Define the term gross domestic product indicated in bold in the text (paragraph [4]).

Define the term current account surplus indicated in bold in the text (paragraph [7]).

Using an exchange rate diagram, explain how a decrease in the interest rate might influence the value of the Thai baht (paragraph [6]).

Using a production possibilities curve (PPC) diagram, explain how the importing of “new technology and capital equipment” might affect Thailand’s production possibilities (paragraph [3]).

Using information from the text/data and your knowledge of economics, evaluate the implications of the strong Thai baht on Thailand’s economy.

NB Candidates may show a decrease in demand for the Thai baht resulting from the decreased attractiveness of /financial/ portfolio investments
This will lead to a decrease in demand and result in a depreciation/decrease in the value/price. This approach should be fully rewarded.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of (Thai) baht in other currency, (Thai) baht in other currency, or other currency per THB, or OTHER CURRENCY/THB. The horizontal axis may be quantity, Q, or quantity of (Thai) baht.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the information provided.

Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.

Answers may include:

• Definition of appreciation.

Economic analysis may include:

• AD/AS
• Marshall Lerner
• J-curve
• Elasticities
• PPC
• Terms of Trade.

Implications of strong Thai baht on inflation rate may include:

• Imported factors of production cheaper, which results in an increase in SRAS and less inflationary pressure (paragraph [3]).
• Makes exports less competitive and may result in a decrease in AD (paragraph [4]), which results in less inflationary pressure (could be a problem as inflation rate is under target (paragraph [2])).
• The inflation rate is at 0.3 % (Table 1), which is lower than target rate any increases in AS or decreases in AD may make it more difficult for the central bank to reach its inflation target (paragraph [2]).
  Increase in SRAS and decrease AD may lead to deflation concerns, as inflation is very low at 0.3 % (Table 1).

Implications of strong Thai baht on economic growth may include:

• Export-orientated country, exports become more expensive (paragraph [4]). AD decreases. may restrict/hinder economic growth, which is down to 3 % from 4.1 % (paragraph [4]).
• Long-term impact of lower domestic investment if government reduces controls on capital outflow to curb the appreciation, may decrease investment leading to a decrease in AD and real GDP (paragraph [5]).
• Producers can afford new technology and capital equipment, improves productivity, quality and quantity of resources, leads to positive impact on SRAS/LRAS/PPC/RGPD/Economic growth (paragraph [3]).
• Foreign debt is easier to pay off, businesses may have less costs leading to SRAS increases leading to increased output (paragraph [3]).

Implications of strong Thai baht on employment may include:

• Increased unemployment due to lower exports, particularly in tourism which makes up 16 % of employment (paragraph [4]), but lower unemployment rates of 1 % (Table 1) give less significance to this argument (paragraph [2]).

Implications of strong Thai baht on balance of payments may include:

• Current account surplus (Table 1) may decrease as exports, become more expensive for foreigners and imports cheaper for Thai citizens (paragraph [4]).
• The effect on net exports depends on the price elasticity of demand for both export and imports.
• Appreciation may help with trade relationship with the US. Thailand wants to avoid being labelled a currency manipulator and its current account surplus is close to the US threshold and the appreciation may help reduce this surplus (paragraph [7]).
• Improve terms of trade (paragraph [3]).
• Helps with foreign debt repayment (paragraph [3]).
• Marshall-Lerner and J-curve discussion.

Any reasonable evaluation.

To reach level 3, students must make reference to the extract/context, not just present a discussion on the implications in general.

Most students successfully defined the term. The major area of weakness made by a minority of candidates was not to define it in terms of 'value’.

For definitions, precision is expected, and this proved to be the reason why many candidates only obtained one mark as the response required several elements. Many overlooked the money flow (positive) and the elements that make-up the current account, often restricting their answer to the balance of trade.

It was encouraging to see that so many students were able to accurately construct and label appropriate exchange rate diagrams resulting from a cut in interest rates. Still, some labelling errors mainly occurred when students used the “other currency / Thai Baht" format incorrectly for the y-axis. Students used a variety of explanations/reasoning. Some explained the impact in terms of an increase in the supply of the baht resulting from the exodus of funds in Thailand's banks to overseas banks. Others explained in terms of a decrease in demand for the Baht. Either approach, if accurately explained, was rewarded with full marks.

Main weaknesses of answers:

• Misunderstanding of the reason(s) for the change in demand and/or supply of the baht regarding interest rates.
• Failure or partial failure to understand the link between a decrease in interest rates and the exchange rate.
• Confusion regarding the internal and external effects of a decrease in interest rates. Some students explained in terms of internal consequences e.g. effects on costs of borrowing ignoring the impact on exchange rates.
• A failure to recognise the difference between ''physical ''and ''portfolio'' investment.

There were some encouraging answers to this question. Most candidates understood the meaning of production possibilities and were able to construct an accurately labelled diagram resulting from the increased import of ''technology and capital equipment''. Only a few students showed a movement rather than a shift. Well prepared candidates were able to explain the impact on Thailand's production possibilities.

The main weaknesses/errors included:

• Poor labelling which indicated a lack of understanding of PPC such as ''Price'' and ''Output''.
• Failure to identify appropriate products on the axes.
• An explanation that focused on generalities rather than how potential output was affected.
• Not referring to the diagram in the explanation.

Many students were able to identify relevant issues in the text and link these to economic concepts, showing some knowledge and understanding regarding the implications of the strong baht on the Thai economy. A significant minority of candidates were able to use the data and information in the text to develop an effective analytical answer, using economic concepts and theory, though a lot of the analysis did not go beyond AD/AS diagrams. Other students had a sound understanding of the economics involved but failed to effectively apply it to the case study presented. Too often, there was a lack of context relating to the extract, with answers that were purely theoretical. At the other extreme, some answers lacked analysis and relied on an overly descriptive approach, often merely paraphrasing the text with little attempt at applying economic concepts. There were often too many statements / assertions with no or limited reasoning / analysis.

While it is essential for students to use economic theory and concepts, these must be applied in context. In this case, for example, PED, the Marshall Lerner condition and the terms of trade were often mentioned but too often not applied effectively or not always interpreted in a way that showed real understanding of these theories.