END OF YEAR 12 ASSESSMENT

Edexcel A Level
Economics (A)
Year 12 Assessment

PAPER 2: THE NATIONAL

ECONOMY
(Edition 1)

STUDENT
ANSWERS
 Edexcel A Level Economics (A)
Year 12 Assessment
Paper 2 – The National Economy
Student Answers with Commentary

1a Calculate the Gross Domestic Product (GDP) of Country Z in 2017.

(1 mark)
• $6804mn

Incorrect. Candidate has forgotten to subtract imports. [0]
1b Define the term ‘Aggregate Demand’ and explain why the AD curve slopes downwards from left to
right
(4 marks)
• Aggregate demand is the total demand for goods and services produced within an economy. It is
calculated with the formula C+I+G+X-M. As prices goes down, people spend more. When prices go
up, people spend less.
There is a knowledge mark for the definition but nothing else gains credit. The formula does not
help to answer the question. The remaining explanation refers to price rather than price level
and, in any case, does not adequately explain the downward sloping nature of the AD curve. [1]
2a Using these figures, calculate the MPC for the local area. You should give answer to 2 d.p.
(2 marks)
• 0.15

This is awarded both marks despite no workings being shown.
2b Define the term ‘marginal propensity to save’ and explain how an increase in the marginal propensity
to save (MPS) will affect the multiplier
(3 marks)
• MPS is the probability that a worker will save her additional income. MPC is the marginal propensity
to consume. When MPC is higher then the multiplier will be greater. Therefore, when MPS is higher,
the multiplier will lower. It depends on the level of MPT and MPM though as well. If MPT decreases
at the same time that MPS increases then the multiplier is constant.

The definition is fine. The remainder is the answer shows an understanding of the relationship
between MPS and the multiplier (which is worth a knowledge mark – [1]). But the ‘explanation’
doesn’t really show an understanding of why there is i.e. the relationship beyond an implicit
knowledge of the formula. [1]

3a Complete the table by filling in the two empty boxes with the correct values.

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(2 marks)
• First box: 105
• Second box: £2.53

Again, no working is shown but candidates are not asked to do this
3b Using just the data for Good X
i) calculate the inflation rate between 2014 and 2017
ii) explain one cost-push factor that may have caused the price changes.
(3 marks)
The inflation rate is 25% (115-90).
This might be because firms have had to raise their prices because the minimum wage has been
increased by the government and now the firms are just passing those costs onto the consumer. Or
it might be an indirect tax.

The inflation calculation is incorrect. However, the explanation is valid and worth 2 (correct
identification and good explanation). The candidate has given two reasons but the question only asks
for one, and so only one is credited [2].

4a The figures below relate a fictional country: Rosaria. Using the data given, calculate the population
size for the county.
(1 mark)
• 26m
4b Explain one possible reason for the difference between the GDP figure and the GNI figure
(2 marks)
• GDP measures the value of all goods and services made in the UK. GNI is a measure of inequality in
the country. The GNI is higher than the GDP because the economy is very equal.
Fundamental misunderstanding of the concept of GNI (perhaps confusing it with the Gini
coefficient). No credit for just the definition of GDP. [0]

4c Explain one possible reason for the difference between the GDP/capita figure and the GDP/capita at
PPP figure.
(2 marks)
• The cost of living in Rosaria is very high (compared to the USA). This might be because people earn so
much in Rosaria that firms feel that they can charge them a high price.
The explanation is very loose (not particularly rooted in good economic theory) but the
understanding between GDP/Capita and what the purpose of PPP is trying to show is
demonstrated well. Full marks. [2]
5a Calculate how much he will repay in total
(1 mark)
• £3180.00

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 Incorrect because the candidate has assumed that the 6% interest on the first year (£180) is the total
interest, rather than calculating compound interest [0].
5b Explain how the Bank of England can increase economic growth by decreasing the Bank Rate.
(4 marks)
When the Bank of England reduces Bank Rate, people will save less and spend more (C increases).
Firms will take out more loans (I increases). C and I are components of AD and so AD increases, which
increases economic growth.

Two elements of knowledge only but not explained, plus no real understanding of the Bank Rate
shown, as compared with commercial rates [2].

6a Using a Keynesian AD/AS model, illustrate and explain the difference between actual and potential
growth.
(5 marks)
Potential growth is an increase in the maximum level output possible within an economy when all
resources are fully employed i.e. a right shift in LRAS. Actual growth refers to an increase in the actual
level of output at the current moment in time.

On the diagram, potential growth is shown by the shift in AS from Yfe to Yfe1. Actual growth is shown
by the increase in AD leading to an increase in real GDP from Y to Y1.

Full marks. Good knowledge demonstrated and applied well to the diagram [5].

6b Using a diagram, examine the impact of a fall in oil prices on the aggregate supply (AS) curve.
(8 marks)
When oil prices fall, people will choose to spend more money now because things will be cheaper. Oil
is involved in the production of most goods in the economy so when oil prices fall, production costs
fall, things are cheaper and people choose to buy more of those goods.

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 So, consumption (C) increases – as people buy more
things – and government spending (G) increases too.
Therefore, AD increases and real GDP increases. As
a result, unemployment falls. As AD shifts this
creates a movement along the AS curve. The
equilibrium point shifts to the right.

The AS curve itself, therefore, doesn’t move. The
quantity and quality of resources remains constant
because although the price of oil has fallen, the
amount of oil in the economy hasn’t changed.

There is a fundamental error in the theory here. The second sentence correctly identifies the issue
but it is applied incorrectly to the AD/AS diagram. Rather than shifting AD, the fall in production costs
will shift SRAS and there is an extension along the AD curve instead. One bit that is credit-worthy is
the second sentence and the link from oil prices to production costs. [1] Also, some evaluation credit
can be given for the recognition that the productive potential does not change [1]

6C With reference to the data, assess the effectiveness of two economic reforms that Narendra Modi
has used to improve levels of private investment in India.
(10 marks)
Modi has pushed through a simple nationwide sales tax (GST) in order to replace a confusing array of
local and national taxes. Overly complicated bureaucracy and red-tape can put off investors. This is
an attempt to cut through/minimise that bureaucracy, simplify the system and, therefore, encourage
investors.

There is still concern, however, that Modi’s economic reforms have not gone far enough. The
bureaucracy, therefore, has perhaps been reduced but it is still very present and making investment
unattractive. Examples include: the country is still weighed down by over-complicated labour laws
and property purchases are weighed down by bureaucracy whilst private lending (from banks) to
industry is falling for the first time in 20 years.

In addition, Modi has masterminded the adoption of a new Bankruptcy Law which greatly simplifies
the legal process for banks to recover debts owed by insolvent companies.

Whilst these banking sector reforms were helpful, however, previous bad debts are weighing down on
India’s banking system, hindering the flow of loans to the private sector.

The candidate does well initially; s/he gives a good evaluative discussion of sales taxes. The second
policy, however, is far too brief. The candidate adds very little to the quotes that have just been taken
from the data. In the first discussion, the candidate linked the quoted back to the idea of investment
and the effectiveness of the strategy. In the second part is really doesn’t do that at all well. Therefore,
this answer is capped in Band 2 [6/7]

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 6d Discuss whether demographic changes or the level of education and skills provision in India will be
the most significant factor in influencing India’s potential growth rate.
(12 marks)
• LRAS indicates the level of output that can be achieved by an economy when all resources are fully
employed. LRAS shifts outwards when the quality or the quantity of resources increase.

The data says that the demographic structure of India’s population is favourable and over a quarter of
the people joining the world’s workforce between now and 2025 will be Indian. Therefore, the LRAS
should shift out.

However, the data also says that this population growth will be nothing without a sustained increase
in education and skills provision too. The skills levels in India might be very low and so even with lots
of new people being born, the LRAS might not shift out too much because the extra skills that are
being added aren’t up to much.

Greater education and skills provision would allow workers to be more productive. If all workers are
more skilled this will shift LRAS to the right because even with the same number of workers, more
output will be able to be produced.

Education and training can be an ineffective strategy though if it is not well resourced and funded.
There is a time lag to education and it is very expensive which means that there is an opportunity cost
to the policy. The money could have been better spent on healthcare or education.

Overall, I think that both demographic changes and education and training will provide India with a
large increase to LRAS but there may be other factors such as investment level, government spending
on infrastructure or relaxed immigration policies. Probably the demographic changes will be the most
important simply because they are the biggest.

This is a relatively good answer. It looks at both policies and seeks comparison between the two
(evaluating each on their own merits and then sizing towards the end – “the biggest factor”!). The
evaluation of education and training is disappointing because it doesn’t directly address the LRAS
issue. It is throwaway evaluation that adds very little value. The answer reached bottom B3 [9]

6e Discuss the extent to which high levels of economic growth in India will always be beneficial for
consumers, firms and the Government.
(15 marks)
• Economic growth is measured by changes in GDP. GDP is the value of all goods and services made in
the economy. When GDP increases, more output is demanded. This will create a demand for labour
because people are needed to make the output. And so, an increase in GDP will lead to a decrease in
unemployment. In addition, the government will see more tax revenue (because workers are paying
income tax) and spend less on transfers to the unemployed. Currently, an unemployed person gets

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 £70 per week in JSA from the government even though they do not contribute to the GDP. If that
person in in work, it will shift GDP.

When people are in work, they get more income so they will be able to consumer more and satisfy
their wants and needs better. The economy will also produce more and get to export more as a result,
which further increase GDP. The government may collect more tax from exports.

Economic growth, on other hand, may lead to income inequality. The rich get richer and the poor get
poorer. However, many economists would say that the poorest do get richer because they are now
in work so they are better off, it’s just the gap between the richest and poorest has widened.

The environment might also get worse as more businesses start up. When Britain industrialised it lead
to lots of smog in London (“the big smoke”) and even in China today there is a giant pollution cloud in
Beijing. The government may have to spend lots of money to fix that and it is not very pleasant for
consumers who are walking around.

This answer covers a lot of ground and considers several different objectives of the 3 economic agents
in the question. The first paragraph is good and shows a good understanding of the links when GDP
and unemployment and government finances. The second paragraph, by contrast, does not use
correct theory – an increase in production does not guarantee an increase in exports and governments
do not tend to tax exports (only in particular circumstances!). The third and fourth paragraph show a
good appreciation of the evaluation side. The language should be more formal and the points more
developed. This is a decent answer that doesn’t quite hit the top band but there are good elements
to it.[9/10]

7 Evaluate the view that policies aimed at increasing investment are always better than those aimed at
increasing consumption
(25 marks)
Increasing investment can be done through a number of different policies such as decreasing
corporation tax or decreasing interest rates. In either case, firms will be happier to take on loans and
invest in their business to expand. Investment is defined as expenditure on capital goods.

When investment increases, the LRAS shifts to the right. This is because there are now more capital
goods and the potential output of the economy has increased. When LRAS shifts to the right, real GDP
increases and the price level will fall meaning that prices are now more competitive.

Investment is particularly beneficial to an economy when it is over-heating and suffering from
demand-pull inflation. When there is a large negative output gap, there is no reason to increase LRAS
– it just leads to a larger output gap.

Consumption is defined as the expenditure on goods and services. When it increases, AD increases.
This is good because when AD increases, real GDP increases and unemployment falls. However, it is

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 opposite of investment. When the economy has a large output gap this is the time to do increase AD.
When the economy is over-heating, then more consumption will simply lead to more inflationary
pressure – which is undesirable.

Therefore, when the economy is at full capacity it is fair to argue that investment policies are more
beneficial than consumption ones.

The answer is ‘correct’ but it is too simplistic. The theory is correct and the economic terminology is
used effectively. There is little in the way of detailed discussion, however, and the answer would
benefit from more ‘flair’ – examples, discussion of other macro-objectives and a range of issues rather
than just the ‘it depends on the output gap’ point. It scores in the middle bands but is really just a
foundation to what could be a much better response. [12]

8 Discuss whether demand-side policies or supply-side policies are more efficient at reducing the level
of unemployment in a country.
(25 marks)

Demand-side policies will shift AD to the right. An example here could by a reduction in income taxes.
Such a policy will increase the demand for goods and services in an economy. As a result, the demand
for labour increases. As a result, unemployment falls because more people are being hired by
businesses. Unemployment occurs where people, who are willing and able to work, cannot find a job.
Clearly, if more people are being hired by businesses (due to an increase in the demand for output)
then unemployment is said to fall.

Demand-side policies, however, may not be effective for a number of reasons. For example, tax cuts
may not always lead to increased consumption if confidence is low. After the Great Recession, for
example, people were so worried about job security and their own private debts that any decrease in
income tax would have been ineffective because people would have held onto their extra income
rather than spending it.

Supply-side policies are defined as policies whose primary aim is to shift LRAS to the right either by
increasing the quantity or the productivity of resources. Shifting LRAS to the right will only be effective
in reducing unemployment when AD is at full employment already. In that scenario, when LRAS shifts
the intersection between AD and LRAS will still be at Yfe. Therefore, real GDP has increased and more
people are employed.

On the other hand, there is no point increasing LRAS if there is already a large output gap in the
economy. In that case you are simply increasing potential output but, since there is no increase in AD,
this will actually create more unemployment.

Therefore, in the majority of cases, demand-side will always be better.

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Excellent analysis of demand-side policies with a good use of an example and historical context. The
evaluation is good as well. Unfortunately, the answer goes awry in the third paragraph. The candidate
does not identify how supply-side policies can reduce unemployment at all. There is discussion about
full employment which doesn’t really work. Although supply-side policies do shift LRAS, this will not
reduce unemployment if the economy is already at full employment. The fourth paragraph simply
focusses on output gaps and misses the point totally about the different types of unemployment,
which is where this essay should be rooted. [10]

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