b=^~=d`b=b

r=S=ESPRSF=J=q=rh===d~=b

c=b~=n
k

q==~=====b~==~==== ====~==~~=~K==q=~=~==~= ===~=^===W==~=~=~~ ~X=~==~~=X=~~====== =~K

qW=N==QR=

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

SECTION A ^=lkb=====Ek=J==== ======~~=~F (1) The competitiveness of the UKs manufacturing sector has declined in recent years. (a) Discuss the factors that might have affected the international competitiveness of UK goods. (40 marks)

(b) Evaluate the methods by which the UKs international competitiveness could be increased. (60 marks) (2) Trading blocs are becoming increasingly important in the world economy. (a) Discuss the benefits to a country of belonging to a trading bloc. (40 marks) (b) To what extent might the policies of trading blocs conflict with the objectives of the World Trade Organisation? (60 marks)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

pb`qflk=_==^=lkb= PK ob`bppflk

EXTRACT 1 The worlds two biggest economies, America and Japan, seem to be sliding dangerously towards recession. Will the euro area follow them? On the surface the latest news is grim. In January, unemployment in the euro area rose for the first time in almost four years, to 8.8%. New figures this week also showed that Germanys GDP growth fell to an annual rate of only 0.8% in the fourth quarter of 2000, down from over 4% in the first half. But other economies within the euro area are still thriving. As a result, Euroland as a whole probably grew at a fairly respectable rate of around 2.5%. This explains why, unlike in America and Japan, the European Central Bank (ECB) has not felt the need to cut interest rates. An American recession would clearly dent growth in the euro area, but by less than in some other parts of the world. For a start, the euro areas exports to America amount to only 2.5% of its GDP. However, direct trade flows understate the influence of the American economy. In recent years European firms have built up large stakes in American companies, and so a growing share of their profits depends on the fortunes of corporate America. An American recession would also infect Europe through stockmarkets. If American share prices keep sliding, they will probably drag European stocks down too. The good news is that European consumer confidence is less sensitive to swings in share prices than American consumer confidence: Europes households own fewer shares. Economies in the euro area will also be cushioned this year by tax cuts, worth altogether a net 0.6% of GDP. Measures of business and consumer confidence signal only a mild slowdown this year. The blame for the slowdown seen so far in Europe cannot be pinned on the United States. Rather the main culprit is weaker consumer spending following a squeeze on real incomes. Inflation has risen, but wage growth has remained relatively modest, thanks to increasingly flexible labour markets. While growth in the euro area has remained robust, the ECBs main concerns have been inflation and a weak euro. Headline inflation fell in January to 2.4%, but remains above the ECBs target of 2%. After regaining about 15% against the dollar between October and early January, the euro has since slipped back. If it resumes its climb, that would probably encourage the ECB to cut rates, in order to prevent a tightening in overall monetary conditions. If America really does go into recession, the euro might well climb strongly against the dollar which would further squeeze the euro regions exports. (Adapted from The Economist 3/03/01). (a) With reference to the sixth paragraph, examine the main reasons for economic slowdown in Europe. (6 marks)
P

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

(b) (c) (d)

Analyse the likely impact of an American recession on the euro area. (10 marks) Explain factors that might affect (i) consumer confidence and (ii) business confidence. Evaluate the case for a reduction in interest rates in the euro area. (12 marks) (2 x 4 marks)

EXTRACT 2: Retailers are battling against the shift in consumer demand away from goods and towards services: in 1990 goods accounted for over 50% of consumer spending but by 1999 this had fallen to less than 47%. In contrast, services accounted for just under 44% of consumer spending but by 1999 it had increased to nearly 49%. As consumers get older, they prefer to spend money on a variety of services, ranging from private education for their children to holidays abroad. An ever-smaller proportion of household budgets goes on essential goods like food and shoes. Households have been able to make these changes to their buying habits because goods, especially electronic products, are becoming cheaper. When this is taken into account, the volume of spending on goods and services remained broadly constant as a proportion of the total in the 1990s. An economist at Deutsche Bank said: Not only are consumers now accustomed to falling prices, they have become more price-sensitive because low inflation and the Internet make it easier to keep tabs on prices. (Adapted from the Economist 13/01/01) (e) With reference extract 2, examine the factors that might explain the changes in the pattern of consumer spending. (8 marks) Examine two likely economic effects of the changing pattern of consumer spending. (6 marks)

(f)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

QUESTION 4: DEFLATION (This question has been adapted from one set in January 2001. Given world events it is still topical and contains questions of a synoptic nature. It illustrates the idea that there is mileage in making use of old questions as a means of preparing candidates for the new examinations.) EXTRACT 1 In the late 1980s the Japanese economy was booming: interest rates were low, investment was very high, property and share prices rose rapidly. All this changed in 1990 when there was a crash in share prices followed by a sharp fall in land prices. This led to a downturn in the economy. EXTRACT 2 For most British people, growing up in an era of constantly rising prices, the prospect of falling prices might have a certain appeal. However, for most economists, theres only one thing worse than rising prices. And thats falling prices. In a recent speech, Alan Greenspan, chairman of the US Federal Reserve, argued that deflation could be quite as bad as inflation at distorting the economy and preventing it reaching its full potential. Widespread deflation can easily become part of a vicious cycle of a recession. A little bit of deflation for a short time may do little harm; the danger is that it becomes entrenched. That is what happened in the 1930s and what Japan has been fighting to avoid. When an economy is deflating, the real value of debts rises over time and becomes increasingly burdensome and many companies would have to retrench. Deflation, if not caused by a collapse in demand, would almost certainly lead to it. If consumers think goods are becoming cheaper, they may delay purchases. Deflation also leads to a redistribution of wealth, and this too, can dampen demand. Borrowers, whose debts are getting bigger, end up worse off; lenders, who are owed more, will be better off. Falling prices would allow you to buy more if you were in work and on a steady income but you probably wouldnt be. In the depression of the Thirties, a lucky few enjoyed cheap goods, but many more were unemployed. Companies facing falling prices for their products would try to protect their profits by cutting wages and cutting jobs. If employees resisted wage cuts, unemployment would tend to rise. Any government trying to fight its way out of the vicious cycle of falling prices and falling demand would face serious difficulties. The standard policy solution of encouraging growth and investment by cutting interest rates may no longer be an option: rates can be reduced to zero but no further.

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

But while it wouldnt all be wonderful news, deflation neednt be all bad. Greenspan pointed out that some industries, such as computers and telecommunications, have learned to live with rapidly falling prices while maintaining high levels of investment and profitability. SOURCE: OBSERVER, 11/1/98 QUESTION 4 (continued) (a) (b) Explain what is meant by the term deflation. (4 marks)

With reference to Extract 1, explain the effect on GDP of the change in asset prices in 1990. (8 marks) Explain why deflation neednt be all bad? (line 28, extract 2) (8 marks)

(c) (d) (e) (f)

With reference to the extracts, examine the problems associated with a long period of deflation. (12 marks) Assess the relative effectiveness of using monetary and fiscal policy to move the economy out of a period of deflation. (12 marks) How might the continuing deflation in Japan affect the global economy? (6 marks)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

SECTION A Mark Scheme: Question 1 1. (a) The competitiveness of the UKs manufacturing sector has declined in recent years. Discuss the factors which might have affected the international competitiveness of UK goods. (40 marks) 28-40 marks

LEVEL 5 Relevant factors include: Value of the relative to other currencies; Relative inflation rates; Inadequate levels of investment; Relative levels of efficiency & productivity; Non-price factors e.g. design, quality, reliability.

Both price and non-price factors should be explained and their significance should be considered. If non-price factors are omitted, award up to 27 marks (top of Level 4). Award up to 35 marks if there is no consideration of the relative importance of the factors mentioned. (b) Evaluate the methods by which the UKs international competitiveness could be increased. (60 marks) 42-60 marks

LEVEL 5

Methods of increasing competitiveness include: Measures to reduce the value of the e.g. reduction in interest rates; Supply side policies aimed at increasing efficiency & productivity e.g. privatisation; improvements in education and training; Measures aimed at increasing investment e.g. tax breaks; Subsidies for research and development. Four methods should be identified, explained and their significance evaluated. If there is no comment on the significance of the points made, then award up to 35 marks (top of Level 3). Typically, a Level 2 response (24-29 marks) might make reference to two points in a superficial way. (60 marks)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

Mark Scheme: Question 2 Trading blocs are becoming increasingly important in the world economy. (a) Discuss the benefits to a country of belonging to a trading bloc. (40 marks) LEVEL 5 28-40 marks

The meaning of a trading bloc should be made clear i.e. group of countries with agreed tariff reductions but excluding countries not in the bloc. Benefits include: Increased specialisation and trade within the bloc; Benefits resulting from above (law of comparative advantage); Increased potential market for firms; Possibility of benefiting from economies of scale; Greater choice and lower prices for consumers. Up to four points should be considered. Award up to 35 marks if there is no consideration of the relative importance of the factors mentioned. (b) To what extent might the policies of trading blocs conflict with the objectives of the World Trade Organisation? (60 marks)

The objectives of the World Trade Organisation should be explained i.e. promoting world trade through the reduction in trade barriers policing existing agreements Trading blocs might: Distort world trade; Have adverse effects on those countries who do not belong to them; Lead to inefficient allocation of resources e.g. CAP operated by the EU; Contradict the Most Favoured Nation clause of WTO Result in conflicts between different trading blocs and increased protectionism between blocs There should be a clear understanding of the WTO together with consideration of four factors which should be identified, explained and their significance should be considered. If there is no comment on the significance of the points made, then award up to 35 marks (top of Level 3). Typically, a Level 2 response (24-29 marks) might make reference to two points in a superficial way. (60 marks)
hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

Mark Scheme: Question 3 (a) With reference to the sixth paragraph, examine the main reasons for economic slowdown in Europe.

Fall in real wages i.e. wage growth must have been less than the rate of inflation. In turn, this led to a fall in consumption that would have caused a fall in aggregate demand. (6 marks) (b) Analyse the likely impact of an American recession on the euro area. Fall in exports to USA but this is only a small proportion of Eurolands GDP so this factor is of limited significance Decline in profits of USA firms will impact on European companies which have large takes in American companies Impact on share prices: a fall in asset prices might cause a fall in consumer spending via the wealth effect But: tax cuts in euro area should help to offset the impact of an American recession.

Maximum 2 marks for identification of points only; maximum of 7 marks without evaluation. (10 marks) (c) Explain factors which might affect (i) consumer confidence and (ii) business confidence.

Consumer confidence affected by: Job security/level of unemployment Changes in asset prices: shares and house prices Expectations Business confidence affected by: Expectations of changes in sales Prospects in overseas markets Political factors e.g. changes in governments (d) Evaluate the case for a reduction in interest rates in the euro area.

(4 marks)

(4 marks)

Case for: Dangers of recession in USA having an adverse effect on Euroland & value of euro would probably rise. Prospect of stockmarket crash
hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

 Increase in Eurolands unemployment Fall in growth rate in some EU countries BUT: Inflation above ECBs ceiling Weakness of the euro Tax cuts already in place Maximum marks if there is no evaluation: 6 marks (e)

(12 marks)

With reference extract 2, examine the factors which might explain the changes in the pattern of consumer spending.

Factors include: Higher income elasticity of demand for services relative to goods Fall in prices of some consumer goods Increased price elasticity of demand for goods Rise in price of services relative to goods Maximum of 5 marks without application of elasticity concepts. (8 marks) (f) Examine two likely economic effects of the changing pattern of consumer spending.

Effects include: Changing pattern of employment Changes in profitability of consumer goods and services industries Smaller retailers likely to be squeezed out of the market

(6 marks)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

NM

Mark Scheme: Question 4 (a) Explain what is meant by the term deflation.

A period of generally falling prices usually associated with falling aggregate demand. 3 marks for knowledge; 1 mark for application of AD. (4 marks) (b) With reference to Extract 1, explain and illustrate the likely effect on GDP of the change in asset prices in 1990.

The fall in asset prices would have the effect of making people feel less wealthy (the wealth effect). In turn, this would cause a fall in aggregate demand. This is likely to cause a fall in real national income and to a fall in the rate of inflation. 3 marks for diagram, 5 marks for explanation. (8 marks) (c) Explain why deflation neednt be all bad? (line 28, extract 2)

Explanation of why some industries such as computers and telecommunications have thrived despite falling prices e.g. Rising demand Economies of scale Increasing productivity Also: consumers with savings will benefit from an increase in the real value of money. If deflation is confined to one country then its goods might become more competitive so benefiting the balance of payments. (8 marks) (d) With reference to the extracts, examine the problems associated with a long period of deflation.

Relevant points include: The increase in real value of debts leading to a loss of consumer confidence and a fall in borrowing and spending; Redistribution of income which makes lenders (e.g. banks) better off while making borrowers (e.g. households) worse off; Increasing levels of unemployment. Firms will try to reduce costs by reducing their labour force: this causes further decreases in aggregate demand so making the recession worse; Consumers may postpone expenditure if they think goods will be cheaper in the future. Once again this reduces aggregate demand leading to higher unemployment.
NN

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

At least 3 points should be considered. Maximum 3 marks for identification of factors; maximum 6 if no evaluation. (12 marks) (e) Assess the relative effectiveness of using monetary and fiscal policy to move the economy out of a period of deflation.

Distinction between monetary and fiscal policy. With reference to monetary policy: a reduction in interest rates from a low level e.g. 3% to 2% may not have much effect on aggregate demand because: Confidence is very low; It is more desirable to hold cash than other assets; The real value of debts is increasing so there is little incentive to borrow; A massive increase in the monetary base might just lead to increased savings.

With reference to fiscal policy: Increased public expenditure, financed through increased borrowing would lead to increased levels of national debt; In the long run such high debts might not be sustainable because of the costs of servicing them. 2 marks for understanding of monetary and fiscal policy. At least 2 points relating to each policy should be considered. Maximum 6 marks if no evaluation. (12 marks) (f) How might the continuing deflation in Japan affect the global economy?

Danger that lower AD in Japan will lead to a fall in demand for exports from other countries e.g. USA, EU. Therefore, AD will fall in other countries, causing higher unemployment and lower incomes. Also, the economic situation in Japan might lead to a fall in the yen making Japanese exports cheaper and imports more expensive. This might also reduce AD in other countries. (6 marks)

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

NO

Section

Knowledge Application % %

Analysis %

Evaluation %

TOTAL %

A Qu.1(a) 10 10 15 5 40 Qu.1(b) 10 10 15 25 60 Total 20 20 30 30 100 Qu.2(a) 10 10 15 5 40 Qu.2(b) 10 10 15 25 60 Total 20 20 30 30 100 N.B. The mark out of 100 is divided by 2 to yield a figure out of 50 so that Sections A & B are equally weighted. B Qu.3(a) Qu.3(b) Qu.3(c) Qu.3(d) Qu.3(e) Qu.3(f) Total

1 3 2 2 1 1 10

2 2 3 1 1 1 10

1 5 3 3 2 1 15

2 0 0 6 4 3 15

6 10 8 12 8 6 50

B Qu.4(a) Qu.4(b) Qu.4(c) Qu.4(d) Qu.4(e) Qu.4(f) Total

3 2 1 1 2 1 10

1 2 3 2 1 1 10

0 4 4 3 2 2 15

0 0 0 6 7 2 15

4 8 8 12 12 6 50

hWynr^i=J=d`byp=j~~y_ybubjmi^o=nrbpqflkp=rkfq=SK

NP