Question 1) The three Gorges region, a scenic area along the Yangtze River attracted attention globally due

to construction of the Three Gorges Dam. The dam started its role in power generation and flood control in 2008. Its reservoir stretched 563 kilometers along the Yang Tze river about 1.5 million people were relocated. a) Identify and explain two negative externalities and two positive externalities that result from the building of the Three Gorges Dam (8m) L1- what is externalities? (2m) -Third party effect result from consumption/production of G&S made by first parties -Two types of externalities (positive and negative) -Positive externalities are the benefits gain by the third parties -Negative externalities are the cost incurred to third parties where no compensation is paid. -ve externality : External cost (SC>PC by EC) +ve: External benefits (SB>PB by EB) L2- List down two positive and negative externalities and explain (6m) Positive externalities (3m) 1) Create more job employment -When electricity is easier to get access, more factories will be setting up. -Generate more job opportunities to the people especially the rural area. -People will receive income when get employed. They might use the income to improve their living standard. -Increase economic growth of the country 2) Human lives save. -A dam that can prevent water flooding from the river. -Natural disaster like flood is prevented. 3) Addition of tourism spot / new attraction to tourists -Increase government revenue Negative externalities (3m) 1) Destruction of habitats of wildlife -Loss of the beauty of the Three Gorges 2) Noise pollution/air pollution / land pollution due to the construction of dam -Suffer from breathing difficulties. Carbon monoxide which released from the construction might causes lung cancer -Annoying noise from the construction of dam might interrupting the living lifestyle of the people who living surrounding the area 3) Cost to 1.5 million people relocated -Cost of transport, inconvenient cost, cost of inadaptability to new environment.

b) Discuss how cost-benefit analysis could be applied in the case of the building of the Three Gorges Dam (12m) L1 Knowledge about cost-benefit analysis (4m) evaluate projects based on SC & SB (include externalities) quantify O.C to society of many possible outcomes of an economic decision apply in public projects (eg. Airports, rail projects, parks) which affect society far into future carried by the government different from private projects that consider PC & PB but ignore externalities take into account both private and external costs and benefits L2 CBA steps + L3 Evaluation(up to 12 marks) 1. Idenitification of all relevant costs and benefits Private cost: Cost of construction of Three Gorges Dam, worker safety when at work Private benefits: Profits earn after construction, stimulate economics growth, power generation, flood control External cost: noise pollution, land pollution, loss of habitat of wildlife, affect people living and force to relocate External benefits: tourism in the country (Yangtze River), international recognition, job opportunites (need to hire to watch over dam) Evaluation: may not cover everyone affected cannot include all stakeholders some groups might be left out of decision Difficulties of inclusiveness and exclusiveness (How? Example?) 2. Difficulties in quantifying identified costs and benefits into monetary value Market price (quantitative cost and benefits) Qualitative cost and benefits - use shadow prices ( based on estimated price) eg: loss of countryside and have to relocate, what value to place on (1.5 million affected people value annual loss of countryside at RM100 then cost = RM 1.5 x 10^8)

Evaluation: difficult to put monetary value to C&B especially externalities which are intangible difficult to measure / very subjective doubts to ascertain the value of loss of home/countryside 3. Forecast future cost and benefits (not necessarily) employ statistical forecasting techniques to estimate costs and benefits of Three Gorges Dam over many years able to plan properly and budget on right amount

Evaluation: difficult to quantify, accuracy of calculation probability of future C&B occurring is questionable because different generations different value systems 4. Decision making if construction of Three Gorges Dam SB>SC (which is +net benefits), government should undertake project as it benefits the society and everyone gains benefits. Increase society welfare if construction SC>SB (+net cost) government should reject the project because it will not bring much benefits to the society but only profit the private firms.

Evaluation: pressure groups may lobby for public to reject, to conciliate government abandon it politicians may go ahead to retain political power and earn profits (profitable) L4 Conclusion( Credit 1 mark) Uncertain Despite its limitation, still best tool available because evaluate projects based on true cost to society as it includes all externalities

Question 2) a) Explain, with the aid of diagram, how a government would maintain a fixed exchange rate. (8m) L1 knowledge about fixed exchange rate. (2m) Value of a currency fixed in relation to an anchor currency Not allowed to fluctuate Fixed below the ER Devaluation. Fixed above the ER Revaluation Maintained by intervention of central banks Central banks hold reserves in foreign currencies. L2 How government maintain a fixed ER (6m) Devaluation (3m) -Fixed below the equilibrium, government will sell its currency to increase the supply, supply curve shift right, price of currency decrease until fixed ER (SS=DD) add on reserve. (Explain with diagram) Revaluation (3m) -Fixed above the equilibrium, government will buy its currency to increase the demand, demand curve shifts to the right, increases price of currency, until fixed ER(SS=DD) withdraw reserve. (Explain with diagram)

b) Discuss whether it is better for a country with a floating exchange rate to face an appreciation or a depreciation of its currency (12m) L1 knowledge about floating exchange rate (4m) - Allowed to find its owned level in market - Determined by DD and SS of currency in the market - No government intervention in setting of ER - Depreciation lowering the price (value) of currency DD decrease or SS increase - Appreciation increasing value of currency DD increase or SS reduce L2 & L3: Discussion on the effects of appreciation & depreciation (up to 12 marks) Appreciation: - TOT improves, Px > Pm (enjoy more unit of imports with an unit of export) - SOL improves, price of exports are higher than price of imports, DD for imports increase, higher volume of imports, boosts living standards (with better quality goods and more variety of good and service from around the world). Allows consumers to buys a higher level of consumer durables -Low imported inflation However, -Worsening balance of trade if the demand for imported and exported goods are price elastic (consumer goods). DD more on imported goods, money flow out more than flow in. Higher foreign debts -Lowering domestic productivity. Less incentive and profit to the local producer to produce. Slowing down the economic growth. -High unemployment less job opportunities are offered. Cut labour costs Depreciation: - Increasing international competitiveness - More employment level - Improve balance of trade However - Worsening balance of trade if the demand for imported and exported goods are price inelastic (capital goods). More profit. Example developed countries L4 Conclusion (Credit 1 mark) -Uncertain -Depends whether the nature of economy of the country itself

Question 3) a) Increasing raw material costs cause the price of a good rise. Explain the effect of this price rise for the good on the markets for its substitute and complimentary goods (8m) L1 Knowledge about substitute and complimentary goods. (up to 2 marks) Substitute goods are replacements for another product , eg. a rise in the price of Esso petrol should cause a higher demand on other petrol brandings. Complimentary good is a good with a -ve cross elasticity of demand , when the price of one good drops , the demand for this good will increase as well as the demand for the compliment good will also increase . Eg. when price of hotdog decrease , demand for hotdog and hotdog bun will increase . L2 - Effect of increment in price to substitute and complimentary goods (up to 6 marks) Effects on substitute (up to 3 marks) If the price of raw material to produce pepsi rises , the cost of producing a unit of pepsi will be higher , hence , producer will need to increase the price of pepsi , when this happens , consumers will switch to consuming coke instead because they are able to consume the similiar type of good for a cheaper price and same quality. Consumers will switch to consume the substitute good , demand for own good will drop and demand for substitute good increases. Show interrelated market for Effects on compliment (up to 3 marks) When the price of a good increases , the demand for that good will drop , because consumers have to pay more for a unit of good and they have less purchasing power , this will cause a leftward shift in demand for the complimentary of the good , because consumers will not consume that type of good and instead switch to consuming other goods . Eg. If price of producing a car increases , people will demand less for cars and demand less on petrol , because petrol is only a necessity if people are driving cars .

b) Discuss the usefulness to businesses of knowledge of price elasticity of demand and income elasticity of demand. L1 Knowledge on Price Elasticity of Demand and Income Elasticity of Demand.(4m) -Price Elasticity of Demand is the responsiveness of consumers towards the change in the price of the good. Can be measured by % Change in Quantity Demanded over % Change in Price. -Income elasticity of demand is the responsiveness of consumers towards the change in Income. It can be measured by % Change in quantity Demanded over % Change in Income L2 Usefulness of PED and YED (up to 6 marks) PED (3 marks) -Act as a pricing policy whereby identifying the Price Elasticity of Demand helps firms to decide whether to raise or lower price, or whether to price discriminate. Price discrimination is a policy of charging consumers different prices for the same product. The firm conducts research by using PED which aids them to identify what kind of pricing policy is to be used as it shows the responsiveness of consumers towards a change in price which would show whether the demand for the product is inelastic or elastic enabling them to use different pricing policies to maximize total revenue. -If dd is elastic, to maximize the revenue, firm reduce its price -If dd is inelastic, to maximize the revenue, firm increase its price Can show diagram YED (3 marks) - The knowledge of income elasticity of demand helps firms predict the effect an economic cycle on sales. For example, luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle. Therefore, as we become better off, we can afford to increase spending on different goods and services. - YED can be of use to businesses to identify changes in consumers demand towards changes in income. In the case for normal luxury goods, income elasticity of demand exceeds +1, so as income rises, the proportion of a consumer's income spent on that product will go up which would lead to a increase in demand for that product. This would result in better knowledge for firms in terms of revenue flowing in. -Furthermore, in the case whereby the goods are normal necessities the income elasticity of demand is positive but less than 1 but for inferior goods the income elasticity of demand is negative therefore as income rises, the share or proportion of their budget on these products will fall such that if a firm is producing an inferior good and economic growth in long term is positive, then they should consider diversifying into producing normal goods as for example if that firm is in the TV producing business producing black and white TV, they consider switching to colour or HD TV`s as in the long run the nature of the good will change which would change consumers demand on the good as income rises. L3 Limitations to the use of Price Elasticity of Demand and Income Elasticity of Demand (up to 6 marks) -Price elasticity of demand can be inaccurate measure to determine the demand of consumers towards price changes as research has to be carried out on a regular basis to rule out all abnormalities and to ensure a more accurate of measure of consumers demand. Furthermore, PED does not take into account what kind of consumers are demanding for their products which could be low income earners, middle income earners or even high income earners thus it does not give confidence to firms to supply the product as it could result in increased cost for them.

-Income elasticity of demand can be of limited use as it has to be carried out several times due to human errors, changes in income patterns of consumers and changes in daily wages for consumers which makes it inaccurate to judge whether a good is inferior or normal. This could result in the wrong method used by firms to gain more revenue or to forecast demand which can lead to less sales and L4 Conclusion (credit 1 mark) -Uncertainty

Question 4 a) Explain the influences which determine the level of demand for rail services in an economy. (8m) L1 knowledge about demand (2m). -demand is a economic principle that describe the consumer desire and willingness to pay a price for a specific goods and services. Assuming ceteris paribus the price of a good or services will increase as the demand increases. L2 determinant of demand.(6m) i)Price (higher price, lower demand) ii) Income (rail services cheaper, therefore affordable for lower income groups) iii)Taste and Preference (prefer rail service to avoid jam) iv)Price of related goods (substitutes such as bus travel)

b) Discus whether rail services can and should be provided by the free market (12m) L1 Knowledge about free market (4m) Free market is when there is no government intervention Transactions are freely made, no barriers Fully owned by the private sectors High competition Producers able to maximize profit and consumers able to maximize satisfaction Price mechanism L2 Advantages of having rail services in the free market (up to 6 marks) 1) Efficiency is high high competition Productive efficiency - Fewest possible resources will be used to produce maximum output - No wastages Allocative efficiency - Due to high competition, producers will produce what the consumers want. - Allocative efficiency achieved when it meets what the consumers want. - Variety of choices of goods and services. - Firms able to gain maximization of profits, and therefore able to produce more goods and services for consumers. - Able to reduce the traffic as the choices of transportation increases. ii) Increase in competitiveness Self interest able to provide incentive to promote economy growth. Producers keep the price as low as possible so they are able to compete, and it is beneficial to consumers as it increases their purchasing power and standard of living. Quality will be increased due to the constant research and development in order to encourage consumers to consume for it. Quality increases lead to increment of confidence from consumers towards the services. Demand increases Increase in consumer welfare Increase in productivity and innovation leads to lower unemployment rate. L3 Disadvantages of having rail services in the free market. (up to 6 marks) i) Creation of monopolies It might widen up the gap between the rich ones and the poor ones. ( Inequality ) The monopolies might increase the price of the goods and services. Some consumers came from the lower income group, therefore, lower their purchasing power, increase their cost of livings, lower their standard of living. Only the rich ones are able to consume for it as they are willing and able to demand for it whereby the poor ones are willing to but not able to demand for it. However, big firms will keep growing bigger whereby the small firms will be forced to shut down as they cannot compete with them due to the big firm is able to produce at the lower price with a better quality and small firms will be priced out from the market. Unemployment rate increases as more machines and less labor will be used to cut cost. ii) Under Provision of public goods and merit goods Rail services may be one of the trends these days.

 Private firms will be competing with each other to produce rail services as it is able to gain revenue from it Those which people might want to use but dont want to pay may not be available because the firms may not find it profitable to produce. For example, Public goods, such as, street lighting. Ignorance of social cost, as the main aims of private firms is to maximize their profits and they will not take considerations of their actions into account. L4 Conclusion (credit 1 mark) - It is uncertain that it is good for the free market to provide rail services as it will be charged in a high price. In my opinion, I think it is still the best letting government to intervene, therefore, a mixed market will be most suitable one to provide rail services.

Question 5) a) With the aid of diagrams, explain how consumer surplus and producer surplus occur (8m) L1 - Knowledge on Consumer Surplus and Producer Surplus : (4m) Consumer Surplus is a measure of welfare gained by consumers from the consumption of goods & services. It is the also known as the difference between the total price that the consumers are will & able to pay and the total amount they actually pay, shown by the area above the market equilibrium price and below the demand curve. Market price is RM6, consumer willing at 10 CS is 4 Producer Surplus is a measure of welfare gained by producers from producing goods and services, or the difference between what producers are willing and able to supply the good and the price they actually received. The level of producer surplus is bounded by the area below the market price and above the supply curve. L2 - Occurrence of Consumer Surplus and Producer Surplus (4m) Consumer Surplus :- For example, if consumers are willing and able to buy a T-Shirt at RM 50 but the market price is RM 30, this means that consumer surplus is RM 20 as shown in a diagram. *diagram* Producer Surplus :- For example, if producers are willing and able to supply a pair of sneakers at RM 80 but market price is RM 100, then producer surplus would be totaled to RM 20 as shown in the diagram. *diagram*

b) Discuss the effects on consumers, producers and government if a government imposes indirect tax. (12m)

L1 - Knowledge on Indirect tax (2m): - Indirect tax is a tax imposed on suppliers which have an effect of an increase in cost of productions which results a leftward shift of the supply curve. Therefore, causing price to rise and quantity to fall. L2 - Effects on consumers, producers and government (up to 6 marks) e.g, when government imposed indirect tax on vegetables, Price rise from RM 3 to RM 5 while quantity falls. *diagram* 1. Consumers surplus falls Before indirect tax, willing and able to pay at RM 7 and market price is at RM 3 so consumer surplus is RM 4. After indirect tax, consumer surplus falls to RM 2 when market price rises to RM 5. Consumer overall welfare when consuming vegetable now falls. 2. Producer Surplus falls Before indirect tax, producers are willing and able to supply vegetable at RM 1 with quantity 30 unit After indirect tax, producer is now willing and able to supply vegetable at RM 2 with lower quantity. It reduces producer profit. Hence, overall producer welfare falls 3. Government Gains Revenue Area of A is the consumer's burden on indirect tax while area B is the producer's burden on indirect tax, whereas Area C is the deadweight loss to the society. Area A + Area B = Government total revenue earned from indirect tax. Therefore, could use the revenue to finance on public projects such as building hospital which could maximize society welfare. L3 - Evaluation on Effects (up to 6 marks) Diagram Influence by different elasticity of demand and supply -Assumed elasticity of supply constant 1) if demand is price elastic producer bear relatively more tax compare to consumers 2) if demand is price inelastic producer bear relatively less tax compare to consumers 3) if demand is perfectly elastic producer bear entire of tax, but no tax bear by consumers 4) if demand is perfectly inelastic - consumer bear entire of tax, but no tax bear by producers L4 Conclusion (credit 1 mark) -Uncertainty

Question 6) a) Explain the effect of the buffer stock scheme upon the agricultural market. (8m) L1- knowledge of buffer stock scheme (up to 2m) - stabilise the volatile prices of agricultural goods - government sets a target price so that price of agricultural goods remain constant - buys up supplies when harvest are plentiful - sell stocks when supplies in the market are low - purpose to stabilize the price in the market - inelastic in DD and SS(due vagaries of nature, perishability). A little of DD or supply will leads to greater in price. L2- effect of buffer stock scheme upon the agricultural market (up to 6 marks) Good harvest (3 marks) Price of corn S (good harvest)

Target price D Q of corn

100 160

Large rise in supply (160) - supply curve will shift outward causing price to drop Gov will buy up excess of 60 units to prevent price from falling. Keep price at target price Bad harvest (3 marks) Price of corn S(bad harvest)

Target price D Q of corn

50 100

Bad weather large fall in supply- supply curve shift inward causing price to rise Gov will release stock into the market (50) to prevent price from rising Keep price at target price

b) Discuss whether the introduction of maximum prices by a government would solve the problem of scarcity. (12m) L1- knowledge of scarcity and maximum prices (up to 4 marks) - Scarcity is where there are limited resources and unlimited wants - Maximum prices is also known as ceiling prices - Set below the free market price which the suppliers cannot exceed - Prevent prices from rises above that level - It is usually used where there is a shortage L2- Advantages of maximum price (up to 6 marks)

Price of foodstuff
Black market price $18

$10 $6

Maximum price Q of food stuff 60 100 140

Increase consumer benefits (low prices) ($6) Poor can consume the goods Prices will be stable and less fluctuations

L3- Disadvantages of maximum price (up to 6 marks) Less incentives for producers to supply more Consumer loses out due to shortages Only benefit to some consumers who are able to get the goods at the controlled price but disadvantage to those who are prepared to pay a higher price but unable to obtain it

- Creates welfare loss - Ineffectiveness in allocating resources - Not producing at a socially desirable output of 100 - Not selling at a market generated price of $ 10 Black market Excess demand and shortage Foodstuff is sold at a higher price ($18) than the maximum price (6)

L4 Conclusion (credit 1 mark) - Maximum prices cannot solve scarcity - It causes excess demand and shortages - Thus, government should impose other policies such as minimum prices or tax which is more effective because raising prices of foodstuff will increase the supply and decrease the demand so that demand and supply equal at a given higher price.

Question 7) a) Explain how inflation affects the function of money. (8m) L1: Knowledge about inflation: (2m) -Inflation means a rise in the general price level and therefore a fall value of money. -Causes of inflation (elaborate) L2: Explanation of how inflation affect the function of money (6m) 1) Medium of exchange - eroding the purchasing power - more money supply needed (shoe leather cost) - money value is reduces / loss confidence on currency paper - People not prefer to use money for transaction purpose. - Example, Zimbawe, prefer use USD to exchange their service 2) The unit of account function is affected by inflation since it become more difficult to compare values over time. -Price difficult to established menu cost 3) The effect of inflation on the store of value function -discourage savings, since the value savings reduced when inflation occur. -Real money value eroded. -Eg, interest rate is 5% - rate of return is 5%, if inflation is 10%, real money savings in the back reduce. Not to save but spend. - Inflation encourage people to search for substitute methods of preserving the value of their assets, such as purchasing gold or property. 4) Inflation also affects the standard of deferred payment function. For example, businesses may be unwilling to become creditor over long periods of time when they fear a decline in the value of money. - Redistribution effect - lender worse off and borrower will better off.

b) Discuss whether gold is good to act as money during inflation. (12m) L1 Knowledge on inflation (up to 2 marks) The sustain increase in general price of good & services. It is also mean A fall in the value of money. When there is no confident in value of money of the country. The country tends use another value able good to act as money such as gold.... L2 Function Gold act as money during inflation (up to 6 marks) i) Gold can as a medium of exchange. - It is acceptable by most of the country as payment of good and services. For example, when people loses confident in their paper currencies , they can use gold to act as money to pay for good and services. This is because gold can maintain it's value for it is scarce so it's limited in supply and not easily to forge ii) Gold can act as store of value. Gold has a durable characteristic. People can store their wealth in the form of gold and it is difficult to depreciate. For example, people can buy gold when gold is in a cheaper price and when the currency of their country depreciate, they still can use gold in another country to restore their wealth. This is because when currency of country depreciate, the value of gold will still be stable due to scarcity. L3 Limitation to act as money during inflation (up to 6 marks) i) gold is difficult to become unit of account. -This is because gold cannot facilitates a price system where G&S can be measured against a common standard. Therefore, Prices of FOPs cannot be established. -Due to its characteristic of difficult to break into smaller pieces (non divisible) ii) difficult to become medium of exchange - It is not portable. It is heavy to be carried around to make payment of good and services. For example, when the payment requires a bar of gold, it would be difficult for consumers to carry around gold bars. This is because there will be people taking the initiative to steal the gold bars. - It is difficult to make transaction all around the world as some country may have gold but some country may not have gold -High cost of production -Too little supply difficult to fulfil the needs of transaction around the world L4 - Conclusion (credit 1 mark) -It is uncertain that gold is good to act as money during inflation due to the downfall of it.

Question 8) a) Explain the factors influencing the labour productivity of a country. (8m) L1- Knowledge about labour productivity (2m) Measures the efficiency of workers Quantity of good and services a worker can produce over a period of time Labour productivity is measured as= Total output or GDP/ No. of workers L2- Determinants of labour productivity (6m) Skill -The general population nowadays have to be skilled and competent in their field of work to get jobs. Workers with higher skill level will tend to increase productivity as they can generate more output than the lower skilled workers. -Through training and education will leads the labour become more mobile (switch between job) and skillful (more specialize in the field) Facilities / fringe and benefits of employee. -The working environment (safety, more socializing with working, flexibility of working hour)is essential to increase productivity of a country. When provided with better facilities and working equipment, workers can work at their be -Employees need motivation and encouragement in order to work better and more efficiently. With increase benefits such as pay rises or medical insurances, workers will generally feel more secure thus increasing productivity.st and have higher productivity than usually required. - Free Transportation easily to go for work Technologies -Technology plays an important part in determining the productivity of a country. With better technology, the labour force of a country have access to better quality equipment which increases productivity. (shorter time with more output) -Machine can act as a helping hand to labour. -Improve the quality of the products, increase the variety of goods.

b) Discuss whether it is better for government to raise the economy's rate of productivity growth or to control its inflation rate. (12m) L1- Knowledge on labour productivity and inflation (4marks) - Labour productivity : measures efficiency workers :the amount of goods and services a worker can produce over a fixed period of time -inflation : sustained general increase in prices of goods and services : causes: too much demand & rising cost L2- Benefits of higher productivity and controlling rate of inflation in a country (up to 6marks) Benefits of higher productivity (up to 3marks) -Lower average cost. Improvement in productivity will allow businesses to produce more output at a lower cost. This will give incentive to the supplier to produce more as they are able to earn more profit. -Improve competitiveness: by improving competitiveness, businesses can develop a competitive advantage where there is an intense price and non-price competition with the overseas suppliers. This will cause suppliers to produce better quality goods for the consumers which will increase the consumer surplus. Benefits of controlling rate of inflation in a country (up to 3marks) Increase investor's confidence: there will be no hyperinflation hence increases businesses confidence to invest in the country. Therefore, it will improve the economic growth as more money will be flowing in than flowing out. This will also improve the balance of payment. Cost of living decrease: able to enjoy goods at a lower price as the rate of inflation is stable. This will lead to an increment of standard of living in the long run. Decrease equality: poor can afford goods and services as controlling inflation will increase the real income of the consumers. This will also lead to an increment of standard of living of the poor. L3- Evaluation (up to 6 marks) i) Higher productivity will lead to the worsening of balance of payment -Higher income buy more on imported goods ii) lower inflation discourage / giving less incentive to the producer to producer -Slowing down economic growth iii) In the long run (full employment achieved), inflation can be occur but productivity will be in stagnant condition (unchanged) L4 Conclusion (credit 1 mark) -There are contradicting between both economics objectives. Depends on the country current needs. To me, increasing productivity is better in the long run compared to short run while controlling rate of inflation is better in the short run compared to long run. And mild inflation is encouraged.

Question 9) b) Discuss whether a government should operate a fixed exchange rate system or floating exchange rate (12m) L1 - knowledge and understanding of types of exchange rates (4m) fixed exchange rate: exchange rate is pegged by government and they must intervene to maintain the exchange rate, eg. buy their own currency when the exchange rate is depreciating and sell when the exchange rate is appreciating floating exchange rate: exchange rate is determined by demand and supply of the currency and there is no intervention by government L2 & L3 Comparison between fixed exchange rate and floating exchange rate (up to 12m) Fixed exchange rate advantages: -stability and certainty (international trade is stable and profits are unaffected as there is no movement in the exchange rate which encourages international trade) -discipline on domestic firms (must remain competitive on international markets as the exchange rate does not appreciate for profits to increase) disadvantages: -governments need large foreign reserves to maintain the exchange rate (may not be possible if the country is small or in debt), also they must make intervention a priority -no free market (against the function of price mechanism) Floating exchange rate advantages: -automatic correction of balance of payments disequilibria (no need for any expenditure switching or dampening policies, governments can then redirect their focus to other issues such as spending on improving roads and other infrastructures) -no huge reserves are needed disadvantages: -uncertainty in trade of goods as it is risky and firms might not make profit (therefore, less international trade) -inflation has a major effect (inflation makes a country's goods uncompetitive as prices increase, so demand for goods would fall resulting in a fall in demand for its currency) L4 Conclusion (credit 1 mark) - It would be more desirable if a government operates a floating exchange rate system as advantages of floating ER is more than fixed ER.

Question 9) b) Discuss whether a government should encourage formation of Free Trade Area or Common Market. L1- knowledge about Free Trade Area and Common Market (up to 4 marks) Free Trade Area is formed by removing trade barriers between member countries. There is free trade between member countries and all members are free to choose their own tariffs against non members. Example: NAFTA, ASEAN Common market is also known as Economic Union, it involves the removal of restrictions on the movement of factors of production (labour, capital, and enterprise) and free trade between members and common external tariff towards non-member countries. In the case of EU, there are also common taxes, common trade laws, single currency (Euro) and centralised economic policies. L2- advantages of Free Trade Area and advantages of Common market (up to 6 marks) Advantages of Free Trade Area: Free trade increases the size of the export market for local producers. Producers will be able to earn higher profits from larger market size and the revenue earned can be used to invest in capital equipment or labour training in order to further increase output and improve quality of goods. Free trade exposes local producers to foreign competition and this stimulates a higher level of innovation, research and development among local producers in order to compete with foreign producers. This leads to more choices for consumers and increases standard of living of the consumers. Advantages of Common Market: Since workers are free to move between member countries of the Common Market, there will be more job opportunities for citizens inside the Common Market. Workers will be able to improve their lives by opting to move to a place which offers jobs with higher salaries and better work conditions. Since there is full freedom of movement for all the factors of production between the member countries, the factors of production become more efficiently allocated, countries can specialise in the production of goods in which they have a comparative advantage in, which they will produce with less opportunity cost. L3- limitations of Free Trade Area and limitations of Common Market (up to 6 marks) Limitations of Free Trade Area: With the removal of trade barriers, infant industries in a country will not be protected. Infant industries are unable to compete with established firms which sell goods with high quality and low price. They cannot survive in a highly competitive market in the absence of any form of protectionism. Dumping may occur. Foreign producers may dump their goods in overseas markets by selling them at a price lower than the cost of production in order to drive local producers out of business. After successfully driving them out of business, foreign producers will establish themselves as a monopoly and exploit local consumers with higher price and lower output. Consumer welfare decreases.

Limitations of Common Market: Free movement of labour which causes net migration from one country to another has resulted in problems of overcrowding in UK cities. Workers will migrate from less developed countries to developed countries to take advantage of higher benefits and wages. For example, the UK's population is set to rise due to immigration, this has pushed up house prices and led to congestion on roads. Trade diversion, which take place when a country moves from buying goods from a low cost country to buying from a higher cost country. For example, UK will import milk from New Zealand before joining EU which had low or zero tariffs. After joining EU, UK has to apply CET on New Zealand's milk, hence it is cheaper for UK consumers to purchase milk from member countries. Risky L4 Conclusion (credit 1 mark) -It is uncertain that the formation of Free Trade Area is better than the formation of Common Market.

Question 10) b) Discuss whether government should be concern about the stability in domestic value of money or balance of payment disequilibrium.(12m) L1 knowledge on stability in domestic value of money and balance of payment disequilibrium Stability in domestic value (4 marks) Money is important as it functions as medium of exchange, store of value, unit of account and deferred payment Purchasing power of money Caused by inflation (demand-pull inflation, cost push inflation, increase in money supply) and deflation Value of money falls or rise Balance of Payment Disequilibrium summarized account of all international monetary transaction between one country and rest of the world shows total payments and receipts of particular country as result of international trading disequilibrium can be in the form of surplus or deficit credit exceeds debit or debit exceeds credit Current Account deficit or surplus caused by population growth, growing income, lack of competitiveness, lack capacity, nonprice factor, overvalued exchange rate L2 disadvantages of unstable domestic value of money and balance of payment disequilibrium (up to 6 marks) Unstable domestic value of money o o o o o o erosion of purchasing power value of money fall buy less goods with same amount of money before standard of living decrease because cost of living increase Shoe-leather costs Inconvenience cost to adjust out notion of what a fair price is for each item Value of money decrease. Inconvenience to travel to and fro the bank to carry the large sum of money.

Balance of Payment Disequilibrium (debit exceed credit) o o o o o o o o o increase unemployment export less than import (people demand on imported goods) decrease profit of domestic producers national output reduces less labour is required to supply at that level of output unemployment increase weakening exchange rate export less than import (people demand more on imported goods) need to buy foreign currency and sell domestic currency demand for domestic currency decrease and supply increase depreciate

L3 benefit of unstable domestic value of money and balance of payment disequilibrium (up to 6 marks) Unstable domestic value of money o o o o o o o o o o o result in rise of employment level or business growth value of money decrease Price of goods increase more profit to producers incentive to increase output require more labour to increase output supply employment increase encourage investment value of money fall due to mild inflation suggest the rise in employment level rising income consumption will rise business confidence increase

Balance of Payment Disequilibrium (debit exceed credit) Reflect higher standards of living o Import more than export o Shows that consumers able to buy because income increase o Imported goods seen as luxury goods o Standard of living increase because there are more variety of goods to chose from Nature of cause of disequilibrium o Due to import of capital asset which causes BOP disequilibrium o Used to generate future output and contribute to countrys GDP o Import high technology machinery by Malaysia during KLIA project which caused disequilibrium in BOP L4 Conclusion (credit 1 mark) -Uncertain

Question 10) b) Discuss whether a government should use expenditure switching policies or expenditure reducing policies to improving competitiveness of a country (12m) L1- Knowledge of expenditure switching policies & expenditure reducing policies (up to 4 marks) Expenditure switching policy is to increase the competitiveness of domestically produced goods both at home & abroad. It attempts to switch the demand of imported goods towards the demand of domestic goods It is not designed to reduce the total amount of spending in a country but to redirect or switch spending to a countrys products rather than those produced in another country. Expenditure reducing policy is used to reduce the total level of spending in an economy by slowing down economic growth Itll have 2 effects, such as a reduction of spending will cause domestic people to purchase fewer imported goods The other effect is that domestic producers will find that their domestic market is dampened, they may try to make up for the decrease in domestic sales with increase sales abroad.

L2- How expenditure switching policy improves the competitiveness of a country & limitation (up to 6marks) One example is by using tariff. Tariff is the tax imposed on imported goods. Tariff diagram The above diagram shows that by imposing tax on imported goods, this will lead to the price of imported good to be more expensive than before, price of imported good will be relatively more expensive than exported goods,which improves the competitiveness of the country since exported goods are cheaper and more people will purchase it. Another example of expenditure switching policy is to use exchange controls that is to devaluate the currency. Devaluating the currency means to fix the value of the currency of one country at a price lower than the equilibrium price of the currency market, in other way its to fix the currency at a lower price. Once the government devaluate the currency, the value of the currency of a country drops, causing price of the exported goods to decrease whereas the imported good to increase since the value of foreign currency is relatively higher than home currency, which will result in an increase of competitiveness of a country since more exported goods can be sold than before due to its lower price. However, by using tariff, it might cause the foreign countries to retaliate, that is to take revenge. As our exported goods become more competitive, foreign competitors who suffer a loss of business as buyers switch away from their goods may resort to imposing tariff on our exported goods to make their good cheaper than the our exported goods, making the imported goods more competitive, then all will be back to square one. Other than that, the J-curve effect will take place when the currency is devaluated The J-curve effect is the time lag in currency devaluation. In the short term, a devaluation of currency might not cause more demand for exported goods. This is because of the low price elasticity of demand of imports & exports in the short term.

Foreign buyers are already locked into existing contracts with current suppliers and will not switch to but the domestic goods immediately. This will still reduce the competitiveness of the country since buyers are still demanding for imported goods.

L3- How expenditure reducing policy improves the competitiveness of a country & limitation (up to 6 marks) One example of expenditure reducing policy is the deflationary fiscal policy- by imposing income tax on domestic consumers. By imposing income tax on local consumers, this will lead to a partial loss in their income, causing the amount of money they actually earn to be lesser than before. This will reduce their purchasing power, causing them to not be able to afford the imported goods since its relatively more expensive. They will opt for domestic goods instead since its cheaper. This will lead to a decrease in demand for imported goods, making our domestic goods more competitive which increases the competitiveness of our country. Other than that, deflationary monetary policy also can be used- that is to increase the interest rate. When the interest rate increases, this will encourage people to save cash in their bank since the rate of return is higher than before. With that, people will prefer to save than to spend, they will demand lesser foreign goods than domestic goods since its relatively expensive than domestic goods. Hence, this will increase the competitiveness of the domestic goods in the country. However, imposing income tax will be effective if it obeys Marshall Lerners theory. Marshall Lerner states that combined elasticity of demand for export and import has to be more than 1 (elastic) in order for people to purchase exported goods and less imported goods when the value of the home currency is lowered. If the demand is inelastic, cheaper prices of exported goods will not appeal to consumers because consumers will still want to demand for imported goods although its relatively more expensive because they are not sensitive to the price change. They will still prefer to spend than save. This will reduce the competitiveness of the country since there is not much demand for exported goods. Other than that, increasing the interest rate might result in inflation. By increasing the interest rate, the government will have to fork out an amount of money which increases government spending Demand pull inflation is C+I+G+(X-M), g stands for government spending. An increase in government spending will lead to an increase in inflation rate. When inflation rate increases, this causes domestic goods to be relatively more expensive, so people will demand for imported goods compared to domestic goods since its not as competitive as imported goods.

L4- Conclusion (credit 1 mark) -The more effective policy to use to improve the competitiveness of a country is uncertain since both expenditure switching and expenditure reducing policy has its advantages and limitations. The effective measure to use to improve the competitiveness of a country depends on the economic situation of a country.

Question 11) b) Discuss whether a widespread shortage of labour might be a major cause of inflation. (12m) L1 Knowledge on inflation (up to 4 marks) -Inflation refers to a general and sustained increase in prices. It can be caused by a multitude of factors, including cost push factors, demand pull factors and increases in money supply.. L2 How does a widespread shortage of labour and rising wages cause inflation (Up to 4 marks) -A widespread shortage of labour will lead to an increase in wage rates. When wages rise, the firms will try to pass on the cost increased to customers, leading to cost push inflation. Diagram L3 Other factors rather than shortage of labour that cause inflation (Up to 6 marks) i) Demand pull inflation (C+I+G+X-M) ii) Cost push inflation (depletion of natural resources, deep recession) iii) Imported inflation L4 Conclusion (credit 1 mark) - Not necessarily shortage of labour is the main cause of inflation.

b) Discuss the significance for the balance of payments on current account increased use of protectionist policies around the world. (12m) L1 Knowledge about protectionism (up to 4 marks) Impose restrictions on trade in goods and services encourage consumers to purchase domestic goods and services help to reduce a countrys current account deficit L2 The use and Benefits of protectionist policies(up to 6 marks) Tariffs - A tax on a good coming into a country - Raises revenue for government - It can be used to restrict imports such as Chinese toys - The increase in cost per unit for supplying toys to Malaysia causes a fall in supply of toys - Therefore, it encourages domestic producer to produce more - Increase domestic employment Quotas - Are physical limits that are placed on the level of imports coming into a country - Can be in terms of volume (number of units imported) or value imports - Prevent demerit goods which generates negative externalities such as cigarette - Price for the exported good would increase domestic producers benefit by receiving higher prices. - Easy to manage L3 Drawbacks of protectionist policies (up to 6 marks) Tariffs - Only effective to reduce imported good when demand is elastic - Reduces consumer surplus as the price of imports rise and consumers purchasing power decreases - Reduce foreign direct investment Quotas - Government could not gain revenue - Will lead to black market - Consumer surplus decreases L4 - Conclusion (credit 1 mark) -Encourage to have protectionist policies to keep competitiveness of own domestic goods especially for the developing countries. It is suggested to find a balance between protective measures in order to make use of protectionist policies on CA.

Question 12) a) Explain what may cause a countrys balance of payment deficit (8m) L1- Knowledge on BOP deficit (Up to 2 marks) -balance of payment measures all transactions of a country with other countries in a certain period of time -BOP is in deficit when the X<M of a country -BOP consists of current account,capital account , and financial account. -For example , in Malaysia ,the total exports < imports , therefore the current account is in deficit ,since current account has a big portion in a countries economy ,this leads to BOP deficit L2-Causes of BOP deficit (Up to 6 marks) i) Increase in disposable income of consumer -when the economy is in boom , this leads to an increase in consumers income ,this will lead to an increase in consumption and investments which are usually bought from other countries , this causes the X<M -higher income group usually demand for imports , thus X<M -For example , when Malaysia opened KLIA , goods and services had to be imported from other countries due to lack of skill and insufficient capital , this caused the total X<M which led to BOP deficit , ii) Overvalued exchange rate -A high exchange rate causes exports to be more expensive in the foreign market while imports become relatively cheaper in the local market -this then causes an increase in demand for imports because it is cheaper compared to exports , thus X<M -this leads to producers having no incentive to produce more goods because goods produced are not profitable as they are no longer competitive in the foreign market . -For example , when the exchange rate RM increases , the cost of production increases , this leads to an increase in the price of goods produced locally . The price of exported goods would then be relatively cheaper than imported goods , thus X<M , this will then lead to a deficit in the BOP -However this is only valid for elastic goods , if inelastic , an increase in price would not have a change in demand from the consumer

Question 12 a) Explain how a countrys balance of payments is organized to account for all its international transactions.(8m) L1- Knowledge about Balance of Payments& international transaction (2marks) BOP is a summarized account of all international monetary transaction between one country and the rest of world. It shows the total payments and total receipts of a particular country as a results of international trading. Receipts of money- credit side,+ve sign ; outflows of money-debit side,-ve sign. Consists current account, financial account and capital account. International transaction refers to the activities for all the inflow and outflow of money from one country to another. L2- Explain how BOP is organized to account for all international transactions. (up to 6 marks) Current account-consists visible goods, invisible goods(services), net income flow and current transfer (government & private) Give example for each component in detailed Capital account- involve transfer of ownership of fixed assets and the acquisition or disposal of non financial assets. Give example in detailed Financial account- records the forms of investments overseas by local citizens and the inward flow of investment funds from foreign residents. Consists investment, other financial flows and reserves. Give example in detailed Error of omission purpose? Reserve BOP always in equilibrium position