RI 2026 Y6 Trade class test mark scheme (final)

2026 Y6 H2 Economics: Globalisation & the International Economy Class Test 5 – Mark Scheme Countries may experience rising Balance of Trade deficit when they suffer a loss in competitiveness in trade. a) Discuss whether the use of tariffs or supply side policy is the more appropriate measure to manage the above challenge when a country loses its competitiveness. [15] Introduction • A loss of trade competitiveness means domestic goods become relatively less attractive compared with foreign goods, causing exports to fall and imports to rise. This can worsen the Balance of Trade (BOT) and potentially reduce aggregate demand and growth. • Appropriate or not: whether it is effective and desirable to improve the BOT Body Requirement #1: Discuss how Tariffs is an appropriate measure in managing the challenges arising from the loss in competitiveness Thesis: Explain how tariffs can help address BOT concerns. Key idea: Tariff → import prices rise → imports fall → M decreases → (X − M) rises → BOT improves Define tariff: Import tax on foreign goods/services entering the country. Explain how tariff works using a tariff diagram: • The import tariff raises the price of imports from Pw to Pw+tariff. The higher price reduces overall consumption of the good in the domestic market from Q 4 to Q3. Local consumers find goods/services expensive and choose to cut down consumption of these products. • Concurrently, the increase in import prices causes an increase in quantity of domestically produced substitutes from Q1 to Q2. • Due to the fall in quantity demanded of imports from Q 4Q1 to Q3Q2, import volume and expenditure would decrease. Import expenditure in the balance of trade falls from Q1EFQ4 to Q2HJQ3. This is cos even though import expenditure paid by consumers Q2BCQ3, part of it goes to the govt as tax revenue so doesn’t flow out of the country – thus reducing the BOT deficit (holding exports unchanged). Pw Pe Pw + Tariff Price F J H E B C A World Price + Tariff World Price S D Q Q1 Q2 Qe Q3 Q4

• Domestic industries would also now be more capable of competing with the higher priced imported goods and services. • Desirability: To produce this increased level of output, firms which previously were under threat from imports would now hire more domestic factors of production – reduction in unemployment • Desirability: The tax revenue gained from implementing the tariff can also be used to support export industries via grants and thus boost export competitiveness. Anti-thesis: Tariffs is not an appropriate measure to reduce BOT deficit from the loss in competitiveness (Choose 1 of the 3) – why it is undesirable/ineffective 1. Allocative inefficiency (undesirability): Protectionism merely perpetuates domestic inefficiency as it prolongs the inefficient use of the economy’s resources and leads to allocative inefficiency. Identification of dead weight loss EBH and CJF as the g