M1 H2 ECONS CSQ2 Answer

Question 2 Crisis in United Kingdom and Spain Table 2: Spain Key Economic Indicators 2009 2010 2011 2012 2013* Gross domestic product, constant prices (% change) -3.8 -0.2 0.1 -1.6 -1.3 Inflation (% change) -0.2 2.0 3.1 2.4 1.8 Unemployment rate (%) 18.0 20.1 21.7 25.0 26.9 Current account balance (US billion $) -70.4 -62.3 -55.4 -14.8 19.4 Government Net Debt (% of GDP) 42.5 50.1 58.6 73.5 80.8 Government budget balance (% of GDP) -9.3 -8.1 -8.1 -6.3 -4.9 *Estimated figures. Table 3: UK Key Economic Indicators 2009 2010 2011 2012 2013* Gross domestic product, constant prices (% change) -5.2 1.7 1.1 0.2 1.4 Inflation (% change) 2.1 3.3 4.5 2.8 2.7 Unemployment rate (%) 7.5 7.9 8.0 8.0 7.7 Current account balance (US billion $) -31.4 -61.9 -36.0 -93.9 -69.2 Government Net Debt (% of GDP) 62.4 72.2 76.8 81.6 84.8 Government budget balance (% of GDP) -10.3 -8.4 -6.0 -5.8 -4.0 *Estimated figures. Source: International Monetary Fund, 2013 Extract 5: Spain set to reveal its pain in its books Spain, a Eurozone behemoth, is in the crosshairs of Europe's financial crisis. The country is suffering from soaring borrowing cost (for the sovereign bond), a banking system leaking cash and unemployment rates at devastating levels. The Spanish economy is the Eurozone’s fourth-largest -- after Germany, France and Italy -- making up around 11% of the bloc's GDP. After Bankia, the country’s fourth largest bank, asked for a €19 billion state intervention to prevent bankruptcy, the situation in Spain has developed like a perfect storm, with money being pulled out of the country. This leaves Spain in a precarious financial state, driving investors away and making

2    ©Millennia Institute 9732/01/14 [Turn over it more likely to need a bailout by seeking finan cial support from International Monetary Fund (IMF) or European Union (EU). The mood of the markets may, ultimately, dictate Spain's ability to pull itself from its financial hole. Investors already twitchy about the prospect of a "Gre xit" -- a Greek exit from the euro -- will react badly to further bad news out of Spain. Greece has been swallowing austerity medicine to cut government spending and raise taxes as part of the bailout deal with IMF and EU since 2010. But its economy has slid further into recession, and initial hopes it could detach itself from external life- lines within two years now look wildly optimistic. As with other fragile countries within the euro bloc, Spain cannot benefit from an independent monetary policy. Spain has focused on cost cutting and labour reforms in November 2011. Spain has also been under pressure to implement austerity measures to try and combat its debt crisis. If governments implement austerity measures t oo soon they risk snuffing out demand and recovery, but delays could provoke a catastrophe with inflati on and high interest burdens to service countries’ debt. Source: Cable News Network, September 2012 Extract 6: U.K. budget deficit unexpectedly swells on spending gain Britain’s budget deficit unexpectedly widened in November as spending surged and a drop in income-tax receipts depressed government revenue, pr ompting warnings that Britain could lose its top credit rating. “There has to be a very real danger that at least one of the credit rating agencies will strip the U.K. of its AAA rating (a measure of credit rating) over the coming months,”   said  Howard Archer, an economist at IHS Global Insight in London. Fitch Ratings said letting the debt goal slip weakened the credibility of the fiscal regime and Standard and Poor’s lowered its outlook to negative from stable, citing weak prospects. The pound remained lower against the dollar, down 0.2 percent on the day. Source: Cable News Network, 21 December 2012 Extract 7: Bank of England steps up stimulus The Bank of England stepped up its economic st imulus, announcing an increased bond-buying program designed to jolt the struggling British economy out of a double-dip recession. The £50 billion, or $78 billion, in additional stimulus comes on top of £325 billion already pumped into the economy by the Bank of England over the past several years. Noting that the British economy was already in recession, with corporate earnings down and consumers and companies reluctant to spend, stimulus measures had “to work harder and harder,” Graeme Leach, chief economist at the Institute of Directors said. “The end result is that we could see another £50 billion on top of this, within a few months.” Britain’s banking crisis wrecked government finances, prompting London to embark on its biggest austerity program since World War II. Meanwhi le, the economic outlook has been worsened by the

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4    ©Millennia Institute 9732/01/14 [Turn over Questions (a) (i) What is the difference between real GDP growth and nominal GDP growth? [1] (ii) Identify the economy which is projected to have a higher growth in nominal GDP in 2013. [1] (b) (i) Describe the trend in the UK’s government net debt from 2009 to 2012 shown in Table 3. [1] (ii) With reference to the data, account for the above trend in the UK’s government net debt. [4] (c) (i) Explain how the credit downgrade affects the external value of pounds. [2] (ii) Explain how this change in external value of pounds might affect the prices of goods and services in the UK. [3] (d) Discuss the impact of Eurozone crisis on the UK’s balance of payment. [8] (e) To what extent can Spain adopt the policies used by the UK to achieve her macroeconomic aims of sustained economic growth and low unemployment? [10] [Total: 30]

5    ©Millennia Institute 9732/01/14 [Turn over CSQ2 Answer to Questions (a) (i) What is the difference between real GDP growth and nominal GDP growth? (1) Real GDP (growth) has been adjusted for inflation while nominal GDP (growth) has not been adjusted for inflation (1) OR (Real GDP growth measures annual % change in real GDP where) real GDP measures national income at constant prices while (nominal GDP growth measures annual % change in nominal GDP where) nominal GDP measures national income at current year prices (1) Note in marker’s report: A significant number failed to score because they were careless in expression and stated the opposite of what they really meant. For example, some stated that nominal GDP accounted for inflation when t