A-level

ECONOMICS
Paper 2 National and International Economy

Time allowed: 2 hours

Materials
For this paper you must have:
• an AQA 12-page answer book
• a calculator.

Instructions
• Use black ink or black ball-point pen. Pencil should only be used for drawing.
• Write the information required on the front cover of your answer book.
The Paper Reference is 7136/2.
• In Section A, answer EITHER Context 1 OR Context 2.
• In Section B, answer ONE essay.

Information
• The marks for questions are shown in brackets.
• The maximum mark for this paper is 80.
• There are 40 marks for Section A and 40 marks for Section B.

Advice
• You are advised to spend 1 hour on Section A and 1 hour on Section B.

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Section A

Answer EITHER Context 1 OR Context 2.

EITHER

Context 1 Total for this context: 40 marks

Investment in Africa
Study Extracts A, B and C and then answer all parts of Context 1 which follow.
Extract A

Figure 1: Real GDP (US$ bn), selected African Figure 2: Foreign direct investment (FDI) net
nations, 2015–2018 inflows (US$ bn), selected African
nations, 2015–2018
Country 2015 2016 2017 2018 Country 2015 2016 2017 2018

Egypt 250.0 260.9 271.8 286.3 Egypt 6.9 8.1 7.4 8.1

Kenya 52.3 55.4 58.1 61.7 Kenya 0.6 0.7 1.3 1.6

Liberia 2.6 2.6 2.5 2.6 Liberia 0.2 0.3 0.2 0.1

Morocco 113.4 114.6 119.5 123.2 Morocco 3.3 2.2 2.7 3.5

Nigeria 461.8 454.4 458.0 466.9 Nigeria 3.0 4.5 3.5 2.0
Source: World Bank, 2020 Source: World Bank, 2020

Extract B: Foreign direct investment in Africa

In 2018, foreign direct investment (FDI) in Africa rose to $46 billion, an 11% increase on the
previous year. Morocco and Kenya saw some of the biggest rises in FDI, although many
nations in Sub-Saharan and Central Africa experienced falls. Nations with high and stable
growth seem better able to attract FDI inflows.

It was expected that increased rates of economic growth in Africa, along with progress towards 5
the African Continental Free Trade Area (AfCFTA) agreement and key improvements in
infrastructure, would boost FDI. Multinational corporations (MNCs) from developing countries
have been expanding their activities in Africa but investors from developed countries remain
key. French companies are currently the largest investors in Africa, followed by the
Netherlands, the United States and the UK. Africa is a key producer of commodities and with 10
higher demand and rising commodity prices, FDI inflows are expected to increase even further.

The growing number of special economic zones (SEZs) are also likely to help Africa attract
more FDI. SEZs are areas with relaxed trade rules, little regulation and little or no tax on firms
that invest in the zone. This makes locating in a SEZ very appealing to foreign firms. The
creation of these zones has helped to promote development in several Asian economies and 15
many African nations hope to make their economies more business-friendly. There are an
estimated 237 SEZs in the African continent already.

FDI can have many benefits. It should create employment, boost long-run economic growth
and increase exports. SEZs and improving competitiveness should contribute to the
achievement of key macroeconomic objectives and the development of a country’s economy. 20
Source: News reports, 2020

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Extract C: Problems for Africa

It has been said that ‘investing in Africa is only for the brave’. Some of the issues faced by firms
include lack of infrastructure such as poor electricity and transport networks, bureaucracy,
political instability and corruption. African nations’ current share of global trade is only around
3%.

Since African governments began to use SEZs in the early 1970s, they have failed to attract 5
significant investment, to promote exports, or to create sustainable industrial development.
SEZs create distortions in markets, with too much focus on short-term gains. Often, conflicts of
interest occur between host governments and investors. Many MNCs, that have been attracted
to Africa by the SEZs, have been accused of doing little to improve the living standards of the
African people. It has been said that they do not create many jobs, they exploit workers and 10
damage the environment. Too often, profits are not reinvested in Africa but distributed to
shareholders or invested elsewhere.

Some argue that African governments should be doing more to improve the living standards of
their citizens, rather than relying on foreign firms. However, high debts, high unemployment
rates and low tax revenues often make it difficult for the governments of African nations to 15
develop their economies without investment from abroad.
Source: News reports, 2020

0 1 Using the data in Extract A (Figure 1), if 2015 is the base year, calculate the index of
Egypt’s real GDP in 2018.

Give your answer to one decimal place.

[2 marks]

0 2 Explain how the data in Extract A (Figures 1 and 2) show that nations with high and
stable economic growth attract rising foreign direct investment (FDI) inflows.
[4 marks]

0 3 Extract B (lines 18–19) states: ‘FDI can have many benefits. It should create
employment, boost long-run economic growth and increase exports.’

With the help of a suitable diagram, explain how a rise in inward foreign direct investment
(FDI) may lead to increased exports.
[9 marks]

0 4 Extract C (lines 13–14) states: ‘Some argue that African governments should be doing
more to improve the living standards of their citizens, rather than relying on foreign firms.’

Using the data in the extracts and your knowledge of economics, assess the view that to
improve the living standards of their citizens, African nations should pursue policies to
attract foreign direct investment (FDI).
[25 marks]

Turn over ►
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Do not answer Context 2 if you have answered Context 1.

OR

Context 2 Total for this context: 40 marks

Is inflation a problem?

Study Extracts D, E and F and then answer all parts of Context 2 which follow.

Extract D

Figure 3: Unemployment rates (%), Figure 4: CPI inflation rates (%),

selected economies, 2015–2018 selected economies, 2015–2018
Country 2015 2016 2017 2018 Country 2015 2016 2017 2018

Argentina 6.5 8.5 8.4 9.2 Argentina 10.0 10.6 25.7 34.3

Brazil 8.3 11.3 12.8 12.3 Brazil 9.0 8.7 3.4 3.7

France 10.4 10.0 9.4 9.0 France 0.1 0.3 1.2 2.1

UK 5.4 4.9 4.4 4.1 UK 0.0 0.7 2.7 2.5

USA 5.3 4.9 4.3 3.9 USA 0.1 1.3 2.1 2.4
Source: Knoema, 2020 Source: Knoema, 2020

Extract E: Argentina’s economic woes

In 2019, Argentina’s inflation rate hit 53.8%, climbing to its highest level in thirty years. This
confirmed Argentina’s place among the five countries with the highest inflation rates in the
world, just behind Venezuela, Zimbabwe, South Sudan and Sudan. However, inflation isn’t the
only problem faced by Argentina. The country has just suffered three years of recession and
the government has often struggled to meet its debt repayments. 5

Despite one of the tightest monetary policies in Argentina’s history, implemented in 2018 after a
currency crisis, inflation continued to rise and the recession deepened. It was hoped that policy
measures, including a reduction in tariffs and strict currency controls, would help to reduce
inflation, but so far this has not happened.

In 2020, Argentina’s central bank cut its base interest rate to support the recovery of the 10
economy. However, it has been argued that lower interest rates would be likely to cause further
inflation. “Loosening monetary policy without having a clear fiscal plan or winning over the
confidence of businesses and consumers is a mistake”, said an Argentine economist.

Some argue that Argentina should prioritise eliminating inflation over other objectives of
economic policy. In the 1970s and 1980s, the UK experienced high inflation. Policies were put 15
in place to reduce the money supply and reduce government spending. The control of inflation
became the main target of UK government macroeconomic policy. However, reducing inflation
often comes at the expense of growth and jobs, at least in the short term.
Source: News reports, 2020

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Extract F: Is the problem of high inflation in the past?

These days, most advanced economies no longer suffer from rapidly rising prices. Despite over
a decade of low interest rates, increases in the money supply and record employment levels,
inflation rates in most advanced economies remain low.

Since the 1990s, many governments have set inflation targets which their central banks are
required to achieve. This has contributed to a reduction in inflation. In some countries, the risk 5
of deflation has been greater than the risk of inflation. In the 2000s and the early 2010s, rising
commodity prices added to inflationary pressures. However, since oil and some other
commodity prices crashed in 2014, in many advanced economies inflation above 3% has been
rare. In emerging markets, inflation tends to be higher, but the direction of change is the same.
For nearly two decades, economists have talked about an era of ‘global disinflation’. 10

Low inflation can be self-reinforcing as expectations change. Also, as inflation falls, the real
rate of interest is likely to increase, weakening demand and further reducing inflation. This
would not be a problem if central banks could cut nominal interest rates sufficiently to offset the
risk of deflation, but many have little room to do so. Nominal rates are near zero in the UK, and
only a little higher in the USA. 15

Before the pandemic, two-thirds of countries in the Organisation for Economic Co-operation and
Development (OECD) had low inflation and a record proportion of their population of working
age in employment. This has led some to claim that the Phillips curve is outdated and no longer
a relevant model. Low inflation and low unemployment can be achieved simultaneously.
Source: News reports, 2020

0 5 Using the data in Extract D (Figure 3), calculate the difference between the UK’s and
Argentina’s mean unemployment rates over the period 2015 to 2018.

Give your answer to two decimal places.

[2 marks]

0 6 Explain how the data in Extract D (Figures 3 and 4) show that there may be a short-run
trade-off between unemployment and inflation.
[4 marks]

0 7 Extract E (lines 7–9) states: ‘It was hoped that policy measures, including a reduction in
tariffs... would help to reduce inflation’.

With the help of a diagram, explain how a reduction in tariffs could help to reduce
inflation.
[9 marks]

0 8 Extract E (lines 15–17) states: ‘Policies were put in place to reduce the money supply
and reduce government spending. The control of inflation became the main target of UK
government macroeconomic policy.’

Using the data in the extracts and your knowledge of economics, evaluate the view that
achieving a low and stable rate of inflation should be the main economic objective of
governments.
[25 marks]

Turn over ►
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Section B

Answer one essay from this section.

Each essay carries 40 marks.

EITHER

Essay 1

The UK has been running a deficit on its balance of trade in goods and services since 1998.
Expenditure-reducing and expenditure-switching policies can both be used to correct a trade deficit.
However, the UK government has focused on other objectives rather than achieving a trade balance.

0 9 Explain how expenditure-switching policies can be used to reduce a deficit on a country’s

balance of trade in goods and services.
[15 marks]

1 0 Assess the view that floating exchange rates are always better than fixed exchange rates.
[25 marks]

OR

Essay 2

In 2018, the European Commission estimated that Bulgaria and Romania were both experiencing
positive output gaps whilst the UK was experiencing a negative output gap. Persistent output gaps
can cause problems for economies which may be addressed by supply-side improvements.

1 1 Explain the main problems for an economy of having a large positive output gap.
[15 marks]

1 2 Evaluate the view that supply-side improvements in the UK economy can best be
achieved through the use of interventionist policies.
[25 marks]

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OR

Essay 3

Over the past 20 years, the growth of world trade has averaged 6% per year, twice as fast as the
growth in world output. As countries become ever more interconnected, they experience both
economic opportunities and threats.

1 3 Explain reasons for changes in the value of exports from the UK to the rest of the world.
[15 marks]

1 4 Evaluate the view that international trade always benefits nations.

[25 marks]

END OF QUESTIONS

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