Economics 0455/21 October/November 2020: question paper and mark scheme

Mark scheme

1(a) Calculate Turkey’s total output. 1 $320 billion 1(b) Identify two factors that affect borrowing in an 2 economy. • interest rates • confidence levels • wages / incomes 1(c) Explain the relationship between the growth of 3 Istanbul’s service sector and its growth in total output. Logical explanation which might include: Higher growth in service sector leads to higher total economic growth (1). This is expected as countries become more developed, the share of services increases (1) and the share of primary sector decreases (1). For example, in 2011, the service industry grew most rapidly at 28.16% and the total economic growth was 21.9% (1). However, although growth of service sector was lowest in 2010 at 11.9%, total growth was 14.38% (1), higher than in 2014 where growth of service sector was higher (1). 1(d) Explain two reasons for Istanbul’s increased 4 One mark for each of two reasons identified and one mark for population. each of two explanations. Logical explanation which might include: People moving from rural areas to the city centre (1) e.g. for higher wages / more employment opportunities / better housing / low cost of living / good transport links (1). Improved healthcare (1) longer life expectancy / lower infant mortality / higher quality of life (1). 1(e) Analyse how good transport links have contributed to 4 Istanbul’s economic growth. Coherent analysis which might include: Good roads could lead to reduction in commute time (1) good roads / air transport leads to faster transport of goods and services (1). Workers can move easily / higher labour mobility (1) reduce unemployment (1). More competition in the labour market (1) more competition in the product market (1) could lead to fall in cost of production (1) increase in productivity (1). Easy to conduct business internationally due to good air transport links (1) access to huge international market (1) e.g. 1.5 billion people within a flight time of 4 hours (1) may have attracted MNCs (1). Contributed to the growth of the transport industry (1) allowing transport firms to take greater advantage of economies of scale (1). 1(f) Draw a demand and supply diagram to show the 4 effects on flights to Turkey of greater worries about safety for tourists. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or p and q (1) Original demand and supply curves correctly labelled (1) Demand curve shifts to the left (1) Equilibriums – shown by lines P1 and Q1 and P2 and Q2, or by labelling equilibrium points as E1 and E2 (1). O 1(g) Discuss whether or not Istanbul benefits from 6 Apply this example to all questions with the command investment by MNCs. word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Up to 4 marks for why it may be beneficial: Each point may be credited only once, on either side of an Increased investment leads to increased total demand (1) argument, but separate development as to how/why the leads to economic growth (1). outcome may differ is rewarded. Increase demand for workers in Istanbul (1) decreasing unemployment rates (1) increasing incomes (1) and Generic example mark increasing standards of living (1). Bring new / better technology (1) increase productive 1 capacity / productivity (1) Tax revenue may decrease … Increase variety of products on sale (1) produce new products (1) ... because of reason 1 Increase tax revenue (1) allowing local government to e.g. incomes may be lower. spend more on e.g. roads (1). Tax revenue may increase because incomes may 0 Up to 4 marks for why it may not be beneficial: be higher i.e. reverse of a previous argument. Replace domestically owned firms in Istanbul / decrease demand for domestic firms (1) MNCs may be more efficient Tax revenue may increase because of a different 1 than domestic firms (1) leading to failure of domestic firms / reason decrease demand for domestic firms (1) monopoly of i.e. not the reverse of a previous argument MNCs (1). e.g. government spending on subsidies may Profits leave the country (1) not reinvested stimulate the economy more than spending on domestically (1). education. MNCs may exploit workers (1) such as low wages (1) poor working conditions (1). MNCs may exploit environment (1) e.g. pollution (1). 1(h) Discuss whether or not competition is beneficial for 6 airlines. Up to 4 marks why it is beneficial: Competition will lead to airline being forced to be more efficient (1) productivity increase (1) use latest technology (1) reduce wasteful spending (1) quality increases (1) cost of production goes down (1) prices become more affordable (1) increase in quantity demanded (1) total revenue and profit increases (1). Up to 4 marks why it is not beneficial: Too much competition means less market share for each airline (1) less quantity demanded (1) airlines may have to advertise more (1) increase cost of production (1) total revenue and profit decreases (1) airlines who can’t compete may go bankrupt / leave the market (1). Too much competition may result in the airline being small (1) cannot take advantage of economies of scale (1). An airline may not benefit from becoming more competitive (1) because of brand loyalty (1) lower demand for air travel (1).

Mark scheme

2(a) State two components of the current account. 2 Any two components. Accept exports and imports for 1 mark. Any two from: • trade in goods • trade in services • primary income • secondary income 2(b) Explain why inflation may fall even if there is an 4 increase in total demand. Logical explanation which might include: There may have been an increase in total supply (1) which may be greater than the increase in total demand (1). There could be an improvement in productivity (1) better technology / capital (1). Costs of production could have gone down (1) e.g. lower taxes / lower costs of raw material, stronger exchange rates (1). 2(c) Analyse how a country’s current account deficit might 6 be reduced if its firms become internationally competitive. Coherent analysis which might include: Being internationally competitive e.g. high productivity, low inflation, low exchange rates (max 2) increases production (1) reduces cost of production (1) decreases price of exports (1) increases quality of exports (1) increases demand for exports (1) increases value of exports / net exports (1). Imports relatively more expensive / other countries products more expensive (1) lower relative quality of imports (1) decreases imports (1). 2(d) Discuss whether or not lower taxes on firms will be 8 Level Descriptors Mark beneficial for an economy. 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 be beneficial: information and clear and logical analysis • will increase after tax profits to evaluate economic issues and situations. • increase ability and incentive to invest One side of the argument may have more • firms may expand output leading to higher employment depth than the other, but overall, both sides and economic growth of the argument are considered and • higher investment may increase innovation and developed. There is thoughtful evaluation productivity which may improve the current account of economic concepts, terminology, • will reduce cost of production. This may reduce information and/or data appropriate to the inflation question. The discussion may also point out the possible uncertainties of alternative Why it might not be beneficial: decisions and outcomes. • firms might not invest more and just keep the profits to themselves 2 A reasoned discussion which makes use of 3–5 • government will get less revenue from firms, reducing economic information and clear analysis to ability to spend to improve the economy evaluate economic issues and situations. • may attract MNCs which may replace domestic firms The answer may lack some depth and • capital goods may replace labour, causing development or may be one-sided. There is unemployment relevant use of economic concepts, • higher output may result in external costs e.g. terminology, information and data pollution. 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 for no 0 creditable content. 2(d) Example of L3 answer: Lower taxes on firms will be beneficial for an economy, as this will reduce the production costs for firms and increase their profits. With greater profits, firms may invest in labour, which will decrease unemployment, and allow the firm to increase its output. With greater output, a firm’s exports may increase, and this will improve the current account position. Furthermore, lower taxes may allow for lower prices as the reduced production costs may be passed on to consumers. Also, lower taxes may allow a firm to increase its wages which not only increase average incomes, but also increase productivity and so economic output. On the other hand, low taxes may not be beneficial, as firms may use their increased income for expansion, but may also increase external costs such as pollution when they do this. Furthermore, lower taxes may allow firms to become monopolies, which will hurt competition and the potential for new firms. Moreover, with increased income, firms may choose to become capital-intensive rather than labour-intensive, which would increase unemployment. Principal Examiner comment: Strong on one side and reasonable on the other side.

Mark scheme

3(a) State two sectors, other than the primary sector, in an 2 Reward but do not expect the quaternary sector. economy. Secondary sector (1) Tertiary sector (1) 3(b) Explain two possible reasons for a fall in the price of a 4 product such as natural rubber. Logical explanation which might include: Decrease in demand for natural rubber (1) emergence of substitutes (1) decrease in future expected price or any other relevant examples (1). Increase in supply of natural rubber (1) due to increase in number of producers / good yield / relevant example (1). 3(c) Analyse the influences on spending. 6 Coherent analysis which might include: Income (1) higher income increases the ability to spend / increases purchasing power (1). The rate of interest (1) a change in the rate of interest influences the proportion of income that is spent and saved (1) and affects borrowing (1). Confidence (1) people spend more when they are optimistic (1) about future income / job security (1). Wealth (1) people can spend some of their wealth (1) e.g. sell shares (1) use it as collateral to borrow (1). Inflation (1) spending may fall if prices rise more than money wages (1) spending may rise as people seek to buy products before they increase in price even further (1). Expansionary fiscal / monetary policy may increase spending (1). 3(d) Discuss whether or not the growth of the primary 8 Level Descriptors Mark sector is beneficial to a country. 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 is beneficial: information and clear and logical analysis • can increase total output of the economy, increasing to evaluate economic issues and situations. economic growth One side of the argument may have more • can provide employment opportunities that are depth than the other, but overall both sides accessible to all / requires low skill / requires low of the argument are considered and technology developed. There is thoughtful evaluation • could increase standards of living in rural areas of economic concepts, terminology, • provide raw materials for secondary sector information and/or data appropriate to the • could ensure that country has food security, reduce question. The discussion may also point imports of necessities, if prices of primary sector out the possible uncertainties of alternative products are high e.g. high oil price which this could decisions and outcomes. bring huge export revenue to the country. This could reduce current account deficit. 2 A reasoned discussion which makes use of 3–5 economic information and clear analysis to Why it is not beneficial: evaluate economic issues and situations. • productivity may be low in the primary sector, very low The answer may lack some depth and value added development or may be one-sided. There is • may be low wages and poor working conditions relevant use of economic concepts, • overdependence on primary sector may restrict growth terminology, information and data of secondary and tertiary sectors appropriate to the question. • some primary industries may be disrupted by weather conditions and natural disasters 1 There is a simple attempt at using 1–2 • supply and demand are inelastic so there may be economic definitions and terminology. considerable price fluctuations Some reference may be made to economic • natural resources e.g. copper may be depleted. theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content. 3(d) Example of an L1 answer: Growth of the primary sector may benefit an economy because it uses renewable and non-renewable resources. It provides the raw materials needed by other sectors. Consumers’ demands cannot be fulfilled without the primary sector as it is needed to produce all goods and services. It may not be as beneficial as other sectors as wages are lower and natural resources may eventually become depleted. Principal Examiner comment: A few relevant identifications.

Mark scheme

4(a) Define tariffs. 2 Tariffs are a tax (1) on imports/exports (1) which increase the price of imported/exported goods (1). 4(b) Explain two non-tariff methods of protection. 4 Also accept other non-tariff barriers such as rules and regulations, exchange controls, etc. Logical explanation which might include: Quotas (1) quantitative restriction on the amount of imports One mark for each of two reasons identified and one mark for that can enter a country (1). each of two explanations. Subsidies (1) grants given to domestic firms to reduce domestic cost of production and reduce demand for imported goods (1). Embargoes (1) total restriction on a certain product from a certain country (1). 4(c) Analyse, using a production possibility curve (PPC) 6 diagram, the beneficial effects for a country of the growth of its small and medium-sized firms. Up to 4 marks for the diagram: Axes correctly labelled (1). Initial curve drawn as a curve or downward sloping line to the axes (1). New curve drawn as a curve or downward sloping line to the axes (1). Shift to the right indicated by arrow or lettering (1). Up to 2 marks for coherent analysis which might include: The growth of its small and medium-sized firms will lead to Also accept a tilt outward of the new PPC curve. an increase in the number of firms in the economy (1) this will increase productive potential / increase productive capacity / cause economic growth (1). 4(d) Discuss whether or not increased international trade 8 can promote economic growth. Level Descriptors Mark 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 may: information and clear and logical analysis • increase size of the market for domestically produced to evaluate economic issues and situations. goods, increase exports, increase total demand One side of the argument may have more • firms can specialise and achieve economies of scale, depth than the other, but overall both sides decrease cost of production, increase demand for of the argument are considered and goods and services produced domestically developed. There is thoughtful evaluation • increase competitive pressure (1) making firms more of economic concepts, terminology, efficient (1) information and/or data appropriate to the • increase access to products not available domestically, question. The discussion may also point e.g. raw materials to produce other goods, increase out the possible uncertainties of alternative output of an economy (1). decisions and outcomes. Why it may not: 2 A reasoned discussion which makes use of 3–5 • Increase amount of imports, decrease total demand of economic information and clear analysis to the economy evaluate economic issues and situations. • domestic firms may not be able to compete causing The answer may lack some depth and less revenue, less profits, more unemployment, development or may be one-sided. There is • may result in shortages of e.g. rice in the domestic relevant use of economic concepts, market terminology, information and data • make the economy more subject to sudden changes in appropriate to the question. demand and supply. 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 for no 0 creditable content. 4(d) Example of L2 answer: Increased international trade may not benefit a country because the country may be in a trade deficit as the cost of a country’s imports exceed the total value of its exports. Consumers may purchase more goods and services from abroad than from domestic firms which may reduce economic growth as they make less profit. The value of the currency may fall eventually because more goods and services are being imported instead of exported. Principal Examiner comment: Limited on one side.

Mark scheme

5(a) State the rewards for labour and capital. 2 Wages (1) for labour Interest (1) for capital 5(b) Explain the two types of poverty. 4 One mark for identifying absolute poverty and one mark for an explanation. Logical explanation which might include: One mark for identifying relative poverty and one mark for an Absolute poverty (1) is when someone cannot afford the explanation. basic necessities of life (1) less than $1.90 per day at PPP (1). Relative poverty (1) is when someone earns less than is needed to participate in the normal activities of society (1) when there is inequality (1). 5(c) Analyse how firms can benefit from specialisation. 6 Coherent analysis which might include: Improve skills of workers (1) save time (1) lead to invention of new technology (1) increase productivity (1) raise quality (1) decrease average cost of production (1) decrease prices (1) increase demand (1) enable advantage to be taken of economies of scale (1) increase profits (1). 5(d) Discuss whether or not supply-side policy measures 8 can reduce unemployment. Level Descriptors Mark In assessing each answer, use the table opposite. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic Why they can: argument, making use of economic • decrease corporation / profit tax, more profits, more information and clear and logical analysis investments, more demand for labour, reduction in to evaluate economic issues and situations. cyclical unemployment One side of the argument may have more • decrease interest rates, more borrowing, more depth than the other, but overall both sides investment, more demand for labour, reduction in of the argument are considered and cyclical unemployment developed. There is thoughtful evaluation • decrease income tax, increase disposable income, of economic concepts, terminology, more spending / demand for goods and services, more information and/or data appropriate to the production, increase demand for labour question. The discussion may also point • government subsidies can encourage firms to expand out the possible uncertainties of alternative and take on more workers, reduce cyclical decisions and outcomes. unemployment • increase spending on education and training, increase 2 A reasoned discussion which makes use of 3–5 skills / productivity of labour, increase demand for economic information and clear analysis to labour, decrease structural unemployment. evaluate economic issues and situations. • provide more information on jobs / job centres, easier The answer may lack some depth and for workers to find jobs, decrease frictional development or may be one-sided. There is unemployment relevant use of economic concepts, • reduce unemployment benefit to reduce the time terminology, information and data workers are between jobs, decrease frictional appropriate to the question. unemployment. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Why they cannot: Some reference may be made to economic • may be a time lag theory, with occasional understanding. • more investments could lead to increased technological development, less demand for workers 0 A mark of zero should be awarded for no 0 • education programmes not according to market needs creditable content. 5(d) • privatisation could lead to firms cutting amount of workers • decrease in minimum wage could decrease incentive to work • may be a lack of total demand. Example of L2 answer: Supply-side measures such as training and education can help to reduce unemployment as they allow people to become more skilled and therefore increase their opportunities to become hired. Also, when a firm is subsidised by the government, it may have more money to invest in labour, and this would reduce unemployment. Privatisation can also cause a reduction in unemployment, as the private sector may be willing to invest more capital to labour to increase its output and this would reduce unemployment. On the other hand, supply-side measures may not reduce unemployment, because subsidies given to firms may increase its capital, but this may be used to become more capital-intensive rather than labour-intensive, which would not reduce unemployment. Also, if people are trained and educated, but gain skills that are not demanded, they may remain unemployed and therefore unemployment would not decrease. Privatisation may lead to firms becoming more capital-intensive rather than labour-intensive, and this would not reduce unemployment. Principal Examiner comment: Reasonable on both sides.