Economics 0455/23 October/November 2020: question paper and mark scheme

Mark scheme

1(a) Calculate the external cost per kilometre of driving a 1 $ not necessary for 1 mark. car in Manila in 2017. $0.54 (1). 1(b) Identify two macroeconomic aims of the Philippine 2 Also accept raised labour productivity and low government. unemployment. Economic growth (1) full employment (1). If more than two are given, consider the first two only. 1(c) Explain one reason why traffic congestion can reduce 2 labour productivity. Logical explanation which might include: Reduce health of workers / workers arriving tired / stressed (1) this is likely to lead to more days of absence from work / reduce their output per hour (1). Late arrival to work (1) output per day declines / less working time (1). 1(d) Explain how an increase in the mobility of Philippine 4 workers would be likely to affect unemployment in the Philippines. Logical explanation which might include: Greater geographical mobility (1) enables moving from areas of unemployment to areas where there are job vacancies / expanding industries such as computer, retail, and education (1) will affect frictional unemployment (1) take jobs overseas (1). Greater occupational mobility (1) through education/training enables moving into jobs requiring different skills/qualifications (1) will reduce structural unemployment (1). 1(e) Draw a demand and supply diagram to show how a 4 rise in the price of car parking could affect the market for cars in the Philippines. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or p and q. (1). Demand and supply curves correctly labelled (1). Demand curve shifted 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). Note: if diagram also shows shift in supply curve (e.g. will not get new equilibrium point) it can still get 3 marks. 1(f) Analyse the relationship between the countries’ 5 Responses do not have to be in the format suggested but consumer expenditure and imports. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Coherent analysis which might include: and analyse the overall data. Expected relationship: Direct / positive relationship (1) generally countries with higher consumer expenditure import more goods and services (1). As income rises consumption rises for both domestic and imported goods and services (1). Evidence: E.g. Brazil spends the most and imports the most and Panama spends the least and imports the least (1) supportive data (1). Exception: Argentina/Philippines (1) supportive data (1). Analysis: Trade restrictions reduce growth in imports (1) imports include not only consumer goods, but also capital goods bought by firms (1). 1(g) Discuss whether or not the supply of enterprise is 6 Apply this example to all questions with the command likely to increase in the Philippines. word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Up to 4 marks for why it might: Each point may be credited only once, on either side of an • economy is growing / rising incomes / higher consumer argument, but separate development as to how/why the spending (1) so likely to earn higher profit (1) outcome may differ is rewarded. • well-educated population (1) ability to employ skilled labour (1) attracts MNCs (1) Generic example mark • greater skills (1) encourage workers to set up own businesses (1) Tax revenue may decrease… 1 • population is growing (1) so more potential entrepreneurs (1) larger markets (1) ...because of reason 1 • deregulation (1) so there may be more market e.g. incomes may be lower. opportunities / less barriers to entry (1) • the reduction of traffic congestion (i) will increase Tax revenue may increase 0 productivity of workers (1) raising opportunity to make because incomes may be higher profits (1) i.e. reverse of a previous argument. Up to 4 marks for why it might not: Tax revenue may increase 1 • some entrepreneurs may emigrate (1) because of a different reason • high taxes (1) which may reduce the reward to i.e. not the reverse of a previous argument entrepreneurs (1) e.g. government spending on subsidies may • traffic congestion (1) can increase costs of production stimulate the economy more than spending on (1) MNCs may be discouraged from entering the education. country / reducing the supply of foreign entrepreneurs (1) • may not want to take the risk/stress of running own business (1) prefer to stay as employee (1) • growth rate is falling (1) less opportunities for investment / new businesses (1) 1(h) Discuss whether or not building more roads in Manila 6 will benefit the Philippine economy. Up to 4 marks for why it might: • reduce traffic congestion (1) lowering journey times / transport costs (1) helps tourism (1) • productivity may rise (1), reduce costs of production (1) encourages higher output / economic growth (1) • government expenditure on roads (1) leads to higher employment (1) and higher spending / total demand (1) • MNCs may be attracted into the country (1) reducing unemployment (1) • lower average costs (1) may increase international price competitiveness (1) increasing exports (1) improving the current account position (1) Up to 4 marks for why it might not: • shortage of land (1) opportunity cost in terms of how the land is used (1) • opportunity cost (1) could have been used for education / health (1) • government may have to raise taxes to fund the road building (1) and taxes are already high (1) • may increase the number of cars on the roads (1) may not reduce traffic congestion in the long run (1) • during the building process there will be disruption to drivers and production (1) • more roads lead to increase in negative externalities (1) example (1) lowering standard of living (1) • rapid growth in population (1) land more expensive to build roads (1) • additional expenditure if at full employment (1) could lead to demand-pull inflation (1)

Mark scheme

2(a) Define microeconomics. 2 Study/analysis of or focus on individual markets / economic agents e.g. individuals, households, and firms (2). Study of economics on a small scale, e.g. demand for cars (1). Demand and supply for individual products/markets (1). 2(b) Explain two causes of differences in economic 4 One mark for each of two causes identified and one mark for development between countries. each of two explanations. Logical explanation which might include: Allow reference to political instability and social unrest if Resources – land/labour/capital/enterprise (1) affect linked to economic development. productive capacity of a country (1). Income (1) enabling people to consume more goods and services (1). Productivity (1) making better use of resources (1). Higher international trade / exports (1) results in higher output (1) Size of primary sector (1) larger primary sectors may mean lower incomes / hard working conditions (1). Saving (1) which can influence the proportion of capital goods produced/the extent to which people have a safety net (1). Investment (1) which may influence economic growth / make work less physically demanding (1). Education / literacy rates (1) which influence choices/income/health (1). Healthcare (1) which affects life expectancy / quality of life (1). 2(c) Analyse how a cut in the interest rate could reduce 6 poverty. Coherent analysis which might include: Cost of borrowing will fall / reward from saving will decline (1) increase borrowing / demand for loans (1) consumer spending will increase (1) firms may invest more (1) output may rise (1) unemployed gain jobs / employment may increase (1) incomes may rise / reduction in absolute poverty (1). The poor who have borrowed in the past (1) will have more money to spend on basic necessities (1) spend on education (1) improve skills (1) get better paid jobs (1) reducing relative poverty (1). Housing may be cheaper (1) making shelter more accessible (1). May enable some of the poor to borrow to start up small businesses (1) and earn a higher income (1). Cheaper for government to borrow (1) enabling it to spend more on education/healthcare (1). 2(d) Discuss whether or not government intervention will 8 Level Descriptors Mark correct the market failure caused by a demerit good. 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 • tax can be imposed/increased to evaluate economic issues and situations. • this will raise price One side of the argument may have more • consumers better informed about negative impact depth than the other, but overall, both sides • demand would be expected to contract of the argument are considered and • a minimum price could be imposed developed. There is thoughtful evaluation • this again would be expected to reduce demand of economic concepts, terminology, • restrictions could be imposed on the imports of demerit information and/or data appropriate to the goods question. The discussion may also point out the possible uncertainties of alternative Why it might not: decisions and outcomes. • demand may be price inelastic, some demerit goods are addictive 2 A reasoned discussion which makes use of 3–5 • the government may set a tax too high or too low economic information and clear analysis to • the rich may not be dissuaded by the tax evaluate economic issues and situations. • producers may not pass on the tax to consumers The answer may lack some depth and • a minimum price set below the equilibrium level would development or may be one-sided. There is have no effect relevant use of economic concepts, • a minimum price could result in a surplus which may terminology, information, and data put downward pressure on price, encourage producers appropriate to the question. to charge less than the minimum price 1 There is a simple attempt at using 1–2 economic definitions and terminology. Example of Level 2 answer: Some reference may be made to economic Government’s job is to keep the economy going in a theory, with occasional understanding. healthy way. Therefore, they try eliminating demerit goods to increase the benefits for society as a whole. If there is 0 A mark of zero should be awarded for no 0 market failure caused by a demerit good it will be because creditable content. too many people are consuming them and causing total benefit for society to fall. Reward but do not expect provision of information. 2(d) Government intervention such as increasing taxes for merit goods will lower consumption and also with the money collected from taxes they can make merit goods instead of demerit goods. For example, if too many people consume cigarettes and tobacco, the government can raise taxes for tobacco and prices will rise. They can use the taxes collected to make additional videos and tell people the bad things that comes from smoking. Therefore, people will consume less of these demerit goods. However, demerit goods especially addictive things like cigarettes will have a lot of people producing them since its easy to make money. An increase in tax may cause unemployment if they cannot sell as much as before so the fixing of one market failure may cause another one to appear. Principal Examiner comment: This is reasonable on one side but limited on the second side. Example of a Level 1 answer: Government intervention can cause a huge change in the market of a demerit good. Increase in taxes for a demerit good will reduce demand. Principal Examiner comment: One method of government intervention identified.

Mark scheme

3(a) Define privatisation. 2 Allow denationalisation (2) only private firms (1). The sale of state-owned assets / state-owned enterprises / nationalised industries (1) to the private sector / individuals (1). 3(b) Explain two causes of a fall in the birth rate. 4 One mark for each of two causes identified and one mark for each of two explanations. Logical explanation which might include: Rise in the cost of having children (1) e.g. children staying No mark for simply linking fall in birth rate with low income. in education for longer (1). Rise in the education of women (1) may be more likely to enter employment/delay having children (1). Rise in government provision of state pensions (1) less need for couples to have children to support them in old age (1). Rise in access to contraceptives (1) making family planning more effective (1). Improvement in healthcare (1) reducing infant mortality (1). Increase in state provision of welfare payments (1) reducing the need to have children support parents in old age (1). Reduction in infant mortality (1) people having fewer children in the expectation more will survive (1). Ageing population (1) fewer people of child-bearing age (1). Education (1) e.g. higher cost of having children (1) women may get married later (1). More women working (1) may delay childbirth (1). Government policy (1) e.g. placing a limit on number of children (1). 3(c) Analyse, using a production possibility curve (PPC) 6 diagram, the effects of a decrease in the quantity of capital capital goods in an economy. goods A B 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 left / pivot indicated by arrow or lettering (1). Up to 2 marks for coherent analysis which might include: O B A Capital goods are a resource / investment used to produce consumer other goods (1). goods Fewer capital goods / factors of production reduce potential output / productive capacity (1). Accept a PPC diagram that shows fewer capital goods and the same quantity of consumer goods. Accept Good A / Good B labelling on axis. Note: movement along the existing PPC is incorrect. So potentially only 2 marks for correctly labelled axes and correct curve. 3(d) Discuss whether or not a government should allow 8 Level Descriptors Mark monopolies. 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 • monopolies may be able to take advantage of to evaluate economic issues and situations. economies of scale One side of the argument may have more • may be able to experience lower average costs and depth than the other, but overall, both sides charge lower prices of the argument are considered and • may earn high profits and so be able to spend on developed. There is thoughtful evaluation investment and research and development of economic concepts, terminology, • may be able to produce high quality products information and/or data appropriate to the • may be internationally competitive question. The discussion may also point • maybe nationalised monopolies with welfare objectives out the possible uncertainties of alternative decisions and outcomes. Why it should not: • maybe market failure/abuse market power 2 A reasoned discussion which makes use of 3–5 • may charge high prices economic information and clear analysis to • may restrict output evaluate economic issues and situations. • may become complacent The answer may lack some depth and • may not improve quality development or may be one-sided. There is relevant use of economic concepts, Example of Level 3 answer: terminology, information, and data Yes, the government should allow monopolies. It will appropriate to the question. prevent duplication of goods due to unique products with no close substitutes produced. This can reduce the 1 There is a simple attempt at using 1–2 wastage of resources. Monopolies can also benefit from economic definitions and terminology. economies of scale as they produce in large quantities so Some reference may be made to economic they can benefit from cost saving by negotiating favourable theory, with occasional understanding. prices as a result of bulk buying. This can translate into lower prices for consumers, increasing their ability to 0 A mark of zero should be awarded for no 0 consume more goods and services, boosting economic creditable content. growth and their standard of living. 3(d) Since it is possible for monopolies to earn supernormal profits, they are more able to spend more on research and development of their products, improving quality for consumers. No, they should not allow monopolies. Due to them being a single seller, this allows them to exploit consumers by charging higher prices as there is imperfect information and they are the only firm in the market, consumers have no choice but to buy the unreasonably priced products which means consumers spend too much in the long run and may even cause inflation to rise too. Monopolies may also increase income inequality as the producer gains at the expense of their consumers, especially those on lower incomes, causing poverty for those on low incomes especially if these products are essential goods and services such as food and utilities. Principal Examiner comment: This is a well thought out response with strong arguments on both sides and several aspects analysed.

Mark scheme

4(a) Define deregulation. 2 The removal of rules/regulation (2). Less government intervention (1) to encourage competition (1). Actions making it easier for businesses to enter / operate in an industry (1). Supply-side policy (1) to increase competition (1). 4(b) Explain two benefits consumers may gain from a 4 One mark for each of two benefits identified and one mark for market economic system. each of two explanations. Logical explanation which might include: Sovereignty (1) consumers decide what will be produced (1). Choice (1) there may be a number of firms producing a product (1). Low prices (1) competition may mean that firms have to charge low prices to keep their customers (1). High quality (1) the profit incentive may encourage firms to raise quality to attract more consumers (1). 4(c) Analyse how education and subsidies can increase a 6 country’s economic growth rate. Coherent analysis which might include: Education/training may increase qualifications/skills (1) raising the productivity of workers (1) increasing the mobility of workers (1) attracts MNCs (1) reduces unemployment (1) raising the quality (1) and quantity of output (1). Subsidies will lower firms’ costs of production (1) encouraging firms to increase their production (1) increasing supply (1) lowering price (1) a higher output is likely to be bought and sold (1). Subsidies for consumers e.g. education/health (1) may help in gaining skills/jobs and being more productive (1). 4(d) Discuss whether or not a reduction in a country’s trade 8 Level Descriptors Mark protection will reduce its current account surplus. 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 • lower tariffs will reduce price of imports to evaluate economic issues and situations. • removal of quotas may result in more imports being One side of the argument may have more purchased depth than the other, but overall, both sides • removal of a ban/embargo will permit imports of the of the argument are considered and product to enter the country developed. There is thoughtful evaluation • import expenditure may rise of economic concepts, terminology, • higher import expenditure may reduce the gap information and/or data appropriate to the between export revenue and import expenditure question. The discussion may also point out the possible uncertainties of alternative Why it might not: decisions and outcomes. • foreign firms may not have the capacity to supply more products 2 A reasoned discussion which makes use of 3–5 • demand for imports may be price inelastic economic information and clear analysis to • the quality of imports may have fallen evaluate economic issues and situations. • other countries may also reduce their trade restrictions The answer may lack some depth and • the exchange rate may fall, raising exports and development or may be one-sided. There is reducing imports relevant use of economic concepts, • export revenue may rise to match the higher import terminology, information, and data expenditure appropriate to the question. • may have large surplus on invisibles 1 There is a simple attempt at using 1–2 Example of Level 2 answer: economic definitions and terminology. The removal of quotas and tariffs on imports will make it Some reference may be made to economic relatively cheaper to import into the country. More imports theory, with occasional understanding. will come into the country reducing its current account 0 A mark of zero should be awarded for no 0 surplus. However, a reduction in a country’s trade creditable content. protection will show the country’s willingness to have trading partners. 4(d) As such, domestic firms will allocate more resources into producing exports at relatively lower costs and better quality so that they will be more competitive in the global economy. Other countries may be attracted to these exports and the demand for them will increase. Thus, the demand for local currency will increase, causing the current account surplus to increase. Thus, the current account surplus may increase or decrease depending on the extent of the fall in import prices and the rise in demand for exports. Principal Examiner comment: There is limited coverage of both sides.

Mark scheme

5(a) State two functions, other than issuing banknotes and 2 Allow banker to the banks coins, of a central bank. Two from: • manages monetary policy / sets the rate of interest • manages the national debt • controls the banking system • banker to commercial banks • banker to the government • lender of last resort • looks after reserves of gold and foreign currency 5(b) Explain two reasons why workers in the tertiary sector 4 One mark for each of two reasons identified and one mark for may be paid more than workers in the primary sector. each of two explanations. Logical explanation which might include: Higher demand (1) due to e.g. higher productivity / more profitable / expansion of tertiary industries (1). Lower supply (1) due to e.g. higher qualifications/skills/education needed (1). Stronger bargaining power (1) due to stronger trade unions / professional organisations (1). Primary sector workers can be replaced by capital equipment (1) so bargaining strength is weak (1). More favoured by government policy (1) e.g. increased government spending on education/healthcare (1). Tertiary sector workers are mainly found in developed countries where wages / cost of living is generally high (1) whereas primary sector workers are mainly found in undeveloped countries were wages / cost of living are generally low (1). Lower value of goods and services being provided in primary sector (1) lower pay for primary sector workers (1). 5(c) Analyse the advantages for firms of using division of 6 labour. Coherent analysis which might include: Division of labour involves workers specialising (1) this can increase output / increase productivity (1) costs of production may be reduced (1) e.g. lower costs of training (1) e.g. less equipment needed (1). Specialisation can increase quality (1) lower costs can enable to charge lower prices (1) demand may rise (1) revenue/profits may increase (1). 5(d) Discuss whether or not deflation will benefit an 8 Level Descriptors Mark 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: information and clear and logical analysis • if due to lower costs of production, may be more to evaluate economic issues and situations. internationally competitive One side of the argument may have more • improve the current account position depth than the other, but overall, both sides • may increase purchasing power if incomes do not fall of the argument are considered and • may raise living standards developed. There is thoughtful evaluation • may increase economic growth and employment of economic concepts, terminology, information and/or data appropriate to the Why it might not: question. The discussion may also point • if due to lower total demand may result in a recession out the possible uncertainties of alternative • consumers may postpone purchases decisions and outcomes. • investment may fall • firms may reduce output, reducing demand for raw 2 A reasoned discussion which makes use of 3–5 materials economic information and clear analysis to • unemployment may rise evaluate economic issues and situations. The answer may lack some depth and Example of Level 3 answer: development or may be one-sided. There is When an economy undergoes deflation, the general price relevant use of economic concepts, level in the economy falls resulting in goods and services in terminology, information, and data the country becoming cheaper. This results in a higher appropriate to the question. demand for the country’s goods and services from both those living in the country and abroad. The revenue from 1 There is a simple attempt at using 1–2 exports will increase due to greater international demand economic definitions and terminology. resulting in a current account surplus. Lower prices may Some reference may be made to economic improve standard of living for consumers as more can be theory, with occasional understanding. bought than before. 0 A mark of zero should be awarded for no 0 creditable content. 5(d) However, an economy may not benefit from deflation as a prolonged deflation may result in unemployment. Firms may lose confidence in future sales as consumers wait for prices to fall further. Lower output may result in less employment further reducing demand and causing a recession. The government may have to intervene by cutting taxes and interest rates to encourage increased consumption. Principal Examiner comment: This is a concise answer with reasonable argument for the benefits and a strong answer for why there may not be benefits. Example of Level 1 answer: Deflation makes prices of goods and services to be low which will entice consumers to buy more as prices are cheaper than before. Principal Examiner comment: A basic understanding of deflation without any discussion of whether or not it is beneficial to the economy.