GCE

Economics
Advanced GCE
Unit F585: The Global Economy

Mark Scheme for January 2013

OCR (Oxford Cambridge and RSA) is a leading UK awarding body, providing a wide range of
qualifications to meet the needs of candidates of all ages and abilities. OCR qualifications
include AS/A Levels, Diplomas, GCSEs, Cambridge Nationals, Cambridge Technicals,
Functional Skills, Key Skills, Entry Level qualifications, NVQs and vocational qualifications in
areas such as IT, business, languages, teaching/training, administration and secretarial skills.

It is also responsible for developing new specifications to meet national requirements and the
needs of students and teachers. OCR is a not-for-profit organisation; any surplus made is
invested back into the establishment to help towards the development of qualifications and
support, which keep pace with the changing needs of today’s society.

This mark scheme is published as an aid to teachers and students, to indicate the requirements
of the examination. It shows the basis on which marks were awarded by examiners. It does not
indicate the details of the discussions which took place at an examiners’ meeting before marking
commenced.

All examiners are instructed that alternative correct answers and unexpected approaches in
candidates’ scripts must be given marks that fairly reflect the relevant knowledge and skills
demonstrated.

Mark schemes should be read in conjunction with the published question papers and the report
on the examination.

OCR will not enter into any discussion or correspondence in connection with this mark scheme.

© OCR 2013

2
F585 Mark Scheme January 2013

Annotations

Annotation Meaning

Unclear

Benefit of doubt

Cross

Effective evaluation

No Development

Level 1

Level 2

Level 3

Level 4

Not answered question

Noted by no credit given

Too vague

Tick

Development of point

1
F585 Mark Scheme January 2013

Subject specific marking instructions

Some questions may have a ‘Level of Response’ mark scheme.

The following guidelines on the quality of written communication are embedded into the Levels of Response mark scheme used for question 3:

Level 4: Complex ideas have been expressed clearly and fluently using a style of writing which is appropriate to the complex subject matter.
Sentences and paragraphs, consistently relevant, have been well structured, using appropriate technical terminology. There may be few, if any,
errors of spelling, punctuation and grammar.

Level 3: Relatively straightforward ideas have been expressed with some clarity and fluency. Arguments are generally relevant, though may stray
from the point of the question. There will be some errors of spelling, punctuation and grammar, but these are unlikely to be intrusive or obscure
meaning.

Level 2: Some simple ideas have been expressed in an appropriate context. There are likely to be some errors of spelling, punctuation and
grammar of which some may be noticeable and intrusive.

Level 1: Some simple ideas have been expressed. There will be some errors of spelling, punctuation and grammar.

2
F585 Mark Scheme January 2013
Question Answer Marks Guidance
1 (a) (i) Exchange rate (max 1 mark) 2 Award one mark for explicit definition of an
 The price / value of one currency against another (1) exchange rate
Award one mark for description of fixed rate
Fixed rate:(max 1 mark)
 where the exchange rate is set by the government / central Use for each mark awarded
bank (1)
 where the exchange rate is pegged to another currency (1) Allow “stays equal”
 where the exchange rate is maintained by intervention in
FOREX markets (1)
 an exchange rate not determined by the market (1)
 an exchange rate which is not allowed to fluctuate (1)

(ii) The exchange rate which equalises the price of a basket of identical 2 Up to two marks for an accurate and precise
traded goods and services in two different countries (2) definition or one mark for an idea of true value of a
currency, plus one mark for the idea of what a
An attempt to measure the true value of a currency (1) in terms of currency will buy
the goods and services it will buy / in terms of a basket of goods
and services (1) Use for each mark awarded

Do not allow
 PPP as a measure of GDP (but one mark
can be awarded for an understanding of
adjustments related to differences in the cost
of living)
 real value/ exchange rate.

3
F585 Mark Scheme January 2013

Question Answer Marks Guidance

1 (b) Disadvantages include: 6 Award one mark for each valid disadvantage and a
 need to maintain high levels of foreign currency reserves; further 2 marks for analytical explanation of the
 loss of control over domestic monetary policy; disadvantage identified.
 over or under-valuation;
 speculative attacks on the currency; Use for each mark awarded
 possible retaliation
Do not accept “loss of ability to devalue exchange
Example 1: High levels of foreign currency are required (1) in order rate”
to facilitate intervention in FOREX markets (1) to buy the currency
in order to raise demand (1) should the currency fall below its fixed
Do not accept the argument that the stability of the
rate (1). This has a high opportunity cost (1).
exchange rate attracts FDI as a disadvantage of a
Example 2: Loss of control over domestic monetary policy (1) fixed exchange rate. Candidates adopting this
arises because the interest rate must be used to support the approach are likely to analyse the disadvantages of
exchange rate (1) by, for example, lowering the interest rate to FDI rather than of a fixed exchange rate.
reduce the demand for the currency should it increase above its
fixed rate (1). This means that the interest rate may not be
appropriate for domestic monetary conditions (1) so, for example,
may contribute to inflationary pressure (1).

Example 3: A fixed exchange rate may become over or under

valued over time (1) as it diverges from its PPP rate (1) because
changes in demand and supply of the currency are not allowed to
changes its value (1).

Example 4: A fixed exchange rate is prone to speculative attack (1)

as it may not reflect its PPP value (1) so may be under or
overvalued (1). An overvalued currency may be sold, thus
increasing its supply (1) to drive down its price (1).

Example 5: A fixed exchange rate could lead to retaliation (1). This

is because a country may stimulate aggregate demand by
deliberately undervaluing their currency (1) raising X-M (1).Other
countries may retaliate by devaluing their own exchange rate (1)
creating a currency war (1)

4
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
1 (c) Consequences depend on the 10 If only one consequence is
nature of the external shock. referred to candidates should be
capped to the bottom of the
An external shock can be a relevant Level as follows:
change in AD or SRAS resulting  commentary on one
from a change in economic consequence = seven marks
conditions outside the economy.  analysis of one consequence
= four marks
Analysis of the shock should be in  application of one
terms of AD/AS, though there is consequence = two marks
no requirement for this to be
diagrammatic. In Level 4 award marks as Level 4 (7–10 marks)
follows: For a commentary on the consequences of an
Analysis should be developed to  one stated point of external shock for an economy, such as
include impact on two of: evaluation = seven marks Greece, which is a member of a monetary
 the change in AD/AS  two or more stated points of union
 GDP evaluation = eight marks Annotate using in the LHS margin
 employment/unemployment,  one developed comment = 9
inflation marks
 balance of payments (current  two developed comments or
and/or capital account). one comment with two points
of development = 10 marks
Commentary could be in terms of:
extent of consequences
 need for a policy response in Annotate developed comment Level 3 (4–6 marks)
a monetary union For an analysis of the consequences of an
 nature of the shock (different with external shock for an economy, which makes
consequences for different clear the impact on AD or AS
shocks) Level 3 Analytical responses are characterised by
 extent to which the shock is Analysis of the extent of the explicit use of the economists’ toolkit of
asymmetric consequences without analysis of concepts and theories and through explanation
 policy response of monetary the consequences themselves of cause and consequence
authority. should be awarded level 3 only.

Annotate using in the LHS margin

5
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
Level 2 Level 2 (2–3 marks)
Responses in this level will show For an application of knowledge and
a TOTAL lack of economic understanding of the consequences of an
analysis external shock for an economy
Annotate using in the LHS margin

Level 1 (1 mark)
For knowledge and understanding of the nature
of an external shock for an economy and / or a
monetary union
Annotate using in the LHS margin

6
F585 Mark Scheme January 2013

Question Answer Marks Guidance

2 (a) Up to three marks for definitions of the terms: 4 Up to four marks
 budget deficit is excess of government expenditure (1) over tax
receipts / government income / government revenue (1) in a given Use for each mark awarded
time period
 national debt is the total / cumulative outstanding (1) money owed by Accept national debt is the total outstanding
the public sector / government (1) (1) money owed by the government (1)

One mark for an explicit distinction between the two: Do not accept money owed by “the country
 budget deficits add to the nation’s debt and represent the increase in as a whole including private sector”
national debt (1).
 Budget deficits are usually smaller than national debt. Award only 1 mark for “difference”
 National debt is the accumulation of all previous budget deficits between G & T
 Budget deficit is annual. National debt is over a number of years.
Budget deficit must make reference to the
government not the economy

(b) Without fiscal rules an economy may face problems such as: 6
 persistent budget deficits which are structural in nature rather than Use for each mark awarded
cyclical;
 unsustainable economic growth and high inflation caused by Do not credit “fiscal rules give stability
excessive use of fiscal stimulus measures; because it gives goals for a government to
 rising levels of national debt; follow.”
 lack of fiscal credibility and consequent impact on ability to borrow,
interest rates, investment, long term economic growth, etc.

Max three marks for each example:

Example 1: Without fiscal rules, an economy may develop persistent
budget deficits (1). These deficits may be independent of the economic
cycle (1) and could become structural in nature (1). This will create
problems as governments may find it difficult to find these deficits (1)
without higher long term interest rates (1) which may damage long term
economic performance (1).

7
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Example 2: Without fiscal rules, governments may make excessive use of
fiscal stimulus measures (1). This will tend to make economic growth
unsustainable (1) as it may do little to raise the productive capacity of the
economy (1). Alternatively, it may generate inflationary pressures (1)
especially if AD is the economy operates close to full capacity (1) or deficits
are not fully funded (1).

Example 3: Reduced government borrowing reduces supply of bonds (1),

which raises bond prices (1), lowering yield on bonds and so long term
interest rates fall (1). This stimulates investment (1) which creates the
conditions for sustainable/long term/non-inflationary growth (1)

Example 4: Reduced borrowing and debt reduces expectations of future

tax rises (1) which raises consumer and business confidence (1) increasing
C and I (1) which results in more stable economic growth rather than go-
stop growth (1)

8
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
2 (c) Valid application from Extract 4: 10 If analysis of the impact of
 in the immediate aftermath of depreciation does not extend to
Argentina’s default the exchange rate AD, then max marks are as
depreciated follows:
 1 peso = 1 US$ to 4 peso = 1 US$  L4 = seven marks
 1 peso = 1 US$ to 1 peso = 0.25 US$  L3 = four marks
 depreciated by 75%.
Level 4 Level 4 (7–10 marks)
Valid analysis of the impact of the In Level 4 award marks as follows: For a commentary on the extent to
depreciation of the peso on Argentina’s  one stated point of which the exchange rate is the most
economic growth since 2003: evaluation = seven marks important influence on Argentina’s
 price of exports falls, increasing  two or more stated points of economic growth since 2003.
demand evaluation = eight marks
 Annotate using in the LHS
 price of imports rises, reducing demand one developed comment = 9
marks margin
 AD increases, raising GDP
 two developed comments or
Valid commentary could include: one comment with two
 importance depends on other points of development = 10
components of AD (SR) marks
 depends on size of impact of (X–M) on
AD Annotate developed evaluation
 depends on size of multiplier effect
 depends on Marshall-Lerner condition with
 role of terms of trade (terms of trade
increased by 135% 2002–10) Level 3 Level 3 (4–6 marks)
 demand for exports affected by Analytical responses are For an analysis of the influence of
economic growth in Asia rather than characterised by explicit use of the the exchange rate on Argentina’s
price effect economists’ toolkit of concepts economic growth since 2003
 depends on influences on LRAS, and theories and through
explanation of cause and Annotate using in the LHS
including changes in capital stock and
consequence margin
quantity and quality of labour force.

9
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
Level 2 Level 2 (2–3 marks)
Responses in this level will show a For an application of knowledge and
TOTAL lack of economic analysis understanding of influences on
Argentina’s economic growth since
2003

Annotate using in the LHS

margin

Level 1 (1 marks)
For knowledge and understanding
of influences on Argentina’s
economic growth since 2003

Annotate using in the LHS

margin

10
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
3 Level 4 Band 3 20 Additional example of Level 4 Level 4 Band 3 (18–20 marks)
Judgement might include: Band 3 response For a judgement on the factors that
 whether FDI is the most effective way  Erratic levels of aid will not be determine whether or not FDI, such
may be dependent on economic as effective as consistent levels as that to Latin America and Africa,
environment in individual economies of FDI is the most effective way of
 some economies may lack necessary promoting development.
conditions to attract FDI, so ODA may
be more effective Annotate using in the LHS
 FDI may be most effective way for margin
countries with higher levels of
development (Latin America)
 ODA may be a more effective way for
countries with a lower level of
development or for countries which
lack basic infrastructure or productive
capacity (Africa)

Level 4 Band 2
Developed discussion might include: Level 4 Band 2 Level 4 Band 2 (15–17 marks)
 increases in the savings rate to finance Marks in this level should only For a developed discussion which
private sector investment be awarded where candidates recognises that there may other
- but limited by lack of financial explain how other methods may ways of promoting development
infrastructure promote development e.g.
 promoting structural change through Annotate using in the LHS
simple recognition that ODA is
export promotion / import substituting
an alternative remains in L4 margin
industrialisation
 Overseas Development Assistance Band 1
(ODA) to fund capital investment,
improve infrastructure or health and
education
- but limited by poor governance
- but often ‘tied’
- but may come with conditions
which damage development
(criticism of Washington
Consensus)

11
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
Level 4 Band 1 Level 4 Band 1 (11–14 marks)
Basic discussion might include: For a basic discussion of the pros
 FDI may promote growth but not and cons of FDI in promoting
development because it might development
- be capital intensive so
employment effects may not be Annotate using in the LHS
large margin
- lead to resource depletion so
growth and development may not
be sustainable
 impact of FDI might be limited because
- it may be short-lived, dependent
on global economic growth
- there may be little change in
economic structure if
concentrated in resource sector
- there may be more important
constraints on economic
development – lack of good
governance, missing markets,
lack of infrastructure etc
- it may lead to current account
deficit, eg may raise imports of
components
 depends on nature of FDI
- mergers and acquisitions may
lead to no impact on economic
growth
- size of multiplier effects – spill
over effects may be limited

12
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
Level 3 Level 3 Level 3 (5–10 marks)
Analysis of the role of FDI in promoting Analytical responses are For a one-sided analysis of whether
economic development will make reference to characterised by explicit use of the or not FDI, such as that to Latin
some, but not all, of the following: economists’ toolkit of concepts America and Africa, promotes
 increases investment; and theories and through development
 potentially increases exports; explanation of cause and
 increases government tax receipts consequence Annotate using in the LHS
which may facilitate increased margin
expenditure on health, education and Examples of Level 3 responses
infrastructure; FDI creates jobs and so reduces
 leads to an increase in AD, real GDP unemployment (L2). This means
and employment; that there are higher incomes (L2)
 generates multiplier effects; raising GDP / GDP per capita
 raises HDI; (L3). As a result of higher incomes
 raises productive capacity of the it is likely that there will be a
economy; reduction in poverty as there is
greater consumption of life
 increases LRAS;
sustaining goods (L3). The
 raises the rate of economic growth;
measured level of development
 technology transfers raise efficiency of will rise as GDP per capita is a
domestic industry; component of the HDI (L3).
 allows developing countries to change
economic structure through importing FDI represents an increase in
capital, changing factor endowment; investment into the economy (L2),
 allows developing economies to ‘plug’ which raises the level of both AD
the savings gap (Harrod-Domar model) and AS (L2). The result is an
increase in real GDP, which will
increase GDP per capita and
living standards (L3), which
directly affects the measured level
of development as GDP per capita
is a component of the HDI (L3).

13
F585 Mark Scheme January 2013

Question Answer Marks Guidance

Content Levels of response
Level 2 Level 2 (3–4 marks)
Responses in this Level will show For an application of knowledge and
a total lack of economic analysis understanding of whether or not
FDI, such as that to Latin America
Examples of Level 2 responses and Africa, promotes development
FDI creates jobs and so reduces
unemployment (L2). This means Annotate using in the LHS
that there are higher incomes (L2) margin

FDI represents an increase in

investment into the economy (L2),
which raises the level of both AD
and AS (L2).

Level 1 (1–2 marks)

For knowledge and understanding
of FDI or economic development

Annotate using in the LHS

margin

14
OCR (Oxford Cambridge and RSA Examinations)
1 Hills Road
Cambridge
CB1 2EU

OCR Customer Contact Centre

Education and Learning

Telephone: 01223 553998
Facsimile: 01223 552627
Email: [email protected]

www.ocr.org.uk

For staff training purposes and as part of our quality assurance

programme your call may be recorded or monitored

Oxford Cambridge and RSA Examinations

is a Company Limited by Guarantee
Registered in England
Registered Office; 1 Hills Road, Cambridge, CB1 2EU
Registered Company Number: 3484466
OCR is an exempt Charity

OCR (Oxford Cambridge and RSA Examinations)

Head office
Telephone: 01223 552552
Facsimile: 01223 552553

© OCR 2013