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Supply-side policies Theme 2

Where it is examined
A-level Paper 2 (and Paper 3); AS Paper 2
Level
AS and A level
Specification
Section 2.6, 1 statement
Since 2016
21 question parts: 9 essays, 5 levels-marked responses, 5 multiple-choice items

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SeriesPaperQMarksTitle
June 2025AS Paper 26(g)20Evaluate the use of market-based supply-side policies to increase UK employment.
June 2023Paper 2825UK inflation, as measured by the CPI, rose to 10.1% in the 12 months to July 2022, compared to 2.0% in the 12 months to July 2021. (Source: adapted from https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/ consumerpriceinflation/july2022) Evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation.
June 2022AS Paper 26(g)20Evaluate the supply-side policies the UK Government could use to increase the UK’s productivity.
October 2020AS Paper 26(f)20Evaluate supply-side policies that could be used to increase the UK’s rate of economic growth.
October 2020Paper 31(e)25Evaluate the microeconomic and macroeconomic impact of large infrastructure projects such as the building of a third airport in Istanbul.
October 2020Paper 32(d)25Evaluate possible microeconomic and macroeconomic policies which could be used to improve UK competitiveness.
June 2018AS Paper 26(f)20Evaluate government policies, apart from migration policies, that could be used to increase the employment rate in the UK.
June 2018Paper 32(e)25Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia.
June 2017Paper 31(d)25With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile.

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June 2025 · Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6Sources for use with SECTION B Read the following figures (1–2) and extracts (A and B) before answering Question 6. Question 6 The German economy Figure 1: German government tax revenue, % of total revenue, 2022 2%2% 4% Income taxes 6% Value added tax Petrol duty 9% Corporation tax 41% Tobacco duty Motor vehicle tax Other 36% (Source adapted from: https://www.bundesfinanzministerium.de) Figure 2: German government budget, % of GDP, 2014–2022 1.9 2 1.5 1.2 1.3 % of 1 0.6 GDP 0 –2 –2.6 –4 –3.7 –4.3 –6 2014 2016 2018 2020 2022 (Source adapted from: https://tradingeconomics.com/germany/government‑budget) Extract A The opportunities and challenges facing the German economy The German economy entered a recession in 2023, and business confidence in the country fell at the fastest pace since 2021. German growth was the lowest among major economies in 2023. The future, however, is a greater concern owing to external factors such as global conflicts and restrictions on free trade. 5 The German government has been trying to improve its economic performance, with an aim to have renewables account for 80% of its energy supply. However, this would be a major shift for Germany where fossil fuels such as coal and gas still provide 75% of the energy needs and exposes it to volatile global energy prices. The rapid building of liquid natural gas terminals has helped to secure energy supplies in the short term. 10 The German government needs to remove a number of problems that have long held back its economy. Infrastructure projects in renewable energy production, such as wind farms, have been delayed by lengthy planning procedures. Business leaders complain of excessive bureaucracy and lack of technological advances. Labour shortages are another issue. Germany is expected to be short of up to 7 million workers by 2035, partly due to 15 an ageing population. There is a lack of skilled workers in the building trade, electrical engineering and professional services, which are important for the country’s economic ambitions. The German government needs to introduce effective policies such as planning reforms to speed up construction projects or reforms to increase the flexibility of the labour market. 20 The German economy has long been one of the biggest exporters in the world. It has trade surpluses with all its major trading partners except China and in 2021 its current account surplus was 7.7% of GDP. However, this has caused tensions with the governments of other countries, in particular the USA, which sees Germany’s surplus as partly a cause of the USA’s huge current account deficit. Having said that, a weakening 25 euro caused by higher interest rates in the USA compared to the Eurozone is beginning to have an effect in reducing Germany’s current account surplus – which dropped to 4.2% in 2022. (Source adapted from: https://www.ft.com/, https://www.cnb.cz/en/monetary‑policy/inflation‑reports/boxes-and-annexes-contained-in- inflation-reports/The-German-economy-and-the-dollar-euro-exchange-rate, and https://tradingeconomics.com/germany/current-account-to-gdp) Extract B US technology firm Intel invests in German semiconductor factories Intel is to double its investment in semiconductor factories in eastern Germany to €30 billion. This is the largest foreign direct investment in Germany’s history. Intel acquired the land for the factories in November 2022 and the first factory is expected to start production within four to five years. The site is expected to create 7 000 construction 5 jobs during the building phase, about 3 000 permanent high‑tech jobs and tens of thousands of additional jobs across the semiconductor industry. (Source adapted from: https://www.ft.com)
(e) Discuss supply‑side policies the German government could use ‘to improve its economic performance’ (Extract A, line 6). (15)
June 2025 · AS Paper 2 · Q6(g) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6Sources for use with SECTION B Read Figures 1 and 2 and Extract A before answering Question 6. UK living standards and supply‑side policies Figure 1: UK rate of economic growth, 2010 to 2028 10.0 % 7.5 5.0 2.5 0 –2.5 –5.0 –7.5 –10.0 * Data from 2023 to 2028 are forecast figures (Source: adapted from https://www.statista.com/statistics/375195/gdp-growth-forecast-uk/) Figure 2: UK inflation rate* and base interest rate, January 2022 to October 2023 12 % 10 8 6 4 2 0 inflation rate base interest rate * Measured by Consumer Prices Index (CPI). This is the year-on-year inflation rate calculated monthly. (Source: adapted from www.statista.com and www.tradingeconomics.com) Extract A Economic reforms Economists forecast that the UK will experience a slower rate of economic growth between 2024 and 2028. They also expect a high rate of inflation due to rising import prices of food, fuel and energy, and a strong demand for consumer goods. As a result, real income per household is estimated to decrease by around 0.9% in 2024. 5 This decrease would be the largest reduction in living standards since the Office for National Statistics records began in the 1950s. However, the UK government argues that there are some limitations of using GDP to compare living standards over time. One main reason is the fact that GDP figures are in nominal terms. The government questions the reliability of inflation data as it 10 believes that the Monetary Policy Committee (MPC) of the Bank of England will keep a high base interest rate to control inflation. The government also claims that the forecast by economists fails to consider the market-based supply-side policies it introduced in November 2023 to improve living standards. The government’s £10.4 billion cut to National Insurance contributions for employees 15 is the most significant policy, expected to increase employment and living standards. It is forecast to bring additional people into work and encourage more people to work longer hours. This is likely to result in an extra 94 000 full-time workers. The government has also taken measures to encourage more out-of-work benefits claimants into jobs. It introduced stricter benefit rules for people who can work but 20 do not take a job offered to them. This includes stopping people’s benefits if they do not actively engage in seeking employment in six months. This is likely to result in a further increase in employment figures. But economists claim that its impact on GDP will be relatively insignificant. This is because most of those affected by this policy will take on work with limited hours and very low pay. 25 These market-based supply-side policies, combined with measures centred on childcare subsidies for working parents, are expected to increase total employment by 200 000 between 2024 and 2028. The government argues that the expected increase highlights that it is better to “unlock the potential we have at home”, rather than encouraging migration. However, several economists suggest that 30 a rise in net migration is contributing more to an increase in the UK’s potential economic growth. Furthermore, the UK government’s decision to offer 100% tax relief on investment in capital machinery will increase overall investment by 0.5% by 2028. The benefits of 35 this effective tax cut for firms are estimated to increase over time, as technology advances and productivity improves. However, this tax cut will not prevent business investment falling in the short term, as higher interest rates are making it more expensive for firms to borrow. Economists suggest that this tax cut can only be funded by decreasing government 40 expenditure on public services in the long run. Government expenditure will need to decrease by a third, as a proportion of GDP, between 2024 and 2028. (Source: adapted from https://www.ft.com/content/5ff3538b-aed2-4898-b423- f0c61da728ff)
(g) Evaluate the use of market-based supply-side policies to increase UK employment. (20)
June 2024 · Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6The UK Economy Figure 1: UK national debt, percentage of GDP, 2001–2021 100 % 90 80 70 60 50 40 30 20 10 0 (Source: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/ publicsectorfinance/bulletins/publicsectorfinances/december2021) Figure 2: UK fiscal deficit, percentage of GDP, 2001–2021 16 % 14 12 10 8 6 4 2 0 (Source: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/ publicsectorfinance/bulletins/publicsectorfinances/december2021) Figure 3: Interest rate on a 10-year UK government bond, July 2022 to March 2023 4.5 % 4.0 3.5 3.0 2.5 2.0 1.5 0 Sep 22 Jul 22 Aug 22 Oct 22 Nov 22 Dec 22 Jan 23 Feb 23 Mar 23 (Source: https://www.ft.com/content/ece962c3-b7e5-48c6-a0b1-06f9823a4853# post-ad2ac225-0543-49e7-9ed5-af9907e83697) Figure 4: Income tax rates for 2023–24, compared to 2022–23 2022–23 2023–24 Tax band Income threshold Tax rate Income threshold Tax rate Personal Up to £12 570 0% Up to £12 570 0% allowance 20% 20% Basic rate £12 571–£50 270 £12 571–£50 270 Higher rate £50 271–£150 000 40% £50 271–£125 140 40% Additional rate Over £150 000 45% Over £125 140 45% (Source: Gov.uk) Extract A Freeze in income tax thresholds from 2023 onwards The freeze on the personal allowance, and the basic and higher-rate income tax bands in England, Wales and Northern Ireland will be extended to April 2028. While this freeze may not look like a tax rise on the face of it, having thresholds that fail to rise in line with salaries, people will still end up paying more tax on their income – particularly if they end 5 up in a higher tax band as a result. The biggest change announced in the Autumn Statement 2022 was the reduction of the additional-rate income tax threshold, dropping from £150 000 to £125 140 from 6 April 2023. It is estimated around 250 000 taxpayers will be pushed into the additional rate tax band, paying 45% tax on any income above the new limit. 10 The Chancellor said lowering the additional rate threshold means that a person earning £150 000 will pay an extra £1 200 income tax per year. (Source adapted from: https://www.which.co.uk/news/article/6- tax-changes-to-watch-out-for-in-2023) Extract B UK Monetary Policy Decisions At a special meeting on 19th March 2020, the monetary policy committee of the Bank of England announced further measures to help support the UK economy during the global health crisis. It voted to reduce the base rate of interest to 0.1% and restart the quantitative easing programme by buying £200 billion of UK government bonds and 5 corporate bonds. This followed a number of announcements by the UK government to try and limit the damage of the deep recession the country was facing and reduce the chances of deflation occurring in the UK. Government borrowing grew massively during 2020 and 2021 to fund support for businesses and workers. However, since then the monetary policy committee has rapidly increased the base 10 rate of interest – which reached 4% in February 2023. The UK government’s long-term borrowing costs are higher today than they were before former prime minister Liz Truss’s £45 billion proposed tax cuts caused the interest rate on 30-year government bonds to briefly rise above 5%, which almost caused a financial crisis. The Bank’s use of quantitative easing (QE) has also come in for criticism, with former 15 governor of the Bank of England Mervyn King saying that the decision to keep pumping money into the economy during the global health crisis was a mistake that fuelled inflation. He said: ‘central banks decided it was a good time to print a lot of money. That was a mistake [as] we had too much money chasing too few goods’. Experts have argued this pushed inflation higher in the UK by stimulating aggregate 20 demand. However, critics say QE does not cause inflation as most of the extra money is contained in the financial system and does not affect consumption and investment. Higher interest rates on the national debt may limit the ability of the UK government to increase spending on supply-side policies needed to boost economic growth, such as a £20 billion plan to transform carbon capture in the UK, which would create jobs and 25 support a move to cleaner electricity generation and technology. (Source: adapted from: https://www.bankofengland.co.uk/monetary-policy-summary-and- minutes/2020/monetary-policy-summary-for-the-special-monetary-policy-committee- meeting-on-19-march-2020 and https://www.ft.com)
(e) Discuss supply-side policies the UK government could introduce to stimulate economic growth. (15)
June 2023 · AS Paper 2 · Q1(a) 3 marks AO1=1, AO2=1, AO3=1 Short answer
Data and extracts for question 11 Between 2019 and 2020 the UK Government increased its expenditure on healthcare from £175.1 billion to £219.9 billion.
(a) Explain one likely impact of this interventionist supply-side policy on aggregate supply in the UK. (3)
June 2023 · AS Paper 2 · Q1(b) 1 mark Multiple choice
Data and extracts for question 11 Between 2019 and 2020 the UK Government increased its expenditure on healthcare from £175.1 billion to £219.9 billion.
(b) Which one of the following is also an example of an interventionist supply-side policy? (1) A A decrease in the level of unemployment benefits B A decrease in the regulation of product markets C An increase in the provision of training programmes D An increase in the rate of corporation tax
June 2023 · Paper 2 · Q8 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
8 UK inflation, as measured by the CPI, rose to 10.1% in the 12 months to July 2022, compared to 2.0% in the 12 months to July 2021. (Source: adapted from https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/ consumerpriceinflation/july2022) Evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation.
June 2022 · Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6UK Government spending and inequality Figure 1: UK regional gross disposable household income per capita, 2018 £ per capita 19 000 to 21 000 17 000 to 18 999 16 000 to 16 999 15 000 to 15 999 14 500 to 14 999 14 000 to 14 499 13 000 to 13 999 North East South East (Source: adapted from University of Sheffield/Office for National Statistics: https://www.sheffield.ac.uk/news/nr/uk-higher-regional-inequality-large-wealthy-country-1.862262) Figure 2: UK subjective happiness by income, April 2021 Answer to the question: ‘On a scale of 1–10, how happy did you feel after yesterday?' (0 = not at all, 10 = completely) Less than £10 000 £10 000–£20 000 £20 000–£40 000 More than £40 000 7.31 7.02 7.13 7.29 (Source: adapted from https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/ datasets/incomegroupsplitestimatesonpersonalandeconomicwellbeingacrosstime) Extract A Regional inequality in the UK Geographically, the UK is highly unequal in incomes. According to research from the University of Sheffield, the estimate of the Gini coefficient is 0.34. There are a number of different reasons for this. First, labour in poor places tend to develop too few skills, with a lack of education holding people back. In Rotherham in the north of England, for 5 example, 21% of disadvantaged 18-year-olds from state schools and colleges go on to higher education compared to 41% in London. Secondly, there is a lack of infrastructure spending in northern cities compared to London. In 2017–18, 28% of public expenditure on transport – and 46% of capital expenditure on railways – was spent in London. The argument for this is that London gets a lot of public money because a lot of people take 10 public transport. This has angered many people in the North. These problems cannot be solved quickly. They compound each other. Just as people are rarely poor for one reason, regions do not fall behind only because they have poor transport, poor schools or poor policy making, but for all those reasons and more. Ideally, the UK would develop a bold plan for regional development that could be followed 15 by future governments, as Germany did for its eastern part. Tera Allas of McKinsey, a consultancy firm, argues that improving education is crucial, even if the returns are not immediately obvious. It is easier to improve schools than to persuade businesses to move to a poorer part of the country. (Source: adapted from https://www.economist.com/britain/2020/07/30/ why-britain-is-more-geographically-unequal-than-any-other-rich-country) Extract B Public sector spending on infrastructure Economic differences across the UK are large and have grown. The government is looking at reducing this inequality partly through spending on transport infrastructure. Public sector capital spending is due to rise from just over 2% of GDP to 3%. That amounts to around £20 billion of additional spending per year on new capital projects. The 5 government is looking to take advantage of current low interest rates to finance the expansion without worsening its fiscal position. The government is determined to focus this spending on the north of England, Wales and the Midlands. Planned schemes include a new Trafford Park tram line in Manchester and reopening train lines and stations closed back in the 1960s, including stations in 10 Haxby in Yorkshire and Blyth in Northumberland. Progress has already been made in Wales with the reopening of Bow Street station near Aberystwyth. This project has taken 11 years to become a reality and cost £8m. It is estimated that it will generate a boost to the economy of £24m through boosting local trade, creating new jobs in the local area, and easing pressure on congested roads heading into Aberystwyth. 15 (Source: adapted from https://www.economist.com/britain/2020/01/09/the-coming- splurge-on-northern-infrastructure and https://www.wales247.co.uk/transport-for-wales- delivers-new-bow-street-station) Extract C Options for UK tax rises in the future There are a number of options for raising additional tax revenue in the future. These include: • increasing council tax on houses: this annual charge paid to local government is currently based on estimated house prices in 1991 and so is very out of date. This 5 would negatively affect areas where house prices have risen the most since 1991 • a one-off wealth tax: a 5% tax on property and pension wealth of more than £500 000 would raise £260 billion to help pay for the global health crisis in five years, according to proposals from the Wealth Commission • increasing corporation tax: at the 2021 Budget the Chancellor announced that 10 the top rate of UK corporation tax would be increased to 25% by 2023. This will remain the lowest rate in the G7 group of the world's largest advanced countries, but will raise £17.2 billion in 2025–26. (Source: adapted from https://www.telegraph.co.uk/tax/income-tax/five-tax-rises-rishi- sunak-considering-chances-happening-budget/, and https://home.kpmg/uk/en/home/ insights/2021/03/tmd-corporation-tax-rate-to-increase-to-25-percent.html)
(e) With reference to Extract B, discuss the benefits of an increase in infrastructure spending on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer. (15)
June 2022 · AS Paper 2 · Q6(g) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or Hard
Data and extracts for question 6UK investment and productivity Figure 1: UK investment, annual percentage change, 2014 to 2019 10 % 8 6 4 2 0 -2 -4 2014 2015 2016 2017 2018 2019 (Source adapted from: https://www.ft.com/content/5e12351e-baaf-11e9-96bd-8e884d3ea203) Figure 2: UK labour productivity, annual percentage change, 2014 to 2019 2 % 1 0 -1 -2 2014 2015 2016 2017 2018 2019 (Source adapted from: https://www.theguardian.com/business/2019/oct/08/uk-productivity- brexit-boris-johnson-labour) Extract A Another recession? For the first time in nearly seven years, the UK economy contracted by 0.2% in the second quarter of 2019. This was as a result of a significantly weaker than expected performance in almost every part of the UK economy. Business investment has been weak across the world, but it is particularly low in the UK. 5 Firms are reluctant to commit to capital spending while there is economic uncertainty. Growth in investment, in areas such as transport and machinery, has slowed. Global trade tensions are also affecting investment decisions. Labour productivity decreased by 0.5% in the second quarter of 2019, the worst performance since mid-2014. Declining productivity is a concern especially as it 10 comes at a time when the unemployment rate has been one of the lowest. The rate of unemployment decreased from 6% in July 2014 to 3.8% in July 2019. The UK’s economic growth has been held back by low investment and productivity since the Global Financial Crisis of 2008. Moreover, the uncertainty over the UK’s future trade relationship with the EU has discouraged companies from investing in productivity- 15 boosting technology. This has decreased the prospects for increases in workers’ pay. Without business investment and improvements in productivity, short-term growth in real GDP is likely to slow further and reduce living standards. However, the UK Government expects the UK economy to perform better than Germany and Italy. These export-focused countries are highly exposed to the slowdown in world 20 trade and the fall in average global incomes. The UK economy is seeing continued strength in consumer spending. Consumption will support growth, provided there is no sudden shock to the UK labour market. Household incomes are strong, primarily due to high employment. Government expenditure has also been rising since the end of 2018. The UK Government has promised more money 25 for schools and infrastructure improvements. Despite this, some economists believe that the UK economy is likely to experience another recession. They claim that low income households cannot cope with a new downturn. The overall picture for the UK economy does not look promising because most businesses are reluctant to invest, productivity is low and economic growth relies on 30 continued consumption. (Source adapted from: ‘On the brink: Britain’s economy braced for Brexit shock’, FT, https:// www.ft.com/ content/40c604d2-c01c-11e9-89e2-41e555e96722; ‘Recession threat hangs over UK economy ahead of Brexit, FT, https://www.ft.com/content/5e12351e-baaf- 11e9-96bd-8e884d3ea203; ‘UK productivity falls at fastest pace in five years as Brexit dents investment, The Guardian, https://www.theguardian.com/ business/2019/oct/08/ uk-productivity-brexit-boris-johnson-labour)
(g) Evaluate the supply-side policies the UK Government could use to increase the UK’s productivity. (20)
October 2020 · AS Paper 2 · Q2(c) 1 mark Multiple choice
(c) Which one of the following is an example of a market-based supply-side policy? (1) A A reduction in unemployment benefits B Construction of new transportation links C Government-funded apprenticeship schemes D Increased government spending on healthcare
October 2020 · AS Paper 2 · Q6(f) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6UK government budget and household consumption Figure 1: UK government spending and tax revenue as % of GDP, 1980–2018 50 45 40 35 30 25 0 1980 2018 1990 2000 2010 Government spending Government tax revenue (Source: adapted from Office for Budget Responsibility (OBR), http://cdn.obr.uk/EFO- MaRch_2018.pdf © Crown copyright 2018) Figure 2: UK real household consumption, quarterly, £ billions, 1997 to 2018 (Source: adapted from ONS, www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/ bulletins/consumertrends/apriltojune2018) Extract A UK household consumption Despite the slow growth in real household disposable incomes, consumer spending rose in 2017. Annual spending per person increased by £589, when compared with 2016. This may have reflected UK households’ delay in adjusting to the increase in inflation that was associated with the fall in the exchange rate of the British pound. The increase 5 in consumption has also been driven by low interest rates. In 2017 UK house prices increased by an average of 5.1%. UK consumers have financed most of their spending by borrowing on credit cards in order to maintain their living standards. In 2017 borrowing on credit cards rose by 9.6%, the second-highest level since before the financial crisis. This has increased the Bank of 10 England’s concerns about the sustainability of borrowing, given the slow growth in real incomes. The Bank has also indicated that the base interest rate was likely to rise faster than previously expected. More expensive credit could therefore constrain the ability of households to spend. (Source: adapted from ‘Consumer Trends UK’, ONS, https://www.ons.gov.uk/economy/ nationalaccounts/ satelliteaccounts/bulletins/consumertrends/octobertodecember2017 and © Crown copyright 2018) Extract B Reduction of the UK’s budget deficit Since 2010 many economists have believed that the biggest problem facing the government was the rising budget deficit. In late 2017, the UK’s Chancellor of the Exchequer announced that the government would continue with its plans to decrease its budget deficit. To address this issue, the government further reduced welfare payments 5 and introduced extra spending cuts in the public sector. The UK government had estimated that the fall in UK productivity since the financial crisis was only temporary. However, it has now accepted that this fall in the level of productivity is a long-term issue. Subsequently, the UK’s forecast long-term trend rate of growth was reduced. Slower growth means lower tax receipts, higher spending and a 10 bigger budget deficit. Some economists have suggested that the government should not pursue additional reductions in the budget deficit. They have also claimed that the responsibility of the government is not to balance the budget but to balance the economy by moving it to full employment. 15 (Source: adapted from ‘Philip Hammond must ditch deficit reduction and invest. But will he?’, The Guardian, https:// www.theguardian.com/politics/2017/nov/19/philip-hammond-must-ditch-deficit- reduction-and-invest-but-will-he’)
(f) Evaluate supply-side policies that could be used to increase the UK’s rate of economic growth. (20)
October 2020 · Paper 3 · Q1(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1Turkey – an emerging economy Figure 1: Turkey’s central bank lending rate, percent, 2013–2018 25 20 15 % 10 5 0 2014 2015 2016 2017 2018 Figure 2: Selected emerging economy exchange rates, percentage change against the US dollar: January 2018 compared to January 2016. Russian rouble South African rand Polish zloty Hong Kong dollar Chinese renminbi Indian rupee Turkish lira Argentine peso -60 -40 -20 0 20 Percentage changes (Source adapted from: FT.com) Extract A Can Turkey’s central bank avoid another rate rise? At an annual rate of 25%, Turkey’s inflation is alarming. However, it may have peaked. This may be a turning point for the economically struggling country, whose currency (the Turkish lira) has lost nearly a third of its value against the US dollar in 2018. The central bank may be able to avoid tightening monetary policy further, as a severe economic 5 adjustment is already well under way. Turkey is highly indebted in foreign currency. The Turkish government takes measures against excessive appreciation or depreciation of the Turkish lira to reduce financial stability risks. The financial market faces difficulties in trying to restore foreign investors’ confidence. Consumer prices increased by 2.7% in October 2018, a much lower rate than the 6.3% 10 recorded in September 2018. The lira has stabilised, having risen 16% since the central bank raised interest rates by 6.25 percentage points. However, the government wants lower borrowing costs to fuel credit growth and economic expansion. Timothy Ash at a London investment bank says at this point it’s “illogical” to raise interest rates again in Turkey. That’s because Turkey’s economy is already experiencing a severe slowdown. 15 In the long term Turkey’s economic growth is expected to be above that of other emerging markets such as Brazil, Russia and China. Turkey’s private sector is resilient. Between 2018–50 we expect Turkey to grow by an annual average of 3.1%. Brazil is expected to grow by an annual average of 2.1%, Russia by 1.6% and China by 2.8%. GDP growth will nevertheless be well below that recorded in 2004–07 and 2010–15. Average 20 growth in GDP per head will be substantially lower, mainly reflecting the expected rise in the total population. (Source adapted from: https://ftalphaville.ft.com/2018/11/06/1541508141000/Can‑Turkey‑s-central‑bank- avoid‑another‑rate‑hike‑/. 6 Nov 2018 Colby Smith and one sentence The president wants lower borrowing costs to fuel credit growth and economic expansion from https://www.theguardian.com/world/2018/aug/07/turkey‑urged‑to‑announce-emergency-interest‑rate‑hike Larry Elliott 7/8/18 and http://country.eiu.com/article.aspx?articleid=157174199&Country=Turkey&topic=Economy&subtopic= Long-term+outlook&subsubtopic=Summary) Extract B Turkey aims to bin the plastic bag You get a free plastic bag whenever you go to a shop, even if it is just to buy a loaf of bread or a chocolate bar. In Turkey, plastic bags are everywhere, with millions being thrown away, and their use is causing a growing environmental problem. In Istanbul, the country’s biggest city with about 12 million people, around 10 000 tonnes 5 of waste are being collected every day. Plastic bags and other plastic waste make up 950 tonnes, or almost 10%, of the total waste. The Turkish government said it was looking at ways to discourage the consumption of single‑use plastic bags. One possible step currently under review is a ban of the black bags that are said to contain carcinogens. Another is that the state may raise taxes 10 on plastic products, which could lead to supermarkets charging consumers for the bags. In Corlu, a town north‑west of Istanbul, a local environmental group distributed 20 000 canvas bags to shoppers in one month. In some parts of Turkey, plastic bags are completely banned, with heavy fines for both firms and consumers who use them. (Source adapted from: tseibert@thenational.ae https://www.thenational.ae/world/europe/turkey‑aims‑to‑bin‑the‑plastic‑bag‑1.530059 accessed 11/11/18) Extract C Istanbul’s third airport set to be the busiest in the world Istanbul’s third airport is being constructed over an area of 76.5 million square metres, to the north of Istanbul. When complete, the new airport will have six runways and have an annual passenger capacity of up to 200 million people, making it potentially the world’s busiest airport. “This airport is going to be the most important hub between Asia and 5 Europe,” said one business leader. The airport design includes high vaulted ceilings and spacious, modern and efficient design – and its tulip‑shaped air traffic control tower won the 2016 International Architecture Award. It uses mobile applications and artificial intelligence for customers, is energy efficient and has a high‑tech security system. The site employs 36 000 people and 10 is estimated to cost the equivalent of £10 billion. However, the rush to meet the deadline set by the Turkish government is a major cause of accidents on the construction site, according to the construction workers’ union. (Source adapted from: https://www.lonelyplanet.com/news/2018/08/08/istanbuls‑huge‑new‑airport/ and https://www.voanews.com/a/istanbul‑to‑unveil‑new‑airport‑seeks‑to‑be‑world‑s‑biggest/4632308.html)
(e) Evaluate the microeconomic and macroeconomic impact of large infrastructure projects such as the building of a third airport in Istanbul. (25)
October 2020 · Paper 3 · Q2(d) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 2The UK economy Figure 3: GDP per hour worked, nominal values at PPPs, percentage above or below UK level, 2018 Japan Italy US France Germany -10 0 10 20 30 40 Percentages (Source adapted from: ONS.gov.uk) Figure 4: UK index of output per hour worked, base year 2016 = 100 130 120 110 100 Index 90 80 70 60 50 2000 2005 2010 2015 2018 Key Productivity if pre-crisis trend had continued Actual UK productivity (Source adapted from: ONS.gov.uk) Figure 5: Proportion of adults with low literacy and/or numeracy skills, by age, selected countries Aged 16-24 Aged 55-65 Italy US England Spain N. Ireland France Canada Germany Japan S Korea 0 10 20 30 40 50 60 (Source adapted from: OECD.org) (Figures 3, 4 and 5 Source: FT.com 2016 data published https://www.ft.com/content/6ada0002‑9a57‑11e8‑9702‑5946bae86e6d 2018) Extract D The end of the High Street? Homebase, the UK’s second‑largest do‑it‑yourself (DIY) retailer, made £20–40 million a year profit up to 2016. The Australian conglomerate Wesfarmers bought Homebase for £340 million in 2016, and began to rebrand 24 stores under its own name. It scaled back on curtain, cushion and other homeware sales in favour of power tools and building materials. 5 In 2018 Wesfarmers sold the DIY chain for £1, in the face of “extremely challenging” market conditions and excess store space. The chain was bought by restructuring specialist Hilco, which had also rescued the music chain HMV in 2013, and the stores have gone back to using the Homebase name. Over 70% of Homebase stores are currently losing money and the new owner wants to exit loss‑making stores and agree to rent reductions, as sales 10 fell 10% in 2018. Homebase has gone back to popular products and brands dropped by its previous owner Wesfarmers. The closures will add to the mounting job losses on Britain’s high streets. About 25 000 jobs have gone in the first seven months of 2018, according to analysis by an economics thinktank. A further 8 300 jobs are under threat at suppliers, with the multiplier effect 15 meaning that GDP is £1.5 billion less than projected. Several Marks & Spencer clothing stores closed their doors for the last time as the high‑street chain pushes ahead with a transformation plan. It plans to close 100 stores by 2022. Toys R Us, Poundworld and Maplin have shut down completely, while New Look, Mothercare and Carpetright have plans to close hundreds of stores as losses rise sharply. 20 Increasing rents and higher business rates have occurred at the same time as falling consumer confidence. Meanwhile, House of Fraser employees and pensioners are nervously awaiting more details about their future. The £90 million rescue deal by Sports Direct, the sportswear chain controlled by Mike Ashley, will protect 16 000 jobs for the time being. (Source adapted from: https://www.ft.com/content/00d0bb9e‑a6ee‑11e8‑8ecf‑a7ae1beff35b 24 August 2018 and https://www.theguardian.com/business/2018/aug/13/homebase‑close‑80‑stores‑high‑street‑job‑losses‑mount Patrick Collinson 13 Aug 2018)
(d) Evaluate possible microeconomic and macroeconomic policies which could be used to improve UK competitiveness. (25)
June 2019 · AS Paper 2 · Q3(b) 1 mark Multiple choice
Data and extracts for question 33 UK unemployment rate as a % of all those economically active, seasonally adjusted, from 2008 to 2018 9 8 7 % unemployed 6 5 4 0 2008 2010 2012 2014 2016 2018 (Source: adapted from https://www.ons.gov.uk/employmentandlabourmarket/ peoplenotinwork/ unemployment/timeseries/mgsx Crown Copyright)
(b) Which one of the following policies is most likely to reduce the unemployment rate in the UK? (1) A A decrease in direct taxes on company profits B A decrease in quantitative easing C An increase in government payments to the unemployed D An increase in the UK base interest rate
June 2019 · Paper 2 · Q4(a) 1 mark Multiple choice
Data and extracts for question 44 The UK Government is planning to cut the rate of corporation tax on all pre-tax profits of companies to 17% by 2020. (Source: adapted from https://www.ft.com/content/ 7579f124-5742-11e7-9fed-c19e2700005f)
(a) This would be an example of: (1) A a contractionary monetary policy B an exchange rate policy C an expansionary monetary policy D a supply-side policy
June 2019 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 The diagram below shows the aggregate demand (AD) and a possible long-run aggregate supply (LRAS) for the UK. Price LRAS level AD 0 Real output
(b) Annotate the diagram above to show the likely impact of government policy to promote business competition on the equilibrium level of real output and price level. (2)
June 2019 · AS Paper 2 · Q4(c) 1 mark Multiple choice
Data and extracts for question 44 The diagram below shows the aggregate demand (AD) and a possible long-run aggregate supply (LRAS) for the UK. Price LRAS level AD 0 Real output
(c) Which one of the following is an interventionist supply-side policy? (1) A An improvement in infrastructure B An increase in indirect taxation C An increase in interest rates D An increase in the regulation of markets
June 2018 · AS Paper 2 · Q6(f) 20 marks AO1=4, AO2=4, AO3=6, AO4=6 20-mark essay Either/or
Data and extracts for question 6The UK economy Figure 1: Unemployment – International Labour Organisation (ILO) and the claimant count, millions, 2010-2016 3 2.5 2 Millions 1.5 1 0.5 0 2010 2011 2012 2013 2014 2015 2016 ILO Claimant count (Source: ONS Datasets, https://www.ons.gov.uk/) Figure 2: Household savings*, 2010-2015 12 % 10 8 6 4 2 0 2011 2012 2013 2014 2015 2010 * Savings as a percentage of household disposable income (Source: http://www.tradingeconomics.com/united-kingdom/personal-savings) Figure 3: UK average house prices, 2005–2016 220 200 180 160 140 0 2006 2008 2010 2012 2014 2016 (Source: http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/) Extract A Soaring house prices House prices are still rising rapidly. The average UK house price was £214 000 in June 2016, according to the Office for National Statistics (ONS). This is £24 000 more than it was at its peak in September 2007, just before the economic downturn. First-time buyers have experienced the largest rise in house prices. 5 Even the loss of consumer confidence over Britain’s vote to leave the EU did not stop house prices from rising – annual growth increased from 5.2% in July 2016 to 5.6% in August 2016. House price growth was the strongest in London, with annual average prices rising by 9.6%. However, in Wales average house prices actually fell by 0.5% during the same period. In its first post-Brexit referendum forecast, estate agency Countrywide 10 said that house prices will fall by 1% across the UK in 2017, before rising by 2% in 2018. Real household income in the UK fell by 10.4% in the years following the financial crisis. This increased the difference between real income and house prices. In 1997, a house cost little more than twice the average income. By early 2015, the average price of a house was five times the average annual income. 15 The rate of home ownership for 25 to 34-year-olds has fallen to 35.8% over the last twenty-five years as houses became less affordable. First-time buyers have to wait longer to save up for a house deposit. Conversely, home ownership has risen to 78.6% among those aged 65 to 74. (Source: adapted from ‘The state of the UK housing market in five charts’, The Telegraph, http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/; ‘UK house price growth slows as demand cools after Brexit vote’, The Guardian, https://www.theguardian.com/business/2016/sep/30/uk-house- price-growth-slows-demand-cools-brexit-vote-nationwide) Extract B UK migration trends in the year ending June 2016 Inward migration levels are among the highest ever recorded with an estimated 650 000 people moving to the UK. This is an increase of around 11 000 from the previous year. Employment remains the most common reason for long-term migration (312 000) to the UK, with around 182 000 of these coming with a definite job and 130 000 looking for 5 work. Long-term migration to the UK for study was estimated to be 163 000. In addition, 80 000 long-term migrants arrived in the UK to accompany their families. There were 41 280 refugees applying for asylum, including dependants, of which 10 547 people were granted asylum. Asylum applicants cannot usually accept offers of employment while 10 their case is being processed. (Source: adapted from ‘Migration Statistics Quarterly Report: December 2016’, ONS, https:// www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/ internationalmigration/bulletins/migrationstatisticsquarterlyreport/dec2016)
(f) Evaluate government policies, apart from migration policies, that could be used to increase the employment rate in the UK. (20)
June 2018 · Paper 3 · Q2(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 2Indonesia Figure 4: World coal prices, 2006–2016, US dollars per tonne 250 200 150 $ per tonne 100 50 0 2006 08 10 12 14 16 (Source: http://www.economist.com/news/world-week/21697025-business-week) Figure 5: Indonesia’s real GDP, annual percentage change 10 5 + % 0 change – in GDP 5 10 15 2006 08 10 12 14 16 (Source: http://www.economist.com/news/world-week/21697025-business-week) Extract D Indonesia’s economic outlook The Indonesian economy is expected to grow by an average of 4.8% a year between 2017 and 2021. Joko Widodo, president of Indonesia since 2014, is increasingly confident in his role and now has enough political support to pass some of his desired supply-side reforms. His government has been aggressively trying to improve the business and investment 5 environment by easing regulations and offering tax incentives, for example to firms investing in special economic zones. Indonesia receives US$2.3 billion a year in overseas development aid, which is mainly spent on education and healthcare. There is also ongoing aid from international institutions and non-government organisations paying for restructuring after the 2004 10 Indian Ocean earthquake and tsunami, which led to the loss of over 170 000 lives and much damage to economic livelihood. Aid agencies have supported the Indonesian government in providing healthcare free at the point of access for 88 million of the poorest people, free schooling for 12 years for each child, and tertiary education for students accepted into university. There is a scheme to provide each of Indonesia’s 15 15.5 million poorest households with a cash transfer of 200 000 rupiah (US$14.37) a month. The World Bank has approved US$800 million in infrastructure loans to Indonesia, with another US$950 million as conditional loans. The Asian Development Bank has committed itself to lending US$2 billion. In December Japan’s development agency lent Indonesia US$535 million to construct two power stations. 20 (Sources: adapted from http://country.eiu.com/Indonesia and http://www.economist.com/ news/special-report/21693404-after-decades-underinvestment- infrastructure-spending-picking-up-last) Extract E Indonesia’s economic policies as commodity prices collapse Indonesia is the world’s fourth largest exporter of coal and the raw material accounts for 11% of its exports. Its other main exports are crude oil, palm oil, rubber and tin. Its main commodity exports tripled in value between 2000 and 2010, and as exports boomed, so did the economy. But the value of commodity exports has fallen by more than half from 5 its peak. Coal now sells for just US$50 per tonne, against US$125 in 2011. In the decade to 2014, Indonesia’s real GDP grew by an annual average of 6%, but the collapse in commodity prices has slowed the economy. In 2015 growth was 4.8%, the slowest rate since 2009. But compared with many other commodity exporters, Indonesia is getting off lightly. 10 The value of the rupiah, Indonesia’s currency, against the US dollar has fallen by 30% since 2013, but has since stabilised. Other emerging market currencies have depreciated even more steeply over that period. Despite the weak exchange rate, Indonesia’s inflation rate has mostly remained within the central bank’s target range of 3-5%. The main impact of the rupiah’s fall has been to curb imports, helping limit Indonesia’s current account 15 deficit to around 2% of GDP despite weaker export earnings. A cautious fiscal policy during the boom years has allowed for a modest fiscal expansion to offset the effects of weak exports and investment. The national debt is just 26% of GDP. Mr Widodo knows that Indonesia cannot raise its long-term growth rate if the economy remains reliant on coal. It needs a broader range of manufacturing and service industries. 20 If new enterprise is to flourish, Indonesia must support local entrepreneurship. The labour market is inflexible. To start a business takes an average of 47 days, compared with four in Malaysia and two in Singapore. The President’s supply-side policies are improving the business climate. The average number of days needed to approve a new power plant has declined from 900 to 200. The government recently revised its “negative investment 25 list” of sectors in which foreign ownership is banned or restricted, fully opening up the rubber, film and restaurant sectors, among others. In 2015 he launched a series of measures to try to reduce government failure, including easing some regulations, streamlining licensing procedures for firms on industrial estates and providing tax incentives to invest in special economic zones. 30 The government has used savings from cutting fuel subsidies, worth over 4% of GDP, to fund extra capital spending. But the budget deficit still widened to 2.8% of GDP, very close to the legal limit of 3%. If public expenditure is to increase further, the government will need to raise more revenue. That will not be easy. Most workers and employers pay little or no tax. Only 27 million of Indonesia’s 255 million people are registered taxpayers, 35 and in 2014 just 900 000 of them paid what they owed, leaving it with a tax revenue to GDP ratio of around 10%. Big companies say that they are being squeezed harder by the tax authorities because they are an easier target. Infrastructure spending will help bring foreign investment and good jobs to Indonesia as well as encouraging exports. Indonesia’s infrastructure problem can be summed up 40 as too few roads and congested ports. In the short term, infrastructure spending puts people to work and boosts demand for raw materials. In the longer term this spending offers the chance to make up for decades of neglect and underinvestment. Indonesia has plans for 65 dams, 16 of which are already under construction. In 2015 work started on the Keureuto Dam, designed to boost agricultural productivity in Aceh. Recently fields 45 were flooded for the massive Jatigede Dam in West Java, after 20 years of delays. Once complete, the dam will irrigate 90 000 hectares of rice paddy, increasing efficiency by giving farmers two harvests a year instead of one. (Sources: adapted from http://www.economist.com/news/special-report/21693405- secure-growth-it-needs-indonesia-must-resist-its-protectionist-urges-roll- out and http://www.economist.com/news/special-report/21693404-after- decades-underinvestment-infrastructure-spending-picking-up-last)
(e) Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia. (25)
June 2017 · AS Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6UK economic recovery Figure 1: Components of aggregate demand in selected countries 2014 Government Exports - Country Consumption Investment spending Imports UK 66% 14% 21% –2% Germany 57% 17% 19% 6% France 57% 20% 25% –2% China 34% 49% 14% 3% NB: Figures may not add up to 100% due to rounding calculations. (Source: World Bank 2014) Figure 2: Nominal GDP per capita at Purchasing Power Parities (PPPs) (the base year 2000=100) 150 140 130 120 110 100 90 0 2000 2002 2004 2006 2008 2010 2012 2014 France Germany United Kingdom (Source: https://www.imf.org) Extract A The UK economy – a strange recovery At the Autumn Statement in November 2015, the Chancellor of the Exchequer had good reason to cheer his economic record. The UK economy appeared to have returned towards its long-term trend in the rate of economic growth. GDP growth has remained strong, with output rising at the highest rate in the G7 group of seven major industrialised countries. Unemployment continued to drop and business 5 investment grew by 5%. However, a number of concerns remain, particularly in relation to the UK’s current account deficit, which reached a record high of 6% of GDP in the third quarter of 2014. This was primarily a result of a sharp decline in the rate of return on UK investments overseas. Low export growth meant that the UK’s trade deficit persisted. 10 In 2012, the Chancellor had announced a target for the UK to export £1 trillion of goods and services by 2020, which would require an annual growth rate of 8%. However, the annual growth in UK exports had reached just 2.7%. The Office for Budget Responsibility (OBR) forecast that UK exports will only reach £630 billion by 2020 – a third lower than the government’s target. 15 Exports in services continued to grow in 2015, but the UK’s goods industries were struggling. It was particularly concerning that data showed output in the UK’s construction and manufacturing industries falling. Indeed, the output of the manufacturing sector remained 6.3% below its pre-recession peak. Households, meanwhile, are set to become even more indebted over the coming years. 20 It is projected that the household gross debt to income ratio will rise by 26 percentage points between 2015 to 2020, returning to levels last seen before the Global Financial Crisis. The economy did not appear to be rebalancing away from consumer driven growth towards export-led growth, making another recession almost inevitable. Fundamental to this problem is the UK’s low productivity, which in 2015 remains 25 around 20 percentage points below the average for the rest of the G7. It is vital that the government tackles this problem, particularly in the sectors that are currently facing difficulties. This will require relaxing the planning system to promote more house-building, the removal of burdens on UK manufacturers such as carbon taxes, finally getting shale gas exploration going, and reforming apprenticeships to rapidly 30 improve skills in construction, manufacturing and technology. (Source: adapted from http://www.cityam.com/229481/chancellor-beware- uk-not-out-woods-yet, 25 November 2015 by Daniel Mahoney)
(e) Evaluate policies the government could use to increase the UK’s productivity. (15)
June 2017 · Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) 1.00 0.95 0.90 price of 0.85 one euro in pounds 0.80 0.75 0.70 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Year (Source: https://www.ecb.europa.eu/stats/exchange/eurofxref/html/ eurofxref-graph-gbp.en.html#) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (CPI) 3.25 3 2.75 2.5 2.25 Annual 2 percentage change 1.75 in prices 1.5 1.25 1 0.75 0.5 0.25 0 2011 2012 2013 2014 2015 Year (Source: adapted from http://www.imf.org/external/pubs/ft/weo/ 2015/02/weodata/download.aspx) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated. The ECB cut its base interest rate by 0.1% to minus 0.3% in order to encourage private 5 banks to lend funds to companies and households rather than deposit them at the central bank. The central bank agreed to extend its €60 billion (£45 billion) monthly bond-buying quantitative easing (QE) programme for a further six months. The ECB’s €1.1 trillion QE scheme had originally been due to end in September 2016. “We are doing more because it works,” Mr Draghi said. Yet the ECB did not increase the 10 size of its monthly asset purchases and also disappointed those expecting that it would cut interest rates more aggressively. The euro rose almost 3% against the dollar to $1.08 after the announcement. Italian and Spanish bond yields both jumped by 0.27% to 1.62% and 1.72% respectively. The ECB’s economists reduced their inflation forecasts for the next two years. They now 15 predict consumer prices in the Eurozone rising by just 1% in 2016 and 1.6% in 2017 – still below the central bank’s ceiling of 2%. In November 2015, the inflation rate was just 0.1% and core inflation, excluding volatile items such as fuel and food, dropped to 0.9%. Mr Draghi stressed again that monetary policy alone could not restore the Eurozone to economic health. He called for looser fiscal policy among member states to support 20 aggregate demand and more rapid implementation of supply-side reforms. “In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively,” he said. (Source: http://www.independent.co.uk/news/business/news/ecb-disappoints-traders -with-weaker-than-expected-stimulus-a6759786.html, 4th December 2015)
(e) Discuss ‘looser fiscal policy’ and ‘supply-side reforms’ (Extract A, lines 20 and 21) that may be used by governments of Eurozone countries to increase economic growth. (15)
June 2017 · Paper 3 · Q1(d) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1Chile Figure 1: Copper prices, US dollars per tonne, 2007–2015 10000 US dollars per tonne 5000 0 2007 2008 2009 2010 2011 2012 2014 2015 2013 (Source: adapted from http://www.indexmundi.com/commodities/ ?commodity=copper&months=120) Figure 2: US dollar per 100 Chile pesos exchange rate, 2007–2015 0.24 0.22 Price of 100 Chile 0.20 pesos in 0.18 US dollars 0.16 0.14 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Source: https://www.google.co.uk/finance?q=CLPUSD&ei=OGEvVun-AouIU6awjugF) Figure 3: Chile: copper output and real GDP growth, 2007–2015 10 GDP 5 Annual 0 % change –5 Copper output –10 2013 2007 2008 2009 2010 2011 2012 2014 2015 (Source: adapted from FT.com sources below) Extract A Chile’s economic outlook brightens Chile has been hit hard by a worldwide fall in commodity prices since 2011. Copper accounts for 20% of Chile’s GDP and 60% of its exports; one third of the world’s copper is produced by Chile. China purchased 40% of the world’s copper, so a slowdown in China combined with increased global over-supply has meant copper prices have 5 collapsed (see Figure 1). Chilean government income from copper exports had reached $11.5 billion a year before copper prices fell, but now tax revenues from this source have fallen drastically. Growing numbers of copper mines struggle to break even at current prices. Chile’s GDP is now growing, helped by a weak currency that has boosted export 10 industries outside the mining sector, such as its successful wine and salmon industries. There are strengths in tourism and high-tech products. Public services are good in Chile, and poverty rates have been falling fast. On top of this, a large and diversified financial sector with high domestic savings provides a useful safety net, given high levels of corporate debt and the government’s need to finance a fiscal deficit of 3% of GDP. 15 Chile’s economy is often regarded as the best run in the region. This is attributed to the credibility of its financial institutions, relatively low levels of national debt (about 15% of GDP) and its free-trade model, which is unrestricted by government interventionism that has distorted the economies of countries such as Argentina and Venezuela. “Chile is an example of how credible institutions can smooth the economic cycle and make 20 adjustments less traumatic,” said Mr Valdés, the minister of finance in Chile, pointing to its widely respected and independent central bank and a well-established fiscal rule that give officials the freedom to implement counter-cyclical policies. However, there are worries that without enough spare capacity in the economy, expansionary fiscal and monetary policies could end up increasing inflation rather than 25 economic growth. Meanwhile monetary policy is restricted by inflation that has reached 5%, well outside the central bank’s 2–4% target range, fuelled by a weaker exchange rate. Crucially, investment remains low because of uncertainty over the outcome of the Prime Minister’s reforms, which are aimed at reducing inequality. A recent rise in corporation tax from 20% to 25% and labour market reforms that strengthen the power of trade 30 unions may have a negative effect on business confidence. Despite a “mildly contractionary” budget, Valdés insisted that the government would continue with costly reforms. Increased taxes on those on higher incomes are considered by the government to be necessary to sustain economic development in Chile. “We do want to change society, while recognising all the good things that have been done in 35 the past 25 years,” said Mr Valdés, referring to an average growth rate of 5.3% over the past three decades, but under 2% in 2015. There is broad consensus that investment in education is the key to unlocking Chile’s growth potential. (Sources: adapted from http://www.ft.com/cms/s/0/89926ce8-df96-11e4-a6c400144feab7de html#axzz3pCnzT3PC FT 20 April 2015 and http://www.ft.com/cms/s/0/d60ac2b2-7453- 11e5-a129-3fcc4f641d98.html?siteedition=uk#axzz3pCnzT3PC FT 19 October 2015 and http://www.ft.com/cms/s/0/d60ac2b2-7453-11e5-a129-3fcc4f641d98.html?siteedition= uk#axzz3pCnzT3PC FT 19 October 2015 all by Benedict Mander) Extract B Chile’s copper mining on a downward track There was a time when investing in Chilean mining meant guaranteed success. After 1990, when military rule was replaced by an elected government, market reforms and restored relations with the US and UK meant foreign companies were keen to exploit vast copper reserves. The existence of large copper reserves in a stable country with a 5 business-friendly government is rare, making Chile much more attractive to investors than countries such as Zambia. By mid-2015, however, the copper price hit a six-year low. Chilean mines are becoming less productive. After 20 years of heavy digging, the ore is lower grade, and much further down. The deeper pits take longer to mine, and use more fuel. Wages are high, and trade 10 unions are powerful. A mining truck driver earns $70 000 a year, $10 000 more than the US equivalent. Many mining projects that were planned are being postponed, and investors are looking to Peru; even the US copper mining industry is becoming more competitive. Energy supply is also a worry as Chile produces virtually no fossil fuels and relies on 15 imported coal and liquid natural gas to power its mines. Energy costs account for 18% of the cost of copper production. Water supply is also becoming a major problem. Farmers and communities accuse mining companies of causing water shortages to keep their operations running. A prolonged drought has not helped. Mining firms are turning to desalination plants 20 or using untreated seawater. However pumping water 200 kilometres from the Pacific Ocean to the copper mines is costly. Chile’s environmentalist movement has forced the government to tighten regulations. In 2001, it took 236 days to get an environmental impact assessment of a new mine approved. By 2013, this had increased to 506 days. 25 (Source: adapted from http://www.ft.com/cms/s/0/ea060ef4-6ae2-11e5-8171- ba1968cf791a.html#axzz3p20if45k Gideon Long September 27, 2015)
(d) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile. (25)

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