Define the term foreign direct investment indicated in bold in the text (paragraph [3]).

Define the term human capital indicated in bold in the text (paragraph [5]).

Using a demand and supply diagram, explain how a subsidy changes the consumer surplus for a good (paragraph [6]).

Using a Lorenz curve, explain how a progressive tax system could change Vanuatu’s income distribution (paragraph [7]).

Using information from the text/data and your knowledge of economics, discuss the effectiveness of foreign aid in achieving economic development in Vanuatu.

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

For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.

Candidates may use different notation or shading on the demand and supply diagram with a supported explanation to indicate an increase in consumer surplus and this should be fully awarded.

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

The two curves may be shown on one graph, or may be shown on two graphs.

The vertical axis should be labelled (cumulative) % of income and the horizontal axis should be (cumulative) % of population / households. A title is not necessary. There must be a diagonal line, but it is not a requirement that it is labelled. There should be an indication of the inward shift of the Lorenz curve.

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
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Answers may include:

• Definition of economic development, foreign aid.

Economic analysis, focusing on economic development, may include:

• AD/AS.
• Poverty cycle.
• PPC.
• Lorenz curve.

Effectiveness of foreign aid in achieving economic development may include:

• Aid could be essential to help with transition to a higher developing country status (paragraph [3]).
• Aid spending on Education:
  
  • Higher skilled labour leads to high incomes – breaking poverty cycle/helping with the poverty gap (paragraph [2]).
  • Higher level of skill may allow people to move from the informal sector to formal sector with better working conditions (paragraph [2])
  • Could help increase participation of women in the workplace (paragraph [4])
  • Aid spending on health care
  • Workforce more productive – higher incomes – break poverty cycle (paragraph [5]).
• Aid spending on Infrastructure:
  
  • Access to export markets – increases real GDP, increased output – increase employment opportunities – increasing incomes and lowering poverty (paragraph [6]).
• Isolated island nation, more shipping ports/airports may lower costs (paragraph [1]).
• Shipping ports/airports – larger markets – access economies of scale (paragraph [5]).
• PPC or AD/AS – increases quality and quantity of resources (paragraph [5]).
• Infrastructure spending could include improving access to water and electricity (paragraph [2] and [4]).
• Infrastructure may help decrease the poverty gap/decrease pressure on cities (paragraph [2]).
• Allow for export industry grow and government may be able to remove subsidies and spend on other areas for economic development (paragraph [6]).
• Aid spending may help with decreasing the natural disaster vulnerability (paragraph [1]).

Lack of effectiveness of foreign aid in achieving economic development may include:

• Lacks the capacity to deliver the quality education and healthcare needed (paragraph [5]).
• Institutions are lacking to support redistribution of benefits from potential export growth (paragraph [5]).
• Infrastructure spending mentioned is targeted on export growth (paragraph [6]) and may not be in areas that directly improve standards of living such as access to electricity and water (paragraph [3]).
• Problems with misuse of funds (paragraph [6]).
• Over-reliance on aid is seen as a potential issue (paragraph [7]).
• Intentions of donors, China is focusing on infrastructure – but this may not benefit the very poor (paragraph [4]).
• Concession loans may cause repayment issues in the future (paragraph [4]).
• The new UN developing country status may allow Vanuatu to access funds from other areas and therefore aid might not be needed (paragraph [3]).
• Vanuatu’s most vulnerable status and climate change does not appear to be part of the aid strategy and this could be more important than the targeted sectors(paragraph [1]).

Any reasonable discussion.

In many answers a complete definition was missing, often being too imprecise and/or inaccurate. A surprising number of students thought that FDI was a governmental investment abroad.

Most were only able to access one mark as there was not a clear link as to how this might influence productive capacity/factors of production etc. A surprising number of candidates thought this was to do with the size of the labour force.

This was generally well answered by the majority of students. Most accurately constructed a correct diagram, identifying both the original and the new consumer surplus resulting from the subsidy. Diagrams were in the main accurately annotated and effectively used in the explanation.

This was well answered by a significant proportion of students attempting this question. It was clear that the Lorenz curve analysis was well understood and diagrams were generally accurate and well labelled. Students recognised the likely impact of a progressive tax system in creating a more equitable distribution of income and were able to use their diagram effectively explaining this.

As with development questions in the past, many students failed to focus on economic development and instead concentrated almost exclusively on economic growth with development as a by-product. Answers would benefit from a clear interpretation of economic development so that the response can link to criteria to help assess effectiveness.

There were notable exceptions where students used appropriate economic analysis/concepts such as the poverty cycle, the Lorenz curve, PPC and AD/AS to develop an in-depth analysis coupled with valid and balanced judgments. Students should be advised that a development question that focuses on growth will struggle to get beyond Level 1.