Economics 9708/42 May/June 2023: question paper and mark scheme

Mark scheme

1(a) Explain what is meant by purchasing power parity (PPP). 2 A comparison of the cost of a bundle of goods and services bought with the local currency (1) with the cost of the same bundle bought with another currency (1) For example, a bundle which costs 500 Pakistan Rupees and 2 US$ would give a PPP of 250R = 1 $ (1) 1(b) Explain, with the help of a diagram, the likely impact of the BRI on both 4 the potential economic growth and the actual economic growth of Pakistan. Actual economic growth will reflect an increase in Pakistan’s GDP per year using existing resources.(1) Potential economic growth is the outwards movement of Pakistan’s PPC (1) Consumption PPC2 goods PPC1 PPC = Production possibility curve y x Capital goods Accurately drawn and labelled graph (1) showing showing/referring to both movement from x to y for actual economic growth and PPC1 to PPC2 for potential economic growth (2) Max 3 if diagram is not accurately drawn and labelled. 1(c) Consider, with reference to Table 1.1, the change in the standard of 6 living in Pakistan and China between 2014 and 2018. What is meant by the standard of living (SoL) (1) Split material and non-material SoL (1) GDP pc has risen for China 28% (1) and Pakistan 14% (1) Unemployment has fallen for countries for China (1) and Pakistan (1) Gini Coefficient has fallen in China (1) and risen in Pakistan (1) Max 3 marks for simple statements Link Material SoL to GDP pc both better off (1) Change in Gini coefficient means the increase in income has become more evenly spread in China and less evenly spread in Pakistan. (1) Material SoL is likely to have increased in China and may have fallen in Pakistan (1) Rising employment is linked to rising SoL (1) No data on non-material aspects of SoL such as pollution or working hours (1) Max 3 marks for further developments 1(d) Evaluate, using the article, the likely impact of the BRI on the economies 8 of Pakistan and China in the long run. Advantages China More exports of capital equipment rail equipment, cement and steel. Cheaper export routes to middle eastern and western market allowing development of western Chinese provinces. Use of excess Chinese capacity lowering Chinese cost of production at home boosting profits. Market for Chinese bank loans. Pakistan Inwards investment on railways/Gwadar port/industrial zones. Boost AD and AS leadings to higher non-inflationary GDP Investment in reliable electricity supply with benefits for industry, and improve consumer standard of living domestic comfort and human capital through better education. Disadvantages Power stations are coal/nuclear energy technology considered polluting. The former contributing to global warming. Debts for Pakistan to repay. Initial employment benefits for Pakistan unclear if construction uses Chinese labour. No clear indication of profitability to Pakistan Ability of Pakistan to repay the loans. Currently approximately 25% of GDP. Pakistan may default on repayment of loans to China. Judgement: Based on the evidence provided. (1) Guidance: MAX 5 marks for advantages. Both China and Pakistan must be considered. Max 5 Marks for disadvantages. Max 5 Marks if only one country considered. Max 7 marks for 2 sided answers. Judgement of the impact of BRI on Pakistan and China 1 mark. EITHER

Mark scheme

2 The increased use of electric vehicles (EVs) is encouraged as part of 20 governments’ climate change policies because they create fewer negative externalities than diesel and petrol (gas) vehicles. Evaluate, with the help of diagrams, two policies that a government may use to encourage the use of EVs. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis Market failure regarding this question would relate to allocative inefficiency. Market failure can be explained by defining allocative efficiency and linking this to the requirement to allocate resources to maximise consumer satisfaction. This can be supported by a diagram illustrating a level of output where AR = MC or MSB = MSC which is consistent with an outcome that achieves allocative efficiency. Negative externalities occur when the when the consumption/use of a good produces a cost to society which is greater than that received by an individual producer MPB > MSB or MSC >MPC. This is sometimes described as a negative ‘spill-over’ effect. The negative externality leads to an over production of the good. Government intervention takes place to address the failure of market forces to allocate resources efficiently. In this case positive externalities would lead to under-consumption of a good or service. Different types of government intervention can be used to correct the under-production of output to enable consumer satisfaction to be maximised. Forms of government intervention might include: the use of subsidies for consumers to increase consumption and also producers to change production methods, use of positive advertising; the direct provision of goods and services such as alternative transport methods. Indirect taxation. Nudge theory effects. A clearly labelled, accurate diagram can be used to show the impact of a positive/negative externality on the level of output and the welfare change will be identified. The diagram could show the market equilibrium point which does not take into account the existence of a negative consumption externality and may compare this with the allocatively efficient level of output when the negative externality is taken into account. The diagram may be amended or re-drawn to show the impact of a chosen policy(ies) and the impact on consumption or production shown. Reference to the diagram and the outcomes it illustrates is made in the text. 2 AO3 Evaluation A government might introduce a subsidy to encourage producers to increase output to enable allocative efficiency, however it is difficult to measure the precise value of the subsidy. Subsidies are costly in that the funds might have been used by governments for other purposes. This means governments will have to make a value judgement when deciding whether to provide a subsidy. Also, the impact on price and output in some circumstances takes a long time to become effective. Advertising is often costly and it is not always certain that it will have a sufficiently persuasive effect to ensure the correct level of output/ consumption is reached. Direct provision is also costly and sometimes less efficient than that provided through market forces. It is possible to show that government intervention can reduce the level of inefficiency caused by the existence of positive externalities but it is not clear whether the net effect of government intervention will always be positive. Some types of intervention will be more effective than others depending on the nature of the good/service under consideration. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 OR

Mark scheme

3 Evaluate, with the help of a diagram(s) how total market demand and 20 minimum efficient scale may determine the form of market structure in an industry. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis The concepts of increasing/constant/decreasing returns to scale and the minimum efficient scale (MES) of production the level of output where LRAC are initially minimized. The explanation of a number of examples of economies of scale: division of labour, financial, marketing, managerial technical and their impact on the long run average cost curve (LRAC). An analysis of the relationship between total demand for a product and the minimum efficient scale effectively total demand divided by MES to give the maximum number of firms who could operate at the MES. A description of different forms of market structure eg perfect competition, monopolistic competition, oligopoly or monopoly. An analysis of the relationship between the MES and the market demand determining the number of firms many/a few/one equivalent to perfect competition, monopolistic competition, oligopoly or monopoly. Examples MES and market demand. MES = 50% therefore in theory 2 firms – a duopoly MES 2% therefore 50 firms perfect/monopolistic competition. Relevant diagram for economies of scale with indication of MES and demand curve. AO3 Evaluation MES is not static and may change over time eg technological change. The definition of the market will affect the calculation of the relationship. The village shop which operates at a small scale is appropriate for the village market. Markets will still exist where particular firms produce small scale high- cost items e.g. luxury cars or designer clothes to satisfy a niche portion of a bigger market. Accept all valid responses AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 EITHER

Mark scheme

4 Consider the extent to which the depreciation of its foreign exchange 20 rate contributes to the economic growth of a low-income country. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis Knowledge and understanding of the effect of depreciation on the external value of a country’s currency (exchange rate - ER), economic growth and low-income country Analysis of this effect on the price of exports (X) and imports (M) and the effect on their demand and supply, links to aggregate demand (AD) through the balance of payments effect (X-M) Candidates may refer to this in terms of injections and leakages and their effect on AD AD and AS diagram showing this may be used to show the effect on the level of national income. Alternatively, the analysis of the increased injection may be through the multiplier effect and/or the 45° diagram. A clear link must be made between the effect of the depreciation and the level of economic growth, the type of economic growth: actual or potential should be made. AO3 Evaluation The ability of supply capacity in the low-income country to react to the effect of the depreciation. The nature of many developing countries exports of agricultural commodities being price inelastic in supply compared with oil exports. The short run effects on employment (positive) and inflation (negative) Beneficial effect on ability to service international debt positive if denominated in domestic currency but negative if borrowings are in a foreign currency. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 OR

Mark scheme

5 Evaluate the effectiveness of using monetary policy to reduce the rate of 20 inflation and how this policy may affect a government’s ability to achieve its other macroeconomic aims. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis A knowledge of monetary policies which might include interest rate, money supply, exchange rates and reserve asset ratio policy. A definition of inflation and a statement of a government’s macroeconomic aims: eg low unemployment, economic growth and balance of payments equilibrium. An explanation of the impact of higher interest rates to reduce inflation either through consumer demand or its impact on investment. This can be shown either through the monetary transmission mechanism analysis or AS/AD analysis. Alternative macroeconomic aims of the government are identified for example economic growth, unemployment and balance of payments. The model employed to analyse the reduction in inflation is applied to the alternative aims to find the outcomes. Phillips curve analysis may be used to demonstrate the relationship between inflation and employment to illustrate the unlikelihood of both low inflation and low unemployment being achieved together. AO3 Evaluation Evaluation may be concerned with either the analysis used to reduce inflation or the ability to meet all the macroeconomic aims. An initial analysis of the monetary policy to reducing the level of inflation which may be in terms of how accurate the central bank is in determining the increase in the rate of interest/reserve asset ratio required or reduction in the money supply. The time lags between policy implementation and outcome may also be discussed. Expectations and the role they play in determining policy outcomes. The model(s) employed will show either the effect of the policy on the alternative aims and requires an explicit comment on whether this enables the alternative to be achieved or not. Two examples of a contradiction in the simultaneous achievement of the aims need to be shown and commented upon. The short and long run implications of inflation reduction on achieving the alternative aims might be evaluated. The Phillips curve relationship may be criticised from the “rational expectations” viewpoint. 5 The short run and long run effects of the chosen inflation policy can be compared in terms of actual and potential reduction/increase in economic growth. The relationship between the rate of inflation, the exchange rate and the balance of payments including the Marshall-Lerner effect. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6