MS3£3.00

GENERAL CERTIFICATE OF EDUCATION TYSTYSGRIF ADDYSG GYFFREDINOL

MARKING SCHEME

ECONOMICS AS/Advanced

SUMMER 2008

INTRODUCTION The marking schemes which follow were those used by WJEC for the Summer 2008 examination in GCE ECONOMICS. They were finalised after detailed discussion at examiners' conferences by all the examiners involved in the assessment. The conferences were held shortly after the papers were taken so that reference could be made to the full range of candidates' responses, with photocopied scripts forming the basis of discussion. The aim of the conferences was to ensure that the marking schemes were interpreted and applied in the same way by all examiners. It is hoped that this information will be of assistance to centres but it is recognised at the same time that, without the benefit of participation in the examiners' conferences, teachers may have different views on certain matters of detail or interpretation. WJEC regrets that it cannot enter into any discussion or correspondence about these marking schemes. PAGE EC1 1 EC2 4 EC3 6 EC4 12 EC5 17 EC6 21

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EC1 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited. 1. The production possibility diagram shows an economy that produces only

manufactured goods and agricultural goods. (a) If the economy is operating on its production possibility frontier

producing OM1 and OA1 what is the opportunity cost of increasing the output of manufactured goods from OM1 to OM2? [1]

A1 – A2 or OA1 – OA2 or A1 A2 (1) (b) If the economy is now producing at point X what does this indicate? [1] The economy has unemployed resources/is not efficient. (1) (c) Adapt the diagram to show an increase in the productivity of

manufacturing only. [1] The ppf is shifted to the right but only from the manufacturing axis. (1) (d) Explain two reasons why this increase in manufacturing productivity

could have come about. [4 Related to manufacturing:

• technological change/investment • improvements in working practices • better training of workers • subsidies/government incentives/R&D tax credits. • motivation 2 x 2

2. Study the diagram which shows a market in equilibrium at £5. (a) Calculate the value of the consumer surplus. [1] The value of the consumer surplus is £3 x 50 = £150 (1) (b) In the diagram above, explain why the demand curve slopes down from

left to right. [2] Candidate explains a reason for the downward slope of the demand curve

with either explicit or implicit reference to the substitution effect or the income effect. (2) Good description of 'Law of Demand' (1), Diminishing marginal utility acceptable.

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3. The data shows the price, quantity demanded and total revenue for a product over its full price range.

(a) At what price is the price elasticity equal to unity or one? £5 (1) (b) Explain why the firm's total revenue changes when the price falls from

£8 to £7. [3] Revenue rises because demand is price elastic (1) candidate uses the data to

explain that quantity demanded rise by more than the fall in price (2). 4. In July 2007 parts of the UK were badly affected by flooding. There were calls

for increased Government spending on flood defences and drainage systems. Explain why flood defences are public goods. [4]

Flood defences are public goods because they cannot be provided by the market (1) example of market failure (1) Candidate explains non-diminishability (2), non excludability (2) non-rejectability (2). Maximum 4. Maximum 3 with no context.

5. Study the circular flow diagram. (a) Identify flow 1.

Output/Production Goods and services National Income GDP/GNP (1x1)

(b) Identify, in the diagram, the three injections into the circular flow which apply to firms. [3]

Exports, Investment and Government spending or grants or subsidies. (3x1) (c) Asses the likely impact on the level of savings in the economy if there is

an increase in the rate of interest. [4]

Savings will increase (1) Opportunity cost of spending increases. (2) Higher rate of interest gives savers higher future spending power (2) greater accumulation of wealth (2). Depends on how much interest rates rise (1) state of the economy (1)

Max 3 without evaluation.

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6. Study the diagram and then answer the questions that follow. (a) Distinguish between GDP and GNP. [2] GDP = income from UK based factors of production. (1) GNP = income from UK owned factors of production (1) GNP = GDP + Net property income from abroad. (2) (b) Explain, using the data, which country had a recession in the period

shown. [2] Japan (1) Negative GDP growth in 2001/02 (1) (c) With the aid of a diagram, discuss the view that the United States was

likely to have had rising inflation in 2003. [6] Rising real GDP as a result of rising AD can cause inflation/use of diagram (3)

Depends on the state of the economy/close to full employment or with some spare capacity/use of diagram. Depends on what is happening to aggregate supply. (3)

Maximum 4 with no diagram. Maximum 3 if no evaluation. 7. Study the date which shows the changes in UK interest rates and changes in

the exchange rate of the pound against the dollar. Using the data, discuss the extent to which changes in interest rates affect

changes in the exchange rate. [6] Candidates explains how changes in the interest rate and the exchange rate can be

positively related. Possible use of a diagram. Use of data. (4) Candidate explains that other factors can affect the exchange rate. (2)

Maximum 4 if no evaluation or no use of the data. Maximum 3 if neither. 8. The diagram shows the effect of the imposition of a tariff on an imported

product.

Using the diagram discuss the view that when a tariff is imposed there are no winners only losers. [8]

Candidate explains using the diagram that losers from a tariff are consumers, foreign

producers, domestic producers who export if there is retaliation and society/resource misallocation. Foreign producers (especially LEDs). (4)

Candidate explains that are also winners from a tariff such as domestic producers and their employees, also the government through tariff revenue (hence society if the money is spent on say merit goods). (4)

Maximum 4 if no evaluation or no reference to the diagram. Maximum 3 if neither.

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EC2 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited. (a) (i) Explain, using examples, the difference between the private and social

costs of road travel. [4] Private costs are the costs paid by the individual to buy/use a product (1) for a

car a private cost could be petrol/insurance/road tax. (1) External costs are cost imposed on society by consumers/producers and not

reflected in the price of the product (1) and for a car could be pollution/congestion/noise. (1)

Private costs + External costs = Social costs. (1) (ii) Explain why traffic congestion might be regarded as a form of market

failure. [4] Market failure occurs when the market mechanism fails to produce an

efficient allocation of resources. (2) Road congestion results in the price of road travel not reflecting its full social

cost. (2)

(b) Using the information in the data comment on the price elasticity of demand for car travel in the London congestion charging area. [4]

Ped is inelastic. (2) Definition only (1). Use of date: congestion will not fall significantly when the charge rises and revenue

will rise. (2) (c) Using the data and economic analysis explain why car ownership in the UK has risen. [6] Falling cost of motoring compared to other forms of travel. (2) Rising incomes/demand for cars is income elastic. (2) Quality of public transport/convenience of cars. (2) Falling price of new cars in relation to incomes. (2) Increased employment (2) Maximum of 4 with no use of data.

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(d) Evaluate, with the aid of a diagram, the effect on the price of petrol of a rise in VAT on petrol. [6]

Candidate draws a diagram with the supply curve shifting divergently to the left (2) and explains it. (+2) Explicit diagram or explanation of how VAT pushes up prices. Parallel shift of supply curve (1).

Evaluation: depends on how much VAT has been increased/Ped and Pes of petrol. (2)

(e) Discuss the effects on the UK economy of a substantial increase in road

building. [8] Road building is an injection into the circular flow and shifts AD to the right and raises

national income via the multiplier. (2) Rising employment (2). Also shifts the AS curve to the right as it is capital investment. (2) Improved infrastructure leads to increased competitiveness (2). Initially reduces road congestion and reduced business costs. (2) BUT taxes may have to rise to pay for it. (2) More roads encourages more road use and does not solve congestion. (2) More pollution (2). Depends on how it is financed PFI/higher taxes/borrowing. (2) Opportunity cost leads to reduced Government spending elsewhere. Building roads destroys the environment/countryside. (2) Max 4 without evaluation (f) To what extent do you agree with the view that road tolls are the best way to

reduce road congestion in the UK? [8] Road tolls will internalise the externality of congestion. Tolls provide revenue for improvements in public transport/rail/buses. Reduction of congestion will benefit the economy and improve competitiveness. Tolls can be used to spread demand over time (peak v off-peak). BUT Tolls are difficult to set at a level which is equal to external costs. Tolls will not reduce congestion if demand for road space is inelastic. Tolls are regressive. Tolls are expensive to set up and administer. Maximum 4 without evaluation.

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EC3 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited. 1. VEGETABLE PRICES SOAR AS FLOODS HIT UK HARVEST. (a) Comment on the price elasticities of demand and supply of vegetables

and with the aid of a diagram show how flooding will raise their prices. [10]

Candidate identifies that demand and supply elasticities are inelastic. (2)

(level1) Candidate explains these inelasticities. (4) (lLevel 2) Candidate uses a diagram to explain the fall in supply and resultant rise in

price. (2) Candidate shows inelastic demand and supply in the diagram. (2) (level 3) Candidate shows an understanding of short run and long run differences in

elasticities. (2) (level 3) (b) Discuss the view that a system of guaranteed minimum prices should

operate in agricultural markets. [10] Diagram showing minimum prices and explanation of minimum prices. (2)

(level 1) Candidate explains the case for guaranteed prices: Stable prices for farmers/consumers/avoidance of volatility which would occur

in a free market due to weather/pests, etc. Use of a diagram to show this. Encourages farmers to stay in agriculture/farmers incomes are

higher/preserves the rural environment. (Up to 6 marks) (level 2) Candidate explains the case against guaranteed prices: Encourages overproduction. Consumers lose if prices are held above the

market price (loss of consumer surplus). Cost to taxpayers to support the scheme. Misallocation of resources. (Up to 4 marks) (level 3)

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2. MINIMUM WAGE INCREASED TO £5.52 PER HOUR. (a) Explain how wages are determined in the labour market. [10]

Candidate draws a fully labelled demand and supply diagram showing how the equilibrium wage is determined. (2 marks) (level 1)

Candidate shows and explains how the equilibrium wage will change if demand or supply changes. (6) (level 2)

Candidate explains why the demand for labour slopes down to the right (2)

and the supply of labour up to the right. (2) (level 3) Also credit NMW and public sector pay review bodies (2)

(b) With the aid of a diagram, discuss the possible effects of an increase in

the national minimum wage. [10] Candidate draws a diagram showing the NMW set above/below the free

market wage. (2) (level 1) Candidate uses the diagram to show an increase in the NMW and identifies

the rise in unemployment resulting from it and also the increase in the number of people wishing to work. Pushes up firms' costs causing inflation/loss of competitiveness reduces profits. (4) (level 2)

Candidate evaluates: depends where the NMW is set, how much it increases,

elasticity of demand and supply of labour, could cause firms to increase training and investment to raise productivity, depends on the state of the economy. If employment is not affected or even increases tax revenue could rise and benefit spending fall. (4) (level 3)

Max 6 no evaluation. Max 8 no diagram.

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3. SCHOOL LEAVING AGE TO BE RAISED TO 18 BY 2013 (a) Explain why the government provides secondary education free of

charge but imposes taxes on cigarettes and alcohol. [10] Candidate explains what is meant by merit and demerit goods. (4) (level 1) Candidate explains why education is a merit good and alcohol/tobacco is a

demerit good. (4) (level 2) Candidate introduces the concept of market failure OR diagrammatic analysis

OR information failure/retrospective regret. (2) (level 3) (b) Discuss the economic effects of the government making it compulsory

for your people to stay in education or training until they are 18 years of age. [10]

Candidate shows an understanding of external benefits of increased

consumption of education. (2) (level 1) Candidate explains some economic benefits of better education/training: Higher skills, increased productivity, higher potential growth, lower levels of

unemployment, increased competitiveness, AS/PPF shift etc. (4) (level 2) Candidate evaluates examining the problems of such a policy:

Higher government spending (higher taxes/borrowing) smaller labour force, beneficial effects will take a long time to be effective, possible that the policy will fail with badly directed training/education programmes. (4) (level 3)

Max 6 without evaluation.

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4. UK GOVERNMENT ONLY BORROWS TO PAY FOR CAPITAL EXPENDITURE

(a) Explain what is meant by government capital expenditure and with the use of examples and a diagram show how it benefits the UK economy. [10] Candidate explains what is meant by government capital expenditure (2) and gives appropriate examples (2) 4 marks (level 1) Candidate explains benefits to the economy such as higher productivity, higher employment, lower costs, lower inflationary pressures, improved productive potential, improved infrastructure, higher potential growth rate. Candidates to relate this to examples of capital spending such as road building, new schools and hospitals, rail infrastructure. 4 marks (level 2) Diagram such as PPF or AD/AS. 2 marks (level 3)

(b) Discuss whether a rise in current spending by the Government on such

things as teachers' pay and state pensions is good for the economy. [10] Candidate defines current spending. (2) (level 1) Candidate explains why current spending is good for the economy: Rising public sector wages/pensions = rising AD and via the multiplier rising

GDP. Use of an AD/AS diagram. Higher teachers'/nurses' pay will lead to improvements in recruitment and a better standard of education/health. Up to 6 marks (level 2)

*Reward candidates who treat the effects of rising teachers'/nurses' pay

literally. Candidate explains why it may be bad for the economy: Rises in public spending can cause inflation (AD rises to cause demand-pull

inflation). Use of an AD/AS diagram. If teachers'/nurses' pay rises too much private sector employers have trouble recruiting. Could also trigger a wage-price/cost-push spiral. Up to 4 marks (level 3)

*The answer can be equally rewarded if done in reverse. Max 6 without evaluation.

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5. EXTENSIVE SUPPLY-SIDE REFORM NEEDED IN EUROPE (a) Explain, with examples, what is meant by supply-side policies. [10]

Candidate defines supply-side policies: aimed at increasing the quantity of factors of production and their productivity. Candidate identifies some examples of supply-side policies, i.e. tax and benefit reform, labour market reform, education/training, privatisation, de-regulation, etc. (4) (level 1) Candidate explains these policies. (4) (level 2) Candidate uses diagrams to illustrate their answer (LafferCurve/AS) OR uses examples of current/recent UK supply-side policies. (2) (level 3)

(b) Discuss the view that supply-side policies will produce only advantages for an economy. [10] Candidate shows a basic idea of how supply-side reforms raise employment/potential growth rate/efficiency. (2) (level 1)

Advantages of supply side policies explained: Increased employment, more competition and efficiency, increased output

and growth with reduced threat to inflation, improved competitiveness, use of AD/AS analysis. (4) (level2)

Disadvantages of supply-side policies explained: Flexible labour markets can increase inequality, reduce job security, safety

can be compromised, easier to close business, loss of power of organised labour, policies take a long time to have an effect, can involve a lot of government expenditure, can be badly directed. During a recession supply side policies will not raise output. (4) (level 3)

Max 6 without evaluation.

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6. UK TRADE DEFICIT REACHES £55.8bn IN 2006

(a) Explain the main forms of protectionism used to reduce the level of imports into a country. [10]

Candidate identifies various forms of protection that can be introduced: Tariffs, quotas, subsidies, embargoes, foreign exchange controls, non-tariff

barriers. (4) (level 1) Candidate explains the various forms of protection. (4) (level 2) Candidate mentions different types of tariff/quota OR uses examples of recent

issues of protectionism OR draws an appropriate diagram. (2) (level 3) Maximum 6 marks for tariffs and 4 marks for other forms of protection. (b) Evaluate the view that a depreciation of the pound on the foreign

exchange market would benefit the UK economy. [10] Candidate explains what is meant by a depreciation of the pound. (2) (level 1) Candidate explains how a fall in the value of the pound will benefit the

economy: Improvement in the trade deficit. FDI increases. Increased AD/employment/economic growth. (4) (level 2) Candidate evaluates: Higher import prices can cause inflation. Depends on the Ped of exports and imports/Pes of exports/time lags. Effects depend on the size of the depreciation and how long it lasts. Depends against which currencies the pound has depreciated. (4) (level 2) Maximum 6 without evaluation.

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EC4 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited.

Economics AS (EC4) For each question there is a list of indicative content which suggests the range of economic concepts, theory, issues and arguments which might be included in candidates' answers. This content is not intended to be prescriptive, in that candidates may achieve full marks for answers which include only part of the content. The mark scheme will also be amended in the light of actual candidate responses. The levels take into consideration the quality of the written communication used by the candidate. This will be assessed using the following levels as appropriate to each part-question (see Table below). Level 1 Form and style of communication are appropriate, using specialist accuracy.

Spelling, grammar and punctuation are adequate to convey meaning.

Level 2 Form and style of communication are highly appropriate using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation are generally accurate.

Level 3 Form and style of communication are excellent, using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation show a high degree of accuracy.

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1. (a) Explain, using economic theory, the European Commission's case for forcing mobile phone companies to cut their 'roaming' charges. [8]

Level 1 Identification of high charges e.g.

40p costs 10p Profits far higher than on domestic class

1-4 marks

Level 2 Explanation of view that phone companies exploit consumers abusing monopoly power achieving supernormal profit collusion competition is not bringing prices down so EU has to do it

5-8 marks

(b) Explain, using the data, the main characteristics of the UK's mobile

phone network market. [8]

Level 1 Level 2

Identification of market structure and recognition of main features of oligopoly e.g. oligopolistic limited number of competitors significant non-price competition differentiated products interdependence possible price leadership barriers to entry abnormal profits 1-4 marks Level 2 Use of data Use of data e.g. five major mobile phone companies £5.8 billion profit a year from international roaming charges competition on new services must be applied

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(c) Discuss the view that mobile phone operators need to make abnormal profits. [12]

Level 1 Explanation of need for profits

e.g. high risk/competition need to recoup cost of investment high capital costs of

establishing/maintaining network

1-6 marks

Level 2 Evaluation e.g. explanation of possible monopoly profits (using diagram) high charges take away consumer surplus

7-12 marks

(d) "The small number of operators in the UK mobile phone network

market, is the best way of ensuring a good deal for the customer." To what extent do you agree with statement? [12]

Level 1 Level 2

Explanation that small number of operators is best way of ensuring a good deal for the customer e.g. economies of scale non-price competition via rapid technological innovation in

phone design and facilities small number does not imply lack of competition the market is regulated Evaluation e.g. generates abnormal profits – use of rise profits/efficiency

issues more competitive market would give more choice contrast/compare with other market structures – perfect

competition and monopoly

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2. (a) What evidence is there to suggest that "recovery from the national economic catastrophe in 2002 has been swift"? [8]

Level 1 Identification of possible evidence

e.g. growth, increased investment, exports rising, stable exchange rate. Inflation falling budget deficit moves to surplus High sales of cars, white goods, etc

1-4 marks

Level 2 Explanation using figures of how these indicate 'recovery' e.g. investment rising rapidly indicates business confidence, will create growth

5-8 marks

(b) Explain how abandoning the fixed exchange rate for the peso affected

the Argentinian economy after 2002. [8]

Level 1 Explanation of abandoning fixed exchange rate i.e. before 2002 peso fixed against the $US, afterwards rate varies central bank manages rate

1-4 marks

Level 2 Explanation of effects of devaluation/managing exchange rate e.g. imports dearer, exports cheaper current balance went from negative to

positive, made farm exports profitable

5-8 marks

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(c) Discuss the arguments for governments, such as Argentina's, maintaining 'an interventionist role for the state'. [12]

Level 1 Identification of possible arguments for

intervention e.g. ensure that essential infrastructure gets built private firms may not be willing to invest maintain control over TNC's control inflation directly with price controls develop strategic industries

1-6 marks

Level 2 Evaluation of interventionist policies e.g. may discourage private sector investment TNC's such as EDF may withdraw investment discourages FDI export bans will worsen current account may lead to higher Government spending

7-12 marks

(d) To what extent can Jorge Taiana's statement that 'Argentina's growth

can be sustained' be regarded as realistic? [12]

Level 1 Identification of possible reasons for optimism e.g. investment growth strong current balance in surplus inflation expected to fall boom in

construction and tourism smaller companies expanding farm exports very profitable currency strong foreign debt cancelled AS>AD will be sustainable

1-6 marks

Level 2 Evaluation indicating that growth may not be sustained e.g. depletion of gas reserves energy shortages in key industries shortages of skilled workers possible government budget deficit foreign firms leaving/reluctant to invest in

Argentina exchange rate may be artificially low

7-12 marks

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EC5 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited.

Economics A (EC5) For each question there is a list of indicative content which suggests the range of economic concepts, theory, issues and arguments which might be included in candidates' answers. This content is not intended to be prescriptive, in that candidates may achieve full marks for answers which include only part of the content. The mark scheme will also be amended in the light of actual candidate responses. The levels take into consideration the quality of the written communication used by the candidate. This will be assessed using the following levels as appropriate to each part-question (see Table below). Level 1 Form and style of communication are appropriate, using specialist vocabulary

accuracy. Spelling, grammar and punctuation are adequate to convey meaning.

Level 2 Form and style of communication are highly appropriate using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation are generally accurate.

Level 3 Form and style of communication are excellent, using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation show a high degree of accuracy.

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(a) How far does it seem likely "that low inflation will continue in the future"? (Article 1 lines 49-50) (20)

Level 1 Identification/explanation of low inflation (e.g. target of 2%). Factors which might keep inflation low e.g. falling gas and electricity prices, unemployment up. Factors which might increase inflation e.g. rising fuel prices, less competition in food higher taxes on petrol, travel etc, growth in money supply. 1- 8 marks Level 2 Explanation of reasons for possible increased inflation e.g. • how increased money supply might increase inflation;

• possible fall in value of sterling if trade deficits continue; • consumers and producers expect higher prices; • higher fuel taxes increase costs for firms/impact on CPI; • use of appropriate theoretical/diagrammatic analysis.

9-14 marks Level 3 Evaluation explaining possible continued low inflation e.g. • sterling exchange rate high and stable;

• low inflation already maintained for several years; • international competition keeps prices down; • higher unemployment may reduce demand; • AS may increase faster than AD. .

15-20 marks

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(b) Discuss the view that "a current account deficit is not particularly important for the UK economy". (Article 2 lines 79-80) (20)

Level 1 Identification of relevant material from data e.g. • current account deficit imports > exports (crudely);

• deficit record level, increasing year-on-year; • manufacturing from surplus to deficit; • should led to fall in exchange rate.

1-8 marks Level 2 Explanation of why deficit may not be important e.g. • balanced by investment flows;

• service surplus creates foreign earnings/most workers are in service industries;

• IPD earned by UK firms etc abroad; • has not caused collapse in currency therefore shows confidence in UK

economy. 9-14 marks Level 3 Evaluation explaining cause for concern about deficit e.g. • loss of jobs in manufacturing;

• regional/structural unemployment may occur; • UK losing self-sufficiency; • FDI leading to greater foreign control of UK industry; • capital and investment flows may be volatile; • high exchange rate makes exports dearer, imports cheaper.

15-20 marks

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(c) Evaluate the Chancellor's claim in the Budget Report that "the UK economy is in a strong position to respond to the global economic challenges of the next decade". (Article 3 lines 109-110) (20)

Level 1 Identification of possible arguments e.g. • steady growth;

• low inflation; • low corporate taxes; • rising investment; • rising employment/falling employment; • increased spending on health, education, transport; • strong exchange rate.

1-8 marks Level 2 Explanation of possible arguments for economy being strong e.g. • steady growth/rising employment/falling employment creates;

• stable employment/business confidence; • low inflation makes UK goods and services competitive; • low corporate taxes encourage investment; • rising investment/increased spending on health, education, transport

makes economy more productive; • strong exchange rate encourages inward capital flows.

9-14 marks Level 3 Evaluation of arguments for strength of economy e.g. • inflation now rising/higher than EU average;

• trade deficit getting continually worse indicating uncompetitiveness/may increase unemployment;

• rising interest rates may reduce growth; • high exchange rate may make UK goods and services less competitive.

15-20 marks

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EC6 GENERAL MARKING GUIDANCE Positive Marking It should be remembered that candidates are writing under examination conditions and credit should be given for what the candidate writes, rather than adopting the approach of penalising him/her for any omissions. It should be possible for a very good candidate to achieve full marks and a very poor one to achieve zero marks. Marks should not be deducted for a less than perfect answer if it satisfies the criteria of the mark scheme, nor should marks be added as a consolation where they are not merited. For each question there is a list of indicative content which suggests the range of economic concepts, theory, issues and arguments which might be included in candidates' answers. This content is not intended to be prescriptive, in that candidates may achieve full marks for answers which include only part of the content. The mark scheme will also be amended in the light of actual candidate responses. All questions will be allocated 20 marks and will be marked using the following levels of response.

Level 1 Some points of connection between the areas studied and some reference made to relevant knowledge gained from other Sections of the specification content, but with only limited accuracy. Knowledge of subject content is limited with one or two relevant points made but not developed. Form and style of communication are appropriate, using specialist vocabulary in context but sparingly and/or with only approximate accuracy. Spelling, grammar and punctuation are adequate to convey meaning.

1-4

Level 2 The answer shows reasonable understanding between the areas studied and uses some relevant knowledge gained from other Sections of the specification content. A satisfactory and mainly accurate treatment but with a mainly descriptive approach and limited development. Form and style of communication are appropriate and coherently organised, using specialist vocabulary in context but sparingly and/or with only approximate accuracy. Spelling, grammar and punctuation are accurate.

5-8

Level 3 The answer shows a good understanding of the interrelatedness between the areas studied. The candidates successfully integrates relevant and accurate gained from other Sections of the specification content. Economic concepts and theories are applied and presented with accuracy and substantial use of economic terminology. There is obvious understanding of the limitations of economic theories and models. Form and style of communication are highly appropriate, using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation are generally accurate.

9-14

Level 4 The answer shows excellent understanding of the connections between the areas of subject content studied. The candidate deploys wide-ranging and highly detailed knowledge of content from different Sections of the specification content. A thorough understanding of economic concepts, theories and techniques is used to analyse economic theories and issues. The candidate shows clear and explicit evidence of understanding the limitations of economic models and theories. Form and style of communication are excellent, using specialist vocabulary fluently and accurately in context. Spelling, grammar and punctuation show a high degree of accuracy.

15-20

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1. Discuss the argument that if all markets were perfectly competitive the efficiency of the economy would be maximised. [20]

Definition and explanation of perfect competition e.g. competition in its purest from Explanation and evaluation of how perfect competition creates efficiency: e.g. explanation of assumptions of model; diagrammatic representation of efficiency (productive and allocative); comparison with other types of market; not necessarily ideal e.g. costs may be lower in a monopoly market because

of economies of scale/distinction between static and dynamic efficiency; perfect competition is an idealised model rather than a real-world market;

government may allow monopoly but regulate. Application to wider economy e.g. discussion of how or whether Government could try to achieve perfect competition, whether UK firms would be competitive with foreign firms.

2. External costs and benefits may arise from both consumption and production of goods and services. To what extent should governments intervene to correct market failure caused by external costs and external benefits? [20]

Definition/identification and explanation of external costs and benefits. Explanation of types of government intervention/reasons for intervention to correct market failure e.g. to reduce pollution:

regulation; redistribute income - taxes/subsidies, transfer payments; correct information failure e.g. merit and demerit goods; state provision to provide public goods. Evaluation of reasons/effects of government intervention e.g. affects consumer choice;

higher taxes may increase prices creates disincentives to effort and enterprise;

regulation may restrict innovation/raise costs/prices/inflation state provision may be inefficient; it is difficult to measure external costs and loss of employment; external benefits. Level 4 impact on the macro economy e.g. inflation, employment

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3. "If the Government wishes to maximise economic growth it should cut taxes substantially." Discuss. [20]

Definition of economic growth/explanation of importance/descriptive explanation of effect of tax increases Explanation and evaluation of how tax cuts may affect growth: e.g. higher disposable income; higher retained profits for investment if corporation taxes reduced; higher potential profitability; cutting excise taxes will lower prices/inflation; will increase aggregate demand; creation of confidence; use of AS and AD/or PPC; creation of incentives to effort; Laffer curve – enterprise, tax cuts can increase government revenue Government may have to borrow more; crowding out; May make income inequalities wider; Some reference to alternative policies. Level 4 answers should refer to possible effects on other macroeconomic variables/whether policy would work e.g. inflation, imports, time-lags before policy takes effect.

4. Evaluate the view that policies designed to reduce unemployment will

inevitably increase inflation. [20] Defining unemployment/explanation of effects. Identification and explanation of likely policies to reduce unemployment e.g. lower taxes, higher Government spending, lower interest rates Explanation of how reflationary polices may increase AD ∴ may lead to demand-pull inflation, lower unemployment may increase demand ∴ may increase prices

theoretical explanation e.g. traditional Phillips curve, use of Keynesian X/AS/AD analysis

Evaluation of statement/explanation that there may be no trade-off e.g. reference to international competitiveness – international forces keeping

inflation down. expectations-augmented Phillips curve use of supply-side policies - AS curve shifts to the right or Phillips curve shifts to the left.

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5. Discuss the view that the abolition of all international trade barriers would lead to higher standards of living in the UK. [20]

Definition and explanation of free trade/growth/employment/trade barriers Explanation and evaluation of arguments for and against free trade: e.g. comparative advantage leads to more efficient production; free trade creates lower prices/more choice for consumers; domestic producers should become more efficient; wider markets create economies of scale; encourages FDI infant & declining industries may suffer from abolition of protection; 'strategic' industries may be unable to survive; protection may be necessary against 'unfair' trade practices e.g dumping; current deficit may cause falling exchange rate; loss of tariff revenue for Government/might have to cut Government

spending.

Level 4 answers should focus upon 'internal' effects upon the economy such as those on inflation, growth and employment as well as the current balance.

6. "Developing countries face disadvantages when competing with more

advanced developed countries". Discuss the best policies that developing countries can implement to overcome these disadvantages. [20]

Explanation and illustration of possible disadvantages: e.g. characteristics of a developing country

lack of capital low levels of education/skill; dependence upon particular industries; dependence upon imports; lack of appropriate technology; high debt repayments; protectionism corrupt governments Evaluation of possible methods for overcoming difficulties: e.g. encouraging strategic industries; protectionist measures;

concentration upon import substitution; relying upon free competition and trade; attracting inward investment/FDI; aid from other countries. export led growth

Attempt to balance relative merits of alternative policies e.g. explanation of why best policies may vary between different countries.

GCE Economics Marking Scheme (Summer 2008)/ED

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