AQA Economics Unit 4 11th June 2013

CRAMMING!

If anyone can shed some light on:
-what crowding in/out actually is (textbook is vague)
-Exo/Endogenous shocks (examples of)
-Comparative/Absolute advantage
-Evaluative methods

Thanks

PS,

What statistics are you all learning for tomorrow?

So far i'm going for:

Bond yields (UK)
Recent growth
National debt
Budget deficit
Inflation
Interest rates

Hope this helps GOOD LUCK EVERYONE! SMASH IT!

Extract B (lines 40-42) suggests the US and the UK may be ‘very concerned for their
macroeconomic performance’ if free trade agreements lead to greater openness of their
economies. Using the data and your economic knowledge, assess the possible impact on the UK
economy of greater openness to world markets.
Evaluative issues:
• how restricted trade had been before the greater openness
• the strength of the economy to face the challenge presented by greater openness
• the importance of trade to the economy
• the impact perhaps being determined by the phase of the economic cycle the UK was in
at the outset
• the relevance and importance of distinguishing between short and long term
considerations
• the degree of openness, and hence vulnerability, to exogenous shocks
Extract D (lines 39-40) concludes that ‘the EU, including the UK, may need to rely on an external economic stimulus to improve macroeconomic performance’. Using the data and your economic knowledge, assess the possible effects on UK macroeconomic performance of an external economic stimulus, whether arising from other EU members or from other parts of the world.

Evaluative comments:
• how an external stimulus relates to internal developments, eg interest rates, fiscal
boost
• the ability of the UK economy to face the challenge which an external stimulus might
create
• the duration of the stimulus
• whether that stimulus is having to combat equally strong external ‘deflators’ affecting
the UK economy
• the strength of the stimulus
• whether or not it comes after significant weakening of the UK economy has taken place
• whether the stimulus benefits all of the EU and therefore whether the UK can also
benefit, as a member, from the rejuvenation of the EU
• the possible greater significance should the stimulus arise from the remainder of the
EU
• whether or not the stimulus comes at a time of overheating of the economy
• the impact on business and consumer confidence and the effects of this
In May 2008, the Governor of the Bank of England spoke of the need for the UK economy to move away from spending and importing, towards saving and exporting. Evaluate the consequences for UK unemployment if this movement were to occur.
Evaluation:
• the extent of any imbalance in the economy and whether it has been significant
• the extent of, and success with, the adjustment which takes place
• how enduring the adjustment proves to be
• whether or not this adjustment really will prove to be the remedy for the economy’s
weaknesses
• the possibility of external influences impeding the process
• placing adjustment into the context of recent UK experience



The level of UK public sector spending grew from 37% of GDP in 1997 to over 45% in
2008. To what extent do you regard such an expansion of the public sector as beneficial to
the UK economy?
Evaluation:
• the ability of the economy to absorb such an increase in public spending
• the trends in the economic cycle during this period of increased spending
• the nature of the spending taking place
• the impact on the budget deficit and National Debt
• the impact on UK/EU fiscal rules
• the possible significance of government action of this nature when crises loom, e.g. the credit crunch and the need for stabilisation of the financial sector and the whole economy

In a floating exchange rate system, a currency may be subject to frequent fluctuations in its external value. Discuss the possible economic consequences of such fluctuations for the achievement of a country’s macroeconomic objectives.

Evaluation:
• the degree of fluctuation
• the frequency/predictability of fluctuations
• the duration of such fluctuations
• the possible relevance of what is causing those fluctuations
• the ability to prevent or control them
• the degree of instability/stability elsewhere in the economy
• whether or not these fluctuations are the only reason for government objectives not
being achieved or are only one of a number of factors
Extract B (lines 35-37) concludes: ‘Globalisation must surely have played its part in the success of the UK economy…whatever problems it may also have created.’ Using the data and your economic knowledge, to what extent do you agree with the view that globalisation has been of benefit to UK macroeconomic performance?
Evaluation:
• not knowing what might have happened to the UK economy had globalisation not
become so evident
• the assessment may depend on the view taken of how significant or essential
globalisation has been in bringing about various domestic supply-side reforms
• whether cyclical factors have sometimes prevented the UK from obtaining the full benefit
of globalisation
Extract D (lines 32-33) concludes that ‘UK adoption of the euro at such an economically unstable time remains highly unlikely, whatever the potential benefits’. Using the data and your economic knowledge, to what extent do you agree with the view that the UK economy would benefit if the euro were to be adopted by the UK at some point in the future?

Evaluation:
• any assessment can be criticised because we cannot tell what would have happened
to the economy if we had not adopted the euro
• cyclical trends can mean that the euro may not be given a fair chance to prove itself
were it to be adopted or its perceived benefits for the UK may take longer to become
apparent
• the difficulty of giving values to particular costs and benefits when trying to assess the
impact so that assessment becomes quite subjective
• whether or not entry takes place once Gordon Brown’s 5 principles have been fulfilled
Assess the impact on UK macroeconomic performance of a prolonged period of deflation.

Evaluation:
• whether or not deflation has set in worldwide or just nationally
• the extent of the deflation
• the duration of the deflation
• the flexibility/resources the government/central bank has to deal with the problem
• the extent of damage to consumer and business confidence
• how much it impacts on profits
• whether deflation causes consumers to keep delaying purchases hoping for even lower prices

Evaluate the significance for the UK balance of payments on current account of increased use of protectionist policies around the world.

Evaluation:
• the impact on the balance of payments may depend on the extent of the increased
protectionist policies
• the impact may depend on the level of protectionism which existed before the further
increase in trade barriers
• the degree of impact may depend on the flexibility of the supply-side of the UK
economy to take appropriate action given the specific nature of increased
protectionism
• the economic conditions in which the strengthening takes place around the world will
be significant
• given that the UK may be part of the process of strengthening, it will have to consider
the impact on import flows compared to the impact on export performance
• of some importance will be the particular elasticity conditions for exports and imports
• the different parts of the current account might be affected in different ways
To what extent should government borrowing be a cause for concern?
Evaluation:
• the level of concern/acceptability of borrowing may depend on the economic
circumstances at the time
• concern may depend on the actual level of borrowing
• assessment may be coloured by the decisions made by other countries
• borrowing needs to be related to the National Debt to help any assessment
• the uses to which the borrowed money is put
• whether borrowing creates a necessity to raise taxes in the future or to cut spending
• whether it breaks any fiscal rules and, in turn, whether this is seen as important (up to
mid-2008 the UK Code for Fiscal Stability and the on-going EU Stability and Growth
Pact------
In 2009, the World Bank described the Chinese economy as a “relative bright spot in an
otherwise gloomy global economy” (Extract B, lines 34-35). Using the data and your economic knowledge, assess the consequences for the UK economy of China’s continued economic growth during a global recession.
Evaluation:
• the extent to which China wishes to share the ‘proceeds’ of growth with other countries
by importing more goods
• although the phrase ‘global recession’ is used it may be that some other UK markets are
not faring too badly, so making China’s contribution to UK economic performance less
significant
• the ability of the UK to maintain/increase market share in China
• China is pushing ahead with export-led growth which may not be in the long-term
interests of UK manufacturing
• the extent to which the UK economy welcomes Chinese investment in its economy and
whether China reciprocates.
Extract D (lines 35-36) argues that ‘a more ambitious set of common macroeconomic
policies would help speed recovery in the EU’. Using the data and your economic knowledge, assess the impact on the UK economy of recovery in the EU as a whole.

Evaluation:
• the possible significance of a slow recovery
• the possible supply problems if recovery is too rapid
• whether the UK can take advantage of EU recovery
• whether the advantage lies more with the rest of the EU in terms of exporting to the UK
than for the UK exporting to the rest of the EU
• the significance of EU recovery for the UK relative to recovery taking place elsewhere in
the world, i.e. in markets which have significance for the UK
• whether or not recovery has implications for the movement of labour in and out of the
UK and how this affects the UK labour market.
Discuss how rising oil prices might affect the macroeconomic performance of an economy.

Evaluation:
• whether the oil price increases are simply building on past price increases or whether
they represent a supply-side shock of which there has been little or no recent
experience
• whether or not petrol taxes are reduced to compensate for higher oil prices
• mature economies having less dependency on oil
• whether price increases are sustained over a long period of time
• whether, as in the UK’s case, an economy is also an oil exporter as well as an importer
• whether rising economic growth and inflation-reducing forces are in evidence to dull the
impact of rising oil prices
Discuss ways in which government economic policies can be used to try to reconcile conflicts between macroeconomic objectives.
Evaluation:
• some ways of trying to reconcile conflict may not be politically expedient, eg increasing
unemployment in order to control inflation
• government may attempt to reconcile conflict through fine-tuning which does not have a
good track record
• conflict can be short term, supply-side remedies long term
• limiting growth in order to stabilise prices might harm material living standards
• supply-side improvements may be made, eg productivity, but may not bring a reduction of
conflict if other countries have seen improvements to a greater extent, eg economic
growth increases the flow of imports. An export drive to balance this may be unsuccessful
if our productivity improvement is outpaced by that in other countries.
• the rate of inflation may be controlled but inflation may still be higher than in the
economies of our trading partners, perhaps limiting the desired improvement to the current
account (inflation having caused a deterioration)
• the policy constraints for members of the eurozone which won’t apply to those members of
the EU, including the UK, who have not adopted the euro
Evaluate government policies which might bring about a reduction in the UK deficit on the balance of trade in goods and services.

Evaluation:
• the need to distinguish between those policies which offer a possible short-term
improvement and those which offer a potential cure for the problem in the long term
(e.g. a reference to expenditure-dampening v expenditure switching).
• the need to distinguish policies which can be regarded as realistic in the current
climate, e.g. supply-side policies, from those which might be politically unacceptable,
e.g. protectionism
• some policies may not bring immediate improvement, eg the long-term nature of
supply-side policies; exchange rate manipulation and the J-curve effect
• there may be less significance attached to the deficit if it is seen as part-and-parcel of a
maturing economy which, although successful in the trade in services, has lost much of
its industrial base, thus needing to import more finished goods
• the underlying issue of whether or not a deficit really matters if it does not impede
economic growth and job creation and does not damage investor and business
confidence.
Extract B (lines 33-34) argues that ‘the living standards of developed countries, including the UK, will be affected by economic growth in Africa’. Using the data and your economic knowledge, assess the view that living standards in the UK are likely to benefit from sustained economic growth in the economies of Africa.

Evaluation:
• a comparison of short run and long run effects
• the economic changes in Africa may be so gradual and piece-meal as to have little
measurable impact on the UK
• however, countries such as Mozambique growing rapidly in the last decade, albeit from
lowly positions, may bring pressure to the developed world sooner than was originally
thought
• the net effect may be small if Africa compensates for the decline of other UK markets
(temporary or permanent)
• the potential benefits of African expansion in the context of UK recession, opening up
markets which had not been envisaged just a few years earlier
• the difficulty of making generalisations, eg parts of Africa providing new sources of energy
and raw materials to help UK growth while others begin to present competition for UK
manufacturing
• the possibility of having to avoid generalisations because of the diverse character of the
continent, so that comments on the potential impact on the UK economy and its living
standards are only pertinent to individual economies; stark contrasts between various
parts of Africa are likely to persist
• the possibility of complementarily, eg African expansion of secondary activities requiring
and stimulating the UK tertiary sector.
• the environmental impact and the increasing demand on resources arising from growth in
Africa


Extract D (lines 27-28) states that ‘the impact of the increased government borrowing arising from budget deficits across the EU is of concern amongst some economists’. Using the data and your economic knowledge, assess the impact on the UK economy of increased government borrowing by EU governments.ica, possibly impacting on the UK, eg higher oil prices.

Evaluation:
• the relevance of the scale of borrowing
• assessment in terms of the net impact, eg do the benefits clearly outweigh any
problems?
• the economic context in which the borrowing is taking place, eg recession or recovery
• whether the fiscal policy is accompanied by monetary expansion and the possible impact
of this combination of expansionary policy
• the perceived costs associated with fiscal balance or surplus
• the speed with which borrowing can be reduced
• the confidence that households and businesses have in government efforts to stabilise
the fiscal position
• whether the EU is at one with fiscal policy around the world or very much out on a limb.
Assess the contribution which supply-side reforms might make in helping avoid major recessions

Evaluation:
• consequences may all depend on the nature and scale of the reforms
• is ‘avoidance’ wishful thinking when alleviation is probably a more realistic aspiration,
especially when placed in an international context?
• supply-side reforms can give an underlying strength to an economy which might help
avoid recessions
• global recession which impacts on any one economy may require an immediate
(perhaps Keynesian) response on the demand side and continuing demandmanagement
policies
• the limited immediate relevance of supply-side reforms whatever the economic shock
suffered
• the inability of markets to deal at all with serious shocks to the macroeconomy even
where there have been supply-side reforms
• such a response may also be seen as most appropriate even if a downturn is peculiar to
one economy
• the benefits of supply-side reforms becoming apparent in a global recession when other
economies begin to recover
• a strong impetus for supply-side reforms may only appear because of a recession rather
than as a consequence of recession (and so the changes in the economic cycle come
first)
• the prospect that supply-side reforms can help sustain periods of high economic growth
and prevent any downturn, e.g. they help avoid or control inflation as an economy grows.
• it should not always be assumed that recessions have no benefits, eg providing an
impetus to efficiency drives and structural reform, and supply-side reforms may ease this
process
• the value of comparing interventionist versus free-market supply-side measures.



To what extent might it be argued that inflation is preferable to deflation?
Evaluation:
• the extent of the problem, i.e. how significant the rate of inflation or deflation is
• the length of time in which prices rise or fall
• the potential benefits of mild inflation which might not be said of mild deflation
• the relative ease/difficulty of executing, and making effective, policies to deal with either of
the problems
• the simultaneous experience of other countries
• whichever problem prevails, the danger of the authorities overshooting targets, eg.
quantitative easing and low interest rates bringing too much reflation and hence more
inflation
• the difficulty of making a judgement without more detailed information on an actual
occurrence and the events surrounding it
• both inflation and deflation have redistributive effects and it is impossible to predict which
might be the more beneficial
• a realistic conclusion is that, whatever the relative impact, neither may be desirable and the
authorities should be aiming for a period of sustained price stability
Evaluate the possible macroeconomic consequences for an economy of a rise in the exchange rate of its currency.

Evaluation:
• the extent of the rise in the exchange rate
• the external value of the currency from which the rise begins to take place
• the significance of the exchange rate factor compared to other influences on the
macroeconomy
• whether or not exports have been an important, or sole, cause of growth for an economy
• elasticity conditions for exports and imports
• the period of time in which the appreciation lasts
• the role of speculators in terminating the rise
• the effectiveness/speed of a corrective market mechanism or a decision to ‘dirty float’
• the state of the world economy as the appreciation takes place, eg might a prosperous
world merely absorb higher prices arising from a country’s exchange rate appreciation?

Does anyone have the econ4 jan 2013 paper? I recommend watch pajholden videos on youtube

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See you in like 15 hours

If I'm not wrong, one of the evaluative points for ER is how much the exchange rate has appreciated or depreciated by?? The impact can depend on the fall/rise. Any other points?

Elasticities for demand of UK goods, significance of impact