Paper 2 (2023)

Question 1

Consequences of a higher rate of economic growth

Answer 1

Increased expenditure, high standard of living, more jobs, higher incomes and less poverty
Increase pressure on available resources which could have negative environmental effects such as in relation to congestion and pollution

Question 2

Evaluation of whether PED or YED is likely to be of greater importance to a firm producing cars

Answer 2

PED should be easier to calculated
PED indicates if price should be increased or decreased
Firm needs to take into account availability of substitutes, amount spent on the product and time period
YED helpful for the extent of change in spending due to changes in income
Firm needs to take into account if normal or inferior, proportion of income spent and if the economy is in an upturn or downturn

Question 3

Advantages of a maximum price

Answer 3

The price of certain products can be limited making such items more affordable, reducing the extent of poverty

Question 4

Disadvantages of a maximum price

Answer 4

Impact will be to create a situation of excess demand leading to queueing or rationing and the creation of a black or illegal market

Question 5

Assumptions of the theories of comparative and absolute advantages

Answer 5

Only two products being traded
Existence of perfect competition in both product and factor markets
No transport costs
Production subject to constant returns to scale
No restrictions on trade

Question 6

Limitations of the theories of absolute and comparative advantages

Answer 6

Trade will involve more than two products
Perfect competition will not apply to all markets
There will be costs of transport
Producers may experience economies of scale, reducing costs of production
There may well be trade restrictions

Question 7

PES and its use in increasing a business’ total sales

Answer 7

Usefulness depends on the type of good and whether decisions need to be made in the short run or long run
May help businesses with regards to stock holding and decisions about which products to focus on
May help businesses make decisions about productive capacity and whether to invest in new technology
Depends on the accuracy of the data used to produce the value
May change over time and so may have little value in a growing economy
Some products naturally are more inelastic so knowledge may have little use

Question 8

XED and its use in increasing a business’s total revenue

Answer 8

Understands if products are complements or substitutes
Measures closeness of relationship so how quickly and the extent to which it should respond to price changes
Assists in the development of a pricing strategy
Depends on accuracy of data which may not be possible to keep up to date in a growing economy so may be dependent on inaccurate estimates
Businesses may not be able to act on the data is cost structure cannot easily be changed
Other variables such as non price determinants may be more useful

Question 9

Explain the difference between free goods and public goods

Answer 9

Free goods are not scarce and have no opportunity cost as no factors of production are required to produce them
Public goods are non-excludable and non-rival

Question 10

Consider the view that pubic goods can never be provided in a market economy

Answer 10

Their characteristics lead to the free rider problem so a price cannot be charged so the market economy would not supply them and therefore they must be provided by the government

Question 11

Assess the view that the consequences of imperfect information are more serious in a market economy than in a mixed economy

Answer 11

Merit and demerit goods need government intervention because of the issues of under and over consumption due to imperfect information so the market is no efficient
Other types of private good can be efficiently provided without government intervention but allocation processes may mean low income groups do not have equal access

Question 12

Explain the difference between the terms of trade and the balance of trade in goods

Answer 12

The term of trade is a numerical measure of the ratio between export and import prices whereas the balance of trade in goods measures the revenue earned from exports of goods minus the expenditure on imports of goods

Question 13

Consider whether an economy should be more concerned about its terms of trade than its balance of trade in goods

Answer 13

Effects of changes to terms of trade include relative change in competitiveness, increase in cost-push inflation and effects on balance of trade in goods and services
Effects of changes to the balance of trade include an increase in the demand for export ceteris paribus may lead to an increase in the balance of trade, impact on employment, economic growth and inflation

Question 14

Assess if a rise in the terms of trade will benefit the macroeconomic performance of an open economy that is heavily dependent on international trade

Answer 14

May lower inflation if raw material import prices are lower
Depending on PED if may lead to economic growth if the income earned from exports increases and a boost to employment
May lead to lower economic growth if it leads to a current account deficit

Question 15

Assess if a fall in the terms of trade will benefit the macroeconomic performance of an open economy that is heavily dependent on international trade

Answer 15

Exports may be boosted and this may lead to higher economic growth
May reduce a current account deficit
May be a sign of a weak economy with exports that are less in demand so lower economic growth
If imports are price inelastic could lead to import cost-push inflation if the economy is highly dependent on imported goods

Question 16

Internal effects of inflation

Answer 16

Income redistribution
Menu costs
Shoe leather costs (having to hold smaller quantities of cash and searching for the best interest rate)
Uncertainty in transactions
May provide a stimulus for output and be a sign of economic growth

Question 17

External effects of inflation

Answer 17

Declining price competitiveness of exports and increased competitiveness for imports
May increase the current account deficit
May lead to an exchange rate depreciation
Uncertainty in international transactions
Depending on PED may boost export revenue and improve terms of trade and may be a sign of increased demand and further stimulate output

Question 18

Why estimates of PES may differ

Answer 18

The time period
Level of stock
Changes in the production process

Question 19

Advantages of a subsidy for mass transit systems

Answer 19

It can be considered a merit good that helps lower income families, improves labour mobility, reduces road congestion and improves air quality

Question 20

Disadvantages of subsidies

Answer 20

Opportunity cost
Poor decisions as a result of information failure
Government inability to provide funding

Question 21

How supply side policy can be used to reduce long term unemployment

Answer 21

By retraining and updating skills
By providing information on job vacancies
By encouraging business start-ups

Question 22

Advantages of supply side policies

Answer 22

May be non-inflationary
May be more long term

Question 23

Disadvantages of supply side policy

Answer 23

May take a long time to have an effect
Opportunity cost
Receptiveness of the workforce
Policies may not work depending on the type of unemployment
Demand side policy may be more applicable for cyclical unemployment

Question 24

Consequences of a persistent current account deficit on the domestic economy

Answer 24

Employment levels
Economic growth
Inflation
Living standards
Government budget
Business confidence
Possible need to restructure the economy

Question 25

Consequences of a persistent current account deficit on the external economy

Answer 25

Exchange rates Ability to trade Need for imports Debt interest

Question 26

Explain the difference between the causes of a movement along and a shift of a PPC

Answer 26

A movement along a PPC is caused by a reallocation of resources as resources are shifted between the two types of product involving an opportunity cost but a shift of the PPC is caused by an increase in the quantity or quality of resources allowing more of both goods to be produced

Question 27

Assess whether education should be classified as a public good rather than classified as a merit good

Answer 27

Education is classified as a merit good because it is a private good with the characteristics of being rival and excludable. It can therefore be provided through a market because it is possible to charge a price for it although it can also be provided by the state

Question 28

Evaluation of if education should be classified as a public good rather than a merit good

Answer 28

Public goods can only be provided by the state Merit goods will be under-provided in the free market and governments should intervene to increase provision If demand for education is very low when provided through a market a government could decide to entirely provide it through the state

Question 29

Supply side policy to reduce the rate of inflation

Answer 29

Make the labour market more flexible Increased expenditure on education and training Promotion of competition in markets

Question 30

Arguments for protectionism

Answer 30

Infant industries Declining industries Strategic industries To prevent dumping To reduce a current account deficit To raise government revenue

Question 31

Arguments against protectionism

Answer 31

Free trade can lead to greater specialisation and greater output Resources are allocated more efficiently Consumers have a wider range of products to choose from This can lead to improved living standards

Question 32

Consider whether a rise in the price of a product because of higher costs of production is likely to always reduce the consumer surplus

Answer 32

The overall impact is that consumer surplus will always fall but the extent of the fall is dependent on the PED

Question 33

Advantages and disadvantages of using maximum prices

Answer 33

If set below equilibrium, it will make goods more affordable This helps low income consumers and improves their living standards and health Creates a shortage and informal markets Governments have to increase spending to enforce legislation Rich and poor households gain equally

Question 34

Advantages and disadvantages of transfer payments

Answer 34

Can be targeted at those most in need Can be targeted at the purchase of basic food May be costly and have an opportunity cost May not be used for their intended purpose

Question 35

Advantages of encouraging entrepreneurship

Answer 35

Entrepreneurs organise the other factors to produce output They take risks and receive profit which is the motivation to be successful so stimulate output Must be creative and innovative to succeed and therefore have the skills to anticipate current and future need and increase the productive potential and long run economic growth Modern economies are dynamic and entrepreneurs can quickly respond to changes

Question 36

Disadvantages of encouraging enrepreneruship

Answer 36

May be a cost in training and educating Rate of success may be low Success depends on other factors such as availability of government subsidies and other factors of production Entrepreneurs may seek short run gain which may not encourage long run growth and actually makes it less likely due to resource depletion

Question 37

Explain the difference between absolute and comparative advantage

Answer 37

Absolute advantage is where for a given set of resources one country can produce more of a certain product than another. Comparative advantage exists where one country can produce a certain product at a lower opportunity cost than another country

Question 38

Consider whether the principle of comparative advantage is always the more important influence when each country is deciding whether to trade with each other

Answer 38

The benefits of specialisation leading to more efficient resource allocation An increase in world output An increase in employment and living standards May exhaust finite natural resource Strategic industries Exchange rate may not be between opportunity cost ratios

Question 39

Advantages and disadvantages of protectionism

Answer 39

Possible retaliation Possible long term reliance on measures that may reduce future competitiveness

Question 40

Explain the difference between cost-push and demand-pull inflation

Answer 40

Cost push is caused by increases in the costs of production. Demand pull is caused by increases in AD not matched by increases in AS

Question 41

Consider which type of inflation. is more likely to occur if there is a depreciation in the exchange rate of a country with few natural resources

Answer 41

Leads to a fall in the price of exports for the trading partner and a rise in the price of imports for the country. Cost-push due to the need to import resources

Question 42

Disadvantages of using monetary policy to control high rates of inflation

Answer 42

There is a time lag between interest rate policy and it taking effect Other factors other than interest rates may affect consumer spending and offset the impact of a rise in interest rates

Question 43

Consider the confidence of the classification of YED for a good

Answer 43

Dependent on income level of individual or household in cause of inferior, necessities or superior goods A necessity for a low income household could be a normal good for another YED is an estimate calculated over separate time periods

Question 44

Evaluation of changes in consumer surplus

Answer 44

Depends on relative extent of price change Also depends on coefficient of PED It is assumed that a price change is the only factor that determine a change in consumer demand

Question 45

Consider why government intervention to provide merit goods may not always be successful

Answer 45

Governments may lack the resources to provide sufficiently Governments may not have enough information on which goods to provide

Question 46

Advantages and disadvantages of a buffer stock scheme in agriculture

Answer 46

Effective in smoothing price changes Responsive to market conditions Involves minimum and maximum prices Storage of products can influence price changes Can be inefficient where surplus stock builds up Little incentive for producers to change output Could lead to waste

Question 47

Advantages and disadvantages of methods besides buffer stick schemes

Answer 47

Less intervention more emphasis on market forces Improved security of supply for domestic market Reduced dependent on imports Income of efficient farmers can increase Subsidies have an opportunity cost

Question 48

Increased investment in new infrastructure can have a positive and negative impact on the circular flow of income in an economy

Answer 48

Increased investment can be from firms or government Household savings can be a source of funds for this investment Investment is an injection in to the circular flow of income There is increased payments for factors of production Households supply factor services to firms in the form of labour, enterprise and capital In turn, firms provide factor services to implement the investment Leakages impact on the total flow of funds in the circular flow of income Taxation on the inputs into the new infrastructure project is a leakage from households and firms to the government Other leakages are spending on imports of materials to implement the new infrastructure project Household savings are a leakage from factor income Equilibrium in the circular flow will depend on the balance between injections and leakages

Question 49

Evaluation of whether an increase in investment in new infrastructure projects will always have a positive impact on the circular flow of income in an economy

Answer 49

The circular flow model is a simplified view of reality. The impact will depend upon the net of injections and leakages. There could be a negative impact on the circular flow of income if leakages exceed injections. Most forms of new infrastructure have a negative impact not taken into account by the model