Economics 0455/22 May/June 2021: question paper and mark scheme

Mark scheme

1(a) Calculate Chile’s agricultural output in 2017. 1 Accept $11.8bn and $12bn. $ is not essential. $11.76bn / $11 760 000 000 / $11 760m (1). 1(b) Identify two disadvantages of a country 2 One mark each for each of two disadvantages. specialising. Rely on a small number of industries is not sufficient. Two from: • demand may fall / new competitors may appear • supply/output may fall / diseases / natural disasters / bad weather may affect agricultural output / costs may rise • non-renewable resources may run out • structural unemployment may occur • reliance on imports no longer produced by home country / overdependency on other countries 1(c) Explain one reason why demand for cherries is 2 In terms of close substitutes, also accept: fall in price will cause price-elastic. some people to switch towards this product and away from rival products. A luxury product (1) they do not have to be purchased / not essential / not a necessity (1). One mark for the reason identified and one mark for the Has close substitutes (1) example / rise in price will explanation. cause some people to switch to rival products (1). A candidate who writes a luxury product and has close substitutes and no more has identified two reasons, so just one mark. If a candidate identifies one of the two reasons but does not explain it and then identifies the second reason and explains it, the second reason can be taken and with the explanation, 2 marks. 1(d) Explain how Chile’s population structure differs 4 Accept for the first and second points other relevant age ranges from Haiti’s population structure. e.g. over 60, under 10. Logical explanation which might include: Accept longer life expectancy for lower death rate and shorter life Chile has a higher proportion of its population aged expectancy for higher death rate. over 65 / Haiti a lower proportion aged over 65 (1). Note that each country overall has more females than males, so Chile has a lower proportion of the population aged not a difference. under 15 / Haiti has a higher proportion aged under 15 (1). Chile is likely to have a lower birth rate / Haiti is likely to have a higher birth rate (1). Chile likely to have a lower death rate / Haiti is likely to have a higher death rate (1). Chile’s population pyramid indicates a relatively high level of development/high income country / Haiti’s population pyramid indicates a relatively low level of development/low income country (1). Chile’s population pyramid is less pyramid shaped / more stationary / constrictive / bulges out in the middle / more egg-shaped / Haiti’s is more pyramid shaped / more expansive (1). Lower dependency ratio in Chile / higher dependency ratio in Haiti (1). Higher proportion of population of working age in Chile / lower proportion of population of working age in Haiti (1). Higher population size in Chile / lower population size in Haiti (1). 1(d) Chile has a higher average age / older population / Haiti has a lower average age population / younger population (1). 1(e) Analyse why China buys most of its cherries from 4 Free trade agreement on its own is not sufficient. Chile. Coherent analysis which might include: Chile has high production standards (1) cherries are likely to be of a high quality (1). China does not impose tariffs on Chilean cherries (1) may keep their price low (1). 1(f) Analyse why Chilean astronomers are paid more 5 Also accept an approach based on an analysis of why Chilean than Chilean farm workers. farm workers are paid less than Chilean astronomers. This may include reference to immigrant farm workers who may be Coherent analysis which might include: prepared to accept relatively low wages and Chilean farm Most astronomers have a university degree (1) high workers being replaced by capital equipment / more replaceable cost of training/ long period of training (1) well qualified than astronomers. / well educated / high level of knowledge (1) highly productive / highly skilled / efficient (1) in short supply (1) high demand (1) more inelastic demand (1) more inelastic supply (1). Most work in the public sector (1) government may be more willing / able to pay higher wages (1) public sector workers are more likely to belong to a trade union (1) have stronger bargaining power (1). 1(g) Discuss whether or not Chilean consumers would 6 Apply this example to all questions with the command word benefit from more government intervention in the DISCUSS economy. (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Award up to 4 marks for why they might: Not taking lower taxes, lower subsidies or reduced immigration • evidence of market failure (1) controls as a form of government intervention. • merit goods may be underproduced (1) as under- consumed (1) Each point may be credited only once, on either side of an • demerit goods may be overproduced (1) as argument, but separate development as to how/why the outcome overconsumed (1) may differ is rewarded. • external costs could be reduced (1) external benefits may be increased (1) external costs / Generic example mark external benefits are not taken into account by the private sector (1) Tax revenue may decrease … 1 • public goods may not be produced (1) no profit incentive to make them (1) as there can be free ... because of reason e.g. incomes may be lower. 1 riders (1) • inequality (1) poor consumers may lose out / there Tax revenue may increase because incomes may be 0 may be poverty (1) resources may not be devoted higher i.e. reverse of a previous argument. to producing what the poor need (1) may not be able to afford prices charged (1) Tax revenue may increase because of a different • government subsidies (1) can lower prices (1) reason i.e. not the reverse of a previous argument e.g. 1 • government could set maximum prices (1) lower government spending on subsidies may stimulate the prices of necessities (1) economy more than spending on education. • government could control (private sector) monopoly power (1) prevent abuse of market power (1) • government investment in education (1) could lower prices / raise quality of output (1). Award up to 4 marks for why they might not: • government failure may occur (1) e.g. government may lack information (1). • market forces can provide wide choice of products (1) may be consumer sovereignty (1) 1(g) • profit incentive (1) industries may respond to changes in consumer demand (1) • efficient industries (1) prices may be low (1) quality may be high (1) • government intervention in the form of nationalisation (1) may reduce competition (1). • government taxes / tariffs / regulation / minimum wages (1) may increase costs (1) raise prices (1) • maximum prices could reduce availability of products (1) • government limits on immigration (1) may reduce availability of products / raise prices (1) 1(h) Discuss whether or not the Haitian economy would 6 For an approach which discusses whether or not the Haitian benefit from fewer of its people working in Chile. economy benefits from its people working in Chile, award a maximum of 3 marks. Award up to 4 marks for why it might: • wages may be low in Chile (1) work involves unskilled labour (1) • employment may be rising in Haiti (1) the country could keep more of its skilled workers (1) • larger labour force / more workers (1) higher total demand (1) increase GDP / increase economic growth / increase productive potential (1) increase living standards (1) increase exports (1) • rise in the numbers employed in Haiti could increase tax revenue (1) may enable more spending on e.g. education (1) • fewer parents may leave behind dependent relatives (1) reduce burden on the government (1) • jobs could be found in other countries (1) Award up to 4 marks for why it might not: • wages may be higher in Chile (1) fewer emigrant workers may send money home (1) living standards may be lower (1) lower spending (1) • less money coming into the country (1) may increase a current account deficit (1) • job opportunities may be higher in Chile (1) unemployment may rise in Haiti (1) • if unemployment rises in Haiti, cost of unemployment benefits may rise (1) opportunity cost / higher taxation (1) • opportunities to gain new skills may be reduced (1) these skills could be brought back into the country (1) 1(h) • may reduce pressure to invest / spend on capital equipment (1) reduce advances in technology / reduce increases in efficiency / productivity (1) • may increase overcrowding / overpopulation (1) increase external costs / pollution (1) pressure on resources (1).

Mark scheme

2(a) Identify two basic necessities, other than housing. 2 Accept any relevant basic necessity e.g. heating or electricty. Two from e.g.: If more than two examples given, only consider the first three. Food, water, clothing, healthcare and education. 2(b) Explain how frictional unemployment differs from 4 Up to 2 marks for each type of unemployment. cyclical unemployment. Logical explanation which might include: Frictional unemployment arises from people being in between jobs (1) may be waiting for a better paid job / may be seasonally unemployed / may have worked on a short-term contract / may lack information about vacancies (1) may exist even when there is full employment / may be self-correcting (1). Cyclical unemployment is caused by a lack of total (aggregate) demand (1) more people unemployed than there are job vacancies (1) may arise from a recession / economic downturn (1) may need government action to reduce it (1). Frictional unemployment would be reduced by a rise in labour mobility (1) cyclical unemployment would not be (1). Frictional unemployment may be short term (1) cyclical unemployment may be long term (1). 2(c) Analyse why the children of the rich tend to 6 Note the focus here is on the children of the rich so no marks for become rich adults. e.g. the children of the poor may lack education. Coherent analysis which might include: Reference to highly skilled / productive or efficient may be linked The children of the rich tend to receive a good to education, healthcare or nutrition but can only be credited education (1) may not have to take part-time jobs / not once. have to help in family business when studying / not have to leave school early (1) become well qualified / well educated / gain high level of knowledge (1) become highly skilled / productive / efficient (1) find it is relatively easy to find employment / get a good job (1) well-paid (1). The children of the rich tend to receive good health care (1) good nutrition (1) have good housing (1) unlikely to miss time at school (1) unlikely to miss time at work (1) income will be high (1). The children of the rich tend to have high expectations (1) apply for better jobs (1). The children of the rich may inherit e.g. property (1) may gain income from e.g. inherited property / business / savings (1). Rich parents may have connections with e.g. bosses of major employers (1) more likely to gain high paid work (1). 2(d) Discuss whether a government should provide 8 Level Description Marks subsidies to families to spend on housing. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it might: information and clear and logical analysis to • will increase the spending power of families who evaluate economic issues and situations. One receive it side of the argument may have more depth • may increase quantity supplied than the other, but overall both sided of the • may give low-income families access to a basic argument are considered and developed. necessity, reducing poverty There is thoughtful evaluation of economic • may enable families to spend more on e.g. concepts, terminology, information and/or data education appropriate to the question. The discussion • may increase employment / reduce may also point out the possible uncertainties unemployment, creating jobs building housing / of alternative decisions and outcomes. increase labour mobility • may increase quality of housing and so improve 2 A reasoned discussion which makes use of 3–5 health economic information and clear analysis to evaluate economic issues and situations. The Why it might not: answer may lack some depth and • rich can already afford housing development may be one-sided. There is • some families may not spend it on housing relevant use of economic concepts, • may be inflationary, demand increasing for terminology, information and data appropriate housing and e.g. furniture, carpets to the question. • opportunity cost • taxes may be raised to finance subsidy 1 There is a simple attempt at u sing economic 1–2 • building more houses may result in environmental definitions and terminology. Some reference damage may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Mark scheme

3(a) Define enterprise. 2 Risk bearing (1) setting up / owning a business (1) key decision making / organisation of the other factors of production (1) profit incentive / profit is the reward (1). 3(b) Explain the influence of opportunity cost on 4 consumers’ decisions. Logical explanation which might include: Opportunity cost is the (next) best alternative (1) forgone / sacrificed (1). Consumers have limited income / time (1) have to make choices (1) cannot have everything they want (1) if buy more of one product may have to buy less of another / example of what product may be given up to buy another product (1). 3(c) Analyse why a firm may become more capital- 6 intensive. Coherent analysis which might include: The cost of capital may fall / the price of labour may rise (1) lowering costs of production (1) making the firm more price-competitive (1) may increase profits (1). Advances in technology (1) may improve the quality of capital (1) making it more productive / efficient (1) may increase the quality of products produced (1) raise demand for the products produced (1). Firms may want to reduce human error / more consistent quality / uniform products (1) reduce wastage (1). Firms may want to avoid disruption to production (1) caused by industrial action / strikes / sickness (1) capital equipment does not need to take breaks / can work 24 hours a day (1). There may be a shortage of labour (1) making it difficult to recruit workers (1). A government may reduce taxes on capital goods (1) provide subsidies (1) the rate of interest may be reduced (1) making capital goods more affordable (1). The firm’s output may rise (1) reducing the average fixed cost of capital / benefiting from economies of scale (1). 3(d) Discuss whether inflation harms a country’s 8 Level Description Marks industries. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it might: information and clear and logical analysis to • may increase costs of production evaluate economic issues and situations. One • may reduce competitiveness, lowering sales at side of the argument may have more depth home and abroad than the other, but overall both sided of the • may upset industrial relations, workers pressing for argument are considered and developed. wage rises There is thoughtful evaluation of economic • may make it difficult to plan concepts, terminology, information and/or data • may discourage savings which can reduce funds appropriate to the question. The discussion available for investment may also point out the possible uncertainties • corporation tax may be moved into a higher tax of alternative decisions and outcomes. bracket • may be menu costs / shoe leather costs 2 A reasoned discussion which makes use of 3–5 economic information and clear analysis to Why it might not: evaluate economic issues and situations. The • may be demand-pull inflation with demand for the answer may lack some depth and firm’s products increasing development may be one-sided. There is • may be low and stable relevant use of economic concepts, • may enable a firm to reduce the real cost of any terminology, information and data appropriate debt to the question. • may enable the firm to cut the real cost of wages • may be lower than other countries’ inflation rates 1 There is a simple attempt at using economic 1–2 definitions and terminology. Some reference • may not be foreign substitutes may be made to economic theory, with • some industries may have inelastic demand occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Mark scheme

4(a) Define birth rate. 2 Not sufficient to have just number of births. The number of births per thousand of the population (1) in a year (1) live births (1) 4(b) Explain two causes of an increase in the quality of 4 One mark each for each of two causes identified and one mark labour in a country. each for each of two explanations. Logical explanation which might include: Improvements in education (1) qualifications / knowledge (1). Improvements in training (1) increasing skills (1). Improvements in healthcare (1) making workers physically/mentally stronger (1). Increases in pay (1) raising motivation (1). Improvements in nutrition (1) enabling workers to work harder / concentrate more (1). Reduction in working hours / length of working day (1) keeping workers fresher / enabling them to concentrate more (1). Improvements in working conditions (1) raising motivation / enabling workers to work harder / concentrate more (1) Immigration (1) of skilled workers (1). Experience (1) becoming more familiar with tasks (1). Specialisation (1) become more familiar with one task / ‘practice makes perfect’ (1). 4(c) Analyse how a rise in the interest rate could cause 6 a recession. Coherent analysis which might include: A higher interest rate would increase the cost of borrowing (1) reduce borrowing (1) reduce the spending power of people who have borrowed in the past (1) increase saving (1) consumer expenditure / spending may fall (1) investment may fall / may discourage MNCs (1) unemployment may increase / employment may fall (1) total demand may fall (1) the output of goods and services / GDP may fall (1) if output falls over a period of two quarters / six months there will be a recession (1). A higher interest rate may encourage more people to buy the currency (1) to put money into the country’s financial institutions (1) raising the value of the foreign exchange rate (1) raising the price of exports (1) lowering demand for exports (1) reducing the price of imports (1) increasing demand for imports (1). 4(d) Discuss whether or not MNCs improve the 8 Help avoid a recession = one relevant identification. economic performance of the host countries in which they operate. Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic Why they might: argument, making use of economic • may bring in new technology and methods of information and clear and logical analysis to production, increasing economic growth evaluate economic issues and situations. One • may create new jobs, may reduce unemployment side of the argument may have more depth • may add to exports, reducing a current account than the other, but overall both sides of the deficit / increasing a current account surplus argument are considered and developed. • may create more competition / have greater There is thoughtful evaluation of economic efficiency, lowering inflation concepts, terminology, information and/or data • may increase tax revenue, enabling the appropriate to the question. The discussion government to spend more on e.g. education and may also point out the possible uncertainties healthcare of alternative decisions and outcomes. Why they might not: 2 A reasoned discussion which makes use of 3–5 • may drive out domestic producers, leaving the economic information and clear analysis to country’s output unchanged evaluate economic issues and situations. The • may employ workers from their home country answer may lack some depth and • may import capital equipment and raw materials development may be one-sided. There is from their home countries relevant use of economic concepts, • may deplete non-renewable resources, reducing terminology, information and data appropriate sustainable economic growth to the question. • may provide only low-skilled, low-paid jobs to locals 1 There is a simple attempt at using economic 1–2 • send profits back to home country definitions and terminology. Some reference • may cause external costs e.g. pollution may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Mark scheme

5(a) Identify two functions of money. 2 Note: a description of the function gets the mark e.g. money can be used to buy and sell products, may be used to trade. Two from: Medium of exchange, store of value, standard of Nothing for characteristics of money, deferred payments, unit of account / measure of value. 5(b) Explain two reasons why commercial banks may 4 One mark each for each of two reasons identified and one mark want to merge. each for each of two explanations. Logical explanation which might include: Nothing for increase revenue. Greater market power/share (1) eliminating a competitor / providing a greater range of services (1). More opportunity to take advantage of economies of scale (1) lower costs of production / higher profit / example e.g. share ATMs (1). May enable the merged bank to operate in more than one country / become a multinational company (1) access to new market (1). Become better known (1) large banks may be more likely to have a brand image (1). May enable rationalisation (1) eliminate duplication / rase efficiency (1). Survival (1) may have been loss making / at risk of going out of business (1). 5(c) Analyse how a fall in a country’s foreign exchange 6 rate could increase employment. Coherent analysis which might include: A fall in a country’s foreign exchange rate will lower the price of exports (1) raise the price of imports (1) make domestically produced products more price competitive (1) reduce demand for imports (1) increase demand for exports (1) increase total demand (1) raise firms’ revenue and/or profits (1) encourage firms to increase output (1) take on more workers (1). 5(d) Discuss whether or not it is an advantage to keep a 8 Accept an answer based on the advantages that large firms have firm small. over small firms. In assessing each answer, use the table opposite. Level Description Marks Why it might: 3 A reasoned discussion which accurately 6–8 • flexible, less people to consult, more in touch with examines both sides of the economic consumers argument, making use of economic • may be able to provide more personal attention information and clear and logical analysis to • may receive government subsidies evaluate economic issues and situations. One • may be able to concentrate on a niche market side of the argument may have more depth • may have good labour relations than the other, but overall both sides of the • may avoid diseconomies of scale argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data Why it might not: appropriate to the question. The discussion • may not be able to take advantage of economies may also point out the possible uncertainties of scale of alternative decisions and outcomes. • may be driven out of business by larger competitors 2 A reasoned discussion which makes use of 3–5 • may be difficult to raise finance economic information and clear analysis to • risk of being taken over by a larger firm evaluate economic issues and situations. The • may have difficulty recruiting highly skilled workers answer may lack some depth and • may not have the resources to survive a fall in development may be one-sided. There is demand relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using economic 1–2 definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.