Download Section 4: The national and international economy

Topic 1
The measurement of economic performance
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AQA Economics
Section 4: The national and international
economy
Topic 1 The measurement of economic
performance
The objectives of government economy policy
1 The current account contains the flows of income into and out of an economy relating to foreign trade and the
returns on factors of production located outside their country of origin. (3 marks)
2 Exports of goods; profits earned on overseas investments. (1 mark each, total 2 marks)
3 3.5% (4 marks for correct answer; 2 marks for correct calculation of percentage change but with wrong data)
4 Falling economic growth may still be positive but at a lower rate of growth than in previous periods of time.
Negative economic growth is where the economy is shrinking in terms of the level of national income, i.e.
national income is getting smaller over time. (2 marks for each point, total 4 marks)
5 a
b
Year 1 = 72.8 units; year 2 = 70 units. (1 mark each, total 2 marks)
% change = 3.8% fall (must have fall or minus sign for full marks). (2 marks)
Macroeconomic indicators and index numbers
6 The level of unemployment is the number of people (1) who are out of work, looking for work who cannot find
employment (1). The unemployment rate is the level of unemployment as a percentage of the working
population (1). (3 marks)
7 Price indices for year 2 are: X = 75, Y = 125, Z = 120 (1 mark for each), weighted index = 115 (2 marks) (5
marks for correct answer of 115)
8 a
£188,160 (4 marks; 2 marks if wrong method of adjusting for price level is used)
b
4.5% (4 marks; allow 3 marks for one error, 2 marks for two errors in calculation)
c
1.4% (4 marks; allow 3 marks for one error, 2 marks for two errors in calculation)
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Section 4: The national and international economy
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Topic 1
The measurement of economic performance
Uses of national income data
9 1 mark for each of the following plus any other relevant ideas (to max. of 3 marks):

Use real national income (i.e. adjust for price changes).

Ensure GDP uses an appropriate exchange rate (if relevant).

Use per capita measures.

Use an appropriate average (such as modal per capita rather than mean per capita).
10 The actual exchange rate is the current price of one currency in terms of another (2). The PPP rate is the
exchange rate which would make goods/services in each country the same when converted into each other’s
currency, i.e. ‘the law of one price’. It is used often for making comparisons of GDP between countries more
meaningful. (3) (5 marks)
11 Relevant issues are:

Distribution of income may vary in each country.

Systems of tax and welfare may be significantly different.

PPP exchange rate may not have been used when making comparisons.

Significantly different amounts spent on merit goods in each country.

One country may have more money spent on the military or other sectors which do not contribute greatly
to living standards.

Environmental factors.

Political freedoms. (1 mark for identification of relevant issue (up to max. of 3 marks) + 1–2 marks for
development of each relevant issue, total 9 marks)
Exam-style questions: multiple choice
12 B
13 B
14 C
15 B
Exam-style questions: data response
16 a
$348 billion (allow for differences in rounding). (2 marks)
b
The exchange rate which equalises the cost of goods and services in different countries once converted
into the same currency. (3 marks)
c
Relevant issues would include:
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Section 4: The national and international economy
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Topic 1
The measurement of economic performance

Both rise over the period: US GDP per capita rises from $37,000 in 2002 to $53,000 in 2013, UK GDP per
capita rises from $25,000 in 2002 to $37,000 in 2013.

Both countries see a fall in GDP per capita in 2008/09.

US GDP per capita rises from 2010 onwards, from $46,000 to $53,000 in 2013, whereas the UK’s is
flatter and only rises from $35,000 to $37,000 over the same period. (up to 2 marks for each point made if
units of measurement and time period are correct, total 4 marks)
d
e
Reasons for the objective would be as follows:

increases living standards

generates more tax revenue

allows debt as a proportion of income to fall

less welfare expenditure needed

frees up other areas for government expenditure

popular with electorate (up to 3 marks for each point, total 6 marks)
Possible areas for discussion include:

outline of what HDI measures

how HDI/GDP per capita measure the standard of living in a country

limitations of HDI/GDP per capita as a standard of measurement
Issues for evaluation:

Usefulness of both measures depends on how income is distributed.

With extreme inequality, both measures may not be useful at all.

HDI must be slightly better as it contains more information which is relevant.

GDP per capita is more easily understood.

HDI is a composite index which is only useful to compare between countries. (25 marks)
Exam-style questions: essay
17 a
Possible issues for inclusion:

economic growth

inflation rate

current account on balance of payments

unemployment rate

relative performance (over time and between countries may matter) (15 marks)
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Section 4: The national and international economy
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Topic 1
b
The measurement of economic performance
Arguments for analysis:

trade-off between growth and inflation

trade-off between inflation and unemployment

trade-off between growth and stable current account

some indicators move in right direction together, e.g. growth and unemployment
Issues for evaluation:

depends on objectives being considered

trade-off may exist only in short run

in long run there may be no trade-off

different policies can be used for multiple objectives (25 marks)
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Section 4: The national and international economy
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Topic 2
Topic 2
How the macroeconomy works
How the macroeconomy works
National income and the circular flow of income
1 If national income increases, it may be the result of higher levels of output or simply increases in prices across
the economy. Real national income strips out the effects of price increases and therefore shows us whether or
not output and income are growing — if so, more is being produced that can raise economic welfare. (1 mark
for each point to max. of 3 marks)
2 £49 billion. (4 marks; subtract 1 mark for each error in stages presented if not correct)
Determinants of aggregate demand and the
multiplier
3 Reasons include:

Wealth effect of lower price level on consumption

Reduced need for higher interest rates at lower price level

Improved competitiveness of exports at lower price level (1 mark for identification of reason + 1 more for
development to max. of 4 marks)
4 Answer = £2,716,400 million (6 marks)
Imports = £362,500 million (2), exports = £278,900 million (2); (5 marks for 1 error, 4 marks for 2 errors etc.)
5 a
10
b
2.5
c
4
d
3 (2 marks for each correct answer; 1 mark for one error)
6 a
Increase of £130m
b
Increase of £4,100m
c
Increase of £1,120m
d
Decrease of £287.5m (3 marks for each correct answer; 2 marks for OFR with incorrect multiplier; 1 mark
for each correct calculation of multiplier)
7 The multiplier effect means that a change in aggregate demand will lead to a larger change in national income
overall. This is because income earned by one person will be spent, thus creating income for another person
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Section 4: The national and international economy
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Topic 2
How the macroeconomy works
and so on. The reverse multiplier occurs when the initial change in aggregate demand was a fall and therefore
there will be an overall greater decrease in national income. (1 mark for each point made to max. 4 marks)
Determinants of aggregate supply
8 Aggregate supply measures the quantity of output that all the UK’s producers are willing to produce at any
given price level. (3 marks)
9 a
SRAS
b
AD
c
AD
d
SRAS
e
AD (would also shift LRAS) (1 mark each, total 5 marks)
10 SRAS refers to output decisions based on firms with regards to different price levels. There is a positive
relationship between the price level and the quantity firms are willing to supply. LRAS looks at the maximum
amount that can be produced in the economy as a whole and this is independent of the price level (which is
why it appears vertical). (2 marks for each of SRAS and LRAS, total 4 marks)
11 a
LRAS
b
SRAS
c
LRAS
d
SRAS
e
LRAS (1 mark each, total 5 marks)
12
(4 marks for correctly drawn diagram)
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Section 4: The national and international economy
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Topic 2
How the macroeconomy works
Relevant points of analysis include:

No distinction is made between short run and long run.

Demand management is effective in short run and long run.

Economy does eventually reach capacity level.

Output can be raised and (cyclical) unemployment lowered without any upwards pressure on prices at
low output levels. (up to 3 marks for each point made, total 9 marks)
Aggregate demand and aggregate supply analysis
13 Any of the following:

increases in population

advances in technology

better/more infrastructure

improved education and training

supply-side improvements/policies

immigration where skills shortages (1 mark each to max. of 3 marks)
14

1 mark for each shift in curve (2 marks)

1 mark for correct labels on axes

1 mark for correct labels of equilibrium points (total 4 marks)
15
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Section 4: The national and international economy
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Topic 2
How the macroeconomy works
(up to 4 marks for correctly drawn diagram)
Analysis: how improved labour market flexibility works in producing non-inflationary growth. (up to 6 mark for
analysis, total of 9 marks overall)
16 The diagram could take a number of forms, but is likely to include a rightward shift of the AD curve with one of
the following:

an upward-sloping SRAS curve

a vertical LRAS curve

a Keynesian AS curve
Up to 4 marks for showing one of these diagrams correctly, with up to 5 marks for clearly developing how the
impact on output (real GDP) and the price level depends on the slope of the AS curve (or whereabouts the
increase in AD occurs on the Keynesian AS curve).
Exam-style questions: multiple choice
17 D
18 A
19 A
Exam-style questions: data response
20 Any two of the following:

rising income

cuts in direct tax

cuts in interest rates

rising confidence

wealth effects (1 mark each, total 2 marks)
b
Rise in national income = $8 billion.
AQA A-level Economics
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Section 4: The national and international economy
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Topic 2
How the macroeconomy works
Size of multiplier is 1.6.
Therefore, initial rise must be 8/1.6 = $5 billion. (3 marks; 1 mark for each correct stage)
c
4 marks for correctly drawn diagram showing either a rightward shift in the SRAS curve, or a ‘stretching’
to the right of a Keynesian AS curve. Diagram should show initial and new equilibrium positions as well as
having fully labelled axes and curves.
d
Up to 4 marks for a correctly drawn and fully labelled diagram showing a leftward shift in the AD curve –
this could be based on an SRAS, an LRAS or a Keynesian AS curve. Issues for analysis:

effects on output, prices and jobs

multiplier effects

depends where economy was before rise in interest rates

depends on assumptions made for AS curve (up to 4 marks for each developed point to max. of 12
marks, total 16 marks)
Exam-style questions: essay
21 a
b
Points for analysis include:

interest rates

taxes

confidence

income

wealth effects (15 marks)
Points for analysis include:

Government spending is a large component of AD.

Interest rates can be set to affect the level of consumption and investment.

Taxes can be changed to control consumption.
Points for evaluation include:

AD consists of the plans of millions of households and firms and is almost impossible to predict
precisely.

Policy changes have time lags.

Multiplier effects are uncertain.

It is too hard to control GDP exactly — people’s behaviour is not always understood.

GDP can be influenced by government, but it is about how far it can achieve this rather than a yes/no
answer. (25 marks)
AQA A-level Economics
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Section 4: The national and international economy
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Topic 2
How the macroeconomy works
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
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10
Topic 3
Topic 3
Economic performance
Economic performance
Economic growth and the economic cycle
1 Output gaps exist when actual growth in output differs from trend growth in potential output. These can be
negative (where actual output is below trend output) or positive (where actual output is above trend output). (3
marks)
2 Any three from the following:

Inventory cycle

excessive debt

speculation

asset price bubbles

animal spirits

herding

multiplier–accelerator

political cycles (1 mark each, total 3 marks)
3 The multiplier effect explains how an initial rise in the level of injections causes a greater than proportionate
increase in national income. At the same time the accelerator theory suggests that investment increases when
national income rises over time. Both concepts feed off each other — a rise in investment will have a multiplier
effect on national income which, in turn, will generate more investment, which has a further multiplied effect on
national income, and so on. This will also work in the opposite direction and fluctuations in output caused by
other factors can be magnified into booms and downturns or recession by the multiplier–accelerator
interactions. (1 mark for each point to max. of 5)
4 Up to 4 marks for diagram showing sharp shift to left in AD. Relevant issues for analysis of economic shock:

probably a demand-side shock — through fall in confidence and effects on C and I

possibly a supply-side shock as well — through reduction in banks’ willingness to lend money for C
and I

reverse multiplier effect on GDP and employment — further knocks to confidence

cuts in interest rates needed to stop sharper falls in GDP (up to 12 marks, total max. 15 marks)
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Section 4: The national and international economy
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Topic 3
Economic performance
Employment and unemployment
5 Voluntary unemployment is where workers will not accept a job at the current wage rate — perhaps due to
structural factors. Involuntary unemployment is where workers cannot find work at the going wage rates, even
though they would accept them if available (perhaps due to cyclical causes) (1 mark for each point to max. of 4
marks)
6
(up to 4 marks for correctly drawn diagram). Not all these labels are required — but the new and old
equilibrium must be identified and some indicator of the ‘real wage’ unemployment that now exists.
7 Relevant issues include:

effect on government expenditure through higher welfare expenditure

effect on taxation revenue

effect on ‘lost’ economic growth

effect on types of unemployment (hysteresis effect) (1 mark for identification of a consequence and up to
2 marks for development of each point, total 9 marks)
8 Factors include:

welfare provision

taxes on income

geographical mobility

training levels (1 mark for identification of a factor and 2 marks for development of each up to maximum of
7 marks)
2 marks for explanation that the natural rate can be reduced, but not through traditional demand-side policies
(total 9 marks)
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Section 4: The national and international economy
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Topic 3
Economic performance
Inflation and deflation
9 Disinflation refers to a fall (1) in the rate of inflation (1). Deflation refers to a fall (1) in the price level over time
(1) — or negative inflation (1) or falling average prices (1). (4 marks)
10 Negative consequences of inflation include:

menu costs

search/shoe leather costs

uncompetitive exports

fiscal drag

uncertainty (up to 2 marks for each consequence explained to max. of 4 marks)
11 Standard cost-push inflation diagram:
Up to 4 marks for the correctly drawn diagram for cost-push inflation (fully labelled); 2 further marks for
indicating the effect of higher interest rates as shown by a leftward shift in AD and the new macroeconomic
equilibrium as a result (total 6 marks).
12 Reasons to keep inflation low could include:

any recognised cost of inflation (each one can be rewarded separately)

economy more likely to be stable in terms of growth if inflation is kept stable

no need for higher interest rates to bring down inflation

less chance of wage/price spiral (up to 3 marks for each reason identified and analysed, total 9 marks)
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Section 4: The national and international economy
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Topic 3
Economic performance
Macroeconomic policy conflicts
13 Opportunity cost represents the cost of the next best alternative forgone (up to 2 marks). Examples of this are
found in any of the macro trade-offs, such as inflation–growth, growth–stable current account balance etc. (up
to 2 marks for any one trade-off explained, total 4 marks)
14 Up to 4 marks for long-run Phillips curve (LRPC). Explanation of how attempts to reduce unemployment on
short-run Phillips curve (SRPC) only fuel inflationary expectations and move us back to the natural rate of
unemployment, as indicated by the position of the LRPC (vertical). (up to 6 marks for explanation, total 10
marks).
15 Relevant points might include:

in long run, economy always returns to LRPC and natural rate of unemployment

adjustment from short run to long run could be lengthy in time and therefore may be worth obtaining
reductions in unemployment even if will be cancelled out in long run

can still reduce unemployment but only through supply-side reform (i.e. shift LRPC)

examples of relevant ways to shift LRPC (up to 3 marks for each point identified and developed, total 9
marks)
Exam-style questions: multiple choice
16 C
17 C
18 A
Exam-style questions: data response
19 a
Assuming the unemployment rate is approx. 8.6%, the size of the UK labour force would be
2,503,000/8.6% = 29,104,651. Award marks for both method and answer — allow margin of error on
unemployment rate and possible rounding issues. (2 marks)
b
The economic cycle refers to the repeated (1) variations in economic growth (1) which follow a semipredictable pattern (1) where growth ranges from high to low (or even negative) (1). Allow 1 mark for example
of stage of cycle, e.g. recession. (4 marks)
c
Most will draw short-run Philips curve.
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Section 4: The national and international economy
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Topic 3
Economic performance
(4 marks for correctly drawn diagram) Reward answers which show movement along an SRAS/Keynesian AS
curve (but not the LRAS curve, which allows no trade-off).
Analysis of issues:
d

Unemployment is partially determined by level of AD.

Inflation is also partially determined by level of AD.

A trade-off exists in that, by using AD management to reduce unemployment, we may generate
demand-pull inflation (and vice versa). (up to 6 marks for analysis, to max. 9 marks)
Issues for analysis include:

Unemployment is caused by a variety of factors — some demand, some supply.

Trade-off may exist between inflation and unemployment.

SRPC shows trade-off in short run.

LRPC shows no trade-off in long run.

Economy eventually returns to natural rate of unemployment (according to LRPC).
Issues for evaluation:

Speed of adjustment is not agreed upon — it could take many years for the economy to return to
LRPC, so it could be argued that trade-off is still there nearly all the time.

Unemployment caused by non-demand factors can potentially be reduced at no cost of inflation.

There is always some residual unemployment in existence.

Some types of factor immobility cannot practically ever be eliminated. (25 marks)
Exam-style questions: essay
20 a
Answers might include:
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Section 4: The national and international economy
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Topic 3
b
Economic performance

definitions of inflation

main causes of inflation: demand-pull, cost-push, excessive growth in money supply (quantity theory)

diagrams to support explanations (15 marks)
Issues for analysis include:

both inflation and deflation impose problems/costs for an economy

explanations of costs of inflation

explanations of costs of deflation

difference between benign and malevolent deflation
Issues for evaluation:

costs imposed are all different — no real agreement on which is worst

deflation — may not be harmful if benign

some inflation may help — hence the non-zero official target rate

rate of inflation/deflation more important

how anticipated and how long it is expected to last may determine impact (25 marks)
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Section 4: The national and international economy
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Topic 4
Topic 4
policy
Financial markets and monetary policy
Financial markets and monetary
The structure of financial markets and financial
assets
1 Functions of money:

medium of exchange

store of value

measure of value

standard of deferred payment (1 mark for each, total 4 marks)
2 Narrow money usually refers to notes and coins and that which can be easily converted into cash without any
loss in value or delay in time. Broad money includes narrow money and those bank accounts where there may
be a time delay in the conversion of the balance into money in a liquid form. (2 marks for each definition, total 4
marks)
3 Debt refers to amounts borrowed to be repaid at some specified point in the future. Equity refers to the
ownership of a stake in an enterprise. (2 marks for each definition, total 4 marks)
4 The forward market for foreign exchange rates allows the purchase of foreign currency at some specified point
in the future at a price agreed now, so as to protect the buyer of the currency from unwanted or unpredictable
changes in the value of the currency in the future. (3 marks)
5 As interest rates rise, the rate of return on bonds, which is fixed, will fall in relative terms. This means the bond
price must fall so as to encourage the purchase of these now less lucrative bonds. The price of the bond
should fall until the return on the bonds is equivalent to the rate of interest available on bonds now being
issued. (3 marks)
6 Price of a bond = (annual coupon/current interest rates) × 100
= (£1.25/1.5) × 100
= £83.33 (4 marks; 1 mark lost for each incorrect step)
Commercial banks and investment banks
7 Banks can create credit by knowing that when they receive deposits they will only need to hold a small fraction
of this deposit in liquid form (i.e. as notes and coins) as most of the deposits will not be withdrawn. This
enables the bank to lend the remainder of that deposit out to gain a return. Again, this deposit will eventually
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Section 4: The national and international economy
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Topic 4
Financial markets and monetary policy
return to the bank and can then be lent out again. The amount of credit that can be created will depend on the
fraction of a deposit the bank chooses (or is compelled by regulations) to hold. (4 marks)
8 Commercial banks are often known as ‘high street’ banks and their main areas of operations are in accepting
deposits from customers and lending money to others. Investment banks operate by helping firms to acquire
finance, such as arranging share issues and debenture issues. They earn money by charging fees for the
services that they provide to businesses. They also make money through trading in financial assets. (4 marks;
2 marks for each definition/description)
9 Banks have a need for liquidity, which means that they must hold enough cash or liquid assets to meet the
daily requirements of customers to make withdrawals. However, holding cash is not likely to generate a return.
Profits can be earned by seeking investment opportunities and lending the money out. This conflicts with the
need for liquidity. (4 marks; 2 marks for each description)
Central banks and monetary policy
10 Quantitative easing refers to the aspect of monetary policy where the government buys government securities
from banks (through the Bank of England) to increase their liquidity so that they can increase lending to the
private sector to boost aggregate demand. This policy is used when interest rates can no longer be practically
lowered. (3 marks)
11 Price stability in the UK is defined as an inflation rate of 2% (+/- 1%). This is achieved by controlling the overall
level of aggregate demand to ensure that it matches growth in aggregate supply. Higher interest rates would
tend to lead to lower inflation and so on. (4 marks)
12 These policies would be:

changes in interest rates

quantitative easing

funding for lending (most answers will not include this policy) (up to 3 marks for each point explained; 1
for identification and 2 for development; total 6 marks)
Regulation of the financial system
13 Moral hazard in banking refers to the problem that exists where banks can take excessive risk in the pursuit of
profits in the belief that someone else would cover the costs if the risky investments were to fail. (4 marks)
14 Possible causes of financial crisis include any of the following:

prolonged period of low interest rates

easy credit — few checks on those borrowing money

reckless lending

moral hazard
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Section 4: The national and international economy
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18
Topic 4

Financial markets and monetary policy
rapid decline in lending once crisis begins, starving economy of liquid funds (up to 3 marks for each point
developed, total 9 marks)
Exam-style questions: multiple choice
15 B
16 C
17 A
18 D
Exam-style questions: data response
19 a
37,467 approvals (44,960 × 100/120). (2 marks)
b
Funding for Lending aims to increase the lending to private sector organisations and will lower the cost of
borrowing. As a result, this will make the returns available for savers lower. (4 marks)
c
d
Relevant points for inclusion:

easier to borrow money to purchase property which is then rented out by the owner

will lead to an increase in the quantity of rented property

should lead to rising house prices

makes it easier for people to access the housing market in terms of rental property

makes it harder for those on lower incomes to buy their first house due to higher prices (9 marks)
Points for analysis:

makes a financial crisis less likely to happen

reduced risks of reckless lending

banks more likely to survive

may make it harder for riskier investment to attract funding

UK may lose financial trade to other financial centres with less restrictive regulations
Points for evaluation:

some tightening of regulation is probably welcome

reduces incidence of moral hazard

depends on extent of tightening of regulation (25 marks)
Exam-style questions: essay
20 a
Answers may include any of the following points:

prolonged period of low interest rates
AQA A-level Economics
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Section 4: The national and international economy
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19
Topic 4
Financial markets and monetary policy

easy credit — few checks on those borrowing money

reckless lending

moral hazard

rapid decline in lending once crisis began starving economy of liquid funds
Stronger answers will make reference to toxic debt/sub-prime lending/origins in the US housing crash and so
on, but do not penalise too heavily those who do not know lots about the historical context (though these
answers will probably not score full marks). (15 marks)
b
Issues for analysis:

Moral hazard issue means that, without reform, banks may resume taking unnecessary risks.

Housing bubbles are not unusual and one similar to that which initiated the crash could occur.

Having banks act as both commercial banks and investment banks may always mean a risk of crisis.

Banks are profit-making businesses — risks, failures and speculation are part of this environment.
Issues for evaluation:

An exact repeat of the crisis is unlikely — a similar one is possible but each time the causes and
consequences may vary.

Some intervention is probably needed — it is a question of how much.

Need to weigh up costs of intervention with potential savings. (25 marks)
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Section 4: The national and international economy
Hodder Education
20
Topic 5
Topic 5
policies
Fiscal policy and supply-side policies
Fiscal policy and supply-side
Fiscal policy
1 Direct taxes are those that cannot be avoided by those liable — they are usually paid on incomes (e.g. income
tax, corporation tax). An indirect tax can be avoided by passing it on to consumers (or producers) in the form of
a higher price. These are taxes on expenditure. VAT is the most common example. (4 marks; 2 marks for each
category)
2 Current government spending is spending on the day-to-day running of government-provided activities. For
example, this would include the pay for those involved in the public sector, and the cost of goods and services
used up to provide the services. Capital expenditure by the government is on long-term infrastructure projects,
such as new railways. Current expenditure can also be broken up into that needed to run services, the
servicing of debt and that which covers welfare expenditure. (2 marks for each point made to max. of 4 marks)
3 Reasons include:

to support those on low or no incomes

to improve economic performance

to provide public goods

to provide merit goods

to defend/secure the nation

to provide administrative support to the systems in place (1 mark for each reason identified and a further
mark for the explanation to a max. of 6 marks)
4 Taxes are used for a number of reasons:

Taxes change incentives (i.e. lower taxes on income to encourage work).

Taxes on demerit goods discourage their consumption.

Taxes on activity may discourage production (e.g. on negative externalities).

Taxes fund government spending.

Taxes redistribute income. (up to 12 marks for these reasons and up to 5 marks for each reason that is
developed)
Diagrams may include:


externality diagrams (probably negative externalities)
AD/AS diagrams — showing how government spending can boost GDP (up to 4 marks for any relevant
diagram, total 15 marks)
AQA A-level Economics
Section 4: The national and international economy
21
© Steve Stoddard and David Horner 2016
Hodder Education
Topic 5
Fiscal policy and supply-side policies
Supply-side policies
5 Supply-side policies:

tax/benefit reform

trade union reform

deregulation/privatisation
Supply-side improvements:

more developed financial industry

advances in technology reducing barriers to markets/factor immobility

rise in spirit of enterprise (1 mark for relevant example of each category)
6 A cut in direct tax will improve the incentive to work as it raises the opportunity cost of not working (micro
effect), but at the same time it increases disposable income and should therefore lead to higher consumption
and higher aggregate demand (macro effect). (4 marks; 2 marks for each point developed)
7 Labour market flexibility refers to the degree to which there are barriers present which prevent the labour
market working as a true free market. Improvements in labour market flexibility could therefore come from any
of the following:

more training to reduce occupational immobility

lower taxes on workers (employers’ NICs)

lower income tax

tax credits to reduce the poverty trap (up to 4 marks for each developed point, total 9 marks)
Exam-style questions: multiple choice
8 D
9 B
10 D
11 A
Exam-style questions: data response
12 a
(i)
(£18,000 − £10,600) × 20% = £1,480 (1)
(ii)
(£48,000 − £42,385) × 40% + (£42,385 − £10,600) × 20% = £8,603 (1)
b
A progressive system of tax is where the average amount of tax paid on income rises as incomes rise.
This is usually achieved through increasing marginal rates of tax changed as incomes rise. It is usually used as
a form of income redistribution from richer earners to lower earners. It will therefore reduce the unwelcome
effects of high income inequality. (4 marks)
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
22
Topic 5
c
d
Fiscal policy and supply-side policies
Causes of long-run growth include:

population size/immigration

education and training

infrastructure

level of technology (3 marks for each point identified and developed, total 9 marks)
Arguments that could be made include:

would reduce costs of servicing the national debt

national debt will shrink as a % of GDP and in absolute size

may reduce long-term borrowing costs (long-term interest rates)

deficits are useful as a means of boosting spending when other parts of AD fall

does not distinguish between types of government spending

spending on infrastructure is needed for long-run growth — would this be affected?
Points for evaluation include:

Why is a law needed? It could be overturned anyway?

What size surplus will be required?

Will the law distinguish between types of expenditure? This is important.

Can the government ever really totally control the budgetary balance? (25 marks)
Exam-style questions: essay
13 a
b
Analysis of issues includes:

Taxes can affect the level of GDP — via effects on consumption and investment.

Taxes can be used to alter the pattern of activity — via taxes on expenditure to encourage/discourage
consumption and production of different goods and services.

A shift from direct to indirect taxes will affect incentives. (Up to 5 marks per point developed; 15 marks)
Points for analysis include:

Government spending can be used to manage the macroeconomy, so should not be too tightly
controlled.

A deficit can be used in a recession to boost GDP.

Austerity and tight controls on spending may lead to losses in confidence and affect other components
in AD.

Other policies can be used to complement any tight control on spending.
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
23
Topic 5
Fiscal policy and supply-side policies
Points for evaluation include:

What do we mean by tight controls? How tight?

It depends on the use of monetary policy and other government instruments.

Is it the level of spending that is being controlled or the types of spending? (25 marks)
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
24
Topic 6
Topic 6
The international economy
The international economy
Globalisation
1 Globalisation refers to the increasing interconnectedness or integration of previously separate economies. (3
marks for clear definition)
2 Any three from the following:

improved transport links (cheaper, faster etc.)

improved communication

reduced trade barriers

spread of capitalism across world (1 mark for identification of a factor + 1 mark for development, total 6
marks)
3 Benefits include:

access to wider markets

location inside customs unions — access to free trade

cheaper labour/reduced labour regulations

local knowledge of market

tax advantages

transfer pricing (up to 3 marks for each benefit identified and explained, total 9 marks)
Trade
4 Absolute advantage exists when a country can produce a good for a lower cost than it would take to produce
the good in another country. (3 marks)
5 Comparative advantage exists when a country can produce a product for a lower opportunity cost than other
countries. (3 marks)
6 The WTO (World Trade Organization) is an international organisation seeking to promote free trade and the
dismantling of already existing trade barriers. It meets on a regular basis and attempts to secure trade deals
between member states and discourage unfair competition. (4 marks)
7 Features of a custom union include:

free trade between members states
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
25
Topic 6
The international economy

common external tariff on ‘outside’ trade

likely attempts to harmonise regulations on competition/government intervention in markets (1 mark for
each feature identified + 1 mark for development to a max. of 4 marks)
8
(up to 4 marks for correctly drawn diagram)
Analysis of issues:

works by increasing relative price of imports

works by substitution effect

assumes price is elastic enough to make a difference to import quantities

assumes no significant retaliation from other country

assumes goods are fairly close substitutes for one another (up to 6 marks for analysis, total 9 marks)
The balance of payments
9 Current account (1); capital account (1); financial account (1) (3 marks)
10 Devaluation (1); protectionist measures (1 — only allow this once, i.e. do not count tariffs and quotas as
separate answers); deflationary policies (1); supply-side policies (1). (max. 3 marks)
11 Foreign direct investment (FDI) refers to the acquisition of business interests in a foreign economy. This will
either take the form of opening up a new business (or branch of an existing business) or involve taking control
of an existing foreign business. Portfolio investment is the purchasing of the financial capital of an existing
business located overseas. This would include the buying of shares or bonds in a foreign country. The key
distinction is that FDI involves some form of controlling interest in the business activities being obtained
whereas portfolio investment refers to a more passive purchasing of financial assets (i.e. to ‘make money’
rather than to run the business). (1 mark for each point to a max. of 4 marks)
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
26
Topic 6
The international economy
12 Deficit of £210,444 million (4 marks — must say deficit for full marks; 3 marks for five or more correct steps in
calculation, 2 marks for four or more correct steps, 1 mark for two correct steps)
13 Reducing the level (or rate of growth) of aggregate demand (1) would reduce the level of consumption (1). This
would mean less spent by households on goods and services (1). Part of household spending would include
spending on imports (1). Reducing the amount spent on imports would lead to a reduced deficit on the current
account (1). Exports are not a function of aggregate demand and would be unaffected (1). (4 marks max.)
Exchange rate systems
14 The price of one currency expressed in terms of another currency. (3 marks)
15 $1 = €1.26 (2 mark; if answer says €1 = $0.80 then award 1 mark)
16 France: £35,555.56 (2 marks)
USA: £43,629.63 (2 marks)
17 Trade (1); interest rates (1); speculation (1); government intervention (1); inflation (1) (max. 3 marks)
18 Relevant issues include:

Need to match interest rates with level set in country whose currency is being targeted.

Government intervention is likely in foreign exchange market.

Inflation rates will become similar in both economies.

Trade between economies is likely to increase.

Fiscal policy will become more important in order to affect aggregate demand. (1 mark for each point
identified (max. 3 marks) + up to 2 marks for each point developed, total 9 marks)
Economic growth and development
19 HDI consists of:

years of expected schooling

life expectancy

GDP per capita (PPP) (1 mark for each, total 3 marks)
20 Economic growth measures the increase in GDP over time or the increase in the productive capacity of an
economy over time. Economic development is multi-dimensional and includes a number of criteria including
national income but also education, health and infrastructure. (4 marks; 2 marks for each point)
21 Development depends upon a set number of factors coming into play — without these, development is unlikely
to be reached. These factors include:
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
27
Topic 6
The international economy

income per capita reaching a set level

education level — literacy rates in particular

healthcare reaching a set minimum level

property rights clearly established — rule of law, maintenance of contracts — corruption in public office
would prevent these being clearly and reliably established

transport infrastructure

trade allowed with other countries

financial sectors developed enough to channel funds to those wishing to start up enterprises (award up to
2 marks for each point made to a max. of three separate points, total 6 marks)
22 Policies to help development include:

investment in education

investment in health

maintenance of laws/property rights

opening up economy to allow FDI/foreign trade

developing financial sector (3 marks for each point developed, total 9 marks)
Exam-style questions: multiple choice
23 D
24 C
25 A
26 C
Exam-style questions: data response
27 a
Current account deficit is where the flows of money out of the country outweigh the flows of money into
the country from trade and incomes from assets. (3 marks; only award 2 marks max. if the answer only looks
at trade aspect of current account)
b
The flows of money out of a country must be financed by money coming into the country. If there is a net
outflow then the shortfall is financed by either borrowing or running down reserves of foreign currencies held —
a form of outflow. In this sense, the totals must agree — even if the individual components are in deficit or
surplus, the overall total must be zero. (3 marks)
c
The policies which could be used are:

devaluation

deflation of aggregate demand

protectionist measures
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
28
Topic 6

d
The international economy
supply-side reform (up to 4 marks for each policy, total 9 marks)
Issues for analysis:

deficit may indicate weakness in export sector of economy

deficit must be financed by running down savings or by a surplus on financial and capital account

deficit may be the result of above average growth — surplus may be the result of lower than average
growth

deficit may just exist due to shift away from exports to a service sector economy
Issues for evaluation:

size of deficit matters

how persistent the deficit is matters

a surplus on the financial account will always ‘finance’ a deficit

may need higher than average interest rates over time to attract short-term capital to finance a deficit

surplus is not necessarily a good thing (25 marks)
Exam-style questions: essay
28 a
b
Characteristics of a less developed economy include:

high poverty rates

high reliance on primary sector

higher risk of malnutrition

high fertility/birth rate

poor infrastructure

poorly developed financial sector (up to 4 marks for each point developed, total 15 marks)
Issues for analysis:

aid brings in foreign currency which can be invested

conditions may be attached to the aid which further encourage development

exports of country may be insufficient to generate resources needed for internal investment

there may be other solutions — opening up markets, borrowing money etc.
Issues for evaluation:

depends on the size of the aid

is the aid monetary or some other form of aid?
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
29
Topic 6
The international economy

how is the aid used — is there a danger of corruption in its use?

is it one-off or on a regular basis? (25 marks)
AQA A-level Economics
© Steve Stoddard and David Horner 2016
Section 4: The national and international economy
Hodder Education
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