IB Economics 2010 May and November exams

IB ECONOMICS
2010 Examinations: May and November examination sessions
The May and November 2010 examinations
May
Nov
HL Paper 1 examination
HL Paper 1 mark scheme
HL Paper 2 examination
HL Paper 2 mark scheme
SL Paper 1 examination
SL Paper 1 mark scheme
SL Paper 2 examination
SL Paper 2 mark scheme
HL Paper 3 examination
HL Paper 3 mark scheme
May and Nov 2010 IB Economics Examinations
M10/3/ECONO/HP1/ENG/TZ1/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 1
Wednesday 19 May 2010 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer one question.
Use fully labelled diagrams and references to examples where appropriate.
1 hour
2210-5102 2 pages
© International Baccalaureate Organization 2010
22105102
M10/3/ECONO/HP1/ENG/TZ1/XX
2210-5102
– 2 –
Answer one question. Each question is worth [25 marks].
1. (a) Explain the importance of price elasticity of demand and cross-elasticity of
demand for business decision-making.
[10 marks]
(b) Studies have shown that the demand for tobacco tends to be highly price inelastic.
Evaluate the view that governments can best reduce smoking by substantially
increasing taxes on cigarettes.
[15 marks]
2. (a) Explainwhyacountrymaywishtoreduceitsrateofination.
[10 marks]
(b) Evaluate the likely impact on the economy of relying on higher interest rates to
reducetherateofination.
[15 marks]
3. (a) There has been an increasing trend in different parts of the world for countries
to engage in economic integration through the formation of trading blocs.
Using suitable examples, explain the different types of trading bloc that may
be formed.
[10 marks]
(b) Evaluate a country’s decision to join a free trade area (FTA).
[15 marks]
4. (a) Explain the difference between economic growth and economic development,
and how each of these may be measured.
[10 marks]
(b) Evaluate the view that the best way that developed countries can help the growth
and development process of very poor, highly indebted countries is through a
general cancellation of debts.
[15 marks]
M10/3/ECONO/HP1/ENG/TZ1/XX/M+
17 pages
MARKSCHEME
May 2010
ECONOMICS
Higher Level
Paper 1
2 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the
maximum marks indicated.
1. (a) Explain the importance of price elasticity of demand and cross-elasticity of
demand for business decision-making. [10 marks]
Answers should include:
a definition of PED
a definition of XED
the link between PED, price changes and changes in total revenue
the importance of XED in terms of changes in price of substitutes
and complements
examples of PED and XED in real life (products with high/low elasticities;
products related are complements or substitutes).
Answers may include:
an explanation that PED and XED are extremely difficult to accurately
measure in reality
use of diagrams to show the relationship between PED, price changes
and changes in total revenue
use of diagrams to illustrate the complement/substitute relationship.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
4 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
(b) Studies have shown that the demand for tobacco tends to be highly
price inelastic. Evaluate the view that governments can best reduce
smoking by substantially increasing taxes on cigarettes. [15 marks]
Answers may include:
cigarettes as an example of market failure having the characteristics of
demerit goods
use of an MSC/MSB diagram to show the negative externalities associated
with the consumption of cigarettes, candidates may use a simple supply and
demand diagram
an explanation of inelastic demand and the implications for a tax
on cigarettes; low PED means a tax may not lead to a significant decrease in
quantity of cigarettes demanded
distinction between inelastic demand for tobacco in general and elastic
demand for particular brands
the incidence of taxation may be considered
consideration of the extent of the tax increase; tax may have to increase a lot
to have a major impact
the problem of relating the tax to the value of the external costs
the impact on government revenues and spending possibilities; revenue will
increase a lot in view of the low PED
an assessment of alternative policies such as negative/positive advertising
and direct controls.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be awarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
5 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 15
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 69
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 1012
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 1315
6 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
2. (a) Explain why a country may wish to reduce its rate of inflation. [10 marks]
Answers should include:
an explanation of the term rate of inflation
an explanation for wishing to reduce the inflation rate in terms of the
various costs of inflation. This may include the impact on:
international competitiveness
the distribution of wealth and income
savers and borrowers
fixed income recipients suffer reduced real income
certainty/uncertainty and the willingness of businesses to invest
government finances
government interest rate policy
purchasing power, pressure on wages and industrial relations
“shoe leather” and “menu” costs.
Answers may include:
mention of lower inflation for general economic performance, e.g. the
growth rate
mention of the various ways in which inflationary pressures may be reduced
a distinction between moderate inflation and hyper-inflation.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
7 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
8 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
(b) Evaluate the likely effects on the economy of relying on higher interest
rates to reduce the rate of inflation. [15 marks]
Answers may include:
an explanation of the use of interest rates to tackle inflation
an explanation of the linkage between higher interest rates and AD
the impact of higher interest rates on costs/AS
the impact on output, growth, employment, the balance of payments and the
exchange rate
use of AD/AS diagrams
the implications of using higher interest rates in dealing with cost inflation
other measures to deal with inflation, e.g. supply-side policies
the problem of time lags
interest rates as a highly flexible tool of economic policy
the distributional impact of higher interest rates on savers and borrowers
overall assessment.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
9 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 15
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 69
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 1012
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 1315
10 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
3. (a) There has been an increasing trend in different parts of the world for
countries to engage in economic integration through the formation of
trading blocs. Using suitable examples, explain the different types of
trading bloc that may be formed. [10 marks]
Answers should include:
an explanation of economic integration through trading blocs
an explanation of free trade areas
an explanation of customs unions
an explanation of common markets
suitable examples.
Answers may include:
an explanation of preferential trading areas
an explanation of complete economic integration
an explanation of progress towards monetary union.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
11 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
12 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
(b) Evaluate a country’s decision to join a free trade area (FTA). [15 marks]
Answers may include:
Advantages:
possibility of economies of scale
larger export market
increased competition leads to efficiency and lower prices in the long run
productive and allocative efficiency
possibility of increased foreign investment as a way to get inside market
greater consumer choice of products
transfer of labour and capital within the free trade area
fosters political stability
trade creation.
Disadvantages:
increased competition can force inefficient domestic producers out of
the market
domestic workers may be unemployed
competition may only exist in the short run. In the long run, firms may
merge to keep control of their markets and an oligopolistic or monopolistic
market structure in the free trade area can result. Higher prices may be the
outcome
the transfer of resources within the free trade area may not be even
can damage multilateral trading negotiations (WTO).
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
13 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 15
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 69
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 1012
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 1315
14 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
4. (a) Explain the difference between economic growth and economic
development, and how each of these may be measured. [10 marks]
Answers should include:
a definition of economic growth
a definition of economic development
an explanation that economic growth is a quantitative concept whereas
economic development is more qualitative
an explanation that economic growth is measured by the increase in real
national income over a period of time, whereas economic development,
in addition to the latter, could also include a whole variety of other measures
such as schooling, life expectancy, provision of healthcare, income
distribution, political freedoms etc. (just a few examples would suffice).
Answers may include:
a production possibility diagram to illustrate the difference between
economic growth and economic development
a mention of specific indices such as the HDI or HPI.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
15 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
16 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
(b) Evaluate the view that the best way that developed countries can help the
growth and development process of very poor, highly indebted countries is
through a general cancellation of debts. [15 marks]
Answers may include:
a definition of developing, highly indebted countries
examples of such countries
arguments for debt cancellation in terms of the problems of debt,
e.g. the opportunity cost of debt repayments, the impact on development,
the gearing of the economy towards exports, the potentially serious
implications of the problem on absolute poverty
arguments against debt cancellation,. e.g. the danger of moral hazard,
debt forgiveness and the creation of a dependency culture, the rewarding of
irresponsible governments and penalizing of committed ones, debt as one
of just many causes of poverty in developing countries
alternatives to debt cancellation such as aid or trade agreements
the role of the IMF and World Bank, e.g. through structural adjustment
programmes
an overall assessment as to how the highly indebted countries can best be
helped: debt write-offs versus effective aid and by industrialized countries
lifting trade barriers.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
17 M10/3/ECONO/HP1/ENG/TZ1/XX/M+
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 15
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 69
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 1012
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 1315
M10/3/ECONO/HP2/ENG/TZ1/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 2
Wednesday 19 May 2010 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer three questions.
Use fully labelled diagrams and references to examples where appropriate.
1 hour
2210-5105 2 pages
© International Baccalaureate Organization 2010
22105105
M10/3/ECONO/HP2/ENG/TZ1/XX
2210-5105
– 2 –
Answer three questions. Each question is worth [10 marks].
1. With the aid of a diagram, explain why the price elasticity of supply is likely to change over time.
2. Explain why an airline would want to practice price discrimination. Under what conditions would
the airline be able to do so?
3. With the aid of a diagram, explain how the government could try to eliminate a deationary
(recessionary) gap.
4. With the aid of a diagram, explain how an increase in transfer payments to the poorest households
inanationislikelytoaffecttheLorenzcurveandtheGinicoefcientofthatnation.
5. Explainthedifferencebetweenaxedexchangerateandaoating(exible)exchangerate.
6. Explain the difference between outward-oriented growth strategies and inward-oriented
growth strategies.
M10/3/ECONO/HP2/ENG/TZ1/XX/M+
8 pages
MARKSCHEME
May 2010
ECONOMICS
Higher Level
Paper 2
2 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the maximum marks
indicated. Each question is worth [10 marks].
1. With the aid of a diagram, explain why the price elasticity of supply is likely to change over time.
Candidates may include:
a definition of price elasticity of supply
the formula for calculating the PES
an explanation of why the PES can change over time:
how quickly the costs of using resources rise as output increases; if the cost of resource use increases
quickly as production increases, producers are less likely to increase supply, resulting in an inelastic
supply
time period:
the longer the time period considered, the more elastic supply will be (for example, difficulty in
expanding capital e.g. constructing another factory)
amount of excess capacity; the greater the excess capacity, the more elastic supply will be
availability of substitutes in production; the more the substitutes, the easier it is to switch production,
and the more elastic supply will be
reference may be made to the market period, the short run and the long run
a diagram showing supply curves with different values of PES
examples, such as primary products (agriculture, minerals) which have a lower PES than manufactured
products.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
4 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
2. Explain why an airline would want to practice price discrimination. Under what conditions would the
airline be able to do so?
Candidates may include:
a definition of price discrimination
an explanation of why an airline would want to practice price discrimination
it can earn higher revenues and earn greater economic (supernormal) profits through the capture of
consumer surplus
it can drive higher cost competitors out of the market by lowering prices for some consumer groups,
and therefore it can increase its monopoly power
an explanation of how an airline can practice price discrimination:
an airline can split the market and discriminate between different buyers: they can charge the elderly
lower prices on certain days, give discounts for students’ weekend travel, offer lower fares to
travellers who make advance bookings and charge higher fares to those making their travel plans
closer to the day of travel
conditions for price discrimination:
the producers have price setting ability because the market is imperfect, and can distinguish between
separate groups of buyers on the basis of age, income etc.
consumers have different price elasticity of demand i.e. different demand curves for different
consumers e.g. holidaymakers, business people and therefore some consumers are willing to pay
higher prices than others
producers must be able to keep the markets separate.
Candidates may illustrate how a monopolist can charge different prices in different markets using marginal
revenue and marginal cost curves.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
5 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
3. With the aid of a diagram, explain how the government could try to eliminate a deflationary
(recessionary) gap.
Candidates may include:
a definition of a deflationary (recessionary) gap
graphical representation of a deflationary (recessionary) gap.
Government shifting the AD curve to the right:
an explanation of government expenditure increases and how this will increase AD
an explanation of tax decreases or transfer payment increases and how this will increase AD
an explanation of interest rate decreases that could be expected to influence consumption/
investment/exchange rate and how this will increase AD
graphical illustration of the above
influence of the multiplier effect.
Candidates may choose to draw a
45
diagram and this would be equally acceptable. Candidates who
incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
6 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
4. With the aid of a diagram, explain how an increase in transfer payments to the poorest households in a
nation is likely to affect the Lorenz curve and the Gini coefficient of that nation.
Candidates may include:
a definition of transfer payments
a definition of the Lorenz curve
a definition of the Gini coefficient
a diagram illustrating a Lorenz curve and the Gini coefficient
an explanation that an increase in transfer payments to the poorest households can lead to an
improvement in income distribution, by increasing the incomes of lower income groups
an explanation that an improvement in income distribution will cause the Lorenz curve to move towards
the line of absolute equality
an explanation that the Gini coefficient (index) will become lower indicating a more equitable distribution
of income.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
7 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
5. Explain the difference between a fixed exchange rate and a floating (flexible) exchange rate.
Candidates may include:
a definition of an exchange rate
a definition of a fixed exchange rate
a definition of a floating (flexible) exchange rate.
Explanation of the difference between a fixed exchange rate and a floating (flexible) exchange rate in
terms of how they function:
explanation of how a fixed exchange rate is maintained at a fixed level: buying and selling by the
government of a country of its domestic currency in the foreign exchange market
explanation of the factors causing variations of a floating (flexible) exchange rate: changes in the
demand for and supply of a currency resulting from changes in trade flows, international interest rate
differentials, international price level differentials and speculation.
Diagrams may be used in response to this question but are not essential for the achievement of
full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
8 M10/3/ECONO/HP2/ENG/TZ1/XX/M+
6. Explain the difference between outward-oriented growth strategies and inward-oriented growth
strategies.
Candidates may include:
an explanation that an outward-oriented growth strategy relies on increasing exports as the
basis of growth, while an inward-oriented growth strategy relies on protection and increased
self-reliance
an explanation that outward-oriented growth strategies are based on free trade whereas inward-oriented
growth strategies are based on import substitution
an explanation that outward-oriented growth strategies are based on market liberalization whereas
inward-oriented growth strategies based on government intervention to regulate domestic industries and
protect infant industries
an explanation of the advantages and disadvantages of outward-oriented growth strategies and
inward-oriented growth strategies.
Examiners should be aware that candidates may take a different approach which if appropriate, should be
rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 13
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 46
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 78
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 910
M10/3/ECONO/SP1/ENG/TZ1/XX
ECONOMICS
STANDARD lEvEl
PAPER 1
Wednesday 19 May 2010 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer one question.
Use fully labelled diagrams and references to examples where appropriate.
1 hour
2210-5111 2 pages
© International Baccalaureate Organization 2010
22105111
M10/3/ECONO/SP1/ENG/TZ1/XX
2210-5111
– 2 –
Answer one question. Each question is worth [25 marks].
1. (a) With the aid of at least one diagram, explain the difference between a movement
along an existing demand curve for a good and a shift of the demand curve
for a good.
[10 marks]
(b) Evaluate the view that the market forces of demand and supply will always lead
to the best allocation of resources.
[15 marks]
2. (a) Aggregate demand consists of consumption, investment, government spending
and net exports (exports minus imports). Explain two factors that may inuence
consumption and two factors that may inuence government spending.
[10 marks]
(b) Evaluate the possible impact of an increase in consumption expenditure on the
performance of an economy.
[15 marks]
3. (a) Explain the possible consequences of an improvement in a country’s terms of
trade for a country with a current account decit.
[10 marks]
(b) Evaluate the view that, in the long term, expenditure-switching policies
(protectionism) are the most effective way to reduce a current account decit.
[15 marks]
4. (a) Explain the difference between economic growth and economic development,
and how each of these may be measured.
[10 marks]
(b) Evaluate the view that the best way that developed countries can help the growth
and development process of very poor, highly indebted countries is through a
general cancellation of debts.
[15 marks]
M10/3/ECONO/SP1/ENG/TZ1/XX/M
17 pages
MARKSCHEME
May 2010
ECONOMICS
Standard Level
Paper 1
– 2 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
– 3 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the
maximum marks indicated.
1. (a) With the aid of at least one diagram, explain the difference between a
movement along an existing demand curve for a good and a shift of the
demand curve for a good. [10 marks]
Answers should include:
a definition of demand
an explanation that a change in the price of the good itself leads to a
movement along the existing demand curve as the price of the good is one
of the axes
a reference to the ceteris paribus assumption
a correctly labelled diagram showing movement along the demand curve
and the resultant change in price and quantity demanded
an explanation that a change in any of the non-price determinants of demand
will lead to a shift of the demand curve to either the left or right e.g. income,
tastes, price of other goods
a correctly labelled diagram showing a shift of the demand curve for a good.
Answers may include:
examples of goods to illustrate such movements and shifts, particularly
complements and substitutes
diagrams may or may not include a supply curve to illustrate the change in
price and quantity.
Both a movement and a shift in demand needed for full marks (one or two
diagrams may be used).
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 4 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–3
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 4–6
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 7–8
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 9–10
– 5 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that the market forces of demand and supply will
always lead to the best allocation of resources. [15 marks]
Answers may include:
a definition of resource allocation, best allocation of resources
an explanation that “market forces of demand and supply” refers to a free
market system in which demand and supply are left alone to set prices in the
economy
an explanation of “invisible hand”
an explanation of how the price mechanism is signalled by changes in
consumer demand and producer supply
an explanation of how price acts as an incentive to consumers to make
decisions about how to get the best value for their money
an explanation of how price acts as an incentive to producers who decide
how to best allocate their productive resources in order to make the most
profit
an explanation that prices will rise or fall until a shortage or surplus is
eliminated and there is an equilibrium price and quantity arrived at in the
market
an explanation of how consumers acting in their own best interest and
producers acting in their own best interest produce a situation in which there
is no pressure in the market and resources are optimally allocated
an explanation that the free market rarely leads to the best allocation of
resources because of market failures
reference to some market failures (lack of provision of public goods,
overprovision of demerit goods, externalities
an explanation that government intervention is often necessary to assist in
resource allocation and correct market failures.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 6 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–5
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 6–9
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 10–12
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 13–15
– 7 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
2. (a) Aggregate demand consists of consumption, investment, government
spending and net exports (exports minus imports). Explain two factors
that may influence consumption and two factors that may influence
government spending. [10 marks]
Answers should include:
a definition of consumption
a definition of government spending
an explanation of any two factors which may influence consumption such
as the distribution of income, changes in wealth, the availability of credit,
social attitudes, interest rates, changes in personal taxes, confidence in
economy, expectations of future income. Reference to disposable better
than just income
an explanation of any two factors which may influence government
spending such as the population structure (e.g. an aging population), the rate
of interest/cost of government borrowing, unexpected events, e.g. a credit
crunch, war, the economic cycle (government spending usually rises in the
downturn), political decisions, unemployment.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–3
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 4–6
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 7–8
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 9–10
– 8 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the possible impact of an increase in consumption expenditure on
the performance of an economy. [15 marks]
Answers may include:
an explanation of “performance of an economy” in terms of growth,
employment, price stability and the balance of payments
possible linkages between consumption and investment
consideration of an increase in consumption leading to an increase in
real GDP (economic growth)
a diagram showing a shift of AD to the right
comparison with potential growth
the likely impact on employment, e.g. distinction between demand deficient
and structural unemployment
the possibility of demand pull inflation, depending on where the economy is
operating
the adverse impact on balance of payments if there is a large increase in
demand for imports
consumption financed by credit, payments default and the credit crunch,
may have a negative effect on the economy in the longer-term
an overall assessment of the impact.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 9 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–5
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 6–9
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 10–12
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 13–15
– 10 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
3. (a) Explain the possible consequences of an improvement in a country’s terms
of trade for a country with a current account deficit. [10 marks]
Answers should include:
a definition of current account
a definition of terms of trade: ratio of average price exports/average price
imports
an explanation of improvement in terms of trade
an explanation of current account deficit
an explanation of possible adverse effect on the current account in terms of
higher export prices/lower import prices
an explanation that a rise in export prices could improve the current account
when export prices increase because of an increase in demand for a
country’s exports
an explanation that a rise in export prices could worsen the current account
when export prices rise as a result of domestic inflation, rising costs or
greater inefficiency, or appreciation of the currency.
Answers may include:
the importance of PED for exports and imports.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 11 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–3
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 4–6
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 7–8
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 9–10
– 12 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that, in the long term, expenditure-switching policies
(protectionism) are the most effective way to reduce a current account
deficit. [15 marks]
Answers may include:
an explanation of expenditure-switching and different types of
protectionism, e.g. tariffs and quotas
an explanation of how protectionism may be used to reduce a current
account deficit
arguments against protectionism to reduce a current account deficit,
e.g. retaliation, contravention of WTO rules, impact on resource allocation
and efficiency, impact on consumer prices
consideration of expenditure reducing policies
consideration of exchange rate policies
consideration of supply-side policies to shift LRAS right and make exports
more competitive in the long run
consideration of the effect on other government objectives
overall assessment.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 13 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–5
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 6–9
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 10–12
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 13–15
– 14 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
4. (a) Explain the difference between economic growth and economic
development, and how each of these may be measured. [10 marks]
Answers should include:
a definition of economic growth
a definition of economic development
an explanation that economic growth is a quantitative concept whereas
economic development is more qualitative
an explanation that economic growth is measured by the increase in real
national income over a period of time, whereas economic development,
in addition to the latter, could also include a whole variety of other measures
such as schooling, life expectancy, provision of healthcare, income
distribution, political freedoms etc. (just a few examples would suffice).
Answers may include:
a production possibility diagram to illustrate the difference between
economic growth and economic development
a mention of specific indices such as the HDI or HPI.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 15 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–3
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 4–6
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included 7–8
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used 9–10
– 16 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that the best way that developed countries can help the
growth and development process of very poor, highly indebted countries is
through a general cancellation of debts. [15 marks]
Answers may include:
a definition of developing, highly indebted countries
examples of such countries
arguments for debt cancellation in terms of the problems of debt,
e.g. the opportunity cost of debt repayments, the impact on development,
the gearing of the economy towards exports, the potentially serious
implications of the problem on absolute poverty
arguments against debt cancellation,. e.g. the danger of moral hazard,
debt forgiveness and the creation of a dependency culture, the rewarding of
irresponsible governments and penalizing of committed ones, debt as one
of just many causes of poverty in developing countries
alternatives to debt cancellation such as aid or trade agreements
the role of the IMF and World Bank, e.g. through structural adjustment
programmes
an overall assessment as to how the highly indebted countries can best be
helped: debt write-offs versus effective aid and by industrialized countries
lifting trade barriers.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 17 – M10/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question
Very little recognition of relevant economic theory
Relevant terms not defined
Significant errors 1–5
2 Some understanding of the specific demands of the question
Some recognition of relevant economic theory
Some relevant terms defined
Some errors 6–9
3 Understanding of the specific demands of the question
Relevant economic theory explained and developed
Relevant economic terms defined
Few errors
Where appropriate, diagrams included
An attempt at evaluation 10–12
4 Clear understanding of the specific demands of the question
Relevant economic theory clearly explained and developed
Relevant economic terms clearly defined
No major errors
Where appropriate, diagrams included and explained
Where appropriate, examples used
Evidence of appropriate evaluation 13–15
M10/3/ECONO/SP2/ENG/TZ0/XX
ECONOMICS
STANDARD lEvEl
PAPER 2
Thursday 20 May 2010 (morning)
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
Answer three questions.
Use fully labelled diagrams and references to the text / data where appropriate.
2 hours
2210-5113 11 pages
© International Baccalaureate Organization 2010
22105113
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 2 –
1. Study the extract below and answer the questions that follow.
Texas oil tycoon aims to harness power of wind
One of the biggest problems facing the United States (USA) in the next 50 years is how to
satisfy its energy demands. This will require some tough choices involving opportunity cost.
Currently the USA imports 70 % of its oil needs. Should US oil drilling be increased or is the
answer to expand the use of wind energy?
T Boone Pickens, an American businessman is famous for thinking big. Over the next
four years he intends to erect 2700 wind turbines across Texas at a cost of US$54 billion.
His scheme is ve times bigger than the world’s largest wind farm, and when nished
will generate enough electricity for one million homes. His idea is to use wind-generated energy
as a substitute for natural gas used to produce electricity. The natural gas will then be used to
fuel cars in order to reduce the demand for oil. Pickens aims to make a gross prot of 25 %,
aided by a government subsidy for alternative energy creation.
Texas, with its wide open spaces, low population and steady winds, should be perfect for
wind-generated energy. Pickens has persuaded neighbouring farmers to join his scheme in
return for annual payments of between US$10 000 – US$20 000 for each turbine on their land,
which will not interfere with farming. Pickens refuses to have any of the turbines on his own
property because “they are ugly’’.
The nearby town of Sweetwater is in the middle of a huge “construction boom” that is
increasing investment demand. Two new companies have just opened, one to service the
blades of the 2700 turbines, and another renting out cranes to build the new turbines.
These new economic opportunities have increased the population of the town and created
many new jobs, not only in the manufacture of the turbines and blades, but also in
their maintenance. New roads and houses are being built, while local schools and medical
centres have been renovated using the extra tax revenue from the energy companies.
Supporters of the Pickens plan believe the US economy will benet, through increased direct
foreign investment, increased private domestic investment and a decreased need to import oil
from overseas, all of which will contribute to economic growth.
Opposition to the wind farm has come from environmentalists who are concerned with the
negative impact on wildlife and the destruction of the habitat of a rare bird. Concern has also
been expressed about the noise the turbines will make and the visual pollution to what was a
scenic area.
[Source: adapted from The Age, 19 April 2008]
(This question continues on the following page)
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 3 –
Turn over
(Question 1 continued)
(a) Dene the following terms indicated in bold in the text:
(i) opportunity cost (paragraph )
(ii) investment (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how a subsidy is likely to affect the price
and quantity of wind-generated energy.
[4 marks]
(c) Using an AD/AS diagram, explain how increased private domestic investment
and a decreased need to import oil from overseas are likely to contribute to
economic growth in the US economy (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the decision to construct the world’s largest wind farm in Texas.
[8 marks]
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 4 –
2. Study the extract and data below and answer the questions that follow.
Pakistan’s economy
There was a positive transformation in the Pakistani economy in the early 2000s.
The exchange rate was allowed to oat, exports of primary commodities increased along
with foreign direct investment and foreign reserves, while government debt fell.
By 2007, however, Pakistan faced a number of political and economic problems. In addition
to political instability, there were hailstorms and diseases destroying crops, which led to large
increases in food imports. The price of imported raw materials continued to increase with 27 %
of the higher import expenditure due to the increase in oil prices. Industrial production began
to fall. Foreign investment in shares fell from US$1.5 billion in 2006 to US$97 million.
These events have led to Pakistan’s highest current account decit ever, amounting to 8.6 %
of Gross Domestic Product (GDP) (June 2008).
Table 1
2007 2008 2009
(estimated)
Real GDP growth (%) 6.0 5.8 4.4
Current account balance (% of GDP) –5.7 –8.6 –8.3
Exchange rate (Pakistani rupees to US$) 61 66 64
Consumer price ination (%) 7.6 19 11
What is the government doing? The new budget (2008–2009) aims to reduce the budget decit
from 7 % of GDP to 4.7 % (by raising tax revenue and reducing government expenditure).
It will also introduce tariffs and quotas. While the introduction of tariffs could help reduce the
twin decits (budget decit and current account decit), it could reduce consumer welfare and
lead to an inefcient allocation of resources.
The government is preparing a plan aimed at increasing foreign exchange earnings through
export-led growth. The intention is to diversify production and exports in industries in which
Pakistan has a comparative advantage, making better use of the country’s abundant labour
supply and natural resources.
[Source: adapted from http://www.economist.com, 14 June 2008]
(This question continues on the following page)
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 5 –
Turn over
(Question 2 continued)
(a) Dene the following terms indicated in bold in the text:
(i) foreign direct investment (paragraph )
(ii) ination (Table 1).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how the continuing increase in prices of
imported raw materials (paragraph ) could have contributed to the impact on
the general price level and output in 2008 (Table 1).
[4 marks]
(c) Using the data from Table 1, explain two factors that might contribute to the
estimated fall in the ination rate in 2009.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact on the Pakistani economy of the decision to introduce tariffs
(paragraph ).
[8 marks]
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 6 –
3. Study the extract below and answer the questions that follow.
Ireland economy faces slowdown
The Irish economy has performed well over the past decade, with Irish per capita income
growth above the European Union (EU) average. Economic activity has been a result of strong
domestic demand but this is now falling.
The effects on Ireland’s labour market of a deep slump in the construction sector,
in particular, are increasing. Employment fell by 26 800 in 2007, equivalent to 9.5 % of the
sectors workforce.
The sharp fall in job numbers has led to an increase in the number of people who
are unemployed. In the second quarter of 2008, the number of unemployed people increased
by 15.2 % (compared to the same period in 2007) and the unemployment rate increased
to 5.2 %.
The scal position of Ireland has deteriorated rapidly since recording a healthy budget
surplus of 3 % of Gross Domestic Product (GDP) in 2006. Ireland is now expected to
record a budget decit of 5.8 % of GDP in 2008 as the economy slows. It is likely to increase
further if the government implements expansionary demand-side policies such as increased
government spending and decreased taxation.
The government, trade unions and businesses have been unable to agree on a new national
minimum wage deal. The minimum wage is an example of a minimum price (price oor).
Trade unions have rejected a 5 % pay increase over 21 months, after seeking a 5 % increase
per year and a minimum wage for lower paid workers. Some economists argue that allowing
an increase in the minimum wage will worsen the unemployment problem.
Some economists have argued that greater labour market exibility is needed to improve
Ireland’s unemployment problem. This could include supply-side policies such as abolishing
the minimum wage, decreasing the power of trade unions and reducing unemployment
benets.
Economists are divided on whether the government should stimulate economic activity
using demand-side policies or instead focus on supply-side policies that concentrate on
labour market reforms.
[Source: adapted from OECD Economic Outlook 83/The Economist, 21 October 2008]
(This question continues on the following page)
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 7 –
Turn over
(Question 3 continued)
(a) Dene the following terms indicated in bold in the text:
(i) unemployment rate (paragraph )
(ii) Gross Domestic Product (GDP) (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how falling domestic demand is likely to
contribute to higher levels of unemployment.
[4 marks]
(c) Using an appropriate diagram, explain how an increase in the minimum wage
could “worsen the unemployment problem” in Ireland (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate whether demand-side policies or supply-side policies should be used to
reduce the current level of unemployment in Ireland.
[8 marks]
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 8 –
4. Study the extract below and answer the questions that follow.
India faces rising currency
The Indian economy has performed remarkably well in the past 10 years, achieving levels
of growth only beaten by China. However, India is not without problems including rural
poverty and the lack of infrastructure, which threaten to limit the gains from economic growth.
Now the strength of the Indian economy and its attractiveness to foreign investors is causing
a new and unexpected problem a rising currency. This week the Indian rupee reached its
highest value against the US$ since 1998.
During 2007, foreign investment into India increased by more than 80 % to a record
US$44 billion. India is an attractive place for investment because it is a developing economy
with the potential for future economic growth. The relatively cheap labour available in India
makes it an attractive place for manufacturing and call centres. For these reasons, the Indian
rupee has appreciated 15 % against the US$ in the past year.
While large capital inows are benecial for the economy, the rising currency may cause
increasing hardship for exporters, especially India’s labour-intensive manufacturing industries.
Exports account for 10 % of the US$854 billion economy and the government is counting on
strong exports to support economic growth in India. India’s economy expanded by 9.2 % in the
past year, the highest growth rate in two decades.
The nation’s largest computer-services provider, said the Indian rupee’s “drastic’ gains will
reduce earnings by over US$7 billion. The Federation of Indian Exporters says “the currency
is overvalued and we are asking the government to intervene’’.
India’s central bank, which sold a record US$11.9 billion Indian rupees in February in a bid to
slow the currency’s gains, is, however, also concerned about India’s rising ination rate.
The Reserve Bank of India is torn between the need to contain ination, which accelerated at
7 % in February, the fastest pace for more than two years, and the need to limit the appreciation
of the currency. To reduce ination, one policy response is to increase interest rates but this is
likely to further strengthen the Indian rupee.
[Source: adapted from The Economist, 13 December 2007, Bloomberg, 17 April 2008,
and Economics Help, 12 November 2008]
(This question continues on the following page)
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 9 –
Turn over
(Question 4 continued)
(a) Dene the following terms indicated in bold in the text:
(i) economic growth (paragraph )
(ii) interest rates (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how increased foreign investment has
impacted on the value of the Indian currency (paragraph ).
[4 marks]
(c) Using an appropriate diagram, explain how strong exports will “support
economic growth in India” (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact of a rising currency on the Indian economy.
[8 marks]
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 10 –
5. Study the extract below and answer the questions that follow.
Vietnam’s changing economy
Vietnam has achieved an impressive turnaround in its agricultural sector. Whereas in the
mid-1980s the country was on the verge of famine, today it is the second-largest rice exporter
in the world. In addition, it produces and exports a variety of farm, shery and forest products,
though these activities are not always consistent with sustainable development.
Important factors behind the success of Vietnam’s agriculture were privatization of farms
and equitable distribution of land ownership, stabilization of the economy in the mid-1980s,
liberalization (freeing) of farm prices and its policies based on free trade.
Vietnam’s economic transformation is often measured in terms of the declining share of
the agricultural sector in Gross Domestic Product (GDP) and the corresponding increase
in the shares of the industrial sector and the service sector. Where the primary sector
(agriculture, forestry and sheries) used to provide over two-thirds of all jobs 10 years ago,
now it provides only about half of all jobs.
Until recently, the government and international agencies were advising Vietnamese farmers
to diversify their production, partly by moving towards non-farm industries, and partly by
diversifying crops within agriculture. An example of the diversication suggested is the
development of “craft industries” producing simple homespun products and tourism that
would bring rich tourists who would buy these products. However, in recent months there
have been rapid increases in rice prices due to increases in world demand for rice. This would
provide large benets for rice farmers. The government is now concerned that diversication
has gone too far, as some rice farmers have already switched out of rice production.
In the long term, Vietnam may face a far more serious danger. Scientists predict a rise in the
sea levels along its coast that by the year 2100 could submerge one-eighth of its land area,
as well as give rise to extreme weather conditions. As most of Vietnam’s agricultural land
and population are near the sea, such developments would be highly destructive to the country
and its economy.
[Source: adapted from The Economist, “From basket case to rice basket”, 24 April 2008]
(This question continues on the following page)
M10/3/ECONO/SP2/ENG/TZ0/XX
2210-5113
– 11 –
(Question 5 continued)
(a) Dene the following terms indicated in bold in the text:
(i) sustainable development (paragraph )
(ii) free trade (paragraph ).
[2 marks]
[2 marks]
(b) Using the concept of income elasticity of demand, explain the change in relative
importance of the agricultural sector in comparison to the industrial and the
service sectors in Vietnam (paragraph ).
[4 marks]
(c) Using an appropriate diagram, explain the likely long-term impact of a
rise in sea levels on the productive capacity of the Vietnamese economy
(paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate diversication as a policy option for improving export performance
in Vietnam.
[8 marks]
M10/3/ECONO/SP2/ENG/TZ0/XX/M
22 pages
MARKSCHEME
May 2010
ECONOMICS
Standard Level
Paper 2
– 2 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
– 3 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
1. (a) Define the following terms indicated in bold in the text:
(i) opportunity cost (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that something is being given up.
2 Precise definition 2
An explanation that it is the next best alternative foregone when an
economic decision is made.
(ii) investment (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is spending by businesses.
2 Precise definition 2
An explanation that it is the addition of capital stock to the economy
or expenditure by firms on capital.
– 4 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how a subsidy is likely to affect the
price and quantity of wind-generated energy. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled demand/supply diagram, showing a shift
to the right/increase in supply of wind-generated energy or explaining
that a subsidy paid by the government will reduce the cost of producing
wind energy and lead to an increase in supply, an increase in output and a
lower price.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled demand/supply diagram, showing a shift
to the right/increase in supply of wind-generated energy and explaining
that a subsidy paid by the government will reduce the cost of producing
wind energy and lead to an increase in supply, an increase in output and a
lower price.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
– 5 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an AD/AS diagram, explain how increased private domestic
investment and a decreased need to import oil from overseas are likely to
contribute to economic growth in the US economy.
[4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled AD/AS diagram showing a shift to the
right (increase) in the AD curve or for explaining that I (private
investment) and M (imports) are components of aggregate demand
(C G X M)+Ι+ + and an increase in spending on I and a decrease in
spending on M will increase AD. (1 component = [1 mark]
)
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled AD/AS diagram showing a shift to the
right (increase) in the AD curve
and for explaining that I (private
investment) and M (imports) are components of aggregate demand
(C G X M)+Ι+ + and an increase in spending on I and a decrease in
spending on M will increase AD. (Diagram + 1 component =
[3 marks])
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level, or
inflation. The horizontal axis may be output, real output, national output, real
national output, national income (Y), or GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
– 6 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the decision to construct the world’s largest wind farm in Texas.
[8 marks]
Responses
may include:
Possible advantages of wind-generated energy:
it is clean and efficient
it provides electricity to power one million homes (paragraph )
it can be used as a substitute for natural gas (paragraph )
it can reduce the dependency on oil (paragraph )
it can reduce the dependency on petrol (gasoline) to fuel cars
(paragraph )
it creates employment (paragraph )
it creates new investment demand
it creates extra tax revenue to provide services (paragraph )
it reduces the need to import oil and may reduce the US current account
deficit
forward and backward linkages deriving from investment in the wind farm.
Possible disadvantages of wind-generated energy:
the wind farms are ugly (paragraph )
negative externalities such as the impact on wildlife (paragraph )
the noise caused by the wind turbines (paragraph )
the cost to taxpayers of the energy subsidy
the main motive of T Boone Pickens is to make a profit.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Level
0 No valid discussion.
0
1 Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8
– 7 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
2.
(a) Define the following terms indicated in bold in the text:
(i) foreign direct investment (paragraph ) [2 marks]
level
0
Wrong definition 0
1
Vague definition 1
The idea that it is a company investing in another country.
2
Precise definition 2
An explanation that it is a long-term investment by multinational
corporations in another country.
(ii) inflation (Table 1). [2 marks]
level
0
Wrong definition 0
1 Vague definition 1
The idea that it is rising prices.
2
Precise definition 2
An explanation that it is a sustained increase in the general or average
level of prices.
– 8 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how the continuing increase in
prices of imported raw materials (paragraph
) could have contributed to
the impact on the general price level and output in 2008 (Table 1).
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing a correctly labelled AD/AS diagram (upward sloping AS)
showing a decrease in AS
or an explanation of how increased prices for
raw materials will increase the costs of production, shifting AS and
contributing to a higher price level and lower output.
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled AD/AS diagram (upward sloping AS)
showing a decrease in AS
and an explanation of how increased prices for
raw materials will increase the costs of production, shifting AS and
contributing to a higher price level and lower output.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level, or
inflation. The horizontal axis may be output, real output, national output, real
national output, national income (Y), or GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
– 9 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using the data from Table 1, explain two factors that might contribute to
the estimated fall in the inflation rate in 2009.
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For explaining that a fall in economic growth from 5.8 % to 4.4 %
should ease demand pressure on inflation
or for explaining that an
appreciation of the Pakistani rupee from 66 rupees to the US dollar to
64 rupees to the US dollar will make imports cheaper and will reduce
cost pressure on inflation.
2
Correct application of appropriate theory 3-4
For explaining that a fall in economic growth from 5.8 % to 4.4 %
should ease demand pressure on inflation
and for explaining that an
appreciation of the Pakistani rupee from 66 rupees to the US dollar to
64 rupees to the US dollar will make imports cheaper and will reduce
cost pressure on inflation.
The exact mention of “demand pressure” and “cost pressure” is not required.
Candidates may suggest that since the Real GDP growth is still positive,
demand pressure on inflation will not really be eased. If so, this should be
fully rewarded.
– 10 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact on the Pakistani economy of the decision to introduce
tariffs (paragraph
). [8 marks]
Responses
may include:
a definition of tariffs
a tariff diagram
revenue from tariffs could help reduce the budget deficit (paragraph )
tariffs on imported goods will discourage their purchase and so less imports
will reduce the current account deficit
(paragraph )
tariffs will encourage production in domestic import-competing industries
tariffs can protect and encourage employment in domestic industries
tariffs contribute to a dead-weight loss of welfare (paragraph ), because
of the loss of consumer surplus
tariffs lead to an inefficient allocation of resources (paragraph ), because
goods are produced by relatively inefficient domestic farmers as opposed to
more efficient foreign farmers
tariffs can have an inflationary impact in a country with an existing problem
of high inflation
(Table 1)
tariffs could encourage producers to diversify (paragraph ) and avoid the
risk of over-specialization
the introduction of tariffs may result in retaliation which may affect export
industries making it difficult to achieve export-led growth
the tariffs may go against WTO rules (Pakistan is a member)
a worsening of international political relations.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Level
0 No valid discussion.
0
1 Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8
– 11 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
3. (a) Define the following terms indicated in bold in the text:
(i) unemployment rate (paragraph ) [2 marks]
level
0
Wrong definition 0
1
Vague definition 1
The idea that it is the number of people unemployed in a country.
2
Precise definition 2
An explanation that it is the number of unemployed expressed as a
percentage of the workforce. (If this is expressed as an equation, then
full marks should be awarded if the equation is correct).
(ii) Gross Domestic Product (GDP) (paragraph ). [2 marks]
level
0
Wrong definition 0
1 Vague definition 1
The idea that it is a measure of output.
2
Precise definition 2
An explanation that it is the value of all goods and services produced
in an economy in a given time period.
– 12 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how falling domestic demand is
likely to contribute to higher levels of unemployment.
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing a correctly labelled AD/AS diagram showing a shift
to the left (decrease) in AD
or for explaining that as domestic
demand falls, output will fall contributing to unemployment in the
economy.
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled AD/AS diagram showing a shift
to the left (decrease) in AD
and for explaining that as domestic
demand falls, output will fall contributing to unemployment in the
economy.
Candidates may draw a demand-deficient unemployment diagram, with AD
L
shifting to the left and employment decreasing. If so, this should be fully
rewarded. (Axes would be Wages and Employment or Number of Workers.)
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level, or
inflation. The horizontal axis may be output, real output, national output, real
national output, national income (Y), or GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
– 13 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an appropriate diagram, explain how an increase in the minimum
wage could “worsen the unemployment problem” in Ireland
(paragraph ).
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing a correctly labelled labour market diagram showing a shift
upwards in the minimum wage curve
or for explaining that an increase in
the minimum wage above equilibrium will cause a fall in the quantity of
labour demanded meaning businesses require less labour causing
unemployment to go up.
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled labour market diagram showing a shift
upwards in the minimum wage curve
and for explaining that an increase
in the minimum wage above equilibrium will cause a fall in the quantity
of labour demanded meaning businesses require less labour causing
unemployment to go up.
Candidates who write about falling demand instead of quantity demanded
should not be penalized.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
The vertical axis may be wages, or price of labour. The horizontal axis may be
employment or number of workers.
– 14 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate whether demand-side policies or supply-side policies should be
used to reduce the current level of unemployment in Ireland.
[8 marks]
Responses
may include:
Evaluation of the demand-side policies:
a definition of demand-side policies
an AD/AS diagram showing a rightward shift of the AD function
a connection between the shape of the AS function and the likelihood that
demand-side policies may or may not succeed (
i.e. given the economic
slowdown in Ireland it is likely that the AD function may intersect the AS
function on a point close to its horizontal range so that an increase in AD
may result in an increase in output with negligible inflationary costs.
Otherwise, on a steeper range of AS, the demand-side policies may have a
heavy inflationary cost)
the role of increased government spending which can create additional
employment opportunities, for example, through infrastructural investment
that would stimulate the economy
(paragraph )
reduced indirect and direct taxation may successfully increase consumer
expenditure and stimulate the economy
however, if not carefully targeted, increased government spending may leak
from the circular flow of income through increased savings and/or import
spending
the large budget deficit in Ireland may prevent further government
borrowing and reduce the scope for aggregate demand stimulation
(paragraph )
reduced interest rates may allow businesses to invest more and employ more
people
reduced interest rates may not stimulate increased investment by businesses
because of pessimistic expectations during a crisis.
Evaluation of supply-side policies:
a definition of supply-side policies
an AD/AS diagram showing a rightward shift of the LRAS function
wage restraint through reduction of union power may add flexibility to the
labour market
(paragraph )
wage restraint may be conducive to social instability (industrial action) that
may further worsen the economic slowdown
reducing unemployment benefits
social consequences of reducing benefits (poverty, inequality)
decrease in income tax may provide incentives for workers to work more
decrease in income tax has a limited effect on highly-paid workers as they
opt for an increase in leisure
labour market flexibility will allow market forces to set wages and lower
costs for businesses
deregulation may have severe safety or environmental consequences
interventionist policies, such as increased training/education, encouraging
R+D, the provision of infrastructure, and improved information flows may
be high cost and involve serious opportunity costs.
– 15 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
Overall evaluation:
demand-side polices have a macroeconomic focus
demand-side policies may be more effective in times of cyclical downturns
demand-side policies are flexible in timing and focus
demand-side policies are difficult to implement with limited fiscal resources
supply-side policies have a microeconomic focus
time lags may reduce the impact of any supply-side policy in the short term
in the long run, supply-side policies may improve efficiency and assist
international competitiveness.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Level
0 No valid discussion.
0
1 Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8
– 16 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
4. (a) Define the following terms indicated in bold in the text:
(i) economic growth (paragraph ) [2 marks]
level
0
Wrong definition 0
1
Vague definition 1
The idea that it is a growth of economic activity in the economy.
2
Precise definition 2
An explanation that it is the growth of real output in an economy
over time.
(ii) interest rates (paragraph ). [2 marks]
level
0
Wrong definition 0
1 Vague definition 1
The idea that it is a payment to or from financial institutions.
2
Precise definition 2
An explanation that it is the price of borrowed or loaned money.
– 17 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how increased foreign investment
has impacted on the value of the Indian currency (paragraph ).
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing a correctly labelled demand/supply diagram showing a shift
to the right/increase in demand for the Indian rupee
or for explaining
how increased foreign investment inflows have caused an increase in the
demand for the Indian rupee and an appreciation of the currency.
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled demand/supply diagram showing a shift
to the right/increase in demand for the Indian rupee
and for explaining
how increased foreign investment inflows have caused an increase in the
demand for the Indian rupee and an appreciation of the currency.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
The vertical axis may be price (value) of rupee in US$ (or other currencies),
rupee/US$ (rupee/other currencies), or simply exchange rate. The horizontal
axis may be quantity of rupees or just quantity. A title is not necessary.
(c) Using an appropriate diagram, explain how strong exports will “support
economic growth in India” (paragraph ).
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing an AD/AS diagram showing a shift of the AD curve to the
right
or for explaining that strong exports will increase net exports
(exports minus imports) and contribute to a growth in aggregate demand,
output and, therefore, real GDP (economic growth).
2
Correct application of appropriate theory 3-4
For drawing an AD/AS diagram showing a shift of the AD curve to the
right
and for explaining that strong exports will increase net exports
(exports minus imports) and contribute to a growth in aggregate demand,
output and, therefore, real GDP (economic growth).
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level, or
inflation. The horizontal axis may be output, real output, national output, real
national output, national income (Y), or GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
– 18 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact of a rising currency on the Indian economy.
[8 marks]
Responses
may include:
the rising currency should reduce cost inflationary pressures
imported goods and services will be cheaper, including some used in the
production process, hence reducing cost inflation
consumers may decide to purchase more overseas produced goods and
services
attempts to control the rising currency (through lower interest rates) may
worsen inflation
higher interest rates may make rural poverty worse (paragraph )
a rising currency may endanger the recent record of high economic growth
(paragraph )
exports will be more expensive and demand may decline causing a
reduction in export earnings
(paragraph )
if export revenue decreases, domestic employment and incomes may decline
especially in India’s labour-intensive manufacturing industries
(paragraph )
domestic goods and services may become less price competitive with
imports
business profits may decline
unemployment may increase
foreign investment may decrease
domestic investment may decline
contractionary demand-side policies may restrict economic growth
in the long run the rupee may become less internationally competitive.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 19 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
Level
0 No valid discussion.
0
1 Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8
5.
(a) Define the following terms indicated in bold in the text:
(i) sustainable development (paragraph ) [2 marks]
level
0
Wrong definition 0
1
Vague definition 1
The idea that it is related to the use of the world’s resources.
2
Precise definition 2
An explanation that it is development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs.
(ii) free trade (paragraph ). [2 marks]
level
0
Wrong definition 0
1 Vague definition 1
The idea that it is to do with international trade.
2
Precise definition 2
An explanation that it is international trade that takes place without
any protectionism (trade barriers).
– 20 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using the concept of income elasticity of demand, explain the change in
relative importance of the agricultural sector in comparison to the
industrial and the service sectors in Vietnam (paragraph ). [4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
An explanation that YED for manufactured goods and services is higher
than for agricultural products
or for explaining that as income increases,
there will be a relatively greater increase in demand for manufactures
and services, as they become relatively more important to consumers,
than agricultural products.
2
Correct application of appropriate theory 3-4
An explanation that YED for manufactured goods and services is higher
than for agricultural products
and for explaining that as income
increases, there will be a relatively greater increase in demand for
manufactures and services, as they become relatively more important to
consumers, than agricultural products.
(c) Using an appropriate diagram, explain the likely long-term impact of a
rise in sea levels on the productive capacity of the Vietnamese economy
(paragraph ).
[4 marks]
level
0
Inappropriate answer 0
1
Identification of appropriate theory 1-2
For drawing a correctly labelled PPC diagram showing an inward shift in
the PPC
or an explanation that rising sea levels will reduce the amount of
productive land and thus reduce the productive capacity of the
Vietnamese economy.
2
Correct application of appropriate theory 3-4
For drawing a correctly labelled PPC diagram showing an inward shift in
the PPC
and an explanation that rising sea levels will reduce the amount
of productive land and thus reduce the productive capacity of the
Vietnamese economy.
Candidates may draw a diagram showing a shift of the LRAS curve to the left.
If correctly labelled and explained this can be fully rewarded. If the Keynesian
model is used, the productive capacity must be indicated on the horizontal axis.
If not indicated, only one mark may be awarded for the diagram.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For a PPC, the axes could be two alternative products, one on each axis,
e.g.
Good A and Good B: or two groups of products, e.g. consumer goods and
capital goods. A title is not necessary.
– 21 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate diversification as a policy option for improving export
performance in Vietnam. [8 marks]
Responses
may include:
explanations of diversification and specialization.
Arguments in favour of diversification (and against specialization):
avoids long-term declines in commodity terms of trade
avoids extreme agricultural price fluctuations (paragraph )
avoids developed country barriers to trade (agricultural subsidies)
reduces vulnerability to “shocks” such as extreme weather conditions
(paragraph )
takes advantage of possibilities offered by “craft industries” and tourism
(paragraph )
diversification into manufacturing provides opportunities for increased
employment, use of new technologies and development of skills
diversification allows countries to achieve economic transformation
(paragraph )
over very long term must diversify into production that will not be affected
by rising sea levels
(paragraph )
by diversifying, countries may produce a good or service in which they
might have a comparative advantage.
Arguments against diversification (and in favour of specialization):
specialization according to comparative advantage increases productive
efficiency and the quantity of output produced
specialization and trade according to comparative advantage allow countries
to consume at a point outside their PPC
specialization according to comparative advantage improves the global
allocation of resources
specialization allows countries to take advantage of economies of scale
specialization allows farmers to take advantage of increases in food prices
(paragraph )
diversification implies structural change and so may lead to structural
unemployment.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
– 22 – M10/3/ECONO/SP2/ENG/TZ0/XX/M
Level
0 No valid discussion.
0
1 Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8
M10/3/ECONO/HP3/ENG/TZ0/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 3
Thursday 20 May 2010 (morning)
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
Answer three questions.
Use fully labelled diagrams and references to the text / data where appropriate.
2 hours
2210-5107 11 pages
© International Baccalaureate Organization 2010
22105107
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 2 –
1. Study the extract and data below and answer the questions that follow.
Rising prices blamed on the “big” supermarkets
Since 1990, supermarket prices in Australia have risen twice as fast as anywhere else in the
developed world. An inquiry into supermarket prices has established that consumers are paying
much more for basic items such as bread, milk, meat and eggs compared to other developed
countries as shown in Table 1.
Table 1
Australia USA France Germany Japan
Food ination rate
(1990–2006)
68 % 46 % 28 % 17 % 4 %
The inquiry conducted by the Australian Competition and Consumer Commission into
supermarket prices, concluded that the three largest supermarket chains, Coles, Woolworths
and Franklins, are charging higher prices for their goods and services. They are acting as a
collusive oligopoly. They are earning abnormal prots (sometimes called supernormal prots
or economic prots) and are allocating resources inefciently.
In opening remarks at the commission, it was said that competition had collapsed at the
expense of consumers, creating an oligopolistic market structure, where the three largest
supermarkets control over 80 % of Australia’s food sales, as Table 2 indicates. They are
also diversifying into other areas such as banking, takeaway food, cut owers and
gasoline (petrol).
Table 2
Australia USA France Germany Japan
% share of food
sales of three largest
supermarket chains
80.4 % 21 % 38 % 47 % 17.5 %
Small independent food stores want the government to intervene and not allow the total market
share of these three supermarket chains to be larger than 75 %, with no supermarket chain
controlling more than 25 % of the market. Over the last 20 years, many small independent
food stores have closed due to the extended trading hours of the large supermarkets,
favourable rental agreements for these large stores, the economies of scale generated by their
size, and because independent food stores have been bought by the three larger companies.
The three large supermarket chains claim the existing situation should be maintained because
of the number of people they employ (173 000 people in Australia), the long-term careers in the
retail sector they provide and the service businesses they attract to rural parts of Australia.
[Source: adapted from The Age, 9 April 2008 and http://www.regional.org.au/articles/agriculture/beef/bin_retail1.htm]
(This question continues on the following page)
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 3 –
Turn over
(Question 1 continued)
(a) Dene the following terms indicated in bold in the text:
(i) collusive oligopoly (paragraph )
(ii) abnormal prots (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how collusive oligopolies can earn
abnormal prots.
[4 marks]
(c) Using an appropriate diagram, explain how the increased size of the
supermarkets has led to economies of scale (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate a decision by the Australian government to reduce the total market
share of the three largest supermarket chains to 75 % (paragraph ).
[8 marks]
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 4 –
2. Study the extract below and answer the questions that follow.
Moving towards a recession
Economic performance in the United States (USA), Western Europe and Japan according to
economic indicators such as the growth of output, investment, employment and wages, has been
getting worse in each downward phase of the business cycle since 1973. The current cycle in
the USA, which began in early 2001, has been the worst of all. Gross Domestic Product (GDP)
growth has been the slowest in any comparable cycle since the 1940s; growth in investment
is down 30 % and the creation of jobs is down 65 %. In addition, hourly wages have not
increased in real terms since 1979. This forms the background for the current economic
problems that began in 2007.
Many economists believe that the USA economy is now in recession. Falling house
prices have reduced the ability of homeowners to borrow against their property, which
in turn reduces their ability to spend freely on consumer goods and services. This fall in
consumer spending has led to businesses hiring less labour in some industries, which has
further slowed consumer spending. The construction of new homes has fallen, with sales of
new homes falling even faster, resulting in a large oversupply of homes, which will continue
to force down prices even more.
The USA Federal Government is considering tax cuts and additional government spending
to stimulate the economy, even if this increases the budget decit. The hope is to encourage
consumer spending and business investment although this may add to inationary pressures.
The chairman of the Federal Reserve (the central bank) in the USA has indicated that he is
happy to support the use of scal policy by lowering interest rates.
Cuts in indirect taxes and direct taxes affect production costs, disposable income and the
spending power of consumers, and have an impact on the allocation of resources (factors of
production). They may also have a psychological effect on investors.
[Source: adapted from The New York Times, 13 and 17 January 2008]
(This question continues on the following page)
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 5 –
Turn over
(Question 2 continued)
(a) Dene the following terms indicated in bold in the text:
(i) indirect taxes (paragraph )
(ii) resources (factors of production) (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how a fall in consumer spending could
lead to a recession.
[4 marks]
(c) Using a demand and supply diagram, explain why the price of labour (wages)
will fall if businesses hire less labour.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the role of scal policy in stimulating the USA economy.
[8 marks]
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 6 –
3. Study the extract and data below and answer the questions that follow.
Pakistan’s economy
There was a positive transformation in the Pakistani economy in the early 2000s.
The exchange rate was allowed to oat, exports of primary commodities increased along
with foreign direct investment and foreign reserves, while government debt fell.
By 2007, however, Pakistan faced a number of political and economic problems. In addition
to political instability, there were hailstorms and diseases destroying crops, which led to large
increases in food imports. The price of imported raw materials continued to increase with 27 %
of the higher import expenditure due to the increase in oil prices. Industrial production began
to fall. Foreign investment in shares fell from US$1.5 billion in 2006 to US$97 million.
These events have led to Pakistan’s highest current account decit ever, amounting to 8.6 %
of Gross Domestic Product (GDP) (June 2008).
Table 1
2007 2008 2009
(estimated)
Real GDP growth (%) 6.0 5.8 4.4
Current account balance (% of GDP) –5.7 –8.6 –8.3
Exchange rate (Pakistani rupees to US$) 61 66 64
Consumer price ination (%) 7.6 19 11
What is the government doing? The new budget (2008–2009) aims to reduce the budget decit
from 7 % of GDP to 4.7 % (by raising tax revenue and reducing government expenditure).
It will also introduce tariffs and quotas. While the introduction of tariffs could help reduce the
twin decits (budget decit and current account decit), it could reduce consumer welfare and
lead to an inefcient allocation of resources.
The government is preparing a plan aimed at increasing foreign exchange earnings through
export-led growth. The intention is to diversify production and exports in industries in which
Pakistan has a comparative advantage, making better use of the country’s abundant labour
supply and natural resources.
[Source: © The Economist Newspaper Limited, London (12 June 2008)]
(This question continues on the following page)
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 7 –
Turn over
(Question 3 continued)
(a) Dene the following terms indicated in bold in the text:
(i) exchange rate (paragraph )
(ii) foreign direct investment (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how increased spending on food imports
(paragraph ) could affect Pakistan’s exchange rate.
[4 marks]
(c) Using an appropriate diagram, explain how the continuing increase in prices for
imported raw materials (paragraph ) could have contributed to the impact on
the general price level and output in 2008 (Table 1).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact on the Pakistani economy of the decision to introduce tariffs
(paragraph ).
[8 marks]
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 8 –
4. Study the extract below and answer the questions that follow.
Vietnam’s changing economy
Vietnam has achieved an impressive turnaround in its agricultural sector. Whereas in the
mid-1980s the country was on the verge of famine, today it is the second-largest rice exporter
in the world. In addition, it produces and exports a variety of farm, shery and forest products,
though these activities are not always consistent with sustainable development.
Important factors behind the success of Vietnam’s agriculture were privatization of farms
and equitable distribution of land ownership, stabilization of the economy in the mid-1980s,
liberalization (freeing) of farm prices and its policies based on free trade.
Vietnam’s economic transformation is often measured in terms of the declining share of
the agricultural sector in Gross Domestic Product (GDP) and the corresponding increase
in the shares of the industrial sector and the service sector. Where the primary sector
(agriculture, forestry and sheries) used to provide over two-thirds of all jobs 10 years ago,
now it provides only about half of all jobs.
Until recently, the government and international agencies were advising Vietnamese farmers
to diversify their production, partly by moving towards non-farm industries, and partly by
diversifying crops within agriculture. An example of the diversication suggested is the
development of “craft industries” producing simple homespun products and tourism that
would bring rich tourists who would buy these products. However, in recent months there
have been rapid increases in rice prices due to increases in world demand for rice. This would
provide large benets for rice farmers. The government is now concerned that diversication
has gone too far, as some rice farmers have already switched out of rice production.
In the long term, Vietnam may face a far more serious danger. Scientists predict a rise in the
sea levels along its coast that by the year 2100 could submerge one-eighth of its land area,
as well as give rise to extreme weather conditions. As most of Vietnam’s agricultural land
and population are near the sea, such developments would be highly destructive to the country
and its economy.
[Source: © The Economist Newspaper Limited, London (24 April 2008)]
(This question continues on the following page)
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 9 –
Turn over
(Question 4 continued)
(a) Dene the following terms indicated in bold in the text:
(i) sustainable development (paragraph )
(ii) free trade (paragraph ).
[2 marks]
[2 marks]
(b) Using the concept of income elasticity of demand, explain the change in relative
importance of the agricultural sector in comparison to the industrial and the
service sectors in Vietnam (paragraph ).
[4 marks]
(c) Using an appropriate diagram, explain the likely long-term impact of a
rise in sea levels on the productive capacity of the Vietnamese economy
(paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate diversication as a policy option for improving export performance
in Vietnam.
[8 marks]
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 10 –
5. Study the extract below and answer the questions that follow.
Fair trade in Malawi
Malawi is one of the world’s least developed countries, with about 85 % of the population living
in rural areas. Agriculture accounts for more than 30 % of Gross Domestic Product (GDP)
and 90 % of exports. The economy depends on economic assistance from the International
Monetary Fund (IMF), World Bank and individual donor nations.
The district hospital at Mchinji in Malawi was built nearly 20 years ago to provide basic
healthcare services to the population. Healthcare services also have major external
benets for the economy (positive externalities), such as more productive workers,
lower absenteeism from work and higher economic growth. The hospital was originally built
to serve 275 000 people, but now serves 600 000. Malawi has the lowest number of doctors
per capita in the world.
Work started recently on a hospital extension. The extension has been paid for by fair trade
groundnuts, grown in Malawi and sold to British shoppers. This story is being repeated
throughout Malawi with fair trade revenues being used to improve infrastructure and
better educational opportunities. Disadvantaged producers and families are beneting from
fair trade funds.
Fair trade is seen as a form of aid. The free market was not providing enough income
to farmers, but now groundnut farmers receive a guaranteed payment above the world
equilibrium price for their goods, and use the extra payments to make improvements in
their communities. Fair trade advocates payment of fair prices and social and environmental
standards in the production of a wide range of goods. The focus is on exports from
developing to developed countries, working with very poor producers to help them achieve a
position of greater economic security and self-sufciency.
Fair trade has become one of the fastest growing retail sectors in Great Britain.
Consumers are spending more than UK£450 million (US$900 million) annually on fair trade
products.
Fair trade, however, has its critics. Free market economists argue that by encouraging
oversupply, fair trade agreements result in the inefcient allocation of resources and may
drive prices down in the long term. Other critics have pointed out that the major beneciaries
of free trade agreements are the large supermarkets rather than the poor producers in
developing countries.
[Source: adapted from The Guardian Weekly, 15 February 2008]
(This question continues on the following page)
M10/3/ECONO/HP3/ENG/TZ0/XX
2210-5107
– 11 –
(Question 5 continued)
(a) Dene the following terms indicated in bold in the text:
(i) World Bank (paragraph )
(ii) free market (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how a guaranteed price above the
equilibrium price will benet groundnut farmers (paragraph ).
[4 marks]
(c) Using an appropriate diagram, explain how the provision of hospital services
has positive externalities (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate fair trade as a means of improving the welfare of people in Malawi.
[8 marks]
M10/3/ECONO/HP3/ENG/TZ0/XX/M+
22 pages
MARKSCHEME
May 2010
ECONOMICS
Higher Level
Paper 3
2 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
1. (a) Define the following terms indicated in bold in the text:
(i) collusive oligopoly (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is where firms join together to act like a monopoly.
2 Precise definition 2
An explanation that it is a situation where a small number of firms act
together to avoid competition by resorting to agreements to fix prices
(or output).
(ii) abnormal profits (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that revenues are greater than costs.
2 Precise definition 2
An explanation that they are where a firm earns a level of revenue that
is greater than the total costs of production, including opportunity
costs (or where a firm earns a level of revenue that is greater than that
required to ensure that a firm will continue to supply its existing good
or service).
4 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(b) Using an appropriate diagram, explain how collusive oligopolies can earn
abnormal profits. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled diagram illustrating how a collusive
oligopoly can earn abnormal profits (a monopoly diagram) or an
explanation of how oligopolies can act together as a monopoly, charging
a profit-maximising price that is higher than the costs of production and
therefore earn abnormal profits.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled diagram illustrating how a collusive
oligopoly can earn abnormal profits (a monopoly diagram) and an
explanation of how oligopolies can act together as a monopoly, charging
a profit-maximising price that is higher than the costs of production and
therefore earn abnormal profits..
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For the vertical axis, the label may be price, costs, a currency or any
abbreviations of these. For the vertical axis, quantity (or Q) is sufficient.
5 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(c) Using an appropriate diagram, explain how the increased size of the
supermarkets has led to economies of scale
(paragraph )
.
[4 marks]
[4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled diagram showing a fall in the LRAC or
an explanation that economies of scale are achieved when the
supermarkets’ costs per unit of output (or average costs) decrease as the
level of output increases (a percentage increase in inputs results in a
larger percentage increase in output) as a result of e.g. bulk buying
(or any other economy of scale).
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled diagram showing a fall in the LRAC
and an explanation that economies of scale are achieved when the
supermarkets’ costs per unit of output (or average costs) decrease as the
level of output increases (a percentage increase in inputs results in a
larger percentage increase in output) as a result of e.g. bulk buying
(or any other economy of scale).
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For the vertical axis, the label may be costs, a currency or any abbreviations
of these. For the vertical axis, quantity (or Q) is sufficient. The curve must be
labelled LRAC or LAC.
6 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(d) Using information from the text/data and your knowledge of economics,
evaluate a decision by the Australian government to reduce the total
market share of the three largest supermarket chains to 75 %. [8 marks]
Responses may include:
Reasons in favour of such a decision:
reduce market share for the three largest supermarket chains allowing for
greater competition (paragraph ) with the benefits of competition such as
lower prices, higher output and more choice
less (productive and allocative) inefficiency in the allocation of resources
less risk that the dominant firms will achieve dominance in other areas
e.g. banking (paragraph )
greater opportunity for smal independent food stores
greater employment opportunities if overall output increases
a possible slowdown in food price inflation.
Reasons against such a decision:
extended hours of service to the consumer may be reduced (paragraph )
rental agreements may not be favourable for the large chains (paragraph )
less employment and career opportunities in the large chains (paragraph )
a reduction in the potential for economies of scale for the large chains
(paragraph ) with higher prices as a result.
Additional points:
reducing the market share from 80 % to 75 % might make little difference to
the market
a better policy might be for the government to ensure that collusion does not
take place.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
7 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 6-8
2. (a) Define the following terms indicated in bold in the text:
(i) indirect taxes (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that they are a payment by households/firms to government.
2 Precise definition 2
An explanation that an indirect tax is a tax on expenditure (or a tax
levied on goods and services).
(ii) resources (factors of production) (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that resources (factors of production), are land, labour,
capital (and enterprise).
2 Precise definition 2
An explanation that resources (factors of production), land, labour,
capital (and enterprise), are those needed for the production of goods
and services.
8 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(b) Using an appropriate diagram, explain how a fall in consumer spending
could lead to a recession. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled AD/AS diagram showing how a fall in
consumption (a component of AD) could lead to a fall in real output
through a shift of the AD curve to the left, or an explanation showing
how a fall in consumption (a component of AD) could lead to a fall in
real output causing negative growth.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled AD/AS diagram showing how a fall in
consumption (a component of AD) could lead to a fall in real output
through a shift of the AD curve to the left, and an explanation showing
how a fall in consumption (a component of AD) could lead to a fall in
real output causing negative growth.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level
or inflation. The horizontal axis may be output, real output, national output,
real national output, national income, GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
9 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(c) Using a demand and supply diagram, explain why the price of labour
(wages) will fall if businesses hire less labour. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled demand and supply diagram for the
labour market showing a decrease in demand by businesses for labour
will result in a lower price of labour (wages) or an explanation of how a
decrease in demand for labour will result in a lower price of labour
(wages).
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled demand and supply diagram for the
labour market showing a decrease in demand by businesses for labour
will result in a lower price of labour (wages) and an explanation of how
a decrease in demand for labour will result in a lower price of labour
(wages).
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
The vertical axis may be price, price of labour, wage, average wage or P. The
horizontal axis may be quantity of labour, quantity or Q. A title is not
necessary.
A similar and equally correct approach may be to draw a labour market
diagram with aggregate supply of labour and aggregate demand for labour.
10 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(d) Using information from the text/data and your knowledge of economics,
evaluate the role of fiscal policy in stimulating the USA economy. [8 marks]
Responses may include:
an explanation/definition of fiscal policy
an AD/AS diagram showing a rightward shift of AD
a reference to Keynesian policies.
Positive role that fiscal policy may have:
the effect direct investment may have on business investment
(paragraph )
the possible effect on consumer spending (paragraph )
lower production costs as a result of tax cuts in indirect taxes
(paragraph )
direct tax cuts increase disposable income (paragraph )
supply side benefits of increased government spending on infrastructure
possible increase in business confidence (paragraph )
multiplier and accelerator effects
impact on employment.
Negative role fiscal policy may have:
inflationary pressures conflicting with growth and the desire to stimulate the
economy (paragraph )
is the package powerful enough to convince investors?
inflexibility in that it cannot be changed easily and quickly
time lags for policy measures to have an effect
financing a budget deficit
“crowding out” effect of increased borrowing
could add to the trade deficit.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
11 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 6-8
3. (a) Define the following terms indicated in bold in the text:
(i) exchange rate (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is how much a currency is worth.
2 Precise definition 2
An explanation that it is the price (or value) of one currency expressed
or converted in terms of another, e.g. €1 = US$1.5 (example not
required).
(ii) foreign direct investment (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a company investing in another country.
2 Precise definition 2
An explanation that it is a long-term investment by multinational
corporations in another country.
12 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(b) Using an appropriate diagram, explain how increased spending on food
imports (paragraph ) could affect Pakistan’s exchange rate. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled exchange rate diagram showing how an
increase in spending on food imports results in an increase in the supply
of the currency on the foreign exchange market and a fall in the value of
the Pakistani rupee, ceteris paribus or an explanation that the increased
purchase of food imports would lead to an increase in the supply of the
currency on the foreign exchange market and a fall in the value of the
Pakistani rupee, ceteris paribus.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled exchange rate diagram showing how an
increase in spending on food imports results in an increase in the supply
of the currency on the foreign exchange market and a fall in the value of
the Pakistani rupee, ceteris paribus and an explanation that the increased
purchase of food imports would lead to an increase in the supply of the
currency on the foreign exchange market and a fall in the value of the
Pakistani rupee, ceteris paribus.
A diagram showing and explaining a fall in demand for the rupee and so a
depreciation may receive a maximum of [1 mark] for the diagram, and
[0 marks] for the explanation.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
The vertical axis may be price (or value) of the rupee in US$ (or in other
currencies), US$/rupee or exchange rate. The horizontal axis should be
quantity of rupees or just quantity (or Q). A title is not necessary.
13 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(c) Using an appropriate diagram, explain how the continuing increase in
prices for imported raw materials (paragraph ) could have contributed
to the impact on the general price level and output in 2008 (Table 1). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled AD/AS diagram (upward sloping AS)
showing a decrease in AS or an explanation of how increased prices for
raw materials will increase the costs of production, shifting AS and
contributing to a higher price level and lower output.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled AD/AS diagram (upward sloping AS)
showing a decrease in AS and an explanation of how increased prices for
raw materials will increase the costs of production, shifting AS and
contributing to a higher price level and lower output.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level, average price level, or
inflation. The horizontal axis may be output, real output, national output, real
national output, national income (Y), or GDP. Any appropriate abbreviations,
such as APL, CPI, RNO or RNY are allowable. A title is not necessary.
14 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(d) Using information from the text/data and your knowledge of economics,
evaluate the impact on the Pakistani economy of the decision to
introduce tariffs (paragraph ). [8 marks]
Responses may include:
a definition of tariffs
a tariff diagram
revenue from tariffs could help reduce the budget deficit (paragraph )
tariffs on imported goods will discourage their purchase and so less imports
will reduce the current account deficit (paragraph )
tariffs will encourage production in domestic import-competing industries
tariffs can protect and encourage employment in domestic industries
tariffs contribute to a dead-weight loss of welfare (paragraph ), because
of the loss of consumer surplus
tariffs lead to an inefficient allocation of resources (paragraph ), because
goods are produced by relatively inefficient domestic farmers as opposed to
more efficient foreign farmers
tariffs can have an inflationary impact in a country with an existing problem
of high inflation (Table 1)
tariffs could encourage producers to diversify (paragraph ) and avoid the
risk of over-specialization
the introduction of tariffs may result in retaliation which may affect export
industries making it difficult to achieve export-led growth
the tariffs may go against WTO rules (Pakistan is a member)
a worsening of international political relations.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 6-8
15 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
4. (a) Define the following terms indicated in bold in the text:
(i) sustainable development (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is related to the use of the world’s resources.
2 Precise definition 2
An explanation that it is development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs.
(ii) free trade (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is to do with international trade.
2 Precise definition 2
An explanation that it is international trade that takes place without
any protectionism (trade barriers).
16 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(b) Using the concept of income elasticity of demand, explain the change in
relative importance of the agricultural sector in comparison to the
industrial and the service sectors in Vietnam (paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
An explanation that YED for manufactured goods and services is higher
than for agricultural products or for explaining that as income increases,
there will be a relatively greater increase in demand for manufactures
and services, as they become relatively more important to consumers,
than agricultural products.
2 Correct application of appropriate theory 3-4
An explanation that YED for manufactured goods and services is higher
than for agricultural products and for explaining that as income
increases, there will be a relatively greater increase in demand for
manufactures and services, as they become relatively more important to
consumers, than agricultural products.
(c) Using an appropriate diagram, explain the likely long-term impact of a
rise in sea levels on the productive capacity of the Vietnamese economy
(paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled PPC diagram showing an inward shift in
the PPC or an explanation that rising sea levels will reduce the amount of
productive land and thus reduce the productive capacity of the
Vietnamese economy.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled PPC diagram showing an inward shift in
the PPC and an explanation that rising sea levels will reduce the amount
of productive land and thus reduce the productive capacity of the
Vietnamese economy.
Candidates may draw a diagram showing a shift of the LRAS curve to the left.
If correctly labelled and explained this can be fully rewarded. If the Keynesian
model is used, the productive capacity must be indicated on the horizontal axis.
If not indicated, only one mark may be awarded for the diagram.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For a PPC, the axes could be two alternative products, one on each axis, e.g.
Good A and Good B: or two groups of products, e.g. consumer goods and
capital goods. A title is not necessary.
17 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(d) Using information from the text/data and your knowledge of economics,
evaluate diversification as a policy option for improving export
performance in Vietnam. [8 marks]
Responses may include:
explanations of diversification and specialization.
Arguments in favour of diversification (and against specialization):
avoids long-term declines in commodity terms of trade
avoids extreme agricultural price fluctuations (paragraph )
avoids developed country barriers to trade (agricultural subsidies)
reduces vulnerability to “shocks” such as extreme weather conditions
(paragraph )
takes advantage of possibilities offered by craft industries” and tourism
(paragraph )
diversification into manufacturing provides opportunities for increased
employment, use of new technologies and development of skills
diversification allows countries to achieve economic transformation
(paragraph )
over very long term must diversify into production that will not be affected
by rising sea levels (paragraph )
by diversifying, countries may produce a good or service in which they
might have a comparative advantage.
Arguments against diversification (and in favour of specialization):
specialization according to comparative advantage increases productive
efficiency and the quantity of output produced
specialization and trade according to comparative advantage allow countries
to consume at a point outside their PPC
specialization according to comparative advantage improves the global
allocation of resources
specialization allows countries to take advantage of economies of scale
specialization allows farmers to take advantage of increases in food prices
(paragraph )
diversification implies structural change and so may lead to structural
unemployment.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
18 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 6-8
5. (a) Define the following terms indicated in bold in the text:
(i) World Bank (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is an international.
2 Precise definition 2
An explanation that it is an:
international organization whose aims include:
providing aid and advice to developing countries
reducing poverty levels
encouraging and safeguarding international investment.
Any two points are sufficient for [2 marks].
(ii) free market (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a market without any constraints.
2 Precise definition 2
An explanation that a free market exists where prices and output are
determined by demand and supply.
19 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(b) Using an appropriate diagram, explain how a guaranteed price above the
equilibrium price will benefit groundnut farmers (paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a correctly labelled demand and supply diagram with a
guaranteed price above equilibrium or an explanation that a guaranteed
price above equilibrium may mean that farmers can earn higher
income/revenues.
2 Correct application of appropriate theory 3-4
For drawing a correctly labelled demand and supply diagram with a
guaranteed price above equilibrium and an explanation that a guaranteed
price above equilibrium may mean that farmers can earn higher
income/revenues.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For the vertical axis, the label could be price of groundnuts, price or P. For the
horizontal axis, quantity of groundnuts, quantity or Q are acceptable. A title is
not necessary.
20 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(c) Using an appropriate diagram, explain how the provision of hospital
services has positive externalities (paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 1-2
For drawing a marginal social cost/marginal social benefit diagram where
there is a positive externality (either MSB>MPB or MSC<MPC) or for
an explanation that health care provides external benefits since third
parties (or the economy) benefit when people are in better health.
2 Correct application of appropriate theory 3-4
For drawing a marginal social cost/marginal social benefit diagram where
there is a positive externality (either MSB>MPB or MSC<MPC) and for
an explanation that health care provides external benefits since third
parties (or the economy) benefit when people are in better health.
Candidates who incorrectly label diagrams can earn a maximum of [3 marks].
For the vertical axis, the label could be price, price of health care, price and
costs, price and costs of health care, MSB, MSC or P. For the horizontal axis,
quantity of health care, quantity or Q are acceptable. A title is not necessary.
An alternative positive externalities diagram would be a demand and supply
diagram with a demand
private
curve and a demand
private
+
external benefit
curve (or a
private
private
curve and a supply
private
+ external
curve.
21 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
(d) Using information from the text/data and your knowledge of economics,
evaluate fair trade as a means of improving the welfare of people in
Malawi. [8 marks]
Note: To be eligible for Level 3. Candidates must relate the points in the
answer to the concept of improved economic welfare (or development) as
stated in the question.
Responses may include:
an evaluation that fair trade is an alternative to the world trading system as
producers are seen to be poor and not receiving a fair price for their product
an evaluation that fair trade enables the producer (farmer) to obtain a larger
share of the final consumer price, and emphasizes environmental
sustainability and labour rights.
Reasons why fair trade may result in improved welfare:
fair trade provides improved infrastructure and better educational
opportunities (paragraph )
allows farmers to achieve a greater degree of economic security and
self-sufficiency (paragraph )
provides higher prices for products and so a higher income for farmers
famers can benefit from training and quality management
fair trade is one of the fastest growing retail sectors in Great Britain and so
farmers in Malawi that produce fair-trade certified products may enjoy
greater demand
the emphasis on sustainability may result in increased living standards for
future generations of Malawians.
Reasons why fair trade may not result in improved welfare/arguments against
fair trade:
Malawi is one of the world’s least developed countries (paragraph ) and
will require more than fair trade to improve this situation
Malawi will still be dependent on economic assistance from the IMF,
World Bank and donor nations
fair trade that includes a guaranteed price above equilibrium may result in
surpluses and represent a misallocation of resources (paragraph )
if demand for groundnuts is inelastic, then the increase in price may result in
lower incomes if there is not sufficient demand for fair trade groundnuts
fair trade may cause Malawi to be dependent on agriculture, rather than
diversifying
most of the benefits could go to large supermarkets rather than diversifying
(paragraph )
fairtrade products may be among the first to experience a decrease in
demand in economic downturns in more developed countries, thus
continuing to make the fair-trade farmers vulnerable to forces outside their
control.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
22 M10/3/ECONO/HP3/ENG/TZ0/XX/M+
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 1-2
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 3-5
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 6-8
IB ECONOMICS 2010 Examinations: May and November examination sessions
IB ECONOMICS 2010 Examinations  May and November examination sessions
May and Nov 2010 IB Economics – Examinations Interactive! Click or tap to jump The May and November 2010 examinations May HL Paper 1 examination HL Paper 1 mark scheme HL Paper 2 examination HL Paper 2 mark scheme SL Paper 1 examination SL Paper 1 mark scheme SL Paper 2 examination SL Paper 2 mark scheme HL Paper 3 examination HL Paper 3 mark scheme Nov
May and Nov 2010 IB Economics     Examinations Interactive  Click or tap to jump  The May and November 2010 examinations M...
M10/3/ECONO/HP1/ENG/TZ1/XX 22105102 ECONOMICS Higher level PAPER 1 Wednesday 19 May 2010 (afternoon) 1 hour INSTRUCTIONS to candidates  Do not turn over this examination paper until instructed to do so.  Answer one question.  Use fully labelled diagrams and references to examples where appropriate. 2210-5102 2 pages © International Baccalaureate Organization 2010
M10 3 ECONO HP1 ENG TZ1 XX  22105102  ECONOMICS Higher level PAPER 1 Wednesday 19 May 2010  afternoon  1 hour INSTRUCTIONS...
–2– M10/3/ECONO/HP1/ENG/TZ1/XX Answer one question. Each question is worth [25 marks]. 1. (a) Explain the importance of price elasticity of demand and cross-elasticity of demand for business decision-making. [10 marks] (b) Studies have shown that the demand for tobacco tends to be highly price inelastic. Evaluate the view that governments can best reduce smoking by substantially increasing taxes on cigarettes. [15 marks] 2. (a) [10 marks] (b) Evaluate the likely impact on the economy of relying on higher interest rates to reduce the rate of inflation. 3. (a) Explain why a country may wish to reduce its rate of inflation. There has been an increasing trend in different parts of the world for countries to engage in economic integration through the formation of trading blocs. Using suitable examples, explain the different types of trading bloc that may be formed. [15 marks] [10 marks] [15 marks] (b) Evaluate a country’s decision to join a free trade area (FTA). 4. (a) Explain the difference between economic growth and economic development, and how each of these may be measured. [10 marks] (b) Evaluate the view that the best way that developed countries can help the growth and development process of very poor, highly indebted countries is through a general cancellation of debts. [15 marks] 2210-5102
   2     M10 3 ECONO HP1 ENG TZ1 XX  Answer one question. Each question is worth  25 marks . 1.    a    Explain the import...
M10/3/ECONO/HP1/ENG/TZ1/XX/M+ MARKSCHEME May 2010 ECONOMICS Higher Level Paper 1 17 pages
M10 3 ECONO HP1 ENG TZ1 XX M   MARKSCHEME May 2010  ECONOMICS  Higher Level  Paper 1  17 pages
–2– M10/3/ECONO/HP1/ENG/TZ1/XX/M+ This markscheme is confidential and for the exclusive use of examiners in this examination session. It is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of IB Cardiff.
   2     M10 3 ECONO HP1 ENG TZ1 XX M   This markscheme is confidential and for the exclusive use of examiners in this exa...
–3– M10/3/ECONO/HP1/ENG/TZ1/XX/M+ In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the maximum marks indicated. 1. (a) Explain the importance of price elasticity of demand and cross-elasticity of demand for business decision-making. [10 marks] Answers should include: a definition of PED a definition of XED the link between PED, price changes and changes in total revenue the importance of XED in terms of changes in price of substitutes and complements examples of PED and XED in real life (products with high/low elasticities; products related are complements or substitutes). Answers may include: an explanation that PED and XED are extremely difficult to accurately measure in reality use of diagrams to show the relationship between PED, price changes and changes in total revenue use of diagrams to illustrate the complement/substitute relationship. Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded. Assessment Criteria Part (a) 10 marks Level Marks 0 Completely inappropriate answer. 1 Little understanding of the specific demands of the question Very little recognition of relevant economic theory Relevant terms not defined Significant errors 1–3 Some understanding of the specific demands of the question Some recognition of relevant economic theory Some relevant terms defined Some errors 4–6 Understanding of the specific demands of the question Relevant economic theory explained and developed Relevant economic terms defined Few errors Where appropriate, diagrams included 7–8 2 3 4 Clear understanding of the specific demands of the question Relevant economic theory clearly explained and developed Relevant economic terms clearly defined No major errors Where appropriate, diagrams included and explained Where appropriate, examples used 0 9–10
   3     M10 3 ECONO HP1 ENG TZ1 XX M   In addition to the assessment criteria, use the paper-specific markscheme below. A...
–4– (b) M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Studies have shown that the demand for tobacco tends to be highly price inelastic. Evaluate the view that governments can best reduce smoking by substantially increasing taxes on cigarettes. Answers may include: cigarettes as an example of market failure having the characteristics of demerit goods use of an MSC/MSB diagram to show the negative externalities associated with the consumption of cigarettes, candidates may use a simple supply and demand diagram an explanation of inelastic demand and the implications for a tax on cigarettes; low PED means a tax may not lead to a significant decrease in quantity of cigarettes demanded distinction between inelastic demand for tobacco in general and elastic demand for particular brands the incidence of taxation may be considered consideration of the extent of the tax increase; tax may have to increase a lot to have a major impact the problem of relating the tax to the value of the external costs the impact on government revenues and spending possibilities; revenue will increase a lot in view of the low PED an assessment of alternative policies such as negative/positive advertising and direct controls. Examiners should be aware that candidates may take a different approach which if appropriate, should be awarded. Effective evaluation may be to: consider short-term versus long-term consequences examine the impact on different stakeholders discuss advantages and disadvantages prioritize the arguments. [15 marks]
   4      b   M10 3 ECONO HP1 ENG TZ1 XX M   Studies have shown that the demand for tobacco tends to be highly price inela...
–5– M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Assessment Criteria Part (b) 15 marks Level Marks 0 Completely inappropriate answer. 1 Little understanding of the specific demands of the question Very little recognition of relevant economic theory Relevant terms not defined Significant errors 1–5 Some understanding of the specific demands of the question Some recognition of relevant economic theory Some relevant terms defined Some errors 6–9 2 3 4 0 Understanding of the specific demands of the question Relevant economic theory explained and developed Relevant economic terms defined Few errors Where appropriate, diagrams included An attempt at evaluation 10–12 Clear understanding of the specific demands of the question Relevant economic theory clearly explained and developed Relevant economic terms clearly defined No major errors Where appropriate, diagrams included and explained Where appropriate, examples used Evidence of appropriate evaluation 13–15
   5     M10 3 ECONO HP1 ENG TZ1 XX M   Assessment Criteria Part  b  15 marks Level  Marks  0  Completely inappropriate an...
–6– 2. (a) M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Explain why a country may wish to reduce its rate of inflation. Answers should include: an explanation of the term rate of inflation an explanation for wishing to reduce the inflation rate in terms of the various costs of inflation. This may include the impact on: – international competitiveness – the distribution of wealth and income – savers and borrowers – fixed income recipients suffer reduced real income – certainty/uncertainty and the willingness of businesses to invest – government finances – government interest rate policy – purchasing power, pressure on wages and industrial relations – “shoe leather” and “menu” costs. Answers may include: mention of lower inflation for general economic performance, e.g. the growth rate mention of the various ways in which inflationary pressures may be reduced a distinction between moderate inflation and hyper-inflation. Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded. [10 marks]
   6    2.   a   M10 3 ECONO HP1 ENG TZ1 XX M   Explain why a country may wish to reduce its rate of inflation. Answers sh...
–7– M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Assessment Criteria Part (a) 10 marks Level Marks 0 Completely inappropriate answer. 1 Little understanding of the specific demands of the question Very little recognition of relevant economic theory Relevant terms not defined Significant errors 1–3 Some understanding of the specific demands of the question Some recognition of relevant economic theory Some relevant terms defined Some errors 4–6 Understanding of the specific demands of the question Relevant economic theory explained and developed Relevant economic terms defined Few errors Where appropriate, diagrams included 7–8 2 3 4 Clear understanding of the specific demands of the question Relevant economic theory clearly explained and developed Relevant economic terms clearly defined No major errors Where appropriate, diagrams included and explained Where appropriate, examples used 0 9–10
   7     M10 3 ECONO HP1 ENG TZ1 XX M   Assessment Criteria Part  a  10 marks Level  Marks  0  Completely inappropriate an...
–8– (b) M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Evaluate the likely effects on the economy of relying on higher interest rates to reduce the rate of inflation. Answers may include: an explanation of the use of interest rates to tackle inflation an explanation of the linkage between higher interest rates and AD the impact of higher interest rates on costs/AS the impact on output, growth, employment, the balance of payments and the exchange rate use of AD/AS diagrams the implications of using higher interest rates in dealing with cost inflation other measures to deal with inflation, e.g. supply-side policies the problem of time lags interest rates as a highly flexible tool of economic policy the distributional impact of higher interest rates on savers and borrowers overall assessment. Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded. Effective evaluation may be to: consider short-term versus long-term consequences examine the impact on different stakeholders discuss advantages and disadvantages prioritize the arguments. [15 marks]
   8      b   M10 3 ECONO HP1 ENG TZ1 XX M   Evaluate the likely effects on the economy of relying on higher interest rate...
–9– M10/3/ECONO/HP1/ENG/TZ1/XX/M+ Assessment Criteria Part (b) 15 marks Level Marks 0 Completely inappropriate answer. 1 Little understanding of the specific demands of the question Very little recognition of relevant economic theory Relevant terms not defined Significant errors 1–5 Some understanding of the specific demands of the question Some recognition of relevant economic theory Some relevant terms defined Some errors 6–9 2 3 4 0 Understanding of the specific demands of the question Relevant economic theory explained and developed Relevant economic terms defined Few errors Where appropriate, diagrams included An attempt at evaluation 10–12 Clear understanding of the specific demands of the question Relevant economic theory clearly explained and developed Relevant economic terms clearly defined No major errors Where appropriate, diagrams included and explained Where appropriate, examples used Evidence of appropriate evaluation 13–15
   9     M10 3 ECONO HP1 ENG TZ1 XX M   Assessment Criteria Part  b  15 marks Level  Marks  0  Completely inappropriate an...
– 10 – 3. (a) M10/3/ECONO/HP1/ENG/TZ1/XX/M+ There has been an increasing trend in different parts of the world for countries to engage in economic integration through the formation of trading blocs. Using suitable examples, explain the different types of trading bloc that may be formed. Answers should include: an explanation of economic integration through trading blocs an explanation of free trade areas an explanation of customs unions an explanation of common markets suitable examples. Answers may include: an explanation of preferential trading areas an explanation of complete economic integration an explanation of progress towards monetary union. Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded. [10 marks]
    10     3.   a   M10 3 ECONO HP1 ENG TZ1 XX M   There has been an increasing trend in different parts of the world for ...