Edexcel a-level Economics a theme 4 a global perspective



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WORKBOOK ANSWERS

Edexcel A-level Economics A

Theme 4 A global perspective


This Answers document provides suggestions for some of the possible answers that might be given for the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but they are intended as a guide to give teachers and students feedback.

The abbreviation KAA stands for Knowledge, Analysis and Application. Generic levels-based mark descriptors for longer answers are provided here.


Levels-based mark descriptors for longer answers


25-mark questions

KAA Level 4 descriptor (13–16 marks):

  • Demonstrates precise knowledge and understanding of the concepts, principles and models.


  • Ability to link knowledge and understanding in context using appropriate examples.

  • Analysis is relevant and focused with evidence fully and reliably integrated.

  • Economic ideas are carefully selected and applied appropriately to economic issues and problems.

  • The answer demonstrates logical and coherent chains of reasoning.

Evaluation Level 3 descriptor (7–9 marks):

  • Evaluative comments supported by relevant reasoning and appropriate reference to context.


  • Evaluation recognises different viewpoints and is critical of the evidence provided and/or the assumptions underlying the analysis enabling informed judgements to be made.

15-mark questions

KAA Level 3 descriptor (7–9 marks):

  • Demonstrates accurate knowledge and understanding of the concepts, principles and models.

  • Ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated.

  • Economic ideas are carefully selected and applied appropriately to economic issues and problems.

  • The answer demonstrates logical and coherent chains of reasoning.

Evaluation Level 3 descriptor (5–6 marks):

  • Evaluative comments supported by relevant chain of reasoning and appropriate reference to context.

  • Evaluation recognises different viewpoints and/or is critical of the evidence.

12-mark questions

KAA Level 3 descriptor (6–8 marks):

  • Demonstrates accurate knowledge and understanding of the concepts, principles and models.

  • Ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated.

  • Economic ideas are carefully selected and applied appropriately to economic issues and problems.

  • The answer demonstrates logical and coherent chains of reasoning.

Evaluation Level 3 descriptor (3–4 marks):

  • Evaluative comments supported by relevant chain of reasoning and appropriate reference to context.

  • Evaluation recognises different viewpoints and/or is critical of the evidence.

10-mark questions

KAA Level 3 descriptor (5–6 marks):

  • Demonstrates accurate knowledge and understanding of the concepts, principles and models.

  • Ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated.

  • Economic ideas are carefully selected and applied appropriately to economic issues and problems.

Evaluation Level 3 descriptor (3–4 marks):

  • Evaluative comments supported by relevant chain of reasoning and appropriate reference to context.

  • Evaluation recognises different viewpoints and/or is critical of the evidence.

Topic 1

Globalisation and trade



Causes and effects of globalisation

1 2 marks for any two valid points:

  • Reduced integration between countries as there is less trade in goods and services or more protectionism

  • Reduced flows in international capital or FDI

  • Reduced flows of labour between countries or emigration/immigration

2 Knowledge (1 mark) and linked analysis to globalisation (2 marks); application to some examples of countries or projects from your own knowledge (2 marks).

IMF (up to 3 marks): the IMF is a specialised agency of the UN that aims to help the world economy by promoting global financial stability (1 mark), encouraging countries to adopt sound exchange rate policies (1 mark) and discouraging competitive depreciation (1 mark), giving loans to countries with balance of payments difficulties (1 mark), and supporting and advising on policies to help countries correct the underlying causes of their balance of payments problems (1 mark). In this way it promotes trade (1 mark).

Application (up to 2 marks): promotion of market liberalisation, privatisation and free trade after the collapse of the Soviet Union in 1990. More recently, IMF’s first two bailouts of Greece.

World Bank (up to 3 marks): the World Bank consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) (1 mark for any). It is not a bank in the common sense but a specialised agency affiliated with the UN that aims to promote economic development (1 mark) and is a non-profit institution (1 mark). It aims to promote development by providing loans (1 mark), policy advice and technical assistance for development projects (1 mark). In this way it promotes trade (1 mark) and capital transfers (1 mark).

Application (up to 2 marks): in Bangladesh, the World Bank provided a $59.8 million credit to provide medical services and nutritional supplements to children and their mothers. In Bosnia, the World Bank helps offer ‘microcredit’ loans, typically less than $1,000, to individuals who wish to start small businesses and otherwise would not have access to bank credit.

WTO (up to 3 marks): the WTO is an international organisation established to promote free trade (1 mark). It enforces rules (1 mark), helps countries negotiate to reduce trade barriers (1 mark) and is an arbitrator in trade disputes (1 mark). In this way it promotes trade (1 mark).

Application (up to 2 marks): China formally joined the body in December 2001. Russia joined in August 2012.

3 Knowledge and analysis (1 + 1 mark per factor):

  • Declining costs of transport, e.g. containerisation in shipping lowers costs due to technical economies of scale, greater productivity with more advanced ports etc.

  • Declining costs of communication, e.g. the rise of the internet has allowed services to become increasingly tradeable (e.g. back office accounting, call centres etc.)

  • Liberalisation of trade — could refer to GATT and the WTO or the growth in the size and number of trade blocs.

  • Liberalisation of capital markets — deregulation of global financial markets and hence greater levels of FDI and the rise of MNCs.

  • Asia’s rise and the entry of billions of people into the world market economy — gains from off-shoring or rising incomes in emerging markets increase demand for tradeable goods.

Application (2 marks): reference to specific countries, industries or examples:

e.g. Taiwan-based Foxconn manufactures products for Apple in China (Shenzhen) which are exported to the USA



Evaluation (2 marks for any relevant point):

  • Significance — rise of Asia very significant because the global supply of labour almost doubled in absolute numbers between the 1980s and early 2000s, with half of that growth coming from Asia.

  • Role of trade blocs might inhibit globalisation through trade diversion.

4 KAA (9 marks):

Possible benefits include:



  • Faster global economic growth — gains from comparative advantage

  • Off-shoring creates jobs in emerging economies and so reduces absolute poverty

  • Inequality between countries falls — due to catch up and convergence

  • Greater FDI improves diffusion of new technology

  • Firms have access to larger markets and so gain economies of scale and increased profits

  • Disinflation as off-shoring lowers labour costs or greater competition increases productive efficiency

  • Increased mobility of labour allows access to foreign know-how, skilled workers, remittances etc.

  • Greater consumer surplus from lower prices, greater choice, higher quality

Possible costs include:

  • Off-shoring and production in developing countries can exploit labour, e.g. long working hours, poor conditions

  • Inequality within countries rises — gains for some sectors at the expense of others, e.g. technology and finance in developed countries

  • Foreign capital is footloose, e.g. capital flight in 1997–98 Asian financial crisis — increased interdependence increases risks of shocks

  • Inflation due to rising commodity prices and so cost-push inflation

  • Immigration can mean pressure on public services or constrain growth in others due to the brain drain

  • External costs — pressures on finite resources; external costs stemming from transport

Evaluation (6 marks):

  • Different countries have benefited to different extents, e.g. China much more than land-locked fragile states.

  • Recent trend of deglobalisation suggests there is a limit to benefits.

Comparative advantage and the terms of trade

5 a Comparative advantage: The ability of one country to produce a good or service at a lower opportunity cost than another country. (1 mark) If each country specialises in those goods and services where it has an advantage, then total output and economic welfare can be increased. (1 mark)

b Absolute advantage: A country can produce a good for lower costs than another (1 mark) and so uses fewer resources to produce the same amount of goods or services. (1 mark)

6 a

Country

Cars

Computers

UK

200

600

China

300

1,500

Total pre-trade

500

2,100

b China

c

Country

Opportunity cost of producing 1 car

Opportunity cost of producing 1 computer

UK

3

1/3

China

5

1/5

d

Country

Cars

Computers

UK

400

0

China

100

2,500

Total post-trade

500

2,500

e The ratio between export and import prices. (2 marks)

Index of terms of trade = (index of export prices/index of import prices) x 100 (2 marks)



f Terms of trade to lie between the two opportunity cost ratios e.g. 1 computer : 4 cars

Country

Cars

Computers

UK

(400) 300 (export 100 cars)

(0) 400

China

(100) 200

(2,500) 2,100 (export 400 computers)

Total post-trade

(500) 500

(2,500) 2,500

7 Knowledge (1 mark) and linked analysis to improved terms of trade (2 marks).

Application to Figure 1 (2 marks for two data references), e.g. China’s terms of trade had worsened by about 10% but from mid-2008 to mid-2009 it improved back to its base value in 2004.

  • An appreciation of China’s exchange rate (1 mark) would reduce import prices in Yuan (1 mark) and leave export prices unchanged in Yuan (1 mark) and so allow China to get more imports for exports (1 mark).

  • Increased demand for China’s exports (1 mark) will improve the terms of trade — due to both the exchange rate effect and the price effect on export goods — this might be because of faster world economic growth (1 mark) or improvements in Chinese competitiveness (1 mark) or global growth leading to a change in income elasticity of demand (1 mark) and so greater demand for more income elastic manufactured goods from China (1 mark).

8 Knowledge (1 mark) and linked analysis to an economic effect (1 mark); application to Figure 1 (2 marks for two data references), e.g. China’s terms of trade had worsened by about 10% but from mid-2008 to mid-2009 it improved back to its base value in 2004.

Definition/knowledge: an improvement in the terms of trade means that the home economy gets more imports for exports (1 mark).

Positives (1 mark):


  • Able to consume more imports and thus experience a general increase in living standards

  • External debt servicing (i.e. paying off loans and interest) will be cheaper

  • Firms will also be able to import cheaper raw materials and capital, which can enhance competitiveness

  • Improved terms of trade can also improve the current account of the balance of payments if exports are relatively price inelastic, and an improvement in the terms of trade can increase export revenue and improve the current account, since the relative increase in price will be greater than the relative fall in the quantity of export goods sold. The same is true if imports are price inelastic; import spending would decrease

Negatives (1 mark):

  • If exports are price elastic then an improvement in the terms of trade will cause export revenue to fall — just as import spending would rise if the demand for imports is relatively price elastic. Both would have a negative effect on the balance of payments

  • A decrease in export revenue and/or an increase in import spending could lower economic growth and so reduce employment

9 Knowledge (1 mark) and linked analysis (up to 2 marks or 1 + 1 of two factors). Application (2 marks) e.g. context of one country’s competitive industries, e.g. UK’s financial services

  • Factors of production are perfectly mobile — resources used in one industry can be switched into another without any loss of efficiency. This is unlikely and structural unemployment might result.

  • No transport costs are considered — changes to oil prices and concerns over the external costs of transport might make transport more significant (if oil prices rise).

  • Constant returns to scale — doubling the inputs in each country leads to a doubling of total output. But there may be increasing returns to scale (perhaps because of economies of scale) as firms specialise, so the potential gains from trade are much greater.

  • No externalities from production or consumption of the goods, e.g. China may produce significant carbon emissions. There are no barriers to trade. Only two goods are produced in the model. Trade finance is possible.

Free trade versus protectionism

10 Knowledge (1 mark) and linked analysis (2 marks); application to some examples of countries from your own knowledge (2 marks).

Application (2 marks): use of examples of inward-oriented, such as India 1947–90, Brazil in 1960s, China etc. or outward-oriented countries, such as Tigers — South Korea, Hong Kong, Taiwan, Singapore.

An inward development strategy — focuses on substituting imported goods and services with domestically produced goods (1 mark), behind protective trade barriers. (1 mark) These policies are based on the expectation that industry will benefit from economies of scale, the current account will improve, and scarce foreign exchange will only be used for importing essential capital goods. (1 mark for each reason)



An outward development strategy — focuses on increasing exports. (1 mark) It is often associated with a laissez-faire approach to imports and is based on the expectation that industries will exploit their comparative advantage (1 mark) and improve efficiency due to greater competition. (1 mark)

11

Domestic market

Consumers

Domestic firms

Quantity demanded or supplied

Q3

Q1

Area of consumer or producer surplus

PS = area XZPworld

CS = area WVPworld

12 Other advantages include:

  • export-led growth

  • increased competition and thus productive efficiency improvements

  • access to larger markets, gain from economies of scale and larger profits

  • technological progress and innovation spillovers improve productivity

13 Up to 2 AO1 marks each.

a Industries which a country has a comparative advantage in (1 mark) but are just starting up and so consist of low-volume producers who are short of experience. (1 mark) They lack the economies of scale (1 mark) and the benefits of ‘learning by doing’ held by foreign competitors (1 mark), who will clearly have a cost advantage over domestic firms. (1 mark) Hence tariff protection is required for a limited period (1 mark) until the domestic industry ‘learns the ropes’ and grows large enough to benefit from economies of scale (1 mark) and so survive the full weight of international competition.

b As labour is a derived demand (1 mark), any fall in imports and rise in domestic production (which could be illustrated on a tariff diagram, 2 marks) will result in greater domestic demand for labour. (1 mark) It assists government in achieving the macroeconomic policy objective of full employment. (1 mark) Political pressures will add to the pressure on governments to act against the outsourcing of jobs. (1 mark)

c The WTO defines dumping as ‘charging a lower price for a good in a foreign market than one charges for the same good in a domestic market, such that the foreign market is injured’. (2 marks) Dumping can occur as foreign firms try to gain monopoly power (1 mark) in a foreign market and so amounts to predatory pricing on an international scale. (1 mark)

d These policies aim to switch consumer demand from imported goods onto domestically produced ones. (1 mark) This could be achieved by a devaluation of the exchange rate. (1 mark and further explanation 1 mark) Protectionism. (1 mark and further explanation 1 mark)

Types of import barrier



14

Term

Definition

Example

Tariff

Tax levied on imports to increase their price domestically

EU Common External Tariff (CET) weighted average 6.7%

Quota

A trade barrier that places a limit on the quantity of a good that can be imported

China import quota on cotton (894,000 tonnes)

Non-tariff measures

Any valid example will be credited such as: could be technical barriers to trade (TBT) regarding standards for manufactured goods. Sanitary and phytosanitary (SPS) measures concerning food safety and animal/plant health, and domestic regulation in services

In South African Development Community (SADC), Shoprite spends $5.8m on filing certificates and import permits per year to secure $13.6m duty savings

Subsidies to domestic producers

Government grants given to domestic firms to lower their costs of production in order to make them more price competitive than imports

Common Agricultural Policy in EU

15 Correctly labelled tariff diagram (application 2 marks):



Analysis of economic impact:

  • Imports increase in price from P1 to Ptariff and the number of imports falls from Q4 – Q1 to Q3 – Q2 and so the current account improves.

  • Domestic firms increase production from Q1 to Q2 and so gain producer surplus by the area P1ABPtariff. Greater output means a greater derived demand for labour and so lower unemployment.

  • Government gains tariff revenue CDEB and the revenue raised can be spent on better public services or used to improve public finances.

  • Consumers reduce their quantity demanded from Q4 to Q3 and so lose consumer surplus equal to area P1FEPtariff. This implies a deterioration in living standards.

Evaluation points:

  • The net effect is a loss of consumer surplus (loss of consumer surplus is greater than the gains in tax revenue and producer surplus) and so a deadweight loss equal to the triangles ABC and DEF.

  • Price elasticity of demand determines how consumers’ demand changes in response to the rise in price caused by the tariff. If demand is inelastic then the tariff is less successful in reducing the number of imports.

  • Price elasticity of supply determines the extent to which domestic firms can increase production and take on new workers in response to the rise in price caused by the tariff. If price elasticity of supply is inelastic then firms cannot increase output as much and so imports will still be needed.

  • Retaliation is likely so export demand may also fall — this may offset improvements in the current account or reductions in unemployment.

  • The extent to which price increases and domestic firms benefit and imports fall will depend on the size of the tariff imposed.

16 KAA (16 marks):

Analysis points might include:

  • Reference to more than one country or global economy (marks will be capped at Level 3 where no reference is made). Application to examples of countries and protectionist measures.

  • Loss of gains from comparative advantage — and so a decrease in world output and fall in welfare; inflationary consequences — as import prices rise, e.g. higher input costs and cost-push inflation; implications for global trade imbalances as surplus countries may see fewer exports and so smaller trade surpluses, or fewer imports and so larger surpluses.

  • Use a tariff diagram to show effect of a tariff and so:

  • impact on consumers of higher prices globally and a loss of consumer surplus and so net deadweight loss

  • domestic producers gain from a higher domestic output and so more producer surplus — some gains in employment possible for countries using protectionism (assuming not all counties become protectionist)

  • tax revenue to the government which can be used to fund public services or to improve public finances

  • Gains from protectionism — such as infant industries are allowed to grow or reduced unemployment in sunset or strategic industries.

Evaluation (9 marks) points might include:

  • Different impacts on different countries; trade surplus versus trade deficit countries; developed and developing countries; impact likely to be on inter-trade bloc trade rather than intra-trade within blocs.

  • Impact depends on the openness to trade as a proportion of GDP, e.g. there will be a larger impact on export growth in China, Japan, Singapore etc.

  • Judgement on whether costs outweigh the benefits for the global economy.

Patterns of trade, trade blocs and the role of the WTO

17 Knowledge (1 mark) and linked analysis (2 marks); application to some examples of countries from your own knowledge (2 marks).

Application (2 marks): e.g. 157 members (1 mark); 97% world trade (1 mark); Russia last major economy to join in 2012 (1 mark); latest round of trade talks is Doha round which was started in 2001 (1 mark); last agreement was in Bali 2013

Knowledge and analysis (3 marks): the World Trade Organization oversees and regulates the international trading environment. (1 mark) Its primary objective is to reduce trade barriers (1 mark), but it also sets trade rules (1 mark) and has a dispute settlement role. (1 mark)

18 1 mark for each correct row (data below to 1 d.p.)




2008 (% of world exports)

1985 (% of world exports)

USA

8.3

13.0

China

9.1

1.6

Germany

9.3

11.6

UK

2.9

6.4

19 Application (2 marks) to data in table — country (1 mark) and data (1 mark).

Knowledge and understanding (2 marks) (1 + 1) for TWO reasons.

Analysis 2 marks for linked explanation to change in trade pattern (1 + 1):

  • Decrease in protectionism, e.g. lower tariffs; WTO membership; trade bloc membership (could count as two points)

  • Opening up of Asia and collapse of communism (Washington consensus)

  • Changes to competitiveness, e.g. lower unit labour costs in emerging markets with lower wages or changes to exchange rates or relative inflation rates/real exchange rates

  • Trend of global supply chains and off-shoring

  • Increased FDI, particularly to Asia, leading to improved trade links/competitiveness

  • Changes to comparative advantage

Evaluation (2 marks) (1 + 1) or (2 for identification and development):

  • Changes to factors, e.g. trend of re-shoring; rising protectionism

20

Trade bloc

Definition

Example

Free trade area

A group of countries that agree to have free trade between themselves

NAFTA

Customs union

An agreement between a group of countries to set a common external trade policy, e.g. common external tariff, and to allow free trade within the membership countries

SACU

Common market

Members agree to free trade, common external trade policy, and free movement of goods and services, capital and labour across their borders

COMESA

Monetary union

Members agree to form a common market and also form a single currency or fix their exchange rates for their respective currencies

Eurozone


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