| Date | November 2016 | Marks available | 4 | Reference code | 16N.2.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 3 | Adapted from | N/A |
Question
Inequality in China
- As China’s economy first began to use market-oriented policies in the 1970s, it was famously suggested that some citizens, particularly through hard work, “should be allowed to get rich before others”. The government still plays a dominant role in the allocation of resources and benefits, keeping most of the gains for itself and its employees. Civil servants, who are assigned government housing, have benefited more and accumulated more wealth than the private sector employees.
- Income inequality is a politically sensitive issue in China and the government has not reported on it for 26 years. In 1988, the Gini coefficient was 0.38 and the next set of figures released in 2014 give a value of 0.47.
- According to research by the China Reform Foundation (CRF), “hidden income” amounts to more than US$1.4 trillion, or the equivalent of Australia’s annual gross domestic product (GDP). “Hidden incomes” refer to money gained from bribery or other corrupt behaviour, for example, bribes for officials or corrupt payments for doctors.
- Low-income households are stuck with an outdated tax system that fails to address the inequality issue. They carry the burden of tax payments while the rich and powerful operate largely outside the tax system. Low-income households also have difficulty accessing credit.
- Although the Chinese government expenditure is high, there tends to be inadequate spending on social protection programmes relating to health and old age. The lack of social protection has resulted in a high marginal propensity to save (MPS) amongst the low-income households as they put money away to provide for future health, education and retirement needs. The high savings result in a low marginal propensity to consume at 37 % of household income (compared to an average of more than 50 % of household income in more developed-market economies). The low marginal propensity to consume and the associated high savings rate have received significant attention in domestic and international policy circles and are viewed as a key barrier to China’s continuing road to development.
Define the term market-oriented policies indicated in bold in the text (paragraph [1]).
With reference to the figures on the marginal propensity to consume (paragraph [5]), explain how the value of the multiplier in China would compare with the value of the multiplier in a more developed-market economy (no calculation required).
Markscheme
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that they are policies without government intervention.
2 Accurate definition. [2]
An explanation that they are policies that support the allocation of resources by supply and demand (or the price mechanism) rather than through government intervention in markets.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is limited understanding. [1–2]
For showing an understanding of the multiplier formula/equation/effect or for an explanation that the value of the multiplier in China would be lower than that in a more developed-market economy because the marginal propensity to consume (0.37) is lower than the average of more developed market economies (0.5).
2 There is clear understanding. [3–4]
For showing an understanding of the multiplier formula/equation/effect and for an explanation that the value of the multiplier in China would be lower than that in a more developed-market economy because the marginal propensity to consume (0.37) is lower than the average of more developed market economies (0.5).
An answer that contains only a correct formula for the multiplier should receive [1] only.
For [4], some reference to the data must be included.
Examiners report
Some candidates simply gave examples of market-oriented policies for this question.
This higher level extension topic was not well understood by lower achieving candidates, who wrote about many things other than the multiplier. Given the information in the text, it was a very easy question for candidates with mathematical understanding of the multiplier.
