Econ

Question 1

Describe the meaning of real income

Answer 1

real income is income adjusted for the effects of inflation/income with the effects of inflation removed

Question 2

Describe the way in which the rate of inflation is calculated in the UK

Answer 2

complete the Living Costs and Foods Survey/complete a survey to
find out what average families buy (1)
* create a basket of goods based on the results of the survey (1)
* items in the basket are updated annually (1)
* the costs of housing are not included in the basket (1)
* give a weight to each item in the basket based on
importance/proportion of household spending (1)
* gather priced from retailers around the country (1)
* check prices from last time/base year (1)
* calculate percentage change in prices (1)
* add up all the percentage changes and calculate an average
change, which is inflation (1)

Question 3

Describe demand-pull inflation

Answer 3

when demand is increasing faster than supply, prices will rise (1)
* when demand exceeds supply, prices will rise (1)
* when there is excessive demand in the economy, prices will rise (1)

Question 4

Explain the way in which monetary policy could be used to reduce a high inflation rate

Answer 4

interest rate could be increased (ID) to discourage borrowing by
making it more expensive/encourage saving by making it more
rewarding (1). The reduction of spending due to less
borrowing/more saving will reduce aggregate demand in the economy (DEV) (1)
* reducing aggregate demand will reduce the demand-pull pressure
in the economy and will reduce the rate at which prices are
increasing (DEV) (1)

Question 5

Explain the impacts on consumers of a fall in their real income

Answer 5

consumers are no longer able to afford their preferred brands
(ID) so this may affect their (perceived) standard of living (EXP)
(1)
* consumers may be forced to shop around/‘shoe leather cost’ (ID) which is an opportunity cost of time (EXP) (1)
* borrowing may increase (ID) as normal daily costs can’t be
covered (EXP) (1) heating vs eating (DEV) (1)
* consumers are less able/willing to save (ID) increasing financial uncertainty in future/unable to save for ‘a rainy day’ (EXP) (1)
* unable to save for mortgage deposit (ID) therefore unable to get on the housing ladder (EXP) (1)
* reduces consumer confidence (ID) making them less willing to purchase luxury items/‘high-ticket items’ (eg holidays/cars) (EXP) (1) which will have an impact on quality of life (DEV)

Question 6

Compare scarcity with a shortage

Answer 6

unlimited wants whereas demand exceeds supply (1)
permanent - can never be
resolved whereas temporary (1)
wants are unlimited whereas demand is not met (1)
wants never fully satisfied due to human nature etc whereas cured by a rise in
price/an increase in
supply (1)
universal whereas limited to a certain market (1)

Question 7

Explain the shape of a normal demand curve.

Answer 7

the income effect (ID) causes demand for a product to fall when price rises, because it becomes less affordable (EXP) (1)
* the substitution effect (ID) causes consumers to switch to cheaper substitutes as price rises (EXP) (1)
* the Law of Diminishing Marginal Utility (ID) states that as more of a good is consumed, the marginal utility gained from the consumption of an additional unit decreases (EXP) (1). A
consumer will only demand additional units if price is lowered (DEV) (1), this is because the lower price reflects the lower
satisfaction gained from consuming one more unit of the product (DEV) (1)

Question 8

Describe what is meant by price inelastic demand

Answer 8

the percentage change in quantity demanded is less than the
percentage change in price/any % change in price will cause a
smaller % change in the demand for it (1)
* % change of quantity demanded/% change in price (1)
* the PED formula will be less than one (1)
* total revenue will fall if price goes down for a price inelastic
good/total revenue will increase if the price increases of a price
inelastic good (1)

Question 9

Explain factors which affect the price elasticity of demand for goods and services

Answer 9

availability of substitutes (ID) this is because if substitutes are
available consumers will be more likely to switch to a cheaper
similar good when price goes up. (EXP) (1) eg Tesco toothpaste
for Colgate (DEV) (1)
* degree of necessity (ID) the more essential a product is the less
responsive consumers will be to a change in price (EXP) (1) eg
bread or milk (DEV) (1)
* proportion of income (ID) the smaller the percentage of income
spent on a good/service the less responsive consumers will be to
a change in price. (EXP) (1) eg matches (DEV) (1)
* frequency of purchase (ID) the ability to postpone the purchase
means that consumers will be less responsive to a change in price
(EXP) (1) eg Sofas (DEV) (1)
* brand loyalty (ID) if consumers have a brand preference, they
may be less likely to respond to a change in price (EXP) (1)
* habit forming (ID) if a product is addictive consumers will be less
likely to respond to a change in price (EXP) (1) eg cigarettes
(DEV) (1)
* the longer the time period since the price change (ID) this is
because consumers have more time to find alternatives (EXP) (1)
eg changing from oil fired heating to a heat pump (DEV) (1)
* how widely defined a good is (ID) the wider the definition the
less responsive consumers will be to a price change (EXP) (1) eg
crisps and Walkers crisps (DEV) (1)

Question 10

Describe the factors which cause average costs to fall in the short run

Answer 10

AFC is spread over a continually larger number of units causing
ATC to fall (1)
* AVC fall initially due to increasing returns to the variable factor
(1). This is due to increased specialisation/division of labour
(DEV) (1). This is due to discounts on materials as a greater
number are purchased (DEV) (1)
* in the short run at least one factor of production is fixed (DEV)
(1)

Question 11

Describe internal economies of scale

Answer 11

cost savings due to the increased size of the firm (1)
* purchasing economies are when discounts can be negotiated due to size of order/bulk purchases can be made (1)
* technical economies when size of operation permits increased use of large-scale machinery/equipment (1)
* management economies for example employing specialist staff (1).
* A Purchasing Manager will be able to negotiate better deals with suppliers (DEV) (1)
* financial economies for example when banks view a large firm as more credit-worthy (1). This will mean firms can obtain lower
interest rates on their borrowing (DEV) (1)
* risk-bearing economies ie diversifying into a range of
goods/services, to reduce risk from failure of any one (1)

Question 12

Distinguish between regressive and progressive taxation

Answer 12

the proportion of income paid in tax falls as the income of the taxpayer rises/lower income earners pay a higher percentage of their income in tax/the poor pay proportionately more than the rich whereas the proportion of income paid in tax rises as the income of the
taxpayer rises/higher income earners pay a higher percentage of their income in tax/the rich pay proportionately more than the poor (1)
favoured by the wealthier
as proportionately they pay
less whereas favoured by those on lower incomes as they will pay proportionately less\favoured by some in society as seen as fairer (1)
indirect taxes whereas direct taxes (1)
for example, VAT, duties
on alcohol, petrol, road tax whereas
for example, income
tax, inheritance tax,
corporation tax
(1)

Question 13

Describe 3 types of unemployment

Answer 13

frictional unemployment – due to time taken to move between
jobs (1)
* cyclical/demand deficient unemployment – due to downturns in aggregate demand (1)
* structural unemployment – due to decline in traditional industries (1)
* seasonal unemployment – due to the nature of jobs at certain times of the year (1)
* regional unemployment – due to areas of high unemployment occurring in certain areas of the country when firms/industries close/decline (1)
* technological unemployment – workers replaced by automation
of the production process (1)

Question 14

Explain ways in which fiscal policy could be used to decrease unemployment

Answer 14

Increase Spending
* increase capital spending (ID) creating projects which increase employment (EXP) (1). The multiplier effect will stimulate further growth/demand for labour (DEV) (1)
* increase current spending (ID) for example building new schools gives construction jobs (EXP) (1). This will allow employment of new teachers/this will increase potential for school leavers to
achieve gainful employment (DEV) (1)
* increased government spending would increase circular flow of income/money flowing in the economy/AD (ID) which may lead to firms expanding, creating jobs (EXP) (1) for example, increasing spending on public sector wages would lead to more
discretionary income/consumer demand (DEV) (1)
* increasing spending on education (ID) higher skilled workers will be more employable (EXP) (1)
Reduce Taxation
* reduced corporation tax (ID) which would increase funds available for firms to invest and create jobs (EXP) (1)
* reduced Income Tax/VAT (ID) which would lead to more disposable income consumer spending and increase output/supply/jobs (EXP) (1) incentive to work (DEV)

Question 15

Explain what is meant by a multiplier
effect

Answer 15

an injection into the economy (ID) causes a larger increase in
final national income (EXP) (1). Injections increase the flow of
income in an economy and leakages/withdrawals reduce it (EXP)
(1) and the extent of the increase/decrease depends on the
multiplier (DEV) (1). This will lead to firms hiring more resources
and increasing their output (DEV) (1) increased incomes will
increase consumer spending (DEV) (1) one person’s spending
becomes another person’s income (DEV) (1). This process
continues round the circular flow until the new, higher
equilibrium level is reached (DEV) (1). Output and economic
growth are increased (DEV) (1)
* due to the multiplier the increase in national income may be
greater than the original injection (DEV) (1)
* the formula is 1/1-mpc or 1/MPS (1)
* credit a numerical example eg if the MPC is 0.8 then the
multiplier will be 5; if there is an increase in spending of £1bn
then the increase in national income will be £5bn (1)
* credit an applied example – eg Radio One Big Weekend in Dundee
2023 (1)
* the extent of the multiplier is determined by the MPC or MPS (1)

Question 16

Explain types of market failure

Answer 16

Demerit goods - they will be overprovided by the market as they will driven by private profit. However these goods have social costs that exceed the private costs.
the under-provision/non-provision of public goods (ID) because
firms are not able to charge and make profit from providing
it/non-payers or “free riders” cannot be excluded from using the
goods (EXP) (1)
* the under-provision of merit goods (ID) because if left to free
market, many people would not be able to access these services
as they couldn’t afford it/society would not be able to benefit if
these services weren’t available to all (EXP) (1)
* monopoly/one firm may dominate a market (ID) which means
reduced consumer choice/higher prices/poorer quality (EXP) (1)
* negative externalities (ID) which are costs which private firms do
not account for in production/the costs of spill-over effects
imposed on a third party (EXP) (1)
* positive externalities (ID) which benefit society and may be
underprovided by the market (EXP) (1)
* wealth/income inequality (ID) an inefficient allocation of
resources due to wealthier people having access to more
resources than others (EXP) (1)
* lack of information (ID) where there is unequal knowledge
between the producer and consumer of a product (EXP) (1)

Question 17

Other than taxation matters, describe economic powers which have been devolved to the Scottish Parliament by the UK Government

Answer 17

determining the price/promotion of alcohol (1)
* awarding of rail passenger franchises (1)
* making budgetary decisions on health (1), such as having no
prescription charges (DEV) (1)
* making budgetary decisions on education (1), such as having no
tuition fees for further education (DEV) (1)
* the ability to build up a budget surplus (1) to a limit of £125m
(DEV) (1)
* limited resource borrowing (1) of up to £600 million each year/
£1.75 billion overall (DEV) (1)
* capital borrowing powers up to 15% of overall borrowing cap (1)
equivalent to £450 million a year/£3 billion in total (DEV) (1)
* some aspects of social security/make budgetary decisions on
welfare (1) - responsibility for 11 benefits/including disability
living allowance/personal independence payments/carers’
allowances/subsidising bedroom tax (1)
* full economic decision making on agriculture, forestry & fisheries
(1)
* full economic decision making on tourism (1)
* full economic decision making on economic development (1)
* full economic decision making on social housing policy (1)
* policy making on environmental issues (1) including
environmental protection/climate change/pollution
matters/waste management/water supplies (DEV) (1)

Question 18

Describe what is meant by a ‘negative multiplier effect’

Answer 18

when a decrease in demand/spending leads to a proportionately greater decrease in National Income (1)
* spending is related to income so when less is spent, less is received in income (1). This is because a reduction in spending by one group (C+I+G) would mean a greater reduction in income (Y) for others (DEV) (1)
* credit example linked to case study – if a car factory closes, fall in demand/spending will have a negative knock-on effect on
local shops, pubs, restaurants etc (DEV) (1)
* can be caused by a reduction in injections/increase in
withdrawals (accept example of injection/withdrawal) (1)
* can be calculated by the formula is 1/1-MPC or 1/MPS (1)
* credit numerical example – for example if MPC is 0.75 then multiplier will be 4/if Investment reduces by £2 bn then National
Income decreases by £8 bn (DEV) (1)

Question 19

Explain supply side policies which could be used to help reduce unemployment

Answer 19

invest in better transport links/infrastructure (ID) meaning unemployed can access jobs in further away locations (EXP) (1)
* more job centres (ID) make unemployed more aware of vacancies (EXP) (1)
* strategies to help make rented accommodation more readily available and affordable/increase the supply of affordable social housing (ID) which increases geographical mobility (EXP) (1)
* more “back to work schemes” (ID) giving unemployed advice, help with CVs, coaching in employability skills (EXP) (1)
* increasing training opportunities (ID) making the workforce more flexible and therefore employable (EXP) (1)
* providing subsidies/grants to firms (ID) meaning that firms may need more workers (EXP) (1)
* reducing trade union power (ID) could lead to employers being able to afford to take on more workers (EXP) (1)
* a reduction in corporation tax (ID) would increase potential for future investment which may allow firms to take on more workers
(EXP) (1)
* deregulation (ID) allows new entrants to a market, necessitating recruitment (EXP) (1) for example bus deregulation (DEV) (1)

Question 20

Distinguish, using examples, between economic goods and free goods

Answer 20

needs the use of scarce resources to produce it whereas is abundantly supplied (1)
creation has an opportunity cost whereas creation does not deplete scarce resources (1)
carries a price whereas does not command a price (1)
for example car, for example air

Question 21

Describe, using an example, what is meant by joint demand

Answer 21

Description:
* joint demand is when the demand for one good/service is
directly related to the demand for another (1)
* demand for two or more goods is interdependent/complementary (1)
Example:
* for example, smartphones and apps (1)

Question 22

Describe, using an example, what is meant by joint supply

Answer 22

Description:
* joint supply is when a process results in more than one output (1)
* an increase in the supply of one product leads to an increase in supply of another product/a by-product (1)
Example:
* sheep can produce meat/wool/sheepskin (1)

Question 23

Explain, using examples, the reasons for some demand curves not being downward sloping

Answer 23

speculation (ID) is when consumers purchase more of a good
when its price rises because they expect it to rise further in the future (EXP) (1) for example houses/shares/euros (DEV) (1)
* ostentatious/Veblen goods (ID) involve consumers purchasing more of a good because it is well-known/expensive, to “show off” (EXP) (1) for example Rolex watch (DEV) (1)
* Giffen goods (ID) involves low-income consumers purchasing more basic food products as prices increase, because they cannot afford to purchase anything else (EXP) (1) for example
rice/potatoes (DEV) (1)
* if the quality of a good does not easily have an
identified/perceived link between price and quality (ID), high price may be used as a measure of high quality, causing an increase in demand (EXP) (1) for example expensive shampoo
such as Aussie (DEV) (1)

Question 24

Describe 2 macroeconomic aims of the UK government

Answer 24

low and stable rate of inflation/inflation at target of 2%
CPI/between 1% and 3% CPI (1)
* positive/sustainable economic growth (1)
* low rate of unemployment/below 4%/full employment/NAIRU (1)
* keeping the balance of payments in balance/surplus (1)

Question 25

Explain the impact of an increase in interest rates on individuals and firms

Answer 25

Individuals
* consumers will gain a higher return on savings (ID) therefore they are encouraged to save more (EXP) (1)
* mortgages will become more expensive (ID) which will reduce consumers’ ability to consume other things (EXP) (1)
* personal loans will become more expensive (ID) so individuals defer spending on ‘high ticket’ items (EXP) (1)
* consumers less likely to use credit card/HP (ID) as spending is more expensive (EXP) (1)
Firms
* borrowing will be more expensive for firms (ID) therefore they are discouraged from borrowing (EXP) (1). This may lead to a
reduction in investment (DEV) (1)
* increased supplier costs may be passed on which may mean a rise in the costs of production/higher prices (ID) which leads to a decrease in the demand for their products/lower sales and
profits (EXP) (1). This could lead to job cuts (DEV) (1)

Question 26

Discuss the costs and benefits of economic growth

Answer 26

Costs
* if AD increases faster than AS then demand-pull inflation may
occur (1)
* increased AD may lead to increased imports (1) and a resultant is increased deficit on the current account (DEV) (1)
* cost–push inflation may arise as firms increase output and import more raw materials (1)
* increased production may lead to increased social costs such as congestion and pollution (1)
* scarce/non-renewable resources are used up (1)
* increased growth does not necessarily increase standards of living for all – income inequality may result (1)
Benefits
* increased production leads to greater levels of employment (1)
* increased employment leads to higher standards of living (DEV) (1)
* increased employment leads to increased tax revenue for the government (DEV) (1)
* economic growth encourages foreign direct investment (1)
* economic growth can lead to reduced public sector/government
borrowing (1) which can reduce the national debt (DEV) (1)
* improved national credit rating (1)
* can lead to increased exports (1) which can improve the balance of payments deficit (DEV) (1)
* economic growth increases confidence which encourages
enterprise (1)

Question 27

Describe uses of national income statistics

Answer 27

compare figures against other countries (1)
* compare figures against previous years (1)
* calculate the country’s rate of economic growth (1)
* evaluate/compare living standards in a country (1) by dividing
the NI by head of population (1) (DEV)
* compare performance in different sectors of the economy (1)
* evaluate success/failure of economic policies (1)
* identify areas where government assistance may be required (1)
* calculate the amount of contributions required, for example to IMF (1)

Question 28

Describe reasons for economic growth being a government objective

Answer 28

to achieve higher standards of living/lift people out of poverty
(1)
 to increase employment/to reduce transfer payments (1)
 to help reduce income inequality (1)
 to increase profits for firms (1)
 to increase tax revenue (1)
 to attract foreign direct investment projects (1)
 to reduce government borrowing (1)
 to improve public services (1)
 to promote research and development spill over effects (1)
 to potentially increase exports improving the B of P (1)
 to appear better than other countries when compared/in league
tables (1)

Question 29

Explain why ‘investing more in infrastructure projects’ may result in an even greater increase in National Income

Answer 29

better infrastructure may improve geographical mobility of labour (ID) which allows vacancies to be filled, increasing output (EXP) (1)
 better infrastructure improves business transport/
communications (ID) which can lower costs of production (EXP)
(1) This will increase productivity/output (DEV) (1) This will increase profits for firms allowing them to expand (DEV) (1)
 better infrastructure may attract FDI (ID) which can increase output/GDP (EXP) (1)
 government may receive more tax revenue (ID) which can be spent on education and training so increase output (EXP) (1)
 investing creates jobs and incomes in the economy (ID) which generates demand/consumer spending (EXP) (1)
o this leads to further investment spending or increased
AD/output/consumer spending (DEV) (1)
o this creates further jobs and incomes (DEV) (1)
o this triggers the multiplier effect (DEV) (1)
o the formula for this is 1/1-MPC or 1/MPS (DEV) (1)
o the effect is most impactful when MPC is high/MPS is low
(DEV) (1)
 for example, if the MPC is 0·8 (ID) then the multiplier will be 5
times (EXP) (1). If £1 billion is spent developing infrastructure,
then there will be an overall increase in national income of £5 billion (DEV) (1)

Question 30

Describe what is meant by ‘current spending’

Answer 30

day to day spending (1)
 ongoing/regular spending on items replaced/used up/consumed regularly (1)
 examples include, nurses’ wages, bandages, hospital food (DEV) (1)

Question 31

Explain why the government intervenes to provide public goods

Answer 31

to ensure they are provided/free to access for all (ID) as private
firms will not supply them/they are non-excludable/non
rivalrous/face the ‘free rider’ problem/have no profit motive
(EXP) (1)
 to ensure essential services are accessible by all (ID) to maximise
welfare (EXP) (1)
 to ensure services such as police/street lights are provided (ID)
to reduce crime/accidents (EXP) (1)

Question 32

Explain why the government intervenes to provide merit goods

Answer 32

to ensure that they are provided to everyone (ID) as the
government believes all of society deserve to benefit from them
(EXP) (1)
 to ensure they are provided/free to access for all (ID) as these
are underprovided/under consumed by the market/can only be
afforded by the rich (EXP) (1)
 to ensure services such as health care and education are
available to all (ID) in order to improve welfare/life
expectancy/standards of living/productivity (EXP) (1)

Question 33

Define scarcity

Answer 33

scarcity is the problem of unlimited wants faced with finite
resources (1)
 scarcity is a universal problem/affects all economies (1)
 scarcity is permanent (1)
 scarcity is a relative concept (1)

Question 34

Explain methods of reducing the impact of scarcity

Answer 34

discovery of new resources (ID) for example finding new reserves of oil (EXP) (1)
 specialisation (ID) in order to improve efficient use of scarce resources (EXP) (1)
 resource substitution (ID) can help reduce the pressure on finite resources (EXP) (1). For example, using machinery instead of labour (DEV) (1)
 alternative resources can be sought (ID) for example solar/wind energy instead of fossil fuels (EXP) (1)
 geographical mobility of resources can be improved (ID) for example helping workers find employment across the country (EXP) (1)
 occupational mobility can be improved (ID) for example, training schemes which provide workers with flexible skills (EXP) (1)
 new production techniques (ID) to increase productivity (EXP) (1) for example, Japanese management styles/techniques or performance-related pay (DEV) (1)
 encouraging immigration (ID) to increase the supply of labour (DEV) (1)
 reduce level of wants (ID):
o by educating regarding sustainability (EXP) (1)
o by use of price mechanism for example max/min price to ‘ration’ (EXP) (1)
 ensure the economy is efficient (ID) with productive, allocative efficiency and full employment (EXP) (1)

Question 35

Describe factors which increase the supply of a product

Answer 35

 if the price of the product rises producers will divert resources to increase supply (1)
 if the cost of production falls supply will increase (1)
 new technology will increase the supply of a product (1) for example, automation making it possible to increase the
production of a product (1)
 good weather increases output of agricultural products (1)
 payment of subsidies/grants encourages firms to increase supply (1)
 if taxes are imposed on imported goods, domestic firms will be encouraged to increase supply (1)
 prices of substitute goods may encourage firms to divert
resources, increasing supply of high priced goods (1)
 goods in joint supply − an increase in the supply of one will lead
to increased supply of the other (1)

Question 36

Describe internal and external economies of scale

Answer 36

Internal economies of scale
 cost savings due to the increased size of the firm (1)
 purchasing economies are when discounts can be negotiated due
to size of order/bulk purchases can be made (1)
 technical economies when size of operation permits increased
use of large-scale machinery/equipment (1)
 management economies for example employing specialist staff
such as accountants (1)
 financial economies for example when banks view a large firm as
more credit-worthy (1)
 risk-bearing economies ie diversifying into a range of
goods/services, to reduce risk from failure of any one (1)
External economies of scale
 cost savings due to the increased size of the industry (1)
 local colleges may provide directly relevant training (1)
 ancillary firms locating close to industry (1)
 agglomeration or clustering economies of scale (1)
 transportation infrastructure provided by local authority (1)

Question 37

Explain ways in which fiscal policy measures can be used to reduce the level of income inequality in the UK

Answer 37

Taxation
 increase income tax (tax brackets) (ID)
- as this is a progressive tax (EXP) (1)
- as highest earners will pay more (EXP) (1)
- as increased government revenue can be redistributed (EXP) (1) For example, increased welfare spending (DEV) (1)
 increase tax-free allowances (ID) to increase disposable income for lower income earners (EXP) (1)
 switch emphasis from regressive to progressive taxation (ID) to reduce the burden of taxation on low income earners (EXP) (1)
 reduce VAT (ID) - as this is a regressive tax (EXP) (1)
- as lower earners will pay less of their income on tax (EXP)
(1)
- as reduces the prices of goods and services and increases purchasing power (EXP) (1)
 review/reform the council tax system (ID) for example, increase rebates for low income earners (EXP) (1)
 increase inheritance tax/capital gains tax (ID) as this reduces the wealth of more affluent (EXP) (1)

Expenditure
 increase spending on infrastructure projects/training (ID) to allow more people to enter the labour market (EXP) (1) for example extending the Borders railway (1)
 increase job seekers’ allowance (ID) which will increase disposable incomes for unemployed (EXP) (1)
 increase pay for lower paid public sector workers (ID) for example nurses (EXP) (1)
 increase housing benefit (ID) which makes social
housing/private rented housing more affordable (EXP)(1)
 increasing child support (ID) which is means-tested so benefits lower earners more (EXP) (1)
 government assistance for businesses setting up in areas of high unemployment/innovative industries (ID) creating jobs (EXP) (1)
 increase local authority funding (ID) targeting low income households to increase educational attainment (EXP) (1)

Question 38

Distinguish between the UK’s Gross Domestic Product (GDP) and Gross National Product (GNP)

Answer 38

measures the value of all goods and services produced by UK firms within the UK whereas measures the value of goods and services produced by UK firms whether in UK or not (1)
is a measure of the UK’s national output/value of all the goods and services produced in an economy whereas includes GDP + net property income from abroad (1)
for example includes Famous Grouse whisky produced in Scotland whereas for example includes Primark producing clothes in Bangladesh (1)
used by many nations as the main measure of economic activity whereas used mainly by the USA as its measure of economic activity (1) GNP is higher than GDP because it includes GDP (DEV) (1) GDP is more commonly referred to in the UK than GNP (DEV) (1)

Question 39

Describe limitations of using national income statistics to compare economies

Answer 39

regional inequalities may not be revealed (1)
 income inequalities may not be revealed (1)
 each country may calculate in a different way making it difficult to compare (1)
 statistics must be in real terms to be comparable (1)
 inaccuracies/corruption in data produced by each country (1)
 calculation per capita is essential in order to compare (1) one country may record ‘good’ production − medicines, another country may record demerit goods − like cigarettes, chemical
weapons (1)
 figures may not take account of the shadow/black economy (1) the shadow economy can be up to 50% in developing economies
DEV (1). Figures do not include household productivity, for example DIY (DEV) (1)
 may not include figures of subsistence activity, for example, crops for own consumption (1)
 depletion of natural/scarce resources are ignored. One country may be using up their assets quicker as GNP increases (1)
 currency values change over time (1)

Question 40

Describe, using a diagram, the stages of the business cycle

Answer 40

Boom/peak
 GDP above the target/trend rate/highest level (1)
 highest levels of consumer spending (1)
 firms have highest confidence/profits/investment (1)
 unemployment is lowest/full employment (1)
Slump/trough
 GDP zero/negligible/prolonged period of low GDP (1)
 lowest spending (1)
 firms have lowest levels of confidence/profits /investment/many business failures (1)
 unemployment highest (1)
Recovery
 GDP rising/turnaround in GDP/positive GDP (1)
 consumers begin to spend more/spending rising (1)
 firms are more confident/start to invest again/profits rising (1)
 employment starts to rise/rising (1)
Recession
 two consecutive quarters of negative GDP/lowest (1)
 consumer spending falling (1)
 firms’ profits falling/firms cut back on investment (1)
 unemployment rising (1)

Question 41

Explain one possible effect on employment of the government’s decision to lift the pay cap

Answer 41

This will lead to increased unemployment (ID) due to
increasing wage costs (1).
o This is because organisations may ‘shed’ workers
to limit cost increases/limit reductions in profit
(DEV) (1).
o Firms may also substitute machinery for labour
(DEV) (1).
o A negative multiplier effect may create even more
unemployment as those made unemployed will
spend less (DEV) (1).
o This is because lifting the pay cap will mean the
market price of labour (wages) will not be
prevented from settling at equilibrium price (DEV)
(1).

Question 42

Explain one reason for government intervention in a market

Answer 42

Governments provide merit goods (ID) because they
are deemed to benefit society (1). Without
intervention markets sometimes fail to produce
enough of these/these goods are often
under-consumed (DEV) (1).
 Governments regulate de-merit goods (ID) because
they are deemed to be bad for society (1). Markets
sometimes produce too many of these/may be
over-consumed (DEV) (1).
 Governments provide public goods (ID) because
without intervention these goods could be underprovided (1). These goods are difficult to generate
profit from/they result in a free-rider problem/they
are non-excludable in use/they are
non-rivalled in use (DEV) (1).
 Governments regulate negative externalities (ID)
because they are a cost to a third party (1). Without
intervention markets may over-produce these (DEV)
(1).
 Governments promote positive externalities (ID)
because they are a benefit to a third party (1).
Without intervention firms may have no incentive to
generate these (DEV) (1).
 Governments attempt to address inequality (ID)
because markets may result in unequal distribution of
income and wealth (1). Markets may fail to provide
the basic needs of some members of society (DEV) (1).

Question 43

Explain the ways in which supply side policies can be used to create economic growth.

Answer 43

Grants may be awarded (ID) which could be used to invest in
capital improving productivity (1). Increased productivity
means more output can be produced without increasing input
(DEV) (1).
 Education may be improved (ID) to improve efficiency of
workers (1). More efficient workers will reduce wastage/errors
(DEV) (1).
 More/better training may be provided (ID) to improve
productivity/flexibility (1). More flexible staff will reduce
stoppages/bottlenecks (DEV) (1).
 Industry may be deregulated (ID) to increase opportunities for competition (1). More competition encourages increased
efficiency (DEV) (1).
 Minimum wage may be increased (ID) to incentivise more
people to join the labour force (1).
 Subsidies may be offered (ID) to reduce the unit cost of
production leading to higher output (1).
 Tax breaks may be awarded to new firms (ID), which would
have the effect of reducing costs leading to higher output (1).
 Labour mobility/flexibility may be improved (ID) for example
zero hour contracts which makes it easier to meet demand (1).

Question 44

Explain the effects of economic growth on unemployment.

Answer 44

Unemployment may decrease (ID) as creating economic
growth may have increased demand for labour (1).
o More people in work increases consumer
spending/AD (DEV) (1).
o This will stimulate further growth/a positive
multiplier effect (DEV) (1).
 Unemployment may decrease (ID) as the growth may
have increased tax revenue which the government can
invest (1).
o Government investment in eg capital projects
creates jobs (DEV) (1).
o Government may also use increased revenue to fund
increased public sector wages/schemes to improve
employment (DEV) (1).
o This will incentivise more people to enter the labour
market (DEV) (1).

Question 45

Describe the positive and negative effects of high levels of unemployment on an economy

Answer 45

Negative effect of high unemployment:
 Reduced income/falling standards of living (1).
 More competition for jobs (1).
 Less tax revenue for government (1) eg less income tax
as less people working/less VAT as less disposable
income/spending (DEV) (1).
 Wage levels may fall as workers are forced to accept
less skilled/less well-paid jobs (1).
 Economic growth may slow due to reduced AD (1).
 Economic growth may slow due to de-skilling of
workforce (1).
 Increased JSA costs for government (1) which may
increase budget deficit (DEV) (1).
 Increased costs for government on NHS/policing/social
work (1).
 Pressure on government to intervene eg bring forward
capital spending plans (1).
Positive effects of high unemployment:
 Opportunity for entrepreneurial activity/retraining (1).
 Firms have more choice when hiring employees (1)
allowing them to select better quality staff, improving
efficiency/productivity (DEV) (1).
 Firms have reduced costs due to fewer demands for
wage rises/people willing to work for less improving
profitability/potential for growth (DEV) (1).
 There is reduced inflationary pressure (1) which may
lead to improved BoP as exports competitive (DEV) (1).

Question 46

Describe reasons for a UK multinational choosing to locate abroad

Answer 46

cheaper costs of production/labour/rent/land (1)
* to benefit from economies of scale (1)
* to reduce the costs of transport (1)
* to access a new market/increase market share (1)
* to locate close to market (1)
* to benefit from sympathetic tax regimes (1) for example low
corporation tax (DEV) (1)
* to benefit from less stringent legislation (1) such as planning
permission/health and safety (DEV) (1)
* to access subsidies offered by the host government (1)
* to access specialised/highly trained labour (1)

Question 47

Describe factors which decrease the exchange rate for the pound sterling

Answer 47

decrease in demand for the pound/increase in supply of pound
(1)
* decrease in foreign direct investment (1)
* decrease in hot money inflows/interest rates (1)
* decrease in tourism/an event cancelled for example due to
Covid19 (1)
* increase in the rate of UK inflation (1)
* decrease in competitiveness of UK exports (1)
* speculation that the exchange rate will fall further (1)
* government intervention by purchasing/selling pounds (1) this
might be done in order to stabilise exchange rate to protect the
exchange rate from an external shock (DEV) (1)
* political/external events such as Brexit creating instability (1)

Question 48

Describe disadvantages to a country of hosting a multinational, other than a loss of jobs if it leaves

Answer 48

local firms may struggle, as are faced with increased competition
(1)
* opportunity cost of government grants (1)
* increased pollution from factories etc (1)
* depletion of non-renewable resources (1)
* no long-term commitment, leave when resources are depleted
(DEV) (1)
* negative multiplier effect when it leaves (DEV) (1)
* profits do not remain in the host country − they are repatriated
(1)
* creates reliance on foreign firms (which may lack loyalty) for
investment (1)
* ‘screwdriver’ economy may be created where job creation is
centred in the low skilled/low paid assembly area (1)
* MNC brings in its own management team (1)

Question 49

Describe factors which may attract foreign firms to locate in Scotland.

Answer 49

availability of natural resources (for example, oil, forests, land)
(1)
 a skilled workforce (1). This helps improve productivity levels
(DEV) (1)
 access to Scottish consumers/a new market (1). This may allow
for economies of scale (DEV) (1)
 low interest rates (1)
 weak pound relative to other currencies (1)
 EU membership (currently) which eliminates trade barriers (1).
This allows a non-EU company to trade as though it were an EU
company (DEV) (1)
 flexible labour markets (1). This allows for flexibility in
recruitment (DEV) (1)
 relatively weak unions/good industrial relations record (1). This
may result in less working days lost due to industrial action
(DEV) (1)
 access to subsidies/Regional and National government grants
(1). These can reduce costs of production (DEV) (1)
 good transport and infrastructure (road/rail/air/sea/
broadband) (1). This provides good links to major markets in
England and the EU (DEV) (1)
 low corporation tax levels (1). This allows businesses to keep
more of their profits after tax (DEV) (1)
 an English speaking population (1)
 high levels of disposable income/likely market for the product (1)
 political stability allows businesses to plan ahead (1)

Question 50

Explain the impact of the weak exchange rate of Sterling on the UK Balance of
Payments.

Answer 50

it will improve the current account balance (ID) as UK exports
increase/UK imports decrease (EXP) (1) UK consumers may buy
more domestic products (DEV) (1)
* foreign buyers require less of their currency to buy UK
goods/services (ID) makes exports more competitive abroad
having a favourable effect on the balance of payments (EXP) (1)

Question 51

Describe the theories of absolute and comparative advantage.

Answer 51

Absolute advantage
* this is gained when a country can produce more of a product than another country (1)
* this may be because of climatic advantages/skilled labour/ technology (DEV) (1)
* for example, China has a large low cost labour force giving it an absolute advantage in textile production (DEV) (1)
* any country with an absolute advantage should specialise and trade (DEV) (1). This will lead to increased world output and improved living standards (DEV)(1)
* credit correct use of a numerical example showing absolute advantage (1)

Comparative advantage
* this is gained when a country which has an absolute advantage in no area specialises in the area where its disadvantage is least/in which it is ‘least-worst’ (1)
* ie where the opportunity cost of production is at its lowest (DEV) (1)
* this shows that even if a country is less efficient at producing all goods and services it should still specialise and trade (DEV) (1)
* for example, if 2 goods are traded between country A and country B - and country A can produce TVs 10 times better than country B and can produce cars 3 times better than country B (1) then country A should specialise in TV production and country B should specialise in cars (DEV) (1)

Question 52

Describe reasons for governments imposing trade barriers.

Answer 52

• infant industries can be protected (1)
• domestic employment can be safeguarded (1)
• strategic industries can be kept under domestic control (1) to maintain strong defence in case of war (DEV) (1)
• balance of payments will improve (1) due to less imports (DEV) (1)
• can be used to highlight political disagreements (1)
• can be used to retaliate against other nations (1)
• can be used to prevent ‘dumping’/flooding the market (1)
• maintaining health and safety standards (1) rejecting goods of a lower quality (DEV) (1)
• can be used to protect the environment/reduce social costs eg by using fewer air miles (1)

Question 53

Describe components of the UK Balance of Payments.

Answer 53

Current account
* trade in goods, which is the value of exports minus the value of imports of goods (1)
* trade in services, which is the value of exports minus the value of imports of services (1)
* investment income/net
primary income, which is income from interest/profits/dividends (1)
* transfers/net secondary income which could be overseas development aid (1) Capital/Financial Account
* foreign direct investment, which is cross-border investment by individuals and firms in areas such as capital and land (1)
* portfolio investment, which is investment to purchase stocks and shares (1)
* other investment, which is any further types of cross-border investment for example, ‘hot money’ (1)
* reserve assets, which could be foreign currency managed by the Bank of England (1)
* balancing item, which is used to correct net errors and omissions (1)

Question 54

Describe the role of the:
(i) World Trade Organisation (WTO)
(ii) World Bank.

Answer 54

World Trade Organisation (WTO)
* encourages free trade (1) by reducing tariffs and non-tariff barriers (DEV) (1)
* regulates world trade (1)
* mediates in trade disputes (1)
* enforces members’ adherence to agreements/can impose penalties (1)

(ii) World Bank
* funds development projects in developing economies (1)
* provides zero to low interest rate loans (1)
* collects data on economies (1)
* provides advice to developing economies (1)
* minimise poverty/boost prosperity for the poorest people (1)
* help create sustainable economic growth (1)

Question 55

Explain the ways in which developed economies can assist a developing economy
to achieve economic growth.

Answer 55

• food aid (ID) allows workers to be nourished/productive (EXP)(1)
• capital/equipment (ID) enables improved productivity and output (EXP) (1)
• Project Aid (funding to support particular projects) (ID) supports growth/improvements to infrastructure in the long run (EXP) (1) better infrastructure will attract more investment/create better
  opportunities for growth (DEV)(1)
• knowledge transfer/training (ID) gives technical and managerial know-how to improve efficiency (EXP) (1)
• free trade agreements (ID) to make their products relatively less expensive/more competitive (EXP) (1)
• soft loans/loans (lower than normal rates of interest) (ID) allow the purchase of capital equipment (EXP) (1)
• debt relief/a country’s debt could be written off (ID) freeing the country from repayments (EXP) (1). This allows financial
  resources to be re-directed towards expanding output (DEV)(1)
• medical aid (ID) reduces illness/days lost/improves productive potential (EXP) (1)
• tied aid (ID) allows access to capital equipment although it may be tied to buying it from the donor country (EXP) (1). This equipment can help it to produce more efficiently/increasing output (DEV) (1)

Question 56

Explain the impacts of emerging economies on UK firms.

Answer 56

significant and growing markets (ID) from which demand/profits can be generated (EXP) (1) particular industries for example luxury products such as whisky may experience high sales (DEV) (1)
* access to cheaper land/labour/materials (ID) reducing production costs for UK firms (EXP) (1)
* competitively priced manufactured goods may be exported from them (ID) which will generate increased competition for UK firms (EXP) (1). This will reduce UK income/profits (DEV) (1) and
inability to compete may drive UK firms out of business (DEV)(1)
* increasing global demand for natural resources (ID) will increase production costs (EXP) (1)
* some of the emerging nations are less regulated (ID) which can cause them to be unstable and therefore risky to trade with (EXP) (1)

Question 57

Compare the economic characteristics of a developing economy and an
emerging economy.

Answer 57

Developing whereas Emerging
slow economic growth whereas rapid economic growth (1)
low productivity whereas rapid improvements n productivity (1)
low standards of living whereas improving standards of living (1)
underdeveloped
industry/infrastructure whereas rapid industrialisation(1)
little FDI whereas attractive to FDI (1)
reliance on agriculture whereas secondary industry increasing rapidly (1)
exports limited whereas diversifying exports (1)
low levels of savings/poor
banking facilities whereas easier access to banking facilities and credit (1)
low education opportunities whereas Investment in education (1)

Question 58

Explain the benefits to a developing economy of hosting a multinational company.

Answer 58

The MNC provides job opportunities (ID) as the demand for labour will increase (1). This will reduce unemployment (DEV) (1).
 Creates additional tax revenue for the developing economy’s government (ID) which can be used to stimulate growth (1).
 Increases economic growth (ID) as the MNC increases the developing economy’s output (1).
 Creates an initial cash investment (ID) which will improve BoP (1).
 The MNC will sell its goods abroad (ID) which means an increase in exports for the developing economy (1). This will improve its balance of trade figures (DEV) (1).
 This will improve the standard of living in the developing economy (ID) as workers can buy more goods and services than before (1).
 Use of new technology by the MNC (ID) gives the developing economy’s workers more opportunity to improve their skills for the future (1). Other organisations in the developing economy can benefit from technology transfer, leading to greater overall output (DEV) (1).
 MNCs may invest in infrastructures such as new roads (ID) which will benefit the developing economy as a whole (1).