Professional Documents
Culture Documents
Costs of inflation: shoe leather (a cost when consumers spend time and money trying
to find the best prices), menu costs (additional costs incurred by businesses as a
conseq. of inflation)
Terms of Trade: a ratio of the index of export prices to import prices
(effects of high inflation) LEIUS: loss of PP, effects on savings, effects on
international competitiveness, uncertainty for investors, social unrest
Discuss whether it is the behaviour of producers, consumers or governments that is
most likely to cause inflation. [12]
Inflation is a sustained rise in the general price level and is measured by the CPI or RPI.
Each of the groups can contribute to inflation although in different ways. Producers may
increase prices to raise profit levels or to respond to higher import prices (cost push);
consumers may increase their spending and reduce their saving raising AD (demand pull);
governments may increase the money supply (monetary inflation), lower direct taxation and
run budget deficits (demand pull) and raise indirect taxation (cost push inflation); they may
also manipulate the exchange rate.
Candidates can argue for any group although government influence may be most
widespread.
For a definition of inflation 1 mark
For an understanding of different types of inflation 6 marks
Analysis of the influence of different groups 6 marks
(10 marks max.)
Discussion of the relative impact of the groups 4 marks
Explain the difference between cost-push inflation and demand-pull
inflation. [8]
Inflation is a sustained rise in the general price level with an accompanying reduction in the
real value of money. Cost-push inflation is caused by persistent rises in the costs of
production independent of demand, which cause firms to maintain or increase their profit
margins. Examples include increases in wage rates, indirect taxes and raw material costs.
These may be linked to monopoly power, government action and changes in exchange
rates.
Demand-pull inflation is caused by increases in aggregate demand (C+l+G+X-M) often when
the economy is close to full employment. Influences may be increases in consumer
spending, government expenditure, money supply, spending attitudes, export demand.
For knowledge of inflation up to 2 marks
For explanation of cost-push inflation up to 3 marks
For explanation of demand-pull inflation up to 3 marks
For an understanding of public goods and why they are provided by the
government
(up to 6 marks)
For an understanding of merit goods and why they are provided by the
government
(up to 6 marks)
(10 marks max.)
Discussion of the accuracy of the definition. (4 marks)
(b) Discuss whether national defence or a public park is the better example of a public
good. [12]
A public good possesses the properties of non-rivalry and non-excludability. Consumption
by one does not reduce the availability to others and it is not possible to restrict the benefit of
the good to selected groups. Non-rejectability, that is automatically having to consume the
good or service, can also apply. Defence is a classic example of a public good, as increases
in population do not reduce the protection for current consumers and it is not possible to
prevent consumers in some places from getting the benefit as it applies nationally. Everyone
is automatically protected. A public park is non-rival up to the (unlikely) point at which its
popularity causes it to become so crowded that others cannot enjoy it and the admission of
others would reduce the consumption of other users . While public parks are usually free to
enter, so no-one is excluded by price, it is possible to exclude people by admission systems
and the enforcement of charges. No-one is forced to enjoy the existence of the public park
as they are not compelled to use it. While defence always demonstrates the required
qualities, a public park usually does but not always or entirely.
Understanding of the properties of a public good 4 marks
Discussion of national defence as a public good 4 marks
Discussion of a public park as a public good 4 marks
(c) Discuss whether all countries should set annual inflation targets of around 3%. [6]
Case for includes e.g. stable and low rate desirable, active policy priority, retention of
competitiveness, avoidance of unwanted redistribution, maintenance of confidence and
risk taking.
Case against includes e.g. unrealistic (current high inflation), unnecessary (current low
inflation), more important priorities, ineffective control (lack of institutional framework) and
different circumstances in different economies.
4 marks maximum for one side
Explain two possible economic reasons for Indias introduction of export
restrictions.
[4]
Reasons include:
To transfer supply to the home market (1) to improve living standards (1)
To help lower income families in India (1) as rice is an important part of their diet
(1)
To reduce inflationary pressure in India (1) as rice has a large weight in the CPI
(1).
(ii) Analyse the social costs associated with the increased mining of Rare Earth
elements. [4]
Social costs are made up of private and external costs (1),
private costs are incurred by the producer while external costs (negative externalities) affect
3rd parties (1),
private costs of mining include e.g. labour costs (wages and training) and costs of equipment
(purchase and running) (1), external costs include e.g. pollution and environment
degradation with worsening health and living conditions.
(ii) What differences were there in the types of goods traded between the two
countries? [2]
Australia exports mainly minerals and farm products (1), Thailand exports mainly
manufactured or processed (1), credit comment on petroleum, seafood or restricted
data.
(iii) Explain what might have caused these differences. [4]
Absolute and comparative advantage (1), meaning (1), differences in factors of
production (1), application e.g. Australia land rich, Thailand capital/technology rich
(2).
(b) (i) Name two protective measures, other than tariffs, which would restrict free
trade. [2]
Quotas, embargoes, VERs, subsidies, exchange control, licences, etc. any 2
Discuss whether Australia and Thailand should have abolished all tariffs
immediately. [6]
Case for based on free trade arguments (reduce poverty, living standards), welfare and
efficiency, with reference to data up to 4 marks.
Case against based on infant industry, need for adjustment, special circumstances etc.
with reference to data up to 4 marks. Credit reasoned conclusion up to 2 marks.
Discuss whether high indirect taxes are the best way to discourage smoking.
Operation of tax leaves choice to customer, raises revenue, targeted but is regressive,
ineffective and encourages evasion.
Compare to alternatives such as a ban or education.
Demand factors include prices of related goods, expected future prices,
incomes, tastes and preferences, population, government policies, climate
and weather, etc
Supply factors include costs of factors of production, expected future
prices, technology, government indirect taxes and subsidies, climate and
weather, etc
Explain the main determinants of price elasticity of demand for example,
availability and number of close substitutes, degree of necessity, proportion of
consumers income spent on good, time period
Explain the main determinants of price elasticity of supply for example, level
of stocks or inventories, availability of spare capacity, ease of factor
substitution, nature of product, time period
PES measures the responsiveness of supply to a change in price.
Factors which influence it include the existence of spare capacity,
availability of stocks, the time period involved and the mobility of
factors.
For understanding price elasticity of supply up to 3 marks
For identifying some influences up to 3 marks
For explaining the influences up to 2 marks
It is said that the standard of living in Orissa continues to be very low. Discuss
whether the
(Up to 3 marks)
It results in an inflow of foreign currency that strengthens the exchange rate and foreign
currency reserves. (Up to 3 marks)
Notes: The suggested benefit must be fully explained for 3 marks.