Economics 0455/22 October/November 2020: question paper and mark scheme

Mark scheme

1(a) Calculate the percentage of total world output of palm 1 Accept 60. oil produced by Indonesia in 2017. 60% (1). 1(b) Identify two variable costs of producing palm oil. 2 If more than two are given, consider the first two only. Accept ‘labour’, ‘workers’ or ‘wages’ for ‘casual labour’. • fertilisers • palm oil seeds • casual labour 1(c) Explain one opportunity cost of conserving forests in 2 Indonesia. Logical explanation which might include: Palm oil not produced / rice not produced / tourism lost as a result of building fewer hotels / lost opportunity to Norwegian government to spend on e.g. education (1) (next) best alternative forgone (1). 1(d) Explain two external costs of the destruction of forests 4 One mark for each of two costs identified and one mark for in Indonesia. each of two explanations. Logical explanation which might include: Loss of wildlife habitats (1) extinction of species / harmful effect on animals not involved in the economic decision (1). Harmful gases/air pollution/pollution (1) unpleasant atmosphere for local residents / illnesses / global warming (1). 1(e) Draw a demand and supply diagram to show the effect 4 of a ban on burning stubble on the market for rice. price S 2 S1 of rice Axes correctly labelled – price and quantity or p and q (1). Demand and supply curves correctly labelled (1). Supply curve shifted to the left (1). P2 Equilibriums – shown by lines P1 and Q1 and P2 and Q2, or P1 by labelling equilibrium points as E1 and E2 (1). D1 O Q2 Q1 quantity of rice For quantity label accept Q, quantity demanded, quantity supplied. Do not reward a completely macro diagram. 1(f) Analyse the relationship between countries’ GDP per 5 HDI now includes years of schooling but accept an idea that it head ranking and HDI ranking. includes education - adult literacy rate was included in the old measure. Coherent analysis which might include: Responses do not have to be in the format suggested but Expected relationship: they should address the expected/normal relationship, offer Generally, the higher the GDP per head ranking, the higher supporting evidence of that, highlight any exceptions to that, the HDI ranking / positive relationship / direct and analyse the overall data. relationship (1). Supporting evidence: The top country, the top two or top three countries with the highest GDP per head ranking have the highest HDI ranking (1) the country, two countries with the lowest GDP per head ranking have the lowest HDI ranking (1). Exception: Cuba or Indonesia (1) supportive data – Cuba has a lower GDP per head ranking than Indonesia but a higher HDI ranking than Indonesia (1). Analysis: It is the expected relationship (1). GDP is a component of HDI / HDI ranking influenced by additional factors – education and/or life expectancy / higher GDP per head enables more to be spent on education and healthcare (1). 1(g) Discuss whether or not the immigration of workers 6 For an answer that examines the effects of migration of would be likely to benefit the Indonesian economy. workers from Indonesia, a maximum of 2 marks. Up to 4 marks why it might: Apply this example to all questions with the command • may be skilled workers (1) who may be more word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)). productive (1) • may be motivated to work harder (1) to improve quality Each point may be credited only once, on either side of an of life (1) argument, but separate development as to how/why the • bring in new ideas (1) improving production methods / outcome may differ is rewarded. use advanced technology (1) • may pay taxes (1) enabling the government to spend Generic example mark more (1) • fill vacancies left by Indonesians going to work abroad Tax revenue may decrease … 1 (1) • increase size of labour force (1) increase productive ... because of reason 1 capacity (1) reduce dependency ratio (1) e.g. incomes may be lower. • may increase exports / total (aggregate) demand (1) may result in economic growth / increase output (1). Tax revenue may increase because incomes may 0 be higher i.e. reverse of a previous argument. Up to 4 marks why it might not: • population is already increasing (1) immigration may Tax revenue may increase because of a different 1 take it above the optimum level / lead to reason overpopulation / put pressure on resources (1) i.e. not the reverse of a previous argument • pressure may be put on housing / education / food (1) e.g. government spending on subsidies may • may put downward pressure on wages (1) may replace stimulate the economy more than spending on Indonesian workers / cause unemployment (1) education. lowering living standards (1) • may need training (1) increasing firms’ costs (1) • may increase pollution (1) • may send money home to relatives (1) may have to import more e.g. rice (1) negative impact on the current account of the balance of payments (1). 1(h) Discuss whether or not the Indonesian tourism 6 industry will increase in the future. Up to 4 marks for why it might: • it is currently price competitive (1) • if the exchange rate continues to fall (1), price of tourism for foreign visitors will fall (1) • it has natural tourist attractions (1) may preserve forests (1) • global economy is growing (1), incomes are rising (1) enabling foreigners to afford more holidays (1) • people coming from abroad to work in high paid jobs may be skilled / highly motivated (1) raise quality of tourism (1). • Indonesian government may subsidise the tourism industry (1) lowering costs of production (1). • the industry may be promoted /advertised (1) • air travel is falling in price (1) air travel is a complement to holidays (1) • foreign investment may be attracted into the industry (1) Up to 4 marks for why it might not: • pollution may discourage visitors (1) worried about health (1) • there are substitutes (1) Indonesia has competition from neighbouring countries (1) • natural areas of beauty may be destroyed (1) by e.g. new palm oil plantations / natural disasters (1) • net emigration (1) may mean there are not enough workers (1). • Covid-19 may continue to reduce tourism (1).

Mark scheme

2(a) Define trade in goods balance. 2 Accept exports (of goods) = imports of (goods) for 1 mark Value of exports of goods / revenue earned from exports minus value of imports of goods / expenditure on imports of goods (2). Exports minus imports (1) of goods / visible items (1). 2(b) Explain two benefits producers may gain from free 4 One mark for each of two benefits identified and one mark for trade. each of two explanations. Logical explanation which might include: Availability of larger/global market (1) may increase revenue/profit (1). Ability to produce on a larger scale / higher output (1) take advantage of economies of scale (1) specialise (1). Access to cheaper / better quality raw materials / raw materials without tariffs imposed on them (1) lowering costs of production/raising quality of products produced/lowering price (1). Access to advanced technology/ideas from abroad (1) resulting in improved methods of production/new products (1). Increased competitive pressure (1) which may raise efficiency (1). 2(c) Analyse, using a production possibility curve (PPC) 6 diagram, the effect of an increase in unemployment on an economy. capital goods Up to 4 marks for the diagram: Axes correctly labelled (1). A Curve drawn as a curve or downward sloping line to the axes (1). B Two production points shown – one on or to left of PPC and the other further to the left of the PPC (1). Movement of the production point inwards indicated by arrow or lettering (1). Up to 2 marks for coherent analysis which might include: O Unemployment means resources are not used (1) there is consumer inefficiency (1) reduces output/GDP / causes a goods recession (1). For analysis, only accept a PPC shifted inwards if logical justification is given i.e. an increase in unemployment may cause some workers to leave the labour force – ‘unemployment causing unemployment’. 2(d) Discuss whether or not an increase in the rate of 8 Level Descriptors Mark income tax will reduce inflation. 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 • reduce disposable income/purchasing power to evaluate economic issues and situations. • consumer expenditure likely to fall One side of the argument may have more • investment may fall depth than the other, but overall both sides • total (aggregate) demand may fall of the argument are considered and • demand-pull inflation may decrease developed. There is thoughtful evaluation • higher government revenue may increase government of economic concepts, terminology, spending on supply-side policy measures. information and/or data appropriate to the question. The discussion may also point Why it might not: out the possible uncertainties of alternative • workers may seek higher wages decisions and outcomes. • higher wages may increase costs of production • cost-push inflation/wage-price spiral may occur 2 A reasoned discussion which makes use of 3–5 • higher tax revenue may increase government economic information and clear analysis to spending evaluate economic issues and situations. • higher government spending may offset lower The answer may lack some depth and consumer expenditure leaving total (aggregate) development or may be one-sided. There is demand unchanged relevant use of economic concepts, • people may be very confident about the future so they terminology, information and data cut back on savings rather than spending. 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: Due to an increase in the rate of income tax, inflation may fall as disposable income will fall. People will have less money to spend so they may spend less and total demand will fall. A fall in demand will cause prices to fall as producers will not be able to sell as many goods and services. They will want to keep their market share. Demand-pull inflation will decrease. However, an increase in income tax may not cause inflation to fall. Workers may force up the wage rate. Firms’ labour cost and costs of production will increase so firms may push up prices to maintain profits. This can cause cost-push inflation and a wage price spiral. Plus, government revenue from high taxes will rise and government spending may rise. This may offset the fall in consumer expenditure and inflation may not fall. Principal Examiner comment: Strong on both sides. Example of L1 answer: Inflation refers to the fall in the purchasing power of money. Income tax is a payment to the government. The increase in direct tax will definitely help the government. This may help the government solve the problem of inflation and will increase the purchasing power of money. Principal Examiner comment: Definitions given but the answer does not explain why inflation may, or may not, be reduced.

Mark scheme

3(a) Define demerit good. 2 A product which is more harmful to consumers than they realise / the government considers is more harmful (2). It is over-consumed / overproduced (1) it creates external costs (1). A product that is harmful (1). 3(b) Explain the difference between an extension in 4 Up to 2 marks for diagram(s) showing the difference. demand and an increase in demand. Maximum of 2 marks for extension in demand and a Logical explanation which might include: maximum of 2 marks for an increase in demand. An extension in demand is caused by a change in the price of the product (1) rise in quantity demanded (1) it is shown by a movement along the demand curve (1). An increase in demand is caused by a change in an influence on demand other than a change in the price of the product / means more is demanded at each and every price (1) example of a cause of an increase in demand e.g. rise in incomes (1) it is shown by a shift in the demand curve (1). 3(c) Analyse the effects on income distribution and tax 6 revenue of an increase in indirect taxes. Coherent analysis which might include: Income is likely to become less evenly distributed (1) indirect taxes are usually regressive (1) taking a larger percentage of income of the poor (1). Tax revenue likely to rise (1) will rise more on goods with inelastic demand (1) e.g. food (1) may fall if demand falls significantly (1). If any extra tax revenue is spent on lower income groups (1) e.g. welfare benefits (1) the effect on income distribution is less certain / income may be more evenly distributed (1). Tax evasion and avoidance is less common in the case of indirect taxes (1) though there may be informal markets (1). 3(d) Discuss whether or not a government should impose a 8 Level Descriptors Mark maximum price on food. 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 should: information and clear and logical analysis • may influence price and quantity purchased to evaluate economic issues and situations. • if set below the equilibrium level, will reduce price One side of the argument may have more • some people will be able to purchase food at a lower depth than the other, but overall both sides price of the argument are considered and • may reduce poverty – food is a basic necessity developed. There is thoughtful evaluation • may stop monopoly food producers setting high prices. of economic concepts, terminology, information and/or data appropriate to the Why it should not: question. The discussion may also point • if set above the equilibrium, it will have no effect out the possible uncertainties of alternative • it set below the equilibrium, will result in shortages decisions and outcomes. • some additional measure will have to be introduced to ration out food 2 A reasoned discussion which makes use of 3–5 • some foods may be harmful to health and their economic information and clear analysis to consumption should be discouraged evaluate economic issues and situations. • may result in firms making losses and so reducing The answer may lack some depth and quality of food or employment of workers development or may be one-sided. There is • free market forces may result in a more efficient relevant use of economic concepts, allocation of resources. 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 for no 0 creditable content. 3(d) Example of L2 answer: The effect on price, quantity demanded and quantity supplied may be shown on a diagram. Government should impose a maximum price on foods. Price is likely to fall and this will aid those in poverty. They will be able to buy basic necessities easier and allow them to spend on other things. Governments should not impose a maximum price on food as it can cause businesses to make a loss and need government subsidisation. Principal Examiner comment: Reasonable on one side and limited on the other side.

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4(a) State two functions of a commercial bank. 2 Internet banking alone is too vague. Two from: • lending • accepting deposits • allowing customers to make payments • looking after valuables • giving financial advice • providing insurance • exchanging foreign currency 4(b) Explain two reasons why emigration from a country 4 One mark for each of two reasons identified and one mark for may increase. each of two explanations. Reward answers that give an argument from the opposite Logical explanation which might include: perspective but do not double award. Rise in unemployment (1) people move abroad in search of Accept ‘static approach’ e.g. unemployment. jobs (1). Fall in income (1) seek higher wages abroad (1). Lower living standards (1) e.g. healthcare may be better abroad / less pollution (1). Relaxation on immigration controls (1) making it easier to move abroad (1). Greater social unrest / outbreak of war (1) seek greater security (1). High inflation at home (1) seek lower cost of living (1). 4(c) Analyse the possible causes of a rise in the wages of 6 bank workers. Coherent analysis which might include: Demand for bank workers may increase (1) due to higher demand for banking / this may result from more people opening bank accounts/using the services of banks (1) may also result from a rise in the productivity of workers (1) more banks competing for the services of bank workers / more competition for workers (1) higher wages paid to retain bank workers (1). Supply of bank workers may fall (1) qualifications may have been increased (1) skills may have increased / may need to be more skilled as working with more advanced technology (1). Bank workers may use trade union power (1) collective bargaining and/or industrial action (1). Banks may have earned large profits (1) may have rewarded workers with bonuses (1) bonuses / high pay may be used to motivate workers (1). A higher national minimum wage (1) forcing banks to pay some of their staff more (1). Bank workers may work longer hours / may work overtime (1). Bank workers may be more experienced (1) more productive / more skilled (1). Inflation / higher income tax (1) purchasing power will fall unless wages increased (1). 4(d) Discuss whether or not demand for cars will become 8 Level Descriptors Mark more price-elastic in the future. 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 • may be closer substitutes. Price of public transport and to evaluate economic issues and situations. /or quality of public transport may fall making them One side of the argument may have more closer substitutes depth than the other, but overall both sides • may take up a larger proportion of income. Incomes of the argument are considered and may fall developed. There is thoughtful evaluation • price may rise. Demand becomes more price elastic as of economic concepts, terminology, price rises information and/or data appropriate to the • the number of firms producing certain types of cars question. The discussion may also point may increase out the possible uncertainties of alternative • time will give consumers more opportunity to search decisions and outcomes. out lower prices. 2 A reasoned discussion which makes use of 3–5 Why it might not: economic information and clear analysis to • may become more of a necessity. People may work evaluate economic issues and situations. further from where they live The answer may lack some depth and • may become easier to postpone purchase. If cars last development or may be one-sided. There is longer, consumers may be able to delay buying relevant use of economic concepts, replacements terminology, information and data • people may have become used to driving – habit appropriate to the question. forming. May be reluctant not to own and drive a car • price of complements may rise, so that even if price of 1 There is a simple attempt at using 1–2 cars fall, people may not buy more cars. 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 an L2 answer: Reward answers that give an argument from the opposite perspective but do not double award. Demand for cars may become more price-elastic. People may be more willing to switch to substitutes. If bus transportation reduced market prices, people may use buses rather than buying cars when prices of cars rise. On the other hand, cars may be price-inelastic in the future. They may become more of a necessity if people find buses and trains inconvenient. Cars also show a better standard of living and many jobs require a car which makes having a car a necessity therefore it becomes price-inelastic. Principal Examiner comment: Reasonable on both sides.

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5(a) Define wages. 2 A payment/reward (1) to labour/workers (1). 5(b) Explain two reasons, other than methods of protection, 4 One mark for each of two reasons identified and one mark for why a country’s exports may fall. each of two explanations. Logical explanation which might include: Lower incomes abroad (1) reduce the ability of foreigners to buy the country’s exports / lower demand (1). Rise in the foreign exchange rate (1) will make exports more expensive (1). Quality may fall (1) e.g. educational standards may have declined (1). Price may rise (1) due to inflation/higher costs of production/lower productivity/making exports less competitive (1). Domestic demand may rise (1) products may be switched from the export to the home market (1). Lower output (1) reduce the ability of firms to export as many goods and services / result of fewer resources (1). 5(c) Analyse how a rise in investment could increase a 6 country’s economic growth rate. Coherent analysis which might include: More investment will increase total (aggregate) demand (1) there will be more capital goods (1) these may be more efficient / embody advanced technology (1) productive capacity will increase / productivity rise (1) costs of production may fall (1) prices may fall (1) quality may rise (1) more products may be demanded by domestic consumers (1) foreign buyers / more exports (1) output may increase (1). Higher investment may increase employment (1) raise income (1). Investment in human capital/education/healthcare (1) can raise productivity (1). 5(d) Discuss whether or not a country should switch from a 8 Level Descriptors Mark fixed foreign exchange rate system to a floating foreign exchange rate system. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why it should: to evaluate economic issues and situations. • the government will not have to devote time and One side of the argument may have more attention to maintaining the exchange rate and so may depth than the other, but overall both sides use policy measures to e.g. reduce inflation of the argument are considered and • fewer foreign exchange reserves would have to be developed. There is thoughtful evaluation kept to maintain the exchange rate. These could be of economic concepts, terminology, used to stimulate economic activity information and/or data appropriate to the • exchange rate may be lower which may increase question. The discussion may also point economic growth, lower unemployment and improve out the possible uncertainties of alternative the current account position. decisions and outcomes. Why it should not: 2 A reasoned discussion which makes use of 3–5 • a lower exchange rate may cause inflation economic information and clear analysis to • fluctuations in the exchange rate may create evaluate economic issues and situations. uncertainty. This may discourage investment and The answer may lack some depth and reduce economic growth development or may be one-sided. There is • may discourage MNCs from setting up in the country relevant use of economic concepts, • a higher exchange rate could reduce economic growth, terminology, information and data employment and harm the current account position. 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. 5(d) Example of L3 answer: A floating exchange rate changes with changes in demand and supply. A country should switch from a fixed foreign exchange rate system to a floating exchange rate system as there will be no need to keep foreign reserves so it can spend foreign reserves on something else. A country can easily change monetary policy changing interest rate without being worried. It can concentrate on other aims and not the exchange rate. Floating exchange rate automatically adjust current account of the balance of payments as increase in demand for exports will increase exchange rate reducing demand on exports. A country should not switch from fixed foreign exchange rate system to floating exchange rate as speculation could say that the value of local currency will decrease so people will sell it causing value to decrease as it will have lower demand. The uncertainty about export and import prices may discourage MNCs. Principal Examiner comment: Strong on one side and reasonable on the other.