Economics · Oct / Nov 2020 · Paper 22 · Question 5
0455
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The question as text
Wage rate growth has increased recently in Kazakhstan, but its economic growth rate has slowed. This is, in part, due to a fall in exports. To try to increase the economic growth rate, the government has increased its spending on investment. In August 2015, it adopted a floating foreign exchange rate system in an attempt to improve the country’s macroeconomic performance.
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5(a)[2]
Define wages. A payment/reward (1)
to labour/workers (1).
5(b)[4]
Explain two reasons, other than methods of protection, why a country’s exports may fall. Logical explanation which might include: Lower incomes abroad (1)
reduce the ability of foreigners to buy the country’s exports / lower demand (1). Rise in the foreign exchange rate (1)
will make exports more expensive (1). Quality may fall (1)
e.g. educational standards may have declined (1). Price may rise (1)
due to inflation/higher costs of production/lower productivity/making exports less competitive (1). Domestic demand may rise (1)
products may be switched from the export to the home market (1). Lower output (1)
reduce the ability of firms to export as many goods and services / result of fewer resources (1). 4 One mark for each of two reasons identified and one mark for each of two explanations.
5(c)[6]
Analyse how a rise in investment could increase a country’s economic growth rate. Coherent analysis which might include: More investment will increase total (aggregate) demand (1)
there will be more capital goods (1)
these may be more efficient / embody advanced technology (1)
productive capacity will increase / productivity rise (1)
costs of production may fall (1)
prices may fall (1)
quality may rise (1)
more products may be demanded by domestic consumers (1)
foreign buyers / more exports (1)
output may increase (1). Higher investment may increase employment (1)
raise income (1). Investment in human capital/education/healthcare (1)
can raise productivity (1).
5(d)[8]
Discuss whether or not a country should switch from a fixed foreign exchange rate system to a floating foreign exchange rate system. In assessing each answer, use the table opposite. Why it should:
the government will not have to devote time and attention to maintaining the exchange rate and so may use policy measures to e.g. reduce inflationfewer foreign exchange reserves would have to be kept to maintain the exchange rate. These could be used to stimulate economic activityexchange rate may be lower which may increase economic growth, lower unemployment and improve the current account position. Why it should not:a lower exchange rate may cause inflationfluctuations in the exchange rate may create uncertainty. This may discourage investment and reduce economic growthmay discourage MNCs from setting up in the countrya higher exchange rate could reduce economic growth, employment and harm the current account position. 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: A floating exchange rate changes with changes in demand and supply. A country should switch from a fixed foreign exchange rate system to a floating exchange rate system as there will be no need to keep foreign reserves so it can spend foreign reserves on something else. A country can easily change monetary policy changing interest rate without being worried. It can concentrate on other aims and not the exchange rate. Floating exchange rate automatically adjust current account of the balance of payments as increase in demand for exports will increase exchange rate reducing demand on exports. A country should not switch from fixed foreign exchange rate system to floating exchange rate as speculation could say that the value of local currency will decrease so people will sell it causing value to decrease as it will have lower demand. The uncertainty about export and import prices may discourage MNCs. Principal Examiner comment: Strong on one side and reasonable on the other.
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