Question Answer MarkNumber1(a) LEVEL 5 (28-40 marks) (40) Possible areas of discussion include: • Understanding of trade blocs • Trade creation within blocs based on law of comparative advantage; Significant because of the increase in number and size of trading blocs • Increase in economic growth and employment But benefits are not distributed evenly – countries outside trading blocs might be worse off • Trade diversion associated with the use of protectionist measures against non-members – distortion of comparative advantage However, impact depends on the level and range of trade restrictions Other evaluation could include: • Short run/long run implications • Prioritisation of factors A Level 5* mark (32-40) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 3 points and 2 pieces of evaluation For a L5 mark (28-31): 3 factors and 1 evaluative point. Max 28 marks if no evaluation. Award a L4 mark (24-27 marks) if only 2 factors + evaluation Award a L2 mark (16-19 marks) for identification of points only or for narrow response focussing on one or two points.
Question Answer MarkNumber1(b) Possible areas of discussion include: (60) • Decline in world output associated with decline in exports and imports – fall in trade as a proportion of world GDP (Could count as two points if imports and exports are dealt with separately) • Less FDI • Reduced capital movements between countries • Reduction in labour movements between countries • Increase in protectionism Evaluation points could include: • Magnitude of effect: since countries are more integrated, impact is likely to be greater • How impact will differ between countries depending on their degree of integration into the world economy • Whether recession is brief or lengthy • Other factors may be more significant in influencing interdependence e.g. communication costs; reduction in trade barriers A Level 5* mark (48-60) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 4 points and 3 pieces of evaluation. For a L5 mark (42-47): should consider 4 points + 2 evaluative comments. Max 42 marks (top L4) if no evaluation. Award a L4 mark (36-41 marks) if only 3 points + evaluation Award a L2 mark (24-29 marks) for identification of points only or for narrow response focussing on one or two points.
Question Answer MarkNumber2(a) LEVEL 5 (28-40 marks) (40) Factors include: • Improved public services But: money might go on increased wages or administration • Crowding Out: resource and financial But: not a problem if unemployed resources • Reduction in freedom and choice But: might enable the poor to experience more freedom and choice • Danger of inflation if increased expenditure is financed by borrowing from the Bank of England But: other factors might reduce inflationary pressures e.g. China • Increased employment • Increased fiscal deficit A Level 5* mark (32-40) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 3 points and 2 pieces of evaluation For a L5 mark (28-31): 3 factors and 1 evaluative point. Max 28 marks if no evaluation. Award a L4 mark (24-27 marks) if only 2 factors + evaluation Award a L2 mark (16-19 marks) for identification of points only or for narrow response focussing on one or two points.
Question Answer MarkNumber2(b) LEVEL 5 (42-60 marks) (60) Effects include: • Decrease in aggregate demand and real output But: depends on what is happening to public expenditure • Possibility of a lower rate of inflation But: could lead to inflationary wage demands • Disincentives to work if income tax is increased Depends on relative strength of substitution and income effects • Improvement in the balance of trade in goods and services But: other factors might be more significant in influencing the balance of trade • Reduction in fiscal deficit and so less need for borrowing But: higher unemployment might have a detrimental effect on the public finances. Also Laffer curve analysis. • Significance of tax increases relative to other countries – this is likely to be used as an evaluative point. • Impact on distribution of income A Level 5* mark (48-60) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 4 points and 3 pieces of evaluation. For a L5 mark (42-47): should consider 4 points + 2 evaluative comments. Max 42 marks (top L4) if no evaluation. Award a L4 mark (36-41 marks) if only 3 points + evaluation Award a L2 mark (24-29 marks) for identification of points only or for narrow response focussing on one or two points.
Question Answer MarkNumber3(a) LEVEL 5 (28-40 marks) (40) Factors include: • wage costs; level of National Minimum Wage • non-wage costs e.g. national insurance contributions; health and safety regulations; environmental regulations; VAT; parental leave; planning regulations • government grants • level of corporate taxes • size/quality/flexibility of the workforce • strength of EU economies e.g. expectation of gaining a return on investment • quality of infrastructure • desire to gain access to EU market and to avoid tariffs • membership of single currency Evaluation points: • prioritisation of factors e.g. significance of wage costs • consideration of differences in attractiveness of particular EU countries for FDI • distinction between short and long run issues A Level 5* mark (32-40) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 3 points and 2 pieces of evaluation For a L5 mark (28-31): Discussion of 3 points and at least one evaluation point. Max 28 marks if no evaluation. Award a L4 mark (24-27 marks) if only 2 factors + evaluation Award a L2 mark (16-19 marks) for identification of points only or for narrow response focussing on one point.
Question Answer MarkNumber3(b) Possible benefits include: (60) • Credit on B/P capital account • Future benefit on B/P current account if exports rise and imports fall • For economic growth: multiplier effects • Increased employment • New methods of production and working practices: impact on UK producers • Tax revenue to government Evaluation points might include: • Negative impact on B/P (investment income to shareholders abroad) • Increased competition for domestic producers: unemployment? Net employment affect might be small • Increased dependence of economy on decisions made by managers overseas. Significant if investment is withdrawn in the future. • Impact on the economy might be small (if there is little value added in the UK) • FDI is a small % of GDP. A Level 5* mark (48-60) should be awarded for answers which meet the Level 5 criteria convincingly e.g. 4 points and 3 pieces of evaluation. For a L5 mark (42-47): Discussion of 4 points and two evaluation points. Max 42 marks (top L4) if no evaluation. Award a L4 mark (36-41 marks) if only 3 points + evaluation Award a L2 mark (24-29 marks) for identification of points only or for narrow response focussing on one or two points.
Question Answer MarkNumber4(a) WTO is primarily concerned with the promotion of (4) free trade (1) by organising negotiations to reduce trade barriers such as tariffs and quotas (1). Mark for reference to any example e.g. Doha round or to product in which tariffs have been reduced. (1) A further mark for any other aspect of WTO’s work e.g. resolving trade disputes or for comment on success/lack of success. (1)Question Answer MarkNumber4(b) • Understanding of the term ‘quotas’ (6) • These countries lack comparative advantage in production of textiles • Other countries such as China and India have vertically integrated supply chains 2 marks for definition of quotas, 2 marks for application (specific mention of countries) and 2 for analysisQuestion Answer MarkNumber4(c) Consideration of: (10) • Loss of jobs in American and EU. But workers might be more productively employed in other industries. • China is ‘keeping its currency at an artificially low level’. This would give its exports an unfair competitive advantage. If true, this argument could justify protection but consumers enjoy higher consumer surplus from cheaper textiles • China giving subsidies to its textiles industry. This would also make China’s textiles relatively cheaper and give it an unfair advantage so justifying protectionist measures. • Could lead to deterioration in trade in goods balances of EU and America. But this might be a short term issue only. Also, as China becomes more prosperous, it might buy more goods from other countries. 2 mark for identification/knowledge; 1 for application; 3 marks for analysis; 4 marks for any two evaluative comments (2 + 2; 1 + 3 or 3 + 1).
Question Answer MarkNumber4(d) (12) Diagram to show a rise in the price of textiles (from P1 to P2) and an increase in domestic production (from A to E). Analysis of: • Effects on consumers e.g. higher prices; loss of consumer surplus • Effects on producers e.g. higher domestic output within the EU • Welfare losses • Tax revenue to the government • Implications for the balance of trade • Imports decline from AB to EF Evaluative comments might include: • Significance of PED/PES for impact on the amount imported • Impact depends on the level of tariffs • Short run/long run effects 2 marks for a correctly labelled diagram + 1 mark for clear reference to textiles on the diagram or in the text; 5 marks for analysis; 4 marks for any two evaluative comments (2 + 2; 1 + 3 or 3 + 1).
Question Answer MarkNumber4(e) Tariffs on textiles are a form of indirect taxation (6) and it is stated that they will have a regressive effect (1). Since imported clothes from China are aimed at the mass market, the tax will fall proportionately more heavily on those people earning relatively low incomes. (2) Therefore, they will make income distribution more uneven. (1) Evaluation: • If tax is ad valorem then the tariff is less likely to have a regressive effect • Tariffs might only be a tiny proportion of the price paid by consumers 1 mark for identification of regressive effect; 3 marks for application and analysis; 2 marks for any one evaluative point.
Question Answer MarkNumber4(f) Understanding of supply side policies (1) (12) Answers might include reference to the following policies: • Training/education to improve the productivity of the workforce But…wage costs in developed countries are too high to regain competitiveness. Also cost of training might be very high. • Grants towards research and development aimed at improving non-price factors such as quality and design While this could provide a niche market for designer clothes in a developed country, it is unlikely to result in mass production of textiles • Cuts in corporation tax Although this might provide additional funds for investment, the tax cuts might be distributed to shareholders in the form of dividends • Reduction in trade union power and/or reduction in minimum wages But…if unions are not very strong then this policy will have limited impact. Other evaluative comments might include: Prioritisation of factors Drawing conclusion(s) from discussion Typically a good answer will consider 3 points but it is possible for maximum marks to be gained by a detailed discussion of 2 points. 1 mark for knowledge e.g. definition of supply side policies 2 marks for application to textiles 4 marks for analysis 5 marks for any two evaluative points (3 + 2 or 2 + 3)
Question Answer MarkNumber5(a)(i) 1999: 195 217 x 100 = 21.0% 928 730 2007: 309 955 x 100 = 22.1% 1 401 042 1 mark for correct method; 2 marks for accurate calculations. (3) Allow +/- 0.1% Or 3 marks without calculations shown 2/3 marks if only 1 correct answerQuestion Answer MarkNumber5(a)(ii) Possible effects include: • Deterioration in trade in goods and services balance – use of data; • Unemployment in manufacturing industries • Possibility of fall in aggregate demand, leading to fall in real incomes (use of AD/AS analysis) • Pressure on domestic firms to reduce costs to remain competitive Evaluation could include: • Prioritisation of effects • Trade in goods and services deficit not a problem if there are inflows into investment income and financial accounts • Unemployment in manufacturing might be offset by employment gains in services sector • AD might not fall if rise in consumption and investment outweighs rise in imports 2 marks for identification; 2 for application (e.g. calculation of trade in goods and services balance; or (10) examples or points clearly related to UK economy); 2 for analysis and 4 for any two evaluation points (2 + 2; 1 + 3; 3 + 1).
Question Answer MarkNumber5(a)(iii) Value of exports fell from £243 635bn to £220 703bn (1) i.e. by £22 932bn or 9.4% (1) Causes include: • Slower rates of growth in countries buying UK exports • Value of £ was relatively high • Decline in non-price competitiveness • UK inflation relatively high • Evaluative points could include: • Prioritisation of factors • Comment that it could have been caused by a combination of factors 2 marks for identification of factors; 2 for application (use of data – see above or related to UK economy); and 2 for any one evaluative comment. (6)Question Answer MarkNumber5(b)(i) Positive correlation expected (1 mark) (4) An increase in interest rates (relative to those in other countries) is likely to cause a rise in ‘hot money’ flows as investors seek the highest return on their cash. This could be illustrated with a supply and demand diagram – showing an increase in demand for the currency. (Up to 3 marks)Question Answer MarkNumber5(b)(ii) Use of data to show periods of correlation and years when relationship is weak. (2 + 1 marks). Comment that there is no precise relationship (1) but overall trend is (3) similar (1); 1 mark for specific data reference.
Question Answer MarkNumber5(b)(iii) Reasons include: • State of economy relative to those of major competitors ( Could count as 2 factors ). Might be regarded as the most significant factor: investors unwilling to hold currency of a country whose economy is weak • Speculation relating to future state of economy: UK considered to be facing a more serious recession than other countries because e.g. high levels of debt; significance of housing market • Significant cut in interest rates, making sterling less attractive • Relative inflation rates But…. may not be significant in the short term – other factors more significant • Current account balance But… may have little impact if there are substantial flows into financial account 2 marks for identification; 1 for application (e.g. use of data); 5 for analysis and 4 for any two evaluation points (2 + 2; 1 + 3; 3 + 1). (12)
Question Answer MarkNumber5(c) Analysis could include: For Inflation: • Decrease value of the pound could result in a higher rate of inflation because imported raw materials will cost more. Increase demands for exports causes a rise in AD and possible demand-pill inflation. • Imported manufactured goods will also cost more But…. other factors might reduce inflationary pressures e.g. increase in productivity; AS rising faster than AD For Economic growth: Growth could increase if imports (leakages) are falling faster than exports (injections) But… other factors could be causing growth rates to fall e.g. lower investment or FDI For full employment: Higher import prices could result in lower unemployment But… falling real incomes might result in higher unemployment in other sectors of the economy. 2 marks for identification; 1 for application to the UK economy; 5 for analysis and 4 for any two evaluation points (2 + 2; 2 + 1). (12) Maximum 3/4 if no reference to simultaneous achievement of objectives.
Further copies of this publication are available fromInternational Regional Offices at www.edexcel.com/internationalFor more information on Edexcel qualifications, please visit www.edexcel.comAlternatively, you can contact Customer Services at www.edexcel.com/ask or on + 44 1204 770 696Edexcel Limited. Registered in England and Wales no.4496750Registered Office: One90 High Holborn, London, WC1V 7BH