® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International General Certificate of Secondary Education MARK SCHEME for the March 2016 series 0455 ECONOMICS 0455/22 Paper 2 (Structured Questions), maximum raw mark 90 This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the March 2016 series for most Cambridge IGCSE ® and Cambridge International A and AS Level components. Page 2 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 1 (a) Using information from the extract, identify two examples of the factor of production ‘land’. [2] Rivers (1) soil (1). Allow fertilisers (1) as these may be natural fertilisers. (b) Explain the type of exchange rate system that is referred to in the extract. [2] A floating exchange rate system (1) determined by market forces/demand and supply (1). (c) Using information from the extract, calculate the rise in GDP per head in India from 2012 to 2013. [3] Increase in income per head: US$50/3.45%/3.448%/3.5%. (3) Correct working i.e. 2012 GDP per head = US$1450. (1) 2013 GDP per head = US$1500. (1) Maximum of 2 marks without $ sign or % Maximum of 2 marks for different denomination of 50 e.g. 50 billion. (d) Explain two characteristics of the USA mentioned in the extract that suggest that it is a developed country. [4] • A low proportion of the labour force employed in agriculture/primary sector. (1) Developed countries tend to have most of their workers employed in the tertiary sector/as economies develop workers move out of agriculture/ primary sector/means a high proportion are employed in secondary and tertiary sectors. (1) • Long life expectancy. (1) People in developed countries usually enjoy good health care systems/good nutrition/high living standards. (1) (e) Using information from the extract, analyse two reasons why the productivity of Indian agricultural workers is likely to increase in the future. [4] • More educated (1) and as a result are likely to be more skilled (1). • Working with more capital (1) this will enable agricultural workers to produce more/work more efficiently (1). • Working with more fertile soil/government subsidising fertilisers/government providing subsidies (1) this will enable agricultural workers to produce more/work more efficiently (1). (f) Discuss whether an increase in output always reduces average cost. [5] Up to 3 marks for why it might: May enable firms to enjoy economies of scale (1) examples (2). Average fixed costs fall as output rises (1) fixed costs are spread over a larger output (1). Accept but do not expect: Increasing returns (1). Up to 3 marks for why it might not: May experience diseconomies of scale (1) examples (2). Accept but do not expect: Diminishing returns/less efficient combination of resources (1) Diagram showing economies and/or diseconomies of scale (1). Page 3 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (g) Explain the cause of the example of market failure referred to in the extract. [4] Definition of market failure (1). Failure to take into account the external costs (1) that is the gap between social and private costs (1). Water pollution caused by the use of fertilisers (1) third parties will suffer (1) e.g. people or animals may become sick/damage to the environment (1). Do not expect but reward link to government failure via the government promoting use of fertilisers/subsidising fertilisers (1). Market forces not able to work properly due to high stockpile of wheat (1) long term imbalance between demand and supply (1). (h) Discuss whether food subsidies reduce poverty. [6] Up to 4 marks for why they might: A subsidy reduces the cost of production (1) increases supply (1) lowers price (1) (increase in supply and lower price may be shown on a diagram) makes food more affordable for the poor (1) the poor spend a high proportion of their income on food (1). Food subsidies could raise the incomes of farmers (1). In some countries many farmers have low incomes themselves (1) may increase employment (1). Up to 4 marks for why it might not: The subsidies may not be passed on to the consumers (1) one possible reason is corruption (1). Food prices may still be too high for the poor to afford (1). Farmers may produce more food but it may be of a lower quality (1) it may have a lower nutritional value (1). There is an opportunity cost involved (1) government spending on e.g. education might reduce poverty more effectively (1). There may be over-production of food (1). If one country subsidises food it could lead to unemployment in agricultural workers abroad (1) causing their incomes to fall. (1) Food subsidies may not be sufficient to reduce poverty (1) as poverty has many causes e.g. lack of education (1) 2 (a) Define a ‘stock exchange’. [2] An organisation/market for the sale and purchase of shares (and securities/stocks) (2). An organisation where shares are sold/buying and selling of shares (1). (b) Explain why some firms have survival as a short-term goal. [4] Some firms may be making a loss/be in financial difficulties (1) they may hope to continue to produce until demand increases/grow in the future (1) and so revenue rises (1) or costs of production fall (1) so profit is again earned (1) or recession ends (1) and economic growth occurs (1). Page 4 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (c) Analyse how consumers may suffer as a result of a fall in the profits firms earn. [6] Some firms may decide to stop production (1) this may reduce competition (1) raise price (1) lower quality (1) reduce choice (1). Some firms may reduce output (1) may lower availability of products (1). Firms will have less funds available to put back into the firm/invest (1) spend less on research and development (1) so the quality of the product may not improve (1). Firms may try to cut costs of production (1) may use lower quality raw materials (1) reduce quality of product produced (1). (d) Discuss whether a decrease in wage rates and an increase in working hours will always reduce the supply of workers to a firm. [8] Up to 5 marks for why it might: Wage rates are a key influence on the supply of workers (1) a decrease in wages would reduce the financial return from working (1) workers may decide to switch to another firm (1) or to another occupation (1). Longer working hours would reduce leisure time (1) this may make the job less attractive (1). Up to 5 marks for why it might not: Wage rates and working hours may not be better elsewhere (1) there may be a lack of job vacancies (1) during an economic downturn/recession/period of high unemployment (1). Earnings may still be high despite a fall in wage rates (1) if e.g. bonuses/overtime payments increase (1). Workers take into account job satisfaction (1) may stay in the job if they enjoy it (1). Workers may stay in the job if working conditions are good, there are long holidays, good promotion chances, good pensions and good fringe benefits (up to 2). Note: maximum of 6 marks if reference only to decrease in wages or increase in working hours. 3 (a) Define a ‘monopoly’. [2] A market with one seller/single seller/supplier/producer (2). A price maker/a firm with market power/dominant firm/large market share/has barriers to entry (and exit) (1). (b) Explain how a falling death rate may affect demand in a country. [4] A falling death rate may increase the size of the population (1) this will increase demand (1). A falling death rate may increase the average age of the population (1) demand for e.g. health care is likely to increase (1). Page 5 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (c) Analyse why price can be lower in a monopoly market than in perfect competition. [6] It can be lower if the monopoly enjoys economies of scale/perfect competition unable to enjoy economies of scale (1) examples (2) if possible to enjoy economies of scale would lower average costs (1). It can be lower if the monopoly is subsidised (1) e.g. state owned enterprises (1). It can be lower if the monopoly avoids wasteful duplication/perfect competition may result in wasteful duplication (1) e.g. provision of water pipes (1). It can be lower if a monopoly keeps price low as a barrier to entry (1) making it difficult for new firms with high average costs (1) to enter the market (1). A monopoly is a price maker/can influence price (1) a perfectly competitive firm is a price taker/unable to influence price (1). A state monopoly may not be trying to maximise profit (1) may be trying to promote economic welfare (1) keep prices low to make the product affordable (1) (d) Discuss whether an increase in a country’s population size will cause an increase in living standards. [8] Up to 5 marks for why it might: If there is an increase in the labour force (1) more output can be produced (1) increasing the goods and services available/raising incomes (1) will lower the dependency ratio (1). Market size will increase (1) which may enable firms to take greater advantage of economies of scale (1). The higher total demand (1) may attract multinational companies to set up in the country (1). A larger population may lead to specialisation (1) in e.g. education and health care (1). A fall in the death rate will increase life expectancy (1) a key influence on living standards (1). Net immigration of workers (1) may bring in new skills (1). Up to 5 marks for why it might not: If the birth rate falls or the death rate declines (1) there may be an increase in the dependency ratio (1). There may be a shortage of resources (1) may put pressure on e.g. health care/housing (1). Population may increase more rapidly than output (1) lowering GDP per head (1). There may be external costs caused (1) e.g. congestion/pollution (1). Reward but do not expect reference to optimum population. 4 (a) Identify two costs of unemployment. [2] 1 mark for each of two relevant costs identified e.g.: • loss of output • loss of income/higher poverty/lower living standards • loss of tax revenue • higher cost of unemployment benefits • social costs such as decline in health • loss of skills of workers. Page 6 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (b) Explain two advantages of a sole proprietor. [4] Profit incentive/all profits go to the sole proprietor (1) do not have to share with partners and/or shareholders (1). Flexible (1) as no one else to consult/quick to make decisions (1). Provides personal services/has personal contact with consumers (1) can pick up changes in demand/target products (1). Low start up costs/easy to set up (1) eases entry into the market/limited legal requirements (1). Own boss (1) no-one to take orders from (1). (c) Analyse how a reduction in government spending may affect unemployment. [6] May increase unemployment as there may be less total (aggregate) demand (1) which may cause a recession (1) leading to cyclical unemployment (1). Lower government spending on education (1) could reduce skills/qualifications (1) increase structural unemployment (1). Lower government spending may reduce public sector jobs (1). Lower government spending on unemployment benefits (1) may increase the incentive to work (1) reduce frictional unemployment (1). (d) Discuss whether a cut in corporation tax will increase economic growth. [8] Up to 5 marks for why it might: It will increase firms’ incentive to expand/invest (1) as they know they will be able to keep more of any profits earned (1). It will increase firms’ ability to expand/invest (1) as they will have more funds available to spend on capital goods (1). If firms increase their output it will directly increase real GDP (1) it will also lead to higher employment (1) which will increase total demand (1) further increasing output (1). Multinational firms may be attracted into the country by a low rate (1) they will contribute to the country’s economic growth (1). Up to 5 marks for why it might not: Firms may be making a loss (1) and so will not benefit from the cut (1). Firms may be pessimistic about the future (1) may not expect to make a profit in the future (1). Higher profits may be distributed to shareholders (1) who may spend the extra income on imports (1). Lower tax revenue (1) may lead to a cut in government spending (1). Multinational companies may send most of their profits abroad (1) so government revenue may not increase significantly reducing funds available to promote growth (1). Corporation tax may have been high to start with (1) may still act as a disincentive (1). 5 (a) What is the opportunity cost of a person going to university? [2] Opportunity cost is the (next) best alternative foregone (1). The cost may be working in a job/wages (1). Page 7 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (b) Explain why there may be some people unemployed whilst there are job vacancies. [4] The unemployed may not know about the job vacancies (1). They may lack the skills/qualifications to do the jobs (1) occupationally immobile/example of occupational immobility (1). The jobs may be in different parts of the country (1) the unemployed may be geographically immobile (1) due to e.g. differences in housing costs (1). They may be waiting for better paid jobs (1). They may not be willing to work despite being registered as unemployed (1). (c) Analyse how an increase in investment may affect unemployment. [6] It may increase unemployment if workers and capital goods are substitutes (1) machines will replace workers (1). Investment is a component of total (aggregate) demand (1) higher investment increases total demand (AD) (1) higher AD can reduce cyclical unemployment (1). It may reduce unemployment if workers and capital goods are complements (1) more workers will be taken on to work with the capital goods (1). Investment can increase labour productivity (1) this can make labour more attractive (1) can make products more internationally competitive (1) raise total demand further (1) encouraging firms to expand further (1). (d) Discuss whether supply-side policy measures will reduce inflation. [8] Supply-side policy measures include government policy measures designed to increase total (aggregate) supply/quality of resources/quantity of resources (1). They include government spending on education and training, privatisation, regulation, cuts in direct taxes, cuts in unemployment benefits and trade union reforms (1). Up to 5 marks for why they might: Supply-side policy measures may reduce costs of production (1) e.g. cuts in corporation tax will lower costs (1). They may increase labour productivity (1) e.g. education (1). Lower costs and higher productivity will increase aggregate supply/productive potential (1) higher aggregate supply/productive potential may reduce cost-push inflation (1) allow total demand to increase without causing inflation (1). Up to 5 marks for why they might not: Some policy measures e.g. education spending will increase total (aggregate) demand (1) this may rise by more than total supply (1) causing demand-pull inflation (1). The policy measures may not work e.g. privatisation may lead to private sector monopolies developing (1) these may push up prices (1). Spending on education may not improve labour productivity (1). Some supply-side policy measures take time to work e.g. education spending (1) by that time inflation may not be a problem or people may have got so used to inflation they act in a way that causes further inflation (1). 6 (a) Define an ‘export quota’. [2] A limit (1) on the quantity/value that can be exported/designed to keep products in the country/designed to keep domestic prices low (1). Page 8 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (b) Explain the difference between inelastic supply and perfectly inelastic supply. [4] Inelastic supply occurs when a change in price results in a smaller percentage change in supply (1) PES<1 (maybe illustrated) (1). Perfectly inelastic supply occurs when a change in price has no effect on supply (1) PES = 0 / represented by a vertical supply curve (maybe illustrated) (1). (c) Using a demand and supply diagram, analyse how an increase in the cost of producing smart phones will affect the market for smart phones. [6] Up to 4 marks for the diagram: • axes correctly labelled – price and quantity or P and Q (1). • demand and supply curves correctly labelled (1) • shift of the supply curve to the left (1) • correct equilibriums identified either by lines drawn to both axes or equilibrium points clearly identified e.g. E and E1 (1) Up to 2 marks for written comments: • higher costs will discourage output/cause a decrease in supply (1) • price will be expected to rise and quantity (traded) to fall (1) 0 P1 P D D S S S1 S1 Q1 Q Quantity Price Page 9 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (d) Discuss whether a country exporting its raw materials always benefits its economy. [8] Up to 5 marks for why it might: It will generate export revenue (1) this will appear in the trade in goods balance (1) which may improve the current account position (1). Exporting will increase total demand (1) increasing incomes (1) leading to economic growth (1) causing a rise in employment (1). Exporting will be more beneficial if the raw materials are highly priced (1) and in inelastic demand (1). Up to 5 marks for why it might not: Exporting can cause demand-pull inflation (1) as it will increase total demand (1) when an economy is operating close to full capacity (1). Exporting raw materials enables foreign countries to compete with the country’s finished products at home and abroad (1) reducing the country’s finished exports (1) and increasing the country’s imports of finished products (1). Exporting raw materials may deplete raw materials (1) reducing the country’s ability to produce and export in the future (1). Up to 3 marks for possible effect on the exchange rate: May lead to an appreciation in the exchange rate (1) may be in an advantage in that more imports can be purchased with the same volume of exports (1) may be a disadvantage as it may make domestic products less internationally competitive (1). 7 (a) How are earnings received by a country from foreign tourism recorded in the current account of its balance of payments. [2] Positive inflow/credit item/export (1) In trade in services / invisible balance section (1). (b) Explain two factors that could cause an increase in foreign tourists to a country. [4] An increase in incomes abroad (1) will increase foreigners’ ability to afford holidays in the country (1). A reduction in the country’s exchange rate (1) making holidays in the country cheaper (1). A rise in the price of holidays in other countries/lower price in domestic market (1) some people will switch to a substitute holiday/costs may be lower in the domestic market (1). An improvement in tourist attractions in the country (1) e.g. better hotels (1) Special events occurring in the country (1) e.g. the World Cup. (1) Page 10 Mark Scheme Syllabus Paper Cambridge IGCSE – March 2016 0455 22 © Cambridge International Examinations 2016 (c) Analyse why workers with the same skills may be paid different wage rates. [6] Some workers may have stronger bargaining power (1) because they are in trade unions/ in stronger trade unions (1). Some workers may be more willing to accept lower paid jobs (1) because they e.g. regard job security to be more important (1). The demand for workers may be different in different countries/areas/industries (1) the demand for labour may be different in the different industries/countries (1). The supply of workers may be different in different countries/areas (1) the wage rate will tend to be higher where supply is lower (1). Workers may be in the public or the private sector (1). In some countries, the public sector is better paid (1). Workers may have more experience (1) may have more responsibility (1). A group of workers may be discriminated (1) example of such a group (1). Some workers may not be aware similarly skilled workers are being paid more (1) and so may remain in a lower paid job (1). Overtime may be paid at a higher rate (1). (d) Discuss how population problems in developing countries may differ from those in developed countries. [8] Up to 5 marks for the possible problems of developing countries: Some developing countries have a high population growth rate (1) this may put pressure on resources (1). Some developing countries have a high birth rate (1) this increases the dependency ratio (1) and may reduce the size of the labour force (1) and may result in products/resources that might have been used to increase living standards/economic growth being used to e.g. feed the higher population (1). Some developing countries have a high infant mortality rate (1) lower quality of life (1). Some developing countries experience net emigration (1) may lose skilled workers (1). Up to 5 marks for the possible problems of developed countries: Some developed countries have a decreasing death rate/falling birth rate (1) and so an ageing population (1) increase dependency ratio (1) increase cost of pensions/health care (1). Some developed countries experience net immigration (1) this may pressure on resources (1) may be a mismatch between skills of immigrants and job vacancies (1). Problems may be less severe in developed countries (1) longer life expectancy/less risk of overpopulation (1). Credit but do not expect relevant reference to the concept of optimum population. ® IGCSE is the registered trademark of Cambridge International Examinations. This document consists of 12 printed pages. © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International General Certificate of Secondary Education ECONOMICS 0455/21 Paper 2 Structured Questions May/June 2016 MARK SCHEME Maximum Mark: 90 Published This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the May/June 2016 series for most Cambridge IGCSE ® , Cambridge International A and AS Level components and some Cambridge O Level components. Page 2 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 1 (a) Using information from the extract, identify two characteristics of monopoly. [2] • High barriers to entry and exit (1) • A sole producer (1) • Gain total control of the market (1) (b) Calculate the total output of car parts in US$ in 2013. [3] • US$396.8 bn Accept US $396 bn or US $397 bn or US $3.968253968x10 11 (3) • Correct working i.e. US $250 bn x 100/63 (2) • US$250 bn is 63% of the total (1) (c) Explain, using information from the extract, why wages in the UK car industry fell in 2008. [2] • A recession occurred in the UK in 2008 (1). Falling GDP may reduce demand for cars (1). Demand for labour falls (1) (d) Using information from the extract, explain two merits of a market system. [4] • Consumer sovereignty (1) consumers having the power to decide what is produced / firms allocate resources according to consumer demand (1) results in greater choice for consumers (1) • Firms respond to price changes (1) bring in new methods of production (1) may lower costs / are more efficient / competitive (1) • May encourage innovation (1) improve quality (1) due to the profit motive (1) (e) Analyse two reasons, referred to in the extract, why a decrease in employment may increase labour productivity. [4] • Less skilled workers may lose their jobs (1) they may have relatively low productivity (1). • The industry may become more capital intensive (1) machines replacing workers / more capital equipment per worker enables workers to produce more output (1). Page 3 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (f) Discuss whether a declining industry should be protected by the government. [5] Up to 3 marks for why it should: • Will save jobs / prevent unemployment (1) this can prevent living standards falling (1) prevent government spending on unemployment benefits rising (1) prevent loss of tax revenue (1) give workers time to find other jobs (1) • Will stop real GDP / output falling (1) avoid a recession / fall in economic growth (1). • Will assist exports / reduce imports (1) positive effect on Balance of Payments on current account (1) • Industry may be a strategic industry (1) such industries are important for the survival of the country (1). Up to 3 marks for why it should not: • An inefficient use of resources (1) involves an opportunity cost (1) resources would be better devoted to infant industries / expenditure on health and or education (1). • May provoke retaliation (1) other countries may impose trade restrictions (1) this may raise the cost of other firms/make it difficult for them to sell abroad (1). • Industry becomes too dependent on government support (1) making it less competitive (1) (g) Using information from the extract, explain two functions of commercial banks. [4] • Provide loans (1) interest will be charged on these / enable households and firms to borrow (1). • Enables customers to save (1) provides a secure place/pays interest (1). (h) Discuss whether small car manufacturing firms can compete with large car manufacturing firms. [6] Up to 4 marks for why they might: • Small firms can specialise in luxury models (1) cater for a small market (1). May provide specialist parts for bigger firms (1) • Small firms can provide a specialised product (1) build cars to suit individual customer needs (1). • Small firms may be subsidised / have taxes reduced by the government (1) reduce costs of production (1). • Large firms may experience diseconomies of scale (1) example (1) giving small firms a cost advantage (1). • May experience external economies of scale (1) example (1). Up to 4 marks for why they might not: • Average costs may be higher (1) as large firms may experience economies of scale (1) example (1). • Large firms may have brand loyalty (1) well known/high spending on advertising (1) high spending on research and development (1) • Large firms may force small firms out of the market (1) by lowering prices (1) NOTE: MAX of 4 marks if no mention of car manufacturing. Page 4 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 2 (a) Define ‘an indirect tax’. [2] A tax on spending / goods and services / consumption (1) the burden of the tax can be moved on to someone else (1) example (1) (b) Explain how a cut in the rate of corporation tax could result in an increase in tax revenue. [4] • A lower tax will increase the profit firms can keep / lower the cost of production (1) encourage them to increase output (1) increasing employment (1) pay higher wages (1) direct tax revenue would rise (1). • Spending / consumption may increase (1) more revenue from indirect taxes (1). (c) Using a demand and supply diagram, analyse the effect of removing an indirect tax on the market for the product. [6] Up to 4 marks for the diagram: • axes correctly labelled – price and quantity or P and Q (1) • demand and supply curves correctly labelled (1) • supply curve shifted to the right (1) • correct equilibriums identified either by a line drawn to both axes or equilibrium points clearly identified e.g. E and E1 (1). Up to 2 marks for written comments: • removing an indirect tax effectively reduces costs of production (1) • A greater supply will lower price (1). D D S S 1 S 1 S P Q Q 1 P 1 O price quantity Page 5 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (d) Discuss whether an increase in taxes will reduce inflation. [8] Up to 5 marks for why it might: • Increases in income tax (1) will reduce disposable income (1) spending may fall (1) lower demand will reduce demand-pull inflation (1). • Increases in corporation tax (1) reduces profits firms can keep (1) reduces demand for capital goods/investment (1). • Increases in indirect taxes (1) will reduce spending (1) lowering demand-pull inflation (1) Up to 5 marks for why it might not: • Consumers and firms may respond by reducing saving (1) rather than spending (1). • Higher indirect taxes and corporation tax (1) increase costs of production / higher prices (1) may cause cost-push inflation (1). • Higher income tax may encourage workers to press for wage rises (1) increasing costs of production (1) causing cost-push inflation (1). 3 (a) Identify two functions of money. [2] 1 mark each for any two of the following: • medium of exchange / means of payment • store of value • unit of account/measure of value • standard of deferred payment. (b) Explain two reasons why household borrowing may increase. [4] 1 mark for identifying a reason and 1 mark for explaining: • The rate of interest may fall (1) making it cheaper to borrow (1). • Incomes may fall / prices may rise / inflation (1) so people may borrow to purchase basic necessities (1). • People may become more optimistic about the future (1) more confident that they will repay loans (1). • The price of housing may fall (1) encouraging people to take out mortgages (1). • Increase in family size (1) creates a greater need to borrow to support more children (1) • The cost of health care/education may increase (1) requiring people to pay more for the services (1). Page 6 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (c) Analyse three ways in which international trade differs from internal trade. [6] 1 mark for identification of a difference and 1 mark for analysis: • International trade usually covers greater distances (1) which increases the cost of transport (1) may take longer for delivery (1). • International trade means a bigger market than the internal market (1) and more competitive (1) enabling firms to gain economies of scale (1) • Internal trade involves using the same currency (1) international trade may involve two or more currencies (1) increasing transaction costs (1). • International trade means a wider range of goods & services (1) this gives consumers greater choice (1) • Trade restrictions may be imposed on products traded internationally (1) raising costs of production (1). • Tastes and cultures may differ (1) requiring differences in products offered (1). • Regulations may differ (1) requiring adjustments in products (1). • Languages may differ (1) e.g. incurring costs of translation (1). (d) Discuss whether an increase in exports will increase the exchange rate. [8] • The exchange rate is the price of a currency (1) Up to 5 marks for why it might: • An increase in exports may increase export revenue (1) this will increase demand for the currency (1) higher demand pushes up the price of the currency (1) raising the value of a floating exchange rate (1) which is determined by market forces (1). Up to 5 marks for why it might not: • Exports may increase but export revenue may not (1) more exports may be bought for a lower price (1) and so demand for the currency will not rise (1). (1) An increase in exports may be offset by an increase in imports / lower interest rate (1) or government intervention by selling domestic currency (1) so demand and supply of the currency will increase (1) which may leave the exchange rate unchanged (1). 4 (a) Why may less wheat be the opportunity cost of producing more milk? [2] • Opportunity cost is the cost of the (next) best alternative foregone (1). • Land / resources used for growing wheat may be used to keep cows (1) reducing the amount of wheat that can be produced (1). Page 7 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (b) Explain two reasons why the supply of a product may be price-inelastic. [4] 1 mark for each reason identified and 1 mark for explanation: • It may take time to produce the product (1) this means that it will take time to adjust supply in response to a change in price / example of a product that it takes time to produce (1). • It may not be possible to store the product (1) this means that it cannot be taken out of storage when price rises / products cannot be put into storage when price falls (1). • It may be costly to adjust supply (1) e.g. it might be necessary to build new factories and this may discourage firms from adjusting supply (1). • The supply of a natural resource may become limited (1) e.g. gold maybe close to depletion (1) (c) Analyse how an increase in exports could increase a country’s employment rate and inflation rate. [6] • An increase in exports may mean a higher total demand (1). Higher demand may encourage firms to increase their output (1) to produce more products firms may take on more workers (1) reducing cyclical unemployment (1). • Higher demand may cause demand-pull inflation (1). A higher demand for workers may push up wages (1). Higher demand for raw materials may push up the price of raw materials (1). Costs of production may increase (1) causing cost-push inflation (1). Note: a maximum of 4 marks for analysis of the effect on either the employment rate or the inflation rate. Page 8 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (d) Discuss whether the average cost of production always decreases when a firm increases the total output that it produces. [8] Up to 5 marks for why it might: • The firm may experience economies of scale (1) total cost will rise by less than total output (long run average cost may fall as output increases) (1). • The firm may experience buying/purchasing economies of scale (1) may be offered a discount price when buying raw materials in bulk (1). • The firm may experience technical economies of scale (1) larger, more cost efficient technological equipment may be purchased to produce a higher output (1). • The firm may experience managerial economies of scale (1) specialist staff may be employed when output is high (1) • The firm may experience financial economies of scale (1) as output increases, it may be able to borrow more cheaply / or sell its shares at a lower price (1) • The firm may experience R & D economies of scale (1) the R & D expenditure can be spread over a higher output (1). • The industry may also be growing in size (1) enabling advantage to be taken of external economies of scale (1). Up to 5 marks for why it might not: • The firm may experience diseconomies of scale (1) total cost may rise by more than total output (long run average cost may increase as output increases) (1). • The firm may experience diseconomies of scale (1) this may make the firm slower to respond to changing market conditions / more difficult to keep costs down (1). • The firm may experience communication problems (1) ideas may not be communicated or may be misunderstood (1). • The firm may experience poor industrial relations (1) e.g. strikes may increase costs of production (1). • External diseconomies of scale may occur (1) e.g. pushing up the costs of production (1). • Allow up to 2 marks for a correctly labelled average cost diagram which shows economies and diseconomies of scale as an alternative to describing average costs rising / falling as output increases 5 (a) Define ‘market failure’. [2] • Where the market forces of demand and supply (1) do not achieve efficiency (1) • When social costs are greater than social benefits (1) example of external cost e.g. monopoly or external benefit e.g. merit or public goods (1) Page 9 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 (b) Explain how government regulation may reduce market failure. [4] • Regulation involves rules and laws (1). • Firms may be banned (1) from producing products that create external costs (1) example such as water pollution (1). • Firms may be fined (1) if they create external costs (1) example e.g. air pollution (1). • Consumers may be banned from consuming products that create external costs (1) or where there are high private costs (1) some of which people are unaware of (1) example e.g. cigarettes (1) • Consumption of some products that have external benefits (1) and/or high private benefits (1) some of which people are unaware of (1) may be made compulsory (1) e.g. primary school education (1). (c) Analyse the effect of a decrease in resources on government economic aims. [6] • Fewer resources will make it more difficult to achieve economic growth (1) there will be fewer factors of production to produce goods and services (1) output may fall or rise more slowly (1). • Fewer resources may increase costs of production (1) supply may fall by more than demand/there may be a shortage of e.g. raw materials (1) cost-push inflation may occur (1). • Natural disasters (1) can lead to cost push inflation (1) loss of employment (1) government expenditure exceeding government income (1) • The current account may move into a deficit/larger deficit (1) as exports may decline (1) while e.g. food may have to be imported (1). • Destruction of factories may reduce unemployment opportunities (1) which may increase unemployment (1) but more workers may be needed to e.g. rebuild factories (1). (d) Discuss whether the social benefits of building flood defences will exceed the social costs involved. [8] Up to 5 marks for a discussion of why social benefits maybe greater: • Social benefits are private benefits plus external benefits (1). • Explain private benefits (1) e.g. greater employment, greater revenue for firms, protection of homes / reduction in high risk of flooding (up to 3) • Explain external benefits (1) e.g. increase in house prices in the area, greater tourism, reduced cost to emergency services and benefit payments (up to 3) Up to 5 marks for why social costs maybe greater: • Social costs are private costs and external costs (1). • Explain private costs (1) e.g. cost of land, raw material labour and buildings, may only be a low risk of flooding (up to 3) • Explain external costs (1) e.g. pollution, destruction of wildlife habitats, opportunity cost of resources (up to 3). Page 10 Mark Scheme Syllabus Paper Cambridge IGCSE – May/June 2016 0455 21 © Cambridge International Examinations 2016 6 (a) Identify two reasons why workers go on strike. [2] 1 mark for each of two reasons identified e.g.: • to gain higher wages / to resist wage cuts • t