Economics 0455/22 May/June 2022: question paper and mark scheme

Mark scheme

1(a) Calculate Bhutan’s GDP in 2018. 1 Accept the figure without the $ sign. $2.6 bn / $2600 m / $2 600 000 000 / 2.6 × 10⁹ (1). 1(b) Identify two indicators that are in both the World 2 If more than two indicators are given, consider the first Happiness Index and the Human Development Index. three. Life expectancy (1) GDP per head (1). 1(c) State why Bhutan’s 2018 government budget is likely to 2 have increased total demand in Bhutan. Government spending was greater than government revenue (1) there was a budget deficit (1) of $70 m (1) the government may have used expansionary fiscal policy (1). 1(d) Explain two reasons why someone may prefer to work in 4 One mark for each of two reasons identified and one the tertiary sector rather than in the primary sector. mark for each explanation. Note there is a degree of ‘mix and match’ here. For Logical explanation which might include: example, working hours or manual work can be taken Better working conditions / non-wage factors (1) e.g. working as a development of working conditions. inside / not having to work in wet weather / less stress / more Accept an answer that explains the disadvantages of job satisfaction / fringe benefits (1). working in the primary sector e.g. may prefer to work in Shorter working hours (1) permitting more leisure time (1). the tertiary sector as working hours are longer in the Type of work / less physically demanding / not manual work primary sector. (1) less risk to health / less tiring / less dangerous / fewer accidents / may lack physical strength (1). Better paid (1) enabling more goods and services to be purchased / higher standard of living / as may require more qualifications / skills/training / value added may greater in the tertiary sector / tertiary sector may be expanding / primary sector contracting / may be higher demand for tertiary workers (1). 1(e) Analyse how investment in capital goods and education 4 Up to 3 marks for analysis on investment in capital can increase New Zealand’s productivity. goods and up to 3 marks for investment in education. Note only credit increase efficiency once. Coherent analysis which might include: Higher investment in capital goods will enable workers to work with better equipment (1) more output per worker / worker hour (1). New capital goods may incorporate advances in technology / be of higher quality (1) result in innovation (1) can work for long hours (1). Higher investment in education can enable more children to be educated / children to be educated for longer / improve quality of education / increase knowledge (1) increase workers’ skills / qualifications (1) enable workers to use more advanced technology (1). Investment in capital goods and/or education can enable capital goods/ workers to work at a faster rate (1) be more efficient (1) make fewer mistakes / less wastage (1). 1(f) Analyse the relationship between GDP per head and net 5 There may be an implied comparison e.g. generally migration. countries with a high GDP per head have net immigration. New Zealand has a GDP per head of Coherent analysis which might include: approx. $55 000 and net immigration of about 40,00 Overview whereas Kenya has a GDP per head of $2,000 and net Generally, the countries with higher GDP per head have net emigration of about 50 000 (1 mark). immigration / net migration / the countries with lower GDP per head tend to have net emigration / positive/direct relationship For explanation of exception, do not accept that Kenya (1). has ‘lower net migration’ / Mozambique has ‘higher net Supporting evidence migration’ – a misinterpretation of the figure. Up to 2 marks for two pieces of supporting evidence e.g. New Zealand has the highest GDP per head and the highest net immigration / net migration / highest positive migration (1) Cyprus has the second highest GDP per head and the second highest net immigration / net migration / positive migration (1) the four countries with the highest GDP per head, all have net immigration / positive net migration (1) the two countries with lowest GDP per head both have net emigration / negative net migration (1) Exception Exception is Kenya or Mozambique (1) Kenya has higher GDP per head but higher net emigration than Mozambique (1). Comments Higher GDP per head may encourage people to move to the country to increase their living standards / income / people who migrate into the country may be high skilled / lower GDP per head may encourage people to emigrate to increase their living standards/income (1) other influences e.g. immigration controls / size of population / wars / political instability (1). 1(g) Discuss whether or not enterprise is likely to have 6 Apply this example to all questions with the increased in New Zealand after 2019. command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, which may include: Each point may be credited only once, on either side of High labour productivity / high-skilled workers (1) may keep an argument, but separate development as to how/why costs down (1) and increase profits (1) which will motivate the outcome may differ is rewarded. more people to be entrepreneurs (1). Higher investment / better quality capital goods (1) may Generic example Mark increase the number of firms / result in expansion of firms (1) and the opportunities to become entrepreneurs (1). Tax revenue may decrease… 1 Investment in education / better quality education (1) may increase the people with the skills to become entrepreneurs / ...because of reason e.g., incomes may be 1 increase risk taking ability (1). lower. Higher government spending on mental health / child poverty / pollution (1) may increase workers’ skills / increase workers’ Tax revenue may increase because incomes 0 health / increase workers’ productivity (1) higher government may be higher i.e., reverse of a previous subsidies (1) reduce firms’ costs of production (1) higher argument. government spending may increase total demand (1). Higher economic growth (1) may have created more Tax revenue may increase because of a 1 opportunities / greater confidence / higher total demand (1). different reason i.e., not the reverse of a Net immigration may have continued (1) and some previous argument e.g. government immigrants may have been entrepreneurs / may set up new spending on subsidies may stimulate the firms (1) more people in the country may raise total demand economy more than spending on education. (1). Cut in income tax rates (1) could increase demand (1) firms’ revenue / profits (1) create greater profit incentive (1). 1(g) Award up to 4 marks for logical reasons why it might not, Accept tax revenue may have increased for tax may which may include: have increased for why it might not Reward recognition Uncertainty / lack of confidence (1) reason e.g. there may that tax revenue may rise without a rise in tax rates or have been a recession / negative economic growth / unclear with a fall in tax rates. what may happen to GDP (1) which could have resulted in the reward to enterprise declining (1) may think there is a greater risk of running / setting up a firm (1). Corporation tax may have increased / tax may have increased (1) which would reduce retained profits / amount of profit that can be kept (1). Government attempts to reduce pollution / poverty / improve mental health (1) may increase firms’ costs of production and reduce profits (1) may have an opportunity cost (1) less spending on something that could increase enterprise (1) e.g. reduction is spending on education (1). 1(h) Discuss whether or not a cut in income tax rates will 6 Rise in income is not sufficient – need idea of increase living standards. disposable income. Award up to 4 marks for logical reasons why it might, which may include: Will increase disposable income (1) increase ability to buy goods and services / increase purchasing power (1) buy basic necessities / reduce absolute poverty (1) may be able to fulfil more wants / buy more luxuries (1). May increase spending (1) increase total demand (1) reduce unemployment / increase employment (1) increase output / increase economic growth (1). May increase saving (1) and so provide a safety net (1). May encourage investment (1) which may lower costs of production (1) reduce prices (1). May be able to buy more merit goods / better quality education/healthcare (1) increase health / life expectancy (1). May increase the incentive to work (1) may earn more in work than on unemployment benefits (1). May enable people to work fewer hours (1) enjoy more leisure time (1). 1(h) Award up to 4 marks for logical reasons why it might not, which may include: Tax revenue may fall (1) may result in a cut in government spending (1) on e.g. education / health care / mental healthcare / child poverty / pollution / unemployment benefit (1) poor may be most reliant on public services (1). It may increase congestion as people buy more cars (1) may lead to pollution (1). It may increase depletion of non-renewable resources as consumption increases (1). It may benefit mostly the rich / poor may not benefit / will not benefit the unemployed (1) and so not everyone may enjoy higher living standards (1). People may spend on demerit goods (1) higher spending which could reduce health / life expectancy (1). Higher spending / demand may increase prices / cause inflation (1) leave purchasing power unchanged / reduce purchasing power (1).

Mark scheme

2(a) Identify two forms of money. 2 Do not accept credit cards, debit cards or cheques. Two from: coins (1) bank notes / paper money (1) bank If more than two forms are given, consider the first deposits / accounts (1) digital money (1). three. Accept cash instead of coins and/or bank notes/paper money for 1 mark. Also accept commodity money, fiat money/legal tender and fiduciary money. Reward but do not expect identification of reserves at the central bank. Also accept examples of items that have been used as money e.g., salt, gold. Accept a currency as alternative to either coins or paper money. 2(b) Explain two functions a central bank performs for its 4 One mark for each of two functions identified and one government. mark for each explanation. Logical explanation which might include: The central bank acts as a banker for the government (1) it accepts tax payments to the government / provides facilities for the government to make payments / manages the national debt / lends to the government (1). It operates the government’s monetary policy (1) e.g. changing interest rates / to influence inflation (1). It holds reserves of foreign currency (1) to influence the foreign exchange rate (1). It manages the government’s debt (1) issuing government securities / paying interest on government securities (1). It issues bank notes (1) influencing the money supply (1). It may regulate commercial banks / banking system (1) to ensure they act responsibly (1). It acts as a lender of last resort (1) lending to commercial banks / to prevent banks going out of business / a financial collapse (1). 2(c) Analyse why a government may have lower 6 Accept an answer from the viewpoint of why unemployment as its main aim. unemployment may be harmful e.g., a government may want lower unemployment as unemployment reduces Coherent analysis which might include: economic growth. Unemployment may be at a high level (1) unemployment is an inefficient use of resources / waste of resources (1) not working at full capacity (1). Lower unemployment would increase output / economic growth (1) raise incomes / GDP per head (1) increase living standards (1) reduce poverty / more able to buy basic necessities (1) may reduce the crime rate (1) may increase exports (1). Lower unemployment will increase total demand / increase consumer spending / increase spending (1) increase tax revenue (1) lower government spending on unemployment benefits (1) increase the government’s ability to spend on (e.g. education) / reduce budget deficit / government spending on unemployment benefits involves an opportunity cost (1). Lower unemployment may reduce the chances of workers losing skills (1) being in work keeps workers up to date with e.g. advances in technology (1). 2(d) Discuss whether or not inflation will harm producers. 8 Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which 6−8 accurately examines both sides of Why it might: the economic argument, making may increase costs of production – cost-push inflation – use of economic information and reducing profit clear and logical analysis to may reduce international competitiveness evaluate economic issues and may cause menu costs situations. One side of the may cause shoe leather costs argument may have more depth may make it difficult to plan ahead. than the other, but overall, both sides of the argument are Why it might not: considered and developed. There may be demand-pull inflation, increasing firms’ revenue is thoughtful evaluation of may be low and stable economic concepts, terminology, may be lower than other countries’ inflation rates, information and/or data increasing price competitiveness appropriate to the question. The may enable them to reduce real wages discussion may also point out the may increase tax revenue, some of which may be spent possible uncertainties of on e.g. subsidies alternative decisions and cost of debt may fall / may be cheaper to borrow (in real outcomes. terms) some producers may be making products with inelastic demand. 2(d) 2 A reasoned discussion 3−5 which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at 1−2 using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be 0 awarded for no creditable content.

Mark scheme

3(a) Define a production possibility curve. 2 Nothing for a diagram, A diagram showing maximum output / possible combinations (1) of two types of products / of capital and consumer goods (1) with given resources / given technology / in a given time period (1) shows opportunity cost (1). 3(b) Explain why demand for soap is more price-inelastic than 4 demand for a luxury brand of perfume. Logical explanation which might include: Soap is more essential / necessary than a luxury brand of perfume (2) OR soap is a necessity (1) luxury brand of perfume does not have to be purchased / not essential / a want (1). Soap has fewer substitutes than a luxury brand of perfume (2) OR soap does not have close substitutes (1) whereas a luxury brand of perfume may have close substitutes (1). Soap is likely to take up a smaller proportion of income than a luxury brand of soap (2) OR soap is likely to take only a small proportion of income (1) whereas a luxury brand of perfume is likely to take up a large proportion (1). It is harder to delay the purchase of soap than the purchase of a luxury brand of perfume OR the purchase of soap cannot be delayed (1) while the purchase of a luxury brand of perfume can be (1). 3(c) Analyse, using a demand and supply diagram, how an 6 increase in income will affect the market for a luxury brand of perfume. Coherent analysis which might include: Up to 4 marks for the diagram: D and S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New demand curve shifted to the right (1). Written analysis Equilibriums – shown by lines or equilibrium points (1). An increase in income will cause an increase in demand for luxury perfume is not sufficient for a mark. Up to 2 marks for written analysis which might include: Reward but do not expect reference to a luxury brand of Luxury perfume will be more affordable / greater purchasing perfume being a normal good. power / luxury perfume will take a smaller proportion of income / more will be demanded at the same price (1) price will rise / quantity traded will increase (1). 3(d) Discuss whether or not the public sector should be 8 Level Description Marks responsible for the supply of all internet services. 3 A reasoned discussion which 6−8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, Why it might: making use of economic government may charge a low price information and clear and logical enable poor to gain access to the internet, help children analysis to evaluate economic with education issues and situations. One side government may base decisions on social costs and of the argument may have more benefits depth than the other, but overall, government can control what is on the internet both sides of the argument are may be more able to take advantage of economies of considered and developed. scale There is thoughtful evaluation of avoidance of wasteful duplication economic concepts, terminology, government may take a longer-term view on investing. information and/or data appropriate to the question. The Why it might not: discussion may also point out the opportunity cost – could have spent the money on e.g. possible uncertainties of healthcare alternative decisions and private sector may invest more outcomes. private sector may be more efficient / have lower costs of production profit incentive may encourage private sector to raise quality private sector may make decisions quicker. 3(d) 2 A reasoned discussion which 3−5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at 1−2 using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be 0 awarded for no creditable content.

Mark scheme

4(a) Define dumping. 2 Accept the sale of a product at a low price. The sale of a product at less than cost price (1) in a foreign country (1) to gain a larger market share (1) to get rid of surplus stock / to prevent price falling on the domestic market (1). 4(b) Explain two reasons why a country’s foreign exchange 4 One mark for each of two reasons identified and one rate may depreciate. mark for each explanation. A common response may be an increase in the supply Logical explanation which might include: of the currency (1) to buy more imports (1); A decrease Inflation / fall in productivity (1) may make domestic products in demand for the currency (1) if less exports are sold less internationally competitive / reducing net exports / (1). Total = 4. reducing exports / increasing imports (1). Income at home may rise (1) increasing demand for imports / diverting products from the home market (1). Incomes abroad may have fallen (1) reducing demand for exports (1). The rate of interest may have fallen (1) discouraging an inflow of funds from other countries / encouraging an outflow of funds to other countries (1). There may be speculation that the currency will fall in value (1) selling the currency before it falls in value (1) Inward foreign direct investment may fall / outward fdi may increase (1) due to changes in economic activity (1). A central bank/government may sell the currency (1) to increase exports / reduce imports / improve the balance of payments (1). Increase in supply of currency (could be shown by a diagram) (1). Decrease in demand for the currency (could be shown on a diagram) (1). 4(c) Analyse how a MNC could reduce poverty in a host 6 country. Coherent analysis which might include: A MNC could increase employment / create job opportunities (1) some of the unemployed could gain jobs / unemployment could fall (1). It may pay higher wages / incomes may rise (1) increasing workers’ ability to buy products / buy basic necessities (1). It may provide accommodation (1) and healthcare for workers (1). It may provide infrastructure (1) making e.g. transport/energy more affordable (1). It may provide training / invest in education (1) enabling people to earn higher wages in the long run (1). It may sell products at a cheaper price (1) enabling more goods and services to be purchased (1). It may pay taxes to the government / tax revenue may rise (1) enabling the government to spend on measures to reduce poverty (1). 4(d) Discuss whether or not a very low birth rate would be a 8 Level Description Marks cause for concern for a government. 3 A reasoned discussion which 6−8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making Why it might: use of economic information and may create an ageing population clear and logical analysis to may reduce size of the labour force in the future evaluate economic issues and may increase dependency ratio situations. One side of the may reduce tax revenue argument may have more depth may take population below the optimum level. than the other, but overall, both sides of the argument are Why it might not: considered and developed. There may maintain the size of the labour force in the short run is thoughtful evaluation of as parents do not have to leave the labour force economic concepts, terminology, may reduce overcrowding information and/or data may reduce pollution appropriate to the question. The may reduce depletion of non-renewable resources. discussion may also point out the possible uncertainties of alternative decisions and outcomes. 4(d) 2 A reasoned discussion which 3−5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1−2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

Mark scheme

5(a) Define supply. 2 Allow one mark in total for amount produced or amount Willingness to sell a product (1) and ability to sell a product sold. Need idea of selling / making available to (1). consumers for full two marks. Supply at a given price / in a given time period (1). 5(b) Explain two ways a government could increase the 4 One mark for each of two ways identified and one mark consumption of merit goods. for each explanation. Can accept lower price as a development of a subsidy Logical explanation which might include: for a mark and lower price as another mark if given as a Provide information/education (1) about the benefits of merit development of indirect taxes or maximum price. goods / consumers may be unaware of full benefits (1). Provide merit goods free / direct provision (1) e.g. education and healthcare / nationalise industries producing merit goods (1). Subsidise the production of merit goods (1) to lower prices (1). Subsidise the consumption of merit goods (1) by e.g. providing vouchers (1). Set a maximum price / price ceiling (1) to make merit goods more affordable / to lower price (1), Pass laws / introduce regulation (1) to make consumption of merit goods compulsory (1). Remove / cut indirect taxes on merit goods (1) to make them more affordable / to lower price (1). 5(c) Analyse how the level and pattern of household 6 Reward but do not expect: spending may change when GDP decreases. reference to inferior and normal goods. dissaving. Coherent analysis which might include: Nominal GDP may fall but real GDP may rise if Spending may decrease (1) as households may have less there is deflation income (1) less able to buy goods and services / lower purchasing power (1). Lower GDP may reduce confidence / create greater uncertainty (1) encouraging people to save more (1). May borrow less (1) may be concerned cannot repay (1). May expect prices to fall further (1) delay purchases (1). Spending may not decrease if households think the decrease is temporary (1) may borrow (1) as interest rates may be lower (1) may use past saving to finance spending (1). May spend a higher proportion on basic necessities (1) less on luxuries/wants (1). May spend a higher proportion of income (1) as saving may fall by more than spending (1). Households may spend less on imports (1) imports may be higher in price / lower in quality (1). GDP may decrease but GDP per head may rise (1) if population falls by more than GDP (1). 5(d) Discuss whether or not a firm will benefit from an 8 Level Description Marks increase in its output. In assessing each answer, use the table opposite. 3 A reasoned discussion which 6−8 accurately examines both sides of Why it might: the economic argument, making may increase average revenue, if higher output is result use of economic information and of higher demand clear and logical analysis to profits may rise if average revenue raises more than evaluate economic issues and average cost situations. One side of the may be able to make greater use of spare capacity argument may have more depth higher output may increase a firm’s market power than the other, but overall, both greater advantage may be taken of technical, marketing sides of the argument are managerial, labour and risk bearing economies of scale. considered and developed. There is thoughtful evaluation of Why it might not: economic concepts, terminology, average revenue may fall, higher output may reduce information and/or data price appropriate to the question. The not all of the higher output may be sold / may be a lack of discussion may also point out the demand possible uncertainties of diseconomies of scale may be experienced − managerial alternative decisions and / communication problems may occur / labour relations outcomes. may decline growth achieved by vertical merger may lead to problems of co-ordination. 5(d) 2 A reasoned discussion which 3−5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1−2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.