AQA A-level Economics 7136 - P2 (National and international economy) - 23rd May 2019

Might post my essay plans after Paper 1 for comparison with you guys

Might post my essay plans after Paper 1 for comparison with you guys

I'm going to start planning essays right now, I'm kinda on a time constraint rn so I'll make them short and succinct

Day 4:

Macroeconomic Policy Objectives
Q1: Explain why low unemployment is a key objective of economic policy for many governments (15 marks)
A: Unemployment is the % of people in the labour force without a job but registered as being willing and available for work.
Unemployment



Q2: Discuss whether reducing unemployment should be the main objective of government (25 marks)
A: Unemployment is defined as people who are able, available and willing to work at the going wage rate but cannot find a job despite an active search for work.
Unemployment means that scarce human resources are not being used to produce goods and services to meet people's needs and wants.

Keeping unemployment low is one of the 4 main macroeconomic objectives of the government. The UK government aims to keep unemployment at it's lowest. Currently, the unemployment rate stands at 4%
One reason why the government may want to keep unemployment low/keep employment high is because it can allow them to increase tax revenue collected. By increasing the number of people in work,
the government can increase tax revenue collected on an aggregate level. As a result of this, the government can use the increased tax revenue to achieve other objectives such as decreasing the
fiscal budget deficit or increase the state-provision of education as well as healthcare.

However, the extent to which the objective of decreasing unemployment is met is dependent on several other factors. For instance, the government must first identify what type of unemployment they are targetting.
Different types of unemployment need different policies to solve, all of which are accompanied by an opportunity cost. For example, by implementing policies to reduce cyclical unemployment,
the government will do so at the expense of not reducing structural unemployment.

Although keeping unemployment is an important macroeconomic objective, there are other objectives that the government may want to pursue. For instance, the government may want to achieve economic growth,
improve the trade balance with the international economy, maintain environmental integrity or keep inflation at the stable 2% level.


The government must also make a tradeoff between achieving different objectives. For example, by achieving high economic growth, the government may have done so but at the expense of higher inflation above the 2% level.
At the expense of maintaining a positive budgetary position, the government have stifled economic growth. These are just examples, but genuine conflicts are much much worse than outlined in theory.


Having weighed up the evidence, the macroeconomic objective of achieving low unemployment may be in the interest of governments due to its many benefits, for example, the increased tax revenue to fund expenditure
on other projects, However, whether this objective is achieved ultimately depends on whoever is in power at that time.
Macroeconomic objectives importance are ranked by the value judgements to authorities and politicians who dominate the countries bureaucracy.
It is important to note achieving macro objectives are not exclusive at all. By achieving high economic growth, a government can simultaneously achieve increased unemployment since labour is derived demand of economic growth.

The Phillips Curve
Q1: Discuss whether it is possible for the government to keep unemployment below the NAIRU in the long run (25 marks)
A: Unemployment is when those who are able and want to work are not in employment. In the UK unemployment stands at it lowest it's been at 3.9% whereas long-term unemployment stands at 1.1%.
The NAIRU, the non-accelerating inflation rate of unemployment is the estimated level of unemployment at which there is no pressure for inflation to occur in an economy.


Q2: Evaluate the view that there is a trade-off between inflation and unemployment (25 marks)
A: Inflation is defined as a persistent increase in the price level of the economy; inflation in the UK stands at 1.9% as of 2019 below the 2.0% target. Unemployment is the level of individuals who want
to and are able to work but are not currently in full employment. In the UK employment stands at the lowest it's been at 3.9%.

The Philips Curve can be used to demonstrate the trade-off between unemployment and inflation in the economy

*Appendix with Short-Run Philips Curve*

There is an inverse relationship between high inflation rates in the economy. At high inflation rates in the economy, there is low unemployment and vice-versa. This occurs because, at low levels of unemployment, there are increased pressures on factors of production in the short-run, in this instance labour.
Due to increased pressure on existing factors, prices increase in the market economy in order to ration out scare resources.


Short-Run and Long-Run Aggregate Supply
Q1: Discuss whether increasing aggregate demand is more likely to reduce unemployment or increase prices (15 marks)
A:




Day 5:

Financial Markets
Q1: Explain the functions of the capital market (15 marks)
A:

Banks and Risk
Q1: Explain the risks that banks face and how they might reduce them (15 marks)(old spec question)
A:

Types of Bank and Regulation
Q1: Explain how the UK financial system is regulated (15 marks)
A:

Q2: To what extent does the UK financial system pose a risk to the UK economy (25 marks)
A: Makes reference to 'Japan's Lost Decade and 2008 sub-prime mortgage crisis'


Money
Q1: Explain the functions of money (15 marks)
A:

Day 6:

Central Banks and Monetary Policy
Q1: Explain the roles of the Bank of England and the Monetary Policy Committee(15 marks)
A:

Q2: Evaluate the impact of lower interest rates on economic agents (25 marks)
A: 'Note: There is no such thing as 'the interest rate' there are multiple interest rates in an economy
refer to the Transmission Mechanism for more

Fiscal Policy and Supply-Side Policies
Q1: Explain the possible demand-side consequences of a decrease in taxation rate (15 marks)
A:

Q2: Evaluate the view that the present policy of the government to reduce its deficit through lower government spending is unnecessary(25 marks)
A:

Globalisation and Emerging Economies
Q1: Use examples to illustrate your answer, explain the difference between economic growth and economic development(15 marks)
A: USA/UK vs China/India


Day 7:

Growth and Development
Q1: Discuss the view that free trade is more effective than aid in promoting economic development in developing countries (25 marks)
A:

Trade
Q1: Examine why international trade has benefitted UK consumers (15 marks)
A: Reference Comparative Advantage
Gains from trade diagram with the perfectly elastic world supply curve
Consuming beyond PPF

Competing Abroad
Q1: Discuss the view that protectionist policies should be introduced to protect UK businesses (25 marks)
A:

The Balance of Payments
Q1: Is devaluing the currency the best way of reducing a current account deficit? (25 marks)
A:

I'm going to start planning essays right now, I'm kinda on a time constraint rn so I'll make them short and succinct

Day 4:

Macroeconomic Policy Objectives
Q1: Explain why low unemployment is a key objective of economic policy for many governments (15 marks)
A: Unemployment is the % of people in the labour force without a job but registered as being willing and available for work.
Unemployment



Q2: Discuss whether reducing unemployment should be the main objective of government (25 marks)
A: Unemployment is defined as people who are able, available and willing to work at the going wage rate but cannot find a job despite an active search for work.
Unemployment means that scarce human resources are not being used to produce goods and services to meet people's needs and wants.

Keeping unemployment low is one of the 4 main macroeconomic objectives of the government. The UK government aims to keep unemployment at it's lowest. Currently, the unemployment rate stands at 4%
One reason why the government may want to keep unemployment low/keep employment high is because it can allow them to increase tax revenue collected. By increasing the number of people in work,
the government can increase tax revenue collected on an aggregate level. As a result of this, the government can use the increased tax revenue to achieve other objectives such as decreasing the
fiscal budget deficit or increase the state-provision of education as well as healthcare.

However, the extent to which the objective of decreasing unemployment is met is dependent on several other factors. For instance, the government must first identify what type of unemployment they are targetting.
Different types of unemployment need different policies to solve, all of which are accompanied by an opportunity cost. For example, by implementing policies to reduce cyclical unemployment,
the government will do so at the expense of not reducing structural unemployment.

Although keeping unemployment is an important macroeconomic objective, there are other objectives that the government may want to pursue. For instance, the government may want to achieve economic growth,
improve the trade balance with the international economy, maintain environmental integrity or keep inflation at the stable 2% level.


The government must also make a tradeoff between achieving different objectives. For example, by achieving high economic growth, the government may have done so but at the expense of higher inflation above the 2% level.
At the expense of maintaining a positive budgetary position, the government have stifled economic growth. These are just examples, but genuine conflicts are much much worse than outlined in theory.


Having weighed up the evidence, the macroeconomic objective of achieving low unemployment may be in the interest of governments due to its many benefits, for example, the increased tax revenue to fund expenditure
on other projects, However, whether this objective is achieved ultimately depends on whoever is in power at that time.
Macroeconomic objectives importance are ranked by the value judgements to authorities and politicians who dominate the countries bureaucracy.
It is important to note achieving macro objectives are not exclusive at all. By achieving high economic growth, a government can simultaneously achieve increased unemployment since labour is derived demand of economic growth.

The Phillips Curve
Q1: Discuss whether it is possible for the government to keep unemployment below the NAIRU in the long run (25 marks)
A: Unemployment is when those who are able and want to work are not in employment. In the UK unemployment stands at it lowest it's been at 3.9% whereas long-term unemployment stands at 1.1%.
The NAIRU, the non-accelerating inflation rate of unemployment is the estimated level of unemployment at which there is no pressure for inflation to occur in an economy.


Q2: Evaluate the view that there is a trade-off between inflation and unemployment (25 marks)
A: Inflation is defined as a persistent increase in the price level of the economy; inflation in the UK stands at 1.9% as of 2019 below the 2.0% target. Unemployment is the level of individuals who want
to and are able to work but are not currently in full employment. In the UK employment stands at the lowest it's been at 3.9%.

The Philips Curve can be used to demonstrate the trade-off between unemployment and inflation in the economy

*Appendix with Short-Run Philips Curve*

There is an inverse relationship between high inflation rates in the economy. At high inflation rates in the economy, there is low unemployment and vice-versa. This occurs because, at low levels of unemployment, there are increased pressures on factors of production in the short-run, in this instance labour.
Due to increased pressure on existing factors, prices increase in the market economy in order to ration out scare resources.


Short-Run and Long-Run Aggregate Supply
Q1: Discuss whether increasing aggregate demand is more likely to reduce unemployment or increase prices (15 marks)
A:




Day 5:

Financial Markets
Q1: Explain the functions of the capital market (15 marks)
A:

Banks and Risk
Q1: Explain the risks that banks face and how they might reduce them (15 marks)(old spec question)
A:

Types of Bank and Regulation
Q1: Explain how the UK financial system is regulated (15 marks)
A:

Q2: To what extent does the UK financial system pose a risk to the UK economy (25 marks)
A: Makes reference to 'Japan's Lost Decade and 2008 sub-prime mortgage crisis'


Money
Q1: Explain the functions of money (15 marks)
A:

Day 6:

Central Banks and Monetary Policy
Q1: Explain the roles of the Bank of England and the Monetary Policy Committee(15 marks)
A:

Q2: Evaluate the impact of lower interest rates on economic agents (25 marks)
A: 'Note: There is no such thing as 'the interest rate' there are multiple interest rates in an economy
refer to the Transmission Mechanism for more

Fiscal Policy and Supply-Side Policies
Q1: Explain the possible demand-side consequences of a decrease in taxation rate (15 marks)
A:

Q2: Evaluate the view that the present policy of the government to reduce its deficit through lower government spending is unnecessary(25 marks)
A:

Globalisation and Emerging Economies
Q1: Use examples to illustrate your answer, explain the difference between economic growth and economic development(15 marks)
A: USA/UK vs China/India


Day 7:

Growth and Development
Q1: Discuss the view that free trade is more effective than aid in promoting economic development in developing countries (25 marks)
A:

Trade
Q1: Examine why international trade has benefitted UK consumers (15 marks)
A: Reference Comparative Advantage
Gains from trade diagram with the perfectly elastic world supply curve
Consuming beyond PPF

Competing Abroad
Q1: Discuss the view that protectionist policies should be introduced to protect UK businesses (25 marks)
A:

The Balance of Payments
Q1: Is devaluing the currency the best way of reducing a current account deficit? (25 marks)
A:

I did Context 2 and Essay 1 from Section B
Just found out that I got the 2 markers wrong so I'm really not feeling optimistic at all right now
We've got 2 more paper so we'll see.

I also did context 2 and essay 1. Which points did you write about in the 25 marker for essay 1? I wrote about nudge policies and subsidising merit goods i remember.

I did Context 2 and Essay 1 from Section B
Just found out that I got the 2 markers wrong so I'm really not feeling optimistic at all right now
We've got 2 more paper so we'll see.

Does anyone know if Tutor2u are going to do one of these for Macro? Praying so

https://www.youtube.com/watch?v=13w_XVpUgKA

I received a lot of positive feedback from posting a successful officially AQA marked past paper for Paper 1, so I'll do it for paper 2! Enjoy!

1. Using the data in Extract A (Figure 2), calculate, to two decimal places, the mean growth rate for India from 2010 to 2014:
10.26 + 6.64 + 5.62 + 6.64 + 7.24 = 36.4
36.4/5 = 7.28%
Marks awarded: 2/2
2. Explain why the data in Extract A (Figure 1) show that living standards in India have improved:
Over the years 1980 to 2014 there has been a consistent increase in the life expectancy at birth from 53.9 to 68. Expected years of schooling have risen from 6.4 years to 11.7 and GNI per capita at 2011 PPP has risen $1255 to $5497. Overall, this has contributed to a higher HDI value of 0.609 (before 0.362). This shows living standards have increased since HDI is a good indicator of access to resources/goods/services etc.
Examiner comment: Includes good explanation and evidence with clear use of data. Full marks (4/4)
3. Extract B (lines 17–19) states ‘India still protects its economy with anti-dumping measures and export subsidies that are designed to promote economic growth.’ With the help of a diagram, explain how export subsidies may help promote economic growth in India:
A subsidy is an amount of money given by the government to a firm or organisation that is assigned to help them invest in new inventions/innovation to increase competitiveness. An increase in capital expenditure by firms given subsidies should boost productivity since more can be produced in the same time frame. This should lead to a fall in average costs.
Diagram: Shift right in SRAS:
The increase in SRAS to SRAS2 means there has been a reduction in prices P to P1 and a rise in real GDP from y to y1, indicating economic growth. India's exports are now much more price competitive which means more are likely to be bought. There may then be an accelerator effect if firms increase investment to maintain a fixed capital to output ratio and so economic growth increases through rises in the productive potential (LRAS). Increasing exports causing AD to rise (X rise) may induce an upwards multiplier effect if firms raise employment in response to raising demand and workers spend these higher incomes
Examiner comment: Good knowledge and understanding with relevant application and well-focused logical chains of analysis. High level 3 (9/9)
4. Extract C (lines 2–3) states ‘More recently, India has begun to use more market-based strategies to help its development, including liberalising trade and privatisation.’ Using the data in the extracts and your knowledge of economics, evaluate the view that greater use of market-based strategies is the best way to improve the economic development of India:
Market based strategies are those defined as policies to allow the market mechanism to function efficiently and allow natural movements of trade of specialisation.

One way for India to improve development is to allow liberalisation of markets and allowing free trade with other economies. By allowing free trade, there is a much larger market for Indian exports. Now with lower transport and communication barrier across the globe, the demand for Indian exports is likely to increase.
Diagram: Keynesian: Shift right in AD
Demand for exports has risen and since AD = C + I + G + (X-M), AD has risen to AD2. Demand pull inflation has risen to P1 and real GDP has risen y to y1, indicating economic growth. If firms see raising GDP they may choose to raise investment as they wish to keep a fixed capital to output ratio, inducing an increase in the productive potential of the economy (LRAS). Also, firms may choose to increase employment. As workers have higher incomes, they now may spend it (rise in C) causing further rises in real GDP. Both of these effects will raise economic growth. Liberalising markets has indeed shown improvements in India's growth (see extract C, lines 5-7). Also as shown by the diagram, India is far from its output gap - it should be able to keep exporting and producing more with little inflationary pressure in the foreseeable future (evidence for this?). However, whether this feeds through to increased economic development is debatable. Whether higher tax receipts will instigate government spending with infrastructure projects or welfare depends on their efficiency, which is unlikely considering extract B states intervention often leads to failure.

Some argue that India would benefit from increased regulation and monitoring in order to reduce the issues raised with a large informal sector. A large informal sector means there is little tax receipt from transactions. Any economic activity, estimated to account for 95% of all employment will not be accounted for and as increased regulation and monitoring should allow governments to regenerate profits earned into welfare systems or education or healthcare (teacher didn't upload the rest but was awarded 24/25)


Explain the possible reasons for changes in the pattern of trade between the UK and the rest of the world:
The Current Account on the balance of payments refers to the trade in visibles (goods), invisibles (services), net primary income and net secondary income between the UK and the rest of the world. Firstly, there has been an emergence in the past few decades of new trading partners, for example the BRICs (e.g. India). These countries have considerably lower labour costs and so their exports are much more price competitive than ours. As a result, we have seen our exports fall and our imports from them increase, particularly in the manufacturing sector.
Secondly, these has been investment and growth of resource rich countries, for example countries in the middle east that have lots of oil. For us, a country with relatively low (and falling) energy supplies and as we have experienced growth in our economy, there has been a need for us to import energy supplies and therefore trade with these countries has increased substantially over the last few decades. Lastly, in the past few decades there has been a shift in employment sectors in the UK. We now enjoy a substantial comparative advantage in terms of the financial service sector that accounts for 79% of UK GDP. This has occurred due to the process of deindustrialisation in the UK due to highest labour costs and the need to import resources. Our specialisation has led to a unique offering of quality financial services which we export to the rest of the world, reflected in our surplus for trade in indivisibles in the current account of our BOP. (A good response showing sound knowledge. Examples given although limited development of points and application of theory. L3 low. 11/15).

Evaluate the measures that might be taken to reduce a deficit on the current account of the UK’s balance of payments:
A deficit on the current account on the UK's balance of payments means that the value of imports of divisibles, indivisibles and net primary/secondary income is greater than the value we export. The government may choose to adopt either expenditure reducing or expenditure switching policies, or a combination of both.

One example of an expenditure switching policy may be to take action to protect the exports. This may include implementing a tariff or quota.
Diagram: tariff diagram.
By increasing the world price of an import from Wp to Wp+t, domestic supply has extended and so domestic production has increased q1 to q2. Imports have fallen q3 to q4. This is because now imports are becoming less price competitive. AD = C + I + G + (X - M) and the value of M has fallen, causing a rise in AD from AD to AD1.
Diagram: Keynesian shift right in AD.
Prices have increased P to P1, increasing demand pull inflation. Real GDP has risen, q to q1 ( should be y to y1), and unemployment is expected to fall as firms have new workers. These may be an upwards multiplier effect if workers spend new income (C rise) and there is a larger final proportionate increase in real GDP.
If firms raise investment a fixed capital to output ratio these may be an accelerator effect and LRAS i.e. productive potential may raise.
Since the value of exports has fallen, it has been successful in reducing the current account deficit. However, it will need to be ensured that any expenditure switching to domestic production can be met currently, the UK has an output gap (estimated?) of only -0.35% and so any increases in AD may not benefit growth/employment etc but merely cause significant inflationary pressures - unwanted with our current CPI inflation rate of 1.85%. Also, in the UK we have a high marginal propensity to consume imports and so if price is raised we could continue to purchase them the deficit could worsen if value increased! Therefore, it may be unwise to adopt such short term policies.

Instead, the government may choose to devalue the pound in order to make our exports more price competitive. A decrease in interest rates may cause hot money to flow out of the UK since foreign investors seek to gain a better return on their savings.
Diagram: supply shift right, presumably supply of the £
An increase in the supply of pounds S to S1 has caused the price of pounds to fall i.e. a depreciation. Exports should now become more price competitive and imports should be more expensive as demand switches. As a result, more exports should be purchased instead and the deficit in the current account should improve. However, in the short term the PED for imports and exports may be price inelastic due to trade agreements etc. Due to the Marshall-Lerner condition in the short term we may see the value of imports rise and we may see an initial worsening of the deficit
Diagram: J-Curve
This was seen in 2016 after extreme devaluation of the sterling after the Brexit vote where initially the current account deficit worsened. Over time, this is expected to correct due to increasing elasticities (shown).
Also, decreasing interest rates may prove undesirable. Falling costs of borrowing a lower incentive to save and lowered mortgage repayments may increase our spending and, as mentioned before, our spending on imports may increase. Therefore, devaluing the pound may prove ineffective in improving our deficit.

A more sustainable, long term approach may be to use supply side policies to boost the productivity of UK workers and thus making our exports more price competitive.
We have experienceda traditional deficit on the current account and also weak productivity gains - it is not unlikely that these are linked. Therefore it may be argued that longer term improvements into schemes such as education and training may be more beneficial to boost productive potential, increase attractiveness of workers and make our exports competitive whilst dampening inflationary pressures, despite a high opportunity cost.

In conclusion, it may be beneficial to use expenditure switching or reducing policies to increase the amount of UK exports and reduce the value of imports but in the long term this may not be sustainable. Firstly, any increase in AD are likely to be inflationary since we have a small output gap of -0.35%. Secondly, any protectionist policies used could mean higher costs of imports and could involve retaliation by other countries. Use of the exchange rate may be useful but it is volatile - a much more sustainable choice for the UK economy would be to target supply side policies to improve the traditional deficit on the current account of the balance of payments.

Good knowledge with well-focussed logical chains of reasoning, good analysis and application. Supported evaluation throughout although lacks depth in conclusion. Mid level 5. (22/25).

Overall mark: 72/80 (64/80 was an A*)

How's everyone feeling about Paper 2?