Mark Scheme

Section A

Question 1

(a) Define the term 'economic growth'. [2 marks]

Award 1 mark for a partial definition:

• An increase in output/production
• An increase in GDP
• An increase in national income

Award 2 marks for a full definition that includes:

• An increase in real GDP / real national output / real national income (reference to 'real' required for full marks)
• Over a period of time / usually measured over a year

Accept:

• An increase in a country's productive capacity
• An increase in the value of goods and services produced

Reject:

• References to economic development only (without reference to output/GDP)
• Definitions that confuse GDP with GDP per capita without clarification

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(b) Calculate the percentage point change in India's unemployment rate between 2020 and 2022. [2 marks]

Award 2 marks for correct answer:

• 8.0% - 6.5% = 1.5 percentage points (decrease/fall)
• Must include unit (percentage points) and direction of change for full marks

Award 1 mark for:

• Correct calculation (1.5) but missing unit or direction
• Correct working shown but minor arithmetic error

Reject:

• Answers given as % or percentage (rather than percentage points)
• 1.5% (this is incorrect terminology)

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(c) Explain two reasons why India's Real GDP growth was negative in 2020. [4 marks]

Award up to 2 marks for each explained reason (maximum 4 marks total):

Level 2 (2 marks per reason): Clear explanation showing cause and effect

Level 1 (1 mark per reason): Identification or partial explanation

Likely reasons include:

COVID-19 pandemic / lockdown measures (up to 2 marks)

• 1 mark: COVID-19 caused businesses to close / lockdown was imposed
• 2 marks: COVID-19 led to lockdown measures which forced many businesses to close or reduce operations, reducing production and consumption, leading to a fall in GDP / Lockdowns restricted consumer spending and business investment, causing aggregate demand to fall

Reduced exports / fall in international trade (up to 2 marks)

• 1 mark: Exports fell / international trade declined
• 2 marks: Global recession reduced demand for Indian exports, leading to lower production in export industries / International supply chains were disrupted, reducing India's ability to export goods and services

Fall in consumption and investment (up to 2 marks)

• 1 mark: People spent less / businesses invested less
• 2 marks: Uncertainty caused by the pandemic led consumers to save rather than spend and businesses to postpone investment projects, reducing aggregate demand and therefore GDP

Increased unemployment (up to 2 marks)

• 1 mark: More people became unemployed
• 2 marks: Businesses closed or reduced workforce due to falling demand, increasing unemployment which further reduced consumer spending and aggregate demand

Accept other valid reasons with appropriate explanation

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(d) Analyse how economic growth might affect the standard of living in a developing country such as India. [6 marks]

Level 3 (5-6 marks):

• Clear analysis showing how economic growth affects standard of living
• At least two distinct impacts explained with development
• Clear chain of reasoning linking growth to living standards
• Recognition that the effect may be positive or negative, or conditional

Level 2 (3-4 marks):

• Sound explanation of how growth affects standard of living
• At least one impact explained with some development OR two impacts identified with limited development
• Some chain of reasoning present but may lack depth

Level 1 (1-2 marks):

• Basic statement(s) about growth or living standards
• Limited or no development
• May confuse growth with development

Indicative content:

Positive effects:

• Economic growth increases employment opportunities, raising incomes and enabling people to afford more goods and services
• Higher GDP means government tax revenues increase, allowing more spending on healthcare, education and infrastructure, improving access to services
• Growth can lead to better technology and productivity, improving quality of goods/services available
• Rising incomes may improve nutrition and health outcomes

Negative effects or limitations:

• Benefits of growth may not be evenly distributed; inequality may increase, so some groups see no improvement in living standards
• Growth may come at environmental cost (pollution, resource depletion) which reduces quality of life
• Rapid industrialisation may lead to urban congestion, poor working conditions
• HDI data in the table shows little improvement despite growth, suggesting growth alone doesn't guarantee higher living standards

For top marks, candidates should:

• Make explicit reference to India or developing countries
• Link clearly to the data provided (e.g., noting that HDI fell despite recovery in 2021-22)
• Show analysis (because/therefore/this means that) rather than just description

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Question 2

(a) State the equilibrium price shown in the diagram. [1 mark]

Award 1 mark for:

• $2.00 / $2 / 2 dollars

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(b) Define the term 'indirect tax'. [2 marks]

Award 1 mark for a partial definition:

• A tax on goods/services
• A tax on spending/expenditure
• A tax paid by producers/sellers

Award 2 marks for a full definition:

• A tax on goods/services (or expenditure) which is paid to the government by producers/firms but can be passed on to consumers through higher prices
• A tax on spending which increases the price consumers pay

Accept:

• Examples given (VAT, excise duties) with explanation that they are taxes on goods/services
• Reference to taxes that are 'indirect' because they are not paid directly to government by final consumer

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(c) Explain two reasons why a government might impose a tax on sugary drinks. [4 marks]

Award up to 2 marks for each explained reason (maximum 4 marks):

To raise (tax) revenue (up to 2 marks)

• 1 mark: To get more money / increase government income / raise revenue
• 2 marks: To raise tax revenue which can be used to fund government spending on public services such as healthcare or education / Revenue is needed to finance government expenditure or reduce budget deficit

To reduce consumption / discourage consumption of unhealthy products (up to 2 marks)

• 1 mark: To make people buy less sugary drinks / to improve health
• 2 marks: The tax increases the price of sugary drinks, making them less affordable and reducing quantity demanded, which may reduce obesity and health problems / To discourage consumption of demerit goods that cause negative effects on health

To correct market failure / reduce negative externalities (up to 2 marks)

• 1 mark: Because sugary drinks cause problems for society / externalities
• 2 marks: Sugary drinks create negative externalities through strain on healthcare system from treating diabetes and obesity; tax internalises these external costs and moves market toward socially optimum output

To reduce government healthcare costs (up to 2 marks)

• 1 mark: To reduce NHS/healthcare spending
• 2 marks: By reducing consumption of sugary drinks, the government may reduce the future burden of treating diet-related diseases, freeing up healthcare resources for other uses

Accept other valid reasons with appropriate explanation

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(d) Discuss whether imposing a tax on sugary drinks is an effective way to reduce their consumption. [6 marks]

Level 3 (5-6 marks):

• Balanced discussion considering both why the tax may be effective AND why it may not be effective
• Clear chain of reasoning with developed points
• Reference to economic concepts (e.g., price elasticity of demand, substitutes)
• Judgement or conclusion reached

Level 2 (3-4 marks):

• One-sided discussion (only arguments for OR against effectiveness) with development OR
• Both sides considered but limited development
• Some use of economic reasoning
• May lack clear conclusion

Level 1 (1-2 marks):

• Basic statements about taxes or consumption
• Limited economic understanding
• No clear structure or reasoning

Indicative content:

Arguments that it IS effective:

• Tax increases price, which reduces quantity demanded (law of demand)
• If demand is price elastic, the percentage fall in quantity demanded will be greater than percentage increase in price, significantly reducing consumption
• Tax acts as a disincentive to purchase, particularly affecting price-sensitive consumers
• Evidence from some countries (e.g., Mexico) shows consumption fell after sugar taxes introduced
• May be particularly effective if there are no close substitutes available

Arguments that it is NOT effective:

• If demand is price inelastic (which it may be, as sugary drinks can be habit-forming/addictive), quantity demanded falls by a smaller percentage than price rises, so consumption falls only slightly
• Consumers may switch to other unhealthy alternatives (e.g., other sugary snacks) rather than reducing sugar intake overall
• Those on low incomes may continue to buy sugary drinks despite higher prices, making the tax regressive
• Enforcement may be difficult; consumers might buy from other sources
• The tax may need to be very large to significantly affect behaviour, which could be politically unpopular

For top marks, candidates should:

• Use economic terminology accurately (e.g., price elasticity of demand)
• Provide a balanced assessment
• Reach a supported conclusion (e.g., "effectiveness depends on the price elasticity of demand for sugary drinks...")

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Question 3

(a) Calculate the unemployment rate in Country Y. Show your working. [2 marks]

Award 2 marks for correct answer with working:

Working:

• Labour force = Employed + Unemployed = 42.5 + 2.5 = 45 million
• Unemployment rate = (Unemployed / Labour force) × 100
• = (2.5 / 45) × 100
• = 5.56% (or 5.6% or 5.5%)

Award 2 marks for:

• Correct answer (5.5% or 5.6% or 5.56%) with correct working shown

Award 1 mark for:

• Correct working shown but minor arithmetic error
• Correct method indicated but calculation incomplete

Reject:

• (2.5/60) × 100 = 4.17% (incorrect as uses working age population instead of labour force)
• Answers without working shown

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(b) Identify two groups of people who might be classified as economically inactive. [2 marks]

Award 1 mark for each valid group identified (maximum 2 marks):

• Students / those in full-time education
• Retired people / pensioners
• People who are sick or disabled / long-term sick
• Homemakers / those looking after family/home
• People who have given up looking for work / discouraged workers
• Those who do not need or want to work / independently wealthy
• People under the legal working age / children

Award 1 mark per valid group (no explanation required)

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(c) Explain how cyclical unemployment differs from structural unemployment. [4 marks]

Award up to 4 marks using the following guidance:

Award up to 2 marks for explanation of cyclical unemployment:

• 1 mark: Unemployment caused by lack of demand / recession
• 2 marks: Unemployment caused by a fall in aggregate demand during an economic downturn/recession; when the economy contracts, demand for labour falls and workers are laid off / During a recession, consumer spending and business investment fall, reducing derived demand for labour

Award up to 2 marks for explanation of structural unemployment:

• 1 mark: Unemployment caused by changes in the structure of the economy / decline of industries / skills mismatch
• 2 marks: Unemployment caused by long-term changes in the structure of the economy, such as decline of certain industries or technological change, where workers' skills no longer match available jobs / Occurs when certain industries decline permanently (e.g., coal mining) and workers lack the skills needed for jobs in growing sectors

For full marks, answer must clearly distinguish between the two types

Alternative approach for full marks: Clear explanation of key difference (e.g., "Cyclical is temporary and related to the business cycle, while structural is long-term and related to changes in the economy's structure") plus development of each type (2 marks for difference clearly stated + 1 mark for cyclical + 1 mark for structural)

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(d) Analyse the likely effects of rising unemployment on an economy. [6 marks]

Level 3 (5-6 marks):

• Clear analysis of multiple effects with developed chain of reasoning
• At least two distinct effects explained showing consequence(s)
• Use of economic terminology
• May consider short-term and long-term effects, or effects on different stakeholders

Level 2 (3-4 marks):

• Sound explanation of effects with some development
• At least one effect explained clearly OR two effects with limited development
• Some appropriate economic terminology

Level 1 (1-2 marks):

• Basic identification of effect(s)
• Limited development or economic understanding
• May be largely descriptive

Indicative content:

Effect on output/GDP:

• Unemployment means factors of production are not being used; the economy is producing inside its PPC / below potential output
• Lost output represents economic waste and means GDP is lower than it could be
• Opportunity cost of unemployment is the goods/services that could have been produced

Effect on government finances:

• Government spending increases due to higher benefit payments (unemployment benefits, welfare payments)
• Tax revenue falls because unemployed workers pay no income tax and spend less (reducing VAT revenue)
• This may lead to a larger budget deficit, forcing government to borrow more or cut spending elsewhere

Effect on consumers/living standards:

• Unemployed workers lose income, reducing their standard of living and ability to afford goods/services
• May lead to poverty, stress, and health problems
• Families of unemployed workers also affected
• Increased inequality in society

Effect on aggregate demand:

• Unemployed workers have less income to spend, reducing consumption (largest component of AD)
• Fall in consumption leads to further fall in aggregate demand, which may cause more unemployment (negative multiplier effect)
• This can deepen a recession

Effect on firms:

• Lower consumer spending reduces demand for goods/services, decreasing business revenues and profits
• However, increased unemployment may reduce wage pressure and give employers more choice when hiring (potential benefit to firms)

Effect on workers:

• Workers who are unemployed for extended periods may lose skills (hysteresis effect)
• This can make it harder to find jobs in future, potentially causing cyclical unemployment to become structural

Social effects:

• Higher crime rates, family breakdown, mental health issues
• Loss of social cohesion

For top marks, candidates should:

• Develop clear chains of reasoning (because/therefore/this leads to)
• Use appropriate economic terminology
• Consider more than one type of effect or stakeholder group

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Question 4

(a) Define the term 'multinational company'. [2 marks]

Award 1 mark for a partial definition:

• A company that operates in more than one country
• A company with operations in different countries
• A company with factories/offices abroad

Award 2 marks for a full definition:

• A company that has operations/production facilities in more than one country
• A company that produces in its home country and at least one other country

Accept:

• A company with headquarters in one country and subsidiaries/branches in others
• Reference to production or operations (not just sales) in multiple countries

Reject:

• A company that exports (this alone does not make it an MNC)
• A large/big company (without reference to multiple countries)

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(b) Identify two reasons why BYD wants to produce cars in Europe rather than only exporting from China. [2 marks]

Award 1 mark for each valid reason identified (maximum 2 marks):

From the extract or by inference:

• To reduce costs / reduce transport costs
• To be closer to consumers / improve competitiveness
• To avoid tariffs/trade barriers
• To reduce delivery times
• To adapt products to local preferences
• To improve brand image / be seen as local
• To avoid potential restrictions on imports

Award 1 mark per reason (no explanation required for this question)

Note: Answer should be based on understanding of why firms choose FDI over exporting; both extract-based and knowledge-based answers acceptable

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(c) Explain how government subsidies might give Chinese car manufacturers a competitive advantage. [4 marks]

Award up to 4 marks:

Level 2 (3-4 marks): Clear explanation of how subsidies create competitive advantage with developed chain of reasoning

Level 1 (1-2 marks): Basic explanation or identification of subsidy effect without full development

Indicative content:

Full explanation should include:

• Subsidies are government payments/financial assistance to firms (1 mark for understanding of subsidy)
• Subsidies reduce firms' costs of production (1 mark)
• Lower costs allow Chinese manufacturers to charge lower prices than competitors or increase profit margins (1 mark)
• This makes them more competitive in international markets because consumers will prefer cheaper Chinese cars, increasing market share / European manufacturers with higher costs cannot compete on price (1 mark)

Alternative valid chains of reasoning:

• Subsidies allow Chinese firms to invest more in research and development, improving quality/technology, making their products more attractive than competitors
• Subsidies enable firms to produce on a larger scale, benefiting from economies of scale, further reducing average costs
• Lower prices due to subsidies allow Chinese firms to undercut rivals and gain market share

For full marks:

• Must explain the mechanism (how subsidies lead to advantage)
• Must show competitive advantage over other firms

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(d) Discuss whether European governments should restrict imports of Chinese cars to protect domestic car manufacturers. [6 marks]

Level 3 (5-6 marks):

• Balanced discussion with arguments for AND against restrictions
• Clear use of economic reasoning
• Reference to different stakeholders (manufacturers, consumers, workers)
• Judgement or conclusion reached

Level 2 (3-4 marks):

• One-sided discussion with development OR both sides with limited development
• Some economic reasoning present
• May lack balance or conclusion

Level 1 (1-2 marks):

• Basic statements about trade or protection
• Limited economic reasoning
• May be purely descriptive

Indicative content:

Arguments FOR restricting imports (protecting domestic producers):

• Protects jobs in European car industry; prevents unemployment among car workers and related industries (extract mentions union concerns)
• Gives European manufacturers time to adapt and become more competitive / develop electric vehicle technology
• Maintains domestic production capacity and reduces dependence on foreign suppliers
• Levels the playing field if Chinese firms benefit from unfair government subsidies
• Prevents dumping if Chinese cars are being sold below cost
• Protects strategic industry important for national security/economic security
• Maintains tax revenue from domestic firms
• Prevents deindustrialisation

Arguments AGAINST restricting imports (allowing free trade):

• Consumers benefit from lower prices and greater choice; restrictions would force them to pay more for cars
• Competition from Chinese firms incentivises European manufacturers to improve efficiency and innovation
• Restricting imports may lead to retaliation from China, harming European exporters to China
• Goes against free trade principles; reduces gains from trade
• May break WTO rules or trade agreements
• Higher prices from protection act like a regressive tax on consumers
• Resources may be more efficiently allocated if allowed to flow to competitive industries rather than protecting inefficient ones
• European consumers may benefit from better quality or more advanced technology in Chinese electric vehicles

For top marks, candidates should:

• Consider multiple stakeholders (not just manufacturers)
• Use economic terminology (e.g., protectionism, tariffs, comparative advantage, retaliation)
• Reach a supported judgement (e.g., "depends on whether job losses outweigh consumer benefits" or "depends on whether subsidies are truly unfair or whether European firms are simply less efficient")

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Section B

Question 5

(a) Explain how inflation is measured and identify two limitations of using a consumer price index. [8 marks]

Mark allocation:

• How inflation is measured: up to 4 marks
• Two limitations: up to 4 marks (2 marks per limitation)

How inflation is measured (up to 4 marks):

Award up to 4 marks for clear explanation:

• Consumer Price Index (CPI) measures changes in the average price level of a basket of goods and services (1 mark)
• A survey of household spending patterns is conducted to determine what goods/services to include and their weights/importance in the basket (1 mark)
• Prices of these items are regularly collected from a range of retail outlets (1 mark)
• The weighted average price change is calculated; the percentage change in the index over 12 months gives the inflation rate (1 mark)

Alternative points:

• Base year is set at 100 and subsequent changes show increase/decrease from this base
• Weights reflect proportion of spending on different categories
• Regular updating of basket to reflect changing spending patterns

Two limitations (2 marks each, up to 4 marks total):

Award up to 2 marks for each limitation:

Level 2 (2 marks per limitation): Clear explanation of limitation showing why it is a problem

Level 1 (1 mark per limitation): Identification or partial explanation

Possible limitations:

Different spending patterns (up to 2 marks)

• 1 mark: Different people buy different things / not everyone spends the same way
• 2 marks: The basket reflects average spending, but individuals/households have different consumption patterns, so CPI may not accurately reflect inflation experienced by specific groups (e.g., pensioners who spend more on heating; families with children)

Doesn't include all prices (up to 2 marks)

• 1 mark: Doesn't include house prices
• 2 marks: CPI excludes some major items such as house prices (includes only mortgage interest or rent), so doesn't capture full cost of living increases, particularly for those buying property

Quality changes (up to 2 marks)

• 1 mark: Quality of goods changes over time
• 2 marks: CPI struggles to account for quality improvements; a price rise may reflect better quality rather than inflation, or price stability may hide effective increases if quality deteriorates, distorting the true inflation measure

New goods and services (up to 2 marks)

• 1 mark: New products are not immediately included
• 2 marks: There is a time lag before new goods/services are added to the basket, so CPI may not reflect current spending patterns, particularly understating price changes in fast-changing sectors like technology

Substitution bias (up to 2 marks)

• 1 mark: Consumers switch to cheaper alternatives when prices rise
• 2 marks: CPI assumes fixed weights, but in reality consumers substitute away from goods that become relatively more expensive toward cheaper alternatives, meaning CPI may overstate inflation as it doesn't account for this substitution effect

Outlet bias (up to 2 marks)

• 1 mark: Consumers may shop at cheaper stores
• 2 marks: CPI collects prices from a sample of outlets but consumers may increasingly switch to discount retailers when prices rise, meaning actual inflation experienced may be lower than measured

Accept other valid limitations with appropriate explanation

For full marks on part (a), candidates must address both how inflation is measured AND provide two well-explained limitations

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(b) Evaluate the view that a low rate of inflation is always beneficial for an economy. [12 marks]

Level 4 (10-12 marks):

• Comprehensive evaluation with well-developed arguments on both sides
• Clear analysis of how low inflation benefits the economy AND potential drawbacks or limitations
• Sophisticated use of economic theory and terminology
• Explicit consideration of context (e.g., "always beneficial" or different economic circumstances)
• Well-supported judgement/conclusion

Level 3 (7-9 marks):

• Good evaluation with developed arguments
• Covers both benefits and limitations of low inflation, though may be unbalanced
• Sound use of economic concepts with clear explanation
• Some judgement present but may lack full justification

Level 2 (4-6 marks):

• Reasonable explanation with some evaluation
• May be one-sided (only benefits OR only limitations) with development
• OR both sides addressed but with limited development
• Uses some economic terminology but analysis may be incomplete
• Limited or implicit judgement

Level 1 (1-3 marks):

• Basic statements about inflation
• Limited understanding of economic effects
• Mainly descriptive with little or no evaluation
• Little or no use of economic terminology
• No clear judgement

Indicative content:

Arguments that low inflation IS beneficial:

Economic stability and confidence

• Low and stable inflation creates certainty for businesses and consumers, encouraging investment and spending
• Firms can plan ahead with confidence, making long-term investment decisions
• Reduces risk of boom-bust cycles

Protects purchasing power

• Real incomes (purchasing power) are maintained if inflation is low
• Particularly benefits those on fixed incomes (e.g., pensioners)
• Standard of living is protected

Maintains competitiveness

• If inflation is lower than competitor countries, exports become relatively cheaper and imports more expensive, improving trade balance
• Helps maintain international competitiveness without need for currency depreciation

Reduces costs and distortions

• Lower menu costs (costs of changing price lists)
• Reduces redistributional effects between borrowers and lenders
• Avoids wage-price spirals
• Maintains value of money as a store of value

Helps achieve other macroeconomic objectives

• Low inflation is often associated with stable economic growth
• May reduce inequality by protecting real value of savings

Arguments that low inflation is NOT always beneficial / limitations:

Depends how low

• Very low inflation close to zero risks deflation (falling prices)
• Deflation causes consumers to delay purchases expecting lower prices, reducing aggregate demand
• Deflation increases real value of debt, harming borrowers
• Many economists argue optimal inflation is around 2% rather than close to zero

May indicate weak demand

• Very low inflation may signal weak aggregate demand and potential recession
• Could be associated with high unemployment and low growth
• Japan's experience shows prolonged very low inflation/deflation can trap economy in stagnation

Measurement issues

• Low measured inflation (e.g., 2%) may mask high inflation in specific sectors (e.g., housing costs, education)
• Some groups may still experience significant cost of living increases even if average inflation is low

Opportunity cost of achieving it

• Keeping inflation very low may require high interest rates or tight fiscal policy
• This can reduce growth and increase unemployment
• Trade-off with other objectives (Phillips curve relationship)

Context matters

• For a developing country trying to grow rapidly, slightly higher inflation may be acceptable trade-off for higher growth/investment
• Economic circumstances matter: in a recession, low inflation may be problematic; during a boom, it may be very desirable

Not inflation itself but unexpected inflation that causes problems

• If low inflation is expected and stable, economic agents can adjust
• It's unexpected changes in inflation that cause the most disruption
• Stable moderate inflation may be preferable to unstable very low inflation

For top marks (Level 4), candidates should:

• Explicitly address "always" in the question (showing it depends on context/how low/economic circumstances)
• Cover multiple well-developed arguments on both sides
• Use sophisticated economic terminology appropriately
• Provide clear, supported evaluation/judgement (e.g., "Low inflation around 2% is generally beneficial, but very low inflation risks deflation and may indicate weak demand, so 'always beneficial' overstates the case" or similar nuanced conclusion)

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Question 6

(a) Calculate the current account balance for Country Z in Year 2. Show your working. [4 marks]

Award up to 4 marks:

Full marks (4) for correct answer with clear working:

Working:

• Balance of trade in goods = Exports of goods - Imports of goods = 138 - 195 = -57
• Balance of trade in services = Exports of services - Imports of services = 64 - 48 = +16
• Current account = Balance of trade in goods + Balance of trade in services + Investment income + Transfers
• Current account = -57 + 16 + 8 + (-6)
• Current account = -39 (billion dollars) or -$39bn

OR alternative clear working method that arrives at -39

Award 4 marks for:

• Correct answer (-39 or -$39bn or $39bn deficit) with full working shown

Award 3 marks for:

• Correct answer with working shown but minor omission in presentation
• OR correct method with one minor arithmetic error

Award 2 marks for:

• Correct method indicated but arithmetic errors
• OR correct calculation of trade balance but incorrect treatment of investment income/transfers

Award 1 mark for:

• Some correct working shown (e.g., correctly calculates trade in goods or services)
• OR shows understanding that current account includes multiple components

Reject:

• Answer without working shown
• Working that does not show understanding of current account components

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(b) To what extent should a government be concerned about a current account deficit? [12 marks]

Level 4 (10-12 marks):

• Comprehensive evaluation showing circumstances when deficit is/is not concerning
• Well-developed arguments considering multiple perspectives
• Sophisticated understanding of current account and its implications
• Excellent use of economic theory and terminology
• May reference the data provided in part (a)
• Clear, well-supported judgement considering context and qualifications

Level 3 (7-9 marks):

• Good evaluation with arguments on both sides
• Sound understanding of why deficits might be concerning and why they might not be
• Clear use of economic concepts with explanation
• Some reference to context or circumstances
• Judgement present but may lack full sophistication

Level 2 (4-6 marks):

• Reasonable explanation with some evaluation
• May be one-sided with development OR both sides with limited development
• Shows some understanding of current account deficit implications
• Uses some economic terminology
• Limited judgement or conclusion

Level 1 (1-3 marks):

• Basic statements about current account or deficits
• Limited economic understanding
• Mainly descriptive
• Little evaluation or judgement

Indicative content:

Reasons why government SHOULD be concerned:

Debt implications

• Current account deficit means country is spending more abroad than earning from abroad, requiring borrowing from overseas or selling assets
• Builds up external debt over time, which must be repaid with interest
• If deficit is large or persistent, debt may become unsustainable
• Country becomes increasingly indebted to foreigners

Exchange rate pressure

• Persistent deficit creates downward pressure on exchange rate as supply of currency exceeds demand
• Depreciation may lead to imported inflation
• Very rapid depreciation can undermine confidence

Loss of competitiveness

• Deficit suggests country's goods and services are uncompetitive internationally
• May indicate structural problems in the economy (declining industries, low productivity)
• Could signal deindustrialisation

Dependence on foreign finance

• Deficit must be financed by capital inflows (foreign investment, loans)
• Makes country vulnerable to sudden stops in foreign lending
• Financial crises can occur if foreign investors lose confidence (as seen in some emerging markets)

Living beyond means

• Persistent deficit means country is consuming more than it produces
• May be unsustainable in long run
• Could indicate domestic economy is overheating

Can reference data from part (a):

• Country Z's deficit has worsened from Year 1 to Year 2 (can calculate: Year 1 would be -21, Year 2 is -39)
• Trade in goods deficit has widened substantially
• This worsening trend may be concerning

Reasons why government should NOT be too concerned / deficit may not be problematic:

Depends on cause of deficit

• If deficit is due to importing capital goods/machinery for investment, this may increase future productive capacity and exports, making it sustainable
• High imports of capital goods may lead to higher growth in future
• If due to strong domestic growth and high consumer confidence (attracting imports), this may be positive sign

Depends on size relative to GDP

• Small deficit relative to size of economy may be easily financed and not problematic
• What matters is the deficit as % of GDP, not absolute value
• Many successful economies run current account deficits (e.g., USA, UK, Australia)

May be self-correcting

• Deficit causes exchange rate to depreciate (increased supply of currency)
• Depreciation makes exports cheaper and imports more expensive
• This automatically corrects the deficit over time (unless demand is price inelastic)

May reflect confidence

• Capital inflows financing the deficit may indicate foreign investors are confident in the economy
• Foreign Direct Investment is beneficial (brings technology, jobs, skills)
• Countries with strong growth prospects often attract investment and run deficits

Alternative measures may be strong

• Current account is only one indicator; government should consider full picture
• If country has strong GDP growth, low unemployment, low inflation, the deficit may not be priority concern
• Other policy objectives may be more important

Depends on financing method

• If financed by FDI or long-term investment, more sustainable than financed by short-term "hot money"
• Type of capital inflow matters for vulnerability to sudden outflows

Historical context

• Some countries have successfully run deficits for extended periods (e.g., USA due to dollar's reserve currency status)
• What's sustainable depends on country's specific circumstances

For top marks (Level 4), candidates should:

• Explicitly address "to what extent" by considering circumstances/context where deficits are more or less concerning
• Develop multiple arguments on both sides with clear economic reasoning
• Use data from part (a) where relevant
• Provide sophisticated judgement (e.g., "Concern should depend on the cause, size relative to GDP, and method of financing. Country Z's deficit has widened significantly and trade performance has deteriorated, which would be concerning if this trend continues, but if it reflects investment in productive capacity, it may be sustainable. The government should monitor the deficit but prioritize policies to improve competitiveness rather than arbitrary deficit reduction.")
• Use sophisticated economic terminology (external debt, capital flows, exchange rate mechanisms, competitiveness, etc.)

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Sample Answers with Examiner Commentary

Question 5(b) — Sample Answers

Grade A (high distinction) answer*

Low inflation, typically around 2%, brings significant benefits to an economy, but the view that it is always beneficial is too simplistic and depends on how low inflation is and the economic context.

Low inflation is beneficial for several reasons. First, it creates economic certainty and stability. When inflation is low and predictable, firms can plan investment with confidence because they know future costs will be relatively stable. This encourages long-term capital investment, which increases productive capacity and promotes economic growth. Consumers also benefit from certainty – they can make purchasing decisions without worrying about rapid erosion of their money's purchasing power. Second, low inflation protects the real incomes of people on fixed incomes, particularly pensioners whose pensions may not be index-linked. If inflation is low, the real value of their income is maintained and their standard of living is protected. Third, low inflation helps maintain international competitiveness. If a country has lower inflation than its trading partners, its exports become relatively cheaper over time and imports relatively more expensive (assuming exchange rates remain constant), which should improve the trade balance. Finally, low inflation avoids various costs associated with high inflation, such as menu costs (the costs of changing prices), shoe leather costs (costs of managing money when it loses value quickly), and the arbitrary redistribution of wealth from savers to borrowers.

However, there are several reasons why very low inflation is not always beneficial. Most importantly, if inflation is too low – close to zero – there is a risk of deflation, which is falling prices. Deflation can be very harmful because it encourages consumers to delay purchases, expecting prices to fall further. This reduces aggregate demand, causing firms to cut production and employment, leading to recession. Deflation also increases the real value of debt, making it harder for borrowers (including governments) to repay loans. Japan's experience from the 1990s onwards shows how prolonged very low inflation and periods of deflation can trap an economy in stagnation with low growth. Furthermore, very low inflation may actually indicate weak aggregate demand in the economy, suggesting the economy is performing below potential with high unemployment. In this context, low inflation is a symptom of economic weakness rather than a benefit. There is also an opportunity cost to achieving very low inflation – it may require high interest rates or contractionary fiscal policy, which reduce economic growth and increase unemployment. The Phillips curve suggests there is a trade-off between inflation and unemployment in the short run, so prioritising very low inflation may mean accepting higher unemployment.

Whether low inflation is beneficial also depends on how it is measured. Official CPI inflation may be low, but this could mask high inflation in specific sectors like housing, healthcare, or education. Households heavily exposed to these sectors would not benefit from low average inflation. Additionally, in certain economic circumstances, slightly higher inflation may be acceptable or even desirable. Developing countries experiencing rapid growth and high investment may naturally experience higher inflation, and trying to suppress this could harm growth. Similarly, during a recession, low inflation combined with weak demand is problematic, whereas during a boom period, low inflation would be very desirable to prevent overheating.

In conclusion, low inflation around 2% is generally beneficial for an economy as it provides stability while avoiding deflation risks. However, the view that it is "always" beneficial is incorrect because very low inflation risks deflation, may indicate weak demand, and depends on economic circumstances. The optimal inflation rate is not zero but a low, stable, positive rate. Context matters – what is beneficial for a mature economy in one phase of the business cycle may not be appropriate for a developing economy or for an economy in recession.

Mark: 12/12

Examiner commentary: This is an excellent answer demonstrating comprehensive understanding and sophisticated evaluation. The candidate provides multiple well-developed arguments on both sides, uses precise economic terminology throughout (real income, menu costs, aggregate demand, deflation, Phillips curve), and explicitly addresses the "always" in the question. The answer shows excellent structure with clear paragraphs addressing benefits, limitations, and context. The Japan example adds real-world credibility. The conclusion directly answers the question with a nuanced, well-supported judgement. This response demonstrates all the qualities expected of a Level 4 answer and is worthy of full marks.

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Grade C (pass) answer

Low inflation has many benefits for the economy. When prices are not rising quickly, people can afford to buy more goods and services because their wages go further. This means their standard of living is better. Businesses also benefit because they can plan ahead more easily when they know prices will be stable. This helps them to invest in new equipment and expand. Low inflation also helps pensioners because their savings keep their value better than if there was high inflation.

Another benefit is that low inflation helps with exports. If our country has lower inflation than other countries, our goods will be cheaper, so foreign people will want to buy more of our exports. This improves the balance of payments and brings money into the country. The government also likes low inflation because it is one of their main macroeconomic objectives, showing the economy is under control.

However, very low inflation can cause some problems. If inflation is too low, it might turn into deflation where prices actually fall. This is bad because people will wait to buy things expecting them to get cheaper, so shops sell less and may have to close down, causing unemployment. Deflation also makes debts harder to pay back because the real value of the debt increases.

Also, very low inflation might mean the economy is not growing much. When there is low demand in the economy, prices don't rise much but this also means unemployment might be high. So low inflation could actually be a sign that the economy is in trouble rather than doing well. To get inflation very low, the government might have to use high interest rates which would stop people borrowing to buy houses or start businesses, which is bad for growth.

In conclusion, low inflation is usually good for the economy because it keeps prices stable and helps people and businesses plan ahead. However, if it is too low it can cause deflation which is harmful, and getting inflation very low might damage growth. So low inflation around 2% is good but not if it goes close to zero.

Mark: 7/12

Examiner commentary: This is a solid Grade C response demonstrating sound understanding with some evaluation. The candidate identifies several benefits of low inflation (stability, purchasing power, competitiveness) and some limitations (deflation risk, may indicate weak growth). There is a reasonable attempt at both sides of the argument and a conclusion is provided. However, the analysis lacks the depth and sophistication of the top-band answer. Economic terminology is used but sometimes imprecisely (e.g., "people can afford to buy more" conflates nominal and real income effects). The explanation of mechanisms could be more developed – for example, the link between low inflation and competitiveness assumes exchange rates remain constant, which is not acknowledged. The answer would benefit from more explicit consideration of "always" and more nuanced discussion of context. Nevertheless, this demonstrates good Level 3 understanding and merits a mid-range mark.

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Grade E (near miss) answer

Low inflation is good for the economy because prices don't go up too much. This is beneficial because people can buy things without prices changing all the time. When inflation is low, things are cheap so people can afford more, which is good for living standards. Also businesses like it when inflation is low because they can make more profit.

Low inflation is good for the government because they want to keep inflation low, it is one of their targets. If they achieve low inflation it shows they are doing a good job. It also means interest rates can be low which helps people get mortgages.

However, low inflation is not always good because sometimes we need prices to go up a bit. If there is no inflation at all then wages won't go up either and people won't get pay rises. Also if inflation is too low then it's the same as deflation which is when prices go down. This sounds good but it actually causes problems because shops can't make money if they have to keep lowering prices.

Low inflation might also mean there are not many jobs available. When inflation is low it can mean the economy is not doing well and unemployment is high. This is bad for people who need jobs.

In conclusion, low inflation is mostly beneficial for an economy but it is not always good because sometimes it means the economy is weak and there is unemployment. The best thing is to have some inflation but not too much, somewhere in the middle.

Mark: 4/12

Examiner commentary: This answer demonstrates limited understanding and sits at the bottom of Level 2. While the candidate identifies that low inflation has benefits and some limitations, the explanations lack development and contain several misconceptions. The statement that "things are cheap so people can afford more" confuses low inflation (slow price rises) with low prices. The claim that "businesses like it when inflation is low because they can make more profit" is unsupported and oversimplified – profits depend on many factors. The understanding of deflation is superficial ("shops can't make money if they have to keep lowering prices" doesn't explain the demand-side problem). The link between low inflation and unemployment is asserted but not properly explained. The answer would benefit from: clearer definitions of key terms, more developed chains of reasoning explaining why low inflation has particular effects, use of proper economic terminology (aggregate demand, real income, purchasing power), and more explicit evaluation considering circumstances and context. To reach Grade C, this candidate needs to develop economic concepts more fully and explain mechanisms rather than just asserting outcomes.

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Question 6(b) — Sample Answers

Grade A (high distinction) answer*

Whether a government should be concerned about a current account deficit depends on several factors including the size of the deficit, its causes, how it is financed, and whether it is temporary or persistent. Country Z's current account deficit has nearly doubled from $21 billion in Year 1 to $39 billion in Year 2, which does warrant some concern, but whether this is a serious problem depends on the underlying reasons.

A government should be concerned about a current account deficit for several important reasons. First, a deficit means the country is spending more abroad than it is earning from abroad, which must be financed by borrowing from overseas or by selling domestic assets to foreigners. If the deficit is large and persistent, external debt will accumulate over time. This debt must eventually be repaid with interest, which places a burden on future generations and diverts resources away from domestic use. If foreign lenders lose confidence in the country's ability to repay, they may suddenly withdraw funds, causing a financial crisis as seen in several emerging markets during the 1990s Asian financial crisis. Looking at Country Z's data, the deficit has worsened significantly, driven largely by a deteriorating trade in goods deficit (from -33bn to -57