PAPER 1: EXTENDED RESPONSE QUESTIONS

INTERNATIONAL ECONOMICS

Free Trade and Protectionism

What are the benefits (gains) from international trade?(10)(a) The possible benefits might include the following:

• international trade and efficient resource allocation• international trade and specialization• the benefits of specialization in terms of the principle of comparative advantage• international trade and the enlargement of markets for producers• the link between trade, specialization, economics of scale and lower unit costs• greater variety of products for consumers• international trade, competition and the challenge to monopoly power.

To what extent is it justifiable for governments to resort to protectionism?(15)(Total 25 marks)

(b) Reward responses which critically assess the arguments for protectionism and provide an overall evaluation.Credits should also be given to those responses which show good current awareness of the importance of trading blocs and the role of the WTO.Issues and areas for discussion might include:• inward and outward orientated growth strategies• protection as a way of overcoming balance of payment problems• the infant industry argument/sunset industries argument• employment arguments• strategic arguments• possibility of retaliation• misallocation of measures and inefficiency• higher prices/less choice for consumers.N.B. To reach bands 4 and 5 there must be some evaluation of the arguments for protectionism and an analytical approach overall.

QUESTION 2

Why do countries practise protectionism? (12)(a) Candidates should explain the arguments in favour of protectionism which could include:

• infant industry argument• protection of domestic jobs• raising government revenue• helping diversity (prevent over specialisation)• correcting a balance of payments deficit• “uneven playing ground” argument

• strategic reasons• political reasons• health, safety and environmental standards.

Discuss the likely problems associated with such a policy. (13) (Total 25 marks)(b) Issues and areas for discussion might include:

• a diagram showing the effect of a tariff to illustrate the inefficiency area;• higher prices for consumers• lower levels of consumption• “infant industries” not “growing up” but remaining uncompetitive and dependent on

protection• potential retaliation by trading partners• a reduction in worldwide output• costs of protecting jobs outweighing the benefits• comparative advantage arguments.

QUESTION 3

What are the benefits (gains) from international trade? (10)(a) The possible benefits might include the following:

• international trade and efficient resource allocation• international trade and specialization• the benefits of specialization in terms of the principle of comparative advantage• international trade and the enlargement of markets for producers• the link between trade, specialization, economics of scale and lower unit costs• greater variety of products for consumers• international trade, competition and the challenge to monopoly power

To what extent is it justifiable for governments to resort to protectionism? (15) (Total 25 marks)

(b) Reward responses which critically assess the arguments for protectionism and provide an overall evaluation.Credits should also be given to those responses which show good current awareness of the importance of trading blocs and the role of the WTO.Issues and areas for discussion might include:• inward and outward orientated growth strategies• protection as a way of overcoming balance of payment problems• the infant industry argument/sunset industries argument• employment arguments• strategic arguments• possibility of retaliation• misallocation of measures and inefficiency• higher prices/less choice for consumers.N.B. To reach bands 4 and 5 there must be some evaluation of the arguments for protectionism and an analytical approach overall.

QUESTION 4

Identify the main types of trading blocs and their characteristics. (10)(a) Possible points for discussion:

Free trade areas• remove tariffs and quotas between themselves• retain whatever restrictions they wish with non-member countries• provisions may be implemented to stop imports entering the bloc via the country

with the lowest tariffCustoms Unions• free trade areas that also adopt common external tariffs and quotas with non

membersCommon MarketsCustoms Unions that may operate with the following additional elements• free movement of labour and capital• common system of taxation• common employment legislation and workers’ rights• common agricultural policy• common competition policy• the absence of special treatment by member governments of their own domestic

industries• supra national institutions.Common Markets are sometimes extended to economic and monetary union with fixed exchange rates or single currencies, plus common macroeconomic policies.Two types, well covered, with relevant examples, would be sufficient to reach the highest mark band.

With reference to real-world examples, evaluate the advantages and disadvantages of membership of a trading bloc. (15) (Total 25 marks)

[10 marks](b) Possible points in favour of trading blocs:

• increased market size• increased competition• increased efficiency• lower prices• greater choice• improvements in quality• more rapid spread of technology• trade blocs provide some of the benefits of free trade while awarding

countries some protection• trade blocs may attract FDI• increased growth• improvements in wages and working conditions• members of trading blocs may gain greater bargaining power with

the rest of the world.Possible arguments against trading blocs:• resources may flow to the more efficient larger countries to the

detriment of the smaller members• failure to recognize the specific requirements of smaller nations

• the economic costs of greater competition may be too great forcertain nations

• high administrative costs• trading blocs may represent barriers to world trade, especially for

LDCs• trading blocs may restrict certain forms of FDI• trading blocs may produce trade wars• any reasonable answer

QUESTION 5

Critically assess the arguments for and against the increased liberalisation of international trade. Refer in your answer to both less developed and more developed countries.

(Total 25 marks)Possible areas for discussion include:• meaning of liberalisation of international trade• types of protectionism• infant industry argument• importance of diversification• impact on employment• balance of payments effects• impact on comparative advantage and resource allocation• effect on consumers in terms of price, variety and quality• general effects on competitiveness• significance of trading blocs• the growing income gap between rich and poor nations• social/cultural consequences of withdrawing protection to traditional industries

‘Globalisation can be defined as the ability to produce any good (or service) anywhere in the world using capital, technology and components from anywhere and to sell the output anywhere and place the profits anywhere’ (Peter Jay 1996). Discuss the economic and social consequences of globalisation. (Total 25 marks)

An open-ended question, but it is hoped that even weaker candidates who might be tempted towards ‘rambling answers’ might find enough pegs in the definition around which they can structure an answer.

QUESTION 6

To what extent has the international trading system contributed to economic growth and development in less developed countries? (Total 25 marks)

• A distinction between economic growth and economic development must be made.• Some “outward-oriented” countries have experienced high rates of economic

growth as a result of their rapidly-expanding exports; however, this has not necessarily contributed to increased development.

• World trade still tends to be dominated by MDCs.• Many LDCs are heavily reliant on the export of one or two commodities and the

importing of manufactured goods; deteriorating terms of trade have harmed both growth and development.

• When LDCs do attempt to industrialise/diversify, they often come up against protectionist barriers in MDCs.

• Increasing liberalisation of trade may lead to problems in terms of “sustainable development”.

Reward any plausible argument. Candidates might examine a wide range of factors other than the international trading system which have contributed to growth and development (e.g. FDI, aid, technology). These should be rewarded.

Explain the concepts of trade creation and trade diversion.(10)(a) Trade Creation

• results from a country joining a trading bloc• consumption shifts from a high-cost producer to a low-cost producer• removal of trade barriers allows greater specialization according to comparative

advantageTrade Diversion• results from the formation of a trading bloc• consumption shifts from a lower-cost producer outside the trading bloc to a higher-

cost producer within the trading bloc• there is a net loss in world welfareExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Evaluate the advantages and disadvantages of joining a trading bloc.(15) (Total 25 marks)(b) The answer should identify the type of trading bloc under discussion (free trade area,

customs union or common market).Advantages• possibility of economies of scale• increased competition leads to efficiency and lower prices• productive and allocative efficiency• greater consumer choice• transfer of labour and capital in a customs union or a common marketDisadvantages• increased competition can force inefficient domestic producers out of the market• domestic workers may be unemployed• short run gains versus the possibility of increased mergers (less competition) in

the long run• the gains of the trading bloc may be distributed unevenly• loss of economic sovereigntyIf a candidate discusses only one advantage and/or one disadvantage then award up to [4 marks] for that advantage and/or disadvantage.If a candidate discusses and evaluates only advantages or only disadvantages then award up to [7 marks].Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Exchange Rates

QUESTION 7

Explain the factors which cause the value of a currency to change under a floating exchange rate.(12)

(a) • responses should note that any factors which affect the supply or demand of acurrency will cause appreciation or depreciation

• to reach the top bands, responses must address both supply and demand factorsAward up to a maximum of [7 marks] if no diagrams are used.

To what extent does an appreciation of the currency harm an economy?(13)(Total 25 marks)

(b) • because the question is framed in the terms “to what extent”, a balanced approachis expected noting that some people suffer under a higher value of the currency(e.g. exporters, workers in the tourism industry) but also that some people benefit

froman increased value(e.g. Importers / people who want to travel abroad)

• the best responses should be able to say that although domestic producers may be harmed by a higher value of a currency, it will force them to be more efficient, thus leading to a more efficient allocation of resources

• the lower cost of imported inputs may reduce production costs in the domestic industry

• greater ability to consume imports may raise living standards

What might cause a depreciation of a country’s currency? (10)(a) Responses should begin with a definition of depreciation as a fall in the value of one currency

with respect to another in a floating exchange rate system.Depreciation can come about as a result of an increase in the supply of a currency. This may be caused by• increased spending on imports (visible and/or invisible)• capital outflows in response to higher interest rates abroad• capital outflows caused by speculation• capital flights in LDCs.Depreciation can come about as a result of a fall in the demand for a currency. This may be caused by• decrease in demand for exports (visible and/or invisible) because of relatively

higher inflation rates.• decrease in demand for exports (visible and/or invisible) because of changes in

tastes abroad.Responses should be expected to produce a supply and demand diagram to show depreciation.

Discuss whether a country benefits more from a low value of its currency or a high value of its currency. (15) (Total 25 marks)

(b) Responses should include a discussion of the change in the value of a currency on exporters, importers, consumers, government.

Better responses will carry the argument through to an awareness of the broader macroeconomic issues of inflation (if exchange rate is low) and unemployment (if exchange rate is high) and discuss the implications of these/or government policies.

QUESTION 8

Explain three factors which might cause the value of a currency to appreciate. (10)(a) • definition of appreciation of the value of a currency

• appreciation is caused by either an increase in demand or a decrease in supply of the currency on the foreign exchange market

• increase in domestic interest rates or a fall in foreign interest rates• favourable investment prospects• increased demand for a country’s exports• speculation that the currency will rise in value• increased foreign income• central bank purchasing of the currencyExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Evaluate the possible effects of such an appreciation on an economy. (15) (Total 25 marks)

(b) Disadvantages include:• reduced export competitiveness• imports become more attractive• higher level of unemployment in export industries and in industries which compete

with imports• lower level of AD• downward multiplier• current account repercussions.Advantages include:• domestic producers are forced to be more efficient• imported raw materials become cheaper• inflationary pressure may be reduced.Candidates may introduce the concept of elasticity in order to explain the repercussions on a current account. This should not be expected but should be rewarded.If only advantages or disadvantages are considered up to [7 marks].Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded.

QUESTION 9

Explain how changes in a country’s exchange rate may occur under a floating exchange rate system. (10)

(a) Answers may include: definition of exchange rate an explanation of floating exchange rate system an explanation of how changes in demand for the currency affect the exchange rate,

e.g. exports, travel and tourism, capital inflows, speculation, inflation etc. an explanation of how changes in the supply of the currency affect the exchange

rate,e.g. imports, travel and tourism, capital outflows, speculation, inflation rate, etc.

a description of how government may intervene to manage the exchange rate eg direct investment, interest rates

use of correct diagrams to illustrate how changes in demand and supply affect theexchange rate.

Discuss the view that exchange rate changes are the most important factor in determining a country’s export sales. (15) (Total 25 marks)

(b) Answers may include a discussion of: the impact of exchange rate changes on the price of and demand for exports the influence of price elasticity of demand on export sales importance of other factors affecting exports sales such as:

– non-price factors e.g. quality of products– efficiency of domestic producers– comparative advantage– degree of protectionism– world economic growth– membership of a trading bloc– rate of inflation

For an evaluative approach candidates may discuss the relative importance of the different factors affecting export sales

– the short run and long run determinants of export sales– make a judgment on the importance of the exchange rate affecting export sales

compared to other factors.Examiners should be aware that candidates may take a different approach, which if appropriate should be fully rewarded.

Balance of Payments/TOT

Explain why an improvement in a country’s terms of trade does not always lead to an improvement in its balance of payments on current account. (10)

(a) • definition of terms of trade• definition of current account• explanation of improvement in terms of trade• impact of higher export prices/lower import prices on the current account• importance of PEDSome candidates may confuse this with the balance of trade. If so, do not automatically award zero, reward relevant material if it appears.

An economy is currently experiencing a deficit on the current account of its balance of payments. The government is considering either allowing the exchange rate to fall or reducing aggregate demand.

Evaluate the relative advantages and disadvantages of these two policies. (15)(b) Exchange rate fall answers may include:

• explanation of how the exchange rate can fall (depreciation/devaluation)• reference to expenditure-switching policies• exports cheaper/imports more expensive – increase in demand for exports, fall in

demand for imports• importance of PED/Marshall Lerner• importance of J curve effect• impact on other goals of economic policy, i.e. inflation, unemployment and

economic growth• possibility of competitive depreciationsReducing aggregate demand answers may include:• reference to expenditure-reducing policies• use of fiscal and monetary policy to reduce demand• linkage between less AD and the current account• impact of higher interest rates, higher taxation and less government spending on

growth, employment and inflation• problems of time lags• problem of discriminatory nature of higher taxes and interest ratesReward the use of AD/AS diagrams.Candidates may consider other policies in their evaluation but they must answer the question put.Examiners should be aware that candidates may take a different approach, which if appropriate should be fully rewarded.

Describe three possible economic consequences of a persistent current account deficit for a country.(10)

(a) • explanation of balance of payments current account deficit• explanation of the possible consequences of a current account deficit:• cost of financing a deficit• depletion of foreign exchange reserves• cost of running a capital account surplus• interest payments on borrowing• reduced AD and economic growth• depreciation of the exchange rate• as an indicator of underlying lack of business competitiveness• on government policy e.g. increased protectionism• problems of import penetration e.g. unemployment

• for one consequence described: maximum level 1 awarded• for two consequences described: maximum level 2 awardedExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Evaluate different methods of correcting a current account deficit. (15) (Total 25 marks)(b) Points for discussion might include considering advantages and disadvantages of:

• expenditure-reducing policies e.g. contractionary fiscal and monetary policy

• expenditure-switching policies e.g. devaluation of the exchange rate, depreciation• supply-side policies to improve business efficiency e.g. deregulation of markets• policies to promote exports e.g. subsidies• policies to reduce imports e.g. protectionismExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Explain the components of the balance of payments.(10)(a) Responses should define the components in general terms and should then explain the main

elements that make up the balance of payments accounts:• the balance of trade• the invisible balance• balance of payments on current account• balance of payments on capital account.Responses which do not introduce all four components should be limited to a maximum of [6 marks].

Evaluate the extent to which the balance of payments may be controlled by the manipulation of interest rates.(15) (Total 25 marks)

(b) This part of the question asks candidates to evaluate the effect of interest rate changes on the concepts identified in (a).Responses may consider:• the effect on exchange rates of altering interest rates• the role of “hot” money• the importance of elasticity of demand for exports and imports• the “short-termism” of hot money• the internal effects of interest rate changes on the demand for imports• the internal effects of interest rate changes on the supply of exports• alternative methods of controlling the balance of payments.Examiners should be aware that candidates may take a different approach, which if appropriate, should be fully rewarded.

[15 marks]

Explain why a country’s balance of payments on current account may at times be in deficit and at other times be in surplus.(12)

(a) Candidates should clearly define the term balance of payments oncurrent account and explain the terms deficit and surplus on current account.Explanations of deficits and surpluses might include the following:• changes in exchange rates which alter the relative prices of imports and exports• the impact of the level of economic activity in overseas markets on exports• the impact of the level of domestic economic activity on imports• relative domestic and foreign rates of inflation• changes in the pattern of comparative advantage and overseas competition• the impact of changes in barriers to trade• changes in investment income and transfers• changes in the terms of trade• the impact of fiscal and monetary policies• any reasonable answer.

To what extent does the existence of a current account deficit represent an economic problem?(13)(Total 25 marks)

(b) Reward candidates who are able to discuss circumstances in which a currentaccount deficit may and may not represent a problem and who are able toprovide an overall evaluation.Issues and areas for discussion might include:• not a problem if

– deficit is small and/or temporary– it is counterbalanced by capital inflows– other countries are continuously willing to finance the deficit– it reflects a growing economy and higher living standards– automatic correction of a deficit under a floating exchange rate system– any reasonable answer.

• reasons why it may be a problem– need to finance deficit may lead to depletion of foreign exchange

reserves/overseas borrowing/greater indebtedness– a reflection of trading uncompetitiveness/overvalued exchange rate– overseas creditors decide to “turn off the taps”– the impact on the exchange rate and inflation– the need for domestic deflation and the conflict with the goals of full

employment and economic growth– any reasonable answer.

Assess the impact of an increase in interest rates onthe balance of payments

(10)the domestic economy.

(15)(Total 25 marks)

(a) The external effects of an increase in interest rates might bear on the exchange rate. Higher interest rates relative to those of other countries should lead to an appreciation of the exchange rate. This might be caused by movements of money into the country on the capital account.The effects on the balance of trade will be less predictable, depending on import and export elasticities. Where there is a high degree of elasticity in demand for imports and exports, the currency appreciation will lead to a deterioration in the balance of trade which could even reverse the currency appreciation.

[10 marks](b) The syllabus indicates that Standard Level candidates are likely to use the basic

AD/AS model to deal with the effects of an increase in interest rates on the domestic side of the economy.An increase in interest rates might encourage savings at the expense of consumption, causing the AD curve to move to the left. (The increased cost of investment might also have a longer term and more indirect effect on the AS curve, also shifting it to the left.)The effects on the economy would depend on the shape of the AS curve, reducing the rate of inflation if it is vertical, or output if it is more horizontal. Good responses will refer to this controversy and illustrate the answer with a diagram.

Also, reward responses which set interest rates against the background of monetary policy, and express suitable opinions on its effectiveness as a tool of economic policy.The important aspect of examining this question is to judge how far the candidate applies knowledge of the economic concepts and theories. Reward any references to real-world events and consequences.N.B. To reach bands 4 and 5 there must be some evaluation of the arguments and an analytical approach overall.

[15 marks]

“Whether the exchange rate rises or falls there are always losers.” Evaluate this statement from a domestic and/or global perspective.

(Total 25 marks)Candidates can receive full credit for answers based only on domestic perspectives

Definitions that should be included:• exchange rate• appreciation/depreciation; revaluation/devaluationFor currency appreciation the following issues could be addressed:• loss of domestic and international markets as the price of exports

increases and the price of imports falls• the resulting impact on the Balance of Payments• the Marshall-Lerner condition• possible falls in domestic output and employment• possible effects of policies to deal with Balance of Payments deficits• hot money/capital flows• effects of cheaper imports on inflation• de-industrialisationFor currency deprecation, the following issues could be addressed:• effect on domestic and international market shares• the Marshall-Lerner condition, the J-curve and the Balance of Payments• possible effects on inflation (cost push and demand pull)• hot money and capital flight• terms of trade• debt repayments/debt servicing ratios and the effect of these on

public expenditure and investment• loss of confidence in the currency• competitors may devalue to restore competitiveness / possible global instability• environmental issues

[25 marks]

Explain the various factors that could cause a change in the terms of trade for a country. (10)

(a) Candidates should define “terms of trade”.Factors that may be considered include:• changes in international competitiveness• inflation• competitive advantage• labour costs• investments• exchange rate movements

• protection/subsidies• changes in global demand for and supply of commodities

Discuss, with reference to less developed countries, the possible consequences of a deterioration in the terms of trade. (15)

(b) A variety of approaches may be expected. Deterioration should imply onlynegative consequences. A deterioration in terms of trade can be beneficial incertain circumstances. Discussions may include:(i) initial consequences

• problem of having to export ever greater quantities of commodities to buy given quantities of imports

• increased export volumes• decreased import spending• changes in volumes depend on price elasticities of demand for imports and

exports(ii) longer-term consequences

• balance of payments consequences• debt and debt servicing• depreciation of exchange rates• IMF / World Bank intervention / assistance• change in standard of living• change in social spending and infrastructure• the need for long term structural change

Reference to some real LDC examples is expected although not necessarily for all points made.Candidates who rely on generalisations would not expect to score as highly as those who have made some reference to real examples.

Explain why a deterioration in the terms of trade could bring about an improvement in the balance of payments on current account.

(Total 10 marks)An accurate distinction between the terms of trade and the balance of payments on current account

is required. Give some credit to those candidates who are merely able to explain what is meant by a deterioration in the terms of trade and an improvement in the current account. However, higher marks should be awarded only where clear linkages between the two are made.To reach Band 4B, students must make use of the concept of price elasticity of demand.

With reference to the Marshall-Lerner condition, explain how the depreciation of a country’s exchange rate might affect its current account balance.

(Total 10 marks)• definition of depreciation (better candidates will know that this refers to a freely floating

exchange rate)• definition of the Marshall-Lerner condition• explanation of how a depreciation will only be successful if the PEDexports plus the

PEDimports is greater than one• definition of current account balance• explanation that exports will be cheaper, imports more expensive, and that elasticity will

determine the ultimate impact on export revenue and import expenditure

• some candidates will extend the analysis with the J-curve effect, but this is not necessary for full marks

Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded.

[10 marks]

DEVELOPMENT

Explain how an increase in the quantity and quality of a nation’s factors of production can promote economic development. (10)

(a) • definition of factors of production• definition of economic development• explanation of an increase in the quantity of resources• the impact of an increase in the quantity of resources on productive capacity,

economic growth and, possibly, economic development• explanation of an increase in the quality of resources• the impact of specific examples of an increase in the quality of resources, e.g. the

use of improved health and education programmes, on economic development.

Evaluate the impact of globalization on the economic development of developing countries. (15) (Total 25 marks)

(b) Answers may include a discussion of:• features of developing countries• the nature of globalization• evaluation of the impact of globalization on

– free trade– FDI by MNCs– liberalisation of capital markets– greater labour mobility– the transfer of knowledge and technology– income and wealth inequality– increased industrialization and urbanization– greater tourism– protectionism in developed countries

For an evaluative approach candidates may discuss– the advantages and disadvantages of globalization– the relative importance of the different consequences of globalization– the short and long run consequences of globalizationExaminers should be aware that candidates may take a different approach, which if appropriate should be fully rewarded.

Explain the main characteristics of a market economy.(a) Points for explanation might include:

• consumer sovereignty• private ownership of the means of production

• the profit motive• self interest• competition between firms• allocation of resources through the interaction of supply and demand• signalling, rationing through the price mechanism• free international trade• the difference between the pure market economy and the mixed market economyExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded.

[10 marks]

Evaluate the proposition that economic development is best achieved through the market system.

(15)(b) Points for discussion might include:

• definition of economic development• the advantages of the market system in terms of enhancing development

• more efficient resource allocation• greater productivity• greater consumer choice• increased business competitiveness• export led economic growth• problems of state planning/interventionist policies

• the disadvantages of the market system in terms of enhancing development• under provision of merit goods• over provision of demerit goods• positive and negative externalities• under provision of public goods• income inequality

• benefits of alternative development strategies• inward-orientated strategies e.g. import substitution• state planning/interventionist policies.

Examiners should be aware that candidates may take a different approach, whichif appropriate should be rewarded.

[15 marks]

QUESTION 8

Evaluate the consequences for developing countries of relying on market forces and outward orientated strategies to achieve economic growth. (Total 25 marks)

The implication of the question is that candidates can respond in terms of positive or negative consequences or both. Some likely arguments are:Consequences of the use of market forces:• possible increase in income inequality as growth occurs first in a modern sector• lack of regulation may lead to presence of negative externalities• greater access to international capital markets• smaller size of the state sectorReward any other reasonable example, especially if backed by real world awareness.Consequences of outward-orientated strategy:• openness to world markets may lead to greater FDI and presence of multinationals and

to economic activities which may result in air pollution, soil erosion, deforestation, etc.

• improved access to foreign exchange, technology and foreign markets• greater exposure to fluctuation in the world economy• dependence on a narrow range of export markets, leading to resource reallocation

and possible structural unemploymentReward any other reasonable example especially if backed by real world examples.The best answers will relate the chosen strategies to the outcome in terms of growth and growth rates.

[25 marks]

Explain two significant barriers to economic growth in LDCs. (10)(a) Candidates may distinguish between economic growth and economic development, but

the focus of the answer must be on economic growth. Barriers could include:• overdependence on primary products• low labour productivity• vicious cycle of poverty• institutional and political factors• MDC protectionism• indebtedness• social and cultural factorsExaminers should be aware that candidates may take a different approach, which if appropriate should be rewarded

Evaluate strategies that may be used to overcome the two barriers identified in (a). (15) (Total 25 marks)

(b) • Aid• FDI• greater access to MDC markets• reduced subsidies from MDC governments to MDC producers• inward-oriented strategies• outward-oriented strategies• investment in human capitalIf a list (i.e. without evaluation) up to [5 marks].If only one strategy discussed and evaluated up to [7 marks].For a full discussion and evaluation of two strategies up to [15 marks].Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded.

Explain the different forms of aid that may be available to a developing nation.(10)(a) Candidates should introduce and explain at least three of the following in order to move

above Level 2 i.e. be awarded more than [5 marks]. Three well-developed examples can obtain full marks.• Bilateral aid – aid from one country to another.• Multilateral aid – aid is given to international aid agencies, who then decide where

the need is greatest.• Grant aid – where money, food aid, or emergency relief is provided as a gift, with

no repayment expected.• Soft loans – loans that are given to LDCs at below-market rates of interest.• Official aid – aid administered by governments or government agencies.• Unofficial aid – administered by a non-governmental body, such as a charity.

• Tied aid – the recipient country has to agree to buy goods or services from the donor country.

• Mixed credits – MDCs lend LDCs money for the purchase of MDC exports at below-market prices. In effect, this is a mixture of a loan and an export subsidy.

To what extent is aid effective in terms of addressing the problems faced by LDCs?(15) (b) Responses must show awareness of both the positive and negative effects of aid.

Good responses will distinguish between the effect of aid on growth and the effect of aid on development. Better responses will discriminate between the effects of different types of aid.Positive effects might include:• fill the “savings gap”, “investment gap” “technology gap”, “foreign exchange gap”• NGO aid is more successful in contributing towards development.Negative effects might include:• displaces local producers• debt service problems• dependency culture• corruption – misuse of aid• contributes to military struggle• tends to focus on urban areas reinforcing income inequalities and worsening rural–

urban migration• food aid damaging to domestic agriculture.

Discuss the view that foreign aid benefits the donor more than the recipient.(15)

(b) A variety of approaches are possible in response to this question, and candidates who are able to provide an answer from different standpoints should be suitably rewarded. A sensible evaluation is also required.Candidates may consider individual types of aid from (a) and assess/evaluate the relative benefits to the donor and to the recipient of each type of aid.They may, instead, list possible benefits of aid in general to the donor and to the recipient and then evaluate the relative overall benefits.Benefits to donors might include:• aid given to finance imports from donor countries• aid given to pay for debt/aid which increases indebtedness to the donor• aid given to support political regimes sympathetic to donor countries• aid given to provide employment in the industries of the donor country or to sell

products from the donor country, e.g. construction contracts or military defence products

• any reasonable answer.Benefits to recipients might include:• aid given to bridge the savings gap• aid given to bridge the foreign exchange gap• aid given as FDI• aid given to finance provision of merit goods in recipient country• aid given to finance imports of “appropriate” technology• aid given to finance infrastructure projects in LDCs• any reasonable answer.

Explain how economists might measure the extent to which living standards vary between countries. (10)

(a) Responses might begin by explaining what is meant by living standards.Living standards may be measured using:• national income figures (significance of income per head, expressed in real as

opposed to money terms)• purchasing power parities• composite indices, e.g. the HDI• other indicators such as infant mortality, distribution of income, access to work,

access to a clean and safe water supply.Any reasonable answer

Evaluate the ways in which more developed countries might help the less developed countries to raise living standards.(15)

(b) In order to answer this part of the question, answers are likely to evaluate the effectiveness of the various kinds of aid. Good answers will also contrast the provision of aid with approaches that are designed to encourage LDCs “to help themselves”; e.g. removing barriers to trade with the MDCs. The various policies should be evaluated in relation to the factors which are likely to improve the living standards of the LDCs;e.g. investment in human capital, adequate food and water supplies, appropriatetechnology, improved infrastructure.Possible issues and areas for discussion:• role of aid and motives for aid• effectiveness of various forms of aid; e.g. grants/loans, tied/untied, technical• role and impact of foreign direct investment/multinational corporations• role of major institutions such as the IMF, World Bank and WTO• impact of policies of these institutions, e.g. structural adjustment programmes• impact of debt reduction policies• role and impact of financial flows• role of trade – access to markets of MDCs and removal of barriers to trade• Any reasonable answer

Critically evaluate the significance of foreign direct investment (FDI) in the process of economic development for less developed countries (LDCs).

(Total 25 marks)Definitions of FDI and economic

development.Advantages:• FDI as an injection into the

circular flow• skills transfers• technology transfers• exports and exports earnings• Employment• output growth• productivity growth• infrastructure

• association of FDI with– liberalization of trade and

markets– increased wages– increased choice of

products/quality– links with growth and

developmentDisadvantages:• unemployment• competition for domestic

producers

• imports/balance of payments problems

• transfer pricing• repatriation of profits• dual economies• inappropriate

technologies/products• environmental degradation• partial and limited technology

transfers• some FDI dependent on cheap

labour/raw materials and is volatile and transient

• dual currencies

• corruption• health and safety risks• exploitation of labour• dependency.Points made should be related to economic development. If candidates simplyrelate their discussion to economic growth, their responses should be limitedto Band 2 and below.

Discuss the view that investment in human capital is the most effective way to provide development.

(Total 25 marks)Responses should address the different ways in which countries/governments/international

organizations can “invest in human capital”.These might include:• government spending on – education

– training/skills programmes– health care/nutrition– sanitation– provision of water

• policies to redistribute income• policies to increase mobility of labour• specific policies to address inequalities between men and women.In order to successfully answer this question, students must be able to explain the concept of “development”. They may even make some comparison with growth. However, it is necessary that they not simply define development, but that they show how the policies they describe can actually contribute to development.The command term “discuss” is one which is designed to elicit evaluation. Therefore, to reach the top band, it is necessary that a “critical approach” is adopted. Candidates should evaluate the view that investment in human capital is the most effective way to provide development versus other ways of achieving development.

Explain the factors which influence price elasticity of supply. Illustrate your answer with reference to the market for a commodity or raw material.(13)

(a) Candidates should define price elasticity of supply. Some factors which influence the PES of commodities are:• the number of producers and barriers to entry into the industry e.g. oligopolistic oil

industry• the relationship between producers, e.g. cartels, commodity agreements etc.• the availability of producer substitutes• the time period (distinction between very short, short and long run)• storage of stocks - possible with minerals but not with foodstuffs• elasticity of supply of factor inputs - factor endowments, lead times etc.

N.B. Candidates who explain the factors which influence PES without any reference to a commodity or raw material should be restricted to a maximum of [6 marks].Candidates who confuse PED with PES should be limited to a maximum of [4 marks], providing there is something of relevance.

Discuss the importance of price elasticity of supply and price elasticity of demand for producers of primary commodities in less developed countries.(12)

(b) This part of the question asks the candidate to apply the knowledge provided in response to (a) using the problems of LDCs as commodity producers.Reference to real world examples should be rewarded.Candidates might be expected to consider the effects of degrees of inelasticity of supply and demand on:• export revenues and the external balance• the exchange rate• fluctuating effects on local employment and investment

Reward any other reasonable argument or example.N.B. Particular credit should be given to those candidates who are able to relate the importance of PED and PES to primary commodity producers in LDCs, rather than just discussing the importance of the concepts in general terms.Also give credit to those candidates who widen their answer by examining the importance of PED and PES for the economy at large for LDCs, e.g. in relation to the terms of trade, balance of payments, depreciation, government revenues etc.

Describe the main barriers to economic development that countries may experience.(12)(a) Candidates should define economic development and may describe the

following barriers:• institutional/political• international trade• financial• distribution of income• infrastructure• population• geographical.

Evaluate the view that countries with a more equal distribution of income and wealth are more likely to experience higher levels of development.(13)(Total 25 marks)

(b) To reach the upper mark bands candidates need to demonstrate skills of critical evaluation.Possible points and areas for discussion:• saving and investment• the level and pattern of consumption• human capital• “trickle down”• incentives to work• efficiency• government revenues• capital flows/flight• level of poverty• rural/urban migration• taxation

• land reform• other routes to development.It is quite possible that a candidate could effectively argue the point that a less equal distribution of income and wealth might contribute to increased growth which might then contribute to higher levels of development.Candidates might answer this question by using a particular country as a referencepoint, and should be given suitable credit. However, top marks should only beawarded if candidates introduce some underlying economic theory into their response.

To what extent has the international trading system contributed to economic growth and development in less developed countries?

(Total 25 marks)• A distinction between economic growth and economic development must be made.

• Some “outward-oriented” countries have experienced high rates of economic growth as a result of their rapidly-expanding exports; however, this has not necessarily contributed to increased development.

• World trade still tends to be dominated by MDCs.• Many LDCs are heavily reliant on the export of one or two commodities and the

importing of manufactured goods; deteriorating terms of trade have harmed both growth and development.

• When LDCs do attempt to industrialise/diversify, they often come up against protectionist barriers in MDCs.

• Increasing liberalisation of trade may lead to problems in terms of “sustainable development”.

Reward any plausible argument. Candidates might examine a wide range of factors other than the international trading system which have contributed to growth and development (e.g. FDI, aid, technology). These should be rewarded.

[25 marks]

Explain the various factors that could cause a change in the terms of trade for a country.(10)(a) Candidates should define “terms of trade”.

Factors that may be considered include:• changes in international competitiveness• inflation• competitive advantage• labour costs• investments• exchange rate movements• protection/subsidies• changes in global demand for and supply of commodities

Discuss, with reference to less developed countries, the possible consequences of a deterioration in the terms of trade.(15)

(b) A variety of approaches may be expected. Deterioration should imply onlynegative consequences. A deterioration in terms of trade can be beneficial incertain circumstances. Discussions may include:(i) initial consequences

• problem of having to export ever greater quantities of commodities to buy given quantities of imports

• increased export volumes• decreased import spending• changes in volumes depend on price elasticities of demand for imports and

exports(ii) longer-term consequences

• balance of payments consequences• debt and debt servicing• depreciation of exchange rates• IMF / World Bank intervention / assistance• change in standard of living• change in social spending and infrastructure• the need for long term structural change

Reference to some real LDC examples is expected although not necessarily for all points made.Candidates who rely on generalisations would not expect to score as highly as those who have made some reference to real examples.