A Level Economics Booklet

Skills Exercises
Knowledge and Understanding (AO1)
Cambridge International AS & A Level

Economics 9708
For examination from 2023
Contents
Introduction ................................................................................................................................4
Knowledge and understanding (AO1) ......................................................................................5
Exercise 1: Key terms and definitions ...................................................................................5
Exercise 2: Understanding formulas ...................................................................................18
Exercise 3: Understanding and explaining syllabus content ............................................. 21
Skills Exercises
Introduction
Cambridge International AS & A Level Economics attracts a variety of learners from many different
backgrounds. For some learners Economics is a new subject and an opportunity to explore an area of study
that interests them, while developing a set of transferable skills. Other learners have previously studied
Economics and are looking to continue developing their knowledge of the subject. Either way, the study of
Economics allows learners to experience the diverse and dynamic world within which different economies
exist and gain the knowledge needed to understand how governments and markets operate within real
contexts, analyse alternative courses of action and develop the ability to make justified recommendations.
Skills and why they are important?

Skills are the key to success. The performance of candidates in Cambridge International AS & A Level
Economics exams have shown a range of areas where improvement would be helpful. These areas of
improvement tend to centre around the assessment objectives (AOs) of the course and we have addressed
these three AOs in three Skills Exercises booklets.
• Knowledge and Understanding (AO1)

• Analysis (AO2)
• Evaluation (AO3)
The skills exercises in these booklets make use of examination questions and include worksheets to help
skills development and incorporate suggested teaching approaches, such as discussion, structured support
and writing in sequence. They do not attempt to cover all possible aspects of the examinations, only those
problem areas which have presented consistently over time.
How will these skills be developed?

The Skills Exercises booklets aim to help learners develop skills in:
• using knowledge and understanding to answer examination questions
• using the context given in the examination to make answers relevant
• developing skills of analysis – including understanding analysis, identifying analysis and developing
analysis skills
• building evaluation skills – including understanding limitations and imperfections, separating analysis
and evaluation and making reasoned conclusions.
The skills exercises provide suggestions so you can have confidence that the materials you prepare and use
in the classroom are building skills and resilience in your learners. This document should be used alongside
the other teaching and learning resources provided on the School Support Hub at:
www.cambridgeinternational.org/support
4
Skills Exercises
Knowledge and understanding (AO1)

Exercise 1: Key terms and definitions
The skill of knowledge and understanding requires learners to show knowledge of the syllabus
content as well as recalling facts and definitions. AO1 Knowledge and Understanding requires
learners to:
• Show knowledge of syllabus content, recalling facts, formulae and definitions.

• Demonstrate understanding of syllabus content, giving appropriate explanations and
examples.
• Apply knowledge and understanding to economic information using written, numerical and
diagrammatic forms.
Activity 1: Economic terms

There are some economic terms that look similar and learners tend to confuse one with another.
Understanding these terms and using them in the right context is essential to demonstrate knowledge
and understanding.
Give learners Worksheet 1: Economic terms and ask them to define the terms.
Learners could peer assess each other’s work using the answer sheet.
Lead a group discussion to ensure understanding of the terms and definitions.
Challenge learners to apply the terms to the correct context.
5
Skills Exercises
Worksheet 1: Economic terms
Define each economic term in the boxes provided.

1.
Absolute poverty Relative poverty
2.
Actual production Production potential
3.
Ad valorem tax Specific tax
4.
Asym m etric inform ation Moral hazard
5.
Devaluation of currency Depreciation of currency
6.
Direct taxes Indirect taxes
7.
Econom ic grow th Econom ic developm ent
6
Skills Exercises
8.
Econom ies of scale Increasing returns to scale
9.
Equality Equity
10.
Free goods Econom ic goods
11.
Free trade area Custom union
12.
Governm ent borrowing National debt
13.
Inflation Disinflation Deflation
14.
Internal value of m oney External value of m oney
15.
Kinked dem and curve The Kuznets curve
7
Skills Exercises
16.
Laffer curve Lorenz curve
17.
Liquidity trap Poverty trap
18.
Market equilibrium Consum er equilibrium
19.
Money Cheques Credit cards
20.
Multiplier Accelerator
21.
Norm al goods Inferior goods Necessities
22.
Price elasticity of dem and Price elastic dem and
23.
Prim ary incom e Prim ary sector
8
Skills Exercises
24.
Production Productivity
25.
Profits Profitability
26.
Public goods Private goods
27.
Qualities of m oney Functions of m oney
28.
Real incom e Disposable incom e
29.
Secondary incom e Secondary sector
30.
Social cost External cost
31.
Tax rate Tax am ount
9
Skills Exercises
32.
Term s of trade Balance of trade
33.
Trade creation Trade diversion
34.
Trade deficit Budget deficit Current account deficit
35.
Transfer paym ents Transfer earnings
36.
Universal benefits Means tested benefits
37.
X-efficiency Dynam ic efficiency
10
Skills Exercises
Worksheet 1 answers may include:
1.
Absolute poverty Relative poverty
Absolute poverty is when a person does not have Relative poverty is the comparison of the standard of
enough money to afford basic necessities. living of a person with another.
2.
Actual production Production potential
Actual production can be raised by utilizing already Potential output rises when the quantity or quality of
available resources. Graphically, it can be shown by a resources improves. Graphically, it is shown by a
movement from inside a production possibility curve rightward shift in PPC or the long run (LRAS).
(PPC) towards a point on the PPC.
3.
Ad valorem tax Specific tax
Ad valorem tax is when the tax is based on the value Specific tax is when the tax amount per unit is a fixed
of the product, for example a tax of 15% of the price. amount, for example $0.20 per unit. Though both are
The higher the price of the product, the higher the examples of indirect taxes, ad valorem tax is based
tax amount per unit would be. on the value of the product whereas specific tax is
based on the number of units purchased.
4.
Asym m etric inform ation Moral hazard
Asymmetric information arises when one of the A moral hazard arises when a person changes his
parties in a transaction has more information than behaviour after an agreement between the buyer and
the other. For example, a seller probably knows more seller has already been reached. For example, after
about the quality of his used car than the potential getting home insurance, a person may get a little
buyer and a person buying insurance is probably more careless about the security of his house, knowing that
aware of his health issues and life style than the any loss because of a theft will now be covered by the
company selling the insurance. insurance company.
5.
Devaluation of currency Depreciation of currency
While both devaluation and depreciation of currency reflect a decrease in exchange rate, devaluation is because
of the actions of the government, whereas depreciation of currency is due to market forces. An increase in
exchange rate, if due to government intervention, is known as revaluation and appreciation is because of the
market forces of demand and supply.
6.
Direct taxes Indirect taxes
Direct taxes are directly paid by the tax payers to Indirect taxes are levied on expenditures e.g. sales tax
the government, e.g. income tax. Higher direct taxes and excise duties. They raise the cost of production
reduce disposable income, leading to lower and shift the supply curve to the left. Producers often
consumption and shift the Aggregate Demand (AD) shift the burden of these taxes to the consumers by
curve to the left. raising prices, so these taxes usually affect real
income.
11
Skills Exercises
7.
Econom ic grow th Econom ic developm ent
Economic growth is an increase in the real output of Economic development is a more comprehensive term
an economy. and occurs when the quality of life and general well-
being of the citizens, as indicated by literacy rate and
life expectancy, improve.
8.
Econom ies of scale Increasing returns to scale
Economies of scale are a decrease in the long run Increasing returns to scale happen when the
average cost due to an increase in business size. percentage change in output exceeds the percentage
change in inputs.
9.
Equality Equity
Equality is when everyone receives the same Equity is fairness and means that everyone receives
outcome/income. income as per their contribution. Equity may be
described as the ratio of reward and effort.
10.
Free goods Econom ic goods
Free goods are resources, e.g. sunshine, which is not Economic goods are not only desirable but also scarce.
scarce and there is no economic cost involved in their Usually, a price has to be paid to have economic
provision. They are a gift of nature. goods. All public and private goods, as well as merit
and demerit goods, are examples of economic goods.
11.
Free trade area Custom union
Free trade area is one which abolishes all trade A custom union not only removes all trade
barriers for its members but allows them to restrictions for members but also maintains a
independently decide tariffs for non-members. uniform tariff policy for non-members.
12.
Governm ent borrowing National debt
Government or public sector borrowing is needed to National debt is a cumulative number and a stock
finance a budget deficit. It is a flow concept that is concept. Rising public sector borrowings raise
for a period of time. national debt and the decision of the government to
repay loans reduces it.
13.
Inflation Disinflation Deflation
Inflation is a persistent increase in Disinflation is when inflation rates Deflation is when the inflation rate
general price levels. Price levels rise fall. Price levels still rise but at a is negative and price levels fall.
when there is positive inflation. slower rate when there is
disinflation.
12
Skills Exercises
14.
Internal value of m oney External value of m oney
Internal value of money is the purchasing power of External value of money is the exchange rate, i.e. how
money to buy goods and services. It falls whenever many units of a foreign currency can be purchased
the inflation rate is positive (i.e. when price levels with a given amount of national currency. Changes in
rise). external value of money are either depreciation or
appreciation.
15.
Kinked dem and curve The Kuznets curve
Kinked demand curve shows an interdependence of The Kuznets curve shows the relationship between per
firms. In a market dominated by a few large firms, capita income and income inequality. According to
the outcome of the decision of a firm to change price this curve, a rise in per capita income initially raises
depends on the reactions of its competitors and vice income inequalities, but eventually income inequalities
versa. Kinked demand curve assumes that the decision begin to fall.
of a firm to raise its price is not matched by its
competitors, resulting in a proportionately larger fall
in its quantity demanded. Thus, firms choosing to

raise prices face a flatter, price elastic demand curve.
However, the decision to reduce prices is followed by
the competitors, resulting in a negligible rise in the
quantity demanded. Thus, the demand curve faced by
the firm choosing to lower its price is a steeper one,
showing price inelastic demand. The demand curve is
kinked at the point of initial price and quantity.
16.
Laffer curve Lorenz curve
A Laffer curve shows the relationship between tax A Lorenz curve is the graphical representation of
rates and tax revenues. According to this curve, an income or wealth inequality. The further the Lorenz
increase in tax rates initially raises tax revenues, but curve is from the line of equity (a 45-degree line),
eventually tax receipts begin to fall. Very high tax the greater would be the Gini coefficient and income
rates discourage incentives to work, resulting in a disparities.
slowdown of economic activity and instead of raising
tax revenues, result in a loss of tax revenues. High tax
rates also raise the possibility of tax evasion, which
may also lead to lower tax revenues.
17.
Liquidity trap Poverty trap
Liquidity trap is a situation where interest rates are Poverty trap is a situation where the benefits of rising
very low and savings are high. Expansionary income are offset by the removal of means tested
monetary policy becomes ineffective, as lowering benefits, leaving that person no better off.
interest rates cannot encourage people to spend or
invest more.
13
Skills Exercises
18.
Market equilibrium Consum er equilibrium
Market equilibrium is when demand equals supply Consumer equilibrium is achieved when a consumer
and there is no tendency to change in equilibrium maximizes his total utility by equating the marginal
price and quantity. utility per dollar for the last units of all commodities.
19.
Money Cheques Credit cards
Money is used to buy goods and Cheques do not represent any Although credit cards help in
services and is an instrument to value, so they cannot be buying goods and services, they
settle debts. Though coins and considered as money. cannot be regarded as money, as
currency notes are popular forms they are a borrowing instrument
of money, more and more people and represent no value. They are
are shifting to online payments. In money substitutes.
a modern economy, bank deposits
and online payments are also
examples of money.
20.
Multiplier Accelerator
An expenditure multiplier shows the relationship An accelerator is the relationship between changes in
between changes in autonomous expenditures and income and induced investment.
national income. Any change in autonomous
expenditures results in a larger change in national
income because of the multiplier.
21.
Norm al goods Inferior goods Necessities
Normal goods, e.g. fine dining, are Inferior goods, e.g. public Demand for necessities, such as
goods whose demand rises with transport, are those whose fuel, does not change much when
income. demand falls when income rises. income changes.
22.
Price elasticity of dem and Price elastic dem and
Price elasticity of demand measures the degree of A product is said to have price elastic demand when
responsiveness of the quantity demanded to a change a change in price causes a more than proportionate
in the own price of the product. change in the quantity demanded.
23.
Prim ary incom e Prim ary sector
Primary income is income earned from providing Primary sector involves extracting natural resources
factor services in other countries. Examples include and raw materials. Examples include agriculture
wages, rent, interest payments and dividends. sector, livestock, mines and forests.
14
Skills Exercises
24.
Production Productivity
Production is the number of units a firm produces. Productivity is the ratio of output produced and
inputs employed. Higher productivity does not
necessarily guarantee higher output, as highly
productive firms may still be producing fewer units if
they have fewer workers than less productive firms.
25.
Profits Profitability
Profit is the excess of total revenues over total cost. Profitability is the ratio of profits and sales or capital
employed. A business may be earning more profits,
yet be less profitable.
26.
Public goods Private goods
Public goods are non-excludable and non-rival. Non Private goods are excludable and rivals. Merit,
excludability means that no one has a legal right to demerit, consumer and capital goods are examples of
stop others from using a product, whereas non rivalry private goods. Since the use of these products may be
means that the use of a product by one does not restricted to only those who pay the price, the
affect its consumption by others. National defence, private sector may provide them to earn profits.
streetlights and lighthouses are good examples of Public parks, public libraries and roads are also not
public goods. It is not possible to charge a price and pure public goods, as they are excludable (a toll may
make a profit from providing these goods, so only a be charged for using a road) and rival (for example,
government can provide them. road congestion).
27.
Qualities of m oney Functions of m oney
Qualities of money are features of money that help it Functions of money are the roles money needs to
perform its functions effectively. Some of the qualities perform, such as medium of exchange, store of value,
of money are general acceptability, portability, unit of value and a standard for deferred payments.
divisibility, homogeneity, durability and scarcity.
28.
Real incom e Disposable incom e
Real income is the purchasing power i.e. the amount Disposable income is income minus direct taxes. It
of goods and services one can buy with given money falls when direct taxes, such as income taxes, are
income. It falls when prices rise. raised.
29.
Secondary incom e Secondary sector
Secondary income is a payment received from The secondary sector involves producing goods and
another country, against which, no production services. Automobiles, steel, textiles and electronics
activity takes place. Examples include pensions and are some examples of the secondary sector industries.
donations.
15
Skills Exercises
30.
Social cost External cost
Social costs include both the private and external External costs, such as pollution, are borne by
costs of an economic transaction. outsiders to a transaction, whereas private costs, such
as the rent of a building, are borne by the members
of the transaction.
31.
Tax rate Tax am ount
Tax rate is the ratio of tax amount and income. The Tax amount is the product of tax rate and income
tax system is progressive when the tax rate rises with earned. The tax amount rises faster than income
income, proportionate when the tax rate does not when the system of taxation is progressive. In a
change with income and regressive when the tax rate proportionate system of taxation, the tax amount
falls when income rises. rises in line with income, while in a regressive tax
system, the tax amount rises slower than income or
may even fall. Since the tax amount may rise with
income in all three taxation systems, it is the tax rate
that differentiates a progressive system of taxation
from the other two.
32.
Term s of trade Balance of trade
Terms of trade are the ratio of average export price Balance of trade is the difference between exports
and average import price. Higher terms of trade may and imports of goods. It is one of the four components
be caused by a comparatively higher inflation rate or of a current account. Trade is balanced when exports
a stronger currency. It may lead to rising trade deficit of goods equal their imports. Trade surplus means
if the PED (price elasticity of demand) for net exports exports of goods exceed imports of goods, while a
exceeds 1. trade deficit is when exports of goods are less than
their imports.
33.
Trade creation Trade diversion
Trade creation occurs when trade shifts from a less Trade diversion takes place when trade shifts from a
efficient/high cost producer country to a low more efficient country to a less efficient one. It
cost/more efficient country. It happens when a trade happens when a country signs a trade agreement
agreement is signed between countries allowing with a less efficient country, allowing tariff free
tariff-free imports from efficient countries. imports from it at the expense of imports from a
more efficient non-member country.
34.
Trade deficit Budget deficit Current account deficit
Trade deficit is when the export of Budget deficit is when government Current account deficit arises
goods falls short of their imports. expenditures exceed tax revenues. when inflows from exports of
Budget deficit raises AD goods and services, factor incomes
(Aggregate Demand), whereas and net transfers fall short of
trade deficit reduces it. outflows for the same.
16
Skills Exercises
35.
Transfer paym ents Transfer earnings
Transfer payments are payments against which no Transfer earnings are the minimum payment one
production activity takes place, for example pension requires to continue in the existing profession. These
and unemployment allowances. They are payments are the earnings possible from the next best
received but not earned. alternative occupation.
36.
Universal benefits Means tested benefits
Universal benefits, such as medical care, public Means tested benefits are given to individuals and
schooling and pensions, are unconditional and given families on the basis of their income and resources.
to everyone, irrespective of their income. These benefits are gradually withdrawn when income
rises.
37.
X-efficiency Dynam ic efficiency
X-efficiency is the degree of efficiency maintained by Dynamic efficiency involves improving efficiency over
firms in imperfect markets. Since the pressure on time. It can either be achieved by developing new and
firms to be efficient is less in less competitive markets, better products or by discovering better techniques
the firms tend to be X-inefficient. X-inefficiency is to produce goods at lower costs.
the gap between actual efficiency and potential
efficiency.
17
Skills Exercises
Exercise 2: Understanding formulas

The skill of knowledge and understanding requires learners to demonstrate knowledge of the syllabus
content, recalling facts, formulas and definitions.
Activity 1: Formulae
Give learners Worksheet 2: Formulae and ask them to provide the correct formula for each
economic term.
Follow this up with a discussion to ensure understanding and any misconceptions.
18
Skills Exercises
Worksheet 2: Formulae
Provide the correct formula for each of the following economic terms.
Economic term Formula

PED =
MED =
CED =
TOT =
Labour productivity =
Gini coefficient =
Unemployment rate =
MRT =
ART =
MPC =
MPT =
MPM =
APC =
APS =
Expenditure multiplier =
Real income =
GDP deflator =
Unit labour cost =
MC =
AP =
MRP =
MP =
MEW =
19
Skills Exercises
Worksheet 2 answers:
Economic term Formula

𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
PED =
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MED =
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
CED =
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
TOT = × 100
𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
Labour productivity =
𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
𝑎𝑎
, where a = area above Lorenz curve and b
Gini coefficient = 𝑎𝑎+𝑏𝑏
= area below Lorenz curve
𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
Unemployment rate = × 100
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MRT =
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
ART = × 100
𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MPC =
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MPT =
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MPM =
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
APC =
𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
APS =
𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
1
Expenditure multiplier =
𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
Real income = Money Income × GDP deflator
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
GDP deflator =
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤/ℎ𝑜𝑜𝑜𝑜𝑜𝑜
Unit labour cost =
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 /ℎ𝑜𝑜𝑜𝑜𝑜𝑜
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MC =
𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
AP =
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
MRP = Sale Price × MR

𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
MP =
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
Real per capita income + Leisure time – Negative

MEW =
externalities
20
Skills Exercises
Exercise 3: Understanding and explaining syllabus content

The skill of knowledge and understanding requires learners to demonstrate understanding of the
syllabus content, giving appropriate explanations and examples.
Activity 1: Identifying correct and incorrect statements

Give learners Worksheet 3: Identifying correct and incorrect statements.
Learners identify which statements are correct and which are incorrect, explaining their choice in each
case.
Lead a group discussion to embed learners’ knowledge and understanding of the syllabus content.
21
Skills Exercises
Worksheet 3: Identifying correct and incorrect statements
For each of the following statements, identify which ones are correct and which are not. Explain your
choice in each case.
1. An outward shift in production possibility curves (PPC) may initially raise unemployment.
2. Buying shares of a profitable company is considered to be an investment and raises Aggregate

Demand (AD).
3. A falling inflation rate does not mean that the price level is falling as well.
4. There is a higher number of people in employment in a country where the unemployment rate is
low compared to a country with a high unemployment rate.
5. For the price level to be stable, the rate of inflation must be stable.
6. All goods provided by the government are public goods.
7. Public goods must only be provided by the government.
8. Roads and motorways are examples of public goods; thus, they must be provided by the
government.
9. Higher income taxes force consumers to consume less and save more.
10. A product has price elastic demand (PED) when a rise in its price causes a fall in its quantity
demanded.
22
Skills Exercises
11. A perfectly competitive firm maximizes profits where its sale price equals the marginal cost of the
last unit produced.
12. The higher the Gini Coefficient, the greater would be the income inequalities.
13. According to the law of diminishing returns, adding more and more variable inputs will result in
falling output.
14. Lowering income taxes and lowering interest rates are demand side tools as well as supply side
tools.
15. Rising marginal cost leads to a rise in average cost.
16. A comparatively higher inflation rate in country X than country Y necessarily means that the price
level in country X is higher.
17. Minimum price should be imposed on demerit goods and maximum prices should be imposed on
merit goods to change their consumption to the optimal level.
18. According to Keynesians, a market economy is inherently unstable and the government must play
a stabilising role through monetary and fiscal policies.
19. A business should shut down immediately if it is incurring a loss.
20. Persuasive advertisement can help prevent a market failure.
21. Tax revenues rise when tax rates are raised.
23
Skills Exercises
22. Increased government expenditures financed by borrowing from the central bank raises the
money supply by an amount higher than the increase in government expenditures.
23. Decreasing the period when the unemployed are eligible for welfare payments will help reduce the
natural rate of unemployment.
24. According to Phillips curve, it is possible to achieve low inflation and high economic growth at the
same time.
25. The exchange rate should be raised and interest rate should be decreased to reduce
unemployment.
24
Skills Exercises
1. An outward shift in production possibility curves (PPC) may initially raise unemployment.
Correct
An outward shift in PPC raises the potential to produce and may initially raise unemployment in
case this additional production capacity is not brought into use instantly.
2. Buying shares of a profitable company is considered to be investment and raises Aggregate

Demand (AD).
Incorrect
Investment, in macroeconomics, involves new fixed capital formation, such as machines and
equipment, increase in stocks of raw materials or finished goods and new constructions. Since the
purchase of shares does not instantly raise the demand for goods and services, it is not
investment and cannot be considered a component of AD.
3. A falling inflation rate does not mean that the price level is falling as well.
Correct
A falling inflation rate is disinflation, which means that the price level will continue to rise at a
falling rate. The price level will fall only when the inflation rate is negative.
4. There is a higher number of people in employment in a country where the unemployment rate is
low compared to a country with a high unemployment rate.
Incorrect
Unemployment is given as a percentage of labour force. A higher unemployment rate does not
necessarily mean a higher number of unemployed or lower number of employed people, as it will
depend on the size of the labour force.
5. For the price level to be stable, the rate of inflation must be stable.
Incorrect
For the price level to be stable, the inflation rate should be zero. A stable inflation rate means the
price level continues to rise at a constant/stable rate.
6. All goods provided by the government are public goods.
Incorrect
The government not only provides public goods but also many private goods such as roads, public
parks, hospitals and schools. Some of the private goods provided by the government are merit
goods.
7. Public goods must only be provided by the government.
Correct
Public goods, such as defence and streetlights, are non-excludable and non-rival. Since it is not
possible to restrict their use only to those who pay a price, a price for their provision cannot be
charged and no profits can be made. Therefore, a profit maximizing private sector firm will not
produce these goods, making their provision the sole responsibility of the government.
25
Skills Exercises
8. Roads and motorways are examples of public goods; thus, they must be provided by the
government.
Incorrect
Roads and motorways are not public goods. They are excludable and those who do not pay a toll
tax can be stopped from using the road. They are also rivals, as there could be road congestion
during rush hours, forcing an average commuter to spend more time in travel than they
normally would.
9. Higher income taxes force consumers to consume less and save more.
Incorrect
Higher income taxes reduce disposable income and force consumers to consume as well as to save
less.
10. A product has price elastic demand (PED) when a rise in its price causes a fall in its quantity
demanded.
Incorrect
A rise in price always causes a fall in the quantity demanded of a product, irrespective of PED.
However, the fall in quantity demanded is proportionately higher for goods with price elastic
demand.
11. A perfectly competitive firm maximizes profits where its sale price equals the marginal cost of the
last unit produced.
Correct
For a perfectly competitive firm, sale price equals marginal revenues.
12. The higher the Gini Coefficient, the greater would be the income inequalities.
Correct
Gini coefficient is the ratio between the area of the Lorenz curve and the entire area below the
line of complete equality. The higher the Lorenz curve, the higher the Gini coefficient would be
and the greater the income disparities.
13. According to the law of diminishing returns, adding more and more variable inputs will result in
falling output.
Incorrect
Adding more and more variable inputs, such as labour, to a given quantity of fixed input, such as
capital, initially raises the output at an increasing rate (increasing returns), but later at a
decreasing rate (decreasing returns). Output rises throughout, but it is the rate at which it rises
that determines whether the returns are rising or falling.
26
Skills Exercises
14. Lowering income taxes and lowering interest rates are demand side tools as well as supply side
tools.
Correct
Lowering income taxes raises the disposable income and encourage consumers and investors to
spend more, raising the Aggregate Demand (AD). Thus, they are a demand side tool. Lowering
income taxes also promotes incentives to work and enterprise, so they are a supply side tool as
well.
Lower interest rates reduce the cost of borrowing and reward for saving, so they discourage
saving and induce borrowing and spending, resulting in higher AD. Hence, lower interest rates are
a demand side tool. Lower interest rates encourage more borrowing to invest in modern and
more sophisticated technology and capital equipment. Such investments may raise the production
potential of an economy, causing a rightward shift in Aggregate Supply (AS), thus they are a
supply side tool as well.
15. Rising marginal cost leads to a rise in average cost.
Incorrect
Average cost continues to fall, as long as the marginal cost is below the average cost. The average
cost rises only when the marginal cost is above it.
16. A comparatively higher inflation rate in country X than country Y necessarily means that the price
level in country X is higher.
Incorrect
A higher inflation rate means prices rise faster, but it does not necessarily mean that goods are
more expensive in the country with a comparatively higher inflation rate.
17. Minimum price should be imposed on demerit goods and maximum prices should be imposed on
merit goods to change their consumption to the optimal level.
Correct
An effective minimum price is set above the market equilibrium and discourages the consumption
of demerit goods by making them expensive.
An effective maximum price is set below the market equilibrium and encourages the consumption
of merit goods by making them more affordable. However, some suppliers refuse to sell the goods
at lower prices, resulting in increased shortages.
18. According to Keynesians, a market economy is inherently unstable and the government must play
a stabilising role through monetary and fiscal policies.
Correct
Keynesian economists believe that an active government role is essential for a stable economy.
19. A business should shut down immediately if it is incurring a loss.
Incorrect
A business making losses may continue to operate in the short run, as long as its revenues exceeds
the variable cost and contributes to the fixed cost.
27
Skills Exercises
20. Persuasive advertisement can help prevent a market failure.
Correct
Persuasive advertisement may help overcome information failure and encourage people to raise
the consumption of merit goods and reduce the consumption of demerit goods.
21. Tax revenues rise when tax rates are raised.
Incorrect
Higher tax rates may slow down the economic activity and may also encourage people to evade
taxes. This may result in lower tax revenues.
22. Increased government expenditures financed by borrowing from the central bank raises the
money supply by an amount higher than the increase in government expenditures.
Correct
Increased government expenditures financed by borrowing from the central bank will raise the
liquidity available with commercial banks, allowing them to create credit money. Because of the
monetary multiplier, the impact on money supply will be larger than the increase in government
spending.
23. Decreasing the period when the unemployed are eligible for welfare payments will help reduce the
natural rate of unemployment.
Correct
Decreasing the period for welfare payments will compel workers to put in more effort to find a
job, leading to reduced frictional unemployment (frictional unemployment is a part of natural
unemployment).
24. According to Phillips curve, it is possible to achieve low inflation and high economic growth at the
same time.
Incorrect
According to Phillips curve, there is an inverse relationship between the rate of unemployment
and the rate of inflation. Higher economic growth would mean lower unemployment and lower
unemployment may trigger inflation.
25. The exchange rate should be raised and interest rate should be decreased to reduce
unemployment.
Incorrect
A higher exchange rate makes exports expensive and imports cheaper and may reduce net
exports and AD, leading to higher unemployment. Lower interest rates, however, may help
reduce unemployment by raising AD.
28
Skills Exercises
Analysis (AO2)

Economics 9708
Contents
Introduction ................................................................................................................................4
Analysis (AO2) ...........................................................................................................................5
Exercise 1: Analysing information .........................................................................................5
Exercise 2: Labelling and interpreting diagrams .................................................................. 8
Exercise 3: Analysis in action ..............................................................................................21
Skills Exercises
Introduction


• Analysis (AO2)

analysis skills
4
Skills Exercises
Analysis (AO2)
Exercise 1: Analysing information
The skill of analysis requires candidates to select, interpret and organise economic information in
written and numerical forms. Learners are required to:
• Examine economic issues and relationships, using relevant economic concepts, theories and
information.
• Select, interpret and organise economic information in written, numerical and diagrammatic
form.
• Use economic information to recognise patterns, relationships, causes and effects.
• Explain the impacts and consequences of changes in economic variables.
Activity 1: Missing information
For an unambiguous analysis, learners should be able to interpret the sign and coefficients of various
types of elasticity of demand.
Give learners Worksheet 1: Missing information.
Show learners how to comment on and explain the sign and value for the first row.
Learners complete the remaining rows either individually or in pairs.
Discuss and compare answers with learners.
5
Skills Exercises
Worksheet 1: Missing information
Use the information in the elasticity of demand column to comment on and explain the sign and value.
Sr. Elasticity of
Com m ent – sign Com m ent – value Explanation – sign Explanation – value
No. dem and
PED =
1.
– 1.5
PED =
2.
– 0.8
MED =
3.
+ 1.2
MED =
4.
+ 0.3
MED =
5.
– 1.2
CED =
6.
+ 0.5
CED =
7.
+ 2.5
CED =
8.
– 0.75
CED =
9.
– 1.25
10. CED = 0
11. MED = 0
6
Skills Exercises
Sr. Elasticity of
Com m ent – sign Com m ent – value Explanation – sign Explanation – value
No. dem and
PED > 1 show s price The negative sign The product may
PED = PED is alw ays elastic demand, confirms the inverse
1. relationship betw een be a luxury or one
– 1.5 negative % age ∆ in Qd > %
age ∆ in price P and Q. with substitutes.
PED < 1 show s price The negative sign The product may be
PED = inelastic demand, confirms the inverse a necessity or one
PED is alw ays
2. relationship betw een w hose substitutes
– 0.8 negative % age ∆ in Qd < % P and Q. are not easily
age ∆ in price available.
Income elastic Demand for normal The product may be
MED = demand, goods rises w ith an a luxury.
3. Normal good increase in income.
+ 1.2 % age ∆ in Qd > %
age ∆ in income
Income inelastic Demand for normal The product may be
MED = demand, goods rises w ith an a necessity.
4. Normal good increase in income.
+ 0.3 % age ∆ in Qd < %
age ∆ in income
Income elastic Demand for inferior A rise in income
MED = demand, goods falls w ith an causes a more than
5. Inferior good increase in income. proportionate fall in
– 1.2 % age ∆ in Qd > %
age ∆ in income Qd.
Cross price inelastic Demand for a The tw o products

demand, product rises w hen are w eak
CED =
6. Substitutes % age ∆ in Qd of its substitutes substitutes.
+ 0.5 become expensive.
good X < % age ∆ in
price of good Y
Cross price elastic Demand for a The tw o products
demand, product rises w hen are strong
CED =
7. Substitutes % age ∆ in Qd of its substitutes substitutes.
+ 2.5 become expensive.
good X > % age ∆ in
price of good Y
Cross price inelastic Demand for a The complementary
demand, product rises w hen good is less
CED =
8. Complements % age ∆ in Qd of its complements essential.
– 0.75 become cheaper.
good X < % age ∆ in
price of good Y
Cross price elastic Demand for a The complementary
demand, product rises w hen good is more
CED =
9. Complements % age ∆ in Qd of its complements essential.
– 1.25 become cheaper.
good X > % age ∆ in
price of good Y
Perfectly cross price A change in the For example, rail
inelastic demand, price of a good does travel and restaurant
10. CED = 0 Unrelated goods
% age ∆ in Qd = 0 not affect Qd of meal.
unrelated goods.
Perfectly income A change in For example, food.
inelastic demand, consumer’s income
% age ∆ in Qd = 0 leaves Qd of
11. MED = 0 Perfect necessities
necessities
completely
unchanged.
7
Skills Exercises
Exercise 2: Labelling and interpreting diagrams

The skill of analysis requires candidates to select, interpret and organise economic information in
written, numerical and diagrammatic form. It is important that learners draw correctly labelled
diagrams, where applicable, to recognise patterns, relationships, causes and effects.
Activity 1: Labelling diagrams
Give learners Worksheet 2: Labelling diagrams.
Explain to learners that diagrams 1–4 are production possibility curves (PPCs).
Learners label the diagrams.
Once completed, learners peer assess each other’s work using the answer sheet.
Discuss the answers as a class making sure that learners have corrected any errors.
8
Skills Exercises
Worksheet 2: Labelling diagrams
Label the following diagrams. Diagrams 1–4 are production possibility curves (PPCs).
1 5
D1
D0
2 6
D0
D1
3 7
B
A
D
4 8
B
D
9
Skills Exercises
9 13
AS
S
D1
AD1
AD0 D0
10 14
AS
S
AD 0
D0
AD1 D1
11 15
AS0 AS 1
AD
12 16
As 1
As 0
AD
10
Skills Exercises
1 5
Good Y P
S
P1
P0
D1
D0
Q0 Q1 Q
Good X
2 6
Good Y P
S
P0
P1
D0
D1
Good X
Q1 Q0 Q
3 7
Good Y
B
A
D
Good X
4 8
Good Y
A
Y1
Y2 D
B
X1 X2 Good X
11
Skills Exercises
9 13
Price
Level AS Exchange
S
Rate
E1
P1
E0
P0
D1
AD1
D0
AD0
Y0 Y1 Real Output Q0 Q1 Quantity
of Currency
10 14
Price AS Exchange
Level Rate S
P0
E0
P1
AD 0 E1
D0
AD1 D1
Y1 Y0 Real Output Q1 Q0 Quantity
of Currency
11 15
Exchange
Price
AS0 AS 1 Rate
Level
P0 E1
E0
P1
AD
Y0 Y1 Real Output Quantity

of Currency
12 16
Exchange
Price As 1 Rate
Level
As 0
P1 E0
P0
E1
AD
Y1 Y0 Real Output Quantity

of Currency
12
Skills Exercises
Activity 2: Economic events
The skill of analysis requires candidates to select, interpret and organize economic information in
written, numerical and diagrammatic form.
Once learners have correctly labelled the diagrams, they are then required to select the appropriate
economic event.
Give learners Worksheet 3: Economic events.
Explain to learners that they should match the economic event to the correct diagram(s) shown on
Worksheet 2: Labelling diagrams.
Lead a feedback session to consolidate understanding.
Learners may choose different diagrams and should be given credit for this so long as they are able
to justify their selection.
13
Skills Exercises
Worksheet 3: Economic events
Match the economic event to the correct diagram
Sr. No. Economic Event Diagram(s) No.
1. Increase in potential output
2. Increase in actual output
3. Imports becoming expensive
4. Fall in interest rates
5. A firm raising wages of workers
6. Demand pull inflation
7. Cost push inflation
8. Income tax being raised
9. Good deflation
10. Bad deflation
11. Incomes/price levels in other countries rising
12. A country imposing trade barriers on its imports
13. Fall in exchange rates
14. Higher inflation rate
15. Government giving subsidies to its exports
16. Government deciding to sell foreign currencies
17. Decrease in unemployment OR increase in output
Government raising its spending on

18.
education/infrastructure
19. Rise in budget deficit
20. Rise in trade deficit
21. Contractionary monetary policy
22. Expansionary fiscal policy
23. Contractionary fiscal policy (budget surplus)
24. Increase in the price of a substitute
25. Increase in income
14
Skills Exercises
Sr. No. Economic Event Diagram(s) No
1. Increase in potential output 1, 11
2. Increase in actual output 3, 9
3. Imports becoming expensive 9, 12, 15 (7 if single product)
4. Fall in interest rates 1, 9, 11, 14, 16
5. A firm raising wages of workers 7
6. Demand pull inflation 9
7. Cost push inflation 12
8. Income tax being raised 10
9. Good deflation 11
10. Bad deflation 10
11. Incomes / price levels in other countries rising 9, 13, 14
12. A country imposing trade barriers on its imports 9, 12, 15
13. Fall in exchange rates 9, 12
14. Higher inflation rate 14, 16
15. Government giving subsidies to its exports 9, 13 (or 8 if single product)
16. Government deciding to sell foreign currencies 9, 12, 13
17. Decrease in unemployment OR increase in output 3, 9, 11
Government raising its spending on

18. 1, 9, 11
education/infrastructure
19. Rise in budget deficit 9
20. Rise in trade deficit 10, 14, 16
21. Contractionary monetary policy 2, 10, 12, 13, 15
22. Expansionary fiscal policy 9
23. Contractionary fiscal policy (budget surplus) 10
24. Increase in the price of a substitute 5
25. Increase in income 5 OR 6
15
Skills Exercises
Activity 3: Focus on analysis
Explain to learners that Worksheet 3: Economic events contained a list of various economic events.
Give learners Worksheet 4: Chains of analysis.
Learners need to complete each chain to identify the focus of analysis for some of those events using
Worksheet 3 and their selection of diagrams.
Learners may be encouraged to do the same exercise for other economic events.
Discuss the answers as a class once learners have completed the task. Make sure any
misconceptions are identified and corrected.
16
Skills Exercises
Worksheet 4: Chains of analysis

Identify the chain of analysis for the following economic events:
Economic Event 3 – Imports becoming expensive
(a) The impact of expensive imports on demand pull inflation:
Imports
becoming ? ? ? ? ?
expensive
(b) The impact of expensive imports on exchange rates:
Imports becoming
expensive ? ? ?
(c) The impact of expensive imports on cost push inflation:
Imports becoming
expensive ? ? ?
(d) The impact of expensive imports on trade deficit:
Imports
becoming ? ? ? ? ? ?
expensive
Economic Event 4 – Fall in interest rates
(a) The impact of a fall in interest rates on Aggregate Demand (AD):
Low er
interest ? ? ? ? ? ? ? ?
rates
(b) The impact of a fall in interest rates on the exchange rate:
Low er
interest rates ? ? ? ? ?
(c) The impact of a fall in interest rates on net exports:
Low er interest
rates ? ? ? ?
17
Skills Exercises
(d) The impact of a fall in interest rates on Aggregate Supply (AS):
Low er interest rates ? ? ?
Economic Event 13 – Fall in exchange rates
(a) The impact of a fall in exchange rates on demand pull inflation:
Fall in
exchange ? ? ? ? ? ?
rate
(b) The impact of a fall in exchange rates on cost push inflation:
Fall in
exchange rate ? ? ? ?
Economic Event 14 – Higher inflation rate
(a) The impact of inflation on exchange rates:
Higher
inflation ? ? ? ? ? ? ?
rate
Economic Event 18 – Government raising its spending on education/infrastructure
(a) The impact of higher government spending on education/infrastructure on demand pull inflation:
Government
raising its ? ? ? ? ? ? ?
spending
(b) The impact of higher government spending on education/infrastructure on cost push inflation:
Government
raising its ? ? ? ?
spending
(c) Combined effect of increased government spending on inflation:
Government
raising its ? ? ? ? ? ? ? ?
spending
18
Skills Exercises
Economic Event 3 – Imports becoming expensive
(a) The impact of expensive imports on demand pull inflation:

Imports becoming expensive → may be because of import tariffs or weaker currency →
locally made goods seem cheaper → imports fall → Aggregate Demand (AD) rises →
may trigger demand pull inflation.
(b) The impact of expensive imports on exchange rates:

Imports becoming expensive → imports fall → supply of currency falls → exchange
rate rises.
(c) The impact of expensive imports on cost push inflation:

Imports becoming expensive → cost of imported raw material rises → Aggregate
Supply (AS) decreases → cost push inflation.
(d) The impact of expensive imports on trade deficit:

Imports becoming expensive → imports fall → trade deficit falls → however, cost of
production may go up → exports become less price competitive → exports fall →

impact on trade deficit is uncertain.
Economic Event 4 – Fall in interest rates
(a) The impact of a fall in interest rates on Aggregate Demand (AD):

Lower interest rates → reward for saving falls → cost of borrowing falls → savings fall
→ consumption rises → opportunity cost of investment falls → investments rise →

AD rises → demand pull inflation or real output rises.
(b) The impact of a fall in interest rates on exchange rate:

Lower interest rates → financial capital inflows fall → demand for currency falls →
financial capital outflows rise → supply of currency rises → exchange rates fall.
(c) The impact of a fall in interest rates on net exports:

Lower interest rates → exchange rates fall → exports become cheaper → imports
become expensive → net exports rise.
(d) The impact of a fall in interest rates on Aggregate Supply (AS):

Lower interest rates → investment in capital and technology rises → production
potential rises → AS shifts to the right.
19
Skills Exercises
Economic Event 13 – Fall in exchange rates
(a) The impact of a fall in exchange rates on demand pull inflation:

Fall in exchange rate → exports become cheaper → imports become expensive →
exports rise → imports fall → AD rises → may trigger demand pull inflation.
(b) The impact of a fall in exchange rates on cost push inflation:

Fall in exchange rate → imported raw materials become expensive → cost of
production rises → AS falls → cost push inflation.
Economic Event 14 – Higher inflation rate
(a) The impact of inflation on exchange rates:

Higher inflation rate → exports become relatively expensive → imports seem cheaper
→ exports fall → imports rise → demand for currency falls → supply of currency
rises → exchange rates fall.
Economic Event 18 – Government raising its spending on education/infrastructure
(a) The impact of higher government spending on education/infrastructure on demand pull inflation:
Government raising its spending → G rises → AD rises → price level and real output
rise.
(b) The impact of higher government spending on education/infrastructure on cost push inflation:
Government raising spending → increased spending on education improves workers’
skills and productivity and increased spending on infrastructure reduces cost of
businesses → production potential rises → AS increases → price level falls but real
output rises.
(c) Combined effect of increased government spending on inflation:

Government raising spending → G rises → AD rises → price level and real output rise
→ production potential rises → AS rises → price level falls but real output rises →
combined impact on price level is uncertain → real output certainly rises.
20
Skills Exercises
Exercise 3: Analysis in action

The skill of analysis requires candidates to explain the impacts and consequences of changes in
economic variables. Learners should use the economic information to recognise patterns,
relationships, causes and effects. Answering the question in the true context is vital to score good
marks.
Activity 1: Applying analysis
Give learners Worksheet 5: Applying analysis.
Learners work individually or in pairs to answer the practice questions.
When completed, learners peer assess each other’s work.
Lead a discussion to consolidate understanding.
21
Skills Exercises
Worksheet 5: Applying analysis
Practice Paper 2 Question 1(c)

Explain how changes in any three demand factors might account for the greater rate of growth in
numbers of visitors into Thailand from China than from other countries.
Practice Paper 2 Question 3(b)

Discuss the ways in which businesses might attempt to increase the price elasticity of supply of their
products. Assess whether these attempts are likely to be successful.
Practice Paper 2 Question 3(a)

The annual rate of inflation in an economy increased sharply and unexpectedly.
Explain the likely consequences of such an increase for consumers and firms.
22
Skills Exercises
Practice Paper 2 Question 1(c)

Explain how changes in any three demand factors might account for the greater rate of growth in
numbers of visitors into Thailand from China than from other countries.
Sample Answer
Higher income of Chinese tourists compared to other countries might have led to more
tourists coming to Thailand from China, as tourism is a normal good.
Exchange rate of Chinese currency may be high, making it cheaper for Chinese tourists
to visit Thailand.
Some Thailand tourism companies may have advertised heavily in China to attract
Chinese tourists into Thailand.
Examiner Comment
The focus of the question was on a greater rate of growth in Chinese tourists visiting Thailand and not
on a high number of Chinese tourists. Thus, a dynamic approach instead of static approach was
required to tackle this question. The candidate could have mentioned a faster increase in Chinese
income than other countries (instead of giving the static idea of high income), appreciation of currency
(instead of high exchange rate) and increasing promotion expenditures in China (instead of high
marketing expenses) as reasons for a higher growth in the number of Chinese tourists.
Practice Paper 2 Question 3(b)

Discuss the ways in which businesses might attempt to increase the price elasticity of supply of their
products. Assess whether these attempts are likely to be successful.
Sample Answer
Businesses may invest in the latest technology and equipment, which reduces the cost of
production, shifts the supply curve to the right and helps raise supply.
Governments can give subsidies to businesses to raise production. Subsidies help reduce
the cost of production, shift the supply curve to the right and thus help raise supply.
Businesses can also invest in training and education programmes of their workforce.
More skilled labour would help produce more goods, helping firms to raise supply.
Businesses may maintain stocks, which may help fulfil demand, in case of an emergency.
23
Skills Exercises
Examiner Comment
Instead of focusing on how businesses can help raise the price elasticity of supply (PES), the
response focused on how supply could be raised, thus failing to score good marks. A better response
should focus not only on altering supply, but altering it instantly, which is the essence of PES. For
example, the idea that a firm acquires technology that raises the speed of production (and not just the
production) could have been discussed. The mention of government subsidies was also irrelevant as
the question was not about the role of the government in influencing PES. The last sentence of the
question (assess whether these attempts are likely to be successful) requires evaluation skills (AO3).
Practice Paper 2 Question 3(a)

The annual rate of inflation in an economy increased sharply and unexpectedly. Explain the likely
consequences of such an increase for consumers and firms.
Sample Answer
Inflation is an increase in price level. Borrowers gain at the expense of those who save,
as borrowers pay back less in real terms. Low income earners suffer more, as they are
unable to shift the burden of higher cost of living to others by raising prices. Local goods
become less price competitive both at home and abroad, leading to reduced net exports
and rising trade deficit. Firms may also have to reprint menus to inform distributors
and customers about the revised prices, leading to higher costs.
Examiner Comment
The definition of inflation is incomplete, as it does not mention a time period and also mentions price
level instead of the more acceptable ‘general price level’.
It is unclear if the borrower is a producer or a consumer, so the argument of borrowers gaining at the
expense of those who save may not be enough evidence to be rewarded marks.
24
Skills Exercises
Evaluation (AO3)

Economics 9708
Contents
Introduction ................................................................................................................................4
Evaluation (AO3) .......................................................................................................................5
Exercise 1: Understanding evaluation ..................................................................................5
Exercise 2: Understanding the assessment objectives in context .................................... 10
Exercise 3: Conclusions ......................................................................................................17
Skills Exercises
Introduction


• Analysis (AO2)

analysis skills
4
Skills Exercises
Evaluation (AO3)
Exercise 1: Understanding evaluation
The skill of evaluation is the least understood and often confused with analysis. It is important that learners
not only understand the difference but can also write according to the AO3 Evaluation criteria:
• Recognise assumptions and limitations of economic information and models.

• Assess economic information and the strengths and weaknesses of arguments.
• Recognise that some economic decisions involve consideration of factors such as priorities and value
judgements.
• Communicate reasoned judgements, conclusions and decisions, based on the arguments.
Activity 1: Analysis and evaluation
Give learners Worksheet 1: Analysis and evaluation.
Learners should answer the questions using both analytical and evaluative skills.
When completed discuss the answers with learners and ensure they understand and recognise the
differences between the two assessment objectives.
5
Skills Exercises
Worksheet 1: Analysis and evaluation

Read the practice questions below. Demonstrate the use of both analysis and evaluation when answering
each question.
(a) ‘Market failure can always be overcome to increase economic efficiency.’ How far do you agree with this
statement?
(b) Evaluate whether the theory of wage determination can account for wage differentials (i) between a
director and a general worker in the same company and (ii) between two workers doing the same job in
different companies.
(c) Discuss the extent to which the Human Development Index (HDI) and the Measure of Economic Welfare
(MEW) provide better measures of living standards than Gross National Income (GNI).
(d) Discuss whether solving the problem of unemployment should be the main policy objective for the
government of a developing country.
6
Skills Exercises
(e) Compare the likely effectiveness of a policy of imposing minimum prices on demerit goods with one other
policy to improve public health and consider which policy is more likely to be successful.
(f) An economy is experiencing a fall in average incomes during a severe recession.
Discuss the extent to which the concepts of income elasticity of demand and price elasticity of demand might
be useful to an entrepreneur in this economy and consider which would be more useful.
(g) Discuss whether you would advise a government to use monetary policy or fiscal policy to solve the
problem of deflation in an economy.
(h) If the cost of the subsidy is to be paid from tax revenues, discuss whether the revenue should be raised
through direct taxes or indirect taxes.
7
Skills Exercises
(a) ‘Market failure can always be overcome to increase economic efficiency.’ How far do you agree with this
statement?
For analysis, an explanation of different forms of market failure and methods of reducing
them, such as indirect taxation or subsidies, direct provision or legislation, should be provided.
For evaluation, limitations of the role of the government in overcoming market failure, such
as problems of imperfect government, will be discussed, followed by a reasoned conclusion.
(b) Evaluate whether the theory of wage determination can account for wage differentials (i) between a
director and a general worker in the same company and (ii) between two workers doing the same job in
different companies.
For analysis, an explanation of the theory of wages based on demand (MRP Theory) and
supply (supply curve could be upward rising or backward bending, depending on income and
substitution effects) should be provided. The analysis could be for both perfect and imperfect
markets.
For evaluation, a real world exploration of the limits to perfect competition, such as imperfect
information, lack of labour mobility, discrimination and monopsony, trade union intervention,
minimum wage legislation, may be discussed, followed by a reasoned conclusion.
(c) Discuss the extent to which the Human Development Index (HDI) and the Measure of Economic Welfare
(MEW) provide better measures of living standards than Gross National Income (GNI).
For analysis, an explanation of per capita GNI, HDI and MEW as measures of the living
standard should be provided.
For evaluation, the relevance and limitations of GNI, HDI and MEW should be discussed. A
reasoned conclusion must follow for full marks.
(d) Discuss whether solving the problem of unemployment should be the main policy objective for the
government of a developing country.
For analysis, learners should identify possible government policy objective and discuss the
significance of unemployment as the only policy objective.
For evaluation, learners should discuss the significance of alternative policy objectives, such as
inflation, economic growth, balance of payments and distribution of income.
The analysis and evaluation, followed by a reasoned conclusion, must be in the context of a
developing economy.
8
Skills Exercises
(e) Compare the likely effectiveness of a policy of imposing minimum prices on demerit goods with one other
policy to improve public health and consider which policy is more likely to be successful.
For analysis, an explanation of the likely effectiveness of a minimum price and another policy
(e.g. indirect taxes or awareness campaigns) should be provided, while discussing the benefits
and drawbacks for both policies.
For evaluation, a clear comparison between the effectiveness of both policies should be
provided, followed by a reasoned conclusion as to which policy is more likely to be successful.
(f) An economy is experiencing a fall in average incomes during a severe recession.
Discuss the extent to which the concepts of income elasticity of demand and price elasticity of demand might
be useful to an entrepreneur in this economy and consider which would be more useful.
For analysis, an explanation of the usefulness of both types of elasticity of demand for an
entrepreneur when incomes are falling should be given.
For evaluation, provide a clear comparison of the usefulness of both PED (price elastic
demand) and MED (income elastic demand), followed by a reasoned conclusion as to which is
more useful.
(g) Discuss whether you would advise a government to use monetary policy or fiscal policy to solve the
problem of deflation in an economy.
For analysis, an explanation of how monetary and fiscal policies can be used to stimulate
Aggregate Demand should be provided, with due reference to the strengths and weaknesses of
each approach.
For evaluation, provide a clear comparison of the use of each policy to solve the problem of
deflation, followed by a reasoned conclusion as to which policy may be more appropriate.
(h) If the cost of the subsidy is to be paid from tax revenues, discuss whether the revenue should be raised
through direct taxes or indirect taxes.
For analysis, explain the advantages and disadvantages of raising the revenue through direct
and indirect taxes.
For evaluation, provide a clear comparison between the two types of taxes, followed by a
reasoned conclusion on which type of tax should be used.
9
Skills Exercises
Exercise 2: Understanding the assessment objectives in context

The skill of knowledge and understanding requires learners to demonstrate understanding of the syllabus
content, giving appropriate explanations and examples.
The skill of analysis requires explaining the impacts and consequences of changes in economic variables.
The skill of evaluation requires the recognition of assumptions and limitations of economic information and
models.
Activity 1: Identifying the assessment objective

Give learners Worksheet 2: Identifying the assessment objective.
Explain to learners the importance of knowing which assessment objective(s) should be addressed when
answering examination questions.
Lead a feedback session with learners, making sure they understand both the answer given and how the
assessment objective relates to the statement.
10
Skills Exercises
Worksheet 2: Identifying the assessment objective

For each set, identify which statement demonstrates knowledge and understanding (AO1), analysis (AO2) or
evaluation (AO3). Circle the correct option.
Set 1
For goods with PED (price elastic demand), price can be
(a) decreased to raise revenues, as revenues gained by additional AO1 / AO2 / AO3
units sold exceed the revenues lost by lower prices.
PED is more useful than MED (income elastic demand) for a
(b) businessman, as price can be changed more easily and quickly AO1 / AO2 / AO3
than altering the type of the product the firm produces.
PED measures the degree of responsiveness of quantity
(c) AO1 / AO2 / AO3
demanded to a change in the price of the product.
During a period of economic boom, a firm should raise the
(d) production of normal goods to take advantage of the rising AO1 / AO2 / AO3
demand.
Set 2
Demerit goods are addictive and their PED is usually low. Thus,
(a) an indirect tax and increase in price may not be effective in AO1 / AO2 / AO3
bringing smoking down to the desired levels.
An indirect tax on demerit goods will raise the cost of production
(b) and shift the supply curve to the left. The price will rise, forcing AO1 / AO2 / AO3
consumers to decrease smoking.
The costs of consuming demerit goods, such as cigarettes, are
(c) often underestimated because of information failure. Thus, they AO1 / AO2 / AO3
are over consumed.
Set 3
Free trade involves removing trade barriers on the exports and
(a) AO1 / AO2 / AO3
imports of goods and services.
Infant industries should be protected to ensure that they get the
(b) time to establish themselves to be able to compete with the large AO1 / AO2 / AO3
international firms.
Free trade increases the variety of goods available for consumers
(c) and helps improve living standards. However, some domestic AO1 / AO2 / AO3
industries may be forced to close down.
11
Skills Exercises
Set 4
In a perfectly competitive labour market, a firm should hire
(a) workers if their MRP (marginal revenue product) is at least equal AO1 / AO2 / AO3
to the market wage.
It is difficult to accurately measure the MRP of an individual
(b) AO1 / AO2 / AO3
worker.
(c) MRP is the product of sale price and marginal product. AO1 / AO2 / AO3
The power of trade unions may force firms to pay wages to their
(d) AO1 / AO2 / AO3
workers in excess of their productivity.
Set 5
It is difficult to measure the exact monetary value of external cost.
(a) Thus, deciding the right amount of tax to tackle the issue of AO1 / AO2 / AO3
negative externalities becomes a challenge.
Market failure arises when market forces fail to efficiently allocate
(b) AO1 / AO2 / AO3
resources.
A government should impose indirect taxes on firms polluting the
environment. Such taxes will raise their cost of production, shift
(c) AO1 / AO2 / AO3
the supply curve to the left and force firms to produce and pollute
less.
Set 6
(a) A higher interest rate is a tool of contractionary monetary policy. AO1 / AO2 / AO3
Higher interest rates may not be able to attract capital inflows if
foreign investors are sceptical of the economic and political
(b) AO1 / AO2 / AO3
stability of the country and think that exchange rates are
overvalued.
Higher interest rates attract capital inflows and reduce capital
(c) outflows, resulting in a higher demand and lower supply of AO1 / AO2 / AO3
currency. Exchange rates will thus appreciate.
Set 7
The government decision to raise taxes reduces disposable
income and force consumers and investors to consume and
(a) AO1 / AO2 / AO3
invest less. AD (Aggregate Demand) thus falls, and helps reduce
demand pull inflation.
Higher taxes may reduce the incentive to work and enterprise,
and force investors and businesses to shift to other countries,
(b) AO1 / AO2 / AO3
resulting in a reduced production potential. This may lead to rising
unemployment.
A government should decrease its spending and raise taxes to
(c) AO1 / AO2 / AO3
reduce demand pull inflation.
12
Skills Exercises
Set 8
Depreciation is more useful for economies having excess
capacity, as they may be able to meet the extra demand for
(a) AO1 / AO2 / AO3
cheaper net exports without triggering inflation. However,
countries heavily dependent on essential imports may lose out.
Depreciation makes exports cheaper and imports expensive,
(b) AO1 / AO2 / AO3
raises net exports and reduces trade deficit.
Depreciation of currency may not be able to raise net exports if
(c) other countries raise import barriers or experience a period of AO1 / AO2 / AO3
economic recession.
Depreciation of exchange rate means that the same amount of
(d) national currency can now acquire fewer units of a foreign AO1 / AO2 / AO3
currency.
Depreciation of currency may help raise net exports if the PED for
(e) AO1 / AO2 / AO3
net exports is more than 1.
Set 9
One of the external consequences of inflation is that local goods
become less price competitive both at home and abroad.
(a) AO1 / AO2 / AO3
Assuming a price elastic demand, exports fall and imports rise,
leading to a rise in trade deficit.
(b) Inflation is a sustained increase in general price level. AO1 / AO2 / AO3
External consequences of inflation are more worrying for
(c) economies relying heavily on international trade and have a AO1 / AO2 / AO3
comparatively higher inflation rate than their trading partners.
Set 10
Supply side policies aim to promote competition, efficiency and
(a) AO1 / AO2 / AO3
incentive to work.
Supply side tools may take a few months to several years in
showing their effects, however, unlike demand management
(b) AO1 / AO2 / AO3
policies, they help to simultaneously achieve the goals of stable
prices and high employment.
Increased government spending on education and training
(c) improves workers’ skills and productivity, reduces unit labour cost AO1 / AO2 / AO3
and helps increase production potential.
13
Skills Exercises
Worksheet 2 answers:
Set 1
For goods with PED price elastic demand, price can be
(a) decreased to raise revenues, as revenues gained by additional AO1 / AO2 / AO3
units sold exceed the revenues lost by lower prices.
PED is more useful than MED (income elastic demand) for a
(b) businessman, as price can be changed more easily and quickly AO1 / AO2 / AO3
than altering the type of the product the firm produces.
PED measures the degree of responsiveness of quantity AO1 / AO2 / AO3
(c)
demanded to a change in the price of the product.
During a period of economic boom, a firm should raise the
(d) production of normal goods to take advantage of the rising AO1 / AO2 / AO3
demand.
Set 2
Demerit goods are addictive and their PED is usually low. Thus,
(a) an indirect tax and increase in price may not be effective in AO1 / AO2 / AO3
bringing smoking down to the desired levels.
An indirect tax on demerit goods will raise the cost of production
(b) and shift the supply curve to the left. The price will rise, forcing AO1 / AO2 / AO3
consumers to decrease smoking.
The costs of consuming demerit goods, such as cigarettes, are
(c) often underestimated because of information failure. Thus, they AO1 / AO2 / AO3
are over consumed.
Set 3
(a) Free trade involves removing trade barriers on the exports and AO1 / AO2 / AO3
imports of goods and services.
Infant industries should be protected to ensure that they get the

(b) time to establish themselves to be able to compete with the large AO1 / AO2 / AO3
international firms.
Free trade increases the variety of goods available for consumers
(c) and helps improve living standards. However, some domestic AO1 / AO2 / AO3
industries may be forced to close down.
Set 4
In a perfectly competitive labour market, a firm should hire
(a) workers if their MRP (marginal revenue product) is at least equal AO1 / AO2 / AO3
to the market wage.
It is difficult to accurately measure the MRP of an individual
(b) AO1 / AO2 / AO3
worker.
MRP is the product of sale price and marginal product.

(c) AO1 / AO2 / AO3
The power of trade unions may force firms to pay wages to their AO1 / AO2 / AO3
(d)
workers in excess of their productivity.
14
Skills Exercises
Set 5
It is difficult to measure the exact monetary value of external cost.
(a) Thus, deciding the right amount of tax to tackle the issue of AO1 / AO2 / AO3
negative externalities becomes a challenge.
Market failure arises when market forces fail to efficiently allocate AO1 / AO2 / AO3
(b) resources.
A government should impose indirect taxes on firms polluting the

environment. Such taxes will raise their cost of production, shift AO1 / AO2 / AO3
(c)
the supply curve to the left and force firms to produce and pollute
less.
Set 6
(a) A higher interest rate is a tool of contractionary monetary policy. AO1 / AO2 / AO3
Higher interest rates may not be able to attract capital inflows if

foreign investors are sceptical of the economic and political AO1 / AO2 / AO3
(b)
stability of the country and think that exchange rates are
overvalued.
Higher interest rates attract capital inflows and reduce capital
(c) outflows, resulting in a higher demand and lower supply of AO1 / AO2 / AO3
currency. Exchange rates will thus appreciate.
Set 7
The government decision to raise taxes reduces disposable
income and force consumers and investors to consume and AO1 / AO2 / AO3
(a)
invest less. AD (Aggregate Demand) thus falls, and helps reduce
demand pull inflation.
Higher taxes may reduce the incentive to work and enterprise,
and force investors and businesses to shift to other countries, AO1 / AO2 / AO3
(b)
resulting in a reduced production potential. This may lead to rising
unemployment.
A government should decrease its spending and raise taxes to AO1 / AO2 / AO3
(c) reduce demand pull inflation.
15
Skills Exercises
Set 8
Depreciation is more useful for economies having excess
capacity, as they may be able to meet the extra demand for AO1 / AO2 / AO3
(a)
cheaper net exports without triggering inflation. However,
countries heavily dependent on essential imports may lose out.
Depreciation makes exports cheaper and imports expensive,
(b) AO1 / AO2 / AO3
raises net exports and reduces trade deficit.
Depreciation of currency may not be able to raise net exports if

(c) other countries raise import barriers or experience a period of AO1 / AO2 / AO3
economic recession.
Depreciation of exchange rate means that the same amount of
(d) national currency can now acquire fewer units of a foreign AO1 / AO2 / AO3
currency.
Depreciation of currency may help raise net exports if the PED for AO1 / AO2 / AO3
(e)
net exports is more than 1.
Set 9
One of the external consequences of inflation is that local goods
become less price competitive both at home and abroad. AO1 / AO2 / AO3
(a)
Assuming a price elastic demand, exports fall and imports rise,
leading to a rise in trade deficit.
(b) Inflation is a sustained increase in general price level. AO1 / AO2 / AO3
External consequences of inflation are more worrying for

(c) economies relying heavily on international trade and have a AO1 / AO2 / AO3
comparatively higher inflation rate than their trading partners.
Set 10
Supply side policies aim to promote competition, efficiency and AO1 / AO2 / AO3
(a)
incentive to work.
Supply side tools may take a few months to several years in
showing their effects, however, unlike demand management AO1 / AO2 / AO3
(b)
policies, they help to simultaneously achieve the goals of stable
prices and high employment.
Increased government spending on education and training
(c) improves workers’ skills and productivity, reduces unit labour cost AO1 / AO2 / AO3
and helps increase production potential.
16
Skills Exercises
Exercise 3: Conclusions
A reasoned conclusion is an integral part of evaluation. To be rewarded full marks, learners should provide a
conclusion or recommendation supported by a valid economic argument.
Activity 1: Identifying valid conclusions
Give learners Worksheet 3: Identifying valid conclusions.
Explain to learners that each conclusion is linked to the practice questions provided in Worksheet 1:
Analysis and evaluation.
Learners read the statements and decide which statement is the valid conclusion. Explain that in some
cases both statements are valid.
Discuss answers with learners ensuring that they understand how the correct conclusions or
recommendations were arrived at.
17
Skills Exercises
Worksheet 3: Identifying valid conclusions

Tick the statement(s) you think is/are a valid conclusion. In some instances, both statements could be valid.
Statem ent 1 Statem ent 2
 The intervention of the government helps  The government should play its role in
overcome market failure and bring the output overcoming market failure through imposing
closer to the socially desirable level. However, indirect taxes, subsidies, direct provision and
a) imperfections, such as lack of accurate regulations. It can impose indirect taxes on
information, may make government intervention demerit goods and firms generating negative
less effective, and market failure may continue externalities, give subsidies or directly provide
to exist. merit goods.
 MRP (marginal revenue product) theory is a  As per MRP (marginal revenue product) theory, a
good explanation for different wages a worker firm should hire workers as long as their MRP is
might earn, since firms are often profit at least equal to the market wage. Workers with
maximizing and willing to pay more to workers higher MRP should be paid higher wages and
b) contributing more in the form of higher MRP. those with lower MRP should be paid lower
However, factors such as labour mobility, trade wages.
unions, monopsonies etc. may lead to wages
not fully justified by the classic theory of wage
determination.
 The Human Development Index and Measure of  Per capita GNI is a more accurate indicator of
Economic Welfare provides more living standards, as assigning an exact monetary
c) comprehensive measures of living standards value to components of alternative measures,
and are thus more reliable than simple per such as negative externalities, is difficult.
capital Gross National Income.
 It is the duty of every government to achieve low  Controlling unemployment is an important
unemployment, high economic growth, stable macroeconomic objective; however, the focus of
price level, balanced balance of payment and government policy must shift to other
d) macroeconomic problems, such as stable price
more equitable income distribution.
level in case inflation is rising and unemployment
is showing a decreasing trend.
 Minimum price provides a financial incentive to  Most demerit goods are addictive in nature, and
decrease the consumption of demerit goods, thus, minimum prices, which make demerit goods
e) thus they could be more effective than expensive, will not be effective in reducing their
awareness campaigns to curb the consumption consumption. Therefore, awareness campaigns
of demerit goods. are more useful than introducing minimum prices.
 PED (price economic demand) is more useful  The data used to calculate PED (price elastic
than MED (income elastic demand) for an demand) and MED (income elastic demand) may
entrepreneur in the short run, as price can be not be accurate, so strategies made by
f) entrepreneurs may not bring desired results,
changed more quickly than altering the type of
the product the firm produces. therefore, they should use other information as
well for devising an effective marketing strategy.
 The government should use a combination of  Fiscal policy is more effective than monetary
fiscal and monetary policies to overcome policy, as lowering interest rates may not be able
g) to reverse deflation if there is general pessimism
deflation.
among consumers and producers.
 The government should generate tax revenues  The government should use a combination of
through imposition of direct taxes, as they would direct and indirect taxes to generate revenues.
h)
be fairer and would ensure greater equality in
income distribution.
18
Skills Exercises
 The intervention of the government helps  The government should play its role in
overcome market failure and bring the output overcoming market failure through imposing
closer to the socially desirable level. indirect taxes, subsidies, direct provision and
However, imperfections, such as lack of regulations. It can impose indirect taxes on
accurate information, may make government demerit goods and firms generating negative
a) externalities, give subsidies or directly provide
intervention less effective, and market failure
may continue to exist. merit goods.
The second statement provides a summary of the tools the government has in
overcoming market failure; thus, it is not a valid conclusion.
 MRP (marginal revenue product) theory is a  As per MRP (marginal revenue product)
good explanation for different wages a worker theory, a firm should hire workers as long as
might earn, since firms are often profit their MRP is at least equal to the market
maximizing and willing to pay more to wage. Workers with higher MRP should be
workers contributing more in the form of paid higher wages and those with lower MRP
b) higher MRP. However, factors such as labour should be paid lower wages.
mobility, trade unions, monopsonies etc. may
lead to wages not fully justified by the classic
theory of wage determination.
The second statement is not a valid conclusion as it only describes MRP theory.
 Human Development Index and Measure of  Per capita GNI is a more accurate indicator of
Economic Welfare provide more living standards, as assigning an exact
comprehensive measures of living standards monetary value to components of alternative
c) and are thus more reliable than simple per measures, such as negative externalities, is
capital Gross National Income. difficult.
Both statements could be considered valid conclusions.

 It is the duty of every government to achieve  Controlling unemployment is an important
low unemployment, high economic growth, macroeconomic objective, however, the focus
stable price level, balanced balance of of government policy must shift to other
payment and more equitable income macroeconomic problems, such as stable
d) distribution. price level in case inflation is rising and
unemployment is showing a decreasing trend.
The first statement provides a good summary of macroeconomic objectives, but it

cannot be accepted as a reasoned conclusion.
 Minimum price provides a financial incentive  Most demerit goods are addictive in nature,
to decrease the consumption of demerit and thus, minimum prices, which make
goods, thus they could be more effective than demerit goods expensive, will not be effective
awareness campaigns to curb the in reducing their consumption. Therefore,
e)
consumption of demerit goods. awareness campaigns are more useful than
introducing minimum prices.
Both statements are valid conclusions and may be accepted by the examiners.
 PED (price economic demand) is more useful  The data used to calculate PED (price elastic
than MED (income elastic demand) for an demand) and MED (income elastic demand)
f)
entrepreneur in the short run, as price can be may not be accurate, so strategies made by
entrepreneurs may not bring desired results,
19
Skills Exercises
changed more quickly than altering the type therefore, they should use other information
of the product the firm produces. as well for devising an effective marketing
strategy.
Though the second statement provides limitations of PED and MED, it does not
compare both types, therefore it cannot be accepted as a valid conclusion.
 The government should use a combination of  Fiscal policy is more effective than monetary
fiscal and monetary policies to overcome policy, as lowering interest rates may not be
deflation. able to reverse deflation if there is general
pessimism among consumers and producers.
g)
The first statement does not provide any reasoning, so it cannot be accepted as a
valid conclusion. However, it may be accepted if the candidate has explicitly evaluated
the limitations of both policies before writing this conclusion.
 The government should generate tax  The government should use a combination of
revenues through imposition of direct taxes, direct and indirect taxes to generate
as they would be fairer and would ensure revenues.
h) greater equality in income distribution.
The second statement does not provide any reasoning, so it cannot be accepted as a
valid conclusion.
20
Cambridge Assessment International Education
The Triangle Building, Shaftesbury Road, Cambridge, CB28EA, United Kingdom
t: +44 1223 553554
e: info@cambridgeinternational.org www.cambridgeinternational.org
© Cambridge University Press & Assessment 2022

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Skills Exercises

Knowledge and Understanding (AO1)

Cambridge International AS & A Level

Skills and why they are important?

• Knowledge and Understanding (AO1)

How will these skills be developed?

Knowledge and understanding (AO1)

• Show knowledge of syllabus content, recalling facts, formulae and definitions.

Activity 1: Economic terms

Worksheet 1: Economic terms

Define each economic term in the boxes provided.

Worksheet 1 answers may include:

enough money to afford basic necessities. living of a person with another.

available resources. Graphically, it can be shown by a resources improves. Graphically, it is shown by a

(PPC) towards a point on the PPC.

based on the number of units purchased.

market forces of demand and supply.

being of the citizens, as indicated by literacy rate and

life expectancy, improve.

outcome/income. income as per their contribution. Equity may be

described as the ratio of reward and effort.

and demerit goods, are examples of economic goods.

repay loans reduces it.

when there is positive inflation. slower rate when there is

rise). external value of money are either depreciation or

of a firm to raise its price is not matched by its

competitors, resulting in a proportionately larger fall

in its quantity demanded. Thus, firms choosing to

However, the decision to reduce prices is followed by

the competitors, resulting in a negligible rise in the

quantity demanded. Thus, the demand curve faced by

the firm choosing to lower its price is a steeper one,

showing price inelastic demand. The demand curve is

kinked at the point of initial price and quantity.

rates discourage incentives to work, resulting in a disparities.

slowdown of economic activity and instead of raising

tax revenues, result in a loss of tax revenues. High tax

rates also raise the possibility of tax evasion, which

may also lead to lower tax revenues.

interest rates cannot encourage people to spend or

currency notes are popular forms they are a borrowing instrument

are shifting to online payments. In money substitutes.

a modern economy, bank deposits

and online payments are also

between changes in autonomous expenditures and income and induced investment.

national income. Any change in autonomous

expenditures results in a larger change in national

income because of the multiplier.

income. demand falls when income rises. income changes.

in the own price of the product. change in the quantity demanded.

inputs employed. Higher productivity does not

necessarily guarantee higher output, as highly

productive firms may still be producing fewer units if

they have fewer workers than less productive firms.

employed. A business may be earning more profits,

yet be less profitable.

government can provide them. road congestion).

divisibility, homogeneity, durability and scarcity.

income. It falls when prices rise. raised.