/en/c/I8358EN/ [Accessed July 2020]. Source adapted.
\nText B Hoang Tien, N., 2020. Analysis of Japan’s international trade and investment activities in Vietnam [online]
Available at: https://www.researchgate.net/publication/338719794_Analysis_of_Japan’s_international_trade_and_
investment_activities_in_Vietnam [Accessed July 2020]. Source adapted.
Minh, A., 2020. After years of negotiations, Vietnam finally sells lychees to Japan [online] Available at: https://e.vnexpress.net/news/business/economy/after-years-of-negotiations-vietnam-finally-sells-lychees-to-japan-4119587.html [Accessed July 2020]. Source adapted.
\nTable 1 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.
\nTable 2 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.
\nDefine the term debt servicing indicated in bold in Table 1.
\nDefine the term Gini coefficient indicated in bold in Table 2.
\nSketch a demand and supply diagram to show the effect on revenue earned by Vietnamese farmers with improved access to the Japanese market (Text B, paragraph [1]).
\nUsing information from Table 1, calculate the change in the surplus on Vietnam’s balance of trade in goods with Japan between 2015 and 2019.
\nExplain two economies of scale which may not be available to smaller farms (Text A, paragraph [2]).
\nUsing a production possibilities curve (PPC) diagram to show comparative advantage, explain why Vietnam would export seafood to Japan while Japan would export machinery to Vietnam (Text B, paragraph [1]).
\nUsing a demand and supply of money diagram, explain the likely effect on interest rates of a reduction in the minimum reserve requirement for banks (Text C, paragraph [1]).
\nUsing an exchange rate diagram, explain how the central bank in Vietnam could prevent the dong from depreciating by using its reserve assets (Text C, paragraph [2]).
\nUsing information from the texts/data and your knowledge of economics, discuss the view that trade with Japan is more beneficial for Vietnam’s economic development than foreign direct investment (FDI) from Japan.
\nThe diagram has three requirements:
\nCandidates who incorrectly label diagrams can be awarded a maximum of [2].
For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nThe increase in revenue could alternatively be indicated by labelling the corners of the revenue boxes or by referring in writing an increase in revenue from P x Q to P1 x Q1.
\n2015: (15 141 − 12 531) 2610
2019: (22 475 − 16 484) 5991
any valid working should be rewarded with [1]
\n(Change in surplus) (US)$ 3381 million
\nAn answer of 3 381, without workings or without units, is sufficient for [1].
\nOwn figure rule applies.
\nN.B. Alternatively, if a student answers in terms of the economies of scale that large farms can get, the answer may be fully rewarded.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a diagram showing comparative advantage, the PPC lines could be linear or curved and they could intersect or be non-intersecting. They should show that Japan has a comparative advantage in machinery production while Vietnam has a comparative advantage in seafood production. However, the labelling could be reversed from the examples below. Either one of the examples below is satisfactory or two diagrams can be drawn, with one for Vietnam and one for Japan, but the PPCs should have different slopes that correctly convey the comparative advantages. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a money demand and supply diagram, the vertical axis should be labelled interest rate, i, ir or r. The horizontal axis may be labelled Quantity (Q) or Q of Money. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of dong in another currency, other currency/dong or other currency per dong. The horizontal axis should be quantity, or quantity of dong. A title is not necessary.
\nAlternatively, a candidate may draw a diagram showing the dong depreciating (due to S shifting right or D shifting left) and the D curve then shifting right to restore the exchange rate to its initial level. If explained properly, this can be fully rewarded.
\nAnswers that only deal with trade or only deal with FDI should be rewarded a maximum of level 3.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nEconomic models / theories may include:
\nPoints that support the view that trade is more beneficial:
Benefits of trade with Japan:
Costs of FDI from Japan:
\nPoints that support the view that FDI is more beneficial:
Benefits of FDI from Japan:
Costs of trade with Japan:
\nSynthesis of relative benefits of trade vs FDI:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMany were unable to get full marks for the definition of debt servicing as they did not identify either or both principal/initial amount and interest so were only awarded one mark.
\nThis was often partially answered, with students simply stating it was a measure of inequality. A minority provided a complete description.
\nMost candidates sketched the demand and supply diagram and showed a shift in the demand curve to the right. However, a large number of candidates forgot to highlight the change in revenue in the diagram. Many offered extensive explanations, which were not asked for and wasted valuable time.
\nMost candidates were able to perform well on this question, showing their workings, although some ignored the currency or million in their final answer and so lost a mark.
\nA limited number gave a clear, applied explanation of two economies of scale. Answers were often too vague and imprecise. Some misread the question, focusing on the benefits to large firms, rather than economies of scale not available to small firms. Those students who were well prepared scored well.
\nMost candidates were able to perform well on the diagram, but many were not able to explain the comparative advantage theory in terms of opportunity cost.
\nThis question was generally well understood and answered effectively. The significance of the minimum reserve ratio in terms of lending by the banks, coupled with the effect on the money supply and interest rates, was well understood but many students were unaware of the perfectly interest inelastic nature of supply, so lost a mark for the diagram. A minority confused reserved assets and minimum reserve requirements.
\nExchange rate diagrams were generally drawn correctly, although there were still too many labelling errors of the vertical axis. Most students were able to effectively explain how reserve assets could be used to prevent depreciation. This is an area of the syllabus where understanding of the question has improved.
\nA large number of students’ answers strayed away from what was being asked and did not clearly focus on economic development.
\nOften the evaluation was very superficial, especially for some who found it difficult to identify the separate impact on economic development of trade and FDI as these are heavily interwoven.
\nIn several of the responses, the students understood the effect that trade and FDI might have on Vietnam's economy in general, they used diagrams, theories and terminologies, but focused entirely on economic growth and so were not awarded beyond 6 marks as these responses do not clearly indicate an understanding of the “specific demands of the question”.
\nIn some instances, some appeared to present pre-prepared answers and thus the work matched the descriptor for 1-3 marks.
\nText D — Overview of Malawi
\nText E — Agricultural Production
\nText F — Tobacco Exports
\nTobacco is Malawi’s major export, providing over 50 % of foreign currency earnings. Due to lower global demand and the purchasing policies of multinational tobacco firms, prices paid to farmers in Malawi are low and falling. To reduce costs, farmers resort to using child labour. Following allegations of labour exploitation, the United States has restricted tobacco imports from Malawi. There is concern that other importing countries might also impose restrictions.
\nTable 3: Economic data for Malawi
\nTable 4: Development data for Malawi
\nText D United Nations Department of Economic and Social Affairs, 2020. Malawi 2020 Voluntary National Review Report For Sustainable Development Goals (SDGs) [online] Available at: https://sustainabledevelopment.un.org/content/documents/26180Main_Messages_Malawi.pdf [Accessed July 2020]. Source adapted.
\nThe World Bank, 2020. World Bank Approves $157 Million to Protect Malawi’s Watersheds and Improve Rural
Livelihoods [online] Available at: https://www.worldbank.org/en/news/press-release/2020/07/06/world-bank-approves-157-million-to-protect-malawis-watersheds-and-improve-rural-livelihoods [Accessed July 2020]. Source adapted.
Text E Chilunga, Z., 2020. Government increases maize prices from K250 to K310 per kg [online] Available at: https://www.nyasatimes.com/government-increases-maize-prices-from-k250-to-k310-per-kg/ [Accessed July 2020]. Source adapted.
\nFabricius, P., 2020. Malawi sets stellar example with push for food security [online] Available at: https://www.
businesslive.co.za/bd/opinion/2020-07-13-peter-fabricius-malawi-sets-stellar-example-with-push-for-food-security/ [Accessed July 2020]. Source adapted.
Text F AFP, 2019. US restricts tobacco imports from Malawi over labour abuses [online] Available at: https://www.
theeastafrican.co.ke/business/US-restricts-tobacco-imports-from-Malawi-over-labour-abuses/2560-5369826-
vhw4q7z/index.html [Accessed July 2020]. Source adapted.
Table 3 World Bank Data Bank, World Development Indicators n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=MW [Accessed July 2020]. Source adapted.
\nTable 4 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/
reports.aspx?source=2&country=MW [Accessed July 2020]. Source adapted.
List two of the Sustainable Development Goals (Text D, paragraph [1]).
\nDefine the term tariffs indicated in bold in the text (Text D, paragraph [5]).
\nSketch a production possibilities curve (PPC) diagram to show the effect of improved human capital on Malawi’s potential output (Text D, paragraph [2]).
\nUsing information from Table 3, calculate real GDP (at 2010 prices) in 2019 using the price deflator.
\nUsing a poverty cycle diagram, explain how an increase in funds for the education of teenage girls could break the poverty cycle (Text D, paragraph [2]).
\nUsing an AD/AS diagram, explain how a reduction in government spending may reduce inflation (Text D, paragraph [4]).
\nUsing an exchange rate diagram, explain how a reduction in the current account deficit could affect the exchange rate for the kwacha (Text D, paragraph [5]).
\nUsing a demand and supply diagram, explain how the rise in the maximum price of maize would change the welfare loss associated with the maximum price (Text E, paragraph [2]).
\nUsing information from the texts/data and your knowledge of economics, evaluate the government’s policies to promote economic growth and economic development in Malawi.
\nThe diagram has three requirements:
\nCandidates who incorrectly label diagrams can be awarded a maximum of [2].
\nFor a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient. A title is not necessary.
\nClear labelling of the PPC curves such as PPC1 PPC2 is sufficient to indicate the shift to the right.
\nLabelling PPC diagram with P and Q or PL and RGDP are fundamental errors thus zero marks.
\n100= 7669.92
\nAny valid working should be rewarded with [1]
\n(US)$ 7669.92 million
\nAn answer of 7 669.92, without workings, without units or incorrect units, is sufficient for [1].
\nIf the answer is rounded up, it cannot be awarded [1]. It has to be given correctly to 2 decimal places (in line with the examination “Instructions to candidates”).
\nThe wording in the boxes may be different, so long as it is equivalent. No title is necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS diagram, the vertical axis may be Average (general) price level or price level. The horizontal axis may be real output, real national output, real national income, real GDP or real Y. Any abbreviation of the previous terms is acceptable. A title is not necessary.
\nAn answer may alternatively draw a Keynesian AS curve, with the original intersection of AD and AS being in the upward sloping portion of the AS curve. Alternatively, the original intersection may be in the horizontal section of the AS curve and the PL may not fall. This can receive full marks if the explanation states that due to high unemployment/spare capacity in Malawi, contractionary fiscal policy will not be able to reduce inflation.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of kwacha in other currencies, other currency/ kwacha or other currency per kwacha. The horizontal axis should be quantity or quantity of kwacha. A title is not necessary.
\nN.B. Acceptable alternatives are the supply curve shifting left or both curves shifting.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nAccept any annotation that clearly shows the change in welfare loss.
\nN.B. Answers that only deal with development or only deal with growth should be awarded a maximum of level 3.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nEconomic Models / theories may include
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMost could identify 2 SDG areas. However, many could not give precise SDGs. A significant minority offered imprecise or incomplete answers (some very narrow aspects of an SDG such as “provide access to higher education for girls” or broad areas without actual goals such as “education” or “climate”). To be awarded full marks, precise answers are expected with no ambiguity.
\nAlmost all candidates were able to perform well on this question. The vast majority offered correct definitions, but a few failed to recognise that a tariff is a tax.
\nThe majority of candidates sketched the PPC diagram and showed a shift in the PPC curve to the right and labelled the PPC diagram correctly. However, some labelled the diagram inaccurately, in many cases making fundamental errors, rendering the diagram meaningless. Examples of fundamental labelling errors found: “price and output” or “real GDP” or “actual and potential output” or “human capital and growth”.
\nAlso many, probably most, offered a written explanation (sometimes extensive) of the diagram. This was not asked for and wasted a great deal of valuable exam time.
\nThe majority of candidates were able to perform well on this question, although some rounded to a whole number or one decimal place, some ignored the units, and some forgot to multiply by 100.
\nBetter answers gave a thorough appropriate poverty cycle and used the diagram to show where education could break the cycle. Some students provided a “reversed” diagram and so lost a mark for it. Often the diagram and/or explanations were incomplete for human capital and/or productivity were missing.
\nThis was generally well answered. Students constructed accurate diagrams coupled with a full explanation. The possible impact of a decrease in government spending on inflation was well understood. One possible weakness was that students gave too much detail, again wasting valuable time.
\nMost candidates were able to perform well on this question. Most provided a correct diagram, although there were still cases of incorrect labelling of the vertical axis. The explanations offered by students demonstrated a good understanding of the links between a decreasing current account deficit and the exchange rate. Candidates often lost a mark for not distinguishing increase in exports from decrease in imports.
\nSome students spent too much time explaining how the deficit came about in the first place. This was not the question.
\nThe identification of the welfare loss on the diagram was rarely accurate, despite the fact that it was clear that students understood the concept. Where candidates did not earn full marks in the diagram, the most common shortcoming was due to the confusion between the welfare loss in the international trade diagram and the welfare loss in the price control diagram.
\nIn general this question was not well answered. However, there were a significant minority of outstanding responses. This question required students to evaluate policies given in the text which are aimed at promoting economic growth and economic development. Clearly, many candidates did not go through the text and pick out the policies being promoted for that purpose by the Government of Malawi.
\nSome students used strategies/policies that were not designed for the promotion of economic growth and development, such as contractionary fiscal policy, and some students introduced policies that were not in the text, so strayed away from what was being asked. Such parts of the answers were not only considered as irrelevant but wasted time that could have been used on relevant policies.
\nOne of the main weaknesses was a lack of balance, with students focusing primarily on economic growth to the exclusion of economic development.
\nIt is important to stress the importance of analysing policies rather than just describing them and then making appropriate judgments as to their efficacy.
\nBurundi is a landlocked country in Central Africa. Its economy is heavily reliant on the agricultural sector, which employs 92 % of the labour force but contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million population live in poverty, especially in rural areas. The level of food insecurity (people without access to enough food) is almost twice as high as the average for sub-Saharan African countries with more than 60 % of the population living below the poverty line.
\nInfrastructure in Burundi is poor. There are no railroads and only three major routes through the country, two of which involve water transport, across Lake Tanganyika. Access to clean water is low, while fewer than 5 % of the population have access to electricity. The literacy rate for those aged 15 and over is 61.6 %, while only 1 % of secondary schools have access to the internet.
\nTable 1: Labour market data for Burundi (2019)
\nGovernment finance
\nThe budget deficit of Burundi increased in 2019, partly due to an inefficient system for collection of taxes. Tax rates in Burundi are given in Table 2.
\nTable 2
\n* Top rates of personal income tax in other countries are often much higher,
such as 57.2 % in Sweden and 35 % in Mexico.
A firm in Burundi paid 32 000 Burundi francs (Fbu), including VAT, in order to purchase a piece of industrial equipment. The rate of VAT for this equipment is 20 %.
\nGender inequality in Burundi
\nTable 3 illustrates selected indicators of gender inequality in Burundi compared with Mexico and Sweden.
\nTable 3
\nApproximately 92 % of the labour force are employed in agriculture, which contributes 40 % of Burundi’s GDP.
\nTrade
The main exports of Burundi in 2018 were gold (41.4 %), coffee (17.3 %) and tea (9.5 %), while refined petroleum (17.3 %) was its main import. Although the current account deficit was reduced to 10 % of GDP in 2019, there remains a huge imbalance between exports and imports. Reserve assets do not cover more than one month of imports, while the economy relies on foreign aid and foreign direct investment (FDI) to finance the deficit. The low level of foreign aid is likely to be insufficient to finance the deficit.
On the upside, Burundi has an abundance of minerals, including 6 % of the world’s nickel reserves. It is the only African country producing rare-earth minerals, which are used in many hi-tech products, such as smartphones. The United States (US) has been keen to diversify its supply of rare-earth minerals because of its trade dispute with China.
\nFigure 1 shows the market for gold in Burundi. Dd and Sd represent the yearly domestic demand and supply functions for gold, while Sw and Sw1 represent the world supply of gold in 2019 and 2020 respectively. The price of gold is measured in US dollars (US$) per ounce (oz). The world price increased from US$1500 per oz to US$1800 per oz between July 2019 and July 2020.
\nFigure 1
\n[Source: United Nations Development Programme, 2020. The Next Frontier: Human Development and the Anthropocene [online] Available at: http://hdr.undp.org/sites/default/files/Country-Profiles/BDI.pdf [Accessed 20 April 2020]. Source adapted.
\nThe World Bank, n.d. Population, total – Burundi [online] Available at: https://data.worldbank.org/indicator/SP.POP.
TOTL?locations=BI [Accessed 20 April 2020]. Source adapted.
United Nations Development Programme, n.d. Human Development Reports [online] Available at:
http://www.hdr.undp.org/en/countries/profiles/BDI [Accessed 20 April 2020]. Source adapted.]
Using the information provided in Table 1, calculate the rate of unemployment for Burundi in 2019.
\nExplain why dependence on primary sector production may be considered a barrier to economic development.
\nUsing the information in Figure 1, calculate the price elasticity of demand for gold in Burundi when price increases from US$1500 per oz to US$1800 per oz.
\nUsing the information in Figure 1, calculate the change in the value of Burundi’s gold exports resulting from the increase in the price of gold from US$1500 per oz to US$1800 per oz.
\nDefine the term progressive tax.
\nCalculate the amount of VAT which was paid on the purchase of this equipment.
\nSketch an AD/AS diagram to illustrate the possible effect on the Burundian economy in the long run if the government reduces the rate of corporate income tax from 30 % to 26 %.
\nWith reference to the data in Table 3, explain two ways in which gender inequality might act as a barrier to economic development in Burundi.
\nUsing the text/data provided and your knowledge of economics, recommend a policy which could be introduced by the government of Burundi to reduce income inequality in Burundi.
\nAny valid working should be rewarded with [1].
\n= 1.5%
\nAn answer of 1.5 or 1.5% without working is sufficient for [1].
\nN.B. An answer of 1.52 arises because of incorrect working and so should be awarded [0].
\nN.B. A response that links only to growth can be awarded a maximum of [3]. Similarly, if development is merely stated, but not linked, then a maximum of [3] is awarded.
\nAny valid working (correct %Δ Qd or %Δ P, provided the formula is not inverted) is sufficient for [1]
\n= −1 or 1
\nAn answer of −1 or 1 without any valid working is sufficient for [1].
\nN.B. A response in which the formula is inverted should be awarded [0].
\nInitial value = 1000 (70 − 25) × 1500 = 67 500 000
\nNew value = 1000 (85 − 20) × 1800 = 117 000 000
\nAny valid working (initial or final value) is sufficient for [1].
\nChange in value = US$117 million − US$67.5 million
\n= US$49.5 million or US$49 500 000
\nAn answer of 49.5 or 49.5 million or $49.5 million without any valid working is sufficient for [1].
\nN.B. For full marks to be awarded the response must provide valid working and include correct units.
\n(32 000/1.2) × 0.2
\nAny valid working should be rewarded with [1].
\n= Fbu 5333.33
\nAn answer of 5333 without workings is sufficient for [1].
\nN.B. For full marks to be awarded the response must provide valid working and include correct units.
\nFor AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviation of the previous terms is acceptable. A title is not necessary.
\nN.B. A Keynesian diagram with AS shifting to the right and showing a higher (full employment/potential) output level is also acceptable.
\nA diagram which is not fully labelled may be awarded a maximum of [1].
\nRefer to paper 3 markbands, available under “your tests” tab > supplemental materials.
\nPossible policies may include (but are not restricted to):
\nN.B. If more than one policy is recommended, only the best policy should be rewarded, unless the policies are shown to be complementary or if they are compared/contrasted with the student’s one chosen policy.
\nAlthough stronger candidates were able to calculate the rate of unemployment accurately, it was surprising to see so many errors. Candidates often divided the number of unemployed by the number of employed or by the size of the population – or even inverted the formula.
\nMany candidates neglected to focus on the difficulties of over-reliance on the primary sector or made unsupported assertions, such as that in the primary sector “economies of scale are not possible”, “there is no innovation”, “prices are low” or “there is no infrastructure”. Such responses also tended to imply an impact on economic activity/growth without referring to development. Stronger candidates were able to link price volatility to income, living standards and development or to explain the significance of a low YED for many primary products.
\nMany candidates produced an answer of 1.25 as a consequence of using the final quantity as the denominator for the calculation of the percentage change.
\nResponses to this question were extremely poor. It was evident that some candidates were not familiar with the identification of exports on a trade diagram (as introduced in the new syllabus). Furthermore, some candidates who were able to calculate the quantity of exports were not able to multiply by the price in order to calculate the value. It was common to see responses in which candidates had merely calculated the changes in the value of domestic output or where the quantity of gold demanded had been multiplied by the price.
\nIt was disappointing to see so many responses in which candidates referred to those on higher incomes paying “more tax” rather than referring to the percentage of income paid as tax. Additionally, a significant number of candidates referred to “richer households paying more tax than “poorer”, thus mixing wealth with income.
\nIt is clear that many candidates had not been prepared adequately for this question. Such candidates incorrectly multiplied the level of expenditure by the tax rate. This calculation is specified in the subject guide, and illustrated in the specimen paper, thus it was disappointing that candidates in many centres were unable to perform the calculation accurately.
\nThis question was answered poorly. The question required candidates to recognize that such a market-orientated supply-side policy would shift the LRAS (or the Keynesian AS) curve to the right. However, many candidates shifted the AD curve and/or the SRAS curve.
\nAlthough candidates were generally able to identify data relating to income inequality, many struggled to explain the link to economic development. Weaker responses suggested that less educated females cannot work or that those without bank accounts cannot receive income or spend. The significance for development of health, education or access to banking services was not explained well by many candidates. Marks were also lost for neglecting to make explicit reference to the data or to link to development. Furthermore, some responses presented a correlation between indicators and the HDI or GNI without attempting to explain causality.
\nA wide range of approaches were adopted for the “policy question”. Responses which scored well mostly:
\nResponses were able to achieve full marks with a fairly concise answer which met these requirements. Diagrams, although not expected/required) were often used effectively to support the theory/explanation.
\nCandidates who did not score highly tended to demonstrate some of the following weaknesses:
\nThe following diagram illustrates the market for bananas in Country A. D and S represent the domestic demand and supply for bananas, while bananas can be imported at the current world price of $3 per kg.
\nThe government of Country A decides to impose a quota on banana imports of 150 000kg per month.
\nThe demand and supply functions for the currency of Country A (the dollar ($)) are given by:
\nQd = 1900 - 18P
\nQs = 580 + 12P
\nwhere Qd is the quantity of dollars demanded per month, Qs is the quantity of dollars supplied per month and P is the price of the dollar, measured in yen (¥).
\nThe following table provides selected items of the balance of payments for Country A in 2015.
\nTable 1
\nAssuming that there are no restrictions on the importing of bananas into Country A:
\nState the quantity of bananas which will be purchased each month in Country A.
\nAssuming that there are no restrictions on the importing of bananas into Country A:
\nCalculate the monthly expenditure on bananas imported into Country A.
\nAssuming that there are no restrictions on the importing of bananas into Country A:
\nCalculate the domestic producer surplus.
\nIdentify the price which would be paid by consumers in Country A per kg of bananas following the imposition of the quota.
\nIdentify the quantity of bananas which would be purchased in Country A per month following the imposition of the quota.
\nCalculate the change in revenue earned by domestic producers of bananas in Country A as a result of the quota.
\nWith reference to the diagram, explain why the welfare loss from the imposition of the quota is likely to be greater than the welfare loss resulting from a tariff of $2 per kg.
\nOutline the reason why a fall in the price of the dollar should lead to an increase in the quantity of dollars demanded.
\nAssume that the dollar/yen exchange rate is in equilibrium. Using the functions, calculate the cost, in dollars, of a motorbike which costs ¥552 640.
\nUsing examples from Table 1, outline the difference between debit items and credit items in the balance of payments.
\nCalculate the current account balance from the data given in Table 1.
\nExplain two implications of a rising current account surplus.
\n400 000 kg
\n350 000 × $3 = $1 050 000
\nAn answer of $1 050 000 or $1.05million without any valid working is sufficient for [1].
\n0.5 × 50 000 × 1 = $25 000
\nAn answer of $25 000 without any valid working is sufficient for [1].
\n$5
\n300 000 kg [1]
\nOFR applies if (b)(i) is incorrect eg $5.50 for (b)(i) would lead to 275 000 kg for (b)(ii).
\nInitial revenue = 3 × 50 000 = 150 000 [1]
\nFinal revenue 5 × 150 000 = 750 000 [1]
\nN.B. For the marks above, it is not necessary to specify the initial and final revenue – a candidate may simply write (5 × 150 000) – (3 × 50 000) and be fully rewarded.
\nChange in revenue = 750 000 – 150 000 = $600 000 [1]
\nOFR applies within part (iii) if at least one of the revenue figures is calculated correctly.
OFR may also be applied if a candidate has identified the price(s) incorrectly in (a)(ii) or (b)(i).
N.B. Some candidates may annotate the diagram – and use to show revenues – these annotations can be seen and rewarded by looking at the script in full response mode.
\nOne example of OFR might be: P = $5.50 and so final revenue would be 5.5 × 175 000 = $962 500, so the change would be 962 500 – 150 000 = $812 500.
\nAnother example of OFR might be if a candidate identifies the new price as $3, rather than $5, then the change in revenue could be 3 × 150 000 – 3 × 50 000 = $300 000.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1–2]
For explaining that the impact on price and quantity of consumption and imports would be identical to that of the quota, but the welfare loss would be greater with a quota.
P= $5, imported quantity = 150 000 kg, Qd = 300 000 kg.
If the result of the tariff (price, Qd, imports) is identified correctly award [1].
OR
If one welfare loss is identified accurately, award [1].
A response which indicates that the foregone tariff revenue is the reason for the difference, but with little/no accurate supporting evidence, should be awarded [2].
\n2 The written response is accurate. [3–4]
For explaining that the welfare loss is likely to be greater for the quota, because, even though the impact on price and quantity is the same in this diagram in the case of a $2 tariff, the government does not necessarily benefit in terms of revenue from a quota.
A response which explains that price, quantity (and imports) would be the same with a tariff or quota, but that there would be no tariff revenue with the quota so welfare loss would be greater without reference to the diagram should be awarded [3].
\nN.B. Some candidates may annotate the diagram – these annotations can be seen and rewarded by looking at the script in full response mode.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
If there is no reference to exports and the answer relies on the general law of demand, award [0].
1 There is limited understanding. [1]
For stating that more exports would be sold at a lower exchange rate.
2 There is clear understanding. [2]
For explaining that more exports would be sold at a lower exchange rate and that as a result more dollars would be demanded in order to purchase these exports.
\n
1900 − 18P = 580 + 12P
\n1320 = 30P
P= ¥44 (or P = 44) [2]
Any valid working is sufficient for [1].
An answer of ¥44 or 44 without any valid working is sufficient for [1].
The bike will cost $12560
\nOFR applies if the exchange rate calculated is incorrect.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague distinction. [1]
The idea that debits are negative and credits are positive.
2 Accurate distinction. [2]
A clear statement that debit items signify currency outflows while credit items signify currency inflows, with an accurate example of each from the table.
Current account balance = exports of goods and services − imports of goods and services + net income + net current transfers
= 3240 + 1928 − 3519 − 1590 − 456 − 488
= − $885 billion
\nValid working is sufficient for [1]. Working should not be considered valid if items from the financial or capital accounts are included. The minimum requirement for valid working is that the elements 3240 + 1928 – 3519 – 1590 are present and correct.
\nAn answer of − $885 billion or – 885 without any valid working is sufficient for [1] only.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited.
For providing one implication without explanation. [1]
For providing two implications without explanation OR for providing one implication with explanation. [2]
2 The written response is accurate.
For providing one implication without explanation and one implication with explanation. [3]
For providing two implications with explanation. [4]
Implications include:
\nN.B. An explanation that AD will increase should be awarded [1] only.
\nThis question was generally answered very well, although with some responses omitting the relevant units (kg).
\nThis question was generally well-answered, although a significant proportion of candidates ignored the word “imported” in the question and provided total spending on bananas ($3 x 400 000 = $1.2 million).
\nThis question was generally well-answered, with a range of errors, most notably incorrect calculation of the area of the triangle providing an answer of $50 000.
\nThe majority of candidates identified $5 as the correct response, although a significant proportion gave $5.50 as the answer, presumably the result of placing the new domestic supply curve in the incorrect position.
\nThis question was generally well-answered, with a large number of OFR (Own Figure Rule) marks awarded.
\nThe majority of candidates correctly identified the initial revenue earned by domestic producers while the calculation of the new revenue proved troublesome. However, there were again many OFR marks awarded, taking account of errors in part (b)(ii).
\nThe majority of candidates were able to identify the welfare loss resulting from a tariff of $2 per kg. Lower achieving responses then relied on the diagram, indicating relevant areas, to explain, while higher achieving responses addressed the key issue – that tariff revenue is received by the domestic government while the revenue resulting from a higher price resulting from a quota (“quota revenue”) typically does not.
\nA significant number of candidates relied simply on the law of demand for the answer to this question. In the context of exchange rates, the idea that goods/services priced in the depreciating currency would become cheaper was necessary.
\nThe vast majority of candidates were able to calculate the exchange rate accurately, although a surprising number then multiplied the ¥/$ rate of 44 by the ¥ price, with the result that the motorbike would cost more than $24 million!
\nThe majority of candidates were able to discriminate between debit and credit items, but many failed to relate these terms to the direction of currency flows.
\nAlthough there were many correct answers, it was concerning that so many responses indicated a lack of awareness regarding which items should not appear in the current account.
\nThis question was generally very well-answered.
\nFirm A, a firm with monopoly power, is producing at a level of output Q’ equal to 150 000 units per month for which the following are true (all figures are in dollars ($)):
\nTable 1
\nThe values in Table 1 imply the following:
\nP = AR > MR > AC > MC
\nDefine the term monopoly power.
\nUsing the figures provided in Table 1, calculate the monthly level of profits Firm A is making at the current level of output, Q’.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nState the reason Firm A cannot be a perfect competitor.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nDetermine whether Firm A should increase or decrease its level of output in order to maximize profits. You must give a reason for your choice.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nDetermine whether total revenue collected will increase, decrease or remain unchanged if Firm A increases its level of output. You must give a reason for your choice.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nDescribe how average cost will be affected if Firm A increases its level of output.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nDetermine whether Firm A is productively efficient at the current level of output. You must give a reason for your choice.
\nUsing the relationship P = AR > MR > AC > MC and/or figures provided in Table 1:
\nExplain why allocative efficiency is achieved, in the absence of externalities, at a level of output where price (average revenue) is equal to marginal cost.
\nOn the following axes, sketch a fully labelled diagram showing the level of output Q’ for which the relationship
P = AR > MR > AC > MC is true. The use of figures provided in Table 1 is not required.
Now assume that the market in which Firm A operates has evolved into an oligopoly with only two firms, Firm A and Firm B. Each firm can cut price or maintain the current price. The following payoff matrix shows the profits they face. The profit payoffs for Firm A are in bold.
\nUsing the profit figures in the payoff matrix, explain why strategic interdependence will lead both firms to cut price.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that the firm faces a negatively sloped demand curve OR that it arises when one firm dominates the market.
2 Accurate definition. [2]
The ability of a firm to set the price.
Total revenues = 140 × 150 000 = $21 000 000 [1]
\nTotal costs = 60 × 150 000 = $9 000 000 [1]
\n= TR – TC = 21 000 000 – 9 000 000 = $12 000 000 [1]
\nOR
\n= (AR – AC) × Q = (140 – 60) × 150 000 = $12 000 000 [3]
\nAny valid working is sufficient for [1].
\nOFR applies for the final figure (assuming that at least either TR or TC is calculated correctly).
\nAn answer of $12 000 000 or 12 000 000 or 12 million without any valid working is sufficient for [1] only.
\nPrice (or average revenue) is greater than (or is not equal to) marginal revenue.
\nAn answer which indicates that P> MR is sufficient for [1].
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Correct answer with incorrect reasoning. [1]
This firm should increase its level of output.
2 Accurate answer. [2]
Since MR>MC (or $80 > $50), this firm should increase its level of output.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Correct answer without a valid reason provided. [1]
Total revenue will increase.
2 Accurate answer. [2]
Total revenue will increase because marginal revenue is positive OR the idea that increasing output by one unit will add ($80.00) to total revenue and thus total revenue will increase.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Correct answer without a valid reason provided. [1]
Average cost will decrease.
2 Accurate answer. [2]
Average cost will decrease since marginal cost is lower than average cost. Therefore, producing an additional unit of output will reduce average cost.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Correct answer without a valid reason provided. [1]
The firm is not productively efficient.
2 Accurate answer. [2]
The firm is not productively efficient, because AC>MC so AC is not at a minimum.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1–2]
For the idea that welfare loss is zero OR that social (community) surplus (sum of consumer surplus and producer surplus) is maximized.
For a vague reference to surplus or benefit, [1] may be awarded.
\n2 The written response is accurate. [3–4]
For explaining that as long as price is greater than MC, output should continue to be increased until MB (price) equals MC, because as a result social (community) surplus will be higher OR for explaining that all units valued more than they cost to produce are indeed produced up until the point where price equals marginal cost for the last unit produced.
Some marginal analysis is required for [4]. A response which explains that price is the value placed by society on a product, while MC is the (marginal) cost, and when they are equal, community surplus is maximized, may be awarded [3].
\nFor an accurately drawn diagram of a firm with monopoly power. [1]
\nThe AR curve must be downward sloping and MR must below AR. The MC and AC curves must have the appropriate shapes, and MC should intersect AC at or close to the minimum. However, it is not necessary for MR to be twice as steep as AR.
\nFor accurate labelling of axes and all curves. [1]
N.B. The labels P = AR, MR, AC and MC on the vertical axis are not necessary.
For identifying the level of output that satisfies the relationship. [1]
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague explanation. [1–2]
Award [1] for each of the following points:
2 Accurate explanation. [3–4]
For an explanation that uses correctly the figures showing that the level of profits attained by any decision (strategy) depends on the decision (strategy) the rival firm makes and that if Firm B “maintains price” then Firm A can earn more by cutting price as $24 million > $18 million, while if Firm B ‘cuts price’ then Firm A will also cut price, as again profits will be greater ($8 million > $3 million). So Firm A will cut price, no matter which strategy Firm B chooses, and vice-versa.
Award [3] for a response which demonstrates some understanding of strategic interdependence, makes some reference to the data and incorporates the points above. For example, a response which explains that one firm might seek to cut price in order to earn greater profit/market share, causing the other firm to do the same (with some data incorporated).
\nAward [4] for a response which demonstrates clear understanding, by a precise use of the data, that whatever decision is taken by B, A can earn more by cutting price (as outlined above).
\nThe majority of candidates were able to identify that monopoly power refers to the ability to be a price-setter, although some merely described monopoly as a situation in which one firm dominates the market, earning 1 mark only.
\nThe calculation was performed successfully by the majority of candidates.
\nThe accurate response, that the firm cannot be a perfect competitor because AR ≠ MR, was provided by a significant proportion of the cohort. However, it was common to see responses such as “the firm is making abnormal profit” or “P ≠ MC”, both of which are possible for a perfectly competitive firm (the former in the short run, the latter if the firm is not producing at the profit-maximizing level of output) but not as a defining characteristic of the model.
\nThe majority of candidates were able to realise that increasing output would move output closer to the profit-maximizing level. Higher achieving responses used marginal analysis to support this.
\nMany candidates were unable to explain that total revenue would increase if output increased because MR was positive and thus producing an additional unit would increase total revenue.
\nThere was a wide range of responses to this question. Lower achieving responses argued that costs would increase as output expands, thus increasing average costs. Many candidates who recognized that AC would decrease explained by writing that economies of scale would operate, or that fixed costs would be spread over an increased quantity. Higher achieving responses explained that as MC<AC, an increase in output must lead to a decrease in AC.
\nMost candidates recognized that, at the current level of output, MC ≠ AC, and thus productive efficiency is not achieved.
\nThis question was generally answered poorly. Some candidates focused on externalities and market failure, while the majority described the condition for allocative efficiency. Few responses included an explanation which incorporated the idea that, as output increases and approaches the allocative efficient position, the addition to benefit (marginal benefit) exceeds the addition to cost (marginal cost) and hence community surplus increases.
\nThe majority of candidates were able to sketch the four relevant curves (AC, MC, AR, MR) with appropriate shapes, but a common error was to indicate Q’ as the profit-maximizing level of output, hence failing to meet the relationship specified.
\nAlthough the majority of candidates were able to explain the payoff matrix, few were able to apply effectively to the concept of strategic interdependence. A large proportion of responses explained that if one firm cut price then it would be in the interests of the other firm to cut price also, and so the firm would react in this manner. A small number of candidates explained that, whatever Firm B decides to do, it is in the interests of Firm A to cut price (and vice-versa) given the assumption that there is no communication between the firms.
\nThe following table illustrates the tax rates that are applied to different ranges of annual incomes in Country Z in the years 2015 and 2016.
\nTable 1
\nThe following table illustrates the distribution of income in Country X and Country Y in 2015 before taxes and transfer payments.
\nTable 2
\nFernando earns $35 000 in 2015. Calculate his average rate of tax.
\nMaki, who earns $70 000 in 2015, pays an average rate of tax of 27.14 %. Using the figures provided in Table 1, outline why her average tax rate is higher than that of Fernando.
\nOutline one potential advantage and one potential disadvantage of a progressive tax system.
\nFernando receives a pay rise in 2016. His total income rises to $43 000. Calculate the percentage of his additional income which must be paid as tax.
\nCountry Z implements a 10 % sales tax in 2016. Explain why an indirect tax is unlikely to be used as a mechanism to promote equity.
\nCalculate the percentage of income received by the highest 20 % in Country X. Enter your answer in Table 2.
\nOutline why Country X has a higher Gini coefficient, using the data in Table 2.
\nOn the following axes, plot the Lorenz curve for Country Y.
\nOutline why the Gini coefficient must have a value between 0 and 1 (or between 0 and 100).
\nCountry X raises the level of transfer payments. Explain two reasons why this policy could help to break the poverty cycle.
\n(0 × 10 000) + (0.1 × 10000) + (0.2 × 15 000) = 4000
= 11.43% or 11.43
N.B. The % sign is not necessary as the question asks for the “rate”.
Any valid working is sufficient for [1].
An answer of 11.43% or 11.43 without any valid working is sufficient for [1] only.
A candidate who calculates the tax paid as $3999.7 should be fully rewarded.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 There is limited understanding. [1]
For the idea that her income is subject to higher marginal tax rates and so her average tax rate is higher OR Maki’s average tax rate is higher than Fernando’s because her income falls into a higher tax bracket and she therefore has a higher marginal tax rate.
2 There is clear understanding. [2]
For explaining that Maki’s marginal tax rate (60%) is higher than her average rate (27.14%), which causes the average tax rate to be higher when income is higher. Therefore, since Maki earns twice as much as Fernando, her average tax rate is higher. Alternatively, candidates may explain, using figures to support their answer, that Maki earns twice as much income as Fernando and pays more than twice as much tax.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1]
For providing one advantage OR one disadvantage.
2 The written response is clear. [2]
For providing one advantage AND one disadvantage.
The potential advantages are:
\nThe potential disadvantages are:
\nRise in income = 43 000 − 35 000 = $8000
\nNew tax payment = (0.1 × 10 000) + (0.2 × 20 000) + (0.4 × 3000) = $6200 [1]
\nOriginal tax payment = $4000
Rise in tax = 6200 − 4000 = $2200 [1]
OFR applies if part (a)(i) has been answered incorrectly.
\n\n
= 27.5% [1]
\nAn answer of 27.5%, 27.5, 0.275 or 0.28 without any valid working is worth [1].
Any valid alternative approach should be fully rewarded.
Any valid working is worth [1].
OFR applies if the rise in tax has been calculated incorrectly.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1–2]
For the idea that indirect taxes are inequitable because lower income earners are affected more.
2 The written response is accurate. [3–4]
For explaining that indirect taxes are inequitable because lower income earners are affected more AND that this is because the indirect tax paid will be identical for two individuals who buy the same item, so the higher income earner will pay a lower proportion of his income on the tax than the lower income earner. Therefore, the tax may be seen as unfair.
The term “regressive” is not necessary, provided it is implied.
A response which explains accurately that an indirect tax will lead to greater inequality may be awarded [4] – the link to equity is implied.
100 − 3.0 − 6.8 − 12 − 20.1 = 58.10
\nAn answer of 58.10 without any valid working is sufficient for [1]. Placing the result in the table is not necessary.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1]
Country X will have the higher Gini coefficient because the income distribution is more unequal.
2 The written response is clear. [2]
Country X will have the higher Gini coefficient, as the lowest 40% of the income groups are only receiving 9.80% of the country’s total income, while the top 40% are receiving almost 80% of the total income. However, in Country Y, the lowest 40% receive 25% of the income, a higher share than in Country X, while the top 40% receive 55%, which is a lower share than in Country X.
A response including some accurate and relevant reference to the data, with a resulting comment that the distribution of income is more unequal in Country X should be awarded [2].
\nFor correctly labelled axes. [1]
N.B. % of income/households/population are acceptable labels for the axes. The scale only needs to be shown for 10, 20, 30 etc.
For drawing a Lorenz curve below the diagonal. [1]
\nFor an accurately plotted Lorenz curve – allow very minor discrepancies. [1]
\n(To be correct: 0% at 0%; 10% on vertical axis at 20% on horizontal, 25% at 40%, 45% at 60%, 70% at 80%, 100% at 100%.)
\nN.B. A candidate might use a different scale from the one above – using only a portion of the grid. Provided this is accurate and the plotting of points is approximately correct, then the third mark may be awarded.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited. [1]
The Gini coefficient is measured by the area between the Lorenz curve and the diagonal divided by the total area beneath the diagonal (half square) OR that a Gini coefficient of 0 implies perfect equality (of income).
2 The written response is clear. [2]
The Gini coefficient is measured by the area between the Lorenz curve and the diagonal divided by the total area beneath the diagonal (half square). Therefore it can only yield any number between 0 and 1 (or between 0 and 100 when multiplied by 100). (Perfect equality would have a coefficient equal to zero, while perfect inequality would have a coefficient equal to 1 (or 100).)
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 The written response is limited.
For providing one reason without explanation. [1]
For providing two reasons without explanations OR for providing one reason with explanation. [2]
2 The written response is accurate.
For providing one reason without explanation and one reason with explanation. [3]
For providing two reasons with explanations. [4]
Reasons may include:
\nAn explanation which accurately combines two points (eg health and education) rather than explaining each one separately may be awarded full marks.
\nThe explanation might relate to the poverty cycle for a household or for the economy.
\nLower achieving candidates struggled to calculate the correct amount of tax to be paid ($4000) but the majority of candidates succeeded. Most of the latter were then able to calculate the average tax rate successfully.
\nThe majority of candidates demonstrated an understanding of the nature of the tax system provided (progressive) but it was common for candidates to neglect to use the data provided or to refer to the concepts of average and marginal tax rates.
\nThis question was well-answered.
Higher achieving responses demonstrated a sound grasp of tax calculations by applying the appropriate rates to the additional $8000, calculating the additional tax $2200) and converting to a percentage. The majority calculated the new level of tax ($6200) but there were many errors. It was somewhat surprising to see that many candidates who had earned full marks for part (i) could not do so again in this question part.
\nThe vast majority of candidates were able to recognize that a sales tax may be inequitable, and while most attempted to explain why, explanation was limited in many cases. Although the term “regressive” was not required, the idea that indirect taxes are regressive needed to be explained.
\nThis question was well-answered.
\nAlthough many candidates neglected to use the data provided or to use this data to compare Country X and Country Y, understanding of the relationship between inequality and the Gini coefficient was evident in most responses. Several responses mixed equality with equity, though.
\nThis question was generally well-answered. Most candidates were clearly aware of a Lorenz curve and its derivation. Some careless errors were seen, such as incorrect plotting, mixing the axes and numbering axes incorrectly. The use of “quintile” as a label on the horizontal axes was not rewarded.
\nThis question was generally well-answered. The majority of candidates referred to the formula and showed that the result could not lie outside the limits given.
\nThere were many good answers to this question. Candidates recognized that households who spent transfer payments on health and education, or on better food/cleaner water, could lift themselves out of the poverty cycle. Candidates were also rewarded for explaining that greater income could lead to more saving and thus investment, again breaking the cycle. There was some confusion among lower achieving candidates regarding the nature of transfer payments, together with some repetition in the two reasons given.
\nAngola and Namibia
\nAngola and Namibia are neighbouring countries on the west coast of Africa.
\nAngola
Namibia
\n\n
Figure 1: Selected economic data for Angola and Namibia (2014)
\n[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The World Factbook, Country Reports,
Central Intelligence Agency, 2015; www.databank.worldbank.org, accessed 13 August 2015 and www.cia.gov, accessed 13 August 2015]
Define the term infrastructure indicated in bold in the text (paragraph 3).
\nDefine the term customs union indicated in bold in the text (paragraph 6).
\nAngola and Namibia have different Gini coefficient values. Using a Lorenz curve diagram, explain what this means (Figure 1).
\nUsing a demand and supply diagram, explain the effect on the price and quantity of fuel consumed in Angola, caused by the elimination of domestic fuel subsidies (paragraph 4).
\nUsing information from the text/data and your knowledge of economics, compare and contrast factors that are likely to lead to economic development in Angola and Namibia.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is (any one of the following is sufficient):
\n\n
2 Accurate definition. [2]
\nFor an explanation that it is (any two of the following is sufficient):
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is where countries agree to trade freely.
\n\n
2 Accurate definition. [2]
\nFor an explanation that it is a form of economic integration where member countries agree to liberalize trade (trade freely amongst themselves) and adopt a common external tariff (or common trade policies) towards non-members.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For drawing a clearly labelled Lorenz curve diagram showing the curve for Angola to be closer to the line of equality than the curve for Namibia or for an explanation that the lower Gini coefficient value for Angola means that income distribution is more equal in Angola than in Namibia.
\n\n
2 The written response is accurate. [3-4]
For drawing a clearly labelled Lorenz curve diagram showing the curve for Angola to be closer to the line of equality than the curve for Namibia and for an explanation that the lower Gini coefficient value for Angola means that income distribution is more equal in Angola than in Namibia.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor Lorenz curve diagram, the vertical axis should be labelled cumulative % of income or % of income and the horizontal axis should be cumulative % of population or % of population. It is not necessary to provide a label on the “line of absolute equality”. There should be labels on the Lorenz curves for Angola and Namibia. A title is not necessary.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For drawing a correctly labelled demand and supply diagram, with a subsidy supply curve below the market supply curve, indication that the subsidy curve is moving back to the market supply curve, and a rise in price and a fall in quantity demanded and supplied or for an explanation that the reduction in fuel subsidies will increase firms’ costs, leading to a fall in supply with a higher price and a lower quantity.
\n\n
2 The written response is accurate. [3-4]
For drawing a correctly labelled demand and supply diagram, with a subsidy supply curve below the market supply curve, indication that the subsidy curve is moving back to the market supply curve, and a rise in price and a fall in quantity demanded and supplied and for an explanation that the reduction in fuel subsidies will increase firms’ costs, leading to a fall in supply with a higher price and a lower quantity.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
Command term
“Compare and contrast” requires candidates to give an account of similarities and differences between two (or more) items or situations referring to both (all) of them throughout.
Responses may include:
\nFactors affecting development
\nFactors affecting growth which may impact economic development
\nAny reasonable evaluation.
\nSri Lanka’s economic reforms
\n
[Sources: adapted from Sunday Times, Sri Lanka, www.sundaytimes.lk, 23 August 2015, and James Crabtree, 2015, Sri Lanka plans ‘big bang’ reforms, Financial Times, www.ft.com, 19 August. Used under licence from the Financial Times. All Rights Reserved.]
List two characteristics of an economically less developed country.
\nDefine the term privatization indicated in bold in the text (paragraph 2).
\nUsing a production possibilities curve (PPC) diagram, explain how “billions of US dollars worth of infrastructure investment from China” may affect potential economic output (paragraph 1).
\nUsing a definition of the term opportunity cost and information from the text, explain how the servicing of debt has an opportunity cost that may affect economic development in Sri Lanka.
\nUsing information from the text/data and your knowledge of economics, discuss the possible effects of the proposed market-oriented reforms on Sri Lanka’s economic development.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
For listing one of the following characteristics:
\n\n
2 Accurate definition. [2]
\nFor listing two of the following characteristics:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is when the government no longer owns a company.
\n\n
2 Accurate definition. [2]
\nAn explanation that the government sells state-owned enterprises (assets/firms) plus one of the following:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a PPC (outward shift) showing an increase in the potential output in Sri Lanka or for an explanation that China’s investment in infrastructure would likely improve the quality and/or the quantity of the factor of production capital and therefore may increase production possibilities (potential economic output).
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a PPC (outward shift) showing an increase in the potential output in Sri Lanka and for an explanation that China’s investment in infrastructure would likely improve the quality and/or the quantity of the factor of production capital and therefore may increase production possibilities (potential economic output).
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor PPC, there must be two goods or groups of goods competing for the same resources on the axes. Good A and Good B would be sufficient.
\n\n
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For a correct definition of opportunity cost or for an explanation that money spent on debt servicing in Sri Lanka will reduce the government’s ability to spend on achieving development objectives, such as infrastructure spending, reducing youth unemployment, increasing household incomes.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor a correct definition of opportunity cost and for an explanation that money spent on debt servicing in Sri Lanka will reduce the government’s ability to spend on achieving development objectives, such as infrastructure spending, reducing youth unemployment, increasing household incomes.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
\n
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nPossible positive effects:
\nPossible negative effects:
\nAny reasonable discussion.
\nRelief as Kenya raises tariff for steel and iron imports
Kenya sees gross domestic product (GDP) growth picking up but current account a concern
\n[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November 2013]
\nUsing an AD/AS diagram, explain how “good economic growth rates in neighbouring countries like Uganda” benefit Kenya’s economy (paragraph 5).
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled AD/AS diagram showing a shift of the AD curve to the right and an increase in the real GDP or for providing an explanation that economic growth in neighbouring countries is likely to lead to an increase in Kenyan exports, leading to an increase in AD and real GDP.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled AD/AS diagram showing a shift of the AD curve to the right and an increase in the real GDP and for providing an explanation that economic growth in neighbouring countries is likely to lead to an increase in Kenyan exports, leading to an increase in AD and real GDP.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be output, real output, national output, real national output, national income, or GDP. A title is not necessary.
\n\n
Indonesia’s economy
\n
\n
Figure 1 – Indonesian development statistics
\n[Sources: adapted from World Bank and Statistics Indonesia; www.legalbusinessonline.com, accessed 18 September 2015; www.indonesia-investments.com, accessed 23 August 2015; www.hdr.undp.org, accessed 23 August 2015; www.bloombergview.com, accessed 9 August 2015; www.reuters.com, accessed 9 August 2015; www.lowyinterpreter.org, accessed 23 August 2015 and www.data.worldbank.org, accessed 23 August 2015]
\n* signifies no data available
\nDefine the term infrastructure indicated in bold in the text (paragraph 1).
\nDefine the term micro-credit indicated in bold in the text (paragraph 5).
\nUsing a demand and supply diagram, explain the impact on the market for fuel of the government’s decision to reduce fuel subsidies (paragraph 2).
\nUsing a production possibilities curve (PPC) diagram, explain how “the government’s record US$22 billion investment in infrastructure projects” will affect Indonesia’s production possibilities (paragraph 2).
\nUsing information from the text/data and your knowledge of economics, discuss the possible impacts of market-oriented and interventionist policies on Indonesia’s economic development.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is (any one of the following is sufficient):
\n\n
2 Accurate definition. [2]
\nAn explanation that it is (any two of the following is sufficient):
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a small loan.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is a small loan, plus one further descriptor, such as:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity or for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity and for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a PPC (outward shift) showing an increase in production possibilities in Indonesia or for explaining that the government’s record US$22 billion investment in infrastructure projects would likely improve the quality and/or the quantity of the factors of production (capital) and therefore may increase production possibilities and/or potential economic output.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a PPC (outward shift) showing an increase in production possibilities in Indonesia and for explaining that the government’s record US$22 billion investment in infrastructure projects would likely improve the quality and/or the quantity of the factors of production (capital) and therefore may increase production possibilities and/or potential economic output.
\nCandidates who incorrectly label diagrams can receive a maximum of [3].
\nAn alternate approach would be to explain that improved infrastructure allows firms to make more efficient use of their factors of production, leading to increased production possibilities.
\nFor a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nBenefits of government intervention:
\nConcerns (weaknesses of) about government intervention:
\nBenefits of market-oriented policies:
\nConcerns (weaknesses of) about market-oriented policies:
\nAny reasonable discussion.
\nAustralia’s terms of trade
\n
\n
Figure 1 – Export and import indices for Australia
\n[Sources: Extract: Adapted from Fairfax Syndication, www.afr.com/news, 30 July 2015 Table: ABS data used with permission from the Australian Bureau of Statistics, July 2015, www.abs.gov.au]
\nDefine the term current account deficit indicated in bold in the text (paragraph 1).
\nDefine the term gross national income indicated in bold in the text (paragraph 3).
\nUsing a definition of price elasticity of demand, explain why “the revenues received by the nation’s biggest exporters continue to fall” (paragraph 5).
\nUsing a definition of the terms of trade, explain the terms of trade change in Australia from 2011 to 2015 (Figure 1).
\nUsing information from the text/data and your knowledge of economics, discuss the possible effects of the fall in Australia’s terms of trade on the Australian economy.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is when the net flow of money from trade in goods and services is negative or that the value of imports is greater than the value of exports.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is when the net flow of money from trade in goods and services and income flows and/or transfers is negative.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is the total value of output
\n\n
2 Accurate definition. [2]
\nAn explanation that it is the total value of incomes (or output or expenditure) earned by a nation’s factors of production regardless of where the assets are located or gross domestic product plus net property income from abroad.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For providing an accurate definition of price elasticity of demand (or formula) or for noting that demand for commodities tends to be inelastic and since prices of exports are falling, total revenue will be falling because the percentage change in quantity is less than the percentage change in price.
\n\n
2 The written response is accurate. [3-4]
For providing an accurate definition of price elasticity of demand (or formula) and for noting than demand for commodities tends to be inelastic and since prices of exports are falling, total revenue will be falling because the percentage change in quantity is less than the percentage change in price.
\nNB the definition of PED may be integrated with the explanation, and does not have to be separately defined.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For defining the terms of trade as the ratio of a country’s average export prices to their average import prices (or for giving the equation Terms of trade = Average export prices / Average import prices x 100) or for explaining that there was a fall in the terms of trade index that could have been caused by either the fall in the average prices of Australia’s exports and/or the increase in the average prices of Australia’s imports.
\n\n
2 The written response is accurate. [3-4]
For defining the terms of trade as the ratio of a country’s average export prices to their average import prices (or for giving the equation Terms of trade = Average export prices / Average import prices x 100) and for explaining that there was a fall in the terms of trade index that could have been caused by either the fall in the average prices of Australia’s exports and/or the increase in the average prices of Australia’s imports.
\nNB [1] may be given for the explanation that the terms of trade is an indication of the amount of exports needed to buy imports.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nAny reasonable discussion.
\nNew Zealand dollar overvalued
\nDefine the term depreciation indicated in bold in the text (paragraph [4]).
\nDefine the term monetary policy indicated in bold in the text (paragraph [6]).
\nUsing an exchange rate diagram, explain how the increase in the official interest rate to 3.5 % is likely to affect the value of the New Zealand dollar (paragraph [5]).
\nUsing an AD/AS diagram, explain how “monetary policy tightening” may affect a country’s inflation rate (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, discuss the possible economic consequences of an overvalued New Zealand dollar on the New Zealand economy.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that the exchange rate/value (price) of a currency falls.
2 Accurate definition. [2]
An explanation that it is a decrease in the value (price/exchange rate) of one currency plus one of the following:
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that is to do with interest rates (or money supply).
2 Accurate definition. [2]
An explanation that it is any two of the following:
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram, showing a shift of the demand curve for the New Zealand dollar to the right or for an explanation that when the interest rate rises, people abroad will wish to save more in New Zealand financial institutions, and so demand for the currency will increase and the value of the currency will rise (appreciate).
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled exchange rate diagram, showing a shift of the demand curve for the New Zealand dollar to the right and for an explanation that when the interest rate rises, people abroad will wish to save more in New Zealand financial institutions, and so demand for the currency will increase and the value of the currency will rise (appreciate).
Candidates may offer an alternative explanation that, because of the interest rate increase, there might be an increase of “hot money” inflows, leading to the shift in the demand curve. This may be fully rewarded.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of NZD in other currencies, or other currency per NZD. The horizontal axis should be quantity or quantity of NZD. A title is not necessary.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled AD/AS diagram, showing a shift of the AD curve to the left or for an explanation that monetary policy tightening (increasing interest rates and/or reducing the money supply) should reduce consumption and/or investment, components of AD (C+I+G+[X−M]), lowering the inflation rate (inflationary pressure) in the economy.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled AD/AS diagram, showing a shift of the AD curve to the left and for an explanation that monetary policy tightening (increasing interest rates and/or reducing the money supply) should reduce consumption and/or investment, components of AD (C+I+G+[X−M]), lowering the inflation rate (inflationary pressure) in the economy.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis, the label may be Average (General) Price Level, APL or Price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized. [1–2]
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. [3–5]
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. [6–8]
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
Discuss requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
Inflation rate:
Employment:
\nEconomic growth:
\nCurrent account balance:
\nAny reasonable discussion.
\nThe majority of candidates found this to be a straightforward question. Lower achieving responses explained that it was a decrease in the value of one currency, but omitted to explain that it was in a floating exchange rate system, or due to changes in market forces. The lowest achieving responses confused the term with deflation and thought that it was falling prices in the economy.
\nThe majority of candidates were able to explain that it is a demand-side policy, relating to changes in interest rates (or changes in the money supply). Lower achieving responses confused monetary and fiscal policies.
\nThe majority of candidates drew an exchange rate diagram, with a shift of the demand curve for the New Zealand dollar to the right and an increase in the exchange rate. They then explained that people abroad would want to take advantage of the higher interest rate by saving in New Zealand financial institutions, increasing demand for the currency and so increasing its value. Others wrote about ‘hot money’ inflows and were also fully rewarded. Lower achieving candidates clearly did not understand the question and provided all sorts of incorrect diagrams, many not related to exchange rates.
\nThis was generally a well answered question. The majority of candidates provided an AD/AS diagram, with a shift of the AD curve to the left, and a fall in the average price level. They then explained that monetary policy tightening, increasing interest rates, should reduce components of AD, such as consumption and/or investment, lowering inflationary pressure in New Zealand. Lower achieving candidates were not aware that monetary policy related to interest rates (and money supply), and so were unable to provide a relevant diagram or explanation.
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nHigher achieving responses explained the meaning of an overvalued currency and then went on to consider the consequences of the high exchange rate for different macroeconomic indicators, such as the inflation rate, employment, economic growth, and the current account balance. They used information from the text to support their opinions. They discussed the possible outcomes and reached a considered conclusion regarding the overall impact. Lower achieving responses ignored the text and were very vague about the consequences of an overvalued currency. Some persisted with the idea that an overvalued New Zealand dollar was another way of saying that there was inflation in the economy.
\nZambia’s reliance on copper exports
\n
[Sources: adapted from www.reuters.com, 8 September 2015; Financial Times, “Zambia’s copper belt reels as price falls”, 26 January 2015; Financial Times, “Zambia bears the brunt of China’s economic slowdown”, 9 September 2015; Wall Street Journal, “Copper Mine Shutdown Threatens Zambia’s Economy”, 3 August 2015 and World Bank, “Making Mining Work for Zambia”, 17 June 2015]
\n\n
Figure 1 – Selected economic indicators for Zambia, Malawi, Sub-Saharan Africa and middle income countries
\n\n
Define the term foreign direct investment indicated in bold in the text (paragraph 3).
\nDefine the term marginal cost indicated in bold in the text (paragraph 4).
\nUsing an AD/AS diagram, explain how the falling value of the Zambian kwacha (Zambia’s currency) is “feeding into inflation” (paragraph 6).
\nUsing information from the text/data and your knowledge of economics, discuss the possible impacts of Zambia’s reliance on copper production on its economic development.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is investment by companies abroad.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is any two of the following:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is the extra costs of production.
\n\n
2 Accurate definition. [2]
\nAn explanation that is the (extra) cost of producing an additional unit of output
Or
The change in total costs divided by the change in output/quantity.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled AD/SRAS diagram showing a shift of the SRAS to the left and an increase in the price level or for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus (cost-push) inflation.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled AD/SRAS diagram showing a shift of the SRAS to the left and an increase in the price level and for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus (cost-push) inflation.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor AD/AS, the vertical axis may be price level, average price level or APL. The horizontal axis may be real output, national output, real GDP, national income, Y or GDP. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nPossible positive consequences:
\nPossible negative consequences:
\nAny reasonable discussion.
\nExplain two reasons why the demand for manufactured goods might be price elastic.
\nEvaluate the importance of cross price elasticity of demand for a business selling a good if the price of a related good increases.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB Candidates who only explain one reason should not be awarded marks beyond level 2.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the relative size of XED and the extent to which the revenue and profit will rise or fall; the assumption that other factors affecting demand remain constant and that XED is difficult to predict and measure.
\nGhana to seek help from International Monetary Fund
\nDefine the term budget deficit indicated in bold in the text (paragraph [1]).
\nDefine the term economic development indicated in bold in the text (paragraph [6]).
\nUsing an exchange rate diagram, explain how the large current account deficit may have affected the value of the Ghanaian cedi.
\nUsing an AD/AS diagram, explain how the falling value of the Ghanaian cedi may have contributed to inflation.
\nUsing information from the text/data and your knowledge of economics, discuss possible consequences of International Monetary Fund (IMF) financial aid on Ghana’s economic growth and development.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is to do with government revenue or spending.
2 Accurate definition. [2]
An explanation that it is when (planned) government spending is greater than government revenues.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that living standards improve.
2 Accurate definition. [2]
An explanation that it is a broad concept involving any two of the following:
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram for the Ghanaian cedi with the supply curve shifting to the right and a fall in the exchange rate or for providing an explanation that outflows of money on the current account exceed inflows and hence there is increased selling of the Ghanaian cedi that will result in downward pressure on the currency (depreciation of the currency).
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled exchange rate diagram for the Ghanaian cedi with the supply curve shifting to the right and a fall in the exchange rate and for providing an explanation that outflows of money on the current account exceed inflows and hence there is increased selling of the Ghanaian cedi that will result in downward pressure on the currency (depreciation of the currency).
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of cedi in other currencies, or other currency per cedi. The horizontal axis should be quantity or quantity of cedi. A title is not necessary.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled AD/AS diagram showing a fall in short-run aggregate supply and an increase in the average price level or for explaining that a fall in the value of the cedi will result in an increase in the cost of imported factors of production and therefore a fall in short-run aggregate supply, resulting in (cost-push) inflation.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled AD/AS diagram showing a fall in short-run aggregate supply and an increase in the average price level and for explaining that a fall in the value of the cedi will result in an increase in the cost of imported factors of production and therefore a fall in short-run aggregate supply, resulting in (cost-push) inflation.
Candidates might explain that the falling cedi results in increasing net exports (X-M) due to cheaper exports and more expensive imports, which increases AD causing demand-pull inflation. This alternative approach should be fully rewarded.
\nCandidates who incorrectly label diagrams can be awarded with a maximum of [3].
\nFor AD/AS, the vertical axis may be Average (General) Price Level, APL or Price level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized. [1–2]
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. [3–5]
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. [6–8]
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
Discuss requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nPossible positive consequences:
\nPossible negative consequences:
\nAny reasonable discussion.
\nDiscussion may include more general consideration of the nature of aid, growth and development and relationships between them.
\nAlthough this is an easy term to define, a considerable number of candidates defined a current account or trade deficit rather than a budget deficit.
\nThis is quite a common question, and was answered well by the vast majority of candidates.
\nMost candidates were able to earn at least two marks for this question, by drawing a demand and supply diagram with an increase in supply of the Ghanaian cedi, and explaining that a current account deficit implies an increase in the supply of the Ghanaian cedi. Many were able to earn full marks for an accurate explanation of the reason for the increase in the supply. Many went off topic in the explanation. As always, there were examples of imprecise labelling on the y-axis.
\nThis was a very straightforward question, and the majority of candidates performed well. Inaccuracies included incorrect labelling (lower achieving responses not distinguishing between microeconomic and macroeconomic labels). Teachers should note that there were two approaches to this question (cost-push and demand-pull inflation), both of which were acceptable.
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nA large number of candidates defined aid, economic growth and economic development and then wrote quite generic essays on the advantages and disadvantages of aid in general. In order to earn more than four marks, candidates needed to be familiar with the particular nature of financial aid from the IMF. Higher achieving responses recognised the consequences of the conditions imposed as part of an IMF package, and the implications of these conditions on economic growth and development. Many candidates failed to distinguish between economic growth and development.
\nThe following information relates to Country A.
\nTable 1
\nThe following data are income quintile shares for the United States (US), Sweden and Brazil in 2011.
\nFigure 1
\nDistinguish between inflation and disinflation.
\nCalculate the inflation rate for 2013 and for 2015 for Country A. Enter your results in Table 1.
\nIdentify the year in which Country A experienced disinflation.
\nThe consumer price index (CPI) is a weighted price index. Outline one reason why weights are used in the construction of the CPI.
\nDetermine the percentage change in the CPI of Country A between the base year and 2013.
\nOutline how a producer price index may prove useful in predicting future inflation.
\nExplain two reasons why governments attempt to avoid deflation.
\nUsing the data in Figure 1, comment on the degree of income inequality in the United States (US), Sweden and Brazil.
\nUsing your answer to part (f), sketch and label a Lorenz curve for Brazil and for Sweden in the following box.
\nState whether the US, Sweden or Brazil has the highest Gini coefficient.
\nDefine the term poverty trap (poverty cycle).
\nExplain two reasons for which a highly unequal income distribution may prove a barrier to economic development.
\nInflation refers to a (sustained) increase in the Average Price Level – or the idea that inflation is an increase in the prices of goods and services [1]
\nDisinflation refers to a decrease in the rate of increase of the Average Price Level
OR
a decrease in the rate of inflation. [1]
NB the command term is distinguish, so the precision required in the definition of inflation is relaxed.
\n[1] for each correct answer.
\n2014
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 Vague response. [1]
For stating that not all goods have the same significance for consumers.
\n\n
2 Accurate response. [2]
For outlining that weights reflect the proportion of total spending allocated so that increased prices in goods with a larger weight lead to a more significant effect on the inflation rate than goods with a smaller weight
OR increased prices are not of equal significance to the typical consumer so weights are used to reflect the relative importance of each good.
Responses may demonstrate understanding but might not be expressed in the form above. Examiners should reward understanding. Please be aware that the command term is outline and not explain.
\n56.28 %
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 Vague response. [1]
For outlining that a producer price index measures the costs of bought-in raw materials and intermediate products (factors of production).
\n\n
2 Accurate response. [2]
For outlining that a producer price index measures the costs of bought-in raw materials and intermediate products (factors of production) and that current increases/decreases in production costs are likely to lead to increases/decreases in consumer prices in the future.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
A limited explanation of one reason may be awarded [1]. An accurate explanation of one or a limited explanation of two may be awarded [2].
\n\n
2 The written response is accurate. [3-4]
For accurately explaining any two of the following:
\nAn accurate explanation of one reason and a limited explanation of another reason may be awarded [3].
\nTwo accurate explanations may be awarded [4].
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 Vague response. [1]
For stating that income inequality is greater in Brazil, followed by the US, followed by Sweden.
\n\n
2 Accurate response. [2]
For stating that income inequality is greatest in Brazil, followed by the US, followed by Sweden as the relative quintile shares indicate. Reference to data in the table is required to be awarded [2]. The actual income shares need not be mentioned, but reference to the top 20% in Brazil earning more than the top 20% in Sweden (or similar) is required. It can be inferred that the US is in the middle.
\n[1] for two correctly sketched Lorenz curves or properly labelled axes (“Cumulative” is not required).
\n[2] for two correctly sketched Lorenz curves and properly labelled axes.
\nThe horizontal axis may be labelled “Households (%)” or “Population (%)”. “Cumulative” is not required.
\nBrazil
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that people cannot escape from poverty.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is any circular chain of events starting and ending in (an indicator of) poverty, or an explanation that low incomes lead to low savings which leads to low investment/low spending on health and education/low spending on physical and human capital, which leads to low growth/productivity, which leads to low income. An appropriate diagram may be fully rewarded.
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
A limited explanation of one reason may be awarded [1]. An accurate explanation of one or a limited explanation of two may be awarded [2].
\n\n
2 The written response is accurate. [3-4]
For accurately explaining any two of the following:
\nEach reason provided should be linked clearly to development. However, a candidate who has explained reasons clearly but neglected to mention development in either should be penalized for this once only – so a well-explained response which does not mention development explicitly may be awarded a maximum of [3].
\nAn accurate explanation of one reason and a limited explanation of another reason may be awarded [3].
\nTwo accurate explanations may be awarded [4].
\nExplain the view that the best allocation of resources occurs when consumer surplus and producer surplus are maximized.
\nDiscuss the implications of the direct provision of public goods by a government.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the nature of public goods and whether they have to be provided by the government. The problems of providing public goods by the government, such as the opportunity cost of government spending and inefficient government provision.
\nFor Firm A, the relationship between inputs and output can be expressed as follows:
\nTable 1
\nConsider a monopolist facing a downward sloping, straight line demand curve. The following diagram illustrates the total revenue (TR) curve faced by the monopolist.
\nThe following table illustrates the demand conditions faced by another monopolist.
\nTable 2
\nFirm B operates in a monopolistically competitive market. The following diagram illustrates the marginal cost (MC), average cost (AC), average revenue (AR) and marginal revenue (MR) curves it faces. The diagram is not drawn to scale.
\nDefine the term increasing returns to scale.
\nUsing the data in Table 1 to support your answer, identify how changes in inputs may result in constant returns to scale and in decreasing returns to scale.
\nDetermine:
\nDetermine:
\nDetermine:
\nCalculate the marginal revenue resulting from a fall in price from $8 to $6.
\nCalculate the price elasticity of demand when price falls from $10 to $8.
\nExplain why a profit-maximizing monopolist would never choose to operate on the inelastic portion of its demand curve.
\nState two characteristics of monopolistic competition.
\nCalculate Firm B’s short-run profit/loss at the profit-maximizing level of output.
\nUsing the diagram, explain how long-run equilibrium will be reached.
\nWith reference to the diagram, outline whether allocative efficiency will be achieved in the long run in a monopolistically competitive market.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
For the idea that if input/inputs are increased, there is a large increase in output / an increase in productivity
OR that average costs fall as output increases.
\n
2 Accurate definition. [2]
\nFor stating that an increase in all inputs leads to a proportionately greater increase in output
OR that an increase in all inputs by x% leads to a greater than x% increase in output.
Constant returns are seen when output increases from 3000 to 4000 units (33% increase in inputs and output).
\nDecreasing returns are seen if output increases from 4000 units – increase in inputs – 25% and then 20%, while output increases by 20% and then 14.6%.
\nOR by taking ratios of inputs and output (ie that 5/4 = 100/80 = 30/24 = 4800/4000 = 1.25)
\nFor identifying and illustrating one of these OR for identifying but not illustrating both. [1]
\nFor identifying and illustrating both. [2]
\nAny valid combination of inputs used should be accepted. A candidate who focuses on one factor of production only may be awarded a maximum of [1].
\n$0 or 0
\n$50
\n$40
\nCandidates who provide an answer of $20 per unit may not be awarded a mark here but should NOT be penalized in part (h) for the same error (giving the answer as “per unit”).
\n[1]
\nAny valid working is sufficient for [1] so either 24 or 12 would be sufficient.
\n= $2 [1]
\nAn answer of $2 or 2 without workings is sufficient for [1].
\nPED =
\nAny valid working is sufficient for [1].
\n= –5 or 5 [1]
\nOR an answer of 3 (or –3) if the midpoint method is used.
\nAn answer of 5 (or –5) without any valid working is sufficient for [1] only.
\nCorrect use of negative sign for ΔP may be present but is not necessary.
\nWhen demand is price inelastic, a decrease in output / increase in price will:
\nTherefore, the profit-maximizing monopolist would never choose to produce on the inelastic portion of its demand curve, as profit could always be increased by raising price. [1]
\nResponses which state that if demand is inelastic an increase in output will cause revenue to fall [1] and therefore profits will fall [1] may be awarded a maximum of [2].
\nOR an accurate explanation such as the one below may be fully rewarded:
\nMR = MC is a condition for profit maximization.
MC must be a positive number, so MR must be positive at the profit-maximizing
level of output.
If MR is positive, then demand must be elastic.
Award [1] for each valid characteristic up to a maximum of [2].
\n350 X (16 – 20) [1]
\nAny valid working is sufficient for [1].
\n= –$1400 (or a loss of $1400) [1]
\nAn answer of $1400 or 1400 without workings is sufficient for [1].
\n$4 with working should be awarded [1] for valid working.
\nIf the candidate provided a “per unit” answer in part (c)(iii) and again here, do not penalize again.
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 The response is limited. [1-2]
For an explanation that losses incurred will force some firms to leave the industry.
\n\n
2 The response is accurate. [3-4]
For an explanation that losses (of $1400) incurred will force some firms to leave the industry. As a result, the demand curve faced by remaining firms will shift to the right (reducing losses). The process will continue until remaining firms make normal profits.
\nIf there is no reference to the diagram (losses or $1400), a maximum of [3] may be awarded.
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 Vague outline. [1]
For stating that allocative efficiency requires that P = MC (or MB = MC).
\n\n
2 Accurate outline. [2]
For outlining that as P > MR, then P cannot equal MC when MR = MC.
\nA candidate who draws and refers to long run equilibrium on the diagram provided, explaining that it is inconsistent with the position of allocative efficiency, may be fully rewarded. Please note that stating the condition is sufficient for [1], even if the candidate goes on to provide the incorrect conclusion.
\nAmerican shrimp farmers taste victory
\n\n
Figure 1: Amount of shrimp imported to the US compared with domestic catch (thousands of tons)
\nDefine the term subsidies indicated in bold in the text (paragraph [2]).
\nDefine the term variable costs indicated in bold in the text (paragraph [7]).
\nUsing a supply and demand diagram with international trade values from the text, explain the statement that “The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically” (paragraph [2]) (Does not need to be to scale).
\nUsing an average costs diagram, explain the short-run consequence for shrimp farmers if the price received “is not enough to cover their variable costs” (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, discuss the view that the US should impose tariffs on the imported shrimp.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that the government gives money to an industry.
2 Accurate definition. [2]
An explanation that the government gives money to an industry in order to, any one of the following:
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that they are costs of production that change.
2 Accurate definition. [2]
An explanation that they are the costs of production that change as output changes (or increase as output increases).
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb or explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb and explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.
The numbers do not have to be on the diagram. Full marks may be awarded if the numbers from the text are used in the explanation with correct references to the quantities indicated on the diagram (eg 0Q1 is domestic supply of 100 million lb and Q1-Q2 is the imported amount of 1200 million lb).
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled SW or Sworld (to distinguish it from the domestic supply curve). S or SD are both fine for the domestic supply curve.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled costs diagram, showing AVC (MC not required for full marks) with a price below AVC or for explaining that since the shrimp farmers are not able to cover their average variable costs, some may have to shut down in the short run.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled costs diagram, showing AVC (MC not required for full marks) with a price below AVC and for explaining that since the shrimp farmers are not able to cover their average variable costs, some may have to shut down in the short run.
An alternate approach would be to show the price at the minimum of AVC and explain that if the price were to go below this level, the firms would have to shut down as they would no longer be able to cover their variable costs.
\nFor a costs diagram, the use of Price or Cost (P or C) on the vertical axis and Output or Quantity on the horizontal axis is sufficient.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized. [1–2]
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. [3–5]
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. [6–8]
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
Discuss requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nAny reasonable discussion.
\n\n
Almost all candidates were able to define this term.
\nThis question was not well-answered by the majority. Most candidates were able to access at least one mark, for a vague response, but clarity was lacking.
\nThis was well-answered by most candidates, suggesting that candidates are comfortable with the free trade diagram. Lower achieving responses showed a shift of the upward-sloping domestic supply curve.
\nA lot of information is given in this question, so that candidates familiar with this section of the theory of the firm were able to perform well. However, there were a lot of poor variants of the model. Many candidates seemed to remember parts of the theory, but were unable to apply it accurately. Common errors included not showing a price on the y-axis, mixing up fixed and variable costs, and labelling the AVC curve as the ATC curve.
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nThis is a standard AO3 question, and most candidates were able to gain at least three marks by presenting the standard tariff diagram with basic analysis. In order to access higher marks, there had to be a reasonable contextualisation of the market for shrimp in the US. There was a lot of information in the text that could be used to make an argument. Typically, candidates would provide a list of advantages and disadvantages of protectionism. As always, to access level 3, candidates needed to provide some synthesis/evaluation, and this was not often present. Very good answers would develop some theory in addition to the standard tariff analysis. (e.g. structural unemployment, comparative advantage, higher costs of production for producers using shrimp, consumer surplus).
\nExplain why a reduction in interest rates might lead to an increase in aggregate demand.
\nEvaluate the view that expansionary monetary policy is the most effective way to achieve economic growth.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the problems of expansionary monetary policy, such as inflation, that consumption and investment may not increase if business and consumer confidence are low, and the time lags associated with interest rate changes. Responses could also cover alternative policies to achieve economic growth, such as fiscal policy or supply-side policy.
\nExplain, using a production possibilities curve (PPC) diagram, an increase in the actual output of an economy.
\nDiscuss the view that economic growth always leads to a rise in living standards.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration that economic growth may not always lead to a rise in living standards because of factors such as environmental costs, the distribution of income, inflation and how the increased use of capital intensive technology may lead to unemployment.
\nExplain two reasons why the demand for primary commodities might be price inelastic.
\nDiscuss the significance of price elasticity of demand (PED) for a government imposing an indirect tax on a good.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nAward a maximum of level 2 marks if a candidate has only explained one reason why the demand for primary commodities might be price inelastic.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the extent to which government revenue and the production/consumption of the product will be impacted by the PED, consideration of the effect of PED on how the tax burden will be divided between consumers and producers, consideration of the effect of PED on workers (employment), consideration of the difficulties in measuring PED and in determining the socially optimal level of production/consumption (when taxes are imposed to limit the production/consumption of demerit goods).
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nInequality in China
\nDefine the term market-oriented policies indicated in bold in the text (paragraph [1]).
\nWith reference to the figures on the marginal propensity to consume (paragraph [5]), explain how the value of the multiplier in China would compare with the value of the multiplier in a more developed-market economy (no calculation required).
\nLevel
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that they are policies without government intervention.
2 Accurate definition. [2]
An explanation that they are policies that support the allocation of resources by supply and demand (or the price mechanism) rather than through government intervention in markets.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is limited understanding. [1–2]
For showing an understanding of the multiplier formula/equation/effect or for an explanation that the value of the multiplier in China would be lower than that in a more developed-market economy because the marginal propensity to consume (0.37) is lower than the average of more developed market economies (0.5).
2 There is clear understanding. [3–4]
For showing an understanding of the multiplier formula/equation/effect and for an explanation that the value of the multiplier in China would be lower than that in a more developed-market economy because the marginal propensity to consume (0.37) is lower than the average of more developed market economies (0.5).
An answer that contains only a correct formula for the multiplier should receive [1] only.
\nFor [4], some reference to the data must be included.
\nSome candidates simply gave examples of market-oriented policies for this question.
\nThis higher level extension topic was not well understood by lower achieving candidates, who wrote about many things other than the multiplier. Given the information in the text, it was a very easy question for candidates with mathematical understanding of the multiplier.
\nRelief as Kenya raises tariff for steel and iron imports
Kenya sees gross domestic product (GDP) growth picking up but current account a concern
\n[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November 2013]
\nDefine the term tariff indicated in bold in the text (paragraph 2).
\nDefine the term economic growth indicated in bold in the text (paragraph 2).
\nUsing an international trade diagram, explain the impact on the Kenyan government of implementing a tariff on steel imports.
\nUsing an exchange rate diagram, explain why a deficit in the current account may result in downward pressure on the Kenyan shilling (Kenya’s currency) (paragraph 5).
\nUsing information from the text/data and your knowledge of economics, evaluate the claim that trade protection measures will support economic growth in Kenya.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a barrier to trade or a tax.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is a tax on imported goods.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a growing economy (or an increase in GDP/output).
\n\n
2 Accurate definition. [2]
\nAn explanation that it is one of the following:
\nN.B. The term “over time” is not necessary for [2].
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve, with enough labelling so that it is possible to indicate, in some way, the area representing government revenue or for providing an explanation that the tariff causes the world supply curve to shift upwards (or the tariff causes the price to rise), creating government revenue [1] with the amount referenced to the diagram [2].
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve (with enough labelling so that it is possible to indicate, in some way, the area representing government revenue) and for providing an explanation that the tariff causes the world supply curve to shift upwards (or the tariff causes the price to rise), creating government revenue [1] with the amount referenced to the diagram [2].
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nThe use of P and Q on the axes is sufficient for an international trade diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
\nCandidates who use P and Q values to indicate the government revenue, eg (Q2Q3 x PW+T – PW), should be fully rewarded.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate or for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports, than coming in from the sale of exports, and so the supply of the shilling on the international money market increases, lowering its value.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate and for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports, than coming in from the sale of exports, and so the supply of the shilling on the international money market increases, lowering its value.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of shilling in another currency, other currency/shilling or other currency per shilling. The horizontal axis should be quantity, or quantity of shillings. A title is not necessary.
\nCandidates may state that the deficit means that overall there has been less demand for the currency because there has been less demand for the country’s exports, thus causing a shift in the demand curve to the left and a fall in the value of the shilling. If properly explained, with a correct diagram, then this approach may be fully rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n\n
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
\n
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nStrengths of protectionist measures:
\nLimitations of protectionist measures:
\nAny reasonable discussion.
\nAustralian economy feels the effects of falling iron ore price
\n
[Sources: Sydney Morning Herald: adapted from http://www.smh.com.au/business/markets/china-panic-feeds-into-australiansharemarket-20150708-gi7nyk.html
Marketwatch: adapted from www.marketwatch.com, accessed 26 July 2015. Reprinted with permission of MarketWatch, Copyright © 2015 Dow Jones & Company, Inc. All Rights Reserved Worldwide.]
Define the term depreciation indicated in bold in the text (paragraph 1).
\nDefine the term current account indicated in bold in the text (paragraph 1).
\nUsing an exchange rate diagram, explain why “slowing growth in China” may have caused a depreciation of the Australian dollar (paragraph 1).
\nUsing a demand and supply diagram, explain why “the double effect of slowing growth in China and higher levels of production in Australia has driven the price of iron ore lower” (paragraph 1).
\nUsing information from the text/data and your knowledge of economics, discuss the possible consequences for the Australian economy of the fall in the value of the Australian dollar.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that the exchange rate falls.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is a decrease in the value (price) of one currency (in terms of another currency) plus one of the following:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a measure of money, coming into and going out of a country, from international trade.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is a measure of the net flows of funds from trade in goods and services, income and transfers (or the balances of trade in goods and services, net incomes, and net transfers).
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram, with a shift of the demand curve for the Australian dollar to the left or for an explanation that slowing growth in China will lead to a fall in demand for Australian exports thereby reducing demand for the Australian dollar, causing the Australian dollar to depreciate.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled exchange rate diagram, with a shift of the demand curve for the Australian dollar to the left and for an explanation that slowing growth in China will lead to a fall in demand for Australian exports thereby reducing demand for the Australian dollar, causing the Australian dollar to depreciate.
\n\n
Candidates who incorrectly label diagrams can receive a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of AUS$ in US$, US$/AUS$ or US$ per AUS$. The horizontal axis should be quantity, or quantity of Australian dollars. A title is not necessary.
\n\n
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled demand and supply diagram with a shift of the demand curve to the left and a shift of the supply curve to the right or for an explanation that slowing Chinese demand and increasing supply by iron ore producers will both have caused a fall in the price of iron ore.
\n\n
2 There is a correct diagram and an accurate written response. [3–4]
\nFor drawing a correctly labelled demand and supply diagram with a shift of the demand curve to the left and a shift of the supply curve to the right and for an explanation that slowing Chinese demand and increasing supply by iron ore producers will both have caused a fall in the price of iron ore.
\n\n
If a candidate only shows and explains a single correct shift, then a maximum of [2] can be rewarded.
\nCandidates who incorrectly label diagrams can receive a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n\n
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
\n
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Possible negative consequences include:
\nPossible positive consequences include:
\nPossible mixed consequences include:
\nAny reasonable discussion that offers a considered and balanced review of the possible effect of a depreciating currency on Australia’s economic growth.
\nExplain how two types of economies of scale can lead to a fall in long-run average costs.
\nDiscuss the view that barriers to entry in a monopoly will always lead to abnormal profits in the long run.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: monopoly firms do not always earn abnormal profits even with barriers to entry due to insufficient demand for their products (resulting from changing consumer tastes, technological obsolescence, etc); governments often regulate or nationalize monopolies, resulting in lower prices and profits; monopolies may have goals different from profit maximization (such as revenue maximization, technology development, etc); consideration of the word “always”.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nThe following diagram illustrates the domestic market for rice in Country Alpha.
\n\n
The following table provides selected data from the balance of payments for Alpha for 2016.
\nTable 1
\nCalculate the social surplus at the equilibrium market price.
\nThe government in Alpha imposes a price ceiling of $5 per kilogram.
\nCalculate the resulting shortage in the market.
\nThe government in Alpha imposes a price ceiling of $5 per kilogram.
\nCalculate the change in the consumer surplus after the imposition of the price ceiling.
\nThe government in Alpha imposes a price ceiling of $5 per kilogram.
\nCalculate the welfare loss after the imposition of the price ceiling.
\nA new government in Alpha decides to abolish the price ceiling. Instead, it opens the rice market to imports. The world supply of rice is perfectly elastic; any quantity can be bought for $3 per kilogram.
\nUsing the diagram, calculate the import expenditures on rice.
\nDefine the term comparative advantage.
\nExplain two limitations of the theory of comparative advantage.
\nAlpha’s government decides to impose a $2 tariff on each kilogram of imported rice. Using the diagram, calculate the government revenue that results from the imposition of the tariff.
\nUsing the data in Table 1, calculate Alpha’s current account balance for 2016.
\nOutline how Alpha’s current account balance for 2016 is likely to affect the exchange rate of its currency.
\nState one way in which the government of Alpha might bring about a depreciation of its currency.
\nFollowing the depreciation, it is observed that the current account balance worsens initially, but improves after a certain period of time. Explain why this might be expected to happen.
\n0.5 X 8000 (14 – 2) [1]
\nAny valid working is sufficient for [1].
\n$48 000 [1]
\nAn answer of $48 000 or 48 000 without any working is sufficient for [1].
\n3000 kg
\n(0.5 X 12 X 6000) – (0.5 X 8 X 8000) [1]
\nAny valid working is sufficient for [1].
\n= $4000 [1]
\nAn answer of $4000 or 4000 without any workings is sufficient for [1].
\nNB if a candidate has calculated the initial consumer surplus in part (a) as part of the social surplus (and workings are seen for this) the “valid working” mark may still be awarded.
\n0.5 X 2000 X 3 [1]
\nAny valid working is sufficient for [1].
\n= $3000 [1]
\nAn answer of $3000 or 3000 without any working is sufficient [1].
\n3 X (11 000 – 2000) [1]
\nAny valid working is sufficient for [1].
\n= $27 000 [1]
\nAn answer of $27 000 or 27 000 without any working is sufficient for [1].
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that one country can produce more efficiently than another country.
\n\n
2 Accurate definition. [2]
\nAn explanation that it is when a country can produce a product at a lower opportunity cost than another country.
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For a limited explanation of one limitation [1].
For an accurate explanation of only one or a limited explanation of two limitations [2].
\n
2 The written response is accurate. [3-4]
For accurately explaining any two of the following limitations:
\n
For providing an accurate explanation of one limitation and a limited explanation of another [3].
For providing accurate explanations of two limitations [4].
\n2 (9000 – 6000) = $6000
\n(852 – 829 + 409 – 435) +144 – 170 [1]
\nAny valid working is sufficient for [1].
\nValid working must include (852 – 829 + 409 – 435), and may include +144 or –170 but neither –288 or 361 (as these are not current account items).
\n= –$29 million [1]
\nLevel
\n0 The work does not reach a standard described by the descriptors below. [0]
\n
1 Vague outline. [1]
For the idea that a deficit will cause the exchange rate to fall.
\n\n
2 Accurate outline. [2]
For outlining that a current account deficit implies that the supply of the currency exceeds the demand for the currency causing the exchange rate to depreciate
OR demand for currency shifts (has decreased) left OR supply of currency shifts (has increased) right, (or, both) either of which causes a depreciation.
OFR applies if a current account surplus has been calculated in part (f)(i).
\nThe central bank may:
\nLevel
0 The work does not meet a standard described by the descriptors below. [0]
\n
1 The written response is limited. [1-2]
For the idea that a depreciation makes exports cheaper (and imports more expensive) leading to increased net exports and thus causing an improvement in the current account balance.
\n\n
2 The written response is accurate. [3-4]
For an explanation that the effect of a depreciation, which makes exports cheaper (and imports more expensive) depends on the price elasticities of demand for exports and imports; short-term elasticities are relatively low and therefore the current account balance may worsen; only in the long term, when the Marshall-Lerner condition is satisfied, namely that the sum of these elasticities must exceed unity, will it improve.
\nNB It is not necessary to refer explicitly to the Marshall-Lerner condition or the J-curve effect.
\nExplain the impact that a cut in taxation and an increase in government spending might have on the circular flow of income.
\nDiscuss whether the real gross national income (GNI) per capita of a country is a good indicator of its standard of living.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nAward a maximum of level 2 marks if a candidate only refers to either a cut in taxation or an increase in government spending (but not both).
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the limitations of using real GNI per capita to measure the standard of living such as the lack of information about the distribution of income and the composition of output, measurement problems and non-income factors (leisure time, quality of environment) affecting the well-being of the population; consideration of alternative measures such as HDI and “green GDP” per capita; consideration of the meaning of “standard of living”.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nExplain the effect an increase in investment might have on real gross domestic product (GDP) using the Keynesian multiplier.
\nDiscuss the view that interventionist supply-side policies are the most effective way for a government to achieve economic growth.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nAward a maximum of level 2 marks if a candidate does not use the concept of the Keynesian multiplier.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of alternative policies (market-based supply-side policies, expansionary monetary policies, expansionary fiscal policies) with regard to factors such as time lags, the ability to create employment, the impact on the government budget, the short-run effect on the AD, the administrative requirements and the political support required for their implementation, social effects and effects on the environment.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nJapan–European Union Economic Partnership Agreement (JEEPA)
\n[Source: adapted from The Japan-EU Trade Agreement: Pushing Back Against Protectionism, http://globalriskinsights.com,
15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by Katherine Hyunjung Lee, Jul 12, 2017, Medill
News Service, https://dc.medill.northwestern.edu; and A new trade deal between the EU and Japan, The Economist (London,
England), Jul 8th 2017, https://www.economist.com/finance-and-economics/2017/07/08/a-new-trade-deal-between-the-eu-andjapan.
© The Economist Newspaper Limited, London, July 8th 2017]
Define the term quota indicated in bold in the text (paragraph [4]).
\nDefine the term sustainability indicated in bold in the text (paragraph [6]).
\nUsing an AD/AS diagram, explain the impact of the trade agreement between Japan and the EU (JEEPA) on Japan’s economic growth (paragraph [1]).
\nUsing an international trade diagram, explain the likely impact of Japan “removing the current 30 % tariff” on the level of cheddar cheese imports. (paragraph [4]).
\nUsing information from the text/data and your knowledge of economics, evaluate the possible consequences of the trade agreement between Japan and the EU (JEEPA).
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be “price level” or any similar terms such as “average (general) price level”. For the horizontal axis, “real (national) output/income” or “real GDP”. Any relevant abbreviations are acceptable.
A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of price and quantity for the axes is sufficient. The domestic supply curve may be labelled as Sdomestic or Sd or just S and the European supply curve may be labelled SEurope, SEU, or Sworld, or Sw.
A title is not necessary.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nA definition of:
\nStrengths of the trade agreement:
\nLimitations of the trade agreement:
\nAny reasonable evaluation.
\nA fall in income leads to a fall in demand for a good. Explain this relationship between the demand for the good and consumer income.
\nEvaluate the consequences of rising incomes on service sector producers (such as hotels) and primary sector producers (such as rice farmers).
\nAnswers may include:
\nAward a maximum of level 2 if there is no mention of normal goods and/or income elasticity.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nAward a maximum of level 2 if the focus is only on supply as this is a poor interpretation of the question.
\nBoth the primary and the service sectors need to be covered accurately to go beyond the mid-point of level 2.
\nEvaluation may include: consideration that there are some types of service sector goods, such as budget hotels that might experience a fall in demand as incomes rise; that some low income consumers may increase their demand significantly for rice as their incomes rise.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why the consumption of merit goods, such as healthy food, can lead to positive externalities of consumption.
\nDiscuss whether advertising by the government is the most appropriate way of increasing consumption of a merit good.
\nAnswers may include:
\nAward a maximum of level 2 if there is no illustration of the types of positive externalities that could occur with the merit good described, for example, less government spending on health care.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: whether advertising will influence demand, other factors that influence the demand for merit goods, alternatives to advertising like subsidies, legislation and direct provision.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how aggregate demand might be affected by an increase in interest rates.
\nDiscuss whether the use of fiscal policy is the most effective way to bring an economy out of a recession.
\nAnswers may include:
\nAward a maximum of level 2 if the response fails to link the increase in interest rates to at least two components of AD.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the limitations of fiscal policy like the effect on the government budget, time lags, the difficulty of promoting economic activity in a recession and the significance of the multiplier effect. There may also be reference to alternative policies like monetary and supply-side.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the factors that cause demand-pull and cost-push inflation.
\nDiscuss the view that deflation will always be bad for an economy.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: consideration of the possible benefits of deflation, eg increased export competitiveness, caused by increases in AS and benefits to savers. Consideration of the word “always”.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why an increase in incomes over time may lead to an increase in demand for some goods but a decrease in demand for other goods.
\nThe income elasticity of demand for primary commodities tends to be relatively low, while the income elasticity of demand for manufactured goods and services tends to be higher. Examine the likely effects of this for individual producers and for the economy as a whole.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nExamination may include: the differences in YED in developed and less developed economies, the importance of YED at different stages of development, the values of YED may change over time, the relative growth rates of different economies and the impact on YEDs.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why demerit goods are an example of market failure.
\nEvaluate the effectiveness of using indirect taxation to correct market failure.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the impact on different stakeholders in terms of price, consumption, production, employment, welfare and the wider economy; the problems of determining the level of tax to achieve the socially efficient output.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain two factors that might give rise to economies of scale for a firm.
\nDiscuss the view that legislation is the best way of dealing with the problem of monopoly power.
Answers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the advantages and disadvantages of government responses including legislation, regulation, nationalization and trade liberalization, to the problem of monopoly power.
\nN.B.: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how expansionary fiscal policy could be used to close a deflationary (recessionary) gap.
\nEvaluate the view that fiscal policy is the most effective way of achieving long-term economic growth.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the type of fiscal policy and how it is financed, advantages and disadvantages of fiscal policy, consideration of alternative policies, such as monetary and supply-side policies, consideration of ‘best.’
\nNB Candidates who only consider the effects of fiscal policy on AD, and do not consider the supply side effects on long-term economic growth cannot be awarded above Level 2.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain two reasons why a government might want to subsidize a good or service.
\nDiscuss the view that governments should tax the consumption of gasoline (petroleum).
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: consideration of reasons against (impact on business costs, impact on low income car owners), for example, some governments could subsidize it.
\nN.B.: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain what effect a reduction in interest rates might have on consumption and investment.
\nEvaluate the effectiveness of using monetary policy to reduce the rate of inflation.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the importance of the type of inflation, the ability to adjust interest rates incrementally and relatively quickly, the significance of time lags, possible conflicts with other objectives of economic policy, such as inflation and growth.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the possible impact of an increase in wealth and consumer confidence on aggregate demand.
\nExamine why, in contrast to the monetarist/new classical model, the economy will not automatically return to the full employment level of output in the Keynesian model.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the importance of the type of unemployment, the degree to which both models represent extreme theoretical ends of a spectrum, the degree to which reality deviates from the models, the difficulty of establishing what is full employment, policy implications.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the causes of economic growth in terms of an increase in actual output and an increase in potential output.
\nDiscuss the view that the consequences of economic growth are always beneficial.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: a consideration that growth is “always” beneficial, the overall costs of growth in relation to its overall benefits, the costs and benefits of growth in terms of the nature of goods produced, how growth might widen the distribution of income, short-term versus long-term consequences of growth and the link between growth and development.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why some firms might choose the goal of profit maximization while others might choose to adopt satisficing behaviour.
\nDiscuss whether price will always be lower and output will always be higher in perfect competition compared to monopoly.
Answers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the benefits of monopoly like economies of scale, which could lead to lower prices and higher output.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how the price elasticity of demand for a good might be affected by the number and closeness of substitutes.
\nExamine the significance of price elasticity of demand for the decision making of firms and government.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nExamination may include: situations where a change in price would not lead to a rise/fall in total revenue/tax revenue, different price elasticities, other factors affecting demand that cause a change in total revenue/tax revenue, the impact of time on PED when price changes. Responses which consider the significance of PED for firms or government only (not both) should not be rewarded above Level 2
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why structural unemployment might occur in an economy.
\nEvaluate government policies to deal with the different types of unemployment.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nExamination may include: the effectiveness of fiscal, monetary and supply-side policies in terms of dealing with the different types of unemployment including the limitations of using demand management to deal with anything other than cyclical unemployment and the suitability of various supply-side policies. In addition, the short-run/long-run implications of using demand management and supply-side policies may be evaluated.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThe following diagram illustrates the production possibilities of two countries, Country A and Country B, in the production of cotton and bananas.
\nTable 5 provides information relating to the Balance of Payments for Urbania for 2017.
\nTable 5
\nUrbania has a current account deficit of $125 million in 2017.
\nUsing the diagram, calculate the opportunity cost of producing one tonne of bananas in Country A.
\nUsing information provided in the diagram to support your answer, determine which country should specialise in the production of cotton.
\nDistinguish between the terms absolute advantage and comparative advantage.
\nExplain two reasons why specialisation in a narrow range of primary products according to the theory of comparative advantage might not benefit an economically less developed country.
\nCalculate the value of V (exports of services) for Urbania in 2017.
\nDistinguish between direct investment and portfolio investment.
\nUsing the information in Table 5, calculate the financial account balance.
\nUsing your answer to part (g)(i), calculate the value of W (reserve assets) in Table 5.
\nUsing your answer to part (g)(ii), describe how the level of reserve assets in Urbania changed by the end of 2017.
\nThe government of Urbania is concerned that the rate of inflation is significantly higher than in its close trading partners.
\nOutline how Urbania’s relatively high rate of inflation might affect its current account balance.
\nOutline one method, other than attempting to reduce the value of its currency, which may be used by the government of Urbania to reduce its current account deficit.
\nExplain how a depreciation of the Urbanian dollar ($) might result in a J-curve effect.
\nof a tonne of cotton (0.375 tonne cotton or 375 kilograms of cotton or 0.38 tonne cotton).
\n1527 + V − 1393 − 954 − 35 − 49 = −125
\nAny valid working is sufficient for [1].
\nV = $779 million
\nAn answer of 779 without working is sufficient for [1].
\nCurrent account + capital account + financial account = 0
\n− 125 + (6 + 11) + financial account = 0
\nAny valid working is sufficient for [1].
\nFinancial account = $108 million
\nNet portfolio + net direct + W = financial account
\n285 − 196 + W = 108
\nW = $19 million
\nOFR applies.
\nThe level of reserve assets in Urbania has decreased.
\nOFR applies.
\nN.B.: A sketch of a J curve, without any explanation, would only be sufficient for 1 mark (only if it is properly labelled).
\nExplain how the overuse of common access resources can lead to negative externalities.
\nDiscuss the view that the best way to reduce the threat to sustainability, arising from the burning of fossil fuels, is for the government to provide subsidies to firms that produce energy through renewable sources.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: alternative policies that could be used instead of subsidies, consideration of the impact of subsidies on different stakeholder groups, negative effects on the fossil fuel industry. It could also consider the short-term costs of subsidies and the long-term benefits on sustainability.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nTable 3 illustrates the exchange rates between the US dollar (US$) and the Mexican peso (MX$) between 2013 and 2017.
\nFigure 5 illustrates the year-on-year changes in Mexico’s spending on imports of goods and services between 2008 and 2017.
\n[Source: The World Bank 2019: World Development Indicators Licenced under CC BY 4.0
https://creativecommons.org/licenses/by/4.0/.]
Figure 6 illustrates the demand and supply conditions for rice in Country B, where Dd is domestic demand, Sd is domestic supply and Sw is world supply.
\nCountry B imposes a tariff on rice imports, which is illustrated on Figure 7.
\nCalculate the value of the Mexican peso (US$ per MX$) in 2015. Enter your result in Table 3.
\nUsing Table 3, state one possible effect on Mexican consumers and one possible effect on Mexican producers from the change in the value of the Mexican peso (US$ per MX$) between 2014 and 2016.
\nUsing Figure 5, state two likely causes for the change in Mexico’s spending on imports of goods and services in 2009.
\nUsing information from Figure 5, sketch an exchange rate diagram to show how the change in Mexico’s spending on imports in 2010 would have affected its exchange rate (US$ per MX$), ceteris paribus.
\nExplain two factors that may cause the Mexican peso to appreciate against the US dollar in the future without any official intervention.
\nUsing Figure 6, identify the equilibrium price when Country B engages in free trade.
\nUsing Figure 6, calculate the consumer surplus and the producer surplus when Country B engages in free trade.
\nUsing Figure 7, identify the equilibrium quantity being consumed following the imposition of the tariff.
\nUsing Figure 7, calculate the revenue received by the government as a result of the imposition of the tariff in Country B.
\nUsing Figure 7, calculate the change in consumer surplus as a result of Country B imposing the tariff.
\nUsing Figure 7, calculate the welfare loss as a result of Country B imposing the tariff.
\nExplain two methods that a government could use to correct a persistent current account deficit.
\n0.06 is sufficient for [1]
\nThe answer may be either in the table or in the space provided below the question.
\nAward [1] for each valid reason up to a maximum of [2]:
\n[1] for labelled S and D curves with a shift of S to the right
[2] for labelled S and D curves with a shift of S to the right AND for showing the fall in the value of the peso.
$4 OR 4 is sufficient for [1].
\nCS: 0.5 (12 − 4) × 8 = $32 million
\nOR
\n32 is sufficient for [1].
\nNB Neither units nor workings are required.
\nPS: 0.5 (4 − 1) × 2.5 = $3.75 million
\nOR
\n3.75 is sufficient for [1].
\nNB Neither units nor workings are required.
\nOFR applies, eg if answer to (i) is $7, then CS: $12.5 million PS: $15 million.
\nQuantity = 6.5 million kilograms (million kgs) OR 6.5 is sufficient for [1].
\nNB Superfluous units may be ignored.
\n1.5 (6.5 − 3.75)
\nAny valid working is sufficient for [1].
\n= $4.125 million OR $4.13 million
\nNB Either answer is acceptable for [1].
\nAn answer of 4.125 or 4.13 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working with correct units. However, superfluous units may be ignored.
\n−0.5 (6.5 + 8) × 1.5 OR 21.125 − 32
\nAny valid working is sufficient for [1]
\n= −$10.875 million
\nOR
\n−$10.88 million
\nNB Either answer is acceptable.
\nAn answer of a decrease of 10.875 or 10.88 without workings is sufficient for [1].
\nOFR applies. If answer to (d)(i) is $7, then 0.5 (6.5 + 5) × 1.5 = $8.625 million OR 21.125 − 12.5 = $8.625 million
\nOFR also applies, if the initial CS is calculated incorrectly in (d)(ii).
\nFor full marks to be awarded, the response must provide valid working with correct units. However, superfluous units may be ignored.
\nNB If a candidate is penalized by [1] for missing units and missing negative sign, then they should not be penalized again in (e)(iv) for missing units.
\n0.5 (1.5 × 1.25) + 0.5(1.5 × 1.5)
\nAny valid working is sufficient for [1].
\n= $2.0625 million OR $2.06 million
\nNB Either answer is acceptable.
\nAn answer of 2.0625 or 2.06 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working with correct units. However, superfluous units may be ignored.
\nOFR does not apply, since there would be a welfare gain if the answer to (d)(i) were $7.
\nWell-answered. Most students were able to perform the calculation correctly.
\nAlthough a minority of candidates incorrectly interpreted the change as an appreciation of the peso, consequently producing incorrect answers, most candidates focused on higher import prices for consumers and the potential for increased exports for firms.
\nSome students read the graph incorrectly and responded on the basis of an increase in import spending in 2009. Most, however, were able to provide two causes of the fall in import spending.
\nGenerally well-answered by the majority. Weaker students tended to shift the demand curve to the right, which would reflect increased export revenue rather than decreased import spending.
\nSome responses did not fully consider the factors that would actually cause an appreciation of the peso, but instead simply outlined that exports might have increased. To reach level 2, candidates should analyse a factor that would increase exports.
\nWeaker candidates interpreted \"free trade\" as a free market (without international trade) and gave $7 as the answer. Most candidates provided the correct response.
\nAlthough many candidates were able to calculate CS and PS correctly, this is still a significant area of concern. Calculation of the relevant areas, using correct units, was a problem for a significant number of candidates.
\nGenerally well-answered.
\nA number of candidates were not able to read accurately from the graph and hence produced inaccurate calculations. In particular, the quantity of imports (6.5 − 3.75) was often incorrect. However, the majority of candidates earned full marks.
\nAs for part (ii), a significant number of candidates made careless errors. Additionally, many candidates neglected to specify a decrease in consumer surplus.
\nA number of candidates assumed that the two \"welfare loss triangles\" were of equal area and therefore calculated incorrectly. Stronger candidates were able to provide the correct response (for all of part (e)).
\nMost candidates had a good understanding of methods to correct a persistent current account deficit. One fairly common mistake, however, was to suggest that inflows on the financial/capital account should be encouraged. Furthermore, some candidates responded with a very narrow focus, providing two different types of trade protection rather than two methods as indicated in the subject guide.
\nExplain why the exploitation of common access resources, such as uncontrolled fishing, might pose a threat to sustainability.
\nEvaluate whether the use of carbon taxes is the most effective way for the government to deal with the threat to sustainability posed by the use of fossil fuels.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the limitations of using carbon taxes, such as identifying the size of the externality and estimating the impact on demand, the difficulty of identifying which firms are liable to the tax, the fact that taxes do not stop the use of fossil fuels but only discourage it; alternative methods, such as legislation and “cap and trade”; references to subsidies / investment in alternative energy sources.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why a loss-making firm in perfect competition would shut down in the long run.
\nDiscuss the view that perfect competition is a more desirable market structure than monopoly.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: reference to benefits of monopoly such as economies of scale, research and development, natural monopoly, and/or the disadvantages of monopoly (higher price, lower output). To focus on the word “desirable” in the question, discussion may also include the advantages and disadvantages of perfect competition.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how an increase in investment might lead to economic growth.
\nDiscuss the possible consequences of economic growth on living standards, unemployment and inflation.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the impact on different stakeholders. Workers may benefit due to there being more jobs available but consumers may not benefit because of the increase in prices. Or living standards may not increase equitably. In addition, the discussion may focus on the cause of the economic growth. If it is caused by an increase in AD then it is more likely to lead to inflationary pressure than if it was caused by an increase in LRAS. However, in the Keynesian range of the LRAS curve any increase in AD may not necessarily lead to an increase in inflation.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the impact that a fall in the world price of oil might have on aggregate supply and gross domestic product (GDP) in an economy.
\nEvaluate the view that economic growth is best achieved through improvements in technology.
\nAnswers may include:
\nExplanation may include: the perspective of an oil exporting country as an alternative to an oil importing country. In this case, a fall in the world price of oil would mean reduced export revenues, and as net exports are a component of aggregate demand, this would cause aggregate demand and GDP to decrease.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the effect of advances in technology being dependent on the skill level of the labour force and whether the technology is appropriate for the development level of the economy. The response may also consider how factors other than technology might affect LRAS such as the discovery of new natural resources and the importance of aggregate demand in affecting growth in the short term. A PPF diagram may be rewarded equally if used to explain economic growth effectively.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain why a high rate of inflation may negatively affect both a country’s export competitiveness and the level of capital investment by firms.
\nDiscuss the view that the use of monetary policy is always the best way to reduce inflation.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the impacts of monetary policy on the economy, trade, employment, households, savings, investment, confidence, etc. It may also consider the merits of monetary policy in comparison with alternative policies to control inflation. It may consider the merits of policy options in relation to cost-push versus demand-pull inflation.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how an increase in the costs of factors of production would affect the market price and output of a good.
\nDiscuss the consequences for different stakeholders in the economy of the government providing subsidies on goods, such as renewable energy.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the importance of price elasticity of demand, opportunity cost issues, externality issues, equity issues and efficiency issues.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how equilibrium interest rates are determined in an economy.
\nDiscuss whether an increase in interest rates is the most effective way of reducing the rate of inflation in an economy.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the limitations of monetary policy like time lags and the independence of the central bank. Also, the effectiveness of monetary policy may be reduced if inflation and interest rates are already very high. In addition there may be reference to alternative policies like fiscal policy and supply-side policies.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the cause of cyclical (demand-deficient) unemployment.
\nDiscuss the view that the most significant consequence of unemployment is the loss of tax revenue for the government.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the other economic and personal and social consequences of unemployment, eg loss of GDP, increased cost of unemployment benefits, greater disparities in the distribution of income or an increase in government spending due to falling tax revenues and increased unemployment benefits acting as an automatic stabilizer.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain how an increase in leakages can affect the size of the circular flow of income.
\nTo what extent is the use of national income statistics an effective way of comparing the standard of living between countries?
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: consideration of the limitations of national income statistics to compare living standards such as: different methods of calculation, the impact of different types of output on living standards, environmental factors, crime levels, political instability, the exchange rate and income distribution.
\nNB Definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nSouth Africa’s grain millers oppose corn tariff
\nDefine the term depreciation indicated in bold in the text (paragraph [6]).
\nDefine the term current account indicated in bold in the text (paragraph [6]).
\nUsing an exchange rate diagram, explain how “the need to import corn” will affect the value of the South African rand (paragraph [3]).
\nUsing a demand and supply diagram, explain the effect of government subsidies on the US corn market (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, evaluate the economic impacts of trade protection in the South African corn market.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram the vertical axis may be exchange rate, price of rand in dollars, or US dollars per rand, or USD/rand, or rand/USD. The horizontal axis should be quantity or quantity of rand or quantity of rand traded. A title is not necessary.
\nCandidates may include a World Supply Curve/Line and should not be penalized for doing so. It may be positioned in such a way as to impede imports or to promote exports. Both are valid approaches. So long as the explanation and diagram explain why the domestic supply line shifts right and the correct effects on the price and the quantity of corn produced in the USA, the answer can receive full marks.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
Advantages:
Disadvantages:
Explain how the value of the cross price elasticity of demand (XED) for a particular good is determined by its relationship to other goods.
\nExamine the significance of both cross price elasticity of demand and income elasticity of demand for a firm.
\nAnswers may include:
\nNB Candidates can only be awarded Level 4 if they consider both positive/negative and make at least some brief reference to magnitude, ie a maximum of Level 3 for consideration of just one or the other.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nExamination may include: relative importance of other factors which may affect firms, eg PED, the importance of the business cycle for YED, the degree to which XED and YED can be measured in reality, the tendency of YED and XED to change over time, the possibility of mergers between firms that produce substitute goods, the possibility of collaboration between firms that produce complementary goods.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nSouth Sudan joins the East African Community
\nFigure 1: Intra-East African Community* trade in goods (USD$bn)
\n* Burundi, Kenya, Rwanda, Tanzania and Uganda.
Not including South Sudan, which acceded to the treaty in 2016.
Define the term monetary union indicated in bold in the text (paragraph [1]).
\nDefine the term comparative advantage indicated in bold in the text (paragraph [5]).
\nExplain why “deteriorating terms of trade have resulted in a worsening of the current account” in South Sudan (paragraph [4]).
\nUsing a cost diagram, explain how membership in the common market may allow producers in South Sudan to gain economies of scale (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, evaluate the likely impact on South Sudan of its membership of the EAC common market.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a cost diagram, the vertical axis may be labelled Cost (C) or Average cost (AC) or Long run average cost (LRAC). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nAdvantages/opportunities of economic integration:
\nDisadvantages/challenges of economic integration:
\nAny reasonable evaluation.
\nExplain why prices tend to be relatively rigid in oligopolistic markets.
\nDiscuss whether an oligopolistic firm should collude rather than compete.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: consideration of the arguments in favour of collusion – economic (abnormal) profits (which can be re-invested in research and development and/or distributed to the shareholders); consideration of the arguments in favour of competition: lower prices and higher quantity for consumers, improved product quality/variety, increased market share for the competing firm(s), improved allocative and/or productive efficiency, difficulties of maintaining cartel structures due to the incentive of cartel members to cheat.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB Definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nSolar power in Kenya
\nDefine the term poverty trap indicated in bold in the text (paragraph [2]).
\nDefine the term total revenue indicated in bold in the text (paragraph [6]).
\nUsing an externalities diagram, explain how the widespread use of solar panels will decrease the negative externalities of consumption caused by the use of kerosene lamps (paragraph [5]).
\nUsing a theory of the firm diagram, explain the output and pricing decision of M-Kopa if it chooses to pursue the goal of revenue maximization (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, examine the extent to which access to credit and appropriate technology can contribute to economic development in Kenya.
\n
NB drawing the poverty cycle without comment [1]. Needs further explanation for [2].
\n\n
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe horizontal axis can be labelled output/quantity OR Q. The vertical axis can be labelled cost/benefit OR price/P. A title is not necessary.
\nCandidates who incorrectly label diagrams can be rewarded with a maximum of [3].
\nThe use of P/C/R and Q/quantity/output on the axes is sufficient for a theory of the firm diagram. A title is not necessary.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Examine” requires candidates to consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue.
Responses may include:
\nAny reasonable examination.
\nTo reach level 3, candidates must make reference to economic development, and both access to credit and appropriate technology should be addressed in reasonable depth. If a candidate only examines credit or appropriate technology a maximum of [5] should be awarded.
\nExplain two factors that would lead to an increase in the demand for a product.
\nDiscuss the view that competitive markets will always achieve allocative efficiency.
\nAnswers may include:
\nNB If only one non-price factor is explained, a maximum of Level 2 can be achieved.
Also, be aware of confusion between price and non-price factors and the difference between an increase in demand and an increase in the quantity demanded.
Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the difference between private and social optimality; challenges to the view expressed in the question in terms of such market failures as positive and negative externalities, merit goods and demerit goods, lack of provision of public goods, lack of information.
\nNB If candidates go straight into an evaluation of the view without sufficient explanation of how competitive markets achieve allocative efficiency, a maximum of mid L3 should be awarded.
\nN.B.: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nBurundi
\nList two components of the Human Development Index (HDI) (paragraph [2]).
\nDefine the term monetary policy indicated in bold in the text (paragraph [5]).
\nUsing a production possibilities curve (PPC) diagram, explain the effect on economic growth of the “destruction of much of the country’s physical, social and human capital” (paragraph [1]).
\nUsing an AD/AS diagram, explain why the “decrease in the prices of imports, especially oil” might reduce inflationary pressure (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, evaluate the challenges to economic growth and economic development faced by Burundi.
\nCandidates who incorrectly label diagrams can be rewarded with a maximum of [3].
\nFor a PPC, the axes could be two alternative products, one on each axis, eg Good A and Good B or Schools and Motor Cars; or two groups of products, eg Consumer Goods and Producer Goods.
\nCandidates who incorrectly label diagrams can be rewarded with a maximum of [3].
\nFor AD/AS, the vertical axis may be “average (general) price level”, “APL” or “price level”. For the horizontal axis, “real output”, “real national output”, “real income”, “real national income”, “real GDP” or “real Y”. Any abbreviations are acceptable. A title is not necessary. “AS” is a valid label for the SRAS curve.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nDiscussion of factors affecting growth and/or development
\nAny reasonable discussion.
\nUsing the concept of the multiplier, explain how an increase in investment might affect aggregate demand.
\nDiscuss the effectiveness of supply-side policies in reducing unemployment.
\nAnswers may include:
\nNB Candidates who do not refer to the concept of the multiplier should not be awarded marks beyond level 2.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: consideration of the disadvantages of supply-side policies (political opposition, opportunity cost for the government budget, time lag, increased inequality in income distribution) in reducing unemployment, consideration of alternative (demand-side) policies.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nExplain how income inequality might be measured in a country.
\nEvaluate the view that the best way to reduce income inequality in a country is by using progressive taxation.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the impact of progressive taxation in reducing income inequality including:
tax avoidance/tax evasion; disincentive effects; effects on efficiency; consideration of alternative approaches such as government spending on merit goods/transfer payments, minimum wage, consideration of `best’.
NB If only progressive taxation is considered, with explanation and evaluation of its impact, but no alternative policy is considered, a maximum of mid-Level 3 should be awarded, as the question would not have been fully answered in terms of `best way’.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nExplain the potential effects on the economic growth rate from a substantial increase in the number of skilled people of working age entering a country.
\nDiscuss the view that, apart from indicating economic growth rates over time, national income statistics are of little use.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: consideration of “little use”, the drawbacks of using national income statistics to make conclusions about the standards of living, practical difficulties of measurement and calculation, the narrowness of such statistics, economic growth versus economic development.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nNB Definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nExplain how expansionary fiscal policy could be used to close a deflationary (recessionary) gap.
\nEvaluate the view that fiscal policy is the most effective way of achieving long-term economic growth.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\n\n
Answers may include:
\nEvaluation may include: the type of fiscal policy and how it is financed, advantages and disadvantages of fiscal policy, consideration of alternative policies, such as monetary and supply-side policies, consideration of `best’
\nNB Candidates who only consider the effects of fiscal policy on AD, and do not consider the supply-side effects on long-term economic growth, cannot be awarded above Level 2.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\n\n
Chinese investment helps Peru to develop
\n[Source: adapted from “The World Bank Country Overview: Peru”, http://www.worldbank.org/en/country/peru/overview, 17 April
2017; and “The World Factbook”, https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html, 6 September 2017]
Define the term absolute poverty indicated in bold in the text (paragraph [2]).
\nDefine the term foreign direct investment (FDI) indicated in bold in the text (paragraph [4]).
\nExplain two reasons why Chinese companies may have been attracted into Peru (paragraph [4]).
\nUsing a poverty cycle diagram, explain how increased foreign direct investment might break the cycle (paragraph [4]).
\nUsing information from the text/data and your knowledge of economics, evaluate the factors that may allow Peru to continue to achieve high rates of economic growth in the future.
\nExample of poverty cycle (any cycle, starting and ending with an indicator of poverty, is acceptable):
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nFactors affecting economic growth:
\nTo reach level 3, students must be aware of the particular situation in the economy of Peru, not just present a discussion of growth factors in general.
\nThe majority of candidates could reach at least L1 by indication a specific monetary level of daily income but many still list the out-of-date figure “US$1 a day”.
\nThis is a common and hence well-attempted definition.
\nMost candidates could identify 2 reasons, but fewer could provide sufficient explanation. As it is often the case for questions without a diagram, candidates were unsure of the extent to which they needed to elaborate on the two reasons and often over-elaborated.
\nThere were lots of variations of the poverty cycle and most were appropriate. Often, candidates struggled to explain how FDI would break the cycle and instead explained their poverty cycle which was not required by the question.
\n“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nThe candidates who had the most difficulties with this question were those who did not read the question carefully enough and wrote on the policies which contributed to economic development in Peru. Many also discussed the policies which the government could adopt to promote growth.
\nAs for other parts (d), some candidates just repeated the text and failed to use economic theory to explain the impact on future levels of economic growth. An AD/AS framework could have helped many achieve higher marks. Some candidates could not achieve L3 due to a lack of evaluation. Those who reached L3 were often those who considered factors that might hinder economic growth in the future such as the price volatility or depletion of minerals and other primary products.
\nWith reference to the concept of excess demand, explain how a decrease in supply of a good would lead to a new market equilibrium.
\nA government decides to impose an indirect tax on unhealthy drinks. Discuss the consequences for the stakeholders in these markets.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: the importance of price and cross elasticities of demand, equity issues, micro and macro-economic consequences.
\nSome responses may approach unhealthy food as a demerit good leading to market failure / negative externalities of consumption. This can be credited equally if it leads to a valid discussion.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nCanadian drywall tariffs will continue
\n[Source: adapted from Drywall tariffs will continue, www.kamloopsthisweek.com, 5 January 2017]
\nDefine the term dumping indicated in bold in the text (paragraph [2]).
\nDefine the term variable costs indicated in bold in the text (paragraph [4]).
\nUsing a tariff diagram, explain the effect of the “preliminary tariffs” on Canadian consumers of drywall (paragraph [3]).
\nUsing a demand and supply diagram, explain how the “imposition of the preliminary tariff” may have affected the market for new homes built in Canada (paragraph [4]).
\nUsing information from the text/data and your knowledge of economics, evaluate the effect of the tariff on drywall on different stakeholders.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\nCandidates who incorrectly label diagrams can receive a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
\n\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and
limitations. Opinions and conclusions should be presented clearly and supported with
appropriate evidence and sound argument.
Responses may include:
Consumers of drywall (Canadian building firms):
\nDomestic producers of drywall:
\nUS producers of drywall:
\nThe Canadian government:
\nCanadian economy:
\nAny reasonable evaluation.
\nTo reach level 3, students must be aware of the particular situation in the Canadian drywall market on specific stakeholders, not just present an evaluation of tariffs in general.
\nMany candidates had no problem in defining 'dumping' accurately in terms of exporting goods at below cost of production. However, a significant number produced imprecise or inaccurate definitions eg: ''a price below the market equilibrium''; ''a price below the world price'' or ''exporting at a low price''.
\nThe key point in defining variable costs is that they are costs that vary with output. Simply giving examples of variable costs or stating that ''they are costs that are not fixed'' is not acceptable as an accurate definition.
\nDiagram: Most candidates were familiar with the tariff diagram, producing well constructed and accurate diagrams. Labelling of diagrams, however, still produces many problems. It should be emphasized to candidates that inaccurate labelling results in a loss of marks. The most common inaccuracy was the labelling of 'world supply' as 'world price'. Other unacceptable labelling included 'quantity demanded on the horizontal axis' and 'price level' on the vertical axis. Explanation: Many candidates disregarded the wording of the question ie the effect of the tariff on the consumer and used the question as a vehicle to explain all features of the diagram, explaining the effects on the Canadian producers, the US producers and the government, etc. While including other stakeholders will not lose marks, it will cost the candidate a considerable amount of time that could have been more usefully used on other questions.
\nGenerally, this was well answered. Candidates identified that the imposition of the tariff increased costs of production to house builders and that this was a condition of supply, causing the supply curve to decrease. The best answers explained the impact on the market in a simple and concise interpretation of the diagram.
\nA major error by a small minority of candidates was to state that the imposition of a tariff would decrease demand. By decreasing the demand curve any explanation is likely to be inaccurate.
\nThis question offered candidates the opportunity to develop points made in parts (c) and (d) as well as examining the impact on other stakeholders.
\nUse of text: The best candidates used the text appropriately in support of economic analysis. Less successful candidates relied heavily on quotes from the text with little in the way of development or value added.
\nAnalysis: While most candidates identified the relevant stakeholders, too often they produced a generic list of the effects of tariffs on stakeholders. Many candidates took a descriptive approach, adding little value to the content of the text. Where there was analysis sometimes, it often lacked depth, relying on statements without explanation/reasoning. Such an approach is unlikely to achieve more than L1. There were, however, some outstanding answers, highlighting clear understanding coupled with a sophisticated approach.
\nEvaluation: There was limited effective evaluation in many of the answers. Many candidates appeared to think that evaluation involves summarising the points made in the body of the answer. On occasions when evaluating many candidates did make realistic judgements eg ''30 new jobs will significantly reduce Canada's unemployment rate''. There were, however, examples of outstanding evaluative comment.
\nCurrent account deficit poses a challenge to Pakistan’s economy
\n[Source: adapted from Current account deficit may lead to IMF loan: FPCCI chairperson, https://www.thenews.com.pk/
print/226102-Current-account-deficit-may-lead-to-IMF-loan-FPCCI-chairperson and Current account deficit poses biggest
challenge to economy: SBP, https://www.thenews.com.pk/print/225481-Current-account-deficit-poses-biggest-challenge-toeconomy-
SBP. Copyright © The News International, Karachi, Pakistan.]
List two functions of the central bank (paragraph [2]).
\nDefine the term fiscal policy indicated in bold in the text (paragraph [5]).
\nUsing an exchange rate diagram, explain how the central bank might depreciate the value of the rupee (paragraph [3]).
\nExplain the difference between a current account deficit and a budget deficit (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the effects of the increasing current account deficit on Pakistan’s economy.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nCandidates whose explanation does not correspond to the diagram (eg the candidate explains increase of supply, but the diagram shows decrease of demand) can be awarded a maximum of [2].
\nFor an exchange rate diagram, the vertical axis may be labelled exchange rate, price of rupee in terms of another currency, another currency per rupee, another currency/rupee. The horizontal axis should be labelled quantity (of rupees). A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nPositive effects:
\nNegative effects:
\nAny reasonable discussion.
\nTo reach level 3, students must be aware of the particular situation in Pakistan, not just present an evaluation of a current account deficit in general.
\n\n
Most candidates defined the term accurately.
\nGenerally accurately defined.
\nThere some excellent answers to this question with good, clear and accurately labelled diagrams coupled with a concise explanation. Most candidates explained the depreciation in terms of increased supply of rupees. A minority explained it in terms of decreased demand for rupees. Both were acceptable.
\nWeaknesses: incorrect labelling; failure to explain how the central bank might increase the supply of rupees (decrease demand); and a confusion between internal and external money supply.
\nIn many cases a current account deficit was only partially explained. Candidates often defined the current account in terms of the balance of trade only. Also, the current account was explained in volume terms rather than value.
\nBudget deficit was generally well understood and defined accurately
\nThis question posed problems with many candidates focusing on how to reduce a current account deficit rather than on its consequences. Those that did attempt to discuss the effects did so superficially. Other candidates attempted to interpret the question in terms of exchange rates. While there was some relevance, such an approach was too narrowly based. The few candidates that did attempt to examine the effects often produced unbalanced answers with very few identifying any positive effects for Pakistan.
\nExplain how the price mechanism reallocates resources when there is an increase in demand for a good or service.
\nTo what extent is advertising the most effective way of increasing the consumption of merit goods?
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the cost of advertising, the effectiveness of advertising and reference to alternative ways to increase the consumption of merit goods.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nEconomic development in two West African countries
\nGhana
\n\n
Table 1: Selected economic data for Ghana and Nigeria
[Source: adapted from UNDP Ghana country profile, http://hdr.undp.org, accessed 19 February 2019;
UNDP Nigeria country profile, http://hdr.undp.org, accessed 19 February 2019; About Ghana, http://hdr.undp.org,
accessed 19 February 2019; About Nigeria, http://hdr.undp.org, accessed 19 February 2019]
* measles: a highly contagious disease that is one of the leading causes of death among young children
\nState the reason for the difference between Ghana’s GNI per capita and its GDP per capita (Table 1).
\nDefine the term Gini coefficient indicated in bold in Table 1.
\nUsing an externalities diagram, explain why the percentage of infants receiving measles vaccinations in Nigeria indicates the existence of a market failure (Table 1).
\nUsing a demand and supply diagram, explain how the cut in fuel subsidies may have had “severe consequences for low-income households” (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, compare and contrast the level of economic development in Ghana and Nigeria.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an externalities diagram, the vertical axis may be price, p, or costs/benefits. The horizontal axis may be quantity or q. A title is not necessary.
\nAn alternate approach would be to draw a subsidy diagram that shows what happens to price as the subsidy is reduced.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis may be price, or p. The horizontal axis may be quantity or q. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Compare and contrast” requires the candidate to give an account of similarities and differences of two situations, referring to both of them throughout.
Responses may include:
\nEconomic analysis, focusing on economic development, may include:
\nTo explore the impact on:
Similarities between Ghana and Nigeria:
Differences between Ghana and Nigeria:
\nAny reasonable evaluation.
\nChina’s increasing presence in Bolivia
\n[Source: adapted from Financial sovereignty or a new dependency? How China is remaking Bolivia,
http://nacla.org/blog/2017/08/11/financial-sovereignty-or-new-dependency-how-china-remaking-bolivia,
10 August 2017, this article was originally published by NACLA; and Trading Economics, Bolivia Current Account,
https://tradingeconomics.com/bolivia/current-account, accessed 9 October 2017]
Define the term interest rates indicated in bold in the text (paragraph [5]).
\nDescribe the nature of foreign direct investment (paragraph [6]).
\nUsing information from the text, explain two reasons why Chinese multinational corporations (MNCs) are investing in Bolivia.
\nUsing an externalities diagram, explain how the Chinese infrastructure projects have caused negative externalities (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, discuss the possible effects of Chinese involvement on economic growth and development in the Bolivian economy.
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe y axis may be labelled price but could be costs or benefits and the x axis labelled quantity.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nPositive outcomes for growth and/or development:
\nNegative outcomes for growth and/or development:
\nAny reasonable discussion.
\nTo reach level 3, students must be aware of the particular situation in the Bolivian economy, not just present a discussion of growth and development factors in general. They must also present a balanced evaluative approach between both growth and development.
\n\n
Most students were able to define this term accurately.
\nMost students received 1 mark but a significant number failed to identify two points from the list in the markscheme to obtain 2 marks.
\nThere were some excellent answers where candidates identified two reasons from the text and explained them effectively. Other candidates, however, scored badly as their answers addressed the reasons why China (the country) invests in Bolivia rather than the MNCs. In other instances students copied sections of the text but with no added value.
\nOverall it was evident that there was a good understanding of the concept of externalities but this was often spoiled by careless inaccuracies / omissions. Too often, on otherwise excellent answers, negative externalities or welfare loss was not identified on the diagram as required. Also the welfare loss was frequently inaccurately placed on the diagram. Most candidates used the negative externalities of production approach while a minority analysed in terms of negative externalities of consumption. Both were acceptable as long as the explanation matched the diagram. This was not always the case and on occasions there was a dis-connect between the diagram and explanation.
\nMany candidates did not answer the question with few making a clear distinction between growth and development. The focus of a large number of answers was on how growth could be achieved, not the impact of the involvement of China on growth and development in Bolivia. The focus of many candidates was on growth, often ignoring development or simply stating ''....leads to growth and therefore development''. There were too many assertions/statements without reasoning or justification. This resulted in unbalanced and/or superficial answers, which resulted in a L1 or low L2 mark.
\nExplain two reasons why a government might impose an indirect tax on a good.
\nEvaluate the impact that an increase in indirect tax might have on consumers and producers.
\nAnswers may include:
\nNB Candidates who only explain one reason should not be awarded marks beyond level 2.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: the relative impact may depend on PED and PES, indirect tax might benefit consumers if it is imposed on demerit goods, tax revenue raised can be used to benefit consumers and producers through government spending.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nExplain how an economic recession can lead to an increase in absolute poverty.
\nEvaluate the view that government policies to promote equity will always have a negative effect on efficiency.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: The advantages of government policies used to promote efficiency. For example, government expenditure on health and education might improve the efficiency of the labour force and reducing tax on low income households might improve their incentive to work.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nEconomic growth in Cambodia
\n[Source: adapted from Here Comes Cambodia: Asia’s New Tiger Economy, Asian Development Bank, May 10, 2016,
https://www.adb.org/news/features/here-comes-cambodia-asia-s-new-tiger-economy]
Define the term economic growth indicated in bold in the text (paragraph [2]).
\nDefine the term diversification indicated in bold in the text (paragraph [5]).
\nUsing a demand and supply diagram, explain why the increase in the minimum wage might affect Cambodia’s garment manufacturing competitiveness against other countries in the region (paragraph [4]).
\nUsing an externalities diagram, explain why the garment industry is a source of market failure (paragraph [8]).
\nUsing information from the text/data and your knowledge of economics, evaluate export promotion as a strategy for achieving economic development in Cambodia.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis may be price, or p. The horizontal axis may be quantity or q. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an externalities diagram, the vertical axis may be price, p, or costs/benefits.
The horizontal axis may be quantity or q. A title is not necessary.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires the candidate to make an appraisal by weighing up the strengths and limitations.
Responses may include:
\nEconomic analysis, focusing on economic development, may include:
\nTo explore the impact on:
Strengths of export promotion:
Limitations of export promotion:
\nAny reasonable evaluation.
\nThe market for corn on the island of Nissos is perfectly competitive. The demand and supply for corn in Nissos are given by the functions
\n\n\nwhere is the quantity of corn demanded per month in millions of kilograms (kg), is the quantity of corn supplied per month in millions of kg and is the price per kg of corn in dollars ($).
\nAdvisors to the government of Nissos suggest setting a price floor.
\nThe monthly corn surplus created must be purchased by the government of Nissos.
\nState two characteristics of a perfectly competitive market.
\nUsing a fully labelled diagram, outline the relationship between marginal product (MP) and average product (AP) of labour.
\nDetermine the slope of the market supply function for the corn farmers in Nissos.
\nCalculate the monthly equilibrium quantity of corn in Nissos.
\nPlot and label on Figure 1 the market demand curve and the market supply curve for corn in Nissos.
\nDraw and label the marginal revenue (MR) curve for corn for an individual farmer in Nissos on the grid below.
\nUsing Figure 1, calculate the consumer surplus in Nissos at the market equilibrium.
\nExplain one possible advantage and one possible disadvantage of governments setting a price floor in agricultural markets.
\nDraw and label on Figure 1 a curve that illustrates the price floor in Nissos that leads to a monthly surplus of 3 million kg of corn.
\nState one measure that the government of Nissos might take to deal with this corn surplus, following the imposition of the price floor.
\nOutline why purchasing this surplus implies an opportunity cost for the government of Nissos.
\nUsing Figure 1, determine the size of the decrease in monthly corn consumption following the imposition of the price floor.
\nUsing Figure 1, calculate the change in consumer expenditure on corn in Nissos.
\nAward [1] for each valid characteristic.
\nCharacteristics may include:
\nThe vertical axis may be labelled Marginal/Average Product, Product, Output, (or abbreviations of these). The horizontal axis may be labelled (Quantity of) labour, workers, variable factor, input.
\n(+) 1 is sufficient for [1].
\n10 − 0.5P = P − 2
12 = 1.5P
P = 8
Q = − 2 + 8 = 6
Any valid working is sufficient for [1].
\nQ = 6 million kg
\nAn answer of 6 million kg or 6 million or 6 without working is sufficient for [1].
\nFor full marks to be awarded the response must provide some valid working and include correct units.
\nHorizontal line at $8.00 with MR label on Figure 1 is sufficient for [1].
\n× 6 (20 − 8)
\nNo workings are required.
\n$36 million is sufficient for [1].
\nOFR applies.
\nFor providing a limited explanation of one advantage or one disadvantage, award a maximum of [1].
\nFor an accurate explanation of one advantage or one disadvantage or a limited explanation of both, award a maximum of [2].
\nFor providing an accurate explanation of one advantage or one disadvantage and a limited explanation of one disadvantage or one advantage, award a maximum of [3].
\nFor providing two accurate explanations, award a maximum of [4].
\nAward [1] for a horizontal line above the equilibrium price.
\nAward [1] for the line being drawn at $10.
\nIf the line is not labelled a maximum of [1] may be awarded.
\nOFR applies.
\nAward [1] for one accurate possible measure.
\nMeasures may include:
\n1 million kg is sufficient for [1].
\nNo workings are required.
\nOFR applies.
\n8 × 6 = $48 million
10 × 5 = $50 million
Any valid working is sufficient for [1].
\nChange = $2 million OR an increase of $2 million.
\nAn answer of 2 or 2 million or $2 million without working is sufficient for [1].
\nOFR applies.
\nFor full marks to be awarded the response must provide valid working and include correct units.
\nFigure 3 illustrates the market for cotton in the country of San Marcus, a small closed economy. Cotton is used as an input in the San Marcus textile industry. Quantity is in thousands of kilograms (kg).
\nThe Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its producers of cotton.
\nSan Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade, becoming an open economy.
\nThe world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain the $8 subsidy.
\nDefine the term social (community) surplus.
\nCalculate the social (community) surplus in the market for cotton in San Marcus.
\nDraw and label the new supply curve following the granting of the subsidy to domestic cotton producers on Figure 3.
\n\n
Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton producers.
\nCalculate the resulting change in producer surplus following the introduction of the subsidy to cotton producers in San Marcus.
\nCalculate the change in the consumer surplus resulting from the subsidy.
\nExplain two reasons why the government of San Marcus may have decided to grant a subsidy to its cotton producers.
\nState two functions of the WTO.
\nPlot and label the world cotton supply curve that San Marcus now faces on Figure 3.
\n\n
With reference to your answer to question (b)(ii), calculate the change in the cost of financing the $8 per kg subsidy to the government of San Marcus following the decision to import cotton from the world market.
\nExplain one possible advantage and one possible disadvantage for the San Marcus economy of the decision to join the WTO and slowly liberalize trade.
\n\n
consumer surplus
\n\n
producer surplus
\n\n
social surplus
250 000 + 150 000
Any valid working is sufficient for [1].
\n= $400 000
\nOR
Any valid working is sufficient for [1].
\n= $400 000
\nAn answer of $400 000 or 400 000 (without working) is sufficient for [1].
\nDrawing a new supply curve parallel and below / to the right of the original supply curve is sufficient for [1].
\n8 × 75 (× 1000)
\nAny valid working is sufficient for [1].
\n= $600 000
\nAn answer of 600 000 or $600 000 (without working) is sufficient for [1].
\nOFR may apply.
\n\n
OR
(0.5 × 75 × 9) − (0.5 × 50 × 6) = 337.5 − 150
Valid working may include:
\nAny valid working is sufficient for [1].
\n=$187 500
\nAn answer of 187 500 or $187 500 (without working) is sufficient for [1].
\nOFR may apply.
\n
OR
(0.5 × 75 × 15) − (0.5 × 50 × 10) = 562.5 − 250
\nAny valid working is sufficient for [1].
\nValid working may be:
\n= $312 500
\nAn answer of 312 500 or $312 500 (without working) is sufficient for [1].
\nOFR may apply.
\nAllocate [1] for each valid function.
\nFunctions may include:
\nNB Describing trade liberalization in two ways (eg removal of barriers, lowering of tariffs) only counts as one function.
\nAny other valid function(s).
\nAward [1] for an accurate and labelled world cotton supply curve.
\ninitial cost
= $600 000
Calculated earlier on (b)(ii), OFR applies.
\nnew cost of subsidy
8 × 50 × 1000 = $400 000
new cost of subsidy minus initial cost
$400 000 − $600 000
Any valid working is sufficient for [1].
\n= $200 000 or a decrease of $200 000
\nAn answer of −$200 000 or −200 000 is sufficient for [1].
\nOFR applies.
\nNB Responses should refer to the economy of San Marcus, not just one industry such as the consumers or producers of cotton.
\nThe information provided in Table 1 represents data for Country X in 2015.
\nTable 1
\nThe information provided in Table 2 relates to Country Y.
\nTable 2
\nFigure 4 represents the circular flow of income in Country A, with values in billions of dollars ($).
\nFigure 4
\nThe government of Country A decides to increase the level of taxation to $34 billion.
\nTable 3 provides information on the rates of direct tax in Country A.
\nTable 3
\nTable 4 provides information on the household distribution of income in Country A.
\nTable 4
\nCalculate gross domestic product (GDP) for Country X in 2015.
\nCalculate gross national income (GNI) for Country X in 2015.
\nCalculate the rate of consumer price inflation in 2016.
\nUsing the GDP deflator, calculate the percentage change in real GDP between 2014 and 2015.
\nIdentify the term represented in Figure 4 by the letter V.
\nIdentify the term represented in Figure 4 by the letter M.
\nState the four factor payments which constitute the income flow in the circular flow of income model.
\nDefine the term leakages.
\nDetermine the size of the budget surplus/deficit and state which using Figure 4.
\nUsing an AD/AS diagram, explain how this may affect the level of unemployment.
\n\n
Calculate the average tax rate for an individual who earns $64 000 per year.
\nDraw and label the Lorenz curve diagram for Country A on Figure 5.
\nExplain how an increase in the top rate of direct tax from 32 % to 36 % might affect equity and efficiency in Country A.
\nGDP = C + I + G + (X − M)
= 745 + 229 + 437 + 234 − 289
Any valid working is sufficient for [1].
\n= $1356 billion
\nAn answer of 1356 billion or $1356 (without working) is sufficient for [1].
\nGDP + net factor income = GNI
1356 − 111 = $1245 billion
An answer of 1245 (without working) is sufficient for [1].
\nOFR applies.
\n\n
An answer of 3.66 (without working) is sufficient for [1].
\n\n
real GDP in 2015
rate of change
Any valid working is sufficient for [1].
= 2.57 %
\nAn answer of 2.57 (without working) is sufficient for [1].
\nIncome OR factor income OR household income OR factor payments.
\nAward [1] for identifying the term correctly.
\nimports
\nAward [1] for identifying the term correctly.
\nrent, wages, interest and profit
\nAward [1] for three payments provided.
\nAward [2] for four payments provided.
\nbudget surplus of $5 billion
\nAward [1] for determining the size of the budget correctly.
\nNB A response in which the AS curve shifts to the left, on the basis that the increase in taxation may be indirect taxation, should be rewarded.
\n12 000 × 5 % + 15 500 × 12 % + 32 500 × 21.5 % + 4 000 × 32 %
= $10 727.50
Working is not required.
\naverage tax rate
Any valid working is sufficient for [1].
\n= 16.76 %
\nAn answer of 16.76 or 0.17 (without working) is sufficient for [1].
\nAward [1] for an accurate Lorenz curve.
\nOR
\nAward [1] for a Lorenz curve which is inaccurate but which goes from (0,0) to (100,100) and which lies below the line of perfect equality AND axes labelled accurately.
\nAward [2] for an accurate Lorenz curve with axes correctly labelled.
\nNB The term “cumulative” is not necessary for labelling of axes.
\nNB A response which explains that inequality will be reduced, without explicitly using the term equality/inequality, should be rewarded.
\nExplain why a government might decide to impose a price ceiling on goods and services such as essential foods or rented housing.
\nEvaluate the view that the most effective way in which the government can encourage the consumption of merit goods is through direct provision.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: advantages and disadvantages of direct provision; consideration of alternatives such as maximum prices, subsidies, legislation, advertising, required private insurance in the case of health care.
\nNB A maximum of Level 3 should be awarded for responses that do not consider any alternatives to direct provision.
\nIt was encouraging to see how many candidates were able to discuss price ceilings and provide a diagram to illustrate the concept. Usually one reason (for example, to help those earning low incomes) was given but often it was not well-developed. Too many just used the example of “essential foods” or “rented housing” without providing specific and realistic examples. A common mistake was to spend too little time on why price ceilings may be imposed, which was the question, and to spend too much time on the effects of price ceilings, which was not the question. Some confused price ceilings with price floors.
\nThis question proved to be very problematic for several candidates who attempted it without having any clear understanding of the term “direct provision”. Most could not specifically explain what the term means. The term “merit goods” was widely understood, however, and examples of merit goods were readily provided. Several candidates were able to consider alternatives to direct provision, but the term was often confused with subsidies with the subsidy diagram being provided. It was not uncommon for candidates to devote lengthy, but largely irrelevant, discussion to demerit goods.
\nExplain the concepts of consumer surplus and producer surplus.
\nExamine the view that the best allocation of resources, from society’s point of view, occurs where the marginal private benefit equals the marginal private cost.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nExamination may include: the significance of external benefits and external costs for the socially optimum resource allocation (MSB = MSC), under-provision and over-provision at the free market price, other sources of market failure such as demerit goods, asymmetric information.
\nNB For a response that just evaluates the view without explaining it, a maximum of Level 2 should be awarded.
\nThis question was not answered well by most candidates who attempted it. Many confused consumer surplus with excess demand and producer surplus with excess supply. It was difficult for many candidates to give an accurate definition or explanation of the terms. Those that did understand the concepts provided precise definitions and were able to diagram the concepts well. However, candidates often struggled to give examples to illustrate the concepts.
\nMany candidates struggled to accurately define MPB and MPC, with the word “additional” often being absent. Few were able to analyse why this equation might represent optimal allocation and it was not uncommon for candidates to ignore the explanation and proceed straight to the evaluation by asserting that MSC=MSB is optimal. The diagrams to show externalities were often very good, with some good examples of the existence of externalities being given.
\nExplain two factors which could shift a firm’s supply curve to the left.
\nDiscuss the view that the provision of subsidies by the government on goods such as agricultural products will always be beneficial to stakeholders.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the disadvantages of subsidies such as: opportunity cost to the government, higher taxes to fund subsidies, difficulties in removing subsidies once established, distortion of the market, creation of inefficiency, equity issues (eg some consumers and producers will benefit more than others).
\nThe candidates that completed the highest achieving responsesto this question used supply theory to explain two factors that affect a firm’s supply curve such as: rising costs of different factors of production, indirect tax increases and supply-side shocks like poor weather conditions in agriculture. Where students focused on the rise in two resource costs such as labour and raw materials this was credited as two factors. Candidates that accessed the highest marks supported their answers with clearly labelled and annotated demand and supply diagrams along with effective real-world examples to illustrate.
\nMany students demonstrated a sound knowledge and understanding of subsidy theory in response to this question. Most explained clearly how subsidies affect different stakeholders from the view of benefits subsidies bring to consumers and producers. The students that accessed the higher marking criteria levels evaluated this by considering the costs subsidies represent to government. It was also good to see students discussing further impacts of subsides in agriculture by considering efficiency losses that might occur if less efficient producers were drawn into a market as well as the efficiency gains that might occur from the positive externalities that might be captured by increasing output from subsidies. The highest achieving responses considered real-world examples by, for example, looking at countries where farming subsidies have reduced the price of food for low income consumers.
\nExplain how aggregate demand in an economy might be affected by a rise in the exchange rate and a decrease in the income of major trading partners.
\nTo what extent is expansionary fiscal policy the best policy to achieve a reduction in the rate of unemployment?
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB if only one factor of the two factors mentioned above are considered, a maximum of Level 2 should be awarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: inappropriateness of using policies to increase AD against structural, frictional and seasonal unemployment, consideration of the use of supply-side policies to tackle structural, frictional and seasonal unemployment, consideration of the use of monetary policy, problems associated with the use of expansionary fiscal
policy, consideration of the words “best”.
NB where no alternative policies are considered a maximum of Level 3 should be awarded.
\nMost candidates seemed to be familiar with AD/AS analysis and could use a diagram with relative ease. Most understood how a rise in the exchange rate caused exports to be more expensive, but few related it to an increase in the demand for imports, both of which would decrease AD. Few candidates were able to provide specific examples of economies that had experienced the situations mentioned in the question.
\nMost candidates had a fairly good understanding of what fiscal policy is and how expansionary fiscal policy is achieved, but many were unable to explain specifically how it reduces unemployment. Many could diagram how AD shifts rightwards, causing economic growth, but were not able to explain how this growth leads to a decline in unemployment. Many could evaluate fiscal policy in general, but not specifically as it relates to a reduction in unemployment. Often there was no comparison between fiscal policy and other policies to determine which was the best policy to reduce unemployment. In a minority of cases, there was confusion between fiscal policy and monetary policy.
\nUnited States (US) tin can manufacturers seek tariff exemption on tinplate steel
\n[Source: adapted from www.prnewswire.com, accessed 27 August 2017]
\nDefine the term excess demand indicated in bold in the text (paragraph [3]).
\nDefine the term structural unemployment indicated in bold in the text (paragraph [4]).
\nUsing a supply and demand diagram and data from the text, explain how a “disequilibrium in the domestic US tinplate steel market” would occur if there were no imports (paragraph [3]).
\nUsing an international trade diagram, explain the effect of a tariff on the imports of tinplate steel (paragraph [1]).
\nUsing information from the text/data and your knowledge of economics, discuss possible economic impacts of the tariff on tinplate steel.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a supply and demand diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
Possible impacts:
\nUnfortunately, most candidates did not reach L2. Those who were awarded L1 often referred simply to demand exceeding supply. An explanation that quantity demanded was greater than quantity supplied would have added precision to the definition.
\nMost candidates exhibited knowledge of one factor which could contribute to structural unemployment. Some confused this type of unemployment with cyclical or frictional employment.
\nSurprisingly, many candidates struggled with this question. A lot of diagrams illustrated a change in equilibrium, with supply or demand shifting, rather than a disequilibrium. Many candidates also failed to make use of the text. Some centres expressed concerns that use of data was required in a question part other than (d). However, the purpose of (b) and (c) remains application of simple concepts to the text/data provided.
\nThis was generally a well answered question. A few candidates addressed the welfare effects and/or impact on tax revenue, which was not required by the question. A common problem was a missing label for the world supply curves (e.g. Sw, Sw + tariff).
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nAs for many past questions on tariffs, answers were often generic, going through the tariff diagrams and the ‘standard’ impacts on domestic production, imports, the price, etc. In such cases, the tariff diagram was over-elaborated on and lacked application to the text. It was not uncommon for answers to cite the infant industry argument, which was clearly not relevant in this case. Such answers reflect economic analysis but limited application to the text and would generally remain in level 2. Another common problem which kept answers in level 2 was that many candidates simply repeated the text or only slightly expanded upon what was presented.
\nA level 3 answer is one where the candidate applies economic analysis to the text. In this case, some good responses considered (with or without reference to an international trade diagram) that the tariff would increase the price of tinplate steel and commented that this could contribute to cost-push inflation but since only 2 % of all American steel was tinplate, the impact would not be significant.
\nExplain why public transport, such as buses and trains, might be under-provided in a market economy.
\nDiscuss the view that imposing an indirect tax on gasoline (petrol) is the most effective way of reducing the market failure caused by cars.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the disadvantages of indirect tax on gasoline, such as: effects on the rate of inflation, equity (some stakeholders affected more than others) and the importance of price elasticity of demand (PED) in affecting the incidence of the tax. Consideration of other policies that can be used, such as: subsidies to public transport, subsidies for electric car producers, government providing infrastructure for the use of electric cars (eg charging points), advertising (eg encourage the use of public transport) and government regulations to reduce car use.
\nThis question proved to be the most challenging tor students on the paper. The term ‘public transport’ confused many students who viewed bus, tram and train travel as public goods, which they are not. This led to many answer that focused on public good theory, which took their answers off the central theme of the question, which was to get students to consider public transport as a merit good because of the positive externalities of its provision and consumption. This was, again, quite confusing for students because the benefits of public transport can be seen as the reduced negative externalities of private transport such as the congestion and pollution associated with cars. The highest achieving responses focused on how increasing the provision and consumption of, for example, trains can reduce journey times for workers and improve overall productivity in the economy. It was good to see effective examples of countries where governments had supported public transport schemes.
\nStudents performed better on part (b) compared to part (a) of this question where they were more comfortable explaining how indirect taxation on petrol/gasoline can be used to deal with the market failure associated with car use. Many analysed the impact indirect taxation has on the market for petrol/gasoline and in turn the use of cars. This was often supported by effective cost and benefit diagrams. The highest achieving responses went on the evaluate the issues associated with using indirect taxation such as the inequitable impact on low income households and the negative consequences on the car manufactures along with the associated consequences for employment. It was good to see some candidates using effective real-world examples of the impact of indirect tax on petrol/gasoline such as countries that have suffered protests because of their imposition.
\nExplain the role of improved productivity in achieving economic growth.
\nDiscuss the view that economic growth can only be achieved at the expense of other macroeconomic objectives such as a low and stable rate of inflation and equity in the distribution of income.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB if no explicit and precise understanding of productivity is demonstrated, a maximum of Level 2 should be awarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: circumstances in which growth might positively impact on price stability and the distribution of income and/or unemployment and the balance of payments, the different impacts of short term and long-term growth, consideration of the word “only”.
\nNB At least two macroeconomic objectives need to be considered. Where only one is considered, without any evaluation, a maximum of Level 2 should be awarded. Where only one is considered, with evaluation, a maximum of Level 3 should be awarded. Thus, Level 4 requires two objectives and some evaluation.
\nA majority of candidates did not understand the term ‘productivity’. Some were able to explain how it is achieved through technological advances, but few were able to accurately define the term. Some were able to diagram the LRAS curve or PPC curve shifting outwards but could not accurately explain why they were shifting outwards. Examples of improved productivity in relation to a particular economy were almost never given. There was also much confusion between the terms ‘production’ and ‘productivity’.
\nThis question was not answered well by most of the candidates who attempted it. The concept of economic growth seems to have been reasonably well understood, but few were able to relate economic growth to the other macroeconomic objectives. Often the question was answered as if it were, “What are the causes of economic growth,” but not directly answering the question posed. Some could analyse the statement and explain why the achievement of economic growth does conflict with other objectives, but most could not evaluate why economic growth can be achieved without conflicting with the other objectives.
\nExplain how increased investment by the government in education and training can affect both aggregate demand and aggregate supply.
\nEvaluate the view that inflationary pressures in an economy are best reduced using supply-side policies.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the disadvantages of using particular supply-side policies, such as: the impact of market-based polices on equity, not as effective with demand-pull inflation, the impact of interventionist policies on the government budget and the time lags associated with supply-side policies. The advantages of supply-side policies, such as: increased real GDP, increased employment, more effective with cost-push inflation and possible improvement in economic efficiency. Consideration of deflationary monetary and fiscal policies as alternative policies to reduce inflation.
\nThis question was generally well answered by students. The highest achieving responses focused on how increasing the government expenditure on education and training directly increases the G component of aggregate demand. They then went on to explain how higher expenditure on education and training increases aggregate supply as workers become more productive. Some candidates explained how more productive employees may earn higher incomes, which could lead to a rise in aggregate demand. This point has some logic but the focus on the direct impact of a rise in G on aggregate demand is the stronger argument. Explanations supported by a real-world example included countries that fund workplace training schemes.
\nCandidates found this question quite challenging because questions on policies to reduce inflation normally consider monetary and fiscal approaches rather than supply-side policies. High achieving responses to this question explained how interventionist supply-side policies such as price controls and subsidies in key markets might reduce inflationary pressure. These points were then evaluated by considering the opportunity costs of policies such as wide scale subsidies and shortages that might be created by price controls. The highest achieving responses also considered how market-based supply-side policies such as strong competition policy and reducing the power of trade unions might reduce inflationary pressures and these policies were evaluated by considering the long-term nature of this approach and how, for example, reducing trade union power might negatively affect employee welfare. The highest achieving responses used real-world examples to illustrate such countries that use fuel subsidies to reduce energy prices.
\nExplain the relationship between the law of diminishing returns and a firm’s short-run cost curves.
\nEvaluate the view that monopoly is an undesirable market structure as it fails to achieve productive and allocative efficiency.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: reasons why monopoly might be desirable (eg possibilities of economies of scale and the case of natural monopoly, the need to innovate to maintain economic profit, ability to finance research and development). Other reasons why monopoly may be undesirable (eg low quality of the products and services, x-inefficiency).
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMany candidates were able to either explain the law of diminishing returns or draw correctly the shortrun cost curves for a firm. Only a few were able to produce a complete answer by explaining the crucial link between diminishing marginal product and increasing marginal cost. The best candidates were able to support their answers with a numerical and/or hypothetical example of diminishing marginal product (increasing marginal cost). Some candidates confused diminishing marginal returns with diminishing marginal utility. Other candidates got off-track by confusing diminishing marginal returns with diseconomies of scale.
\nThe great majority of candidates were able to draw a monopoly diagram and correctly determine the profit-maximizing level of output. Considerably fewer candidates were also able to show (correctly!) on the diagram the levels of output associated with allocative and productive efficiency. Some candidates were able to identify either the positive or the negative features of monopoly but did not explore the both sides of the issues as the question implies.
\nExplain the various phases of the business cycle.
\nDiscuss the view that economies will always return to the full employment level of output in the long run.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB Examiners should be aware of variations in the business cycle diagrams candidates might draw and should be flexible in crediting the diagrams drawn by candidates.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the Keynesian view that an economy can remain stuck in a deflationary gap, consideration of the role of government, consideration of the word “always”.
\nThis question was generally well answered by students who explained how the economy changes during different phases of the business cycle. It was interesting to see the variety of approaches to the business cycle used by students but the overall theme of how real GDP/economic growth changes over time was clearly understood in many answers. In the highest achieving responses students were able to explain how real GDP changes overtime and how this affected inflation and unemployment. The highest achieving responses supported this with real-world examples of how the business cycle has affected particular countries.
\nThere were a mixed set of responses to this question. Effective answers involved students showing a good understanding of the theory involved by explaining how an economy might return to full employment in the long run using the Monetarist/Neo Classical model where short-run aggregate supply changes when the economy is in either an inflationary or deflationary gap situation. This was supported with clear aggregate demand and supply diagrams. Some candidates who did not have a sound grasp of this theory really struggled to answer the question. The highest achieving responses went on to evaluate the view that economies always return to full employment by, for example, putting forward the Keynesian view that an economy can get stuck in a deflationary situation because wages do not adjust downwards. Well-developed real-world examples allowed students to access the very highest marks.
\nUsing an appropriate externalities diagram, explain why a government might decide to impose a price floor on a demerit good.
\nEvaluate the view that the most effective way in which the government can discourage the consumption of demerit goods is through government regulations.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB If students attempt to provide two different diagrams, one for a price floor and one for negative externalities, they should be credited in the same way one diagram might be.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: advantages and disadvantages of government regulations; consideration of alternatives such as minimum prices, taxation, negative advertising.
\nMost candidates were able to draw an appropriate externalities diagram to which they applied a price floor set above the free market equilibrium. Some chose to use two separate diagrams, which was acceptable. Most candidates could provide a solid explanation of why a price floor might be applied in this case.
\nCandidates were not always clear about what represents a government regulation. The syllabus describes indirect taxation, in the relevant paragraph, as a market-based policy, and regulation, a ban and so forth, as being distinct from market-based policies. By declaring indirect taxes to be regulations some candidates restricted their ability to effectively address the question. Responses that clearly identified what regulations are tended to provide the best real-world examples as a result.
\nExplain why price elasticity of demand varies along the length of a straight-line demand curve.
\nExamine the significance of price elasticity of demand for the decision-making of firms and governments.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nExamination may include: the differing incidence of indirect tax on consumers and firms due to differing price elasticities, the impact of PED on the uses of tax/subsidy to address market failure, the impact of time on PED (and total revenue) when price changes, the difficulty of estimating PED values for firms, other factors affecting demand that cause a change in total revenue/tax revenue.
\nAward a maximum of level 2 if the response considers either the significance of PED for firms or for governments (but not both).
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nThere were many candidates who were able to explain price elasticity of demand in principle but were not able to apply the economic theory to answer this particular question. A common mistake was to correctly explain why different products have different price elasticities of demand and/or to show the different elasticities on two separate diagrams. However, in this question part it is stated explicitly that elasticity “along… a straight-line demand curve” should be explored. Some candidates needlessly drew a supply curve on the diagram for this question and incorrectly assumed that at the intersection of the supply and demand curves the price elasticity of demand is necessarily equal to one. Some candidates were able to provide excellent numerical examples and/or technical (mathematical) explanations to demonstrate how the coefficient of the price elasticity of demand should vary along a straight-line demand curve but did not link the mathematical calculations to relevant economic theory.
\nThe majority of the candidates seemed well prepared to answer this question. Still, there were some cases where the candidates were not careful enough and drew a market supply curve in addition to the market demand curve (implying a competitive market) while (correctly) explaining that a given (single) firm should set a price for its product at the point where price elasticity of demand is equal to one in order to maximize its total revenue. Given the specific demands of the question, such use of diagrams was not usually considered a significant error. However, such candidates could not get credit for clear understanding and application of relevant economic theory.
\nExplain why monopoly power may be considered a type of market failure.
\nExamine the role of barriers to entry in making monopoly a less desirable market structure than perfect competition.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nExamination may include: alternative reasons why monopoly may be less desirable than perfect competition, such as productive and allocative inefficiency, price and output, abuse of monopoly power.
\nThis was usually well attempted though lower achieving responses did not successfully identify the market failure that was the point of the question. Some candidates provided a general description of the faults of monopoly with inadequate regard for what was asked. The highest achieving responses focused on allocative inefficiency and identified that as market failure.
\nAs with part (a), lower achieving responses did not sufficiently focus on the specifics of the question and were inclined to provide a general discussion of the relative merits of perfect competition and monopoly. Higher achieving responses were able to effectively examine the question through the lens of barriers to entry as specified by the question. There was some very good use of real-life examples in these responses. It can be very effective to consider why a particular real-life example does or does not conform to the expectations of theory, this also indicates synthesis as required in the part (b) questions in this paper.
\nExplain how a deflationary gap might occur.
\nUsing the monetarist/new classical model and the Keynesian model, discuss the view that increases in aggregate demand will inevitably be inflationary.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of an increase in AD not being inflationary in the Keynesian model if the economy is operating with spare capacity, consideration of an increase in AD not being inflationary in the monetarist/new classical model if the economy is recovering from equilibrium below the full employment level of output, consideration of the impact of simultaneous improvements on the supply side of the economy as AD increases, a consideration of the word “inevitably”, a consideration of the word “inflationary” in the context of the AD/AS model.
\nAward a maximum of level 2 if the response considers either the monetarist/new classical model or the Keynesian model (but not both).
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nThe majority of candidates were able to define deflationary gap and explain how a decrease in aggregate demand would lead to equilibrium at a level of real output below the full employment level of output. The candidates which provided better answers were able to link their answer to the components of aggregate demand but often could not give plausible reasons why any of the components would decrease. In the best answers the candidates were able to give such reasons due to their knowledge of historical episodes where aggregate demand has decreased because of specific events in the economy. Unfortunately, some candidates focused on explaining deflation and their explanations, even though they were correct, were considered only marginally relevant given the specific demands of the question.
\nThis question part provided candidates with excellent opportunity to explore the assumptions and the world views behind the two major macroeconomic models – the Keynesian and the monetarist/new classical models. While the great majority of candidates were able to draw diagrams to illustrate both models, many candidates struggled to explain the diagrams in detail and apply them to answer the question. Even in cases where the diagrams were dynamic in nature, and seemed promising at first sight, the explanations were either vague or superficial. Some candidates tried to combine both paradigms in a single diagram but the result was either an incomplete answer or a complete but rather complex diagram that was confusing for both candidate and examiner. Combining the two models in a single diagram to answer this question is, generally, not a good idea because of the subtle differences between the meaning of “full employment” in the monetarist/new classical and the traditional Keynesian world view.
\nExplain how an increase in unemployment might lead to a loss of gross domestic product (GDP) and a budget deficit.
\nDiscuss the view that there will always be a trade-off between the unemployment rate and the inflation rate.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the view that there is no trade-off in the long-run (the long-run Phillips curve), the importance of supply-side improvements to the economy in achieving lower unemployment and inflation, criticisms of the statistical Phillips curve relationship, and discussion of the word “always”.
\nAlthough there were many very good responses to this question there was a significant minority who confused a budget deficit with a trade deficit. However, good responses were able to produce very precise and well explained argumentsin which the links were clearly explained. Good real-life examples were also used by higher achieving responses here.
\nIn this part candidates often tended to describe the inverse relationship illustrated by the short-run Phillips curve rather than consider the trade-off referred to by the question and explain what that meant. Good responses embarked on a sophisticated review of relevant theory. Frequently Neoclassical and Keynesian concepts and perspectives were utilized to support responses. There was potentially a lot of theory that could be used and not all candidates achieved an appropriate balance of theory and synthesis.
\nExplain how government spending might promote greater equity in an economy.
\nEvaluate the view that government policies to promote greater equity will always have a negative effect on efficiency.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the hypothetical trade-off between equity and efficiency, consideration of how government spending on socially desirable goods and services (eg health care services, education, sanitation, clean water supplies) might positively impact efficiency in the utilization of the economy’s resources in the long run (eg through poverty reduction and human capital formation) and in the short run (eg through the positive impact of government spending on AD), consideration of how automatic stabilizers might improve efficiency in the utilization of the economy’s resources in the short run (eg through the positive impact on AD during recessions), consideration of how certain kinds of government spending and taxation may increase allocative efficiency (eg through the increased consumption of merit goods and decreased consumption of demerit goods), government provision of merit goods may be less efficient than private provision, consideration of the word “always”, consideration of the meaning of the word “equity” (eg the difference between equity in the distribution of income and equality in the distribution of income, equity as equality of opportunity), consideration of the meaning of the word “efficiency” (eg productive and allocative efficiency in microeconomics, efficiency in the utilization of the economy’s factors of production in macroeconomics).
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nNB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nSurprisingly, many candidates focused completely on government spending and its effect on gross domestic product (and the economy at large) while ignoring the “equity” component of the question. Since there are different possible valid interpretations of the meaning of equity, a very specific and particular definition of the term was not expected. However, candidates were expected to provide some working definition at the beginning of their answers and to use this definition consistently to answer the question. With that being said, there were some interpretations of the meaning of equity which were considered unacceptable in the context of the IB economics syllabus. For example, some candidates made references to equity in the sense of “owner’s equity” in a business and this particular interpretation of the meaning of equity led those candidates astray. Quite a few candidates considered “government spending to promote equity” in the economy to be the same as “government subsidies to help small firms (without economies of scale) compete with larger firms (with considerable economies of scale)”, and this approach was also deemed unacceptable.
\nThis was a rather broad question and allowed for various valid approaches. There are different possible valid interpretations of the meaning of equity and efficiency in the context of the IB economics syllabus. There are also many government policies and all of them may be reasonably considered to affect equity and/or efficiency in one way or another. Therefore, neither particular definitions of the relevant economic terms nor a particular example of government policy (or set of policies) were required for top marks. However, it was expected that candidates should provide acceptable working definitions of equity and efficiency in the beginning of their responses, then use these definitions to link equity and efficiency to particular government policies and to evaluate these policies. Candidates who ignored efficiency and equity (or only mentioned them in a vague manner) and proceeded to evaluate government policies in general got little credit for their responses to this question item. The best candidates were able to give acceptable definitions of efficiency and equity at the beginning, to use these definitions consistently throughout the response, to identify appropriate government policies to promote equity, and to evaluate both the positive and negative effects of those policies on efficiency.
\nBhutan’s growth soars amid hydropower building boom
\n[Source: adapted from Central Intelligence Agency, The World Factbook, Bhutan, https://www.cia.gov/library/publications/theworld-
factbook/geos/bt.html, accessed 19 August 2017; White-collared, by Ross Adkin, 31 August 2016, Himal Southasian,
http://himalmag.com/white-collared-bhutan-thimphu-bureaucrats, accessed 19 August 2017; The World Bank: Bhutan,
https://data.worldbank.org/country/bhutan, © 2019 The World Bank Group, licenced under the Creative Commons Attribution
4.0 International License, https://creativecommons.org/licenses/by/4.0; and Bhutan growth soars amid hydropower building
boom, by Nidup Gyeltshen and Phuntsho Wangdi, August 17, 2017, https://asia.nikkei.com/Economy/Bhutan-growth-soarsamid-
hydropower-building-boom, accessed 19 August 2017]
Define the term concessional long-term loans indicated in bold in the text (paragraph [2]).
\nDefine the term real gross domestic product (GDP) indicated in bold in the text (paragraph [2]).
\nExplain two possible disadvantages for Bhutan in receiving India’s tied aid (paragraph [3]).
\nUsing a production possibilities curve (PPC) diagram, explain how rising numbers of university graduates will affect Bhutan’s potential output (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, evaluate the government policies being used to promote economic development in Bhutan.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
Strengths of policies:
\nLimitations of policies:
\nTo reach level 3, students must clearly link their arguments to specific government policies undertaken by the government of Bhutan.
\nFew candidates provided two meaningful points to reach level 2. Many defined this concept as tied aid.
\nOn the other hand, most candidates could define this term accurately. Some, however, failed to make the connection to the adjustment for inflation and simply defined GDP.
\nMost candidates were able to identify two disadvantages of tied aid for Bhutan, but a significant number merely described the disadvantages of receiving any form of aid and/or loans- indebtedness and dependency were two common disadvantages identified but those are not specific to TIED aid.
\nThe majority of candidates scored 2 marks for the explanation. Similar questions appeared in past papers and often, candidates could not link the increase in potential output to changesin quantity and/or quality of resources. This was less of a problem in this exam session. PPC curves were often drawn/shifted correctly, the appropriate labelling of axes was the only recurrent problem – we had a lot of “Real GDP”, “Price Level” and “number of university graduates” as labels.
\n“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nHigher achieving responses could establish a clear link between specific policies and economic development – for example, explaining how the promotion of jobs in agriculture could lead to more citizens of Bhutan earning an income or leaving the informal sector. In particular, to achieve a level 3 mark, candidates should critically evaluate the contribution of the policy to economic development. In this case, one could point out that overreliance on the agricultural sector is a common problem of economically less developed countries. A rare few recognised that many of the policies were growth oriented.
\nIt was encouraging that most answers reflected a good understanding of economic development. However, many struggled to add value to what was already in the text and connect the policies to development.
\nFirm A produces cartons of coffee. Figure 1 illustrates the firm’s total cost (TC) and variable cost (VC) at different output levels per month.
\nFigure 1
\nFigure 2 illustrates the average total cost (ATC), average variable cost (AVC) and marginal cost (MC) at different output levels for Firm B, which produces cans of tea.
\nThe price of tea in the perfectly competitive tea market is presently $21 per can.
\nCalculate Firm A’s average fixed costs when it is producing 125 cartons of coffee per month.
\nCalculate Firm A’s average variable costs when it is producing 125 cartons of coffee per month.
\nUsing Figure 2, calculate the average fixed costs when 80 cans per month are produced.
\nUsing Figure 2, calculate the total costs when 55 cans per month are produced.
\nExplain why in the short run, as output increases, marginal costs typically decrease and then increase.
\nUsing this information, draw and label the average revenue curve on Figure 2.
\n(ii) Using Figure 2, identify the quantity of cans per month Firm B must produce in order to maximize profits.
\n\n
(iii) Calculate the economic profit when Firm B is producing at the output level identified in part (ii).
\nSometimes a firm continues to produce in the short run, even when it is making an economic loss. Explain why the firm might choose to do this.
\nOutline why a perfectly competitive firm is a “price taker”.
\nFirm B and all the other firms in the tea market begin to sell their tea in distinctive packages and many differentiate their product with organic tea or fruit flavours. Explain how the demand curve faced by Firm B will change as a result.
\nFirm B conducted a market survey and found out that the price elasticity of demand for its brand of tea is 0.8 among urban customers, whereas it is 1.2 among customers in rural areas. The sales director said “This information could help Firm B to raise its revenue, by trying to separate the two markets, provided that certain conditions are satisfied”. Explain this statement.
\n\n
Identification of FC at $500 or any valid working is sufficient for [1].
\n= $4
\nAn answer of $4 or 4 (without working) is sufficient for [1].
\n\n
Identification of VC at $1 500 or any valid working is sufficient for [1].
\n= $12
\nAn answer of $12 or 12 (without working) is sufficient for [1].
\n(25 − 20)
= $5
An answer of $5 is sufficient for [1].
\n30 × 55
\nIdentification of ATC at $30 or any valid working is sufficient for [1].
\n= $1650
\nAn answer of $1650 or 1650 (without working) is sufficient for [1].
\nNB If the candidate identifies ATC as $29 or $31, (with a final answer of $1595 or $1705) this should be fully rewarded.
\nA correctly labelled AR (or P/MR/D) line is sufficient for [1].
\n(ii) Where marginal revenue equals marginal cost.
\nAn answer of 105 is sufficient for [1].
\nIf the candidate identifies the quantity as 104 or 106 this should be fully rewarded.
\nOFR may apply.
\n\n
(iii) 105 (21 − 23)
\nAny valid working is sufficient for [1].
\n= −$210 or a loss of $210
\nAn answer of −$210 or a loss of $210 (without working) is sufficient for [1].
\nOFR may apply — eg −$208 if 104 cans identified in (ii) OR −$212 if 106 cans identified in (ii).
\nFirm B could:
\nInfrastructure projects in Tanzania
\n[Source: The World Bank, 2020. The World Bank In Tanzania [online] Available at: https://www.worldbank.org/en/country/
tanzania/overview [Accessed 29 September 2020] Source adapted.
The World Bank, 2020. Modest Reduction in Poverty in Tanzania: More Can Be Done to Accelerate Pro-Poor Growth
[online] Available at: https://www.worldbank.org/en/news/press-release/2019/12/11/modest-reduction-in-poverty-intanzania-
more-can-be-done-to-accelerate-pro-poor-growth [Accessed 29 September 2020] Source adapted.
Kabwe, Z., 2020. Tanzania elections: Life has got worse under Magufuli. We need change. [online] Available at:
https://africanarguments.org/2020/01/08/tanzania-elections-life-has-got-worse-under-magafuli-we-need-change/
[Accessed 29 September 2020] Source adapted.
Materu, B., 2020. Debt is within limits, says Tanzania [online] Available at: https://www.theeastafrican.co.ke/business/
Debt-is-within-limits-Tanzania/2560-5408196-10c4mla/index.html [Accessed 29 September 2020] Source adapted.]
Define the term budget deficit indicated in bold in the text (paragraph [2]).
\nDefine the term human capital indicated in bold in the text (paragraph [7]).
\nUsing an AD/AS diagram, explain how “lower prices for food and raw materials” might put downward pressure on inflation (paragraph [1]).
\nUsing a Lorenz curve diagram, explain what is meant by an “increase in income inequality from 2015 to 2019” (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, evaluate the impact on economic development of the Tanzanian government’s policy of spending on infrastructure projects.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average/general price level.
The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviation is acceptable.
A title is not necessary.
NB Candidates may alternatively draw a Keynesian AS curve shifting to the right.
\nAlternatively, the explanation may refer to an increase in the Gini coefficient/index. If explained correctly, this may be fully rewarded.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe two curves may be shown on one graph or may be shown on two graphs. If using two graphs, it must be clear that the curve for 2015 is closer to the line of equality than for 2019.
\nThe vertical axis should be labelled cumulative % of income, or % of income and the horizontal axis should be cumulative % of population/households or % of population/households. There must be a diagonal line, but it is not a requirement that it is labelled. There should be labels to indicate the difference between the two Lorenz curves. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nStrengths of the policy may include:
\nLimitations of the policy may include:
\nAny reasonable evaluation.
\nMost candidates scored L2 on both definitions. A few confused a budget deficit with a trade deficit.
\nMost candidates scored L2 on both definitions.
\nMost candidates could establish that lower prices for food and raw materials would lead to lower cost-push inflation. In some cases, candidates shifted the AD and/or LRAS curves instead and could not be awarded marks for the diagram. Some candidates chose to illustrate the lower inflationary pressures on a Keynesian diagram. While that is a valid approach, the shift of the Keynesian AS was seldom adequate.
\nThe Lorenz curve diagram was mostly illustrated correctly with a few candidates losing a mark for careless errors on axes labels — one mark was often deducted for the use of ‘wealth’ instead of ‘income’ on the vertical axis. Some answers also missed a mark because the explanation simply described the curve’s shift outwards instead of explaining how the high income earners would enjoy a higher proportion of national income. Some made reference to the Gini coefficient. Although that was not necessary, it helped candidates explain the significance of the outward shift of the Lorenz curve.
\nAs for other questions on this paper, those who scored in the lower L2 range provided theoretical answers or general description of the text. Candidates who could establish meaningful connections to development issues such as indebtedness and FDI inflows often scored L3 on this question.
\nThe World Bank reports on economic growth in Kenya
\n[Source: adapted from The World Bank Country Overview, http://www.worldbank.org/en/country/kenya/overview,
7 March 2017; Kenya in 2050, The Economist Intelligence Unit, https://www.eiu.com/public/topical_report.
aspx?campaignid=ForecastingTo2050, 13 July 2017, data reused by permission of The Economist Intelligence Unit; and World
Bank economic updates, Kenya’s Economy Strong in a Challenging Global Environment, http://www.worldbank.org/en/country/
kenya/publication/kenya-economic-update-economy-strong-challenging-global-environment, March 2016.]
Define the term investment indicated in bold in the text (paragraph [2]).
\nDefine the term productivity indicated in bold in the text (paragraph [5]).
\nUsing an AD/AS diagram, explain how expansionary monetary policy might lead to economic growth (paragraph [1]).
\nExplain the difference between economic growth and economic development (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, discuss the extent to which continued economic growth may lead to economic development in Kenya.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be real output, real national output, real national income, real Y, or real GDP. A title is not necessary.
\n\n
Responses may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nEconomic growth and economic development:
\nAny reasonable discussion.
\nTo reach level 3, students must show awareness of the ways and to what extent (evaluating) economic growth may or may not lead to economic development – making a very clear link between the two (not just an analysis on economic growth or/and economic development). They must present a balanced evaluative approach on how growth might or might not impact on economic development.
\nThis was surprisingly badly answered, often phrased in uneconomic terms eg ''spending money in order to get a profit''.
\nAgain, surprisingly, weak definitions of this important economic term. The best that many candidates could come up with is that involves an increase in efficiency.
\nThis question was well answered overall. Diagrams were generally accurate although a minority of students lost a mark by omitting 'real' when labelling GDP on the horizontal axis. Another limitation on some answers was a failure to explain why AD increased eg explaining the effect of falling interest rates on consumption and/or investment and therefore AD. A small minority failed link the above analysis to economic growth.
\nMany students lost 1 mark when defining economic growth re: Real GDP by not including 'real'. Also, many students relied on definitions of the terms without making a distinction between the concepts.
\nMany candidates did not answer this question directly. Some answers were largely generic in nature with minimal reference to the text. Much emphasis was placed on what may cause economic growth and many directed the question to the role of government in generating growth. This was not the question. The extent to which growth will or will not generate development was barely addressed in some cases. The result was that many of the answers were unbalanced at best or irrelevant at worst.
\nBank of Canada raises interest rates for the first time in seven years
\n[Source: adapted from Bank of Canada raises interest rates for first time in seven years,
The Globe and Mail, July 12, 2017, https://beta.theglobeandmail.com]
\n
Table 1: Canada’s main exports
\n[Source: adapted from https://tradingeconomics.com, accessed 4 September 2017]
\n\n
Table 2: Canada’s main export destinations
\n[Source: adapted from https://tradingeconomics.com, accessed 5 October 2017]
\nOutline two roles of a country’s central bank (paragraph [1]).
\nDefine the term current account deficit indicated in bold in the text (paragraph [4]).
\nUsing an AD/AS diagram, explain the likely impact on the Canadian economy of the increase in the official interest rate (paragraph [1]).
\nUsing an exchange rate diagram, explain one reason for the appreciation of the Canadian dollar (paragraph [3]).
\nUsing information from the text/data and your knowledge of economics, discuss the possible effects on the Canadian economy of the strengthening of the Canadian dollar against the US dollar.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be “price level” or any similar terms such as “average (general) price level”. For the horizontal axis, “real (national) output/income” or “real GDP”. Any relevant abbreviations are acceptable.
A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of CA$ in US$, or US$ per CA$, or US$/CA$ (US$ may be replaced by “other currencies”). The horizontal axis may be quantity or quantity of CA$.
\nExaminers should be aware that candidates may take a different approach which,if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
To discuss the effects on the economy, candidates might consider the advantages and disadvantages related to macroeconomic goals.
\nResponses may include:
A definition/explanation of a “stronger currency”.
Economic growth:
\nLow unemployment:
\nLow and stable inflation:
\nCurrent account:
\nStandard of living
\nTo reach Level 3, candidates must refer to the particular situation in the Canadian economy, not just present the advantages and disadvantages of a stronger currency in general.
\nAny reasonable discussion.
\nTurkey’s rising current account deficit
\n[Source: adapted from ‘Battered: Turkish lira suffers worst year since 2008’, by Mehreen Khan, Markets, FT.COM,
22 December 2016, ‘Turks urged to trust in lira to defeat “tyranny of dollar”’, by Mehul Srivastava and Jonathan Wheatley,
Markets, FT.COM, 07 December 2016 ,’Turkish lira tumbles amid fears on economy and terrorist threat’, by Mehul Srivastava
and Roger Blitz, Markets, FT.COM, 12 January 2017, used under licence from the Financial Times. All Rights Reserved;
Turkey’s Surging Current Account Deficit and Its Impact in 2017, by Market Realist, Apr. 21, 2017:
http://marketrealist.com/2017/04/turkeys-surging-current-account-deficit-and-its-impact-in-2017/, 21 April 2017;
Turkey’s annual current account deficit growth jumps to 68 percent in May, www.intellignews.com, 13 July 2017.]
\n
Figure 4: Turkey inflation rate
\n[Source: adapted from https://tradingeconomics.com, accessed 6 September 2017]
\nState two functions of the International Monetary Fund (IMF) (paragraph [1]).
\nDefine the term depreciation indicated in bold in the text (paragraph [3]).
\nUsing an AD/AS diagram, explain how Turkey’s reliance on energy imports is putting “further pressure on inflation” (paragraph [4]).
\nUsing an exchange rate diagram, explain what is likely to have happened to the Turkish lira when Turkish citizens “bought US$1 billion worth of foreign currency” (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the implications of Turkey’s persistent current account deficit.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be “price level” or any similar terms such as “average (general) price level”. For the horizontal axis, “real (national) output/income” or “real GDP”. Any relevant abbreviations are acceptable.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of (Turkish) lira in US$, lira in US$, or US$ per TRY, or US$/TRY The horizontal axis may be quantity, Q, or quantity of (Turkish) lira.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nEconomic analysis may include:
\nTo explore the impact on:
\nAny reasonable discussion.
\nExplain how production that causes pollution leads to market failure.
\nDiscuss whether government regulation is the most effective way to deal with negative externalities of consumption.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
NB Where a diagram showing negative externalities of consumption is used, a maximum of level 2 should be awarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Discussion may include: the effectiveness of government regulation including the policing of regulation, consideration of alternative policies like taxation, where the tax revenue raised can be used to pay for some of the of the consequences of the negative externality.
\nNB To reach level 4, students need to consider an alternative approach to regulation.
\nThis question was generally well answered with clear definitions of negative externalities and market failure and an effective explanation of how pollution leads to market failure. Most students supported their answers with an effective cost/benefit diagram that illustrated the market failure caused by negative externalities. The best answers included real world examples to illustrate the theory they used. A common error amongst weaker answers were poorly labelled diagrams.
\nStudents produced accurate explanations of the market failure associated with the negative externalities of consumption using demerit goods such as cigarettes and alcohol and illustrated this with an effective diagram. The use of regulation as a policy option to deal with the negative externality was often poorly developed. Many answers confused taxation and advertising to reduce consumption as methods of regulation. This lost candidates marks because they failed to clearly answer the question. The best answers considered regulations on cigarettes and alcohol such as age restrictions, bans on consumption in public places and limits on promotion and evaluated these methods effectively. Top level answers used relevant real-world examples to support their answers.
\nExplain the impact of a price floor on market outcomes.
\nDiscuss the consequences for different stakeholders when the government imposes a price ceiling on a market.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
NB A price floor to reduce consumption of a demerit good can be fully rewarded if the candidate approaches the question in this way.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Discussion may include: consideration of how the product will be allocated and whether those in need are able to access the good after the imposition of a price ceiling, the effect on the quality of the product, the likelihood of underground (parallel) markets developing.
\nThis question was generally well answered by candidates with some effectively explained theory on the effect price floors (minimum prices) on markets where they are used. The strongest responses considered the impacts on consumers, producers and governments in terms of higher prices, increased revenues and the cost of intervention buying. An effective use of the minimum price diagram was important to illustrate the answer as was an effective real-world answer and many students used agricultural markets to do this.
\nThis question was generally well answered by candidates who often used the rental property market as an illustrative answer. Most students used an effective price ceiling diagram to explain the impact of the policy on consumers, producers and the government. The weakness in some answers was not to fully evaluate the consequences of the price ceiling. For example, the policy is good for the buyers who can actually buy the goods, but large numbers cannot if shortages develop because of the maximum price. Real world examples were applied quite well in this question with rent controls in cities such as New York and Berlin being used. A small number of students got price ceilings and price floors mixed up in parts (a) and (b) and this led to some low marks for those who made this mistake.
\nThe information in Table 1 refers to Country A (base year: 2011).
\nTable 1
\nThe central bank of Country A aims to achieve price stability, defined as “inflation below but close to 2 % annually”.
\nThe information in Table 2 refers to Country B, an economically less developed economy.
\nTable 2
\nCalculate the inflation rate for 2014 and for 2015. Enter your results in Table 1.
\nCalculate the unemployment rate for 2012 and for 2013. Enter your results in Table 1.
\nExplain two reasons why low and stable inflation is desirable.
\nState two functions of a country’s central bank.
\nUsing the data in Table 1 to support your answer, identify two reasons why many economists would consider Country A’s economy to be performing poorly in 2012.
\nState one reason why monetary policy is considered to have limited effectiveness in increasing aggregate demand if an economy is in a deep recession.
\nExplain two reasons why fiscal policy may prove effective in lifting an economy out of a deep recession.
\nOutline the meaning of the natural rate of unemployment, with reference to the long-run Phillips curve and types of unemployment.
\nUsing the information in Table 2 for Country B calculate nominal GDP in 2014. Enter your result in Table 2.
\nUsing the information in Table 2 for Country B calculate nominal GNI in 2015. Enter your result in Table 2.
\nUsing the information in Table 2 for Country B, determine real GDP in 2014 and in 2015. Enter your results in Table 2.
\nUsing the information in Table 2 for Country B, calculate the rate of economic growth between 2014 and 2015.
\nThe data in Table 2 suggest that Country B may have attracted significant foreign direct investment (FDI).
\nOutline one possible disadvantage of foreign direct investment (FDI) for economically less developed countries.
\n2014: 1.95
2015: 4.89
Award [1] for each correct answer.
\nNo workings are required.
\nN.B. Responses written either in Table 1 or in the answer boxes provided should be fully rewarded
\n2012: 7.34
2013: 5.33
Award [1] for each correct answer.
\nNo workings are required.
\nN.B. Responses written either in Table 1 or in the answer boxes provided should be fully rewarded
\nFor a limited explanation of one reason, award a maximum of [1].
\nFor an accurate explanation of one reason or a limited explanation of two reasons,award a maximum of [2].
\nFor providing an accurate explanation of one reason and a limited explanation of a second reason, award a maximum of [3].
\nFor providing two accurate reasons, award a maximum of [4].
\nNB A response which only states the correct data without specifying that there is high unemployment and deflation may be awarded a maximum of [1].
\nAnswers may include:
\nAny other valid reason.
\nAward [1] for one possible reason.
\nFor a limited explanation of one reason, award a maximum of [1].
\nFor an accurate explanation of one reason or a limited explanation of two reasons, award a maximum of [2].
\nFor providing an accurate explanation of one reason and a limited explanation of a second reason, award a maximum of [3].
\nFor providing two accurate reasons, award a maximum of [4].
\nNB A response that refers to the types of unemployment that are not cyclical may be rewarded.
\n351.70 is sufficient for [1].
\nNo workings are required.
\nNB Responses for (h) and (i) written either in Table 2 or in the answer boxes provided should be fully rewarded.
\n292.56 is sufficient for [1].
\nNo workings are required.
\nNB Responses for (h) and (i) written either in Table 2 or in the answer boxes provided should be fully rewarded.
\n2014: 351.70
2015: 355.84
Award [1] for both correct figures.
\nNo workings are required.
\nOFR applies for 2014 figure.
\nNB Responses for (h) and (i) written either in Table 2 or in the answer boxes provided should be fully rewarded.
\n\n
No workings are required.
\n1.18 % or 1.18 is sufficient for [1].
\nOFR applies.
\nAward [1] for stating one possible disadvantage without any outline.
\nAward [2] for stating one possible disadvantage with a brief outline.
\nDisadvantages may include:
\nAny other valid disadvantage outlined.
\nExplain how a natural monopoly may arise.
\nDiscuss how governments restrict monopoly power.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Discussion may include: consideration of the relative merits of alternative means by which monopolies might be restricted. “Real-life” examples would be very suitable as a means to support the discussion.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nStronger candidates were able to clearly distinguish between monopoly and natural monopoly but quite a few candidates just wrote everything they knew about monopoly, maybe hoping that there would be enough overlap between monopoly and natural monopoly to earn some marks.
\nThe most prepared candidates were able to define precisely monopoly power, explain and discuss the government policies that restrict monopoly power, and support their answers with appropriate diagram and examples. However, there were quite a few candidates that strayed toward explaining and evaluating monopoly as a market structure.
\nExplain how a decrease in business confidence can affect the real GDP of an economy that is producing below the full employment level of output.
\nEvaluate the view that a decrease in aggregate demand would always be deflationary.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Evaluation may include: When AD falls in the Keynesian model and the economy is below full employment the average price level does not fall because wages and costs tend not to fall.
\nNB Candidates can approach this question in terms of deflationary conditions in the economy or as deflation.
\nThis question was well answered by many candidates. The key terms of business confidence, real GDP and full employment were mostly well defined and the impact of a fall in business confidence on real GDP was clearly explained with an effective AD/AS diagram. Weaker answers tended to be imprecise in the explanation of business confidence and needed to be clearer on the meaning of full employment.
\nThis question proved to be quite challenging for students because the term \"deflationary\" can be answered as falling prices or falling output when there is a deflationary gap. Most candidates chose to focus on falling prices and there were some very good answers to this with students focusing on the Keynesian AS where falling aggregate demand will cause deflation if output is at or near full employment. When, however, output is below full employment, falling aggregate demand will not cause deflation because wages are 'sticky' downwards. Some students were drawn onto the Neo-classical LRAS which has another approach that could be used effectively to explain how falling aggregate demand will always cause deflation. Some students used real world examples here, but many found it difficult to build one into their answer.
\nExplain why there is a possible trade-off between the unemployment rate and the inflation rate in the short run.
\nDiscuss the view that the redistribution of income is the most important impact that inflation has on an economy.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Discussion may include: consideration of alternative impacts of inflation (such as a loss of export competitiveness, increases in short-run economic growth, decreases in savings and increases in uncertainty resulting in lower investment and hence lower long-run economic growth, “menu costs”) with the candidate making judgment with regard to what might be the most important impact and whether or not the candidate feels the potential redistributive effect is the most significant impact of inflation, the importance of how high the inflation rate is, the difference between expected and unexpected inflation.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nCandidates were expected to focus their answers on the negative short run relationship between inflation and unemployment and explain it with the help of the AD/AS model. The best answers used both the short-run Phillips curve diagram (to show the alleged negative relationship, and therefore trade-off, between the inflation rate and the unemployment (rate) in the short run) and AD/AS diagram (to explain why there may be a negative relationship between inflation and unemployment in the short run). Both diagrams were usually done well but many candidates found it difficult to use both diagrams to support a coherent and complete explanation. A common mistake for candidates when trying to link the two diagrams was to incorrectly connect points on the two vertical axes with a dashed line as if both axes measure inflation.
\nCandidates were expected to focus on the impacts of inflation in their answers, but many candidates choose to elaborate on the types and causes of inflation instead. A common mistake was to confuse the impacts of inflation with the impacts of increasing aggregate demand (without explaining why inflation may lead to increasing aggregate demand in the short run in order to make their answer relevant to the specific demands of the question).
\nExplain how government expenditures are used to promote equity in the distribution of income.
\nEvaluate the impact on efficiency in the allocation of resources when the government uses taxation to promote equity.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Evaluation may include: consideration of the extent to which there is a trade-off between equity and efficiency and why an attempt to improve equity can have positive and negative effects on efficiency. Evaluation can consider the impact on incentives to work and whether higher taxation does actually lead to disincentives.
\nThere were some good answers to this question with many candidates showing a clear understanding of equity in terms of opportunity and fairness and explaining how government spending on welfare payments, education and healthcare can improve equity. Many students used the Lorenz curve diagram and Gini coefficient to illustrate how equity could be improved by reducing income inequality.
\nThis was quite a challenging question for students and this was reflected in the answers of candidates. The strongest responses considered how progressive taxation could improve equity, but how it may have a negative impact on worker and entrepreneur incentives which could reduce economic efficiency. It was also good to see students considering how indirect taxation on luxury goods could be used to improve equity but might cause unemployment in those industries which could lead to inefficiency. Too many answers got rather tied up in the way progressive taxation works or drifted onto other areas of taxation that would not really be effective at improving equity.
\nExplain why measuring unemployment in a country is difficult.
\nDiscuss whether the most important consequence of unemployment is a loss of income for individuals.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Discussion may include: whether or not a loss of income is the most important consequence of unemployment that may be set in the context of other impacts of unemployment, such as reduced economic growth, reduced government revenues, increased government expenditures on unemployment benefits, personal and social problems, political instability, with judgment being made with regard to whether a loss of income is the most important impact of unemployment.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nCandidates were generally able to explain the problems with measuring unemployment but had difficulties explaining these problems in economic terms and categorizing them according to whether they lead to underestimation or overestimation of the unemployment rate. Some candidates pointed out that the average unemployment rate for an economy ignores regional, ethnic, age and gender disparities but this was not considered relevant and candidates received no credit for this part of their answer since this is a problem of using the average rate to make judgements about the state of the economy and not a problem of measuring unemployment (government statisticians do use the surveys of the labour force to measure and provide data about the unemployment rates for different regions, age groups, genders and levels of education).
\nCandidates used many acceptable diagrams to show unemployment and the various economic consequences of unemployment. However, many otherwise well-prepared candidates focused on the economic consequences of unemployment and ignored the personal and social consequences.
\nExplain how knowledge of price elasticity of demand could be used by a firm that is considering changing the price of its product.
\nDiscuss how the introduction of a subsidy in a market will affect consumers, producers and the government.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDiscussion may include: judgments about which stakeholders are better off and which stakeholders are worse off due to the imposition of a subsidy, which are well supported by the explanation of the theory, the diagram and the example(s).
\nFor many candidates, the difficulty in this question was to focus the answer on a single firm that sells a specific product. Many candidates drew diagrams with supply curves as if there are many firms that constitute the supply in a competitive market but then gave an example with a single firm that should be a price taker in a competitive market (and therefore should not be able to change the price of its product/should not have a downward sloping demand curve). Another common mistake, stemming from the failure to distinguish between the supply of a single firm and the supply of the market, was to use examples from broad categories of goods whose demand can be considered price inelastic (such as agricultural products or cigarettes), ignoring the fact that the demand for a single producer (of agricultural products) should be rather price elastic due to the competitive nature of such markets and the substitutability of such goods.
\nThe subsidy is a difficult topic to examine because there are many types of subsidies that governments use in practice to support the firms in a given industry. The two main types are a subsidy that has the form of a specific cash payment per unit of production (the opposite of a specific per unit tax) and a subsidy that decreases the cost of production (such as provision of infrastructure, subsidized wages, subsidized energy, low-interest loans, etc). A correctly drawn diagram appropriate for the first type of subsidy was often used, but in their explanations, candidates were confusingly explaining that the subsidy decreases the producers' cost of production. Some weaker answers also had the effects of the subsidy on consumer and producer surplus shown incorrectly on the diagram. Another common mistake was to give an example where the subsidy is provided to stimulate the production and consumption of a merit good while simultaneously pointing out that the provision of subsidy would create deadweight loss/lead to allocative inefficiency.
\nIn the country of Gardia, the currency is the gamma. The exchange rate of the United States dollar (US$) to the gamma is US$ 1 = 6.20 gamma.
\nGardia received a loan of US$ 4 million from a foreign bank in 2018 when the exchange rate was US$ 1 = 5.3 gamma. It must pay back US$ 4.2 million (original amount borrowed plus interest) in 2019 when the exchange rate is US$ 1 = 6.2 gamma.
\nBoth the gamma and the US$ are fully convertible currencies, which float freely in foreign exchange markets. The supply and demand for US$ (in billions) are given by the functions
\n\n\nwhere g is the exchange rate of the US$ in terms of the gamma, is the quantity of US$ supplied per month and is the quantity of US$ demanded per month.
\nThe demand (D) function is represented in Figure 2.
\nAssume that the monthly supply of US$ changes to the function
\n\nIf a visitor to Gardia from the US buys a towel that costs 23 gamma, calculate the cost in US$.
\nMore foreign tourists are visiting Gardia. Outline the effect on the value of the gamma. You must give a reason for your answer.
\nState two factors that could cause Gardia’s current account to be in deficit, even though its balance of trade in goods is in surplus.
\nDetermine the size of Gardia’s current account surplus/deficit when the sum of the financial and capital accounts is US$ 2 billion.
\nGardia is aiming to increase its economic growth rate. Explain two sources of economic growth for economically less developed countries.
\nCalculate the additional cost of paying back the loan in gamma in 2019, due to the interest and the change in the exchange rate.
\nCalculate the equilibrium exchange rate for the US$ in terms of the gamma.
\nPlot and label the new supply curve on Figure 2.
\nUsing Figure 2, calculate how many US$ are needed to buy one gamma at the new exchange rate.
\nState two reasons that could have caused an increase in the supply of US$.
\nGardia’s investment (in plant and equipment) increased by 11 million gamma in the last month. In the same month, its government spending decreased by 8 million gamma. It has been estimated that the marginal propensity to consume (MPC) on domestic goods and services in Gardia is 0.75.
\nCalculate the maximum possible increase in real gross domestic product (GDP) in Gardia that could result from the changes in investment and government spending.
\nUsing a fully labelled monetarist/new classical diagram, explain why, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output in the long run.
\n= 3.71
\nNo workings are required.
\nUS$3.71 or 3.71 is sufficient for [1].
\nPossible factors may include:
\nNB Using examples is sufficient (though not required) but for [2] the examples must be from different accounts (bullet points).
\nNB A response that provides at least one account but does not refer to it having a (greater) deficit should be awarded [1].
\nAward [1] for each valid factor.
\nA deficit of US$2 billion or − $2billion is sufficient for [1].
\nFor a limited explanation of one source, award a maximum of [1].
\nFor an accurate explanation of one source or a limited explanation of two sources, award a maximum of [2].
\nFor providing an accurate explanation of one source and a limited explanation of a second source, award a maximum of [3].
\nFor providing two accurate sources, award a maximum of [4].
\n2018: 4 × 5.3 = 21.2
2019: 4.2 × 6.2 = 26.04
Any valid working is sufficient for [1].
\n26.04 − 21.2
= 4.84 million gamma or 4.84 million
An answer of 4.84 million or 4.84 or 4.84 million gamma without workings is sufficient for [1].
\ng − 2 = 10 − 2g
3g = 12
Any valid working is sufficient for [1].
\ng = 4 or $1 = 4 gamma
\nAn answer of 4g or 4 without workings is sufficient for [1].
\nAward [1] for a correctly plotted supply curve.
\nAward [1] for a correctly labelled supply curve.
\nNB If the supply curve is incorrectly plotted with a label, then no marks should be awarded.
\nUS$ = US$ 0.29 or 0.29 or 29 cents
\nEither of the above equivalent answers is sufficient for [1].
\nOFR applies.
\nFor OFR divide 1 by the equilibrium value that appears on the plot or whatever is indicated on the vertical axis that is given by the intersection of demand and supply.
\nReasons may include:
\nNB Acceptable answers do not require an explicit reference to Gardia.
\nAward [1] for each valid reason.
\n× (11 − 8) = 4 × 3
\nAny valid working (eg the multiplier being calculated correctly) is sufficient for [1].
\n= 12 million gamma
\nAn answer of 12 million gamma or 12 without workings is sufficient for [1].
\nIf investment is ignored and so the answer provided is 11 × 4 = 44 then [1] may be awarded.
\nFor full marks to be awarded the response must provide valid working and include correct units.
\n\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
NB An alternative response which illustrates and explains how the economy would adjust to a decrease in aggregate demand should also be fully rewarded.
\nTable 1 provides information required for the calculation of a consumer price index (CPI). It shows a typical basket of goods purchased by the citizens of Country Alpha and the prices of these goods for two consecutive years. Assume 2015 is the base year, when the cost of the typical basket was $45.00.
\nTable 2 provides selected economic data for Country A.
\nAn economist advises the government of Country A to spend $207 million on a new infrastructure project. She estimates that as a result, nominal GDP would increase by $828 million, ceteris paribus.
\nA worker in Country J can produce either 12 kilograms (kg) of rice or 4 kg of wheat per hour. A worker in Country H can produce either 14 kg of rice or 7 kg of wheat per hour.
\n\n
Calculate the cost of the typical basket in 2016.
\nThe cost of the typical basket was $50 in 2017. Calculate the consumer price index (CPI) for 2017.
\nThe consumer price index for 2014 was 101.23. Calculate the rate of inflation between 2014 and 2015 (the base year).
\nExplain two reasons why the calculation of the inflation rate may not be accurate.
\nOutline how monetary policy is used to lower the inflation rate in an economy.
\nIn 2019, nominal GDP was $102 874.55 million. Using data from Table 2, identify whether Country A experienced inflation or deflation or disinflation in 2019.
\nUsing data from Table 2, state the reason why there is a difference between the real GDP growth rate and the real GDP per capita growth rate between 2015 and 2019.
\nAn economist forecasts that the real GDP growth rate in 2020 will be 3.41 %. Using the data in Table 2, calculate the forecast for real GDP ($ million) in 2020.
\nCalculate the estimated value of the multiplier used by the economist.
\nCalculate the estimated value of the multiplier used by the economist.
\nPlot and label the production possibility curves for Country J and for Country H, assuming constant opportunity costs, on Figure 4.
\n\n
Using the data and the concept of opportunity costs to support your answer, determine which good Country H should specialize in. You must give a reason for your choice.
\nExplain two gains from trade that arise when Country J and Country H specialize according to comparative advantage.
\n5 × 2.5 + 10 × 1.5 + 2 × 10
\nAny valid working is sufficient for [1].
\n= $47.50
\nAn answer of $47.50 or 47.50 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working and include correct units.
\n50/45 × 100 = 111.11 No units (eg $) permitted.
\nNB workings are not required.
\n(100 − 101.23)/101.23 × 100 = −1.22 %
\nNB workings are not required.
\n−1.22 %
\nAn answer of −1.22 % or −1.22 or deflation of 1.22 % is sufficient for [1].
\ndeflation OR inflation is sufficient for [1].
\nNB There has been deflation since the base year. In 2019, however, the presence of deflation can only be confirmed if the percentage change in nominal GDP is below 0.72 %.
\nbecause the population has been growing is sufficient for [1].
\n103 785.98 × 1.0341
\nAny valid working is sufficient for [1].
\n= $ 107 325.08 million OR $107.33 billion
\nAn answer of 107 325.08 without workings is sufficient for [1].
\nNB Since ($ million) is in the question, units are not required.
\n828/207
\nAny valid working is sufficient for [1].
\n= 4
\nAn answer of 4 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working with NO units.
\n0.75 is sufficient for [1].
\nOFR applies.
\n[1] for one correctly drawn production possibility curve
[2] for two correctly drawn production possibility curves
A response with missing or incorrect labels may be awarded a maximum of [1].
Kgs are not required on the axes.
The majority of candidates performed the calculation correctly.
\nSeveral errors were in evidence here. Candidates assumed that 2016 was the base year (even though 2015 is stated clearly as the base year) and calculated accordingly. Rounding errors were common, with candidates neglecting the requirement to express answers accurately or to 2dp.
\nRelatively few candidates were able to calculate the rate of inflation correctly. Most students appeared to assume that 2013 was the base year - possibly because they are not used to reading tables which show deflation.
\nThere were many good responses which explained the biases which might render the calculated inflation rate inaccurate. Weaker responses stated but did not explain these factors or implied that the data collection might be inaccurate. Additionally, weaker responses stated that \"many people buy in parallel/black markets\" or referred to price volatility as a reason for inaccuracy.
\nCandidates were mostly able to explain contractionary monetary policy, although a small minority focused on expansion. For full marks, reference to consumer spending and/or investment spending was required, and this was not included by some candidates.
\nBoth inflation and deflation were allowed here as the data did not preclude either result. However, the data did not indicate disinflation. The great majority of candidates earned the mark.
\nThe data shows that the per capita growth rate is always less than the GDP growth rate, which shows that the population is actually increasing every year. The question was not answered well, with many candidates merely defining the real GDP per capita growth rate or describing the implications of an unequal distribution of income.
\nApart from some carelessness in the use of units ($ million) and rounding to 2dp, the question was answered well.
\nWell-answered.
\nWell-answered, although some candidates were careless and applied the formula incorrectly (eg MUL T = 1/MPC) the majority of responses were correct.
\nA small minority of candidates ignored the assumption of constant opportunity costs (and drew concave PPCs). However, the vast majority of candidates earned full marks.
\nAlthough the majority of candidates were able to identify that Country H should specialize in wheat, weaker students mistakenly compared Country H's opportunity cost of producing wheat with its opportunity cost of producing rice, which is simply the reciprocal and thus meaningless.
\nMany candidates did not recognise the most important outcome of specializing according to comparative advantage, namely that global output is higher and as a result both countries, even those with an absolute disadvantage in both goods, are able to consume outside their PPCs. Candidates tended to describe general gains from trade without any focus on the importance of comparative advantage.
\nThe strong Thai baht
\n* currency manipulator: the US will label a country as a currency manipulator if the following three requirements are met (a country will be placed on a watchlist if they meet two of the requirements):
1. The country is using its foreign reserves to change the value of its currency to gain an advantage
2. The country has a bilateral trade surplus with the US of over US$20 billion
3. The country has a current account surplus of more than 2 % of its GDP.
\n
Table 1: Thailand macroeconomic indicators 2019
\n[Source: Bloomberg News, 2020. Thailand moves closer to US currency watchlist [online]. Available at:
https://www.bangkokpost.com/world/1831214/thailand-moves-closer-to-us-currency-watchlist
[Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022.
All rights reserved. Source adapted.
Bloomberg, 2019. The Thai Baht reached a new 6-year high. Here’s why it’s surging [online]. Available at:
https://www.thestar.com.my/business/business-news/2019/10/25/the-thai-baht-reached-a-new-6-year-high-hereswhy-
its-surging [Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022.
All rights reserved. Source adapted.
Cumperayot, P., 2019. What Does a Rising Baht Mean for Thailand’s Economy? [online]. Available at:
https://thediplomat.com/2019/08/what-does-a-rising-baht-mean-for-thailands-economy/
[Accessed 27 October 2020]. Source adapted.]
Define the term gross domestic product indicated in bold in the text (paragraph [4]).
\nDefine the term current account surplus indicated in bold in the text (paragraph [7]).
\nUsing an exchange rate diagram, explain how a decrease in the interest rate might influence the value of the Thai baht (paragraph [6]).
\nUsing a production possibilities curve (PPC) diagram, explain how the importing of “new technology and capital equipment” might affect Thailand’s production possibilities (paragraph [3]).
\nUsing information from the text/data and your knowledge of economics, evaluate the implications of the strong Thai baht on Thailand’s economy.
\nNB Candidates may show a decrease in demand for the Thai baht resulting from the decreased attractiveness of /financial/ portfolio investments
This will lead to a decrease in demand and result in a depreciation/decrease in the value/price. This approach should be fully rewarded.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of (Thai) baht in other currency, (Thai) baht in other currency, or other currency per THB, or OTHER CURRENCY/THB. The horizontal axis may be quantity, Q, or quantity of (Thai) baht.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nEconomic analysis may include:
\nImplications of strong Thai baht on inflation rate may include:
\nImplications of strong Thai baht on economic growth may include:
\nImplications of strong Thai baht on employment may include:
\nImplications of strong Thai baht on balance of payments may include:
\nAny reasonable evaluation.
\nTo reach level 3, students must make reference to the extract/context, not just present a discussion on the implications in general.
\nMost students successfully defined the term. The major area of weakness made by a minority of candidates was not to define it in terms of 'value’.
\nFor definitions, precision is expected, and this proved to be the reason why many candidates only obtained one mark as the response required several elements. Many overlooked the money flow (positive) and the elements that make-up the current account, often restricting their answer to the balance of trade.
\nIt was encouraging to see that so many students were able to accurately construct and label appropriate exchange rate diagrams resulting from a cut in interest rates. Still, some labelling errors mainly occurred when students used the “other currency / Thai Baht\" format incorrectly for the y-axis. Students used a variety of explanations/reasoning. Some explained the impact in terms of an increase in the supply of the baht resulting from the exodus of funds in Thailand's banks to overseas banks. Others explained in terms of a decrease in demand for the Baht. Either approach, if accurately explained, was rewarded with full marks.
\nMain weaknesses of answers:
\nThere were some encouraging answers to this question. Most candidates understood the meaning of production possibilities and were able to construct an accurately labelled diagram resulting from the increased import of ''technology and capital equipment''. Only a few students showed a movement rather than a shift. Well prepared candidates were able to explain the impact on Thailand's production possibilities.
\nThe main weaknesses/errors included:
\nMany students were able to identify relevant issues in the text and link these to economic concepts, showing some knowledge and understanding regarding the implications of the strong baht on the Thai economy. A significant minority of candidates were able to use the data and information in the text to develop an effective analytical answer, using economic concepts and theory, though a lot of the analysis did not go beyond AD/AS diagrams. Other students had a sound understanding of the economics involved but failed to effectively apply it to the case study presented. Too often, there was a lack of context relating to the extract, with answers that were purely theoretical. At the other extreme, some answers lacked analysis and relied on an overly descriptive approach, often merely paraphrasing the text with little attempt at applying economic concepts. There were often too many statements / assertions with no or limited reasoning / analysis.
\nWhile it is essential for students to use economic theory and concepts, these must be applied in context. In this case, for example, PED, the Marshall Lerner condition and the terms of trade were often mentioned but too often not applied effectively or not always interpreted in a way that showed real understanding of these theories.
\nFree Trade Agreement between the European Union and Indonesia
\n[Source: Iswara, M. A., 2019. Indonesia gets Rp 232 billion grant from EU to ease trade negotiations [online]. Available
at: https://www.thejakartapost.com/news/2019/09/30/indonesia-gets-rp-232-billion-grant-from-eu-to-ease-tradenegotiations.
html [Accessed 27 October 2020]. Source adapted.]
Define the term tariffs indicated in bold in the text (paragraph [5]).
\nState two functions of the World Trade Organization (WTO) (paragraph [6]).
\nUsing a demand and supply diagram for processed food, explain how the EU’s tariff on palm oil might impact the market for processed food in the EU (paragraph [5]).
\nUsing a production possibilities curve (PPC) diagram to illustrate comparative advantage, explain why the EU would export cars to Indonesia and Indonesia would export clothing to the EU (paragraph [2]).
\nUsing information from the text/data and your knowledge of economics, discuss the economic effects on Indonesia of establishing a free trade agreement with the EU.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe x and y axes can be cars and clothing.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nEconomic models/theory may include:
\nPositive economic effects may include:
\nNegative economic effects may include:
\nAny reasonable discussion.
\nThis was generally well answered.
\nStudents often lost marks by confusing the functions of WTO with its aims and objectives. A list of the functions of the WTO and other such organisations are easily accessible and students should be encouraged to search for these.
\nWell prepared students had little difficulty with this question, recognising that palm oil was a factor of production in processed foods and that a tariff would result in an increase in the costs of production. They then went on to construct a well labelled diagram, illustrating the effect of the tariff on the price and output of processed food in the EU. The main limitation was that some students failed to recognise the fact that palm oil was a factor of production.
\nThere were, however, a significant number of students who misread the question and based their answer on a tariff diagram while others used a supply and demand diagram related to palm oil and not processed food. Using such diagrams and using them as the basis for their explanation made it very difficult to access marks.
\nAs with part (b), well prepared candidates had little difficulty with this question. It is comforting to note the accuracy and appropriateness of the diagram used and that it was clearly understood. There was in general a good understanding of the concept of comparative advantage although there were occasions when there was confusion with absolute advantage. In the explanation, the essential idea that there must be different opportunity costs for there to be a comparative advantage was sometimes not fully explained.
\nOverall this was disappointingly answered. Most students had some idea of a free trade area but relatively few were able to analyse the effects on Indonesia in joining such an area. There were, however, exceptions where students demonstrated not only a clear understanding of a free trade area in general but were able to apply its impact on the Indonesian economy using a wide range of economic concepts/theory such as trade creation/diversion, economies of scale and AD/AS analysis etc. Such answers were all too rare.
\nA significant number focused on the economic effects on the Indonesian economy and the EU (not asked for) while some only on the EU (which made these answers irrelevant). Many responses lacked analytical depth and others misused or misread the data in the extract. Many failed to recognise (from the extract) that the EU was phasing out their use of biodiesel by 2030 and based their answer on the expansion of palm oil production.
\nFirm A, which is operating in a perfectly competitive market, produces almonds. Figure 1 illustrates Firm A’s average total cost (ATC), average variable cost (AVC) and marginal cost (MC) curves at different output levels.
\nFigure 2 illustrates a perfectly competitive market in equilibrium and a perfectly competitive firm operating in this market. S is supply, D is demand, Po is the short-run equilibrium price, Qo is the short-run equilibrium quantity, MC is marginal cost, ATC is average total cost, AR is average revenue, MR is marginal revenue.
\nFirm B is a monopoly producer of diamonds. Figure 3 illustrates its demand (D), marginal revenue (MR), average total cost (ATC) and marginal cost (MC) curves at different output levels.
\nThe market for shampoo displays the characteristics of monopolistic competition.
\nUsing information from Figure 1, calculate Firm A’s total fixed costs.
\nThe market price of almonds is $11 per kilogram. Using Figure 1, identify the quantity of almonds Firm A must produce in order to maximize profits.
\nCalculate the economic profit/loss when Firm A is producing at the output level identified in part (b)(i).
\nBased on the information in Figure 2, state whether the firms in this market are making normal profits, economic profits or economic losses.
\nOn Figure 2, draw and label appropriate additional curves to show how a perfectly competitive market will move from short-run equilibrium to long-run equilibrium.
\nUsing your answer to part (c)(ii), explain how the market adjustment takes place.
\nState two assumed characteristics of a monopoly.
\nExplain two reasons why a monopoly may be considered desirable for an economy.
\nUsing Figure 3, calculate the economic profit when Firm B is maximizing its profits.
\nUsing Figure 3, calculate the total revenue when Firm B is maximizing its revenue.
\nA shampoo firm is earning economic profits. Outline, with a reason, what will happen to its demand curve in the long run.
\nSketch and label a diagram to illustrate the long-run equilibrium for a firm in monopolistic competition.
\n20 (29 − 10)
\nAny valid working (from another output level e.g. 30 (24.67 − 12)) is sufficient for [1].
\n= $380
\nAllow +/− $10 i.e. from $370 to $390.
\nNB responses that lie outside the +/− $10 tolerance but indicate that, at a given quantity, the AVC and ATC are approximately accurate (eg 45 (31 − 23) = $360) may be fully rewarded.
\nAn answer of $380 or 380 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working and include correct units. However, superfluous units (e.g. $380 per kg) may be ignored.
\n21 kg OR 21 is sufficient for [1].
\n21 (11− 28)
\nAny valid working is sufficient for [1].
\n= − $357 OR (economic) losses = $357
\nOFR applies if incorrect quantity is given for (b)(i).
\nAn answer of a loss of $357 or −357 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working and include correct units. However, superfluous units may be ignored.
\nEconomic losses OR losses
\nis sufficient for [1].
\n[1] for one accurate, labelled diagram OR two diagrams without labels.
[2] for two accurate, labelled diagrams.
D1 or AR1 or MR1 is sufficient for firm’s model. P1 is not required for firm’s model. Titles are not required for the diagrams.
\nThe firm’s new Q need not be specified on the diagram.
\nAward [1] for each valid characteristic:
\nAny other valid characteristic.
\n20 (20 − 15)
\nAny valid working is sufficient for [1].
\n= $100
\nAn answer of $100 or 100 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working and include correct units.
\nNB Answers that include “per gram” may be accepted.
\n30 × 15
\nAny valid working is sufficient for [1].
\n= $450
\nAn answer of $450 or 450 without workings is sufficient for [1].
\nFor full marks to be awarded, the response must provide valid working and include correct units.
\nNB Answers that include “per gram” may be accepted.
\n[1] for D tangential to ATC (AC)
[1] which is vertically above intersection of MR and MC
[1] for correctly indicating Po and Qo, where MR = MC and D is tangential to ATC
A response with missing or incorrect labels or without MC intersecting minimum ATC may be awarded a maximum of [2].
\nVertical axis may be labelled P or Price or Costs or Revenue. Horizontal axis may be labelled Quantity or Q or Output.
\nNB Provided that the price and quantity have been labelled (eg Po, Qo) then it is not necessary to label the axes.
\nCandidates were generally able to recognize that Q(ATC−AVC)= FC although a significant minority simply subtracted AVC from ATC. Those who selected a quantity of 20kg for the calculation were able to produce an answer of $380. However, candidates who selected an alternative quantity found some difficulty in reading precise figures from the graph. Candidates who performed a calculation based on a reasonable reading from the graph were awarded appropriately.
\nMost candidates recognized the profit-maximizing level of output at 21kg.
\nStronger candidates were able to perform the calculation using an accurate reading from the graph. However, there was some tendency to mix the price with AVC or to revert to the quantity which had been selected for part (a).
\nWell answered. candidates recognized that if ATC>P then economic losses are made.
\nThe majority of candidates were able to sketch a new, correctly positioned supply curve above/to the left of the original while some sketched a much smaller decrease in supply than that required. While most candidates sketched and labelled the firm's new demand curve correctly, a surprising number did not draw a new curve for the firm. Some students were not able to distinguish between a short-run shutdown (when firms continue to make losses but temporarily halt output and stop paying their VC), and a long-run exit of firms from a market, which will raise the price until normal profits are being earned at minimum ATC.
\nCandidates who chose question one generally had a good understanding of the model and were able to respond accurately. Weaker answers omitted a reference to the price increase.
\nGenerally well-answered by the majority. Weaker responses stated that \"abnormal profit\" was a characteristic rather than a consequence of the market characteristics.
\nMost candidates identified \"economies of scale\" and \"abnormal profit allows for more R&D\" as relevant points. Weaker students neglected to explain why these may be desirable ie how society (rather than the firm itself) may benefit from these factors. Candidates who described natural monopoly tended to neglect to explain how/why it might be desirable.
\nWell-answered. The majority of candidates identified the profit-maximizing level of output and calculated profit correctly.
\nStronger candidates recognised that revenue is maximized where MR= 0 and used this knowledge to calculate total revenue correctly. However, a significant minority were unable to apply this theory correctly.
\nMost candidates recognized that the existence of economic profits would attract new firms into the industry and consequently shift the shampoo firm's demand curve to the left/make the demand curve more elastic. However, a minority argued that increased competition might reduce prices and increase demand. There was some confusion between the firm and the market/industry.
\nWell-prepared candidates were able to sketch an accurate diagram and earn full marks. However, a significant majority were unable to do so. The important feature that distinguishes monopolistic competition from monopoly in the long run is that AR (the demand curve) is tangential to the ATC curve, but not at minimum ATC, which would be the case in perfect competition. (Students should note that a monopoly may also be making normal profits when it so happens that its profit maximizing quantity occurs where AR intersects ATC.)
\nChanging times for Vanuatu
\n[Source: Daily Post, 2019. Vanuatu poised to graduate from Least Developed Country status [online]. Available at https://
dailypost.vu/news/vanuatu-poised-to-graduate-from-least-developed-country-status/article_203172ef-98a8-5e83-
ab2c-515c4858ee86.html [Accessed 27 October 2020]. Source adapted.]
Define the term foreign direct investment indicated in bold in the text (paragraph [3]).
\nDefine the term human capital indicated in bold in the text (paragraph [5]).
\nUsing a demand and supply diagram, explain how a subsidy changes the consumer surplus for a good (paragraph [6]).
\nUsing a Lorenz curve, explain how a progressive tax system could change Vanuatu’s income distribution (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, discuss the effectiveness of foreign aid in achieving economic development in Vanuatu.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nCandidates may use different notation or shading on the demand and supply diagram with a supported explanation to indicate an increase in consumer surplus and this should be fully awarded.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe two curves may be shown on one graph, or may be shown on two graphs.
\nThe vertical axis should be labelled (cumulative) % of income and the horizontal axis should be (cumulative) % of population / households. A title is not necessary. There must be a diagonal line, but it is not a requirement that it is labelled. There should be an indication of the inward shift of the Lorenz curve.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nEconomic analysis, focusing on economic development, may include:
\nEffectiveness of foreign aid in achieving economic development may include:
\nLack of effectiveness of foreign aid in achieving economic development may include:
\nAny reasonable discussion.
\nIn many answers a complete definition was missing, often being too imprecise and/or inaccurate. A surprising number of students thought that FDI was a governmental investment abroad.
\nMost were only able to access one mark as there was not a clear link as to how this might influence productive capacity/factors of production etc. A surprising number of candidates thought this was to do with the size of the labour force.
\nThis was generally well answered by the majority of students. Most accurately constructed a correct diagram, identifying both the original and the new consumer surplus resulting from the subsidy. Diagrams were in the main accurately annotated and effectively used in the explanation.
\nThis was well answered by a significant proportion of students attempting this question. It was clear that the Lorenz curve analysis was well understood and diagrams were generally accurate and well labelled. Students recognised the likely impact of a progressive tax system in creating a more equitable distribution of income and were able to use their diagram effectively explaining this.
\nAs with development questions in the past, many students failed to focus on economic development and instead concentrated almost exclusively on economic growth with development as a by-product. Answers would benefit from a clear interpretation of economic development so that the response can link to criteria to help assess effectiveness.
\nThere were notable exceptions where students used appropriate economic analysis/concepts such as the poverty cycle, the Lorenz curve, PPC and AD/AS to develop an in-depth analysis coupled with valid and balanced judgments. Students should be advised that a development question that focuses on growth will struggle to get beyond Level 1.
\nNew policies for Brazil
\nDefine the term multinational corporations indicated in bold in the text (paragraph [5]).
\nDefine the term green GDP indicated in bold in the text (paragraph [7]).
\nUsing a business cycle diagram from 2010 to 2019, explain how cyclical unemployment may have changed during the economic boom (paragraph [1]) and the recession (paragraph [2]) in Brazil.
\nUsing an externalities diagram, explain how manufacturing companies in Brazil are contributing to market failure (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, evaluate the impact of market-oriented policies on economic development in Brazil.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a business cycle diagram, the vertical axis should be (Real) GDP, (Real) GDP growth/%, level of economic activity, (Real) output. The horizontal axis should be time and show dates from 2010–19. A title is not necessary.
\nIf a student labels growth and shows a recession as positive the student can not be awarded full marks.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe y axis may be labelled price but could be costs or benefits and the x axis labelled quantity.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nEconomic analysis, focusing on economic development, may include:
\nPositive outcomes on economic development may include:
\nNegative outcomes on economic development may include:
\nAny reasonable evaluation.
\nThis question was quite well answered although some responses were somewhat vague. It is important to note that the answer must indicate that companies must have productive units in another country (not just shares in a company as some students suggested), whether it be in the form of direct physical investment or FDI.
\nThere were some excellent definitions of green GDP which were clear and precise. Some were, however, too imprecise. This included not fully understanding the meaning of the 'green' element of GDP, not defining GDP itself and a number not defining it in value terms.
\nMost candidates were able to construct an accurate business cycle diagram but a significant minority failed to use the data as required in the question, not incorporating the timeline. The term cyclical unemployment was generally understood but again in a significant minority of cases, the term was inaccurately defined. Some students provided a purely generic answer, which was totally unrelated to the text provided.
\nThere were some excellent answers, with explanations fully integrated and with accurate diagrams (although some students failed to identify the external costs / DWL). In other instances, the concept of market failure was not understood and the link to external costs was missing. This resulted in inaccurate diagrams (e.g. basic supply and demand) and explanations. Where there was basic understanding some candidates did not emphasise the impact of negative externalities on third parties which inevitably left a gap in the analysis. Again, some students provided a purely generic answer which did not relate to the case study, to manufacturing companies dumping wastewater into rivers.
\nThis in general was not well answered. Too many students did not fully understand the link between market-oriented policies and economic development. Most relied on listing market-oriented policies with very little reference to economic development. Some focused on economic growth which in isolation would attract few marks.
\nToo often there was limited analysis with some candidates relying on statements / unjustified assertions instead of reasoned arguments. Answers tended to be primarily descriptive and overly reliant on quotes / paraphrases of the extract with no or very little added value. At the other extreme some students made virtually no reference to the extract. In some cases, potentially relevant diagrams were drawn (e.g. poverty cycle diagram) but not used or explained in the context of the question.
\nThe Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP), Australia and Japan
Adapted from Karp, P., 2017. Revived Trans-Pacific trade deal undercuts Australian jobs market, unions say. The
Guardian, Copyright Guardian News & Media Ltd 2021, https://www.theguardian.com/australia-news/2017/dec/19/
revived-trans-pacific-trade-deal-undercuts-australian-jobs-market-unions-say; Kodachi, H., 2019. Australian rice
finds favor in Japan as cheaper option, Nikkei Asian Review, https://asia.nikkei.com/Business/Markets/Commodities/
Australian-rice-finds-favor-in-Japan-as-cheaper-option.
* The CPTPP includes eleven member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
\nDefine the term free trade area indicated in bold in the text (paragraph [1]).
\nDefine the term quotas indicated in bold in the text (paragraph [2]).
\nUsing price elasticity of demand (PED) data from the text and the J-curve effect, explain the most likely impact of “the falling value of the Australian dollar” on Australia’s current account (paragraph [4]).
\nUsing an international trade diagram, explain how “increased quotas for the export of rice to Japan” will affect the price of rice in Japan (paragraph [2]).
\nUsing information from the text/data and your knowledge of economics, evaluate the view that free trade is beneficial to Japan’s economy.
\nAnswers may include:
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
\nEconomic analysis may include:
\nFor free trade:
\nAgainst free trade:
\nAny reasonable evaluation.
\nMost students provided a limited definition as they did not include that FTAs allow members to set their own barriers to non-members. A few students did not read the question carefully, thus defining 'free trade' as opposed to 'free trade area'.
\nMost students got full marks, but a few omitted to make a specific reference to the amount of goods/services, thus only getting one mark.
\nThis produced a mixed bag of answers. There were some very simple, but highly effective responses showing a clear understanding of the M-L condition and effectively linking it to the J-curve. Better candidates noted that the question demanded the use of the data from the text. Many did not, losing marks.
\nMost candidates included a J-curve diagram in the explanation, although this is not specifically asked in the question. When the J-curve was included without complete explanation of the effects of depreciation in the SR and LR, no additional mark was given.
\nMany students lost marks by not explaining why PEDx + PEDm was inelastic in the short run and elastic in the long run.
\nThis proved surprisingly challenging for many. Some answers did demonstrate a good understanding of quotas in terms of an accurate diagram and explanation. Less successful answers provided diagrams showing the introduction of quotas rather than increased quotas and incorrect labelling. A few students did not include the world supply curve and a few students tried to explain the effects using a tariff diagram. This suggests that there is the limited understanding of quotas and their effects.
\nMany candidates were able to explain and analyse the effects of free trade/protectionism on the different stakeholders directly mentioned in the text, that is from increased Australian imports, but most ignored the potential benefits for Japan from increased exports (not stated explicitly in the text but implied). Too many candidates relied on their knowledge of free trade and produced generic/textbook type answers largely unrelated to the question. A few students included impacts on Australia, which did not address the demands of the question.
\nSão Tomé and Príncipe Economic Development Challenges
\n[Source: Adapted from Jennings, R., 2018. Taiwan cannot compete with China on Aid to keep foreign allies. VOA News.
Available at: https://www.voanews.com/east-asia-pacific/taiwan-cannot-compete-china-aid-keep-foreign-allies.]
Define the term relative poverty indicated in bold in the text (paragraph [2]).
\nDefine the term economies of scale indicated in bold in the text (paragraph [3]).
\nUsing an externalities diagram, explain why “business pollution” is leading to market failure in STP (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the role of aid in achieving economic development in STP.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe y axis may be labelled price but could be costs or benefits and the x axis labelled quantity.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nEconomic analysis may include:
\nTo discuss:
Role of aid in achieving economic development:
Aid in general has been very important in supporting the economy:
\nAid might not support economic development:
\nAny reasonable discussion.
\nTo reach level 3, students must show awareness of the ways in which aid will impact upon economic development (not simply discuss the advantages and disadvantages of aid and trade in general). This means to link the evaluation to how it will reduce poverty, increase living standards, reduce income inequalities and increase employment opportunities, improve health and education indicators.
\nThere were few accurate definitions. Too many confused \"relative poverty\" with \"absolute poverty\".
\nSurprisingly few candidates gave an accurate definition of the term as few recognised that it is a long run concept, referring to a fall in ATC or costs.
\nAgain, well answered overall. Diagrams were generally accurate and well explained. In some responses the diagram confused negative externalities of consumption and production, and on occasion there was inaccurate labelling that spoiled an otherwise good answer. It was pleasing to see that more candidates, than in the past, indicated welfare loss on their diagram. Some students lost marks by not mentioning the type of pollution mentioned in the text and the effect on third parties/society.
\nThere was a tendency to repeat/paraphrase the text and many struggled to provide analysis linked to development. There was often too much focus on economic growth and a minimum of evaluation. The poverty cycle diagram was often drawn without reference to it in the text. PPC and AD/AS diagrams were also used, showing higher economic growth only.
\nToo many candidates were unclear as to the nature of aid, confusing aid with commercial loans and even a few arguing that FOi by MNCs was a form of aid. As occurs too often in (d) answers, some provided a generic response, with little reference to the text.
\nFirm A is producing at a level of output Q1, which is equal to 1500 units per month, and its costs and revenues are shown in Table 1.
\nTable 1
\nUsing the data in Table 1, state the reason why Firm A is operating in a perfectly competitive market.
\nOn the diagram, label Firm A’s cost curves. The use of figures provided in Table 1 is not required
\nUsing the figures in Table 1 or the diagram in part (b), determine whether Firm A is productively efficient. You must give a reason for your choice.
\nUsing the figures in Table 1 or the diagram in part (b), determine whether Firm A is allocatively efficient. You must give a reason for your choice.
\nUsing the figures in Table 1 or the diagram in part (b), determine whether Firm A is producing at the profit-maximizing (loss-minimizing) level of output. You must give a reason for your choice.
\nUsing Table 1, calculate the monthly profit or loss Firm A is making at the current level of output, Q1.
\nUsing Table 1, calculate the total fixed costs incurred by Firm A at the current level of output, Q1.
\nUsing your answer to part (e), calculate the average fixed costs if Firm A produces 2000 units of output per month instead of Q1 units.
\nList two assumptions of the perfect competition model.
\nExplain why a loss-making perfectly competitive firm will shut down in the long run but may not shut down in the short run.
\nExplain why in the long run economic losses cannot persist in a perfectly competitive market.
\nAn answer which indicates that MR = P or AR = MR or that the demand curve faced by the firm is horizontal/perfectly elastic is sufficient for [1].
\nATC accurately labelled [1]
\nAVC accurately labelled [1]
\nMC accurately labelled [1]
\nTR = 30 × 1500 = 45 000
\nTC = 32 × 1500 = 48 000
\nAny valid working is sufficient for [1].
\n= 45 000 − 48 000
\n= −$3000
\nAn answer of −$3000 or 3000 without any valid working is sufficient for [1].
\nNB alternative calculation, which should be fully rewarded:
\n= (AR − ATC)Q = (30 − 32)1500 =− $3000
\nAFC = 32 − 28 = 4
\nAny valid working is sufficient for [1].
\nFC = AFC × Q = 4 × 1500
\n= $6000
\nAn answer of $6000 or 6000 without any valid working is sufficient for [1].
\n= 3
\nAn answer of $3.00 or 3 is sufficient for [1].
\nOFR applies.
\nExplain two reasons why a government might set a price ceiling (maximum price) on a good.
\nUsing real-world examples, discuss the consequences of a price ceiling on stakeholders.
\nAnswers may include:
• Definition: price ceiling (maximum price).
• Explanation: of the government’s motives for introducing a price ceiling, such as equity and accessibility.
• Diagram: showing price ceiling (maximum price).
Answers may include:
\n• Definition: price ceiling, stakeholders.
• Explanation: impact of a price ceiling on stakeholders:
• Diagram: to show price ceiling (if not given in part (a)).
• Synthesis (discuss): a considered and balanced review that includes a range of consequences for different stakeholders.
• Examples should include real-world illustrations such as rents, fuel, food and their consequences.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExplain two possible causes of deflation.
\nUsing real-world examples, evaluate the effectiveness of monetary policy to achieve low inflation.
\nAnswers may include:
\nAnswers may include:
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExplain why a monopolistically competitive firm can make economic (abnormal) profit in the short run, but not in the long run.
\nDiscuss the consequences of a perfectly competitive market becoming a monopoly market.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the positive and negative effects on different stakeholders; short-run and long-run effects on prices and economic (abnormal) profit; the consequences for productive and allocative efficiency, innovation, research and development; the possible positive effects of economies of scale.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nQuite a few candidates did not know the exact characteristics of monopolistic competition and were not able to make the link between these characteristics and the inability to make abnormal profit in the long run.
\nMost candidates focused on correct but rather theoretical discussions about allocative and productive efficiencies and supported their answers with appropriate diagrams. Much fewer were those which were also able to demonstrate a real-world understanding by discussing the ability of monopolies to invest in R&D and the possible benefits to society from economies of scale.
\nThe data in Table 2 refer to Kanyaland, a small, open, developing economy in 2019. All data are in billions of Kanyaland dollars (K$).
\nTable 2
\nAssume that the level of GDP in Kanyaland in 2009 was K$455 billion and government expenditures were K$205 billion. For each additional Kanyaland dollar earned as income, it had been estimated that K$0.60 was spent on domestic goods and services, K$0.10 was saved, K$0.21 was paid in taxes and K$0.09 was spent on imported goods and services.
\nTable 3 shows the values of the consumer price index (CPI) between 2016 and 2020 in Kanyaland.
\nTable 3
\nTable 4 shows the income tax rates in Kanyaland.
\nTable 4
\nRufus and Sammy are citizens of Kanyaland. Rufus earns K$23 000 annually whereas Sammy earns K$46 000 annually.
\nUsing the data in Table 2, calculate factor income sent (paid) abroad in 2019.
\nIf the government increased expenditures by K$21 billion, calculate the new level of GDP achieved.
\nExplain two possible positive consequences of economic growth in Kanyaland.
\nIn many developing countries GNI figures are lower than GDP figures. Outline how this may be due to the high levels of foreign direct investment (FDI) in developing countries.
\nKanyaland specializes in and exports a narrow range of agricultural products. Outline one negative consequence of this strategy in achieving economic growth.
\nExplain how unemployment benefits and progressive taxation may help decrease economic fluctuations in Kanyaland.
\nUsing Table 3, calculate the rate of inflation in 2017 and in 2018.
\nWith reference to the CPI data in Table 3, describe the most likely monetary policy response adopted at the end of 2018 by the central bank of Kanyaland.
\nUsing Table 4, identify the marginal tax rate for Rufus.
\nUsing Table 4, calculate the average tax rate for Sammy.
\nThe Gini coefficient in Kanyaland changed from 0.35 in 2010 to 0.52 in 2020. Outline what this change indicates for the economy.
\nFactor income sent (paid) abroad = 1098 + 68 − 982
\nAny valid working is sufficient for [1].
\n= $184 billion
\nAn answer of $184 billion or 184 without any valid working is sufficient for [1].
\nmultiplier =
\nIdentification of the value of the multiplier = 2.5 is sufficient for [1].
\n= 2.5 × 21 = 52.5
Any valid working is sufficient for [1].
\n = 455 + 52.5
= $507.5 billion
\nAn answer of $507.5 without any valid working is sufficient for [1].
\nOFR applies if the multiplier is calculated incorrectly and the resulting incorrect number is applied correctly to calculate the new level of GDP.
\n2017: × 100 = −1.19 %
\n2018: × 100 = −0.75 %
\nAward [1] for each correct answer.
\nNo workings are necessary. The % sign is not necessary.
\nAny answer which refers to easy (expansionary) monetary policy or an increase in the money supply or a decrease in interest rates is sufficient for [1].
\nFor an answer of 0.26 or 26 % award [1].
\nValid working (i.e. three of the four in parentheses correct) is sufficient for [1].
\nATR = × 100 = 26.35 %
\nOR
\nATR = = 0.26
\nAn answer of 26.35 or 0.26 without any valid working is sufficient for [1].
\nA common error was to add income from abroad to GNI and subtract from GDP — giving a result of $48 billion. Candidates also forfeited a mark for omitting “billions” or “K$”.
\nThis part was done quite poorly. Lower-achieving responses appeared confused by the wordy nature of the question and hence were not able to calculate the multiplier. A significant number were able to benefit from the Own Figure Rule although many incorrectly multiplied both the initial and the increase in government spending by the multiplier.
\nGenerally well-answered. Lower-achieving responses stated rather than explained, providing responses such as “unemployment will fall”. Also, a minority of candidates suggested that an increase in output would be a consequence (rather than a cause/condition).
\nThe question was generally well-answered. Lower-achieving responses did not refer to the repatriation of profits or explained that some output “did not belong to the host country” — resulting in a Level 1 mark awarded.
\nAlthough the question was generally well-answered, some responses did not refer to a consequence for growth but simply explained over-specialization.
\nA significant number of candidates found difficulty with this question. Lower-achieving responses understood “economic fluctuations” to mean “inequality”. Of those who understood the question and the appropriate learning outcome, a large number referred to the idea that unemployment benefits would allow consumers to spend more, without explaining how this would slow down a decline in real GDP. For full marks, candidates were expected to refer to expansionary and contractionary periods — and some did not do this.
\nThere was a surprising number of rounding errors presented here.
\nVery well-answered.
\nLower-achieving responses took an average of 22 % and 26 % - or gave an answer of 4 % as the increase in the marginal rate.
\nAfter successfully calculating the total tax paid through each band, quite a few students did not complete the calculation of the average tax rate (i.e. total tax divided by income).
\nWell-answered.
\nChina’s trade reforms
\n[Source: According to a report on ResearchAndMarkets.com. China’s Auto Revolution, 2018 - China Poised to Become Major Auto Exporter. Available at: https://www.prnewswire.com/news-releases/chinas-auto-revolution-2018---china-poisedto-become-major-auto-exporter-300720917.html [accessed 28 September 2018]. Source adapted.]
\nDefine the term trade war indicated in bold in the text (paragraph [1])
\nDefine the term consumption indicated in bold in the text (paragraph [3]).
\nUsing an international trade diagram, explain how US tariffs could affect the export of Chinese steel and aluminium to the US (paragraph [2]).
\nUsing a demand and supply diagram, explain how reduced tariffs on “imported factors of production” would affect the price of Chinese goods (paragraph [7]).
\nUsing information from the text/data and your knowledge of economics, evaluate the impacts of free trade measures on China’s economy.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve may be labelled Sw, or Sworld or SChina. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
\n“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
\nAnswers may include:
\nBenefits of reduced tariffs:
\nLimitations of reduced tariffs:
\nAny reasonable evaluation.
\nMost candidates scored at least Level 1 on both definitions.
\nMany candidates had some idea of what a trade war is but could not structure the definition properly and/or allude to retaliatory actions.
\nMost candidates scored at least Level 1 on both definitions.
\nDefining consumption also proved challenging with a significant minority explaining consumption through usage rather than expenditure. Many tended to repeat the term in the definition (e.g. consumers' spending). This should be avoided if possible.
\nAs for past questions on tariffs, the diagram was generally correctly labelled and explained but sometimes came with a lot of unnecessary information (such as the government revenue and welfare losses). Nonetheless, the most crucial piece of information, which was necessary to explain why Chinese exports would decrease — namely, that the price received increased — was sometimes missing. Another common problem was the absence of label for the \"world\" supply curves (Pw and Pw + tariff are not sufficient).
\nThis question was generally well attempted. Most candidates could make the connection between imported inputs and the supply curve of final goods. Some candidates did not read the question properly and used an AD/AS diagram instead of a simple demand and supply diagram. The macroeconomic diagram was not accepted.
\nMost candidates scored marks in the mid/top range of Level 2 or low range of Level 3. Arguments both for and against the free trade policies were generally well understood and explained, but some responses made minimal effective use of the text. Many candidates assumed that the US and other countries would also adopt free trade policies towards China. While that is a valid assumption, candidates should explicitly state they are making that assumption.
\nTo reach Level 3, candidates need to use the text and their knowledge of economics to enrich arguments which are already mentioned in the text. This was sometimes done by considering that Chinese exports seem very competitive and may not enjoy much benefits from ease in tensions between China and the rest of the world. At times, candidates brought arguments that did not seem to fit in the context set in the text. In particular, the idea that free trade policies would be detrimental to infant industries in China — a valid point — but went on to identify the Chinese automobile industry as an infant industry. To be considered as effective, this argument should be supported with examples of industries which could be considered as 'infant' in China without conflicting with the information from the text.
\nExplain two causes of demand-pull inflation.
\nEvaluate the effectiveness of interventionist supply-side policies in reducing demand-pull inflation.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the tension between the inflationary short-run effects and disinflationary long-run effects of interventionist supply-side policies; spending on healthcare, education and infrastructure may improve equality in the distribution of income/equity; interventionist supply-side policies may be expensive and lead to high budget deficits and increased indebtedness; considerable time lags; negative effects on the environment; consideration of the strengths and limitations of alternative policies (e.g. contractionary monetary policy, contractionary fiscal policy, market-based supply-side policies).
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMany students did not make it clear that they understand that the inflation is a process and not a one-off increase in the average price level. Another common weakness was using the new classical AD/AS diagrams that shows an economy that recovers from recession (closes a deflationary gap) to illustrate demand-pull inflation.
\nThere were many students who did not show any awareness of the short-run effects of interventionist supply-side policies on AD. There were also candidates who completely ignored the crucial long-term effects of interventionist supply-side policies in their diagrams and explanations.
\nThe fall of the Indian rupee
\n\n
Table 1: Selected economic indicators for India
\nTulsi Jayakumar, Forbes India, 2018. Reining in Current Account Deficit: Options for India. Available at: http://www.forbesindia.com/article/spjimr/reining-in-current-account-deficit-options-for-india/51455/1 [accessed 19 January 2019]. Source adapted. Reproduced by permission of the author.
\nDefine the term current account indicated in bold in the text (paragraph [1]).
\nDefine the term depreciation indicated in bold in the text (paragraph [4]).
\nUsing an AD/AS diagram, explain how an increase in oil prices “could worsen inflationary pressures” (paragraph [4]).
\nUsing an exchange rate diagram, explain how higher interest rates could “protect the rupee from further depreciation” (paragraph [5]).
\n\n
Using information from the text/data and your knowledge of economics, discuss the possible economic consequences on the Indian economy of a depreciating rupee.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average price level or general price level. The horizontal axis may be real output, real national output, real national income, or real GDP. Any abbreviation is acceptable. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of the (Indian) rupee in another currency, other currency/(Indian) rupee or other currency per (Indian) rupee. The horizontal axis should be quantity, or quantity of (Indian) rupee. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
\nBenefits of the depreciation may include:
\nLimitations/disadvantages of the depreciation may include:
\nAny reasonable discussion.
\nMost candidates scored at least Level 1 on both definitions.
\nMany limited their definition of the current account to the balance of trade in goods and services.
\nMost candidates scored at least Level 1 on both definitions.
\nThose who were awarded Level 1 for this question often had not specified that the decrease in exchange rate was the result of changes in market forces (or that it was occurring under a floating exchange rate system). That omission meant that the simple mention of a 'decrease in the value of a currency' could refer to both a depreciation and a devaluation. In general, if if a definition can apply to two concepts, then it is a vague definition. This has also been an issue in past examination sessions.
\nThis question was reasonably well attempted. Most candidates could link the higher oil prices to a fall in SRAS. Some suggested that AD increased as a result of the currency depreciation which made exports cheaper and imports more expensive. While theoretically correct and using information from paragraph 4, such a response did not answer the question and hence could not be rewarded.
\nMany candidates recognised that the demand for rupees increased in the foreign exchange market. However, some students only referred to the actions of foreign 'investors' without any link to inwards flows of financial/portfolio investment or savings. A minority of candidates had difficulties distinguishing between the internal money supply and the supply of currency on the foreign exchange market.
\nMost candidates scored marks in the mid/top range of Level 2. Almost all could offer the 'standard' consequences of a depreciation, but effective use of the text was less prevalent. There was also a heavy emphasis on the impact on economic growth and inflation, few even considered the impact on the current account deficit. Some students got fixated on the issue of inflation and often neglected the data provided in the table which suggested that inflation was still not very high. The lack of effective use of the text kept many answers with a good show of theoretical analysis in Level 2. For example, candidates often stated that the depreciation would make exports cheaper but seldom referred to the fact that since other Asian currencies also depreciated, the impact on export prices might not be so significant.
\nExplain two causes of structural unemployment.
\nDiscuss the consequences of different types of unemployment.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: comparison of the extent of the negative consequences for the government budget, personal incomes and the real GDP of the different types of unemployment; comparison of the extent of the negative personal and social consequences of the different types of unemployment for individuals who have lost their jobs; consideration that unemployment is part of the adjustment process of a dynamic economy; consideration of the desirability of some types of unemployment (e.g. frictional) in comparison to others (e.g. cyclical); consideration of the duration of different types of unemployment from the point of view of individuals and the economy as a whole.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nEven though many candidates could not precisely define structural unemployment, most of them were able to demonstrate good understanding by the use of appropriate examples.
\nSome less-prepared students had difficulties distinguishing between the different types of unemployment as well as distinguishing between the causes of unemployment and the consequences of unemployment.
\nFiji’s challenges and opportunities
\n[Source: Adapted from: Chaudhary, F., 2018. Green finance – Ginger farmers explore funding possibilities.
The Fiji Times, https://www.fijitimes.com/green-finance-ginger-farmers-explore-funding-possibilities;
and Chaudhary, F., 2018. Risk mitigation in the Pacific’s coconut sector. The Fiji Times,
https://www.fijitimes.com/risk-mitigation-in-the-pacifics-coconut-sector.]
Define the term absolute advantage indicated in bold in the text (paragraph [3]).
\nDefine the term asymmetric information indicated in bold in the text (paragraph [6]).
\nUsing a costs diagram, explain how the expansion of the coconut industry could lead to economies of scale (paragraph [4]).
\nUsing a production possibility curve (PPC) diagram, explain how damage to Fiji’s infrastructure has affected its production possibilities (paragraph [1]).
\nUsing information from the text/data and your knowledge of economics, discuss the view that government intervention is the best way to achieve economic development in Fiji.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a cost diagram, the vertical axis may be labelled Cost (C) or Average cost (AC) or Long run average cost (LRAC). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a PPC, the axes could be two alternative products, one on each axis, eg Good A & Good B or Schools & Motor Cars; or two groups of products, eg Consumer Goods and Producer Goods.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nEconomic analysis may include
\nDiscussion that government intervention is the best way to achieve economic development may include:
\nDiscussion that government intervention may not be best way to achieve economic development may include:
\nStudents may offer alternative strategies to achieve economic development:
\nAny reasonable discussion.
\nTo reach level 3, students must show awareness of the ways in which government intervention impacts upon economic development (not simply discuss the advantages and disadvantages of government intervention in
general). This means to link the evaluation to how it will reduce poverty, increase living standards, reduce income inequalities and increase employment opportunities, improve health and education indicators.
Generally well answered although some candidates confused \"absolute advantage\" and \"comparative advantage\".
\nAgain, generally well answered although some candidates failed to realise the significance that one party to the transaction needs to have 'more' information than the other party.
\nAnswers to this question were disappointing. Cost diagrams were generally incomplete and/or inaccurately labelled, eg AC only instead of LRAC. Too many failed to understand that economies of scale are a long run concept, and some did not provide any reasons for these economies of scale.
\nThis was well answered overall. Most candidates produced accurate diagrams and explanations. Weaker candidates used diagrams where the PPC did not shift /decrease but moved inside the boundary. No marks were awarded in these circumstances. However, the explanation often missed reference to lower quantity or quality of FoPs.
\nAs with most development questions this was not well answered. Many candidates wrote about government intervention but relatively few concentrated on economic development. Most highlighted the impact on economic growth. Also, most students did not reach an appropriate conclusion ie whether government intervention is the 'best way' to achieve economic development.
\nExplain why the price elasticity of demand for primary commodities is often relatively low while the price elasticity of demand for manufactured goods is often relatively high.
\nDiscuss the importance of price elasticity of demand and cross price elasticity of demand for a firm’s decision making.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the difficulty of obtaining reliable estimates in reality due to imperfect information, past data not necessarily being a guide to the future, the unreliability of consumer survey techniques, the problem of estimating variables that are not constant and the impact of factors other than the price of the good and the price of other goods.
\nAward a maximum of [9] if only PED or only XED is addressed.
\nThere were many good responses to this question with good explanations of the difference between the price elasticity of demand of primary commodities and manufactured goods, The best answers gave detailed coverage of how commodities are more likely to be necessity goods with relatively few substitutes compared to manufactured goods, which makes the demand for commodities relatively price inelastic. The best answers used effective real-world examples to illustrate the points made.
\nMany students produced good responses on how price and cross price elasticity of demand are important to firms in terms of changing price to increase revenues and responding to the price changes of related goods. Many candidates used effective diagrams and real-world examples to illustrate their answers. A weakness in answers was many candidates did not evaluate the points they made. A strong answer in this section would include discussion of the problems of measuring price and cross price elasticity of demand because the values change over time and any measurement of elasticity assumes that other factors affecting the demand for a good remain constant.
\nAngola’s economic reforms
\n[Source: Business Day, 2018. President Lourenço’s economic reforms are making Angola attractive. Available at: https://www. businesslive.co.za/bd/opinion/2018-02-16-president-lourenos-economic-reforms-are-making-angola-attractive/# [accessed 19 January 2019]. Source adapted.
\nAFP, News24, 2018. Angola president vows investment drive, graft fight. Available at: https://www.news24.com/Africa/News/angola-president-vows-investment-drive-graft-fight-20181015 [accessed 19 January 2019]. Source adapted.]
\nDefine the term recession indicated in bold in the text (paragraph [1]).
\nDefine the term privatization indicated in bold in the text (paragraph [2]).
\nUsing a demand and supply diagram, explain the impact on households of “removing some subsidies on food” (paragraph [5]).
\nUsing a Lorenz curve diagram, explain the likely impact on income distribution of “plans to encourage investment in rural areas” (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, evaluate the effectiveness of market-oriented policies in achieving economic development in Angola.
\n\n
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or P. The horizontal axis should be quantity or Q. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe two curves may be shown on one graph, or may be shown on two graphs. If using two graphs, it must be clear the curve after investment is closer to the line of equality than the previous one.
\nThe vertical axis may be labelled (cumulative) % of (national) income (GDP and GNI are valid alternatives to income but wealth is not acceptable). For the horizontal axis, the label may be (cumulative) % of
population/people/households. A title is not necessary. There must be a diagonal line, but it is not a requirement that it is labelled. There should be labels (or arrow) to indicate the difference between the two Lorenz curves (or direction of the change).
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
Answers may include:
\nStrengths of market-oriented policies:
\nLimitations of market-oriented policies:
\nAny reasonable evaluation.
\nMost candidates scored at least Level 2 for this question.
\nPrivatization proved to be one of the most challenging terms to define in this examination paper. Few explicitly referred to the government selling state-owned/public enterprises to the private sector.
\nThis question did not seem to pose candidates any problems. The majority could establish that the removal of the subsidy would shift the supply curve to the left and lead to a higher equilibrium price.
\nOn the other hand, this question proved to be challenging. Candidates either did very well or very poorly here. A significant number of candidates did not seem to fully comprehend what the Lorenz curve measures nor how it should be labelled. Some diagrams even showed curves shifting above the line of perfect equality. For those who were familiar with the concept, 1 mark was often deducted for the use of 'wealth' instead if 'income' on the vertical axis. This suggests that some candidates do not know the difference between the two concepts — this was also an issue in the last examination session. Some answers also missed a mark because the explanation did not establish how the investment might lead to more equality.
\nUnfortunately, there were not very many good answers to this question. Candidates did not seem familiar with the concept of market-oriented policies or had a very narrow view of what they constitute. Another problem is that too few answers reflected an understanding of economic development. It would be wise for candidates to define the concept for such questions. That could help them focus on the impact of government policies on the standard indicators of development. Some students discussed the impact on economic growth rather than development and did not establish how growth could lead to development. Candidates need to be more aware of the need to address the actual question asked.
\nExplain the concept of positive externalities of consumption.
\nDiscuss the view that tradable permits are more effective than taxes in reducing pollution.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: The advantage of tradeable permits over taxation is they create an incentive for firms to develop systems to reduce pollution and taxes just penalize all producers in a market and add to costs and the final selling price to households. The weakness of tradeable permits is the system is complicated to set up and administer and taxes are easier for a government to use.
\nAward a maximum of [9] if only tradeable permits or only tax is addressed.
\nThere were plenty of good answers to this question. Effective responses showed a clear understanding of the positive externalities of consumption, using examples from areas such as healthcare and education. Responses were generally well illustrated by using cost/benefit diagrams to show the associated market failure. The strongest answers localised their examples to specific situations with many effective points made about the positive externalities of vaccines.
\nStudents generally had a good understanding of how tradeable permits and taxes can be used as policy options to reduce pollution. It was good to see a clear understanding of the market failure associated with pollution and how tradable permits and taxes can be used to deal with external costs associated with, for example, electricity production. If there was a weakness, it was probably the explanation of tradable permits, although this is quite a difficult policy to explain. The answers on the use of taxes to reduce pollution was generally very strong. Students were generally good at evaluating the respective policies by, for example, considering the difficulties for governments of judging the level of intervention needed to achieve a socially efficient level of output.
\nExplain why cyclical (demand-deficient) unemployment may occur in an economy.
\nEvaluate the effectiveness of interventionist supply-side policies in reducing the level of unemployment in an economy.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the importance of the type of unemployment (e.g. demand-deficient unemployment may be more directly reduced through expansionary monetary and fiscal policies); consideration of the effectiveness of supply-side policies (e.g. in terms of time lags, the ability to create employment, the impact on the government’s budget deficit, opportunity cost); government investment in new technologies (e.g. robotics/artificial intelligence) may lead to displacement of labour.
\nThere were some very strong answers to this question, with many students explaining how cyclical unemployment occurs during a recession when aggregate demand falls, and unemployment rises. These answers were effectively illustrated with aggregate demand and supply diagrams. Real-world examples often prove more difficult for students in macroeconomic questions, but there were still some effective examples from different countries where unemployment has increased because the current pandemic (at the time of writing) caused recession and a fall in aggregate demand.
\nThis question also produced some effective responses, with candidates showing a good understanding of the way interventionist supply-side policies can reduce unemployment. The strongest answers considered how state-provided education and training, employment subsidies and government-financed employment exchanges can reduce different types of unemployment. The answers were illustrated by showing an increase in the long-run aggregate supply curve, along with real-world examples of the use of interventionist supply-side policies. Large numbers of students evaluated their answers by considering the costs and relative effectiveness of the interventionist supply-side approach. The best responses also discussed the relative merits of alternative policy options such as monetary and fiscal policy, along with a market-based supply-side approach.
\nExplain how expansionary monetary policy could be used to close a deflationary (recessionary) gap.
\nEvaluate the effectiveness of monetary policy in reducing an economy’s rate of inflation.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the implications of monetary policy in terms of the ability to implement changes in interest rates relatively quickly through the banking system, the possible conflicts with other objectives of economic policy, such as growth / unemployment, time lags, the independence of the central bank; the ineffectiveness of monetary policy in relation to cost-push inflation; the possibility that alternative policies (e.g. supply-side policies) may be more effective.
\nMany students showed a good understanding of expansionary monetary policy and the deflationary gap and clearly explained how reducing interest rates can lead to an increase in aggregate demand and close a deflationary gap. These answers were illustrated by effective aggregate demand and supply diagrams and in some cases real-world examples. Although, as was said earlier, students do find using examples with macroeconomic questions challenging.
\nThis question also produced many good responses from candidates. The best answers showed a clear understanding of how contractionary monetary policy reduces aggregate demand and leads to a fall in demand-pull inflation. These responses were well illustrated by aggregate demand and supply diagrams. Finding a real-world example to support their answers proved quite challenging for students, although there were some effective points about countries using monetary policy to control inflationary pressures. It was good to see candidates evaluating their answers by considering the deflationary threat of increasing interest rates and a possible rise in unemployment, along with the problem of using contractionary monetary policy to deal with cost-push inflation. The best answers often included discussion of other policy options to reduce inflation such as fiscal policy and supply-side policies.
\nEconomic growth in Laos
\n[Source: Foreign Policy In Focus, 2018. China’s Belt and Road Hits Bumps in Laos. Available at: https://fpif.org/chinas-belt-and-road-hits-bumps-in-laos/ [accessed 19 January 2019]. Source adapted.
\nRadio Free Asia, 2018. China’s Fast Track to Influence: Building a Railway in Laos. Available at: https://www.rfa.org/english/news/special/laoschinarailway/ [accessed 25 October 2018]. Source adapted.]
\nDefine the term economic growth indicated in bold in the text (paragraph [1]).
\nDefine the term poverty trap indicated in bold in the text (paragraph [4]).
\nUsing an AD/AS diagram, explain how the construction of the China–Laos railway will contribute to economic growth in Laos (paragraph [1]).
\nUsing an externalities diagram, explain why the construction of dams on the Mekong River might lead to market failure (paragraph [2]).
\nUsing information from the text/data and your knowledge of economics, evaluate the role of foreign direct investment in promoting economic development in Laos.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average price level or general price level.
\nThe horizontal axis may be real output, real national output, real national income, or real GDP. Any abbreviation is acceptable. A title is not necessary.
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an externalities diagram, the y axis may be labelled price or P or costs or benefits, and the x axis labelled quantity or Q.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
Answers may include:
\nStrengths of FDI/MNCs may include:
\nLimitations of FDI/MNCs may include:
\nAny reasonable evaluation.
\nMost candidates scored Level 2 on both definitions.
\nA few lost 1 mark in this question because they left out the term 'real'.
\nMost candidates scored Level 2 on both definitions.
\nMost could give a clear and concise definition of this term.
\nThis question did not seem to pose candidates any problems, with a good mix of increases in LRAS and AD, both adequately supported.
\nSome candidates had issues with the labelling of the curves (reversed MSC and MPC or confused MPB/MSB with MPC/MSC) but otherwise most did very well for this question. Some missed 1 mark because they did not explain market failure satisfactorily using the diagram.
\nMost responses achieved marks in the mid/top Level 2 mark band. The nature of FDI and economic development were usually understood and explained adequately. Those answers provided a balanced view on the impact of FDI and MNCs in terms of development. Unfortunately, too few made sufficient use of the text to achieve Level 3. Very few candidates considered common unit 4 issues such as the lack of diversification, over-reliance on the primary sector or indebtedness in their answers. Lower-achieving responses were usually those with insufficient knowledge of FDI — which was generally understood as general 'investment'.
\nExplain why governments provide subsidies.
\nEvaluate the effectiveness of price floors in achieving a reduction in the consumption of demerit goods.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nThis was a very popular question and was well done by most candidates. Clearly it is an area that is well taught, and candidates were able to present clear diagrams which accurately showed the application of a subsidy. Most candidates were also able to offer real-world example of where subsidies had been applied. Many responses confined themselves to one specific reason for subsidies being used by government. Higher-achieving responses were able to offer several reasons, and to support their explanation throughout with real-world examples. There was tendency for candidates to think in terms of specific products without much development.
\nA successful avenue was to look at an industry as a whole. The dispute between Airbus and Boeing over state subsidies was usefully selected by some candidates, enabling a wider consideration of why they are given. That such example might touch on other syllabus, such as trade, does not matter as long as the question is addressed.
\nA surprisingly large number of candidates confused maximum and minimum prices. Many candidates also ignored the question's specific reference to demerit goods. Significant numbers of responses identified incorrect community welfare losses, where it was presumed the government would buy the surplus of a demerit good resulting from a minimum price. Thus, they were considering the consequences for welfare, of a price support scheme usually targeted at farmers. Responses that were able to provide real-word examples in support of an analysis that examined the relative merits of price floors scored well. It was probably easier in this case to consider how alternative policies might be arguably better, such as indirect taxes.
\nExplain the reasons for the shape of the long-run average total cost curve.
\nDiscuss the view that governments should always try to prevent the creation of barriers to entry in a market.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the possible negative effects of barriers to entry on allocative and productive efficiency; economies of scale may lead to lower prices and higher output, benefitting both producers and consumers; branding reduces problems of asymmetric information and may be beneficial to consumers; legal barriers to entry may protect consumers (e.g. licensing) and stimulate R&D (e.g. patents) or lead to inefficiencies and rent-seeking.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nThis was not a particularly popular question. For some candidates the nature of long-run costs was not clear and they utilized vocabulary and terms pertinent to the short run. There were a good proportion of clear responses that clearly identified the link with economies and diseconomies of scale, where they were able to identify specific sources of such economies and diseconomies. Better responses were able to identify industries, where such changes in long-run costs as output changes, might be found.
\nThe key to approaching this question well was to carefully consider the different types of potential barriers to entry. A number of candidates tried to make this about advantages and disadvantages of monopoly, which worked up to a point, provided the focus was on barriers to entry. However the highest-achieving responses were able to consider in some detail what form such barriers might take, and to consider whether they always needed to be prevented. Inevitably the current (at the time of writing) pandemic provided the example of vaccines and whether or not their patents needed to be protected. There was some good use of real-world examples by the highest-achieving candidates.
\nFilipino rice farmers prepare for trade liberalization
\nTable 1: Average economic costs and prices of rice in the Philippines and Vietnam
\n[Source: Rappler, 2018. Gov’t to support farmers amid moves to lift rice import quotas. Available at: https://www.rappler.com/business/203837-government-support-philippine-farmers-lifting-rice-import-quotas [accessed 1 June 2018]. Source adapted.
\nPhilippine News Agency, 2018. Tariff on imported rice to rake in P20-B yearly. Available at: http://www.pna.gov.ph/articles/1043516 [accessed 2 August 2018]. Source adapted.
\nErnesto M. Ordoñez / Inquirer.net, 2018. Averting the 35% rice tariff crisis. Available at: https://business.inquirer.net/258373/averting-35-rice-tariff-crisis#ixzz5VJ32ugph.
\nBen O. de Vera, Inquirer.net, 2018. Tariff on rice to curb inflation by 0.4 percentage point. Available at: https://business.inquirer.net/256313/tariff-rice-curb-inflation-0-4-percentage-point#ixzz5VGfm0xUp [accessed 29 August 2018]. Source adapted.]
\nState two functions of the World Trade Organization (WTO) (paragraph [1]).
\nDefine the term free trade indicated in bold in the text (paragraph [1]).
\nUsing an AD/AS diagram, explain how removing “the import quota will reduce the inflation rate in the Philippines” (paragraph [5]).
\nUsing a perfect competition diagram, explain whether farmers in the Philippines are making an economic profit or loss (Table 1).
\nUsing information from the text/data and your knowledge of economics, evaluate the impact on the economy in the Philippines of removing the rice quota.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS the vertical axis may be average (general) price level, APL or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nNB Candidates must state the values in either the diagram or the explanation for full marks.
\nNB Some candidates may refer to the Vietnamese price of PH₱9.64 shown in Table 1. This is also acceptable as it must be assumed that these candidates consider that, once the quota is removed, the price in the Philippines will fall to the Vietnamese level. Both PH₱12.19 and PH₱9.64 should be accepted as valid prices.
\nFor a perfectly competitive diagram, the vertical axis may be labelled Cost (C), Price (P) or Revenue (R). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary. AC or ATC can be used.
\nNB MC curve is not required for full marks.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
\nEconomic Analysis may include:
\nPositive impacts may include:
\nNegative impacts may include:
\nAny reasonable evaluation.
\nOverall not well answered. Too many students confused the WTO with other organizations such as the IMF or World Bank. Some candidates tended to highlight the aims of the WTO rather than its functions.
\nOn what should be a straightforward definition, a surprising number of answers lacked precision, e.g. \"Free trade is trade without restrictions\". Candidates should be reminded that definitions need to be precise and that vague answers will attract 1 mark at best.
\nWhile the question specifically asked for an an AD/AS diagram, a significant minority of students offered up a quota diagram.
\nTwo different approaches (decrease of AS or decrease in AD) were offered by candidates with a variety of reasons for each shift.
\nSome lower-achieving responses lost one mark for not relating the decrease in AS with the increase in the cost of production. Good responses had little difficulty in explaining, using the diagram, that removing the import quota would likely increase the supply of rice, reducing its price thus lowering input costs, a significant component in calculating the CPI/inflation rate.
\nSome candidates took the alternative route and explained the impact on inflation in terms of an increase in the value of imports resulting from the removal of the quota on rice and how this would decrease X-M, resulting in a fall in AD with a consequent impact on inflation.
\nThis was generally well answered. Overall there was evidence of a sound understanding of the perfect competition model and a testament to good teaching of this element of the syllabus. Some potentially good answers were marred by a failure to use the data provided either on the diagram or in the explanation. This inevitably resulted in a loss of 1 mark. Some constructed a perfect competition diagram but failed to indicate a loss.
\nAs with most part (d) questions, there was a general lack of depth of analysis and effective evaluation with a disappointing number of students managing to achieve a Level 3 quality of answer. The higher-achieving answers focused on the macroeconomic impact of the removal of the quota, i.e. impact on inflation, employment (focusing on specific sectors) and economic growth. Some students highlighted the impact on the balance of payments. Lower-achieving responses spent too much time explaining the effect of a quota rather than the impact of its removal. Such an approach attracted few marks and wasted valuable time that would have been better spent on the more salient aspects of the question. Candidates should be encouraged to only focus on the question being asked rather than the one they would like to have been asked. In addition, little effective use was made of the information in the extract, with too many students simply repeating the points made in the text without much analysis or evaluation.
\nEconomic development in Honduras and Guatemala
\nHonduras
\nTable 2: Selected economic data for Honduras and Guatemala
\n[Source: Central Intelligence Agency, 2018. The World Factbook. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html [accessed 1 November 2018]. Source adapted.
\nUnited Nations Human Development Reports, Guatamala (http://hdr.undp.org/en/countries/profiles/GTM) and Honduras (http://hdr.undp.org/en/countries/profiles/HND). Licenced under Creative Commons 3.0 IGO, https://creativecommons.org/licenses/by/3.0/igo/legalcode.]
\nDefine the term absolute poverty indicated in bold in the text (paragraph [2]).
\nDefine the term investment indicated in bold in the text (paragraph [5]).
\nUsing a perfectly competitive firm diagram, explain the effect of declining prices of coffee beans on the profits of Honduras’ coffee farmers in the short run (paragraph [2]).
\nWith reference to the data in Table 2, explain why the GNI per capita for Guatemala is lower than its GDP per capita.
\nUsing information from the text/data and your knowledge of economics, contrast the potential for economic development in Guatemala and Honduras.
\nFor [4] the candidate must either correctly show the loss on the diagram in the form of a revenue box or have sufficient labelling to be able to correctly identify the loss in their written explanation.
\nFor a perfectly competitive firm diagram, the vertical axis may be labelled Cost (C), Price (P) or Revenue (R). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary.
\n[1] for showing an awareness of the difference between GNI and GDP (by GNI = GDP + Net income abroad OR GNI is income from productive factors owned by residents of the country whereas GDP is income produced in the country).
\n[1] for an explanation that the GNI per capita in Guatemala at 7278 is lower than the GDP per capita at 8100.
\n[2] for an explanation that this means that the net income from abroad is negative OR that foreign owners of productive resources in Guatemala are earning more income than owners from Guatemala are earning in foreign countries.
\nNB Responses that do not refer to the data in Table 2 can be awarded a maximum of [3].
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n“Contrast” requires candidates to give an account of the differences between two (or more) items or situations, referring to both (all) of them throughout.
\nEconomic analysis may include:
\nResponses may include:
\nAny reasonable evaluation.
\nGenerally poorly defined. Vague and imprecise. Often a confusion arose between absolute and relative poverty.
\nThis was quite well understood and answered although there was often a confusion between portfolio investment and physical investment.
\nOn balance this was quite well answered. In the main, students understood the theory of perfect competition and were able to apply it to a situation of falling prices and demonstrate both diagrammatically and in terms of an explanation how the falling prices could affect profits.
\nSome students did not identify the correct level of output at MR=MC and/or did not clearly identify the loss in the diagram. It seems it was challenging for some students to know whether to start from a position of economic profit or loss.
\nThe terms were poorly understood, particularly GNI. Many candidates used the value in the table to correctly state that the GNI was lower then GDP, but some did not correctly explain the difference between the two. Similarly, the \"per capita\" aspect of the question was often missing. Overall, the majority of students were not able to effectively distinguish between the two concepts.
\nAgain, the development question was poorly answered.
\nFigure 1 illustrates the production possibilities for rice and pencils in Country H. Resources in Country H are fully employed.
\nFigure 1
\nFigure 2 illustrates Islandia’s demand (D) for and supply (S) of rice.
\nFigure 2
\nThe government of Islandia wants to reduce the price of rice by 40 % in order to enable low-income households to buy enough rice to meet their needs. The government decides to achieve this by imposing a maximum price.
\nThe government of Islandia realises that when a maximum price is set below the equilibrium price, a method of non-price rationing is necessary. Critics of the maximum price policy argue that it might result in the creation of a parallel market.
\nAssuming that 25 000 pencils are produced initially, identify the opportunity cost for Country H if the production of rice is to be increased by 100 %.
\nState one reason why the production possibility curve (frontier) for Country H might shift outwards.
\nTable 1 provides information about Good X and Good Y, which are related goods.
\nTable 1
\nUsing Table 1, calculate the cross price elasticity of demand between Good X and Good Y when the price of Good X increases.
\nThe demand for Good Z is income inelastic.
\nDefine the term income inelastic demand.
\nCountry D is an economically less developed country that specializes in the production of primary products.
\nExplain two implications for Country D of a relatively low income elasticity of demand for its primary products.
\nGood A and Good B are in joint supply.
\nUsing a diagram to support your answer, explain the impact on the market for Good B of an increase in the price of Good A.
\nCalculate the shortage resulting from the imposition of the maximum price.
\nCalculate the change in producer surplus resulting from the imposition of the maximum price.
\nCalculate the change in consumer expenditure on rice resulting from the imposition of the maximum price.
\nState two methods of non-price rationing.
\nWith reference to Figure 2, outline why the imposition of a maximum price might lead to the creation of a parallel market.
\nExplain one reason, apart from the possible creation of a parallel market, why the imposition of a maximum price for rice in Islandia might not enable low-income households to buy enough rice to meet their needs.
\n15 000 pencils
\nOR 750 pencils per kg of rice
\nAn answer of 15 000 pencils or 15 000 or 750 is sufficient for [1].
\nStating that there is an increase in the quantity and/or quality of one or more factors of production
OR an improvement in technology / institutional framework / population, is sufficient for [1].
It is not necessary to name a specific factor of production, but a response which correctly states one factor, e.g. an increase in the quality of labour should be rewarded.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n\n
Any valid working (correct %Δ Qd(Y) or %Δ P(X), provided the formula is not inverted) is sufficient for [1].
\n= 0.3
\nAn answer of 0.3 without any valid working is sufficient for [1].
\nImplications may include:
\nNB Reference to the effects of negative economic growth should be rewarded.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
The market for Good B
\n\n
An alternative diagram would be with P of Good A on vertical axis and Q of Good B on horizontal axis and an upward sloping curve. The explanation should be consistent with this diagram. For full marks the response should refer to the quantity of Good B increasing and its price decreasing.
\nNB If the explanation is vague, [1] may be awarded for an appropriate example (such as any product and its by-product).
\nA candidate who has provided a correct diagram but refers to quantity supplied (rather than supply) of good B should not be penalized.
\nThe maximum price = $5 × 0.6 = $3.
\nAt $3, Qd = 300 000, Qs = 100 000, so the shortage = 200 000 kg
\nAn answer of 200 or 200 000 is sufficient for [1].
\n\n
Initial PS = 0.5 × 4 × 200 000 = $400 000
\nNew PS = 0.5 × 2 × 100 000 = $100 000
\nAny valid working (initial or final PS) is sufficient for [1]
\nChange in PS = $100 000 – $400 000
\n= –$300 000 (i.e. a decrease)
\nOR Decrease in PS = 0.5 × 2 (200 000 + 100 000) = $300 000
\nAn answer of 300 or 300 000 without any valid working is sufficient for [1].
\nFor full marks to be awarded the response must provide valid working and include correct units.
\nNB OFR applies where a candidate has identified the maximum price incorrectly in part (g).
\nInitial consumer spending = 5 × 200 000 = $1 000 000
\nNew consumer spending = 3 × 100 000 = $300 000
\nAny valid working (initial or final consumer expenditure) is sufficient for [1].
\n= –$700 000 (i.e. a decrease)
\nAn answer of 700 or 700 000 without any valid working is sufficient for [1].
\nFor full marks to be awarded the response must provide valid working and include correct units.
\nNB OFR applies where a candidate has identified the maximum price incorrectly in part (g). Examiners should not penalize twice for the absence of a negative sign (i.e. in both parts h and i).
\nAward [1] for each appropriate method, up to a maximum of [2].
\nMethods may include:
\nCandidates struggled to respond accurately to the question by recognizing that rice production would increase from 20 to 40 kg (100 % increase). Candidates were expected to identify the initial and final combination of rice and pencils.
\nVery well-answered. A few candidates referred to \"more production\" but the majority identified a factor which would increase the quantity/quantity of factors of production.
\nThe question was generally well-answered. Lower-achieving responses mixed the numerator/denominator, calculated the percentages relative to the final price/quantity or took the change in price to be zero.
\nA surprising number of students made reference to a response to a change in price rather than income. The major weakness was a tendency to suggest that there would be zero change in the quantity demanded rather than a less than proportionate change.
\nThis question was generally answered very poorly. Many candidates simply re-stated the definition in the context of primary products. The link to Section 4 of the course was not generally made, with candidates limiting their answers to the likelihood of stability in times of positive growth or recession. Few candidates referred to the idea of slow growth in demand for exports, with implications for the current balance and terms of trade. The strongest responses explained the need for diversification as a result of low YED for primary products.
\nThe vast majority of candidates appeared to be unaware of the concept of joint supply. Many referred to Good A and Good b as substitutes, complements or goods in competitive supply. Responses focused on demand factors rather than the idea of one product being a by-product of another.
\nGenerally well-answered.
\nThere were many errors in the calculation of producer surplus. These included neglecting to use the correct formula for a triangle, confusing producer surplus with producer revenue and many errors related to the use of correct units. Many candidates neglected to specify a negative change.
\nAlthough most candidates calculated the initial level of consumer expenditure accurately, it was common for candidates to identify 300 000 as the new quantity purchased. While this would be the correct quantity demanded it cannot be purchased as only 100 000kg of rice would be supplied. Many candidates neglected to specify a negative change.
\nGenerally well-answered although a small but nevertheless a surprising number of candidates did not respond or did not understand the term \"non-price rationing\". Phrases such as \"distribution by the government\" were provided by lower-achieving candidates.
\nMany candidates generally referred to the creation of an \"alternative\" market arising to meet unsatisfied demand without referring to Figure 2 or explaining why consumers and/or producers would be willing to exchange at a price higher than that of the official market.
\nGenerally well-answered. Most candidates suggested that the shortage would impact all consumers, including those on lower incomes. Stronger responses provided suggestions as to why those on lower incomes might be impacted disproportionately.
\nExplain the causes of cost-push inflation.
\nDiscuss the view that deflation is more harmful than inflation.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: in a progressive taxation system the inflation pushes individuals and businesses into higher income brackets, leading to higher tax revenue for the government and higher tax burden for individuals and businesses; the effect of inflation/deflation on groups with fixed incomes versus the effect on groups with incomes that change with the price level; the importance of the magnitude of price changes (low inflation rates of about 2 % or less may be beneficial for the economy); the importance of how prolonged the inflation/deflation is, whether the inflation/deflation is anticipated or not anticipated, whether the deflation is caused by supply-side or demand-side factors, whether the inflation is demand-pull or cost-push (mild demand-pull inflation may stimulate employment and economic growth, increase profits); the possibility that inflation may get out of control and inflation rates may reach astronomical levels.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nThis question was usually well done, most candidates were pretty clear about what cost-push inflation is. The question asks for causes, so more than one was advisable. In general, appropriate diagrams were drawn and labelled to show the impact of cost-push inflation. A minority of candidates confused cost-push inflation with demand-pull inflation. That of course, seriously undermined their response. Real-world examples were used but were often very generic in nature.
\nTo approach this question well, candidates needed to clearly consider deflation and inflation. It was necessary to consider something of the potential issues of each one before arriving at a reasoned conclusion. For some reason many candidates felt that they had to consider policies to moderate either situation. This was not asked for and simply cost these candidates valuable time. Japan's prior experience with deflation was a popular example used by many candidates.
\nExplain two factors which influence the value of a currency in a floating exchange rate system.
\nUsing real-world examples, discuss the consequences of a fall in a country’s exchange rate.
\nAnswers may include:
\nAnswers may include:
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExplain how the Lorenz curve and the Gini coefficient are used to measure differences in income inequality between countries.
\nDiscuss the view that taxation is the most effective means of achieving equity in the distribution of income.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the meaning of the word “equity”; the difference between equity in the distribution of income and equality in the distribution of income; a consideration of whether it is the most effective means of achieving equity; the effect on equity/equality depends on the type of taxation – progressive (direct) taxation tends to decrease equality/equity while regressive (indirect) taxation may decrease equality/equity; taxation is a major source of government revenue; taxation may be used to discourage the consumption and production of goods with negative externalities; too much taxation may discourage hard work and entrepreneurship; government expenditures on human and physical capital formation may have positive effects on economic growth in the long run; transfer payments may improve the quantity and quality of human capital but may also decrease the incentives to look for employment and to work hard or study; government expenditures and transfer payments may lead to budget deficits and high levels of indebtedness.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nA large number of candidates were unable to correctly label the axes of the diagram showing the Lorenz curve. Often they were labelled back to front, meaning that the Lorenz curve was then incorrectly drawn. Many candidates struggled to clearly explain how the Gini coefficient is derived from the information illustrated in the diagram. However, there were also candidates who were very clear in their explanations and who were also able to draw on actual Gini coefficient values for countries. Such responses were often, very well explained.
\nIt was important for candidates to clearly identify what was being asked for in this question. The question required candidates to consider what equity might mean. A lot of responses seemed to feel that this meant equality and framed their responses accordingly. The question was also asking candidates whether they thought taxation was \"the most effective means\" to achieve equity. To do that, candidates should have explored alternatives to taxation. Many candidates confined their responses to the relative merits of direct and indirect taxes and therefore struggled to generate a convincing level of synthesis. Once again, the highest-achieving responses were able to structure a well-reasoned argument supported by alternative policies and relevant use of real-word examples.
\nTrade war with the United States puts pressure on China’s currency
\n[Source: Michael Smith, The Australian Financial Review, 2018. China risks further US fire as currency hits 10-year low. [online] Available at: https://www.afr.com/markets/currencies/china-risks-further-us-fire-as-currency-hits-10year-low20181030-h17agp [accessed 30 October 2018]. Source adapted.
\nFinancial Times: Tom Mitchell, 2018. US rate rises compound trade pressure on China. Available at: https://www.ft.com/content/27a73392-c534-11e8-bc21-54264d1c4647 2 October. Used under license from the Financial Times. All Rights Reserved. [Accessed 1 October 2018]. Source adapted.
\nTrading Economics, 2018. China Current Account. Available at: https://tradingeconomics.com/china/current-account [accessed 31 October 2018]. Source adapted.]
\nDefine the term fixed exchange rate indicated in bold in the text (paragraph [1]).
\nDefine the term monetary policy indicated in bold in the text (paragraph [2]).
\nUsing an exchange rate diagram, explain why the “widening trade deficit in services” could lead to a depreciation of the renminbi (paragraph [3]).
\nUsing an AD/AS diagram, explain how “increasing China’s interest rate” could affect its economic growth (paragraph [5]).
\nUsing information from the text/data and your knowledge of economics, discuss the view that a depreciating currency is good for the Chinese economy.
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of RMB in another currency, other currency/RMB or other currency per RMB. The horizontal axis should be quantity, or quantity of RMB. A title is not necessary.
\n
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS the vertical axis may be average (general) price level, APL or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary.
\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
Economic analysis may include:
\nArguments supporting the claim may include:
\nArguments against the claim may include:
\nAny reasonable discussion.
\nThis was generally well answered although a significant minority of candidates simply stated that the exchange rate did not change but with no indication to what the currency was fixed to.
\nIn the main there were few problems here, with most candidates having little difficulty in accurately defining the term. However, some students only referred to one aspect of monetary policy and thus lost 1 mark.
\nThere was a wide range of marks for this question. The more informed students had little difficulty, with accurate diagrams and concise but effective explanations. Nevertheless, in a few cases a correct explanation was provided that did not match the diagram so only 2 marks could be awarded.
\nAs in the past with exchange rate diagrams, there were the usual labelling errors, especially on the vertical axis.
\nAgain, a wide range of responses were seen in terms of quality, from excellent answers to those that showed little or no understanding at all. There was moreover clear evidence of careless labelling of the AD/AS diagram, the most common being labelling the horizontal axis as \"GDP\" instead of \"real GDP\".
\nThe accompanying explanation sometimes missed a step (e.g. higher interest rates cause AD to fall, without elaborating on borrowing costs, impact on C & I etc). Some very good responses carelessly lost a mark.
\nThere were some very weak answers where there was minimal evidence of understanding with some, surprisingly, suggesting that higher interest rates would generate economic growth. This was largely the result of a misunderstanding of portfolio investment and physical investment and the different effects of rising interest rates.
\nMany candidates identified some of the possible effects of depreciation but there was relatively little evaluation as to whether it would be good for the Chinese economy. Some students did not even extend their analysis to the \"Chinese economy\" as required by the question, thus providing a generic answer.
\nToo many points tended to be stated rather than analysed. Overall, many students took a descriptive approach with limited appropriate analysis. In some cases, the significance of the PEDx and PEDm was identified while others mentioned the Marshall-Lerner condition and/or J curve theory, but few effectively recognised or analysed their significance. Candidates need to learn how to apply theory to the stimulus text.
\nNote that a widget is an imaginary product.
\nIn the country of Laurania, the widget industry operates as an oligopoly. The Minister for Finance is worried that the firms in the industry might abuse their power by acting together as a monopoly, and has said that the industry’s concentration ratio is cause for concern.
\nA firm operates under conditions of diminishing returns.
\nThe demand curve faced by firms in the widget industry is downward sloping.
\nFigure 3 shows the marginal cost (MC) curve, the average variable cost (AVC) curve and the average total cost (ATC) curve for a firm in the widget industry.
\nFigure 3
\nOne firm in the widget industry uses the practice of price discrimination, charging a lower price to one group of consumers than to another group, even though there is no difference in the cost of supplying to each group.
\nOutline how a concentration ratio might be used to identify an oligopoly.
\nUsing a diagram to support your answer, explain how monopoly power can create a welfare loss.
\nState two government responses to the abuse of monopoly power.
\nIt has been observed that the law of diminishing returns operates in the widget industry.
\nOutline the law of diminishing returns.
\nSketch the marginal product (MP) and average product (AP) curves for this firm.
\nSketch the total product (TP) curve for this firm.
\nSketch the marginal revenue (MR) curve for firms in the widget industry.
\nSketch the total revenue (TR) curve for firms in the widget industry.
\nCalculate the firm’s total variable costs if output is 20 000 widgets per month.
\nIdentify the level of output at which the firm would achieve productive efficiency.
\nCalculate the firm’s monthly total fixed costs if output equals 50 000 units per month.
\nState two conditions necessary for price discrimination to take place.
\nUsing a diagram (or diagrams), explain why a profit maximizing firm might charge a higher price in one market than in another.
\nNB The AC curve is not required. If it is included do not penalize any associated errors.
\nAward [1] for each valid government response stated.
\nAnswers may include:
\nNB Deregulation should not be accepted unless its nature is indicated (as deregulation could also increase monopoly power).
\nAward [1] for an accurate, labelled marginal product curve.
Award [1] for an accurate, labelled average product curve.
NB If the shape of each curve is correct, but the relationship between them is incorrect, then a maximum of [1] may be awarded.
\nAward [1] for an accurate, labelled TP curve, starting at the origin.
\nAward [1] for an accurate, labelled MR curve (MR must be downward-sloping but need not be linear and need not become negative).
\nAward [1] for an accurate, labelled TR curve (must start from the origin, with ever-decreasing gradient, but need not end at the horizontal axis).
\n20 000 × 18 = $360 000
\nAn answer of $360 000 or 360 000 or 360 (without working) is sufficient for [1].
\n85 000 or 85 (allow 84 000 or 86 000)
\nAt 50 000 units, AFC = 15.6 − 12 = 3.6
\nAny valid working is sufficient for [1].
\nFC = 3.6 × 50 000 = $180 000
\nAn answer of $180 000 or 180 000 (without working) is sufficient for [1].
\nAward [1] for each valid condition stated.
\nConditions may include:
\nNB A statement that markets are differentiated/divided is not sufficient for [1].
\nNB Alternative presentations may include: back to back (mirror) or an additional third diagram indicating the sum of the revenue curves.
\nThe majority of candidates demonstrated an understanding that a concentration measures market power, but many did not specify that a higher ratio signified greater market power.
\nMost candidates were able to draw a diagram depicting monopoly equilibrium with welfare loss indicated. Stronger responses explained clearly that P>MC at the profit-maximizing level of output, resulting in market failure/welfare loss. Lower-achieving responses described the diagram without reference to the idea of allocative efficiency not being achieved.
\nWell-answered. A small proportion of candidates listed \"deregulation\" as a response, although it could arguably either increase or reduce monopoly power.
\nThe majority of candidates were able to achieve 1 mark with reference to increasing inputs having, at some stage, a negative influence on output. However, many responses were not specific enough for level 2, neglecting to refer to the application of more variable factors to one or more fixed factor. It was also common for lower-achieving responses to refer to a decrease in output rather than a decrease in marginal product.
\nGenerally well-answered, with lower achieving responses sketching the two curves with an incorrect intersection.
\nFew candidates produced an accurate sketch which illustrated an increasing gradient and then a decreasing gradient, finally becoming negative so that total product decreased.
\nThis question was answered correctly by the vast majority of candidates.
\nGenerally well-answered although a significant number of candidates sketched curves which did not start at the origin.
\nWell-answered.
\nWell-answered, although a number of candidates identified the level of output which would achieve production efficiency as 80 000 units Per month — selecting the minimum AVC instead of the minimum ATC.
\nGenerally well-answered. Some candidates neglected to multiply the fixed cost per unit ($3.6) by the quantity (50 000) but gave an answer of $3.60.
\nGenerally very well-answered.
\nHigher-achieving candidates were able to draw an appropriate diagram and show that profit maximization in each market would result in a higher price in the market where demand was less elastic and a lower price in the market where demand was more elastic. However, it was evident that many candidates did not understand this concept. It was common for candidates to draw two diagrams, one a perfectly competitive market and the other a monopoly market, to try and explain price discrimination. Others drew two market diagrams with different equilibrium prices.
\nExplain how the price mechanism reallocates resources when there is a decrease in the supply of a good.
\nEvaluate the view that the threat to sustainability, caused by economic activity requiring the use of fossil fuels, is best addressed through the use of carbon taxes.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: possible advantages and disadvantages of the use of carbon taxes, consideration of other available policy options such as cap and trade schemes and funding for clean technologies, assessment of “best”.
\nA maximum of [12] should be awarded if there is not at least some reference to other policies.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nGenerally, this question was not answered well by a majority of the candidates. While many candidates were able to explain the mechanics of a decrease in supply in terms of the leftward shift of the supply curve, the subsequent increase in price and decrease in quantity demanded, few were able to extend this analysis further by relating it to the signalling and incentive functions of price and the impact on resource reallocation. In addition, definitions of supply, price mechanism and resources were often absent and good developed examples were rarely provided.
\nAgain, good definitions were often lacking and the terms \"sustainability\" and \"carbon tax\" were not usually defined well by the candidates, if at all. On the plus side, candidates often demonstrated an understanding that taxes reduce supply and thus the quantity of fossil fuels produced but were often unable to explain the emission of carbon as a negative externality. If the term negative externality was mentioned at all, it was often not diagrammed well. The best responses were also able to discuss alternative policies to carbon taxes and to reach a considered judgment about \"best\".
\nExplain two reasons why a government might impose indirect taxes.
\nDiscuss the view that price floors are more effective than subsidies in providing assistance to producers in the agricultural sector.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if only one reason is explained.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the possible consequences of price floors, e.g. surpluses, inefficient allocation of resources and welfare impacts; the possible consequences of subsidies, e.g. on consumers, producers or the government; consideration of “more effective”.
\nA maximum of [12] should be awarded if there is evaluation but no consideration of “more effective”.
\nThis was the more popular of the two Section A questions and it was encouraging to see how any candidates were able to explain two reasons why a government might impose indirect taxes and to diagram the imposition of a tax as a shift leftwards of the supply curve. The reasons given were mostly to raise revenue and to lower the quantity consumed of demerit goods. Almost all candidates were able to give examples of goods on which indirect taxes are imposed, cigarettes being the example that was overwhelmingly provided. Often, however, candidates failed to score very high marks here as the reasons were not developed in sufficient detail and/or they were presented in far too general a manner with a lack of reference to economic theory. For example, the raising revenue argument was usually not supported with reference to the rectangle representing government revenue on the supply and demand diagram.
\nThis question required an explanation of how price floors could provide assistance to agricultural producers and how subsidies also could, with an evaluation of one against the other. Often candidates explained one policy fully and not the other or went straight into evaluating the view without providing the necessary underpinning explanation, and so this question was generally not very well answered. The question was problematic for candidates who were not able to diagram price floors or who confused price floors with price ceilings, as several candidates did. Often a guaranteed higher price for producers was explained but without showing how this could provide greater revenues. Most did not mention the purchasing of excess supply by the government. The concept of subsidies seemed to be reasonably well understood by candidates and, while most were able to diagram a rightward shift of the supply curve, again the impact on producers' revenues was not always shown. Definitions of subsidies and price floors were usually fairly accurate. Many candidates were able to evaluate the consequences of subsidies on the different stakeholder but were often less effective in evaluating the consequences of price floors.
\nTable 2 provides information relating to the country of Averna in 2019.
\nTable 2
\nIn 2019, the population of Averna is 213 600, while the GDP deflator is 125.
\nTable 4 provides data relating to Country Y.
\nTable 4
\nTable 5 provides information relating to the country of Buranda.
\nTable 5
\nCalculate Averna’s nominal gross domestic product (GDP) in 2019.
\nDefine the term price deflator.
\nUsing your answer to part (a), calculate Averna’s real GDP per capita in 2019.
\nExplain two reasons why an increase in real GDP per capita may not lead to an improvement in living standards.
\nTable 3 provides information relating to the labour market in the country of Buranda.
\nTable 3
\nCalculate the unemployment rate in Buranda.
\nDefine the term underemployment.
\nIdentify a period in which Country Y experienced disinflation.
\nWith reference to the short-run Phillips curve, describe the relationship between inflation and unemployment in Country Y for the period 2011 to 2016.
\nOutline how the data for the period 2016 to 2018 may reflect a change in the short-run Phillips curve for Country Y.
\nCalculate Buranda’s terms of trade index for 2008 and 2018.
\nUsing your answers to part (g)(i), explain how the change in Buranda’s terms of trade may act as a barrier to economic development.
\nGDP = 2350 + 1380 + 1624 + (462 − 476)
\nAny valid working is sufficient for [1].
\n= $5340 million or $5.34 billion
\nAn answer of $5340 million, $5.34 billion (or 5340 or 5.34) without any valid working is sufficient for [1].
\nIf a candidate makes a small error in transcribing the figures e.g. 1642 instead of 1624, then they can still receive [1] for valid working.
\nCalculating GDP at factor cost (plus subsidies less indirect taxes) may be fully rewarded:
\nGDP at factor cost = 2350 + 1380 + 1624 + (462 − 476) + 681 − 759
\n= $5262 million or $5.26 billion
\nFor full marks to be awarded the response must provide valid working and include correct units.
\nReal GDP = 5340 × 100/125 = $4272 million
\nReal GDP per capita = 4 272 000 000/213 600
\nAny valid working is sufficient for [1] e.g. using nominal GDP instead of real GDP (5340/213 600 = $25 000) or neglecting to convert to per capita figure (=$4272m).
\nNeglecting to multiply by 100 in calculating real GDP may be considered a units error.
\n= $20 000
\nAn answer of $20 000 or 20 000 (without working) is sufficient for [1].
\nFor full marks to be awarded the response must provide valid working and include correct units.
\nOFR applies from part (a). Per capita figures may be rounded to the nearest dollar.
\nReasons may include:
\nAny valid working is sufficient for [1].
\n= 17.39 % or 17.39
\nAn answer of 17.39 % or 17.39 (without working) is sufficient for [1].
\n2011 – 2012
OR 2011 – 2013
OR 2012 – 2013
OR 2012
OR 2013
Award [1] for identifying the period correctly.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
2008:
\n\nAn answer of 97.80 is sufficient for [1].
\n2018:
\n\nAn answer of 86.24 is sufficient for [1].
\nNB Candidates who make a similar rounding error/misplace the decimal point/do not multiply by 100 on both calculations should be penalized once only.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
There were relatively few accurate responses to this question. The majority of candidates included \"Government expenditure on unemployment benefits\" which should have been excluded as the item represents a transfer payment. It was also common to see every item included in the calculation.
\nMost students were able to describe the price deflator or provide the formula. Lower-achieving responses tended to refer to \"adjusting a price for inflation\", demonstrating a weak grasp of the term.
\nMany responses earned full marks via the Own Figure Rule. Lower-achieving responses calculated per capita GDP OR real GDP but not both. A common error was to neglect to multiply by 100 when converting nominal GDP to real GDP
\nCandidates were generally able to identify the relevant concepts needed to answer the question such as the distribution of income, the composition of output, the creation of externalities of the amount of leisure time available. However, many neglected to focus on the possible impact of an increase in real GDP, and simply wrote that \"GDP does not measure health/education/happiness\". Stronger responses explained clearly the possible reasons why an increase in real GDP may not lead to more spending on health, education or other merit goods.
\nAlthough the majority of responses were accurate, it is surprising, given the number of times this calculation has been required in previous examination sessions, to see so many inaccurate responses. The denominator was often shown as 9.3 million (the population) or 5.7 million (the employed).
\nGenerally well answered, with the idea of skills being under-utilised forming the basis of student responses. Lower-achieving responses referred to \"the existence of part-time workers\" without stating that they would like to work full-time or confused underemployment with unemployment.
\nIt was surprising that so many responses indicated that disinflation occurred after 2013, possibly due to candidates referring to the incorrect column i.e. looking at the data for unemployment.
\nGenerally well-answered. Candidates were able to state the Phillips curve relationship and identify this relationship in Country Y between 2011 and 2016.
\nThe majority of candidates were able to identify that the traditional Phillips curve relationship had broken down and that this may be reflected by an outward shift of the curve. Lower-achieving responses explained incorrectly that the breakdown of the relationship signified a move to the long-run Phillips curve.
\nAlthough many candidates were able to perform the appropriate division, it was common for the index to be expressed as decimal fraction, often expressed to 3 decimal places. Lower-achieving responses divided the 2019 data by the 2018 data or subtracted one element from another.
\nThis question was answered poorly. Relatively few candidates were able to explain the meaning of a deterioration of the terms of trade. The majority of responses merely focused on the prices of exports and imports, treating them separately rather than considering the relative changes and making simple inferences regarding the current account deficit. Many responses discussed the volume of exports and imports rather than the (relative) prices. It was rare to see any references to elasticities or the Marshall-Lerner condition when explaining the implications of a deteriorating terms of trade.
\nCan the Democratic Republic of the Congo achieve its economic potential?
\n*looted: goods stolen from a place, typically during a war or riot
\n[Source: Médecins Sans Frontières/Doctors Without Borders (MSF), 2017. D. R. Congo: Urgent need for aid in the rural areas
of Kasai. [online] Available at: https://prezly.msf.org.uk/d-r-congo-urgent-need-for-aid-in-the-rural-areas-of-kasai#.
AFP, News24, 2018. Restive DRC’s big challenge - fulfilling economic potential. [online] Available at:
https://www.news24.com/Africa/News/restive-drcs-big-challenge-fulfilling-economic-potential-20181003
[accessed 3 October 2018]. Source adapted.]
Define the term gross domestic product (GDP) per capita indicated in bold in the text (paragraph [1]).
\nList two components of the Human Development Index (HDI) (paragraph [1]).
\nUsing an externalities diagram, explain the benefits of hygiene and sanitation education programmes (paragraph [5]).
\nUsing a production possibilities curve (PPC) diagram, explain how the production possibilities (potential output) of the DRC might be affected if there were greater access to electricity (paragraph [4]).
\nUsing information from the text/data and your knowledge of economics, evaluate the effectiveness of interventionist policies as a means of achieving economic development in the DRC.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe vertical axis can be price, costs or benefits. The horizontal axis is quantity. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.
\n\n
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\n“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
\nResponses may include:
\nEconomic analysis may include:
\nStrengths of interventionist policies may include:
\nLimitations of interventionist policies may include:
\nTo reach level 3, students must show awareness of the ways in which interventionist policies will impact upon economic development (not simply discuss the advantages and disadvantages of interventionist policies in general). This means to link the evaluation to how they will reduce poverty, increase living standards, reduce income inequalities and increase employment opportunities, improve health and education indicators.
\nAny reasonable evaluation.
\nGenerally poorly answered. A common answer was just GPD/population, therefore did not attract full marks. There were also two other basic weaknesses. One was that students referred to the output of goods and services and not the value. Two, students often ignored the \"per capita\" aspect of the definition.
\nAgain relatively poorly answered. Most definitions were partial/incomplete, with statements such as \"education\" or \"living standards\". A few students are still using the old definition of HDI, which included indicators like literacy rates. It is expected that candidates will have up-to-date knowledge and understanding of key terms.
\nSome students interpreted \"hygiene and sanitation education programmes\" as three different programmes: hygiene, sanitation and education. This alternative interpretation was accepted.
\nSome candidates produced sound responses with accurate externality diagrams coupled with a comprehensive explanation. Lower-achieving responses constructed diagrams with labelling errors or showing positive externalities on production that clearly highlighted a lack of understanding alongside an explanation that confirmed the limited approach undertaken.
\nOccasionally students did not explain the benefit in the context of the article.
\nThere were some encouraging answers to this question. Most candidates understood the meaning of production possibilities and were able to construct an accurately labelled diagram alongside an ability to apply the concept in terms of greater \"access to electricity\". There were a range of errors by some candidates including:
\nThis was poorly answered with few candidates having little understanding of the demands of the question. Such as:
\nExplain how a decrease in income might affect the demand for normal goods and the demand for inferior goods.
\nDiscuss the significance of income elasticity of demand for producers of primary products and producers of manufactured goods when incomes are rising.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if a candidate has only covered normal goods OR inferior goods.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of primary products that have a high YED and/or manufactured goods that have a low or negative YED, the YED of a good depends on the income level in the economy, the problems of measuring YED because other factors affecting the demand for primary products and manufactured goods apart from income are changing at the same time.
\nA maximum of [9] should be awarded if a candidate has only covered producers of primary products OR manufactured goods.
\nThis question was generally well answered by candidates with the best answers explaining how a decrease in income would lead to a fall in demand for normal goods and a rise in demand for inferior goods. These answers were supported by effective demand and supply diagrams and good use of real-world examples.
\nThis question proved challenging for students. The application of income elasticity of demand (YED) to primary goods and manufactured goods is something candidates have found quite difficult in the past and this session was no different. The best answers considered how primary goods tend to have a low YED and manufactured goods a high YED and how this affects the revenues of producers when incomes are rising. Students struggled to evaluate the points they made in the answer, although the strongest responses did consider evaluative points such as the impact factors other than income affect demand for primary goods and manufactured goods.
\nExplain how the size of the circular flow of income in an economy is likely to be affected by a decrease in the rate of interest.
\nEvaluate the effectiveness of fiscal policy as a means of achieving long-term economic growth.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the various advantages and disadvantages of fiscal policy, including both the demand- and supply-side effects on the economy, consideration of alternative (supply-side and monetary) policies.
\nThis proved to be a difficult question for candidates and was certainly the least popular. Most were unable to provide an accurate circular flow diagram and to explain the circular flow model and, all too often, the key concepts of injections and leakages were completely ignored or simply glossed over. Thus, usually, candidates did not link the lowering of interest rates to a decrease in a leakage (saving) and an increase of an injection (investment). Many briefly mentioned that the size of the circular flow would increase but were not able to properly explain why. Examples were almost never provided. Many candidates appeared to be much more at ease with the AD/AS model, which they often launched into at an early stage of their answer to this question. Some credit was given for this where appropriate, but this approach was often not explicitly related to leakages and injections.
\nAlthough some candidates confused fiscal policy with monetary policy, many displayed a good understanding of what fiscal policy is and how expansionary fiscal policy is achieved. However, few candidates were able to explain what long-term economic growth is in comparison to short-term economic growth and to specifically explain how it might be achieved. Thus, typically, answers tended to be more general nature in relation to fiscal policy and economic growth, with diagrams showing how AD shifts rightwards, causing SR economic growth, without the shift rightwards of LRAS on account of the supply-side effects of fiscal policy. Many could evaluate fiscal policy in general, but not specifically as it relates to increasing long-term economic growth. A few candidates did compare fiscal policy to supply-side policies but often failed to recognise that certain aspects of fiscal policy are in effect supply-side policies.
\nExplain the impact on consumers, producers and the government of a price floor being introduced in an agricultural market.
\nEvaluate the view that a price ceiling is an ineffective policy to protect low-income consumers.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if a candidate has only considered one stakeholder. A maximum of [8] should be awarded if a candidate has only considered two stakeholders. All three stakeholders are needed to reach level 4.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the benefits a price ceiling might bring to low-income consumers if the ceiling is managed through an effective alternative rationing system and how some consumers will gain significantly through a price ceiling even if others lose.
\nThis question was generally well answered by students with a clear explanation of how producers gain from a minimum price and consumers and the government lose out. The best answers used clear, accurate diagrams, showing changes in consumer and producer surpluses. Effective answers also showed the cost to governments of intervention buying and surplus stock management. The very best answer used effective real-world examples such as intervention buying in agricultural markets.
\nThere were many good answers to this question with the strongest responses clearly explaining how a price ceiling can benefit low-income consumers in markets for goods such as housing, basic food, and energy. Many candidates evaluated the policy well by considering how maximum prices can lead to parallel markets, shortages and corruption. The best answers used effective diagrams and well-developed real-world examples.
\nExplain how aggregate demand is likely to be affected by an increase in the wealth of consumers and an increase in business confidence.
\nEvaluate the effectiveness of monetary policy in reducing an economy’s rate of unemployment.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nAward a maximum of [6] if only wealth or only business confidence is addressed.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: the implications of monetary policy in terms of the ability to implement changes in interest rates relatively quickly and incrementally, the limited political constraints, the possible conflicts with other objectives of economic policy, time lags, the independence of the central bank, the ineffectiveness of monetary policy in relation to structural unemployment / the natural rate of unemployment, its possible ineffectiveness during a recession, the possibility that alternative policies (e.g. supply-side policy) may be more effective.
\nMost responses to this question were disappointing in the sense that a certain level of understanding was usually shown but not to the level required to achieve a high mark. The main problem was that, while most candidates understood the concept of aggregate demand and its components, the concepts of wealth and business confidence were usually not well understood. Wealth was commonly equated with income and so an increase in wealth was often simply seen as an increase in disposable income, which would increase AD. Only in relatively few cases was the increase in consumption and thus AD explained in terms of the wealth effect. Business confidence was not well-understood and was often confused with consumers' confidence in business, but candidates did usually make the connection with increased investment and AD, although the reasons given were not always correct and, invariably, no examples were provided.
\nCandidates were reasonably successful in explaining the nature of expansionary monetary policy, which seemed to be a concept that is well-understood. Many were able to explain that it involves the lowering of interest rates and other devices as well. However, the mechanisms by which these different aspects of monetary policy would lead to an increase in aggregate demand, greater economic growth and eventually a decrease in the rate of unemployment were often not fully developed. Monetary policy was sometimes evaluated on its own, drawing on a standard set of pre-learned points, but not usually in terms of its effectiveness in specifically lowering the rate of unemployment. Thus, answers given were often too general and generic, without sufficient focus on reducing unemployment.
\nExplain how in the Keynesian AD/AS model an economy can be in equilibrium while producing below the full employment level of output.
\nEvaluate the view that fiscal policy is the best way to reduce unemployment.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the problems of using fiscal policy to reduce unemployment such as; budget deficit, inflation and it is not as effective at reducing unemployment that is not demand-deficient (structural, frictional). There could also be coverage of alternative policies such as monetary and supply side.
\nA maximum of [12] should be awarded if a candidate has not considered an alternative policy.
\nThe responses to this question were mixed in terms in terms of the standard. The best answers clearly focused on the reason why equilibrium national income can exist below full employment in the Keynesian model by focusing on the argument that wages and costs do not fall when the economy is operating below full employment. A common mistake was for students to simply explain equilibrium income below full employment without explaining why the equilibrium would stay at this level and not adjust back to full employment. Very good answers were supported by an effective real-world example.
\nThere were some very good answers to this question. The best responses focused on how expansionary fiscal policy reduces demand deficient unemployment as aggregate demand increases when tax is reduced, and government expenditure is increased. Good responses would go on to evaluate the use of fiscal policy by discussing issues such as increasing inflation, the cost of financing the policy, and fiscal policy is not particularly effective at reducing frictional and structural unemployment. The highest-level responses would use effective real-world examples to support the points being made.
\nExplain why governments impose price floors in the market for agricultural products.
\nEvaluate the effectiveness of government regulations in achieving a reduction in the consumption of demerit goods.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the strengths of government regulations: do not increase tax burden; relatively simple to implement (compared to market-based policies), addressing directly the consumption of demerit goods, complete bans may be very effective in preventing the use of highly addictive demerit goods; consideration of the limitations of government regulations: difficulties/cost of enforcement and lack of government revenue, may be politically unpopular; decrease the revenues of producers of demerit goods and the income of workers in these industries; complete bans may lead to underground parallel markets; consideration of the strengths and limitations of alternative (market-based) policies.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMany candidates used generic labelling of the diagrams (just P and Q) despite the question asking specifically about an agricultural product so the diagrams, while appropriate, were not considered \"effectively applied\". A common weakness of many answers was that while candidates explained that by imposing a price floor the government increases the revenues of the producers, they did not provide any explanation of why the government would want to increase the revenues of agricultural producers, resulting in somewhat incomplete answers. Surprisingly many candidates drew a price ceiling diagram to show a minimum price.
\nThe most common mistake was when candidates focused excessively on taxation (often incorrectly considering taxation to be regulation). Another mistake was to state that demerit goods have negative externalities in production despite the IB syllabus stating clearly that \"demerit goods are goods whose consumption creates external costs\". Almost all candidates were able to give an appropriate example of a demerit good (cigarettes being the most popular example by far) even if they could not precisely define it.
\nExplain how economic growth might reduce the level of absolute poverty in a country.
\nEvaluate the view that progressive income tax is the best way to increase equity in an economy.
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB Where a money value is given for absolute poverty there is flexibility on the value. Anything around $2 a day is acceptable.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the problems of applying progressive taxation if high-income people avoid paying or people do not expand their businesses and how this can reduce opportunities for people of low incomes. Answers might also include consideration of alternative policies to increase equity such as increased transfer payments and improvements to the functioning of the labour market.
\nA maximum of [12] should be awarded if a candidate has not considered an alternative policy.
\nSouth Korea’s exchange rate and central bank intervention
\nFigure 1: South Korea’s exchange rate with the US$
\nTable 1: South Korea’s balance of trade in goods and services, seasonally adjusted
\nDefine the term foreign direct investment indicated in bold in the text (paragraph [3]).
\nList two responsibilities of a central bank (paragraph [4]).
\nUsing an AD/AS diagram, explain how the change in the balance of trade in goods and services from 2018 to 2019 could have affected South Korea’s economy (Table 1 and paragraph [1]).
\nUsing an exchange rate diagram, explain the effect on the South Korean won’s exchange rate of South Korea’s central bank selling US dollars (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, evaluate the South Korean central bank’s decision to intervene in order to prevent the South Korean won from depreciating again.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be price level or average/general price level.
The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviation is acceptable. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of won in another currency, other currency/won or other currency per won. The horizontal axis should be quantity, or quantity of won. A title is not necessary.
NB: an answer may alternatively draw an exchange rate diagram for the US dollar and show the supply curve shifting right with the US dollar depreciating, which is equivalent to the won appreciating. If the explanation is correct, this can be fully rewarded.
\nNB: the diagram may show the won initially depreciating due to declining demand and/or rising supply, with the demand curve then shifting right to reverse the depreciation. If the explanation is correct, this can be fully rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
\nArguments for intervening to prevent depreciation may include:
\nArguments for not intervening to prevent depreciation may include:
\nAny reasonable evaluation.
\nMost candidates achieved L2 on both definitions. The candidates who were only awarded L1 on the definition of FDI were those who did not clearly differentiate between portfolio (financial) investment and FDI.
\nThis question was also well attempted. Most candidates were able to identify a decreasing net export value as a component of aggregate demand and the direct reason for lower GDP and/or lower inflationary pressures. There were some cases in which the candidate took the approach of a decreasing but still positive net exports value. If the response was clearly explained full marks were awarded.
\nMany candidates recognised that the demand for the won increased in the foreign exchange market. In some cases, diagrams for the US$ were included and properly explained in terms of a decreasing value of the US$ which in turn represents an increasing value of the won. Often, those who were not awarded a mark on this question were those who shifted the supply of won.
\nMost candidates scored marks in the mid/top range of Level 2 for this question. Almost all could offer the ‘standard’ consequences of a depreciation but few specifically addressed the central bank’s decision to intervene to keep the won from depreciating further. Answers which merely focused on the advantages and disadvantages of a low exchange rate were often limited to L2. Those who evaluated the need for intervention and considered arguments such as retaliation or the depletion of foreign reserves were able to reach L3.
\nCoffee production in Honduras
\nTable 2: Personal remittances (debits and credits) in the
Honduras balance of payments (US$ million)
\n
\n
\n
\n
\n
Figure 2: Foreign aid flows from the United States to Honduras (US$ million)
\n[Source: Financial Times, 2018. Honduran Farmers Flee the Effects of Climate Change [online] Available at: https://www.
ft.com/content/adc270e2-fd72-11e8-aebf-99e208d3e521 [Accessed 29 September 2020] Used under licence from
the Financial Times. All Rights Reserved.
McDonnell, T., 2019. Trump Froze Aid To Guatemala. Now Programs Are Shutting Down [online] Available at: https://
www.npr.org/sections/goatsandsoda/2019/09/17/761266169/trump-froze-aid-to-guatemala-now-programs-are-shutting-
down?t=1601386752458 [Accessed 29 September 2020] Source adapted.]
List two functions of the World Bank (paragraph [3]).
\nDefine the term unemployment indicated in bold in the text (paragraph [6]).
\nUsing a demand and supply diagram, explain why the global price of coffee beans dropped when “countries such as Vietnam, Indonesia and Ethiopia increased their exports” (paragraph [2]).
\nUsing an externalities diagram, explain how coal-fired power plants in the US might be causing market failure (paragraphs [3] and [4]).
\nUsing information from the text/data and your knowledge of economics, discuss the extent to which foreign aid from the US may assist economic development in Honduras.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe y axis may be labelled price, but could be costs or benefits, and the x axis is labelled quantity. P and Q are sufficient. A title is not necessary.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Answers may include:
\nBenefits of aid may include:
\nLimitations of aid may include:
\nAny reasonable discussion.
\nListing the functions of the World Bank posed more problems to candidates with many confusing the functions of the World Bank with those of the IMF or even of a central bank.
\nMost candidates could define unemployment accurately. A few used the word ‘unemployed’ instead of ‘without a job’ and this meant the mark was capped to L1.
\nThis question did not seem to pose candidates any problem. The majority could establish that the supply curve would increase, leading to lower prices.
\nSome candidates had issues with the labelling of curves (reversed MSC and MPC or confused MPB/MSB with MPC/MSC) but otherwise most did well for this question.
\nUnfortunately, there were not many good answers to this question. The impact of foreign aid on development in Honduras was seldom precisely explained. Many responses were a general description of the text with very limited value added or provided theoretical costs and benefits of foreign aid. Those who established links between aid and development concepts/issues such as the poverty cycle, a lack of diversification and a narrow range of exports were often awarded L3.
\nExplain why merit goods tend to be under-provided in a free market.
\nEvaluate the use of carbon taxes to reduce threats to sustainability.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the extent to which carbon taxes affect different stakeholders, the advantages and disadvantages of carbon taxes in comparison with alternative policies, the difficulties of measuring externalities / estimating the socially-optimal level of output.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nThe better responses demonstrated clear understanding of merit goods, but some lower-achieving responses showed confusion of merit goods with public goods or with goods that have positive externalities of production. Some candidates correctly pointed out that merit goods are associated with positive externalities of consumption, but their answers could be improved by listing third-party benefits instead of only private benefits such as (in the case of education) higher starting salary or higher material standard of living.
\nThe clarity of many candidates’ answers would be improved if they had fully labelled the diagram (e.g. using the much more informative Quantity of electricity and Price of electricity instead of the generic Q and P labels) and had used this labelling to clearly explain in their answers which market they were analysing with the help of the diagram and what exactly were the negative externalities in that market.
\nThe candidates demonstrated good general understanding of indirect taxes, but some lower-achieving answers took this aspect of the question too far and focused on explaining and evaluating taxes on demerit goods, virtually ignoring the aspects of the question that referenced carbon and sustainability. Another weakness in some answers, which could possibly be avoided by more careful labelling of the diagram, was the explanation of carbon taxes as taxes on carbon as if the carbon is the main product of the firms being taxed with carbon taxes, not a side effect from the production of other goods (such as electricity).
\nExplain why producers in an oligopolistic market might choose to engage in non-price competition.
\nEvaluate the view that the use of legislation and regulation by government is the most effective way to control monopoly power.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nEvaluation may include: consideration of the advantages and disadvantages of legislation and regulation; comparison of the effectiveness of regulation of prices, regulation of patents and limitations to mergers/takeovers to alternative measures such as trade liberalization and nationalization.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMost candidates correctly explained that when an oligopolistic firm decreases its price the other firms in the market will decrease their prices as well and hence the demand would be price inelastic below the current price, resulting in falling total revenue. Nevertheless, those same candidates too often supported their explanations by a diagram showing positive marginal revenue (which implies that the falling price results in increasing total revenue).
\nMost candidates explained monopoly in general terms and discussed forms of government intervention in general (such as taxation, subsidies and price ceiling) but their answers could be improved by focusing on the specific demands of the question.
\nGovernments intervene in markets to support firms and to promote equity. Explain one policy that could be used to support firms and one policy that could be used to promote equity.
\nUsing real-world examples, evaluate the effects for stakeholders of a government imposing an indirect tax on a particular good.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if only one policy/objective is addressed.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
\nAnswers may include:
\nA maximum of [9] should be awarded if only one stakeholder is mentioned.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nThere were many good answers to this question with effective responses focusing on government intervention through policies like trade protectionism (such as tariffs) and minimum prices to support producers and maximum prices and subsidies to promote equity. The strongest responses used economic terms effectively and had effective diagrams to support the economic theory applied to answer the question. One weakness in student responses was when they did not clearly distinguish between support for firms and the promotion of equity. It is important for students to clearly distinguish between equity and equality in their answers to questions on this topic.
\nThis was generally well answered by students who produced effective theory-based answers that considered the impact of indirect tax on consumers, producers, government, workers and wider society. The part (b) questions on this new paper 1 have an emphasis on real-world examples and nearly all students attempted to do this. It was good to see answers that looked at the impact of indirect taxation on different markets and in different countries in the world. The strongest responses developed answers that evaluated the effects of indirect taxes on different stakeholders by, for example, considering how the impact of indirect taxation is affected by the price elasticity of demand and supply of a good.
\nExplain how rising commodity prices and wages might lead to cost-push inflation.
\nDiscuss the possible consequences of deflation for an economy.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nNB A maximum of [6] should be awarded if a candidate has only explained the effect of rising commodity prices OR rising wages.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: consideration of the extent to which the consequences of deflation depend on its causes; consideration of the effect of deflation on different stakeholders.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMost candidates were able to draw an AD/AS model and explain that cost-push inflation is caused by an increase in the cost of production but their answers would be improved if they could further support their explanations by an appropriate historical example.
\nThe great majority of candidates understood the concept of deflation but too many candidates focused their answers on the causes of deflation instead of on the consequences of deflation. Also, candidates often spent a lot of time discussing the consequences of expansionary fiscal and monetary policies. Their answers could be significantly improved if they had focused on discussing negative consequences that can be directly attributed to the falling average price level.
\nExplain how the use of supply-side policies might encourage greater domestic competition and improve the international competitiveness of a country.
\nUsing real-world examples, evaluate the view that the use of interventionist supply-side policies is the most effective way of reducing a country’s rate of unemployment.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if only one of the two goals in the question item is addressed.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
\nAnswers may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nAs the question requires an evaluation of the “most effective way”, a maximum of [12] should be awarded where no other policies are considered, as the question wouldn’t be fully addressed. For [13] or more the synthesis and evaluation must be effective and balanced and there must at least be some mention of alternative policies.
\nThis question had many good answers, with the best responses looking at how interventionist supply-side policies, such as subsidies and grants to support research and development, along with education and training, could increase competition within domestic markets and make a country more internationally competitive. Some candidates approached this question from a market-based supply-side approach and looked at policy options like tax cuts, deregulation and privatization. It was important for students to focus their chosen supply-side policies on greater domestic competition and international competitiveness and the best answers did this effectively.
\nThis question was generally well answered by students, with many considering interventionist supply-side policies such as education and training, employment subsidies, and direct state employment. Good answers considered interventionist supply-side policies in terms of the types of unemployment (frictional, structural, and demand deficient unemployment) and illustrated their response with an increase in LRAS and/or demand and supply for labour diagram. Similar to question 1, most students tried to support their answer with a real-world example. The very best answers effectively evaluated the use of interventionist supply-side policies but considered aspects such as the financial cost of the measures and how effectively they work.
\nExplain how a better trained and educated labour force might affect economic growth.
\nDiscuss the view that economic growth always leads to rising living standards.
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
\nAnswers may include:
\nDiscussion may include: the advantages and disadvantages of economic growth, the extent to which economic growth affects different stakeholders and material and non-material aspects of the standard of living, consideration of the word “always”.
\nNB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nSome answers were focused on the effect of increased training and education on aggregate demand and could be significantly improved by addressing the more important effects on short-term and long-term aggregate supply.
\nA generally well answered question with some excellent examples and discussion that considered a range of positive and negative effects of economic growth on living standards.
\nExplain how political and social factors can act as barriers to economic growth and economic development.
\nUsing real-world examples, discuss the significance of economic barriers for a country’s economic growth and economic development.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
\nAnswers may include:
\nA maximum of [6] should be awarded if only economic growth or economic development in the question item is addressed.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
\nAnswers may include:
\nExaminers should be flexible in the interpretation of the difference between economic and political/social barriers.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nN.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nA maximum of [9] should be awarded if only economic growth or economic development in the question item is addressed.
\nRelative to the other questions on the paper, this question was the most challenging for students. The aim of the question was for responses to consider issues such as gender inequality, corruption, unequal political power and status, a weak institutional framework through the legal system, and ineffective taxation structures. Many answers, however, drifted into general barriers to economic growth and development. Students also found it difficult to answer the question using economic theory, such as the PPC model and the poverty cycle.
\nCandidates found the emphasis on economic barriers more straightforward to deal with compared to political and social factors in part (a). Strong answers focused on economic barriers, such as low levels of human capital, overdependence on the primary sector, and protectionism in international markets. The best answers took a factor such as trade barriers and explained how this might reduce economic growth and development. Again, it was important for answers to use a real-world example to support their answer and most students did this. The best answers evaluated the significance of different economic barriers by, for example, discussing the advantages and disadvantages of having an over-reliance on the primary sector.
\nChina and global trade
\n[Source: China Economic Review, 2020. Japan, the EU and the US target China with WTO rule change proposal [online]
Available at: https://chinaeconomicreview.com/japan-the-eu-and-the-us-target-china-with-wto-rule-change-proposal/
[Accessed 29 September 2020] Source adapted.
Sasso, M., 2020. U.S. Furniture Industry Eyes Cambodia as Vietnam’s Wages Rise [online] Available at: https://www.
bloomberg.com/news/articles/2020-01-08/u-s-furniture-industry-eyes-cambodia-as-vietnam-s-wages-rise [Accessed
29 September 2020] Used with permission of Bloomberg L.P. Copyright © 2022. All rights reserved. Source adapted.
The Economist, 2020. Don’t be fooled by the trade deal between America and China
https://www.economist.com/leaders/2020/01/02/dont-be-fooled-by-the-trade-deal-between-america-and-china
[Accessed 29 September 2020] Source adapted.]
Define the term trade war indicated in bold in the text (paragraph [1]).
\nList two functions of the World Trade Organization (WTO) (paragraph [2]).
\nUsing a tariff diagram, explain the likely effect on consumer surplus of a 25 % tariff on all wooden furniture imported into the US (paragraph [5]).
\nUsing a foreign exchange diagram, explain the possible effect of China’s large current account surplus in 2007 on the exchange rate of China’s currency (the renminbi) (paragraph [6]).
\nUsing information from the text/data and your knowledge of economics, evaluate China’s use of subsidies as a form of trade protection.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nCandidates may indicate the change in consumer surplus with shaded areas or numbers/letters in the diagram (e.g. a loss of consumer surplus of P1P2AB in the diagram below).
\nThe use of P and Q on the axes is sufficient for a tariff diagram. World supply must be distinguished from domestic supply. If abbreviated, the world supply curve must be labelled Sw or Sworld. A title is not necessary.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nFor an exchange rate/foreign exchange diagram, the vertical axis may be exchange rate, price of renminbi in another currency, other currency/renminbi or other currency per renminbi. The horizontal axis should be quantity, or quantity of renminbi. A title is not necessary.
\n
NB: an acceptable alternative is the supply curve shifting left.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nDo not award beyond Level 2 if the answer does not contain reference to the information provided.
\nCommand term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
Advantages of subsidies may include:
Disadvantages of subsidies may include:
Any reasonable evaluation.
\nMost candidates scored at least L1 on both definitions. Many candidates had some idea of what a trade war is, but could not structure the definition properly and/or allude to retaliatory actions.
\nThe functions of the WTO were sometimes expressed too vaguely or the same function was repeated. At times it was difficult to determine where one function ended and another one was being described. Students should be more explicit in their writing when a question asks for a list of two functions.
\nAs for past questions on tariffs, diagrams were sometimes missing the “world supply” label (Pw and Pw + tariff are not sufficient labels for a supply curve). Surprisingly, many candidates who opted for question 1 where unfamiliar with the concept of consumer surplus. Some even confused the consumer surplus and the welfare loss. Those who could identify the change in the consumer surplus often failed to identify that the consumer surplus was reduced due to the higher price AND lower quantity demanded. A considerable number of candidates explained the whole diagram (government revenue, exporters’ revenue…) rather than focusing on answering the question asked. Of all part (b) and (c) questions on this paper, this one proved the most difficult to candidates.
\nThis question was generally well attempted. Most candidates could establish that a current account surplus would put upward pressure on the exchange rate. Some incorrectly labelled the vertical axis as the \"value\" of the currency rather than its \"price\" in terms of another currency.
\nMost candidates scored marks in the mid/top range of L2. Most candidates could provide arguments both for and against protectionism but few discussed subsidies specifically. Many candidates opted to draw the generic trade diagram to explain how a subsidy could reduce imports. To reach L3, candidates need to use the text and their knowledge of economics to enrich arguments which are already mentioned in the text. This was sometimes done by bringing in the concept of ‘dumping’ which the text did not mention but clearly alluded to. Some answers reached L3 through discussing the impact of the removal of subsidies on macroeconomic variables such as the current account and real GDP using information from the text. A few candidates brought in an export subsidy diagram which was often used effectively to explain the impact of subsidies on foreign markets.
\nDistinguish between perfect competition and monopolistic competition.
\nUsing real-world examples, discuss the impact of large firms having significant market power.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
\nAnswers may include:
\nN.B. A maximum of [6] should be awarded for responses that confuse monopoly with monopolistic competition.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
\nAnswers may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nThis question was generally well attempted, with candidates usually able to offer a well explained account of the key assumptions behind each market structure. Diagrams were usually used effectively to enable distinctions to be made between the two structures.
\nAlthough they are not specifically asked for in part (a) questions, many candidates were more comfortable in using examples to explain the differences, particularly to explain monopolistic competition. It was noted that some candidates struggled to provide a clear answer and that was often because they were confused with what monopolistic competition was. A significant number thought that the question was referring to a monopoly.
\nGood responses acknowledged that the question must allude to monopoly and oligopoly market structures and were able to develop a substantive response in which they were able to utilize real-world examples in order to develop the synthesis appropriate to the discussion. Good candidates also displayed a good level of knowledge and factual data in relation to the examples they offered, enabling greater depth to the synthesis provided.
\nSome candidates took the question as an opportunity to examine government responses to market power, which misreads the question.
\nTable 5 shows selected items of the balance of payments for Laylaland in 2020. Figures are in millions of US dollars (US$).
\nTable 5
\nLaylaland has a current account deficit of US$1865 million.
\nChia seeds are an agricultural good produced in many countries and priced in US dollars (US$).
\nFigure 1 illustrates the market for chia seeds in a small country called Nofiberland. D is the domestic demand and S is the domestic supply for chia seeds. Chia seeds can be initially imported at the current world price of US$15.00 per kg. Sw is therefore the world supply faced in Nofiberland with free trade. To protect Nofiberland producers, the government decides to impose a US$6.00 tariff on chia seed imports. St is therefore the world supply faced in Nofiberland after the tariff is imposed.
\nFigure 1
\nQuinoa is a great source of protein and is thus considered a “super food”. As a result, the demand for quinoa in advanced economies has lately been rising very fast while global supply has not changed. A small country called Proteinland gets 80 % of its export revenues from exporting quinoa to advanced economies.
\nDistinguish between credit and debit items in the balance of payments.
\nState one example of a debit item from the financial account of the balance of payments.
\nUsing Table 5, calculate the value of net current transfers for Laylaland in 2020.
\nUsing Table 5, calculate the net exports of goods and services for Laylaland in 2020.
\nExplain two methods that Laylaland’s government could use to correct the current account deficit.
\nList two administrative barriers that Nofiberland could have used to limit imports of chia seeds.
\nCalculate the price elasticity of demand for chia seeds in Nofiberland following the imposition of the tariff.
\nCalculate the change in consumer expenditure on imported chia seeds in Nofiberland resulting from the imposition of the tariff.
\nCalculate the total welfare loss resulting from the imposition of the tariff on chia seeds.
\nOutline one reason why the imposition of the tariff would lead to a welfare loss.
\nDescribe the impact of the rise in demand for quinoa on the terms of trade of Proteinland.
\nExplain how the increase in world demand for quinoa would likely affect the current account balance of Proteinland.
\nCorrect examples include:
\nOR examples of any of the above, such as:
Domestic residents purchasing foreign bonds / setting up a new company abroad or acquiring controlling percentage of shares of a foreign company / the central bank buying foreign currency / domestic residents buying foreign currency.
For any correct example award [1].
\n539 − 1397 = −858
\nAn answer of −$858 million or −858 is sufficient for [1].
\nNX + Net Income + Net Current Transfers = −1865
\n(Net Income = 412 − 1075 = −663)
\nNX = 663 + 858 − 1865
Any valid working is sufficient for [1]. Valid working may constitute identifying the three figures (663, 858, 1865) regardless of their +/− signs.
NX = $344 million
\nAn answer of −$344 without any valid working is sufficient for [1].
\nOFR applies if current transfers have been calculated incorrectly in part (c).
\nPED =
\nAny valid working (correct %Δ Qd(X) or %Δ P(X), provided the formula is not inverted) is sufficient for [1]. However, simply stating the correct % (e.g. a denominator of 40 %) is not sufficient.
\nPED = 0.43 or −0.43 or
\nAn answer of 0.43 or −0.43, without any valid working is sufficient for [1].
\nIf a % sign is used in the final answer, a maximum of [1] may be awarded.
\n− = 462 − 465
\nAny valid working is sufficient for [1].
\n= −$3 million
\nAn answer of −$3 million or 3 without any valid working is sufficient for [1].
\nAny valid working is sufficient for [1]. If the response provides a correct calculation of one relevant triangle, then [1] may be awarded.
\n= $27 million
\nAn answer of $27 million or 27 without any valid working is sufficient for [1].
\nPLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
\n\n
For stating that the terms of trade have improved/risen/increased or that there has been a favourable movement [1].
\nMostly correct.
\nMany students did not know the items in the financial account of the balance of payments and instead stated a current account item. Others failed to show that FDI needed to be qualified as being “overseas” to be a debit item.
\nThere were several unit errors, including the omission of the negative sign.
\nThis was not a straightforward question but was generally done well, signifying a good understanding of the current account. Again, there were some unit errors.
\nLower-achieving responses stated rather than explained — stating that import tariffs could be used but not how this would impact the current account. A small number of candidates used two very similar methods e.g. two forms of trade protection — and were awarded L1 only.
\nMany candidates suggested that tariffs and quotas were administrative barriers.
\nCalculation of PED should be very straightforward for HL candidates. However, many were careless and used the incorrect denominator or mixed initial values with final values.
\nThis question was done poorly. Candidates overlooked “imported” and calculated the change in consumer spending on chia seeds.
\nMost candidates were able to calculate the area of two triangles — although some, in error, assumed that they were congruent.
\nSome candidates explained correctly that the loss in consumer surplus would outweigh the gains in producer surplus and tax revenue. However, it was pleasing to see the majority explaining that production would be switched from more efficient foreign producers to less efficient domestic producers.
\nWell-answered.
\nAlthough candidates generally grasped the issue, many found it difficult to explain clearly and earn full marks. A number of scripts argued that the PED would be significant (and so the current account could worsen) whereas this is not the case following an increase in demand.
\nCountries often specialize and trade according to the theory of comparative advantage. Explain the limitations of this approach.
\nUsing real-world examples, discuss the advantages and disadvantages for a country of being a member of a trading bloc.
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
\nAnswers may include:
\nMarks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
\nAnswers may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nN.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nCandidates appeared to find question 3 a challenge judging by the relatively few candidates who chose to respond to it.
\nIt was interesting to note, however, that whilst this question was unpopular, nevertheless some of the best responses seen were to this question. A significant number of candidates produced focused and precise answers, detailing the limitations of the theory of comparative advantage.
\nHowever, it was not uncommon for candidates to treat part (a) as a discussion of the merits of free trade. Alternatively, absolute advantage was explained, with no consideration of the concept of comparative advantage as asked by the question. Such candidates therefore struggled to provide the limitations of the theory of comparative advantage as asked.
\nCandidates were generally more able to effectively address part (b) of this question. There was usually a good understanding of trade blocs. The use of real-world examples in this question was often very effective, with good candidates demonstrating a very competent understanding of various trading arrangements. Most candidates opted to explain different types of trading arrangement under different levels of integration. Good responses were able to examine the impact of trade creation and trade diversion, amongst other impacts, on member countries. Less effective responses tended to opt for a discussion of the merits of free trade alone, without adequate reference to the context set by the question.
\nText A — Overview of North Macedonia
\nText B — North Macedonia’s economic reforms
\nText C — North Macedonia’s trade agreements
\nNorth Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.
\nTable 1: Consumer Price Index (CPI) for North Macedonia (base year = 2010)
\nTable 2: Economic data for North Macedonia
\n[Text A: World Bank Data Bank, n.d. North Macedonia economy briefing: Prospects for Macedonian-Greek Economic
Relations After the Prespa Agreement [online] Available at: https://data.worldbank.org/country/north-macedonia
[Accessed 20 April 2021]. Source adapted.]
Text C: World Trade Organization, n.d. WT/TPR/S/390 • The Republic of North Macedonia [online] Available at:
https://www.wto.org/english/tratop_e/tpr_e/s390_sum_e.pdf [Accessed 20 April 2021]. Source adapted.
Table 1 and 2: Data from The World Bank [online] Available at: https://data.worldbank.org/ [Accessed 20 April 2021]. Source adapted.]
\nDefine the term foreign direct investment (FDI) indicated in bold in the text (Text A, paragraph [3]).
\nDefine the term unemployment rate indicated in bold in the text (Text A, paragraph [6]).
\nUsing information from Table 1, calculate North Macedonia’s annual rates of inflation between 2016 and 2019.
\nUsing your answer to part (b)(i), identify the year disinflation set in.
\nUsing information from Text A, paragraph [4], calculate North Macedonia’s balance of trade in 2018.
\nUsing an AD/AS diagram, explain the likely impact of North Macedonia’s supply-side policies on its full employment level of output (Text B, paragraph [2]).
\nUsing an externalities diagram, explain how dependence on coal could be a source of market failure (Text B, paragraph [3]).
\nUsing an exchange rate diagram, explain how the central bank of North Macedonia is preventing an appreciation of the denar against the euro (Text B, paragraph [4]).
\nUsing an international trade diagram, explain the likely impact of the removal of import quotas on North Macedonia’s production of wine (Text C).
\nUsing information from the texts/data and your knowledge of economics, discuss the likely economic effects on North Macedonia of its entry into the European Union (EU) Common Market.
\nInflation in 2017:
[(110.9 – 109.4)/109.4] x 100 = 1.37%
Inflation in 2018:
[(112.5 – 110.9)/110.9] x 100 = 1.44%
Inflation in 2019:
[(113.4 – 112.5)/112.5] x 100 = 0.8%
Award [1] for any valid working but incorrect inflation rates calculated or for figures rounded to less than 2 dp or figures without the % sign.
\nAward [2] for correct inflation rates (with or without workings).
\nAward [1] for identifying 2019 as the year disinflation sets in (“after 2018” or “between 2018 and 2019” are also valid answers).
\nOFR applies.
\n7.57 − 9.56
Any valid working should be rewarded with [1]
= −(US)$1.99 billion
\nAn answer of –(US)$1.99 billion, (US)$1.99 billion, –1.99, 1.99 or a deficit of 1.99 without workings is sufficient for [1].
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nFor AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviation of the previous terms is acceptable. A Keynesian AS is acceptable. A title is not necessary.
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nThe y axis may be labelled price or P and/or costs and/or benefits, and the x axis labelled quantity or Q. A title is not necessary.
\nCandidates who label diagrams incorrectly can be awarded a maximum of [3].
\nFor an exchange rate diagram, the vertical axis may be exchange rate, price of the denar in euro (other currency), euro (other currency)/denar or euro (other currency) per denar. The horizontal axis should be quantity, or quantity of denars. A title is not necessary.
\nCandidates may show the initial increase in demand for the denar leading to an appreciation, followed by the increase in supply due to intervention. If correctly drawn and explained, such an approach should be fully rewarded.
\nCandidates who incorrectly label diagrams can be awarded a maximum of [3].
\nThe use of P and Q on the axes is sufficient for an international trade diagram. The world price line may be labelled as S(World), SW, S(EU), Pworld, PW, PEU or any similar label indicating the horizontal line is the world (EU) price/supply. A title is not necessary.
\nCommand term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nMost candidates scored at least 1 mark on both definitions. Many candidates had some idea of what FDI was, but could not provide two key points. On the other hand, the vast majority of candidates pointed out that the unemployment rate is the proportion of the labour force (and not the population) which is without a job and hence could score full marks for part (a)(ii).
\nMany could not calculate inflation rates correctly, often forgetting to divide the difference between two values of the CPI by the initial value or dividing that difference by the final value – and this suggest unfamiliarity with relative (%) change calculations. Otherwise, most candidates seemed to understand the meaning of disinflation – even though many scored a mark on (b)(ii) thanks to the principle of ‘own figure rule’ (OFR). Most could calculate the balance of trade correctly and remembered to provide the correct unit ($ billion) and sign (negative).
\nUnfortunately, many candidates shifted the SRAS instead of the LRAS. This suggests they did not understand the difference between real output and the full employment level of output, and/or the difference between the determinants causing a shift of SRAS and those causing a shift of LRAS.
\nSome candidates had issues with the labelling of curves (reversed MSC and MPC or confused MPB/MSB with MPC/MSC) but otherwise most did well for this question. Some did not score full marks because they explained the external cost (the environmental degradation) but not the source of market failure (the misallocation of resources).
\nMislabelling of the vertical axis was a common error (often swapping the numerator and denominator when expressing the exchange rate as a fraction). Otherwise, most were able to draw a correct diagram showing an increase in supply of denar. Although quite a few did not explain how the central bank increases the supply of denar by buying foreign reserves/euros.
\nThis proved to be the most difficult question on this paper with very few candidates being able to provide one of the correct quota diagrams to illustrate the changes in price and quantity as a result of the removal of the quota. All diagrams provided in IB-approved textbooks were considered to be acceptable. Diagrams and explanations were not marked in isolation and as such, so long as the explanation made sense of the diagram provided (regardless of which diagram had been used), it was fully rewarded. Some candidates also misread the question and assumed that the quotas were placed on Macedonian wine being exported to the EU. Candidates must be reminded to look at the indicated part of the text (Text C in this case) to ensure that the question is fully understood.
\nMost responses reflected some understanding of the features of a common market but those were often limited to the removal/reduction of trade barriers. Such responses seldom exceeded 7-9 marks since they did not provide a full examination of the consequences of membership to a common market. Stronger responses not only evaluated the impact of lower trade barriers on producers in North Macedonia, but also considered other potential impacts, such as the benefits to consumers, long term impacts as a result of the unrestricted movement of capital and labour, a possible loss of sovereignty as more EU firms may control essential services in North Macedonia, and changing trade position with non-member countries due to the imposition of a common tariff. Some candidates discussed the consequences of adopting the euro. While this would likely be the natural next step of integration for an EU member country, an evaluation of the impact of membership to a monetary union is beyond the scope of this question.
\nTaxes on fuel
\nIndia is said to have the highest taxes on fuel in the world. At the current market equilibrium, the price of petrol (gasoline) in New Delhi is comprised of the components shown in Table 4 (approximate figures).
\nTable 4
\nFigure 2 illustrates the market for petrol in New Delhi. D represents the demand for petrol in millions of litres per day. S + t represents the supply (incorporating the effect of indirect tax) of petrol in millions of litres per day.
\nFigure 2
\nThe causes and costs of congestion
\nIn the last 10 years, India’s road network has increased by 34 % while vehicle registrations have increased by 200 %. Additionally, India’s strong rate of economic growth has resulted in increased demand for motor vehicles.
\nTraffic congestion involves slower speeds and increased journey times, which impose higher costs on the economy. Congestion has a range of indirect impacts including environmental harm, inefficient use of resources and reduced quality of life.
\nFigure 3 shows the growth in road passenger traffic in India and China from 2000 to 2017.
It can be seen that there has been a huge increase in the use of road passenger traffic in India. It has been argued that Indian workers who implement rational consumer choice would assess the costs and benefits of using cars and, as a result, many would switch to alternative forms of transport.
Figure 3
\nTraffic congestion is a major problem in India. It is estimated that congestion in four major cities costs the Indian economy approximately US$22 billion annually. According to a 2019 survey, India has four of the eight most congested cities in the world. People in these cities pay higher fuel costs, inhale toxic gases, and waste up to 11 days a year stuck in traffic.
\nIn New Delhi, India’s capital city, 45 % of workers use cars to travel to work, while 89 % of workers indicate plans to purchase a car in the next five years. However, 80 % of car users say they would change their plans if ridesharing businesses such as Uber could meet their requirements on price, timeliness and availability.
\n[Source: © The Times of India, Dash, D.K., 2018. ‘Traffic congestion costs four major Indian cities Rs 1.5 lakh crore a year’
[online] Available at: https://timesofindia.indiatimes.com/india/traffic-congestion-costs-four-major-indian-cities-rs-1-5-lakh-crore-a-year/articleshow/63918040.cms [Accessed 20 April 2020]. Source adapted.]
Using a diagram and the information above, explain why traffic congestion in India may be considered an example of market failure.
\nOn Figure 2, draw the market supply curve without the indirect taxes for petrol in New Delhi.
\nUsing Figure 2, calculate the revenue (in rupees per day) collected from the indirect taxes on petrol in New Delhi.
\nUsing Figure 2 and your answer to part (a)(ii), calculate the loss in consumer surplus which results from the imposition of indirect taxes on petrol in New Delhi.
\nUsing Figure 2 and your answer to part (a)(ii), show that in the absence of indirect taxes the supply of petrol in New Delhi would be price inelastic.
\nUsing Figure 2 and the information in Table 4, calculate the total profit earned by petrol suppliers in New Delhi per day.
\nDefine the term rational consumer choice.
\nWith reference to the use of cars in India, explain how one limitation of the assumptions of rational consumer choice might result in the overuse of cars in New Delhi.
\nUsing the text/data provided and your knowledge of economics, recommend a policy which could be introduced by the government of India in order to address the problem of traffic congestion in New Delhi.
\nCandidates who label the diagram incorrectly can be awarded a maximum of [3].
The y axis may be labelled price or P and/or costs and/or benefits, and the x axis labelled quantity or Q. A title is not necessary. S and D are not required to be part of the labelling.
Negative consumption externality
\n50 × 500 (million)
\nAny valid working should be rewarded with [1]
\n= (RPs) 25 billion (or 25 000 million or 25 000 000 000)
\nN.B. as rupees is stated in the question, it is not necessary to include it in the response.
\nAn answer of 25 billion (or 25 000 million or 25 000 000 000) without workings is sufficient for [1]
\nOFR applies provided the S curve is drawn below the S + t curve (i.e. the vertical distance between the curves may be incorrect).
\nN.B. the symbol may be used for the Indian rupee.
For full marks to be awarded the response must provide valid working and include correct units.
\n40 × 0.5 (500 + 600) (million)
\nAny valid working should be rewarded with [1]
\n= RPs 22 billion (or 22 000 million or 22 000 000 000)
\nAn answer of RPs 22 billion (or 22 000 million or 22 000 000 000) without workings is sufficient for [1]
\nOFR applies provided the S curve is drawn below the S + t curve.
\nN.B. If a student finds the y intercept (of the demand curve, which is 270) and calculates the difference between two triangles, the working should be as follows:
\n0.5 (240 × 600) − 0.5 (200 × 500) = 72 000 − 50 000
\nFor full marks to be awarded the response must provide valid working and include correct units.
\n3 × 500 (million)
\nAny valid working should be rewarded with [1].
\n= RPs 1.5 billion (or 1 500 million or 1 500 000 000)
\nAn answer of RPs 1.5 billion (or 1 500 million or 1 500 000 000) without workings is sufficient for [1].
\nN.B. For full marks to be awarded the response must provide valid working and include correct units.
\nN.B. A range of valid responses is available for this question. Candidates should be fully rewarded if they provide a well-explained answer which applies other limitations of the assumptions of rational consumer choice such as:
\nRefer to paper 3 markbands, available under “your tests” tab > supplemental materials.
\nPossible policies may include (but are not restricted to):
\nN.B. If more than one policy is recommended, only the best policy should be rewarded, unless the policies are shown to be complementary or if they are compared/contrasted with the student’s one chosen policy.
\nThe question was generally well-answered although a small minority of candidates treated traffic congestion as a production externality.
\nGenerally well-answered. A minority of candidates drew the supply curve below the S + t curve but with an incorrect vertical distance between the curves.
\nGenerally well-answered although some candidates omitted “millions” or wrote the answer in full but with an incorrect number of zeros.
\nCandidates achieving full marks generally knew that the change in consumer surplus could be determined by calculating the area of the trapezium (bounded by the respective price and quantity). A significant number of candidates attempted to calculate the initial and final values and may have been confused by the difficulty of doing so. The question was not answered well even though the calculation should have been fairly straightforward.
\nThe majority of candidates were able to identify two points on the supply curve, calculate PES and show that as the value was less than 1 supply was price inelastic. However, errors were common. Candidates calculated PED rather than PES or took final values as the denominator when calculating elasticity. Very few candidates were able to recognize and state that any linear supply curve which intersects the horizontal axis must represent price inelastic supply.
\nWell-answered.
\nAlthough many candidates were able to specify the concept of utility maximization, there were also a significant number of fairly vague responses which relied on the idea that costs and benefits would be assessed. A surprising number of responses simply rearranged the term, suggesting that when consumers make choices by acting rationally, this is rational consumer choice.
\nThe majority of candidates identified a lack of information as a limitation of the assumptions of rational consumer choice. It was then possible to apply this to the context provided in a number of ways, such as:
\nIt is argued that the theory of demand is based on rational consumer decisions and that a rational consumer will in fact ignore the externalities, resulting in over-use of cars. This approach was fully rewarded.
\nGenerally, candidates were able to suggest an appropriate policy (or more) to address the market failure resulting from traffic congestion. However, responses often focused only on pollution, with suggestions for subsidizing e-vehicles, arguably having little impact on congestion. Stronger responses used market failure theory well to support the recommendation.
\nExplain two ways a government might respond to the existence of asymmetric information in a market.
\nUsing real-world examples, evaluate different approaches to managing common access resources.
\nAnswers may include:
\nAnswers may include:
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\nExplain two tools open to a central bank to conduct expansionary monetary policy.
\nUsing real-world examples, evaluate the effectiveness of monetary policy to achieve low unemployment.
\nAnswers may include:
\n\n
Answers may include:
\nN.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded
\nExplain how currency depreciation might affect a country’s current account balance.
\nUsing real-world examples, discuss the possible implications of a persistent current account deficit.
\nAnswers may include:
\nAnswers may include:
\nN.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
\n\n
Using a production possibilities curve (PPC) diagram, explain why choices have to be made in all economies.
\nDiscuss the view that governments should not intervene in housing markets.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nN.B. Definitions, theory and examples that have already been given in part (a) and then referred to in part (b) should be rewarded.
\nDiscussion may include: the advantages and disadvantages of intervention, different methods of intervention and a consideration of the case for a free market. Candidates may choose to focus on price controls or subsidies, which should be fully rewarded if they are able to satisfy the demands of the level descriptors.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThe highest achieving responses clearly focused on the question of scarcity at a country level using a two-good example to show how production of one good means foregoing the production of another. A definition and explanation of opportunity cost in this situation was a useful support to the answer. One disappointing aspect of some answers were poorly drawn and labelled PPC diagrams. It would be good to see future candidates using PPC diagrams more effectively to illustrate economic theory.
\nThere were many effective answers that explained how maximum prices are applied in the rental market for housing and these were supported by clearly drawn graphical analysis. The discussion was developed by considering the problems of applying maximum prices (excess demand, parallel markets, reduced producer surplus) as reasons for non-intervention. The highest achieving responses also considered the advantages and disadvantages of alternative approaches such as housing subsidies. It was pleasing to see some candidates using effective real-world examples like tent controls in New York to illustrate their answers.
\nExplain why changes in the price of goods and services may lead to changes in resource allocation.
\nExamine the consequences of the lack of a pricing mechanism for common access resources.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nN.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nExamination may include: the need for government intervention, impact on different stakeholders, consideration of the impact of government intervention, implications of resource depletion.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nEffective answers used demand and supply diagrams to show how, for example, a rise in the price of a particular good caused by increased demand draws more resources into a market as entrepreneurs are attracted by increasing profits. High achieving answers used effective real-world examples to illustrate how this occurs.
\nWhile there were many very good answers to this question there were also some very lower achieving answers where candidates tried to answer the question without a clear understanding of what common access resources are. Effective responses focused on resources like forests and fish stocks and illustrated how their non-excludable nature leads to over-exploitation and threatens sustainability. High achieving answers effectively illustrated the consequences of over-exploitation using market failure diagrams. The ‘examine’ command term made synthesis and evaluation challenging for some candidates but it was pleasing to see answers that considered the implications of government intervention and relative importance of the effects of over-consumption of common access resources on different stakeholders.
\nExplain how the Lorenz curve and the Gini coefficient are used to measure income inequality.
\nDiscuss the view that the best way to achieve greater equity in the distribution of income in a country is to use a progressive tax system.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nN.B. Definitions, theory and examples that have already been given in part (a) and then referred to in part (b) should be rewarded.
\nDiscussion may include: the problems of applying a progressive tax because of tax avoidance, the impact of a progressive tax on incentives and a consideration of other ways of redistributing of income such as spending on public services and transfer payments.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThe highest achieving responses to this question clearly defined income inequality and explained the Lorenz curve and Gini coefficient using an effective diagram. Income inequality for a country was shown through the shape of the Lorenz curve and size of the Gini coefficient. It was also important to support this with a real-world example.
\nThis question proved challenging to candidates and it may well have been the reason relatively few candidates chose to answer it. Effective answers focused on the concept of equity and how the use of progressive tax can achieve greater equity. This could be done, for example, by taxing those on high incomes at a higher rate and using the money raised to fund public services, like further education, which give people on lower incomes greater working opportunities. Responses with effective synthesis and evaluation involved, for example, looking at the problems collecting tax from the very richest people and making sure spending by governments is done efficiently.
\nExplain what effect an increase in interest rates might have on unemployment.
\nEvaluate the effectiveness of fiscal policy as a tool to reduce unemployment.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nN.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.
\nEvaluation may include: the relative merits of fiscal policy. The emphasis should be on fiscal policy though it is valid to consider alternatives in a manner that identifies the relative merits or demerits of fiscal policy.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThis was the most popular question in the paper and it produced some very effective answers. The highest achieving responses had accurate definitions of interest rates and unemployment and clearly explained how a rise in interest rates often leads to a fall in aggregate demand and economic growth which in turn causes demand-deficient unemployment. Good answers were supported with an aggregate demand and supply diagram and a real-world example.
\nThis question seemed to produce the highest achieving responses in the paper. Candidates seemed comfortable with the clear direction of the question and the way it lends itself to synthesis and evaluation. The highest achieving answers clearly explained how an expansionary fiscal policy leads to a rise in aggregate which in turn creates jobs and supported this with an effective aggregate demand and supply diagram. High achieving responses used effective synthesis and evaluation on this question by considering some of the issues relating to expansionary fiscal policy to reduce unemployment such as financing the policy, inflationary pressures and the problems of increasing aggregate demand in a recession.
\nExplain why the under-consumption of merit goods causes market failure.
\nDiscuss whether there should always be direct provision of public goods by the government.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nDiscussion may include: an evaluation of whether public goods should always be directly provided by the government in terms of possible alternatives and the possible problems of direct provision, eg the opportunity cost, political conflict and possible benefits, eg economies of scale. Candidates may also discuss the possible creation of government debt to finance public goods, consideration of what the social benefits might be, the difficulty of measurement of such benefits and, therefore, the prospect of a misallocation of resources since government will not necessarily accurately assess need.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThis was a very popular question and candidates were generally comfortable explaining why the under-consumption of merit goods causes market failure. The examples they used however tended to be rather generic and there were few effective attempts to develop examples in the context of the question. Areas of loss or potential gain in diagrams were often not correctly indicated.
\nHigh achieving responses were able to precisely define public goods and offer meaningful examples. However, a significant number of candidates were unable to clearly explain what they are. There was a tendency by some to describe merit goods instead. The higher achieving responses contained valid discussions of market failure, missing markets and the role of the state. This question proved to be a strong indicator of candidate achievement. There was no expectation that a diagram be provided for this question although there were some very imaginative efforts on display. Not all questions automatically suggest an appropriate diagram.
\nExplain how expansionary monetary policy might lead to a rise in inflation.
\nDiscuss the view that the most significant impact of high inflation in a country is a loss of export competitiveness.
\nAnswers may include:
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
\nAnswers may include:
\nEvaluation may include: other factors that could have caused a fall in a country’s export competitiveness, other consequences of inflation that could be more significant like redistribution of income, uncertainty leading to lower investment and the impact changes in the exchange rate could have on a country’s export competitiveness.
\nExaminers should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
\nOpinions or conclusions should be presented clearly and should be supported by appropriate examples.
\nMarks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
\nThis was the least popular of the two Section B questions. The use of diagrams in this question was generally good. However, the labels used were not always precise. It is better to indicate that the horizontal axes refers to the spending and output of the whole economy, many candidates just record quantity. Valid real-world examples were rare and, where they were offered they tended not to be adequately developed. In general candidates were aware of what monetary policy was and of the links its use might have to inflation.
\nCandidates were generally able to explain the impact of inflation on export competitiveness. However, it proved more challenging to decide whether it was the most significant impact. High achieving responses considered other impacts of a high rate of inflation and then considered which would likely be the more significant. Examples help to tackle a question like this, so considering countries that are more export dependent or less export dependent might serve as appropriate cases in point.
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