European Baccalaureate 2021 Economics PDF

EUROPEAN BACCALAUREATE 2021: ECONOMICS NOTES ON SOLUTIONS AND MARKING In 2021, the system of marking changes, most notably the pass mark becomes 5.0 and the total marks for the paper becomes 100. The allocation of marks to parts of the questions is now 6,7,10,10 (or 7,7,10,10 for one question); the...

EUROPEAN BACCALAUREATE 2021: ECONOMICS NOTES ON SOLUTIONS AND MARKING In 2021, the system of marking changes, most notably the pass mark becomes 5.0 and the total marks for the paper becomes 100. The allocation of marks to parts of the questions is now 6,7,10,10 (or 7,7,10,10 for one question); the weightings are similar to the previous scheme (2,2,3,3) so the structure of the paper and requirements of parts of questions is unchanged. Please note, however, that with the pass mark reduced, any answer that is considered a marginal pass/fail or ‘just good enough’ should receive about half the marks allocated, not 60% of them. Full, or almost full, marks for a part can still be awarded when the answer is complete and the candidate has demonstrated the skills required. We would also like to use this as an opportunity to shift the emphasis in solutions away from content (most of which markers will know) and towards defining what candidates must do to pass the exam/question and what they can do in order to achieve higher marks. The matrices are a guide to how markers should allocate marks to different skills. As an example: In Q1b) 2 marks are allocated to knowledge, 2 to comprehension and 3 to application. A candidate that possesses the knowledge to explain the chart (i.e. notes that rates of inflation in the four categories are different and that HICP is a weighted average of them, notes the COVID-19 impact at the end of the time period, etc.) can be given 2 marks for Knowledge as a maximum, or close to it if there is a small error or omission. If he/she displays comprehension of that knowledge to interpret the chart clearly and correctly (i.e. notes that energy prices are the most volatile and services the least, points out the period of very low or negative inflation in 2014-17 and relatively high inflation 2017-19 [though even here it is on target], etc.) then 2 marks can be awarded for Comprehension. If he/she comments that HICP correlates with energy prices quite strongly as the other categories are more stable, gives an explanation for the changes in HICP (recovery from the financial crash/euro crisis and austerity policies, recovery, impact of COVID lockdowns, etc.), then around 3 marks for Application are awarded. If the underlying knowledge is good, interpretation of the chart partial and comments weak or unclear the mark awarded might be 2.0+1.2+1.2=4.4 (i.e. a ‘clear pass’ but not ‘very good’). A candidate that does not have sufficient knowledge to interpret the chart properly but notes that HICP is varying between +2% and -1% over the period in a roughly cyclical pattern and offers a basic and correct explanation for that might be awarded 1.0+1.2+1.4=3.6 (i.e. a ‘marginal pass’). There is still scope for interpretation, for example Q1c) asks about the relative threats of inflation and deflation, there is no clear right of wrong answer to this and candidates are asked to ‘discuss’ the issue. What is important is that the candidate shows that he/she understands the implication of each and can rationalise them in clear economic terms. There will be cases where one marker thinks a piece of discussion is worth 4.2 and the other 4.8. Also, note that the following pages are guidelines for marking, not model answers; candidates that include material that is not in them but is relevant and correct (e.g. examples, knowledge of recent economic events) should be rewarded. Those that omit important points should not receive full marks even if what they have written is correct. Please also bear in mind the operative verb in the question when marking, ‘discuss’, ‘analyse’ etc. are not the same as ‘state’ or explain’. Our aim is to reduce the differential between marks awarded by teachers and external markers.  EUROPEAN BACCALAUREATE 2021: ECONOMICS SUGGESTED SOLUTION AND GUIDELINES FOR EVALUATION: QUESTION 1 a) Define inflation and describe how it is measured. Definition: a sustained increase in the general price level. Usually it is measured by the (Harmonised) Consumer Price Index (CPI/HICP), this is a weighted average of retail prices. To calculate it, goods and services are given different weights according to the percentage of income that households spend on them; the weightings are determined from household surveys. To work out the inflation rate, compare the prices of a representative basket of goods now with the base year. For the annual rate (which is the normal measure) compare present day prices with prices one year previously. b) With reference to the chart above, comment on the record of inflation in the euro area since 2013 and identify possible reasons for the trends observed. Students are expected to comment on periods of both high and low rates of inflation/deflation and recognise that inflation varies over time. From the graph, inflation has been positive since 2013 except for brief periods in 2015, 2016 and 2020 where it turned negative; peaks of around 2% can be seen in 2013, 2017 and 2019. Generally it has been a period of low inflation. Downward trends can be observed in 2013-15 and 2018-20 and upward trends in 2016-17. Over the whole period prices in services, non-energy industrial goods and food have risen between 0.5% and 1.5%, usually food prices have risen faster than the other two sectors. Energy prices have been most volatile, changing rapidly and in a range of -1.0% to +2.2%. Students need to identify possible reasons based on a theoretical approach and show some knowledge of economic events that have contributed to the fluctuations. The impact of volatile energy prices is clear, the HICP line is closely correlated with energy price changes. For higher marks, students must show an understanding that inflation can come from demand-pull and/or cost-push sources. The chart does not allow us to identify exact causes of inflation over the period, but good candidates will know that this was a period of relative stability with growth in much of the eurozone, though it was also a period of austerity with some members in recovery from the debt crisis, so some demand pull effect would be expected. Cost-push effects are more clearly visible in the chart and can be linked to the development of energy prices. Good candidates might also mention the effects of money supply on inflation. Monetary policy has in recent years been used to increase the liquidity in the money market through very low interest rates and quantitative measures. c) Discuss whether deflation is worse for economies than inflation. Students need to explore the problems of both inflation and deflation. Inflationary costs include: Inflation is generally a problem when above the desired target 2-3%. It erodes purchasing power for those on fixed incomes There are psychological and political costs  Makes planning for investment difficult Shoe leather costs Makes exports less competitive Current account problems Deflationary problems include Lack of confidence in the economy Reluctance from consumers to spend money Decreases Aggregate Demand Lower investment Recession (cause or effect) Fall in GDP The question asks candidates to ‘discuss’, so to attain good marks they must explain some (not necessarily all) of the points above. They should also indicate which factors cause the greatest difficulties for the economy. Any examples should be rewarded and good candidates will provide a conclusion evaluating which problem may be more damaging and why. d) Describe the objectives of the European Central Bank’s monetary policy and evaluate the effectiveness of various measures in meeting those objectives. The primary objective of the ECB’s monetary policy is to maintain price stability. This is the best contribution monetary policy can make to economic growth and job creation. The fundamental aim of the ECB is to use monetary instruments to maintain an inflationary target. This target is to maintain inflation rates below, but close to, 2% over the medium term. This is to encourage growth as once the inflation rate falls below this level there is a fear of slipping into deflation. Other roles include maintaining an adequate supply of cash to the economy to meet the demands of the population for cash to hold. Some central banks (not the ECB) have a target exchange rate against other currencies that they want to maintain in order to keep the international purchasing power of their currency reasonably stable. The main instruments of monetary policy available to control inflation include interest rates, open market operations (OMO), reserve requirements (RR), quantitative easing (QE). Monetary Policy in recent years has been used to raise inflation away from potential deflation and in this way create expansion by using the following monetary instruments: Interest Rates After the 2009 financial crash interest rates were lowered in order to stop the world economy slipping into recession with the result that growth was stimulated and inflation moved above the 2% target around 2010-12. Fear of unemployment and low confidence meant that aggregate demand stayed flat and inflation dropped below 2%, at times becoming negative. Credit allocation collapsed as banks were afraid that borrowers would not be able to repay. Since then interest rates have remained very low (usually negative in real terms) in an attempt to encourage consumer borrowing, business investment and maybe government borrowing, all of which should raise Aggregate Demand and increase growth, and thus bring higher inflation; it has, however, remained low. With such low interest rates it is questionable whether they are still an effective tool, though they have allowed governments to raise their borrowing considerably in response to the pandemic.  Open Market Operations Net buying involves the central bank buying back more maturing bonds than it is issuing new bonds. This adds cash to the banking system making it more liquid and therefore able to expand lending for consumption and investment. In addition net buying reduces the supply of bonds on the market raising their price, forcing yields on existing bonds down; interest rates in general tend to fall. Net buying OMO has positive liquidity effects on the banking system and forces interest rates down and should stimulate the economy. This only happens if commercial banks are confident in the creditworthiness of their borrowers and if borrowing in general is elastic in relation to falling interest rates. At present there is much uncertainty and the impact may thus be limited. Reserve Requirement Lowering it allows the banks to reduce minimum liquidity ratios and thus support more lending for consumption and investment. As with OMOs, lowering the minimum liquid assets ratio only works if banks feel confident that the previous rate was higher than their preferred rate which will be based on the risk associated with potential borrowers’ ability to repay and consumers’ confidence in borrowing to fund demand. Quantitative Easing The ECB introduced this in 2015 (though other central banks had been using it for several years), it has become an official part of monetary policy used extensively in an attempt to stimulate bank lending. QE means a central bank buys back bonds before maturity, thus making the commercial banks cash rich by turning illiquid assets (bonds) into liquid assets (cash) and as a result in a position to lend more. Again, low confidence and uncertainty have reduced its effectiveness as a way of stimulating an economy, which means that economies need to consider a budgetary or a supply side stimulus. Marking recommendation To pass, candidates must describe the objectives of the ECB, define an optimum rate of inflation and briefly describe instruments of monetary policy, not necessarily all of those listed above. Higher marks should only be awarded for a more comprehensive answer and when there is evidence of policies being evaluated, as stated by the question. Any attempt to provide case studies or additional instruments of monetary policy should be rewarded, if relevant. The limitations of monetary policy under current conditions should be explained. QUESTION KNOWLEDGE COMPREHENSION APPLICATION ANALYSIS / TOTAL DISCUSSION Q1.a 6.0 6 Q1.b 2.0 2.0 3.0 7 Q1.c 2.0 1.0 2.0 5.0 10 Q1.d 2.5 2.5 5.0 10 TOTAL 12.5 3.0 7.5 10.0 33 Original language: English  EUROPEAN BACCALAUREATE 2021: ECONOMICS SUGGESTED SOLUTION AND GUIDLINES FOR EVALUATION: QUESTION 2 a) Define unemployment and describe two ways of measuring it. The candidate must describe and understand the difference between the two main ways in which unemployment is measured: claimant count and survey. The ILO states that a person of working age must be without a job, have been actively seeking work in the past four weeks and be available to start work in the next two weeks. The other main method is the claimant count which measures the number of people registered as unemployed and claiming benefits. Students should be awarded more than 3 points if they successfully describe both methods and assess the benefits and disadvantages of each measure and explain why the two figures will differ; the survey method generally gives a higher level, typically 2-3% in European states. Because of differences in eligibility for benefits, the labour force survey is normally used for international comparisons ILO, Eurostat). b) Describe the data presented in the map above and explain why employment rates can differ between countries. The map above shows the employment rate of the active population (between 15 and 64 years) of European countries in 2020. The employment rate is produced by calculating the proportion of individuals in employment within the total number of individuals within the group. Defining the potential working population is debatable: 15-64 is taken in the source, but in Europe many will remain in full time education until 18 or later. Defining ‘in employment’ is also not straightforward, for example how to measure part-time jobs, unpaid work, self-employment. Eurostat uses a broad definition of any (even 1 hour) work within the reference period for ‘pay, profit or family gain’. The graph shows relatively large disparities between European countries, with employment rates ranging from 50.3 - 61.87% to above 75%. Countries with employment rates above 75% are Germany, Switzerland, the Netherlands, Sweden, Norway, as well as Estonia and Iceland (mainly north-western Europe). There are 6 countries in the lowest category: Italy, Greece, Macedonia, Serbia, Montenegro and Turkey (mainly the Balkans or southern Europe). The map is difficult to interpret as not all the ranges are the same size: for example 61.87-67.27 (5.40)% v. 73.03-75.30 (2.27%) but the fact that that there are adjacent countries with different records of employment (e.g. Netherlands-Belgium or Austria-Italy) suggests that it is not simply down to geography. Many economists attribute these disparities in employment rates to varying degrees of flexibility in the labour market. In countries where the labour market is characterized by rigidities, the difficulty of shedding excess labour discourages employers from hiring. High wage levels and the associated costs (including social security contributions) can make labour costs too high. The relative cost of capital and labour and its effect on productivity can also have an impact Rating recommendations: To obtain at least half marks, candidates must demonstrate they understand employment rate, identify disparities in employment rates in Europe and give examples. To obtain additional marks, candidates must explain why rates might differ between countries or regions, there is no clear right answer to this so any rational and explained argument should be rewarded. Candidates are not expected to have detailed knowledge of the respective labour  markets in specific countries, but they must demonstrate understanding of the main factors influencing the employment rate. c) Explain the social and economic consequences of unemployment. Students should list and explain some of the points below: Costs to the unemployed. The loss of income can lead to a rise in personal debt and general lower standards of living. Cost of wasted resources. Unemployed labour reduces output and is lost forever. Costs to GDP and output. The growth of an economy stagnates and can lead to negative multiplier effect, further unemployment and maybe deflation. Costs to the government. The government’s loss of revenue can lead to bigger budget deficits, less growth and more borrowing. Costs to society. Unemployment can lead to high levels of depression and suicide in society. Higher crime rates, social deprivation, divorce and political unrest. Additional marks will be awarded for detail, examples and interlinked explanations. d) Describe and evaluate two macroeconomic policies that states might increase the rate of employment. Responses may cover a range of Supply-side measures – such as, wage subsidies, training, removing labour market imperfections (such as minimum wage), raising labour mobility, better information, lower transfer payments. Candidates may also refer to Demand-side policies such as expansionary fiscal policies. Strong responses might point out the limitation on this imposed by the Growth and Stability Pact constraints. The other demand-side policy selected for discussion could include monetary policy, though in the Eurozone the ECB pursues a single interest rate policy for all member states. Knowledge of labour market conditions in individual EU states is not required to pass, but should be rewarded where used appropriately to strengthen the evaluation. Pass level answers will note that there are positive and negatives attached to each of the policies selected for evaluation but this line of reasoning does not have to be comprehensive and detailed. Stronger candidates may also refer to differing schools of economic thought and the implications of these for policy making. While not required to pass, this should be rewarded. QUESTION KNOWLEDGE COMPREHENSION APPLICATION ANALYSIS / TOTAL DISCUSSION Q2.a 6.0 6 Q2.b 1.0 3.0 3.0 7 Q2.c 3.0 3.0 4.0 10 Q2.d 2.0 2.0 6.0 10 TOTAL 12.0 5.0 6.0 10.0 33 Original language: English  EUROPEAN BACCALAUREATE 2021: ECONOMICS SUGGESTED SOLUTION AND GUIDELINES FOR EVALUATION: QUESTION 3 a) Define economic growth and describe how it can be measured. Economic growth can be defined as a long-run increase in an economy’s productive capacity/ potential output. Economic growth is therefore an increase in the real value of goods and services that can be produced within and economy given the available resources and technology. It is usually measured by the annual percentage change in real Gross Domestic Product (GDP). This is, however, only a proxy measure as the potential output or productive capacity cannot be measured directly. It is actual output (i.e. GDP) that determines the standard of living of inhabitants and thus a growth in it, ceteris paribus, should improve living standards. As noted, growth is generally quoted as a percentage increase in GDP over a year or quarter. Marks above pass level should be awarded when the candidate notes that allowances for change in prices (i.e. in real terms) and population change (i.e. per capita) can be made to give a more accurate picture of the impact on the average person. Note, however, that these figures tell us nothing about the distribution of income or how growth is affecting different groups in society. Economic growth can be illustrated with various diagrams, and it is expected that good candidates may use at least one relevant diagram to illustrate economic growth. Growth can be illustrated by a shift outward in the production possibility curve or a shift to the right in the long run aggregate supply curve. b) With reference to the source above, explain with examples the possible effects of Covid-19 on long-term growth. The causes of economic growth are associated with the availability and use of factors of production. More resources (land, labour and capital) as well as improvements in them will cause economic growth, i.e. shift the production possibility curve outwards. For example, investment in people through better training (increasing human capital), investment in research and development and improvements in technology may raise productivity and future growth. Candidates are expected show a knowledge and understanding of the causes of economic growth and how the pandemic may affect them. The article mentions greater uncertainty and higher precautionary savings which could slow growth in the long run. The Harrod-Domar model of growth focuses on the importance of saving and investment in achieving growth. A high saving ratio and stocks of productive capital are the main drivers of growth in this model. With lower levels of income and uncertainty, investment spending is likely to decrease even if saving is rising. Candidates need not refer to any specific model but should explain the main causes of growth and therefore what may cause a slowdown in growth or a fall in potential production; the article mentions bankruptcies and job losses, both will have a detrimental effect on growth, in the short- term at least. Note that some of this loss of income has been offset by much higher government borrowing and spending to deal with the impact of the pandemic in the short-term (though this is not within the remit of the article). The pandemic has caused a large fall in Aggregate Demand and some sectors of the economy are particularly hard hit. How future demand and consumer patterns will change is uncertain, but some industries may never get back to pre-pandemic levels of output. Tourism, for example, may  experience long-lasting effects in peoples travel habits. Changes in spending patterns change the structure of the economy, some sectors will grow while others will decline. Technological developments may also affect sectoral productivity (for example from more home working or new distribution networks). The article states that structural changes in the economy are necessary for long-term recovery and growth. Through these changes less productive activities should be replaced by more productive ones. These changes in consumer patterns and technology have short-term cost. The cost will, however, depend on the mobility of factors of production. Flexible labour and capital markets may diminish the effects of these changes to the long-run performance of the economy. For high marks, candidates should demonstrate that they have fully understood the key points of the source and can combine them with their knowledge of economic growth to create a coherent explanation of the long-term macroeconomic impact of the Covid-19 pandemic. c) Discuss to what extent economic growth brings about an improvement in the standard of living and describe the negative effects it creates. Economic growth can be viewed from quantitative or a qualitative points of view. Quantitative growth considers the purely numeric expansion in total economic production in the sense of the increase of a national product (e.g. GDP – see part a)). Qualitative growth considers not just the increase in total output, but also the improvement in the quality of life, sustainability, protection of the environment and distribution of income, etc.. Major statistical agencies such as Eurostat now collect ‘well-being’ and ‘happiness’ data; however, measuring qualitative growth in a society is associated with considerable difficulties. Economic growth represents a higher level of national income. This leads to better material welfare, health, education, and opportunities. Poverty may be reduced as extra tax revenue raised may be used to increase social security and welfare schemes. Higher income may, however, be allocated to the few, leading to greater inequality of income and wealth. Also, growth may result in some groups being exploited and suffering poor living standards and working conditions. The true benefit of economic growth also depends on how sustainable it is. Pollution and exhaustion of resources may mean that future generations are not able to benefit from similar growth. Also, a steady rate of economic growth (say around 2%) may be more beneficial than one that fluctuates a lot. Candidates are expected to explain the various benefits and problems associated with growth and how they affect people and the standard of living of the population. They should also consider the wider impact of growth on the environment and in the very long-term. d) Outline the measures that governments can use to support long-term economic growth and assess their likely effectiveness under present circumstances. The response should focus on supply-side policies that target the causes of economic growth (investment in human capital, physical capital, technical progress and innovation). Examples of policies related to achieving more or better use of land, labour and capital should be rewarded. The starting point of growth policy is to increase the quantity and quality of production factors. The most important growth policy measures include:  Promotion of investment by improving the investment climate and profit expectations. Promotion of education and research geared to the needs of the economy. Promotion of competition to encourage innovation. Promotion of labour productivity through continuing education and retraining. Provision of infrastructure and other public goods to promote efficient use of factors of production. Policies may be divided into market-based policies and interventionist policies. Market-based policies focus on improving conditions for companies and allowing markets to work freely: reduction of red tape, deregulation of the market, more flexibility in the labour market, reduction of the tax burden, etc. Interventionist policies focus on correcting market failure and introducing laws and regulation where the free market does not produce an optimal outcome. Candidates might also discuss demand-side measures, though these are usually associated more with short-term (cyclical) lack of growth. They can impact on long-term growth though, for example borrowing to improve transport infrastructure (as above). Similarly monetary policy that creates stable low inflation and promotes confidence will deliver long-term growth benefits. Candidates that mention these should be rewarded if they explain how they encourage growth and/or give examples. The limitations of standard growth promoting policies in a period of global uncertainty should be noted and discussed for a high mark. QUESTION KNOWLEDGE COMPREHENSION APPLICATION ANALYSIS / TOTAL DISCUSSION Q3.a 7.0 7 Q3.b 2.0 2.0 3.0 7 Q3.c 2.0 2.0 6.0 10 Q3.d 3.0 2.0 5.0 10 TOTAL 14.0 2.0 7.0 11.0 34 Original language: English Marking Matrix for Paper QUESTION KNOWLEDGE COMPREHENSION APPLICATION ANALYSIS / TOTAL DISCUSSION Q1 12.5 3.0 7.5 10.0 33 Q2 12.0 5.0 6.0 10.0 33 Q3 14.0 2.0 7.0 11.0 34 TOTAL 38.5 10.0 20.5 31.0 100