Economics 9708/43 May/June 2020: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 4 Data Response and Essays, May/June 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
In pursuit of well-being
It has been said that the mark of success of a government is raising the quality of life or the well-being of the people in the country. This is sometimes measured by the Human Development
Index (HDI). Table 1.1 shows the rank order of selected countries by the HDI and compares it with the rank by Gross Domestic Product (GDP) of that country.
In order to understand how people make decisions, governments in the United States (US), the
United Kingdom (UK) and Australia established Behavioural Insights Teams. They came to be known as the Nudge Units as they used nudge theories from behavioural economics.
It was hoped that this approach would help to achieve an increase in well-being as well as in economic growth and GDP. Nudge policies were used, with some success, to get people back to work, encourage them to pay their taxes on time and give them good reasons to save for future pensions or to study for improved qualifications.
They were not, however, sufficient to eliminate government budget deficits which remained at a high level. There was an ever-rising demand for public services but this was not matched by an equal rise in tax revenues so the deficit increased.
Eliminating the government budget deficit continued to be a problem. One method of dealing with the problem was to increase taxation. However, tax rates were already high and even higher tax rates would not result in the increase in revenue that was needed. An alternative option was to increase government borrowing. There might be a strong case to support economic growth, but increasing the deficit in order to achieve this could risk causing another financial crisis.
A third option was to reduce government expenditure on public services. This could be achieved without causing a reduction in the quality of the service and a reduction in well-being if increases in productivity took place. Without continued increases in productivity, however, further cuts in spending could have serious long-term detrimental effects, especially in health provision and education.
Table 1.1 Rank of selected countries by HDI and GDP in 2017
Rank HDI Rank GDP
(millions US$)
Norway 1 0.89 29 391 959
Australia 3 0.86 13 1 359 723
Germany 5 0.85 4 3 423 287
UK 13 0.83 5 2 496 757
Thailand 70 0.58 26 432 898
Botswana 103 0.43 115 15 564
Pakistan 117 0.38 43 251 487
Eswatini 121 0.36 157 3 938
Sources: RSA Issue 1, 2017
(a) What is meant by nudge theory? [2]
(b) Consider whether the information provides any evidence that nudge theory could increase an economy’s GDP. [6]
(c) Distinguish between demand-side and supply-side policies and identify and explain one demand-side policy and one supply-side policy from the information. [6]
(d) The information is entitled ‘In pursuit of well-being’. Discuss whether the information supports the idea that GDP is a good measure of well-being. [6]
Section B
Answer two questions.
Mark scheme
1(a) What is meant by nudge theory? 2
Policies designed to influence behaviour by persuasion or example in order to
achieve one of the main government economic policy aims.
1(b) Consider whether the information provides any evidence that nudge 6
theory could increase an economy’s GDP.
• paying taxes increases revenue which might be spent on projects to
increase GDP
• more people working reduces unemployment which increases income and
might help economic growth
• increasing saving for education might increase skill levels in the economy
and improve productivity.
1(c) Distinguish between demand-side and supply-side policies and identify 6
and explain one demand-side policy and one supply-side policy from the
information.
Distinction (2) identify (2) explain (2) demand side – changes in tax rates,
supply side – improving infrastructure, training, productivity, borrowing could be
used to stimulate either demand or supply
1(d) The information is entitled ‘In pursuit of well-being’. Discuss whether the 6
information supports the idea that GDP is a good measure of well-being.
HDI is said to be a measure of well-being. Countries are ranked by HDI. Some
countries with low HDI also have low GDP, but some with higher HDI do not
have highest GDP. Examples should be given. But the GDP is not by per
capita and does not use PPP. There is no real evidence that GDP is a
comparable accurate measure of well-being.
Discuss whether competitive markets in the private sector are the best way to achieve an efficient allocation of resources. [25]
Mark scheme
2 Discuss whether competitive markets in the private sector are the best 25
way to achieve an efficient allocation of resources.
Explanation of efficiency. Discussion of what is meant by competitive markets
and whether this means only perfect competition. Efficiency is achieved in
perfect competition but other competitive markets may not and individual
actions are not always best for society as a whole. Discussion of reasons for
market failure and necessity/desirability of government intervention to achieve
efficiency.
L4 (18–25 marks): For an accurate discussion of efficiency, competition and
market failure, with examples and a conclusion about the need for government
intervention. No conclusion – maximum 21.
L3 (14–17 marks): For a competent explanation of productive and allocative
efficiency and more limited discussion of different competitive markets. Still
expect a consideration of the reasons for market failure and the need for
government.
L2 (10–13 marks): For a briefer analysis of efficiency and of market failure with
few examples and no comment about different types of competitive markets.
No conclusion.
L1 (1–9 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Explain what is meant by a ‘consumer’s equilibrium position’ in indifference curve theory and how it can be used to form a demand curve. [12]
(b) One of the world’s first filmed singing commercials advertised a soft drink. It stated that, for the same price, consumers would get twice as much of that drink than that of its major rival. This made it cheaper and was similar to a price reduction. Its rival responded by an advertising campaign stating that its own drink was superior to the first firm’s inferior product.
Discuss whether it is possible to use diagrams from indifference curve theory to illustrate how a consumer might react to these two advertising campaigns. [13]
Mark scheme
3(a) Explain what is meant by a ‘consumer’s equilibrium position’ in 12
indifference curve theory and how it can be used to form a demand
curve.
Explanation of consumer equilibrium using indifference curves. Equilibrium
position should be determined initially, then for a change in price.
L4 (9–12 marks): For a sound explanation of the analysis and a clear comment
on how a demand curve is formed. A clear understanding of the principles
involved.
L3 (7–8 marks): For an accurate reference to the question but with a more
limited analysis probably without a good explanation of the construction of a
demand curve.
L2 (5–6 marks): For a briefer explanation of the analysis and equilibrium
position but with no link to the demand curve.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
3(b) One of the world’s first filmed singing commercials advertised a soft 13
drink. It stated that, for the same price, consumers would get twice as
much of that drink than that of its major rival. This made it cheaper and
was similar to a price reduction. Its rival responded by an advertising
campaign stating that its own drink was superior to the first firm’s
inferior product.
Discuss whether it is possible to use diagrams from indifference curve
theory to illustrate how a consumer might react to these two advertising
campaigns.
Analysis of income and substitution effects. The first drink could possibly be
represented by a shift in the budget line for a price reduction. The consumer
might substitute it for the rival drink. But the notion of a more superior drink
might result in a negative income effect.
L4 (9–13 marks): For a clear analysis of income and substitution effects and a
reasoned account of the changes in consumer equilibrium using both effects.
Accurate diagrams.
L3 (7–8 marks): For a weaker analysis of the two effects or diagrams which
contain slight inaccuracies.
L2 (5–6 marks): For a poor analysis and weak diagrams confusingly
presented.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
‘A firm is fully aware of market conditions and its best rational interest would be achieved by pursuing the clearly defined objective of maximising profits.’
Consider whether this statement has any merit in different market structures. [25]
Mark scheme
4 ‘A firm is fully aware of market conditions and its best rational interest 25
would be achieved by pursuing the clearly defined objective of
maximising profits.’
Consider whether this statement has any merit in different market
structures.
Candidates should consider each of the assumptions. Is the firm aware of
market condition, is its best interest achieved by maximising profits and in
which market structure might that be true.
L4 (18–25 marks): For a sound discussion of under what market structure the
firm will be fully aware of market conditions, and whether it is always best to
aim to maximise profits. Consideration of contestable markets, alternative
aims, price leadership, lack of information, degrees of competition and lack of
information. Maximum 21 no conclusion.
L3 (14–17 marks): For a competent comment but with consideration of only
part of the assumptions and a less developed analysis.
L2 (10–13 marks): For a weak comment on the assumptions and only a brief
explanation of alternative aims.
L4 (1–9 marks): For an answer that shows some knowledge but does not
indicate that the question has been fully grasped or where the answer is mostly
irrelevant.
After negotiation, the workers in an industry obtained from employers higher wage rates. The employers’ spokesperson said ‘the cost of the deal would have to be met through improved productivity or by reductions in other costs’.
Analyse whether this deal can be incorporated into the economic theory of wages and consider the possible outcome for employment of such a deal. [25]
Mark scheme
5 After negotiation, the workers in an industry obtained from employers 25
higher wage rates. The employers’ spokesperson said ‘the cost of the
deal would have to be met through improved productivity or by
reductions in other costs’.
Analyse whether this deal can be incorporated into the economic theory
of wages and consider the possible outcome for employment of such a
deal.
Candidates should discuss how the theory might incorporate a negotiated
wage rate and the effect of this on profits and employment. Discussion of how
the improvement in productivity and reductions in costs might influence the
outcome.
L4 (18–25 marks): For recognition of the theory applied to imperfect competition
and a discussion of the effect on profits and employment of fixing a wage above
the market rate. Consideration of shifting the MRP curve and/or the cost curve.
L3 (14–17 marks): For a competent explanation of the theory but with a more
limited discussion of the shifts in MRP and/or costs.
L2 (10–13 marks): For a correct but very brief analysis and some poor
evaluation.
L4 (1–9 marks): For an answer that shows some knowledge but does not
indicate that the question has been fully grasped or where the answer is mostly
irrelevant
(a) Explain what economists mean by an inflationary gap and discuss why this is considered to be an economic problem. Use a diagram(s) to support your answer. [12]
(b) How far would you agree that the use of monetary policy is the most effective way to solve the problem of an inflationary gap? [13]
Mark scheme
6(a) Explain what economists mean by an inflationary gap and discuss why 12
this is considered to be an economic problem. Use a diagram(s) to
support your answer.
A clear definition of the meaning of the term ‘inflationary gap’ will be supported
by an accurate, clearly labelled supporting diagram which identifies the
inflationary gap. Some attempt should then be made to consider why this might
cause economic problems. References might be made to the negative effect
on expectations, private investment, the exchange rates, savers and debtors
plus any other relevant effects.
L4 (9–12 marks): For an answer that explains the meaning of an inflationary
gap and which refers to at least three potential negative effects. The relative
importance of each identified effect should be considered.
L3 (7–8 marks): For an answer that identifies at least two negative effects
associated with an inflationary gap and considers their relative importance or
analyses three potential impacts on the economy associated with an
inflationary gap.
L2 (5–6 marks): For an answer that describes what is meant by an inflationary
gap and supports this with a reasonably accurate diagram and some brief
comment regarding potential negative effects on the economy.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
6(b) How far would you agree that the use of monetary policy is the most 13
effective way to solve the problem of an inflationary gap?
Responses should indicate a clear understanding of what is meant by monetary
policy and alternative methods of monetary control should be explained.
References should then be made to the problems associated with an inflationary
gap and an attempt made to discuss the effectiveness of alternative monetary
policies used to reduce an inflationary gap. The effectiveness of these polices
should be evaluated and compared with alternative fiscal/supply side policies.
L4 (9–13 marks): For a detailed explanation of why monetary policies might
solve problems associated with an inflationary gap. At least two types of
monetary policy should be considered. Alternative policy measures should then
be explained and discussed. A conclusion should then consider the relative
effectiveness of monetary policy options compared to fiscal/supply side
alternatives.
L3 (7–8 marks): For analysis of how monetary policy might work in order to
reduce an inflationary gap. A clear diagram will be provided and problems
associated with an inflationary gap will be identified. Only a brief comment will
be provided regarding alternative policy approaches.
L2 (5–6 marks): For an answer that focuses upon explaining what is meant by
an inflationary gap and describes alternative monetary policy options but does
not discuss the effectiveness of either monetary policy or alternative policy
options.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) ‘Developing countries have low levels of productivity and a high dependency ratio.’
Explain the meaning of these two characteristics and consider whether they are linked. [12]
(b) Assess the view that foreign direct investment remains the key to economic growth in developing countries. [13]
Mark scheme
7(a) ‘Developing countries have low levels of productivity and a high
dependency ratio.’
Explain the meaning of these two characteristics and consider whether
they are linked.
Candidates should provide clear explanation of the terms productivity and
dependency ratio. It is essential that the characteristics of both terms are
established within the context of undeveloped countries. Responses might
suggest that the two terms are linked, for example high dependency ratio might
be associated with low productivity or an increase in productivity might lead to
a reduction in the death rate and a reduction in the birth rate, due to its effect
on the overall level of increase of GDP. Alternatively, it could be argued that
the two are not necessarily related. A range of alternative responses would be
acceptable provided they are supported by an acceptable economic rationale.
L4 (9–12 marks): an answer that clearly explains both characteristics in the
context of an underdeveloped country and then discusses how each
characteristic might be linked. Responses should examine links which work
both ways, for example, why an increase in productivity might affect the
dependency and vice versa. Different approaches are acceptable but a
conclusion should be provided.
L3 (7–8 marks): For a clear explanation of both characteristics and their
relation to an underdeveloped economy. Some attempt to establish links
between these characteristics but the argument will not be fully developed.
L2 (5–6 marks): For a limited attempt to describe the two characteristics but
only provides a brief explanation of their relevance to an underdeveloped
economy. A brief outline of potential links might be described but not
discussed.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
7(b) Assess the view that foreign direct investment remains the key to
economic growth in developing countries.
Foreign direct investment should be explained referring specifically to the role
of private multinational corporations (MNCs) including references to improving
labour skills, building factories, promoting research and development.
Economic growth should be clearly defined as the increase in real GDP in a
specific time period. Alternative growth strategies such as export led growth,
direct government investment, structural change might be considered. The
importance of foreign direct investment should then be compared with the
alternative strategies identified.
L4 (9–13 marks): For an answer that clearly explains both characteristics in the
context of an underdeveloped country and then discusses how each
characteristic might be linked. Responses should examine links which work
both ways, for example, why an increase in productivity might affect the
dependency and vice versa. Different approaches are acceptable but a
conclusion should be provided.
L3 (7–8 marks): For a clear explanation of both characteristics and their
relation to an underdeveloped economy. Some attempt to establish links
between these characteristics but the argument will not be fully developed.
L2 (5–6 marks): For a limited attempt to describe the two characteristics but
only provides a brief explanation of their relevance to an underdeveloped
economy. A brief outline of potential links might be described but not
discussed.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
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Economics 9708/43 for May/June 2020 is out of 70 marks, with 2 hours 15 minutes to answer it.
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