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Economics · Oct / Nov 2020 · Paper 21 · Question 5

0455

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Free trade has allowed the Mexican economy to specialise in low-cost manufacturing. Unemployment nationally is relatively low, but approximately 50 million people were still considered to be in poverty in 2016. In addition, there are worries that technological advances will soon replace labour with capital.

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  • 5(a)[2]

    State the rewards for labour and capital. Wages (1)

    for labour Interest (1)

    for capital

  • 5(b)[4]

    Explain the two types of poverty. Logical explanation which might include: Absolute poverty (1)

    is when someone cannot afford the basic necessities of life (1)

    less than $1.90 per day at PPP (1). Relative poverty (1)

    is when someone earns less than is needed to participate in the normal activities of society (1)

    when there is inequality (1). 4 One mark for identifying absolute poverty and one mark for an explanation. One mark for identifying relative poverty and one mark for an explanation.

  • 5(c)[6]

    Analyse how firms can benefit from specialisation. Coherent analysis which might include: Improve skills of workers (1)

    save time (1)

    lead to invention of new technology (1)

    increase productivity (1)

    raise quality (1)

    decrease average cost of production (1)

    decrease prices (1)

    increase demand (1)

    enable advantage to be taken of economies of scale (1)

    increase profits (1).

  • 5(d)[8]

    Discuss whether or not supply-side policy measures can reduce unemployment. In assessing each answer, use the table opposite. Why they can:

    decrease corporation / profit tax, more profits, more investments, more demand for labour, reduction in cyclical unemployment
    decrease interest rates, more borrowing, more investment, more demand for labour, reduction in cyclical unemployment
    decrease income tax, increase disposable income, more spending / demand for goods and services, more production, increase demand for labour
    government subsidies can encourage firms to expand and take on more workers, reduce cyclical unemployment
    increase spending on education and training, increase skills / productivity of labour, increase demand for labour, decrease structural unemployment.
    provide more information on jobs / job centres, easier for workers to find jobs, decrease frictional unemployment
    reduce unemployment benefit to reduce the time workers are between jobs, decrease frictional unemployment. Why they cannot:
    may be a time lag
    more investments could lead to increased technological development, less demand for workers
    education programmes not according to market needs Level Descriptors Mark A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content. Guidance
    privatisation could lead to firms cutting amount of workers
    decrease in minimum wage could decrease incentive to work
    may be a lack of total demand. Example of L2 answer: Supply-side measures such as training and education can help to reduce unemployment as they allow people to become more skilled and therefore increase their opportunities to become hired. Also, when a firm is subsidised by the government, it may have more money to invest in labour, and this would reduce unemployment. Privatisation can also cause a reduction in unemployment, as the private sector may be willing to invest more capital to labour to increase its output and this would reduce unemployment. On the other hand, supply-side measures may not reduce unemployment, because subsidies given to firms may increase its capital, but this may be used to become more capital-intensive rather than labour-intensive, which would not reduce unemployment. Also, if people are trained and educated, but gain skills that are not demanded, they may remain unemployed and therefore unemployment would not decrease. Privatisation may lead to firms becoming more capital-intensive rather than labour-intensive, and this would not reduce unemployment. Principal Examiner comment: Reasonable on both sides.
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