Economics Paper 2 SL Markscheme

N20/3/ECONO/SP2/ENG/TZ0/XX/M
Markscheme
November 2020
Economics
Standard level
Paper 2
23 pages
–2– N20/3/ECONO/SP2/ENG/TZ0/XX/M
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Section A
1. (a) (i) Define the term budget deficit indicated in bold in the text (paragraph 2). [2]
Level Marks
0 The work does not meet a standard described by the descriptors 0
below.
1 Vague definition. 1
The idea that it is to do with government revenue or spending.
2 Accurate definition. 2
An understanding that it is when government spending is greater
than government revenues.
(ii) Define the term gross domestic product (GDP) indicated in bold in the text
(paragraph 3). [2]
Level Marks
below.
The idea that it is the output produced in an economy.
An understanding that it is the total value/output of all goods and
services produced in an economy (in a given time period).
NB The term “in a given time period” is not necessary for [2].
(b) Using an exchange rate diagram, explain how raising interest rates would “stop the fall
in the peso’s value” (paragraph 4). [4]
Level Marks
below.
1 There is a correct diagram OR an accurate written response. 1–2
An exchange rate diagram showing a shift of the demand curve
of the peso to the right and an increase in the exchange rate OR
for an explanation that an increase in the interest rate could
attract foreign financial investors to buy Argentinian bonds or
save in Argentinian banks, which would increase the demand for
pesos, stopping the fall in the peso’s value.
OR
An exchange rate diagram showing a shift of the supply curve of

the peso to the left and an increase in the exchange rate OR for
an explanation that an increase in the interest rate would
discourage investors from selling Argentinian financial assets,
which would decrease the supply of pesos, stopping the fall in
the peso’s value.
2 There is a correct diagram AND an accurate written response. 3–4
An exchange rate diagram showing a shift of the demand curve
of the peso to the right and an increase in the exchange rate
AND for an explanation that an increase in the interest rate
could attract foreign financial investors to buy Argentinian bonds
or save in Argentinian banks, which would increase the demand
for pesos, stopping the fall in the peso’s value.
OR
An exchange rate diagram showing a shift of the supply curve of

the peso to the left and an increase in the exchange rate AND
for an explanation that an increase in the interest rate would
discourage investors from selling Argentinian financial assets,
which would decrease the supply of pesos, stopping the fall in
the peso’s value.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of
pesos in USD, USD/peso, USD per peso. The horizontal axis should be quantity, or quantity
of pesos. A title is not necessary.
A title is not necessary.
A diagram may show demand initially shifting left (and/or supply shifting right)
causing the exchange rate to fall and then demand shifting right (or supply shifting
left) to restore the value of the peso to its original level. If correctly drawn and
explained, this can achieve full marks.
(c) Using an AD/AS diagram, explain how the peso’s weakness is “raising inflation”
(paragraph 6). [4]
Level Marks
below.
An AD/AS diagram showing a shift of the AS/SRAS curve to the
left and an increase in price level.
OR
An explanation that a weak peso makes imports more expensive
(imported oil prices go up), which increases the costs of
production, shifting SRAS to the left/up, further raising inflation.
An AD/AS diagram showing a shift of the AS/SRAS curve to the
left and an increase in price level.
AND
An explanation that a weak peso makes imports more expensive
(imported oil prices go up), which increases the costs of
production, shifting SRAS to the left/up, further raising inflation.
For AD/AS the vertical axis may be average (general) price level, or price level. For
the horizontal axis, real output, real national output, real income, real national
income, real GDP or real Y. Any abbreviations are acceptable. A title is not
necessary. “AS” is a valid label for the SRAS curve.
(d) Using information from the text/data and your knowledge of economics, discuss
the view that Argentina should keep its floating exchange rate system. [8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
below.
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable 3–5
depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in depth. 6–8
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory
and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:

• Definition of floating exchange rate.
Arguments for floating exchange rates may include:

• The peso is less likely to be overvalued, and therefore exports will be more price-
competitive (paragraph 3).
• Allows current account to be self-correcting, which seems to be happening as the current
account deficit is slowly narrowing (paragraph 3) now that the peso has significantly
depreciated.
• More freedom to set interest rates and domestic monetary policy (paragraph 2), which has
been necessary given the high inflation rate and need to finance the government deficit.
• The central bank needs not use foreign reserves to maintain a fixed exchange rate, which
could otherwise be depleted (paragraph 4).
• Argentina needs to keep its floating exchange rate system to qualify for the US$50 billion
loan from the IMF (paragraphs 4 and 5). The loan is necessary to meet Argentina’s debt
requirements until 2020.
Arguments against floating exchange rates may include:

• Speculative activity can greatly influence the exchange rate, eg speculators selling pesos
to buy US dollars (paragraph 1), further depreciating the peso.
• The rise in interest rates (to stop the peso falling) is reducing investment (paragraphs 4
and 6).
• Servicing foreign debt is difficult/costs more in terms of pesos when the value of the
currency continues to fall in value (paragraph 4).
• Instability and lack of predictability for firms, consumers, importers and exporters –
imported costs, including oil, have increased (paragraph 6).
• Governments not required to keep exchange rate fixed, hence there is less incentive for
governments to keep inflation in check (paragraph 6).
• If the peso continues to fall, the IMF may need to continue to support the Argentinian
economy. This could make Argentina over-reliant on (conditional) loans from the IMF.
• If demand for exports and/or imports is very inelastic, a depreciation will widen the trade
deficit, causing further downward pressure on the peso.
• Further depreciation might lead to stagflation and/or a recession (paragraph 6).
Any reasonable discussion.

2. (a) (i) Define the term tariff indicated in bold in the text (paragraph 2). [2]
Level Marks
below.
The idea that it is a barrier to trade.
An understanding that it is a tax on imports.
(ii) Define the term trade war indicated in bold in the text (paragraph 3). [2]
Level Marks
below.
The idea that it is trade that is seen as unfair by one country,
leading to protectionism OR the idea that it is rising
protectionism.
An understanding that the imposition of a trade barrier by one
country can trigger off a series of retaliations by (a) trade
partner(s).
– 10 – N20/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an international trade diagram, explain the outcome on US producers of the
introduction of a tariff on imports from China (paragraph 2). [4]
Level Marks
below.
A tariff diagram showing a shift upwards of the world supply
curve OR for providing an explanation that the tariff causes the
price to rise (world supply curve shifts upwards), and therefore
the US producers will produce more (receive a higher revenue).
A tariff diagram showing a shift upwards of the world supply
curve AND for providing an explanation that the tariff causes the
price to rise (world supply curve shifts upwards), and therefore
the US producers will produce more (receive a higher revenue).
The use of P and Q on the axes is sufficient for an international trade diagram. The
world supply curve must be labelled Sw, or Sworld or SChina. A title is not
necessary.
(c) Using an AD/AS diagram, explain the desired impact of China’s “eased monetary policy”
on its economic growth (paragraph 5). [4]
Level Marks
below.
An AD/AS diagram, showing a shift of the AD curve to the right
with an increase in real GDP OR for an explanation that
China’s “eased monetary policy” (decreasing interest rates
and/or increase in the money supply) should increase C and/or I
and hence AD, creating economic growth.
An AD/AS diagram, showing a shift of the AD curve to the right
with an increase in real GDP AND for an explanation that
China’s “eased monetary policy” (decreasing interest rates
and/or increase in the money supply) should increase C and/or I
and hence AD, creating economic growth.
For AD/AS, the vertical axis may be average (general) price level or price level. The
horizontal axis may be real output, real national output, real income, real national
income, real GDP or real Y. Any abbreviations are acceptable. A title is not
necessary. “AS” is a valid label for the SRAS curve.
(d) Using information from the text/data and your knowledge of economics, discuss the
arguments for and against the trade protection measures imposed by the US on China. [8]
Level Marks
below.
depth.
and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a
range of arguments, factors or hypotheses. Opinions and conclusions should be presented
clearly and supported with appropriate evidence and sound argument.
Answers may include:

• Definition of trade protection, tariff, subsidies.
Arguments for trade protection may include:

• To reduce a trade deficit with China (paragraph 1), as the imposition of tariffs should
reduce import spending.
• To allow US firms to compete against “unfair trade practices” (paragraph 1) from China. If
China uses unfair trade practices and their goods/services are relatively cheaper, then
American goods will not be able to compete and unemployment may rise.
• Import-substitution might take place due to the tariffs if consumers are able to substitute
the previously imported goods with domestically-produced goods (paragraph 4) at an
affordable price, leading to increased revenue for domestic firms and economic growth for
the US.
• Trade protection may have been used for political reasons, rather than economic ones.
• The US government will gain revenue from the tariffs.
Arguments against trade protection may include:

• The tariffs have been harming Chinese producers and workers in some provinces have
already become unemployed (paragraph 2).
• The reduction in Chinese incomes/growth will mean that less is imported from the US,
harming US exporters (paragraph 2).
• US farmers are suffering from the retaliatory ban on soybeans (paragraph 2), showing that
the original intention of protecting its steel industry is backfiring on the farmers.
• The trade war is negatively impacting global trade; as Chinese incomes fall they are
importing less: export revenue for producers in the EU and Australia (paragraph 3) is
falling.
• Germany’s economy may hit a recession if the tariffs on cars and car parts are imposed
(paragraph 3).
• With or without import substitution, consumers are paying higher prices for domestic and
imported goods.
• Prices of inputs might rise; leading to cost-push inflation.
• Profits of large US companies (such as Apple Inc. and Caterpillar Inc.) have been hurt
(paragraph 4), this is not good for the companies, its shareholders and possibly the
workers if they become unemployed. (Since Apple Inc. has production firms in China, it
will hurt the US and China alike.)
• Small and medium-sized firms in China are most hurt (paragraph 5), which may result in
more unemployment if the trade war continues.
• With trade protection, welfare losses exist, which means that resources are allocated to
less efficient producers.
Any reasonable discussion.

Section B
3. (a) (i) State two functions of the International Monetary Fund (IMF) (paragraph 2). [2]
Level Marks
below.
Any one of the following:
• oversee/monitor the stability of the international monetary
system
• promote international monetary cooperation
• lend money to help members in balance of
payments/financial difficulties
• give advice to member countries on economic policies
• promote economic stability.
Any two of the following:
• oversee/monitor the stability of the international monetary
system
• promote international monetary cooperation
• lend money to help members in balance of
payments/financial difficulties
• give advice to member countries on economic policies
• promote economic stability.
(ii) Define the term human capital indicated in bold in the text (paragraph 5). [2]
Level Marks
below.
The idea that it is the quality of labour or that it is a factor of
production (labour).
Any two of the following:
• factor of production (labour)
• skills
• abilities
• knowledge/qualifications
• level of health (that make a labour force productive).
(b) Using a poverty cycle diagram, explain how the government of Pakistan could intervene to
“break out of the poverty cycle” (paragraph 3). [4]
Level Marks
below.
A poverty cycle diagram OR an explanation of one of:
• government may (collect more tax and) spend on investment
projects such as education/infrastructure to increase level of
human and physical capital and therefore break the cycle
• government may attract FDI which may supplement low
savings as it could increase incomes and therefore break the
cycle
• any valid government policy which would attract FDI and/or
encourage economic growth.
A poverty cycle diagram AND an explanation of one of:
• government may (collect more tax and) spend on investment
projects such as education/infrastructure to increase level of
human and physical capital and therefore break the cycle
• government may attract FDI which may supplement low
savings as it could increase incomes and therefore break the
cycle
• any valid government policy which would attract FDI and/or
encourage economic growth.
Example of poverty cycle (any cycle, including investment and starting and ending
with an indicator of poverty, is acceptable).
(c) Using an externalities diagram, explain how “greater access to education” for girls in
Pakistan could reduce market failure (paragraph 5). [4]
Level Marks
below.
An externalities diagram showing MSB higher than MPB and
indicating under-consumption of education and/or welfare loss
(potential welfare gain) OR for an explanation that greater
access to education for girls could reduce the under-
consumption in the market (reduce the welfare loss) and
therefore reduce market failure.
NB diagrams may differ based on the explanation. Candidates

may state that the greater access to education is represented
through an increase in demand (MPB) or increase in supply
(MPC).
An externalities diagram showing MSB higher than MPB and
indicating under-consumption of education and/or welfare loss
(potential welfare gain) AND for an explanation that greater
access to education for girls could reduce the under-
consumption in the market (reduce the welfare loss) and
therefore reduce market failure.
NB diagrams may differ based on the explanation. Candidates

may state that the greater access to education is represented
through an increase in demand (MPB) or increase in supply
(MPC).
The vertical axis may be price, but could be costs or benefits. The horizontal axis is
quantity. P and Q is sufficient. A title is not necessary.
(d) Using information from the text/data and your knowledge of economics, evaluate the
potential impact of the IMF and the World Bank on economic development in Pakistan. [8]
Level Marks
below.
depth.
and evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths
and limitations. Opinions and conclusions should be presented clearly and
supported with appropriate evidence and sound argument.
Responses may include:

• Functions of IMF, World Bank.
• Definition of economic development.
• The difference between the IMF and the World Bank.
May promote/achieve economic development because:

• IMF loans provide help with balance of payments deficit and external debt
obligations (paragraph 1), allows government revenue to be used for
improving quality of life through expenditure on merit goods.
• The IMF may learn from previous agreements and provide the
monitoring/support needed for successful implementation of realistic
conditions to reduce the burden of debt payments (paragraph 4).
• Other potential lenders may be persuaded or given the confidence to provide
finance to help with economic development projects (paragraph 3).
• The World Bank’s education projects directly influence education and female
enrollment rates which promote gender equality, employment possibilities,
increasing incomes and access to basic needs (paragraph 5).
• Providing key infrastructure such as hydroelectric dams allows access to
electricity and provides basic needs and infrastructure for business
development (paragraph 6).
• Loans help build capacity and attract FDI to facilitate economic growth needed
to break out of the poverty cycle (paragraph 3), may provide employment
opportunities and increased tax revenue.
• IMF suggestions/conditions such as improved tax collection and access to
credit can help support economic development (paragraph 2).
Above points should link to how these impacts will reduce poverty, increase living
standards, reduce income inequalities and/or increase employment opportunities,
improve health and education indicators, ie achieve economic development.
However, may not promote economic development because:

• Loan conditions (paragraph 2) may limit the government’s ability to achieve its
development objectives, particularly the improvement in human capital
(paragraph 5).
• Development spending might be decreased due to contractionary fiscal policy.
• Balance of payments issue has not been dealt with in the past (paragraph 4).
• World Bank infrastructure project – may lack sustainability (paragraph 6).
• The lending conditions may reduce economic growth, increase unemployment
and hamper economic development.
• While FDI may lead to increased employment and economic growth, attracting
FDI may require offering concessions (tax, regulatory, etc) which may limit its
development impact.
• More loans and extending loans (paragraph 3) may not be dealing with other
fundamental issues of managing the loans, such as servicing costs (paragraph
4).
• Environmental issues may be overlooked, threatening sustainability
(paragraph 6).
Any reasonable evaluation.

4. (a) (i) State two functions of the World Trade Organization (WTO) (paragraph 1). [2]
Level Marks
below.
One function is stated OR two functions are partially stated.
A clear understanding demonstrated by listing two of the
following functions of the WTO for its member countries:
• to set and enforce rules for international trade
• to provide a forum for negotiating trade liberalization
• to monitor further trade liberalization
• to resolve trade disputes
• to increase the transparency of decision-making processes
• to help developing countries benefit fully from the global
trading system.
(ii) Define the term inflation indicated in bold in the text (paragraph 2). [2]
Level Marks
below.
The idea that it is an increase in prices.
An understanding that it is a sustained increase in the
(average/general) price level.
(b) Using a Lorenz curve diagram, explain the possible impact on the distribution of income in
the Philippines when “the income tax for the highest income earners has been raised from
30% to 35%” (paragraph 4). [4]
Level Marks
below.
A Lorenz curve diagram with 2 curves showing a shift closer to
the line of perfect income equality OR an explanation that an
increase of the tax rate in the highest income tax bracket makes
it more progressive/reduces the disposable income of highest
income earners/shifts the curve closer to the diagonal, thereby
achieving greater income equality/resulting in greater equity in
the distribution of income (decreasing inequality).
A Lorenz curve diagram with 2 curves showing a shift closer to
the line of perfect income equality AND an explanation that an
increase of the tax rate in the highest income tax bracket makes
it more progressive/reduces the disposable income of highest
income earners/shifts the curve closer to the diagonal, thereby
achieving greater income equality/resulting in greater equity in
the distribution of income (decreasing inequality).
For the vertical axis, the label may be cumulative percentage of (national) income or
percentage of (national) income (GDP and GNI are valid alternatives to income but wealth is
not acceptable). For the horizontal axis, the label may be cumulative
percentage of population/people/households or percentage of
population/people/households. A title is not necessary.
(c) Using an AD/AS diagram, explain the impact on the potential output of the Philippines
of the government increasing its “spending on new airports, roads and bridges”
(paragraph 4). [4]
Level Marks
below.
An AD/AS diagram showing an increase in LRAS OR for
explaining that increasing spending on infrastructure means that
it
• increases (the quantity and quality of) factors of production
OR
• increases efficiency/productivity
shifting LRAS to the right, thereby increasing potential output.

An AD/AS diagram showing an increase in LRAS AND for
explaining that increasing spending on infrastructure means that
it
• increases (the quantity and quality of) factors of production
OR
• increases efficiency/productivity
shifting LRAS to the right, thereby increasing potential output.
For AD/AS the vertical axis may be average (general) price level, or price
level. The horizontal axis may be real output, real national output, real income, real
national income, real GDP or real Y. Any abbreviations are acceptable. A title is
not necessary.
(d) Using information from the text/data and your knowledge of economics, evaluate
the use of export promotion as a means of achieving economic development in
the Philippines. [8]
Examiners should be aware that candidates may take a different approach which, if
appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information
provided.
Level Marks
below.
depth.
and evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and
limitations. Opinions and conclusions should be presented clearly and supported with
appropriate evidence and sound argument.
Answers may include:

• Definitions of economic development, export promotion.
• The link between export-led growth and economic development.
Advantages of export promotion may include:

• The PEDP 2017–2022 wants to boost the export of services, which could bring in more
export revenue due to its higher value, increasing incomes of workers in numerous
services, allowing for a better standard of living and higher tax revenue for the
government (paragraph 3).
• Increased exports of processed foods rather than unprocessed foods will increase farm
incomes (paragraph 2).
• If boosting exports and increasing export competitiveness (such as the standards, testing
and certification) is successful, then more export revenue should come in (paragraph 3),
providing the government with more tax revenue which could be spent on development
objectives.
• Removing regulations should make it easier for exporters to run their business and to
export their products (paragraph 3).
• Investment in the production processes and supply chains (paragraph 3) should reduce
the costs of production over time and make the goods more export competitive.
• Exploiting existing and new opportunities from trade agreements (paragraph 3) should
increase export revenues in sectors that are competitive.
• If more is exported, then more can be imported and the tariffs on rice can be lowered,
benefitting low-income families (paragraph 1).
Disadvantages/limitations of export promotion may include:

• Export promotion could favour economic activities in urban areas which could lead to
higher prices and wages in these areas, especially in Manila (paragraph 2); higher
domestic prices and inflation, affecting all families negatively as real incomes and
purchasing power falls, and therefore lower income families are most negatively affected,
lowering standards of living, and possibly increasing inequality and poverty.
• Export promotion will be difficult to achieve when investment in much-needed irrigation
systems that would improve productivity in farming as well as infrastructure to help
farmers connect to export markets, is discouraged (paragraph 2).
• There is a lack of access to export markets due to the lack of infrastructure, which would
also hamper export promotion.
• The Philippines lacks the infrastructure needed to attract export-oriented manufacturing
(paragraph 4) from overseas.
• Other countries may resist increased exports from the Philippines.
• Reliance on a narrow range of exports (such as processed food) may be risky.
• More will be spent on infrastructure by the government. Although the budget may have
more income from an increase in income tax, poorer households may suffer due to a
higher indirect tax on a range of goods (paragraph 4).
Any reasonable evaluation.
Candidates may argue that export promotion may lead to economic growth. As long
as they have established a clear link between economic growth and economic
development, such arguments should be fully rewarded.

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N20/3/ECONO/SP2/ENG/TZ0/XX/M

No part of this product may be reproduced in any form or by any electronic or

De plus, la licence associée à ce produit interdit toute utilisation commerciale de

An exchange rate diagram showing a shift of the supply curve of

An exchange rate diagram showing a shift of the supply curve of

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

A title is not necessary.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

Responses may include:

Arguments for floating exchange rates may include:

Arguments against floating exchange rates may include:

Any reasonable discussion.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

Answers may include:

Arguments for trade protection may include:

Arguments against trade protection may include:

Any reasonable discussion.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

NB diagrams may differ based on the explanation. Candidates

NB diagrams may differ based on the explanation. Candidates

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

Responses may include:

May promote/achieve economic development because:

However, may not promote economic development because:

Any reasonable evaluation.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

shifting LRAS to the right, thereby increasing potential output.

shifting LRAS to the right, thereby increasing potential output.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

Answers may include:

Advantages of export promotion may include:

Disadvantages/limitations of export promotion may include:

Any reasonable evaluation.

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