Paper 3: Microeconomics and Macroeconomics · 9EC0/03
Edexcel A A-level Paper 3, June 2017
All 10 written questions from Edexcel A A-level Paper 3 (June 2017), Microeconomics and Macroeconomics. Case studies: Copper prices, US dollars per tonne, 2007–2015 and The UK economy. Each question shows its marks and topic, with an examiner insight on 9, and opens the question paper and mark scheme at the right page.
Section A
Case study
Copper prices, US dollars per tonne, 2007–2015
Extracts: A: Chile’s economic outlook brightens · B: Chile’s copper mining on a downward track
In the extracts: Chile, GDP, Chilean, Copper, Chile GDP, Mr Vald, Energy, China, Argentina and Venezuela, Benedict Mander
Q1(a)
With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015.
Mark splitKnowledge 2Application 2Analysis 1
Q1(b)
Examine the likely impact of externalities of copper mining on firms and communities within Chile.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 2
TopicMarket failure
Examiner insight
- What to cover
- Identify negative production externalities from Chilean copper mining, such as water use, pollution and health damage. Marginal social cost exceeds marginal private cost, so communities bear costs the mining firms do not pay.
- Diagram
- Negative production externality: MPC and MSC with MPB, free market output above the social optimum; label the welfare loss triangle.
- Evaluation
- Note possible positive externalities such as jobs, training and local infrastructure. Depends on the size of the external cost and whether regulation forces firms to internalise it.
- Watch out
- Describing pollution in words without ever using the marginal social cost and marginal private cost framework.
Q1(c)
Apart from externalities, discuss the problems that Chile faces as a result of dependency on copper mining.
Mark splitKnowledge 2Application 2Analysis 4Evaluation 4
TopicMarket failure
Examiner insight
- What to cover
- Link copper price volatility to unstable export revenue, tax receipts and the current account. Add Dutch disease raising the exchange rate and squeezing manufacturing, plus finite reserves and structural unemployment risk.
- Diagram
- Commodity market with price inelastic demand and supply and a shifting supply curve, showing large swings in the copper price.
- Evaluation
- Weigh copper contribution to Chilean growth, jobs and comparative advantage, and the use of a sovereign wealth fund. Depends on price trends and the speed of diversification. Conclude.
- Watch out
- Returning to pollution and externalities, which this question explicitly excludes.
Q1(d)
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicEconomic growth
Examiner insight
- What to cover
- Cover both sides as Paper 3 requires. Micro: education, infrastructure and diversification cut firms costs and change specific Chilean markets. Macro: AD and LRAS shift right, raising growth, employment and living standards.
- Diagram
- AD/AS with AD and LRAS shifting right, plus a micro diagram such as a subsidy or labour market showing lower costs or higher wages.
- Evaluation
- Weigh cost, opportunity cost, time lags, government failure and possible inequality, judging micro and macro effects separately. Depends on copper revenue funding the policy. Give a final judgement.
- Watch out
- Answering only at macro level and losing the microeconomic half that the Paper 3 question demands.
Q1(e)
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicAggregate demand
Examiner insight
- What to cover
- Cover both sides. Micro: investment cuts Chilean firms unit costs, raises productivity and can change market structure. Macro: investment raises AD now and LRAS later, lifting growth, jobs and competitiveness.
- Diagram
- AD/AS with AD and LRAS shifting right, plus a firm cost curve diagram showing average cost falling.
- Evaluation
- Weigh the accelerator and multiplier size, crowding out, structural unemployment from automation, and reliance on volatile copper revenue. Depends on business confidence. Judge micro and macro effects.
- Watch out
- Treating investment only as a demand side injection and ignoring its long run supply side effect.
Section B
Case study
The UK economy
Extracts: C: The National Living Wage (NLW) · D: The productivity puzzle in the UK
In the extracts: GDP, NLW, NMW, PSNB, National Minimum Wage, National Living Wage, Living Wage Premium, Spain France UK, Education Ltd, GDP Forecast
Q2(a)
With reference to Extract D (line 18), explain the meaning of the term ‘output gap’. Use an aggregate demand and aggregate supply diagram in your answer.
Mark splitKnowledge 2Application 2Analysis 1
TopicAggregate demandAggregate supplyNational income
Examiner insight
- What to cover
- Define the output gap as the difference between actual real GDP and the trend or potential level of output. Say whether Extract D describes a negative or a positive gap.
- Diagram
- AD/AS with AD crossing SRAS to the left of LRAS; label actual output, potential output and the negative output gap between them.
- Watch out
- Drawing AD and SRAS with no LRAS or potential output line, so there is no gap left to label.
Q2(b)
With reference to Figures 4 and 5 and your own knowledge, examine the relationship between the national debt as a proportion of GDP and the fiscal deficit.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 2
TopicRole of the state in the macroeconomy
Examiner insight
- What to cover
- Explain that each year of fiscal deficit adds to the national debt stock. The debt to GDP ratio can still fall if nominal GDP grows faster than the debt. Use Figures 4 and 5 to show this.
- Evaluation
- Depends on the growth rate of nominal GDP, the interest rate paid on debt, and whether the deficit is cyclical or structural. A shrinking deficit still adds to total debt.
- Watch out
- Saying a smaller deficit means the national debt falls, when debt keeps rising while any deficit remains.
Q2(c)
Discuss the likely impact of the National Living Wage on the profitability of firms. Use a cost and revenue diagram in your answer.
Mark splitKnowledge 2Application 2Analysis 4Evaluation 4
TopicLabour market
Examiner insight
- What to cover
- The National Living Wage raises average and marginal costs, so at a given price profit per unit falls. Firms may cut hours, raise prices or substitute capital for labour to protect margins.
- Diagram
- Cost and revenue diagram: AC and MC shifting upwards with AR and MR drawn; label the shrinking profit rectangle between AR and AC.
- Evaluation
- Weigh higher pay raising motivation, productivity and retention, and higher consumer spending lifting revenue. Depends on labour intensity, price elasticity of demand and monopsony power. Conclude.
- Watch out
- Drawing a labour market diagram instead of the cost and revenue diagram the question demands.
Q2(d)
With reference to the information provided and your own knowledge, evaluate the likely microeconomic and macroeconomic influences on the UK’s international competitiveness.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
Examiner insight
- What to cover
- Cover both sides. Micro: unit labour costs, productivity, skills, innovation, investment and regulation in UK firms. Macro: the exchange rate, relative inflation, corporation tax and infrastructure.
- Diagram
- Foreign exchange diagram showing sterling appreciating and raising export prices, plus a cost curve diagram showing average cost falling from productivity gains.
- Evaluation
- Weigh price against non-price competitiveness, short run exchange rate moves against long run productivity, and export elasticities. Judge the main influence, covering micro and macro.
- Watch out
- Confusing competitiveness with the size of the trade balance, which is an outcome rather than a cause.
Q2(e)
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of a government policy of cutting public expenditure rather than raising taxes as a means of reducing a fiscal deficit.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicRole of the state in the macroeconomy
Examiner insight
- What to cover
- Cover both sides. Macro: spending cuts shift AD left with a larger multiplier than tax rises, cutting growth and employment. Micro: public sector jobs, benefit recipients and specific markets are hit, worsening inequality.
- Diagram
- AD/AS with AD shifting left, plus a micro diagram such as a labour market showing falling public sector employment.
- Evaluation
- Weigh the larger spending multiplier against tax rises damaging incentives, the loss of long run capacity if capital spending is cut, and time lags. Judge micro and macro.
- Watch out
- Discussing only spending cuts, when the question requires them to be weighed against raising taxes.
Question text is quoted from the question papers, © Pearson Edexcel, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.