A-Level Economics A: Case Studies PAPER 2

Question 1

Theme 2: Economic Growth

What was the UK’s, US’s, and Eurozone’s economic growth in 2019?

Answer 1

UK - 1.4%
US - 2.1%
Eurozone - 1.2%

Question 2

Theme 2: Economic Growth

What was the UK’s, US’s, and Eurozone’s inflation rate?

Answer 2

UK - 2.1%
US - 2.1%
Eurozone - 1.3%

Question 3

Theme 2: Economic Growth

What was the UK’s, US’s, and Eurozone’s budget deficit in 2018?

Answer 3

UK - 1.2% of GDP
US - 3.9% of GDP
Eurozone - 0.5% of GDP

Question 4

Theme 2: Economic Growth

What was the UK’s, US’s, and Eurozone’s estimated unemployment rate?

Answer 4

UK - 3.8%
US - 3.7%
Eurozone - 7.5%

Question 5

Theme 2: Consumption

What’s an example of an increase in consumption in 2018 for American households and firms?

Answer 5

Trump administration announced tax cuts in 2018 for American households and firms. This increased disposable income for consumers across America. This, therefore, increased their marginal propensity to consume.

Question 6

Theme 2: Consumption

What’s a recent example of a decrease in consumption in the USA?

Answer 6

Due to the Covid 19 pandemic, countries have experienced high rates of unemployment as a result of lockdowns. Lockdowns force non-essential shops to close. With many fears of redundancy, this fuels the increased marginal propensity to save which has contributed to the recession the US was experiencing in 2020, due to the reduction of GDP.

Question 7

Theme 2: Investment

What is an example of an increase in investment in 2020?

Answer 7

China was the only G20 nation projected to see positive economic output at the end of 2020. Because Covid-19 has accelerated the shift in power from the West to the East, it has simply attracted more and more people to invest their money in Chinese firms.

Question 8

Theme 2: Investment

What is an example of a decrease in investment in the UK?

Answer 8

Brexit has deterred investors from the UK ever since the EU referendum in 2016. In the event of a no-deal Brexit, the UK would be forced to trade on the terms of the World Trade Organisation (WTO). This may result in much larger tariffs on UK exports, significantly damaging GDP and thus discouraging risk-averse investors from channelling their funds into the UK.

Question 9

Theme 2: SRAS

What are the determinants of SRAS?

Answer 9

1. Cost of employment
2. Cost of raw materials
3. Government regulation

Question 10

Theme 2: SRAS

What is an example of the cost of employment increasing?

Answer 10

During peak seasons at airports, like Christmas, airport baggage handlers are most likely to go on strike with demands for higher wages, as this is the period when airports cannot afford any delays in flights. A rise in wages increases the cost of production for firms, and therefore shifts the SRAS curve left, from SRAS 1 to SRAS 3.

Question 11

Theme 2: SRAS

What is an example of the cost of employment decreasing?

Answer 11

Due to national lockdowns to prevent the spread of coronavirus, the UK government had implemented a furlough scheme, which subsidised wage bills. 80% of monthly salaries were covered by the government, with the remaining 20% covered by employers. This should lower the cost of production for firms, shifting the curve to the right from SRAS 1 to SRAS 2.

Question 12

Theme 2: SRAS

What is an example of the cost of raw materials increasing?

Answer 12

In 1973, the Organisation of Petroleum Exporting Countries (OPEC) imposed an oil embargo against the United States due to geopolitical factors in the Middle East. The USA was very reliant on oil at that time, and OPEC controlled roughly 75% of the global supply, an embargo forced the price of oil upwards, which increased the cost of production for many firms.

Question 13

Theme 2: SRAS

What is an example of the cost of raw materials decreasing?

Answer 13

As the issue of climate change is becoming increasingly clear, people have started the transition to becoming ‘greener’, and leaving less harmful impacts on the planet through the use of renewable energy. As mentioned, by shifting away from non-renewable energy sources, countries are less reliant on OPEC for oil, as multiple alternatives are available. This in turn reduces the overall cost of production for firms, shifting the curve from SRAS 1 to SRAS 2.

Question 14

Theme 2: SRAS

What is an example of the government increasing costs of production? (Hint: BCA)

Answer 14

The European Union has pledged to become climate-neutral by 2050, and in order to achieve this goal, they plan to implement a Border Carbon Adjustment (BCA) mechanism by 2022. This is effectively a tax levied on imports that are not produced by environmentally-friendly methods. Firms will therefore either have to pay the tax or invest in ‘green’ technology to exempt themselves from it. Either way, firms will see an increase in the cost of production.

Question 15

Theme 2: Supply-side policy

What is an example of a market-based supply-side policy in the UK? (Hint: 2013)

Answer 15

In 2013, the UK Government privatised Royal Mail. The Government believed privatisation would enable Royal Mail to raise money to invest and therefore improve its competitiveness. The Government raised £2bn through the sale.

Question 16

Theme 2: Supply-side policy

What is the UK’s justification for privatising the Royal Mail?

Answer 16

The UK government points to other countries’ success when privatising their postal services. For example, Belgium’s postal service returned to profitability soon after its part-privatisation in 2006. Austria Post and Deutsche Post also benefited from increased profits after being privatised. Both companies enjoy profit margins double that of Royal Mail.

Question 17

Theme 2: Supply-side policy

What is an example of an interventionist supply-side policy in the UK?

Answer 17

The government initially invested £55bn in a high speed and efficient train service, called HS2, connecting London, Leeds, Manchester, the East and West Midlands and South Yorkshire.

Question 18

Theme 2: Supply-side policy

What is the UK’s justification for the development of HS2?

Answer 18

HS2 will significantly increase the number of seats between London and Birmingham. The full network would run up to 18 trains an hour. HS2 will increase labour productivity as less time is spent travelling to work.

Question 19

Theme 2: Supply-side policy

How would HS2 help alleviate the geographical immobility of labour?

Answer 19

HS2 is expected to carry over 300,000 people every day, supporting a wider transformation in the way we travel. It will relieve congestion on vital roads. It will also help increase the geographical mobility of labour.

Question 20

Theme 2: Supply-side policy

What did the UK announce in 2018 with regard to the NHS?

Answer 20

In 2018, the UK Government announced an additional £20bn for the National Health Service by 2023. The UK currently spends £114bn on the NHS. Funding will increase by around £4bn a year for the next 5 years. The money will be used to reduce waiting times for patients, helping boost labour productivity.

Question 21

Theme 2: Demand-side policy

What is an example of monetary policy in the UK?

Answer 21

In December 2007, the Bank of England cut the interest rate from 5.75% to 5.5% to encourage consumers to spend and firms to invest (boosting AD).

Question 22

Theme 2: Demand-side policy

When did the BoE stop cutting interest rates?

Answer 22

The Bank of England continued cutting the interest rate until it reached 0.25% in August 2016.

Question 23

Theme 2: Demand-side policy

When did the BoE actually start increasing interest rates?

Answer 23

The Bank of England continued cutting the interest rate until it reached 0.25% in August 2016. As economic performance improved, unemployment fell and inflation pushed up, the Bank of England began raising the interest rate, to 0.5% in 2017 and to 0.75% in 2018.

Question 24

Theme 2: Demand-side policy

In the form of Quantitative Easing, how much had been pumped into the UK economy in November 2009, July 2012, August 2016, and March 2020?

Answer 24

November 2009 - £200bn
July 2012 - £375bn
August 2016 - £435bn
March 2020 - £645bn

Question 25

Theme 2: Demand-side policy

What is a limitation of quantitative easing in the UK?

Answer 25

30% of bondholders are foreign financial corporations. When the Bank of England purchases bonds, they are buying bonds held by foreign investors. This will do little to stimulate economic activity in the UK.

Question 26

Theme 2: Demand-side policy

What is the breakdown of UK Government Spending as of the 16th of March 2016?

Answer 26

Health - £145bn
Education - £102bn
Defence - £46bn
Government Debt Interest - £39bn
Housing - £34bn
Transport - £29bn
Total 2016-17: £772bn

Question 27

Theme 2: Demand-side policy

What did the UK implement in the aftermath of the 2008 financial crisis?

Answer 27

The UK government implemented an expansionary fiscal policy. Spending on education, healthcare, infrastructure and welfare increased.

Question 28

Theme 2: Demand-side policy

In terms of taxes, what had occurred after the 2008 financial crisis?

Answer 28

Taxes on expenditure (VAT) were cut from 17.5% to 15%.

Question 29

Theme 2: Demand-side policy

What impact occurred as a result of UK expansionary fiscal policy?

Answer 29

Government debt increased from 40% of GDP in 2006 to over 75% of GDP in 2010. In 2018, UK debt reached 86% of GDP.

Question 30

Theme 2: LRAS

What is an example of the impact of technological advances on LRAS?

Answer 30

In 2015, China made a ten-year plan, “Made in China 2025”, to expand their high-tech sectors in order to become a “manufacturing superpower”. This involves Research & Development (R&D) subsidies in the aviation industry, railway equipment, Information Technology, etc. As shown in the diagram, this will shift the LRAS curve to the right, expanding output to Y2 whilst still maintaining the price level at P1.

Question 31

Theme 2: LRAS

What is an example of the impact of changes in education on LRAS?

Answer 31

The new T-levels introduced to 16-18-year-olds will increase the quantity of high-skilled workers, as the younger generation will be equipped with the skills that potential employers are looking for. This will shift the LRAS curve to the right, boosting the productive capacity of an economy.

Question 32

Theme 2: LRAS

What is an example of the impact of competition policy on LRAS? (Hint: AIRLINE)

Answer 32

The “Airline Deregulation Act” was passed by Congress in 1978 to effectively remove ‘red tape’ in the aviation industry by no longer allowing the U.S. government to control air routes or fares. This allowed more firms to enter the market, which increased competition due to the presence of a profit motive.

Question 33

Theme 4: Globalisation

What’s a recent example of external shocks to the global economy?

Answer 33

The Covid-19 pandemic forced countries around the world to close their borders to foreigners in order to reduce the spread of the virus. This also meant a temporary halt to imports and exports between countries. However this has forced firms across the planet to rethink their structuring of supply chains - as these chains have clearly proven to be more vulnerable to economic shocks than once thought.

Question 34

Theme 4: Globalisation

What’s an example of globalisation not benefitting countries?

Answer 34

Trade liberalisation has encouraged firms from the West (i.e. the UK, America and Europe) to outsource their factories to the East (i.e. Asia and the Middle East). Low-Income Countries in the East offer cheap labour and therefore attract foreign firms as a way of reducing costs. However, this resulted in mass structural unemployment in countries in the West, particularly in the textiles and manufacturing industries.

Question 35

Theme 4: Patterns of Trade

In 2016, what was the UK’s main export value?

Answer 35

In 2016, UK exports were valued at around £300bn. The main exports in the UK were financial services, cars, wholesale medicines, gas turbines, petroleum and gold.

Question 36

Theme 4: Patterns of Trade

In 2016, what was the UK’s main import value?

Answer 36

In 2016, UK imports were valued at around £500bn. The main imports were cars, vehicle parts, aircraft, gold, petroleum and wholesale medicines. The leading suppliers of imports to the UK are Germany, China, the USA and the Netherlands.

Question 37

Theme 4: Regulation

What is one of the UK’s new regulatory bodies within the CMA?

Answer 37

The Digital Markets Unit (DMU). The unit regulates firms that have a “strategic market status” and are funded by digital advertising, namely Facebook and Google.

Question 38

Theme 4: Regulation

What is the approach the DMU utilises in terms of regulation?

Answer 38

It is “ex ante” regulation, as opposed to “ex post” regulation. Ex ante regulation refers to government intervention prior to any market power abuse, telling firms how to behave rather than punishing them after misbehaving.

Question 39

Theme 4: Regulation
`
What are recent reasons for efforts to regulate tech firms?

Answer 39

The storming of the US Capitol in January 2021 saw tech firms like Apple and Facebook ban Parler (a social media app) from their app stores. As well as this, Twitter and Youtube banned Donald Trump on their platforms as the president violated their guidelines. This opened the tech firms to more regulatory scrutiny as many world leader have expressed concerns regarding how much power the firms have over free speech.

Question 40

Theme 4: Regulation

What is a recent example of regulatory capture in 2016?

Answer 40

In 2016, there was a public outcry when energy companies stopped showing consumers how much profit they make off each household. This action meant that firms could increase prices to exploit monopoly power without households being aware. However, OFGEM sided with the energy companies without sufficient justification.

Question 41

Theme 4: Restrictions on free trade

What are examples of import tariffs lowering?

Answer 41

In 2017, China cut import tariffs on 187 consumer goods from whisky to cashmere clothing. Its import tariffs on luxury foreign goods such as Scottish Whiskey from 10% to 5% is a sign the Chinese government want to encourage consumer spending.

Question 42

Theme 4: Restrictions on free trade

What are examples of high import tariffs? (Hint: AMERICA)

Answer 42

In January 2018, President Trump imposed 30% tariffs on imported solar panels from China.

Question 43

Theme 4: Restrictions on free trade

Why were the tariffs on solar panels a major hit to the US solar industry?

Answer 43

It was also a blow to the U.S. solar industry, which was responsible for generating $18.7 billion of investment in the American economy and which at the time imported 80% to 90% of its solar panel products.

Question 44

Theme 4: Restrictions on free trade

What are examples of import quotas in the US?

Answer 44

The United States limits the number of Chinese car imports to 3 million per year. This import quota on foreign car products will help the domestic car manufacturing companies to increase their production and establish their footprint in the United States market with maximum profit.

Question 45

Theme 4: Restrictions on free trade

What are examples of subsidies?

Answer 45

The EU gives €39 billion to farmers in direct subsidies. Indirectly, this makes EU agricultural exports more competitive and gives EU farmers an advantage in trade. A domestic subsidy from the government can give the local firm a competitive advantage.

Question 46

Theme 4: Free trade

Which economist generally supported free trade?

Answer 46

Adam Smith, the author of The Wealth Of Nations (1776), made the argument there is no point in protecting the Scottish wine industry if it would cost 30 times the price of importing wine from warmer countries.

Question 47

Theme 4: Free trade

Which economist supported free trade on the basis of comparative advantage?

Answer 47

David Ricardo On the Principles of Political Economy and Taxation (1817), Ricardo tried to show that the removal of tariffs would lead to a net welfare gain – the gain of consumers outweighing the loss of producers.

Question 48

Theme 4: Free trade

Give three examples of trade blocs which have increased free trade within the bloc?

Answer 48

• European Union - The most integrated trading block. The EU27 have free trade and common regulations and is part of a customs union.
• NAFTA - North Atlantic Free Trade Association. A free trade area between Canada, US and Mexico.
• ASEAN Free Trade Area -Free trade area in South East Asia was founded in 1992. Includes: Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, Vietnam, Laos, Myanmar and Cambodia.

Question 49

Theme 4: Specialisation and trade

How does Vietnam have a comparative advantage against the UK?

Answer 49

Countries like Vietnam can develop and advantage in the production of a good. It is the largest coffee supplier to the UK and, over the last 30 years, it became one of the world’s largest coffee producers.

Question 50

Theme 4: Specialisation and trade

In terms of market share, how much has Vietnam’s coffee industry grown?

Answer 50

Over the last 30 years, its market share increased from 1% to 20%.

Question 51

Theme 4: Specialisation and trade

What are four examples of real-life comparative examples?

Answer 51

• UK - Financial Services
• Saudi Arabia- Oil
• Japan - Cars
• Taiwan - Manufactured Electronics

Question 52

Theme 4: Market failure in the financial sector

What is an example of asymmetric information causing a market failure in the financial sector?

Answer 52

The Global Financial Crisis was partially caused by banks selling packages of prime and subprime mortgages, but advertising them as all prime mortgages.

Question 53

Theme 4: Market failure in the financial sector

What is an example of externalities causing a market failure in the financial sector?

Answer 53

There are a number of costs placed on firms, individuals and the government that the financial market does not pay. One example of this is the cost to the taxpayer of bailing out the banks after the 2007-8 financial crisis.

Question 54

Theme 4: Market failure in the financial sector

What is an example of moral hazards causing a market failure in the financial sector?

Answer 54

This is where individuals make decisions in their own best interests knowing there are potential risks. The Global Financial Crisis was caused by moral hazard when employees sold mortgages to those who would not be unable to pay them back. By selling more mortgages, they would see higher salaries and bonuses but would not see the negative effects if the loan was not repaid.

Question 55

Theme 4: Market failure in the financial sector

What is an example of speculation and market bubbles causing a market failure in the financial sector?

Answer 55

A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value or a contraction, which is sometimes referred to as a “crash” or a “bubble burst.” Bubbles included the dot com bubble in the 1990s and the Wall Street Crash in 1929.

Question 56

Theme 4: Market failure in the financial sector

What is an example of market rigging causing a market failure in the financial sector?

Answer 56

This is where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market. In the Libor scandal of 2008, financial institutions were accused of fixing the London Interbank Lending Rate (LIBOR), one of the most important rates in the world.

Question 57

Theme 4: Taxation

What is an example of progressive taxation?

Answer 57

For example, in the UK income tax is progressive. This should help reduce inequality because those on lower incomes pay less tax. The tax is based on the payer’s ability to pay.

Question 58

Theme 4: Taxation

What is an example of regressive taxation?

Answer 58

For example, as a percentage of income, the London Congestion Charge and Council Taxes are higher for those on lower incomes. This leads to a less equitable distribution of income.

Question 59

Theme 4: Taxation

What has been the UK’s strategy with regards to taxation?

Answer 59

Over the last 2-3 decades, the UK switched towards indirect taxes, they tend to be more regressive. The top income tax rate fell from 83% in 1979 to 40% in 1988.