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NAME _______________________________ FORM ____________ TEACHER ______________________________________________ Approx time spent revising for this exam ___________ I made revision notes for this exam (circle) YES NO 2.3 MARKING SCHEDULE Level 2 Economics, 2008 AS 90796 Describe economic growth and its causes and effects using economic models Practice credits: Four You are advised to spend 40 minutes answering the questions in this booklet. Check there are six pages in this booklet. You should answer all the questions in this booklet. This booklet must be handed to your teacher at the end of the examination (D) Define/describe key economic terms in question (E) Explain how or why (R) Relate/refer to the context of the question Achievement Achievement with Merit 1 AC 1 AE 5 other A or M or E 1 MC 1 ME 1 other MC or ME or M 7 other A or M or E Achievement with Excellence 1 MC 1 ME 1 other MC or ME or M 1E 7 other A, M, or E Codes The suffix C in A C and M C refers to causes. The suffix E in A E and M E refers to effects. © Douceinator Exams 2008. All rights reserved. No part of this publication may be reproduced by any means (including transmission by carrier pigeon, yak or unauthorised smoke signals) or stored in brown paper bags without prior permission. 2 QUESTION ONE Economic growth can be measured by calculating changes in productive capacity or by measuring changes in net social welfare. Real gross domestic production (Real GDP) could also be used to measure the growth of an economy. (a) Define economic growth. An increase in the productive capacity of an economy idea = A (b) Explain ONE benefit of measuring growth using changes in productive capacity and ONE benefit of using changes in net social welfare. Benefit of using changes in productive capacity (D) Productive capacity is potential maximum output (E) Because if an economy is operating at less than maximum output then there is potential for future growth / if new resources or better technology then productive capacity will increase so there is potential for future growth (R) Increases in Productive capacity mean there is the possibility for output to increase Benefit of using changes in net social welfare D or E or R for both = A or D+E+R for both = M (D) Net social welfare is using economic and non economic quality of life factors (E) Because economic and non economic factors (eg HDI) measure quality of life factors holistically rather than only output measures (R) Net social welfare measures outcomes of growth which determine standards of living (c) Explain why changes in real GDP are used to measure growth rather than nominal GDP. (D) Real GDP = actual output (adjusted for inflation) output (including effects of inflation ie current market prices) (E) Because real GDP has effects of inflation removed it measures changes in total output whereas nominal GDP measures changes in output and prices (idea) (R) Nominal GDP can be misleading as it may have increased if prices increased rather than solely an increase in output (idea) D or E or R = A or D+E+R = M Economic growth 2008, 90796. (2.3) 2 3 QUESTION TWO Economists say investment will increase our real income. However, they warn that as a nation we are poor savers. GRAPH ONE Production Possibility Curve Feijoas (kg) Fireworks (boxes) (a) (b) Movement from a point inside the curve towards the frontier Show an increase in real income on GRAPH ONE. idea = Ae Explain how an increase in physical investment causes an in increase in real income. (D) Physical investment is the purchase of capital goods /capital stock (E) Because with more capital goods, firms can increase production, so total output (real incomes) increases (R) Increase in capital stock means output increases so real incomes increase D or E or R = Ac or D+E+R = Mc (c) Describe the difference between savings and investment. Savings is when households put excess income in a bank / income not spent. Investment is firms purchasing capital goods / stock difference described = A (d) Explain the effect of an increase in real income on inflation. (D) Real income is real GDP (E) Because when real GDP increases, firms output would have increased so their profit will have increased. Investment will increase as their confidence increased. As employment increases to produce extra output household incomes also increase. As incomes increase, spending increases. Aggregate demand increases. This causes demand pull inflation (R) Increases in real GDP cause an increase in aggregate demand so demand pull inflation occurs D or E or R = Ae or D+E+R = Me 1 × Mc and 1 × Me from question 2 = E Economic growth 2008, 90796. (2.3) 3 4 QUESTION THREE The Speights Coast to Coast adventure race attracts about 1000 competitors and their supporters to the Canterbury and West coast regions. GRAPH TWO Circular Flow Model Households Expenditure Financial Government Overseas Goods and services Firms (a) Explain how the Coast to Coast causes economic growth in Canterbury and the West Coast. (D) Economic growth is an increase in productive capacity (E) Because events cause an injection of spending in a local economy/region incomes increase, firms profit increases so investment increases as confidence increases, employment increases so household income and spending increases so productive capacity increases (R) Spending increases in the Canterbury/West Coast regions so firms increase investment and output so growth occurs D or E or R = Ac or D+E+R = Mc (b) Name the flow that best demonstrates an increase in real gross domestic production. Goods and services flow (shows actual output so better than payments for goods and services which is nominal GDP) stated = A (c) If the level of savings increased, state a money flow that would decrease. EG: Payments for goods and services / indirect tax (GST) (d) stated = Ac With reference to specific flows in the circular flow diagram, explain the link between an increase in savings on investment and growth. (D) Growth is an increase in productive capacity. Savings is income not spent. Investment is buying stock/capital goods (E) Because an increase in savings means the financial intermediaries have more funds to lend to firms as loans for investment so investment can increase. More capital goods result in increased output which is growth OR less consumption so firms confidence falls so investment falls so growth falls. (R) Savings flow to banks from households increases. Financial intermediaries have more funds to lend so investment flow to producer sector increases. Goods and services flow from producers to households increases (this is growth) D or E or R = Ac or D+E+R = Mc Economic growth 2008, 90796. (2.3) 4 5 QUESTION FOUR Research into biological pest and disease control methods has increased the productivity of fruit production. The technological advances have the potential to increase the primary sectors contribution to both gross domestic production and total exports. GRAPH THREE Production Possibility Curve Fridge production Fruit production (a) What is Gross Domestic Production? Total value of all goods and services produced in a country in a year (b) On GRAPH THREE above, show the effect of the technological advances in fruit production methods. New curve shifted outwards as shown. Must have arrow (c) idea = A = Ae Explain the link between technology, productivity and growth. (D) Technology is innovation. Productivity is an increase in the rate of production. Growth is an increase in productive capacity. (E) Because innovation results in increased efficiency / better ways of manufacturing productivity increases. This results in an increase in output which is growth (R) Better fruit production methods results in more fruit being produced per tree so total output increases D or E or R = Ac or D+E+R = Mc Economic growth 2008, 90796. (2.3) 5 6 (d) Explain with reference to fruit growing, how increases in technology impact on exports. (D) Technology is innovation. Exports are NZ goods sold overseas (E) Because technology increases result in increased efficiency or new improved products NZ goods become more competitive / in demand overseas so exports increase (R) Improvements to fruit production without chemicals increase overseas demand for NZ fruit so exports increase D or E or R = Ae or D+E+R = Me (e) Explain a consequence of growth in the organic fruit industry on resource use. (D) Growth is an increase in productive capacity. Resources are inputs (E) Because output increases, inputs, which are resources increase / Technological advances result in more efficient use of resources (and less chemical resources) / resources move from sunset industries to sunrise industries (R) EG Land that was being used for conventional crops may now be used for organic fruit production D or E or R = Ae or D+E+R = Me 1 ×Mc and 1 × Me from question 4 = E QUESTION FIVE The government is pleased with the latest statistics which show the economy is booming. Experts say while the outlook for the economy looks bright, businesses will have to “stay on the ball” to benefit from future growth forecasts. (a) Explain the effect of economic growth on government revenue. (D) Growth is an increase in productive capacity. Govt revenue is money earned / taxation (E) Because an increase in output results 1. in higher profits, firms company tax revenue increases. 2. in increased employment so household incomes rise so income tax revenue increases 3. in increased sales so GST revenue increases 4. dividends from SOE’s increase (R) As output increases, govt tax revenue increases D or E or R = Ae or D+E+R = Me (b) Explain why all firms DO NOT enjoy equal benefits of growth. Use examples. (D) Sunrise industries are new industries with increasing sales. Sunset industries are established industries with declining sales (E) Because technology / consumer preference changes result in increased demand for some products (eg digital cameras) and decreased demand for other products (eg film cameras) so profits for firms in sunrise industries benefit from increased profits whereas firms in sunset industries face declining profits (R) Firms in sunrise industries benefit more from growth than firms in sunset industries D or E or R = Ae or D+E+R = Me Economic growth 2008, 90796. (2.3) 6