MAY 2011

1 vi) Yes, agricultural goods take a very long time to grow therefore
supply can only be increased once the crop has been harvested and the
next crop is planted. Agricultural goods cannot be stored for a long time
because they are perishable e.g. tomatoes. Manufactured goods can be
stored so their supply can be increased almost instantly. So in the short
run agricultural goods are more inelastic in supply than manufactured
goods. If demand for manufactured goods rises, more spare capacity can
be utilized provided it is available e.g. labour and machinery. However, if a
firm is already running at full capacity then supply cannot be increased in
the short term, in the long term however it is possible to find and use
more factors of production and invest in new capital.

1biii) An ageing population means there are less people who are able to
work, which would decrease the supply of labour. This may lead to firms
having a shortage of workers and perhaps spare capacity. Wages will also
rise increasing the firms costs which would increase the price of the
goods. However some firms may substitute labour for capital and buy
machines to deal with the shortage of labour which could increase
efficiency. Firms will have to adapt to the change in the pattern of
demand. As there are fewer young people demand for some goods will go
down e.g. i-pods and these firms will face problems. On the other hand
firms which provide goods for old people, e.g. wheelchair firms, may be
able to expand. One of disadvantages of an ageing population can be
overcome if the supply of labour is increased by making the retirement
age higher, although productivity will be decrease as they are older and
generally slower.

2a vii)

A merger between firms producing similar goods will make a larger firm.
This larger firm will be able to take advantages of economies of scale and
thus average costs will decrease. This may result in lower prices for the
consumer, which will benefit them. The two firms will now have shared
resources which could mean an increase in the investment by the firm
which could benefit the consumer due to better infrastructure, e.g. in this
example more telephone masts erected. However, when the two
companies merge there is going to be less competition and so this may
mean a lower amount of choice than before the merger. As the firm is now
much larger it could establish a monopoly which could lead to higher
prices due to little competition and lower choice and quality. I think that as
long as anti-competitive legislation is put in place, the merger will be
beneficial to consumers as they will have all the benefits of a large firm
without the negatives of a monopoly.

2b v) Imposing rules on the use of petrol/diesel fuelled cars or even

banning the use of these cars would be better at reducing negative
externalities because no one could then use them so the negative
externalities would be wiped out. The reason banning isn't used is that
diesel/petrol fuelled cars are more useful than electric cars at this time, so
people would complain. Electric cars cant go as fast or as far as
petrol/diesel cars. Taxation is a good way of reducing negative
externalities because if the tax was proportionate to the amount the
consumer drives, the consumer would be influenced to drive less and save
money. This is not always the case. Petrol/diesel is a necessity because
people need to use their car which they consider the best mode of
transport. Some people will be encouraged to use other modes of
transport e.g. bicycle but others will just pay the tax. Overall it does result
in a decrease in the negative externalities and from the tax government
gains revenue. Between these two policies, taxation is best because it is
more reasonable to the consumer as it gives them a choice. It reduces the
demand and it also provides revenue for the government which can be
used to develop electric cars. The money could also be used in other ways
to decrease negative externalities.

3b v) If a government increases its spending on certain areas in the

economy it can increase economic growth. If it gives subsidies to firms
they can become more competitive in the global economy and production
can increase. More people will be employed and demand will increase. If
the government spends its money on building motorways this can lead to
improved infrastructure and more employment and a multiplier effect
which will increase demand and reduce unemployment further. However
governments need to take care that the increased demand is matched by
an in increase in supply to avoid inflation. Too much expenditure can lead
to huge budget deficits. When this happens the measures taken to
remedy the situation may reduce economic growth.

3c iii) They can reduce the demand of demerit goods like alcohol and
cigarettes whilst at the same time earn lots of revenue for the government
due to these goods being inelastic in demand. The money raised from
indirect taxes can be used to fund a deficit or be spent in order to increase
economic growth in the country. The taxes are also discretionary; the
consumers only pay the tax if they buy the products. However, there are
many disadvantages of indirect taxes. Firstly, they can lead to cost push
inflation as firms have to pay the taxes and they pass the tax on to the
consumers. Indirect taxes are regressive, poorer people pay a higher
proportion of their income in this tax than the rich. In conclusion the
disadvantages easily outweigh the advantages as indirect taxes restrict
growth as entrepreneurs are discouraged to set up firms as they might
feel that indirect taxes will restrict demand for their goods. Furthermore
the taxes can contribute to inflation and possibly unemployment and all
they really do is provide some funds for the government which could be
done using other methods.

4b ii) Yes I do agree with the statement. When the exchange rate of a
currency depreciates, this means that the domestic currency can now buy
less of a foreign currency. This means that imports will seem more
expensive to consumers and exports will be cheaper to other countries.
This will increase demand for exports and decrease the demand for
imports. As the balance of trade is visible exports visible imports, the
balance of trade will improve. However, the strength of this depends on
the price elasticity of demand for the imports and exported goods. If the
good has an inelastic demand the demand will not be affected greatly
when the exchange rate depreciates. This may be because the good is a
necessity. Therefore for depreciation to be successful it is best if the
demand for both imports and exports is elastic.

4c iii ) International borrowing by a developing country can lead to an

increase in the standard of living. The borrowed money can have an
immediate effect if it is used to provide food and clean water to the
poorest people in the country. It can also be used to develop the country
and promote economic growth by improving infrastructure, subsidising
firms and improving health and education in the country. All these
measures can increase employment and raise the standard of living.
However the country will need to repay the debt with interest. Some
countries become reliant on foreign loans and the debt spirals out of
control. Unless the country has used the money wisely to promote
economic growth the countrys standard of living will fall as it tries to pay
back the debt.

JANUARY 2012
1c ii) The people who benefit most from an increase in the minimum
wage are the disadvantaged workers (women, ethnic minorities) who will
see their living standards rise. In counties like Jamaica this may be a large
proportion of the workforce. Others may be disadvantaged. Minimum
wage legislation has the potential to create job losses and firms may
suffer losses as their costs increase. However the negative effects can be
avoided if the economy is growing at the same time and if worker
productivity rises at the Price S S1 D Quantity Q2 Q1 P1 P2 same time. If
productivity rises and it might do so, as workers are more satisfied with
their wages, the whole economy benefits. The firms become more
efficient. As a result I would disagree with this statement. Minimum wage
has the potential to benefit the whole economy with less income
inequality and higher productivity.

1 d ii) Division of labour has its fair share of advantages and

disadvantages. As a firm implements division of labour into its production
process, it tends to become much more efficient and productive. This
occurs due to labour speeding up the production process as they become
more skilled. Mistakes can be reduced and quality can rise. Furthermore,
division of labour allows average costs to fall due to rising productivity. On
the other hand, since workers are doing the same job on a daily basis,
they may become demoralised due to the monotony of the task. This
creates job dissatisfaction which eventually leads to inefficiency. Firms
may also encounter bottlenecks or clogs in the production process due to
interdependence between departments. All in all, division of labour is a
concept that can prove to be very effective. Some of the problems may be
overcome with good motivational management. If workers are given rest
breaks or paid by how much they produce then the problems associated
with their dissatisfaction might be overcome.

2b ii ) The importance of government schemes to encourage the setting

up of small firms depends on various factors, such as the state of the
economy. By helping small firms establish, the government can increase
competition in an economy, this will result in lower prices and more choice
to consumers. Aggregate demand in the economy will rise leading to an
increase in GDP (economic growth) and higher levels of employment in
the economy. However, if a government increases expenditure on small
firms it would mean that government funds for other services such as
education and healthcare would fall. This may cause living standards to
plunge. The importance of schemes to encourage small firms depends on
the state of the economy and the government budget. A fall in public
services might outweigh the advantages of stimulating competition
through encouraging small firms.

2 c iii) Privatised firms exist to make a profit. They will try to achieve this
by becoming more efficient. When a public sector firm is privatised then it
may face competition. This will lead to reduced prices and more variety. It
may even make it more competitive in the international market. However
efficiency may lead to unemployment as firms in the private sector
rationalise and only keep the best workers. A firm which has been a
monopoly in the public sector e.g. electricity, may remain a monopoly and
exploit consumers with high prices. This will bring down the standard of
living in the economy. The government should ensure that privatised firms
dont have adverse effects on an economy. They can regulate them so
that their prices are not too high e.g. Ofgem regulates the gas and
electricity industry in the UK.

3b iv ) Inflation does not always worsen the balance of payments on the

current account. Due to inflation the price of home produced goods
increases, therefore this results in a fall in demand for exports but a rise in
demand for imports as they appear cheaper. As imports increase and
exports fall the balance of payments on the current account worsens. But
if the exports are necessities (price inelastic), for example medicine, and
the imported goods and services are also necessities e.g. food, the
balance of payments on current account may not worsen. Therefore
inflation does not always worsen the balance of payments on the current
it depends on the price elasticity of demand for exports and imports.

3c iii) Supply side policies such as education and training would greatly
improve the quality of labour increasing the chances that people have
adequate skills to get hired and reducing unemployment. However
training takes time so it would not have an immediate effect. Deregulation
and privatisation would encourage new firms to set up, make industries
more competitive and might result in them employing more labour. Whilst
these measures might solve some types of unemployment like structural
unemployment by giving workers new skills they would not solve cyclical
unemployment which requires an increase in aggregate demand. Supply
side policies can also be costly which means the government would have
to reduce its expenditure in other areas. The extent to which supply side
polices reduce unemployment depends on the state of the economy and
the types of unemployment it faces.
4a vi ) When multinationals invest in other countries unemployment
might fall since they usually demand local workers. The standard of living
of these previously unemployed workers will increase. Multinationals will
provide variety and choice at cheap prices for the people of the country as
their goods will now be tariff free. However, multinationals can destroy
local business due to competition. The multinational may undercut the
prices of domestic producers. This might lead to closure of these firms and
so unemployment may rise. The unemployed workers will suffer lower
standards of living. Even the workers employed by multinationals may
suffer from low wages and poor working conditions. The multinational may
only care about profits and keeping costs low so may cause pollution. In
conclusion, multinationals can improve the standard of living in a country
but the government must regulate these firms. Regulations about pay and
conditions of work as well as fines on pollution may help to maintain the
improvement in the standard of living that multinationals bring to a
country.

4b iii ) The benefits of tariffs include a decrease in imports as prices are

increased. This might help the balance of payments. At the same time as
imported goods increase in price there might be an increase in demand
for domestic goods which appear cheaper. On the other hand tariffs will
increase the price of goods to not only consumers but also to firms who
might use imports of raw materials to make the domestic goods. Whether
or not tariffs are of benefit to a developed economy depends on many
factors. Developed countries import raw materials from developing
countries so prices of domestic goods as well as the imports will rise
leading to inflation. If developing countries retaliate then developed
countries may not be able to sell their manufactured goods abroad. The
developed country may find itself with a fall in exports, inflation and poor
relations with developing countries so perhaps the disadvantages of tariffs
are greater than the benefits.

MAY 2012

1b ii ) I agree that it is likely that demand for flour is likely more price
inelastic than the demand for chocolate. This is because flour could be
seen as more an essential good (as a food staple) whereas chocolate is
more of a luxury. There are also several goods that could be substitutes
for chocolate wine, sweets etc. However, there are also several
substitutes for flour, which people could switch to if the price went too
high, examples might include: potatoes and rice. For some people who are
addicted to chocolate it may become a necessity with an inelastic demand
curve. I would conclude by saying that it not easy to pigeon hole these
two items as to whether they are price elastic/inelastic.

1 c iv) Trade unions use collective bargaining to try to increase wages.

They can put pressure on firms to increase wages by threatening
industrial action e.g. strikes. However if wages increase the firm faces
increased costs. If these are passed on to the consumer demand will fall, if
they are absorbed by the firm profits will fall so the firm may decide to
reduce the number of workers. If the workers can be replaced by
machines then it may become more cost effective to do so as wages rise.
Trade unions are strong if they represent the majority of workers in the
firm and if the economy is booming. In these circumstances the trade
union may be able to increase wages and maintain employment. However
in times of recession the trade union will find it difficult to protect jobs let
alone increase wages.

2b iv ) I would agree with this to a limited extent. In the secondary sector

productivity can be increased by division of labour which can lead to the
greater use of machinery. When the workers are trained to use the
machines then fewer workers are need but more is produced. Similarly in
the primary sector more machines can be used e.g. tractors and fewer
workers employed but the primary sector depends on factors outside the
control of man e.g. the weather. So even if a farmer uses fertilisers and
the latest farming methods the yield can be destroyed by drought or flood
and so productivity is reduced. So in some circumstances it is true to say
that it is easier to increase productivity in the secondary sector but if good
conditions prevail it may be that in the primary sector productivity can
increase simply by better harvests on the other hand productivity can fall
just as easily!

2c v) Monopolies have both advantages and disadvantages for

consumers. One advantage is that monopolies, since very profitable, can
invest heavily in research and development, improving their products and
thereby provide better and improved quality products. They may also sell
the products at a lower price, for their average costs may reduce due to
economies of scale. Monopolies are price makers and produce unique
products, therefore, consumers have less or no choice and have to pay
high prices. Since the monopolies have no competitors to compete with
them, they may also cut back on research and development as it is after
all a cost and consumers are forced to buy the good as no substitutes are
available. Overall the existence of monopolies may be bad to consumers
as they have no competition. However, there are also acts and
government policies that are used against unfair monopolies examples are
the Consumer Protection Act and the Office of Fair Trading.

3b iii ) Reducing direct taxes (e.g. income tax) will give individuals more
money in their pockets to spend. The demand in the economy will only
occur if the people go on and spend the money on more goods and
services. To do this people must have confidence to spend. Otherwise they
are likely to store the money away in banks until such time as they have
the confidence to spend and invest again. We have seen this in UK
business in the last few years as business and banks sit on profits and
equity after the 2008-9 recession rather than investing it. To create
demand a government not only needs to reduce direct taxes but also
create confidence. By reducing indirect taxes rather than direct taxes
goods and services would become cheaper so this could also create
demand as more people may be able to afford them. However if the goods
necessities or worse imports then demand will not increase very much
within the economy. A government should consider reducing both to be
confident in increasing demand in the economy.

3b v) It can be expected that an increase in government expenditure

would decrease unemployment in the short-run. This is because, as a
component of aggregate demand, government expenditure on helping
businesses e.g. by subsidies enables businesses to supply more and they
may, in turn, employ more people. Government may also decide to
directly employ people e.g. building roads, hospitals, which will have a
very clear effect on the unemployment rate. However, if increased
government spending is on unemployment benefits then this may
discourage workers from finding employment. If the spending is financed
through higher taxes, this can be a drain on the economy and actually
reduces aggregate demand (the consumer element). Also, if the spending
is financed through borrowing future generations will have to pay this
back through higher taxes in the future which will likely lead to higher
unemployment in the future. These higher taxes may also be a
disincentive to work/production. Government will have to carefully balance
short and long term prosperity.

4a iii) When a country joins a trading bloc, the production of firms

increases due to the larger market and increased demand due to free
trade. Therefore they are likely to experience economies of scale because
production increases and average costs reduce. Free trade increases the
competition within the trading bloc, therefore firms increase efficiency and
produce quality goods at lower costs. Even though advantages exist
certain disadvantages occur. When countries are in trading blocs, local
firms may face competition from large, powerful ones. As a result, local
firms may have to shut down due to the fierce competition. Even the large
firms may face problems as increased production may lead to
diseconomies of scale and the firms' average costs will start to increase.
In my opinion a firm may benefit from a trading bloc if there is no fierce
competition or if the firm can adjust and compete successfully.

4b iv ) Yes quotas are more effective in reducing imports. This is because

to hope for a reduction on imports through a tariff is highly dependent on
price elasticity of demand. If the commodity is elastic, then a tariff can be
effective, however if the commodity is inelastic, the consumers wont
reduce their demand by very much and the importers will continue
importing. However quotas impose a limit on how much can come into a
country. No matter how much is demanded there is an upper limit to how
much can be imported whereas with a tariff more can be imported as long
as consumers are willing to pay a higher price. The quota not only limits
supply but also leads to an increase in price so consumers are hit twice.

JAN 2013

1b ) "Agricultural workers may earn lower wages than those in the tertiary
sectors. Agricultural workers are not highly educated. Their jobs may not
need any training to do the work on farms. Since they require no skills the
supply of agricultural workers is greater than office workers. Those
working in the tertiary sector may need high levels of education. Not
everyone has the aptitude or intelligence to work in the tertiary sector, or
in some countries, the money to be trained well enough, to work in
tertiary sectors. Demand is also a factor. There is also high demand for
workers in the tertiary sectors. In some countries agricultural workers may
be replaced with machines, thus lowering the demand for them. The
availability of foreign agricultural workers can also contribute to the lower
wages in agriculture. Overall I think supply is the most important factor
with demand being less important. However, there are other factors. The
government can increase the wages of the agricultural workers by setting
a national minimum wage which would increase their wages and reduce
the gap between agricultural sector and those in the tertiary sector."

1c iii ) "The population of Bulgaria will fall as death rate is greater than
birth rate. This will lead to a fall in the workforce. Firms will face problems
recruiting workers so wages will increase and production may fall. This
could lead to lower economic growth in the country. Bolivia, because of its
high birth rate, will experience an increase in its population. Although the
government will, initially, have to increase its expenditure on children,
when the children grow up and enter the workforce they will pay taxes
and government revenue will increase. The increase in the labour supply
will lead to economic growth. If the population continues to grow at a high
rate then the country could face the problem of overpopulation and find
that it doesn't have enough resources for the growing population. Because
the problems are different in the two countries it is difficult to decide
which one has the greater problems. However, the problems can be
overcome if the government and firms work together to ensure that the
best use is made of all the available resources."

2b iii ) "Economies of scale can result in a large firm enjoying lower long
run average costs which lead to higher profits. The economies include
marketing economies where firms enjoy discounts from bulk purchases.
They can benefit from management economies where they hire specialist
workers and managers to work more efficiently and be more productive.
However firms can face difficulties through an increase in their size. They
may encounter management diseconomies of scale making the business
hard to control, co-ordinate and make decisions. This leads to the firm
becoming inefficient. It is particularly difficult to motivate workers as they
feel alienated in a large firm. Average costs will rise and profits will fall.
Firms experiencing diseconomies of scale must identify the problems and
try to overcome them e.g. motivating the workers and improving the
management structure so that the advantages of large scale production
still exist but the disadvantages are eliminated."

2c iii ) "Consumers often benefit from an oligopoly. Prices in an oligopoly

usually remain constant. There is choice and the products are usually of a
good quality as the firms use non-price competition rather than price
competition as they try to avoid price wars. Due to fierce non-price
competition a lot is spent on advertising which leads to increased costs for
the firms so prices will rise to protect profit margins. Oligopolies may form
cartels, they collude, which enables them to enjoy monopolistic benefits
at the expense of the consumer, e.g. all firms may increase prices to the
same higher price. Overall oligopolies benefit consumers as long as they
are carefully regulated by the government so that the disadvantages of
cartels are avoided. In the UK cartels are illegal to protect the consumers."

3b ii) "There are many advantages to reducing interest rates to stimulate

economic growth i.e. loose monetary policy. Spending rather than saving
is encouraged, so firms and individuals are likely to borrow more to fund
spending. Firms will take out cheap loans to invest in production. This in
turn may reduce unemployment and increase the standard of living of the
previously unemployed workers. These workers will spend their wages and
increase aggregate demand. The exchange rate will go down as hot
money flows out of the economy and this will stimulate demand for
exports. However all the extra demand in the economy might cause
demand pull inflation. Price would rise, sometimes at a rapid rate. The
extra income might be spent on imports, so the current account balance
might worsen. People who rely heavily on interest from savings e.g. the
elderly, would face a decreased quality of life. Therefore it would not
always be beneficial, as the costs might outweigh the benefits for the
elderly and inflation occurs. It is, however, an incredibly useful tool to get
out of a recession, but not for long term use nor to be used alone but with
other government policies."

3c ii ) "Imposing indirect taxes increases price and reduces demand. A fall

in demand leads to a fall in production. As the firms produce less so they
will produce fewer environmental costs like pollution. Economic growth
can lead to more cars on the roads but if petrol were taxed more heavily
the demand would fall and so would the related externalities of congestion
and air pollution. On the other hand, if government regulates the level
pollution a firm makes, firms will try to generate lower external costs
because they may be penalised with fines and cancellation of licences if
they break the laws. It will also be difficult for the government to measure
the external cost and set a monetary value as a fine. When using
government regulation, it would be impossible or expensive to monitor all
firms, but with taxes everyone will have to pay it if they buy the taxed
product whereas a firm exceeding its output quota or pollution permit may
be able evade the fines. So taxation would be more successful as
everyone has to pay tax."

4b ii) "Oil has an inelastic demand as it is a necessity in many production

processes and also in transport. As a result, a non-oil producing country
must import oil from a foreign country regardless of an increase in price;
the demand for oil is therefore inelastic. An increase in the price of oil
would lead to a greater outflow of money from the country. This will lead
to a worsening of the balance of trade. At the same time, since the price
elasticity of demand of oil is inelastic, this would increase the cost of
production of the domestic producers leading to cost push inflation which
would increase the prices of exports thus leading to a fall in demand for
exports. This also leads to a worsening of the balance of trade. However, if
a substitute for oil is found, then oil will have a more elastic demand. As a
result, a rise in oil prices will not lead to a worsening of the balance of
trade, and if new resources are discovered in the country which might act
as a substitute for oil, then a rise in oil prices will not worsen the balance
of trade."
4c iv ) "Firms like Nestle benefit from incentives from governments
because they reduce production and set up costs for the firm.
Governments could also reduce the red tape for the multinationals and
this would result in setting up in a country seem much easier. However
multinationals like Nestle may be able to set up in a country even if they
are not offered incentives because they are usually very large and
profitable. They can fund the investment completely by themselves and
not need any help from the government of the host nation. They may be
attracted to the country due to its market, raw materials and labour
supply. I conclude that although government help would be beneficial for
firms setting up in a country they might be able to overlook it in order to
access a new market, sell their products, and increase their profits which
is main aim of firms when deciding to set up in a country

MAY 2013

1c iii )

"Knowledge of price elasticity of demand for products helps firm to

generate higher total revenue. If firms know that their products have
elastic demand, they will reduce the price of their products. The relative
increase in quantity demanded is greater than the fall of the price. The
total revenue will increase. On the other hand, if a firm's products have
inelastic demand, they should increase the price because a rise in price is
greater than a decrease in quantity demanded. So their total revenues will
rise. However, price decisions made by firms can also be influenced by
other factors. For example in a price war, firms may decrease their prices
to attract more consumers and gain market share irrespective of the
elasticity of demand. Changing costs may lead to price changes so that
firms maintain profit levels. This shows that price elasticity of demand is
important but is just one of many factors a firm will look at when setting
its price."

1d ii ) "Spain is a mixed economy. In recent years there has been a move

towards a free market economy as many state owned firms have been
privatised e.g. Iberia Airlines. Privatisation increases competition and
efficiency and raises revenue for the government. There are still some
state owned firms e.g. RENFE (railway network) and Correos (postal
service). Their primary aim is not to make a profit, unlike the private
sector firms, but to provide a public service. Private sector firms include
many foreign multinationals e.g. the fast food chain McDonalds and also
domestic firms e.g. the large bank, Santander. These exist to make a profit
for their shareholders. Some parts of the economy are owned and run by
both private and public sector firms e.g. schools and hospitals. As the
economy of Spain declines so the government will sell off more and more
state owned firms and the economy will become more a free market
economy but it will still be known as a mixed economy as the state will
still provide public and merit goods."

2b ii) MONOPOLY ANSWER

2d iii) "Regional policy can overcome problems such as unemployment
and/or congestion in certain parts of a country. Relocating firms to areas
where older industries have closed will help solve the unemployment
problem in these areas. It might also help in reducing income inequalities
in the country. If firms are encouraged out of congested areas this would
leave those areas with cleaner, healthier environments for the people who
live there. However regional policy, like giving loans and grants to firms,
has an opportunity cost. Instead of spending it on education and
healthcare or infrastructure for the whole country it is spent on just one
region. Another disadvantage is that firms may fail when government
incentives are withdrawn so the area may not benefit in the long term.
Overall, regional policy can lead to increased employment, decreased
pollution, greater economic growth for the whole country not just
particular regions. The drawbacks depend on how much the policy costs
the government, how the money is raised and how successful it is in
solving the problems of the region. Sometimes policies like giving advice,
granting planning permission and reducing red tape are just as effective
and don't cost a lot."

3a iii ) "During inflation as prices rise the value of money falls and so
does its purchasing power. This is a disadvantage for lenders as the
money they receive back from borrowers has less purchasing power than
when it was loaned to the borrowers. The lenders can buy fewer goods
and services with the money when it is returned. On the other hand
borrowers have the use of the goods and services bought at a lower price
with the borrowed money and pay back less in real terms. So the
borrowers gain and the lenders suffer. Lenders usually add interest to
loans. If the lenders set the rate of interest higher than the rate of
inflation then the borrower won't benefit. The lender will be compensated
by the interest payments on the loan and will be able to purchase the
same amount or even more when the loan is repaid. In this case borrowers
will suffer. If during inflation, borrowers' incomes don't rise then they may
find it difficult to repay the loans. In this case both borrowers and lenders
are losers."

3b ii ) "In January - March 2011 India was experiencing falling inflation

9.47% to 8.82%. The government probably thought that inflation was
under control and kept interest rates at 6.5%. However it thought it
necessary to increase interest rates in March to 6.75%. This might have
been due to the fear of demand pull inflation. A rise in interest rates
makes borrowing more expensive and should reduce demand. From March
to December interest rates rose from 6.75% to 8.5% but the impact on
inflation was varied. It peaked in September at 10.06% but fell to 9.2% in
December. The government might have decided that interest rates alone
could not control inflation or that it was due to increased costs (cost-push
inflation) rather than excess demand in the economy. Unfortunately, for
governments, changes in interest rates may be subject to time lags so the
results are not seen immediately. The increases in interest rates over 2011
from 6.5% to 8.5% may be the reason why inflation fell from 10.06% its
highest level in September to 9.20% in December but more data would be
needed to confirm this."

3c vi ) "Reducing inflation will make the price of exports appear lower to

buyers. The demand for exports will increase. At the same time imports
will appear more expensive than domestic goods and services so the
demand for imports will fall. Therefore reducing inflation could increase
exports and reduce imports, as a result the balance of payments
improves. However, it is not always the case. If inflation is still higher than
in other countries then exports may still be relatively more expensive and
imports cheaper. If imports have no domestic substitutes then they will
still be bought by domestic consumers. If the government wants to
improve the balance of payments then controlling and reducing inflation is
important but the government may also need to use some protectionist
measures e.g. tariffs."

4b iv )

"International borrowing can be used by the country to increase economic

growth. This can be done by using the loans to improve infrastructure,
develop a skilled labour force, improve existing industries and set up new
firms. The standard of living in the country will improve as more people
are employed and education improves. The government may also use the
loan to improve the health service to achieve a healthy and productive
workforce. The main disadvantage is that the debt has to be repaid
usually with interest. If the government hasn't spent the loan on
increasing the country's productive capacity but has spent it on importing
guns and tanks then it may find it difficult to repay the loans. It may be
forced to borrow more to repay previous debts. The country would suffer
as it falls deeply into debt. Sometimes developed countries agree to
cancel the debts to developing countries but this is not always the case so
borrowing might cause more problems than benefits.

4c ii ) "Joining a custom union makes imports cheaper to the country as

barriers like tariffs and quotas are abolished. This leads to an increase in
exports because countries in the union trade more with each other. Firms
will have larger markets and so might expand and this could lead to lower
unemployment. However, joining a customs union can result in too many
imports into the country, this could worsen the balance of payments.
Moreover, domestic firms will face higher competition from other firms in
the union. They might not be able to compete and have to be closed down
leading to unemployment. This will worsen the balance of payments even
more as there are now fewer exports. On balance, joining a customs union
has the main advantage of increasing trade between members but this
may be outweighed by the decline of domestic firms if they are unable to
adjust to competition. The loss of markets outside of the customs union
should also be taken into consideration as countries outside the union
have to face high customs duties and other barriers to trade and may
retaliate and impose similar barriers to goods and services exported from
the union."

JAN 2014

1a vii) It could be argued that this statement is correct. This is because

chocolate is not an agricultural good like cocoa beans are, therefore
production speed can be increased with shorter notice as it does not take
time to grow chocolate. As well as this chocolate is not as perishable as
cocoa beans, therefore it can be stored and this extra stock can be used
to increase supply when needed, making the supply of chocolate more
price elastic. On the other hand, chocolate is made of cocoa beans so if
there is a limited supply of cocoa beans, the supply of chocolate is also
impacted. As well as this, the supply of chocolate cannot be increased any
easier than the supply of cocoa beans if the capacity of the factory
producing chocolate is at full capacity unless a new factory is built which
would take time. Overall, it is easier to increase the supply of chocolate as
often it does not take as much time provided that the supply of other
ingredients is there. However with time, both the supply of chocolate and
cocoa beans can be increased.

1c ii) Division of labour may benefit firms, as labour becomes more expert
due to repetition leading to fewer mistakes so less waste. Moreover labour
which is specialised in certain task will use tools and machines more
efficiently. However, division of labour may harm firms, because each
stage in production depends on the previous stages so, if one stage
stopped, the whole process will be affected will stop. On the other hand
workers will be more skillful due to repetition. As workers become more
skillful, they can find jobs easily and get high wages. However due to
repetition workers become bored and hence de-motivated. However firms
can avoid boredom of workers by giving them financial incentives like
piece work or non-financial incentives like job rotation. Firms may benefit
from division of labour, as their profits increase because they become
more efficient, while workers may be immobile if over specialisation takes
place.

2b iv) Governments can encourage new small firms in the economy by

giving them subsidies such as financial incentives, tax breaks and grants.
This will increase the competition in the market and hence the economy
will benefit. As competition will force firms to produce more efficiently with
high quality products with low prices. Moreover, new firms will create job
opportunities and hence decrease unemployment. Furthermore, increasing
the local production may increase exports and decrease imports and
hence improve the current account. However, spending on new small
firms may have an opportunity cost to the government as spending on
education and/or health care may fall. In addition, promoting competition
may lead to fast economic growth that may lead to environmental
damage and inflation in the future. Although, encouraging new small firms
may lead to problems in the future, the benefits outweigh the problems. In
addition, the government may solve problems by imposing environmental
taxes to prevent environmental damage.

2c ii ) Tourism creates jobs in the Seychelles. When tourists arrive they

need a tourist guide. Local businesses e.g. hotels, restaurants , shops will
employ more staff.. This reduces unemployment in Seychelles. More
tourists mean more demand for air travel and cars. This contributes to the
amount of greenhouse gases into the atmosphere. This causes global
warming and adds noise pollution. However, the benefits of tourism can
outweigh its negative externalities with the aid of government regulation
to protect the environment like fines being imposed on vehicles that emit
excess carbon dioxide into the atmosphere

3b v) decreasing direct taxation more disposable income increased

spending increased production increased employment. On the other
hand few gave the other side of the argument: decreasing direct taxation
more disposable income increased spending on imports or more saving
no increase in employment
Direct taxation is imposed directly on the profits and income earned. If
direct tax is reduced, this means there is more left as a reward; increased
disposable income. People may spend more on goods and services. This
will increase demand for goods and therefore the demand for labour will
rise. This will increase employment in an economy and will help a nation
recover from recession. However if demand for imports is increased, this
will not lower the level of unemployment. Also, if people start to save
rather than spend, this too will not benefit the economy whilst in
recession, as demand for goods and services will not increase. Direct
taxation may reduce unemployment but it also has many drawbacks.
Indirect taxation will be more successful in reducing unemployment. This
is because prices will be cut. So these discounts appear as a great deal,
therefore demand will increase.

3c ii ) One supply side policy is improving labour flexibility. If workers are

more flexible, due to increased education and training, they are likely to
be able to move more easily from one job to another. This means that if a
whole industry has declined, they may find it easier to acquire jobs in
another industry which is booming. Therefore structural unemployment
would be reduced. However, if a region has declined or workers have been
replaced by machines and demand for their skills they have acquired
through this training and education are not needed, workers will find it
difficult to find jobs. Also in a recession for example, demand may not be
there so although workers may have the right skills unemployment may
not be reduced. Overall, structural unemployment can be reduced by
increasing labour flexibility as they are more employable, however this
method cannot be used alone if there is a lack of demand in the economy.
Therefore it depends on the state of the economy

4a vi ) Protection could lead to being self-sufficient in the production of

food which means global food price shocks don't affect your own
consumers. Safety standards can be checked thoroughly ensuring
hygiene. However this could promote inefficiency if domestic farmers no
longer feel the need to invest in better production methods, increasing
costs for consumers. Consumers also face less choice and a lower
standard of living if domestic farmers are inefficient. Protection should
reduce unemployment among domestic farmers as they are the only ones
allowed to sell in the domestic market. One country's farmers may not be
able to produce all the desired goods so shortages may arise. Much of the
competition on food prices is from developing countries so stopping them
from selling their goods abroad deprives them from much needed income.
If the government protects by subsidies to domestic farmers there is
opportunity cost as the money could have been spent on better things
such as education. Overall I think it's a bad idea because it promotes
inefficiency, causes higher prices and less choice while also pushing poor
people in developing economies into more poverty which might
necessitate an increase in the aid budget. Also farming is not an infant
industry and should not need help. Other countries could retaliate and ban
the imports of goods from the original country, costing people jobs.

4b iii ) The end of incentives to foreign car manufacturers would lead to a

decrease in government expenditure . This money could be spent
elsewhere in the economy on education, health care or even improving
the country's own car industry. Foreign car manufacturers who were
thinking of moving to the country may now consider alternatives but those
already in the country might stay as labour may be cheaper and the
infrastructure in place. However, some car manufacturers might decide to
move out of the country if incentives elsewhere make it worthwhile. This
would lead to unemployment and a reduction of GDP. If the car
manufactures have invested large sums of money and the business is
successful then an end to the incentives will probably make no difference
to the firms. Their profits may fall slightly as costs increase but whilst
incentives might have led them to set up in the country other factors may
make them stay

MAY 14

1b iii ) Demand for a particular product such as a mobile phone depends

on many factors; one of these factors is population. If the population
increases then there would be an increase in demand for mobile phones.
Furthermore if there was a change in the age distribution of the population
then this might also change the demand for mobile phones. This is
because at present mobile phones seem to be more popular with younger
generations than the older generations. However, population changes are
not the only thing that would influence the demand for mobile phones.
There are lots of other factors that influence the level of demand for
mobile phones eg changes in tastes, fashions and the availability of
substitutes and income. Arguably, income levels are a more important
factor determining the demand for phones than population changes. This
is because even if the population was rising, if the average income of
consumers was falling then there may not be an increase in the demand
for mobile phones. For instance if there was an economic recession, there
may be less demand for mobile phones. This means that income changes
may be a more significant factor than changes in the population when
determining the demand for mobile phones.

1c iv) MNCs adv and dis Adv

2a vii) DIscuss other reasons for the existence of small firms

2b iv) Oligopoly ans

3a vii) ADV & DISADV ECONOMIC GROWTH

3b iv) Fiscal policy

4a iv ) I do not agree for a number of reasons. On the one hand, tariff

barriers reduce the incentive to import by raising prices. This is effective
as it means people are now less willing to import goods because
domestically produced goods are now either cheaper or more competitive.
On the other hand, as the price of imported goods rises people may still
chose to buy it - which would mean a tariff is not that effective at reducing
imports as it would depend on what the good is. For example a net oil
importer would still need to import oil even if a tariff were placed on it if
there were no domestic alternative. On the other hand non-tariff barriers
such as quotas or embargos make it impossible to import goods over a
certain amount legally and thus are more effective than tariffs in reducing
imports. Furthermore, the effectiveness of tariff barriers will depend on
the price elasticity of demand for the good. Whilst non-tariff barriers will
always be effective, an inelastic price elasticity of demand will result in
little or no change in demand following the introduction of a tariff, whilst
an elastic good would make the tariff more effective in that instance.

4b v) dep effects on BOP

JUNE 15

1a vi) Flowers are an agricultural good which means that the supply would
be inelastic in the short run. This is because flowers take time to grow.
This means that if there is a sudden increase in the price of flowers the
flower supplier would not be able to respond quickly and increase supply
by a lot. How quickly the flower grower could respond to a change in price
would also depend on the season. The supply of flowers may be more
responsive (ie more elastic) in the spring and summer. However, in the
long-run if the flower grower thinks that the price rise is likely to stay they
may decide to grow more flowers or use special greenhouses to increase
flower crops. Cards are a manufactured product. This means that the card
manufacturers can respond relatively quickly to a change in price. A 10%
increase in price would lead to a more than 10% increase in supply. This is
because the length of the production process for making cards is much
shorter than growing flowers, it requires few raw materials, which are
easily available eg printing machine, paper, inks etc. The price elasticity of
supply of cards is also more elastic than flowers because it is easy to store
finished cards whereas to store flowers after they have been cut is difficult
because they are perishable. However, the supply of cards may become
less responsive to a change in price (ie more inelastic) if the card factory
machines are working at full capacity or if the warehouse storage area is
full, or if the factory runs short of printing ink

1b ii) A national minimum wage results in an improvement in standards of

living, especially for minority or disadvantaged groups (eg women). It
particularly benefits poorer people who have fewer skills and fewer job
opportunities. They would typically be paid a low wage and the
introduction of a national minimum wage is likely to increase their level of
income and mean that they can buy more goods and services and reduce
the level of poverty in society. However, the introduction of a national
minimum wage will increase business costs. This may mean that firms
decided to reduce staff numbers (ie lay off staff) to maintain profit
margins. This would mean that the level of unemployment would increase,
which would mean low income people would be worse off than they were
before the minimum wage was introduced. However, whether the
potential rise in unemployment would happen is debatable; it depends on
whether or not the firm decides to absorb the increase in wage cost, by
reducing profit margins. If they do this then unemployment would not rise.
It also depends on whether or not labour productivity increases following
the introduction of a minimum wage, if it does then the firm wont mind
paying a higher wage to workers.

2 b vi) adv disadv economies of scale

2c ii) One of the roles of government in the economy is to promote

competition and prevent anti-competitive practices. Supporting small
business is a good way of promoting competition because with support -
small businesses will be able to survive and grow into larger businesses
and will be able to compete with the larger firms that are in the market
already. This will give consumers more choice and will help stop big firms
exploiting customers. In addition, supporting small business is good
because it will increase employment and will also encourage innovation in
the economy. This will also force big firms to become more innovative too
because they dont want to lose customers. This would lead to an increase
in productivity and a more efficient allocation of resources which is good
for the whole economy. However, there are other things that the
government could do which might be better at promoting competition. For
example the government could focus on introducing more anti-
competitive legislation. This might be more effective than focusing on
supporting small firms, because most anti-competitive behaviours tend to
be carried out by large firms (eg the energy market in the UK). The
government could also look at lowering barriers to entry and encourage
multinationals to enter the country to compete with the existing large
firms. It is also not guaranteed that small businesses will survive or if they
do survive they may be taken over by a larger firm in the market. Hence,
supporting small firms is not guaranteed to lead to a long run increase in
competition in the market place. It could be that some markets are more
efficient when they have a few large firms (eg the energy market) because
of economies of scale. In these markets supporting small firms would not
be the best way to promote competition it would be better to regulate
the behaviour of large firms in the market instead. Question

3a iii) BOP ANS FROM COPY

3c ii) Arguments supporting the statement (1 mark) with development (up

to 2 marks) Increases price (1 mark), reduces demand (1 mark) and
switch to cleaner alternative e.g. walk (1 mark) Award use of diagram
(up to 2 marks) Arguments not supporting the statement (1 mark) with
development (up to 2 marks) Inelastic demand Other methods might
be more effective, e.g. CO2 emission regulation, congestion charge in
cities, banning cars from city centres and other similar schemes
Encouraging use of alternative methods of cleaner transport Further
guidance Maximum for one sided argument (3 marks) Maximum for
both sides (4 marks) Need reasoned conclusion/judgment (5 6 marks)
e.g. prioritisation of factors, if no availability of substitute then price
elasticity of demand will be inelastic and taxation will be ineffective in
reducing number of car journeys, depends on the size of the tax increase
(NO ER REPORT)

4a iii) ADV DISADV MULTINATIONALS

4b v) The depreciation of a countrys currency will mean that exports

appear cheaper to foreign buyers and imports seem to be more
expensive. This should mean that demand for exports will rise and the
demand for imports will fall. This should mean that the current account
balance improves (ie a current account deficit would fall). This could be
good for the country as it could lead to export led growth and more jobs in
the export industries, which would reduce unemployment. However, fewer
imports will also decrease consumer choice at home, which might reduce
the standard of living of the country. A depreciation of the currency could
also lead to cost push inflation, because the price of any imported raw
material used by firms at home would increase. This would increase costs
of production which could be passed on to consumers in the form of
higher prices in the shops (ie inflation). However the final impact on the
current account of the balance of payments and on the economy would
depend on the price elasticity of demand for the products. If the imports
are necessities (ie price inelastic) eg oil (or if there is not domestic
alternatives available) then the rise in the price of imports will mean that
imports will not fall by much and the amount spent on imports will
actually rise. Similarly if the demand for exports is price inelastic (or if the
country does not actually make things that other countries want), then a
fall in price of exports will actually lead to a fall in revenue received. This
means that depreciation may actually lead to a deterioration of the
current account of the balance of payments, a reduction in growth and an
increase in inflation.

JAN 16

1a vi) Indicative content Tax: Effectiveness depends on the size of the

tax elasticity of demand (inelastic then not much fall in consumption)
whether tax encourages hidden economy to develop What government
does with the tax revenue (e.g. uses it to finance an health awareness
campaign) Regulation: Effectiveness depends on: What level the
restriction is set at (hard to determine the safe amount of sugar)
Monitoring of the rules People can just add their own sugar at home to
the food that has been had sugar content reduced Awareness: Increase
awareness of the risks of eating too much sugar will reduce demand
Effectiveness depends on: Whether or not consumers chose to ignore
the campaign and not change tastes and preferences and continue eating
too much sugar Whether or not consumers see the campaign Whether
or not consumers are able to assess for themselves how much sugar is a
safe amount to eat

1c) Arguments (up to two) supporting the statement (1 mark each) with
further development (up to 2 marks) Guarantees a minimum income (1)
which increases standard of living (1) Likely to be above free market
wage rate (1) Award diagram marks (up to 2) Arguments (up to two) not
supporting the statement (1 mark each) with further development (up to 2
marks) Only works if the NMW is raised above the current equilibrium
wage rate for cocoa farm workers Discussion of other methods e.g.
provide subsidies, investment in education and training to allow farm
workers to move out of farming and into occupations with less volatile
incomes may cause unemployment- so lower income for families of
farmer Up to 2 marks for judgement Depends where the current NMW is
in relation to the equilibrium wage for cocoa farm workers it may already
be below the current equilibrium rate for cocoa farm workers. Depends
how much the NMW is increased by Unlike to make a big difference,
especially if they can earn more money from growing a different type of
commodity (e.g. rubber) (NO ER )

2b iii ) A highly competitive market may benefit consumers because of:

Lower prices (1) because if firms try to overcharge then consumers can
switch to another supplier (1) More choice (1) because: more
competition means there will be many alternative suppliers (1); each
supplier will try to differentiate its products from rivals (1); competitive
markets will have new entrants offering fresh ideas (1). Better quality (1)
because: consumers are rational and will look for the best products on
offer (1); firms who sell poor quality products will go out of business and
leave the market (1)
A highly competitive market may not benefit consumers because of :
Lack of innovation (1) because: firms make less profit (1); not enough
profit made to finance product development (1) Decreasing quality (1)
as firms try to cut costs (1) Market uncertainty (1) because: unprofitable
firms will leave the market (1); supply disrupted by firms deciding to leave
the market (1); this will be inconvenient for consumers (1)
ev- most consumers would argue that competition is desirable because
there are more benefits that consumers enjoy from healthy competition.
However, it depends on the type of market. For example it may be more
efficient to have less competition in some markets because of the need to
exploit economies of scale e.g. the aircraft manufacturing market.( no er)

2c iii) privatisation ans

3a v) book supply side

3b ii) Identification of two macroeconomic objectives (2 marks) e.g.

economic growth, low unemployment, low inflation, current account
balance of payment, protection of environment Suggest: Correct
explanation of impact of a cut in rates on one or both of the
macroeconomic objectives identified (up to 2 marks) Judgement up to 2
marks. Size of the impact depends on the size of cut in interest rates
Impact may be different if other variables are changing too e.g. change in
exchange rate Impact of cut in interest rates may be offset by a change
in Fiscal Policy or Supply Side Policy + ev

4bii) Each argument explaining why MNC's not paying enough tax is main
disadvantage (1 mark, up to 2) MNC may pay minimal tax to developing
nations (1) which means that developing nations lose potential tax
revenue (1) which could have been spent on improving living standards in
the developing nation (1) or spent on health or education(1) Each
argument why it is NOT the main disadvantage i.e. identification of other
disadvantages and explanation 2 marks MNC often pay low wages (1)
and working conditions are often poor (1) MNC may employ child labour
(1) which is unethical (1) MNC may use up non-renewable scare
resources (1) and then leave once the resources are used up (1) MNC
may cause environmental damage (1) by increase pollution in developing
nations

e.v. If the MNC did pay enough tax the governments might not use the
money to overcome the other disadvantages or to improve living
standards. Governments should consider regulating MNC's to overcome
more important problems of exploitation of workers and the environment.

4c v) dep effects on BOP

JUNE 2016

1b v) reasons for fuel being more inelastic + ev----

Overall, in the short run, both demand for tea and fuel may be inelastic as
tea is addictive and takes a small proportion of income, whereas fuel may
be the only option for necessary journeys by car. However in the long run
the demand for both may become more price elastic as people can
change their habits to, say, coffee ,if prices change by a large margin.
People may also sell their cars or change to an alternative fuel and
possibly use public transport if the routes cover their requirements.

1d ) Reasons why public sector produces goods and services in a mixed

economy Government provides goods and services which would either
not be provided by the private sector (or not enough would be provided) if
left to market forces (eg Health care & Education/Merit goods/Public
goods) Reasons why private sector produces good and services in a mixed
economy Individuals or groups of individuals are free to set up
businesses and supply goods and services to anyone who wants to buy
them Profit motive Government policy e.g. privatisation reducing the
role of the state Relevant examples e.g. national defence (public sector)
or mobile phones (private sector) (1 mark) Further guidance Up to 3
marks for discussion of role of either public sector or private sector in the
production of goods and services or for discussion of mixed economy with
relevant examples Up to 4 marks for discussion of both the public sector
and private sector or for discussion of mixed economy with relevant
examples compared to other economic systems (eg planned/free market)
Final 2 marks requires some level of supported judgement e.g. balance
of private and public provision depends on a range of factors including
Political ideology/government policy Degree of market failure
Availability of government funds Availability of private sector funding
State of the economy
2b ii) MERGER BETWEEN FIRMS

2d ) Arguments supporting the statement with development (up to 3

marks) Governments seek to maintain jobs in areas which are in decline
as low unemployment is an economic objective. Government often
provides incentives (eg grants, tax breaks) to firms to relocate in areas of
high unemployment so that jobs will move to the area Arguments not
supporting the statement with development (up to 3 marks) Discussion
of other reasons why governments try to influence the location of firms eg
to reduce congestion, to reduce income inequality Further guidance Up
to maximum of 3 marks for a one sided argument Up to maximum of 4
marks for a two sided argument Final 2 marks requires supported
judgement e.g. candidate reaches a conclusion based on examination of
evidence and quality of argument. eg it may not just be for one particular
reason, but for a combination of reasons influenced by political and social
factors. The nature of the industry may also be a consideration.

Or ev - It depends on the objectives of the government, the main aim

may be to increase employment or it may be to increase economic
growth. With the significant cost to government in incentivising firms a
number of reasons may be responsible, and the government may have to
choose carefully which to pursue.

3a iii) expansionary fiscal unemployment from copy

= 2 ev

The effectiveness of the policy depends on the type of unemployment.

Expansionary fiscal policy may be ineffective at reducing cyclical
unemployment, but supply side may be needed to reduce structural
unemployment.

Or, It depends on the magnitude of the policy as well as confidence. A

small reduction in taxes may not have much effect. Both of these
concluding comments could with some development access both
judgement marks.

3c iii ) Arguments supporting the statement with development (up to 3

marks) To protect the environment world production must be reduced
this would lead to closure of production facilities which would lead to
increase in unemployment and a reduction in economic growth Cleaner
air requires people to travel less this may mean people will not go out as
often which could lead to the closure of small businesses and retail outlets
and reduce the level of demand in the economy Regulation may mean
that output is restricted this will lead to job losses and reduce the level
of demand in the economy Arguments not supporting the statement with
development (up to 3 marks) New types of industries, businesses and
jobs will be created, which will lead to economic growth Environmental
protection will encourage development of new technologies which will
mean that output can still increase Less congestion and pollution could
increase productivity leading to economic growth, investment in green
growth.

Overall the effect on economic growth depends on the regulation of the

firms. If governments provide the firms with incentives and at the same
time regulate them well to help switch to greener methods, both the
environment and economic growth can be positively impacted.

4b iii) book

Definition of development aid (up to 1 mark) eg development aid is

money and other forms of assistance that is given to less developed
countries by developed countries Arguments supporting the statement
with development (up to 3 marks) Aid can support countries in
developing their natural resources and power supplies. Aid can
encourage industrial development which can create jobs and improve
transport infrastructure. Projects that develop clean water and sanitation
can lead to improved health and living standards which improves
productivity Aid which supports education and training will increase
skills of population which improves productivity Aid which improves
infrastructure eg road building, bridges, which improves productivity
Arguments not supporting the statement with development (up to 3
marks) Corruption may lead to local politicians using aid for their own
means rather than promoting economic growth. Aid may be used for
inappropriate projects that do not yield expected benefits of economic
growth (white elephant projects) Further guidance Up to maximum of 3
marks for a one sided argument Up to maximum of 4 marks for a two
sided argument Final 2 marks requires supported judgement e.g. Aid can
increase the dependency of developing nations on donor countries which
might compromise future growth prospects e.g. trade rather than aid may
be a better way to increase economic growth. e.g. it may be a condition of
the investment that the projects are run by foreign companies or that a
proportion of the resources or profits will be sent abroad.

Ev alternative - Overall whether development aid can lead to increased

economic growth depends on what the government decides to spend it
on. If on imports of weapons to strengthen the military or if it ends in
corrupt hands, economic growth decreases. Alternatively if used to invest
in infrastructure or to improve human capital there will be long term
economic benefits to the country which creates revenue, and the ability to
pay any money back with interest. This would decrease the burden for
future generations.

4c iii) adv dis adv protectionism +

The success of the tariff depends on the PED for tyres. If tyres are inelastic
then the tariff may not reduce demand significantly and instead lead to
inflation. It depends on macroeconomic priority of the government.
Unemployment may be reduced in the domestic industry but at the cost of
potential inflation. The tariff may be beneficial but is the threat of
retaliation from China worth the cost. In the long run the impacts are
difficult to fully quantify as the tyres may be used to produce cars for
export. In the short term domestic tyre producers may benefit, but in the
long run export prices may rise, negatively affecting the Balance of
Payments.

JAN 2017 MS POINTS ONLY

1(a)(iv) Each demand factor indentified, 1 mark up to 2. Explanation up

to 2 marks. e.g. Demand for final product, derived demand (1). e.g. If
potatoes become popular the demand will increase for agricultural
workers to plant and harvest the potatoes (2). Machines replacing
workers (1). If more machinery is employed the demand for workers will
fall and so will wages (2). Each supply factor identified, 1 mark up to 2.
Explanation up to 2 marks. e.g. Size of working population (1). If more
women working then supply will increase, wages fall/retirement age and
school leaving changes (2). Age distribution of population (1) - If ageing
population the supply will fall/wages will rise (2). Qualifications and
training (1). Agricultural workers are unskilled so supply not limited by
education (1). Further guidance: Up to 3 marks for responses which only
refer to demand or supply factors. Up to 4 marks for responses which refer
to demand and supply factors. Up to 2 marks for supported judgement
e.g. Supply is more important because agriculture is labour intensive
and machinery expensive. There are other factors which might be more
important than demand and supply e.g. MWR. Farming is now requiring
workers with skills as more sophisticated machinery is available.

1 (b)(iv) Reasons why supply of french fries is more elastic up to 3 marks.

e.g. can be stored frozen so there can be stocks which can be used when
demand increases. Reasons why supply of potatoes is less elastic up to 3
marks agricultural product so take time to grow can only be stored for
short periods of time Further guidance: Up to 3 marks for responses
which only refer to french fries or potatoes. Up to 4 marks for responses
which refer to french fries and potatoes. Up to 2 marks for reasoned
conclusion french fries may have the same elasticity as potatoes if
stocks are used and not replaced. potatoes can be more elastic - it
depends on the time period SR v LR. the availability of freezers will affect
the elasticity of supply of french fries. To increase supply need more
freezers.

2 (a)(v) Each arguments supporting the statement 1 mark (up to 2).

Development up to 2 marks e.g. Secondary sector can easily substitute
machinery for workers and machinery is more efficient. Tertiary sector
e.g. call centres work on a 1 to 1 basis so difficult to increase use division
of labour Each argument against the statement 1 mark (up to 2).
Development up to 2 marks e.g. Secondary sector may already be using
machines and division of labour. Some firms in secondary sector may be
making non identical items so can't employ processes to increase
productivity. Tertiary sector: new more efficient technology (online retail,
ATMs). Further guidance: Up to 3 marks for responses which only refer to
secondary or tertiary. Up to 4 marks for responses which refer to
secondary and tertiary. Up to 2 marks for reasoned/justified conclusion.
e.g. Depends on type of firm in secondary and tertiary. Scope for
application of division of labour/mechanisation. Award for reference to
the difficulty of measuring productivity in the tertiary sector.#

2 (b)(i) Candidates must distinguish/imply which data supports the

argument and does not support the argument for 4 marks. e.g. Small firms
are important because there are many of them (1). They make up 90% of
the firms in the economy (1). Small firms are not important because larger
firms employ many more people (1). Small firms only employ
approximately 12% of the workforce (1). Supported judgement 1 mark
Small firms are not important as employment is more important to the
economy than the number of firms. Small firms are important because
they are often innovative and will lead to future growth as they expand.
Depends on contribution to GDP.

2 (b)(iii) Identifying actions of large firms which lead to failure of small

firms, 1 mark up to 2. Development up to 2 marks. e.g. Price competition
(1) large firms can sell more cheaply (1) than small firms due to
economies of scale (1). Advertising (1) large firms can spend more on
advertising and advertise on TV, (1) small firms cannot afford this form of
advertising (1). Non price competition (1) brand loyalty acts as a barrier
to entry (1). Other factors (not actions of large firms) which may lead to
the failure of small firms, 1 mark up to 2. Development up to 2 marks. e.g.
Lack of finance (1). Banks may consider small firms too risky (1) and may
charge interest rates which small firms may not be able to afford (1)
Small firms may experience cash flow problems (1). Short term loans
may not be available. Change in demand (1) small firms may only
produce one good/service so if demand falls they go out of business (1).
Increase in interest rates (1) may lead to small firms being unable to
repay loans (1). Further guidance: Up to 3 marks for responses which only
refer to actions of large firms or other factors which lead to failure of small
firms. Up to 4 marks for responses which refer to the actions of large firms
and other factors. Up to 2 marks for reasoned/justified conclusion. e.g.
Large firms are the main factor because they can increase their market
share by price and non price competition. Other factors are more
important they can affect the costs of the firm which might lead to the
firm going bankrupt. It depends on the good or service being produced.
There may be no competition from large firms if it is a unique, individual
item. It depends on the impact of government regulation on large firms.
Government aid to small firms.

3 (b)(iii) Each advantage identified, 1 mark up to 2 marks. Development of

each up to 2 marks. e.g. Increased incomes/employment (1) leads to
increased standard of living (1). More tax revenue (1) so better public
services (1). Each disadvantage identified, 1 mark up to 2 marks.
Development of each up to 2 marks. e.g. Increased
manufacturing/transport (1) leads to environmental damage (1).
Unsustainable (1) as non-renewable resources are used up (1). May
increase the gap between rich and poor in a country (1). Further
guidance: Up to 3 marks for one sided arguments Up to 4 marks for both
sides of the argument Up to 2 marks for reasoned/justified conclusion. e.g.
Supervision and monitoring by governments/world organisations of
pollution and non renewable resources can limit the disadvantages.
Governments can redistribute income so that poor can enjoy benefits of
economic growth through taxation and benefits.

3(c)(v) Each effect of an increase in interest rates, 1 mark Up to 2 marks.

Development of each effect up to 2 marks. Maximum marks = 4. e.g.
Loans become more expensive so less borrowing/less spending (1) which
will lead to a fall in demand (1). This would lead to more unemployment
(1). Firms would experience an increase in costs (1) as loans more
expensive (1) so may lay off workers (1). Savings rates increase so people
will save more (1) and consume less (1) so firms will sell less and employ
less people (1). Further guidance: Up to 4 marks for effects and
development of increase in interest rates. Up to 2 marks for assessing the
extent of the impact on employment levels. e.g. It will depend upon the
size of the increase in interest rates and how long they remain high. It
will depend upon the impact of an increase in interest rates on the total
demand in the economy. It will depend upon the impact of the increase
in interest rates on the exchange rate.

4 (a)(iv) Advantages of depreciation identified, 1 mark up to 2.

Development up to 2 marks. e.g. Exports are cheaper (1) so demand
increases (1), improves current account balance (1). Imports are more
expensive (1) so demand decreases (1), improves current account
balance (1). Disadvantages of depreciation identified, 1 mark up to 2.
Development up to 2 marks. e.g. Inflation (1): imports are more
expensive (1), costs may rise due to import content of domestic goods
(1) Standard of living may fall (1) due to inflation (1). Travel/holidays
more expensive (1). Further guidance: Up to 3 marks for one sided
arguments Up to 4 marks for both sides of the argument Up to 2 marks for
reasoned/justified conclusion. e.g. Effect of PED on imports and exports.
Amount of imports which are necessities/amount which are luxuries.

4 (b)(iv) Benefits of free trade identified, 1 mark up to 2. Development up

to 2 marks. e.g. Increased choice for consumers (1) especially goods the
country can't produce itself (1). Increased competition for domestic
producers (1) increases efficiency and quality (1). Large market (1)
increased demand for exports (1) can lead to economic growth (1).
Disadvantages of free trade identified, 1 mark up to 2. Development up to
2 marks. e.g. Over dependency on narrow range of goods (1). If demand
falls country will suffer major loss in earnings (1). Domestic firms cannot
compete (1) with larger more powerful foreign competitors (1) leading to
unemployment (1). Environmental damage/depleting resources (1) as
production and travel increases (1). Further guidance: Up to 3 marks for
one sided arguments Up to 4 marks for both sides of the argument Up to 2
marks for reasoned/justified conclusion. e.g. Are domestic industries
competitive? Is the country developed/developing - developing
countries may be exploited. Intervention from government/world
organisations to try to reduce environmental damage. Developing vs
developed countries and free trade.

JAN 2015

1(a)(vii) Each disadvantage identified, 1 mark (up to 2). Development up

to 2 marks. e.g. workers can be easily replaced by machines as they
perform simple jobs. They could therefore become unemployed. They can
also become bored and / or suffer from repetitive strain. Each advantage
identified, 1 mark (up to 2) Development up to 2 marks. e.g. Division of
labour will increase productivity (also accept production) (1 mark) so
workers may be rewarded with higher wages especially if paid by how
much they produce. Maximum for 1 sided arguments = 3 marks
Maximum for both sides = 4 marks Must have both sides of argument for
4 marks. Award 5th and 6th marks for evaluation/reasoned judgement e.g.
It depends on the actions of the firm and the government. If the
firm/government provides training then workers can find less boring jobs.
If the firm wants to motivate workers then it may use job rotation to stop
boredom.

1(b)(v) 1 mark for definition of mixed economy. Each way in which a

government affects price of goods 1 mark up to 2 marks. E.g. the
government can impose indirect taxes/give subsidies/impose
minimum/maximum price/regulations (banning cigarette advertising)
Development up to 2 marks. E.g. the government imposes indirect taxes
which increase costs and increase price on harmful goods. Each way in
which the private sector affects price of goods (govt has no effect) 1 mark
up to 2 marks. E.g. produce goods people want to buy and are willing to
pay a price. Private sector will react to changes in demand and will
change supply. E.g. if demand for ice creams rise in hot weather price will
rise unless supply also rises. Maximum for 1 sided arguments +
definition = 3 marks Maximum for 1 sided argument = 3 marks
Maximum for both sides + definition = 4 marks Must have both sides of
argument for 4 marks. Award 5th and 6th marks for evaluation/reasoned
judgement e.g. Governments can influence price. Their reasons may differ
e.g indirect taxes to protect the people from harmful goods whilst others
may use the taxes just as a way of raising revenue but both effect price of
goods.
2(a)(v) Each advantage identified, 1 mark, up to 2 e.g. more efficient,
more competitive internationally/take advantage of economies of scale.
Development up to 2 marks e.g. more efficient take advantage of large
scale machinery, rationalise. Each disadvantage identified, 1 mark, up to
2. E.g. unemployment, decrease competition. Development up to 2 marks
e.g. as firms rationalise some workers will be made redundant.
Maximum for 1 sided arguments = 3 marks Maximum for both sides = 4
marks Must have both sides of argument for 4 marks. Award 5th and 6th
marks for evaluation/reasoned judgement e.g. Depends on the state of
the economy. If there are lots of other firms in the industry then it may
benefit the economy as there will still be competition. If unemployment is
already high then redundant workers may not be able to find new jobs.
The government plays a part as it can provide retraining programmes and
encourage exports. Candidates who refer only to advantages and
disadvantages to firms and/or consumers can achieve only maximum of 4
marks.

2(b)(v) Each argument supporting statement, 1 mark, up to 2. E.g.

machines dont make mistakes, dont get tired, increase labour efficiency.
Development up to 2 marks e.g. the workers in charge of the machines
will produce more as all the goods will be perfect (no man made
mistakes), no goods thrown away. The machines can work 24/7 so produce
a consistent amount unlike workers who may get tired. Each argument
against statement, 1 mark, up to 2. Training and incentives can increase
productivity. Also accept reasons why machines can decrease productivity
e.g. boredom and monotony/breakdowns. Development up to 2 marks e.g.
Workers who are trained are more productive than new, unskilled workers.
If workers are bored they may make mistakes, there might be industrial
unrest and strikes which will lead to lost production/decreased
productivity. e.g. Maximum for 1 sided arguments = 3 marks Maximum
for both sides = 4 marks Need reasoned conclusion/judgement for 5-6
marks. e.g. Increased use of machinery can aid division of labour but
excess use may lead to a decrease in productivity unless the workers are
motivated.

3(a)(vi) Each advantage of financial incentives or disincentives identified,

1 mark, up to 2. E.g. people/firms like financial encouragement
(subsidies/grants), reduces costs of reducing pollution. Taxes increase
price/costs. Development up to 2 marks e.g. people and firms may want
to reduce pollution but may not be able to afford to do so financial
incentives may have positive effects. Each disadvantage/advantage of
non monetary measures identified, 1 mark e.g. government has to
increase taxation/reduce expenditure on other items, firms can ignore
legislation. Tradable permits encourage firms to reduce pollution.
Development up to 2 marks e.g. some firms may break the law and
continue to pollute and pay fines as it is cheaper than changing their
production process. Maximum for 1 sided arguments = 3 marks
Maximum for both sides = 4 marks Need reasoned conclusion/judgement
for 5-6 marks. e.g. a combination of measures may be best along with
educating the population. If the people and firms support the fight against
pollution then measures will work. If they dont understand why there is
need for the measures then they will try to avoid them and continue to
pollute. The taxation or incentives must be directly related to a reduction
in pollution. Accept PED argument as evaluation.

3(b)(iv) Each group benefitting from inflation identified, 1 mark, up to 2

marks e.g. debtors/borrowers, importers. Development up to 2 marks e.g.
debtors will win if their loans bought goods at previously cheaper prices.
Importers will have an increased demand for imports as they appear
cheaper. Also accept low positive rate of inflation will stimulate an
economy. Each group which loses from inflation identified 1 mark, up to 2
marks e.g. creditors/lenders, exporters, people on fixed incomes.
Development up to 2 marks e.g. people on fixed incomes will have a
falling standard of living as they buy less with their incomes and have no
opportunity of increasing them. Also accept that the opportunity cost of
low inflation may be too high e.g. high unemployment and low economic
growth. Maximum for 1 sided arguments = 3 marks Maximum for both
sides = 4 marks Need reasoned conclusion/judgement for 5-6 marks. e.g.
There are some groups who benefit from inflation but even these might
suffer when other things are considered. If the rate of interest is high then
even borrowers may suffer. If inflation spreads to other countries then
importers might face a falling demand for imports as import prices rise.

4(a)(iii) Each reason why economy might suffer, 1 mark, up to 2. E.g.

domestic firms suffer, unemployment, balance of payments problems.
Cheap imports due to exploitation of labour may have adverse effects on
importing firms e.g. Primark. Development up to 2 marks e.g. domestic
firms may not be able to compete so may go out of business and choice
for consumers decline. Each reason why the economy may not suffer, 1
mark, up to 2. E.g. imports may be used in manufacturing so prices may
fall, fall in inflation. Development up to 2 marks. E.g. if prices fall then
inflation will fall which will improve standard of living. Maximum for 1
sided arguments = 3 marks Maximum for both sides = 4 marks Need
reasoned conclusion/judgement for 5-6 marks. E.g. It would be disastrous
if a country became dependent on cheap imports and its own industries
closed. If the amount and use of cheap imports could be channelled into
industries which would improve their competitiveness then a country
could achieve economic growth. Cheap imports might be cheap quality
and, if they are raw materials, result in sub-standard products of domestic
firms. Cheap imports due to exploitation of labour may have adverse
effects on importing firms e.g. Primark.

4(a)(v) Each advantage of chosen method, 1 mark, up to 2. Development

up to 2 marks e.g. chosen method =tariffs Tariffs make the goods more
expensive so demand will fall. They can be placed at different rate on
different goods. Each advantage of non chosen method or disadvantages
of chosen method , 1 mark, up to 2. Development up to 2 marks e.g.
chosen method tariff, non chosen quotas. e.g. tariffs will only reduce
imports if the goods are non essentials. If the goods are necessities with
an inelastic demand then an increase in price will increase the amount
spent on imports. Or e.g. quotas would be more successful as they can
reduce the amount regardless of elasticity and they also increase the price
due to the reduction in supply. Need reasoned conclusion/judgement for 5-
6 marks. Must identify which measure is more successful for evaluation
marks. e.g. Tariffs are more successful and also have other benefits. Tariffs
will raise revenue which the government might spend on subsidies to
exporters so improving the balance of payments. e.g. quotas if at a low
level will reduce imports but tariffs will be affected by PED.