SECTION A
Answer ALL questions. Write your answers in the spaces provided.
Use the data to support your answers where relevant. You may annotate and
include diagrams in your answers.
1. Look at this data on exchange rates
Index
Jan 2005 = 100; source ONS 2015
1980…
1981…
1982…
1983…
1985…
1986…
1987…
1988…
1990…
1991…
1992…
1993…
1995…
1996…
1997…
1998…
2000…
2001…
2002…
2003…
2005…
2006…
2007…
2008…
2010…
2011…
2012…
2013…
2015…
130
120
110
100
90
80
70
60
Value of the £: trade-weighted index 1980-2015
1a) Define the term ‘index’. (1)
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1b) In relation to the graph, which of the following statements is true?
A. Between 1980 and 2015 the £ has never been higher than $1.25
B. Over the whole period the biggest rise in the £’s value was in late 1980
C. Over the whole period the biggest fall in the £’s value was between 2007 and 2008
D. The pound’s value in 2015 is worryingly high
State your answer here __________
1c) In 2010 the trade-weighted index was 80. Explain what that means. (2)
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2a) The diagram shows an economy operating at point A. This economy will be experiencing:
Price
level
LRAS
SRAS
A
AD
Real output
A. Demand-deficient unemployment
B. Demand-pull inflation
C. A failure of supply-side policies
D. A negative output gap
State your answer here __________
2b) Define the term ‘output gap’. (1)
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2c) Explain one reason why supply-side policies might fail. (2)
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3. Look at this data on UK trade with China, then answer the questions below.
£ms
UK trade with China 1998-2014 ONS 2015
40000
36130
35000
30000
25000
20000
14075
15000
Exports
Imports
10000
5000
2940 1498
0
3a) Define the term ‘import’. (1)
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3b) Calculate the balance of trade between the UK and China in 2014. (2)
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3c) In relation to the UK/China data, which of the following statements is correct?
3a) Imports from China rose by 1,229% between 1998 and 2014
3b) In 2014 we imported £3.6 billion of goods from China
3c) It looks as if UK exports to China should outstrip our imports within 5 years
3d) Between 2000 and 2014 UK exports to China rose by 840%
State your answer here __________
4. This UK data shows the trade cycle from 1956 to 2015
% ch
% change in quarterly GDP v previous year
UK Q1 1956 - Q2 2015 Source: ONS 2015
12
10
8
6
4
2
-2
-4
1956 Q1
1958 Q2
1960 Q3
1962 Q4
1965 Q1
1967 Q2
1969 Q3
1971 Q4
1974 Q1
1976 Q2
1978 Q3
1980 Q4
1983 Q1
1985 Q2
1987 Q3
1989 Q4
1992 Q1
1994 Q2
1996 Q3
1998 Q4
2001 Q1
2003 Q2
2005 Q3
2007 Q4
2010 Q1
2012 Q2
2014 Q3
0
-6
-8
4a) Define the term ‘trade cycle’. (1)
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4b) How many recessions have there been since 1956? Explain your thinking.
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4c) Which of the following is the most accurate statement relating to the graph?
A. The peaks of the cycle come quite predictably – every 5 years.
B. The 2009 recession was the deepest of the last 50 years.
C. The recession of 1965-66 saw one of the sharpest downturns.
D. The data shows the superiority of economic policy today compared with years gone by.
State your answer here __________
5. The aggregate demand within an economy is represented by AD1
5a) Define the term ‘aggregate demand’. (1)
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5b) Explain how a short run aggregate supply curve might look on this graph. (By all means draw a
SRAS curve on the diagram above). 2 marks
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5c) If it experiences an appreciation of its currency, how would that be reflected in the diagram?
A. AD will shift rightwards to AD2 because foreign buyers will buy more of our exports
B. AD will remain at AD1 but the long run AS curve will move rightwards
C. AD will shift leftwards to AD3 because UK producers have become less competitive internationally
D. AD will remain at AD1 but the long run AS curve will move leftwards
State your answer here __________
End of Section A
SECTION B
Read Figures 1 and 2 and extract (A) before answering Question 6.
Answer ALL Questions 6(a) to (e), and EITHER Question 6(f) OR Question 6(g).
Q6. UK employment 2015
Extract A. Adapted from On Immigration, Madsen Pirie, Adam Smith Institute, April 6 th 2015
Many argue that immigration harms the economy. Some suppose that immigrants are attracted by
welfare, and come to live off benefits at the taxpayers’ expense. Others assert the contradictory claim
that “they come here to take our jobs.” Some point to the pressure on services and resources, with
immigrant children filling classrooms and their sick taking up hospital beds and lengthening waiting
times to see doctors.
The reality is that most immigrants are young and ambitious, coming to better their lives. They are
overwhelmingly fit and looking for work. Many of the jobs they take up are ones whose low pay and
long hours do not appeal to the native population. They come from countries where underemployment is the norm; they want to work. Most do not draw benefits or take up hospital space. In
some sectors they help fill skill shortages, and many UK businesses clamour for more educated and
talented foreigners to be allowed in.
The work they do adds to our GDP and boosts growth. The taxes they pay boost our public
finances. Most immigrants have shown some drive in being prepared to move to a new country to
improve their lot. Some have scraped up cash to finance their trip. Some have taken risks on their
journey. They constitute a huge net plus to the economy, not a minus.
It is true that in some areas, particularly if they concentrate, they can put pressure on local
facilities. These are indeed problems, but they are ones that can be addressed and dealt with, and
some are temporary rather than long-term.
Immigrants do one more positive thing for the economy. Most countries in Europe face declining and
ageing populations, and will encounter difficulties if there are not enough young people in work and
paying taxes to support the elderly with appropriate services. The UK population is not declining, and
it is immigration that is making the difference. Far from constituting a problem, it is in this case a
solution.
Extract B. Net migration to the UK 2005-2014
000s
Net migration to the UK 2005-2014
Source ONS Aug 2015
700
600
500
Immigration
400
300
Emigration
200
100
0
YE YE YE YE YE YE YE YE YE YE YE YE YE YE YE
Jun Jun Jun Jun Jun Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep
05 06 07 08 09 10 10 11 11 12 12 13 13 14p 14p
Extract C. Data extracted from ONS August 2015 report on Labour Market Trends
000s
UK employment total, 1999 - 1st Q 2015
Source: ONS
32,000
31,000
30,000
29,000
28,000
27,000
25,000
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
26,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015
6a) Explain the distinction between unemployment and under-employment. (Extract A). [5 marks]
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6b) From the data in Extract B, calculate an estimate of the net migration figure for the year-ending
December 2014 (the end of the lines). [4 marks]
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6c) Explain the impact of rising levels of net inward migration on AS/AD. Use a diagram to support
your answer. [6 marks]
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6d) Assess the effects of unemployment on firms and the government. [10 marks]
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_____
6e) Using the data in the extracts and your economic knowledge, discuss the possible effects of
migration on the U.K.’s rate of economic growth. [15 marks]
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6f) Evaluate whether non-price factors are the most important influence on the UK’s net trade
balance. [20 marks]
OR
6g) Evaluate the potential conflicts and trade-offs that can arise during a period of relatively rapid
economic growth. [20 marks]
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End of questions
ANSWERS
1a) Define the term ‘index’. (1)
An index takes one number within a series as 100, then relates all other numbers to that 100 base
period.
1b) C
1c) In 2010 the trade-weighted index was 80. Explain what that means. (2)

If an index is 80, it means that period is 20% lower than the base period (when the data
equalled 100). Here, the £ has fallen 20% against all other currencies.
2a) B. Demand pull inflation
2b) Define the term ‘output gap’. (1)

The difference between actual output and its full capacity output level.
2c) Explain one reason why supply-side policies might fail. (2)


They might fail if demand is deficient. In 2011 and 2012 the UK was suffering from lack of
demand due to the exceptional squeeze on people’s real living standards
OR it may be that in some countries corruption syphons off most of the supply benefits from
the capital spending (the money disappears to Switzerland and the road/railway etc is never
completed)
3a) Define the term ‘import’. (1)

An import is a product or service bought from an overseas supplier.
3b) Calculate the balance of trade between the UK and China in 2014. (2)
Balance of trade = exports minus imports
£14,075m - £36,130m = minus £22,055m
3c) D
4a) Define the term ‘trade cycle’. (1)

The pattern of GDP upturns and downturns that characterises free market economies
4b) How many recessions have there been since 1956? Explain your thinking.


4 (though there’s a case for saying that the period 1974-1976 contained two, in which case 5
is OK)
A recession is two successive quarters of negative growth; they took place in 1974/5, 1980,
1990 and 2008/9
4c) B
5a) Define the term ‘aggregate demand’. (1)

It’s the sum total of the demand for goods and services throughout the economy, measured
by value.
5b) Explain how a short run aggregate supply curve might look on this graph. (By all means
draw a SRAS curve on the diagram above). 2 marks

The SRAS curve is upward sloping, from bottom left to top right, reflecting the fact that the
higher the price level, the keener companies are to supply the market
5c) C
6a) Explain the distinction between unemployment and under-employment. (Extracts A & C). [5
marks]


Unemployment occurs when people who are willing and able to work cannot find a job;
Extract C shows the plunge in employment during the 2009 recession; clearly, at a time like
that, unemployment will be widespread
Under-employment is when work is spread too thinly over too many people; e.g. 5 people
employed when 3 could easily do the work; this is unlikely to happen in a free market system,
because profit-seeking firms would employ the three and make the two redundant
6b) From the data in Extract B, calculate an estimate of the net migration figure for the yearending December 2014 (the end of the lines). [4 marks]

I can cheat: the actual figures were immigration 641,000 (I’d say anywhere between 630,000
and 645,000 is fair) and emigration 323,000 (let’s say 313,000 to 330,000)

So the full-mark answer can lie between 300,000 and 332,000 (actual answer: 318,000)

Give 1 mark each for acceptable estimates; one for the correct formula (Imm – Em) and one
for the correct answer
6c) Explain the impact of rising levels of net inward migration on AS/AD. Use a diagram to
support your answer. [6 marks]

Without question, net inward migration increases labour supply, threatening to push wage
rates down …

… but the migrant labour must eat, sleep etc and therefore spends much of its income in the
UK (there’s likely to be some money sent back to family back home, but this is rarely a huge
chunk of the UK-generated income)

As the diagram shows, this is a huge win-win from an economic point of view (but the
electorate aren’t all economists!)
AS1
Price
level
2
AS
P1
AD2
AD1
Q1
Q2
Real output
6d) Assess the effects of unemployment on firms and the government. [10 marks]

It can be argued that firms love unemployment; it gives them a labour pool from which they
can pick strong, well-qualified, perhaps relevantly-experienced candidates – and with little
pressure on wages. In the period 2010 to 2013, when the labour market was soft, annual pay
rises of 1% were commonplace – and zero% was not unheard of

Employers’ representatives such as the CBI would make a different claim, bemoaning the lost
potential output involved when, by implication, there’s a negative output gap that needs to be
filled; so the employers would emphasise the opportunity cost implied in economic weakness
that makes it impossible for existing suppliers to employ all the staff available

For the government the situation appears to be clearer. Unemployment puts pressure on
public spending and represents the loss of PAYE and other tax income, i.e. unemployment is
a lose-lose in terms of the fiscal balance; but recent governments have found silver linings;
after the 2009 recession the Coalition government was able to place blame on the
unemployed for the high welfare payments – and use them as a justification for lowering
welfare payments for all non-pensioners; some economists believe that lowering welfare
payments mean improved incentives to work – perhaps benefiting economic growth in the
long term
6e) Using the data in the extracts and your economic knowledge, discuss the possible effects
of migration on the U.K.’s rate of economic growth. [15 marks]
 Economic growth is widely measured as the rate of change in real GDP; as such, it verges on
the inevitable that net immigration at a rate that’s about half a percent per year (325,000ish
out of a population of about 65 million) will add to GDP and therefore to ‘growth’. For the past
25 years America’s per capita growth rate has been below Britain’s – but the focus on total
GDP has told a different story (America’s population growth rate is significantly higher than
Britain’s). So let’s accept that there’s no doubt that net migration will boost total GDP

More interesting is how relatively high net immigration is likely to affect per capita GDP
growth; the argument for can be constructed on a demographic basis (most immigrants are
relatively young adults and therefore of working age; this fits in with Madsen Pirie’s point
about helping pay for older people) or on an attitudinal basis. The latter point takes as its
starting point that throughout history, migrants have tended to be motivated and enterprising;
after all, they’ve taken a risk in spending money moving to a place where, probably, they have
no definite job/accommodation and so on. Most would stay put, for fear of going from the
frying pan into the fire; migrants have always been willing to take that risk (and today the risks
are higher than they’ve been for a very long time); the case can be put, therefore, for saying
that the average immigrant will generate higher economic value in the medium-long term than
the average Brit

But there are economic arguments to counter this; one comes from trade union leaders who
believe that their members’ wages are being held down by the fact that excess labour
demand pulls in more labour supply (from elsewhere in the EU) whereas in the past it would
have pulled up the wage rate. This might not have mattered if recent years hadn’t seen
dramatic increases in the remuneration packages for those at Director level within
businesses. This has meant that income inequality is higher today than for more years – and
the perceived unfairness is believed by some to be a threat to long term economic health
6f) Evaluate whether non-price factors are the most important influence on the UK’s net trade
balance. [20 marks]






OR
There are several factors that affect the UK’s net trade balance, including the impact of UK
real incomes on the rate of importing, the value of the £, the state of the world economy, nonprice factors and the degree of protectionism; is any single one of these the ‘most important’
one? The answer will tend to change over time
The data in Q3 showed the UK’s massive (£22bn) trade deficit with China; the level of that
deficit probably owes something to protectionist tariffs levied by China, including the 50-75%
tariffs levied on Jaguar Land Rover exports of luxury cars. Despite this example, the level of
tariff protection today is far lower than, say, twenty years ago; in most cases it’s less than
10%, making it a relatively small contributor to what has traditionally been Britain negative net
trade balance
Real incomes in the UK are a very important factor, because our propensity to import is high
generally, but especially so when dealing with discretionary, luxury spending; when the British
spend big, they buy cars from Germany, bags from France and Italy, champagne from France
and electronic treats from the US, Japan and the Far East; in general this wouldn’t be the
most important factor, but in luxury boom times, it could be
Logically, exchange rates should be a factor of overwhelming important, since they dictate the
effective prices charged for exports and therefore the profitability generated; curiously,
though, economists for the past ten – fifteen years have found that this ain’t necessarily so;
they’ve ended up thinking that perhaps the price elasticity of our exports is so low that the
exchange rate tends not to matter
The state of the world economy is, of course, a huge factor affecting the level of our exports;
the Eurozone crisis hit the region where the UK sends 50% of its exports – so this inevitably
had an effect on our net trade balance; in 2015 there are worries that a Chinese slowdown
will hit world growth, leaving the UK vulnerable to falling exports and a worsening balance of
trade
… which leaves non-price factors; as I write, James Dyson has announced global sales of
£1,400 million and profits of £367 million; that huge margin of 26% is Apple-like (Tesco is
struggling to get a 1% margin at the mo). The point is simple: produce brilliantly designed,
innovative and well-marketed products and they will come and they will pay top dollar; in
China they want Land Rover Evoques; in Japan they want Dyson cleaners; and everywhere
they want Johnnie Walker. In the long run, non-price factors are the key to a healthy trade
balance – look at Germany, with the world’s biggest trade surpluses; they don’t think price,
they think quality
6g) Evaluate the potential conflicts and trade-offs that can arise during a period of relatively
rapid economic growth. [20 marks]
 In a period of relatively rapid growth, the classic trade-off has been between inflation and that
growth rate (masquerading as government concern about unemployment); in other words 15
or so months of 3% real growth would usually put pressure on the supply side of the
economy; companies would start to struggle to get the inputs they need (and at a price they
can afford); worries about capacity constraints will see companies investing in bigger
premises, new factories and newer, smarter machinery; as this demand for capital goods is
clustered with others needing the same, the price of construction projects rises; so demand
pull factors coalesce with cost-push factors to make inflation creep upwards; in recent years
the inflationary pressure has manifested itself most obviously in assets rather than in labour
(wage demands); so house prices shoot ahead – as, probably, do stock market prices (and
fine art, and fine wine)

For the government, the signs are there that this growth is too boom-like; so the correct policy
response is to tighten monetary or fiscal policy or both; but that threatens the gravy-train –
and governments love a gravy train (less forgivably, so too have central bankers); the tradeoff is clear: do we risk strangling this boom that everybody likes – and that makes we
politicians and bankers look good (Gordon Brown 2006; Nigel Lawson 1989; Anthony Barber
1973); or do we let it go on a little bit longer – and, who knows, perhaps it’s not a boom at all,
but a new, higher, long term growth rate!

A further trade-off is between the rapid growth and the balance of trade; higher growth means
higher imports and therefore a worse trade deficit; that’s bearable in the short-term, but much
less so in the long run; in the Lawson boom of the 1980s, depreciating the £’s value was
intended to get round this problem; it didn’t.