Economics · Oct / Nov 2016 · Paper 23 · Question 2

Define ‘a trade union’. [2]

An association / body / organisation/group of people (1)

which represents workers / members (1).

Explain two influences on the strength of a trade union. [4]

Level of economic activity/unemployment rate (1)

if there is high income economic growth/low unemployment demand for workers is likely to be high (1). Size of membership/proportion of workers who are members (1)

affects funds available/makes it more difficult to replace workers (1). Level of skills/qualifications of workers (1)

more skilled workers are harder to replace (1). If elasticity of demand for workers is elastic (1)

trade unions unlikely to be successful in raising wages (1). If wages are a small proportion of total costs (1)

unions have greater bargaining strength (1). If an essential industry /example (1)

unions more likely to be successful because important that industry/service is not interrupted by industrial action (1). Government legislation (1)

the more restrictions placed on trade unions, the less power they will have (1). Quality of the leadership (1)

skilful leaders are likely to be effective negotiators (1).

Analyse how wage increases may cause unemployment. [6]

Wage rises may increase costs of production (1)

if rise more rapidly than productivity (1)

higher costs of production may increase prices (1)

higher prices may reduce demand (1)

lower demand will reduce firms. revenue/profits (1)

firms may reduce output (1)

fewer workers will be needed to make a lower output (1). Higher wages may increase costs of production (1)

firms reduce costs by substituting capital for labour (1). Firms may relocate to areas where wages are lower (1)

to reduce costs (1). Expect higher skills if pay higher wages (1)

so may make some unskilled workers redundant (1)

as return from their labour is not sufficient (1). Higher wages may affect particular industries (1)

resulting in structural unemployment (1).

Discuss whether a government should devalue the country’s exchange rate. [8]

A devaluation will reduce the price of exports (1)

raise the price of imports (1). Up to 5 marks for why it should: Export revenue may increase (1)

and import expenditure may fall (1)

improving the current account position/reducing a current account deficit (1). May increase total demand (1)

causing economic growth (1)

reducing unemployment (1). The currency may initially be overvalued (1)

foreign reserves may have to be used to buy the currency (1). Some MNCs may be attracted by a lower exchange rate (1)

make exports from the country more competitive (1). Up to 5 marks for why it should not: It may cause inflation (1)

rise in price of finished imported goods (1)

rise in price of imported raw materials (1)

higher costs of production (1)

higher total demand (1)

because of rise in net exports (1). The currency may have initially been undervalued (1)

there would have been upward pressure on the exchange rate (1). If a large devaluation other countries may retaliate (1)

by putting on tariffs (1)

making exports less price competitive (1). If country is reliant upon imported raw materials (1)

may result in imported inflation (1)

will make exports less competitive (1). If exports are inelastic in demand (1)

export revenue may not rise (1). Higher demand for exports without matching increase in production (1)

can result in demand- pull inflation (1). May result in loss of confidence in MNCs (1)

resulting in lower FDI and economic growth (1).