H2 Econs Mock Paper 1

Case study 1
Procedure
- Focus on the skills on actually marking for accuracy
- No need to copious amounts of copying humanities paper not possible to hit 100%
- Copy to process and cover gaps, it is a long paper that you just sat for, copying helps
you keep focus
- Skills
- Cambridge questions are phrased differently, but basic skills are always important
want to reinforce those
- Questioning the question (breakdown of question) mind-block: asking the right
questions to continue
(a).
-

What is PES? (give definition)

- PES is defined as a measure of the responsiveness of quantity supplied to a change in
the commoditys own price, ceteris paribus
Why will it change? (what does change even mean, what are the factors that determine its
value)
- 2 options (smaller than 1 to greater than 1, or greater than 1 to smaller than 1)
- Possible factors: Stocks and spare capacity, number of firms, factor mobility, time
period
- Explain why previously smaller than 1: Need time to build houses and in the SR, there
is a lack of materials and labour bricks running out .. construction workers left the
industry lack of spare capacity
- Explain why now greater than 1: Availability of materials and spare capacity as brick
makers reopen plants and skilled workers as former military personnel join the
construction industry and training schemes help to train them to become skilled
workers

(b).
-

What is price discrimination (give definition)

- Price discrimination occurs when a producer sells a specific product to different buyer
at different prices and the difference in price charged did not arise due to differences
in production cost
- In this case, third degree price discrimination may be occurring
What is the pricing policy by the electricity company
- Read the table: process the information higher prices in the day than at night
- (Why?) day prices are higher as demand for electricity is more price inelastic due to
higher degree of necessities in the day-time where electricity is required for the
functioning of the economy when most people are awake, e.g. business and
production activities, school, households, etc

Night prices are lower as demand is more price elastic due to lower degree of
necessities. Most activities are not essential to be conducted in the night when most
people will be resting
Whether it is a PD? (2 sides)
- (so what else could it be? Explain dont just state)
- During the day period, power stations with higher operating costs (e.g. oil-fired
stations) will have to be activated leading to higher marginal cost incurred and hence
higher prices are charges
- During the night (off-peak period), nuclear and coal-fired stations with lower
operating costs will be used
Answer systematically: even the best of us need to slow down to be complete (ensure
consistency)

(c)
-

What is the difference? Clarify the difference

- Prices in London are higher
Why is there a difference? (what are prices determined by)
- DDSS factors
- London has a higher average house price because
- Higher demand due to higher annual income earned leading to higher
purchasing power and higher population
- Lower supply due to lack of land in the capital available for building new
houses
- Yorkshire has a lower average house price because
- Lower demand due to lower annual income earned leading to lower
purchasing power and smaller population size
- Higher supply due to abundance of land available for building new houses

(d).
-

Explain means different things in different questions. In this case: you need to explain why
you think it is what it is
- Structural unemployment as the mining industry is in a decline and the miners might
not have the skills to work in expanding industries that require higher skills (since
mining involves more manual labour)
(note: cyclical unemployment not accepted as the impact on the whole economy will be too
small given that only 1300 workers will be affected. No presence of words like slowing GDP
growth; recession.

(e)
-

Hard to come up with a fixed flow chart or template for it. What is most important is to
answer the question: discuss the FACTORS. (DONT ANSWER YOUR OWN QUESTION)
Dont answer these ways

One of the factors is the advantages and disadvantages of this policy forcing the
issue to be advantages and disadvantages
- This is the best policy because (mechanics merits and limitations format)
Case material: according to Ex2, the UK sits atop significant coal resources enough to
provide power for 300 years potentially creates thousands of jobs reduce the UKs
balance of trade deficit
- Reframe as factor: if the government decides to redevelop the coal industry, it would
have to consider whether the industry would be able to gain comparative advantage
in the future
- UK has the factor endowment in coal and the expertise able to produce coal at a
lower opportunity cost than other countries
- If successful, X increases and M falls significantly (UK imports more than 75% of its
coal requirements - Ex1)
- BOT and BOP improves, ceteris paribus
- As (X-M) increases, AD would increase leading to increasein national income via the
multiplier process (insert AD-AS diagram)
- Employment also increases due to rise in the demand for labour as a FOP (Ex2:
potentially creates thousands of jobs reduce the UKs balance of trade deficit)
- However: comparative advantage might not materialize in coal production as the
competition will be fierce with cheap suppliers from Colombia, China, Russia, South
Africa and the US. (Evidence: Ex 1: UK mines under increasing competition from
alternative power sources and cheap coal produced elsewhere in the world)
- UKs deep mines will need to find a way to cut production costs
Case materials: Coal is the dirtiest fossil fuel and emits more carbon emissions (Ex1)
- Reframe as factor: if the government decides to redevelop the coal industry, it would
also have to consider possibilities of market failure (this is not trivial shows youve
read the question)
- Redeveloping the coal industry and using it as the main source for electricity
generation will increase the carbon emissions in UK (negative externalities)
- Explain how negative externalities result in allocative inefficiency
- Externalities = divergence between MSC and MPC
- Risk of respiratory diseases to third parties
- In the pursuit of self interest overproduction, Qe
- DWL = excess of MSC over MSB for amount overproduced (understand and
state what is DWL)
- However, with the new CCS technology which could enable the coal-fired power
station to trap harmful emission underground out to under the seabed during the
production of electricity (Ex2)
- Negative externalities can be better contained to reduce effects on third parties
- Evaluation: even though the CCS technology can reduce the problem of pollution
during the production of electricity, it does not help to cut down the carbon emissions
during the extraction of coal)
Conclusion
-

The UK government is unlikely to redevelop the coal industry as the coal industry is
unlikely to regain comparative advantage given the stiff competition from other
countries, even though it has significant coal resources
In addition, the environmental costs may be too high for the government to deal with
given the constraints the government might face in terms of financing the new
technology

(f)
-

Explain briefly why need government intervention

Explain how each policy works to address economic inefficiency in resource allocation
- A well-developed analysis of two economic policies to achieve economic efficiency
with good reference to the case material
Assess its effectiveness and limitations
Evaluation- provide an overall stand on whether the UK government currently adopts the
most appropriate economic policies
Carbon trading - EU ETS (cap and trade scheme)
- Estimate socially efficient level of emission and the number of permits to be issued to
the big factories and power plants
- These firms are allowed to pollute up to the permitted level
- If any of the big factories or power plants wants to pollute beyond the
permitted level, it can purchase extra permits from others who might not
need them
- Price of the permits is determined by the forces of demand and supply.
- The total level of emission = social optimum
- The EU government lowers the overall cap on the emissions progressively to
five firms time to react (e.g. to cut emission by adopting green technology but
with the intention for the level of emission to reach the socially efficient level
eventually)
- However, can be administratively costly if there are many polluters
- Technical difficulties: high cost in measuring pollution, and high cost in setting
up a mechanism of monitoring and verifying actual emissions
- Efficient level of total emissions is not known: information failure
- The market could under-estimate the cost of pollution and therefore the
market failure will not be fully corrected. (pollution permits might be
underpriced - UK has topped up that very low carbon price with its own
carbon price floor scheme)
- Firms with greater financial power may see no incentive in cutting back
pollution levels as compared to the smaller firms
Transition to a low-carbon power sector
- By transiting to a low-carbon power sector which uses renewables e.g. wind and solar,
nuclear and CCS

The UK government aims to reduce the amount of emission and hence MEC
(position reasoning using technical term)
- New market output will be closer to the socially efficient level
- However, the transition will require massive capital outlays which will put a strain on
the governments budget (Ex4: governments support has also been provided)
- Hence, the opportunity cost is high
- Moreover, CCS is a new and untested technology that might not produce
results
Retrofit improvement in the energy efficiency of homes
- By insulating loft and cavity walls and replacing old inefficient boilers
- The demand for gas for heating will fail
- The policy aims to reduce MPS/ demand to coincide with the MPC at the
socially efficient level
- The level of effectiveness depends on the take-up rate
- Given that there is no upfront cost for consumers, as the costs of the
measures is paid back over time through electricity bills and payments are
supposed to be less than savings through reduced energy bills
- This creates more incentive
Evaluation
- These economic policies aim to reduce greenhouse gas emission by internalising the
external costs or to change consumers consumption patterns e.f. Use renewables
instead, retrofit improvement in energy efficiency of homes
- Appropriateness is dependent on the success rate in achieving economic efficiency in
resource allocation which sometimes is difficult to quantify
- Governments are also faced with various constraints (financial trade-offs in objectives,
etc.) when implementing these policies
-

Case Study 2
(ai)
-

Singapores budget balance as a % of GDP is in a surplus but Indonesia is in a deficit.

Both Singapores and Indonesias budget balance as a % of GDP has fallen in value
(1m for each)

Clarify the meaning of budget balance: G-T

When an economy experiences economic growth,assuming a progressive income tax system,
an increase in real national income would lead to an increase in income tax revenue, cet par,
improves the budget balance
When an economy experiences economic growth, the government may also reduce
government spending on unemployment benefits as more people get employed during a
period of economic growth, cet par, improving the budget balance
(2m for either explanation point on G&T)

(aii)

(b)
-

Explain the nature of infrastructure as good that necessitates government provision (in given
context)
- Infrastructure such as ports, mass transit and toll roads (Ex6) are merit goods deemed
by the government as socially desirable and would be under-provided by the private
sector in a free market. The provision of infrastructure also generates positive
externalities in the form of economic growth due to better- linked physical and digital
infrastructure increasing efficiency in transporting goods and services within and
across countries as well as increasing the productive capacity of economy (Ex6)
- (OR provide an explanation of infrastructure being a public good)
Explain the nature of infrastructure as a good that requires government financing for
provision
- The provision of infrastructure involves high fixed cost and the private sector may not
have the financial ability to do so
- Ex6: even with the newly launched Asia infrastructure investment bank, Asia may still
suffer from a lack of funds.
- Therefore, the government must step in to provide the duns needed to finance the
provision of infrastructure (Ex 7: governments must utilize more tax revenue in raising
public infrastructure investment)
(2m for each part, fully answer the question: why provide + why finance)

(c)
-

Clarify the issue of concern for Indonesian government: over-dependence on commodity

exports revenue being a key economic growth drive
Indonesia wants to reverse its declining economic growth rate (table 3) and achieve its
targeted 7% annual real GDP growth (Ex8)

Commodities tend to be subjected to volatile price changes (Ex8)

- PED<1 (key essential input in production process), a given change in market supply
conditions would produce significant price fluctuations
- E.g. an increase in market supply, cet par significant fall in prices, less than
proportionate increase in Qd significant fall in X revenue, AD, more than
proportionate fall in real NY due to k effect and fall in actual growth
With China reducing its demand for Indonesias commodities, commodity prices are expected
to continue falling and this will reduce export revenue further exacerbates the fall in AD
and actual growth (Ex8: as China slows down, Indonesia too)
- Hence Indonesia needs to shift its export focus from commodities to manufacturing to
achieve its target growth rate of 7% (Ex8)
(2 well-explained points with theoretical framework and supported by relevant case material,
2 marks each)

(d)
-

Intro
-

Clarify the meaning of rebalancing of Chinas economy: shift emphasis from

investment-led to consumption- driven growth
- Clarify the nature of economic interdependence between China and other developing
economies in Asia (e.g. Indonesia & Philippines): export of commodities to China (Ex8)
implications on BOT (i.e. X-M) and macroeconomic effects
Thesis: the rebalancing of Chinas economy and the gradual appreciation of its currency
should benefit most developing economies in Asia
- As China rebalances its economy, consumption is expected to rise. If domestic firms in
China are not able to address the needs of Chinese households, consumers may turn
to import from other developing economies in Asia, thus increasing X revenue,
improving BOT and increase AD in these countries increase in Real NY via k effect
hence raising actual growth and employment (elaboration). The increase in export
revenue would also improve BOT and the current account of the BOP, cet par.
- The appreciation of the renminbi would mean a relative depreciation of the currencies
of its trade partners of the other developing economies fall in price of X in foreign
currency terms and rise in price of M in domestic currency terms
- Assuming M-L condition is satisfied where PEDm + PEDx >1 improvement of
BOT of other developing economies, cet par, improves the current account of
the BOP
- An increase in next X value and BOT improvement increase in AD more
than proportionate increase in RNY actual growth
Antithesis: however, the rebalancing of Chinas economy and the gradual appreciation of its
currency may negatively impact some developing economies in Asia
- As China reduces dependence on investment-led growth, demand for capital goods
and primary commodities meant for infrastructure production such as coal and copper
could fall. This would reduce export revenue and worsens BOT for commodity

exporting asian developing economies such as Indonesia, cet par (Ex8) AD falls,
more than proportionate fall in real NY via the reverse k process and reduces actual
growth and employment (elaborate) (table 3: Indonesia)
- In addition, as net export revenue falls, assuming no change in import
expenditure, worsening of BOT and current account of BOP
- Alternatively: it takes time for China to rebalance its economy,. Shifting from
investment- led growth to consumption-led growth may cause the economy to slow
down as consumption is unable to increase immediately to make up for the fall in
investment fall in AD, real NY and growth in SR this may then reduce consumer
sentiment which can reduce consumption, thus going against rebalancing in the SR.
The fall in consumption may include a smaller demand for imports, thus reducing the
export revenue of other countries and the consequent adverse effects on growth and
BOP
- Appreciation of the renminbi would make Chinese exports dearer in foreign currency
terms. For developing countries in Asia that import primary or intermediate goods
from China imported inflation due to higher input prices. The rise in cost of
production causes SRAS to decrease, prompting firms to pass on higher costs to
consumers in the form of higher prices cost- push inflation
Conclusion/ syntheses: whether other developing economies in Asia would benefit from
Chinas rebalancing depends on the following factors:
- Type of exports from developing countries countries which export capital goods
and commodities meant for infrastructure development e.g. Indonesia will be more
negatively affected than countries which export manufactured goods such as Vietnam
and Thailand
- Time period the rebalancing of Chinas economy is likely to pose more challenges in
the SR. It takes time for China to rebalance its economy. Hence, the benefits would
likely be reaped only in the long term.
- Governments response in the form of mitigating policies to reduce negative
impact in the form of falling export demand and imported inflation, governments can
implement policies e.g.demand-management stimulus measures) especially in the SR.

(e)
-

Introduction
- Identify the relevant two macro aims of Indonesia in Ex8:
- To reverse declining growth and to achieve targeted 7% annual economic
growth (by rebalancing its economy from commodities-led growth to
manufacturing- driven growth)
- To increase employment (Ex8: workers are cheap and demography is in its
flavour)
- Clarify the meaning of the need to embrace greater market forces and increase
participation of foreign firms
- Embracing greater market forces is a type of structural reform
(market-oriented SS-side policies) where government intervention is reduced

to improve efficiency of markets in allocating resources. In Indonesia, labour

market reforms are urgently needed to address rigidities caused by inflexible
labour laws, minimum wages and tight immigration rule.
- Increasing the participation of foreign firm
Thesis 1: explain how embracing greater market forces will help attainment of macro aims
- removal/ reform of inflexible labour laws
- To achieve greater efficiency in allocation of workers across industries
- Importance in given context of rebalancing towards manufacturing industry:
demand for workers is likely to rise in manufacturing industries as Indonesia
pushes ahead with rebalancing
- By allowing workers to move freely from commodities to manufacturing
industries, the greater supply of manufacturing workers will help ease upward
pressure on wages. This improves Indonesias cost competitiveness in
manufacturing (Ex8), then raising SRAS and hence actual growth as
manufacturing takes a larger share of the countrys GDP.
- Removal of minimum wages
- To reduce labour cost and raise unemployment
- Minimum wages has resulted in a surplus of workers who are willing to work
but not being employed by firms currently
- Importance in given context of rebalancing towards manufacturing industry:
the removal of minimum wages will help increase employment and reduce
cost of production for labour-intensive firms. This increases SRAS and
improves Indonesias X competitiveness PED>1 (manufactured goods)
increase X revenue, AD, more than proportionate increase in RNY and actual
growth
- Loosening of tight labour immigration rules
- Importance in given context of rebalancing towards manufacturing industry:
reduce shortage of semi-skilled workers in manufacturing industries
- With most workers working in commodities industries previously, the lack of
semi-skilled workers may cause wages to rise
- For instance, there are sectors where firms are required to produce up to 40%
of their component in Indonesia before being able to sell them. However,
despite the lower wages offered by Indonesia, foreign firms have not been
keen to set up production bases, perhaps due to lack of semi-skilled workers
domestically (Ex8) deters FDI in manufacturing sector lowers AD,
growth, employment (elaborate)
- Hence with relaxation of immigration rules promote FDI growth and
employment
Thesis 2: explain how increase participation of foreign firms will help attainment of macro
aims
- FDI will help Indonesia improve its actual and potential growth
- with greater FDI opportunity for public- private partnership (Ex7) in
infrastructure development will help narrow the infrastructure gap currently

experienced by Indonesia (Ex6: rising urbanisation in countries such as

Indonesia and the Philippines will spur greater need for physical infrastructure
and power generation capacity) improve both quantity and quality of FOP
increases in LRAS achieves potential growth
- This is particularly pertinent as poor infrastructure itself tend to deter FDI
which can be inferred from Indonesian firms having to spend more on logistics
compared to firms in other countries (Ex8). Therefore, to reverse the decline
in FDI, Indonesia should increase infrastructure spending.
Anti-thesis 1: Explain how embracing greater market forces may hinder Indonesia in
achieving its macroeconomic aims
- In light of shift-towards manufacturing the labour market reforms with loosening of
immigration rules would worsen the structural unemployment problem
- Structural unemployment may happen if the Indonesian government does not provide
skills training for workers who do not have the skills to shift from
commodities-exporting sector to manufacturing industries. This could worsen once
foreign workers are allowed to enter and compete with the local workers
Anti-thesis 2: explain how allowing participation of foreign firms may hider Indonesia in
achieving its macroeconomic aims
- By increasing participation of foreign firms, inefficient domestic firms may end up
shutting down due to the lack of protection. This can lead to massive unemployment
especially in the short term which may then explain the governments decision to bar
FDO from entering the industries such as onshore oil extraction and e-commerce (Ex8)
- Evaluation: however, competition can help to raise cost efficiency of domestic firms
by promoting efforts at raising productivity and increasing AS over time actual and
potential growth
Synthesis: to successfully rebalance the economy, Indonesia should embrace greater market
forces and increase participation of foreign firms
- Ultimately, the government should weigh the costs and benefits of pursuing these
structural reforms. Although there will be structural adjustment pains in the short run,
Indonesia should press on with embracing greater market forces and increasing
participation of foreign firms in view of the long term benefits generated on the
economy
- Mitigating policies should be implemented, especially in the short run where workers
may face structural unemployment and rising income inequality due to greater
competition in the labour market. This therefore requires the government to
implement supply-side policies such as skills training to reduce the risk of workers
being structurally unemployed.