Economics 0455/22 October/November 2021: question paper and mark scheme

Mark scheme

1(a) Calculate, in $, Air India’s loss in 2018. 1 7 × 10 to the power 8. 7 × 10ˆ8. 0.7bn, 700m, 700 000 000. 1(b) Identify two substitutes for air travel. 2 For ‘ships’ accept water travel. Trains (1) ships (1). 1(c) Explain one characteristic that suggests that Air India 2 was a monopoly in 1994. Share of the market was 100% (1) only firm / share above 25% of the market / share above 40% / a complete/pure monopoly / no competition (1). Able to set price (1) a price-maker (1). 1(d) Explain two reasons why a government may privatise an 4 One mark each for each of two reasons identified and one industry. mark each for each of two explanations. Logical explanation which might include: Raise (tax) revenue (1) which could be spent on e.g. education, healthcare / increase government spending (1). Increase efficiency / may perform better in the private sector / higher productivity (1) introduce a profit motive / increase output/GDP / reduce costs of production (1). Increase competition (1) lower price / increase quality / increase choice (1). Industry may be loss making / costly to run (1) reduce need to use tax revenue to finance industry / tax revenue can be used for other purposes e.g. education / increase government spending / reduce national debt / tax rates might be cut (1). 1(e) Analyse how India’s position on the current account of 4 Up to 2 marks maximum for idea of size of current account its balance of payments in 2017 compares with the other balance without reference to deficit or surplus e.g. China four countries. has the largest current account balance and India the lowest. Coherent analysis which might include: So maximum of 2 marks without reference to deficit/s or Brazil, India and Kenya had a current account deficit (1) while surplus/es. China and Russia had a current account surplus (1). India’s current account deficit is the largest in terms of $s (1) No marks for writing about a budget balance. but the second largest in % terms (1). China’s current account had a larger impact on its economy in terms of $s (1) and Kenya’s in percentage terms (1). Russia’s current account surplus is larger than China’s in terms of % of GDP (1). China has the largest surplus in $s (1). 1(f) Analyse how a successful airline industry can promote 5 economic growth. Coherent analysis which might include; May increase number of tourists (1) raise revenue from tourism / increase the size of the tourist industry (1) may increase exports / imports / increase the ease of movement of people and goods into and out of the country (1). May attract more MNCs (1) these will increase the country’s output/GDP (1) introduce new technology / new methods of production (1). May lower costs of production (1) raising firms’ profits (1) providing the incentive/finance to expand (1) increase the country’s output/GDP (1). May increase employment (1) raise incomes (1) increase total demand (1) increase tax revenue (1) more could be spent on e.g. education (1). May increase (geographical) mobility of labour (1) making it easier for expanding firms to recruit workers (1). 1(g) Discuss whether the Indian government should increase 6 Apply this example to all questions with the command the tax on airline fuel. word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for why it should: • Raise revenue (1) can be used to finance e.g. education / training of pilots / increase government spending (1) Each point may be credited only once, on either side of an burden more likely to fall on the rich / may enable tax on argument, but separate development as to how/why the basic necessities to be reduced (1). outcome may differ is rewarded. • May reduce market failure (1) air travel causes external costs / social cost exceeds social benefit (1) air/noise Generic example mark pollution (1) a tax may reduce air travel / lower demand for air travel (1) by raising price (1) encourage people to Tax revenue may decrease … 1 switch to other forms of transport (1). ... because of reason e.g. incomes may be 1 Award up to 4 marks for why it should not: lower. • Will increase airlines’ costs / reduce airlines’ profits / cause a loss (1) airlines’ other costs are rising (1) difficult Tax revenue may increase because incomes 0 for them to cover higher costs / raise prices (1) due to may be higher i.e. reverse of a previous elastic demand / price sensitive demand (1) may go out argument. of business (1) may discourage investment (1) causing unemployment (1). Tax revenue may increase because of a different 1 • May reduce tourism in the country (1) harming the reason i.e. not the reverse of a previous current account position (1). argument e.g. government spending on • Airline fuel is already highly taxed (1) may be difficult to subsidies may stimulate the economy more than tax further (1). spending on education. • Ait travel is safer than car travel in many countries (1) so injuries may increase if there is a switch between the two (1). 1(h) Discuss whether more people will apply to be pilots for 6 Note: some points may be given in reverse e.g. education Indian airlines in the future. standards may rise. Award up to 4 marks for logical reasons why they might: • Introduction of new technology (1) will make the job easier (1) • Improved staff training (1) improve/increase skills (1) improve motivation / satisfaction (1) • improve working conditions (1) airlines want to retain staff (1) • More routes are being flown / size of industry is increasing (1) demand for pilots may increase / more job opportunities (1) may raise wages (1). • More fringe benefits may be provided (1) example (1). • Being a pilot is a highly regarded occupation in many countries (1). Award up to 4 marks for logical reasons why they might not: • There may not be more people qualified to become pilots (1) education standards may fall / qualifications may be high (1). • Period of training may increase / cost of training may increase (1). • Other jobs may offer higher wages / better working conditions / wages of pilots may fall (1) example of other jobs (1). • Advances in technology may reduce the need for pilots (1) may increase skills needed (1). • Increased tax on fuel may reduce the size of the airline industry (1) causing people to expect fewer job opportunities / unemployment of pilots (1). • Price of substitute forms of transport may reduce (1) lowering demand for pilots (1). 1(h) • Job may require workers to be away from their families (1) people may want to stay close to home (1). • Working hours may be unsociable (1) people may want to spend more time with their families (1). • May be considered in some cases to be a risky job (1).

Mark scheme

2(a) Define a free good. 2 No marks for an example. No opportunity cost (1) a good that takes no resources/factors of production to produce / naturally abundant in supply / does not use scarce resources (1). 2(b) Explain, with examples, the difference between the 4 For tertiary sector, it is not sufficient to just have the sector secondary sector and the tertiary sector. which sells products as this is only part of the sector. Logical explanation which might include: But for the tertiary sector example accept the sale of a Secondary sector covers manufacturing (and construction) / product e.g. the sale of jewellery. converts primary products into finished goods (1) e.g. car industry (1). Tertiary sector covers services / final stage of production (1) e.g. insurance (1). 2(c) Analyse, using a production possibility curve (PPC), the 6 Nothing for higher output, higher GDP as this is uncertain. effect of an increase in the quality of its resources on an economy. Up to 4 marks for the diagram: Axes correctly labelled with different outputs (1). Initial curve drawn as a curve / line sloping downward to the axes (1). New curve drawn as a curve / line sloping downward to the axes (1). Shift indicated by arrow or letter (1). Up to 2 marks for coherent analysis which might include: Better quality resources will increase productivity (1) enable more of both types of goods to be produced (1) with a given quantity of resources (1) increase productive potential / productive capacity / total supply (1) cause economic growth (1). 2(d) Discuss whether or not a fall in a country’s birth rate will 8 Level Description Marks benefit 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: information and clear and logical • reduce the number of dependents analysis to evaluate economic issues • fewer workers away from work to bring up children and situations. One side of the • enable resources to be used to increase economic argument may have more depth than growth / raise living standards the other, but overall, both sides of the • reduce pressure on the environment argument are considered and • move towards the optimum population developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • reduce the size of the labour force in the longer term appropriate to the question. The • reduce labour mobility discussion may also point out the • create an ageing population possible uncertainties of alternative • reduce size of markets decisions and outcomes. 2 A reasoned discussion which makes 3–5 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 u sing 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 2(d) Level Description Marks 0 A mark of zero should be awarded for 0 no creditable content.

Mark scheme

3(a) Identify two determinants of price elasticity of supply. 2 Accept weather. Two from: • ability to store • level of stocks • perishability • production time • level of spare capacity • cost of altering supply • time period under consideration – short/long run 3(b) Explain two advantages to an economy of ending child 4 One mark each for each of two advantages identified and labour. one mark each for each of two explanations. Logical explanation which might include: Enable children to be educated (1) raise productivity / workers’ skills / literacy rates / long run economic growth (1). Improve children’s health (1) increase life expectancy / raise living standards (1). Reduce cycle of poverty (1) children will later gain higher paid jobs (1). Raise wages (1) due to reduced supply of cheap labour (1). Remove international bans / encourage more foreign tourists (1) increase exports (1). Increase job opportunities for adults (1) lower unemployment / increase employment of adults (1). 3(c) Analyse how average cost can change as output 6 Nothing for reference to causes of changes in total costs increases. e.g. employing more workers will increase wages paid. Average cost may fall due to economies of scale (1) example of an economy of scale e.g. financial economy (1) explanation of the example (up to 2 marks) e.g. banks may charge lower interest rates (1) reducing firms’ cost of borrowing (1). Another example e.g. buying economy (1) explanation of the example (up to 2 marks) e.g. able to buy in bulk (1) and receive a discount (1). Higher output may enable fixed costs to be spread over a larger output (1) which may reduce average fixed costs (1) whether average total cost will fall will depend on what happens to average fixed cost plus average variable cost (1). Average cost may rise due to diseconomies of scale (1) example e.g. managerial economy (1) explanation of the example (up to 2 marks) e.g. difficulty of keeping control of a large organisation (1) leading to more mistakes / poor decision making (1). Another example e.g. poor labour relations (1) explanation of the example (up to 2 marks) e.g. lack of contact between workers and managers (1) may be strikes (1). 3(d) Discuss whether or not an economy would benefit from 8 Level Description Marks allocating more of its resources to agriculture. 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 • specialisation may increase efficiency, raise output, analysis to evaluate economic issues increase exports and situations. One side of the • may improve the current account of the balance of argument may have more depth than payments the other, but overall, both sides of the • imports of food may be reduced, reduced reliance on argument are considered and other countries for basic necessities developed. There is thoughtful • health and safety standards may be maintained evaluation of economic concepts, • the industry is labour intensive in some countries and so terminology, information and/or data may reduce unemployment appropriate to the question. The discussion may also point out the Why it might not: possible uncertainties of alternative • wages in the industry tend to be relatively low decisions and outcomes. • the supply of agricultural products can fluctuate significantly due to changes in weather conditions 2 A reasoned discussion which makes 3–5 • opportunity cost of fewer resources for manufacturing use of economic information and clear goods and for services analysis to evaluate economic issues • demand for manufactured goods and for services tend to and situations. The answer may lack rise more as income increases some depth and development may be • agriculture uses up considerable amounts of water. one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at u sing 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 3(d) Level Description Marks 0 A mark of zero should be awarded for 0 no creditable content.

Mark scheme

4(a) Identify two of the three resource allocation decisions. 2 Two from: • what to produce • how to produce • who to produce for 4(b) Explain two reasons why households may save less even 4 One mark each for each of two reasons identified and one though their income has increased. mark each for each of two explanations. Logical explanation which might include: Fall in the rate of interest (1) which would reduce the return from saving / spend/borrow rather than save (1). Inflation (1) spend more now before prices rise further / may reduce the real rate of interest (1). Increase in confidence about the future (1) less motive to save for hard times / less concerned will experience unemployment or fall in income (1). Fall in range, number or reliability of financial institutions (1) which would reduce the safe places to save (1). Greater consumption opportunities / spend more / higher living standards (1) with the introduction of new products / lower prices / may be able to afford private education / healthcare (1). Increase in taxes (1) reducing disposable income (1). Rise in family size (1) increasing household expenses (1). Rise in debt (1) may reduce ability of households to e.g. to put money into a savings account (1). Change in social attitudes (1) due to e.g. change in age of households (1). 4(c) Analyse how a trade union may benefit its members. 6 Coherent analysis which might include: A trade union may negotiate with employers (1) to raise wages (1) improve working conditions (1) example (1) increase fringe benefits (1) example (1) through collective bargaining (1) and sometimes industrial action / strikes (1). A trade union may settle disputes between the employer and the workers (1) e.g. over changes in working practices (1) protect workers’ rights (1). A trade union may seek to protect the employment of its members (1) in some cases negotiate favourable redundancy terms (1). A trade union may negotiate / put pressure on the government (1) to e.g. raise a national minimum wage or reduce the retirement age (1). In some countries, trade unions provide benefits and services to members (1) e.g. training services (1). 4(d) Discuss whether or not a fall in its foreign exchange rate 8 Level Description Marks will improve a country’s macroeconomic performance. 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 • export prices will fall and import prices will rise analysis to evaluate economic issues • demand for exports may rise and demand for imports and situations. One side of the may fall argument may have more depth than • domestic output will increase, economic growth may rise the other, but overall, both sides of the • more workers may be employed, reducing argument are considered and unemployment developed. There is thoughtful • a deficit on the current account of the balance of evaluation of economic concepts, payments may be reduced or a surplus increased terminology, information and/or data • may encourage foreign investment if it is thought assets appropriate to the question. The can be bought more cheaply. discussion may also point out the possible uncertainties of alternative Why it might not: decisions and outcomes. • rise in price of imported capital goods and raw materials may increase costs of production, causing cost-push 2 A reasoned discussion which makes 3–5 inflation use of economic information and clear • higher total (aggregate) demand may cause demand-pull analysis to evaluate economic issues inflation, especially if the economy is working close to full and situations. The answer may lack capacity some depth and development may be • demand for exports and imports may be price inelastic, one-sided. There is relevant use of causing export revenue to fall and import expenditure to economic concepts, terminology, rise – in such a case may benefit more from a rise in the information and data appropriate to the exchange rate question. • trade restrictions imposed by other countries may prevent the country from exporting more products 1 There is a simple attempt at u sing 1–2 • may discourage foreign investment due to a lack of economic definitions and terminology. confidence in the country’s future economic prospects. Some reference may be made to economic theory, with occasional understanding. 4(d) Level Description Marks 0 A mark of zero should be awarded for 0 no creditable content.

Mark scheme

5(a) Identify two ways a government could reduce income 2 Accept higher taxes on high incomes and lower taxes on inequality. low incomes but do not accept increasing taxes on incomes as this is TV. Two from: • progressive taxation Redistributing income is TV – could be redistributing from • state benefits the poor to the rich. • spending on state education / training • spending on state healthcare • equal pay legislation • minimum wage 5(b) Explain two advantages of a market economic system. 4 One mark each for each of two advantages identified and one mark each for each of two explanations. Logical explanation which might include: Consumer sovereignty (1) with consumers deciding what Nothing for no taxes. goods and services are produced (1). Low prices (1) due to competition (1). High quality (1) due to innovation (1). Consumer choice (1) variety of products produced (1). Greater efficiency (1) due to the profit motive (1). Automatic adjustment to changes in demand and supply / quick response to changes in demand and supply (1) via changes in price / with use of the price mechanism / increase consumer satisfaction (1). 5(c) Analyse why life expectancy may decrease. 6 Coherent analysis which might include: Incomes may fall (1) lowering living standards / reducing access to basic necessities (1). Reduction in healthcare (1) e.g limited access to medication (1). Reduction in education (1) people may lead less healthy lives (1) more smoking (1) more ‘junk food’ (1) less exercise (1). Rise in poor nutrition / malnutrition (1) eating more low-quality food / people not having enough food (1). More pollution (1) making people more susceptible to diseases (1). May be spread of new diseases / pandemics (1) wars / civil unrest (1). Climate change (1) may result in more natural disasters (1). More people employed in jobs with poor working conditions / more dangerous jobs (1) resulting in more sickness / accidents (1). 5(d) Discuss whether or not supply-side policy measures can 8 Only accept lower interest rates, if linked to increasing total reduce inflation. supply. In assessing each answer, use the table opposite. Level Description Marks Why they might: 3 A reasoned discussion which accurately 6–8 • they may increase total (aggregate) supply, reducing examines both sides of the economic cost-push inflation argument, making use of economic • they can allow total (aggregate) demand to increase information and clear and logical without causing inflation analysis to evaluate economic issues • education and training can increase labour productivity, and situations. One side of the reducing labour costs argument may have more depth than • a cut in direct taxes may increase the incentive to be the other, but overall, both sides of the more productive and more innovative argument are considered and • labour market reforms may reduce power of trade unions developed. There is thoughtful and reduce rise in wages evaluation of economic concepts, • subsidies can lower costs of production terminology, information and/or data appropriate to the question. The Why they might not: discussion may also point out the • privatisation does not always increase competition and possible uncertainties of alternative so does not always lower prices decisions and outcomes. • education and training can be expensive, may be in areas that are not in demand and will have a time lag 2 A reasoned discussion which makes 3–5 • cuts in income tax may increase total (aggregate) use of economic information and clear demand as well as total (aggregate) supply analysis to evaluate economic issues • resource limitations / unable to increase productive and situations. The answer may lack capacity due to e.g. limited land available some depth and development may be • inflation may be caused by rise in price of raw materials one-sided. There is relevant use of which have no domestic substitute e.g. oil economic concepts, terminology, information and data appropriate to the question. 5(d) Level Description Marks 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 0 no creditable content.