Economics · Oct / Nov 2020 · Paper 22 · Question 2
0455
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Mexico has a history of trade deficits. The government is moving the economy closer to free trade, to try to improve its macroeconomic performance. It was predicted in 2017 that Mexico’s economy would experience a small rise in its unemployment rate. In 2017 the economy’s inflation rate was 6.6%, the highest rate since 2001. A number of policy measures may be used to reduce inflation, including increasing the rate of income tax.
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2(a)[2]
Define trade in goods balance. Value of exports of goods / revenue earned from exports minus value of imports of goods / expenditure on imports of goods (2). Exports minus imports (1)
of goods / visible items (1). 2 Accept exports (of goods) = imports of (goods) for 1 mark
2(b)[4]
Explain two benefits producers may gain from free trade. Logical explanation which might include: Availability of larger/global market (1)
may increase revenue/profit (1). Ability to produce on a larger scale / higher output (1)
take advantage of economies of scale (1)
specialise (1). Access to cheaper / better quality raw materials / raw materials without tariffs imposed on them (1)
lowering costs of production/raising quality of products produced/lowering price (1). Access to advanced technology/ideas from abroad (1)
resulting in improved methods of production/new products (1). Increased competitive pressure (1)
which may raise efficiency (1). 4 One mark for each of two benefits identified and one mark for each of two explanations.
2(c)[6]
Analyse, using a production possibility curve (PPC) diagram, the effect of an increase in unemployment on an economy. Up to 4 marks for the diagram: Axes correctly labelled (1). Curve drawn as a curve or downward sloping line to the axes (1). Two production points shown – one on or to left of PPC and the other further to the left of the PPC (1). Movement of the production point inwards indicated by arrow or lettering (1). Up to 2 marks for coherent analysis which might include: Unemployment means resources are not used (1)
there is inefficiency (1)
reduces output/GDP / causes a recession (1). For analysis, only accept a PPC shifted inwards if logical justification is given i.e. an increase in unemployment may cause some workers to leave the labour force – ‘unemployment causing unemployment’. capital goods O consumer goods A B
2(d)[8]
Discuss whether or not an increase in the rate of income tax will reduce inflation. In assessing each answer, use the table opposite. Why it might:
reduce disposable income/purchasing powerconsumer expenditure likely to fallinvestment may falltotal (aggregate) demand may falldemand-pull inflation may decreasehigher government revenue may increase government spending on supply-side policy measures. Why it might not:workers may seek higher wageshigher wages may increase costs of productioncost-push inflation/wage-price spiral may occurhigher tax revenue may increase government spendinghigher government spending may offset lower consumer expenditure leaving total (aggregate) demand unchangedpeople may be very confident about the future so they cut back on savings rather than spending. 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 Example of L3 answer: Due to an increase in the rate of income tax, inflation may fall as disposable income will fall. People will have less money to spend so they may spend less and total demand will fall. A fall in demand will cause prices to fall as producers will not be able to sell as many goods and services. They will want to keep their market share. Demand-pull inflation will decrease. However, an increase in income tax may not cause inflation to fall. Workers may force up the wage rate. Firms’ labour cost and costs of production will increase so firms may push up prices to maintain profits. This can cause cost-push inflation and a wage price spiral. Plus, government revenue from high taxes will rise and government spending may rise. This may offset the fall in consumer expenditure and inflation may not fall. Principal Examiner comment: Strong on both sides. Example of L1 answer: Inflation refers to the fall in the purchasing power of money. Income tax is a payment to the government. The increase in direct tax will definitely help the government. This may help the government solve the problem of inflation and will increase the purchasing power of money. Principal Examiner comment: Definitions given but the answer does not explain why inflation may, or may not, be reduced.
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