EJC_H2_ECONS_Essay5_Suggested_ans_and_mark_scheme

1 5 (a) Explain how a country’s circular flow of income could be affected by its trading partners’ pro-trade policy. [10] (b) Discuss whether an increasing balance of payments surplus is necessarily desirable for a country. [15] Part (a): Explain how a country’s circular flow of income could be affected by its trading partners’ pro-trade policy. [10 Question Dissection Command Word Explain Question Type Explanation Concept(s) • Circular flow of Income • Workings of the Multiplier Process End Point To explain how increase in injection via an increase in export expenditure (due to pro-trade policy adopted by a country’s trading partner) into the circular flow of Income can lead to a multiplied increase in the country’s national income OR Students can alternatively interpret as a rise in X and M but M rising more than X and hence a rise in W  reverse k process. Context Any country Suggested Answers (I) Introduction When a country’s trading partner adopts a pro-trade policy, this suggests that free trade is promoted where b uyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services. This may facilitate the increase in the demand for the country’s exports, hence increasing its export revenue. Assuming that import expenditure remains unchanged, the increase in the country’s export revenue will lead to an injection into a country’s circular flow of income, which will then lead to a multiplied increase in the country’s national income. [Note: students can also explain that pro-trade policy of trading partners can encourage an increase in import expenditure of the country. Assuming that increase in export revenue is greater than import expenditure, this will lead to an increase in injection into the country’s circular flow of income) (II) Body (1) Describe the circular flow of income model The circular flow of Income shows the flow of goods & services and their payment around the economy. It illustrates the relationship between various economic units and how the economy arrives at an equilibrium level of output, income and expenditure

2 Figure 1: The Circular Flow of Income Model To produce a country’s final goods and services, firms pay income to households for the use of factors services i.e. labour services, land , capital and entrepreneurship-ability owned by households. Households will then use their factor income to buy domestically produced consumer goods and services from firms. However, in a 4-sector economy, not all income earned by households is spent on domestically produced goods and services and passed back to firms. Some of the income may leak out of the circular flow of income in the form of savings, taxes paid to the government and expenditure on imported goods. These make up the withdra