Economics ib paper

c IB DIPLOMA PROGRAMME PROGRAMME DU DIPLÔ ME DU BI PROGRAMA DEL DIPLOMA DEL BI N06/3/ECONO/SP1/ENG/TZ0/XX/M+ MARKSCHEME November 2006 ECONOMICS Standard Level Paper 1 7 pages —2— N06/3/ECONO/SP1/ENG/TZ0/XX/M+ This markscheme is confidential and for the exclusive use of examiners in this examination session. It is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of IBCA. —3— N06/3/ECONO/SP1/ENG/TZ0/XX/M+ In addition to the assessment criteria use the paper-specific markscheme below. Award up to the maximum marks as indicated. 1. (a) Explain why underprovision of merit goods in an economy is considered to be a market failure. Candidates may include any of the following: – definition of market failure – definition of merit good – explanation of positive externalities – how the underprovision of merit goods leads to market failure – diagram of underprovision of merit goods – example of merit goods – social benefits and marginal social benefits Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. (b) Evaluate the possible measures that a government might use to correct such a market failure. Candidates may include any of the following: – government financing the production of the good – direct provision of merit goods – subsidies – legislation to make consumption of the good or service mandatory – advertising to encourage consumption Candidates may illustrate government measures with examples. Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to: – consider short run versus long run consequences – examine the impact on different stakeholders – discuss advantages and disadvantages – prioritize the arguments [10 marks] [15 marks] —4— 2. (a) N06/3/ECONO/SP1/ENG/TZ0/XX/M+ [10 marks] Explain the following different types of unemployment: – – – – frictional unemployment: search time workers experience between jobs structural unemployment: mismatch of skills between unemployed and available work cyclical/demand-deficient unemployment: in a recession or because of falling AD real wage/classical unemployment: when real wages are pushed above the market clearing level by minimum wages (b) Evaluate the effectiveness of the different measures available to governments to deal with the types of unemployment in (a). [15 marks] Candidates may include any of the following: – explanation of how demand management can be used to reduce cyclical/demand-deficient unemployment – discussion of the problems associated with expansionary fiscal and monetary policy: e. g. inflation, time lags, export competitiveness – explanation of how supply-side policies can be used to reduce the other three types of unemployment – discussion of the problems associated with supply-side policies: e. g. less protection for workers, time lags, cost and effectiveness of policies Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to: – consider short run versus long run consequences – examine the impact on different stakeholders – discuss advantages and disadvantages – prioritize the arguments —5— 3. (a) N06/3/ECONO/SP1/ENG/TZ0/XX/M+ [10 marks] Explain the reasons why countries trade with each other. Candidates may include any of the following: – differences in factor endowments – variety and quality of goods – gains from specialization – political considerations – learning about new production techniques and technology No need to mention “ comparative advantage” for full marks. Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. (b) Given the benefits of trade, evaluate the economic arguments in favour of protectionism. Candidates may include any of the following: – infant industry argument – efforts of a developing country to diversify – protection of employment – source of government revenue – strategic arguments – means to overcome a balance of payments disequilibrium – anti-dumping – maintenance of health, safety and environmental standards Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to: – consider short run versus long run consequences – examine the impact on different stakeholders – discuss advantages and disadvantages – prioritize the arguments [15 marks] —6— 4. (a) N06/3/ECONO/SP1/ENG/TZ0/XX/M+ Explain why a firm may benefit from becoming a multinational corporation. Candidates may include any of the following: – definition of multinational corporation – examples of MNCs – access to new markets – access to cheap resources – reduce transport costs – take advantage of less regulations – transfer pricing [10 marks] Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. (b) Evaluate the effectiveness of Foreign Direct Investment (FDI) as a means of achieving economic growth and economic development in a less developed country. [15 marks] – definition of FDI – understanding of difference between economic growth and economic development Candidates may include any of the following possible advantages of FDI: – fills saving gap – fills foreign exchange gap resulting from deficit on current account of the balance of payments – fills revenue gap by taxing MNC activities – transfer of technology from MDC to LDC – increased demand for local labour resources – training opportunities for local workers – reduced unemployment in LDC – extra goods for consumption and for export will be produced – local suppliers will be used by MDC to source supplies – source of capital for LDC which stimulates growth Candidates may include any of the following possible disadvantages of FDI: – loss of sovereignty by host nation – dependence of host nation on activities of MNC – repatriation of profits by MNC – exploitation of local labour force — low wages and poor working conditions – may drive out local businesses – dual economies result – income inequalities due to widening wage differentials in urban and rural areas – capital intensive technology rather than labour-intensive technology limits benefits to host country – MNCs exert political control to influence government policy – environmental degradation —7— N06/3/ECONO/SP1/ENG/TZ0/XX/M+ Advantages and disadvantages of FDI should be related to growth and development. Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to: – consider short run versus long run consequences – examine the impact on different stakeholders – discuss advantages and disadvantages – prioritize the arguments