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Topic 1 The measurement of economic performance WORKBOOK ANSWERS 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 1 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: AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 2 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 3 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 4 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 AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 5 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 6 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 AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 7 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 © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 8 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 © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 9 Topic 2 How the macroeconomy works AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 11 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 12 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 13 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. AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 14 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: AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 15 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 16 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 AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 17 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 AQA A-level Economics © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 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 © Steve Stoddard and David Horner 2016 Section 4: The national and international economy Hodder Education 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) AQA A-level Economics © Steve Stoddard and David Horner 2016 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 30