Examiner report for Unit 1 (Jan 2008)

Unit 1 In January 2008 :

Question (a) : Using an example in each case, identify two different factors of production which may be needed for the production of pizzas that are delivered to homes
Comments of examiners: A small number of candidates gave land as an example of a factor of production but then gave a wrong example that did not refer to the site or raw materials characteristics.


Question (b) : State and explain two possible determinants of the increase in demand for high quality pizzas
Comments of examiners : The best answers usually referred to a change in income/disposable income as a possible determinant. A lot of candidates drew extensively on the first five lines of the case study. The majority of these answers, however, did not recognise the reasons given as being the taste / fashion determinant of demand. Another weakness was that this same so-called determinant was used for a second time.


Question (c) i : With reference to the data, use a supply and demand diagram to show how the global price of mozzarella cheese has increased.
Comments of Examiners : The original intention of this question was to award a mark for answers that explicitly recorded $1940 and $3000 on the vertical axis, hence the line reference.

Question (c) ii : Explain how the global market of cheese might change with the release of US stock piles
Comments of Examiners : This question caused problems for many candidates for the reason stated above. Given the context, it is difficult to see candidates confusing ‘stockpile’ with ‘stocks’, as used to describe a synonym for shares. So not as many candidates as might have been expected gained four marks for some simple market analysis of the sudden release of the additional supply of US cheese onto the market. Although not required, a diagram could achieve three marks.

Question (d) ii : Explain the significance of the price elasticity for mozzarella cheese producers

Comments : There was considerable confusion between revenue and profits when referring to the effects of an increase or decrease in price. Only a handful of candidates stated that the 0.2 estimate indicates that there are seemingly few close substitutes for mozzarella cheese. Rather more candidates explained that the statistic was an estimate and that producers should bear this in mind when making pricing decisions.

Question (e) : Using evidence provided, comment on the extent to which the market for high quality pizzas may be considered to be one of monopolistic competition

Comments : To obtain marks though, it was essential that the written answer was applied to the high quality pizza market.
As in previous examinations, there were some weak answers from candidates who wrote about ‘monopolistic’ and not ‘monopolistic competition’. These answers did not gain marks due to the confusion with monopoly. Two marks were most typical for commenting that the market was most likely an oligopoly due to the dominance of well known brands. Rather more comment was needed for full marks; for example, that data was needed to make a proper assessment or further information was needed on some of the other characteristics of an oligopoly

Question (f) : Discuss the extent to which the increase in the global price of mozzarella cheese is really of serious concern to all pizza producers

Comments : The main way that most candidates used to reach Level 4 was to distinguish between large and small pizza producers. This was usually done by considering how larger firms could benefit from economies of scale, particularly through the bulk purchasing of mozzarella cheese. Other possibilities were to make assumptions about the price elasticity of demand for pizzas or to discuss how other variable costs might be reduced. Some answers recognised correctly that all producers would have to bear the costs and that the market structure could have a bearing on pricing decisions. A high mark on this part required a discussion of more than one of these aspects.

Why does the aggregate demand has the downward slope ?

I found out on internet and I ll summarise it as 3 main explainations :

- Interest Rates :
In the economy, we have a fix amount of money. The price level representing for the amount of currency we have to spend to purchase something. If the price level is high, therefore we have to have a large amount of currency to purchase. And with low price level, the quantity of currency we have to purchase is less. Suppose that some of these money that we do not spend, will go to bank as a saving. It will lead to the rising in bank loans and therefore it will drive down the interest rate.
With lower interest rates, firms are easier to borrow and therefore the investment will increase, which leads to the increase in aggregate demand ( because Investment is one of factors determine the aggregate demand).

- Exchange rates :
When the price level falls, the interest rates is driven down and therefore it more likely to decrease the exchange rates. Lowering exchange rate can increase the net export because the price of export become cheaper. Price level falls, exchange rates fall, increase in net exports which contribute to aggregate demand >> therefore AD increase.

- Wealth :
The lower price level is, the more you can afford to buy >> therefore it increases the consumption and leads to the increase in aggregate demand.

AS micro essays (8)

Food is necessary to life and to maintain the national security. Efforts are often made to stabilize price and incomes of farmers. Most of the governments intervened to the agricultural market to ensure that an adequate amount of food is supplied at the acceptable price. The impact can be positive or negative to the economy depends on how the consumers and producers reflect to the policies. However, to the end, the circumstance is that the intervention of the government spill over the international trade in food products.

Intervening into the agricultural market by setting a barrier always is carefully considerable by the government. The price in free market has to be set by the demand and supply forces. We always have question that whether we are using our resources in the most efficiency way. The low price in the free market needs to be made by the increase in the productivity or the achieving economy of scales, not by supporting from government. So therefore intervening into the agricultural market often contents the fear that market fails in achieving productive and allocative efficiency. But in the other hand, appropriate policy at suitable time will bring benefit to the economy.

The most common type of trade barrier is the tariff. Tariffs discourage imports by rising

the price of the imported good, thus discouraging consumer purchases. Domestic

producers benefit from reduced competition and higher prices, and producers in exporting

countries are harmed by the reduction in the level of exports.

Unlike tariff, which allows goods flow into the market without limit, quota fixes the quantity of import products that can go legally to the economy. The function of the quota is, by reducing the available of import goods in the market, the price of import product will rise and therefore it brings to domestic products more competitiveness.

Quotas can have unintended side effects, as illustrated by the U.S. sugar program. Selected countries are each allocated a fixed quantity of sugar which they can legally export to the U.S. These quotas protect U.S. producer prices, which are higher than world prices. Over time, high U.S. sugar prices have encouraged increases in domestic sugar production. Corn growers have become major supporters of the U.S. sugar program because the higher U.S. sugar price resulting from the quota led food manufacturers to substitute high fructose corn syrup (HFCS) for sugar. Therefore, with the sugar program, production of HFCS has been highly profitable; without the sugar program, sugar prices would have been lower and HFCS production might not have been profitable.

Barrier entries also bring to the war in economy. In most cases, losses equally taken by both countries. . For example, the EU has banned the use of growth hormones in cattle production in member countries and has banned meat imports from animals which have been given growth hormones. This essentially eliminates all meat imports from the U.S., where use of growth hormones has been judged safe. The U.S. has challenged the ban and both sides claim to have a scientific basis for their position. Similarly, the U.S. has banned imports of all fruits and vegetables treated with ethylene dibromide, but other countries disagree with this decision.

In conclusion, international trading should be liberated. Each country has its comparative advantage, and the trading will have the circumstance that both economies will gain benefit. By eliminating the barrier in the agricultural market, it will bring benefit to the whole economy even though the cost is some domestic sector might get worse off. And more important, it will avoid the trading war which just will damage the economy

Phillip Curve

Phillip Curve shows the relationship between level of unemployment and level of inflation. It is a trade-off between them, which means that if there is a rise in unemployment, therefore it would be a fall in inflation rates and vice versa.
When there is an increase in unemployment rates, more people now are not spending much as before. Therefore it could be a decline in the consumption, which is one factor, determined the aggregate demand. The rate of unemployment strongly depends on the aggregate demand. So a raise in unemployment rate would lead to a fall in aggregate demand and therefore, the rate of inflation will be reduced.

However, this model is not always true. It can’t explain the situation of the economy when there is a stagflation, which means that there is slower economic growth (or recession) combine with higher level of unemployment. So that new model has introduced base on the idea of Phillip Curve to explain it.Supposing the rate of inflation is now at 0, and therefore the rate of unemployment is at U. After time, the government realised that it is a high level of unemployment and they want to intervene to fix it. What they might do is to boost the demand for the market. After intervention, the unemployment rate is improved, it contracts from U to V. As there is a rise in demand, the inflation rate will increase as there is a rise in price level. Therefore prices get higher, and workers now required a higher real paid for their works.

However as there is a rise in their wages, workers now realised that their increase is just a nominal increase, therefore they might stop supply more labour and the output will return to its original. And finally, in the long run of Phillip Curve, there is a rise in inflation but a sustained in level of unemployment.

But.....
If inflation rises then exports become uncompetitive and so they fall. Exports are injections so AD falls which means unemployment raises.
If there is inflation then demand for Imports will rise and so leakages increase and so...unemployment rises.
If unemployment is low then exchange rates are high which makes imports competitive, exports not so...so unemployment raises.
So, really, inflation is high and unemployment is high; inflation is low and unemployment is low.
The exact opposite.
Or is this wrong...?
.... Absolutely true ...

Output gap

An output gap is said to exist when an economy is not producing at full capacity. So a negative output gap occurs when the economy’s actual output bellows its potential output. Illustrating the negative output using PPF diagram, the point has to lie within the curve, which means that the economy is not using all of its capacity.

Some problem might rise from it. The economy doesn’t achieve the allocative and productive efficiency. The productivity of workers might be low or there is the wrong target of producing, when the supply doesn’t meet the demand in market, or we can say that the consumer satisfaction isn’t maximised.



But I think the output gap is not so harmful for the economy. Well it’s not when the gap is not so large. When there is an output gap, it will lower the inflationary pressure for the economy. The economy can increase their output without rising in price level because they have capacity. We might say that when the negative output occurs, there is a high level of unemployment, because the economy doesn’t use all of its resources, here is workers. It might not be true because some people work as waitresses, bankers, bus-drivers, street cleaners, and teachers as well, doesn’t actually ‘produce’. Therefore their contribution will not take into account of output of the economy.

When the output gap is getting wider, we can assume that the economy is failing to achieve the allocative and productive efficiency. To deal with it, the government might use the supply side policy. Training is needed more to increase workers productivity. Or government might subsidise firms to reduce their production cost, therefore they can produce more.

In the other hand, the positive output arises when an economy’s actual output is higher than its potential output. It seems to be impossible because when the economy is at full capacity, the output will not raise even the aggregate demand shifts to the right. For a short time, however, an economy might be able to produce more if workers work overtime, some people who are not usually in the labour force enters it, and machinery is used flat out. It contains a danger of inflationary and it can’t be hold for a long run, according to the diminishing returns law unless the economy potential output increase.

Unit 2 Goverment Policy - Monetary Policy

Unit 2 mindmap (Unemployment)

Compare Living standard using statistics ...

According to the statistic information of National income in 2003, the USA became the country in the world having the highest Living Standard, with the Gross National income reached into 11 012.6 million dollars, and the Americans had the highest efficiency in production as well with the Gross National Income per capital was at 37 870 dollars. In the South of America, Colombia achieved 10.1 million dollars in Nation Income, which is equal to 1% of America and the Productivity was 6 410 which is much lower than the USA
In the European countries, the British economy was at the top high National income with the high Gross National Income, which was 1 680.1 million dollars and high level of efficiency in production. Another large economy in the Europe is Russia Federation: with the high level population and the large area of land, Russian Federation‘s Gross national Income was 374.8 million dollars in 2003.
On the east side of Europe, Czech Republic was achieved 72.9 million dollars. Even their achievement is lower than the Russian, but with the lower factors of endowment, small area, average level of population, they still achieve a good level of National Income and the Productivity is much higher than the Russia Federation when the Gross national Income per capita was at 7150 million dollars compare to 2610 million dollars of Russia.
In South East Asia, the National income of Indonesia in 2003 was 173.5, which is a high level among the Asian countries. In south Asia, Pakistan was achieved 77.6 million dollars, which is less than Indonesia but the efficiency in production is higher with 4 690 dollars per capita compare to 3 210 dollars of Indonesia.
In fact, consider and comment on the Living standard of a country we do not only just base on the information of National Income. Living standard which mean is the average quality of living of people. So the National Income is the result of the combination of all people in a country. And how the National Income affects the Living of people, it much depends on the strategy of the Government in spending. So living standard doesn’t only depend on the National Income but strongly affected by another factors such as the distribution of income or education ...etc.
As we see in the National Income statistic, the USA is the country having the highest national income. But the gap of Income distribution between High Income Group and Low Income Group is very large. The distribution of income into the lowest income people is 16.1% when the highest income group take into account 68.2% in 2000. The inequality is described more in Population aspect. 78% is the percentage of the concentration of people in cities and in the Communication aspect, the Internet users per 1000 people in 2003 was at 119. The number of people using internet in the USA is low if compare to UK with 658.9 or in New Zealand – 413.8. We might connect the high level of people living in city and the low level of users of internet. The low level of people using internet in country side can be the reason that pull down the level of people using internet in America.
Colombia is at the top of countries having the lowest National Income. But we can’t conclude that the Living standard of Columbians is bad. The percentages spending of Colombia on education in 2002 reach into 5.2 % or National Health Services, which is the high level of spending if compare to UK or Indonesia, countries achieved the higher National Income. So that, people there is receiving a good Living standard when the Government concentrated on Education and people doesn’t worry about their health services.
In Asia, Pakistan has the National Income at 77.6 million dollars – which is 2 times lower than Indonesia. But Pakistan has a great achievement of technique in production. With the level of productivity at 4 690 dollars per capita, the low level of energy per capita, which was at 454 kg of oil equivalent, Pakistan could save a lot of money from solving negative externality caused by pollution, or the money they saved from production by using efficiency resources is really considerable to distribute to other sectors in the country such as health care or education.
In Europe, the UK can be an example to show that living standard doesn’t just rely on the National Income. UK has the high level of National Income, which is 1 680.1 million dollars, but it has to face with a lot of problem as well. The old population of UK is now the difficult question for the government when there was the slow growth from 1990 – 2003 was at 0.2 %, and the percentage of population aged +65 was 16 % - the highest level among 10 countries surveyed. In the other hand, British people in some aspects are having the higher living standard if compare with the USA – which has the highest level of National Income. The contribution to the high living standard of UK is the high level of spending of the government on education and health care services. The communications of UK is good as well when the statistics in telephone mainlines, telephone per 1000 people or Internet users is always at the high level.

Who else gained from the recession ?

We are now living at the really excited time. All of the banks in the UK are now having the financial crisis, at the same time. This is the situation that has ever never been in history. The recession is soaring and seems to be unpredicted about the end. People’s confidence and expectation about the economy is falling to the lowest point. Investors are now withdrawing away from the economy.

But it’s not hopeless about getting advantage from the situation. I think that, people who are flexible in market share prices and have little bit lucky, can earn a lot of money. Let’s take a simple example in real life. Most of us tend to buy more, or just buy things when the prices of them are at the lowest. You often buy clothes after Christmas, when the prices are discounted into 70%. It’s same with the share prices. When the business is not doing well, investor’s confidence is low, then they will withdraw their money and massively sell it. And when the prices of shares become cheap, it’s now the time for people to make the choice. In my opinion, company which has big affect on the economy is a good choice, because the government might not let the company go into bankrupt due to its strongly effect. An example is the AIG in America. When the price of share of AIG reaches its warning low point, the supply of shares of AIG was increase very fast while people expected the continuous falling in its share price. But finally, the American saved this company and this company turned over the difficult time to reach the growth after that. So a lot of people were profited by buying shares at the right time.

Why is the pound falling ?

Firstly, I agree that the falling of the Sterling is most caused by the recession in UK now. To deal with the fall in consumer and investor confidence, the MPC has been dropping the rates of interest to the lowest level that we’ve ever seen before, with the aim of pumping cash into the flow of credit in the market. As we know that the interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange. By cutting interest rates, the immediate result received is the withdrawing of foreign currencies away from the market. Traders tend to move from one currency to another to take advantage of price movements or take advantage of better return in other countries. It leads to the increase in the demand for foreign currency such as Euro and Dollar and the Supply of Sterling increases as well. Therefore, the value of Sterling falls.

With the low exchange rates, UK traders can decline the Trade deficit because of the increase in competiveness in foreign market when the price of exports becomes cheaper. But it might be a bad effect to the economy when the cost-push inflation occurs due to the rise in import prices.

The prices in house market can increase when the interest rates is set low. But it can’t be true for the UK economy in this circumstance. The world house market just experienced big failure leads to the recession spread over many economies and caused the fear of investors about another crisis in this market. So that now, even with the low interest rates that can make them easier to enter this market but with lack of confidence, they will tend to invest on production which is now strongly supported and encouraged by the government.

Measuring the National Income

How best to fight the recession?

While the cutting of interest rates into 2.5% last three months seems to be not efficiency to the recovery of the economy, now government is considering whether there will be a continuous cut. The main purpose of the government to boost up the economy now is to increase the consumption, investigation and production in the economy. So that, the government expected that with the low interest rates will lead to the rise in the flow of credit by borrowing money and then, boost the economy to go up again. But the debate about which parallel of rates is enough is now a hot topic for economists. Three members of The Times Monetary Policy Committee are calling for a cut into 1 percent, drastic cut over 3 months and this is a level not reached since 1694. But this idea is argued by other members while the large cut last three months just lead to a little effect on the economy. They assumed that increasing the flow of credit can be solved without cutting more rates by issuing a new policy to force banks to lend money with state guarantee. This suggestion reached into the crux problem of the economy because now there is a lending drought that leads to the loss of confidence of many parts in the economy. Mr Pennant-Rea,former Bank Deputy Governor, agreed. “The best option is for the Government to guarantee bank loans, for specified purposes and for a limited period. It is high time the monetary debate concentrated on the banks.