GCE MARKING SCHEME

ECONOMICS AS/Advanced

SUMMER 2011

INTRODUCTION The marking schemes which follow were those used by WJEC for the Summer 2011 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.

Unit Page EC1 1 EC2 4 EC3 12 EC4 19

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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.

Q.1 Explain one reason for an inward shift of the production possibility frontier. [2] Natural disasters, war, etc (1) Explained (1) If candidate writes recession it can be rewarded provided it has a plausible

explanation. Q.2 (a) Adapt the diagram to show the effects on price and output of a

maximum price imposed below the free market equilibrium on products such as rice or sugar. [2]

Candidate labels the diagram showing the maximum price below the

equilibrium (1) and the new and quantity supplied / excess demand (1) (b) Discuss whether the imposition of a maximum price on products such

as rice and sugar will be beneficial to producers and consumers in Kenya. [6]

Consumers – lower prices/bigger consumer surplus but excess demand and

thus black markets. (2+2) Producers – lower prices/less profit/lower producer surplus/less incentive to

produce but depends how low the price is set and Ped/Pes. (2+2) Reference to consumers and producers needed for full marks as well as

some evaluation. Maximum 4 marks otherwise. Q.3 (a) Define price elasticity of supply. [2] Definition or equation (2) (b) Using the data, explain why the price elasticity of supply of salt changes

over time. [4] Short run inelastic (1) use of data (1) Long run elastic (1) use of data (1) Implied knowledge of short run and long run maximum of 2.

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Q.4 With the aid of a diagram and the information given, evaluate the view that setting a minimum price for vodka in Russia will reduce alcohol consumption. [8]

Diagram showing minimum price reducing quantity demanded (2) Explanation of diagram (2) BUT: A lot of vodka is more expensive than the minimum price (2) Depends on the PEd of vodka (2) Black market/illegal production (2) Vodka is not the only way to consume alcohol (2) Maximum 4 marks without evaluation. Maximum of 6 marks without diagram. Q.5 In the emergency budget of June 2010, the government raised VAT from 17.5% to 20%. (a) The diagram below shows the demand and a supply for furniture

following the increase in VAT from 17.5% to 20%. [2] (i) Consumer surplus after increase in VAT = P2AD (1) or any continuous

labelling of triangle. (ii) Producer surplus before the increase in VAT = BP1C (1) or any

continuous labelling of triangle. (b) Adapt the aggregate demand and supply diagram and briefly explain the

effects on the UK economy of the rise in VAT. [6] Correct adaptation of the AD/AS diagram (shift left the lower part of the

AS curve) (2) AD to the left (1). Up to 2 for the diagram. Rise in VAT reduce consumption reduce AD-effect on employment and

output (2). Rise in VAT will increase government revenue and reduce the budget

deficit. Rise in VAT will make the tax system more regressive (2). Increase in price level/inflation explained (2) Maximum of 6 Q.6 (a) Apart from using tariffs, identify two other ways in which a country can

try to protect itself from foreign imports. [2] (i) Quotas (1) or, (ii) Import licences (1) or, (iii) Embargoes (1) or, (iv) Domestic subsidies (1) Any other plausible answer.

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(b) Using the information above and an appropriate diagram, explain the possible effects on the European Union (EU) of imposing tariffs on shoes imported from China and Vietnam. [8]

Tariff diagram 4 marks. Effects: Boost to employment and output in the EU lower EU imports/balance of payments benefits Higher shoe prices in the EU/loss of consumer surplus Tariff revenue that the Government collects Retaliation Increase in domestic producer surplus Resource misallocation. No use of the data maximum 6 marks. No application to the diagram maximum 6 marks. Q.7 With reference to the diagram, discuss the view that an increase in interest

rates by the Bank of England will bring down the rate of inflation. [8] Appropriate diagram (2) Higher interest rates will reduce AD: lower consumption and investment. Higher

interest rates will cause a rise in the exchange rate reducing the price of imports and raising the price of exports, reducing their demand and AD.

Maximum 6 marks - if address the AD and exchange rate route. However, it depends on how much interest rates are increased and how responsive

the economy/AD is to a rise in interest rates. Other factors in the UK/global economy have an impact on the inflation rate.

Maximum 4 marks.

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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.

SECTION A

Q.1 (a) Calculate the budget deficit for 2010-2011 [1] £161bn (1) (b) With the aid of a diagram, show how the net inward migration of labour

might affect wage rates. [4] Diagram showing the supply of labour shifting to the right and reducing wage

rates (2) Explanation (2) (c) (i) Using examples, distinguish between the Government's current

expenditure and capital expenditure. [4] Definition of current and capital expenditure (2x1) Examples (2x1) (ii) Explain how the Government uses its expenditure to correct

market failure. [7] • Public goods explained with examples (defence/law/order) • Merit goods explained with examples (health and education) • Spending on the environment/reducing inequality/reducing labour

immobility/increasing information levels • Government spending to reduce monopoly power, e.g. start-up

grants • Subsidies to firms to reduce pollution (R&D grants) Maximum 4 for each example explained. (d) With the aid of an aggregate demand and aggregate supply diagram,

explain how a fiscal stimulus might help an economy in a recession. [6] Explanation of what is meant by a fiscal stimulus – rise in G and a fall in T = 1 and how it will affect AD and GDP (3) Appropriate AD/AS diagram (2)

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(e) Evaluate the supply side reforms that could be introduced to reduce the number of economically inactive adults in the UK. [8]

• Benefit reform, thus more incentive to look for work. • Reduce NMW, thus wages can fall to market rates. BUT • Likely to increase inequality and 'casualise' the labour force. • Lower income tax rates/raise tax-free allowances/increase tax credits to

increase incentives to work. BUT • Possible loss of government revenue/no guarantee it will work. • Increased spending on education/training to reduce skills shortages. • Complexity of benefits system does not encourage people to look for work. BUT • Expensive/takes time to work/may be ineffective. For full marks, two policies must be fully evaluated/three policies evaluated. An understanding of supply side policies (1). Maximum 4 without evaluation. (f) Discuss the view that the very low exchange rate of the pound will help the

UK out of recession. [10] • Low exchange rate will increase demand for exports and reduce demand for

imports due to rise in UK price competitiveness. Increased level of AD as exports increase and demand for imports fall, thus increased UK GDP, resulting in a recovery.

BUT • UK exports may not increase in demand because overseas markets are in

recession (use of the data). Cheap exports do not mean they will sell as goods/services are sold on the basis of non-price factors as well.

• Demand for imports may be price inelastic. • Competitive devaluation. • Other components of aggregate demand may be changing. • Expensive imports resulting from a low exchange rate can cause inflation

preventing any recovery from recession. • Use of diagram (2). Maximum 6 without evaluation.

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SECTIONS B and C

The following levels should be applied to each question.

Part (a) Questions

Level 1 1-3

Limited knowledge of relevant economic theory. One or two basic points made.

Level 2 4-6

Good understanding of subject matter with some application. Relevant points made and developed using examples/diagrams and appropriate economic theory.

Level 3 7-8

The demands of the question are fully understood and relevant economic theory has been fully explained and applied using relevant examples/diagrams throughout the answer.

Part (b) Questions

Level 1 1-4

Limited knowledge of relevant economic theory with no real engagement with the issue being considered. Likely to focus on just one side of the issue. Information is poorly organised. There is limited use of specialist terminology/vocabulary and frequent errors in spelling, punctuation and grammar.

Level 2 5-8

Basic economic theory and principles are explained/applied/analysed. The candidate engages with the issue being considered using appropriate examples/diagram, but may focus heavily on one side of the issue and evaluation may be limited. Information is well organised and ideas are expressed in a logical manner. There is good use of specialist terms/vocabulary with some errors in SPG, but these are not intrusive.

Level 3 9-12

Relevant economic theory and principles are fully understood, applied and analysed. The issue is fully evaluated using a range of appropriate examples/diagrams. Information is very well organised and argument is presented clearly and coherently. There is very good use of specialist terms/vocabulary with few, if any, errors in spelling, punctuation or grammar.

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SECTION B Q.2 Oil prices rise as global economy grows. (a) Explain what is meant by equilibrium price and explain, with examples,

how in a free market the equilibrium price might rise or fall. [8] Definition of equilibrium price (D=S) (2). Candidate shows how rises and falls in demand and supply can affect market

price, giving an example in each case.

Maximum 3 for each of supply and demand. (b) Discuss how useful the concept of price elasticity of demand is to decision

makers such as firms and governments. [12] Definition/formula of price elasticity of demand (2).

Firms: price setting depending on whether Ped is elastic or inelastic.

Governments: indirect taxation, predicting effects on quantity sold tax revenue.

Maximum 8 without evaluation (maximum 6 if only firms or government covered).

If just do firms or just do government provided there is evaluation (8).

Evaluation: Other information is just as useful, i.e. incomes, expectations, state of the economy. Can price elasticity of demand be accurately measured?

Maximum 4. Q.3 Motorists face tolls to pay for new roads. (a) Using motoring as an example, distinguish between private costs, external

costs and social costs. [8] Definition of private costs (2) plus motoring example (1) Definition of external costs (2) plus motoring example (1) Definition of social costs (2). (b) Evaluate the view that road congestion in the UK can best be solved by

allowing private firms to build new motorways for profit. [12] Case for: • New roads will reduce congestion if there are tolls. • No cost to the government/taxpayer. • Road construction increases GDP/employment. Case against: • Building roads may not reduce congestion (supply creates its own demand). • Possible conflicts with environmental pressure groups/damage to the

environment/road travel increases external sots. • Motoring will become more costly, possibly inflationary effects. • Road tolls as a consequence of private firms building new motorways are

regressive. Maximum 8 without evaluation. (Answer is reversible). Alternative policies maximum of 4, e.g. raising petrol taxes.

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Q.4 Government committed to reducing child poverty. (a) Explain the ways in which governments can attempt to reduce income

inequality. [8] Government can reduce income inequality through: • The tax system (progressive taxes). • The benefits system. • Tax credits. • Provision of merit goods. • Subsidies for higher education/EMA/housing. • Minimum wage/maximum wage. • Minimum prices for agricultural goods (raising farm incomes). • Maximum prices. Up to 3 marks for each point. (b) Using a diagram, evaluate the effects of an increase in the UK national

minimum wage. [12] Increase in the NMW could reduce the demand for labour and increase the

supply, thus increasing unemployment (use of a diagram), increase in firms' costs (loss of competitiveness), wage push from higher paid workers, distortion of the labour market, could increase illegal low pay.

• More tax revenue because more people are working and less benefits to

pay out. BUT Depends how much the NMW rises by and from what level.

• Differing effects on different labour markets and in different regions. • It might encourage employers to increase the productivity of their workers. • The effects of a rise in the NMW depends on the state of the economy. • Reduction of poverty. More spending by low wage earners in the

economy. • Different sector impact.

Maximum 8 without evaluation. Maximum 10 without an appropriate diagram.

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SECTION C

Q.5 UK interest rate stays at historically low level. (a) Using a diagram, outline the basic circular flow of income and explain

the effects of injections into and withdrawals from the circular flow. [8] Candidate explains and draws the circular flow diagram (4) Candidate identifies the injections and withdrawals into/from the circular flow

(2) and explains their effects on it, for example, AD (2). (b) Discuss the view that the Bank of England must set a low interest rate if

it wants to increase consumption and investment in the UK economy. [12]

Low interest rates should raise C and I. Candidate explains why less

incentive to save, cheaper to borrow for C and cheaper loans for investment spending to increase I.

Investment projects with a lower rate of return will be viable. BUT • Interest rates fall increases disposable income especially for those paying

a mortgage.

• Low interest rates may not work in a recession when confidence is low (use of recent experience when interest rates have been low).

• Other factors affect consumer spending (availability of credit, income

levels, job security, asset prices, etc). • Investment funds come from other sources, i.e. retained profits, share

issues. • Investment also determined by technological change and the relative price

of labour. • Cut in interest rates may lead to demand pull inflation. • Effect on AD may be minimal.

Maximum 8 without evaluation. (Answer is reversible).

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Q.6 New 50% income tax rate introduced and government expenditure cut. (a) Using a diagram and appropriate examples, explain how a significant

reduction in government spending could affect aggregate demand and aggregate supply in the economy. [8]

A reduction in government spending will reduce AD as it represents a fall in injections shifting AD to the left (2). Example (1). Reduction in capital spending by the government will affect AS as it affects productive capacity (2). Example (1). Diagram showing AD shifting left and AS left or not as far right (2).

(b) Evaluate the effects on the economy of a rise in income tax rates. [12] A rise in income tax rates would reduce disposable income and reduce AD

with negative effects on employment and output (AD/AS diagram). A rise in income tax rates could also affect incentives to work (Laffer Curve)

both among low and high income earners. Lower inflation. Reduced imports. Higher tax revenues. BUT It depends on what else is happening in the economy and to other taxes. Depends on how much tax rates increase by and to what levels. Effects depend on tax thresholds. Higher income tax rates may make people work harder (to reach target

incomes). Time lags. Maximum 8 without evaluation. (Answer is reversible).

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Q.7 Unemployment rises but trade deficit improves. (a) Explain the government's main macroeconomic objectives and why

there may be policy conflict when attempting to achieve them. [8] Policy objectives: low inflation, low unemployment, sustainable economic

growth and equilibrium on the balance of payments (2+2). One policy conflict at least must be explained (most will use the

inflation/unemployment one using AD/AS analysis). More conflicts can be explained with a maximum 6 marks for each. (b) Discuss the view that free trade between countries is the best way for a

government to achieve its macro economic objectives. [12] Understanding of free trade. Countries specialise in the production of goods and services they are best at

producing (international division of labour/comparative advantage. Free trade increases competition and lowers prices, thus inflation is lower. Free trade leads to greater efficiency/productivity. Increased trade leads to increased world production/GDP promoting

economic growth/lower unemployment. Open economies taking advantage of free trade and generate trade

surpluses, i.e. Japan, Germany and China. BUT Cheap imports can destroy jobs and reduce GDP. Large trade deficits are possible when a country loses its comparative

advantage/competitiveness, i.e. US/UK economies. Imports > exports negatively affect AD. Free trade may not always be fair trade - problem of dumping. Maximum 8 without evaluation. Reversible answer.

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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. Each question in Section B will be marked using a Levels of Response mark scheme. 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. In addition, in Section B, candidates will be assessed on their Quality of Written Communication. Levels of response are used for QWC and these levels will help to determine where in a level a candidates' response lies.

SECTION A Q.1 (a) Define average revenue (MR). [1] Average price charged by firm/price charged. TR ÷ output or TR ÷ quantity Demand curve for firm/industry (b) Define marginal revenue (AR). [1] The extra revenue from selling one more unit of a good (1). The increase/decrease in revenue from selling one more/one less unit of a

good (1) Increase/decrease in revenue from selling one more/one less unit of a good (1).

(c) Explain why a monopolist's marginal revenue (MR) curve is always

below its average revenue (AR) curve. [2] Explanation of AR and MR (1). Firm has to cut price to sell more, therefore, price of next unit is always lower

than that of previous unit (2). OR If AR is falling, MR must be falling at a faster rate/twice as fast (1). Use of

numerical example to illustrate this (1). Monopolist is a price maker/set the price for the industry

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Q.2 The diagram shows the long-run equilibrium for a profit-maximising firm in perfect competition. The firm produces an output of OQ2.

(a) Explain why OQ2 is the profit-maximising level of output. [2] Output with greatest profit where MR=MC (1). Development, e.g. up to this output extra revenue (MR) for each unit exceeds

extra cost (MC) (1). Above this output MC greater than MR, at any other output will make a loss

because AR less than AC (1) (ALTERNATIVE: Firm has to produce at minimum ATC because otherwise it

makes abnormal profits, new firms will enter and drive AR down. OR It will make a loss and firms will leave and drive the AR up). (2)

(b) At the profit-maximising level of output of OQ2 what does the diagram

show about the firm's: (i) productive efficiency; [2]

Productively efficient (1) Development, e.g. because at bottom of ATC curve (1). e.g. producing at lowest-cost output ATC minimised (1).

(ii) allocative efficiency? [2] Allocatively efficient (1) Development because P=AR=MC (1). Development, e.g. price of last unit = value of resources used (1).

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Q.3 Some economists argue that Tesco is too powerful in the grocery market and should be made to sell some of its shops.

(a) Explain one argument for making Tesco sell some of its shops. [2] Appropriate reason with explanation: e.g. Tesco with more than 25% share of

market, therefore, classified as a monopoly, has too much power over consumers, abnormal profits/local monopolies, may exploit suppliers, may be inefficient, will allow new entrants/larger competitors therefore classified as a monopoly (2).

(b) Explain one argument against making Tesco sell some of its shops. [2] Appropriate reason with explanation: e.g. is successful because it is efficient,

meets consumer need; customer has choice of other stores, price competition exists; would lose benefit of economies of scale, possible job losses (2).

Q.4 (a) Explain what happened to the real price of alcohol and tobacco between

1996 and 2009. [2] Alcohol and tobacco rose (1). Use of figures, e.g. alcohol and tobacco rose by 57% (73.3 to 115.3 = 42/73.3

= 57.3%) CPI by 25.8% (88.1 to 110.8 = 22.7/88.1 = 25.8%) (1). Alcohol and tobacco rose in real terms faster than inflation (1). Explanation must be related to figures/technicalities of CPI. (b) Using the table explain what factors might have affected the weights of

alcohol and tobacco and manufactured goods in 1996 and 2009. [4] Movements in the CPI represent the changing cost of a representative

shopping basket (1). Identification of weights as a percentage of average consumer

income/spending on products (2). Weights reflect the relative importance attached to various components

entering into any index number. The weights in the consumer price index, for example, are chosen so that the bundle of goods and services whose prices are measured corresponds to what an average consumer would buy.

Possible links to price movements of products, e.g. real price of manufactured

goods fell and this could be reflected in the weight which has also fallen (2). The proportion of income spent on products is reflected in the weight ascribed

to them. Thus, whilst it is possible that consumers spend more on alcohol, the evidence suggests as a proportion of income it has fallen (2).

Other development points: • Spending on other products has risen faster than alcohol and tobacco. • Higher taxes, social reasons, smoking ban/other regulations may have

reduced consumption • Technological changes/international competition have reduced prices of

manufactured goods.

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Q.5 With reference to the date, discuss the possible relationship between GDP

growth and Government borrowing. [6] • Identification of link using figures – borrowing increases as GDP growth

falls/becomes negative. Explanation by using figures (2). • Explanation of inter-relationship, up to 4 marks, e.g. increased government

spending on unemployment benefits /reduction in tax revenue as a result of recession.

• Government spent money to save banks. • May have increased spending and borrowing as counter/cyclical measures. (Maximum of 3 marks if no recognition/explanation of negative GDP

growth/recession.) Q.6 Hungary is hoping to join the Eurozone by 2012. What problems does the data

suggest might occur for its economy? [6]

Identification of potential problems, e.g.: • Hungary has the highest inflation in EU. • Will not be competitive in a Single Market. • Possibly exports will go down and imports will go up. • Joining euro may be unrealistic/impossible unless it can reduce inflation. • Low inflation pre-condition for entry to Eurozone/reference to convergence

criteria. • ECB interest rate may be too low to control inflation in Hungary (one size fits all

argument). • Non-Eurozone countries may devalue/depreciate their currencies. • Cost of transition to euro, e.g. menu costs changing. • Possible wage-price spiral. Up to 3 marks for the above. Development of issues especially related to international competitors and macro-economic performance, e.g. growth/employment/trade balance (3).

Q.7 How useful is the data when comparing the standard of living of Portugal and

Saudi Arabia? [8] Explanation of usefulness, e.g. • Saudi Arabia has higher GDP per capita and World GDP ranking. • Portugal has a much higher life expectancy and literacy rates. This suggests that

Portuguese citizens have better access to health and education and this may lead to higher GDP/personal income.

For high marks need explanation rather than mere statement of how factors may

affect/reflect standard of living.

Evaluation: • Takes into account limited range of factors. • Figures may be unreliable. • Does not account of distribution of income/gender imbalance, etc. (Maximum 5 for one side only)

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SECTION B

The following levels should be applied to each question.

LEVEL MARK BAND DESCRIPTOR

Level 1 1-5

Candidate makes few, if any, relevant points. There may be some attempt to draw conclusions, but understanding of connections between different areas of subject content is limited or not demonstrated. Information is poorly organised. There is limited use of specialist terminology/vocabulary and frequent errors in spelling, punctuation and grammar.

Level 2 6-10

Candidate makes some valid points using relevant economic concepts and theories. There may be some application with valid conclusions drawn. Some ability to make connections between different parts of the subject content is demonstrated. Information is well organised and ideas are expressed in a logical manner. There is good use of specialist terms/vocabulary with some errors in spelling, punctuation and grammar, but these are not intrusive.

Level 3 11-15

Candidate shows good knowledge and understanding of economic concepts and theories. There is good application and analysis with solid logical conclusions drawn. The ability to make connections between different parts of the subject content is demonstrated on several occasions. Information is very well organised and argument is expressed clearly and coherently. There is good use of specialist terms/vocabulary and spelling, punctuation and grammar are generally accurate.

Level 4 16-20

Candidate demonstrates excellent knowledge, understanding, analysis and evaluation using economic concepts and theories. The ability to synthesise and make connections between different parts of the subject content is fully demonstrated throughout the answer. Information is very well organised and the form and style of communication is highly appropriate, using specialist terms/vocabulary with facility. There is very good use of specialist terms/vocabulary with few, if any, errors in spelling, punctuation and grammar.

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Q.8 External costs and benefits 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 benefits? [20]

Definition and explanation of external costs and benefits. e.g. negative externalities occur when MSC>MPC. positive externalities occur when MSB>MPB Explanation of types of government intervention/reasons for intervention. • To reduce pollution. • Re-distribute income. • Correct information failure, e.g. merit and demerit goods. • To provide public goods. • Retrospective regret. • Internalising the externality. Evaluation of effects of government intervention (government failure), e.g. • Creation of disincentives to effort and enterprise. • Higher taxes. • Higher costs/prices. • Difficulty of accurately measuring externalities.

Q.9 "Monopoly power is not automatically bad as long as it is regulated". Discuss this view. [20]

Definition of monopoly power:

• Single/dominant producer/existence of entry barriers. Evaluation of case for current approach:

• Monopoly power may lead to scale economies and therefore lower-cost production.

• UK firms may need to be large to compete internationally. • Firms grow by satisfying consumers. • Monopoly power reward for high quality/low prices/low costs/R&D/innovation. • New firms can enter if efficient enough. Evaluation of possible adverse effects of monopoly power with appropriate diagrammatic analysis:

• Higher prices. • Lower output. • Anti-competitive practices • May be able to exploit consumers. • Monopolies may be contrived/complex. • Deliberate erection of barriers to entry. Attempt to balance these arguments, e.g. explanation of why efficiency may vary between different situations.

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Q.10 "The excessive profits made by banks in recent years suggest that they should be more highly taxed than other types of business". Discuss [20]

Definition and explanation of 'excessive ' profits:

• Above level of other businesses. • Abnormal profit (when price exceeds average total cost). • Profits above level required to keep firm in the industry. Explanation and evaluation of arguments for and against taxing high profits:

• Result from exploitation of monopoly power / barriers to entry. • Firms will still stay in industry even if abnormal profits taxed. • Tax revenue may be used for other purposes. • Abnormal profits are a welfare inefficiency. • Abnormal profits are a reward for innovation/competitiveness/high quality/low

prices/low costs. • Banks have gained profits by satisfying consumers. • New firms can enter if efficient enough. • Monopoly power may lead to scale economies/increased investment/R&D. • Depends upon level at which tax is set. • Depends upon how abnormal profits arose. • Higher profit taxes will deter FDI. • Government should use regulation instead. • Bank's international competitiveness may be reduced. Level 4 answers should make a reasoned judgement about the benefits of extra taxes on high profits, referring to wider economic effects such as welfare, economic growth and international competitiveness.

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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.

Each question in Section B will be marked using a Levels of Response mark scheme.

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.

In addition, in Section B, candidates will be assessed on their Quality of Written Communication. Levels of response are used for QWC and these levels will help to determine where in a level a candidates' response lies.

SECTION A Q.1 (a) Explain why the trend in bus journeys after 2005 was 'rather different

from what might have been expected'. [8]

Level 1 1-4 Identification of trend in bus journeys using figures, e.g. • fell from 1996-2005, then started to rise

Level 2 5-8 Explanation of unexpected trend, e.g. • cost of bus fares has risen relative to motoring • more people own private cars • might have been expected to fall because of higher

income/bus transport may be regarded as inferior form of transport

(b) Explain what the data suggests about the market structure of bus

transport in the UK. [8]

Level 1 1-4 Identification of basic structure using figures, e.g. • high level of concentration • oligopoly at national level • monopoly/duopoly in most local areas

Level 2 5-8 Development, e.g.

• limited competition • predatory pricing

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(c) To what extent are bus passengers likely to benefit from the OFT's referral of the bus market to the Competition Commission? [12]

Level 1 1-6 Explanation of reasons for referral, e.g.

bus companies have monopoly power evidence of deliberate creation of barriers to entry higher prices in monopoly areas bus companies colluding in dividing areas up better value for tax payers/fewer taxes

Level 2 7-12 Evaluation of arguments against referral, e.g.

bus service possibly natural monopoly/break up would increase costs

high passenger satisfaction with current services will deter investment, therefore poorer services Government should concentrate upon reducing

congestion and journey time instead makes very little difference to competition • cost of investigation (£20 million) • will create uncertainty for bus industry

(d) Discuss the economic arguments for the Government subsidising bus

travel. [12]

Level 1 1-6 Explanation of arguments for subsidies, e.g. • social benefits for lower income groups/rural areas • has progressive effect • reduction of social costs such as pollution and

congestion • increased consumer and producer surplus • better employment prospects in some areas • use of appropriate diagram(s)

Level 2 7-12 Evaluation of argument, e.g. • higher Government spending/taxes/borrowing • bus companies already making high profits • opportunity cost of subsidies • bus passengers should pay for own transport • encourages inefficiency • bus companies may not pass on benefits of subsidy to

passengers • other policies may be appropriate, e.g. higher taxes on

private cars • use of appropriate diagram(s)

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Q.2 (a) Explain what Figures 1 and 2 show about the UK's trade with the rest of the world between 1996 and 2009. [8]

Level 1 1-4 Identification of increasing exports and trade deficit using

figures, e.g. • trade balance in deficit most years, deficit fell after

2007.

Level 2 5-8 Explanation of exports almost doubling but trade deficit worsened, therefore, imports must be rising more rapidly.

(b) Explain the factors which appear to have influenced the exchange rate of

sterling in early 2010. [8]

Level 1 1-4 Identification relevant factors, e.g. • trade deficit, capital flows, political uncertainty, speculation

Level 2 5-8 Explanation of how these affect exchange rate, e.g. • imports increase supply of sterling, exports increase

demand, rate depends upon balance • speculators think exchange rate will fall, therefore sell pound • use of appropriate diagram

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(c) Discuss the likely effectiveness of spending more on education and high-tech start-ups as methods to increase the UK's exports. [12]

Level 1 1-6 Arguments for higher spending, e.g.

• improves productivity of labour force • high-tech firms needed to sell high-value/up-to-date

products • UK exports will be cheaper/higher quantity • effects on supply-side, e.g. increased AS • use of appropriate diagram(s)

7-12 Evaluation of policies, e.g. • cost of increased government spending • higher taxes and government borrowing • Government may subsidise inefficient firms • crowding out of private investment • effects very long-term • other factors, e.g. quality/exchange rate/UK reputation

more important (d) Discuss whether the protectionist measures used by countries such as

China and India might damage the development of their own economies. [12]

Level 1 1-6 Explanation of possible harmful effects of protectionist

policies e.g. protectionism increases prices/reduces choice for

consumers domestic producers could become more efficient loss of consumer surplus • restricted markets create economies of scale trade creation and trade diversion adverse effects upon developing countries effects upon inflation, growth and employment

Level 2 7-12 Evaluation of argument to justify use of protectionist

measures e.g. infant and declining industries may survive 'strategic' industries are necessary for the economy protection may be necessary against 'unfair' trade

practices e.g. dumping by Western countries retaliation against protectionism by EU, USA, etc • tariffs generate income for Government effects upon inflation, growth and employment

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SECTION B

Answer one question The following levels should be applied to each question.

LEVEL MARK BAND DESCRIPTOR

Level 1 1-5

Candidate makes few, if any, relevant points. There may be some attempt to draw conclusions, but understanding of connections between different areas of subject content is limited or not demonstrated. Information is poorly organised. There is limited use of specialist terminology/vocabulary and frequent errors in spelling, punctuation and grammar.

Level 2 6-10

Candidate makes some valid points using relevant economic concepts and theories. There may be some application with valid conclusions drawn. Some ability to make connections between different parts of the subject content is demonstrated. Information is well organised and ideas are expressed in a logical manner. There is good use of specialist terms/vocabulary with some errors in spelling, punctuation and grammar, but these are not intrusive.

Level 3 11-15

Candidate shows good knowledge and understanding of economic concepts and theories. There is good application and analysis with sound logical conclusions drawn. The ability to make connections between different parts of the subject content is demonstrated on several occasions. Information is very well organised and argument is expressed clearly and coherently. There is good use of specialist terms/ vocabulary and spelling, punctuation and grammar are generally accurate.

Level 4 16-20

Candidate demonstrates excellent knowledge, understanding, analysis and evaluation using economic concepts and theories. The ability to synthesise and make connections between different parts of the subject content is fully demonstrated throughout the answer. Information is very well organised and the form and style of communication is highly appropriate, using specialist terms/ vocabulary with facility. There is very good use of specialist terms/vocabulary with few, if any, errors in spelling, punctuation and grammar.

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Q.3 To what extent do policies for reducing inflation necessarily tend to increase unemployment? [20]

Identification and explanation of likely policies to reduce inflation, e.g. • higher taxes, lower government spending, higher interest rates Explanation of how deflationary policies may reduce AD, therefore, may lead to

demand-deficient unemployment, e.g. • 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 • expectations-augmented Phillips curve • depends on shape of AS curve • use of supply-side policies Q.4 "The high level of the Government's debt means that it must raise taxes

sharply and cut government spending severely." Discuss [20] Definition/explanation of reasons for Government debt, e.g. • spending consistently higher than taxes • cost of rescuing banks • recession Explanation arguments for cutting spending/raising taxes, e.g. • debt may be unsustainable in the long-run • lower consumption in future years • cost of interest payments • difficulty of meeting pension liabilities • reduce crowding-out/release funds for private sector investment • incentive effects of lower taxes • may make recession worse Evaluation of arguments for cutting spending/raising taxes may make recession

worse e.g. • possible mass unemployment • social costs of cutting spending/raising taxes • could reduce tax revenue (Laffer curve) • cuts in capital spending will reduce AS/productive capacity • may discourage investment from abroad • effects depend on types of spending and taxes changed • use of AS/AD analysis to illustrate possible problems Level 4 answers should evaluate effect of spending cuts/higher taxes on macro-

economic objectives, e.g. deflationary policy may reduce employment, growth, personal incomes, etc.

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Q.5 How far do the activities of foreign multinational companies benefit the poor developing countries in which they operate? [20]

Definition/explanation of inward investment/multinational companies/poor developing

countries. Explanation and evaluation of effect of MNC's, e.g. • technology transfer/up-skilling of workforce • higher tax revenue for Government • injections of capital • multiplier effects/increased employment • effects on AS/AD or PPC (increased productive capacity) Evaluation of benefits of MNC's • possible displacement of domestic industry • profit repatriation • possible capital flight • exploitation of natural resources • may have inflationary effects • benefits urban/coastal/'core' regions more than rural/inland/'peripheral' • MNC's/TNC's have power over national governments • may have inflationary effects • MNc's/TNc's may expect tax breaks/subsidies Level 4 answers should refer to wider macro-economic effects, e.g. on employment,

growth, economic stability and particular countries/different types of developing countries (e.g. sub-Saharan, 'tigers', etc).

GCE Economics MS (Summer 2011)

WJEC 245 Western Avenue Cardiff CF5 2YX Tel No 029 2026 5000 Fax 029 2057 5994 E-mail: exams@wjec.co.uk website: www.wjec.co.uk