Highly Possible Topics To Be Tested In Unit 4: Global Economy

Here is what you have been waiting for. Sorry, I really have limited time to blog tonight. Do send message to me through my chatbox. Hope to get back to you in no time.

A. National debt

1. Reasons for ballooning national debt/ increasing fiscal deficit/ deteriorating public finances:

a) Large scale government to bail out the failed financial institutions

b) Payment for jobseekers allowance rose

c) Falling tax revenue as many people were made redundant, companies reported large losses and fall in asset prices led to lower capital gain tax

d) Increasing number of elderly people. So there is a commitment to pay for Social Security and healthcare

e) More borrowing to pay for previous debts

2. Economic implications/ effects of rising level of national debt/ budget deficit:

a) Austerity programme to balance the book

b) Crowding out effect

c) Rising inflation

d) Lower credit rating by Fitch, Moody’s and S&P’s. More difficult to raise finances

e) Economic growth hence better ability to pay for the debt

f) More jobs created

3. Methods to reduce national debt:

a) Austerity drive to bring UK out of red ink

b) Expansionary fiscal and monetary policy to attain growth so that more tax revenue can be generated to pay off the debt

c) Expansionary fiscal and monetary policy to achieve higher inflation, so that UK’s debt worth lesser than what it looks

d) Negotiate for more favourable term but unlikely to happen

B. Eurozone crisis

1. Reasons to join:

a) No transaction costs. Only minimal fee paid to banks for facilitating the process

b) Eliminate exchange rate uncertainty. So predicting costs, profits and planning for future production are made easy

c) Macroeconomic discipline. Members are reminded to keep inflation low and not to overspend

d) May emerge as a large economic powerhouse succeeding the States and euro may overtake dollar as the most traded currency

e) Attract more FDI

f) Price transparency as firms and consumers can compare prices which are all quoted in euro

g) Financially secured as member countries are more backed by EU government that wants to secure the interests of entire euro zone e.g. EU government tries to prevent Greece from becoming insolvent

2. Reasons not to join:

a) No power to set own interest rate that is best to own nation

b) Cannot devalue currency to boost competitiveness and pursue export-led growth in times of crisis

c) Strict inflationary target which is close to but below 2% at the expense of lower economic growth

d) ight spending target as member countries are told not to succeed over Growth and Stability Pact

e) Confusion on day of transition

f) Loss of jobs especially bankers, currency analyst and workers in money exchanger

C. Falling pound

1. Reasons for collapse in pound:

a) Severe cut in interest rates and maintained at 0.5% for a very long time

b) Lack of demand for UK bonds

c) Speculation that sterling may fall. So currency speculators and foreign government choose to hold lesser pound

d) Current account deficit

e) De-globalisation which has caused reversal of FDI. So lesser demand for pound

2. Economic effects:

a) Value of foreign debts worth more

b) Narrow current account deficit

c) Revival of manufacturing sector. So more jobs created

d) Inflation due to rise in (X-M) and artificially more expensive foreign goods and raw materials

e) Economic growth

f) Further fall in pound due to speculation activities

g) Rise in FDI due to growing competitiveness

Also watch out for topics like protectionism/ foreign aid/ debt cancellation/ FDI together with its benefits and costs

Section B:

8 marks evaluation based question (2 explanations 6 marks and 1 evaluation 2 marks)

10 marks evaluation based question (2explanations 6 marks and 2 evaluations 4 marks)

12 marks evaluation based question (2 explanations 7 marks and 2 evaluations 5 marks)

15 marks evaluation based question (3 explanations 9 marks and 2/3 evaluations 6 marks

Also, bear in mind that a MAXIMUM mark per explanation is 4 marks. Will never be higher. So don’t try to change the formation

Answering techniques for Section B Unit 3: Business Economics and Economics Efficiency

This will be a short posting. I forgot to mention about the exam techniques in Section B. Under the new specification, these changes have been made:

(a) Only four questions will be tested unlike in the past where some questions may have further breakdown, for instance (a)(i) and (a)(ii).

(b) Each question therefore carries greater weightage and ought to be addressed carefully.

(c) Both question 9 and 10 will have equal distribution of marks for each question. For instance if 9(b) has 8 marks, then question 10 (b) will also has 8 marks

(d) Marks are in ascending order and they are even. For instance, 4 marks, 8 marks, 12 marks and 16 marks which in total made up 40 marks

(e) Explanations carry equal weight with evaluations

How to know which question require evaluations?

Simple. Question (b) onwards. Otherwise stick to my JEDATE rule (Justify, Evaluate, Discuss, Assess, To what extent and Examine). Analyse/ outline/ explain are not evaluation words

(1) How do I tell evaluation marks from explanation marks?

They carry equal weightage as mentioned earlier. For instance 8 marks question will have 4 marks for explanations and 4 marks for evaluations. For a 16 marks question, the breakdown will be 8 marks for explanations and 8 marks for evaluations. This means problem. As far as I can recall, only Unit 3 gives such heavy emphasis onto evaluations, something not seen in other units as they usually carry lesser marks than explanations per question

(2) Do I get marks if I provide evaluations even if the question does not ask for it?

No, you don’t. It is just a waste of time and you are taking the grave risk that you may not be able to complete the paper on time

(3) What is the further breakdown for marks?

Consider a 8 marks evaluation-based question. Explanations carry 4 marks. So it can be 2/2 or 3/1. The same goes for evaluations. If a question has 12 marks, then explanations have 6 marks where it could be 3/3 or 2/2/2. The same goes for evaluations. Finally, if the question has 16 marks, explanations will be 2/2/2/2 or 3/3/2 or 4/4. The same style applies for evaluations. My advice is provide more point in case if you’re weak in providing explanations

All these are easy and effective techniques that some of you may have thought about it, but rest assured, your whole mind might go blank on the exam spot, forgetting all these rules. By the way, the distribution of marks is meant for new specification only and not all those papers before January 2010

Best wishes!

Highly Possible Questions in Unit 3: Business Economics and Economics Efficiency

Sorry for the late posting. Here they are:

Key concepts that will be most likely tested in Section A: MCQ

1. Perfect competition

a) Features of perfect market that must be understood-relatively very large number of firms compared to other market structure and there are no barriers to entry and exit (small and low cost businesses)

b) Firms can only make normal profits in the long run

c) Can only be both productive and allocative efficient in the long run. Short run, only allocative efficient is achieved

2. Monopoly

a) Objectives of firms such as profit maximising (MC = MR), revenue maximisation (MR = 0), sales maximisation (AC = AR) and satisficing

b) Conditions to practice price discrimination and being able to tell that people/ market with inelastic demand (willing to pay) will be charged more (PED < 1) and people/ market with elastic demand (PED > 1) will be charged less (not willing to pay)

c) Imperfect market/ price maker like monopoly will not be able to achieve productive and allocative efficiency both in short run and long run

d) Change in profits, output and price due to changes in AC and MC/ AR and MR. Maybe required to draw curve

(e) Theory of EOS especially purchasing and technical

3. Oligopoly

a) Game theory/ price fixing/ cartel/ tacit collusion to avoid damaging price war

b) Knowing that the market is not contestable, sunk cost is high and there is strong brand loyalty

(4) Monopolistic

a) Being able to tell which of the given options is monopolistic. Choose the one where it has the lowest cost and is likely to have many of them

b) Only normal profits in the long

c) Never productive and allocative efficient both in short run and long run

(5) Competition Commission/ OFT/ European Commission

a) Must know the roles

b) Will only intervene due to absence of competition which can be as a result of sharing future market information, price fixing, paying retailers to stock only their goods etc

c) Watch out for new concept in specification. They are performance target and profit capping

Section B: Data response

For this section, focus only on concepts related to monopoly, oligopoly and Competition Commission. It is highly unlikely that perfect competition and monopolistic competition will be tested for two reasons. Limited amount of issues that can be asked, less realistic and articles normally involve multinationals

Pay attention to questions like:

1. Market structure. Usually monopoly and oligopoly. Candidates have to mention one characteristic and relate this to the Extract. Careful as not all the times concentration ratio is given. They may provide information in the form of picture showing number of firms or also market capitalisation. Usually carries 4 marks

2. The contestability of the market. Usually we provide answers by saying that the market is not/ less contestable due to the features of oligopoly like high advertising costs, patents and brand loyalty. In evaluation, we argue by saying that contestability is possible by providing reasons like presence of Competition Commission, can operate in a smaller scale like online business from home, whistle-blowers are rewarded handsomely to stem immoral corporate practice and others (may carry 8-12 marks)

3. Gains from mergers. It can be horizontal, vertical and conglomerate. Evaluation we provide the problems with each type of merger (may be 8-12 marks)

4. Pricing and non-pricing strategy that can be adopted. For pricing we say revenue maximisation, sales maximisation, predatory pricing, limit pricing and buy 2 for the price of 1. For non-price we say, marketing, advertising to promote unique feature and R&D to improve product quality. Evaluation we may contradict by explaining why each strategy may have its own problem in the light of the information provided

5. Concept of game theory, how does it work and problems that might surface. It may include, sellers have the tendency to backstab one another, intervention by regulatory watchdog and might not work if influential sellers enter the market and flood the market with its product

6. Profits, output and price if firms were to face rise in revenue or/ and cost. Candidates must have sufficient practice in diagram drawing. May carry between 4-8 marks

7. Concept of price discrimination. Candidates must be familiar with the definition, conditions to conduct such practice and being able to draw the diagram. Evaluation must be in the light of the information provided. Most likely 10-14 marks

8. Concept of productive and allocative efficient. Candidates must define and provide diagram. Relate the concept to the issue, for instance banks have tendency to overcharge certain transaction fees due to price making ability and hence not being allocative efficient. Lack of competition will not encourage firms to be cost efficient. So always operate at level where costs are higher

9. Effectiveness of regulators like Competition Commission and OFT in regulating private monopolies. Must know the definition, roles and powers by referring to information in the Extract if any on actions that have been taken. Evaluation may include, regulatory capture, too long to investigate an issue and power is superceeded by European Competition Commission (may carry 10-14 marks)

I’m quite confident that the questions in my list will appear in some way or another. My only concern is candidates may work under panic and hence not being able to distinguish those questions. I give some examples here:

(a) Assess the methods by which the manufacturers of instant coffee might compete with each other in both the UK and the US (throw in the price and non-price methods)

(b) BAA charge more for landings at Heathrow than at other airports. Evaluate the reasons for and consequences of such a policy (price discrimination)

Best of luck!!