GCE Economics Mark Scheme Winter 2010

Mark Scheme (Results)
Winter 2010

GCE

GCE Economics (6356/01)

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January 2010
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Question Answer Mark
Number
1(a) LEVEL 5 (28-40 marks) (40)

Possible areas of discussion include:
• Understanding of trade blocs
• Trade creation within blocs based on law of
comparative advantage;
Significant because of the increase in number and
size of trading blocs
• Increase in economic growth and employment
But benefits are not distributed evenly –
countries outside trading blocs might be worse
off
• Trade diversion associated with the use of
protectionist measures against non-members –
distortion of comparative advantage
However, impact depends on the level and range
of trade restrictions

Other evaluation could include:
• Short run/long run implications
• Prioritisation of factors

A Level 5* mark (32-40) should be awarded for
answers which meet the Level 5 criteria
convincingly e.g. 3 points and 2 pieces of evaluation
For a L5 mark (28-31): 3 factors and 1 evaluative
point.
Max 28 marks if no evaluation.
Award a L4 mark (24-27 marks) if only 2 factors +
evaluation
Award a L2 mark (16-19 marks) for identification of points
only or for narrow response focussing on one or two
points.

Number
1(b) Possible areas of discussion include: (60)
• Decline in world output associated with decline
in exports and imports – fall in trade as a
proportion of world GDP (Could count as two
points if imports and exports are dealt with
separately)
• Less FDI
• Reduced capital movements between countries
• Reduction in labour movements between
countries
• Increase in protectionism

Evaluation points could include:
• Magnitude of effect: since countries are more
integrated, impact is likely to be greater
• How impact will differ between countries
depending on their degree of integration into
the world economy
• Whether recession is brief or lengthy
• Other factors may be more significant in
influencing interdependence e.g.
communication costs; reduction in trade barriers

convincingly e.g. 4 points and 3 pieces of
evaluation.
For a L5 mark (42-47): should consider 4 points +
2 evaluative comments.
Max 42 marks (top L4) if no evaluation.
Award a L4 mark (36-41 marks) if only 3 points +
evaluation
Award a L2 mark (24-29 marks) for identification of
points only or for narrow response focussing on one or
two points.

Number
2(a) LEVEL 5 (28-40 marks) (40)

Factors include:
• Improved public services
But: money might go on increased wages or
administration
• Crowding Out: resource and financial
But: not a problem if unemployed resources
• Reduction in freedom and choice
But: might enable the poor to experience more
freedom and choice
• Danger of inflation if increased expenditure is
financed by borrowing from the Bank of England
But: other factors might reduce inflationary
pressures e.g. China
• Increased employment
• Increased fiscal deficit

For a L5 mark (28-31): 3 factors and 1 evaluative
point.
evaluation
two points.

Number
2(b) LEVEL 5 (42-60 marks) (60)

Effects include:
• Decrease in aggregate demand and real output
But: depends on what is happening to public
expenditure
• Possibility of a lower rate of inflation
But: could lead to inflationary wage demands
• Disincentives to work if income tax is increased
Depends on relative strength of substitution and
income effects
• Improvement in the balance of trade in goods
and services
But: other factors might be more significant in
influencing the balance of trade
• Reduction in fiscal deficit and so less need for
borrowing
But: higher unemployment might have a
detrimental effect on the public finances. Also
Laffer curve analysis.
• Significance of tax increases relative to other
countries – this is likely to be used as an
evaluative point.
• Impact on distribution of income

evaluation.
For a L5 mark (42-47): should consider 4 points +
2 evaluative comments.
evaluation
two points.

Number
3(a) LEVEL 5 (28-40 marks) (40)

Factors include:
• wage costs; level of National Minimum Wage
• non-wage costs e.g. national insurance
contributions; health and safety regulations;
environmental regulations; VAT; parental leave;
planning regulations
• government grants
• level of corporate taxes
• size/quality/flexibility of the workforce
• strength of EU economies e.g. expectation of
gaining a return on investment
• quality of infrastructure
• desire to gain access to EU market and to avoid
tariffs
• membership of single currency

Evaluation points:
• prioritisation of factors e.g. significance of
wage costs
• consideration of differences in attractiveness
of particular EU countries for FDI
• distinction between short and long run issues

For a L5 mark (28-31): Discussion of 3 points and
at least one evaluation point.
evaluation
points only or for narrow response focussing on one point.

Number
3(b) Possible benefits include: (60)
• Credit on B/P capital account
• Future benefit on B/P current account if
exports rise and imports fall
• For economic growth: multiplier effects
• Increased employment
• New methods of production and working
practices: impact on UK producers
• Tax revenue to government

Evaluation points might include:
• Negative impact on B/P (investment income to
shareholders abroad)
• Increased competition for domestic producers:
unemployment? Net employment affect might
be small
• Increased dependence of economy on decisions
made by managers overseas. Significant if
investment is withdrawn in the future.
• Impact on the economy might be small (if there
is little value added in the UK)
• FDI is a small % of GDP.

evaluation.
For a L5 mark (42-47): Discussion of 4 points and
two evaluation points.
evaluation
two points.

Number
4(a) WTO is primarily concerned with the promotion of (4)
free trade (1) by organising negotiations to reduce
trade barriers such as tariffs and quotas (1). Mark
for reference to any example e.g. Doha round or to
product in which tariffs have been reduced. (1)

A further mark for any other aspect of WTO’s work
e.g. resolving trade disputes or for comment on
success/lack of success. (1)

Number
4(b) • Understanding of the term ‘quotas’ (6)
• These countries lack comparative advantage
in production of textiles
• Other countries such as China and India have
vertically integrated supply chains

2 marks for definition of quotas, 2 marks for
application (specific mention of countries) and 2 for
analysis

Number
4(c) Consideration of: (10)
• Loss of jobs in American and EU.
But workers might be more productively employed
in other industries.
• China is ‘keeping its currency at an artificially
low level’. This would give its exports an unfair
competitive advantage.
If true, this argument could justify protection
but consumers enjoy higher consumer surplus from
cheaper textiles
• China giving subsidies to its textiles industry.
This would also make China’s textiles relatively
cheaper and give it an unfair advantage so
justifying protectionist measures.
• Could lead to deterioration in trade in goods
balances of EU and America.
But this might be a short term issue only. Also,
as China becomes more prosperous, it might buy
more goods from other countries.

2 mark for identification/knowledge; 1 for
application; 3 marks for analysis; 4 marks for any
two evaluative comments (2 + 2; 1 + 3 or 3 + 1).

Number
4(d) (12)

Diagram to show a rise in the price of textiles (from P1 to P2) and an
increase in domestic production (from A to E).

Analysis of:
• Effects on consumers e.g. higher prices; loss of consumer
surplus
• Effects on producers e.g. higher domestic output within the EU
• Welfare losses
• Tax revenue to the government
• Implications for the balance of trade
• Imports decline from AB to EF

Evaluative comments might include:
• Significance of PED/PES for impact on the amount imported
• Impact depends on the level of tariffs
• Short run/long run effects

2 marks for a correctly labelled diagram + 1 mark for clear reference
to textiles on the diagram or in the text; 5 marks for analysis; 4 marks
for any two evaluative comments (2 + 2; 1 + 3 or 3 + 1).

Number
4(e) Tariffs on textiles are a form of indirect taxation (6)
and it is stated that they will have a regressive
effect (1). Since imported clothes from China are
aimed at the mass market, the tax will fall
proportionately more heavily on those people
earning relatively low incomes. (2)
Therefore, they will make income distribution more
uneven. (1)

Evaluation:
• If tax is ad valorem then the tariff is less likely
to have a regressive effect
• Tariffs might only be a tiny proportion of the
price paid by consumers

1 mark for identification of regressive effect; 3
marks for application and analysis; 2 marks for any
one evaluative point.

Number
4(f) Understanding of supply side policies (1) (12)

Answers might include reference to the following
policies:
• Training/education to improve the productivity of
the workforce
But…wage costs in developed countries are too high
to regain competitiveness. Also cost of training
might be very high.
• Grants towards research and development aimed
at improving non-price factors such as quality and
design
While this could provide a niche market for
designer clothes in a developed country, it is
unlikely to result in mass production of textiles
• Cuts in corporation tax
Although this might provide additional funds for
investment, the tax cuts might be distributed to
shareholders in the form of dividends
• Reduction in trade union power and/or reduction
in minimum wages
But…if unions are not very strong then this policy
will have limited impact.

Other evaluative comments might include:
Prioritisation of factors
Drawing conclusion(s) from discussion

Typically a good answer will consider 3 points but it is
possible for maximum marks to be gained by a
detailed discussion of 2 points.
1 mark for knowledge e.g. definition of supply side
policies
2 marks for application to textiles
4 marks for analysis
5 marks for any two evaluative points (3 + 2 or 2 + 3)

Number
5(a)(i) 1999: 195 217 x 100 = 21.0%
928 730

2007: 309 955 x 100 = 22.1%
1 401 042

1 mark for correct method; 2 marks for accurate
calculations. (3)
Allow +/- 0.1%
Or 3 marks without calculations shown
2/3 marks if only 1 correct answer

Number
5(a)(ii) Possible effects include:
• Deterioration in trade in goods and services balance
– use of data;
• Unemployment in manufacturing industries
• Possibility of fall in aggregate demand, leading to
fall in real incomes (use of AD/AS analysis)
• Pressure on domestic firms to reduce costs to remain
competitive

Evaluation could include:
• Prioritisation of effects
• Trade in goods and services deficit not a problem if
there are inflows into investment income and financial
accounts
• Unemployment in manufacturing might be offset by
employment gains in services sector
• AD might not fall if rise in consumption and
investment outweighs rise in imports

2 marks for identification; 2 for application (e.g.
calculation of trade in goods and services balance; or
(10)
examples or points clearly related to UK economy); 2 for
analysis and 4 for any
two evaluation points (2 + 2; 1 + 3; 3 + 1).

Number
5(a)(iii) Value of exports fell from £243 635bn to £220 703bn (1)
i.e. by £22 932bn or 9.4% (1)

Causes include:
• Slower rates of growth in countries buying UK
exports
• Value of £ was relatively high
• Decline in non-price competitiveness
• UK inflation relatively high
•
Evaluative points could include:
• Prioritisation of factors
• Comment that it could have been caused by a
combination of factors

2 marks for identification of factors; 2 for application
(use of data – see above or related to UK economy); and
2 for any one evaluative comment. (6)

Number
5(b)(i) Positive correlation expected (1 mark) (4)
An increase in interest rates (relative to those in other
countries) is likely to cause a rise in ‘hot money’ flows as
investors seek the highest return on their cash. This
could be illustrated with a supply and demand diagram –
showing an increase in demand for the currency. (Up to 3
marks)

Number
5(b)(ii) Use of data to show periods of correlation and years
when relationship is weak. (2 + 1 marks). Comment that
there is no precise relationship (1) but overall trend is (3)
similar (1); 1 mark for specific data reference.

Number
5(b)(iii) Reasons include:
• State of economy relative to those of major
competitors ( Could count as 2 factors ).
Might be regarded as the most significant factor:
investors unwilling to hold currency of a country whose
economy is weak
• Speculation relating to future state of economy: UK
considered to be facing a more serious recession than
other countries because e.g. high levels of debt;
significance of housing market
• Significant cut in interest rates, making sterling less
attractive
• Relative inflation rates
But…. may not be significant in the short term – other
factors more significant
• Current account balance
But… may have little impact if there are substantial
flows into financial account

2 marks for identification; 1 for application (e.g. use of
data); 5 for analysis and 4 for any two evaluation points
(2 + 2; 1 + 3; 3 + 1).
(12)

Number
5(c) Analysis could include:

For Inflation:
• Decrease value of the pound could result in a higher
rate of inflation because imported raw materials will
cost more. Increase demands for exports causes a
rise in AD and possible demand-pill inflation.
• Imported manufactured goods will also cost more
But…. other factors might reduce inflationary
pressures e.g. increase in productivity; AS rising faster
than AD

For Economic growth:
Growth could increase if imports (leakages) are falling
faster than exports (injections)
But… other factors could be causing growth rates to
fall e.g. lower investment or FDI

For full employment:
Higher import prices could result in lower
unemployment
But… falling real incomes might result in higher
unemployment in other sectors of the economy.

2 marks for identification; 1 for application to the UK
economy; 5 for analysis and 4 for any two evaluation
points (2 + 2; 2 + 1). (12)

Maximum 3/4 if no reference to simultaneous
achievement of objectives.

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GCE Economics Mark Scheme Winter 2010

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