Download Economics - Tasmanian Assessment, Standards and Certification

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Economics
Subject Code: EC851
2005 External Examination Report
TASMANIAN QUALIFICATIONS AUTHORITY
Section A - Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
D
D
D
C
D
B
C
D
C
D
C
D
C
D
A
D
A
A
A
D
Note that for Q11 and 16 the examiners felt that these questions dealt with issues in far greater
depth than our current course requires. As such B was also accepted for Q11, and B was also
accepted for Q16.
Section B
Question 21
a)
Consumer Sovereignty
Candidates needed to explain that consumer sovereignty means that consumers play a key
role in economic decision-making in market economies.
They should refer to some of the following:
Consumers are free to allocate their resources and distribute their incomes in order to
maximise their satisfaction. Their decisions will lead them to choose some goods and
services in preference to others. This indicates to producers the nature and quantity of
goods and services they should produce. In turn, via derived demand, it indicates how
factors of production will be allocated. Producer competition and profit maximisation will
ensure factors are allocated efficiently. Candidates could also refer to limits on
sovereignty.
2005 External Examination Report
Economics
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Subject Code: EC851
b)
Characteristics of unregulated market economies are:
Freedom of enterprise and freedom of choice
The profit motive and self interest
Private property
Consumer Sovereignty
Competition
The Price Mechanism
Limited Government
Two of the above should be fully and clearly explained using economic terms correctly in
order to receive full marks.
c)
Candidates were expected to explain two or more reasons why planned economies fail ie
what are their problems and how do they lead to failure. These could include:
Inefficient resource allocation
Little incentive to work hard or innovate
Poor planning
Low productivity
Lack of flexibility
Production imbalances
Corruption
d)
Money is:
A medium of exchange
Standard for deferred payment
A store of value
A measure of value
These attributes facilitate exchange, encourage specialisation, allow international trade,
permit saving and encourage investment and capital accumulation.
Some candidates saw the word monetary and then went on to explain monetary policy,
these candidates received few marks.
e)
Candidates were expected to indicate the following:
The USA is a highly developed mixed market economy.
Australia is highly developed mixed market economy, however it is not as much of a
market economy as the USA.
North Korea is planned economy with low-medium level development.
PNG is a mixed market economy with a low level of development.
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Economics
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Subject Code: EC851
Question 22
a)
This part was generally well answered. Most candidates were able to explain that an
unregulated market economy means one where all the major decisions about production
and distribution of goods and services are made by individual consumers and producers,
with little or no government interference. The chief characteristic of this type of system is
that there is private ownership and control of resources. The decision of what to produce ,
how to produce, and for whom to produce are decided by the interaction by interaction or
consumers and producers in the market . Characteristics of this economy are self interest
and the profit motive, the operation of the price mechanism, freedom of enterprise and
consumer sovereignty.
b)
Candidates were able to discuss capital in a general sense but many did not answer the
question directly. Better answers were able to define capital as being produced means of
production e.g.. Machinery and technology. They then went on to say that the major role
it plays is to increase the productivity of other factors of production, land and labour. This
ultimately leads to higher standard of living.
Merit was given to points raised such as:
•
•
•
•
•
c)
The importance of infrastructure investment
The difference between private and public capital
The need to forgo current consumption in order to form capital
The difference between gross and net investment
An illustration of an outwardly moving production possibility curve.
This question was well handled by most candidates. Two very well explained problems
were required for full marks but more than 2 problems were given merit.
Possible points which could have been discussed were:
•
•
•
•
•
d)
Income inequality – the system does not provide adequately for those who have few
resources and rewards well those who have many resources.
Collective goods and services such as roads parks etc. will not be provided.
High social costs such as environmental degradation because of profit motive, and
use of free goods.
Market concentration and monopoly control of markets can be gained where
producers can control prices and exploit consumers.
The system is inherently unstable with variations in the level of economic activity,
the business cycle causing alternative problems of unemployment and inflation.
Candidates were required to explain how governments could intervene to solve the
problems they raised in part c. Depending on what problems they discussed in c. possible
answers in this part were
•
•
•
•
•
Transfer payments, welfare system and progressive tax to redistribute income and
alleviate income inequality.
Provision of collective goods and services e.g. roads, public transport, education and
hospitals.
Environmental protection laws, rehabilitation requirements, quotas, closed seasons.
Laws prohibiting restrictive trade practices. Monopolies and price fixing.
Use of fiscal and or monetary policy to control cyclical fluctuations in a level of
economic activity.
2005 External Examination Report
Economics
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Subject Code: EC851
This part, like part c, was generally well answered.
e)
Candidates were required to comment on each indicator separately and to draw some
possible conclusions about the performance of the Russian economy as it made its
transition to a market system.
•
•
•
•
Unemployment did not vary much over the 12 year period with the increase in 1999
probably being due to previous state enterprises shedding staff.
At the beginning of the transition period pent up demand in the old command
economy was released causing hyperinflation of 2600%. Over the 12 year period as
supply expanded to match demand, inflation was reduced to 64%. This is still too
high.
At the beginning of the transition period 1992, growth per capita was -14.5%
indicating falling living standard. This fall continued into 1999. By 2004 growth
was positive indicating a slight rise in living standards. (most candidates incorrectly
stated that growth increased from ‘92 to ’99. They missed the point that the figure
in ’99 of -4% still indicated falling living standards – just that living standards were
not falling as fast as they had done in ’92).
The rouble experienced a massive devaluation during the period ’92 – ’99 but
recovered to, almost its original level by ’04. Many candidate incorrectly stated that
the currency got stronger in the period to ’99 i.e. They interpreted 4600 roubles to
1 USD as an appreciation.
Some comments in conclusion were required with most candidates being able to state the
transition to a market economy initially saw the economy weakening but subsequently
recovering. Some candidates were able to correctly point out that this experience is typical
for a command economy making the transition to a market one.
Section C
Question 23
a)
The price mechanism is the process by which the forces of supply and demand operate
freely to determine the price and quantity traded for a particular good or service. These
market forces signal to producers how they should allocate scarce resources to satisfy the
wishes of consumers.
This system is used in a market based economy such as Australia and a good example is
the stock market where large numbers of buyers and sellers interact to determine the price
of a particular share and the quantity traded.
A simple supply and demand diagram would helps with explanations:
b)
As stated above the price mechanism operates through the forces of demand and supply.
Demand refers to the quantities which consumers are willing to buy at various prices at a
particular time. Supply is the quantities which are offered for sale at various prices at a
particular time.
The price mechanism guides the market to equilibrium by adjusting the quantity
demanded or supplied where shortages or surpluses exist. This is best shown in a
diagram. In fact it would be difficult to fully answer without diagrams.
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Economics
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Subject Code: EC851
High marks were also awarded to candidates who explained how a change in determinants
other than price could lead to a new equilibrium via the price mechanism.
c)
Tasmanian potato growers are faced with cheap imports from countries like New Zealand.
A specific problem is that McDonalds is buying the cheaper imports thus reducing sales
to Tasmanian suppliers. The imports are cheaper because economies of scale are being
used to lower production costs and selling price.
Candidates were not expected to have very specific knowledge of these events but were
expected to produce a logical analysis. The problem can be shown on a diagram with the
imported price being below the Australian market equilibrium.
If Tasmanian growers are unable to compete they must rationalise farms to lower costs or
face lower incomes and the possible exit from the industry. Some candidates suggested
the production of alternative products as a rational solution based on the argument of
comparative advantage.
d)
The price mechanism can protect the environment by making resources more expensive as
they become scarce e.g timber, oil.
In the case of oil world demand continues to grow (particularly from China & India)
while at the same time stocks are dwindling. Recent events such as the war in Iraq and
hurricanes in the USA (restricting refining of oil) have impacted on the supply.
Candidates were not expected to have a detailed knowledge of these events but a logical
demand/supply analysis to show how prices could increase was expected.
For example a diagram could show a shift in the supply curve to the left.
Some candidates took the alternate view that the environment is not protected by the price
mechanism citing evidence of pollution, environmental damage and over use of resources
as examples. In the case of oil it was pointed out that oil can be considered a necessity by
many and therefore demand is insensitive to price i.e consumers are not put off by rising
prices. These answers received high marks if argued logically.
e)
Diagrams should show the following changes with new equilibrium price and quantity.
i.
ii.
iii.
iv.
Supply shifts to the left.
Demand shifts to the right.
Supply shifts to the right.
Supply shifts to the right.
Question 24.
a)
Labour can be defined as the human effort, both mental and physical, required to produce
goods and services, and is a factor in production. The supply of labour can be defined as
the quantity of labour which workers are prepared to offer at each possible wage rate
during a period of time. The quantity is often measured in terms of the number of
workers per unit of time, or the number of hours worked per unit of time. The wage rate is
generally measured by the hour, day, week, month or year. Labour supply data may be
shown by means of a supply schedule like the one in (e) of this question, or graphically
by a supply curve.
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Economics
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Subject Code: EC851
The labour supply is dynamic, not static, and can be influenced by factors such as an
aging population, legal restrictions such as school leaving age, conditions of employment,
seasonal factors and mobility of workers.
b)
Include a diagram of a demand curve for labour showing wage rates, quantity, contraction
and expansion.
The demand curve is a graphical representation of the labour supply schedule. The
curve slopes negatively from left to right because there is an inverse relationship
between wage rates for labour and the quantity of labour which is demanded. As wage
rates rise, the quantity demanded falls.
Each point on the curve represents a particular wage - quantity combination. When wage
rates rise, then there is a contraction of demand along the slope, and when wage rates fall,
an expansion of demand occurs. When wages are lower, consumers are willing and able
to employ more workers, so that the quantity of labour demanded is higher. As wages rise
then the quantity demanded becomes less.
c)
Diagrams to show shortage and surplus of labour supply.
Where the minimum wage is set below the equilibrium wage, the labour market is unlikely
to be affected. If an employer tries to pay the minimum wage rather than the equilibrium
wage, then the worker will seek another employer as the market at minimum rate shows a
shortage, i.e. demand exceeds supply. A problem may arise for individual workers where
there is a restriction on mobility for some reason - family, lack of alternative employers.
Where the minimum wage is above the equilibrium wage, there will be a surplus of labour,
i.e. supply will exceed demand, and unemployment will result. This means that the
resource of labour is being under utilized, and the economy is less productive than it
could be - i.e. operating inside its PPF. Unemployment means increased transfer
payments, reduced taxation, and consumption, so if uncorrected by market forces or
government intervention may impact on the business cycle.
d)
The skill shortage may be overcome by a combination of the market mechanism and
government intervention.
As wage rates rise, workers will be willing to supply more of their labour. This may lead
some skilled people, e.g. retired workers or women with families, to re-enter the
workforce. At the same time demand may contract in response to higher wages. These
forces will lead to a new equilibrium where the quantity of skilled labour demanded will
be equal to the quantity supplied.
Diagram to show this move to equilibrium.
It is unlikely that the market mechanism on its own will resolve the skill shortage quickly
enough, or sufficiently, and so government intervention will also occur. In 2005 the
Federal Budget promised funding for new technical colleges, an approach targeting
training and education as means of resolving the shortage. Extending compulsory
secondary education with credit for TAFE subjects studied in YR 11/12, increasing or
funding apprenticeships, attracting overseas skilled workers, retaining/attracting skilled
workers with improved conditions (hospital staff in Tas.), delaying retirement from the
workforce.
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Economics
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Subject Code: EC851
e)
(i)
(ii)
(iii)
(iv)
Most candidates were able to correctly graph the supply and demand curves.
$2100
$2400
$1200 – up to , but not including $2400.
Section D
Question 25
a)
Economic growth refers to an increase in the volume or real value of goods and services
produced in an economy over a period of time.
It was expected that candidates would include some information on GDP. This could be a
brief definition and comments on real GDP, per capita GDP and what is/is not included in
GDP. Reference to changes in economic growth and the business cycle were also
valuable.
This was not a question about development and indicators of development
b)
Candidates were expected to show an understanding of what inflation is and cover at least
two types of inflation.
Demand Pull – this occurs where AD > AS.
Cost Push – this occurs when factors of production increase in price and cause (profit
maximizing) producers to lift their prices.
Links between types of inflation can be strong eg demand pull inflation causes price
increase so labour demands wage increases leading to cost push inflation.
Understanding the nature of inflation is important for governments trying to remedy the
problem.
c)
Lower economic growth can lead to lower AD, lower levels of production and therefore
lower demand for workers. Thus unemployment rises (and vacancy rates and participation
rates may change).
Lower economic growth can result in lower inflationary pressures. The conditions for
demand pull inflation are likely to decline as AD declines or rises more slowly. As
unemployment rises the conditions for cost push inflation are also diminished.
d)
Monetary policy aims to influence the cost and supply of money in order to reach
government objectives. It is implemented by the RBA. The RBA should use expansionary
monetary policy to lower interest rates. Some candidates explained how the RBA used
market operations to lower interest rates. The heart of the question was to explain how
lower interest rates lead to restoring the growth rate. Best explanations showed how AD
increased as consumption and investment expenditure were encouraged and, therefore,
economic growth was restored.
Monetary policy has a significant time lag and is better at controlling booms than
regulating downturns.
2005 External Examination Report
Economics
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Subject Code: EC851
e)
Year ended 30th June
1999
2000
2001
2002
2003
Growth Rate
Problem
6.25
-6.15
8.55
-4.99
Nil or Inflation
Unemployment
Nil or Inflation
Unemployment
Many candidates were unable to calculate a simple growth rate.
Question 26
a)
GDP is the total market value of final goods and services produced in the economy in
any given year. It includes the value of commodities produced in Australia but sold
overseas (exports) and excludes imports and intermediate goods. GDP does not include
unpaid work done by housewives, or home maintenance, or volunteer work, or transfer
payments. Some values have also to be guessed because products are not actually
exchanged, eg. Farm products produced and consumed by farmers.
Note: GDP measures production, many candidates gave definitions of expenditure
(GNE) or income (National Income) and scored poorly.
b)
Unemployment
-
-
frictional-between jobs
structural-arising from the development of new industries and
decline of old, technological changes, new methods of production
cyclical-fluctuations in the business cycle –recession
seasonal- seasonal nature of some work
Mention of hidden, underemployment or discouraged workers was also rewarded. Any
one of these well explained gained pass marks, however to gain full marks two well
explained or three reasonable explanations were required. Some candidates talked about
unemployment but did not explain the different types. This question was well answered.
c)
Savings are a leakage from the circular flow, and with investment fixed this will tend to
lead to a contraction in the GDP for the year. The amount of contraction will depend on
how consumption expenditure is affected and this will depend on the value of the
propensity to save and the multiplier process. An explanation of the stock adjustment
principle was rewarded. Simple one line answers saying GDP would be reduced without
an explanation did not gain a pass mark.
d)
The Federal Budget is the fiscal policy instrument used by the Federal Government to
influence household spending. Where households are spending less and the government
wishes to stimulate the economy and have an expansionary policy then the government
can either decrease tax rates and hence increase households disposable income-and hence
increase expenditure, ( increased consumption) or increase government expenditure, eg.
On education, health, baby bonus, welfare benefits, etc.
To gain full marks it was necessary to mention both of these possibilities and give an
explanation. The question was in general well answered.
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Economics
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Subject Code: EC851
e)
(i)
1999
2000
2001
2002
2003
2004
2005
(ii)
915
932
953
958
997
1040
1146
Equilibrium 2001, 2003
(iii) Oversupplied 1999, 2002, 2004
Part (iii) was poorly answered with by far the majority of candidates answering that
if expenditure was greater than production then the economy was over supplied.
This of course is WRONG.
Section E
Question 27
a)
The exchange rate is the value of a currency expressed in terms of another currency. The
exchange rate of the Australian dollar against the US dollar shows how much of the US
dollar can be bought with 1$AUS, eg US 70c. This is subject to constant change as the
result of the market forces of supply and demand. Australia has a floating exchange rate.
Currency is bought and sold on the Foreign Exchange (Forex) Market. When there are
financial dealings between countries there will usually be the need to buy and sell
currencies.
While this question was generally answered well, some candidates made very general
comments rather than clearly defining the meaning of the phrase.
b)
International trade enables countries to specialize in producing certain products and trade
their surpluses for goods and services that they cannot produce domestically, International
trade also allows countries which do produce the same commodities to benefit from the
principles of Absolute and Comparative advantage. Absolute advantage means that a
country can produce a product with the use of less resources than another country.
Comparative advantage means that a country is relatively more efficient at producing a
product than another country in that it incurs a lower opportunity cost in this production.
This question was well answered with many candidates giving examples.
c)
If the $AUD depreciates against the value of the $US then this means the Australian
Dollar will but less US Dollars. As imports of US goods are paid for in US dollars,
imports will become more expensive. This should mean we will but less imports.
However this may not be possible if the imports cannot be made locally and are essential (
eg , some capital equipment )
On the other hand the depreciation of the Australian dollar makes our exports cheaper for
American purchasers. This should mean that we will export more to the US. This is very
good for our exporters as they are paid in Australian dollars.
2005 External Examination Report
Economics
10
Subject Code: EC851
Answers tended to be very good or very poor. It seems candidates either fully understood
the exchange rate issue or had very little understanding.
d)
If Australia exports more to the US over a long period than it imports, US importers will
be increasing their demand for the Australian Dollar to pay for the Australian Dollar. This
should result in upward pressure on the Australian Dollar. Better answers showed this
using a graph.
If this upward pressure continued for long periods( making exports dearer and imports
cheaper) it could in fact put pressure on the dollar to eventually decrease in value. Better
answers mentioned that there are many other factors affecting the value of our dollar.
e)
There was great confusion with this question as some parts of the stimulus contained
information not assessed in the current course ( eg “other investments”). As such a
couple of alternative answers were accepted, as long as the correct economic logig was
used ( eg Current account and Capital and Financial account should balance)
i.
ii.
iii.
iv.
$241,000m
$100,000m
$401,000m ( if the candidate added up the information given …even though it was
incomplete), OR -$200,000m if the candidate stated it must balance with the Capital
account ( and the complete information should contain Net INCOME)
$200,000m
Generally well answered but candidates should be encouraged to show calculations as
those with incorrect answers, but based on correct calculations( ie they made a silly
mathematical error) scored some marks.
Question 28
a)
This question asked for a definition of per capita income. Many candidates stated that
per capita income was calculated by dividing REAL GDP by the population. This of
course, would give you real per capita income and not the definition required in this
question.
Satisfactory answers gave the formula and explained that per capita income was the GDP
divided by the total population and that this was used a measure of standard of living.
Candidates who used working age population with discussion that young people and
retirees were excluded from the number in the population for this calculation were
incorrect. Better answers discussed how this figure shows the average income per person
and that it did not highlight the fact that in some cases a large amount of the income goes
to a small proportion of the population.
It was refreshing to read some answers where examples were provided such as Australia
and Japan’s per capita income is around US$30,000 making them each a developed
country whereas subsistence economies of an economy such as India has a per capita
income of less than US$1,000 indicating a less developed economy. Some answers
included the characteristics of economies with high per capita income including a strong
recorded tertiary sector and a higher standard of living.
2005 External Examination Report
Economics
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Subject Code: EC851
b)
For full marks on this question candidates were expected to provide an explanation of
economic development with discussion on any two of the limitations of relying on per
capita income as a measure of economic development.
Economic development requires sustained increases in real GDP per capita as well as
improvements in the social indicators so as to reduce the incidence of poverty. Per capita
income on its own is therefore not an indicator of development.
c)
Considered responses stated that economic welfare could either increase or decrease
depending on whether the increased population added to GDP. For example, an increase
in population may be due to an increase in skilled migrants, such as qualified doctors or
engineers who will likely raise the GDP of the country, whereas the per capita income
measure would decrease if the population increase was due to increased birth rates.
Candidates were rewarded for sound reasoning about instances where population decline
would actually occur.
Better answers noted that the change in population also has a significant ability to distort
per capita income as a measure of economic development. A large increase in population
will reduce per capita income which has the potential to make the economy much weaker
than it is, which could in turn discourage foreign investment that is needed for the
development process, compounding the problem of poverty in the developing world. A
large decrease (unlikely except in the event of war or natural disaster) could make it
appear as though economic welfare had improved, which could discourage foreign aid and
that is equally important to the development process. Population growth also puts greater
strain on govt to provide goods and services for its population, which in turn will require
foreign loans (since there are no or limited domestic savings to draw upon for capital and
only small incomes to tax for revenue). The interest repayments on these loans will again
disadvantage economic welfare.
d)
Possible strategies included:
-
population control measures
diversification of the economy with an emphasis on export promotion and import
substitution
attracting foreign funds and investment
redistributing economic resources, especially land
improving health and education of labour force.
Most candidates able to outline two strategies available to stimulate economic
development. Only 11 candidates mentioned comparative advantage and how this might
assist developing countries to diversify their industry base. It was disappointing that only
2 candidates included a diagram of the production possibility curve to support the written
answers.
Candidates should remember that strategies such as lower tax rates and removal of
interest rates were not considered to be in the right context in this answer. Explanation
was needed for marks to be awarded for these answers.
e)
(i) An error in word processing made this part confusing for candidates. The correct
calculations were:
1999:
2005:
444/1.24 = $US358 (2 decimal places not expected)
811/1.37 = $US591
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Economics
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Subject Code: EC851
A number of variations such as 3.58 (1999) and 5.92(2005) were accepted due to
the word processing error.
Answers demonstrating multiplication of 444 x 124 = $US55056 and 811 x 137
(2005) were incorrect.
(ii) Of the 120 candidates who answered this question, only 2 8 were able to
calculate the growth of per capita income. The correct calculation was 592358/358 = 65.36%. Candidates were not penalised for omitting the 2 decimal places
as requested in the question. Many candidates calculated the growth using the
following: 358/592 = 60.48%.
(iii) Candidates were expected to provide some analysis and interpretation of the data in
addition to stating that living standards had increased over the period. Better
answers included examples of how the improved standard of livings might be
observed through improvements in literacy rates, greater access to a safe supply and
clean drinking water, access to education and health facilities for more of the
population. Some answers noted that the rise in per capita income does not reflect
China’s environmental degradation over this time i.e. the increase in per capita
income does not take into account the social costs experienced by many in society.
All correspondence should be addressed to:
Tasmanian Qualifications Authority
PO Box 147, Sandy Bay 7006
Ph: (03) 6233 6364 Fax: (03) 6224 0175
Email: [email protected]
Internet: http://www.tqa.tas.gov.au
2005 External Examination Report