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2011 HSC Notes from the Marking Centre — Economics

2011 HSC Notes from the Marking Centre – Economics

Introduction
Section II
Section III
Section IV

Introduction

This document has been produced for the teachers and candidates of the Stage 6 course in Economics. It contains comments on candidate responses to the 2011 Higher School Certificate examination, indicating the quality of the responses and highlighting their relative strengths and weaknesses.

This document should be read along with the relevant syllabus, the 2011 Higher School Certificate examination, the marking guidelines and other support documents developed by the Board of Studies to assist in the teaching and learning of Economics.

General comments

Teachers and candidates should be aware that examiners may ask questions that address the syllabus outcomes in a manner that requires candidates to respond by integrating their knowledge, understanding and skills developed through studying the course.

Candidates need to be aware that the marks allocated to the question and the answer space (where this is provided on the examination paper) are guides to the length of the required response. A longer response will not in itself lead to higher marks. Writing in excess of the space allocated may reduce the time available for answering other questions.

Candidates need to be familiar with the Board's Glossary of Key Words, which contains some terms commonly used in examination questions. However, candidates should also be aware that not all questions will start with or contain one of the key words from the glossary. Questions such as 'how?','why?'; or ‘to what extent?’ may be asked, or verbs may be used that are not included in the glossary, such as ‘design’, ‘translate’ or 'list'.

Section II

Question 21

The better responses were those that correctly outlined at least one role of the World Trade Organisation (WTO). These included to promote free global trade, reduce barriers to global trade and resolve trade disputes between member nations.

Weaker responses were those that referred in a general way to a role of the WTO, such as to increase or monitor trade, without specifically referring to free trade and the reduction of trade barriers. Some candidates incorrectly outlined the role of the WTO as to establish bilateral trade agreements, or confused the role of the WTO with that of the World Bank.
A range of disadvantages of bilateral trade agreements were outlined by candidates. These included disadvantages to the global economy, such as trade diversion, lower global trade, reduced global growth, increase in regionalism, negative effects on developing economies or reduced effectiveness of the WTO. They also included disadvantages to a domestic economy, such as reducing protection and engaging in free trade with another economy, for example, closure of industries and structural unemployment.

In better responses, candidates demonstrated a clear understanding of the nature of a bilateral trade agreement (between two countries) and provided a sound explanation of a disadvantage of such an agreement. Weaker responses were those that provided a correct disadvantage but a limited explanation.
A wide range of economies other than the Australian economy was used by candidates as a basis for their response in this section. In better responses, candidates clearly linked government strategies to the international business cycle and focused on this relationship in their response. Many referred to significant changes to the international business cycle, such as those that occurred during the Global Financial Crisis (GFC) and the Asian financial crisis, and analysed how the economy responded to those changes.

Better responses were those that referred to a range of government strategies in response to the international business cycle, including shorter-term macroeconomic strategies (fiscal and monetary policies), as well as longer-term structural policies. They also showed the impact of the strategies used on key economic variables. Candidates also incorporated data such as fiscal stimulus amounts, cash rates, growth and unemployment rates.

Weaker responses were those that provided descriptions/explanations of government strategies used in an economy other than that of Australia to further integrate into the global economy, including those of opening up to trade and investment, exchange rate policies and microeconomic reform. These candidates did not show an understanding of the relationship between the international business cycle and specific government policies.

Question 22

1. Most candidates correctly calculated the change in the current account balance and stated the change of a decrease in $35 billion from Year 1 to Year 2. Many candidates also correctly calculated that the current account deficit increased by $35 billion.
  
  In weaker responses, candidates often only calculated the current account balance for Year 1 and Year 2 but did not calculate the change from Year 1 to Year 2, and/or gave an incorrect calculation.
2. In better responses, candidates demonstrated a clear understanding of one factor that may have caused the change in the Net Income component of the current account. They noted that the Net Income component had deteriorated from Year 1 to Year 2 and sketched in general terms one reason for this change. Reasons included: increases in foreign financial flows into the economy; subsequently increasing the payments of dividends and interest, which are recorded as debits in the Net Income component; depreciating exchange rates that increased the debt servicing costs; and increasing profits to foreign investors that resulted in increased dividend payments and higher interest repayments on foreign debt due to higher global interest rates.
  
  In weaker respones, candidates did not understand the meaning of the Net Income component on the current account and incorrectly referred to it as being part of the labour market with tax and unemployment factors being the cause of the change.
3. In better responses, candidates demonstrated a clear understanding of one factor that may have caused the change in the Imports component of the current account. They correctly identified that imports had increased, and sketched in general terms one reason that had caused this change. Reasons included: increasing domestic growth with demand spilling over into imports, as increased consumer spending and business investment increases the demand for imports; an appreciation of the domestic currency results in increasing the volume of imports as the price of imports decreases; a depreciation of the currency can also result in increasing the value of imports as the cost of imports rises and decreasing trade barriers increasing the supply of imports.
  
  In weaker responses, candidates merely stated one factor that may have caused the change in imports and did not attempt to explain how it may have caused the increase. Some candidates became confused with the effects of a depreciating currency, incorrectly stating that it made imports cheaper and easier to sell.
In better responses, candidates demonstrated a clear understanding of the reasons for Australia’s persistently high current account deficit (CAD), linking their answers to its persistent nature and the structural and cyclical causes. Examples included: the role of the savings investment gap and Australia’s high interest rate differential; narrow export base; high net foreign liabilities; high economic growth rates and increasing aggregate demand; twin deficits; the Pitchford thesis; the historic nature of the composition of Australia’s trade; and the effects of the mining boom on Australia’s current account. Responses were well structured with clear links provided in a specific rather than general way.

In weaker responses, candidates provided only general information on the CAD and failed to link their answers to its persistent nature. In addition, some of these candidates focused on general trade issues and current events without relating this back to the question.

Question 23

Most candidates correctly calculated the labour participation rate either in the form of a percentage (66.7%), ratio (0.667) or fraction (2/3).

Some candidates listed the formula but gave an incorrect answer or expressed the answer in an incorrect format (eg left off the % symbol).
In better responses, candidates clearly and concisely distinguished an award from an enterprise agreement, incorporating terminology such as 'minimum pay and conditions' and 'negotiations at enterprise or workplace level', or 'centralised' and 'decentralised'.

In weaker responses, candidates defined one or both of the terms using general or basic economic terminology without making a clear distinction between them, or confused the two types.
In better responses, candidates showed a clear cause and effect of one labour market policy on the level of structural unemployment. The policies included current, historical or hypothetical policies. Many candidates referred to training, education and development, and referred to the 2011 Budget measures. Others mentioned broad and specific policies of governments past and present, and how these measures either increased or decreased structural unemployment. Better responses were those that also clearly identified the features of structural unemployment: mismatch of skills, structural changes in the economy, businesses moving their operations offshore, capital substitution, wage rigidities in the labour market, or institutional factors.

In weaker responses, candidates defined or described a labour market policy but with very little focus on how it linked to the level of structural unemployment. Some used a non-labour market policy to explain how that influences structural unemployment. Others described unemployment in general terms.
In better responses, candidates clearly identified the advantages associated with the decentralised wage-fixing system. These included flexibility in wage negotiations, efficient resource allocation, incentives to acquire more skills, productivity, reduction in real labour costs, and increases in output and profitability. Candidates constructed a logical response that showed cause and effect of the decentralised system, mentioning short-term and long-term effects on the micro and macro levels that lead to positive economic outcomes. These effects include low inflation, low cost–push inflation, elimination of wage price spiral, international competitiveness, productivity growth, higher living standards, jobs growth/fall in unemployment, and sustainable growth.

Weaker responses tended to either define or describe the decentralised system and outlined a general advantage or outcome. It was important to show how the decentralised system may affect the level of economic activity.

Question 24

In better responses, candidates provided a clear and concise definition of a public good. Many candidates correctly provided examples of public goods, such as clean air and national defence.

In weaker responses, candidates simply identified one or two characteristics of public goods. Some candidates also confused public goods with public sector goods.
In better responses, candidates demonstrated a sound understanding of the effects of market failure on the preservation of the environment. These candidates provided a clear and concise explanation of the limitations of the price mechanism in not taking social costs into account, and the consequences of negative external factors on the environment. Some candidates supported their response with a clear and accurate diagram, with reference to the overuse and exploitation of resources and ecological unsustainability, caused by market failure.

Many candidates provided a sound explanation of market failure and examples of environmental degradation as a result of market failure.

In weaker responses, candidates did not understand the concept of market failure.
In better responses, candidates provided balanced coverage of how regulations and market-based policies are used to manage the natural environment. They referred to regulations as laws that are enacted by the government to limit or prohibit activities that damage the environment, and market-based policies such as those that use financial incentives and disincentives to influence production activities so that social costs are included. In these responses, candidates explained the positive impact on the natural environment of implementing these regulations and policies. Some candidates supported their response with clear and accurate diagrams. These responses made extensive use of examples, such as the carbon tax, the emissions trading scheme, and the use of subsidies, fines, bans and product standards. Some candidates referred to international agreements such as the Kyoto and Montreal Protocols.

In weaker responses, candidates provided general information describing the nature of these policies or regulations, but did not provide an explanation for how their use would manage the natural environment.

Section III

Question 25

Most candidates provided an adequate distinction between contractionary and expansionary fiscal policy. Better responses distinguished between the changing stance of fiscal policy and simplistic budget deficit/surplus analysis. Many responses merely stated that a budget deficit/surplus is expansionary/contractionary without any explanation or reasoning as to how this occurs.

Better responses integrated solid theory on how fiscal policy affects economic activity and income distribution with application to the current budget and reference to the stimulus material. Weaker responses tended to only describe aspects of the current Commonwealth Government budget, providing little or no reference to theory or explanation as to how these aspects were relevant to answering the question.

Many responses made a clear distinction between discretionary and non-discretionary fiscal policy, relating this to the fiscal stimulus package put in place by the Rudd Government in 2008 in response to the GFC. Better responses linked the effects of automatic stabilisers (social security and progressive income taxes) to income distribution. They distinguished between the non-discretionary effects of automatic stabilisers and the effects of discretionary changes in tax rates, unemployment benefits and pensions.

Better responses were well structured and gave equal weighting to the effects of fiscal policy on both economic activity and income distribution. The use of relevant and correctly explained diagrams was a feature of such responses. Some weaker responses were characterised by incorrectly drawn and/or poorly explained diagrams, or diagrams that were not adequately linked to answering the question.

In some better responses, candidates referred to the twin deficits hypothesis, the effects of fiscal policy on currency exchange rates (via its effect on economic activity), the balanced budget multiplier, and the effects of various specific expenditure initiatives in education and other areas.

Some weaker responses seemed to be prepared responses, which resulted in the candidates not adequately addressing the question.

Question 26

In better responses, candidates wrote specifically on the links between the changes in the cash rate and the corresponding effects on both inflation and unemployment. These candidates often referred to the various channels of the transmission mechanism, including consumption, savings, investment, cash flow, expectations, exchange rate and asset prices. They also considered the trade-offs between inflation and unemployment using the short- and long-run Phillips curves, and referred to concepts such as cyclical unemployment and the NAIRU (Non-Accelerating Inflation Rate of Unemployment).

In better responses, candidates referred to the Reserve Bank of Australia’s (RBA) inflation target, and differentiation was made between the headline and underlying rates of inflation. Use of the stimulus was sound and often led to a discussion of the problems associated with monetary policy, with particular reference to both inflation and unemployment. Better responses integrated economic theory with both the stimulus material and their own data, and considered the three most recent key phases of the Australian economy in detail: pre-GFC, the GFC itself, and post-GFC to the present day. These responses included key definitions and were well structured and sustained. Relevant diagrams were used, which were labelled clearly and carefully explained.

In weaker responses, candidates answered the question in a much more descriptive, general manner, often with too much emphasis on the mechanics of domestic market operations. The connection between the cash rate and inflation was treated superficially, and usually only referred to aggregated demand in simple terms without specifically working through the various links of the transmission mechanism. Unemployment was often only treated as a secondary issue. The integration of the stimulus material into the responses was also general and often not related to the question. Many candidates simply chose to copy out parts of the quote provided without any further discussion. Diagrams tended to be poorly drawn and not explained. The use of statistics, from both the stimulus and candidates’ own knowledge, was similarly limited.

Section IV

Question 27

Most responses provided a clear definition of microeconomic reform (MER). Many contained the definition of MER with examples, and provided a diagram showing the increase of aggregate supply arising from MER. The majority of candidates had a good understanding of the goals of MER and of the historical developments in microeconomic reform. These responses were distinguished by a thoughtful integration of economic concepts pertaining to MER. They defined microeconomic reform in relation to increases in aggregate supply and allocative, technical and dynamic efficiency. They clearly distinguished between product and factor markets, and discussed a range of MERs and their effects on these markets. They also gave a variety of examples of the effect of MER on markets, including linking increased wages to increased productivity, increased human capital, increased competition, decreased prices and costs, innovation, structural change and structural unemployment. Such responses often highlighted the effect of a microeconomic policy initiative on, say, a factor market, and how the reformed factor market subsequently affected a product market.

In weaker responses, candidates defined MER and suggested examples of microeconomic reforms; however, they needed to distinguish between factor and product markets. These responses generally provided a discussion of specific examples of microeconomic reform and their effects on the economy as opposed to product and factor markets. They also provided general information pertaining to MER, and sometimes provided a limited discussion on the benefits and costs of microeconomic reform in relation to the Australian economy.

Question 28

In better responses, candidates clearly distinguished between the domestic and global factors that affect Australia's exchange rate. Additionally, these candidates often integrated these factors and examined both the short-term and long-term effects on the exchange rate. These responses often made reference to global factors such as the commodities boom, movements in the international business cycle and the impacts of the GFC, and gave a comprehensive explanation of how these factors influenced the value of the Australian dollar. They also applied these factors to events that have been occurring in the global and Australian economies, and provided accurate economic information relating to these events.

Better responses correctly explained the way in which Australia's exchange rate is influenced by changes to the levels of Australia's exports and imports, and the attractiveness of Australia as an investment destination, including interest rate differentials between Australia and the rest of the world and the RBA's ability to manage the exchange rate. These candidates enhanced the quality of their responses by including correctly labelled and fully explained demand and supply diagrams of the Australian dollar, which showed the effect of these changes on the exchange rate. Weaker responses tended to be more descriptive and general in nature. They provided a range of global and domestic factors that affect Australia’s exchange rate. These responses made little or no use of data, or to references to current events in the global and domestic economies. They referred mainly to the effect of changing trade and investment flows on the Australian dollar as global factors, and the effect of interest rate changes and inflation in Australia as domestic factors. These responses often included diagrams of how changes to demand and supply influence the value of the Australian dollar, but the accompanying explanations of these diagrams were generally poor or non-existent.

Weaker responses also outlined the effects of changes in the exchange rate on the Australian economy. These responses described the effects of depreciation and appreciation, thus limiting these candidates’ ability to access marks.