Eco2017exams : simplebooklet.com

2 M17 3 ECONO HP1 ENG TZ1 XX Section A Answer one question from this section Microeconomics 1 a Explain how the overuse of common access resources can lead to negative externalities 10 b Discuss the view that the best way to reduce the threat to sustainability arising from the burning of fossil fuels is for the government to provide subsidies to firms that produce energy through renewable sources 15 2 a Explain why a loss making firm in perfect competition would shut down in the long run 10 b Discuss the view that perfect competition is a more desirable market structure than monopoly 15

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5 M17 3 ECONO HP1 ENG TZ1 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A Microeconomics 1 a Explain how the overuse of common access resources can lead to negative externalities Answers may include definitions of common access resources and negative externalities diagram to show negative externalities arising from overconsumption depletion of common access resources or production environmental degradation as a by product of production activities explanation that overuse of common access resources can lead to environmental damage or resource depletion which are forms of market failure leading to negative externalities of production or consumption examples of how overuse of common access resources leads to negative externalities such as over fishing open cast mining and deforestation Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

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6 b M17 3 ECONO HP1 ENG TZ1 XX M Discuss the view that the best way to reduce the threat to sustainability arising from the burning of fossil fuels is for the government to provide subsidies to firms that produce energy through renewable sources Answers may include definition of subsidies and sustainability diagram s to show the impact of subsidies on the market for renewable energy and the market for fossil fuels explanation that subsidies reduce the costs of production for renewable energy firms and the price of renewable energy to consumers which reduces the demand for energy produced by burning fossil fuels This creates greater sustainability in the energy market examples of subsidies on the market for renewable energy such as solar power and wind farms synthesis or evaluation discuss Discussion may include alternative policies that could be used instead of subsidies consideration of the impact of subsidies on different stakeholder groups negative effects on the fossil fuel industry It could also consider the short term costs of subsidies and the long term benefits on sustainability 15

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7 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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9 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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10 b M17 3 ECONO HP1 ENG TZ1 XX M Discuss the view that perfect competition is a more desirable market structure than monopoly Answers may include definitions of market structure perfect competition and monopoly diagram s to compare and contrast perfect competition and monopoly explanation that perfect competition has a number of advantages like lower prices greater choice and allocative and productive efficiency compared with monopoly examples of markets which have features of perfect competition and monopoly synthesis or evaluation discuss Discussion may include reference to benefits of monopoly such as economies of scale research and development natural monopoly and or the disadvantages of monopoly higher price lower output To focus on the word desirable in the question discussion may also include the advantages and disadvantages of perfect competition 15

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11 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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12 M17 3 ECONO HP1 ENG TZ1 XX M Section B Macroeconomics 3 a Explain the impact that a fall in the world price of oil might have on aggregate supply and gross domestic product GDP in an economy Answers may include definitions of aggregate supply and GDP diagram to show AS SRAS shifting to right and GDP increasing explanation that in an oil importing country a fall in the price of oil reduces production costs to industry and causes the aggregate supply to increase and GDP to rise example of economies where fall in oil prices has increased aggregate supply and GDP in an economy Explanation may include the perspective of an oil exporting country as an alternative to an oil importing country In this case a fall in the world price of oil would mean reduced export revenues and as net exports are a component of aggregate demand this would cause aggregate demand and GDP to decrease 10

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13 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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14 b M17 3 ECONO HP1 ENG TZ1 XX M Evaluate the view that economic growth is best achieved through improvements in technology Answers may include definition of economic growth diagram to show LRAS increasing and real output increasing explanation of how technological improvements cause LRAS to increase in the long term as industry becomes more productive examples of technological improvements increasing LRAS in an economy synthesis or evaluation Evaluation may include the effect of advances in technology being dependent on the skill level of the labour force and whether the technology is appropriate for the development level of the economy The response may also consider how factors other than technology might affect LRAS such as the discovery of new natural resources and the importance of aggregate demand in affecting growth in the short term A PPF diagram may be rewarded equally if used to explain economic growth effectively 15

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15 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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17 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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18 b M17 3 ECONO HP1 ENG TZ1 XX M Discuss the view that the use of monetary policy is always the best way to reduce inflation Answers may include definition of monetary policy diagram s to show the application of policy to deal with inflation AD AS explanation of the way in which policy impacts the rate of inflation examples of where such policy has been used synthesis or evaluation discuss Discussion may include the impacts of monetary policy on the economy trade employment households savings investment confidence etc It may also consider the merits of monetary policy in comparison with alternative policies to control inflation It may consider the merits of policy options in relation to cost push versus demand pull inflation 15

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19 M17 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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2 M17 3 ECONO SP1 ENG TZ1 XX Section A Answer one question from this section Microeconomics 1 a A fall in income leads to a fall in demand for a good Explain this relationship between the demand for the good and consumer income 10 b Evaluate the consequences of rising incomes on service sector producers such as hotels and primary sector producers such as rice farmers 15 2 a Explain why the consumption of merit goods such as healthy food can lead to positive externalities of consumption 10 b Discuss whether advertising by the government is the most appropriate way of increasing consumption of a merit good 15

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5 M17 3 ECONO SP1 ENG TZ1 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A Microeconomics 1 a A fall in income leads to a fall in demand for a good Explain this relationship between the demand for the good and consumer income Answers may include definitions of demand income income elasticity of demand normal good diagram to show how a fall in income leads to a fall in demand for a normal good explanation that the positive income elasticity of demand means the good is a normal good examples of normal goods necessities Award a maximum of level 2 if there is no mention of normal goods and or income elasticity Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

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6 b M17 3 ECONO SP1 ENG TZ1 XX M Evaluate the consequences of rising incomes on service sector producers such as hotels and primary sector producers such as rice farmers Answers may include definitions of service sector primary sector good diagrams to show changes in the demand for goods produced by the service sector and primary sector as income rises explanation that a rise in income leads to a rise in demand for normal goods produced by the service sector like hotels and how a rise in income leads to a less significant rise in demand for necessity goods produced in the primary sector like rice other examples could be used as long as reference is made to the correct sector examples of how demand for normal goods and necessity goods changes as incomes change synthesis or evaluation Award a maximum of level 2 if the focus is only on supply as this is a poor interpretation of the question Both the primary and the service sectors need to be covered accurately to go beyond the mid point of level 2 Evaluation may include consideration that there are some types of service sector goods such as budget hotels that might experience a fall in demand as incomes rise that some low income consumers may increase their demand significantly for rice as their incomes rise 15

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7 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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8 2 a M17 3 ECONO SP1 ENG TZ1 XX M Explain why the consumption of merit goods such as healthy food can lead to positive externalities of consumption Answers may include definitions of positive externalities merit goods diagram s to show the positive externality of consumption explanation of how healthy food will be under consumed in a competitive market because the MSB is greater than the MPB can use any example of a merit good examples of where the consumption of merit goods has led to positive externalities Award a maximum of level 2 if there is no illustration of the types of positive externalities that could occur with the merit good described for example less government spending on health care 10

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9 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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10 b M17 3 ECONO SP1 ENG TZ1 XX M Discuss whether advertising by the government is the most appropriate way of increasing consumption of a merit good Answers may include definitions of advertising and merit good diagram s to show the effect of advertising and other alternatives to advertising explanation of how advertising will shift the demand curve MPB towards the MSB curve examples of specific policies governments have used synthesis or evaluation discuss Discussion may include whether advertising will influence demand other factors that influence the demand for merit goods alternatives to advertising like subsidies legislation and direct provision 15

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11 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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12 M17 3 ECONO SP1 ENG TZ1 XX M Section B Macroeconomics 3 a Explain how aggregate demand might be affected by an increase in interest rates Answers may include definitions of AD interest rates diagram s showing the decrease in AD due to the increase in interest rates explanation of how an increase in interest rates will decrease consumption and investment as borrowing decreases or any other transmission mechanism examples of countries that have increased interest rates Award a maximum of level 2 if the response fails to link the increase in interest rates to at least two components of AD 10

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13 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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14 b M17 3 ECONO SP1 ENG TZ1 XX M Discuss whether the use of fiscal policy is the most effective way to bring an economy out of a recession Answers may include definitions of fiscal policy recession diagram to show how an increase in AD will increase real GDP explanation of how fiscal policy involves an increase in government spending or a decrease in taxes or both how an increase in government spending might create a multiplier effect on the economy leading to an increase in real GDP examples of the use of fiscal policy synthesis or evaluation discuss Discussion may include the limitations of fiscal policy like the effect on the government budget time lags the difficulty of promoting economic activity in a recession and the significance of the multiplier effect There may also be reference to alternative policies like monetary and supply side 15

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15 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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17 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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18 b M17 3 ECONO SP1 ENG TZ1 XX M Discuss the view that deflation will always be bad for an economy Answers may include definition of deflation diagram to show deflation shift of AD to the left and or shift of AS to the right explanation of the negative effects of deflation eg delayed consumption investment downward deflationary spiral possibility of financial crisis worse position for debtors borrowers examples of deflation in different countries synthesis or evaluation discuss Discussion may include consideration of the possible benefits of deflation eg increased export competitiveness caused by increases in AS and benefits to savers Consideration of the word always 15

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19 M17 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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2 M17 3 ECONO HP2 ENG TZ0 XX Section A Answer one question from this section 1 Study the extract below and answer the questions that follow Relief as Kenya raises tariff for steel and iron imports Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports In 2014 a government official announced an increased tariff on steel and iron imports Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products he explained To protect and create more jobs in the iron and steel industries tariffs on a wide range of imported iron and steel products will be increased from 0 and 10 to 25 he said The government official further stated that as well as protecting the local industries from cheaper imports the protectionist measures would raise an additional 2 6 billion Kenyan shillings Kenya s currency annually in government revenue and support economic growth The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers The government remains focused on improving the business environment Over the past six months the government has made it easier to register a company and trade across borders The time taken to move goods out of the main harbour has fallen sharply non tariff barriers such as roadblocks have also been reduced Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges However there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business Kenya sees gross domestic product GDP growth picking up but current account a concern Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports particularly for agriculture that makes up nearly a quarter of the Kenyan economy The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services and Kenya s large and persistent current account deficit of over 10 of gross domestic product GDP in the last three years This is a major concern for sustained economic growth and the value of the Kenyan shilling Sources adapted from www standardmedia co ke 13 June 2014 www af reuters com 25 July 2014 and www cnbcafrica com 25 November 2013 This question continues on the following page

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3 M17 3 ECONO HP2 ENG TZ0 XX Question 1 continued a i Define the term tariff indicated in bold in the text paragraph 2 ii Define the term economic growth indicated in bold in the text paragraph 2 b Using an international trade diagram explain the impact on the Kenyan government of implementing a tariff on steel imports 4 c Using an AD AS diagram explain how good economic growth rates in neighbouring countries like Uganda benefit Kenya s economy paragraph 4 d Using information from the text data and your knowledge of economics evaluate the claim that trade protection measures will support economic growth in Kenya 8 Turn over

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M17 3 ECONO HP2 ENG TZ0 XX 4 2 Study the extract and data below and answer the questions that follow Australia s terms of trade Australia s terms of trade fell sharply in the three months through to June 2015 the largest fall since the global financial crisis of 2008 Official trade price data released by the Australian Bureau of Statistics ABS imply the terms of trade slumped by about 5 8 from the March quarter This may worsen the current account deficit The terms of trade index is now significantly below its September 2011 peak because of ongoing falls in the prices of iron ore coal and energy This is of critical importance given Australia s growing reliance on income from exports of liquefied natural gas The golden age of commodity driven income growth is long gone said an economist at Commonwealth Bank The continued fall in the terms of trade reflects a pronounced fall in the purchasing power of Australian households and businesses This has been a familiar theme over the past few years he said Basically falling commodity prices namely iron ore and coal have weighed heavily on export revenues and therefore real gross national income growth Falling prices for exports are likely to damage the Australian government s revenue expectations and to damage hopes for any rebound in economic strength in the near future While the quantity of export shipments chiefly iron ore continues to break records the revenues received by the nation s biggest exporters continue to fall and several key economists fear that this may lead to a recession This would break a 24 year run of unbroken economic growth The Australian dollar s 0 4 fall in the exchange rate has done little to offset this effect and the Reserve Bank of Australia continues to signal that it may take further measures to lower its current price of around AU 1 US 0 73 The ongoing terms of trade collapse highlights the urgency for governments and companies to accelerate efforts at encouraging productivity The manager of the Reserve Bank of Australia said Australia s dreadful productivity effort over the last decade was masked by the rapidly increasing terms of trade up until 2013 This kept our income growing but the weakness now is harshly exposed as commodity prices slide Figure 1 Export and import indices for Australia Year 2011 2015 Index of export prices 100 Index of import prices 100 77 108 Sources Extract Adapted from Fairfax Syndication www afr com news 30 July 2015 Table ABS data used with permission from the Australian Bureau of Statistics July 2015 www abs gov au This question continues on the following page

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5 M17 3 ECONO HP2 ENG TZ0 XX Question 2 continued a i Define the term current account deficit indicated in bold in the text paragraph 2 ii Define the term gross national income indicated in bold in the text paragraph 2 b Using a definition of price elasticity of demand explain why the revenues received by the nation s biggest exporters continue to fall paragraph 4 c Using a definition of the terms of trade explain the terms of trade change in Australia from 2011 to 2015 Figure 1 4 d Using information from the text data and your knowledge of economics discuss the possible effects of the fall in Australia s terms of trade on the Australian economy 8 Turn over

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6 M17 3 ECONO HP2 ENG TZ0 XX Section B Answer one question from this section 3 Study the extract and data below and answer the questions that follow Indonesia s economy Indonesians hope that their new president will be able to speed up reforms to stimulate economic growth and economic development These reforms include upgrading infrastructure reducing red tape excessive regulations and reducing corruption It is also hoped that he will increase Indonesia s global competitiveness create new jobs and educate one of the world s youngest workforces Some government policies are already being implemented These include a large power plant construction programme tax incentives to infant industries and tax cuts for industries like transport telecommunications metal production and agricultural processing In addition there has been a decision to reduce fuel subsidies in order to contribute funds towards the government s record US 22 billion investment in infrastructure projects The subsidies had kept fuel prices low in a country where millions of people live in poverty Despite the policies Indonesia is struggling Economic growth is slow and consumer confidence has deteriorated Indonesia s main export commodities are coal gold and palm oil for which prices have fallen The inflation rate is 7 26 which is above the central bank s target range of 3 to 5 Slower growth in the world economy makes the situation even worse for Indonesia s struggling economy Economists have said that the president must put his efforts into improving export competitiveness by making investments in education and training The costs of doing business in Indonesia are high due to paperwork and confusing regulations The government has adopted policies to improve this These policies aim to create certainty and transparency for foreign investors and to empower small businesses which play a critical part in Indonesia s economy Other policies such as obtaining loans and encouraging micro credit institutions make it easier to gain access to credit Trade protection and intervention are increasing as policymakers look to reduce imports manage markets and promote domestic industries This question continues on the following page

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7 M17 3 ECONO HP2 ENG TZ0 XX Question 3 continued Figure 1 Indonesian development statistics Relative poverty of population Absolute poverty in millions Gini coefficient Human Development Index HDI value 2007 2008 2009 2010 2011 2012 2013 2014 16 6 15 4 14 2 13 3 12 5 11 7 11 5 11 0 37 35 33 31 30 29 29 28 0 35 0 35 0 37 0 38 0 41 0 41 0 41 0 654 0 671 0 678 0 681 0 684 Sources adapted from World Bank and Statistics Indonesia www legalbusinessonline com accessed 18 September 2015 www indonesia investments com accessed 23 August 2015 www hdr undp org accessed 23 August 2015 www bloombergview com accessed 9 August 2015 www reuters com accessed 9 August 2015 www lowyinterpreter org accessed 23 August 2015 and www data worldbank org accessed 23 August 2015 signifies no data available 2 a i Define the term infrastructure indicated in bold in the text paragraph ii Define the term micro credit indicated in bold in the text paragraph 2 b Using a demand and supply diagram explain the impact on the market for fuel of the government s decision to reduce fuel subsidies paragraph 4 c d Using a production possibilities curve PPC diagram explain how the government s record US 22 billion investment in infrastructure projects will affect Indonesia s production possibilities paragraph 4 Using information from the text data and your knowledge of economics discuss the possible impacts of market oriented and interventionist policies on Indonesia s economic development 8 Turn over

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8 4 M17 3 ECONO HP2 ENG TZ0 XX Study the extract and data below and answer the questions that follow Zambia s reliance on copper exports Due to its economic success Zambia has recently been classified as a middle income country by the World Bank According to the United Nations UN classification Zambia is in the medium human development category However outside mining and export areas the standard of living remains extremely low for Zambians Zambia is one of the world s top producers of copper The country s economy is reliant on copper exports which make up 80 of export earnings Mining employs approximately 90 000 people and contributes approximately 25 30 of government revenue in Zambia From 1997 to 2013 mining attracted US 12 6 billion in foreign direct investment helping Zambia become one of Africa s top economic performers with average annual gross domestic product GDP growth of 6 4 over the last decade But now foreign and local businesses including giant multinational mining corporations and small Zambian companies have been hit hard by a rapid fall in the price of copper In January 2015 the price reached a five and a half year low of approximately US 5353 per tonne below the estimated marginal cost of production of US 5500 Sadly for many domestic Zambian mines their marginal costs are even higher because their mines are old deep and expensive to operate The fall in commodity prices is linked to the slowdown in Chinese economic growth China accounts for 45 of global copper consumption The situation highlights the vulnerability of Africa s resource dependent nations to changes in China s economy This is an indicator of the need for Zambia to diversify its economy away from primary commodities This will require the government to implement structural reforms to improve the supply side of the economy Zambia is facing other economic problems as well as the falling price of copper Most of Zambia s electricity is produced from hydropower but a severe drought has led to widespread power cuts further threatening copper mining The power problems and fall in copper prices have driven the Zambian kwacha Zambia s currency to record lows due to a widespread selling of currencies which are linked to commodities It lost 17 of its value against the US dollar from December 2014 through to the end of March 2015 The weakness of the Zambian kwacha is raising import costs and feeding into inflation The governing Patriotic Front party which has been in power since 2011 attracted voters by promising to share the country s mineral wealth more equitably raise wages and improve infrastructure But now the government is struggling to maintain fiscal discipline as the budget deficit has risen to an unacceptable level of approximately 10 of GDP This question continues on the following page

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9 M17 3 ECONO HP2 ENG TZ0 XX Question 4 continued There has also been much attention to the unsustainable mining practices of foreign and domestic mines in Zambia These have added to Zambia s challenges of poverty alleviation economic growth and economic development Sources adapted from www reuters com 8 September 2015 Financial Times Zambia s copper belt reels as price falls 26 January 2015 Financial Times Zambia bears the brunt of China s economic slowdown 9 September 2015 Wall Street Journal Copper Mine Shutdown Threatens Zambia s Economy 3 August 2015 and World Bank Making Mining Work for Zambia 17 June 2015 Figure 1 Selected economic indicators for Zambia Malawi Sub Saharan Africa and middle income countries Removed for copyright reasons a i Define the term foreign direct investment indicated in bold in the text paragraph 2 ii Define the term marginal cost indicated in bold in the text paragraph 2 b Using an AD AS diagram explain how the falling value of the Zambian kwacha Zambia s currency is feeding into inflation paragraph 4 c Using a Lorenz curve diagram explain the meaning of the different Gini coefficient values for Zambia and Malawi shown in Figure 1 4 d Using information from the text data and your knowledge of economics discuss the possible impacts of Zambia s reliance on copper production on its economic development 8

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5 M17 3 ECONO HP2 ENG TZ0 XX M Use the paper specific markscheme together with the markbands Award up to the maximum marks as indicated Section A 1 a i Define the term tariff indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term economic growth indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition The idea that it is a barrier to trade or a tax Accurate definition An explanation that it is a tax on imported goods 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is a growing economy or an increase in GDP Accurate definition An explanation that it is one of the following an increase in real GDP an increase in the real value of output over time an increase in potential output N B The term over time is not necessary for 2 2 Marks 0 1 2

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6 b M17 3 ECONO HP2 ENG TZ0 XX M Using an international trade diagram explain the impact on the Kenyan government of implementing a tariff on steel imports Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve with enough labelling so that it is possible to indicate in some way the area representing government revenue or for providing an explanation that the tariff causes the world supply curve to shift upwards or the tariff causes the price to rise creating government revenue 1 with the amount referenced to the diagram 2 There is a correct diagram and an accurate written response For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve with enough labelling so that it is possible to indicate in some way the area representing government revenue and for providing an explanation that the tariff causes the world supply curve to shift upwards or the tariff causes the price to rise creating government revenue 1 with the amount referenced to the diagram 2 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 The use of P and Q on the axes is sufficient for a demand and supply diagram The world supply curve must be labelled Sw or Sworld A title is not necessary

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7 c M17 3 ECONO HP2 ENG TZ0 XX M Using an AD AS diagram explain how good economic growth rates in neighbouring countries like Uganda benefit Kenya s economy paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled AD AS diagram showing a shift of the AD curve to the right and an increase in the real GDP or for providing an explanation that economic growth in neighbouring countries is likely to lead to an increase in Kenyan exports leading to an increase in AD and real GDP There is a correct diagram and an accurate written response For drawing a correctly labelled AD AS diagram showing a shift of the AD curve to the right and an increase in the real GDP and for providing an explanation that economic growth in neighbouring countries is likely to lead to an increase in Kenyan exports leading to an increase in AD and real GDP Candidates who incorrectly label diagrams can receive a maximum of 3 For AD AS the vertical axis may be price level or average price level The horizontal axis may be output real output national output real national output national income or GDP A title is not necessary Marks 0 1 2 3 4 4

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8 d M17 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the claim that protection measures will support economic growth in Kenya Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definition of economic growth definition of protectionist measures Strengths of protectionist measures infant industry argument allows steel and iron industry time to become internationally competitive which can bring about growth helps diversify economy away from over reliance on primary exports which is necessary for sustained growth paragraph create more jobs thus increase consumption AD and growth diagram paragraph raises government revenue paragraph that can be invested by the government in ways that will promote growth if imports are being unfairly subsidized protectionism will level the playing field paragraph can help correct the persistent current account deficit which is hindering growth paragraph 8

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9 M17 3 ECONO HP2 ENG TZ0 XX M Limitations of protectionist measures does not encourage long term efficiency which may be better achieved through deregulation paragraph inefficient allocation of resources argument protected industries can become over reliant on government support and so may not contribute to economic growth politically difficult to remove protectionist measure once in place revenue from tariffs can be subject to corruption potential problems of retaliatory tariffs from trading partners which could damage Kenya s exports and thus threaten future growth removing barriers and deregulation administrative barriers rather than protectionism could encourage domestic entrepreneurship and FDI which will support growth tariffs increase cost of doing business paragraph for those producers reliant on imported components higher prices on steel and iron which will increase input costs for construction and infrastructure projects necessary for economic growth higher input costs may reduce SRAS causing a reduction in real GDP threatening growth to achieve growth Kenya should be producing goods in which they have a comparative advantage not in which they need protectionism Any reasonable discussion

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10 2 a i Define the term current account deficit indicated in bold in the text paragraph Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is when the net flow of money from trade in goods and services is negative or that the value of imports is greater than the value of exports Accurate definition An explanation that it is when the net flow of money from trade in goods and services and income flows and or transfers is negative 2 Marks 0 1 2 Define the term gross national income indicated in bold in the text paragraph Level 0 1 M17 3 ECONO HP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The idea that it is the total value of output Accurate definition An explanation that it is the total value of incomes or output or expenditure earned by a nation s factors of production regardless of where the assets are located or gross domestic product plus net property income from abroad 2 Marks 0 1 2

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11 b M17 3 ECONO HP2 ENG TZ0 XX M Using a definition of price elasticity of demand explain why the revenues received by the nation s biggest exporters continue to fall paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For providing an accurate definition of price elasticity of demand or formula or for noting that demand for commodities tends to be inelastic and since prices of exports are falling total revenue will be falling because the percentage change in quantity is less than the percentage change in price The written response is accurate For providing an accurate definition of price elasticity of demand or formula and for noting than demand for commodities tends to be inelastic and since prices of exports are falling total revenue will be falling because the percentage change in quantity is less than the percentage change in price 4 Marks 0 1 2 3 4 NB the definition of PED may be integrated with the explanation and does not have to be separately defined c Using a definition of the terms of trade explain the terms of trade change in Australia from 2011 to 2015 Figure 1 Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For defining the terms of trade as the ratio of a country s average export prices to their average import prices or for giving the equation Terms of trade Average export prices Average import prices x 100 or for explaining that there was a fall in the terms of trade index that could have been caused by either the fall in the average prices of Australia s exports and or the increase in the average prices of Australia s imports The written response is accurate For defining the terms of trade as the ratio of a country s average export prices to their average import prices or for giving the equation Terms of trade Average export prices Average import prices x 100 and for explaining that there was a fall in the terms of trade index that could have been caused by either the fall in the average prices of Australia s exports and or the increase in the average prices of Australia s imports 4 Marks 0 1 2 3 4 NB 1 may be given for the explanation that the terms of trade is an indication of the amount of exports needed to buy imports

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12 d M17 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics discuss the possible effects of the fall in Australia s terms of trade on the Australian economy Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include definition of terms of trade it may harm the current account balance paragraph depending upon PED Australia s reliance on export income of energy paragraph fall in purchasing power for households and businesses paragraph pressure on real GDP growth paragraph effects upon government revenue paragraph the effect on revenues of domestic producers and thus a fall in investment may lead to a recession paragraph the pressure to improve productivity supply side policies paragraph the need to sell more exports to cover imports and the overuse of resources resulting in negative externalities problems of being dependent on commodity exports and price volatility Any reasonable discussion 8

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13 M17 3 ECONO HP2 ENG TZ0 XX M Section B 3 a i Define the term infrastructure indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term micro credit indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition The idea that it is any one of the following is sufficient large scale services or facilities of a country necessary for economic activity add to the capital stock of a nation usually supplied by the government Accurate definition An explanation that it is any two of the following is sufficient large scale services or facilities of a country necessary for economic activity add to the capital stock of a nation usually supplied by the government The work does not meet a standard described by the descriptors below Vague definition The idea that it is a small loan Accurate definition An explanation that it is a small loan plus one further descriptor such as micro credit allows poor people to set up a small scale business micro credit is loaned to borrowers who do not have security collateral at a low rate of interest 2 2 Marks 0 1 2

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14 b M17 3 ECONO HP2 ENG TZ0 XX M Using a demand and supply diagram explain the impact on the market for fuel of the government s decision to reduce fuel subsidies paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity or for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity There is a correct diagram and an accurate written response For drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity and for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For a demand and supply diagram the vertical axis should be price or p The horizontal axis should be quantity or q A title is not necessary 4

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15 c M17 3 ECONO HP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain how the government s record US 22 billion investment in infrastructure projects will affect Indonesia s production possibilities paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a PPC outward shift showing an increase in production possibilities in Indonesia or for explaining that the government s record US 22 billion investment in infrastructure projects would likely improve the quality and or the quantity of the factors of production capital and therefore may increase production possibilities and or potential economic output There is a correct diagram and an accurate written response For drawing a PPC outward shift showing an increase in production possibilities in Indonesia and for explaining that the government s record US 22 billion investment in infrastructure projects would likely improve the quality and or the quantity of the factors of production capital and therefore may increase production possibilities and or potential economic output Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 An alternate approach would be to explain that improved infrastructure allows firms to make more efficient use of their factors of production leading to increased production possibilities For a PPC diagram there must be two goods or groups of goods competing for the same resources on the axes Good X and Good Y are appropriate but simply X and Y are not sufficient 4

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16 d M17 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics discuss the possible impacts of market oriented and interventionist policies on Indonesia s economic development Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include definition of economic development explanation of supply side policies explanation definition of interventionist policies paragraph and explanation definition of market oriented supply side policies paragraph and examples of market oriented policies reducing red tape tax cuts tax incentives reducing fuel subsidies examples of interventionist policies infrastructure projects investment in education and training increased trade protection access to micro credit 8

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17 M17 3 ECONO HP2 ENG TZ0 XX M Benefits of government intervention government spending on infrastructure upgrading infrastructure paragraph including power plants paragraph which could lead to increased growth and can contribute to economic development create new jobs paragraph more employment leads to economic growth higher incomes a reduction in the unemployment rate and thus contributes to economic development educate one of the world s youngest workforces paragraph this would allow the young workforce to get better paid jobs and support their families better increased access to credit and micro credit paragraph this would allow entrepreneurs to take out loans that otherwise they may not have access to Having access to credit might stimulate the number of small businesses in Indonesia which play a critical part in Indonesia s economy paragraph allowing for increased incomes and standards of living increased trade protection paragraph this would allow domestic firms to set up or survive it protects already existing businesses from cheaper imports allowing economic growth to happen more employment contributes to economic development Concerns weaknesses of about government intervention interventionist policies may lead to inefficiency bureaucracy and corruption which hinder economic growth and economic development which the citizens are hoping the new president will reduce paragraph budget implications of increased government spending with possible implications for future government spending on development objectives poor planning of project and no long term plans Benefits of market oriented policies reducing red tape paragraph less bureaucracy and deregulation might lead to more incentives to set up formal businesses which may lead to economic growth and economic development more jobs more foreign investment tax cuts tax incentives paragraph industries like transport telecommunications metal production and agricultural processing which are now promoted on a national scale which may lead to economic growth and economic development through more jobs reducing corruption paragraph reducing costs for individuals and firms more opportunities for entrepreneurs more formal businesses that pay tax Concerns weaknesses of about market oriented policies reducing fuel subsidies paragraph allowing world prices to determine the price of fuel which might be seen as a necessity in Indonesia for transport cooking likely will result in higher prices of this essential product This could be problematic for the 28 million people in absolute poverty Figure 1 greater inequality which already exists Figure 1 intervention may be necessary to provide merit goods correct market failures and reduce poverty but market oriented policies may be needed to ensure a high enough rate of economic growth which is already slow paragraph Any reasonable discussion

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18 4 a i Define the term foreign direct investment indicated in bold in the text paragraph Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is investment by companies abroad Accurate definition An explanation that it is any two of the following long term investment in another country Investment spending on capital by a multinational corporation MNC investment in another country representing at least 10 ownership investment in productive facilities 2 Marks 0 1 2 Define the term marginal cost indicated in bold in the text paragraph Level 0 1 M17 3 ECONO HP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The idea that it is the extra costs of production Accurate definition An explanation that is the extra cost of producing an additional unit of output Or The change in total costs divided by the change in output quantity Marks 0 1 2 2

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19 b M17 3 ECONO HP2 ENG TZ0 XX M Using an AD AS diagram explain how the falling value of the Zambian kwacha Zambia s currency is feeding into inflation paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled AD SRAS diagram showing a shift of the SRAS to the left and an increase in the price level or for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus cost push inflation There is a correct diagram and an accurate written response For drawing a correctly labelled AD SRAS diagram showing a shift of the SRAS to the left and an increase in the price level and for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus cost push inflation Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For AD AS the vertical axis may be price level average price level or APL The horizontal axis may be real output national output real GDP national income Y or GDP A title is not necessary 4

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20 c M17 3 ECONO HP2 ENG TZ0 XX M Using a Lorenz curve diagram explain the meaning of the different Gini coefficient values for Zambia and Malawi shown in Figure 1 Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled diagram showing two Lorenz curves with the Lorenz curve for Malawi closer to the line of equality than the curve for Zambia or for an explanation that Malawi s Gini coefficient is lower than Zambia s Gini coefficient which means that Malawi s Lorenz curve is closer to the line of perfect equality and so income distribution is more equal There is a correct diagram and an accurate written response For drawing a correctly labelled diagram showing two Lorenz curves with the Lorenz curve for Malawi closer to the line of equality than the curve for Zambia and for an explanation that Malawi s Gini coefficient is lower than Zambia s Gini coefficient which means that Malawi s Lorenz curve is closer to the line of perfect equality and so income distribution is more equal 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 The two curves may be shown on one graph or may be shown on two graphs If using two graphs it must be clear that Malawi s curve is closer to the line of equality than Zambia s The vertical axis should be labelled cumulative of income or of income and the horizontal axis should be cumulative of population or of population A title is not necessary There must be a diagonal line but it is not a requirement that it is labelled There should be labels to indicate the difference between the two Lorenz curves

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21 d M17 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics discuss the possible impacts of Zambia s reliance on copper production on its economic development Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss required candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include definition of economic development Possible positive consequences may have been instrumental in allowing Zambia to become both a middle income and a medium human development country paragraph Zambian HDI higher than that of the sub Saharan average Figure 1 even though its GNI per capita is lower This suggests that its economic development might be benefitting from the economic growth creation of jobs in the copper sector paragraph leading to higher incomes and improved standards of living generation of tax government revenue paragraph which may be used to finance development objectives through spending on health education and infrastructure attraction of FDI strong economic growth paragraph plus the theoretical benefits of FDI increase in AD diagram increase in LRAS diagram jobs government revenue multiplier effects training for workers and the ways that these might impact upon economic development increased incomes improved skill levels government revenue to finance development objectives paragraph 8

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22 M17 3 ECONO HP2 ENG TZ0 XX M Possible negative consequences resource curse arguments while growth rates have been good there is evidence to suggest that the benefits have not been shared equitably paragraph paragraph Figure 1 with inequality and poverty data vulnerable to price volatility both demand and supply of copper likely to be inelastic so a fall in demand from China leads to a significant fall in the price paragraph falling price may lead to a fall in Zambia s terms of trade since copper generates 80 of its export revenues If the terms of trade deteriorate the current account will worsen since demand for copper is likely to be inelastic copper mining uses a lot of hydropower possibly diverting its use from households and other industries the currency is vulnerable to changes in the price of copper threat to government budget when the price falls making it difficult for the government to finance its development objectives fluctuating revenues make it difficult for governments to plan for spending on development objectives copper mining may generate external costs and represent a threat to sustainable development negative externalities of production diagram Any reasonable discussion

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2 M17 3 ECONO SP2 ENG TZ0 XX Section A Answer one question from this section 1 Study the extract below and answer the questions that follow Relief as Kenya raises tariff for steel and iron imports Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports In 2014 a government official announced an increased tariff on steel and iron imports Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products he explained To protect and create more jobs in the iron and steel industries tariffs on a wide range of imported iron and steel products will be increased from 0 and 10 to 25 he said The government official further stated that as well as protecting the local industries from cheaper imports the protectionist measures would raise an additional 2 6 billion Kenyan shillings Kenya s currency annually in government revenue and support economic growth The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers The government remains focused on improving the business environment Over the past six months the government has made it easier to register a company and trade across borders The time taken to move goods out of the main harbour has fallen sharply non tariff barriers such as roadblocks have also been reduced Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges However there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business Kenya sees gross domestic product GDP growth picking up but current account a concern Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports particularly for agriculture that makes up nearly a quarter of the Kenyan economy The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services and Kenya s large and persistent current account deficit of over 10 of gross domestic product GDP in the last three years This is a major concern for sustained economic growth and the value of the Kenyan shilling Sources adapted from www standardmedia co ke 13 June 2014 www af reuters com 25 July 2014 and www cnbcafrica com 25 November 2013 This question continues on the following page

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3 M17 3 ECONO SP2 ENG TZ0 XX Question 1 continued a i Define the term tariff indicated in bold in the text paragraph 2 ii Define the term economic growth indicated in bold in the text paragraph 2 b Using an international trade diagram explain the impact on the Kenyan government of implementing a tariff on steel imports 4 c Using an exchange rate diagram explain why a deficit in the current account may result in downward pressure on the Kenyan shilling Kenya s currency paragraph 4 d Using information from the text data and your knowledge of economics evaluate the claim that trade protection measures will support economic growth in Kenya 8 Turn over

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4 2 M17 3 ECONO SP2 ENG TZ0 XX Study the extract below and answer the questions that follow Australian economy feels the effects of falling iron ore price Iron ore is Australia s largest export and the double effect of slowing growth in China and higher levels of production in Australia has driven the price of iron ore lower In addition the Australian dollar AU has experienced a 10 depreciation against the US dollar US These two factors combined have caused a dramatic worsening in the current account Australian mining companies are losing significant revenue from falling commodity prices and this is further worsened by the rapidly depreciating currency The Australian dollar traded at US 0 7375 on Wednesday nearly at a six year low Australia recorded a monthly balance of trade deficit of AU 2 61 billion in May 2015 compared with a deficit of AU 1 61 billion a year earlier The increasing deficit in Australia s balance of trade is an indicator of potential declines in growth and employment according to a foreign currency expert The price of iron ore has fallen more than 67 between February 2013 and July 2015 In Australia falling iron ore prices create downward pressure on economic growth Australia s real gross domestic product GDP grew 2 in 2015 down from 2 5 in 2014 Some economists noted that falling commodity prices reduced Australia s export revenues by more than 2 of GDP in 2015 An expanding group of Australian based economists argue that the central bank should further cut interest rates because of global economic uncertainty falling commodity prices weak consumer demand and persistent weakness in non mining sectors such as tourism and education exports Australia has been a popular destination for tourists and attracts many international students Sources Sydney Morning Herald adapted from http www smh com au business markets china panic feeds into australiansharemarket 20150708 gi7nyk html Marketwatch adapted from www marketwatch com accessed 26 July 2015 Reprinted with permission of MarketWatch Copyright 2015 Dow Jones Company Inc All Rights Reserved Worldwide a i Define the term depreciation indicated in bold in the text paragraph 2 ii Define the term current account indicated in bold in the text paragraph 2 b Using an exchange rate diagram explain why slowing growth in China may have caused a depreciation of the Australian dollar paragraph c d 4 Using a demand and supply diagram explain why the double effect of slowing growth in China and higher levels of production in Australia has driven the price of iron ore lower paragraph 4 Using information from the text data and your knowledge of economics discuss the possible consequences for the Australian economy of the fall in the value of the Australian dollar 8

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6 M17 3 ECONO SP2 ENG TZ0 XX Question 3 continued Angola Angola s economy is driven by its oil sector It is the second largest oil producer in Africa Oil production and its supporting activities contribute about 50 of gross domestic product GDP more than 70 of government revenue and more than 90 of the country s exports Diamonds contribute an additional 5 to exports Subsistence agriculture provides the main livelihood for most people in Angola but half of the country s food is still imported Since 2005 the Angolan government has borrowed billions of US dollars from China Brazil Portugal Germany Spain and the European Union EU to help rebuild Angola s infrastructure The global recession that started in 2008 slowed economic growth In particular lower prices for oil and diamonds during the global recession slowed GDP growth to 2 4 in 2009 and many construction projects stopped Falling oil prices and slower than expected growth in non oil sectors have reduced growth prospects for 2015 Angola has responded by reducing government subsidies and by proposing import quotas and making it more difficult to import Domestic fuel subsidies have been eliminated Corruption especially in the mining sector is a major long term challenge Namibia Namibia s economy is heavily dependent on the mining and processing of minerals for export Mining accounts for 11 5 of GDP but provides more than 50 of foreign exchange earnings Namibia is a primary source for high quality diamonds In addition Namibia is the world s fifth largest producer of uranium produces large quantities of zinc and is a smaller producer of gold and copper The mining sector employs less than 2 of the population Namibia normally imports about 50 of its grain requirements A high per capita GDP relative to the region hides one of the world s most unequal income distributions The Namibian economy is closely linked to South Africa with the Namibian dollar pegged one to one to the South African rand Namibia receives 30 to 40 of its revenues from the countries in the Southern African Customs Union SACU Angola is not a member of the SACU Namibia s economy remains vulnerable to world commodity price fluctuations and drought The rising cost of mining diamonds increasingly from the sea has reduced profit margins Namibian authorities recognize these issues and have emphasized the need for diversification This question continues on the following page

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7 M17 3 ECONO SP2 ENG TZ0 XX Question 3 continued Figure 1 Selected economic data for Angola and Namibia 2014 Human Development Index HDI rank HDI value Population millions Land mass kilometres squared Gross national income GNI per capita in purchasing power parity PPP terms US Real GDP growth rate Inflation rate Life expectancy at birth years Expenditure on health public of GDP Expenditure on education public of GDP Gini coefficient Population below poverty line Angola 149 Namibia 127 0 526 0 626 24 2 1 246 700 2 4 825 615 6540 8577 4 2 7 3 52 3 8 3 5 0 43 40 5 5 3 5 3 64 7 7 8 5 0 60 27 8 Sources adapted from www commons wikimedia org 14 August 2014 The World Factbook Country Reports Central Intelligence Agency 2015 www databank worldbank org accessed 13 August 2015 and www cia gov accessed 13 August 2015 a i Define the term infrastructure indicated in bold in the text paragraph 2 ii Define the term customs union indicated in bold in the text paragraph 2 b Angola and Namibia have different Gini coefficient values Using a Lorenz curve diagram explain what this means Figure 1 c d 4 Using a demand and supply diagram explain the effect on the price and quantity of fuel consumed in Angola caused by the elimination of domestic fuel subsidies paragraph 4 Using information from the text data and your knowledge of economics compare and contrast factors that are likely to lead to economic development in Angola and Namibia 8 Turn over

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8 4 M17 3 ECONO SP2 ENG TZ0 XX Study the extract below and answer the questions that follow Sri Lanka s economic reforms After Sri Lanka s 25 year civil war ended in 2009 it became one of the world s fast growing emerging markets helped by billions of US dollars worth of infrastructure investment from China Sri Lanka s new government plans to implement a range of market oriented policies to open up its financial system liberalize the Sri Lankan rupee Sri Lanka s currency and make new trade deals with both India and China Sri Lankan economists and corporate leaders are urging tough economic decisions reducing the bureaucracy and eliminating costly inefficiencies in state enterprises 300 state owned firms dominate the economy and there is pressure for them to enhance their competitiveness One realistic option is a policy of privatization Another policy is the establishment of 46 economic zones across the country with low tax rates This should encourage the private sector to invest in setting up these zones Improving infrastructure is also a priority Power supply is unreliable and broadband speeds are slow in rural areas Another priority is to reduce controls on exchanging currency Sri Lankans find it difficult to obtain foreign exchange limiting tourism and business overseas Improving access to foreign currencies would make people s lives easier and encourage more business On a positive note improved international relations has increased tourism To take advantage of this the government should now implement a strategy to further promote tourism A major challenge for the government is that more than 25 of the population lives below US 2 50 per day This is caused largely by the fact that 30 of the population is involved in agriculture which contributes less than 10 of gross domestic product In addition tackling youth unemployment and increasing household incomes are challenges But perhaps the greatest problem confronting the government is the country s massive debt burden which is equivalent to 700 of its tax revenue This creates a significant debt servicing problem especially because much of the debt is foreign owned Another problem is a current account crisis Sri Lanka needs to replace its reliance on payments from Sri Lankans employed overseas with export revenues And instead of relying on borrowing from overseas to finance its current account deficit the country needs to attract foreign direct investment There is also a need for the government to try to improve the ability for companies to do business such as by reducing the time it takes to register a business and by improving access to credit for small companies which would significantly stimulate the economy Business confidence has to improve in order to stimulate new investments and economic growth Sources adapted from Sunday Times Sri Lanka www sundaytimes lk 23 August 2015 and James Crabtree 2015 Sri Lanka plans big bang reforms Financial Times www ft com 19 August Used under licence from the Financial Times All Rights Reserved This question continues on the following page

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9 M17 3 ECONO SP2 ENG TZ0 XX Question 4 continued a i List two characteristics of an economically less developed country 2 2 ii Define the term privatization indicated in bold in the text paragraph b Using a production possibilities curve PPC diagram explain how billions of US dollars worth of infrastructure investment from China may affect potential economic output paragraph c d 4 Using a definition of the term opportunity cost and information from the text explain how the servicing of debt has an opportunity cost that may affect economic development in Sri Lanka 4 Using information from the text data and your knowledge of economics discuss the possible effects of the proposed market oriented reforms on Sri Lanka s economic development 8

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5 M17 3 ECONO SP2 ENG TZ0 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A 1 a i Define the term tariff indicated in bold in the text paragraph Marks Level 0 The work does not meet a standard described by the descriptors below Vague definition The idea that it is a barrier to trade or a tax Accurate definition An explanation that it is a tax on imported goods 1 2 ii 2 0 1 2 Define the term economic growth indicated in bold in the text paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is a growing economy or an increase in GDP output Accurate definition An explanation that it is one of the following an increase in real GDP an increase in the real value of output over time an increase in potential output N B The term over time is not necessary for 2 2 Marks 0 1 2

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6 b M17 3 ECONO SP2 ENG TZ0 XX M Using an international trade diagram explain the impact on the Kenyan government of implementing a tariff on steel imports Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve with enough labelling so that it is possible to indicate in some way the area representing government revenue or for providing an explanation that the tariff causes the world supply curve to shift upwards or the tariff causes the price to rise creating government revenue 1 with the amount referenced to the diagram 2 There is a correct diagram and an accurate written response For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve with enough labelling so that it is possible to indicate in some way the area representing government revenue and for providing an explanation that the tariff causes the world supply curve to shift upwards or the tariff causes the price to rise creating government revenue 1 with the amount referenced to the diagram 2 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 The use of P and Q on the axes is sufficient for an international trade diagram The world supply curve must be labelled Sw or Sworld A title is not necessary Candidates who use P and Q values to indicate the government revenue eg Q2Q3 x PW T PW should be fully rewarded

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7 c M17 3 ECONO SP2 ENG TZ0 XX M Using an exchange rate diagram explain why a deficit in the current account may result in downward pressure on the Kenyan shilling Kenya s currency paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate or for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports than coming in from the sale of exports and so the supply of the shilling on the international money market increases lowering its value There is a correct diagram and an accurate written response For drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate and for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports than coming in from the sale of exports and so the supply of the shilling on the international money market increases lowering its value Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of shilling in another currency other currency shilling or other currency per shilling The horizontal axis should be quantity or quantity of shillings A title is not necessary Candidates may state that the deficit means that overall there has been less demand for the currency because there has been less demand for the country s exports thus causing a shift in the demand curve to the left and a fall in the value of the shilling If properly explained with a correct diagram then this approach may be fully rewarded 4

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8 d M17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the claim that trade protection measures will support economic growth in Kenya Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definition of economic growth definition of trade protection measures Strengths of protectionist measures infant industry argument allows steel and iron industry time to become internationally competitive which can bring about growth helps diversify economy away from over reliance on primary exports which is necessary for sustained growth paragraph create more jobs thus increase consumption AD and growth diagram paragraph raises government revenue paragraph that can be invested by the government in ways that will promote growth if imports are being unfairly subsidized protectionism will level the playing field paragraph can help correct the persistent current account deficit which is hindering growth paragraph 8

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9 M17 3 ECONO SP2 ENG TZ0 XX M Limitations of protectionist measures does not encourage long term efficiency which may be better achieved through deregulation paragraph inefficient allocation of resources argument protected industries can become over reliant on government support and so may not contribute to economic growth politically difficult to remove protectionist measure once in place revenue from tariffs can be subject to corruption potential problems of retaliatory tariffs from trading partners which could damage Kenya s exports and thus threaten future growth removing barriers and deregulation administrative barriers rather than protectionism could encourage domestic entrepreneurship and FDI which will support growth tariffs increase cost of doing business paragraph for those producers reliant on imported components higher prices on steel and iron which will increase input costs for construction and infrastructure projects necessary for economic growth higher input costs may reduce SRAS causing a reduction in real GDP threatening growth Any reasonable discussion

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10 2 a i Define the term depreciation indicated in bold in the text paragraph Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below Vague definition The idea that the exchange rate falls Accurate definition An explanation that it is a decrease in the value price of one currency in terms of another currency plus one of the following in a floating exchange rate system as a result of market forces supply and demand The work does not meet a standard described by the descriptors below Vague definition The idea that it is a measure of money coming into and going out of a country from international trade Accurate definition An explanation that it is a measure of the net flows of funds from trade in goods and services income and transfers or the balances of trade in goods and services net incomes and net transfers 2 Marks 0 1 2 Define the term current account indicated in bold in the text paragraph Level 0 1 M17 3 ECONO SP2 ENG TZ0 XX M Marks 0 1 2 2

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11 b M17 3 ECONO SP2 ENG TZ0 XX M Using an exchange rate diagram explain why slowing growth in China may have caused a depreciation of the Australian dollar paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the demand curve for the Australian dollar to the left or for an explanation that slowing growth in China will lead to a fall in demand for Australian exports thereby reducing demand for the Australian dollar causing the Australian dollar to depreciate There is a correct diagram and an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the demand curve for the Australian dollar to the left and for an explanation that slowing growth in China will lead to a fall in demand for Australian exports thereby reducing demand for the Australian dollar causing the Australian dollar to depreciate 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of AUS in US US AUS or US per AUS The horizontal axis should be quantity or quantity of Australian dollars A title is not necessary

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12 c M17 3 ECONO SP2 ENG TZ0 XX M Using a demand and supply diagram explain why the double effect of slowing growth in China and higher levels of production in Australia has driven the price of iron ore lower paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled demand and supply diagram with a shift of the demand curve to the left and a shift of the supply curve to the right or for an explanation that slowing Chinese demand and increasing supply by iron ore producers will both have caused a fall in the price of iron ore There is a correct diagram and an accurate written response For drawing a correctly labelled demand and supply diagram with a shift of the demand curve to the left and a shift of the supply curve to the right and for an explanation that slowing Chinese demand and increasing supply by iron ore producers will both have caused a fall in the price of iron ore Marks 0 1 2 3 4 If a candidate only shows and explains a single correct shift then a maximum of 2 can be rewarded Candidates who incorrectly label diagrams can receive a maximum of 3 The use of P and Q on the axes is sufficient for a demand and supply diagram A title is not necessary 4

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13 d M17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics discuss the possible consequences for the Australian economy of the fall in the value of the Australian dollar Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Possible negative consequences include Australian mining companies are losing significant revenue due to the fall in demand for exports paragraph falling iron ore prices create downward pressure on economic growth because mining profits fall forcing mining companies to cut back on hiring and growth oriented investment paragraph possibility of imported inflation through higher priced imports leading to higher input costs for manufacturers weak economy makes it difficult for central bank to raise interest rates to support the dollar paragraph falling value of currency can lead to low business confidence and uncertainty cutting interest rates will further depreciate the Australian dollar exacerbating a deterioration in the balance of trade and current account paragraph depreciating currency increases outflows on income line of current account as more dollars required to exchange for foreign currencies with which to pay income obligations worsens current account deficit may lead to speculative outflows due to concerns that the Australian dollar is likely to depreciate further leading to further downward pressure 8

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14 M17 3 ECONO SP2 ENG TZ0 XX M Possible positive consequences include persistent weakness in non mining sectors depreciating currency likely to reduce relative price of service exports tourism and education thus improve balance of trade in services paragraph can encourage inflows on financial account as Australian assets are cheaper Possible mixed consequences include Australian commodity exports should be more competitive but slowing growth in China likely to offset any gains from fall in relative price of commodity exports mixed impact on balance of trade likely to improve services but less likely to improve goods because of dependency on commodity exports Iron ore is Australia s largest export paragraph Any reasonable discussion that offers a considered and balanced review of the possible effect of a depreciating currency on Australia s economic growth

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15 M17 3 ECONO SP2 ENG TZ0 XX M Section B 3 a i Define the term infrastructure indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term customs union indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition The idea that it is any one of the following is sufficient large scale public systems services and facilities of a country necessary for facilitates economic activity an addition to the capital stock of a nation usually supplied by the government Accurate definition For an explanation that it is any two of the following is sufficient large scale public systems services and facilities of a country necessary for facilitates economic activity an addition to the capital stock of a nation usually supplied by the government The work does not meet a standard described by the descriptors below Vague definition The idea that it is where countries agree to trade freely Accurate definition For an explanation that it is a form of economic integration where member countries agree to liberalize trade trade freely amongst themselves and adopt a common external tariff or common trade policies towards non members 2 Marks 0 1 2 2

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16 b M17 3 ECONO SP2 ENG TZ0 XX M Angola and Namibia have different Gini coefficient values Using a Lorenz curve diagram explain what this means Figure 1 Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For drawing a clearly labelled Lorenz curve diagram showing the curve for Angola to be closer to the line of equality than the curve for Namibia or for an explanation that the lower Gini coefficient value for Angola means that income distribution is more equal in Angola than in Namibia The written response is accurate For drawing a clearly labelled Lorenz curve diagram showing the curve for Angola to be closer to the line of equality than the curve for Namibia and for an explanation that the lower Gini coefficient value for Angola means that income distribution is more equal in Angola than in Namibia Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 For Lorenz curve diagram the vertical axis should be labelled cumulative of income or of income and the horizontal axis should be cumulative of population or of population It is not necessary to provide a label on the line of absolute equality There should be labels on the Lorenz curves for Angola and Namibia A title is not necessary 4

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17 c M17 3 ECONO SP2 ENG TZ0 XX M Using a demand and supply diagram explain the effect on the price and quantity of fuel consumed in Angola caused by the elimination of domestic fuel subsidies paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For drawing a correctly labelled demand and supply diagram with a subsidy supply curve below the market supply curve indication that the subsidy curve is moving back to the market supply curve and a rise in price and a fall in quantity demanded and supplied or for an explanation that the reduction in fuel subsidies will increase firms costs leading to a fall in supply with a higher price and a lower quantity The written response is accurate For drawing a correctly labelled demand and supply diagram with a subsidy supply curve below the market supply curve indication that the subsidy curve is moving back to the market supply curve and a rise in price and a fall in quantity demanded and supplied and for an explanation that the reduction in fuel subsidies will increase firms costs leading to a fall in supply with a higher price and a lower quantity Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 The use of P and Q on the axes is sufficient for a demand and supply diagram A title is not necessary 4

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18 d M17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics compare and contrast factors that are likely to lead to economic development in Angola and Namibia Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Compare and contrast requires candidates to give an account of similarities and differences between two or more items or situations referring to both all of them throughout Responses may include definition of economic development Factors affecting development Unequal income distribution paragraph Figure 1 Angola and Namibia Life expectancy at birth Figure 1 Angola and Namibia Expenditure on health care Figure 1 Angola and Namibia Expenditure on education Figure 1 Angola and Namibia Population below poverty line Figure 1 Angola and Namibia Factors affecting growth which may impact economic development Oil export revenue paragraph Angola Mineral export revenue paragraphs and Angola and Namibia Global recession paragraph Angola and Namibia Falling commodity prices paragraphs and Angola and Namibia Lack of diversification paragraph Angola and Namibia Membership of the customs union paragraph Namibia Population sizes Figure 1 Angola and Namibia Real GDP growth rates Figure 1 Angola and Namibia Inflation rates Figure 1 Angola and Namibia Any reasonable evaluation 8

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19 4 a i List two characteristics of an economically less developed country Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below Vague definition For listing one of the following characteristics low levels of GDP per capita high levels of poverty relatively large agricultural sector large informal sectors high birth rates population growth rates poor infrastructure underdeveloped capital markets banking sector heavily indebted unable to access international markets over specialized on a narrow range of products small tax base dependency on primary sector exports Accurate definition For listing two of the following characteristics low levels of GDP per capita high levels of poverty relatively large agricultural sector large informal sectors high birth rates population growth rates poor infrastructure underdeveloped capital markets banking sector heavily indebted unable to access international markets over specialized on a narrow range of products small tax base dependency on primary sector exports 2 Marks 0 1 2 Define the term privatization indicated in bold in the text paragraph Level 0 1 M17 3 ECONO SP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The idea that it is when the government no longer owns a company Accurate definition An explanation that the government sells state owned enterprises assets firms plus one of the following to the private sector to raise revenue Marks 0 1 2 2

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20 b M17 3 ECONO SP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain how billions of US dollars worth of infrastructure investment from China may affect potential economic output paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a PPC outward shift showing an increase in the potential output in Sri Lanka or for an explanation that China s investment in infrastructure would likely improve the quality and or the quantity of the factor of production capital and therefore may increase production possibilities potential economic output There is a correct diagram and an accurate written response For drawing a PPC outward shift showing an increase in the potential output in Sri Lanka and for an explanation that China s investment in infrastructure would likely improve the quality and or the quantity of the factor of production capital and therefore may increase production possibilities potential economic output Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can receive a maximum of 3 For PPC there must be two goods or groups of goods competing for the same resources on the axes Good A and Good B would be sufficient 4

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21 c Using a definition of the term opportunity cost and information from the text explain how the servicing of debt has an opportunity cost that may affect economic development in Sri Lanka Level 0 1 2 d M17 3 ECONO SP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For a correct definition of opportunity cost or for an explanation that money spent on debt servicing in Sri Lanka will reduce the government s ability to spend on achieving development objectives such as infrastructure spending reducing youth unemployment increasing household incomes There is a correct diagram and an accurate written response For a correct definition of opportunity cost and for an explanation that money spent on debt servicing in Sri Lanka will reduce the government s ability to spend on achieving development objectives such as infrastructure spending reducing youth unemployment increasing household incomes 4 Marks 0 1 2 3 4 Using information from the text data and your knowledge of economics discuss the possible effects of the proposed market oriented reforms on Sri Lanka s economic development Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include definition of economic development definition of market oriented reforms policies 8

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22 M17 3 ECONO SP2 ENG TZ0 XX M Possible positive effects investing in infrastructure paragraph to improve infrastructure paragraph reducing the cost of economic activity opening up financial system paragraph may encourage foreign banks and increased lending to business thus increased capital formation in the long run possible shift in LRAS to the right liberalizing the currency paragraph and allows for greater access to credit and encourages tourism and business paragraph trade deals liberalization paragraph may promote export growth reducing current account deficit creating youth employment and increasing household incomes paragraph reducing bureaucracy paragraph which would reduce the cost of doing business privatization of state owned enterprise may lead to greater efficiency and more reliable power supply in the energy generation industry paragraph and supporting industry efficiency creating 46 economic zones with low tax rates may encourage FDI leading to increased AD and job creation to tackle high youth unemployment paragraph creation of economic zones likely to increase manufacturing and industrialization encouraging a shift away from low income agricultural jobs to higher income manufacturing jobs thereby tackling the large percentage of the population living on less than US 2 50 per day paragraph potential for increased government revenue to repay debt by privatizing state owned enterprises paragraph export led growth and the attraction of FDI paragraph Sri Lanka is actively encouraging FDI so trade and investment are likely to increase thus increasing AD and or LRAS and possibly breaking the poverty trap easier for businesses to register paragraph improving access to credit for small companies and increasing long run potential output creates jobs paragraph Possible negative effects increased unemployment privatizations of utilities could result in higher utility prices thus harming low income households possible negative externalities created by the opening of the economic zones possibility of increased income inequality in the distribution of income privatized firms may have monopoly power FDI may lead to more outflows of incomes on the current account liberalization of currency markets paragraph may lead to capital flight outflows on financial account Any reasonable discussion

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M17 3 ECONO HP3 ENG TZ0 XX Economics Higher level Paper 3 Wednesday 3 May 2017 morning Candidate session number 1 hour Instructions to candidates Write your session number in the boxes above You are permitted access to a calculator for this paper Do not open this examination paper until instructed to do so Answer two questions Answers must be written within the answer boxes provided Unless otherwise stated in the question all numerical answers must be given exactly or correct to two decimal places You must show all your working The maximum mark for this examination paper is 50 marks 2217 5107 International Baccalaureate Organization 2017 20 pages 20EP01

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3 M17 3 ECONO HP3 ENG TZ0 XX Answer two questions Each question is worth 25 marks Answers must be written within the answer boxes provided 1 For Firm A the relationship between inputs and output can be expressed as follows Table 1 Land 1 2 3 4 5 6 Labour 20 40 60 80 100 120 Capital 6 12 18 24 30 36 Output 800 1800 3000 4000 4800 5500 a Define the term increasing returns to scale 2 b Using the data in Table 1 to support your answer identify how changes in inputs may result in constant returns to scale and in decreasing returns to scale 2 This question continues on the following page Turn over 20EP03

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11 M17 3 ECONO HP3 ENG TZ0 XX Question 2 continued The government in Alpha imposes a price ceiling of 5 per kilogram b i ii Calculate the resulting shortage in the market 1 Calculate the change in the consumer surplus after the imposition of the price ceiling 2 iii Calculate the welfare loss after the imposition of the price ceiling 2 A new government in Alpha decides to abolish the price ceiling Instead it opens the rice market to imports The world supply of rice is perfectly elastic any quantity can be bought for 3 per kilogram c Using the diagram on page 10 calculate the import expenditures on rice 2 This question continues on the following page Turn over 20EP11

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13 M17 3 ECONO HP3 ENG TZ0 XX Question 2 continued The following table provides selected data from the balance of payments for Alpha for 2016 Table 1 Net capital transfers Net current transfers Net direct investment Exports of services Imports of goods Net investment income Imports of services Exports of goods Using the data in Table 1 calculate Alpha s current account balance for 2016 f i million 288 170 361 409 829 144 435 852 ii Outline how Alpha s current account balance for 2016 is likely to affect the exchange rate of its currency 2 2 This question continues on the following page Turn over 20EP13

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3 M17 3 ECONO HP3 ENG TZ0 XX M The following are the annotations available to use when marking responses Annotation AEr Explanation Mark Value if applicable Shortcut key Arithmetic error Benefit of the doubt Cross incorrect point Alt 6 Does not follow Error carried forward Good analysis Good definition Good diagram Good explanation GP Good point Highlight tool Incorrect labelling Alt 7 Irrelevant L0 Level 0 L1 Level 1 L2 Level 2 N0 No working shown awards 0 marks 0 N1 No working shown awards 1 mark 1 Not answered question Alt 8 Not enough 0 1 Num 0 plus 1 awards 1 mark 1 1 0 Num 1 plus 0 awards 1 mark 1 0 2 Num 0 plus 2 awards 2 marks 2 2 0 Num 2 plus 0 awards 2 marks 2

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5 M17 3 ECONO HP3 ENG TZ0 XX M Notes for examiners 1 Whenever relevant carry over marks must be awarded If a candidate makes an error in calculation but then uses the incorrect figure appropriately and accurately in later question parts then the candidate may be fully rewarded This is the own figure rule and you should put OFR on the script where you are rewarding this To do this you will need to use the OFR annotation 2 Alternative approaches may be taken in responses to the 4 questions that use A02 command terms If this is the case and the alternative approaches are valid then full credit should be given 1 a Define the term increasing returns to scale Level 0 1 2 b The work does not meet a standard described by the descriptors below Vague definition For the idea that if input inputs are increased there is a large increase in output an increase in productivity OR that average costs fall as output increases Accurate definition For stating that an increase in all inputs leads to a proportionately greater increase in output OR that an increase in all inputs by x leads to a greater than x increase in output 2 Marks 0 1 2 Using the data in Table 1 to support your answer identify how changes in inputs may result in constant returns to scale and in decreasing returns to scale 2 Constant returns are seen when output increases from 3000 to 4000 units 33 increase in inputs and output Decreasing returns are seen if output increases from 4000 units increase in inputs 25 and then 20 while output increases by 20 and then 14 6 OR by taking ratios of inputs and output ie that 5 4 100 80 30 24 4800 4000 1 25 For identifying and illustrating one of these OR for identifying but not illustrating both 1 For identifying and illustrating both 2 Any valid combination of inputs used should be accepted A candidate who focuses on one factor of production only may be awarded a maximum of 1 c Determine i ii marginal revenue when output is equal to 4 units 1 0 or 0 1 average revenue when output is equal to 6 units 1 50 1

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6 iii M17 3 ECONO HP3 ENG TZ0 XX M economic profit if output is equal to 2 units and average cost is equal to 130 per unit 1 40 1 Candidates who provide an answer of 20 per unit may not be awarded a mark here but should NOT be penalized in part h for the same error giving the answer as per unit d Calculate the marginal revenue resulting from a fall in price from 8 to 6 2 1 Any valid working is sufficient for 1 so either 24 or 12 would be sufficient 2 1 An answer of 2 or 2 without workings is sufficient for 1 e Calculate the price elasticity of demand when price falls from 10 to 8 PED 2 Any valid working is sufficient for 1 5 or 5 OR an answer of 3 or 3 if the midpoint method is used An answer of 5 or 5 without any valid working is sufficient for 1 only Correct use of negative sign for P may be present but is not necessary 1

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7 M17 3 ECONO HP3 ENG TZ0 XX M f Explain why a profit maximizing monopolist would never choose to operate on the inelastic portion of its demand curve 4 When demand is price inelastic a decrease in output increase in price will increase total revenue decrease output and therefore total costs increase profit 1 1 1 Therefore the profit maximizing monopolist would never choose to produce on the inelastic portion of its demand curve as profit could always be increased by raising price 1 Responses which state that if demand is inelastic an increase in output will cause revenue to fall 1 and therefore profits will fall 1 may be awarded a maximum of 2 OR an accurate explanation such as the one below may be fully rewarded MR MC is a condition for profit maximization MC must be a positive number so MR must be positive at the profit maximizing level of output If MR is positive then demand must be elastic g State two characteristics of monopolistic competition 2 low or zero barriers to entry many firms product differentiation some price setting power the firms are small relative to the size of the industry Award 1 for each valid characteristic up to a maximum of 2 h Calculate Firm B s short run profit loss at the profit maximizing level of output 2 350 X 16 20 1 Any valid working is sufficient for 1 1400 or a loss of 1400 An answer of 1400 or 1400 without workings is sufficient for 1 4 with working should be awarded 1 for valid working If the candidate provided a per unit answer in part c iii and again here do not penalize again 1

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8 i M17 3 ECONO HP3 ENG TZ0 XX M Using the diagram on page 8 explain how long run equilibrium will be reached Level 0 1 2 The work does not meet a standard described by the descriptors below The response is limited For an explanation that losses incurred will force some firms to leave the industry The response is accurate For an explanation that losses of 1400 incurred will force some firms to leave the industry As a result the demand curve faced by remaining firms will shift to the right reducing losses The process will continue until remaining firms make normal profits 4 Marks 0 1 2 3 4 If there is no reference to the diagram losses or 1400 a maximum of 3 may be awarded j With reference to the diagram on page 8 outline whether allocative efficiency will be achieved in the long run in a monopolistically competitive market Level 0 1 2 The work does not meet a standard described by the descriptors below Vague outline For stating that allocative efficiency requires that P MC or MB MC Accurate outline For outlining that as P MR then P cannot equal MC when MR MC Marks 0 1 2 A candidate who draws and refers to long run equilibrium on the diagram provided explaining that it is inconsistent with the position of allocative efficiency may be fully rewarded Please note that stating the condition is sufficient for 1 even if the candidate goes on to provide the incorrect conclusion 2

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9 2 a M17 3 ECONO HP3 ENG TZ0 XX M Calculate the social surplus at the equilibrium market price 2 0 5 X 8000 14 2 1 Any valid working is sufficient for 1 48 000 1 An answer of 48 000 or 48 000 without any working is sufficient for 1 b i ii Calculate the resulting shortage in the market 1 3000 kg 1 Calculate the change in the consumer surplus after the imposition of the price ceiling 2 0 5 X 12 X 6 000 0 5 X 8 X 8 000 1 Any valid working is sufficient for 1 4000 1 An answer of 4000 or 4000 without any workings is sufficient for 1 NB if a candidate has calculated the initial consumer surplus in part a as part of the social surplus and workings are seen for this the valid working mark may still be awarded iii Calculate the welfare loss after the imposition of the price ceiling 2 0 5 X 2000 X 3 1 Any valid working is sufficient for 1 3000 1 An answer of 3000 or 3000 without any working is sufficient 1 c Using the diagram on page 10 calculate the import expenditures on rice 2 3 X 11 000 2000 1 Any valid working is sufficient for 1 27 000 An answer of 27 000 or 27 000 without any working is sufficient for 1 1

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10 d i Level 0 1 2 ii Level 0 1 2 M17 3 ECONO HP3 ENG TZ0 XX M Define the term comparative advantage The work does not meet a standard described by the descriptors below Vague definition The idea that one country can produce more efficiently than another country Accurate definition An explanation that it is when a country can produce a product at a lower opportunity cost than another country 2 Marks 0 1 2 Explain two limitations of the theory of comparative advantage The work does not meet a standard described by the descriptors below The written response is limited For a limited explanation of one limitation 1 For an accurate explanation of only one or a limited explanation of two limitations 2 The written response is accurate For accurately explaining any two of the following limitations why the assumptions of the theory may not hold in the real world eg constant opportunity costs zero transport costs perfect competition no trade barriers free movement of factors of production within the country homogeneous products inability of the model in explaining intra industry trade the static nature of the theory ignoring changes in technology If two of these are explained full marks may be awarded why application of comparative advantage may not bring about the benefits inherent in the theory eg structural unemployment infant industry argument over specialization on primary products over reliance on trading partners the strategic argument If two of these are explained full marks may be awarded any other reasonable limitation explained However the argument that it assumes only 2 countries products should not be accepted as the theory of comparative advantage is a model which can be generalized 4 Marks 0 1 2 3 4 For providing an accurate explanation of one limitation and a limited explanation of another 3 For providing accurate explanations of two limitations 4 e Alpha s government decides to impose a 2 tariff on each kilogram of imported rice Using the diagram on page 10 calculate the government revenue that results from the imposition of the tariff 1 2 9000 6000 6000 1

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11 f i M17 3 ECONO HP3 ENG TZ0 XX M Using the data in Table 1 calculate Alpha s current account balance for 2016 2 852 829 409 435 144 170 1 Any valid working is sufficient for 1 Valid working must include 852 829 409 435 and may include 144 or 170 but neither 288 or 361 as these are not current account items ii Level 0 1 2 g i 29 million 1 Outline how Alpha s current account balance for 2016 is likely to affect the exchange rate of its currency 2 Marks The work does not meet a standard described by the 0 descriptors below Vague outline 1 For the idea that a deficit will cause the exchange rate to fall Accurate outline 2 For outlining that a current account deficit implies that the supply of the currency exceeds the demand for the currency causing the exchange rate to depreciate OR demand for currency shifts has decreased left OR supply of currency shifts has increased right or both either of which causes a depreciation OFR applies if a current account surplus has been calculated in part f i State one way in which the government of Alpha might bring about a depreciation of its currency 1 The central bank may sell the currency in the foreign exchange market reduce interest rates increase the money supply add to its reserves of foreign currency 1

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12 ii Level 0 1 2 M17 3 ECONO HP3 ENG TZ0 XX M Following the depreciation it is observed that the current account balance worsens initially but improves after a certain period of time Explain why this might be expected to happen The work does not meet a standard described by the descriptors below The written response is limited For the idea that a depreciation makes exports cheaper and imports more expensive leading to increased net exports and thus causing an improvement in the current account balance The written response is accurate For an explanation that the effect of a depreciation which makes exports cheaper and imports more expensive depends on the price elasticities of demand for exports and imports short term elasticities are relatively low and therefore the current account balance may worsen only in the long term when the Marshall Lerner condition is satisfied namely that the sum of these elasticities must exceed unity will it improve Marks 0 1 2 3 4 NB It is not necessary to refer explicitly to the Marshall Lerner condition or the J curve effect 4

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13 3 a M17 3 ECONO HP3 ENG TZ0 XX M Distinguish between inflation and disinflation 2 Inflation refers to a sustained increase in the Average Price Level or the idea that inflation is an increase in the prices of goods and services 1 Disinflation refers to a decrease in the rate of increase of the Average Price Level OR a decrease in the rate of inflation 1 NB the command term is distinguish so the precision required in the definition of inflation is relaxed b i Calculate the inflation rate for 2013 and for 2015 for Country A Enter your results in Table 1 2012 2013 2014 2015 Consumer price index CPI 151 58 156 28 158 93 156 07 2 Inflation rate 3 10 OR 3 1 1 70 1 80 OR 1 8 1 for each correct answer ii c i Level 0 1 2 ii Identify the year in which Country A experienced disinflation 1 2014 1 The consumer price index CPI is a weighted price index Outline one reason why weights are used in the construction of the CPI 2 Marks 0 The work does not meet a standard described by the descriptors below Vague response 1 For stating that not all goods have the same significance for consumers Accurate response 2 For outlining that weights reflect the proportion of total spending allocated so that increased prices in goods with a larger weight lead to a more significant effect on the inflation rate than goods with a smaller weight OR increased prices are not of equal significance to the typical consumer so weights are used to reflect the relative importance of each good Responses may demonstrate understanding but might not be expressed in the form above Examiners should reward understanding Please be aware that the command term is outline and not explain Determine the percentage change in the CPI of Country A between the base year and 2013 1 56 28 1

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14 d M17 3 ECONO HP3 ENG TZ0 XX M Outline how a producer price index may prove useful in predicting future inflation Level 0 1 2 e The work does not meet a standard described by the descriptors below Vague response For outlining that a producer price index measures the costs of bought in raw materials and intermediate products factors of production Accurate response For outlining that a producer price index measures the costs of bought in raw materials and intermediate products factors of production and that current increases decreases in production costs are likely to lead to increases decreases in consumer prices in the future Marks 0 1 2 Explain two reasons why governments attempt to avoid deflation Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited A limited explanation of one reason may be awarded 1 An accurate explanation of one or a limited explanation of two may be awarded 2 The written response is accurate For accurately explaining any two of the following deflation induces households to postpone purchases further decreasing spending which in turn further decreases consumption expenditures and thus AD and leads to a further decrease in real output real debt of households firms increases so that consumption expenditures further decrease or banks accumulate bad loans increasing the likelihood of a bank crisis deflation being typically caused by a fall in AD leads to an increase in cyclical unemployment deflation being typically caused by a fall in AD leads to an increase in cyclical unemployment the real cost of government debt servicing increases putting pressure on other areas of government spending deflation puts downward pressure on firms profits because after buying raw materials etc and making the goods by the time that they sell them prices will have fallen lower to possibly just above the costs of the raw materials Therefore firms are less likely to expand invest higher real interest rates or lower business confidence will discourage firms from borrowing for investment projects any other reasonable reason explained An accurate explanation of one reason and a limited explanation of another reason may be awarded 3 Two accurate explanations may be awarded 4 2 4 Marks 0 1 2 3 4

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15 f M17 3 ECONO HP3 ENG TZ0 XX M Using the data in Figure 1 comment on the degree of income inequality in the United States US Sweden and Brazil Level 0 1 2 The work does not meet a standard described by the descriptors below Vague response For stating that income inequality is greater in Brazil followed by the US followed by Sweden Accurate response For stating that income inequality is greatest in Brazil followed by the US followed by Sweden as the relative quintile shares indicate Reference to data in the table is required to be awarded 2 The actual income shares need not be mentioned but reference to the top 20 in Brazil earning more than the top 20 in Sweden or similar is required It can be inferred that the US is in the middle Marks 0 1 2 2

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h 17 M17 3 ECONO HP3 ENG TZ0 XX M Define the term poverty trap poverty cycle 2 Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that people cannot escape from poverty Accurate definition An explanation that it is any circular chain of events starting and ending in an indicator of poverty or an explanation that low incomes lead to low savings which leads to low investment low spending on health and education low spending on physical and human capital which leads to low growth productivity which leads to low income An appropriate diagram may be fully rewarded Marks 0 1 2

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18 i M17 3 ECONO HP3 ENG TZ0 XX M Explain two reasons for which a highly unequal income distribution may prove a barrier to economic development Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited A limited explanation of one reason may be awarded 1 An accurate explanation of one or a limited explanation of two may be awarded 2 The written response is accurate For accurately explaining any two of the following a highly unequal distribution of income implies that the poorest are deprived of proper education and health care and thus the growth and development prospects are constrained a highly unequal distribution of income may lead to lower consumption and thus lower AD because rich have a lower propensity to consume leading to slower growth and therefore slower development higher income inequality leads to more transfer payments and possibly lower tax revenue which restricts public investment in education and infrastructure causing slower growth and reduced possibilities for development higher income inequality may increase the risk of corruption which increases the costs to business and deters inward investment thus leading to slower growth and development higher income inequality may act as a barrier to those in poverty opening businesses thus limiting development opportunities for the poor unequal distribution of income may lead to more crime and vandalism More has to be spent on security reducing the funds available for development related spending OR only one of these points may be rewarded unequal distribution of income may lead to political instability deterring investors and thus reducing growth and therefore development any other reasonable explanation Each reason provided should be linked clearly to development However a candidate who has explained reasons clearly but neglected to mention development in either should be penalized for this once only so a well explained response which does not mention development explicitly may be awarded a maximum of 3 An accurate explanation of one reason and a limited explanation of another reason may be awarded 3 Two accurate explanations may be awarded 4 4 Marks 0 1 2 3 4

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3 N17 3 ECONO HP1 ENG TZ0 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A Microeconomics 1 a With reference to demand and supply in competitive markets explain how the economic question what to produce is answered Answers may include definitions of demand supply competitive markets diagram s to show demand and supply and the price mechanism explanation of how scarcity and opportunity cost necessitates choices and how the price mechanism works to provide incentives examples of choices and price mechanism at work Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

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4 b N17 3 ECONO HP1 ENG TZ0 XX M Discuss the consequences of the direct provision of public goods by the government Answers may include definition of public goods PPF diagram to show the trade off between public good and private goods Candidates should not be expected to use a diagram for this part of the question explanation of the relationship between the characteristics of public goods the free rider problem and market failure examples of public goods and or consequences of their direct provision synthesis or evaluation discuss Discussion may include the extent to which public goods exist the opportunity cost of providing public goods the extent to which the government understands what is best in terms of allocating resources and moral hazard 15

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5 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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7 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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8 b N17 3 ECONO HP1 ENG TZ0 XX M Discuss the reasons why firms compete or collude in oligopolistic markets Answers may include definitions of collusion oligopolistic markets diagram s to show oligopoly explanation of why firms may choose to collude or not to collude why interdependence is central to this decision tacit collusion and price leadership example of where firms have colluded or not colluded synthesis or evaluation discuss Discussion may include the information problem that oligopoly firms face some consideration of why cartels are difficult to maintain due to their unenforceability the incentive to cheat of members of cartels Incentives to collude might be considered such as joint profit maximization 15

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9 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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11 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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12 b N17 3 ECONO HP1 ENG TZ0 XX M Discuss the view that the best way to reduce unemployment is through education and training Answers may include definition of unemployment diagram to show how education and training increases the supply of available labour and leads to a rise in employment explanation that education and training increases the skill level of unemployed workers and increases their opportunities for employment examples of where education and training has reduced unemployment synthesis or evaluation discuss Discussion may include consideration of how education and training might be appropriate for structural unemployment but might not be as effective with demand deficient and frictional unemployment There could be consideration of the cost and effectiveness of government run education and training There could also be consideration that alternative policies are more effective than education and training in reducing certain types of unemployment 15

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13 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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14 4 a N17 3 ECONO HP1 ENG TZ0 XX M Explain how short term fluctuations in the level of economic activity may be evened out through the impact of automatic stabilizers Answers may include definitions of automatic stabilizers fluctuations in the level of economic activity diagram s to show either increases or decreases in AD depending on the direction of the stabilization or use of a business cycle diagram showing smaller fluctuations explanation of how factors such as progressive taxes and unemployment benefits tend to work counter cyclically to stabilize short term fluctuations in the level of economic activity examples of automatic stabilizers working in practice 10

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15 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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16 b N17 3 ECONO HP1 ENG TZ0 XX M Evaluate the view that the use of fiscal policy is the most effective way of reducing the rate of inflation in an economy Answers may include definitions of fiscal policy rate of inflation diagram to show the impact of deflationary fiscal policy shift AD left explanation of the mechanisms through which deflationary fiscal policy may lower the rate of inflation through its impact on AD examples of fiscal policy being used to lower the rate of inflation synthesis or evaluation Evaluation may include the importance of the type of inflation possible conflicts with other objectives of economic policy the direct impact on AD the problem of time lags political constraints the use of fiscal policy to influence the supply side of the economy There could also be consideration of alternative policies to reduce the rate of inflation such as monetary policy and supply side policies 15

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17 N17 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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3 N17 3 ECONO SP1 ENG TZ0 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A Microeconomics 1 a Explain why governments provide subsidies for some goods and services 10 Answers may include definition of subsidies diagram s to show the application of subsidies to a market and reasons to apply a subsidy such as merit goods explanation of why governments apply subsidies and a consideration of how subsidies influence the market and society in terms of welfare such as making goods more affordable for low income households examples of the application of subsidies Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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4 b N17 3 ECONO SP1 ENG TZ0 XX M Discuss the consequences of providing a subsidy for goods such as agricultural products Answers may include definition of subsidy diagram s to show the impact of a subsidy explanation of the consequences that the provision of a subsidy might have in terms of price to the consumer price to the producer resource allocation and cost to the government examples of consequences that might follow or have followed from the application of a subsidy synthesis or evaluation discuss Discussion may include opportunity cost to the government of paying for subsidies how subsidies may be applied inefficiently and how subsidies might distort markets in the long run 15

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5 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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7 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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8 b N17 3 ECONO SP1 ENG TZ0 XX M Evaluate the view that the use of regulation is the most effective way to reduce negative externalities Answers may include definitions of regulation and negative externalities diagram s to show the impact of regulation on negative externalities explanation of how regulation reduces negative externalities An example of this might be a regulation on producers to produce a good in way that reduces pollution example s of regulations used to reduce negative externalities synthesis or evaluation Evaluation may include the benefits of using regulation to deal with negative externalities such as direct effect on externalities and relative ease of application It may also include the problems of using regulations such as managing the regulation increasing the price of the good produced and the negative impact on employment in the regulated industry It may also consider alternatives to regulation such as taxes 15

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9 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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10 N17 3 ECONO SP1 ENG TZ0 XX M Section B Macroeconomics 3 a Explain why structural unemployment may occur in an economy Answers may include definitions of unemployment and structural unemployment diagram to show the decline in employment caused by structural factors such as a fall in demand for labour in a particular market explanation of how the structural changes in the economy such as capital replacing labour in a market lead to unemployment because workers do not have the skills or geographical mobility to get a new job quickly examples of where structural changes in the economy lead to structural unemployment 10

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11 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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12 b N17 3 ECONO SP1 ENG TZ0 XX M Discuss the view that the best way to reduce unemployment is through education and training Answers may include definition of unemployment diagram to show how education and training reduces unemployment such as an increase in the supply of available labour increasing employment and LRAS shifting to the right explanation that education and training increases the skill level of unemployed workers and increases their opportunities for employment examples of where education and training has reduced unemployment synthesis or evaluation discuss Discussion may include consideration of how education and training might be appropriate for structural unemployment but might not be as effective with demand deficient and frictional unemployment There could be consideration of the cost and effectiveness of government run education and training There could also be consideration that alternative policies are more effective than education and training in reducing certain types of unemployment 15

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13 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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14 4 a N17 3 ECONO SP1 ENG TZ0 XX M With reference to the income output and expenditure approaches explain how the real gross national product GNP gross national income GNI per capita of a country can be measured Answers may include definitions of real GNP GNI per capita income output and expenditure approaches diagram to show the circular flow of income explanation of how the income output and expenditure approaches are used to calculate GDP and adding net property income gives GNI GNP This is adjusted to get real GNP GNI per capita by allowing for inflation and population examples of the components of the income output and expenditure approaches 10

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15 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

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16 b N17 3 ECONO SP1 ENG TZ0 XX M Discuss the view that a rise in the GNP GNI per capita will always lead to a rise in living standards in a country Answers may include definition of living standards diagram s of AD AS PPC explanation that a rise in GNP GNI per capita leads to rising real incomes better public services and rising employment which leads to rising living standards examples of where rising GNP GNI per capita leads to rising living standards synthesis or evaluation discuss Discussion may include consideration of how rising GNP GNI per capita might lead to situations that have a negative impact on living standards such as negative externalities and widening income inequality It is also difficult to assess rising living standards because it is affected by non monetary factors It may also be argued that a rise in GNP GNI per capita can be accompanied by inflation reducing the potential rise in living standards 15

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17 N17 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

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6 N17 3 ECONO SP2 ENG TZ0 XX Section B Answer one question from this section 3 Study the extract and data below and answer the questions that follow Ethiopia Ethiopia has the second highest population in Sub Saharan Africa with a population of 96 9 million and a fairly high population growth rate of 3 Ethiopia is also one of the world s poorest countries The country s gross domestic product GDP per capita is substantially lower than the regional average However the economy has experienced strong economic growth over the past decade more than double the regional average of 5 3 Currently agriculture is the major sector of the economy 80 of the labour force is engaged in agriculture and it contributes about 50 to the nation s GDP The World Bank says that Ethiopia needs to diversify its economy so that more employment is generated by the manufacturing sector Although small scale enterprises are doing well their rapid growth is negatively affected by many obstacles Access to credit is very difficult and so domestically funded investment is hard to achieve causing a significant investment gap There are also problems with the provision of infrastructure like electricity telecommunications and access to roads particularly in rural areas The government has been encouraging foreign direct investment from multinational corporations MNCs to attempt to solve some of Ethiopia s economic problems and to break the poverty cycle Much of the investment has come from China whose total investment in the country has reached almost US 17 billion China has established Ethiopia as one of its six special economic zones in Africa The two countries have signed five cooperation deals relating to technologies electric power finance energy and aviation Last year the Huajian Group a Chinese shoe manufacturer announced a US 2 2 billion investment plan in Ethiopia They intend to set up an industrial zone which is expected to contain approximately 45 textile and garment leather and leather products chemical and pharmaceuticals agricultural processing and metal engineering factories In the first year of the project there should be 3000 jobs created By the end of the project approximately 30 000 workers are expected to find employment there Worries exist in Ethiopia about the country s large trade imbalance with China and the influx of Chinese goods China accounts for 21 of total imports into the country but only 11 of Ethiopia s exports go to China There are also concerns relating to the over use of resources Source International Baccalaureate Organization 2017 This question continues on the following page

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7 N17 3 ECONO SP2 ENG TZ0 XX Question 3 continued Figure 1 Development data for Ethiopia 2014 Removed for copyright reasons 2 a i Define the term investment indicated in bold in the text paragraph ii Define the term multinational corporations MNCs indicated in bold in the text paragraph b Using a poverty cycle diagram explain how investment from abroad might break the poverty cycle paragraph 2 4 c Using data from Figure 1 explain why there is a difference between Ethiopia s HDI world ranking and its GNI per capita world ranking 4 d Using information from the text data and your knowledge of economics evaluate the possible impact on the Ethiopian economy of the foreign direct investment from China 8 Turn over

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8 4 N17 3 ECONO SP2 ENG TZ0 XX Study the extract below and answer the questions that follow Aid to Papua New Guinea PNG A group of Australian politicians is visiting Papua New Guinea PNG a former colony to see first hand where Australia s AU 477 million in foreign aid is being used The aid is being spent on women and children who are crime victims immunizations for young children to protect them from diseases such as polio efforts to eradicate tuberculosis provision of free education for girls pre school and early learning and training for the next generation of PNG police officers There is a lot of aid money being spent but it is making very little difference Though PNG is close to Australia it is very far away in terms of economic development One non governmental organization NGO Save the Children reported that the level of need in PNG is astonishing Children are far more likely to die before their fifth birthday here in PNG than most other places in the world There is a huge amount of violence against women and children The value of its Human Development Index HDI is 0 466 ranking it 156 out of 187 countries One of the Australian politicians is concerned that corruption is so widespread that it is preventing efforts to get PNG s educational health and justice systems to operate effectively Make no mistake there are many problems including problems with security family violence and many other socio economic concerns he said However I think corruption is the largest issue confronting the challenges of PNG You have to question whether you can address these issues without dealing with the issue of corruption first These challenges cannot be met without a system of government that is functioning properly This is a society that has been propped up by aid and the actions of NGOs The government simply does not work Another member of the visiting group thinks improving agricultural productivity is a way forward for PNG economically and socially with great potential for economic growth A project spokesperson said that increased foreign aid could lift productivity and improve growth by assisting PNG farmers to improve irrigation and supply routes He also said that research and development in addition to training local farmers could help Another project that the group is visiting runs a programme to encourage women to be more involved in decision making in the growing and selling of coffee a crop that is important to the PNG economy The leader of the visiting group says that our aid money here should ensure that more children are born in environments with supervised medical care and that there is a police and justice system that protects the rights of children Children should have the right to be free from violence and free from sexual assault and should have access to the great transformative power of education Source Ellen Whinnet PNG Where Foreign Aid Barely Scratches the Surface Herald Sun 14 August 2015 irrigation a method for regularly supplying water to plants It is used to assist in the growing of agricultural crops particularly during periods of low rainfall This question continues on the following page

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9 N17 3 ECONO SP2 ENG TZ0 XX Question 4 continued a i List two components of the Human Development Index HDI paragraph ii Define the term economic growth indicated in bold in the text paragraph b Using a demand and supply diagram explain how the market for coffee in Papua New Guinea could be affected by improved irrigation paragraph 2 2 4 c Using an externalities diagram explain why the introduction of free education for girls corrects a market failure paragraph 4 d Using information from the text data and your knowledge of economics evaluate the role of foreign aid in contributing to economic development in Papua New Guinea 8

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3 N17 3 ECONO SP2 ENG TZ0 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A 1 a i Define the term monetary union indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 State two functions of a country s central bank paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition An explanation that it is any one of the following a form of economic integration trade bloc common market a common currency common central bank common interest rates monetary policy Accurate definition An explanation that it is any two of the following a form of economic integration trade bloc common market common market a common currency common central bank common interest rates monetary policy The work does not meet a standard described by the descriptors below For stating any one of the following responsibilities regulator of commercial banks banker to the government control of interest rates control of money supply implementing monetary policies maintenance of price stability control of exchange rate policy holder of foreign exchange reserves provider and printer of notes and coins promoting full employment For stating any two of the following responsibilities regulator of commercial banks banker to the government control of interest rates control of money supply implementing monetary policies maintenance of price stability control of exchange rate policy holder of foreign exchange reserves provider and printer of notes and coins promoting full employment 2 2 Marks 0 1 2

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4 b N17 3 ECONO SP2 ENG TZ0 XX M Using an exchange rate diagram explain how Denmark s central bank is maintaining the fixed value of the Danish krone against the euro paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve of the Danish krone to the right and a fall in the exchange rate or for an explanation that the central bank is supplying Danish krone to buy euros thus increasing the supply of the Danish krone on the foreign exchange market and bringing the value of the Danish krone back to the fixed rate There is a correct diagram and an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve of the Danish krone to the right and a fall in the exchange rate and for an explanation that the central bank is supplying Danish krone to buy euros thus increasing the supply of the Danish krone on the foreign exchange market and bringing the value of the Danish krone back to the fixed rate Marks 0 1 2 3 4 An alternative explanation would be that the central bank has been cutting interest rates paragraph which will encourage Danish people to save abroad increasing the supply of the krone and bringing the value of the krone back to the fixed rate Another alternative approach would be to illustrate and explain how the demand for Danish krone has decreased because of the central bank cutting interest rates reducing foreign saving in Danish banks and bringing the krone back to the fixed rate Candidates who incorrectly label diagrams can be awarded a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of Danish krone in euros EUR Danish krone or euros per Danish krone The horizontal axis may be quantity or quantity of Danish krone 4

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5 c N17 3 ECONO SP2 ENG TZ0 XX M Using an AD AS diagram explain how the interest rate cuts made by Denmark s central bank might affect the Danish economy paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled AD AS diagram showing an increase in AD with an increase in real GDP and an increase in the average price level or for one of the following explanations lower interest rates may lead to an increase in AD because of an increase in consumption or investment and that this would lead to an increase in real GDP and an increase in the average price level lower interest rates may lead to an increase in AD because of a fall in the exchange rate and a rise in exports and that this would lead to an increase in real GDP and an increase in the average price level There is a correct diagram and an accurate written response For drawing a correctly labelled AD AS diagram showing an increase in AD with an increase in real GDP and an increase in the average price level and one of the following explanations lower interest rates may lead to an increase in AD because of an increase in consumption or investment and that this would lead to an increase in real GDP and an increase in the average price level lower interest rates may lead to an increase in AD because of a fall in the exchange rate and a rise in exports and that this would lead to an increase in real GDP and an increase in the average price level Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For AD AS the vertical axis may be price level average price level or APL The horizontal axis may be real output national output real GDP national income Y or GDP A title is not necessary 4

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6 d N17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the decision to maintain the fixed value of the Danish krone against the euro Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Arguments for maintaining the fixed value may include greater certainty businesses able to plan ahead with certainty about predicted costs of imported factors of production exporters benefit from the fixed low value of the Danish krone paragraph letting it float would lead to a higher value paragraph and would harm exporters by making their products less competitive This may lead to unemployment since exports are very important to the Danish economy It could be an economic catastrophe paragraph high level of confidence from outside investors and international credit rating agencies will make it easier to attract foreign investment paragraph if the central bank continues to be able to defend the Danish krone speculators may decide to stop buying it up thereby stopping the upward pressure paragraph according to the central bank there will be no difficulty in maintaining the peg paragraph belief that the ability to print krone will enable the government central bank to continue to intervene to defend the peg paragraph 8

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7 N17 3 ECONO SP2 ENG TZ0 XX M Arguments against the fixed value may include the arrangement might fail and the central bank may have to break the peg despite what it says paragraph the speculators may continue to buy up the Danish krone assuming that at some point the central bank will be unable to maintain the peg paragraph if the central bank does keep printing money to maintain the peg paragraph it may lead to demand pull inflation monetarist explanation of inflation the central bank may be sacrificing domestic monetary policy options to maintain the peg paragraph perhaps the peg no longer represents the best value for the Danish krone and that it is now under valued against the euro other countries could argue that the value of the Danish krone is at an artificially low level making their exports more competitive than they should be and leading to retaliation accumulating foreign reserves is a waste of financial assets paragraph Any reasonable evaluation

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8 2 a i Define the term current account deficit indicated in bold in the text paragraph Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is when the flow of money from trade in goods and services is negative OR The idea that imports exceed exports Accurate definition An explanation that it is when the net flow of money from trade in goods and services and income flows and or transfers is negative OR An explanation that the outflows of money from trade in goods and services income flows and or transfers are larger than the inflows of money 2 Marks 0 1 2 List two functions of the World Trade Organization paragraph Level 0 1 N17 3 ECONO SP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below One function is stated or two functions are partially stated see Level 2 for functions A clear understanding demonstrated by listing two of the following functions of the WTO to set and enforce rules for international trade to provide a forum for negotiating trade liberalization to monitor further trade liberalization to resolve trade disputes to increase the transparency of decision making processes to cooperate with other major international economic institutions involved in global economic management to help developing countries benefit fully from the global trading system 2 Marks 0 1 2

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9 b N17 3 ECONO SP2 ENG TZ0 XX M Using an exchange rate diagram explain how Indonesia s current account deficit has weakened the rupiah against the US dollar paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve to the right and a fall in the value of the Indonesian rupiah against the US dollar or for an explanation that a current account deficit involves an increase in the supply of the currency to buy the excess imports and thus causes the currency to fall in value There is a correct diagram and an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve to the right and a fall in the value of the Indonesian rupiah against the US dollar and for an explanation that a current account deficit involves an increase in the supply of the currency to buy the excess imports and thus causes the currency to fall in value Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of Indonesian rupiah in US US Indonesian rupiah or US dollars per Indonesian rupiah The horizontal axis may be quantity or quantity of Indonesian rupiah A title is not necessary 4

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10 c N17 3 ECONO SP2 ENG TZ0 XX M Using an international trade diagram explain how reducing the quota for cattle imports will affect the price and domestic production of cattle paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled trade diagram with a decrease in the quota a fall in the level of imports and an increase in the price with an increase in the quantity supplied by domestic producers and an increase in domestic production or for an explanation that a decrease in the quota will result in a fall in the imports of cattle and thus an increase in the price and an increase in the quantity of cattle that the domestic cattle producers are willing and able to supply There is a correct diagram and an accurate written response For drawing a correctly labelled trade diagram with a decrease in the quota a fall in the level of imports and an increase in the price with an increase in the quantity supplied by domestic producers and an increase in domestic production and for an explanation that a decrease in the quota will result in a fall in the imports of cattle and thus an increase in the price and an increase in the quantity of cattle that the domestic cattle producers are willing and able to supply Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 The use of P and Q on the axes is sufficient for an international trade diagram A title is not necessary 4

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11 d N17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the use of trade protection in Indonesia Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include an explanation of trade protection tariffs quotas and other non tariff barriers to support domestic producers reference to diagram in part c Justification for trade protection may reverse the effects of the slowdown in economic growth paragraph by reducing demand for imports net export component of AD will increase reduced imports will reduce the current account deficit paragraph and prevent the Indonesian rupiah from falling further may act as a way to practice import substitution and diversify its economy away from the dependence on commodity exports paragraph trade protection will prevent imports of low quality imported goods but not imports of raw materials so that domestic manufacturers who use imported raw materials will not be damaged and may become more competitive paragraph level playing field argument Indonesia s average tariff in the past was well below others Indonesia had been too open to imports of consumer goods in the past and it is simply a correction paragraph 8

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12 N17 3 ECONO SP2 ENG TZ0 XX M Arguments against trade protection higher prices hurting consumers paragraph welfare loss loss of efficiency paragraph may invite retaliation from trading partners such as China may be seen as hypocritical that Indonesia is seeking freer trade eg with the UK while also increasing trade protection paragraph may be difficult to attract foreign direct investment paragraph if the government is pursuing interventionist policies such as higher levels of protection paragraph allows Indonesian firms to remain uncompetitive paragraphs and will not solve the underlying problem of crumbling infrastructure and excessive regulations and possibly delay necessary structural reforms paragraph Any reasonable evaluation

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13 N17 3 ECONO SP2 ENG TZ0 XX M Section B 3 a i Define the term investment indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term multinational corporations MNCs indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition The idea that it is buying machinery Accurate definition An explanation that it is any addition to the capital stock of the economy or that it is expenditure spending by firms on capital 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is a company that invests in other countries Accurate definition For an explanation that it is a company that has productive units in more than one country or that it is a company that carries out foreign direct investment in another country Marks 0 1 2 2

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14 b N17 3 ECONO SP2 ENG TZ0 XX M Using a poverty cycle diagram explain how investment from abroad might break the poverty cycle paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a poverty cycle including investment that starts and ends in an indicator of poverty or for an explanation that investment from abroad will reduce the investment gap paragraph and break the poverty cycle There is a correct diagram and an accurate written response For drawing a poverty cycle including investment that starts and ends in an indicator of poverty and an explanation that investment from abroad will reduce the investment gap paragraph and break the poverty cycle Marks 0 1 2 3 4 Example of poverty cycle any cycle including investment and starting and ending with an indicator of poverty is acceptable 4

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15 c N17 3 ECONO SP2 ENG TZ0 XX M Using data from Figure 1 explain why there is a difference between Ethiopia s HDI world ranking and its GNI per capita world ranking Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For explaining that the HDI is a composite index and that GNI per capita is one of the components or for an explanation that the lower ranking for GNI per capita 201 must mean that one or more of the other components life expectancy mean years of schooling or expected years of schooling must be relatively stronger than other countries to account for the higher HDI ranking 173 The written response is accurate For explaining that the HDI is a composite index and that GNI per capita is one of the components and for an explanation that the lower ranking for GNI per capita 201 must mean that one or more of the other components life expectancy mean years of schooling or expected years of schooling must be relatively stronger than other countries to account for the higher HDI ranking 173 Marks 0 1 2 3 4 4

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16 d N17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the possible impact on the Ethiopian economy of the foreign direct investment from China Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument 8

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17 N17 3 ECONO SP2 ENG TZ0 XX M Responses may include definition of foreign direct investment Strengths fills the savings investment gap paragraph which should lead to economic growth provides employment in the economy paragraph leading to higher levels of consumption raising living standards should improve the infrastructure in the economy paragraph resulting in an increase in LRAS should improve R D providing access to technology paragraph resulting in an increase in LRAS should improve electricity provision paragraphs and resulting in an increase in LRAS and improvement of living standards of households provides education and training positive externality of consumption resulting in an increase in LRAS direct effect of the investment on AD can reduce the dependence on agriculture paragraph increasing diversification paragraph provision of tax revenue for the government which may be used to finance development objectives industrial zone should lead to higher value added economic activity paragraph Limitations worries about the trade imbalance paragraph over use of resources paragraph may lead to negative externalities of production capital intensive production methods may not provide much employment but this is not the case in shoes paragraph local producers may be negatively affected jobs may be filled by Chinese people MNCs may be politically powerful and able to negotiate tax breaks contributing lower income to the government dependence upon MNCs FDI causes vulnerability if these firms countries change policy Any reasonable evaluation

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18 4 a i List two components of the Human Development Index HDI paragraph Level 0 1 2 ii 2 2 Marks The work does not meet a standard described by the descriptors 0 below One component is stated 1 Any one of the following measures life expectancy at birth mean years of schooling for those aged 25 years and above expected years of schooling for a child of school entrance age capped at 18 years of age GNI per capita or GDP per capita Two components are stated 2 Any two of the following measures life expectancy at birth mean years of schooling for those aged 25 years and above expected years of schooling for a child of school entrance age capped at 18 years of age GNI per capita or GDP per capita Define the term economic growth indicated in bold in the text paragraph Level 0 1 N17 3 ECONO SP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The idea that it is a growing economy or an increase in GDP Accurate definition An explanation that it is one of the following an increase in the real value of output over time an increase in real GDP an increase in potential output productive capacity N B The term over time is not necessary for 2 2 Marks 0 1 2

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19 b N17 3 ECONO SP2 ENG TZ0 XX M Using a demand and supply diagram explain how the market for coffee in Papua New Guinea could be affected by improved irrigation paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled demand and supply diagram showing an increase in supply a shift of the curve to the right a fall in price and an increase in quantity or for an explanation that improved irrigation increases the supply of coffee lowering the price and increasing the quantity There is a correct diagram and an accurate written response For drawing a correctly labelled demand and supply diagram showing an increase in supply a shift of the curve to the right a fall in price and an increase in quantity and for an explanation that improved irrigation increases the supply of coffee lowering the price and increasing the quantity Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 The use of P and Q on the axes is sufficient for a demand and supply diagram A title is not necessary 4

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20 c N17 3 ECONO SP2 ENG TZ0 XX M Using an externalities diagram explain why the introduction of free education for girls corrects a market failure paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a correctly labelled externalities diagram showing an MSB curve to the right of the MPB curve and indicating under provision of education and or welfare loss potential welfare gain or for an explanation that education for girls will be under provided in a free market and that the provision of free education will correct this either by shifting the MSC curve to the right or by shifting the MPB demand curve to the right There is a correct diagram and an accurate written response For drawing a correctly labelled externalities diagram showing an MSB curve to the right of the MPB curve and indicating under provision of education and or welfare loss potential welfare gain and for an explanation that education for girls will be under provided in a free market and that the provision of free education will correct this either by shifting the MSC curve to the right or by shifting the MPB demand curve to the right Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 The vertical axis may be price but could be costs or benefits The horizontal axis is quantity A title is not necessary 4

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21 d N17 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the role of foreign aid in contributing to economic development in Papua New Guinea Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definition of economic development identification of types of aid eg bilateral tied grant aid soft loans emergency relief emergency financial relief NGO aid Possible positive outcomes assistance for women and children crime victims paragraph immunizations for young children to protect them from diseases increasing the quality quantity of future labour paragraph provision of free education for girls pre school and early learning paragraph training for the next generation of PNG police officers improves security and may attract FDI paragraph benefits of aid which is targeted to improve elements of the HDI paragraph aid can contribute to economic growth paragraph which might then be used to achieve development objectives 8

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22 N17 3 ECONO SP2 ENG TZ0 XX M Possible negative outcomes a lot of aid money being spent but it is making very little difference paragraph problems associated with corruption leads to poor functioning of institutions police justice health education governance hindering the effectiveness of the aid paragraph problems associated with aid dependency leads to long term risk when foreign aid falls paragraph NGO aid may allow the government to ignore its development responsibilities paragraph problems associated with lack of effectiveness in improving life expectancy paragraph N B To reach level 3 candidates must direct their responses to the issue of promoting economic development rather than write in general terms about aid Any reasonable evaluation

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N17 3 ECONO HP3 ENG TZ0 XX Economics Higher level Paper 3 Thursday 2 November 2017 morning Candidate session number 1 hour Instructions to candidates Write your session number in the boxes above You are permitted access to a calculator for this paper Do not open this examination paper until instructed to do so Answer two questions Answers must be written within the answer boxes provided Unless otherwise stated in the question all numerical answers must be given exactly or correct to two decimal places You must show all your working The maximum mark for this examination paper is 50 marks 8817 5107 International Baccalaureate Organization 2017 19 pages 20EP01

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2 N17 3 ECONO HP3 ENG TZ0 XX Answer two questions Each question is worth 25 marks Answers must be written within the answer boxes provided 1 The demand for a product in a perfectly competitive market is given by the function Qd 64 2P while market supply is given by the function Qs 4P 8 where P is the price per unit in dollars Qd is the monthly quantity demanded and Qs is the monthly quantity supplied in thousands of units a i State one characteristic of a perfectly competitive market b ii Outline the reason why the coefficient of price in the supply function above is positive Calculate the equilibrium price and the equilibrium quantity in this market This question continues on the following page 20EP02 1 2 2

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4 N17 3 ECONO HP3 ENG TZ0 XX Question 1 continued d Using an appropriate example explain the significance of price elasticity of demand in relation to the size of the tax revenues a government collects following the imposition of an indirect tax 4 In order to reduce consumption of the product the government is considering the imposition of an indirect tax Following the imposition of the indirect tax the supply of the product will now be given by the function Qs 3P 8 e i ii State the type of indirect tax under consideration Outline the reason for your answer to part e i This question continues on the following page 20EP04 1 2

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8 2 N17 3 ECONO HP3 ENG TZ0 XX Quinoa is an agricultural product traded in world markets and priced in US dollars US It is produced in many countries Farmers in Fairsea a small island open economy produce quinoa The following diagram illustrates demand D and supply conditions for quinoa in Fairsea where Sd is domestic supply and Sw is world supply There are no restrictions on free trade and the world price of quinoa is initially at US 4 per kilogram kg A portion of Fairsea s quinoa requirements are imported Price per kg US 16 Sd 15 14 13 12 11 10 9 8 7 6 5 Sw 4 3 2 1 0 D 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 Quantity per year millions of kg a Calculate the annual import expenditure on quinoa under free trade This question continues on the following page 20EP08 2

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9 N17 3 ECONO HP3 ENG TZ0 XX Question 2 continued b i ii Define the term consumer surplus 2 Calculate the size of the consumer surplus under free trade 2 The government of Fairsea decides to impose a quota on quinoa imports to assist its quinoa farmers The quota is set at 50 of the initial annual volume of quinoa imports into Fairsea c i Explain one way in which the effect of imposing a tariff is likely to be different from that of imposing a quota 2 On the diagram on page 8 draw and label Fairsea s new quinoa supply curve following the introduction of the quota ii iii Determine the new equilibrium price of quinoa in Fairsea 1 1 This question continues on the following page Turn over 20EP09

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11 N17 3 ECONO HP3 ENG TZ0 XX Question 2 continued The currency of Fairsea is the Fairsea dinar FD The current exchange rate between the Fairsea dinar and the US dollar US is US 1 00 FD0 35 while the current exchange rate between the US dollar and the euro is 1 00 US 1 12 e i ii Given the above exchange rates calculate the current exchange rate between the euro and the Fairsea dinar Using your answers to part b ii and c ii calculate in Fairsea dinars the change in the consumer surplus following the introduction of the quota 3 2 iii Calculate the change in export revenues of foreign farmers in US dollars following the introduction of the quota assuming that they sell their quinoa at the new Fairsea market price 2 This question continues on page 13 Turn over 20EP11

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14 3 N17 3 ECONO HP3 ENG TZ0 XX The following data relate to Country X in 2016 Table 1 Item Government expenditure on goods and services Imports of goods and services Factor income earned received from abroad Investment expenditure Factor income paid sent abroad Exports of goods and services Wages and salaries Profits of companies Unemployment benefits Subsidies Consumer expenditure million 640 1045 435 1130 482 980 2360 2710 758 349 4590 a Calculate the gross domestic product GDP of Country X for 2016 b Calculate the gross national product GNP of Country X for 2016 This question continues on the following page 20EP14 2 2

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17 N17 3 ECONO HP3 ENG TZ0 XX Question 3 continued The government of Country X is concerned about the distribution of income in the country and would like to make it more equitable The following table illustrates the amount of tax paid per year at different levels of income Table 3 Income per year Tax paid per year 20 000 4350 40 000 8100 60 000 11 570 e i ii A politician in Country X has stated that Our tax system is inequitable as it is regressive Explain this statement using the data in Table 3 4 Apart from taxation state two other measures which could be taken by a government to make the distribution of income more equitable 2 This question continues on the following page Turn over 20EP17

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19 N17 3 ECONO HP3 ENG TZ0 XX Question 3 continued An increase in consumer confidence has caused aggregate demand to increase by 25 million f i On the diagram on page 18 draw and label the new aggregate demand curve 1 ii Determine the average price level once the economy has returned to a position of long run equilibrium 1 iii Explain how the economy would move back to this position of long run equilibrium The government of Country Y has announced its intention to introduce incentive related supply side policies g Outline how one incentive related supply side policy would help to boost aggregate supply 20EP19 4 2

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3 N17 3 ECONO HP3 ENG TZ0 XX M Notes for examiners 1 Whenever relevant carry over marks must be awarded If a candidate makes an error in calculation but then uses the incorrect figure appropriately and accurately in later question parts then the candidate may be fully rewarded This is the own figure rule and you should put OFR on the script where you are rewarding this 2 Alternative approaches may be taken in responses to the 4 questions that use A02 command terms If this is the case and the alternative approaches are valid then full credit should be given 1 a i State one characteristic of a perfectly competitive market Level 0 1 ii 2 Marks 0 1 Outline the reason why the coefficient of price in the supply function above is positive Level 0 1 The work does not meet a standard described by the descriptors below Any one of the following characteristics a large number of firms homogeneous product absence of barriers to entry and exit price takers perfect information 1 The work does not meet a standard described by the descriptors below Vague understanding The idea that it is a result of the law of supply OR that there is a positive relationship between price and quantity supplied Clear understanding A brief explanation that at higher prices quantities supplied are greater since the profit margins of firms are higher or reference to the idea that marginal costs are likely to increase as output increases or another valid incentive such as to gain more revenue Marks 0 1 2 2

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6 d N17 3 ECONO HP3 ENG TZ0 XX M Using an appropriate example explain the significance of price elasticity of demand in relation to the size of the tax revenues a government collects following the imposition of an indirect tax Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For explaining that if demand is price inelastic then tax revenues collected by the government would be higher than if demand is price elastic as quantity demanded would decrease by less following the increase in price or for providing an appropriate example s The written response is accurate For explaining that if demand is price inelastic then tax revenues collected by the government would be higher than if demand is price elastic as quantity demanded would decrease by less following the increase in price and for providing an appropriate example s If the example is not explained then the candidate can be awarded up to 3 Marks 0 1 2 3 4 The example should relate to product s with price elastic and or price inelastic demand A numerical example which shows the effect of an indirect tax on tax revenue but not merely producer revenue may also be fully rewarded If candidates confuse tax revenue with producer revenue but demonstrate understanding of elasticities and provide a relevant example they may be awarded a maximum of 2 marks N B reference to percentage changes proportionality is NOT required 4

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7 e i N17 3 ECONO HP3 ENG TZ0 XX M State the type of indirect tax under consideration 1 Ad valorem or percentage 1 The name of a tax such as value added tax may not be accepted ii Outline the reason for your answer to part e i Level 0 1 2 The work does not meet a standard described by the descriptors below Vague response The change in d value the coefficient of P changes the slope of the supply curve OR the idea that the supply curve becomes steeper with an ad valorem tax Accurate response For outlining that as price quantity increases the size of the tax also increases consistent with ad valorem causing the supply curve to be steeper as a result of the change in the coefficient 2 Marks 0 1 2 To achieve level 2 the response must refer to the change in the coefficient of price the d value and to the change in the size of the tax as price quantity increases

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9 ii N17 3 ECONO HP3 ENG TZ0 XX M Calculate the resulting consumer expenditure and producer revenue and government tax revenue following the imposition of the 3 per unit tax Consumer expenditure 14 36 000 504 000 An answer of 504 000 without workings is sufficient for 1 Producer revenue 11 36 000 396 000 An answer of 396 000 without workings is sufficient for 1 Tax revenue 3 36 000 108 000 An answer of 108 000 without workings is sufficient for 1 The tax revenue may also be calculated by subtracting producer revenue from consumer expenditure OFR applies Examiners will need to examine the graph carefully and reward valid working 3 1 1 1

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11 ii N17 3 ECONO HP3 ENG TZ0 XX M In the grid above sketch an average total cost ATC curve that would result in economic losses for this firm 1 For a correctly sketched U shaped ATC lying above MR AR 20 at all quantities and with the MC curve intersecting the ATC at the minimum ATC 1 A labelled MR or P curve is not necessary for part i or for part ii h If a perfectly competitive firm aiming at profit maximization is producing at a level of output for which marginal revenue MR marginal cost MC state what action the firm should take with respect to its level of output 1 It should increase output 1

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12 i N17 3 ECONO HP3 ENG TZ0 XX M Using an appropriate diagram explain when a loss making perfectly competitive firm will shut down in the short run Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For a diagram which shows price below a U shaped AVC curve with explanation that the firm would shut down if price falls below AVC Or an explanation that in the short run a firm faces fixed costs which are unavoidable so it will shut down if the price is less than minimum AVC as at any level of output it would lose more than the unavoidable fixed costs The written response is accurate For a diagram which shows price below a U shaped AVC curve with explanation that the firm would shut down if price falls below AVC AND an explanation that in the short run a firm faces fixed costs which are unavoidable so it will shut down if the price is less than minimum AVC as at any level of output it would lose more than the unavoidable fixed costs Marks 0 1 2 3 4 A response which explains accurately that if AVC P ATC the firm should NOT shut down may be fully rewarded 4

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13 2 a N17 3 ECONO HP3 ENG TZ0 XX M Calculate the annual import expenditure on quinoa under free trade 2 120 20 x 4 1 Any valid working is sufficient for 1 US 400 million 1 An answer of 400 million or 400 million without workings is sufficient for 1 b i Define the term consumer surplus Level 0 1 2 ii 2 Marks The work does not meet a standard described by the descriptors 0 below Vague definition 1 The benefit that consumers enjoy OR the area between the demand curve and the price line Accurate definition 2 The difference between how much consumers are willing to spend or to pay and what they actually spend or pay OR the Idea that it is the difference between benefit utility satisfaction received and the price expenditure Calculate the size of the consumer surplus under free trade 2 16 4 x 120 2 1 Any valid working is sufficient for 1 US 720 million An answer of 720 million or 720 million without workings is sufficient for 1 1

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14 c i Explain one way in which the effect of imposing a tariff is likely to be different from that of imposing a quota Level 0 1 2 N17 3 ECONO HP3 ENG TZ0 XX M The work does not meet a standard described by the descriptors below For one difference vaguely explained Possible responses include a quota affects the volume of imports while a tariff affects the price a quota has a certain effect on the volume of imports while a tariff does not a tariff leads to tariff revenues but a quota does not Clear explanation of one difference Possible responses include a quota is a quantitative restriction so it affects the volume of imports while a tariff is a tax on imports so it affects the price of imports a quota being a quantitative restriction has a certain effect on the volume of imports while the effect of a tariff is uncertain a tariff leads to tariff revenues but a quota does not lead to tariff revenues because it is a restriction on quantity imported OR because others receive the revenue rent Marks 0 1 2 2

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16 d N17 3 ECONO HP3 ENG TZ0 XX M Using the diagram explain two benefits enjoyed by Fairsea farmers following the introduction of the quota Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For a limited explanation of one benefit award a maximum of 1 For an accurate explanation of one benefit or a limited explanation of two benefits award a maximum of 2 Benefits may include enjoying a higher price greater volume of sales greater revenues profits higher producer surplus less competition faced from foreign producers economies of scale any other valid response The written response is accurate For providing an accurate explanation of one benefit and a limited explanation of a second benefit award a maximum of 3 For providing two accurate benefits award a maximum of 4 Accurate explanations may include the restricted supply of quinoa in the domestic market permits them to enjoy a higher price as they were selling quinoa at US 4 00 per kilogram and now they may sell at US 6 50 per kilogram as a result of the higher price they can increase the quantity they offer from selling 20 million kilograms of quinoa per year and now they sell 45 million kilograms of quinoa per year since they sell more quinoa at a higher price they earn more revenues per period from 4 x 20 to 6 50 x 45 since they sell more at a higher price they enjoy a greater producer surplus 20 to 101 25 less competition from foreign producers as imports decrease from 100 to 50 any other valid response Award a maximum of 3 if no reference is made to figures or the diagram or if the figures are not all correct The main benefits relate to a higher price greater quantity increased revenue less competition and increased producer surplus A candidate who includes two of these in one explanation may be fully rewarded So the third bullet point above would earn 4 marks Marks 0 1 2 3 4 4

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17 e i N17 3 ECONO HP3 ENG TZ0 XX M Given the above exchange rates calculate the current exchange rate between the euro and the Fairsea dinar FD 0 35 US 1 00 Any valid working is sufficient for 1 FD 0 39 1 00 US 1 12 2 1 1 An answer of 0 39 or FD 0 39 without workings is sufficient for 1 Accept also FD1 2 55 or 2 56 ii Using your answers to part b ii and c ii calculate in Fairsea dinars the change in the consumer surplus following the introduction of the quota 3 Initially US 720 million Now 9 5 x 95 2 US 451 25 million 1 OFR applies 451 25 720 Any valid working is sufficient for 1 US 268 75 million 1 268 75 x 0 35 FD 94 06 million 1 OFR may be applied if either the initial or the final consumer surplus is correct and the subtraction is performed correctly OFR applies ie if an incorrect US figure is converted correctly into FD then 1 mark may be awarded ie the mark is awarded for accurately converting a US figure to a FD figure

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18 iii N17 3 ECONO HP3 ENG TZ0 XX M Calculate the change in export revenues of foreign farmers in US dollars following the introduction of the quota assuming that they sell their quinoa at the new Fairsea market price 2 Initial export revenues in US initial import expenditures earlier 100 4 400 million New export revenues 50 6 5 US 325 million 1 Change 325 400 Any valid working is sufficient for 1 Identification of initial export revenues as equal to initial import expenditures may constitute valid working US 75 million An answer of US 75 million or 75 million without workings is sufficient for 1 OFR applies 1

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19 f N17 3 ECONO HP3 ENG TZ0 XX M The US central bank decides to increase US interest rates As a result many financial investors switch their Fairsea dinar deposits into US dollars Explain one advantage and one disadvantage for the Fairsea economy from the expected change in the value of the Fairsea dinar Level 0 1 2 Marks 0 The work does not meet a standard described by the descriptors below The written response is limited 1 2 For a limited explanation of one advantage or one disadvantage award a maximum of 1 For an accurate explanation of one advantage or one disadvantage or a limited explanation of one advantage and one disadvantage award a maximum of 2 Advantages may include exports more competitive imports less attractive import competing firms benefit net exports rise current account improves aggregate demand increases growth accelerates employment rises unemployment falls any other valid advantage Disadvantages may include risk of demand pull inflation risk of cost push inflation domestic firms importing inputs suffer income distribution may become more unequal firms have less incentive to cut costs drive for efficiency suffers terms of trade deteriorate Fairsea central bank raise interest rates and subsequent disadvantages any other valid disadvantage The written response is accurate For providing an accurate explanation of one advantage or one disadvantage and a limited explanation of one disadvantage or one advantage award a maximum of 3 For providing an accurate explanation of one advantage and an accurate explanation of one disadvantage award a maximum of 4 Accurate explanations of advantages may include above with some explanation Any other valid explanation Accurate explanations of disadvantages may include above with some explanation Any other valid explanation N B only one effect is required 3 4 4

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21 3 a N17 3 ECONO HP3 ENG TZ0 XX M Calculate the gross domestic product GDP of Country X for 2016 2 C I G X M 4590 1130 640 980 1045 1 Any valid working is sufficient for 1 6295 million 1 An answer of 6295 million or 6295 without any workings is sufficient for 1 b Calculate the gross national product GNP of Country X for 2016 2 GDP net property income from abroad 6295 435 482 1 Any valid working is sufficient for 1 6248 million 1 An answer of 6248 million or 6248 without any workings is sufficient for 1 OFR applies c i Calculate real GDP for Country X for 2012 and 2013 Enter your answers in Table 2 Year Nominal GDP million GDP deflator 2 Real GDP 2011 4620 90 95 2012 4865 91 61 5310 56 2013 5100 94 32 5407 12 2014 5730 100 00 2015 6000 101 23 2012 5310 56 million an answer of 5310 56 is sufficient 2013 5407 12 million an answer of 5407 12 is sufficient Responses written in either the table or in the text box should be rewarded A candidate who uses 2011 as a base year and hence produces answers of 4892 95 and 4917 78 may be fully rewarded 1 1

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22 ii N17 3 ECONO HP3 ENG TZ0 XX M Using your answers to part c i calculate the rate of economic growth for 2013 5407 12 5310 56 100 5310 56 Any valid working is sufficient for 1 1 82 2 1 1 An answer of 1 82 or 1 82 without workings is sufficient for 1 OFR applies d i Outline the likely effects on a country s balance of trade of a high rate of economic growth Level 0 1 2 Marks The work does not meet a standard described by the descriptors 0 below Vague outline 1 For the idea that higher incomes will lead to more imports or that higher incomes will worsen the balance of trade OR For reference to export led growth so that exports increase or improve the balance of trade OR that economic growth may lead to inflation which would reduce exports increase imports or that economic growth may worsen the trade balance Accurate outline 2 For outlining that higher incomes lead to an increase in imports which will worsen the balance of trade OR For outlining that export led growth will be caused by result in an increase in exports and hence the balance of trade will improve OR that economic growth may lead to inflation which would reduce exports increase imports and worsen the trade balance A response which explains that growth leads to a currency appreciation may be awarded a maximum of 1 mark unless there is reference to export led growth 2

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24 e i A politician in Country X has stated that Our tax system is inequitable as it is regressive Explain this statement using the data in Table 3 Level 0 1 2 ii The work does not meet a standard described by the descriptors below The response is limited For the idea that a tax is regressive if the average tax rate decreases as income increases The response is accurate For the idea that a tax is regressive if the average tax rate ATR decreases as income increases and since the ATR or paid here is decreasing from 21 75 0 22 to 20 25 0 20 to 19 28 0 19 2 percentages are sufficient then the tax system of country X is regressive Therefore those on higher incomes pay proportionately less making the tax system unfair The work does not meet a standard described by the descriptors below Responses may include subsidize socially desirable goods and services increase transfer payments measures to promote equality of opportunity increase impose a minimum wage introduce price controls any other reasonable response Award 1 for each measure stated up to a maximum of 2 Two types of transfer payment or two types of subsidy direct provision may be awarded a maximum of 1 mark 4 Marks 0 1 2 3 4 Apart from taxation state two other measures which could be taken by a government to make the distribution of income more equitable Level 0 1 N17 3 ECONO HP3 ENG TZ0 XX M Marks 0 1 2 2

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26 iii N17 3 ECONO HP3 ENG TZ0 XX M Explain how the economy would move back to this position of long run equilibrium Level 0 1 2 The work does not meet a standard described by the descriptors below The response is limited For the idea that the new short run equilibrium will exert upward pressure on the APL and thus on wages which are assumed flexible in the long run The increase in wages will shift SRAS left The response is accurate For the idea that the new short run equilibrium will exert upward pressure on the APL and thus on wages which are assumed flexible in the long run The increase in wages will increase production costs shifting the SRAS left until equilibrium output is equal to potential output and long run equilibrium is restored 4 Marks 0 1 2 3 4 For Level 2 reference should be made to increasing wages and the restoration of equilibrium at potential output g Outline how one incentive related supply side policy would help to boost aggregate supply Level 0 1 2 The work does not meet a standard described by the descriptors below Vague outline For reference to personal income tax cuts OR For reference to cuts in business tax OR For reference to cuts in capital gains tax Accurate outline For outlining that personal income tax cuts aim at increasing the incentive to work and therefore increase the size of the labour force OR For outlining that cuts in business tax aim at increasing the incentive to invest leading to an increase in the quantity quality of capital OR For outlining that cuts in capital gains tax aim at increasing the incentive to invest leading to an increase in the quantity quality of capital Marks 0 1 2 2