case study Flashcards
(16 cards)
Explain two methods of measuring unemployment and consider the extent of the possible difficulties in obtaining an accurate measurement of unemployment. (8)
Claimant count and labour force survey.
Claimant count is when U.E is measured on the basis of who is recieving UE benefits
Labour force survey - identifies people activley seeking a job
C.C- dis : the claimant count figure may omit people actively looking for a job and may include people who are, in reality, not looking for a job.
LFC- dis- Costly, not updated frequently,, based on sampling which may not be entirely accurate due to sampling errors and/or problems associated with data collection in general.
eval: An assessment of the difficulties of both measures is required with an overall assessment of the extent of the possible difficulties (1), leading to a valid conclusion (1).
Assess whether supply-side policy is likely to be equally successful in reducing both structural and cyclical unemployment. (12)
SSP- policies designed to increase AS of an economy
supply side policies may be used to encourage investment into education and training to solve structural problems in the economy and hence structural unemployment.
infrasture - mobility is easier - more job oppurtunities - SUE solved
However, supply side policies may be less successful in solving cyclical/demand deficient unemployment as they have less impact on the level of aggregate demand (AD) – unless for example, if they involve a direct injection of government spending due to the additional investment.
DIS- SSP : potential cost of the policy and the time taken for the policy to be effective.
Eval : short run SSP leads to rise in AD - demand pull inflation
long run - achieve macro objectives -
SSP- Structural and FP - cyclical
With the help of examples, explain the difference between the marginal rate of taxation and the average rate of taxation and consider whether a government should decide to increase the rate of indirect tax to raise additional revenue. (8)
Marginal - proportion of increase in income paid in taxes
average - avg % of total income paid in tax
e.g: if person earns 100rs and 30rs is taken in tax- margainal is 30%
E.g- earns 50k pays 10k average rate - 20%
indirect tax def
indirect taxes:
* easier and quicker to put in place than direct taxes
* they may be less easy to avoid than direct taxes
* however, they are often seen as regressive and can lead to a higher MRT for poorer households
* their effectiveness in raising revenue depends on PED
* they may also lead to cost push inflation
An assessment of the strengths and weaknesses of using indirect taxes to raise additional government revenue (1), leading to a valid conclusion (1).
- expensive prodycs good
necessies - no
Assess whether the achievement of a balanced budget should always be a main government macroeconomic objective.(12)
An analysis which directly compares the strengths and weaknesses and uses of a balanced budget with a budget in surplus and deficit may gain access to Level 3 and full marks.
* The strengths of a balanced budget may include stability and may encourage both domestic and inward investment,
but it may not be sufficiently flexible to deal with changing economic conditions e.g., unemployment and inflation.
* A budget deficit may enable, e.g., economic growth or reduce unemployment but may be unsustainable in the long run.
* A budget surplus may be necessary to solve inflation, but this may cause opportunity costs due to a lack of government spending.
* Analysis of other government macroeconomic objectives may be rewarded but only in the context of a balanced or unbalanced budget e.g., the problems of achieving other objectives if the sole aim is a balanced budget. These may include difficulties in controlling inflation, unemployment, creating actual economic growth etc.
eval - An overall assessment of whether the achievement of a balanced budget should always be a main government macroeconomic objective.
* If part of the analysis, this should also include an assessment of the difficulties of achieving other objectives against the desirability of a balanced budget to gain higher level evaluation marks.
* Leading to an overall and balanced conclusion.
With the help of a diagram, explain what is meant by the circular flow of income in an open economy and consider the extent to which it can explain economic growth in such an economy. (8)
AO2 Analysis (max 3 marks)
The first two marks are for an analysis of injections greater than withdrawals and how this leads to economic growth/increase in national income and (1) for an analysis of withdrawals greater than injections and how this leads to a fall in economic growth/national income (1).
Reference must be made in some way to the fact that in open economy injections include income from exports and that leakages includes expenditure on imports along with at least one other example of an injection and one other example of a leakage for the (1).
eval - relative sizes of injections and leakages will lead either to economic growth or a fall in economic growth with 1 mark reserved for a justified conclusion.
Assess whether supply-side policy is the most effective way to achieve long-run economic growth. (12)
AO1 Knowledge and understanding and AO2 Analysis
Long-run economic growth is likely to need both growth of AD and AS
Analysis of the role of supply side policy in achieving long-run economic
growth and its advantages and disadvantages. E.g., supply side policy such as training and education is more likely to increase AS, but this can also lead to an increase in AD, for example as better training leads to an increase in income and therefore an increase in consumer spending. It is also less likely to result in inflation. However, it is costly and will take time.
Analysis of the extent to which supply side policy can lead to growth in both AD and AS. For an explanation that a problem with supply side policy is that it is less effective in directly increasing the level of AD.
Analysis of at least one alternative policy e.g., fiscal policy or monetary policy and how they may achieve long-run economic growth, together with their advantages and disadvantages e.g., fiscal policy such as a reduction in income tax is more likely to increase AD and can be relatively quick. It may also indirectly lead to an increase in AS if more people are encouraged to enter the workforce. However, if AS does not increase, it may be inflationary. It may also reduce the amount available for government spending.
Analysis of the extent to which these policies can lead to growth in both AD and AS. For an explanation that a problem with such policies is that they are less effective in directly increasing the level of AS.
Explain what is meant by the term protectionism and consider the effectiveness of using tariffs as a method of protectionism. (8)
AO1 Knowledge and Understanding (max 3 marks)
Protectionism is when governments attempt to protect domestic businesses against foreign competition (1). It seeks to reduce the impact of the free market/ restrict free trade (1) by increasing the price competitiveness of domestic businesses against foreign competitors (1).
AO2 Analysis (max 3 marks)
An explanation of how tariffs work (diagram will help although this is not essential) as a method of protectionism i.e., increasing prices of imports and increasing the price competitiveness of domestic businesses. NB: no marks for a diagram unless it is used to explain the impact on the price of imports and how it protects domestic businesses. Up to 2 marks e.g., for an explanation of how tariffs increase the price of imports (1) and how this protects domestic businesses as it increases their price competitiveness (1)
Problems may include possible retaliation, inelastic PED for imports, possible cost push inflationary pressure. Up to 2 marks e.g., retaliation by other countries may offset the impact, if the demand for imports is price inelastic then imports may not fall and domestic businesses will not benefit, if the impact is on imported raw materials, this will lead to cost push inflation and domestic businesses who rely on such imports will not benefit.
eval - Evaluation should consider how effective tariffs may be considering both how they can protect domestic businesses and the associated problems with 1 mark reserved for a justified conclusion.
Assess whether free trade is always better than a policy of protectionism for a developing economy that wishes to trade internationally(12)
free trade (ad) - Competitive pressure to keep costs down / increase efficiency / lower
prices for consumers.
increased choice and availability
for consumers.
Disadvantages may include:
Over exploitation of scarce resources.
Closure of domestic industries and /or problems for developing industries
leading to unemployment particularly in a developing economy.
Dumping / unfair competition.
It is likely that the advantages of protectionism will result from the
disadvantages of free trade and the disadvantages of protectionism will result from the advantages of free trade.
Explain what is meant by a depreciation of the exchange rate and consider whether a depreciation is likely to increase domestic real output. (8)
AO1 Knowledge and Understanding (max 3 marks)
An accurate definition the exchange rate (1). Understanding that there is likely to be a depreciation of the exchange rate if the demand for a currency falls (1) or there is an increase in the supply of a currency (1).
AO2 Analysis (max 3 marks)
A depreciation of the exchange rate will reduce (increase) the perceived price of exports (imports) (1) which will increase the value of both (X-M) and aggregate demand (1) and increase the rate of domestic real output (1) .
AO3 Evaluation (max 2 marks)
One mark for a valid explanation that this assumes that the economy is not operating at full capacity (1) or depends on the elasticity of demand for goods that are traded internationally (1). The second mark is for a justified conclusion.
Assess whether contractionary fiscal policy is likely to be the best way to reduce a current account deficit on the balance of payments. (12)
AO1 Knowledge and understanding and AO2 Analysis
* Understanding of the terms fiscal policy/current account deficit.
* How contractionary fiscal policy might reduce a current account deficit –
this may include increased taxation might reduce imports/reduce demand-pull inflationary pressure resulting in improved international price competitiveness.
* An explanation of the limitations of fiscal policy – impact on domestic growth, unemployment.
* An explanation of an alternative policy – monetary and/or supply side policies, minimum prices, regulation backed by fines.
AO3 Evaluation
* Consideration that fully assesses the relative effectiveness of the policies analysed in reducing a current account deficit and arrives at a reasoned conclusion concerning whether fiscal policy is the ‘best’ approach.
With the help of an aggregate demand and aggregate supply diagram, explain how a decrease in interest rates could cause economic growth and consider whether economic growth will always result in inflation. (8)
One mark for a valid explanation that rise in inflation assumes that the economy is operating at full capacity; the growth may be focused on capital intensive industries (1) or that the source of the growth may be long term in nature (1). The second mark is for a justified conclusion.
Assess whether economic growth is always desirable for an economy.
The meaning of the term economic growth.
* An explanation of the potential benefits of economic growth for an
economy – higher incomes, reduction in unemployment, improved government finances, increased international competitiveness, increases in both consumer and business confidence, increased life expectancy.
* An explanation of the costs of economic growth for an economy – inflation, current account deficits, inequality, pollution.
AO3 Evaluation
* Consideration that fully assesses the relative perspectives of economic growth for an economy and arrives at a reasoned conclusion concerning which viewpoint (or otherwise) is most likely.
Explain the difference between the terms of trade and the balance of trade in goods and consider whether an economy should be more concerned about its terms of trade than its balance of trade in goods.
AO1 Knowledge and Understanding (max 3 marks)
The term of trade is a numerical measure of the relationship/ratio between export and import prices (1)
with an accurate formula showing the measure as an index (1)
whereas the balance of trade in goods measures the revenue earned from exports of goods minus the expenditure on imports of goods (1)
AO2 Analysis (max 3 marks)
Analysis must consider issues concerning both the terms of trade and the balance of trade in goods. These may include:
* Up to 2 marks for an analysis of the effects of changes to the terms of trade e.g., relative change in competitiveness, increase in cost-push inflation, effects on balance of trade in goods and services.
* Up to 2 marks for an analysis of the effects of changes to the balance of trade e.g., an increase in the demand for exports ceteris paribus may lead to an increase in the balance of trade, impact on employment levels, economic growth, inflation.
* MAX 3 marks overall
AO3 Evaluation (max 2 marks)
Evaluation should use relevant analysis to consider the importance of both measures and make a judgement as to which one may be of most concern to an economy (1). Reserve one mark for a justified conclusion (1).
Assess whether a rise or a fall in the terms of trade will benefit the 12 macroeconomic performance of an open economy that is heavily
dependent on international trade.
Indicative content Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
Better answers will examine the impacts on the wider economy i.e., employment, price stability, economic growth as well the on the current account. Reference will also be made to the dependency on international trade.
For a rise in the terms of trade:
* This may lower inflation if raw material import prices are lower.
* Depending on price elasticity of demand, it may lead to economic growth if the income earned from exports increases and a boost to employment.
* It may however lead to lower economic growth if it leads to a current account deficit.
For a fall in the terms of trade:
* Exports may be boosted, and this may lead to higher economic growth.
* It may reduce a current account deficit.
* It may however be a sign of a weak economy with exports that are less in
demand and therefore lead to lower economic growth.
* If imports are price inelastic, this may lead to import cost-push inflation if
the economy is highly dependent on imported goods.
* Answers which do not refer to the heavy dependence on international trade cannot gain more than L2.
* Answers which only refer to a rise or a fall in the terms of trade cannot gain more than L2.
* At least one negative effect in addition to positive effects (either for a rise or a fall in the terms of trade) should be considered within the analysis to gain lower L3.
AO3 Evaluation
* Evaluation should consider both price elasticity of demand for exports and imports and the dependency on international trade. N.B. reference to the Marshall-Lerner condition may be rewarded but must not be expected as that is an AL topic.
* The benefits and drawbacks of both a rise in the terms of trade and a fall in the terms of trade should be carefully considered and compared to form a judgement about their impact on the wider economy.
* This should lead to a considered conclusion about which is more likely to be of benefit.
Accept all valid responses.
