_______________________

Name:
_
2.6.2 Trade
_______________________
Class:
_

_______________________
Date:
_

Time: 2630 min.

Marks: 1763 marks

Comments:

Page 1 of 155
Q1.
Extract B describes the trade figures as ‘disappointing’.

Explain how the data in Extract A (Figure 2) show that the UK’s trade performance has
been ‘disappointing’ given the fall in the value of the pound since November 2015.
[4 marks]

Q2.
Extract B (lines 21) states ‘Although some argue that a current account deficit is not a
problem, others point to the worryingly large and persistent nature of the deficit.’

Using the data in the extracts and your knowledge of economics, assess the impact of a
persistent current account deficit on the macroeconomic performance of the UK economy.
[25 marks]

Q3.
An African Development Bank report showed that Angola received more direct foreign
investment than any other African country in 2015. Angola is a less economically
developed country (LEDC) that has had fluctuating economic growth in the past. Despite
having suffered from a long civil war which ended in 2002, many multinational
corporations (MNCs) are now investing heavily in Angola’s growing economy.

Evaluate the view that MNCs play a positive role in the development of LEDCs.
[25 marks]

Q4.
The diagram below shows the market demand curve (D), the market supply curve (S) for
solar panels produced in a country, and the world market supply curve (SW) for solar
panels.

To protect domestic producers of solar panels the country introduces a tariff on imports.
The imposition of the tariff increases the price of solar panels from the world market price
(PW) to the higher price (PT).

Page 2 of 155
 Following the imposition of the tariff, the amount of tariff revenue collected by the
government is shown by the area

A EFGH
B JFGK
C PWPTGK
D Q2FGQ3
[1 mark]

Q5.
The table below shows the average exchange rate and currency valuation estimates for
four nations in comparison to the US Dollar in January 2016.

Average exchange rate Currency valuation

to US $1 estimate
Australian Dollar 1.46 Undervalued by 24%
Brazilian Real 4.05 Undervalued by 32%
Chinese Yuan 6.57 Undervalued by 46%
Danish Krone 6.84 Undervalued by 12%

Which one of the following can be concluded from the data?

A The Australian Dollar has appreciated by 24%

against the US Dollar.
B The Brazilian Real has been devalued by 32%
against the US Dollar.
C The Chinese Yuan has depreciated the most
against the US Dollar.
D The Danish Krone has the closest purchasing
power parity to the US Dollar.
[1 mark]

Q6.
Globalisation can make some product markets more contestable.

Which one of the following characteristics of globalisation is the most likely explanation for
such an increase in contestability?

A A reduction in protectionism
B Greater synchronisation of economic cycles
between countries
C Higher levels of labour migration
D The growth of employment in emerging market
economies
[1 mark]

Page 3 of 155
Q7.
Extract C (lines 2–3) states ‘More recently, India has begun to use more market-based
strategies to help its development, including liberalising trade and privatisation.’

Using the data in the extracts and your knowledge of economics, evaluate the view that
greater use of market-based strategies is the best way to improve the economic
development of India.
[25 marks]

Q8.
Between 2011 and 2016, UK unemployment fell from a high of 8.5% to 4.8%. Some argue
that government attempts to reduce unemployment inevitably lead to trade-offs with other
macroeconomic policy objectives.

Discuss the view that falling unemployment will inevitably lead to trade-offs with other
macroeconomic policy objectives.
[25 marks]

Q9.
The UK has seen significant changes in its pattern of trade with the rest of the world in
terms of what we trade and with whom. The UK’s current account deficit widened from
£29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest
annual deficit as a percentage of GDP since records began in 1948.

Explain the possible reasons for changes in the pattern of trade between the UK and the
rest of the world.
[15 marks]

Q10.
The UK has seen significant changes in its pattern of trade with the rest of the world in
terms of what we trade and with whom. The UK’s current account deficit widened from
£29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest
annual deficit as a percentage of GDP since records began in 1948.

Evaluate the measures that might be taken to reduce a deficit on the current account of
the UK’s balance of payments.
[25 marks]

Q11.
The Government has ruled out the possibility of a rise in VAT before 2020 but other
indirect taxes may increase. It has also stated that the personal income tax allowance will
be increased from £10 800 in 2015/16 to £12 500 by 2020, and plans to cut the main rate
of corporation tax from 20% to 17%.

Explain how changes in both government spending and taxation might affect the level of
economic activity.
[15 marks]

Q12.
The table below shows how much of each of two products can be produced by two

Page 4 of 155
 countries with the same amount of resources.

Motorbikes Cars
Brazil 10 or 5
United States 6 or 2

Which one of the following statements is correct?

A Brazil has a comparative advantage in the

production of both motorbikes and cars.
B Brazil has a comparative advantage in the
production of cars.
C The opportunity cost of producing motorbikes is
higher in the United States than Brazil.
D Trade will not take place because Brazil is better
at producing both goods.
[1 mark]

Q13.
INVESTIGATION

Scenario

You are an economist, employed by a firm of economic consultants working for the
government. You have been asked to produce a report on the importance of
manufacturing for the UK economy. As part of this investigation, you are to provide
answers to three questions.

To what extent, if at all, do you consider that the UK manufacturing sector has been in
decline since 2003? You must use the data in Extract B to support your assessment.
[10 marks]

Q14.
Using the data in Extract A, calculate in £bn, the value of the UK’s exports to Taiwan in
2014, if the total value of the UK’s exports to the world in that year was £500bn.
[2 marks]

Q15.
Explain the term ‘comparative advantage’ (Extract B, line 17) and, with the help of a
diagram, analyse two causes of increased globalisation in the world.
[9 marks]

Q16.
Extract C (lines 21 – 22) states: ‘Any kind of deal between the EU and ASEAN economies
is still a long way off, and the UK must wait to see how new trade deals affect its
macroeconomic performance.’

Using the data and your knowledge of economics, evaluate the extent to which
international agreements to increase free trade are likely to be beneficial to the UK’s

Page 5 of 155
 macroeconomic performance.
[25 marks]

Q17.
Explain the term ‘foreign direct investment’ (Extract E, line 7) and, with the help of a
diagram, analyse how foreign direct investment and improvements to infrastructure may
boost productivity.
[9 marks]

Q18.
Extract F (line 21) asks: ‘Why are productivity rates in other economies important for the
UK?’

Using the data and your knowledge of economics, evaluate the significance of productivity
improvements in the UK and in other EU economies for the performance of the UK
economy.
[25 marks]

Q19.
In January 2009, £1 could buy approximately 1.04 euros on the foreign exchange market.
By July 2015, £1 could buy approximately 1.44 euros.

Explain the factors that may lead to a rise in the exchange rate of a currency.
[15 marks]

Q20.
In January 2009, £1 could buy approximately 1.04 euros on the foreign exchange market.
By July 2015, £1 could buy approximately 1.44 euros.

Evaluate the impact on the UK’s macroeconomic performance of a sustained rise in the
value of the pound sterling against the euro.
[25 marks]

Q21.
The Office for Budget Responsibility (OBR) forecast that government spending would
account for 36% of GDP by 2020 compared to 45% of GDP in 2010.

To what extent do you regard a contraction of the public sector to be beneficial for the UK
economy? Justify your answer.
[25 marks]

Q22.
It is now nearly a decade since the financial crisis caused a recession in the UK. In March
2009, the Monetary Policy Committee (MPC) set the UK Bank Rate at 0.5%, which was a
record low, in order to stimulate economic growth.

Explain the main features of a recession.

[15 marks]

Page 6 of 155
Q23.
Explain the phrase ‘devaluation of the exchange rate’ (Extract B, line 12) and, with the
help of a diagram, analyse how a devaluation of the Chinese currency (the yuan) may
affect economic growth in the UK.
[9 marks]

Q24.
Extract C (lines 2 – 4) asks: ‘Is it time the UK considered manipulating its currency
directly and managing its exchange rate in order to reduce the ever-increasing trade
deficit and to help improve its performance?’

Using the data and your knowledge of economics, evaluate the view that the UK should
focus its monetary policy on managing the exchange rate in order to improve
macroeconomic performance.
[25 marks]

Q25.
‘George Osborne talks about boosting exports and rebalancing the economy, but the
Chancellor is not nearly as worried about the trade deficit as he is about the budget
deficit.’

To what extent do you agree that a persistent trade deficit is more damaging to the UK’s
macroeconomic performance than a persistent budget deficit? Justify your answer.
[25 marks]

Q26.
In 2014, the UK’s contributions to the European Union (EU) budget rose by £2.7bn,
making it the second largest net contributor. However, it is argued that the UK benefits
much more from the trade and the job creation that EU membership brings.

Explain how membership of a customs union, such as the EU, affects the pattern and
volume of trade between countries.
[15 marks]

Q27.
In 2014, the UK’s contributions to the European Union (EU) budget rose by £2.7bn,
making it the second largest net contributor. However, it is argued that the UK benefits
much more from the trade and the job creation that EU membership brings.

Evaluate the extent to which individuals and firms in the UK benefit from membership of
the EU.
[25 marks]

Q28.
International trade

Extract B: Transatlantic free trade?

David Cameron today confronted his critics by making the positive case for continuing 1
European Union membership as he held talks with President Barack Obama over a giant US-

Page 7 of 155
 EU trade deal that could provide a £10bn annual boost to the UK economy.

With his party in renewed turmoil over Europe, the Prime Minister sought to reassure the White
House (where senior figures in the Obama administration have insisted they regard the UK as 5
a crucial member of the union) that the UK are not looking to leave the EU.

The planned agreement would establish a free trade area between the world's two largest
trading blocs, creating a transatlantic market of 800 million consumers.

Writing in today's Wall Street Journal, Mr Cameron says: "This deal could add as much as
£10bn to the UK economy and £63bn to US GDP. But the rest of the world would benefit too, 10
with gains that could generate €100bn (£84bn) worldwide".

The Government last night released research suggesting a US-EU agreement sweeping away
trade barriers would particularly benefit the automotive, financial and chemical sectors. It
claimed the deal could be worth £380 a year for each British family.

Karel de Gucht, the European Commissioner for Trade, has cited the deal as a prime reason 15
for the UK staying in the EU, telling The Independent last week that it would be "clear
madness" for the UK to leave in light of such a deal.
Source: Adapted from: © www.independent.co.uk 13 May 2013

Q29.
International trade

Extract C: China and Europe risk trade war

China this week responded to EU anti-dumping tariffs on solar panels with a levy on 1
European wine. However, by attacking wine producers, Beijing has potentially turned a
straightforward dispute over state subsidies between Germany and China into a full-blown
European trade war.

France has effectively been targeted in retaliation for a levy designed to protect German 5
manufacturers in what appears to be a deliberate attempt to increase tensions within the EU.
In doing so, experts said that China, which is relatively new to the politics of global trade, has
demonstrated smart tactics.

The danger is that China may decide to target other seemingly innocent parties if the row
escalates, and that might mean the UK. Increased protectionism could be damaging as the 10
UK is placing much of its hope for export success on the growing Chinese market.

In the last five years, UK goods exports to China have virtually doubled to £15.9bn and, three
years ago, David Cameron set a $30bn (£20bn) target by 2015 as part of a bilateral deal with
Beijing. Including Hong Kong, China is now the UK's fifth largest net trading partner.

However, China's influence in the UK stretches wider. At the end of 2011, foreign direct 15
investment into the UK from China totalled £1.3bn, the second largest in the EU after
Germany. In the last six months alone, China's telecoms giant Huawei has announced plans
to invest £1.3bn in a new plant while ABP (a large Chinese investment group), plans to spend
£1bn developing the Royal Albert Dock in London.

The Government also hopes to attract Chinese money to invest in UK infrastructure as part of 20
George Osborne's 'Plan for Growth'. In other words, China is a key part of the Government's
economic recovery plan.
Source: ©Telegraph Media Group Ltd 2013

Q30.
Explain how the data in International trade Extract A show that the UK is having more
success in trading goods with the rest of the world than with Europe.
[4 marks]

Page 8 of 155
Q31.
International trade Extract B (lines 12−13) states ‘The Government last night released
research suggesting a US-EU agreement sweeping away trade barriers would particularly
benefit the automotive, financial and chemical sectors.’

With the help of a diagram, explain the extent to which the removal of a tariff might affect
the volume of imports into the UK.
[9 marks]

Q32.
International trade Extract C (lines 10−11) suggests that ‘Increased protectionism could
be damaging as the UK is placing much of its hopes for export success on the growing
Chinese market.’

Using the data in the extracts and your economic knowledge, evaluate the view that the
use of protectionism is inevitably damaging to economies.
[25 marks]

Q33.
In recent years, growth rates in the UK have been low and unemployment has risen. For
example, in 2012 output was still below its peak of 2008 and unemployment had risen
from 6.4% from 7.8%.

Explain why economic growth is a key objective of UK Government economic policy.

[15 marks]

Q34.
In 2013 Ethiopia had a relatively high real GDP growth rate of 7% but only 42% of its
population had access to improved water sources and life expectancy was only 63 years.

Discuss the view that free trade is more effective than aid in promoting economic
development in developing countries such as Ethiopia.
[25 marks]

Q35.
According to the principle of comparative advantage, on what does a country’s gains from
international trade depend?

A Its level of money wage rates compared to its

trading partners.

B It imposing a higher level of tariffs compared to

those of its trading partners.

C Its greater productive capacity in some goods

compared to its trading partners.

D Its lower opportunity cost in the production of

some goods compared to its trading partners.
[1 mark]

Page 9 of 155
Q36.
The table below shows the effective exchange rate index for Country X in 2010 and 2012
(2012 = 100).

Year Effective exchange rate index

2010 125

2012 100

All other things being equal, which one of the following options provides both the correct
percentage change in the index from 2010 to 2012 and a valid reason why this change
may have occurred?

Change in
Reason
exchange rate

An increase in interest rates

A 20%
in Country X

An increase in interest rates

B 20%
in other countries

An increase in interest rate

C 25%
in Country X

An increase in interest rates

D 25%
in other countries
[1 mark]

Q37.
Brazil: The Hot ‘BRIC’

Extract A: Who are the BRICs?

The BRIC label was first coined by the investment bank Goldman Sachs and refers to a 1
group of four large developing countries (Brazil, Russia, India and China), distinguished
from other promising emerging markets by their potential to rank among the world's
largest and most influential economies by the mid-21st century. Their potential is largely
due to their natural resources, the size and structure of their population, their attitudes to 5
investment and trade, and their capacity for technological progress. The four BRIC
economies have a combined population of over 2.8 billion, about 40% of the world's
population. They also produce more than a quarter of the world's output.

Analysts have suggested that, to enable a country to realise its potential for growth, there
is a number of conditions that need to be met. These include: 10
• a suitable level of human capital, for example, in relation to education, inequality
and life expectancy
• a stable macroeconomic environment, for example, as reflected in indicators of
inflation, growth and government borrowing
• access to current technologies such as the Internet and mobile
15
communications
• a stable political environment including the rule of law and the absence of
widespread corruption.

Page 10 of 155
 Source: News reports, October 2013

Q38.
Brazil: The Hot ‘BRIC’

Extract B: Brazilian economy

Brazil has a mixed economy with abundant natural resources. It has been the world's 1
largest producer of coffee for the last 100 years and it will shortly become one of the
world's top ten oil producers. Brazil also has a strong manufacturing sector. For example,
it is a likely source of the A4 paper you use in your printer, and its Bandeirante
Corporation has long competed with aerospace giants as a world-class manufacturer in 5
the niche market of short-haul commuter aircraft. By value, it ranks as the 23rd largest
exporter in the world. However, the discovery of oil off the coast of Brazil has led to an
appreciating currency; this makes life more difficult for domestic manufacturers.

Brazil is the world's fifth largest country by both population and total area. It has grown
rapidly over the last thirty years and is now the world's seventh largest economy. It has 10
the fourth largest car market in the world. From 1980 to 2011, Brazil's Human
Development Index increased by 30.8%. However, Brazil is also well known for its
inequality, and there is much rural and urban poverty. Many of its large cities contain
crowded and deprived slum districts known as favelas. Brazil's health care system ranks
125th out of 190 countries. 15

Brazil currently dominates Foreign Direct Investment (FDI) into Latin America and in 2011
it attracted about one third of all the FDI into the region. FDI creates jobs and contributes
to improvements in human capital as foreign companies often invest in their workforce.
New investment has a multiplier effect and the resultant growth in GDP generates higher
tax revenues for the Brazilian Government. However, there are also the environmental 20
effects to consider. Many overseas companies that are located in Brazil export part of
their output but some of their profits are sent abroad.
Source: News reports, October 2013

Q39.
Brazil: The Hot ‘BRIC’

Extract C: How does Brazil compare with the UK?

Selected data for the UK and Brazil (2013 unless otherwise stated)

UK Brazil

GDP (PPP) $2.39 trillion $2.42 trillion

Real GDP per head (PPP) $36,600 $12,100

Real GDP growth per capita (2000–2012) 1.14% per annum 2.27% per annum

Average growth (2000–2012) 1.72% per annum 3.41% per annum

Human Development Index (HDI) 0.875 0.730

(World ranking 26) (World ranking 85)

Unemployment 7.7% 5.5%

Page 11 of 155
 Inflation 2.7% 6.2%

Current account of the balance of payments –2.41%

–3.83%
(%GDP)

Public sector debt (%GDP) 91.1% 59.2%

Budget balance (%GDP) –7.4% +1.6%

Industry %GDP 20.5% 26.4%

Services %GDP 78.9% 68.1%

Gini coefficient 34.0 54.7

Share of income of the poorest 10% of the 2.1% 0.8%

population

Share of income of the richest 10% of the 28.5% 42.9%

population

Years of schooling 16 yrs 14 yrs

Literacy rate 99% 90.4%

Life expectancy 80.3 yrs 73.0 yrs

Infant mortality rate 4.5 per thousand live 19.8 per thousand live
births births

Population 63.4 million 201.0 million

Population, % over 65 17.3% 7.3%

Population, % under 15 17.3% 24.2%

Source: The World Factbook 2013–14. Washington, DC: Central Intelligence Agency, 2013.

Note: PPP = purchasing power parity

Q40.
Brazil: The Hot ‘BRIC’

Extract D: News report – Is Brazil in trouble?

In June 2013, more than a million citizens across Brazil took to the streets to protest 1
against political corruption, poor healthcare, inadequate schools, substandard public
transport and crumbling infrastructure. This is in a country which is reported to be
spending $13.3 billion to host the 2014 World Cup and $18 billion to host the 2016
Olympic Games. 5

In February 2014, the Brazilian currency, the real, is also making the headlines. In recent
months it has collapsed against the pound. A year ago, visitors to Brazil would have got
2.70 real for £1 but now the rate stands at 3.61 to the pound. The fall in the value of the
real is in response to a widening budget deficit and fears that the government's credit
rating will be reduced. In response, the central bank has raised its base interest rate to 10

Page 12 of 155
 10.75%.

Q41.
Using Brazil: The Hot 'BRIC', explain how Brazil is likely to benefit from inward
investment by a UK car manufacturer.

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

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_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________
[15 marks]

Q42.
The Balance of Payments

Extract D: UK trade figures and real GDP growth 2006 - 2012

UK trade balance

Balance of
Real GDP
Trade in Trade in trade in
(% change on previous
goods services goods and
year)
services
(£ million) (£ million)
(£ million)

2006 -76 842 41 643 -35 199 2.8

2007 -90 535 53 802 -36 733 3.4

2008 -94 261 61 689 -32 572 -0.8

2009 -82 933 59 560 -23 373 -5.2

2010 -98 585 65 733 -32 852 1.7

2011 -100 092 76 832 -23 260 1.1

Page 13 of 155
 2012 -108 700 75 319 -33 381 0.3
Source: news reports 2014

Q43.
The Balance of Payments

Extract E: Re-balancing the UK economy

The UK government wants to re-balance the economy more towards investment, 1

manufacturing and exports, and away from consumption and government spending.
Manufacturing only accounts for around 11% of what is produced in Britain, while the
service sector accounts for over three-quarters of UK GDP.

Britain, which until recently exported more to Ireland than to the combined BRIC economies 5
(Brazil, Russia, India, and China), wants to export more to emerging economies and help its
companies access the fastest-growing markets in the world.

In 2012, Britain’s trade deficit hit its highest level since 2007. The hope was that with sterling

having lost about a quarter of its value since the financial crash five years previously, this 10
depreciation would have boosted exports in the same way that it did during the early 1990s,
when the pound depreciated after a sterling crisis. The last time that Britain had a trade
surplus was towards the end of that decade, in 1997.
Source: news reports, February 2014

Q44.
The Balance of Payments

Extract F: Warning on UK's current account deficit

The UK is one of only eight countries to see its current account deficit increase since 2008, 1
and its deficit has increased the most. Should overseas investors be worried? The UK has
lived with large current account deficits for decades. From the 1940s to the early 1970s,
when the country was operating a fixed exchange rate system, the UK was forced to use
5
contractionary policies to keep the balance of payments in check and had to devalue the
pound sterling in 1949 and 1967. From the 1980s onward, with the exchange rate floating,
persistent current account deficits stopped being a cause for concern.

In the boom years before the global financial crisis, the current account deficit remained large,
exceeding 3% of GDP in 2006. With hindsight, this should have rung alarm bells that the 10
economy had become seriously unbalanced, with foreign money flowing into the UK to fund
unsustainable public and private sector consumption rather than investment. After the crash,
it was widely assumed that the UK economy would recover through higher exports and higher
business investment. Indeed, the government's 2010 budget forecasted a current account
surplus of 0.9% in 2013, driven by a surge in exports. This forecast proved highly inaccurate 15
as the current account deficit increased.

Although surveys show that business confidence is high, investment fell in the year to the end
of September 2013, and the UK's export performance has been poor, despite the
depreciation of sterling by approximately 25% in the immediate aftermath of the financial
crisis. In contrast, other European economies have seen strong export growth.
20
The UK's large current account deficit cannot be ignored easily, and research shows that
such deficits are reduced eventually through some combination of slower growth and
currency depreciation.
Source: news reports, February 2014

Page 14 of 155
Q45.
Explain how the data in The Balance of Payments Extract D show that increasing
growth in real GDP frequently leads to an increased deficit in the balance of trade in
goods and services.
[4 marks]

Q46.
The Balance of Payments Extract E (lines 8−10) states that: ‘The hope was that with
sterling having lost about a quarter of its value since the financial crash five years
previously, this depreciation would have boosted exports …’
With the help of a diagram, explain how a boost to exports would help the recovery of the
UK economy.
[9 marks]

Q47.
The Balance of Payments Extract F (lines 21−22) states: ‘The UK's large current
account deficit cannot be ignored easily, and research shows that such deficits are
reduced eventually through some combination of slower growth and currency
depreciation’.

Using the data in the extracts and your knowledge of economics, evaluate the significance
of a large and persistent deficit on the current account of the balance of payments for the
UK economy.
[25 marks]

Q48.
In May 2014, the European Central Bank (ECB) President, Mario Draghi, warned that
there was a risk of deflation across economies in Europe.

Explain why deflation may occur in an economy.

[15 marks]

Q49.
Although international trade has benefited UK consumers greatly over the last century,
improvements in transport mean it is becoming more difficult for UK firms to compete
against low-cost foreign producers.

Explain why international trade has benefited UK consumers.

[15 marks]

Q50.
Although international trade has benefited UK consumers greatly over the last century,
improvements in transport mean it is becoming more difficult for UK firms to compete
against low-cost foreign producers.

Discuss the view that protectionist policies should be introduced to protect UK firms.
[25 marks]

Q51.

Page 15 of 155
 The following diagram illustrates the demand and supply of a commodity in an economy
open to international trade.

After the imposition of a tariff, what is the total value of the revenue received by the
domestic producers?

A £3,900,000

B £9,000,000

C £5,200,000

D £9,100,000

[1 mark]

Q52.
THE GLOBAL CONTEXT

Extract B: Will growing inequality damage the US economy?

Some economists are predicting that the US will play a leading role in driving world 1
economic growth and, as the country which is the UK’s main export partner, this may
provide an injection into the UK’s circular flow of income. However, since the 2008
financial crash, there has been debate in the US over whether or not economic growth can
be strengthened and, if so, how best to achieve this. Within this debate, there are growing 5
concerns about the specific issue of income inequality. The top 1% of earners have
received 95% of the increase in income since the financial crisis. Since 2009, the top 1%
have seen their incomes rise on average by 31.4%, whereas the rest of the population has
seen a rise of only 0.4%.

The economist, Joseph Stiglitz, has highlighted inequality as one of the prime reasons 10
why the US has continued to struggle to recover. His basic argument is that the rich have
a lower marginal propensity to consume (the proportion of any increase in income spent)
and a higher marginal propensity to save (the proportion of any increase in income not
spent) than the poor.

Such inequality also creates unsustainable ‘property-price bubbles’ as wealthy individuals 15

increase the demand for property to let out on the rental market which further fuels
inflation. Tax receipts, which could be injected into the economy, also end up being
reduced, as the rich are able to exploit loopholes to avoid payment of tax. For this

Page 16 of 155
 reason, Stiglitz argues that it is necessary for the US Government to intervene to deal with
inequality. If the incomes of the poor were raised, increased consumption would occur. 20
This argument is refuted by Paul Krugman, who states that there are some European
economies with much lower income inequality which are also in a mess.
Source: News reports, 2013

Q53.
THE GLOBAL CONTEXT

Extract C: Incentives and economic performance

Could inequality be adversely affecting economic performance? According to some 1

economists, capitalism is not working effectively. Reducing trade union power and
creating more flexible labour markets have created greater income inequality. Successive
governments have also reduced taxation on companies and high earners (such as the
cut in income tax for those earning over £150 000 from 50% to 45%) in order to promote 5
incentives and wealth generation, as well as focusing much of the UK’s hopes on the
financial services industry. These policies, however, have created greater divides in terms
of the ‘haves’ and ‘have nots’ which may have consequences for the UK’s macroeconomic
performance.

There has been a shift, over the last generation, in the share of GDP from the workforce 10
to shareholders of between 5% −7%, with many low earners finding it difficult to get
onto the property ladder. Neo-classical economists cite the trickle-down effect as a way
of improving the living standards of all by cutting taxes for upper income groups and
business, stating that economic progress depends on saving and innovation which, in turn,
depends on the ability to make high profits. However, research by the Tax Justice Network 15
claims that, when there are high levels of inequality, to avoid tax, financial capital often
leaves the country, rather than staying in the domestic economy.

It has been argued that other policies such as public sector pay rise limits of 1%, benefits
rising at 1% rather than inflation-linked increases, and the removal of some housing
benefit, as well as the culture of bankers’ bonuses, have all contributed to growing 20
inequality. This is likely to have consequences for consumer spending power, but may
also help to contribute to reduced inflationary expectations. There has also been criticism
of the UK banking system, in that it has been too focused on making quick financial returns
rather than long-run investment. Ultimately, these factors may damage the UK’s ability to
achieve its macroeconomic targets. 25
Source: News reports, 2013

Q54.
The Global Context Extract B (lines 1−3) states: ‘some economists are predicting that
the US will play a leading role in driving world economic growth and, as the country which
is the UK’s main export partner, this may provide an injection into the UK’s circular flow of
income.’

Explain the term ‘circular flow of income’ and analyse how economic growth in the US
may lead to increased national income in the UK.
[9 marks]

Q55.
The Global Context Extract C (lines 7−9) states: ‘These policies, however, have created
greater divides in terms of the ‘haves’ and ‘have nots’ which may have consequences for
the UK’s macroeconomic performance.’

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 Using the data and your knowledge of economics, assess the importance for UK
macroeconomic performance of increasing income inequality, both domestically and in
other economies.
[25 marks]

Q56.
THE EUROPEAN UNION CONTEXT

Extract E: The French economy faces problems

The International Monetary Fund (IMF) has warned the French government that, unless it 1
makes major economic reforms to lower its labour costs and avoid tax rises, the economy
is likely to experience reduced growth. This view was echoed in a recent survey of
bankers, in which France was identified as the most serious threat to Europe’s recovery
from the debt crisis which has crippled growth and driven unemployment to record highs. 5
The outlook for France, the Eurozone’s second largest economy, is more worrying than
that for Italy, Spain or Germany.

The Chief Executive officer of the Institute of International Finance said: ‘There’s a lack of
concern about international competitiveness in France.’ French President,
François Hollande, is failing to revive business investment in the face of one of the world’s 10
highest tax burdens. Such investment could generate greater efficiency and higher
productivity, especially important if the euro’s exchange rate does not always work in
France’s favour.

An IMF spokesperson, Edward Gardner, also said that French unemployment, which
currently stands at 11%, would continue to rise, despite President Hollande’s vow to 15
reduce it by the end of the year. ‘It reflects in large part a general phenomenon in Europe
that the recovery is slower in coming than we had expected.’ The euro area’s recovery
almost came to a halt as the French economy unexpectedly shrank and German growth
slowed.

The failure of the French economy to improve is in contrast to the overall success of the 20
German economy and the stronger signs of recovery in the UK. President Hollande now
faces difficult choices in reducing government spending to reach European budget deficit
commitments. Furthermore, a recent announcement that VAT will rise, despite previous
claims that there would be no significant tax rises, may cause further problems for the
economy. 25
Source: News reports, 2013

Q57.
THE EUROPEAN UNION CONTEXT

Extract F: Ireland emerges from bailout

Whilst many of the Eurozone members still face instability in their own economies, Ireland 1
became the first economy to emerge from its bailout since the Eurozone crisis began. In its
final report on Ireland’s progress under the rescue scheme, the European Commission said:
‘With public sector debt at 122% of GDP in 2013, Ireland needs to continue with its fiscal
reduction programmes, reduce private-sector debt and improve bank profitability to revive 5
lending.’

Of the UK’s top ten European trading partners, Ireland is the only one with which the UK
has a current account surplus. The importance of trade with Ireland is therefore of great
significance. The Irish and UK economies are highly integrated and it is not yet clear how
further cuts in Ireland might impact on the UK’s macroeconomic performance. 10

Public sector debt across many European nations is still at very dangerous levels and
Ireland’s debt to GDP ratio is the second highest in the EU. Higher national debts may
lead to problems such as crowding out, where private sector investment is reduced due
to increased public sector borrowing. The EU introduced the Stability and Growth Pact

Page 18 of 155
 (limiting total debt as a percentage of GDP to 60% and annual deficits to 3% of GDP) in 15
order to prevent individual economies from creating instability across the EU. However, EU
member countries have struggled to keep to the pact, with only four member countries not
breaking the rules. Both Ireland and the UK have breached the pact since 2008. No doubt
more problems lie ahead for the Eurozone.
Source: News reports, 2013

Q58.
The European Union Context Extract E (lines 8−9) states: ‘There’s a lack of concern
about international competitiveness in France.’

Explain what is meant by ‘international competitiveness’ and analyse how the international
competitiveness of France might be improved.
[9 marks]

Q59.
The European Union Context Extract F (lines 14−18) states: ‘The EU introduced the
Stability and Growth Pact …in order to prevent individual economies from creating
instability across the EU. However, EU member countries have struggled to keep to the
pact, with only four member countries not breaking the rules.’

Using the data and your knowledge of economics, evaluate the likely impact on the UK
economy of other EU countries attempting to reduce their public sector debt at the same
time.
[25 marks]

Q60.
There are several countries, such as Iceland, Serbia and Turkey, which may join the
European Union in the future and so become members of the single market.

With the help of either a numerical example or a diagram, explain how the theory of
comparative advantage demonstrates that countries can benefit from international trade.
[15 marks]

Q61.
There are several countries, such as Iceland, Serbia and Turkey, which may join the
European Union in the future and so become members of the single market.

Evaluate the view that further enlargement of the European Union would be beneficial for
the UK economy.
[25 marks]

Q62.
Since the start of the financial crisis of 2007−2008, the UK, the Eurozone and the USA
have adopted quantitative easing (QE) in an attempt to stimulate their economies.

To what extent do you agree that maintaining inflation at the target rate of 2% should be
the top priority of UK macroeconomic policy? Justify your answer.
[25 marks]

Page 19 of 155
Q63.
The economies of Mexico, Indonesia, Nigeria and Turkey (MINT) have all been identified
as the next main emerging market economies with high rates of growth. However, there
are warnings that what goes up will eventually come down.

Explain why economies may go from periods of economic growth to recession.

[15 marks]

Q64.
THE EUROPEAN UNION CONTEXT

Extract F: Is deflation a bad thing?

Deflation is the new economic menace threatening European economies including the UK. 1
In the Eurozone in particular, the European Central Bank is considering the use of
quantitative easing to help avoid deflation; but why is it such a problem? Firstly, there is
the argument that deflation delays spending. However, this does not relate to all forms
of consumption. Another reason is the effect on debtors. Prices and perhaps incomes 5
may fall, but the real value of debt increases. For firms experiencing falling revenues,
and households with declining incomes, debt repayments become more of a burden.
Governments can be caught in the same trap, because if prices and incomes fall, so does
tax revenue.

There is an alternative view that moderate deflation is not a bad thing, especially if it is the 10
result of innovation that reduces production costs. Also, some comfort is to be had from
falling or barely rising prices as this goes some way to improve competitiveness. Some of
the Eurozone’s economies desperately need to become more competitive and they need to
either reduce costs or increase productivity. However, falling prices deter investment, which
makes productivity improvements far more difficult. 15
Source: news reports, 2014

Q65.
The European Union Context Extract F (line 1) states: ‘Deflation is the new economic
menace threatening European economies including the UK.’

Using the data and your knowledge of economics, evaluate the view that deflation in the
EU’s economies would inevitably be damaging to the UK’s macroeconomic performance.
[25 marks]

Q66.
Globalisation and outsourcing of manufacturing provides several potential benefits to
economies.
However, some countries, such as the UK, continue to suffer persistent trade deficits but
are unable to resort to import controls.

Explain how the UK Government could reduce a balance of payments deficit on the
current account, other than through the use of import controls.
[15 marks]

Q67.
Globalisation and outsourcing of manufacturing provides several potential benefits to
economies.

Page 20 of 155
 However, some countries, such as the UK, continue to suffer persistent trade deficits but
are unable to resort to import controls.

Assess the view that, for the UK, the economic benefits of globalisation outweigh the
costs.
[25 marks]

Q68.
Savings often provide the funds for investment. In 1997, the UK saving ratio stood at 13%,
at the beginning of the financial crisis in 2007 it was only 5% and by 2014 it had risen
slightly to 7%.

Evaluate the likely impact of a fall in the saving ratio on the performance of the UK
economy.
[25 marks]

Q69.
THE GLOBAL CONTEXT

Extract B: Inflation never quite goes away

Governments around the world seeking a cure for inflation accept that such a cure may 1
never be achieved. They recognise, therefore, that the next best thing is effective control
in order to secure economic stability and sustained economic growth. Even then, past
experience suggests that inflation will never be fully under control. Governments recognise
that there may be both national and international forces at work which have a bearing 5
on prices. International causes of inflation are inevitably going to be more difficult, or
impossible, for a country to control than those whose origins are from within that country.

Some economists might argue that a weak global economy can help to suppress inflation
but this weakness, if it persists, will have costs in terms of jobs and living standards. In any
case, there may still be pessimism about inflation in the long term. As growth strengthens 10
both in emerging and advanced economies, consumer demand, energy costs, primary
commodity prices and wage costs are certain to rise. Agricultural commodity prices, for
example, have fallen in recent decades but a significant upward trend could occur.
Such a trend will be reinforced by the growth of a global population, now over 7 billion.
An increasing global inflation problem could have serious consequences for all aspects of 15
UK macroeconomic performance, including the balance of payments and employment.
It breeds uncertainty for government, consumers and businesses and raises expectations of
future inflation. Because it affects competitiveness and can disrupt trade and investment
flows, the impact on both the current and the capital accounts of the balance of payments
needs to be assessed. It is also likely that worsening inflation can halt any hesitant 20
recovery. Overall, economic instability can be expected.
Source: news reports, 2012

Q70.
The Global Context Extract B (lines 15−16) argues: ‘An increasing global inflation
problem could have serious consequences for all aspects of UK macroeconomic
performance, including the balance of payments and employment.’

Using the data and your economic knowledge, discuss the possible impact on the UK
balance of payments of an increasing rate of inflation throughout the global economy.
[25 marks]

Page 21 of 155
Q71.
THE EUROPEAN UNION CONTEXT

Extract E: Would the UK be left out in the cold by saying goodbye to the EU?

In recent years, growing disenchantment with the EU has led to calls for the UK to leave 1
the organisation. Supporters and opponents of UK membership have presented coherent
arguments.

A study by the so-called Bruges Group, which opposes the EU, estimated the annual cost
of UK membership to be £65bn. This included an estimated cost to businesses of £28bn 5
to comply with EU regulations and an annual net contribution to the EU Budget of £14.6bn.
A member of the EU Commission in 2011 estimated that the Common Agricultural Policy
(CAP) causes the UK consumer to pay up to three times as much for food than if the CAP
did not exist. The common external tariff raises prices of imports into the EU, including the
prices of consumer goods and resources used by businesses. It also protects inefficient, 10
high-cost EU producers.

Those supporting UK membership point, for example, to the 3.5 million UK jobs created
from trade with the EU, either within the export sector or, more widely, through the operation
of an export-led multiplier. The Single European Market has helped trade creation and has
allowed EU labour to move to the UK, to the benefit of UK businesses. Despite not being in 15
the eurozone, the UK has continued to attract a large share of the world’s investment funds
so that it is now the third largest recipient internationally. It is claimed that a large part of
this is due to EU membership. The EU as a whole has also exerted much greater influence
than could any individual EU country in negotiations to further global free trade. One
business organisation has argued that non-membership would be like ‘sitting outside in the 20
corridors rather than at the decision table’.
Sources: various, 2012

Q72.
The European Union Context Extract E (lines 12−14) points out that UK trade with the
EU has created 3.5m jobs in the UK ‘either within the export sector or, more widely,
through the operation of an export-led multiplier’.

Explain the term ‘export-led multiplier’ and analyse two possible economic reasons for an
increase in UK exports to the EU.
[9 marks]

Q73.
The European Union Context Extract E (lines 1−2) states: ‘In recent years, growing
disenchantment with the EU has led to calls for the UK to leave the organisation.’

Do you agree with the view that the UK economy would benefit if the UK left the EU?
Justify your answer using the data and your economic knowledge.
[25 marks]

Q74.
In July 2012, the Office for Budget Responsibility concluded that UK Government
measures to cut the budget deficit have improved the UK’s long-term economic prospects.

To what extent do you agree, if at all, that the implementation of a budget deficit reduction
programme will improve the UK’s long-term economic prospects? Justify your answer.
[25 marks]

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Q75.
‘When the exchange rate of a country’s currency causes problems, it may be down to free
market forces, but government intervention might be to blame.’

Explain three possible determinants of a country’s exchange rate against other

currencies.
[15 marks]

Q76.
‘When the exchange rate of a country’s currency causes problems, it may be down to free
market orces, but government intervention might be to blame.’

Assess the importance of a floating exchange rate to a country trying to achieve

macroeconomic stability.
[25 marks]

Q77.
‘Economic shocks can bring with them significant consequences for macroeconomic
performance, as the UK knows only too well.’

Using at least one example of each, explain how demand-side and supply-side shocks
might harm a country’s economic growth.
[15 marks]

Q78.
‘Economic shocks can bring with them significant consequences for macroeconomic
performance, as the UK knows only too well.’

Evaluate the likely impact of world economic growth both on the UK economy and on
individuals in the economy.
[25 marks]

Q79.
THE EUROPEAN UNION CONTEXT

Extract D: Can the eurozone survive?

Before the global recession of 2008, the euro had emerged as a successful major 1
currency, making travel and trade for member countries much easier. Those countries
traditionally with weaker currencies, such as Italy, Greece and Spain, were given a degree
of stability which fostered economic growth. Some leading economists and politicians
were urging the UK to adopt the euro, seeing it as a major step towards the full integration 5
of the UK into the European Union (EU).

The global recession changed everything. By 2011, there were many in the UK relieved
that we were still outside the eurozone. The growing debt crisis in the eurozone has
inevitably had repercussions for the euro. Stronger members found themselves being
called upon to offer financial support to those economies in trouble. Media reports began 10
to suggest that the ultimate outcome of the debt crisis would be the break-up of the
eurozone, with some of the weaker members such as Spain, Italy and Greece re-adopting
their former national currencies.

Page 23 of 155
 The UK Government has adopted a policy of fiscal restraint in order to reduce annual
borrowing and to try to limit the growth of the National Debt (the total outstanding debt of 15
the government). It urged the weaker members of the eurozone in particular to adopt a
similar policy if they were to retain membership.

However, the potential benefits of leaving the eurozone are not lost on some politicians
and economists within the weaker economies. One such benefit is the absence of the
same ‘one-size-fits-all’ interest rate. For example, some countries still in recession in the 20
eurozone saw their interest rates, as set by the European Central Bank, rise to 1.25% in
July 2011. This was at a time when the Bank of England kept the UK Bank Rate at 0.5%.
Countries could also restore an exchange rate for their own currencies which would give
them a competitive edge, rather than being forced to cut wages and jobs. They would also
not be obliged to follow such a strict policy of fiscal restraint which remaining members 25
would have to follow.

There are others, however, both within these countries and beyond, who warn against
departure from the eurozone. It is difficult to predict what the economic impact on the
UK might be should there be a break-up of the eurozone. The impact would depend on
a number of factors, including how many countries left and which countries these were. 30
It might also depend on the degree of economic instability which departure from the
eurozone might cause in those countries as they restored their national currencies, and
the impact on the stability of the remaining members of the eurozone. It has to be borne in
mind, however, that the EU would still exist.

The UK might expect disruption to trade, at least in the short term, with consequences for 35
the balance of payments. Another banking crisis could also emerge. International money,
seeking a safe haven, might favour the pound sterling and thus strengthen its external
value. These potential developments have implications for UK growth and employment
and pose yet another threat to the current recovery. The UK might be relieved to be
outside the eurozone. However, the UK is certainly not immune from the possible 40
consequences of its break-up.
Source: European Central Bank, 2012

Q80.
The European Union Context Extract D (lines 19–26) refers to economies which, if they
left the eurozone, would no longer be obliged to follow such a strict policy of fiscal restraint
and could enjoy other economic benefits.

Explain the phrase ‘policy of fiscal restraint’ and analyse one potential economic benefit
for an economy if it leaves the eurozone.
[9 marks]

Q81.
The European Union Context Extract D (lines 28–29) states that it ‘is difficult to predict
what the economic impact on the UK might be should there be a break-up of the
eurozone’.

Using the data and your economic knowledge, assess the possible impact on the UK
economy if a number of countries leave the eurozone.
[25 marks]

Q82.
‘Globalisation has made many economies more prosperous, but all economies have been
made more vulnerable to economic shocks.’

Page 24 of 155
 Explain the term ‘globalisation’ and the role that multinational companies play in the
development of globalisation.
[15 marks]

Q83.
‘Globalisation has made many economies more prosperous, but all economies have been
made more vulnerable to economic shocks.’

To what extent, if at all, have the economic consequences of globalisation differed

between developed and developing countries?
[25 marks]

Q84.
THE GLOBAL CONTEXT

Extract B: A decade of change, challenge and opportunity

This year, ten years will have passed since the downfall of Saddam Hussein in Iraq. 1
Over these years the Middle East and North African countries (MENA) have continued to
witness economic and political instability, culminating in the recent so-called ‘Arab Spring’
uprisings in countries such as Egypt, Libya and Syria.

The Organisation for Economic Cooperation and Development (OECD) distinguishes two 5
groups within the MENA region. The resource-rich economies, such as Iraq, Saudi Arabia
and Dubai, are recognised as being different from those seen as resource-deficient, such
as Egypt and Jordan. For both groups, however, and despite the political problems for
some, the OECD is optimistic about future growth.

The OECD argues that, as the global economy recovers, demand for goods and services 10
from European and emerging markets in particular will encourage development of MENA’s
manufacturing and service sectors. Just as the UK, for example, enjoys a comparative
advantage in financial services, some MENA economies are now developing attractively
priced manufactured goods. Tourism is also ripe for further development.

However, although the OECD points to economic progress having been made, recent 15
years have highlighted challenges which need to be faced in the MENA economies if there
is to be further progress. Improvements in labour productivity and hence competitiveness
are essential for increased trade with the rest of the world. More foreign investment in
infrastructure and manufacturing plant is desperately needed, with advanced countries
such as the UK having a role to play here. Unemployment remains persistently high in 20
some MENA countries, as does inflation.

Jordan is beginning to show what can be done to bring about a more successful economy.
Through productivity improvements, it is now one of the most competitive MENA countries.
This has helped it to negotiate a number of significant free trade agreements, including
those with the EU and the US. Exports have brought increased economic growth to 25
Jordan, as has domestic investment.

One of the benefits of economic success can be a higher standard of living. The Human
Development Index (HDI) allows international comparisons of living standards. The Arab
states of the Middle East have seen an improvement in the index from 0.444 in 1980 to
0.641 in 2011. The latter figure can be compared with 0.862 for the UK. 30

Income per head, access to healthcare and education, life expectancy, the quality of the
environment and a fair distribution of income are key factors in any assessment of living
standards. The UK and other developed countries need to remember that higher living
standards can mean bigger markets for goods and services.

Page 25 of 155
 In many of the MENA economies, there is still much to be done to achieve sustained 35
economic success. But, where Jordan leads, others will begin to follow. To do so would
see a significant strengthening of MENA’s economic importance in the global economy.
Source: news reports, 2012

Q85.
The Global Context Extract B (lines 36–37) states that, if other MENA economies were
to follow Jordan’s lead, there would be a ‘significant strengthening of MENA’s economic
importance in the global economy’.

To what extent, if at all, should developed countries such as the UK be concerned about a
significant strengthening of the economic importance of MENA countries in the global
economy? Justify your answer, using the data and your economic knowledge.
[25 marks]

Q86.
THE EUROPEAN UNION CONTEXT

Extract D: Economic growth or a double-dip recession?

In the third quarter of 2011, UK real GDP rose by 0.6%. Within this, manufacturing output 1
increased by just 0.1%, while services such as banking and finance showed a 0.7%
increase. Unemployment was around 8% of the labour force.

Such weak growth figures are a reflection of the economic situation within the European
Union (EU) as a whole. The likelihood is that the next few years for the UK economy will 5
be bleak. This pessimism is shared by other EU countries.

Prospects do not look good for the EU economy as a whole but, of course, the detailed
picture varies between member countries. There has been a general deterioration in
confidence. Intense financial turmoil in money and capital markets is affecting both
investment and consumption. Deficit-reduction programmes are also suppressing 10
domestic demand. Weaknesses in the global economy are holding back UK and EU
exports. In mid-2011, the hope had been expressed by some economists that exports
would be a major driver of economic growth, but such optimism proved groundless.

Attention has again turned to domestic demand within the EU. The projected decrease
in inflation in the UK and in other member countries, coupled with limited wage growth, 15
should at least limit any further significant erosion of real disposable income. However,
there is continuing concern over the level of household debt which may yet constrain
demand. Overall, the fears of a double-dip recession still loom large.

Within the UK, there is a debate over the relative importance of the various potential
sources of growth in the next few years. There is a view that tightening of fiscal policy 20
in the UK, together with similar policies in other EU countries, is damaging consumer
demand and business confidence unnecessarily. The UK think-tank, the Institute for
Public Policy Research (IPPR), argues for changes to be made to UK fiscal policy, and
supports more severe spending cuts only when the economy improves.

The Institute therefore points to three possible solutions to the problem of slow UK and 25
EU growth. These are: increases in government spending; substantial increases in global
demand; and households and firms being given stronger incentives to spend more, for
example through tax cuts. While growth in demand is seen as an important determinant
of economic growth over the next few years, elements of government spending and
incentives to business can make important contributions to the strengthening of the supply 30
side of the economy.

Page 26 of 155
 None of the solutions offered by the IPPR seems likely to occur at the moment. The UK
Government appears to be determined to maintain its tight fiscal policy, arguing that it
is the only basis for sustained long-term growth. The global economy is far from stable,
with increased talk by some of greater protectionism, although the emerging markets, 35
such as India and Brazil, offer some hope for UK and EU exports. Households lack the
confidence, and often the ability, to increase spending, while companies lack the optimism
to invest. It needs to be borne in mind that the EU remains the UK ’s most important single
trading partner by far. The best hope for stronger UK economic growth must therefore
surely rest with the EU, but this requires the eurozone to be stabilised and macroeconomic 40
conditions to improve throughout the EU.
Sources: news reports, 2012

Q87.
The European Union Context Extract D (lines 39–41) argues that the ‘best hope for
stronger UK economic growth must therefore surely rest with the EU, but this requires the
eurozone to be stabilised and macroeconomic conditions to improve throughout the EU’.

To what extent would you agree that the EU is likely to offer the ‘best hope for stronger UK
economic growth’ over the next few years? Justify your answer, using the data and your
economic knowledge.
[25 marks]

Q88.
In November 2011, the UK inflation rate was 4.8%, the rate of unemployment was 8.3%,
while Bank Rate remained at 0.5%.

Explain two economic consequences for an individual and two economic consequences
for an economy of an increase in its price level.
[15 marks]

Q89.
Weaknesses in the UK balance of trade in goods persist, with a deficit of £27.6 bn in the
third quarter of 2011, compared, for example, to £23.3 bn in the same quarter in 2010.

Explain three reasons for a country such as the UK experiencing persistent deficits in the
balance of trade in goods.
[15 marks]

Q90.
Weaknesses in the UK balance of trade in goods persist, with a deficit of £27.6 bn in the
third quarter of 2011, compared, for example, to £23.3 bn in the same quarter in 2010.

Discuss the possible contribution of supply-side reforms to achieving an improvement in

the UK balance of trade in goods.
[25 marks]

Q91.
The formation of single markets by countries in various parts of the world, including within
Europe, has shown that much is to be gained from increased economic cooperation.

Explain the main features of a single market, such as that which exists within the

Page 27 of 155
 European Union (EU).
[15 marks]

Q92.
The formation of single markets by countries in various parts of the world, including within
Europe, has shown that much is to be gained from increased economic cooperation.

Evaluate the possible economic costs and benefits to an EU member state, such as the
UK, of being part of the EU single market.
[25 marks]

Q93.
THE GLOBAL CONTEXT

Extract B: A passage to India

In July 2010, the UK Prime Minister led a Government delegation to India. The hope was 1
that India’s economic success could help to bring some relief to the UK economy and
speed the recovery process through increased exports.

India’s growth in 2010 is expected to be about 9%. Its GDP per capita is $3100, although
over 400 million Indians live below the international poverty line of $1.25 per day. It has a 5
labour force of almost 500 million but an official rate of unemployment of 11%. Quarterly
sector growth is impressive: 1.8% in services, 2.2% in manufacturing and 1.7% in
agriculture between January and March 2010.

For the Indian Government, inflation and economic growth are top of the agenda.
Unfortunately, there is often a trade-off between these two macroeconomic indicators. 10
Inflation jumped from 1.3% in October 2009 to almost 5% in November 2009. However,
food inflation was 19%. As in other countries, rising oil costs are also amongst the causes
of inflation for the Indian economy.

The UK Government still hopes to promote increased UK economic involvement in India.

Certainly Indian business has become more involved in the UK. Tata, one of India’s oldest 15
companies, is now the UK’s leading manufacturer through its ownership of Corus Steel
and Jaguar Land Rover. India is now more likely to be creating jobs in the UK through
direct investment rather than ‘stealing’ them, for example through call-centre activity
relocated from the UK. UK business needs to rise to the challenges and opportunities
presented in India. Companies such as Vodafone (telecommunications) and BAE 20
Systems (defence and aerospace) are amongst the recent success stories and it is widely
believed that India’s increased demand for world-class services, for example financial and
legal, can be met by the UK.

Infrastructure investment is urgent. Each year, about 40% of India’s agricultural produce
rots before arriving at market because of inadequate storage facilities and poor road and 25
rail links. The Indian Government’s plans to spend $500bn between 2010 and 2013 on
new ports, roads, rail links and airports will help to improve the situation. This investment
is an export opportunity for UK firms specialising in infrastructure projects. The growth of
the Indian economy will also help UK service exporters such as banking, education and
health-care businesses. Currently, India accounts for only 1% of UK exports. 30

However, India remains fiercely protective, and investment and trade flows from the UK
could remain limited. Progress will depend on whether a long-awaited EU-India trade
deal becomes a reality and on the outcome of the World Trade Organization’s global trade
talks. Many argue that India can only benefit from increased international trade.

The UK Government said at the time of the Prime Minister’s July 2010 visit to India that the 35
UK had a vital stake in India’s rise to becoming a global power and in its future prosperity.

Page 28 of 155
 At the same time, a view was also expressed that the UK needs India much more than
India needs the UK. It is hoped that all aspects of the UK’s macroeconomy can eventually
benefit as India develops further.

Source: news reports, 2010

Q94.
The Global Context Extract B (lines 2−3) states that ‘India’s economic success could
help to bring some relief to the UK economy and speed the recovery process through
increased exports’.

Using the data and your economic knowledge, assess the importance to the UK economy
of continued economic growth in India.
[25 marks]

Q95.
THE EUROPEAN UNION CONTEXT

Extract D: The fiscal remedy for recession

The recession of 2009 brought renewed interest amongst EU governments in a so-called 1

Keynesian approach to spending their way out of recession. They were desperate to avoid
a prolonged period of negative growth and the accompanying mass unemployment.

In the UK, as well as within the eurozone, fiscal rules were abandoned as the fight for
economic recovery began. The Stability and Growth Pact of the eurozone, to which the 5
UK had also adhered in an informal way before the recession, limited budget deficits to
3% of GDP and a nation’s debt to 60% of GDP. Such constraints were often far exceeded
and increasing concerns were being expressed. In May 2010, the new UK Government
became a prominent voice within Europe for a reversal of fiscal policy, with public
spending cuts and tax increases. 10

The UK Government’s policy was given some support by the economic crisis unfolding in
Greece, a member of the eurozone. The Greek Government needed to be ‘bailed out’ by
fellow member states if it was not to default on its debts. It had a budget deficit of 14% of
GDP and a national debt of 115% of GDP in 2009, a year when its GDP also fell by 2%.

There was concern in the EU that such a situation had been allowed to develop, with 15
increasing calls for EU-wide controls. France and Germany were pressing for an EU
institution such as the European Commission to provide such a role, with the power to
impose an EU-wide fiscal policy on all member states and not just the eurozone.

The UK Government opposed any such powers over member countries. However, it had
gone as far as to establish an Office for Budget Responsibility (OBR), intended to keep 20
the Government’s tax and spending plans under control by providing a reality check on the
state of the nation’s finances. The OBR, however, does not have the powers that some
were envisaging for the EU.

In a climate of greater stability in 2010, some still believed that an EU-wide fiscal policy
needed to be a key part of the evolution towards a federal state. It cannot be denied that 25
the best way forward must be that which delivers macroeconomic stability across the
EU. Whether this comes about through member governments each developing a policy
of fiscal responsibility or through a fiscal policy imposed by the EU on all member states
remains open to debate.
Source: various sources, 2010

Page 29 of 155
Q96.
The European Union Context Extract D (lines 16−18) suggests that France and
Germany would like the EU to have ‘the power to impose an EU-wide fiscal policy on all
member states and not just the eurozone’.

Using the data and your economic knowledge, assess the possible economic
consequences for the UK economy of an EU-wide fiscal policy requiring all member states
to balance their budgets.
[25 marks]

Q97.
UK exports of goods which, in 2002, were valued at £187 billion, had risen to £228 billion
in 2009.
The deficit on the UK balance of trade in goods rose from £48 billion in 2002 to £82 billion
in 2009.

Explain three possible reasons for growth in the value of an economy’s exports of goods.
[15 marks]

Q98.
UK exports of goods which, in 2002, were valued at £187 billion, had risen to £228 billion
in 2009.
The deficit on the UK balance of trade in goods rose from £48 billion in 2002 to £82 billion
in 2009.

Evaluate the view that an increasing deficit in UK trade in goods is a major problem for the
UK economy.
[25 marks]

Q99.
THE GLOBAL CONTEXT

Extract B: Winners and losers

The debate over the consequences of globalisation for individual countries continues. 1
Inevitably, there will be benefits and costs, winners and losers. For example, whilst the
UK has experienced deindustrialisation, its service sector has been successful in world
markets.

As the debate continues, one aspect of globalisation cannot be disputed: that the greater 5
integration of economies has meant that major events occurring in one part of the world
will have an impact not just on the affected country or region but are now much more likely
to have global significance.

Some events are known about well in advance of them actually happening. Major sports
competitions are an example. In 2012, for instance, the UK will host the Olympic Games. 10
Similarly, Russia and Qatar will host the football World Cup in 2018 and 2022 respectively.
The economic impact of such events on host countries is likely to be positive. For other
countries, the immediate impact is likely to be more limited. However, the UK and other
economies could benefit if these events make the host countries more open to trade and
investment in the long term.
15
Other events are far less predictable or are completely unpredictable. For example,
how might the UK cope with a disruption to gas and oil supplies if relations with Russia

Page 30 of 155
 deteriorate or political turbulence in the Middle East escalates? What path to recovery will
the UK take following the devastating effects of the 2008 US financial crisis?

Generalisations about the economic impact of natural disasters are often unhelpful. 20
Hurricane Katrina in 2006, which caused billions of dollars of damage in the New Orleans
area of the USA, had minimal economic impact on the rest of the world. However, the
Japanese earthquake and tsunami in 2011 are on a different scale. Japan accounts for
7% of world GDP. There are fears that the scale of the damage may lead to a return to
recession in Japan, as fearful Japanese consumers spend less and save more. Global 25
supply chains originating in Japan, such as car components supplied to the rest of the
world, have been severely disrupted. The UK, as well as Japan’s other trading partners,
will struggle to maintain exports to the Japanese market until stability is restored.

Like any other country, the UK needs to have a strong economy to be able to respond
successfully to all types of global event and to secure sustained economic growth. 30
Important factors include high productivity, resource mobility, innovation, skilled labour,
a strong infrastructure in its widest sense and general flexibility in the economy. The
ability to make use of these supply-side qualities will, however, also depend on aggregate
demand. The impact of major global events on UK aggregate demand will inevitably vary
considerably, positively or negatively, with unknown consequences for macroeconomic 35
performance.
Source: news reports, 2010/11

Q100.
The Global Context Extract B (lines 13 −15) refers to the possible benefit to the UK and
other economies if countries hosting major sports competitions become more open to
investment in the long term.

Explain the term ‘investment’ and analyse two possible economic benefits for the UK
when it is investing overseas.
[9 marks]

Q101.
The Global Context Extract B (lines 29 −30) states that ‘the UK needs to have a strong
economy to be able to respond successfully to all types of global event …’.

Using the data and your economic knowledge, assess the significance to UK
macroeconomic performance of major global events such as sports competitions, natural
disasters and economic downturns.
[25 marks]

Q102.
THE EUROPEAN UNION CONTEXT

Extract D: Turkey − gateway to Asia

Turkey has been in talks since 2005 regarding possible membership of the European 1
Union (EU). While further enlargement of the EU causes some concern, serious
consideration needs to be given to Turkey. Its geographical position links Europe and
Asia. Since Asia is currently driving world economic growth, Turkey can be an important
strategic gateway to Asia for the EU. 5

The UK Government supports Turkey’s application for EU membership but questions still
persist. If Turkey joins the EU, can the UK successfully take up the resulting trade and
investment opportunities? Will the UK be overwhelmed by imports and cheap migrant

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 labour? Will UK businesses be determined enough to grasp any opportunities?

Turkey has a population of 75 million, which is expected to rise to 100 million by 2020. 10
The average age is just 27 and it has vast economic potential. Turkey’s GDP is ranked
18th in the world, and GDP per capita is £7163. Like the UK, there has been some
negative growth in recent years but the economy recovered to achieve 11% growth in the
first quarter of 2010. Between 2002 and 2007, Turkey’s annual average economic growth
of 7% was far greater than that of the UK. 15

About 50% of Turkey’s exports are to Europe, with textiles being particularly important.
Machinery and semi-manufactured goods are major imports. The UK does not yet rank
alongside countries such as Germany, Italy, China and the US as important exporters to
Turkey, but opportunities certainly exist.

Turkey has had a reputation for economic instability. Since 2005, for example, inflation 20
has been between 5% and 12%. Unemployment has remained in double figures: 10%
of the labour force in 2005 and 14% currently. However, Turkey now boasts a relatively
modest budget deficit of between 4% and 5% of GDP.

Despite a degree of instability, Turkey is seen as an attractive centre for investment. For
example, the country received £115 bn in foreign direct investment in 2009. However, 25
Turkey’s infrastructure still leaves much to be desired.

UK businesses need to consider the potential economic opportunities. Lord Digby Jones,
formerly of the Confederation of British Industry (CBI), points out that Turkey’s recent
economic growth is from a low base. According to Lord Jones, “Whereas a little bit of
growth in a prosperous country such as Germany does not make much difference, in 30
a developing country such as Turkey millions of people get richer”. This is perhaps an
exaggeration, especially in the short run, but a valid point is being made.

The UK must not be blind to the potential problems of Turkey’s possible membership of
the EU and must also be in a position to grasp the opportunities which are sure to appear.
Source: news reports, 2010

Q103.
The European Union Context Extract D (lines 33 −34) argues that the ‘UK must not be
blind to the potential problems of Turkey’s possible membership of the EU and must also
be in a position to grasp the opportunities which are sure to appear’.

Using the data and your economic knowledge, assess the potential economic
consequences for the UK if Turkey joined the EU.
[25 marks]

Q104.
‘The long-term progress made towards a free-trade world must be maintained. Calls for
greater protectionism would lead to a disastrous collapse of global economic activity.’

Explain three protectionist policies that a government could introduce to reduce a deficit
on the current account of the balance of payments.
[15 marks]

Q105.
‘The long-term progress made towards a free-trade world must be maintained. Calls for
greater protectionism would lead to a disastrous collapse of global economic activity.’

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 Assess the view that the progress made towards free trade has brought significant
economic benefits both to the UK and to the rest of the world.
[25 marks]

Q106.
THE GLOBAL CONTEXT

Extract B: China: a bright spot in a gloomy world

China, despite its recent rapid growth, has not remained immune to the economic downturn 1
as some economists had hoped. However, it remains an economy which is looking to the
future with some optimism. It continues to invest in the production of raw materials and
resources in other countries. The consequent increased global investment should give a
much-needed boost to jobs and growth in countries benefiting from it. Despite this investment, 5
growth in demand from China is likely to continue to push up world raw material prices in the
long term.

Certainly, China has shown an increased recognition of the need to play its part in bringing
about global recovery. For example, in a recent international agreement to boost the funds of
the International Monetary Fund (IMF) by $500 billion, China has agreed to contribute 10
$40 billion, compared to the UK’s $15 billion. The IMF can now fulfil its promise of loans to
such countries as Poland and Mexico, which should contribute to the greater global stability
needed for recovery.

Nevertheless, China, fearing inflation, has expressed its concern about the policy of some
leading central banks, including the Bank of England, of quantitative easing (increasing the 15
money supply) in order to bring about economic revival by increasing aggregate demand.
China also knows that its policy of holding down the external value of its currency in
order to boost export-led growth is only likely to be successful if a global revival of
demand is achieved. For example, China saw a 25% decline in exports in 2008. The
depressed UK market will have contributed to this decline. 20

The other major world economies are keen to keep talking with China and win its approval
for a host of measures to bring about recovery. They want to engage China in more
long-term talks as well. These will include international financial reforms and
environmental policies, especially as China’s industrial growth continues to create
negative externalities. 25

China has every reason to be optimistic about its future prospects. In June 2009, the
Organisation for Economic Co-operation and Development (OECD) forecast growth for
that year of 7.7% and 9.3% for 2010. To a country used to double-digit growth figures,
this may seem like a recession. However, such figures are a far cry from the negative
growth seen in many parts of the global economy, including the UK economy. 30

Nevertheless, the ongoing concern of the Chinese Government is reflected in the

decision to give a $565 billion fiscal stimulus to its economy in 2009. It is also considering
protectionist policies, which may impact on those countries hoping to increase exports to
China. For the World Bank, however, the Chinese economy remains a ‘relative bright
spot in an otherwise gloomy global economy’ and countries such as the UK are keen to 35
see China help pull the global economy out of recession.

China has reacted coolly to suggestions that a solution to the world’s economic problems
lies in the hands of two powers: itself and the US. Although the UK has played a leading
role in international discussions on recovery, such an assertion may yet prove to have a
ring of truth. What is certain is that co-operation is vital in ensuring that appropriate 40
policies are followed to bring about a new era of sustained growth.
Source: various sources, 2009

Q107.
The Global Context Extract B (lines 4-5) refers to global investment undertaken by
China.

Page 33 of 155
 Explain the term ‘global investment’ and analyse two economic consequences for an
economy receiving such investment.
[9 marks]

Q108.
In 2009, the World Bank described the Chinese economy as a “relative bright spot in an
otherwise gloomy global economy” (The Global Context Extract B, lines 34-35).

Using the data and your economic knowledge, assess the consequences for the UK
economy of China’s continued economic growth during a global recession.
[25 marks]

Q109.
THE EUROPEAN UNION CONTEXT

Extract D: Is European Union (EU) unity threatened?

In March 2009, the Hungarian Government asked Germany for €190 billion to prevent 1
what it saw as a new economic ‘Iron Curtain’ from going up across Europe. The term ‘Iron
Curtain’ was intended to remind Europeans of the Soviet-era divide between the poorer
Communist East and the more prosperous, free, democratic West. Hungary argued that,
without such help, the contrast between the richer and poorer members of the EU would 5
only widen further. Germany’s refusal of Hungary’s request symbolised, for many, the
deepening divide between the EU’s richer and poorer members.

The contrast in fortunes is seen by newer members of the EU, such as Latvia, Lithuania
and Hungary, as one which can only worsen during the recession and which may threaten
the EU’s existence in the long term. On the other hand, some people in the more− 10
established members of the EU, such as the UK and France, have become increasingly
disillusioned with the EU and especially with the level of assistance now expected from
these more-established members by the newer members.

At the Brussels Summit of March 2009, the Czech Prime Minister warned of ‘the greatest
crisis in the history of European integration’. Gordon Brown, for the UK, spoke of the need 15
for unity and common policies. The Single European Market, for example, is seen as an
evolving policy which can foster prosperity for all and bring closer integration.

Cyclical unemployment is now widespread, however, and has been growing faster in the
Eastern members of the EU than in those of the West. This could increase tensions 20
between Eastern and Western members of the EU. The impact of cyclical unemployment
on both individuals and whole economies can be serious, as incomes and output fall and
welfare-dependency becomes more widespread.

Nevertheless, it would be wrong to argue that the wealthier members of the EU have
been totally immune to the problem. The Netherlands, the worst affected Western member, 25
experienced a 34% rise in unemployment between January 2008 and March 2009. There
was a much greater rise in Latvia and Lithuania, both in the East.

During a recession, questions are likely to be asked about the future of the EU as
policy disagreements emerge. Supporters claim that the EU is a force for good and
needs to be strengthened, rather than weakened or abandoned. In this way, it is 30
argued, East-West tensions can be kept at bay.

Such supporters feel that an enlarged EU, with open markets based on the Single
European Market policy, helps spread benefits of membership across the whole
organisation and offers the best chance of rapid recovery. In the UK, however, many
35
see openness as a threat to jobs and to living standards.

In the current climate, it has also been argued that a more ambitious set of common
macroeconomic policies would help speed recovery in the EU. Fiscal and
supply-side policies come into this category, as well as monetary policy, even though only

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 16 members of the 27-member EU have adopted the euro. Even so, limited agreement 40
on monetary policy, such as interest rates, could be of benefit.

The UK has not had the leading role in EU recovery policies that it has had globally, but it
has shown a willingness to play its part in fostering unity and economic revival so that
Europe can make a vital contribution to international recovery. Talk of disunity and the 45
break-up of the EU can only cause instability and hinder economic recovery. This is
something that members can ill-afford, particularly the UK. Growth, jobs and stable prices
are desperately needed.
Source: various sources

Q110.
The European Union Context Extract D (lines 35-36) argues that ‘a more ambitious set
of common macroeconomic policies would help speed recovery in the EU’.

Using the data and your economic knowledge, assess the impact on the UK economy of a
recovery in the EU as a whole.
[25 marks]

Q111.
‘Oil, as a form of energy, reigns supreme but it has brought significant problems to
economies in terms of inflation in particular, and the potential for economic instability in
general.’

Discuss how rising oil prices might affect the macroeconomic performance of an economy.
[25 marks]

Q112.
‘While it is necessary to have macroeconomic policy objectives, such as price stability and
full employment, they can sometimes prove difficult to reconcile.’

Explain the various macroeconomic policy objectives and their importance to an economy.
[15 marks]

Q113.
The deficit on the UK balance of trade in goods and services rose from £26 billion in 2003
to £44 billion in 2008.

Explain the main factors which might help determine the volume of UK exports and
imports.
[15 marks]

Q114.
The deficit on the UK balance of trade in goods and services rose from £26 billion in 2003
to £44 billion in 2008.

Evaluate government policies which might bring about a reduction in the UK deficit on the
balance of trade in goods and services.
[25 marks]

Page 35 of 155
Q115.
THE GLOBAL CONTEXT

Extract B: Living standards

Economists can generally agree on the causes of economic growth such as investment, 1
innovation and improvements in productivity. There is greater disagreement over the
consequences. An important part of the debate is the impact of economic growth on living
standards. The debate has become more complex as measurement of living standards
has taken on greater sophistication. GDP per capita (income per head) remains one of 5
the basic measures.

Supporters of continued economic growth point to increased consumption possibilities,

greater welfare, more support for the disadvantaged and more resources for health,
education and infrastructure.
10
Opponents of unlimited economic growth point to the rapid depletion of exhaustible natural
resources and environmental deterioration. The Copenhagen Summit of December 2009
brought the latter issue into sharp focus once again.

Various indices, such as the Human Development Index, incorporate a number of factors
into their calculations in order to give as comprehensive a view of living standards as 15
possible and to allow more accurate international comparisons. Factors include life
expectancy, infant mortality and nutritional levels.

The Legatum Institute publishes a global survey annually, popularly known as a ‘prosperity
index’. It brings together data on, for example, economic growth, welfare, happiness,
crime and healthcare. This data is then used to rank countries. 20

The 2009 index ranked 104 countries. The UK was placed 12th (its best position for three
years). Low scores for key public services kept it out of the top ten. All African countries
were in the bottom half of the index.

However, the continent of Africa is undergoing economic change. The World Bank points 25
to a rapid transformation in some countries. Mozambique has seen annual average
growth of 8% in the last decade, Kenya has emerged as a major global supplier of cut
flowers and Rwanda is developing tourism very successfully. While Lesotho is developing
its clothing industry, Ethiopia is starting to manufacture footwear. Can we look to Africa
for the next wave of ‘emerging economies’, to follow India and China? In 2009, Africa as a 30
whole had the world’s third highest rate of growth behind India and China. Africa’s role as
a major supplier of raw materials to China also illustrates its increasing economic links with
the rest of the world.

As a result of this economic change, living standards in Africa will no doubt improve.
Additionally, the living standards of developed countries, including the UK, will be affected 35
by economic growth in Africa. Export markets for both goods and services will strengthen,
as will investment opportunities, and natural resources will become more accessible.

But how long before the UK faces stiff competition from Africa in agriculture, manufacturing
and service activities? No one can accurately predict the impact on the UK economy but
the careful monitoring of developments in Africa will become increasingly necessary.
Source: various sources, 2010

Q116.
The Global Context Extract B (lines 33−34) argues that ‘the living standards of
developed countries, including the UK, will be affected by economic growth in Africa’.

Using the data and your economic knowledge, assess the view that living standards in the
UK are likely to benefit from sustained economic growth in the economies of Africa.

Page 36 of 155
 [25 marks]

Q117.
THE EUROPEAN UNION CONTEXT

Extract D: Is EU unity threatened?

Europe, and indeed much of the world, was shaken by the depth of the economic 1
downturn from 2008. Many countries, including the UK, saw the solution to be a return to
Keynesian economics and, therefore, tolerance of large budget deficits. This was coupled
with significant monetary expansion, so that, in the UK for example, the Bank of England
Bank Rate was cut to 0.5% in 2009, accompanied by a policy of ‘quantitative easing’ 5
(increases in the money supply).

The UK pressed other EU governments to embark on fiscal expansion. Not all shared the
UK’s enthusiasm and, at best, wanted only a much more modest fiscal stimulus than was
the case in the UK. However, events sometimes overtook such wishes. Ironically, given
the scale of the UK fiscal stimulus, until the latter part of 2009 the UK was the only major 10
economy to remain in recession. This may reflect the greater significance of the housing
and financial sectors in the UK compared to other EU countries.

The fiscal position of many EU countries has given rise to concern. Italy, for example, now
has a national debt (the total outstanding debt of central government) of around 120% of
GDP, even though its annual budget deficit is not exceptionally large. Some countries 15
have shown a greater determination than Italy to cut their deficits. In December 2009, for
example, Ireland announced sharp cuts in public sector wages. But it is certainly not just
Italy which has shown complacency. The EU’s Stability and Growth Pact limits annual
borrowing to 3% of GDP. EU governments are under increasing pressure to return to this
target by 2014. 20

The short- to medium-term benefits of fiscal expansion during downturns cannot be

denied. Government spending can initiate a powerful stimulus to an economy through the
multiplier process. Aggregate demand therefore rises. The UK Pre-Budget Report put
government spending at £676 billion. Tax cuts will give households more spending power.
Coupled with cheap credit and retail price discounts, recovery can therefore be helped 25
through increased consumption.

However, the impact of increased government borrowing arising from budget deficits
across the EU is of concern amongst some economists. It may eventually force the
authorities to increase interest rates, lead to ‘crowding-out’ of private sector activity and
make public spending cuts and tax increases an inevitability. In the UK, for example, 30
a VAT rate of 17.5% was restored in January 2010 following a temporary cut to 15%.
Equally, the 2009 Pre-Budget Report announced an increase in National Insurance
contributions.

The problem in trying to assess the impact of fiscal expansion is, of course, not knowing
what might have happened without it. Certainly, some economists are quick to attribute 35
the end of recession in France and Germany in 2009 to such fiscal loosening. Indeed, it is
difficult to argue that, for any country in the EU, economic growth and employment cannot
be beneficial to some extent at a time when business and consumer confidence are both
at a low level.

Whether such a policy eventually causes inflation to make an unwelcome return remains 40
to be seen. At that point, EU members may experience a greater urgency to balance
budgets and reduce monetary expansion.
Source: various sources, 2010

Q118.

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 The Europena Union Context Extract Extract D (lines 27−28) states that ‘the impact of
the increased government borrowing arising from budget deficits across the EU is of
concern amongst some economists’.

Using the data and your economic knowledge, assess the impact on the UK economy of
increased government borrowing by EU governments.
[25 marks]

Q119.
‘The UK economy has recently been in the grip of its worst recession for 60 years.’

Explain possible reasons for an economy moving from a period of prosperity to one of
recession.
[15 marks]

Q120.
‘Inflation needs to be avoided at all costs but it is nowhere near as damaging to an
economy as deflation.’

To what extent might it be argued that infl ation is preferable to deflation?

[25 marks]

Q121.
An economy which is enjoying rapid economic growth experiences a significant rise in the
external value of its currency within a floating exchange rate system.

Explain the factors which may lead to a rise in the exchange rate of a currency within a
floating exchange rate system.
[15 marks]

Q122.
An economy which is enjoying rapid economic growth experiences a significant rise in the
external value of its currency within a floating exchange rate system.

Evaluate the possible macroeconomic consequences for an economy of a rise in the

exchange rate of its currency.
[25 marks]

Q123.
The Global Context Extract B (lines 5–8) argues: “It now seems unlikely that economic
‘powerhouses’ such as India and China will provide support for the global economy
through trade and investment. Such support might have helped avoid world recession and
restored economic growth.”

Explain the term ‘world recession’ and analyse how both trade and investment can help
to bring about economic growth.
[9 marks]

Q124.

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 The Global Context Extract B (lines 35–37) concludes: ‘Globalisation must surely have
played its part in the success of the UK economy…whatever problems it may also have
created.’

Using the data and your economic knowledge, to what extent do you agree with the view
that globalisation has been of benefit to UK macroeconomic performance?
[25 marks]

Q125.
The European Union Context Extract D (lines 13–14) argues that it ‘is not difficult to
understand why the pound has fallen against the euro and other currencies’.

Explain what is meant by ‘the pound has fallen against the euro and other currencies’ and
analyse two determinants of such a fall.
[9 marks]

Q126.
‘Failure to get a new trade deal would put another dark cloud over the world economy.’
Source: PETER MANDELSON, EU Trade Commissioner, July 2008

Explain the main economic determinants of a country’s demand for imports.

[15 marks]

Q127.
‘Failure to get a new trade deal would put another dark cloud over the world economy.’
Source: PETER MANDELSON, EU Trade Commissioner, July 2008

Evaluate the significance for the UK balance of payments on current account of increased
use of protectionist policies around the world.
[25 marks]

Page 39 of 155
Mark schemes

Q1.

Max 4
Response
marks

• includes evidence that shows that the UK’s trade 4 marks

performance has been disappointing given the fall in the
value of the pound
• clearly explains how this data is evidence that the UK’s trade
performance has been disappointing given the fall in the
value of the pound.

• includes evidence that shows that the UK’s trade 3 marks

performance has been disappointing given the fall in the
value of the pound
• unclear explanation of how this data is evidence that the
UK’s trade performance has been disappointing given the
fall in the value of the pound.

• includes some limited evidence that shows that the UK’s 2 marks
trade performance has been disappointing given the fall in
the value of the pound
• limited explanation of how this data is evidence that the UK’s
trade performance has been disappointing given the fall in
the value of the pound.

• includes evidence that does not clearly show that the UK’s 1 mark
trade performance has been disappointing given the fall in
the value of the pound
• no explanation of how this data is evidence that the UK’s
trade performance has been disappointing given the fall in
the value of the pound.

Relevant issues include:

• explanation of relevant terms/phrases such as ‘fall in the value of the pound’,

‘disappointing trade performance’
• explaining that a fall in the exchange rate should make the UK more internationally
competitive, increasing exports, decreasing imports and reducing the trade deficit
• the balance of total trade is in deficit throughout the whole of the period from
November 2015 to November 2016, indicating the value of exports has not
overtaken the value of imports
• the total trade deficit ranges from £0.3bn in December 2015 to £5.3bn in September
2016, indicating either a falling value of exports or rising value of imports
• the total trade deficit ends larger than it started. In November 2015, the deficit was
£2.5bn whereas in November 2016 it was £4.8bn
• the goods balance is in deficit throughout the whole period from November 2015 to
November 2016 indicating the value of exports of goods has not overtaken the value
of imports of goods
• the goods deficits range from £8bn in December 2015 to £13.8bn in September
2016
• the deficit in goods ends larger than it started. In November 2015, the deficit in
goods was £9.5bn whereas in November 2016 it was £12.1bn

Page 40 of 155
 • the balance in services did not improve over the whole period. It started at £8bn in
November 2015 and ended at £8bn in November 2016.

Note: Accept figures that are within a range of + or − £0.5bn.

[4]

Q2.
Areas for discussion include:

• definitions/explanations: trade or current account deficit, trade, balance of

payments, macroeconomic performance
• explaining how a trade or current account deficit may impact upon:
◦ economic growth
◦ unemployment
◦ inflation
◦ other measures of performance
• considering the causes of the trade or current account deficit
• explaining the difference between trade in goods and services
• considering other parts of the current account of the balance of payments, ie
primary and secondary income flows, and their significance
• the role of the capital and financial accounts
• the significance of having a floating exchange rate
• possible government responses to the deficit and their impact on macroeconomic
performance
• the UK’s past experiences with current account deficits
• the relative importance of the current account deficit in comparison to the other
economic goals
• the “persistent” nature of the deficit
• the potential costs and benefits of surpluses on the financial account
• possible structural problems in the UK economy causing the imbalance.

The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the student’s response to the question.

Level of Max
Response
response 25 marks
Sound, focused analysis and well-supported evaluation
that: 21 – 25
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles to
5
the given context and, where appropriate, good use of data
to support the response
• includes well-focused analysis with clear, logical chains of
reasoning
• includes supported evaluation throughout the response and
in a final conclusion.
4 Sound, focused analysis and some supported evaluation
that: 16 – 20
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes some good application of relevant economic
principles to the given context and, where appropriate, some

Page 41 of 155
 good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
Some reasonable analysis but generally unsupported
evaluation that: 11 – 15
• focuses on issues that are relevant to the question, showing marks
satisfactory knowledge and understanding of economic
terminology, concepts and principles but some weaknesses
may be present
• includes reasonable application of relevant economic
3
principles to the given context and, where appropriate, some
use of data to support the response
• includes some reasonable analysis but which might not be
adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
A fairly weak response with some understanding that:
• includes some limited knowledge and understanding of 6 – 10
economic terminology, concepts and principles but some marks
errors are likely
2 • includes some limited application of relevant economic
principles to the given context and/or data to the question
• includes some limited analysis but it may lack focus and/or
become confused
• includes some evaluation which is weak and unsupported.
A very weak response that:
• includes little relevant knowledge and understanding of 1–5
economic terminology, concepts and principles marks
1
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and unsupported.
[25]

Q3.
Areas for discussion include:

• definitions/explanations: economic development, MNCs, LEDCs

• positive roles of MNCs in developing nations such as the effects on:
◦ employment and job creation
◦ economic growth (short-run and long-run)
◦ the trade balance (eg increase exports)
◦ productivity and international competitiveness
◦ infrastructure
◦ investment and positive multiplier effects
◦ development of human capital
◦ knowledge and technological transfer
◦ standards of living
• potential negative roles of MNCs in developing nations such as the effects on:
◦ the environment
◦ the exploitation of workers
◦ the destruction of culture
◦ the indigenous industries being unable to compete
◦ the unfair political influence which MNCs may possess

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 ◦ possible tax avoidance
◦ the repatriation of profits which is negative on GNP
• explaining the main differences between LEDCs and MEDCs
• examples of MNCs and countries in which they have set up
• the issue that job creation may be limited due to the capital-intensive nature of the
FDI and filling management roles from the source nation
• that the role depends upon the objectives of the MNC and that initial positive effects
may change over time
• what may happen if the MNC had not been involved in the economy. Would
domestic firms have fared better?
• the individual government’s ability to control the power of the MNCs may determine
whether, on balance, they have a positive impact on development.

The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the student’s response to the question.

Level of Max 25
Response
response marks
Sound, focused analysis and well-supported evaluation
that: 21 – 25
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles to
5
the given context and, where appropriate, good use of data
to support the response
• includes well-focused analysis with clear, logical chains of
reasoning
• includes supported evaluation throughout the response and
in a final conclusion.
Sound, focused analysis and some supported evaluation
that: 16 – 20
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
4 • includes some good application of relevant economic
principles to the given context and, where appropriate, some
good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
Some reasonable analysis but generally unsupported
evaluation that: 11 – 15
• focuses on issues that are relevant to the question, showing marks
satisfactory knowledge and understanding of economic
terminology, concepts and principles but some weaknesses
may be present
• includes reasonable application of relevant economic
3
principles to the given context and, where appropriate, some
use of data to support the response
• includes some reasonable analysis but which might not be
adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.

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 A fairly weak response with some understanding that:
• includes some limited knowledge and understanding of 6 – 10
economic terminology, concepts and principles but some marks
errors are likely
2 • includes some limited application of relevant economic
principles to the given context and/or data to the question
• includes some limited analysis but it may lack focus and/or
become confused
• includes some evaluation which is weak and unsupported.
A very weak response that:
• includes little relevant knowledge and understanding of 1–5
economic terminology, concepts and principles marks
1
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and unsupported.
[25]

Q4.
B
[1]

Q5.
D
[1]

Q6.
A
[1]

Q7.
Areas for discussion include:
• definitions/explanations: economic development, market-based strategies,
interventionist strategies
• differences and links between economic growth and economic development
• examples of market-based strategies such as privatisation, deregulation,
liberalisation of foreign trade, removing restrictions on international investment
• examples of interventionist strategies such as government spending on
infrastructure, protectionist policies and government spending on health and
education
• the pros and cons of market-based approaches to achieving development
• the pros and cons of interventionist approaches to achieving development
• difficulties in measuring development in terms of economic/human development
• the potential barriers that may hinder India’s development
• analysis of the impact of development on formal employment/informal employment
• the progression from the primary sector to secondary sector employment
• whether growth and development are sustainable
• economic/social/political freedom arguments
• costs of development and/or growth and their impact on living standards
• the effectiveness of policies that might stimulate development
• protectionism as an aid to development
• the role of investment (domestic and foreign direct)
• key industries in development.

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The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the candidate’s response to the question.

Level of Response Max

response 25 marks

5 Sound, focused analysis and well-supported evaluation 21 – 25

that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning
• includes supported evaluation throughout the response
and in a final conclusion.
4 Sound, focused analysis and some supported evaluation 16 – 20
that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes some good application of relevant economic
principles to the given context and, where appropriate,
some good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally unsupported 11 – 15
evaluation that: marks
• focuses on issues that are relevant to the question,
showing satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
2 A fairly weak response with some understanding that: 6 – 10
• includes some limited knowledge and understanding of marks
economic terminology, concepts and principles but some
errors are likely
• includes some limited application of relevant economic
principles to the given context and/or data to the
question
• includes some limited analysis but it may lack focus
and/or become confused
• includes some evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and understanding of marks
economic terminology, concepts and principles

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 • includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and
unsupported.
[25]

Q8.
Areas for discussion include:
• definitions/explanations: unemployment, macroeconomic policy, macroeconomic
goals, trade-offs
• explaining the various causes/types of unemployment
• distinguishing between involuntary and voluntary unemployment
• explaining the different policy responses depending upon the nature of the
unemployment
• explaining the effects of falling unemployment on:
○ inflation
○ economic growth
○ trade
○ other goals such as the budget deficit
• highlighting the UK’s experience in reducing unemployment whilst maintaining
stable inflation and a satisfactory balance of payments position
• the role of supply-side policies and productivity improvements in avoiding conflicts
• the effects of economic shocks on the economy and the difficulty of insulating
against these
• the short-run Phillips curve
• government policies to reduce unemployment
• considering the relative success of recent government policies in the UK or other
economies
• considering the position of the economy in terms of the proximity to the productive
potential
• considering the position of the UK in terms of the economic cycle

The use of relevant diagrams such as the short-run Phillips curve and AD/AS diagrams to
support the analysis should be taken into account when assessing the quality of the
candidate’s response to the question.

Level of Response Max 25

response marks

5 Sound, focused analysis and well-supported evaluation 21 – 25

that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning
• includes supported evaluation throughout the response
and in a final conclusion.
4 Sound, focused analysis and some supported evaluation 16 – 20
that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors

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 • includes some good application of relevant economic
principles to the given context and, where appropriate,
some good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally unsupported 11 – 15
evaluation that: marks
• focuses on issues that are relevant to the question,
showing satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
2 A fairly weak response with some understanding that: 6 – 10
• includes some limited knowledge and understanding of marks
economic terminology, concepts and principles but some
errors are likely
• includes some limited application of relevant economic
principles to the given context and/or data to the
question
• includes some limited analysis but it may lack focus
and/or become confused
• includes some evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and understanding of marks
economic terminology, concepts and principles
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and
unsupported.
[25]

Q9.
Relevant issues include:
• definitions/explanations: trade, pattern of trade
• explaining the pattern in terms of the geographical distribution of UK exports and
imports
• explaining the significance of trade to the UK economy
• explaining the pattern in terms of different goods and services traded
• using relevant examples to illustrate the changes in the pattern of trade
• explaining comparative advantage and how changes in comparative advantage
might be significant
• giving a numerical example of comparative advantage
• explaining other possible reasons for changes in the pattern of trade, eg:
○ changes in absolute advantage
○ changes in protectionist/free trade policies in other countries
○ joining/changing membership of trading blocs

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 ○ consideration of trade diversion/trade creation due to trading blocs
○ exchange rate changes
○ changing quality/reputation
○ government intervention distorting markets
○ de-industrialisation
○ causes and changes in globalisation
○ external shocks
○ economic development
○ factor endowment and exploitation of resources
○ innovation and invention (both product and process)
○ any other valid argument.

The use of relevant diagrams, such as a tariff diagram, to support the analysis should be
taken into account when assessing the quality of the candidate’s response to the
question.

Level of Response Max 15

response marks

3 A good response provides an answer that: 11 – 15

• is well organised and develops a selection of the key marks
issues that are relevant to the question
• shows sound knowledge and understanding of economic
terminology, concepts and principles with few, if any,
errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning.
2 A reasonable response provides an answer that: 6 – 10
• focuses on issues that are relevant to the question marks
• shows satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in
places.
1 A weak response provides an answer that: 1–5
• has identified one or more relevant issues marks
• has some limited knowledge and understanding of
economic terminology, concepts and principles but some
errors are likely
• has very limited application of relevant economic
principles to the given context and/or data to the
question
• might have some limited analysis but it may lack focus
and/or become confused.
[15]

Q10.
Areas for discussion include:
• definitions/explanations: the balance of payments, the current account, current

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 account deficit
• explaining the difference between a surplus or deficit on current account
• explaining the composition of the current account of the balance of payments
• explaining the historical experience of the UK’s current account
• explaining the causes of deficits
• explain possible measures to reduce the deficit such as:
○ exchange rate manipulation
○ changes in interest rates potentially affecting the exchange rate
○ expenditure-reducing policies
○ expenditure-switching policies
○ the role of protectionism
○ government role in export promotion/trade deals
○ the role of fiscal and monetary policy
○ supply-side improvements which might begin to provide a solution to the
weakness, such as:
– competitiveness/unit labour costs
– investment (human and physical capital)
– technology, R&D and productivity
– infrastructure
• consideration of the UK’s membership of the WTO and EU restricting its ability to
use protectionism
• consideration of whether the deficit is a problem if the capital account is in surplus
• consideration of the impact on other macroeconomic goals of trying to reduce the
deficit on the current account of the balance of payments.

The use of relevant diagrams such as AD/AS diagrams to support the analysis should be
taken into account when assessing the quality of the student’s response to the question.

Level of Response Max 25

response marks

5 Sound, focused analysis and well-supported evaluation 21 – 25

that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning
• includes supported evaluation throughout the response
and in a final conclusion.
4 Sound, focused analysis and some supported evaluation 16 – 20
that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes some good application of relevant economic
principles to the given context and, where appropriate,
some good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally unsupported 11 – 15
evaluation that: marks
• focuses on issues that are relevant to the question,

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 showing satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
2 A fairly weak response with some understanding that: 6 – 10
• includes some limited knowledge and understanding of marks
economic terminology, concepts and principles but some
errors are likely
• includes some limited application of relevant economic
principles to the given context and/or data to the
question
• includes some limited analysis but it may lack focus
and/or become confused
• includes some evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and understanding of marks
economic terminology, concepts and principles
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and
unsupported.
[25]

Q11.
Relevant issues include:
○ definitions/explanations: government spending, taxation, economic activity
○ explaining the different forms of government spending such as
capital/current/transfers
○ explaining the levels of government spending
○ explaining the reasons for government spending i.e. the redistribution of
income and wealth, merit good provision etc.
○ explaining how changes in government spending and taxation can influence
aggregate demand both directly and indirectly
○ explaining discretionary policy
○ explaining automatic stabilisers
• explaining the effects of the economic cycle on government spending and taxation
• explaining how changes in government spending could change aggregate supply
such as:
○ capital spending on infrastructure
○ training and education
○ subsidies/grants for research and development
○ subsidies/grants for investment
○ tax credits
○ assisted childcare and the effects on labour supply
○ any other relevant point
• multiplier and possible accelerator effects
• explaining the different types of taxation

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 • explaining how changes in taxation could change aggregate supply such as:
○ reducing income tax creating incentives to work
○ reducing corporation tax allowing firms to retain more profit for investment
○ reducing taxation, possibly making UK firms more competitive abroad and
effects on supply
○ using taxation (tariffs) as a form of protectionism, aiding domestic supply
○ any other relevant point.

The use of relevant diagrams such as AD/AS, or labour market diagrams to support the
analysis should be taken into account when assessing the quality of the candidate’s
response to the question.

Note: Unless a candidate considers both government expenditure and taxation, they are
unlikely to have ‘developed a selection of key issues that are relevant to the question’ and
therefore unlikely to achieve level 3.

Level of Response Max 15

response marks

3 A good response provides an answer that: 11 – 15

• is well organised and develops a selection of the key marks
issues that are relevant to the question
• shows sound knowledge and understanding of economic
terminology, concepts and principles with few, if any,
errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning.
2 A reasonable response provides an answer that: 6 – 10
• focuses on issues that are relevant to the question marks
• shows satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in
places.
1 A weak response provides an answer that: 1–5
• has identified one or more relevant issues marks
• has some limited knowledge and understanding of
economic terminology, concepts and principles but some
errors are likely
• has very limited application of relevant economic
principles to the given context and/or data to the
question
• might have some limited analysis but it may lack focus
and/or become confused.
[15]

Q12.
B
[1]

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Q13.

Level of Response Max

response 10 marks

3 A good response that: 8 – 10

• is well organised and includes at least three relevant, marks
well-developed issues
• makes effective use of the numerical/statistical data in
Extract B
• shows some appreciation of the limitations of the data
• includes a supported final judgement concerning the
extent to which UK manufacturing industry has been in
decline since 2003.
2 A reasonable response that: 4–7
• is fairly well organised and includes at least two relevant marks
and fairly well-developed issues
• includes some satisfactory use of the numerical/statistical
data in Extract B
• may show some appreciation of the limitations of the data
• at the top of the level, is likely to include a final
judgement regarding the extent to which UK
manufacturing industry has been in decline since 2003.
1 A weak response that: 1–3
• is very brief and/or lacks coherence marks
• may include one or more superficial points regarding the
extent to which UK manufacturing industry has declined
since 2003
• doesn’t show any appreciation of the limitations of the
data
• contains very limited or poor use of the data in Extract B
• may include an unsupported judgement concerning the
decline in UK manufacturing since 2003.

When assessing the extent to which manufacturing industry has been in decline since
2003, most candidates are likely to base their assessment on the data in Extract B.
However, they can also be rewarded for making relevant use of the other extracts and
their own knowledge.

Allow candidates a small margin of error, particularly when quoting from Figures 1 and 2.

Relevant issues include:

• the changes in the index of output of manufacturing, e.g. the fluctuations and
comparing the start and end values (97.8 to 96.6)
• the decline in employment between 2003 Q1 and 2009 Q1 (3.65m to 2.99m)
• the modest recovery in employment between 2009 Q1 and 2015 Q3
• discussion of output and employment as indicators of the possible decline in
manufacturing
• changes in the exports of goods (increase of £97.1bn)
• changes in the imports of goods (increase of £171.2bn)
• changes in the balance of trade in goods (deteriorates by £74.1bn)
• not all goods are manufactures, e.g. basic commodities
• the trade figures do not take into account inflation
• the changing share of manufacturing but precise data for the period 2003 – 2015
has not been provided
• use of data concerning the rate of growth of manufacturing
• the growth of manufacturing compared to the rate of growth of real GDP

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 • some may use data in the extracts relating to car manufacturing and the steel
industry.

As indicated in the table above, a good response will include a supported final judgement
concerning the extent to which there has been a decline in manufacturing since 2003. It is
likely that they will conclude that the evidence backs the view that manufacturing has
declined over the period but should not be penalised for a different conclusion, provided it
is well supported.
[10]

Q14.

Max 2
Response
marks

For the correct answer £2bn. The ‘units’, (£bn) must be shown. 2 marks

For the correct answer without a unit shown. 1 mark

[2]

Q15.
Anticipated diagrams might utilise the SRAS shifting right, micro diagrams
demonstrating falling costs, removal of tariffs/quotas.

Relevant issues include:

• A relevant definition of comparative advantage.
• The difference between acquired and natural comparative advantage.
• The difference between absolute advantage and comparative advantage.
• A numerical example / diagram.
• Improved communication through developments in technology, such as the internet
has allowed individuals to order goods across international borders.
• Further to this, international pay sites such as PayPal facilitate the easy exchange of
currency with minimal transaction costs which has increased the volume of goods
and services traded abroad.
• The work of the WTO
• Removal of protectionism
• Creation of trading blocs
• Economies of scale
• The role of MNC’s
• Financial liberalisation
• Containerisation
• Reduced transport costs.
[9]

Q16.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Where there is no explicit reference to the data, award a maximum of 21 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

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 Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Issues and areas for discussion include

Introduction • Macroeconomic performance

• Trade
• Free trade or trading blocs

Developing the • Focussing on improving trade in services (Extract B)

response to • Sharing technology (Extract B)
the question: • Boosting exports, competition and investment (Extract B)
• Improving international relations (Extract B)
(Application) • Growth of Asian economies in comparison to slow EU
growth (Extract C)
• Problems for trade unions and environmental issues
(Extract C)
• Regional inequality (Extract C)
• Unfair competition from state subsidised industry (Extract
C)
• Increasing power of MNCs in comparison to elected
government (Extract C)

(Analysis) Arguments why free trade agreements may benefit the UK:
• Effects of increased export opportunities on output and
employment
• Effects of increased inward investment on output and
employment
• Impacts on the price of imports / semi-manufactures
• Economies of scale and the effects on price level
• Boosts to productivity and output
• Benefits of competitive markets and sharing of technologies
• Boosts to international relations
• Improved choice / quality
• Comparative advantage and the gains from trade.

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 Arguments why free trade agreements may damage the UK:
• The UK is unable to use protectionist policies such as
quotas, tariffs, export subsidies
• Possibly open to more external shocks
• Sunrise / sunset industry arguments
• May be subject to increased price fluctuations / instability
• Loss of potential tariff revenue (although this is not directly
received in the EU)
• Cultural and strategic industry arguments
• May be unable to protect against “dumping”
• Environmental issues with increased transportation
• Unclear growth and employment effects
• Problems for small business in comparison to MNCs
• May give an impetus to further deregulation / privatisation.

Evaluation • The UK being unable to negotiate their own deals due to EU

membership at the moment, however after we leave the EU
it can conduct its own negotiations.
• The EU currently not having deals in place in comparison to
other economies
• Benefits and costs depending on the various stakeholders
points of view and short-term benefits, such as lower prices,
may have long-term costs such as increased structural
unemployment
• Regions of the UK may experience different impacts
• Trade deals may be done which don’t directly involve the UK
but could benefit it or could potentially damage it such as the
TPP
• References to UK’s current situation affecting trade
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss issues not discussed above.
[25]

Q17.
The anticipated diagram would make appropriate use of diagrams, e.g. LRAS
shifting right, SRAS shifting right, PPF’s or AC curves.

Relevant issues include:

• Definition of investment.
• Explaining this in terms of a business entity in one country gaining ownership in
another.
• Explaining the difference between FDI and portfolio investment.
• Increased foreign direct investment (FDI) by possibly bringing new technology or
production processes into an existing firm which may reduce the need for labour to

Page 55 of 155
 gain the same output and therefore boosts labour productivity.
• Improvements to infrastructure carried out by government capital spending such as
improvements to motorways may allow transport costs to fall allowing the company
to produce the same output for lower cost and boosts to efficiency and productivity.
• Research and development and increased competition due to FDI.
• Different forms of transport and communication links for infrastructure.
[9]

Q18.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Where there is no explicit reference to the data, award a maximum of 21 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Issues and areas for discussion include

Introduction • Productivity improvements

• The EU economy
• Macroeconomic performance.

Developing the • Improvements to infrastructure & investment (Extract E)

response to • Difficult to improve productivity in some jobs (Extract E)
the question: • Links to living standards (Extract E)
• Links to wages (Extract E)
(Application) • Improvements in skills (Extract E)
• Improvements to competitiveness (Extract F)
• Solutions to unemployment problems (Extract F)
• Boosts to welfare and lower prices (Extract F)
• Product and process innovation (Extract F)

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 • Structural weakness and lack of investment (Extract F)

(Analysis) Arguments why productivity improvements may benefit the

UK
• Improvements in efficiency
• Lower unit costs for firms and potential for increased profits
• Improved competitiveness and the impact on the current
account of the balance of payments
• If UK productivity improvements can be achieved it may
attract FDI and improve the capital account of the balance of
payments
• Higher wages
• Economic growth
• Possible boosts to tax revenue
Arguments why productivity improvements may not benefit
the UK
• Productivity improvements may not require as many workers
and impact on unemployment
• Other countries may become more competitive at the UK’s
expense
• If other countries are more competitive then it may divert FDI
• Productivity improvements don’t necessarily improve living
standards
• Other issues such as exchange rates may distort
productivity gains
• Opportunity cost of supply-side policies
• Difficulties in measuring the impact of supply-side policies

Evaluation • Potential conflicts between macroeconomic goals are

traditionally reduced through productivity improvements.
However, due to globalisation this may not always be the
case
• The UK’s membership of the EU allows productivity
improvements to be shared easily due to the free movement
of workers and capital although this doesn’t appear to have
helped the UK’s current membership
• Knowledge transfer and process innovation have improved
between economies however, the UK has still remained
behind
• Competitiveness relies on many other factors which are not
covered by productivity
• Consideration of UK’s decision to leave the EU
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams
• An overall judgement on the issues raised

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Page 57 of 155
Q19.

For defining / explaining Up to 2 marks per

• Exchange rates definition or
• Appreciation explanation to a
• Different exchange rate systems maximum of 4 marks

Award 1 mark for each logical link in the chain of reasoning

For example
A free floating exchange rate is determined by
the supply and demand of currency on FOREX
(1 mark). Speculative activity (1 mark) may
occur if it is thought there will be a rise in the
interest rate (1 mark) of a particular economy
which will increase the demand of that currency
(1 mark) as the returns to saving rise (1 mark) if
money is placed in an economy’s financial
Up to 15 marks
institutions (1 mark). As the flow of ‘hot money’
increases (1 mark) this may lead to an
appreciation (1 mark but not to be awarded in
addition to definition marks) such as £1 =
$1.46 goes to £1 = $1.50 (1 mark for examples
but not use of the example in the preamble).
Other examples include: trade flows, productivity
rates, inward investment, other speculative
activities and government intervention.

Up to 2 marks per
diagram (1 mark for
Use of diagrams to help support explanations,
labelling, 1 mark for
currency diagrams, trade cycles and AD/AS
correct information
diagrams
shown) to a maximum
of 4 marks.

1 mark per reference

Reference to the UK and/or other economies. to a maximum of 2
marks
[15]

Q20.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation 17 to 21

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 OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Issues and areas for discussion include

Introduction • Balance of payments

• Current account and capital account
• Exchange rates
• Macroeconomic performance indicators

Developing the Arguments why an appreciation of the pound

response to the against the Euro may be beneficial to the UK’s
question: macroeconomic performance
(application and • The effects of cheaper raw materials from Europe
analysis) on inflation
• The effects on competitiveness with the rest of the
world if costs are lower
• Impacts on UK manufacturing employment of
cheaper European raw materials
• Potential improvements to productivity in response
to more expensive exports
• Impacts of non-price competitiveness in response
to more expensive exports
• Could reduce inflationary pressure if the economy
is in a boom
• May act as a stabiliser to UK growth
Arguments why an appreciation of the pound
against the Euro may be detrimental to the UK’s
macroeconomic performance
• The effects of cheaper raw materials from Europe
on unemployment
• Outsourcing to Europe affecting employment and
growth
• The loss of export competitiveness against Europe
• Potential falls in FDI from Europe due to increased
costs and its effects on growth

Evaluation • Depends upon the duration of the change, self-

correction may occur
• Other issues other than exchange rate may have

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 greater potential impacts on the economy such as
domestic fiscal and monetary policy
• The Marshall-Lerner condition (not in specification)
and the effects of changing exchange rates upon
the current account of the balance of payments
• Changes to the patterns of trade and the
importance of the exchange rate multilaterally
rather than bilaterally.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to
ensure that more basic evaluation is adequately
rewarded where a genuine effort has been made to
display that skill.

Also give credit • Reference to the UK / other economies

for • Diagrams
• An overall judgement on the issues raised

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q21.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Issues and areas for discussion include

Page 60 of 155
Introduction • Public sector
• The UK economy
• Macroeconomic performance / living standards

Developing the Arguments why a smaller public sector may benefit

response to the the UK economy:
question:
• Crowding-out arguments (both physical and
(application and financial)
analysis) • The role of potentially lower taxes in affecting
growth
• The role of potentially lower taxes in supply-side
policy
• The role of potentially lower taxes on private sector
employment and the willingness to work
• The role of potentially lower taxes on FDI
• Deficit reduction and debt repayment
• Potential boosts to the private sector of reduced
red-tape and effects on recruitment.
Arguments why a smaller public sector may be
damaging to the UK economy:
• An absence of the “crowding in” effect
• A lack of public sector employment and negative
multiplier effects
• Regional effects especially in places reliant upon
high levels of public expenditure
• The possibility that some unemployment could be
structural in nature due to the nature of some
public sector jobs
• A lack of provision of public services
• A lack of correction of market failures
• Possible rising inequality.

Evaluation • Effects may differ depending on income group and

stakeholder group depending upon the focus of
government policy
• The global economy may have a much larger
effect for example FDI may not be forthcoming due
to global uncertainty
• Effects may differ depending on the employment
sector (some government spending may be “ring-
fenced”)
• Other factors which may be more important than
the size of the public sector
• The degree of requirement for the size of the
government may vary with the trade cycle
(alternatively it could be argued that this should be
irrelevant to the trade cycle).
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to
ensure that more basic evaluation is adequately
rewarded where a genuine effort has been made to
display that skill.

Also give credit • Reference to the UK / other economies

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 for • Diagrams
• An overall judgement on the issues raised

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q22.

For defining / explaining Up to 2 marks per

• Recession definition or
• Economic growth explanation to a
• The trade cycle. maximum of 4 marks

Award 1 mark for each logical link in the chain of reasoning:

For example
Higher unemployment (1 mark) much of which
will be cyclical unemployment (1 mark) due to a
lack of AD which causes disposable incomes to
fall (1 mark) which leads to further negative
multiplier effects (1 mark) which may mean even
less revenue and profits for firms (1 mark).
Firms are also likely to be reluctant to hire new
staff due to existing spare capacity (1 mark) and
Up to 15 marks
may just run down existing stocks (1 mark)
rather than increase output (1 mark) which may
exacerbate the unemployment problem and lead
to both hysteresis (1 mark) and further problems
of demotivated “long-term” unemployment (1
mark).
Other issues include: Effects on inflation,
balance of payments on current account,
poverty, and investment.

Up to 2 marks per
diagram (1 mark for
Use of diagrams to help support explanations, labelling, 1 mark for
e.g. trade cycle, AD/AS correct information
shown) to a maximum
of 4 marks

1 mark per reference

Reference to the UK and/or other economies. to a maximum of 2
marks
[15]

Q23.
The anticipated diagram would make appropriate use of diagrams, e.g. AD/AS,
currency diagrams.

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 Relevant issues include:
• For a relevant explanation of a devaluation of the exchange rate: An exchange rate
is the value of one currency in terms of another and a devaluation is when a
currency is lowered in value against another. This usually occurs in a fixed
exchange rate system unlike a depreciation which is in a floating exchange rate
system.
• Numerical example of a devaluation.
• As China devalues its currency, the value of the yuan falls in relation to the pound,
therefore one pound buys more yuan. This makes imports from China relatively
cheaper and exports from the UK to China relatively more expensive, thus the value
of imports rises and the value of exports fall which are both components of
aggregate demand causing aggregate demand to fall therefore reducing real
national output and creating negative short-run economic growth.
• Effects on investment.
• Effects on business confidence.
[9]

Q24.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Where there is no explicit reference to the data, award a maximum of 21 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Introduction • Monetary policy

• Exchange rates
• Macroeconomic performance

Developing the Drawing on the information in the extracts:

response to
• Currency wars and potential retaliation (Extract B)

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the question: • Investor confidence (Extract B)
• Threats to economic growth in the UK and USA (Extract B)
(Application) • Effects of interest rates on exchange rates (Extract B)
• Methods of reducing trade deficits (Extract C)
• Effects on other Monetary Policy instruments and targets
(Extract C)
• Problems that Switzerland faced in a fixed system (Extract
C)
• Effects on trade and stability due to stable exchange rates
(Extract C)

(Analysis) Arguments why managing the exchange rate may be

beneficial:
• Stability leading to investment
• More certainty regarding export revenue for firms
• More certainty regarding import prices for firms
• Consumers benefitting from stable prices
• Possible avoidance of deflationary pressure if revalued
• Improving competitiveness of firms if devalued
• Increased trade flows with the EU due to increased
transparency in prices if fixed to Euro.
Arguments why managing the exchange rate may not be
beneficial:
• Loss of ability to use interest rates effectively
• May be expensive for government
• Loss of BoE’s independence and use of policy instruments
• Conflicts and trade-offs with other macroeconomic
objectives
• Potential of choosing "the wrong rate" to fix at
• The UK’s historical experience with the ERM
• Loss of automatic adjustment or stabilisation

Evaluation • The relative success or lack of success in the use of interest

rates in the past
• The possible success or lack of success in the use of
quantitative easing in the past
• The relative importance of the trade deficit in terms of other
macroeconomic goals, is it more important to focus on
domestic consumption?
• Can the government afford to prop up the currency if needed
or does this contradict aims to reduce the budget deficit?
• Is the currency the major problem with the UK’s export
competitiveness or is it due to structural problems and a lack
of productivity?
• Would fixing the exchange rate low lead to a "race to the
bottom" with other currencies?
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams

Page 64 of 155
 • An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss issues not not mentioned above.
[25]

Q25.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Introduction • Budget deficit

• Trade deficit
• The Balance of Payments

Developing the Arguments why a trade deficit is more damaging

response to the than a budget deficit:
question:
• Could indicate lack of productivity
(application and • Could cause depreciation of currency
analysis) • Could cause problems for a country’s reserves
• A surplus on the financing section of the balance of
payments increasing international indebtedness
• Deflationary pressure
• Could indicate structural weaknesses
• Effects on jobs such as structural unemployment
Arguments why a budget deficit is more damaging
than a trade deficit:
• Crowding out

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 • Loss of credit status leading to increased costs of
government borrowing
• Future generations footing the bill (vertically
inequitable)
• Possibility of tax rises / cuts in spending
• Adds to national debt
• Could be inflationary

Evaluation • Both issues are not mutually exclusive, an

improved supply-side performance could help
both.
• The UK’s ability to attract FDI will help finance the
capital account and may off-set any problems on
the trade deficit, however this may also benefit the
UK’s budget deficit in terms of job creation and
generating tax revenue.
• Deficits on both may be necessary and
advantageous, they may both benefit living
standards in terms of more goods being consumed
or boosting AD.
• Consideration that trade-offs may take place with
the other macroeconomic goals, for example
reducing the budget deficit may reduce the trade
deficit but at the same time harm unemployment or
create deflation.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to
ensure that more basic evaluation is adequately
rewarded where a genuine effort has been made to
display that skill.

Also give credit • Reference to the UK / other economies

for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q26.
Explanation
For defining / explaining
Up to 2 marks per
• Customs union / free trade area definition or
• Pattern of trade explanation to a
• Volume of trade maximum of 4 marks
• Trade or exports / imports

Award 1 mark for each step in a logical chain of reasoning:

For example: Up to 15 marks

Due to the membership of the EU, there are no

Page 66 of 155
 internal tariffs (1 mark) between the UK and the
other 27 member states (1 mark) so when
trading with another country for example France
(1 mark for example) the cost of doing so is
lower (1 mark) and firms will experience lower
prices if France has exploited its comparative
advantage (1 mark) as France has a lower
opportunity cost than the UK (1 mark) in for
example the production of wine (1 mark for
example) which leads to trade creation (1 mark)
which increases the volume of imports (1 mark)
from other members of the EU which affects the
pattern of trade in terms of who trades what with
who (1 mark).
Other examples include: Potential for exporting
products in which the UK holds a comparative
advantage in, economies of scale, potential
trade diversion due to common external tariff,
retaliation, enforced embargoes.

Up to 2 marks per
diagram (1 mark for
Use of diagrams to help support explanations,
labelling, 1 mark for
e.g. tariff diagram, quota diagram, AD/AS,
correct information
Economies of scale
shown) to a maximum
of 4 marks

1 mark per reference

Reference to the UK and/or other economies. to a maximum of 2
marks

Award a maximum of 10 marks if both parts of the question are not attempted i.e. the
pattern of trade and the volume of trade.
[15]

Q27.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13

Page 67 of 155
 marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Introduction • The EU
• How benefits to individuals and firms can be measured
• Consumer welfare

Developing the Benefits of EU membership on individuals and firms:

response to
the question: • Job creation in export industries
• Increased supply of labour potentially reduces costs for firms
(application • Lower cost labour reduces cost of living therefore improved
and analysis) consumer welfare
• Firm’s costs are reduced for raw materials from within EU
• Economies of scale
• Competition drives efficiency in firms
• Other benefits e.g. maternity / paternity benefits (Individuals)
• Microeconomic effects and effects on individual markets e.g.
CAP
• Potentially larger markets for firms
• Employment opportunities accessible in other countries
Costs of EU membership on individuals and firms:
• Structural unemployment in certain regions due to free trade
• Pressure on public services due to increased population as
a result of immigration from other EU countries
• Higher taxes on individuals to pay for public services
• Increased supply of labour could lower wages for individuals
• Higher taxes as a result of EU contributions
• Microeconomic effects such as higher agricultural prices due
to common external tariff and CAP
• EU regulations increasing costs
• Competition causing firms to go bust

Evaluation • Benefits to some people such as lower cost for wages for
firms may be a problem for others for example low-paid
workers
• Difficulty of estimating what would have happened had the
UK not been in the EU
• Different experiences in different regions of the UK,
structural unemployment may be exacerbated in some
areas
• How do we measure benefits? The issues are somewhat
subjective
• What is the alternative? Potential of “Brexit”
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic

Page 68 of 155
 evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q30.
Response: Max
4 marks

• includes evidence that shows that the UK is having more 4 marks

success in trading goods with the rest of the world than with
Europe

• clearly explains how this data is evidence of increased trade

with the rest of the world

• includes evidence that shows that the UK is having more 3 marks

success in trading goods with the rest of the world than with
Europe

• unclear explanation of how this data is evidence of increased

trade with the rest of the world

• includes evidence that shows that the UK is having more 2 marks

success in trading goods with the world than with Europe

• limited explanation of how this data is evidence of increased

trade with the rest of the world

• includes evidence that does not clearly show that the UK is 1 mark
having more success in trading goods with the rest of the world
than with Europe

• no explanation of how this data is evidence of increased trade

with the rest of the world

Relevant issues include:

• Evidence of reducing deficit in trade in goods or increasing surplus in trade in
goods with the rest of the world countries is an indication of more success
• the only country with which the UK has a trade surplus is outside Europe, ie
USA
• between February-April 2012 and February-April 2013 the UK’s trade balance
deteriorated with the three countries in Europe but improved with the two
countries in the rest of the world
• in February-April 2012 the UK’s biggest deficit (£5.5 billion) was with China,
the rest of the world, whereas in February-April 2013 the UK’s biggest deficit
(£5.9 billion) was with Germany, inside Europe
[4]

Page 69 of 155
Q31.
Level of An answer that: Max
response 9 marks
• is well organised and develops one or more of
3 7-9 marks
the key issues that are relevant to the question
• shows sound knowledge and understanding of
relevant economic terminology, concepts and
principles
• includes good application of relevant economic
principles and/or good use of data to support the
response
• includes well-focused analysis with a clear,
logical chain of reasoning
• includes a relevant diagram that will, at the top of
this level, be accurate and used appropriately.
• includes one or more issues that are relevant to
2 4-6 marks
the question
• shows reasonable knowledge and understanding
of economic terminology, concepts and
principles but some weaknesses may be present
• includes reasonable application of relevant
economic principles and/or data to the question
• includes some reasonable analysis but it might
not be adequately developed and may be
confused in places
• may include a relevant diagram.
• is very brief and/or lacks coherence
1 1-3 marks
• shows some limited knowledge and
understanding of economic terminology,
concepts and principles but some errors are
likely
• demonstrates very limited ability to apply
relevant economic principles and/or data to the
question
• may include some very limited analysis but the
analysis lacks focus and/or becomes confused
• may include a relevant diagram but the diagram
is not used and/or is inaccurate in some
respects.

A standard tariff diagram is expected, illustrating the volume of imports with and without a
tariff.

Relevant issues include:

• a tariff as a tax on imports
• removing the tariff makes imports more competitive
• the impact on the demand for imports and the supply of home produced goods
• the relevance of elasticities.
[9]

Q32.
Areas for discussion include:
• meaning and types of protectionism
• criteria for assessing whether protectionism is damaging, eg resource

Page 70 of 155
 allocation, employment, growth, environmental impact, social factors
• benefits of free trade as illustrated by the principle of comparative advantage
• dynamic benefits of free trade, eg increased competition, economies of scale
• the problems that may result from free trade
• various arguments for protectionism, eg protection of sunrise and sunset
industries, diversification of output, protection of employment, low wage
arguments, protection against dumping, raising revenue to correct balance of
payments deficits
• protectionism and trading blocs
• trade creation and trade diversion
• protectionism, living standards and inflation
• impact on different economies, eg developed versus developing economies
• protectionism as a means of dealing with domestic macroeconomic problems
• retaliation and ‘beggar thy neighbour’ policies
• short-run and long-run consequences
• exchange rate changes as an alternative to protectionism or as a form of
protectionism, eg emerging economies fixing their exchange rates at a low
level to encourage export-led growth.

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the candidate’s response to the question.
[25]

Q33.
Relevant issues include:
• the nature of economic growth
• short-run versus long-run growth
• UK economic growth and living standards
• UK economic growth, tax revenues, public spending and the budget balance
• UK economic growth, inequality and poverty
• UK economic growth and employment
• UK economic growth and inflation
• UK economic growth and the balance of payments, including export-led
growth
• the relationship between the government’s wider political and social
objectives, eg political and military power, the environment.

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the candidate’s response to the question.
[15]

Q34.
Areas for discussion include:
• the difference between economic development and economic growth
• the nature of free trade and preferential trading arrangements
• the role of multinational companies in global trade and economic development
• examples of how global trade policies impact on the economic development of
a country, eg removal of tariff barriers into the EU provide an opportunity for
greater exports
• factors that contribute to economic development, eg investment in
infrastructure, investment in human capital, better health care and sanitation
• export-led growth
• exports as an injection into the circular flow of income with associated
multiplier effects

Page 71 of 155
 • how export earnings generate foreign currency that can be used to finance
imports that are necessary for development
• free trade leads to cheaper imports and can promote improvements in the
competitiveness of domestic producers
• trade and comparative advantage
• trade may allow sectors within an economy to develop economies of scale and
create opportunities to access new technology
• the view that exports promote self-reliance, whereas aid promotes
dependency
• free trade may inhibit the development of infant industries
• free trade may lead to reliance on a limited range of products, maybe a few
primary products, and lead to instability
• free trade may result in large, unsustainable current account deficits
• aid might damage domestic producers, eg food aid and agriculture
• aid may be directed at prestige projects and be misappropriated by corrupt
officials
• aid can be effective in improving basic living standards and allow people to
escape from poverty and disease
• effectiveness of aid depends on the type of aid and how it is distributed.

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the candidate’s response to the question.

The use of examples of developing economies should be taken into account when
assessing the quality of response.
[25]

Q35.
D
[1]

Q36.
B
[1]

Q41.
Level of Response Max
response 15 marks

3 A good response provides an answer that: 11-15

marks
• is well organised and develops a selection of the
key issues that are relevant to the question
• shows sound knowledge and understanding of
economic terminology, concepts and principles
with few, if any, errors
• includes good application of relevant economic
principles and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical
chains of reasoning.
2 A reasonable response provides an answer that: 6-10 marks

Page 72 of 155
 • focuses on issues that are relevant to the
question
• shows satisfactory knowledge and understanding
of economic terminology, concepts and
principles but some weaknesses may be present
• includes reasonable application of relevant
economic principles and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which
might not be adequately developed or becomes
confused in places.
1 A weak response provides an answer that: 1-5 marks
• has one or more relevant issues identified
• has some limited knowledge and understanding
of economic terminology, concepts and
principles but some errors are likely
• has very limited application of relevant economic
principles and/or data to the question
• might have some limited analysis but it may lack
focus and/or become confused.

Relevant issues include:

• impact on employment, unemployment and human capital
• impact on real GDP and aggregate demand
• multiplier and accelerator effects
• effects on long-run growth and productivity
• spill-over effects on other firms
• impact on the balance of payments: exports and import substitution
• impact on the budget balance and public sector debt
• may stimulate spending on improvements to the infrastructure
[15]

Q45.
Response: Max
4 marks

• includes evidence that shows that increasing growth in real 4 marks

GDP leads to a reduced deficit in the balance of trade in goods
and services.

• clearly explains how this data is evidence that increasing

growth in real GDP leads to a reduced deficit in the balance of
trade in goods and services.

• includes evidence that shows that increasing growth in real 3 marks

GDP leads to a reduced deficit in the balance of trade in goods
and services.

• unclear explanation of how this data is evidence that increasing

growth in real GDP leads to a reduced deficit in the balance of
trade in goods and services..

• includes evidence that shows that increasing growth in real 2 marks

GDP leads to a reduced deficit in the balance of trade in goods

Page 73 of 155
 and services.

• limited explanation of how this data is evidence that increasing

growth in real GDP leads to a reduced deficit in the balance of
trade in goods and services.

• includes evidence that does not clearly show that increasing 1 mark
growth in real GDP leads to a reduced deficit in the balance of
trade in goods and services.

• no explanation of how this data is evidence that increasing

growth in real GDP leads to a reduced deficit in the balance of
trade in goods and services.

Relevant issues include:

• biggest trade deficit £36, 733 million coincides with the fastest growth rate in
GDP (3.4%) in 2007
• years of recession (negative growth in GDP) occur when the deficit on balance
of trade in goods and services improves in both years (2008 and 2009)
• when growth picks up in 2010 (1.7% from -5.2% in 2009) the deficit on the
balance of trade in goods and service deteriorates (£32 852 million from £23
373 million)
• why an increase in the rate of growth of GDP often leads to an increased
deficit in the balance of trade in goods and services
[4]

Q46.
Level of An answer that: Max
response 9 marks
• is well organised and develops one or more of
3 7-9 marks
the key issues that are relevant to the question
• shows sound knowledge and understanding of
relevant economic terminology, concepts and
principles
• includes good application of relevant economic
principles and/or good use of data to support the
response
• includes well-focused analysis with a clear,
logical chain of reasoning
• includes a relevant diagram that will, at the top of
this level, be accurate and used appropriately.
• includes one or more issues that are relevant to
2 4-6 marks
the question
• shows reasonable knowledge and understanding
of economic terminology, concepts and
principles but some weaknesses may be present
• includes reasonable application of relevant
economic principles and/or data to the question
• includes some reasonable analysis but it might
not be adequately developed and may be
confused in places
• may include a relevant diagram.
• is very brief and/or lacks coherence
1 1-3 marks

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 • shows some limited knowledge and
understanding of economic terminology,
concepts and principles but some errors are
likely
• demonstrates very limited ability to apply
relevant economic principles and/or data to the
question
• may include some very limited analysis but the
analysis lacks focus and/or becomes confused
• may include a relevant diagram but the diagram
is not used and/or is inaccurate in some
respects.

An AS/AD diagram is expected, showing a rightward shift of the AD curve.

Relevant issues include:

• meaning of recovery
• exports as a component of aggregate demand
• impact on output and employment in the export-producing sectors
• export-led multiplier effects
• possible accelerator effects
[9]

Q47.
Areas for discussion include:
• nature and size of the UK current account deficit in recent years
• why large current account deficits are seen as undesirable, e.g. indicate a lack
of competitiveness
• potential benefits of running a current account deficit, e.g. improves living
standards in the short run, inflows of FDI to finance the deficit may stimulate
growth
• current account deficit has to be financed in some way – either by attracting
foreign direct or portfolio investment, by borrowing or by running down
reserves.
• policies to correct the deficit are not necessarily desirable, either depreciation
of the currency or deflationary policies
• large current account deficit may be seen as unsustainable and foreign
lenders may eventually withdraw their investment, leading to a sterling crisis
• if deflationary measures are needed to reduce deficit and this would usually be
undesirable due to the effects on output and employment
• so far, long periods of current account deficit do not seem to have been a
barrier to achieving other policy objectives
• the changing size of the deficit could be compared to growth, e.g. if the growth
of nominal GDP is higher than growth in the deficit then it is less likely to be a
serious problem
• UK is relatively successful in attracting overseas investment due to other
factors (e.g. low tax rates, viewed as a stable economy) which means that the
deficit can be financed.
• a floating exchange rate mean that the government can allow exchange rate
to depreciate allowing partial correction of current account deficit – this option
is not available to those with a fixed or pegged currency

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[25]

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Q48.
Relevant issues include:
• lower AD leading to a fall in the price level
• reduction in consumer confidence and spending
• lower business confidence and investment
• price cutting by firms in a period of recession
• recession/deflation in the rest of the world
• falling world commodity prices
• strengthening exchange rate
• technological breakthroughs lowering costs of production
• impact of cheaper imports from low waged economies
• malign v benign deflation

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[15]

Q49.
Relevant issues include:
• definition of international trade
• absolute and comparative advantage
• benefits of comparative advantage as long as trade occurs at a mutually
beneficial terms of trade
• numerical example to illustrate the principle of comparative advantage
• international trade allows specialisation so countries can benefit from more
efficient production which should mean more jobs and cheaper prices for
consumers
• availability of consumer goods that cannot be easily produced in UK
• increased choice for consumers which should lead to lower prices and higher
quality products
• helps to prevent domestic firms with monopoly power exploiting consumers
• the dynamic effects of international trade on domestic producers, eg through
increased competition stimulating improvements in productivity and innovation

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[15]

Q50.
Areas for discussion include:
• definitions of free trade and protectionist policy in context of international trade
• types of protectionist policy
• potential benefits gained through protectionist policies e.g in relation to growth,
jobs the current account of the balance of payments
• the growing UK current account deficit; has been at record levels as a
percentage of GDP
• businesses may find it hard to compete against low-cost foreign competition
• improvements in technology, transport etc. make it easier for consumers to
buy from abroad
• impact of international trade on government objectives for jobs and the current
account balance
• cheaper labour overseas makes it hard for UK businesses to compete on price
• cheap labour is just another form of comparative advantage and should not be
seen as unfair

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 • arguments to justify protection, e.g. infant industry, job protection, prevention
of dumping
• membership of the WTO makes it very difficult for the UK to adopt protectionist
policies
• EU membership means severe limitations on what protectionist measures can
be introduced
• protectionist policies are likely to lead to retaliation from other countries no real
evidence that protectionist policies work in long-run – countries with highly
protected industries have not outperformed those with more open economies
• discussion of alternatives to protectionism, eg allowing the exchange rate to
fall international trade may make it easier to achieve some government
objectives, e.g. low inflation and high productivity

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[25]

Q51.
A
[1]

Q54.

Explanation:

For a relevant explanation of circular flow: eg A model which

demonstrates the flow of money between households and firms and going
on to explain the role of injections/leakages or linking the circular flow to
measures of national income/output/expenditure.

For a diagram of the circular flow

Analysis:

For Example: Increased growth in the US could lead to rising disposable

income of US citizens who may increase their spending this may be on
UK’s goods or services which would lead to increased export earnings for
the UK which would increase the output of UK firms and therefore AD of
which exports are a component which therefore increases the national
income of the UK.

Use of appropriate diagrams, eg a diagram showing increased AD on an

AD/AS diagram or increased FDI from overseas increasing both AD and
AS

Reference to the UK or other economies.

[9]

Q55.
Introduction • The meaning of inequality

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 • Differences between income and wealth
• UK economic performance measures.

Developing the Drawing on the information in the extracts:

response to
the question: • the rich having a lower MPC and a higher MPS and if
incomes of the poor increased consumption would
Application increase (Extract B)
• US economic growth and US being the UK’s main
export partner (Extract B)
• Increased income inequality due to reduced union
power (Extract C)
• trickle-down effects improving living standards
(Extract C)
• promoting incentives and wealth generation and
focusing on financial services (Extract C)
• economic progress often depends on saving and
innovation (Extract C)
• UK financial services making short term with profits
and lacking long term investment (Extract C)

Developing the Arguments how inequality impacts on UK performance:

response to
the question: • impacts on consumption and AD
• US as the UK’s main export market + other export
Analysis markets
• how supply side reforms have affected UK macro-
performance
• UK’s comparative advantage in financial services
• increased savings linking to investment
• policies impacting on consumption and investment
and different income groups
• entrepreneurship, “wealth generation” and the free
market.
• equity vs efficiency arguments
• impact on FDI
• asset bubbles
• UK banking system and the pursuit of long term
investment
Analysis of each of the UK’s four main macro-economic
goals or other social goals or current government targets
could be included.

Evaluation • Does inequality in other countries really impact on the

UK economy?

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 • The relative amount of inequality
• Does the marginal propensity to consume have such
a big impact or are there more important
considerations (does increased saving by the “top
1%” have such an impact?)
• The importance of exports and FDI in the economy.
• Other considerations such as domestic policy or
financial crisis creating bigger impacts.
• The relative importance of each macroeconomic
performance indicator
• Whether Government intervention is necessary for the
improvement of the economy and if so in what way?

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q58.

Explanation:

Definition: As there is no single definition for this, any suitable

definitions can be credited: eg The ability of an economy to sell goods
and services in or to other countries and linking to the theory
comparative advantage or in terms of lower costs of production or
price/non price competitiveness

Analysis:

For Example: A fall in corporation tax may reduce a firms costs therefore
the firms expected profits may rise and improve confidence which may be
a catalyst for investment which may increase spending on both human
capital and physical capital which may lead to productivity advancements
allowing firms to sell goods for cheaper on international markets.

Use of appropriate diagrams, eg AD/AS

Reference to the UK or other economies.

[9]

Q59.
Introduction • The nature of public sector debt

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 • The relationship between deficits and debt
• The EU and fiscal rules.

Developing the Drawing on the information in the extracts:

response to
the question: • Eurozone recovery slowing (Extract B)
• Taxation affecting investment (Extract B)
Application
• Ireland creating conditions to increase lending
(Extract C)
• Crowding out (Extract C)
• High levels of public debt (Extract C)
• Significant trade partners (Extract C)

Developing the Arguments as to how reduced public sector debt in other

response to economies may effect UK:
the question:
• methods of reducing public sector debt
Analysis • equity and different income groups
• impact on UK exports/FDI
• impact on UK growth (short-run and long-run)
• impact on the balance of payments on both current
and capital accounts.
• impact on employment/unemployment
• impact on inflation.
• impact on investment and confidence
• impact on ratings agencies and bond yields
• crowding in/crowding out arguments
• standards of living
• Keynesian multiplier
Consideration of how reduced public sector debt
domestically is also worthy of credit.

Evaluation • How ‘impact’ is measured and the importance of

various macroeconomic performance indicators
• The differences between the relationships with each
nation ie countries which provide us with net exports
possibly having a bigger impact
• Consideration of ‘at the same time’ as being with each
other or with the UK
• The rate at which debts are being reduced
• Consideration of whether Government debt is in fact a
problem

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 • Consideration of FDI and how this might be affected
• Will the private sector actually have more freedom to
invest both domestically and abroad with reduced
Government intervention
• Whether debt reduction causes crowding in or
crowding out and the effects on AD.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q60.

Explanation:

For defining/explaining
• Comparative advantage
• The difference between absolute advantage and comparative
advantage.
• International trade.

For Example: As countries specialise in the provision of goods and

services in which they hold a natural or assumed advantage either due to
factor endowment or the development of specific advantages due to cost
reasons over time due to having a lower opportunity cost then it would be
mutually beneficial for to exchange the goods or services they have
specialised in, with another country as long as they can establish certain
terms of trade which will therefore benefit both countries in terms of
increased consumption possibilities which may allow households to
consume an increased amount of goods and services which may improve
living standards.

For the numerical example it is expected that the candidate is likely to

make use of at least 2 ‘tables’ where students initially demonstrates 2
economies where either the two economies are initially producing both
goods or already specialising. The other expected table would
demonstrate that trade was mutually beneficial in terms of increased
availability of both goods.

Use of diagrams to help support explanations, eg production possibility

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 frontiers or consumption possibilities.

Relevant real world examples and/or relevant reference to the UK and/or

other economies.
[15]

Q61.
Introduction • The nature of EU single market
• Origins of the EU
• How ‘beneficial’ may be measured in terms of
macroeconomic performance.

Developing the • Current EU policies regarding freedom of movement

response to of labour/capital/trade etc.
the question:
• How more EU members may affect growth
Application / • How more EU members may affect inflation
Analysis
• How more EU members may affect the balance of
payments
• How more EU members may affect unemployment
• Trade diversion/Trade creation.
• Comparative advantage
• Extended overseas markets and economies of scale
• The impact on inward and outward FDI
• The relative size of the economies of the possible
entrants.
• The effects on other EU members
• The implications of immigration
• The possibility that these countries may enter the
Eurozone.
• Short-run and long-run considerations
• The UK’s current macro-economic performance in
context.

Evaluation • The importance of which countries join and when?

• The relative size of say the agricultural sector of the
new markets may affect the UK’s proportion of CAP
• The ‘net contributor’ argument in terms of EU funding.
• Scope for FDI (both inward and outward)
• The relative importance of EU institutions to the UK.
• The relative effects on each macroeconomic goal

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 being dependant on the UK’s position on the trade
cycle
• The importance of stability
• Important current political considerations
• Immigration depending on the net migration size
• Economic and social impact of further integration.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q62.
Introduction • Inflation and the types of inflation
• The role of the Bank of England
• Explanation of the target rate of inflation.

Developing the • Why the UK has inflation targets

response to
the question: • The importance of the other macroeconomic goals
• How the independent Bank of England has control of
Application / the tools to control inflation
Analysis
• The importance of low inflation greasing the wheels of
the economy.
• Limitations to the use of policy tools
• The importance of inflationary expectations
• The effects of deflation
• Trade-offs in macroeconomic goals
• How inflation can affect growth
• How inflation can affect the Balance of payments
• How inflation can affect unemployment or vice versa
• How focusing on other goals may impact on inflation
• How the prioritisation may change

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 • How other policies affect inflation
• The role of supply side policy in controlling inflation
• Short-run vs long-run considerations.

Evaluation • Whether control of inflation depends on where the

economy is operating in the trade cycle
• Whether the UK has the ability to control cost push
inflation to the same extent as demand pull
• How ‘independent’ is the Bank of England in setting
policy
• Historical perspectives compared to current economic
policies.
• The prospects of inflation as opposed to deflation
• The effects on the UK when the UK went outside of
the target in the past
• The relative importance of inflation compared to other
goals
• Is there an inevitable trade off with unemployment?
• Short-run vs long-run considerations.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q63.
For defining/explaining:
• Economic growth (short-run or long-run)
• Recession
• The trade cycle

For Example: An external shock such as the banking crisis which began
in 2007 reduced the ability of the financial sector to lend which caused
individuals difficulty in gaining credit and therefore causing consumption to
fall as consumption is a large component of aggregate demand as AD

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 falls the real national output of the economy falls which could cause a
negative multiplier effect and, if real national output falls for 2 successive
quarters this is a recession.

Use of diagrams to help support explanations, eg AD/AS or the trade

cycle.

Relevant real world examples and/or relevant reference to the UK and/or

other economies.
[15]

Q65.
Introduction • Deflation
• The EU
• Macroeconomic performance indicators.

Developing the Drawing on information in the extracts:

response to
the question: • Central banks’ ability to respond (Extract E)
• Eurozone ‘one size fits all’ vs UK’s and others ability
Application to respond Extract E
• Delaying spending (Extract F)
• Effects on debtors (Extract F)
• Effects on tax revenue (Extract F)
• Reduced production costs/productivity (Extract F)
• Improving competitiveness (Extract F)
• Deterring investment (Extract F)

Developing the Arguments as to how deflation in the EU may benefit

response to the UK economy:
the question:
• Effects on competitiveness if UK also experiences
Analysis deflation
• Benign inflation due to improved productivity helping
growth and maintaining low prices
• Long run, sustainable economic growth achieving
deflation
• UK’s low stable inflation causing stability in
comparison to deflation
• Deflation in other economies may make UK a relative
safe haven for firms from abroad considering
FDIMicroeconomic effects such as benefits to first
time buyers of possible falling house prices.
Consideration of how deflation in the EU may damage
the UK economy:

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 • If EU experiences deflation and UK doesn’t then UK
may become less competitive in relative terms
• EU deflation delaying spending and causing a fall in
UK exports
• Lack of FDI across the EU due to uncertainty
• Damaging tax revenues in the UK which may reduce
ability of UK Government to meet targets
• Possibility that QE and other policy responses by the
ECB and European economies as a result of deflation
may give boosts to these economies.
• Microeconomic effects such as falling house prices
causing negative equity.

Evaluation • The UK as part of the EU possibly suffering deflation

• The duration of deflation having a major impact
• The cause of deflation being vital to understanding the
effects
• Benign vs malign arguments
• The UK’s ability to avoid deflation in comparison to
other economies
• The relative difficulty of combatting inflation when the
causes are external in a globalised economy.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Relevant diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q66.
For defining/explaining
• Globalisation
• Balance of payments on current account
• Trade deficit
• Import controls.

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 For example: By carrying out supply-side policies such as training and
education this would hopefully improve productivity in the domestic
market which should improve the potential output per worker which
increases the long run productive potential of the economy. This could
reduce the general price level which makes domestic goods and services
more competitive abroad which may lead to other countries increasing
demand for the UK’s exports such as financial services in which the UK
holds a comparative advantage and if the value of imports remains the
same this may reduce the balance of payments on the current account.
Other examples could include: issues such as exchange rate
depreciation, expenditure reducing policies or export subsidies.

Use of diagrams to help support explanations, eg LRAS increasing or

exchange rate depreciation.

Reference to the UK and/or other economies.

[15]

Q67.
Introduction • Globalisation
• UK economy
• Stakeholders in the economy, households, firms,
government and whole economy.

Developing the Arguments that the UK benefits from globalisation

response to
the question: • Comparative advantage arguments – job creation in
financial services
Application / • Endowment of factors of production – access to goods
Analysis and services difficult to produce domestically
• Increased choice
• Lower costs of consumer goods/cost of semi-finished
goods and commodities
• Benefits from transfer of technology
• Welfare gains in terms of trade
• Economies of scale arguments
• Benefits of international co-operation
• Increased FDI.
Arguments that the UK loses out due to globalisation
• Outsourcing has led to structural unemployment in
regions of the UK
• Issues surrounding labour migration
• Multinational corporations exploiting tax loopholes

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 • Multinational corporations influence over political
decisions
• More open to economic shocks elsewhere in the world
• Potential for imported inflation
• Over-dependence on certain markets/possible
strategic markets arguments
• Lack of control over markets and goods and services
• Environmental issues.

Evaluation • Benefits and costs depend on viewpoint, eg a firm

lowering costs may do so at the expense of an
individual’s job
• Globalisation as a source of competition creating
more resilience in UK firms
• Short-term benefits in comparison to longer term, for
example short-term prices may fall but over-reliance
could lead to long term losses
• Loss of manufacturing could lead to long-run over-
dependence on certain economies
• Comparative advantage is dynamic – eg although the
UK may benefit in terms of specialising in financial
services now, this may not be forever.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q68.
Introduction • Saving ratio
• Macroeconomic performance.

Developing the • Increased consumption benefiting standards of living

response to
the question: • Increased short-run economic growth
• Positive multiplier arguments
Application /

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 Analysis • Increased deficits on the balance of payments on
current account
• Increased problems of personal debt
• Demand pull inflationary pressures caused by too
much consumption
• Over-reliance on credit
• Lack of funds in financial institutions for lending and
investment
• Lack of funds for long-run growth
• Effects on confidence
• Paradox of thrift arguments (not in specification)
• Effects on employment.

Evaluation • Is the saving ratio important in an economy or is it a

by-product of economic conditions?
• Has increased economic integration and international
finance diminished the importance of the savings
ratio?
• Savings creating the condition for investment in the
long run
• Low savings and the effects of future policy changes
• Changes in the saving ratio as an effect of having a
strong economy rather than the cause of a problem.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

Also give • Reference to the UK/other economies

credit for
• Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q70.
• Definition of inflation
Introduction
• Global experiences of inflation
• UK inflation and the scenario of ‘worsening inflation’
• The balance of payments and its various parts.
• Low inflation for achieving economic stability and sustained growth
Developing the
Extract B (lines 2–3)
response to the

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 • Reference to energy costs and primary commodity prices Extract B
question
(lines 12 & 13)
(application)
• The brake on hesitant recovery Extract B (lines 21 & 22)
• The dangers of loose monetary policy in the UK Extract C (lines 7–
11)
• The breeding of ‘uncertainty’ Extract C (line 11)
• Disruption to trade and investment flows (Extract B lines 19 & 20)
• Cost-push inflation
• Demand-pull inflation
• AD/AS analysis
• Balance of payments
• Competitiveness.
• The notion of ‘impact’
Analysis
• Measurement of impact in the context of the balance of payments
• World commodity prices increases and the UK import bill
• UK competitiveness given the authorities’ success or failure in
controlling inflation
• The impact of imported inflation on future balance of payments’
performance
• Inflation, the UK exchange rate and the balance of payments
• The impact of global inflation on the macroeconomy of other
countries and how this will inevitably impact on the UK’s balance of
payments
• Investment flows and the capital account.
• Is the problem in almost every part of the global economy and
Evaluation
what, therefore, is the relevance of this to the UK balance of
payments?
• Is the problem one experienced by the UK’s major trading partners?
• ‘Increasing inflation’ but is the deterioration still from low initial
levels of inflation?
• UK inflation compared to inflation amongst our trading partners
• A worsening, but still mild, inflation as a stimulant to the world of
business, to investment, and the impact on the capital account
• An inflation scenario which still compares favourably to the
prospect of deflation for the balance of payment
• The severity of any anti-inflation policies pursued by other
governments which may impact on global demand for UK goods
and services
• The impact on the current account of success or failure in UK
authorities’ attempts to deal with any national problem of inflation.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.

• Reference to the UK/other economies

Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

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Q72.
Relevant issues/logical chains of analysis include:
• defining exports and/or the multiplier
• explanation of the link between the multiplier and AD/use of an arithmetical example
• explaining export-led multiplier, eg the impact of a growing export sector on other
sectors of the economy, for example, as those employed in the export sector spend
their incomes on goods and services; those businesses in the export sector
demanding machinery and technology from other businesses outside the export
sector
• use of relevant diagrams, eg AD/AS
• An improvement in the macroeconomy of the EU to which over half of UK exports
are sold. Fiscal policy may loosen in the EU, so that consumers’ disposable incomes
rise and hence their demand for UK goods and services. Equally, unemployment
may fall in the EU allowing average incomes to rise and hence consumer demand
for UK exports
• UK productivity increases lowering unit costs
• UK/EU relative inflation rates are favourable to the UK
• Quality of UK goods and services
• The exchange rate of the £ against other currencies
• Changing comparative advantage favouring the UK
• appropriate diagrams, eg AD/AS, comparative advantage
[9]

Q73.
• Reference to the history of the EU
Introduction
• The history of UK membership of the EU
• Changing views about membership over time
• The nature of the EU, for example, as a customs union/single
market
• The possible criteria for making a decision.
• The estimated total cost to UK of membership Extract E(lines 4 &
Developing the
5)
response to the
• UK Budget contributions Extract E (line 6)
question
• The Single European Market Extract E (lines 14 & 15)
(Application)
• Foreign direct investment Extract E lines (15 & 16)
• The EEA Extract F (lines 3−5)
• The example of Norway as a non-member of the EU Extract F
• Trade theory
• AD
• Economic growth
• The notion of economic benefit
Analysis
• Economic growth
• Employment
• Balance of Payments
• Exchange rate
• Prices
• CAP
• SEM
• CET
• The euro
• The EEA.
• The uncertainty surrounding the future outside the EU
Evaluation
• Whether a comparison with just one other economy (Norway) is
helpful
• To what extent, if at all, would trade be affected?

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 • Could the UK re-establish former economic links, for example, with
the Commonwealth or is this a myth from non-existent halcyon
days?
• The difficulty of assessing in a truly objective and precise way the
various costs and benefits
• The possible UK support for membership to foster and maintain
economic ties with the EU in contrast to strong opposition to
political ties and loss of national sovereignty
• The possible changing views about membership as enlargement of
the EU continues
• Support for membership increasingly tempered by a fear that the
UK will become embroiled in the euro crisis financially when the UK
is outside the Eurozone
• ‘Sitting on the fence’ has limitations; should the UK fully embrace all
aspects of the EU and become ‘full Europeans’ including adoption
of the euro?
• The possibility of the UK joining the EEA or even NAFTA instead.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.
• Reference to the UK/other economies
Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q74.
• The budget and budget deficit
Introduction
• The recent UK experience
• Short term long-term
• The notion of improvement in economic prospects.
• Short-term gain versus long-term gain
Developing the
• International credit-agency ratings for the UK and their possible
response to the
significance
question
• Interest rates and quantitative easing − short term benefit, long-
(application and
term inflation?
analysis)
• The importance of stabilising the economy
• Recession in the short term but the possible long-term weakening
of the economy
• The contrast with the ‘Keynesian solution’
• Economic growth
• Inflation/deflation
• Cost-push inflation at a time of ‘austerity’ creating problems in the
long-term
• Competitiveness and the balance of payments on current account
• Long-term prospects for employment/unemployment
• Cyclical and structural unemployment.
• The severity of reductions in the deficit
Evaluation
• The period of time over which so-called fiscal austerity lasts
• What is reasonable to consider as ‘long-term’ when referring to

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 ‘long-term economic prospects’?
• How the budget deficit is achieved
• Whether the improvement in long-term prospects fully compensates
for short-term problems arising from the reductions in the deficit
• Does the alternative ‘Keynesian solution’ really hold water under
scrutiny?
• Are international credit ratings really that significant?
• Long-term prospects may improve on one measure, eg inflation,
but suffer on another measure, eg growth
• The possible self-defeating nature of deficit reduction, ie efforts to
reduce a deficit can bring about an increase as the economy
worsens
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.
• Reference to the UK/other economies
Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q75.
Relevant issues/logical chains of analysis include:
• defining exchange rate/appreciation/depreciation/revaluation/devaluation
• the distinction between various exchange rate systems
• trade flows will affect an exchange rate. If exports increase so too will the demand
for the currency of the exporting country by overseas buyers. This will cause the
exchange rate to appreciate. Equally, if imports into a country increase, so too will
the supply of that country’s currency, causing the exchange rate to depreciate
• Investment flows, competitiveness government involvement in FOREX, interest
rates and hot-money flows, expectations, confidence
• External factors such as strong US or Eurozone recovery or an economic shock
such as an international banking crisis
• diagrams to help support explanations, eg supply of, and demand for, a currency or
for exports and/or imports
[15]

Q76.
• Exchange rate
Introduction
• Floating exchange rate
• Other exchange rate systems
• Macroeconomic stability.
• Automatic adjustment under a floating exchange rate
Developing the
• The significance of automatic adjustment for macroeconomic
response to the
stability
question
• Interest rates determined by domestic conditions but nevertheless
(application and
impacting on the exchange rate
analysis)
• Speculation and its impact
• Global economic shocks

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 • Economic growth and stability
• The exchange rate and prices
• The exchange rate and the balance of payments on current
account
• The exchange rate and employment
• A floating exchange rate and business confidence
• The possible significance of intervention by the authorities in an era
of managed flexibility
• Other factors which are more effective in achieving stability
• The likelihood of automatic adjustment occurring efficiently or at all
Evaluation
• Whether other conditions potentially able to secure stability can
counteract any destabilising effect of a floating exchange rate or
will it be vice versa?
• The extent of changes to an exchange rate under a floating system
• The impact of economic shocks making it very unlikely that stability
can be achieved whatever the exchange rate system in operation
• The preparedness of a government to intervene to influence an
exchange rate in order that macroeconomic stability can be
achieved
• In reality, how long is ‘a period of macroeconomic stability’ expected
to be?
• Are changes in an exchange rate, within reason, really relevant to
achieving macroeconomic stability?
• The need to recognise that a floating exchange rate may help to
stabilise one aspect of the macroeconomy, eg prices, but not do a
great deal for another aspect, eg economic growth.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.
• Reference to the UK/other economies
Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q77.
Relevant issues/logical chains of analysis include:
• defining economic shock, eg what maybe an unexpected event or one that at least
some had predicted which affects an economy either positively or negatively (it is
anticipated that the majority of candidates will see shock in negative terms because
of the reference to ‘harm’ and this should not be penalised. Please make sure that
credit is not given where the preamble to the question is simply copied out, ie an
economic shock is something which can have significant consequences)
• distinguishing a demand-side shock from a supply-side shock, perhaps with
examples, such as the euro crisis, the ‘credit crunch’; oil price increase or a natural
disaster.
• defining economic growth, eg an increase in real GDP or an increase in productive
capacity.
• distinguishing between actual and potential growth
• Supply: A significant increase in global oil prices will impact on an economy having

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 to import most or all of its oil from the international market, causing the SRAS curve
to shift to the left. Higher oil prices will lead to higher unit costs and hence higher
prices and hence cost-push inflation. The impact of inflation on real incomes will
affect AD (1mark). Demands from labour for higher wages will worsen the inflation
problem. Inflation will cause an increase in unemployment and eventually cause
economic growth to falter so that stagflation becomes a real possibility.
• Supply: A significant increase in prices of primary commodities generally and/or food
prices.
• Supply: A major war/significant natural disaster/a series of devastating terrorist
attacks around the world in major economies.
• Demand: The severity of the Eurozone crisis
• Demand: An unanticipated and sudden downturn in emerging economies such as
India and China.
• Demand: credit crunch/crisis in major financial markets
• any other economic shock explained which potentially harms growth
• diagrams to help support explanations, eg AD/AS showing shifts of AD and/or AS,
micro supply and demand diagrams, PPF
[15]

Q78.
• Economic growth
Introduction
• The standard of living
• The recent global experience.
• How world economic growth is likely to be achieved
Developing the
• The importance of ensuring that growth is sustainable
response to the
• Recognition that the impact could be positive or negative in net
question
terms
(application and
analysis) The UK economy:
• Aggregate demand
• Changes to the incentive to invest and the possible impact on such
things as productive capacity
• Aggregate supply
• Inflation
• The environment
• The ability to sell overseas and hence the impact on exports
• Imports
• The balance of payments on current account
• The prospects for inward/outward FDI
• World growth causing changes to wealth creation in the UK
• Employment/unemployment
• The impact of world commodity prices.
The individual in the UK:
• Trend in average income (income per head)
• Distribution of income
• A possible sharpening of the “haves and have-nots” distinction
• Consumption patterns
• The wealth effect associated with rising asset prices in a period of
growth
• Choice of jobs
• Quality of life
• Quality of life measures such as the HDI and the “happiness index”.

• The extent of world economic growth

Evaluation

Page 95 of 155
 • World economic growth from what starting point, eg years of
stagnation?
• The importance of considering where in the world growth is taking
place and the bearing this may have on the UK economy
• The UK’s capability to participate in the growth process and in its
rewards
• The possibility of the UK economy importing the downside of world
growth, eg inflation and a deteriorating environment, without
enjoying the benefits, eg more jobs and more spending power
• It is easier to measure the economic impact on the individual, ie
income per head, than it is to measure changes to the quality of life
• What of the individual who has the wrong skills or qualifications to
allow occupational mobility or cannot become geographically
mobile?
• Short term v long term impact for both the individual and the
economy
• Does the UK economy enjoy higher demand without giving due
attention to its supply-side?
• Is sufficient attention given to the environment both from the
individual’s point of view and that of the UK economy?
• Whether growth elsewhere is likely to cause net economic benefit
or net economic damage to the UK.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.
• Reference to the UK/other economies
Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q80.
Explanation
• Defining/explaining fiscal policy, fiscal restraint, economic benefit.
• Explaining the possible direction of fiscal policy to achieve fiscal restraint, perhaps
with some reference to what might be meant by ‘strict’.
• Reference to the macroeconomic aims of such fiscal restraint via AD.
• Use of relevant diagrams, eg AD/AS
• Greater freedom in monetary policy, eg setting interest rates so that national interest
rates suit national economic trends and deciding on domestic monetary growth. This
will allow interest rates to be raised if boom conditions emerge making it possible to
adopt a counter-inflation interest rate policy. Equally, ECB rates will not have to be
accepted if the national economy experiences a downturn when it would be
necessary to lower interest rates in order to raise components of AD in the economy,
such as consumption or investment.
• The ability to devalue a restored national currency.
• Greater freedom on fiscal policy.
• Freedom from the ‘legal’ obligation to offer financial support to other eurozone
conomies in crisis should it be in a position to do so.
• Any other valid analysis; for example, it would be conceivable for a candidate to
argue that there is a general benefit of greater freedom on national policies while

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 retaining the benefits of EU membership such as CAP, SEM, CET, with one or other
of the latter being given some weight in an answer.
• Use of appropriate diagrams, eg AD/AS, interest rates.
• The UK/eurozone – £/€
[10]

Q81.
Issues and areas for discussion include:

• the Eurozone and the EU

Introduction
• UK status
• economic criteria for measuring impact
• the likely nature of Eurozone break-up.
• the degree of stability that had existed before the global financial crisis
Developing the
especially for the weaker members (lines 3–4)
response to the
• the significance of the debt crisis (lines 8–13)
question
• the importance of eurozone stability for the UK (lines 35–39)
(Application)
• the inability of the UK to be immune from the eurozone problems even
though it lies outside the eurozone (lines 39–41)
• GDP
• injections/withdrawals from the circular flow
• cyclical/structural unemployment.
• economic instability in the eurozone or more widely in the EU
Analysis
• the impact on the £
• the impact on the euro
• the status and stability of the restored national currencies of those
economies leaving the eurozone
• UK economic growth
• UK employment.
• UK balance of payments, current and capital accounts, especially the
impact othe world economy UK exports
• the impact on the UK banking/financial sector
• the scale of any UK commitment to ‘bail-outs’
• diagrams to help the analysis
• reference to the real world.
• the significance of which countries actually leave the eurozone
Evaluation
• how many countries decide to leave
• the policies those countries decide to pursue following their exit
• whether or not the exit of some countries leaves the eurozone as a much
stronger economic entity with which the UK establishes even stronger
economic ties
• the relative value of the £ in relation to the newly restored national
currencies
• if there is a continuing crisis whether or not the UK can compensate by
developing stronger economic ties elsewhere in the world
• whether the UK and the remaining members of the eurozone pursue
policies intended to support the economies exiting from the eurozone
• the exit of countries in the context of the state of the world economy
at that point and the EU economy in particular
• the potential significance of the EU still remaining as an economic
entity with, for example, the SEM still intact
• reference to what actually happens when this paper is sat by candidates
and what is suggested in the data
• a final judgment on the issue of countries leaving the eurozone.

Page 97 of 155
 Examiners should note that, for some of the weaker or average candidates,
parts of the above represent quite sophisticated evaluation and so it is
important to ensure that more basic evaluation is adequately rewarded where a
genuine effort has been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q82.
• For a definition of MNCs, eg a corporation or enterprise which manages production
or delivers services in more than one country.
• Example(s) of MNCs
• Explanation:
MNCs will be heavily involved in foreign direct investment (FDI) which is investment
by companies which have their head offices in other countries. It will strengthen
economic links between countries and so further the process of global integration.
Investment can establish production units in a number of countries and if necessary
initiate a modernisation of production processes.
• fostering trade
• spreading technology
• making developing countries aware of the potential benefits of becoming a part of a
globalised world
• encouraging migration of labour
• establishing or strengthening supply chains
• any other aspect of MNCs’ work relevant to globalization.
• Use of diagrams to help support explanations of globalisation or the role of MNCs,
eg MEC, comparative advantage, AD/AS.
• References to the UK and/or other economies
[15]

Q83.
Issues and areas for discussion include:

• globalisation
Introduction
• developed and developing economies
• criteria which underlie an assessment of economic
consequences
• economic growth
Developing the
• labour flows
response to the
• capital flows
question
• employment/unemployment, eg structural unemployment
(application and
• balance of payments on current and capital accounts
analysis)
• trade and trade policy, eg exploitation of comparative
advantage
• MNC policies, eg branch-plant syndrome
• deindustrialisation
• the way in which the two categories of countries and
governments within them respond to the challenges of
globalisation if at all
• the response of businesses in the two categories of
countries, eg productivity, productive efficiency, efficiency-
enhancing techniques such as Just-in-Time (JIT) and Total

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 Quality Management (TQM)
(examiners please note that these terms are not in the
specification)
• exploitation
• the impact on the distribution of income and/or wealth
• impact on living standards of different income groups &
regions
• use of diagrams
• references to the real world.
• the possible error in just comparing two groups of countries
Evaluation
when the diversity of experience and development within
them is there for all to see
• the relative degree of dominance of MNCs in each category
and the nature of MNC policies
• relative degrees of vulnerability to major global shocks
• only conditional judgments are possible because the global
economy is far from the end of the process of globalisation
• the degree to which national governments will stand up for
the national interest, perhaps in a selfish, nationalistic way
• resources available to individual national governments to
lend support to national businesses
• the potential greater flexibility of response of developing
countries to changes arising from globalisation
• quantifying different costs and benefits may be difficult, eg
not being able to determine what part of a country’s
environmental costs can be attributed to the globalisation
process
• a final judgment, eg the extent of benefits will vary across
economies, the degree of vulnerability perhaps much less
so.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q85.
Issues and areas for discussion include

• criteria for assessing ‘significant strengthening of the

Introduction
economic importance’
• identification of one or more MENA economies
• the range of economic experience in the MENA economies.
• comparative advantage
Developing the
• labour productivity
response to the
• production possibilities
question
• supply of resources from the resource-rich MENA
(Application)
economies (line 6)
• opportunities for UK financial services (lines 12-13)
• the threat from MENA manufacturing (lines 13-14)

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 • further investment opportunities for UK in the MENA
economies (lines 18-20)
• the potential significance of free trade agreements between
MENA and other economies (lines 24-26)
• potential benefits to the UK of higher living standards in
MENA countries (lines 27-30).
• economic growth
Analysis
• employment and unemployment
• balance of payments on current account
• supply-side reforms
• AD/AS analysis
• comparative advantage
• further structural change in the UK economy
• living standards
• direction of investment
• use of diagrams
• references to the UK and/or other economies.

• ‘concern’ needs to be measured against opportunities in

Evaluation
the MENA economies
• continuing political instability in the MENA region may dilute
any threats to the UK and any opportunities for the UK in
the MENA economies
• the inflexibility of the UK economy may mean lost
opportunities
• if and when importance strengthens, the MENA economies’
more powerful negotiating position regarding prices of
resources needed by developed countries
• MENA economies in relation to other opportunities
elsewhere in the global economy
• opportunities/threats in the UK domestic economy
compared to those presented by the MENA economies
• how the UK might compare to other economies with similar
aims of gaining a foothold in the MENA economies, eg, the
emerging markets
• the significance of relative inflation rates between MENA
economies and the UK, and between the UK compared to
other economies showing interest in the MENA economies
• the possible greater impact on the UK and a cause for
concern if the UK’s major markets, the EU and US,
continue to have problems
• the threat the MENA economies pose to the UK in
established UK markets especially in the long term
• a final judgement on the economic consequences.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill..

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q87.

Page 100 of 155

Issues and areas for discussion include

• economic growth
Introduction
• general causes of economic growth
• the EU
• ‘the best hope’ in relation to what?
• economic growth theory
Developing the
• trade cycle and recession
response to the
• fiscal policy and deficit-reduction policy
question
• application to recent/current events so heavily represented
(Application)
in the media
• the EU tumbling back into recession (lines 4–6)
• variation in prospects between EU member countries (lines
7–8)
• strict fiscal policies in UK and in much of the rest of the EU
(lines 20–22)
• recovery in the global economy (lines 35–36)
• hopes for stabilisation in the eurozone (lines 40–41).
• how the EU can help UK GDP growth, eg demand for
Analysis
exports, euro and other currencies strengthening against
the pound
• stimulus from those EU economies recovering more quickly
than others
• the EU and the single market
• stimulus from other parts of the world, eg the emerging
markets
• UK supply-side reforms giving a competitive edge in albeit
depressed markets
• the contribution of domestic demand within the UK, eg if
fiscal constraints are relaxed on spending, tax cuts are
introduced, consumers begin to show a stronger response
to low interest rates
• the impact of any increase in domestic wage increases
should they occur after a period of restraint
• UK private sector beginning to more than compensate for
the contraction of the public sector
• investment trends in the UK
• trends in the exchange rate of the £ against other
currencies impacting on UK global exports
• use of diagrams
• references to the UK and/or other economies.

• whatever growth is seen within the EU, other parts of the

Evaluation
world may grow more strongly and offer more opportunities
to the UK
• the speed of recovery particularly in the eurozone
• the persistence/exacerbation of economic problems for the
UK should the eurozone begin to break up
• whether or not the UK is competitive enough against the
emerging markets
• greater reliance for growth from within the UK if recovery
becomes more rapid, perhaps on the back of a looser fiscal
policy, increased consumer and business confidence, a
stronger government growth strategy
• the dangers of discussing just in terms of eurozone/non-
eurozone countries; analysis must be of individual EU
economies to assess their potential contribution to UK

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 growth in the future and their past importance to the UK
economy
• in more stable times, the size of population in the EU, total
spending power, and the benefits to the UK of the single
market
• whatever the UK prospects for growth emanating from the
EU, the long term sense of limiting UK reliance on one area
of the world and developing stronger links elsewhere
• a final judgement on the prospects for the UK
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q88.
Relevant issues/logical chains of analysis include:
• defining the price level and/or inflation with reference to cost-push and demand-pull
or the phrase ‘increase in the price level’ and/or economic consequences’
• a rise in the price level will erode real personal disposable income when there has
been no increase in money wages to compensate. This means that consumption
may have to be curtailed and/or the proportion of income saved reduced. The
material well-being of the individual is therefore affected as might the quality of life if
the individual feels the necessity of working longer hours to compensate
• greater danger of unemployment if competitiveness suffers or anti-inflation
measures take effect
• shoe-leather’ costs/‘menu’ costs
• the real value of debts
• the dangers of being a creditor
• uncertainty affecting decisions, notably consumption decisions
• the impact on those on fixed incomes
• the impact on behaviour of rising expectations about inflation
• reduced real value of savings
• the impact on competitiveness if the economy’s prices rise faster than those in its
trading partners. It therefore becomes more difficult to sell goods and services
overseas unless exporters’ prices are limited by accepting narrower profit margins. It
also means that imports can become more price attractive and so imported goods
begin to displace those produced domestically. The current account can therefore
be adversely affected
• the impact of policies introduced to combat inflation
• distributional effects
• the impact on business confidence and hence investment
• a cause of unemployment
• inflation can make supply-side reforms more imperative, eg leading to higher
productivity, lower unit costs and thus a compensatory factor when considering the
impact of price increases
• rising inflation expectations across the economy as a cause of further inflation
• impact on the exchange rate
• short run, long run considerations
• diagrams to help support explanations, eg Phillips curve, AD/AS, MEC

Page 102 of 155

 Examiner note: there may be need for flexibility where a candidate argues a case for a
factor that we would normally associate with, say, the individual, being relevant to the
economy, eg shoe-leather costs and inefficiency in the economy.
[15]

Q89.
Relevant issues/logical chains of analysis include:
• defining/explaining the balance of trade, visibles/invisibles, the balance of payments
on current account,(persistent) deficit/surplus
• high exchange rate which has perhaps appreciated steadily over time. It has made
the price of exported goods more expensive and the price of imported goods
cheaper. If the price elasticity of demand for exports and imports is elastic less
export revenue can be expected. Expenditure on imports will show an increase and
hence a balance of trade deficit emerges, all other things being equal
• persistent inflation which compares unfavourably to that of trading partners
• high income elasticity of demand for imports
• supply-side weaknesses such as low productivity
• limited structural changes in the economy so that it no longer produces what world
markets want
• deindustrialisation making increased imports of imported goods inevitable
• quality of goods compared to other countries
• economic downturns amongst our trading partners not experienced within the UK so
that export sales become more difficult while imports of goods stay buoyant or even
increase especially if overseas suppliers are desperate to sell and reduce their
overseas prices
• comparative advantage
• protectionism in trading partners not replicated in the UK
• diagrams to help support explanations, eg AD/AS, comparative advantage,
tariffs/quotas
[15]

Q90.
Issues and areas for discussion include

• definition of supply-side reforms

Introduction
• the balance of trade in goods
• improvement: reduced deficits or from deficit to surplus.
• aggregate supply
Developing the
• aggregate demand
response to the
• productive capacity
question
• cost-push/demand-pull inflation
(analysis and
• productivity
application)
• the concept of competitiveness
• supply-side reforms in outline
• objectives of reforms, e.g. flexibility, mobility, quality, lower
unit costs,
choice, structural change
• individual reforms relevant to the trade in goods
• the significance of overseas demand for UK exports and
UK demand for imported goods
• other policies not linked to the supply side
• use of diagrams
• references to the real world.
• the nature, extent and effectiveness of UK reforms in
Evaluation

Page 103 of 155

 relation to those of other countries
• whether or not supply-side reforms can in any way
compensate for decades of deindustrialisation so that
imported goods are an inevitability
• the long-term nature of reforms so that deficits may persist
in the short and medium terms
• the significance of changing tastes in world markets
• supply-side reforms at a time of a sustained global
downturn
• supply-side reforms concentrating on lowering unit costs
rather than quality and choice, so imports remain attractive,
exports no more attractive
• whether supply-side reforms will always be a story of ‘too
little, too late’
• relative merits of supply-side policies to other policies that
can be used to reduce deficits eg significance of exchange
rates
• a final judgement, perhaps in the context of recent UK
experience.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q91.
Relevant issues/logical chains of analysis include:
• defining a single market (eg a type of trade bloc which is initially a free trade area for
goods for the benefit of member countries)
• examples of single markets other than the EU, eg. Agreement on Internal Trade
(AIT) in Canada; European Free Trade Association (EFTA)
• identifying an important distinction between a single market and a customs union: in
the latter a common trade policy such as the EU common external tariff
• a type of trade bloc initially concerned with free trade in goods
• free trade in services
• working to remove barriers to further economic integration, eg any remaining
physical barriers (borders), fiscal (taxes), with the long-term aim of strengthening
general economic relations between members
• liberalisation of financial markets to encourage better flow of investment funds
• common policy on government procurement (any member government obliged to
consider submission of bids for government contracts from any member country)
• common technical, safety and health standards for goods which may arise from
cooperation on R&D
• links may be established with neighbouring countries, eg EFTA + EU = EEA
• often having a strong commitment to supporting the international (multilateral)
trading system as spearheaded by the WTO
• diagrams to help support explanations, eg comparative advantage, but diagrams are
unlikely in this part of the answer
[15]

Page 104 of 155

Q92.
Issues and areas for discussion include

• the concept of a single market

Introduction
• other examples of single markets
• the development of the EU single market
• possible criteria for assessing benefits in outline.
Developing the It will be perfectly legitimate for a candidate to cite benefits and,
response to the by evaluating these, to identify costs (or vice versa), eg
question competition as a spur to efficiency, but in evaluation, the UK not
(analysis and able to match the achievements in efficiency seen in some
application) other member states with higher unemployment being a
potential cost (consequence) of this.
• economic growth
• economies of scale
• comparative advantage
• specialisation
• efficiency, with inefficient firms failing (static v dynamic
efficiency)
• productivity
• competition
• choice of goods and living standards
• mobility of resources
• harmonisation of economic policies possible
• trade expansion/trade creation
• standardisation of national regulations
• greater ease of doing business between members
• investment
• the single market as a ‘driver’ to further enlargement of the
EU in general (although some would see this as a cost)
• costs for the UK associated with being geographically
separate from the rest of the EU and peripheral to the core
• unemployment
• low wages arising from mass immigration
• a steady weakening, perhaps ultimately loss, of UK
economic links with the rest of the world as trade diversion
becomes more prevalent
• costs associated with a ‘survival of the fittest’ scenario
• bullying by dominant members into accepting economic
policies seeking to strengthen the single market which are
not in UK’s long-term interests
• regulations not necessarily being removed but imposed at
EU, rather than national, level
• use of diagrams
• references to the real world.

• much of any objective evaluation may rest on to what

Evaluation
extent the single market is allowed to develop ultimately
• non-EU countries which did have strong economic ties with
one or other members of a single market may find them
weakening (trade diversion taking place), eg the
Commonwealth and UK
• progress can be slow, eg the single market in services still
needs to be developed, and yet some members are largely
dependent on services

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 • a single market may not mean fewer regulations faced by
members but just regulations raised to organisation, rather
than national, level and this may not be efficient from the
national perspective or, ultimately, from the single market
perspective
• threat of competition for an individual economy from lower-
cost members with implications for the balance of
payments and jobs, perhaps irrespective of the efficiency
gains in the higher-cost country
• labour mobility does not always deal with surplus/shortage
problems very neatly and individual countries may suffer
• migration driven not by economic factors (e.g. prospects of
employment) but the supportive mechanisms in place in
the recipient countries (eg welfare and health-
care),perhaps causing a heavier burden on an economy’ s
public finances and downward pressure on wages
• higher living standards for all cannot be assumed;
improvements may well be patchy
• any economic benefits such as higher growth can be
diluted by developments beyond the single market, notably
global recession
• the possibility of any one member being continually
pressured to accept developments e.g. the single currency
and/or a common fiscal policy
• the drawing of different conclusions is possible when
considering the likelihood of a two-speed EU, ie euro
members v non-euro members
• a final judgement on the potential benefits of the single
market for a country such as the UK. Some central facts:
access to 500m people; over half of UK trade is with other
members of the single market; estimated that 3.5mn UK
jobs are linked to export of goods and services to the
remainder of the single market; another estimate suggests
that member countries trade twice as much with each other
as they would in the absence of the single market.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q94.

Introduction • economic growth

• other macroeconomic performance indicators
• the contrasting economies of India and the UK.

Developing the • Line 3: reference to increased exports

response to

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the question: • Lines 6–8: impressive quarterly growth which, if
maintained, could create spin-offs for the UK
Application
• Line 18–19: GDP, multiplier, accelerator
• Line 19: inward investment from India
• Lines 24–28: benefits for the UK from India’s infra-
structure development
• Line 31: the limitations for the UK if India remains
‘fiercely protective’.

Developing the • how it is expected that India might develop in the

response to future
the question:
• the current importance of India to the UK and how this
Analysis might change in the future
• the potential impact on UK economic growth
• the potential impact on the UK balance of payments
both on current and capital accounts
• the potential impact on employment/unemployment
• UK structural change influenced by economies such
as India
• the impetus that stronger links with India may give to
supply-side reforms
• the impact on productivity and competitiveness
• the impact on investment flows
• use of diagrams
• reference to other economies.

Evaluation • India needs to be put into the context of other

significant fastdeveloping nations which may all
eventually play a part in UK macroeconomic
performance
• India needs to be put into the context of our currently
important trading partners – the US and the EU
• India may decide to remain protectionist in terms of
certain types of investment and trade
• how more effective, if at all, some of our competitors
are in penetrating the Indian economy
• the net trade flow
• the net investment flow
• whether the UK produces what India’s development
requires, and, if not, whether the UK is able and
willing to carry out the required structural change
• how supportive the UK government is of private sector

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 efforts in penetrating the Indian economy
• whether or not India’s growth and development
continues in the current global economic climate
• a final judgement on the overall likely importance of
India to the UK economy.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.
[25]

Q96.

Introduction • the nature of the EU perhaps with reference to

institutions
• the UK position within the EU
• fiscal policy and budgetary positions
• criteria for assessing consequences.

Developing the • Lines 1–3: the remedial Keynesian approach now

response to denied to member states
the question:
• Line 4: the abandonment of fiscal rules
Application • Lines 11–14: the crisis in Greece arising from fiscal
looseness
• Lines 19–23: the UK Government seeming to be a
step ahead of some in the EU especially with the
setting up of the OBR.
• Keynesian multiplier
• Budgetary positions
• Current account deficits.

Developing the • the general economic consequences any individual

response to economy might expect in trying to achieve a balanced
the question: budget

Analysis • the consequences for the EU as a whole of achieving

that position
• the idea of 27 nations being required to follow the
same policy
• the reasons for the policy
• the impact on economic growth
• the impact on living standards in the short term and

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 long term
• the impact on employment/unemployment
• the impact on the UK’s balance of payments on
current account
• the impact on inflation
• the possibility of deflation
• the impact on types and levels of government
spending
• the changes in taxation and the possible impact of the
changes
• use of relevant diagrams
• reference to other economies.

Evaluation • whether or not the policy is introduced for economic

reasons or to reflect a particular political philosophy
may influence judgement on the policy
• the time given for any one country to achieve a
balance
• the UK’s original fiscal position at the time the policy is
introduced
• for how long a country will be expected to continue
with the policy
• whether or not the policy will be effectively enforced
• whether the UK pursues the policy mainly through tax
increases or public spending cuts or a combination of
both
• whether it will be short-term ‘pain’ for long-term benefit
• the differing impact on particular sections of the UK
population
• whether additional private sector activity will
compensate
• whether monetary policy has the same constraints
imposed
• the problems which ‘one-size-fits-all’ policy tends to
generate for individual nations
• a final judgement on the overall impact on the UK
economy.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

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 [25]

Q97.

For
• defining exports or export of goods
• value v volume
• placing exports into the context of trade in goods and services
• placing exports into the context of the balance of payments on current
account.

Comparative advantage is established or strengthened where an

economy can produce a good at a lower opportunity cost than another
country and therefore has a greater likelihood of improved
competitiveness and more efficient use of resources, so that sales should
rise in foreign markets. In the UK the financial services sector has
developed this advantage. Reward an illustrative numerical example of
comparative advantage.

Rising incomes overseas.

Improved productivity in the exporting economy.

A lower rate of inflation compared to trading partners or perhaps deflation

in contrast to competitors’ inflation.

Government support for the export sector.

Exchange rate depreciation.

Changes in export prices.

Any other valid cause.

Use of diagrams to help support explanations, e.g. comparative

advantage, exchange rates.

Reward references to the UK economy.

Award a maximum of 12 marks if 3 reasons are not considered.

If more than 3 reasons are considered, reward the best 3.

[15]

Q98.

Introduction • the trade in goods

• the balance of payments on current account – deficits
and surpluses
• criteria for assessing the impact of a deficit

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 • the potential nature of the problem in the context of
the UK economy.

Developing the • the possible determinants of a successful export

response to performance
the question:
• possible determinants of imports
Application / • whether competitiveness in world markets is an
Analysis underlying issue and is the real cause for concern
• Whether global macroeconomic conditions provide
part of the answer and whether they will be a
temporary phenomenon
• whether deficits arise from a loss of comparative
advantage
• the part played by the exchange rate at any one time
and whether this is a temporary difficulty
• whether non-price factors must be seen as a cause
for concern
• deindustrialisation as part of the explanation over the
long term
• the impact of deficits on other macroeconomic
indicators – growth and employment
• the compensatory role of invisibles
• the compensatory role of capital flows
• the possibility that a deficit might be a reflection of
rising living standards in a country
• use of diagrams
• reference to the UK and/or other economies

Evaluation • how persistent the deficit is

• how large the deficit is, for example, in relation to
GDP
• whether it has an impact on the exchange rate and
the consequences of this
• the ability to borrow, if necessary, to finance the deficit
• whether, in reality, it has had any lasting adverse
impact on growth or jobs
• whether the attempts to reduce it cause more
problems, e.g. deflation of AD
• whether the deficit brings higher living standards, if
only in the short term
• is the deficit indicative of a country ‘living beyond its
means’?

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 • it may lead to calls for increased protectionism which
may cause long term problems
• the need to distinguish actions to control the deficit
from actions to bring about a long term solution
• international opinion of the deficit
• whether it brings intervention by the IMF
• a final judgement.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.
[25]

Q100.
Explanation

For defining investment, for example, that which is spent on capital

equipment which can be used to create output and / or improve efficiency.

Investment and its linkage with aggregate demand

Investment as an injection into the circular flow

Investment and human capital

Overseas investment, such as FDI, portfolio investment or investment by

multinational companies.

Examples of investment.

Use of technical terms, e.g. gross / net investment; private / social capital;
physical / financial capital.

For use of a relevant diagram, e.g. circular flow

Analysis of benefit

Overseas investment spearheading trade links boosting the export sector.

Overseas investment can spearhead trade links thus helping to boost the
UK export sector. This in turn can be the growth inducing factor for the
economy, especially by generating an export multiplier leading to an
economic stimulus of the sector.

Stronger international linkages benefiting the balance of payments on

current account.

The potential benefits to domestic employment.

Profit, interest, dividends (PID) from overseas investment and uses to

which these might be put.

Any other valid analysis.

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 Use of appropriate diagrams, e.g. AD / AS.

References to the UK economy in the analysis.

[9]

Q101.

Introduction • macroeconomic performance

• the possible nature of major global events such as
sports competitions, natural disasters and economic
downturns.

Developing the • the stimulus to countries hosting major events

response to benefiting other countries (lines 5-8)
the question:
• the distinction between predictable and unpredictable
Application evens (lines 16-19)
• the importance of such events forging stronger
economic ties between countries (lines 13-15)
• the need for a strong economy in order to take
advantage of opportunities (lines 29-30)
• US financial crisis (line 19)
• the Japanese earthquake and tsunami in 2011 (line
23).
• use of AD / AS analysis
• the multiplier
• economic cycle

Developing the • economic growth

response to
the question: • stability of prices
• employment / unemployment
Analysis
• the balance of payments on current and capital
accounts
• creating a strong economy in order to be able to
respond to the stimuli of global events
• the possibility of global events having a negative
impact and the ability of an economy to respond
• analysis of fundamental factors such as productivity,
quality of resources, flexibility
• references to the UK and / or other economies
• use of diagrams.

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 Evaluation • what we might regard as “significant”
• what we decide to be the key measure(s) of
“significance”
• the likelihood of major global events not being good
news, e.g. disruption to oil supplies
• how we might be perceived to be economically weak
by other countries because of our possible inability to
play a key role as an event unfolds
• is the impact of any major global event nothing more
than transitory?
• with so many potential “players” internationally any
one country can’t always expect to have a significant
role to play
• the short term impact of an “event” in contrast to long
term sustaining of, and benefits from, trade and
investment links
• possible contrasting abilities to respond to positive
events as opposed to negative ones or vice versa
• a final judgement on the overall significance.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q103.

Introduction • criteria for measuring economic consequences

• nature of potential problems
• nature of potential opportunities
• the EU
• the issue of enlargement of the EU.

Developing the • Turkey’s geographical position (line 3)

response to
the question: • an expected population in Turkey of 100m by 2020
(line 10)
Application • Turkey’s vast economic potential (line 11)
• Turkey’s impressive growth for at least 5 years, 2002
– 2007 = 7% (lines 14 – 15), 2010 first quarter = 11%

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 (lines 13 – 14)
• Turkey’s reputation for economic instability (line 20)
• high inflation in some recent years in Turkey (lines 20-
21)
• an attractive centre for investment (line 24)
• migration and the impact on UK PPF
• consequences for UK AD as the EU expands
• export-led multiplier.

Developing the • the diverse nature of member countries of the EU

response to
the question: • the UK approach to the EU and to enlargement in
particular
Analysis • demands upon the EU budget and hence upon
individual members
• Turkey as part of the SEM and the likely flow of cheap
imports to UK
• cheap migrant labour impacting on the UK labour
market and social and economic infrastructure
• Turkey as an additional market for the UK
• investment opportunities
• investment income coming back to the UK
• the benefits of its established links with Asia
• UK economic growth
• UK unemployment
• UK balance of payments
• UK inflation / deflation
• reference to other economies
• use of diagrams.

Evaluation • Turkish membership may be seen as the “straw which

breaks the camel’s back” as EU enlargement gathers
pace
• short term v long term considerations
• the ability of the UK to take up opportunities
successfully
• the UK’s possible inability to take up opportunities in
the context of having to shoulder some of the
problems which Turkey’s membership may give rise to
in the EU
• the possibility that the UK macroeconomic indicators

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 do not all head in the same direction (for example,
Turkey as a stimulus to economic growth but migrant
labour causing an unemployment problem)
• the difficulty of giving “values” to pros and cons pre-
membership and therefore being unable to take up a
decisive stance with confidence
• the impact could change over time as circumstances
change
• continuing enlargement, including Turkey, potentially
providing ammunition to the Euro-sceptics in
government and beyond causing the UK to remain by
choice on the sidelines of the EU. An assessment of
the significance of this issue for the UK
• a final judgement on the overall impact on the UK
economy.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q104.

For:
• defining protectionism or protectionist policies and / or deficit on the
current account of the balance of payments
• classical / strategic trade theory
• explaining in broad terms the nature of protectionist policies and the
distinctions which may be drawn between them
• placing protectionism into the context of progress towards free trade
• reference to the WTO.

For explaining three possible protectionist policies:

Tariffs on imports may be introduced to make imports more expensive

than domestic output because they are duties or taxes imposed on the
price of imports. Demand for these imports may be reduced but this will
depend very much on elasticity conditions. If the demand for these
imports is elastic, the import bill will fall (ceteris paribus) and so help the
current account.

Quotas / voluntary export restraints (VERs).

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 Export subsidies

Exchange rate policy

Exchange controls / Limits on currency conversion.

Non-tariff barriers to inhibit trade, e.g. cumbersome health and safety

regulations that create costs to exporters regarded as unreasonable.

Domestic government’s favouritism towards home producers when

awarding contracts which cannot necessarily be economically justified
(public procurement policy).

Any other valid argument

Use of diagrams to help support an explanation, e.g. the standard tariff

diagram.

References to the UK and / or other economies.

If more than three policies are considered, reward the best three.
[15]

Q105.

Introduction • the world economy and economic diversity within it

• free trade
• progress towards a free-trade world – the role of
GATT and latterly the WTO
• the dangers of increased protectionism
• how ‘benefit’ might be measured.

Developing the • trade spearheading globalisation and the benefits this

response to can bring
the question:
• the principle of comparative advantage
Application / • specialisation
Analysis
• economies of scale
• efficiency
• the impetus to improving competitiveness in price and
non-price ways
• the pace of innovation
• the benefits of greater choice
• prospects for economic growth
• trade in preference to aid to help development

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 • employment prospects
• the drive for greater competitiveness forcing down
prices and hence helping to achieve low inflation
• implications for the balance of payments
• the impact on less successful economies of a free-
trade world
• use of diagrams
• reference to the UK and / or other economies.

Evaluation • a consideration of who might be the major

beneficiaries
• the possibility of structural unemployment as
comparative advantage changes between countries
• economic shocks in one part of the world are more
likely to affect other parts
• the difficulty of drawing conclusions which are too
generalised as to be virtually meaningless
• on-going protectionism even by countries involved in
WTO talks such as Doha which might limit benefits
• a consideration of ‘significant’ economic benefits
• the possible problems of measuring economic
benefits
• how the ‘losers’ might be helped, if at all, and if there
is a willingness to do so
• if free trade is so beneficial why does an underlying
protectionism persist?
• benefits for some sectors of an economy, damage to
others
• trade blocs (free trade for members v protectionism
towards non-members)
• the need for WTO talks to make much more progress
before benefits can be cited without significant
qualification
• a final judgement on the perceived benefits of
progress towards free trade.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to ensure
that more basic evaluation is adequately rewarded where
a genuine effort has been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Page 118 of 155

Q107.
Explanation:

explain the concept of global investment, eg

• define global investment in terms of international capital flows,
perhaps with a reference to the role of multinational companies in this
respect
• explain the growth of global investment, eg in terms of outsourcing,
utilising cheap labour, establishing ownership of raw materials and
energy supplies
• define / explain the term global investment, eg expenditure to
generate future income; spending on capital equipment to increase
output, perhaps to displace labour; human capital
• simply define global investment in terms of ‘total investment in the
world’.

Analysis:

explain the concept of global investment, eg

• it promotes economic growth in that it is an injection into the circular
flow of income, generating higher AD through the multiplier process
but also adding to the productive capacity of the recipient economy
• its impact on the further economic development of less-developed
economies
• human capital formation helping to promote skills within a country’s
workforce
• financing innovation
• helping to improve productivity
• a general improvement in business efficiency
[9]

Q108.
It is hoped that candidates will clarify the criteria by which consequences can be
measured and then relate China’s growth to the performance of the UK economy in an
evaluative way.

The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction: • recession
• economic growth

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 • criteria for assessing consequences

Developing a • reference to the growth performance of the Chinese

response to economy
the question:
• reference to the problems of the UK economy
• why continued growth of a major economy may be
important to another country in recession
• economic growth
• the balance of payments
• employment / unemployment
• investment flows
• inflation
• China’s growth perhaps causing inflation exacerbated
by the UK pursuing a potentially inflationary policy of
quantitative easing and fiscal expansion
• the impact on the UK of China taking increasing
control over world resources by its investment
• China’s contribution to the IMF which might ultimately
be of benefit to the UK
• impact on the exchange rate.

Evaluation: • the extent to which China wishes to share the

‘proceeds’ of growth with other countries by importing
more goods
• although the phrase ‘global recession’ is used it may
be that some other UK markets are not faring too
badly, so making China’s contribution to UK economic
performance less significant
• the ability of the UK to maintain / increase market
share in China
• China is pushing ahead with export-led growth which
may not be in the long-term interests of UK
manufacturing
• the extent to which the UK economy welcomes
Chinese investment in its economy and whether
China reciprocates.
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of growth and with no
attempt to place it into the context of the UK/China.
However, this must be considered as low-level evaluation
and awarded accordingly.

Also give • relevant use of evidence and examples not contained

credit for: in the data

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 • diagrams
[25]

Q110.
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction: • common macroeconomic policies

• economic recovery
• the significance of the rest of the EU to the UK
• the criteria by which the impact on the UK economy
might be assessed.

Developing a • the implications for economic growth

response to
the question: • the impact on employment / unemployment
• the consequences for the balance of payments on
current account
• the effects on the £ / € exchange rate
• the greater likelihood of avoiding a period of deflation
• the dangers of inflationary pressures building up
• the further development of the SEM in a period of
recovery and increasing prosperity.

Evaluation: • the possible significance of a slow recovery

• the possible supply problems if recovery is too rapid
• whether the UK can take advantage of EU recovery
• whether the advantage lies more with the rest of the
EU in terms of exporting to the UK than for the UK
exporting to the rest of the EU
• the significance of EU recovery for the UK relative to
recovery taking place elsewhere in the world, i.e. in
markets which have significance for the UK
• whether or not recovery has implications for the
movement of labour in and out of the UK and how this
affects the UK labour market.

Also give • relevant use of evidence and examples not contained

credit for: in the data
• diagrams
[25]

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Q111.
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction: • reference to the quote in the question

• the recent experience of rising oil prices
• criteria for assessing macroeconomic performance

Developing a • the implications of this for the pattern of production

response to
the question: • consequences for the balance of payments on current
account
• inflation
• the impact of inflation on jobs
• the impact of inflation on economic growth
• rising oil prices and business and consumer
confidence
• implications for government revenue and expenditure
• the impact on export performance

Evaluation: • whether the oil price increases are simply building on

past price increases or whether they represent a
supply-side shock of which there has been little or no
recent experience
• whether or not petrol taxes are reduced to
compensate for higher oil prices
• mature economies having less dependency on oil
• whether price increases are sustained over a long
period of time
• whether, as in the UK’s case, an economy is also an
oil exporter as well as an importer
• whether rising economic growth and inflation-reducing
forces are in evidence to dull the impact of rising oil
prices

Also give • relevant use of evidence and examples from the UK /

credit for: other economies
• diagrams
[25]

Q112.
Define the concept of macroeconomic policy objectives in terms of reference to the criteria
by which macroeconomic performance is measured

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 Explain macroeconomic policy objectives, e.g.
• economic growth can be defined as increases in the productive capacity of an
economy. Such increases will determine the long-run trend rate of growth and will
shift the LRAS curve and the PPC to the right. Actual growth can be measured by
GDP
• price stability
• full employment or low unemployment
• improving the performance of the balance of payments on current account
• exchange rate stability
• fiscal stability

Explain the importance of macroeconomic policy objectives to an economy, eg

• price stability and international competitiveness
• economic growth and living standards
• the balance of payments on current account
• the importance of reducing unemployment
• an essential requirement for efficient policy making
• they establish benchmarks against which the authorities, NGOs, economists,
business can measure success / failure within the economy
• they allow policies to be formulated in good time if objectives seem increasingly
unlikely to be met
• because of the inherent weaknesses there may be in an economy, it is vital to have
objectives which give a sense of direction and which provide the prospect of being
able to remedy those weaknesses
• if achieved, they create a stable economic climate for the private sector
[15]

Q113.
For candidates who:

Define/explain
• exports/imports
• balance of trade in goods and services
• define / explain the term global investment, eg expenditure to generate future
income; spending on capital equipment to increase output, perhaps to displace
labour; human capital
• the balance of trade in goods and services in the context of the current account or
the balance of payments as a whole
• the possible nature of a country’s exports and imports given its own stage of
development
• the UK may adopt a strategy of export-led growth. This may be because it is
perceived as the most rapid way of achieving economic growth and/or because it
feels itself to be very competitive in world markets. It may recognise that a good
export performance will initiate a multiplier effect which should benefit the economy
beyond the export sector and that exports may well encourage supply-side
improvements such as innovation and higher productivity to sustain good external
performance
• favourable terms of trade (examiners note that this term is not included in the
specification but candidates may well discuss relative export/import prices even if
the term is not used)
• the need for imports of raw materials, energy and/or finished goods, e.g. because
the UK has lost so much of its industrial base
• a sustained favourable exchange rate motivates an export drive
• absolute/comparative advantage, e.g. UK comparative advantage in financial
services
• the impact on UK exports of overseas recession, especially the US and the EU as

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 far as the UK is concerned
• exchange rate movements
• relative inflation rates
• relative rates of productivity (traditionally unfavourable for the UK) and impact on
competitiveness
• the ability of the UK to impose protectionist policies
[15]

Q114.
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and/or other issues in the time available.

Issues and areas for discussion include:

Introduction: • the balance of trade in goods and services

• the balance of payments accounts
• surplus/deficit.

Developing a • supply-side policies

response to
the question: • exchange rate manipulation
• protectionist policies
• controlling aggregate demand in order to constrain
import growth and release more output to the export
sector
• adoption of an export-led growth strategy
• control of inflation if this is perceived to be the cause
of the problem
• expenditure-switching policies compared to
expenditure-dampening policies.

Evaluation: • the need to distinguish between those policies which

offer a possible short-term improvement and those
which offer a potential cure for the problem in the long
term (e.g. a reference to expenditure-dampening v
expenditure switching).
• the need to distinguish policies which can be regarded
as realistic in the current climate, e.g. supply-side
policies, from those which might be politically
unacceptable, e.g. protectionism
• some policies may not bring immediate improvement,
eg the long-term nature of supply-side policies;
exchange rate manipulation and the J-curve effect
• there may be less significance attached to the deficit if
it is seen as part-and-parcel of a maturing economy
which, although successful in the trade in services,
has lost much of its industrial base, thus needing to
import more finished goods

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 • the underlying issue of whether or not a deficit really
matters if it does not impede economic growth and job
creation and does not damage investor and business
confidence.

Also give • relevant use of evidence and examples from the UK /

credit for: other economies
[25]

Q116.
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction • sustained economic growth

• living standards
• reference to general living standards in the UK
• criteria on which judgements are to be made.

Developing the • line 5 GDP per capita as a basic measure of living

response to standards; higher growth may lead to higher GDP per
the question: capita in the UK
Application
• lines 17-19 references to aspects of the quality of life,
which may or may not benefit from economic growth
• lines 29-31 Africa as a major supplier of raw materials
which could facilitate UK economic growth and thus
impact on living standards
• lines 36-37 Africa as a potential competitor to the UK
in the world economy with a possible adverse impact
on UK growth and living standards
• discussion of whether both can be pursued at once

Developing the • how UK manufacturing might benefit from African

response to demand for manufactured goods and components
the question: and hence contribute to economic growth
Analysis
• the potential, eventual competition for UK
manufacturing and a consequent adverse impact on
growth
• the potential benefits to UK financial services helping
African development, providing further stimulus to this
traditionally successful growth sector
• investment opportunities opening up in Africa
• greater accessibility to African raw materials and
energy supplies, helping to facilitate UK economic
growth

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 • benefits to other UK services, e.g. tourism
• an assessment of the net effects on UK economic
growth and therefore on living standards
• the impact on employment, the more successful and
competitive Africa becomes, and hence on average
incomes
• the possible adverse impact on manufacturing regions
of the UK, while more service based regions may
benefit, so adversely affecting disposable income in
the former
• the overall impact on income per head depending on
the UK response to developments in Africa
• the impact on UK living standards if African
development begins to allow successful
encroachment on other UK markets
• growth and the quality of life, allowing a widening out
of the discussion on living standards.

Evaluation • a comparison of short run and long run effects

• the economic changes in Africa may be so gradual
and piece-meal as to have little measurable impact on
the UK
• however, countries such as Mozambique growing
rapidly in the last decade, albeit from lowly positions,
may bring pressure to the developed world sooner
than was originally thought
• the net effect may be small if Africa compensates for
the decline of other UK markets (temporary or
permanent)
• the potential benefits of African expansion in the
context of UK recession, opening up markets which
had not been envisaged just a few years earlier
• the difficulty of making generalisations, eg parts of
Africa providing new sources of energy and raw
materials to help UK growth while others begin to
present competition for UK manufacturing
• the possibility of having to avoid generalisations
because of the diverse character of the continent, so
that comments on the potential impact on the UK
economy and its living standards are only pertinent to
individual economies; stark contrasts between various
parts of Africa are likely to persist
• the possibility of complementarity, eg African
expansion of secondary activities requiring and
stimulating the UK tertiary sector.
• the environmental impact and the increasing demand
on resources arising from growth in Africa, possibly

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 impacting on the UK, eg higher oil prices.
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of growth in the context of
living standards, with no attempt to place it into the
context of the UK / Africa and with only limited reference
to living standards. However, this must be considered as
low-level evaluation and awarded accordingly. Marginally
more credit could be given to this type of evaluation if
placed in the context of the countries concerned.

Also give • relevant use of evidence and examples not contained

credit for: in the data
• diagrams
• an overall judgement on the issues raised

[25]

Q118.
It is hoped that candidates will place the answer firmly into the context of the EU and not
simply base the answer on the impact of the UK borrowing requirement, so that any final
judgement is sufficiently comprehensive and relevant.

The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction • government borrowing

• budget deficit
• PSNCR as one technical measure
• the EU fiscal position as a whole
• the Stability and Growth Pact
• proposals for some regulation of fiscal policy
independent of government
• criteria for measuring the impact.

Developing the • line 3 reference to Keynesian economics and

response to tolerance of deficits because of the benefits they can
the question: bring
Application
• lines 21-22 reference to the multiplier process and
aggregate demand
• lines 28-29 the potential impact of borrowing on
interest rates and (line 40) on inflation
• lines 36-39 EU fiscal stimulus counterbalancing any

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 loss of business and consumer confidence

Developing the • the reasons behind the increased borrowing

response to
the question: • the benefits of government spending
Analysis • the benefits of tax cuts
• the potential impact of increased borrowing on interest
rates within the EU and whether greater differences
emerge between interest rates in the euro area
members of the EU and non-euro members of the EU
• the dangers of ‘crowding-out’ of private sector activity
amongst member countries
• the uncertainty that increasing borrowing can create
for households and businesses
• the potential impact on the nation’s international credit
rating and hence on its ability to borrow in the future
on favourable terms
• the possibility of seeking help from, for example, the
IMF and the impact of this
• the economic pain associated with eventual remedial
measures such as spending cuts and tax increases
• the impact on the UK if EU fiscal expansion generally
provides a stimulus to the UK economy
• the impact on the value of the euro and the
implications of this for the external value of the pound
• any problems which emerge may become EU-wide
problems making recovery even harder to achieve
• measuring the impact in terms of growth, jobs and
prices.

Evaluation • the relevance of the scale of borrowing

• assessment in terms of the net impact, eg do the
benefits clearly outweigh any problems?
• the economic context in which the borrowing is taking
place, eg recession or recovery
• whether the fiscal policy is accompanied by monetary
expansion and the possible impact of this combination
of expansionary policy
• the perceived costs associated with fiscal balance or
surplus
• the speed with which borrowing can be reduced
• the confidence that households and businesses have
in government efforts to stabilise the fiscal position
• whether the EU is at one with fiscal policy around the

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 world or very much out on a limb.
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of borrowing, or of higher
public spending and / or higher taxation, but with no
attempt to place it into the context of the UK and the EU.
However, this must be considered as low-level evaluation
and awarded accordingly. If these pros and cons are put
into the context of the UK and EU, perhaps with an explicit
attempt to prioritise, greater credit can be given.

Also give • relevant use of evidence and examples not contained

credit for: in the data
• diagrams
• an overall judgement on the issues raised

[25]

Q119.
Define / explain economic growth and / or recession, perhaps with
reference to GDP, criteria for identifying parts of the economic cycle, the
UK experience of recent years
Explain possible reasons, eg
• an economic shock such as higher oil prices. Higher oil prices may
then impact on inflation since oil can be a significant cost of
production and can adversely affect households’ cost-of-living. Anti-
inflation policy may need to be used such as higher interest rates but
such a response, especially if too severe, might slow the economy too
much. This and the declining confidence of households and
businesses may bring about a downturn and eventual recession
• other external economic shocks, such as the global banking crisis or
recession amongst our major trading partners for whatever reason
• deterioration in domestic leading sectors such as construction and the
car industry
• high levels of demand domestically causing demand-pull inflation and
remedial action by the authorities follows which inadvertently plunges
the economy into recession
• government failure to take remedial action quickly enough or the
wrong type of action or inadequate action as the macroeconomy
deteriorates for whatever reason
• a slump in private sector investment with no compensatory activity in
the public sector
• any other valid point.

Make use of diagrams in the analysis.

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 [15]

Q120.
It is anticipated that candidates will review the various consequences of both inflation and
deflation, a review interspersed with evaluative comments, before arriving at a final
judgement. Examiners should reward well informed, relevant discussion and conclusion.

The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction • the concept of price stability / price instability

• definitions of inflation and deflation
• the UK experience of recent years
• the UK Government’s setting of an inflation target
• price stability as a desired objective and its
relationship with other macroeconomic objectives.

Developing the • inflation damaging competitiveness with a potential

response to impact on the balance of payments on current
the question: account
• anti-inflation policies which are potentially harmful to
the economy
• the impact on business and household confidence
• the impact on real income and hence real spending
power
• the ultimate damage to economic growth and jobs
• deflation as being far less common than inflation in
many economies
• the impact on real incomes and real purchasing power
• the dangers of consumer postponement of purchases
hoping that prices will fall further
• the impact on profits
• the impact of lower profits and lower business
confidence on investment
• the potential benefits of reflationary policies
• the benefits of falling prices to competitiveness
• the possible harm done to growth and jobs
• the impact on creditors / debtors
• whether one is more / less anticipated than the other

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 Evaluation • the extent of the problem, i.e. how significant the rate
of inflation or deflation is
• the length of time in which prices rise or fall
• the potential benefits of mild inflation which might not
be said of mild deflation
• the relative ease / difficulty of executing, and making
effective, policies to deal with either of the problems
• the simultaneous experience of other countries
• whichever problem prevails, the danger of the
authorities overshooting targets, eg. quantitative
easing and low interest rates bringing too much
reflation and hence more inflation
• the difficulty of making a judgement without more
detailed information on an actual occurrence and the
events surrounding it
• both inflation and deflation have redistributive effects
and it is impossible to predict which might be the more
beneficial
• a realistic conclusion is that, whatever the relative
impact, neither may be desirable and the authorities
should be aiming for a period of sustained price
stability
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of inflation and / or deflation,
but with no attempt to place them into the context of the
question or to prioritise them explicitly. This must be
considered as low-level evaluation and awarded
accordingly.

Also give • reference to the experiences of other economies

credit for:
• diagrams
• an overall judgement on the issues raised

[25]

Q121.
For candidates who:
Define / explain
• exchange rate
• exchange rate system
• appreciation of exchange rate
• the concept of the ‘average family’

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 • floating exchange rate system, perhaps with comparative reference to
fixed exchange rate systems.
Explain how the exchange rate of a currency may be caused to rise within
a floating exchange rate system, e.g:
• trade flows. As exports are demanded there will be a greater demand
for the currency of the exporting country by those overseas customers
buying those exports and being required to pay with the foreign
currency in question. The country concerned will be importing goods
and services. This will require buyers to sell the domestic currency in
order to buy foreign currencies with which to buy imports. The
increase in demand for the currency arising from higher export sales
may be greater than the increase in supply of the currency arising
from increased imports, all other things being equal, the exchange
rate will rise.
• net inward investment
• speculative movements resulting in increased purchases of the
currency
• ‘dirty floating’, i.e. official intervention in the foreign currency market in
a floating exchange rate system in order to buy the currency
• higher interest rates relative to other comparable countries
• external economic stimuli, eg a strong and sustained US recovery
which can be related to trade and / or investment flows
• external shocks, eg a banking crisis
• any other relevant factor.

For those candidates who adopt a basic supply and demand approach to
the question without citing specific determining factors such as trade,
award a maximum of 10 marks for the answer as a whole.
Make use of diagrams in the analysis.
[15]

Q122.
It is hoped that candidates will briefly explain the macroeconomic criteria by which
consequences can be measured, before providing some discussion of the potential impact
of appreciation and arriving at a final judgement.

The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction • appreciation versus depreciation of currency

• criteria for measuring macroeconomic consequences
• exchange rate systems.

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Developing the • the potential impact on economic growth as exports
response to perhaps become more difficult to sell overseas
the question:
• the possible stimulus to growth as imports of raw
materials and energy become cheaper
• the possible benefits to inflation as lower demand for
exports reduces pressure on domestic production and
resources and imports of goods and services are
cheaper
• the impact on employment as cheap imports threaten
domestic production and hence jobs and as the
overseas demand for exports falls away
• the impact on a significant tourist industry in the
economy concerned and hence on growth and jobs in
an expanding sector of an increasingly service
economy
• the impact on the balance of payments on current
account given relative changes in exports and imports
of goods and services
• the strong currency making inward investment less
attractive, perhaps affecting growth and jobs.

Evaluation • the extent of the rise in the exchange rate

• the external value of the currency from which the rise
begins to take place
• the significance of the exchange rate factor compared
to other influences on the macro-economy
• whether or not exports have been an important, or
sole, cause of growth for an economy
• elasticity conditions for exports and imports
• the period of time in which the appreciation lasts
• the role of speculators in terminating the rise
• the effectiveness / speed of a corrective market
mechanism or a decision to ‘dirty float’
• the state of the world economy as the appreciation
takes place, eg might a prosperous world merely
absorb higher prices arising from a country’s
exchange rate appreciation?
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of appreciation, but with
minimal reference to the macro-economy. However, this
must be considered as low-level evaluation and awarded
accordingly.

Also give • reference to the UK / other economies

credit for:

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 • diagrams
• an overall judgement on the issues raised

[25]

Q123.
Explanation
• Define trade, investment, economic growth or any other relevant term
except recession.
• Explain the concept of world recession, eg
◦ define ‘recession’ or ‘world recession’ (one definition would be the
UK official definition applied to the global economy of two
successive quarters of negative GDP growth)
◦ explain likely features of recession such as lower investment,
higher unemployment, lower inflation or deflation (do not credit in
such an explanation reference to negative GDP growth if this has
already formed part of a definition, unless some points are added
in order to provide an explanation)
◦ comment on ‘world’, perhaps suggesting that it may be a term
used when only some key areas of the global economy are in
recession; referring to how a key area such as the US might draw
other parts of the global economy into recession; make reference
to the global nature of the recession of recent years
• Analyse how trade and investment might help cause economic
growth, eg
Trade:
• a country’s improved export performance can help create growth by
output being increased to meet higher overseas demand and this
then stimulating a multiplier effect which will lead to higher output and
employment beyond the export sector itself
◦ trade as a stimulant to innovation
◦ trade as a stimulant to investment
◦ trade as an incentive for a range of supply-side reforms
◦ trade encouraging competition, so providing a possible stimulant
to static and dynamic efficiency
Investment:
• investment is a component of AD so higher investment might produce
higher actual growth but it is also a supply-side determinant of growth
in that it helps create higher output through increased rates of
innovation and labour productivity
◦ investment producing growth-inducing structural change
◦ investment producing growth-inducing infra-structure
developments
◦ investment in human capital

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 ◦ any other valid point
Reward references to the UK/other economies
[9]

Q124.
Issues and areas for discussion include

Introduction • explanation of globalisation

• how benefit can be measured
• macroeconomic performance criteria

Developing the • economic growth

response to
the question: • employment/unemployment
• inflation/price stability/deflation
• trade flows
• investment flows
• balance of payments
• competitiveness
• any other valid issue

Evaluation • not knowing what might have happened to the UK

economy had globalisation not become so evident
• the assessment may depend on the view taken of how
significant or essential globalisation has been in
bringing about various domestic supply-side reforms
• whether cyclical factors have sometimes prevented
the UK from obtaining the full benefit of globalisation
Examiners should note that it may be possible to award
some marks for basic evaluation such as a consideration
of the advantages and disadvantages of globalisation.
However, this must be considered as low-level evaluation
and awarded accordingly.

Also give • relevant use of evidence and examples not contained

credit for: in the data
• diagrams
• an overall judgement on the issues raised
[25]

Q125.
Define any relevant term
• Explain “the pound has fallen against the euro and other currencies”,

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 perhaps by defining and comparing various exchange rates;
◦ use the term depreciation and/or devaluation and compare to
appreciation/revaluation;
◦ use recent real world values to help illustrate the phrase; the
impact on export/import prices; the potential impact on the
economy
analyse two determinants of such a fall, e.g.
• Overseas investors become less confident about an economy
because it may be showing signs of entering a recession, so they
begin to withdraw their funds and sell the currency of that economy
while potential new investors, deciding not to invest, bring about a
reduction in demand for pounds, causing the currency to depreciate.
◦ Relative interest rates
◦ Government policies, e.g. increased borrowing
◦ Speculation against a currency
◦ Capital flows
◦ Trade flows
◦ Loss of business and consumer confidence as economic
forecasts worsen
◦ Any other valid determinant
Reward references to the UK/other economies
[9]

Q126.
• define imports;
• relate import performance to export performance, perhaps with an
invisible/visible
• reference;
• explain imports in the context of the balance of payments on current
account, perhaps referring to imports explicitly as a debit item;
• put imports into the context of the circular flow of income
explain determinants of a country’s demand for imports, eg
• income which allows consumers to demand more goods and services,
assuming disposable income also increases with gross income. Some
will be purchased from overseas sources, given that UK consumers
traditionally display a high propensity to import. This may be for
reasons such as consumer preference, as characteristics such as
quality and after-sales service are seen to be stronger in imports or
because the goods or services in question are no longer
produced/supplied in the domestic economy.
• relative prices (terms of trade)
• protectionist policies

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 • cheaper credit helping to finance purchases
• deindustrialisation
• raw material, component and energy requirements
• the impact of the Single European Market
• exchange rate trends
• cyclical factors, e.g. recession
• a change in comparative advantage
Reward references to the UK economy
[15]

Q127.
Issues and areas for discussion include

Introduction • protectionism v free trade

• the UK balance of payments on current account
• the work of GATT/WTO
• the Doha Round of talks
• types of protectionism

Developing the • an overview of UK exports/imports; manufactures v

response to services
the question:
• competitiveness of exports, e.g. productivity trends,
innovation, design, other non-price factors which
might compensate for increased protectionism or
mean that we are at a greater disadvantage if these
factors remain weak
• the potential significance of the exchange rate
• supply and demand elasticity conditions as far as
exports and imports are concerned
• the danger of further deindustrialisation and the
consequent impact on the balance of payments on
current account
• the potential significance of the EU trade bloc and
whether even more of our trade is with the EU as
protectionism elsewhere increases
• account in the context of impediments to trade of
various kinds
• any other valid issue

Evaluation • the impact on the balance of payments may depend

on the extent of the increased protectionist policies

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 • the impact may depend on the level of protectionism
which existed before the further increase in trade
barriers
• the degree of impact may depend on the flexibility of
the supply-side of the UK economy to take
appropriate action given the specific nature of
increased protectionism
• the economic conditions in which the strengthening
takes place around the world will be significant
• given that the UK may be part of the process of
strengthening, it will have to consider the impact on
import flows compared to the impact on export
performance
• of some importance will be the particular elasticity
conditions for exports and imports
• the different parts of the current account might be
affected in different ways
Examiners should note that it may be possible to award
some marks for basic evaluation such as a consideration
of the advantages and disadvantages of protectionism.
However, this must be considered as low-level evaluation
and awarded accordingly.

Also give • relevant use of evidence and examples from other

credit for: economies
• diagrams
• an overall judgement on the issues raised
[25]

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Examiner reports

Q1.
Here, students were asked to explain why the data was disappointing given the fall in the
value of the pound. The data included information on goods, services and the overall
goods balance. Students could often quote bits of data, but some failed to relate this back
to why the depreciation led these figures to be disappointing. Many students were also
confused over what constitutes a smaller or larger deficit. It is worthwhile getting students
to focus on the “why” aspect of the question and match the data to the proposition.

Q2.
This question required students to explain the impact of the current account deficit on the
macroeconomic performance of the UK. Many students automatically treated the current
account deficit in isolation which of course, was credited. As a result, some said that the
current account deficit was likely to cause recession. However, the students with better
evaluation skills often identified that this may slow down growth rather send it negative.
Stronger students not only used data from the extract but also their wider knowledge of
trade and also considered solutions to it. Some students at the higher end also considered
the capital and financial accounts as well as primary and secondary incomes and their
effects on performance. Too many students tried to bring in issues such as “Brexit” despite
it being somewhat inappropriate in this question.

Q3.
Again, some very good answers appeared for this question. Many students highlighted the
benefits of MNC’s in terms of growth, employment, development and influence on trade.
Many students also highlighted real world examples of the successes, and indeed failures
of many MNC’s in specific countries. Some students failed to develop their answers
sufficiently using economics and some developed political or cultural arguments that
drifted off from the actual analysis required. It was encouraging that students could bring
in many examples to this question though.

Q5.
The key, D, was only selected by 34% of students. Distractors B and C were each chosen
by 27% of students. Distractor A was chosen by 12% of students. This pattern of
responses suggests that the majority of students had a poor knowledge and
understanding of exchange rate concepts and currency relationships and were guessing
the answer. Students need to be well taught that MCQ data interpretation questions
require careful consideration of all the information needed to reach a particular conclusion
and not just the information given.

All four currencies in the table are stated to be undervalues against the US Dollar. The
question contains no information on each countries exchange rate policy or movements in
its exchange rate against the US Dollar.

• Response A. The question contains no data making it possible to conclude that the
Australian Dollar has appreciated against the US Dollar. The fact that this was the
least popular distractor seems to suggest that the majority of students thought
appreciation was inconsistent with currency undervaluation. This is incorrect
because an undervalued currency can still remain undervalued, albeit by less, if it
appreciates against the other currency.

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 • Response B cannot be concluded from the data in the question. It contains no data
to link the undervaluation of the Brazilian Real with a possible equivalent
devaluation against the US Dollar. The students selecting this distractor based their
choice on the apparent, but unsupported, connection between the use of the term
‘devalued by 32%’ in the response and ‘undervalued by 32%’ in the table.

• Response C cannot be concluded from the data in the question. It contains no data
to link the undervaluation of the Chinese Yuan with a possible equivalent
depreciation against the US Dollar. The students selecting this distractor based their
choice on the apparent, but unsupported, connection between the statement that the
‘Chinese Yuan has depreciated the most against the US Dollar’ and the data
showing the Chinese Yuan to be the most undervalued of the four currencies
against the US Dollar.

• Response D can be concluded from the data in the table. The comparison of a pair
of currencies to determine whether one is under or overvalued against the other
involves the concept of purchasing power parity. The Danish Krone is the least
undervalued against the US Dollar of the four currencies and therefore has the
closest purchasing power parity with the US Dollar.

Q7.
This question was based on the new specification topic area of development and asked
students to use the context to decide whether India should embark on more “market-
based” strategies to help development. This confused some weaker students who did not
understand the term ‘marketbased’ and some students were also unable to come up with
suitable market-based strategies despite two examples (trade liberalisation and
privatisation) being provided in the stem. Further to this, some students focussed solely
on economic growth without considering the wider aspects of development. Having said
this, many stronger students were able to provide examples from their wider knowledge
and had also drawn on their learning in the classroom to provide detailed reasons as to
why market-based strategies may help (or hinder) India’s development prospects. 12% of
students produced level 5 answers for this question.

Q8.
This question proved a very popular choice amongst students although surprisingly the
answers were not as strong as they could have been. Most student began by explaining
the trade-off between unemployment and inflation, often using short-run Phillips curve
diagrams to illustrate, however some did not understand why this occurred and merely
stated that the diagram showed that it did. Most students considered potential trade-offs
with trade but some students muddled this and all too often believed that lower
unemployment made the economy more productive and improved exports. The most able
students could correctly evaluate that it depended how the unemployment had been
reduced or tackled the ‘inevitability’ of the events.

Q9.
This question, although appearing seemingly straightforward when set, was the worst
answered of all the 15-mark questions. Although some students gave logical answers to
the determinants of patterns of trade, some focussed on the causes of the trade deficit
which was not being asked. Many considered trade volumes rather than who trades what
with which nations. Good answers here included “tariff” diagrams to consider either the
imposition or removal of tariffs affecting trade flows and trade diversion/creation
arguments. An issue which was detected here which was slightly worrying was that some
students are incorrectly labelling diagrams so that the axes often had price level and real
national output/income instead of price and quantity. A minority of students attempted to

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 evaluate this question which simply is not required in a 15-mark question where no AO4
marks are awarded.

Q10.
Here students performed the best of all the essay questions. Most students were awarded
a level 4 answer or above and were accurately able to give either suitable expenditure
reducing, expenditure switching or supply-side possibilities to reduce the trade deficit.
Most students accurately used diagrams and fully analysed the issues. One issue that
was detected was that some students, when describing depreciation of currency was that
some students do not understand how this can be done other than through interest rate
manipulation. Often, students (correctly) identified the fact that lower interest rates could
cause depreciation, however they failed to consider the full impacts of an interest rate fall
on consumption and the possibility that imports may rise. Stronger students considered
the UK’s position within the EU and the possibility that protectionism may be used in the
future. Sadly, a very small minority of students still do not understand the difference
between the balance of payments and the budget deficit which led to some very confused
responses.

Q11.
Although this essay was least favoured by the students in terms of the amount who chose
to attempt it, it provided the highest score out of the 15-mark questions. Many could
accurately explain how government spending and taxation affected AD and AS and linking
this to growth and economic activity. One area that could have been improved upon is
where students often grouped taxation together rather considering the differing effects of
increasing or lowering, for example, income tax compared to VAT. Diagrams were often
used successfully with this question.

Q13.
Students who answered this question well were able to demonstrate their ability to use
quantitative data effectively to support their judgements regarding the extent to which the
UK manufacturing sector has been in decline since 2003. All four assessment objectives
were considered when determining the overall quality of a student’s response.

The best answers were well organised and often started by indicating how it might be
possible to assess the extent to which UK manufacturing industry has declined. Only a
small minority of students stated that it could be determined by looking at changes in the
value of the output of UK manufacturing industry or by looking at the change in
manufacturing output as a proportion of GDP, i.e. whether it has declined relative to the
rest of the economy. Good answers recognised that Figure 1 provided the key data but
also used data from the other Figures to back up or modify their conclusions. Strong
answers appreciated that it was essential to look at the overall trends shown in the data
but also understood that other patterns in the data might be significant. For example, they
might state that the index of manufacturing output was slightly lower in 2015 than in 2003
but also recognised that the major decline occurred between 2008 and 2009 and that
there has been a recovery in output since 2009. Quoting figures accurately to support
their analysis of the data was also a feature of these answers. The best students realised
that the 2008-09 financial crisis was a major cause of the decline in manufacturing output
and some stated that what happened at this time produced ‘outliers’ that obscured the
overall trends. Data taken from Figure 4 was sometimes quoted to support this
conclusion. Most of the good responses also used the data from Figure 2 and argued that
superficially, the significant fall in employment lent support to the conclusion that
manufacturing had declined since 2003. However, they qualified their judgement by
stating that, considering the trends in Figure 1, productivity in manufacturing, perhaps due
to high levels of investment and improvements in technology, had increased. Some also

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 made use of Figure 3 by stating that the value of exports had risen by over 50%
contradicting the view that UK manufacturing is in decline, but modified this judgement by
quoting figures showing the larger increase in imports or the growing deficit on the
balance of trade in goods.

To achieve Level 3, it was not necessary for students to use data from all four Figures, but
they had to use sufficient data to provide a robust, supported overall judgement regarding
the extent to which, if at all, the UK manufacturing sector has been in decline. Typically,
Level 3 responses made provisional judgements as they worked their way through the
data and provided a final conclusion based on their overall findings.

Whilst many students attempted to assess the limitations of the data, only a very small
minority was able to make any meaningful comments. It was only rarely recognised that
the data in Figure 3 might be misleading because it was quoted at current prices and
hence didn’t accurately indicate what has happened to the volumes of exports and
imports. Also, very few students realised that some goods, e.g. oil and other commodities,
are not manufactured. However, some erroneously stated that the figures were misleading
because the increase in exports might have resulted from an increase in the sale of
services abroad. When using data from Figure 4, some commented on the grouping of the
data but very few understood that the main problem was that the group showing average
growth rates between 1993 and 2007 made it impossible to isolate what happened after
2003. Another mistake was that some students believe that the data in Figure 1 were
unreliable because they were shown in index number form.

Weaker students made very limited use of the data in Extract B and some tried to explain
why the UK’s manufacturing industry might have declined since 2003 rather than using
the data to assess whether or not it had declined. A common weakness was quoting the
data inaccurately, e.g. omitting ‘thousands’ when using Figure 2; some stated that
employment in manufacturing had fallen from around 3650 in 2003 to 3000 in 2015. Other
weak answers trawled through the data without presenting any indication of the general
trend or significant patterns. Weak responses such as these, did not make any attempt to
provide an overall judgement of what the data showed.

Some students did not focus on the extent to which UK manufacturing has declined since
2003. Too many discussed long-term trends, going back to the 1960s and 1970s; they
often quoted figures from Extract A. The question directed students to make use of the
data in Extract B. This does not mean that they should not use data from the other
Extracts but the data used must relate to the question set. For most, this did not adversely
affect the overall quality of their response but for a few it seriously distorted their
conclusions.

It appeared that some students were not very well prepared for a question of this type.
Using statistical data to support conclusions is a demanding but essential skill for an
economist. It is important that students are provided with plenty of opportunities to
practise and develop their competence in this area.

Q24.
The answers to this question were sometimes quite disappointing. The question asked if
the UK should switch its monetary policy to focus on management of the exchange rate.
Most students could identify the potential benefits to the UK's net trade if a devaluation
was to occur and some focussed on the potential benefits to employment, growth etc.
However, only stronger students were able to understand the limitations of focussing on
the exchange rate in terms of potential loss of other monetary policy tools. More able
students brought in explanation of the UK’s historical monetary policy, such as experience
of the ERM or current targets of the MPC, however, it was disappointing to see that some
students could only link managing currency to the flow of hot money.

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Q25.
Students generally answered this question quite well by explaining the difference between
the two types of deficit and their effects. It was encouraging that many students clearly
understood the problems of persistent budget deficits and the accumulation of national
debt. Students were less adept at explaining the effects of persistent trade deficits with
many just considering short term effects on aggregate demand. More able students
considered the reasons why these deficits occur and their implications on macroeconomic
performance, whilst weaker students just considered policy responses to both deficits and
nothing else.

Q26.
The third essay combination was by far the preferred set of questions although question
11 was also the worst answered out of all the 15 mark questions. At the top end, students
effectively used tariff diagrams and protectionism diagrams to illustrate trade creation and
trade diversion and related this to the joining of a trading bloc. At the lower end, students
simply did not understand what the question was asking and just trawled through how
changing trade patterns affect a countries macroeconomic performance.

Q27.
Many students answered this question with a clear focus on how membership of the EU
had benefitted both firms and individuals. It was good to see that centres had clearly
made use of the EU referendum to highlight the benefits (and possible problems).
However, the referendum had also clouded some students' minds when it came to
answering this question and some students did not fully relate their answer to firms or
individuals and just talked about the economy in general. Some students also failed to
develop their economic analysis by simply making political statements taken from the
news that were not backed up by economic reasoning.

Q65.
Stronger answers were able to analyse the causes of deflation and answer in context
based upon the EU’s experiences. Analysis generally focused on the effects on exports
and foreign direct investment although some students also considered areas such as
migration and future productivity. Weaker answers did not consider that the question was
asking about the effects of the EU on the UK. More able students identified the UK as
being an EU member and developed answers which combined both. It was also
encouraging that students were able to analyse policy responses by the various
stakeholders which added to their answers. The mean mark for this question was 15.82.

Q66.
This essay was the most popular with students scoring highly and the majority gaining the
full 15 marks. Students focused on three broad areas: supply-side policy, currency
depreciation and expenditure reducing policies. A minority opted to explain protectionist
policies which the question precluded; this demonstrates the need for students to read the
questions carefully. Diagrams were used to analyse further the issues (both micro and
macro diagrams) and in general there were less answers which made the mistake of
confusing a balance of payments deficit and a budget deficit than in previous years. The
mean mark for this question was 11.43.

Q67.
Most students showed a good understanding of the potential advantages and
disadvantages of globalisation and in general related this to the UK. Weaker answers did

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 not consider that the question was focusing on the UK’s experiences, therefore, gave a
general response to the costs and benefits of globalisation. Almost all students identified
structural unemployment as a problem for the UK and also many identified the ‘China
effect’ and potentially increased susceptibility to shocks. Many cited recent world events
and issues faced by the UK as a result. The mean mark for this question was 15.84.

Q68.
Most answers were confined to level 3 with some relevant analysis, but most focused on
the shortrun and increased AD. Many did not pick up on the prompt in the question
regarding the link between saving and investment. Evaluation was particularly weak on
this question. Some students could not see past the link between savings and
consumption which limited answers considerably. Better answers on this question
considered liquidity in the banking system and even credit creation but these were rare.
The mean mark for this question was 14.

Q70.
In general, students were able to answer this question quite well. However, some were
confused as to what was meant by the global economy and focussed solely on UK
inflation which limited their marks. Other answers chose to analyse the effects on all areas
of the macroeconomy rather than focussing on the balance of payments. Weaker answers
also failed to consider the differing effects on different parts of the balance of payments,
many focussing solely on the current account, which again limited the marks that could be
awarded. Centres appear to be encouraging application by getting students to quote data
which is to be encouraged as is students bringing in their own wider knowledge of recent
events. The mean for this question was 13.07.

Q72.
Most students were able to explain the term “export-led multiplier” by either defining
exports and then the multiplier or describing how increased exports could create a larger
than proportionate increase in real national income through employment etc. Most
students were also able to identify two distinct reasons as to why exports to the EU might
increase. However, many students made the mistake of using the “absence of tariffs”
which on its own is a historical reason why exports increased in the past but, in the
context of the question, could not be used to explain the recent increase to the EU. Some
students also ignored the EU aspect of the question and opted for explanations of other
countries outside of the EU. In terms of diagrams, many students were able to draw
accurate currency diagrams or diagrams which demonstrated the LRAS shifting to the
right. However, many students opted for the effects of increased exports (in terms of AD
increasing) which were not what the question required. The mean for this question was
7.75.

Q73.
This question proved very topical and many students were able to write up-to-date
answers based on recent media reports and for some, even examples from their local
area. Students often cited arguments about trade creation, trade diversion, immigration,
effects on public services and the effects on the macroeconomic indicators. Some
misunderstood the nature of the costs to the UK and assumed that the “£65bn” referred to
a fee that the UK government had to pay. Stronger answers identified the fact it was
difficult to compare the experiences of others outside of the EU, such as Norway, and that
it was very difficult to judge whether the UK should leave the EU when similar events have
never happened before. The mean for this question was 15.80.

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Q74.
Many students failed to pick up on the long-run nature of the question and opted for short-
run analysis and discussion. Some students assumed that a reduction in the budget deficit
now, meant that the government would then just increase its spending in the future. Too
few students considered the issues regarding debt reduction, crowding out/in, debt
interest or equity issues. Stronger answers identified these issues and discussed trade-
offs in the short run and costs/benefits in the long run of government policies. Weaker
answers tended to focus their answers on the costs and benefits of the methods, which
although relevant, were not the only aspects that needed to be discussed. The mean for
this question was 13.78.

Q75.
Those who attempted this question tended to pick up marks quite quickly. Most students
successfully explained various issues such as trade flows, investment or speculative hot-
money flows as reasons for currency appreciation or depreciation. Many students were
able to draw diagrams which illustrated the effects and causes. It was clear that some
centres have used past examination questions to their advantage by preparing students
with similar questions. It was also good to see that most students are now splitting their
issues into separate arguments and using “firstly, secondly, etc, finally” to clearly define
where issues start and end. The mean for this question was 11.8.

Q76.
This question had quite a varied response. Many successfully used their knowledge to
analyse the advantages of having free floating exchange rates in obtaining stability.
Equally, stronger answers were able to assess the relative merits of fixed or managed
systems and recent world, and particularly UK experiences. Students were also able to
evaluate the relative importance of exchange rates in terms of stability. Weaker answers
often made large assumptions regarding exchange rates and often failed to consider the
stability part of the question. In terms of diagrams, there was some appreciation of the J-
curve and knowledge of the Marshall-Lerner condition which was encouraging. It is also
apparent that students in some centres still confuse balance of payments and government
budgets, which led to some very low marks being awarded on occasions. The mean for
this question was 14.21.

Q77.
This proved to be the most successfully answered of all the 15 mark questions. Many
students correctly identified, either endogenous shocks, or exogenous shocks (almost all
opting for oil price rises for supply-side shocks) and then developing analysis in terms of
effects on growth. The majority of students successfully differentiated between supply-side
and demand-side shocks although there was overlap on occasions with students
beginning analysis of a supply-side issue, only to draw AD falling with no subsequent
analysis as to why this would happen. Most students were able to identify what a shock
was although many did not opt to define economic growth, which resulted in very few
students picking up full marks in the explanation at the start. The mean for this question
was 11.45.

Q78.
This question proved to provide the best responses in terms of the 25 mark essay
questions. Many students provided wider knowledge of current affairs and economic
issues and examples of the growing global economy. Stronger answers identified issues
which also affected individuals and related factors such as quality of life and standards of
living to their answer. Some students confused world economic growth with the opening

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 up of new markets. Others did not fully consider world economic growth and focussed
solely on the UK. Stronger answers developed issues and evaluation regarding where
world economic growth was occurring and its likely effects on the UK in the long run. It
was clear that weaker answers did not fully consider the effects of economic growth on
individuals in terms of quality of life factors and merely linked the “individuals” aspect to
issues regarding employment. The mean for this question was 14.91.

Q80.
Almost 60% of students gained at least 8 marks for this question. The first part of the
question was answered well with many students making reference to austerity measures
introduced by the Coalition Government and the supposed fiscal constraints of the Growth
and Stability Pact. The Extract provided pointers for the second part of the question and
accurate analysis duly followed. The mean mark for this question was 7.4.

Q81.
Unfortunately, some students interpreted this question as countries exiting the EU, rather
than exiting the Eurozone, and digressed into immigration issues, the opportunity to avoid
EU regulations and so on. The media coverage of the proposed in-out referendum on UK
membership of the EU may have led students to interpret the question incorrectly, but
students should always read the question carefully.

Evaluation was often superficial, with some students repeating the Extract, but failing to
explain and analyse the issues being raised. A typical example of this was where a
student restated that “the impact of a country exiting from the euro would depend on a
number of factors, such as how many countries left and which countries these were”, but
then failing to offer any development of these issues. Most answers picked up on the
possibility of sterling acting as a “safe haven”, but weaker students conflated FDI and “hot
money” into their analysis. The mean mark for this question was 13.6.

Q82.
Most students displayed good knowledge and understanding of globalisation and
multinational companies. Students who failed to structure their answers left it to the
examiner to disentangle what was relevant. The mean mark for this question was 9.8.

Q83.
Weaker students found it hard to go beyond a Level 3 answer because they tended to
write about the costs and benefits of globalisation in general, with insufficient focus on
how these might differ between developed and developing countries. Many students
made the assumption that all developed and developing countries had the same
characteristics, yet a key characteristic of globalisation is the diversity of development
within developed and developing economies. The few students who picked up on this
were able to generate a high level of evaluation. This was particularly the case for a Level
5 answer where this additional observation was introduced into a conclusion, rather than
concluding with a repeat of what had been written previously. The mean mark for this
question was 14.9.

Q85.
The Extract identified a number of issues which allowed the better candidate to produce
depth of analysis and convincing evaluation. However, only a few students availed
themselves of this. Weaker students often restricted their answer to a single issue, for
example arguing that the UK would increase exports to MENA. They then assumed that

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 this would lead to demand pull inflation and as a consequence the UK would need to
pursue supply-side policies. This was a typical example of an answer which pursued an
essentially theoretical approach, but ignored the range of information available in the
Extracts to produce an answer that was more in context. Better answers recognised the
distinction between resource rich and resource deficient economies within the MENA
group and developed their answers accordingly.

The opportunity for UK firms to invest in MENA economies, and its possible
consequences for the UK economy, was ignored by many students. A high level of
evaluation was achieved by those few students who considered long and short term
consequences and placed the MENA economies within the context of their overall share
of world GDP and trade. The mean mark for this question was 13.97.

Q87.
Failure to read and apply the information in the Extract was even more marked than other
questions, with some students believing that the question was asking whether the UK
should leave the EU. Students invariably displayed some good knowledge and
understanding of the causes of economic growth, but weaker students maintained a
theoretical approach and failed to develop their response in context. Better students were
able to evaluate whether the EU offered ‘the best hope for stronger UK economic growth’
in the light of the banking and debt crisis in the EU and whether the rest of the world
economy offered a better opportunity for export led growth. They also analysed and
evaluated the suggestion that domestic policies might be used to stimulate economic
growth. All of these issues were raised in the Extract and provided students with the basis
for a well-informed answer. Students who recognised that the Coalition government is
trying to rebalance the economy invariably produced strong evaluative comments
regarding the prospects for UK economic growth both in the short run and long run. The
mean mark for this question was 13.94.

Q88.
Student’s knowledge of the consequences of inflation was flimsy. Some focused their
answer on the causes of inflation and digressed into lengthy explanations of demand-pull
and cost-push inflation. However, there were also some excellent answers that had no
difficulty in achieving maximum marks. The mean mark for this question was 11.19.

Q89.
Fortunately, there were few examples of students confusing the trade deficit with the
budget deficit. A few students digressed into the consequences of trade deficits, another
example of students' failure to read the question carefully. Some students continue to take
an extreme view of deindustrialisation, believing that the UK has little or no manufacturing
and unfortunately citing the car industry as an example. Well informed students had little
difficulty in identifying three clear reasons and achieving maximum marks. Some students
adopted a “write everything I know” approach with a limited explanation of each. This left it
to the examiner to select the best three reasons and these students invariably failed to
achieve high marks. The mean mark for this question was 10.73.

Q90.
There was often a lack of detail on the nature of supply-side reforms with students
restricting themselves to the briefest of definitions. There was also the assumption on the
part of many students that supply-side reforms always involved an increase in government
expenditure and therefore they were unaffordable in current circumstances. It is
disappointing to see that many students still believe that the UK, despite EU membership,

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 has the option to pursue protectionist policies.

Good answers considered the long term improvements that might be achieved by supply-
side reforms and contrasted these with detailed analysis of expenditure-switching and
expenditurereducing policies and possible short term improvements in the trade balance.
Students who related their answers to recent UK experience were able to generate good
evaluation. The mean mark for this question was 14.13.

Q91.
Students who had learnt the single market topic were able to do well on this part of the
question. Weaker students were able to offer little beyond free trade in goods and the lack
of protectionist policies, such as tariffs and quotas, within the single market. The mean
mark for this question was 8.52.

Q92.
A few answers generated detailed economic analysis to pass judgement on costs and
benefits of EU membership, ranging through trade creation / trade diversion issues, a “two
speed” EU, future expansion of the EU and trade agreements with non-EU members. Too
often students fell back on assertions or anecdotal evidence to reach a conclusion. In the
light of a possible in-out referendum on UK membership of the European Union it is to be
hoped that future students will take the opportunity to scrutinise the economic costs and
benefits in more detail. The mean mark for this question was 13.17.

Q94.
On the whole, this question was done reasonably well, with some clear Level 5 answers
being provided. The latter were achieved because of logical, lucid accounts, with sound
economic analysis and evaluation, frequent reference to the data (but not an over-reliance
on the material at the expense of analysis) and a clear final judgement on how important,
if at all, India’s economic growth was to the UK economy. Most students confined
themselves to the various macroeconomic indicators but the question just referred to the
‘UK economy’ rather than macroeconomy. Reference to targeted investment in the UK by
India could have been linked, for example, to the potential for revival of an industry or
region on the basis of such investment. However, a student confining the answer to
macroeconomic indicators could be well rewarded. There were some excellent answers
from those students who applied the information in the extract to generate informed
judgements in context.

Q96.
For this question, the extent of media coverage on the issue should probably have made
this a more popular choice. There were undoubtedly some good answers where students
were obviously well versed in the various pertinent arguments and were able to put the
UK economy into the EU context in a successful way. Equally, as mentioned above, some
students did no more than write about UK fiscal policy, with answers devoid of any EU
context. Such an obvious weakness needs to be driven home with future students. Others
saw the question as being about the issue of an EU-wide fiscal policy being imposed on
member countries but largely neglecting the specific issue of balanced budgets.

Q97.
Explaining three reasons for the growth of exports should not be beyond A2 students.
However, while it was relatively easy for some students to score full marks, others
struggled even to find one sound reason. Some cited inflation and an appreciation in the

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 exchange rate, forgetting that the question was about growth in value and not simply
achieving a higher price for an export. Only occasionally did students who gave one or
other of these reasons link it, for example, to the need for price inelasticity of demand if
the country in question was to witness a higher value of exports.

Q98.
Too often, it becomes obvious that some students merely see a fiscal deficit and a trade
deficit (or balance of payments deficit) as one and the same thing. In these cases, they
seem to be happier to talk about budget deficits and so the answer heads off into
irrelevance. Others seemed unsure about deficit and so decided to concentrate on export
or import performance. Centres must ‘hammer home’ the various distinctions if there is to
be an improvement in performance because this weakness appears time-and-time again
across different examination series. It was also apparent in some responses that the
importance of the phrase ‘trade in goods’ had not been recognised.

Q100.
This question requires precise knowledge if they are to be answered in a relevant and
accurate way. This was not a problem for the majority of students, however, the structure
of answers could be improved in some cases. Examiners cannot always identify at what
point the explanation ends and the analysis begins. Leaving a line or two between the
parts really does help. This question asked for two factors and students should always
adhere to this instruction. A few students felt it would be acceptable to write all they knew
on overseas investment.

This question proved to be demanding. Some students were vague about the precise
meaning of investment, and centres might like to give this greater attention in teaching.
Some students, however, displayed a very sound knowledge. In the analysis, discussion
of the benefits accruing to the country receiving UK investment could not be credited.

Q101.
This question tested higher level skills of analysis and evaluation. Recent examinations
have seen more evidence of good quality evaluation, with fewer students finding it
necessary to tell the examiner that they are now going to evaluate (when they often don’t).
This indicates that evaluation has become less awkward and less clumsy, therefore,
students can naturally progress from the analysis and on occasions, give sophisticated
answers. In only few cases now is evaluation just confined to a closing paragraph, but
rather it pervades the entire answer. The closing paragraph(s) should not repeat what has
gone before, but offer a final judgement on the issue in hand with some new material. This
is an important criterion for the award of a Level 5 mark.

Some good responses were offered for this question, but students needed to take heed of
the phrase ‘major global events’ when deciding what to discuss. The Olympics featured in
many answers. Often, better answers came from students who devoted their time to
discussing the economic downturn of recent years but then providing some balance by
considering noneconomic events, such as the Olympics, which have an economic
dimension.

Q103.
This question tested higher level skills of analysis and evaluation. Recent examinations
have seen more evidence of good quality evaluation, with fewer students finding it
necessary to tell the examiner that they are now going to evaluate (when they often don’t).
This indicates that evaluation has become less awkward and less clumsy, therefore,

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 students can naturally progress from the analysis and on occasions, give sophisticated
answers. In only few cases now is evaluation just confined to a closing paragraph, but
rather it pervades the entire answer. The closing paragraph(s) should not repeat what has
gone before, but offer a final judgement on the issue in hand with some new material. This
is an important criterion for the award of a Level 5 mark.

For this question, some students thought that they had plenty to write about: trade,
investment, immigration and the potential for economic instability. In some instances,
students needed to bear in mind that they were considering the potential impact of just
one country in the UK and needed to moderate their judgements in light of that fact. Very
few referred to the present plight of the Eurozone and the EU as a whole and what
bearing this might have on the UK-Turkish judgements they were making.

Some students placed Turkey and Greece into the same category of economies, even
though the extract material discouraged that judgement. It would have been good to see a
greater display of knowledge on the EU, for example, the Single European Market and the
Common External Tariff. Some wrote about these in general terms but were unable to
provide the correct terminology. It also needs to be recognised that a new member will
undergo a transitional phase during which, not all the benefits of membership will
necessarily be available.

Responses to this question were well developed. Inevitably, the discrimination between
them tends to be on the basis of the way in which the extracts have been used, the ability
to link discussion to events in the EU or the world, and the quality of the analysis and
evaluation.

It is worth emphasising an earlier point that students need to guard against unjustified
exaggeration when referring to the potential impact of just one event or just one country
(in this case of this question, Turkey), in the hope, perhaps that such exaggeration will
impress the examiner.

Q104.
Students have become much more ‘comfortable’ with international-type questions and this
was no exception.

It was rare for students to attempt this question unless they had the knowledge of the
topic. Thus the vast majority of answers were relevant and accurate. On this occasion,
students made an effort to distinguish in their answers, each policy from the others. It was
important, however, to relate their answer to the current account of the balance of
payments and why each could be relevant to the deficit. There was a mark constraint of
10 if three policies were not considered.

Q105.
Students have become much more ‘comfortableߣ with international-type questions and
this was no exception.

Students should have considered the wording of the question carefully and noted that two
words were in bold type, ie ‘both to the UK and the rest of the world’. The better answers
stressed the distinction by arguing that, inevitably, free trade had differing effects on
different countries and this might come down to the type of economy in question. Some
students would have liked a question on globalisation or interpreted this as a question on
that topic. A few concentrated on the EU as an example of free trade, forgetting or
unaware of the common external tariff. Comparative advantage often featured but the
quality of the analysis varied considerably.

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Q107.
Many candidates continue to score well on these parts of the context questions, although
presentation could sometimes be improved. Candidates should be advised that it is good
practice to leave a line space between the explanation and the beginning of the analysis,
and a further line space between the two parts of the analysis. This not only helps
examiners but will also help candidates gauge whether or not they have given sufficient
attention to each part. Weaker candidates tended to produce a rambling piece of
inaccurate and superficial explanation and / or analysis.

In this question, candidates sometimes struggled to offer a coherent and precise

explanation of ‘global investment’ and / or a sound analysis of two distinct consequences.
Use of diagrams should be encouraged to earn additional marks but they need to be well
drawn and satisfactorily integrated into the text which surrounds them. Candidates should
be advised to use sufficient space so that clarity and the main representation of the
diagram are not lost.

Q108.
Responses to this question are showing much stronger evidence of the higher-level skills
of analysis and evaluation. This is something to further encourage amongst candidates
and to practise regularly. The better quality of evaluation, rather than just the greater
incidence of it, is also worthy of note. More candidates are seeing the importance of
making some sort of final judgement but this needs to be something more than mere
repetition of what has gone before. Too often, weaker candidates based their answers on
assertions that they were unable to justify.

There is also the problem of candidates insisting on putting in theories and concepts they
have revised which have questionable, or absolutely no, relevance to the question being
answered. The Phillips Curve and J-curve are two cases in point. In this question, it was
good to see that many candidates could provide a balanced assessment of China’s
economic growth.

It is obvious that candidates are being encouraged to use the data to support their
answer; there were many more examples of explicit references being included in
responses. The mark constraint for non-use of data is not severe but will prevent Level 5
from being reached.

Q110.
Responses to this question are showing much stronger evidence of the higher-level skills
of analysis and evaluation. This is something to further encourage amongst candidates
and to practise regularly. The better quality of evaluation, rather than just the greater
incidence of it, is also worthy of note. More candidates are seeing the importance of
making some sort of final judgement but this needs to be something more than mere
repetition of what has gone before. Too often, weaker candidates based their answers on
assertions that they were unable to justify.

There is also the problem of candidates insisting on putting in theories and concepts they
have revised which have questionable, or absolutely no, relevance to the question being
answered. The Phillips Curve and J-curve are two cases in point. In this question,
candidates need to be discouraged from writing all they know about the EU. Some were
determined to include analysis of EU enlargement and the euro but often struggled to
make them relevant.

It is obvious that candidates are being encouraged to use the data to support their
answer; there were many more examples of explicit references being included in

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 responses. The mark constraint for non-use of data is not severe but will prevent Level 5
from being reached.

Q111.
In this question, candidates were adept at explaining, precisely and coherently, the term
‘macroeconomic performance’ before breaking this down into its component parts in order
to answer the question. Candidates were obviously helped by the fact that oil prices are a
current and controversial issue and by the consequent media coverage the issue has
been given.

Q112.
This question did prove to be quite challenging for many candidates. It became obvious in
the reading of some answers that candidates would have probably done better to choose
one of the other questions on offer. Care needs to be taken when a question has two parts
(as in this question which asked for an explanation of objectives and an explanation of
their importance) that sufficient attention is given to each of them. It was perhaps
surprising that candidates tended to give almost all of their attention in this question to the
importance of objectives when one would have thought that the easier part of this
question was explaining the nature of them. The mark scheme did include a constraint
where one of the two parts was ignored.

Q113.
Given that this was a question with an international flavour, it was good to see that it
proved quite popular among candidates and well-answered by some. Because of the
context questions, it may be that more attention is being given by centres to international
topics. Essay responses can only benefit from this.

For this question, candidates seemed quite clear about the determining factors, leaving
answers to be distinguished by the quality of the explanation of each. Pleasingly, some
responses were put strongly into the context of UK export performance and the high
propensity to import.

Q114.
This question offered the opportunity to analyse and evaluate two or three policies. There
were a good number of competent answers, again with the UK weaknesses uppermost in
candidates’ minds. Comments are, of course, encouraged on the feasibility of chosen
policies. For example, candidates might wish to discuss protectionism but do need to
convey an understanding that EU membership and WTO treaties are major obstacles.
Some of the best answers distinguished explicitly between expenditure-reducing and
expenditureswitching policies, which had the added advantage of giving answers a strong
sense of direction.

Unfortunately, there is still, at times, confusion between the Budget and the Balance of
Payments. This inevitably led to confused analysis.

Q116.
For this question when responding to data students must be encouraged to use the
material in the extracts explicitly, ie quoting a line reference or quoting verbatim the actual
words used. By not doing so, a Level 5 mark cannot be achieved. This is always quite
tragic when the response includes some highly impressive analysis and evaluation which
is undoubtedly of Level 5 quality. The best responses in this question were those which

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 identified the potential economic impact of sustained economic growth in the economies
of Africa and then related these carefully to the consequent potential impact on UK living
standards. Weaker responses tended to be those which lost sight of the central issue in
the question (living standards) and confined their answer to economic growth, causing the
reader to draw his / her own conclusions on what the impact might therefore be on living
standards. Another weakness was to write almost exclusively of living standards in the
economies of Africa, with the UK relegated to the sidelines.

Q118.
As mentioned earlier in this report, some students did not read this question carefully
enough. In these cases, examiners were given a textbook approach to the pros and cons
of an expansionary fiscal policy without a great deal of effort to place the answer into the
EU context or to assess the impact of increased government borrowing by EU
governments on the UK economy. However, for this question there is certainly much
stronger evidence of evaluation. Sometimes the conclusion or final judgement is
weakened by repetition of what has gone before and efforts should be made to bring
something new to that part of the answer. Additionally, care has to be taken that the
evaluation develops from some sound analysis if a good mark is to be awarded.

Q119.
It had been expected that this would be a more popular question than was in fact the
case. There were few problems found with this question. The strongest answers were
those which recognised the significance of the wording: an economy moving from a period
of prosperity to one of recession. Answers of this type took some of the features of the
former period and explained why these might be contributory factors in an economy
descending into recession. The majority of students, however, simply explained what
caused a recession, which was often a reasonably successful response also.

Q120.
For this question, students who made up their minds at the outset that there could really
be no one correct answer to this question because of the number of variables, often
offered the strongest performances. These analysed and evaluated key issues in both
categories and recognised that different countries have had different experiences. This
latter point made a final judgement more difficult in favour of inflation or deflation but then,
of course, that was the very conclusion that the student could draw. Some excellent
responses were seen, including those which distinguished benign deflation from
malevolent deflation, but these were too few and far between. It still seems to be the case
that students are far happier with the issue of inflation than they are with the issue of
deflation.

Q121.
Traditionally, questions on exchange rates and the balance of payments prove to be the
least popular on any question paper. This was not the case here. There were some
excellent responses, with even the weaker answers often able to earn a reasonable mark.
It is a topic which encourages the use of diagrams and the mark scheme reflected this in
the marks available for this aspect of answers.

For this question, students needed to identify specific factors, such as increased demand
for exports and higher interest rates, and explain these in a coherent way. The mark
scheme did cater for those who just adopted a general supply and demand approach but
this approach could not earn the level of marks available to more detailed answers.
Confusion persists on some aspects of exchange rates, notably the distinction between

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 investment and ‘hot-money’ flows.

Q122.
Traditionally, questions on exchange rates and the balance of payments prove to be the
least popular on any question paper. This was not the case here. There were some
excellent responses, with even the weaker answers often able to earn a reasonable mark.
It is a topic which encourages the use of diagrams and the mark scheme reflected this in
the marks available for this aspect of answers.

For this question, more students now recognise the importance of specifying the possible
nature of macroeconomic consequences if this seems to be required, before putting them
into the context of the question. There seemed to be no serious weaknesses identified
except to say that students cannot devise their own question and expect to be well
rewarded. Importantly here, a question on the consequences of a rise in the exchange
rate cannot become a question on a fall in the exchange rate simply because the student
is more confident with the latter. Overall, some pleasing analysis and evaluation were
seen.

Q123.
Very few candidates penalised themselves by omitting part of the question from their
responses. Both the explanation and analysis were given due attention by many and for
which a full award of 10 marks could often be given. It did seem strange at this level that
there were candidates who struggled to find a link between trade and / or investment and
economic growth.

Q124.
The better answers to this question clarified at the outset what is meant by the terms
‘globalisation’ and ‘macroeconomic performance’ and then, following an analysis of the
pros and cons of globalisation for the UK economy, arrived at a reasonably informed
judgement. Weaker answers simply dealt with the pros and cons in a general way without
any significant linkage with the UK economy. A review of general pros and cons can only
be regarded as the most basic type of evaluation and rewarded accordingly. Others
insisted on giving detailed outlines of the causes of globalisation.

This seems to be the type of question for which candidates are happy to make simplistic
statements that will not stand up to testing; for example, the idea that the UK now has no
manufacturing base or that foreign direct investment is a one-way process.

Q125.
No significant problems emerged in the responses but candidates did need to ensure that
they were identifying two distinct determinants of the fall in the external value of the
pound. There continues to be confusion for some between investment flows and ‘hot
money’ flows and this distinction would be worth devoting some time to in teaching.

Q126.
Candidates found it reasonably easy to include a number of relevant determinants of the
demand for imports, commonly touching upon price and exchange rates. A few concerned
themselves with the fact that deindustrialisation in the UK had forced consumers to
become reliant on imports and linked this to the changing structure of the UK economy
towards a service-orientated economy.

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Q127.
The most obvious problem in this question was that it was misread by some candidates.
In these cases, the responses developed by addressing the issue of the UK becoming
more protectionist with little reference to the world at large. Obviously, this severely limited
the marks which could be awarded. Others ignored the fact that the question was
concerned with the impact on the UK balance of payments. In some responses, too much
time was devoted to analysing the types of protection without going on to answer the
question. In the latter responses, it seemed to be the case that the material had been
revised and it was going to be used in considerable depth, however much the actual
question might suffer.

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