Distinguish between inflation and disinflation.

Calculate the inflation rate for 2013 and for 2015 for Country A. Enter your results in Table 1.

Identify the year in which Country A experienced disinflation.

The consumer price index (CPI) is a weighted price index. Outline one reason why weights are used in the construction of the CPI.

Determine the percentage change in the CPI of Country A between the base year and 2013.

Outline how a producer price index may prove useful in predicting future inflation.

Explain two reasons why governments attempt to avoid deflation.

Using the data in Figure 1, comment on the degree of income inequality in the United States (US), Sweden and Brazil.

Using your answer to part (f), sketch and label a Lorenz curve for Brazil and for Sweden in the following box.

State whether the US, Sweden or Brazil has the highest Gini coefficient.

Define the term poverty trap (poverty cycle).

Explain two reasons for which a highly unequal income distribution may prove a barrier to economic development.

Inflation refers to a (sustained) increase in the Average Price Level – or the idea that inflation is an increase in the prices of goods and services [1]

Disinflation refers to a decrease in the rate of increase of the Average Price Level
OR
a decrease in the rate of inflation. [1]

NB the command term is distinguish, so the precision required in the definition of inflation is relaxed.

[1] for each correct answer.

2014

Level

0 The work does not reach a standard described by the descriptors below. [0]

1 Vague response. [1]

For stating that not all goods have the same significance for consumers.

2 Accurate response. [2]

For outlining that weights reflect the proportion of total spending allocated so that increased prices in goods with a larger weight lead to a more significant effect on the inflation rate than goods with a smaller weight
OR increased prices are not of equal significance to the typical consumer so weights are used to reflect the relative importance of each good.

Responses may demonstrate understanding but might not be expressed in the form above. Examiners should reward understanding. Please be aware that the command term is outline and not explain.

56.28 %

Level

0 The work does not reach a standard described by the descriptors below. [0]

1 Vague response. [1]

For outlining that a producer price index measures the costs of bought-in raw materials and intermediate products (factors of production).

2 Accurate response. [2]

For outlining that a producer price index measures the costs of bought-in raw materials and intermediate products (factors of production) and that current increases/decreases in production costs are likely to lead to increases/decreases in consumer prices in the future.

Level
0 The work does not meet a standard described by the descriptors below. [0]

1 The written response is limited. [1-2]

A limited explanation of one reason may be awarded [1]. An accurate explanation of one or a limited explanation of two may be awarded [2].

2 The written response is accurate. [3-4]

For accurately explaining any two of the following:

• deflation induces households to postpone purchases, further decreasing spending which in turn further decreases consumption expenditures and thus AD and leads to a further decrease in real output
• real debt of households / firms increases so that consumption expenditures further decrease (or banks accumulate bad loans increasing the likelihood of a bank crisis)
• deflation being typically caused by a fall in AD leads to an increase in cyclical unemployment
• deflation being typically caused by a fall in AD leads to an increase in cyclical unemployment
• the real cost of government debt servicing increases, putting pressure on other areas of government spending
• deflation puts downward pressure on firms’ profits because after buying raw materials etc and making the goods, by the time that they sell them prices will have fallen lower to possibly just above the costs of the raw materials. Therefore firms are less likely to expand/invest
• higher real interest rates or lower business confidence will discourage firms from borrowing for investment projects
• any other reasonable reason explained

An accurate explanation of one reason and a limited explanation of another reason may be awarded [3].

Two accurate explanations may be awarded [4].

Level

0 The work does not reach a standard described by the descriptors below. [0]

1 Vague response. [1]

For stating that income inequality is greater in Brazil, followed by the US, followed by Sweden.

2 Accurate response. [2]

For stating that income inequality is greatest in Brazil, followed by the US, followed by Sweden as the relative quintile shares indicate. Reference to data in the table is required to be awarded [2]. The actual income shares need not be mentioned, but reference to the top 20% in Brazil earning more than the top 20% in Sweden (or similar) is required. It can be inferred that the US is in the middle.

[1] for two correctly sketched Lorenz curves or properly labelled axes (“Cumulative” is not required).

[2] for two correctly sketched Lorenz curves and properly labelled axes.

The horizontal axis may be labelled “Households (%)” or “Population (%)”. “Cumulative” is not required.

Brazil

Level
0 The work does not meet a standard described by the descriptors below. [0]

1 Vague definition. [1]

The idea that people cannot escape from poverty.

2 Accurate definition. [2]

An explanation that it is any circular chain of events starting and ending in (an indicator of) poverty, or an explanation that low incomes lead to low savings which leads to low investment/low spending on health and education/low spending on physical and human capital, which leads to low growth/productivity, which leads to low income. An appropriate diagram may be fully rewarded.

Level

0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited. [1-2]

A limited explanation of one reason may be awarded [1]. An accurate explanation of one or a limited explanation of two may be awarded [2].

2 The written response is accurate. [3-4]

For accurately explaining any two of the following:

• a highly unequal distribution of income implies that the poorest are deprived of proper education and health care and thus the growth and development prospects are constrained
• a highly unequal distribution of income may lead to lower consumption and thus lower AD (because rich have a lower propensity to consume) leading to slower growth and therefore slower development
• higher income inequality leads to more transfer payments (and possibly lower tax revenue), which restricts public investment in education and infrastructure, causing slower growth and reduced possibilities for development
• higher income inequality may increase the risk of corruption which increases the costs to business and deters inward investment thus leading to slower growth and development
• higher income inequality may act as a barrier to those in poverty opening businesses, thus limiting development opportunities for the poor
• unequal distribution of income may lead to more crime and vandalism. More has to be spent on security, reducing the funds available for development-related spending
  OR (only one of these points may be rewarded)
  unequal distribution of income may lead to political instability, deterring investors and thus reducing growth and therefore development
• any other reasonable explanation.

Each reason provided should be linked clearly to development. However, a candidate who has explained reasons clearly but neglected to mention development in either should be penalized for this once only – so a well-explained response which does not mention development explicitly may be awarded a maximum of [3].

An accurate explanation of one reason and a limited explanation of another reason may be awarded [3].

Two accurate explanations may be awarded [4].