Question 120 marks
Question
Poland: a growing economy Extract 1: Poland’s successful transition from a planned economy Since 1995, Poland has grown faster than all other large economies at a similar level of development. By 2015, Poland’s national income had reached a record level. Consumption expenditure rose and exports dramatically increased, coming close to US$250 billion in 2013. Poland’s growth has been based on skilled labour and entrepreneurship, not on natural resources. Two crucial factors were important in Poland’s development. Firstly, Poland adopted a policy of expanding the quantity and quality of education. In 2015, 50% of young people studied at university level, up from 10% in 1989. Secondly, the Polish government used funds from the European Union (EU) to develop transport links that helped to connect Poland with Western Europe. Poland seems to have been thorough in introducing market-oriented reforms at the beginning of its transition from a planned economy in the 1990s. This helped to create a private sector boom and ensured Poland avoided a post-transition recession. It managed the privatisation process in an efficient way. Lastly, Poland benefited from a large and rapidly growing domestic market, which helped to insulate it from external shocks, such as the global financial crisis in 2007–08. Poland’s performance in the last 25 years could be called a miracle. Source: Marcin Piatkowski: Brookings Institution, February 2015 Extract 2: Will Poland’s economy slow down? The Polish economy’s growth slowed significantly in 2016, mainly due to a slowdown in private investment. The outlook for 2017 was also gloomy, with concerns regarding the global economy and domestic economic policy. Private consumption and public investment were expected to continue to be strong, but a significant slowdown in economic activity was expected throughout the year. This was because of a significant decline in investment by private companies. In the first half of 2016 companies were cutting spending on fixed capital. A survey by the Polish central bank indicated that companies were very reluctant to start new investments. Entrepreneurs were afraid of the possible consequences of changes in the government’s economic policy, for example increased indirect taxes such as general sales taxes. In addition, foreign companies were delaying major investments in Poland because of the uncertainties in the economic climate. After a period of rising net exports of goods, by 2016 the trend was reversing mainly due to a decline in demand from the larger EU economies. The outlook for 2017 was not any better and the fall in net exports of goods was expected to be the main factor slowing down the Polish economy. Public spending was one possible way in which Poland’s economic growth could have been boosted in 2017. The government could increase the budget deficit and take other demand- stimulating actions. An interesting suggestion from the government was to decrease the retirement age back to its 2012 level (65 years for men and 60 years for women). All of these proposals might keep GDP growth above 3% until the end of the year. Source: Adam Czerniak, Poland Today, Issue 13, March 2017 Table 1.1: Poland’s current account of the balance of payments, 2014–2016 (million Euros) 2014 2015 2016 Balance of trade in goods −3 255 2 213 1 949 Balance of trade in services 9 059 10 915 13 700 Balance on primary income −13 961 –14 935 –15 859 Balance on secondary income –377 –846 –1 063 Source: National Bank of Poland (a) (i) Give an example of an item included in the balance on primary income. [1] (ii) Give an example of an item included in the balance on secondary income. [1] (iii) What is the trend in Poland’s current account balance from 2014 to 2016? [2] (b) Identify two policies adopted by the Polish government that could be considered as supply- side policies. [2] (c) Explain, with the help of a diagram, why the imposition of an indirect tax, such as a general sales tax, could discourage entrepreneurs from investing. [4] (d) Consider, using Extract 2, the likely changes in Poland’s aggregate demand in 2017. [4] (e) Discuss whether increasing the Polish government’s budget deficit will always have a positive impact on Poland’s economy. [6] Section B Answer one question.
Mark scheme
1(a)(i) The single mark is available for the identification of either a broad 1 This is the current IMF classification as per component of the Primary Income balance such as net factor incomes syllabus. from abroad Or a specific example of the broad component e.g. profit or dividends from investments abroad, interest on loans overseas, remittances from income earned abroad etc. (1 mark) The candidate must show clear understanding that this refers to items that represent an external transaction. 1(a)(ii) The single mark is available for the identification of either a broad 1 This is the current IMF classification as per component of the Secondary Income balance such as net transfers from syllabus. abroad Or a specific example of the broad component e.g. government aid, spending on overseas embassies etc. (1 mark) The candidate must show clear understanding that this refers to items that represent an external transaction. 1(a)(iii) The current balance shows a declining (1) deficit (1) 2 Candidates need to use the data in the table to calculate the deficit and that this is declining. It is essential that the correct term, ‘deficit’ be used. If the candidate states that the deficit is improving then allow 1 mark for deficit, but the second mark should only be awarded if it is clear that the candidate also understands that the deficit is going down. If for example the candidate uses the term deficit and then illustrates that the deficit has gone down in figures then this can be awarded 2 marks. 1(b) For identification of each valid policy (2 @ 1 mark) 2 Supply-side policies include any policies that aim to increase the aggregate supply. Any examples of policies that aim to achieve this should be credited. The examples might include the policy of expanding the quality and quantity of education, the use of EU funds to develop transport links, privatisation and market- oriented reforms. 1(c) For an appropriate diagram (Up to 2 marks) 4 The most appropriate diagram is one that shows a shift in the supply curve to the left, For an accompanying explanation that shows why this will deter with a rise in price and fall in quantity. This entrepreneurs from investing with due reference to falling sales as a shows that entrepreneurs will face a rise in result of the higher price and lower profit prospects (Up to 2 marks) price and a fall in sales and a likely fall in profits. Shifts in the aggregate supply curve are not acceptable. 1(d) For explaining that Extract 2 suggests that aggregate demand is likely to 4 There are a number of indications in Extract 2 fall (or rise. See below.) (1 mark maximum) to suggest that the Polish economy will slow down. For example, net exports and private For an explanation of how a change in any component would contribute investment are expected to fall. This leads to to this fall (or offset it. See below). the view that ‘the outlook was gloomy’ and (Up to 2 marks per component explained, 3 marks maximum) ‘there will be a significant slowdown in economic activity’. These changes must be 4 marks total linked to the predicted fall in aggregate demand. A candidate may recognise that the factors mentioned are likely to depress aggregate demand, but may go on to explain that whether Candidates may take the view that whether aggregate demand actually falls depends upon other factors. aggregate demand will actually fall depends Extract 2 suggests that the government might take action to offset upon the extent to which any government the fall and overall this might cause aggregate demand to rise. This action to increase aggregate demand such as approach could still be awarded full marks as long as it is well- increased public spending or ‘other demand argued and there is a clear explanation of the link between the stimulating actions’ overcome those factors action taken and aggregate demand. that are depressing aggregate demand. 1(e) For a clear understanding of the meaning of an increasing budget deficit 6 Candidates need to explain that an increasing and/or how this might arise in terms of G and T. (1 mark) budget deficit represents an increase in AD. This could be caused by a fall in taxes that will For explaining the potential positive effects of an increasing budget increase consumption, and/or a rise in deficit as aggregate demand increases. (Up to 2 marks) government spending that has a direct effect upon AD. They need explain that this will shift For explaining the potential negative effects of an increasing budget the AD upwards and increase equilibrium deficit as aggregate demand increases. (Up to 2 marks) national income. They then need to explain that the impact can be on prices and/or output For a conclusion that the impact will depend upon the relationship and employment and that this depends upon between aggregate demand and aggregate supply and the new the availability of unused resources. They equilibrium. (1 mark) then need to provide a conclusion on whether the impact will always be positive.