AQA A2 Economics Unit 4 WORKBOOK ANSWERS - Hodder Plus ...

WORKBOOK ANSWERS AQA A2 Economics Unit 4
The National and International Economy This Answers book provides answers for the questions asked in the workbook.
They are intended as a guide to give teachers and students feedback. The
candidate responses supplied here for the longer essay-style questions are
intended to give some idea about how the exam questions might be answered.
The examiner commentaries (underlined text) have been added to give you
some sense of what is rewarded in the exam and which areas can be
developed. Again, these are not the only ways to answer such questions but
they can be treated as one way of approaching questions of these types. Introduction to the national and
international economy 1 Microeconomics is the branch of the subject that studies individual
markets, such as commodity, energy, car and clothes markets. Macroeconomics
is the branch of the subject that studies the national economy in
aggregate, and how the national economy interacts with the wider global
economy.
Topic 1 Macroeconomic indicators 1 The economic cycle is a period of approximately 6 or 7 years in which
the economy completes a cycle of downturn, recession, recovery and boom. A
peak and a trough are further features of the cycle. 2 Boom: The period leading up to the peak of the cycle when an
overheating economy is experiencing high GDP growth and inflationary
pressures driven by unsustainable demand. Speculative activity, which tends
to grow in the boom period, is a factor that makes a boom unsustainable. Recession: The part of the economic cycle when the depressed economy is
experiencing negative economic growth. A collapse of aggregate demand
brings about a recession. Recovery: The period after a recession when the economy starts to
experience steady GDP growth without significant inflationary pressures. Double dip recession: When an economy falls back into recession before it
has properly recovered from the first recessionary 'dip'. A double dip
recession can lead into a 'lost decade' of negative or stagnant economic
growth. Economy's growth rate: Long-term economic growth, or trend growth, is the
rate of growth the economy can sustain, ignoring the short-term ups and
downs of the economic cycle. It can be illustrated by the outward movement
of the economy's production possibility frontier. The percentage annual
increase in real GDP measures economic growth. 3 Economic growth is most commonly measured in terms of the annual
percentage rate of change in real gross domestic product (GDP). 4 First, demand-side growth is caused by a change in one of the
components of aggregate demand. If any of the components increases
(consumption, investment, government spending or exports), the economy will
grow. Second, supply-side growth occurs when the productive capacity of the
economy increases. This takes place due to an increase in the physical
capital infrastructure of the national capital stock or because of the
enhancement of either the depth or the breadth of the economy's human
capital stock. 5 The two main costs of economic growth are resource depletion and
environmental damage.
. Economic activity requires factor inputs and will often lead to scarce
resources such as fossil fuels being consumed and lost forever because
they cannot be replaced.
. Environmental damage occurs when the production process creates
harmful toxics, gases and waste in the course of making consumer and
capital goods. This has also been called the paradox of prosperity, as
human living standards improve as a result of greater access to
consumer goods but decline as a result of environmental destruction,
poorer air quality and polluted water supplies. The two main benefits of growth are improved living standards and
technological advancement.
. As an economy grows, the output of capital and consumer goods will
increase, which should in turn lead to an increase in the level of
employment as firms need more workers to maintain production. The
higher level of employment combined with increased production should
result in the average household being able to attain buy consumer
goods, which will improve their standard of living.
. Technological advancements will often occur as an economy grows
because firms will seek to maximise profits by inventing new products
to develop new markets and meet consumer needs. This dynamic growth
will normally occur when an economy is growing because it will require
firms to undertake investment, which is encouraged by higher business
confidence. 6 Gross domestic product is the total value of an economy's domestic
output of goods and services. Gross national product is the same as GDP
except that it adds what a country earns from overseas investments and
subtracts what foreigners earn in a country and send back home. 7 National income statistics underestimate the true level of economic
activity, and hence people's living standards, because the non-monetised
economy is under-represented. In the UK, housework and 'do-it-yourself'
home improvement take place without money incomes being generated. The
contribution of these to living standards is imputed, but the 'guesses' are
generally too low. Economic activity undertaken illegally in the hidden economy is also
omitted. Economic transactions conducted in cash because people are
engaging in tax evasion are not recorded in the national income figures, so
their contribution to living standards is also not recorded. 8 Two economic indices learnt at AS are the Retail Prices Index (RPI)
and the Consumer Prices Index (CPI). Both are used to measure the average
price level for goods and services that people buy. A main purpose of most
economic indices is to remove the distorting effect of inflation from the
data being measured. 9 National income figures fail to measure the extent to which the
positive externalities that benefit people add to their economic welfare
and standards of living. They also don't measure the human happiness people
enjoy from mixing with their family and friends. 10 (i) Cyclical unemployment: This is unemployment caused by an
economic downturn and collapse of aggregate demand. It is sometimes
referred to as demand-deficient or Keynesian unemployment. The slowdown in
economic activity results in firms laying off workers due to a lack of
demand for their output. (ii) Frictional unemployment: This is 'between jobs' unemployment that
occurs when workers leave one job and start searching for a new job. (iii) Structural unemployment: This is a destructive form of unemployment
that occurs when an industry or sector of the economy enters structural
decline and sometimes disappears completely. Workers find themselves
redundant or no longer needed, without the skills to match any new jobs. 11 (i) Whereas the money wage rate or nominal wage rate is the hourly
wage rate measured in money that a worker receives for supplying labour,
the real wage rate is measured in terms of the goods and services the
worker can buy with the money at the current price level. (ii) Wage 'stickiness' or wage inflexibility may prevent the real wage
rate falling to the full-employment wage rate. Stickiness or inflexibility
is caused by labour market imperfections and by workers' unwillingness to
accept cuts in the nominal wage rate, which are usually necessary for real
wage rates to fall. 12 As stated in the answer to question 10 (i), cyclical unemployment is
caused by a collapse of aggregate demand in the downturn of the economic
cycle. 13 Every month, the Office for National Statistics (ONS) collects
information on about 120,000 prices for a 'shopping basket' of about 650
goods and services. The change in the prices of those items is used for
calculating the rate of inflation, shown by changes in the Consumer Prices
Index (CPI). The contents of the basket are reviewed every year, and
changes can be made for a number of reasons. Some items enter the basket
because spending on them has reached a level that demands inclusion, to
ensure that the basket represents typical consumer spending. Some are
included to make data collection easier or to improve coverage of
particular categories. Changes to the basket are often made to improve coverage of a sector where
spending has increased. The ONS tracks consumer spending, and uses survey
results to ensure that items on which people spend most have the biggest
share of the basket. Each is assigned a proportion, or 'weight', of the
index. The 'weight' of each category in both the CPI and the RPI is
adjusted every year to take account of these changes, giving more
prominence to areas whose 'weight' is rising. The Living Costs and Food Survey (LCFS), which in 2008 replaced the
Expenditure and Food Survey (EFS), collects information on spending
patterns and the cost of living that reflects household budgets across the
country. A primary use of the survey is to provide information about
spending patterns for the Consumer Prices Index. 14 The average price level has risen at a relatively fast rate since
2008, despite the deep recession that the UK experienced in 2008/09. The
rise in the price level has been driven by rising global commodity prices
and the devaluation of sterling following the banking crisis in autumn
2008. The rising price of global commodities has been partly caused by demand
from the emerging economies, especially China and India. These economies
have been experiencing strong GDP growth of between 7 and 11% per year,
which has significantly increased demand for raw materials and sources of
energy such as oil and gas. This economic growth has created millions of
jobs and lifted more people out of poverty than in any other period in
history. As a result levels of disposable income have increased and demand
for food has surged. The fall in t